[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29037]
[[Page Unknown]]
[Federal Register: November 29, 1994]
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Part VII
Department of Education
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34 CFR Part 668
Student Assistance General Provisions; Final Rule
DEPARTMENT OF EDUCATION
34 CFR Part 668
RIN 1840-ACO9
Student Assistance General Provisions
AGENCY: Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the Student Assistance General Provisions
regulations to further implement changes made to section 435 of the
Higher Education Act of 1965, (HEA) as amended by the Higher Education
Technical Amendments of 1993 (Technical Amendments). These regulations
modify the procedures that the Secretary uses to decide appeals of and
challenges to the determination of institutional cohort default rates
in the Federal Family Education Loan (FFEL) Program.
EFFECTIVE DATE: These regulations take effect July 1, 1995. However,
affected parties do not have to comply with the information collection
requirements in Sec. 668.17(f) and (h) until the Department of
Education publishes in the Federal Register the control number assigned
by the Office of Management and Budget (OMB) to these information
collection requirements. Publication of the control number notifies the
public that OMB has approved these information collection requirements
under the Paperwork Reduction Act of 1980.
FOR FURTHER INFORMATION CONTACT: Geneva Coombs, Default Management
Section, U.S. Department of Education, 600 Independence Avenue, SW.,
(room 3916, ROB-3), Washington, DC 20202-5449 for information regarding
deadlines and procedures related to the appeal of cohort default rate
determinations by institutions. Telephone (202) 708-9396. For
information on other policy issues related to this regulation, contact
Pat Newcombe, Federal Family Education Loan Program Section. 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: Section 2(c)(55) of the Technical Amendments
amended section 435 of the HEA to modify the process governing
institutions' appeals of their cohort default rates based on
allegations of improper loan servicing and collection.
On March 22, 1994, the Secretary published a proposed rule and
notice in the Federal Register, 59 FR 13606, requesting comments on the
procedures that should be established to implement the statutory
amendments. The Secretary indicated that he would issue final
regulations establishing procedures for institutions to appeal their
default rates based on allegations of improper loan servicing or
collection. The Secretary also solicited public help in developing
those procedures.
After reviewing the comments received in response to the proposed
rule, the Secretary issued interim final regulations on April 29, 1994.
59 FR 22278. These regulations were in final form with a stated
effective date, but invited additional public comments that could
result in future revisions to the regulations. Any revisions would have
a later effective date. The Secretary received 80 comments in response
to the regulations published on April 29. The Secretary has considered
all of these comments in preparing these revisions to the final
regulations. Some of the changes suggested by the commenters are
reflected in these revisions. The Secretary's response to the
suggestions made by the commenters is provided after the following
discussion of the changes made to the final regulations. To ensure that
the public understands how the revisions affect the final rule, the
Secretary is publishing complete revised versions of Sec. 668.17(f),
(g) and (h).
Revisions to the Final Rules published on April 29, 1994
The Secretary has revised the standard for determining whether an
institution has shown that, for purposes of an appeal of a cohort
default rate, improper servicing or collection is considered to have
caused a default. In particular, the Secretary has determined that, for
purposes of appeals of cohort default rate calculations only, a
lender's failure to perform certain collection actions will be
considered to have caused a default. The Secretary has revised the
regulations to provide that improper servicing or collection will be
considered to have caused a default if the borrower has not made a
payment on the loan and the institution can prove that the lender
failed to perform one or more of the following activities (if such
activities were required on the particular loan): (1) Send at least one
letter (other than the final demand letter) urging the borrower or
endorser to make payments on the loan; (2) make at least one attempt to
reach the borrower by phone; (3) request preclaims assistance from the
guaranty agency (if required), or (4) send the final demand letter.
Therefore, the loan will be excluded from the default rate calculation
if the borrower did not make a payment on the loan and the institution
can show that the lender missed one of these four activities. If the
borrower did not make a payment on the loan and the lender did not make
contact with the borrower because the borrower could not be located,
the default will be considered to have been caused by improper
servicing or collection if the loan file does not include a
certification or any evidence that skip tracing activities were
performed before the claim was submitted.
The Secretary has determined that it is appropriate to focus the
evaluation of cohort default rate appeals on these particular
activities because these activities are important elements of the loan
servicing and collection process. Each of the activities considered in
the cohort default rate appeal process (letters, phone calls, preclaims
assistance, final demand and skip tracing) represent a different method
of collecting on a loan. The Secretary believes that if each collection
technique is used, a default on the loan should not, for cohort default
rate appeal purposes, be considered to have been caused by improper
servicing or collection.
The Secretary receives hundreds of cohort default rate appeals
annually and resolution of these appeals requires significant staff
time and resources. In light of these factors and the tight statutory
time frames for filing and deciding appeals, the Secretary believes it
is necessary to have an appeal process that will result in the rapid
and fair adjudication of appeals. The servicing and collection
activities identified above are reflected in the loan servicing and
collection records that are available to institutions and the Secretary
as part of the appeal process. The Secretary will be able to review
these records and determine, in a relatively straightforward fashion,
whether the relevant servicing and collection activities have been
performed. Accordingly, the Secretary believes that the adoption of
this modified appeal standard will contribute to ensuring a fair and
workable appeal process.
The Secretary has determined that if a borrower made a payment on
the loan, the default on the loan cannot be considered to have been
caused by improper servicing or collection. The payment by the borrower
demonstrates that the borrower is aware of his or her repayment
obligation and reflects an affirmation of the debt. This restriction is
also consistent with 34 CFR 668.17(e)(1)(ii)(B) which counts as a
default any loan on which an institution or related individual or
entity makes a payment in order to avoid a default on the loan.
The Secretary's decision to revise the appeal standard for cohort
default rate appeals is based, in large part, on the need to respond to
Congress' intention that appeals of loss of FFEL Program eligibility
should be filed and resolved within a relatively short period of time.
The Department considers the standard included in the April 29 final
regulations to be faithful to the letter and purpose of section 435 of
the HEA. However, the Secretary has found that determinations under
this standard are quite time-consuming for institutions, guaranty
agencies and the Department. Hence, while the Department continues to
consider the original appeal standard an appropriate implementation of
Congressional intent, the Department's experience demonstrates that it
does not sufficiently contribute to satisfaction of the statutory goal
of ensuring quick and fair decisions.
In preparing these final regulations, the Secretary focused on the
two clear goals of section 435 of the HEA: first, to hold institutions
with unacceptably high default rates responsible for those rates and
the costs to the taxpayers of those defaults; and second, to allow
institutions to appeal the determinations of their rates and provide
decisions on those appeals in relatively rapid fashion. The standard
for deciding appeals included in these final regulations will achieve
these goals. The promulgation of these rules allows institutions to
avoid responsibility for certain loans where arguably the regulatory
violations amounted to improper servicing or collection that are
presumed to have ``caused'' the default for purposes of the cohort
default rate appeals. In addition, the regulations will allow the
Secretary to make timely appeal decisions based on a quick review of
certain records. An appeals process that is based on elaborate rules or
that requires time-consuming review would not serve either purpose.
The Secretary believes that this revised standard for evaluating
cohort default rate appeals based on allegations of improper loan
servicing or collection may make it easier for institutions to prove
that loans should be removed from the calculation. The Secretary
further believes that institutions with pending appeals before the
Department should receive the benefit of this revised standard.
