[Federal Register Volume 59, Number 197 (Thursday, October 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25363]
[[Page Unknown]]
[Federal Register: October 13, 1994]
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Part II
Department of Education
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34 CFR Part 682
Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AC09
Federal Family Education Loan Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Secretary proposes to amend the Federal Family Education
Loan (FFEL) Program regulations. The FFEL Program consists of the
Federal Stafford, Federal Supplemental Loans for Students (SLS),
Federal PLUS, and the Federal Consolidation Loan Programs. These
amendments are needed to implement certain changes made to the Higher
Education Act of 1965, as amended (HEA), by the Omnibus Budget
Reconciliation Act of 1993, enacted August 10, 1993, and by the Higher
Education Technical Amendments of 1993, enacted December 20, 1993. The
proposed regulations would also amend the FFEL Program regulations to
permit a lender to issue a ``master check'' to an institution for
purposes of disbursing Federal Stafford loan proceeds to an
institution, to prohibit a subsequent holder of a loan to bill the
Secretary for any applicable interest benefits or special allowance on
a loan for which origination fees have not been paid, and to limit the
collection charges that may be assessed a borrower with a defaulted
loan that is paid off through loan consolidation. The proposed
regulations would implement section 428(n) of the HEA as amended by
OBRA which requires a State to share the costs of defaulted Federal
Stafford and Federal SLS loans with the Federal government.
DATES: Comments must be received on or before November 14, 1994.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Ms. Patricia Newcombe, Chief, Federal Family Education
Loan Program Section, Loans Branch, U.S. Department of Education, 600
Independence Avenue, SW., room 4310, Regional Office Building 3,
Washington, DC 20202-5343. Comments may also be sent through the
internet to ``[email protected]''
A copy of any comments that concern information collection
requirements should also be sent to the Office of Management and Budget
at the address listed in the Paperwork Reduction Act section of this
preamble.
FOR FURTHER INFORMATION CONTACT: Mr. Douglas D. Laine, Program
Specialist, Federal Family Education Loan Program Section, Loans
Branch, U.S. Department of Education, 600 Independence Avenue, SW.,
room 4310, Regional Office Building 3, Washington, DC 20202-5343,
telephone: (202) 708-8242. Individuals who use a telecommunications
device for the deaf (TDD) may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern
time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
Background
The FFEL Program regulations (34 CFR Part 682) govern the Federal
Stafford Loan Program, the Federal SLS Program, the Federal PLUS
Program, and the Federal Consolidation Loan Program (formerly the
Guaranteed Student Loan programs).
The Secretary is proposing to revise 34 CFR Part 682 to implement
changes made to the HEA by the Omnibus Budget Reconciliation Act of
1993 (OBRA) (Pub. L. 103-66) and the Higher Education Technical
Amendments of 1993 (the Technical Amendments)(Pub. L. 103-208). OBRA
added section 428(n) to the HEA to require a State to pay a fee to the
Secretary based on the State's new FFEL loan volume and the dollars
associated with the most recent cohort default rates calculated for
schools in that State. This provision is intended to encourage a State
to ensure that its educational institutions provide quality services to
their students. A State may achieve this objective through licensing
and State Postsecondary Review Entities. This provision is also
intended to partially offset the cost to the Federal government of
paying student loan default claims.
These proposed regulations would also amend the FFEL Program
regulations to reflect certain other changes made to the HEA by OBRA.
The Secretary proposes to amend the regulations to reflect statutory
provisions providing for the payment of lender referral fees to
guaranty agencies, the reduction of the reinsurance coverage and
reinsurance rates for a guaranty agency's losses on default claims and
the reduction of insurance coverage a guaranty agency may pay on
default claims.
These proposed regulations would also amend the FFEL Program
regulations to reflect certain changes to the HEA by the Technical
Amendments. These changes require a lender to rebate excess interest on
certain Federal Stafford loans to either the borrower or the Secretary
and require lenders to convert the interest rates on certain Federal
Stafford loans to a variable interest rate.
