[Federal Register Volume 59, Number 33 (Thursday, February 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3422]
[[Page Unknown]]
[Federal Register: February 17, 1994]
_______________________________________________________________________
Part II
Department of Education
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34 CFR Parts 668 and 682
Student Assistance General Provisions; Federal Family Education Loan
Programs; Proposed Rule
DEPARTMENT OF EDUCATION
34 CFR Parts 668 and 682
RIN 1840-AB80
Student Assistance General Provisions; Federal Family Education
Loan Programs
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Student Assistance General
Provisions and Federal Family Education Loan program regulations. These
amendments are needed to implement changes in the Higher Education Act
of 1965, as amended (HEA), and to improve the monitoring and
accountability of institutions and third-party servicers participating
in the student financial assistance programs authorized by Title IV of
the HEA (Title IV, HEA programs). The changes would establish
requirements governing contracts between institutions and third-party
servicers to administer any aspect of an institution's participation in
those programs. In addition, the changes would strengthen sanctions
against institutions for violations of Title IV, HEA program
requirements and establish similar sanctions for third-party servicers.
The changes also would establish standards of administrative and
financial responsibility for third-party servicers that administer any
aspect of a guaranty agency's or lender's participation in the Federal
Family Education Loan programs.
DATES: Comments must be received on or before April 4, 1994.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Mr. Greg Allen, U.S. Department of Education, 400 Maryland
Avenue SW., room 4318, 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. Greg Allen. Telephone (202) 708-
7888. 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 6 p.m., Eastern time, Monday through
Friday.
SUPPLEMENTARY INFORMATION: The Student Assistance General Provisions
(34 CFR part 668) currently apply to all institutions that participate
in the Student Financial Assistance Programs authorized by Title IV of
the HEA. For purposes of these regulations, the Title IV, HEA Student
Financial Assistance Programs include the Federal Pell Grant, Federal
Family Education Loan (FFEL), Federal Direct Student Loan, State
Student Incentive Grant (SSIG), Federal Perkins Loan, Federal Work-
Study (FWS), and Federal Supplemental Educational Opportunity Grant
(FSEOG) programs.
The FFEL program regulations (34 CFR part 682) govern the Federal
Stafford Loan Program, the Federal Supplemental Loans for Students
(Federal SLS) Program, the Federal PLUS Program, and the Federal
Consolidation Loan Program, collectively referred to as the Federal
Family Education Loan programs (formerly the Guaranteed Student Loan
(GSL) programs). With respect to 34 CFR part 682, the Federal Stafford
Loan, Federal SLS, Federal PLUS, and Federal Consolidation Loan
programs are hereinafter referred to as the Stafford, SLS, PLUS and
Consolidation Loan programs.
The Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239),
enacted December 19, 1989, amended the HEA to authorize the Secretary
to promulgate regulations governing the limitation, suspension, or
termination of the eligibility of an individual or organization to
contract with an educational institution to administer any aspect of
the institution's participation in any Title IV, HEA program. That act
further amended the HEA to authorize the Secretary to promulgate
regulations to take emergency action against or to fine such an
individual or organization.
The Higher Education Amendments of 1992 (Pub. L. 102-325), enacted
July 23, 1992, amended the HEA to expand the Secretary's authority to
regulate the activities of those individuals and organizations, now
called third-party servicers. Further, Public Law 102-325 authorizes
the Secretary to promulgate regulations that are applicable to third-
party servicers to establish minimum standards with respect to sound
management and accountability of the FFEL programs and include
standards for financial responsibility and the assessment of
liabilities for FFEL program violations. These proposed regulations
would implement those statutory provisions. In addition, these proposed
regulations would strengthen and clarify the procedures for fining an
institution or limiting, suspending, or terminating its participation
in any Title IV, HEA program, and make other minor changes.
The Secretary believes that establishing accountability guidelines
for an institution's continued participation and the participation of
an institution's third-party servicer in the Title IV, HEA programs is
an important element in the general effort for better and more
accountable schools, as called for in the National Education Goals.
Negotiated Rulemaking
Section 492 of the HEA contains procedural requirements that the
Secretary is to follow in developing proposed regulations for parts B,
G, and H of Title IV of the HEA, as amended by the Higher Education
Amendments of 1992. Section 492(a) requires the Secretary to convene
regional meetings to gain input on the content of proposed regulations.
Section 492(b) requires the Secretary, subsequent to these meetings, to
draft and submit regulations implementing parts B, G, and H to a
negotiated rulemaking process.
In accordance with the requirements of section 492, the Secretary
convened four regional meetings to discuss issues related to
implementation of parts B, G, and H. The Secretary invited
representatives of groups involved in student financial assistance
programs, such as students, legal assistance organizations that
represent students, institutions of higher education, guaranty
agencies, lenders, secondary markets, loan servicers, guaranty agency
servicers, and collection agencies. As a precursor to the regional
meetings, the Secretary held a meeting in Washington, DC, in August
1992, to invite comments from interested parties as to the key issues
that should be addressed at the regional meetings. At the four regional
meetings, the Secretary provided participants with a list of issues,
based upon those identified in the meeting in August 1992 that needed
to be addressed in these proposed regulations. Regional meetings were
held in New York, New York; San Francisco, California; Atlanta,
Georgia; and Kansas City, Missouri during September 1992. Participants
in the meetings were invited to nominate individuals to serve as
participants in negotiated rulemaking sessions. The Secretary selected
participants for the negotiations process from individuals nominated by
groups participating in the regional meetings and attempted, to the
extent possible, to have participants reflect the diversity of those
participating in the student aid community.
Negotiated rulemaking sessions were held in April, June, and August
1993 in and around the environs of Washington, DC. Taking into account
views expressed at the regional meetings, the Department of Education
prepared draft regulations on the main issues discussed. The draft
served as the basis for the negotiated rulemaking process.
Regional Meeting Comments
In connection with these regulations, one issue was identified
during the August meeting for discussion at the regional meetings: The
requirement under section 487(c)(1)(C)(i) of the HEA for an audit of a
third-party servicer's administration of an institution's, lender's, or
guaranty agency's Title IV, HEA program. During the regional meetings,
participants were asked for their recommendations on formulating the
compliance standards against which a third-party servicer would be
measured in these proposed regulations. Recommendations from the
regional meetings varied.
Participants involved in the New York meeting suggested that the
compliance standards for third-party servicers contracting with
institutions should parallel institutional compliance standards.
Participants in San Francisco recommended that compliance standards
for third-party servicers should be developed by an independent
accounting firm but that the Department of Education should specify
servicer activities that would need to be included in the annual
compliance audit report. Participants at this meeting further suggested
separate standards for different types of third-party servicers.
Participants meeting in Atlanta suggested that compliance audits of
third-party servicers be limited to the area of their specific
function; for example, with respect to loan servicers, the default rate
of Title IV, HEA program loans should be an indicator of compliance
with Title IV, HEA program requirements. Participants also recommended
that a third-party servicer, and not the institution with which the
servicer contracts, should be cited for any violation of an audit
standard by that servicer. One participant recommended that the
standards developed by the Association of Independent Certified Public
Accountants should be used in the Department of Education's audit
guide.
Participants attending the Kansas City regional meeting suggested
that in devising audit standards for third-party servicers, the
Secretary first should review the audit check list currently in use by
the Office of Inspector General of the Department of Education for
auditing third-party servicers. Participants did not consider
consultants or software providers used by an institution to be included
in the definition of third-party servicer. Participants suggested that
the Department of Education devise a process for grading and validating
software.
