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UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C.
20202
____________________________________
In the Matter of Docket
No. 98-109-SP
MODERN TREND BEAUTY SCHOOL, Student
Financial
Assistance Proceeding
Respondent. PRCN:
199610812239
____________________________________
Appearances: Glenn Bogart, Birmingham, AL, for Respondent.
Denise
Morelli, Esq. Office of the General Counsel, United States Department of
Education, Washington, DC, for Student Financial Assistance Programs.
Before: Richard F. O’Hair, Administrative Judge
DECISION
Modern Trend Beauty School, which operated beauty schools
in Cheyenne, Wyoming, Brenham, Texas, and Lake Jackson, Texas, was a
participant in the Federal student financial aid programs under the Higher
Education Act of 1965, as amended, 20 U.S.C. §1070 et seq. (Title
IV). On May 29, 1998, the Office of
Student Financial Assistance Programs (SFAP), U.S. Department of Education (ED)
issued a Final Program Review Determination Letter (FPRD) informing Modern
Trend that it was assessing a liability of
$955,520 against the school because of a finding of Title IV
violations. Modern Trend exercised its
right to appeal this assessment under 34 C.F.R. § 668.113.
Between December 11 – 15, 1995, SFAP institutional review
specialists from ED’s Denver, Colorado, regional office conducted a program
review of Modern Trend’s compliance with Title IV requirements at its Cheyenne
location. The March 14, 1996, program
review report noted that once program violations were discovered, SFAP expanded
the program review to Modern Trend’s two Texas locations. Following this, Modern Trend closed its
Cheyenne school in July 1996 and its Brenham school in November of that same
year. SFAP determined the violations
discovered in the program review were serious enough to warrant the imposition
of an emergency action and this was followed by a notification of its intention
to terminate the eligibility of Modern Trend’s last remaining school at Lake
Jackson to participate further in the Title IV programs and to impose a fine of
$1,278,500. The parties thereafter
entered into a settlement agreement on January 22, 1997, whereby Modern Trend
agreed to forfeit its eligibility to participate in the Title IV programs and
SFAP agreed not to impose its intended fine.
Modern Trend further agreed to file a close-out audit for the period
July 1, 1994, to January 22, 1997, the date the institution lost its Title IV
eligibility, and to conduct a full file review of all students who had received
Title IV aid from 1993 to 1997.
Modern Trend still had not submitted the agreed upon
close-out audit and required file review by May 29, 1998, the date SFAP issued
its FPRD, and this was noted in the FPRD.
SFAP also documented that it had found a significant number of Title IV
violations during its program review.
These violations fell primarily into the following categories: 1)
improper disbursement of Title IV funds; 2) failure to make Title IV refunds;
3) untimely payment of Title IV refunds; 4) failure to properly calculate
refunds; and, 5) failure to pay student credit balances. The major finding of
the program review, Finding 1, was that Modern Trend had failed to submit its
close-out audit. For this violation SFAP
demanded that Modern Trend return $955,520, all Title IV funds disbursed during
the period of the overdue audit. Of
this amount, $924,801 was to be returned to ED and $30,719 to holders of
Federal Family Education Loans (FFEL).
SFAP demanded the return of all Title IV disbursements under Finding 1;
therefore, it did not make specific dollar assessments for the remaining FPRD
findings summarized above, if the violations occurred within the period of the
overdue audit. The issue of specific
liability for each of the remaining
findings did not become relevant until Modern Trend finally submitted a
close-out audit in February 1999, and its full file review on September 13,
1999. SFAP’s examination of the full
file review disclosed discrepancies in refund amounts and an absence of many of
the school’s relevant accounting records.
After requesting and receiving additional back-up documentation, Mr.
Cary, an SFAP institutional review specialist, assembled all relevant documents
and recalculated the refunds for each student. He determined that Modern Trend
had outstanding refund and repayment liabilities of $188,221. ED Exhibit
3. By this time, SFAP had accepted
Modern Trend’s close-out audit and, therefore, reduced its demand from Modern
Trend from the original amount of $955,520 to the $188,221 figure computed by
Mr. Cary.
