FR Doc E7-10826
[Federal Register: June 12, 2007 (Volume 72, Number 112)]
[Proposed Rules]
[Page 32409-32447]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jn07-19]
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Part II
Department of Education
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34 CFR Parts 674, 682, and 685
Federal Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Proposed Rule
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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: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend 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.
DATES: We must receive your comments on or before August 13, 2007.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments by fax or by e-mail. Please submit your comments only
one time, in order to ensure that we do not receive duplicate copies.
In addition, please include the Docket ID at the top of your comments.
Federal eRulemaking Portal: Go to http://www.regulations.gov,
select ``Department of Education'' from the agency
drop-down menu, then click ``Submit.'' In the Docket ID column, select
ED-2007-OPE-0133 to add or view public comments and to view supporting
and related materials available electronically. Information on using
Regulations.gov, including instructions for submitting comments,
accessing documents, and viewing the docket after the close of the
comment period, is available through the site's ``User Tips'' link.
Postal Mail, Commercial Delivery, or Hand Delivery. If you
mail or deliver your comments about these proposed regulations, address
them to Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street,
NW., room 8026, Washington, DC 20006-8542.
Privacy Note: The Department's policy for comments received from
members of the public (including those comments submitted by mail,
commercial delivery, or hand delivery) is to make these submissions
available for public viewing on the Federal eRulemaking Portal at
http://www.regulations.gov. All submissions will be posted to the
Federal eRulemaking Portal without change, including personal
identifiers and contact information.
FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of
Education, 1990 K Street, NW., Washington, DC 20006-8542. Telephone:
(202) 219-7048 or via the Internet: gail.mclarnon@ed.gov.
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 the contact person listed under FOR FURTHER
INFORMATION CONTACT.
SUPPLEMENTARY INFORMATION:
Invitation To Comment
We invite you to submit comments regarding these proposed
regulations. To ensure that your comments have maximum effect in
developing the final regulations, we urge you to identify clearly the
specific section or sections of the proposed regulations that each of
your comments addresses and to arrange your comments in the same order
as the proposed regulations.
We invite you to assist us in complying with the specific
requirements of Executive Order 12866 and its overall requirement of
reducing regulatory burden that might result from these proposed
regulations. Please let us know of any further opportunities we should
take to reduce potential costs or increase potential benefits while
preserving the effective and efficient administration of the programs.
During and after the comment period, you may inspect all public
comments about these proposed regulations by accessing Regulations.gov.
You may also inspect the comments, in person, in room 8026, 1990 K
Street, NW., Washington, DC, between the hours of 8:30 a.m. and 4 p.m.,
Eastern time, Monday through Friday of each week except Federal
holidays.
Assistance to Individuals With Disabilities in Reviewing the Rulemaking
Record
On request, we will supply an appropriate aid, such as a reader or
print magnifier, to an individual with a disability who needs
assistance to review the comments or other documents in the public
rulemaking record for these proposed regulations. If you want to
schedule an appointment for this type of aid, please contact the person
listed under FOR FURTHER INFORMATION CONTACT.
Negotiated Rulemaking
Section 492 of the Higher Education Act of 1965, as amended (HEA)
requires the Secretary, before publishing any proposed regulations for
programs authorized by Title IV of the HEA, to obtain public
involvement in the development of the proposed regulations. After
obtaining advice and recommendations from individuals and
representatives of groups involved in the Federal student financial
assistance programs, the Secretary must subject the proposed
regulations to a negotiated rulemaking process. The proposed
regulations that the Department publishes must conform to agreements
resulting from that process unless the Secretary reopens the process or
provides a written explanation to the participants in that process
stating why the Secretary has decided to depart from the agreements.
Further information on the negotiated rulemaking process can be found
at: http://www.ed.gov/policy/highered/reg/hearulemaking/2007/nr.html.
On August 18, 2006, the Department published a notice in the
Federal Register (71 FR 47756) announcing our intent to establish up to
four negotiated rulemaking committees to prepare proposed regulations.
One committee would focus on issues related to the Academic
Competitiveness Grant and National Science and Mathematics Access to
Retain Talent (SMART) Grant programs. A second committee would address
issues related to the Federal student loan programs. A third committee
would address programmatic, institutional eligibility, and general
provisions issues. Lastly, a fourth committee would address
accreditation. The notice requested nominations of individuals for
membership on the committees who could represent the interests of key
stakeholder constituencies on each committee. The four committees met
to develop proposed regulations over the course of several months,
beginning in December 2006. This NPRM proposes regulations relating to
the student loan programs that were discussed by the second committee
mentioned in this paragraph (the ``Loans Committee'').
The Department developed a list of proposed regulatory changes from
advice and recommendations submitted by individuals and organizations
in testimony submitted to the Department in a series of four public
hearings held on:
[[Page 32411]]
September 19, 2006, at the University of California-
Berkeley in Berkeley, California.
October 5, 2006, at the Loyola University in Chicago,
Illinois.
November 2, 2006, at the Royal Pacific Hotel Conference
Center in Orlando, Florida.
November 8, 2006, at the U.S. Department of Education in
Washington, DC.
In addition, the Department received written comments on possible
regulatory changes submitted directly to the Department by interested
parties and organizations. All regional meetings and a summary of all
comments received orally and in writing are posted as background
material in the docket and can also be accessed at
http://www.ed.gov/policy/highered/reg/hearulemaking/2007/hearings.html.
Staff within the
Department also identified issues for discussion and negotiation.
Lastly, because The Third Higher Education Extension Act of 2006, (Pub.
L. 109-292), made changes to the law governing eligible lender trustee
relationships as of September 30, 2006, the Department added this issue
to the Loans Committee agenda.
At its first meeting in December, 2006, the Loans Committee reached
agreement on its protocols and proposed agenda. These protocols
provided that the non-Federal negotiators would not represent the
interests of stakeholder constituencies, but would instead participate
in the negotiated rulemaking process based on each Committee member's
experience and expertise in the Title IV, HEA loan programs.
The members of the Loans Committee were:
Jennifer Pae, United States Students Association, and Luke
Swarthout (alternate), State PIRG (Public Interest Research Groups)
Higher Education Project;
Deanne Loonin and Alys Cohen (alternate) of the National
Consumer Law Center.
Darrel Hammon, Laramie Community College, and Kenneth
Whitehurst (alternate), North Carolina Community Colleges.
Pamela W. Fowler, University of Michigan, Patricia McClurg
(alternate), University of Wyoming, and Sara Bauder (alternate),
University of Maryland.
Elizabeth Hicks, Massachusetts Institute of Technology,
and Ellen Frishberg (alternate), Johns Hopkins University.
Jeff Arthur, ECPI College of Technology, Robert Collins
(alternate), Apollo Group, and Nancy Broff (alternate), Career College
Association.
Shari Crittendon, United Negro College Fund, and William
``Buddy'' Blakey (alternate), William A. Blakey & Associates, PLLC.
Scott Giles, Vermont Student Assistance Corporation, and
Rachael Lohman (alternate), Pennsylvania Higher Education Assistance
Agency.
Tom Levandowski, Wachovia Corporation, and Lee Woods
(alternate), Chase Education Finance.
Phil Van Horn, Wyoming Student Loan Corporation, and
Robert L. Zier (alternate), Indiana Secondary Market for Education
Loans.
Robert Sommer, Sallie Mae, and Wanda Hall (alternate),
EdFinancial Services.
Richard George, Great Lakes Higher Education Guaranty
Corporation, and Gene Hutchins (alternate), New Jersey Higher Education
Student Assistance Authority.
Eileen O'Leary, Stonehill College, and Christine McGuire
(alternate), Boston University.
Alisa Abadinsky, University of Illinois at Chicago, and
Karen Fooks (alternate), University of Florida.
Dan Madzelan, U.S. Department of Education.
Ellen Frishberg of Johns Hopkins University resigned from the Committee
after the third negotiated rulemaking session.
During its meetings, the Loans Committee reviewed and discussed
drafts of proposed regulations. It did not reach consensus on the
proposed regulations in this NPRM. More information on the work of this
committee can be found at:
http://www.ed.gov/policy/highered/reg/hearulemaking/2007/loans.html.
These regulations were further refined by the Task Force on Student
Loans. The Secretary created this task force on April 24, 2007, to
review issues within the student loan industry. The task force was
comprised of representatives from several offices within the
Department, including the Office of Postsecondary Education, Office of
Federal Student Aid, Office of the General Counsel, Office of Budget
Service, Office of Planning, Evaluation, and Policy Development, and
Office of Inspector General. The task force submitted its
recommendations regarding these regulations to the Secretary on May 9,
2007.
Significant Proposed Regulations
The following discussion of the proposed regulations begins with
changes that affect more than one of the title IV student loan
programs--the Perkins Loan Program, the FFEL Program, or the Direct
Loan Program.
This discussion is followed by separate discussions of proposed
changes that affect only one of the three programs. Generally, we do
not address proposed regulatory provisions that are technical or
otherwise minor in effect.
Simplification of Deferment Process (Sec. Sec. 674.38, 682.210,
682.210, 682.210, and 685.204)
Statute: Sections 428(b)(1)(M), 455(f)(2), and 464(c)(2)(A) of the
HEA authorize deferments for borrowers in the FFEL, Direct Loan, and
Perkins Loan programs under certain circumstances. A FFEL, Direct Loan,
or Perkins Loan borrower may receive a deferment during a period when
the borrower is: Enrolled at least half-time in an institution of
higher education; enrolled in an approved graduate fellowship program;
enrolled in an approved rehabilitation training program; seeking and
unable to find full-time employment; performing qualifying active duty
military service; or experiencing an economic hardship.
Current Regulations: Currently, a borrower who has loans held by
one or more lenders must apply separately to each lender for a
deferment in accordance with Sec. Sec. 674.38, 682.210, and 685.204 of
the Department's regulations. Each lender is required to review the
borrower's deferment request, and make its own determination of the
borrower's eligibility for the deferment. There is an exception to this
requirement for in-school deferments. Under Sec. Sec. 674.38(a)(2) and
682.210(c)(1), a Perkins institution or a FFEL lender may grant an in-
school deferment based on information from the borrower's school, or
student status information from another source. The Secretary also has
this option in the Direct Loan Program under Sec.
685.204(b)(1)(iii)(A)(3). When an in-school deferment is granted using
this procedure, the institution, lender or Secretary must notify the
borrower that the deferment has been granted, and provide the borrower
an opportunity to decline the deferment.
Proposed Regulations: The proposed regulations in Sec.
682.210(s)(1)(iii) would allow FFEL lenders to grant graduate
fellowship deferments, rehabilitation training program deferments,
unemployment deferments, military service deferments, and economic
hardship deferments based on information that another FFEL lender or
the Department has granted the borrower a deferment for the same reason
and the same time period. The proposed regulations in Sec.
685.204(g)(2) would also permit the Department to grant a deferment on
a Direct Loan based on deferment information from a
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FFEL Program lender. The proposed regulations in Sec. 674.38(a)(2)
would permit schools in the Perkins Loan Program to grant deferments
based on information from another Perkins Loan holder, FFEL lender, or
the Department.
Under the proposed regulations in Sec. Sec. 674.38(a)(3),
682.210(s)(1)(iv) and 685.204(g)(3), Title IV, HEA loan holders will be
able to rely in good faith on the deferment eligibility determinations
of other lenders, including the Department. However, if a loan holder
has evidence indicating that the borrower does not qualify for a
deferment, the loan holder may not grant a deferment based on another
holder's determination of deferment eligibility.
In addition, the proposed regulations in Sec. Sec. 674.38(a)(6),
682.210(i)(1) and (t)(7), and 685.204(g)(5) would allow a borrower's
representative to apply for a military service deferment on behalf of
the borrower. This change would apply to both the Armed Forces
deferment available for loans made before July 1, 1993 and the current
military service deferment.
