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Volume 64, Number 148

Proposed Rules

Page 42175-42203

DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC78

Federal Family Education Loan (FFEL) Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Secretary proposes to amend the Federal Family Education Loan (FFEL) Program regulations. These proposed regulations implement changes made to the Higher Education Act of 1965 by the Higher Education Amendments of 1998 (the ``1998 Amendments''). The proposed regulations cover a variety of items, including changes to the financial structure of guaranty agencies in the FFEL Program.

DATES: We must receive your comments on or before September 15, 1999.

ADDRESSES: Address all comments about these proposed regulations to Ms. Pamela A. Moran, U.S. Department of Education, P.O. Box 23272, Washington, DC 20202-5449. If you prefer to send your comments through the Internet, use the following address: ffelnprm@ed.gov

If you want to comment on the information collection requirements, you must send your comments to the Office of Management and Budget at the address listed in the Paperwork Reduction Act section of this preamble. You may also send a copy of these comments to the Department representative named in this section.

FOR FURTHER INFORMATION CONTACT: Mr. George Harris, U.S. Department of Education, 400 Maryland Avenue, SW., room 3045, ROB-3, Washington, DC 20202-5449. Telephone: (202) 708-8242. If you use a telecommunications device for the deaf (TDD) you may call the Federal Information Relay Service (FIRS) at 1-800-877-8339.

Individuals with disabilities may obtain this document in an alternate format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed in the preceding paragraph.

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 program.

During and after the comment period, you may inspect all public comments about these proposed regulations in Room 3045, ROB-3, 7th and D Streets, SW., Washington, DC, between the hours of 8:30 a.m. and 4:00 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, you may call (202) 205-8113 or (202) 260-9895. If you use a TDD, you may call the Federal Information Relay Service at 1-800-877-8339.

Background

These proposed regulations are needed to implement and reflect changes to the Higher Education Act of 1965 (the HEA) made by the 1998 Amendments, Public Law 105-244, enacted October 7, 1998.

The FFEL Program regulations (34 CFR part 682) govern the Federal Stafford Loan Program (subsidized and unsubsidized), the Federal Supplemental Loans for Students Program (no longer active), the Federal PLUS Program, and the Federal Consolidation Loan Program (formerly collectively known as the Guaranteed Student Loan Programs). A lender that is eligible under the HEA may make guaranteed loans under the FFEL Program. A guaranty agency is a State or private nonprofit entity that has an agreement with the Secretary to perform certain administrative roles in the FFEL Program. Guaranty agencies receive and hold Federal funds to pay certain FFEL Program costs and expenses. They are trustees for the Federal Government and must comply with fiduciary standards.

Negotiated Rulemaking Process

Section 492 of the HEA requires that, before publishing any proposed regulations to implement programs under Title IV of the HEA, the Secretary obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations, the Secretary must conduct a negotiated rulemaking process to develop proposed regulations. All published proposed regulations must conform to agreements resulting from the negotiated rulemaking process unless the Secretary reopens the negotiated rulemaking process or provides a written explanation to the participants in that process why the Secretary has decided to depart from the agreements.

To obtain public involvement in the development of the proposed regulations, the Secretary published a notice in the Federal Register (63 FR 59922, November 6, 1998) requesting advice and recommendations from interested parties concerning what regulations were necessary to implement Title IV of the HEA. We also invited advice and recommendations concerning which regulated issues should be subjected to a negotiated rulemaking process. We further requested advice and recommendations concerning ways to prioritize the numerous issues in Title IV, in order to meet statutory deadlines. Additionally, we requested advice and recommendations concerning how to conduct the negotiated rulemaking process, given the time available and the number of regulations that needed to be developed.

In addition to soliciting written comments, we held three public hearings and several informal meetings to give interested parties an opportunity to share advice and recommendations with the Department. The hearings were held in Washington, DC, Chicago, and Los Angeles, and we posted transcripts of those hearings to the Department's Information for Financial Aid Professionals website (http://www.ifap.ed.gov).

We then published a second notice in the Federal Register (63 FR 71206, December 23, 1998) to announce the Department's intention to establish four negotiated rulemaking committees to draft proposed regulations implementing Title IV of the HEA. The notice announced the organizations or groups believed to represent the interests that should participate in the negotiated rulemaking process and announced that the Department would select participants for the process from nominees of those organizations or groups. We requested nominations for additional participants from anyone who believed that the organizations or groups listed did not adequately represent the list of interests outlined in section 492 of the HEA. Once the four committees were established, they met to develop proposed regulations over the course of several months, beginning in January.

The proposed regulations contained in this notice of proposed rulemaking (NPRM) reflect the final consensus of the negotiating committee, which was made up of the following members:

• American Association of Collegiate Registrars and
• Admissions Officers.
• American Association of State Colleges and Universities.
• American Council on Education.
• Career College Association.
• Consumer Bankers Association.
• Education Finance Council.
• Education Loan Management Resources.
• Guaranty Agency CEO Caucus.
• Legal Services Counsel (a coalition).
• National Association of Independent Colleges and Universities.
• National Association of State Student Grant and Aid Programs.
• National Association of State Universities and Land Grant Colleges.
• National Association of Student Financial Aid Administrators.
• National Association of Student Loan Administrators.
• National Council of Higher Education Loan Programs.
• National Direct Student Loan Coalition.
• Sallie Mae, Inc.
• State Higher Education Executive Officers Association.
• Student Loan Servicing Alliance.
• United States Department of Education.
• United States Student Association.
• US Public Interest Research Group.

As stated in the committee protocols, consensus means that there must be no dissent by any member in order for the committee to be considered to have reached agreement. Consensus was reached on all of the proposed regulations in this document.

The committee that developed these proposed regulations focused on issues unique to FFEL Program guaranty agencies and lenders, particularly in the areas where changes were made to the HEA by the 1998 Amendments affecting guaranty agency financial restructuring. Issues that affected Title IV borrowers in general, such as deferments, cancellations, forbearances, loan amounts, interest rates, etc., were addressed by another negotiating committee. However, the committee agreed that if it completed its required work early, the negotiators could propose changes to update or clarify other provisions in the existing FFEL regulations that were not otherwise being modified as a result of the 1998 Amendments. The committee reached consensus on its required work early and, in response to proposals presented by various negotiators, spent most of its last meeting looking at changes to other regulatory provisions. Some of those additional changes were agreed to by the committee and are included in these proposed regulations.

The goal of the negotiations was to develop an NPRM that reflected a final consensus of the negotiating committee. The proposed regulations in this document reflect that consensus. The following discussion includes summaries of some of the points of view expressed by the negotiators as they sought to reach consensus. This information will assist you in understanding the rationale for some of these proposed regulations.

The members of the committee represented lenders, loan servicers, guaranty agencies, schools, students, and other interested parties from various sectors of the FFEL Program and student aid community, as well as the Secretary. We listened to the views and recommendations offered by the other negotiators during the first meeting of the committee on January 19-20, 1999, and prepared draft proposed regulations that were provided to the other negotiators on February 12. The committee discussed these draft regulations at the second meeting on February 16-17. Taking into account the information provided at the February meeting, we revised the draft proposed regulations and provided them to the other negotiators on March 18. The committee discussed the revised draft regulations during the third meeting on March 22-24, and tentative agreement was reached on many issues.

Between the third and fourth meetings, we again revised the draft proposed regulations and provided them to the other negotiators on April 15. The negotiators discussed the revised draft regulations at the fourth meeting, on April 19-20, and tentative agreement was reached on the entire draft regulations, subject to the edits agreed to by the negotiators. Those edits were incorporated into a new draft, which the Department sent to the other negotiators on May 10. The last meeting of the negotiated rulemaking committee was held May 17-18. On May 17, after a few refinements to the draft language, the negotiators agreed to the draft proposed regulations that they had developed without dissent. After reaching consensus on the regulations that were required to be developed as a result of the 1998 Amendments, the negotiators then agreed to examine other existing regulations that some negotiators believed should be modified. The following discussion of the proposed regulations covers both sets of regulations: the regulations required to implement the changes made to the HEA by the 1998 Amendments and other regulations that the negotiators agreed to propose or revise.

Proposed Regulatory Changes

In accordance with the consensus reached in the negotiated rulemaking, the Secretary proposes to amend the following sections of the regulations:

Section 682.205 Disclosure Requirements for Lenders

The proposed regulations would implement the changes made by the 1998 Amendments to section 433 of the HEA. Those changes affect the loan disclosures that a lender is required to provide to a borrower. Specifically, the HEA now requires a lender to use simple and understandable terms in its disclosure statements and to provide a telephone number the borrower can use to obtain additional loan information. The changes to the HEA also permit a lender to provide the disclosure information and the lender's phone number electronically.

The negotiators reached consensus on these proposed regulations and enhanced the telephone number requirement by requiring the lender to provide a toll free number accessible within the United States.

Section 682.207 Due Diligence in Disbursing a Loan

Although the proposed regulations in this section do not implement changes made by the 1998 Amendments, the negotiators agreed to propose them as improvements to the existing FFEL Program regulations.

The negotiators agreed to propose a change to the Secretary's longstanding policy that a lender must cancel all future disbursements on a loan whenever the first disbursement is returned to the lender. Some negotiators argued that this policy encouraged borrowers to accept loan funds they did not need at the beginning of a school year. Under current policy, a borrower who realizes he or she does not need the first disbursement of a loan and returns the unneeded funds to the lender is required to reapply later in the year to obtain subsequent disbursements that he or she does need. The extra paperwork and loan processing creates an unnecessary burden on the borrower, the school, the lender, and the guaranty agency. The proposed regulations would leave in place the provision that when a disbursement is returned because the student withdrew, the remaining disbursements are cancelled. However, under the proposed regulations, in the absence of information that the student is no longer enrolled, and at the request of the school, a lender may disburse subsequent disbursements after the first disbursement is returned to the lender.

Section 682.208 Due Diligence in Servicing a Loan

The proposed regulations would make changes to reflect the establishment of a Student Loan Ombudsman's office in the Department, as provided by section 141(f) of the 1998 Amendments. The Ombudsman's office would provide informal resolution of complaints received from Title IV loan borrowers.

The negotiators agreed that the FFEL Program regulations should require schools, lenders, and guaranty agencies to inform borrowers of the existence of the Department's Student Loan Ombudsman's office to resolve disputes borrowers have regarding their FFEL Program loans. The negotiators believed that a borrower should first try to resolve any dispute with a lender or loan servicer on the assumption that many of these disputes are simple misunderstandings. However, if the borrower informs the lender or servicer in writing that he or she believes the dispute has not been resolved, the lender or servicer would advise the borrower to request the guaranty agency to settle the dispute. The guaranty agency analyzes the information provided by the borrower and other parties and notifies the borrower of its decision. If the guaranty agency does not resolve the dispute, the agency's response must provide the borrower with information about the Department's Student Loan Ombudsman's office. The negotiators believed this process would resolve the vast majority of disputes.

