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Summary: Notice of terms and conditions of purchase of loans under the Ensuring Continued Access to Student Loans Act of 2008

Publication Date: July 1, 2008

Page Numbers: 37422-37451

Summary: Notice of terms and conditions of purchase of loans under the Ensuring Continued Access to Student Loans Act of 2008

Posted on 07-01-2008



[Federal Register: July 1, 2008 (Volume 73, Number 127)]
[Notices]               
[Page 37422-37451]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy08-29]                         

=======================================================================

DEPARTMENT OF EDUCATION

DEPARTMENT OF THE TREASURY

OFFICE OF MANAGEMENT AND BUDGET


Federal Family Education Loan Program (FFELP)

AGENCY: Department of Education, Department of the Treasury, Office of 
Management and Budget.

ACTION: Notice of terms and conditions of purchase of loans under the 
Ensuring Continued Access to Student Loans Act of 2008.

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SUMMARY: Under section 459A of the Higher Education Act of 1965, as 
amended (``HEA''), as enacted within the Ensuring Continued Access to 
Student Loans Act of 2008 (Pub. L. 110-227), the Department of 
Education (``Department'') has the authority to purchase, or enter into 
forward commitments to purchase, Federal Family Education Loan Program 
(``FFELP'') loans made under sections 428 (subsidized Stafford loans), 
428B (PLUS loans), or 428H (unsubsidized Stafford loans) of the HEA, on 
such terms as the Secretary of Education (``Secretary''), the Secretary 
of the Treasury, and the Director of the Office of Management and 
Budget (collectively, ``Secretaries and Director'') jointly determine 
are ``in the best interest of the United States'' and ``shall not 
result in any net cost to the Federal Government (including the cost of 
servicing the loans purchased).''
    This notice (a) establishes the terms and conditions that will 
govern the loan purchases made under section 459A of the HEA, (b) 
outlines the methodology and factors that have been considered in 
evaluating the price at which the Department will purchase loans made 
under section 428, 428B, or 428H of the HEA, and (c) describes how the 
use of those factors and methodology will ensure that the loan 
purchases do not result in any net cost to the Federal Government. The 
Secretaries and Director concur in the publication of this notice and 
have jointly determined that the programs described in this notice are 
in the best interest of the United States and shall not result in any 
net cost to the Federal Government (including the cost of servicing the 
loans purchased).

DATES: Effective Date: The terms and conditions governing the Loan 
Purchase Commitment Program and the terms and conditions governing the 
Loan Participation Purchase Program are effective July 1, 2008.

FOR FURTHER INFORMATION CONTACT: Kristie Hansen, U.S. Department of 
Education, Office of Federal Student Aid, Union Center Plaza, 830 First 
Street, NE., Room 113F1, Washington, DC 20202. Telephone: (202) 377-
3309 or by e-mail: Kristie.Hansen@ed.gov.
    If you use a telecommunications device for the deaf (TDD), call the 
Federal Relay Service (FRS), toll free, at 1-800-877-8339.
    Individuals with disabilities can 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:

Introduction

    The purchasing of loans is intended to encourage eligible FFELP 
lenders to provide students and parents access to Stafford and PLUS 
loans for the 2008-2009 academic year. To accomplish this objective, 
the Department is offering lenders the opportunity to participate in a 
Loan Purchase Commitment Program (``Purchase Program'') and a Loan 
Participation Purchase Program (``Participation Program'') 
(collectively, ``Programs'').
    Under the Loan Purchase Commitment Program, the Department may 
purchase eligible loans that are held by eligible lenders. To 
participate in the Purchase Program, each eligible lender must enter 
into a Master Loan Sale Agreement with the Department and deliver to 
the Department or its agent the fully executed master promissory note 
(or all electronic records evidencing the same) evidencing each 
eligible loan that the eligible lender wishes to sell to the Department 
and any and all other documents and computerized records relating to 
such eligible loans.
    Under the Loan Participation Purchase Program, the Department may 
purchase participation interests in eligible loans that are held by an 
eligible lender acting as a sponsor under a Master Participation 
Agreement. To participate in the Participation Program, each sponsor 
must enter into a Master Participation Agreement with the

[[Page 37423]]