Regulatory Changes
The Secretary submitted a draft of the proposed regulatory language
governing third-party servicers along with the issue described above
for discussion at the negotiated rulemaking sessions. Consensus was
reached on all major issues except where noted below.
The following summarizes the major changes in this notice of
proposed rulemaking (NPRM):
Part 668--Student Assistance General Provisions
Section 668.1 Scope. Part 668 governs the administration of the
Title IV, HEA programs by an institution and provides for various
enforcement measures against institutions for any violations of program
requirements by the institution or its agents. A third-party servicer,
as an agent of an institution, must currently apply the requirements of
part 668 to administer properly the Title IV, HEA programs on behalf of
an institution. The Secretary proposes to specify that the requirements
of the Student Assistance General Provisions regulations would be
applied to a third-party servicer (as proposed to be defined in
Sec. 668.2) to the extent that the servicer administers any aspect of
an institution's participation in a Title IV, HEA program. This
proposal would enable the Secretary, for the first time, to directly
oversee the conduct of third-party servicers. The Secretary also
proposes to make clear that although the Secretary would hold a third-
party servicer responsible for compliance with applicable regulations,
an institution that contracts with the servicer always remains
responsible for the servicer's compliance. This clarification merely
restates the Department of Education's long-standing policy and
requirements with respect to institutional responsibility.
Section 668.2 General definitions. These proposed regulations
would incorporate the statutory definition of third-party servicer in
section 481(f) of the HEA. Under that definition (as amended by the
Higher Education Technical Amendments of 1993 (Pub. L. 103-208),
enacted on December 20, 1993), a third-party servicer is an
``individual, or any State, or private, profit or nonprofit
organization'' that contracts with an eligible institution to
administer any aspect of the institution's participation in a Title IV,
HEA program. The statutory definition includes additional elements
applicable to a third-party servicer's administration of the FFEL
programs. These aspects of the definition are addressed in a subsequent
discussion on 34 CFR part 682.
The Secretary also proposes to include as part of the definition of
third-party servicer examples of services which a third-party servicer
could provide to an institution that the Secretary considers to
constitute the administration of the institution's participation in a
Title IV, HEA program. The Secretary believes that examples are
necessary to alert those individuals and organizations that contract
with an eligible institution of the specific activities that would be
subject to the requirements proposed in these regulations.
The examples that the Secretary proposes to include in the
definition of third-party servicer are primarily examples that show an
obvious relationship to the administration of the Title IV, HEA
programs. The Secretary proposes these examples to specifically detail
which activities unequivocally constitute the administration of an
institution's participation in the Title IV, HEA programs. While these
examples are not all-inclusive, they do provide a baseline to judge
other activities that could be deemed an aspect of the administration
of an institution's participation in the Title IV, HEA programs.
The Secretary also proposes to include another set of examples that
the Secretary believes do not constitute the administration of an
institution's participation in the Title IV, HEA programs. For example,
the Secretary does not consider the activity of publishing ability-to-
benefit (ATB) tests to be a third-party servicer activity because
publishers of ATB tests do not contract with institutions and under the
statute would not fall within the definition of a third-party servicer.
As another example, the Secretary does not consider performing
activities as a Multiple Data Entry Processor (MDE) to be included in
the scope of third-party servicer activities. While an MDE could be
considered to administer certain aspects of an institution's
participation in the Title IV, HEA programs, an MDE is bound by other
Department of Education requirements. Therefore, the Secretary does not
believe it necessary to separately regulate MDE activities as part of
these proposed regulations.
In general, the Secretary also proposes to exclude auditing
activities from the scope of these regulations. Entities performing
audits are required to be impartial and independent entities with no
vested interest in the Title IV, HEA programs. Further, while auditors
provide services needed to comply with Title IV, HEA requirements,
their services are not directly connected to the day-to-day
administration of Title IV, HEA assistance. The Secretary, therefore,
believes that auditing activities should not be included in the scope
of these regulations.
Other proposed examples classified as being outside the scope of
these regulatory requirements simply reinforce the Secretary's belief
that certain activities performed by a third-party servicer that do not
substantially affect the delivery of Title IV, HEA program aid do not
constitute the administration of an institution's participation in the
Title IV, HEA programs, (for example, contracting to warehouse
records).
As a result of deliberations during the negotiated rulemaking
sessions, Federal and non-Federal negotiators concluded that it was not
necessary to include or exclude computer services or software providers
from the proposed definition of third-party servicer or the examples
provided. The negotiators concluded that computer software and computer
services are simply technological means to assist in carrying out
specific administrative functions. Accordingly, the Secretary invites
public comment on whether an individual, State, or organization
providing computer software and services represented to satisfy Title
IV, HEA program requirements should specifically be included in what
the Secretary considers to constitute a third-party servicer's
administration of an eligible institution's participation in a Title
IV, HEA program.
These proposed regulations would also make clear that an
individual, State, or organization that engages in an excluded function
is still considered to be a third-party servicer with respect to any
other function that constitutes the administration of a Title IV, HEA
program performed under a contract with an institution.
The Secretary further proposes to remove the terms designated
department official, initiating official, and show-cause official from
subpart G of this part and place them in Sec. 668.2, because this
section contains the general definitions applicable to all of part 668
and to all of the Title IV, HEA programs.
Section 668.11 Scope. The Secretary proposes that a third-party
servicer's violation of an applicable provision of Subpart B of the
Student Assistance General Provisions regulations may subject the
servicer to a proceeding under subpart G. This change implements the
statutory authority under section 487(c)(1) of the HEA to provide for
the accountability of a third-party servicer's administration of any
aspect of an institution's participation in the Title IV, HEA programs.
Subpart G governs emergency actions or fines against an institution and
the limitation, suspension, or termination of the institution's
participation in a Title IV, HEA program. The Secretary proposes to add
references to a third-party servicer in subpart G so as to provide for
emergency actions and fines against a third-party servicer or the
limitation, suspension, or termination of the servicer's eligibility to
contract with an institution to administer any aspect of the
institution's participation in a Title IV, HEA program (see the
discussion beginning with Sec. 668.81).
The Secretary also proposes to provide that if a third-party
servicer violates an applicable provision of this subpart, the
Secretary may also initiate an emergency action, a fine proceeding, or
a limitation, suspension, or termination action against any institution
under whose contract the servicer violated that provision. Because an
institution has agreed to comply with all applicable Title IV, HEA
requirements in its agreement with the Secretary, and because the
institution must demonstrate under Sec. 668.12 the capability to
administer the Title IV, HEA programs, the Secretary emphasizes that
the institution is always responsible for the actions of any of its
employees, officers, or agents.
Section 668.12 Institutional participation agreement. The
Secretary proposes to require an institution to agree, in its
participation agreement, to be liable for all misused Title IV, HEA
program funds, including those received on the institution's behalf by
a third-party servicer, and to be liable for refunds, including those
that a third-party servicer was required to pay on the institution's
behalf. This provision emphasizes that an institution is always liable
for the actions of its employees, officers, and agents regarding its
participation in a Title IV, HEA program.
