Publication Date: January 15, 2009
Posted Date: January 15, 2009
Subject: Notice of terms and conditions of additional purchase of loans under the Ensuring Continued Access to Student Loans Act of 2008
FR Type: Notice
[Federal Register: January 15, 2009 (Volume 74, Number 10)] [Notices] [Page 2518-2564] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr15ja09-78] ----------------------------------------------------------------------- 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 additional purchase of loans under the Ensuring Continued Access to Student Loans Act of 2008. ----------------------------------------------------------------------- SUMMARY: Under the authority of section 459A of the Higher Education Act of 1965, as amended (``HEA''), as enacted by the Ensuring Continued Access to Student Loans Act of 2008 (Pub. L. 110-227) and amended by Public Law 110-315 and Public Law 110-350, the Department of Education (``Department'') may 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 establishes the terms and conditions that will govern certain loan purchases made under section 459A of the HEA, as extended by Public Law 110-350, including (a) purchases from an asset-backed commercial paper vehicle referred to as an ``ABCP Conduit'' or ``Conduit'' (``ABCP Conduit Program'') and (b) replication for the 2009-2010 academic year of the Loan Participation Purchase Program (``2009-2010 Participation Program'') and Loan Purchase Commitment Program (``2009-2010 Purchase Program'') (collectively, ``Programs''). This notice also outlines the Department's methodology and factors that have been considered in evaluating the price at which the Department will purchase these additional FFELP loans; and describes how the use of those factors and methodology will ensure that the additional 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, based on the Department's analysis, the purchase of additional loans as described in this notice is 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 purchase of loans under the 2009-2010 Participation Program and Purchase Program, and the ABCP Conduit Program are effective January 16, 2009. FOR FURTHER INFORMATION CONTACT: U.S. Department of Education, Office of Federal Student Aid, Union Center Plaza, 830 First Street, NE., room 111G3, Washington, DC 20202. Telephone: (202) 377-4401 or by e-mail: ffel.agreementprocess@ed.gov. [[Page 2519]] 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 accessible format (e.g. , braille, large print, audiotape, or computer diskette) on request to the office listed under FOR FURTHER INFORMATION CONTACT. SUPPLEMENTARY INFORMATION: Introduction The Department's purchase of FFELP loans is intended primarily to ensure that students and parents continue to have access to FFELP loans for the remainder of the 2008-2009 academic year and for the 2009-2010 academic year. The Department of Education first exercised its authority under section 459A of the HEA in July 2008, when the Secretaries and Director established the Participation Program and Purchase Program for eligible loans made for academic year 2008-2009.\1\ --------------------------------------------------------------------------- \1\ The Secretaries and Director announced the terms and conditions governing the Participation Program and the Purchase Program for academic year 2008-2009 in a notice published in the Federal Register on July 1, 2008 (73 FR 37422). Minor revisions to this notice were published in the Federal Register on July 17, 2008 (73 FR 41048). --------------------------------------------------------------------------- Under the Participation Program, the Department has purchased participation interests in eligible loans that are held by an eligible lender acting as a sponsor under a Master Participation Agreement. Under the Purchase Program, the Department has purchased eligible loans that are held by eligible lenders. To participate in either the Participation Program or the Purchase Program, a lender must enter into an agreement with the Department for that program. Subsequent to the announcements of the Purchase Program and Participation Program in July, the Secretary of Education concluded that additional action was necessary to ensure students and parents have access to FFELP for the remainder of the 2008-2009 academic year. Specifically, the Secretaries and Director acknowledged the possibility that some lenders would not be able to obtain capital to make second disbursements of 2008-2009 academic year FFELP loans even for the short-term necessary before lenders can utilize the ABCP Conduit Program. To provide needed liquidity to support new lending, the Department, through the Short-term Purchase Program announced in December 2008, extended the offer to purchase loans to include eligible loans made for the 2007-2008 academic year. The Department at that time gave notice that it would purchase such loans beginning on or about December 1, 2008 and would continue purchasing them through February 28, 2009 or the date on which one or more conforming Asset-Backed Commercial Paper (ABCP) Conduits for purchasing FFELP loans become operational, whichever occurs earlier. Through the Short-term Purchase Program, the Department will expend up to $500 million to purchase eligible loans each week during this period, for a potential