The Secretary proposes to amend the Student Assistance General Provisions regulations, 34 CFR part 668, to permit a school to appeal its Direct Loan Program cohort rate or weighted average cohort rate on the basis of improper servicing or collection of t

[Federal Register: July 13, 1998 (Volume 63, Number 133)]

[Proposed Rules]               

[Page 37713-37720]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr13jy98-25]



[[Page 37713]]


_______________________________________________________________________


Part IV






Department of Education






_______________________________________________________________________




34 CFR Part 668




Student Assistance General Provisions; Proposed Rule



[[Page 37714]]



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


DEPARTMENT OF EDUCATION


34 CFR Part 668


RIN 1840-AC52



Student Assistance General Provisions


AGENCY: Office of Postsecondary Education, Department of Education.


ACTION: Notice of proposed rulemaking.


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


SUMMARY: The Secretary proposes to amend the Student Assistance General 

Provisions regulations, 34 CFR part 668, to permit a school to appeal 

its Direct Loan Program cohort rate or weighted average cohort rate on 

the basis of improper servicing or collection of the Direct Loans 

included in that rate. The Secretary also proposes to clarify when a 

school's rate is considered final.


DATES: Comments must be received by the Department on or before 

September 11, 1998.


ADDRESSES: All comments concerning these proposed regulations should be 

addressed to Kenneth Smith, U.S. Department of Education, P.O. Box 

23272, Washington, DC 20026-3272. Comments may also be sent through the 

Internet to: cohort__rates@ed.gov.

    Comments that concern information collection requirements must be 

sent to the Office of Management and Budget at the address listed in 

the Paperwork Reduction Act section of this preamble. A copy of those 

comments may also be sent to the Department representative named in 

this section.


FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of 

Education, 600 Independence Avenue, SW., ROB-3, Room 3045, Washington, 

DC 20202. 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.

    Individuals with disabilities may obtain this document in an 

alternate format (e.g., Braille, large print, audiotape, or computer 

diskette) on request to the contact person listed in the preceding 

paragraph.


SUPPLEMENTARY INFORMATION:


Invitation to Comment


    Interested persons are invited to submit comments and 

recommendations regarding these proposed regulations.

    To ensure that public comments have maximum effect in developing 

the final regulations, the Department urges commenters to identify 

clearly the specific section or sections of the proposed regulations 

that each comment addresses and to arrange comments in the same order 

as the proposed regulations.

    All comments submitted in response to these proposed regulations 

will be available for public inspection, during and after the comment 

period, in Room 3045, Regional Office Building 3, 7th and D Streets, 

SW., Washington, DC, between the hours of 8:30 a.m. and 4:00 p.m., 

Eastern time, Monday through Friday of each week except Federal 

holidays.

    On request the Department supplies an appropriate aid, such as a 

reader or print magnifier, to an individual with a disability who needs 

assistance to review the comments or other documents in the public 

rulemaking docket for these proposed regulations. An individual with a 

disability who wants to schedule an appointment for this type of aid 

may call (202) 205-8113 or (202) 260-9895. An individual who uses a TDD 

may call the Federal Information Relay Service at 1-800-877-8339, 

between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.

    To assist the Department in complying with the specific 

requirements of Executive Order 12866 and its overall requirement of 

reducing regulatory burden, the Secretary invites comments on whether 

there may be further opportunities to reduce any regulatory burdens 

found in these proposed regulations.


General


    On December 1, 1995, the Secretary published final regulations (60 

FR 61760) that modified the regulations relating to the default 

reduction initiative in the Federal Family Education Loan (FFEL) 

Program and implemented default reduction measures in the William D. 

Ford Federal Direct Loan (Direct Loan) Program. Those regulations 

established the formula for the calculation of rates for schools that 

participate in the Direct Loan Program and revised the appeal 

procedures and criteria for schools that were subject to a loss of 

eligibility to participate in the FFEL Program or the Direct Loan 

Program due to high FFEL Program cohort default rates, Direct Loan 

Program cohort rates, or weighted average cohort rates.

    The Secretary is proposing to amend the appeal procedures and 

criteria in these regulations. A discussion of each proposed change is 

provided below.


Section 668.17(h)  Loan Servicing Appeals


    Under the Department's regulations, a school may challenge its FFEL 

Program cohort default rate or weighted average cohort rate on the 

basis of the improper servicing or collection of the FFEL loans 

included in the calculation of that rate. However, a school may not 

challenge a Direct Loan Program cohort rate or a weighted average 

cohort rate on the basis of the improper servicing or collection of the 

Direct Loans included in the calculation of the rate. The procedures 

and criteria for loan servicing appeals were made different for the two 

programs because the historical and structural problems of the FFEL 

Program did not exist in the new Direct Loan Program.

