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Publication
Date: June 12, 2007
FRPart: II
Page Numbers: 32409-32447
Summary: Federal
Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Proposed Rule
Posted on 06-12-2007
[Federal Register: June 12, 2007 (Volume 72, Number 112)]
[Proposed Rules]
[Page 32409-32447]
From the Federal Register Online via GPO Access [http://www.access.gpo.gov ] [DOCID:fr12jn07-19]
[Page 32409]
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Part II
Department of Education
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34 CFR Parts 674, 682, and 685
Federal Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Proposed Rule
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DEPARTMENT OF EDUCATION
34 CFR Parts 674, 682, and 685
[Docket ID ED-2007-OPE-0133]
RIN 1840-AC89
Federal Perkins Loan Program, Federal Family Education Loan
Program, and William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan
(Perkins Loan) Program, Federal Family Education Loan (FFEL) Program,
and William D. Ford Federal Direct Loan (Direct Loan) Program
regulations. The Secretary is amending these regulations to strengthen
and improve the administration of the loan programs authorized under
Title IV of the Higher Education Act of 1965, as amended.
DATES: We must receive your comments on or before August 13, 2007.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments by fax or by e-mail. Please submit your comments only
one time, in order to ensure that we do not receive duplicate copies.
In addition, please include the Docket ID at the top of your comments.
Federal eRulemaking Portal: Go to http://www.regulations.gov, select ``Department of Education'' from the agency
drop-down menu, then click ``Submit.'' In the Docket ID column, select
ED-2007-OPE-0133 to add or view public comments and to view supporting
and related materials available electronically. Information on using
Regulations.gov, including instructions for submitting comments,
accessing documents, and viewing the docket after the close of the
comment period, is available through the site's ``User Tips'' link.
Postal Mail, Commercial Delivery, or Hand Delivery. If you
mail or deliver your comments about these proposed regulations, address
them to Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street,
NW., room 8026, Washington, DC 20006-8542.
Privacy Note: The Department's policy for comments received from
members of the public (including those comments submitted by mail,
commercial delivery, or hand delivery) is to make these submissions
available for public viewing on the Federal eRulemaking Portal at
http://www.regulations.gov. All submissions will be posted to the
Federal eRulemaking Portal without change, including personal
identifiers and contact information.
FOR FURTHER INFORMATION CONTACT: Ms. Gail McLarnon, U.S. Department of
Education, 1990 K Street, NW., Washington, DC 20006-8542. Telephone:
(202) 219-7048 or via the Internet: gail.mclarnon@ed.gov.
If you use a telecommunications device for the deaf (TDD), you may
call the Federal Relay Service (FRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed under FOR FURTHER
INFORMATION CONTACT.
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 programs.
During and after the comment period, you may inspect all public
comments about these proposed regulations by accessing Regulations.gov.
You may also inspect the comments, in person, in room 8026, 1990 K
Street, NW., Washington, DC, 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 record for these proposed regulations. If you want to
schedule an appointment for this type of aid, please contact the person
listed under FOR FURTHER INFORMATION CONTACT.
Negotiated Rulemaking
Section 492 of the Higher Education Act of 1965, as amended (HEA)
requires the Secretary, before publishing any proposed regulations for
programs authorized by Title IV of the HEA, to obtain public
involvement in the development of the proposed regulations. After
obtaining advice and recommendations from individuals and
representatives of groups involved in the Federal student financial
assistance programs, the Secretary must subject the proposed
regulations to a negotiated rulemaking process. The proposed
regulations that the Department publishes must conform to agreements
resulting from that process unless the Secretary reopens the process or
provides a written explanation to the participants in that process
stating why the Secretary has decided to depart from the agreements.
Further information on the negotiated rulemaking process can be found
at: http://www.ed.gov/policy/highered/reg/hearulemaking/2007/nr.html.
On August 18, 2006, the Department published a notice in the
Federal Register (71 FR 47756) announcing our intent to establish up to
four negotiated rulemaking committees to prepare proposed regulations.
One committee would focus on issues related to the Academic
Competitiveness Grant and National Science and Mathematics Access to
Retain Talent (SMART) Grant programs. A second committee would address
issues related to the Federal student loan programs. A third committee
would address programmatic, institutional eligibility, and general
provisions issues. Lastly, a fourth committee would address
accreditation. The notice requested nominations of individuals for
membership on the committees who could represent the interests of key
stakeholder constituencies on each committee. The four committees met
to develop proposed regulations over the course of several months,
beginning in December 2006. This NPRM proposes regulations relating to
the student loan programs that were discussed by the second committee
mentioned in this paragraph (the ``Loans Committee'').
The Department developed a list of proposed regulatory changes from
advice and recommendations submitted by individuals and organizations
in testimony submitted to the Department in a series of four public
hearings held on:
[[Page 32411]]
September 19, 2006, at the University of California-
Berkeley in Berkeley, California.
October 5, 2006, at the Loyola University in Chicago,
Illinois.
November 2, 2006, at the Royal Pacific Hotel Conference
Center in Orlando, Florida.
November 8, 2006, at the U.S. Department of Education in
Washington, DC.
In addition, the Department received written comments on possible
regulatory changes submitted directly to the Department by interested
parties and organizations. All regional meetings and a summary of all
comments received orally and in writing are posted as background
material in the docket and can also be accessed at http://www.ed.gov/policy/highered/reg/hearulemaking/2007/hearings.html.
Staff within the
Department also identified issues for discussion and negotiation.
Lastly, because The Third Higher Education Extension Act of 2006, (Pub.
L. 109-292), made changes to the law governing eligible lender trustee
relationships as of September 30, 2006, the Department added this issue
to the Loans Committee agenda.
At its first meeting in December, 2006, the Loans Committee reached
agreement on its protocols and proposed agenda. These protocols
provided that the non-Federal negotiators would not represent the
interests of stakeholder constituencies, but would instead participate
in the negotiated rulemaking process based on each Committee member's
experience and expertise in the Title IV, HEA loan programs.
The members of the Loans Committee were:
Jennifer Pae, United States Students Association, and Luke
Swarthout (alternate), State PIRG (Public Interest Research Groups)
Higher Education Project;
Deanne Loonin and Alys Cohen (alternate) of the National
Consumer Law Center.
Darrel Hammon, Laramie Community College, and Kenneth
Whitehurst (alternate), North Carolina Community Colleges.
Pamela W. Fowler, University of Michigan, Patricia McClurg
(alternate), University of Wyoming, and Sara Bauder (alternate),
University of Maryland.
Elizabeth Hicks, Massachusetts Institute of Technology,
and Ellen Frishberg (alternate), Johns Hopkins University.
Jeff Arthur, ECPI College of Technology, Robert Collins
(alternate), Apollo Group, and Nancy Broff (alternate), Career College
Association.
Shari Crittendon, United Negro College Fund, and William
``Buddy'' Blakey (alternate), William A. Blakey & Associates, PLLC.
Scott Giles, Vermont Student Assistance Corporation, and
Rachael Lohman (alternate), Pennsylvania Higher Education Assistance
Agency.
Tom Levandowski, Wachovia Corporation, and Lee Woods
(alternate), Chase Education Finance.
Phil Van Horn, Wyoming Student Loan Corporation, and
Robert L. Zier (alternate), Indiana Secondary Market for Education
Loans.
Robert Sommer, Sallie Mae, and Wanda Hall (alternate),
EdFinancial Services.
Richard George, Great Lakes Higher Education Guaranty
Corporation, and Gene Hutchins (alternate), New Jersey Higher Education
Student Assistance Authority.
Eileen O'Leary, Stonehill College, and Christine McGuire
(alternate), Boston University.
Alisa Abadinsky, University of Illinois at Chicago, and
Karen Fooks (alternate), University of Florida.
Dan Madzelan, U.S. Department of Education.
Ellen Frishberg of Johns Hopkins University resigned from the Committee
after the third negotiated rulemaking session.
During its meetings, the Loans Committee reviewed and discussed
drafts of proposed regulations. It did not reach consensus on the
proposed regulations in this NPRM. More information on the work of this
committee can be found at: http://www.ed.gov/policy/highered/reg/hearulemaking/2007/loans.html.
These regulations were further refined by the Task Force on Student
Loans. The Secretary created this task force on April 24, 2007, to
review issues within the student loan industry. The task force was
comprised of representatives from several offices within the
Department, including the Office of Postsecondary Education, Office of
Federal Student Aid, Office of the General Counsel, Office of Budget
Service, Office of Planning, Evaluation, and Policy Development, and
Office of Inspector General. The task force submitted its
recommendations regarding these regulations to the Secretary on May 9, 2007.
Significant Proposed Regulations
The following discussion of the proposed regulations begins with
changes that affect more than one of the title IV student loan
programs--the Perkins Loan Program, the FFEL Program, or the Direct
Loan Program.
This discussion is followed by separate discussions of proposed
changes that affect only one of the three programs. Generally, we do
not address proposed regulatory provisions that are technical or
otherwise minor in effect.
Simplification of Deferment Process (Sec. Sec. 674.38, 682.210,
682.210, 682.210, and 685.204)
Statute: Sections 428(b)(1)(M), 455(f)(2), and 464(c)(2)(A) of the
HEA authorize deferments for borrowers in the FFEL, Direct Loan, and
Perkins Loan programs under certain circumstances. A FFEL, Direct Loan,
or Perkins Loan borrower may receive a deferment during a period when
the borrower is: Enrolled at least half-time in an institution of
higher education; enrolled in an approved graduate fellowship program;
enrolled in an approved rehabilitation training program; seeking and
unable to find full-time employment; performing qualifying active duty
military service; or experiencing an economic hardship.
Current Regulations: Currently, a borrower who has loans held by
one or more lenders must apply separately to each lender for a
deferment in accordance with Sec. Sec. 674.38, 682.210, and 685.204 of
the Department's regulations. Each lender is required to review the
borrower's deferment request, and make its own determination of the
borrower's eligibility for the deferment. There is an exception to this
requirement for in-school deferments. Under Sec. Sec. 674.38(a)(2) and
682.210(c)(1), a Perkins institution or a FFEL lender may grant an in-
school deferment based on information from the borrower's school, or
student status information from another source. The Secretary also has
this option in the Direct Loan Program under Sec.
685.204(b)(1)(iii)(A)(3). When an in-school deferment is granted using
this procedure, the institution, lender or Secretary must notify the
borrower that the deferment has been granted, and provide the borrower
an opportunity to decline the deferment.
Proposed Regulations: The proposed regulations in Sec.
682.210(s)(1)(iii) would allow FFEL lenders to grant graduate
fellowship deferments, rehabilitation training program deferments,
unemployment deferments, military service deferments, and economic
hardship deferments based on information that another FFEL lender or
the Department has granted the borrower a deferment for the same reason
and the same time period. The proposed regulations in Sec.
685.204(g)(2) would also permit the Department to grant a deferment on
a Direct Loan based on deferment information from a
[[Page 32412]]
FFEL Program lender. The proposed regulations in Sec. 674.38(a)(2)
would permit schools in the Perkins Loan Program to grant deferments
based on information from another Perkins Loan holder, FFEL lender, or
the Department.
Under the proposed regulations in Sec. Sec. 674.38(a)(3),
682.210(s)(1)(iv) and 685.204(g)(3), Title IV, HEA loan holders will be
able to rely in good faith on the deferment eligibility determinations
of other lenders, including the Department. However, if a loan holder
has evidence indicating that the borrower does not qualify for a
deferment, the loan holder may not grant a deferment based on another
holder's determination of deferment eligibility.
In addition, the proposed regulations in Sec. Sec. 674.38(a)(6),
682.210(i)(1) and (t)(7), and 685.204(g)(5) would allow a borrower's
representative to apply for a military service deferment on behalf of
the borrower. This change would apply to both the Armed Forces
deferment available for loans made before July 1, 1993 and the current
military service deferment.
Reasons: The non-Federal negotiators recommended adding provisions
to Sec. 682.210 of the regulations to allow FFEL lenders to grant
deferments based on deferments granted by other lenders. They noted
that this is allowable for in-school deferments and asked to extend
this authority to other deferments. Under this proposal, the FFEL
lender would determine borrower eligibility for the deferment by
contacting the other lender or by checking the Department's National
Student Loan Data System (NSLDS). The Department agreed to consider
this addition to the regulations. In addition, the Department agreed
with the negotiators to allow Perkins Loan schools to grant deferments
based on a borrower's FFEL or Direct Loan deferment eligibility as
reflected in the proposed changes to Sec. 674.38(a). However, since
eligibility and documentation requirements for some Perkins Loan
deferments are different from corresponding deferment requirements in
the FFEL and Direct Loan programs, these proposed regulations would not
allow FFEL lenders, or the Department for Direct Loans, to grant
deferments based on a borrower receiving a deferment on his or her
Perkins Loan.
The proposed regulations limit this simplified deferment process to
deferments that are available to a borrower who received a Title IV,
HEA loan on or after July 1, 1993. The negotiators suggested that the
new regulations should also apply to deferments that were available to
a borrower who first received a Title IV, HEA loan prior to July 1,
1993.
However, the Department decided that the pre-July 1, 1993
deferments are more complex and have more detailed qualifications than
the current deferments. In addition, the older deferments are not the
same for all types of loans. A borrower could qualify for a deferment
on some of their loans but not others. The post-July 1, 1993 deferments
are relatively uniform across the Title IV, HEA loan programs and
across loan types. In light of these differences, the Department
decided that the new policy should apply only to the deferments
available on current loans.
Some negotiators asked that the regulations include protection for
lenders that grant a deferment in error based on another lender's
determination of deferment eligibility. In response, the Department is
proposing to add language to Sec. Sec. 674.38(a)(3), 682.210(s)(1)(iv)
and 685.204(g)(3) stating that loan holders may rely in good faith on
the deferment determination of another holder, but may not knowingly
grant an ineligible borrower a deferment if the loan holder has
information indicating that the borrower is not eligible.
Some negotiators proposed that loan holders be allowed to grant a
deferment unilaterally, without any contact from the borrower. The
Department did not accept this proposal because, although a borrower
may qualify for a deferment on all of his or her loans, the borrower
may not necessarily want a deferment on all of his or her loans. Under
the simplified process, the borrower would not have to submit a
deferment application to each lender, but would still have to request
the deferment, in writing, electronically or verbally.
Some negotiators requested a change to the regulations that would
allow a request for a military service deferment to be submitted by a
representative of the borrower as well as the borrower. They noted that
borrowers who qualify for these deferments may not be in a position to
easily apply for them. The Department agreed that a special provision
for these borrowers is warranted. The Department is proposing to amend
the regulations in Sec. Sec. 674.38(a)(6), 682.210(i)(5) and (t)(7),
and 685.204(g)(5) to allow a borrower's representative to apply for a
military service deferment or an Armed Forces deferment on the
borrower's behalf.
The Department notes that granting a deferment under this
simplified process is optional for lenders. A lender is not required to
use this process when reviewing deferment requests.
Accurate and Complete Copy of a Death Certificate (Sec. Sec. 674.61,
682.402, and 685.212)
Statute: Sections 437(a) and (d) of the HEA provide for the
discharge of a FFEL loan if the borrower, or a dependent on whose
behalf a parent has borrowed, dies. This provision also applies to
Direct Loans under section 455(a)(1) of the HEA. Section 464(c)(1)(F)
provides for the discharge of a Perkins Loan if the borrower dies.
Current Regulations: Current regulations in Sec. Sec. 674.61(a),
682.402(b), and 685.212(a) state that if a Perkins, FFEL, or Direct
Loan borrower dies, or if the student for whom a FFEL or Direct PLUS
Loan was borrowed dies, the borrower's loan will be discharged based on
an original or certified copy of the death certificate. Under
exceptional circumstances, and on a case-by-case basis, a discharge due
to the death of the borrower may be granted without an original or
certified copy of the death certificate.
Proposed Regulations: The Secretary proposes to amend Sec. Sec.
674.61(a), 682.402(b), and 685.212(a) to allow the use of an accurate
and complete photocopy of the original or certified copy of the
borrower's death certificate, in addition to the original or certified
copy of the death certificate, to support the discharge of a Title IV
loan due to death.
Reasons: The Secretary believes that allowing the use of an
accurate and complete photocopy of the death certificate will decrease
the burden for survivors of the deceased and for loan holders
processing death discharges. We have also learned that, in some states,
there are restrictions and additional costs related to getting an
additional original or certified copy of the original death certificate
to provide to loan holders. Under the proposed regulations, the lender
may accept an accurate and complete photocopy of the death certificate.
The Secretary chose not to allow the use of a fax or electronic version
of the certificate because documents in those formats are more
vulnerable to alteration.
Under the proposed regulations a lender may rely on an ``accurate
and complete photocopy'' of the original or certified copy of the death
certificate to grant a discharge due to the death of the borrower. The
intent of the proposed change is not to require an individual to
provide an original or certified copy of the death certificate to the
lender for the lender to photocopy, but rather to allow a lender to
accept a photocopy of the original or certified copy of the death
certificate as an accurate and complete copy of the original or certified copy, unless there is evidence that
the copy is not an accurate and complete copy of the original or
certified copy.
Although other data sources such as NSLDS, the Social Security
Administration's Death Master File, and documents such as a police
report or court documents could possibly be used as a basis for
discharging a loan due to death, the Department declined to expand the
documentation requirements in order to guard against fraud and abuse in
the discharge process.
While the Department believes that it is difficult to alter an
original or certified copy of an original death certificate because
these documents are generally notarized or contain raised, government
stamps validating the document's authenticity, we nonetheless solicit
public comment on whether the use of a photocopy of an original or
certified copy of an original death certificate could lead to fraud and
abuse in the death discharge process. Specifically, we are interested
in comments that identify how such fraud is likely to occur and ways to
address this issue.
Total and Permanent Disability Discharge (Sec. Sec. 674.61, 682.402,
and 685.213)
Statute: Sections 437(a), 464(c)(1)(F), and 455(a)(1) of the HEA
provide for a discharge of a borrower's FFEL, Perkins, or Direct Loan
Program loan, respectively, if the borrower becomes totally and
permanently disabled. A total and permanent disability is determined in
accordance with regulations of the Secretary.
Current Regulations: Sections 674.61(b), 682.402(c), and 685.213 of
the Perkins, FFEL, and Direct Loan Program regulations, respectively,
authorize the discharge of a loan if the borrower becomes totally and
permanently disabled. Section 674.51 of the Perkins Loan Program
regulations defines total and permanent disability, and Sec. 682.200
defines totally and permanently disabled, for the purposes of the FFEL
and Direct Loan Programs, as the condition of an individual who is
unable to work and earn money because of an injury or illness that is
expected to continue indefinitely or result in death.
Under current regulations in Sec. Sec. 674.61(b), 682.402(c), and
685.213, a Perkins, FFEL or Direct Loan borrower submits a discharge
application to the loan holder. The application must include a
physician's certification that the borrower is totally and permanently
disabled as defined in Sec. 682.200 or has a total and permanent
disability as defined in Sec. Sec. 674.51. To establish eligibility
for the discharge, a borrower cannot have worked or earned money or
received a Title IV loan at any time after the date of the borrower's
total and permanent disability. The loan holder reviews the
application, and upon making an initial determination that the borrower
meets the definition and requirements for a total and permanent
disability discharge, notifies the borrower that the loan has been
assigned to the Department and that no payments are due to the lender.
Under Sec. 685.213 of the current regulations, the Department is
responsible for reviewing disability discharge applications submitted
by Direct Loan borrowers.
Upon assignment of the Perkins or FFEL Loan or receipt of a Direct
Loan discharge application, the Department reviews the application. If
the borrower meets the eligibility requirements for a discharge, the
Department notifies the borrower that the loan has been placed in a
three-year conditional discharge status and that no payments are due
during that period. During the three-year conditional discharge period,
the borrower's income from employment cannot exceed the poverty line
for a family of two for any 12-month period, and the borrower cannot
take out any additional Title IV loans. Under current regulations, in
some cases, the three-year conditional period will already have elapsed
if the borrower's total and permanent disability date is more than
three years prior to the date the borrower applies for a discharge. In
such cases, a final discharge decision is made immediately upon
assignment of the account to the Department without any current income
verification, as long as the borrower is otherwise eligible. Otherwise,
if, at the end of the three-year conditional discharge period, the
borrower still meets the discharge requirements, the Department makes a
final determination of eligibility and discharges the loan. Under
current regulations, any payments received by the loan holder or the
institution after the date the loan is assigned to the Secretary or
during the three-year conditional discharge period are forwarded to the
Department for crediting to the borrower's account. When the Department
makes a final determination to discharge the loan, the payments
received on the loan after the date the loan was assigned to the
Department are returned. If the borrower does not meet the eligibility
requirements during the three-year conditional discharge period,
collection activity resumes on the loan.
Proposed Regulations: These proposed regulations would restructure
the disability discharge regulations for the Perkins Loan, FFEL, and
Direct Loan programs, Sec. Sec. 674.61(b), 682.402(c) and 685.213,
respectively, to clarify the eligibility requirements for a final total
and permanent disability discharge and better describe the discharge
process. The Department is not changing the definition of total and
permanent disability in Sec. 674.51 or the definition or totally and
permanently disabled in Sec. 682.200.
The proposed regulations would: (1) Add a new requirement in
Sec. Sec. 674.61(b)(2)(i), 682.402(c)(2)(i) and 685.213(b)(1) that the
borrower submit a discharge application to the loan holder within 90
days of the date the physician certifies the borrower's application;
(2) define the date of the borrower's total and permanent disability as
the date the physician certifies the borrower's disability on the
discharge application form in Sec. Sec. 674.61(b)(3)(ii),
682.402(c)(3)(ii), and 685.213(c)(2); (3) require a prospective three
year conditional discharge period to establish eligibility for a total
and permanent disability discharge beginning on the date the Secretary
makes an initial determination that the borrower is totally and
permanently disabled, in Sec. Sec. 674.61(b)(3)(iii),
682.402(c)(3)(iii) and 685.213(c)(3); and (4) provide that upon making
a final determination of the borrower's total and permanent disability,
the Secretary returns those payments made on the loan after the date
the physician completed and certified the borrower's discharge on the
loan discharge application in Sec. Sec. 674.61(b)(5),
682.402(c)(4)(iii), 685.213(d)(3)(ii).
Reasons: The Department is proposing to restructure the Perkins
Loan, FFEL, and Direct Loan total permanent disability discharge
regulations in Sec. Sec. 674.61(b), 682.402(c) and 685.213,
respectively, to clarify the eligibility requirements and to better
explain the application and eligibility process. Several negotiators
argued that the process and eligibility requirements as currently
written are difficult for borrowers to understand. For example, non-
Federal negotiators noted that the current regulations establish a
different standard for eligibility for the period between the date of
the physician's certification and the Secretary's initial determination
of eligibility in comparison to the three-year conditional discharge
period. The Department proposes to address these concerns by clearly
listing the continuing eligibility requirements in Sec.
674.61(b)(2)(iii) of the Perkins Loan Program regulations, Sec.
682.402(c)(3) of the FFEL program regulations, and
[[Page 32414]]
Sec. 685.213(b)(2) of the Direct Loan program regulations and by
requiring loan holders to disclose these eligibility requirements to
borrowers. Some non-Federal negotiators also noted that even though
collection activity is suspended after the borrower submits a discharge
application, some borrowers continued to make payments on their loan
because they were not aware of the suspension of collection activity.
The Department is proposing to amend the regulations to require loan
holders to inform borrowers that no further payments on the loan are
due once the discharge application is sent to the Secretary for her
initial eligibility determination.
The proposed regulations in Sec. Sec. 674.61(b)(2)(i),
684.402(c)(2)(i) and 685.213(b)(1) would require borrowers to submit
the completed application for a total and permanent disability
discharge to the loan holder within 90 days of the date the physician
certifies the application. This requirement would help ensure that the
Secretary has accurate and timely information on which to base her
determination. Limiting the time period will also help borrowers avoid
the possibility that they might inadvertently take an action that would
disqualify them for a final discharge. The Department initially
proposed a 30-day application submission requirement, but the
Department was persuaded by the non-Federal negotiators that 90 days
would provide a more appropriate standard for borrowers.
Under the proposed regulations in Sec. Sec. 674.61(b)(3)(ii),
682.402(c)(3)(ii), and 685.213(c)(2) if the Secretary makes an initial
determination that the borrower qualifies for a discharge, the date of
disability is the date the physician certifies the borrower's
disability on the form. The proposed regulations also provide for a
three-year prospective conditional discharge period to establish
eligibility for a total and permanent disability discharge. The
conditional discharge period begins on the date that the Secretary
makes her initial determination that the borrower is totally and
permanently disabled. Thus, the receipt of any Title IV, HEA loans,
including consolidation loans, or income by the borrower before the
date the physician certified the application form would not disqualify
the borrower from receiving a final discharge. However, the borrower
would have to meet the disability requirements for a three-year
prospective period.
The Department is proposing these changes because currently, in
some cases, the three-year conditional discharge period has already
elapsed before the borrower applies for a discharge and a final
discharge is made immediately upon assignment of the account to the
Department. This result is inconsistent with the original intent of the
Department's regulations, which was to conform the discharge
requirements to other Federal programs that only provide Federal
benefits based on a disability after monitoring the applicant's
condition. Further, there have been instances when borrowers have
received otherwise disqualifying Title IV loans and earnings in excess
of allowable levels after the date of application but also after the
date of the borrower's retroactive final discharge. Under current
regulations, the Secretary grants a final discharge in these
circumstances. Some non-Federal negotiators did not agree with the
Department's proposal that the borrower's disability date should be the
date the physician certifies that the borrower is disabled on the
discharge application form.
Lastly, the Department is proposing changes to Sec. Sec.
