Federal Perkins Loan Program. (Comments Due September 11, 2000).

[Federal Register: July 27, 2000 (Volume 65, Number 145)]

[Proposed Rules]               

[Page 46127-46131]

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

[DOCID:fr27jy00-18]                         


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DEPARTMENT OF EDUCATION


34 CFR Part 674


RIN 1845-AA15



Federal Perkins Loan Program


AGENCY: Office of Postsecondary Education, Education.


ACTION: Notice of proposed rulemaking.


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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 

(Perkins Loan) Program regulations. These proposed regulations are 

intended to improve collections in the Perkins Loan program by 

providing greater flexibility in the process of assigning defaulted 

Perkins loans to the Secretary for collection. They allow State 

institutions participating in the Perkins program to invoke their right 

to sovereign immunity in bankruptcy proceedings. In addition, these 

proposed regulations clarify the maximum collection costs that may be 

assessed a borrower who defaults on a rehabilitated defaulted loan.


DATES: We must receive your comments by September 11, 2000.


ADDRESSES: Address all comments concerning these proposed regulations 

to Ms. Vanessa Freeman, U.S. Department of Education, P.O. Box 23272, 

Washington, DC 20026-3272. If you prefer to send your comments through 

the Internet, use the following address: perkinsnprm@ed.gov.

    If you want to comment on the information collection requirements 

you must send your comments to the Office of Management and Budget at 

the address listed in the Paperwork Reduction Act section of this 

preamble. You may also send a copy of these comments to the Department 

representative named in this section.


FOR FURTHER INFORMATION CONTACT: Ms. Vanessa Freeman, Program Analyst, 

U.S. Department of Education, 400 Maryland Avenue, SW., Room 3045, 

Regional Office Building #3, Washington, DC 20202-5346. Telephone: 

(202) 708-8242. If you use a telecommunications device for the deaf 

(TDD), you may call the Federal Information Relay Service (FIRS) at 1-

800-877-8339.

    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


    We invite you to submit comments regarding these proposed 

regulations. To ensure that your comments have maximum effect in 

developing the final regulations, we urge you to identify clearly the 

specific section or sections of the proposed regulations that each of 

your comments addresses and to arrange your comments in the same order 

as the proposed regulations.

    We invite you to assist us in complying with the specific 

requirements of Executive Order 12866 and its overall requirement of 

reducing regulatory burden that might result from these proposed 

regulations. Please let us know of any further opportunities we should 

take to reduce potential costs or increase potential benefits while 

preserving the effective and efficient administration of the program.

    During and after the comment period, you may inspect all public 

comments about these proposed regulations at the following address: 

U.S. Department of Education, 7th and D Sts. SW., ROB #3, Rm 3045, 

Washington, DC 20026-3272, between the hours of 8:30 a.m. and 4 p.m., 

Eastern time, Monday through Friday, of each week except Federal 

holidays.


Assistance to Individuals With Disabilities in Reviewing the 

Rulemaking Record


    On request, we will supply 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. If you want to 

schedule an appointment for this type of aid, you may call (202) 205-

8113 or (202) 260-9895. If you use a TDD, you may call the Federal 

Information Relay Service at 1-800-877-8339.


Negotiated Rulemaking


    Section 492 of the HEA requires that, before publishing any 

proposed regulations for programs under Title IV of the HEA, the 

Secretary obtain public involvement in the development of the proposed 

regulations. After obtaining advice and recommendations, the Secretary 

must conduct a negotiated rulemaking process to develop the proposed 

regulations. All published proposed regulations must conform to 

agreements resulting from the negotiated rulemaking process unless the 

Secretary reopens the negotiated rulemaking process or provides a 

written explanation to the participants in that process why the 

Secretary has decided to depart from the agreements.

    To obtain public involvement in the development of the proposed 

regulations, we held listening sessions


[[Page 46128]]


in Washington, DC, Atlanta, Chicago, and San Francisco. Four half-day 

sessions were held on September 13 and 14, 1999, in Washington, DC. In 

addition, we held three regional sessions in Atlanta on September 17, 

in Chicago on September 24, and in San Francisco on September 27, 1999. 

The Office of Student Financial Assistance's Customer Service Task 

Force also conducted listening sessions to obtain public involvement in 

the development of our regulations.