    As discussed in the preamble to the final regulations published on 

December 1, 1995, Congress' decision to provide schools with an FFEL 

Program loan servicing appeal was based, in large measure, on a number 

of incidents in which large FFEL Program lenders had failed to comply 

with the Department's loan servicing requirements. The lenders' failure 

to satisfy FFEL Program loan servicing requirements had a demonstrable 

effect on cohort default rates (see 60 FR 61769). However, the detailed 

loan servicing regulations in the FFEL Program do not exist in the 

Direct Loan Program. Instead, loan servicing in the Direct Loan Program 

is controlled by contracts between the Department and its Direct Loan 

Servicers.

    Nevertheless, to promote parity between the FFEL Program and the 

Direct Loan Program, the Secretary is proposing to permit a school to 

appeal its Direct Loan Program cohort rate or weighted average cohort 

rate on the basis of the improper servicing or collection of defaulted 

Direct Loans included in that rate. Just as for an FFEL Program loan 

servicing appeal, this type of appeal would only be available to a 

school--

    <bullet> With a Direct Loan Program cohort rate or weighted average 

cohort rate that equals or exceeds 20 percent for the most recent year 

in which data are available; or

    <bullet> That becomes subject to a loss of eligibility due to rates 

that equal or exceed 25 percent for 3 consecutive years.

    While the Secretary continues to believe that the structure and 

controls inherent in the Direct Loan Program should ensure that Direct 

Loans are properly serviced and collected, establishing appeal 

provisions for the Direct Loan Program that are similar to those 

available in the FFEL Program will address concerns that some schools 

have raised about this difference between the two programs.

    The procedures for a school's loan servicing challenge in the 

Direct Loan


[[Page 37715]]


Program would correspond to those for a school challenging its FFEL 

Program cohort default rate on a similar basis. A summary of the 

proposed appeals process follows:

    <bullet> Within 10 working days of receiving notification from the 

Secretary that its Direct Loan Program cohort rate or weighted average 

cohort rate equals or exceeds 20 percent for the most recent year or 

that it is subject to loss of participation in the loan programs based 

on its rate, the school notifies the Secretary, in writing, that it is 

appealing the calculation of its rate based on allegations of improper 

loan servicing or collection.

    <bullet> Within 15 working days of receiving the school's notice, 

the Secretary determines the size of the representative sample of loan 

servicing and collection records to be reviewed and notifies the school 

of the amount of the fee that it must pay to the Secretary for copying 

and providing the documents. Under the proposed regulations, the 

Secretary may charge a fee of up to $10 per borrower file in the 

sample. The Secretary intends to charge a fee of $10 per borrower file.

    <bullet> Within 15 working days of receiving the notice of the fee, 

the school must pay the fee to the Secretary. If payment is not 

received from the school within the required timeframe, the records 

will not be provided and the school will have waived its right to 

challenge the rate.

    <bullet> Upon timely receipt of the fee, and within the timelines 

provided in the proposed regulations, the Secretary provides the school 

with a representative sample of the loan servicing and collection 

records relating to borrowers whose Direct Loans were included in the 

school's rate.

    <bullet> After receiving the relevant loan servicing and collection 

records from the Secretary (for Direct Loan Program loans included in a 

rate) and from the appropriate guaranty agency (for FFEL Program loans 

included in a rate), the school has 30 calendar days to file its appeal 

with the Secretary.

    <bullet> If the school is also filing an appeal based upon 

allegations that inaccurate data were used to calculate the rate, under 

Sec. 668.17(c)(1)(i)(A), the school may delay submitting its loan 

servicing appeal until the appeal under Sec. 668.17(c)(1)(i)(A) is 

submitted to the Secretary.

    Due to fundamental differences between the FFEL and Direct Loan 

programs, the proposed regulations for appeals based on loan servicing 

and collection in the Direct Loan Program are not exactly the same as 

the FFEL Program regulations. One of the most significant differences 

is in the scope of an appeal. For both FFEL and Direct Loans, under 

Sec. 668.17(h)(3)(v)(B), if the Secretary finds that evidence presented 

by the school shows that some loans included in the sample reviewed by 

the school should be excluded from the calculation of the rate, the 

Secretary reduces the rate to reflect the percentage of defaulted loans 

in the sample that should be excluded.

    In the FFEL Program, the proportional reduction applies to all of 

the FFEL loans included in the school's rate, because an FFEL Program 

cohort default rate is a percentage rate of the students whose loans 

are in default. However, for some schools, the Direct Loan Program 

cohort rate is not limited to the percentage rate of students whose 

loans are in default. For proprietary non-degree-granting institutions, 

it may also include the percentage rate of borrowers repaying Direct 

Loans under the income-contingent repayment (ICR) plan who have 

scheduled payments of less than $15 per month, when those amounts 

result in negative amortization for a period of 270 days or more (see 

Secs. 668.17(e)(1)(ii) and 668.17(f)(1)(ii)).

    If borrowers are included in a school's Direct Loan Program cohort 

rate because they are repaying under the ICR plan, rather than because 

their loans are in default, the improper loan servicing and collection 

criteria do not apply. For example, the Direct Loan Servicer would not 

mail a final demand letter to a borrower who is making payments under 

the ICR plan and is not in default. Therefore, as reflected in the 

proposed Sec. 668.17(h)(2)(iii), the proportional reduction of the rate 

would apply only to borrowers with defaulted loans who were included in 

a school's rate, not to any borrowers who have been included because 

they made certain payments under the ICR plan.