Reasons: The non-Federal negotiators recommended adding provisions
to Sec. 682.210 of the regulations to allow FFEL lenders to grant
deferments based on deferments granted by other lenders. They noted
that this is allowable for in-school deferments and asked to extend
this authority to other deferments. Under this proposal, the FFEL
lender would determine borrower eligibility for the deferment by
contacting the other lender or by checking the Department's National
Student Loan Data System (NSLDS). The Department agreed to consider
this addition to the regulations. In addition, the Department agreed
with the negotiators to allow Perkins Loan schools to grant deferments
based on a borrower's FFEL or Direct Loan deferment eligibility as
reflected in the proposed changes to Sec. 674.38(a). However, since
eligibility and documentation requirements for some Perkins Loan
deferments are different from corresponding deferment requirements in
the FFEL and Direct Loan programs, these proposed regulations would not
allow FFEL lenders, or the Department for Direct Loans, to grant
deferments based on a borrower receiving a deferment on his or her
Perkins Loan.
The proposed regulations limit this simplified deferment process to
deferments that are available to a borrower who received a Title IV,
HEA loan on or after July 1, 1993. The negotiators suggested that the
new regulations should also apply to deferments that were available to
a borrower who first received a Title IV, HEA loan prior to July 1,
1993.
However, the Department decided that the pre-July 1, 1993
deferments are more complex and have more detailed qualifications than
the current deferments. In addition, the older deferments are not the
same for all types of loans. A borrower could qualify for a deferment
on some of their loans but not others. The post-July 1, 1993 deferments
are relatively uniform across the Title IV, HEA loan programs and
across loan types. In light of these differences, the Department
decided that the new policy should apply only to the deferments
available on current loans.
Some negotiators asked that the regulations include protection for
lenders that grant a deferment in error based on another lender's
determination of deferment eligibility. In response, the Department is
proposing to add language to Sec. Sec. 674.38(a)(3), 682.210(s)(1)(iv)
and 685.204(g)(3) stating that loan holders may rely in good faith on
the deferment determination of another holder, but may not knowingly
grant an ineligible borrower a deferment if the loan holder has
information indicating that the borrower is not eligible.
Some negotiators proposed that loan holders be allowed to grant a
deferment unilaterally, without any contact from the borrower. The
Department did not accept this proposal because, although a borrower
may qualify for a deferment on all of his or her loans, the borrower
may not necessarily want a deferment on all of his or her loans. Under
the simplified process, the borrower would not have to submit a
deferment application to each lender, but would still have to request
the deferment, in writing, electronically or verbally.
Some negotiators requested a change to the regulations that would
allow a request for a military service deferment to be submitted by a
representative of the borrower as well as the borrower. They noted that
borrowers who qualify for these deferments may not be in a position to
easily apply for them. The Department agreed that a special provision
for these borrowers is warranted. The Department is proposing to amend
the regulations in Sec. Sec. 674.38(a)(6), 682.210(i)(5) and (t)(7),
and 685.204(g)(5) to allow a borrower's representative to apply for a
military service deferment or an Armed Forces deferment on the
borrower's behalf.
The Department notes that granting a deferment under this
simplified process is optional for lenders. A lender is not required to
use this process when reviewing deferment requests.
Accurate and Complete Copy of a Death Certificate (Sec. Sec. 674.61,
682.402, and 685.212)
Statute: Sections 437(a) and (d) of the HEA provide for the
discharge of a FFEL loan if the borrower, or a dependent on whose
behalf a parent has borrowed, dies. This provision also applies to
Direct Loans under section 455(a)(1) of the HEA. Section 464(c)(1)(F)
provides for the discharge of a Perkins Loan if the borrower dies.
Current Regulations: Current regulations in Sec. Sec. 674.61(a),
682.402(b), and 685.212(a) state that if a Perkins, FFEL, or Direct
Loan borrower dies, or if the student for whom a FFEL or Direct PLUS
Loan was borrowed dies, the borrower's loan will be discharged based on
an original or certified copy of the death certificate. Under
exceptional circumstances, and on a case-by-case basis, a discharge due
to the death of the borrower may be granted without an original or
certified copy of the death certificate.
Proposed Regulations: The Secretary proposes to amend Sec. Sec.
674.61(a), 682.402(b), and 685.212(a) to allow the use of an accurate
and complete photocopy of the original or certified copy of the
borrower's death certificate, in addition to the original or certified
copy of the death certificate, to support the discharge of a Title IV
loan due to death.
Reasons: The Secretary believes that allowing the use of an
accurate and complete photocopy of the death certificate will decrease
the burden for survivors of the deceased and for loan holders
processing death discharges. We have also learned that, in some states,
there are restrictions and additional costs related to getting an
additional original or certified copy of the original death certificate
to provide to loan holders. Under the proposed regulations, the lender
may accept an accurate and complete photocopy of the death certificate.
The Secretary chose not to allow the use of a fax or electronic version
of the certificate because documents in those formats are more
vulnerable to alteration.
Under the proposed regulations a lender may rely on an ``accurate
and complete photocopy'' of the original or certified copy of the death
certificate to grant a discharge due to the death of the borrower. The
intent of the proposed change is not to require an individual to
provide an original or certified copy of the death certificate to the
lender for the lender to photocopy, but rather to allow a lender to
accept a photocopy of the original or certified copy of the death
certificate as an accurate and complete
[[Page 32413]]
copy of the original or certified copy, unless there is evidence that
the copy is not an accurate and complete copy of the original or
certified copy.
Although other data sources such as NSLDS, the Social Security
Administration's Death Master File, and documents such as a police
report or court documents could possibly be used as a basis for
discharging a loan due to death, the Department declined to expand the
documentation requirements in order to guard against fraud and abuse in
the discharge process.
While the Department believes that it is difficult to alter an
original or certified copy of an original death certificate because
these documents are generally notarized or contain raised, government
stamps validating the document's authenticity, we nonetheless solicit
public comment on whether the use of a photocopy of an original or
certified copy of an original death certificate could lead to fraud and
abuse in the death discharge process. Specifically, we are interested
in comments that identify how such fraud is likely to occur and ways to
address this issue.
Total and Permanent Disability Discharge (Sec. Sec. 674.61, 682.402,
and 685.213)
Statute: Sections 437(a), 464(c)(1)(F), and 455(a)(1) of the HEA
provide for a discharge of a borrower's FFEL, Perkins, or Direct Loan
Program loan, respectively, if the borrower becomes totally and
permanently disabled. A total and permanent disability is determined in
accordance with regulations of the Secretary.
Current Regulations: Sections 674.61(b), 682.402(c), and 685.213 of
the Perkins, FFEL, and Direct Loan Program regulations, respectively,
authorize the discharge of a loan if the borrower becomes totally and
permanently disabled. Section 674.51 of the Perkins Loan Program
regulations defines total and permanent disability, and Sec. 682.200
defines totally and permanently disabled, for the purposes of the FFEL
and Direct Loan Programs, as the condition of an individual who is
unable to work and earn money because of an injury or illness that is
expected to continue indefinitely or result in death.
Under current regulations in Sec. Sec. 674.61(b), 682.402(c), and
685.213, a Perkins, FFEL or Direct Loan borrower submits a discharge
application to the loan holder. The application must include a
physician's certification that the borrower is totally and permanently
disabled as defined in Sec. 682.200 or has a total and permanent
disability as defined in Sec. Sec. 674.51. To establish eligibility
for the discharge, a borrower cannot have worked or earned money or
received a Title IV loan at any time after the date of the borrower's
total and permanent disability. The loan holder reviews the
application, and upon making an initial determination that the borrower
meets the definition and requirements for a total and permanent
disability discharge, notifies the borrower that the loan has been
assigned to the Department and that no payments are due to the lender.
Under Sec. 685.213 of the current regulations, the Department is
responsible for reviewing disability discharge applications submitted
by Direct Loan borrowers.
Upon assignment of the Perkins or FFEL Loan or receipt of a Direct
Loan discharge application, the Department reviews the application. If
the borrower meets the eligibility requirements for a discharge, the
Department notifies the borrower that the loan has been placed in a
three-year conditional discharge status and that no payments are due
during that period. During the three-year conditional discharge period,
the borrower's income from employment cannot exceed the poverty line
for a family of two for any 12-month period, and the borrower cannot
take out any additional Title IV loans. Under current regulations, in
some cases, the three-year conditional period will already have elapsed
if the borrower's total and permanent disability date is more than
three years prior to the date the borrower applies for a discharge. In
such cases, a final discharge decision is made immediately upon
assignment of the account to the Department without any current income
verification, as long as the borrower is otherwise eligible. Otherwise,
if, at the end of the three-year conditional discharge period, the
borrower still meets the discharge requirements, the Department makes a
final determination of eligibility and discharges the loan. Under
current regulations, any payments received by the loan holder or the
institution after the date the loan is assigned to the Secretary or
during the three-year conditional discharge period are forwarded to the
Department for crediting to the borrower's account. When the Department
makes a final determination to discharge the loan, the payments
received on the loan after the date the loan was assigned to the
Department are returned. If the borrower does not meet the eligibility
requirements during the three-year conditional discharge period,
collection activity resumes on the loan.
Proposed Regulations: These proposed regulations would restructure
the disability discharge regulations for the Perkins Loan, FFEL, and
Direct Loan programs, Sec. Sec. 674.61(b), 682.402(c) and 685.213,
respectively, to clarify the eligibility requirements for a final total
and permanent disability discharge and better describe the discharge
process. The Department is not changing the definition of total and
permanent disability in Sec. 674.51 or the definition or totally and
permanently disabled in Sec. 682.200.
The proposed regulations would: (1) Add a new requirement in
Sec. Sec. 674.61(b)(2)(i), 682.402(c)(2)(i) and 685.213(b)(1) that the
borrower submit a discharge application to the loan holder within 90
days of the date the physician certifies the borrower's application;
(2) define the date of the borrower's total and permanent disability as
the date the physician certifies the borrower's disability on the
discharge application form in Sec. Sec. 674.61(b)(3)(ii),
682.402(c)(3)(ii), and 685.213(c)(2); (3) require a prospective three
year conditional discharge period to establish eligibility for a total
and permanent disability discharge beginning on the date the Secretary
makes an initial determination that the borrower is totally and
permanently disabled, in Sec. Sec. 674.61(b)(3)(iii),
682.402(c)(3)(iii) and 685.213(c)(3); and (4) provide that upon making
a final determination of the borrower's total and permanent disability,
the Secretary returns those payments made on the loan after the date
the physician completed and certified the borrower's discharge on the
loan discharge application in Sec. Sec. 674.61(b)(5),
682.402(c)(4)(iii), 685.213(d)(3)(ii).
Reasons: The Department is proposing to restructure the Perkins
Loan, FFEL, and Direct Loan total permanent disability discharge
regulations in Sec. Sec. 674.61(b), 682.402(c) and 685.213,
respectively, to clarify the eligibility requirements and to better
explain the application and eligibility process. Several negotiators
argued that the process and eligibility requirements as currently
written are difficult for borrowers to understand. For example, non-
Federal negotiators noted that the current regulations establish a
different standard for eligibility for the period between the date of
the physician's certification and the Secretary's initial determination
of eligibility in comparison to the three-year conditional discharge
period. The Department proposes to address these concerns by clearly
listing the continuing eligibility requirements in Sec.
674.61(b)(2)(iii) of the Perkins Loan Program regulations, Sec.
682.402(c)(3) of the FFEL program regulations, and
[[Page 32414]]
Sec. 685.213(b)(2) of the Direct Loan program regulations and by
requiring loan holders to disclose these eligibility requirements to
borrowers. Some non-Federal negotiators also noted that even though
collection activity is suspended after the borrower submits a discharge
application, some borrowers continued to make payments on their loan
because they were not aware of the suspension of collection activity.
The Department is proposing to amend the regulations to require loan
holders to inform borrowers that no further payments on the loan are
due once the discharge application is sent to the Secretary for her
initial eligibility determination.
