The Department of Education sent a 225 page notice of proposed rulemaking (NPRM) to the Federal Register last Thursday that included - among other things - proposed regulations on prohibited inducements and preferred lender lists. The NPRM is available on the Department’s Web site, but it remains "unofficial" until it has been posted in the Federal Register. No publication date has been scheduled for the NPRM to appear in the Federal Register, but it is expected to be released soon to give ample time for public discussion before its planned implementation in the summer of 2008. Summaries of the proposed changes on prohibited inducements and preferred lender lists are included in this article because this topic has been of particular interest recently. NASFAA will be examining the
NPRM’s other proposed regulatory changes after they have been posted to the Federal Register.
These proposed regulations come after the failure of negotiators to reach consensus during the last round of negotiated rulemaking. During the previous rounds negotiators reached tentative agreement on the majority of the proposed regulatory language, but could not consent to language on preferred lender lists, prohibited inducements, and some other lending issues that affect institutions participating in the Perkins Loan program. Without reaching consensus on the entire regulatory package, the Department was free to re-examine and propose new regulatory language on any of the previously discussed proposed regulations.
Preferred Lender Lists
If a school decides to provide a preferred lender list, the NPRM includes several regulations to govern how that list must be implemented and presented to students and parents. Schools are under no obligation to provide any preferred or recommended lender list.
The NPRM states that schools may not use a preferred lender list to deny or impede a borrower’s choice of lender. Schools would be required to list at least three lenders that are not affiliated with each other. Under the proposed regulations, no lender would be allowed on a school’s preferred lender list that had solicited the school with any benefits in exchange for being on the list. Schools would be mandated to ensure that if a lender offers any borrower benefits, that the same lender provides those benefits to all students at the school. Schools would also be prohibited from automatically assigning lenders through award packaging to first-time borrowers.
A school’s preferred lender list would also need to require several disclosures, including:
- The method and criteria used by the school to select those lenders
- Comparative information about the interest rates and other benefits offered by those lenders
- A prominent statement informing borrowers that they are not required to use any of the lenders on the preferred lender list
Prohibited Inducements for Lenders and Guarantors
According to the Department, the guidance outlined in the NPRM solidifies guidance that was "contained in various DCLs issued by the Department" in the past, of which, the most comprehensive was issued in February, 1989 (89-L-129). The NPRM offers a non-exhaustive list of prohibited activities that lenders and guarantors can engage in and an exhaustive list of permissible activities. While the guidance for lenders and guarantors is almost identical, guarantors are given explicitly more permissible activities "in recognition of their administrative, training, outreach, and oversight roles in the FFEL program."
Included in the NPRM is a specific definition of a "school-affiliated organization" that includes "alumni organizations, foundations, athletic organizations, and social, academic, and professional organizations." Lenders and school-affiliated organizations would be prohibited from offering prospective borrowers prizes or additional financial aid funds to secure loan applications. Lenders would also be prohibited from offering schools benefits such as access to a lender’s other financial products, computer hardware, or payment for the cost of printing college materials at less than market rate or at no cost.
Lenders would also be prohibited from doing any philanthropic activities - including awarding grants, scholarships, or other financial contributions - to secure loan applications or to be placed on a school’s preferred lender list. Lenders would not be allowed to pay for any financial aid administrator’s conference or training registration or any transportation or lodging costs. A lender would also not be allowed to pay for "any entertainment expenses" relating to lender-sponsored functions. According to the NPRM, lenders would be allowed to provide short-term staffing services to a school to "assist a school with financial aid related functions" on an emergency, non-recurring basis.
The NPRM states that lenders would be allowed to provide assistance to schools that is "comparable to the assistance provided by the Department to a school in the Direct Loan Program." Lenders would also be allowed to offer reduced loan origination fees and interest rates to borrowers and participate in a school’s financial literacy and other outreach activities as long as the lender does not promote its own products and fully discloses its sponsorship to attendees. Lenders would be allowed to pay for meals and refreshments for school officials as long as the costs are reasonable and are in conjunction with a meeting or conference and where all attendees are free to attend.
