Armstrong v. Accrediting Council for Continuing Educ. and Training, Inc.

• Citation: 168 F.3d 1362
• Decision Date: 23 March 1999
• Docket Number: No. 97-5316,97-5316
• Parties: , 133 Ed. Law Rep. 39 Vanessa ARMSTRONG, Appellant, v. ACCREDITING COUNCIL FOR CONTINUING EDUCATION AND TRAINING, INC., et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1362

168 F.3d 1362

335 U.S.App.D.C. 62, 133 Ed. Law Rep. 39

Vanessa ARMSTRONG, Appellant, v. ACCREDITING COUNCIL FOR CONTINUING EDUCATION AND TRAINING, INC., et al., Appellees.

No. 97-5316.

United States Court of Appeals,

District of Columbia Circuit.

Argued Oct. 2, 1998.

Decided March 23, 1999.

Appeal from the United States District Court for the District of Columbia (No. 91cv03135).

Michael E. Tankersley argued the cause for appellant. With him on the briefs was Alan B. Morrison.

Anthony M. Alexis, Assistant U.S. Attorney, argued the cause for appellee Richard Riley, Secretary of Education, et al. With him on the brief were Wilma A. Lewis, U.S. Attorney, R. Craig Lawrence and Scott S. Harris, Assistant U.S. Attorneys.

Henry S. Weinstock argued the cause and filed the brief for appellees Bank of America, N.T. & S.A., et al.

Mark E. Shure argued the cause and filed the brief for appellee Educational Credit Management Corporation.

Before: HENDERSON, RANDOLPH and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

Concurring statement filed by Circuit Judge HENDERSON.

TATEL, Circuit Judge:

In this case, we must decide whether appellant, a student who attended a for-profit vocational school with help from a federally guaranteed student loan, may assert the school's alleged fraud and failure to provide the education it promised as a defense against the lender's effort to collect the loan. Although federal student loan policy now recognizes school misconduct defenses against lenders who have "referral relationships" with for-profit schools, appellant obtained her loan in the late 1980s, a time when federal policy protected lenders from such defenses. Because we find no basis for applying the new standards retroactively to appellant's loan, we affirm the district court's dismissal of her claims for declaratory and injunctive relief.

I

Established by the Higher Education Act of 1965, the Guaranteed Student Loan Program provides interest rate subsidies and federal insurance for private lenders to make student loans. See 20 U.S.C. § 1078(a), (c) (1994). ^* To raise funds to make, i.e., "originate," additional loans, original lenders sell loans to other lenders on a secondary loan market. So-called "guaranty agencies" guarantee the loans, paying loan holders the amounts due and taking assignment of the loans if students default. See id. § 1078(c). The Secretary of Education "reinsures" the loans and ultimately reimburses guaranty agencies on a sliding scale. See id. § 1078(c)(1). Although guaranteed student loans often change hands many times, they are not considered negotiable instruments; neither repurchasers nor assignees become "holders in due course." See Jackson v. Culinary Sch., 788 F.Supp. 1233, 1248 n. 9 (D.D.C.1992), rev'd on other grounds, 27 F.3d 573 (D.C.Cir.1994), vacated, 515 U.S. 1139, 115 S.Ct. 2573, 132 L.Ed.2d 824, on reconsideration, 59 F.3d 254 (D.C.Cir.1995). Instead, subsequent holders assume loans subject to all claims and defenses available against original lenders. Cf. 34 C.F.R. § 682.508(c) (1988).

Students may use federally guaranteed student loans to attend "eligible" schools, including for-profit vocational schools. See 20 U.S.C. § 1085(a)(1) (1988). To establish eligibility, vocational schools must be accredited by a nationally recognized accrediting agency. See id. § 1085(c)(4). The Secretary requires eligible schools to perform certain functions to facilitate student access to guaranteed loans, including giving students information on loan availability, certifying student eligibility to participate in the federal loan program, and forwarding applications to lenders. See 34 C.F.R. §§ 668.41-.43, 682.102(a), 682.603 (1988).

Federal student loan policy has undergone two significant changes relevant to this case. The first began in 1979 when Congress amended the Higher Education Act to encourage lenders to market loans to for-profit vocational school students. See Higher Education Technical Amendments of 1979, Pub.L. No. 96-49, 93 Stat. 351. The 1979 amendments removed a ceiling on the federal interest subsidy paid to participating GSLP lenders, "making proprietary school loans, which had previously been considered as too risky, more attractive." S.REP. NO. 102-58, at 6 (1991) ("Senate Report"). Later amendments removed other limitations on student borrowers attending for-profit schools, increased aggregate loan limits, and allowed students who had not completed high school to use GSLP loans to attend accredited postsecondary schools. See Education Amendments of 1980, Pub.L. No. 96-374, 94 Stat. 1367; Higher Education Amendments of 1986, Pub.L. No. 99-498, sec. 425, § 1075(a), 100 Stat. 1268, 1359; id. sec. 481, § 1088, 100 Stat. 1268, 1476.