The proposed regulations in Sec. Sec. 674.61(b)(2)(i),
684.402(c)(2)(i) and 685.213(b)(1) would require borrowers to 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. This requirement would help ensure that the
Secretary has accurate and timely information on which to base her
determination. Limiting the time period will also help borrowers avoid
the possibility that they might inadvertently take an action that would
disqualify them for a final discharge. The Department initially
proposed a 30-day application submission requirement, but the
Department was persuaded by the non-Federal negotiators that 90 days
would provide a more appropriate standard for borrowers.
Under the proposed regulations in Sec. Sec. 674.61(b)(3)(ii),
682.402(c)(3)(ii), and 685.213(c)(2) if the Secretary makes an initial
determination that the borrower qualifies for a discharge, the date of
disability is the date the physician certifies the borrower's
disability on the form. The proposed regulations also provide for a
three-year prospective conditional discharge period to establish
eligibility for a total and permanent disability discharge. The
conditional discharge period begins on the date that the Secretary
makes her initial determination that the borrower is totally and
permanently disabled. Thus, the receipt of any Title IV, HEA loans,
including consolidation loans, or income by the borrower before the
date the physician certified the application form would not disqualify
the borrower from receiving a final discharge. However, the borrower
would have to meet the disability requirements for a three-year
prospective period.
The Department is proposing these changes because currently, in
some cases, the three-year conditional discharge period has already
elapsed before the borrower applies for a discharge and a final
discharge is made immediately upon assignment of the account to the
Department. This result is inconsistent with the original intent of the
Department's regulations, which was to conform the discharge
requirements to other Federal programs that only provide Federal
benefits based on a disability after monitoring the applicant's
condition. Further, there have been instances when borrowers have
received otherwise disqualifying Title IV loans and earnings in excess
of allowable levels after the date of application but also after the
date of the borrower's retroactive final discharge. Under current
regulations, the Secretary grants a final discharge in these
circumstances. Some non-Federal negotiators did not agree with the
Department's proposal that the borrower's disability date should be the
date the physician certifies that the borrower is disabled on the
discharge application form.
Lastly, the Department is proposing changes to Sec. Sec.
674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) to provide that
the Secretary, upon making a final determination of the borrower's
total and permanent disability, will return payments made on the loan
after the date the physician completed and certified the borrower's
total and permanent disability on the loan discharge application. The
non-Federal negotiators did not agree with the Department's position
and stated that if a borrower successfully completed a three-year
prospective discharge period, the borrower should receive a refund of
prior payments made on the loan. The Department is proposing this
change because it believes that not counting any loans or income
received prior to the date the physician certifies the borrower's
disability on the application and returning payments made by the
borrower or on the borrower's behalf back to the date of disability
provided by a physician would create two onset dates and create program
integrity issues in the administration of the total and permanent
disability discharge process. In addition, in administering the
discharge process, the Department has found that, in many cases,
certifying physicians have to rely solely on the individual's
statements in determining a date of disability onset. In these
situations, there may not be a strong medical basis for using that date
as a date for establishing eligibility for Federal benefits. In light
of this history, the Department believes that the best date to use as
the eligibility date is the date the physician certified the
application, since that process requires the physician to review the
borrower's condition at that time rather than speculate as to the
borrower's condition in the past.
NSLDS Reporting Requirements (Sec. Sec. 674.16, 682.208, 682.401, and
682.414)
Statute: Section 485B(e) of the HEA provides for the Secretary to
prescribe by regulation standards and procedures that require all
lenders and guaranty agencies to report information to the NSLDS on all
aspects of Title IV loans in uniform formats in order to permit the
direct comparison of data submitted by individual lenders, servicers,
and guaranty agencies.
Current Regulations: The current Perkins Loan Program and FFEL
Program regulations do not reflect NSLDS reporting requirements. Under
Sec. 682.401(b)(20), guaranty agencies are required to monitor student
enrollment status of a FFEL Program borrower, or a student on whose
behalf a parent has borrowed, and report to the current holder of the
loan within 60 days any changes in the student's enrollment status that
triggers the beginning of the borrower's grace period or the beginning
or resumption of the borrower's immediate obligation to make scheduled
payments.
Current Sec. 682.414(b)(4) requires guaranty agencies to report
information consisting of extracts from computer databases and supplied
in the medium and the format prescribed in the Stafford and SLS, and
PLUS Loan Tape Dump Procedures. The tape dumps, which are now obsolete,
contained loan status information on guaranty agency loans.
Proposed Regulations: The Secretary proposes in Sec. 674.16(j) of
the Perkins Loan regulations, and Sec. 682.208(i) and Sec.
682.414(b)(4) of the FFEL regulations to require institutions, lenders,
and guaranty agencies to report enrollment and loan status information,
or any other Title IV-loan-related data required by the Secretary, to
the Secretary by a deadline established by the Secretary.
The proposed changes to Sec. 682.401(b)(20) require a guaranty
agency to report enrollment and loan status information on a FFEL
Program borrower or student to the current holder of any loan within 30
days of any changes to the student's enrollment status.
Reasons: The proposed changes to Sec. Sec. 674.16(j), 682.208(i)
and 682.414(b)(4) would provide for the establishment by the Secretary
of NSLDS reporting timeframes to improve the timeliness and
availability of
[[Page 32415]]
information important to administering the student loan programs. The
Secretary also believes that the Department will be able to implement
other proposed regulatory changes, such as simplification of the
deferment granting process, more easily and more efficiently if timely
and accurate information is more readily available in NSLDS.
Some non-Federal negotiators requested that the proposed
regulations require the Secretary to consult with program participants
before determining the ``deadline dates established by the Secretary''.
The Department declined to make this change to the proposed
regulations, but noted that there are other opportunities for program
participants to be involved in discussions about NSLDS reporting
requirements and that it was unnecessary to require it in regulations.
The Department is required to consult with the community under section
432(e) of the HEA and will continue to discuss the issues and concerns
of Title IV, HEA program participants related to NSLDS reporting
through established workgroups and conference calls.
Several negotiators noted that the Department's proposed reduction
of the timeframe for a guaranty agency to report enrollment status to a
lender from 60 days to 30 days might be disruptive and require systems
changes for the various participants in the Title IV loan programs. A
negotiator requested a longer time frame of at least 45 days. The
Department acknowledges that the change to 30 days will have some
impact on the guaranty agencies' and lenders' systems. However, the
Department is concerned that a timeframe of 45 days or longer will mean
that the information in the NSLDS is quickly out-of-date. The
Department invites further comment and discussion on this timeframe and
on any associated costs through this NPRM. Also, under the master
calendar requirements contained in the HEA, if the Department finalizes
these proposed regulations on or before November 1, 2007, this
provision will be effective on July 1, 2008, which will provide
sufficient time for system reprogramming.
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.409,
and 682.414)
Statute: Section 467(a) of the HEA authorizes the Secretary to
collect assigned Perkins Loans under such terms and conditions as the
Secretary may prescribe. Section 432(a) of the HEA authorizes the
Secretary to prescribe regulations as necessary to carry out the
purposes of the FFEL Program, including regulations to establish
minimum standards with respect to sound management and accountability
in the FFEL Program.
Current Regulations: Currently the regulations for the Perkins Loan
program and the FFEL Program do not include any requirements for
institutions and lenders to create and maintain a record of their
electronic signature process for promissory notes and MPNs.
Proposed Regulations: The proposed changes in Sec. 674.19(e)(2)
and (3) would require an institution to create and maintain a
certification regarding the creation and maintenance of any
electronically signed Perkins Loan promissory note or MPN in accordance
with documentation requirements in proposed Sec. 674.50. Proposed
changes to Sec. 674.19(e)(4)(ii) and Sec. 682.414(a)(5)(iv) would
require an institution or the holder of a FFEL loan, respectively, to
retain an original of an electronically signed Perkins Loan or FFEL
Program MPN for 3 years after all loans on the MPN are satisfied. Under
the proposed changes in Sec. 674.50(c)(12) and Sec. 682.414(a)(6), an
institution, for assigned Perkins loans, or a guaranty agency and
lender, for assigned FFEL loans, would be required to cooperate with
the Secretary, upon request, in all matters necessary to enforce an
assigned loan that was electronically signed. This cooperation would
include providing testimony to ensure the admission of electronic
records in legal proceedings and providing the Secretary with the
certification regarding the creation and maintenance of electronically
signed promissory notes. The proposed changes in Sec. Sec.
674.50(c)(12)(iii) and 682.414(a)(6)(iii) also would require the
institution, or the guaranty agency and lender, respectively, to
respond within 10 business days, to any request by the Secretary for
any record, affidavit, certification or other evidence needed to
resolve any factual dispute in connection with an electronically signed
promissory note that has been assigned to the Department. Lastly,
proposed changes in Sec. Sec. 674.50(c)(12)(iv) and 682.414(a)(6)(iv)
would require that an institution, or guaranty agency and lender,
respectively, ensure that all parties entitled to access have full and
complete access to the electronic records associated with an assigned
Perkins or FFEL MPN, until all loans made on the MPN are satisfied.
Proposed changes to Sec. 682.409(c)(4)(viii) of the FFEL Program
regulations would require the 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.
Reasons: MPNs are used in all of the Title IV, HEA Loan programs.
MPNs, which can be used for up to a 10-year period, have no loan amount
or loan period on the face of the note and can be signed
electronically. The Department is amending Sec. Sec. 674.19 and 674.50
of the Perkins Loan Program regulations and Sec. Sec. 682.409 and
682.414 of the FFEL Program regulations to support the Department's
efforts to enforce electronically-signed promissory notes that are
assigned to the Department. These requirements will help ensure that
the Department has the evidence to enforce the loan in cases in which a
factual dispute or a legal challenge is raised in connection with the
validity of the borrower's electronic signature and the MPN. In order
to preserve the integrity of the Perkins and FFEL programs as well as
the Federal fiscal interest, the Department believes it is essential
that an institution or lender be able to guarantee the authenticity of
a borrower's signature on loans assigned and collected by the
Department.
During the regulatory negotiations, the Department originally
proposed to require in Sec. 682.406(a) that a lender submit a
certification regarding the creation and maintenance of the electronic
MPN or promissory note, including the lender's authentication and
signature process, to the guaranty agency as part of the default claim
process. The certification would have then been submitted to the
Department when the guaranty agency assigned a FFEL loan under the
mandatory assignment provisions in Sec. 682.409(c). The Department
also originally proposed to amend Sec. 682.414(a)(ii) to require a
guaranty agency to maintain a certification regarding the creation and
maintenance of the lender's electronic MPN for each loan held by the
agency.
With respect to the Perkins Loan Program, the Department originally
proposed similar new requirements that an institution maintain a
certification regarding the creation and maintenance of the MPN in
Sec. 674.19(d) and provide the certification to the Department, upon
request, when assigning the loan in accordance with Sec. 674.50(c).
Many non-Federal negotiators believed that the Department's
original proposal was too burdensome.
Some non-Federal negotiators submitted a counter-proposal to the
Department that proposed placing the burden of creating and maintaining
a certification of a lender's electronic signature process on the
lender that
[[Page 32416]]
created the original electronic MPN. This counter-proposal was intended
to be consistent with the lenders' current practices. The non-Federal
negotiators from lending organizations reaffirmed that lenders will be
in possession of and would deliver whatever the Department needs to
enforce an electronically signed promissory note or MPN, including
expert testimony in court cases.
The Department returned to the final session of negotiations with
revised proposed regulations in Sec. 682.414(a)(6) based on the
counter-proposal submitted by some of the non-Federal negotiators. The
non-Federal negotiators expressed their support for this proposal, but
questioned many of the details. In particular, some non-Federal
negotiators believed that it was redundant for the certification of a
loan holder's electronic signature process to include a requirement
that the lender document its borrower authentication process. However,
the Department considers this requirement a vital part of the
certification. Several non-Federal negotiators noted that the Perkins
Loan Program regulations in Sec. Sec. 674.19(d) and 674.50(c) did not
contain the same detailed requirements as Sec. 682.414(a)(6) regarding
the contents of the certification. These proposed regulations include
the same standards in both programs. Several non-Federal negotiators
thought that the provisions in Sec. 674.50(c)(12)(iii) and Sec.
