ED Refines Disbursement Rules Involving Third Party Servicers

By Joan Berkes, Policy & Federal Relations Staff

The Department of Education (ED) published new rules on October 30, 2015, finalizing a Notice of Proposed Rulemaking (NPRM) published on May 18, 2015. The general effective date of these final rules is July 1, 2016. This article is the third in a series describing the provisions of the final rule.

Confirming Student Eligibility before Disbursement

Current regulatory provisions at 668.164(b) generally require that an institution may disburse Title IV funds only if the student is enrolled for classes for the payment period (except for a late disbursement) and is eligible to receive those funds. Current regulations at 668.25(c) require a third-party servicer that disburses Title IV funds to confirm the eligibility of the student before making that disbursement, and holds the third-party servicer jointly and severally liable with the institution for non-compliance with related Title IV requirements.

The final rule, under revised 668.164(b), restates and clarifies the requirement to confirm student eligibility as follows:

“(3) At the time a disbursement is made to a student for a payment period, an institution must confirm that the student is eligible for the type and amount of title IV, HEA program funds identified by that disbursement. A third-party servicer is also responsible for confirming the student’s eligibility if the institution engages the servicer to perform activities or transactions that lead to or support that disbursement. Those activities and transactions include but are not limited to—

“(i) Determining the type and amount of title IV, HEA program funds that a student is eligible to receive;

“(ii) Requesting funds under a payment method described in § 668.162; or

“(iii) Accounting for funds that are originated, requested, or disbursed, in reports or data submissions to the Secretary.”

The final rule does not alter language in current 668.25, regarding responsibilities and liability of third-party servicers. Thus, the current requirement that servicers who perform activities leading to or supporting a disbursement must also calculate the return of Title IV funds for withdrawn students remains unchanged.

In the NPRM, ED explained that it was addressing these rules because it has found noncompliance or inadequate compliance with the confirmation of eligibility provisions in cases where third party servicers were involved in disbursement. ED stated that servicers accepted at face value that the institution confirmed eligibility when it credited the students’ ledger accounts, and reported those disbursements to the Department as valid payments made to those students. ED pointed out that servicers must carry out contracted activities in a manner keeping with a fiduciary under the Title IV programs, and “cannot feign ignorance over what the institution did or did not do in confirming eligibility.”

Many of the comments to the NPRM asked for further explanation of the current and proposed provisions. In general, ED responded that “the institution and its third-party servicer may establish a process under which the institution confirms eligibility and the servicer verifies periodically that the confirmations were made in accordance with that process... the institution and the servicer should be sufficiently motivated to implement credible processes because they are jointly responsible and jointly liable.”

ED also pointed out that when a third-party servicer enters into a contract with an institution, the servicer must agree to comply with the statutory provisions in the HEA and the regulations governing the Title IV programs “that fall within the ambit of the activities and transactions the servicer will perform under that contract.” When a third-party servicer determines the type and amount of Title IV awards that students are eligible to receive, requests those funds from ED, or accounts for those funds in reports and data submissions to ED, “the servicer has a fiduciary duty to ensure that disbursements are made only to eligible students for the correct amounts.” If a third-party servicer is engaged to perform one or more of these activities, ED states, “it is not possible to confine the servicer’s fiduciary responsibilities to discrete functions, … because these activities are interrelated.”

ED disagreed with comments that an institution is solely responsible for disbursement errors simply because the institution makes an entry crediting a student’s ledger account: “As a practical matter, where a third-party servicer is engaged to determine the type and amount of title IV, HEA program funds that a student is eligible to receive, the institution may reasonably rely on that information in crediting the student’s ledger account. Moreover, disbursing funds is a process that begins with determining the awards that a student is eligible to receive and culminates in making payments of those awards to the student. So, the act of crediting the student’s ledger account is just part of that process—it simply identifies the date on which the student receives the benefit of title IV, HEA program funds.”

Although ED declined to further define the degree of responsibility and liability associated with specific servicer function, it did state that a third-party servicer is not subject to eligibility confirmation provisions if the servicer is engaged only to deliver credit balance payments to students, or only to provide exit counseling to student loan borrowers.

This is the third in a series of articles on the final rules. See the first and second.

 

Publication Date: 11/5/2015


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