[00:00:00] Speaker 00: Case number 22-5104 et al. [00:00:04] Speaker 00: The Sandium Education Solutions Inc. [00:00:06] Speaker 00: versus Miguel A. Cardona in his official capacity as Secretary of the Department of Education and Department of Education Appellants. [00:00:15] Speaker 00: Mr. Hazel, party appellants. [00:00:17] Speaker 00: Mr. St. [00:00:17] Speaker 00: John, party appellee. [00:00:21] Speaker 02: Good morning, Mr. Hazel. [00:00:23] Speaker 02: We will hear from you. [00:00:26] Speaker 06: Good morning. [00:00:27] Speaker 06: May it please the court, Stephen Hasel for the government. [00:00:30] Speaker 06: If I may, I'd like to reserve three minutes for rebuttal. [00:00:34] Speaker 06: The Higher Education Act provides borrowers who create no meaningful costs, prevents borrowers who create no meaningful costs from receiving collection charges that amount to thousands of dollars. [00:00:47] Speaker 06: When a borrower refuses to cooperate and thus requires coercive and costly activities, [00:00:52] Speaker 06: Collection charges are authorized, but when a borrower cooperates quickly, there's no need for those activities and no basis for collection charges. [00:01:01] Speaker 06: The agency has interpreted the statute this way for decades, the 7th Circuit has approved that interpretation, and the same result is warranted here. [00:01:10] Speaker 06: The basic flaw in Ascendium's argument is that it assumes that all costs associated with defaulting borrowers are collection costs. [00:01:20] Speaker 06: That's not consistent with the statute's text, its structure, and with its funding mechanism. [00:01:24] Speaker 01: Can I ask you a question about that? [00:01:26] Speaker 01: Because it seems to me that you have framed your arguments based on this distinction between collection costs and administrative costs. [00:01:34] Speaker 01: Isn't it easier and more [00:01:39] Speaker 01: I guess intuitive to look at this as permissible under the secretary's prerogative to define reasonable collection costs and hold that the section about the 16% cap needs to be read in conjunction with the section that talks about reasonable collection costs and therefore [00:02:07] Speaker 01: I guess it's section 20 USC, section 1078-6. [00:02:10] Speaker 01: It says the guarantee agency may, in order to defray collection costs, charge the borrower an amount not to exceed 16% of the outstanding principal and interest at the time of the loan sale. [00:02:25] Speaker 01: Why can't we just read that as something that needs to be reasonable? [00:02:30] Speaker 01: That just seems to be the more logical way to look at the way the secretary exercised [00:02:36] Speaker 01: his discretion in this case because the secretary is still also bound by 20 USC section 1091A which says a borrower who has defaulted on a loan made under the sub-chapter shall be required to pay in addition to other charges specified in the sub-chapter reasonable collection costs. [00:02:57] Speaker 01: These are not in conflict with each other because a borrower in a rehabilitation plan is also a defaulted borrower. [00:03:06] Speaker 01: So the collection costs on them also need to be reasonable. [00:03:09] Speaker 01: So it seems to me that looking at it this way seems to be a stronger argument for you than trying to distinguish between collection costs and administrative costs. [00:03:21] Speaker 01: because that requires you to argue that there are no collection costs in the first 60 days, and that's not clear. [00:03:27] Speaker 06: Your Honor, let me take that question in two parts. [00:03:30] Speaker 06: So first, on the relationship between those two provisions, I think it's absolutely right that those are closely related. [00:03:36] Speaker 06: That reasonable collection cost provision says that when there are those costs, a guarantor can collect them, including against [00:03:43] Speaker 06: borrowers who enter rehabilitation agreements. [00:03:46] Speaker 06: The second provision, that rehabilitation cap provision, says when those costs are assessed, they can't go above a 16 percent cap. [00:03:54] Speaker 06: And we know that because for among other reasons there is that in order to defray collection cost language. [00:04:00] Speaker 06: So Congress is very clearly [00:04:02] Speaker 06: linking these two provisions. [00:04:04] Speaker 06: So I think that's absolutely right. [00:04:07] Speaker 06: On your broader point, Your Honor, about sort of how to use the word reasonable here, you know, the agency's interpretation going back three decades now has been that there just are no collection costs in this period, and I'm happy to say more about why that's the best interpretation. [00:04:24] Speaker 01: No, I understand that, but my question is why do you need to rely on that when you can just rely on the fact that [00:04:29] Speaker 01: even under section 1078-6, those have to be reasonable. [00:04:33] Speaker 01: And you can interpret that to be it's not reasonable to collect them in the first 60 days. [00:04:38] Speaker 06: Your Honor, again, the agency's interpretation is that there are just no collection costs, certainly at a minimum, because the word reasonable is in the statute, as you point out. [00:04:49] Speaker 06: This would be an entirely reasonable approach that the agency has taken, and as the Seventh Circuit has approved. [00:04:56] Speaker 06: So we don't have any objection to that reading, just that we think that there is also this interpretation of collection costs that is independently supporting the agency's interpretation. [00:05:08] Speaker 01: My understanding is you've raised both