[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10132]
[[Page Unknown]]
[Federal Register: April 29, 1994]
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Part IV
Department of Education
_______________________________________________________________________
34 CFR Part 668
Student Assistance General Provisions; Interim Final Rule
DEPARTMENT OF EDUCATION
34 CFR Part 668
RIN 1840-AC09
Student Assistance General Provisions
AGENCY: Department of Education.
ACTION: Interim final regulations with invitation for comment.
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SUMMARY: On December 20, 1993, the President signed the Higher
Education Technical Amendments of 1993. These interim final regulations
implement certain provisions of the technical amendments relating to
the determination of institutional cohort default rates in the Federal
Family Education Loan program. The Secretary invites comments on these
regulations.
DATES: Effective date: These regulations take effect either 45 days
after publication in the Federal Register or later if Congress takes
certain adjournments, with the exception of Sec. 668.17 (f) and (h)
which will become effective after the information collection
requirements contained in this section have been submitted by the
Department of Education and approved by the Office of Management and
Budget under the Paperwork Reduction Act of 1980. If you want to know
the effective date of these regulations, call or write the Department
of Education contact person. A document announcing the effective date
will be published in the Federal Register. Comments on these interim
final regulations must be received on or before June 13, 1994.
ADDRESSES: All comments concerning these regulations should be
addressed to Pamela A. Moran, Acting Chief, Loans Branch, Division of
Policy Development, Policy, Training, and Analysis Service, U.S.
Department of Education, 400 Maryland Avenue, SW. (room 4310, ROB-3),
Washington, DC 20202-5449.
FOR FURTHER INFORMATION CONTACT: Doug Laine, Program Specialist, Loans
Branch, Division of Policy Development, Policy, Training, and Analysis
Service, U.S. Department of Education, 400 Maryland Avenue, SW. (room
4310, ROB-3), Washington, DC. 20202-5449. 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 Public Law 103-208
amended section 435 of the Higher Education Act of 1965, as amended
(HEA), 20 U.S.C. 1085. This section modified the process governing
institutions' appeals of their cohort default rates based on
allegations of improper loan servicing and collection.
In a Federal Register Notice published March 22, 1994, 59 FR 13606,
the Secretary requested comments on the procedures that should be
established to implement the statutory amendments.
The Secretary indicated in the Notice that he intended to issue
regulations establishing procedures for schools to appeal their default
rates based on allegations of improper loan servicing or collection.
The notice solicited public help in developing those procedures. The
Secretary invited public comment on any aspect of implementing the
statute, but in particular, the Secretary solicited comments on the
following issues:
1. What procedures should the Secretary use in determining whether
to exclude from the calculation of cohort default rates loans, the
inclusion of which due to improper servicing or collection, would
result in an inaccurate or incomplete calculation of a school's cohort
default rate?
2. What procedures should be used for sampling of loan servicing
and collection records?
3. What procedures should the Secretary provide for schools to
review the information provided by the guaranty agencies to the
Secretary for use in determining cohort default rates prior to
calculation of the final rates?
The Secretary received 54 comments in response to the request for
comments. Many of the comments are reflected in these rules. The
Secretary's response to the suggestions made by the commenters that
were not accepted is provided after the following discussion of the
procedures established by these rules.
Appeals Based on Allegations of Improper Loan Servicing
Public Law 103-208 added section 435(a)(3) to the HEA to
specifically provide certain institutions with an opportunity to appeal
the calculation of their cohort default rates on the basis of
allegations of improper loan servicing or collection. In particular,
this opportunity will be available to institutions that: (1) Are
subject to loss of eligibility for the FFEL Program under section
435(a)(2) of the HEA; (2) are subject to loss of eligibility for the
Federal Supplemental Loans for Students (SLS) Program under section
428A(a)(2) of the HEA; or (3) have cohort default rates that equal or
exceed 20 percent for the most recent year for which data are
available. The statute requires the Secretary to take steps to ensure
that these institutions have access to a representative sample of
relevant loan servicing and collection records for a reasonable period
of time, not to exceed 30 calendar days. Upon completion of the appeal,
the Secretary will reduce an institution's cohort default rate to
reflect the percentage of defaulted loans in the sample that are
required to be excluded under section 435(m)(1)(B) of the HEA.