The Secretary also proposes to amend this section by adding new
paragraph (b)(2)(vi) to reflect a new statutory directive under the HEA
governing the past performance of individuals, agencies, or
organizations affiliated with an institution. Under section 487(a)(16)
of the HEA, an institution may not knowingly contract with or employ
any individual, agency, or organization that has been or whose officers
or employees have been convicted of, or pled nolo contendere or guilty
to, a crime involving the acquisition, use, or expenditure of Title IV,
HEA program funds or been judicially determined to have committed fraud
involving Title IV, HEA program funds. An institution may not contract
with another institution or a third-party servicer that has been
terminated under section 432 of the HEA involving the acquisition, use,
or expenditure of funds under the Title IV, HEA programs, or that has
been judicially determined to have committed fraud involving Title IV,
HEA program funds.
The Secretary's proposed rules, in accordance with the consensus
reached at the negotiated rulemaking sessions, would apply the
prohibitions not only to instances of judicial determinations of
criminal or fraudulent activity, but also to administrative
determination of fraud and judicial or administrative determinations of
any other material violations of law. Administrative proceedings are
more frequent and often occur well in advance of related court
proceedings. The Secretary believes that administrative proceedings
afford sufficient due process, including notice, hearing, and review,
to be relied upon for excluding individuals, agencies, or organizations
under these provisions from applicable employment or contracting, if
such a determination of culpability has been made. The Secretary
believes that the reference to material violations of law is necessary,
as Title IV, HEA funds are also endangered by the employment of those
determined to have violated laws governing the handling of those funds,
even if those violations do not rise to the level of fraud. For
example, an institution should not employ a person or organization that
has failed to pay refunds required under law.
Finally, these proposed regulations would include determinations of
misuse of all Federal (as opposed to simply Title IV, HEA programs)
funds and State or local government funds. For example, a person
determined to have committed fraud in the acquisition of State
educational grant funds could foreshadow a potential danger to the
Title IV, HEA programs if that person were employed by an institution.
These additional requirements are needed to establish appropriate
safeguards to protect the Title IV, HEA programs if serious questions
are raised about the honesty and lawful conduct of an individual,
agency, or organization that contracts with or is employed by an
institution.
Section 668.13 Factors of financial responsibility. Section 498(e)
of the HEA introduces the concept of ``substantial control'' over an
institution essentially by adopting the current regulatory concept of
``the ability to affect substantially the actions of'' an institution.
Accordingly, the Secretary substitutes the new phrase where applicable
in these proposed regulations. Further, the Secretary proposes to
establish that an institution is not considered financially
responsible--a condition of participation in the Title IV, HEA
programs--if a person with substantial control over the institution--
(1) Has or had substantial control, either alone or in combination
with members of his or her family, over another institution or a third-
party servicer that owes liabilities for violations of Title IV, HEA
program requirements, if those liabilities are not being properly
repaid;
(2) Has family members who, alone or in combination with one
another, exercise or exercised substantial control over the other
institution or servicer; or
(3) Owes liabilities, or members of his or her family owe
liabilities, for violations committed by the other institution or
servicer, and the liabilities are not being properly repaid.
The institution could continue to be considered financially
responsible if--
(1) The person repays a proportion of the liabilities equivalent to
the amount of control held over the other institution or servicer;
(2) The institution can establish that the person does not, in
fact, have substantial control over the institution; or
(3) The institution can establish that neither the person nor any
of his or her family members in fact has or had substantial control
over the other institution or servicer.
The definition of a family member (as currently defined in
Sec. 668.13(j)) refers to a parent, sibling, spouse, or child; spouse's
parent or sibling; or sibling's or child's spouse.
Finally, the Secretary would apply the concepts of ``substantial
control'' and ``ownership interest'' (as currently defined in section
498(e) of the HEA and Sec. 668.13) to third-party servicers.
These provisions would expand the factors of financial
responsibility of an institution to take into consideration substantial
control over both other existing institutions (as opposed to only
defunct institutions) and third-party servicers. Section 498(e) of the
HEA clearly contemplates this expansion. Furthermore, these
requirements are needed for the same reasons that similar requirements
recently were adopted for persons with substantial control over defunct
institutions. A person might be responsible for incurring liabilities
for Title IV, HEA program violations because of his or her substantial
control over third-party servicers or other institutions. The person
could, nevertheless, have the same level of control over a
participating institution while avoiding responsibility for repayment
of those liabilities. These requirements are intended to prevent those
persons from continuing to participate either directly or indirectly in
the Title IV, HEA programs without assuming responsibility for their
prior actions.
The Secretary also proposes technical changes to this section to
remove as factors of financial responsibility the consideration of
matters that would instead be included in Sec. 668.12 as conditions for
participation in the Title IV, HEA programs, for the reasons given in
the discussion of that section.
Section 668.23 Audits, records, and examination. The Secretary
proposes to specify that in addition to current requirements, an
institution would be required to cooperate with a guaranty agency in
whose program the institution participates and the State postsecondary
review entity designated under subpart 1 of part H of Title IV of the
HEA, in the conduct of audits, investigations, and program reviews.
These requirements would clarify existing responsibilities to be
accountable to authorized persons or organizations for the
institution's activities with respect to the sound management of the
Title IV, HEA programs. The Secretary further proposes to apply these
requirements to a third-party servicer that contracts with an
institution to administer any aspect of that institution's
participation in a Title IV, HEA program. This change would merely
clarify existing responsibilities of a third-party servicer, as an
agent of an institution, to be accountable and provide access to
authorized persons for the servicer's activities on behalf of the
institution's participation in a Title IV, HEA program.
The Secretary proposes to add a requirement that a third-party
servicer that administers funds or determines student eligibility under
contract with an institution would be required to have prepared, at
least annually, a compliance audit of all aspects of the servicer's
administration of the participation in the Title IV, HEA programs of
each institution with which the servicer contracts. (This requirement
would be satisfied by an audit report submitted in accordance with the
Single Audit Act or Office of Management and Budget Circular A-133.)
This requirement is necessitated by section 487(c)(1)(C) of the HEA.
The Secretary, however, believes that the contractual obligations
of some third-party servicers do not necessitate audits of the
servicers' activities. Accordingly, the Secretary proposes to require
annual audits to be performed only by those servicers that administer
funds or determine student eligibility on behalf of institutions. The
consequences of the activities of those servicers to the integrity of
the Title IV, HEA programs justify stricter accountability to the
Secretary.
In addition, the Secretary proposes certain additional exceptions
to the annual audit requirement in the discussion that follows. A
third-party servicer that is required to have an audit performed would
be excused from the annual audit requirement if that servicer contracts
with only one participating institution and if that servicer's
administration of a Title IV, HEA program would still be covered fully
in that institution's compliance audit. (In proposed regulations to be
published shortly after these, the Secretary intends to propose to
excuse certain institutions from having an annual audit performed. If
an institution were to be excused from an audit requirement, the
activities of that institution's third-party servicer would not be
fully covered, and thus the servicer would be required to have an audit
performed to meet the requirements of this section). This provision
would not harm the integrity of the Title IV, HEA programs as the
servicer's activities still would be covered fully by the submission of
an institution's compliance audit.
A third-party servicer that is required to have an audit performed
and that contracts with more than one participating institution could
have performed, to meet the requirements of this section, a single
comprehensive compliance audit that covers all of the servicer's
activities for all of the institutions that the servicer contracts with
for Title IV, HEA program purposes, if the audit is conducted in such a
way as to satisfy each individual audit requirement and if the audit
covers all aspects of the servicer's administration of the
participation in the Title IV, HEA programs of all institutions with
which the servicer contracts. The Secretary believes that, by allowing
third-party servicers to have one inclusive audit performed, instead of
many individual audits, the burden associated with these regulations
would be reduced (regulatory burden reduction is an objective under
Executive Order (E.O.) 12866). Furthermore, the Secretary does not
believe that this provision would in any way affect the soundness of
the information required by these regulations.