682.414(a)(6)(iii) that require institutions, lenders and guaranty
agencies to respond to requests for information from the Department
within 10 business days would be too difficult to meet and asked the
Department to use another standard. The Department notes, however, that
10 business days is a significant period of time and that it is vital
that the Department receive the information as quickly as possible when
a borrower is contesting the validity of a debt. Lastly, several non-
Federal negotiators expressed concern about the requirement to retain
an original electronically signed MPN for at least 7 years after all
the loans made on the MPN have been satisfied. In issuing this NPRM,
the Department has, after considering these concerns, decided to
require that schools and lenders retain the original, electronically
signed MPN for at least 3 years after all the loans made on the MPN
have been satisfied. This record retention standard is needed to
accommodate borrower challenges to an administrative wage garnishment
or federal offset action taken by the Department to collect on assigned
FFEL loans.
The Department realizes that these proposed regulations for
electronically signed documents may have an impact on the operations of
lenders, guaranty agencies and institutions. The Department
particularly invites comments on possible changes to these regulations
to reduce that impact while ensuring the Department's ability to
enforce loans.
Record Retention Requirements on Master Promissory Notes (MPNs)
Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.406, and
682.409)
Statute: Section 443(a) of the General Education Provisions Act
(GEPA), 20 U.S. 1232f(a), provides that recipients of Federal funds
under any applicable program must retain records of the amount and
distribution of Federal funds to facilitate effective audits of the use
of those funds. The GEPA generally applies to institutions that
participate in the Title IV, HEA programs.
Current Regulations: Current requirements related to the retention
of loan disbursement records by institutions are in Sec.
668.24(c)(1)(iv) and (e)(1) and require institutions to retain
disbursement records, unless otherwise directed by the Secretary, for
three years after the end of the award year for which the aid was
awarded and disbursed. Section 674.50(c) does not currently include
disbursement records as part of the documentation the Secretary may
require an institution to submit when assigning a Perkins Loan to the
Department.
Section 682.414(a)(4)(ii) and (iii) requires a guaranty agency to
ensure that a lender retains a record of each disbursement of loan
proceeds to a borrower for not less than three years following the date
the loan is repaid in full by the borrower, or for not less than five
years following the date the lender receives payment in full from any
other source. Section 682.414(a)(4)(iii) also provides that, in
particular cases, the Secretary or the guaranty agency may require the
retention of records beyond this minimum period. However,
S682.409(c)(4) does not currently require a guaranty agency to submit a
record of the lender's disbursements when assigning a loan to the
Department.
Proposed Regulations: The proposed changes in Sec. 674.19(e)(2)(i)
and (e)(3)(i) would 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. The institution also
would be required to retain disbursement records for each loan made on
an MPN until the loan is canceled, repaid, or otherwise satisfied.
Proposed Sec. 674.50(c)(11) would require an institution to submit
disbursement records on an assigned Perkins loan upon the Secretary's
request. The proposed changes in Sec. 682.409(c)(4)(vii) would 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.
Reasons: The proposed changes to Sec. Sec. 674.19(e) and 674.50(c)
of the Perkins Loan Program regulations that require the retention of
MPN disbursement records by an institution and submission of such
records, if requested by the Secretary, on Perkins Loans assigned to
the Department would support enforcement and collection on the MPN.
These regulatory changes would also facilitate the process of proving
that a borrower benefited from the proceeds of the loan, if the
borrower challenges the validity of the loan. The proposed addition of
Sec. 682.409(c)(4)(vii), requiring a guaranty agency to submit a
record of the lender's disbursement records upon assigning an FFEL loan
to the Department, would accomplish the same enforcement goals.
The Department's original proposal related to the retention of
disbursement records in support of enforcement of FFEL loans assigned
to the Department presented during the negotiations was different than
the changes proposed here. The Department originally proposed to
require schools to report to the lender the date and amount of each
disbursement of FFEL loan funds to a borrower's account no later than
30 days after delivery of the disbursement to the borrower. Under the
Department's original proposal, lenders also would have been required
to provide the record of a school's delivery of loan disbursements to a
FFEL borrower as a condition for a guaranty agency to make a claim
payment and receive reinsurance coverage. Lastly, the Department
originally proposed to require that the guaranty agency, upon
assignment of a FFEL loan to the Department, submit a record of the
school's delivery of loan disbursements to the borrower.
The Department's original proposal for the retention of MPN
disbursement records on assigned Perkins Loans is reflected in these
proposed regulations.
Some non-Federal negotiators expressed concern about the burden
associated with reporting and retaining voluminous amounts of
disbursement data when only a limited amount of the data would actually
be needed by the Department to enforce an assigned
[[Page 32417]]
Perkins or FFEL loan. Some non-Federal negotiators expressed concern
that the new requirements could affect the payment of insurance and
reinsurance claims in the FFEL program. Some of the non-Federal
negotiators asserted that lenders, guaranty agencies, and schools could
supply needed disbursement records to the Department without adding new
regulations. Several non-Federal negotiators suggested that the
Department use existing data systems, such as the NSLDS, to collect
disbursement information, rather than requiring new record retention
procedures.
The Department carefully considered the concerns of these non-
Federal negotiators, and returned to the last session of negotiations
with the proposed changes to the regulations on retention of
disbursement records that are reflected in this NPRM. The Department
decided that requiring the collection, retention, and submission of a
school-based record documenting each disbursement of a FFEL loan might
be too burdensome in light of the relatively few occasions that require
the use of such records. The Department decided to continue to use the
lender documentation of disbursements currently provided to the
Department in the FFEL assignment process. The Department is proposing
to codify this practice in Sec. 682.409(c)(4)(vii). However, the
Department intends to monitor this process carefully and will require a
guaranty agency or lender to return reinsurance, interest benefits and
special allowance for any loan determined to be unenforceable due to
the absence of disbursement records in accordance with Sec.
682.406(a)(13). If the disbursement documentation is not available or
reliable, the Department reserves its authority to reexamine this issue
in the future.
For institutions that participate in the Perkins Loan program, the
Department is proposing new provisions requiring the retention of
school-based disbursement records because the institution is the lender
in the Perkins Loan Program. Moreover, because MPNs have been in use in
the Perkins Loan Program for approximately three years, institutions
have retained all disbursement records on Perkins MPNs under current
record retention requirements in Sec. 668.24. The only new requirement
for Perkins institutions will be that these disbursement records must
be retained for at least three years after a Perkins Loan is satisfied
and that these disbursement records be submitted to the Department on
an assigned Perkins MPN, if requested by the Secretary.
Loan Counseling for Graduate or Professional Student PLUS Loan
Borrowers (Sec. Sec. 682.603, 682.604(f), 682.604(g), 685.301,
685.304(a), and 685.304(b))
Statute: Under section 428B(a)(1) of the HEA, a graduate or
professional student may borrow a PLUS Loan. However, section
485(b)(1)(A) of the HEA specifically excludes PLUS Loan borrowers from
the groups of borrowers for which exit counseling must be provided. The
HEA does not address entrance counseling requirements for Stafford and
PLUS Loan borrowers.
Current Regulations: The current regulations in Sec. Sec.
682.604(f) and (g) and 685.304(a) and (b) require entrance and exit
counseling for Stafford Loan borrowers, but not for graduate or
professional student PLUS Loan borrowers.
Proposed Regulations: Proposed Sec. 682.604(f)(2) would require
entrance counseling for graduate or professional student PLUS Loan
borrowers. The proposed entrance counseling requirements for student
PLUS Loan borrowers would vary, depending on whether the borrower has
received a Stafford Loan prior to receipt of the PLUS Loan.
Proposed Sec. 682.604(g) would also modify the exit counseling
requirements for Stafford Loan borrowers. If the borrower has received
a combination of Stafford Loans and PLUS Loans, the institution must
provide average anticipated monthly repayment amount information based
on the combination of different loan types the borrower has received in
accordance with proposed Sec. 682.604(g)(2)(i).
In addition, the proposed regulations in Sec. 682.603(d) would
require institutions, as part of the process for certifying a FFEL
Program Loan, to notify graduate or professional students who are
applying for a PLUS Loan of their eligibility for a Stafford Loan. The
proposed regulations require institutions to provide a comparison of
the terms and conditions of a PLUS Loan and Stafford Loan, and ensure
that prospective PLUS borrowers have an opportunity to request a
Stafford Loan.
The proposed regulations in Sec. Sec. 685.301(a)(3),
685.304(a)(2), and 685.304(b)(4) would include comparable changes to
the Direct Loan Program regulations with respect to graduate or
professional student borrowers of Direct PLUS Loans.
Reasons: The committee agreed that with the newly authorized
availability of PLUS Loans to graduate and professional students, there
is a need to revise the loan counseling requirements to account for
graduate and professional student PLUS borrowers.
Several negotiators pointed out that exit counseling is often more
beneficial to student borrowers than entrance counseling, as exit
counseling occurs at the time the loan is nearing repayment, and
students are more focused on repaying the loan at that point. However,
the statute specifically exempts PLUS borrowers from exit counseling
requirements. Although the Department encourages schools to provide
exit counseling to graduate and professional student PLUS borrowers,
the Department cannot require schools to provide such counseling.
One negotiator suggested that the Department require a school's
Stafford Loan exit counseling include information related to the PLUS
Loan if a Stafford Loan borrower also had a PLUS Loan. The Department
determined that, in those cases, the exit counseling requirements for
Stafford Loan borrowers could be modified to include information on
PLUS Loans. Accordingly, that requirement is included in Sec. Sec.
682.604(g)(2) and 685.304(b)(4) of the proposed regulations.
The Department and the other negotiators agreed that borrowers who
are eligible for both Stafford Loans and PLUS Loans should be given
information on the relative merits of each loan type, and be given an
opportunity to obtain a Stafford Loan prior to the borrower's receipt
of a PLUS Loan. Therefore, the Department is proposing to require in
Sec. Sec. 682.603(d) and 685.301(a) that the school provide a
comparison of the terms and conditions of a PLUS Loan and a Stafford
Loan prior to the graduate or professional student's receipt of a PLUS
Loan, so the borrower has the opportunity to make the best decision in
terms of which loan to accept.
Several negotiators felt that the Department's initial proposal was
too vague, and asked for more specificity regarding which terms and
conditions should be highlighted for these borrowers. In response, the
Department has added more specificity to Sec. Sec. 682.603(d)(1) and
685.301(a)(3) of the proposed regulations.
With regard to entrance counseling requirements for borrowers who
have both Stafford and PLUS Loans, one negotiator asked if the proposed
regulations would preclude a school from providing both Stafford and
PLUS Loan entrance counseling at the same time. The Department
responded that the proposed regulations would not preclude this
practice.
[[Page 32418]]
One negotiator pointed out that many graduate or professional
student PLUS borrowers will have already received Stafford Loans as
undergraduates, and therefore will have already received Stafford Loan
entrance counseling. Since the entrance counseling information for both
loan types is similar, this negotiator felt that it would be redundant
to offer PLUS Loan entrance counseling to a borrower who was already
received Stafford Loan entrance counseling. Other negotiators, however,
argued that since the terms and conditions of the loans are different,
additional counseling should be required. In light of this discussion,
the Department is proposing to modify the entrance counseling
requirements in Sec. Sec. 682.604(f)(2) and 685.304(a)(2) to require
that different sets of information be provided to graduate or
professional student PLUS borrowers who have already received Stafford
Loans, and graduate or professional student PLUS borrowers who have not
received Stafford Loans.
Maximum Loan Period (Sec. Sec. 682.401, 682.603, and 685.301)
Statute: The HEA does not address the issue of maximum loan periods
specifically.
Current Regulations: Current regulations in Sec.
682.401(b)(2)(ii)(C), Sec. 682.603(f)(2)(i), and Sec.
685.301(a)(9)(ii)(A) provide that the loan period for a title IV, HEA
program loan may not exceed 12 months.