Public Law 103-208 also amended section 435(m)(1)(B) of the HEA to
clearly provide that the Secretary would consider allegations of
improper loan servicing or collection only in considering appeals of
cohort default rate determinations filed by institutions. This change
was made in response to certain court rulings which suggested that the
Secretary was required to determine whether loans were properly
serviced prior to making initial determinations of and releasing cohort
default rates. Section 435(m)(1)(B) of the HEA now provides that, in
considering appeals of cohort default rates under section 435(a)(3) of
the HEA, the Secretary should exclude any loans 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.
These regulations establish the procedures for implementing the
appeal process provided by sections 435(a)(3) and 435(m)(1)(B) of the
HEA. The regulations specify that an institution which is subject to
the loss of participation in the FFEL program because of default rates
equal to or in excess of 25 percent for the three most recent years for
which rates are calculated or which has a cohort default rate which
equals or exceeds 20 percent may appeal the calculation of the rate
based on allegations of improper loan servicing or collection. These
regulations do not specifically include institutions that are subject
to the loss of participation in the Federal SLS Program because that
program has been repealed by Congress effective July 1, 1994. See
Public Law 103-66, section 4047(b) and (d). These regulations replace
the former regulatory provision which related to the loss of SLS
participation because that subsection becomes moot on the elimination
of the SLS program. However, an institution that is currently subject
to a loss of participation in the SLS program will have the opportunity
to pursue an appeal under these procedures.
Under these regulations, once an institution receives notice from
the Secretary that its cohort default rate or rates exceed the levels
specified in section 435(a)(3) of the HEA, the institution will have 10
working days to initiate an appeal of the rate based on allegations of
improper loan servicing or collection. The Secretary's default rate
notification to the institution will include a list of all borrowers
included in the calculation of the cohort default rate. To initiate an
appeal, the institution must include the list of borrowers in its
notification to the guaranty agencies that it is appealing the
calculation of the cohort default rate based on allegations of improper
loan servicing or collection.
Once the guaranty agency receives the institution's appeal, it must
provide the institution with the loan servicing or collection records
for a representative sample of the loans insured by the guaranty agency
and included in the institution's cohort default rate. The sample must
be identified by the guaranty agency and the universe estimate derived
from the sample results must be acceptable at a 95 percent confidence
level with a plus or minus 5 percent confidence interval. In some
cases, the result may be that servicing and collection records for all
the loans guaranteed by the agency and included in the institution's
default rate will be sent to the institution. Once the sample is
identified, the guaranty agency must send the loan servicing and
collection records to the institution within 15 working days of
receiving the institution's request. The guaranty agency's response to
the institution must also include a list of certain dates that will
assist the institution in reviewing the records and the Department in
resolving the appeal. An agency may charge the institution a reasonable
fee for copying and production of the records, not to exceed $10 per
borrower file. The Secretary will charge a similar fee in response to a
request for records maintained by the Department on behalf of the
Higher Education Assistance Foundation.
After receiving the records from the guaranty agency, the
institution has 30 calendar days to file its appeal with the Secretary.
The regulations identify the material that must be submitted by the
institution. The Secretary will review the appeal and issue a decision.
The Secretary will assume that the records maintained by the guaranty
agency in the normal course of business in the FFEL Program are correct
unless the institution provides substantial evidence to the contrary.
If the Secretary finds that the evidence submitted by the institution
shows that some of the loans included in the sample of loans should be
excluded from calculation of the cohort default rate, the Secretary
will adjust the institution's cohort default rate to reflect the
percentage of defaulted loans that should be excluded. The Secretary
will use a statistically valid methodology to determine the estimate of
the number of loans that should be excluded from the calculation of the
cohort default rate and the confidence interval of the estimate. In
determining the exact methodology, the Secretary will need to consider
the number of loans in the sample, the number of guaranty agencies
involved and other appropriate factors. The Secretary will notify the
institution, in writing, of his decision on the appeal.