A third-party servicer would be required to have an audit performed
at least once every two years if the servicer administers less than
$1,000,000 under the Title IV, HEA programs for the period covered by
the audit, or if the servicer's most recently submitted audit report
did not contain any material deficiencies and was submitted in a timely
fashion. Also, a third-party servicer would not be required to have an
audit performed for any year in which the servicer administers less
than $250,000 under the Title IV, HEA programs.
The Secretary is proposing these Title IV, HEA program fund
thresholds, for purposes of exceptions to the audit requirements of
this section, on the assumption that a large amount of Title IV, HEA
program funds are not at risk in the case of a third-party servicer
that administers less than $250,000 during the audit period. Similarly,
the Secretary believes that a third-party servicer administering less
than $1,000,000 in the Title IV, HEA programs during the audit period
or whose most recently submitted audit report revealed no abnormal
practices or material discrepancies in the servicer's administration of
those funds, provided that the audit report was submitted in a timely
fashion, would not be likely to endanger those funds. By proposing
these exceptions to the audit requirements of this section, and thus
limiting the scope of these provisions, the Secretary believes that the
Department of Education will be able to concentrate on those third-
party servicers that pose the greatest financial risk to the Title IV,
HEA programs; these exceptions also reduce the administrative burden on
those qualifying for the exemptions. The threshold amounts were
extrapolated from similar exemptions to audit submission requirements
for institutions under the Single Audit Act ($100,000 and $25,000) and
increased by a factor of ten in order to cover third-party servicer
activities because these entities generally contract with multiple
clients and thus would administer greater amounts of Title IV, HEA
program funds than any single institution.
These provisions are intended to parallel similar audit
requirements for institutions (in proposed regulations to be published
shortly after these). The intent is to minimize the burden associated
with these regulations, both to the servicing industry and to the
Federal Government, as called for under E.O. 12866. The Secretary
believes that these exceptions would not harm the integrity of the
audit oversight that Congress intended under section 487(c)(1)) of the
HEA. Under that section and these regulations, the Secretary retains
the authority to require any third-party servicer to have an audit
performed on an annual basis if the Secretary believes it is necessary.
This section would be amended to provide that the servicer's first
audit would cover the servicer's first full fiscal year after the
effective date of these regulations and any period on or after the
effective date of these regulations up to the beginning of the
servicer's first full fiscal year. The Secretary believes that initial
audits will be more useful and effective if they encompass an entire
fiscal year. The Secretary also believes that allowing servicers
additional time to prepare for the implementation of these regulations
would enable servicers to comply more fully with these regulations as
well as defray the costs associated with an audit of a partial fiscal
year. Subsequent audits would, as required by statute, encompass the
entire period since the servicer's previous audit.
A third-party servicer that is required to have an audit performed
would be required to submit that audit to the Department of Education's
Inspector General by the deadlines established in the audit guide
developed by the Department's Office of Inspector General. The
Secretary also proposes to apply the statutory requirements of section
487(c) of the HEA to third-party servicers such that the results of
these audits would be made available to the appropriate authorities, as
detailed in the discussion at the beginning of this section. (The
Secretary intends to propose similar requirements for institutions
required to have an audit performed in proposed regulations to be
published shortly after these).
Section 668.24 Audit exceptions and repayments. The Secretary
proposes to extend to a third-party servicer the provisions governing
audit exceptions and determinations of audit liabilities that currently
apply to institutions. These modifications would simply reflect the
Secretary's current practice under this section as applied to a third-
party servicer. In addition, an institution or a third-party servicer
would have an opportunity to demonstrate within 45 days (35 days is
mandated under the current regulations) of the Secretary's notification
that the expenditure or compliance was proper. The Secretary is
proposing 45 days to make the response period consistent with other
reporting requirements in this part.
In addition, this section would be amended to specify additional
steps that the Secretary may take to insure the payment of any
liabilities that are owed. Under this section, if an institution or
third-party servicer owes funds, the Secretary may determine that an
administrative offset (as provided for under 34 CFR 30.28) is an
appropriate alternative to collect those funds.
In the case of an institution or third-party servicer that provides
surety or a guarantee for the benefit of the Secretary, such as a bond
or letter of credit, the Secretary may determine it is necessary to
collect from that surety or guarantee before the procedures under
subpart H of this part are completed, if circumstances warrant.
The Secretary would collect a surety or guarantee before all
available appeal procedures are completed--
(1) Where the need to provide relief to students or borrowers
affected by the institution's or third-party servicer's actions, as
applicable, that led to the assessment of liability, is more important
than deferring collection activities until after the completion of
appeal proceedings (for example, when unpaid refunds to the Title IV,
HEA programs are identified, the Secretary may collect in advance of a
final determination or exhaustion of appeal procedures, as the harm to
students outweighs deferring collection); or
(2) Where the conditions under which a surety or guarantee are held
do not provide adequate assurances that the surety or guarantee will be
available for collection through the completion of available appeal
proceedings.
These modifications would provide clarification in the regulations
of the Secretary's existing practice and authority to collect from
sureties or guarantees in accordance with their terms, prior to final
determinations of liabilities or exhaustion of appeal procedures.
The Secretary also proposes to make clear that an institution is
responsible for repayment of any funds owed by its servicer until those
funds are repaid by the servicer. The Secretary considers this
provision necessary because an institution is always responsible for
the actions of its agents.
The Secretary proposes that if a determination is made to assess a
liability against a third-party servicer, the servicer would be
required to notify each institution under whose contract the servicer
was assessed a liability of the Secretary's determination. The servicer
would also be required to notify every institution that contracts with
the servicer for the same service that the Secretary determined a
liability is owed.
Final consensus on this particular language was not reached as
negotiators believed that this provision essentially requires the
notification of all institutions with which a servicer contracts.
Negotiators objected to a notice being provided to institutions that a
servicer contracts with that would not be directly affected by a
determination from the Secretary to assess liability. A number of
negotiators opposed this language on the ground that such a blanket
notification unnecessarily damages a servicer's reputation among
unaffected institutions. However, the Secretary believes that an
institution that contracts with a third-party servicer should be
informed of determinations by the Department of Education that the
institution's servicer is improperly administering the Title IV, HEA
programs, especially given the potential liability exposure to the
institution. These notification requirements would arise only if the
Secretary determines that a third-party servicer owes a liability based
on an audit finding, after providing the institution or third-party
servicer an opportunity to respond to an audit report response. By
limiting the requirement for notice provided by a third-party servicer
to institutions receiving the same service for which a liability was
assessed, the Secretary believes that he has responded to any
legitimate concerns raised by the negotiators.
Section 668.25 Contracts between an institution and a third-party
servicer. The Secretary proposes to redesignate Sec. 668.25, governing
loss of institutional eligibility, as Sec. 668.26 and to add a new
Sec. 668.25 that would establish minimum requirements for contracts
between an institution and a third-party servicer. Proposed Sec. 668.25
would allow an institution to contract with a servicer to administer
aspects of the institution's participation in a Title IV, HEA program
only to the extent that the servicer's eligibility to contract with
that institution has not been limited, suspended, or terminated under
the proceedings in Subpart G (as proposed to be amended). In addition,
under these proposed regulations, a third-party servicer is considered
eligible to contract with an institution to administer aspects of the
institution's participation in a Title IV, HEA program to the extent
that the servicer is not found to exhibit indicators of questionable
past performance.
