Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

The Secretary amends the Federal Family Education Loan (FFEL) Program regulations. These final regulations are needed to implement changes to the Higher Education Act of 1965, as amended (HEA) giving the Secretary additional powers to assure the safety o

FR part
VI
Attachments:
PublicationDate: 11/27/96
FRPart: IV
RegPartsAffected: Citation : (R)682.401
Citation : (R)682.410
PageNumbers: 60425-60438
Summary: The Secretary amends the Federal Family Education Loan (FFEL) Program regulations. These final regulations are needed to implement changes to the Higher Education Act of 1965, as amended (HEA) giving the Secretary additional powers to assure the safety of Federal reserve funds and assets maintained by guaranty agencies insuring educational loans under the FFEL Program. The regulations establish conflicts of interest restrictions for guaranty agency staff and affiliated individuals and prohibit agencies from using Federal reserve funds for certain purposes.
CommentDueDate:

  
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[


[Federal Register: November 27, 1996 (Volume 61, Number 230)]
[Rules and Regulations]
[Page 60425-60438]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27no96-21]


[[Page 60425]]

_______________________________________________________________________

Part VI





Department of Education





_______________________________________________________________________



34 CFR Part 682



Postsecondary Education: Federal Family Educational Loan Program;
Guaranty Agencies--Conflicts of Interest; Final Rule


[[Page 60426]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC33


Federal Family Education Loan (FFEL) Program; Guaranty Agencies--
Conflicts of Interest

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the Federal Family Education Loan (FFEL)
Program regulations. These final regulations are needed to implement
changes to the Higher Education Act of 1965, as amended (HEA) giving
the Secretary additional powers to assure the safety of Federal reserve
funds and assets maintained by guaranty agencies insuring educational
loans under the FFEL Program. The regulations establish conflicts of
interest restrictions for guaranty agency staff and affiliated
individuals and prohibit agencies from using Federal reserve funds for
certain purposes.

DATES: Effective date: These regulations take effect on July 1, 1997.
However, affected parties do not have to comply with the information
collection requirement in Sec. 682.418(c) until the Department of
Education publishes in the Federal Register the control number assigned
by the Office of Management and Budget (OMB) to this information
collection requirement. Publication of the control number notifies the
public that OMB has approved this information collection requirement
under the Paperwork Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Mr. George Harris, Senior Policy
Specialist, U.S. Department of Education, 600 Independence Avenue,
S.W., Room 3045, Regional Office Building 3, Washington, DC 20202-5449.
Telephone: (202) 708-8242. Individuals who use a telecommunications
device for the deaf (TDD) may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern
time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

On September 19, 1996 the Secretary published a notice of proposed
rulemaking (NPRM) for this part in the Federal Register (61 FR 49382).
The NPRM included a discussion of the major issues surrounding the
proposed changes, which will not be repeated here. The following list
summarizes those issues and identifies the pages of the preamble of the
NPRM on which a discussion of those issues may be found:
<bullet> The use of FFEL reserve funds to pay a lender's claim if a
guaranty agency fails to comply with Federal reinsurance requirements.
(page 49383)
<bullet> The addition of a requirement that guaranty agencies
prohibit conflicts of interest by guaranty agency staff and affiliated
individuals. (page 49383)
<bullet> Prohibition of certain uses of a guaranty agency's reserve
fund. (page 49384)

Executive Order 12866

These final regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those determined by the
Secretary to be necessary for administering this program effectively
and efficiently.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, the Secretary has
determined that the benefits of the final regulations justify the
costs.

Summary of Potential Costs and Benefits

The potential costs and benefits of these final regulations are
discussed elsewhere in this preamble under the following heading:
Analysis of Comments and Changes.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 53 parties
submitted comments on the proposed regulations. An analysis of the
comments and of the changes in the regulations since publication of the
NPRM follows.
Major issues are grouped according to subject, with appropriate
sections of the regulations referenced in parentheses. Other
substantive issues are discussed under the section of the regulations
to which they pertain. Technical and other minor changes--and suggested
changes the Secretary is not legally authorized to make under the
applicable statutory authority--generally are not addressed.

Paperwork Reduction Act of 1995

Section 682.418(c) contains information collection requirements. As
required by the Paperwork Reduction Act of 1995, the U.S. Department of
Education has submitted a copy of this section to the Office of
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)). In
response to the Secretary's invitation in the NPRM to comment on any
potential paperwork burden associated with this regulation, the
following comments were received.

Role of a Guaranty Agency as a Trustee or Fiduciary

Comment: A number of guaranty agencies questioned the Secretary's
discussion of the role of guaranty agencies in the preamble to the
NPRM. In particular, the commenters argued that the Secretary was
overstating the holdings of the court decisions cited in the preamble.
The commenters suggested that these decisions did not hold them to be
trustees or fiduciaries for the Federal Government. In addition, they
noted that neither the HEA nor the agreements between the Department
and the agencies use the term ``fiduciary'' or ``trustee'' and argued
that the Secretary's description of their role was not supported by
legal authority.
Discussion: The Secretary's position that ``the guaranty agencies'
role is best characterized as that of a trustee holding money for the
benefit of another'' is firmly rooted in the HEA. Under section 422(e)
of the HEA, the reserve funds of the guaranty agencies and any assets
purchased with those funds are the property of the United States. This
statute is consistent with court decisions that describe the guaranty
agency as ``akin to that of a trustee,'' Ohio Student Loan Com'n v.
Cavazos, 900 F.2d 894, 899 (6th Cir. 1990), cert. denied 111 S.Ct. 245
(1990) or ``analogous to that of a trustee holding money for the
benefit of another,'' Education Assistance Corp. v. Cavazos, 902 F.2d
617, 627 (8th Cir. 1990), cert. denied 111 S.Ct. 246 (1990). Other
courts have specifically concluded that the guaranty agency does not
have an ownership interest or property right in its reserve fund and
that the reserve funds are ultimately under the control of the United
States. Puerto Rico Higher Education Assistance Corp. v. Riley, 10 F.3d
847, 851 (D.C. Cir. 1993); State of Colorado v. Cavazos, 962 F.2d 968,
971 (10th Cir. 1992); Rhode Island Higher Education Assistance Auth. v.
Secretary, U.S. Dep't of Education, 929 F.2d 844 (1st Cir. 1991); Great
Lakes Higher Education Corp. v. Cavazos, 911 F.2d 10 (7th Cir. 1990);
South Carolina State Education Assistance Auth Corp. v. Cavazos, 897,
F.2d 1272 (4th Cir. 1990), cert. denied 111 S.Ct 243; Delaware v.
Cavazos, 723 F.Supp. 234 (D.Del. 1989), aff'd without opinion, 919 F.2d
137 (3d Cir. 1990); Student Loan Fund of Idaho v. Riley, Case No. CV
94-0413-S-LMB (D.Ida., Memo. Decision, Sept. 14, 1995), appeal pending,
No. 95-36179

[[Page 60427]]

(9th. Cir.); Connecticut Student Loan Foundation v. Riley, Case No.
3:93CV02570 (JBA) (D.Conn., Oct. 31, 1996). The guaranty agency
commenters who challenged the Secretary's reading of the law in this
area failed to cite any statutes or court decisions that counter this
authority. A party who holds property for the benefit of another and
who must carry out specific duties with regard to that property falls
clearly within the legal definition of a trustee. Black's Law
Dictionary 1514 (6th ed. 1990). A trustee owes a fiduciary duty to the
beneficiary. Id. at 1508 (``trust'') and 1514. In the case of guaranty
agencies, the Secretary (who provides the funds used to maintain the
reserve funds and reserve funds assets) is the beneficiary and is
entitled to issue appropriate rules to protect the Federal Government's
interests in those funds and assets by prohibiting inappropriate uses
and protecting against conflicts of interest.
Guaranty agencies are State or private non-private organizations,
that are required to serve the public good. Thus, even outside the
legal obligations governing the agencies' relationship to the reserve
fund and assets, the agencies should have been held to a high standard
in protecting the public trust. While these regulations provide further
protection for the Secretary in regard to the agencies' role in the
FFEL Program and maintenance of Federal property and assets, they are
consistent with the agencies' long-standing obligations under State and
common law.
Changes: None.

Separate Non-FFEL Funds

Comment: Some guaranty agencies questioned the discussion in the
preamble to the NPRM that distinguished between funds that are subject
to these regulations and funds that were consistently funded and
maintained separate from their reserve funds and that are not covered
by these regulations. These commenters argued that the requirement that
non-FFEL program activities must be funded exclusively from sources
unrelated to the FFEL guaranty agency activities exceeded the
Secretary's authority. These commenters also contended that the
prohibition on the use of FFEL funds for non-FFEL purposes was only
established in regulations issued by the Secretary in 1986 and should
not be applied prior to the effective date of those rules.
Discussion: The court decisions cited above reaffirmed that a
guaranty agency had no legitimate expectation or right at the time it
joined the FFEL Program that it could use Federal reserve funds for
other than FFEL purposes. Delaware v. Cavazos, 723 F.Supp. at 240.
Thus, an agency that wanted to engage in non-FFEL program activities
has always been required to maintain separate funds. The discussion in
the preamble to the NPRM is consistent with this requirement. Moreover,
a guaranty agency has a fiduciary responsibility to protect the reserve
funds and assets held by it for the Federal Government from uses
inconsistent with the purposes for which they were provided.
Changes: None.

