Final Rule: Standards of Financial Responsibility, Mandatory & Discretionary Triggers, Recalculation of Composite Score Requirements, and Reporting Requirements

STANDARDS OF FINANCIAL RESPONSIBILITY

• 668.171 General – (b) General Standards of Financial Responsibility

The Final Rule makes a considerable number of revisions to the financial responsibility regulations.

(b) General Standards of Financial Responsibility.

Except as provided in paragraph (h) of this section, the Department considers an institution to be financially responsible if the Department determines that–

(3) The institution is able to meet all of its financial obligations and provide the administrative resources necessary to comply with title IV, HEA program requirements. An institution is not deemed able to meet its financial or administrative obligations if–

1. 1. It fails to make refunds under its refund policy, return title IV, HEA program funds for which it is responsible under § 668.22, or pay title IV, HEA credit balances as required under § 668.164(h)(2);
   2. It fails to make repayments to the Department for any debt or liability arising from the institution’s participation in the title IV, HEA programs;
   3. It fails to make a payment in accordance with an existing undisputed financial obligation for more than 90 days;
   4. It fails to satisfy payroll obligations in accordance with its published payroll schedule;
   5. It borrows funds from retirement plans or restricted funds without authorization; or
   6. It is subject to an action or event described in paragraph (c) of this section (mandatory triggering events), or an action or event that the Department has determined to have a significant adverse effect on the financial condition of the institution under paragraph (d) of this section (discretionary triggering events);

Fame Comment: ED added the new mandatory triggering events to this section.

 

Final Rule – MANDATORY & DISCRETIONARY TRIGGERS

MANDATORY TRIGGERS

• 668.171 General – (c) Mandatory Triggering Events

The Final Rule revises and adds new mandatory and discretionary triggers to the list of financial responsibility requirements.

(c) Mandatory triggering events.

(1) Except for the mandatory triggers that require a recalculation of the institution’s composite score, the mandatory triggers in this paragraph (c) constitute automatic failures of financial responsibility. For any mandatory triggers under this paragraph (c) that result in a recalculated composite score of less than 1.0, and for those mandatory triggers that constitute automatic failures of financial responsibility, the Department will require the institution to provide financial protection as set forth in this subpart, unless the institution demonstrates that the event is resolved or that insurance covers the loss in accordance with paragraph (f)(3) of this section. The financial protection required under this paragraph is not less than 10 percent of the total title IV, HEA funding in the prior fiscal year. If the Department requires financial protection as a result of more than one mandatory or discretionary trigger, the Department will require separate financial protection for each individual trigger.

(1) For automatic triggers, the Department will consider whether the financial protection can be released following the institution’s submission of two full fiscal years of audited financial statements following the Department’s notice that requires the posting of the financial protection.  In making this determination, the Department considers whether the administrative or financial risk caused by the event has ceased or been resolved, including full payment of all damages, fines, penalties, liabilities, or other financial relief. For triggers that require a recalculation of the composite score, the Department will consider whether the financial protection can be released if subsequent annual submissions pass the Department’s requirements for financial responsibility.

(2) The following are mandatory triggers:

1. Legal and Administrative Actions.

1. For an institution or entity with a composite score of less than 1.5, other than a composite score calculated under 34 CFR 600.20(g) and § 668.176, that has entered against it a final monetary judgment or award, or enters into a monetary settlement which results from a legal proceeding, including from a lawsuit, arbitration, or mediation, whether or not the judgment, award or settlement has been paid, and as a result, the recalculated composite score for the institution or entity is less than 1.0, as determined by the Department under paragraph (e) of this section;

1. On or after July 1, 2024, the institution or any entity whose financial statements were submitted in the prior fiscal year to meet the requirements of 34 CFR 600.20(g) or this subpart, is sued by a Federal or State authority to impose an injunction, establish fines or penalties, or to obtain financial relief such as damages, or in a qui tam action in which the United States has intervened, but only if the Federal or State action has been pending for 120 days, or a qui tam action has been pending for 120 days following intervention by the United States, and –

• No motion to dismiss, or its equivalent under State law has been filed within the applicable 120-day period; or
• If a motion to dismiss or its equivalent under State law, has been filed within the applicable 120-day period and denied, upon such denial

