[Federal Register Volume 72, Number 211 (Thursday, November 1, 2007)]
[Rules and Regulations]
[Pages 61960-62011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-5332]
[[Page 61959]]
-----------------------------------------------------------------------
Part II
Department of Education
-----------------------------------------------------------------------
34 CFR Parts 674, 682 and 685
Federal Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Final Rule
Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 /
Rules and Regulations
[[Page 61960]]
-----------------------------------------------------------------------
DEPARTMENT OF EDUCATION
34 CFR Parts 674, 682 and 685
[Docket ID ED-2007-OPE-0133]
RIN 1840-AC89
Federal Perkins Loan Program, Federal Family Education Loan
Program, and William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: The Secretary amends the Federal Perkins Loan (Perkins Loan)
Program, Federal Family Education Loan (FFEL) Program, and William D.
Ford Federal Direct Loan (Direct Loan) Program regulations. The
Secretary is amending these regulations to strengthen and improve the
administration of the loan programs authorized under Title IV of the
Higher Education Act of 1965, as amended (HEA).
DATES: Effective Date: These regulations are effective July 1, 2008.
Implementation Date: The Secretary has determined, in accordance
with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), that
institutions, lenders, guaranty agencies, and loan servicers that
administer Title IV, HEA programs may, at their discretion, choose to
implement Sec. Sec. 674.38, 674.45, 674.61, 682.202, 682.208, 682.210,
682.211, 682.401, 682.603, 682.604, 685.204, 685.212, 685.301, and
685.304 of these final regulations on or after November 1, 2007. For
further information, see the section entitled Implementation Date of
These Regulations in the SUPPLEMENTARY INFORMATION section of this
preamble.
FOR FURTHER INFORMATION CONTACT: For information related to
Simplification of the Deferment Process, Loan Counseling for Graduate
or Professional Student PLUS Loan Borrowers, Mandatory Assignment of
Defaulted Perkins Loans, Reasonable Collection Costs, and Child or
Family Service Cancellation, Brian Smith. Telephone: (202) 502-7551 or
via Internet: [email protected].
For information related to Accurate and Complete Copy of a Death
Certificate, NSLDS Reporting Requirements, Maximum Loan Period, and
Frequency of Capitalization, Nikki Harris. Telephone: (202) 219-7050 or
via Internet: [email protected].
For information related to Total and Permanent Disability,
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department, Record Retention Requirements on
MPNs Assigned to the Department, Eligible Lender Trustees, and Loan
Discharge for False Certification as a Result of Identity Theft, Gail
McLarnon. Telephone: (202) 219-7048 or via Internet:
[email protected].
For information related to Prohibited Inducements and Preferred
Lender Lists, Pamela Moran. Telephone: (202) 502-7732 or via Internet:
[email protected].
If you use a telecommunications device for the deaf (TDD), you may
call the Federal Relay Service (FRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to any of the contact persons listed in this
section.
SUPPLEMENTARY INFORMATION: On June 12, 2007, the Secretary published a
notice of proposed rulemaking (NPRM) for the Perkins Loan, FFEL and
Direct Loan Programs in the Federal Register (72 FR 32410).
In the preamble to the NPRM, the Secretary discussed on pages 32411
through 32427 the major changes proposed in that document to strengthen
and improve the administration of the loan programs authorized under
Title IV of the HEA. These include the following:
Amending Sec. Sec. 674.38, 682.210, and 685.204 to allow
institutions that participate in the Perkins Loan Program, FFEL
lenders, and the Secretary to grant a deferment under certain
circumstances to a borrower if another FFEL lender or the Department
has granted the borrower a deferment for the same reason and time
period.
Amending Sec. Sec. 674.38, 682.210, and 685.204 to allow
a Perkins, FFEL or Direct Loan borrower's representative to apply for
an armed forces or military service deferment on behalf of the
borrower.
Amending Sec. Sec. 674.61, 682.402, and 685.212 to allow
the use of an accurate and complete photocopy of an original or
certified copy of the death certificate, in addition to the original or
a certified copy of the death certificate, to support the discharge of
a Title IV loan due to death.
Amending Sec. Sec. 674.61, 682.402, and 685.213 to
restructure the regulations governing the discharge of a Perkins, FFEL
or Direct Loan based on the borrower's total and permanent disability
to clarify and provide additional explanation of the eligibility
requirements.
Amending Sec. Sec. 674.61, 682.402, and 685.213 to
provide for a prospective conditional discharge period to establish
eligibility for a total and permanent disability discharge that is up
to three years in length and begins on the date that the Secretary
makes the initial determination that the borrower is totally and
permanently disabled.
Amending Sec. Sec. 674.16, 682.208, and 682.414 to
require institutions, lenders, and guaranty agencies to report
enrollment and loan status information, or any other Title IV-related
data required by the Secretary, to the Secretary by the deadline
established by the Secretary.
Amending Sec. Sec. 674.19, 674.50, and 682.414 to require
an institution or lender to maintain the original electronic promissory
note, plus a certification and other supporting information, regarding
the creation and maintenance of any electronically-signed Perkins Loan
or FFEL promissory note or Master Promissory Note (MPN) and provide
this certification to the Department, upon request, should it be needed
to enforce an assigned loan. Institutions and lenders are required to
maintain the electronic promissory note and supporting documentation
for at least three years after all loan obligations evidenced by the
note are satisfied.
Amending Sec. Sec. 674.19 and 674.50 to require an
institution that participates in the Perkins Loan Program to retain
records showing the date and amount of each disbursement of each loan
made under an MPN for at least three years from the date the loan is
canceled, repaid or otherwise satisfied and require the institution to
submit disbursement records on an assigned Perkins Loan, upon request,
should the Secretary need the records to enforce the loan.
Amending Sec. 682.409 to require a guaranty agency to
submit the record of the lender's disbursement of loan funds to the
school for delivery to the borrower when assigning a FFEL loan to the
Department
Amending Sec. Sec. 682.604 and 685.304 to require
entrance counseling for graduate or professional student PLUS Loan
borrowers and modify the exit counseling requirements for Stafford Loan
borrowers who have also received PLUS Loans.
Amending Sec. Sec. 682.401, 682.603, and 685.301 to
eliminate the maximum 12-month loan period for annual loan limits in
the FFEL and Direct Loan programs.
Amending Sec. Sec. 674.8 to permit the Secretary to
require assignment of a Perkins Loan if the outstanding principal
balance on the loan is $100 or more, the loan has been in default for
seven or more years, and a payment has
[[Page 61961]]
not been received on the loan in the preceding 12 months, unless
payments were not due because the loan was in a period of authorized
forbearance or deferment.
Amending Sec. 674.45 to limit the amount of collection
costs a school may assess against a Perkins Loan borrower to 30 percent
for first collection efforts; 40 percent for second collection efforts;
and, in cases of litigation, 40 percent plus court costs.
Amending Sec. 674.56 to clarify the eligibility
requirements for a Perkins Loan borrower to qualify for a child or
family service cancellation.
Amending Sec. Sec. 682.200 and 682.401 to incorporate
into the regulations specific rules for lenders and guaranty agencies
on prohibited inducements and activities and permissible activities in
accordance with the recommendations of the Department's Task Force on
these issues.
Amending Sec. Sec. 682.200 and 682.602 to reflect the
provisions of The Third Higher Education Extension Act of 2006, Public
Law 109-202, that prohibit a FFEL lender from entering into a new
eligible lender trustee (ELT) relationship with a school or a school-
affiliated organization as of September 30, 2006, but allowing such
relationships in existence prior to that date to continue with certain
restrictions.
Amending Sec. 682.202 to provide that a lender may only
capitalize unpaid interest on a Federal Consolidation Loan that accrues
during an in-school deferment at the expiration of the deferment.
Amending Sec. Sec. 682.208, 682.211, 682.300, 682.302,
and 682.411 regarding loan discharge for false certification as a
result of identity theft.
Amending Sec. Sec. 682.212 and 682.401 to specify
requirements that a school must meet if it chooses to provide a list of
recommended or preferred FFEL lenders for use by the school's students
and their parents, and prohibit the use of a preferred lender list to
deny a borrower the right to use a FFEL lender not included on a
school's list.
In addition to the changes that strengthen and improve the
administration of the loan programs authorized under HEA, these final
regulations also incorporate certain statutory changes made to the HEA
by the College Cost Reduction and Access Act (CCRAA) (Pub. L. 110-84).
These changes are:
Amending Sec. Sec. 674.34, 682.210, and 685.204 to extend
the military deferment to all Title IV borrowers regardless of when
their loans were made, eliminate the 3-year limit on the military
deferment and add a 180-day period of deferment following the
borrower's demobilization as of October 1, 2007.
Amending Sec. Sec. 674.34, 682.210, and 685.204 to
authorize a 13-month deferment following conclusion of their military
service for certain members of the Armed Forces who were enrolled in a
program of instruction at an eligible institution at the time, or
within 6 months prior to the time the borrower was called to active
duty as of October 1, 2007.
Amending Sec. Sec. 674.34 and 682.210 to revise the
definition of economic hardship to allow a borrower to earn 150 percent
of the poverty line applicable to the borrower's family size as of
October 1, 2007.
Amending Sec. Sec. 682.202 and 685.202 to reduce interest
rates on subsidized Stafford loans made to undergraduate students as of
July 1, 2008.
Amending Sec. 682.302 to reduce special allowance
payments for loans first disbursed on or after October 1, 2007 and
establish different rates for eligible not-for-profit lenders and other
lenders.
Amending Sec. 682.305 to increase the loan fee a lender
must pay to the Secretary from 0.50 to 1.0 percent of the principal
amount of the loan for loans first disbursed on or after October 1,
2007.
Amending Sec. 682.404 to reduce the percentage of
collections that a guaranty agency may retain from 23 to 16 percent and
to decrease account maintenance fees paid to guaranty agencies from
0.10 to 0.06 percent as of October 1, 2007.
Removing Sec. 682.415 to eliminate the ``exceptional
performer'' status as of October 1, 2007.
Because these amendments implement changes to the HEA made by the
CCRAA, we do not discuss them in the Analysis of Comments and Changes
section.
Waiver of Proposed Rulemaking--Regulations Implementing the CCRAA
Under the Administrative Procedure Act (5 U.S.C. 553), the
Department is generally required to publish a notice of proposed
rulemaking and provide the public with an opportunity to comment on
proposed regulations prior to issuing final regulations. In addition,
all Department regulations for programs authorized under Title IV of
the HEA are subject to the negotiated rulemaking requirements of
section 492 of the HEA. However, both the APA and HEA provide for
exemptions from these rulemaking requirements. The APA provides that an
agency is not required to conduct notice-and-comment rulemaking when
the agency for good cause finds that notice and comment are
impracticable, unnecessary or contrary to the public interest.
Similarly, section 492 of the HEA provides that the Secretary is not
required to conduct negotiated rulemaking for Title IV, HEA program
regulations if the Secretary determines that applying that requirement
is impracticable, unnecessary or contrary to the public interest within
the meaning of the HEA.
Although the regulations implementing CCRAA are subject to the
APA's notice-and-comment and the HEA's negotiated rulemaking
requirements, the Secretary has determined that it is unnecessary to
conduct negotiated rulemaking or notice-and-comment rulemaking on these
regulations. These amendments simply modify the Department's
regulations to reflect statutory changes made by the CCRAA, and these
statutory changes are either already effective or will be effective
within a short period of time. The Secretary does not have discretion
in whether or how to implement these changes. Accordingly, negotiated
rulemaking and notice-and-comment rulemaking are unnecessary.
There are no significant differences between the NPRM and these
final regulations resulting from public comments.
Implementation Date of These Regulations
Section 482(c) of the HEA requires that regulations affecting
programs under Title IV of the HEA be published in final form by
November 1 prior to the start of the award year (July 1) to which they
apply. However, that section also permits the Secretary to designate
any regulation as one that an entity subject to the regulation may
choose to implement earlier and the conditions under which the entity
may implement the provisions early.
Consistent with the intent of this regulatory effort to strengthen
and improve the administration of the loan programs authorized under
Title IV of the HEA, the Secretary is using the authority granted her
under section 482(c) to designate certain provisions of the
regulations, identified in the following paragraph, for early
implementation at the discretion of each institution, lender, guaranty
agency, or servicer, as appropriate.
In accordance with the authority provided by section 482(c) of the
HEA, the Secretary has determined that for some provisions there are
conditions that must be met in order for an institution, lender,
guaranty agency, or servicer, as appropriate, to implement
[[Page 61962]]
those provisions early. The provisions subject to early implementation
and the conditions are--
Provision: Sections 674.38, 682.210, and 685.204 that simplify the
deferment granting process and allow a borrower's representative to
request a military service deferment or an Armed Forces deferment.
Condition: None.
Provision: Sections 674.61, 682.402, and 685.212 that allow the use
of an accurate and complete photocopy of the original or certified copy
of the borrower's death certificate to support the discharge of a Title
IV loan due to death.
Condition: None.
Provision: Sections 682.603, 682.604, 685.301, and 685.304 that
require entrance counseling requirements and modify exit counseling for
graduate or professional student PLUS borrowers.
Condition: None.
Provision: Section 674.45 that limits the amount of collection
costs a school may assess against a Perkins Loan borrower.
Condition: None.
Provision: Section 682.202 that limits the frequency of
capitalization on Federal Consolidation loans to quarterly, except that
a lender may only capitalize unpaid interest that accrues during an in-
school deferment at the expiration of the deferment.
Condition: None.
Provision: Sections 682.208 and 682.211, which allow a lender to
suspend credit bureau reporting for 120 days and grant borrowers a 120-
day forbearance on a loan while the lender investigates a false
certification as a result of an alleged identity theft.
Condition: None.
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRM published on
June 12, 2007, 241 parties submitted comments on the proposed
regulations. An analysis of the comments and the changes in the
regulations since publication of the NPRM and as a result of public
comment follows.
We group major issues according to subject, with appropriate
sections of the regulations referenced in parentheses. We discuss other
substantive issues under the sections of the regulations to which they
pertain. Generally, we do not address technical and other minor
changes--and suggested changes the law does not authorize the Secretary
to make. We also do not address comments pertaining to issues that were
not within the scope of the NPRM.
Simplification of Deferment Process (Sec. 674.38, 682.210, and
685.204)
Comments: Commenters were generally supportive of our proposal to
simplify the deferment process. Some commenters, however, had
suggestions for modifications.
The proposed regulations would allow a borrower's representative to
request a military service or Armed Forces deferment on behalf of the
borrower. Some commenters recommended that we define ``borrower's
representative'' for purposes of a military service or Armed Forces
deferment. However, several other commenters did not think it was
necessary to define ``borrower's representative.''
One commenter recommended that the Department revise the
regulations to require (rather than just allow) lenders to grant
military service deferments to eligible borrowers based upon a request
from the borrower's representative.
With regard to the simplified deferment granting procedures, some
commenters recommended that we require, rather than allow, lenders to
grant deferments under the proposed procedures.
One commenter noted that interest does not accrue on subsidized
FFEL or Direct Loans, or on Perkins Loans, during deferment periods and
recommended that borrowers with these types of loans not be required to
make an initial deferment request.
One commenter recommended that the notification of a deferment to a
borrower of unsubsidized loans include information on the cost of the
deferment.
One commenter recommended that we adopt a comparable simplified
forbearance process for schools that participate in the Perkins Loan
Program. This commenter felt that Perkins Loan schools should be able
to grant forbearances based on a forbearance granted on a borrower's
FFEL or Direct Loan. This commenter also requested that we allow
borrowers in the Perkins Loan Program to verbally request a forbearance
on their loans.
Several commenters recommended that we modify the regulations to
permit a lender to grant a deferment ``during'' the same time period as
a deferment granted by another lender. This would allow the deferment
dates of a deferment granted by one lender to be part of the deferment
period granted by another lender. The commenter noted that the dates of
the deferment periods may not be exactly the same based on the status
of the loans held by each of the lenders and the applicability of the
deferments to the separate loans.
Discussion: The Department agrees with the commenters who
recommended that we not define the term ``borrower's representative''
for purposes of a military service or Armed Forces deferment. A
borrower's representative would be a member of the borrower's family,
or another reliable source. We do not think it is necessary to regulate
a specific definition of the term ``borrower's representative.'' We
believe allowing flexibility in this regard will be especially helpful
to borrowers called to active duty and stationed overseas in areas of
conflict. Defining ``borrower's representative'' could unnecessarily
limit access to this benefit for those most deserving of it. Commenters
also overwhelmingly supported our decision not to define the term
``borrower's representative.''
We also agree with the recommendation that lenders should be
required to accept a military service or Armed Forces deferment request
from a borrower's representative. We believe that the proposed
regulations would require lenders to accept such deferment requests and
we have not changed that language.
However, we believe the simplified process that applies to other
types of deferments should be optional for lenders. While many lenders
may welcome the simplified deferment requirements as a convenience,
other lenders may prefer to grant deferments based on their own review
of a borrower's deferment documentation. We intend that these amended
regulations will provide lenders with flexibility in structuring their
processes for granting deferment requests; we do not want to
unnecessarily limit their flexibility.
We disagree with the suggestion that lenders be allowed to grant
deferments to borrowers with subsidized loans or Perkins Loans without
a request from the borrower. We believe that the borrower who is
ultimately liable for the loan should be responsible for deciding
whether to request a deferment.
We disagree with the recommendation that schools participating in
the Perkins Loan Program be allowed to grant forbearances based on
forbearances granted on the borrower's FFEL Program loans. The
mandatory forbearance requirements in the FFEL Program differ from the
forbearance requirements in the Perkins Loan Program. Additionally,
given that Perkins schools have wide flexibility in granting
forbearances in the Perkins Loan Program, the Department sees no value
in allowing schools to base Perkins forbearances on
[[Page 61963]]
forbearances granted in the FFEL Program.
We also disagree with the recommendation that we allow deferments
to be granted ``during'' the same time period as another deferment
under the simplified procedures. If the applicability of the deferment
and the status of the separate loans is not the same, the simplified
deferment process cannot be used because the loan holder would need to
obtain separate documentation verifying the eligibility of the borrower
based on different dates.
Changes: None.
Accurate and Complete Copy of a Death Certificate (Sec. Sec. 674.61,
682.402 and 685.212)
Comments: Many commenters supported the proposed changes in
Sec. Sec. 674.61, 682.402, and 685.212 to allow loan holders to use an
accurate and complete photocopy of a death certificate to discharge a
Title IV loan due to the death of a borrower. The commenters agreed
that this approach will reduce the cost of securing additional original
or certified copies of a death certificate for the surviving family
members and decrease burden for loan holders.
Several commenters suggested that the language in Sec. Sec.
674.61, 682.402, and 685.212 be revised to allow a loan holder to use
other data sources to grant a loan discharge based on the death of the
borrower, such as official court documents, the National Student Loan
Data System (NSLDS), or the Social Security Administration's (SSA's)
Death Master File. Two commenters suggested that the Department allow
loan holders to use NSLDS to ``look back'' and discharge loans for a
deceased borrower that were not included in an original discharge due
to the death of the borrower.
Discussion: During the negotiations concerning these regulations,
some non-Federal negotiators asked the Department to expand the types
of documentation that could be used to support a request for a
discharge based on the death of the borrower. Specifically, these
negotiators asked that they be allowed to base discharges on
documentation from NSLDS, SSA's Master Death file or court documents.
We declined to adopt these proposals in order to guard against fraud
and abuse in the discharge process. The SSA has publicly acknowledged
that its Master Death file contains inaccuracies. For that reason, we
do not consider the file to be appropriate for use in granting a death
discharge and continue to believe that we should not expand the types
of documentation for program integrity reasons.
The Department agrees that using NSLDS to identify the loans of a
deceased borrower that were not included in a discharge based on the
death of the borrower is worth exploring; however, for program
integrity reasons we do not agree that NSLDS information alone should
be the basis for discharging loans that were not included in the
original discharge. The Department will give further consideration to
the commenters' suggestion but declines to adopt the suggestion in
these final regulations.
Change: None.
Comments: While supporting the Department's efforts to decrease the
burden on families applying for a discharge, one commenter expressed
concern that fraudulent photocopies would be used to secure a discharge
based on the death of the borrower, thus threatening the integrity of
the Title IV loan programs. Another commenter recommended that the
Secretary conduct a study of how the process for granting requests for
discharges based on the death of the borrower will work before issuing
final regulations allowing use of a photocopy.
Discussion: We appreciate the commenter's concern about the
possible use of fraudulent photocopies of death certificates and will
closely monitor the use of this documentation. We do not believe a
study is necessary at this time. An official death certificate is very
difficult to alter and we expect loan holders to be vigilant when using
a photocopy as the basis for a death discharge. To ensure the integrity
of the Title IV loan programs, the granting of a discharge of a Title
IV loan based on the accurate and complete photocopy of an original or
certified copy of the original death certificate is still at the
discretion of lenders and the Secretary.
Change: None.
Total and Permanent Disability Discharge (Sec. Sec. 674.61, 682.402,
and 685.213)
Comment: Many commenters supported our proposals to restructure the
regulations in Sec. Sec. 674.61, 682.402, and 685.213 to clarify the
eligibility requirements a borrower must meet to receive a total and
permanent disability loan discharge and to provide for a similar
process across the three loan programs. Several commenters also
supported the requirement for a three-year conditional discharge period
beginning on the date the Secretary makes an initial determination that
the borrower is totally and permanently disabled.
Discussion: We appreciate the commenters' support. Upon further
internal review, we believe that the Perkins Loan Program regulations
could be clearer with respect to the information that an institution
must provide to a borrower upon receipt of the borrower's discharge
application.
Changes: The Department has made changes to Sec. 674.61(b)(2) of
the Perkins Loan Program regulations to provide a more detailed
description of the information that must be provided to a borrower upon
the institution's receipt of an application for a discharge.
Comment: Several commenters supported the proposal in Sec. Sec.
674.61(b)(2)(i), 682.402(c)(2), and 685.213(b)(1) requiring a borrower
seeking a total and permanent disability discharge to submit the
completed application within 90 days of the date the physician
certifies the application, thus ensuring that the loan holder has
timely and accurate information on which to base a preliminary
determination about the borrower's eligibility for the discharge.
However, other commenters believed that the 90-day time limit would be
insufficient for a borrower who may be incapable of managing his or her
affairs or unable to put together the paperwork necessary to submit the
application. The commenters also stated that the proposed time limit
would not accommodate delays in the process that are out of the
borrower's control. The commenters suggested that the Secretary make
exceptions to the 90-day time limit to accommodate extenuating
circumstances so that borrowers will not be required to obtain a new
physician certification if the borrower misses the 90-day time limit.
One commenter suggested that we adopt a 180-day time limit for
submission of the discharge application.
Discussion: The Department continues to believe that the
requirement in Sec. Sec. 674.61(b)(2)(i), 682.402(c)(2), and
685.213(b)(1) that borrowers submit the completed application for a
total and permanent disability discharge to the loan holder within 90
days of the date the physician certifies the application is appropriate
and reasonable. Allowing exceptions based on extenuating circumstances
or allowing a 180-day time limit would not ensure that the Secretary
has accurate and timely information on which to base her determination
on the borrower's application. Allowing exceptions or a longer time
limit would also open up the possibility that a borrower might
inadvertently take action that would disqualify the borrower for a
final discharge.
Changes: None.
[[Page 61964]]
Comment: Several commenters noted that the proposed regulations do
not provide for a 60-day administrative forbearance that is provided to
a borrower under the current FFEL regulations for completion and
submission of the discharge application form. The commenters were
concerned that the omission of the forbearance would increase
delinquency on borrower accounts and penalize the borrower. One
commenter recommended that we require lenders to suspend collection
activity and provide a forbearance to a borrower who is attempting to
complete a discharge application as well as during any period while the
application is pending.
Discussion: Section 682.402(c)(5) of the proposed regulations
allows a lender to grant a borrower a forbearance of payment of both
principal and interest if the lender does not receive the physician's
certification of total and permanent disability within 60 days of the
receipt of the physician's letter requesting additional time to
complete and certify the borrower's discharge application. Under Sec.
674.33(d)(5) of the Perkins Loan Program regulations, an institution is
required to forbear payment on a loan for any acceptable reason. In the
Direct Loan Program, Sec. 685.205(b)(5) specifically allows the
Secretary to grant a borrower an administrative forbearance for the
period of time it takes the borrower to submit appropriate
documentation indicating that the borrower has become totally and
permanently disabled. Given that these provisions provide a borrower
with significant access to forbearance while obtaining a physician's
certification and completing the discharge application, the Department
believes that requiring the cessation of collection activity is
unnecessary until the loan holder actually receives the discharge
application.
Changes: None.
Comment: Several commenters stated that we should continue our
current practice of using the date the borrower became totally and
permanently disabled instead of the date the physician certifies the
borrower's disability on the application as we proposed in Sec. Sec.
674.61(b)(3)(ii), 682.402(c)(3)(ii), and 685.213(c)(2) as the date to
establish the borrower's eligibility for a discharge. The commenters
claimed that using the date the physician certifies the application as
the date the borrower became totally and permanently disabled is
arbitrary and contradicts statutory intent that disabled borrowers
receive immediate relief as of the date the borrower becomes totally
and permanently disabled.
Several commenters stated that many borrowers do not realize they
have the ability to obtain a discharge of their student loans and as a
result do not apply for a total and permanent disability discharge
until several years after becoming disabled. These commenters expressed
concern that using the date the physician certifies the borrower's
application as the disability date combined with a prospective
conditional discharge period would subject these borrowers to a long
delay in receiving the discharge.
One commenter stated that, in the FFEL Program, using a date
identified by a physician as the borrower's disability date ensures
that only one date of disability appears on all applications and forms
received by the Secretary when the borrower has multiple loans. The
commenter believes that under the proposed changes to the disability
discharge process, the start date of the three-year conditional
discharge period for a borrower who has multiple loans may vary for
each loan because loans can be assigned to the Secretary at different
times in the discharge process based on when the borrower submits
documentation to each lender when the lender files the claim with the
guarantor, and when the guarantor reviews and pays the claim.
Several commenters questioned the Department's contention that
certifying physicians rely solely on a borrower's statements in
determining the borrower's date of disability and that there may not be
strong medical evidence for using a different date to establish
eligibility for Federal benefits. The commenters did not believe that
it was appropriate for the Department to assume that a physician's
diagnostic methodology is flawed.
Discussion: Sections 437(a) and 464(c)(1)(F) of the HEA provide for
the discharge of a borrower's Title IV loans if the borrower becomes
totally and permanently disabled as determined in accordance with
regulations of the Secretary. As discussed in the preamble to the NPRM,
the Department proposed these regulatory changes to eliminate the
possibility that a final discharge would be made immediately upon
assignment of the account to the Department. We believe this result is
inconsistent with the intent of these regulations, which is to conform
the discharge requirements to those of other Federal programs that only
provide for Federal benefits after appropriate monitoring of the
applicant's condition.
The Department believes that borrowers are sufficiently informed
about the availability of a total and permanent disability discharge.
The promissory notes used in the Title IV loan programs notify
borrowers of the possibility to have the loan discharged if the
borrower becomes totally and permanently disabled. Information on the
discharge is also available on the Department's Web site and in
numerous Department publications as well as in information from other
program participants. Although a borrower may experience a delay before
receiving a total and permanent disability discharge under these
regulations, we wish to emphasize again our belief that the provision
of Federal benefits should be made only after there is sufficient
monitoring of the applicant's condition.
We do not agree that using a date identified by a physician as the
borrower's disability date instead of the date the physician certifies
the borrower's disability on the discharge application means that a
borrower with multiple loans assigned to the Department has only one
date of disability. The Department addresses this and similar issues
frequently under the current total and permanent disability discharge
process and resolves discrepancies in disability dates on assigned
loans by consulting with the physician that certified the borrower's
application. The Department expects to continue this approach to
resolve discrepancies under the new process and does not believe the
regulations need to specifically address issues related to processing
an application.
Lastly, the Department does not agree that the concern we expressed
in the NPRM that there may not be strong medical evidence to support
using the borrower's disability date assumes a flawed diagnostic
methodology on the part of the certifying physician. As we stated in
the preamble to the NPRM, we believe that the best date to use as the
eligibility date is the date the physician certified the application
because that process requires the physician to review the borrower's
condition at that time, rather than speculate about the borrower's
condition in the past.
Changes: None.
Comment: Several commenters disagreed with the Secretary's opinion
that a three-year prospective conditional discharge period would help
prevent fraud and abuse in the Title IV loan programs by allowing the
Secretary to monitor a borrower's status before granting a discharge.
The commenters stated that whether the conditional discharge period is
prospective or retroactive is irrelevant as long as the Secretary has
access to a physician's
[[Page 61965]]
certification confirming that the borrower meets the eligibility
requirements for a disability discharge.
Several commenters also disagreed with the Department's statement
in the preamble to the NPRM that there have been instances when
borrowers have received otherwise disqualifying Title IV loans and
earnings in excess of allowable levels after the date of the borrower's
disability discharge application but also after the date of the
borrower's retroactive final discharge. The commenters cited an
analysis of a sample of total and permanent disability cases that they
claimed did not support the Secretary's view.
Several commenters acknowledged the need to protect the integrity
of the Title IV programs in regard to disability discharges and stated
that reliance on a single physician's certification or determination of
permanent disability may encourage fraud and abuse in the discharge
process.
Discussion: In a Final Audit Report published in November 2005, the
Department's Inspector General concluded that the current, three-year
conditional discharge period was ineffective for ensuring that a
borrower is totally and permanently disabled because it does not always
allow the Department to examine the borrower's current earnings and
loan information. As a result, a borrower who is not currently disabled
could receive a disability discharge even though the borrower has
received current disqualifying income or loans. The Inspector General's
Audit Report noted that approximately 54 percent of the borrowers who
received disability discharges applied for the discharge more than
three years after the disability. As a result, for the discharges
approved by the Department from July 1, 2002, through June 30, 2004,
approximately 54 percent (2,593 borrowers) were based on a three-year
period during which there was no examination of the borrower's current
income. The Inspector General examined current income information that
was available for a limited number of these borrowers who had submitted
a Free Application for Federal Student Aid (FAFSA) and found that a
number of borrowers who claimed to be totally and permanently disabled
also reported current income over the limit for a disability discharge.
As a result the Inspector General recommended that the Department
revise the regulations to ensure that current income and Title IV loan
information is considered when determining whether a borrower is
totally and permanently disabled.
The proposed regulations address the Inspector General's concerns
and we believe they will discourage fraud and abuse in the disability
discharge process. To further ensure against the possibility of fraud
and abuse, we have added a provision to the Perkins, FFEL and Direct
Loan Program regulations specifically reflecting the Secretary's
authority to require a borrower to submit additional medical evidence
if the Secretary determines that the borrower's application does not
conclusively prove that the borrower is disabled. As part of this
review, the Secretary may arrange for an additional review of the
borrower's condition by an independent physician at no expense to the
applicant.
Changes: We have amended Sec. Sec. 674.61(b)(4), 682.402(c)(4),
and 685.213(d) to provide that the Secretary reserves the right to
require additional medical evidence of a borrower's total and permanent
and disability as well as an additional review of the borrower's
condition by an independent physician at the Secretary's expense.
Comment: Many commenters disagreed with the Department's proposal
in Sec. Sec. 674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii)
that only payments made on the loan after the date the physician
certifies the borrower's total and permanent disability discharge
application would be returned to the borrower. The commenters claimed
this proposal would harm borrowers who do not obtain a timely
certification of disability or who continue to make payments to keep
from defaulting or becoming delinquent on their loans. One commenter
recommended that repayments be refunded back to the date certified by
the physician even if a prospective conditional discharge period is
required.
One commenter recommended that no payments previously made on a
loan be returned to a borrower if the borrower receives a final
discharge based on a total and permanent disability.
One commenter requested that we clarify to whom the Secretary
returns payments after a final determination of the borrower's total
and permanent disability is made in Sec. 674.61(b)(5)(iii).
Discussion: As stated in the preamble to the NPRM, the Department
proposed this change to be consistent with the decision to rely on the
date the physician certifies the borrower's disability on the
application and to maintain program integrity in the administration of
the discharge process. Under these regulations, the borrower's
disability date is the date the physician certifies the borrower's
discharge application. In this situation, there is no basis for
returning payments made by the borrower, or on the borrower's behalf,
before that date. However, it is appropriate to return any payments
made by or on behalf of the borrower after that date.
Lastly, the Secretary returns any payments to the individual who
made the payments after a final determination of the borrower's total
and permanent disability is made. We agree that the regulations should
reflect this fact.
Changes: Sections 674.61(b)(5)(iii), 682.402(c)(4)(iii), and
685.213(d)(3)(ii) have been changed to reflect that any payments made
after the date that the physician certified the borrower's application
for a disability discharge will be sent to the person who made the
payment after the final discharge is issued.
Comment: Several commenters felt that the prospective three-year
conditional discharge period should begin on the date the physician
certifies the borrower's total and permanent disability discharge
application rather than on the date the Secretary makes an initial
determination that the borrower is totally and permanently disabled.
The commenters stated that using the date the Secretary makes the
initial determination would be unfair to borrowers. The commenters also
believed that using the date the Secretary initially determines that a
borrower is disabled weakens the Secretary's incentive to make
expeditious decisions on disability discharge applications and
increases the likelihood that a borrower might inadvertently take an
action that would disqualify him or her for a final discharge. One
commenter recommended that the final regulations set a time limit for
the Department to make a determination of a borrower's initial
eligibility for a disability discharge.
Discussion: The Department has considered the comments and has
decided that beginning the prospective three-year conditional discharge
period on the date the physician certifies the borrower's total and
permanent disability discharge application rather than on the date the
Secretary makes an initial determination that the borrower is totally
and permanently disabled is appropriate and will not increase the
opportunity for fraud in the disability discharge process.
Changes: We have revised Sec. Sec. 674.61(b)(3)(i),
682.402(c)(3)(i), and 685.213(c)(2) to provide that the three-year
conditional discharge period begins on the date the physician certifies
the
[[Page 61966]]
borrower's total and permanent disability discharge application.
Comment: Several commenters requested that we apply the same
eligibility standards that apply during the conditional discharge
period (which prohibit the receipt of any additional Title IV loans and
allow a borrower to earn no more than 100 percent of the poverty line
for a family of two, as determined in accordance with the Community
Service Block Grant Act) to the period between the date the borrower
obtains a physician's certification and the date the Secretary makes
her initial determination that the borrower is totally and permanently
disabled. The commenters believed that applying different eligibility
requirements at different stages in the process would confuse borrowers
and jeopardize their ability to qualify for a discharge.
Discussion: The Department has considered the comments and agrees
that applying the same eligibility standards beginning on the date the
borrower obtains the physician's certification on the total and
permanent disability discharge application and continuing those
standards throughout the prospective three-year conditional discharge
would reduce the complexity of the process without creating an
opportunity for fraud.
Changes: We have revised Sec. Sec. 674.61(b)(4)(i),
682.402(c)(4)(i), and 685.213(d)(1) to provide that a borrower may not
receive any Title IV loans or earn more than 100 percent of the poverty
line for a family of two, as determined in accordance with the
Community Service Block Grant Act, beginning on the date the physician
certifies the borrower's discharge application and throughout the
prospective three-year conditional discharge period.
Comment: One commenter requested that the proposed regulations be
clarified to define the term ``new Title IV loan'' to exclude
subsequent disbursements of a prior loan.
Discussion: The Department does not believe that such a change is
necessary. The regulations in Sec. Sec. 674.61(b)(2)(iv)(C)(2) and
(3), 682.402(c)(4)(i)(B) and (C), and 685.213(b)(2)(ii)(A) and (B)
already differentiate between new loans and subsequent disbursements of
prior loans.
Changes: None.
Comment: One commenter requested that the effective dates and
trigger dates in the proposed regulations be carefully evaluated so
that borrowers who are in the process of having discharge forms
certified are not subject to the new requirements. Another commenter
requested that the effective date of any new regulations governing the
disability discharge process be based on the approval date of a new
Federal form to eliminate processing confusion and inadvertent delays
for applicants.
Discussion: The Department anticipates that both the new total and
permanent disability discharge applications and the final regulations
that govern the process will be effective on July 1, 2008, for
borrowers who apply for a discharge on or after that date. Borrowers
who are in the process of having discharge forms certified as of that
date will not be subject to the new regulations.