These proposed regulations would also amend the FFEL Program
regulations to permit a lender to disburse Federal Stafford loan
proceeds to a school via a master check. This change is needed to
facilitate a lender's ability to disburse Federal Stafford loans. These
proposed regulations would also prohibit a subsequent holder of a loan
to bill the Secretary for any applicable interest benefits or special
allowance on a loan for which origination fees have not been paid. This
change is needed to ensure that origination fees are paid on a loan if
the loan is sold by considering the loan ineligible for reinsurance if
such fees are not paid. These proposed regulations would also limit the
collection charges that may be assessed a borrower with a defaulted
loan that is paid off through loan consolidation. This change will
encourage a borrower to get his or her loan out of default for purposes
of Title IV eligibility by having it paid off through consolidation.
The proposed regulations would delete current Sec. 682.407--
Administrative Cost Allowance for Guaranty Agencies. This section is no
longer needed because OBRA removed the Secretary's authority for paying
an administrative cost allowance to a guaranty agency from the HEA.
Proposed Regulatory Changes
The following summarizes the major changes in this notice of
proposed rulemaking:
Section 682.202 Permissible charges by lenders to borrowers.
The proposed regulations would implement the requirements of
section 427A(i) of the HEA as amended by the Technical Amendments. The
changes in this section reflect the new statutory language that
requires lenders to return excess interest to certain Stafford loan
borrowers or the Secretary and requires the conversion of the interest
rate on certain Federal Stafford loans to a variable interest rate.
Section 682.207 Due diligence in disbursing a loan.
The proposed regulations would extend a provision of the FFEL
Program regulations that were published on June 28, 1994 (59 FR 33334)
that permitted the use of a master check for purposes of disbursing
PLUS loans to the Federal Stafford loan programs. This proposed rule
would allow a lender to use a master check to disburse Federal Stafford
loans, thereby facilitating their disbursement. A ``master check'' is a
check representing the disbursement of loan proceeds for more than one
borrower. If a master check is used, the lender must provide the school
with a list of the borrower's names, social security numbers, and the
loan amounts disbursed through the master check. The proposed
regulations would also require a lender to provide a school with a list
of the borrowers' names, social security numbers, and the loan amounts
if the loans are disbursed by electronic funds transfer.
Section 682.305 Procedures for payment of interest benefits and
special allowance.
The proposed regulations would amend the FFEL Program regulations
to require an originating lender to pay origination fees to the
Secretary. In many cases, the Secretary is not recovering the
origination fees from the originating lender or any subsequent holder
of a loan when the loan is sold. A June 1994 report conducted by the
General Accounting Office and the Office of the Inspector General (GAO/
AIMD-94-131 and ACN 17-30302) has identified this as a potentially
serious area of abuse that may be costing the Department a significant
amount of money. The Secretary has decided that regulatory controls are
needed to help reduce the incidence of abuse in this area. Therefore,
in addition to the proposed rule that would require the originating
lender to pay origination fees, the proposed regulations would also
prevent a subsequent holder of a loan for which the origination fees
were not paid from receiving any interest benefits or special allowance
on that loan, or a guaranty agency from receiving reinsurance payments
from the Secretary on that loan, until the origination fees have been
paid.
Section 682.401 Basic program agreement.
The proposed regulations are needed to implement section 428(e) of
the HEA. Under this section, the Secretary will pay a lender referral
fee to each guaranty agency with whom the Secretary has a lender
referral agreement in an amount equal to 0.5 percent of the principal
amount of a loan made as a result of the agency's referral services.
The proposed regulations would also change the regulations to
reflect a change made by OBRA to section 428(b)(1)(G) of the HEA that
limits a guaranty agency to paying 98 percent of the unpaid principal
balance of each loan on default claims on loans disbursed on or after
October 1, 1993.