arguments. [00:05:11] Speaker 01: That's right. [00:05:12] Speaker 01: But your emphasis is on the collection cost is one. [00:05:15] Speaker 06: That's correct. [00:05:16] Speaker 01: I was just wondering why. [00:05:19] Speaker 06: It's partly because of the history of this regulatory approach and the way that the agency has explained it before, but you're absolutely right that we have raised both and of course we would welcome a decision from this court on either basis. [00:05:32] Speaker 02: So just to be clear, if we disagree, just hypothetically speaking, if we disagreed with you and believed that there were some collection costs, then we thought that the secretary was wrong to say that there are no collection costs. [00:05:46] Speaker 02: We think that there are some. [00:05:49] Speaker 02: Your fallback argument is consistent with Judge Pan's questioning, which is that, well, the secretary could still define [00:06:02] Speaker 02: reasonable collections costs to exclude whatever those costs are. [00:06:07] Speaker 06: That's right, Your Honor, and I would say that this aspect of our argument ties into the Seventh Circuit's approach. [00:06:13] Speaker 06: Their emphasis was, look, what Congress was really focused on here were these costly activities, things like civil litigation, things like wage garnishment. [00:06:22] Speaker 06: By comparison, the activities that are performed in connection with these borrowers who cooperate quickly, it's things like sending a form letter. [00:06:29] Speaker 06: That's a tiny cost. [00:06:31] Speaker 06: It's negligible in comparison. [00:06:33] Speaker 06: That's not the kind of thing that Congress would have been focused on. [00:06:36] Speaker 06: And at a minimum, it was reasonable for the agency to decide that wasn't the sort of thing that Congress was focused on. [00:06:43] Speaker 06: I do want to address, though, the [00:06:44] Speaker 06: the collection cost piece of this, because it is true that there are no collection costs related to these fireworks. [00:06:51] Speaker 04: Before you get there, let's stay in this world where we don't agree with you on your main argument, but we're inclined to agree with you on your fallback argument. [00:07:05] Speaker 04: What would you say to the counter argument that [00:07:09] Speaker 04: 1078-6's reference to 16% is supposed to inform what a reasonable collection cost is in the rehabilitation context. [00:07:23] Speaker 04: In other words, [00:07:24] Speaker 04: 1091A speaks in general terms about reasonable collection costs and 10786 speaks in specific terms about what a reasonable collection cost is in the rehabilitation context. [00:07:39] Speaker 06: So, Your Honor, 10-78-6, and I realize there's a lot of different provisions flying around here, but that 16% cap, I think the fact that Congress put in a cap for all rehabilitating borrowers, so that includes borrowers who do not cooperate quickly, who might take many months or many years of collection activities before they finally enter a rehabilitation agreement. [00:08:00] Speaker 06: I think the fact that Congress wanted to cap even the amount for those borrowers, that's entirely consistent with the Secretary's approach [00:08:08] Speaker 06: here and saying that, you know, for the people who walk right quickly, who do all the right things, like the Bible plaintiff who enter these agreements quickly, you know, those people shouldn't be charged any collection costs. [00:08:22] Speaker 06: So, go ahead. [00:08:24] Speaker 04: I was just going to say I do want to get to the whether there are collection costs. [00:08:28] Speaker 04: I think we'll let you. [00:08:31] Speaker 04: Just like Judge Wilkins put his cards on the table, last argument I'll put mine on the table here, I'm inclined to go with you on what you just said. [00:08:40] Speaker 04: I think that your argument would be stronger if 1078.6 said the guarantee agency shall not charge more than 16 percent. [00:08:56] Speaker 04: Instead, it speaks in affirmative terms. [00:08:59] Speaker 04: It says the guarantee agency may charge up to 16%. [00:09:04] Speaker 04: That seems a little bit [00:09:07] Speaker 04: harder for you. [00:09:09] Speaker 04: Do you agree? [00:09:11] Speaker 06: I guess I pointed to two other features of the text of that provision. [00:09:14] Speaker 06: One is, of course, in order to defray collection costs language, which I think is helpful for the reasons we've already discussed. [00:09:21] Speaker 06: It also pointed to the may not exceed language. [00:09:24] Speaker 06: I think what Congress wanted to do was to set a cap [00:09:27] Speaker 06: may not exceed, those are exactly the words Congress would use. [00:09:31] Speaker 06: If what Congress was trying to do was to create this stand-alone entitlement to a fee, a rehabilitation fee that's entirely untethered from collection costs, which is what Ascendium's argument is, there's no way they would use that kind of language there. [00:09:47] Speaker 04: I can't speak for my colleagues, but I'm fine with you moving to the argument that you've been trying to make. [00:09:51] Speaker 04: Thank you. [00:09:52] Speaker 04: And that I did not let you. [00:09:54] Speaker 06: I appreciate that, Your Honor. [00:09:56] Speaker 06: So on this collection costs point, I think two features of the statute are particularly helpful here. [00:10:04] Speaker 06: One, as we pointed out, is this distinction that happens again and again throughout the statute between administrative costs and collection costs. [00:10:12] Speaker 06: One example is 1080B, and just a quote that refers to the costs of recovery, including administrative