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UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
____________________________________
In the Matter of Docket No. 92-113-SP
CHAUFFEUR’S
TRAINING SCHOOL, Student Financial
Assistance Proceeding
Respondent.
____________________________________
Appearances: Keith J. Roland, Esq., of Roland, Fogel,
Koblenz & Petroccione, Albany, NY, for Chauffeur’s Training School, Inc.
Sarah L. Wanner, Esq., Office of the General
Counsel, United States Department of Education, Washington, D.C., for Student
Financial Assistance Programs
Before: Judge Ernest C. Canellos
DECISION ON
REMAND
On July 11, 1997, the
Secretary remanded this case for further proceedings consistent with the
district court’s decision in Chauffeur’s
Training School v. Riley, 967 F. Supp. 719 (N.D.N.Y. 1997). Consequently,
the issues before me are limited to the narrowly drawn questions presented by
the district court concerning the appropriate calculation of liability.[1] Chauffeur’s Training School (CTS) had filed
suit against the U.S. Department of Education (Department) challenging the
Department’s administrative assessment of liabilities with respect to its
participation in the Guaranteed Student Loan (GSL) program, and sought a
declaratory judgment setting aside my administrative decision.
The district court noted that my decision had upheld
$2,056,600 in liabilities owed by CTS for errors in the student files which
were actually reviewed but that SFAP had recalculated its losses before the
court and sought to collect "contingent liabilities" in the amount of
$1,850,542. As the court noted, SFAP’s
new calculation of liability “was never before Judge Canellos or the Secretary.” In light of this observation, the court concluded
that CTS was denied the ability to challenge the Department’s sampling and
extrapolation methodology‑‑a methodology upon which CTS'
liabilities were significantly predicated.
In this regard, the court noted that “where, as here, the record is inadequate
to allow meaningful judicial review, the Court should remand to the agency for
further findings.”
Accordingly, on July 31, 1997, January 30, 1998, and
January 5, 1999, I issued orders directing the parties to respond to the issues set
out in the district court’s decision.[2] The parties were directed to respond precisely to the following
questions:
1.
In
light of the institution’s obligation to conduct a sufficient accounting for
its determinations regarding Guaranteed Student Loans (GSL), that it caused to
be disbursed to students, can the errors caused by Respondent in the 187 GSL
program loans actually examined by Student Financial Assistance Program
reviewers be projected to determine the amount of errors for loans to other
Respondent borrowers? What specific
evidence, or inferences from evidence, supports such a projection? If those errors can be projected, what is
the liability amount derived from that projection?
2.
Does
the Department’s Estimated Actual Loss Formula provide a reasonable method of
computing actual losses to the Department for the cost of: (a) default
payments; (b) loans discharged because of false certification, pursuant to 20
U.S.C. § 1087; and (c) interest and special allowance payments on repaid loans?
In response to these questions, CTS argues that SFAP’s
projections of liability are unsupportable by the evidence in the record. In opposition to CTS, SFAP argues that my
findings in the Initial Decision would support the use of either formula, but
notes that the decisions of the Secretary have specifically authorized the use
of the estimated actual loss formula under circumstances similar to this
case. In light of the rulings upheld by
the Secretary subsequent to the issuance of my Initial Decision, I find that
the estimated actual loss formula should be used to calculate CTS’ liability.[3]
It is well established that the nature of the
enforcement of Title IV programs through the use of program review
determinations creates the need for institutions to cooperate with SFAP by providing
the agency with complete file reviews when that information is needed to
determine whether any, if not all, Title IV funds disbursed to the institution
were spent contrary to the statutory and regulatory requirements.[4] More fundamentally, an institution's
cooperation in providing SFAP with documentation of its expenditure of Title IV
funds is consistent with its fiduciary duty to account for the disbursement of
Title IV program funds. An institution is the only one that has at its disposal
the files and records to justify the expenditure of Title IV funds. See In
re Belzer Yeshiva, Docket No. 95-55-SP, U.S. Dep’t of Educ. (June 19,
1996); In re National Broadcasting School, Docket No. 94-98-SP,
U.S. Dep’t of Educ. (December 12, 1994). SFAP does not bear the burden of
specifically identifying the exact liabilities for the findings of
non-compliance, nor does it have the information needed to assess these exact
liabilities since they are determined by the extent of the institution's
non-compliance. In re Belzer Yeshiva at 4. Consequently, CTS’ refusal to provide SFAP with the data
requested undercuts its position that the extrapolation methodology should be
rejected because it is not a precise measure of SFAP’s liability.[5]
Subsequent to the issuance of the tribunal’s Initial Decision in this case, this tribunal has recognized that in cases, like this one, where the procedures set forth under Subpart H -- audit and program review regulations -- govern the proceeding, SFAP is entitled to recover losses directly attributed to the institution's improper expenditure of Title IV funds. In that respect, the reliability and appropriateness of using the estimated actual loss formula is firmly established in our administrative case law and, therefore, its application is clearly warranted in this case. More specifically, the decisions of the tribunal have consistently held that use of the estimated actual loss formula constitutes a fair calculation of the extent of the Department’s losses where it is determined that an institution has improperly disbursed Title IV loans.[6]
It cannot be overemphasized that throughout this appeal,
CTS’s position that it should be relieved of liability as SFAP has failed to
establish any damages with specificity, run counter to its obligations to
demonstrate the propriety of its Title IV expenditures. This is CTS’ argument despite the fact that
it has the burden of proving that its expenditures are correct and, most
important, that it possesses the information with which to quantify these
damages. Presented with this situation,
SFAP could do nothing more than it has done.
