[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19434]
[[Page Unknown]]
[Federal Register: August 10, 1994]
_______________________________________________________________________
Part VI
Department of Education
_______________________________________________________________________
34 CFR Part 682
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Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AC06
Federal Family Education Loan Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Family Education
Loan (FFEL) Program regulations. These amendments are needed to
implement changes in the Higher Education Act of 1965, as amended
(HEA), giving the Secretary additional powers to assure the safety of
reserve funds and assets maintained by guaranty agencies insuring
educational loans under the FFEL Program pursuant to agreements with
the Secretary. The amendments would further define ``reserve funds and
assets'' and establish the substantive standard for the return of
``unnecessary'' reserves. They would also provide procedural due
process for challenges to these orders and for orders requiring that
reserve funds and assets outside of the guaranty agency's control be
returned to it or to the Secretary.
DATES: Comments must be received on or before October 11, 1994.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Mr. Donald M. Feuerstein, U.S. Department of Education,
400 Maryland Avenue SW., room 4624, Regional Office Building 3,
Washington, DC 20202-5343.
A copy of any comments that concern information collection
requirements should also be sent to the Office of Management and Budget
at the address listed in the Paperwork Reduction Act section of this
preamble.
FOR FURTHER INFORMATION CONTACT: Mr. Donald M. Feuerstein, telephone:
(202) 401-2280. Individuals who use a telecommunications device for the
deaf (TDD) may call the Federal Information Relay Service (FIRS) at 1-
800-877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through
Friday.
SUPPLEMENTARY INFORMATION:
Background
The FFEL Program regulations (34 CFR Part 682) govern the Federal
Stafford Loan Program, the Federal Supplemental Loans for Students
Program, the Federal PLUS Program, and the Federal Consolidation Loan
Program (formerly the Guaranteed Student Loan programs).
The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66)
(OBRA), enacted August 10, 1993, added section 422(g)(1) of the HEA.
The conference report on OBRA states, ``* * * the conferees wish to
emphasize that this language is not intended to diminish the
longstanding and judicially-supported view that a guaranty agency's
assets are dedicated to the loan programs and may not be used for
unauthorized purposes. It is the conferees' further intention that all
references to guaranty agency reserves contained in amendments to
section 422 refer only to the 'federal portion' of such reserves.'' In
the course of the negotiated rulemaking the industry negotiators stated
that ``* * * Section 422 defines the federal portion of reserves as
federal advances and earnings made on those advances, and states that
non-Federal reserves are not subject to recall, repayment or recovery
by the Secretary, except in the case of the termination of the
guarantor's agreement with the Secretary in accordance with Sections
428(c)(9) (E) and (F).'' To protect the Federal fiscal interest, OBRA
authorized the Secretary to direct (1) the return of ``unnecessary''
reserves from guaranty agencies (section 422(g)(1)(A)), (2) the return
to the guaranty agency or to the Secretary of guaranty agency reserves
and assets held by, or under the control of, any other party (section
422(g)(1)(B)), and (3) guaranty agencies to cease and desist from
``misapplication, misuse, or improper expenditure'' of reserve funds
and assets (section 422(g)(1)(C)).
Negotiated Rulemaking
OBRA expressly provides that determinations under section 422(g)(1)
(A) and (B) be based on standards set forth in regulations subject to
negotiated rulemaking. The negotiated regulations are also to contain
procedures for administrative due process. Although no such requirement
was made for determinations under section 422(g)(1)(C), the conference
report on OBRA expressed the conferees' intent that the issue of
``recovery'' in the case of misuse, misapplication, or improper
expenditure be ``addressed'' during the negotiated rulemaking over the
first two subsections.
Monthly negotiated rulemaking sessions were held from January
through June 1994 in and around Washington, DC.
Proposed Regulatory Changes
The Secretary submitted drafts of proposed regulatory language to
implement section 422(g)(1) (A) and (B) for discussion at the
negotiated rulemaking sessions. Although not required by OBRA to be
negotiated, a draft regulation to implement section 422(g)(1)(C) was
also submitted by the Secretary at the request of industry negotiators
but was withdrawn when substantial opposition to its approach was
expressed. Nevertheless, the dialogue with the other negotiators was
quite helpful, and the Secretary intends to reconsider the approach and
propose regulatory language on this subject in the regular course at a
later time after consultation with interested parties. Consensus was
reached on all aspects of the other rules and the accompanying
preamble. In reaching consensus, the negotiators agreed that all of the
rules proposed in this notice properly come within the Secretary's
statutory powers, but they reserve the right to challenge the validity
of the underlying statutes or subsequent interpretations of the rules
by the Secretary.
