Team I
Lender and Guaranty Agency Issues

Third Meeting
March 22-24, 1999
Washington, DC

This meeting commenced at approximately 8:30 a.m. on March 22, 1999, as scheduled, and adjourned on March 24, 1999, at approximately 11:00 a.m.

All members, except Legal Services Counsel and American Council on Education; and the Facilitators were present. The summaries of this Team's first and second meetings, which were previously distributed, were approved without amendment. Approved meeting summaries will be posted on the Internet.

As preliminary matters, the Facilitators explained that Jeff Baker, of the Department of Education, was assigned to monitor all four Teams for overlapping issues and to insure that redundant efforts and conflicting agreements are avoided. If Team members wish to provide input on issues that are partly within the purview of the Team and partly within another Team, they should get their comments to either a member of the other Team or Jeff Baker. They also reminded the Team that the preamble to the regulations being negotiated would not be negotiated under the Committee's organizational protocols, but that the Committee may suggest inclusions in the preamble, and that time permitting, Team members will have an opportunity to review the preamble.

The meeting's main discussions followed a March 17, 1999, agenda of issues previously distributed by the Department of Education spokesperson. This document included draft regulatory provisions for unresolved sections. Other members also distributed proposed provisions.

Tentative agreements were achieved as indicated by the attached appendix. The agenda for the April meeting will mainly consist of items still not subject to tentative agreement.

Negotiated rulemaking draft NPRM - April 13, 1999
Committee I - FFEL guaranty agency and lender issues
Tentative consensus reached

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

1. The authority citation for Part 682 continues to read as follows:

AUTHORITY: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

4. Section 682.305 is amended by revising the heading and paragraphs (a)(1), (a)(3) and (c)(1) as follows:

§ 682.305 Procedures for payment of interest benefits and special allowance and collection of origination fees.

* * *

(c) Independent audits.

(1) If a lender originates or holds more than $5 million in FFEL loans during its fiscal year, it must submit an independent annual compliance audit for that year, conducted by a qualified independent organization or person. The Secretary may, following written notice, suspend the payment of interest benefits and special allowance to a lender that does not submit its audit within the time period prescribed in paragraph (c)(2) of this section.

* * *

5. Section 682.401 is amended by revising paragraphs (b)(11), (c)(1) (c)(2), and (c)(3), adding a new paragraph (c)(5), and revising paragraphs (e)(1) and (e)(3) to read as follows:

§ 682.401 Basic program agreement.

* * *

(b) Terms of agreement.

* * *

(11) The agency must be able to receive and respond to written, electronic, and telephone inquiries.

* * *

(c) Lender of last resort.

(1) The guaranty agency must ensure that it, or an eligible lender described in section 435(d)(1)(D) of the Act, serves as a lender-of-last-resort in the state in which the guaranty agency is the designated guaranty agency. As used in this paragraph, the term "designated guaranty agency" means the guaranty agency in the state for which the Secretary has signed a Basic Program Agreement under § 682.401.

(2) The lender-of-last-resort must make subsidized Federal Stafford loans and unsubsidized Federal Stafford loans to any eligible student who -

(i) Qualifies for interest benefits pursuant to § 682.301;

(ii) Qualifies for a combined loan amount of at least $200; and

(iii) Has been otherwise unable to obtain loans from another eligible lender for the same period of enrollment.

(3) The lender-of-last resort may make unsubsidized Federal Stafford and Federal PLUS loans to borrowers who have been otherwise unable to obtain such loans from another eligible lender.

* * *

(ii) If the Secretary determines that the designated guaranty agency does not have the capability to provide lender-of-last-resort loans, in accordance with paragraph (c)(5)(i) of this section the Secretary may provide federal funds to another guaranty agency, under terms and conditions agreed to by the Secretary and the agency, to make lender-of-last-resort loans in that state.

(e) Prohibited inducements. A guaranty agency may not --

(1) Offer directly or indirectly any premium, payment, or other inducement to an employee or student of a school, or an entity or individual affiliated with a school, to secure applicants for FFEL loans.

* * *

(3) Mail or otherwise distribute unsolicited loan applications to students enrolled in a secondary school or a postsecondary institution, or to parents of those students, unless the potential borrower has previously received loans insured by the guaranty agency;

* * *

6. Section 682.404 is amended by revising paragraphs (a)(1), and (a)(2)(ii), removing paragraphs (a)(2)(iii) and (a)(3), renumbering paragraphs (a)(4) and (a)(5) as (a)(3) and (a)(4), respectively and revising the renumbered paragraph (a)(4), revising the heading for paragraph (b), revising paragraphs (b)(1), (b)(2), and (g), redesignating paragraph (i) as paragraph (l) and inserting new paragraphs (i), (j), and (k) to read as follows:

§ 682.404 Federal reinsurance agreement.