    The most significant remaining differences between the requirements 

for a loan servicing appeal in the FFEL Program and those proposed for 

the Direct Loan Program are the following:

    <bullet> For FFEL, the regulations in Sec. 668.17(h)(3)(ii) require 

a school to include in its notice of appeal to the guaranty agency a 

list of the students included in its rate. No similar requirement is 

provided for Direct Loans because the Department already has that 

information.

    <bullet> When sending the school a list of the loans and a 

description of how the sample of loans was chosen, a guaranty agency is 

required, in Sec. 668.17(h)(3)(ii)(B)(5), to send a copy of the list to 

the Secretary. No corresponding action is provided for the Direct Loan 

Program because it would be redundant.

    <bullet> In Sec. 668.17(h)(3)(ii)(B)(6), a guaranty agency is 

required to notify a school that has failed to pay a fee that the 

school has apparently waived its right to challenge the calculation of 

its rate with regard to the loans guaranteed by that agency. The 

guaranty agency also notifies the Secretary. The Secretary then 

determines whether the guaranty agency's conclusion was correct. No 

similar provision is needed for Direct Loans because the Secretary 

issues the original notification of the waiver determination.

    <bullet> For FFEL, a school is required in Sec. 668.17(h)(3)(iv)(C) 

to send the Secretary a copy of the lists provided to it by the 

guaranty agencies when it is filing an appeal. No similar list is 

required for Direct Loans because the Department will have the 

information that it provided to the institution.

    <bullet> Section Sec. 668.17(h)(3)(viii)(C) provides that a 

lender's failure to submit a request for preclaims assistance to the 

guaranty agency, if required, is a factor in determining whether a 

default on an FFEL Program loan may be considered to have been due to 

improper servicing or collection. No similar factor is included for 

Direct Loans because no similar process exists for the Direct Loan 

Servicer. The Direct Loan Servicer services the loan until its transfer 

to the Department's Debt Collection Service at 271 days of delinquency, 

the date on which the loan is considered, under Sec. 668.17(e)(3), to 

be in default for rate calculations purposes.

    The revisions in this NPRM would provide the regulatory changes 

needed to properly reflect the proposed changes to the appeal process 

for Direct Loans. The proposed regulations would not revise the current 

regulations for an FFEL Program appeal on the basis of improper 

servicing or collection.

    Official rates for fiscal year (FY) 1996 are scheduled to be issued 

later this year. The Secretary intends to allow a school to appeal its 

official Direct Loan Program cohort rate or weighted average cohort 

rate for FY 1996 on the basis of the improper servicing or collection 

of the Direct Loans included in the rate as defaulted loans. This type 

of appeal would be available only to schools with rates of 20 percent 

or greater and to schools that are subject to loss of participation in 

the loan programs based on their rates.


Section 668.17(i)  Finality of a School's Rate


    Under Sec. 668.17(a)(2), a school with an FFEL Program cohort 

default rate, Direct Loan Program cohort rate, or a weighted


[[Page 37716]]


average cohort rate that is over 40 percent for the most recent fiscal 

year for which rates have been calculated may be subject to an action 

to limit, suspend, or terminate its participation in all of the Federal 

student financial aid programs authorized by Title IV of the Higher 

Education Act of 1965, as amended (HEA). If the Secretary initiates 

such an action, the school may appeal under 34 CFR part 668, Subpart G.

    The Secretary has found, however, that some schools with a rate 

over 40 percent do not challenge the rate when they are notified. 

Rather, these schools wait to challenge the calculation of that rate 

until they have 3 consecutive years of rates over 25 percent. As a 

result, the administrative review process provided under Subpart G is 

delayed while the school's new appeal is evaluated. The Secretary 

believes that some schools wait to appeal in these circumstances solely 

to delay a final determination of the limitation, suspension, or 

termination action. Because a school may continue to make loans while 

the appeal process is pending, any unnecessary delay increases the 

likelihood of program abuse.

    It was not the intent of the Secretary to permit this type of 

delay--which may last a year or more--between the date a school is 

notified of its rate and the resolution of the school's appeal of a 

sanction resulting from the rate. The Secretary proposes to address the 

problem of unnecessary delays in Subpart G proceedings by providing 

that once the Secretary initiates a proposed limitation, suspension, or 

termination action under Sec. 668.17(a)(2), based on the school's rate, 

the school may not challenge that rate.

    A school that initiates an appeal of a rate over 40 percent in a 

timely manner, within 10 working days of the date that the school is 

notified of the rate, would not be affected by this revision. The 

Secretary does not initiate an action under Sec. 668.17(a)(2) during 

the period in which a school may file a timely appeal of its rate. 

Also, if a school does file a timely appeal, the Secretary does not 

initiate an action under Sec. 668.17(a)(2) until a determination has 

been made on the appeal. Note that current provisions in Sec. 668.17(i) 

are not changed other than to number paragraphs and to update 

references to types of rates; the only substantive change to the 

current Sec. 668.17(i) is in the proposed Sec. 668.17(i)(3).