Therefore, the Secretary intends to apply the revised standard to
pending appeals as a matter of administrative adjudication except where
the standard included in the April 29 regulations would be more
favorable to the institution.
The final regulations require the institution to notify the
Secretary as well as the appropriate guaranty agencies that it is
appealing its cohort default rate. This requirement will ensure that
the Secretary is notified that an institution has timely appealed so
the Secretary does not take action to end the participation of the
institution.
The final regulations eliminate the requirement that guaranty
agencies provide a list of certain dates for each loan included in the
sample of loan servicing and collection records provided to the
institution. The Secretary has determined that it is not necessary to
have these dates listed separately as part of the appeal.
The final regulations include a definition of ``loan servicing and
collection records'' for purposes of the cohort default rate appeal
process. The regulations define the term to mean the default claim
package submitted by the lender to the guaranty agency on which the
decision to pay a default claim was based. The Secretary believes these
records will provide institutions with sufficient information on which
to appeal under the revised appeal standards in these regulations. The
Secretary notes that the regulations allow the guaranty agency to
provide copies of loan servicing and collection records in an
electronic or other format if the institution agrees.
The regulations have also been modified to provide some flexibility
to guaranty agencies in providing loan servicing and collection records
to institutions. Under existing regulations, guaranty agencies are
required to provide loan servicing and collection records to a
requesting institution within 15 working days of receiving the request.
This deadline is consistent with the statutory time frames that govern
an appeal by an institution that is subject to loss of FFEL eligibility
based on default rates in excess of certain thresholds for each of the
three most recent fiscal years. However, the statutory time limit does
not apply to institutions which are challenging the calculation of
their cohort default rate but are not subject to the loss of FFEL
Program eligibility. While these institutions may wish to challenge a
cohort default rate calculation, they are not subject to the statutory
time frames. Therefore, the Secretary has decided that the requirement
that a guaranty agency respond to a request for a sample of loan
servicing and collection records within 15 working days will apply only
to institutions which are subject to loss of FFEL eligibility. A
guaranty agency will have 30 calendar days to respond to a request for
servicing and collection records from an institution which is not
subject to loss of FFEL Program eligibility.
The regulations have also been modified to clarify that, if the
guaranty agency chooses to charge for copying and providing the
servicing and collection records, the institution must pay the amount
owed to the agency before the agency is required to copy and provide
the records. The regulations provide that the agency must inform the
institution of the amount owed within 15 working days of the date the
agency receives the institution's request for records and the
institution must pay the amount owed within 15 working days of
receiving the notice of charges from the agency. If payment is not
received within this time frame, the institution will be considered to
have waived its appeal and the guaranty agency will notify the
institution and the Secretary that the institution has apparently
waived its appeal in regard to loans guaranteed by that guaranty
agency. The Secretary will decide that the institution has not met its
burden of proof in regard to the servicing or collection of loans
guaranteed by a guaranty agency which the institution did not pay
unless the institution proves that the agency's conclusion that the
institution waived its appeal was incorrect.
Analysis of Comments
Comments: Many commenters suggested that the Secretary should
remove from the calculation of the cohort default rate any loan that
was not serviced or collected in strict compliance with the
Department's due diligence requirements in 34 CFR 682.411. The
commenters suggested that the standard included in the final rules
would be inconsistent with statutory intent unless the standard
required the exclusion of all loans as to which lender servicing did
not strictly comply with 34 CFR 682.411. The commenters claimed that
the statutory provisions did not refer to a ``causation'' requirement
and that the Secretary's approach was thus inconsistent with the
statute. The commenters complained that the Department's rules reflect
a bias against certain types of institutions and were part of an
attempt to force certain institutions to close. Finally, the commenters
suggested that, without a reference to strict compliance with 34 CFR
682.411, lenders would not have any incentive to comply with the
Department's rules.
Discussion: The Secretary does not agree with the suggestion that
Congress intended to require the exclusion of all loans on which the
lender may not have strictly complied with the requirements of 34 CFR
682.411. The statutory term ``improper servicing or collection'' is not
defined or used elsewhere in the HEA and the Secretary sees no basis
for the commenters' claim that it must be defined by strictly
incorporating other distinct statutory terms (such as ``due
diligence'') or other specific regulations. The Secretary also does not
agree with the suggestion that even a minor or technical non-compliance
with the requirements of 34 CFR 682.411 should be considered to have
caused a default for cohort default rate purposes. Moreover, the
commenters did not cite to any legislative history supporting their
claimed interpretation of the statute. The assertions by some
commenters that any ``servicing error'' (a term that does not appear in
the HEA or the regulations and has no clear meaning) requires the
removal of loans from the cohort default rate calculation similarly has
no basis in the HEA.
Many commenters misunderstand the purpose of 34 CFR 682.411. The
requirements in 34 CFR 682.411 are designed to ensure that lenders and
guaranty agencies receiving FFEL Program benefits (such as reinsurance
and interest and special allowance payments) take certain collection
actions in regard to the loans. These requirements have never been
intended to set forth standards which, if not followed in their
entirety, would excuse borrowers who refuse to repay their loans.
Similarly, they are not intended to provide protection for institutions
that fail to meet the statutory requirements for continued
participation in the FFEL Program. In enacting various statutory
provisions, Congress has stated its determination that institutions
bear a significant responsibility for defaults in the FFEL Program.
See, for example, sections 428A(a)(2), 435(a)(2), 494C(b), 496(a)(5)(J)
of the HEA. The Secretary does not believe that a lender's failure to
strictly satisfy the requirements for Federal benefits should excuse
the institution from the statutory consequences of its high default
rate. Moreover, the commenters' suggestion that 34 CFR 682.411 is
intended to provide a comprehensive definition of ``due diligence'' is
inaccurate. The Secretary's decisions regarding payments of reinsurance
are governed by compliance with other requirements relating to loan
servicing and collection in addition to 34 CFR 682.411. See 34 CFR
682.208 and Part 682, Appendix D.
The claim by some commenters that the statute does not support a
causation requirement is also incorrect. As noted in the decision of
the U.S. Court of Appeals for the District of Columbia Circuit in
Atlanta College of Medical and Dental Technology v. Cavazos, 987 F.2d
821, 830 (D.C. Cir. 1993), Congress required that a loan would be taken
out of the default rate calculation only if the institution's cohort
default rate would be inaccurate or improper due to the improper
servicing or collection. Congress did not explain how improper
servicing or collection could cause a default rate to be inaccurate or
incomplete but left the implementation of this requirement to the
Secretary. There is no evidence that Congress intended to require the
Secretary to look behind the guaranty agency's claims payments. In
fact, a review of every guaranty agency claim payment would be a very
time consuming and resource intensive process and is inconsistent with
the tight time frames in section 435(a)(2) of the HEA.
The statutory requirement that an inaccurate or incomplete cohort
default rate be ``due to'' improper servicing or collection is the
source of the causation requirement found in the Secretary's
regulations at 34 CFR 668.17(f). The Secretary believes that the
requirement of a causal link comports with the statutory language and
intent. See Atlanta College, 987 F.2d at 830.
Despite the Secretary's conclusion that the standard in the interim
final regulations for determining whether a default was caused by
improper servicing or collection--i.e., did the borrower receive notice
that the time for repayment had begun--is consistent with the intent of
section 435 of the HEA, the Secretary has determined that the revised
standard included in these regulations is a preferable policy course.
