94-28321. Health Education Assistance Loan Program  

  • [Federal Register Volume 59, Number 220 (Wednesday, November 16, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-28321]
    
    
    [[Page Unknown]]
    
    [Federal Register: November 16, 1994]
    
    
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    DEPARTMENT OF HEALTH AND HUMAN SERVICES
    
    Public Health Service
    
    42 CFR Part 60
    
    RIN 0905-AS87
    
     
    
    Health Education Assistance Loan Program
    
    AGENCY: Health Resources and Services Administration, HHS.
    
    ACTION: Notice of proposed rulemaking.
    
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    SUMMARY: This proposed rule would amend existing regulations governing 
    the Health Education Assistance Loan (HEAL) program to establish 
    performance standards against which lender and holder default rates 
    would be measured, as mandated by the Health Professions Education 
    Extension Amendments of 1992. The proposal also amends the regulations 
    to reflect various statutory provisions related to HEAL performance 
    standards for schools, lenders, and holders, including the following: 
    The formula for calculating default rates; the requirement that certain 
    schools develop default management plans; the borrower's option to 
    reduce his or her insurance premium by obtaining a credit worthy 
    cosigner; the waiver of penalty fees for schools, lenders, and holders 
    with a low volume of loans; and the option to pay off defaulted loans 
    to reduce default rates.
    
    DATES: Comments on this proposed rule are invited. To be considered, 
    comments must be received by December 16, 1994.
    
    ADDRESSES: Respondents should address written comments to Fitzhugh 
    Mullan, M.D., Director, Bureau of Health Professions (BHPr), Health 
    Resources and Services Administration, Room 8-05, Parklawn Building, 
    5600 Fishers Lane, Rockville, Maryland 20857. All comments received 
    will be available for public inspection and copying at the Office of 
    Program Development, BHPr, Room 8A-55, Parklawn Building, 5600 Fishers 
    Lane, Rockville, Maryland weekdays (Federal holidays excepted) between 
    the hours of 8:30 a.m. and 5:00 p.m.
    
    FOR FURTHER INFORMATION CONTACT:
    Michael Heningburg, Director, Division of Student Assistance, Bureau of 
    Health Professions, Health Resources and Services Administration, 
    Parklawn Building, Room 8-48, 5600 Fishers Lane, Rockville, Maryland 
    20857; telephone number: 301-443-1173.
    
    SUPPLEMENTARY INFORMATION: Section 707(a) of the Public Health Service 
    Act (the Act) requires that, not later than 1 year after enactment of 
    the Health Professions Education Extension Amendments of 1992 (Pub. L. 
    102-408), the Secretary shall establish performance standards for 
    lenders and holders of HEAL loans, including fees to be imposed for 
    failing to meet such standards. In the report accompanying Public Law 
    102-408, the Congress stated that it expects ``* * * schools, lenders, 
    and holders to assume and share the responsibility for minimizing HEAL 
    defaults * * *'' (Conference Report 102-925, p. 112).
        In accordance with the above, this Notice of Proposed Rulemaking 
    (NPRM) proposes to amend the HEAL regulations to establish performance 
    standards for lenders and holders of HEAL loans. Under this proposal, 
    the Secretary would establish requirements and fees to be imposed on a 
    HEAL lender or holder based on the lender or holder's HEAL default 
    rate. The default rate for lenders and holders would be calculated in 
    accordance with the statutory default formula set forth in section 
    719(5) of the Act, except that loans made to students at Historically 
    Black Colleges and Universities (HBCUs) prior to the end of the first 3 
    years that the lender/holder performance standard is in effect would be 
    excluded from the default rate calculation. The proposed performance 
    standard requirements, including the risk-based fee to be assessed on 
    each lender and holder, are described below.
        In developing these proposals, the Department has relied heavily on 
    section 708 of the Act, which sets forth fees and performance 
    requirements for HEAL schools with default rates greater than 5 
    percent. Schools, lenders, and holders all play a significant role in 
    helping to assure the collectibility of HEAL loans, and all benefit 
    from participation in the HEAL program. Accordingly, this approach is 
    designed to assure similar measures of accountability for all parties 
    involved in the HEAL program.
        This proposal also clarifies various statutory provisions related 
    to HEAL performance standards for schools, lenders, and holders, 
    including the following: (1) The formula for calculating default rates; 
    (2) the requirement that certain schools develop default management 
    plans; (3) the borrower's option to reduce his or her insurance premium 
    by obtaining a credit worthy cosigner; (4) the waiver of penalty fees 
    for schools, lenders, and holders with a low volume of loans; and (5) 
    the option to pay off defaulted loans to reduce default rates. The 
    specific amendments proposed are described below according to the 
    subparts, section numbers, and headings of the HEAL regulations 
    affected.
    