Section 435(m)(1)(B) of the HEA includes two prerequisites for
exclusion of a loan from the cohort default rate calculation. Under the
law, the institution must prove both (1) that the loans were serviced
or collected improperly and (2) that the improper loan servicing and
collection caused the student loan default. If either of these two
requirements is not proven, the loan will not be excluded from the
cohort default rate calculation.
These regulations reflect the Secretary's view, based on
consideration of past appeals of cohort default rate determinations
that, for purposes of a cohort default rate appeal, a loan is
considered to have been serviced or collected improperly only if, under
applicable rules, the Department would decline to pay reinsurance on
the principal of the loan by reason of the improper servicing or
collection. The HEA does not define the term ``improper servicing or
collection'' used in section 435(m). Therefore, to determine what
constitutes improper loan servicing and collection, the Secretary looks
to its due diligence regulations, its published policies such as
Appendix D to 34 CFR part 682 and other applicable policies and
practices. There is no indication that the 1993 amendments to section
435(m) were intended to establish new concepts regarding what does and
does not constitute improper loan servicing and collection. For that
reason, the Secretary construes section 435(m) by reference to concepts
developed over a period of years in the administration of the FFEL
Program.
Section 435(m) of the HEA also specifies that a loan which has been
subject to improper servicing or collection is excluded from
calculation of the cohort default rate only if the default on the loan
was ``due to'' improper servicing or collection and results in an
inaccurate or incomplete calculation of the cohort default rate. The
statute does not explain how improper servicing or collection could
cause a cohort default rate to be inaccurate or incomplete. In Atlanta
College of Medical and Dental Careers, Inc. v. Riley, 987 F.2d 821, 830
(D.C. Cir. 1993), however, the Court of Appeals assumed that a cohort
default rate would be inaccurate or incomplete if it contained loans
which defaulted due to improper servicing or collection. The Secretary
considers that interpretation to be reasonable. The Court of Appeals in
Atlanta College also concluded that the type of causal link between
improper servicing and default on a loan is properly left to the
Secretary. The Secretary believes that a stringent showing of default
causation is appropriate. Section 435(m) of the HEA does not include
any general ``causation'' challenge that would permit an institution to
appeal the calculation of its default rates on the basis that its
students defaulted for reasons beyond the institution's control.
Moreover, Congress set tight constraints on the time periods for
challenges to the calculation of the cohort default rates and clearly
did not contemplate a time-consuming, heavily burdensome process for
determining default causation.
Based on these factors, the Secretary has determined that section
435(m) should be interpreted to allow only a limited loan servicing
challenge. Accordingly, these regulations reflect the Secretary's
determination that, for purposes of the calculation of a cohort default
rate, improper servicing or collection is considered to have caused a
default only if the improper servicing or collection resulted in a lack
of notification to the borrower that he or she must begin repaying the
loan. The Secretary believes that once the borrower has been informed
of the obligation to repay the loan, the institution cannot show that a
resulting default was due to the alleged improper servicing. The
position reflected in these regulations has its genesis in certain
decisions of the Secretary which resolved appeals of cohort default
rate determinations on a case-by-case basis. Case-by-case adjudication
is a permissible approach to decision making under applicable law. See
NLRB v. Bell Aerospace Corp., 416 U.S. 267, 294 (1974). However, the
Secretary's adjudications resolving individual appeals have not
established rules of general applicability. As explained in more detail
in the comment and response section of this document, the Secretary has
considered a variety of proposed standards for adjudication of appeals
based on allegations of improper servicing and collection. Some of
these approaches would arguably broaden the appeal standard for
institutions, while others reflect a more narrow scope than is
reflected in the Secretary's adjudications to date. After careful
consideration of these alternatives, the Secretary concludes that the
general construction of section 435(m) of the HEA reflected in his most
recent appeal decisions faithfully implements Congressional intent and
fairly balances the rights of all those affected by those decisions.