    The proposed revision would help the Department, guaranty agencies, 

and institutions to research appeals more efficiently and to resolve 

appeals and limitation, suspension, and termination actions promptly. 

Ensuring timely appeals and resolutions is particularly important 

because schools remain eligible to participate in the FFEL and Direct 

Loan programs until the appeal process is complete.


Executive Order 12866


Clarity of the Regulations


    Executive Order 12866 requires each agency to write regulations 

that are easy to understand.

    The Secretary invites comments on how to make these proposed 

regulations easier to understand, including answers to questions such 

as the following: (1) Are the requirements in the proposed regulations 

clearly stated? (2) Do the proposed regulations contain technical terms 

or other wording that interferes with their clarity? (3) Does the 

format of the proposed regulations (grouping and order of sections, use 

of headings, paragraphing, etc.) aid or reduce their clarity? Would the 

proposed regulations be easier to understand if they were divided into 

more (but shorter) sections? (A ``section'' is preceded by the symbol 

``Sec. '' and a numbered heading; for example, Sec. 668.17 Default 

reduction and prevention measures.) (4) Is the description of the 

proposed regulations in the ``Supplementary Information'' section of 

this preamble helpful in understanding the proposed regulations? How 

could this description be more helpful in making the proposed 

regulations easier to understand? (5) What else could the Department do 

to make the proposed regulations easier to understand?

    A copy of any comments that concern how the Department could make 

these proposed regulations easier to understand should be sent to 

Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 

Education, 600 Independence Avenue, SW. (room 5121, FB-10), Washington, 

DC 20202-2241.


Regulatory Flexibility Act Certification


    The Secretary has determined that these proposed regulations would 

not have a significant adverse economic impact on a substantial number 

of small entities. A Preliminary Regulatory Flexibility Analysis (PRFA) 

was performed. The provision that extends the appeals of improper loan 

servicing to Direct Loans will provide a positive benefit to schools. 

The provision on the finality of appeals was analyzed in more detail. 

The PRFA determined that the number of small and large entities 

experiencing adverse economic impacts from the appeal finality 

provisions is expected to be between one and eight per year, which is 

not a substantial number.


Estimate of the Number of Entities Experiencing Adverse Economic 

Impacts From Finality of Appeal Provision


    Although no school has successfully used the delaying tactic these 

regulations would prohibit, 2 schools could have used this tactic for 

fiscal year 1994 rates, and it is possible that up to 16 schools could 

use this tactic for fiscal year 1995 rates. There is no reason to 

believe that this will apply to more schools in the future. Thus, the 

estimate of the number of small and large entities to which these 

regulations would apply is between 2 and 16 each year. In the year when 

two schools could have used this delaying tactic, one school 

unsuccessfully attempted to employ it or half of the eligible schools. 

The PRFA estimates that about half of the schools to which these 

regulations would apply will attempt to employ this delaying tactic, or 

between one and eight per year. Thus, the number of small and large 

entities to which these regulations would impose adverse economic 

impacts is small and not considered a substantial number.


Estimate of the Adverse Economic Impacts of Finality of Appeal 

Provision


    One school attempted to use this delaying tactic, but that appeal 

was denied on technical grounds. Had that school been successful, the 

economic impact would have been to delay the school's removal from the 

Title IV programs for an estimated six months. During those six months, 

the school was estimated to have potentially earned an additional 

$135,000 in Title IV revenue. Using a 5 percent profit rate, which is 

typical for proprietary schools participating in Title IV programs, the 

adverse economic impact on this school would have been to lose about 

$6,750 in profit. The PRFA did not address whether this was a 

significant economic impact, since it was previously determined that a 

full Regulatory Flexibility analysis was not required because of the 

small number of entities to which these regulations would apply.

    The Secretary particularly invites comments on the impact of these 

proposed regulations on small entities.


Paperwork Reduction Act of 1995


    Section 668.17 contains information collection requirements. As 

required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 

the Department of Education has submitted a copy of this section to the 

Office of Management and Budget (OMB) for its review.


[[Page 37717]]


    Collection of Information: Student Assistance General Provisions--

668.17--Default reduction and prevention measures.

    The Secretary proposes to provide schools the opportunity to 

challenge Direct Loan Program cohort rates or weighted average cohort 

rates on the basis of allegations of improper loan servicing or 

collection of the Direct Loans included in that rate as defaulted 

loans. Annual public reporting burden for the portion of this 

collection of information that is attributable to Sec. 668.17(h) 

remains unchanged and is estimated to average 128 hours per response 

for 160 non-degree-granting school respondents, 96 hours per response 

for 20 degree-granting school respondents, and 16 hours per response 

for 20 low borrower school respondents, including the time for 

reviewing instructions, searching existing data sources, gathering and 

maintaining the data needed, and completing and reviewing the 

collection of information. The collection's total estimated annual 

recordkeeping and reporting burden hours for this section equals 22,720 

hours.