    Subpart A--General Program Description
    
    Section 60.2  HEAL Default Rate
    
        The Department is proposing to add a new section to the HEAL 
    regulations which would address the HEAL default rate. Paragraph (a) of 
    this section, ``Default rate formula,'' would explain that the default 
    rate of each school, lender, and holder is calculated in accordance 
    with the formula set forth in section 719(5) of the Act, except that 
    for lenders and holders, loans made to students at HBCUs prior to the 
    end of the first 3 years that the lender/holder performance standard is 
    in effect would be excluded from the default rate calculation.
        This approach for calculating lender and holder default rates is 
    consistent with the statutory school performance standard set forth in 
    section 708 of the HEAL stature. Section 708(d)(3) provides HBCUs with 
    a 3-year period during which they remain eligible for participation in 
    the HEAL program regardless of their default rates. In granting HBCUs a 
    3-year reprieve from termination due to high default rates, the 
    Congress indicated concern that the performance standard provision not 
    cause these schools to lose access to HEAL funding during the initial 
    years of its implementation.
        In developing this proposed rule, the Department was concerned that 
    lenders and holders, in an effort to maintain low default rates, might 
    choose not to make or purchase loans for students at HBCUs, which 
    historically have higher than average default rates. To assure that the 
    lender/holder performance standard provisions do not unwittingly 
    undermine the Congress' expressed desire that access to HEAL loans be 
    maintained for HBCUs, the proposed rule exempts any loans made to 
    students at HBCUs prior to the end of the first 3 years that the 
    standard is in effect from being included when lender/holder default 
    rates are calculated.
        Paragraph (b) of this section would establish the effective dates 
    of the default rate calculations, for purposes of determining risk-
    based insurance premiums and program eligibility. The Department is 
    proposing in this paragraph that default rates be calculated as of 
    September 30 of each year, and that these rates be used to determine 
    risk-based insurance premiums and program eligibility, for purposes of 
    loans made or purchased on or after July 1 of the following year. These 
    timeframes are designed to provide adequate time for schools, lenders, 
    and holders to pay off defaulted loans, if desired, in order to reduce 
    their risk category or maintain eligibility, and to plan for the costs 
    associated with continued HEAL activity if their default rates are 
    greater than 5 percent. The Department developed this provision in 
    response to concerns that the initial implementation of the school 
    risk-based premiums on January 1, 1993, did not provide adequate time 
    for schools with default rates greater than 5 percent to evaluate their 
    options regarding the pay off of defaulted loans and to prepare for the 
    costs of continued participation in the HEAL program.
        Paragraph (c) of this section would set forth the procedures for 
    schools, lenders, and holders to follow if they want to pay off 
    defaulted HEAL loans to reduce their risk category or maintain 
    eligibility. This proposal would require that if a school, lender, or 
    holder chooses to pay off one or more HEAL loans, it must, for each 
    borrower it chooses, pay off the outstanding principal and interest of 
    all HEAL loans held by the Department for that borrower. This proposal 
    is designed to prevent the confusion that is likely to arise during the 
    collection process if a borrower's HEAL portfolio were divided, with a 
    portion sold to the purchasing entity and a portion remaining with the 
    Department. The proposal also would clarify that any defaulted HEAL 
    loans paid off by a school, lender, or holder are assigned to that 
    entity and may be collected by that entity using any collection methods 
    available to it. Finally, this provision would require that a payoff be 
    completed by May 31 in order to reduce the school, lender, or holder's 
    default rate that would be used to determine the risk category (or 
    program eligibility) for loans made or purchased on or after July 1 of 
    the same year.
    
    Subpart B--The Borrower
    
    Section 60.8  What Are the Borrower's Major Rights and 
    Responsibilities?
    
        Paragraph (b)(1) of this section would be amended to clarify that 
    the borrower must pay the borrower's insurance premium, as more fully 
    described in Sec. 60.14(b)(1).
    
    Subpart C--The Loan
    
    Section 60.10  How Much Can be Borrowed?
    
        Paragraph (b)(1) of this section would be amended to clarify that 
    the non-student borrower may not receive a loan that is greater than 
    the sum of the borrower's insurance premium plus the interest that must 
    be paid on the borrower's HEAL loans during the period for which the 
    new loan is intended.
    
    Section 60.13  Interest
    
        The Department is proposing to delete paragraph (a)(4) of this 
    section, which states that the Secretary announces the HEAL interest 
    rate on a quarterly basis through a notice published in the Federal 
    Register. Since the Department notifies all lenders of the HEAL 
    interest rate at the beginning of each quarter, and since students and 
    schools can contact either the Department or a HEAL lender for 
    information on the HEAL interest rate, the Federal Register notice is 
    no longer necessary.
    
    Section 60.14  The Insurance Premium
    
        The Department is proposing to change the heading of this section 
    to ``Risk-based insurance premiums.'' The section would be amended to 
    reflect the new statutory provisions for determining borrower and 
    school insurance premiums and to include the proposed lender and holder 
    premiums.
        Paragraph (a)(1) of this section would be redesignated as paragraph 
    (a), and would be amended to state that a risk-based insurance premium 
    is charged to the borrower, school, lender, and holder, in accordance 
    with the procedures set forth in paragraph (b) of this section.
        The reference in paragraph (a)(1) to the date that the premium is 
    due to the Secretary would be moved to newly designated paragraph (c), 
    described below, which would address procedures for collecting 
    insurance premiums. In addition, existing paragraphs (a)(2) through 
    (5), which also deal with the collection of the insurance premiums, 
    would be moved to newly designated paragraph (c) and amended as 
    described below.
        Paragraph (b), which addresses the insurance premium rate, would be 
    amended to reflect the various insurance premium rates for borrowers, 
    schools, lenders, and holders. Paragraphs (b)(1) and (2) would set 
    forth the statutory insurance premium rates that apply to borrowers and 
    schools, including the borrower's option to reduce the insurance 
    premium by 50 percent by obtaining a credit worthy cosigner, and the 3-
    year special consideration provided for Historically Black Colleges and 
    Universities.
        Paragraphs (b)(1) and (2) also would include clarification of the 
    statutory provision which provides special consideration in determining 
    the borrower and school insurance premium rate for schools with a low 
    volume of HEAL loan activity. Under this proposal, any school which, 
    for purposes of the default rate calculation, has made a total of 50 or 
    less loans would be placed in the low-risk category, regardless of its 
    default rate. In establishing the low volume threshold, the Department 
    first considered the Conference report language accompanying Public Law 
    102-408, which states the following:
    
        ``The Secretary may grant an institution a wavier of the 
    requirements of the risk categories only if the Secretary determines 
    that the default rate is not an accurate indicator because the 
    volume of loans has been insufficient. For example, some schools of 
    public health may have default rates that exceed 30%. However, since 
    these default rates are based on a small number of loans (in some 
    cases, only two to five loans) they may be a misleading measure of 
    the institution's ability to control defaults.'' (Conference Report 
    102-925, p.111)
    