Proposed Regulations: Proposed Sec. Sec. 682.401(b)(2)(ii)(A),
682.603(g)(2)(i), and 685.301(a)(10)(ii)(A) would 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 Program.
Reasons: The Secretary believes eliminating the 12 month limit on
loan periods would give schools, lenders and students greater
flexibility when rescheduling disbursements. This proposed change would
allow institutions to certify a single loan for students in shorter
non-term or nonstandard term programs and to provide greater
flexibility in rescheduling disbursements for students who drop out and
return within the permitted 180-day period.
This issue was added to the rulemaking agenda at the request of
some non-Federal negotiators. One proponent of the change noted that,
on average, 17 percent of students have an academic program longer than
a 12-month period, and by eliminating the maximum length of a loan
period, the need to certify another loan to cover the remainder of the
program would be eliminated. The negotiators noted that the proposed
changes would not increase the amount of borrowing by students. In
other words, annual loan limits would still be controlled by the
institution's academic year in those instances where the academic year
and loan period both exceed 12 months.
The Secretary agrees with these negotiators that it would benefit
the students and the FFEL and Direct Loan Programs to remove the 12
month rule from the regulations.
Mandatory Assignment of Defaulted Perkins Loans. (Sec. Sec. 674.8 and
674.50)
Statute: To participate in the Perkins Loan Program, an institution
of higher education enters into a Program Participation Agreement (PPA)
with the Secretary under section 463 of the HEA. The HEA enumerates
several provisions of the PPA. Section 463(a)(9) of the HEA allows for
the addition of provisions to the PPA, agreed to by the institution and
the Secretary, that may be necessary to protect the United States from
unreasonable risk of loss.
Current Regulations: The regulations governing the required
contents of the PPA are in Sec. 674.8 of the Perkins Loan Program
regulations. Under Sec. 674.8(d), the PPA includes a provision that
the school may voluntarily assign a defaulted Perkins Loan to the
Department if the school decides not to service or collect the loan or
the loan is in default despite the school's due diligence in collecting
the loan.
Proposed Regulations: The proposed regulations in Sec. 674.8(d)(3)
would provide that the PPA also include a provision under which the
Department could require assignment of a Perkins Loan if the
outstanding principal balance of the loan is $100 or more, the loan has
been in default for seven or more years, and a payment has not been
received on the loan in the preceding 12 months. The proposed
regulations provide an exception to the mandatory assignment
requirement if payments were not due on the loan in the preceding 12
months because the loan was in an authorized deferment or forbearance
period. Under proposed Sec. 674.50(e)(1) the Secretary would accept
the assignment of a Perkins Loan without the borrower's Social Security
Number if the Secretary has exercised her mandatory assignment
authority under Sec. 674.8(d)(3).
Reasons: The Department's records show that institutions are
holding more than $400 million in uncollected Perkins Loans that have
been in default for 5 years or more. Since Perkins Loans are comprised
largely of Federal funds, these uncollected loans present an
unreasonable risk of loss to the United States.
The Department has collection tools, such as Federal benefit
offsets, that are not available to the Perkins institutions. The
Department has encouraged schools to voluntarily assign these old
defaulted loans, so that the Department may employ these tools to
collect on these loans. As part of this effort, the Department, in
recent years, significantly streamlined the voluntary assignment
process for Perkins Loans. Despite these efforts, the numbers and
amounts of older defaulted Perkins Loans held by schools continues to
grow.
To address this problem, the Department proposes modifying the
regulations governing the PPA to provide for mandatory assignment of
older defaulted loans, at the request of the Secretary. One of the
negotiators recommended, as an alternative to the proposed regulations,
that the Department adopt a referral process, under which a school
could refer a loan to the Department. The Department would collect on
the loan and return the proceeds to the school, minus collection
charges. Other negotiators proposed that if the Department required
mandatory assignment of loans, the funds collected from those Perkins
Loans should be re-allocated to Perkins schools.
The Department did not accept these proposals. The Department
previously used a referral program with very limited success. In
addition, there is no system in place for re-allocation of net
Department collections to Perkins institutions. Accordingly, the
Department does not believe these proposals are in the Federal fiscal
interest.
One negotiator pointed out that the current assignment regulations
require a Social Security Number for all assigned loans. This
negotiator noted that, in the early years of the program, schools were
not required to collect the Social Security Numbers of Perkins Loan
borrowers. The negotiator feared that schools would be penalized if
they were required to assign loans, only to have the assignments
rejected for lack of a Social Security Number. The Department has
addressed this concern in the proposed regulations by exempting
mandatorily assigned Perkins Loans from the requirement that the
institution provide a Social Security Number for all assigned loans.
The Department initially proposed mandatory assignment of defaulted
Perkins Loans if the outstanding balance of the loan is $50 or more and
the loan has been in default for 5 years.
[[Page 32419]]
Negotiators offered a counter-proposal, requiring assignment if the
account to be assigned is more than $1,000 in outstanding principal,
and the borrower has not made a payment on the loan in 10 years,
excluding authorized periods of deferment and forbearance, and
excluding loans for which the school has obtained a judgment.
The Department did not accept the counter-proposal because
excluding all deferment and forbearance periods from the 10 years would
push the loans eligible for mandatory assignment significantly beyond
10 years in default. The Department believes that the proposed criteria
would effectively rule out mandatory assignment of many of the loans
that would most benefit from the Department's collection activities.
However, the Department has modified its original proposal. In
particular, the Department's proposed regulations would require a loan
to be assigned if the account balance is $100 or more and it has been
in default for at least 7 years. The revised proposal generally
approximates the mandatory assignment requirements in the FFEL Program.
Reasonable Collection Costs (Sec. 674.45)
Statute: Section 464A(b)(1) of the HEA provides for assessing
against a borrower reasonable collection costs on a defaulted Title IV
loan. The HEA does not define ``reasonable collection costs'' for
purposes of the Perkins Loan Program.
Current Regulations: Section 674.45(e) requires a school to assess
collection costs against a borrower, based on either the actual costs
incurred for those collection actions, or an average of the costs
incurred for similar actions taken to collect loans in similar stages
of delinquency. The current regulations do not cap collection costs
that may be charged to the borrower, except, as described in Sec.
674.39, in the case of a loan that has been successfully rehabilitated.
Section 674.39(c)(1) caps collection costs on rehabilitated loans at 24
percent, unless the borrower defaults on the rehabilitated loan.
However, Sec. 674.47(e) establishes caps on the amount of unpaid
collection costs that a school may charge to its Perkins Fund.
Proposed Regulations: The proposed regulations in Sec.
674.45(e)(3) would limit the amount of collection costs a school may
assess against a Perkins Loan borrower to 30 percent of the total of
the principal, interest, and late charges collected for first
collection efforts; 40 percent of the total of the principal, interest,
and late charges collected for second collection efforts; and, in cases
of litigation, 40 percent of the total of the principal, interest, and
late charges collected plus court costs. The proposed regulations
specify that these caps on collection costs go into effect for
collection agency placements made on or after July 1, 2008.
Reasons: The lack of a cap on collection costs in the Perkins Loan
Program has led to abuse, with some institutions charging collection
costs of 60 percent or more. During the negotiations, the Department
initially proposed capping Perkins Loan Program collection costs at 24
percent, to match the limit already in place for Perkins loans that
have been rehabilitated. Several negotiators contended that this cap
was too low. They pointed out that Perkins Loans are often low-balance
loans, but that they require the same efforts to collect as higher-
balance loans. This can lead to increased collection costs in the
Perkins Loan Program.
These negotiators also noted that most collection agencies charge
on a contingency fee basis and that a percentage of the amount
collected from the borrower goes to the collection agency. One
negotiator asserted that a 24 percent collection cap would limit the
amount that could be charged to the borrower to 19.3 percent, to allow
for the collection agency to retain its fee, and to still make the
Perkins Fund whole by recovering and returning to the Fund the entire
amount owed by the borrower.
The negotiators also pointed out that collection agency fees are
market driven and competitive and that placing a cap on collection
costs would increase the collection costs that would have to be
absorbed by the Fund. This would have the effect of reducing the amount
of Perkins Loans available to future borrowers.
These negotiators also pointed out that litigation is required
under certain circumstances in the Perkins Loan program. If schools
must litigate to stay in compliance with the Perkins Loan regulations,
but can only assess collection costs of 24 percent, this would deplete
the Perkins Fund.
Another negotiator argued that it would not be profitable for
collection agencies to provide services to smaller schools under the
proposed collection costs cap. This negotiator also contended that a
low cap would reduce the effectiveness of the collection agencies.
The Department asked negotiators to propose alternatives to the
proposed 24 percent cap on collection costs. One negotiator stated that
any cap on collection costs in the Perkins Loan Program would be
unreasonable, because there are so many variables involved in
collecting on a Perkins Loan.
Some negotiators offered a counter-proposal that included a sliding
scale for the cap on collection costs: For first collection efforts, 33
percent of the unpaid balance; for second collection efforts, 40
percent of the unpaid balance; for loans that have been litigated, 50
percent plus court costs; for borrowers living abroad, 50 percent of
the unpaid balance.
The Department and other negotiators believe that a 50 percent cap
is too high. However, the Department's proposed regulations do reflect
an increase from the original proposal in light of the arguments and
factors noted during the negotiations.
Child or Family Service Cancellation (Sec. 674.56)
Statute: Under section 465(a)(2)(I) of the HEA, a Perkins Loan
borrower may qualify for cancellation of the loan if the borrower is a
full-time employee of a public or private nonprofit child or family
service agency who is providing, or supervising the provision of,
services to high-risk children who are from low-income communities, and
the families of such children.
Current Regulations: The current regulations for the child or
family service discharge in Sec. 674.56(b) reflect the statutory
language, without providing additional details on the eligibility
criteria for a child or family service cancellation.
Proposed Regulations: The proposed regulations in Sec. 674.56(b)
expand on the current regulations and specify that, to qualify for a
child or family service cancellation, a borrower who is a full-time,
non-supervisory employee of a child or family service agency must be
providing services directly and exclusively to high-risk children from
low-income communities. In addition, the proposed regulations specify
that if the employee provides services to the families of high-risk
children from low-income communities, the services provided to the
children's families must be secondary to the services provided to the
high-risk children from low-income communities.
Reasons: On October 20, 2005, the Department published Dear
Colleague Letter (DCL) GEN-05-15, which clarified the Department's
long-standing policy with regard to the eligibility criteria for a
child or family service cancellation. The DCL specifies that a full-
time, non-supervisory employee of a public or private child or family
service agency must be providing services directly and exclusively to
high-risk children from low-income
[[Page 32420]]
communities to qualify for a child or family service cancellation. As
noted in the DCL, many employees of a child or family service agency
who do not work directly with high-risk children from low-income
communities may provide services that indirectly benefit such children.
Congress did not intend such borrowers to qualify for child or family
service cancellations, unless the borrower is in a supervisory
position, and is supervising staff members who work directly with high-
risk children from low-income communities. The NPRM would incorporate
this guidance into the regulations in proposed Sec. 674.56(b).
Prohibited Inducements (Sec. Sec. 682.200 and 682.401)
Statute: Section 435(d)(5) of the HEA provides that, after notice
and an opportunity for a hearing, the Secretary may disqualify from
participation in the FFEL Program any FFEL lender that provides
inducements or engages in other prohibited activity to secure FFEL loan
applications or sell other products. Those prohibited inducements and
activities include: Offering, directly or indirectly, points, premiums,
payments, or other inducements to any educational institution or
individual to secure FFEL loan applications; conducting unsolicited
mailings of student loan applications to individuals who have not
borrowed previously from the lender; offering FFEL loans to a
prospective borrower to induce the borrower to purchase an insurance
policy or other product; or engaging in fraudulent or misleading
advertising. A lender is not prohibited from providing assistance to
schools that is comparable to the kinds of assistance that the
Department provides to schools through the Direct Loan Program. In
order to avoid confusion regarding the types of assistance a lender may
provide to schools, the Department will identify and publish a list of
services provided to schools through the Direct Loan Program on or
before publication of final regulations. The most recent description of
the kinds of assistance the Department provides to schools in the
Direct Loan Program was published in a Notice of Proposed Rulemaking on
August 10, 1999 (64 FR 43428, 43429-43430) and can be accessed at:
http://www.ed.gov/legislation/FedRegister/proprule/1999-3/081099a.html.