Changes: None.
Comment: One commenter suggested the Secretary return Perkins Loan
accounts to the school that assigned them if the Secretary determines
that the borrower is not totally and permanently disabled. The
commenter stated that if such accounts were returned to the school, the
school's Perkins Loan revolving fund would benefit from any repayments
made when the school resumes collection.
Discussion: The current assignment process in Sec. 674.50 of the
Perkins Loan Program regulations requires that, upon accepting
assignment of a loan, the Secretary acquire all rights, title, and
interest of the institution in that loan. Returning an assigned Perkins
Loan account to the school if the Secretary determines that a borrower
is not totally and permanently disabled would add administrative burden
to the process and is inconsistent with current regulatory requirements
in Sec. 674.50(f)(1).
Changes: None.
Comment: One commenter suggested that if the Secretary makes an
initial determination that the borrower's disability is not total and
permanent, the borrower should not only resume repayment but should
also be required to repay all amounts that would have been due during
the cessation of collection on the loan while the application was being
processed by the loan holder and the Secretary.
Discussion: The Department believes that to require a borrower to
repay all amounts that would have been due during the cessation of
collection on the loan while the application is being processed would
unnecessarily discourage borrowers who might qualify for a discharge
from applying.
Changes: None.
Comment: One commenter felt that the Department should consider
disability determinations made by other Federal agencies such as the
SSA or the Veteran's Administration (VA) in determining whether
borrowers are eligible for a disability discharge on their Title IV
loans.
Discussion: The Department has previously considered the idea of
applying the disability standards used by other Federal agencies to
borrowers seeking a discharge of their Title IV loans. However, the
definition of total and permanent disability used in the Department's
discharge process is appropriately more demanding than that used by SSA
and the VA. Those agencies use regular medical reviews of applicants
over a number of years to ensure that the applicants remain eligible
for benefits. In those programs, an individual loses benefits if they
are no longer disabled. In contrast, the Department is providing a
significant benefit to an individual on a one-time basis without any
opportunity to conduct future reviews to determine if the individual is
actually disabled. The Secretary believes that the process established
in these regulations provides an appropriate process that will ensure
that only appropriate discharges are granted.
Changes: None.
NSLDS Reporting (Sec. Sec. 674.16, 682.208, 682.401, and 682.414)
Comment: Many commenters did not agree with proposed Sec.
682.401(b)(20), which would change the timeframe in which guarantors
must report certain student enrollment data to the current loan holder
from 60 days to 30 days. The commenters believed that this change would
not accommodate timely reporting in months that have 31 days. Other
commenters stated that guarantors currently report information to NSLDS
at least monthly and that changing the requirement for guarantors to
report enrollment information to lenders to 30 days would not improve
the timeliness of information. One commenter believed that the
Secretary did not appropriately consider all the other established
reporting periods and deadlines when developing this proposal, and that
new NSLDS reporting requirements will unnecessarily burden schools with
additional reporting.
One commenter asked how the Department intends to categorize
Perkins Loan data that are reported to NSLDS under the new regulations.
The commenter noted that historically schools categorized and reported
Perkins Loans based on the terms and conditions of the loan and
reported disbursements made under these categories as one loan made
over a period of years. A school would create a new category of Perkins
Loan when
[[Page 61967]]
the terms and conditions of Perkins Loans were affected by statutory
changes. The commenter believed that reporting Perkins Loans as
separate loans each award year would dramatically increase the number
of loans reported to NSLDS and increase burden and costs associated
with NSLDS reporting. The commenter noted that new NSLDS reporting
criteria would increase the number of Perkins Loan account records and
associated costs of reporting with no benefit to the institution or
borrowers.
Three commenters stated that the language in paragraph (j) of
proposed Sec. 674.16 fails to reflect the intent of Section 485B of
the HEA which specifically provides that the development of NSLDS
reporting timeframes be accomplished according to mutually agreeable
solutions based on consultation with guaranty agencies, lenders and
institutions. The commenters stated that the Department has not devoted
sufficient effort to conducting a meaningful dialogue and information
exchange with institutions about reporting needs for research and
policy analysis purposes.
Several other commenters suggested that there should be weekly
updates to NSLDS instead of the suggested 30 days and believed that
guaranty agencies, servicers, students, and schools would benefit from
having more accurate and timely information in NSLDS.
Discussion: The Secretary believes that the new NSLDS reporting
timeframes will improve the timeliness and availability of information
important to managing the student loan program. The Secretary also
believes that the proposed regulatory changes, such as the
simplification of the deferment granting process, will be easier and
more efficiently implemented if timely and accurate information is more
readily available in NSLDS.
The Department appreciates the commenters' concerns about the cost
associated with increased reporting of Perkins Loans. Although the
costs incurred by institutions to make the systems changes necessary to
comply with new NSLDS reporting requirements are difficult to estimate,
we believe that requiring institutions to report Perkins Loans on an
award year basis, as FFEL and Direct Loan Program loans are reported,
will increase the quality and integrity of Perkins Loan data and allow
the Department to make meaningful comparisons between the Title IV loan
programs for research and budgeting purposes. We also believe that
reporting Perkins Loans on an award year basis will provide borrowers
with a more accurate picture of their total indebtedness.
The Department regularly consults with program participants in
setting NSLDS reporting requirements in established workgroups that
meet several times a year. We believe the regulations reflect this
consultative process.
With regard to the commenter who suggested that there should be
weekly updates to NSLDS instead of the suggested 30-day timeframe,
entities that wish to report to NSLDS on a weekly basis are able to so
under current protocols. We decline to require weekly reporting
requirements for all entities at this time, however, because we believe
that small institutions would find such a standard difficult to manage.
The Secretary agrees with commenters that the 30-day reporting
timeframe does not leave guarantors adequate time to report data to the
current loan holder in months that have 31 days.
Changes: We have changed the reporting timeframe in Sec.
682.401(b)(20) to 35 days.
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.409,
and 682.414)
Comment: One commenter agreed that proper execution and retention
of electronic loan records is necessary for program integrity reasons.
Several other commenters stated that the proposed changes in Sec.
674.19(e)(2)(ii) requiring a school participating in the Perkins Loan
Program to develop and maintain a certification of its electronic
signature process were overly broad, would discourage schools from
using electronic notes, and would impose burdensome new record-keeping
requirements. Other commenters stated that institutional compliance
with these new requirements would be difficult unless the Department
clearly defines these new requirements and provides schools with a
``safe harbor'' of minimum compliance standards for Perkins Loans
already signed electronically by borrowers. The commenters stated that
the burden of complying with Sec. 674.50(c)(12)(i) for institutions
would be difficult to justify given the few borrowers who might dispute
the validity of the electronic signature at some future date.
Several commenters stated that the requirement in Sec.
674.50(c)(12)(ii)(B) that a school's certification include screen shots
as they would have appeared to the borrower is impractical and
unnecessary and asked that this requirement be eliminated.
Discussion: The Department believes that the requirements in Sec.
674.19(e)(2) that an institution create and maintain a certification
regarding the creation and maintenance of electronically signed Perkins
Loan promissory notes or MPNs in accordance with Sec. 674.50(c)(12)
ensures that the school and the Department have the evidence to enforce
an assigned loan if a challenge or factual dispute arises in connection
with the validity of the borrower's electronic signature. Schools are
required to take legal action to collect on a defaulted Perkins Loan in
accordance with Sec. 674.46 of the Perkins Loan Program regulations.
If a legal challenge to the validity of an electronic signature should
arise in the course of litigating a defaulted Perkins Loan, a school
will be in a much stronger legal position to prove that the borrower
signed the loan and benefited from the proceeds of the loan. The need
to ensure the integrity of the Perkins Loan Program justifies
establishing electronic signature safeguards. Perkins Loan schools
should generally not be incurring new costs or burden related to the
certification of electronic signatures on promissory notes. In July of
2001, the Department published its Standards for Electronic Signature
in Electronic Student Loan Transactions (Standards) to facilitate the
development of electronic processes under the Electronic Signatures in
Global and National Commerce Act (E-Sign Act). These Standards provided
guidance to FFEL Program lenders and guaranty agencies, and to schools
in their role as lenders under the Perkins Loan Program, regarding the
use of electronic signatures in conducting student loan transactions,
including using electronic promissory notes. At that time, we informed
loan holders and institutions in the FFEL or Perkins Loan Program that
if their processes for electronic signature and related records did not
satisfy the Standards and the loan was held by a court to be
unenforceable based on those processes, the Secretary would determine
on a case-by-case basis whether Federal benefits would be denied, in
the case of the FFEL Program, or whether a school would be required to
reimburse its Perkins Loan Fund, in the case of the Perkins Loan
Program. If, as we assume, Perkins Loan holders are complying with the
Standards, added burden or cost should not be an issue. The regulations
in Sec. 674.50(c)(12) that describe what the certification must
include are already very specific and detailed and a ``safe harbor'' is
unnecessary. The only provision of these regulations that is not
specific is
[[Page 61968]]
Sec. 674.50(c)(12)(ii)(F), which requires the certification to include
``all other documentation and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.'' This provision is not intended
to be overly burdensome on schools. This provision is intended to cover
whatever documentation a school has that is not already listed in Sec.
674.50(c)(12)(ii)(A) through (E).
Lastly, the Department does not agree with the commenters'
suggestion that inclusion of screen shots as they would have appeared
to the borrower is impractical or unnecessary. The inclusion of screen
shots in the certification is a critical part of the process to ensure
that the promissory note is a valid, legal document, that the terms and
conditions of the loan were properly represented to the borrower, and
that the borrower was fully aware of the fact he or she was receiving a
loan.
Changes: None.
Comment: One commenter suggested that the Department require each
institution that participates in the Perkins Loan Program to designate
an ``E-Sign Contact Person'' on its FISAP submission to enable
institutions to meet documentation requests from the Secretary in a
timely manner.
Discussion: The Department believes this suggestion has merit and
will consider implementing this proposal administratively. However, no
change to the regulations is necessary.
Changes: None.
Comment: Many commenters stated that the 10-business day deadline
required by Sec. Sec. 674.50(c)(12)(iii) and 682.414(a)(6)(iii) within
which Perkins Loan and FFEL loan holders must respond to a request for
evidence that may be needed to resolve a dispute with a borrower on a
loan assigned from the Secretary was too short. One commenter
recommended a 10-business day standard only if the request relates to
pending litigation and an alternative, 30-day standard if the request
is not related to litigation. One commenter recommended delaying
implementation of the 10-business day deadline by one year to give
institutions the opportunity to put in place the systems, policies, and
capability to comply and produce the requested documentation. One
commenter suggested adopting a 15-business day deadline with an option
to appeal if the institution faces a special situation. Another
commenter suggested a 25-business day deadline. One commenter requested
that the Secretary withdraw this proposal completely.
Discussion: The Department does not believe that a 10-business day
deadline to respond to requests from the Secretary for evidence needed
to resolve a dispute involving an electronically-signed loan that has
been assigned to the Secretary is burdensome. The Department believes
that 10 business days provides sufficient time for loan holders. The
Secretary believes that a timely response to a request for information
is essential to proper enforcement of a promissory note, especially
when a borrower is contesting the validity of an electronic signature
and that challenge involves court proceedings or court-imposed
deadlines. Finally, we believe that delaying implementation of this
deadline or not imposing any deadline would threaten the integrity of
the FFEL and Perkins Loan Programs.
Changes: None.
Comment: Several commenters expressed concern regarding the
provision in proposed Sec. 674.50(c)(12)(i)(B), under which the
Department would require a Perkins Loan holder to provide testimony to
ensure the admission of electronic records in a legal proceeding. These
commenters requested that the Department clarify that the institution
will not be responsible for any expenses related to this requirement.
Discussion: Section 489 of the HEA and 34 CFR Sec. 673.7 of the
General Provisions regulations for the Federal Perkins Loan, Federal
Work Study, and Federal Supplemental Educational Opportunity Grant
Programs provide for an administrative cost allowance that an
institution may use to offset its cost of administering the campus-
based programs, including the costs related to the provision of
testimony.
Changes: None.
Comment: One commenter requested that the Department revise Sec.
682.409(c)(4)(viii), which would require a guaranty agency to provide
the Secretary with the name and location of the entity in possession of
an original, electronically signed MPN that has been assigned to the
Department. The commenter asked that we change this provision to give
guaranty agencies the option of providing the Secretary the name and
location of the entity that created the original MPN or promissory note
in response to the Secretary's request. The commenter believed this
approach would provide flexibility for loan holders to continue to
track the entity that created the original electronically signed MPN,
while providing flexibility for new technological changes that may
allow subsequent holders to obtain possession of an original electronic
MPN record. This commenter also recommended a change in Sec.
682.414(a)(6)(i) to allow the ``entity'' that created or the ``entity
in possession'' of an original electronically signed promissory note
respond to a request for information from the Secretary rather than the
guaranty agency or lender that created the note for the same reason.
Discussion: We disagree with the commenter that allowing a guaranty
agency the option of providing the Secretary with the name and location
of the entity that created the original MPN or promissory note meets
the Department's needs. We also disagree that the ``entity'' that
created or that is in possession of the original electronically signed
promissory note would be the more appropriate party to respond to a
request for information from the Department. If the Department needs
the original, electronically signed MPN, it should be a simple matter
for a guaranty agency to provide the name and location of the entity
that possesses the document. Moreover, the lender and guaranty agency
are the program participants that have the legal obligation to maintain
program records and cooperate with the Secretary to enforce loan
obligations.
Changes: None.
Comment: One commenter supported the provisions in Sec. Sec.
674.19(e)(4)(ii) and 682.414(a)(5)(iv) requiring loan holders to retain
an original of an electronically-signed MPN for three years until all
the loans on the MPN are satisfied but requested clarification in the
regulations as to the meaning of the term ``satisfied.''
Discussion: The FFEL, Perkins and Direct Loan Program regulations
already define when a loan is ``satisfied.'' In all three programs, a
loan is ``satisfied'' if the loan has been canceled, repaid in full or
discharged in full. In the Perkins Loan Program, a loan is also
considered ``satisfied'' if the loan has been repaid in full in
accordance with an institution's authority to compromise on the
repayment of a defaulted loan in accordance with Sec. 674.33(e) or the
institution writes off the loan in accordance with Sec. 674.47(h).
Accordingly, we do not believe any further clarification in the
regulations is needed.
Changes: None.
Comment: One commenter stated that the proposed regulations
requiring a FFEL Program loan holder to retain an original of an
electronically-signed MPN for three years after all the loans are
satisfied is unmanageable. This commenter recommended that FFEL Program
lenders be required to submit
[[Page 61969]]
electronic signature certifications and authentication records to the
guarantor at the time a claim is submitted. The commenter believed that
this approach would ensure that certification and authentication
records are available and submitted consistently and promptly with each
loan the guarantor assigns to the Department.
Discussion: The Department carefully considered this approach
during negotiated rulemaking, but after considering comments made
during that process, we determined that, at this time, it would not be
necessary to require FFEL Program lenders to submit electronic
signature certifications and authentication records to the guarantor at
the time a claim is submitted. Instead, consistent with our
understanding of how paper notes are being handled in the student loan
industry, we have adopted the framework contained in these final
regulations, which puts the responsibility for managing the electronic
promissory notes and ensuring their continued enforceability on the
lenders and guaranty agencies that created them.
Changes: None.
Comment: One commenter recommended that the Department adopt the
accessibility standards of section 101(d) of the E-Sign Act, which
requires that electronic records ``remain accessible to all persons who
are entitled to access * * * in a form that is capable of being
accurately reproduced for later reference'' rather than the standard in
proposed Sec. 682.414(a)(6)(iv), which requires a guaranty agency to
provide the Secretary with ``full and complete access'' to electronic
loan records. The commenter believed that the standard as currently
proposed is burdensome and ambiguous. The commenter also requested a
change in terminology in Sec. 682.414(a)(6)(iv) that would require the
``entity in possession'' of the original electronically signed
promissory note rather than the holder be responsible for ensuring
access to electronic loan records.
Discussion: The Department disagrees that using the accessibility
standards of section 101(d) of the E-Sign Act rather than the standard
in proposed Sec. 682.414(a)(6)(iv) is appropriate and believes that
the term ``full and complete access'' is clear and straight forward.
The Department also does not agree with the suggestion that we
substitute the term ``entity in possession'' of the original
electronically signed for ``holder'' in Sec. 682.414(a)(6)(iv). We
believe the term ``entity'' is too vague for the purposes of these
regulations.
Changes: None.
Comment: Several commenters suggested that the Department modify
the regulations to include a provision that would end the requirement
for certification of electronic signatures on MPNs after five years to
evaluate the impact of the provisions on schools that participate in
the Perkins Loan Program.
Discussion: The Department does not believe it is necessary or
advisable to ``sunset'' the provisions requiring the certification of
electronic signature on MPNs after five years. These requirements are
essential to the integrity of the Title IV loan programs and the
Department's ability to enforce electronically-signed, assigned
promissory notes. Additionally, the Department can evaluate the impact
of these regulations without establishing a sunset date for these
provisions.
Changes: None.
Comment: Several commenters requested that we establish a
prospective effective date for the provisions requiring the
certification of electronically-signed notes that includes only
promissory notes signed on or after the effective date of the final
regulations to allow program participants sufficient lead time to
implement the changes.
Discussion: The Department does not agree that these requirements
should only apply to electronically-signed promissory notes made on or
after July 1, 2008. As stated above in response to another comment, in
July of 2001, the Department published Standards to facilitate the
development of electronic processes under the E-Sign Act. We assume
that FFEL Loan and Perkins Loan holders are complying with those
standards and, therefore, should be ready to comply with these new
requirements on July 1, 2008.
Changes: None.
Record Retention Requirements on Master Promissory Notes (MPNs)
Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.406, and
682.409)
Comment: One commenter suggested that the Department collect the
Perkins Loan Program MPN and the records showing the date and amount of
each disbursement of Perkins Loan Program funds at the time the loan is
assigned to the Department and require an institution to respond to
requests for information on an assigned loan for three years following
assignment, rather than require the institution to retain the MPNs and
disbursement records. The commenter believed that this approach would
reduce burden and prevent data corruption or archiving problems for
Perkins Loan Program institutions and would allow the Department
immediate access to MPNs and disbursement records if the records were
needed to enforce the loan.
Discussion: The current Perkins Loan Program assignment procedures
outlined in Dear Colleague Letter CB-06-12 (August 1, 2006) require a
school to submit the original or a certified true copy of the
promissory note upon assignment of the loan to the Department. The
requirement in Sec. 674.19(e)(4)(ii) that an institution retain an
original electronically signed MPN for three years after all the loans
made on the MPN are satisfied applies to loans that have not been
assigned to the Department. The regulations in Sec. 674.50(c)(11)
allow the Secretary to request a record of disbursements for each loan
made to a borrower on an MPN that shows the date and amount of each
disbursement on a Perkins Loan that has been assigned to the
Department. If a school wishes to submit the disbursement records to
the Department when assigning a Perkins Loan, the school may do so.
Changes: None.
Comment: Several commenters asked that the Department implement a
process to notify a Perkins Loan Program school when an assigned loan
has been satisfied so that the school does not incur additional cost
and burden when determining when it can destroy documentation
supporting its electronic authentication and signature process and
disbursement records.
One commenter suggested that the Department provide schools the
option to retain documentation supporting the school's electronic
signature process and disbursement records for at least three years
after the loan is assigned to the Secretary, rather than when the loan
is satisfied, so that schools would know exactly when the three-year
period begins and ends.
Discussion: The Department believes that implementing a process to
notify a school participating in the Perkins Loan Program that an
assigned loan has been satisfied has merit and will explore the
possibility for implementing such a process. Such a process, however,
does not need to be reflected in the regulations.
The Department continues to believe that it is vital for a school
to retain disbursement records and documentation supporting its
authentication and electronic signature process for at least three
years from the date the loan is canceled, repaid or otherwise satisfied
so that the Department has access to the documents if needed to enforce
an assigned loan and to ensure the continued integrity of the Perkins
Loan Program.
[[Page 61970]]
Changes: None.
Comment: Several commenters stated that the new record retention
provisions requiring schools participating in the Perkins Loan Program
to retain disbursement and electronic authentication and signature
records for each loan made using an MPN for at least three years from
the date the loan is canceled, repaid or otherwise satisfied were
unduly burdensome.
The commenters requested that instead of retaining a copy of each
screen shot as it would have appeared to the borrower, the Department
should require institutions to retain a ``description'' of each screen
shot. The commenter also stated that requiring schools to retain ``all
other documentary and technical evidence supporting the validity and
authenticity of an electronically-signed note'' was so open-ended that
schools would be forced to retain all material on the chance that the
Department might request it at some future date.
Discussion: As discussed earlier in this section, the Department
believes that the retention of records will make it easier for the
Department or the school to prove that a borrower benefited from the
proceeds of a loan and will preserve program integrity. Moreover, we do
not believe this requirement is overly burdensome or costly because it
is consistent with the Department's current requirements and record
storage experience. When the MPN was implemented in the Perkins Loan
Program, schools were advised in Dear Colleague Letter CB-03-14 to
retain documentation to support a borrower's loan transactions should
the school need to enforce a loan made under a Perkins MPN. When the
Perkins Loan Program MPN was updated and reissued in June of 2006,
schools were specifically directed in Dear Colleague Letter CB-06-10 to
retain disbursement records to support a borrower's loan transactions.
This guidance, together with the record retention provisions in 34 CFR
668.24 that require a school to retain disbursement records for three
years after the disbursement is made, ensures that schools should be in
possession of the required records already. Further, existing
Assignment Procedures in Dear Colleague Letter CB-06-12 specifically
require schools to retain disbursement records on assigned loans made
under an MPN until the loan is paid-in-full or otherwise satisfied and
submit those records if requested to do so by the Department. As we
stated in response to an earlier comment, screen shots are part of the
loan making process and also provide evidence that a borrower who
signed an MPN or promissory note electronically was aware that he or
she was receiving a loan. It is the Department's experience that
electronic storage of records supporting Title IV loans transactions
are generally cost efficient.
Changes: None.
Comment: One commenter requested that the Department confirm that
an institution is only required to retain the documentation and
templates that apply to electronically-signed MPNs signed for a
specified time period during which the institution's process remained
unchanged, and that it will not be necessary for institutions to retain
this documentation on a loan-by-loan basis.
Discussion: The commenter is correct that an institution is
required to retain the documentation and templates that apply to all of
an institution's electronically-signed MPNs for discrete periods of
time. We wish to emphasize that should any aspect of an institution's
electronic signature process change, the institution must document the
new process in the affidavit or certification required by Sec.
674.50(c)(12).
Changes: None.
Comment: One commenter requested that we clarify what would
constitute an ``original'' electronically-signed MPN under the proposed
Perkins Loan record retention requirements. The commenter stated that
if an ``original'' electronically-signed MPN means that a school can
print a copy of the signed MPN, the Department should not use the word
``original.'' However, if the Department's intent is to require a
school to produce something more than a paper copy of the MPN, the
commenter requested that the Secretary provide schools and servicers
additional time to ensure their ability to meet the new requirements
before the regulations take effect.
Discussion: An institution or its servicers should have a system
designed so that the signed electronic record is designated as the
``authoritative'' copy of the promissory note and must be able to
reproduce an electronically signed promissory note, when printed or
viewed, as accurately as if it were a paper record. The institution or
its servicer should enable the viewing or printing of electronic
records using commonly available operating systems and hardware.
Designation of the electronic note created by the institution as the
``original'' is a useful means for designating the electronic note that
the institution must retain under these regulations.
Changes: None.
Comment: One commenter asked that we clarify whether the
requirement to retain documentation of the ``date and amount of each
disbursement'' of Perkins Loan Program funds referred to records
reflecting the date the money was applied to a borrower's account or to
records showing the date the funds were awarded. Another commenter
requested clarification on the timeframe under which an institution
would be required to submit Perkins Loan disbursement records.
Discussion: The requirement to retain documentation of the ``date
and amount of each disbursement'' of loan funds refers to the amount
and date that Perkins Loan Program funds were applied to a borrower's
account. An institution may, but is not required to, submit
disbursement records to the Department when it assigns a Perkins Loan.
If an institution does not submit the disbursement records to the
Secretary when assigning a Perkins Loan, it must retain the records for
three years from the date the loan is canceled, repaid, or otherwise
satisfied in case the Secretary needs the records to enforce the loan.
Changes: None.
Comment: Several commenters stated that guarantors are not
currently required to collect the record of the lender's disbursement
of Stafford and PLUS loan funds to a school for delivery to the
borrower as part of the claims process nor are they required to submit
loan disbursement data under the current process for assigning loans to
the Secretary. For these reasons, the commenters stated that
disbursement records may not be readily available for submission in the
FFEL mandatory assignment process as required by proposed Sec.
682.409(c)(4)(vii). The commenters requested that the Department
implement any new guaranty agency reporting obligation prospectively
for new Stafford and PLUS loans made under an MPN on and after July 1,
2008 to give sufficient lead time to guarantors and lenders to
establish the processes to support this new requirement. Another
commenter, again citing the lack of availability of disbursement
records through the claims process, recommended that the Secretary
require the submission of the record reflecting the date of guarantee
instead and only for loans that are under investigation by the
Secretary.
Discussion: The Department's longstanding regulations in Sec.
682.414(a)(4)(ii)(D) have directed guaranty agencies to require a
participating lender to maintain current, complete, and accurate
records of each loan that it holds, including but not limited to, a
copy of a record of each disbursement of loan proceeds. Although these
records are not collected
[[Page 61971]]
as part of the claims process, these records must be retained in
accordance with Sec. 682.414(a)(4)(ii)(D). For this reason, the
Department sees no reason to implement these new regulations
prospectively and is confident that guaranty agencies and lenders can
implement a process that provides for the submission of disbursement
records as part of the mandatory assignment process before the
regulations become effective on July 1, 2008.
Changes: None.
Comment: Several commenters suggested that we revise the provision
in Sec. 682.414(a)(5)(iv) requiring a lender to retain an original
electronically signed Stafford or PLUS MPN for three years after all
loans made under the MPN are satisfied to require the ``entity in
possession'' of the original electronically signed MPN, rather than the
``holder,'' to retain the note for a period ending on the earlier of 20
years from the date of signature or the date all the loans on the MPN
have been satisfied. The commenters stated that this change would
address cases when a loan is assigned to another party, such as the
guarantor or Secretary, and the lender has no way of knowing when all
the loans under the MPN are satisfied. The commenter stated that this
change would also address the fact that the life span of record
retention technology has a practical limit.
Discussion: As stated in response to comments discussed earlier,
the Department believes using the term ``entity'' in the context of
Sec. 682.414 is too vague. The intent of the regulations is to create
a legal obligation on the lender and guaranty agency that created the
promissory note to cooperate with the Secretary.
Changes: None.
Loan Counseling for Graduate or Professional Student PLUS Loan
Borrowers (Sec. Sec. 682.603, 682.604, 685.301, and 685.304)
Comments: Overall, commenters were supportive of the proposed
changes to the loan counseling regulations, but some commenters had
questions or concerns regarding the proposed changes.
One commenter asked if the notification requirements specified in
Sec. 682.603(d) would be met if the information listed were provided
to borrowers through the school's financial aid award letter process.
Several commenters noted that the proposed regulations would
require schools to provide one set of initial counseling materials to
student PLUS borrowers who have received prior Stafford Loans and
another set of initial counseling materials to student PLUS borrowers
who have not received prior Stafford Loans. The commenters acknowledged
that establishing less comprehensive initial counseling requirements
for student PLUS borrowers who have already received Stafford Loan
initial counseling was intended to minimize burden on schools. However,
these commenters stated that separate initial counseling requirements
would actually be more burdensome. For some schools, separating student
PLUS borrowers into different categories for initial counseling
purposes would be more cumbersome than providing the same initial
counseling to all student PLUS borrowers.
Several commenters noted that proposed Sec. 682.604(f) is
disjointed and hard to follow. These commenters recommended
restructuring Sec. 682.604(f).
Discussion: The regulations do not specify a method a school must
use to notify a student PLUS Loan borrower of the student's eligibility
for a Stafford Loan, the different terms and conditions of PLUS and
Stafford loans, and the opportunity to request a Stafford Loan instead
of a PLUS Loan. The regulations only specify that this information must
be provided to the student before the loan is certified, in the case of
a FFEL Loan (see Sec. 682.603(d)), or before the loan is originated,
in the case of a Direct Loan (see Sec. 685.301(a)(3)). If the
financial aid award letter includes the required information, and is
provided to the student before the loan is certified or originated, it
would meet the requirements of Sec. 682.603(d) or Sec. 685.301(a)(3),
as the case may be.
Many schools no longer provide in-person loan counseling, and
instead use electronic, interactive counseling programs. Often these
electronic, interactive counseling programs are developed by guaranty
agencies and provided to schools. We believe that the benefits of a
more informed borrower, particularly for graduate and professional PLUS
borrowers who have access to significantly increased loan amounts,
outweigh the costs of providing the additional loan counseling. In
addition, schools are not required to provide separate counseling for
student PLUS borrowers. Schools are not required to develop separate
initial counseling materials for student PLUS borrowers with prior
Stafford Loans and student PLUS borrowers without prior Stafford Loans.
The regulations only specify minimum initial counseling requirements.
Schools must provide certain information to PLUS borrowers who have
received prior Stafford loans, and must provide certain information to
PLUS borrowers who have not received prior Stafford Loans. The
regulations do not prohibit schools from exceeding the minimum initial
counseling requirements. If a school finds that providing comprehensive
initial counseling to all student PLUS borrowers is more cost effective
than providing the limited counseling required by the regulations, a
school may provide the comprehensive counseling to all student PLUS
borrowers.
We agree with the commenters' recommendations regarding the
restructuring of Sec. 682.604(f).
Changes: We have restructured Sec. 682.604(f). Revised Sec.
682.402(f) begins with a discussion of initial counseling requirements
for Stafford Loan borrowers, then discusses initial counseling
requirements for student PLUS Loan borrowers, and ends with a
discussion of general initial counseling requirements.
Maximum Length of Loan Period (Sec. Sec. 682.401, 682.603, and
685.301)
Comment: Commenters were in unanimous support of the Secretary's
proposal to eliminate the maximum 12-month loan period for annual loan
limits in the FFEL and Direct Loan programs and the 12-month period of
loan guarantee in the FFEL Programs. One commenter noted that the
regulatory change would require loan origination systems changes.
Another commenter noted that the change would require the removal of a
system edit used by some guaranty agencies to monitor school loan
certification. This commenter asked the Secretary to confirm that this
regulatory change would have no impact on a school's reporting to
NSLDS.
One commenter asked the Secretary to further clarify in the
preamble to these final regulations the relationship of the longer loan
period to loan limits and the definition of academic year. Another
commenter asked that we clarify in the preamble that the intent of the
regulations is to avoid potential misunderstandings among schools that
might lead to the application of a single Stafford annual loan limit
for a period spanning multiple academic years.
Discussion: The Secretary appreciates the commenters' support. The
Secretary understands that this regulatory change may require lenders
and guaranty agencies to make changes in their loan origination
systems. The Secretary believes that the effective date of the
regulations under the master calendar provisions of the HEA provides
sufficient time for these changes to be made.
[[Page 61972]]
The intent of the regulations generally is not to allow schools to
certify a single Stafford annual loan limit for a period spanning
multiple years, although borrowers attending non-term and certain
nonstandard term programs on a less-than-full-time basis may have loan
periods that span more than the period associated with an academic year
for a full-time student. Schools are still expected to monitor annual
loan limit progression by the school's academic year, which must meet
at least the minimum standards defined in 34 CFR 668.3. Annual loan
limits continue to apply to the academic year or the period of time
necessary for a student to progress to the next grade level as
referenced in Sec. 682.401(b)(2)(ii). Unless a school uses standard
terms and is authorized to certify loans by the term, most loan
certifications will also continue to be for the academic year according
to the school's defined Title IV academic year.
The proposed changes to Sec. Sec. 682.401, 682.603, and 685.301
are intended to allow a school to certify a single loan for students in
shorter, non-term or nonstandard term programs (for example, a 15 month
program when the school's Title IV academic year encompasses 10
months). The change will also provide greater flexibility in
rescheduling loan disbursements for students in non-term and certain
nonstandard term programs who are progressing academically in their
programs more slowly than anticipated, or who drop out and return
within the permitted 180-day period to retain Title IV disbursements.
The Secretary clarifies that this change has no impact on school
reporting to the Department's NSLDS.
Change: None.
Mandatory Assignment of Defaulted Perkins Loans (Sec. Sec. 674.8 and
674.50)
Justification for Mandatory Assignment
Comments: A large number of schools commented on this proposal,
challenging the Department's justification for requiring mandatory
assignment of defaulted Perkins Loans. These schools acknowledged that
the Department has collection methods unavailable to the schools, but
noted that schools have collection methods, such as withholding
transcripts and placing administrative holds on services, that the
Department does not have.
Many of these schools identified the amount of outstanding Perkins
Loan balances they would lose upon implementation of these regulations.
These schools argued that the loss of potential collections on these
loans removes an income source for their Perkins Loan Fund, and reduces
the number of Perkins Loans available to future borrowers. These
commenters pointed out that there has been no Federal Capital
Contribution (FCC) in the Perkins Loan Program in recent years, and
asserted that the mandatory assignment proposal would further deplete a
school's Perkins Loan Fund.
These schools also identified their recovery rates on Perkins Loans
they hold that are in default for seven or more years. They based their
calculations on the outstanding amounts on these loans, and the amounts
collected in the preceding three years. Recovery rates reported by the
commenters ranged from a low of seven percent to a high of 79 percent.
The schools argued that the Department has not demonstrated that it has
a higher recovery rate on defaulted Perkins Loans than the schools.
Discussion: The Department acknowledges that schools have
collection tools that are unavailable to the Department. However, the
low recovery rates reported by many schools indicate that these tools
are not generally effective. The mandatory assignment requirements will
have little impact on schools that do use these tools effectively to
collect on defaulted loans. If even one payment is received on a
defaulted loan in the year prior to the Department requiring
assignment, the loan would not be eligible for mandatory assignment. In
addition, it is our experience that many schools maintain holds on
transcripts and other administrative services after they assign Perkins
Loans to the Department. We expect that schools will continue this
practice for mandatorily assigned loans. The Department's estimated
savings resulting from mandatory assignment are provided in the
Accounting Statement in Table 1 of the Regulatory Impact Analysis.
The Department is aware of the large amount of aged, defaulted
Perkins Loans held by schools with little or no collection activity. As
noted in the preamble to the NPRM, our records show that schools are
holding more than $400,000,000 in such loans. The commenters'
submissions identifying the amounts of Perkins Loan funds schools may
lose under the regulations illustrate the magnitude of the problem. The
data showing large amounts of old defaulted Perkins Loans which schools
have been unable to collect supports requiring mandatory assignment.
With respect to the Department's recovery rates, defaulted Perkins
Loans that are assigned to the Department under the current voluntary
assignment procedures are assigned for such reasons as hardship,
incarceration, refusal to pay, and the school's inability to locate the
borrower. Schools are required to undertake first-year and second-year
collection efforts before assigning Perkins Loans to the Department,
although schools may dispense with the second-year collection efforts
and assign a loan to the Department after the first year collection
efforts have failed. Thus, the defaulted Perkins Loans that are
assigned to the Department through voluntary assignment are loans that
schools consider uncollectible.
The Department's analysis of its recovery rate on these defaulted
Perkins Loans shows that, as of August 30, 2007, the Department's
recovery rate is:
53.90 percent for loans assigned to us in 2002.
45.90 percent for loans assigned to us in 2003.
36.02 percent for loans assigned to us in 2004.
The recovery rates show increased collections on defaulted Perkins
Loans the longer the Department holds the loans. We believe the
Department's recovery rate on defaulted Perkins Loans compares
favorably to the schools' self-reported recovery rates. Therefore, we
strongly believe that requiring assignment of these loans to the
Department, as described in these regulations, is in the best interests
of the taxpayers and the government.
Changes: None.