        It seems apparent from this language that the Congress, while not 
    defining ``low volume,'' intended for this exclusion to be limited to 
    schools with a small amount of HEAL activity. The Department next 
    considered the Department of Education's (ED) low-volume threshold for 
    default penalties. ED uses a threshold of 30 loans for determining 
    whether schools are subject to modified procedures for determining 
    default rates. However, the ED procedures involve a comparison of data 
    over a 3-year period for low volume entities, whereas the HEAL statute 
    requires that any entity not meeting the low volume exclusion be 
    subject to the same default formula applied to high volume entities. As 
    a result, the Department determined that it would be most equitable to 
    allow a higher threshold for the HEAL ``low volume'' definition. At the 
    same time, given the Conference report language, the Department could 
    not justify a level that would be so high as to reduce the 
    effectiveness of the performance standard requirements. Further 
    analysis of HEAL school data supported a threshold of 50 loans, since 
    this level resulted in 34.6% of HEAL schools, representing only 1.3% of 
    HEAL loans in repayment, being excluded from the performance standard 
    penalties during Fiscal Year 1993. Based on the above, the Department 
    considers a threshold of 50 loans to be more than adequate to prevent 
    unfair penalties being imposed on schools with a small volume of HEAL 
    activity, while at the same time assuring that this exemption is not so 
    lenient as to make the performance standard requirements meaningless.
        Paragraphs (b)(3) and (4) would describe the proposed insurance 
    premium rates for lenders and holders. The proposed rates for lenders 
    included in paragraph (b)(3) would be as follows:
        Low-risk: A lender with a default rate of not to exceed 5 percent 
    would not be required to pay an insurance premium. In addition, a 
    lender whose volume of HEAL loans made (for purposes of the default 
    rate calculation) is 50 or less, would not be required to pay an 
    insurance premium.
        Medium-risk: A lender with a default rate in excess of 5 percent 
    but not to exceed 10 percent would be assessed an insurance premium 
    equal to 5 percent of the principal amount of any new loans made.
        High-risk: A lender with a default rate in excess of 10 percent but 
    not to exceed 20 percent would be assessed an insurance premium equal 
    to 10 percent of the principal amount of any new loans made.
        Ineligible: A lender with a fault rate in excess of 20 percent 
    would not be eligible to make new HEAL loans.
        The proposed rates for holders included in paragraph (b)(4) would 
    be as follows:
        Low-risk: A holder with a default rate of not to exceed 5 percent 
    would not be required to pay an insurance premium. In addition, a 
    holder whose volume of HEAL loans held (for purposes of the default 
    rate calculation) is 50 or less, would not be required to pay an 
    insurance premium.
        Medium-risk: A holder with a default rate in excess of 5 percent 
    but not to exceed 10 percent would be assessed an insurance premium 
    equal to 5 percent of the original principal amount of any loans newly 
    purchased.
        High-risk: A holder with a default rate in excess of 10 percent but 
    not to exceed 20 percent would be assessed an insurance premium equal 
    to 10 percent of the original principal amount of any loans newly 
    purchased.
        Ineligible: A holder with a default rate in excess of 20 percent 
    would not be eligible to purchase new HEAL loans.
        The proposed lender and holder insurance premiums are the same as 
    the school insurance premiums which were enacted as part of Public Law 
    102-408 and became effective January 1, 1993. The proposal to make 
    lenders and holders with default rates greater than 20 percent 
    ineligible for the HEAL program is also consistent with Public Law 102-
    408, which generally prohibits students at schools with default rates 
    in excess of 20 percent from borrowing from the HEAL program at all. 
    Since schools, lenders, and holders all play an important role in 
    assuring the collectibility of HEAL loans, and all benefit from 
    participation in the HEAL program, the Department considers it most 
    equitable for all parties to be subject to the same basic insurance 
    premium rate structure. This is also consistent with the Conference 
    report language accompanying Public Law 102-408, which indicated that 
    schools, lenders, and holders should assume and share the 
    responsibility for minimizing HEAL defaults.
        Although the Department's proposed approach is modeled after the 
    school risk-based insurance premiums established in the HEAL statute, 
    the Department is interested in comments on an alternate approach which 
    would create a more gradual continuum of risk-based premiums for 
    lenders and holders. This alternate approach would be structured such 
    that lenders and holders with default rates: (1) Greater than 5 percent 
    but less than 6 percent pay a 1 percent premium; (2) Greater than 6 
    percent but less than 7 percent pay a 3 percent premium; (3) Greater 
    than 7 percent but less than 8 percent pay a 5 percent premium; (4) 
    Greater than 8 percent but less than 9 percent pay a 7 percent premium; 
    and (5) Greater than 9 percent but less than 10 percent pay a 9 percent 
    premium. This approach would still result in an average risk premium of 
    5 percent for lenders and holders in the 5-10 percent range, but would 
    phase the penalties in more gradually and provide less harsh penalties 
    for lenders and holders at the lower end of the default rate spectrum. 
    The Department is interested in comments regarding whether this 
    alternate approach would be considered preferable to the ``notched'' 
    approach that is being proposed.
        A new paragraph (b)(5) would prohibit schools, lenders, or holders 
    from passing their insurance premium costs to borrowers.
        Existing paragraphs (c) (1) and (2), which address the method of 
    calculating the insurance premium for loans made before July 22, 1986, 
    when premium amounts were determined based on the amount of time 
    remaining until graduation, would be deleted and replaced by a new 
    paragraph (c), which would set forth procedures for the collection of 
    insurance premiums. New paragraph (c)(1), dealing with the borrower 
    premium, would address provisions previously included in paragraphs (a) 
    (1) and (2). This paragraph would state that the premium charged to the 
    borrower must be collected by the lender through a deduction from the 
    HEAL loan proceeds and is due to the Secretary, along with 
    documentation identifying the loan for which the premium is being paid, 
    no later than 30 days after the date of disbursement of the HEAL loan. 
    It also would require the lender to identify clearly to the borrower 
    the amount of the borrower's insurance premium.
        New paragraph (c)(2), addressing the school premium, would state 
    that for schools required to pay an insurance premium, in accordance 
    with paragraph (b)(2) of this section, the premium would be collected 
    by the Secretary on a quarterly basis, and would be due to the 
    Secretary no later than 30 days after the date of the quarterly billing 
    notice.
        New paragraph (c)(3), addressing the lender premium, would state 
    that for lenders required to pay an insurance premium, in accordance 
    with paragraph (b)(3) of this section, the premium, including 
    documentation identifying the loan for which the premium is being paid, 
    would be due to the Secretary 30 days after the date of disbursement of 
    the HEAL loan.
        New paragraph (c)(4), addressing the holder premium, would state 
    that for holders required to pay an insurance premium, in accordance 
    with paragraph (b)(4) of this section, the premium, including 
    documentation identifying the loan for which the premium is being paid, 
    would be due to the Secretary 30 days after the date that the loan 
    transfer takes place.
        Existing paragraph (a)(3), which establishes penalties for late 
    payment of the insurance premium, would be redesignated as paragraph 
    (c)(5)(i). As amended, this paragraph would require that if the 
    insurance premium due from a school, lender, or holder is not paid by 
    the due date, a late fee will be charged in accordance with the 
    Department's Claims Collection Regulation (45 CFR part 30). This 
    paragraph also would prohibit the late fee from being passed on to the 
    borrower.
        Existing paragraph (a)(4) would be redesignated as paragraph 
    (c)(5)(ii). As amended, this paragraph would state that if the borrower 
    or lender insurance premium is not paid within 60 days of disbursement 
    of the loan, the Secretary may deny insurance coverage on the loan. 
    This paragraph also would state that if the school premium is not paid 
    within 60 days of the date of the quarterly billing notice, the 
    Secretary may immediately suspend the school and may initiate 
    termination proceedings against the school. Finally, if the holder 
    premium is not paid within 60 days of the loan transfer, the Secretary 
    may cancel the insurance coverage on the loan.
        Existing paragraph (a)(5), which addresses refunds of premiums, 
    would be redesignated as paragraph (c)(6) and would be amended to 
    clarify that premiums are not refundable except in cases of error, or 
    unless the loan, including any accrued interest, is canceled within 120 
    days of the date of disbursement. Previously, the regulations did not 
    provide for the refund of the insurance premium once a loan was 
    disbursed, even if it was canceled soon thereafter. Accordingly, this 
    amendment is intended to assure that if cancellation of the loan, 
    including any accrued interest, occurs within a reasonable period of 
    time, a full refund of the premium(s) may be made. This is consistent 
    with Department of Education policies governing the Federal Family 
    Education Loan (FFEL) programs.
        Existing paragraph (c)(3), which addresses the charging of premiums 
    for loans disbursed in multiple installments, would be redesignated as 
    new paragraph (d).
    