1. The Department has initiated action to recover from the institution the cost of adjudicated claims in favor of borrowers under the borrower defense to repayment provisions in 34 CFR part 685 and, the recalculated composite score for the  institution or entity as a result of the adjudicated claims is less than 1.0, as determined by the Department under paragraph (e) of this section; or
2. For an institution or entity that has submitted an application for a change in ownership under 34 CFR 600.20 that has entered against it a final monetary judgment or award, or enters into a monetary settlement which results from a legal proceeding, including from a lawsuit, arbitration, or mediation, or a monetary determination arising from an administrative proceeding described in paragraph (c)(2)(i)(B) or (C) of this section, at any point through the end of the second full fiscal year after the change in ownership has occurred, and as a result, the recalculated composite score for the institution or entity is less than 1.0, as determined by the Department under paragraph (e) of this section. This trigger applies whether the judgment, award, settlement, or monetary determination has been paid.

1. Withdrawal of Owner’s Equity.

1. For a proprietary institution whose composite score is less than 1.5, or for any proprietary institution through the end of the first full fiscal year following a change in ownership, and there is a withdrawal of owner’s equity by any means, including by declaring a dividend, unless the withdrawal is a transfer to an entity included in the affiliated entity group on whose basis the institution’s composite score was calculated; or is the equivalent of wages in a sole proprietorship or general partnership or a required dividend or return of capital; and
2. As a result of that withdrawal, the institution’s recalculated composite score for the entity whose financial statements were submitted to meet the requirements of § 668.23 for the annual submission, or 34 CFR 600.20(g) or (h) for a change in ownership, is less than 1.0, as determined by the Department under paragraph (e) of this section.

1. Gainful Employment.

As determined annually by the Department, the institution received at least 50 percent of its title IV, HEA program funds in its most recently completed fiscal year from gainful employment (GE) programs that are “failing” under subpart S of this part.

Fame Comment: Under this section, mandatory triggers cause recalculation of the institutions composite score, which in turn would require a Letter of Credit(LOC). The some concerning on the list have to do with failed GE programs, withdrawal of owners’ equity, and adjudicated borrower defense claims.

1. Institutional Teach-out Plans or Agreements.

The institution is required to submit a teach-out plan or agreement, by a State, the Department or another Federal agency, an accrediting agency, or other oversight body for reasons related in whole or in part to financial concerns.

1. Publicly Listed Entities.

For an institution that is directly or indirectly owned at least 50 percent by an entity whose securities are listed on a domestic or foreign exchange, the entity is subject to one or more of the following actions or events:

1. SEC actions. The U.S. Securities and Exchange Commission (SEC) issues an order suspending or revoking the registration of any of the entity’s securities pursuant to section 12(j) of the Securities Exchange Act of 1934 (the “Exchange Act”) or suspends trading of the entity’s securities pursuant to section 12(k) of the Exchange Act.
2. Other SEC actions. The SEC files an action against the entity in district court or issues an order instituting proceeding pursuant to section 12(j) of the Exchange Act.
3. Exchange actions. The exchange on which the entity’s securities are listed notifies the entity that it is not in compliance with the exchange’s listing requirements, or its securities are delisted.
4. SEC reports. The entity failed to file a required annual or quarterly report with the SEC within the time period prescribed for that report or by any extended due date under 17 CFR 240.12b-25.
5. Foreign exchanges or oversight authority. The entity is subject to an event, notification, or condition by a foreign exchange or oversight authority that the Department determines is equivalent to those identified in paragraphs (c)(2)(vi)(A) through (D) of this section.

1. Non-Federal Educational Assistance Funds.

For its most recently completed fiscal year, a proprietary institution did not receive at least 10 percent of its revenue from sources other than Federal educational assistance, as provided under § 668.28(c). The financial protection provided under this paragraph (c)(3)(viii) will remain in place until the institution passes the 90/10 revenue requirement under § 668.28(c) for two consecutive years.

1. Cohort Default Rates.

The institution’s two most recent official cohort default rates are 30 percent or greater, as determined under subpart N of this part, unless–

1. 1. The institution files a challenge, request for adjustment, or appeal under subpart N of this part with respect to its rates for one or both of those fiscal years; and
   2. That challenge, request, or appeal remains pending, results in reducing below 30 percent the official cohort default rate for either or both of those years or precludes the rates from either or both years from resulting in a loss of eligibility or provisional certification.