In addition to inserting this requirement in Sec. 682.208, the negotiators also proposed adding a conforming requirement to Sec. 682.411 so that the lender due diligence regulations would also contain an Ombudsman notification provision. In addition, guaranty agencies would be required to inform defaulted borrowers of the availability of the Department's Student Loan Ombudsman's office. The negotiators believed this notice to a student loan defaulter would be most effective if it was part of the notification already required by Sec. 682.410(b)(5) before a guaranty agency reports the borrower's default to a credit bureau. Finally, although not part of the proposed regulations developed by this negotiating committee, another negotiating committee agreed to propose regulations requiring schools to provide information about the Department's Student Loan Ombudsman's office when providing exit counseling to borrowers.

Section 682.210 Deferment

Although the proposed regulations in this section do not implement changes made by the 1998 Amendments, the negotiators agreed to propose them as improvements to the existing FFEL Program regulations.

These regulations propose to exclude in-school deferments from the general requirement that a deferment may not be granted for a period beginning more than 6 months before the date the lender receives the request and the documentation required for the deferment. The negotiators believed that the process for obtaining documentation to support an in-school deferment is almost always beyond the student's ability to control. Moreover, many students mistakenly assume that the school notifies their lender that they are in-school. Taken together, these factors have resulted in misunderstandings and technical problems that have led to borrowers defaulting while they are enrolled in-school and eligible for an in-school deferment.

Section 682.211 Forbearance

Although the proposed regulations in this section do not implement changes made by the 1998 Amendments, the negotiators agreed to propose them as improvements to the existing FFEL Program regulations.

The proposed regulations would modify and incorporate into the regulations the Secretary's policy of permitting lenders and guaranty agencies to grant administrative forbearances to assist FFEL borrowers who are residents of areas where natural disasters have occurred. Under that policy, the Secretary notifies loan holders whenever the Federal Emergency Management Agency (FEMA) designates an area eligible for Federal assistance under FEMA's Individual Assistance Program. The Secretary strongly recommends that loan holders grant forbearances to borrowers who contact them and indicate that they have been adversely affected by a natural disaster and need temporary relief from their loan obligations. If the holder believes that the borrower has been harmed and needs assistance, the holder may grant a forbearance for up to 3-months based on the borrower's oral or written request for assistance, which must be documented in the holder's files. The holder does not need to obtain supporting documentation or a signed written agreement from the borrower to justify a forbearance for this initial 3-month period. However, a continuation of the forbearance past this 3-month period would require supporting documentation and a written agreement from the borrower.

The proposed regulations would modify that policy by allowing loan holders to determine if a natural disaster had occurred that affected the borrower's ability to make payments on the loan. If the holder made that determination, it could grant an administrative forbearance to the borrower for up to 3 months consistent with the Secretary's previously described policy. The determination of whether a borrower is covered by a natural disaster would be made by the loan holder, with no requirement that the disaster area be covered under FEMA's Individual Assistance Program. Because loan holders would decide whether a borrower is covered by a natural disaster, the Secretary would no longer need to notify loan holders about the numerous disaster areas designated by FEMA each year. In addition, the forbearance would not be limited only to residents of the disaster area, but could include, at the holder's discretion, borrowers who were adversely affected by the disaster even if they lived outside the disaster area. For example, if the county where the borrower resides suffers no actual damage from tornadoes that destroy the borrower's place of employment in an adjoining county, the forbearance would be permitted. Under the proposed regulations, the determination of whether the borrower was affected by a natural disaster would be made by the holder of the loan, and the Secretary would not challenge a holder's reasonable exercise of that judgment.

The proposed regulations would also allow a lender to grant an administrative forbearance to resolve a borrower's delinquency that existed at the beginning of a mandatory administrative forbearance period under Sec. 682.211(j)(2). These forbearances apply whenever the lender is notified by the Secretary that--

• Exceptional circumstances exist, such as a local or national emergency or military mobilization; or
• The geographic area in which the borrower or endorser resides has been designated as a disaster area by the President of the United States or Mexico, the Prime Minister of Canada, or a Governor of a State.

Section 682.215 Federal Stafford Loan Forgiveness Demonstration Program

The Federal Stafford Loan forgiveness demonstration program was established under section 428J of the HEA by the Higher Education Amendments of 1992. The loan forgiveness program was never implemented because funds were never appropriated for the program. With the enactment of the 1998 Amendments, the Federal Stafford Loan forgiveness demonstration program was replaced by a new section 428J titled ``Loan forgiveness for teachers.'' Consequently, the regulations currently in Sec. 682.215 for the Federal Stafford Loan forgiveness demonstration program are no longer needed and would be deleted.

Section 682.302 Payment of Special Allowance on FFEL Loans

The proposed regulations would implement the requirements of section 438(b)(2)(H) of the HEA, which modified the statutory formula for calculating the amount of special allowance payable on an FFEL Program loan. Previously, the general formula subtracted the applicable interest rate on the loan from the average of the 91-day Treasury bills auctioned during a quarter, and a special allowance factor of 3.1 percent was added to the result. That calculation produced an annualized special allowance rate, which was then divided by four to determine the special allowance paid to the lender for that quarter. The changes made by section 438(b)(2)(H) of the HEA reduced the special allowance factor from 3.1 percent to 2.8 percent, with a further reduction to 2.2 percent during the in-school, grace, and deferment periods. For example, under the new formula, if the 91-day Treasury bill average for a quarter was 5.4 percent and the applicable interest rate on a loan was 7.4 percent, the special allowance calculation for a loan in repayment and not in deferment would be:

(5.4 - 7.4) + 2.8 <divide> 4 = 0.2 percent

In addition to reflecting the previously described revisions, these proposed regulations also reflect the changes made to the HEA relating to the special allowance calculation for loans made or purchased with the proceeds of tax-exempt funds. More specifically, these proposed regulations specify which loans qualify for the minimum (or floor) special allowance rate and are subject to the 50 percent limitation on the maximum special allowance rate.

Section 682.305 Procedures for Payment of Interest Benefits and Special Allowance and Collection of Origination and Loan Fees

The proposed regulations would implement sections 438(c), 438(d), and 428(b)(1)(U)(iii)(I) of the HEA, requiring the Secretary to collect origination fees owed by a lender by offsetting the amount of interest and special allowance payments due the lender or by collecting the amount of origination fees directly from the lender.

Under the proposed regulations, if the full amount of origination and loan fees cannot be collected from the originating lender and the loan has been transferred to a subsequent holder, the Secretary may, following written notice, collect the fees from the subsequent holder. To ensure that originating lenders report origination and loan fees due the Secretary, the negotiators proposed that all participating lenders be required to submit a quarterly ED Form 799 (request for interest and special allowance), or comply with whatever successor process to the ED Form 799 may exist in the future. These proposed regulations would require lenders to report quarterly even if the lender is not owed, or does not wish to receive, interest benefits or special allowance payments from the Secretary.

Section 682.400 Agreements Between a Guaranty Agency and the Secretary

The proposed regulations would delete the reference to the payment of administrative cost allowances to guaranty agencies. Those allowances were eliminated by the 1998 Amendments.

Section 682.401 Basic Program Agreement

The proposed regulations would implement changes made by the 1998 Amendments to sections 422(c)(6)(B)(i) and 428(j)(3) of the HEA. The negotiators agreed to propose that guaranty agencies be required to receive and respond to written, electronic, and telephone inquiries.

A guaranty agency must ensure that it or an eligible lender as described in section 435(d)(1)(D) of the HEA serves as a lender-of-last-resort in the State in which the guaranty agency is the designated guaranty agency. The designated guaranty agency is the guaranty agency with which the Secretary has signed a Basic Program Agreement under Sec. 682.401 to serve the State. The guaranty agency or the lender-of-last-resort may arrange lender-of-last-resort loans to be made by another eligible lender. The proposed regulations specify which loans a lender-of-last-resort is required to make in order to satisfy its statutory obligation. In addition, the proposed regulations provide a lender-of-last-resort with authorization to expand its lender-of-last-resort program to borrowers other than those it is required to serve to meet its statutory obligation.

The proposed regulations describe the procedures that would be used by the Secretary to determine which guaranty agencies would receive Federal funds to be used to make lender-of-last-resort loans. A guaranty agency using Federal funds would be required to provide lender-of-last-resort subsidized and unsubsidized Federal Stafford loans and Federal PLUS loans to borrowers who are otherwise unable to obtain loans under the agency's lender-of-last-resort program. The funds would be advanced on terms and conditions agreed to by the Secretary and the agency if the Secretary determines that--

• Eligible borrowers in a State who qualify for subsidized Federal Stafford loans are seeking and are unable to obtain subsidized Federal Stafford loans;
• The guaranty agency designated for that State has the capability to provide lender-of-last-resort loans in a timely manner, either directly or indirectly using a third party, but cannot do so without Federal capital; and
• It would be cost effective to advance Federal funds to the agency.

The Secretary may provide Federal funds to another guaranty agency, other than the designated agency, to serve a State if the Secretary determines that the designated guaranty agency does not have the capability to provide lender-of-last-resort loans in a timely manner or that it would not be cost effective to provide Federal funds to the designated agency.

In the area of prohibited inducements, the proposed regulations prohibit a guaranty agency from mailing or otherwise distributing 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.

The negotiators extensively discussed the change made to section 428(b)(3) of the HEA. For many years, there has been a regulatory prohibition, based on section 428(b)(3) of the HEA, against a guaranty agency's offering, directly or indirectly, any premium, payment, or other inducement to an employee orstudent of a school, or an entity or individual affiliated with a school, to secure applicants for FFEL Program loans. The statutory prohibition was amended by the 1998 Amendments by adding an exception so that it would not be considered a prohibited inducement for a guaranty agency to provide assistance to schools comparable to the kinds of assistance provided by the Secretary. The Department took the view that the intent of the provision is to provide the exception to assistance comparable to the kinds of assistance provided by the Secretary to schools under the Federal Direct Loan Program. Some negotiators argued that the Secretary could provide assistance under one of the many programs administered by the Department that could also benefit Federal Direct Loan schools' administration of the program. After discussion, the negotiators agreed that it would not be a prohibited inducement for a guaranty agency to provide assistance to schools comparable to the kinds of assistance provided by the Secretary to schools under, or in furtherance of, the Federal Direct Loan Program.