    Section 60.15  Other Charges to the Borrower
    
        Paragraph (c) of this section would be amended to clarify that, in 
    making a HEAL loan, the lender may pass on to the borrower only the 
    cost of the borrower's insurance premium.
    
    Section 60.17  Security and Endorsement
    
        Paragraph (b) of this section would be amended by deleting the 
    first sentence, which requires a HEAL loan to be made without 
    endorsement unless the borrower is a minor. In addition, a new 
    paragraph (c) would be added to this section to state that a credit 
    worthy parent or other responsible individual, other than a spouse, may 
    cosign the loan note. This is consistent with section 708(c) of the 
    Act, which allows a HEAL borrower to obtain a cosigner to reduce the 
    cost of the borrower insurance premium by 50 percent.
    
    Subpart D--The Lender and Holder
    
    Section 60.31  The Application To Be a HEAL Lender or Holder
    
        A new paragraph (e) would be added to this section to state that 
    any lender or holder which is in the medium- or high-risk categories, 
    as described in Sec. 60.14, must submit a default management plan with 
    its HEAL application. The default management plan must specify the 
    detailed short-term and long-term procedures that the lender or holder 
    will have in place to minimize defaults on loans to HEAL borrowers. 
    Under the plan the lender or holder must, among other measures, assure 
    that borrowers receive information concerning repayment options, 
    deferments, forbearance, and the consequences of default. This 
    requirement is consistent with a statutory provision which requires 
    default management plans from schools in the medium- or high-risk 
    categories.
        A new paragraph (f) would be added to this section to state that a 
    lender or holder with a HEAL default rate, as calculated in accordance 
    with Sec. 60.2, that exceeds 20 percent (except for lenders or holders 
    with a total loan volume, for purposes of the default rate calculation, 
    of 50 loans or less) would be ineligible to make or purchase HEAL 
    loans.
    
    Section 60.33  Making a HEAL Loan
    
        Existing paragraphs (g) and (h) would be redesignated as paragraphs 
    (h) and (i), respectively, and a new paragraph (g) would be added to 
    this section to set forth requirements for cosigners. This paragraph 
    would provide clarification of procedures for implementing the 
    statutory provision which allows a borrower to reduce the insurance 
    premium by 50 percent by obtaining a credit worthy cosigner. Under this 
    provision, a lender would be required to follow procedures similar to 
    those used in making commercial or private loans without a Federal 
    guarantee to determine whether a cosigner is credit worthy.
    
    Section 60.35  HEAL Loan Collection
    
        This section would be amended to clarify that, in collecting a HEAL 
    loan with a cosigner, the lender or holder must apply to the cosigner, 
    collection procedures that are at least as stringent as those it would 
    follow in attempting to collect a commercial or private loan with a 
    cosigner. In addition, this section would be amended to more clearly 
    delineate that the lender or holder must apply to the cosigner due 
    diligence procedures similar to those that are applied to the borrower.
    
    Subpart E--The School
    
    Section 60.50  Which Schools Are Eligible To Be HEAL Schools?
    