674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) to provide that
the Secretary, upon making a final determination of the borrower's
total and permanent disability, will return payments made on the loan
after the date the physician completed and certified the borrower's
total and permanent disability on the loan discharge application. The
non-Federal negotiators did not agree with the Department's position
and stated that if a borrower successfully completed a three-year
prospective discharge period, the borrower should receive a refund of
prior payments made on the loan. The Department is proposing this
change because it believes that not counting any loans or income
received prior to the date the physician certifies the borrower's
disability on the application and returning payments made by the
borrower or on the borrower's behalf back to the date of disability
provided by a physician would create two onset dates and create program
integrity issues in the administration of the total and permanent
disability discharge process. In addition, in administering the
discharge process, the Department has found that, in many cases,
certifying physicians have to rely solely on the individual's
statements in determining a date of disability onset. In these
situations, there may not be a strong medical basis for using that date
as a date for establishing eligibility for Federal benefits. In light
of this history, the Department believes that the best date to use as
the eligibility date is the date the physician certified the
application, since that process requires the physician to review the
borrower's condition at that time rather than speculate as to the
borrower's condition in the past.
NSLDS Reporting Requirements (Sec. Sec. 674.16, 682.208, 682.401, and
682.414)
Statute: Section 485B(e) of the HEA provides for the Secretary to
prescribe by regulation standards and procedures that require all
lenders and guaranty agencies to report information to the NSLDS on all
aspects of Title IV loans in uniform formats in order to permit the
direct comparison of data submitted by individual lenders, servicers,
and guaranty agencies.
Current Regulations: The current Perkins Loan Program and FFEL
Program regulations do not reflect NSLDS reporting requirements. Under
Sec. 682.401(b)(20), guaranty agencies are required to monitor student
enrollment status of a FFEL Program borrower, or a student on whose
behalf a parent has borrowed, and report to the current holder of the
loan within 60 days any changes in the student's enrollment status that
triggers the beginning of the borrower's grace period or the beginning
or resumption of the borrower's immediate obligation to make scheduled
payments.
Current Sec. 682.414(b)(4) requires guaranty agencies to report
information consisting of extracts from computer databases and supplied
in the medium and the format prescribed in the Stafford and SLS, and
PLUS Loan Tape Dump Procedures. The tape dumps, which are now obsolete,
contained loan status information on guaranty agency loans.
Proposed Regulations: The Secretary proposes in Sec. 674.16(j) of
the Perkins Loan regulations, and Sec. 682.208(i) and Sec.
682.414(b)(4) of the FFEL regulations to require institutions, lenders,
and guaranty agencies to report enrollment and loan status information,
or any other Title IV-loan-related data required by the Secretary, to
the Secretary by a deadline established by the Secretary.
The proposed changes to Sec. 682.401(b)(20) require a guaranty
agency to report enrollment and loan status information on a FFEL
Program borrower or student to the current holder of any loan within 30
days of any changes to the student's enrollment status.
Reasons: The proposed changes to Sec. Sec. 674.16(j), 682.208(i)
and 682.414(b)(4) would provide for the establishment by the Secretary
of NSLDS reporting timeframes to improve the timeliness and
availability of information important to administering the student loan programs. The
Secretary also believes that the Department will be able to implement
other proposed regulatory changes, such as simplification of the
deferment granting process, more easily and more efficiently if timely
and accurate information is more readily available in NSLDS.
Some non-Federal negotiators requested that the proposed
regulations require the Secretary to consult with program participants
before determining the ``deadline dates established by the Secretary''.
The Department declined to make this change to the proposed
regulations, but noted that there are other opportunities for program
participants to be involved in discussions about NSLDS reporting
requirements and that it was unnecessary to require it in regulations.
The Department is required to consult with the community under section
432(e) of the HEA and will continue to discuss the issues and concerns
of Title IV, HEA program participants related to NSLDS reporting
through established workgroups and conference calls.
Several negotiators noted that the Department's proposed reduction
of the timeframe for a guaranty agency to report enrollment status to a
lender from 60 days to 30 days might be disruptive and require systems
changes for the various participants in the Title IV loan programs. A
negotiator requested a longer time frame of at least 45 days. The
Department acknowledges that the change to 30 days will have some
impact on the guaranty agencies' and lenders' systems. However, the
Department is concerned that a timeframe of 45 days or longer will mean
that the information in the NSLDS is quickly out-of-date. The
Department invites further comment and discussion on this timeframe and
on any associated costs through this NPRM. Also, under the master
calendar requirements contained in the HEA, if the Department finalizes
these proposed regulations on or before November 1, 2007, this
provision will be effective on July 1, 2008, which will provide
sufficient time for system reprogramming.
Certification of Electronic Signatures on Master Promissory Notes
(MPNs) Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.409,
and 682.414)
Statute: Section 467(a) of the HEA authorizes the Secretary to
collect assigned Perkins Loans under such terms and conditions as the
Secretary may prescribe. Section 432(a) of the HEA authorizes the
Secretary to prescribe regulations as necessary to carry out the
purposes of the FFEL Program, including regulations to establish
minimum standards with respect to sound management and accountability
in the FFEL Program.
Current Regulations: Currently the regulations for the Perkins Loan
program and the FFEL Program do not include any requirements for
institutions and lenders to create and maintain a record of their
electronic signature process for promissory notes and MPNs.
Proposed Regulations: The proposed changes in Sec. 674.19(e)(2)
and (3) would require an institution to create and maintain a
certification regarding the creation and maintenance of any
electronically signed Perkins Loan promissory note or MPN in accordance
with documentation requirements in proposed Sec. 674.50. Proposed
changes to Sec. 674.19(e)(4)(ii) and Sec. 682.414(a)(5)(iv) would
require an institution or the holder of a FFEL loan, respectively, to
retain an original of an electronically signed Perkins Loan or FFEL
Program MPN for 3 years after all loans on the MPN are satisfied. Under
the proposed changes in Sec. 674.50(c)(12) and Sec. 682.414(a)(6), an
institution, for assigned Perkins loans, or a guaranty agency and
lender, for assigned FFEL loans, would be required to cooperate with
the Secretary, upon request, in all matters necessary to enforce an
assigned loan that was electronically signed. This cooperation would
include providing testimony to ensure the admission of electronic
records in legal proceedings and providing the Secretary with the
certification regarding the creation and maintenance of electronically
signed promissory notes. The proposed changes in Sec. Sec.
674.50(c)(12)(iii) and 682.414(a)(6)(iii) also would require the
institution, or the guaranty agency and lender, respectively, to
respond within 10 business days, to any request by the Secretary for
any record, affidavit, certification or other evidence needed to
resolve any factual dispute in connection with an electronically signed
promissory note that has been assigned to the Department. Lastly,
proposed changes in Sec. Sec. 674.50(c)(12)(iv) and 682.414(a)(6)(iv)
would require that an institution, or guaranty agency and lender,
respectively, ensure that all parties entitled to access have full and
complete access to the electronic records associated with an assigned
Perkins or FFEL MPN, until all loans made on the MPN are satisfied.
Proposed changes to Sec. 682.409(c)(4)(viii) of the FFEL Program
regulations would require the guaranty agency to provide the Secretary
with the name and location of the entity in possession of an original,
electronically signed MPN that has been assigned to the Department.
Reasons: MPNs are used in all of the Title IV, HEA Loan programs.
MPNs, which can be used for up to a 10-year period, have no loan amount
or loan period on the face of the note and can be signed
electronically. The Department is amending Sec. Sec. 674.19 and 674.50
of the Perkins Loan Program regulations and Sec. Sec. 682.409 and
682.414 of the FFEL Program regulations to support the Department's
efforts to enforce electronically-signed promissory notes that are
assigned to the Department. These requirements will help ensure that
the Department has the evidence to enforce the loan in cases in which a
factual dispute or a legal challenge is raised in connection with the
validity of the borrower's electronic signature and the MPN. In order
to preserve the integrity of the Perkins and FFEL programs as well as
the Federal fiscal interest, the Department believes it is essential
that an institution or lender be able to guarantee the authenticity of
a borrower's signature on loans assigned and collected by the
Department.
During the regulatory negotiations, the Department originally
proposed to require in Sec. 682.406(a) that a lender submit a
certification regarding the creation and maintenance of the electronic
MPN or promissory note, including the lender's authentication and
signature process, to the guaranty agency as part of the default claim
process. The certification would have then been submitted to the
Department when the guaranty agency assigned a FFEL loan under the
mandatory assignment provisions in Sec. 682.409(c). The Department
also originally proposed to amend Sec. 682.414(a)(ii) to require a
guaranty agency to maintain a certification regarding the creation and
maintenance of the lender's electronic MPN for each loan held by the
agency.
With respect to the Perkins Loan Program, the Department originally
proposed similar new requirements that an institution maintain a
certification regarding the creation and maintenance of the MPN in
Sec. 674.19(d) and provide the certification to the Department, upon
request, when assigning the loan in accordance with Sec. 674.50(c).
Many non-Federal negotiators believed that the Department's
original proposal was too burdensome.
Some non-Federal negotiators submitted a counter-proposal to the
Department that proposed placing the burden of creating and maintaining
a certification of a lender's electronic signature process on the
lender that created the original electronic MPN. This counter-proposal was intended
to be consistent with the lenders' current practices. The non-Federal
negotiators from lending organizations reaffirmed that lenders will be
in possession of and would deliver whatever the Department needs to
enforce an electronically signed promissory note or MPN, including
expert testimony in court cases.
The Department returned to the final session of negotiations with
revised proposed regulations in Sec. 682.414(a)(6) based on the
counter-proposal submitted by some of the non-Federal negotiators. The
non-Federal negotiators expressed their support for this proposal, but
questioned many of the details. In particular, some non-Federal
negotiators believed that it was redundant for the certification of a
loan holder's electronic signature process to include a requirement
that the lender document its borrower authentication process. However,
the Department considers this requirement a vital part of the
certification. Several non-Federal negotiators noted that the Perkins
Loan Program regulations in Sec. Sec. 674.19(d) and 674.50(c) did not
contain the same detailed requirements as Sec. 682.414(a)(6) regarding
the contents of the certification. These proposed regulations include
the same standards in both programs. Several non-Federal negotiators
thought that the provisions in Sec. 674.50(c)(12)(iii) and Sec.
682.414(a)(6)(iii) that require institutions, lenders and guaranty
agencies to respond to requests for information from the Department
within 10 business days would be too difficult to meet and asked the
Department to use another standard. The Department notes, however, that
10 business days is a significant period of time and that it is vital
that the Department receive the information as quickly as possible when
a borrower is contesting the validity of a debt. Lastly, several non-
Federal negotiators expressed concern about the requirement to retain
an original electronically signed MPN for at least 7 years after all
the loans made on the MPN have been satisfied. In issuing this NPRM,
the Department has, after considering these concerns, decided to
require that schools and lenders retain the original, electronically
signed MPN for at least 3 years after all the loans made on the MPN
have been satisfied. This record retention standard is needed to
accommodate borrower challenges to an administrative wage garnishment
or federal offset action taken by the Department to collect on assigned
FFEL loans.
The Department realizes that these proposed regulations for
electronically signed documents may have an impact on the operations of
lenders, guaranty agencies and institutions. The Department
particularly invites comments on possible changes to these regulations
to reduce that impact while ensuring the Department's ability to
enforce loans.
Record Retention Requirements on Master Promissory Notes (MPNs)
Assigned to the Department (Sec. Sec. 674.19, 674.50, 682.406, and
682.409)
Statute: Section 443(a) of the General Education Provisions Act
(GEPA), 20 U.S. 1232f(a), provides that recipients of Federal funds
under any applicable program must retain records of the amount and
distribution of Federal funds to facilitate effective audits of the use
of those funds. The GEPA generally applies to institutions that
participate in the Title IV, HEA programs.
Current Regulations: Current requirements related to the retention
of loan disbursement records by institutions are in Sec.
668.24(c)(1)(iv) and (e)(1) and require institutions to retain
disbursement records, unless otherwise directed by the Secretary, for
three years after the end of the award year for which the aid was
awarded and disbursed. Section 674.50(c) does not currently include
disbursement records as part of the documentation the Secretary may
require an institution to submit when assigning a Perkins Loan to the
Department.
Section 682.414(a)(4)(ii) and (iii) requires a guaranty agency to
ensure that a lender retains a record of each disbursement of loan
proceeds to a borrower for not less than three years following the date
the loan is repaid in full by the borrower, or for not less than five
years following the date the lender receives payment in full from any
other source. Section 682.414(a)(4)(iii) also provides that, in
particular cases, the Secretary or the guaranty agency may require the
retention of records beyond this minimum period. However,
S682.409(c)(4) does not currently require a guaranty agency to submit a
record of the lender's disbursements when assigning a loan to the
Department.
Proposed Regulations: The proposed changes in Sec. 674.19(e)(2)(i)
and (e)(3)(i) would require an institution that participates in the
Perkins Loan Program to retain records showing the date and amount of
each disbursement of each loan made under an MPN. The institution also
would be required to retain disbursement records for each loan made on
an MPN until the loan is canceled, repaid, or otherwise satisfied.
Proposed Sec. 674.50(c)(11) would require an institution to submit
disbursement records on an assigned Perkins loan upon the Secretary's
request. The proposed changes in Sec. 682.409(c)(4)(vii) would require
a guaranty agency to submit the record of the lender's disbursement of
loan funds to the school for delivery to the borrower when assigning a
FFEL Loan to the Department.
Reasons: The proposed changes to Sec. Sec. 674.19(e) and 674.50(c)
of the Perkins Loan Program regulations that require the retention of
MPN disbursement records by an institution and submission of such
records, if requested by the Secretary, on Perkins Loans assigned to
the Department would support enforcement and collection on the MPN.
These regulatory changes would also facilitate the process of proving
that a borrower benefited from the proceeds of the loan, if the
borrower challenges the validity of the loan. The proposed addition of
Sec. 682.409(c)(4)(vii), requiring a guaranty agency to submit a
record of the lender's disbursement records upon assigning an FFEL loan
to the Department, would accomplish the same enforcement goals.
The Department's original proposal related to the retention of
disbursement records in support of enforcement of FFEL loans assigned
to the Department presented during the negotiations was different than
the changes proposed here. The Department originally proposed to
require schools to report to the lender the date and amount of each
disbursement of FFEL loan funds to a borrower's account no later than
30 days after delivery of the disbursement to the borrower. Under the
Department's original proposal, lenders also would have been required
to provide the record of a school's delivery of loan disbursements to a
FFEL borrower as a condition for a guaranty agency to make a claim
payment and receive reinsurance coverage. Lastly, the Department
originally proposed to require that the guaranty agency, upon
assignment of a FFEL loan to the Department, submit a record of the
school's delivery of loan disbursements to the borrower.
The Department's original proposal for the retention of MPN
disbursement records on assigned Perkins Loans is reflected in these
proposed regulations.
Some non-Federal negotiators expressed concern about the burden
associated with reporting and retaining voluminous amounts of
disbursement data when only a limited amount of the data would actually
be needed by the Department to enforce an assigned Perkins or FFEL loan. Some non-Federal negotiators expressed concern
that the new requirements could affect the payment of insurance and
reinsurance claims in the FFEL program. Some of the non-Federal
negotiators asserted that lenders, guaranty agencies, and schools could
supply needed disbursement records to the Department without adding new
regulations. Several non-Federal negotiators suggested that the
Department use existing data systems, such as the NSLDS, to collect
disbursement information, rather than requiring new record retention
procedures.
The Department carefully considered the concerns of these non-
Federal negotiators, and returned to the last session of negotiations
with the proposed changes to the regulations on retention of
disbursement records that are reflected in this NPRM. The Department
decided that requiring the collection, retention, and submission of a
school-based record documenting each disbursement of a FFEL loan might
be too burdensome in light of the relatively few occasions that require
the use of such records. The Department decided to continue to use the
lender documentation of disbursements currently provided to the
Department in the FFEL assignment process. The Department is proposing
to codify this practice in Sec. 682.409(c)(4)(vii). However, the
Department intends to monitor this process carefully and will require a
guaranty agency or lender to return reinsurance, interest benefits and
special allowance for any loan determined to be unenforceable due to
the absence of disbursement records in accordance with Sec.
682.406(a)(13). If the disbursement documentation is not available or
reliable, the Department reserves its authority to reexamine this issue
in the future.
For institutions that participate in the Perkins Loan program, the
Department is proposing new provisions requiring the retention of
school-based disbursement records because the institution is the lender
in the Perkins Loan Program. Moreover, because MPNs have been in use in
the Perkins Loan Program for approximately three years, institutions
have retained all disbursement records on Perkins MPNs under current
record retention requirements in Sec. 668.24. The only new requirement
for Perkins institutions will be that these disbursement records must
be retained for at least three years after a Perkins Loan is satisfied
and that these disbursement records be submitted to the Department on
an assigned Perkins MPN, if requested by the Secretary.
Loan Counseling for Graduate or Professional Student PLUS Loan
Borrowers (Sec. Sec. 682.603, 682.604(f), 682.604(g), 685.301,
685.304(a), and 685.304(b))
Statute: Under section 428B(a)(1) of the HEA, a graduate or
professional student may borrow a PLUS Loan. However, section
485(b)(1)(A) of the HEA specifically excludes PLUS Loan borrowers from
the groups of borrowers for which exit counseling must be provided. The
HEA does not address entrance counseling requirements for Stafford and
PLUS Loan borrowers.
Current Regulations: The current regulations in Sec. Sec.
682.604(f) and (g) and 685.304(a) and (b) require entrance and exit
counseling for Stafford Loan borrowers, but not for graduate or
professional student PLUS Loan borrowers.
Proposed Regulations: Proposed Sec. 682.604(f)(2) would require
entrance counseling for graduate or professional student PLUS Loan
borrowers. The proposed entrance counseling requirements for student
PLUS Loan borrowers would vary, depending on whether the borrower has
received a Stafford Loan prior to receipt of the PLUS Loan.
Proposed Sec. 682.604(g) would also modify the exit counseling
requirements for Stafford Loan borrowers. If the borrower has received
a combination of Stafford Loans and PLUS Loans, the institution must
provide average anticipated monthly repayment amount information based
on the combination of different loan types the borrower has received in
accordance with proposed Sec. 682.604(g)(2)(i).
In addition, the proposed regulations in Sec. 682.603(d) would
require institutions, as part of the process for certifying a FFEL
Program Loan, to notify graduate or professional students who are
applying for a PLUS Loan of their eligibility for a Stafford Loan. The
proposed regulations require institutions to provide a comparison of
the terms and conditions of a PLUS Loan and Stafford Loan, and ensure
that prospective PLUS borrowers have an opportunity to request a
Stafford Loan.
The proposed regulations in Sec. Sec. 685.301(a)(3),
685.304(a)(2), and 685.304(b)(4) would include comparable changes to
the Direct Loan Program regulations with respect to graduate or
professional student borrowers of Direct PLUS Loans.
Reasons: The committee agreed that with the newly authorized
availability of PLUS Loans to graduate and professional students, there
is a need to revise the loan counseling requirements to account for
graduate and professional student PLUS borrowers.
Several negotiators pointed out that exit counseling is often more
beneficial to student borrowers than entrance counseling, as exit
counseling occurs at the time the loan is nearing repayment, and
students are more focused on repaying the loan at that point. However,
the statute specifically exempts PLUS borrowers from exit counseling
requirements. Although the Department encourages schools to provide
exit counseling to graduate and professional student PLUS borrowers,
the Department cannot require schools to provide such counseling.
One negotiator suggested that the Department require a school's
Stafford Loan exit counseling include information related to the PLUS
Loan if a Stafford Loan borrower also had a PLUS Loan. The Department
determined that, in those cases, the exit counseling requirements for
Stafford Loan borrowers could be modified to include information on
PLUS Loans. Accordingly, that requirement is included in Sec. Sec.
682.604(g)(2) and 685.304(b)(4) of the proposed regulations.
The Department and the other negotiators agreed that borrowers who
are eligible for both Stafford Loans and PLUS Loans should be given
information on the relative merits of each loan type, and be given an
opportunity to obtain a Stafford Loan prior to the borrower's receipt
of a PLUS Loan. Therefore, the Department is proposing to require in
Sec. Sec. 682.603(d) and 685.301(a) that the school provide a
comparison of the terms and conditions of a PLUS Loan and a Stafford
Loan prior to the graduate or professional student's receipt of a PLUS
Loan, so the borrower has the opportunity to make the best decision in
terms of which loan to accept.
Several negotiators felt that the Department's initial proposal was
too vague, and asked for more specificity regarding which terms and
conditions should be highlighted for these borrowers. In response, the
Department has added more specificity to Sec. Sec. 682.603(d)(1) and
685.301(a)(3) of the proposed regulations.
With regard to entrance counseling requirements for borrowers who
have both Stafford and PLUS Loans, one negotiator asked if the proposed
regulations would preclude a school from providing both Stafford and
PLUS Loan entrance counseling at the same time. The Department
responded that the proposed regulations would not preclude this
practice.
[[Page 32418]]
One negotiator pointed out that many graduate or professional
student PLUS borrowers will have already received Stafford Loans as
undergraduates, and therefore will have already received Stafford Loan
entrance counseling. Since the entrance counseling information for both
loan types is similar, this negotiator felt that it would be redundant
to offer PLUS Loan entrance counseling to a borrower who was already
received Stafford Loan entrance counseling. Other negotiators, however,
argued that since the terms and conditions of the loans are different,
additional counseling should be required. In light of this discussion,
the Department is proposing to modify the entrance counseling
requirements in Sec. Sec. 682.604(f)(2) and 685.304(a)(2) to require
that different sets of information be provided to graduate or
professional student PLUS borrowers who have already received Stafford
Loans, and graduate or professional student PLUS borrowers who have not
received Stafford Loans.
Maximum Loan Period (Sec. Sec. 682.401, 682.603, and 685.301)
Statute: The HEA does not address the issue of maximum loan periods
specifically.
Current Regulations: Current regulations in Sec.
682.401(b)(2)(ii)(C), Sec. 682.603(f)(2)(i), and Sec.
685.301(a)(9)(ii)(A) provide that the loan period for a title IV, HEA
program loan may not exceed 12 months.
Proposed Regulations: Proposed Sec. Sec. 682.401(b)(2)(ii)(A),
682.603(g)(2)(i), and 685.301(a)(10)(ii)(A) would eliminate the maximum
12-month loan period for annual loan limits in the FFEL and Direct Loan
programs and the 12 month period of loan guarantee in the FFEL Program.
Reasons: The Secretary believes eliminating the 12 month limit on
loan periods would give schools, lenders and students greater
flexibility when rescheduling disbursements. This proposed change would
allow institutions to certify a single loan for students in shorter
non-term or nonstandard term programs and to provide greater
flexibility in rescheduling disbursements for students who drop out and
return within the permitted 180-day period.
This issue was added to the rulemaking agenda at the request of
some non-Federal negotiators. One proponent of the change noted that,
on average, 17 percent of students have an academic program longer than
a 12-month period, and by eliminating the maximum length of a loan
period, the need to certify another loan to cover the remainder of the
program would be eliminated. The negotiators noted that the proposed
changes would not increase the amount of borrowing by students. In
other words, annual loan limits would still be controlled by the
institution's academic year in those instances where the academic year
and loan period both exceed 12 months.
The Secretary agrees with these negotiators that it would benefit
the students and the FFEL and Direct Loan Programs to remove the 12
month rule from the regulations.
Mandatory Assignment of Defaulted Perkins Loans. (Sec. Sec. 674.8 and
674.50)
Statute: To participate in the Perkins Loan Program, an institution
of higher education enters into a Program Participation Agreement (PPA)
with the Secretary under section 463 of the HEA. The HEA enumerates
several provisions of the PPA. Section 463(a)(9) of the HEA allows for
the addition of provisions to the PPA, agreed to by the institution and
the Secretary, that may be necessary to protect the United States from
unreasonable risk of loss.
Current Regulations: The regulations governing the required
contents of the PPA are in Sec. 674.8 of the Perkins Loan Program
regulations. Under Sec. 674.8(d), the PPA includes a provision that
the school may voluntarily assign a defaulted Perkins Loan to the
Department if the school decides not to service or collect the loan or
the loan is in default despite the school's due diligence in collecting
the loan.
Proposed Regulations: The proposed regulations in Sec. 674.8(d)(3)
would provide that the PPA also include a provision under which the
Department could require assignment of a Perkins Loan if the
outstanding principal balance of the loan is $100 or more, the loan has
been in default for seven or more years, and a payment has not been
received on the loan in the preceding 12 months. The proposed
regulations provide an exception to the mandatory assignment
requirement if payments were not due on the loan in the preceding 12
months because the loan was in an authorized deferment or forbearance
period. Under proposed Sec. 674.50(e)(1) the Secretary would accept
the assignment of a Perkins Loan without the borrower's Social Security
Number if the Secretary has exercised her mandatory assignment
authority under Sec. 674.8(d)(3).
Reasons: The Department's records show that institutions are
holding more than $400 million in uncollected Perkins Loans that have
been in default for 5 years or more. Since Perkins Loans are comprised
largely of Federal funds, these uncollected loans present an
unreasonable risk of loss to the United States.
The Department has collection tools, such as Federal benefit
offsets, that are not available to the Perkins institutions. The
Department has encouraged schools to voluntarily assign these old
defaulted loans, so that the Department may employ these tools to
collect on these loans. As part of this effort, the Department, in
recent years, significantly streamlined the voluntary assignment
process for Perkins Loans. Despite these efforts, the numbers and
amounts of older defaulted Perkins Loans held by schools continues to
grow.
To address this problem, the Department proposes modifying the
regulations governing the PPA to provide for mandatory assignment of
older defaulted loans, at the request of the Secretary. One of the
negotiators recommended, as an alternative to the proposed regulations,
that the Department adopt a referral process, under which a school
could refer a loan to the Department. The Department would collect on
the loan and return the proceeds to the school, minus collection
charges. Other negotiators proposed that if the Department required
mandatory assignment of loans, the funds collected from those Perkins
Loans should be re-allocated to Perkins schools.
The Department did not accept these proposals. The Department
previously used a referral program with very limited success. In
addition, there is no system in place for re-allocation of net
Department collections to Perkins institutions. Accordingly, the
Department does not believe these proposals are in the Federal fiscal
interest.