total aggregate amount of up to $6.5 billion. The Secretaries and the Director believe that, although capital markets have improved, lenders may continue to have difficulty in obtaining funding to make loan commitments for the upcoming academic year, or to make subsequent disbursements on loans, without a commitment from the Department to purchase those loans. To address this need, the Secretaries and the Director have concluded that the Purchase Program and the Participation Program should be replicated for the 2009-2010 academic year. The Secretaries and the Director further conclude that the Department should enter into forward purchase commitments with one or more conforming ABCP Conduits that can purchase FFELP loans, and thereby provide additional liquidity to support new lending. An entity that wishes to establish an ABCP Conduit must submit such offers to the Department at www.federalstudentaid.ed.gov/ ffelp. Terms and Conditions Pursuant to section 459A of the HEA, the Secretaries and Director establish the terms and conditions that will govern these additional purchase programs. The terms and conditions governing the replication of the Loan Purchase Program for academic year 2009-2010 (``2009-2010 Loan Purchase Commitment Program Terms and Conditions'') are attached as Appendix A to this notice; those governing the replication of the Participation Program for academic year 2009-2010 (``2009-2010 Loan Participation Program Terms and Conditions'') are attached as Appendix B to this notice, and those governing the ABCP Conduit Program are attached as Appendix C to this notice. The 2009-2010 Purchase Program and 2009-2010 Participation Program will operate for the 2009-2010 academic year in substantially the same way as the Purchase Program and Participation Program did for the 2008- 2009 academic year. Under the ABCP Conduit Program, the Department will enter into forward purchase commitments to purchase FFELP loans (subsidized Stafford loans, unsubsidized Stafford loans, and PLUS loans) on which the lender made the first disbursement on or after October 1, 2003, but no later than June 30, 2009, fully disbursed no later than September 30, 2009, and conveyed to the Conduit no later than June 30, 2010. The Department will not agree to purchase FFELP Consolidation loans under this program. In order to participate in the ABCP Conduit Program, a sponsoring entity must enter into a ``Put Agreement'' with the Department consistent with the terms and conditions stated in Appendix C. The Put Agreement will establish the nature of the relationship between the Department and the Conduit and Conduit Manager. The Department will agree to purchase loans from the Conduit upon demand as needed to support the issuance of commercial paper by the Conduit. The Conduit is expected to exercise the Put only after the Conduit has attempted to obtain funds to meet maturing commercial paper from other resources, including other financial institutions, and has either been unable to do so, or, if it has obtained such funding, is unable to issue new commercial paper sufficient to obtain funds to repay those borrowings. As explained in detail in Appendix C, the Department will agree to purchase loans at either 97 percent or 100 percent of the total of the outstanding principal balance plus accrued but unpaid interest as of the purchase date, depending on the characteristics of the loan. The Conduit may purchase loans as defined in the Put Agreement and the attached terms and conditions for the ABCP Conduit Program in Appendix C. Loans purchased by the Conduit must have been selected from the seller's portfolio in a manner that assures the sale to the Conduit of loans is fairly representative of the seller's total portfolio of conduit eligible loans. In addition, a lender that sells the Conduit a loan owed by a particular borrower must also sell the Conduit all other eligible loans it holds for that particular borrower. Under the 2009-2010 Purchase Program and 2009-2010 Participation Program, the Department will purchase loans or participation interests in loans that have ``eligible borrower benefits,'' which are borrower benefits previously deemed acceptable in the 2008-2009 programs (upfront fee reductions already consummated or interest reductions not exceeding .25 percent conditioned on borrower use of an automatic loan payment process). [[Page 2520]] However, under the ABCP Conduit Program, the Department will agree to purchase loans with a broader range of borrower benefits, as summarized in the terms and conditions for the ABCP Conduit Program in Appendix C to this notice. In addition, a list of those specific borrower benefits will be posted to the Department's Web site at http:// www.federalstudentaid.ed.gov/ffelp. While loans that have a direct payment to a borrower as a borrower benefit--rather than an interest or principal reduction--are eligible for inclusion in the Conduit, the Department will require the holder of the loan to make the payment to the borrower prior to sale to the Department, regardless of whether the borrower actually earned the benefit. The Department will also require the seller of the loan to establish a reserve for this purpose. Outline of Methodology and Factors in Determining Prices for All Programs In accordance with Public Law No. 110-227, Public Law 110-315, and Public