Similarly, section 428(b)(3) of the HEA restricts guaranty agencies
from offering inducements or engaging in other prohibited activities to
secure applicants for FFEL loans or to secure the designation of the
guaranty agency as the insurer of particular loans. A guaranty agency
is prohibited from: Offering, directly or indirectly, premiums,
payments, or other inducements to any educational institution or its
employees to secure FFEL loan applicants; or offering to a lender or
its employees, agents, or independent contractors, any premiums,
incentive payments, or other inducements to administer or market loans
and secure designation as the guarantor or insurer of loans, (except
for Unsubsidized Stafford loans and lender-of-last-resort loans). The
guaranty agency is also prohibited from conducting unsolicited mailings
of student loan applications to students or their parents unless the
agency has previously guaranteed a FFEL Loan for the student or parent,
and from conducting fraudulent or misleading advertising related to
loan availability. A guaranty agency is not prohibited from providing
assistance to schools that is comparable to the kinds of assistance the
Department provides to schools through the Direct Loan Program.
Current Regulations: Prohibited inducements and other impermissible
activities by lenders are contained in the definition of lender in 34
CFR Sec. 682.200(b). The regulations mirror the statutory provisions
except to clarify that: (1) Assistance provided to schools that is
comparable to that provided by the Secretary is limited to the kinds of
assistance provided to schools under or in furtherance of the Direct
Loan program; (2) unsolicited mailing of student loan application forms
includes applications sent to the student and the student's parents;
and (3) the prohibition against fraudulent and misleading advertising
refers to advertising related to the lender's FFEL program activities.
The comparable regulations for guaranty agencies are in 34 CFR
682.401(e), which specifies that a guaranty agency may not offer,
directly or indirectly, any premium, payment, or other inducement to an
employee or student of a school, or any entity or individual affiliated
with a school, to secure FFEL Loan applicants. The regulations provide
examples of prohibited inducements of lenders by a guaranty agency and
include: Compensating lenders or their representatives to secure loan
applications for guarantee by the agency; performing functions that a
lender would otherwise perform without appropriate compensation;
providing equipment or supplies to lenders at below market cost or
rental; and offering to pay a lender not holding loans guaranteed by
the agency a fee for applications guaranteed by the agency. The current
regulations also recognize the administrative and oversight functions
of the guaranty agency by specifically excluding certain activities
from the description of prohibited inducements. The regulations also
prohibit guaranty agencies from sending unsolicited mailings to
students in postsecondary and secondary schools and their parents
unless the individual had borrowed previously using the agency's loan
guarantee and conducting fraudulent or misleading advertising
concerning loan availability.
Proposed Regulations: The proposed regulations would incorporate,
with some modifications, current interpretive and clarifying guidance
on prohibited inducements and activities provided to lenders and
guaranty agencies by the Department over the years since the provisions
were added to the HEA. This guidance was contained in various DCLs
issued by the Department and in responses to private letter inquiries
from program participants. The most comprehensive DCL on this subject
was issued in February 1989 (No. 89-L-129). The proposed regulations
for both lenders and guaranty agencies adopt the format of that DCL to
include a non-exhaustive list of examples of prohibited inducements and
activities, and an exhaustive list of permissible activities. Under
these proposed regulations, certain activities are identified as
permissible, because the Department believes those activities are
necessary for the lender or guaranty agency to fulfill its role in the
administration of the FFEL Program. Consistent with the Department's
longstanding policy in this area, the scope of permissible activities
by guaranty agencies is broader than that for lenders in recognition of
their administrative, training, outreach, and oversight roles in the
FFEL program.
Under paragraph (5)(i) of the definition of lender in Sec.
682.200(b) of the proposed regulations, lenders would be prohibited
from offering, directly or indirectly, any points, premiums, payments,
or other benefits to any school or other party to secure FFEL loan
applications or loan volume. The proposed regulations would add a
definition of a school-affiliated organization to Sec. 682.200, to
include alumni organizations, foundations, athletic organizations, and
social, academic, and professional organizations. Prohibited payments
and other benefits to prospective borrowers would include prizes or
additional financial aid funds. The proposed regulations would also
provide other examples of ``other benefits'' to a school
[[Page 32421]]
that would be prohibited, including: Access to a lender's other
financial products, computer hardware, and payment of the cost of
printing and distribution of college catalogs and other materials at
less than market rate or at no cost.
The proposed regulations would prohibit a lender from undertaking
philanthropic activities, such as providing grants, scholarships,
restricted gifts, or financial contributions to secure loan
applications, loan volume, or placement on a school's preferred lender
list. Lenders would also be prohibited from making payments or
providing other benefits to a student at a school, or to a loan
solicitor or sales representative who visits campuses, in exchange for
loan applications secured from individual prospective borrowers. The
proposed regulations would prohibit lenders from paying conference or
training registration, transportation and lodging costs for employees
of schools and school-affiliated organizations. The proposed
regulations would further prohibit a lender's payment of any
entertainment expenses related to lender-sponsored functions and
activities for school and school-affiliated organization employees.
Lenders would also be prohibited from providing staffing services to a
school as a third-party servicer or otherwise to assist a school with
financial aid related functions, on more than a short-term, non-
recurring emergency basis. The proposed regulations would also modify
prior program guidance by prohibiting all payments of loan application
referral or processing fees between lenders, (whether or not the lender
receiving the payment participates in the FFEL Program), or between
lenders and any other entity. The proposed regulations would not revise
the current regulations governing the prohibition on lenders conducting
unsolicited mailings, offering FFEL Loans to induce a borrower to
purchase a life insurance policy or other product or service offered by
the lender, and engaging in fraudulent or misleading advertising.
The proposed regulations would permit a lender to undertake
activities that are specifically permitted by the HEA. These activities
include: Providing assistance to a school, as identified by the
Secretary, that is comparable to the assistance provided by the
Department to a school in the Direct Loan Program; offering reduced
borrower loan origination fees; offering reduced borrower interest
rates; paying Federal default fees that would otherwise be paid by the
borrower; and purchasing loans from another loan holder at a premium.
In addition, the proposed regulations would permit a lender to
participate in a school's or guaranty agency's student financial aid
and financial literacy outreach activities, as long as the lender does
not promote its student loan or other services to the recipients or
attendees and there is full disclosure of any lender sponsorship,
including the development and printing of any materials. The proposed
regulations would allow a lender to provide a toll-free telephone
number and free data transmission services to schools that participate
in the FFEL program with the lender and to the school's borrowers and
prospective borrowers for the purpose of communications on FFEL Loans.
The proposed regulations would permit a lender to continue to offer
repayment incentive programs to borrowers under which the borrower
receives or retains a benefit, such as a reduced interest rate or
forgiveness of a certain amount of loan principal in exchange for the
borrower making one or more scheduled payments. The proposed
regulations would also permit a lender to sponsor meals, refreshments,
and receptions to school officials or employees that are reasonable in
cost and that are scheduled in conjunction with meeting or conference
events if those functions are open to all meeting or conference
attendees. The proposed regulations would also permit a lender to
provide schools, school-affiliated organizations and borrowers items of
nominal value that constitute a form of generalized marketing or are
intended to create good will.
Section 682.401 of the proposed regulations, which governs guaranty
agency prohibited inducements and permitted activities, would generally
mirror the proposed regulations for lenders. The proposed regulations
would prohibit a guaranty agency from providing a school with prizes or
additional financial aid funds under any Title IV, State or private
program based on the school's voluntary or coerced agreement to
participate in the guaranty agency's program or to provide a specified
volume of loans, using the agency's loan guarantee. The proposed
regulations would prohibit the 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 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.
The proposed regulations would prohibit a guaranty agency from
undertaking 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. The proposed
regulations would also prohibit a guaranty agency from providing
staffing services to a school, including as a third-party servicer,
other than on a short-term, non-recurring emergency basis to assist the
school with financial aid-related functions. The proposed regulations
would also prohibit a guaranty agency from assessing additional costs
or denying benefits to a school or lender that would otherwise be
provided by the agency because the school or lender declined to agree
to participate in the agency's program or declined or failed to provide
a certain volume of loan applications or loan volume for the agency's
loan guarantee.
Unlike the proposed regulations for participating lenders, the
proposed regulations would allow a guaranty agency to provide meals and
refreshments that are reasonable in cost and provided in connection
with guaranteed agency-provided training for school and lender program
participants and for elementary, secondary, and postsecondary school
personnel and in conjunction with other workshops and forums
customarily used by the guaranty agency to fulfill its responsibilities
under the HEA. The proposed regulations also would permit a guaranty
agency to pay travel and lodging costs that are reasonable as to cost,
location and duration, to facilitate attendance of school staff in
training programs and facility service tours that school staff would
otherwise be unable to attend. Guaranty agencies would also be
permitted to pay reasonable costs for school officials to participate
on an agency's governing board, a standing official advisory committee,
or in support of other official activities of an agency in accordance
with proposed Sec. 682.401(e)(2)(iv). The proposed regulations also
reflect the guaranty agency's ability under the HEA to pay Federal
default fees on loans that would otherwise be paid by the borrowers and
to undertake default aversion activities approved by the Secretary with
certain guaranty agency funds. There are no proposed changes to the
current regulations governing a guaranty
[[Page 32422]]
agency's direct or indirect payment of incentives or other inducements
to lenders to secure the agency as an insurer of the lender's FFEL
loans, or relating to the prohibitions against the unsolicited mailing
or distribution of unsolicited loan applications to students in
secondary or postsecondary schools and their parents and against
fraudulent and misleading advertising concerning loan availability.
The proposed regulations would also clarify and strengthen the
Department's authority to enforce the rules related to improper
inducements. There are three proposed changes in this area. First, the
proposed regulations would amend Sec. Sec. 682.413(h), 682.705(c), and
682.706(d) to provide that, in any formal action against a lender or
guaranty agency based on a violation of the prohibited inducement
provisions, once the Department's deciding official finds that the
lender or guaranty agency provided or offered the payments or
activities specified in the definition of lender in Sec. 682.200 or
Sec. 682.401, the Secretary will apply a ``rebuttable presumption''
that the activities or payments were undertaken or made by the lender
or guaranty agency to secure FFEL Loan applications or FFEL loan
volume. The lender or guaranty agency will have a full opportunity to
show that the activity or payment was made for reasons unrelated to
securing loan applications or loan volume.
Another proposed change in this area would add a new Sec.
682.406(d) to specify that a guaranty agency may not make a claim
payment from its Federal Fund to a lender or request a reinsurance
payment from the Department on a loan if the lender offered or provided
an improper inducement, as defined in the definition of lender in Sec.
682.200(b), to a school or other party in connection with the making of
the loan. This change would reflect the Department's long-standing
policy that a loan made in violation of the prohibited inducement
provisions is not eligible for federal subsidy payments.
The final change in the area of enforcement related to inducements
would clarify and expand the borrower's legal rights. Since 1994, the
promissory notes and MPNs used in the FFEL Program have included a
description of the borrower's rights under the Federal Trade
Commission's (FTC's) Holder Rule as it applies to FFEL loans. Under the
FTC's Holder Rule, if a loan is made by a for-profit school, or the
borrower is referred to the lender by a for-profit school, any lender
holding the borrower's loans is subject to all claims and defenses that
the borrower could assert against the school with respect to the loan.
Section 682.209(k) of the proposed regulations would expand the
protections provided by the FTC's Holder Rule by essentially
incorporating it into the regulations, applying it to all loans made
under the FFEL Program and specifying that it applies if the lender
making the loan offered or provided an improper inducement to the
school or any other party in connection with the making of the loan.