One negotiator pointed out that the current assignment regulations
require a Social Security Number for all assigned loans. This
negotiator noted that, in the early years of the program, schools were
not required to collect the Social Security Numbers of Perkins Loan
borrowers. The negotiator feared that schools would be penalized if
they were required to assign loans, only to have the assignments
rejected for lack of a Social Security Number. The Department has
addressed this concern in the proposed regulations by exempting
mandatorily assigned Perkins Loans from the requirement that the
institution provide a Social Security Number for all assigned loans.
The Department initially proposed mandatory assignment of defaulted
Perkins Loans if the outstanding balance of the loan is $50 or more and
the loan has been in default for 5 years.
[[Page 32419]]
Negotiators offered a counter-proposal, requiring assignment if the
account to be assigned is more than $1,000 in outstanding principal,
and the borrower has not made a payment on the loan in 10 years,
excluding authorized periods of deferment and forbearance, and
excluding loans for which the school has obtained a judgment.
The Department did not accept the counter-proposal because
excluding all deferment and forbearance periods from the 10 years would
push the loans eligible for mandatory assignment significantly beyond
10 years in default. The Department believes that the proposed criteria
would effectively rule out mandatory assignment of many of the loans
that would most benefit from the Department's collection activities.
However, the Department has modified its original proposal. In
particular, the Department's proposed regulations would require a loan
to be assigned if the account balance is $100 or more and it has been
in default for at least 7 years. The revised proposal generally
approximates the mandatory assignment requirements in the FFEL Program.
Reasonable Collection Costs (Sec. 674.45)
Statute: Section 464A(b)(1) of the HEA provides for assessing
against a borrower reasonable collection costs on a defaulted Title IV
loan. The HEA does not define ``reasonable collection costs'' for
purposes of the Perkins Loan Program.
Current Regulations: Section 674.45(e) requires a school to assess
collection costs against a borrower, based on either the actual costs
incurred for those collection actions, or an average of the costs
incurred for similar actions taken to collect loans in similar stages
of delinquency. The current regulations do not cap collection costs
that may be charged to the borrower, except, as described in Sec.
674.39, in the case of a loan that has been successfully rehabilitated.
Section 674.39(c)(1) caps collection costs on rehabilitated loans at 24
percent, unless the borrower defaults on the rehabilitated loan.
However, Sec. 674.47(e) establishes caps on the amount of unpaid
collection costs that a school may charge to its Perkins Fund.
Proposed Regulations: The proposed regulations in Sec.
674.45(e)(3) would limit the amount of collection costs a school may
assess against a Perkins Loan borrower to 30 percent of the total of
the principal, interest, and late charges collected for first
collection efforts; 40 percent of the total of the principal, interest,
and late charges collected for second collection efforts; and, in cases
of litigation, 40 percent of the total of the principal, interest, and
late charges collected plus court costs. The proposed regulations
specify that these caps on collection costs go into effect for
collection agency placements made on or after July 1, 2008.
Reasons: The lack of a cap on collection costs in the Perkins Loan
Program has led to abuse, with some institutions charging collection
costs of 60 percent or more. During the negotiations, the Department
initially proposed capping Perkins Loan Program collection costs at 24
percent, to match the limit already in place for Perkins loans that
have been rehabilitated. Several negotiators contended that this cap
was too low. They pointed out that Perkins Loans are often low-balance
loans, but that they require the same efforts to collect as higher-
balance loans. This can lead to increased collection costs in the
Perkins Loan Program.
These negotiators also noted that most collection agencies charge
on a contingency fee basis and that a percentage of the amount
collected from the borrower goes to the collection agency. One
negotiator asserted that a 24 percent collection cap would limit the
amount that could be charged to the borrower to 19.3 percent, to allow
for the collection agency to retain its fee, and to still make the
Perkins Fund whole by recovering and returning to the Fund the entire
amount owed by the borrower.
The negotiators also pointed out that collection agency fees are
market driven and competitive and that placing a cap on collection
costs would increase the collection costs that would have to be
absorbed by the Fund. This would have the effect of reducing the amount
of Perkins Loans available to future borrowers.
These negotiators also pointed out that litigation is required
under certain circumstances in the Perkins Loan program. If schools
must litigate to stay in compliance with the Perkins Loan regulations,
but can only assess collection costs of 24 percent, this would deplete
the Perkins Fund.
Another negotiator argued that it would not be profitable for
collection agencies to provide services to smaller schools under the
proposed collection costs cap. This negotiator also contended that a
low cap would reduce the effectiveness of the collection agencies.
The Department asked negotiators to propose alternatives to the
proposed 24 percent cap on collection costs. One negotiator stated that
any cap on collection costs in the Perkins Loan Program would be
unreasonable, because there are so many variables involved in
collecting on a Perkins Loan.
Some negotiators offered a counter-proposal that included a sliding
scale for the cap on collection costs: For first collection efforts, 33
percent of the unpaid balance; for second collection efforts, 40
percent of the unpaid balance; for loans that have been litigated, 50
percent plus court costs; for borrowers living abroad, 50 percent of
the unpaid balance.
The Department and other negotiators believe that a 50 percent cap
is too high. However, the Department's proposed regulations do reflect
an increase from the original proposal in light of the arguments and
factors noted during the negotiations.
Child or Family Service Cancellation (Sec. 674.56)
Statute: Under section 465(a)(2)(I) of the HEA, a Perkins Loan
borrower may qualify for cancellation of the loan if the borrower is a
full-time employee of a public or private nonprofit child or family
service agency who is providing, or supervising the provision of,
services to high-risk children who are from low-income communities, and
the families of such children.
Current Regulations: The current regulations for the child or
family service discharge in Sec. 674.56(b) reflect the statutory
language, without providing additional details on the eligibility
criteria for a child or family service cancellation.
Proposed Regulations: The proposed regulations in Sec. 674.56(b)
expand on the current regulations and specify that, to qualify for a
child or family service cancellation, a borrower who is a full-time,
non-supervisory employee of a child or family service agency must be
providing services directly and exclusively to high-risk children from
low-income communities. In addition, the proposed regulations specify
that if the employee provides services to the families of high-risk
children from low-income communities, the services provided to the
children's families must be secondary to the services provided to the
high-risk children from low-income communities.
Reasons: On October 20, 2005, the Department published Dear
Colleague Letter (DCL) GEN-05-15, which clarified the Department's
long-standing policy with regard to the eligibility criteria for a
child or family service cancellation. The DCL specifies that a full-
time, non-supervisory employee of a public or private child or family
service agency must be providing services directly and exclusively to
high-risk children from low-income communities to qualify for a child or family service cancellation. As
noted in the DCL, many employees of a child or family service agency
who do not work directly with high-risk children from low-income
communities may provide services that indirectly benefit such children.
Congress did not intend such borrowers to qualify for child or family
service cancellations, unless the borrower is in a supervisory
position, and is supervising staff members who work directly with high-
risk children from low-income communities. The NPRM would incorporate
this guidance into the regulations in proposed Sec. 674.56(b).
Prohibited Inducements (Sec. Sec. 682.200 and 682.401)
Statute: Section 435(d)(5) of the HEA provides that, after notice
and an opportunity for a hearing, the Secretary may disqualify from
participation in the FFEL Program any FFEL lender that provides
inducements or engages in other prohibited activity to secure FFEL loan
applications or sell other products. Those prohibited inducements and
activities include: Offering, directly or indirectly, points, premiums,
payments, or other inducements to any educational institution or
individual to secure FFEL loan applications; conducting unsolicited
mailings of student loan applications to individuals who have not
borrowed previously from the lender; offering FFEL loans to a
prospective borrower to induce the borrower to purchase an insurance
policy or other product; or engaging in fraudulent or misleading
advertising. A lender is not prohibited from providing assistance to
schools that is comparable to the kinds of assistance that the
Department provides to schools through the Direct Loan Program. In
order to avoid confusion regarding the types of assistance a lender may
provide to schools, the Department will identify and publish a list of
services provided to schools through the Direct Loan Program on or
before publication of final regulations. The most recent description of
the kinds of assistance the Department provides to schools in the
Direct Loan Program was published in a Notice of Proposed Rulemaking on
August 10, 1999 (64 FR 43428, 43429-43430) and can be accessed at:
http://www.ed.gov/legislation/FedRegister/proprule/1999-3/081099a.html.
Similarly, section 428(b)(3) of the HEA restricts guaranty agencies
from offering inducements or engaging in other prohibited activities to
secure applicants for FFEL loans or to secure the designation of the
guaranty agency as the insurer of particular loans. A guaranty agency
is prohibited from: Offering, directly or indirectly, premiums,
payments, or other inducements to any educational institution or its
employees to secure FFEL loan applicants; or offering to a lender or
its employees, agents, or independent contractors, any premiums,
incentive payments, or other inducements to administer or market loans
and secure designation as the guarantor or insurer of loans, (except
for Unsubsidized Stafford loans and lender-of-last-resort loans). The
guaranty agency is also prohibited from conducting unsolicited mailings
of student loan applications to students or their parents unless the
agency has previously guaranteed a FFEL Loan for the student or parent,
and from conducting fraudulent or misleading advertising related to
loan availability. A guaranty agency is not prohibited from providing
assistance to schools that is comparable to the kinds of assistance the
Department provides to schools through the Direct Loan Program.
Current Regulations: Prohibited inducements and other impermissible
activities by lenders are contained in the definition of lender in 34
CFR Sec. 682.200(b). The regulations mirror the statutory provisions
except to clarify that: (1) Assistance provided to schools that is
comparable to that provided by the Secretary is limited to the kinds of
assistance provided to schools under or in furtherance of the Direct
Loan program; (2) unsolicited mailing of student loan application forms
includes applications sent to the student and the student's parents;
and (3) the prohibition against fraudulent and misleading advertising
refers to advertising related to the lender's FFEL program activities.
The comparable regulations for guaranty agencies are in 34 CFR
682.401(e), which specifies that a guaranty agency may not offer,
directly or indirectly, any premium, payment, or other inducement to an
employee or student of a school, or any entity or individual affiliated
with a school, to secure FFEL Loan applicants. The regulations provide
examples of prohibited inducements of lenders by a guaranty agency and
include: Compensating lenders or their representatives to secure loan
applications for guarantee by the agency; performing functions that a
lender would otherwise perform without appropriate compensation;
providing equipment or supplies to lenders at below market cost or
rental; and offering to pay a lender not holding loans guaranteed by
the agency a fee for applications guaranteed by the agency. The current
regulations also recognize the administrative and oversight functions
of the guaranty agency by specifically excluding certain activities
from the description of prohibited inducements. The regulations also
prohibit guaranty agencies from sending unsolicited mailings to
students in postsecondary and secondary schools and their parents
unless the individual had borrowed previously using the agency's loan
guarantee and conducting fraudulent or misleading advertising
concerning loan availability.
Proposed Regulations: The proposed regulations would incorporate,
with some modifications, current interpretive and clarifying guidance
on prohibited inducements and activities provided to lenders and
guaranty agencies by the Department over the years since the provisions
were added to the HEA. This guidance was contained in various DCLs
issued by the Department and in responses to private letter inquiries
from program participants. The most comprehensive DCL on this subject
was issued in February 1989 (No. 89-L-129). The proposed regulations
for both lenders and guaranty agencies adopt the format of that DCL to
include a non-exhaustive list of examples of prohibited inducements and
activities, and an exhaustive list of permissible activities. Under
these proposed regulations, certain activities are identified as
permissible, because the Department believes those activities are
necessary for the lender or guaranty agency to fulfill its role in the
administration of the FFEL Program. Consistent with the Department's
longstanding policy in this area, the scope of permissible activities
by guaranty agencies is broader than that for lenders in recognition of
their administrative, training, outreach, and oversight roles in the
FFEL program.
Under paragraph (5)(i) of the definition of lender in Sec.
682.200(b) of the proposed regulations, lenders would be prohibited
from offering, directly or indirectly, any points, premiums, payments,
or other benefits to any school or other party to secure FFEL loan
applications or loan volume. The proposed regulations would add a
definition of a school-affiliated organization to Sec. 682.200, to
include alumni organizations, foundations, athletic organizations, and
social, academic, and professional organizations. Prohibited payments
and other benefits to prospective borrowers would include prizes or
additional financial aid funds. The proposed regulations would also
provide other examples of ``other benefits'' to a school
that would be prohibited, including: Access to a lender's other
financial products, computer hardware, and payment of the cost of
printing and distribution of college catalogs and other materials at
less than market rate or at no cost.
The proposed regulations would prohibit a lender from undertaking
philanthropic activities, such as providing grants, scholarships,
restricted gifts, or financial contributions to secure loan
applications, loan volume, or placement on a school's preferred lender
list. Lenders would also be prohibited from making payments or
providing other benefits to a student at a school, or to a loan
solicitor or sales representative who visits campuses, in exchange for
loan applications secured from individual prospective borrowers. The
proposed regulations would prohibit lenders from paying conference or
training registration, transportation and lodging costs for employees
of schools and school-affiliated organizations. The proposed
regulations would further prohibit a lender's payment of any
entertainment expenses related to lender-sponsored functions and
activities for school and school-affiliated organization employees.
Lenders would also be prohibited from providing staffing services to a
school as a third-party servicer or otherwise to assist a school with
financial aid related functions, on more than a short-term, non-
recurring emergency basis. The proposed regulations would also modify
prior program guidance by prohibiting all payments of loan application
referral or processing fees between lenders, (whether or not the lender
receiving the payment participates in the FFEL Program), or between
lenders and any other entity. The proposed regulations would not revise
the current regulations governing the prohibition on lenders conducting
unsolicited mailings, offering FFEL Loans to induce a borrower to
purchase a life insurance policy or other product or service offered by
the lender, and engaging in fraudulent or misleading advertising.
The proposed regulations would permit a lender to undertake
activities that are specifically permitted by the HEA. These activities
include: Providing assistance to a school, as identified by the
Secretary, that is comparable to the assistance provided by the
Department to a school in the Direct Loan Program; offering reduced
borrower loan origination fees; offering reduced borrower interest
rates; paying Federal default fees that would otherwise be paid by the
borrower; and purchasing loans from another loan holder at a premium.
In addition, the proposed regulations would permit a lender to
participate in a school's or guaranty agency's student financial aid
and financial literacy outreach activities, as long as the lender does
not promote its student loan or other services to the recipients or
attendees and there is full disclosure of any lender sponsorship,
including the development and printing of any materials. The proposed
regulations would allow a lender to provide a toll-free telephone
number and free data transmission services to schools that participate
in the FFEL program with the lender and to the school's borrowers and
prospective borrowers for the purpose of communications on FFEL Loans.
The proposed regulations would permit a lender to continue to offer
repayment incentive programs to borrowers under which the borrower
receives or retains a benefit, such as a reduced interest rate or
forgiveness of a certain amount of loan principal in exchange for the
borrower making one or more scheduled payments. The proposed
regulations would also permit a lender to sponsor meals, refreshments,
and receptions to school officials or employees that are reasonable in
cost and that are scheduled in conjunction with meeting or conference
events if those functions are open to all meeting or conference
attendees. The proposed regulations would also permit a lender to
provide schools, school-affiliated organizations and borrowers items of
nominal value that constitute a form of generalized marketing or are
intended to create good will.
Section 682.401 of the proposed regulations, which governs guaranty
agency prohibited inducements and permitted activities, would generally
mirror the proposed regulations for lenders. The proposed regulations
would prohibit a guaranty agency from providing a school with prizes or
additional financial aid funds under any Title IV, State or private
program based on the school's voluntary or coerced agreement to
participate in the guaranty agency's program or to provide a specified
volume of loans, using the agency's loan guarantee. The proposed
regulations would prohibit the payment of entertainment expenses,
including expenses for private hospitality suites, tickets to shows or
sporting events, meals, alcoholic beverages, and any lodging, rental,
transportation or other gratuities related to any activity sponsored by
the guaranty agency or a lender participating in the agency's program,
for school employees or employees of school-affiliated organizations.
The proposed regulations would prohibit a guaranty agency from
undertaking philanthropic activities, including providing scholarships,
grants, restricted gifts, or financial contributions in exchange for
FFEL loan applications or application referrals, a specified volume or
dollar amount of FFEL loans using the agency's loan guarantee, or the
placement of a lender that uses the agency's loan guarantee on a
school's list of recommended or suggested lenders. The proposed
regulations would also prohibit a guaranty agency from providing
staffing services to a school, including as a third-party servicer,
other than on a short-term, non-recurring emergency basis to assist the
school with financial aid-related functions. The proposed regulations
would also prohibit a guaranty agency from assessing additional costs
or denying benefits to a school or lender that would otherwise be
provided by the agency because the school or lender declined to agree
to participate in the agency's program or declined or failed to provide
a certain volume of loan applications or loan volume for the agency's
loan guarantee.
Unlike the proposed regulations for participating lenders, the
proposed regulations would allow a guaranty agency to provide meals and
refreshments that are reasonable in cost and provided in connection
with guaranteed agency-provided training for school and lender program
participants and for elementary, secondary, and postsecondary school
personnel and in conjunction with other workshops and forums
customarily used by the guaranty agency to fulfill its responsibilities
under the HEA. The proposed regulations also would permit a guaranty
agency to pay travel and lodging costs that are reasonable as to cost,
location and duration, to facilitate attendance of school staff in
training programs and facility service tours that school staff would
otherwise be unable to attend. Guaranty agencies would also be
permitted to pay reasonable costs for school officials to participate
on an agency's governing board, a standing official advisory committee,
or in support of other official activities of an agency in accordance
with proposed Sec. 682.401(e)(2)(iv). The proposed regulations also
reflect the guaranty agency's ability under the HEA to pay Federal
default fees on loans that would otherwise be paid by the borrowers and
to undertake default aversion activities approved by the Secretary with
certain guaranty agency funds. There are no proposed changes to the
current regulations governing a guarantyagency's direct or indirect payment of incentives or other inducements
to lenders to secure the agency as an insurer of the lender's FFEL
loans, or relating to the prohibitions against the unsolicited mailing
or distribution of unsolicited loan applications to students in
secondary or postsecondary schools and their parents and against
fraudulent and misleading advertising concerning loan availability.
The proposed regulations would also clarify and strengthen the
Department's authority to enforce the rules related to improper
inducements. There are three proposed changes in this area. First, the
proposed regulations would amend Sec. Sec. 682.413(h), 682.705(c), and
682.706(d) to provide that, in any formal action against a lender or
guaranty agency based on a violation of the prohibited inducement
provisions, once the Department's deciding official finds that the
lender or guaranty agency provided or offered the payments or
activities specified in the definition of lender in Sec. 682.200 or
Sec. 682.401, the Secretary will apply a ``rebuttable presumption''
that the activities or payments were undertaken or made by the lender
or guaranty agency to secure FFEL Loan applications or FFEL loan
volume. The lender or guaranty agency will have a full opportunity to
show that the activity or payment was made for reasons unrelated to
securing loan applications or loan volume.
Another proposed change in this area would add a new Sec.
682.406(d) to specify that a guaranty agency may not make a claim
payment from its Federal Fund to a lender or request a reinsurance
payment from the Department on a loan if the lender offered or provided
an improper inducement, as defined in the definition of lender in Sec.
682.200(b), to a school or other party in connection with the making of
the loan. This change would reflect the Department's long-standing
policy that a loan made in violation of the prohibited inducement
provisions is not eligible for federal subsidy payments.
The final change in the area of enforcement related to inducements
would clarify and expand the borrower's legal rights. Since 1994, the
promissory notes and MPNs used in the FFEL Program have included a
description of the borrower's rights under the Federal Trade
Commission's (FTC's) Holder Rule as it applies to FFEL loans. Under the
FTC's Holder Rule, if a loan is made by a for-profit school, or the
borrower is referred to the lender by a for-profit school, any lender
holding the borrower's loans is subject to all claims and defenses that
the borrower could assert against the school with respect to the loan.
Section 682.209(k) of the proposed regulations would expand the
protections provided by the FTC's Holder Rule by essentially
incorporating it into the regulations, applying it to all loans made
under the FFEL Program and specifying that it applies if the lender
making the loan offered or provided an improper inducement to the
school or any other party in connection with the making of the loan.
Reasons: The Department believes that more explicit regulatory
requirements governing prohibited incentive payments and other
inducements by lenders and guaranty agencies are needed to ensure FFEL
Program integrity, reassure borrowers and taxpayers of that integrity,
and enhance the Secretary's enforcement authority in this area. Current
regulations are primarily limited to restating the statutory language
currently in the HEA. The Department's interpretive and policy guidance
in this area over the years has been issued in DCLs and in responses to
private letter inquiries from program participants. The most
comprehensive guidance on this subject was published as DCL 89-L-129/S-
55/G-157 in February 1989. The most recent guidance on prohibited
school and lender relationships was published as DCL 95-G-278/L-178/S-
73 in March 1995. The Department believes that this guidance, and the
general requirements of the law, may no longer be generally known and
understood by lenders and other participants that have entered the FFEL
industry in the last few years. Moreover, the FFEL Program has changed
significantly since this prior guidance was issued. In recent years,
the increased competition among FFEL lenders, particularly in the FFEL
Consolidation Loan Program, has resulted in a number of lenders
offering a variety of benefits to borrowers, schools, and school-
affiliated organizations. There has also been a rapid growth in private
alternative loans marketed by many of the same lenders participating in
the FFEL Program. Special relationships between schools and lenders
have developed, jeopardizing a borrower's right to choose a FFEL lender
and undermining the student financial aid administrator's role as an
impartial and informed resource for students and parents working to
fund postsecondary education.
During the negotiated rulemaking discussions, several negotiators
expressed concern about the impact that the proposed regulations might
have on the numerous business arrangements between schools and
financial institutions, and recommended that any regulations listing
prohibited and permissible activities be based on a limited
interpretation of the applicable statutory language. Another negotiator
suggested that the regulations could have a ``chilling effect'' on
school and lender relationships. A couple of negotiators argued that
the intent of the statutory prohibition of lender and guaranty agency
inducements was not to curtail competition for market share, but to
prevent unnecessary borrowing that would not have occurred if not for
the incentive, and that given the current FFEL annual loan limits and
the cost of education, borrowers were borrowing due to high levels of
unmet need rather than any incentives being provided. One negotiator
argued that inducements to borrowers were a problem only if the
inducement resulted in harm to the individual or raised credibility
issues about the loan process.
Other negotiators expressed the view that, because of improper
inducements, borrowers were actively being ``steered'' by schools to
particular lenders and argued that the credibility of the loan process
was an issue that the Department needed to address. One negotiator
contended that inducements to borrowers created unequal terms to
borrowers in the FFEL Program and appeared to operate as ``redlining''
because the inducements were often based on school loan volume, the
volume of large dollar loans, or a school's cohort default rate.
A couple of negotiators recommended that, rather than attempting to
identify an exhaustive list of inducements, the regulations should
simply provide illustrative examples of acceptable relationships
between schools and lenders, so that future program developments would
not necessarily require a change to the regulations.
Negotiators with expertise in guaranty agency operations asked the
Department to make it clear that school involvement in, and guaranty
agency financial support of, guaranty agency advisory committee
activities would continue to be permissible because of the importance
of those activities to FFEL Program administration. One of these
negotiators also recommended that the list of permissible activities
for guaranty agencies be expanded to permit additional training and
outreach activities to avert defaults authorized under the HEA. Another
of these negotiators asked that the regulations make a clear
distinction between contractual, third-party servicer agreements
between a guaranty agency and school that are paid at the market
rate, and the limited emergency assistance offered by lenders and
guaranty agencies to schools at no cost or at less than a market rate.
This same negotiator asked the Department to clarify that a guaranty
agency or school's compliance with state administered programs or
requirements did not present an inducement-related conflict.
A couple of negotiators recommended that the Department clarify the
nature of the emergency situation under which a lender or guaranty
agency could offer assistance to a school in fulfilling its financial
aid functions at little or no cost. The negotiators noted that the
definition of an ``emergency'' is subjective, and should not excuse a
school from complying with the requirement that it be administratively
capable to participate in the Title IV programs, which includes
retaining sufficient, trained staff during peak processing periods.
They recommended that the Department specify that an ``emergency''
cannot be an annual or recurring event. The Department specifically
solicits comments on whether an ``emergency'' should be limited to a
State- or Federally-declared natural or national disaster that affects
a school or whether an ``emergency'' should encompass broader
circumstances.
Several negotiators with expertise in lender and guaranty agency
operations submitted counter-proposals to the Department's proposed
regulatory language. These alternative proposals would have
significantly expanded the lists of permissible activities for lenders
and guaranty agencies. The Department did not accept these counter-
proposals because they would have allowed activities and payments that
the Department believes are not appropriately performed by lenders and
guaranty agencies. These alternative proposals would: Permit lenders to
pay for meals and refreshments, lodging, and transportation costs for
employees of schools and school-affiliated organizations equivalent to
those permitted to be paid by guaranty agencies; incorporate into the
regulations the detailed listing of comparable services provided by the
Department to Direct Loan schools that was published in a Notice of
Proposed Rulemaking on August 10, 1999 (64 FR 43428, 43429-43430);
permit lenders to pay reasonable loan application ``referral'' fees to
unaffiliated parties in addition to other lenders; expand permissible
borrower repayment incentive programs to include loan forgiveness
benefits for academic achievement and certain kinds of employment; and
prohibit philanthropic giving by lenders and guaranty agencies in
exchange for application referrals, or a specific volume or dollar
amount of loans made, or placement on a school's list of recommended or
suggested lenders. The proposal would also have incorporated into the
regulations selected paragraphs from the Department's DCL 89-L-129/S-
55/G-157, February 1989.
A couple of negotiators voiced concern about the impact of the
proposed treatment of philanthropic giving by lenders on general
philanthropic activities supporting postsecondary institutions by
financial institutions.
Several negotiators objected to the Department's proposal to
include enforcement-related provisions in the proposed regulations. One
negotiator stated that the ``rebuttable presumption'' language was
problematic because the statutory language governing prohibited
inducements requires a demonstration that the inducement was provided
in exchange for loans or loan volume. The same negotiator stated that
enforcement would be better enhanced by clear regulations that define
terms and explain permissible and impermissible activities. Several
negotiators also objected to the inclusion of the FTC Holder Rule
provision into the proposed regulations. One negotiator argued that
these proposed regulations converted what was a lender eligibility
issue into a borrower right and put lenders at risk simply by being on
a school's preferred lender list. The negotiator also stated that it
would lead to nuisance litigation by borrowers. The negotiators
questioned why an inducement infraction by a lender should lead to a
loss of reinsurance and questioned the basis of the proposed provision
that denied claim payment to a lender and reinsurance to the guaranty
agency if it was determined that the loan was made based on an
impermissible inducement.