The statute does not specify the specific causal link that should be
required to remove a loan from the cohort default rate calculation.
Thus, implementation of this requirement is within the Secretary's
discretion. See Atlanta College, 987 F.2d at 830. In exercising that
discretion, the Secretary has also considered the statutory provision
which directs the Secretary to resolve appeals within a relatively
short period of time--45 days. The selection of this time period
strongly suggests that Congress did not intend the Secretary to have a
complicated or burdensome appeal process. To satisfy this apparent
Congressional intent, the Secretary has adopted the revised and
simplified appeal standard reflected in these final regulations.
The Secretary strongly rejects the suggestion that the regulations
themselves are intended to force certain institutions to close, but
this may be a result of section 435. Section 435(m)(4) of the HEA
requires the Secretary to publish default rates for institutions
participating in the FFEL Program. Obviously, Congress has determined
that it is important for the public to have this information. The
Secretary has also found that some lenders also use their own measures
of default rate to measure their risk of loss in relation to loans made
to students attending a particular institution. The Secretary believes
that Congress viewed the cohort default rates as a means of allowing
lenders to compare different institutions with a common measure. Thus,
the impact of these regulations on any particular type of institution
results from the statutory provision itself and not from the specific
regulatory provisions.
The commenters argue that a lender has no incentive to comply with
the requirements of 34 CFR 682.411 unless loans on which the servicing
and collection activities are not in strict compliance with the
requirements of that section are removed from the calculation of the
cohort default rate. This argument reflects a misunderstanding of the
FFEL Program. To receive reinsurance payments on a defaulted loan, the
guaranty agency must determine that the lender complied with the
Secretary's due diligence requirements, 34 CFR 682.406. Thus, the
lender's due diligence activities on the loans are subject to review by
the guaranty agency and the Secretary. These reviews may result in
administrative actions against lenders and guaranty agencies, and
provide a more appropriate method of oversight than the time-sensitive
cohort default rate appeal process. The Secretary believes that these
reviews provide reasonable assurance that a lender is satisfying due
diligence requirements.
In reviewing individual cohort default rate appeals, the Secretary
has found that institutions claim violations of due diligence
requirements in situations where the lender has properly complied with
the regulations. The various self-proclaimed loan servicing experts
utilized by institutions appealing cohort default rates appear to have
used their own standards for due diligence rather than utilizing the
Secretary's rules and have mistakenly claimed that their own
interpretation of due diligence somehow defines the statutory term
``improper servicing or collection''. Thus, the claims by these
institutions have simply slowed the process of adjudicating cohort
default rate appeals rather than contributing to the identification of
improper servicing or collection activities by lenders. Moreover, many
institutions have previously submitted appeals based on generalized
claims of improper servicing or collection activity. Section
435(m)(1)(B) of the HEA, however, requires appeals to be supported by
``evidence submitted in support of the institution's timely appeal.''
The Secretary does not believe that generalized claims of ``servicing
errors'' satisfy this requirement.
Changes: The Secretary has retained the requirement that, for a
loan to be excluded from the calculation of the cohort default rate,
the improper servicing or collection must have caused the default.
However, as discussed above, the Secretary has modified the regulations
to identify specific loan servicing or collection problems that will be
assumed to have the required causal connection for purposes of section
435(m)(1)(B) of the HEA.
Comments: One commenter suggested that the Secretary should
consider the servicing of a loan to have ``caused'' a default if the
servicing of the loan made a default more likely.
Discussion: Section 435 of the HEA does not provide that a default
was caused by allegedly improper servicing or collection activity
simply because the activity may arguably have incrementally increased
the likelihood of default. In fact, the foremost objective of section
435 is to remove from the FFEL Program institutions whose students
default at an excessive rate. While the law provides for the removal of
loans from the default rate calculation where a default was ``due to''
improper servicing or collection, there is no support for the
commenter's claim that any increase in the probability of a default
should be sufficient.
Defaults occur for a variety of reasons. Congress, however, did not
provide that an institution could avoid responsibility for its default
rate by simply pointing to contributing factors arguably beyond its
control. The lack of provision for such a general causation defense
suggests that Congress intended to hold institutions responsible for
their unacceptably high rates of loan defaults, based on the reasonable
conclusion that such institutions bear a fair share of responsibility
for many of those defaults. See S. Rept. 102-58, 102d Cong., 1st. Sess.
10 (1991).
The commenter's reading of the requirements in section 435 of the
HEA does not comport with the statute's goal of establishing
institutional responsibility for high cohort default rates. In light of
the statute's goal of institutional responsibility the Secretary does
not believe that it is appropriate to remove a loan from the cohort
default rate calculation absent a significant showing of improper
servicing or collection that seriously affects the collectability of
the loan.
Changes: None.
Comments: One commenter suggested that the institution should not
have the burden of proving that the improper loan servicing or
collection occurred, but that the lender should be obligated to prove
that proper servicing occurred at the time the default claim is
submitted.
Discussion: In general, the Secretary agrees with the commenter
that the lender is responsible, when it submits an insurance claim, for
showing that a loan was serviced in accordance with the Department's
requirements. Accordingly, the Secretary refuses to pay (or requires
repayment of) reinsurance on loans which are not properly serviced. The
lender's obligation, however, relates to the lender's qualification for
FFEL Program benefits. In the particular circumstance of an
institution's appeal of its cohort default rate, the institution bears
the burden of proving that the default rate, which is calculated based
on the official records of the FFEL Program, is inaccurate or
incorrect. Section 435(a)(3) of the HEA appropriately places the burden
of showing this fact on the institution. The alternative of requiring
lenders to defend their compliance with the Secretary's servicing and
collection rules as part of the cohort default rate appeal process
would significantly complicate the process and seriously delay
decisions while interfering with the Department's other oversight
efforts.
Changes: None.
Comments: Some commenters proposed that the Secretary remove from
the calculation of the cohort default rate loans on which the lender
did not request preclaims assistance from the guaranty agency or the
guaranty agency did not provide notice of the lender's request for
preclaims assistance to the institution.
Discussion: As noted earlier, under the revised regulations, a
lender's failure to request preclaims assistance from the guaranty
agency may be considered improper servicing or collection and result in
the exclusion of the affected loan from the calculation of the
institution's cohort default rate. The Secretary does not agree with
the commenter's suggestion, however, that the loan be excluded if the
guaranty agency did not notify the institution of the request. Since a
default occurs before the guaranty agency begins servicing and
collection activity on the loan, the issue for appeals based on
allegations of improper loan servicing is on the actions of the lender,
not the guaranty agency. Moreover, consideration of whether the agency
notifies the institution of the request for preclaims assistance could
result in unequal treatment of different institutions. A guaranty
agency is only required to notify an institution of the request for
preclaims assistance if the institution has requested such notification
and pays a fee. See section 428(c)(2)(H) of the HEA. An institution
which had not requested such notice or which did not pay the fee would
not have a basis for challenging the rate. As a result, questions of
whether an institution properly requested notification and paid any
required fee could raise issues of fact that would require a time
consuming resolution process. In contrast, the guaranty agency records
which the institution will receive on the sample of loans provided by
the agency will reflect whether the lender requested preclaims
assistance.