    There is no change to the current burden for this collection 

because neither the estimated number of respondents nor the amount of 

time needed to respond is expected to change. At the time that previous 

regulations were published, no rates had been issued that included 

Direct Loans; all schools received rates that included only FFEL loans. 

A school appealing its rate due to improper loan servicing or 

collection, under these proposed regulations, would have been subject 

to the same requirements for the appeal of its FFEL Program cohort 

default rate.

    Organizations and individuals desiring to submit comments on the 

information collection requirements should direct them to the Office of 

Information and Regulatory Affairs, OMB, Room 10235, New Executive 

Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. 

Department of Education.

    The Department considers comments by the public on this proposed 

collection of information in--

    <bullet> Evaluating whether the proposed collection of information 

is necessary for the proper performance of the functions of the 

Department, including whether the information will have practical use;

    <bullet> Evaluating the accuracy of the Department's estimate of 

the burden of the proposed collection of information, including the 

validity of the methodology and assumptions used;

    <bullet> Enhancing the quality, usefulness, and clarity of the 

information to be collected; and

    <bullet> Minimizing the burden of the collection of information on 

those who are to respond, including through the use of appropriate 

automated, electronic, mechanical, or other technological collection 

techniques of other forms of information technology; e.g., permitting 

electronic submission of responses.

    OMB is required to make a decision concerning the collection of 

information contained in these proposed regulations between 30 and 60 

days after publication of this document in the Federal Register. 

Therefore, a comment to OMB is best assured of having its full effect 

if OMB receives it within 30 days of publication. This does not affect 

the deadline for the public to comment to the Department on the 

proposed regulations.


Intergovernmental Review


    The Federal Supplemental Educational Opportunity Grant Program and 

the State Student Incentive Grant Program are subject to the 

requirements of Executive Order 12372 and the regulations in 34 CFR 

part 79. The objective of the Executive order is to foster an 

intergovernmental partnership and a strengthened federalism by relying 

on processes developed by State and local governments for coordination 

and review of proposed Federal financial assistance.

    In accordance with this order, this document is intended to provide 

early notification of the Department's specific plans and actions for 

these programs.

    The Federal Family Education Loan, Federal Supplemental Loans for 

Students, Federal Work-Study, Federal Perkins Loan, Federal Pell Grant, 

Income Contingent Loan, and William D. Ford Federal Direct Loan 

programs are not subject to the requirements of Executive Order 12372 

and the regulations in 34 CFR part 79.


Assessment of Educational Impact


    The Secretary particularly requests comments on whether the 

proposed regulations in this document would require transmission of 

information that is being gathered by or is available from any other 

agency or authority of the United States.


Electronic Access to This Document


    Anyone may view this document, as well as other Department of 

Education documents published in the Federal Register, in text or 

portable document format (pdf) on the World Wide Web at the following 

sites:


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

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

http://www.ed.gov/news.html


    To use the pdf you must have the Adobe Acrobat Reader Program with 

Search, which is available free at either of the second and third of 

the previously listed sites. If you have questions about using the pdf, 

call the U.S. Government Printing Office toll free at 1-888-293-6498.

    Anyone may also view these documents in text copy only on an 

electronic bulletin board of the Department. Telephone: (202) 219-1511 

or, toll free, 1-800-222-4922.

    The documents are located under Option G--

Files/Announcements, Bulletins and Press Releases.


    Note: The official version of this document is the document 

published in the Federal Register.


List of Subjects in 34 CFR Part 668


    Administrative practice and procedure, Colleges and universities, 

Consumer protection, Education, Grant programs-education, Loan 

programs-education, Reporting and recordkeeping requirements, Student 

aid, Vocational education.


    Dated: July 7, 1998.

Richard W. Riley,

Secretary of Education.


(Catalog of Federal Domestic Assistance Numbers: 84.007: Federal 

Supplemental Educational Opportunity Grant Program; 84.032: Federal 

Family Education Loan Program; 84.032: Federal PLUS Program; 84.032: 

Federal Supplemental Loans for Students Program; 84.033: Federal 

Work-Study Program; 84.038: Federal Perkins Loan Program; 84.063: 

Federal Pell Grant Program; 84.069: State Student Incentive Grant 

Program; 84.226: Income Contingent Loan Program; and 84.268: William 

D. Ford Federal Direct Loan Program)

    The Secretary proposes to amend Part 668 of Title 34 of the Code of 

Federal Regulations as follows:


PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS


    1. The authority citation for part 668 continues to read as 

follows:


    Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and 

1141, unless otherwise noted.


    2. Section 668.17 is amended by revising the heading, and 

paragraphs (h) and (i) to read as follows:



Sec. 668.17  Default reduction and prevention measures.


* * * * *

    (h) Appeal based on allegations of improper loan servicing or 

collection--


[[Page 37718]]


(1) General. An institution that is subject to loss of participation in 

the FFEL Program or the Direct Loan Program under paragraph (a)(3), 

(b)(1), or (b)(2) of this section or that has been notified by the 

Secretary that its FFEL Program cohort default rate, Direct Loan 

Program cohort rate, or weighted average cohort rate equals or exceeds 

20 percent for the most recent year for which data are available may 

include in its appeal of that loss or rate a challenge based on 

allegations of improper loan servicing or collection. This challenge 

may be raised in addition to other challenges permitted under this 

section.