The Secretary particularly invites comments as to whether there are
other types of improper servicing that should be considered to have
``caused'' a default for purposes of calculation of a cohort default
rate and the rationale for any such suggestion. Review of cohort
default rate information.
Public Law 103-208 also amended section 435(m)(1)(A) of the HEA to
provide, effective October 1, 1994, that institutions will have an
opportunity to review and correct errors in the information provided by
the guaranty agencies to the Secretary for use in calculating cohort
default rates. These regulations add paragraph (h) to Sec. 668.17 to
establish procedures for this review.
Under the regulations, the Secretary will provide each institution
which has a draft default rate equal to or in excess of 20 percent with
a copy of the records provided by each guaranty agency in regard to
loans made to borrowers for attendance at the institution which were
insured by that guaranty agency. Institutions with draft default rates
under 20 percent may request copies of the records. These records will
be accompanied by a notice indicating the institution's draft default
rate. This draft default rate will not be considered a final agency
decision and will not be otherwise voluntarily released by the
Secretary.
After receiving the information from the Secretary, the institution
will have 30 calendar days to review the information and notify, in
writing, the appropriate guaranty agency of any information included in
the cohort default rate which it believes is incorrect. The institution
should also send the agency any evidence which it believes supports its
contention that the information provided by the guaranty agency to the
Secretary is inaccurate. The guaranty agency shall review the
institution's challenge and respond within 30 calendar days. If the
guaranty agency agrees with the institution, the information used to
calculate the cohort default rate will be adjusted prior to the release
of the official cohort default rates. If the guaranty agency does not
confirm the error alleged by the institution, the institution may use
the data provided by the guaranty agency as part of an appeal of the
calculation of the default rate based on the allegedly erroneous data
after the rates are released.
The Secretary intends to continue his practice of allowing
institutions with a cohort default rate equal to or in excess of 20
percent for the most recent year for which rates have been calculated
to challenge the calculation of the rate based on allegations that
erroneous data were included in the calculation. However, all
institutions must satisfy the time deadlines for filing challenges
under the regulations.
The Secretary believes that section 435 only provides an
opportunity for the institution to review and correct errors in the
information provided to the Secretary by the guaranty agency. The
statute does not contemplate that all allegations of error will be
resolved prior to release of the final default rates. The regulations,
therefore, allow an institution to appeal the calculation of a cohort
default rate based solely on allegations of erroneous data. However, to
ensure that appeals can be decided on a timely basis, the regulations
provide that an institution can only base an appeal on allegations that
were raised to the guaranty agency during the review of the draft
cohort default rate. The Secretary believes that this process will
benefit the institutions, guaranty agencies and the public by
shortening delays that have been experienced in the appeal process and
will result in more timely decisions.
Effect on Pending Default Rates
The Secretary received a number of comments regarding the effect of
the changes to section 435(a)(3) and (m) on the current official cohort
default rates. As the Secretary noted in the Federal Register notice,
Public Law 103-208 does not specifically provide for reopening prior
final determinations. However, the Secretary has been convinced by the
commenters to allow institutions to challenge their current cohort
default rates on the basis of allegations of improper loan servicing or
collection. Accordingly, the regulation allows institutions identified
in section 435(a)(3) of the HEA to file an appeal of the current cohort
default rates based on allegations of improper loan servicing. Thus,
institutions with cohort default rates equal to or in excess of 20
percent for fiscal year 1991 (including institutions subject to the
loss of SLS participation based on a fiscal year 1991 cohort default
rate in excess of 30 percent) may challenge the 1991 cohort default
rate. Similarly, institutions which are subject to the loss of FFEL
program participation based on cohort default rates for fiscal years
1989, 1990 and 1991 may challenge those rates. The regulation specifies
that the time limits for challenging these rates will begin on the date
that the regulations become effective. The Secretary intends to notify
institutions of the effective date of these regulations once that date
is determined. The prior default rates will be considered effective
until the appeal process is completed and a new rate issued.