Classification of Guaranty Agencies Under the Regulatory Flexibility
Act

Comment: Several commenters stated that the basis for determining
that guaranty agencies are not small entities for the purposes of
Regulatory Flexibility Analysis has not been provided. The commenters
asserted that there are a substantial number of guaranty agencies with
assets below $100 million. The commenters further recommended that the
regulations be reviewed by the Small Business Administration.
Discussion: The Secretary analyzed the assets of the 12 private
non-profit guaranty agencies that will be covered under these
regulations. This analysis follows the letter and the spirit of the
Regulatory Flexibility Act, which dictates the terms of the analysis.
The analysis of asset levels of the 12 agencies is based on the latest
audited financial statements that the agencies have provided to the
Secretary. The analysis used generally accepted accounting principles
and found that all 12 had asset levels above $100 million. Thus, for
the purposes of Regulatory Flexibility Analysis, the certification that
these regulations will not have a substantial impact on a significant
number of small entities is affirmed.
On September 16, 1996, a copy of the proposed regulations was
provided to the Small Business Administration (SBA). The SBA did not
comment on the proposed regulations.
Changes: None.

Analysis of Burden Under the Paperwork Reduction Act of 1995

Comment: Several commenters representing guaranty agencies disputed
the estimate of one hour recordkeeping burden required by the
development of a cost allocation plan and maintenance of documentation
for audit. The commenters believed this analysis of the burden grossly
understated the amount of time necessary to analyze and comply with OMB
Circular A-87. One commenter estimated that it would require three or
four people years of work for an agency to develop and maintain a cost
allocation system. Another commenter estimated that it would take at
least 1,000 hours for an agency to develop a cost allocation plan and
an additional two employees annually to manage it properly. The
commenters acknowledged that the recordkeeping burden is already
established in Sec. 682.410(a) of the current regulations and guaranty
agencies already have established cost allocation plans. However, they
argued that the scope of the cost allocation provisions in OMB Circular
A-87 is different in many respects from what is required in the
regulations and what guaranty agencies have developed to comply with
applicable Federal and State laws and would involve in most instances
the development or update, or both, of a different method of cost
allocation. The commenters stated that this provision would also
require guaranty agencies in many instances to maintain an additional
set of financial accounting records.
Discussion: Since publishing the NPRM, the Secretary has received
information that indicates that the one-hour estimate given in the NPRM
was not an accurate estimate of the recordkeeping burden associated
with the modified requirements. The Secretary continues to believe that
the scope of the cost allocation provisions in OMB Circular A-87 is not
radically different, at least not to the extent suggested by some of
the commenters, from what is already required in existing regulations.
The Secretary has sought to minimize burden to the extent possible.
However, in light of the comments received, the Secretary now believes
that a more appropriate estimate would be 100 hours. The Secretary will
continue to look at this issue and welcomes additional input from
guaranty agencies concerning the burden associated with the cost
allocation plan requirement.
Changes: See discussion above.

Section 682.401 Basic Program Agreement

Comment: Several commenters representing guaranty agencies objected
to Sec. 682.401(b)(28) on the grounds that it was an unnecessary
attempt to micromanage the operations of a guaranty agency and would
serve to hamper the effective operations of the guaranty agency. The
commenters stated that existing regulations mandating a specified level
of reserves, coupled with the regulations proposed in the NPRM
mandating reasonable costs, would provide adequate protection of the
Federal fiscal interest. The commenters

[[Page 60428]]

recommended that, at the very least, the transfer of default records by
a guaranty agency to third party contractors should be exempted from
this requirement. One commenter stated that guaranty agencies should be
encouraged to reduce costs where possible and that the main area in
which a guarantor could reduce costs was in computer software,
hardware, and development. One commenter agreed that the Secretary
should be notified of a conversion to another information or computer
system, but recommended that the 30-day notification period be
increased to 45 days so that a guaranty agency could more properly
prepare its notification to the Secretary and the Secretary would have
more time to respond. The same commenter opposed the requirement that
notice must be given in the case of a proposed conversion.
Discussion: The Secretary does not agree that a notification
requirement is an attempt to micromanage the operations of a guaranty
agency. A guarantor's decision to place new guarantees or to convert
records relating to its existing guarantees to an information or
computer system that is owned by or otherwise under the control of an
entity that is different than the party that owns or controls the
agency's existing system is a major decision that could have
significant impact on program participants, especially borrowers. The
Secretary needs advance notification of such proposed conversions
because the Secretary's statutory duty to administer the FFEL Program
properly would be hindered if information relating to major changes
planned by a guaranty agency is not known by the Secretary until after
the fact. If an agency experiences an emergency situation that would
make it impossible for the agency to provide that notification to the
Secretary at least 30 days before a planned conversion, the agency
should notify the Secretary as soon as practicable before the date of
the planned conversion.
As for the comment about reducing costs, the notification
requirement contained in Sec. 682.401(b)(28) has no effect on an
agency's attempt to reduce costs. The Secretary encourages guarantors
to find ways to reduce costs while preserving high quality services,
and that goal can be achieved simultaneously with the notification
requirement.
When developing these regulations, the Secretary did not want to
require a guaranty agency to provide the notification more than 30 days
before a planned conversion from one system to another, or before
solicitation of bids begins. However, if an agency wishes to provide
that notification more than 30 days before a planned conversion or
before solicitation of bids begins, it may do so.
Changes: Section 682.401(b)(28) has been revised to clarify that
the notification must be provided to the Secretary at least 30 days
prior to the conversion or before solicitation of bids begins.
Comment: One commenter representing a collection contractor asked
the Secretary to clarify that the notification requirement contained in
Sec. 682.401(b)(28) did not apply to the transfer of copies of records
from a guaranty agency to a collection contractor.
Discussion: The commenter's understanding is correct.
Changes: None.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

Comment: Many commenters expressed concern that the provision in
Sec. 682.410(a)(2) would cause lenders to end their participation with
any guaranty agency that did not have non-FFEL reserve fund assets
available to pay lender claims in cases in which the claims did not
qualify for Federal reinsurance because the agency did not meet its
Federal requirements. The commenters believed that a lender that
performs all of the required regulatory and statutory activities should
be entitled to an insurance payment from the guaranty agency for a
properly filed claim, even if the agency would not be eligible to
receive or retain a reinsurance payment from the Secretary because the
agency failed to meet a reinsurance requirement prescribed under
Sec. 682.406. The majority of the commenters recommended that the
Secretary require a guaranty agency to pay all insurance claims that
qualify for insurance under the terms of the guaranty agency's program,
even if it meant that the reserve fund would be used to pay claims for
which the agency could not receive or retain Federal reinsurance
payments. One guaranty agency went further by stating that all claims
paid by an agency should be considered proper uses of the reserve fund.
Most of the commenters recommended the addition of language that
would permit the payment of a claim if the agency made a good faith
determination that the claim met the requirements of Sec. 682.406 at
the time the claim was paid or if the only violation was the guaranty
agency's inability to meet the claim payment deadlines. Otherwise, the
commenters believe, the guarantor would be penalized for paying a claim
that appeared in good faith to be reinsurable but only to discover at a
later date that it was not (e.g., due to nonpayment of origination
fees). The suggested language would prevent the penalizing of lenders
or servicers in the instances where they have done nothing wrong. The
addition of the language ``in good faith'' would allow for a level of
tolerance that would be consistent with the provisions of section
432(g) of the HEA, and would reflect the practicalities of high volume
claims processing and the situations where critical data not in the
hands of the guarantor is unavailable or unreliable. The commenters
stated that section 432(g) only imposes a fine or penalty after a
hearing upon a showing that a violation was material and knowing and
would not penalize a guaranty agency for multiple infractions involving
systemic errors.
The commenters asked the Secretary to consider that other sources
of funds are often not available to guaranty agencies or may be
earmarked for other expenditures by the provisions of State law. One
commenter noted that the Secretary has repeatedly viewed funds received
by a guaranty agency for its FFEL Program to be part of the reserve
fund. The commenter wondered how the Secretary could recommend that an
agency obtain non-FFEL funding to honor its insurance agreements with
lenders, while at the same time considering those funds to be part of
the reserve fund. The commenter believed that by definition, those
outside funds would become part of the reserve fund and thus would be
unusable by the guaranty agency for paying claims that did not meet the
requirements of Sec. 682.406. One commenter objected to the restriction
in Sec. 682.410(a)(2)(i) and stated that the outcome of such a
restriction would mean that the fund into which insurance premiums have
been paid cannot be used to pay a valid insurance claim submitted by
the holder. One commenter from a State guaranty agency was concerned
that if a State agency was required to obtain non-FFEL funds to pay
lender claims that did not meet the requirements of Sec. 682.406, the
agency would expose the State to a financial liability that had
previously not existed. The commenter speculated that some State
guarantors would be forced to look towards privatization as a means of
maintaining the State's fiscal interests. One commenter from a guaranty
agency recommended that a guarantor be permitted to use the reserve
fund to pay

[[Page 60429]]

lender claims that did not meet the requirements of Sec. 682.406,
unless this category of claims exceeds a specified percentage of the
agency's total claim payments in the fiscal year in question. One
commenter believed that section 432(o) of the HEA would entitle the
lender to a claim payment from the Secretary if the guaranty agency
failed to pay a claim. In addition, one commenter representing a State
guaranty agency said that under State law, the State was prohibited
from using State funds to cover the expenses incurred by the State
guaranty agency. In effect, the commenter argued, the Secretary's
restriction in Sec. 682.410(a)(2)(i) would prohibit the agency from
honoring its contractual obligations.
Discussion: The Secretary agrees that a lender that performs all of
the regulatory and statutory activities required of the lender should
be entitled to an insurance payment from the guaranty agency for a
properly filed claim. Therefore, the Secretary is withdrawing this
provision of the regulations, and will permit guaranty agencies to use
reserve funds to pay such claims. However, the Secretary will take
appropriate action against a guaranty agency that violates regulatory
requirements.
Changes: The Secretary is returning this provision of the
regulations to its current published form.
Comment: One commenter recommended that the list of costs in
Sec. 682.410(a)(2)(ii) deemed to be ordinary and necessary for the
agency to fulfill its responsibilities under the HEA be expanded to
include costs of customer assistance and education and training on
laws, regulations, and guarantor policies, procedures, and services.
The commenter stated that these are basic services provided by guaranty
agencies.
Discussion: The use of examples following the word ``including'' in
Sec. 682.410(a)(2)(ii) does not mean that other examples are not
applicable. While the Secretary does not disagree that the type of
costs suggested by the commenter may be ordinary and necessary for the
agency to fulfill its responsibilities under the HEA, the Secretary
sees no need to add them to the brief list of examples given in the
regulations.
Changes: None.