Between September 1999 and August 2000, the parties
engaged in further negotiations in an attempt to settle the dispute as to
Modern Trend’s remaining liabilities for improper disbursements, late and
unpaid refunds, and unpaid student credit balances. For the most part, Modern Trend concedes liabilities in these
general areas, and the parties have reduced the spread between their respective
dollar amounts of those liabilities after a series of exchanges of
information. Mr. Cary revised ED
Exhibit 3 and his final analysis results in a school liability of $177,444,
versus Modern Trend’s position that $137,887 is the amount it owes.[1] A secondary dispute between them, however,
addresses how this institutional liability is to be satisfied. Modern Trend insists that the bulk of these
liabilities can be quickly satisfied by means of an offset of Title IV monies
it asserts that SFAP owes to Modern Trend in satisfaction of reimbursement requests
it has submitted to SFAP for funds Modern Trend advanced to its students. SFAP has refused to honor those
reimbursement requests absent the submission of additional, supporting documentation. Modern Trend asks this tribunal to order SFAP to apply the
offsets and the latter maintains the tribunal has no authority to do so. This issue will be addressed below.
Program Review Liabilities
The program review found that Modern Trend violated a
number of regulatory provisions by failing to make refunds to FFEL lenders and
SFAP for loans and Pell Grant payments on behalf of students who withdrew from
Modern Trend prior to completing their programs. Title IV regulations require institutions to have a fair and equitable refund program which
provides for a refund of unearned tuition, fees, room and board, and other
charges to a student who has received Title IV program assistance if the
student withdraws, drops out, is expelled from the institution, or otherwise
fails to complete the program. 34 C.F.R. § 668.22(a)(1)(ii). This refund policy is considered fair and
equitable if the refund is the larger amount provided under the requirements of
either: 1) applicable state law; 2) Federal pro rata refund policy for students
attending for the first time; 3) Federal pro rata refund policy for students
not attending for the first time; or 4) the institution’s refund policy. 34 C.F.R. § 668.22(b). The regulations provide further guidance in
determining the student’s actual withdrawal date and what items must or must
not be included in the refund calculations.
34 C.F.R. §§ 668.21(b); 668.22(c), (d), (h), and (j). After a refund has been calculated, there
are specific timeframes within which the refund must be paid. 34 C.F.R. §§ 682.607(c); 682.605(b); and
685.306; and. If the institution
receives Title IV funds which are in excess of the student’s cost of
attendance, those excess funds must be returned to the student, unless the
student agrees the institution may retain those funds and apply them toward
future costs. These refunds to students
are labeled credit balances. 34
C.F.R.§ 668.65(b).
In
addition to finding that Modern Trend failed to make, or made late, refund
payments, SFAP also found Modern Trend committed computational errors by
awarding Title IV funds to students prior to their having completed the
requisite number of class hours or making payments after the students had
withdrawn. Rules governing the
eligibility of Title IV student aid require the student to be a regular student
enrolled in an eligible program of instruction. 34 C.F.R. § 668.7(a). If
the institution measures its academic year in clock hours, it is required to
disburse Title IV aid in incremental payments which coincide with the number of
clock hours the student has completed in the program of instruction. 34 C.F.R. §§ 690.63; 690.64; 690.3(b)(1);
690.75(a)(3); 20 U.S.C. §§ 1078-7(a)(1), (2).
The regulatory violations described in the program review show that
Modern Trend disbursed Title IV funds to students who had not completed
sufficient class hours to be entitled to receive additional disbursements and
to students who had withdrawn from the institution.
SFAP explained that one reason for the difference between
the $177,444 claimed by SFAP and the $137,887 conceded by Modern Trend can be
partially explained by a number of instances where it refused to give Modern
Trend credit for refunds the school claimed it made because the school could
not appropriately document those payments.
In those instances, Modern Trend attempted to support its claim of
having made a refund payment with nothing more than a copy of the front side of
the purported refund check which did not contain a bank payment stamp in the
right corner. SFAP was willing to
accept as proof of negotiation a copy of the front side of the checks which
contains a bank payment stamp, or a copy of the back side of the check which
contains the appropriate endorsements.
Without evidence of this nature, or any other banking records which
would support Modern Trend’s position that the refund check had been
negotiated, SFAP refused to give Modern Trend credit for having made those
refunds.