Department and a third-party custodian acceptable to the Department and 
must have provided appropriate notice to the Department of the intent 
to participate in the Loan Purchase Commitment Program.\1\
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    \1\ Lenders that qualify as ``eligible not-for-profit holders'' 
for a higher special allowance rate may sell participation interests 
in their loans under this program without loss of eligibility for 
that rate. An entity qualifies for that rate only if the entity is 
the ``sole beneficial owner of such loan.'' 20 U.S.C. 1085(p)(2)(C). 
Courts treat a participation interest in a loan as a beneficial 
ownership of a loan. The Department becomes a beneficial owner of a 
loan in which it purchases a participation interest, and the lender 
then holds a junior beneficial ownership interest. In light of other 
statutory provisions and the congressional intent they evidence, the 
Department interprets the HEA to disqualify an otherwise-eligible 
not-for-profit holder only if a for-profit entity acquires 
beneficial ownership of a loan. See 20 U.S.C. 1085(p)(2)(B), (E), 
(3).
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Terms and Conditions

    Pursuant to section 459A of the HEA, the Secretaries and Director 
establish the terms and conditions that will govern the Loan Purchase 
Commitment Program (``Loan Purchase Commitment Program Terms and 
Conditions,'' attached as Appendix B to this notice) and the terms and 
conditions that will govern the Loan Participation Purchase Program 
(``Loan Participation Purchase Program Terms and Conditions,'' attached 
as Appendix C to this notice). The Loan Purchase Commitment Program 
Terms and Conditions and the Loan Participation Purchase Program Terms 
and Conditions are collectively referred to as the ``Terms and 
Conditions.'' (The Notice of Intent to Participate, referenced in the 
Terms and Conditions, is attached as Appendix D to this notice.)

Outline of Methodology and Factors in Determining Prices

    In accordance with Public Law 110-227, the goal in structuring the 
Purchase Program and the Participation Program described in this notice 
is to maximize student loan availability while ensuring loan purchases 
result in no net costs to the Federal Government. These programs will 
offer temporary liquidity to FFELP lenders at prices that will 
encourage their continued participation in the FFELP. This notice 
responds, in particular, to the requirement in section 459A of the HEA 
for an outline of the methodology and factors considered in evaluating 
the price at which loans may be purchased, and describes how the use of 
such methodology and consideration of such factors will ensure that no 
net cost to the Federal Government results from the loan purchases 
under these programs.
    Servicing and Financing Costs. In determining the prices described 
in this notice, the Secretary and the Secretary of the Treasury 
analyzed the costs incurred in making FFELP loans by large and small 
lenders, for-profit and not-for-profit lenders, and national and 
regional lenders based on publicly available data and consultations 
with a number of lenders and financial market analysts. This analysis 
examined lender returns in the context of loan servicing and financing 
expenses associated with obtaining funding to pay program costs and 
finance actual loan disbursements.
      The rate of lender returns on FFELP loans in the in-school 
and grace periods are effectively set by section 438 of the HEA at the 
commercial paper (CP) rate plus 1.19 percent or CP plus 119 basis 
points for for-profit lenders (a basis point equals one one-hundredth 
of a percent). 20 U.S.C. 1087-1(b)(2)(I)(ii) and (b)(2)(I)(vi)(I)(bb). 
For eligible not-for-profit holders, the HEA provides a return of CP 
plus 134 basis points. 20 U.S.C. 1087-1(b)(2)(I)(ii) and 
(b)(2)(I)(vi)(II)(bb). (These return levels reflect the net of borrower 
interest payments and Federal interest subsidies.) Returns are 
different for PLUS loans, which make up a relatively small portion of 