costs and collection costs. [00:10:20] Speaker 06: Congress couldn't have written that if it didn't think of these as two different categories, both of which are costs of recovery. [00:10:27] Speaker 06: They have to mean two different things. [00:10:29] Speaker 06: Ascendium hasn't even attempted to provide a definition that would give meaning to both of those terms. [00:10:35] Speaker 06: And of course, the secretary has. [00:10:39] Speaker 06: And I think in thinking about that distinction and giving it meaning, what's helpful is also to think about the structure of the statute. [00:10:47] Speaker 06: So in this, [00:10:48] Speaker 06: default phase, the unique feature of that phase is that there are these coercive activities like civil litigation. [00:10:55] Speaker 06: That doesn't happen anywhere else. [00:10:56] Speaker 06: It doesn't happen in the lender phase. [00:10:58] Speaker 06: And so given that context, when Congress used the word collection costs, when it enabled these charges, that would have been a natural shorthand for thinking about the costs that are unique to this default phase, which are these coercive activities. [00:11:13] Speaker 06: And I think that understanding of the statute is reinforced by common sense. [00:11:18] Speaker 06: So if we think about what happens with the borrowers who are covered by this rule, they receive a form letter, they enter a standard form agreement, and that's it. [00:11:29] Speaker 06: Those are all the costs that are associated with them. [00:11:32] Speaker 06: Most people would say those sound like administrative costs and not. [00:11:36] Speaker 06: collection costs, and Congress at least reinforced that in Section 1082L, which is talking about these routine communications between borrowers and guarantors, and it refers to those costs as administrative expenses. [00:11:51] Speaker 06: So it's common sense, and it's the way that Congress thought about this part of the statute. [00:11:58] Speaker 04: You point out in your brief that a Symbium [00:12:01] Speaker 04: is in this case in a way that similarly situated organizations have chosen not to be and that in fact those similarly situated organizations may not even have opposed the rule that's being challenged and I see how that helps you a little bit atmospherically. [00:12:21] Speaker 04: I wonder though, it's not unusual for regulated parties to seek regulation because they know it will hurt their competitors more than it will hurt them. [00:12:33] Speaker 04: Is that what's going on here? [00:12:37] Speaker 06: I don't know what's going on with this industry. [00:12:40] Speaker 06: I think what we were getting at at that point is that this is an average cost system, so these are not costs that are tracked on an individual level. [00:12:53] Speaker 06: You either get these charges or you don't, and they're usually a couple thousand dollars. [00:12:58] Speaker 06: And so what Ascendium is asking for here, what its interpretation would do, is that these people who produced no collection costs, in the agency's view, and tiny costs, regardless of how you categorize them, would have these huge charges. [00:13:12] Speaker 06: That certainly wasn't the Seventh Circuit's idea of what the statute did. [00:13:17] Speaker 06: There's nothing in here that suggests that Congress meant to compel that sort of result. [00:13:22] Speaker 04: It may not be a fair question, but if it is fair, it's because you started it with what you said in your brief. [00:13:30] Speaker 06: Fair enough, Your Honor. [00:13:33] Speaker 06: On this average cost point, just for one minute more, I do want to point out ascending benefits from this, other guarantors benefit from it. [00:13:44] Speaker 06: They certainly haven't challenged it. [00:13:45] Speaker 06: And so this is just sort of part of the regulatory backdrop, I think, against this case needs to be decided. [00:13:56] Speaker 02: All right. [00:13:57] Speaker 02: Any other questions? [00:13:59] Speaker 02: You can either wrap up or we'll give you some time on rebuttal. [00:14:06] Speaker 02: Okay. [00:14:06] Speaker 02: Thank you. [00:14:06] Speaker 02: All right. [00:14:08] Speaker 02: Thank you. [00:14:12] Speaker 02: Mr St John. [00:14:39] Speaker 05: Good morning. [00:14:40] Speaker 05: Good morning. [00:14:41] Speaker 05: Thank you, your honor. [00:14:42] Speaker 05: And may it please the court. [00:14:45] Speaker 05: Congress spoke precisely to who guarantors may charge the rehabilitation fee. [00:14:53] Speaker 05: Every borrower whom the guarantor assisted in rehabilitating a defaulted student loan. [00:15:00] Speaker 05: And Congress also spoke precisely to who must pay reasonable collection costs. [00:15:07] Speaker 05: every borrower who defaults on the student loan. [00:15:12] Speaker 05: The department's challenge rule says that some of these borrowers who Congress required to pay these fees do not have to pay these fees. [00:15:23] Speaker 05: And our position is that the department lacks the statutory authority to substitute its judgment for that of Congress. [00:15:30] Speaker 05: Now, the department has defended this rule as we're just defining reasonable collection costs, but that's not what the challenge rule does. [00:15:42] Speaker 05: The challenge rule doesn't contain a definition of reasonable collection costs. [00:15:47] Speaker 05: It doesn't alter the definition of reasonable costs that exist in the regulations. [00:15:51] Speaker 05: It doesn't change what activities are part of collection costs. [00:15:56] Speaker 05: It only creates an exception. [00:15:58] Speaker 05: The plain text provides that a guarantor may charge