Alternatives to Mandatory Assignment
Comments: Several commenters suggested alternatives to the
mandatory assignment proposal. Some commenters suggested that the
Secretary re-institute a version of the referral program that existed
in the 1980s. Under a referral program, schools could voluntarily
assign loans to the Department; the Department would collect on the
loans, and would return a portion of the collections to the school that
assigned the loan. Other commenters suggested a variation of the
referral program under which the Department would return funds not to
individual schools, but to the Perkins Loan Program generally. Under
this proposal, the amounts the Department collects on assigned loans
would be re-allocated to schools participating in the Perkins Loan
Program, using the standard allocation formula.
Commenters recommended streamlining the voluntary assignment
process, improving the Default Reduction Assistance Program (DRAP), and
re-instituting the IRS Skiptracing
[[Page 61973]]
Service, as alternatives to mandatory assignment.
Discussion: As discussed in the preamble to the NPRM, the referral
program the Department administered in the 1980s was not a success. We
continue to believe, and the commenters did not provide us with any
basis for modifying our position, that a revival of that program would
not be in the Federal fiscal interest.
With regard to the proposals for a streamlined voluntary assignment
process and for re-instituting the IRS Skiptracing Service, we note
that the Department has already streamlined the voluntary assignment
process significantly. We have reduced the supporting documentation
required for assignment, simplified the assignment form, and
implemented a process allowing for the submission of assignment
packages in groups. However, these changes have not significantly
increased the number of voluntarily assigned Perkins Loans.
The commenter requesting that we improve DRAP did not indicate what
the perceived deficiencies of that program are, or make any specific
recommendations for improvements. DRAP is intended as a final effort to
prevent a loan that is about to go into default from going into
default. Any improvements to DRAP would have little impact on loans
that have been in default for seven or more years.
The Department is renewing its computer-matching agreement with the
Internal Revenue Service to re-institute the IRS Skiptracing Service.
Schools and guaranty agencies that have an approved Safeguard Report
will be able to access the Student Aid Internet Gateway (SAIG) to
request and receive data through their mailboxes. The Department is
currently working to make this service available to guaranty agencies
and schools. Announcements on the availability of the IRS Skiptracing
Service will be posted to the Department's Information for Financial
Aid Professionals (IFAP) Web site. To the extent that the IRS
Skiptracing Service is helpful to schools in locating borrowers of
defaulted Perkins Loans, it should reduce the number of loans that will
meet the criteria for mandatory assignment. We will also consider
improving the DRAP program in the future.
Changes: None.
Criteria for Mandatory Assignment
Comments: Many commenters suggested that if the Department requires
mandatory assignment of Perkins Loans, it should modify the criteria
for mandatory assignment. Generally, commenters recommended increasing
the outstanding loan balance and the number of years in default that
would trigger assignment from $100 to $1,000 and from seven years to
ten years, respectively. Commenters argued that a ten-year period of
default made sense, because the maximum repayment period for a Perkins
Loan is ten years. One commenter claimed that many defaulted borrowers
are willing and able to repay their defaulted loans after five to ten
years in default. The commenter asserted that a borrower who has been
in default for this length of time is often in a position to take out a
mortgage on a home or to obtain a loan for some other large purchase.
Such a borrower would seek to repay defaulted Perkins Loans to improve
his or her credit report. Another commenter stated that this often
occurs after 15 years in default.
Several commenters recommended that we exempt schools with low
default rates from the mandatory assignment requirements. Commenters
also recommended that accounts on which the schools have acquired a
judgment against the borrower be exempted. The commenters noted that
schools spend a significant amount of time and effort securing
judgments on loans and stated that it was not fair to require schools
to assign judgment accounts. One school noted that a judgment may
include both private loans and Perkins Loans, making it difficult for
the school to separate the Perkins Loan from the private debt for
assignment purposes.
Finally, a large number of commenters noted that if the Department
required assignment of all loans that meet the criteria for assignment
in the proposed regulations, it would result in a huge inventory of
assignments. The Department would have difficulty absorbing such a
large influx of assigned loans. These commenters recommended that the
Department begin mandatory assignment with loans that are 15 years past
due, and gradually move towards loans that are seven years past due.
Discussion: In the preamble to the NPRM, we discussed in
considerable detail different alternatives for requiring the assignment
of defaulted Perkins Loans to the Department.
Rather than attempting to pinpoint a specific time when borrowers
tend to be motivated to pay off their defaulted loans, the Department
proposed to model the Perkins Loan mandatory assignment requirements on
the mandatory assignment requirements in the FFEL Program. Under the
mandatory assignment process in the FFEL Program, a FFEL Loan is in
default for a little over six years before it is assigned to the
Department. Based on that precedent, in these final regulations, the
Department has adopted a standard of seven years for Perkins Loans.
Similarly, the standard of a balance of $100 or more on a loan
before mandatory assignment will be required is consistent with the
requirement for mandatory assignment of FFEL loans. We continue to
believe that these standards are reasonable.
We do not agree with the proposal to exempt schools with low cohort
default rates from the mandatory assignment requirement. Cohort default
rates are based on collections in the first three years after a loan
enters repayment status. Cohort default rates do not measure a school's
success at collecting on loans that have been in default for several
years and are not relevant to the loans that will be subject to
mandatory assignment. While it may be correct that schools with low
cohort default rates have fewer loans in default for seven years or
more than schools with higher cohort default rates, this fact does not
support a conclusion that the schools with low cohort default rates are
successful at collecting on loans that have been default for seven
years or more.
The Department also disagrees with the recommendation that loans on
which the school has secured a judgment be exempted from mandatory
assignment. Securing a judgment on an account is a helpful collection
tool, but it does not ensure that the borrower will make payments on
the debt. We acknowledge that Perkins Loans that have been merged into
judgments may need to be handled differently than regular Perkins Loans
for purposes of mandatory assignment. The Department will develop
procedures for the assignment of judgment accounts as the Department
operationalizes the mandatory assignment process.
We agree with the recommendation by many commenters that we phase-
in mandatory assignment. The regulations establish the minimum criteria
for mandatory assignment. The regulations do not preclude the
Department from phasing-in mandatory assignment by starting the process
with loans that have been in default for more than the seven-year
minimum. Phasing-in mandatory assignment will ease disruption to both
the schools and the Department.
Changes: None.
Legal Basis for Mandatory Assignment in the Perkins Loan Program
Comments: Some commenters questioned the Department's legal
[[Page 61974]]
authority to require the assignment of Perkins Loans, arguing that
section 463(a)(4)(A) of the HEA provides for mandatory assignment in
certain limited circumstances and precludes the Secretary from
requiring mandatory assignment in other circumstances.
Discussion: Section 463(a)(9) of the HEA authorizes the Secretary
to add provisions to the program participation agreement for schools
where the Secretary has determined that the provision is necessary to
protect the United States from unreasonable risk of loss. For the
reasons discussed in the NPRM and these final regulations, the
Secretary has determined that the mandatory assignment regulations as
proposed, which will allow the Secretary to require participating
schools to assign defaulted loans that meet the criteria in the
regulations, are necessary to protect the United States from
unreasonable risk of loss. The sections of the HEA cited by the
commenters do not prevent the Secretary from exercising her authority
under section 463(a)(9) of the HEA.
Changes: None.
Reasonable Collection Costs (Sec. 674.45)
Collection Cost Caps
Comments: Several commenters stated that the proposed caps on the
collection costs that may be charged to borrowers in the Perkins Loan
Program are too high, and should be reduced. Generally, these
commenters recommended reducing the cap to 24 percent, which would be
consistent with the cap on collection costs in the FFEL Program.
One commenter stated that the proposed regulations would not
sufficiently limit collection costs. This commenter noted that the
Perkins Loan Program is intended to benefit needy students. The
commenter argued that it is reasonable to expect that a portion of low-
income borrowers receiving Perkins Loans would have difficulty repaying
these loans. These borrowers are often the ones least likely to be
aware of their repayment options, and most likely to get caught in a
spiral of increasing collection costs. As collection costs are added to
the loan, the outstanding balance increases so rapidly that the ability
to pay off the loan becomes further and further out of reach.
This commenter also challenged the fee-on-fee method of assessing
collection costs. Under the fee-on-fee method, collection agencies that
charge contingency fees charge a ``make whole rate'' to borrowers. The
commenter asserted that many States prohibit or limit the use of make
whole rates for other types of consumer debt, and the Department should
do likewise for Perkins Loans.
Other commenters, who believed the collection cost caps are too
low, supported the use of a make whole rate, and asked the Department
not to abandon this approach for the Perkins Loan Program.
Several commenters recommended increasing the collection cost caps.
Generally, these commenters recommended increasing the collection cost
caps to:
33 percent for first collection efforts.
40 percent for second collection efforts.
50 percent for collection efforts arising out of
litigation.
50 percent for collection efforts against borrowers living
abroad.
Several commenters who recommended increasing or eliminating the
collection cost caps argued that the proposed caps will make it
financially difficult for schools to collect on defaulted Perkins
Loans. These commenters said that schools will have to pay more for
collections than they can charge to the students. As a result, schools
would charge the difference to the Perkins Loan Fund, thus depleting
the Fund. The amount of funds that could then be lent out to future
students would be reduced. In response to these comments, other
commenters noted that the purpose of assessing collection costs against
a borrower is not to create an income stream for schools' Perkins Loan
Funds.
Several commenters also argued that the quality of collection
efforts will suffer under the proposed collection cost caps.
Discussion: The Department declines to adopt the commenters'
recommendation to reduce the collection cost caps to the same level as
those in the FFEL Program. Perkins Loans are low-balance loans compared
to FFEL loans, but the cost of collection is about the same. Because
the return on collecting Perkins Loans is smaller than the return on
collecting FFEL loans, we believe that higher collection cost caps are
warranted in the Perkins Loan Program. The Department also disagrees
with the commenters' recommendations for increasing the collection cost
caps. We believe that the caps as proposed strike a fair balance
between the concerns of borrowers and the concerns of the Perkins Loan
Program schools and collection agencies.
With regard to contingency fees, the Department is not abandoning
the make whole rate for Perkins Loan collections. The Department does
not regulate the establishment of fees in a contract between a Perkins
Loan Program school and a collection agency. However, institutional
contracts must provide for the recovery to the Perkins Loan Fund of the
outstanding balance of the loan. Since a collection agency incurs
additional expenses associated with collecting these amounts, the
school may authorize the collection agency to also recover these
expenses from the borrower.
Collection agencies frequently charge contingency fees to
borrowers. The Department's rule on assessing collection costs on a
contingency fee basis to an individual who owes a debt to the
Department is in 34 CFR 30.60 and is commonly referred to as the fee-
on-fee method. While this method of assessing collection costs is not
required in the Perkins Loan Program, many schools and servicers use it
because it makes the Fund whole. The make whole rate is the amount by
which the borrower's debt is multiplied to determine the amount that
the collection agency needs to collect to recover 100 percent of the
outstanding balance.
Thus, a collection cost cap of 30 percent means that, for loans
collected on a contingency fee basis, the actual collection costs
charged to the borrower must be less than 30 percent.
We expect that when these regulations take effect, collection
agencies that collect on Perkins Loans will adjust their contingency
fees to comply with the new regulatory requirements. Collection
agencies that charge a make whole rate to borrowers will have to take
that into account when adjusting their contingency fees.
Some schools argue that they have little choice but to agree to
high contingency fees when they negotiate contracts with collection
agencies. Given the inability of many schools to secure favorable terms
with collection agencies collecting on Perkins Loans, the Department
believes that the most effective way to reduce these collection costs
in the Perkins Loan Program is to mandate collection cost limits.
We agree with the commenters who argued that the purpose of
assessing collection costs is not to create an income stream for a
school's Perkins Loan Fund. Additionally, Sec. 674.47(e)(3) and (4)
limits the amount of unpaid collection costs that a school may charge
to the Fund to 30 percent for first collection efforts, and 40 percent
for second collection efforts. These limits match the limits on
collection costs that may be charged to borrowers established in the
final regulations.
Changes: None.
[[Page 61975]]
Additional Concerns
Comments: Several commenters raised additional concerns with regard
to the proposed caps, or recommended modifications to the proposed
regulations. One commenter recommended restricting the amount of
collection charges that may be charged to a borrower from average costs
to actual costs. This commenter stated that allowing agencies to assess
average costs against a borrower is unfair, since the actual collection
cost incurred with respect to a particular borrower may be lower than
the average costs that the borrower is charged.
Some commenters recommended applying the caps only to collection
costs incurred by collection agencies on a contingency fee basis, not
on the costs incurred by schools for their own internal collection
efforts. These commenters argued that the unreasonably high collection
costs seen in the Perkins Loan Program are due to collection agency
contingency fees, not collection activities carried out by Perkins Loan
Program schools.
Other commenters recommended that the cap on litigated loans be
removed, and be replaced by an amount defined by the court.
Another commenter argued that informing borrowers of the new
collection cost caps would be administratively burdensome.
Another commenter said the regulations would be inconsistent with
Sec. 674.45(e), which requires schools to assess all reasonable
collection costs to borrowers.
Discussion: Allowing schools to charge only actual costs to the
borrower is unworkable and inconsistent with standard collection
practices on student loans and other debts. Requiring lenders to
identify specific actual costs for every borrower that the lender
collects on would be administratively burdensome and not cost
effective.
We do not see any justification for applying the caps only to
collection costs incurred by collection agencies. From a borrower's
perspective, collection costs are collection costs. It makes little
difference whether the costs were incurred by a collection agency or by
the school.
With regard to litigated loans, a court may remove all collection
charges from a loan as part of a judgment. The regulations establishing
collection cost caps on loans that are litigated do not preclude a
court from lowering the collection charges or eliminating the
collection charges altogether when the court issues a judgment.
The regulations do not impose a requirement that schools notify
borrowers of the collection cost caps. Collection costs also are not
among the items that a school must discuss during its exit interviews
with borrowers.
Finally, the regulations do not conflict with the reasonable
collection costs provisions in the existing regulations. As amended by
these final regulations, Sec. 674.45 defines ``reasonable collection
costs'' chargeable to the borrower as costs within the proposed caps.
Changes: None.
Child or Family Service Cancellation (Sec. 674.56)
Comment: Commenters were overwhelmingly supportive of the proposed
clarifications to Sec. 674.56, regarding cancellation of loans for
individuals working in the child or family service areas. However, two
commenters had questions about this provision.
To qualify for a child or family service cancellation, among other
requirements, an otherwise eligible borrower must be employed full-time
by a child or family service agency. One commenter asked if employment
by a child or family service agency would disqualify an attorney for
the cancellation, because the agency, rather than the children the
agency serves, is considered to be the attorney's client.
A second commenter noted that the child or family service
cancellation would be one of the hardest cancellations in the Perkins
Loan Program to qualify for, and asked if that was the intent of
Congress when the law was passed.
Discussion: An attorney who is an employee of a child or family
service agency must meet the same eligibility requirements as any other
non-supervisory employee of a child or family service agency to qualify
for the loan cancellation. The attorney must provide services directly
and exclusively to high-risk children from low-income communities.
The determination of whether a borrower qualifies for a discharge
is made on a case-by-case basis and would require consideration of the
attorney's specific responsibilities. However, in general, if the
attorney represents the agency in court, the attorney is not providing
services directly to the child.
If the attorney represents children in court such as in the role of
a guardian ad litem, the attorney would be considered to be providing
services directly to the child. If the other eligibility criteria for
the cancellation are met, the attorney would qualify for a child or
family service cancellation.
With respect to the comment about the difficulty of qualifying for
this cancellation, section 465(a)(2)(I) of the HEA, which establishes
the child or family service cancellation, is very narrowly written. The
statute requires employment at a certain type of agency and the
provision of services to a specific population. The borrower must
provide services to children who are both ``high-risk'' and come from
``low-income communities.'' Section 469(a) and (b) of the HEA defines
both of these terms. The final regulations are consistent with the
statutory language.
Changes: None.
Prohibited Inducements (Sec. Sec. 682.200 and 682.401)
Comment: Many commenters endorsed the Secretary's efforts to
clarify the regulations on improper inducements and improve enforcement
of the law, but disagreed with various aspects of the proposed
regulations. Several commenters thought the proposed regulations were
not sufficiently strict. Several U.S. Senators commended the Secretary
on the proposed regulations, particularly the use of the rebuttable
presumption to more effectively enforce the anti-inducement
requirements. Several commenters thought that the Department's lack of
oversight and enforcement of current requirements was a bigger problem
than the content of the regulations. One association representing
school business officers cautioned against the unintended consequences
of the proposed regulations and expressed concern that the regulations
could affect the wide range of relationships between colleges and
universities and financial institutions. That commenter also noted that
financial institutions were very heavily engaged in philanthropic
endeavors in higher education and expressed concern that any perceived
risk to the lender could result in those needed dollars being invested
elsewhere.
One commenter saw no basis for having different rules for lenders
and guaranty agencies in regard to prohibited inducements.
Discussion: The Secretary thanks the commenters for their support
and comments on this very complex and urgent issue affecting the FFEL
Program. The Secretary believes that this regulatory effort will result
in clearer regulatory guidelines for schools, lenders, and guaranty
agencies participating in the FFEL program. The detailed provisions in
the form of permissible and impermissible activities that govern the
interaction between lenders, guaranty agencies, and schools will assist
these parties in avoiding
[[Page 61976]]
violations of the law. The increased regulatory clarity and specificity
will also improve the Secretary's ability to enforce the law in this
area. Student and parents served by the program, and the taxpayers that
support it, will have renewed trust in the integrity and transparency
of the loan process. Students and parents will clearly understand that
they have a choice of lender and can exercise that choice. Absent
questionable payments and activities between schools and lenders,
students and parents will view a school's financial aid office once
again as an unbiased source of information on the FFEL loan process and
on the factors a prospective borrower should consider in selecting a
lender. Borrowers will be more likely to receive clear comparisons
between the benefits offered under the Federal student loan programs
and under private education loan programs without concern that
prohibited payments or other forms of assistance by a lender to a
school will influence a school's counseling such that a borrower
receives a loan with less favorable terms and conditions.
The Secretary understands commenters' concerns about unintended
consequences for other contractual services performed for schools by
financial institutions and their affiliates, and on philanthropic
giving to higher education. However, she believes that contracted
services between financial institutions and schools in non-student aid
related areas will not be affected by these regulations as long as the
arrangements are negotiated in good faith and are not undertaken to
secure FFEL loan applications or limit a borrower's choice of lender.
Likewise, the Secretary believes that financial institutions will
continue to provide philanthropic support to institutions. These
philanthropic relationships need not change as long as they have not
been undertaken to secure FFEL loan applications or limit a borrower's
choice of lender. She feels confident that schools and financial
institutions will take all the prudent steps necessary to ensure that
there are no conflicts of interest between the financial institution's
role as a FFEL lender and its philanthropic support of higher
education.
Finally, the Department believes that the regulations properly
treat guaranty agencies and lenders differently for purposes of
improper inducements. Guaranty agencies are responsible for lender and
school oversight and training, default prevention, outreach and
financial literacy, and lender claim review and payment and the
regulations need to recognize the important roles these agencies play
in these areas. In contrast, under the HEA, the lender's roles are to
provide loans for eligible borrowers and collect those loans in
accordance with the Secretary's regulations.
Changes: None.
Comment: Some commenters recommended that the Department clarify in
the final regulations that State laws relating to the inducement
practices of lenders, schools and loan guarantors within the FFEL
Program are preempted.
Discussion: The Department appreciates the commenters' concerns
about potential State law conflicts with the Department's inducement-
related regulations. It is well settled that any State law that
conflicts with or ``stands as an obstacle to the accomplishment and
execution of the full purposes and objectives'' of a Federal law is
preempted. Hillsborough County, Fla. v. Automated Med. Laboratories,
Inc., 471 U.S. 707, 713 (1985). Moreover, ``[f]ederal regulations have
no less pre-emptive effect than federal statutes.'' Fid. Fed. Sav. &
Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982). Accordingly,
State statutes, regulations, or rules that conflict with or hinder the
accomplishment and execution of the Department's rulemaking relating to
inducement practices are preempted. We anticipate future negotiated
rulemaking to implement the CCRAA and expect to include this issue
among those considered for rulemaking at that time.
Changes: None.
Use of a Rebuttable Presumption (Sec. Sec. 682.413, 682.705(c), and
682.706(d))
Comment: A number of commenters representing students and other
members of the public supported the proposal to strengthen the
Secretary's enforcement of the prohibition on improper inducements in
the FFEL Program.
Many commenters representing various FFEL Program participants
objected to the Secretary's proposal to adopt a rebuttable presumption
in administrative actions against lenders or guaranty agencies
involving violations of the prohibited inducement provisions. One of
these commenters argued that the use of a rebuttable presumption was
inconsistent with the statutory requirement that the Secretary
determine that an inducement was offered in order to secure loan
applications. The commenter argued that the HEA includes a broad
definition of a prohibited inducement and, as a result, a number of
activities would automatically be presumed by the Department to be a
violation under the rebuttable presumption approach.
Other loan industry commenters stated that the adoption of a
rebuttable presumption was unnecessary given the Department's existing
authority to gather information through reviews and audits conducted by
the Office of Federal Student Aid and the Office of Inspector General.
These commenters claimed that the use of a rebuttable presumption is
inconsistent with procedural due process rights and urged that the
proposal be withdrawn. These commenters argued that, if the presumption
is retained, the regulations must require the Department to have a
factual basis supporting the finding of an improper inducement before
commencing any proceeding that could result in the lender's limitation,
suspension, or termination from the FFEL Program. The commenters also
urged that if retained in the regulations, the presumption be applied
only with respect to activities occurring prospectively from the
general effective date of the regulations.
Discussion: The Secretary thanks the commenters who supported the
proposed regulations.
The Secretary has carefully considered the legal arguments
presented by the lenders, guaranty agencies and their supporters.
However, contrary to those arguments, it is well established that the
Secretary has broad authority to establish appropriate regulations and
procedures for resolving administrative cases under the HEA, including
rules for consideration of evidence and determining the burden of
proof. 20 U.S.C. 1082(a)(1); USA Group Services v. Riley, 82 F.3d 708
(7th Cir. 1996); Career College Ass'n. v. Riley, 74 F.3d 1265 (D.C.
Cir. 1996). The establishment of a rebuttable presumption is within
that legal authority. Moreover, the commenters have misinterpreted the
effect of a rebuttable presumption. The rebuttable presumption does not
eliminate the Secretary's obligation to make a finding that an
inducement was provided in exchange for loan applications. Instead,
under these procedures, once the Department establishes that a lender
or guaranty agency engaged in one of the activities established in
these regulations as creating an improper inducement, the lender or
guaranty agency then has the opportunity and obligation to show that
its purpose for engaging in the activity was unrelated to securing loan
applications. The Secretary is still required to make the ultimate
finding that the lender or guaranty agency offered an improper
[[Page 61977]]
inducement and that the inducement was provided to secure loan
applications.
The Secretary's list of improper inducements included in Sec.
682.401(d) that are presumed to be offered to secure loan applications
is based on our experience in administering the FFEL Program since the
publication of Dear Colleague Letter 89-L-129 in February 1989, which
addressed improper inducements. Moreover, recent reviews,
investigations and reports by the Department's Office of Inspector
General, the Comptroller General, Congress and various State Attorneys
General have consistently shown that lenders undertake the activities
listed in the regulations to secure FFEL Program loan applications. For
example, a recent Congressional report documented how a lender that
wanted to make loans to students at schools where the lender had not
previously made loans began providing services and benefits to the
schools. The report quotes directly from internal lender and school
documents clearly indicating that the lender performed these activities
for the purpose of gaining more loan volume at the schools, and in
fact, the lender was successful. In contrast, none of the recent public
reports, investigations, testimony and settlement agreements or any of
the comments on the proposed regulations suggest that lenders provided
services and benefits to schools for any purpose other than to secure
loan applicants.
With this background, it is appropriate for the Secretary to place
the burden on the lender or guaranty agency to explain its purpose in
providing benefits or services to schools. Moreover, in the great
majority of cases, the evidence of intent will be directly and solely
under the control of the lender or guaranty agency. Accordingly, the
Secretary has determined that it is appropriate and consistent with due
process to require the lender or guaranty to have the obligation to
present that evidence and explain its purpose.
Some of the commenters asked the Secretary to exempt from the
improper inducement provisions the situation in which a State guaranty
agency or an affiliated lender is performing services for small
institutions in accordance with its responsibilities under State law.
The Secretary notes that, as described by these commenters, the
provision of these services may have a purpose (compliance with State
law) other than securing loan applications. This example shows the
appropriateness of placing the burden of explanation on the party most
likely to have evidence of that purpose.
The Secretary also notes that the rebuttable presumption will only
be applied after the Department has previously gathered information
from the lender and the lender has had an opportunity to provide an
alternative explanation for its actions. The Secretary intends to apply
the rebuttable presumption only in those situations where there is
significant evidence that the lender or guaranty agency offered or
provided the payments or activities to secure FFEL loan applications or
FFEL loan volume. Since the rebuttable presumption is a rule of
procedure and does not affect any substantive rights or obligations,
there is no basis for the delayed effective date suggested by some
commenters.
Changes: None.
Application of the Federal Trade Commission (FTC) Holder Rule (Sec.
682.209(k))
Comment: Several commenters representing FFEL Program loan industry
participants opposed our proposal to apply the principles of the
Federal Trade Commission's (FTC's) Holder Rule to all FFEL Program
loans. These commenters argued that implementation of this proposal
will result in significant costs and administrative burden to FFEL
Program participants who will be required to defend meritless legal
claims brought by borrowers challenging their student loan debts. The
commenters urged the Secretary to withdraw the proposal and conduct
further studies to identify a sufficient factual basis identifying harm
to the FFEL Program that necessitates a regulatory solution of this
nature. The commenters believe that any harm intended to be addressed
by the proposal is far outweighed by the costs of the proposal. The
commenters also believe that the proposal effectively creates a private
right of action for borrowers in clear disregard of case law that holds
that there is no private right of action under the HEA. The commenters
noted that the application of this rule could leave a State court in a
position to interpret the Federal inducement regulations to determine
whether the Department's version of the FTC Holder Rule applies. The
commenters indicated that if the Secretary adopts this proposal the
regulations should provide that the claims and defenses that a borrower
may assert against a lender are limited to claims or defenses that the
borrower could assert against the school, and that the borrower's
recovery may not exceed the amount paid on the loan. The commenters
indicated that the Secretary should also clarify that the mere
existence of a preferred or recommended lender relationship with a
school does not trigger application of this Rule.
Other commenters representing consumer and student organizations,
and the office of a State attorney general agreed with the Secretary's
proposal to adopt and apply the principles of the FTC Holder Rule to
the FFEL Program. The commenters argued, however, that our proposed
regulations should mirror the FTC Holder Rule in two important areas.
The commenters recommended that the regulations be modified to provide
that all subsequent holders of a FFEL loan, not just the immediate
holder of the loan, are subject to potential claims, and that the full
range of FTC claims and defenses apply, not just those related to the
loan.
Discussion: We thank those commenters who supported the proposal to
incorporate the principles of the FTC Holder Rule into the regulations
of the FFEL Program. However, we do not agree with the suggestion from
many of those commenters that the Department adopt the specific
language of the FTC's own rule. When the Department first incorporated
the terms of the FTC Holder Rule into the FFEL Program promissory
notes, we made necessary and appropriate modifications to the language
of the FTC Holder Rule to correspond to the requirements and
regulations of the FFEL Program. The Secretary is incorporating that
existing language into these regulations to ensure that they apply to
all borrowers in the FFEL Program, no matter what type of school the
borrower attends. Accordingly, the Secretary does not believe that a
direct incorporation of the FTC Holder Rule into the FFEL Program
regulations is appropriate.
The Secretary does not agree with those commenters who generally
opposed the inclusion of the principles of the FTC Holder Rule into the
FFEL Program regulations. The Secretary believes that this change will
eliminate the current difference in legal rights between borrowers
attending for-profit institutions (who are covered by the FTC Holder
Rule under the FTC's own authority and the FFEL Program promissory
note) and those attending non-profit institutions. That distinction
arose not because of any education-based policy distinction, but solely
because the FTC Holder Rule governed only for-profit institutions with
specified lender relationships. Moreover, this change is consistent
with a long line of court decisions that found
[[Page 61978]]
that the HEA does not preempt State laws that allow borrowers to raise
State law claims as a defense against collection of a FFEL Program loan
unless particular State laws actually conflict with the objectives of
the HEA. Armstrong v. Accrediting Council for Continuing Educ. &
Training, Inc., 168 F.3d 1362 (D.C. Cir. 1999), cert. denied, 528 U.S.
1173 (2000). Courts have also concluded that the lack of a private
right of action does not preclude the use of violations of the HEA as
evidence of the violation of State laws. College Loan Corp. v. SLM
Corp., 396 F.3d 588, 598-599 (4th Cir. 2005); Cliff v. Payco American
Credit, Inc., 365 F.3d 1113, 1127-1130 (11th Cir. 2004). Lastly,
contrary to the commenters' claims, we do not anticipate a significant
increase in risk or costs to lenders. The principles of the FTC Holder
Rule have been in the FFEL Program promissory note and applied to loans
for attendance at for-profit schools since 1994. The Secretary is not
aware of any significant litigation based on this language since that
time and the commenters did not present any facts supporting their
claims.
Given that the FTC Holder Rule has applied to some student loan
borrowers for more than a decade and that the commenters did not
present any support based on that experience for their claim that
including this provision will increase costs, we do not accept the
recommendation for further studies.
We do not believe it is necessary to clarify the effect that a
preferred or recommended lender relationship would have on application
of the regulation. The regulation is consistent with the language that
has been in the FFEL Program promissory notes and the FTC Holder Rule
itself in providing that the borrower may assert the actions of the
school as a defense against the lender if the school refers borrowers
to the lender.
Changes: None.
Exhaustive List of Permissible Activities (Sec. Sec. 682.200(b) and
682.401(e)(2))
Comment: Many loan industry commenters objected to the inclusion in
the regulations of an ``exhaustive'' list of permissible inducement
activities for lenders and guaranty agencies, while including a non-
exhaustive, illustrative list of prohibited inducement activities. The
commenters requested that both lists be illustrative in nature. The
commenters stated that the exhaustive nature of the list of permissible
activities fails to recognize the dynamic nature of the marketplace and
the continual innovation in product delivery and services that result
from private sector competition. The commenters believe that it is
impossible to prescribe a finite list of permissible activities today
that will provide effective guidance for activities developed in the
future. The commenters noted that the Secretary declined for this same
reason to provide a definitive list of types of assistance to schools
that is comparable to the assistance that the Department provides to
schools that participate in the Direct Loan Program and in which
lenders and guaranty agencies may engage without providing an improper
inducement. These commenters recommended that the Secretary follow that
same approach with the proposed list of inducement-related permissible
activities.
Discussion: The Secretary disagrees with the commenters. She
believes that greater clarity is achieved for program participants if a
clear and definitive list of permissible activities is provided. She
also believes that this approach enhances the Department's ability to
enforce the restrictions on improper inducements. The permissible
activities listed represent the only ones the Secretary has approved at
the current time. The Secretary understands, however, that both
statutory changes and the evolution of business practices may require
consideration of additional permissible activities in the future.
Therefore, similar to the approach for notifying lenders and guaranty
agencies of approved activities that are comparable to those provided
by the Secretary under the Direct Loan Program, the Secretary will
notify lenders and guaranty agencies, through a public announcement,
such as a notice in the Federal Register, of any additional permissible
activities that lenders and guaranty agencies may be authorized to
undertake.
Changes: We have revised the definition of lender in Sec.
682.200(b) and revised Sec. 682.401(e)(2) to provide for the
identification and approval by the Secretary of other permissible
services through a public announcement, such as a notice published in
the Federal Register.
Payments to Individuals and Lender Referral and Processing Fees (Sec.
682.200(b))
Comment: Several loan industry commenters claimed that the preamble
of the NPRM was incorrect in stating that ``Compensation or fees based
on the numbers of applications or the volume of loans made or disbursed
are improper, regardless of label, under the Department's current and
prior policy and would continue to be improper under these proposed
regulations.'' The commenters stated that the Department had previously
allowed lenders to pay marketing compensation based on the number of
applications received, but not based on the number of applications that
resulted in funded loans. The commenters asked that the Secretary
clarify that this interpretation continues to apply until the effective
date of the final regulations, and that any change in policy be
applicable to activities occurring on or after July 1, 2008.
The commenters also requested that the reference in the regulation
to prohibited payments to ``any individual'' in paragraph (5)(i)(A)(2)
of the definition of lender in Sec. 682.200(b) be removed and replaced
with ``any employee of a school or school-affiliated organization'' to
clarify the group to which the prohibitions apply. The commenters
further requested that the reference to ``processing'' fees be removed
in paragraph (5)(i)(A)(5) of the definition of lender in Sec.
682.200(b) because use of this term could be interpreted as prohibiting
longstanding commercial contractual relationships with third-party
servicers and other parties that provide anti-money laundering and
PATRIOT Act screening, electronic signature processing, loan
origination services, loan disbursement services, and escrow agent
services to lenders and guaranty agencies.
The loan industry commenters also argued that the regulations would
effectively prevent some small non-participating lenders from meeting
their Community Reinvestment Act requirements through the student loan
program.
Discussion: The commenters did not correctly describe the
Department's prior policy guidance regarding application referral
programs between lenders and marketing arrangements between lenders and
other parties. The Department's policy on marketing and referral fees
was specified in Dear Colleague Letter 89-L-129 (February 1989). The
Dear Colleague Letter stated that any fee paid for loan applications
under a lender referral program or marketing arrangement would be
considered a prohibited inducement if the amount exceeded reasonable
compensation for the referring lender's or party's processing of loan
applications and advertising. Under this policy, the Department
approved or did not object if the compensation paid was reasonable
compensation for processing of loan applications and advertising. The
permitted reasonable compensation could be based on applications
referred but not on loans funded or disbursed. This policy statement
remains in effect
[[Page 61979]]
until the effective date of these regulations.
The Secretary disagrees that reference to ``individuals'' should be
struck from paragraph (5)(i)(A)(2) of the definition of lender in Sec.
682.200(b). Section 435(d)(5) of the HEA effectively defines an
improper inducement as a payment or other inducements ``to any
educational institution or individual'' to secure loan applications.
The Secretary has never interpreted the reference to ``individuals'' as
limited to employees of a school or a school-affiliated organization.
The Secretary notes that the reference to ``processing'' in
paragraph (5)(i)(A)(5) of the definition of lender in Sec. 682.200(b)
was intended to convey, consistent with the Department's longstanding
guidance, that the referring party was being compensated for some level
of administrative work in processing the application, not just for
forwarding the application to the originating lender. However, the
Department understands that the term ``processing'' may be confusing
and has clarified the language for purposes of the provision.
The Secretary believes that the payment of these referral fees
should be treated as an improper inducement for several reasons. The
growth of national lenders and banking means that the payment of
referral fees paid to non-participating lenders is no longer necessary
to ensure nationwide borrower access to the FFEL Program. Moreover,
most referral fee arrangements identified by the Department do not
involve small local lending institutions, but involve payments by large
lenders to school-related organizations. Finally, we note that with the
adoption of the MPN and expanded eligibility standards, there is no
longer any distinction between applications received and loans made, so
there is no reason for distinguishing between them based on these
different standards.
The Secretary further believes that payment of referral fees has
eroded the integrity of the FFEL Program. Many of these fees are being
paid to school-affiliated organizations that have access to certain
personal information of students and alumni and are held in a certain
level of esteem by students, alumni, and their parents. We believe that
these arrangements and payments represent a conflict of interest for
the organization and the school with which it is affiliated because the
arrangement is interpreted as an endorsement of the lender by the
organization and the school. Additionally, these fees do not appear to
be paid to compensate the referring party for any administrative work
done in processing the application, thus making them a prohibited
inducement under the Department's standing interpretive guidance. The
Department is also aware that such fees are being paid to individuals
and organizations that are not under contract to any lender or its
affiliate in an eligible lender trustee arrangement, and that operate
as independent brokers collecting FFEL applications and marketing them
to various FFEL lenders for the highest fee per application.
Finally, in response to the comments about small lenders who have
referred borrowers in exchange for fees to satisfy other legal
obligations, we note that the purpose of the FFEL Program is to provide
loans for student and parent borrowers, not to provide an opportunity
for lenders who do not participate in the program to meet other legal
requirements. We expect that these lenders will find other appropriate
ways to meet those requirements.