overall FFELP volume. These PLUS return levels were reflected in the 
cost neutrality calculations but, for simplicity, are not detailed in 
this notice.
      Lenders reported that loan servicing costs generally 
average between 30 basis points and 60 basis points per dollar loaned, 
with larger, more efficient lenders typically averaging closer to 30 
basis points and small or not-for-profit lenders averaging closer to 60 
basis points. Lenders pay the Department a 1 percent fee on each loan 
they make. 20 U.S.C. 1087-1(d)(2)(B). In addition, lenders must repay 
excess interest payments as required by section 438 of the HEA. 20 
U.S.C. 1087-1(b)(2)(v). Because the student borrowers of most loans 
subject to the Purchase Program and the Participation Program will be 
in school and not making payments on their loans during the 2008-2009 
academic year, lenders may need to obtain funding to make these 
statutorily-required payments to the Department. Financing costs (i.e., 
interest expenses incurred to obtain capital from deposits or from 
private capital markets) typically total 15 basis points for every 
dollar loaned.
      Subtracting estimated servicing and financing costs from 
the lender return levels established in the HEA leaves lenders with 
estimated pre-tax returns of CP plus 44-74 basis points for for-profit 
lenders and CP plus 59-89 basis points for lenders that are eligible 
not-for-profit holders. Lenders finance loan disbursements from these 
returns. If lenders sell participation interests in their loans under 
the Participation Program, they are charged CP plus 50 basis points, 
leaving a net pre-tax return of -6 basis points to 24 basis points for 
for-profit lenders. If lenders can obtain private financing at a lower 
interest rate, their net pre-tax return would be higher.
    Based on this background information, the Secretaries and Director 
determined that setting the price paid by lenders on a participation 
interest in a loan at the principal of that loan and the commercial 
paper rate plus 50 basis points would offer most lenders sufficient 
opportunity to continue their participation in the FFELP. Setting a 
higher price risks limiting participation to only the largest lenders, 
while offering a lower price would be overly generous, especially for 
those same large lenders.
    Origination and Deconversion Costs. In addition to servicing and 
financing costs, lenders incur administrative costs to originate loans 
and remove or ``deconvert'' loans from their servicing systems. In 
determining the proper price to reimburse lenders for these costs, the 
Department and the Department of the Treasury analyzed information from 
lenders and servicers.
    The Department and the Department of the Treasury consulted with 
lenders, who provided them with their estimated origination and 
deconversion costs. Larger, more efficient lenders indicated that their 
origination costs ranged between $20-$30 per loan while these costs for 
smaller lenders were $75 per loan. Lenders indicated that their 
estimated deconversion costs (i.e. the costs resulting from the process 
of taking a loan from one lender's servicing system and transferring it 
to another servicing system) ranged from $20-$50 per loan.
    To ensure the Participation Program is open to more than just the 
largest lenders, the Secretaries and Director used these estimates to 
establish a flat $75 fee paid on each loan sold to the Department to 
cover all servicing, origination, and deconversion costs. This assumes 
the lower end of the origination cost range and the higher end of the 
deconversion costs range.
    Pricing structures on many private servicing contracts tend to have 
costs that differ greatly for different services, with high origination 
costs and relatively low deconversion costs, or at times, the converse. 
Notwithstanding these differences, the Secretaries and Director are 
reasonably certain that the $75 fee accounts for these variations
while ensuring adequate participation in the Participation Program.