collection costs [00:16:05] Speaker 05: may charge the reasonable cost of collection on a defaulted loan unless the borrower undertakes certain activities, in which case the guarantor may not charge any collection costs. [00:16:18] Speaker 05: This is an exception, not a definition. [00:16:20] Speaker 05: and Congress already occupied the field as to who should pay these costs. [00:16:25] Speaker 05: Second, the definition of reasonable collection costs cannot affect the application of the rehabilitation fee because the rehabilitation fee statute does not use the term reasonable collection costs. [00:16:38] Speaker 05: Congress determines directly [00:16:40] Speaker 05: that an appropriate and reasonable fee would be up to 16% of the principal and interest of the loan at the time it was sold. [00:16:49] Speaker 01: I want to emphasize- May I ask you about that, though? [00:16:53] Speaker 01: Why do the collection costs referenced in 1078-6 not have to be reasonable when it can be harmonized with 1091A, which says they need to be reasonable? [00:17:04] Speaker 01: They're not in conflict. [00:17:05] Speaker 01: Why don't we read them together and require the costs in 1078.6 to be reasonable? [00:17:11] Speaker 05: Well, for a couple of reasons. [00:17:13] Speaker 05: One is that these fees are, they're different fees. [00:17:16] Speaker 05: And so 1098 says that, it says, [00:17:20] Speaker 05: 1098 provides that the borrower must pay, the default borrower must pay reasonable collection costs in addition to other charges that are specified in the statute. [00:17:29] Speaker 05: The rehabilitation fee statute says that the guarantor may charge this particular fee. [00:17:36] Speaker 01: To defray collection costs. [00:17:37] Speaker 01: So they're both about collection costs. [00:17:39] Speaker 05: To defray collection costs. [00:17:41] Speaker 05: The purpose of the fee is to defray collection costs. [00:17:44] Speaker 05: But I want to emphasize they can't be the same fee. [00:17:46] Speaker 05: And part of the reason why that's the case is that the proceeds of those fees, the fees go to different places. [00:17:53] Speaker 05: So when a guarantor collects a standard default collection fee, the vast majority of that fee, in addition to those collections, is returned to the Department of Education. [00:18:03] Speaker 05: And that in the case of the rehabilitation fee, Congress set up a different system. [00:18:08] Speaker 05: And the recovery of the rehabilitation fee is retained by the guarantor. [00:18:13] Speaker 05: But 100% of the proceeds from rehabilitation, 100% of the collections on the rehabilitated loan are given to the department. [00:18:20] Speaker 01: The second point I want to make- I'm sorry, can you just clarify, like, why does that change the nature of the fees as collection costs? [00:18:27] Speaker 01: Just because they're going to different places doesn't mean they're not both collection costs covered by both statutes. [00:18:34] Speaker 05: I'm just trying to make the point that there are different fees, and the HTA, even in the standard default collection fee statute, recognizes that there could be different charges. [00:18:42] Speaker 05: But the second point I want to emphasize is that there are different collection activities that lead to the assessment of those charges. [00:18:48] Speaker 05: Whenever a gearing tour enters a rehabilitation agreement with a borrower, it is engaged in unique and different collection activities. [00:18:57] Speaker 05: Congress called the rehabilitation program a repayment incentive. [00:19:02] Speaker 05: The purpose of rehabilitation is for the guarantor to collect amounts due and owing on a defaulted loan. [00:19:09] Speaker 05: The guarantor doesn't engage in those collection activities unless there is a rehabilitation. [00:19:14] Speaker 05: And so Congress recognized that there's going to be, we agree that the language in order to create collection costs is Congress's recognition that there is collection activity going on. [00:19:26] Speaker 05: But it's different collection activity than that that is contemplated when there are other types of agreements in place. [00:19:33] Speaker 05: And Congress set up the system where the guarantor doesn't get paid collection costs for the rehabilitation fee unless it successfully completes rehabilitation with the borrower. [00:19:44] Speaker 05: And that means you don't assign the costs as you go along on a month-by-month basis. [00:19:49] Speaker 05: You assign the fee when you were successful. [00:19:53] Speaker 05: That means going out, soliciting a buyer of this loan, finding the buyer for the loan, getting the proceeds of that loan, which would [00:20:01] Speaker 05: which would be paid to the US government so that its liability that it incurred when there was a default is paid hopefully fully. [00:20:12] Speaker 01: No, I understand that there are differences between repayment plans and rehabilitation plans. [00:20:18] Speaker 01: I just don't understand why that distinction makes a difference when you're defining collection costs and interpreting these two statutes, which refer to collection costs. [00:20:27] Speaker 01: We're still talking about collection costs in both contexts. [00:20:30] Speaker 01: The statute still says they need to be reasonable. [00:20:33] Speaker 01: There's a cap imposed by 1078-6, but I don't see why the differences between the two lead to the conclusion that you are urging, especially since the rule says that a repayment agreement includes a rehabilitation agreement. [00:20:48] Speaker 01: Why can't the secretary [00:20:50] Speaker 01: define it