The Department believes that the proposed regulations adequately
implement the statutory requirements in the HEA's prohibited inducement
provisions and does not believe it will affect unrelated contracts or
agreements between postsecondary institutions and financial
institutions or general philanthropic giving by financial institutions.
Some negotiators believed that borrowers are being inappropriately
steered to various lenders through the use of inducements provided by
lenders to schools and that these activities, if left unchecked, deny
borrowers their choice of lender and undermine the credibility of the
FFEL Program. The Secretary, through these proposed regulations, is
enhancing the borrower's choice of lender and providing for the
disclosure of appropriate information.
The Department believes that the proposed regulations provide clear
and detailed examples of prohibited inducements and improper activities
based on previously published guidance with some modifications to
reflect changes that have occurred in the FFEL program. The proposed
regulations would retain the Department's long-standing policy
distinction between permissible activities by lenders and guaranty
agencies in recognition of their different roles in the FFEL program.
The Department has not, however, authorized lenders or guaranty
agencies to provide staff assistance to schools except in an emergency,
which must be short-term and nonrecurring. As noted earlier, one
negotiator asked the Department to provide a specific exemption from
the inducement restrictions for State-established programs or
requirements. However, such an exemption is not authorized under the
HEA. The prohibition on improper inducements in sections 428(b)(3) and
435(d)(5)(A) of the HEA applies to State guaranty agencies, lenders,
and institutions, as well as to all other participants in the FFEL
program. Based on these current statutory provisions, the Department
recently sent letters to two State guaranty agencies noting that State
authorized programs those agencies administer could create an improper
inducement, because those programs potentially provide benefits to
institutions that participate in the State guaranty agency's guarantee
program and deny benefits to institutions that participate in other
guaranty agencies' programs. The proposed regulations would reflect the
continued prohibition of such programs in proposed section
682.410(e)(1)(i)(B) and (e)(1)(ii).
The proposed regulations would adopt a modified version of the
Department's prior policy, under which ``reasonable'' application
referral fees can be paid to a nonparticipating lender or to another
participating FFEL lender by prohibiting all such payments to a lender
or any other entity. The Department believes that there is no longer a
need for payment of such fees in the current FFEL market and that
lender payment of such fees to school-affiliated organizations and
other unaffiliated parties are a significant problem in the FFEL
Program. In addition, in an attempt to avoid the prohibition on
inducements, lenders have tried to classify fees that are based on
success in securing loan applications or the size and characteristics
of loans disbursed as ``referral'' or ``marketing'' fees. Compensation or fees
based on the number of applications or the volume of loans made or
disbursed are improper, regardless of label, under the Department's
current and prior policy and would continue to be improper under these
proposed regulations. Lenders are free, as they have been historically,
to continue to contract for general marketing services, provided those
services are not compensated based on the number of applications, or
the volume of loans made or disbursed.
The proposed regulations do not incorporate the list of services
the Department provides to Direct Loan schools that was published in
the August 10, 1999 notice of proposed rulemaking as was requested by
some of the negotiators. As the Department made clear during the
negotiated rulemaking discussions, the Department would not want to
limit itself or the lending community by codifying a list of services
that cannot be easily updated and therefore the proposed regulations
allow the use of other forms of public announcement.
The proposed regulations also would not expand the list of
permissible lender repayment incentive programs that are based strictly
on a borrower establishing a successful payment pattern in the
repayment of a loan to include ``loan forgiveness'' based on academic
achievement or employment in a particular field. The Department
believes that repayment incentive programs do not represent a
prohibited inducement if they are conditioned on the borrower's timely
repayment of the loan and borrower receipt of the benefit is not
coincidental to the loan origination process. The Department believes
that the forms of loan forgiveness described by some of the negotiators
would be an inducement offered by lenders to market FFEL loans.
Finally, the Department believes that the addition of the
enforcement provisions is necessary to clarify and strengthen the
Department's authority to enforce the regulations related to the use of
improper inducements. The proposed regulations will result in more
effective and fair enforcement of these restrictions. In response to
the negotiators' concerns about the placement of the rebuttable
presumption provision outside the formal administrative penalty
process, the Department revised the proposed regulations to incorporate
that provision into the regulations that govern formal administrative
proceedings and to clarify that the rebuttable presumption applies only
when the Secretary takes a formal administrative action against a
lender or guaranty agency. As the Department pointed out during the
negotiated rulemaking discussion, violations of the prohibited
inducement provisions are difficult for the Department to enforce. It
is virtually impossible for the Department to prove the relationship
between the parties when the documentation is under the control of the
two parties and the Department cannot issue subpoenas to compel
testimony. To enforce these provisions more effectively, the Department
must be able to identify a connection between certain activities and
loans. The Department believes that the adoption and use of a
rebuttable presumption will improve the Department's ability to enforce
the prohibition on improper inducements while protecting the
appropriate due process rights of lenders and guaranty agencies.
The Department's proposal to include violations of the prohibited
inducement provisions in Sec. 682.406 as a condition of reinsurance
codifies the Department's existing policy and practice when it
documents violations of the prohibited inducement provisions.
Finally, the Department believes that the proposed change to expand
the protections provided by the FTC's Holder Rule by including a form
of that rule in the proposed regulations will allow borrowers to assert
any legal rights they may have if they have been harmed in a situation
in which the lender has offered or provided an improper inducement.
Moreover, by applying the FTC's Holder Rule to all loans, irrespective
of the type of school attended by the borrower, the proposed
regulations will ensure that all FFEL borrowers have the same legal
rights.
Eligible Lender Trustees (ELTs) (Sec. Sec. 682.200 and 682.602)
Statute: The Third Higher Education Extension Act of 2006 (HEA
Extension Act) (Pub. L. 109-292) amended the definition of lender in
section 435(d)(2) of the HEA to prohibit new ELT relationships and
restrict existing ELT relationships by imposing limits on school or
school-affiliated organizations that make or originate loans through an
ELT in the FFEL Program.
Current Regulations: The definition of lender currently in Sec.
682.200 does not reflect these new restrictions on ELT relationships in
the FFEL Program. The current regulations also do not contain a
definition of school-affiliated organizations.
Proposed Regulations: The changes in proposed Sec. 682.200
implement the HEA Extension Act by amending the definition of lender in
Sec. 682.200 to prohibit a FFEL lender from entering into a new ELT
relationship with a school or a school-affiliated organization after
September 30, 2006. ELT relationships in existence prior to that date
would be allowed to continue with certain restrictions. The proposed
regulations would also implement the HEA Extension Act by creating a
new section (formerly reserved Sec. 682.602) that applies the same
limits imposed on FFEL school lenders by the Higher Education
Reconciliation Act (HERA) (Pub. L. 109-171) to school and school-
affiliated ELT arrangements entered into after January 1, 2007. Lastly,
proposed Sec. 682.200 would define the term school-affiliated
organization as any organization that is directly or indirectly related
to a school and includes, but is not limited to alumni organizations,
foundations, athletic organizations, and social, academic, and
professional organizations.
Reasons: We are proposing to amend the definition of lender in
Sec. 682.200 and add new Sec. 682.602 to reflect the changes made to
section 435(d)(2) of the HEA by the HEA Extension Act. Because the HEA
Extension Act did not define ``school-affiliated organization,'' but
included these organizations in imposing limits on ELT arrangements, we
developed and are proposing to add a definition of this term to Sec.
682.200 to add clarity to the regulations. During the negotiated
rulemaking, several non-Federal negotiators expressed concern about the
phrase ``directly or indirectly related to a school'' in the definition
of school-affiliated organization. They felt that we should qualify
this phrase to make it clear that the definition applies only to
organizations that are under the common control and ownership of a
school. The Department disagreed with this suggestion, because many
organizations such as alumni and social organizations are clearly
school-affiliated but may not be under the control and ownership of a
school.
Frequency of Capitalization (Sec. 682.202)
Statute: Section 428C(b)(4)(C)(ii)(III) of the HEA provides for the
capitalization of interest on Consolidation Loans.
Current Regulations: Under current Sec. 682.202(b)(3), a lender
may capitalize unpaid interest as frequently as every quarter.
Capitalization is also permitted when repayment is required to begin or
resume.
Proposed Regulations: Under proposed Sec. 682.202, the frequency
of capitalization on Federal Consolidation Loans would be limited to
quarterly, except that a lender could only capitalize unpaid interest
that accrues during an in-school deferment at the expiration of the deferment. These
proposed regulations would be consistent with the current practice in
the Direct Loan Program.
Reasons: The proposed regulations would align the FFEL Program with
the Direct Loan Program. Capitalization would take place when the
borrower changes status at the end of a period of authorized in-school
deferment.
This change was proposed by non-Federal negotiators to protect
borrowers that previously consolidated their loans while in an in-
school status to lock in low interest rates. Statutory provisions,
subsequently repealed by the HERA, allowed in-school FFEL borrowers to
request an early conversion to repayment status. Unlike Direct Loan
borrowers, FFEL borrowers were not able to consolidate their loans
while they were in an in-school status. By converting to repayment
status, these borrowers could consolidate their loans. Consolidation
Loans received by these borrowers were then immediately placed into in-
school deferments. The proposed regulations would limit when the
interest on these loans could be capitalized.
Loan Discharge for False Certification as a Result of Identity Theft
(Sec. Sec. 682.208, 682.211, 682.300, 682.302 and 682.411)
Statute: Section 437(c) of the HEA authorizes a discharge of a FFEL
Loan or a Direct Loan if the borrower's eligibility to borrow was
falsely certified because the borrower was a victim of the crime of
identity theft.
Current Regulations: Section 682.402 of the FFEL Program
regulations and Sec. 685.215 of the Direct Loan Program regulations
authorize a discharge of a loan if the borrower's eligibility to borrow
the loan was falsely certified because the borrower was the victim of
the crime of identity theft. Section 682.402 requires that, before the
borrower's obligation is discharged, the borrower must provide the loan
holder a copy of a local, State, or Federal court verdict or judgment
that conclusively determines that the individual who is named as the
borrower of the loan was the victim of the crime of identity theft. A
Direct Loan borrower must provide the Secretary the same documentation
to establish eligibility for the discharge.
Proposed Regulations: The proposed regulations do not include any
changes to the eligibility requirements with which a borrower must
comply to obtain a loan discharge as a result of the crime of identity
theft. However, the proposed regulations Sec. 682.208 would allow a
lender to suspend credit bureau reporting on a loan for 120 days while
the lender investigates a borrower's claim that he or she is the victim
of identity theft. The proposed regulations in Sec. 682.211 would
allow a lender to grant a 120-day administrative forbearance to a
borrower upon the lender's receipt of a valid identity theft report as
defined under the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau of an allegation of identity theft
while the lender determines the enforceability of the loan. Under the
proposed changes in Sec. Sec. 682.208 and 682.211, the lender could no
longer collect interest and special allowance payments on the loan if
the lender determines that the loan is unenforceable. The proposed
regulations would allow the lender a three-year period, however, to
submit a claim if, within that time period, the lender receives from
the borrower a local, State, or Federal court verdict of judgment
conclusively proving that the borrower was the victim of the crime of
identity. The proposed regulations in Sec. Sec. 682.300 and 682.302
would clarify that the Secretary terminates the payment of interest
benefits and special allowance on eligible FFEL Program Loans
consistent with the changes we are proposing in Sec. 682.208. Lastly,
proposed regulations in Sec. 682.411 would specify that the HEA does
not preempt provisions of the Fair Credit Reporting Act that provide
for the suspension of credit bureau reporting and collection on a loan
after the lender receives a valid identity theft report or notification
from a credit bureau.
Reasons: Interim final regulations published on August 9, 2006 (71
FR 64377) and final regulations published on November 1, 2006 (71 FR
45665) implemented changes made to the HEA by the HERA to authorize a
discharge of a FFEL or Direct Loan Program loan if the borrower's
eligibility to borrow was falsely certified because the borrower was a
victim of the crime of identity theft. Although some of the negotiators
had concerns with these earlier regulations, the Department believes
that the current regulations properly reflect the statutory provision
and therefore did not propose any changes.
Some non-Federal negotiators asked the Department to add
regulations that would allow loan holders to take actions required by
other Federal laws when they receive an allegation that a loan was
certified due to a crime of identity theft. The Department agreed. The
proposed regulations in Sec. Sec. 682.208 and 682.211 would allow for
the suspension of credit bureau reporting and collection activity,
respectively. The proposed regulations in Sec. 682.411 would allow
lenders to comply with the Fair Credit Reporting Act and stop credit
bureau reporting on delinquent loans while the lender investigates an
alleged identity theft without violating the FFEL Program regulations.
Preferred Lender Lists (Sec. Sec. 682.212 and 682.401)
Statute: Section 432(m) of the HEA requires the Secretary, in
consultation with guaranty agencies, lenders, and other organizations
involved in student financial assistance to develop common application
forms and promissory notes, or MPNs for use in the FFEL Program. These
forms must be formatted to require the applicant to clearly indicate a
choice of lender. Under Section 479A(c) of the HEA, schools are
authorized to refuse to certify, on a case-by-case basis, a statement
that permits a student to receive a loan. The reason for the school's
refusal must be documented and provided to the student in writing. In
exercising this authority, a school may not discriminate against any
borrower.
Current Regulations: Many schools provide lists of preferred or
recommended lenders to students and prospective borrowers. There are no
current regulations that govern a school's use of such lists. Current
Sec. 682.603(e) authorizes a school to refuse to certify a borrower's
eligibility for a FFEL Loan but specifies that, in exercising that
authority, a school must not engage in any pattern or practice that
would result in denial of a borrower's access to loans on the basis of
certain factors including the borrower's choice of a particular lender
or guaranty agency.
Proposed Regulations: Section 682.212(h)(1) of the proposed
regulations specifies the requirements that a school must meet if it
chooses to provide a list of recommended or preferred FFEL lenders for
use by the school's students and their parents, and prohibits the use
of a preferred lender list to deny or otherwise impede the borrower's
choice of lender. Section 682.212(h)(1)(ii) of the proposed regulations
would require a school using a preferred lender list to include on the
list at least three lenders that are not affiliated with each other.
Section 682.212(h)(1)(iii) of the proposed regulations would also
prohibit a school from including lenders on the list that have offered,
or been solicited by the school to offer, financial or other benefits
to the school in exchange for placement on the list. The proposed
regulations further provide, in Sec. 682.212(h)(2)(iii), that if a
school has listed a lender on its preferred lender list and the lender
offers specific borrower benefits (such as lower fees or interest rates) to the
school's borrowers, the school must ensure that the lender provides the
same benefits to all borrowers at the school. Section 682.212(h)(2) of
the proposed regulations would also require the school to disclose to
prospective borrowers, as part of the list, the method and criteria the
school used to select any lender that it recommends or suggests, to
provide comparative information to prospective borrowers about interest
rates and other benefits offered by the lenders, and to include a
prominent statement, in any information related to its list of lenders,
advising prospective borrowers that they are not required to use one of
the school's recommended or suggested lenders. Section 682.212(h)(2)(v)
of the proposed regulations would also prohibit a school from
assigning, through award packaging or other methods, a lender to first-
time borrowers and from delaying certification of a borrower's loan
eligibility to a lender because that particular lender is not on the
school's preferred lender list. The proposed regulations would also
revise Sec. 682.603(e) to further clarify that a school may never
refuse or delay certification of a borrower's loan eligibility because
of the borrower's choice of lender.
Reasons: The Department believes that it is necessary at this time
to establish rules to govern a school's optional use of a preferred
lender list to preserve a borrower's right to choose a FFEL lender.
These proposed regulations will help ensure that such lists are a
source of useful, unbiased consumer information that can assist
students and their parents in choosing a FFEL lender from the over
3,000 lenders that participate in the FFEL Program.
The Department has not previously regulated or restricted the use
of lists of preferred or recommended lenders. With student loan
defaults a national concern in the early 1990s, some schools began
recommending to borrowers that they use lenders that the school
believed provided high-quality customer service in loan origination and
servicing, with the goal of preventing loan delinquency and default and
its negative consequences for borrowers and schools. With the
significant growth of loan volume in recent years, and increased
competition among FFEL lenders, the focus of school selection of
preferred lenders has shifted. Lenders began offering web-based and
proprietary applications and electronic data transmission to reduce the
administrative burden for schools and borrowers and the processing time
necessary to secure a student loan. Increased competition among FFEL
lenders has also led to a proliferation of student loan borrower
benefits, such as reduced interest rates and fees. Given the growing
complexity surrounding the FFEL program, students and parents have been
relying extensively on financial aid administrators as a source of
assistance to identify lenders that offer the best service and benefits
to borrowers. The use of preferred lender lists and other consumer
information related to the student loan process has played a useful
role in assisting financial aid officers in dealing with the large
volume of requests for information and assistance.
There is increasing evidence, however, that the preferred lender
lists maintained by many schools do not represent the result of
unbiased research by the school to identify the lenders providing the
best combination of service and benefits to borrowers. There has also
been increasing evidence that some schools have been restricting the
ability of borrowers to choose the lender of their FFEL Program loan.
The Department has identified instances in which a school selected the
lender for the borrower as part of the financial aid award packaging
process, provided borrowers with an electronic link to only one lender
after recommending a loan as part of the award package, identified only
one lender as their preferred lender in their published financial aid
information, or, if the school was an authorized FFEL Program lender,
directed the aid administrator to use the school as the only lender.
Some other schools have significantly delayed or declined to provide
the necessary loan eligibility certification to a lender for a student
or parent borrower because the lender was not on the school's preferred
list or did not participate in the electronic processing system that
the school used. When these situations were identified, and in response
to student and parent complaints, the Department has investigated and
addressed them on a case-by-case basis, and reminded the school of its
legal responsibilities. Over the last three years, the Department has
also used Department-sponsored meetings and other conferences to
highlight inappropriate and, in some cases, illegal practices related
to the use of preferred lender lists. Unfortunately, many of these
practices have continued, despite the Department's efforts.
Recent Department investigations have shown that, in some cases, a
school's selection of a preferred or recommended lender was the result
of a lender's offer of prohibited inducements that took the form of
direct payments or other benefits to the school, its students, or its
employees rather than the result of the school's effort to research and
analyze the various lender offerings to its students. In 1995, the
Department reminded schools of the prohibited inducement provisions in
the law and the sanctions attached to them, and warned schools against
such activities with both FFEL school lenders and non-school FFEL
lenders (DCL 95-G-278). Despite these actions, the Department's Office
of Inspector General reported to the Secretary in August 2003 that
these relationships were becoming an increasing problem in the FFEL
program, and recommended that the Secretary provide additional guidance
to both schools and lenders. The continuing and growing concern about
these relationships led the Secretary to decide to address preferred
lender lists as part of this rulemaking process.
These proposed regulations are similar to the proposals submitted
by the Department to the negotiating committee during the negotiated
rulemaking process. Some negotiators questioned the need to regulate in
this area, stating that it would be highly intrusive and advising the
Department that it would be better to address the use of preferred
lender lists through training and enforcement as part of school reviews
and audits. Another negotiator recommended that any proposed
regulations on this topic be limited to schools that used a preferred
lender list to actively impede a borrower's choice of lender. Some
negotiators thought that the Secretary should consider prohibiting the
use of preferred lender lists entirely while other negotiators endorsed
the continued use of preferred lender lists as a helpful tool for both
schools and prospective borrowers. Several negotiators expressed the
view that regulations in this area would be administratively burdensome
and could result in schools discontinuing the use of such lists. Some
negotiators expressed concern that if schools discontinued using a
preferred lender list, students would be subject to increased direct
marketing from student loan lenders, which they viewed as
counterproductive to the goal of educating students and parents about
the student loan process.
Some negotiators stated that the Department's proposed requirement
of a minimum number of three lenders on any list was arbitrary. A
couple of those negotiators expressed concern that some schools,
particularly small schools, would have difficulty complying with
the requirement because only one lender was willing to make FFEL loans
to students at the schools. A group of negotiators submitted a counter-
proposal to exempt schools from the requirement that a preferred lender
list include at least three lenders if the school: Had less than 500
borrowers entering repayment in a given year; had issued a request for
proposal to lenders to which there were at least three responses;
recommended a certain lender in accordance with State law; or was a
Historically Black College or University or a Tribally-controlled
College or University. One other negotiator strongly recommended that
the Department require schools to provide information about their
business dealings with each of the lenders on the preferred lender
list. However, several school-based negotiators stated that such a
requirement was administratively unfeasible and would not be helpful to
students because there were generally many business arrangements
between schools and financial institutions that were not related to the
school's participation in the FFEL Loan Program and over which student
financial aid personnel have no control. These same negotiators also
objected to the Department's proposal that, in addition to disclosing
the method and criteria used by the school to choose the lenders on the
school's preferred lender list, the school be required to provide
comparative information on the interest rates and other borrower
benefits offered by those lenders. The school-based negotiators stated
that this requirement would represent a significant administrative
burden and that schools could not ensure the accuracy of the
information on borrower-benefit offerings. Many negotiators objected to
the Department's proposed prohibition against a school soliciting
borrower benefits from a lender in exchange for the lender's placement
on the school's preferred lender list. These negotiators argued that
one of a school's primary reasons for providing a list of lenders was
to identify lenders offering the best interest rates and borrower
benefits possible for the school's borrowers, and believed that a
school's efforts to negotiate better benefits for their borrowers
should not be restricted.
The Department's proposed regulations would require that any school
list of recommended lenders contain at least three lenders to provide
borrower choice. To further ensure that the listed lenders provide an
actual choice for a borrower, the proposed regulations provide that the
three lenders must not be affiliated with each other. The Department
expects a school to collect and retain a statement certifying to this
fact, upon which the school can rely, from each of the lenders they
propose to include on their list. The Department is not proposing any
exemption to the minimum of three lenders. The Department also believes
that the disclosure of supporting information and data with the list is
the most efficient and effective method to ensure that borrowers make
informed consumer decisions. The Department understands that providing
comparative interest rate and benefit information, in addition to
describing the method and criteria used to select lenders for the list,
will involve additional efforts for schools in preparing and providing
a preferred lender list. To assist schools with this effort, the
Department is developing a model format that a school may use to
present this information. The Department will be sharing a draft of the
model format with representatives of school, lending and guaranty
agency communities as well as students and parents to solicit their
thoughts and suggestions. The draft model format will then be revised
and submitted for clearance to the Office of Management and Budget
(OMB) as required by the Paperwork Reduction Act of 1995. This
clearance process will afford additional opportunities for public
comment on the draft model format. The Department plans to submit a
model format form to OMB for its review when these proposed regulations
are published in final form.
The Department also agrees that schools should not be discouraged
from negotiating with lenders for the best possible interest rates and
borrower benefits for their borrowers. As a result, the proposed
regulations, while continuing to prohibit a school's solicitation of
payments and other benefits from a lender for the school or its
employees in exchange for the lender's placement on the school's list,
would not prohibit a school from soliciting lenders for borrower
benefits in exchange for placement on the school's list.
Executive Order 12866
Regulatory Impact Analysis
Under Executive Order 12866, the Secretary must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the OMB.
Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as an action likely to result in a rule that may
(1) Have an annual effect on the economy of $100 million or more, or
adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule); (2) create serious
inconsistency or otherwise interfere with an action taken or planned by
another agency; (3) materially alter the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive order.
Pursuant to the terms of the Executive order, it has been
determined this proposed regulatory action will not have an annual
effect on the economy of more than $100 million. Therefore, this action
is not ``economically significant'' and subject to OMB review under
section 3(f)(1) of Executive Order 12866. In accordance with the
Executive order, the Secretary has assessed the potential costs and
benefits of this regulatory action and has determined that the benefits
justify the costs.
Need for Federal Regulatory Action
These proposed regulations address a broad range of issues
affecting students, borrowers, schools, lenders, guaranty agencies,
secondary markets and third-party servicers participating in the FFEL,
Direct Loan, and Perkins Loan programs. Prior to the start of
negotiated rulemaking, through a notice in the Federal Register and
four regional hearings, the Department solicited testimony and written
comments from interested parties to identify those areas of the Title
IV regulations that they felt needed to be revised. Areas identified
during this process that are addressed by these proposed regulations
include:
Duplication of effort for loan holders and borrowers in
the deferment granting process. The Department has proposed changes
that allow Title IV loan holders to grant a deferment under a
simplified process.
Difficulty experienced by members of the armed forces when
applying for a Title IV loan deferment. The Department has proposed
changes that allow a borrower's representative to apply for an armed
forces or military service deferment on behalf of the borrower.
Confusion regarding the eligibility requirements that a
Title IV loan borrower must meet to qualify for a total and permanent
disability loan discharge. The Department has
proposed changes to clarify these requirements.
Lack of entrance and exit counseling for graduate and
professional PLUS Loan borrowers. The Department has proposed changes
that require entrance counseling and modified exit counseling.
Costs associated with capitalization on Federal
Consolidation Loans for borrowers who consolidated while in an in-
school status. The Department has proposed changes to limit the
frequency of capitalization on such loans.
Based on its experience in administering the HEA, Title IV loan
programs, staff with the Department also identified several issues for
discussion and negotiation, including:
Risk to the Federal fiscal interest associated with the
total and permanent disability discharge on a Title IV loan. The
Department has proposed changes to require a prospective three-year
conditional discharge so that the applicant's condition can be
monitored before the borrower receives a Federal benefit.
Enforcement issues and risk to the Federal fiscal interest
associated with electronically-signed MPNs that have been assigned to
the Department. The Department has proposed changes that require loan
holders to maintain a certification regarding the creation and
maintenance of any electronically-signed promissory notes and that
require loan holders to provide disbursement records should the
Secretary need the records to enforce an assigned Title IV loan.