Analysis of Cost Neutrality

    The cost-neutrality analysis used credit subsidy cost estimation 
procedures established under the Federal Credit Reform Act of 1990 
(Pub. L. 101-508) and OMB Circular A-11. These procedures entail 
performing various analyses, projecting cash flows to and from the 
Government, and discounting those cash flows to the point of 
disbursement; the analysis also used the Credit Subsidy Calculator 
(``OMB calculator''), developed by the Office of Management and Budget 
to estimate credit subsidy costs for all Federal credit programs, as 
the discounting tool.\2\ The results of the analysis were subsidy rates 
that reflect the Federal costs associated with a loan; these costs are 
expressed as a percentage of the credit extended by the loan. For 
example, a subsidy rate of 10.0 percent indicates a Federal cost of $10 
on a $100 loan.
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    \2\ The OMB calculator takes projected future cash flows from 
the Department's student loan cost estimation model and produces 
discounted subsidy rates reflecting the net present value of all 
future Federal costs associated with loans made in a given fiscal 
year. Values are calculated using a ``basket of zeros'' methodology 
under which each cash flow is discounted using the interest rate of 
a zero-coupon Treasury bond with the same maturity as that cash 
flow. To ensure comparability across various Federal credit 
programs, this methodology is incorporated into the calculator and 
used government-wide to develop estimates of the Federal costs of 
credit programs.
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    The metric to determine cost neutrality was that costs under the 
new Programs should not exceed costs expected under the FFELP had the 
loan purchase authority in section 459A of the HEA not been enacted. 
Thus all costs were compared to estimates in the 2009 President's 
Budget for the FFELP, after adjustments were made for enacted 
legislation (other than the loan purchase authority provided by Pub. L. 
110-227), including administrative costs.
    Student loan cost estimates were developed to assess the Federal 
cost incurred for loans financed for students in five categories: 
Students attending proprietary schools, students attending two-year 
schools, freshmen/sophomores at four-year schools, juniors/seniors at 
four-year schools, and students in graduate programs. Risk categories 
have separate assumptions based on historical patterns--for example, 
the likelihood of default or the likelihood of statutory deferments or 
discharge benefits--of borrowers in each category. The analysis also 
considered risk factors that are particular to the new programs, such 
as the likelihood that lenders involved in loan participation 
agreements file for bankruptcy protection.
    This discussion outlines the analysis of the new Purchase Program 
and Participation Program with respect to the following critical 
aspects affecting the Federal cost:
    [cir] Administrative costs;
    [cir] Borrower behavior;
    [cir] Lender behavior; and
    [cir] Various risk factors.
    Administrative Costs. Under the Federal Credit Reform Act, Federal 
administrative costs are not included in credit subsidy cost 
calculations. However, to capture the full cost of the Purchase Program 
and Participation Program, section 459A of the HEA requires the 
determination of cost neutrality to include total costs, including 
Federal administrative costs that are subject to appropriation, and 
thus administrative costs were estimated and included in the cost-
neutrality analysis. Administrative cash flows primarily involve 
servicing costs associated with loans purchased by the Department. 
These costs extend for up to 40 years, because servicing must continue 
until the last loan is paid in full. Administrative costs also include 
start-up costs to enhance the Department's systems to accommodate the 
purchase of participation interests and any put FFELP loans. Other 
start-up costs include legal and technical advisory contracts and 
changes to Department accounting, reporting, and program compliance 
systems and processes.
    For the new programs, the Secretaries and Director estimated that 
start-up costs would be $15.7 million and servicing costs would vary, 
according to the amount of volume in the program. Estimates for start-
up costs were derived from conversations with the Department's existing 
service contract providers, while servicing cost estimates were derived 
from costs currently incurred with the Department's Federal Direct Loan 
servicing contract.
    Borrower Behavior. Given the base FFELP serves as the foundation of 
the new programs, and the characteristics of the base program are 
unchanged, there is no reason to believe that the Purchase Program and 
Participation Program outlined in this notice will affect borrower 
behavior. Thus, this cost analysis uses the same borrower behavior 
assumptions as were used in preparing the 2009 President's Budget to 
gauge the effect on program costs of borrower-based activities such as 
loan repayment, use of statutory benefits such as deferments and loan 
discharges, and default rates and timing. These assumptions are based 
on a wide range of data sources, including the National Student Loan 
Data System, the Department's operational and financial systems, and a 
group 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.
    Lender Behavior. A key factor in assessing whether the Purchase 
Program and Participation Program would operate in a cost-neutral 
manner was lender behavior: Specifically, how many lenders would 
participate in each program and how many loans would they eventually 
choose to sell to the Department. The Secretaries and Director 
considered alternative scenarios of market conditions and lender 
behavior to determine whether each program could be considered cost-
neutral.
    In one scenario, the Secretaries and Director assumed that market 
conditions would not improve and that FFELP lenders would put or sell 
participation interests to the Department in 100 percent of all FFELP 
loans made for the 2008-09 academic year. At the end of the 
participation period, FFELP lenders would also put 50 percent of those 
loans to the Department. The Secretaries and Director assumed that the 
loan volume would be $65 billion and that the total portfolio would be 
similar to the expected 2008-2009 school year of student loans under 
the FFELP before enactment of the loan purchase authority in Public Law 
110-227.\3\ Further, the loans purchased at the end of the 
participation period would be representative of the total loan volume. 
Under this scenario, we determined that costs for both the Purchase 
Program and the Participation Program were less expensive to the 
Government than for the baseline subsidy costs for FFELP loans costs 
for the FFELP baseline in this period. (Please see Table 2, located in 
Appendix A, for a summary of the analysis for this scenario, which also 
includes the risk factors discussed in this notice.)
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    \3\ This loan volume assumption is the full FFELP non-
consolidation estimate for the 2008-2009 academic year (as presented 
in the 2009 President's Budget) and is adjusted to include increases 
to unsubsidized Stafford Loan limits provided for in Pub. L. 110-
227.
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    The Secretaries and Director also considered other scenarios. In 
those scenarios, the Secretaries and Director sorted the expected FFELP 
volume under the Purchase Program and Participation Program into three