The following summarizes the major changes in this notice of
proposed rulemaking:
Section 682.410 Fiscal, administrative and enforcement requirements
Paragraph (a) of this section currently establishes fiscal
requirements for guaranty agencies by (1) defining reserve funds in
terms of sources and permitted uses, (2) regulating the investment of
those funds, (3) providing for reimbursement of reserve funds in the
event that revenue is derived from assets developed or purchased with
those funds or those assets are converted to uses unrelated to the FFEL
Program and (4) establishing minimum reserve fund levels. At the outset
of the negotiated rulemaking proceeding industry negotiators requested
a better definition of the reserve fund, and many of the proposed
amendments to this section are intended to be responsive to that
request.
Paragraph (a)(1) specifies the receipts that must be credited to
the reserve fund. The Secretary proposes to amend that paragraph to
clarify certain matters. First, paragraph (a)(1)(ii) currently refers
only to funds ``appropriated by'' a State for the loan guaranty
programs, but funds received from a State in any other manner for that
purpose are already covered by paragraph (a)(1)(ix). Accordingly, the
Secretary proposes to substitute the broader phrase ``received from''
in paragraph (a)(1)(ii) to obviate any possibility of confusion.
Second, paragraph (a)(1)(vi), which now refers to administrative cost
allowance payments, is proposed to be amended to add transitional
support payments under section 458(a) of the HEA, which Congress
created in OBRA when it eliminated the administrative cost allowance.
Third, although paragraph (a)(1)(vii) currently includes funds
collected by the guaranty agency without any qualification, this
paragraph has always been understood to apply only to collections on
FFEL loans on which a claim has been paid. That qualification is now
proposed to be made explicit. Finally, the Secretary proposes to
rearrange the wording of paragraph (a)(1)(ix) for stylistic reasons
only.
Paragraphs (a) (2) and (3) currently specify the permitted uses of
the reserve fund. Since the former statutory provisions that segregated
certain reserve fund receipts for restricted uses were later repealed,
it is no longer necessary to have two different sets of permitted uses.
To simplify the regulation the Secretary proposes to combine the two
paragraphs by redesignating current paragraph (a)(3)(i) as paragraph
(a)(2)(x) and removing the balance of the current paragraph (a)(3).
Although it is already well understood that neither the current
paragraph (a)(3) nor the current paragraph (a)(2)(ii) was meant to
permit excessive or otherwise unreasonable expenditures, the Secretary
plans to make that understanding explicit in the subsequent rule
proposal on misuse, misapplication, and improper expenditures. The
Secretary now also proposes to add three new paragraphs to paragraph
(a)(2). Paragraph (a)(2)(viii) would make explicit the currently-
understood authority for guaranty agencies to use reserve funds to make
borrower refunds arising from claims and defenses. Paragraph (a)(2)(ix)
would authorize the reversal of prior credits to the reserve funds
under certain conditions, including contemporaneous documentation that
the amounts were received as only temporary infusions of capital.
Finally, the guaranty agency representatives questioned the legality
and fairness of any retroactive application of the other proposed
amendments to this section and requested that paragraph (a)(2)(xi) be
added. Under this provision prior actions would remain lawful if a
guaranty agency had acted in good faith, as measured by the laws,
rules, standards, customs, and practices prevailing at the times of the
actions. Although the Secretary's representatives defended the general
power of the Secretary to amend retroactively regulations governing
guaranty agencies, they agreed to the requested paragraph in the
interest of fairness.
The Secretary recognizes that the customary problems involved in
allocating shared expenses among different activities conducted within
a single entity or among related entities and the particular problems
created by the limited life expectancies of some guaranty agencies as a
result of OBRA may pose difficulties for the agencies in determining
the propriety of payments from the reserve fund under paragraph (a)(2).
In the subsequent rulemaking proceeding on misuse, misallocation, and
improper expenditures the Secretary plans to establish procedures for
the formal review of cost allocation programs and major capital
expenditures by guaranty agencies. In the meantime, the staff of the
Department of Education stands ready to assist program participants by
providing informal advice in these areas.
The Secretary proposes to add a new paragraph (a)(3) to clarify the
appropriate accounting method for reserve fund reporting. Generally-
accepted accounting principles provide for the deferral of certain
items of income and the accrual of certain items of expenses on
financial statements to match related income and expenses, and many
guaranty agencies have established these accounts. On the other hand,
part E of ED Form 1130, the annual report for guaranty agencies,
requires that sources and uses of program funds be reported to the
Secretary strictly on a cash basis. See ED Form 1130 Instructions (May
1993 ed.), pp. 79-80. To avoid any confusion, the new paragraph (a)(3)
would expressly provide that deferrals and accruals for reserve fund
reporting be made only with the prior approval of the Secretary.
The Secretary also proposes to add a new paragraph (a)(4) to
clarify the obligation of guaranty agencies to reflect accurately in
their accounting records the computation of reserve fund balances in
accordance with this section and to provide a mechanism for correcting
those records. Paragraphs (a)(4)(i) and (a)(4)(iii) would restate the
general obligation to maintain correct accounting records and to
correct them when necessary. Paragraphs (a)(4)(ii) and (a)(4)(iv) would
establish specific mechanisms for the correction of erroneous credits
to the reserve fund and for general accounting record reconstructions.