Excessive collection costs charged to defaulted Perkins
Loan borrowers. The Department has proposed changes that cap collection
costs in the Perkins Loan Program.
Unreasonable risk of loss to the United States associated
with the more than $400 million in uncollected Perkins Loans that have
been in default for 5 years or more. The Department has proposed
changes that provide for mandatory assignment of older, defaulted
Perkins loans at the request of the Secretary.
Program integrity issues associated with prohibited
incentive payments and other inducements by lenders and guaranty
agencies. The Department has proposed changes that explicitly identify
prohibited inducements and allowable activities.
Abuse associated with the use of lists of preferred or
recommended lenders. The Department has proposed changes that ensure
such lists are a source of useful, unbiased consumer information that
can assist students and their parents in choosing a FFEL lender.
Lastly, regulations were required to implement The HEA Extension
Act, which made changes to eligible lender trustee relationships as
discussed earlier.
Regulatory Alternatives Considered
A broad range of alternatives to the proposed regulations was
considered as part of the negotiated rule-making process. These
alternatives are reviewed in detail elsewhere in this preamble under
the Reasons sections accompanying the discussion of each proposed
regulatory provision.
Benefits
Many of the proposed regulations codify existing sub-regulatory
guidance or make relatively minor changes intended to establish
consistent definitions or streamline program operations across the
three Federal student loan programs. The Department believes the
additional clarity and enhanced efficiency resulting from these changes
represent benefits with little or no countervailing costs or additional
burden.
Benefits provided in these regulations include: The clarification
of rules on preferred lender lists and prohibited inducements;
simplification of the process for granting deferments; changes to the
process of granting loan discharges that reduce burden for loan
holders, protect borrowers from unnecessary collection activities, and
simplify the application process; limits on the frequency with which
FFEL lenders can capitalize interest on Consolidation Loans; limits on
the amount of collection costs charged to defaulted Perkins Loan
borrowers; and the mandatory assignment to the Department of
longstanding defaulted Perkins Loan with limited recent collection
activity. Of these proposed provisions, only the mandatory assignment
of defaulted Perkins Loans has a substantial economic impact-although
the single-year impact is less than the $100 million threshold.
Preferred Lender and Prohibited Inducements: The proposed
regulations include a number of provisions affecting the use of
preferred lender lists and lender inducements. The use of preferred
lender lists by schools is completely optional; while the Department
encourages maximum disclosure of loan information to borrowers, a
school can avoid the minimal costs associated with the disclosures
required by the proposed regulations by simply opting not to have a
preferred lender list. Accordingly, there are no mandated costs for
these proposals.
The student loan industry features high competition among loan
providers, using an array of interest rate discounts and other borrower
benefits to attract volume. By increasing the amount of information
available to borrowers and clarifying permissible relationships between
lenders and schools, the proposed provisions are expected to improve
market transparency and remove transaction barriers for loan borrowers,
improving market openness and efficiency for both borrowers and loan
providers.
The proposed regulations generally prohibit lenders and guaranty
agencies from regularly providing schools with personnel and other
support services for loan application and other processing activities.
The provision of these services appears to have been a relatively
standard practice in some institutional sectors. To the extent schools
must now pay for this activity themselves, the regulations do not
increase costs but rather shift costs from lenders to schools. The
Department is interested in comments related to any potential burden
associated with this provision. The HEA and implementing regulations
currently require schools to maintain the administrative capability to
operate Title IV programs. The proposed regulations are consistent with
this requirement by prohibiting lenders and guaranty agencies from
providing schools with personnel and other support services and
activities in exchange for loan applications.
Simplification of Deferment Process: In general, current
regulations require each lender to determine a borrower's qualification
for a deferment and require a borrower to initiate the application for
a military service deferment. The proposed regulation allows a lender
to use the determination of deferment eligibility made by another
eligible lender and allows a borrower's representative to apply for a
military service deferment. In both instances, no additional costs are
incurred. In the deferment-granting process, a lender must still make a
determination, but responsibility may be shifted among individual
lenders. In cases in which a loan is transferred to a different lender
in the middle of a deferment period, the new loan holder will not need
to make a separate initial determination of eligibility. Similarly,
under the proposed regulations, a single individual will still submit
an application for military service deferment; the proposal merely
allows individuals dispatched on active duty to designate a
representative to submit their application.
[[Page 32429]]
Changes to Loan Discharge Provisions: The proposed regulations
streamline and simplify the process for applying for death and
disability loan discharges and ensures regulations are internally
consistent and in compliance with other statutes, including the Fair
Credit Reporting Act. Under current regulations, applicants must submit
an original or certified copy of the death certificate in order to
receive a loan discharge; the proposed regulation would allow the use
of an accurate and complete photocopy of the original or certified copy
of the death certificate. The workload to the applicant is unchanged
and no additional costs are incurred. The proposed regulations for the
total and permanent disability discharges also standardize definitions
and dates for the conditional discharge period and require additional
disclosure of information to borrowers. The proposed regulations
require lenders to notify borrowers that additional payments are not
required after the date a discharge application has been submitted. As
a lender must already submit the application to the Secretary, the cost
of electronically notifying the borrower of the repayment requirement
is negligible. Note: The proposed regulations do not change the
borrower's repayment responsibility and do not affect the cash flows of
the loan program.
Reasonable Collection Costs on Defaulted Perkins Loans: The HEA and
implementing regulations specify and limit the level of collection
costs on defaulted loans payable by a borrower in the FFEL and Direct
Loan programs; similar restrictions do not exist for the Perkins Loan
Program. There have been several reports that some schools assess
excessive collection costs to defaulted borrowers. The Department does
not have data to support or deny this assertion and is interested in
any comments or data on this issue. In the absence of data, the
Department assumes there is no measurable difference between the
collection cost rate charged borrowers in the overall Perkins Loans
program and that of the other Federal student loan programs. Given this
assumption, the regulations are estimated to have no measurable
economic impact.
Mandatory Assignment of Certain Defaulted Perkins Loans: As
discussed elsewhere in this preamble, the proposed regulations would
require institutions to assign to the Department any Perkins Loans that
have been in default for 7 or more years and have not had any
collection activity for at least 12 months. Department data indicate
that Perkins Loan institutions hold more than $400 million in
uncollected loans that have been in default for 5 years or more. Since
Perkins Loans are made with a combination of Federal and institutional
funds, these uncollected loans present an unreasonable risk of loss to
the United States.
The Department believes its use of collection tools such as Federal
offset will substantially improve the recovery rate on these older
loans, as Perkins institutions lack access to these tools. Accordingly,
the Department has long encouraged voluntary assignment of these
longstanding non-performing defaulted loans. Despite this
encouragement, and notwithstanding substantial simplification of the
voluntary assignment process, the number and outstanding balance of
older, defaulted Perkins Loans have continued to increase.
Perkins Loans are made from a capital fund held by schools, which
generally includes 75 percent Federal funds and 25 percent
institutional matching funds. As discussed below, the proposed
regulations, once implemented, could increase collections on defaulted
loans by $15 million over the next 10 years. Under the assignment
process, 100 percent of these collections become Federal revenue. In
the absence of the regulations, given the age of the loans and the
inability of the schools to collect, the Department assumes there would
be no Federal or institutional revenue. The proposed regulations
therefore would have minimal economic impact on schools. The impact on
borrowers is that the increased use of Federal tools will require
borrowers to fulfill their obligation to repay their loans.
To estimate the impact of this proposed change, the Department used
a statistically representative sample from records in NSLDS to identify
outstanding Perkins Loans that have been in default for at least 7
years and for which the outstanding balance has not decreased in at
least 12 months. The Department identified $23 million in outstanding
Perkins Loans that meet these criteria and so would be subject to
mandatory assignment. This portfolio increases approximately $1 million
annually under current regulations. Historically, using the credit
reform discounting method in which future collections are discounted to
reflect a current year cost, the Department collects approximately 80
percent of outstanding principal on loans held in-house. If the $23
million of assignable Perkins Loans produced the same collection level,
government revenues would increase, on a discounted basis, by $18
million over the next approximately 10 years as borrowers repay their
loans. This level of collection is unlikely as these borrowers have
been out of repayment for many years. This amount was reduced by $3
million to reflect the Department's standard collections costs.
Accordingly, the Department estimates the proposed regulation will
increase net collections and reduce Federal costs by $15 million.
Costs
Because entities affected by these regulations already participate
in the Title IV, HEA programs, these lenders, guaranty agencies, and
schools must already have systems and procedures in place to meet
program eligibility requirements. These regulations generally would
require discrete changes in specific parameters associated with
existing guidance--such as the provision of entrance counseling, the
retention of records, or the submission of data to NSLDS--rather than
wholly new requirements. Accordingly, entities wishing to continue to
participate in the student aid programs have already absorbed most of
the administrative costs related to implementing these proposed
regulations. Marginal costs over this baseline are primarily related to
one-time system changes that, while possibly significant in some cases,
are an unavoidable cost of continued program participation. In
assessing the potential impact of these proposed regulations, the
Department recognizes that certain provisions--primarily the mandatory
assignment of Perkins Loans and the addition of entrance counseling for
graduate and professional PLUS Loan borrowers--will result in
additional workload for staff at some institutions of higher education.
(This additional workload is discussed in more detail under the
Paperwork Reduction Act of 1995 section of this preamble.) Additional
workload would normally be expected to result in estimated costs
associated with either the hiring of additional employees or
opportunity costs related to the reassignment of existing staff from
other activities. In this case, however, these costs are not incurred
because other provisions in the proposed regulations--primarily changes
involving the maximum length of loan period--result in offsetting
workload reductions that greatly outweigh the estimated additional
burden. The Department estimates annual net burden for institutions of
higher education related to the Title IV student loan programs will
decrease by 180,000 hours as a result of the proposed regulations.
While regulations related to mandatory assignment result in a net increase in burden under the
Perkins Loan Program, schools participating in the Perkins Loan Program
also typically participate in either the FFEL or Direct Loan Program,
both of which have net burden reductions that outweigh the increase
under the Perkins Loan Program. In addition, the estimated annual
burden for Perkins Loan Program participants will drop dramatically
after the first year, during which institutions will need to assign all
outstanding loans that currently meet the requirements for mandatory
assignment. In subsequent years, the number of loans assigned will be
limited to those that newly meet the requirements.
The Department is particularly interested in comments on possible
administrative burdens related to the proposed regulations. In a number
of areas, such as certification of electronic signatures, preferred
lenders, and prohibited inducements, non-Federal negotiators raised
concerns about possible administrative burden associated with
provisions included in these proposed regulations. Given the limited
data available, however, the Department is particularly interested in
comments and supporting information related to possible burden stemming
from the proposed regulations. Estimates included in this notice will
be reevaluated based on any information received during the public
comment period.
Assumptions, Limitations, and Data Sources
Estimates provided above reflect a baseline in which the proposed
changes implemented in these regulations do not exist. In general,
these estimates should be considered preliminary; they will be
reevaluated in light of any comments or information received by the
Department prior to the publication of the final regulations. The final
regulations will incorporate this information in a more robust
analysis.
In developing these estimates, a wide range of data sources were
used, including NSLDS data, operational and financial data from
Department of Education systems, and data from a range of surveys
conducted by the National Center for Education Statistics such as the
2004 National Postsecondary Student Aid Survey, the 1994 National
Education Longitudinal Study, and the 1996 Beginning Postsecondary
Student Survey. Data on administrative burden at participating schools,
lenders, guaranty agencies, and third-party servicers are extremely
limited; accordingly, as noted above, the Department is particularly
interested in comments in this area.
Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and
explain burdens specifically associated with information collection
requirements. See the heading Paperwork Reduction Act of 1995.
Accounting Statement
As required by OMB Circular A-4 (available at http://www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf
), in Table 1 below, we have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of these proposed
regulations. This table provides our best estimate of the changes in
Federal student aid payments as a result of these proposed regulations.
Savings are classified as transfers from program participants
(borrowers in default).
*NOTE: SEE PDF FILE FOT Table 1.--Accounting Statement: Classification of Estimated Savings
Clarity of the Regulations
Executive Order 12866 and the Presidential memorandum ``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:
Are the requirements in the proposed regulations clearly
stated?
Do the proposed regulations contain technical terms or
other wording that interferes with their clarity?
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
we divided them into more (but shorter) sections? (A ``section'' is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 682.209 Repayment of a loan.)
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?
What else could we do to make the proposed regulations
easier to understand?
To send any comments that concern how the Department could make
these proposed regulations easier to understand, see the instructions
in the ADDRESSES section of this 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, lenders, and guaranty agencies that participate in
Title IV, HEA programs and individual students and loan borrowers. The
U.S. Small Business Administration Size Standards define these
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. Guaranty agencies are State and private nonprofit entities that
act as agents of the Federal government, and as such are not considered
``small entities'' under the Regulatory Flexibility Act. Individuals
are also not defined as ``small entities'' under the Regulatory
Flexibility Act.
A significant percentage of the lenders and schools participating
in the Federal student loan programs meet the definition of ``small
entities.'' While these lenders and schools fall within the SBA size
guidelines, the proposed regulations do not impose significant new
costs on these entities.
The Secretary invites comments from small institutions and lenders
as to whether they believe the proposed changes would have a
significant economic impact on them and, if so, requests evidence to
support that belief.
Paperwork Reduction Act of 1995
Proposed Sec. Sec. 674.8, 674.16, 674.19, 674.38, 674.45, 674.50,
674.61, 682.200, 682.208, 682.210, 682.211, 682.401, 682.402, 682.406,
682.409, 682.411, 682.414, 682.602, 682.603, 682.604, 682.610, 685.204,
685.212, 685.213, 685.215, 685.301, 685.304 contain information
collection requirements. Under the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Department of Education has submitted a copy of
these sections to the Office of Management and Budget (OMB) for its
review.
[[Page 32431]]
Collection of Information: Perkins Loan Program, FFEL Program, and
Direct Loan Program.
Sections 674.38, 682.210, and 685.204--Deferment
The proposed regulations in Sec. Sec. 674.38 and 682.210 would
allow FFEL lenders and schools that participate in the Perkins Loan
Program to grant graduate fellowship deferments, rehabilitation
training program deferments, unemployment deferments, economic hardship
deferments and military service deferments based on information from
another FFEL loan holder or from the Department. The proposed
regulations in Sec. 685.204 would permit the Department to grant a
deferment on a Direct Loan based on information from a FFEL loan
holder. Finally, the proposed regulations would allow a representative
of the borrower to apply for a military deferment on a Perkins, FFEL or
Direct Loan on behalf of the borrower. The proposed regulations would
affect borrowers seeking a deferment and loan holders and servicers.
This proposed change represents a decrease in burden because borrowers
with more than one loan would no longer be required to gather and
supply documentation to each loan holder in order to establish
eligibility for a deferment. Conversely, loan holders would be able to
rely on the determination of eligibility by another holder based on
that holder's receipt and review of required documentation from the
borrower. We estimate that the proposed changes will decrease burden
for borrowers and loan holders (and their servicers) by 9,383 hours and
1,042 hours, respectively. Thus, we estimate a total burden reduction
of 10,425 hours in OMB Control Numbers 1845-0019, 1845-0020, and 1845-
0021.
The proposed change allowing a borrower's representative to apply
for a military deferment on behalf of the borrower does not represent a
change in burden. The deferment application and eligibility
determination process would remain the same.
Sections 674.61, 682.402 and 685.212--Loan Discharge for Death
The proposed regulations would allow the use of an accurate and
complete copy of the original or certified copy of the death
certificate, in addition to the original or a certified copy, to
support the discharge of a borrower's or parent borrower's Title IV
loan. This proposed change represents a decrease in burden for the
survivor of the borrower and the loan holder (or its servicer) because
each party will now have increased flexibility in gathering and
reviewing documentation that supports a loan discharge based on the
death of the borrower. We estimate that the proposed changes will
decrease burden for borrowers' survivors and loan holders (and their
servicers) by 3,410 hours and 2,273 hours, respectively. Thus, we
estimate a total burden reduction of 5,683 hours. The proposed changes
will be reflected in OMB Control Numbers 1845-0019, 1845-0020 and 1845-
0021.
Sections 674.61, 682.402, and 685.213--Total and Permanent Disability
Discharge
The proposed regulations restructure Sec. Sec. 674.61, 682.402 and
685.213 to clarify the regulatory requirements for the total and
permanent disability discharge process. The proposed changes require a
borrower to complete a prospective conditional discharge period of
three years from the date that the Secretary makes an initial
determination that a borrower is totally and permanently disabled in
order to qualify for the total and permanent disability discharge on
his or her Perkins, FFEL or Direct Loan. Lastly, the proposed changes
explicitly state that, in order to qualify for a discharge, the
borrower must meet the definition of total and permanent disability
under the Perkins Loan or Direct Loan regulations or the definition of
totally and permanently disabled under the FFEL regulations and receive
no further Title IV loans from the date the physician certifies the
borrower's total and permanent disability on the discharge application.
The proposed regulatory changes would affect Title IV borrowers seeking
a total and permanent disability loan discharge, loan holders (and
their servicers), and guaranty agencies.
The proposed changes would not constitute an increase in burden for
borrowers because the application process and the eligibility
requirements have not changed. The proposed changes would also not
constitute an increase in burden for loan holders and guaranty agencies
because these entities are not responsible for monitoring the
borrower's status during the prospective conditional discharge period
or for making a final determination of the borrower's eligibility for
discharge. Changes to the Permanent and Total Disability Loan Discharge
Application Form would need to be made, however, to state that the
conditional discharge period would be prospective from the date of the
physician's certification of the borrower's disability on the form. The
Total and Permanent Disability Discharge Application currently in use
will expire on May 5, 2008. Final regulations implementing these
provisions will be effective July 1, 2008. A revised Total and
Permanent Disability Discharge Form associated with OMB Control Number
1845-0065 will be submitted for OMB review by January 31, 2008 thereby
ensuring that a newly-approved form will be available for a borrower's
use by the time final regulations are effective.
Sections 674.16, 682.208, 682.401 and 682.414--NSLDS Reporting
Requirements
The proposed changes to Sec. Sec. 674.16, 682.208, 682.401 and
682.414 require schools, lenders, and guaranty agencies to report
enrollment and loan status information, or any other data required by
the Secretary, to NSLDS by a deadline established by the Secretary.
Requiring these entities to report information to NSLDS on a deadline
established by the Secretary codifies existing Departmental practice
and we believe that it will not result in an increase or decrease in
burden; however we invite comments on this issue.
The proposed changes in Sec. 682.401 that require a guaranty
agency to report a borrower's enrollment status to the current holder
of a loan within 30 days, instead of the existing 60-day timeframe, do
not represent an increase in burden. Under current practice, 33 of the
35 existing guaranty agencies participate in a free service provided by
the National Student Clearinghouse Total Enrollment Reporting Process
(TERP). TERP already provides enrollment information to lenders and
lender servicers on behalf of the guaranty agency within a 30-day
period. The remaining two guaranty agencies are expected to enroll with
TERP by the end of the year.
Sections 674.19, 674.50, and 682.414--Certification of Electronic
Signature on Title IV Loan Program Master Promissory Notes (MPNs)
Assigned to the Department
The proposed changes to Sec. Sec. 674.19, 674.50 and 682.414
support the Department's efforts to enforce defaulted Perkins Loan or
FFEL MPNs that are assigned to the Department by requiring that
schools, lenders and guarantors create, maintain, and provide to the
Secretary, upon request, an affidavit or certification regarding the
creation and maintenance of electronic MPNs or promissory notes,
including the authentication and signature process. The proposed
changes in Sec. Sec. 674.19 and 682.414 would also require schools and
the holder of the original electronically signed FFEL MPN to retain an
original of an electronically signed MPN, and associated loan records, for three years
after all the loans made on the MPN are satisfied. The proposed changes
in Sec. Sec. 674.50 and 682.414 would also require schools, lenders
and guarantors to provide any record, affidavit or certification
requested by the Secretary to resolve any factual dispute involving an
electronically signed promissory note assigned to the Department,
including testimony, if appropriate, to ensure admission of electronic
loan records in litigation or legal proceedings to enforce a loan. The
proposed changes would affect schools that participate in the Perkins
Loan Program and FFEL lenders and guarantors.
The proposed changes represent an increase in burden for schools
and FFEL lenders and guarantors by requiring the development of
certifications regarding the creation and maintenance of the records
associated with electronically signed MPNs. The proposed changes
represent a further increase in burden by requiring that schools and
lenders retain an original electronically signed MPN or promissory note
for three years after all the loans on the MPN are satisfied, even
after the loans are assigned to the Department. We estimate that the
proposed changes will increase burden for schools, FFEL lenders, and
guarantors by 2 hours, 322 hours, and 36 hours, respectively, based on
the total number of Perkins and FFEL loans referred for litigation for
the 2006-2007 period. Thus we estimate the total annual burden increase
to be 360 hours. The increase as a result in the proposed changes will
be reflected in OMB Control Numbers 1845-0019 and 1845-0020.
Sections 674.19, 674.50, and 682.409--Retention of Disbursement Records
Supporting MPNs
The proposed changes to Sec. Sec. 674.19 and 674.50 would require
institutions that participate in the Perkins Loan program to retain
disbursement records for each loan made to a borrower on a MPN until
all the loans on the MPN are satisfied. The proposed changes in Sec.
674.50 would also require an institution to submit disbursement
records, upon request, for each loan made to a borrower on a MPN that
has been assigned to the Department should the Department need the
records to enforce the loan. The proposed changes represent an increase
in burden for schools that participate in the Perkins Loan Program.
Although Perkins Loan institutions are currently required to retain
disbursement records for three years under 34 CFR Sec. 668.24, the
requirement to retain the disbursement records for three years after
the loan is satisfied is new. The requirement that an institution
submit disbursement records, upon request, as part of the assignment
process, is also new. We estimate that the proposed changes will
increase burden by a total of 22 hours annually. The increase in burden
as a result of the proposed changes will be reflected in OMB Control
Number 1845-0019.
The proposed changes in Sec. 682.409 would require a guaranty
agency to submit a record of the lender's disbursement of Stafford and
PLUS loan funds to the school for delivery to the borrower for each
loan assigned to the Department. (FFEL lenders are already required to
retain disbursement records under Sec. 682.414(a)(4)(ii)). The
proposed changes in Sec. 682.409 would also require a guaranty agency
to provide to the Secretary the name and location of the entity in
possession of originals of electronically signed MPNs that have been
assigned to the Department. In reviewing the proposed changes to Sec.
682.409, we reexamined the existing burden reflected in OMB Control
Number 1845-0020 and noted that no burden is currently associated with
the FFEL mandatory assignment process. The Department has determined
that the FFEL mandatory assignment process required under Sec. 682.409
represents 2,380 burden hours for each guaranty agency for a total
annual burden of 83,333 hours, which will be reflected in OMB Control
Number 1845-0020. The proposed changes, which codify existing
assignment procedures, are included in these burden hour calculations.
Sections 682.208, 682.211, 682.300, 682.302, 682.402, 682.411, and
685.215--Identity Theft
Interim final regulations published in August 2006 and final
regulations published in November 2006 provided for a discharge of a
FFEL or Direct Loan Program loan if the borrower's eligibility to
borrow was falsely certified because the borrower was a victim of the
crime of identity theft. We have decided against making changes to the
regulations as published but are proposing regulations to provide
lenders with relief from certain due diligence requirements on a loan
when identity theft is alleged.
We are proposing changes in Sec. 682.208 and Sec. 682.211 to
allow lenders to temporarily suspend credit bureau reporting and to
grant a 120-day administrative forbearance, respectively, on a loan
certified as a result of alleged identity theft while the lender
investigates the situation. We are proposing changes in Sec. Sec.
682.300 and 682.302 to specify that the payment of interest and special
allowance on eligible FFEL Program Loans must cease on the date the
lender determines the loan is legally unenforceable based on the
receipt of an identity theft report. Lastly, we are proposing changes
in Sec. 682.411 to permit a lender to take steps in accordance with
the Fair Credit Reporting Act when the lender receives notice of an
alleged identity theft. The proposed changes affect borrowers, lenders
and guarantors.
The proposed changes are burden neutral. The Department's Inspector
General has confirmed that very few Title IV student loans are falsely
certified as the result of the crime of identity theft. The burden
associated with the suspension of credit bureau reporting and the
application of a 120-day administrative forbearance by the lender while
investigating an alleged identity theft would be negligible given that
so few loans are affected and the time-period under which these
requirements are waived is so short.
Sections 682.603, 682.604, 685.301, and 685.304--Entrance Counseling
for Graduate/Professional PLUS Borrowers
The proposed changes to Sec. Sec. 682.603 and 685.301 would
require institutions, as part of the process for certifying a FFEL Loan
or originating a Direct Loan, to notify Graduate/Professional PLUS Loan
student borrowers who are eligible for Stafford Loans of their
eligibility for a Stafford Loan and of the terms and conditions of a
Stafford Loan that are more beneficial to a borrower than the terms and
conditions of a PLUS loan, and to give borrowers an opportunity to
request a Stafford Loan at that time. The proposed changes in
Sec. Sec. 682.604 and 685.304 would also establish a separate entrance
counseling requirement for Graduate/Professional PLUS student
borrowers. We estimate that the proposed changes will increase burden
on an annual basis by an additional 79,992 hours for individual
borrowers and by 2,719 hours for institutions of higher education,
which will be reflected in OMB Control Number 1845-0020.
Sections 682.401, 682.603, and 685.301--Maximum Length of a Loan Period
The proposed changes in Sec. Sec. 682.401, 682.603, and 685.301
would eliminate the maximum 12-month loan period for annual loan limits
in the FFEL and Direct Loan Programs and the 12-month period of loan
guarantee in the FFEL program to allow institutions to certify a single
loan for students in shorter non-term or nonstandard term programs. The proposed changes would also provide greater flexibility in scheduling disbursements for students who drop out and return within the permitted 180-day period. The
proposed changes affect schools and lenders.