Section 682.410(a)(11)(iii) Reasonable Cost

Comment: Some commenters, while not significantly opposed to the
definition of ``reasonable cost'' contained in
Sec. 682.410(a)(11)(iii), nevertheless thought the provisions in
Sec. 682.410(a)(2)(ii)(B), (C), and (D) were overly broad, vague, and
duplicative of the definition of ``reasonable cost.'' The commenters
believed that the reasonable cost definition, together with the
existing audit requirements for guaranty agencies was sufficient, and
recommended the deletion of Sec. 682.410(a)(2)(ii)(B), (C), and (D).
Discussion: The Secretary believes the requirements in
Sec. 682.410(a)(2)(ii)(B), (C), and (D) are clear, but agrees that the
provisions in (B) and (C) are addressed in paragraph
Sec. 682.410(a)(11)(iii)(B) of the ``reasonable cost'' definition.
However, Sec. 682.410(a)(2)(ii)(D) is intended to apply a specific test
to determine if a cost, though reasonable for other purposes, can be
considered an expenditure that is ordinary and necessary for the agency
to fulfill its responsibilities under the HEA.
Changes: The provisions in Sec. 682.410(a)(2)(ii)(B) and (C) have
been removed, and Sec. 682.410(a)(2)(ii)(A)-(G) has been renumbered
Sec. 682.410(a)(2)(ii)(A)-(E).
Comment: One commenter stated that in some cases (e.g., collections
activities) the Secretary's specific requirements may increase costs
beyond those that would otherwise be required. Therefore, the commenter
recommended that additional language be added to
Sec. 682.410(a)(2)(ii)(D) to provide an exception for costs to the
extent that applicable Federal requirements increase the costs of the
activities beyond those of equivalent non-Federal activities.
Discussion: The requirement that costs must not be higher than the
agency would incur under established policies, regulations, and
procedures that apply to any non-Federal activities of the guaranty
agency is intended to apply to expenditures for activities or items
that are roughly equivalent in both the agency's FFEL and non-FFEL
activities. This requirement has no effect on the comparison of
disparate activities or items. For example, if an agency operates a
non-FFEL loan program which has less stringent due diligence standards
than found in the FFEL Program, the agency's servicing costs for its
non-FFEL loan program could be lower than its servicing costs relating
to the FFEL Program. In this example (and for other similar cost areas)
the Secretary did not intend for Sec. 682.410(a)(2)(ii)(D) to be
interpreted to limit the agency's FFEL servicing costs to no more than
that paid for the agency's non-FFEL loan program, if the services
provided are not comparable.
Changes: The Secretary has added the word ``comparable'' before
``non-Federal activities'' in Sec. 682.410(a)(2)(ii)(D).
Comment: Some commenters vigorously objected to the provision in
Sec. 682.410(a)(11)(iii) that requires a guaranty agency to prove that
costs are reasonable, although one guaranty agency commenter agreed
with the regulatory language in the NPRM. The objecting commenters
argued that this provision would stifle the activities of the guaranty
agency. The commenters feared that every single agency expenditure will
be subject to retroactive challenge at the Secretary's discretion and
that the burden of reasonableness will be on the guaranty agency
without any ``safe harbor'' or ``de minimis'' rule. The commenters
believed that this requirement would make it difficult, if not
impossible, to know the standard of duty involved in planning and
making expenditures and would disrupt the delivery of services to
students and schools. The commenters recommended a deletion of the
language placing the burden of proof on the guaranty agency and
proposed placing the burden of proof on the Secretary to challenge the
reasonableness of the cost. In addition, the commenters suggested that
the Secretary's authority to challenge the expenditure should be
limited to one year from the date of the expenditure, absent a showing
of fraud and abuse by the agency, and wanted the regulations to be
prospective in their effect.
Discussion: These regulations establish clear principles for
determining if a cost is reasonable. The guaranty agency commenters
want the Secretary to presume that expenditures made by a guaranty
agency from the reserve fund reflect costs that the guaranty agency
believes are reasonable. The Secretary notes that it is the guarantor,
not the Secretary, that has the information and documentation to show
that it has complied with the reasonable cost principles prescribed in
these regulations. In the event the Secretary questions the
reasonableness of a particular expenditure, the Secretary believes the
guarantor's unique role as the front-line steward responsible for the
use of the reserve fund carries with it the obligation to document that
its use of Federal funds has been appropriate. It is not the
Secretary's role either to prove or disprove; rather, it is the
Secretary's role to consider the agency's documentation and rationale
for a questioned cost and, on behalf of the taxpayers, decide if the
agency has complied with the Federal requirements.
Changes: None.
Comment: A few commenters recommended that
Sec. 682.410(a)(11)(iii)(A) be modified to

[[Page 60430]]

recognize differences in costs as affected by the differences in
guaranty agencies. The commenters suggested that what may be
reasonable, ordinary, and necessary for the operation of a large
guaranty agency in a low cost geographic area may not be reasonable for
a smaller guaranty agency in an area with a labor shortage and high
cost of living. The commenters believed that the regulatory provision,
as written, would interfere with the intent of Sec. 421(a)(1)(A) of the
HEA, which recognizes and encourages guaranty agencies to operate
within different States pursuant to State charters. The commenters
recommended the regulations take into account the geographic area,
demographics, higher education community, size, and nature of the
guaranty agency. Several commenters suggested that
Sec. 682.410(a)(11)(iii)(B) be expanded to include a balancing of the
risks and benefits of a particular action as well as an evaluation of
price, quality, and service. One guaranty agency commenter agreed with
the regulatory language that was presented in the NPRM.
Discussion: The regulations do not prohibit a guaranty agency from
considering reasonable factors, including those presented by the
commenters, when deciding if a particular expenditure would meet the
reasonable cost definition in Sec. 682.410(a)(11)(iii). The Secretary
reminds the commenters that the burden of proof is upon the guaranty
agency, as a fiduciary, to establish that costs are reasonable.
Changes: None.
Comment: Several commenters were concerned about the extent to
which an agency would be required to go to prove an expenditure was
reasonable if it was required to document the market prices of
comparable goods or services under Sec. 682.410(a)(11)(iii)(C). The
commenters noted that guaranty agencies are involved in numerous
purchases of goods and services for which the price is not always the
most important consideration. The commenters recommended that the
regulations permit an agency to exercise its judgment concerning other
factors, including the quality of the goods or services or their timely
delivery. One guaranty agency commenter agreed with the regulatory
language that was presented in the NPRM.
Discussion: As discussed above, the regulations do not prohibit a
guaranty agency from considering reasonable factors, including those
presented by the commenters, when deciding if a particular expenditure
would meet the reasonable cost definition in Sec. 682.410(a)(11)(iii).
However, it is inconceivable that a reasonable cost determination could
be made without considering the market prices for comparable goods or
services.
Changes: None.