[[Page 37425]]

categories: Loans made by lenders and sold to the Department; loans 
made by lenders on which the lenders first sold participation interests 
to the Department and then, on September 30, 2009, sold the loans 
themselves to the Department; and loans made by lenders on which 
participation interests were sold to the Department but then redeemed 
by the lender, for a cash payment, eliminating the Department's 
participation interest. In general, the Secretaries and Director 
derived volume allocations under particular scenarios by making 
assumptions about near-term market conditions, likely lender behavior 
based on type of lending institution and operational capability, and 
projecting lender demand for any particular option under those 
conditions.
    One of these scenarios, considered to be one of the most costly to 
the Government, would be that market conditions improve significantly 
over the next year, and that lenders sell a greater proportion of 
higher cost loans to the Government (in a process often termed 
``cherry-picking''). A Congressional Budget Office analysis, and other 
analyses, of the FFELP portfolio have found that certain loans are more 
profitable for FFELP lenders than others. In particular, borrowers with 
small balances provide relatively little margin income relative to the 
fixed costs lenders face to service those loans. Some borrowers, 
including those that attended schools with higher than average default 
rates, are more likely to become delinquent and, consequently, present 
higher expected default costs, and greater losses of margin income due 
to default.
    The Terms and Conditions seek to reduce the impact of these risk 
factors. For example, program guidelines requiring lenders to sell all 
2008-09 Stafford loans held for a specific borrower, combined with the 
administrative complexity and expense of identifying and deconverting 
only less profitable loans, make it less likely that lenders will 
choose to sell only poorly-performing loans to the Department.
    Nevertheless, if financial markets improve to the point where 
lenders can finance most loans privately, they might still sell those 
least profitable loans to the Department. In this situation, borrowers 
with very low balances will present relatively high servicing costs to 
the Department per dollar of outstanding balance.
    Under the scenario described in the preceding paragraph, the 
analysis estimates 4 percent of FFELP volume ($65 billion in the 2008-
2009 academic year) will be loans made by lenders and sold to the 
Department; 32 percent of volume ($21 billion) would be loans for which 
participation interests, and then the loans themselves, would be sold 
to the Department; and 32 percent ($21 billion) would be loans for 
which participation interests were sold, but then redeemed.\4\ Cost 
estimates assuming these volume allocations and risk adjustments for 
this scenario still compared favorably with the costs for the base 
FFELP. (Please see Table 3, located in Appendix A, for a summary of the 
analysis for this scenario and the risk factors discussed in the 
following sections.)
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    \4\ The loan volume assumption in this scenario was developed 
through conversations with a variety of lending institutions. 
Depository lending institutions indicated that they would use their 
own capital to originate new student loans rather than take 
advantage of the participation agreement structure. Non-depository 
institutions indicated they would use participation agreements. For 
the top 100 lenders in FY 2007, which together accounted for over 80 
percent of FFELP non-consolidation volume, 33 percent of volume was 
originated by depository institutions and 67 percent by non-
depository institutions. (Figures for non-depository institutions 
include loans made by depository institutions acting as eligible 
lender trustees.)
    Lenders currently have $50 billion in warehouses and substantial 
additional loans securitized in rollover accounts that will require 
long-term refinancing. These inventory stocks may provide lenders 
with an incentive to put loans. Representatives of depository 
institutions indicated they may increase volume to ensure students 
have access to loans, but may not want to maintain this additional 
volume on their books.
    In consideration of these factors, estimates assumed all 2008-
2009 FFELP non-consolidation loan volume originated by depository 
institutions over the level originated for 2007-2008 and 50 percent 
of 2008-2009 loans originated by non-depository institutions and 
included in the Loan Participation Purchase Program will be put. 
Estimates further assumed that all loans of $1,000 or less would be 
put first, with the balance up to the total amount put made up of 
loans of over $1,000.
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    It should also be noted that, in addition to the examples discussed 
herein that represent certain abnormal market and lender behavior 
conditions, all other alternatives under which the Purchase Program and 
Participation Program were analyzed were less expensive than base FFELP 
costs.
    Risk Factors. Analyzing whether the Purchase Program and 
Participation Program would operate in a cost-neutral manner requires 
that projected costs account for the presence of various risks and cost 
factors that must be assumed since the programs will not operate 
entirely like the base FFELP, nor without operational risk. In addition 
to cherry-picking, the Secretaries' and Director's estimates included 
adjustments for four other factors: that lenders involved in loan 
participation agreements file for bankruptcy protection (``bankruptcy 
remoteness''); that lenders redeem their participation agreements 
early, reducing Federal earnings from the participation interests 
acquired (``interest adjustments''); that unforeseen problems undermine 
the Department's ability to effectively oversee and administer the 
Purchase Program and Participation Program (``operational risk''); and 
that some of the loans purchased by the Department would be those where 
the Department would otherwise reject a claim under the FFELP program 
(``claim rejects'').
    The Terms and Conditions for each program seek to reduce the impact 
of these risk factors. None of these factors is likely to lead to 
significant additional Federal costs. For example, the requirement that 
