[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15419]
[[Page Unknown]]
[Federal Register: June 24, 1994]
_______________________________________________________________________
Part VII
Department of Education
_______________________________________________________________________
34 CFR Part 682
Federal Family Education Loan Program; Final Rule
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AB81
Federal Family Education Loan Program
AGENCY: Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the regulations governing the Federal
Family Education Loan (FFEL) Program. The FFEL Program consists of the
Federal Stafford, Federal Supplemental Loans for Students (SLS),
Federal PLUS, and Federal Consolidation Loan programs. These amendments
are needed to implement changes to the Higher Education Act (HEA), made
by the Higher Education Amendments of 1992, to define the performance
standards and application procedures under which a lender, servicer, or
guaranty agency will be designated as an exceptional performer. These
regulations authorize the Secretary to recognize lenders, servicers,
and guaranty agencies for an exceptional level of performance in
collecting delinquent and defaulted FFEL Program loans. These
regulations will also encourage lenders, servicers, and guaranty
agencies to provide a higher level of expertise in servicing student
loan portfolios and to provide strict monitoring of collection
activities required on delinquent and defaulted FFEL Program loans.
EFFECTIVE DATE: Pursuant to section 482(c) of the Higher Education Act
of 1965, as amended (20 U.S.C. 1089(c)), these regulations take effect
July 1, 1995, with the exception of the information collection
requirements in Sec. 682.415. The information collection requirements
in Sec. 682.415 will become effective on July 1, 1995, or after these
requirements have been submitted by the Department of Education and
approved by the Office of Management and Budget under the Paperwork
Reduction Act of 1980, whichever is later. A document announcing the
effective date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ron Streets, Federal Family Education
Loan Program Section, 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, D.C. 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: The Higher Education Amendments of 1992
(Pub. L. 102-325) (the 1992 Amendments) enacted July 23, 1992 added a
new section 428I to the HEA to require the Secretary to promulgate
regulations to identify lenders, servicers, and guaranty agencies that
perform at an exceptional level in collecting delinquent and defaulted
FFEL Program loans. These regulations seek to reduce the cost of
defaults in the FFEL Program by encouraging lenders, servicers, and
guaranty agencies to properly collect student loans while easing the
burden on program participants who demonstrate an exceptionally high
level of compliance with program requirements.
On April 20, 1994, the Secretary published a notice of proposed
rulemaking (NPRM) for the FFEL Program in the Federal Register (59 FR
18928). The NPRM included a discussion of the major issues surrounding
the proposed changes which will not be repeated here. The following
list summarizes those issues and identifies the pages of the preamble
to the NPRM on which a discussion may be found:
Separating loan portfolios to calculate the 97 percent
compliance rate (page 18930);
Qualifying separate servicing centers for exceptional
performance designation (page 18930); and
Applicability of the Federal False Claims Act to
exceptional performers (pages 18931-18932).
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRM, 20 parties
submitted comments on the proposed regulations. An analysis of the
comments and the changes in the regulations since publication of the
NPRM follows.
Technical and other minor changes, and suggested changes the
Secretary is not legally authorized to make under the applicable
statutory authority, generally are not addressed.
Comments: Several commenters suggested that lenders, servicers, and
guaranty agencies with regional servicing centers should be able to
qualify each center separately, or as a corporate entity, for
exceptional performance designation.
Discussion: Section 428I of the HEA refers to the designation of a
lender, servicer, or guaranty agency as a single entity and does not
indicate that separate servicing centers should be evaluated
separately. Consistent with the statutory language, the Secretary
believes it is important to view the applicant as a single entity to
accurately determine its overall compliance rating, regardless of the
number of sites at which it services loans.
Changes: None.
Comments: Several commenters recommended that applicants be
permitted to exclude parts of their portfolio from the exceptional
performance designation. The commenters argued that this would allow
applicants to separate their portfolio into segments which had
previously not been serviced with the same quality to qualify as an
exceptional performer. Other commenters stated that not allowing an
exclusion of portions of portfolios may create problems for certain
lenders and holders in terms of access to servicers and secondary
markets.
Discussion: The Secretary does not believe that lenders, servicers,
or guaranty agencies should be able to exclude portions of their loan
portfolio for purposes of determining satisfaction of the requirement
of a 97 percent compliance rating. Section 428I(a)(2) of the HEA
requires that due diligence on each loan serviced during the audit
period shall be reviewed in determining the applicable compliance rate.
Therefore, the Secretary does not believe the statute provides any
basis for excluding portions of a lender's, servicer's, or guaranty
agency's loan portfolio. The Secretary believes the entire loan
portfolio should be available for review to accurately determine the
applicable compliance rate for possible designation as an exceptional
performer.
Changes: None.
Comments: Some commenters suggested that the effective date of
revocation of the designation should be the date the Secretary notifies
the lender, servicer, or guaranty agency that its designation as an
exceptional performer is terminated.
Discussion: The Secretary believes a lender, servicer, or guaranty
agency that loses exceptional performance status is not entitled to
receive the benefits of this status beyond the date that the event or
condition causing the revocation occurred because that entity would no
longer satisfy the requirements for exceptional performance.
Changes: None.