        A new paragraph (a)(3) would be added to this section to require 
    that any school in the medium- or high-risk categories, as set forth in 
    Sec. 60.14, must submit a default management plan annually in 
    accordance with timeframes established by the Secretary. The default 
    management plan must specify the detailed short-term and long-term 
    procedures that the school will have in place to minimize defaults on 
    loans to HEAL borrowers. Under the plan the school must, among other 
    measures, assure that borrowers receive information concerning 
    repayment options, deferments, forbearance, and the consequences of 
    default. This provision is consistent with section 708(b) of the Act.
        A new paragraph (a)(4) would be added to this section to state that 
    a school must have a HEAL default rate that does not exceed 20 percent 
    in order to be eligible to make HEAL loans, except as follows: (1) A 
    default rate in excess of 20 percent does not affect the eligibility of 
    a Historically Black College or University until after October 13, 
    1995; and (2) a default rate in excess of 20 percent does not affect 
    the eligibility of any school that has 50 or less loans in repayment, 
    for purposes of the HEAL default rate calculation described in 
    Sec. 60.2. This provision is consistent with section 708(d) of the Act 
    and with the low volume threshold proposed in Sec. 60.14(b).
    
    Economic Impact
    
        Executive Order 12866 requires that all regulations reflect 
    consideration of alternatives, of costs, of benefits, of incentives, of 
    equity, and of available information. Regulations must meet certain 
    standards, such as avoiding unnecessary burden. Regulations which are 
    ``significant'' because of cost, adverse effects on the economy, 
    inconsistency with other agency actions, effects on the budget, or 
    novel legal or policy issues, require special analysis. The Regulatory 
    Flexibility Act requires that we analyze regulatory proposals to 
    determine whether they create a significant impact on a substantial 
    number of small entities.
        The Department believes that the resources required to implement 
    the proposed requirements in these regulations are minimal. The 
    proposed rule would establish performance standards against which 
    lender and holder default rates would be measured, and would establish 
    fees which would be paid by lenders and holders with default rates over 
    5 percent as a condition for continued program participation. Since 
    most active HEAL lenders and holders do not have default rates over 5 
    percent, these provisions should not require significant additional 
    resources for the majority of lenders and holders. Therefore, in 
    accordance with the Regulatory Flexibility Act of 1980, the Secretary 
    certifies that these regulations will not have a significant impact on 
    a substantial number of small entities.
        OMB has reviewed this proposed rule under Executive Order 12866. 
    The Department requests comments on whether there are any aspects of 
    this proposed rule which can be improved to make the HEAL program more 
    effective, more equitable, or less costly.
    
    Paperwork Reduction Act of 1980
    
        This proposed rule contains information collections which are 
    subject to review by the Office of Management and Budget (OMB) under 
    the Paperwork Reduction Act of 1980. The title, description, and 
    respondent description of the information collections are shown below 
    with an estimate of the time for reviewing instructions, searching 
    existing data sources, gathering and maintaining the data needed, and 
    completing and reviewing the collection of information.
        Title: Health Education Assistance Loan (HEAL) Program: Lender and 
    Holder Performance Standards.
        Description of Respondents: Non-profit institutions and Businesses 
    or other for-profit.
        Description: Lenders and holders must provide the Secretary with 
    documentation identifying the loan for which a premium is being paid. 
    Lenders and schools with default rates greater than 5 percent must 
    submit annual default management plans to the Secretary.
        Estimated Annual Reporting and Recordkeeping Burden:
    
    ----------------------------------------------------------------------------------------------------------------
                                                              Responses      Total                                  
                      Section                      No. of        per         annual      Hours per     Total burden 
                                                  respond.     respond.     response      response         hours    
    ----------------------------------------------------------------------------------------------------------------
    60.14(c)(1)...............................           20        1,500       30,000  1min.          500 hrs.      
    60.14(c)(3)\1\............................            0            0            0  0 min.         0 hrs.        
    60.14(c)(4)\1\............................            0            0            0  0 min.         0 hrs.        
    60.31(e)\1\...............................            0            0            0  0 min.         0 hrs.        
    60.35(a)(1)\2\............................           20          500       10,000  .083 hrs.      (833 hrs.)    
    60.50(a)(3)...............................           87            1           87  10 hrs.        870 hrs.      
                                                                                                     ---------------
          Total Burden Hours..................  ...........  ...........  ...........  .............  1370 hrs.     
    ----------------------------------------------------------------------------------------------------------------
    \1\No burden is estimated for these sections, since it is anticipated that any lender or holder required to pay 
      an insurance premium will cease participation in the program.                                                 
    \2\This recordkeeping burden has been approved under OMB No. 0915-0108. There is no change in the burden because
      this OMB approval includes burden for all borrowers who are in default regardless of whether the loan is held 
      by a lender or holder.                                                                                        
    
        We have submitted a copy of this proposed rule to OMB for its 
    review of these information collections. Send comments regarding this 
    burden estimate or any other aspect of this collection of information, 
    including suggestions for reducing this burden, to the agency official 
    designated for this purpose whose name appears in this preamble, and to 
    the Office of Information and Regulatory Affairs, OMB, Washington, D.C. 
    20503.
    
    List of Subjects in 42 CFR Part 60
    
        Educational study programs, Health professions, Loan programs-
    education, Loan programs-health, Medical and dental schools, Reporting 
    requirements, Student aid.
    
        Accordingly, the Department of Health and Human Services proposes 
    to amend 42 CFR part 60 as follows:
    
        Dated: February 9, 1994.
    Philip R. Lee,
    Assistant Secretary for Health.
        Approved: August 5, 1994.
    Donna E. Shalala,
    Secretary.
    (Catalog of Federal Domestic Assistance, No. 13.108, Health 
    Education Assistance Loan Program)
    
    PART 60--HEALTH EDUCATION ASSISTANCE LOAN PROGRAM
    
        1. The authority citation for 42 CFR part 60 continues to read as 
    follows:
    
        Authority: Section 215 of the Public Health Service Act, 58 
    Stat. 690, as amended, 63 Stat. 35 (42 U.S.C. 216); secs. 727-739A, 
    Public Health Service Act, 90 Stat. 2243, as amended, 93 Stat. 582, 
    99 Stat. 529-532, 102 Stat. 3122-3125 (42 U.S.C. 294-2941-1); 
    renumbered as secs. 701-720, as amended by 106 Stat. 1994-2011 (42 
    U.S.C. 292-292p).
    