1. Contributions and Distributions.

1. An institution’s financial statements required to be submitted under § 668.23 reflect a contribution in the last quarter of the fiscal year, and the entity that is part of the financial statements then made a distribution during the first two quarters of the next fiscal year; and
2. The offset of such distribution against the contribution results in a recalculated composite score of less than 1.0, as determined by the Department under paragraph (e) of this section.

1. Creditor Events.

As a result of an action taken by the Department, the institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart is subject to a default or other adverse condition under a line of credit, loan agreement, security agreement, or other financing arrangement.

1. Declaration of Financial Exigency.

The institution declares a state of financial exigency to a Federal, State, Tribal, or foreign governmental agency or its accrediting agency.

1. Receivership.

The institution, or an owner or affiliate of the institution that has the power, by contract or ownership interest, to direct or cause the direction of the management of policies of the institution, files for a State or Federal receivership, or an equivalent proceeding under foreign law, or has entered against it an order appointing a receiver or appointing a person of similar status under foreign law.

(d) Discretionary Triggering Events.

The Department may determine that an institution is not able to meet its financial or administrative obligations if the Department determines that a discretionary triggering event is likely to have a significant adverse effect on the financial condition of the institution. For those discretionary triggers that the Department determines will have a significant adverse effect on the financial condition of the institution, the Department will require the institution to provide financial protection as set forth in this subpart. The financial protection required under this paragraph (d) is not less than 10 percent of the total title IV, HEA funding in the prior fiscal year. If the Department requires financial protection as a result of more than one mandatory or discretionary trigger, the Department will require separate financial protection for each individual trigger. The Department will consider whether the financial protection can be released following the institution’s submission of two full fiscal years of audited financial statements following the Department’s notice that requires the posting of the financial protection. In making this determination, the Department considers whether the administrative or financial risk caused by the event has ceased or been resolved, including full payment of all damages, fines, penalties, liabilities, or other financial relief.

DISCRETIONARY TRIGGERS

• 668.171 General – (d) Discretionary Triggering Events

(d) Discretionary Triggering Events.

The following are discretionary triggers:

• Accrediting Agency and Government Agency Actions.

The institution’s accrediting agency or a Federal, State, local, or Tribal authority places the institution on probation or issues a show-cause order or places the institution in a comparable status that poses an equivalent or greater risk to its accreditation, authorization, or eligibility.

DISCRETIONARY TRIGGERS

• 668.171 General – (d) Discretionary Triggering Events

The following are discretionary triggers:

(2) Other Defaults, Delinquencies, Creditor Events, and Judgments.

1. Except as provided in paragraph (c)(2)(xi) of this section, the institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart is subject to a default or other adverse condition under a line of credit, loan agreement, security agreement, or other financing arrangement;
2. Under that line of credit, loan agreement, security agreement, or other financing arrangement, a monetary or nonmonetary default or delinquency or other event occurs that allows the creditor to require or impose on the institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart, an increase in collateral, a change in contractual obligations, an increase in interest rates or payments, or other sanctions, penalties, or fees;

DISCRETIONARY TRIGGERS

• 668.171 General – (d) Discretionary Triggering Events

The following are discretionary triggers:

(2) Other Defaults, Delinquencies, Creditor Events, and Judgments.

1. Any creditor of the institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart takes action to terminate, withdraw, limit, or suspend a loan agreement or other financing arrangement or calls due a balance on a line of credit with an outstanding balance;
2. The institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart enters into a line of credit, loan agreement, security agreement, or other financing arrangement whereby the institution or entity may be subject to a default or other adverse condition as a result of any action taken by the Department; or
3. The institution or any entity included in the financial statements submitted in the current or prior fiscal year under 34 CFR 600.20(g) or (h), § 668.23, or this subpart has a judgment awarding monetary relief entered against it that is subject to appeal or under appeal.

(3) Fluctuations in Title IV Volume.

There is a significant fluctuation between consecutive award years, or a period of award years, in the amount of Direct Loan or Pell Grant funds, or a combination of those funds, received by the institution that cannot be accounted for by changes in those programs.

(4) High Annual Dropout Rates.

As calculated by the Department, the institution has high annual dropout rates.

(5) Interim Reporting.

For an institution required to provide additional financial reporting to the Department due to a failure to meet the financial responsibility standards in this subpart or due to a change in ownership, there are negative cash flows, failure of other financial ratios, cash flows that significantly miss the projections submitted to the Department, withdrawal rates that increase significantly, or other indicators of a significant change in the financial condition of the institution.