    (2) Standard of review. (i) An appeal based on allegations of 

improper loan servicing or collection must be submitted to the 

Secretary in accordance with the requirements of this paragraph.

    (ii) The Secretary excludes any loans from the FFEL Program cohort 

default rate, Direct Loan Program cohort rate, or weighted average 

cohort rate calculation that, due to improper servicing or collection, 

would, as demonstrated by the evidence submitted in support of the 

institution's timely appeal to the Secretary, result in an inaccurate 

or incomplete calculation of that rate.

    (iii) For the purposes of this paragraph, a Direct Loan that has 

been included in a Direct Loan Program cohort rate, under paragraph 

(e)(1)(ii) of this section, or a weighted average cohort rate, under 

paragraph (f)(1)(ii) of this section, because it has been in repayment 

under the income-contingent repayment plan for 270 days, with scheduled 

payments that are less than $15 per month and with those payments 

resulting in negative amortization, is not considered to have been 

included in that rate as a defaulted loan. An institution's appeal 

under this paragraph does not affect the inclusion of these loans in an 

institution's rate.

    (3) Procedures. The following procedures apply to appeals from FFEL 

Program cohort default rates, Direct Loan Program cohort rates, and 

weighted average cohort rates issued by the Secretary:

    (i) Notice of rate. Upon receiving notice from the Secretary that 

the institution's FFEL Program cohort default rate, Direct Loan Program 

cohort rate, or weighted average cohort rate exceeds the thresholds 

specified in paragraph (a)(3), (b)(1), or (b)(2) of this section or 

that its most recent rate equals or exceeds 20 percent, the institution 

may appeal the calculation of that rate based on allegations of 

improper loan servicing or collection. The Secretary's notice includes 

a list of all borrowers included in the calculation of the 

institution's rate.

    (ii) Appeals for FFEL Program loans. (A) To initiate an appeal 

under this paragraph for FFEL Program loans included in the 

institution's rate, the institution must notify, in writing, the 

Secretary and each guaranty agency that guaranteed loans included in 

the institution's FFEL Program cohort default rate or weighted average 

cohort rate that it is appealing the calculation of that rate. The 

notification must be received by the guaranty agency and the Secretary 

within 10 working days of the date the institution received the 

Secretary's notification. The institution's notification to the 

guaranty agency must include a copy of the list of students provided by 

the Secretary to the institution.

    (B) Within 15 working days of receiving the notification from an 

institution subject to loss of participation in the FFEL or Direct Loan 

programs under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 

within 30 calendar days of receiving that notification from any other 

institution that may file a challenge to its FFEL Program cohort 

default rate or weighted average cohort rate under this paragraph, the 

guaranty agency shall provide the institution with a representative 

sample of the loan servicing and collection records relating to 

borrowers whose loans were guaranteed by the guaranty agency and that 

were included as defaulted loans in the calculation of the 

institution's rate. For purposes of this section, the term loan 

servicing and collection records refers only to the records submitted 

by the lender to the guaranty agency to support the lender's submission 

of a default claim and included in the claim file. In selecting the 

representative sample of records, the guaranty agency shall use the 

following procedures:

    (1) The guaranty agency shall list in social security number order 

all loans made to borrowers for attendance at the institution and 

guaranteed by the guaranty agency and included as defaulted loans in 

the calculation of the FFEL Program cohort default rate or weighted 

average cohort rate that is being challenged by the institution.

    (2) From the population of loans identified by the guaranty agency, 

the guaranty agency shall identify a sample of the loans. The sample 

must be of a size such that the universe estimate derived from the 

sample is acceptable at a 95 percent confidence level with a plus or 

minus 5 percent confidence interval. The sampling procedure must result 

in a determination of the number of FFEL Program loans that should be 

excluded from the calculation of the FFEL Program cohort default rate 

or weighted average cohort rate under this paragraph.

    (3) The guaranty agency shall provide a copy of all servicing and 

collection records relating to each loan in the sample to the 

institution in hard copy format unless the guaranty agency and 

institution agree that all or some of the records may be provided in 

another format.

    (4) The guaranty agency may charge the institution a reasonable fee 

for copying and providing the documents, not to exceed $10 per borrower 

file.

    (5) After compiling the servicing and collection records for the 

loans in the sample, the guaranty agency shall send the records, a list 

of the loans included in the sample, and a description of how the 

sample was chosen to the institution. The guaranty agency shall also 

send a copy of the list of the loans included in the sample, listed in 

order by social security number, and the description of how the sample 

was chosen to the Secretary at the same time the material is sent to 

the institution.

    (6) If the guaranty agency charges the institution a fee for 

copying and providing the documents under paragraph (h)(3)(ii)(B)(4) of 

this section, the guaranty agency is not required to provide the 

documents to the institution until payment is received by the agency. 