The proposed regulations would add a new paragraph to the
regulations that would limit the amount of collection charges and late
fees a guaranty agency may guarantee when a defaulted loan is
consolidated. Under the proposed regulations, a guaranty agency may not
guarantee a consolidation loan that includes a defaulted loan if the
collection fees and late charges assessed the borrower on the defaulted
loan being consolidated exceeds 18.5 percent of the outstanding
principal and interest on the defaulted loan at the time the pay-off
amount of the loan is certified to the consolidating lender. The
Secretary is proposing this provision to limit the amount of collection
fees and late charges that a borrower may be liable for on a defaulted
FFEL Program loan if such loan is consolidated. Because collection
charges and late fees may be as high as 42 percent of the outstanding
principal and interest of a defaulted loan, the Secretary is proposing
this limitation to encourage a borrower to pay off a defaulted loan
through loan consolidation and bring the loan out of default for
purposes of title IV eligibility.
Section 682.404 Federal reinsurance agreement.
The proposed regulations would amend this section of the
regulations to reflect a change made by OBRA to section 428(c)(1) of
the HEA that reduces the percentages the Secretary will reinsure on a
guaranty agency's default claims on loans made on or after October 1,
1993 from 100, 90, and 80 percent to 98, 88, and 78 percent,
respectively, with two exceptions. First, the Secretary will reinsure
loans at 100, 90, or 80 percent that are transferred from an insolvent
guaranty agency or from an agency that withdraws its participation in
the FFEL Program, under a plan approved by the Secretary. Second, the
Secretary will provide 100 percent reinsurance for loans made under an
approved lender-of-last-resort program.
Section 682.418 State share of default costs.
This proposed rule would add a new Sec. 682.418 to the FFEL Program
regulations to implement a change made by OBRA to section 428(n) of the
Higher Education Act of 1965 (HEA). This provision requires a State to
pay a fee to the Secretary if a school located in that State has a
cohort default rate that exceeds 20 percent. The purpose of this fee is
to partially offset the cost to the Federal government of paying
default claims on FFEL Program loans by requiring a State to share the
cost of defaults by student borrowers attending schools in the State. A
State will be required to pay the fee to the Secretary within 60 days
after the date it is notified by the Secretary of the fee it must pay.
Section 428(n) mandates a formula for the Secretary to use to
determine the amount of the State's fee. The State's fee is calculated
by multiplying the State's new loan volume for FFEL Program loans for
all schools in the State for the current fiscal year by 12.5 percent,
and multiplying that result by the sum of the amounts calculated as
explained in the following paragraph for each school in the State with
a cohort default rate that exceeds 20 percent. That result is then
divided by the amount of loan volume attributable to current and former
students of schools in that State who entered repayment during the
fiscal year used in calculating the cohort default rates. Under section
428(n), the amount by which the State's new loan volume is multiplied
increases from 12.5 percent to 20 percent in fiscal year 1996 and to 50
percent in fiscal year 1997 and succeeding fiscal years.
The amount by which a school exceeds the 20 percent default
standard for this calculation is the amount of loan volume in default
for the cohort default rate for the school minus 20 percent of the
loans attributable to current and former students of the school who
entered repayment during the fiscal year used in calculating the cohort
default rate.
The statutory requirements are more clearly represented using the
following formula:
New Loan Volume x 0.125 x {[A-(B x .2)] C}
A=Dollars in default attributed to the cohort default rate for all
schools in the State that have rates that exceed 20 percent.
B=Dollars entering repayment attributed to the cohort default rate for
all schools in the State that have rates that exceed 20 percent.
C=Dollars entering repayment attributed to the cohort default rate for
all schools in the State.
The Secretary is considering the following approaches to implement
the formula and is interested in public comment as to which approach
would best implement the statute. The language in the statute indicates
that the fee structure should be calculated using the new loan volume
attributable to all institutions in the State for the current fiscal
year. However, the Secretary will not know the final new loan volume
data for a fiscal year until after the fiscal year has ended. The
Secretary has identified the following two options to implement the
statute: (1) to use the new loan volume for the fiscal year that
precedes the fiscal year in which the fee is determined; or (2) to
estimate the new loan volume for the fiscal year during which the State
is assessed a fee. Also, because the time of the year the Secretary
will be determining the fee coincides with the time of the year cohort
default rates are generally determined, the Secretary may be presented
with the opportunity to use either the cohort default rates that are
currently being issued, or the rates that were issued the previous
year. Schools would have had the chance to appeal the rates that were
issued in the previous year based on inaccurate data, while the newer
rates will more likely reflect the school's current situation. The
Secretary is interested in comments regarding which rate should be used
if this situation arises.