(6) Pending Borrower Defense Claims.

There are pending claims for borrower relief discharge under 34 CFR 685.400 from students or former students of the institution and the Department has formed a group process to consider claims under 34 CFR 685.402 and, if approved, those claims could be subject to recoupment.

(7) Discontinuation of Programs.

The institution discontinues academic programs that enroll more than 25 percent of its enrolled students who receive title IV, HEA program funds.

(8) Closure of Locations.

The institution closes locations that enroll more than 25 percent of its students who receive title IV, HEA program funds.

(9) State Actions and Citations.

The institution, or one or more of its programs, is cited by a State licensing or authorizing agency for failing to meet State or agency requirements, including notice that it will withdraw or terminate the institution’s licensure or authorization if the institution does not take the steps necessary to come into compliance with that requirement.

(10) Loss of Institutional or Program Eligibility.

The institution or one or more of its programs has lost eligibility to participate in another Federal educational assistance program due to an administrative action against the institution or its programs.

(11) Exchange Disclosures.

If an institution is directly or indirectly owned at least 50 percent by an entity whose securities are listed on a domestic or foreign exchange, the entity discloses in a public filing that it is under investigation for possible violations of State, Federal or foreign law.

(12) Actions by Another Federal Agency.

The institution is cited and faces loss of education assistance funds from another Federal agency if it does not comply with the agency’s requirements.

(13) Other Teach-out Plans or Agreements Not Included in Paragraph (c) of this Section.

The institution is required to submit a teach-out plan or agreement, including programmatic teach-outs, by a State, the Department or another Federal agency, an accrediting agency, or other oversight body.

(14) Other Events or Conditions.

Any other event or condition that the Department learns about from the institution or other parties, and the Department determines that the event or condition is likely to have a significant adverse effect on the financial condition of the institution.

Fame: There are many Discretionary Triggering Events that may also require a LOC, pending BDR claims, closure of location, not following accrediting agency requirement for teach out plan, loss of funds from another federal agency, high drop out rate, fluctuations in Title IV, state agency actions, etc.

 

Final Rule – RECALCULATION OF COMPOSITE SCORE REQUIREMENT

RECALCULATION OF COMPOSITE SCORE REQUIREMENT

• 668.171 General – (e) Recalculating the Composite Score

(e) Recalculating the Composite Score.

When a recalculation of an institution’s most recent composite score is required by the mandatory triggering events described in paragraph (c) of this section, the Department makes the recalculation as follows:

(1) For a proprietary institution, debts, liabilities, and losses (including cumulative debts, liabilities, and losses for all triggering events) since the end of the prior fiscal year incurred by the entity whose financial statements were submitted in the prior fiscal year to meet the requirements of § 668.23 or this subpart, and debts, liabilities, and losses (including cumulative debts, liabilities, and losses for all triggering events) through the end of the first full fiscal year following a change in ownership incurred by the entity whose financial statements were submitted for 34 CFR 600.20(g) or (h), will be adjusted as follows:

1. 1. For the primary reserve ratio, increasing expenses and decreasing adjusted equity by that amount.
   2. For the equity ratio, decreasing modified equity by that amount.
   3. For the net income ratio, decreasing income before taxes by that amount.

When a recalculation of an institution’s most recent composite score is required by the mandatory triggering events described in paragraph (c) of this section, the Department makes the recalculation as follows:

(2) For a nonprofit institution, debts, liabilities, and losses (including cumulative debts, liabilities, and losses for all triggering events) since the end of the prior fiscal year incurred by the entity whose financial statements were submitted in the prior fiscal year to meet the requirements of § 668.23 or this subpart, and debts, liabilities, and losses (including cumulative debts, liabilities, and losses for all triggering events) through the end of the first full fiscal year following a change in ownership incurred by the entity whose financial statements were submitted for 34 CFR 600.20(g) or (h), will be adjusted as follows:

1. 1. For the primary reserve ratio, increasing expenses and decreasing expendable net assets by that amount.
   2. For the equity ratio, decreasing modified net assets by that amount.
   3. For the net income ratio, decreasing change in net assets without donor restrictions by that amount.