Reasons: The Department believes that more explicit regulatory
requirements governing prohibited incentive payments and other
inducements by lenders and guaranty agencies are needed to ensure FFEL
Program integrity, reassure borrowers and taxpayers of that integrity,
and enhance the Secretary's enforcement authority in this area. Current
regulations are primarily limited to restating the statutory language
currently in the HEA. The Department's interpretive and policy guidance
in this area over the years has been issued in DCLs and in responses to
private letter inquiries from program participants. The most
comprehensive guidance on this subject was published as DCL 89-L-129/S-
55/G-157 in February 1989. The most recent guidance on prohibited
school and lender relationships was published as DCL 95-G-278/L-178/S-
73 in March 1995. The Department believes that this guidance, and the
general requirements of the law, may no longer be generally known and
understood by lenders and other participants that have entered the FFEL
industry in the last few years. Moreover, the FFEL Program has changed
significantly since this prior guidance was issued. In recent years,
the increased competition among FFEL lenders, particularly in the FFEL
Consolidation Loan Program, has resulted in a number of lenders
offering a variety of benefits to borrowers, schools, and school-
affiliated organizations. There has also been a rapid growth in private
alternative loans marketed by many of the same lenders participating in
the FFEL Program. Special relationships between schools and lenders
have developed, jeopardizing a borrower's right to choose a FFEL lender
and undermining the student financial aid administrator's role as an
impartial and informed resource for students and parents working to
fund postsecondary education.
During the negotiated rulemaking discussions, several negotiators
expressed concern about the impact that the proposed regulations might
have on the numerous business arrangements between schools and
financial institutions, and recommended that any regulations listing
prohibited and permissible activities be based on a limited
interpretation of the applicable statutory language. Another negotiator
suggested that the regulations could have a ``chilling effect'' on
school and lender relationships. A couple of negotiators argued that
the intent of the statutory prohibition of lender and guaranty agency
inducements was not to curtail competition for market share, but to
prevent unnecessary borrowing that would not have occurred if not for
the incentive, and that given the current FFEL annual loan limits and
the cost of education, borrowers were borrowing due to high levels of
unmet need rather than any incentives being provided. One negotiator
argued that inducements to borrowers were a problem only if the
inducement resulted in harm to the individual or raised credibility
issues about the loan process.
Other negotiators expressed the view that, because of improper
inducements, borrowers were actively being ``steered'' by schools to
particular lenders and argued that the credibility of the loan process
was an issue that the Department needed to address. One negotiator
contended that inducements to borrowers created unequal terms to
borrowers in the FFEL Program and appeared to operate as ``redlining''
because the inducements were often based on school loan volume, the
volume of large dollar loans, or a school's cohort default rate.
A couple of negotiators recommended that, rather than attempting to
identify an exhaustive list of inducements, the regulations should
simply provide illustrative examples of acceptable relationships
between schools and lenders, so that future program developments would
not necessarily require a change to the regulations.
Negotiators with expertise in guaranty agency operations asked the
Department to make it clear that school involvement in, and guaranty
agency financial support of, guaranty agency advisory committee
activities would continue to be permissible because of the importance
of those activities to FFEL Program administration. One of these
negotiators also recommended that the list of permissible activities
for guaranty agencies be expanded to permit additional training and
outreach activities to avert defaults authorized under the HEA. Another
of these negotiators asked that the regulations make a clear
distinction between contractual, third-party servicer agreements
between a guaranty agency and school that are paid at the market
[[Page 32423]]
rate, and the limited emergency assistance offered by lenders and
guaranty agencies to schools at no cost or at less than a market rate.
This same negotiator asked the Department to clarify that a guaranty
agency or school's compliance with state administered programs or
requirements did not present an inducement-related conflict.
A couple of negotiators recommended that the Department clarify the
nature of the emergency situation under which a lender or guaranty
agency could offer assistance to a school in fulfilling its financial
aid functions at little or no cost. The negotiators noted that the
definition of an ``emergency'' is subjective, and should not excuse a
school from complying with the requirement that it be administratively
capable to participate in the Title IV programs, which includes
retaining sufficient, trained staff during peak processing periods.
They recommended that the Department specify that an ``emergency''
cannot be an annual or recurring event. The Department specifically
solicits comments on whether an ``emergency'' should be limited to a
State- or Federally-declared natural or national disaster that affects
a school or whether an ``emergency'' should encompass broader
circumstances.
Several negotiators with expertise in lender and guaranty agency
operations submitted counter-proposals to the Department's proposed
regulatory language. These alternative proposals would have
significantly expanded the lists of permissible activities for lenders
and guaranty agencies. The Department did not accept these counter-
proposals because they would have allowed activities and payments that
the Department believes are not appropriately performed by lenders and
guaranty agencies. These alternative proposals would: Permit lenders to
pay for meals and refreshments, lodging, and transportation costs for
employees of schools and school-affiliated organizations equivalent to
those permitted to be paid by guaranty agencies; incorporate into the
regulations the detailed listing of comparable services provided by the
Department to Direct Loan schools that was published in a Notice of
Proposed Rulemaking on August 10, 1999 (64 FR 43428, 43429-43430);
permit lenders to pay reasonable loan application ``referral'' fees to
unaffiliated parties in addition to other lenders; expand permissible
borrower repayment incentive programs to include loan forgiveness
benefits for academic achievement and certain kinds of employment; and
prohibit philanthropic giving by lenders and guaranty agencies in
exchange for application referrals, or a specific volume or dollar
amount of loans made, or placement on a school's list of recommended or
suggested lenders. The proposal would also have incorporated into the
regulations selected paragraphs from the Department's DCL 89-L-129/S-
55/G-157, February 1989.
A couple of negotiators voiced concern about the impact of the
proposed treatment of philanthropic giving by lenders on general
philanthropic activities supporting postsecondary institutions by
financial institutions.
Several negotiators objected to the Department's proposal to
include enforcement-related provisions in the proposed regulations. One
negotiator stated that the ``rebuttable presumption'' language was
problematic because the statutory language governing prohibited
inducements requires a demonstration that the inducement was provided
in exchange for loans or loan volume. The same negotiator stated that
enforcement would be better enhanced by clear regulations that define
terms and explain permissible and impermissible activities. Several
negotiators also objected to the inclusion of the FTC Holder Rule
provision into the proposed regulations. One negotiator argued that
these proposed regulations converted what was a lender eligibility
issue into a borrower right and put lenders at risk simply by being on
a school's preferred lender list. The negotiator also stated that it
would lead to nuisance litigation by borrowers. The negotiators
questioned why an inducement infraction by a lender should lead to a
loss of reinsurance and questioned the basis of the proposed provision
that denied claim payment to a lender and reinsurance to the guaranty
agency if it was determined that the loan was made based on an
impermissible inducement.
The Department believes that the proposed 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 proposed regulations, is
enhancing the borrower's choice of lender and providing for the
disclosure of appropriate information.
The Department believes that the proposed regulations provide clear
and detailed examples of prohibited inducements and improper activities
based on previously published guidance with some modifications to
reflect changes that have occurred in the FFEL program. The proposed
regulations would retain the Department's long-standing policy
distinction between permissible activities by lenders and guaranty
agencies in recognition of their different roles in the FFEL program.
The Department has not, however, authorized lenders or guaranty
agencies to provide staff assistance to schools except in an emergency,
which must be short-term and nonrecurring. As noted earlier, one
negotiator asked the Department to provide a specific exemption from
the inducement restrictions for State-established programs or
requirements. However, such an exemption is not authorized under the
HEA. The prohibition on improper inducements in sections 428(b)(3) and
435(d)(5)(A) of the HEA applies to State guaranty agencies, lenders,
and institutions, as well as to all other participants in the FFEL
program. Based on these current statutory provisions, the Department
recently sent letters to two State guaranty agencies noting that State
authorized programs those agencies administer could create an improper
inducement, because those programs potentially provide benefits to
institutions that participate in the State guaranty agency's guarantee
program and deny benefits to institutions that participate in other
guaranty agencies' programs. The proposed regulations would reflect the
continued prohibition of such programs in proposed section
682.410(e)(1)(i)(B) and (e)(1)(ii).
The proposed regulations would adopt a modified version of the
Department's prior policy, under which ``reasonable'' application
referral fees can be paid to a nonparticipating lender or to another
participating FFEL lender by prohibiting all such payments to a lender
or any other entity. The Department believes that there is no longer a
need for payment of such fees in the current FFEL market and that
lender payment of such fees to school-affiliated organizations and
other unaffiliated parties are a significant problem in the FFEL
Program. In addition, in an attempt to avoid the prohibition on
inducements, lenders have tried to classify fees that are based on
success in securing loan applications or the size and characteristics
of loans
[[Page 32424]]
disbursed as ``referral'' or ``marketing'' fees. Compensation or fees
based on the number 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. Lenders are free, as they have been historically,
to continue to contract for general marketing services, provided those
services are not compensated based on the number of applications, or
the volume of loans made or disbursed.
The proposed regulations do not incorporate the list of services
the Department provides to Direct Loan schools that was published in
the August 10, 1999 notice of proposed rulemaking as was requested by
some of the negotiators. As the Department made clear during the
negotiated rulemaking discussions, the Department would not want to
limit itself or the lending community by codifying a list of services
that cannot be easily updated and therefore the proposed regulations
allow the use of other forms of public announcement.
The proposed regulations also would not expand the list of
permissible lender repayment incentive programs that are based strictly
on a borrower establishing a successful payment pattern in the
repayment of a loan to include ``loan forgiveness'' based on academic
achievement or employment in a particular field. The Department
believes that repayment incentive programs do not represent a
prohibited inducement if they are conditioned on the borrower's timely
repayment of the loan and borrower receipt of the benefit is not
coincidental to the loan origination process. The Department believes
that the forms of loan forgiveness described by some of the negotiators
would be an inducement offered by lenders to market FFEL loans.
Finally, the Department believes that the addition of the
enforcement provisions is necessary to clarify and strengthen the
Department's authority to enforce the regulations related to the use of
improper inducements. The proposed regulations will result in more
effective and fair enforcement of these restrictions. In response to
the negotiators' concerns about the placement of the rebuttable
presumption provision outside the formal administrative penalty
process, the Department revised the proposed regulations to incorporate
that provision into the regulations that govern formal administrative
proceedings and to clarify that the rebuttable presumption applies only
when the Secretary takes a formal administrative action against a
lender or guaranty agency. As the Department pointed out during the
negotiated rulemaking discussion, violations of the prohibited
inducement provisions are difficult for the Department to enforce. It
is virtually impossible for the Department to prove the relationship
between the parties when the documentation is under the control of the
two parties and the Department cannot issue subpoenas to compel
testimony. To enforce these provisions more effectively, the Department
must be able to identify a connection between certain activities and
loans. The Department believes that the adoption and use of a
rebuttable presumption will improve the Department's ability to enforce
the prohibition on improper inducements while protecting the
appropriate due process rights of lenders and guaranty agencies.
The Department's proposal to include violations of the prohibited
inducement provisions in Sec. 682.406 as a condition of reinsurance
codifies the Department's existing policy and practice when it
documents violations of the prohibited inducement provisions.
Finally, the Department believes that the proposed change to expand
the protections provided by the FTC's Holder Rule by including a form
of that rule in the proposed regulations will allow borrowers to assert
any legal rights they may have if they have been harmed in a situation
in which the lender has offered or provided an improper inducement.
Moreover, by applying the FTC's Holder Rule to all loans, irrespective
of the type of school attended by the borrower, the proposed
regulations will ensure that all FFEL borrowers have the same legal
rights.
Eligible Lender Trustees (ELTs) (Sec. Sec. 682.200 and 682.602)
Statute: The Third Higher Education Extension Act of 2006 (HEA
Extension Act) (Pub. L. 109-292) amended the definition of lender in
section 435(d)(2) of the HEA to prohibit new ELT relationships and
restrict existing ELT relationships by imposing limits on school or
school-affiliated organizations that make or originate loans through an
ELT in the FFEL Program.