Changes: Paragraph (5)(i)(A)(5) of the definition of lender in
Sec. 682.200(b) has been modified to clarify that prohibited
``processing'' fees do not include fees paid to meet the requirements
of other Federal or State laws.
Definition of School-Affiliated Organization (Sec. 682.200)
Comment: Many commenters objected to the proposed definition of a
school-affiliated organization, which applies to lender and guaranty
agency prohibited inducement activities outlined in Sec. Sec.
682.200(b) and 682.401(e). The commenters indicated that the definition
was overly broad and unworkable. One commenter from a school was
concerned that the regulatory changes would restrict these
organizations from promoting special arrangements and that it will
limit student services through these organizations. The commenters also
indicated that the broad definition could include national membership
organizations, school trade organizations and other associations that
have no ability to establish and administer school policies or control
school activities. The commenters also believe that the definition is
so broad that it could be applied to cover school credit unions or
bookstores that are privately owned but located on or near a campus, or
that include a reference to the school in their name. The commenters
recommended that the definition be limited to only include those
organizations that are part of the school structure even if they are
separate legal entities. The commenters believe that those
organizations that have a de minimus or peripheral connection to the
school, and whose activities are organized and conducted separate and
distinct from the school, should not be covered by the definition.
Discussion: The Secretary believes that special FFEL student loan
marketing or other student loan arrangements with organizations that
are affiliated with a school undermine program integrity, and have been
used to limit borrowers' choice of FFEL lenders. The Department
believes that the definition of school-affiliated organization needs to
be broad to protect borrowers and the program generally. The definition
is intended to include both organizations that exist only by virtue of
the school's existence, whether inside or outside of the school's
structure and control, and other organizations not dependent upon the
school's existence, which provide financial and vocational services to
the school's students, employees, or alumni. However, we stress that
payments or inducements provided to school-affiliated organizations are
only improper if they are undertaken to secure loan applications or
loan volume. This regulation does not affect contractual arrangements
between the school-affiliated organizations and financial institutions
to provide other non-student loan related services. The Secretary fails
to see a basis for the organizations identified by the commenters to be
engaged in the marketing or making of FFEL Program loans.
Changes: None.
Loan Forgiveness Benefits (Sec. Sec. 682.200(b) and 682.401(e))
Comment: Many commenters from schools, lenders, guaranty agencies,
and State-designated secondary markets objected to the proposal to
treat a lender's or guaranty agency's loan forgiveness programs as an
improper inducement unless loan forgiveness is provided under a
repayment incentive program that requires satisfactory payment
performance by the borrower to receive or retain the benefit. Some loan
industry commenters stated that this limitation on guaranty agencies
and private lenders was contrary to the HEA. They requested that the
Department clarify that borrower benefit programs or other loan
forgiveness or assistance programs for students for service, academic
achievement, disaster assistance, or other targeted activities continue
to be allowed. Several commenters representing not-for-profit State and
State-affiliated guarantors and secondary markets noted that existing
[[Page 61980]]
State targeted and administered loan forgiveness programs for teachers,
nurses, and members of the armed forces could be considered prohibited
inducements. The commenters believe such a result impinges on State
sovereignty and is contrary to the Department's regulatory view that
guaranty agencies have responsibility for outreach to students and
parents. The commenters noted that these public service loan
forgiveness programs are not part of guaranty agency marketing
campaigns for applications and request that they be considered a
permissible activity by a guaranty agency or State secondary market.
Discussion: The Secretary acknowledges that FFEL Program lenders
are authorized under statute to offer borrowers reduced fees and
interest rates. The regulations specifically acknowledge that these
benefits are not considered improper inducements under Sec.
682.200(b)(5)(ii). The Secretary also acknowledges that the HEA
specifically provides for loan discharges for certain targeted forms of
employment and public service.
With this provision, however, the Secretary is attempting to
distinguish appropriate forms of repayment assistance that may be
provided to borrowers by lenders and guaranty agencies that would not
be considered an improper inducement from those that are clearly
provided in order for the lender to secure loan applications. The
regulation incorporates the standard for incentive and reward programs
for successful borrower repayment that the Secretary has previously
applied. In this regard, the Secretary has previously found that
repayment incentive programs do not provide an improper inducement if
they provide up-front rebates that are applied to the borrower's
account at or shortly after loan disbursement and that the borrower
retains if he or she establishes a satisfactory repayment pattern, or
provide a similar reduction in loan principal earned on the same basis
after the borrower enters repayment. These programs do not involve cash
payments to borrowers. These regulations are consistent with this
standard.
The Secretary thanks the commenters for informing her of the many
public service oriented loan forgiveness programs that have been
initiated, some of which are State-mandated or State-approved. The
Secretary is convinced that these programs are not used generally for
marketing purposes and agrees that these programs should not be
considered an improper inducement as long as they are not marketed to
secure loan applications or loan guarantees.
Changes: We have revised the definition of lender in Sec.
682.200(b) and revised Sec. 682.401(e)(2) to include as permissible
activities loan forgiveness programs for public service and other
targeted purposes approved by the Secretary, provided the benefits are
not marketed to secure loan applications or loan guarantees.
Service on Lender and Guaranty Agency Advisory Boards and Payment of
Related Costs (Sec. Sec. 682.200(b) and 682.401(e)(2)(v))
Comment: Several commenters objected to our proposal to treat as an
improper inducement, arrangements in which employees of school and
school-affiliated organizations serve on lender advisory committees,
while allowing these employees to serve on a guaranty agency's
governing board or official advisory board. The commenters stated that
the lender advisory committee meetings provide meaningful opportunities
for lenders and schools to exchange information that benefit borrowers.
The commenters argued that uncompensated service of this nature should
be permissible, but that reasonable travel costs should be covered to
be consistent with the treatment of guaranty agencies. Another
commenter representing a lender noted that the regulations did not
contain any explicit prohibition on school employees serving on a
lender advisory board, or of paid consulting arrangements between
lenders and school employees, and that this represented a loophole in
the regulations. This commenter also said the Department should not
allow school-affiliated organization employees to serve on guaranty
agency advisory boards, or allow agencies to pay for travel and lodging
costs to facilitate school staff service on an advisory board,
attendance at training sessions, or tours of the guaranty agency's
service facility. The commenter believes this treatment creates an
avenue for guaranty agencies to provide these benefits on behalf of
their lender partners and that a guaranty agency's financial support
should be limited to meals and refreshments at training conferences.
Discussion: The Secretary notes that the absence of a specific
provision permitting school and school-affiliated organization employee
service on lender advisory boards, comparable to what is provided for
service on guaranty agency advisory boards, means that any compensation
for this service is considered to be an improper inducement if provided
to secure loan applications. The Secretary disagrees with the
commenters who recommended that school and school-affiliated
organization employees be permitted to continue service on lender
advisory boards, on a paid or unpaid basis, and with travel and lodging
expenses paid by the lender. Recent investigations have shown that many
of these meetings have largely been designed as expense-paid vacations
for the school employees in support of continued or increased loan
volume for that FFEL lender from the school. The Secretary believes
that these board meetings are not necessary to the proper
administration of the FFEL Program.
Unlike lenders, guaranty agencies are responsible for lender and
school oversight, school and lender training, default aversion
services, lender claim review and approval, and outreach services to
students, parents, and schools in their respective areas of service.
The Secretary believes that school employee service on a guaranty
agency's board, if used effectively, can be important for those aspects
of FFEL program administration for which the agency is responsible. In
addition, in its role in providing training on the Title IV student aid
programs, the agency is in a good position to identify the training
needs of staff at schools that may not have sufficient resources to
provide or pay for needed training, regardless of whether the school
participates in the FFEL Program. Moreover, under Sec. 682.423, a
guaranty agency is authorized to use its Operating Fund for school and
lender training. The Secretary believes, therefore, that it is
appropriate for a guaranty agency to cover the travel and lodging costs
of school staff if the agency identifies, on a limited, case-by case
basis, that those individuals would otherwise be unable to attend
needed training, provide needed service on the agency's governing or
advisory board, or on another of the agency's formal working
committees.
Changes: For purposes of clarity, we have modified paragraph
(5)(i)(A)(6) of the definition of lender to specifically prohibit a
lender from soliciting school employees to serve on a lender's advisory
board and paying costs related to this service.
Lender and Guaranty Agency Sponsored Meals, Refreshments, and
Receptions at Meetings and Conferences (Sec. Sec. 682.200(b) and
682.401(e)(2)(iii))
Comment: One commenter representing a lender objected to our
proposal to allow lenders and guaranty agencies to continue to sponsor
meals, refreshments, and receptions that are reasonable in cost for
school officials or employees in connection with meetings
[[Page 61981]]
and conferences. The commenter believes that permitting these
activities will allow abuses that have received negative media
attention to continue because there are no defined parameters provided
in the regulations about what is ``reasonable'' or what constitutes a
``reception.'' The commenter recommended that these activities be
prohibited.
Discussion: The Secretary believes that sponsorship by a lender or
guaranty agency of meals, refreshments, and receptions at conferences
and other training meetings that are open to all attendees at a
conference or meeting do not represent an inducement of the individual
attendees or their schools to secure loan applications or loan
guarantees for the sponsoring lender or guarantor. This form of
sponsorship is a form of generalized marketing that is not prohibited
under the law. These arrangements also assist in reducing the cost of
needed training conferences and meetings for individual attendees. In
using the term ``reception,'' the Secretary does not envision private
parties of lender-selected groups of conference attendees, or of school
or school-affiliated organization employees. Instead, the Secretary
expects that the receptions permitted under the regulations will be
general gatherings that are open to all conference or meeting
attendees, are held in conjunction with the conference or meeting, and
are generally held at the conference site. The Secretary believes this
kind of reception provides attendees with an appropriate opportunity
for information sharing on the training being conducted.
By ``reasonable cost,'' the Secretary anticipates that conference
managers and sponsoring lenders and guaranty agencies will adhere to
the ``prudent person test'' under which the cost per person for the
sponsored event does not exceed the cost that would be incurred by a
prudent person under the circumstances at the time the decision was
made to incur the cost. The burden of proof will be on conference
managers and sponsors to show that the costs are consistent with the
normal per person cost of such events.
The Secretary also notes that she neglected to specify in Sec.
682.401(e)(2)(v) that such meals, refreshments, and receptions
sponsored by a guaranty agency must be ``reasonable in cost,'' and has
added that condition to the regulations.
Changes: Section 682.401(e)(2)(iv) has been modified to require
that guaranty agency-sponsored meals, refreshments, and receptions be
``reasonable in cost.''
Lender and Guaranty Agency Performance of School-Based Functions as a
Contractual Third-Party Servicer, With Appropriate Compensation, and to
Participating Foreign Schools (Sec. Sec. 682.200(b) and
682.401(e)(1)(i)(F))
Comment: Many commenters representing lenders, lender servicers,
and guaranty agencies objected to the provision in the proposed
regulations that would prohibit a lender or guaranty agency from
performing functions on behalf of a school except on a short-term, non-
recurring, emergency basis. The commenters noted that this provision
represents a change from longstanding Department policy that allowed a
guaranty agency or lender to perform functions on behalf of a school as
long as the services were performed with appropriate compensation. The
commenters also note that regulations governing third-party servicers
in 34 CFR Sec. 668.2 do not include these same restrictions and permit
any individual or organization to enter into a contract with a school
to administer any aspect of the school's Title IV programs. The
commenters indicated implementing this regulation would force FFEL
Program participants to immediately cease performing certain activities
that benefit schools and their borrowers. Several commenters from small
schools claimed that if they could not contract with their State
guaranty agency as a third-party servicer to administer certain aspects
of the FFEL Program, they would be forced to procure services from less
well-informed, less reliable, and more costly third-party servicers.
Some lender and guaranty agency commenters noted that the
limitation on lenders and guaranty agencies providing staffing services
to schools will result in the elimination of previously Department-
sanctioned and directed eligibility determination services provided to
eligible foreign schools at the school's request. The commenters
recommended that the Secretary provide an exception in the regulations
to allow these services to continue.
A national association stated that the proposed regulations did not
explicitly allow lenders and guaranty agencies to perform student loan
entrance and exit counseling activities, and expressed concern that the
Department would be effectively prohibiting lenders, guaranty agencies,
and secondary market lenders from supporting or participating in
educational outreach and financial literacy efforts. Another national
organization asked that the regulations explicitly permit lenders and
guaranty agencies to provide staff training, computer support, and
printing and distribution of financial aid-related information, and to
perform other school functions with appropriate compensation.
A commenter representing a national consumer organization and
national student associations recommended that the Department impose a
blanket prohibition on lenders providing assistance to schools to
perform school-based financial aid duties, noting that many schools had
already agreed to this restriction under voluntary agreements with
state attorney generals. Several U.S. Senators strongly urged the
Secretary to prohibit all lender or guaranty agency performance of
school financial aid-related functions, even on an emergency basis,
because these activities promoted particular lenders and created a
serious loophole in the regulations.
Discussion: The Secretary understands these regulations represent a
change from prior Department policy. As the commenters noted, under the
Department's prior policy guidance, lenders and guaranty agencies would
not be considered to be providing an improper inducement if they
performed or assisted a school with certain Title IV student aid
functions, particularly FFEL Program loan functions, as long as they
were appropriately compensated for their services or they performed
them under contract as a school third-party servicer. Recent
investigations have shown, however, that lenders and guaranty agencies
generally provided staff or services to schools almost exclusively to
maintain or increase loan volume from the schools. In some cases, staff
paid by a lender essentially took over a school's responsibility for
advising students and parents without disclosing to the students and
parents that the staff members worked for the lender, not the school.
The Secretary believes that lender and guaranty agency staffing for
schools has created a serious conflict of interest for schools in their
critical counseling role with students and parents, and has
significantly contributed to limiting a borrower's choice of lender at
some schools. The limitations imposed by the new regulations include
restrictions on lender and guaranty agency conduct of or participation
in required in-person, school-based initial and exit counseling with
FFEL borrowers. It does not, however, limit a lender's support of or
participation in a school's or a guaranty agency's student aid and
financial literacy-related outreach activities, as that is permitted
under paragraph (5)(ii)(B) of the definition of lender in Sec.
682.200(b). Similarly, the final regulations are being modified to
clarify
[[Page 61982]]
that a guaranty agency can continue its student aid and financial
literacy-related outreach activities.
The Secretary agrees that, under the proposed regulations, a
guaranty agency or lender would be unable to continue to provide loan
eligibility and certification services for participating foreign
schools at the school's request. The Secretary has previously directed
guaranty agencies to provide these services to ensure that eligible
borrowers can successfully secure FFEL loans to attend certain eligible
foreign schools. The Secretary did not intend to interfere with this
activity and has modified the regulations accordingly.
The Secretary disagrees with the suggestion that we define all
forms of lender or guaranty agency staffing to perform school-based
student loan functions as an improper inducement. The Secretary
believes that these services should be allowed in limited situations as
described in the regulations.
Changes: We have modified the definition of lender in Sec.
682.200(b) and have modified Sec. 682.401(e) to allow lenders and
guaranty agencies to perform, as a Secretary-delegated function,
eligibility and loan certification functions if requested by a
participating foreign school. We have modified Sec. 682.200 to exclude
in-person, school-required initial and exit counseling from those
student aid and financial-literacy related outreach activities that a
lender can participate in and support. Section 682.401(e)(2) of the
regulations has also been modified to clarify that a guaranty agency
can continue its student aid and financial literacy-related outreach
activities with schools, students, and parents, excluding in-person,
school-required initial and exit counseling.
Services to Schools and Students Under Other State or Federal Education
Programs or by a State Agency FFEL Lender (Sec. Sec. 682.200(b) and
682.401(e))
Comment: One commenter from a non-profit agency that serves as a
guaranty agency and lender in the FFEL Program, and also participates
in and administers other Federal and State education programs, asked
the Secretary to clearly state that guaranty agencies and lenders are
not prohibited from continuing to meet their obligations under other
Federal and State education laws as long as the activities under those
programs are not tied to expectations regarding loan applications or
loan volume. The commenter stated that many of these other Federal and
State programs encourage or direct agencies or lenders to partner with
students and schools. Another commenter from an agency that serves as a
State lender expressed concern that the proposed regulations would
adversely impact the agency's ability to provide the full array of
services it is mandated to carry out under State law. The commenter
believes that the agency will no longer be able to develop and produce
publications that promote higher education in the State and provide
financial literacy training or to be actively engaged with the State
university in early outreach and awareness programs. The commenter
predicts the regulations will have a chilling effect on school
participation in State grant and loan programs by prohibiting the
inclusion of State grants and loans in eligible students' financial aid
packages. The commenter believes the rationale for the new regulations
is not applicable to a State agency lender that is controlled by the
State and governed by State ethics laws. The commenter asked that the
regulations be modified to recognize differences between State programs
that are funded and delivered within a branch of State government and
other programs.
Discussion: The Secretary agrees with the first commenter. The
Secretary is aware that some State agencies and higher education
commissions act as guaranty agencies and secondary markets and also
administer other Federal and State education programs that are not
related to FFEL Program loans. Some of the other programs in which
these agencies are involved include State grant, scholarship and loan
forgiveness programs and the Federal GEAR-UP and Talent Search
Programs. The Secretary strongly supports the work of these agencies in
administering these other Federal and State programs and clarifies that
such an agency may continue to meets its obligations under other
Federal and State education laws provided the agency does not use its
role in these programs to secure loan applications or loan volume for a
lender or guaranty agency.
In response to the other commenter, the Secretary reiterates that
section 435(d)(5) of the HEA governing prohibited inducements by
lenders does not make any distinction between various types of FFEL
lenders. Therefore we are unable to provide for the distinctions
requested by the commenter in these regulations. The regulatory
restrictions on improper inducements apply equally to for-profit and
State-designated FFEL lenders. The Secretary notes, however, that the
provisions in paragraph (5)(ii)(B) of the definition of lender in Sec.
682.200(b) provide that a lender's support of and participation in a
school's student aid and financial literacy-related outreach activities
are permissible, as long as the name of the entity that developed and
paid for the materials is provided to the participants and the lender
does not promote its student loan or other products.
Changes: None.
Definition of ``Emergency Basis'' for Lender and Guaranty Agency Short-
Term, Non-Recurring, Emergency Staffing Services to FFEL Schools
(Sec. Sec. 682.200(b) and 682.401(e)(3))
Comment: In response to the Secretary's specific solicitation of
comments on whether an emergency should be limited to State- or
Federally-declared national or natural disasters, some commenters
agreed with this limitation. One commenter indicated that the emergency
should be limited to a declared natural disaster because that was
clearly a circumstance outside the school's control. The commenter
believes that a school should be prepared to deal with worker
absenteeism and seasonal application volume. Many other commenters
believe that there may be more localized disasters creating emergencies
for a specific school (for instance, a building on campus may burn or
hazardous materials may be discovered, resulting in the closure of the
financial aid office) than those that are declared by a state or
federal official. The commenters also stated that an office or campus
might be suddenly limited by illness, death, accidents, sudden
employment changes, system conversions or technical failures, and other
unforeseen circumstances that would result in a potential breakdown of
financial aid services to students and their parents. The commenters
recommended that broader, non-recurring unforeseen conditions or events
be encompassed by an emergency, either in the regulations or in the
preamble.
Discussion: The Secretary thanks the commenters for their
suggestions. The Secretary agrees that defining emergency basis to
include only a Federally-declared national disaster or a State- or
Federally-declared natural disaster may not address more localized
disasters or emergencies that may affect a specific school and
interrupt the flow of FFEL loan services to students and parents on
that campus. The Secretary does not agree, however, that an emergency
should include staff absenteeism or employment changes, fluctuations in
seasonal loan volume, planned systems conversions, or other similar
circumstances. The Secretary
[[Page 61983]]
expects schools to be ready to handle such circumstances as part of
being administratively capable of participating in the Federal student
financial aid programs.
Change: Paragraph (b)(5)(iii) of the definition of lender in
Sec. Sec. 682.200 and the provisions in Sec. 682.401(e)(3) have been
modified to include a definition of emergency basis. For the purpose of
a lender or guaranty agency providing short-term, non-recurring
emergency staffing services to a school, this term means a State-or
Federally-declared natural disaster, a Federally-declared national
disaster, and other localized disasters and emergencies identified by
the Secretary.
Definition of ``Other Benefits'' for Purposes of Prohibited Points,
Premiums, Payments, and Other Inducements to Any School or Other Party
(Sec. Sec. 682.200(b) and 682.401(e)(3)(iii))
Comment: Several commenters objected to the proposal to define
``other benefits'' to include as an improper inducement ``preferential
rates for or access to the lender's other financial products.'' The
commenters claim that this will deter lenders from providing
competitive rates and fees to borrowers on private education loans. The
commenters note that under the preferred lender list provisions in
Sec. 682.212(h) of the proposed regulations, schools are not
prohibited from negotiating with lenders to secure the best borrower
benefits on FFEL loans in identifying lenders for the school's
preferred lender list. The commenters believe that a school should also
be able to negotiate for the most beneficial private education loan
benefits for its students from a lender that offers both private
education and FFEL loans without the lender risking sanctions by the
Department.
Discussion: The Secretary disagrees with the commenters. In many
cases, a lender's placement on a school's FFEL preferred lender list or
its promotion as the school's recommended FFEL lender was based on an
agreement to provide the school access to the lender's private
education loan program or to provide more beneficial loan terms on
those private education loans. A lender who provides private education
loans to a school's students at competitive rates may do so as long as
the lender does not offer or provide those benefits in exchange for
FFEL loan applications, FFEL application referrals, a specified volume
or dollar amount of FFEL loans, or placement on the school's list of
recommended or suggested lenders.
Changes: None.
Benefits Based on Participation in a Guaranty Agency's Program (Sec.
682.401(e)(1)(i)(B), 682.401(e)(1)(ii), and 682.401(e)(1)(iii))
Comment: Some guaranty agency commenters expressed concern about
the language in Sec. 682.401(e)(1)(ii), which prohibits a guaranty
agency from assessing additional costs or denying benefits to schools
and lenders based on the school's or lender's decision not to
participate in the agency's loan guaranty program or failure to provide
a specified volume of FFEL Program loans to the agency, or a school's
failure to place a lender that uses the agency's loan guarantee on the
school's preferred lender list. The commenters believe this provision
was intended to align with the requirements of Sec.
682.401(e)(1)(i)(B), which prohibit a guaranty agency from making
payments to a school based on the school's voluntary or coerced
agreement to participate in the agency's program. The commenters
believe, however, that the requirements of proposed Sec.
682.401(e)(1)(ii) are overly broad and will prevent a guaranty agency
from limiting its services to FFEL Program participants. The commenters
stated that the regulations appear to require a guaranty agency to
provide benefits, products, and services to all schools and lenders
even if they do not participate in the agency's loan guaranty program.
The commenters also asked the Secretary to clarify in the preamble to
the regulations that Sec. 682.401(e)(1)(iii) does not prohibit the
continuation of cooperative arrangements between guaranty agencies,
such as the Common Manual, Mapping Your Future, and the Common Review
Initiative that create economies of scale or greater efficiencies for
schools or lenders with which those guarantors participate.
Discussion: The commenters are correct that the requirements of
Sec. 682.401(e)(1)(i)(B) and 682.401(e)(1)(ii) were intended to
complement each other. Section 682.401(e)(1)(i)(B) and
682.401(e)(1)(iii), addresses prohibited incentive payments by guaranty
agencies to schools and lenders to secure loan volume. Section
682.401(e)(1)(ii) addresses the practice in which guaranty agencies
denied schools and lenders benefits or assessed schools and lenders
additional costs if they failed, among other things, to participate in
the agency's program or provide a specified volume of loan applications
or loan volume. The Department has become increasingly aware of these
types of activities over the last several years, and the Secretary
believes that if these activities were undertaken by a guaranty agency
to secure loan volume, the activities would properly be considered a
prohibited inducement. In one case, a guaranty agency that had
previously provided certain funds to support student aid administration
to all schools in its State, including non-FFEL participating schools,
announced that it would stop paying those funds to schools that did not
agree to participate in the agency's FFEL loan guaranty program. In
another instance, a guaranty agency was directed to change its policy
and charge costs related to the administration of a State program to
those schools that did not participate with the guaranty agency and
generate loan volume for that agency after previously not charging
costs to any schools. In another case, scholarship funds from the
guaranty agency's Operating Fund were to be provided only to schools
that participated in the agency's FFEL Program and provided a certain
FFEL loan volume to the guaranty agency. Finally, in another situation,
a lender was notified by a guaranty agency that certain costs for
guaranty agency-provided services to the agency's lenders would be
based on the lender's success or failure in delivering a certain volume
of loan guarantees to the guaranty agency. The Secretary believes that
under certain circumstances, the denial of benefits or the assessment
of additional costs based on participation in a guaranty agency's
program, or loan volume provided to the agency, could represent a
prohibited inducement. The Secretary believes that this provision
accurately reflects the scope of possible guaranty agency activities
that should be viewed as improper inducements.
The Secretary clarifies that Sec. 682.401(e)(1)(iii) does not
require guaranty agencies to discontinue the cited cooperative
arrangements they have undertaken with each other, some with the
express approval of the Secretary. Other cooperative activities that
the guaranty agencies wish to undertake to achieve economies of scale
or that they believe will generate cost efficiencies should be
discussed with the Department before being undertaken.
Changes: None.
Prohibited Inducements and Lender Claim Payments (Sec. 682.406)
Comment: Several lender, lender servicer, and guaranty agency
commenters indicated that proposed Sec. 682.406(d), which would
prohibit a guaranty agency from paying a lender's claim or receiving
Federal reinsurance on a loan for which a lender offered or provided an
improper inducement,
[[Page 61984]]
appeared to impose a duty on the guarantor to determine whether such
improper activity took place as part of normal claim review and
processing prior to claim payment. The commenters agree that if there
was proof of this type of violation, the claim should not be honored,
but believe the regulation, as proposed, would be unmanageable. The
commenters believe that if a guarantor took such action, it would
effectively be denying the lender payment of Federal benefits without
procedural due process protections that would allow the lender to show
that the challenged activity did not occur or was permissible. The
commenters recommended that the regulations be revised to provide that
the guaranty agency should deny claim payment only when it was notified
by the Secretary of the lender's violation of the prohibited inducement
provisions and of the population of affected loans.
Discussion: The Secretary agrees that, generally, a guaranty agency
will not be expected to deny a claim payment to a lender unless the
Secretary has notified the guaranty agency that the lender has provided
improper inducements. However, the Secretary expects guaranty agencies
to include improper inducements as a subject in their oversight of
lenders and to deny claims if the agency determines that the lender has
provided improper inducements.
Changes: The regulations in Sec. 682.406(d) have been modified to
reflect that a guaranty agency may not deny a claim payment unless the
agency determines or is notified by the Secretary that the lender
offered or provided an improper inducement.
Eligible Lender Trustees (ELTs) (Sec. Sec. 682.200 and 682.602)
Comment: Several commenters supported the proposed changes
implementing The Third Higher Education Extension Act of 2006 (HEA
Extension Act) (Pub. L. 109-292) that: Prohibit new ELT relationships
between lenders and schools or school-affiliated organizations;
restrict existing ELT relationships; and define the term school-
affiliated organization.
Discussion: The Secretary appreciates the commenters' support.
Changes: None.
Comment: Several commenters stated that the definition of school-
affiliated organization in Sec. 682.200, in particular the inclusion
of the words ``directly or indirectly related to a school,'' was overly
broad and would inappropriately include organizations that are not part
of the school's organizational structure and over which the school has
no control. The commenters urged the Secretary to revise the definition
to exclude organizations such as foundations, membership associations,
and financial institutions.
Discussion: We continue to believe that many organizations, such as
foundations and alumni and social organizations, are clearly school-
affiliated even if the organization is not under a school's ownership
or control. The intent of the HEA Extension Act was to eliminate or
significantly restrict ELT relationships between a lender and a school
or a school-affiliated organization. The proposed definition of school-
affiliated organization is consistent with this goal.
Changes: None.
Comment: One commenter stated that the effective date of the
proposed regulations should be no earlier than July 1, 2008, the
effective date of the final regulations, rather than the effective
dates in the HEA Extension Act. The commenter indicated that holding
schools accountable for their actions retroactive to the effective
dates in the HEA Extension Act, when those dates were not yet reflected
in the FFEL Program regulations, was unfair.
Discussion: The effective dates in the HEA Extension Act with
respect to ELT relationships are statutory and the Secretary does not
have the authority to change those dates.
Changes: None.
Comment: Several commenters believed the inclusion of the cross-
reference to Sec. 682.601(a)(3) in Sec. 682.602(b)(1) was incorrect
and asked the Secretary to remove it.
Discussion: The commenters are correct that the cross-reference to
Sec. 682.601(a)(3) in this section was included in error.
Changes: Section 682.602(b)(1) has been revised to remove the
cross-reference to ``(a)(3).''
Frequency of Capitalization (Sec. 682.202)
Comments: All of the commenters agreed with the Secretary's
proposal to allow capitalization of unpaid interest that accrues during
an in-school deferment only at the expiration of the deferment. Several
commenters stated that this regulation would level the playing field
between the FFEL and Direct Loan programs. One commenter requested that
the Department consider establishing a prospective effective date and a
triggering date for deferments granted on or after July 1, 2008. The
commenter believed that many servicers and loan holders might have
difficulty implementing the systems changes necessary to implement the
new capitalization rules in the middle of a deferment.
Discussion: The Secretary appreciates the commenters' support. The
Secretary does not believe that a prospective effective date is needed
to implement the capitalization rules. The Secretary recognizes that
systems changes will be necessary to implement this change in the
capitalization rules, but we believe that servicers and loan holders
have ample time to make these changes before the effective date of July
1, 2008.
Changes: None.
Loan Discharge for False Certification as a Result of Identity Theft
(Sec. Sec. 682.208, 682.211, 682.300, 682.302 and 682.411)
Comment: Many commenters supported the proposed regulatory changes
to allow a lender to suspend credit bureau reporting for 120 days and
to grant a 120-day administrative forbearance to a borrower while
investigating an alleged identity theft upon receipt of a valid
identity theft report (as defined under the Fair Credit Reporting Act
(15 U.S.C. 1681a)) from a borrower or notification from a credit
bureau. However, many commenters did not believe that the proposed
changes provided meaningful relief to the victims of identity theft or
lenders because the Department did not propose changes to the
requirement that an individual must obtain a local, State or Federal
judicial determination that conclusively determines that the individual
who is the named borrower of the loan was the victim of the ``crime''
of identity theft. Unless this requirement is met, a FFEL or Direct
Loan Program loan cannot be discharged as falsely certified due to the
crime of identity theft. The commenters suggested that we change the
interpretation of section 437(c) of the HEA and allow a discharge of a
loan falsely certified due to the crime of identity theft based on the
requirements contained in the Fair and Accurate Credit Transactions Act
(FACT Act). Other commenters believed that the Department is properly
interpreting section 437(c) of the HEA and that the statutory language
authorizing a loan discharge for a false certification arising from the
crime of identity theft needs to be changed.
Discussion: During the negotiated rulemaking process, the
Department carefully considered whether there was any basis for
adopting a different standard on which to grant a discharge based on
the crime of identity theft but we determined that current regulations
properly reflect section 437(c) of the HEA by protecting both victims
of the crime of identity theft and the Federal fiscal interest.
Further, we believe that the changes to the regulations in
[[Page 61985]]
Sec. Sec. 682.208 and 682.211 that will allow for the suspension of
credit bureau reporting and collection activity provide relief to
borrowers while allowing lenders to comply with the Fair Credit
Reporting Act without violating the FFEL Program regulations. We wish
to emphasize that the individual who is the named borrower on a FFEL or
Direct Loan that was falsely certified as a result of the crime of
identity theft is not liable for a loan that borrower did not execute
or authorize another to execute on the borrower's behalf, whether or
not the loan is discharged based on a crime of identity theft. An
individual who can demonstrate that his or her signature was forged on
a FFEL or Direct Loan note is relieved of the debt under common law and
State laws against forgery.
Changes: None.
Comment: One commenter requested that the Department retroactively
apply the proposed changes to Sec. Sec. 682.208 and 682.211 that allow
for the suspension of credit bureau reporting and collection activity
to July 1, 2006, the effective date of the identity theft discharge
authorized by the Higher Education Reconciliation Act of 2005 (Pub. L.
109-171). The commenter stated that lenders may have already ceased
credit bureau reporting and due diligence on loans to meet FACT Act
requirements prior to the publication of the regulations, and
subsequently determined that the loan remains enforceable against the
borrower. According to the commenter, a retroactive application of
these provisions would provide a safe harbor for such lenders.
Discussion: While we do not believe retroactive implementation of
the provisions allowing for the suspension of credit bureau reporting
and collection activity is necessary, we will take into consideration
any due diligence conflicts created by the different requirements in
the HEA and the FACT Act in enforcement actions related to the
treatment of borrowers who may have been victims of the crime of
identity theft.
Changes: None.
Comment: Several commenters objected to the requirement in the
current regulations in Sec. 682.402(e)(3)(v)(C) that a person claiming
a discharge must produce a judicial determination that conclusively
determines that a FFEL or Direct Loan was falsely certified due to the
crime of identity theft committed by a specific individual named in the
determination. These commenters viewed this requirement as imposing an
unnecessary burden for victims of identity theft. These commenters
urged the Department to change the requirement that discharge relief be
provided only if a judgment or verdict has been entered because, in
their view, that requirement prevents individuals who have been
victimized by identity theft from obtaining relief. Other commenters
urged the Department to adopt the definition of identity theft in the
FACT Act, and conform discharge relief to the procedures and standards
adopted in that law.
Another commenter noted the difficulty in pursuing the perpetrator
of the crime in instances in which the judicial determination does not
identify that individual. The commenter cited a recently-filed claim
based on a suit filed by the lender against a putative borrower, who
denied executing the loan documents. The court issued a decision in
which it found that the putative borrower had not applied for the loan
and was not obligated to repay it. However, the court further opined
that the putative borrower was the victim of the crime of identity
theft, committed by unnamed individuals. The commenter noted that it
was unable to comply with regulatory requirements to pursue collection
action against the perpetrator if the judicial determination on which
the claim rests does not identify the perpetrator. Some commenters
suggested that we change the regulations to permit discharge relief in
instances in which the court does not find that an identified
individual was the perpetrator of the identity theft.
Discussion: FFEL Program regulations in Sec. Sec. 682.206(d),
682.300(b)(2)(vii), 682.402(a)(4), and 682.406(a)(1) and (a)(10)
provide that--with very limited exceptions--FFEL Program benefits are
payable only if the holder has a legally-enforceable promissory note to
evidence the loan. Because a forged promissory note is ordinarily not
an enforceable obligation of the putative borrower, a party holding a
forged note cannot claim FFEL Program benefits on that loan. The view
that the discharge relief option should be extended to lenders for
legally unenforceable loans ignores the basic requirement that the
lender must hold a legally-enforceable loan. The supposition that
victims of identity theft face continued enforcement by lenders assumes
that lenders ignore credible proof that individuals did not obtain the
debts in dispute. The Department does not consider that supposition to
be well-founded, and the commenter's view that lowering the standards
for discharge relief is needed to relieve victims of the burden of
loans they did not receive is groundless.
As explained in the preamble to the interim final regulations
issued by the Department on August 9, 2006, 71 FR 45666, 45676-45677,
long before either the FACT Act or the identity theft discharge
amendment to the HEA, common law that applied to all loan transactions
made clear that individuals who neither executed loan agreements nor
accepted the benefits of the loan were not liable for the loan.
Putative borrowers therefore faced continued enforcement action only if
the holders of the loans either disbelieved the individuals, or
disregarded well-established law. Statutory relief was not needed to
protect from liability those individuals who made persuasive claims
that they neither signed the note nor accepted the loan benefits.
Statutory relief was not appropriate for individuals who did not
persuasively demonstrate that they had neither signed the loan
agreement nor accepted benefits of the loan. The regulation rests on
these premises.