(3) For a proprietary institution, the withdrawal of equity (including cumulative withdrawals of equity) since the end of the prior fiscal year from the entity whose financial statements were submitted in the prior fiscal year to meet the requirements of § 668.23 or this subpart, and the withdrawal of equity (including cumulative withdrawals of equity) through the end of the first full fiscal year following a change in ownership from the entity whose financial statements were

submitted for 34 CFR 600.20(g) or (h), will be adjusted as follows:

1. 1. For the primary reserve ratio, decreasing adjusted equity by that amount.
   2. For the equity ratio, decreasing modified equity and modified total assets by that amount.

(4) For a proprietary institution, a contribution and distribution in the entity whose financial statements were submitted in the prior fiscal year to meet the requirements of § 668.23, this subpart, or 34 CFR 600.20(g) will be adjusted as follows:

1. 1. For the primary reserve ratio, decreasing adjusted equity by the amount of the distribution.
   2. For the equity ratio, decreasing modified equity by the amount of the distribution.

Fame Comment: If the institution has multiple findings, the financial ratio  might have to be recalculated several times, which could trigger multiple LOC amounts.

 

Final Rule – REPORTING REQUIREMENTS

REPORTING REQUIREMENTS

• 668.171 General – (f) Reporting Requirements

(f) Reporting Requirements.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For a monetary judgment, award, or settlement incurred under paragraph (c)(2)(i)(A) of this section, no later than 21 days after either the date of written notification to the institution or entity of the monetary judgment or award, or the execution of the settlement agreement by the institution or entity.
2. For a lawsuit described in paragraph (c)(2)(i)(B) of this section, no later than 21 days after the institution or entity is served with the complaint, and an updated notice must be provided 21 days after the suit has been pending for 120 days.
3. [Reserved]

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For a withdrawal of owner’s equity described in paragraph (c)(2)(ii) of this section–

1. For a capital distribution that is the equivalent of wages in a sole proprietorship or general partnership, no later than 21 days after the date the Department notifies the institution that its composite score is less than 1.5. In response to that notice, the institution must report the total amount of the wage-equivalent distributions it made during its prior fiscal year and any distributions that were made to pay any taxes related to the operation of the institution. During its current fiscal year and the first six months of its subsequent fiscal year (18-month period), the institution is not required to report any distributions to the Department, provided that the institution does not make wage-equivalent distributions that exceed 150 percent of the total amount of wage-equivalent distributions it made during its prior fiscal year, less any distributions that were made to pay any taxes related to the operation of the institution. However, if the institution makes wage-equivalent distributions that exceed 150 percent of the total amount of wage-equivalent distributions it made during its prior fiscal year less any distributions that were made to pay any taxes related to the operation of the institution at any time during the 18-month period, it must report each of those distributions no later than 21 days after they are made, and the Department recalculates the institution’s composite score based on the cumulative amount of the distributions made at that time;
2. For a distribution of dividends or return of capital, no later than 21 days after the dividends are declared or the amount of return of capital is approved; or
3. For a related party receivable or other assets, no later than 21 days after that receivable/other assets are booked or occur.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For a contribution and distribution described in paragraph (c)(2)(x) of this section, no later than 21 days after the distribution.
2. For the provisions relating to a publicly listed entity under paragraph (c)(2)(vi) or (d)(11) of this section, no later than 21 days after the date that such event occurs.
3. For any action by an accrediting agency, Federal, State, local, or Tribal authority that is either a mandatory or discretionary trigger, no later than 21 days after the date on which the institution is notified of the action.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For the creditor events described in paragraph (c)(2)(xi) of this section, no later than 21 days after the date on which the institution is notified of the action by its creditor.
2. For the other defaults, delinquencies, or creditor events described in paragraphs (d)(2)(i), (ii), (iii), and (iv) of this section, no later than 21 days after the event occurs, with an update no later than 21 days after the creditor waives the violation, or the creditor imposes sanctions or penalties, including sanctions or penalties imposed in exchange for or as a result of granting the waiver. For a monetary judgment subject to appeal or under appeal described in paragraph (d)(2)(v) of this section, no later than 21 days after the court enters the judgment, with an update no later than 21 days after the appeal is filed or the period for appeal expires without a notice of appeal being filed. If an appeal is filed, no later than 21 days after the decision on the appeal is issued.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For the non-Federal educational assistance funds provision in paragraph (c)(2)(vii) of this section, no later than 45 days after the end of the institution’s fiscal year, as provided in § 668.28(c)(3).
2. For an institution or entity that has submitted an application for a change in ownership under 34 CFR 600.20 that is required to pay a debt or incurs a liability from a settlement, arbitration proceeding, final judgment in a judicial proceeding, or a determination arising from an administrative proceeding described in paragraph (c)(2)(i)(B) or (C) of this section, the institution must report this no later than 21 days after the action. The reporting requirement in this paragraph (f)(1)(xi) is applicable to any action described in this section occurring through the end of the second full fiscal year after the change in ownership has occurred.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. For a discontinuation of academic programs described in paragraph (d)(7) of this section, no later than 21 days after the discontinuation of programs.
2. For a failure to meet any of the standards in paragraph (b) of this section, no later than 21 days after the institution ceases to meet the standard.
3. For a declaration of financial exigency, no later than 21 days after the institution communicates its declaration to a Federal, State, Tribal, or foreign governmental agency or its accrediting agency.