The Secretary also determined that consideration of the notice to
the institution would significantly increase the burden on guaranty
agencies and the Secretary. Since the guaranty agency's notice to those
institutions which request notice is not part of the lender claim file
and is not part of lender due diligence, documentation of that notice
would have to be located elsewhere in the records of the guaranty
agency. This additional search would likely delay the appeal process.
Moreover, it has been the Secretary's experience that even when
guaranty agency records indicate that the institution was notified of
the preclaims assistance request, the institution frequently claims
that it did not receive notice. Resolution of conflicting claims would
further burden the appeal process. In this situation, the Secretary is
not satisfied that the effort to produce these additional records is
justified by the result.
Changes: The Secretary has modified the regulations to provide that
a lender's failure to request preclaims assistance, if such a request
was required, will be considered as improper servicing or collection of
the loan that caused the default for purposes of a cohort default rate
appeal.
Comments: A number of commenters recommended that a loan be
eliminated from the calculation of the cohort default rate if the
borrower is not located and the lender did not perform skip tracing.
Discussion: The Secretary believes that adequate skip tracing
efforts are necessary to protect the Federal taxpayers' investment in
the FFEL Program. However, the Secretary notes that skip tracing only
occurs when the borrower has failed to fulfill his or her obligation to
notify the lender if the borrower moves. The Department's regulations
urge institutions to stress the borrowers' responsibility for informing
the lender of any new address as part of the institution's default
reduction efforts. 34 CFR Part 668, Appendix D. Moreover, the
regulations also require institutions to provide information on new
addresses of borrowers to lenders. 34 CFR 682.610(f). Thus, a lender is
only required to begin skip tracing efforts when the borrower (and in
some cases, the institution) has failed to fulfill his or her
obligations. Therefore, the Secretary does not believe that a lender's
failure to perform specific skip tracing steps should be considered to
have caused a default for cohort default rate appeal purposes.
The Secretary believes, however, that a lender's failure to perform
skip tracing at all could, in appropriate cases, be considered to cause
a default for cohort default rate purposes. The Secretary notes that
while lenders maintain records of their skip tracing efforts, those
records are not generally submitted to the guaranty agency as part of
the claim file. Instead, the lender certifies that skip tracing was
performed. The accuracy of the certification is subject to review by
the guaranty agency and the Department and a false certification could
subject the lender to a claim under the False Claims Act. In this
situation, the Secretary believes that the lender has a strong
incentive to provide an accurate certification. Moreover, efforts to
determine in detail what skip tracing efforts were performed by a
lender would require a search of the lender's records and would be very
complicated and time-consuming. (The same is true, in general, of the
suggestion that the Secretary assess the quality of the lender's
letters and phone calls as part of the appeal process.) Hence, the
Secretary will limit the inquiry regarding skip tracing to a simple,
mechanical question. As long as the claim file submitted by a lender
includes a certification (or, if required by the guaranty agency, other
evidence) that skip tracing was performed, the Secretary will conclude
that the loan was not improperly serviced or collected with regard to
skip tracing. However, absent such evidence, a loan on which no payment
or contact has been made will be excluded from the cohort default rate
on appeal.
Changes: The Secretary has changed the regulations to provide that
if the borrower does not make a payment and no contact was made with
the borrower, a lender's failure to provide a certification (or other
evidence) that skip tracing, if required, was performed will result in
exclusion of the loan from the calculation of the cohort default rate
on appeal.
Comments: A number of commenters urged the Secretary to provide
institutions more time to complete and submit appeals to the guaranty
agencies and the Secretary. Some commenters also proposed that the
guaranty agency be permitted to extend the time for the institution to
submit its appeal based on a showing by the institution of good cause,
such as the number of records involved, other activities such as a
visit by an accreditation team or staff illnesses.
Discussion: The Secretary believes that the regulations provide
sufficient time for an institution to complete and submit appeals and
are consistent with the strict time periods for appeals included in
section 435(a)(2) of the HEA.
Changes: None.
Comments: Some commenters recommended that the Secretary grant an
institution's appeal if the guaranty agency does not provide the
complete loan servicing and collection records within the time set
forth in the regulations. A couple of commenters also recommended that
the regulations require the Secretary to issue a decision on the
institution's appeal within a specified time period.
Discussion: The Secretary does not believe it is appropriate to
automatically grant an institution's appeal if the guaranty agency
misses a deadline to provide records to the institution. An institution
that brings a timely appeal continues to participate in the FFEL
programs while it completes the appeal and is not harmed by a delay.
The Secretary believes that the guaranty agencies will take appropriate
steps to provide records within the regulatory time frames. However, in
appropriate cases, the Secretary may consider taking action to levy a
financial penalty or to limit, suspend or terminate a guaranty agency's
participation in the FFEL Program based on violations of the regulatory
time frames.
The Secretary agrees with the commenters that it is important to
decide appeals within a reasonable period of time. However, it is
impossible for the Secretary to anticipate how many appeals will be
filed in a particular year, how complex those appeals will be and what
resources can be applied to deciding those appeals. The Secretary fully
intends to take appropriate steps to satisfy the statutory requirement
that appeals be decided within 45 days. However, this statutory
requirement clearly does not mean that the institution's appeal must be
granted if the Secretary cannot complete consideration of the appeal
within 45 days. Pro Schools, Inc. v. Alexander, 824 F.Supp. 1413 (E.D.
Wisc., 1993).
The Secretary appreciates the institutions' interest in a timely
decision on a cohort default rate appeal. Indeed, a primary reason for
the adoption of the revised appeal standard reflected in these final
regulations is to reduce the complexity of the appeal process for all
parties. The Secretary believes that the revised appeal standard will
permit guaranty agencies to provide records to institutions more
quickly, allow institutions to complete their appeals and permit the
Secretary to resolve those appeals more rapidly. A more complicated
appeal standard would not fulfill Congress' direction (and the
commenters' request) that appeals be decided expeditiously.
Changes: None.
Comments: Some commenters recommended that a loan be removed from
the calculation of the institution's cohort default rate if the loan
was sold or transferred and the borrower was not properly notified of
the sale or transfer of the loan.
Discussion: The Secretary acknowledges that, in the past, the sale
or transfer of a loan may have been a confusing situation for some
borrowers; however, the commenters did not provide any evidence that a
sale or transfer of a loan contributes to a default. Moreover, since
1991 the Secretary has required both the buyer and the seller of a loan
to notify the borrower if the transaction results in a change in the
identity or address of the party to whom payments should be sent. The
Secretary believes that these notices have generally addressed any
confusion on the part of the borrowers. Finally, the Secretary notes
that the revised standard for deciding servicing-based appeals
addresses the situation in which it is claimed that the borrower did
not receive notice of a loan transfer, since it will ensure that the
borrower has been notified of the obligation to repay the loan.
Changes: None.
Comments: Some commenters complained that the failure of a lender
or servicer to timely apply a refund payment to a student's account
should be considered to have ``caused'' a default and result in the
elimination of the affected loan from the calculation of the cohort
default rate.
Discussion: The Secretary shares the commenters' concern regarding
the effect that a lender's failure to receive or apply a refund to a
borrower's account may have on the borrower's repayment record. The
Secretary, however, believes that an evaluation of whether the fact
that the borrower's account does not reflect a required refund
``caused'' the default would be largely speculative since the only
issue would be the amount of the default. Moreover, documentation of
payment of a refund is not generally included in the claim file
submitted by the lender to the guaranty agency and is not generally
considered a part of the lender's due diligence efforts. Thus,
consideration of this issue would require an extensive, time-consuming
review of the lender's own records. In the Department's experience, it
is more typical that the institution failed to pay the refund to the
lender on a timely basis or failed to pay the appropriate refund. The
Secretary does not believe it would be appropriate for a high default
institution to reduce its default rate because of its failure to
fulfill its obligation to make timely refunds.