that way if they wish to. [00:20:52] Speaker 05: I think there are many problems with defining it that way. [00:20:55] Speaker 05: The first of which is that Congress already made the determination that there would be a different fee for completing a rehabilitated loan, which is a special program. [00:21:05] Speaker 05: And Congress, rather than saying it'll be reasonable collection costs here, actually picked a number [00:21:11] Speaker 05: in Congress conferred upon the errant tort, the direct authority to assess that fee. [00:21:18] Speaker 05: There's no delegation to the secretary. [00:21:19] Speaker 01: I'm sorry, but that's your interpretation. [00:21:21] Speaker 01: I don't see why it's not reasonable to interpret this the way the secretary did, which is that they're all collection costs. [00:21:30] Speaker 01: This is a cap on the collection costs that can be obtained, and they have to be reasonable. [00:21:36] Speaker 05: Sure. [00:21:36] Speaker 05: Well, let me try a different approach here, which is that Congress [00:21:41] Speaker 05: Congress said that when there is a loan rehabilitation, there would be a rehabilitation fear. [00:21:49] Speaker 05: The guarantor has the authority to charge that. [00:21:53] Speaker 01: May charge that. [00:21:55] Speaker 01: To defray collection costs. [00:21:57] Speaker 05: May charge it. [00:21:58] Speaker 05: To which borrowers? [00:22:00] Speaker 05: To those whose loans are successfully rehabilitated. [00:22:03] Speaker 05: When will it be charged on the successful completion of rehabilitation? [00:22:08] Speaker 05: What will the amount be up to 16%? [00:22:11] Speaker 05: But what I want to emphasize is again the work that the guarantors do with rehabilitation is unique that relates to rehabilitation and doesn't occur in other contexts. [00:22:23] Speaker 05: It is [00:22:24] Speaker 05: It is totally reasonable for Congress to make the decision that there should be a fee for helping this borrower out of default and for recovering likely 100% of the money that the US taxpayers have paid on this loan. [00:22:41] Speaker 05: So my position is Congress made that determination. [00:22:44] Speaker 01: No, I very much understand your position. [00:22:46] Speaker 01: And I don't want to belabor this. [00:22:47] Speaker 01: I'll just ask you this one final thing. [00:22:50] Speaker 01: But why can't the secretary interpret that provision to require that the collection costs have to be reasonable and that it's not reasonable to assess them in the first 60 days because it doesn't cost them that much to do this. [00:23:09] Speaker 05: So I had a couple of different responses to that. [00:23:12] Speaker 05: One is the challenge rule [00:23:16] Speaker 05: permits the guarantor to charge 16% if the rehabilitation agreement is entered on day 61. [00:23:24] Speaker 05: The guarantor has engaged in no different collection activity between day 60 and day 61. [00:23:31] Speaker 05: The guarantor doesn't need to engage in coercive collection activity for many, many, many months. [00:23:37] Speaker 05: The department's challenge rule isn't defining reasonable collection costs here when the guarantor's activity doesn't change. [00:23:44] Speaker 05: The department is trying to encourage borrowers to enter into these agreements, but Congress determined what were the rules and conditions for these agreements and what fee that they would be charged. [00:23:56] Speaker 05: So I think that, Your Honor, that the question is more hypothetical. [00:24:00] Speaker 05: could the department use reasonable collection costs to limit the fee? [00:24:05] Speaker 05: Now, our legal position is still no, but our observation of this challenge rule is that that is not what this challenge rule does in any way. [00:24:16] Speaker 05: Instead, it prohibits them. [00:24:17] Speaker 05: And I would take a step back and say, well, [00:24:20] Speaker 05: What are the conditions, take a step back and say, what are the conditions under the department's logic that this fee that Congress acknowledged could be charged would ever be provided? [00:24:32] Speaker 05: Is it only in the circumstances where the guarantor is under wage garnishment? [00:24:37] Speaker 05: But Congress didn't say that the rehabilitation program was only open to those who were involved in wage garnishment. [00:24:43] Speaker 05: Congress made that program available to every defaulted borrower, and Congress recognized the ability of a fee to every defaulted borrower. [00:24:50] Speaker 05: And again, I want to emphasize the guarantor is going to do the same work no matter when a rehabilitation fee is borrowed. [00:24:57] Speaker 05: And it's not that we've done X amount of collection work before 60 days, it's also that entering rehabilitation [00:25:06] Speaker 05: what goes on between the borrower and the guarantor during the next ten months is also collection activity. [00:25:12] Speaker 05: It's a repayment of a defaulted loan. [00:25:15] Speaker 05: Congress called every payment received an amount collected on behalf of the defaulted borrower. [00:25:21] Speaker 05: It's a special program that only the guarantor can operate, and the guarantor only holds the loan after default. [00:25:28] Speaker 05: This brings me to, I think, the next important point in this case, which is [00:25:32] Speaker 05: Congress determined that default was going to be the trigger to pay collection costs. [00:25:38] Speaker 05: Now, Congress didn't say you've got to pay collection costs if you miss a payment or two or three or four. [00:25:46] Speaker 05: Congress statually defined default to mean 270 days. [00:25:53] Speaker 