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. If the institution, or an owner or affiliate of the institution that has the power, by contract or ownership interest, to direct or cause the direction of the management of policies of the institution, files for a State or Federal receivership, or an equivalent proceeding under foreign law, or has entered against it an order appointing a receiver or appointing a person of similar status under foreign law, no later than 21 days after either the filing for receivership or the order appointing a receiver or appointing a person of similar status under foreign law, as applicable.
2. The institution closes locations that enroll more than 25 percent of its students no later than 21 days after the closure that meets or exceeds the thresholds in this paragraph (f)(1)(xvi).

(1) In accordance with procedures established by the Department, an institution must timely notify the Department of the following actions or events:

1. If the institution is directly or indirectly owned at least 50 percent by an entity whose securities are listed on a domestic or foreign exchange, and the entity discloses in a public filing that it is under investigation for possible violations of State, Federal, or foreign law, no later than 21 days after the public filing.
2. For any other event or condition that is likely to have a significant adverse condition on the financial condition of the institution, no later than 21 days after the event or condition occurs.

 

1. (f) Reporting Requirements.
2. (2) The Department may take an administrative action under paragraph (i) of this section against an institution, or determine that the institution is not financially responsible, if it fails to provide timely notice to the Department as provided under paragraph (f)(1) of this section, or fails to respond, within the timeframe specified by the Department, to any determination made, or request for information, by the Department under paragraph (f)(3) of this section.

(3)(i) In its timely notice to the Department under this paragraph (f), or in its response to a determination by the Department that the institution is not financially responsible because of a triggering event under paragraph (c) or (d) of this section that does not have a notice requirement set forth in this paragraph (f), in accordance with procedures established by the Department, the institution may—

1. Show that the creditor waived a violation of a loan agreement under paragraph (d)(2) of this section. However, if the creditor imposes additional constraints or requirements as a condition of waiving the violation, or imposes penalties or requirements under paragraph (d)(2)(ii) of this section, the institution must identify and describe those penalties, constraints, or requirements and demonstrate that complying with those actions will not significantly affect the institution’s ability to meet its financial obligations;

1. Show that the triggering event has been resolved, or for obligations resulting from monetary judgments, awards, settlements, or administrative determinations that arise under paragraph (c)(2)(i)(A) or (D) of this section, that the institution can demonstrate that insurance will cover all of the obligation, or for purposes of recalculation under paragraph (e) of this section, that insurance will cover a portion of the obligation; or
2. Explain or provide information about the conditions or circumstances that precipitated a triggering event under paragraph (d) of this section that demonstrates that the triggering event has not had, or will not have, a significant adverse effect on the financial condition of the institution.

(3)(ii) The Department will consider the information provided by the institution in its notification of the triggering event in determining whether to issue a determination that the institution is not financially responsible.

Fame Comment: Basically, the institution is required to report the incident to ED within 21 days of a triggering event that can affect the financial situation of the institution.

ADDITIONAL AUDIT REQUIREMENTS

• 668.171 General – (h) Audit Opinions and Disclosures

(h) Audit Opinions and Disclosures.

Even if an institution satisfies all of the general standards of financial responsibility under paragraph (b) of this section, the Department does not consider the institution to be financially responsible if the institution’s audited financial statements—

(1) Include an opinion expressed by the auditor that was an adverse, qualified, or disclaimed opinion, unless the Department determines that the adverse, qualified, or disclaimed opinion does not have a significant bearing on the institution’s financial condition; or

(2) Include a disclosure in the notes to the institution’s or entity’s audited financial statements about the institution’s or entity’s diminished liquidity, ability to continue operations, or ability to continue as a going concern, unless the Department determines that the diminished liquidity, ability to continue operations, or ability to continue as a going concern has been alleviated. The Department may conclude that diminished liquidity, ability to continue operations, or ability to continue as a going concern has not been alleviated even if the disclosure provides that those concerns have been alleviated.