(a) General.

(1) The Secretary may enter into a reinsurance agreement with a guaranty agency that has a basic program agreement. Except as provided in paragraph (b) of this section, under a reinsurance agreement, the Secretary reimburses the guaranty agency for --

(i) 95 percent of its losses on default claim payments to lenders on loans for which the first disbursement is made on or after October 1, 1998;

(ii) 98 percent of its losses on default claim payments to lenders for loans made on or after October 1, 1993, and before October 1, 1998; or

(iii) 100 percent of its losses on default claim payments to lenders --

* * *

(2) For purposes of this section --

* * *

(ii) Default aversion assistance means the activities of a guaranty agency that are designed to prevent a default by a borrower who is at least 60 days delinquent, and that are directly related to providing collection assistance to the lender.

* * *

(4) If a lender has requested default aversion assistance as described in paragraph (a)(2)(ii) of this section, the agency must, upon request of the school at which the borrower received the loan, notify the school of the lender's request . The guaranty agency may not charge the school or the school's agent for providing this notification, and must accept a blanket request from the school to be notified whenever any of the school's current or former students are the subject of a default aversion assistance request. The agency must annually notify schools of the option to make this blanket request.

(b) Reduction in Reinsurance rate.

(1) * * *

(ii) 88 percent of its losses on default claim payments to lenders on loans made on or after October 1, 1993, and before October 1, 1998; or

(iii) 85 percent of its losses on default claim payments to lenders on loans for which the first disbursement is made on or after October 1, 1998.

(2) * * *

(ii) 78 percent of its losses on default claim payments to lenders on loans made on or after October 1, 1993, and before October 1, 1998; or

(iii) 75 percent of its losses on default claim payments to lenders on loans for which the first disbursement is made on or after October 1, 1998.

* * *

(g) Share of borrower payments returned to the Secretary.

(1) After an agency pays a default claim to a holder using assets of the Federal Fund, the agency must pay to the Secretary the portion of payments received on those defaulted loans remaining after --

(i) The agency deposits into the Federal Fund the amount of those payments equal to the applicable complement of the reinsurance percentage that was in effect at the time the claim was paid; and

(ii) The agency has deducted an amount equal to --

(A) 30 percent of borrower payments received before October 1, 1993;

(B) 27 percent of borrower payments received on or after October 1, 1993 and before October 1, 1998;

(C) 24 percent of borrower payments received on or after October 1, 1998 and before October 1, 2003; and

(D) 23 percent of borrower payments received on or after October 1, 2003.

(2) Unless the Secretary approves otherwise, the guaranty agency must pay to the Secretary the Secretary's share of borrower payments within 45 days of its receipt of the payments.

* * *

(i) Account maintenance fee.

A guaranty agency is paid an account maintenance fee based on the original principal amount of outstanding FFEL Program loans insured by the agency. For fiscal years 1999 and 2000, the fee is 0.12 percent of the original principal amount of outstanding loans. After fiscal year 2000, the fee is 0.10 percent of the original principal amount of outstanding loans.

(j) Loan processing and issuance fee.

A guaranty agency is paid a loan processing and issuance fee based on the principal amount of FFEL Program loans originated during a fiscal year that are insured by the agency. The fee is paid quarterly. No payment is made for loans for which the disbursement checks have not been cashed or for which electronic funds transfers have not been completed. For fiscal years 1999 through 2003, the fee is 0.65 percent of the principal amount of loans originated. Beginning October 1, 2003, the fee is 0.40 percent.

7. Section 682.406 is amended by revising the heading and paragraph (a)(14) as follows:

§ 682.406 Conditions for claim payments from the Federal Fund and for reinsurance coverage.

(a) A guaranty agency may make a claim payment from the Federal Fund and receive a reinsurance payment on a loan only if --

* * *

(14) The guaranty agency certifies to the Secretary that diligent attempts have been made by the lender and the guaranty agency under § 682.411(g) to locate the borrower through the use of reasonable skip-tracing techniques, including contact with the school the student attended.

9. Section 682.413 is amended by revising paragraph (e)(1) as follows:

§ 682.413 Remedial actions.

