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The Secretary amends the Student Assistance General Provisions regulations, 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

FR part
III
Attachments:
PublicationDate: 10/22/98
FRPart: III
RegPartsAffected: Citation : (R)668.17
PageNumbers: 56755-56761
Summary: The Secretary amends the Student Assistance General Provisions regulations, 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 clarifies when a school's rate is considered final.
CommentDueDate:

  
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[


[Federal Register: October 22, 1998 (Volume 63, Number 204)]
[Rules and Regulations]
[Page 56755-56761]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22oc98-27]


[[Page 56755]]

_______________________________________________________________________

Part V





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Final Rule


[[Page 56756]]



DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC52


Student Assistance General Provisions

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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

SUMMARY: The Secretary amends the Student Assistance General Provisions
regulations, 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 clarifies when a school's rate is considered final.

EFFECTIVE DATE: These regulations take effect on July 1, 1999.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of
Education, 600 Independence Avenue, SW., ROB-3, Room 3045, Washington,
DC 20202-5447. 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: On July 13, 1998, the Secretary published a
notice of proposed rulemaking (NPRM) for the Student Assistance General
Provisions regulations in the Federal Register (63 FR 37714).
The NPRM included a discussion of the major issues surrounding the
proposed changes that will not be repeated here. The following list
provides summaries of the changes and identifies the pages of the
preamble to the NPRM on which a discussion of the issues can be found:

Section 668.17(h) Loan Servicing Appeals

The Secretary proposed to allow a school to challenge its Direct
Loan Program cohort rate or weighted average cohort rate on the basis
of the improper servicing or collection of the Direct Loans included in
the calculation of the rate. (63 FR 37714)

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

The Secretary proposed that once the Secretary initiates a proposed
limitation, suspension, or termination (LS&T) action under
Sec. 668.17(a)(2), based on the school's rate, the school may not
challenge that rate.
The Higher Education Amendments of 1998 (Pub. L. 105-244, enacted
October 7, 1998) (the Amendments) make changes that affect the
calculation of Direct Loan Program and weighted average cohort rates.
Regulations implementing the requirements contained in the Amendments
will be drafted through the process provided in that statute. The
Secretary has determined that these final regulations are not subject
to the implementation process provided in the Amendments.
These final regulations contain changes from the NPRM. These
changes are fully explained in the Analysis of Comments and Changes
that follows.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, eight
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. 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.

General

Comments: All of the commenters supported the Secretary's proposal
of a process for schools to challenge their Direct Loan Program cohort
rates or weighted average cohort rates on the basis of allegations of
the improper servicing or collection of the Direct Loans included in
the rates. The commenters said they appreciated the Secretary's effort
to make provisions of the Federal Family Education Loan (FFEL) Program
and the Direct Loan Program more equal in this area. Two commenters
also specifically noted their support of the Secretary's clarification
of when a rate is considered final, at Sec. 668.17(i), agreeing that
the provision would assist in addressing unnecessary delays.
Discussion: The Secretary appreciates the commenters' support.
Changes: None.

Effective Dates for FY 1996 Appeals (Preamble)

Comments: The preamble to the NPRM (63 FR 37715) stated that the
Secretary intends to allow a school to appeal its official Direct Loan
Program cohort rate or weighted average cohort rate for fiscal year
(FY) 1996 on the basis of the improper servicing or collection of the
Direct Loans included in the rate as defaulted loans. Two commenters
asked for clarification of this statement and requested information
about the effective date, the ending date, and whether the provision is
retroactive. One commenter reasoned that this information is needed
because schools participating in the Direct Loan Program were not given
the opportunity to respond to draft cohort rate data.
Discussion: The Secretary will allow schools to appeal rates based
on the improper servicing or collection of Direct Loans when the
schools are notified of their FY 1996 official rates, later this year.
Appeals on this basis will be made using the timelines and requirements
published in these regulations. The provisions in these regulations
also apply to a school's ability to appeal previous rates on this
basis. A school may only appeal its FY 1994 or FY 1995 rate based on
the improper servicing or collection of Direct Loans if the school is
subject to loss of participation due in part to its FY 1994 or FY 1995
rate.
One commenter argued that ``effective'' and ``ending'' dates should
be provided because schools participating in the Direct Loan Program
have not been given the opportunity to respond to draft data. This
comment, however, is based on a misunderstanding of the draft data
review process. The draft data review process allows schools to review
the data on which the rate is based; it does not apply to allegations
of improper servicing or collection. Those allegations can only be
raised during the appeal after the final rates are issued. The draft
data review process is essentially the same for a Direct Loan Program
loan as it is for an FFEL Program loan.
Changes: None.