The proposed changes represent a decrease in burden because schools
and lenders will be able to certify and disburse one loan, as opposed
to two loans, when programs are longer than 12 months. We estimate a
decrease of burden on schools and lenders by 358,375 hours for each
group for an annual total reduction of 716,750 hours. As a result of
these proposed changes, the decrease in burden will be reflected in OMB
Control Numbers 1845-0020 and 1845-0021.
Sections 674.45--Reasonable Collection Costs in the Perkins Loan Program
The proposed changes in Sec. 674.45 would limit the collection
costs an institution may assess against a Perkins Loan borrower to 30
percent of the total of the outstanding principal, interest, and late
charges on the loan collected for first collection efforts, 40 percent
for second and subsequent collection efforts, and 40 percent plus court
costs for collection efforts resulting from litigation. The changes
affect institutions that participate in the Perkins Loan Program and
collection agencies.
The changes do not represent a change in burden. Collection
practices and procedures would not change; only the amount assessed
against a defaulted borrower would change. Therefore, there is no
additional burden associated with this provision.
Sections 674.8 and 674.50--Mandatory Assignment of Defaulted Perkins
Loans
The proposed changes to Sec. Sec. 674.8 and 674.50 would provide
the Department with the authority to require assignment of a Perkins
Loan if the outstanding principal balance on the loan is $100 or more,
the loan has been in default for seven or more years, and a payment has
not been received on the loan in the past 12 months. Institutions that
participate in the Perkins Loan Program (and their servicers) would be
affected by these changes.
The proposed change allowing the Department to require the
assignment of certain defaulted Perkins Loans represents an increase in
burden because institutions would be required to prepare and submit for
assignment to the Department loans that might not otherwise have been
assigned. We estimate that the proposed changes will increase burden on
schools (and their servicers) annually by a total of 95,393 hours. The
increased burden associated with these proposed changes will be
reflected in OMB Control Number 1845-0019.
Sections 682.200 and 682.602--Eligible Lender Trustee
The proposed changes implement the HEA Extension Act by amending
the definition of lender to prohibit a FFEL lender from entering into
an eligible lender trustee (ELT) relationship with a school or a
school-affiliated organization as of September 30, 2006, but allowing
current relationships to continue. The proposed changes also add a new
definition of school-affiliated organization, and add a new Sec.
682.602 to apply most of the same restrictions that are imposed on FFEL
school lenders by the HERA to school and school-affiliated ELT
arrangements as of January 1, 2007. The entities affected by these
proposed changes are lenders, ELTs, schools and school-affiliated
organizations.
The proposed changes impose limits and prohibit certain
arrangements between schools and school-affiliated organizations and
eligible lender trustees. The affected entities under the proposed
regulations are schools and school-affiliated organizations. We
estimate that burden will increase by 57,000 hours and 86,000 hours for
schools and school-affiliated organizations, respectively, and we will
include this burden in OMB control number 1845-0020.
Sections 682.212 and 682.603--Preferred Lender
The proposed regulations in Sec. 682.212 would require that any
school's list of recommended lenders contain at least three
unaffiliated lenders to provide borrower choice. The Department expects
a school to collect and retain a statement certifying to this fact,
upon which the school can rely, from each of the lenders they propose
to include on their list. The proposed regulations also require the
disclosure of supporting information and data with the list as the most
efficient and effective method to ensure that borrowers make informed
consumer decisions. The provision of comparative interest rate and
benefit information, in addition to describing the method and criteria
used to select lenders for the list, will involve additional efforts
for schools in preparing and providing a preferred lender list. We
estimate that burden will increase by 141,625 hours for institutions of
higher education. The increased burden associated with the proposed
changes in Sec. 682.212 will be reflected under a new OMB Control
Number upon publication of the NPRM.
To assist schools with this effort, the Department is developing a
model format that a school may use to present this information. The
Department will be sharing a draft of the model format with
representatives of school, lending and guaranty agency communities as
well as students and parents to solicit their thoughts and suggestions.
The draft model format will then be revised and submitted for clearance
to OMB as required by the Paperwork Reduction Act of 1995. This
clearance process will afford additional opportunities for public
comment on the draft model format. The Department is not requesting
comments on this form at this point, but will publish a separate notice
in the Federal Register, with a 60-day request for public comment, to
do so and will submit the form for OMB approval when these proposed
regulations are published in final form.
The proposed changes in Sec. 682.603 provide that a school must
certify Stafford and PLUS loans expeditiously regardless of the lender
chosen by the borrower, that a school cannot assign a lender to a
first-time borrower, and that a school may not engage in practices that
deny a borrower access to FFEL loans based on the borrower's selection
of a lender or guaranty agency. These proposed changes do not change
the certification process or the data collection requirements
associated with the certification process.
Sections 682.200, 682.209, 682.401, and 682.406--Prohibited Inducements
The proposed changes to Sec. Sec. 682.200 and 682.401 provide
lists of prohibited activities in which lenders and guaranty agencies
may not engage to secure loan applications or loan volume in the FFEL
Program. The proposed regulations would also include lists of
permissible activities in which lenders and guaranty agencies may
engage as part of their roles as administrators of the FFEL program.
The entities affected by these changes are lenders and guaranty
agencies. The inclusion of a detailed list of prohibited and
permissible activities in Sec. Sec. 682.200 and 682.401 largely
codifies long-standing Department guidance and does not represent an
increase in burden.
The proposed changes in Sec. 682.209 would allow a borrower to
assert any defense available under applicable State law against
repayment of the loan if the lender making the loan offered or provided
an improper inducement to the borrower's school. The entities affected
by the proposed changes are borrowers, institutions, lenders, and
guaranty agencies. The proposed change does not represent a change in
burden. This borrower defense against repayment is currently available
to borrowers of FFEL Loans who attend a proprietary school. The
proposed change extending this entitlement to FFEL Loan borrowers who
attend other types of schools is a codification of the rights extended
to such borrowers under State laws. Therefore, there is no burden
associated with this change.
The proposed changes in Sec. 682.406 provide that a guaranty
agency may not make a claim payment on a loan if the lender offered or
provided an improper inducement to the school, a borrower, or any other
individual or entity. The entities affected by the proposed changes are
lenders and guaranty agencies. The proposed change does not represent a
change in burden. The forms and procedures associated with the claim
filing process would remain unchanged.
Consistent with the discussion above, the following chart describes
the sections of the proposed regulations involving information
collections, the information being collected, and the collections the
Department will submit to the Office of Management and Budget for
approval and public comment under the Paperwork Reduction Act.
*NOTE: SEE PDF FILE FOR CHART
If you want to comment on the proposed information collection
requirements, please send your comments to the Office of Information
and Regulatory Affairs, OMB, Attention: Desk Officer for the U.S.
Department of Education. Send these comments by e-mail to OIRA_DOCKET@omb.eop.gov or by fax to (202) 395-6974. Commenters need only
submit comments via one submission medium. You may also send a copy of
these comments to the Department contact named in the ADDRESSES section
of this preamble.
We consider your comments on these proposed collections of
information in--
Deciding whether the proposed collections are necessary
for the proper performance of our functions, including whether the
information will have practical use;
Evaluating the accuracy of our estimate of the burden of
the proposed collections, including the validity of our methodology and
assumptions;
Enhancing the quality, usefulness, and clarity of the
information we collect; and
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
These programs are 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.
Electronic Access to This Document
You may view this document, as well as all other Department of
Education documents published in the Federal Register, in text or Adobe
Portable Document Format (PDF) on the Internet at the following site:
http://www.ed.gov/news/fedregister.
To use PDF you must have Adobe Acrobat Reader, which is available
free at this site. If you have questions about using PDF, call the U.S.
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in
the Washington, DC, area at (202) 512-1530.
You may also view this document in PDF format at the following
site: http://www.ifap.ed.gov.
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.gpoaccess.gov/nara/index.html.
(Catalog of Federal Domestic Assistance Number: 84.032 Federal
Family Education Loan Program; 84.037 Federal Perkins Loan Program;
and 84.268 William D. Ford Federal Direct Loan Program)
List of Subjects in 34 CFR Parts 674, 682 and 685
Administrative practice and procedure, Colleges and universities,
Education, Loan programs--education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
Dated: May 31, 2007.
Margaret Spellings, Secretary of Education.
For the reasons discussed in the preamble, the Secretary proposes
to amend parts 674, 682, and 685 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-1087hh and 20 U.S.C. 421-429, unless
otherwise noted.
2. Section 674.8 is amended by:
A. In paragraph (d)(1), removing the words ``; or'' and adding in
their place the punctuation ``.''.
B. Adding a new paragraph (d)(3).
The addition reads as follows:
Sec. 674.8 Program participation agreement.
* * * * *
(d) * * *
(3) The institution shall, at the request of the Secretary, assign
its rights to a loan to the United States without recompense if--
(i) The amount of outstanding principal is $100.00 or more;
(ii) The loan has been in default, as defined in Sec. 674.5(c)(1),
for seven or more years; and
(iii) A payment has not been received on the loan in the preceding
twelve months, unless payments were not due because the loan was in a
period of authorized forbearance or deferment.
* * * * *
3. Section 674.16 is amended by adding new paragraph (j) to read as
follows:
Sec. 674.16 Making and disbursing loans.
* * * * *
(j) The institution must report enrollment and loan status
information, or any Title IV loan-related information required by the
Secretary, to the Secretary by the deadline date established by the
Secretary.
* * * * *
4. Section 674.19 is amended by:
A. Redesignating paragraphs (e)(2)(i) and (ii) as paragraphs
(e)(2)(iii) and (iv).
B. Adding new paragraphs (e)(2)(i) and (ii).
C. Revising paragraph (e)(3).
D. In paragraph (e)(4)(i), removing the words ``Master Promissory
Note (MPN)'' and adding, in their place, the word ``MPN''.
E. Revising paragraph (e)(4)(ii).
The addition and revisions read as follows:
Sec. 674.19 Fiscal procedures and records.
* * * * *
(e) * * *
(2) * * *
(i) An institution shall retain a record of disbursements for each
loan made to a borrower on a Master Promissory Note (MPN). This record
must show the date and amount of each disbursement.
(ii) For any loan signed electronically, an institution must
maintain an affidavit or certification regarding the creation and
maintenance of the institution's electronic MPN or promissory note,
including the institution's authentication and signature process in
accordance with the requirements of Sec. 674.50(c)(12).
* * * * *
(3) Period of retention of disbursement records, electronic
authentication and signature records, and repayment records. (i) An
institution shall retain disbursement and electronic authentication and
signature records for each loan made using an MPN for at least three
years from the date the loan is canceled, repaid, or otherwise
satisfied.
(ii) An institution shall retain repayment records, including
cancellation and deferment requests for at least three years from the
date on which a loan is assigned to the Secretary, canceled or repaid.
(4) * * *
(ii) If a promissory note was signed electronically, the
institution must store it electronically and the promissory note must
be retrievable in a coherent format. An original electronically signed
MPN must be retained by the institution for 3 years after all the loans
made on the MPN are satisfied.
* * * * *
5. Section 674.38 is amended by:
A. In paragraph (a)(1), removing the words ``(a)(2)'' and adding,
in their place, the words ``(a)(5)''.
B. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(5)
and (a)(7), respectively.
C. Adding new paragraphs (a)(2), (a)(3), (a)(4), and (a)(6).
The additions read as follows:
Sec. 674.38 Deferment procedures.
(a) * * *
(2) After receiving a borrower's written or verbal request, an
institution may grant a deferment under Sec. Sec. 674.34(b)(1)(ii),
674.34(b)(1)(iii), 674.34(b)(1)(iv), 674.34(d), 674.34(e), and
674.34(h) if the institution is able to confirm that the borrower has
received a deferment on another Perkins Loan, a FFEL Loan, or a Direct
Loan for the same reason and the same time period. The institution may
grant the deferment based on information from the other Perkins Loan
holder, the FFEL Loan holder or the Secretary or from an authoritative
electronic database maintained or authorized by the Secretary that
supports eligibility for the deferment for the same reason and the same
time period.
(3) An institution may rely in good faith on the information it
receives under paragraph (a)(2) of this section when determining a
borrower's eligibility for a deferment unless the institution, as of
the date of the determination, has information indicating that the
borrower does not qualify for the deferment. An institution must
resolve any discrepant information before granting a deferment under
paragraph (a)(2) of this section.
(4) An institution that grants a deferment under paragraph (a)(2)
of this section must notify the borrower that the deferment has been
granted and that the borrower has the option to cancel
the deferment and continue to make payments on the loan.
* * * * *
(6) In the case of a military service deferment under Sec. Sec.
674.34(h) and 674.35(c)(1), a borrower's representative may request the
deferment on behalf of the borrower. An institution that grants a
military service deferment based on a request from a borrower's
representative must notify the borrower that the deferment has been
granted and that the borrower has the option to cancel the deferment
and continue to make payments on the loan. The institution may also
notify the borrower's representative of the outcome of the deferment
request.
* * * * *
6. Section 674.45 is amended by:
A. Redesignating paragraph (e)(3) as paragraph (e)(4).
B. Adding new paragraph (e)(3).
The addition reads as follows:
Sec. 674.45 Collection procedures.
* * * * *
(e) * * *
(3) For loans placed with a collection firm on or after July 1,
2008, reasonable collection costs charged to the borrower may not
exceed--
(i) For first collection efforts, 30 percent of the amount of
principal, interest, and late charges collected;
(ii) For second and subsequent collection efforts, 40 percent of
the amount of principal, interest, and late charges collected; and
(iii) For collection efforts resulting from litigation, 40 percent
of the amount of principal, interest, and late charges collected plus
court costs.
* * * * *
7. Section 674.50 is amended by:
A. Adding new paragraphs (c)(11) and (12).
B. In paragraph (e)(1), adding the words ``, unless the loan is
submitted for assignment under paragraph 674.8(d)(3) of this section''
immediately after the word ``borrower''.
The additions read as follows:
Sec. 674.50 Assignment of defaulted loans to the United States.
* * * * *
(c) * * *
(11) A record of disbursements for each loan made to a borrower on
an MPN that shows the date and amount of each disbursement.
(12)(i) Upon the Secretary's request with respect to a particular
loan or loans assigned to the Secretary and evidenced by an
electronically signed promissory note, the institution that created the
original electronically signed promissory note must cooperate with the
Secretary in all activities necessary to enforce the loan or loans.
Such institution must provide--
(A) An affidavit or certification regarding the creation and
maintenance of the electronic records of the loan or loans in a form
appropriate to ensure admissibility of the loan records in a legal
proceeding. This certification may be executed in a single record for
multiple loans provided that this record is reliably associated with
the specific loans to which it pertains; and
(B) Testimony by an authorized official or employee of the
institution, if necessary, to ensure admission of the electronic
records of the loan or loans in the litigation or legal proceeding to
enforce the loan or loans.
(ii) The certification in paragraph (c)(12)(i)(A) of this section
must include, if requested by the Secretary--
(A) A description of the steps followed by a borrower to execute
the promissory note (such as a flowchart);
(B) A copy of each screen as it would have appeared to the borrower
of the loan or loans the Secretary is enforcing when that borrower
signed the note electronically;
(C) A description of the field edits and other security measures
used to ensure integrity of the data submitted to the originator
electronically;
(D) A description of how the executed promissory note has been
preserved to ensure that it has not been altered after it was executed;
(E) Documentation supporting the institution's authentication and
electronic signature process; and
(F) All other documentary and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.
(iii) The Secretary may request a record, affidavit, certification
or evidence under paragraph (a)(6) of this section as needed to resolve
any factual dispute involving a loan that has been assigned to the
Secretary, including, but not limited to, a factual dispute raised in
connection with litigation or any other legal proceeding, or as needed
in connection with loans assigned to the Secretary that are included in
a Title IV program audit sample, or for other similar purposes. The
institution must respond to any request from the Secretary within 10
business days.
(iv) As long as any loan made to a borrower under an MPN created by
an institution is not satisfied, the institution is responsible for
ensuring that all parties entitled to access have full and complete
access to the electronic loan record.
* * * * *
8. Section 674.56 is amended by revising paragraph (b)(1) to read
as follows:
Sec. 674.56 Employment cancellation--Federal Perkins loan, NDSL, and
Defense loan.
* * * * *
(b) * * *
(1) An institution must cancel up to 100 percent of the outstanding
balance on a borrower's Federal Perkins loan or NDSL made on or after
July 23, 1992, for service as a full-time employee in a public or
private nonprofit child or family service agency who is providing
services directly and exclusively to high-risk children who are from
low-income communities and the families of these children, or who is
supervising the provision of services to high-risk children who are
from low-income communities and the families of these children. To
qualify for a child or family service cancellation, a non-supervisory
employee of a child or family service agency must be providing services
only to high-risk children from low-income communities and the families
of these children. The employee must work directly with the high-risk
children from low-income communities, and the services provided to the
children's families must be secondary to the services provided to the
children.
* * * * *
9. Section 674.61 is amended by:
A. Revising the second sentence in paragraph (a).
B. Revising paragraphs (b), (c), and (d).
The revisions read as follows:
Sec. 674.61 Discharge for death or disability.
(a) * * * The institution must discharge the loan on the basis of
an original or certified copy of the death certificate, or an accurate
and complete photocopy of the original or certified copy of the death
certificate. * * *
(b) Total and permanent disability--(1) General. A borrower's
Defense, NDSL, or Perkins loan is discharged if the borrower becomes
totally and permanently disabled, as defined in Sec. 674.51(s), and
satisfies the additional eligibility requirements contained in this
section.
(2) Discharge application process. (i) To qualify for discharge of
a Defense, NDSL, or Perkins loan based on a total and permanent
disability, a borrower must submit a discharge application approved by
the Secretary to the institution that holds the loan. The application
must contain a certification by a physician, who is a doctor of
medicine or osteopathy legally authorized to practice in a State, that
the borrower is totally and permanently disabled as defined in Sec.
674.51(s). The borrower must submit the application to the institution
within 90 days of the date the physician certifies the application.
(ii) If, after reviewing the borrower's application, the
institution determines that the application is complete and supports
the conclusion that the borrower is totally and permanently disabled,
the institution must suspend collection activities and assign the loan
to the Secretary.
(iii) At the time the loan is assigned to the Secretary, the
institution must notify the borrower that--
(A) The loan has been assigned to the Secretary for determination
of eligibility for a total and permanent disability discharge and that
no payments are due on the loan; and
(B) In order to remain eligible for the discharge from the date the
physician completes and certifies the borrower's total and permanent
disability on the application until the date the Secretary makes an
initial eligibility determination--
(1) The borrower cannot work and earn money or receive any new
title IV loans; and
(2) The borrower must, on any loan received prior to the date the
physician completed and certified the application, ensure that the full
amount of any title IV loan disbursement made to the borrower on or
after the date the physician completed and certified the application is
returned to the holder within 120 days of the disbursement date.
(3) Secretary's initial eligibility determination. (i) The borrower
must continue to meet the conditions in paragraph (b)(2)(iii)(B) of
this section from the date the physician completes and certifies the
borrower's total and permanent disability on the application until the
date the Secretary makes an initial determination of the borrower's
eligibility in accordance with paragraph (b)(3)(ii) of this section.
(ii) If the Secretary determines that the certification provided by
the borrower supports the conclusion that the borrower meets the
criteria for a total and permanent disability discharge, the borrower
is considered totally and permanently disabled as of the date the
physician completes and certifies the borrower's application.
(iii) Upon making an initial determination that the borrower is
totally and permanently disabled as defined in Sec. 674.51(s), the
Secretary notifies the borrower that the loan will be in a conditional
discharge status for a period of up to three years, beginning on the
date the Secretary makes the initial determination that the borrower is
totally and permanently disabled. The notification to the borrower
identifies the conditions of the conditional discharge period specified
in paragraph (b)(4)(i) of this section.
(iv) If the Secretary determines that the certification provided by
the borrower does not support the conclusion that the borrower meets
the criteria for a total and permanent disability discharge, the
Secretary notifies the borrower that the application for a disability
discharge has been denied, and that the loan is due and payable under
the terms of the promissory note.
(4) Eligibility requirements for a total and permanent disability
discharge. (i) A borrower meets the eligibility criteria for a
discharge of a loan based on a total and permanent disability if,
during and at the end of the three-year conditional discharge period--
(A) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) The borrower does not receive a new loan under the Perkins,
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation
Loan that does not include any loans that are in a conditional
discharge status; and
(C) The borrower ensures, on any loan received prior to the date
the physician completed and certified the application, that the full
amount of any title IV loan disbursement made on or after the date of
the Secretary's initial eligibility determination is returned to the
holder within 120 days of the disbursement date.
(ii) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(A) Is not required to make any payments on the loan;
(B) Is not considered past due or in default on the loan, unless
the loan was past due or in default at the time the conditional
discharge was granted;
(C) Must promptly notify the Secretary of any changes in address or
phone number;
(D) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(b)(4)(i)(A) of this section; and
(E) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
a discharge under this section.
(iii) If, at any time during or at the end of the three-year
conditional discharge period, the Secretary determines that the
borrower does not continue to meet the eligibility requirements for a
total and permanent disability discharge, the Secretary ends the
conditional discharge period and resumes collection activity on the
loan. The Secretary does not require the borrower to pay any interest
that accrued on the loan from the date of the Secretary's initial
eligibility determination described in paragraph (b)(3) of this section
through the end of the conditional discharge period.
(5) Payments received after the physician's certification of total
and permanent disability. (i) If, after the date the physician
completes and certifies the borrower's loan discharge application, the
institution receives any payments from or on behalf of the borrower on
or attributable to a loan that was assigned to the Secretary for
determination of eligibility for a total and permanent disability
discharge, the institution must forward those payments to the Secretary
for crediting to the borrower's account.
(ii) At the same time that the institution forwards the payment, it
must notify the borrower that there is no obligation to make payments
on the loan while it is conditionally discharged prior to a final
determination of eligibility for a total and permanent disability
discharge, unless the Secretary directs the borrower otherwise.
(iii) When the Secretary makes a final determination to discharge
the loan, the Secretary returns any payments received on the loan after
the date the physician completed and certified the borrower's loan
discharge application.
(c) No Federal reimbursement. No Federal reimbursement is made to
an institution for cancellation of loans due to death or disability.
(d) Retroactive. Discharge for death applies retroactively to all
Defense, NDSL, and Perkins loans.
* * * * *
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
10. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2 unless otherwise noted.
11. Section 682.200(b) is amended by:
A. Amending the definition of Lender by revising paragraph (5) and
adding paragraph (7).
B. Adding a definition of School-affiliated organization.
The revisions and additions read as follows:
[[Page 32438]]
Sec. 682.200 Definitions.
(b) * * *
Lender. * * *
(5)(i) The term eligible lender does not include any lender that
the Secretary determines, after notice and opportunity for a hearing
before a designated Department official, has, directly or through an
agent or contractor--
(A) Except as provided in paragraph (5)(ii) of this definition,
offered, directly or indirectly, points, premiums, payments, or other
inducements to any school or other party to secure applications for
FFEL loans or to secure FFEL loan volume. This includes but is not
limited to--
(1) Payments or offerings of other benefits, including prizes or
additional financial aid funds, to a prospective borrower in exchange
for applying for or accepting a FFEL loan from the lender;
(2) Payments or other benefits to a school, any school-affiliated
organization or to any individual in exchange for FFEL loan
applications, or application referrals, or a specified volume or dollar
amount of loans made, or placement on a school's list of recommended or
suggested lenders;
(3) Payments or other benefits provided to a student at a school
who acts as the lender's representative to secure FFEL loan
applications from individual prospective borrowers;
(4) Payments or other benefits to a loan solicitor or sales
representative of a lender who visits schools to solicit individual
prospective borrowers to apply for FFEL loans from the lender;
(5) Payment of referral or processing fees to another lender or any
other party;
(6) Payment of conference or training registration, transportation,
and lodging costs for an employee of a school or school-affiliated
organization;
(7) Payment of entertainment expenses, including expenses for
private hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation, and other
gratuities related to lender-sponsored activities for employees of a
school or a school-affiliated organization;
(8) Undertaking philanthropic activities, including providing
scholarships, grants, restricted gifts, or financial contributions in
exchange for FFEL loan applications or application referrals, or a
specified volume or dollar amount of FFEL loans made, or placement on a
school's list of recommended or suggested lenders; and
(9) Staffing services to a school as a third-party servicer or
otherwise on more than a short-term, emergency basis, and which is non-
recurring, to assist a school with financial aid-related functions.
(B) Conducted unsolicited mailings to a student or a student's
parents of FFEL loan application forms, except to a student who
previously has received a FFEL loan from the lender or to a student's
parent who previously has received a FFEL loan from the lender;
(C) Offered, directly or indirectly, a FFEL loan to a prospective
borrower to induce the purchase of a policy of insurance or other
product or service by the borrower or other person; or
(D) Engaged in fraudulent or misleading advertising with respect to
its FFEL loan activities.
(ii) Notwithstanding paragraph (5)(i) of this definition, a lender,
in carrying out its role in the FFEL program and in attempting to
provide better service, may provide--
(A) Assistance to a school that is comparable to the kinds of
assistance provided to a school by the Secretary under the Direct Loan
program, as identified by the Secretary in a public announcement, such
as a notice in the Federal Register;
(B) Support of and participation in a school's or a guaranty
agency's student aid and financial literacy-related outreach
activities, as long as the name of the entity that developed and paid
for any materials is provided to the participants and the lender does
not promote its student loan or other products;
(C) Meals, refreshments, and receptions that are reasonable in cost
and scheduled in conjunction with training, meeting, or conference
events if those meals, refreshments, or receptions are open to all
training, meeting, or conference attendees;
(D) Toll-free telephone numbers for use by schools or others to
obtain information about FFEL loans and free data transmission service
for use by schools to electronically submit applicant loan processing
information or student status confirmation data;
(E) A reduced origination fee in accordance with Sec. 682.202(c);
(F) A reduced interest rate as provided under the Act;
(G) Payment of Federal default fees in accordance with the Act;
(H) Purchase of a loan made by another lender at a premium;
(I) Other benefits to a borrower under a repayment incentive
program that requires, at a minimum, one or more scheduled payments to
receive or retain the benefit; and
(J) Items of nominal value to schools, school-affiliated
organizations, and borrowers that are offered as a form of generalized
marketing or advertising, or to create good will.