Indicators of questionable past performance would be--
(1) A limitation, suspension, or termination action by the
Secretary against the servicer within the preceding five years;
(2) An audit finding during the servicer's two most recent audits
amounting to at least five percent of funds received or administered by
the servicer under the Title IV, HEA programs; and
(3) A citation within the preceding five years for the servicer's
failure to submit a required audit report within an acceptable amount
of time.
A third-party servicer that shows these indicators of questionable
past performance with regard to the Title IV, HEA programs could not,
under paragraph (d) of this section, contract with an institution
unless the persons or entities with substantial control over the
servicer agree to be responsible for any potential liability arising
from the servicer's administration of the Title IV, HEA programs. In
the case of a third-party servicer that has been subjected to a
termination action, the servicer could not contract with an institution
unless either the servicer or persons or entities with substantial
control over the servicer (or both) provide financial guarantees
(specified by the Secretary) to the Secretary for potential liabilities
arising from the administration of the Title IV, HEA programs. These
provisions are necessary to hold persons who have substantial control
over a third-party servicer accountable for their past performance in
the administration of the Title IV, HEA programs.
Any contract between an institution and a third-party servicer
would have to require the servicer to agree to comply with all
applicable Title IV, HEA program requirements, including using any
Title IV, HEA program funds that the servicer administers and any
earnings on those funds solely for Title IV, HEA program purposes. The
servicer would have to agree to refer suspected instances of fraud and
criminal activity to the Department of Education's Inspector General.
These requirements would parallel those currently required of
institutions in establishing an institution's administrative capability
but add that the servicer would also have to refer suspected instances
of fraud and criminal activity committed by the institution. The
contract would have to require the servicer to agree to be liable to
the Secretary, jointly and severally with the institution, for any
violation by the servicer of any Title IV, HEA program requirement.
With regard to third-party servicer liability, a number of
negotiators opposed the Secretary's proposed language, submitted to
negotiators at negotiated rulemaking, requiring a third-party servicer
to share liability with an institution for an infraction by the
servicer of any Title IV, HEA program requirement. The negotiators
offered three basic reasons for their opposition.
First, the negotiators stated that any imposition of liability
would improperly interfere with the private contract between the
servicer and the institution. The parties, in the view of the
negotiators, should be free to decide how and if liability should be
divided without Federal regulatory prescription.
The Secretary disagrees with this rationale. To ensure that the
Title IV, HEA programs are properly administered and Federal funds are
safeguarded, the Secretary has always required an institution to
demonstrate that it is administratively capable and financially
responsible. More and more institutions, however, are employing third-
party servicers to administer their programs, thereby delegating
responsibility to entities that the Secretary has not reviewed for
administrative capability or financial responsibility. Because the
Secretary does not directly approve or regulate the qualifications of
these servicers, the Secretary believes that it is reasonable to
require these servicers to stand behind their work and to be
accountable to Federal taxpayers for any losses to Federal funds
through the servicer's administration of the Title IV, HEA programs.
Moreover, if the issue of liability is left to the discretion of the
contracting parties, it is more than likely that some servicers will
assume no responsibility for their actions. In proposing direct third-
party servicer accountability to the Department of Education, the
Secretary believes that institutions employing servicers to administer
aspects of their participation in the Title IV, HEA programs would
benefit from increased servicer integrity in fulfilling contractual
obligations.
Second, the negotiators argued that it would be unreasonable to
require a third-party servicer to be prepared to assume liability
potentially far in excess of the fees earned by the servicer from the
institution. Under this argument, the consequence of requiring third-
party servicers to be liable for their actions would be to increase
servicing fees charged to institutions and could make it economically
impossible, in many cases, for institutions to contract with third
parties for services related to the Title IV, HEA programs. The
negotiators indicated that in some contracts, institutions specifically
give up the right to hold a third-party servicer responsible for the
consequences of the servicer's actions in exchange for a lower fee.
The Secretary does not believe that assumption of liability by
servicers will make servicers unavailable to institutions. The
Secretary believes that most servicers are, or should be, confident
enough in the quality of their work to stand behind it financially. To
the extent that a third-party servicer is unwilling to assume
responsibility, it would seem to indicate that the servicer has no
incentive to ensure compliance with the Title IV, HEA program
requirements.
Third, the negotiators who objected to these proposed provisions
claimed that the Department of Education does not impose similar
constraints on its own contractors to assume contingent liability for
the consequences of their actions.
The Secretary disagrees with this rationale. Those that contract
with the Department of Education have different and more rigorous
requirements imposed on them, both in their selection by the Department
and in contracts into which the Department enters to ensure the proper
use of Federal funds. The Secretary is able to select the Department of
Education's contractors and retains the ability directly to enforce
contractual provisions.
In an effort to respond to these objections during the negotiated
rulemaking sessions, the Secretary suggested a compromise that would
have limited joint and several liability of a third-party servicer for
violations by the servicer of Title IV, HEA program requirements, in
cases where the servicer was not an affiliate of the institution with
which the servicer contracts. In those cases, joint and several
liability would be capped at the fees and compensation received by the
servicer from the institution during the period for which the liability
is assessed. The Secretary suggested that, for the purposes of this
section, an affiliate could be construed as a third-party servicer
that--
(1) Is a parent or subsidiary corporation of the institution;
(2) Shares a person who exercises substantial control over the
institution and servicer as defined in Sec. 668.13; or
(3) Shares a common owner, partner, or officer with the
institution.
The Secretary suggested this alternate language to decrease the
financial risk for servicers that are not related parties to the
institutions with which they contract. However, the Secretary believes
that servicers that are linked to institutions should be fully
accountable to prevent shielding of liability by shifting services to
an affiliate. The Secretary invited reaction from the non-Federal
negotiators on whether this compromise would sufficiently guard the
integrity of the Title IV, HEA programs by providing the Secretary the
means to ensure that a liability is repaid and the violation
contributing to that liability is redressed and alleviate any
legitimate objections raised by the negotiators.
The other negotiators did not accept the Secretary's offered
compromise. Some negotiators would not agree to assumption of any
liability by a third-party servicer. Thus, there was no consensus on
this matter. Because consensus was not reached on either proposal, the
Secretary is under no obligation to modify the position originally
taken at the start of the negotiated rulemaking sessions. The Secretary
therefore proposes regulations consistent with the position taken at
the start of negotiated rulemaking because the Secretary believes that
this proposal will best provide the greatest protection for Federal tax
dollars in the form of Title IV, HEA program funds.
However, because the issue of joint and several liability was
debated throughout the negotiated rulemaking sessions without resulting
in consensus, the Secretary invites specific comment on this issue, and
in particular on the Secretary's compromise rejected by the non-Federal
negotiators, as explained previously.
Other contractual requirements would include, in the case of a
third-party servicer disbursing or delivering funds under the Title IV,
HEA programs or other funds to students, a requirement that the
servicer confirm a student's eligibility before disbursing or
delivering those funds to the student. A contract with that servicer
also would require the servicer to agree to calculate and pay refunds
and repayments in accordance with applicable Title IV, HEA program
regulations.