        2. A new section 60.2, in subpart A, is added to read as follows:
    
    Subpart A--General Program Description
    
    * * * * *
    
    
    Sec. 60.2  HEAL default rate.
    
        (a) Default rate formula. The HEAL default rate for each school, 
    lender, and holder is calculated in accordance with the formula set 
    forth in section 719(5) of the Public Health Service Act (42 U.S.C. 
    292o), except that for lenders and holders, loans made to students at 
    Historically Black Colleges and Universities prior to [insert date 3 
    years after date of publication of final rule] are excluded from the 
    default rate calculation.
        (b) Effective date of default rate calculations. HEAL default rates 
    are calculated as of September 30 of each year. These rates are used to 
    determine risk-based insurance premiums and program eligibility, for 
    purposes of loans made or purchased on or after July 1 of the following 
    year.
        (c) Payoff of defaulted loans to reduce default rate. A school, 
    lender, or holder may pay off the defaulted loans of one or more HEAL 
    borrowers to reduce its default rate. If a school, lender, or holder 
    chooses to exercise this option, it must, for each defaulted HEAL 
    borrower chosen, pay the outstanding principal and interest for all of 
    the borrower's HEAL loans held by the Secretary. Any defaulted HEAL 
    loans paid by a school, lender, or holder are assigned to that entity, 
    and may be collected using only collection methods available to that 
    entity. In order to reduce the school, lender, or holder default rate 
    used to determine the level of the risk-based insurance premium (or 
    program eligibility) for loans made or purchased on or after July 1 of 
    any year, a payoff must be completed by May 31 of that same year.
        3. Section 60.8, in subpart B, is amended by revising paragraph 
    (b)(1) to read as follows:
    
    Subpart B--The Borrower
    
    * * * * *
    
    
    Sec. 60.8  What are the borrower's major rights and responsibilities?
    
    * * * * *
        (b) * * *
        (1) The borrower must pay the borrower's insurance premium as more 
    fully described in Sec. 60.14(b)(1).
    * * * * *
        4. Section 60.10, in subpart C, is amended by revising paragraph 
    (b)(1) to read as follows:
    
    Subpart C--The Loan
    
    
    Sec. 60.10  How much can be borrowed?
    
    * * * * *
        (b) * * *
        (1) In no case may an eligible non-student borrower receive a loan 
    that is greater than the sum of the borrower's insurance premium plus 
    the interest that must be paid on the borrower's HEAL loans during the 
    period for which the new loan is intended.
    * * * * *
    
    
    Sec. 60.13  [Amended]
    
        5. Section 60.13 is amended by removing paragraph (a)(4).
        6. Section 60.14 is revised to read as follows:
    
    
    Sec. 60.14  Risk-based insurance premiums.
    