Current Regulations: The definition of lender currently in Sec.
682.200 does not reflect these new restrictions on ELT relationships in
the FFEL Program. The current regulations also do not contain a
definition of school-affiliated organizations.
Proposed Regulations: The changes in proposed Sec. 682.200
implement the HEA Extension Act by amending the definition of lender in
Sec. 682.200 to prohibit a FFEL lender from entering into a new ELT
relationship with a school or a school-affiliated organization after
September 30, 2006. ELT relationships in existence prior to that date
would be allowed to continue with certain restrictions. The proposed
regulations would also implement the HEA Extension Act by creating a
new section (formerly reserved Sec. 682.602) that applies the same
limits imposed on FFEL school lenders by the Higher Education
Reconciliation Act (HERA) (Pub. L. 109-171) to school and school-
affiliated ELT arrangements entered into after January 1, 2007. Lastly,
proposed Sec. 682.200 would define the term school-affiliated
organization as 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.
Reasons: We are proposing to amend the definition of lender in
Sec. 682.200 and add new Sec. 682.602 to reflect the changes made to
section 435(d)(2) of the HEA by the HEA Extension Act. Because the HEA
Extension Act did not define ``school-affiliated organization,'' but
included these organizations in imposing limits on ELT arrangements, we
developed and are proposing to add a definition of this term to Sec.
682.200 to add clarity to the regulations. During the negotiated
rulemaking, several non-Federal negotiators expressed concern about the
phrase ``directly or indirectly related to a school'' in the definition
of school-affiliated organization. They felt that we should qualify
this phrase to make it clear that the definition applies only to
organizations that are under the common control and ownership of a
school. The Department disagreed with this suggestion, because many
organizations such as alumni and social organizations are clearly
school-affiliated but may not be under the control and ownership of a
school.
Frequency of Capitalization (Sec. 682.202)
Statute: Section 428C(b)(4)(C)(ii)(III) of the HEA provides for the
capitalization of interest on Consolidation Loans.
Current Regulations: Under current Sec. 682.202(b)(3), a lender
may capitalize unpaid interest as frequently as every quarter.
Capitalization is also permitted when repayment is required to begin or
resume.
Proposed Regulations: Under proposed Sec. 682.202, the frequency
of capitalization on Federal Consolidation Loans would be limited to
quarterly, except that a lender could only capitalize unpaid interest
that accrues
[[Page 32425]]
during an in-school deferment at the expiration of the deferment. These
proposed regulations would be consistent with the current practice in
the Direct Loan Program.
Reasons: The proposed regulations would align the FFEL Program with
the Direct Loan Program. Capitalization would take place when the
borrower changes status at the end of a period of authorized in-school
deferment.
This change was proposed by non-Federal negotiators to protect
borrowers that previously consolidated their loans while in an in-
school status to lock in low interest rates. Statutory provisions,
subsequently repealed by the HERA, allowed in-school FFEL borrowers to
request an early conversion to repayment status. Unlike Direct Loan
borrowers, FFEL borrowers were not able to consolidate their loans
while they were in an in-school status. By converting to repayment
status, these borrowers could consolidate their loans. Consolidation
Loans received by these borrowers were then immediately placed into in-
school deferments. The proposed regulations would limit when the
interest on these loans could be capitalized.
Loan Discharge for False Certification as a Result of Identity Theft
(Sec. Sec. 682.208, 682.211, 682.300, 682.302 and 682.411)
Statute: Section 437(c) of the HEA authorizes a discharge of a FFEL
Loan or a Direct Loan if the borrower's eligibility to borrow was
falsely certified because the borrower was a victim of the crime of
identity theft.
Current Regulations: Section 682.402 of the FFEL Program
regulations and Sec. 685.215 of the Direct Loan Program regulations
authorize a discharge of a loan if the borrower's eligibility to borrow
the loan was falsely certified because the borrower was the victim of
the crime of identity theft. Section 682.402 requires that, before the
borrower's obligation is discharged, the borrower must provide the loan
holder a copy of a local, State, or Federal court verdict or judgment
that conclusively determines that the individual who is named as the
borrower of the loan was the victim of the crime of identity theft. A
Direct Loan borrower must provide the Secretary the same documentation
to establish eligibility for the discharge.
Proposed Regulations: The proposed regulations do not include any
changes to the eligibility requirements with which a borrower must
comply to obtain a loan discharge as a result of the crime of identity
theft. However, the proposed regulations Sec. 682.208 would allow a
lender to suspend credit bureau reporting on a loan for 120 days while
the lender investigates a borrower's claim that he or she is the victim
of identity theft. The proposed regulations in Sec. 682.211 would
allow a lender to grant a 120-day administrative forbearance to a
borrower upon the lender's receipt of a valid identity theft report as
defined under the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau of an allegation of identity theft
while the lender determines the enforceability of the loan. Under the
proposed changes in Sec. Sec. 682.208 and 682.211, the lender could no
longer collect interest and special allowance payments on the loan if
the lender determines that the loan is unenforceable. The proposed
regulations would allow the lender a three-year period, however, to
submit a claim if, within that time period, the lender receives from
the borrower a local, State, or Federal court verdict of judgment
conclusively proving that the borrower was the victim of the crime of
identity. The proposed regulations in Sec. Sec. 682.300 and 682.302
would clarify that the Secretary terminates the payment of interest
benefits and special allowance on eligible FFEL Program Loans
consistent with the changes we are proposing in Sec. 682.208. Lastly,
proposed regulations in Sec. 682.411 would specify that the HEA does
not preempt provisions of the Fair Credit Reporting Act that provide
for the suspension of credit bureau reporting and collection on a loan
after the lender receives a valid identity theft report or notification
from a credit bureau.
Reasons: Interim final regulations published on August 9, 2006 (71
FR 64377) and final regulations published on November 1, 2006 (71 FR
45665) implemented changes made to the HEA by the HERA to authorize a
discharge of a FFEL or Direct Loan Program loan if the borrower's
eligibility to borrow was falsely certified because the borrower was a
victim of the crime of identity theft. Although some of the negotiators
had concerns with these earlier regulations, the Department believes
that the current regulations properly reflect the statutory provision
and therefore did not propose any changes.
Some non-Federal negotiators asked the Department to add
regulations that would allow loan holders to take actions required by
other Federal laws when they receive an allegation that a loan was
certified due to a crime of identity theft. The Department agreed. The
proposed regulations in Sec. Sec. 682.208 and 682.211 would allow for
the suspension of credit bureau reporting and collection activity,
respectively. The proposed regulations in Sec. 682.411 would allow
lenders to comply with the Fair Credit Reporting Act and stop credit
bureau reporting on delinquent loans while the lender investigates an
alleged identity theft without violating the FFEL Program regulations.
Preferred Lender Lists (Sec. Sec. 682.212 and 682.401)
Statute: Section 432(m) of the HEA requires the Secretary, in
consultation with guaranty agencies, lenders, and other organizations
involved in student financial assistance to develop common application
forms and promissory notes, or MPNs for use in the FFEL Program. These
forms must be formatted to require the applicant to clearly indicate a
choice of lender. Under Section 479A(c) of the HEA, schools are
authorized to refuse to certify, on a case-by-case basis, a statement
that permits a student to receive a loan. The reason for the school's
refusal must be documented and provided to the student in writing. In
exercising this authority, a school may not discriminate against any
borrower.
Current Regulations: Many schools provide lists of preferred or
recommended lenders to students and prospective borrowers. There are no
current regulations that govern a school's use of such lists. Current
Sec. 682.603(e) authorizes a school to refuse to certify a borrower's
eligibility for a FFEL Loan but specifies that, in exercising that
authority, a school must not engage in any pattern or practice that
would result in denial of a borrower's access to loans on the basis of
certain factors including the borrower's choice of a particular lender
or guaranty agency.
Proposed Regulations: Section 682.212(h)(1) of the proposed
regulations specifies the 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 prohibits the use
of a preferred lender list to deny or otherwise impede the borrower's
choice of lender. Section 682.212(h)(1)(ii) of the proposed regulations
would require a school using a preferred lender list to include on the
list at least three lenders that are not affiliated with each other.
Section 682.212(h)(1)(iii) of the proposed regulations would also
prohibit a school from including lenders on the list that have offered,
or been solicited by the school to offer, financial or other benefits
to the school in exchange for placement on the list. The proposed
regulations further provide, in Sec. 682.212(h)(2)(iii), that if a
school has listed a lender on its preferred lender list and the lender
offers specific
[[Page 32426]]
borrower benefits (such as lower fees or interest rates) to the
school's borrowers, the school must ensure that the lender provides the
same benefits to all borrowers at the school. Section 682.212(h)(2) of
the proposed regulations would also require the school to disclose to
prospective borrowers, as part of the list, the method and criteria the
school used to select any lender that it recommends or suggests, to
provide comparative information to prospective borrowers about interest
rates and other benefits offered by the lenders, and to 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. Section 682.212(h)(2)(v)
of the proposed regulations would also prohibit a school from
assigning, through award packaging or other methods, a lender to first-
time borrowers and from delaying certification of a borrower's loan
eligibility to a lender because that particular lender is not on the
school's preferred lender list. The proposed regulations would also
revise Sec. 682.603(e) to further clarify that a school may never
refuse or delay certification of a borrower's loan eligibility because
of the borrower's choice of lender.
Reasons: The Department believes that it is necessary at this time
to establish rules to govern a school's optional use of a preferred
lender list to preserve a borrower's right to choose a FFEL lender.
These proposed regulations will help ensure that such lists are a
source of useful, unbiased consumer information that can assist
students and their parents in choosing a FFEL lender from the over
3,000 lenders that participate in the FFEL Program.
The Department has not previously regulated or restricted the use
of lists of preferred or recommended lenders. With student loan
defaults a national concern in the early 1990s, some schools began
recommending to borrowers that they use lenders that the school
believed provided high-quality customer service in loan origination and
servicing, with the goal of preventing loan delinquency and default and
its negative consequences for borrowers and schools. With the
significant growth of loan volume in recent years, and increased
competition among FFEL lenders, the focus of school selection of
preferred lenders has shifted. Lenders began offering web-based and
proprietary applications and electronic data transmission to reduce the
administrative burden for schools and borrowers and the processing time
necessary to secure a student loan. Increased competition among FFEL
lenders has also led to a proliferation of student loan borrower
benefits, such as reduced interest rates and fees. Given the growing
complexity surrounding the FFEL program, students and parents have been
relying extensively on financial aid administrators as a source of
assistance to identify lenders that offer the best service and benefits
to borrowers. The use of preferred lender lists and other consumer
information related to the student loan process has played a useful
role in assisting financial aid officers in dealing with the large
volume of requests for information and assistance.
There is increasing evidence, however, that the preferred lender
lists maintained by many schools do not represent the result of
unbiased research by the school to identify the lenders providing the
best combination of service and benefits to borrowers. There has also
been increasing evidence that some schools have been restricting the
ability of borrowers to choose the lender of their FFEL Program loan.
The Department has identified instances in which a school selected the
lender for the borrower as part of the financial aid award packaging
process, provided borrowers with an electronic link to only one lender
after recommending a loan as part of the award package, identified only
one lender as their preferred lender in their published financial aid
information, or, if the school was an authorized FFEL Program lender,
directed the aid administrator to use the school as the only lender.
Some other schools have significantly delayed or declined to provide
the necessary loan eligibility certification to a lender for a student
or parent borrower because the lender was not on the school's preferred
list or did not participate in the electronic processing system that
the school used. When these situations were identified, and in response
to student and parent complaints, the Department has investigated and
addressed them on a case-by-case basis, and reminded the school of its
legal responsibilities. Over the last three years, the Department has
also used Department-sponsored meetings and other conferences to
highlight inappropriate and, in some cases, illegal practices related
to the use of preferred lender lists. Unfortunately, many of these
practices have continued, despite the Department's efforts.
Recent Department investigations have shown that, in some cases, a
school's selection of a preferred or recommended lender was the result