To further encourage private lenders to make vocational school student loans, Congress excluded GSLP loans from the Truth in Lending Act ("TILA"). See Pub.L. No 97-320, sec. 701(a), § 1603, 96 Stat. 1469, 1538 (1982). As a result, the Federal Trade Commission stopped enforcing various TILA regulations against GSLP lenders, including the "Holder Rule." Adopted by the FTC in 1976, the Holder Rule requires purchase money loan agreements (loans supplying money for the purchase of goods or services) arranged by sellers to contain a notice to all loan holders that preserves the borrower's ability to raise claims and defenses against the lender arising from the seller's misconduct. See 16 C.F.R. § 433.2(a) (1998). For example, if a used car dealer who fraudulently sells a lemon also arranges the buyer's financing through a bank, the buyer may rely on the dealer's fraud as a defense against repaying the bank loan. Ending enforcement of the Holder Rule with respect to GSLP loans thus had the effect of protecting lenders from claims and defenses students could raise against their schools.

This lender protection from student suits had one major exception: where lenders delegated to schools "substantial functions or responsibilities normally performed by lenders before making loans." 51 Fed.Reg. 40,890 (1986); 34 C.F.R. § 682.206(a)(2) (1988). In such cases, the Department of Education's "origination policy" kicked in, treating the schools--not the banks--as the lenders that had effectively made the original loans. See 34 C.F.R. § 682.200(b) (1988). As a result, all subsequent loan holders (remember, there are no holders in due course) were subject to claims and defenses that students could raise against their schools. Cf. id. § 682.508(c). But so long as lenders avoided school origination relationships, they could make and sell loans without fear that students could assert school misconduct as a defense against repaying their loans.

These changes in the Guaranteed Student Loan Program accomplished their purpose. Lending to for-profit school students mushroomed, increasing more than six-fold between 1982 and 1988. See Senate Report at 6-7. The changes also had unintended consequences. As a result of the GSLP's easy source of funding, large numbers of for-profit schools sprang up, admitted poorly prepared students, and offered shoddy programs. See id. at 2-3, 8-13. Graduates of these schools were often unable to get jobs. Default rates climbed dramatically, rising as high as 39%. See id. at 2. Because loan guaranty agencies were unable to keep up with growing default rates, many had to be bailed out by the Secretary. See, e.g., id. at 22.

In order to curb high default rates and protect students from for-profit school abuses, Congress initiated a second round of changes to the Guaranteed Student Loan Program in 1992. One change directed the Secretary to terminate GSLP eligibility of for-profit schools with consistently high default rates. See Pub.L. No. 102-325, sec. 427(a), § 1085, 106 Stat. at 549 (redefining "eligible institution" to exclude schools with excessive default rates). As a result, many for profit schools were eliminated from the program.

Congress also directed the Secretary to develop a "Common Guaranteed Student Loan Application Form and Promissory Note" specifying the contractual terms governing guaranteed student loans, and to study the possibility of permitting students to raise fraud-based state law defenses against repayment of student loans. See id. § 425(e), 106 Stat. at 546; id. § 1403, 106 Stat. at 817. Responding to these directives, the Secretary prepared a common promissory note and included in it a provision modeled on the FTC Holder Rule that was directed specifically at lenders affiliated with for-profit schools. See U.S. DEP'T OF EDUC., APPLICATION AND PROMISSORY NOTE FOR FEDERAL STAFFORD LOANS (SUBSIDIZED AND UNSUBSIDIZED) AND FEDERAL SUPPLEMENTAL LOANS FOR STUDENTS (SLS) (1993) ("Common Promissory Note"). In fact, one year earlier the FTC had renewed enforcement of the Holder Rule with respect to GSLP loans. See, e.g., Letter from Jean Noonan, Associate Director for Credit Practices, Federal Trade Commission, to Jonathan Sheldon, National Consumer Law Center (July 24, 1991) ("FTC Opinion").

Treating GSLP lenders like banks that allow used car dealers to arrange financing, the Holder Rule notice the Secretary included in the common promissory note, together with the FTC's renewed enforcement policy made GSLP loan holders "subject to all claims and defenses" that the student borrower could raise against the school. Common Promissory Note. The notice applies where the loan is "used to pay tuition and charges of a for-profit school that refers loan applicants to the lender or that is affiliated with the lender by common control, contract or business arrangement." Id. (emphasis added). According to the Department, "refers" means that a school, with a lender's knowledge, goes beyond "giv[ing] its students information on the availability of student loans" and "recommend[s] that the applicants seek loans from [a particular] lender." U.S. DEP'T OF EDUC., OVERVIEW, FEDERAL TRADE...