Section 682.410(b)(11) Conflicts of Interest

Comment: One commenter rejected what the commenter perceived to be
the underlying premise of Sec. 682.410(b)(11), that the sharing by a
guaranty agency of a corporate management structure with affiliates
would necessarily raise issues of self-dealing and conflicts of
interest. The commenter stated that guaranty agencies, through the
provisions of the Internal Revenue Code governing section 501(c)(3)
organizations, State ethics codes, and State non-stock corporation
provisions, as well as other provisions of State law, are already
prevented from engaging in the type of conduct being regulated in the
NPRM. The commenter stated that the Internal Revenue Code explicitly
forbids a section 501(c)(3) organization from having any part of its
net earnings inure to the benefit of those who control it or who
financially support it. The commenter stated that although section
432(p) of the HEA empowers the Secretary to act when there is a
conflict of interest, the commenter was unaware of any instance when
the Secretary exercised that power. Thus, the commenter concluded, the
regulations proposed by the Secretary are too broad and unnecessary. In
the commenter's view, the Secretary should instead draft ``firewall''
regulations focusing on conflicts of interest between guarantor staff
and lender/secondary market staff. Another commenter disagreed with the
scope of the proposed conflicts of interest regulations and recommended
they be limited, if imposed at all, to decision-making employees.
Discussion: The Secretary has taken steps in the past to address
specific instances of actual or potential conflicts of interests
involving guaranty agencies. However, those steps generally have not
been completely successful in eliminating or preventing conflicts of
interests at those specific agencies, nor do those specific steps have
general applicability to all guaranty agencies. Therefore, the
Secretary has decided that stronger measures, in the form of these
comprehensive regulations, are needed to protect the Federal reserve
funds and assets. The Secretary believes that these FFEL-specific
regulations should impose no significant additional burdens on any
guaranty agency covered under the more generic rules of the Internal
Revenue Code and other requirements that restrict entities and
individuals from engaging in the type of conduct addressed in the
Secretary's regulations.
Furthermore, there is a unique role for the Secretary. The
existence of a Federal reserve fund in agencies with activities outside
of the guaranty agency role creates a dangerous incentive for managers
to find ways to move funds from the restricted-use reserve fund into a
less regulated operation or affiliate. For example, agencies have been
found to be enriching their affiliates by moving operations to the
affiliate, on paper, and then charging the reserve fund a mark-up for
the services performed. The Inspector General found evidence of
agencies protecting their affiliates from fines and losses related to
due diligence violations. The Secretary has responsibility to protect
the Federal reserve funds entrusted to guaranty agencies. That is the
Secretary's role, a role that has been clearly defined by Congress when
it directed the Secretary, in section 422(g)(1)(C) of the HEA, to
prevent the ``misapplication, misuse, or improper expenditure of
reserve funds and assets.'' Finally, in response to the comment about
decision-making employees, the Secretary notes the NPRM proposed to
apply the conflicts of interest rules only to guaranty agency employees
who had decision-making authority as to the administration of a
contract or agreement supported by the reserve fund.
Changes: None.
Comment: One commenter opposed the restrictions in
Sec. 682.410(b)(11)(i) on the grounds that they were too sweeping. The
commenter recommended that, instead of applying the disclosure
requirement to financial or other interests in any entity, the
regulations should limit it to entities ``related to student financial
aid.''
Discussion: The regulations are meant to be sweeping, because the
types of organizations with which a guaranty agency could have actual
or potential conflicts of interest are not limited to those
organizations involved in student financial aid.
Changes: None.
Comment: A few commenters were concerned that the conflict of
interest restrictions in Sec. 682.410(b)(11) would force some guaranty
agencies to modify or abandon affiliation relationships that had been
in place for years and that they believed were beneficial to the FFEL
Program. Some commenters suggested that the Secretary's underlying
motive was to interfere with the ability of guaranty agencies to
compete with the Federal Direct Loan Program. Several

[[Page 60431]]

guaranty agency commenters agreed with the regulatory language that was
presented in the NPRM. One commenter representing schools recommended
that the Secretary prohibit a guaranty agency from having any
affiliated business activities.
Discussion: The Secretary recognizes that some affiliate
relationships may result in improved services and economies of scale
that benefit the affiliated parties, including the guaranty agency.
Thus, the regulations do not require a strict separation of those
entities. Instead, the regulations require that appropriate safeguards
be established to ensure that the Federal fiscal interest is not
jeopardized as a result of those affiliate relationships. The Secretary
will continue to monitor these relationships closely to ensure that the
programmatic and other costs of these relationships do not exceed the
benefits.
Changes: None.
Comment: One commenter noted that Congress has continually given
guaranty agencies authority to expand their participation in the FFEL
Program. The commenter stated that guarantors have been asked to be
lenders, lenders of last resort, and escrow agents. The commenter
believed the Secretary had no authority to regulate a guaranty agency's
affiliations.
Discussion: The Secretary has not said that all affiliations are
prohibited. Only those that result in a real or potential conflict of
interest are the subject of these regulations. Moreover, the various
obligations placed on the guaranty agencies are the responsibilities of
those agencies. Nothing in the HEA authorizes or suggests that the
agency may shift its responsibilities to an affiliate.
Changes: None.
Comment: One commenter suggested that Sec. 682.410(b)(11)(i)(A)
should be applied to all guaranty agencies, without a special exemption
for employees of a State agency covered by State codes of conduct. The
commenter believed that most State codes of conduct are generic and
focus on preventing individual transgressions that might be committed
by employees with limited decision-making authority operating within
well established procurement, contracting, or other decision-making
parameters. The commenter doubted that many State codes of conduct
address the broad, more subtle policy issues that the Secretary
intended to address in the regulations. Several guaranty agency
commenters agreed with the regulatory language that was presented in
the NPRM.
Discussion: The Secretary believes that State codes of conduct
provide sufficient safeguards to protect the interests of the FFEL
Program. If that assumption turns out to be invalid, the Secretary will
consider additional action.
Changes: None.
Comment: Several commenters representing guaranty agencies
recommended the word ``trustee'' be replaced with ``director'' and that
the word ``agents'' be deleted. The commenters recommended this change
wherever the words ``trustee'' and ``agents'' are used. Some guaranty
agency commenters agreed with the regulatory language that was
presented in the NPRM.
Discussion: The Secretary acknowledges that the title ``director''
appears to be commonly used by guaranty agencies.
Changes: The Secretary has added the title ``director'' to the list
of individuals designated in the regulations.
Comment: One commenter argued that the prohibitions in
Sec. 682.410(b)(11)(i)(A) should apply only to guarantor employees who
have financial interests in non-affiliated organizations, not in
affiliated State agencies or not-for-profit corporations. The commenter
recommended that the exemption in Sec. 682.410(b)(11)(i)(A) be revised
to include employees of multiple State agencies within the State
covered by codes of conduct established under State law or to
employees, officers, trustees, or agents employed by a not-for-profit
guarantor and its not-for-profit affiliates covered by a published code
of conduct that, among other standards, requires disclosures of the
interests specified in Sec. 682.410(b)(11)(i)(A). One commenter stated
that some private, not-for-profit guarantors are not State agencies,
but are nevertheless subject to State statutory codes of conduct. The
commenter recommended that the exemption in Sec. 682.410(b)(11)(i)(A)
be expanded to cover those agencies.
Discussion: The Secretary has seen no evidence showing that
private, not-for-profit guarantors and their employees, officers,
directors, trustees, and agents, are covered under State ethics codes
to the extent that State guaranty agencies are covered. The Secretary
believes that State guaranty agencies have sufficient authorities and
responsibilities that allow the Secretary to provide greater deference
to them than to private, not-for-profit guarantors.
Changes: None.
Comment: Several guaranty agency commenters agreed with the
regulatory language that was presented in Sec. 682.410(b)(11)(i)(A) of
the NPRM. Another commenter also agreed, but asked that the Secretary
define the term ``nominal'' with respect to unsolicited favors,
gratuities, or other items that may be accepted.
Discussion: Minor and low cost unsolicited favors, gratuities, or
other items generally may be accepted. The Secretary is reluctant to
place an absolute dollar value on the unsolicited favors, gratuities,
or other items that may be accepted, but it would be highly unlikely
that the agency could justify any case where the value exceeded $25.
Changes: None.
Comment: Several commenters objected to the provisions of proposed
Sec. 682.410(b)(11)(ii). That section proposed that if a guaranty
agency fails to meet the conflict of interest requirements in the
regulations, the Secretary may require the agency to comply with
additional appropriate measures to protect the Federal fiscal interest,
including the divestiture of the agency's non-FFEL functions and its
interests in any affiliated organization. The commenters argued that
this provision exceeded the Secretary's statutory authority. In
addition, they argued that any divestiture authority that arguably
exists could only be exercised after providing the affected guaranty
agency with appropriate due process. In contrast, one commenter agreed
with the proposed rule and another commenter suggested only that
divestiture not be required in situations in which the agency failed to
enforce the prohibition on gifts and gratuities in proposed
Sec. 682.410(b)(11)(i)(C).
Discussion: The Secretary notes that divestiture of the agency's
non-FFEL functions is only one possible measure that may be required to
protect the Federal fiscal interest. The Secretary acknowledges that
divestiture might have a significant impact on the guaranty agency's
operations. However, divestiture would clearly be appropriate if the
guaranty agency organization had otherwise failed to protect the
Federal fiscal interest against the impact of conflicts of interest
among its various activities and among its employees. Before requiring
this step, the Secretary will provide the agency with an appropriate
opportunity, consistent with applicable due process requirements, to
show why the action should not be required. The Secretary further notes
that the requirement for divestiture to protect the Federal fiscal
interest is an appropriate limitation of the guaranty agency's
participation in the FFEL program as authorized by 34 CFR
682.413(c)(1).
Changes: None.