Comments: Some commenters suggested that lenders and servicers
should be made aware of the progress of their application for
exceptional performance designation and the endorsement or lack of
endorsement of key participants. Other commenters suggested that a 30-
day notice and an opportunity for a hearing before the Secretary that
is provided to guaranty agencies should be extended to lenders and
lender servicers.
Discussion: The Secretary does not believe it is necessary to
provide applicants with periodic status reports of pending
applications. Paragraph (b)(4) provides that the Secretary notify the
applicant and the appropriate guaranty agency of his decision to
approve or deny an applicant's request for designation within 60 days
of receipt of the information requested under paragraph (a)(2).
Furthermore, the statute does not require the Secretary to allow a
lender an opportunity to challenge a decision denying designation for
exceptional performance. However, if the Secretary believes it is
appropriate, the Secretary may give the lender or servicer an
opportunity to submit additional information to support its
application.
Changes: None.
Comments: Several commenters objected to the proposed use of
internal auditors to conduct required quarterly audits, stating that
this may compromise the proper safeguarding of public funds. The
commenters recommended that the Secretary require that all audits be
performed by independent auditors.
Discussion: A lender servicer or guaranty agency may only request
permission to have its internal auditors perform the required audits
after the entity has been designated for exceptional performance for at
least 15 months. The Secretary will only approve the request if the
Federal fiscal interest is protected. If the Secretary allows an entity
to use internal auditors for the quarterly audits, the Secretary
believes that the required annual independent financial and compliance
audit is sufficient to assess the reliability of the internal auditor's
accounting procedures and information provided in the quarterly audits.
Changes: None.
Comments: Several commenters argued that it is not clear whether
all claims submitted beginning on or after October 1, 1993, by lenders
and lender servicers designated for exceptional performance will be
reimbursed at the 100 percent rate or will be reimbursed at 98 percent
reinsurance.
Discussion: The Secretary has determined that the reduction in the
reinsurance rate mandated by the Omnibus Budget Reconciliation Act of
1993 (Pub. L. 103-66) does not apply to lenders or lender servicers
designated as exceptional performers. Section 428I of the statute
specifies that lenders and lender servicers designated as exceptional
performers will receive 100 percent reimbursement on all default claims
submitted to guaranty agencies during the period of designation as
stated on page 2 of the Department's Dear Colleague Letter 93-G-246
(November 1993).
Changes: None.
Comments: A few commenters stated that the regulations limit the
100 percent insurance to ``default claims.'' The commenters stated that
since death, disability, and bankruptcy claims are eligible for 100
percent insurance under the HEA, those claims should be eligible for
coverage under the exceptional performer designation.
Discussion: The Secretary agrees with the commenters and has made a
change to the regulations.
Changes: The Secretary has revised Sec. 682.415(a)(1) to clarify
that all claims submitted by a lender or lender servicer designated for
exceptional performance shall receive 100 percent insurance.
Comments: Some commenters stated that the regulations only allow a
lender to be designated for exceptional performance for loans that it
services itself. The commenters argued that a lender should be able to
apply for exceptional performance designation even if it contracts with
a servicer for all or a portion of the servicing of its loan portfolio.
Discussion: The commenters are correct that the regulations allow
an applicant to apply for designation only based on the loans that it
actually services. The regulation is consistent with section
428I(a)(2)(A) of the Act. However, there appears to be a
misunderstanding within the industry. A lender, servicer, or guaranty
agency does not have to service its entire loan portfolio to be
eligible for exceptional performance designation. It may receive
designation based on loans it actually services itself. However, a
lender may not receive designation for a portion of its loan portfolio
serviced by a lender servicer unless the lender servicer has separately
received designation on its entire loan portfolio.
Changes: None.
Comments: Many commenters suggested that paragraph (b)(1)(ii) be
deleted from the final regulations and argued that the Secretary should
rely only on ``documentation'' rather than ``any information'' received
from a guaranty agency indicating that a lender's or servicer's
application for exceptional performance should be denied.
Discussion: The language in paragraph (b)(1)(ii) of the regulations
reflects the statutory language in section 428I(c)(2). Therefore, no
change has been made.
Changes: None.
Comments: A few commenters stated that paragraphs (a)(1) and (b)(4)
specify that lenders and lender servicers are designated for
exceptional performance for a 12-month period following the receipt by
the guarantor of notice of designation. The commenters noted that the
provision makes no reference to notifications to lenders and lender
servicers.
Discussion: The Secretary agrees with the commenters and has
revised the regulations.
Changes: The Secretary has revised paragraphs (a)(1) and (b)(4) to
also require notification to lenders and lender servicers.
Comments: Several commenters opposed inclusion of the statutory
provision that a lender or lender servicer designated for exceptional
performance who fails to service loans or otherwise comply with
applicable program regulations is considered in violation of the
Federal False Claims Act. Some commenters suggested that the Secretary
clarify the circumstances under which a violation of program
regulations would be considered a violation of the Federal False Claims
Act. The commenters argued that claims with servicing errors and
omissions may be submitted inadvertently by lenders and lender
servicers in the ordinary course of business, and as such should not be
considered violations of the Federal False Claims Act. Other commenters
suggested limiting the application of the Federal False Claims Act to
those loans submitted by an exceptional performer that were not covered
by the exceptional performance designation.