(iii) For the purposes of paragraph (5) of this definition--
(A) The term ``school-affiliated organization'' is defined in
section 682.200.
(B) The term ``applications'' includes the Free Application for
Federal Student Aid (FAFSA), FFEL loan master promissory notes, and
FFEL consolidation loan application and promissory notes.
(C) The term ``other benefits'' includes, but is not limited to,
preferential rates for or access to the lender's other financial
products, computer hardware or non-loan processing or non-financial
aid-related computer software at below market rental or purchase cost,
and printing and distribution of college catalogs and other materials
at reduced or no cost.
* * * * *
(7) An eligible lender may not make or hold a loan as trustee for a
school, or for a school-affiliated organization as defined in this
section, unless on or before September 30, 2006--
(i) The eligible lender was serving as trustee for the school or
school-affiliated organization under a contract entered into and
continuing in effect as of that date; and
(ii) The eligible lender held at least one loan in trust on behalf
of the school or school-affiliated organization on that date.
(8) Effective January 1, 2007, and for loans first disbursed on or
after that date under a trustee arrangement, an eligible lender
operating as a trustee under a contract entered into on or before
September 30, 2006, and which continues in effect with a school or a
school-affiliated organization, must comply with the requirements of
Sec. 682.601(a)(3), (a)(5), and (a)(7). * * *
School-affiliated organization. A school-affiliated organization is
any organization that is directly or indirectly related to a school and
includes, but is not limited to, alumni organizations, foundations,
athletic organizations, and social, academic, and professional
organizations.
* * * * *
12. Section 682.202 is amended by:
A. In paragraph (b)(2) introductory text, adding the words, ``and
(b)(5)'' immediately after the words ``(b)(4)''.
B. Redesignating paragraph (b)(5) as paragraph (b)(6).
C. Adding a new paragraph (b)(5).
The addition reads as follows:
Sec. 682.202 Permissible charges by lenders to borrowers.
* * * * *
[[Page 32439]]
(b) * * *
(5) For Consolidation loans, the lender may capitalize interest as
provided in paragraphs (b)(2) and (b)(3) of this section, except that
the lender may capitalize the unpaid interest for a period of
authorized in-school deferment only at the expiration of the deferment.
* * * * *
13. Section 682.208 is amended by:
A. Revising paragraph (a).
B. Adding new paragraphs (b)(3) and (b)(4).
C. Adding a new paragraph (i).
The revisions and addition read as follows:
Sec. 682.208 Due diligence in servicing a loan.
(a) The loan servicing process includes reporting to national
credit bureaus, responding to borrower inquiries, establishing the
terms of repayment, and reporting a borrower's enrollment and loan
status information.
* * * * *
(b) * * *
(3) Upon receipt of a valid identity theft report as defined in
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau that information furnished by the
lender is a result of an alleged identity theft as defined in Sec.
682.402(e)(14), an eligible lender shall suspend credit bureau
reporting for a period not to exceed 120 days while the lender
determines the enforceability of a loan.
(i) If the lender determines that a loan does not qualify for a
discharge under Sec. 682.402(e)(1)(i)(C), but is nonetheless
unenforceable, the lender must--
(A) Notify the credit bureau of its determination; and
(B) Comply with Sec. Sec. 682.300(b)(2)(ix) and
682.302(d)(1)(viii).
(ii) [Reserved]
(4) If, within 3 years of the lender's receipt of an identity theft
report, the lender receives from the borrower evidence specified in
Sec. 682.402(e)(3)(v), the lender may submit a claim and receive
interest subsidy and special allowance payments that would have accrued
on the loan.
* * * * *
(i) A lender shall report enrollment and loan status information,
or any Title IV loan-related data required by the Secretary, to the
guaranty agency or to the Secretary, as applicable, by the deadline
date established by the Secretary.
* * * * *
14. Section 682.209 is amended by adding new paragraph (k) to read
as follows:
Sec. 682.209 Repayment of a loan.
* * * * *
(k) Any lender holding a loan is subject to all claims and defenses
that the borrower could assert against the school with respect to that
loan if--
(1) The loan was made by the school or a school-affiliated
organization;
(2) The lender who made the loan provided an improper inducement,
as defined in paragraph (5)(i) of the definition of Lender in Sec.
682.200(b), to the school or any other party in connection with the
making of the loan;
(3) The school refers borrowers to the lender; or
(4) The school is affiliated with the lender by common control,
contract, or business arrangement.
* * * * *
15. Section 682.210 is amended by:
A. In paragraph (i)(1), adding the words, ``or a borrower's
representative'' immediately following the words ``a borrower''.
B. Adding new paragraph (i)(5).
C. In paragraph (s)(1), by redesignating the text following the
heading as paragraph designation (s)(1)(i).
D. Adding new paragraphs (s)(1)(ii), (s)(1)(iii), (s)(1)(iv),
(s)(1)(v), (t)(7), and (t)(8).
The additions read as follows:
Sec. 682.210 Deferment.
* * * * *
(i) * * *
(5) A lender that grants a military service deferment based on a
request from a borrower's representative must notify the borrower that
the deferment has been granted and that the borrower has the option to
cancel the deferment and continue to make payments on the loan. The
lender may also notify the borrower's representative of the outcome of
the deferment request.
* * * * *
(s) * * *
(1) * * *
(ii) As a condition for receiving a deferment, except for purposes
of paragraph (s)(2) of this section, the borrower must request the
deferment and provide the lender with all information and documents
required to establish eligibility for the deferment.
(iii) After receiving a borrower's written or verbal request, a
lender may grant a deferment under paragraphs (s)(3) through (s)(6) of
this section if the lender is able to confirm that the borrower has
received a deferment on another FFEL loan or on a Direct Loan for the
same reason and the same time period. The lender may grant the
deferment based on information from the other FFEL loan holder or the
Secretary or from an authoritative electronic database maintained or
authorized by the Secretary that supports eligibility for the deferment
for the same reason and the same time period.
(iv) A lender may rely in good faith on the information it receives
under paragraph (s)(1)(iii) of this section when determining a
borrower's eligibility for a deferment unless the lender, as of the
date of the determination, has information indicating that the borrower
does not qualify for the deferment. A lender must resolve any
discrepant information before granting a deferment under paragraph
(s)(1)(iii) of this section.
(v) A lender that grants a deferment under paragraph (s)(1)(iii) of
this section must notify the borrower that the deferment has been
granted and that the borrower has the option to pay interest that
accrues on an unsubsidized FFEL loan or to cancel the deferment and
continue to make payments on the loan.
* * * * *
(t) * * *
(7) To receive a military service deferment, the borrower, or the
borrower's representative, must request the deferment and provide the
lender with all information and documents required to establish
eligibility for the deferment, except that a lender may grant a
borrower a military service deferment under the procedures specified in
paragraphs (s)(1)(iii) through (s)(1)(v) of this section.
(8) A lender that grants a military service deferment based on a
request from a borrower's representative must notify the borrower that
the deferment has been granted and that the borrower has the option to
cancel the deferment and continue to make payments on the loan. The
lender may also notify the borrower's representative of the outcome of
the deferment request.
* * * * *
16. Section 682.211 is amended by:
A. Redesignating paragraphs (f)(6), (f)(7), (f)(8), (f)(9),
(f)(10), (f)(11) as paragraphs (f)(7), (f)(8), (f)(9), (f)(10),
(f)(11), and (f)(12), respectively.
B. Adding new paragraph (f)(6).
The addition reads as follows:
Sec. 682.211 Forbearance.
* * * * *
(f)(1) * * *
(6) Upon receipt of a valid identity theft report as defined in
section 603(q)(4) of the Fair Credit Reporting Act (15 U.S.C. 1681a) or
notification from a credit bureau that information furnished by the
lender is a result of an alleged identity theft as defined in Sec. 682.402(e)(14), for a period
not to exceed 120 days necessary for the lender to determine the
enforceability of a loan. If the lender determines that the loan does
not qualify for discharge under Sec. 682.402(e)(1)(i)(C), but is
nonetheless unenforceable, the lender must comply with Sec. Sec.
682.300(b)(2)(ix) and 682.302(d)(1)(viii).
* * * * *
17. Section 682.212 is amended by:
A. In paragraph (c) introductory text, removing the words ``the
Student Loan Marketing Association,''.
B. In paragraph (d), removing the words ``the Student Loan
Marketing Association or''.
C. Adding new paragraph (h).
The addition reads as follows:
Sec. 682.212 Prohibited transactions.
* * * * *
(h)(1) A school may, at its option, make available a list of
recommended or suggested lenders, in print or any other medium or form,
for use by the school's students or their parents, provided such list--
(i) Is not used to deny or otherwise impede a borrower's choice of
lender;
(ii) Does not contain fewer than three lenders that are not
affiliated with each other and that will make loans to borrowers or
students attending the school; and
(iii) Does not include lenders that have offered, or have been
solicited by the school to offer, financial or other benefits to the
school in exchange for inclusion on the list or any promise that a
certain number of loan applications will be sent to the lender by the
school or its students.
(2) A school that provides or makes available a list of recommended
or suggested lenders must--
(i) Disclose to prospective borrowers, as part of the list, the
method and criteria used by the school in selecting any lender that it
recommends or suggests;
(ii) Provide comparative information to prospective borrowers about
interest rates and other benefits offered by the lenders;
(iii) Ensure that any benefits offered to borrowers by the lenders
are the same for all borrowers at the school;
(iv) Include a prominent statement in any information related to
its list of lenders, advising prospective borrowers that they are not
required to use one of the school's recommended or suggested lenders;
(v) For first-time borrowers, not assign, through award packaging
or other methods, a borrower's loan to a particular lender; and
(vi) Not cause unnecessary certification delays for borrowers who
use a lender that has not been recommended or suggested by the school.
(3) For the purposes of paragraph (h) of this section, a lender is
affiliated with another lender if--
(i) The lenders are under the ownership or control of the same
entity or individuals;
(ii) The lenders are wholly or partly owned subsidiaries of the
same parent company;
(iii) The directors, trustees, or general partners (or individuals
exercising similar functions) of one of the lenders constitute a
majority of the persons holding similar positions with the other
lender; or
(iv) One of the lenders is making loans on its own behalf and is
also holding loans as a trustee lender for another entity.
* * * * *
18. Section 682.300 is amended by:
A. In paragraph (b)(2)(vii), removing the word ``or'' at the end of
the paragraph.
B. In paragraph (b)(2)(viii), removing the punctuation ``.'' at the
end of the paragraph and adding, in its place, ``; or''.
C. Adding new paragraph (b)(2)(ix).
The addition reads as follows:
Sec. 682.300 Payment of interest benefits on Stafford and
Consolidation loans.
* * * * *
(b) * * *
(2) * * *
(ix) The date on which the lender determines the loan is legally
unenforceable based on the receipt of an identity theft report under
Sec. 682.208(b)(3).
* * * * *
19. Section 682.302 is amended by--
A. In paragraph (d)(1)(vi)(B), removing the word ``or'' at the end
of the paragraph.
B. In paragraph (d)(1)(vii), by removing the punctuation ``.'' and
adding, in its place, ``; or''.
C. Adding new paragraph (d)(1)(viii).
The addition reads as follows:
Sec. 682.302 Payment of special allowance on FFEL loans.
* * * * *
(d) * * *
(1) * * *
(viii) The date on which the lender determines the loan is legally
unenforceable based on the receipt of an identity theft report under
Sec. 682.208(b)(3).
* * * * *
20. Section 682.401 is amended by:
A. In paragraph (b)(2)(ii)(A), removing the punctuation ``;'' at
the end of the paragraph and adding, in its place, the words ``, as
defined in 34 CFR 668.3; or''.
B. Revising paragraph (b)(2)(ii)(B).
C. Removing paragraph (b)(2)(ii)(C).
D. In paragraph (b)(20) introductory text, removing the number
``60'' and adding, in its place, the number ``30''.
E. Revising paragraph (e).
The revisions read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(B) A period attributable to the academic year that is not less
than the period specified in paragraph (b)(2)(ii)(A) of this section,
in which the student earns the amount of credit in the student's
program of study required by the student's school as the amount
necessary for the student to advance in academic standing as normally
measured on an academic year basis (for example, from freshman to
sophomore or, in the case of schools using clock hours, completion of
at least 900 clock hours).
* * * * *
(e) Prohibited activities. (1) A guaranty agency may not, directly
or through an agent or contractor--
(i) Except as provided in paragraph (e)(2) of this section, offer
directly or indirectly from any fund or assets available to the
guaranty agency, any premium, payment, or other inducement to any
prospective borrower of a FFEL loan, or to a school or school-
affiliated organization or an employee of a school or school-affiliated
organization, to secure applications for FFEL loans. This includes, but
is not limited to--
(A) Payments or offerings of other benefits, including prizes or
additional financial aid funds, to a prospective borrower in exchange
for processing a loan using the agency's loan guarantee;
(B) Payments or other benefits, including prizes or additional
financial aid funds under any title IV or State or private program, to
a school or school-affiliated organization based on the school's or
organization's voluntary or coerced agreement to use the guaranty
agency for processing loans, or a specified volume of loans, using the
agency's loan guarantee;
(C) Payments or other benefits to a school or any school-affiliated
organization, or to any individual in exchange for FFEL loan
applications or application referrals, a specified volume or dollar
amount of FFEL loans, or the
placement of a lender that uses the agency's loan guarantee on a
school's list of recommended or suggested lenders;
(D) Payment of entertainment expenses, including expenses for
private hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation or other
gratuities related to any activity sponsored by the guaranty agency or
a lender participating in the agency's program, for school employees or
employees of school-affiliated organizations;
(E) Undertaking philanthropic activities, including providing
scholarships, grants, restricted gifts, or financial contributions in
exchange for FFEL loan applications or application referrals, a
specified volume or dollar amount of FFEL loans using the agency's loan
guarantee, or the placement of a lender that uses the agency's loan
guarantee on a school's list of recommended or suggested lenders; and
(F) Staffing services to a school as a third-party sevicer or
otherwise on more than a short-term, emergency basis, which is non-
recurring, to assist the institution with financial aid-related
functions.
(ii) Assess additional costs or deny benefits otherwise provided to
schools and lenders participating in the agency's program on the basis
of the lender's or school's failure to agree to participate in the
agency's program, or to provide a specified volume of loan applications
or loan volume to the agency's program or to place a lender that uses
the agency's loan guarantee on a school's list of recommended or
suggested lenders.
(iii) Offer, directly or indirectly, any premium, incentive
payment, or other inducement to any lender, or any person acting as an
agent, employee, or independent contractor of any lender or other
guaranty agency to administer or market FFEL loans, other than
unsubsidized Stafford loans or subsidized Stafford loans made under a
guaranty agency's lender-of-last-resort program, in an effort to secure
the guaranty agency as an insurer of FFEL loans. Examples of prohibited
inducements include, but are not limited to--
(A) Compensating lenders or their representatives for the purpose
of securing loan applications for guarantee;
(B) Performing functions normally performed by lenders without
appropriate compensation;
(C) Providing equipment or supplies to lenders at below market cost
or rental; and
(D) Offering to pay a lender that does not hold loans guaranteed by
the agency a fee for each application forwarded for the agency's
guarantee.
(iv) Mail or otherwise distribute unsolicited loan applications to
students enrolled in a secondary school or a postsecondary institution,
or to parents of those students, unless the potential borrower has
previously received loans insured by the guaranty agency.
(v) Conduct fraudulent or misleading advertising concerning loan
availability.
(2) Notwithstanding paragraphs (e)(1)(i), (ii), and (iii) of this
section, a guaranty agency is not prohibited from providing--
(i) Assistance to a school that is comparable to that provided by
the Secretary to a school under the Direct Loan Program, as identified
by the Secretary in a public announcement, such as a notice in the
Federal Register;
(ii) Default aversion activities approved by the Secretary under
section 422(h)(4)(B) of the Act;
(iii) Meals and refreshments that are reasonable in cost and
provided in connection with guaranty agency provided training of
program participants and elementary, secondary, and postsecondary
school personnel and with workshops and forums customarily used by the
agency to fulfill its responsibilities under the Act;
(iv) Meals, refreshments and receptions that are scheduled in
conjunction with training, meeting, or conference events if those
meals, refreshments, or receptions are open to all training, meeting,
or conference attendees;
(v) Travel and lodging costs that are reasonable as to cost,
location, and duration to facilitate the attendance of school staff in
training or service facility tours that they would otherwise not be
able to undertake, or to participate in the activities of an agency's
governing board, a standing official advisory committee, or in support
of other official activities of the agency;
(vi) Toll-free telephone numbers for use by schools or others to
obtain information about FFEL loans and free data transmission services
for use by schools to electronically submit applicant loan processing
information or student status confirmation data;
(vii) Payment of Federal default fees in accordance with the Act;
and
(viii) Items of nominal value to schools, school-affiliated
organizations, and borrowers that are offered as a form of generalized
marketing or advertising, or to create good will.
(3) For the purposes of this section--
(i) The term ``school-affiliated organization'' is defined in Sec.
682.200.
(ii) The term ``applications'' includes the FAFSA, FFEL loan master
promissory notes, and FFEL consolidation loan application and
promissory notes.
(iii) The terms ``other benefits'' includes, but is not limited to,
preferential rates for or access to a guaranty agency's products and
services, computer hardware or non-loan processing or non-financial aid
related computer software at below market rental or purchase cost, and
the printing and distribution of college catalogs and other non-
counseling or non-student financial aid-related materials at reduced or
not costs.
(iv) The terms premium, incentive payment, and other inducement do
not include services directly related to the enhancement of the
administration of the FFEL Program the guaranty agency generally
provides to lenders that participate in its program. However, the terms
premium, incentive payment, and inducement do apply to other activities
specifically intended to secure a lender's participation in the
agency's program.
* * * * *
21. Section 682.402 is amended by:
A. Revising the first sentence in paragraph (b)(2).
B. Revising the third sentence in paragraph (b)(3).
C. Revising paragraph (c).
D. In paragraph (e)(2)(iv), adding the words ``or inaccurate''
immediately after the word ``adverse''.
The revisions read as follows:
Sec. 682.402 Death, disability, closed school, false certification,
unpaid refunds, and bankruptcy payments.
* * * * *
(b) * * *
(2) A discharge of a loan based on the death of the borrower (or
student in the case of a PLUS loan) must be based on an original or
certified copy of the death certificate, or an accurate and complete
photocopy of the original or certified copy of the death certificate. *
* *
(3) * * * If the lender is not able to obtain an original or
certified copy of the death certificate, or an accurate and complete
photocopy of the original or certified copy of the death certificate or
other documentation acceptable to the guaranty agency, under the
provisions of paragraph (b)(2) of this section, during the period of
suspension, the lender must resume collection activity from the point
that it had been discontinued. * * *
(c)(1) Total and permanent disability. A borrower's loan is
discharged if the borrower becomes totally and permanently disabled, as defined in Sec.
682.200(b), and satisfies the additional eligibility requirements
contained in this section.
(2) Discharge application process. After being notified by the
borrower or the borrower's representative that the borrower claims to
be totally and permanently disabled, the lender promptly requests that
the borrower or the borrower's representative submit, on a form
approved by the Secretary, a certification by a physician, who is a
doctor of medicine or osteopathy legally authorized to practice in a
State, that the borrower is totally and permanently disabled as defined
in Sec. 682.200(b). The borrower must submit the application to the
lender within 90 days of the date the physician certifies the
application. If the lender and guaranty agency approve the discharge
claim, under the procedures in paragraph (c)(5) of this section, the
guaranty agency must assign the loan to the Secretary.
(3) Secretary's initial eligibility determination. (i) During the
period from the date the physician completes and certifies the
borrower's total and permanent disability on the application until the
Secretary makes an initial determination of the borrower's eligibility
in accordance with paragraph (c)(3)(ii) of this section--
(A) The borrower cannot work and earn money or receive any new
title IV loans; and
(B) The borrower must, on any loan received prior to the date the
physician completed and certified the application, ensure that the full
amount of any title IV loan disbursement made to the borrower on or
after the date the physician completed and certified the application is
returned to the holder within 120 days of the disbursement date.
(ii) If the Secretary determines that the certification provided by
the borrower supports the conclusion that the borrower meets the
criteria for a total and permanent disability discharge, as defined in
Sec. 682.200(b), the borrower is considered totally and permanently
disabled as of the date the physician completes and certifies the
borrower's application.
(iii) Upon making an initial determination that the borrower is
totally and permanently disabled as defined in Sec. 682.200(b), the
Secretary suspends collection activity and notifies the borrower that
the loan will be in a conditional discharge status for a period of up
to three years. This notification identifies the conditions of the
conditional discharge specified in paragraph (c)(4)(i) of this section.
The conditional discharge period begins on the date the Secretary makes
the initial determination that the borrower is totally and permanently
disabled, as defined in Sec. 682.200(b).
(iv) If the Secretary determines that the certification and
information provided by the borrower do not support the conclusion that
the borrower meets the criteria for a total and permanent disability
discharge in paragraph (c)(4)(i) of this section, the Secretary
notifies the borrower that the application for a disability discharge
has been denied, and that the loan is due and payable to the Secretary
under the terms of the promissory note.
(4) Eligibility requirements for total and permanent disability
discharge. (i) A borrower meets the eligibility criteria for a
discharge of a loan based on total and permanent disability if, during
and at the end of the three-year conditional discharge period--
(A) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) The borrower does not receive a new loan under the Perkins,
FFEL, or Direct Loan programs, except for a FFEL or Direct
Consolidation Loan that does not include any loans that are in a
conditional discharge status; and
(C) The borrower ensures, on any loan received prior to the date
the physician completed and certified the application, that the full
amount of any title IV loan disbursement made on or after the date of
the Secretary's initial eligibility determination is returned to the
holder within 120 days of the disbursement date.
(ii) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(A) Is not required to make any payments on the loan;
(B) Is not considered delinquent or in default on the loan, unless
the borrower was delinquent or in default at the time the conditional
discharge was granted;
(C) Must promptly notify the Secretary of any changes in address or
phone number;
(D) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(c)(4)(i)(A) of this section; and
(E) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
discharge under this section.
(iii) If the borrower satisfies the criteria for a total and
permanent disability discharge during and at the end of the conditional
discharge period, the balance of the loan is discharged at the end of
the conditional discharge period and any payments received after the
physician completed and certified the borrower's loan discharge
application are returned.
(iv) If, at any time during the three-year conditional discharge
period, the borrower does not continue to meet the eligibility criteria
for a total and permanent disability discharge, the Secretary ends the
conditional discharge period and resumes collection activity on the
loan. The Secretary does not require the borrower to pay any interest
that accrued on the loan from the date of the initial determination
described in paragraph (c)(3)(ii) of this section through the end of
the conditional discharge period.
(5) Lender and guaranty agency responsibilities. (i) After being
notified by a borrower or a borrower's representative that the borrower
claims to be totally and permanently disabled, the lender must continue
collection activities until it receives either the certification of
total and permanent disability from a physician or a letter from a
physician stating that the certification has been requested and that
additional time is needed to determine if the borrower is totally and
permanently disabled, as defined in Sec. 682.200(b). Except as
provided in paragraph (c)(5)(iii) of this section, after receiving the
physician's certification or letter the lender may not attempt to
collect from the borrower or any endorser.
(ii) The lender must submit a disability claim to the guaranty
agency if the borrower submits a certification by a physician and the
lender makes a determination that the certification supports the
conclusion that the borrower meets the criteria for a total and
permanent disability discharge, as specified in paragraph (c)(4)(i) of
this section.
(iii) If the lender determines that a borrower who claims to be
totally and permanently disabled is not totally and permanently
disabled, as defined in Sec. 682.200(b), or if the lender does not
receive the physician's certification of total and permanent disability
within 60 days of the receipt of the physician's letter requesting
additional time, as described in paragraph (c)(3) of this section, the
lender must resume collection and is deemed to have exercised
forbearance of payment of both principal and interest from the date
collection activity was suspended. The lender may capitalize, in
accordance
[[Page 32443]]
with Sec. 682.202(b), any interest accrued and not paid during that
period.
(iv) The guaranty agency must pay a claim submitted by the lender
if the guaranty agency has reviewed the application and determined that
it is complete and that it supports the conclusion that the borrower
meets the criteria for a total and permanent disability discharge, as
specified in paragraph (c)(4)(i) of this section.
(v) If the guaranty agency does not pay the disability claim, the
guaranty agency must return the claim to the lender with an explanation
of the basis for the agency's denial of the claim. Upon receipt of the
returned claim, the lender must notify the borrower that the
application for a disability discharge has been denied, provide the
basis for the denial, and inform the borrower that the lender will
resume collection on the loan. The lender is deemed to have exercised
forbearance of both principal and interest from the date collection
activity was suspended until the first payment due date. The lender may
capitalize, in accordance with Sec. 682.202(b), any interest accrued
and not paid during that period.
(vi) If the guaranty agency pays the disability claim, the lender
must notify the borrower that--
(A) The loan will be assigned to the Secretary for determination of
eligibility for a total and permanent disability discharge and that no
payments are due on the loan; and
(B) To remain eligible for the discharge from the date the
physician completes and certifies the borrower's total and permanent
disability on the application until the Secretary makes an initial
eligibility determination, the borrower--
(1) Cannot work and earn money or receive any new title IV loans;
and
(2) Must ensure that the full amount of any title IV loan
disbursement made to the borrower on or after the date the physician
completed and certified the application is returned to the holder
within 120 days of the disbursement date.
(vii) After receiving a claim payment from the guaranty agency, the
lender must forward to the guaranty agency any payments subsequently
received from or on behalf of the borrower.
(viii) The Secretary reimburses the guaranty agency for a
disability claim paid to the lender after the agency pays the claim to
the lender.
(ix) The guaranty agency must assign the loan to the Secretary
after the guaranty agency pays the disability claim.
* * * * *
22. Section 682.406 is amended by adding new paragraph (d) to read
as follows:
Sec. 682.406 Conditions for claim payments from the Federal Fund and
for reinsurance coverage.