[[Page 60432]]

Section 682.418 Prohibited Uses of Reserve Fund Assets

Comment: Several commenters representing guaranty agencies objected
to the provisions of Sec. 682.418(a)(1). The commenters stated that
pre-approval for costs such as professional services is impractical and
suggested that the pre-approval process will seriously interrupt the
delivery of services to students and financial aid officials. The
commenters wanted State agencies to be exempt from this requirement
because they believed it was redundant for State agencies with State
contractual regulations. One commenter from a guaranty agency objected
to the absence of any reference in Sec. 682.418(a)(1) to the Secretary
taking into consideration the differences in guaranty agencies, or the
standards by which the Secretary's approval will be granted. Some
commenters recommended that Sec. 682.418(a)(1) be deleted, or that an
exception be carved out for contracts awarded by way of a competitive
bidding process. Otherwise, they suggest, a guaranty agency could end
up paying more for services provided by a non-affiliate than by its
affiliate.
Discussion: The Secretary's pre-approval is only required in those
rare instances where the agency demonstrates that an unusual
circumstance exists that warrants paying an affiliate more than cost
for services rendered. The commenters can be assured that the Secretary
will take all relevant information into account when deciding if the
Federal interests would be served if a guaranty agency paid more than
cost for goods, property, or services provided by its affiliate. The
Secretary believes that under an affiliation relationship, a guaranty
agency should be able to obtain goods, property, or services from its
affiliate at cost.
The Secretary does not agree that State rules will fully protect
Federal reserve funds maintained by a State guaranty agency which has
an affiliated organization.
Changes: None.
Comment: One commenter suggested that the Secretary define the term
``affiliated organization,'' as used in Sec. 682.418(a)(1).
Discussion: The Secretary believes that a regulatory definition of
``affiliated organization'' would limit the ability to apply the
regulations to new forms of affiliations devised in the future. The
Secretary will determine whether a guaranty agency has a relationship
with an ``affiliated organization'' based on all the facts and
circumstances in the particular case. In making this determination, the
Secretary intends to utilize a working definition of ``affiliated
organization'' as any organization controlling, controlled by, or under
common control with, the guaranty agency. A guaranty agency and its
affiliate may be under common control if they share common board
members or officers, or if their activities are otherwise directed by
the same individuals. This definition is based on the definition of
``affiliate'' generally used by the Securities and Exchange Commission.
See, for example, 17 CFR 240.12b-2 and 260.0-2(a).
Changes: None.
Comment: Some commenters objected that the blanket use of the term
``assets'' in Sec. 682.418(a)(2) exceeds the statutory language found
in section 422(g) of the HEA because it is not limited to assets
purchased with the reserve funds but refers simply to ``assets.'' The
commenters recommended that this provision specify that it applies only
to assets purchased with the reserve fund. Other commenters believed
that the HEA gave the Secretary limited authority in this area, and
believed the regulations should exempt insurance agreements with
lenders, agreements with schools, and third party contracts with
private collection agencies. One commenter was concerned that this
provision would infringe on the rights of parties to enter into legally
binding contracts with a guaranty agency.
Discussion: The Secretary is not regulating how a guarantor handles
its non-FFEL assets or funds. On the other hand, the Secretary fully
intends to take steps to protect the Federal reserve fund. Accordingly,
guarantor contracts with other parties that require the use of Federal
reserve funds or assets are subject to the 30-day notification
requirement.
Changes: None.
Comment: One commenter from a guaranty agency agreed that the
Secretary should actively seek to prevent improper depletion of the
reserve fund, but considered the Secretary's proposed regulations to be
inadequate for that purpose. In the commenter's judgment, the
protection of reserve funds cannot be achieved merely by prohibiting a
limited number of specific types of expenditures which, in the
aggregate, represent an insignificant share of overall guaranty agency
costs. Instead, the commenter recommended that the Secretary focus on
the relative cost effectiveness of individual guarantors in carrying
out their primary responsibilities under the HEA. The commenter
suggested an alternative approach that would enable the Secretary to
focus on whether proper value is being received for reserve funds
expended. The commenter additionally stated that the alternative
approach would avoid what the commenter viewed to be ``inevitable,
tedious, and diversionary arguments'' that the measures proposed by the
Secretary to restrict specific types of expenditures are punitive in
nature, represent micromanagement, and are designed to hamper the
ability of guarantors to compete effectively with the Direct Lending
Program. The commenter recommended that the regulations be revised to
require: (1) the expansion of the Secretary's current guarantor
evaluation model to provide a ``fully loaded'' (all overhead costs
allocated) analysis of each guarantor's unit costs of delivering its
services; (2) on-going monitoring of each guarantor's performance
relative to the model by requiring Part E 1130 data to be submitted
quarterly rather than annually; (3) establishment of maximum acceptable
unit cost standards for each primary guarantor service (e.g., 125
percent of national mean cost); (4) the identification and correction
of specific factors that result in a guaranty agency exceeding the
acceptable unit costs in one or more areas; (5) the taking of
corrective action by a guaranty agency where overall costs exceed
current revenues (exclusive of investment income); and (6) a targeted
program review effort designed to ensure that acceptable unit costs are
not being achieved at the expense of program integrity. The commenter
believed that under the alternative approach, guaranty agencies that
manage their operations in a cost-effective manner would be able to
exercise management discretion and flexibility, and that the
alternative approach would be consistent with the Secretary's recent
initiatives to provide incentives for work well done and to encourage
common sense and good business practices by guarantors.
Discussion: Although the commenter has presented an interesting
proposal, the Secretary must decline to pursue it as an alternative to
fiduciary standards. As long as a guaranty agency holds Federal funds,
the Secretary believes it is appropriate to hold the agency accountable
under those standards.
Changes: None.
Comment: One commenter thought that all of the prohibitions and
limitations in Sec. 682.418(b) were unnecessary because the Secretary
could simply rely on the definition of ``reasonable cost'' found in
Sec. 682.410(a)(11)(iii). Thus, for example, contributions and
donations would only

[[Page 60433]]

be prohibited to the extent that they were not reasonable.
Discussion: The commenter's proposal ignores the limited purpose of
the Federal reserve funds and assets. Those funds and assets are
provided solely to serve FFEL Program purposes. The Secretary has
determined that certain uses of those funds and assets are simply
unreasonable, in light of their intended purpose.
Changes: None.

Section 682.418(b)(1) Advertising

Comment: Some commenters objected to the restrictions on
advertising in Sec. 682.418(b)(1) and recommended that a guaranty
agency should be permitted to use reserve funds to advertise the types
of services that the agency provides. The commenters mentioned many
types of services, including default prevention software, training
programs, and Internet sites. A few commenters questioned how an agency
could perform its customer service functions under Sec. 682.418(b)(9),
``public relations,'' if the agency was prohibited from advertising
about those customer service functions.
The commenters also generally stated that provisions on reasonable
costs contained in Sec. 682.410(a)(11) and existing provisions on
guaranty agency reserve levels adequately protect the Federal fiscal
interest. The commenters noted that OMB Circulars A-87 and A-122 allow
for advertising costs ``necessary to meet the requirements of the
Federal award.'' The commenters recommended that guarantors not be
prohibited from using advertising that was related to the guaranty
agency's purposes under the HEA. Other commenters believed the
restrictions on advertising ran counter to the Secretary's, the
President's, and the Congress' stated support of competition for better
education loan services and school choice between the FFEL and the
Direct Loan programs.
Discussion: A guaranty agency may use the reserve fund to pay for
activities that are ordinary and necessary for the fulfillment of its
FFEL guaranty responsibilities under the HEA. In Sec. 682.418(b)(9),
several examples of these activities are given, such as training of
program participants and secondary school personnel, dissemination of
FFEL-related information and materials to schools, loan holders,
prospective loan applicants, and their parents, and training at
workshops, conferences, or other forums. When developing the NPRM, the
Secretary did not intend to bar the use of reserve funds to provide
notices about those activities and meetings. However, a number of
commenters believed that this type of notification would be prohibited
because it was not specifically listed in either Sec. 682.418 (b)(1) or
(b)(9). To clarify this rule, the Secretary has decided to include such
notices as an allowable activity related to ``public relations,'' under
Sec. 682.418(b)(9). The Secretary believes that this clarification,
together with the overall requirement that advertising costs must be
ordinary and necessary for the fulfillment of the agency's FFEL
guaranty responsibilities under the HEA, eliminates the need to have a
separate regulatory provision devoted solely to advertising.
Changes: Section 682.418(b)(1) is deleted and sections 682.418
(b)(2) through (b)(11) will be renumbered (b)(1) through (b)(10). The
definition of the term ``public relations'' under renumbered
Sec. 682.418(b)(8) will permit the use of reserve funds to pay
advertising costs related to providing notice about training of program
participants and secondary school personnel, customer service functions
that disseminate FFEL-related information and materials to schools,
loan holders, prospective loan applicants, and their parents, and
training at workshops, conferences, or other forums.

Section 682.418(b)(2) Compensation for Personnel Services

Comment: Many commenters asked for an explanation of how the
Secretary's total compensation in Sec. 682.418(b)(2) was calculated to
be 118.05 percent of the Secretary's salary. The commenters generally
believed that the calculation did not include all of the Secretary's
compensation. Several commenters believed the Secretary has no
authority to put a limit on compensation that is contained in
Sec. 682.418(b)(2). However, one guaranty agency commenter agreed with
the regulatory language that was presented in the NPRM.
The commenters also argued that 18.05 percent would not cover the
average percentage of a salary attributable to benefits in the non-
profit sector. Some commenters argued that in order to attract and
retain qualified individuals, particularly those for information
systems type positions, it is critical for the guaranty agency to be
able to provide competitive compensation packages to its employees. One
commenter stated that many other organizations, such as universities
and hospitals, receive or administer Federal funds, including funds
issued by the Secretary, yet neither the Secretary or any other Federal
agency has claimed authority for establishing maximum compensation for
employees of those entities. Most of the commenters recommended that
Sec. 682.418(b)(2) be deleted, or if not entirely deleted, the
reference to compensation and benefits should be deleted and the
regulations should refer only to salary when discussing the cap.
Discussion: The Federal reserve funds are provided to guaranty
agencies to be used for specific program purposes. The Secretary is not
convinced that paying compensation in excess of the reasonable amounts
proposed in the NPRM is a necessary or appropriate use of those funds.
A guaranty agency that chooses to pay compensation that exceeds the
amounts allowable under Sec. 682.418(b)(1) (as renumbered) may use non-
FFEL resources to fund those excess amounts of compensation.
Overall responsibility for the FFEL Program is one of the
Secretary's many duties, whereas the administration of a guaranty
agency is, by comparison, the logical equivalent of a subset of the
Secretary's overall duties. The Secretary, as the overall administrator
of the entire FFEL Program, in addition to many other duties, has a
wider area of responsibility than any individual associated with any
guaranty agency. Therefore, the most appropriate salary amount to base
the compensation restrictions upon is the Secretary's total salary paid
(as calculated on an hourly basis) under section 5312 of title 5,
United States Code (relating to Level I of the Executive Schedule).
Further, the sum of all of the components making up the annual
compensation received by the Secretary resulted in the calculation that
all of the benefits received by the Secretary represented a dollar
value equal to 18.05 percent of the Secretary's annual salary.
Changes: None.