        (a) General. The Secretary insures each lender or holder for the 
    losses of principal and interest it may incur in the event that a 
    borrower dies; becomes totally and permanently disabled; files for 
    bankruptcy under chapter 11 or 13 of the Bankruptcy Act; files for 
    bankruptcy under chapter 7 of the Bankruptcy Act and files a complaint 
    to determine the dischargeability of the HEAL loan; or defaults on his 
    or her loan. For this insurance, the Secretary charges an insurance 
    premium to the borrower, and to the school, lender, and subsequent 
    holder, if any, in accordance with the procedures outlined in this 
    section.
        (b) Rate of insurance premium. The rate of the HEAL insurance 
    premium charged to a HEAL borrower, school, lender, and holder shall be 
    determined in accordance with the procedures outlined in this 
    paragraph.
        (1) Borrower insurance premium. (i) Low-risk rate. A borrower 
    attending a school with a default rate of not to exceed 5 percent, or 
    attending a school for which the volume of HEAL loans made for purposes 
    of the default rate calculation is 50 or less, shall be assessed a 
    risk-based premium in an amount equal to 6 percent of the principal 
    amount of the loan.
        (ii) Medium-risk and high-risk rate. A borrower attending a school 
    with a default rate in excess of 5 percent but not exceeding 20 percent 
    (excluding schools for which the volume of HEAL loans made for purposes 
    of the default rate calculation is 50 or less) shall be assessed a 
    risk-based premium in an amount equal to 8 percent of the principal 
    amount of the loan.
        (iii) Reduction of borrower premium. A borrower shall have his or 
    her insurance premium reduced by 50 percent if a credit worthy parent 
    or other responsible party co-signs the loan note.
        (2) School insurance premium. (i) Low-risk rate. A school with a 
    default rate of not to exceed 5 percent, or for which the volume of 
    HEAL loans made for purposes of the default rate calculation is 50 or 
    less, shall not be assessed an insurance premium.
        (ii) Medium-risk rate. A school with a default rate in excess of 5 
    percent but not exceeding 10 percent (excluding schools for which the 
    volume of HEAL loans made for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 5 percent of the principal amount of each HEAL loan approved 
    by the school and disbursed to the borrower.
        (iii) High-risk rate. A school with a default rate in excess of 10 
    percent but not exceeding 20 percent (excluding schools for which the 
    volume of HEAL loans made for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 10 percent of the principal amount of each HEAL loan approved 
    by the school and disbursed to the borrower.
        (iv) Special consideration for Historically Black Colleges and 
    Universities. An Historically Black College or University with a 
    default rate in excess of 20 percent may continue to make HEAL loans to 
    its borrowers until October 13, 1995. A borrower at such a school will 
    be subject to the high-risk insurance premium rate set forth in 
    paragraph (b)(1)(ii) of this section, and the school will be subject to 
    the high-risk insurance premium rate set forth in paragraph (b)(2)(iii) 
    of this section.
        (3) Lender insurance premium. (i) Low-risk rate. A lender with a 
    default rate of not to exceed 5 percent, or for which the volume of 
    HEAL loans made for purposes of the default rate calculation is 50 or 
    less, shall not be assessed an insurance premium.
        (ii) Medium-risk rate. A lender with a default rate in excess of 5 
    percent but not exceeding 10 percent (including lenders for which the 
    volume of HEAL loans made for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 5 percent of the principal amount of each HEAL loan made.
        (iii) High-risk rate. A lender with a default rate in excess of 10 
    percent but not exceeding 20 percent (excluding lenders for which the 
    volume of HEAL loans made for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 10 percent of the principal amount of each HEAL loan made.
        (4) Holder insurance premium. (i) Low-risk rate. A holder with a 
    default rate of not to exceed 5 percent, or for which the volume of 
    HEAL loans held for purposes of the default rate calculation is 50 or 
    less, shall not be assessed an insurance premium.
        (ii) Medium-risk rate. A holder with a default rate in excess of 5 
    percent but not exceeding 10 percent (excluding holders for which the 
    volume of HEAL loans held for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 5 percent of the principal amount of each HEAL loan purchased.
        (iii) High-risk rate. A holder with a default rate in excess of 10 
    percent but not exceeding 20 percent (excluding holders for which the 
    volume of HEAL loans held for purposes of the default rate calculation 
    is 50 or less) shall be assessed a risk-based premium in an amount 
    equal to 10 percent of the principal amount of each HEAL loan 
    purchased.
        (5) Rules regarding insurance premium costs. Schools, lenders, and 
    holders are prohibited from requiring the borrower to pay the school, 
    lender, or holder portion of the insurance premium.
        (c) Collection of insurance premiums. HEAL insurance premiums due 
    from borrowers, schools, lenders, and holders shall be collected in 
    accordance with the procedures outlined in this paragraph.
        (1) Borrower insurance premium. The premium charged to the borrower 
    must be collected by the lender through a deduction from the HEAL loan 
    proceeds. The borrower premium, including documentation identifying the 
    loan for which the premium is being paid, is due to the Secretary no 
    later than 30 days after the date of each HEAL loan disbursement. The 
    lender must clearly identify to the borrower the amount of the 
    insurance premium.
        (2) School insurance premium. For schools required to pay an 
    insurance premium, in accordance with paragraph (b)(2) of this section, 
    the premium shall be collected by the Secretary on a quarterly basis, 
    and is due to the Secretary no later than 30 days after the date of the 
    quarterly billing notice.
        (3) Lender insurance premium. For lenders required to pay an 
    insurance premium, in accordance with paragraph (b)(3) of this section, 
    the premium, including documentation identifying the loan for which the 
    premium is being paid, is due to the Secretary no later than 30 days 
    after the date of each HEAL loan disbursement.
        (4) Holder insurance premium. For holders required to pay an 
    insurance premium, in accordance with paragraph (b)(4) of this section, 
    the premium, including documentation identifying the loan for which the 
    premium is being paid, is due to the Secretary no later than 30 days 
    after the date of each HEAL loan purchase.
        (5) Penalties for late payment. (i) If the insurance premium is not 
    paid by the due date a late fee will be charged to the school, lender, 
    or holder, as appropriate, in accordance with the Department's Claims 
    Collection Regulation (45 CFR part 30). These late fees may not be 
    passed on to the borrower.
        (ii) If the borrower or lender insurance premium is not paid within 
    60 days of disbursement of the loan, the insurance shall cease to be 
    effective on the loan. If the school premium is not paid within 60 days 
    of the date of the quarterly billing notice, the Secretary will 
    immediately suspend the school and initiate termination proceedings 
    against the school. If the holder premium is not paid within 60 days of 
    the loan transfer, the Secretary will cancel the insurance coverage on 
    the loan.
        (6) Refund of premiums. Premiums are not refundable except in cases 
    of error, or unless the loan, including any accrued interest, is 
    canceled within 120 days of the date of disbursement.
        (d) Multiple installments. In cases where the lender disburses the 
    loan in multiple installments, the insurance premium is calculated for 
    each disbursement.
        7. Section 60.15 is amended by revising paragraph (c) to read as 
    follows:
    
    
    Sec. 60.15  Other charges to the borrower.
    
    * * * * *
        (c) Other loan making costs. A lender may not pass on to the 
    borrower any cost of making a HEAL loan other than the costs of the 
    borrower's insurance premium.
        8. Section 60.17 is amended by revising paragraph (b) and adding a 
    new paragraph (c) to read as follows:
    
    
    Sec. 60.17  Security and endorsement.
    
    * * * * *
        (b) If a borrower is a minor and cannot under State law create a 
    legally binding obligation by his or her own signature, a lender may 
    require an endorsement by another person on the borrower's HEAL note. 
    For purposes of this paragraph, an ``endorsement'' means a signature of 
    anyone other than the borrower who is to assume either primary or 
    secondary liability on the note.
        (c) A credit worthy parent or other responsible individual (other 
    than a spouse) may cosign the loan note.
        9. Section 60.31, in subpart D, is amended by adding new paragraphs 
    (e) and (f) to read as follows:
    
    Subpart D--The Lender and Holder
    
    
    Sec. 60.31  The application to be a HEAL lender or holder.
    