The following example illustrates the application of the statutory
formula and the resulting fee a State would be required to pay. If the
new loan volume for a State is $100 million and $40 million of Stafford
and SLS loans entered repayment during the fiscal year used for the
relevant cohort default rates, and the dollars associated with the
default rates of the schools in the State with cohort default rates
above 20 percent is $10 million entering repayment and $4 million
entering default, the State would pay $625,000 as a default offset fee
for fiscal year 1995.
$100m x 12.5% x {[$4m - ($10m x .2)] $40m} = $625,000
A State may charge a fee to schools located in the State that
participate in the FFEL Program to defray the fee assessed the State by
the Secretary. As required by the statute, the State's fee structure
must be approved by the Secretary and be based on the relationship of
the school's cohort default rate to the default fee assessed the State
by the Secretary. A State may not develop its fee structure so that a
school is assessed a fee by a State that is greater than that school's
contribution to the fee the State is required to pay the Secretary. The
State's school fee payment structure must also include a procedure by
which a school with a high cohort default rate may be exempted from
payment of the fee if the school can demonstrate to the satisfaction of
the State that exceptional mitigating circumstances contributed to its
cohort default rate. A State must provide a school a reasonable amount
of time from the date it notifies the school that it is being assessed
a fee under this provision to either pay the fee or submit an appeal,
with appropriate documentation that demonstrates that exceptional
mitigating circumstances contributed to its cohort default rate. The
Secretary is particularly interested in knowing if the public believes
it would be appropriate for the Secretary to provide regulatory
guidance with respect to the exceptional mitigating circumstances a
State may select. The Secretary also is interested in knowing if the
public believes the following criteria would assist the States in
developing their exceptional mitigating circumstances:
(1) The completion and job placement rates of Stafford and SLS loan
borrowers at the school whose loans entered repayment during the fiscal
year used for calculating the school's cohort default rate;
(2) The regional or State unemployment rates during the fiscal year
used for calculating the school's cohort default rate and during the
subsequent fiscal year;
(3) The income level of former Stafford and SLS loan borrowers at
the school whose loans entered repayment during the fiscal year used
for calculating the school's cohort default rate and during subsequent
fiscal year;
(4) The exceptional mitigating circumstances criteria currently
reflected in 34 CFR 668.17(d)(ii) under which a school may appeal its
loss of eligibility to participate in the FFEL Program;
(5) The school's status as a Historically Black College and
University, a Tribally Controlled Community College under section
2(a)(4) of the Tribally Controlled Community College Assistance Act of
1978, and a Navajo Community College under the Navajo Community College
Act.
The Secretary is particularly interested in receiving public
comment on these criteria as well as other criteria the public believes
may assist a State in developing its exceptional mitigating
circumstances.
A State may not attempt to collect a fee from a school under these
regulations during the school's appeal of the fee to the State or if
the school satisfactorily demonstrates to the State that exceptional
mitigating circumstances contributed to its cohort default rate.
The Secretary is interested to know if the public believes that the
State should be responsible in whole, or in part, for the portion of
the State's fee that is attributed to: (1) the fees that are attributed
to a school that has closed or no longer participates in the FFEL
Program; (2) the fees attributed to schools that meet the exceptional
mitigating circumstances standards established by the State; and, (3)
the fees attributed to Historically Black Colleges and Universities,
tribally controlled community colleges, and Navajo Community Colleges
that are exempt from losing eligibility to participate in the FFEL
Program under section 435(a)(2) of the HEA, if it is determined that
such schools are not responsible for their contribution to the State's
fee.
Executive Order 12866
1. Assessment of Costs and Benefits
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this proposed regulatory
action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the Title IV, HEA programs
effectively and efficiently. Burdens specifically associated with
information collection requirements, if any, are explained elsewhere in
this preamble under the heading of Paperwork Reduction Act of 1980.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these proposed regulations, the Secretary has
determined that the benefits of the proposed regulations justify the
costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comment on
whether there may be further opportunities to reduce any potential
costs or increase potential benefits resulting from these proposed
regulations without impeding the effective and efficient administration
of the Title IV, HEA programs.