Discussion: The regulations properly reflect the statutory language
in 31 U.S.C. 3729. The Secretary does not believe it is necessary to
interpret this language further. The Secretary has changed the
regulation, however, to refer to 31 U.S.C. 3129 rather than the Federal
False Claims Act. This change conforms the regulations to section 428I
of the HEA, as modified by the Higher Education Technical Amendments of
1993, Pub. L. 103-208.
Changes: Section 682.415(b)(7)(ii) has been changed to refer to 31
U.S.C. 3729 rather than the Federal False Claims Act.
Comments: Some commenters recommended clarifying in the regulations
that insurance payment on a claim by a lender or lender servicer
designated for exceptional performance may not be denied or repayment
required based solely on a violation of repayment conversion, due
diligence requirements, and timely filing requirements.
Discussion: The Secretary believes that the regulatory language
clearly states that insurance payments will not be denied based solely
on a violation of repayment conversion, due diligence requirements, and
timely filing requirements. However, a guaranty agency or the Secretary
may require the lender or lender servicer to repurchase a loan if the
agency determines the loan should not have been submitted as a claim.
For example, repurchase of a claim could be required if the loan was
not delinquent for 180 days for installments due monthly at the time
the claim was submitted.
Changes: None.
Comments: One commenter suggested that a lender, servicer, or
guaranty agency should be able to receive the exceptional performance
designation even if the annual audit was conducted more than 90 days
prior to the initial request for designation.
Discussion: The Secretary believes that the audit period should end
no more than 90 days prior to requesting exceptional performance
designation to ensure that the information received from applicants is
relatively current. Therefore, a change is not warranted.
Changes: None.
Comments: Many commenters objected to guaranty agencies performing
a detailed review of every default claim submitted by an exceptional
performer.
Discussion: The regulations do not require a review of default
claims submitted by lenders and lender servicers designated for
exceptional performance. However, as stated in the NPRM and in these
final regulations, nothing prohibits the guaranty agency or the
Secretary from reviewing the lender's or lender servicer's activities
related to claims paid under the exceptional performance designation as
part of program oversight responsibilities.
Changes: None.
Comments: One commenter suggested that the scope of the compliance
audit be clarified. The commenter indicated that paragraph
(a)(3)(iii)(A) states ``the audit must yield a compliance rating of at
least 97 percent of all due diligence requirements applicable to each
loan, on average, with respect to the collection of delinquent loans
ending no more than. . . .'' The commenter stated that there are other
activities included in the exceptional performance designation that go
beyond due diligence on delinquent loans. The commenter suggested that
the compliance rating reflect the full scope of activities and measure
the accuracy of performance as a whole.
Discussion: The Secretary agrees with the commenter. During
negotiated rulemaking consensus was reached that the audit would review
compliance with converting FFEL Program loans to repayment under
Sec. 682.209(a), and compliance with the timely-filing requirements
under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the
audit guide published by the U.S Department of Education, Office of
Inspector General. Consensus was also reached that a guaranty agency's
compliance audit would review compliance with timely claim payments and
timely reinsurance filing required for defaulted FFEL Program loans in
Secs. 682.410(b)(6) (iii)-(xii), 682.406 (a)(8) and (a)(9), or
Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9).
Changes: The Secretary has revised paragraph (a)(2)(iii)(A) to
incorporate a reference to paragraph (b)(1)(iv) for lenders and lender
servicers and paragraph (c)(2)(i) for guaranty agencies and guaranty
agency servicers. This cross reference serves the goal identified by
the commenters.
Comments: A few commenters pointed out that paragraph (b)(3)
defines how the 97 percent compliance rating is to be calculated.
However, the provision should, but does not, include conversion to
repayment and timely filing activities in that definition.
Discussion: The Secretary agrees with the commenters.
Changes: The Secretary has revised paragraph (b)(3) by
incorporating references to Secs. 682.209(a), 682.402(e)(2), and
682.406(a)(5).
Comments: Some commenters stated that paragraph (b)(6) should be
clarified by specifically incorporating compliance with conversion of
FFEL Program loans to repayment and timely filing requirements as
components in the quarterly audit.
Discussion: The Secretary agrees with the commenters.
Changes: The Secretary has revised paragraph (b)(6) to clarify that
quarterly audits must also reflect the lender's and lender servicer's
compliance with loan conversion to repayment and the timely filing
requirements.
Comments: Some commenters recommended that the regulations provide
that the Secretary will either approve or disapprove an applicant's
reapplication for exceptional performance designation within 60-days of
receiving all of the required information from the applicant.
Discussion: The Secretary agrees with the commenters. The
commenters' suggestion would provide consistency throughout the
regulation by providing notification to a lender, servicer, or guaranty
agency within 60-days of the date the Secretary receives the required
reapplication information. The regulations already provide a 60-day
time period for decision on an initial application.
Changes: The Secretary has revised paragraph (a)(6)(iii) to include
a 60-day notification to the applicant after receiving the required
information for reapplication.
Comments: Several commenters agreed with the Secretary's
interpretation that section 428(b)(1)(G) of the Higher Education Act,
as amended by Pub. L. 103-66, does not reduce the insurance rate paid
by guaranty agencies to exceptional performers.
Discussion: No comments were received that opposed the Secretary's
determination of the applicable insurance rate of 100 percent that
guaranty agencies are required to pay to lenders and lender servicers
designated for exceptional performance.
Changes: None.