The Secretary notes that cohort default rates for fiscal year 1992
will be issued during the summer of 1994. Institutions which are
interested in challenging their current cohort default rates may want
to wait until after the new rates are issued. An institution with a
cohort default rate in excess of one of the threshold levels for fiscal
year 1991 may find that its fiscal year 1992 cohort default rate is
below the threshold and that the institution is no longer subject to
sanctions based on excessive cohort default rates. Thus, an institution
may want to consider whether filing a challenge of the current default
rates is worth the time, expense and resources needed to prepare and
submit an appeal of a rate that may soon be irrelevant. The Secretary
also notes that the regulations provide that once an institution has
challenged a cohort default rate for a particular year and received a
final decision from the Secretary, that decision is binding in any
future challenge to the default rate filed by the institution.
Analysis of Comments and Responses
Comment: The commenters provided a number of different definitions
of the term ``improper servicing or collection'' of a loan. A number of
respondents to the request for comments suggested that the Secretary
should remove from the calculation of the cohort default rate any loan
that was not serviced in strict compliance with the Department's due
diligence requirements in 34 CFR 682.411. Some commenters suggested
that a loan on which a default claim has been paid should be considered
properly serviced or collected on the grounds that a claim would not
have been paid if servicing was not proper. Other commenters suggested
that the Secretary should consider a lender's failure to grant a
deferment to be improper loan servicing or collection. Some commenters
also suggested that guaranty agency collection efforts should be
considered in evaluating whether improper servicing or collection has
occurred.
Response: The Secretary's view of the satutory term ``improper
servicing or collection'' is discussed earlier in this document. The
Secretary does not agree with the suggestion that Congress intended to
establish a new standard for proper servicing or collection. Instead,
the Secretary believes it is appropriate to rely on the concepts and
requirements developed and applied by the Department over the years.
The requirements in Sec. 682.411 are designed to ensure that lenders
and guaranty agencies that are requesting Federal benefits meet certain
standards in collection as a requirement for receiving those benefits.
These requirements have never been intended to set forth standards
which if not followed in their entirety provide an excuse for borrowers
to 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 loan programs. Congress
has determined that the institutions bear a significant responsibility
for defaults in the FFEL program. 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.
The Secretary also does not agree that it would be appropriate to
assume that all claims which have been paid as defaults have been
properly serviced or collected. While failure to pay a default claim
may be based on a finding of improper servicing or collection, payment
of a default claim is not absolute proof of compliance with the
Secretary's requirements. Accordingly, institutions should have the
opportunity to review servicing and collection records relating to
these loans.
In regard to the issue of a lender's failure to respond to
deferment requests, the Secretary notes that he has consistently
treated deferment errors as ``erroneous data'' in adjudicating appeals
of cohort default rate determinations. This treatment benefits the
appealing institution since a determination that erroneous data was
reported results in the affected loan being removed from the
calculation of defaulted loans (the numerator), but it remains in the
calculation of loans in repayment (the denominator). In contrast, loans
which are excluded from the calculation of the cohort default rate
based on improper servicing or collection are excluded from both the
numerator and the denominator. The Secretary does not believe there is
any reason to change his treatment of deferment errors.
Finally, the Secretary notes that guaranty agency servicing is not
relevant to the default rate calculation. A guaranty agency does not
begin to service a loan until it has already defaulted and, thus, its
servicing does not affect the institution's cohort default rate.
Comment: 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 on
which the agency did not provide notice of the request to the
institution.
Response: A lender's failure to request preclaims assistance could,
in certain circumstances, be considered improper servicing or
collection if it would result in the loss of reinsurance on the
principal of the loan based on the applicable rules and policies and if
the borrower defaulted due to lack of notification that the time for
repayment had begun.