In both cases, the Secretary would not allow a guaranty agency to
change its accounting records if other parties, such as lenders or
students who had relied on the guaranty agency's stated financial
condition, would be unfairly prejudiced. In the case of general
accounting record reconstructions, the Secretary intends to grant the
required approval only on the basis of an audit plan submitted before
any work on the reconstruction actually commences.
The current paragraph (a)(4) limits the investment of reserve funds
to low-risk securities and restates the fiduciary duty of guaranty
agencies in making those investments. This paragraph would be
redesignated as paragraph (a)(5) in the proposed amendment, and the
wording of the paragraph would be rearranged for stylistic purposes.
The Secretary understands that investment risk can arise from the
maturity of securities investments as well as from the identity of
their issuers and will deal with this subject in the subsequent rule
proposal on misuse, misapplication and improper expenditures.
The current paragraph (a)(5) requires proportionate reimbursement
to the reserve fund when a guaranty agency derives revenue from an
asset developed or purchased with the reserve fund or converts the
asset to a use not related to the FFEL Program. This paragraph is based
on the fundamental principle that reserve funds are to be used solely
for the FFEL Program and retain that character when incorporated into
other assets. It provides a remedy for any deviation from this
principle in addition to disallowance of any payment that was not
permitted by paragraph (a)(2) in the first place. The Secretary does
recognize, however, that there may be economies in having assets shared
by program and nonprogram activities. For example, purchasing a single
computer with sufficient capacity for both the FFEL Program and an
unrelated agency activity will ordinarily cost less than the total of
separate computers for each, thereby creating a saving to be shared
between the two activities. Such legitimate joint utilization of assets
should not be stifled by regulation.
The proper scope of this paragraph was discussed in the negotiated
rulemaking proceeding at great length. The basic policy issue was
whether the additional remedy provided by the paragraph should be
limited to situations in which assets are acquired by the guaranty
agency with reserve funds in a technical purchase-and-sale transaction
or should apply to all asset-related transactions in which reserve
funds are used. The basic legal issue was whether the use of the word
``purchase'' in section 422(g)(1) of the HEA precludes the latter
result. The Secretary's position is that, although ``purchase'' and
``develop'' are not synonymous in their everyday usage, the word
``develop'' was added to this paragraph in a 1992 rulemaking proceeding
(57 FR 60355) merely to emphasize the broad meaning traditionally given
to the word ``purchase'' in the law. See, for example, 26 U.S.C.
Sec. 338(h)(3); Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.
1967); U.C.C. Sec. 1-201(32). The industry negotiators argued, on the
other hand, that ``purchase'' is a different term from ``develop,'' and
the Secretary was not authorized to expand the statutory scope by
rulemaking. In addition to disagreeing with this narrow reading of the
statute, the Secretary's representatives expressed concern over
attempting to accommodate the other negotiators' comments on its
original rulemaking proposals only to have them undermine any consensus
by later claiming that the Secretary was acting outside the scope of
statutory authority in adopting the very regulation to which they had
consented. After extensive discussion of these issues, all the
negotiators agreed to substitute a more discriminating set of remedies
for the current monolithic approach of the paragraph, to put aside
their differences over the proper scope of the paragraph by using only
the word ``develop'' in the rule, and not to question the Secretary's
authority to promulgate a rule in this form.
In current paragraph (a)(5), redesignated as paragraph (a)(6), the
proposed revision would provide different consequences, depending upon
the relationship between the initial cost allocation and the use for
nonprogram purposes. If the use for nonprogram purposes was not
substantial, no remedy at all would be necessary. If the use was
substantial but the initial cost allocation was correct, the
consequences of revenue receipts or subsequent conversion to nonprogram
purposes would be governed by the reserve fund's recorded ownership
interest in the asset. If the use was substantial and the agency had
attempted in good faith to allocate the cost between the program and
nonprogram purposes but had done so erroneously, the agency would only
be required to correct the allocation. If there was no such good faith
allocation attempt at the outset, however, the Secretary would be given
a choice of remedies: The Secretary could either require the agency to
correct the allocation or require it to correct the recorded ownership
of the asset to reflect the fair proportionate interests of the
Department. This proposed election of remedies for the Secretary is
based on the traditional legal principle that a beneficiary has the
choice of either disavowing or ratifying a misuse of assets by a
fiduciary. An analysis of fair proportionate interests would utilize
the criteria customarily used in the financial world with regard to the
development of new businesses, would include both monetary and other
contributions to the total development cost, and would consider both
the magnitude and the relative risk of all of these contributions.