Use of ``Shall'' and ``Must'' (Sec. 668.17(h)(3)(iii)(B))

Comments: Two commenters noted that the use of the words ``shall''
and ``must'' appears to be inconsistent when provisions for the FFEL
Program (Sec. 668.17(h)(3)(ii)(B)) are compared with those for the
Direct Loan Program (Sec. 668.17(h)(3)(iii)(B)). For example,
regulations governing the FFEL Program state that ``the guaranty agency
shall provide'' or ``the guaranty agency must provide,'' while
regulations for the Direct Loan Program state only that ``the Secretary
provides.'' The commenters asked that the language be identical in
order to eliminate misinterpretations and to promote parity.

[[Page 56757]]

Discussion: The difference in regulatory language is a necessary
reflection of the difference in the purpose of the regulations, and it
is consistent with language used in other regulations. In the FFEL
Program regulations, the Secretary is regulating the activities of
guaranty agencies; in the Direct Loan requirements, the Secretary is
providing notice of departmental procedures.
Changes: No change is made in response to the commenters' request.
However, to correct an inconsistency in the regulatory language, the
last sentence of Sec. 668.17(h)(3)(iii)(B)(6) was changed from ``the
Secretary shall notify'' to ``the Secretary notifies.''

Selection of Representative Sample (Sec. 668.17(h)(3)(iii)(B))

Comments: One commenter on behalf of a school stated that a school
is capable of identifying students who have experienced loan servicing
problems, and the commenter wanted to ensure that those students would
be included in a school's representative sample. The commenter asked
that a school be allowed to supply a list of those students for
inclusion in the representative sample.
Discussion: The manner in which a representative sample is
determined is described in Sec. 668.17(h)(3)(ii)(B) for FFEL Program
loans and in Sec. 668.17(h)(3)(iii)(B) for Direct Loan Program loans. A
representative sample is not intended to identify each individual
improperly serviced loan included in the calculation of the school's
rate. Instead, it is used to calculate a reliable estimate of the
number of improperly serviced loans included in the school's rate. This
estimate cannot be valid if it includes pre-selected loans.
Changes: None.

Documentation of Criteria (Secs. 668.17(h)(3)(iii)(B) and
668.17(h)(3)(viii))