Comment: Some commenters suggested that an institution should
remain eligible to participate in the FFEL program during the appeal
process.
Response: As provided in current regulations, an eligible
institution that files and pursues an appeal in accordance with the
regulatory requirements will be able to continue to participate in the
FFELP until and unless the Secretary issues a decision determining that
the institution's cohort default rates remain above the threshold
limits.
Comment: Some commenters urged the Secretary to allow all
institutions to challenge their default rates on the basis of improper
servicing or collection.
Response: Section 435(a)(3) specifically allows only institutions
with cohort default rates above certain threshold levels to challenge
their rate based on allegations of improper loan servicing. The
Secretary believes that this limitation was intentional and reasonable
in light of the significant burdens placed on guaranty agencies and the
Secretary in reviewing challenges based on allegations of improper loan
servicing or collection.
Comment: Some commenters urged the Secretary to require
institutions to provide evidence of improper loan servicing prior to
requesting access to loan servicing records.
Response: The HEA does not require institutions to provide evidence
of improper loan servicing or collection prior to filing a challenge of
its cohort default rates.
Comment: Some commenters requested that institutions be required to
submit a complete appeal before the guaranty agency is required to meet
the time deadlines required by the regulations.
Response: These comments were based on the assumption by the
commenters that the institution would be required to submit evidence of
improper loan servicing before the guaranty agency would be required to
respond to the institution's appeal. Under these regulations, the
institution will only need to notify the guaranty agency that it is
appealing the calculation of the cohort default rate and provide a copy
of the list of borrowers included in the calculation of the rate.
Accordingly, the Secretary believes it is unlikely that an institution
will not submit a complete notification to the guaranty agency.
However, an institution which does not submit the notice and list to
the guaranty agency as required by the regulation may be barred from
pursuing an appeal.
Comment: Some commenters suggested that loans serviced by lenders
or servicers who have been designated as exceptional performers under
section 428I of the HEA should not be included in any loans reviewed
for improper servicing or collection on the ground that these loans are
presumed to be serviced or collected properly.
Response: The Secretary does not believe that it is appropriate to
exclude loans serviced by exceptional performers from the process for
determining appeals based on allegations of improper servicing or
collection. The exceptional performer designation is related only to
the lender's receipt of payments from the guaranty agency. It should
not be used to limit the institution's opportunity to challenge the
calculation of its cohort default rate.
Comment: A number of commenters urged the Secretary to provide
institutions more time to complete and submit appeals to the guaranty
agencies and the Secretary.
Response: The Secretary believes that the regulations provide
sufficient time for an institution to complete and submit appeals. The
Secretary believes that the regulations are consistent with the tight
time constraints on the time period for appeals included in the HEA.
Comment: Some commenters recommended that the Secretary consider
the quality of education provided by an institution in determining
whether an institution should be sanctioned based on its excessive
default rates.
Response: The statute sets forth specific grounds for challenges to
an institution's cohort default rates. The quality of education is not
included as a basis for appeal of a default rate based on allegations
of improper loan servicing or collection. The Secretary notes, however,
that institutions which are subject to the loss of FFEL Program
participation under section 435(a)(2) of the HEA may appeal on the
grounds of exceptional mitigating circumstances as defined by the
Secretary's regulations.
Comment: Some commenters recommended that the Secretary grant an
institution's appeal if the guaranty agency does not provide the
servicing and collection records within the time set forth in the
regulations.
Response: 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. In most cases,
the institution continues to participate in the program and is not
harmed by a short delay. The Secretary believes that the guaranty
agencies must 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 limit,
suspend or terminate a guaranty agency's participation in the FFEL
program based on violations of the regulatory time frames.
Comment: One commenter recommended that loans which have been
improperly serviced or collected be removed only from the numerator of
the calculation of the cohort default rate but not from the
denominator.
Response: The Secretary construes section 435(a)(3) to require that
loans which are determined to have defaulted due to improper loan
servicing or collection be ``exclude[d]'' from the calculation of the
cohort default rate entirely.