Section 682.418(b)(3) Contributions and Donations

Comment: Some commenters believed that Sec. 682.418(b)(3) would
prohibit charitable activities by guaranty agency employees and the
training programs that guaranty agencies provide for the State
financial aid organizations. The commenters stated that this training
is an essential element of a guaranty agency function and should not be
prohibited. They also noted that the OMB Circulars allow expenditures
for the morale, health, and welfare of employees. The commenters
recommended that the regulations be revised to comply with the OMB
Circulars, and that the regulations allow a guaranty agency to make
contributions

[[Page 60434]]

and donations from the reserve fund if they are for the purpose of
meeting the agency's functions under the HEA. One commenter recommended
that the regulations establish a maximum allowable amount to allow a
reasonable level of guarantor external involvement and support for such
activities, without prior approval from the Secretary. Another
commenter recommended that the regulations permit minor contributions,
especially in the context of matching donations of money by employees
and allowing employees to volunteer small amounts of time during work
hours. The commenter stated that these are reasonable and ordinary
activities engaged in by reasonable organizations, and that guaranty
agencies should not be prohibited from contributing to their
communities.
Discussion: The prohibition against contributions and donations
does not prohibit guaranty agencies from continuing to provide
education and information dissemination services to schools, nor does
it interfere with the ability of a guaranty agency to perform
activities that are ordinary and necessary for the fulfillment of its
FFEL guaranty responsibilities under the HEA. However, contributions or
donations, including the volunteer services of employees during working
hours, are prohibited, unless the Secretary decides that the Federal
interests would benefit. In that event, the Secretary will provide
specific written authorization to the agency. The Secretary also notes
that, except for the reference to ``guaranty agency'' instead of
``government unit,'' the prohibition in Sec. 682.418(b)(3) contains the
exact language found in OMB Circular A-87.
Changes: None.

Section 682.418(b)(4) Entertainment

Comment: Commenters representing guaranty agencies objected to the
prohibition in Sec. 682.418(b)(4) against the use of the reserve fund
for entertainment, although one guaranty agency commenter agreed with
the regulatory language that was presented in the NPRM. The commenters
argued that guaranty agencies should be allowed to use the reserve fund
for entertainment that would improve the morale, health, and welfare of
their employees. Other commenters also wanted agencies to be allowed to
use the reserve fund for entertainment costs at meetings, conferences,
and workshops related to the guaranty agency's responsibilities under
the HEA.
Discussion: The FFEL reserve fund is intended to be used only for
the purpose of ensuring that all eligible students and their parents
have access to FFEL loans. In carrying out its responsibilities under
the HEA, a guaranty agency, like any other organization, would need to
provide for the adequate morale, health, and welfare of its employees.
Such expenditures may include the reasonable costs of health or first-
aid clinics, recreational facilities, employee counseling services,
child care services, employee information publications, or similar
activities or services. Those costs are not prohibited, and would fall
under the ``ordinary and necessary'' rule with respect to reasonable
costs in Sec. 682.410(a)(11)(iii)(A). However, the Secretary does not
view the types of activities specified under ``entertainment'' in
Sec. 682.418(b)(4) of the NPRM to be ordinary and necessary for the
adequate morale, health, and welfare of a guaranty agency's employees.
The Secretary does not believe that the entertainment activities
prohibited by these regulations are necessary to an agency's ability to
conduct meetings, conferences, and workshops related to the guaranty
agency's responsibilities under the HEA. The Secretary believes that
such entertainment costs would divert FFEL resources from the goal of
ensuring that all eligible students and their parents have access to
FFEL loans.
Changes: None.

Section 682.418(b)(5) Fines, Penalties, Damages, and Other Settlements

Comment: Several commenters opposed the restrictions in
Sec. 682.418(b)(5) on the use of reserve funds to pay fines, penalties,
damages, or settlements against the agency because of the agency's
violation or alleged violation of a Federal, State, or local law or
regulation unrelated to the FFEL Program. The commenters believed those
restrictions would be unfair to the agencies that had no access to
funds other than the FFEL reserves, and would effectively cut off their
ability to defend themselves against lawsuits. The commenters argued
that this provision is unnecessary, especially where a guaranty agency
makes good faith efforts to comply with Federal and State laws
unrelated to the FFEL Program.
The commenters also believed that the provisions in
Sec. 682.418(b)(5) are more restrictive than the OMB Circulars. They
recommended that costs needed to defend a guaranty agency for non-FFEL
related claims where the guaranty agency acted in good faith should be
allowed, and that the language contained in the OMB Circulars allowing
legal expenses required in the administration of a Federal program
should be adopted here. A number of commenters suggested that this
restriction would actually be contrary to the Federal fiscal interest
since they believed it would encourage agencies to avoid litigation at
all costs.
Discussion: The Secretary has decided to modify this restriction so
that the interests of the taxpayer will be protected while, at the same
time, guaranty agency operations will not be jeopardized because the
agency is unable to use reserve funds or obtain non-FFEL funding to pay
fines, penalties, damages, and settlements. The Secretary believes that
a guaranty agency should be permitted to use the reserve fund to pay
fines for such violations or alleged violations as long as they have
been assessed against the guaranty agency, do not involve the
reimbursement of agency employees, do not exceed $1,000, and result
from non-criminal charges. This approach is in accord with the
Secretary's understanding of normal business practices. If the penalty
exceeds $1,000 or involves an actual or alleged criminal violation, the
agency must receive specific prior approval from the Secretary before
using the reserve fund.
Changes: The regulations have been revised accordingly, as
discussed above.

Section 682.418(b)(6) Legal Expenses

Comment: Some commenters believed the prohibition in
Sec. 682.418(b)(6) of the use of the reserve fund to prosecute claims
against the Federal Government would violate a guaranty agency's right
to due process in the case of an agency that had no access to funds
other than the FFEL reserves. The commenters recommended that, at a
minimum, actions based on good faith challenges, or where a reasonable
chance of success can be demonstrated based on precedent, or where
there is no known precedent to the contrary, should be allowed. The
commenters recommended the deletion of the Secretary's approval prior
to reimbursement for legal expenses when the guaranty agency has
substantially prevailed.
One commenter stated that if the Secretary was concerned with the
use of Federal funds for the prosecution of frivolous matters, or
initiation of legal action purely to avoid compliance, then that
concern is addressed by existing ethical and court standards that
prohibit the assertion of a claim by an attorney, that is unwarranted
under existing law, or which cannot be supported by a good faith
argument for a revision or change in existing law.
Discussion: The regulations allow a guaranty agency to use reserve
funds to appeal findings and determinations of

[[Page 60435]]

the Department by presenting its position in administrative hearings.
However, the Secretary does not believe that it is an appropriate use
of taxpayer funds to pay for the agencies' unsuccessful court
challenges. The Secretary notes that the right to sue the Federal
Government does not include the right to use Federal property to do so.
Changes: None.
Comment: Some commenters questioned the provision in
Sec. 682.418(b)(6) that, even if the guarantor prevails in its
litigation, the Secretary will determine the amount of funds to be used
to reimburse the guarantor. The commenters argued that this provision
would make it practically impossible for an agency to hire counsel.
Discussion: The Secretary will reimburse a guaranty agency for all
documented and reasonable legal expenses incurred by the agency if the
agency substantially prevails in its claim against the Secretary.
Changes: None.

Section 682.418(b)(7) Lobbying Activities

Comment: Some commenters recommended a revision so that the
restrictions in Sec. 682.418(b)(7) would not prohibit dues paid to
membership organizations that do not have lobbying as their principal
purpose and activity. One guaranty agency commenter agreed with the
regulatory language that was presented in the NPRM. Another commenter
asked if the Secretary would consider a guaranty agency's response to
an inquiry from a legislator to be lobbying. Some commenters
misinterpreted the restriction in Sec. 682.418(b)(7) to mean that a
guaranty agency could not be a member of an organization that engages
in lobbying, even if only to a minor extent.
Discussion: The regulations do not prohibit guaranty agencies from
being members of organizations that engage in lobbying. The regulations
simply prohibit Federal reserve funds from being used to pay that
portion of the membership dues that would be used for lobbying. This
restriction is similar to existing restrictions on the activities of
charitable organizations under the Internal Revenue Code.
Changes: None.