Comments: Two commenters suggested that the Secretary clarify in
the preamble that the 180 days referred to in Sec. 682.415(b)(5)(i)
means calendar days.
Discussion: The Secretary agrees with the commenters. Section
682.415(b)(5(i) restricts the lender's or lender servicer's exceptional
performance designation to loans that have been serviced by that lender
or lender servicer for the last 180 calendar days prior to a borrower's
default.
Changes: A change has been made. Section 682.415(b)(5)(i) has been
revised to clarify that the 180 days referred to in that paragraph
means calendar days.
Comments: A few commenters noted that the regulations, as written,
do not clarify that the audit will only cover collection activities
performed during the audit period for loans serviced during the audit
period.
Discussion: The Secretary agrees with the commenters and has made a
change to the regulations.
Changes: The Secretary has revised paragraphs (b)(3) and (c)(4) of
the regulations to clarify that the audits must cover collection
activities performed only during the audit period for loans serviced
during the audit period.
Comments: One commenter stated that the definition of ``servicer''
is not consistent with the definition of ``third party servicer'' as
listed in Sec. 682.200. Another commenter suggested deleting paragraph
(d)(3)(i) and renumbering to provide for consistency with the
definition for third party servicers in Sec. 682.416.
Discussion: The Secretary has no alternative but to retain this
definition in the regulations because the statute under section 428I
defines the term ``servicer'' for purposes of qualifying for
exceptional performance designation.
Changes: None.
Comments: Several commenters argued that the insurance rate paid to
lenders, servicers, and guaranty agencies in paragraph (a)(1) is
determined by statute and is not optional. The commenters suggested
that the Secretary delete the term ``may'' and insert ``shall''
instead.
Discussion: The Secretary agrees with the commenters that the
insurance and reinsurance rates are determined by statute.
Changes: The Secretary has revised paragraph (a)(1) by replacing
the term ``may'' with the term ``shall''.
Comments: One commenter noted that paragraphs (b)(6) and
(b)(8)(i)(A) would allow a lender who met the 90-percent benchmark for
a single month, but failed to meet that threshold for each of the other
two months during the audit period, to be designated as an exceptional
performer.
Discussion: The Secretary agrees with the commenter that the
proposed rule did not clearly reflect the statutory requirement.
Section 428I of the HEA requires lenders, servicers, and guaranty
agencies to reach a minimum of 90 percent compliance in due diligence
in collecting delinquent and defaulted FFEL Program loans for each
month of a quarter.
Changes: The Secretary has revised paragraphs (b)(6)(i) and
(b)(8)(i)(A) to clarify that a minimum of 90 percent compliance for
each month of the quarter must be met by a lender, servicer, or
guaranty agency in order to maintain its exceptional performance
status.
Comments: A few commenters stated that the Secretary clarify in the
regulations that complete claim packages are not required on claims
submitted by lenders and lender servicers designated for exceptional
performance.
Discussion: The Secretary believes it is important for purposes of
program oversight to require all lenders and lender servicers to file
complete claim packages that include documents and information that is
normally required to be submitted by guaranty agencies.
Changes: None.
Comments: One commenter suggested that the Secretary clarify that
unreinsured loans and loans that have not been serviced by the servicer
for at least 180 days should be excluded from the compliance rate
calculation.
Discussion: Loans that are unreinsured because due diligence
violations of due diligence requirements in Sec. 682.411 cannot be
excluded from the compliance rate calculation. It would not be in the
Federal interest to allow a lender or lender servicer to exclude, from
calculation of its compliance rate, loans that lost reinsurance due to
the lender's or servicer's failure to perform required due diligence
activities.
Changes: None.
Comments: Some commenters stated that if the audit period ended
more than 90 days prior to enactment of the regulations, the agency
should be permitted to submit a request for designation immediately.
The commenters further stated that applicants should not be required to
wait until the following year, after another annual audit has been
performed, to apply for an exceptional performance designation.
Discussion: The 90-day audit restriction provides the Secretary
with the necessary assurance that the most recent information has been
reported to determine an applicant's eligibility for exceptional
performance designation. The earliest a lender, servicer, or guaranty
agency may apply for designation is July 1, 1995.
Changes: None.
Comments: One commenter stated that the 180-day servicing
requirements referenced in paragraph (b)(5) should not apply to non-
default claims, e.g., bankruptcy, death, disability, etc.
Discussion: The Secretary believes that the 180-day servicing
requirement should apply to all loans for which a claim will be filed
to ensure that due diligence is being properly performed. However, if
the borrower dies, becomes disabled, or files for bankruptcy prior to
completion of the 180-day servicing period, the lender, servicer, or
guaranty agency may submit its claim immediately.
Changes: None.
The Secretary incorporated a general guide to the structural layout
of the regulatory provisions pertaining to lenders and guaranty
agencies on page 18392 of the NPRM.
The NPRM solicited comments as to whether the standards to
designate a guaranty agency as an exceptional performer should be
revised in light of other changes impacting guaranty agencies that were
made by Pub. L. 103-66. The Secretary received the following comments
in response to this request.
Comments: One commenter recommended that a guaranty agency that is
exceptional which merges or assumes the guarantees of another guarantor
should maintain its designation as an exceptional performer.
Discussion: The Secretary believes that a lender, servicer, or
guaranty agency that is designated for exceptional performance and
subsequently merges with another lender, servicer, or guaranty agency
should lose its designation for exceptional performance unless both
parties hold exceptional performance designations at the time of the
merger.