    We then published a notice in the Federal Register (64 FR 73458, 

December 30, 1999) to announce our intention to establish two 

negotiated rulemaking committees to draft proposed regulations 

affecting Title IV of the HEA. The notice requested nominations for 

participants from anyone who believed that his or her organization or 

group should participate in this negotiated rulemaking process. The 

notice announced that we would select participants for the process from 

the nominees of those organizations or groups. The notice also 

announced a tentative list of issues that each committee would 

negotiate.

    Once the two committees were established, they met to develop 

proposed regulations over the course of several months, beginning in 

February. The proposed regulations contained in this NPRM reflect the 

final consensus of Negotiating Committee I (committee), which was made 

up of the following members:


American Association of Collegiate Registrars and Admissions 

Officers

American Association of Cosmetology Schools

American Association of State Colleges and Universities (in 

coalition with American Association of Community Colleges)

American Council on Education

Career College Association

Coalition of Higher Education Assistance Organizations

Consumer Bankers Association

Education Finance Council

Education Loan Management Resources

Legal Services

National Association of College and University Business Officers

National Association of Independent Colleges and Universities

National Association of State Universities and Land-Grant Colleges

National Association of Student Financial Aid Administrators

National Association of Student Loan Administrators

National Council of Higher Education Loan Programs

National Direct Student Loan Coalition

Sallie Mae, Inc.

Student Loan Servicing Alliance

The College Fund/United Negro College Fund

United States Department of Education

United States Student Association

US Public Interest Research Group


    As stated in the committee protocols, consensus means that there 

must be no dissent by any member in order for the committee to be 

considered to have reached agreement. Consensus was reached on all of 

the proposed regulations in this document.


Significant Proposed Regulations


    We discuss substantive issues under the sections of the proposed 

regulations to which they pertain. Generally, we do not address 

proposed regulatory provisions that are technical or otherwise minor in 

effect.


Sections 674.13  Reimbursement to the Fund and 674.50  Assignment of 

defaulted loans to the United States


    Current regulations: Section 674.13 of the current regulations 

requires an institution to reimburse its Federal Perkins Loan Fund 

(Institution's Fund) for the amount of defaulted loans, including 

administrative cost allowances previously claimed, for which the 

institution failed to retain required documentation (e.g., the 

promissory note and a record of advances) or failed to undertake due 

diligence in collections. Section 674.50(c) of the current regulations 

identifies the documentation required to be submitted by an institution 

to assign a loan to the Secretary. Our rejection of an assignment 

submission for incorrect or incomplete documentation or for an 

evidenced lack of due diligence in collection of the loan may result in 

a request that the institution reimburse its Institution's Fund.

    Proposed regulations: We propose to amend these sections of the 

regulations to encourage institutions to assign defaulted loans to us 

by providing the Secretary discretion to accept defaulted loans for 

assignment even if not all the documentation specified in 674.50(c) is 

available or reveals imperfect collection. We also propose to provide 

the Secretary with discretion to determine the circumstances under 

which we will require reimbursement by the institution to its 

Institution's Fund.

    Reasons: The proposed change to these sections of the current 

regulations from absolute requirements to Secretarial discretion 

represents a compromise with the non-federal negotiators regarding 

assignment of certain defaulted loans by institutions.

    Our initial proposal to require loan assignment reflected our 

concern over the approximately $350 million in defaulted Perkins loans 

that are held by participating institutions and have been in default 

for five or more years as reported by schools on their annual Fiscal 

Operations Report. Our proposal would have required schools whose 

Perkins Loan portfolio included a significant percentage of loans in 

default for five or more years to assign to the Secretary those aged 

loans with no recent payment activity.

    We believe that, without additional significant efforts, this 

national portfolio of aging defaulted loans will continue to grow and 

may become less collectible over time. Left unaddressed, this situation 

reduces funds available for future students and may undermine public 

support for the Federal Perkins Loan Program. Institutions may have 

exhausted available collection efforts and ceased collection on an 

unknown number of these accounts. Because we have collection tools, 

such as administrative wage garnishment, federal offset, and litigation 

by the Department of Justice in federal court, that are not available 

to institutions, we want to have these aged accounts assigned to the 

Secretary for collection.

    The non-federal negotiators representing institutions' interests 

strenuously rejected the contention that all loans in default for five 

or more years were inactive accounts and that collection efforts were 

not continuing on those accounts. Although they agreed that we have 

collection tools that are not available to institutions, they expressed 

the belief that we should make these tools more accessible by 

simplifying the existing voluntary assignment process or introducing a 

referral process into the regulations rather than imposing mandatory 

assignment. They indicated that the current voluntary assignment 

process was underused because it was administratively burdensome and 

put institutions at risk of reimbursing their Institution's Fund for 

all loans not accepted for assignment. During the negotiations, there 

was much discussion and review of a proposal submitted by the non-

federal negotiators for use of a referral and voluntary assignment 

process.