Section 682.402 Death, Disability, Closed School, False Certification, and Bankruptcy Payments

Although the proposed regulations in this section do not implement changes made by the 1998 Amendments, the negotiators agreed to propose them as improvements to the existing FFEL Program regulations.

The proposed regulations would make it easier for some borrowers to obtain closed school discharges of their loan obligations. Current regulations require a borrower to file an application if the borrower wants a discharge of his or her loan obligation based on the school closure. Under the proposed regulations, the Secretary or a guaranty agency may discharge a borrower's FFEL Program loan, without an application, if the borrower's loan was made for the same program of study and time period at the same school as a loan for which the borrower has qualified for and received a closed school discharge under the Federal Perkins Loan Program or the Federal Direct Loan Program. In addition, the Secretary, or a guaranty agency with the Secretary's approval, may discharge a borrower's FFEL Program loan, without an application, if the borrower qualifies for a discharge based on information in the Secretary's or guaranty agency's possession that would satisfy the conditions for discharging the borrower's loan obligation.

The proposed regulations also permit a lender to suspend collection efforts against an endorser (or other party that is secondarily liable) on a loan if the borrower files a petition for relief in bankruptcy. Lenders are required by the Bankruptcy Code to immediately suspend any collection efforts outside the bankruptcy proceeding against the individual who has filed. Lenders have been required by the FFEL regulations to continue collection efforts against an endorser who has not filed for bankruptcy. The non-Federal negotiators believed that this situation creates complicated servicing issues for a lender or guaranty agency and creates confusion among participants. The proposed regulations would provide for more consistent treatment of borrowers and endorsers when the borrower files a bankruptcy petition.

Section 682.404 Federal Reinsurance Agreement

The Secretary proposes to modify Sec. 682.404 to reflect sections 422A, 422B, 428(c)(1), 428(c)(6), 428(c)(9)(A), 428(f), 428(l), 438(c)(2)(H)(ii), and 458 of the HEA, as added or modified by the 1998 Amendments.

These proposed regulations reflect the changes made by the 1998 Amendments to the reinsurance rates paid on a defaulted loan for which the first disbursement was made on or after October 1, 1998.

Section 682.404(g) describes the portion of borrower payments on defaulted loans that guaranty agencies are required to return to the Secretary. Specifically, the Secretary is entitled to a share of borrower payments on default claims paid using assets of the Federal Fund. The 1998 Amendments reduced the portion of collections on defaulted loans that a guaranty agency may retain and specified that the guaranty agency share must be deposited into the agency's Operating Fund. Under current regulations, guaranty agencies are authorized to retain a portion of borrower payments received on defaulted loans on which the Secretary has paid a reinsurance claim. Thus, if a borrower payment is received by a guaranty agency after the default claim was paid but before reinsurance is paid, the guaranty agency may not retain any portion of the payment. In addition to reflecting the reduced percentage a guaranty agency is authorized to retain, the Secretary is also proposing to permit guaranty agencies to retain that portion of collections on default claims paid using assets of the Federal Fund instead of default claims on which reinsurance has been paid. The Secretary believes this change would provide guaranty agencies with an incentive to promptly pursue collections on defaulted loans.

Section 682.404(k) of the proposed regulations addresses the default aversion fee. The default aversion fee is part of the new funding model established by the 1998 Amendments for guaranty agencies. The fee is designed to provide an incentive for guaranty agencies to provide effective default aversion efforts and lower default costs.

Section 428(l) of the HEA authorizes the payment of a default aversion fee to a guaranty agency if the agency is instrumental in averting a default by a borrower who becomes 60 days delinquent in repaying a loan. Section 428(l)(2) of the HEA permits a guaranty agency to transfer a default aversion fee from the Federal Fund to the agency's Operating Fund for any loan on which a claim for default has not been paid as a result of the loan being brought into current repayment status by the guaranty agency on or before the 360th day of delinquency. For purposes of a guaranty agency's earning the default aversion fee, section 428(l)(2)(C) of the HEA defines the term ``current repayment status'' as ``* * * the borrower is not delinquent in the repayment of any principal or interest on the loan.''

The negotiators agreed that a borrower who pays all past due amounts should be considered in current repayment status, but there was considerable debate concerning other conditions under which the borrower should be considered as in ``current repayment status.'' In particular, the issue of whether a borrower who was granted forbearance by the lender to resolve a delinquency should be considered ``current repayment status'' for purposes of earning the default aversion fee was extensively discussed. Some negotiators were concerned that if granting forbearance earned the guaranty agency the default aversion fee, without regard to the borrower's later default, guaranty agencies would have an economic incentive to encourage lenders to be less diligent in determining the appropriate use of forbearances. Thus, some negotiators objected that this practice could result in forbearances delaying defaults but not preventing them.

Guaranty agency representatives stated that they would not be motivated by a financial incentive to earn the maximum amount of income from default aversion fees. They maintained that the potential amount they would earn (one percent of the loan balances) would be less than their costs in providing default aversion assistance. A proposal to track loans brought into ``current repayment status'' through the granting of forbearance, such that the guaranty agency would earn the default aversion fee only on those that remained current for some period of time following the end of the forbearance period, was discussed extensively. Although the guaranty agency representatives were supportive of the concept, they expressed concern about the expense associated with making system modifications necessary to track individual loans.

After considerable discussion on this topic among the negotiators, those negotiators representing guaranty agencies proposed a compromise approach that resulted in a consensus on this issue. Under the proposed regulations, a guaranty agency could transfer its calculated net amount of default aversion fees from its Federal Fund to its Operating Fund in response to lender requests for default aversion assistance on delinquent loans. However, if a loan on which the agency has received the default aversion fee is subsequently paid as a default claim, the agency must rebate funds to the Federal Fund. The fees may be transferred from the Federal Fund to the Operating Fund no more frequently than monthly, may not be paid more than once on any loan, and must be equal to the net amount of--

• One percent of the unpaid principal and accrued interest on loans at the time the request for default aversion assistance is submitted by lenders to the agency during a given time period; minus
• One percent of the unpaid principal and accrued interest owed by borrowers on default claims paid by the agency during the same time period for which the fees are transferred.

Thus, if the guaranty agency is successful in assisting delinquent borrowers to avoid default, the default aversion fees are retained by the agency. However, if a delinquent borrower for whom the agency has received the default aversion fee subsequently defaults, the guaranty agency must return to the Federal Fund 1 percent of the outstanding principal and accrued interest owed by the borrower. Accordingly, if the borrower does not make any intervening payments on the loan, the agency would be required to return an amount to the Federal Fund for that borrower that is greater than the amount originally received from the Federal Fund. The returned amount would be increased by 1 percent of the interest that accrues from the date the lender submitted the default aversion request until the date the agency pays the default claim to the lender. The Secretary believes the return of this increased amount fairly compensates the Federal Fund for the loss of the funds for the time period they were held by the guaranty agency in its Operating Fund. The committee concluded that this gross basis calculation of the default aversion fee payments results in default aversion fee payments equivalent to the amount specified in section 428(l) of the HEA without requiring a loan-by-loan tracking. In addition, the negotiators agreed that this approach is consistent with the intent of the statute and creates positive incentives for guaranty agencies to aggressively pursue default reduction.

The proposed regulations would also permit a lender to submit a request for default aversion assistance during the 60th day through the 120th day of the borrower's delinquency. If a lender submits the request after the 120th day of delinquency, the guaranty agency must provide the default aversion assistance for which it may receive the default aversion fee.

Finally, the proposed regulations include requirements that govern who can be hired to collect loans on which default aversion assistance payments have been made. Other than the guaranty agency, which is statutorily authorized to perform both roles, the same party may not perform default aversion assistance on a loan and collect on that loan during a 3-year period following the date a default claim is paid. Because the compensation for collecting on a defaulted loan is usually much greater than that received for preventing default, this regulatory provision is intended to prevent corruption of the default aversion process.

Section 682.406 Conditions for Claim Payments From the Federal Fund and for Reinsurance Coverage

The proposed regulations reflect the changes made by the 1998 Amendments to section 428(c)(2) of the HEA. The negotiators agreed that a default claim should be paid only if diligent attempts were made by the lender and guaranty agency to locate the borrower through the use of effective commercial skip tracing techniques, including contact with the school the student attended. Further, as a condition for receiving a reinsurance payment, the guaranty agency must certify to the Secretary that those diligent skip-tracing efforts were made.

Section 682.409 Mandatory Assignment by Guaranty Agencies of Defaulted Loans to the Secretary

The proposed regulations reflect the changes made by the 1998 Amendments to section 428(c)(8) of the HEA to the standards for requiring mandatory assignment of defaulted loans by removing the transition to the Federal Direct Loan Program as one of the criteria.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

The proposed regulations would make a change to Sec. 682.410 to reflect the establishment of a Student Loan Ombudsman's office in the Department. The proposed changes to Sec. 682.410(b)(5) would add a requirement that a guaranty agency must inform the borrower that the Department's Student Loan Ombudsman's office is available as a dispute resolving office before the agency reports the borrower's default to a credit bureau.

Section 682.411 Lender Due Diligence in Collecting Guaranty Agency Loans

The proposed changes to this section would add a provision in Sec. 682.411(b)(3) requiring a lender to inform a delinquent borrower that the Department's Student Loan Ombudsman's office is available as a dispute resolving office. Under the proposed regulations, a lender's failure to inform a borrower about the availability of the Student Loan Ombudsman's office would not be considered a violation of the lender due diligence requirements in Sec. 682.411 that would cause the loan to lose insurance or reinsurance coverage.

The proposed regulations also implement the requirements of sections 428(c)(2) and 435(l) of the HEA, as modified by the 1998 Amendments. Prior to the enactment of the 1998 Amendments, section 435(l) of the HEA defined ``default'' in the FFEL Program as a delinquency that persisted for 180 days for loans scheduled to be repaid in monthly installments, and 240 days for loans scheduled to be repaid in less frequent installments. This definition was changed by the 1998 Amendments to 270 days and 330 days, respectively, for loans for which the first day of the 270/330-day delinquency period occurs on or after October 7, 1998. These proposed regulations would change the due diligence requirements for lenders to accommodate this new definition of default.

A lender must send a final demand letter to a delinquent borrower at least 31 days before filing a claim with the guaranty agency. When the definition of default was 180/240 days, the final demand letter was sent on or after the 151st/211th day of delinquency. Accordingly, these proposed regulations move the timing of the final demand letter to have it sent on or after the 241st day of delinquency, or the 301st day if the loan was scheduled to be repaid less frequently than monthly.