Any contract with a third-party servicer would have to provide for
the return to the institution of all applicable records and funds held
by the servicer if either party terminates the contract, if the
servicer stops providing services for the administration of a Title IV,
HEA program, or if the servicer goes out of business or files a
petition under the Bankruptcy Code. The servicer would have to return
not only Title IV, HEA program funds, but also institutional or other
funds held by the servicer for the purposes of the Title IV, HEA
program for which the servicer no longer provides services.
Consistent with the time frames for other reporting requirements in
34 CFR part 600 that could affect an institution's eligibility or
participation, this section also would require an institution to notify
the Secretary, within 10 days, each time the institution enters into a
new contract with a third-party servicer or significantly modifies an
existing contract or if such a contract is terminated. The Secretary
intends this provision to cover substantive modifications to existing
contracts, such as the inclusion of additional responsibilities or any
significant increase in the volume of work performed, and not to cover
minor modifications such as a routine adjustment of the compensation
owed to a third-party servicer due to inflation. This section also
would require the institution to notify the Secretary, within 10 days,
if a third-party servicer stops providing services for the
administration of a Title IV, HEA program, goes out of business, or
files a petition under the Bankruptcy Code. Any notification from an
institution would have to include the name and address of the servicer.
Upon the request of the Secretary, an institution that has a contract
with a third-party servicer would have to provide information relevant
to the contract and to the servicer's responsibilities for
administering Title IV, HEA programs as well as a copy of the contract.
These changes are necessary for proper monitoring of and
accountability for Title IV, HEA program funds. The requirement for a
third-party servicer to agree in a contract to observe all applicable
Title IV, HEA program requirements, special arrangements, agreements,
and limitations is necessary to avoid situations where the servicer
improperly argues that it cannot comply with these actions due to
provisions in its contract with an institution.
The provisions governing the circumstances under which a third-
party servicer must return records and funds to an institution are
necessary to protect the interests of participating institutions and
students in the event that a third-party servicer is no longer able to
provide the services promised under a contract. In addition, the
notification provisions would help keep the Secretary informed about
those third-party servicers authorized to administer the Title IV, HEA
programs on behalf of an institution, would assist the Secretary in
providing appropriate materials and funds only to authorized third-
party servicers, and would help the Secretary to obtain timely access
to institutional records.
Section 668.81 Scope and special definitions. The Secretary
proposes to amend this section to provide that the Secretary may
initiate an emergency action against an institution or third-party
servicer, fine an institution or servicer or limit, suspend, or
terminate the institution's participation in a Title IV, HEA program or
the servicer's eligibility to contract with an institution to
administer any aspect of an institution's participation in the Title
IV, HEA programs, if the institution's servicer, acting under contract
with the institution, violates any statutory provision of or applicable
to Title IV of the HEA, any regulatory provision prescribed under that
statutory authority, or any applicable special arrangement, agreement,
or limitation prescribed under the authority of Title IV of the HEA.
This change also makes clear that an institution is always responsible
for the actions of its servicers regarding its participation in the
Title IV, HEA programs and remains subject to possible administrative
action.
Section 668.82 Standard of conduct. The Secretary proposes to
amend paragraph (a) of this section to add that a third-party servicer
is also a fiduciary of the Department of Education. The Secretary also
would amend paragraph (a) to provide that an institution or its third-
party servicers would be required at all times to act with the
competency and integrity sufficient to qualify the institution or
servicer as a fiduciary. This change would clarify and emphasize the
requirement that the fiduciary standard always applies and is not to be
construed narrowly. The Secretary wishes to point out that this
standard is not simply an additional requirement but, rather, it is a
condition of initial and continued participation in or servicing of the
Title IV, HEA programs. An institution or servicer cannot selectively
avoid fiduciary responsibility.
This section would also be amended to specify that the Secretary
would have the authority to initiate proceedings against a third-party
servicer under this subpart if the servicer violates its fiduciary
duty. The Secretary proposes to specify that the Secretary would have
the authority to initiate a proceeding against an institution under
this subpart if the institution's third-party servicer, acting under
contract with the institution, violates the servicer's fiduciary duty.
The Secretary wishes to emphasize that an institution is always
responsible for the actions of its third-party servicers. The Secretary
also proposes to make a technical amendment to clarify the meaning of
paragraph (c) of this section. The Secretary's long-standing
interpretation of these regulations is that a violation of an
institution's fiduciary duty is grounds for termination, limitation,
suspension, and fine proceedings-- individually or in combination. As a
result of the enactment of a statute authorizing the imposition of
emergency actions, the Secretary also proposes to add emergency action
to this list of potential consequences resulting from an institution's
violation of the institution's fiduciary duty. An emergency action also
would be applicable against a third-party servicer that violates its
fiduciary duty.
The Secretary proposes to specify that an institution or third-
party servicer violates its fiduciary duty if the servicer, an officer
or employee of the servicer, or any person with substantial control
over the servicer is guilty of or has been judicially determined to
have committed a crime involving Federal funds. These provisions also
would apply to a person, agency, or organization, or an officer or
employee of an agency or organization with which the servicer
contracts. A violation of fiduciary duty for these reasons would also
constitute grounds for the termination of the participation of an
institution under whose contract the servicer committed the violation.
The Secretary proposes to expand the breadth of paragraph (d) of this
section to parallel similar provisions proposed to be included in
Sec. 668.12, previously discussed, except that, in this case, these
provisions would prohibit a third-party servicer (as opposed to the
provisions of Sec. 668.12 which prohibit institutions) from employing
or contracting with persons or organizations that have questionable
past performance with respect to government funds. Paragraph (d) would
be similarly amended to include misuse of State and local government
funds and administrative determinations of fraud or other material
violations of law.
Finally, the Secretary proposes to amend paragraph (d) of this
section. An institution or servicer, to remain qualified as a
fiduciary, would have to meet the following requirement. If the
institution or servicer becomes aware of a criminal conviction, or an
administrative or judicial determination of fraud or other violation of
law, by a person involved in the servicer's administration of an
institution's participation in a Title IV, HEA program or a person with
substantial control over the servicer, with respect to Federal, State,
or local government funds, the institution or servicer would be
required to protect the Title IV, HEA programs, including removing that
person from Title IV, HEA program involvement or from exercising
substantial control over the institution or servicer, as applicable.
In addition, if an institution or a third-party servicer becomes
aware that a violation of, or failure to carry out, applicable statutes
and regulations by the servicer's principals or affiliates (as those
terms are defined in 34 CFR part 85), the institution or servicer is
required to act to protect the Title IV, HEA programs, the
beneficiaries of those programs, and the Federal Government from the
risks occasioned by those events. These risks may include, but are not
limited to, financial risks and risk to the reputation of the Title IV,
HEA programs. An example of an action that an institution or servicer
must take to protect the Title IV, HEA programs, their beneficiaries,
and the Federal Government is the removal of all Title IV, HEA program
administration duties from the assigned responsibilities of an
individual. A violation of these proposed provisions would constitute
grounds for the termination of the participation of an institution
under whose contract the servicer committed the violation and the
eligibility of the servicer to administer any aspect of an
institution's administration of the Title IV, HEA programs. These
amendments parallel similar changes made to the institutional
participation agreement requirements under Sec. 668.12.