The FACT Act addresses different concerns than does the discharge
provision in these regulations. Specifically, the FACT Act seeks to
provide protections for borrowers after the crime of identity theft has
already been perpetrated. More specifically, although a victim of
identity theft is not liable for the loan, an impersonator could
attempt to obtain more credit from other lenders in the name of the
victimized individual. Individuals whose identification credentials
have been used by an impersonator face substantial difficulty in
preventing the impersonator from continuing to obtain credit in the
name of the individual. The FACT Act does not direct creditors to cease
attempts to collect loans that the lenders determined to be
unenforceable under generally applicable common law, as suggested by
the commenter. Rather, the FACT Act allows the complaining individual
to alert potential lenders--through the credit bureaus--to the identity
theft, and requires lenders to investigate disputes raised by the
consumer either directly with the creditor or through the credit
bureau, to report the results of that investigation to the bureau in a
timely manner, and to correct, if necessary, information the lender had
previously furnished to the bureau. There is no reason for the
Department to adopt in our discharge regulations FACT Act procedures
that are designed not to determine whether the crime of identity theft
occurred, but to prevent future thefts and restore a credit history
damaged by recognized past thefts.
Section 682.402(e)(3)(v)(C) of the FFEL Program regulations
requires the applicant for relief to base the claim on a judicial
decision that ``conclusively
[[Page 61986]]
determines'' that the crime of identity theft caused the loan to be
made. As stated in the preamble to the interim final regulations
published on August 9, 2006, determining that a crime has been
committed necessarily requires discerning the identity of the
perpetrator and determining the state of mind of that person in the
conduct at issue. (71 FR at 45685) Therefore, approval of an identity
theft discharge claim must necessarily rest on a judicial determination
that a named individual committed the crime of identity theft. (71 FR
at 45676)
The comment is well taken that a judicial ruling specifying that a
crime has been committed by an unnamed perpetrator makes this objective
impossible. In the case cited by the commenter, a court concluded that
the putative borrower did not in fact sign, and did not authorize any
other person to sign, the promissory note. The court logically
concluded that the putative borrower was not liable for the loan.
However, the court then opined that this unauthorized signature
constituted a crime of identity theft by an unidentified individual.
This ruling cannot support a discharge claim because the ruling in fact
did not conclusively determine that a crime occurred. To determine that
a crime has been committed, a court must conclude that the elements of
a crime have been proven--either beyond a reasonable doubt, in a
criminal proceeding, or by a preponderance of the evidence, in a civil
suit.\1\ A ruling that an unidentified individual not only lacked
authority to sign the note, but also did so with the state of mind
required to commit a crime, is nothing more than speculation. The
regulations require that the judicial ruling on which the claim rests
be one that conclusively determines that a crime was committed in order
to ensure that relief is provided to the lender only where the ruling
identifies the perpetrator so that this individual can be held
accountable and required to repay. A ruling that an unnamed individual
perpetrated the crime gives the guarantor or the Department no basis on
which to pursue the individual responsible for the identity theft.
---------------------------------------------------------------------------
\1\ The Department recognized that the elements of the crime of
identity theft might be proven in a civil proceeding, such as a
divorce proceeding, but to a lesser standard of proof than required
for a criminal conviction.
---------------------------------------------------------------------------
Changes: The Department has modified Sec. 682.402(e)(3)(iv)(C) to
clarify that, for purposes of the discharge, a local, State or Federal
judicial determination is one that conclusively determines that a FFEL
or Direct Loan was falsely certified due to the crime of identity theft
only if the decision identifies the perpetrator of the crime.
Comment: One commenter suggested that we change the regulations to
require a lender to cease collection activity and refund interest and
special allowance payments received on a loan determined to be
unenforceable after the investigation of an alleged identity theft even
in cases where the individual named as the borrower did not submit a
valid identity theft report as defined under the Fair Credit Reporting
Act (15 U.S.C. 1681a).
Discussion: If a lender determines that a loan is unenforceable
after the investigation of an alleged identity theft, even in cases
where the individual named as the borrower did not submit a valid
identity theft report, a lender is already required to refund interest
and special allowance payments received on a loan under Sec.
682.406(a)(1).
Changes: None.
Comment: One commenter recommended that we modify the regulations
to provide that, if a lender's investigation of the borrower's claim of
a false certification of a loan due to the crime of identity theft
yields evidence that the loan is enforceable and the borrower later
defaults, the lender must provide the evidence upon which the lender
relied to determine that the loan was the legal obligation of the named
borrower.
Discussion: The Department believes that, in cases where a lender's
investigation of an alleged identity theft yields evidence that a loan
is enforceable against the named borrower who subsequently defaults, a
lender is already required to provide the evidence used to make that
enforceability determination under Sec. 682.406(a)(3). This provision
requires that a lender provide an accurate collection history and an
accurate payment history to the guaranty agency with the default claim
filed on the loan showing that the lender exercised due diligence in
collecting the loan.
Changes: None.
Preferred Lender Lists (Sec. Sec. 682.212 and 682.401)
General
Comment: Several commenters supported the Secretary's efforts to
ensure the integrity of the student loan programs and the transparency
in the loan process so that borrowers are assured of their choice of
lender. Several U.S. Senators commended the Secretary for including
clear and detailed provisions on prohibited inducements and preferred
lender lists in the regulations. On the other hand, several commenters
representing schools, lenders, guaranty agencies, student loan
servicers, and associations urged the Secretary to withhold publication
of final regulations governing preferred lender lists and prohibited
inducements in light of the possibility that Congress may pass
legislation in these areas. These commenters believe that, if the
legislation is enacted, the final regulations might be out of date
before they can become effective and, as a result, program participants
may be confused.
Discussion: The Secretary takes the oversight of the Title IV
student loan programs very seriously and continues to believe, as she
did when she began the negotiated rulemaking process in 2006, that
these are urgent issues that require aggressive action to expedite
reform in advance of any Congressional action. Recent investigations
and reports show that problems with preferred lender lists are serious
and continuing and need to be addressed. These regulations will help
end unethical or questionable practices in the student loan programs
and help maintain trust and integrity in the process.
The Secretary understands that for schools that opt to continue to
use preferred lender lists there will be some additional administrative
burden associated with providing additional disclosures on the method
and criteria used by the school to select its preferred lenders,
compiling and disclosing comparative information on the lenders'
borrower benefits, and updating the preferred lender list. She believes
that the benefits to prospective borrowers in regulating the use of
preferred lender lists to ensure that borrowers are aware they have a
choice of lender and can exercise that choice, and that they are
provided with adequate consumer information to make informed decisions
on a choice of FFEL lender, outweigh the burden on schools associated
with regulating this process.
The Secretary is committed to working closely with participants in
the student financial aid programs to implement the regulations and
provide any clarifying guidance that may be necessitated by future
legislation in these areas.
Changes: None.
Preferred Lender Lists (Sec. 682.212)
Use of Preferred Lender Lists
Comment: One commenter representing a school stated that the use of
preferred lender lists represented the wave of the future, but stated
that lenders should be required to
[[Page 61987]]
standardize the presentation of details of their loans to permit
comparison of loans by borrowers and families. Another school commenter
suggested that all schools should be required to have a lender list,
including schools participating in the Direct Loan Program. One
commenter representing a lender recommended that the use of preferred
lender lists be banned because such lists are the foundation of the
conflicts of interest in the student loan programs and undermine
program integrity. This commenter stated that school influence over a
student's choice of lender limits borrower choice and competition for
more beneficial loan terms while creating a flow of easy loan volume
for a lender. This commenter believes that as long as preferred lender
lists exist, lenders will exploit every regulatory regime that the
Department devises for placement on a school's list. Another commenter
representing a lender stated that the Department should not formally
authorize preferred lender lists in regulations when they are not
authorized in statute and conflict with the statutory provision
supporting a borrower's choice of lender.
Discussion: The Secretary continues to believe that a school's use
of a preferred lender list that is based on the school's unbiased
research to identify the lenders providing the best combination of
services and benefits to borrowers at that school may help students and
their parents in navigating the increasingly complex FFEL Program.
There is no statutory prohibition against the use of such lists, as
long as the school does not use the list to limit the borrower's choice
of lender.
Many schools began using preferred lender lists because of their
concern about student loan defaults and the negative consequences for
the borrowers and the school. Many schools continue to use preferred
lender lists to identify lenders that provide high-quality customer
service and loan servicing to prevent delinquency and default. We also
believe that students and parents increasingly rely upon financial aid
offices for information and assistance in dealing with the number of
FFEL lenders and the proliferation of marketing of student loan
borrower benefits. Preferred lender lists and other consumer
information on the student loan process can play a useful role in
assisting financial aid officers in dealing with the large volume of
requests for information and assistance, and in informing borrower
choice. As long as preferred lender lists are properly researched and
constructed in compliance with the regulations, we believe such lists
can serve as a source of unbiased information that facilitates rather
than limits informed borrower choice.
The Secretary does not agree that schools participating in the
Direct Loan Program should be required to use preferred lender lists. A
school participating in the Direct Loan Program is authorized under the
HEA to participate exclusively in that program and is therefore not
subject to the requirements of section 432(m) of the HEA that require a
FFEL borrower be provided with his or her choice of FFEL lender.
Changes: None.
Number of Preferred Lenders (Sec. 682.212(h)(1))
Comment: Several commenters representing schools and associations
objected to the proposed requirement that a preferred lender list
include at least three lenders. Some of these commenters found the
required minimum number of three arbitrary and capricious. These
commenters argued that this requirement may prevent some schools with
low FFEL volume, or tribally-controlled or historically black
institutions and other schools with little choice in lenders for their
students, from using a preferred lender list. One of these commenters
stated that it would be better to simply establish preferred lender
criteria and ensure that all lenders selected, regardless of number,
met the established criteria. Another commenter recommended an
exemption for a school if fewer than 150 borrowers entered repayment
based on the school's most recent cohort default rate data. A few
commenters argued that a school should be given a chance to justify its
use of a list of one or two preferred or recommended FFEL lender(s).
One large university requested an exemption from the three-lender
requirement based on the use of an open-bid or similar process if the
school demonstrates that the arrangement provides the best benefits for
the school's students. This school argued that strict adherence to the
three lender requirement should not result in the school being forced
to include lenders on its list that offer mediocre benefits.
Commenters representing lenders stated that a minimum of three
lenders was too few. One of these commenters stated that, with more
than 3,000 lenders in the FFEL Program, three lenders did not offer
adequate choices to borrowers and suggested that the Department should
require 10 to 12 lenders. The commenter also suggested that all lenders
meeting the school's established criteria, which must be developed and
disclosed, should be included on the list. Another commenter
recommended that any institution wishing to provide student loan
information to its students should be required to provide an annual
listing of all lenders willing to make loans to the school's students
along with their loan terms. Another commenter requested that the
regulations specify that the requirement for a minimum number of
required lenders be applied to each preferred lender list maintained by
a school because many schools maintain more than one preferred lender
list (i.e., separate undergraduate, graduate/professional, medical
school, law school, private loan listings).
Discussion: A school is not required to develop or use a list of
preferred or recommended lenders. The regulations establish minimum
standards to preserve borrower choice for those schools that choose to
develop and use such a list. The Secretary continues to believe that
three, unaffiliated lenders is the appropriate minimum number of
lenders necessary to preserve borrower choice. We also encourage
schools to consider including all lenders that meet the school's
selection criteria on a preferred lender list. A school that chooses
not to recommend lenders, or that has not been able to identify more
than one lender to make loans to its students or parents, is not
prohibited from providing, upon the student's or parent's request, the
name of lenders that have made loans to the school's students and
parents in the past as long as a lender has not provided prohibited
inducements to the school to secure those loans. In providing this
information, the school must make it clear that it is not endorsing
that lender and that the borrower can choose to use any FFEL lender
that will make loans to the borrower for attendance at that school.
Finally, the Secretary believes that it is sufficiently clear in
the regulations that the requirements for use of a preferred lender
list apply to any such list a school develops and maintains if the
school uses multiple preferred lender lists of FFEL lenders.
Changes: None.
Updating Preferred Lender Lists
Comment: A couple of commenters noted that the proposed regulations
did not include a requirement that a school update its preferred lender
list and the required disclosure information with any particular
frequency. One of the commenters recommended that the regulations
specify that a school must update its list at least annually.
Discussion: The Secretary agrees with the commenters that the list
and its
[[Page 61988]]
accompanying disclosures are only useful to borrowers if the
information is current and that the regulations should require updates
on a regular basis.
Changes: The regulations in Sec. 682.212(h)(2) have been modified
to require that a school must update its preferred lender list and the
accompanying information at least annually.
Lenders Selected by Schools (Sec. 682.212(h)(1))
Borrower Benefits Offered
Comment: One commenter representing a lender noted that the
proposed regulations would not require that the lenders selected by the
school for its preferred lender list offer the best loan terms for the
borrower and recommended that this requirement be explicit in the
regulations. Another commenter representing a school noted that the
regulations allow a school to negotiate with a lender for the best
benefits for the school's borrowers, but expressed concern that the
negotiated benefits will be unfair and inequitable from a national
perspective because the best benefits will go to borrowers at large
schools with large enrollments.
Discussion: Although the Secretary anticipates that financial
benefits offered by a lender to the school's student and parent
borrowers will be a key factor in a school's evaluation of lenders for
its preferred lender list, she does not believe it should be the only
factor that the school can consider. It is appropriate for a school to
consider the quality of a lender's customer service in loan origination
and loan servicing, its effectiveness in providing consumer
information, counseling and debt management services, and its
delinquency and default prevention efforts. Schools may face sanctions
if their cohort default rates exceed certain levels, so a lender's
effectiveness in working with borrowers to ensure that loans are repaid
may be a legitimate consideration for some schools. The Secretary does
not intend to dictate the method or criteria a school may use in
selecting lenders for its list beyond the regulatory limits. She
believes that the requirement that the school disclose the method and
criteria used for lender selection will allow students and their
families to evaluate the school's basis for recommending a lender and
to make an informed decision as to the advisability of using one of the
school's preferred lenders or choosing another FFEL lender.
The Secretary understands the commenter's concern about inequitable
benefits in the FFEL Program. However, except with respect to loan
origination fees, the HEA does not specify the manner in which lenders
may offer lower costs and benefits to students provided the lenders do
not discriminate on a legally prohibited basis. Additionally, the
manner in which some State-designated and affiliated lenders provide
borrower benefits is limited under State law.
Changes: None.
Affiliated Lenders (Sec. 682.212(h)(1)(ii) and (h)(3))
Comment: A commenter representing a lender stated that requiring
lenders to simply certify to a school that they are not affiliated with
other lenders on the school's list is meaningless unless there is a
penalty for an incorrect certification. The commenter recommended that
the regulations provide for a monetary penalty for a lender's
misrepresentation of its affiliations. The same commenter stated that
lenders, in addition to certifying their affiliations, should be
required to disclose to borrowers whether they sell their loans. The
commenter believes that this additional disclosure would more fully
inform the borrower's choice of lender.
Several commenters representing lenders, guaranty agencies, and
loan servicers indicated that the definition of ``affiliated lender''
should not include a reference to eligible lender trustees. The
commenters argued that a lender's actions as an originating lender are
unrelated to its actions as a lender trustee. They noted that the
lender's own lending program and the lending program operated under the
trust agreement are separately administered and controlled and
generally involve different loan delivery services, pricing discounts,
and borrower benefits. The commenters believe that the Department's
goals of encouraging consumer choice and competition will be undercut
if an originating lender is considered an affiliate of another
originating lender or party on the basis of the third-party trust
arrangement.
Many commenters representing schools, school-based associations,
lenders, guaranty agencies, and loan servicers recommended that
``affiliated lenders'' for the purpose of preferred lender lists be
defined as lenders that are under common ownership and control. Some of
these commenters noted that this approach would be consistent with
legislation pending in Congress. Many of these commenters also
expressed concern about the scope of the Department's definition of an
affiliated lender. The commenters wanted assurance that the Department
would not define the term ``affiliate'' to include parties engaged in
post-disbursement forward purchase agreements, loan portfolio sales,
post-disbursement loan servicing, and secondary market activity. A
consumer advocate argued that the definition should not include
relationships that involve only post-disbursement servicing or
secondary market activity because this would create a burden on schools
because they could not be expected to know about or monitor
arrangements like forward purchase agreements.
Discussion: The Secretary disagrees that it is necessary or
appropriate to include specific monetary penalties in the regulations
related to a lender's certification of its affiliates to schools. This
section of the regulations governs school, not lender, activities, in
the development of a school's preferred lender list. Further, the
Secretary has sufficient existing statutory and regulatory authority to
sanction a lender for any misrepresentations to the school.
The Secretary agrees with the commenters that a lender's function
and responsibilities as a trustee in a third-party trustee relationship
are separate and distinct from its function as an originating lender.
We believe, therefore, that ensuring a borrower's choice among lenders
will be protected if ``affiliation'' for purposes of a preferred lender
list is limited to affiliates that are under common ownership and
control. The Secretary also wishes to clarify that the Department does
not interpret the lender affiliation provision to include entities that
are involved in post-disbursement activities, which a school has no
ability to monitor or control.
Changes: The regulations have been modified to delete Sec.
682.212(h)(3)(iv) and the reference to lenders serving as trustees.
School Solicitations and Lender Status (Sec. 682.212(h)(1)(iii))
Comment: Some commenters representing lenders requested that the
Secretary clarify in the regulations that a school's solicitation of an
improper benefit from a lender that is not acted upon by the lender
would not disqualify the lender for inclusion on the school's preferred
lender list.
The commenters also requested that the regulations directly
reference the prohibited inducements listed in Sec. 682.200 to prevent
a lender from being publicly accused of an impropriety when it is no
more than an unsubstantiated accusation or perception.
[[Page 61989]]
Discussion: This provision of the regulations governs schools'
actions in developing and using a preferred lender list. The focus is
on a school's improper solicitation of certain benefits and a school's
acceptance of a lender's improper offer and the relationship of those
school actions to the school's preferred lender list. As a result, the
Secretary does not believe it is necessary to include any specific
reference to the prohibited inducement provisions that govern lender
and guaranty agency activities in this section of the regulations. The
Secretary reiterates that a lender that does not act upon a school's
solicitation is not disqualified from being included on a school's
preferred lender list and agrees that this should be more clearly
stated in the regulations.
Changes: Section 682.212(h)(1)(iii) has been modified to clarify
that a preferred lender list developed for use by a school must ``not
include lenders that have offered, or have offered in response to a
solicitation by the school'' financial and other benefits to the school
in exchange for inclusion on the school's preferred lender list.
Financial and Other Benefits Offered for Preferred Lender Status (Sec.
682.212(h)(1)(iii))
Comment: One commenter representing a lender asked that we clarify
the provision that prohibits a lender from being included on a school's
preferred lender list if the lender has offered ``financial or other
benefits'' to the school in exchange for placement on the school's
preferred lender list or loan volume for the lender. The commenter
suggested that we modify this provision to exempt those benefits to a
school that would be permitted under paragraph (5)(ii) of the
definition of lender in Sec. 682.200(b) of the regulations. Another
commenter representing a school-based association argued that the
phrase ``other benefits'' was vague.
Discussion: The Secretary agrees that under paragraph (5)(ii) of
the definition of lender in Sec. 682.200(b) of the regulations,
lenders will be permitted to engage in certain activities that will
provide benefits to a school and its students without violating the
prohibition on improper inducements. The Secretary believes, however,
that those activities and benefits, though permissible, should never be
a factor in a school's decision to place a lender on the school's
preferred lender list. We believe that inserting the exemption clause
recommended by the commenter into this provision would improperly
suggest that these activities, rather than the best borrower benefits,
can be a factor in the school's selection of its preferred lenders. We
do not agree that the term ``other benefits'' is vague. The definition
of this term in the regulations provides sufficient detail about the
types of benefits that are covered by this regulation.
Changes: None.
List Requirements (Sec. 682.212(h)(2))
Method and Criteria (Sec. 682.212(h)(2)(i))
Comment: Many commenters agreed with the Secretary's proposal that
schools electing to use a preferred lender list be required to disclose
the method and criteria used to select the lenders on the list. The
commenters believe that this information will result in a transparent
process that prospective borrowers can trust and provide them with the
necessary information to make an informed decision about which lender
to use.
Discussion: The Secretary thanks the commenters for their support
of the requirement that schools participating in the FFEL Program
disclose the method and criteria for developing their preferred lender
lists.
Changes: None.
Required Comparative Information (Sec. 682.212(h)(2)(ii))
Comment: Several commenters objected to the requirement that a
school provide comparative information about the loans offered by
lenders on the preferred lender list on the grounds that it would be
too administratively burdensome, particularly if it included
information on private education loans. Some commenters expressed
concern that the requirements would be so burdensome and fraught with
controversy that schools would stop providing such lists, which they
believe are useful for borrowers. An association representing financial
aid administrators expressed appreciation for the Department's plan to
develop a model format to help schools collect information from lenders
to help develop the school's lender list. They suggested that lenders
be required to disclose the percentage of borrowers who actually
receive lender-provided borrower benefits. One school commenter stated
that the Secretary should develop and endorse tools to help
institutions compare and evaluate education loan programs. Another
school commenter recommended that the Secretary establish a
clearinghouse of information on all lenders and their loan offerings.
One commenter recommended that the school only be required to maintain
lender contact information to enable borrowers to contact lenders
directly for information. Another commenter stated that the regulations
lacked specifics about what information must be provided, how it was to
be made available, and whether it was to be provided to all applicants
for admission, whether accepted or not, and recommended that the
requirement be deleted or limited to a specific number of national or
competitive lenders.
Discussion: The Secretary thanks those commenters who expressed
support for the Secretary's plans to develop a suggested model format
for schools to use to collect and distribute required comparative
lender benefit information. She believes that the requirement that
schools choosing to develop and maintain preferred lender lists provide
comparative lender information coupled with the requirement that a
school disclose its method and criteria for lender selection is the
only way to restore trust and integrity to the process and to retain
the use of preferred lender lists in the FFEL Program. If adopted by
all schools using preferred lender lists, the model format will provide
a standardized format for collecting and presenting lender information.
The form will be subject to public comment under the Paperwork
Reduction Act of 1995, and the Secretary will invite comments on the
proposed contents, format, and use of the form as part of that public
comment period.
Because schools are able to negotiate with lenders for the best
loan terms for their students, and FFEL lenders are free to offer
different benefits by school, and even by program of study, the
Secretary believes it would be infeasible for the Department to develop
the kind of clearinghouse one commenter suggested.
Changes: None.
Same Borrower Benefits for All Borrowers at the School (Sec.
682.212(h)(2)(iii))
Comment: Many commenters representing schools, school associations,
lenders and State secondary markets, and guaranty agencies strongly
recommended that the Secretary reconsider the proposed requirement that
a school ensure than any lender included on its preferred lender list
offer the same benefits to all borrowers at the school. Many of the
commenters stated that benefit programs are often tailored to different
groups of students in particular programs of study with different debt
levels and believe that the flexibility to offer differing program
benefits to assist borrowers in
[[Page 61990]]
managing debt levels should be preserved. Some of these commenters
believe that this requirement conflicts with a lender's statutory
authority to offer reduced interest rates and fees. They also believe
that this provision goes beyond the statutory scope of the non-
discrimination provisions in sections 421(a)(2) and 438(c) of the HEA.
Several commenters representing guaranty agencies and State-designated
and State-affiliated lenders, some using tax exempt financing, noted
that they were restricted by law to providing benefits only to
residents of the States they serve. These commenters believe that the
implementation of a blanket requirement would result in increased costs
to borrowers. The commenters requested that the Secretary consider, at
a minimum, exempting non-profit, State-affiliated lenders from this
requirement.
Discussion: The Secretary disagrees that the proposed requirement
exceeds her statutory authority. She appreciates, however, that the
unintended consequence of such a requirement could be a loss of
borrower benefits for some borrowers. She agrees that this result would
be inconsistent with allowing a school using a preferred lender list to
negotiate with lenders to ensure the best borrower benefits for its
students. The Secretary expects that a lender making loans at a school
for which it provides different benefits by program, debt level, State
restriction, etc., will provide this information to the school for the
school's use in providing comparative information to borrowers.
Changes: The regulations have been modified to remove paragraph
(iii) from Sec. 682.212(h)(2).
School Loan Certification and Unnecessary Delays (Sec. Sec.
682.212(h)(2)(vi) and 682.603(f))
Comment: Commenters strongly supported the requirement that a
borrower's choice of lender not be effectively denied by a school's
delay in completing the borrower's loan eligibility certification. One
commenter representing a lender requested that the Secretary clarify
the meaning of unnecessary delay by specifying that a refusal to
process, or an intentional delay in processing, a certification because
a lender does not participate in the electronic processing system that
the school uses is impermissible. A school commenter asked that the
regulations provide schools some flexibility without viewing it as a
delay. The commenter asked the Secretary to recognize that a school's
certification processing times may differ if the borrower chooses a
lender that does not participate in the school's electronic processes
without the school being considered to have purposely impeded a
borrower's choice of lender.
Discussion: First, we believe it is necessary to clarify that the
requirements of revised Sec. 682.603(f) apply to all FFEL
participating schools even if the school does not use a preferred
lender list. The HEA provides for a borrower's choice of FFEL lender. A
school cannot abridge that choice through its administrative processes
or its designation of preferred lenders and guaranty agencies.
Second, a school may not decline to provide a loan certification,
or significantly delay a loan certification, because the lender does
not use the electronic process or platform the school uses. The
Secretary understands however, that, under those circumstances, a
school may have to complete a manual certification that may require
more processing time than would an electronic certification. However,
the borrower's request must be honored by the school as expeditiously
as possible without imposing unnecessary administrative hurdles on the
borrower or the lender. Schools are reminded that their administrative
practices in loan certification are subject to review and audit. The
Secretary encourages schools and lenders to work together on behalf of
borrowers to expand their electronic capabilities and platforms to
maximize borrower choice and minimize loan certification processing
times. If a school is aware that the lender the borrower has selected
has elected not to make loans to the school's students in the past, the
school is free to advise the borrower of that fact and encourage the
borrower to confirm with the lender whether it will make a loan to the
borrower so that the borrower will not be delayed in securing loan
funds.
Changes: None.
Executive Order 12866
Regulatory Impact Analysis
Under Executive Order 12866, the Secretary must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by OMB.
Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as an action likely to result in a rule that may
(1) have an annual effect on the economy of $100 million or more, or
adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule); (2) create serious
inconsistency or otherwise interfere with an action taken or planned by
another agency; (3) materially alter the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive order.
Pursuant to the terms of the Executive order, it has been
determined this final regulatory action will have an annual effect on
the economy of more than $100 million. Therefore, this action is
``economically significant'' and subject to OMB review under section
3(f)(1) of Executive Order 12866. In accordance with the Executive
order, the Secretary has assessed the potential costs and benefits of
this regulatory action and has determined that the benefits justify the
costs. (Absent the provisions required to implement the CCRAA, these
regulations would not be considered ``economically significant.'')
Need for Federal Regulatory Action
These regulations address a broad range of issues affecting
students, borrowers, schools, lenders, guaranty agencies, secondary
markets and third-party servicers participating in the FFEL, Direct
Loan, and Perkins Loan programs. Prior to the start of negotiated
rulemaking, through a notice in the Federal Register and four regional
hearings, the Department solicited testimony and written comments from
interested parties to identify those areas of the Title IV regulations
that they felt needed to be revised. Areas identified during this
process that are addressed by these final regulations include:
Duplication of effort for loan holders and borrowers in
the deferment granting process. The final regulations allow Title IV
loan holders to grant a deferment under a simplified process.
Difficulty experienced by members of the armed forces when
applying for a Title IV loan deferment. The final regulations allow a
borrower's representative to apply for an armed forces or military
service deferment on behalf of the borrower.
Confusion regarding the eligibility requirements that a
Title IV loan borrower must meet to qualify for a total and permanent
disability loan discharge. The final regulations clarify these
requirements.
Lack of entrance and exit counseling for graduate and
professional PLUS Loan borrowers. The final
[[Page 61991]]
regulations require entrance counseling and modified exit counseling.
Costs associated with capitalization on Federal
Consolidation Loans for borrowers who consolidated while in an in-
school status. The final regulations limit the frequency of
capitalization on such loans.
Based on its experience in administering the HEA, Title IV loan
programs, staff with the Department also identified several issues for
discussion and negotiation, including:
Risk to the Federal fiscal interest associated with the
total and permanent disability discharge on a Title IV loan. The final
regulations require a prospective three-year conditional discharge so
that the applicant's condition can be monitored before the borrower
receives a Federal benefit.
Enforcement issues and risk to the Federal fiscal interest
associated with electronically-signed MPNs that have been assigned to
the Department. The final regulations require loan holders to maintain
a certification regarding the creation and maintenance of any
electronically-signed promissory notes and require loan holders to
provide disbursement records should the Secretary need the records to
enforce an assigned Title IV loan.
Excessive collection costs charged to defaulted Perkins
Loan borrowers. The final regulations cap collection costs in the
Perkins Loan Program.
Unreasonable risk of loss to the United States associated
with the more than $400 million in uncollected Perkins Loans that have
been in default for a significant number of years. The final
regulations provide for mandatory assignment of older, defaulted
Perkins loans at the request of the Secretary.
Program integrity issues associated with prohibited
incentive payments and other inducements by lenders and guaranty
agencies. The final regulations explicitly identify prohibited
inducements and allowable activities.
Abuse associated with the use of lists of preferred or
recommended lenders. The final regulations ensure such lists are a
source of useful, unbiased consumer information that can assist
students and their parents in choosing a FFEL lender.
Lastly, regulations were required to implement The HEA Extension
Act and the CCRAA.
Regulatory Alternatives Considered
A broad range of alternatives to the regulations was considered as
part of the negotiated rulemaking process. These alternatives were
reviewed in detail in the preamble to the NPRM under the Reasons
sections accompanying the discussion of each proposed regulatory
provision. To the extent they were addressed in response to comments
received on the NPRM, alternatives are also considered elsewhere in the
preamble to these final regulations under the Discussion sections
related to each provision. No alternatives were considered for the
provisions related to the implementation of the CCRAA, as these were
limited to areas where the statute set out explicit parameters that are
not subject to regulatory discretion.
Benefits
As discussed in more detail in the preamble to the NPRM, many of
the regulations not related to the CCRAA codify existing sub-regulatory
guidance or make relatively minor changes intended to establish
consistent definitions or streamline program operations across the
three Federal student loan programs. The Department believes the
additional clarity and enhanced efficiency resulting from these changes
represent benefits with little or no countervailing costs or additional
burden.
Benefits provided in these non-CCRAA regulations include: the
clarification of rules on preferred lender lists and prohibited
inducements; simplification of the process for granting deferments;
changes to the process of granting loan discharges that reduce burden
for loan holders, and protection of borrowers from unnecessary
collection activities. Other changes include simplification of the
deferment application process; limits on the frequency with which FFEL
lenders can capitalize interest on Consolidation Loans; limits on the
amount of collection costs charged to defaulted Perkins Loan borrowers;
and the mandatory assignment to the Department of longstanding
defaulted Perkins Loans with limited recent collection activity.
Of the proposed provisions not related to the CCRAA, only the
mandatory assignment of defaulted Perkins Loans has a substantial
economic impact, although the single-year impact is less than the $100
million threshold. Two commenters questioned the assertion that the
economic impact of this provision is below the threshold, noting ``the
Department believes that there are $400 million in Perkins Loans that
have been in default more than five years. Although the proposed
regulation would impose mandatory assignment on loans in default more
than seven years, not five, it seems clear that the $100 million
threshold will be breached.'' The $400 million figure cited by the
commenters was included in the NPRM to give a sense of the scale of the
overall portfolio of defaulted Perkins Loans. As noted elsewhere in the
NPRM, the Department estimated the amount of outstanding loans
currently subject to the proposed provision, those in default for at
least seven years and for which the outstanding balance has not
decreased in at least 12 months, at $23 million, substantially below
the $100 million threshold. 72 FR 32429. Department estimates for
subsequent years indicate this amount would grow by approximately $1
million annually under current regulations, again well below the
threshold.
Many of the regulatory provisions related to the implementation of
the CCRAA result in significantly lower Federal costs through a
reduction in net payments to lenders and guaranty agencies
participating in the FFEL Program. The Department estimates that these
provisions will reduce Federal costs by $23.3 billion over fiscal years
2007-2012. Student lenders compete vigorously for loan volume by
offering borrowers reduced interest rates and fees while at the same
time earning rates of return significantly above the consumer lending
industry average. The CCRAA-related changes in these regulations may
lead some lenders to reconfigure their marketing, servicing, and profit
expectations to accommodate lower Federal subsidies. The Department's
preliminary analysis indicates both large and small lenders will still
be able to structure their operations to generate a reasonable rate of
return.
The CCRAA reduced special allowance payments for loans first
disbursed on or after October 1, 2007 and established different rates
for eligible not-for-profit lenders and other lenders. The Department
estimates these changes will reduce Federal costs by $14.7 billion over
2007-2012. Over this period, the Department estimates lenders will
originate 83.7 million loans for a total of $625.6 billion. In general,
the Department does not collect data on the for-profit status of
participating lenders. Under current law, not-for-profit lenders
qualify for a special allowance differential for loans financed through
tax-exempt securities. The Department assumes the 39 lenders qualifying
for tax-exempt special allowance reflect the universe of not-for-profit
lenders in the FFEL program. The total outstanding portfolio for these
lenders at the end of 2006 was $40 billion, or 12.41 percent of the
total outstanding portfolio of $325 billion. This rate has been
relatively constant over time and across loan types; it is
[[Page 61992]]
assumed to remain stable throughout the forecasted period. Recent
analysis by Fitch Ratings, An Education in Student Lending, reports the
student loan yield for three large lenders, representing 50 percent of
the market in 2006, as between 7.16 percent and 7.99 percent, with a
net student loan spread between 1.64 percent and 1.84 percent. This is
significantly above the comparable spread for consumer loans. The
reduced special allowance payments under the CCRAA will reduce these
yields but are not anticipated to have a significant adverse effect on
large or small lenders.
The CCRAA reduced the rate guaranty agencies may retain on most
default collections from 23 percent to 16 percent on collections after
October 1, 2007. The Department estimates this change will reduce
Federal costs by $2.2 billion over 2007-2012, half of which is at the
time of enactment as adjustments to loans currently outstanding.
Guaranty agencies use different tools to collect defaulted loans; each
approach has its own retention rate. The three main rates are: The new
16 percent rate reflected in this regulation for regular default
collections; 10 percent on specialized collections, such as the pay-off
of defaulted balances through the origination of a new consolidation
loan; and 0 percent on loans collected through the offset of tax
returns by the Internal Revenue Service and similar activities. The
collection categories affected by the CCRAA represent less than a
quarter of default collections by guaranty agencies. For 2008, the
Department projects it will retain 94.82 percent of all default
collections made by guaranty agencies, an increase from 92.17 percent
in 2007.
The CCRAA decreases account maintenance fees paid to guaranty
agencies from 0.10 percent to 0.06 percent of original principal
balance outstanding on which guarantees were issued, effective October
1, 2007. The Department estimates that this change will reduce Federal
costs by $2.6 billion over 2007-2012, $1 billion of which is at the
time of enactment as adjustments to loans currently outstanding.
The CCRAA eliminated, effective October 1, 2007, the ``exceptional
performer'' designation under which lenders and loan servicers
qualified for higher than standard insurance against loan default. The
Department estimates this change, which applies to any invoice the
Department receives after October 1, 2007, will reduce Federal costs by
$1.2 billion over 2007-2012. In 2007, 90 percent of loans were serviced
by a servicer receiving the higher insurance rate. As with the other
changes reducing payments to lenders, the Department expects some
lenders may reconfigure their marketing, servicing, and profit
expectations to accommodate lower Federal subsidies.
The CCRAA increased the loan fee a lender must pay to the Secretary
from 0.50 to 1.0 percent of the principal amount of the loan for loans
first disbursed on or after October 1, 2007. The Department estimates
this change will reduce Federal costs by $2.6 billion over 2007-2012.
The fee is payable on all new loan originations except PLUS loans
originated through the auction mechanism created by the CCRAA. Student
lenders compete vigorously for loan volume by offering borrowers
reduced interest rates and fees while at the same time earning rates of
return significantly above the consumer lending industry average. The
increased fee, whether alone or in tandem with other changes in the
CCRAA, may lead some lenders to reconfigure their marketing, servicing,
and profit expectations to accommodate lower Federal subsidies. The
Department's preliminary analysis indicates both large and small
lenders will still be able to structure their operations to generate a
reasonable rate of return.