The negotiators also discussed the collection activities that should be required during the additional 90 days of delinquency prior to default. The proposed regulations preserve the current regulatory prohibition against any ``gap'' in collection efforts that exceed 45 days (or 60 days for loans being transferred from one lender or servicer to another). However, other than the timing of the final demand letter, the proposed regulations do not make any additional changes to Sec. 682.411 at this time (other than including notification of the Ombudsman, as discussed earlier).

The proposed regulations require a lender to request default aversion assistance not earlier than the 60th day and no later than the 120th day of delinquency. If a lender fails to request default aversion assistance between the 60th and 120th day of delinquency, and the lender later submits a claim on that loan, the lender would be subject to the interest penalty described in section I.C.3.b. of Appendix D to Part 682. A default aversion assistance request must be made before the 330th day of delinquency. If the lender fails to request default aversion assistance by the 330th day, the Secretary will not pay any accrued interest, interest benefits, and special allowance for the most recent 270 days prior to default.

The current due diligence requirements in Sec. 682.411 provide for a detailed set of requirements pertaining to the collection of delinquent loans by lenders. The Department and the FFEL community are interested in moving toward a performance-based model for due diligence. Thus, the Secretary provides notice that the Department will entertain proposals from FFEL participants to exercise the Secretary's authority to waive potential liabilities in conjunction with approved experiments with performance-based approaches to default prevention. The Secretary will evaluate proposals and may authorize the implementation of one or more experiments to test new performance-based approaches to default prevention. The Secretary encourages FFEL participants to consider proposals that create positive incentives for default prevention and that incorporate collection approaches that have been used successfully in the private sector.

Section 682.412 Consequences of the Failure of a Borrower or Student To Establish Eligibility

The proposed regulations make a conforming change to reflect a revised regulatory citation for the final demand letter required by Sec. 682.411(f).

Section 682.413 Remedial Actions

The proposed regulations would amend this section to reflect changes made to section 428(c)(9)(I) of the HEA by the 1998 Amendments. The HEA provides that the Secretary's decision to terminate a guaranty agency's participation in the FFEL Program after September 24, 1998, based on certain failures specified in the HEA, does not become final until the Secretary provides the agency with an opportunity for a hearing on the record. The HEA requires a hearing on the record only in those cases in which the proposed termination is based on the specific grounds included in section 428(c)(9) of the HEA. The Department's regulations have long identified other grounds on which a guaranty agency's participation could be terminated, and the Department could have applied the new statutory requirement to only the limited number of statutory terminations. The Secretary suggested, however, that the hearing on the record requirement apply to any proposed termination action against a guaranty agency, and the committee agreed to this expansion.

Section 682.414 Records, Reports, and Inspection Requirements for Guaranty Agency Programs

Although the proposed regulations in this section do not implement changes made by the 1998 Amendments, the negotiators agreed to propose them as improvements to the existing FFEL Program regulations.

The Secretary published final regulations in the Federal Register (61 FR 60490, November 27, 1996) reducing the 5-year record retention requirement for schools to 3 years as a result of changes made to the General Education Practices Act (GEPA) by the Improving America's Schools Act of 1994 (Pub. L. 103-382). At that time, the Secretary received requests that the 5-year record retention requirement for lenders be similarly reduced. The Secretary declined to do so and noted that the GEPA changes did not apply to lenders in the FFEL Program.

However, the Secretary made a commitment to consider a future reduction in lender record retention requirements in the interest of reducing lender burden. The proposed regulations reduce the length of time a lender must retain required loan records for loans paid in full by the borrower from 5 years to 3 years from the date the loan is repaid in full by the borrower. For all other loans for which the lender receives payment in full from any other source (for example, a claim payment or a consolidation payoff), or for those loans that are not paid in full, the 5-year retention period will continue to be in effect, except that in particular cases, the Secretary or the guaranty agency may require the retention of records beyond the 3-year or 5-year minimum periods. The Secretary notes that a guaranty agency could serve as a lender's agent for the purpose of maintaining the lender's records for the required time periods. The Secretary believes that the limited exception to the 5-year rule included in these proposed regulations would not interfere with appropriate program administration.

Section 682.417 Determination of Federal Fund or Assets To Be Returned

The changes in these proposed regulations are needed to conform this section to the new financial structure for guaranty agencies under section 422A of the HEA, which was added to the HEA by the 1998 Amendments. The Secretary proposes to change all references to ``reserve funds'' (or ``reserve fund'') in Sec. 682.417 to ``Federal Fund'' to reflect the new financing model established by the 1998 Amendments. As this is done, minor grammatical changes will be made to the current regulations to accommodate the switch from the plural form of ``reserve funds'' to the singular form of ``Federal Fund.''

Section 682.418 Prohibited Uses of the Assets of the Operating Fund During Periods in Which the Operating Fund Contains Transferred Funds Owed to the Federal Fund

The proposed regulations would implement the requirements of section 422B(e)(3)(B) of the HEA, which authorizes the Secretary to regulate the uses or expenditures of a guaranty agency's Operating Fund during any period in which funds transferred from the Federal Fund are in the Operating Fund. The negotiators agreed that the restrictions governing the use of the reserve fund in Sec. 682.418 would be acceptable restrictions for the use of the Operating Fund during these periods. Changing the references to ``reserve fund'' in the existing Sec. 682.418 to ``Operating Fund'' required no new regulations.

Section 682.419 Guaranty Agency Federal Fund

The proposed regulations reflect section 422A of the HEA, as added by the 1998 Amendments, which requires each guaranty agency to establish a Federal Student Loan Reserve Fund (the ``Federal Fund'') within 60 days of enactment of the 1998 Amendments.

On January 27, 1999, the Secretary issued a ``Dear Colleague Letter'' (99-G-316) that provided the Secretary's initial guidance to the guaranty agencies concerning the implementation of the new guaranty agency funding model. Specifically, among other issues, the Secretary stated ``* * * all of the funds, securities, and other liquid assets in the agency's reserve fund as of September 30, 1998, as described in 34 CFR 682.410(a), must be deposited into the Federal Fund when it is established.'' The committee agreed that the date to be used for determining the amount of Federal reserve fund assets to be deposited into the newly established Federal Fund should not be included in these proposed regulations since that date was relevant at only one point in time.

In addition to other receipts, as specified in the Department's regulations, the HEA requires a guaranty agency to deposit revenue from the following sources into the Federal Fund:

• Default reinsurance payments received from the Secretary.
• A percentage of collections equal to the complement of the reinsurance percentage paid on a defaulted loan.
• Insurance premiums collected from borrowers pursuant to Sec. 428(b)(1)(H) and Sec. 428H(h) of the HEA.
• All amounts received from the Secretary as payment for supplemental preclaims activity performed on or before September 30, 1998.
• 70 percent of amounts received on or after October 1, 1998, as payment for administrative cost allowances for loans upon which insurance was issued on or before September 30, 1998.

The negotiators also agreed that, in addition to the deposits specifically listed in the HEA, the proposed regulations should also require the following other amounts to be deposited into the Federal Fund:

• Payments made to the agency by the Secretary on death, disability, bankruptcy, and loan cancellation and discharge claims.
• All funds received by the guaranty agency from any source (including collections from defaulted borrowers) on FFEL Program loans on which the Secretary has paid a claim, minus the portion the agency is authorized to deposit in its Operating Fund.
• Investment earnings on the Federal Fund assets.
• Revenue derived from the Federal portion of a nonliquid asset, in accordance with Sec. 682.420.
• Other funds received by the guaranty agency from any source that are specifically designated for deposit in the Federal Fund.

As written, section 422A(d) of the HEA would permit the assets of the Federal Fund to be used only to pay lender claims and to transfer earned default aversion fees to the agency's Operating Fund. However, other provisions of the HEA authorize or require that the Federal Fund be used for other purposes. These proposed regulations recognize that the Federal Fund has to be used for other purposes, including--

• Transferring account maintenance fees to the agency's Operating Fund, if directed by the Secretary;
• Refunding payments made by or on behalf of a borrower on a loan that has been discharged due to death, disability, bankruptcy, closed school, false certification, or unpaid refund, in accordance with Sec. 682.402;
• Paying the Secretary's share of collections on defaulted loans, in accordance with Sec. 682.404(g);
• Transferring funds to the agency's Operating Fund, pursuant to Sec. 682.421;
• Refunding insurance premiums related to loans cancelled or refunded, in whole or in part;
• Returning to the Secretary portions of the Federal Fund required to be returned by law; and
• Any other purpose authorized by the Secretary.

The Federal Fund (and amounts in the Operating Fund that are transferred from the Federal Fund) must be invested in securities issued or guaranteed by the United States or a State or, with the approval of the Secretary, in other similarly low-risk securities selected by the guaranty agency. Guaranty agencies that have invested the Federal reserve funds in ``pooled'' investments as part of a State investment program may continue using that investment vehicle for the new Federal Fund without requesting specific approval from the Secretary. Earnings on the investment of the Federal Fund are the sole property of the Federal Government.

Guaranty agencies serve as fiduciaries in safeguarding Federal assets and funds entrusted to their care. Thus, guaranty agencies may not use assets of the Federal Fund for any purpose not authorized by the HEA or the Secretary. Consistent with this obligation, the proposed regulations provide that 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.

The HEA requires a guaranty agency to maintain a minimum Federal Fund level equal to at least 0.25 percent. For the purpose of calculating this ratio, these proposed regulations provide that the numerator is the total assets of the Federal Fund including the amount of funds transferred from the Federal Fund that are in the Operating Fund, using an accrual basis of accounting. The denominator in the above ratio is the original principal amount of loans outstanding and guaranteed by the agency.

Section 682.420 Federal Nonliquid Assets

The proposed regulations reflect section 422A of the HEA, as added by the 1998 Amendments, that restates the longstanding principle that the Federal Fund, and nonliquid assets (such as buildings or equipment) developed or purchased by an agency in whole or in part with Federal reserve funds, regardless of who holds or controls the Federal reserve funds or assets, are the property of the United States. Under the 1998 Amendments, the ownership of an asset is prorated based on the percentage of the asset developed or purchased with Federal funds.