05: The challenge rule effectively says, no, 270 days plus 60 days, at least 60 days, if certain things happen. [00:26:03] Speaker 05: That is, I think, a clear conflict with the statute. [00:26:08] Speaker 05: And Congress didn't just define 270 days out of a hat. [00:26:13] Speaker 05: It used default for a purpose. [00:26:16] Speaker 05: And the barber that gets to this point is contacted multiple times before default to be offered repayment plans, here's how you can avoid default, and told about what the consequences are of default. [00:26:27] Speaker 05: But the consequences of default are more than just what happens to the borrower. [00:26:33] Speaker 05: It's on default that there are significant consequences to guarantors and the American taxpayer. [00:26:38] Speaker 05: It's on default where the guarantor pays the lender's claim, where the U.S. [00:26:43] Speaker 05: taxpayer, through the Department of Education, pays the guarantor's reinsurance claim. [00:26:48] Speaker 05: The guarantors are out a bit. [00:26:49] Speaker 05: The U.S. [00:26:50] Speaker 05: taxpayer was out a lot, and Congress determined that the guarantor then has to exercise due diligence to collect on those loans. [00:26:57] Speaker 05: And it begins to collect on those loans right away. [00:27:02] Speaker 05: Now the Seventh Circuit in black recognized that the standard default collection fees enacted because of the losses to the public fisc. [00:27:10] Speaker 05: Congress made a determination not only that borrowers should pay for some of the costs of their default, but also the department recognizes in its rule that these collection charges have incentive effects, right? [00:27:28] Speaker 05: And in those incentive effects, [00:27:31] Speaker 05: Congress is saying, if you default, you'll have to pay collection charges. [00:27:35] Speaker 05: The hope is this will reduce the number of defaults. [00:27:38] Speaker 04: That argument would also seem to help the government's position here because there's an incentive effect from the rule that they've chosen. [00:27:50] Speaker 04: They've incentivized the borrower to [00:27:54] Speaker 04: get right within 60 days after default. [00:28:00] Speaker 04: Doesn't that speak to the reasonableness of the rule? [00:28:05] Speaker 05: Well, with all due respect in terms of the incentive effects, Congress is the one that chooses the policy. [00:28:11] Speaker 05: And they did choose this policy about when collection charges would be applied. [00:28:16] Speaker 05: And they did choose default. [00:28:17] Speaker 05: And what's important about the department's policy, though it may be a reasonable one in the abstract, [00:28:22] Speaker 05: is that it not only conflicts with the plain language of the ATA, but that it also undermines the congressional policy. [00:28:30] Speaker 05: Because if a borrower does not have to pay collection costs upon default, then whatever incentive effect is created by collection charges isn't going to be felt before default. [00:28:39] Speaker 05: And yet what Congress is most concerned about is no defaults, because no defaults means no payment from the U.S. [00:28:46] Speaker 05: Treasury to guarantors, and from the guarantors' perspective, no payment from the guarantors to the lenders. [00:28:56] Speaker 05: So I believe that we have to look to what Congress said in Congress's policy, and Congress's policy has to trump the department's policy. [00:29:05] Speaker 01: The Congress allowed the Secretary to interpret reasonable collection costs. [00:29:10] Speaker 05: But Congress did not permit the Secretary to change the subclass of borrowers who were required to pay reasonable collection costs. [00:29:20] Speaker 01: That's what this case is about. [00:29:22] Speaker 05: Which is what we believe this case is about because that's the language of the statute which was prompted. [00:29:26] Speaker 05: or sorry, that's the language of the statute which the department's challenge rule undermines by creating this exception. [00:29:34] Speaker 05: And I do want to emphasize that guarantors do engage in collection activity. [00:29:38] Speaker 05: Every time alone is in default. [00:29:40] Speaker 05: And that activity begins right away. [00:29:43] Speaker 05: I see that my time is up here. [00:29:44] Speaker 02: I have a couple of questions. [00:29:46] Speaker 02: Just clarify something for me. [00:29:50] Speaker 02: How do guarantors make money in this business? [00:29:55] Speaker 05: How do guarantors make money in this business? [00:29:58] Speaker 05: Well, guarantors have several responsibilities. [00:30:00] Speaker 05: Some of those responsibilities which are pre-default, there are payments that are made to the guarantors. [00:30:06] Speaker 05: For example, there's an administrative maintenance fee payment which is made to guarantors that relates to the size of their current status. [00:30:15] Speaker 05: current repayment status portfolio. [00:30:18] Speaker 05: The percentage is based on how big your portfolio is. [00:30:22] Speaker 05: Second, guarantors are paid if they success... That fee is paid by who? [00:30:28] Speaker 05: That fee is paid by the Department of Education, by the secretary. [00:30:31] Speaker 05: Second, there is a fee that the secretary provides if the guarantor successfully helps a borrower avoid default. [00:30:43] Speaker 05: It's called a default aversion fee, but the basic program is the lenders call for help at some point during delinquency. [00:30:51] Speaker 05: If the guarantors provide that help and the borrower avoids default, then the guarantors receive a fee. [00:30:58] Speaker 05: Collection