ADMINISTRATIVE ACTIONS

• 668.171 General – (h) Audit Opinions and Disclosures

(i) Administrative actions. If the Department determines that an institution is not financially responsible under the standards and provisions of this section or under an alternative standard in § 668.175, or the institution does not submit its financial statements and compliance audits by the date and in the manner required under § 668.23, the Department may–

(1) Initiate an action under subpart G of this part to fine the institution, or limit, suspend, or terminate the institution’s participation in the title IV, HEA programs;

(2) For an institution that is provisionally certified, take an action against the institution under the procedures established in § 668.13(d); or

(3) Deny the institution’s application for certification or recertification to participate in the title IV, HEA programs.

The Final Rule stipulates that an institution is not considered financial responsible if it is required to repay a finding equal to greater than five percent of the funds the institutions received under title IV, during the year covered by that audit or program review.

• Past Performance of an Institution.

An institution is not financially responsible if the institution—

(2) In either of its two most recently submitted compliance audits had a final audit determination or in a Departmentally issued report, including a final program review determination report, issued in its current fiscal year or either of its preceding two fiscal years, had a program review finding that resulted in the institution’s being required to repay an amount greater than five percent of the funds that the institution received under the title IV, HEA programs during the year covered by that audit or program review;

 

SECRETARY’S EVALUATION

• 668.174 Past Performance – (b) Past Performance of Persons or Entities Affiliated with an Institution

(b) Past Performance of Persons or Entities Affiliated with an Institution.

(2) The Secretary may determine that an institution is financially responsible, even if the institution is not otherwise financially responsible under paragraph (b)(1) of this section, if—

1. The institution notifies the Department, within the time permitted and as provided under 34 CFR 600.21, that the person or entity referenced in paragraph (b)(1) of this section exercises substantial control over the institution; and

 

OWNER’S STUDENT LOAN REPAYMENT OBLIGATIONS

• 668.174 Past Performance – (b) Past Performance of Persons or Entities Affiliated with an Institution

The Final Rule adds a new stipulation requiring owners of an institution of higher education not to have defaulted on any Federal student loan.

(b) Past Performance of Persons or Entities Affiliated with an Institution.

(3) An institution is not financially responsible if an owner who exercises substantial control, or the owner’s spouse, has been in default on a Federal student loan, including parent PLUS loans, in the preceding five years, unless —

• (i) The defaulted Federal student loan has been fully repaid and five years have elapsed since the repayment in full;
• (ii) The defaulted Federal student loan has been approved for, and the borrower is in compliance with, a rehabilitation agreement and has been current for five consecutive years; or
• (iii) The defaulted Federal student loan has been discharged, canceled, or forgiven by the Department.

 

About the Authors:

Materials and content originate from the Department of Education posting, with insights and summaries provided by Tom Netting and Sally Samuels.

Sally Samuels, Director of Compliance, Fame

Sally is one of the country’s leading authorities on Federal financial aid administration with more than 43 years of “in the trenches” experience. As a respected Industry leader, she is frequently called upon to speak at School, Accrediting, Regional and State conferences as well as to act as school liaison during program reviews and compliance audits.

 

Having processed, reviewed and taught financial aid for over 40 years Sally brings real life experiences, observations and illustrations to her audience adding a touch of humor to regulatory compliance. Her style makes the sometime complex topics easy to understand and audiences always come away with practical knowledge that they can apply to their everyday situations. Sally has been published many times in various Higher Education periodicals providing her expertise and insight on administering Federal funding based on compliance with the Federal statutes.

 

 

Tom Netting, President/CEO, TEN Government Strategies, Co-Executive Director, CSPEN

Having spent all of his professional career devoted to higher education policy oversight and implementation, Tom Netting has an extensive knowledge of the laws and regulations governing all aspects of higher education. His considerable background and experience have afforded him the opportunity to view the development and implementation of federal higher education and workforce development policy in their entirety – including issues related to higher education and workforce development, health care, veteran affairs policies and the procurement of federal appropriations.