If payment of a fee is required, the guaranty agency shall notify the 

institution, in writing, within 15 working days of receipt of the 

institution's request, of the amount of the fee. If the guaranty agency 

does not receive payment of the fee from the institution within 15 

working days of the date the institution receives notice of the fee, 

the institution shall be considered to have waived its right to 

challenge the calculation of its FFEL Program cohort default rate or 

weighted average cohort rate based on allegations of improper loan 

servicing or collection in regard to the loans guaranteed by that 

guaranty agency. The guaranty agency shall notify the institution and 

the Secretary, in writing, that the institution has failed to pay the 

fee and has apparently waived its right to challenge the calculation of 

its rate for this purpose. The Secretary determines that an institution 

that does not pay the required fee to the guaranty agency has not met 

its burden of proof in regard to the loans insured by that guaranty 

agency unless the institution proves that the agency's conclusion that 

the institution waived its appeal is incorrect.

    (iii) Appeals for Direct Loan Program loans. (A) To initiate an 

appeal under


[[Page 37719]]


this paragraph for Direct Loans included in the institution's rate, the 

institution must notify the Secretary, in writing, that it is appealing 

the calculation of its Direct Loan Program cohort rate or weighted 

average cohort rate. The notification must be received by the Secretary 

within 10 working days of the date the institution received the 

Secretary's notification.

    (B) Within 15 working days of receiving the notification from an 

institution subject to loss of participation in the FFEL or Direct Loan 

Program under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 

within 30 calendar days of receiving that notification from any other 

institution that may file a challenge to its Direct Loan Program cohort 

rate or weighted average cohort rate under this paragraph, the 

Secretary provides the institution with a representative sample of the 

loan servicing and collection records relating to borrowers whose 

Direct Loans were included as defaulted loans in the calculation of the 

institution's rate. For purposes of this section, the term ``loan 

servicing and collection records'' refers only to the records 

maintained by the Department's Direct Loan Servicer with respect to the 

servicing and collecting of delinquent loans prior to the default. In 

selecting the representative sample of records, the Secretary uses the 

following procedures:

    (1) The Secretary lists in social security number order all Direct 

Loans made to borrowers for attendance at the institution and included 

as defaulted loans in the calculation of the Direct Loan Program cohort 

rate or weighted average cohort rate that is being challenged by the 

institution.

    (2) From the population of loans identified by the Secretary, the 

Secretary identifies a sample of the loans. The sample is of a size 

such that the universe estimate derived from the sample is acceptable 

at a 95 percent confidence level with a plus or minus 5 percent 

confidence interval. The sampling procedure must result in a 

determination of the number of Direct Loans included in the rate as 

defaulted loans that should be excluded from the calculation of the 

Direct Loan Program cohort rate or weighted average cohort rate under 

this paragraph.

    (3) The Secretary provides a copy of all servicing and collection 

records relating to each loan in the sample to the institution in hard 

copy format unless the Secretary and institution agree that all or some 

of the records may be provided in another format.

    (4) The Secretary may charge the institution a reasonable fee for 

copying and providing the documents, not to exceed $10 per borrower 

file.

    (5) After compiling the servicing and collection records for the 

loans in the sample, the Secretary sends the records, a list of the 

loans included in the sample, and a description of how the sample was 

chosen to the institution.

    (6) If the Secretary charges the institution a fee for copying and 

providing the documents under paragraph (h)(3)(iii)(B)(4) of this 

section, the Secretary does not provide the documents to the 

institution until payment is received by the Secretary. If payment of a 

fee is required, the Secretary notifies the institution, in writing, 

within 15 working days of receipt of the institution's request, of the 

amount of the fee. If the Secretary does not receive payment of the fee 

from the institution within 15 working days of the date the institution 

receives notice of the fee, the institution shall be considered to have 

waived its right to challenge the calculation of its Direct Loan 

Program cohort rate or weighted average cohort rate based on 

allegations of improper loan servicing or collection in regard to the 

Direct Loans included in that rate. The Secretary shall notify the 

institution, in writing, that the institution has failed to pay the fee 

and has waived its right to challenge the calculation of its rate on 

the basis of those allegations.

    (iv) Procedures for filing an appeal. After receiving the relevant 

loan servicing and collection records from the Secretary (for defaulted 

Direct Loan Program loans included in a Direct Loan Program cohort rate 

or weighted average cohort rate) and from all of the guaranty agencies 

that insured loans included in the institution's FFEL Program cohort 

default rate or weighted average cohort rate calculation (for defaulted 

FFEL Program loans included in a rate), the institution has 30 calendar 

days to file its appeal with the Secretary. An appeal is considered 

filed when it is received by the Secretary. If the institution is also 

filing an appeal under paragraph (c)(1)(i) of this section, the 

institution may delay submitting its appeal under this paragraph until 

the appeal under paragraph (c)(1)(i) of this section is submitted to 

the Secretary. As part of the appeal, the institution shall submit the 

following information to the Secretary:

    (A) A list of the loans that the institution alleges would, due to 

improper loan servicing or collection, result in an inaccurate or 

incomplete calculation of the rate.