    After carefully considering the proposal for a voluntary referral 

process we declined to consider such an approach. Our experience with 

similar Perkins Loan referral plans in the past convinced us that such 

plans are administratively unworkable. They are difficult to manage, 

hard to explain to borrowers, and present fiscal and legal obstacles 

with regard to the return of payments received to the referring 

institution.

    Instead we proposed changes to the current voluntary assignment 

regulations that would allow us to have


[[Page 46129]]


the opportunity to work with interested institutions and organizations 

to develop a less burdensome and more flexible process before turning 

to a mandatory assignment approach. Thus, these proposed regulations 

give the Secretary discretion in the two areas (required reimbursement 

and documentation requirements) that were problematic to some 

negotiators.

    We intend to develop, with the cooperation of participating Perkins 

institutions, a simplified voluntary assignment process for aging 

defaulted accounts. We will also monitor the use of this new process 

over the reporting cycle following implementation of the regulations. 

We expect institutions to actively review their portfolios and use the 

new process to assign aged, nonpaying accounts to us and we anticipate 

a significant reduction in the number and dollar value of these 

accounts as a result. Should the streamlined voluntary assignment 

process prove unsuccessful in reducing the number of these accounts, we 

will consider alternatives, including reintroducing our original 

regulatory proposal for mandatory assignment.


Section 674.39  Loan Rehabilitation


    Current Regulations: Section 674.39(c) of the current regulations 

specifies that if collection costs are assessed on a rehabilitated 

defaulted Perkins loan, those collections costs may not exceed 24 

percent of the unpaid principal and accrued interest on the loan as of 

the date following application of the twelfth payment required to 

rehabilitate the loan.

    Proposed Regulations: We propose to amend this section of the 

regulations by adding a provision that clarifies that the 24 percent 

cap on collection costs that may be charged on a rehabilitated loan 

does not apply if the borrower defaults again on the rehabilitated 

loan.

    Reasons: The cap of 24 percent on collection costs for borrowers 

who successfully rehabilitate a defaulted Perkins loan is a benefit to 

those borrowers, who in many cases were subject to a higher percentage 

of collection costs prior to the rehabilitation. That benefit should no 

longer apply on the loan, however, should the borrower once again 

default on its repayment.


Section 674.49  Bankruptcy of Borrower


    Current Regulations: Section 674.49(b) of the regulations currently 

requires institutions to file a proof of claim in a bankruptcy 

proceeding under Chapter 7 of the Bankruptcy Code unless the borrower 

has no assets.

    Proposed Regulations: We propose to amend this provision of the 

regulations to allow an institution that is determined to be an agency 

of a State to invoke in bankruptcy proceedings its right of sovereign 

immunity under the 11th amendment to the Constitution of the United 

States.

    Reasons: We are amending the regulations to codify the recognized 

right of States and their agents to invoke their rights under the 11th 

amendment to the Constitution and eliminate any conflict in existing 

regulations that would suggest that a proof of claim must be filed in 

all cases where this right might otherwise be invoked.


Executive Order 12866


1. Potential Costs and Benefits


    Under Executive Order 12866, we have assessed the potential costs 

and benefits of this regulatory action.

    The potential costs associated with the proposed regulations are 

those resulting from statutory requirements and those we have 

determined as necessary for administering this program effectively and 

efficiently.

    The proposed regulations would expand borrower benefits by fixing 

collection costs on rehabilitated loans not in default at 24 percent. 

The proposed regulations provide additional flexibility in the 

administration of the Perkins Loan Program by relaxing both the 

documentation requirements for defaulted loans assigned to the 

Secretary, and provisions regarding the institutional reimbursement to 

their Fund for the costs of defaulted loans. The proposed regulations 

also modify current regulations regarding the determination of 

bankruptcy to make Federal requirements consistent with the States' 

constitutional rights under the 11th Amendment. In assessing the 

potential costs and benefits--both quantitative and qualitative--of 

this regulatory action, we have determined that the benefits would 

justify the costs.