Changes: None.
Comments: One commenter argued that guaranty agencies that are
exceptional performers should not be subject to the termination
provision of section 428(c)(9) of the HEA.
Discussion: Exceptional performance designation relates to loan
collection activities but does not reflect a judgment on an agency's
overall economic conditions or program performance. Therefore,
termination of an agency's agreements with the Secretary may still be
appropriate even if the agency has been designated for exceptional
performance.
Changes: None.
Comments: One commenter argued that guarantors that are exceptional
performers should be subject to mandatory assignment of defaulted loans
to the Secretary as by definition it is in the Federal Government's
best interest for loans to be serviced by the guarantor.
Discussion: The Secretary does not agree that there is any
connection between designation of exceptional performance and the
criteria for mandatory assignment of defaulted loans.
Changes: None.
Assessment of Educational Impact
In the notice of proposed rulemaking, the Secretary requested
comments on whether the proposed regulations would require transmission
of information that is being gathered by, or is available from, any
other agency or authority of the United States.
Based on the response to the proposed rules and on its own review,
the Department has determined that the regulations in this document do
not require transmission of information that is being gathered by or is
available from any other agency or authority of the United States.
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 final regulations are those
resulting from statutory requirements and those determined by the
Secretary to be necessary for administering this program effectively
and efficiently.
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. 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.
List of Subjects in 34 CFR Part 682
Administrative practice or procedure, Colleges and universities,
Education, Loan programs--education, Student aid, Vocational education.
Dated: June 15, 1994.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal
Family Education Loan Program)
The Secretary amends Part 682 of Title 34 of the Code of Federal
Regulations as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAM
1. The authority citation for Part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. A new Sec. 682.415 is added to read as follows:
Sec. 682.415 Special insurance and reinsurance rules.
(a) (1) A lender or lender servicer (as an agent for an eligible
lender) designated for exceptional performance under paragraph (b) of
this section shall receive 100 percent reimbursement on all claims
submitted for insurance during the 12-month period following the date
the lender or lender servicer and appropriate guaranty agencies receive
notification of the designation of the eligible lender or lender
servicer under paragraph (b) of this section. A guaranty agency or a
guaranty agency servicer (as an agent for a guaranty agency) designated
for exceptional performance under paragraph (c) of this section shall
receive the applicable reinsurance rate under section 428(c)(1) of the
Act on all claims submitted for payments by the guaranty agency or
guaranty agency servicer during the 12-month period following the date
the guaranty agency receives notification of its designation, or its
servicer's designation, under paragraph (c) of this section. A notice
of designation for exceptional performance under this section is deemed
to have been received by the lender, servicer, or guaranty agency no
later than 3 days after the date the notice is mailed, unless the
lender, servicer, or guaranty agency is able to prove otherwise.
(2) To receive a designation for exceptional performance under
paragraph (a)(1) of this section, a lender, servicer, and guaranty
agency must submit to the Secretary--
(i) A written request for designation for exceptional performance
that includes--
(A) The applicant's name and address;
(B) A contact person;
(C) Its ED identification number, if applicable;
(D) The name and address of applicable guarantors; and
(E) A copy of an annual financial audit performed in accordance
with the Audit Guide developed by the U.S. Department of Education,
Office of Inspector General, or one of the following as appropriate:
(1) A lender may submit a copy of an annual audit required under
Sec. 682.305(c), if the audit period ends no more than 90 days prior to
the date the lender submits its request for designation.
(2) A servicer may submit a copy of the annual financial audit, as
defined, completed and submitted under 34 CFR 682.416(e), if the audit
period ends no more than 90 days prior to the date the servicer submits
its request for designation.
(3) A guaranty agency may submit a copy of the annual audit
required under section 428(b)(2)(D) of the Higher Education Act of
1965, as amended, if the audit period ends no more than 90 days prior
to the date the guaranty agency submits its request for designation;
(ii) If the applicant is a servicer, a statement signed by the
owner or chief executive officer of the applicant certifying that the
applicant meets the definition of a servicer contained in paragraph
(d)(3) of this section; and
(iii) (A) A compliance audit of its loan portfolio, conducted by a
qualified independent organization meeting the criteria in paragraph
(b)(9) of this section, that yields a compliance performance rating of
97 percent or higher of all due diligence requirements applicable to
each loan, on average, with respect to the collection of delinquent or
defaulted loans and satisfying the requirements in paragraph (b)(1)(iv)
of this section or, if applicable, paragraph (c)(2)(i) of this section.
The audit period may end no more than 90 days prior to the date the
lender, servicer or guaranty agency submits its request for
designation.
(B) To satisfy the requirement of paragraph (a)(2)(iii)(A) of this
section, a servicer may submit its annual compliance audit under 34 CFR
682.416(e), if the servicer includes in its report a measure of its
compliance performance rating required under paragraph (a)(2)(iii)(A)
of this section, if this audit is performed in accordance with an audit
guide developed by the U.S. Department of Education, Office of
Inspector General.
(3) The cost of audits for determining eligibility and continued
compliance under this section is the responsibility of the lender,
servicer, or guaranty agency.
(4) A lender or servicer shall also submit the information in
paragraph (a)(2) (i), (ii), or (iii) of this section to each
appropriate guaranty agency.