2. Clarity of the Regulations
Executive order 12866 requires each agency to write regulations
that are easy to understand.
The Secretary invites comments on how to make these regulations
easier to understand, including answers to questions such as the
following: (1) Are the requirements in the regulations clearly stated?
(2) Do the regulations contain technical terms or other wording that
interferes with their clarity? (3) Does the format of the regulations
(grouping and order of sections, use of headings, paragraphing, etc.)
aid or reduce their clarity? Would the regulations be easier to
understand if they were divided into more (but shorter) sections? (A
``section'' is preceded by the symbol ``Sec. '' and a numbered heading;
for example, Sec. 682.410 Fiscal, administrative and enforcement
requirements.) (4) Is the description of the proposed regulations in
the ``Supplementary Information'' section of this preamble helpful in
the understanding of the proposed regulations? How could this
description be more helpful in making the proposed regulations easier
to understand? (5) What else could the Department do to make the
regulations easier to understand?
A copy of any comments that concern whether these proposed
regulations are easy to understand should also be sent to Stanley
Cohen, Regulations Quality Officer, U.S. Department of Education, 600
Independence Avenue, SW., (Room 5100 FB-10), Washington, D.C. 20202.
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. Certain reporting, recordkeeping, and compliance requirements
are imposed on guaranty agencies, lenders, schools, and States by the
regulations. These requirements, however, would not have a significant
impact because the regulations would not impose excessive regulatory
burdens or require unnecessary Federal supervision.
Paperwork Reduction Act of 1980
There are no information collection requirements contained in these
proposed regulations.
Invitation To Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations. All comments
submitted in response to these proposed regulations will be available
for public inspection, during and after the comment period, in room
4310, Regional Office Building 3, 7th and D Streets, SW., Washington,
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of
each week except federal holidays.
Assessment of Educational Impact
The Secretary particularly requests comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Number 84.032, Federal
Family Education Loan Program)
Dated: September 30, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary proposes to amend part 682 of title 34 of the Code of
Federal Regulations as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS
1. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. Section 682.202 is amended adding new paragraphs (a)(6) and
(a)(7) to read as follows:
Sec. 682.202 Permissible charges by lenders to borrowers.
* * * * *
(a) * * *
(6) Refund of excess interest paid on Stafford loans.
(i) For a loan with an applicable interest rate of 10 percent made
prior to July 23, 1992, and for a loan with an applicable interest rate
of 10 percent made from July 23, 1992 through September 30, 1992, to a
borrower with no outstanding FFEL Program loans--
(A) If during any calendar quarter, the sum of the average of the
bond equivalent rates of the 91-day Treasury bills auctioned for that
quarter, plus 3.25 percent, is less than 10 percent, the lender shall
calculate an adjustment and credit the adjustment as specified under
paragraph (a)(6)(i)(B) of this section if the borrower's account is not
more than 30 days delinquent on December 31. The amount of the
adjustment for a calendar quarter is equal to--
(1) 10 percent minus the sum of the average of the bond equivalent
rates of the 91-day Treasury bills auctioned for the applicable quarter
plus 3.25 percent;
(2) Multiplied by the average daily principal balance of the loan
(not including unearned interest added to principal); and
(3) Divided by 4;
(B) No later than 30 calendar days after the end of the calendar
year, the holder of the loan shall credit any amounts computed under
paragraph (a)(6)(i)(A) of this section to--
(1) The Secretary, for amounts paid during any period in which the
borrower is eligible for interest benefits;
(2) The borrower's account to reduce the outstanding principal
balance as of the date the holder adjusts the borrower's account,
provided that the borrower's account was not more than 30 days
delinquent on that December 31; or
(3) The Secretary, for a borrower who on the last day of the
calendar year is delinquent for more than 30 days.