    * * * * *
        (e) Any lender or holder in the medium-risk or high-risk 
    categories, as described in Sec. 60.14, must submit a default 
    management plan with its application to be a HEAL lender or holder. The 
    default management plan must specify the detailed short-term and long-
    term procedures that the lender or holder will have in place to 
    minimize defaults on loans to HEAL borrowers. Under the plan the lender 
    or holder must, among other measures, assure that borrowers receive 
    information concerning repayment options, deferments, forbearance, and 
    the consequences of default.
        (f) A lender with a default rate that exceeds 20 percent (except 
    for a lender with a total loan volume, for purposes of the default rate 
    calculation, of 50 loans or less) is ineligible to make HEAL loans. A 
    holder with a default rate that exceeds 20 percent (except for a holder 
    with a total loan volume, for purposes of the default rate calculation, 
    of 50 loans or less) is ineligible to purchase HEAL loans.
        10. Section 60.33 is amended by redesignating paragraphs (g) and 
    (h) as paragraphs (h) and (i), respectively; and by adding a new 
    paragraph (g) to read as follows:
    
    
    Sec. 60.33  Making a HEAL loan.
    
    * * * * *
        (g) HEAL loans with cosigners. In determining whether a cosigner is 
    creditworthy, a lender must follow procedures for determining 
    creditworthiness that are at least as stringent as those it would 
    follow in making commercial loans or private loans without a Federal 
    guarantee. If a lender does not make commercial loans or private loan 
    without a Federal guarantee, it must obtain and follow creditworthiness 
    procedures that are used by a commercial lender who does make such 
    loans.
    * * * * *
        11. Section 60.35 is amended by revising the introductory 
    paragraph, paragraphs (a)(1) and (2), and paragraphs (e) and (f) to 
    read as follows:
    
    
    Sec. 60.35  HEAL loan collection.
    
        A lender or holder must exercise due diligence in the collection of 
    a HEAL loan with respect to both a borrower and any endorser or 
    cosigner. In collecting a loan with an endorser or cosigner, the lender 
    or holder must apply to the endorser or cosigner collection procedures 
    that are at least as stringent as those it would follow in attempting 
    to collect a commercial or private loan with an endorser or cosigner. 
    At a minimum, in order to exercise due diligence, a lender or holder 
    must implement the following procedures when a borrower fails to honor 
    his or her payment obligations:
        (a)(1) When a borrower is delinquent is making payment, the lender 
    or holder must remind the borrower within 15 days of the date the 
    payment was due by means of a written contact. If payments do not 
    resume, the lender or holder must contact both the borrower and any 
    endorser or cosigner at least 3 more times at regular intervals during 
    the 120-day delinquent period following the first missed payment of 
    that 120-day period. The second demand notice for a delinquent account 
    must inform the borrower that the continued delinquent status of the 
    account will be reported to consumer credit reporting agencies if 
    payment is not made. Each of the required four contacts must consist of 
    at least a written contact which has an address correction request on 
    the envelope. The last contact must consist of a telephone contact, in 
    addition to the required letter, unless the borrower and any endorser 
    or cosigner cannot be contacted by telephone. The lender or holder may 
    choose to substitute a personal contact for a telephone contact. A 
    record must be made of each attempt to contact and each actual contact, 
    and that record must be placed in the borrower's file. Each contact 
    must become progressively firmer in tone. If the lender or holder is 
    unable to locate the borrower and any endorser or cosigner at any time 
    during the period when the borrower is delinquent, the lender or holder 
    must initiate the skip-tracing procedures described in paragraph (a)(2) 
    of this section.
        (2) If the lender or holder is unable to locate either the borrower 
    or any endorser or cosigner at any time, the lender or holder must 
    initiate and use skip-tracing activities which are at least as 
    extensive and effective as those it uses to locate borrowers delinquent 
    in the repayment of its other loans of comparable dollar value. To 
    determine the correct address of the borrower and any endorser or 
    cosigner, these skip-tracing procedures should include, but need not be 
    limited to, contacting any other individual named on the borrower's 
    HEAL application or promissory note (or the endorser or cosigner's 
    application), using such sources as telephone directories, city 
    directories, postmasters, drivers license records in State and local 
    government agencies, records of members of professional associations, 
    consumer credit reporting agencies, skip locator services, and records 
    at any school attended by the borrower. All skip-tracing activities 
    used must be documented. This documentation must consist of a written 
    record of the action taken and its date and must be presented to the 
    Secretary when requesting preclaim assistance or when filing a default 
    claim for HEAL insurance.
    * * * * *
        (e) If a lender or holder does not sue the borrower or any endorser 
    or cosigner, it must send a final demand letter to the borrower and the 
    endorser or cosigner at least 30 days before a default claim is filed.
        (f) If a lender or holder sues a defaulted borrower or endorser or 
    cosigner, it may first apply the proceeds of any judgment against its 
    reasonable attorney's fees and court costs, whether or not the judgment 
    provides for these fees and costs.
    * * * * *
        12. Section 60.50, in subpart E, is amended by adding new 
    paragraphs (a) (3) and (4) to read as follows:
    
    Subpart E--The School
    
    
    Sec. 60.50  Which schools are eligible to be HEAL schools?
    
        (a) * * *
        (3) If the school is in the medium-risk or high-risk categories, as 
    set forth in Sec. 60.14, it must submit a default management plan to 
    the Secretary on an annual basis in accordance with timeframes 
    established by the Secretary.
        (4) The school must have a HEAL default rate that does not exceed 
    20 percent, except as follows:
        (i) A default rate in excess of 20 percent shall not affect the 
    eligibility of a Historically Black College or University until after 
    October 13, 1995; and
        (ii) A default rate in excess of 20 percent shall not affect the 
    eligibility of a school that has 50 or less loans in repayment, for 
    purposes of the HEAL default rate calculation described in Sec. 60.2.
    * * * * *
    [FR Doc. 94-28321 Filed 11-15-94; 8:45 am]
    BILLING CODE 4160-15-M
    
    
    

Document Information

Published:
11/16/1994
Department:
Public Health Service
Entry Type:
Uncategorized Document
Action:
Notice of proposed rulemaking.
Document Number:
94-28321
Dates:
Comments on this proposed rule are invited. To be considered, comments must be received by December 16, 1994.
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: November 16, 1994
RINs:
0905-AS87
CFR: (11)
42 CFR 60.2
42 CFR 60.8
42 CFR 60.10
42 CFR 60.13
42 CFR 60.14
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