costs are another avenue, which we've talked about here today. [00:31:02] Speaker 05: Initially, there were also loan origination, you know, fees when there was a new loan originated, the guarantor would be paid a percentage. [00:31:10] Speaker 05: However, this program has not had new loans initiated in it for a long time. [00:31:16] Speaker 02: It's a legacy program. [00:31:20] Speaker 02: So, I mean, I guess the reason I asked that question is, [00:31:29] Speaker 02: I guess the way I look at the statute is that by saying reasonable costs, the statute could be construed as like sometimes you [00:31:52] Speaker 02: You kind of do rough justice or you kind of have to eat some costs. [00:31:56] Speaker 02: You may not be able to recoup every penny. [00:32:02] Speaker 02: And then sometimes there might be, you know, someone who is kind of like a free rider, so to speak. [00:32:14] Speaker 02: invite 10 people to lunch and say, I'm going to ask all of you to, I'm going to pay for everything and order everything and have all the food there. [00:32:26] Speaker 02: And I'll just ask you all to, you know, reasonably reimburse me. [00:32:31] Speaker 02: And let's say an 11th person shows up and they say, you know, I've got my bag lunch. [00:32:38] Speaker 02: But, you know, they ate one of the cookies. [00:32:41] Speaker 02: that I had bought for the other 10 people, you know, the other 10 people be reasonable for them to just kind of subsidize the cost of that cookie and not charge the free loader for the cost of the cookie. [00:33:01] Speaker 02: So, I mean, these things happen where it's in, I guess what I'm saying is it doesn't, [00:33:10] Speaker 02: doesn't seem to be the case, and it doesn't seem to be your argument that because of this construct, I guess your client is losing some money to the extent that they can't recoup what it believes are some costs under this. [00:33:32] Speaker 02: But kind of in the scheme of things, [00:33:39] Speaker 02: You know, your client is recouping money when people avoid default and you help them do that successfully and that sort of thing. [00:33:50] Speaker 02: I'm just trying to figure out why this is [00:33:57] Speaker 02: to the extent that there's some unfairness here, why is there some sort of manifest unfairness? [00:34:03] Speaker 05: And I'd have to again return to the statute, which was there might be many ways to define reasonableness, but you can't pick a way to define reasonableness that changes the classes in the statute. [00:34:14] Speaker 05: And so in the lunch example, for example, if Congress had said, [00:34:17] Speaker 05: everybody who attends lunch must pay a $20 fee, just to play with the hypothetical, then there would be a problem if there was a person that was there that didn't have to pay the fee, because Congress determined that is ultimately would be appropriate. [00:34:34] Speaker 05: And I want to emphasize that nothing about this rule defines reasonable collection costs. [00:34:39] Speaker 05: This is a red herring argument by the government. [00:34:41] Speaker 05: because a guarantor's collection activity with respect to a rehabilitated loan, its rehab-related collection activity does not depend on when the rehabilitation agreement is entered. [00:34:53] Speaker 05: It's the same in every case. [00:34:56] Speaker 01: Can I ask that? [00:34:57] Speaker 01: So if somebody enters a rehabilitation [00:35:00] Speaker 01: agreement much later, there's not costs accruing as you're trying to persuade them to do something. [00:35:06] Speaker 05: There are costs that are accruing that relate to reasonable collection costs and standard default fee, but the work with respect to rehabilitation, which is the work that Congress identified was deserving of a... But the collection costs for that borrower are going up because if they enter their rehabilitation loan later in the interim time before they enter it, [00:35:29] Speaker 01: Costs are accruing. [00:35:31] Speaker 05: That is correct. [00:35:33] Speaker 01: And those are collection costs. [00:35:35] Speaker 01: Right. [00:35:35] Speaker 05: And the rehabilitation fee is for completing rehabilitation. [00:35:39] Speaker 05: And so those services don't change from one case to another. [00:35:43] Speaker 05: I don't want to repeat unnecessarily the argument. [00:35:45] Speaker 01: No, I think I understand your argument. [00:35:47] Speaker 01: I'm just not sure I agree with it. [00:35:50] Speaker 04: Sure. [00:35:53] Speaker 04: This is Judge Wilkins' hypothetical, I think. [00:35:56] Speaker 04: I think it cuts against you. [00:35:58] Speaker 04: You tell me why it's wrong. [00:36:00] Speaker 04: Congress says to someone, you can organize a lunch. [00:36:06] Speaker 04: You can charge people who attend the lunch a reasonable fee. [00:36:12] Speaker 04: You can't charge anyone more than $20. [00:36:17] Speaker 04: Now, the 11th person comes along. [00:36:19] Speaker 04: And the organizer of the lunch says, I know I can't charge you more than $20. [00:36:23] Speaker 04: I actually think it's reasonable to charge you a lot less than I've charged everyone else, because you brought your own lunch. [00:36:30] Speaker 04: You only ate a cookie. [00:36:32] Speaker 04: Isn't that this case? [00:36:34] Speaker 05: Well, I think that with respect to the rehabilitation fee and the rehabilitation statute, Congress said to the guarantor or to the person hosting the lunch that you may charge $20 for the attendance of the lunch. [00:36:49] Speaker 05: It didn't say you had to. [00:36:50] Speaker 05: It said you may. [00:36:51] Speaker 05: You may charge up to $20, an amount not to