Costs
Because entities affected by these regulations already participate
in the Title IV, HEA programs, these lenders, guaranty agencies, and
schools must already have systems and procedures in place to meet
program eligibility requirements. The non-CCRAA regulations in this
package generally would require discrete changes in specific parameters
associated with existing guidance, such as the provision of entrance
counseling, the retention of records, or the submission of data to
NSLDS, rather than wholly new requirements. Accordingly, entities
wishing to continue to participate in the student aid programs have
already absorbed most of the administrative costs related to
implementing these regulations. Marginal costs over this baseline are
primarily related to one-time system changes, which in some cases could
be significant. In assessing the potential impact of the proposed non-
CCRAA regulations, the Department recognizes that certain provisions,
primarily those requiring the assignment of Perkins Loans and entrance
counseling for graduate and professional PLUS Loan borrowers, will
result in additional workload for staff at some institutions of higher
education. (This additional workload is discussed in more detail under
the Paperwork Reduction Act of 1995 section of the NPRM.) Additional
workload would normally be expected to result in estimated costs
associated with either the hiring of additional employees or
opportunity costs related to the reassignment of existing staff from
other activities. As noted in the NPRM, however, in this case, these
costs would be offset by other provisions in the regulations, primarily
those involving changes to the maximum length of loan period, which
result in workload reductions that greatly outweigh the estimated
additional burden.
In weighing the costs and benefits of these regulations, the
Department considered a range of possible outcomes, many of which were
raised during the negotiated rulemaking discussions. (The following
summarizes these considerations for a number of provisions; a more
complete discussion for all provisions is available in the Reasons
sections of the NPRM.) For prohibited inducements, for example, several
negotiators expressed concern that the proposed regulations might have
a negative impact on the numerous business arrangements between schools
and financial institutions or reduce philanthropic giving to
institutions of higher education; others suggested the regulations
could have a ``chilling effect'' on school and lender relationships.
Conversely, other negotiators expressed the view that eliminating
improper inducements would end the practice of schools actively
``steering'' borrowers to particular lenders and limit the appearance
of ``redlining'' by lenders targeting benefits on certain classes of
borrowers, greatly enhancing the credibility of the loan process.
On balance, the Department believes that these regulations
adequately implement the statutory requirements in the HEA's prohibited
inducement provisions and does not believe it will affect unrelated
contracts or agreements between postsecondary institutions and
financial institutions or general philanthropic giving by financial
institutions. Some negotiators believed that borrowers are being
inappropriately steered to various lenders through the use of
inducements provided by lenders to schools and that these activities,
if left unchecked, deny borrowers their choice of lender and undermine
the credibility of the FFEL Program. The Secretary, through these
regulations, is enhancing the borrower's choice of lender and providing
for the disclosure of appropriate information.
In the area of preferred lender lists, some negotiators questioned
the need to regulate in this area, fearing that the provisions would be
administratively
[[Page 61993]]
burdensome and could result in schools discontinuing the use of such
lists. The non-Federal negotiators expressed concern that if schools
discontinued using a preferred lender list, students would be subject
to increased direct marketing from student loan lenders, which they
viewed as counterproductive to the goal of educating students and
parents about the student loan process. At the same time, some raised
the possibility that school workload would increase in the absence of
preferred lender lists, as students and parents would seek more
information directly from the school about choosing a lender. Non-
Federal negotiators also objected to our proposal that schools choosing
to continue use of preferred lender lists be required to not only
disclose the method and criteria used by the school to choose the
lenders on the school's preferred lender list, but also provide
comparative information on the interest rates and other borrower
benefits offered by those lenders. The non-Federal negotiators believed
that this would represent a significant administrative burden and that
schools could not ensure the accuracy of the information on borrower-
benefit offerings.
The Department believes the disclosure of supporting information
and data with the list of preferred lenders is the most efficient and
effective method to ensure that borrowers make informed consumer
decisions. The Department understands that providing comparative
interest rate and benefit information, in addition to describing the
method and criteria used to select lenders for the list, will involve
additional efforts for schools in preparing and providing a preferred
lender list. To assist schools with this effort, the Department is
developing a model format that a school may use to present this
information.
In general, the Department believes these provisions will produce
the general benefits of greater borrower choice and information and
enhanced faith in the integrity and transparency of the loan program.
While it is possible that some institutions will incur significant
costs, we believe we have provided opportunities, such as the model
form, to minimize these costs and that, on balance, the costs are
outweighed by the likely benefits.
The Department also agrees that schools should not be discouraged
from negotiating with lenders for the best possible interest rates and
borrower benefits for their borrowers. As a result, the regulations,
while continuing to prohibit a school's solicitation of payments and
other benefits from a lender for the school or its employees in
exchange for the lender's placement on the school's list, do not
prohibit a school from soliciting lenders for borrower benefits in
exchange for placement on the school's list.
The regulatory provisions related to the CCRAA expand benefits to
borrowers in a number of areas--primarily through the reduction of
interest rates on Stafford Loans--that significantly increase Federal
costs. The Department estimates that these provisions will increase
Federal costs by $5.9 billion over fiscal years 2007-2012. These
provisions will either reduce costs for student loan borrowers or offer
new or extended benefits during periods of military service or economic
hardship for over 25 million loans and as many as 22 million borrowers
over fiscal years 2007-2012.
The CCRAA reduced interest rates on subsidized Stafford loans made
to undergraduate students effective July 1, 2008. Rates are reduced
from 6.8 percent to 6.0 percent for loans originated between July 1,
2008, and June 30, 2009; to 5.6 percent for the year beginning July 1,
2009; to 4.5 percent for the year beginning July 1, 2010; and to 3.4
percent for the year beginning July 1, 2011. (The rate returns to 6.8
percent for subsequent years.) The Department estimates that this
change will increase Federal costs by $5.9 billion over 2007-2012. On
the average Stafford Loan of $3,180, a borrower would repay $4,391 over
a 10-year repayment period at a 6.8 percent annual rate. Under the
CCRAA, borrowers will save $155 over 10 years ($1.29 per monthly
payment) for loans originated in award year 2008-2009, rising to a $608
savings over 10 years ($5.07 per payment) for loans originated in award
year 2011. Total savings for a borrower taking out an average loan in
each year would be $1,393 over 10 years on borrowing of $12,733, or
roughly 1 percent a year. The average student borrows roughly $9,000 in
Stafford Loans over their time in school; their savings would be less.
The CCRAA revised the definition of economic hardship for the
purpose of qualifying for a student loan deferment. The Department
estimates that this change will have minimal effect on Federal costs.
Previously, borrowers were eligible for a loan deferment if they earned
100 percent of the poverty line for a family of two or if their Federal
educational debt burden exceeded 20 percent of adjusted gross income if
the difference between the adjusted gross income minus the debt burden
is less than 220 percent of the poverty line for a family of two.
Effective October 1, 2007, the CCRAA eliminates the debt burden
provision for all borrowers and ties the income criteria to 150 percent
of the poverty line applicable to the borrower's family size. Removing
the debt burden test restricts eligibility for the economic hardship
deferment while relaxing the family income criteria increases
eligibility. The Department only collects income data on borrowers
choosing the income-contingent repayment option, who represent roughly
15 percent of the outstanding portfolio. Using this group as a proxy
for the total population in repayment, the Department estimates the
changes in the CCRAA counteract one another, resulting in roughly one-
third of borrowers meeting the eligibility requirements before and
after the statutory change. A substantial portion of borrowers who
qualify for economic hardship never apply for the deferment.
The CCRAA extends the military deferment to all Title IV borrowers
regardless of when their loans were made, eliminates the 3-year limit
on the military deferment and adds a 180-day period of deferment
following the borrower's demobilization effective October 1, 2007. The
law also authorizes a 13-month deferment following conclusion of their
military service for certain members of the Armed Forces who were
enrolled in a program of instruction at an eligible institution at the
time, or within 6 months prior to the time the borrower was called to
active duty effective October 1, 2007. Using figures provided by the
Congressional Budget Office, the Department of Defense, and the
Department's National Postsecondary Student Aid Survey, the Department
estimates there will be 12,000 active duty military personnel with
outstanding loans out of a total of 216,000 deployed in 2007,
decreasing to 3,100 out of 55,000 in 2011. These borrowers have
outstanding debt of $49 million in 2007. Assuming 15 months of
deployment and the appropriate new additional new post-deployment
deferments, the Department estimates the interest subsidy provided to
these borrowers would be $17 million over 2007-2012.
Assumptions, Limitations, and Data Sources
Estimates provided above reflect a baseline in which the changes
implemented in these regulations do not exist. As part of the
regulatory impact analysis included in the NPRM, the Department
requested comments or information from the public for consideration in
assessing its preliminary estimates. No such comments or information
related to data used in the preliminary estimates were
[[Page 61994]]
received during the comment period. In the absence of such information,
and given that internal reviews have revealed no problems or
significant new information, the estimates included in the NPRM should
be considered final.
In developing these estimates, a wide range of data sources were
used, including NSLDS data, operational and financial data from
Department of Education systems, and data from a range of surveys
conducted by the National Center for Education Statistics, such as the
2004 National Postsecondary Student Aid Survey, the 1994 National
Education Longitudinal Study, and the 1996 Beginning Postsecondary
Student Survey.
Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and
explain burdens specifically associated with information collection
requirements. See the heading Paperwork Reduction Act of 1995.
Accounting Statement
As required by OMB Circular A-4 (available at http://www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf), in Table 1 below, we
have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of these regulations. This
table provides our best estimate of transfers related to changes in
Federal student aid payments as a result of these final regulations.
Estimated transfers of -$2,914 million reflect annualized savings,
discounted at 7 percent, related to -$13,889 million in net savings as
estimated using traditional credit reform scoring conventions.
Alternatively, if transfers are discounted at 3 percent, annualized
transfers would equal -$2,906 million in estimated net savings of -
$15,743 million. Expenditures are classified as transfers to
postsecondary students; savings are classified as transfers from
program participants (lenders, guaranty agencies).
Table 1.--Accounting Statement: Classification of Estimated Savings
[In millions]
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers......... -$2,914
From Whom To Whom?..................... Federal Government To
Postsecondary Students;
Student Aid Program
Participants to Federal
Government.
------------------------------------------------------------------------
Regulatory Flexibility Act Certification
The Secretary certifies that these regulations will not have a
significant economic impact on a substantial number of small entities.
These regulations affect institutions of higher education, lenders, and
guaranty agencies that participate in Title IV, HEA programs and
individual students and loan borrowers. The U.S. Small Business
Administration Size Standards define these institutions as ``small
entities'' if they are for-profit or nonprofit institutions with total
annual revenue below $5,000,000 or if they are institutions controlled
by governmental entities with populations below 50,000. Guaranty
agencies are State and private nonprofit entities that act as agents of
the Federal government, and as such are not considered ``small
entities'' under the Regulatory Flexibility Act. Individuals are also
not defined as ``small entities'' under the Regulatory Flexibility Act.
A significant percentage of the lenders and schools participating
in the Federal student loan programs meet the definition of ``small
entities.'' While these lenders and schools fall within the SBA size
guidelines, the non-CCRAA regulations do not impose significant new
costs on these entities. The CCRAA-related provisions do not affect
schools, but would have an impact on small lenders. As noted above in
the Regulatory Impact Analysis, while these regulations may lead some
small lenders to reconfigure their marketing, servicing, and profit
expectations to accommodate lower Federal subsidies, the Department's
preliminary analysis indicates these lenders will still be able to
structure their operations to generate a reasonable rate of return.
In the NPRM the Secretary invited comments from small institutions
and lenders as to whether they believe the proposed changes would have
a significant economic impact on them and, if so, requested evidence to
support that belief. Other than the comments discussed in the Analysis
of Comments and Changes section regarding the mandatory assignment of
Perkins Loans, we did not receive comments or evidence on this subject.
In addition to the provisions contained in the NPRM, these
regulations contain provisions implementing non-discretionary
provisions of the CCRAA. As discussed elsewhere in the preamble under
the section entitled Waiver of Proposed Rulemaking--Regulations
Implementing the CCRAA, the Secretary has determined for good cause
shown that it is unnecessary to conduct notice-and-comment rulemaking
pursuant to the APA on the regulations implementing the changes to
these regulations resulting from the CCRAA. Specifically, these
amendments simply modify the Department's regulations to reflect
statutory changes made by the CCRAA, and these statutory changes are
either already effective or will be effective within a short period of
time. The Secretary does not have the discretion in whether or how to
implement these changes. Accordingly, given that notice-and-comment
rulemaking under the APA is not necessary for the regulations
implementing the CCRAA, the provisions of the Regulatory Flexibility
Act do not apply to those regulations.
Paperwork Reduction Act of 1995
These regulations contain information collection requirements that
were reviewed in connection with the NPRM. The Department received no
comments on the Paperwork Reduction Act portion of the NPRM. However,
we are requesting further comment on information collection, OMB
Control Number 1845-0019, consistent with an increase in burden related
to the provisions in Sec. 674.16(j).
Section 674.16(j) requires institutions that participate in the
Perkins Loan Program to report enrollment and loan status information,
or any Title IV related information required by the Secretary, to the
Secretary by the deadline date established by the Secretary. As we
mentioned in the preamble to the NPRM, the Department regularly
discusses issues relating to NSLDS reporting of Title IV, HEA program
participants through established workgroups and conference calls with
Title IV, HEA program participants. These workgroups provided advice on
the changes that have been made to the form requiring schools to report
Perkins Loan data to NSLDS in a manner that is consistent with the way
data on FFEL Loans and
[[Page 61995]]
Direct Loans are reported. These reporting changes will increase burden
for Perkins Loan Program schools and will be associated with Sec.
674.16(j) in the resubmission of OMB Control Number 1845-0019.
Additionally, the Department has determined that consistent with
the provisions of Sec. 682.604(c)(1), the requirement that guaranty
agencies provide the name and location of the entity in possession of
the original electronic Master Promissory Note (MPN) will entail a one-
time increase in burden to make the appropriate software changes that
will collect these data. The guaranty agencies are affected by these
changes and their estimated burden will increase by 1,260 hours as
reflected in OMB Control Number 1845-0020.
The Department has determined that, consistent with the provisions
of Sec. 674.16(j), the reporting of the borrower's academic year level
for each Perkins borrower will increase the total burden by 11,340
total hours. Of that total burden hour increase, the following affected
entities are estimated to have: 4,309 additional hours attributable to
public institutions; 6,010 additional hours attributable to private
institutions; and 1,021 additional hours attributable to for-profit
institutions.
In regard to other information collection requirements described in
the NPRM, the Paperwork Reduction Act of 1995 does not require a
response to a collection of information unless it displays a valid OMB
control number. We display the valid OMB control numbers assigned to
the collections of information in these final regulations at the end of
the affected sections of the regulations.
These final regulations also incorporate statutory changes made to
the HEA by the CCRAA (Pub. L. 110-84). As discussed below, final
regulations in Sec. Sec. 674.34, 682.210, 682.305, 682.404, 682.415,
and 685.204 contain information collection requirements. Under the
Paperwork Reduction Act of 1995, the Department is requesting further
comment on information collections, OMB Control Number 1845-0019, 1845-
0020, and 1845-0021 consistent with the burden associated with the
addition of these provisions in the final regulations.
Collection of Information: Perkins Loan Program, FFEL Program, and
Direct Loan Program.
Sections 674.34, 682.210, and 685.204 (Deferment)
The final regulations in Sec. Sec. 674.34, 682.210, and 685.204
extend the military deferment to all Title IV borrowers regardless of
when their loans were made, eliminate the 3-year limit on the military
deferment and add a 180-day period of deferment following the
borrower's demobilization effective October 1, 2007. The changes made
by the final regulations will allow more borrowers to establish
eligibility for a military deferment and therefore represents an
increase in burden for loan holders and borrowers. We estimate the
changes will increase burden for borrowers and loan holders (and their
servicers) by 1,000 hours and 500 hours, respectively. Thus we estimate
a total burden increase of 1,500 hours in OMB Control Number 1845-0080.
The final regulations in Sec. Sec. 674.34, 682.210, and 685.204
also provide for a 13-month deferment following de-activation of
certain members of the Armed Forces who were enrolled, or enrolled
within 6 months of being called to active duty effective July 1, 2008.
The changes authorize a new deferment and therefore an increase in
burden. We estimate that the changes will increase burden for borrowers
and loan holders (and their servicers) by 650 hours and 350 hours,
respectively. Thus, we estimate a total burden increase of 1,000 hours,
and which will be reflected in a new OMB Collection under a newly
designated OMB Control Number. A revised Military Deferment Request
Form associated with these OMB Control Numbers will be submitted for
OMB review by January 30, 2008.
Lastly, the final regulations in Sec. 674.34 and Sec. 682.210
revise the definition of economic hardship to increase allowable income
for a borrower to establish eligibility for the economic hardship to
150 percent of the poverty line applicable to the borrower's family
size. This change in eligibility requirements will allow more borrowers
to establish eligibility for an economic hardship deferment and
represents an increase in burden. We estimate that the changes will
increase burden for borrowers and loan holders (and their servicers) by
650 hours and 350 hours, respectively. Thus, we estimate a total burden
increase of 1,000 hours in OMB Control Numbers 1845-0005 and 1845-0011.
A revised Deferment Request Form associated with these OMB Control
Numbers will be submitted for OMB review by December 10, 2007.
Section 682.305 (Procedures for Payment of Interest Benefits and
Special Allowance and Collection of Origination and Loan Fees)
Final regulations in Sec. 682.305 increase the loan fee a lender
must pay to the Secretary from .50 to 1.0 percent of the principal
amount of the loan for loans first disbursed on or after October 1,
2007. The changes do not represent a change in burden. Collection
practices and procedures would not change; only the amount the lender
must pay would change. Therefore, there is no additional burden
associated with this provision.
Section 682.404 (Federal Reinsurance Agreement)
Final regulations in Sec. 682.404 reduce the percentage of
collections that a guaranty agency may retain from 23 to 16 percent and
decrease account maintenance fees paid to guaranty agencies from 0.10
to 0.06 percent effective October 1, 2007. The changes do not represent
a change in burden. Collection practices and fee payment procedures
will not change; only the percentage of collections retained and the
amount of fees paid would change. Therefore, there is no additional
burden associated with this provision.
Section 682.415 (Special Insurance and Reinsurance Rules)
The final regulations eliminate the ``exceptional performer''
status and application procedures in Sec. 682.415. This change
represents a decrease in burden. We estimate that the changes will
decrease burden for lenders (and their servicers) by 2,880 hours in OMB
Control Number 1845-0020.
Assessment of Educational Impact
In the NPRM, we requested comments on whether the proposed
regulations would require transmission of information that any other
agency or authority of the United States gathers or makes available.
Based on the response to the NPRM and on our review, we have
determined that these final regulations do not require transmission of
information that any other agency or authority of the United States
gathers or makes available.
Electronic Access to This Document
You may view this document, as well as all other Department of
Education documents published in the Federal Register, in text or Adobe
Portable Document Format (PDF) on the Internet at the following site:
http://www.ed.gov/news/FedRegister.
To use PDF you must have Adobe Acrobat Reader, which is available
free at this site. If you have questions about using PDF, call the U.S.
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in
the Washington, DC, area at (202) 512-1530.
Note: The official version of this document is the document
published in the Federal
[[Page 61996]]
Register. Free Internet access to the official edition of the
Federal Register and the Code of Federal Regulations is available on
GPO Access at: http://www.access.gpo.gov/nara/index.html.
(Catalog of Federal Domestic Assistance Number: 84.032 Federal
Family Education Loan Program; 84.037 Federal Perkins Loan Program;
and 84.268 William D. Ford Federal Direct Loan Program)
List of Subjects in 34 CFR Parts 674, 682 and 685
Administrative practice and procedure, Colleges and universities,
Education, Loan programs--education, Reporting and recordkeeping
requirements, Student aid, and Vocational education.
Dated: October 23, 2007.
Margaret Spellings,
Secretary of Education.
0
For the reasons discussed in the preamble, the Secretary amends parts
674, 682, and 685 of title 34 of the Code of Federal Regulations as
follows:
PART 674--FEDERAL PERKINS LOAN PROGRAM
0
1. The authority citation for part 674 continues to read as follows:
Authority: 20 U.S.C. 1087aa-1087hh and 20 U.S.C. 421-429, unless
otherwise noted.
0
2. Section 674.8 is amended by:
0
A. In paragraph (d)(1), removing the words ``; or'' and adding in their
place the punctuation ``.''.
0
B. Adding a new paragraph (d)(3).
The addition reads as follows:
Sec. 674.8 Program participation agreement.
* * * * *
(d) * * *
(3) The institution shall, at the request of the Secretary, assign
its rights to a loan to the United States without recompense if--
(i) The amount of outstanding principal is $100.00 or more;
(ii) The loan has been in default, as defined in Sec. 674.5(c)(1),
for seven or more years; and
(iii) A payment has not been received on the loan in the preceding
twelve months, unless payments were not due because the loan was in a
period of authorized forbearance or deferment.
* * * * *
0
3. Section 674.16 is amended by adding new paragraph (j) to read as
follows:
Sec. 674.16 Making and disbursing loans.
* * * * *
(j) The institution must report enrollment and loan status
information, or any Title IV loan-related information required by the
Secretary, to the Secretary by the deadline date established by the
Secretary.
* * * * *
0
4. Section 674.19 is amended by:
0
A. Redesignating paragraph (e)(2)(i) as paragraph (e)(2)(iii).
0
B. Adding new paragraph (e)(2)(i).
0
C. Revising paragraph (e)(2)(ii).
0
D. Revising paragraph (e)(3).
0
E. In paragraph (e)(4)(i), removing the words ``Master Promissory Note
(MPN)'' and adding, in their place, the word ``MPN''.
0
F. Revising paragraph (e)(4)(ii).
The addition and revisions read as follows:
Sec. 674.19 Fiscal procedures and records.
* * * * *
(e) * * *
(2) * * *
(i) An institution shall retain a record of disbursements for each
loan made to a borrower on a Master Promissory Note (MPN). This record
must show the date and amount of each disbursement.
(ii) For any loan signed electronically, an institution must
maintain an affidavit or certification regarding the creation and
maintenance of the institution's electronic MPN or promissory note,
including the institution's authentication and signature process in
accordance with the requirements of Sec. 674.50(c)(12).
* * * * *
(3) Period of retention of disbursement records, electronic
authentication and signature records, and repayment records.
(i) An institution shall retain disbursement and electronic
authentication and signature records for each loan made using an MPN
for at least three years from the date the loan is canceled, repaid, or
otherwise satisfied.
(ii) An institution shall retain repayment records, including
cancellation and deferment requests for at least three years from the
date on which a loan is assigned to the Secretary, canceled or repaid.
(4) * * *
(ii) If a promissory note was signed electronically, the
institution must store it electronically and the promissory note must
be retrievable in a coherent format. An original electronically signed
MPN must be retained by the institution for 3 years after all the loans
made on the MPN are satisfied.
* * * * *
0
5.Section 674.34 is amended by:
0
A. Revising paragraph (e)(3)(ii).
0
B. In paragraph (h)(1), adding the words ``, an NDSL, or a Defense
Loan'' after the words ``a Federal Perkins Loan'', removing the words
``made on or after July 1, 2001'', and removing the words ``not to
exceed 3 years''.
0
C. Adding a new paragraph (h)(6).
0
D. Redesignating paragraphs (i) and (j) as paragraphs (j) and (k),
respectively.
0
E. Adding a new paragraph (i).
0
F. In newly redesignated paragraph (j), removing the words ``and (h)'',
and adding in their place, the words ``(h) and (i)''.
The additions and revision read as follows:
Sec. 674.34 Deferment of repayment--Federal Perkins loans, NDSLs and
Defense loans.
(e) * * *
(3) * * *
(ii) An amount equal to 150 percent of the poverty line applicable
to the borrower's family size, as determined in accordance with section
673(2) of the Community Service Block Grant Act.
* * * * *
(h) * * *
(6) The deferment period ends 180 days after the demobilization
date for the service described in paragraphs (h)(1)(i) and (h)(1)(ii)
of this section.
* * * * *
(i)(1) A borrower of a Federal Perkins loan, an NDSL, or a Defense
loan who is called to active duty military service need not pay
principal and interest does not accrue for up to 13 months following
the conclusion of the borrower's active duty military service if--
(i) The borrower is a member of the National Guard or other reserve
component of the Armed Forces of the United States or a member of such
forces in retired status; and
(ii) The borrower was enrolled in a program of instruction at an
eligible institution at the time, or within six months prior to the
time, the borrower was called to active duty.
(2) As used in paragraph (i)(1) of this section, ``Active duty''
means active duty as defined in section 101(d)(1) of title 10, United
States Code, except--
(i) Active duty includes active State duty for members of the
National Guard; and
(ii) Active duty does not include active duty for training or
attendance at a service school.
(3) If the borrower returns to enrolled student status during the
13-month deferment period, the deferment expires at the time the
borrower returns to enrolled student status.
* * * * *
0
6. Section 674.38 is amended by:
0
A. In paragraph (a)(1), removing the words ``(a)(2)'' and adding, in
their place, the words ``(a)(5)''.
[[Page 61997]]
0
B. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(5) and
(a)(7), respectively.
0
C. Adding new paragraphs (a)(2), (a)(3), (a)(4), and (a)(6).
The additions read as follows:
Sec. 674.38 Deferment procedures.
* * * * *
(a) * * *
(2) After receiving a borrower's written or verbal request, an
institution may grant a deferment under Sec. Sec. 674.34(b)(1)(ii),
674.34(b)(1)(iii), 674.34(b)(1)(iv), 674.34(d), 674.34(e), 674.34(h),
and 674.34(i) if the institution is able to confirm that the borrower
has received a deferment on another Perkins Loan, a FFEL Loan, or a
Direct Loan for the same reason and the same time period. The
institution may grant the deferment based on information from the other
Perkins Loan holder, the FFEL Loan holder or the Secretary or from an
authoritative electronic database maintained or authorized by the
Secretary that supports eligibility for the deferment for the same
reason and the same time period.
(3) An institution may rely in good faith on the information it
receives under paragraph (a)(2) of this section when determining a
borrower's eligibility for a deferment unless the institution, as of
the date of the determination, has information indicating that the
borrower does not qualify for the deferment. An institution must
resolve any discrepant information before granting a deferment under
paragraph (a)(2) of this section.
(4) An institution that grants a deferment under paragraph (a)(2)
of this section must notify the borrower that the deferment has been
granted and that the borrower has the option to cancel the deferment
and continue to make payments on the loan.
* * * * *
(6) In the case of a military service deferment under Sec. Sec.
674.34(h) and 674.35(c)(1), a borrower's representative may request the
deferment on behalf of the borrower. An institution that grants a
military service deferment based on a request from a borrower's
representative must notify the borrower that the deferment has been
granted and that the borrower has the option to cancel the deferment
and continue to make payments on the loan. The institution may also
notify the borrower's representative of the outcome of the deferment
request.
* * * * *
0
7. Section 674.45 is amended by:
0
A. Redesignating paragraph (e)(3) as paragraph (e)(4).
0
B. Adding new paragraph (e)(3).
The addition reads as follows:
Sec. 674.45 Collection procedures.
* * * * *
(e) * * *
(3) For loans placed with a collection firm on or after July 1,
2008, reasonable collection costs charged to the borrower may not
exceed--
(i) For first collection efforts, 30 percent of the amount of
principal, interest, and late charges collected;
(ii) For second and subsequent collection efforts, 40 percent of
the amount of principal, interest, and late charges collected; and
(iii) For collection efforts resulting from litigation, 40 percent
of the amount of principal, interest, and late charges collected plus
court costs.
* * * * *
0
8. Section 674.50 is amended by:
0
A. Adding new paragraphs (c)(11) and (12).
0
B. In paragraph (e)(1), adding the words ``, unless the loan is
submitted for assignment under 674.8(d)(3)'' immediately after the word
``borrower''.
The additions read as follows:
Sec. 674.50 Assignment of defaulted loans to the United States.
* * * * *
(c) * * *
(11) A record of disbursements for each loan made to a borrower on
an MPN that shows the date and amount of each disbursement.
(12)(i) Upon the Secretary's request with respect to a particular
loan or loans assigned to the Secretary and evidenced by an
electronically signed promissory note, the institution that created the
original electronically signed promissory note must cooperate with the
Secretary in all activities necessary to enforce the loan or loans.
Such institution must provide--
(A) An affidavit or certification regarding the creation and
maintenance of the electronic records of the loan or loans in a form
appropriate to ensure admissibility of the loan records in a legal
proceeding. This affidavit or certification may be executed in a single
record for multiple loans provided that this record is reliably
associated with the specific loans to which it pertains; and
(B) Testimony by an authorized official or employee of the
institution, if necessary, to ensure admission of the electronic
records of the loan or loans in the litigation or legal proceeding to
enforce the loan or loans.
(ii) The affidavit or certification in paragraph (c)(12)(i)(A) of
this section must include, if requested by the Secretary--
(A) A description of the steps followed by a borrower to execute
the promissory note (such as a flowchart);
(B) A copy of each screen as it would have appeared to the borrower
of the loan or loans the Secretary is enforcing when the borrower
signed the note electronically;
(C) A description of the field edits and other security measures
used to ensure integrity of the data submitted to the originator
electronically;
(D) A description of how the executed promissory note has been
preserved to ensure that it has not been altered after it was executed;
(E) Documentation supporting the institution's authentication and
electronic signature process; and
(F) All other documentary and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.
(iii) The Secretary may request a record, affidavit, certification
or evidence under paragraph (a)(6) of this section as needed to resolve
any factual dispute involving a loan that has been assigned to the
Secretary including, but not limited to, a factual dispute raised in
connection with litigation or any other legal proceeding, or as needed
in connection with loans assigned to the Secretary that are included in
a Title IV program audit sample, or for other similar purposes. The
institution must respond to any request from the Secretary within 10
business days.
(iv) As long as any loan made to a borrower under a MPN created by
an institution is not satisfied, the institution is responsible for
ensuring that all parties entitled to access to the electronic loan
record, including the Secretary, have full and complete access to the
electronic loan record.
* * * * *
0
9. Section 674.56 is amended by revising paragraph (b)(1) to read as
follows:
Sec. 674.56 Employment cancellation--Federal Perkins loan, NDSL, and
Defense loan.
* * * * *
(b) Cancellation for full-time employment in a public or private
nonprofit child or family service agency. (1) An institution must
cancel up to 100 percent of the outstanding balance on a borrower's
Federal Perkins loan or NDSL made on or after July 23, 1992, for
service as a full-time employee in a
[[Page 61998]]
public or private nonprofit child or family service agency who is
providing services directly and exclusively to high-risk children who
are from low-income communities and the families of these children, or
who is supervising the provision of services to high-risk children who
are from low-income communities and the families of these children. To
qualify for a child or family service cancellation, a non-supervisory
employee of a child or family service agency must be providing services
only to high-risk children from low-income communities and the families
of these children. The employee must work directly with the high-risk
children from low-income communities, and the services provided to the
children's families must be secondary to the services provided to the
children.
* * * * *
0
10. Section 674.61 is amended by:
0
A. Revising the second sentence in paragraph (a).
0
B. Revising paragraphs (b), (c), and (d).
The revisions read as follows:
Sec. 674.61 Discharge for death or disability.
(a) * * * The institution must discharge the loan on the basis of
an original or certified copy of the death certificate, or an accurate
and complete photocopy of the original or certified copy of the death
certificate. * * *
(b) Total and permanent disability--(1) General. A borrower's
Defense, NDSL, or Perkins loan is discharged if the borrower becomes
totally and permanently disabled, as defined in Sec. 674.51(s), and
satisfies the additional eligibility requirements contained in this
section.
(2) Discharge application process. (i) To qualify for discharge of
a Defense, NDSL, or Perkins loan based on a total and permanent
disability, a borrower must submit a discharge application approved by
the Secretary to the institution that holds the loan.
(ii) The application must contain a certification by a physician,
who is a doctor of medicine or osteopathy legally authorized to
practice in a State, that the borrower is totally and permanently
disabled as defined in Sec. 674.51(s).
(iii) The borrower must submit the application to the institution
within 90 days of the date the physician certifies the application.
(iv) Upon receiving the borrower's complete application, the
institution must suspend collection activity on the loan and inform the
borrower that--
(A) The institution will review the application and assign the loan
to the Secretary for an eligibility determination if the institution
determines that the certification supports the conclusion that the
borrower is totally and permanently disabled, as defined in Sec.
674.51(s);
(B) The institution will resume collection on the loan if the
institution determines that the certification does not support the
conclusion that the borrower is not totally and permanently disabled;
and
(C) If the institution concludes that the certification and other
evidence submitted by the borrower supports the borrower's eligibility
for a total and permanent disability discharge, to remain eligible for
the final discharge, the borrower must, from the date the physician
completes and certifies the borrower's total and permanent disability
on the application until the date the borrower receives a final
disability discharge--
(1) Not receive annual earnings from employment that exceed 100
percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(2) Not receive a new loan under the Perkins, FFEL, or Direct Loan
programs, except for a FFEL or Direct Consolidation Loan that does not
include any loans on which the borrower is seeking a discharge; and
(3) Must ensure that the full amount of any Title IV loan
disbursement made to the borrower on or after the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(v) If, after reviewing the borrower's application, the institution
determines that the application is complete and supports the conclusion
that the borrower is totally and permanently disabled, the institution
must assign the loan to the Secretary.
(vi) At the time the loan is assigned to the Secretary, the
institution must notify the borrower that the loan has been assigned to
the Secretary for determination of eligibility for a total and
permanent disability discharge and that no payments are due on the
loan.
(3) Secretary's initial eligibility determination. (i) If the
Secretary determines that the borrower is totally and permanently
disabled as defined in Sec. 674.51(s), the Secretary notifies the
borrower that the loan will be in a conditional discharge status for a
period of up to three years, beginning on the date the physician
certified the borrower's total and permanent disability on the
discharge application. The notification to the borrower identifies the
conditions of the conditional discharge period specified in paragraph
(b)(2)(iv)(C) of this section.
(ii) If the Secretary determines that the certification provided by
the borrower does not support the conclusion that the borrower meets
the criteria for a total and permanent disability discharge in
paragraph (c)(4)(i) of this section, the Secretary notifies the
borrower that the application for a disability discharge has been
denied, and that the loan is due and payable to the Secretary under the
terms of the promissory note.
(4) Eligibility requirements for a total and permanent disability
discharge. (i) A borrower meets the eligibility criteria for a
discharge of a loan based on a total and permanent disability if, from
the date the physician certifies the borrower's discharge application,
through the end of the three-year conditional discharge period--
(A) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) The borrower does not receive a new loan under the Perkins,
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation
Loan that does not include any loans that are in a conditional
discharge status; and
(C) The borrower ensures that the full amount of any title IV loan
disbursement received after the date the physician completed and
certified the application is returned to the holder within 120 days of
the disbursement date.
(ii) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(A) Is not required to make any payments on the loan;
(B) Is not considered past due or in default on the loan, unless
the loan was past due or in default at the time the conditional
discharge was granted;
(C) Must promptly notify the Secretary of any changes in address or
phone number;
(D) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(b)(2)(ii)(C)(1) of this section; and
(E) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
a discharge under this section.
(iii) If, at any time during or at the end of the three-year
conditional discharge period, the Secretary determines that the
borrower does not continue to meet the eligibility criteria for a total
and
[[Page 61999]]
permanent disability discharge, the Secretary ends the conditional
discharge period and resumes collection activity on the loan. The
Secretary does not require the borrower to pay any interest that
accrued on the loan from the date of the Secretary's initial
eligibility determination described in paragraph (b)(3) of this section
through the end of the conditional discharge period.
(iv) The Secretary reserves the right to require the borrower to
submit additional medical evidence if the Secretary determines that the
borrower's application does not conclusively prove that the borrower is
disabled. As part of this review, or at any time during the application
process or during or at the end of the conditional discharge period,
the Secretary may arrange for an additional review of the borrower's
condition by an independent physician at no expense to the applicant.