Section 682.418(b)(8) Major Expenditures

Comment: Several commenters representing guaranty agencies objected
to requirements in Sec. 682.418(b)(8) restricting the use of reserve
funds to pay for major expenditures on the grounds that it was an
unnecessary attempt to micromanage the operations of a guaranty agency
and would serve to hamper the effective operations of the guaranty
agency. However, one guaranty agency commenter agreed with the
regulatory language that was presented in the NPRM. One commenter
acknowledged the Secretary's obligation to regulate and review a
guaranty agency's investment of Federal reserve funds in major assets
such as systems or facilities, but did not believe the regulations
proposed by the Secretary provided enough guidance for how such
proposed investments should be justified by the guaranty agencies.
Another commenter recommended a more precise definition of the term
``major expenditure.'' The commenter stated that such costs as claim
payments and personnel compensation are surely ``major'' expenditures,
but doubted that the Secretary intended those expenditures to be
included in the notification requirement under Sec. 682.418(b)(8).
Discussion: The use of the term ``such as'' followed by some
examples of costs to be considered does not mean that costs similar to
those suggested by the commenters could not be evaluated. The Secretary
will not require notification of an agency's intended lender claim
payment. However, the Secretary would want to know about, and would be
concerned if a guaranty agency intended to pay personnel compensation
(presumably, a biweekly or monthly payroll) that exceeds 5 percent of
the agency's reserve fund balance at the time the compensation is paid.
Changes: None.
Comment: One commenter representing a collection agency stated that
it would not be easy to determine if payments made to a collection
contractor would exceed the 5 percent criterion specified in the
regulations. The commenter noted that a collection contractor works on
a contingency basis, therefore, potential expenditures would be
difficult to predict. The commenter also observed that a collection
contractor is paid only if it successfully collects a debt, so the
payment to the contractor may not be a true ``expenditure'' of funds,
but is simply a fee paid for increasing the balance of the agency's
Federal reserve fund.
Discussion: The commenter's point is well taken, but the Secretary
sees no need to revise the regulations. If a guaranty agency believes
that its payment to a collection contractor would exceed the 5 percent
threshold, the Secretary expects to be notified.
Changes: None.

Section 682.418(b)(9) Public Relations.

Comment: One commenter from a school was opposed to the
restrictions on public relations costs in Sec. 682.418(b)(9). The
commenter believed that it was appropriate for guaranty agencies to
sponsor school training sessions, workshops, and conferences on all
aspects of the title IV programs. The commenter stated that schools
generally had insufficient resources available for funding such
training, and without the financial assistance of guaranty agencies, it
would be severely curtailed or eliminated.
Discussion: A guaranty agency is permitted to use the reserve fund
to pay for activities that are ordinary and necessary for the
fulfillment of the agency's FFEL guaranty responsibilities under the
HEA, such as training of program participants and secondary school
personnel, customer service functions that disseminate FFEL-related
information and materials to schools, loan holders, prospective loan
applicants, and their parents, and training at workshops and
conferences. The Secretary does not believe it is appropriate for a
guaranty agency to use Federal reserve funds to pay for an activity
that is not necessary for the agency's fulfillment of its FFEL guaranty
responsibilities.
Changes: None.
Comment: Commenters representing guaranty agencies recommended that
the list of permissible public relations expenditures needs to include
the furnishing of lodging, transportation, and honorarium to
participants in FFEL related functions. Otherwise, according to the
commenters, the performance of a guaranty agency's functions under the
HEA will be hindered. They also recommended the addition of language
prohibiting such expenditures where the sole purpose of the expenditure
is to promote a favorable image of the guaranty agency. One guaranty
agency commenter agreed with the regulatory language that was presented
in the NPRM.
Discussion: Allowable public relations costs may include associated
costs that are reasonable, including costs of the nature discussed by
the commenters. The Secretary declines to list specific costs items in
the regulations because of the number of different items that can be
associated with allowable public relations costs. The Secretary also
believes it would be superfluous to add language prohibiting such
expenditures if the sole purpose of the expenditure is to promote a
favorable image of the guaranty agency, because such expenditures
already

[[Page 60436]]

would fail to meet the regulatory requirements pertaining to allowable
public relations costs.
Changes: None.
Comment: One commenter asked if the restrictions on the use of
reserve funds for public relations costs would mean that a guaranty
agency could not publish an annual report.
Discussion: The Secretary does not consider a guaranty agency's
annual report to be a public relations activity. In the Secretary's
view, an annual report is a normal and customary business document. The
key test concerning such a report would be for the agency to be able to
document that the cost of the report was reasonable.
Changes: None.

Section 682.418(b)(10) Relocation of Employees

Comment: One commenter believed that Sec. 682.418(b)(10) should be
deleted because, in the commenter's opinion, the IRS rules regarding
relocation expenses are sufficient.
Discussion: The issue of whether relocation expenses are income to
a taxpayer for IRS purposes is irrelevant to the issue of whether the
Federal reserve funds should pay for those costs.
Changes: None.

Section 682.410(b)(11) Travel Expenses

Comment: Commenters representing guaranty agencies stated that
travel rates available to Federal employees are not available to
guaranty agency employees and, therefore, Sec. 682.418(b)(11) is not
workable, but one guaranty agency commenter agreed with the regulatory
language that was presented in the NPRM. The commenters also stated
there are no standards provided by which a guaranty agency can develop
a travel policy that will be approved by the Secretary. The commenters
recommended a deletion of Sec. 682.418(b)(11), and suggested that a
guaranty agency should submit its travel plan and be able to use it
unless expressly disallowed by the Secretary. Several commenters
believed the restrictions on travel costs in Sec. 682.418(b)(11) were
unnecessary because the general rules governing reasonable costs would
be sufficient.
Discussion: The Secretary has an obligation to protect diligently
the Federal reserve funds and assets administered by guaranty agencies.
Although there may be a number of alternative approaches that could be
taken to protect those reserve funds and assets, the Secretary has not
been persuaded by the commenters that the approach proposed in the NPRM
was unreasonable, burdensome, or failed to protect the Federal
interests.
Changes: None.

Section 682.418(c) Cost Allocation

Comment: One commenter supported the requirement that guarantors be
required to develop cost allocation plans subject to audit, and also
supported the requirement that the plans be reasonable, as that term is
used in Sec. 682.410, specifically that the plan pass the ``prudent
person'' test. However, the commenter disagreed with the requirement
that the plan must be consistent with OMB Circular A-87. In the
commenter's view, OMB Circular A-87 is designed for a different class
of entities than guaranty agencies, thus, the required application of
it to guarantors would create ambiguities and contradictions that will
be difficult to resolve. The commenter stated that the guarantor
agreements with the Secretary are neither grants nor cost-reimbursement
contracts; they are fee-for-service contracts, with the Secretary
paying the guarantor a fee for each loan guaranteed, for each loan
successfully prevented from default, and for each defaulted loan
collected. The commenter believed the only element of the guarantor's
agreement with the Secretary that resembles cost reimbursement is the
partial reimbursement of claims paid by the guarantor to lenders.
Discussion: The Secretary has stated that OMB Circular A-87 applies
to guaranty agencies. The Secretary does not agree that the fee-for-
service rules apply to guaranty agencies. The guaranty agencies are not
paid for services provided, but instead receive Federal funds to use in
performing certain roles in the FFEL Program.
Changes: None.

Assessment of Educational Impact

In the notice of proposed rulemaking, the Secretary requested
comments on whether the proposed regulations would require transmission
of information that is being gathered by or is available from any other
agency or authority of the United States.
Based on the response to the proposed rules and on its own review,
the Department has determined that the regulations in this document do
not require transmission of information that is being gathered by or is
available from any other agency or authority of the United States.

List of Subjects in 34 CFR Part 682

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

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

Dated: November 21, 1996.
Richard W. Riley,
Secretary of Education.

The Secretary amends title 34 of the Code of Federal Regulations by
revising Part 682 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 682.401 is amended by adding a new paragraph (b)(28) to
read as follows:


Sec. 682.401 Basic program agreement.

* * * * *
(b) * * *
(28) Change in agency's records system. The agency shall provide
written notification to the Secretary at least 30 days prior to placing
its new guarantees or converting the records relating to its existing
guaranty portfolio to an information or computer system that is owned
by, or otherwise under the control of, an entity that is different than
the party that owns or controls the agency's existing information or
computer system. If the agency is soliciting bids from third parties
with respect to a proposed conversion, the agency shall provide written
notice to the Secretary as soon as the solicitation begins. The
notifications described in this paragraph must include a concise
description of the agency's conversion project and the actual or
estimated cost of the project.
* * * * *
3. Section 682.410 is amended by revising the introductory text in
paragraph (a)(2), revising paragraphs (a)(2)(ii) and (x), and adding
new paragraphs (a)(11)(iii) and (b)(11) to read as follows:


Sec. 682.410 Fiscal, administrative, and enforcement requirements.