Section 422A of the HEA, on its face, appears to limit the use of the Federal portion of nonliquid assets to the payment of claims to lenders and the transfer of default aversion fees to the Operating Fund. Such a literal reading of the statute would prohibit an agency from using the Federal portion of nonliquid assets (such as a computer or building) for any other purpose and would significantly burden the guaranty agency's performance of its responsibilities as a guaranty agency in the FFEL Program. The HEA authorizes the Secretary to restrict or regulate the use of the Federal portion of nonliquid assets to the extent necessary to reasonably protect the Federal share of the value of those assets. The Federal regulations in effect prior to the 1998 Amendments authorized guaranty agencies to use the Federal portion of nonliquid assets for other allowable purposes, and the negotiators, including the Secretary, agreed to propose a continuation of that policy. In addition, the negotiators agreed to propose that, if a guaranty agency uses the Federal portion of a nonliquid asset (other than an intangible or intellectual property asset or a tangible asset of nominal value) in the performance of its guaranty activities, the agency must promptly deposit into the Federal Fund an amount representing the net fair value of the use of the asset. The net fair value is the amount that would be paid to use a similar non-Federal asset, minus amounts paid by the agency for expenses that normally would be paid by the owner of the asset.

Guaranty agencies must exercise the level of care required of a fiduciary charged with protecting, investing, and administering the property of others in maintaining and using the Federal portion of nonliquid assets under their control. Accordingly, if the guaranty agency converts the Federal portion of a nonliquid asset, in whole or in part, to a use unrelated to its guaranty activities, the agency promptly must deposit into the Federal Fund a fair percentage of the fair market value or, in the case of a temporary conversion, the net fair value of the portion of the asset employed for the unrelated use.

Section 682.421 Funds Transferred From the Federal Fund to the Operating Fund by a Guaranty Agency

The proposed regulations reflect section 422A(f) of the HEA, as added by the 1998 Amendments, permitting a guaranty agency to transfer a limited amount of funds from the Federal Fund for deposit into the agency's Operating Fund. Upon receiving the Secretary's approval, an agency may transfer from the Federal Fund an amount up to the equivalent of 180 days of cash expenses (not including claim payments) for normal operating expenses for deposit 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 Sec. 682.410 as of September 30, 1998. During any period that an agency's Operating Fund contains funds transferred from its Federal Fund, the Operating Fund may be used only as permitted by Sec. 682.410(a)(2) and Sec. 682.418.

The negotiators agreed on the application procedures that guaranty agencies are to use in requesting approval to transfer funds from their Federal Funds to their Operating Funds. Specifically, a guaranty agency must provide the Secretary with an application containing the following:

• 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.
• 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.
• A certification by the agency that, during the period the transferred funds are outstanding, sufficient funds will remain in the Federal Fund to pay lender claims.
• A certification by the agency that it will be able to meet the reserve recall requirements of section 422 of the HEA, and the statutory minimum reserve level of 0.25 percent, as mandated by section 428(c)(9) of the HEA.
• A certification by the agency that no legal prohibition exists that would prevent the agency from obtaining or repaying the transferred funds.

Section 422A(f)(2) of the HEA also authorizes the Secretary to permit a limited number of guaranty agencies, in certain limited cases, to transfer an amount greater than 180 days of operating expenses (not including claim payments). The Secretary may authorize an agency to exceed the 180-day limit by the amount of income earned on the investment of the Federal Fund during the 3-year period following October 7, 1998 (the date of enactment of the 1998 Amendments.) During any period that an agency's Operating Fund contains funds transferred from its Federal Fund, the Operating Fund may be used only as permitted by Sec. 682.410(a)(2) and Sec. 682.418.

To obtain approval to transfer the investment income, an agency must have transferred, and have outstanding, the maximum amount it is otherwise eligible to transfer. In addition to the previously listed application items required for transferring principal amounts from the Federal Fund, an agency seeking to transfer investment income must demonstrate to the Secretary that the cash flow in the Operating Fund will be negative without the transfer of the investment earnings of the Federal Fund and that the transfer of those earnings will substantially improve the financial circumstances of the guaranty agency.

If the Secretary has neither approved nor disapproved a guaranty agency's requested transfer of principal or the investment earnings of the Federal Fund within 30 days after receiving the previously described application items, the agency may proceed with the transfer.

The Secretary recognizes that guaranty agencies may have transferred funds from the Federal Fund to the Operating Fund as a working capital reserve before receiving the Department's January 27, 1999 ``Dear Colleague Letter'' (99-G-316) guidance concerning the implementation of the new guaranty agency funding model. A guaranty agency that transferred funds (that are still outstanding) without obtaining the Secretary's approval prior to receiving the Department's guidance will be held harmless, subject to the agency providing the Secretary with the previously described application material. Agencies that transferred Federal Fund assets into their Operating Funds are requested to provide the required application material within 60 days following publication of these proposed regulations.

Section 682.422 Guaranty Agency Repayment of Funds Transferred From the Federal Fund

The proposed regulations would implement the requirements of section 422A(f) of the HEA, as added by the 1998 Amendments.

Except in regard to the repayment of investment earnings transferred from the Federal Fund to the Operating Fund, the HEA requires an agency to begin repayment of principal transferred from the Federal Fund not later than the start of the fourth year after the establishment of the Operating Fund. All amounts transferred must be repaid in full not later than 5 years after the date the Operating Fund is established.

Generally, a guaranty agency must repay investment earnings transferred under section 422A(f)(2) of the HEA within 2 years. The HEA authorizes the Secretary to extend the period for repayment of investment earnings from 2 years to 5 years if the Secretary determines that the cash flow of the agency's Operating Fund will be negative if the transferred investment earnings were required to be repaid earlier or the repayment of the earnings would substantially diminish the financial circumstances of the agency. To receive an extension, the agency must demonstrate that it will be able to repay all transferred funds by the end of the eighth year following the date of establishment of the Operating Fund and that the agency will be financially sound upon the completion of repayment. Repayment of amounts transferred from the Federal Fund pursuant to section 422A(f)(2) of the HEA that are repaid during the sixth, seventh, and eighth years following the establishment of the Operating Fund must include the amount transferred, plus any income earned after the fifth year from the investment of the transferred amount. In determining the amount of income earned on the transferred amount, the negotiators agreed that the proposed regulations should provide that the Secretary will use the average investment income earned on all the agency's investments, including investments that are not part of the agency's Operating Fund.

In accordance with section 422A(f) of the HEA, if an agency fails to make a scheduled repayment to the Federal Fund, the agency may not receive any other Federal funds until the agency becomes current in making all scheduled payments, unless the Secretary waives this restriction.

Section 682.423 Guaranty Agency Operating Fund

The proposed regulations would implement section 422B of the HEA, as added by the 1998 Amendments, which requires each guaranty agency to establish a fund designated as the ``Operating Fund'' within 60 days after the enactment of the 1998 Amendments. The Operating Fund must be in an account that is separate from the Federal Fund. The HEA requires an agency to deposit into the Operating Fund:

• Loan processing and issuance fees.
• 30 percent of administrative cost allowances received after October 1, 1998, for loans upon which insurance was issued before October 1, 1998.
• Account maintenance fees.
• Default aversion fees.
• Amounts remaining from collections of defaulted loans after payment of the Secretary's equitable share and depositing the complement of the reinsurance percentage into the Federal Fund.
• Amounts transferred from the Federal Fund.
• Other receipts as specified in the Secretary's regulations.

Except for funds an agency transfers from the Federal Fund under section 422A(f) of the HEA, the Operating Fund is considered the property of the guaranty agency. The HEA authorizes the Secretary to regulate the uses or expenditure of the Operating Fund during any period in which a guaranty agency owes money to the Federal Fund. These proposed regulations would implement these requirements by providing that Sec. 682.410(a)(2) and Sec. 682.418 apply to the use of the Operating Fund during periods in which transfers from the Federal Fund are outstanding.

Section 422B(d)(1) of the HEA specifies that funds in the Operating Fund must be used for certain activities. Those activities are application processing, loan disbursement, enrollment and repayment status management, default aversion, collection activities, school and lender training, financial aid awareness and outreach activities, compliance monitoring, and other student financial aid related activities, as selected by the guaranty agency. In addition to those specified activities, the negotiators agreed that the Operating Fund should also be permitted to be used to pay for other ``guaranty agency-related activities.'' Some of the negotiators, however, expressed concern that ``other student aid-related activities, as selected by the guaranty agency'' was too ambiguous and proposed that more specificity be included in the proposed regulations to more narrowly focus the use of the funds in the Operating Fund for this purpose. The negotiators ultimately agreed to include a requirement that the financial aid-related activities must be for the benefit of students. The Secretary will gather data concerning the use of funds in agencies' Operating Funds for financial aid-related activities that benefit students and will make the data available to the public.

Section 682.800 Prohibition Against Discrimination as a Condition for Receiving Special Allowance Payments

The 1998 Amendments repealed the requirements of the ``Plan for doing business'' for authorities using tax-exempt financing, except for the non-discrimination provisions. In addition, the reference to ``handicapped status'' in the nondiscrimination factors listed in section 438(e) of the HEA was changed to ``disability status.''

Appendix D--Policy for Waiving the Secretary's Right To Recover or Refuse To Pay Interest Benefits, Special Allowance, and Reinsurance on Stafford, PLUS, Supplemental Loans for Students, and Consolidation Program Loans Involving Lenders' Violations of Federal Regulations Pertaining to Due Diligence in Collection or Timely Filing of Claims [Bulletin 88-G-138]

The proposed regulations would revise Appendix D to incorporate the new default definition (270 days of delinquency or 330 days for loans paid less frequently than monthly).

Executive Order 12866

1. Potential Costs and Benefits

Under Executive Order 12866, we have assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are those resulting from statutory requirements and those we have determined as necessary for administering this program effectively and efficiently. Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and explain burdens specifically associated with information collection requirements. See the heading Paperwork Reduction Act of 1995.

In assessing the potential costs and benefits--both quantitative and qualitative--of this regulatory action, we have determined that the benefits would justify the costs.

We have also determined that this regulatory action would not unduly interfere with State, local, and tribal governments in the exercise of their governmental functions.

We note that, as these proposed regulations were subject to negotiated rulemaking, the costs and benefits of the various requirements were discussed thoroughly by negotiators. The resultant consensus reached on a particular requirement generally reflected agreement on the best possible approach to that requirement in terms of cost and benefit.Summary of Potential Costs and Benefits

The following is an analysis of the costs and benefits of the most significant provisions of the proposed regulations, all of which reflect statutory changes included in the 1998 Amendments. There are additional proposed changes, some of which do not result from the 1998 Amendments, intended to further improve the administration of the FFEL Program, which are discussed elsewhere in this preamble under the heading Proposed Regulatory Changes. The Department does not consider there to be significant costs associated with those provisions. Payment of Special Allowance on FFEL Loans

Section 682.302 incorporates the statutory modification of the formula for calculating the amount of special allowance payable on FFEL Program loans. Loan holders in the FFEL Program may receive an interest subsidy, called special allowance, from the Government to ensure a guaranteed rate of return on their loans.