(5) Payments received after the physician's certification of total
and permanent disability. (i) If, after the date the physician
completes and certifies the borrower's loan discharge application, the
institution receives any payments from or on behalf of the borrower on
or attributable to a loan that was assigned to the Secretary for
determination of eligibility for a total and permanent disability
discharge, the institution must forward those payments to the Secretary
for crediting to the borrower's account.
(ii) At the same time that the institution forwards the payment, it
must notify the borrower that there is no obligation to make payments
on the loan while it is conditionally discharged prior to a final
determination of eligibility for a total and permanent disability
discharge, unless the Secretary directs the borrower otherwise.
(iii) When the Secretary makes a final determination to discharge
the loan, the Secretary returns any payments received on the loan after
the date the physician completed and certified the borrower's loan
discharge application to the person who made the payments on the loan.
(c) No Federal reimbursement. No Federal reimbursement is made to
an institution for cancellation of loans due to death or disability.
(d) Retroactive. Discharge for death applies retroactively to all
Defense, NDSL, and Perkins loans.
* * * * *
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
0
11. The authority citation for part 682 continues to read as follows:
Authority: 20 U.S.C. 1071 to 1087-2 unless otherwise noted.
0
12. Section 682.200(b) is amended by:
0
A. Revising paragraph (5) of the definition of Lender.
0
B. Adding new paragraphs (7) and (8) to the definition of Lender.
0
C. Adding a definition of School-affiliated organization.
The revisions and additions read as follows:
Sec. 682.200 Definitions.
(b) * * *
Lender. (1) * * *
(5)(i) The term eligible lender does not include any lender that
the Secretary determines, after notice and opportunity for a hearing
before a designated Department official, has, directly or through an
agent or contractor--
(A) Except as provided in paragraph (5)(ii) of this definition,
offered, directly or indirectly, points, premiums, payments, or other
inducements to any school or other party to secure applications for
FFEL loans or to secure FFEL loan volume. This includes but is not
limited to--
(1) Payments or offerings of other benefits, including prizes or
additional financial aid funds, to a prospective borrower in exchange
for applying for or accepting a FFEL loan from the lender;
(2) Payments or other benefits to a school, any school-affiliated
organization or to any individual in exchange for FFEL loan
applications, application referrals, or a specified volume or dollar
amount of loans made, or placement on a school's list of recommended or
suggested lenders;
(3) Payments or other benefits provided to a student at a school
who acts as the lender's representative to secure FFEL loan
applications from individual prospective borrowers;
(4) Payments or other benefits to a loan solicitor or sales
representative of a lender who visits schools to solicit individual
prospective borrowers to apply for FFEL loans from the lender;
(5) Payment to another lender or any other party of referral fees
or processing fees, except those processing fees necessary to comply
with Federal or State law;
(6) Solicitation of an employee of a school or school-affiliated
organization to serve on a lender's advisory board or committee and/or
payment of costs incurred on behalf of an employee of a school or
school-affiliated organization to serve on a lender's advisory board or
committee;
(7) Payment of conference or training registration, transportation,
and lodging costs for an employee of a school or school-affiliated
organization;
(8) Payment of entertainment expenses, including expenses for
private hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation, and other
gratuities related to lender-sponsored activities for employees of a
school or a school-affiliated organization;
(9) Philanthropic activities, including providing scholarships,
grants, restricted gifts, or financial contributions in exchange for
FFEL loan applications or application referrals, or a specified volume
or dollar amount of FFEL loans made, or placement on a school's list of
recommended or suggested lenders; and
(10) Staffing services to a school, except for services provided to
participating foreign schools at the direction of the Secretary, as a
third-party servicer or otherwise on more than a short-term, emergency
basis, and which is non-recurring, to assist a school with financial
aid-related functions.
(B) Conducted unsolicited mailings to a student or a student's
parents of FFEL loan application forms, except to a student who
previously has received a FFEL loan from the lender or to a student's
parent who previously has received a FFEL loan from the lender;
(C) Offered, directly or indirectly, a FFEL loan to a prospective
borrower to induce the purchase of a policy of insurance or other
product or service by the borrower or other person; or
(D) Engaged in fraudulent or misleading advertising with respect to
its FFEL loan activities.
(ii) Notwithstanding paragraph (5)(i) of this definition, a lender,
in carrying out its role in the FFEL program and in attempting to
provide better service, may provide--
(A) Assistance to a school that is comparable to the kinds of
assistance provided to a school by the Secretary under the Direct Loan
program, as identified by the Secretary in a public announcement, such
as a notice in the Federal Register;
(B) Support of and participation in a school's or a guaranty
agency's student aid and financial literacy-related outreach
activities, excluding in-person school-required initial or exit
counseling, as long as the name of the entity that developed and paid
for any materials is provided to the participants and the lender does
not promote its student loan or other products;
(C) Meals, refreshments, and receptions that are reasonable in cost
and scheduled in conjunction with training, meeting, or conference
events if those meals, refreshments, or
[[Page 62000]]
receptions are open to all training, meeting, or conference attendees;
(D) Toll-free telephone numbers for use by schools or others to
obtain information about FFEL loans and free data transmission service
for use by schools to electronically submit applicant loan processing
information or student status confirmation data;
(E) A reduced origination fee in accordance with Sec. 682.202(c);
(F) A reduced interest rate as provided under the Act;
(G) Payment of Federal default fees in accordance with the Act;
(H) Purchase of a loan made by another lender at a premium;
(I) Other benefits to a borrower under a repayment incentive
program that requires, at a minimum, one or more scheduled payments to
receive or retain the benefit or under a loan forgiveness program for
public service or other targeted purposes approved by the Secretary,
provided these benefits are not marketed to secure loan applications or
loan guarantees;
(J) Items of nominal value to schools, school-affiliated
organizations, and borrowers that are offered as a form of generalized
marketing or advertising, or to create good will; and
(K) Other services as identified and approved by the Secretary
through a public announcement, such as a notice in the Federal
Register.
(iii) For the purposes of paragraph (5) of this definition--
(A) The term ``school-affiliated organization'' is defined in Sec.
682.200.
(B) The term ``applications'' includes the Free Application for
Federal Student Aid (FAFSA), FFEL loan master promissory notes, and
FFEL consolidation loan application and promissory notes.
(C) The term ``other benefits'' includes, but is not limited to,
preferential rates for or access to the lender's other financial
products, computer hardware or non-loan processing or non-financial
aid-related computer software at below market rental or purchase cost,
and printing and distribution of college catalogs and other materials
at reduced or no cost.
(D) The term ``emergency basis'' for the purpose of staffing
services to a school under paragraph (i)(A)(10) of this section means a
state- or Federally-declared natural disaster, a Federally-declared
national disaster, and other localized disasters and emergencies
identified by the Secretary.
* * * * *
(7) An eligible lender may not make or hold a loan as trustee for a
school, or for a school-affiliated organization as defined in this
section, unless on or before September 30, 2006--
(i) The eligible lender was serving as trustee for the school or
school-affiliated organization under a contract entered into and
continuing in effect as of that date; and
(ii) The eligible lender held at least one loan in trust on behalf
of the school or school-affiliated organization on that date.
(8) As of January 1, 2007, and for loans first disbursed on or
after that date under a trustee arrangement, an eligible lender
operating as a trustee under a contract entered into on or before
September 30, 2006, and which continues in effect with a school or a
school-affiliated organization, must comply with the requirements of
Sec. 682.601(a)(3), (a)(5), and (a)(7).
* * * * *
School-affiliated organization. A school-affiliated organization is
any organization that is directly or indirectly related to a school and
includes, but is not limited to, alumni organizations, foundations,
athletic organizations, and social, academic, and professional
organizations.
* * * * *
0
13. Section 682.202 is amended by:
0
A. Adding new paragraph (a)(1)(x).
0
B. In paragraph (b)(2), adding the words, ``and (b)(5)'' immediately
after the words ``(b)(4)''.
0
C. Redesignating paragraph (b)(5) as paragraph (b)(6).
0
D. Adding a new paragraph (b)(5).
The addition reads as follows:
Sec. 682.202 Permissible charges by lenders to borrowers.
* * * * *
(a) * * *
(1) * * *
(x) For a subsidized Stafford loan made to an undergraduate student
for which the first disbursement is made on or after:
(A) July 1, 2006 and before July 1, 2008, the interest rate is 6.8
percent on the unpaid principal balance of the loan.
(B) July 1, 2008 and before July 1, 2009, the interest rate is 6
percent on the unpaid principal balance of the loan.
(C) July 1, 2009 and before July 1, 2010, the interest rate is 5.6
percent on the unpaid principal balance of the loan.
(D) July 1, 2010 and before July 1, 2011, the interest rate is 4.5
percent on the unpaid principal balance of the loan.
(E) July 1, 2011 and before July 2012, the interest rate is 3.4
percent on the unpaid balance of the loan.
* * * * *
(b) * * *
(5) For Consolidation loans, the lender may capitalize interest as
provided in paragraphs (b)(2) and (b)(3) of this section, except that
the lender may capitalize the unpaid interest for a period of
authorized in-school deferment only at the expiration of the deferment.
* * * * *
0
14. Section 682.208 is amended by:
0
A. Revising paragraph (a).
0
B. Adding new paragraphs (b)(3) and (b)(4).
0
C. Adding a new paragraph (i).
The revisions and addition read as follows:
Sec. 682.208 Due diligence in servicing a loan.
(a) The loan servicing process includes reporting to national
credit bureaus, responding to borrower inquiries, establishing the
terms of repayment, and reporting a borrower's enrollment and loan
status information.
(b) * * *
(3) Upon receipt of a valid identity theft report as defined in
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau that information furnished by the
lender is a result of an alleged identity theft as defined in Sec.
682.402(e)(14), an eligible lender shall suspend credit bureau
reporting for a period not to exceed 120 days while the lender
determines the enforceability of a loan.
(i) If the lender determines that a loan does not qualify for a
discharge under Sec. 682.402(e)(1)(i)(C), but is nonetheless
unenforceable, the lender must--
(A) Notify the credit bureau of its determination; and
(B) Comply with Sec. Sec. 682.300(b)(2)(ix) and
682.302(d)(1)(viii).
(ii) [Reserved]
(4) If, within 3 years of the lender's receipt of an identity theft
report, the lender receives from the borrower evidence specified in
Sec. 682.402(e)(3)(v), the lender may submit a claim and receive
interest subsidy and special allowance payments that would have accrued
on the loan.
* * * * *
(i) A lender shall report enrollment and loan status information,
or any Title IV loan-related data required by the Secretary, to the
guaranty agency or to the Secretary, as applicable, by the
[[Page 62001]]
deadline date established by the Secretary.
* * * * *
0
15. Section 682.209 is amended by adding new paragraph (k) to read as
follows:
Sec. 682.209 Repayment of a loan.
* * * * *
(k) Any lender holding a loan is subject to all claims and defenses
that the borrower could assert against the school with respect to that
loan if--
(1) The loan was made by the school or a school-affiliated
organization;
(2) The lender who made the loan provided an improper inducement,
as described in paragraph (5)(i) of the definition of Lender in Sec.
682.200(b), to the school or any other party in connection with the
making of the loan;
(3) The school refers borrowers to the lender; or
(4) The school is affiliated with the lender by common control,
contract, or business arrangement.
* * * * *
0
16. Section 682.210 is amended by:
0
A. In paragraph (i)(1), adding the words, ``or a borrower's
representative'' immediately following the words ``a borrower''.
0
B. Adding new paragraph (i)(5).
0
C. In paragraph (s), adding, immediately following the words ``(1)
General.'', the paragraph designation ``(i)''.
0
D. Adding new paragraphs (s)(1)(ii), (s)(1)(iii), (s)(1)(iv), and
(s)(1)(v).
0
E. Revising paragraph (s)(6)(iii)(B).
0
F. In paragraph (t), removing from the heading the words ``for loans
for which the first disbursement is made on or after July 1, 2001''.
0
G. In paragraph (t)(1), removing the words ``first disbursed on or
after July 1, 2001'', and removing the words ``not to exceed 3 years''.
0
H. Removing paragraph (t)(5).
0
I. Redesignating paragraphs (t)(2), (t)(3), and (t)(4), as paragraphs
(t)(3), (t)(4), and (t)(5), respectively.
0
J. Adding new paragraphs (t)(2), (t)(7), and (t)(8).
0
K. Adding new paragraph (u).
0
L. Adding a new parenthetical phrase after new paragraph (u).
The additions read as follows:
Sec. 682.210 Deferment.
* * * * *
(i) * * *
(5) A lender that grants a military service deferment based on a
request from a borrower's representative must notify the borrower that
the deferment has been granted and that the borrower has the option to
cancel the deferment and continue to make payments on the loan. The
lender may also notify the borrower's representative of the outcome of
the deferment request.
* * * * *
(s) * * *
(1) * * *
(ii) As a condition for receiving a deferment, except for purposes
of paragraph (s)(2) of this section, the borrower must request the
deferment and provide the lender with all information and documents
required to establish eligibility for the deferment.
(iii) After receiving a borrower's written or verbal request, a
lender may grant a deferment under paragraphs (s)(3) through (s)(6) of
this section if the lender is able to confirm that the borrower has
received a deferment on another FFEL loan or on a Direct Loan for the
same reason and the same time period. The lender may grant the
deferment based on information from the other FFEL loan holder or the
Secretary or from an authoritative electronic database maintained or
authorized by the Secretary that supports eligibility for the deferment
for the same reason and the same time period.
(iv) A lender may rely in good faith on the information it receives
under paragraph (s)(1)(iii) of this section when determining a
borrower's eligibility for a deferment unless the lender, as of the
date of the determination, has information indicating that the borrower
does not qualify for the deferment. A lender must resolve any
discrepant information before granting a deferment under paragraph
(s)(1)(iii) of this section.
(v) A lender that grants a deferment under paragraph (s)(1)(iii) of
this section must notify the borrower that the deferment has been
granted and that the borrower has the option to pay interest that
accrues on an unsubsidized FFEL loan or to cancel the deferment and
continue to make payments on the loan.
* * * * *
(6) * * *
(iii) * * *
(B) An amount equal to 150 percent of the poverty line applicable
to the borrower's family size, as determined in accordance with section
673(2) of the Community Service Block Grant Act.
(t) * * *
(2) The deferment period ends 180 days after the demobilization
date for the service described in paragraph (t)(1)(i) and (t)(1)(ii) of
this section.
* * * * *
(7) To receive a military service deferment, the borrower, or the
borrower's representative, must request the deferment and provide the
lender with all information and documents required to establish
eligibility for the deferment, except that a lender may grant a
borrower a military service deferment under the procedures specified in
paragraphs (s)(1)(iii) through (s)(1)(v) of this section.
(8) A lender that grants a military service deferment based on a
request from a borrower's representative must notify the borrower that
the deferment has been granted and that the borrower has the option to
cancel the deferment and continue to make payments on the loan. The
lender may also notify the borrower's representative of the outcome of
the deferment request.
(u) Military active duty student deferment. (1) A borrower who
receives an FFEL Program loan is entitled to receive a military active
duty student deferment for 13 months following the conclusion of the
borrower's active duty military service if--
(i) The borrower is a member of the National Guard or other reserve
component of the Armed Forces of the United States or a member of such
forces in retired status; and
(ii) The borrower was enrolled in a program of instruction at an
eligible institution at the time, or within six months prior to the
time, the borrower was called to active duty.
(2) As used in paragraph (u)(1) of this section, ``Active duty''
means active duty as defined in section 101(d)(1) of title 10, United
States Code, except--
(i) Active duty includes active State duty for members of the
National Guard; and
(ii) Active duty does not include active duty for training or
attendance at a service school.
(3) If the borrower returns to enrolled student status during the
13-month deferment period, the deferment expires at the time the
borrower returns to enrolled student status.
(4) To receive a military active duty student deferment, the
borrower must request the deferment and provide the lender with all
information and documents required to establish eligibility for the
deferment, except that a lender may grant a borrower a military active
duty student deferment under the procedures specified in paragraphs
(s)(1)(iii) through (s)(1)(v) of this section. (Approved by the Office
of Management and Budget under control number 1845-0020)
* * * * *
0
17. Section 682.211 is amended by:
0
A. Redesignating paragraphs (f)(6), (f)(7), (f)(8), (f)(9), (f)(10),
and (f)(11) as
[[Page 62002]]
paragraphs (f)(7), (f)(8), (f)(9), (f)(10), (f)(11), and (f)(12),
respectively.
0
B. Adding new paragraph (f)(6).
The addition reads as follows:
Sec. 682.211 Forbearance.
* * * * *
(f) * * *
(6) Upon receipt of a valid identity theft report as defined in
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau that information furnished by the
lender is a result of an alleged identity theft as defined in Sec.
682.402(e)(14), for a period not to exceed 120 days necessary for the
lender to determine the enforceability of the loan. If the lender
determines that the loan does not qualify for discharge under Sec.
682.402(e)(1)(i)(C), but is nonetheless unenforceable, the lender must
comply with Sec. Sec. 682.300(b)(2)(ix) and 682.302(d)(1)(viii).
* * * * *
0
18. Section 682.212 is amended by:
0
A. In paragraph (c), removing the words ``the Student Loan Marketing
Association,''.
0
B. In paragraph (d), removing the words ``the Student Loan Marketing
Association or''.
0
C. Adding new paragraph (h).
0
D. Adding a parenthetical phrase after paragraph (h).
The addition reads as follows:
Sec. 682.212 Prohibited transactions.
* * * * *
(h)(1) A school may, at its option, make available a list of
recommended or suggested lenders, in print or any other medium or form,
for use by the school's students or their parents, provided such list--
(i) Is not used to deny or otherwise impede a borrower's choice of
lender;
(ii) Does not contain fewer than three lenders that are not
affiliated with each other and that will make loans to borrowers or
students attending the school; and
(iii) Does not include lenders that have offered, or have offered
in response to a solicitation by the school, financial or other
benefits to the school in exchange for inclusion on the list or any
promise that a certain number of loan applications will be sent to the
lender by the school or its students.
(2) A school that provides or makes available a list of recommended
or suggested lenders must--
(i) Disclose to prospective borrowers, as part of the list, the
method and criteria used by the school in selecting any lender that it
recommends or suggests;
(ii) Provide comparative information to prospective borrowers about
interest rates and other benefits offered by the lenders;
(iii) Include a prominent statement in any information related to
its list of lenders, advising prospective borrowers that they are not
required to use one of the school's recommended or suggested lenders;
(iv) For first-time borrowers, not assign, through award packaging
or other methods, a borrower's loan to a particular lender;
(v) Not cause unnecessary certification delays for borrowers who
use a lender that has not been recommended or suggested by the school;
and
(vi) Update any list of recommended or suggested lenders and any
information accompanying such a list no less often than annually.
(3) For the purposes of paragraph (h) of this section, a lender is
affiliated with another lender if--
(i) The lenders are under the ownership or control of the same
entity or individuals;
(ii) The lenders are wholly or partly owned subsidiaries of the
same parent company; or
(iii) The directors, trustees, or general partners (or individuals
exercising similar functions) of one of the lenders constitute a
majority of the persons holding similar positions with the other
lender. (Approved by the Office of Management and Budget under control
number 1845-0020)
* * * * *
0
19. Section 682.300 is amended by:
0
A. In paragraph (b)(2)(vii), removing the word ``or'' at the end of the
paragraph.
0
B. In paragraph (b)(2)(viii), removing the punctuation ``.'' at the end
of the paragraph and adding, in its place, ``; or''.
0
C. Adding new paragraph (b)(2)(ix).
The addition reads as follows:
Sec. 682.300 Payment of interest benefits on Stafford and
Consolidation loans.
* * * * *
(b) * * *
(2) * * *
(ix) The date on which the lender determines the loan is legally
unenforceable based on the receipt of an identity theft report under
Sec. 682.208(b)(3).
* * * * *
0
20. Section 682.302 is amended by:
0
A. In paragraph (d)(1)(vi)(B), removing the word ``or'' at the end of
the paragraph.
0
B. In paragraph (d)(1)(vii), by removing the punctuation ``.'' and
adding, in its place, ``; or''.
0
C. Adding new paragraph (d)(1)(viii).
0
D. Redesignating paragraph (f) as paragraph (g).
0
E. Adding new paragraph (f).
The addition reads as follows:
Sec. 682.302 Payment of special allowance on FFEL loans.
* * * * *
(d) * * *
(1) * * *
(viii) The date on which the lender determines the loan is legally
unenforceable based on the receipt of an identity theft report under
Sec. 682.208(b)(3).
* * * * *
(f) Special allowance rates for loans made on or after October 1,
2007. With respect to any loan for which the first disbursement of
principal is made on or after October 1, 2007, the special allowance
rate for an eligible loan during a 3-month period is calculated
according to the formulas described in paragraphs (f)(1) and (f)(2) of
this section.
(1) Except as provided in paragraph (f)(2) of this section, the
special allowance formula shall be computed by--
(i) Determining the average of the bond equivalent rates of the
quotes of the 3-month commercial paper (financial) rates in effect for
each of the days in such quarter as reported by the Federal Reserve in
Publication H-15 (or its successor) for such 3-month period;
(ii) Subtracting the applicable interest rate for that loan;
(iii) Adding--
(A) 1.79 percent to the resulting percentage for a Federal Stafford
loan;
(B) 1.19 percent to the resulting percentage for a Federal Stafford
Loan during the borrower's in-school period, grace period and
authorized period of deferment;
(C) 1.79 percent to the resulting percentage for a Federal PLUS
loan; and
(D) 2.09 percent to the resulting percentage for a Federal
Consolidation loan; and
(iv) Dividing the resulting percentage by 4.
(2) For loans held by an eligible not-for-profit holder as defined
in paragraph (f)(3) of this section, the special allowance formula
shall be computed by--
(i) Determining the average of the bond equivalent rates of the
quotes of the 3-month commercial paper (financial) rates in effect for
each of the days in such quarter as reported by the Federal Reserve in
Publication H-15 (or its successor) for such 3-month period;
(ii) Subtracting the applicable interest rate for that loan;
[[Page 62003]]
(iii) Adding--
(A) 1.94 percent to the resulting percentage for a Federal Stafford
loan;
(B) 1.34 percent to the resulting percentage for a Federal Stafford
Loan during the borrower's in-school period, grace period and
authorized period of deferment;
(C) 1.94 percent to the resulting percentage for a Federal PLUS
loan; and
(D) 2.24 percent to the resulting percentage for a Federal
Consolidation loan; and
(iv) Dividing the resulting percentage by 4.
(3)(i) For purposes of this section, the term ``eligible not-for-
profit holder'' means an eligible lender under section 435(d) of the
Act (except for a school) that is--
(A) A State, or a political subdivision, authority, agency, or
other instrumentality thereof, including such entities that are
eligible to issue bonds described in 26 CFR 1.103-1, or section 144(b)
of the Internal Revenue Code of 1986;
(B) An entity described in section 150(d)(2) of the Internal
Revenue Code of 1986 that has not made the election described in
section 150(d)(3) of that Code;
(C) An entity described in section 501(c)(3) of the Internal
Revenue Code of 1986; or
(D) A trustee acting as an eligible lender on behalf of a State,
political subdivision, authority, agency, instrumentality, or other
entity described in subparagraph (f)(3)(i)(A), (B), or (C) of this
section.
(ii) An entity that otherwise qualifies under paragraph (f)(3) of
this section shall not be considered an eligible not-for-profit holder
unless such lender--
(A) Was, on the date of the enactment of the College Cost Reduction
and Access Act, acting as an eligible lender; or
(B) Is a trustee acting as an eligible lender on behalf of an
entity described in paragraph (f)(3)(ii)(A) of this section.
(iii) No political subdivision, authority, agency, instrumentality,
or other entity described in paragraph (f)(3)(i)(A), (B), or (C) of
this section shall be an eligible not-for-profit holder if the entity
is owned or controlled, in whole or in part, by a for-profit entity.
(iv) No State, political subdivision, authority, agency,
instrumentality, or other entity described in paragraph (f)(3)(i)(A),
(B), or (C) of this section shall be an eligible not-for-profit holder
with respect to any loan, or income from any loan, unless the State,
political subdivision, authority, agency, instrumentality, or other
entity described in paragraph (f)(3)(i)(A), (B), or (C) of this section
is the sole owner of the beneficial interest in such loan and the
income from such loan.
(v) A trustee described in paragraph (f)(3)(i)(D) of this section
shall not receive compensation as consideration for acting as an
eligible lender on behalf of an entity described in paragraph
(f)(3)(i)(A), (B), or (C) of this section in excess of reasonable and
customary fees.
(vi) For purposes of this paragraph, an otherwise eligible not-for-
profit holder shall not--
(A) Be deemed to be owned or controlled, in whole or in part, by a
for-profit entity; or
(B) Lose its status as the sole owner of a beneficial interest in a
loan and the income from a loan by granting a security interest in, or
otherwise pledging as collateral, such loan, or the income from such
loan, to secure a debt obligation in the operation of an arrangement
described in paragraph (f)(3)(i)(D) of this section.
(4) In the case of a loan for which the special allowance payment
is calculated under paragraph (f)(2) of this section and that is sold
by the eligible not-for-profit holder holding the loan to an entity
that is not an eligible not-for-profit holder, the special allowance
payment for such loan shall, beginning on the date of the sale, no
longer be calculated under paragraph (f)(2) and shall be calculated
under paragraph (f)(1) of this section instead.
* * * * *
0
21. Section 682.305 is amended by:
0
A. Redesignating paragraph (a)(3)(ii) as paragraph (a)(3)(ii)(A).
0
B. Adding new paragraph (a)(3)(ii)(B).
The addition reads as follows:
Sec. 682.305 Procedures for payment of interest benefits and special
allowance and collection of origination and loan fees.
(a) * * *
(3) * * *
(ii) * * *
(B) For any FFEL loan made on or after October 1, 2007, a lender
shall pay the Secretary a loan fee equal to 1.0 percent of the
principal amount of the loan.
* * * * *
0
22. Section 682.401 is amended by:
0
A. In paragraph (b)(2)(ii)(A), removing the punctuation ``;'' at the
end of the paragraph and adding, in its place, the words ``, as defined
in 34 CFR 668.3; or''.
0
B. Revising paragraph (b)(2)(ii)(B).
0
C. Removing paragraph (b)(2)(ii)(C).
0
D. In paragraph (b)(20), removing the number ``60'' and adding, in its
place, the number ``35''.
0
E. Revising paragraph (e).
The revisions read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(B) A period attributable to the academic year that is not less
than the period specified in paragraph (b)(2)(ii)(A) of this section,
in which the student earns the amount of credit in the student's
program of study required by the student's school as the amount
necessary for the student to advance in academic standing as normally
measured on an academic year basis (for example, from freshman to
sophomore or, in the case of schools using clock hours, completion of
at least 900 clock hours).
* * * * *
(e) Prohibited activities. (1) A guaranty agency may not, directly
or through an agent or contractor--
(i) Except as provided in paragraph (e)(2) of this section, offer
directly or indirectly from any fund or assets available to the
guaranty agency, any premium, payment, or other inducement to any
prospective borrower of an FFEL loan, or to a school or school-
affiliated organization or an employee of a school or school-affiliated
organization, to secure applications for FFEL loans. This includes, but
is not limited to--
(A) Payments or offerings of other benefits, including prizes or
additional financial aid funds, to a prospective borrower in exchange
for processing a loan using the agency's loan guarantee;
(B) Payments or other benefits, including prizes or additional
financial aid funds under any Title IV or State or private program, to
a school or school-affiliated organization based on the school's or
organization's voluntary or coerced agreement to use the guaranty
agency for processing loans, or to provide a specified volume of loans
using the agency's loan guarantee;
(C) Payments or other benefits to a school or any school-affiliated
organization, or to any individual in exchange for FFEL loan
applications or application referrals, a specified volume or dollar
amount of FFEL loans using the agency's loan guarantee, or the
placement of a lender that uses the agency's loan guarantee on a
school's list of recommended or suggested lenders;
(D) Payment of entertainment expenses, including expenses for
private hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation or other
gratuities related
[[Page 62004]]
to any activity sponsored by the guaranty agency or a lender
participating in the agency's program, for school employees or
employees of school-affiliated organizations;
(E) Philanthropic activities, including providing scholarships,
grants, restricted gifts, or financial contributions in exchange for
FFEL loan applications or application referrals, a specified volume or
dollar amount of FFEL loans using the agency's loan guarantee, or the
placement of a lender that uses the agency's loan guarantee on a
school's list of recommended or suggested lenders; and
(F) Staffing services to a school, except for services provided to
participating foreign schools at the direction of the Secretary, as a
third-party servicer or otherwise on more than a short-term, emergency
basis, which is non-recurring, to assist the institution with financial
aid-related functions.
(ii) Assess additional costs or deny benefits otherwise provided to
schools and lenders participating in the agency's program on the basis
of the lender's or school's failure to agree to participate in the
agency's program, or to provide a specified volume of loan applications
or loan volume to the agency's program or to place a lender that uses
the agency's loan guarantee on a school's list of recommended or
suggested lenders.
(iii) Offer, directly or indirectly, any premium, incentive
payment, or other inducement to any lender, or any person acting as an
agent, employee, or independent contractor of any lender or other
guaranty agency to administer or market FFEL loans, other than
unsubsidized Stafford loans or subsidized Stafford loans made under a
guaranty agency's lender-of-last-resort program, in an effort to secure
the guaranty agency as an insurer of FFEL loans. Examples of prohibited
inducements include, but are not limited to--
(A) Compensating lenders or their representatives for the purpose
of securing loan applications for guarantee;
(B) Performing functions normally performed by lenders without
appropriate compensation;
(C) Providing equipment or supplies to lenders at below market cost
or rental; and
(D) Offering to pay a lender that does not hold loans guaranteed by
the agency a fee for each application forwarded for the agency's
guarantee.
(iv) Mail or otherwise distribute unsolicited loan applications to
students enrolled in a secondary school or a postsecondary institution,
or to parents of those students, unless the potential borrower has
previously received loans insured by the guaranty agency.
(v) Conduct fraudulent or misleading advertising concerning loan
availability.
(2) Notwithstanding paragraph (e)(1)(i), (ii), and (iii) of this
section, a guaranty agency is not prohibited from providing--
(i) Assistance to a school that is comparable to that provided by
the Secretary to a school under the Direct Loan Program, as identified
by the Secretary in a public announcement, such as a notice in the
Federal Register;
(ii) Default aversion activities approved by the Secretary under
section 422(h)(4)(B) of the Act;
(iii) Student aid and financial-literacy related outreach
activities, excluding in-person school-required initial and exit
counseling, as long as the name of the entity that developed and paid
for any materials is provided to participants and the guaranty agency
does not promote its student loan or other products; but a guaranty
agency may promote benefits provided under other Federal or State
programs administered by the guaranty agency;
(iv) Meals and refreshments that are reasonable in cost and
provided in connection with guaranty agency provided training of
program participants and elementary, secondary, and postsecondary
school personnel and with workshops and forums customarily used by the
agency to fulfill its responsibilities under the Act;
(v) Meals, refreshments and receptions that are reasonable in cost
and scheduled in conjunction with training, meeting, or conference
events if those meals, refreshments, or receptions are open to all
training, meeting, or conference attendees;
(vi) Travel and lodging costs that are reasonable as to cost,
location, and duration to facilitate the attendance of school staff in
training or service facility tours that they would otherwise not be
able to undertake, or to participate in the activities of an agency's
governing board, a standing official advisory committee, or in support
of other official activities of the agency;
(vii) Toll-free telephone numbers for use by schools or others to
obtain information about FFEL loans and free data transmission services
for use by schools to electronically submit applicant loan processing
information or student status confirmation data;
(viii) Payment of Federal default fees in accordance with the Act;
(ix) Items of nominal value to schools, school-affiliated
organizations, and borrowers that are offered as a form of generalized
marketing or advertising, or to create good will;
(x) Loan forgiveness programs for public service and other targeted
purposes approved by the Secretary, provided the programs are not
marketed to secure loan applications or loan guarantees; and
(xi) Other services as identified and approved by the Secretary
through a public announcement, such as a notice in the Federal
Register.
(3) For the purposes of this section--
(i) The term ``school-affiliated organization'' is defined in Sec.
682.200.
(ii) The term ``applications'' includes the FAFSA, FFEL loan master
promissory notes, and FFEL consolidation loan application and
promissory notes.
(iii) The terms ``other benefits'' includes, but is not limited to,
preferential rates for or access to a guaranty agency's products and
services, computer hardware or non-loan processing or non-financial aid
related computer software at below market rental or purchase cost, and
the printing and distribution of college catalogs and other non-
counseling or non-student financial aid-related materials at reduced or
not costs.
(iv) The terms ``premium,'' ``incentive payment,'' and ``other
inducement'' do not include services directly related to the
enhancement of the administration of the FFEL Program that the guaranty
agency generally provides to lenders that participate in its program.
However, the terms ``premium,'' ``incentive payment,'' and
``inducement'' do apply to other activities specifically intended to
secure a lender's participation in the agency's program.
(v) The term ``emergency basis'' for the purpose of staffing
services to a school under paragraph (e)(1)(i)(F) of this section means
a State- or Federally-declared natural disaster, a Federally-declared
national disaster, and other localized disasters and emergencies
identified by the Secretary.
* * * * *
0
23. Section 682.402 is amended by:
0
A. Revising the first sentence in paragraph (b)(2).
0
B. Revising the third sentence in paragraph (b)(3).
0
C. Revising paragraph (c).
0
D. In paragraph (e)(2)(iv), adding the words ``or inaccurate''
immediately after the word ``adverse''.
0
E. In paragraph (e)(3)(v)(C), adding the words ``by a perpetrator named
in the verdict or judgment'' at the end of the paragraph.
The revisions read as follows:
[[Page 62005]]
Sec. 682.402 Death, disability, closed school, false certification,
unpaid refunds, and bankruptcy payments.
* * * * *
(b) * * *
(2) A discharge of a loan based on the death of the borrower (or
student in the case of a PLUS loan) must be based on an original or
certified copy of the death certificate, or an accurate and complete
photocopy of the original or certified copy of the death certificate. *
* *
(3) * * * If the lender is not able to obtain an original or
certified copy of the death certificate, or an accurate and complete
photocopy of the original or certified copy of the death certificate or
other documentation acceptable to the guaranty agency, under the
provisions of paragraph (b)(2) of this section, during the period of
suspension, the lender must resume collection activity from the point
that it had been discontinued. * * *
(c)(1) Total and permanent disability. A borrower's loan is
discharged if the borrower becomes totally and permanently disabled, as
defined in Sec. 682.200(b), and satisfies the additional eligibility
requirements contained in this section.
(2) Discharge application process. After being notified by the
borrower or the borrower's representative that the borrower claims to
be totally and permanently disabled, the lender promptly requests that
the borrower or the borrower's representative submit a discharge
application to the lender, on a form approved by the Secretary. The
application must contain a certification by a physician, who is a
doctor of medicine or osteopathy legally authorized to practice in a
State, that the borrower is totally and permanently disabled as defined
in Sec. 682.200(b). The borrower must submit the application to the
lender within 90 days of the date the physician certifies the
application. If the lender and guaranty agency approve the discharge
claim, under the procedures in paragraph (c)(5) of this section, the
guaranty agency must assign the loan to the Secretary.
(3) Secretary's initial eligibility determination. (i) If, after
reviewing the borrower's application, the Secretary determines that the
certification provided by the borrower supports the conclusion that the
borrower meets the criteria for a total and permanent disability
discharge, as defined in Sec. 682.200(b), the borrower is considered
totally and permanently disabled as of the date the physician completes
and certifies the borrower's application.
(ii) Upon making an initial determination that the borrower is
totally and permanently disabled as defined in Sec. 682.200(b), the
Secretary notifies the borrower that the loan will be in a conditional
discharge status for a period of up to three years and that no payments
are due on the loan. The notification to the borrower identifies the
conditions of the conditional discharge specified in paragraph
(c)(4)(i) of this section. The conditional discharge period begins on
the date the physician certified on the application that the borrower
is totally and permanently disabled, as defined in Sec. 682.200(b).
(iii) If the Secretary determines that the certification provided
by the borrower does not support the conclusion that the borrower meets
the criteria for a total and permanent disability discharge in
paragraph (c)(4)(i) of this section, the Secretary notifies the
borrower that the application for a disability discharge has been
denied, and that the loan is due and payable to the Secretary under the
terms of the promissory note.