(ii) For a fixed interest rate loan made on or after July 23, 1992
to a borrower with an outstanding FFEL Program loan--
(A) If during any calendar quarter, the sum of the average of the
bond equivalent rates of the 91-day Treasury bills auctioned for that
quarter, plus 3.10 percent, is less than the applicable interest rate,
the lender shall calculate an adjustment and credit the adjustment to
reduce the average daily principal balance of the loan as specified
under paragraph (a)(6)(ii)(C) of this section if the borrower's account
is not more than 30 days delinquent on December 31. The amount of an
adjustment for a calendar quarter is equal to--
(1) The applicable interest rate minus the sum of the average of
the bond equivalent rates of the 91-day Treasury bills auctioned for
the applicable quarter plus 3.10 percent;
(2) Multiplied by the outstanding principal balance of the loan
(not including unearned interest added to principal); and
(3) Divided by 4;
(B) For any quarter or portion thereof that the Secretary was
obligated to pay interest subsidy on behalf of the borrower, the holder
of the loan shall refund to the Secretary, no later than the end of the
following quarter, any excess interest calculated in accordance with
paragraph (a)(6)(ii)(A) of this section;
(C) For any other quarter, the holder of the loan shall, within 30
days of the end of the calendar year, reduce the borrower's outstanding
principal by the amount of excess interest calculated under paragraph
(a)(6)(ii)(A) of this section, provided that the borrower's account was
not more than 30 days delinquent as of December 31;
(D) For a borrower who on the last day of the calendar year is
delinquent for more than 30 days, any excess interest calculated shall
be refunded to the Secretary; and
(E) Notwithstanding paragraphs (a)(6)(ii) (B), (C), and (D) of this
section, if the loan was disbursed during a quarter, the amount of any
adjustment refunded to the Secretary or credited to the borrower for
that quarter shall be prorated accordingly.
(7) Conversion to Variable Rate. (i) A lender or holder shall
convert the interest rate on a loan under paragraphs (a)(6) (i) or (ii)
of this section to a variable rate.
(ii) The applicable interest rate for each 12-month period
beginning on July 1 and ending on June 1 preceding each 12-month period
is equal to the sum of--
(A) The bond equivalent rate of the 91-day Treasury bills auctioned
at the final auction prior to June 1; and
(B) 3.25 percent in the case of a loan described in paragraph
(a)(6)(i) of this section or 3.10 percent in the case of a loan
described in paragraph (a)(6)(ii) of this section.
(iii) (A) In connection with the conversion specified in paragraph
(a)(6)(ii) of this section for any period prior to the conversion for
which a rebate has not been provided under paragraph (a)(6) of this
section, a lender or holder shall convert the interest rate to a
variable rate.
(B) The interest rate for each period shall be reset quarterly and
the applicable interest rate for the quarter or portion shall equal the
sum of--
(1) The average of the bond equivalent rates of 91-day Treasury
bills auctioned for the preceding 3-month period; and
(2) 3.25 percent in the case of loans as specified under paragraph
(a)(6)(i) of this section or 3.10 percent in the case of loans as
specified under paragraph (a)(6)(ii) of this section.
(iv) (A) The holder of a loan being converted under paragraph
(a)(7)(iii)(A) of this section shall complete such conversion on or
before January 1, 1995.
(B) The holder shall, not later than 30 days prior to the
conversion provide the borrower with--
(1) A notice informing the borrower that the loan is being
converted to a variable interest rate;
(2) A description of the rate to the borrower;
(3) The current interest rate; and
(4) An explanation that the variable rate will provide a
substantially equivalent benefit as the adjustment otherwise provided
under paragraph (a)(6) of this section.
(iv) The notice may be provided as part of the disclosure
requirement as specified under Sec. 682.205.
(v) The interest rate as calculated under this paragraph may not
exceed the maximum interest rate applicable to the loan prior to the
conversion.
* * * * *
3. Section 682.207 is amended by removing the word ``or'' at the
end of paragraph (b)(1)(ii)(A); removing the semicolon at the end of
paragraph (b)(1)(ii)(B), and adding, in its place, a period and a new
sentence; and by adding a new paragraph (b)(1)(ii)(C) to read as
follows:
Sec. 682.207 Due diligence in disbursing a loan.