(5) A lender may be designated for exceptional performance for
loans that it services itself. A lender servicer may be designated for
exceptional performance only for all loans it services.
(6) (i) To prevent a lapse of a lender's, servicer's, or guaranty
agency's exceptional performance status after the end of the 12-month
period, the lender, servicer, or guaranty agency shall submit updated
information required under paragraph (a)(2) of this section to the
Secretary no later than 90 days after the end of the annual audit
period.
(ii) Upon the Secretary's determination that the lender, servicer,
or guaranty agency maintained at least a 97 percent compliance
performance rate and satisfies the other requirements for designation,
the Secretary notifies the lender, servicer, or guaranty agency that
its redesignation for exceptional performance begins on the date
following the last day of the previous 12-month period for which it
received designation for exceptional performance. However, a lender's,
servicer's, or guaranty agency's designation for exceptional
performance continues until it receives notification from the Secretary
that its request for redesignation is approved, or that its designation
is revoked, under the provisions of paragraph (b)(8)(iii) of this
section.
(iii) The Secretary notifies the lender or lender servicer and the
appropriate guaranty agency within 60 days after the date the Secretary
receives the information, listed in paragraph (a)(2) of this section,
from the eligible lender or lender servicer, that the lender's or
lender servicer's reapplication for designation for exceptional
performance has been approved or denied. A notice under paragraph
(a)(6) of this section is determined to have been received by the
lender, servicer, or guaranty agency no later than 3 days after the
notice is mailed, unless the lender, servicer, or guaranty agency is
able to prove otherwise.
(b) Determination of eligibility. (1) The Secretary determines
whether to designate a lender or lender servicer for exceptional
performance based upon--
(i) The annual compliance audit of collection activities required
for FFEL Program loans under Sec. 682.411(c) through (h), and (m), if
applicable, serviced during the audit period;
(ii) Information from any guaranty agency regarding an eligible
lender or lender servicer desiring designation, including, but not
limited to, any information suggesting that the lender's or lender
servicer's request for designation should not be approved;
(iii) Any other information in the possession of the Secretary, or
submitted to the Secretary by any other agency or office of the Federal
Government; and
(iv) Evidence indicating that the lender or lender servicer has
complied with the requirements for converting FFEL Program loans to
repayment under Sec. 682.209(a), and the timely filing requirements
under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the
audit guide as published by the U.S. Department of Education, Office of
Inspector General. The audit submitted under paragraph (b)(1)(i) of
this section may satisfy this requirement, if a separate sample of
loans is used.
(2) The Secretary informs the eligible lender or lender servicer,
and the appropriate guaranty agency, that the lender's or lender
servicer's request for designation as an exceptional lender or lender
servicer has been approved, unless the results of the audit are
persuasively rebutted by information under paragraphs (b) (1)(ii) or
(iii) of this section. If the request for designation is not approved,
the Secretary informs the lender or lender servicer and the appropriate
guaranty agency or agencies of the reason the application is not
approved.
(3) In calculating a lender's or lender servicer's compliance
rating, as referenced in paragraph (a)(2)(ii) of this section, the
universe for the audit must include all loans in the lender's or lender
servicer's FFEL Program portfolio that are serviced during the audit
period performed under the Department's regulations in Secs. 682.411,
682.209(a), 682.402(e)(2), and 682.406(a)(5). The calculation may
consider only due diligence activities applicable to the audit period.
The numerator must include the total number of collection activities
successfully completed, in accordance with program regulations, that
are serviced during the audit period. The denominator must include the
total number of collection activities required to be performed, in
compliance with program regulations, that are serviced during the audit
period. Using statistical sampling and evaluation techniques identified
in an audit guide prepared by the Department's Office of Inspector
General, a random sample of loans must be selected and evaluated.
(4) The Secretary notifies the lender or lender servicer and the
appropriate guaranty agency within 60 days after the date the Secretary
receives the information, listed in paragraph (a)(2) of this section,
from the eligible lender or lender servicer, that the lender's or
lender servicer's application for designation for exceptional
performance has been approved or denied. (5) (i) Except as provided
under paragraph (b)(8) of this section, a guaranty agency may not
refuse, solely on the basis of a violation of repayment conversion, due
diligence requirements, or timely filing requirements, to pay an
eligible lender or lender servicer, designated for exceptional
performance, 100 percent of the unpaid principal and interest of all
loans for which eligible claims are submitted for insurance payment by
that eligible lender or lender servicer. The designation of a lender or
lender servicer for exceptional performance applies to loans that have
been serviced by the lender or lender servicer for the last 180 days
prior to a borrower's default or earlier in the case of death,
disability, or bankruptcy.
(ii) A guaranty agency or the Secretary may require the lender or
lender servicer to repurchase a loan if the agency determines the loan
should not have been submitted as a claim. A guaranty agency may not
require repurchase of a loan based solely on the lender's violation of
the requirement relating to repayment conversion, due diligence, or
timely filing. The guaranty agency must pay claims to a lender or
lender servicer designated for exceptional performance in accordance
with this paragraph for the one-year period following the date the
guaranty agency receives notification of the lender's or lender
servicer's designation under paragraph (b)(2) of this section, unless
the Secretary notifies the guaranty agency that the lender's or lender
servicer's designation for exceptional performance has been revoked.