The Secretary notes that if the institution shows that a loan
should have been canceled because the student did not attend and the
institution returned the funds to the lender, the default is removed
from the default rate calculation as an issue of erroneous data, not as
a loan servicing or collection issue.
Changes: None.
Comments: A number of commenters proposed that the Secretary simply
remove loans made or held by certain lenders or guaranty agencies from
the calculation of the cohort default rates. For example, some
commenters suggested that any loan made by a lender who was later
subject to action by the Resolution Trust Corporation should be removed
from the calculation. Other commenters suggested that if the
institution could show that a particular lender or guaranty agency had
a high default rate or did not service loans effectively, all the loans
made by that lender or insured by that agency would be eliminated from
the calculation of the default rate for that institution.
Discussion: The Secretary does not agree that all the loans made by
a certain lender or guaranteed by a certain agency should be removed
from the calculation of the cohort default rates. First, the Secretary
notes that, under the law, the issue is whether the institution's
inaccurate or incomplete cohort default rate is caused by lenders'
improper servicing or collection. Generalized assertions that a given
lender has ``high levels'' of ``servicing errors'' have little
probative value when the issue is whether a given loan should be
excluded from the default rate calculation because the loan defaulted
``due to'' improper servicing or collection. A mere allegation that a
lender does not properly service loans in general does not show that
the alleged improper servicing or collection affected a particular
institution's rate. Generalized condemnations of the actions of a
guaranty agency--which insures loans from many lenders made to
borrowers for attendance at many different institutions--are even less
valuable. More importantly, Congress was aware of the broad general
complaints by institutions about loan servicing and expressly required
that the Department base loan servicing appeal decisions on a review of
a representative sample of individual loan servicing records rather
than broad allegations.
The Secretary also notes that, in the limited situations in the
past in which large scale loan servicing and collection problems have
occurred, individual loans which were identified as having been
affected were determined to be ineligible for reinsurance. As a result,
those loans were not included in the calculation of the default rates.
Changes: None.
Comments: Two commenters suggested that the regulation specify the
information that the Secretary will provide to institutions with their
default rate notification letters.
Discussion: The Secretary acknowledges that the institution should
be provided basic information necessary to evaluate the data on which
the default rate calculation is based and will continue to provide that
information. However, the Secretary does not believe it is necessary or
appropriate to specify, in regulations, the specific data elements that
will be included in the information provided to institutions with the
default rate notification letters. Specification of the data elements
in the regulations would needlessly restrict the Secretary's
flexibility in implementing a relatively new procedure.
Changes: None.
Comments: An organization of guaranty agencies noted that the
institution has 10 working days from the date it receives the default
rate notice from the Secretary to begin the appeal process by
submitting its request for records to the guaranty agency. However, the
agency may not know the date on which the institution received the
notice and will not know whether the institution's appeal is timely.
The commenter suggested that the guaranty agency be permitted to use
the date of the notice plus 3 days in the absence of other official
documentation of receipt.
Discussion: The Secretary does not believe that it is necessary to
establish regulatory guidelines for determining when the institution
receives the default rate notice. The Secretary generally sends default
rate notices to institutions by overnight mail and can generally
determine when the institution actually received the notice. The
Secretary does not anticipate that there will be many cases in which a
guaranty agency has questions about the timeliness of an institution's
appeal. However, in those cases, the guaranty agency should contact the
Department to determine the date the institution was notified of its
rate and calculate the appeal deadline based on the information
provided by the Department.
Changes: None.
Comments: A number of commenters complained that a guaranty agency
did not have enough time to provide records to the institution. Some
commenters suggested that the guaranty agency should have up to 60 days
to provide records. Other commenters suggested that the time in which
the agency would have to provide records should not run from the date
the agency receives the institution's request, but should begin with
the date the institution pays any applicable fee for the records. Other
commenters objected to the regulations allowing the guaranty agencies
to charge reasonable fees for providing records and requested that the
Secretary strictly enforce the time deadlines on the guaranty agencies.
Discussion: The Secretary understands that the 15-day deadline for
providing records to institutions places a burden on guaranty agencies
because most institutions submit their requests for documents at about
the same time. However, section 435(a)(2)(A) of the HEA establishes a
limited time in which an institution can submit an appeal of its loss
of FFEL Program eligibility based on its default rate. Accordingly, the
Secretary believes that it is necessary for the guaranty agency to
provide the records within 15 working days in cases in which the
institution may lose FFEL Program eligibility. There is no statutory
deadline for an institution with a default rate over 20 percent but
which is not subject to the loss of eligibility to file its appeal.
Accordingly, the Secretary believes that guaranty agencies should have
a limited amount of additional time to provide records to this latter
group of institutions. The Secretary believes that this revision will
allow guaranty agencies to better manage their obligations under the
regulations, while a longer time period would unduly delay the appeal
process.
In addition, the Secretary notes that some guaranty agencies have
taken the position that institutions must pay the fee for the records
before the agency provides the records. The Secretary sees no reason to
require guaranty agencies to supply records free of charge and
previously authorized guaranty agencies to charge a reasonable fee not
to exceed $10 per file. The Secretary has now amended the regulations
to specifically authorize guaranty agencies to require payment of the
fee before providing the documents. The guaranty agency must notify the
institution of the amount of the fee within 15 working days of the
receipt of the institution's request for records. If the institution
pays the fee on time, the guaranty agency must provide the records to
the institution within 15 working days and the institution has 30
calendar days from the date it receives the records to file its appeal.
The regulations have also been amended to provide that if the guaranty
agency does not receive payment of the fee from the institution within
15 working days of the date the institution received the notice of the
amount of fee from the agency, the institution will be deemed to have
waived its right to appeal. The Secretary reminds guaranty agencies
that they should notify the institution of the amount of the fee
through a method (such as a return receipt) that identifies the date
the institution received the fee notice. The institution may also wish
to use a similar delivery method that ensures that the guaranty agency
receives the institution's payment on time.
Changes: The regulations have been amended to allow the guaranty
agencies up to 30 calendar days to provide loan servicing and
collection records to an institution which is not subject to loss of
FFEL eligibility based on default rates. The regulations have also been
changed to require a guaranty agency which charges a fee to notify the
institution of the amount due within 15 working days of the date the
agency receives the institution's request and allow the guaranty agency
to withhold records until the appropriate fee has been paid. The
regulations also provide that if the guaranty agency does not receive
payment from the institution within 15 working days of the date the
institution received the guaranty agency's fee notice, the institution
will be considered to have waived its appeal. The guaranty agency must
notify the institution and the Secretary in writing of the apparent
waiver. The Secretary will determine that an institution which does not
pay a required fee has not met its burden of proof in regard to the
loans insured by that guaranty agency unless the institution can first
show that the agency's conclusion that the institution waived its
appeal was incorrect. An institution could meet this requirement by
presenting evidence, such as a return receipt, proving that the
institution delivered timely payment to the guaranty agency.