* * * * *
(b)(1) * * *
(ii) * * *
(B) * * * A disbursement made by electronic funds transfer must be
accompanied by a list of the names, social security numbers, and loan
amounts of the borrowers who are receiving a portion of the
disbursement; or
(C) A master check from the lender to the eligible institution to a
separate account maintained by the school as trustee for the lender. A
disbursement made by a master check must be accompanied by a list of
the names, social security numbers, and loan amounts of the borrowers
who are receiving a portion of the disbursement;
* * * * *
4. Section 682.305 is amended by revising paragraph (a)(4) to read
as follows:
Sec. 682.305 Procedures for payment of interest benefits and special
allowance.
(a) * * *
(4) If an originating lender sells or otherwise transfers a loan to
a new holder, the originating lender remains liable to the Secretary
for payment of the origination fees. The Secretary will not pay
interest benefits or special allowance to the new holder or pay
reinsurance to the guaranty agency until the origination fees are paid
to the Secretary.
* * * * *
5. Section 682.401 is amended by adding new paragraphs (b)(10)(iii)
and (b)(27); and by revising paragraph (b)(13) to read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(10) * * *
(iii) The Secretary will pay a lender referral fee to each guaranty
agency with whom the Secretary has a lender referral agreement, an
amount equal to 0.5 percent of the principal amount of a loan made as a
result of the agency's referral service.
* * * * *
(13) Guaranty liability. The guaranty agency shall guarantee--
(A) 100 percent of the unpaid principal balance of each loan
guaranteed for loans disbursed before October 1, 1993; and
(B) Not more than 98 percent of the unpaid principal balance of
each loan guaranteed for loans disbursed on or after October 1, 1993.
* * * * *
(27) Collection Charges and Late Fees on Defaulted FFEL loans being
Consolidated. A guaranty agency may not guarantee collection charges or
late fees that exceed 18.5 percent of the outstanding principal and
interest on a defaulted FFEL Program loan that is included in a Federal
Consolidation loan.
* * * * *
6. Section 682.404 is amended by revising paragraphs (a)(1),
(b)(1), and (b)(2), by removing paragraph (b)(4), and by redesignating
paragraph (b)(5) as paragraph (b)(4).
Sec. 682.404 Federal reinsurance agreement.
(a) General. (1)(i) The Secretary may enter into a reinsurance
agreement with a guaranty agency that has a basic program agreement.
Except as provided in paragraph (b) of this section, under a
reinsurance agreement the Secretary reimburses the guaranty agency for
98 percent of its losses on default claim payments to lenders.
(ii) Notwithstanding paragraph (a)(1)(i) of this section, the
Secretary reimburses a guaranty agency for 100 percent of its losses on
default claim payments--
(A) For loans made prior to October 1, 1993;
(B) For loans made under an approved lender-of-last-resort program;
(C) For loans transferred under a plan approved by the Secretary
from an insolvent guaranty agency or a guaranty agency that withdraws
its participation in the FFEL Program;
(D) For a guaranty agency that entered into a basic program
agreement under section 428(b) of the Act after September 30, 1976, or
was not actively carrying on a loan guarantee program covered by a
basic program agreement on October 1, 1976 for five consecutive fiscal
years beginning with the first year of its operation.
* * * * *
(b) * * *
(1) If the total of reinsurance claims paid by the Secretary to a
guaranty agency during any fiscal year reaches 5 percent of the amount
of loans in repayment at the end of the preceding fiscal year, the
Secretary's reinsurance payment on a default claim subsequently paid by
the guaranty agency during that fiscal year equals--
(i) 90 percent of its losses for loans made before October 1, 1993
or transferred under a plan approved by the Secretary from an insolvent
guaranty agency or a guaranty agency that withdraws its participation
in the FFEL Program; or
(ii) 88 percent of its losses for loans made on or after October 1,
1993.
(2) If the total of reinsurance claims paid by the Secretary to a
guaranty agency during any fiscal year reaches 9 percent of the amount
of loans in repayment at the end of the preceding fiscal year, the
Secretary's reinsurance payment on a default claim subsequently paid by
the guaranty agency during that fiscal year equals--
(i) 80 percent of its losses for loans made before October 1, 1993
or transferred under a plan approved by the Secretary from an insolvent
guaranty agency or a guaranty agency that withdraws its participation
in the FFEL Program; or
(ii) 78 percent of its losses for loans made on or after October 1,
1993.