(6) (i) To maintain its designation for exceptional performance,
the lender or lender servicer must have a quarterly compliance audit of
the due diligence in collection activities required for FFEL Program
loans under Sec. 682.411(c)-(h), and (m), if applicable, and for
converting FFEL Program loans to repayment under Sec. 682.209(a) and
timely filing requirements under Secs. 682.402(e)(2) and 682.406(a)(5)
conducted by a qualified independent organization meeting the criteria
in paragraph (b)(9) of this section that results in a compliance rating
for the quarter of not less than 97 percent. The audit must indicate a
compliance performance rating of not less than 97 percent for two
consecutive months or 90 percent for any month. The quarterly audit may
not include any period covered by the annual financial and compliance
audit under paragraph (a)(2) of this section. The results of the
quarterly compliance audit must be submitted to the Secretary and to
the appropriate guaranty agencies within 90 days following the end of
each quarter.
(ii) If a lender or lender servicer has been designated for
exceptional performance for at least 15 months, a lender or lender
servicer may petition the Secretary for permission to have its internal
auditors perform the subsequent quarterly compliance audits required by
paragraph (b)(6)(i) of this section. If the Secretary approves the
request, the lender's or lender servicer's annual audit must assess the
reliability of the procedures used by the lender's or lender servicer's
internal auditor in performing the quarterly audits.
(iii) The lender or lender servicer shall perform three quarterly
audits and one annual audit that includes a representative sample of
fourth quarter collection activities to satisfy the requirements of
this paragraph.
(7) (i) Insurance payments made on eligible claims submitted by a
lender or lender servicer designated for exceptional performance are
not subject to additional review of repayment conversion, due
diligence, and timely filing requirements, or to required repurchase by
the lender or lender servicer, unless the Secretary determines that the
eligible lender or lender servicer engaged in fraud or other purposeful
misconduct in obtaining designation for exceptional performance.
Notwithstanding the payment requirements in this paragraph, nothing
prohibits the guaranty agency or the Secretary from reviewing the
lender's or lender servicer's activities in regard to the loans paid
under this paragraph as part of program oversight responsibilities, or
for requiring the lender to repurchase a loan if the agency determines
the loan should not have been submitted as a claim. The lender shall
file, and the guaranty agency shall maintain, the documentation the
guaranty agency normally requires its lenders to file with respect to
the collection history of each loan.
(ii) A lender or lender servicer designated under this section that
fails to service loans or otherwise comply with applicable program
regulations is considered in violation of 31 U.S.C. 3729.
(8) (i) The Secretary revokes the designation of a lender or lender
servicer for exceptional performance if--
(A) The quarterly compliance audit required under paragraph (b)(6)
of this section is submitted to the Secretary and indicates that the
lender or lender servicer failed to maintain not less than 97 percent
compliance with due diligence standards for the quarter, or not less
than 97 percent compliance for 2 consecutive months, or 90 percent for
any month; or
(B) Any quarterly audit required in paragraph (b)(6) of this
section is not received by the Secretary within 90 days following the
end of each quarter.
(ii) The Secretary may revoke the designation of an exceptional
lender or lender servicer if--
(A) The Secretary determines the eligible lender or lender servicer
failed to maintain an overall level of regulatory compliance consistent
with the audit submitted by the lender or lender servicer;
(B) The Secretary has reason to believe the lender or lender
servicer may have engaged in fraud in securing its designation for
exceptional performance; or
(C) The lender or lender servicer fails to service loans in
accordance with program regulations. For purposes of this paragraph, a
lender or lender servicer fails to service loans in accordance with
program regulations if the Secretary determines that the lender or
lender servicer has committed serious and material violations of the
regulations.
(iii) The date on which the event or condition occurred is the
effective date of the revocation, except for revocation under paragraph
(a)(6) of this section, which is effective at the close of the 12-month
period for which the lender or lender servicer received designation for
exceptional performance.
(9) Public accountants, public accounting firms, and external
government audit organizations that meet the qualification and
independence standards contained in Government Auditing Standards
published by the Comptroller General of the United States are
acceptable entities to perform the audits required under paragraphs
(a)(3)(iii)(A) and (b)(6) of this section.
(c)(1)(i) Except as provided under paragraph (c)(8) of this
section, the Secretary pays the applicable reinsurance rate under
section 428(b)(1)(G) of the Act on all claims submitted by a guaranty
agency or guaranty agency servicer that has been designated for
exceptional performance.
(ii) A guaranty agency may be designated for exceptional
performance for loans that it services itself.
(iii) A guaranty agency servicer may be designated for exceptional
performance for loans it services.
(iv) A guaranty agency or guaranty agency servicer is designated
for exceptional performance for a 12-month period following the
receipt, by the guaranty agency or guaranty agency servicer, of the
Secretary's notification of designation.
(v) A notice under this paragraph is determined to have been
received no later than 3 days after the date the notice is mailed,
unless the guaranty agency or guaranty agency servicer is able to prove
otherwise.
(2) The Secretary determines whether to designate a guaranty agency
or guaranty agency servicer for exceptional performance based upon--
(i) The annual financial audit and a compliance audit of collection
activities, including timely claim payment and timely reinsurance
filing required for FFEL Program loans under Secs. 682.410(b)(6) (iii)
through (xii), and 682.406 (a)(8) and (a)(9), or Secs. 682.410(b)(7)
and 682.406 (a)(8) and (a)(9); and
(ii) Any other information in the possession of the Secretary.