First, based on the degree of errors in the sample, SFAP gave CTS the
option of doing a full file review. CTS
chose not to do so. As the only other
reasonable alternative, CTS’ damages were determined by applying the error rate
of the sample to the universe of students to calculate the Title IV loans which
were erroneously certified. From that
amount, SFAP applied its estimated actual loss formula to reach its final
assessment of loss. Given the fact that
CTS failed to provide any information which was probative, I find the sampling
technique utilized in conjunction with the estimated loss formula is
appropriate. It goes without saying
that CTS could, if it wished, have reviewed “its” records and determined if the
assessment of liability was less favorable that that which actually
existed. Again, they apparently chose
not to avail themselves of that opportunity.
The estimated loss formula measures the estimated loss to the Department that has or will result from the ineligible loans certified by the institution. Under this formula, an institution's cohort default rate[7] is multiplied by the total amount of ineligible loans disbursed during a given award year to yield an estimated expenditure of defaulted loans. In Re Selan's System of Beauty Culture, Docket No. 93-82-SP, U.S. Dep't of Educ. (December 19, 1994) at 3. This estimate is added to estimated loan subsidies and interest payments made by the Department to yield the estimated loss formula liability.[8] The estimated loss formula has been relied upon by SFAP as an alternative assessment of liability against an institution found to have improperly disbursed Federal Family Education Loan (FFEL) loans and this tribunal has consistently held that this formula constitutes a fair calculation of the extent of the Department's losses where it has determined that an institution has improperly disbursed Title IV loans.[9]
Before the estimated loss formula can be applied, an institution’s total loan volume must be identified. In the instant case, the institution failed to provide the total loan volume for each of its campuses at issue. Consequently, SFAP’s calculation of the total loan volume for each of CTS’ three campuses at issue, Albany, Chicago, and Houston, represented the most accurate assessment of loan volume for both subsidized Stafford loans and unsubsidized Supplemental Loans for Students (SLS).
The chart below illustrates the computation of loan volume.[10]
|
Campus |
Percentage of CTS borrowers by Campus |
Total Stafford Loan Volume |
Stafford Loan Volume by Campus |
Total SLS Loan Volume |
SLS Loan Volume by Campus |
TOTAL Loan Volume by Campus |
Albany
|
9% (161/1400) |
$31,525,311 |
$3,625,410 |
$11,039,279 |
$1,269,517 |
$4,894,927 |
|
Chicago |
20.5% (288/1400) |
$31,525,311 |
$6,462,688 |
$11,039,279 |
$2,263,052 |
$8,725,740 |
|
Houston |
16% (225/1400) |
$31,525,311 |
$5,044,049 |
$11,039,279 |
$1,766,284 |
$6,810,333 |
|
Stafford and SLS TOTALS: |
|
|
$15,132,147 |
|
$5,298,853 |
|
Once the appropriate loan volume is determined, the
first step of the actual loss formula requires the tribunal to establish the
appropriate error rate to use in extrapolating the loss from the sample of
loans to the universe of the three campus’ loan volume. In its March 2, 1998, brief, SFAP referred
to an error rate for each of the three campuses based on the number of files
sampled by SFAP in the FPRD and the alleged number of errors. To that end, SFAP found error rates of 21%
for Albany, 50% for Chicago, and 56% of Houston. Then, SFAP multiplied the error rate by the total loan volume
(both Stafford and SLS) listed above to reach a total for all three campuses of
$9,204,588. This sum is repeatedly
listed in SFAP’s brief as the total amount of FFEL loan funds misspent, although,
inexplicably, it is not employed anywhere in its estimated loss calculation[11].
Instead, SFAP used six different error rates to
extrapolate the amount of the ineligible Stafford and SLS loans. SFAP may have generated these rates from
using information from the original program review report, although I can do
little more than speculate as to why these error rates were proposed.[12] In this respect, I find SFAP’s use of these
six different error rates improper.
There is some indication in SFAP’s submissions that it may have
determined that a distinction between the error rates for ability-to-benefit
(ATB) violations and other violations was appropriate, but such a distinction
is clearly without basis. It is patently
inappropriate for SFAP to bootstrap its arguments on the merits by calculating
its proposed liability to reach issues that have been foreclosed by my Initial
Decision. My determinations on the
scope of CTS’ regulatory violations have been upheld by the district court, and
are not open to relitigation at the administrative agency level.
In its proposed calculation of CTS’ error rate, SFAP
ignored evidence presented by CTS and found probative by the tribunal regarding
student work file records, ATB tests, financial aid worksheets, and other
student records. My initial decision
acknowledged that CTS was able to account for some of its expenditures, and
that CTS had sufficiently rebutted some of SFAP’s allegations. As such, I
determined that the unrebutted allegations constituted a 10 percent error rate
under customary sampling extrapolations.
In other words, CTS had left unrebutted SFAP’s remaining allegations
that its sampling techniques had shown that 10 percent of the student files
maintained by three institutions operated by CTS would contain errors
sufficient to render those students ineligible for Title IV student financial
assistance. Therefore, for the reasons enumerated above, I find that under the
estimated actual loss formula a 10 percent error rate be used. The appendix sets out the actual loss
formula applied in this decision.
ORDER
On the basis of the foregoing, it is hereby - -
ORDERED, that Chauffeur’s Training School repay to the United States Department of Education the sum of $1, 279,333.[13]
_________________________________
Ernest C. Canellos
Chief Judge
Dated: November 23, 1999