The Secretary also proposes to amend this section to explain how a
basis for debarment and suspension relates to the standard of fiduciary
responsibility. Specifically, the Secretary proposes to redesignate
current paragraph (e) of this section as paragraph (f) and to add a new
paragraph (e). The new paragraph would specify that if an institution
or servicer becomes aware that cause for suspension or debarment of any
of the institution's or servicer's principals or affiliates (as those
terms are defined in 34 CFR part 85) may exist, the institution or
servicer is required to act to protect the Title IV, HEA programs in
the same manner discussed in the previous paragraph, pending the
outcome of a debarment or suspension action against that individual, or
of proceedings that could give rise to suspension or debarment action
against that individual.
A violation of these provisions by a third-party servicer would
constitute grounds for the termination of the participation of an
institution under whose contract the servicer committed the violation,
if the institution knew or should have known of the causes for
suspension or debarment. The violation, of course, would also
constitute grounds for the termination of the eligibility of the
servicer to administer any aspect of the institution's administration
of the Title IV, HEA programs.
The Secretary invites comment on how to apply this requirement to
owners and persons holding critical management positions at an
institution or servicer. In the final regulations, the Secretary may
modify these proposed regulations to address specifically their
application to those persons.
These changes are needed to establish appropriate safeguards to
protect the Title IV, HEA programs when serious questions are raised
about the honesty and lawfulness of the conduct of an institution's or
servicer's owners, officers, employees, associates, or contracted help
whose duties involve the administration of or influence over the Title
IV, HEA programs.
The Secretary holds an institution to the highest standard of care
and diligence required of a fiduciary. The use of a third-party
servicer confers that same standard on the servicer. However, the
Secretary wishes to emphasize that the use of a third-party servicer
does not in any way reduce the institution's responsibility to ensure
compliance with Title IV, HEA program requirements.
The Secretary also proposes technical changes to this section to
remove provisions governing lender participation in the FFEL programs
that belong in 34 CFR part 682 and to incorporate provisions in 34 CFR
part 682 concerning the consequences of a debarment or suspension on
lender participation.
Section 668.83 Emergency action. The Secretary proposes to provide
that an emergency action may be imposed on an institution or third-
party servicer if the initiating official receives reliable information
that a third-party servicer, acting under contract with the
institution, is violating a Title IV, HEA program requirement. In an
emergency action proceeding against a servicer, the official would also
be required to notify each institution that contracts with the servicer
of the emergency action. The Secretary believes that an institution
that contracts with a third-party servicer should be kept informed of
any administrative actions taken by the Department of Education against
that servicer that might affect the administration of the institution's
participation in the Title IV, HEA programs. To the examples of
violations that may lead to an emergency action, the Secretary proposes
to add a third-party servicer's lack of administrative ability to make
appropriate refunds if students do not complete educational programs or
periods of enrollment.
Any of these violations would be grounds for emergency action
against a third-party servicer under this subpart. However, because an
institution is always responsible for the actions of the institution's
servicers, the Secretary believes that emergency action against the
institution also may be necessary to prevent the likely loss of Title
IV, HEA program funds.
The Secretary also proposes to include fraud committed by an
institution or a third-party servicer as a specific example of a
possible basis for emergency action. The Secretary proposes to provide
an additional list of specific examples of fraud to emphasize the
seriousness of these violations. Emergency actions based upon fraud are
fully appropriate under existing regulations. The examples involve
falsification of documents related to the Title IV, HEA programs,
including--
(1) Documents pertaining to a student's eligibility;
(2) Documents submitted to the Department of Education, a guaranty
agency, an independent auditor, a third-party servicer, or an
institution by a third-party servicer;
(3) Documents pertaining to an institution's legal authorization to
provide postsecondary education or to the accreditation or
preaccreditation of the institution, the institution's educational
programs, or the institution's additional campuses; and
(4) Documents pertaining to a servicer's loan collection activities
(for example, due diligence activities), including activities that are
not specifically required by the HEA or applicable program regulations.
Sections 668.84 Fine proceedings, 668.85 Suspension proceedings,
and 668.86 Limitation or termination proceedings. The Secretary
proposes to include, as a specific basis for any of these proceedings
against an institution or a third-party servicer, a substantial
misrepresentation of the institution's educational program, financial
charges, or employability of the institution's graduates by an
institution or servicer under contract with an institution, as
applicable. The Secretary believes that substantial misrepresentation
represents a clear indication of a deliberate intent to misuse Title
IV, HEA program funds by deceptively encouraging enrollment, thus
abusing the purpose of Title IV, HEA program funds, which is to provide
equal access to a quality education for recipients of these funds. The
Secretary is proposing to employ the full range of sanctions at the
Secretary's disposal against this possible misrepresentation to
preserve the integrity of the Title IV, HEA programs and to ensure the
accountability of those who administer the programs.
The Secretary proposes to amend these sections to provide for the
imposition of a fine against an institution or third-party servicer or
the limitation, suspension, or termination of the institution's
participation or the servicer's eligibility to contract with an
institution to administer any aspect of that institution's
participation in the Title IV, HEA programs if the institution's
servicer, acting under contract with the institution, violates a Title
IV, HEA program requirement. Under Secs. 668.84, 668.85 and 668.86, if
the Secretary begins a fine, suspension, limitation, or termination
proceeding against a third-party servicer, the Secretary may also begin
a fine, limitation, suspension, or termination proceeding against any
institution under whose contract a third-party commits a violation.
These technical changes are needed to conform to the changes proposed
to the scope of this subpart.
With respect to fine proceedings against third-party servicers, the
Secretary proposes to amend Sec. 668.84 to specify under the procedures
for fine proceedings that a designated department official notifies
each institution that is affected by the alleged violations identified
as the basis for the fine proceeding. To the extent possible, the
official also notifies each institution that contracts with the
servicer for the same service affected by the alleged violation. This
change would parallel the notification requirements that the Secretary
has proposed under Sec. 668.24(b). As explained in the prior discussion
regarding notification requirements under Sec. 668.24(b), there was no
consensus during negotiated rulemaking on this proposed provision. Some
negotiators opposed this requirement on the grounds previously noted.
In addition, Secs. 668.85 and 668.86 would require the official to
notify each institution that contracts with a third-party servicer
under a suspension, limitation, or termination proceeding.
Fine, limitation, suspension, and termination proceedings would all
require the official to include in the notice to a third-party servicer
the consequences of the action to the institution, including that the
Secretary may fine, limit, suspend, or terminate the institution, as
applicable. Given the potential consequences to an institution, the
Secretary deems it proper to provide notice to each institution that
could be affected of the Secretary's intent to seek a sanction against
the servicer, whether the Secretary also intends to seek a sanction
against the institution or not. Even if the Secretary does not begin a
fine, limitation, suspension, or termination proceeding against an
institution, the Secretary believes that the institution should be kept
informed of the status of any proposed sanction against the
institution's servicer. Imposition of the sanction could have an effect
on the institution's participation in a Title IV, HEA program. Further,
the Secretary believes that an institution should be informed if its
servicer's administration of a Title IV, HEA program is called into
question. That information would permit the institution to make
informed judgments about the institution's continued use of the
servicer, and take corrective action prior to the outcome of any
administrative proceeding.
Sections 668.87 Prehearing Conference and 668.88 Hearing. The
Secretary proposes to add references to third-party servicers to
conform to the proposed changes in the scope of this subpart.