Comments: One commenter stated that, since the Secretary does not
regulate the Department's procedures for servicing Direct Loans, a
school cannot know whether it has received complete loan servicing and
collection records. The commenter recommended that the requirements for
loan servicing records in the Direct Loan Program be the same as those
for a guaranty agency's records in the FFEL Program at
Sec. 682.414(a)(1)(ii). Further, the commenter believed that procedures
outlined in the FY 1995 Official Cohort Default Rate Guide (Guide)
require a proportional reduction of a rate if records are incomplete,
illegible, or missing, and that a school cannot know whether this
reduction is appropriate if it is not able to determine whether
complete records have been provided. Another commenter asked the
Secretary to clarify that a loan servicing error is considered to have
occurred when the Direct Loan Servicer is unable to provide complete
and legible loan servicing records.
Discussion: The first commenter is correct that the Secretary
generally does not regulate the Department's own procedures for
servicing Direct Loans. As explained in the preamble for final
regulations for the Direct Loan Program published in the Federal
Register on December 1, 1994 (59 FR 61664), the Secretary is not
required to issue regulations that control internal agency processes
but do not affect the substantive or procedural rights of program
participants (59 FR 61667). For this reason, the Secretary does not
agree that it is appropriate to issue regulations to govern the loan
servicing and collection procedures of the Direct Loan Program. The
Secretary further notes that Sec. 668.17(h), rather than
Sec. 682.414(a)(1)(ii), determines what constitutes a complete loan
servicing and collection record for purposes of an appeal under
Sec. 668.17(h).
As noted in the ``Direct Loan School Guide,'' the Direct Loan
Servicer performs collection activities similar to those performed by
lenders in the FFEL Program. Insofar as those activities relate to the
servicing and collection criteria included in Sec. 668.17(h)(3)(viii),
the procedures of the Direct Loan Servicer are generally equivalent to
the corresponding procedures for an FFEL lender. Therefore, the same
type of record information needed to determine whether an FFEL Program
loan is considered to be improperly serviced or collected under
Sec. 668.17(h)(3)(viii) is needed to determine whether a Direct Loan
Program loan is considered to be improperly serviced or collected. In
order to further clarify these requirements for the Direct Loan
Program, the criteria for determining whether a loan has been
improperly serviced or collected have been revised to separate the
requirements for the FFEL Program from those for the Direct Loan
Program and to include additional guidance.
Also, the commenters are not correct in stating that missing or
illegible records are automatically considered to be loan servicing
errors. The Guide only outlines a procedure for schools to use when
documenting a guaranty agency's failure to comply with a request to
supply a required missing record or to replace an illegible record. The
same procedure is appropriate for a school's documentation of a similar
request to the Direct Loan Servicer.
Changes: Section 668.17(h)(3)(viii) is revised to clarify the
criteria used to determine whether a Direct Loan has been improperly
serviced or collected.
Comments: One commenter asked for clarification of the requirements
for documenting skip tracing in the Direct Loan Program, because the
Department's procedures for servicing Direct Loans are not provided in
regulations. The commenter asserted that, without this clarification, a
school cannot verify that there is adequate documentation to determine
whether skip tracing, if required, was performed in accordance with the
Direct Loan Servicer's contract. The commenter recommended that the
requirements for documenting skip tracing in the Direct Loan Program be
the same as those for the FFEL Program, at Sec. 682.411(g).
Discussion: Section 668.17(h)(3)(viii) has been revised to clarify
the criterion for skip tracing that is used in determining whether a
Direct Loan was improperly serviced or collected. Additional
information about the skip tracing criterion for the Direct Loan
Program will be provided in the same part of the Guide that provides
similar information for the FFEL Program. Although the FY 1996 Guide
contains instructions for the FFEL Program only, these instructions may
be used for the Direct Loan Program as well. The references to a
``lender'' in that part of the Guide should be understood to refer to
the Direct Loan Servicer.
The guidance included in these regulations and the Guide provides
schools with the information needed to determine if the skip tracing
requirement was met. Under the regulations, the skip tracing criterion
looks only at whether skip tracing has been performed and does not
evaluate timing or other procedural requirements related to skip
tracing, and it is not governed by Sec. 682.411(g).
Changes: Section 668.17(h)(3)(viii) is revised to clarify the
criteria used to determine whether a Direct Loan has been improperly
serviced or collected.

Additional Criteria (Sec. 668.17(h)(3)(viii))

Comments: One commenter provided examples of loan servicing
problems that the commenter believes should be considered improper loan
servicing or collection under Sec. 668.17(h)(3)(viii): (1) Maintaining
inaccurate addresses and telephone numbers; (2) failing to apply
deferments and forbearances to accounts accurately; (3) failing to
provide accurate, comprehensive information

[[Page 56758]]