The Secretary proposes to add a new paragraph (a)(7) to state the
principle that any claim by a guaranty agency to recover funds and
assets for the reserve fund from a third party is also Federal
property.
The guaranty agencies requested the addition of proposed paragraph
(a)(8), which would apply one of the traditional fiduciary standards
for non-arm's length transactions to guaranty agencies' use of reserve
funds and assets.
Finally, the guaranty agency negotiators also requested the
addition of the first sentence of paragraph (a)(9) to clarify the
applicability of the definition of reserve funds and assets in this
section throughout sections 422 and 428 of the HEA. The departmental
negotiators, in response, added the second sentence to reference the
Secretary's authority under section 428(c)(9)(F)(vi) of the HEA to use
all funds and assets of the guaranty agency under the circumstances
specified in that section.
Section 682.417 Determination of reserve funds or assets to be
returned
The Secretary proposes to add a new section to establish the
substantive standard for orders to guaranty agencies to return
unnecessary reserves. The section would also establish a process by
which a guaranty agency may challenge an order that it return reserves
or an order that it require the return to itself or to the Secretary of
reserve funds or assets that are held by, or under the control of,
another party. Since the Secretary is not aware of any circumstances
under which all of those funds and assets would not be required for the
orderly termination of the agency's operations or the orderly
liquidation of its assets, no further substantive standard has been
proposed for orders for the return of property not in the hands of the
guaranty agencies.
Proposed paragraph (a) would simply restate the statutory
provisions.
In paragraph (b) the Secretary proposes the substantive standard
for ``unnecessary'' reserves. Under this paragraph the Secretary would
not initiate a proceeding for the recovery of unnecessary reserves
unless the guaranty agency's reserve fund ratio exceeded a specified
level for each of the two preceding Federal fiscal years. In exercising
discretion whether to initiate such a proceeding during the first two
years that this rule is effective, the Secretary will consider that the
effects of OBRA on guaranty agencies were not reflected at all in the
1993 fiscal year and will probably not have been fully reflected in the
1994 fiscal year, either. If the Secretary does initiate a proceeding,
projections of the agency's future financial condition would be used as
the basis for the decision. As soon as possible, the Secretary intends
to propose a system of uniform financial projections for guaranty
agencies that could not only be used in these proceedings, but would
also give the Secretary better general information on the current and
future financial health of the guaranty agency industry. In the
meantime, the Secretary would be able to require a guaranty agency to
submit special projections for the proceeding. If the Secretary
determined to recover reserves from an agency, the agency would be
entitled to retain sufficient reserves at least to satisfy the
``trigger'' level specified in the regulation and to maintain a
sufficient cushion over the statutorily-mandated reserve requirements
to perform its responsibilities as a guaranty agency over a specified
future period. The Secretary proposes to use a higher standard than the
statutory minimum in order to enable agencies to continue to guarantee
new loans and perform their other obligations as guaranty agencies, not
simply to satisfy their existing guarantees and service out their
existing portfolios.
Proposed paragraph (c) would set forth the contents and procedural
requirements for the notice by which the Secretary or an authorized
Departmental official would initiate a proceeding under this section.
The proposed notice is designed to provide the agency with the
information that it needs to respond to the officer's initial
determination. The notice would also include a description of any
actions that the guaranty agency would be required to take to assure
the safety of the reserve funds or assets that are the subject of the
proceeding while the proceeding was pending.
In paragraph (d) the Secretary proposes to provide the procedural
and substantive requirements for the appeal of an initial determination
under paragraph (c). The appeal would be decided by a different
Departmental official who was not a subordinate of the one who made the
initial determination. The guaranty agency would have the burden of
production and persuasion in such an appeal. It would be entitled to an
oral argument to the deciding official promptly after submitting all
material that is required for the appeal but not to a formal hearing.
The record would be closed to evidence before this oral argument unless
the deciding official determined otherwise.
Under section 428(c)(9)(J) of the HEA, the Secretary is required to
protect the confidentiality of financial information collected by the
Secretary under that section. In light of this requirement, only the
guaranty agency and the Department would be considered parties to a
proceeding under this section with any formal rights of participation.
The Department, however, always appreciates receiving information from
all persons having relevant information about matters within its
jurisdiction, and it particularly solicits input from students and
schools in these proceedings. Accordingly, in paragraph (e) the
Secretary proposes to provide an opportunity for public input by
publishing a notice of the initial determination of funds or assets to
be returned in the Federal Register. In the interest of fairness, the
guaranty agency would be given a reasonable opportunity to respond to
any public input if the deciding official considered the information
adverse to the agency.
In paragraph (f) the Secretary proposes to specify the procedures
for, and content of, the decision on appeal. Judicial review could not
be sought until this decision was issued.
Paragraph (g) would contain the substantive and procedural
requirements for compliance with any order of the Secretary issued
under this section.