    (B) Copies of all of the loan servicing or collection records and 

any other evidence relating to a loan that the institution believes has 

been subject to improper servicing or collection. The records must be 

in hard copy or microfiche format.

    (C) For FFEL Program loans, a copy of the lists provided by the 

guaranty agencies under paragraph (h)(3)(ii)(B) of this section.

    (D) An explanation of how the alleged improper servicing or 

collection resulted in an inaccurate or incomplete calculation of the 

institution's rate.

    (E) A summary of the institution's appeal listing the following:

    (1) For FFEL Program cohort default rates, the number of loans 

insured by each guaranty agency that were included as defaulted loans 

in the calculation of the institution's rate and the number of loans 

that would be excluded from the calculation of that rate by application 

of the results of the review of the sample of loans provided to the 

institution to the population of loans for each guaranty agency.

    (2) For Direct Loan Program cohort rates, the number of Direct 

Loans that were included as defaulted loans in the calculation of the 

institution's rate and the number of loans that would be excluded from 

the calculation of that rate by application of the results of the 

review of the sample of loans provided to the institution to the 

population of loans serviced by the Secretary.

    (3) For weighted average cohort rates----

    (i) The number of FFEL Program loans insured by each guaranty 

agency that were included as defaulted loans in the calculation of the 

institution's rate and the number of loans that would be excluded from 

the calculation of that rate by application of the results of the 

review of the sample of loans provided to the institution to the 

population of loans for each guaranty agency; and

    (ii) The number of Direct Loans that were included as defaulted 

loans in the calculation of the institution's rate and the number of 

loans that would be excluded from the calculation of that rate by 

application of the results of the review of the sample of loans 

provided to the institution to the population of loans serviced by the 

Secretary.

    (F) A certification by an authorized official of the institution 

that all information provided by the institution in the appeal is true 

and correct.

    (v) Decision. The Secretary or the Secretary's designee reviews the 

information submitted by the institution and issues a decision.

    (A) In making a decision under this paragraph, the Secretary 

presumes that the information provided to the institution by the 

guaranty agency or Secretary under paragraphs (h)(3)(ii)(B)


[[Page 37720]]


and (iii)(B) of this section is correct unless the institution provides 

substantial evidence showing that the information is not correct.

    (B) If the Secretary finds that the evidence presented by the 

institution shows that some of the loans included in the sample of loan 

records reviewed by the institution should be excluded from calculation 

of the FFEL Program cohort default rate, Direct Loan Program cohort 

rate, or weighted average cohort rate under paragraph (h)(2) of this 

section, the Secretary reduces the institution's rate, in accordance 

with a statistically valid methodology, to reflect the percentage of 

defaulted loans in the sample that should be excluded.

    (vi) Notification. The Secretary notifies the institution, in 

writing, of the decision.

    (vii) Seeking judicial review. An institution may not seek judicial 

review of the Secretary's determination of the institution's FFEL 

Program cohort default rate, Direct Loan Program cohort rate, or 

weighted average cohort rate until the Secretary or the Secretary's 

designee issues the decision under paragraph (h)(3)(v) of this section.

    (viii) Improper loan servicing or collection criteria. For purposes 

of this paragraph, a default is considered to have been due to improper 

servicing or collection only if the borrower did not make a payment on 

the loan and the institution proves that the lender (for an FFEL 

Program loan) or the Direct Loan Servicer (for a Direct Loan Program 

loan) failed to perform one or more of the following activities, if 

that activity was required:

    (A) Send at least one letter (other than the final demand letter) 

urging the borrower or endorser to make payments on the loan.

    (B) Attempt at least one phone call to the borrower or endorser.

    (C) For an FFEL Program loan, submit a request for preclaims 

assistance to the guaranty agency.

    (D) Send a final demand letter to the borrower.

    (E)(1) For an FFEL Program loan, submit a certification (or other 

evidence) that skip tracing was performed; or

    (2) For a Direct Loan Program loan, document that skip tracing was 

performed.

    (i) Effect of decision. (1) An institution may challenge the 

calculation of an FFEL Program cohort default rate, Direct Loan Program 

cohort rate, or weighted average cohort rate under this section no more 

than once. The Secretary's determination of an institution's appeal of 

the calculation of such a rate is binding on any future appeal by the 

institution.

    (2) An institution that fails to challenge the calculation of an 

FFEL Program cohort default rate, Direct Loan Program cohort rate, or 

weighted average cohort rate under this section within 10 working days 

of receiving notice of the determination of that rate is prohibited 

from challenging that rate in any other proceeding before the 

Department.

    (3) If the Secretary has initiated an action under paragraph (a)(2) 

of this section, the institution may not challenge the calculation of 

the FFEL Program cohort default rate, Direct Loan Program cohort rate, 

or weighted average cohort rate on which the action is based.

* * * * *

[FR Doc. 98-18514 Filed 7-10-98; 8:45 am]

BILLING CODE 4000-01-P