Law 110-350, the goal in structuring the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program is to maximize student loan availability while ensuring loan purchases result in no net cost to the Federal Government. The Secretaries and Director described the basis for determining the cost neutrality for the Purchase Program and Participation Program in the Federal Register notice published on July 1, 2008 (73 FR 37422). While this notice provides updated cost estimates, the methodology remains essentially the same for the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program based on analysis of the Department of Education. This section of the notice responds in particular to the statutory requirement 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 no net cost to the Federal Government results from the loan purchases for the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program. Price: To determine the price at which FFELP loans would be purchased from the Conduit, the Secretary of Education considered several factors. These factors included the price that would ensure this program resulted in no net cost to the Federal Government; the increased liquidity that the rate would offer distressed lenders; borrower benefits; and other factors. Based on this analysis, the Secretary of Education determined that 100 percent of outstanding principal and accrued interest was the appropriate price for those loans first disbursed on or after May 1, 2008, with no borrower benefits or only ``eligible borrower benefits,'' and not more than 255 days delinquent at the time of purchase, and 97 percent of principal and interest for any other loans. For the 2009-2010 Purchase Program and the 2009-2010 Participation Program, the Secretary of Education determined that the prices used for the 2008-2009 Programs remained the appropriate prices for 2009-2010. The Department will pay a purchase price for a loan for 2009-2010 of 100 percent of outstanding principal and interest plus one percent fee previously paid on the loan and $75.00. To purchase a participation interest in 2009-2010 loan, the Department will pay 100 percent of the amount of the outstanding principal (including any capitalized interest) of the loan at the time of purchase of the interest. Analysis of Cost Neutrality The cost-neutrality analysis conducted solely by the Department of Education used, in part, credit subsidy cost estimation procedures established under the Federal Credit Reform Act of 1990 (Pub. L. No. 101-508) and OMB Circular A-11. These procedures entail performing various analyses to project cash flows to and from the Government, excluding administrative costs. For changes to outstanding FFELP guaranteed loans, the analysis reflects the modification cost, or the difference between the estimate of the net present value of the remaining cash flows underlying the most recent President's Budget for such loan guarantees, and the estimate of the net present value of these cash flows after the purchase program, reflecting only the effects of the modification. For new loans, cash flows are discounted to the point of disbursement, using the Credit Subsidy Calculator 2 (``OMB calculator''), developed by the Office of Management and Budget to estimate credit subsidy costs for all Federal credit programs, as the discounting tool. Costs for new loans can be expressed as 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. The metric to determine cost neutrality was that costs under the new programs should not exceed costs expected under the FFELP in the absence of these programs. All cost estimates were based on economic and technical assumptions developed for the FY 2009 President's Budget for the FFELP, updated to reflect the impact of statutory or administrative actions that have occurred since the budget was published in February 2008. Student loan cost estimates were developed to assess the Federal cost incurred for loans financed for each loan type. The analysis also considered risk factors particular to the 2009-2010 Purchase Program, the 2009-2010 Participation Program and the ABCP Conduit Program, such as the likelihood that lenders would sell only their least profitable loans. This discussion outlines the Department's analysis of the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program with respect to the following critical aspects affecting the Federal cost:Administrative costs Borrower behavior Lender behavior Risk factors Administrative Costs. Federal administrative costs are normally not included in subsidy cost calculations. To capture the full cost of the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program, however, section 459A of the HEA requires that the determination of cost neutrality reflect total costs, including Federal administrative costs subject to annual appropriation, and these costs were included in this analysis. Administrative cash flows primarily involve servicing costs associated with loans purchased by the Department. These costs can extend for up to 40 years, as servicing must continue until the last loan is paid in full. Under the base scenario for the 2009-2010 Participation and Purchase Programs, servicing costs would be $557 million on a present value basis. Servicing costs associated loans put to the Department from an ABCP Conduit, weighted across the