The
required full file review of refunds which Modern Trend submitted was prepared
by its auditors and Mr. Cary duplicated this effort by recalculating the
refunds for the approximately 169 students at issue. His work product was recorded in a spreadsheet which lists, among
other items, the amount of the refund for each student as computed by Modern
Trend’s auditor and the refund amounts as computed by Mr. Cary, the amount
Modern Trend reported it had paid as a refund, the amount Mr. Cary determined
remained unpaid, a listing of the exhibit numbers for the exhibits he used in
computing each student’s refund, and frequently, the reason for the difference
in refund amounts. In his
recalculation, Mr. Cary found that Modern Trend owed refunds of $177,444 while
Modern Trend’s auditors found the debt to be $137,887. The main distinction between the two is that
Modern Trend’s submission included only the specific dollar refund for each of
its students in question, while Mr. Cary also submitted as exhibits the
relevant payment documents for each student, plus the Pro Rata Refund
Calculation Worksheet and the Withdrawal Record. Both of these documents are essential work papers for the
calculation of any refund owed on behalf of a student.
The
respondent in these 34 C.F.R. Part 668 Subpart H appeals procedures for program
review determinations has the burden of proving that it properly disbursed the
questioned Title IV funds. 34 C.F.R. §
668.116(d). In this instance, I find
that Modern Trend has not met that burden.
Although Modern Trend concedes it owes refunds, the amount it asserts as
its liability is almost $40,000 shy of that reported by SFAP. Both parties’ liability calculations were
prepared by professionals whose occupation requires that they operate in this
medium on a regular basis. Other than
the bottom line, both sets of refund calculations differ markedly in the nature
of the completeness of this analysis.
Modern Trend’s report contains the names of the students and the single
amount of each student’s refund. SFAP
accounting goes well beyond that and provides the background documents by which
each refund can be independently computed and verified. Additionally, Modern Trend cannot adequately
prove it made some of the claimed refund payments by submission of only the
front of a purported refund checks without the appropriate bank notations. Without some proof that the check has been
negotiated, these copies of the front of the check are useless. See In re Ganaye Academy of Cosmetology,
Dkt. No. 97-54-SP, U.S. Dep’t of Educ. (Feb. 4, 1998).
The quality of the evidence submitted by the
parties is an integral factor to be considered by a fact-finder when engaging
in the process of weighing the evidence submitted by the parties. I find the evidence submitted by Respondent
lacks the weight to satisfy its burden of persuasion in this instance. Accordingly, I find the amount of Modern
Trend’s refund liability to be
$177,444, the amount computed
by Mr. Cary. [2]
Reimbursement Offset
As a result of finding serious deficiencies in Modern
Trend’s administration of the Title IV program, SFAP placed the institution on
the reimbursement system of payment on March 18, 1996. Thereafter, Modern Trend was required to
submit periodic reimbursement claims to SFAP for the Title IV disbursements it
made on behalf of its students. Modern
Trend asserts that SFAP is holding unpaid reimbursement claims and it asks this
tribunal to offset those unpaid claims against the refund liability arising out
of the program review. In support of
its position that this tribunal has the authority to order such an offset of
liabilities, it cites several previous decisions from this tribunal including
an order stemming from In re New Concept Beauty Academy, Dkt. No.
96-58-EA, U.S. Dep’t. of Educ. (October 29, 1996)(Order Denying Respondent’s
Motion to Compel and for Sanctions). As
I stated in that Order and I repeat now, this tribunal does not have
jurisdiction to order SFAP to offset funds allegedly owed to an institution by
virtue of reimbursement claims against funds owed to ED by the institution as a
result of a program review or audit review.
My authority is limited to determining whether the final program review
determination is “supportable, in whole or in part.” 34 C.F.R. § 668.119. This
position is further supported by the finding in New Concept Beauty Academy
v. United states Department of Education et al., No. 97-CV-7939, E.D. Pa
(October 29, 1998), which upheld my decision that the tribunal was without
authority to order ED to release Pell Funds to the institution in satisfaction
of reimbursement requests.
ORDER
On the basis of the foregoing, it is hereby ORDERED that those portions of the Final Program Review Determination not withdrawn by Student Financial Assistance Programs are affirmed, and Modern Trend Beauty School is further ORDERED to remit $177,444 in satisfaction of its liabilities identified in ED Exhibit 3.
_________________________________
Judge Richard F. O'Hair
Dated: March 14, 2001