* * *

(e) (1) (i) The Secretary's decision to require repayment of funds, withhold funds, or to limit or suspend a lender, guaranty agency or third party servicer from participation in the FFEL programs or to terminate a lender or third party from participation in those programs does not become final until the Secretary provides the lender, agency, or servicer with written notice of the intended action and an opportunity to be heard. The hearing will be at a time and in a manner the Secretary determines to be appropriate to the resolution of the issues on which the lender, agency or servicer requests the hearing.

(ii) The Secretary's decision to terminate a guaranty agency's participation in the FFEL program after September 24, 1998 does not become final until the Secretary provides the agency with written notice of the intended action and provides an opportunity for a hearing on the record.

* * *

10. Section 682.417 is amended by revising the heading and changing "reserve fund" to read "Federal Fund" wherever it appears as follows:

§ 682.417 Determination of Federal Fund or assets to be returned.

12. A new section 682.419 is added to subpart D as follows:

§ 682.419 Guaranty agency Federal Fund.

(a) Establishment and control. A guaranty agency must establish and maintain a Federal Student Loan Reserve Fund (referred to as the "Federal Fund") to be used only as permitted under paragraph (c) of this section. The assets of the Federal Fund, and the earnings on those assets are, at all times, the property of the United States. Consequently, the guaranty agency must exercise the level of care required of a fiduciary charged with the duty of protecting, investing, and administering the money of others.

(b) Deposits. The agency must deposit into the Federal Fund --

(1) All funds, securities, and other liquid assets of the reserve fund that existed under § 682.410;

(2) The total amount of insurance premiums collected;

(3) Federal payments for default, bankruptcy, death, disability, closed school, false certification, and other claims;

(4) Federal payments for supplemental preclaims assistance activities performed before October 1, 1998;

(5) 70 percent of administrative cost allowances received on or after October 1, 1998 for loans upon which insurance was issued before October 1, 1998;

(6) All funds received by the guaranty agency from any source on FFEL Program loans on which a claim has been paid, minus the portion the agency is authorized to deposit in its Operating Fund;

(7) Investment earnings on the Federal Fund; and

(8) Other funds received by the guaranty agency from any source that are specifically designated for deposit in the Federal Fund.

(c) Uses. A guaranty agency may use the assets of the Federal Fund only --

(1) To pay insurance claims;

(2) To transfer default aversion fees to the agency's Operating Fund;

(3) To transfer account maintenance fees to the agency's Operating Fund, if directed by the Secretary;

(4) To refund payments made by or on behalf of a borrower on a loan that has been discharged in accordance with § 682.402;

(5) To pay the Secretary's share of borrower payments, in accordance with § 682.404(g);

(6) For transfers to the agency's Operating Fund, as approved by the Secretary;

(7) To refund insurance premiums related to loans cancelled or refunded, in whole or in part;

(8) To return to the Secretary portions of the Federal Fund required to be returned by the Act; and

(9) For any other purpose authorized by the Secretary.

(d) Prohibition against prepayment. A guaranty agency may not prepay obligations of the Federal Fund unless it demonstrates, to the satisfaction of the Secretary, that the prepayment is in the best interests of the United States.

(e) Minimum Federal Fund level.

The guaranty agency must maintain a minimum Federal Fund level equal to at least 0.25 percent of its insured original principal amount of loans outstanding.

(f) Definitions. For purposes of this section--

(1) Federal Fund level means the total of Federal Fund assets identified in paragraph (b) of this section plus the amount of funds transferred from the Federal Fund that are in the Operating Fund, using an accrual basis of accounting.

(2) Original principal amount of loans outstanding means--

(i) The sum of--

(A) The original principal amount of all loans guaranteed by the agency; and

(B) The original principal amount of any loans on which the guarantee was transferred to the agency from another guarantor, excluding loan guarantees transferred to another agency pursuant to a plan of the Secretary in response to the insolvency of the agency;

(ii) Minus the original principal amount of all loans on which--

(A) The loan guarantee was cancelled;

(B) The loan guarantee was transferred to another agency;

(C) Payment in full has been made by the borrower;

(D) Reinsurance coverage has been lost and cannot be regained; and

(E) The agency paid claims.

14. A new section 682.421 is added to subpart D as follows:

§ 682.421 Funds transferred from the Federal Fund to the Operating Fund by a guaranty agency.

(a) General. In accordance with this section, a guaranty agency may request the Secretary's permission to transfer a limited amount of funds from the Federal Fund to the Operating Fund. The Secretary will respond to the agency's request within 30 days after receiving it. If the transfer is approved, the transferred funds may be used only as permitted by § 682.410(a)(2) and § 682.418.