(a) * * *
(2) Uses of reserve fund assets. A guaranty agency may not use the
assets of the reserve fund established under paragraph (a)(1) of this
section to pay costs prohibited under Sec. 682.418, but shall use the
assets of the reserve fund to pay only--
* * * * *
(ii) Costs that are reasonable, as defined under
Sec. 682.410(a)(11)(iii), and

[[Page 60437]]

that are ordinary and necessary for the agency to fulfill its
responsibilities under the HEA, including costs of collecting loans,
providing preclaims assistance, monitoring enrollment and repayment
status, and carrying out any other guaranty activities. Those costs
must be--
(A) Allocable to the FFEL Program;
(B) Not higher than the agency would incur under established
policies, regulations, and procedures that apply to any comparable non-
Federal activities of the guaranty agency;
(C) Not included as a cost or used to meet cost sharing or matching
requirements of any other federally supported activity, except as
specifically provided by Federal law;
(D) Net of all applicable credits; and
(E) Documented in accordance with applicable legal and accounting
standards;
* * * * *
(x) Any other costs or payments ordinary and necessary to perform
functions directly related to the agency's responsibilities under the
HEA and for their proper and efficient administration;
* * * * *
(11) * * *
(iii) Reasonable cost means a cost that, in its nature and amount,
does not exceed that which would be incurred by a prudent person under
the circumstances prevailing at the time the decision was made to incur
the cost. The burden of proof is upon the guaranty agency, as a
fiduciary under its agreements with the Secretary, to establish that
costs are reasonable. In determining reasonableness of a given cost,
consideration must be given to--
(A) Whether the cost is of a type generally recognized as ordinary
and necessary for the proper and efficient performance and
administration of the guaranty agency's responsibilities under the HEA;
(B) The restraints or requirements imposed by factors such as sound
business practices, arms-length bargaining, Federal, State, and other
laws and regulations, and the terms and conditions of the guaranty
agency's agreements with the Secretary; and
(C) Market prices of comparable goods or services.
* * * * *
(b) * * *
(11) Conflicts of interest. (i) A guaranty agency shall maintain
and enforce written standards of conduct governing the performance of
its employees, officers, directors, trustees, and agents engaged in the
selection, award, and administration of contracts or agreements. The
standards of conduct must, at a minimum, require disclosure of
financial or other interests and must mandate disinterested decision-
making. The standards must provide for appropriate disciplinary actions
to be applied for violations of the standards by employees, officers,
directors, trustees, or agents of the guaranty agency, and must include
provisions to--
(A) Prohibit any employee, officer, director, trustee, or agent
from participating in the selection, award, or decision-making related
to the administration of a contract or agreement supported by the
reserve fund described in paragraph (a) of this section, if that
participation would create a conflict of interest. Such a conflict
would arise if the employee, officer, director, trustee, or agent, or
any member of his or her immediate family, his or her partner, or an
organization that employs or is about to employ any of those parties
has a financial or ownership interest in the organization selected for
an award or would benefit from the decision made in the administration
of the contract or agreement. The prohibitions described in this
paragraph do not apply to employees of a State agency covered by codes
of conduct established under State law;
(B) Ensure sufficient separation of responsibility and authority
between its lender claims processing as a guaranty agency and its
lending or loan servicing activities, or both, within the guaranty
agency or between that agency and one or more affiliates, including
independence in direct reporting requirements and such management and
systems controls as may be necessary to demonstrate, in the independent
audit required under Sec. 682.410(b)(1), that claims filed by another
arm of the guaranty agency or by an affiliate of that agency receive no
more favorable treatment than that accorded the claims filed by a
lender or servicer that is not an affiliate or part of the guaranty
agency; and
(C) Prohibit the employees, officers, directors, trustees, and
agents of the guaranty agency, his or her partner, or any member of his
or her immediate family, from soliciting or accepting gratuities,
favors, or anything of monetary value from contractors or parties to
agreements, except that nominal and unsolicited gratuities, favors, or
items may be accepted.
(ii) Guaranty agency restructuring. If the Secretary determines
that action is necessary to protect the Federal fiscal interest because
of an agency's failure to meet the requirements of
Sec. 682.410(b)(11)(i), the Secretary may require the agency to comply
with any additional measures that the Secretary believes are
appropriate, including the total divestiture of the agency's non-FFEL
functions and the agency's interests in any affiliated organization.
* * * * *
4. A new Sec. 682.418 is added to subpart D to read as follows:


Sec. 682.418 Prohibited uses of reserve fund assets.

(a) General. (1) A guaranty agency may not use the assets of the
reserve fund established under Sec. 682.410(a)(1) to pay costs
prohibited under paragraph (b) of this section and may not use the
assets of the reserve fund to pay for goods, property, or services
provided by an affiliated organization that would exceed the affiliated
organization's actual and reasonable cost of providing those goods,
property, or services, unless the agency demonstrates to the Secretary,
and receives the Secretary's concurrence, that such a payment would be
in the Federal fiscal interest.
(2) All guaranty agency contracts with respect to its reserve fund
or assets must include a provision stating that the contract is
terminable by the Secretary upon 30 days notice to the contracting
parties if the Secretary determines that the contract includes an
impermissible transfer of the reserve fund or assets or is otherwise
inconsistent with the terms and purposes of section 422 of the HEA.
(b) Prohibited uses of reserve fund assets. A guaranty agency may
use the assets of the reserve fund established under Sec. 682.410(a)(1)
only as prescribed in Sec. 682.410(a)(2). Uses of the reserve fund that
are not allowable under Sec. 682.410(a)(2) include, but are not limited
to--
(1) Compensation for personnel services, including wages, salaries,
pension plan costs, post-retirement health benefits, employee life
insurance, unemployment benefit plans, severance pay, costs of leave,
and other benefits, to the extent that total compensation to an
employee, officer, director, trustee, or agent of the guaranty agency
is not reasonable for the services rendered. Compensation is considered
reasonable to the extent that it is comparable to that paid in the
labor market in which the guaranty agency competes for the kind of
employees involved. Costs that are otherwise unallowable may not be
considered allowable solely on the basis that they constitute personnel
compensation. In no case may the reserve fund be used to pay any
compensation, whether calculated on an hourly basis or otherwise, that
would be proportionately greater than 118.05

[[Page 60438]]

percent of the total salary paid (as calculated on an hourly basis)
under section 5312 of title 5, United States Code (relating to Level I
of the Executive Schedule).
(2) Contributions and donations, including cash, property, and
services, by the guaranty agency to others, regardless of the recipient
or purpose, unless pursuant to written authorization from the
Secretary;
(3) Entertainment, including amusement, diversion, hospitality
suites, and social activities, and any costs associated with those
activities, such as tickets to shows or sports events, meals, alcoholic
beverages, lodging, rentals, transportation, and gratuities;
(4) Fines, penalties, damages, and other settlements resulting from
violations or alleged violations of the guaranty agency's failure to
comply with Federal, State, or local laws and regulations that are
unrelated to the FFEL Program, unless specifically approved by the
Secretary. This prohibition does not apply if a non-criminal violation
or alleged violation has been assessed against the guaranty agency, the
payment does not reimburse an agency employee, and the payment does not
exceed $1,000, or if it occurred as a result of compliance with
specific requirements of the FFEL Program or in accordance with written
instructions from the Secretary. The use of the reserve fund in any
other case must be requested by the agency and specifically approved in
advance by the Secretary;
(5) Legal expenses for prosecution of claims against the Federal
Government, unless the guaranty agency substantially prevails on those
claims. In that event, the Secretary approves the reimbursement of
reasonable legal expenses incurred by the guaranty agency;
(6) Lobbying activities, as defined in section 501(h) of the
Internal Revenue Code, including dues to membership organizations to
the extent that those dues are used for lobbying;
(7) Major expenditures, including those for land, buildings,
equipment, or information systems, whether singly or as a related group
of expenditures, that exceed 5 percent of the guaranty agency's reserve
fund balance at the time the expenditures are made, unless the agency
has provided written notice of the intended expenditure to the
Secretary 30 days before the agency makes or commits itself to the
expenditure. For those expenditures involving the purchase of an asset,
the term ``major expenditure'' applies to costs such as the cost of
purchasing the asset and making improvements to it, the cost to put it
in place, the net invoice price of the asset, ancillary charges, such
as taxes, duty, protective in-transit insurance, freight, and
installation costs, and the costs of any modifications, attachments,
accessories, or auxiliary apparatus necessary to make the asset usable
for the purpose for which it was acquired, whether the expenditures are
classified as capital or operating expenses;
(8) Public relations, and all associated costs, paid directly or
through a third party, to the extent that those costs are used to
promote or maintain a favorable image of the guaranty agency. The term
``public relations'' does not include any activity that is ordinary and
necessary for the fulfillment of the agency's FFEL guaranty
responsibilities under the HEA, including appropriate and reasonable
advertising designed specifically to communicate with the public and
program participants for the purpose of facilitating the agency's
ability to fulfill its FFEL guaranty responsibilities under the HEA.
Ordinary and necessary public relations activities include training of
program participants and secondary school personnel and customer
service functions that disseminate FFEL-related information and
materials to schools, loan holders, prospective loan applicants, and
their parents. In providing that training at workshops, conferences, or
other ordinary and necessary forums customarily used by the agency to
fulfill its responsibilities under the HEA, the agency may provide
light meals and refreshments of a reasonable nature and amount to the
participants;
(9) Relocation of employees in excess of an employee's actual or
reasonably estimated expenses or for purposes that do not benefit the
administration of the guaranty agency's FFEL program. Except as
approved by the Secretary, reimbursement must be in accordance with an
established written policy; and
(10) Travel expenses that are not in accordance with a written
policy approved by the Secretary or a State policy. If the guaranty
agency does not have such a policy, it may not use the assets of the
reserve fund to pay for travel expenses that exceed those allowed for
lodging and subsistence under subchapter I of Chapter 57 of title 5,
United States Code, or in excess of commercial airfare costs for
standard coach airfare, unless those accommodations would require
circuitous routing, travel during unreasonable hours, excessively
prolonged travel, would result in increased cost that would offset
transportation savings, or would offer accommodations not reasonably
adequate for the medical needs of the traveler.
(c) Cost allocation. Each guaranty agency that shares costs with
any other program, agency, or organization shall develop a cost
allocation plan consistent with the requirements described in OMB
Circular A-87 and maintain the plan and related supporting
documentation for audit. A guaranty agency is required to submit its
cost allocation plans for the Secretary's approval if it is
specifically requested to do so by the Secretary.

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

[FR Doc. 96-30360 Filed 11-26-96; 8:45 am]
BILLING CODE 4000-01-P




]

Last Modified: 06/23/1998