Prior to the passage of the 1998 Amendments, the special allowance formula for new Federal Stafford loans (subsidized or unsubsidized) was to be based on a security of comparable maturity (the 10-20 year bond interest rate) plus 1 percent. As such, the Government would have paid loan holders a special allowance if the 10-20 year bond interest rate plus 1 percent for in-school, grace, deferment, and repayment periods was higher than the interest rates charged to borrowers (which are capped at 8.25 percent).

Under the proposed regulations, for new Federal Stafford loans, the Government would pay loan holders a special allowance if the 91-day Treasury-bill (T-bill) interest rate for a given quarter, plus 2.8 percent (or 2.2 percent during in-school, grace, and deferment periods) is higher than the current interest rates charged to borrowers (with borrower interest rates capped at 8.25 percent).

The 1998 Amendments also changed the basis for calculating borrower interest rates on new Federal Stafford loans from a security of comparable maturity plus 1 percent for both in-school and repayment periods to the 91-day T bill interest rate plus 1.7 percent for in-school, grace, and deferment periods, and the 91-day T-bill interest rate plus 2.3 percent for repayment. When the 1998 Amendments was enacted, the 91-day T-bill interest rate plus 2.3 percent was equal to the 10-20 year bond interest rate plus 1 percent. As a result, this change had no financial impact for loans in repayment.

The 1998 Amendments included, in addition to the traditional special allowance payments, a loan-holder special interest subsidy of 0.50 percent above the borrower interest rates at all times. This new subsidy would provide loan holders $183 million for loans during in-school, grace, and deferment status, and $407 million for loans in repayment, for a total benefit to loan holders and a cost to the Federal Government of $590 million for loans originated in FY 2000.Federal Reinsurance Agreement

Section 682.404 incorporates several changes, discussed in detail elsewhere in this preamble under the heading Proposed Regulatory Changes, associated with the restructuring of guaranty agencies under the 1998 Amendments. The statute moves toward a more performance-based system with the establishment of a new funding and operating structure for guaranty agencies.

The changes incorporated in Sec. 682.404 that have costs and benefits for the Federal Government and for guaranty agencies are outlined in the following discussion. For comparison purposes, the amounts shown (except where noted) are for the life of loans originated in FY 2000, as determined by the Credit Reform Act of 1990.

• The default reinsurance payment--the amount guaranty agencies are reimbursed for claim payments to loan holders on defaulted loans made on or after October 1, 1998--was reduced from 98 percent to 95 percent.
• The default collection retention percentage--the percentage guaranty agencies may retain on defaulted loan collections--was reduced from 27 percent to 24 percent, until October 1, 2003 when the rate is further reduced to 23 percent.
• New fees were created that replace the Administrative Cost Allowance. The new loan processing and issuance fee is 0.65 percent of the total principal amount of the loans on which a guaranty agency issued insurance in a given fiscal year. Beginning October 1, 2003 the percentage is reduced to 0.40 percent. The account maintenance 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.

Reducing guaranty agency default reinsurance and default retention would decrease guaranty agency revenues by $111 million and $68 million, respectively, for loans originated in FY 2000. Guaranty agency revenue for loans originated in FY 2000 would increase by $154 million for the loan processing and issuance fee and $213 million for the account maintenance fee. (The account maintenance fee is paid on all outstanding loans; for FY 2000, guaranty agencies are expected to receive $212 million in cash for this fee.) The net benefit to guaranty agencies, and the net cost to the Federal Government, would be $188 million for loans originated in FY 2000. These revenues and costs are a direct result of changes made to the HEA by the 1998 Amendments, and have been implemented prior to the development of these proposed regulations.

[In millions of dollars]

The 1998 Amendments also made a number of changes to the qualifications and procedures for certain transfers between the Federal Fund and the Operating Fund, which will not have an effect on the overall assets managed by the guaranty agencies.

2. Clarity of the Regulations

Executive Order 12866 and the President's Memorandum of June 1, 1998 on ``Plain Language in Government Writing'' require each agency to write regulations that are easy to understand.

The Secretary invites comments on how to make these proposed regulations easier to understand, including answers to questions such as the following:

• Are the requirements in the proposed regulations stated clearly?
• Do the proposed regulations contain technical terms or other wording that interferes with their clarity?
• Does the format of the proposed regulations (groupings and order of sections, use of headings, paragraphing, etc.) aid or reduce their clarity?
• Would the proposed regulations be easier to understand if we divided them into more (but shorter) sections? (A ``section'' is preceded by the symbol ``Sec. '' and a numbered heading; for example, Sec. 682.205 Disclosure requirements for lenders.)
• Could the description of the proposed regulations in the SUPPLEMENTARY INFORMATION section of this preamble be more helpful in making the proposed regulations easier to understand? If so, how?
• What else could we do to make the proposed regulations easier to understand?

Send any comments that concern how the Department could make these proposed regulations easier to understand to the person listed in the ADDRESSES section of the preamble.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities. Entities affected by these proposed regulations are guaranty agencies and lenders that participate in the Title IV, HEA programs. The 36 guaranty agencies are State and private nonprofit entities that act as agents of the Federal Government and are not considered small entities for this purpose. Nearly all of the roughly 4,800 participating FFEL loan holders would be defined as small entities under U.S. Small Business Administration (SBA) guidelines. (Student loans are originated by lenders and are often sold in packages to larger secondary market participants.) Small lenders originate only 16 percent of new loans. The economic impact for loans originated in FY 2000 would be $30 million or approximately $6,300 per average lender.

The Secretary invites comments on this determination, and welcomes proposals on any significant alternatives that would satisfy the same legal and policy objectives of these proposals while minimizing the economic impact on small entities.

Paperwork Reduction Act of 1995

Sections 682.305, 682.402, 682.404, 682.414, and 682.421 contain information collection requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted a copy of these sections to the Office of Management and Budget (OMB) for its review.

Collection of Information: Federal Family Education Loan Program. Documentation and notification requirements.

Guaranty agencies receive payments from the Secretary and others for exclusive use in the FFEL Program. With respect to a guaranty agency's Federal Fund, the accumulated surplus of those payments over permissible expenditures is Federal property to be returned to the Secretary upon the guaranty agency's termination or under certain other circumstances. The same is true with respect to the guaranty agency's Operating Fund if the Operating Fund contains Federal money. The Secretary needs and uses the information to determine whether the guaranty agencies comply with the requirements for safeguarding this property and the limitations on it.

Collection of Information: Requirement for lenders to submit ED Form 799 (request for interest and special allowance).

These proposed regulations would affect all FFEL lenders who owe origination and loan fees to the Secretary. The 1998 Amendments requires the Secretary to collect origination and loan fees owed by a lender by offsetting the amount of interest and special allowance payments due the lender or by collecting the amount of fees directly from the lender. These proposed regulations would require a lender that owes fees to the Secretary to submit a quarterly ED Form 799 (or comply with whatever successor process to the ED Form 799 may exist in the future) even if the lender is not owed, or does not wish to receive, interest benefits or special allowance payments from the Secretary. The Department already estimates the amount of hours a lender needs each year to prepare and submit ED Form 799s under currently approved OMB inventory control number 1840-0034. Under existing regulations, a lender is required to submit an ED Form 799 only if it wants to receive interest and special allowance payments from the Federal Government. The Secretary will ask OMB to adjust the estimate of reporting hours on OMB inventory control number 1840-0034 to reflect that the proposed regulations would change the lender's option to submit an ED Form 799 to a requirement to submit the form (or comply with whatever successor process to the ED Form 799 may exist in the future).

Collection of Information: Closed school discharge of a borrower's loan obligation without an application form.

These proposed regulations would affect the potential loan discharge for FFEL borrowers who have received a discharge of their Federal Perkins Loan or their Federal Direct Loan, or who the Secretary or the guaranty agency, with the Secretary's permission, determines qualify for a discharge based on information in the Secretary or guaranty agency's possession. These FFEL borrowers would not need to submit a closed school loan discharge application to receive a discharge. The total burden hour reduction (based on approximately 30 minutes per application) is not expected to be substantial because of the small number of borrowers who would fall within these criteria.

Collection of Information: Annual notification to schools by guaranty agencies that schools can request an automatic notification of default aversion assistance requests.

The proposed regulations require a guaranty agency to accept a blanket request from a 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 notify schools annually of the option to make this blanket request. Currently, there are 5,899 schools in the FFEL Program, and many of them participate with more than one guaranty agency. Although the number of schools participating with multiple guaranty agencies is not known, the collective burden for the agencies should be minimal. It probably should not take a guaranty agency more than an average of 6 minutes to notify each school.

Collection of Information: Submissions of default aversion assistance requests by lenders and performance of default aversion assistance activities by guaranty agencies.

Under these proposed regulations, default aversion assistance essentially replaces the former preclaims and supplemental preclaims assistance process. The renaming of this process, whereby a guaranty agency assists the lender in attempting to prevent a default by a borrower who is at least 60 days delinquent, should not result in a change to the current burden hour estimate associated with the former process of requesting and providing such assistance.

Collection of Information: Reduction in the length of time a lender must retain loan records.

These proposed regulations would affect all FFEL lenders by reducing the length of time a lender must retain required loan records for loans paid in full by the borrower from 5 years to 3 years from the date the loan is repaid in full by the borrower. For all other loans for which the lender receives payment in full from any other source (for example, a claim payment or a consolidation payoff), or for those loans that are not paid in full, the 5-year retention period will continue to be in effect, except that in particular cases, the Secretary or the guaranty agency may require the retention of records beyond the 3-year or 5-year minimum periods. A guaranty agency could serve as a lender's agent for the purpose of maintaining the lender's records for the required time periods.

The Department already estimates the financial cost and amount of hours a lender needs each year to maintain loan records under currently approved OMB inventory control number 1840-0538. The estimate of lender burden hours required to maintain loan records will not be shown in these proposed regulations because that estimate is not affected by the proposed reduction in the length of the minimum record retention period. The Secretary will ask OMB to adjust the financial cost estimate on OMB inventory control number 1840-0538 to reflect the reduction in the length of the minimum record retention period.

Collection of Information: Guaranty agency option to transfer funds from the Federal Fund into the agency's Operating Fund.

A guaranty agency that wants to transfer money from the Federal Fund to its Operating Fund must provide the Secretary with the information and certifications specified in these proposed regulations. There are 36 guaranty agencies. Some may decline the opportunity to transfer funds, while others may choose to do so more than once. The amount of time required for an agency to assemble its request to the Secretary is not known at this time, but it should not be substantial because the required information and certifications either should already be known by the agency or should be easily collected.