three loan volume scenarios discussed below under ``Lender Behavior,'' would be $35 million on a net present value basis. The Department's estimates were developed using the price structure of the Department's servicing contract for put loans, with adjustments for start-up costs, inflation, and other costs. Borrower Behavior. Since the base FFELP serves as the foundation of the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the [[Page 2521]] ABCP Conduit Program, and the characteristics of the base program are unchanged, there is no reason to believe that the 2009-2010 Purchase Program, the 2009-2010 Participation Program, or the ABCP Conduit Program will affect borrower behavior. Thus, this cost analysis uses borrower behavior assumptions used to prepare the FY 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 proposed programs would operate in a cost-neutral manner was lender behavior: specifically for the ABCP Conduit Program, how many ABCP Conduits would be created, and for the 2009-2010 Purchase Program and the 2009-2010 Participation Program, how many lenders would participate in the program, including how many and what type of loans would they eventually choose to sell to the Department. The Department considered alternative scenarios of lender behavior to determine whether the 2009- 2010 Purchase Program, the 2009-2010 Participation Program, and ABCP Conduit Program could be considered cost-neutral under each. Because the ABCP Conduit Program would allow the Conduit Manager to sell loans with contingent borrower benefits--such as interest rate reductions for a specified number of on-time payments--all alternatives include an adjustment to reflect the impact of these potential reductions on future loan repayments. Consistent with stress tests applied by rating agencies in the private securitization market, this adjustment reduces the net cash flow to the Government by reducing the principal of sold loans by 0.5 percent a year. Based on an analysis of lender and probability data provided by the Treasury Department and the Department of Education's financial advisors, it was determined the most likely size of the ABCP Conduit Program was $25 billion. Within that total, three scenarios were used to assess the impact of different behavior by participating lenders. The first assumed the ABCP Conduit Program would be unsuccessful and 100 percent of loans would be put to the Department on October 1, 2009; the likelihood of this scenario occurring was 2 percent. Under Scenario 2, ongoing minor market disruptions were assumed to result in 20 percent of loans being put, evenly distributed across the five-year life of the ABCP Conduit; this scenario had a likelihood of 10 percent. The third and most probable scenario, with an 88 percent likelihood, assumed that, at the end of the ABCP Conduit, not-for-profit lenders would put 75 percent of their volume and for-profit lenders would put 10 percent of their volume. Scenarios 2 and 3 both also assume loans would be put upon becoming more than 210 days delinquent. Consolidated results were developed weighted by each scenario's relative probability. Two scenarios were examined for the 2009-2010 Participation Program, one under which lenders would put 100 percent of loans financed through the program at the end of 2010 and one under which lenders would put 50 percent of loans financed through participations and redeem the other 50 percent. For the latter scenario, the Department assumed a ``worst case'' in which lenders sold their smallest, least profitable loans. Because long-term loan servicing costs are generally charged on an account basis independent of loan size, small loans tend to be less profitable than larger loans. Considering the probability of the various scenarios, the Department determined that costs for the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program were less expensive to the Government than baseline subsidy costs for FFELP loans. (Please see Tables in this notice for a summary of the analysis.) Risk Factors. Analyzing whether the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program would operate in a cost-neutral manner requires that projected costs account for the presence of various risk factors that must be assumed since these programs will not operate entirely like the base FFELP, or without operational risk. As such, the Secretary of Education's estimates for the 2009-2010 Purchase and Participation Programs included the same adjustments included for the original 2008-2009 programs. For the ABCP Conduit Program, the estimates include five risk factors: (1) That improvements in the national economy will reduce lenders' incentives to put loans for the ABCP Conduit; (2) that some of the loans purchased by the Department would be those on which the Department would reject a reinsurance claim under the FFELP (``claim rejects''); (3) that unforeseen problems undermine the Department's ability to effectively oversee and administer the ABCP Conduit Program (``operational risk''); (4) that costs related to servicing purchased loans do not fully reflect possible future requirements (``general administrative risk''); and (5) that the composition of loans ultimately sold to the Department may result in higher Federal costs than the composition assumed in this analysis (``portfolio composition risk''). To