about a borrower's delinquency status on multiple accounts to a school;
and (4) failing to maintain the most recent information on accounts
supplied by the school.
Discussion: In proposing these regulations, it was not the
Secretary's intent to expand the criteria used to determine whether a
loan is considered to have been improperly serviced or collected. None
of the examples listed by the commenter are considered improper loan
servicing or collection of an FFEL Program loan under
Sec. 668.17(h)(3)(viii) of the previous regulations, and none of these
circumstances would be considered improper loan servicing under these
regulations. The only criteria used to determine whether an FFEL or
Direct Loan program loan has been improperly serviced or collected for
purposes of an appeal of a rate under Sec. 668.17(h) are those listed
at Sec. 668.17(h)(3)(viii).
Changes: None.
Comments: Two commenters asked that the criteria for improper loan
servicing or collection be expanded to include an additional criterion
for a Direct Loan Program loan. The proposed new criterion would
correspond to the criterion for an FFEL Program cohort default rate
appeal concerning a lender's submission of a request for preclaims
assistance to the guaranty agency, at Sec. 668.17(h)(3)(viii)(A)(2) of
these regulations. Both commenters recommended that the timely
notification to schools of a borrower's delinquency be used as this
additional criterion for Direct Loans, reasoning that this notification
would be extremely useful to schools in working with borrowers to avoid
default. One commenter argued that adding this criterion would provide
an appropriate parallel to the preclaims notification process for the
FFEL Program. The other commenter, noting that there was no equivalent
for the FFEL Program's preclaims process in the Direct Loan Program,
asked that the criterion be added in order to maintain an equivalent
number of criteria in the two programs, and thus a more equivalent
level of assurance that loan servicing and collection have been
conducted properly.
Discussion: The purpose of preclaims assistance in the FFEL Program
is to require a guaranty agency to assist a lender in collecting on a
loan before the loan goes into default. There is no parallel for this
activity in the Direct Loan Program because the Department's Direct
Loan Servicer performs all of the collection activities on a Direct
Loan.
In the FFEL Program, a guaranty agency is required to notify
schools of preclaims requests when the schools request that
notification (Sec. 682.404(a)(5)), but there is no requirement that all
schools be notified at the time that a preclaims request is filed. The
Direct Loan Servicer currently makes monthly reports available to a
school concerning the delinquency of borrowers who attended the school.
These reports may be used by schools to contact borrowers and to assist
in reducing the schools' rates, but schools are not required to receive
or use the reports. Accepting the commenters' recommended criterion and
requiring receipt of these reports by Direct Loan schools would place
an additional burden on Direct Loan schools and would create dissimilar
requirements in the FFEL and Direct Loan programs.
Changes: None.

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 as necessary for administering these programs effectively and
efficiently. Burdens specifically associated with information
collection requirements, if any, were identified and explained in the
preamble to the NPRM.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, the Secretary has
determined that the benefits of the regulations justify the costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
The potential costs and benefits of these final regulations were
discussed in the preamble to the NPRM (63 FR 37714).

Paperwork Reduction Act of 1995

Under the Paperwork Reduction Act of 1995, no persons are required
to respond to a collection of information unless it displays a valid
OMB control number. The valid OMB control number assigned to the
collection of information in these final regulations is displayed at
the end of the affected section of the 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

In the NPRM, 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 responses to the NPRM 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.

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.


[[Page 56759]]


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: October 19, 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 amends 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, paragraph
(h), and paragraph (i) and by republishing the OMB control number
following the section to read as follows:


Sec. 668.17 Default reduction and prevention measures.

* * * * *
(h) Appeal based on allegations of improper loan servicing or
collection--(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 paragraph (h) of this section, 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, when used for FFEL
Program loans, 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 identify in social security number
order all loans 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.

[[Page 56760]]

(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 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, when used for Direct
Loans, 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 identifies in social security number order all
Direct Loans 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 notifies 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) 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

[[Page 56761]]

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) 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--
(A) For an FFEL Program loan, the institution proves that the
lender failed to perform one or more of the following activities, if
that activity was required:
(1) Send at least one letter (other than the final demand letter)
urging the borrower or endorser to make payments on the loan.
(2) Attempt at least one phone call to the borrower or endorser.
(3) Submit a request for preclaims assistance to the guaranty
agency.
(4) Send a final demand letter to the borrower.
(5) Submit a certification (or other evidence) that skip tracing
was performed.
(B) For a Direct Loan Program loan, the institution proves that the
Direct Loan Servicer failed to perform one or more of the following
activities, if that activity is applicable to the loan:
(1) Send at least one letter (other than the final demand letter)
urging the borrower or endorser to make payments on the loan.
(2) Attempt at least one phone call to the borrower or endorser
unless the borrower or endorser is incarcerated or is residing outside
a State, Mexico, or Canada.
(3) Send a final demand letter to the borrower.
(4) Document that skip tracing was performed if the Direct Loan
Servicer determined it did not have the borrower's current address.
(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.
* * * * *
(Approved by the Office of Management and Budget under control
number 1840-0537)

[FR Doc. 98-28403 Filed 10-21-98; 8:45 am]
BILLING CODE 4000-01-U




]

Last Modified: 10/28/1998