Executive Order 12866
The contents of this final rule 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 the procedures in this
rule.
The potential costs associated with the contents of this rule are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the FFEL program
effectively and efficiently. In assessing the potential costs of these
procedures, the Secretary has determined that the benefits of these
procedures justify the costs.
The Secretary has also determined that the contents of this rule do
not unduly interfere with State, local and tribal governments in the
exercise of their governmental functions.
The contents of this rule are consistent with the requirements of
the HEA and promote the President's priorities.
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. 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 May 31,
1994.
Invitation to Comment
The Secretary recognizes that many participants in the FFEL program
have an interest in these procedural rules. In light of that interest,
the Secretary is requesting comment on these rules. The Secretary will
consider any comments received within the designated comment period in
determining whether to make any changes in these rules. After reviewing
any comments received during the comment period, the Secretary will
publish changes to the regulation or will publish a notice in the
Federal Register indicating that no further changes will be made.
Waiver of Rulemaking
It is the practice of the Secretary to offer interested parties an
opportunity to comment on proposed regulations. However, the Secretary
has determined that the public interest requires the immediate issuance
of this interim final rule.
Under the Administrative Procedure Act, 5 U.S.C. section 551, et
seq., procedural amendments to regulations do not require prior public
notice and an opportunity for public comment. The changes being made by
this rule do not affect the substantive requirements or the underlying
laws or rules; nor do they modify or revoke existing rights or
obligations, or create new ones. These regulations merely establish
procedures to implement the requirements of sections 435(a)(3) and
435(m)(1)(B) of the HEA. Therefore, public comment is not required
under 5 U.S.C. 553(b)(A).
In addition, the Secretary has determined that notice and comment
is impracticable, unnecessary and contrary to the public interest. The
procedures included in these rules are needed to adjudicate appeals
from the initial determinations of cohort default rates for
institutions. The Secretary is required by section 435(m)(4) of the HEA
to publish cohort default rates for each institution for which a rate
is calculated at least every fiscal year. The cohort default rates to
be released for the current fiscal year are currently scheduled to be
released during the summer of 1994. For the appeal procedures to be in
place prior to the release of the default rates, the procedures must be
published by May 1, 1994. Moreover, the Secretary invited public
comment on what the procedures should be and received and considered
the comments received in preparing this interim final rule.
Accordingly, the Secretary has determined that public comment on this
interim final rule is not required under 5 U.S.C. 553(b)(B).
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: April 21, 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 complete and 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, 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 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 the
institution, 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. 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 and the
description of how the sample was chosen to the Secretary at the same
time the material is sent to the institution. The list of loans
included in the sample must include the following information:
(1) The loans included in the sample listed in order by social
security number;
(2) For each loan listed, the last date of attendance, the date
entered repayment, the date of the first payment missed by the borrower
and the default date listed in the guaranty agency's records.
(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) An explanation of how the alleged improper servicing or
collection resulted in an inaccurate or incomplete calculation of the
cohort default rate.
(D) 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.
(E) 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 loan is considered to have
been serviced or collected improperly only if, under applicable rules,
the Department would decline to pay reinsurance on the principal of the
loan.
(ix) For purposes of this paragraph, improper servicing or
collection is considered to have caused a loan to default for purposes
of the calculation of the cohort default rate only if the improper
servicing or collection resulted in a failure to notify the borrower
that he or she must begin repaying the loan.
(x) For cohort default rates issued by the Secretary for federal
fiscal years from 1989 to 1991, the procedures in this paragraph apply,
except that the 10-day period for initiating an appeal with the
guaranty agency starts on the effective date of these regulations.
(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 or should have received 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 any evidence that it believes supports its
contention that the default rate data are incorrect.
(3) Within 30 calendar 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 and
confirmed by the guaranty agency 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. 94-10132 Filed 04-28-94; 8:45 am]
BILLING CODE 4000-01-P