ensure cost estimates reflect a conservative assessment of possible Federal costs, the Secretary of Education added cost adjustments to incorporate each risk factor. The adjustments were based on an assessment of private-sector behavior and program data as follows: Economic Factors. While the current estimates assume a general improvement in the national economy, it also assumes that there will be some periods wherein it will be in lenders' financial interest to sell loans in the ABCP Conduit to the Department. Because there is a chance conditions will be such that lenders will choose to fund these loans privately rather than sell them to the Department, a risk factor of 50 basis points has been added to the estimate. Claim Rejects. This risk factor takes into account the costs associated with the purchase of loans that would not typically qualify for the federal reinsurance coverage under the FFELP due to improper origination or servicing. The 12 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 lower loss rates than the average portfolio. Operational Risk. This factor addresses risks that might result from servicing errors, technology failures, or fraud. The Department has made every effort to mitigate operational risk. Nonetheless, this analysis assumes a very conservative 100 basis point risk factor to reflect reduction in program cost to reflect this risk. This is consistent with the risk factor used for the original Participation and Purchase Programs. General Administrative Risk. The Department's analysis of cost neutrality examined the Department's current loan servicing contract and assumptions of borrower status over the life of the loan after purchase by the Department. The Department's analysis assumed minimal start-up costs because the ABCP [[Page 2522]] Conduit Program builds on the current previously established programmatic infrastructure. In December 2008, the Department extended its current loan servicing contract for one year. This involved the renegotiation of payment rates for certain activities which may affect long-term servicing costs for the loans purchased under the original Purchase Program, the original Participation Program, the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program. Given the future uncertainty surrounding several factors, including the assumptions outlined in this notice and the status of loans ultimately purchased by the Department, it is possible that unforeseen additional costs may be incurred. Accordingly, a General Administrative Risk Factor of 100 basis points was added to the analysis. Portfolio Composition Risk. The cost to the Government of the ABCP Conduit Program depends on numerous factors, including loan size, default/prepayment risk, borrower benefits, and other characteristics of the purchased loans. The cost-neutrality analysis accounts for some of these factors, as outlined in this notice, but may not incorporate all of the dimensions of lender behavior and the loans ultimately purchased by the Department. Given this uncertainty, savings may deviate to some degree from the Department's estimate of savings in the model. To ensure that the potential risk and the potential costs are adequately reflected, a Portfolio Composition Risk Factor of 100 basis points was added to the analysis. The Department also considered a high operational risk scenario in which the cost assessment for operation risk was raised from 20 basis points to 80 basis points. Even with this increased assessment, the Department estimates that the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program remain cost- neutral. The Terms and Conditions for the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program seek to reduce the likelihood of lenders exclusively selling low-balance loans. Lenders will be required to sell all eligible loans they hold for a specific borrower into the ABCP Conduit, and the Conduit Manager would be required to select loans for any put to the Department in a manner that assures that the loans to be put are representative of the Conduit portfolio. These provisions make it less likely that lenders will choose to sell only poorly-performing loans to the Department. Conclusion. After taking into account alternative market and lender behavior scenarios, the Administration determines that the 2009-2010 Purchase Program, the 2009-2010 Participation Program, and the ABCP Conduit Program are in the best interest of the United States and will result in no net cost to the Government. Applicable Program Regulations: 34 CFR part 682. 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/index.html. 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 at the following site: http://www.ifap.ed.gov. You may obtain a copy of the Master Loan Sale Agreement and direction regarding submission of the Master Loan Sale Agreement and offers to sell loans at http://federalstudentaid.ed.gov/ffelp. 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) Program Authority: 20 U.S.C. 1087i-1. Dated: January 9, 2009. Margaret Spellings, Secretary of Education. Dated: January 9, 2009. Henry M. Paulson, Jr., Secretary of the Treasury. Dated: January 9, 2009. Stephen S. McMillin, Deputy Director, Office of Management and Budget. 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E9-712 Filed 1-14-09; 8:45 am] BILLING CODE 4000-01-C