(b) Transferring the principal balance of the Federal Fund.

(1) Amount that may be transferred. Upon receiving the Secretary's approval, an agency may transfer an amount up to the equivalent of 180 days of cash expenses (not including claim payments) for normal operating expenses to be deposited into the agency's Operating Fund. The amount transferred and outstanding at any time during the first 3 years after establishing the Operating Fund may not exceed the lesser of 180 days cash expenses (not including claim payments), or 45 percent of the balance in the federal reserve fund that existed under § 682.410 as of September 30, 1998.

(2) Requirements for requesting a transfer. A guaranty agency that wishes to transfer principal from the Federal Fund must provide the Secretary with a proposed repayment schedule and evidence that it can repay the transfer according to its proposed schedule. The agency must provide the Secretary with the following --

(i) A request for the transfer that specifies the desired amount, the date the funds will be needed, and the agency's proposed terms of repayment;

(ii) A projected revenue and expense statement, to be updated annually during the repayment period, that demonstrates that the agency will be able to repay the transferred amount within the repayment period requested by the agency; and

(iii) Certifications by the agency that during the period while the transferred funds are outstanding --

(A) Sufficient funds will remain in the Federal Fund to pay lender claims during the period the transferred funds are outstanding;

(B) The agency will be able to meet the reserve recall requirements of § 422 of the Act;

(C) The agency will be able to meet the statutory minimum reserve level of 0.25 percent, as mandated by § 428(c)(9) of the Act; and

(D) No legal prohibition exists that would prevent the agency from obtaining or repaying the transferred funds.

(c) Transferring interest earned by the Federal Fund.

(1) Amount that may be transferred. The Secretary may permit an agency that owes the Federal Fund the maximum amount allowable under paragraph (b) of this section to transfer the interest income earned on the Federal Fund during the 3-year period following October 7, 1998. The combined amount of transferred interest and the amount of principal transferred under paragraph (b)(2) of this section, may exceed 180 days cash expenses (not including claim payments), but may not exceed 45 percent of the balance in the federal reserve fund that existed under § 682.410 as of September 30, 1998.

(2) Requirements for requesting a transfer. To be allowed to transfer the interest income, in addition to the items in paragraph (b)(2) of this section, the agency must demonstrate to the Secretary that the cash flow in the Operating Fund will be negative if the agency is not authorized to transfer the interest, and by transferring the interest, the agency will substantially improve its financial circumstances.

15. A new section 682.422 is added to subpart D as follows:

§ 682.422 Guaranty agency repayment of funds transferred from the Federal Fund.

(a) General. A guaranty agency must begin repayment of money transferred from the Federal Fund not later than the start of the 4th year after the agency establishes its Operating Fund. All amounts transferred must be repaid not later than 5 years after the date the Operating Fund is established.

(b) Extension for repaying the interest transferred.

(1) General. The Secretary may extend the period for repayment of interest transferred from the Federal Fund from 2 years to 5 years if the Secretary determines that the cash flow of the Operating Fund will be negative if the transferred interest had to be repaid earlier, or the repayment of the interest would substantially diminish the financial circumstances of the agency.

(2) Agency eligibility for an extension. To receive an extension, the agency must demonstrate that it will be able to repay all transferred funds by the end of the 8th year following the date of establishment of the Operating Fund, and that the agency will be financially sound upon the completion of repayment.

(3) Repayment of interest earned on transferred funds. If the Secretary extends the period for repayment of interest transferred from the Federal Fund for a guaranty agency, the agency must repay the amount of interest during the 6th, 7th, and 8th years following the establishment of the Operating Fund. In addition to repaying the amount of interest, the guaranty agency must also pay to the Secretary any income earned after the 5th year from the investment of the transferred amount. In determining the amount of income earned on the transferred amount, the Secretary will use the average investment income earned on the agency's Operating Fund.

(c) Consequences if a guaranty agency fails to repay transfers from the Federal Fund. If a guaranty agency fails to make a scheduled repayment to the Federal Fund, the agency may not receive any other federal funds until it becomes current in making all scheduled payments, unless the Secretary waives this restriction.

17. Subpart H -- Special allowance payments on loans made or purchased with proceeds of tax-exempt obligations is amended by deleting sections 682.800 through 682.839, changing the term "handicapped status" to "disability status" in 682.840(a), and redesignating section 682.840 as section 682.800.

(Authority: 20 U.S.C. 1078)
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