exceed. [00:36:54] Speaker 05: The guarantor in the guarantor's discretion can choose, I'm not going to charge $20 to the person that brought their own lunch. [00:37:02] Speaker 05: But that hypothetical, there's no delegation to the department or another entity to come in and say, although Congress told you that you may do this, we're telling you that you may not do this. [00:37:13] Speaker 05: And that ultimately is what the challenge rule does. [00:37:17] Speaker 05: Congress didn't leave a gap here for the department to enter into the equation. [00:37:22] Speaker 05: Also, one thing about that hypothetical that couldn't be a perfect analogy to the rehabilitation context is in each and every case, [00:37:31] Speaker 05: The work that the guarantor's doing at the lunch is, in hosting the event, is the same. [00:37:38] Speaker 05: So there isn't a borrower that comes into rehabilitation in a significantly different space with respect to the event that's being hosted. [00:37:50] Speaker 05: The guarantor's still going to have to go out, collect the funds in the rehabilitation, find a buyer for the loan, sell the loan, put the proceeds to the government. [00:38:03] Speaker 02: All right. [00:38:03] Speaker 02: Thank you. [00:38:04] Speaker 02: We have your argument. [00:38:06] Speaker 02: Thank you. [00:38:09] Speaker 02: So, um, Mr. Hazel, I think you had maybe not sure how much was left on the clock. [00:38:16] Speaker 02: But when we give you three minutes. [00:38:19] Speaker 06: Thank you, Your Honor. [00:38:20] Speaker 06: Just three quick points. [00:38:22] Speaker 06: One on the rehabilitation fee argument. [00:38:25] Speaker 06: Congress recognized and made clear that borrowers who entered those agreements, the rehabilitation fees are supposed to be reasonable and affordable, often $5 a month. [00:38:35] Speaker 06: Ascendium's argument would mean that at the end of that period, they would get a several thousand dollar additional charge. [00:38:41] Speaker 06: That just can't be what Congress intended. [00:38:43] Speaker 06: And that's why every court, every judge, including even the Bible dissent, that [00:38:49] Speaker 06: Ascendium is otherwise relying on, none of them accepted this reading of the rehabilitation fee. [00:38:56] Speaker 06: Second, on the rule, Council said that we're making a red herring argument here. [00:39:02] Speaker 06: No, this rule makes clear that borrowers who cooperate within 60 days [00:39:07] Speaker 06: cannot be charged collection costs. [00:39:09] Speaker 06: The explanation for the rule explains that's both for the reasons that the Seventh Circuit gave and because of the department's longstanding position that there are no collection costs in that period. [00:39:19] Speaker 06: That's something that has been in the regulations since 1992. [00:39:22] Speaker 06: It's been [00:39:24] Speaker 06: reaffirmed and reiterated in our briefs in the Bible and in the black litigation in 2015 dear colleague letter. [00:39:32] Speaker 06: So this is this is by no means a new argument. [00:39:35] Speaker 06: And then finally Judge Wilkins you asked about funding for for guarantors during this period. [00:39:40] Speaker 06: A guarantor who you know is is [00:39:43] Speaker 06: Working with a borrower who cooperates quickly has two sources of funding aside from collection charges. [00:39:51] Speaker 06: One is the department earmarks funds for administrative expenses. [00:39:55] Speaker 06: That's $10.87 each and those are paid including for the loans related to rehabilitated borrowers. [00:40:03] Speaker 06: And the second source of funds is that each time those borrowers make a real rehabilitation payment, the guarantor gets to keep money from that payment. [00:40:12] Speaker 06: So this is not a situation where Ascendium is not making money from those borrowers. [00:40:18] Speaker 06: They have both of those sources. [00:40:20] Speaker 04: I'd be happy to answer any questions. [00:40:22] Speaker 04: I have one clarification question. [00:40:23] Speaker 04: Ascendium said that the reasonable collection cost is a separate fee that they do not [00:40:32] Speaker 04: keep themselves but rather send to the department. [00:40:37] Speaker 04: And they contrasted that with the rehabilitation fee which comes at the end and which they do get to keep. [00:40:45] Speaker 04: Is that all factually correct? [00:40:47] Speaker 06: So your honor, my understanding is that for the rehabilitation payments, Ascenium does get to keep those. [00:40:55] Speaker 06: And that would be $10.786682. [00:40:58] Speaker 06: And they don't keep the reasonable collection costs? [00:41:02] Speaker 04: So they do keep the reasonable collection costs. [00:41:07] Speaker 04: He said they send it to the department. [00:41:09] Speaker 04: Your opposing count, your friend on the other side said that the reasonable collection costs [00:41:14] Speaker 04: is a separate fee that Ascendeeva ultimately sends to the Department of Education. [00:41:21] Speaker 06: I don't think that's correct, Your Honor. [00:41:22] Speaker 06: For the group of borrowers that we're talking about, those who enter rehabilitation agreements, the particular provision is 10-78-6. [00:41:31] Speaker 06: And that says when those rehabilitated loans are either assigned to the department or they're sold to lenders, either way, the guarantor is getting to keep a sum that reflects the collection costs. [00:41:41] Speaker 06: OK. [00:41:42] Speaker 06: That's helpful. [00:41:42] Speaker 06: I'll check it out. [00:41:43] Speaker 06: Thanks. [00:41:44] Speaker 02: I thank you. [00:41:45] Speaker 02: We'll take the matter under advisement.