Comments: A number of commenters suggested changes in the method
used to pick the sample of loans for which the institution will receive
loan servicing and collection records. Some commenters suggested
methods other than the method established in the regulations or
recommended that the institution or an independent auditor be required
to pick the sample.
Discussion: The Secretary has not seen any problems with the
standard for picking the sample included in the interim final
regulations and is satisfied that the standard is appropriate. The
Secretary issued a letter to all guaranty agencies in June 1994
providing suggestions as to how the sample could be selected. An agency
which follows that guidance will have complied with the regulatory
requirements. However, the Secretary understands that there are other
methods an agency may use to pick the sample that also satisfy the
regulatory requirements, and the Secretary does not wish to bar the use
of these other methods. Accordingly, the Secretary does not believe it
is necessary to change the regulations at this time. As the Department
develops more experience with the appeal process, however, the
Secretary may consider issuing further guidance in this area.
Changes: None.
Comments: One commenter objected to the requirement that the
guaranty agency provide a list of certain dates as well as provide the
servicing and collection records. The commenter pointed out that this
requirement forced the agency to review all of the records rather than
just providing copies to the institution.
Discussion: In light of the revised standard for reviewing appeals
based on allegations of improper loan servicing and collection, the
Secretary has determined that it is no longer necessary to require the
guaranty agency to provide a list of certain dates for the loans in the
sample.
Changes: The requirement in Sec. 668.17(f)(3)(E)(2) that the agency
provide a list of certain dates for the loans in the sample has been
deleted.
Comments: One commenter stated that institutions should not have to
provide the Department with a list of the number of loans insured by
each guaranty agency that were included in the calculation of the
default rate since that information will be available from the National
Student Loan Data System (NSLDS).
Discussion: The Secretary needs the list of loans to fully evaluate
an appeal. However, NSLDS is not fully operational at this time and the
necessary information is not yet available from that system. Once NSLDS
is fully operational, the Secretary may reconsider whether it is
necessary for institutions to submit this information. In the meantime,
however, the information is easily available to institutions and the
Secretary believes that placing this minor burden on the many
institutions which appeal will contribute to timely resolution of
appeals.
Changes: None.
Comments: One commenter recommended that after the institution
files its appeal with the Department, the guaranty agency should have
an opportunity to respond to any allegations of improper loan servicing
and collection before the Secretary makes a decision.
Discussion: The Secretary does not believe that it is useful to
provide the guaranty agency an opportunity to respond to allegations of
improper loan servicing and collection as part of the cohort default
rate appeal process. The guaranty agency is not a party to the
proceeding but merely provides evidence necessary for the Secretary to
make the decision. Participation by guaranty agencies in the cohort
default rate appeal process would add needless complexity and delay. If
the Department determines, based on evidence resulting from cohort
default rate appeals, that a guaranty agency improperly received
reinsurance, the agency will have an opportunity to respond to this
determination prior to the imposition of any liabilities.
Changes: None.
Comments: One commenter objected to the requirement that an
institution must submit ``substantial evidence'' to rebut the guaranty
agency's records. Another commenter asked the Secretary to define
``substantial evidence''.
Discussion: The guaranty agency's records are the official records
of the FFEL Program and are generally presumed to be accurate. To
overcome this presumption, the Secretary believes it is appropriate to
require the institution to present more than a mere minimum of
evidence. ``Substantial evidence'' is a well defined term in
administrative law. In general, ``substantial evidence'' is ``more than
a mere scintilla. It means such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion.'' Consolidated Edison
Co. v. NLRB, 305 U.S. 197, 229 (1938). The Secretary does not believe
it is necessary to include this definition in the regulations.
The alternative to this rule would require the Secretary to conduct
a painstaking document-by-document review to validate guaranty agency
records. The Secretary does not believe that such an effort would be
productive or consistent with the objective of deciding appeals
expeditiously.
Changes: None.
Comments: One commenter asked the Secretary to clarify that an
institution cannot challenge its default rate in any other proceeding
before the Department or a guaranty agency if it does not file a timely
appeal. Another commenter objected to the provision limiting an
institution to one appeal of a default rate. The commenter noted that
the default rates are generally released during the busiest time of the
year for institutions, and that institutions which are not faced with
the loss of eligibility should have additional time to submit a notice
of appeal to the guaranty agency.
Discussion: The regulations clearly specify that an institution
which does not timely appeal its cohort default rate cannot challenge
that rate in any other proceeding before the Department. The Secretary
does not believe it is appropriate to include a restriction on
challenges in proceedings governed by guaranty agency rules. However,
the Secretary encourages guaranty agencies to include such a
restriction in their own rules. The Secretary further notes that the
Department, not guaranty agencies, determine cohort default rates.
Accordingly, a guaranty agency's claimed determination of an
institution's default rate does not constitute a decision by the
Secretary.
The Secretary also believes that it is appropriate and necessary to
limit institutions to one timely appeal opportunity for each default
rate calculation. Multiple appeals by an institution place a
significant additional burden on the Department and the guaranty
agencies. The Secretary also does not deem it appropriate to allow
institutions to delay certain appeals. Cohort default rates are
released annually and expeditious consideration and resolution of
appeals will maximize the period during which the institution has a
definitive default rate. To provide institutions with multiple appeals
would result in a substantial waste of resources and might encourage
institutions to engage in strategies to delay final decisions regarding
their rates.
Changes: None.
Comments: A number of commenters suggested changes to
Sec. 668.17(h) which provides for pre-publication review of default
rate data by institutions. One organization of guaranty agency
representatives requested that the agency be given additional time to
respond to requests for correction of information. This organization
also suggested that the opportunity to correct data should only be
provided to institutions with a most recent cohort default rate above
20%.
Discussion: The Secretary believes that the regulations provide
sufficient time for a guaranty agency to respond to allegations of
erroneous data by institutions. The pre-publication review process must
be completed in sufficient time for the Secretary to incorporate
corrections into the default rate calculations and issue rates at
approximately the same time each year. The Secretary will, of course,
monitor the progress of this system.
At this time the Secretary has decided that it is not appropriate
to restrict the right to pre-publication review to certain
institutions. The Secretary will monitor the impact and benefit to
institutions of pre-publication review to determine if changes are
appropriate in the future.
Changes: None.
Comments: A few institutional commenters objected to the provision
preventing an institution from alleging errors in the data unless the
allegations had been asserted in the pre-publication review process.
The institutions argued that new challenges should be permitted because
new information might be developed. Another institution asked the
Secretary to delete the statement that the time for filing a request
for correction with the guaranty agency begins at the time the
institution receives or should have received the information from the
Secretary.
Discussion: The Secretary strongly believes that it is vital to
have a cohort default rate appeal process that results in timely, final
appeal decisions by the Department. This goal has been frustrated in
the past by institutions which constantly raise new objections to their
default rate data after receiving unfavorable decisions on earlier
complaints. In the vast majority of cases, these complaints do not
justify significant further changes in the institution's default rate
and appear designed simply to delay the final resolution of the
institution's cohort default rate. Thus, the Secretary believes it is
reasonable and appropriate to limit the institution to one opportunity
to raise allegations of inaccurate data.
The Secretary also believes that it is appropriate to start the
process for challenging data with the date the institution received or
should have received default rate information from the Secretary. In
the past, some institutions have tried to delay their appeal deadlines
by refusing to accept delivery of the default rate notification letter
or have claimed after the fact that they did not receive it although
the Secretary has a signed return receipt showing receipt. These
regulations seek to eliminate the use of this tactic.