Unlike the proposed regulations for lenders, a guaranty agency would be able to pay for reasonable travel and lodging costs for financial aid administrators that would otherwise be unable to attend the guarantor’s training program. Guaranty agencies would also be able to cover travel and lodging costs for financial aid administrators that serve on the agency’s governing board, advisory board, or in support of other official activities of the guarantor that are mandated by law.
Enforcement Regulations Strengthened
One of the hotly contested issues during the negotiated rulemaking sessions was the idea of "rebuttable presumptions." Rebuttable presumptions means that any lender or guarantor that offers any payments as outlined in the prohibited inducements definitions (682.200 or 682.401) will be presumed to have made those payments to secure loan volume, and may have its authority to make FFEL program loans revoked. It would be up to the lender or guarantor to prove otherwise. According to the Department, this will enable them to more aggressively enforce current regulations as it has been almost impossible to prove "quid pro quo" arrangements between schools and lenders.
Impact Unknown
The potential impact of the proposed changes is hard to know. Both the House and the Senate have moved on legislation - the Sunshine Act - that may make some of the proposed regulations moot. Additionally, many of the alleged improprieties targeted by the New York Attorney General’s investigations and recent Congressional investigations have taken place in the private loan market, which these regulations cannot address.
Still, despite the failure of the negotiators to reach consensus on these very issues in April, The New York Times reports that they are unlikely to meet much resistance from the lending community. According to the Times article, the Consumers Bankers Association (CBA) has already indicated that they will seek minimal changes to these regulations, in part because Congress is already considering tougher restrictions through the Sunshine Act.
"Lenders... have come to embrace the inevitability of reform and in many cases welcome it," said John Dean, special counsel to the CBA.
New York Attorney General Andrew Cuomo has already voiced his disapproval of the proposed rules because they do not require "lenders to be selected solely on the basis of the best interests of student borrowers," reports the Times.
Lawmakers however, were more receptive to the Department's efforts to regulate the student loan industry, as both chairmen of the House and Senate Education Committees gave a nod of approval.
"Today's announcement is a positive development from the Department of Education. It indicates movement forward on issues Congress has identified as needing attention including provisions from the Student Loan Sunshine Act," said Senator Ted Kennedy in a press release on Friday.
Representative George Miller offered similar approval in a press release stating, "Although we have not yet had an opportunity to thoroughly review over 200 pages of rules, we are pleased that the Department of Education has finally joined us in our efforts to clean up the student loan industry."
Other Proposed Regulations
Besides preferred lender lists and prohibited inducements, the NPRM also proposed new regulations on the following topics.
- Simplification of deferment process (§§674.38, 682.210, 682.210, 682.210, and 685.204)
- Accurate and Complete Copy of a Death Certificate (§§674.61, 682.402, and 685.212)
- Total and Permanent Disability Discharge (§§674.61, 682.402, and 685.213)
- NSLDS Reporting Requirements (§§674.16, 682.208, 682.401, and 682.414)
- Certification of Electronic Signatures on Master Promissory Notes (MPNs) Assigned to the Department (§§674.19, 674.50, 682.409, and 682.414)
- Record Retention Requirements on Master Promissory Notes (MPNs) Assigned to the Department (§§674.19, 674.50, 682.406, and 682.409)
- Loan counseling for graduate or professional student PLUS Loan borrowers (§§682.603, 682.604(f), 682.604(g), 685.301, 685.304(a), and 685.304(b))
- Maximum Loan Period (§§682.401, 682.603, and 685.301)
- Mandatory assignment of defaulted Perkins loans. (§§674.8 and 674.50)
- Reasonable collection costs on Perkins Loans (§674.45)
- Child or family service cancellation (§674.56)
- Eligible Lender Trustees (ELTs) (§§682.200 and 682.602)
- Frequency of Capitalization (§682.202)
- Loan Discharge for False Certification as a Result of Identity Theft (§§682.208, 682.211, 682.300, 682.302 and 682.411)
Other Media Coverage
By Justin Draeger
NASFAA Assistant Director for Communications
Posted 06/04/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