* * * * *
7. Section 682.407 is removed and reserved.
8. A new Sec. 682.418 is added to read as follows:
Sec. 682.418 State Share of Default Costs.
(a) State Fee. (1) In the case of any State in which there are
located any institutions of higher education that have a cohort default
rate that exceeds 20 percent, the State shall pay to the Secretary an
amount equal to--
(i) The new loan volume attributable to all institutions in the
State for the current fiscal year multiplied by the percentage
specified in paragraph (b) of this section, multiplied by:
(ii) The quotient of the sum of the amounts calculated under
paragraph (c) of this section for each institution in the State with a
cohort default rate that exceeds 20 percent, divided by:
(iii) The total amount of loan volume attributable to current and
former students of institutions located in that State entering
repayment in the period used to calculate the cohort default rate.
(2) A State must pay the fee to the Secretary under paragraph
(d)(1) of this section within 60 days after the State receives
notification from the Secretary of the fee.
(b) Percentage. For purposes of paragraph (a)(1)(i) of this
section, the percentage used shall be--
(1) 12.5 percent for fiscal year 1995;
(2) 20 percent for fiscal year 1996; and
(3) 50 percent for fiscal year 1997 and succeeding fiscal years.
(c) Calculation. (1) For purposes of paragraph (a)(1)(ii) of this
section, the amount shall be determined by calculating for each
applicable institution, the amount by which the loans received for
attendance by each institution's current and former students who--
(i) Enter repayment during the fiscal year used for the calculation
of the cohort default rate; and
(ii) Default before the end of the following fiscal year;
(2) Exceeds 20 percent of the loans received for attendance by all
the current and former students who enter repayment during the fiscal
year used for the calculation of the cohort default rate.
(d)(1) School Fee. A State may charge a fee to an institution of
higher education that participates in the FFEL Program that is located
in its State according to a fee structure, approved by the Secretary,
that--
(i) Is based on the institution's cohort default rate and the
State's risk of loss; and
(ii) Includes procedures under which a school that is subject to a
fee under paragraph (d)(1) of this section may appeal the fee if the
institution can demonstrate to the satisfaction of the State that--
(A) The fee it is assessed by the State is greater than the fee it
is liable for under the fee structure established by the State and
approved by the Secretary; or
(B) Exceptional mitigating circumstances contributed to its cohort
default rate.
(2) For purposes of paragraph (d)(1)(i) of this section, the State
may not assess a fee to a school that is greater than the amount that
the school contributes to the State's fee.
(3) For purposes of paragraph (d)(1)(ii)(B) of this section, the
State may select the exceptional mitigating circumstances which must be
approved by the Secretary as part of the State's fee structure plan
under section (d)(1) of this section.
(4) A State may not assess a fee to a school under paragraph (d)(1)
of this section until it has received written approval from the
Secretary of its fee structure and the exceptional mitigating
circumstances.
(5) A State must provide a school a reasonable amount of time after
the date the school receives notification from the State of the fee it
is being assessed by the State to either pay the fee or--
(i) Demonstrate to the State that the fee it is assessed by the
State is greater than the fee it is liable for under the fee structure
established by the State and approved by the Secretary; or
(ii) Submit the documentation or other evidence required by the
State to demonstrate that exceptional mitigating circumstances
contributed to its cohort default rate.
(6) A State may not attempt to collect a fee from a school under
paragraph (d)(1) of this section--
(i) During the timeframes established by the State under section
(d)(5) of this section; and
(ii) If the school satisfactorily demonstrates to the State that
exceptional mitigating circumstances contributed to its cohort default
rate.
(7) A school is not exempt from a fee under this section if it
withdraws its participation in the FFEL Program after receiving
notification by a State that it is being assessed a fee under paragraph
(d)(1) of this section.
(Authority: 20 U.S.C. 1078)
[FR Doc. 94-25363 Filed 10-12-94; 8:45 am]
BILLING CODE 4000-01-P