Changes: None.
Comments: An organization of guaranty agencies suggested that
Sec. 668.17(h)(2) be modified to change the requirement that an
institution provide the guaranty agency with ``any evidence'' it
believes supports its contention that the default rate data are
incorrect. The organization recommended the deletion of the word
``any'' to clarify that the institution must submit evidence to support
its claim, rather than simply making the allegation. The organization
also asked the Secretary to address the treatment of situations where
an institution submits questionable documentation to the guaranty
agency.
Discussion: The Secretary agrees with the commenter's suggestion
that the regulation be modified to require an institution to submit
evidence to support a claim that the default rate data are inaccurate.
The Secretary also agrees that the issue of questionable
documentation needs to be addressed. The guaranty agencies and the
Secretary share the responsibility to identify questionable
information. To ensure that issues of questionable documentation are
addressed, the Secretary has modified Sec. 668.17(h)(5) to clarify that
the changes to default rate data will only be made when the error is
confirmed by the guaranty agency and approved by the Department. This
change clarifies the Secretary's authority to question a change
accepted by the guaranty agency that may have been based on
questionable documentation. In any cases in which the Secretary or
guaranty agency identifies questionable documentation, the Secretary or
the agency will notify appropriate investigative offices and request
appropriate action.
Changes: The word ``any'' has been deleted from Sec. 668.17(h)(2).
In addition, Sec. 668.17(h)(5) has been changed to provide that the
information used to calculate default rates will be changed to reflect
allegations of error made by institutions which are confirmed by the
guaranty agency and accepted by the Secretary.
Comments: One commenter requested that the Department not publish
the default rates for lenders, holders and guaranty agencies until
those organizations have an opportunity for pre-publication review of
the data.
Discussion: The Secretary does not believe that lenders, holders
and guaranty agencies need pre-publication review of the default rate
data. Congress provided for pre-publication error correction for
institutions only, but made no such provision for lenders, holders and
guaranty agencies. Moreover, most of the information regarding default
rates comes directly from those sources and should be correct. In
addition, although the HEA requires the publication of these rates for
purposes of public information, there is no loss of eligibility related
to those rates. Congress has provided the opportunity for institutions
to review the data because of certain consequences resulting from those
calculations. Lenders, loan holders and guaranty agencies do not have a
similar need for protection.
Changes: None.
Executive Order 12866
These final 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 regulatory action.
The potential costs associated with the contents of the final
regulations are those resulting from statutory requirements and those
determined by the Secretary to be necessary for administering the FFEL
Program effectively and efficiently. Burdens specifically associated
with information requirements, if any, are identified and explained
elsewhere in this preamble under the heading Paperwork Reduction Act of
1980.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, the Secretary has
determined that the benefits of the final 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.
Paperwork Reduction Act of 1980
Sections 668.17(f) and (h) contain information collection
requirements. As required by the Paperwork Reduction Act of 1980, the
Department of Education will submit a copy of these sections to the
Office of Management and Budget (OMB) for its review. (44 U.S.C.
3504(h)).
These regulations affect institutions of higher education and
guaranty agencies that participate in the Federal Family Education Loan
Program. The Secretary needs the information to properly administer
certain aspects of that program. The collection and reporting burden
for the 300 institutions which challenge the calculation of their
cohort default rates under these provisions is expected to increase by
15,600 hours. The collection and reporting burden for the 46 guaranty
agencies which must respond to the institutions' requests under these
regulations is expected to increase by 2,576 hours.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 3002, New Executive
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.
Comments on the burden estimate must be received on or before December
29, 1994.
List of Subjects in 34 CFR Part 668
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Grant programs-education, Loan
programs-education, Reporting and recordkeeping requirements, Student
aid.
(Catalog of Federal Domestic Assistance Number 84.032, Federal
Family Education Loan Program.)
Dated: November 18, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary amends part 668 of title 34 of the Code of Federal
Regulations as follows:
The authority citation for part 668 continues to read as follows:
Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c and
1141, unless otherwise noted.
1. Section 668.17 is amended by adding paragraphs (f), (g) and (h)
as follows:
Sec. 668.17 Default Reduction Measures
* * * * *
(f) Appeal based on allegations of improper loan servicing or
collection--(1) General. An institution that is subject to loss of
participation in the FFEL programs under paragraph (a)(1) of this
section or has been notified by the Secretary that its cohort default
rate equals or exceeds 20 percent for the most recent year for which
data are available may include in its appeal of that loss or rate a
challenge based on allegations of improper loan servicing or
collection. This challenge may be raised in addition to other
challenges permitted under this section.
(2) Standard of review. An appeal based on allegations of improper
loan servicing or collection must be submitted to the Secretary in
accordance with the requirements of this paragraph. The Secretary
excludes any loans from the cohort default rate calculation which, due
to improper servicing or collection, would, as demonstrated by the
evidence submitted in support of the institution's timely appeal to the
Secretary, result in an inaccurate or incomplete calculation of the
cohort default rate.
(3) Procedures. (i) The following procedures apply to appeals from
cohort default rates issued by the Secretary during Federal fiscal year
1994 and subsequent years. Upon receiving notice from the Secretary
that the institution's cohort default rate exceeds the thresholds
specified in paragraph (c)(2) of this section or that its most recent
cohort default rate equals or exceeds 20 percent, the institution may
appeal the calculation of the cohort default rate based on allegations
of improper loan servicing or collection. The Secretary's notice
includes a list of all borrowers included in the calculation of the
institution's cohort default rate.
(ii) To initiate an appeal under this paragraph, the institution
must notify, in writing, the Secretary and each guaranty agency that
guaranteed loans included in the institution's cohort default rate that
it is appealing the calculation of the cohort default rate. The
notification must be received by the guaranty agency and the Secretary
within 10 working days of the date the institution received the
Secretary's notification. The institution's notification to the
guaranty agency must include a copy of the list of students provided by
the Secretary to the institution.
(iii) Within 15 working days of receiving the notification from an
institution subject to loss of participation in the FFEL programs under
paragraph (a)(1), or within 30 calendar days of receiving such
notification from any other institution that may file a challenge to
its default rate under this paragraph, the guaranty agency must provide
the institution with a representative sample of the loan servicing and
collection records relating to borrowers whose loans were guaranteed by
the guaranty agency and that were included as defaulted loans in the
calculation of the institution's cohort default rate. For purposes of
this section, the term ``loan servicing and collection records'' refers
only to the records submitted by the lender to the guaranty agency to
support the lender's submission of a default claim and included in the
claim file. In selecting the representative sample of records, the
guaranty agency must use the following procedures:
(A) The guaranty agency shall list in social security number order
all loans made to borrowers for attendance at the institution and
guaranteed by the guaranty agency and included as defaulted loans in
the calculation of the cohort default rate which is being challenged by
the institution.
(B) From the population of loans identified by the guaranty agency,
the guaranty agency shall identify a sample of the loans. The sample
must be of a size such that the universe estimate derived from the
sample is acceptable at a 95 percent confidence level with a plus or
minus 5 percent confidence interval. The sampling procedure must result
in a determination of the number of loans that should be excluded from
the calculation of the cohort default rate under this paragraph.