(3) The Secretary informs the guaranty agency or guaranty agency
servicer that its request for designation for exceptional performance
has been approved, unless the results of the audit are persuasively
rebutted by other information received by the Secretary. If the
Secretary does not approve the guaranty agency's or guaranty agency
servicer's request for designation, the Secretary informs the guaranty
agency or guaranty agency servicer of the reason the application was
not approved.
(4) In calculating a guaranty agency's or guaranty agency
servicer's compliance rating, as referenced in paragraph (a)(2)(ii) of
this section, the Secretary requires that the universe of loans in the
audit sample must consist of all loans in the guaranty agency's or
guaranty agency servicer's FFEL Program portfolio that are serviced
during the audit period performed under the Department's regulations in
Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9)
or Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9). The calculation
may consider only the due diligence activities that were or should have
been conducted during the audit period. The numerator must include the
total number of collection activities successfully completed in
accordance with program regulations on loans that were serviced during
the audit period. The denominator must include the total number of
collection activities required to be performed in compliance with
program regulations on loans that were serviced during the audit
period. Using statistical sampling and evaluation techniques identified
in an audit guide prepared by the Department's Office of Inspector
General, a random sample of loans must be selected and evaluated.
(5) The Secretary notifies a guaranty agency or guaranty agency
servicer, within 60 days after the date the Secretary receives the
information listed in paragraph (a)(2) of this section whether the
guaranty agency's or guaranty agency servicer's application for
designation for exceptional performance has been approved or denied.
(6) (i) To maintain its status as an exceptional guaranty agency or
guaranty agency servicer, the guaranty agency or guaranty agency
servicer must have a quarterly compliance audit of the due diligence in
collection activities of defaulted FFEL Program loans under
Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9)
or 682.410(b)(7) and 682.406(a)(8) and (a)(9) conducted by a qualified
independent organization meeting the criteria in paragraph (c)(9) of
this section. The audit must yield a compliance performance rating of
not less than 97 percent. The quarterly audit may not include any
period covered by the annual financial and compliance audit required
under paragraph (a)(2) of this section. The results of the quarterly
compliance audit must be submitted to the Secretary within 90 days
following the end of each quarter.
(ii) If the guaranty agency or guaranty agency servicer has been
designated for exceptional performance for at least 15 months, the
guaranty agency or a guaranty agency servicer may petition the
Secretary for permission to have its internal auditors perform
subsequent quarterly compliance audits required by paragraph (c)(6)(i)
of this section. If the Secretary approves the request, the guaranty
agency's or guaranty agency servicer's annual audit must assess the
reliability of the procedures used by the guaranty agency's or the
guaranty agency servicer's internal auditor in performing the quarterly
audits.
(7) (i) Payments of reinsurance made on claims, under the FFEL
Program, submitted by a guaranty agency or guaranty agency servicer
designated for exceptional performance are not subject to repayment
based on additional review of due diligence activities, including
timely claim payment, or timely filing for reinsurance covering a
period during which the guaranty agency or guaranty agency servicer was
designated for any reason other than a determination by the Secretary
that the eligible guaranty agency or guaranty agency servicer engaged
in fraud or other purposeful misconduct in obtaining designation for
exceptional performance.
(ii) A guaranty agency designated under this section that fails to
servicer loans or otherwise comply with applicable program regulations
is considered in violation of 31 U.S.C. 3729.
(8) (i) The Secretary may revoke the designation of a guaranty
agency or guaranty agency servicer for exceptional performance if the
Secretary has reason to believe the guaranty agency or guaranty agency
servicer fraudulently obtained its designation for exceptional
performance.
(ii) The Secretary may revoke the designation for exceptional
performance upon 30 days' notice, and an opportunity for a hearing
before the Secretary, if the Secretary finds that the guaranty agency
or guaranty agency servicer failed to maintain an acceptable overall
level of regulatory compliance.
(9) A qualified independent organization is an organization that
meets the criteria in paragraph (b)(9) of this section.
(d) Definitions. For purposes of this section--
(1) Due diligence requirements means the activities required to be
performed by lenders or guaranty agencies on delinquent or defaulted
loans pursuant to Sec. 682.411 (c) through (h), and (m), if applicable
and Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and
(a)(9) or Secs. 682.410(b)(7) and 682.406(a)(8) and (a)(9);
(2) Eligible loan means a loan made, insured, or guaranteed under
part B of title IV of the Act; and
(3) Servicer means an entity that services and collects student
loans and that--
(i) Has substantial experience in servicing and collecting consumer
loans or student loans;
(ii) Has an annual independent financial audit that is furnished to
the Secretary and any other parties designated by the Secretary;
(iii) Has business systems capable of meeting the requirements of
part B of title IV of the Act and applicable regulations;
(iv) Has adequate personnel knowledgeable about the student loan
programs authorized by part B of title IV of the Act; and
(v) Does not knowingly have any owner, majority shareholder,
director, or officer of the entity who has been convicted of a felony.
(Authority: 20 U.S.C. 1078-9)
[FR Doc. 94-15419 Filed 6-23-94; 8:45 am]
BILLING CODE 4000-01-P