Executive Order 12866
1. Assessment of costs and benefits
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this proposed regulatory
action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the Title IV, HEA programs
effectively and efficiently. Burdens specifically associated with
information collection requirements, if any, are explained elsewhere in
this preamble under the heading of Paperwork Reduction Act of 1980.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these proposed regulations, the Secretary has
determined that the benefits of the proposed regulations justify the
costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comment on
whether there may be further opportunities to reduce any potential
costs or increase potential benefits resulting from these proposed
regulations without impeding the effective and efficient administration
of the Title IV, HEA programs.
2. Clarity of the regulations
Executive order 12866 requires each agency to write regulations
that are easy to understand.
The Secretary invites comments on how to make these regulations
easier to understand, including answers to questions such as the
following: (1) Are the requirements in the regulations clearly stated?
(2) Do the regulations contain technical terms or other wording that
interferes with their clarity? (3) Does the format of the regulations
(grouping and order of sections, use of headings, paragraphing, etc.)
aid or reduce their clarity? Would the regulations be easier to
understand if they were divided into more (but shorter) sections? (A
``section'' is preceded by the symbol ``Sec. '' and a numbered heading;
for example, Sec. 682.410 Fiscal, administrative, and enforcement
requirements.) (4) Is the description of the proposed regulations in
the ``Supplementary Information'' section of this preamble helpful in
the understanding of the proposed regulations? How could this
description be more helpful in making the proposed regulations easier
to understand? (5) What else could the Department do to make the
regulations easier to understand?
A copy of any comments that concern whether these proposed
regulations are easy to understand should also be sent to Stanley
Cohen, Regulations Quality Officer, U.S. Department of Education, 400
Maryland Avenue, SW., (Room 5125 FOB-6), Washington, DC 20202-2241.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities. The small entities that would be affected by these
regulations are small organizations that contract with guaranty
agencies to administer aspects of the agencies' participation in the
FFEL programs. However, the regulations would not have a significant
impact on these small entities, because the regulations would not
impose excessive regulatory burdens or require unnecessary Federal
supervision. The regulations would impose minimal requirements to
ensure the proper expenditure of program funds.
Paperwork Reduction Act of 1980
Sections 682.410 and 682.417 contain information collection
requirements. As required by the Paperwork Reduction Act of 1980, the
Secretary will submit a copy of these sections to the Office of
Management and Budget (OMB) for its review.
Guaranty agencies receive payments from the Secretary and others
for exclusive use in the FFEL programs, and the accumulated surplus of
those payments over permissible expenditures are Federal property, to
be returned to the Secretary upon the agency's termination or under
certain other circumstances. The Secretary needs and uses the
information to enable him to determine whether the guaranty agencies
comply with the requirements for safeguarding this Federal property and
the limitations on its use.
Annual public reporting and recordkeeping burden contained in the
collection of information proposed in these regulations is estimated to
be 90 hours, including the time for searching existing data sources,
gathering and maintaining the data needed, completing and reviewing the
collection information, and submitting materials.
Organizations and individuals desiring to submit comments on the
information collection requirements should submit them to the Office of
Information and Regulatory Affairs, OMB, room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.
Invitation to Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations. All comments
submitted in response to these proposed regulations will be available
for public inspection, during and after the comment period, in room
4624, Regional Office Building 3, 7th and D Streets, SW., Washington,
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of
each week except federal holidays.
Assessment of Educational Impact
The Secretary particularly requests comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Number 84.032, Federal
Family Education Loan Program)
Dated: July 29, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary proposes to amend part 682 of title 34 of the Code of
Federal Regulations as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS
1. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. Section 682.410 is amended by redesignating paragraphs (a)(6)
through (8) as (a)(10) through (12), respectively; by revising
paragraphs (a)(1) through (5); and by adding new paragraphs (a)(6)
through (8) and (a)(9) to read as follows:
Sec. 682.410 Fiscal, administrative, and enforcement requirements.
(a) Fiscal requirements. (1) Reserve fund assets. A guaranty agency
shall establish and maintain a reserve fund to be used solely for its
activities as a guaranty agency under the FFEL Program (``guaranty
activities''). The guaranty agency shall credit to the reserve fund--
(i) The total amount of insurance premiums collected;
(ii) Funds received from a State for the agency's guaranty
activities, including matching funds under section 422(a) of the Act;
(iii) Federal advances obtained under sections 422(a) and (c) of
the Act;
(iv) Federal payments for default, bankruptcy, death, disability,
closed school, and false certification claims;
(v) Supplemental preclaims assistance payments;
(vi) Administrative cost allowance payments received under
Sec. 682.407 and transitional support payments received under section
458(a) of the Act;
(vii) Funds collected by the guaranty agency on FFEL Program loans
on which a claim has been paid;
(viii) Investment earnings on the reserve fund; and
(ix) Other funds received by the guaranty agency from any source
for the agency's guaranty activities.