If you want to comment on the information collection requirements, please send your comments to the Office of Information and Regulatory Affairs, OMB, room 10235, New Executive Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. Department of Education. You may also send a copy of these comments to the Department representative named in the ADDRESSES section of this preamble.

We consider your comments on these proposed collections of information in--

• Deciding whether the proposed collections are necessary for the proper performance of our functions, including whether the information will have practical use;
• Evaluating the accuracy of our estimate of the burden of the proposed collections, including the validity of our methodology and assumptions;
• Enhancing the quality, usefulness, and clarity of the information we collect; and
• Minimizing the burden on those who must respond. This includes exploring the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses.

OMB is required to make a decision concerning the collections of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. Therefore, to ensure that OMB gives your comments full consideration, it is important that OMB receives the comments within 30 days of publication. This does not affect the deadline for your comments to us on the proposed regulations.

Intergovernmental Review

The FFEL Program is not subject to Executive Order 12372 and the regulations in 34 CFR part 79.

Assessment of Educational Impact

The Secretary particularly requests comments on whether these proposed regulations would require transmission of information that any other agency or authority of the United States gathers or makes available.

Electronic Access to This Document

You may view this document in text or Adobe Portable Document Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm

http://ifap.ed.gov/csb__html/fedlreg.htm

http://www.ed.gov/legislation/HEA/rulemaking/

To use the PDF, you must have the Adobe Acrobat Reader Program with Search, which is available free at the first of the previous sites. If you have questions about using the PDF, call the U.S. Government Printing Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC, area at (202) 512-1530.

Note: The official version of this document is the document published in the Federal Register. Free Internet access to the official edition of the Federal Register and the Code of Federal Regulations is available on GPO Access at:

http://www.access.gpo.gov/nara/index.html

(Catalog of Federal Domestic Assistance Number 84.032 Federal Family Education Loan Program)

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities, Education, Loan programs--education, Reporting and recordkeeping requirements, Student aid, Vocational education.

Dated: July 12, 1999.Richard W. Riley,

Secretary of Education.

For the reasons discussed in the preamble, the Secretary proposes to amend part 682 of Title 34 of the Code of Federal Regulations as follows:

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.

2. Section 682.205 is amended by:

A. Revising paragraphs (a)(1) and (a)(2)(i).

B. Redesignating paragraphs (a)(2)(ii) through (a)(2)(xvii) as paragraphs (a)(2)(v) through (a)(2)(xx), respectively.

C. Adding new paragraphs (a)(2)(ii) through (a)(2)(iv).

D. Adding a new paragraph (a)(3).

E. Revising paragraphs (b), (c)(1), (c)(2)(i), (d), and (e).

F. Adding new paragraphs (f), (g), and (h).

Sec. 682.205 Disclosure requirements for lenders.

(a) * * *

(1) A lender must disclose the information described in paragraph (a)(2) of this section to a borrower, in simple and understandable terms, before or at the time of the first disbursement on a Federal Stafford or Federal PLUS loan. The information given to the borrower must prominently and clearly display, in bold type, a clear and concise statement that the borrower is receiving a loan that must be repaid.

(2) * * *

(i) The lender's name;

(ii) A toll-free telephone number accessible from within the United States that the borrower can use to obtain additional loan information;

(iii) The address to which correspondence with the lender and payments should be sent;

(iv) Notice that the lender may sell or transfer the loan to another party and, if it does, that the address and identity of the party to which correspondence and payments should be sent may change;* * * * *

(3) With the exception of paragraphs (a)(2)(i) through (a)(2)(iii), (a)(2)(v) through (a)(2)(vii), and (a)(2)(xx) of this section, the promissory note approved by the Secretary satisfies these disclosure requirements.

(b) Separate statement of borrower rights and responsibilities. In addition to the disclosures required by paragraph (a) of this section, the lender must provide the borrower with a separate written statement, using simple and understandable terms, at or prior to the time of the first disbursement, that summarizes the rights and responsibilities of the borrower with respect to the loan. The statement must also warn the borrower about the consequences described in paragraph (a)(2)(xvi) of this section if the borrower defaults on the loan. The Borrower's Rights and Responsibilities statement approved by the Secretary satisfies this requirement.

(c) * * *

(1) The lender must disclose the information described in paragraph (c)(2) of this section, in simple andunderstandable terms, in a statement provided to the borrower at or prior to the beginning of the repayment period. In the case of a Federal Stafford or Federal SLS loan, the disclosures required by this paragraph must be made not less than 30 days nor more than 240 days before the first payment on the loan is due from the borrower. If the borrower enters the repayment period without the lender's knowledge, the lender must provide the required disclosures to the borrower immediately upon discovering that the borrower has entered the repayment period.

(2) * * *

(i) The lender's name, a toll free telephone number accessible from within the United States that the borrower can use to obtain additional loan information, and the address to which correspondence with the lender and payments should be sent;* * * * *

(d) Exception to disclosure requirement. In the case of a Federal PLUS loan, the lender is not required to provide the information in paragraph (c)(2)(viii) of this section if the lender, in lieu of that disclosure, provides the borrower with sample projections of the monthly repayment amounts assuming different levels of borrowing and interest accruals resulting from capitalization of interest while the student is in school. Sample projections must disclose the cost to the borrower of principal and interest, interest only, and capitalized interest. The lender may rely on the PLUS promissory note and associated materials approved by the Secretary for purposes of complying with this section.

(e) Borrower may not be charged for disclosures. The lender must provide the information required by this section at no cost to the borrower.

(f) Method of disclosure. Any disclosure of information by a lender under this section may be through written or electronic means.

(g) Plain language disclosure. The plain language disclosure text, as approved by the Secretary, must be provided to a borrower in conjunction with subsequent loans taken under a previously signed Master Promissory Note. The requirements of paragraphs (a) and (b) of this section are satisfied for subsequent loans if the borrower is sent the plain language disclosure text and an initial disclosure containing the information required by paragraphs (a)(2)(i) through (iii), (a)(2)(v), (a)(2)(vi), (a)(2)(vii), and (a)(2)(xx) of this section.

(h) Notice of availability of income-sensitive repayment option.

(1) At the time of offering a borrower a loan and at the time of offering a borrower repayment options, the lender must provide the borrower with a notice that informs the borrower of the availability of income-sensitive repayment. This information may be provided in a separate notice or as part of the other disclosures required by this section. The notice must inform the borrower--

(i) That the borrower is eligible for income-sensitive repayment, including through loan consolidation;

(ii) Of the procedures by which the borrower can elect income-sensitive repayment; and

(iii) Of where and how the borrower may obtain more information concerning income-sensitive repayment.

(2) The promissory note and associated materials approved by the Secretary satisfy the loan origination notice requirements provided for in paragraph (h)(1) of this section.

3. Section 682.207 is amended by revising paragraph (b)(1)(vi) and adding a new paragraph (b)(1)(vii) to read as follows:

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(b) * * *

(1) * * *

(vi) Except as provided in paragraph (d)(2) of this section, may not disburse a second or subsequent disbursement of a Federal Stafford loan to a student who has ceased to be enrolled; and

(vii) May disburse a second disbursement of a Federal Stafford loan, at the request of the school, even if the student or the school returned the first disbursement, unless the lender has information that the student is no longer enrolled.* * * * *

4. Section 682.208 is amended by adding a new paragraph (c)(3) to read as follows:

Sec. 682.208 Due diligence in servicing a loan.

* * * * *

(c) * * *

(3)(i) If the borrower disputes the terms of the loan in writing and the lender does not resolve the dispute, the lender's response must provide the borrower with an appropriate contact at the guaranty agency for the resolution of the dispute.

(ii) If the guaranty agency does not resolve the dispute, the agency's response must provide the borrower with information on the availability of the Student Loan Ombudsman's office.* * * * *

5. Section 682.210 is amended by revising paragraph (a)(5) to read as follows:

Sec. 682.210 Deferment.

(a) * * *

(5) An authorized deferment period begins on the date the condition entitling the borrower to the deferment first exists; however, except for the deferments described in paragraphs (b)(1)(i) and (s)(2) of this section, a deferment cannot begin more than six months before the date the lender receives a request and documentation required for the deferment.* * * * *

6. Section 682.211 is amended by revising paragraph (f)(2), and adding a new paragraph (f)(10) to read as follows:

Sec. 682.211 Forbearance.

* * * * *

(f) * * *

(2) Upon the beginning of an authorized deferment period under Sec. 682.210, or a mandatory administrative forbearance period as specified under paragraph (j)(2) of this section;* * * * *

(10) For a period not to exceed 3 months for a borrower who is affected by a natural disaster.* * * * *

Sec. 682.215 [Removed]

7. Section 682.215 is removed.

8. Section 682.302 is amended to read as follows by:

A. Revising paragraph (b)(1) and the introductory text of paragraph (b)(2).

B. In paragraph (b)(2)(ii), removing the word ``or'' that appears after the semi-colon.

C. In paragraph (b)(2)(iii), removing the period and adding, in its place, ``; or''.

Adding a new paragraph (b)(2)(iv).

E. Redesignating paragraphs (c)(1)(iii)(A) through (E) as paragraphs (c)(1)(iii)(C) through (G), respectively.

F. Revising redesignated paragraph (c)(1)(iii)(C).

G. Adding new paragraphs (c)(1)(iii)(A) and (B).

H. Revising paragraph (c)(3)(i)(A).

I. Adding a new paragraph (c)(4).

Sec. 682.302 Payment of special allowance on FFEL loans.

* * * * *

(b) * * *

(1) Except for non-subsidized Federal Stafford loans disbursed on or after October 1, 1981, for periods of enrollment beginning prior to October 1, 1992, or as provided in paragraphs (b)(2) through (b)(4), or (e) of this section, FFEL loans that otherwise meet program requirements are eligible for special allowance payments.

(2) For a loan made under the Federal SLS or Federal PLUS Program on or after July 1, 1987 and prior to July 1, 1994, and for any Federal PLUS loan made on or after July 1, 1998 or under Sec. 682.209(e) or (f), no special allowance is paid for any period for which the interest rate calculated prior to applying the interest rate maximum for that loan does not exceed--* * * * *

(iv) 9 percent in the case of a Federal PLUS loan made on or after October 1, 1998.