* * * * *
(d) A guaranty agency may not make a claim payment from the Federal
Fund or receive a reinsurance payment on a loan if the lender offered
or provided an improper inducement as defined in paragraph (5)(i) of
the definition of lender in Sec. 682.200(b).
23. Section 682.409 is amended by adding new paragraphs (c)(4)(vii)
and (viii).
The additions read as follows:
Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted
loans to the Secretary.
* * * * *
(c) * * *
(4) * * *
(vii) The record of the lender's disbursement of Stafford and PLUS
loan funds to the school for delivery to the borrower.
(viii) If the MPN or promissory note was signed electronically, the
name and location of the entity in possession of the original
electronic MPN or promissory note.
* * * * *
24. Section 682.411 is amended by revising paragraph (o) as
follows:
Sec. 682.411 Lender due diligence in collecting guaranty agency
loans.
* * * * *
(o) Preemption. The provisions of this section--
(1) Preempt any State law, including State statutes, regulations,
or rules, that would conflict with or hinder satisfaction of the
requirements or frustrate the purposes of this section; and
(2) Do not preempt provisions of the Fair Credit Reporting Act that
provide relief to a borrower while the lender determines the legal
enforceability of a loan when the lender receives a valid identity
theft report or notification from a credit bureau that information
furnished is a result of an alleged identity theft as defined in Sec.
682.402(e)(14).
* * * * *
25. Section 682.413 is amended by:
A. Adding new paragraph (h).
B. In the Note at the end of the section, removing the word
``Note'' and adding, in its place, the words ``Note to Section
682.413''.
The addition reads as follows:
Sec. 682.413 Remedial actions.
* * * * *
(h) In any action to require repayment of funds or to withhold
funds from a guaranty agency, or to limit, suspend, or terminate a
guaranty agency based on a violation of Sec. 682.401(e), if the
Secretary finds that the guaranty agency provided or offered the
payments or activities listed in Sec. 682.401(e)(1), the Secretary
applies a rebuttable presumption that the payments or activities were
offered or provided to secure applications for FFEL loans or to secure
FFEL loan volume. To reverse the presumption, the guaranty agency must
present evidence that the activities or payments were provided for a
reason unrelated to securing applications for FFEL loans or securing
FFEL loan volume.
* * * * *
26. Section 682.414 is amended by:
A. Adding new paragraph (a)(5)(iv).
B. Adding new paragraph (a)(6).
C. Revising paragraph (b)(4).
The additions and revisions read as follows:
Sec. 682.414 Records, reports, and inspection requirements for
guaranty agency programs.
(a) * * *
(5) * * *
(iv) If a lender made a loan based on an electronically signed MPN,
the holder of the original electronically signed MPN must retain that
original MPN for at least 3 years after all the loans made on the MPN
have been satisfied.
(6)(i) Upon the Secretary's request with respect to a particular
loan or loans assigned to the Secretary and evidenced by an
electronically signed promissory note, the guaranty agency and the
lender that created the original electronically signed promissory note
must cooperate with the Secretary in all activities necessary to
enforce the loan or loans. The guaranty agency or lender must provide--
(A) An affidavit or certification regarding the creation and
maintenance of the electronic records of the loan or loans in a form
appropriate to ensure admissibility of the loan records in a legal
proceeding. This certification may be executed in a single record for
multiple loans provided that this record is reliably associated with
the specific loans to which it pertains; and
(B) Testimony by an authorized official or employee of the guaranty
agency or lender, if necessary to ensure admission of the electronic
records of the loan or loans in the litigation or legal proceeding to
enforce the loan or loans.
(ii) The certification described in paragraph (a)(6)(i) of this
section must include, if requested by the Secretary--
(A) A description of the steps followed by a borrower to execute
the promissory note (such as a flow chart);
(B) A copy of each screen as it would have appeared to the borrower
of the loan or loans the Secretary is enforcing when the borrower
signed the note electronically;
(C) A description of the field edits and other security measures
used to ensure integrity of the data submitted to the originator
electronically;
(D) A description of how the executed promissory note has been
preserved to ensure that is has not been altered after it was executed;
(E) Documentation supporting the lender's authentication and
electronic signature process; and
(F) All other documentary and technical evidence requested by the
Secretary to support the validity or the authenticity of the
electronically signed promissory note.
(iii) The Secretary may request a record, affidavit, certification
or evidence under paragraph (a)(6) of this section as needed to resolve
any factual dispute involving a loan that has been assigned to the
Secretary including, but not limited to, a factual dispute raised in
connection with litigation or any other legal proceeding, or as needed
in connection with loans assigned to the Secretary that are included in
a Title IV program audit sample, or for other similar purposes. The
guaranty agency must respond to any request from the Secretary within
10 business days.
(iv) As long as any loan made to a borrower under a MPN created by
the lender is not satisfied, the holder of the original electronically
signed promissory note is responsible for ensuring that all parties
entitled to access to the electronic loan record, including the
guaranty agency and the Secretary, have full and complete access to the
electronic loan record.
(b) * * *
(4) A report to the Secretary of the borrower's enrollment and loan
status information, or any Title IV loan-related data required by the
Secretary, by the deadline date established by the Secretary.
* * * * *
27. Section 682.602 is added to read as follows:
Sec. 682.602 Rules for a school or school-affiliated organization
that makes or originates loans through an eligible lender trustee.
(a) A school or school-affiliated organization may not contract
with an eligible lender to serve as trustee for the school or school-
affiliated organization unless--
(1) The school or school-affiliated organization originated and
continues or renews a contract made on or before September 30, 2006
with the eligible lender; and
(2) The eligible lender held at least one loan in trust on behalf
of the school or school-affiliated organization on September 30, 2006.
(b) Effective January 1, 2007, and for loans first disbursed on or
after that date under a lender trustee arrangement that continues in
effect after September 30, 2006--
(1) A school in a trustee arrangement or affiliated with an
organization involved in a trustee arrangement to originate loans must
comply with the requirements of Sec. 682.601(a), except for paragraphs
(a)(3), (a)(4), (a)(7), and (a)(9) of that section; and
(2) A school-affiliated organization involved in a trustee
arrangement to make loans must comply with the requirements of Sec.
682.601(a)(5) and (a)(8).
(Authority: 20 U.S.C. 1082, 1085)
28. Section 682.603 is amended by:
A. In paragraph (a), at the end of the last sentence, removing the
words ``on the application by the student'' and adding, in their place,
the words ``by the borrower and, in the case of a parent borrower of a
PLUS loan, the student and the parent borrower''.
B. In paragraph (b) introductory text, removing the words ``making
application for the loan''.
C. In paragraph (c), removing the reference ``paragraph (e) of this
section'' and adding in its place, the reference ``paragraph (f) of
this section''.
D. Redesignating paragraphs (d), (e), (f), (g), (h), and (i) as
paragraphs (e), (f), (g), (h), (i), and (j), respectively.
E. Adding a new paragraph (d).
F. In the introductory language in newly redesignated paragraph
(e), removing the words `` application, or combination of loan
applications,'' and adding, in their place, the words ``, or a
combination of loans,''.
G. In newly redesignated paragraph (e)(2) introductory text, adding
the words ``for the period of enrollment'' after the word
``attendance''.
H. In newly redesignated paragraph (e)(2)(ii), adding the word
``Subsidized'' immediately before the word ``Stafford'' and removing
the words ``that is eligible for interest benefits'' immediately after
the word ``loan''.
I. Revising newly redesignated paragraph (f).
J. In newly redesignated paragraph (g)(2)(i), removing the words
``, not to exceed 12 months,''.
The addition and revision read as follows:
Sec. 682.603 Certification by a participating school in connection
with a loan application.
* * * * *
(d) Before certifying a PLUS loan application for a graduate or
professional student borrower, the school must determine the borrower's
eligibility for a Stafford loan. If the borrower is eligible for a
Stafford loan but has not requested the maximum Stafford loan amount
for which the borrower is eligible, the school must--
(1) Notify the graduate or professional student borrower of the
maximum Stafford loan amount that he or she is eligible to receive and
provide the borrower with a comparison of--
(i) The maximum interest rate for a Stafford loan and the maximum
interest rate for a PLUS loan;
(ii) Periods when interest accrues on a Stafford loan and periods
when interest accrues on a PLUS loan; and
(iii) The point at which a Stafford loan enters repayment and the
point at which a PLUS loan enters repayment; and
(2) Give the graduate or professional student borrower the
opportunity to request the maximum Stafford loan amount for which the
borrower is eligible.
* * * * *
(f) In certifying loans, a school--
(1) May not refuse to certify, or delay certification, of a
Stafford or PLUS loan based on the borrower's selection of a particular
lender or guaranty agency;
(2) May not, for first-time borrowers, assign through award
packaging or other methods, a borrower's loan to a particular lender;
(3) May refuse to certify a Stafford or PLUS loan or may reduce the
borrower's determination of need for the loan if the reason for that
action is documented and provided to the borrower in writing, provided
that--
(i) The determination is made on a case-by-case basis; and
(ii) The documentation supporting the determination is retained in
the student's file; and
(4) May not, under paragraph (f)(1), (2), and (3) of this section,
engage in any pattern or practice that results in a denial of a
borrower's access to FFEL loans because of the borrower's race, sex,
color, religion, national origin, age, handicapped status, income, or
selection of a particular lender or guaranty agency.
* * * * *
29. Section 682.604 is amended by:
A. Revising paragraph (f)(1).
B. Redesignating paragraphs (f)(2), (f)(3), and (f)(4) as
paragraphs (f)(5), (f)(6), and (f)(7), respectively.
C. Adding new paragraphs (f)(2), (f)(3), and (f)(4).
D. Revising newly redesignated paragraph (f)(5) introductory text.
E. In newly redesignated paragraph (f)(5)(iv), removing the words,
``of a Stafford loan''.
F. In newly redesignated paragraph (f)(5)(v), adding the words ``,
or student borrowers with Stafford and PLUS loans, depending on the
types of loans the borrower has obtained,'' immediately after the words
``Stafford loan borrowers''.
G. In paragraph (g)(2)(i), removing the words ``Stafford or SLS
loans'' and adding, in their place, ``Stafford loans, or student
borrowers who have obtained Stafford and PLUS loans, depending on the
types of loans the student borrower has obtained,''.
The revision and additions read as follows:
Sec. 682.604 Processing the borrower's loan proceeds and counseling
borrowers.
* * * * *
(f) Initial counseling. (1) A school must ensure that initial
counseling is conducted with each Stafford Loan borrower prior to its
release of the first disbursement unless the student borrower has
received a prior Federal Stafford, Federal SLS, or Direct subsidized or
unsubsidized loan.
(2) A school must ensure that initial counseling is conducted with
each graduate or professional student PLUS loan borrower prior to its
release of the first disbursement, unless the student has received a
prior Federal PLUS loan or Direct PLUS loan. The initial counseling
must--
(i) Inform the student borrower of sample monthly repayment amounts
based on a range of student levels of indebtedness or on the average
indebtedness of graduate or professional student PLUS loan borrowers,
or student borrowers with Stafford and PLUS loans, depending on the
types of loans the borrower has obtained, at the same school or in the
same program of study at the same school;
(ii) For a graduate or professional student who has received a
prior Federal Stafford, or Direct subsidized or unsubsidized loan,
provide the information specified in paragraph (d)(1)(i) through
(d)(1)(iii) of this section; and
(iii) For a graduate or professional student who has not received a
prior Federal Stafford, or Direct subsidized or unsubsidized loan,
provide the information specified in paragraph (f)(5)(i) through
(f)(5)(iv) of this section.
(3) Initial counseling must be conducted either in person, by
audiovisual presentation, or by interactive electronic means.
(4) A school must ensure that an individual with expertise in the
title IV programs is reasonably available shortly after the counseling
to answer the student borrower's questions regarding those programs. As
an alternative, prior to releasing the proceeds of a loan in the case
of a student borrower enrolled in a correspondence program or a student
borrower enrolled in a study-abroad program that the home institution
approves for credit, the counseling may be provided through written
materials.
(5) Initial counseling for Stafford Loan borrowers must--
* * * * *
30. Section 682.705 is amended by adding new paragraph (c) to read
as follows:
Sec. 682.705 Suspension proceedings.
* * * * *
(c) In any action to suspend a lender based on a violation of the
prohibitions in section 435(d)(5) of the Act, if the Secretary, the
designated Department official, or hearing official finds that the
lender provided or offered the payments or activities listed in
paragraph (5)(i) of the definition of lender in Sec. 682.200(b), the
Secretary or the official applies a rebuttable presumption that the
payments or activities were offered or provided to secure applications
for FFEL loans or to secure FFEL loan volume. To reverse the
presumption, the lender must present evidence that the activities or
payments were provided for a reason unrelated to securing applications
for FFEL loans or securing FFEL loan volume.
31. Section 682.706 is amended by adding new paragraph (d) to read
as follows:
Sec. 682.706 Limitation or termination proceedings.
* * * * *
(d) In any action to limit or terminate a lender's eligibility
based on a violation of the prohibitions in section 435(d)(5) of the
Act, if the Secretary, the designated Department official or hearing
official finds that the lender provided or offered the payments or
activities listed in paragraph (5)(i) of the definition of Lender in
Sec. 682.200(b), the Secretary or the official applies a rebuttable
presumption that the payments or activities were offered or provided to
secure applications for FFEL loans. To reverse the presumption, the
lender must present evidence that the activities or payments were
provided for a reason unrelated to securing applications for FFEL loans
or securing FFEL loan volume.
* * * * *
PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM
32. The authority citation for part 685 continues to read as
follows:
Authority: 20 U.S.C. 1087a et. seq., unless otherwise noted.
33. Section 685.204 is amended by:
A. In paragraph (b)(1)(iii)(A) introductory text, removing the
words ``(b)(1)(i)'' and adding, in their place, the words
``(b)(1)(i)(A)''.
B. In paragraph (d)(1), removing the word ``the'' and adding, in
its place, the word ``The''.
C. In paragraph (d)(2), removing the word ``the'' and adding, in
its place, the word ``The''.
D. Adding new paragraph (g).
The addition reads as follows:
Sec. 685.204 Deferments.
* * * * *
(g)(1) To receive a deferment, except as provided under paragraph
(b)(1)(i)(A) of this section, the borrower must request the deferment
and provide the Secretary with all information and documents required
to establish eligibility for the deferment. In the case of a deferment
granted under paragraph (e)(1) of this section, a borrower's
representative may request the deferment and provide the required
information and documents on behalf of the borrower.
(2) After receiving a borrower's written or verbal request, the
Secretary may grant a deferment under paragraphs (b)(1)(i)(B),
(b)(1)(i)(C), (b)(2)(i), (b)(3)(i), and (e)(1) of this section if the
Secretary confirms that the borrower has received a deferment on a
Perkins or FFEL Loan for the same reason and the same time period.
(3) The Secretary relies in good faith on the information obtained
under paragraph (g)(2) of this section when determining a borrower's
eligibility for a deferment, unless the Secretary, as of the date of
determination, has information indicating that the borrower does not
qualify for the deferment. The Secretary resolves any discrepant
information before granting a deferment under paragraph (g)(2) of this
section.
(4) If the Secretary grants a deferment under paragraph (g)(2) of
this section, the Secretary notifies the borrower that
the deferment has been granted and that the borrower has the option to
cancel the deferment and continue to make payments on the loan.
(5) If the Secretary grants a military service deferment based on a
request from a borrower's representative, the Secretary notifies the
borrower that the deferment has been granted and that the borrower has
the option to cancel the deferment and continue to make payments on the
loan. The Secretary may also notify the borrower's representative of
the outcome of the deferment request.
* * * * *
34. Section 685.212 is amended by revising paragraph (a)(1) and (2)
to read as follows:
Sec. 685.212 Discharge of a loan obligation.
(a) * * * (1) If a borrower (or a student on whose behalf a parent
borrowed a Direct PLUS Loan) dies, the Secretary discharges the
obligation of the borrower and any endorser to make any further
payments on the loan based on an original or certified copy of the
borrower's (or student's in the case of a Direct PLUS loan obtained by
a parent borrower) death certificate, or an accurate and complete
photocopy of the original or certified copy of the borrower's (or
student's in the case of a Direct PLUS loan obtained by a parent
borrower) death certificate.
(2) If an original or certified copy of the death certificate, or
an accurate and complete photocopy of the original or certified copy of
the death certificate is not available, the Secretary discharges the
loan only if other reliable documentation establishes, to the
Secretary's satisfaction, that the borrower (or student) has died. The
Secretary discharges a loan based on documentation other than an
original or certified copy of the death certificate, or an accurate and
complete photocopy of the original or certified copy of the death
certificate only under exceptional circumstances and on a case-by-case
basis.
* * * * *
35. Section 685.213 is revised to read as follows:
Sec. 685.213 Total and permanent disability.
(a) General. A borrower's Direct Loan is discharged if the borrower
becomes totally and permanently disabled, as defined in Sec.
682.200(b), and satisfies the additional eligibility requirements
contained in this section.
(b) Discharge application process. (1) To qualify for a discharge
of a Direct Loan based on a total and permanent disability, a borrower
must submit to the Secretary a certification by a physician, who is a
doctor of medicine or osteopathy legally authorized to practice in a
State, that the borrower is totally and permanently disabled as defined
in Sec. 682.200(b). The certification must be on a form approved by
the Secretary. The borrower must submit the application to the
Secretary within 90 days of the date the physician certifies the
application.
(2) Upon receipt of the borrower's application, the Secretary
notifies the borrower that--
(i) No payments are due on the loan; and
(ii) The borrower, in order to remain eligible for the discharge
from the date the physician completes and certifies the borrower's
total and permanent disability on the application until the date the
Secretary makes an initial eligibility determination--
(A) Cannot work and earn money or receive any new title IV loans;
and
(B) Must, on any loan received prior to the date the physician
completed and certified the application, ensure that the full amount of
any title IV loan disbursement made to the borrower on or after the
date the physician completed and certified the application is returned
to the holder within 120 days of the disbursement date.
(c) Initial determination of eligibility. (1) The borrower must
continue to meet the conditions in paragraph (b)(2)(ii) of this section
from the date the physician completes and certifies the borrower's
total and permanent disability on the application until the Secretary
makes an initial determination of the borrower's eligibility in
accordance with paragraph (c)(2) of this section.
(2) If, after reviewing the borrower's application, the Secretary
determines that the certification provided by the borrower supports the
conclusion that the borrower meets the criteria for a total and
permanent disability discharge, the borrower is considered totally and
permanently disabled as of the date the physician completes and
certifies the borrower's application.
(3) The Secretary suspends collection activity and notifies the
borrower that the loan will be in a conditional discharge status for a
period of up to three years upon making an initial determination that
the borrower is totally and permanently disabled, as defined in Sec.
682.200(b). This notification identifies the conditions of the
conditional discharge period specified in paragraph (d)(1) of this
section. The conditional discharge period begins on the date the
Secretary makes the initial determination that the borrower is totally
and permanently disabled.
(4) If the Secretary determines that the certification provided by
the borrower does not support the conclusion that the borrower meets
the criteria for a total and permanent disability discharge, the
Secretary notifies the borrower that the application for a disability
discharge has been denied, and that the loan is due and payable under
the terms of the promissory note.
(d) Eligibility requirements for total and permanent disability.
(1) A borrower meets the eligibility requirements for a total and
permanent disability discharge if, during and at the end of the three-
year conditional discharge period--
(A) The borrower's annual earnings from employment do not exceed
100 percent of the poverty line for a family of two, as determined in
accordance with the Community Service Block Grant Act;
(B) The borrower does not receive a new loan under the Perkins,
FFEL or Direct Loan programs, except for a FFEL or Direct Consolidation
Loan that does not include any loans that are in a conditional
discharge status; and
(C) The borrower ensures, on any loan received prior to the date
the physician completed and certified the application, that the full
amount of any title IV loan disbursement made on or after the date of
the Secretary's initial eligibility determination is returned to the
holder within 120 days of the disbursement date.
(2) During the conditional discharge period, the borrower or, if
applicable, the borrower's representative--
(A) Is not required to make any payments on the loan;
(B) Is not considered past due or in default on the loan, unless
the loan was past due or in default at the time the conditional
discharge was granted;
(C) Must promptly notify the Secretary of any changes in address or
phone number;
(D) Must promptly notify the Secretary if the borrower's annual
earnings from employment exceed the amount specified in paragraph
(d)(1)(A) of this section; and
(E) Must provide the Secretary, upon request, with additional
documentation or information related to the borrower's eligibility for
a discharge under this section.
(3) If the borrower continues to meet the eligibility requirements
for a total and permanent disability discharge during and at the end of
the three-year conditional discharge period, the Secretary--
(i) Discharges the obligation of the borrower and any endorser to
make any further payments on the loan at the end of that period; and
(ii) Returns any payments received after the date the physician
completed and certified the borrower's loan discharge application.
(4) If, at any time during or at the end of the three-year
conditional discharge period, the borrower does not continue to meet
the eligibility requirements for a total and permanent disability
discharge, the Secretary resumes collection activity on the loan. The
Secretary does not require the borrower to pay any interest that
accrued on the loan from the date of the Secretary's initial
determination described in paragraph (c)(2) of this section through the
end of the conditional discharge period.
* * * * *
36. Section 685.301 is amended by:
A. In paragraph (a)(1), removing the words ``in the application by
the student'' and adding, in their place, the words, ``by the borrower
and, in the case of a parent PLUS loan borrower, the student and the
parent borrower.''
B. Redesignating paragraphs (a)(3), (a)(4), (a)(5), (a)(6), (a)(7),
(a)(8), and (a)(9) as (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9),
and (a)(10), respectively.
C. Adding new paragraph (a)(3).
D. Revising newly redesignated paragraph (a)(10)(ii)(A).
The addition and revisions read as follows:
Sec. 685.301 Determining eligibility and loan amount.
(a) * * *
(3) Before originating a Direct PLUS Loan for a graduate or
professional student borrower, the school must determine the borrower's
eligibility for a Direct Subsidized and a Direct Unsubsidized Loan. If
the borrower is eligible for a Direct Subsidized or Direct Unsubsidized
Loan but has not requested the maximum Direct Subsidized or Direct
Unsubsidized Loan amount for which the borrower is eligible, the school
must--
(i) Notify the graduate or professional student borrower of the
maximum Direct Subsidized or Direct Unsubsidized Loan amount that he or
she is eligible to receive and provide the borrower with a comparison
of--
(A) The maximum interest rate for a Direct Subsidized Loan and a
Direct Unsubsidized Loan and the maximum interest rate for a Direct
PLUS Loan;
(B) Periods when interest accrues on a Direct Subsidized Loan and a
Direct Unsubsidized Loan, and periods when interest accrues on a Direct
PLUS Loan; and
(C) The point at which a Direct Subsidized Loan and a Direct
Unsubsidized Loan enters repayment, and the point at which a Direct
PLUS Loan enters repayment; and
(ii) Give the graduate or professional student borrower the
opportunity to request the maximum Direct Subsidized or Direct
Unsubsidized Loan amount for which the borrower is eligible.
* * * * *
(10) * * *
(ii) * * *
(A) Generally an academic year, as defined by the school in
accordance with 34 CFR 668.3, except that the school may use a longer
period of time corresponding to the period to which the school applies
the annual loan limits under Sec. 685.203; or
* * * * *
37. Section 685.304 is amended by:
A. In paragraph (a)(1) removing the words ``(a)(4)'' and adding, in
their place, the words ``(a)(5)''.
B. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and
(a)(6) as paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and (a)(7),
respectively.
C. Adding a new paragraph (a)(2).
D. Revising newly redesignated paragraph (a)(4) introductory text.
E. In newly redesignated paragraph (a)(4)(iv) removing the words
``Direct Unsubsidized Loan borrowers'' and adding, in their place, the
words ``Direct Unsubsidized Loan borrowers, or student borrowers with
Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans,
depending on the types of loans the borrower has obtained,''.
F. In newly redesignated paragraph (a)(5) introductory text,
removing the words ``(a)(1)-(3)'' and adding, in their place, the words
``(a)(1) through (4)''.
G. In newly redesignated paragraph (a)(5)(i), removing the words
``(a)(1)'' and adding, in their place, the words ``(a)(1) or (a)(2)'',
and removing the words ``(a)(3)'' and adding in their place the words
``(a)(4)''.
H. In paragraph (b)(4)(i), removing the words ``Direct Subsidized
Loan and Direct Unsubsidized Loan borrowers'' and adding, in their
place, the words ``student borrowers who have obtained Direct
Subsidized Loans and Direct Unsubsidized Loans, or student borrowers
who have obtained Direct Subsidized, Direct Unsubsidized, and Direct
PLUS Loans, depending on the types of loans the student borrower has
obtained, for attendance''.
The addition reads as follows:
Sec. 685.304 Counseling borrowers.
(a) * * *
(2) Except as provided in paragraph (a)(5) of this section, a
school must ensure that initial counseling is conducted with each
graduate or professional student Direct PLUS Loan borrower prior to
making the first disbursement of the loan unless the student borrower
has received a prior Direct PLUS Loan or Federal PLUS Loan. The initial
counseling must--
(i) Inform the student borrower of sample monthly repayment amounts
based on a range of student levels or indebtedness or on the average
indebtedness of graduate or professional student PLUS loan borrowers,
or student borrowers with Direct PLUS Loans and Direct Subsidized Loans
or Direct Unsubsidized Loans, depending on the types of loans the
borrower has obtained, at the same school or in the same program of
study at the same school;
(ii) For a graduate or professional student who has received a
prior Federal Stafford, or Direct Subsidized or Unsubsidized Loan
provide the information specified in paragraph (a)(3)(i) of this
section; and
(iii) For a graduate or professional student who has not received a
prior Federal Stafford, or Direct Subsidized or Direct Unsubsidized
Loan, provide the information specified in paragraph (a)(4)(i) through
(a)(4)(iv) of this section.
* * * * *
(4) Initial counseling for Direct Subsidized Loan and Direct
Unsubsidized Loan borrowers must--
* * * * *
[FR Doc. E7-10826 Filed 6-11-07; 8:45 am]
BILLING CODE 4000-01-P
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