(2) Uses of reserve fund assets. A guaranty agency may use the
assets of the reserve fund established under paragraph (a)(1) of this
section to pay only--
(i) Insurance claims;
(ii) Operating costs for the agency's guaranty activities,
including payments necessary in collecting loans, providing preclaims
assistance, monitoring enrollment and repayment status, and carrying
out any other guaranty activities;
(iii) Lenders for their participation in a loan referral service
under section 428(e) of the Act;
(iv) The Secretary's equitable share of collections;
(v) Federal advances and other funds owed to the Secretary;
(vi) Reinsurance fees;
(vii) Insurance premiums related to cancelled loans;
(viii) Borrower refunds, including those arising out of student or
other borrower claims and defenses;
(ix) (A) The repayment, on or after December 29, 1993, of amounts
credited under paragraphs (a)(1)(ii) or (ix) of this section, if the
agency provides the Secretary 30 days prior notice of the repayment and
demonstrates that--
(1) These amounts were originally received by the agency under
appropriate contemporaneous documentation specifying that receipt was
on a temporary basis only;
(2) The objective for which these amounts were originally received
by the agency has been fully achieved; and
(3) Repayment of these amounts would not cause the agency to fail
to comply with the minimum reserve levels provided by paragraph (a)(10)
of this section, except that the Secretary may, for good cause, provide
written permission for a payment that meets the other requirements of
this paragraph (a)(2)(ix)(A) of this section.
(B) The repayment, prior to December 29, 1993, of amounts credited
under paragraphs (a)(1) (ii) or (ix) of this section, if the agency
demonstrates that--
(1) These amounts were originally received by the agency under
appropriate contemporaneous documentation that receipt was on a
temporary basis only; and
(2) The objective for which these amounts were originally received
by the agency has been fully achieved.
(x) Any other payments necessary to perform functions directly
related to the agency's guaranty activities and for their proper
administration;
(xi) Notwithstanding any other provision of this section, any other
payment that was allowed by law or regulation at the time it was made,
if the agency acted in good faith when it made the payment or the
agency would otherwise be unfairly prejudiced by the nonallowability of
the payment at a later time; and
(xii) Any other amounts authorized or directed by the Secretary.
(3) Accounting basis. Except as approved by the Secretary, a
guaranty agency shall credit the items listed in paragraph (a)(1) of
this section to its reserve fund upon their receipt, without any
deferral for accounting purposes, and shall deduct the items listed in
paragraph (a)(2) of this section from its reserve fund upon their
payment, without any accrual for accounting purposes.
(4) Accounting records. (i) The accounting records of a guaranty
agency must reflect the correct amount of sources and uses of funds
under paragraph (a) of this section.
(ii) A guaranty agency may reverse prior credits to its reserve
fund if--
(A) The agency gives the Secretary prior notice setting forth a
detailed justification for the action;
(B) The Secretary determines that the credits were made erroneously
and in good faith; and
(C) The Secretary determines that the action would not unfairly
prejudice other parties.
(iii) A guaranty agency shall correct any other errors in its
accounting or reporting as soon as practicable after the errors become
known to the agency.
(iv) If a general reconstruction of a guaranty agency's historical
accounting records is necessary to make a change under paragraphs
(a)(4) (ii) and (iii) of this section or any other retroactive change
to its accounting records, the agency may make this reconstruction only
upon prior approval by the Secretary and without any deduction from its
reserve fund for the cost of the reconstruction.
(5) Investments. The guaranty agency shall exercise the level of
care required of a fiduciary charged with the duty of investing the
money of others when it invests the assets of the reserve fund
described in paragraph (a)(1) of this section. It may invest these
assets only in low-risk securities, such as obligations issued or
guaranteed by the United States or a State.
(6) Development of assets. (i) If the guaranty agency uses in a
substantial way for purposes other than the agency's guaranty
activities any funds required to be credited to the reserve fund under
paragraph (a)(1) of this section or any assets derived from the reserve
fund to develop an asset of any kind and does not in good faith
allocate a portion of the cost of developing and maintaining the
developed asset to funds other than the reserve fund, the Secretary may
require the agency to--
(A) Correct this allocation under paragraph (a)(4)(iii) of this
section; or
(B) Correct the recorded ownership of the asset under paragraph
(a)(4)(iii) of this section so that--
(1) If, in a transaction with an unrelated third party, the agency
sells or otherwise derives revenue from uses of the asset that are
unrelated to the agency's guaranty activities, the agency promptly
shall deposit into the reserve fund described in paragraph (a)(1) of
this section a percentage of the sale proceeds or revenue equal to the
fair percentage of the total development cost of the asset paid with
the reserve fund monies or provided by assets derived from the reserve
fund; or
(2) If the agency otherwise converts the asset, in whole or in
part, to a use unrelated to its guaranty activities, the agency
promptly shall deposit into the reserve fund described in paragraph
(a)(1) of this section a fair percentage of the fair market value or,
in the case of a temporary conversion, the rental value of the portion
of the asset employed for the unrelated use.