2. Clarity of the Regulations


    Executive Order 12866 and the President's Memorandum of June 1, 

1998 on ``Plain Language in Government Writing'' require 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:

    <bullet> Are the requirements in the proposed regulations clearly 

stated?

    <bullet> Do the proposed regulations contain technical terms or 

other wording that interferes with their clarity?

    <bullet> Does the format of the proposed regulations (grouping and 

order of sections, use of headings, paragraphing etc.) aid or reduce 

their clarity?

    <bullet> Would the proposed regulations be easier to understand if 

we divided them into more (but shorter) sections? (A ``section'' is 

preceded by the symbol ``Sec. '' and a numbered heading; for example, 

Sec. 674.39 Loan Rehabilitation.)

    <bullet> Could the description of the proposed regulations in the 

``Supplementary Information'' section of this preamble be more helpful 

in making the proposed regulations easier to understand? If so, how?

    <bullet> What else could we do to make the proposed regulations 

easier to understand?

    Send any comments that concern how the Department could make these 

proposed regulations easier to understand to the person listed in the 

ADDRESSES section of the preamble.


Regulatory Flexibility Act Certification


    The Secretary certifies that these proposed regulations would not 

have a significant economic impact on a substantial number of small 

entities. These proposed regulations would affect institutions of 

higher education that participate in title IV, HEA programs. The U.S. 

Small Business Administration (SBA) Size Standards define institutions 

as ``small entities'' if they are for-profit or nonprofit institutions 

with total annual revenue below $5,000,000 or if they are institutions 

controlled by governmental entities with populations below 50,000.

    The parties affected by these proposed regulations are institutions 

of higher education that participate in the Perkins Loan Program, and 

individual Perkins Loan borrowers. Perkins Loan borrowers are not 

considered small entities under the Regulatory and Flexibility Act. A 

small percentage of the approximately 2,000 institutions participating 

in the Perkins Loan program would meet the SBA definition of ``small 

entities.''

    These proposed regulations would expand borrower benefits and 

provide additional flexibility in the administration of the Perkins 

Loan program to both large and small institutions without requiring 

significant changes to institutional systems or operations. These 

proposed regulations would not impose a significant economic impact on 

a substantial number of small entities.


Paperwork Reduction Act of 1995


    Sections 674.13, 674.39, 674.49, and 674.50 of these regulations 

contain information collection requirements. Under the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education 

has submitted


[[Page 46130]]


a copy of these sections to the Office of Management and Budget (OMB) 

for its review.


Collection of Information: Federal Perkins Loan Program


    Section 674.13  Reimbursement to the Fund. The Department currently 

has these regulations approved under OMB control number 1845-0019. This 

provision allows institutions more flexibility in what the Department 

requires when reimbursing their funds for defaulted student loans and 

does not increase the burden hours for schools.

    Section 674.39  Loan Rehabilitation. We are adding a provision to 

include collection costs that may be charged in excess of 24 percent to 

a rehabilitated loan in the event the rehabilitated loan defaults. 

There are no burden hours associated with this proposed regulation.

    Section 674.50  Assignment of defaulted loans to the United States. 

This proposed regulation relaxes some of the documentation requirements 

for institutions that assign defaulted student loans to the Department 

of Education for collection. This proposed regulation does not increase 

the burden hours for schools.

    Section 674.49  Bankruptcy of borrower. The Department currently 

has this section approved under OMB control number 1845-0023. This 

regulation allows state institutions that participate in the Federal 

Perkins Loans Program the authority to invoke sovereign immunity in 

Bankruptcy proceedings under Chapter 7 or 13 of the Bankruptcy Code. 

This proposed regulation resolves any ambiguity surrounding an 

institution's authority to invoke its rights under the 11th Amendment. 

This proposed regulation does not change information collection 

contained in this section.

    If you want to comment on the information collection requirements, 

please send your comments 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. You 

may also send a copy of these comments to the Department representative 

named in the ADDRESSES section of this preamble.

    We consider your comments on these proposed collections of 

information in--

    <bullet> Deciding whether the proposed collections are necessary 

for the proper performance of our functions, including whether the 

information will have practical use;

    <bullet> Evaluating the accuracy of our estimate of the burden of 

the proposed collections, including the validity of our methodology and 

assumptions;

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

information we collect; and

    <bullet> Minimizing the burden on those who must respond. This 

includes exploring the use of appropriate automated, electronic, 

mechanical, or other technological collection techniques or other forms 

of information technology; e.g., permitting electronic submission of 

responses.