lenders sell participation interests that total at least $50 million 
will limit involvement to large financial institutions that, in 
general, are financially stable and not likely to proceed to 
bankruptcy. Additionally, upon filing for bankruptcy, the yield owed by 
the lender to the Department increases from principal of that loan and 
the commercial paper rate plus 50 basis points, to principal of that 
loan and the commercial paper rate plus 300 basis points.
    However, to ensure estimates reflect a conservative assessment of 
possible Federal costs, the Secretaries and Director added cost 
adjustments to incorporate each risk factor in all of the scenarios 
noted in the preceding paragraphs. The adjustments were based on an 
assessment of private-sector behavior and program data as follows:
      Bankruptcy remoteness. The Government might face legal 
risks if a lender declares bankruptcy while holding rights to loans 
under the participation agreement. The Secretaries and Director believe 
that the structure to be utilized under the Participation Program 
offers sufficient bankruptcy protection, in that legal title of these 
participated loans will be placed in a custodial facility, and that the 
participation agreement vests the Government with a valid security 
interest under the Uniform Commercial Code. Nonetheless, a bankruptcy 
court might tie up control of the loans until the claims of other 
creditors are settled. This risk is more present if markets remain 
distressed during the next one to two years as the likelihood of 
bankruptcy is higher; however, the risk never goes to zero entirely. 
For the scenario in Table 2 below (where the market conditions do not 
improve), the analysis assumes an increase in cost of 15 basis points. 
For the scenario in Table 3, where market conditions do improve, the 
analysis assumes an increase in cost of 5 basis points. Assumptions are based on an 
estimated one-year default rate of lenders and potential recoveries on 
default.
      Interest adjustments. If financial market conditions 
significantly improve between now and the end of September 2009, 
lenders that took advantage of the participation agreements might opt 
to buy their loans out early and finance them privately through more 
favorable rates. While this outcome is highly desirable from a policy 
perspective, it would deprive the Department of some of the margin 
income it might expect from the participation agreement under a 
scenario where lenders opt to maintain their loans in the participation 
agreements until the last possible moment. The cost neutrality analysis 
below assumes a 20 basis point increase in the cost for interest that 
the Department does not realize, based on the expected placement of 
FFELP loans in the participation interest program, and the difference 
between the commercial paper rate plus 50 basis points lenders must pay 
the Department and the cost of Government borrowing.
      Operational risk. Operational risk is in general a major 
concern in all credit activities in both the public and private 
sectors, and has been a major focus in recent efforts to overhaul bank 
regulations. (Operational risk is limited in this analysis to that 
related to funding and management of the participation or loan purchase 
agreements.) In the new Purchase Program and Participation Program, 
operational risk might result from imperfect controls of ineligible 
lending, servicing errors, technology failures, and the risk of fraud. 
While the Department has made every effort to mitigate operational 
risk, the emergency nature and accelerated implementation timeframe for 
these Programs make operational risk more of a concern than in 
established Department programs. For the low risk scenario, the 
analysis below assumes a 10 basis point increase in cost, reflecting 
risks other than credit or market risk, as banks are currently required 
to finance on average about eight percent of their assets with capital. 
For the high scenario, we raised the factor related to operational risk 
by 70 basis points to equal a total of 0.80 percent. We estimated this 
worst-case scenario using survey data from bank regulators implementing 
an overhaul of bank regulations. The largest United States banking 
organizations will be subject to a new system of capital requirements 
which includes an explicit charge for operational risk. Under that 
regulation banks must develop models generating a probability 
distribution of losses for operational risk, and hold capital equal to 
the 99.9th percentile of that estimated probability distribution. Banks 
were surveyed to measure the anticipated impact of the regulation. 
Using the best available models of operational risk, the banks reported 
that operational risk would account for roughly ten percent of their 
required capital. As banks currently finance on average about eight 
percent of their assets with capital, worst-case scenario operational 
risk losses can thus be estimated at about one percent of total assets. 
Also, while we do not believe that this program has, or necessarily 
will, face such a level of operational risk, we developed the high 
scenario to ensure that the program is cost neutral, even under extreme 
and unlikely circumstances.
      Claim rejects. This risk factor takes into account the 
costs associated with the purchase of loans that would not typically 
qualify for the federal guarantee in the FFEL program due to improper 
origination or servicing. The 6 basis point increase in cost is based 
on a historical rejected claim rate of 1 percent of volume, and assumes 
that these loans would have higher loss rates than the average 
portfolio.
    Cost estimates reflecting these factors, for each of the market 
condition and lender behavior scenarios discussed elsewhere in this 
notice, were calculated and included, as illustrated in Tables 2 and 3. 
As those analyses show, even with these risk adjustments, the estimated 
costs of the loans included in the Purchase Program and Participation 
Program remained lower than those for standard FFELP loans.
    Conclusion. After taking into account alternative market and lender 
behavior scenarios and appropriate risk factors, the Secretaries and 
Director determine that the Purchase Program and Participation Program 
are in the best interest of the United States and will result in no net 
cost to the Federal Government (including the cost of servicing the 
loans purchased).
    Applicable Program Regulations: 34 CFR part 682.