(C) Once the sample of loans has been established, the guaranty
agency shall provide a copy of all servicing and collection records
relating to each loan in the sample to the institution in hard copy
format unless the guaranty agency and institution agree that all or
some of the records can be provided in another format.
(D) The guaranty agency may charge the institution a reasonable fee
for copying and providing the documents, not to exceed $10 per borrower
file.
(E) After compiling the servicing and collection records for the
loans in the sample, the guaranty agency shall send the records, a list
of the loans included in the sample, and a description of how the
sample was chosen to the institution. The guaranty agency shall also
send a copy of the list of the loans included in the sample, listed in
order by social security number, and the description of how the sample
was chosen to the Secretary at the same time the material is sent to
the institution.
(F) If the guaranty agency charges the institution a fee for
copying and providing the documents under paragraph (f)(iii)(D) of this
section, the guaranty agency is not required to provide the documents
to the institution until payment is received by the agency. If payment
of a fee is required, the guaranty agency shall notify the institution,
in writing, within 15 working days of receipt of the institution's
request, of the amount of the fee. If the guaranty agency does not
receive payment of the fee from the institution within 15 working days
of the date the institution received notice of the fee, the institution
shall be considered to have waived its right to challenge the
calculation of its cohort default rate based on allegations of improper
loan servicing or collection in regard to loans guaranteed by that
guaranty agency. The guaranty agency shall notify the institution and
the Secretary, in writing, that the institution has failed to pay the
fee and has apparently waived its right to challenge the calculation of
the cohort default rate. The Secretary will determine that an
institution which does not pay the required fee to the guaranty agency
has not met its burden of proof in regard to the loans insured by that
guaranty agency unless the institution proves that the agency's
conclusion that the institution waived its appeal was incorrect.
(iv) After receiving the relevant loan servicing and collection
records from all of the guaranty agencies that insured loans which are
included in the cohort default rate calculation, the institution has 30
calendar days to file its appeal with the Secretary. An appeal is
considered filed when it is received by the Secretary. If the
institution is also filing an appeal under paragraph (d)(1)(i) of this
section, the institution may delay submitting its appeal under this
paragraph until the appeal under paragraph (d)(1)(i) is submitted to
the Secretary. As part of the appeal, the institution must submit the
following information to the Secretary:
(A) A list of the loans which the institution alleges would, due to
improper loan servicing or collection, result in an inaccurate or
incomplete calculation of the cohort default rate.
(B) Copies of all of the loan servicing or collection records and
any other evidence relating to a loan that the institution believes has
been subject to improper servicing or collection. The records must be
in hard copy or microfiche format.
(C) A copy of the lists provided by the guaranty agencies under
paragraph (e)(2) of this section.
(D) An explanation of how the alleged improper servicing or
collection resulted in an inaccurate or incomplete calculation of the
cohort default rate.
(E) A summary of the institution's appeal listing the number of
loans insured by each guaranty agency that were included in the
calculation of the institution's cohort default rate and the number of
loans that would be excluded from the calculation of that rate by
application of the results of the review of the sample of loans
provided to the institution to the population of loans for each
guaranty agency.
(F) A certification by an authorized official of the institution
that all information provided by the institution in the appeal is true
and correct.
(v) The Secretary or his designee reviews the information submitted
by the institution and issues a decision.
(A) In making a decision under this paragraph the Secretary
presumes that the information provided by the guaranty agency is
correct unless the institution provides substantial evidence showing
that the information maintained by the guaranty agency is not correct.
(B) If the Secretary finds that the evidence presented by the
institution shows that some of the loans included in the sample of loan
records reviewed by the institution should be excluded from calculation
of the cohort default rate under paragraph (f)(2) of this section, the
Secretary reduces the institution's cohort default rate, in accordance
with a statistically valid methodology, to reflect the percentage of
defaulted loans in the sample that should be excluded.
(vi) The Secretary notifies the institution, in writing, of the
decision.
(vii) An institution may not seek judicial review of the
Secretary's determination of the institution's cohort default rates
until the Secretary or his designee issues the decision under paragraph
(f)(3)(v) of this section.
(viii) For purposes of this paragraph, a default is considered to
have been due to improper servicing or collection only if the borrower
did not make a payment on the loan and the institution proves that the
lender failed to perform one or more of the following activities:
(A) send at least one letter (other than the final demand letter)
urging the borrower or endorser to make payments on the loan if the
lender was required to send such letters;
(B) attempt at least one phone call to the borrower or endorser, if
such attempts were required;
(C) submit a request for preclaims assistance to the guaranty
agency, if such a request was required;
(D) send a final demand letter to the borrower, if required; and
(E) if required, the lender did not submit a certification (or
other evidence) that skip tracing was performed.
(g) Effect of decision. An institution may challenge the
calculation of a cohort default rate under this section no more than
once. The Secretary's determination of an institution's appeal of the
calculation of a cohort default rate is binding on any future appeal by
the institution. An institution that fails to challenge the calculation
of a cohort default rate under this section within 10 working days of
receiving notice of the determination of the cohort default rate is
prohibited from challenging that rate in any other proceeding before
the Department.
(h) Review of default rate data. Effective on October 1, 1994, an
institution has an opportunity to review and correct the information
provided to the Secretary by the guaranty agencies for the purpose of
calculating a cohort default rate on the loans to be included in the
calculation of the institution's cohort default rate before the final
rate is calculated.
(1) (i) Once the Secretary has received the information used in
calculating the cohort default rates from the guaranty agencies, the
Secretary calculates draft cohort default rates for each institution.
(ii) The Secretary sends all institutions with draft cohort default
rates equal to or in excess of 20 percent, a copy of the information
provided by the guaranty agencies in regard to loans included in the
institution's cohort default rate.
(iii) An institution with a draft cohort default rate less than 20
percent will receive a notice of the draft default rate and may request
a copy of the information provided by the guaranty agencies within 10
working days of receiving the notice from the Secretary. Upon receiving
the request from the institution, the Secretary will send the
institution a copy of the information requested. The time frames
provided in this paragraph will not start until the institution
receives the information from the Secretary.
(2) Within 30 calendar days of receiving the default rate
information from the Secretary, the institution must notify the
guaranty agency of any information included in the default rate data
that it believes is incorrect. The institution must also provide the
guaranty agency with evidence that it believes supports its contention
that the default rate data are incorrect.
(3) Within 30 days of receiving the institution's challenge under
paragraph (h)(2) of this section, the guaranty agency shall respond to
the institution's challenge. The guaranty agency's response must
include a response to each allegation of error made by the institution
and any evidence supporting the agency's position.
(4) The guaranty agency shall provide a copy of its response to the
institution to the Secretary and identify any errors in the information
previously submitted to the Secretary.
(5) The information used to calculate cohort default rates will be
changed to reflect allegations of error made by an institution,
confirmed by the guaranty agency and accepted by the Secretary prior to
releasing final cohort default rates.
(6) The draft default rate issued by the Secretary under paragraph
(h)(1) of this section may not be considered public information and may
not be otherwise voluntarily released by the Secretary or the guaranty
agency.
(7) An institution may not appeal a cohort default rate under
paragraph (d)(1) of this section on the basis of any alleged errors in
the default rate information unless errors were identified by the
institution in a challenge to its preliminary default rate under
paragraph (h) of this section.
[FR Doc. 94-29037 Filed 11-28-94; 8:45 am]
BILLING CODE 4000-01-P