(c) * * *

(1) * * *

(iii) * * *

(A)(1) 2.8 percent to the resulting percentage for a Federal Stafford loan for which the first disbursement is made on or after July 1, 1998; or

(2) 2.2 percent to the resulting percentage for a Federal Stafford loan for which the first disbursement is made on or after July 1, 1998 during the borrower's in-school, grace, and authorized period of deferment;

(B) 2.5 percent to the resulting percentage for a Federal Stafford loan for which the first disbursement is made on or after July 1, 1995 for interest that accrues during the borrower's in-school, grace, and authorized period of deferment;

(C) Except as provided in paragraph (c)(1)(iii)(B) of this section, 3.1 percent to the resulting percentage for a Federal Stafford Loan made on or after October 1, 1992 and prior to July 1, 1998, and for any Federal SLS, Federal PLUS, or Federal Consolidation Loan made on or after October 1, 1992;* * * * *

(3)(i) * * *

(A) The proceeds of tax-exempt obligations originally issued prior to October 1, 1993, the income from which is exempt from taxation under the Internal Revenue Code of 1986;* * * * *

(4) Loans made or purchased with funds obtained by the holder from the issuance of obligations originally issued on or after October 1, 1993, and loans made with funds derived from default reimbursement collections, interest, or other income related to eligible loans made or purchased with those tax-exempt funds, do not qualify for the minimum special allowance rate specified in paragraph (c)(3)(iii) of this section, and are not subject to the 50 percent limitation on the maximum rate otherwise applicable to loans made with tax-exempt funds.* * * * *

9. Section 682.305 is amended by:

A. Revising the heading and paragraph (a)(1).

B. Adding new paragraphs (a)(3)(iii) through (v).

C. Revising paragraph (c)(1).

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

(a) * * *

(1) If a lender owes origination fees or loan fees under paragraph (a) of this section, it must submit quarterly reports to the Secretary on a form provided or prescribed by the Secretary, even if the lender is not owed, or does not wish to receive, interest benefits or special allowance from the Secretary.* * * * *

(3) * * *

(iii) The Secretary collects from an originating lender the amount of origination fees the originating lender was authorized to collect from borrowers during the quarter whether or not the originating lender actually collected those fees. The Secretary also collects the fees the originating lender is required to pay under paragraph (a)(3)(ii) of this section. Generally, the Secretary collects the fees from the originating lender by offsetting the amount of interest benefits and special allowance payable to the originating lender in a quarter, and, if necessary, the amount of interest benefits and special allowance payable in subsequent quarters may be offset until the total amount of fees has been recovered.

(iv) If the full amount of the fees cannot be collected within two quarters by reducing interest and special allowance payable to the originating lender, the Secretary may collect the unpaid amount directly from the originating lender.

(v) If the full amount of the fees cannot be collected within two quarters from the originating lender in accordance with paragraphs (a)(3) (iii) and (iv) of this section and if the originating lender has transferred the loan to a subsequent holder, the Secretary may, following written notice, collect the unpaid amount from the holder by using the same steps described in paragraphs (a)(3) (iii) and (iv) of this section, with the term ``holder'' substituting for the term ``originating lender''.* * * * *

(c) * * *

(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.* * * * *

Sec. 682.400 [Amended]

10. Section 682.400 is amended by:

A. In paragraph (b)(1)(i), adding the word ``and'' after the semi-colon.

B. In paragraph (b)(1)(ii), removing ``; and'' and adding, in its place, a period.

C. Removing paragraph (b)(1)(iii).

11. Section 682.401 is amended by:

A. Revising paragraph (b)(11).

B. In the introductory text of paragraph (b)(23)(i), removing the words ``as defined in Sec. 682.800(d)''.

C. Adding a heading to paragraph (c).

D. Revising paragraphs (c)(1), (c)(2), and (c)(3).

E. Adding a new paragraph (c)(5).

F. Revising paragraphs (e)(1) and (e)(3).

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(11) Inquiries. 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 HEA, serves as a lender-of-last-resort in the State in which the guaranty agency is the designated guaranty agency. The guaranty agency or an eligible lender described in section 435(d)(1)(D) of the HEA may arrange for a loan required to be made under paragraph (c)(2) of this section to be made by another eligible lender. 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 Sec. 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 Sec. 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 those loans from another eligible lender.* * * * *

(5)(i) Upon request of the guaranty agency, the Secretary may advance Federal funds to the agency, on terms and conditions agreed to by the Secretary and the agency, to ensure the availability of loan capital for subsidized and unsubsidized Federal Stafford and Federal PLUS loans to borrowers who are otherwise unable to obtain those loans if the Secretary determines that--

(A) Eligible borrowers in a State who qualify for subsidized Federal Stafford loans are seeking and are unable to obtain subsidized Federal Stafford loans;

(B) The guaranty agency designated for that State has the capability for providing lender-of-last-resort loans in a timely manner, either directly or indirectly using a third party, in accordance with the guaranty agency's obligations under the HEA, but cannot do so without advances provided by the Secretary; and

(C) It would be cost-effective to advance Federal funds to the agency.

(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) * * *

(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, except that a guaranty agency is not prohibited from providing assistance to schools comparable to the kinds of assistance provided by the Secretary to schools under, or in furtherance of, the Federal Direct Loan Program;* * * * *

(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;* * * * *

12. Section 682.402 is amended by:

A. Revising the introductory text following the heading of paragraph (d)(3).

B. Adding a new paragraph (d)(8).

C. Revising paragraph (f)(2).

Sec. 682.402 Death, disability, closed school, false certification, and bankruptcy payments.

* * * * *

(d) * * *

(3) * * * Except as provided in paragraph (d)(7) of this section, in order to qualify for a discharge of a loan under paragraph (d) of this section, a borrower must submit a written request and sworn statement to the holder of the loan. The statement need not be notarized, but must be made by the borrower under the penalty of perjury, and, in the statement, the borrower must state--* * * * *

(8) Discharge without an application. A borrower's obligation to repay an FFEL Program loan may be discharged without an application from the borrower if the--

(i) Borrower received a discharge on a loan pursuant to 34 CFR 674.33(g) under the Federal Perkins Loan Program, or 34 CFR 685.213 under the William D. Ford Federal Direct Loan Program; or

(ii) The Secretary or the guaranty agency, with the Secretary's permission, determines that the borrower qualifies for a discharge based on information in the Secretary or guaranty agency's possession.* * * * *

(f) * * *

(2) Suspension of collection activity. If the lender is notified that a borrower has filed a petition for relief in bankruptcy, the lender must immediately suspend any collection efforts outside the bankruptcy proceeding against the borrower, and may suspend collection efforts against any co-maker or endorser on the loan.* * * * *

13. Section 682.404 is amended to read as follows by:

A. Revising the introductory text of paragraph (a)(1).

B. Redesignating paragraph (a)(1)(ii) as (a)(1)(iii).

C. Revising paragraph (a)(1)(i), adding a new paragraph (a)(1)(ii), and revising redesignated paragraph (a)(1)(iii) introductory text.

D. Removing paragraphs (a)(2)(iii) and (a)(3), and revising paragraph (a)(2)(ii).

E. Redesignating paragraphs (a)(4) and (a)(5) as paragraphs (a)(3) and (a)(4), respectively.

F. Revising the redesignated paragraph (a)(4).

G. Revising the heading for paragraph (b), and removing the word ``or'' at the end of paragraph (b)(1)(i).

H. Revising paragraphs (b)(1)(ii) and (b)(2)(ii), and adding a new paragraph (b)(1)(iii).

I. Removing the word ``or'' after the semi-colon in paragraph (b)(2)(i).

J. Adding a new paragraph (b)(2)(iii).

K. Revising the heading for paragraph (g).

L. Revising paragraphs (g)(1) and (g)(2), and removing paragraph (g)(3).

M. Redesignating paragraph (i) as paragraph (l).

N. Adding new paragraphs (i), (j), and (k).

Sec. 682.404 Federal reinsurance agreement.

(a) * * *

(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) * * *

(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 notify schools annually 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.

(k) Default aversion fee.

(1) General. If a guaranty agency performs default aversion activities on a delinquent loan in response to a lender's request for default aversion assistance on that loan, the agency receives a default aversion fee. The fee may not be paid more than once on any loan. The lender's request for assistance must be submitted to the guaranty agency no earlier than the 60th day and no later than the 120th day of the borrower's delinquency.

(2) Amount of fees transferred. No more frequently than monthly, a guaranty agency may transfer default aversion fees from the Federal Fund to its Operating Fund. The amount of the fees that may be transferred is equal to--

(i) One percent of the unpaid principal and accrued interest owed on loans that were submitted by lenders to the agency for default aversion assistance; minus

(ii) One percent of the unpaid principal and accrued interest owed by borrowers on default claims that--

(A) Were paid by the agency for the same time period for which the agency transferred default aversion fees from its Federal Fund; and

(B) For which default aversion fees have been received by the agency.

(3) Calculation of fee.

(i) For purposes of calculating the one percent default aversion fee described in paragraph (k)(2)(i) of this section, the agency must use the total unpaid principal and accrued interest owed by the borrower as of the date the default aversion assistance request is submitted by the lender.

(ii) For purposes of paragraph (k)(2)(ii) of this section, the agency must use the total unpaid principal and accrued interest owed by the borrower as of the date the agency paid the default claim.

(4) Prohibition against conflicts. If a guaranty agency contracts with an outside entity to perform any default aversion activities, that outside entity may not--

(i) Hold or service the loan; or

(ii) Perform collection activities on the loan in the event of default within 3 years of the claim payment date.* * * * *

14. Section 682.406 is amended by revising the heading, the introductory text of paragraph (a), and paragraph (a)(14) to read as follows:

Sec. 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 Sec. 682.411(h) to locate the borrower through the use of effective skip tracing techniques, including contact with the school the student attended.* * * * *

15. Section 682.409 is amended by revising the introductory text of paragraph (a)(1) to read as follows:

Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted loans to the Secretary.

(a)(1) If the Secretary determines that action is necessary to protect the Federal fiscal interest, the Secretary directs a guaranty agency to promptly assign to the Secretary any loans held by the agency on which the agency has received payment under Secs. 682.402(f), 682.402(k), or 682.404. The collection of unpaid loans owed by Federal employees by Federal salary offset is, among other things, deemed to be in the Federal fiscal interest. Unless the Secretary notifies an agency, in writing, that other loans must be assigned to the Secretary, an agency must assign any loan that meets all of the following criteria as of April 15 of each year:* * * * *

16. Section 682.410 is amended by adding a new paragraph (b)(5)(vii) to read as follows:

Sec. 682.410 Fiscal, administrative, and enforcement requirements.

* * * * *

(b) * * *

(5) * * *

(vii) As part of the guaranty agency's response to a borrower who appeals an adverse decision resulting from the agency's administrative review of the loan obligation, the agency must provide the borrower with information on the availability of the Student Loan Ombudsman's office.* * * * *

17. Section 682.411 is revised to read as follows:

Sec. 682.411 Lender due diligence in collecting guaranty agency loans.

(a) General. In the event of delinquency on an FFEL