    OMB is required to make a decision concerning the collections of 

information contained in these proposed regulations between 30 and 60 

days after publication of this document in the Federal Register. 

Therefore, to ensure that OMB gives your comments full consideration, 

it is important that OMB receives the comments within 30 days of 

publication. This does not affect the deadline for your comments to us 

on the proposed regulations.


Intergovernmental Review


    This program is not subject to Executive Order 12372 and the 

regulations in 34 CFR part 79.


Assessment of Educational Impact


    The Secretary particularly requests comments on whether these 

proposed regulations would require transmission of information that any 

other agency or authority of the United States gathers or makes 

available.


Federalism


    Executive Order 13132 requires us to ensure meaningful and timely 

input by State and local elected officials in the development of 

regulatory policies that have federalism implications. ``Federalism 

implications'' means substantial direct effects on the States, on the 

relationship between the national government and the States, or on the 

distribution of power and responsibilities among various levels of 

government. The proposed regulations in Section 674.49 may have 

federalism implications, as defined in Executive Order 13132. We 

encourage State and local elected officials to review and provide 

comments on these proposed regulations.


Electronic Access to This Document


    You may view this document in text or Adobe Portable Document 

Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb_html/fedlreg.htm


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

Search, which is available free at the previous sites. If you have 

questions about using the PDF, call the U.S. Government Printing Office 

(GPO), toll free, at 1-888-293-6498; or in the Washington, D.C., area 

at (202) 512-1530.


    Note: The official version of this document is the document 

published in the Federal Register. Free Internet access to the 

official edition of the Federal Register and the Code of Federal 

Regulations is available on GPO Access at: http://

www.access.gpo.gov/nara/index.html.


(Catalog of Federal Domestic Assistance Number: 84.037 Federal 

Perkins Loan Program)


List of Subjects in 34 CFR Part 674


    Loan programs--education, Student aid, Reporting and recordkeeping 

requirements.


    Dated: July 19, 2000.

Richard W. Riley,

Secretary of Education.


    For the reasons discussed in the preamble, the Secretary proposes 

to amend part 674 of title 34 of the Code of Federal Regulations as 

follows:


PART 674--FEDERAL PERKINS LOAN PROGRAM


    1. The authority citation for part 674 continues to read as 

follows:


    Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless 

otherwise noted.


    2. Section 674.13 is amended by revising paragraph (a) introductory 

text to read as follows:



Sec. 674.13  Reimbursement to the Fund.


    (a) The Secretary may require an institution to reimburse its Fund 

in an amount equal to that portion of the outstanding balance of--

* * * * *

    3. Section 674.39 is amended by revising paragraph (c) to read as 

follows:



Sec. 674.39  Loan rehabilitation.


* * * * *

    (c) Collection costs on a rehabilitated loan--

    (1) If charged to the borrower, may not exceed 24 percent of the 

unpaid principal and accrued interest as of the date following 

application of the twelfth payment;

    (2) That exceed the amounts specified in paragraph (c)(1) of this 

section, may be charged to an institution's Fund until July 1, 2002 in 

accordance with Sec. 674.47(e)(5); and

    (3) Are not restricted to 24 percent in the event the rehabilitated 

loan defaults.

* * * * *

    4. Section 674.49 is amended by revising paragraph (b) to read as 

follows:


[[Page 46131]]


Sec. 674.49  Bankruptcy of borrower.


* * * * *

    (b) Proof of claim. The institution must file a proof of claim in 

the bankruptcy proceeding unless--

    (1) In the case of a proceeding under chapter 7 of the Bankruptcy 

Code, the notice of meeting of creditors states that the borrower has 

no assets, or

    (2) In the case of a bankruptcy proceeding under either Chapter 7 

or Chapter 13 of the Bankruptcy Code in which the repayment plan 

proposes that the borrower repay less than the full amount owed on the 

loan, the institution has an authoritative determination by an 

appropriate State official that in the opinion of the state official, 

the institution is an agency of the State and is, on that basis, under 

applicable State law, immune from suit.

* * * * *

    5. Section 674.50 is amended by revising paragraph (c) introductory 

text to read as follows:



Sec. 674.50  Assignment of defaulted loans to the United States.


* * * * *

    (c) The Secretary may require an institution to submit the 

following documents for any loan it proposes to assign--

* * * * *

[FR Doc. 00-18952 Filed 7-26-00; 8:45 am]

BILLING CODE 4000-01-P