(ii) If the agency uses funds or assets described in paragraph
(a)(6)(i) of this section in the manner described in that paragraph and
makes a cost and maintenance allocation erroneously and in good faith,
it shall correct the allocation under paragraph (a)(4)(iii) of this
section.
(7) Third-party claims. If the guaranty agency has any claim
against any other party to recover funds or other assets for the
reserve fund, the claim is the property of the United States.
(8) Related-party transactions. All transactions between a guaranty
agency and a related organization or other person that involve funds
required to be credited to the agency's reserve fund under paragraph
(a)(1) of this section or assets derived from the reserve fund must be
on terms that are not less advantageous to the reserve fund than would
have been negotiated on an arm's-length basis by unrelated parties.
(9) Scope of definition. The provisions of this Sec. 682.410(a)
define reserve funds and assets for purposes of sections 422 and 428 of
the Act. These provisions do not, however, affect the Secretary's
authority to use all funds and assets of the agency pursuant to section
428(c)(9)(F)(vi) of the Act.
* * * * *
3. A new Sec. 682.417 is added to subpart D to read as follows:
Sec. 682.417 Determination of reserve funds or assets to be returned.
(a) General. The procedures described in this section apply to a
determination by the Secretary that--
(1) A guaranty agency must return to the Secretary a portion of its
reserve funds that the Secretary has determined is unnecessary to pay
the program expenses and contingent liabilities of the agency; and
(2) A guaranty agency must require the return to the agency or the
Secretary of reserve funds or assets within the meaning of section
422(g)(1) of the Act held by or under the control of any other entity,
that the Secretary determines are necessary to pay the program expenses
and contingent liabilities of the agency or that are required for the
orderly termination of the guaranty agency's operations and the
liquidation of its assets.
(b) Return of unnecessary reserve funds. (1) The Secretary may
initiate a process to recover unnecessary reserve funds under paragraph
(a)(1) of this section if the Secretary determines that a guaranty
agency's reserve fund ratio under Sec. 682.410(a)(10) for each of the
two preceding Federal fiscal years exceeded 2.0 percent.
(2) If the Secretary initiates a process to recover unnecessary
reserve funds, the Secretary requires the return of a portion of the
reserve funds that the Secretary determines will permit the agency to--
(i) Have a reserve fund ratio of at least 2.0 percent under
Sec. 682.410(a)(10) at the time of the determination; and
(ii) Meet the minimum reserve fund requirements under
Sec. 682.410(a)(10) and retain sufficient additional reserve funds to
perform its responsibilities as a guaranty agency during the current
Federal fiscal year and the four succeeding Federal fiscal years.
(3)(i) The Secretary makes a determination of the amount of the
reserve funds needed by the guaranty agency under paragraph (b)(2) of
this section on the basis of financial projections for the period
described in that paragraph. If the agency provides projections for a
period longer than the period referred to in that paragraph, the
Secretary may consider those projections.
(ii) The Secretary may require a guaranty agency to provide
financial projections in a form and on the basis of assumptions
prescribed by the Secretary. If the Secretary requests the agency to
provide financial projections, the agency shall provide the projections
within 60 days of the Secretary's request. If the agency does not
provide the projections within the specified time period, the Secretary
determines the amount of reserve funds needed by the agency on the
basis of other information.
(c) Notice. (1) The Secretary or an authorized Departmental
official begins a proceeding to order a guaranty agency to return a
portion of its reserve funds, or to direct the return of reserve funds
or assets subject to return, by sending the guaranty agency a notice by
certified mail, return receipt requested.
(2) The notice--
(i) Informs the guaranty agency of the Secretary's determination
that the reserve funds or assets must be returned;
(ii) Describes the basis for the Secretary's determination and
contains sufficient information to allow the guaranty agency to prepare
and present an appeal;
(iii) States the date by which the return of reserve funds or
assets must be completed;
(iv) Describes the process for appealing the determination,
including the time for filing an appeal and the procedure for doing so;
and
(v) Identifies any actions that the guaranty agency must take to
ensure that the reserve funds or assets that are the subject of the
notice are maintained and protected against use, expenditure, transfer,
or other disbursement after the date of the Secretary's determination,
and the basis for requiring those actions. The actions may include, but
are not limited to, directing the agency to place the reserve funds in
an escrow account. If the Secretary has directed the guaranty agency to
require the return of reserve funds or assets held by or under the
control of another entity, the guaranty agency shall ensure that the
agency's claims to those funds or assets and the collectability of the
agency's claims will not be compromised or jeopardized during an
appeal. The guaranty agency shall also comply with all other applicable
regulations relating to the use of reserve funds and assets.