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

    Program Authority: 20 U.S.C. 1087i-1.

    Dated: June 25, 2008.
Margaret Spellings, Secretary of Education.
Dated: June 25, 2008. Henry M. Paulson, Jr., Secretary of the Treasury.
Dated: June 25, 2008. Jim Nussle, Director, Office of Management and Budget. BILLING CODE 4000-01-P [[Page 37427]] [GRAPHIC] [TIFF OMITTED] TN01JY08.049 [[Page 37428]] [GRAPHIC] [TIFF OMITTED] TN01JY08.050 [[Page 37429]] [GRAPHIC] [TIFF OMITTED] TN01JY08.051 [[Page 37430]] [GRAPHIC] [TIFF OMITTED] TN01JY08.052 [[Page 37431]] [GRAPHIC] [TIFF OMITTED] TN01JY08.053 [[Page 37432]] [GRAPHIC] [TIFF OMITTED] TN01JY08.054 [[Page 37433]] [GRAPHIC] [TIFF OMITTED] TN01JY08.055 [[Page 37434]] [GRAPHIC] [TIFF OMITTED] TN01JY08.056 [[Page 37435]] [GRAPHIC] [TIFF OMITTED] TN01JY08.057 [[Page 37436]] [GRAPHIC] [TIFF OMITTED] TN01JY08.058 [[Page 37437]] [GRAPHIC] [TIFF OMITTED] TN01JY08.059 [[Page 37438]] [GRAPHIC] [TIFF OMITTED] TN01JY08.060 [[Page 37439]] [GRAPHIC] [TIFF OMITTED] TN01JY08.061 [[Page 37440]] [GRAPHIC] [TIFF OMITTED] TN01JY08.062 [[Page 37441]] [GRAPHIC] [TIFF OMITTED] TN01JY08.063 [[Page 37442]] [GRAPHIC] [TIFF OMITTED] TN01JY08.064 [[Page 37443]] [GRAPHIC] [TIFF OMITTED] TN01JY08.065 [[Page 37444]] [GRAPHIC] [TIFF OMITTED] TN01JY08.066 [[Page 37445]] [GRAPHIC] [TIFF OMITTED] TN01JY08.067 [[Page 37446]] [GRAPHIC] [TIFF OMITTED] TN01JY08.068 [[Page 37447]] [GRAPHIC] [TIFF OMITTED] TN01JY08.069 [[Page 37448]] [GRAPHIC] [TIFF OMITTED] TN01JY08.070 [[Page 37449]] [GRAPHIC] [TIFF OMITTED] TN01JY08.071 [[Page 37450]] [GRAPHIC] [TIFF OMITTED] TN01JY08.072 [[Page 37451]] [FR Doc. E8-14820 Filed 6-30-08; 8:45 am] BILLING CODE 4000-01-C

Last Modified: 06/30/2008