(4) Eligibility requirements for total and permanent disability
discharge. (i) A borrower meets the eligibility criteria for a
discharge of a loan based on total and permanent disability if, from
the date the physician certifies the borrower's application, through
the end of the three-year conditional discharge period--
(A) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) The borrower does not receive a new loan under the Perkins,
FFEL, or Direct Loan programs, except for a FFEL or Direct
Consolidation Loan that does not include any loans that are in a
conditional discharge status; and
(C) The borrower ensures that the full amount of any title IV loan
disbursement on any loan received prior to the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(ii) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(A) Is not required to make any payments on the loan;
(B) Is not considered delinquent or in default on the loan, unless
the loan was past due or in default at the time the conditional
discharge was granted;
(C) Must promptly notify the Secretary of any changes in address or
phone number;
(D) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(c)(4)(i)(A) of this section; and
(E) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
a discharge under this section.
(iii) If the borrower satisfies the criteria for a total and
permanent disability discharge during and at the end of the conditional
discharge period, the balance of the loan is discharged at the end of
the conditional discharge period and any payments received after the
physician completed and certified the borrower's loan discharge
application are returned to the person who made the payments on the
loan.
(iv) If, at any time during or at the end of the three-year
conditional discharge period, the Secretary determines that the
borrower does not continue to meet the eligibility criteria for a total
and permanent disability discharge, the Secretary ends the conditional
discharge period and resumes collection activity on the loan. The
Secretary does not require the borrower to pay any interest that
accrued on the loan from the date of the Secretary's initial
eligibility determination described in paragraph (c)(3)(i) of this
section through the end of the conditional discharge period.
(v) The Secretary reserves the right to require the borrower to
submit additional medical evidence if the Secretary determines that the
borrower's application does not conclusively prove that the borrower is
disabled. As part of this review or at any time during the application
process or during or at the end of the conditional discharge period,
the Secretary may arrange for an additional review of the borrower's
condition by an independent physician at no expense to the applicant.
(5) Lender and guaranty agency responsibilities. (i) After being
notified by a borrower or a borrower's representative that the borrower
claims to be totally and permanently disabled, the lender must continue
collection activities until it receives either the certification of
total and permanent disability from a physician or a letter from a
physician stating that the certification has been requested and that
additional time is needed to determine if the borrower is totally and
permanently disabled, as defined in Sec. 682.200(b). Except as
provided in paragraph (c)(5)(iii) of this section, after receiving the
physician's certification or letter the lender may not attempt to
collect from the borrower or any endorser.
(ii) The lender must submit a disability claim to the guaranty
agency if the borrower submits a certification
[[Page 62006]]
by a physician and the lender makes a determination that the
certification supports the conclusion that the borrower meets the
criteria for a total and permanent disability discharge, as specified
in paragraph (c)(4)(i) of this section.
(iii) If the lender determines that a borrower who claims to be
totally and permanently disabled is not totally and permanently
disabled, as defined in Sec. 682.200(b), or if the lender does not
receive the physician's certification of total and permanent disability
within 60 days of the receipt of the physician's letter requesting
additional time, as described in paragraph (c)(5)(i) of this section,
the lender must resume collection and is deemed to have exercised
forbearance of payment of both principal and interest from the date
collection activity was suspended. The lender may capitalize, in
accordance with Sec. 682.202(b), any interest accrued and not paid
during that period.
(iv) The guaranty agency must pay a claim submitted by the lender
if the guaranty agency has reviewed the application and determined that
it is complete and that it supports the conclusion that the borrower
meets the criteria for a total and permanent disability discharge, as
specified in paragraph (c)(4)(i) of this section.
(v) If the guaranty agency does not pay the disability claim, the
guaranty agency must return the claim to the lender with an explanation
of the basis for the agency's denial of the claim. Upon receipt of the
returned claim, the lender must notify the borrower that the
application for a disability discharge has been denied, provide the
basis for the denial, and inform the borrower that the lender will
resume collection on the loan. The lender is deemed to have exercised
forbearance of both principal and interest from the date collection
activity was suspended until the first payment due date. The lender may
capitalize, in accordance with Sec. 682.202(b), any interest accrued
and not paid during that period.
(vi) If the guaranty agency pays the disability claim, the lender
must notify the borrower that--
(A) The loan will be assigned to the Secretary for determination of
eligibility for a total and permanent disability discharge and that no
payments are due on the loan; and
(B) To remain eligible for the discharge from the date the
physician completes and certifies the borrower's total and permanent
disability on the application until the borrower receives a final
disability discharge, the borrower--
(1) Cannot have annual earnings from employment that exceed 100
percent of the poverty line for a family of two, as determined in
accordance with the Community Services Block Grant;
(2) Cannot receive any new Title IV loans except for a FFEL or
Direct Consolidation Loan that does not include any loans on which the
borrower is seeking a discharge; and
(3) Must ensure that the full amount of any Title IV loan
disbursement made to the borrower on or after the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(vii) After receiving a claim payment from the guaranty agency, the
lender must forward to the guaranty agency any payments subsequently
received from or on behalf of the borrower.
(viii) The Secretary reimburses the guaranty agency for a
disability claim paid to the lender after the agency pays the claim to
the lender.
(ix) The guaranty agency must assign the loan to the Secretary
after the guaranty agency pays the disability claim.
* * * * *
0
24. Section 682.404 is amended by:
0
A. Adding new paragraph (g)(1)(ii)(E).
0
B. Revising paragraph (i).
The addition and revision read as follows:
Sec. 682.404 Federal reinsurance agreement.
* * * * *
(g) * * *
(1) * * *
(ii) * * *
(E) 16 percent of borrower payments received on or after October 1,
2007.
* * * * *
(i) Account Maintenance Fee. A guaranty agency is paid an account
maintenance fee based on the original principal amount of outstanding
FFEL Program loans insured by the agency. For fiscal years 1999 and
2000, the fee is 0.12 percent of the original principal amount of
outstanding loans. For fiscal years 2000 through 2007, the fee is 0.10
percent of the original principal amount of outstanding loans. After
fiscal year 2007, the fee is 0.06 percent of the original principal
amount of outstanding loans.
* * * * *
0
25. Section 682.406 is amended by adding new paragraph (d) to read as
follows:
Sec. 682.406 Conditions for claim payments from the Federal Fund and
for reinsurance coverage.
* * * * *
(d) A guaranty agency may not make a claim payment from the Federal
Fund or receive a reinsurance payment on a loan if the agency
determines or is notified by the Secretary that the lender offered or
provided an improper inducement as described in paragraph (5)(i) of the
definition of lender in Sec. 682.200(b).
* * * * *
0
26. Section 682.409 is amended by adding new paragraphs (c)(4)(vii) and
(c)(4)(viii) to read as follows:
Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted
loans to the Secretary.
* * * * *
(c)* * *
(4)* * *
(vii) The record of the lender's disbursement of Stafford and PLUS
loan funds to the school for delivery to the borrower.
(viii) If the MPN or promissory note was signed electronically, the
name and location of the entity in possession of the original
electronic MPN or promissory note.
* * * * *
0
27. Section 682.411 is amended by revising paragraph (o) as follows:
Sec. 682.411 Lender due diligence in collecting guaranty agency
loans.
* * * * *
(o) Preemption. The provisions of this section--
(1) Preempt any State law, including State statutes, regulations,
or rules, that would conflict with or hinder satisfaction of the
requirements or frustrate the purposes of this section; and
(2) Do not preempt provisions of the Fair Credit Reporting Act that
provide relief to a borrower while the lender determines the legal
enforceability of a loan when the lender receives a valid identity
theft report or notification from a credit bureau that information
furnished is a result of an alleged identity theft as defined in Sec.
682.402(e)(14).
* * * * *
0
28. Section 682.413 is amended by:
0
A. Adding new paragraph (h).
0
B. In the Note at the end of the section, removing the word ``Note''
and adding, in its place, the words ``Note to Section 682.413''.
The addition reads as follows:
Sec. 682.413 Remedial actions.
* * * * *
(h) In any action to require repayment of funds or to withhold
funds from a guaranty agency, or to limit, suspend, or
[[Page 62007]]
terminate a guaranty agency based on a violation of Sec. 682.401(e),
if the Secretary finds that the guaranty agency provided or offered the
payments or activities listed in Sec. 682.401(e)(1), the Secretary
applies a rebuttable presumption that the payments or activities were
offered or provided to secure applications for FFEL loans or to secure
FFEL loan volume. To reverse the presumption, the guaranty agency must
present evidence that the activities or payments were provided for a
reason unrelated to securing applications for FFEL loans or securing
FFEL loan volume.
* * * * *
0
29. Section 682.414 is amended by:
0
A. Adding new paragraph (a)(5)(iv).
0
B. Adding new paragraph (a)(6).
0
C. Revising paragraph (b)(4).
The additions and revisions read as follows:
Sec. 682.414 Records, reports, and inspection requirements for
guaranty agency programs.
(a)* * *
(5)* * *
(iv) If a lender made a loan based on an electronically signed MPN,
the holder of the original electronically signed MPN must retain that
original MPN for at least 3 years after all the loans made on the MPN
have been satisfied.
(6)(i) Upon the Secretary's request with respect to a particular
loan or loans assigned to the Secretary and evidenced by an
electronically signed promissory note, the guaranty agency and the
lender that created the original electronically signed promissory note
must cooperate with the Secretary in all activities necessary to
enforce the loan or loans. The guaranty agency or lender must provide--
(A) An affidavit or certification regarding the creation and
maintenance of the electronic records of the loan or loans in a form
appropriate to ensure admissibility of the loan records in a legal
proceeding. This affidavit or certification may be executed in a single
record for multiple loans provided that this record is reliably
associated with the specific loans to which it pertains; and
(B) Testimony by an authorized official or employee of the guaranty
agency or lender, if necessary to ensure admission of the electronic
records of the loan or loans in the litigation or legal proceeding to
enforce the loan or loans.
(ii) The affidavit or certification described in paragraph
(a)(6)(i)(A) of this section must include, if requested by the
Secretary--
(A) A description of the steps followed by a borrower to execute
the promissory note (such as a flow chart);
(B) A copy of each screen as it would have appeared to the borrower
of the loan or loans the Secretary is enforcing when the borrower
signed the note electronically;
(C) A description of the field edits and other security measures
used to ensure integrity of the data submitted to the originator
electronically;
(D) A description of how the executed promissory note has been
preserved to ensure that is has not been altered after it was executed;
(E) Documentation supporting the lender's authentication and
electronic signature process; and
(F) All other documentary and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.
(iii) The Secretary may request a record, affidavit, certification
or evidence under paragraph (a)(6) of this section as needed to resolve
any factual dispute involving a loan that has been assigned to the
Secretary including, but not limited to, a factual dispute raised in
connection with litigation or any other legal proceeding, or as needed
in connection with loans assigned to the Secretary that are included in
a Title IV program audit sample, or for other similar purposes. The
guaranty agency must respond to any request from the Secretary within
10 business days.
(iv) As long as any loan made to a borrower under a MPN created by
the lender is not satisfied, the holder of the original electronically
signed promissory note is responsible for ensuring that all parties
entitled to access to the electronic loan record, including the
guaranty agency and the Secretary, have full and complete access to the
electronic record.
(b) * * *
(4) A report to the Secretary of the borrower's enrollment and loan
status information, or any Title IV loan-related data required by the
Secretary, by the deadline date established by the Secretary.
* * * * *
Sec. 682.415 [Removed and Reserved]
0
30. Section 682.415 is removed and reserved.
0
31. Section 682.602 is added to read as follows:
Sec. 682.602 Rules for a school or school-affiliated organization
that makes or originates loans through an eligible lender trustee.
(a) A school or school-affiliated organization may not contract
with an eligible lender to serve as trustee for the school or school-
affiliated organization unless--
(1) The school or school-affiliated organization originated and
continues or renews a contract made on or before September 30, 2006
with the eligible lender; and
(2) The eligible lender held at least one loan in trust on behalf
of the school or school-affiliated organization on September 30, 2006.
(b) As of January 1, 2007, and for loans first disbursed on or
after that date under a lender trustee arrangement that continues in
effect after September 30, 2006--
(1) A school in a trustee arrangement or affiliated with an
organization involved in a trustee arrangement to originate loans must
comply with the requirements of Sec. 682.601(a), except for paragraphs
(a)(4), (a)(7), and (a)(9) of that section; and
(2) A school-affiliated organization involved in a trustee
arrangement to make loans must comply with the requirements of Sec.
682.601(a) except for paragraphs (a)(1), (a)(2), (a)(3), (a)(4),
(a)(6), (a)(7), and (a)(9) of that section.
(Approved by the Office of Management and Budget under control
number 1845-0020)
(Authority: 20 U.S.C. 1082, 1085)
0
32. Section 682.603 is amended by:
0
A. In paragraph (a), at the end of the last sentence, removing the
words ``on the application by the student'' and adding, in their place,
the words ``by the borrower and, in the case of a parent borrower of a
PLUS loan, the student and the parent borrower''.
0
B. In paragraph (b), removing the words ``making application for the
loan''.
0
C. Redesignating paragraphs (d), (e), (f), (g), (h), and (i) as
paragraphs (e), (f), (g), (h), (i), and (j), respectively.
0
D. Adding a new paragraph (d).
0
E. In the introductory language in newly redesignated paragraph (e),
removing the words ``application, or combination of loan
applications,'' and adding, in their place, the words ``, or a
combination of loans,''.
0
F. In newly redesignated paragraph (e)(2), adding the words ``for the
period of enrollment'' after the word ``attendance''.
0
G. In newly redesignated paragraph (e)(2)(ii), adding the word
``Subsidized'' immediately before the word ``Stafford'' and removing
the words ``that is eligible
[[Page 62008]]
for interest benefits'' immediately after the word ``loan''.
0
H. Revising newly redesignated paragraph (f).
0
I. In newly redesignated paragraph (g)(2)(i), removing the words ``,not
to exceed 12 months,''.
The addition and revision read as follows:
Sec. 682.603 Certification by a participating school in connection
with a loan application.
* * * * *
(d) Before certifying a PLUS loan application for a graduate or
professional student borrower, the school must determine the borrower's
eligibility for a Stafford loan. If the borrower is eligible for a
Stafford loan but has not requested the maximum Stafford loan amount
for which the borrower is eligible, the school must--
(1) Notify the graduate or professional student borrower of the
maximum Stafford loan amount that he or she is eligible to receive and
provide the borrower with a comparison of--
(i) The maximum interest rate for a Stafford loan and the maximum
interest rate for a PLUS loan;
(ii) Periods when interest accrues on a Stafford loan and periods
when interest accrues on a PLUS loan; and
(iii) The point at which a Stafford loan enters repayment and the
point at which a PLUS loan enters repayment; and
(2) Give the graduate or professional student borrower the
opportunity to request the maximum Stafford loan amount for which the
borrower is eligible.
* * * * *
(f) In certifying loans, a school--
(1) May not refuse to certify, or delay certification, of a
Stafford or PLUS loan based on the borrower's selection of a particular
lender or guaranty agency;
(2) May not, for first-time borrowers, assign through award
packaging or other methods, a borrower's loan to a particular lender;
(3) May refuse to certify a Stafford or PLUS loan or may reduce the
borrower's determination of need for the loan if the reason for that
action is documented and provided to the borrower in writing, provided
that--
(i) The determination is made on a case-by-case basis; and
(ii) The documentation supporting the determination is retained in
the student's file; and
(4) May not, under paragraph (f)(1), (2), and (3) of this section,
engage in any pattern or practice that results in a denial of a
borrower's access to FFEL loans because of the borrower's race, sex,
color, religion, national origin, age, handicapped status, income, or
selection of a particular lender or guaranty agency.
* * * * *
0
33. Section 682.604 is amended by:
0
A. Revising paragraph (f)(1).
0
B. Redesignating paragraphs (f)(2), (f)(3), and (f)(4) as paragraphs
(f)(5), (f)(6), and (f)(7), respectively.
0
C. Adding new paragraphs (f)(2), (f)(3), and (f)(4).
0
D. In newly redesignated paragraph (f)(5), removing the words ``The
initial counseling must'' and adding, in their place, the words
``Initial counseling for Stafford Loan borrowers must''.
0
E. In newly redesignated paragraph (f)(5)(iv), removing the words, ``of
a Stafford loan''.
0
F. In newly redesignated paragraph (f)(5)(v), adding the words ``,or
student borrowers with Stafford and PLUS loans, depending on the types
of loans the borrower has obtained,'' immediately after the words
``Stafford loan borrowers''.
0
G. In paragraph (g)(2)(i), removing the words ``Stafford or SLS loans''
and adding, in their place, ``Stafford loans, or student borrowers who
have obtained Stafford and PLUS loans, depending on the types of loans
the student borrower has obtained,''.
The revision and additions read as follows:
Sec. 682.604 Processing the borrower's loan proceeds and counseling
borrowers.
* * * * *
(f) Initial counseling. (1) A school must ensure that initial
counseling is conducted with each Stafford loan borrower prior to its
release of the first disbursement, unless the student borrower has
received a prior Federal Stafford, Federal SLS, or Direct subsidized or
unsubsidized loan. The initial counseling must--
(i) Explain the use of a Master Promissory Note;
(ii) Emphasize to the student borrower the seriousness and
importance of the repayment obligation the student borrower is
assuming;
(iii) Describe the likely consequences of default, including
adverse credit reports, Federal offset, and litigation;
(iv) In the case of a student borrower (other than a borrower of a
loan made or originated by the school), emphasize that the student
borrower is obligated to repay the full amount of the loan even if the
student borrower does not complete the program, is unable to obtain
employment upon completion of the program, or is otherwise dissatisfied
with or does not receive the educational or other services that the
student borrower purchased from the school; and
(v) Inform the student borrower of sample monthly repayment amounts
based on a range of student levels of indebtedness or on the average
indebtedness of Stafford loan borrowers, or student borrowers with
Stafford and PLUS loans, depending on the types of loans the borrower
has obtained at the same school or in the same program of study at the
same school.
(2) A school must ensure that initial counseling is conducted with
each graduate or professional student PLUS loan borrower prior to its
release of the first disbursement, unless the student has received a
prior Federal PLUS loan or Direct PLUS loan. The initial counseling
must--
(i) Inform the student borrower of sample monthly repayment amounts
based on a range of student levels of indebtedness or on the average
indebtedness of graduate or professional student PLUS loan borrowers,
or student borrowers with Stafford and PLUS loans, depending on the
types of loans the borrower has obtained, at the same school or in the
same program of study at the same school;
(ii) For a graduate or professional student who has received a
prior Federal Stafford, or Direct subsidized or unsubsidized loan,
provide the information specified in Sec. 682.603(d)(1)(i) through
Sec. 682.603(d)(1)(iii); and
(iii) For a graduate or professional student who has not received a
prior Federal Stafford, or Direct subsidized or unsubsidized loan,
provide the information specified in paragraph (f)(1)(i) through
(f)(1)(iv) of this section.
(3) Initial counseling must be conducted either in person, by
audiovisual presentation, or by interactive electronic means. If
initial counseling is conducted through interactive electronic means,
the school must take reasonable steps to ensure that each student
borrower receives the counseling materials, and participates in and
completes the initial counseling.
(4) A school must ensure that an individual with expertise in the
title IV programs is reasonably available shortly after the counseling
to answer the student borrower's questions regarding those programs. As
an alternative, prior to releasing the proceeds of a loan in the case
of a student borrower enrolled in a correspondence program or a student
borrower enrolled in a study-abroad program that the home institution
approves for credit, the counseling may be provided through written
materials.
(5) A school must maintain documentation substantiating the
[[Page 62009]]
school's compliance with this section for each student borrower.
* * * * *
0
34. Section 682.705 is amended by adding new paragraph (c) to read as
follows:
Sec. 682.705 Suspension proceedings.
* * * * *
(c) In any action to suspend a lender based on a violation of the
prohibitions in section 435(d)(5) of the Act, if the Secretary, the
designated Department official, or hearing official finds that the
lender provided or offered the payments or activities listed in
paragraph (5)(i) of the definition of lender in Sec. 682.200(b), the
Secretary or the official applies a rebuttable presumption that the
payments or activities were offered or provided to secure applications
for FFEL loans or to secure FFEL loan volume. To reverse the
presumption, the lender must present evidence that the activities or
payments were provided for a reason unrelated to securing applications
for FFEL loans or securing FFEL loan volume.
* * * * *
0
35. Section 682.706 is amended by adding new paragraph (d) to read as
follows:
Sec. 682.706 Limitation or termination proceedings.
* * * * *
(d) In any action to limit or terminate a lender's eligibility
based on a violation of the prohibitions in section 435(d)(5) of the
Act, if the Secretary, the designated Department official or hearing
official finds that the lender provided or offered the payments or
activities described in paragraph (5)(i) of the definition of lender in
Sec. 682.200(b), the Secretary or the official applies a rebuttable
presumption that the payments or activities were offered or provided to
secure applications for FFEL loans. To reverse the presumption, the
lender must present evidence that the activities or payments were
provided for a reason unrelated to securing applications for FFEL loans
or securing FFEL loan volume.
* * * * *
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
0
36. The authority citation for part 685 continues to read as follows:
Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.
0
37. Section 685.202 is amended by adding new paragraph (a)(1)(v) to
read as follows:
Sec. 685.202 Charges for which Direct Loan Program borrowers are
responsible.
(a) * * *
(1) * * *
(v) For a subsidized Stafford loan made to an undergraduate student
for which the first disbursement is made on or after:
(A) July 1, 2006 and before July 1, 2008, the interest rate is 6.8
percent on the unpaid principal balance of the loan.
(B) July 1, 2008 and before July 1, 2009, the interest rate is 6
percent on the unpaid principal balance of the loan.
(C) July 1, 2009 and before July 1, 2010, the interest rate is 5.6
percent on the unpaid principal balance of the loan.
(D) July 1, 2010 and before July 1, 2011, the interest rate is 4.5
percent on the unpaid principal balance of the loan.
(E) July 1, 2011 and before July 2012, the interest rate is 3.4
percent on the unpaid balance of the loan.
* * * * *
0
38. Section 685.204 is amended by:
0
A. In paragraph (b), removing the parenthetical ``(f)'', and adding in
its place, the parenthetical ``(g)''.
0
B. In paragraph (b)(1)(iii)(A), removing the words ``(b)(1)(i)'' and
adding, in their place, the words ``(b)(1)(i)(A)''.
0
C. In paragraph (d)(1), removing the word ``the'' and adding, in its
place, the word ``The''.
0
D. In paragraph (d)(2), removing the word ``the'' and adding, in its
place, the word ``The''.
0
E. In paragraph (e)(1), removing the words ``first disbursed on or
after July 1, 2001'' and removing the words ``not to exceed 3 years''.
0
F. Removing paragraph (e)(5).
0
G. Redesignating paragraphs (e)(2), (e)(3), and (e)(4), as paragraphs
(e)(3), (e)(4), and (e)(5), respectively.
0
H. Adding a new paragraph (e)(2).
0
I. Redesignating paragraph (f) as paragraph (g).
0
J. Adding new paragraph (f).
0
K. Adding new paragraph (h).
The additions read as follows:
Sec. 685.204 Deferments.
* * * * *
(e) * * *
(2) The deferment period ends 180 days after the demobilization
date for the service described in paragraphs (e)(1)(i) and (e)(1)(ii)
of this section.
* * * * *
(f)(1) A borrower who receives a Direct Loan Program loan is
entitled to receive a military active duty student deferment for 13
months following the conclusion of the borrower's active duty military
service if--
(i) The borrower is a member of the National Guard or other reserve
component of the Armed Forces of the United States or a member of such
forces in retired status; and
(ii) The borrower was enrolled in a program of instruction at an
eligible institution at the time, or within six months prior to the
time, the borrower was called to active duty.
(2) As used in paragraph (f)(1) of this section, ``Active duty''
means active duty as defined in section 101(d)(1) of title 10, United
States Code, except--
(i) Active duty includes active State duty for members of the
National Guard; and
(ii) Active duty does not include active duty for training or
attendance at a service school.
(3) If the borrower returns to enrolled student status during the
13-month deferment period, the deferment expires at the time the
borrower returns to enrolled student status.
* * * * *
(h)(1) To receive a deferment, except as provided under paragraph
(b)(1)(i)(A) of this section, the borrower must request the deferment
and provide the Secretary with all information and documents required
to establish eligibility for the deferment. In the case of a deferment
granted under paragraph (e)(1) of this section, a borrower's
representative may request the deferment and provide the required
information and documents on behalf of the borrower.
(2) After receiving a borrower's written or verbal request, the
Secretary may grant a deferment under paragraphs (b)(1)(i)(B),
(b)(1)(i)(C), (b)(2)(i), (b)(3)(i), (e)(1), and (f)(1) of this section
if the Secretary confirms that the borrower has received a deferment on
a Perkins or FFEL Loan for the same reason and the same time period.
(3) The Secretary relies in good faith on the information obtained
under paragraph (h)(2) of this section when determining a borrower's
eligibility for a deferment, unless the Secretary, as of the date of
the determination, has information indicating that the borrower does
not qualify for the deferment. The Secretary resolves any discrepant
information before granting a deferment under paragraph (h)(2) of this
section.
(4) If the Secretary grants a deferment under paragraph (h)(2) of
this section, the Secretary notifies the borrower that the deferment
has been granted and that the borrower has the option to cancel the
deferment and continue to make payments on the loan.
[[Page 62010]]
(5) If the Secretary grants a military service deferment based on a
request from a borrower's representative, the Secretary notifies the
borrower that the deferment has been granted and that the borrower has
the option to cancel the deferment and continue to make payments on the
loan. The Secretary may also notify the borrower's representative of
the outcome of the deferment request.
* * * * *
0
39. Section 685.212 is amended by revising paragraph (a)(1) and (2) to
read as follows:
Sec. 685.212 Discharge of a loan obligation.
(a) Death. (1) If a borrower (or a student on whose behalf a parent
borrowed a Direct PLUS Loan) dies, the Secretary discharges the
obligation of the borrower and any endorser to make any further
payments on the loan based on an original or certified copy of the
borrower's (or student's in the case of a Direct PLUS loan obtained by
a parent borrower) death certificate, or an accurate and complete
photocopy of the original or certified copy of the borrower's (or
student's in the case of a Direct PLUS loan obtained by a parent
borrower) death certificate.
(2) If an original or certified copy of the death certificate or an
accurate and complete photocopy of the original or certified copy of
the death certificate is not available, the Secretary discharges the
loan only if other reliable documentation establishes, to the
Secretary's satisfaction, that the borrower (or student) has died. The
Secretary discharges a loan based on documentation other than an
original or certified copy of the death certificate, or an accurate and
complete photocopy of the original or certified copy of the death
certificate only under exceptional circumstances and on a case-by-case
basis.
* * * * *
0
40. Section 685.213 is revised to read as follows:
Sec. 685.213 Total and permanent disability.
(a) General. A borrower's Direct Loan is discharged if the borrower
becomes totally and permanently disabled, as defined in Sec.
682.200(b), and satisfies the additional eligibility requirements
contained in this section.
(b) Discharge application process. (1) To qualify for a discharge
of a Direct Loan based on a total and permanent disability, a borrower
must submit a discharge application to the Secretary on a form approved
by the Secretary. The application must contain a certification by a
physician, who is a doctor of medicine or osteopathy legally authorized
to practice in a State, that the borrower is totally and permanently
disabled as defined in Sec. 682.200(b). The borrower must submit the
application to the Secretary within 90 days of the date the physician
certifies the application.
(2) Upon receipt of the borrower's application, the Secretary
notifies the borrower that--
(i) No payments are due on the loan; and
(ii) The borrower, in order to remain eligible for the discharge
from the date the physician completes and certifies the borrower's
total and permanent disability on the application until the date the
borrower receives a final disability discharge--
(A) Not receive annual earnings from employment that exceed 100
percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) Not receive a new loan under the Perkins, FFEL, or Direct Loan
programs, except for a FFEL or Direct Consolidation Loan that does not
include any loans on which the borrower is seeking a discharge; and
(C) Must ensure that the full amount of any Title IV loan
disbursement on any loan received prior to the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(c) Initial determination of eligibility. (1) If, after reviewing
the borrower's application, the Secretary determines that the
certification provided by the borrower supports the conclusion that the
borrower meets the criteria for a total and permanent disability
discharge, as defined in Sec. 682.200(b), the borrower is considered
totally and permanently disabled as of the date the physician completes
and certifies the borrower's application.
(2) Upon making an initial determination that the borrower is
totally and permanently disabled, as defined in Sec. 682.200(b), the
Secretary notifies the borrower that the loan will be in a conditional
discharge status for a period of up to three years and that no payments
are due on the loan. The notification to the borrower identifies the
conditions of the conditional discharge period specified in paragraph
(d)(1) of this section. The conditional discharge period begins on the
date the physician certifies on the application that the borrower is
totally and permanently disabled, as defined in Sec. 682.200(b).
(3) If the Secretary determines that the certification provided by
the borrower does not support the conclusion that the borrower meets
the criteria for a total and permanent disability discharge in
paragraph (d)(1) of this section, the Secretary notifies the borrower
that the application for a disability discharge has been denied, and
that the loan is due and payable to the Secretary under the terms of
the promissory note.
(d) Eligibility requirements for a total and permanent disability
discharge. (1) A borrower meets the eligibility requirements for a
discharge of a loan based on total and permanent disability if, from
the date the physician certified the borrower's discharge application,
through the end of the three-year conditional discharge period--
(i) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(ii) The borrower does not receive a new loan under the Perkins,
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation
Loan that does not include any loans that are in a conditional
discharge status; and
(iii) The borrower ensures that the full amount of any Title IV
loan disbursement on any loan received prior to the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(2) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(i) Is not required to make any payments on the loan;
(ii) Is not considered delinquent or in default on the loan, unless
the loan was past due or in default at the time the conditional
discharge was granted;
(iii) Must promptly notify the Secretary of any changes in address
or phone number;
(iv) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(d)(1)(i) of this section; and
(v) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
a discharge under this section.
(3) If the borrower satisfies the criteria for a total and
permanent disability discharge during and at the end of the three-year
conditional discharge period, the Secretary--
(i) Discharges the obligation of the borrower and any endorser to
make any further payments on the loan at the end of that period; and
(ii) Returns any payments received after the date the physician
completed
[[Page 62011]]
and certified the borrower's loan discharge application to the person
who made the payments on the loan.
(4) If, at any time during or at the end of the three-year
conditional discharge period, the Secretary determines that the
borrower does not continue to meet the eligibility criteria for a total
and permanent disability discharge, the Secretary ends the conditional
discharge period and resumes collection activity on the loan. The
Secretary does not require the borrower to pay any interest that
accrued on the loan from the date of the Secretary's initial
eligibility determination described in paragraph (c)(2) of this section
through the end of the conditional discharge period.
(5) The Secretary reserves the right to require the borrower to
submit additional medical evidence if the Secretary determines that the
borrower's application does not conclusively prove that the borrower is
disabled. As part of this review or at any time during the application
process or during or at the end of the conditional discharge period,
the Secretary may arrange for an additional review of the borrower's
condition by an independent physician at no expense to the applicant.
(Approved by the Office of Management and Budget under control
number 1845-0021)
(Authority: 20 U.S.C. 1087a et seq.)
* * * * *
0
41. Section 685.301 is amended by:
0
A. In paragraph (a)(1), removing the words ``in the application by the
student'' and adding, in their place, the words, ``by the borrower and,
in the case of a parent PLUS loan borrower, the student and the parent
borrower.''
0
B. Redesignating paragraphs (a)(3), (a)(4), (a)(5), (a)(6), (a)(7),
(a)(8), and (a)(9) as (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9),
and (a)(10), respectively.
0
C. Adding new paragraph (a)(3).
0
D. Revising newly redesignated paragraph (a)(10)(ii)(A).
The addition and revisions read as follows:
Sec. 685.301 Determining eligibility and loan amount.
(a) * * *
(3) Before originating a Direct PLUS Loan for a graduate or
professional student borrower, the school must determine the borrower's
eligibility for a Direct Subsidized and a Direct Unsubsidized Loan. If
the borrower is eligible for a Direct Subsidized or Direct Unsubsidized
Loan, but has not requested the maximum Direct Subsidized or Direct
Unsubsidized Loan amount for which the borrower is eligible, the school
must--
(i) Notify the graduate or professional student borrower of the
maximum Direct Subsidized or Direct Unsubsidized Loan amount that he or
she is eligible to receive and provide the borrower with a comparison
of--
(A) The maximum interest rate for a Direct Subsidized Loan and a
Direct Unsubsidized Loan and the maximum interest rate for a Direct
PLUS Loan;
(B) Periods when interest accrues on a Direct Subsidized Loan and a
Direct Unsubsidized Loan, and periods when interest accrues on a Direct
PLUS Loan; and
(C) The point at which a Direct Subsidized Loan and a Direct
Unsubsidized Loan enters repayment, and the point at which a Direct
PLUS Loan enters repayment; and
(ii) Give the graduate or professional student borrower the
opportunity to request the maximum Direct Subsidized or Direct
Unsubsidized Loan amount for which the borrower is eligible.
* * * * *
(10) * * *
(ii) * * *
(A) Generally an academic year, as defined by the school in
accordance with 34 CFR 668.3, except that the school may use a longer
period of time corresponding to the period to which the school applies
the annual loan limits under Sec. 685.203; or
* * * * *
0
42. Section 685.304 is amended by:
0
A. In paragraph (a)(1) removing the words ``(a)(4)'' and adding, in
their place, the words ``(a)(5)''.
0
B. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and (a)(6)
as paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and (a)(7), respectively.
0
C. Adding a new paragraph (a)(2).
0
D. In newly redesignated paragraph (a)(4) removing the words ``The
initial counseling must'' and adding, in their place, the words
``Initial counseling for Direct Subsidized Loan and Direct Unsubsidized
Loan borrowers must''.
0
E. In newly redesignated paragraph (a)(4)(iv) removing the words
``Direct Unsubsidized Loan borrowers'' and adding, in their place, the
words ``Direct Unsubsidized Loan borrowers, or student borrowers with
Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans,
depending on the types of loans the borrower has obtained,''.
0
F. In newly redesignated paragraph (a)(5), removing the words ``(a)(1)-
(3)'' and adding, in their place, the words ``(a)(1)-(4)''.
0
G. In newly redesignated paragraph (a)(5)(i), removing the words
``(a)(1)'' and adding, in their place, the words ``(a)(1) or (a)(2)'',
and removing the words ``(a)(3)'' and adding in their place the words
``(a)(4)''.
0
H. In paragraph (b)(4)(i), removing the words ``Direct Subsidized Loan
and Direct Unsubsidized Loan borrowers'' and adding, in their place,
the words ``student borrowers who have obtained Direct Subsidized Loans
and Direct Unsubsidized Loans, or student borrowers who have obtained
Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans,
depending on the types of loans the student borrower has obtained, for
attendance''.
The addition reads as follows:
Sec. 685.304 Counseling borrowers.
(a) * * *
(2) Except as provided in paragraph (a)(5) of this section, a
school must ensure that initial counseling is conducted with each
graduate or professional student Direct PLUS Loan borrower prior to
making the first disbursement of the loan unless the student borrower
has received a prior Direct PLUS Loan or Federal PLUS Loan. The initial
counseling must--
(i) Inform the student borrower of sample monthly repayment amounts
based on a range of student levels or indebtedness or on the average
indebtedness of graduate or professional student PLUS loan borrowers,
or student borrowers with Direct PLUS Loans and Direct Subsidized Loans
or Direct Unsubsidized Loans, depending on the types of loans the
borrower has obtained, at the same school or in the same program of
study at the same school;
(ii) For a graduate or professional student who has received a
prior Federal Stafford, or Direct Subsidized or Unsubsidized Loan
provide the information specified in Sec. 685.301(a)(3)(i)(A) through
Sec. 685.301(a)(3)(i)(C); and
(iii) For a graduate or professional student who has not received a
prior Federal Stafford, or Direct Subsidized or Direct Unsubsidized
Loan, provide the information specified in paragraph (a)(4)(i) through
(a)(4)(iii) and paragraph (a)(4)(v) of this section.
* * * * *
[FR Doc. 07-5332 Filed 10-31-07; 8:45 am]
BILLING CODE 4000-01-P