(d) Appeal. (1) A guaranty agency may appeal the Secretary's
determination that reserve funds or assets must be returned by filing a
written notice of appeal within 20 days of the date of the guaranty
agency's receipt of the notice of the Secretary's determination. If the
agency files a notice of appeal, the requirement that the return of
reserve funds or assets be completed by a particular date is suspended
pending completion of the appeal process. If the agency does not file a
notice of appeal within the period specified in this paragraph, the
Secretary's determination is final.
(2) A guaranty agency shall submit the information described in
paragraph (d)(4) of this section within 45 days of the date of the
guaranty agency's receipt of the notice of the Secretary's
determination unless the Secretary agrees to extend the period at the
agency's request. If the agency does not submit that information within
the prescribed period, the Secretary's determination is final.
(3) A guaranty agency's appeal of a determination that reserve
funds or assets must be returned is considered and decided by a
Departmental official other than the official who issued the
determination or a subordinate of that official.
(4) In an appeal of the Secretary's determination, the guaranty
agency shall--
(i) State the reasons the guaranty agency believes the reserve
funds or assets need not be returned;
(ii) Identify any evidence on which the guaranty agency bases its
position that the reserve funds or assets need not be returned;
(iii) Include copies of the documents that contain this evidence;
(iv) Include any arguments that the guaranty agency believes
support its position that the reserve funds or assets need not be
returned; and
(v) Identify the steps taken by the guaranty agency to comply with
the requirements referred to in paragraph (c)(2)(v) of this section.
(5)(i) In its appeal, the guaranty agency may request the
opportunity to make an oral argument to the deciding official for the
purpose of clarifying any issues raised by the appeal. The deciding
official provides such an opportunity promptly after the expiration of
the period referred to in paragraph (d)(2) of this section.
(ii) The agency may not submit new evidence at or after the oral
argument unless the deciding official determines otherwise. A
transcript of the oral argument is made a part of the record of the
appeal and is promptly provided to the agency.
(6) The guaranty agency has the burden of production and the burden
of persuading the deciding official that the Secretary's determination
should be modified or withdrawn.
(e) Third-party participation. (1) If the Secretary issues a
determination under paragraph (a)(1) of this section, the Secretary
promptly publishes a notice in the Federal Register announcing the
portion of the reserve fund to be returned by the agency and providing
interested persons an opportunity to submit written information
relating to the determination within 30 days after the date of
publication. The Secretary publishes the notice no earlier than five
days after the agency receives a copy of the determination.
(2) If the guaranty agency to which the determination relates files
a notice of appeal of the determination, the deciding official may
consider any information submitted in response to the Federal Register
notice. All information submitted by a third party is available for
inspection and copying at the offices of the Department of Education in
Washington, D.C., during normal business hours.
(f) Adverse information. If the deciding official considers
information in addition to the evidence described in the notice of the
Secretary's determination that is adverse to the guaranty agency's
position on appeal, the deciding official informs the agency and
provides it a reasonable opportunity to respond to the information
without regard to the period referred to in paragraph (d)(2) of this
section.
(g) Decision. (1) The deciding official issues a written decision
on the guaranty agency's appeal within 45 days of the date on which the
information described in paragraphs (d)(4) and (d)(5)(ii) of this
section is received, or the oral argument referred to in paragraph
(d)(5) of this section is held, whichever is later. The deciding
official mails the decision to the guaranty agency by certified mail,
return receipt requested. The decision of the deciding official becomes
the final decision of the Secretary 30 days after the deciding official
issues it. In the case of a determination that a guaranty agency must
return reserve funds, if the deciding official does not issue a
decision within the prescribed period, the agency is no longer required
to take the actions described in paragraph (c)(2)(v) of this section.
(2) A guaranty agency may not seek judicial review of the
Secretary's determination to require the return of reserve funds or
assets until the deciding official issues a decision.
(3) The deciding official's written decision includes the basis for
the decision. The deciding official bases the decision only on evidence
described in the notice of the Secretary's determination and on
information properly submitted and considered by the deciding official
under this section. The deciding official is bound by all applicable
statutes and regulations and may neither waive them nor rule them
invalid.
(h) Collection of reserve funds or assets. (1) If the deciding
official's final decision requires the guaranty agency to return
reserve funds, or requires the guaranty agency to require the return of
reserve funds or assets to the agency or to the Secretary, the decision
states a new date for compliance with the decision. The new date is no
earlier than the date on which the decision becomes the final decision
of the Secretary.
(2) If the guaranty agency fails to comply with the decision, the
Secretary may recover the reserve funds from any funds due the agency
from the Department without any further notice or procedure and may
take any other action permitted or authorized by law to compel
compliance.
[FR Doc. 94-19434 Filed 8-9-94; 8:45 am]
BILLING CODE 4000-01-P