Section 668.89 Authority and responsibilities of the hearing
official. The Secretary proposes to amend this section to make clear
that a hearing official is bound by all applicable statutes and
regulations. This change would codify in the regulations the existing
responsibility of the hearing official.
Section 668.90 Initial and final decisions--Appeals. This section
would be amended to add references to third-party servicers to conform
to the proposed changes in the scope of this subpart. In addition,
paragraph (a)(3) of this section would be amended to reflect changes
proposed under Secs. 668.12 and 668.82 dealing with the past
performance of individuals, agencies, or organizations that are
affiliated with an institution, including, as applicable, third-party
servicers.
The Secretary proposes to add a new restriction on a hearing
official's authority to modify a proposed sanction against an
institution or third-party servicer. If a designated department
official brings a termination action against an institution or servicer
for engaging in fraud, and a hearing official finds that the
institution or servicer has engaged in fraud, the hearing official must
uphold the termination. The examples of fraud listed in this section
are the same as those proposed for Sec. 668.83 concerning emergency
action.
The Secretary believes that if an institution or third-party
servicer engages in fraud involving a Title IV, HEA program, the
institution's participation in the program should be terminated or the
servicer's eligibility to contract with an institution to administer
any aspect of that institution's participation in the Title IV, HEA
programs, as applicable, should be terminated. The Secretary does not
believe that a lesser sanction that permits the institution or servicer
to continue to participate in the program or in the case of a third-
party servicer to be eligible to contract, is a sufficient safeguard
against the likely abuse of Title IV, HEA program funds.
The Secretary proposes to amend paragraph (c)(1) of this section so
that in a fine, limitation, or termination proceeding, the hearing
official's initial decision automatically becomes the Secretary's final
decision in 30 days (20 days is mandated under the current regulations)
after the initial decision is issued and received by both parties
unless that initial decision is questioned before the Secretary. The
Secretary is proposing these new timeframes to make them consistent
with other reporting requirements in this part. The Secretary does not
believe that a ten-day difference in an institution's or servicer's
right to appeal an initial decision would unduly affect the integrity
of the Title IV, HEA programs.
The Secretary also proposes to make technical changes in paragraph
(a)(3)(iv) of this section to correct typographical errors that
inadvertently appeared in final regulations published in the Federal
Register on July 31, 1991 (56 FR 36698).
Section 668.91 Filing of requests for hearings and appeals;
confirmation of mailing and receipt dates. The Secretary proposes to
add references to third-party servicers to conform to the proposed
changes in the scope of this subpart.
Section 668.92 Fines. The Secretary proposes to add references to
third-party servicers in this section to conform to proposed changes
governing the imposition of fines in other sections of this subpart.
This section would also be amended to provide for the consideration
of the size of the servicer's business (including the number of
institutions and student accounts served by the servicer) in
determining the amount of a fine against a servicer. This provision
would be similar to the provision already in place in this section that
requires consideration of the size of an institution in determining the
amount of a fine against the institution. The Secretary also proposes
to take into account, in the case of a violation by a third-party
servicer, the degree to which the servicer can provide evidence that
the institution contributed to that violation and the extent to which
repeated mechanical systemic unintentional errors contributed to that
violation. For purposes of this section, repeated mechanical systemic
unintentional errors would be counted as a single violation. This
provision was requested by non-Federal negotiators to cover cases where
errors in computer systems result in multiple violations. The Secretary
proposes to adopt these measures in the interest of fairness to a
third-party servicer in cases where a minor programming error leads to
hundreds or thousands of violations. While the Secretary believes that
all resulting losses should be compensated for by the institution or
servicer, fines need not be unduly multiplied. The Secretary
specifically invites comment on whether this provision is sufficiently
specific and not excessively broad and effectively balances the Federal
interest in ensuring compliance with the realities of computer
processing.
The Secretary also proposes to provide for the consideration of the
amount of liability owed by an institution or third-party servicer on
the misuse of Title IV, HEA program funds or refunds in determining the
gravity of the institution's or servicer's violation, as applicable, of
a Title IV requirement. The number of students affected by the
violation also would be a consideration in that determination. The
Secretary intends these provisions to serve as guidelines for
evaluating the gravity of a violation.
Section 668.93 Limitation. The Secretary proposes to add
references to third-party servicers in this section to conform to
proposed changes governing the imposition of limitations in other
sections of this subpart. The Secretary also proposes that a limitation
on a third-party servicer's eligibility to contract with institutions
to administer any aspect of an institution's participation in the Title
IV, HEA programs could include a limit on the number or size of
institutions with which the servicer may contract, the number of
accounts (borrower or loan accounts) that the servicer may service
under contract, an increase or reduction in the responsibilities
allowed or required of the servicer under a contract, or a requirement
for the servicer to obtain surety assuring the servicer's ability to
meet financial obligations.
The Secretary believes that these limitations are necessary to
address the probable causes of improprieties in which a third-party
servicer might engage. By limiting the number or size of institutions
or accounts that a third-party servicer may serve (including, for
example, requiring the servicer to transfer existing accounts back to
the institution) the Secretary may address a problem involving the
servicer's overextended resources. By limiting the responsibilities
performed by the servicer under a contract, the Secretary may restrict
the servicer's administration to a particular Title IV, HEA program
while prohibiting the servicer from administering another Title IV, HEA
program for which the servicer's past performance has been inadequate.
By imposing additional responsibilities under a third-party servicer's
contract, the Secretary may require the servicer to use additional
safeguards before awarding or disbursing Title IV, HEA program funds or
delivering Federal Stafford or Federal SLS loan proceeds.
Section 668.94 Termination. The Secretary proposes to add
references to third-party servicers in this section to conform to
proposed changes governing termination proceedings in other sections of
this subpart. The Secretary proposes to specify that a termination of a
third-party servicer's eligibility to contract with an institution to
administer a Title IV, HEA program ends the authority of the servicer
to administer that program under any existing contract between an
institution and the servicer. In addition, if a third-party servicer's
eligibility is terminated, the servicer would be required to return to
each institution (or otherwise dispose of according to the Secretary's
instructions) any funds received by the servicer under that program for
that institution or the institution's students. The servicer also would
be required to return to the institution all records pertaining to the
servicer's administration of the institution's participation in that
program.
The Secretary believes that the termination of a third-party
servicer's eligibility to contract with an institution should be
treated like the termination of an institution's participation in a
Title IV, HEA program. Not only should new contracts with an
institution be prohibited, but the servicer's existing activities
involving the administration of that program also should cease.
Further, a third-party servicer may possess unexpended funds under that
program for an institution's students at the time that termination
takes effect. The servicer should be required to return those funds to
the institution so that those students may receive their aid. The
return of records to the institution is needed because of the
recordkeeping requirements that the various Title IV, HEA program
requirements that the various Title IV, HEA program regulations apply
to institutions.
Section 668.95 Reimbursements, refunds, and offsets. This section
would be amended to add references to third-party servicers to conform
to the proposed changes in the scope of this subpart.
Section 668.96 Reinstatement after termination. The Secretary
proposes to add references to third-party servicers to conform to
proposed changes in the scope of this subpart. The Secretary also
proposes to eliminate the provision that permits an institution to
apply for reinstatement of its participation after three months if the
institution's participation has been terminated for engaging in
substantial misrepresentation. Like institutions whose participation is
terminated for other violations, the institution would be able to apply
for reinstatement only after 18 months from the date of the
termination, unless the institution also was debarred or suspended
under E.O. 12549 or the Federal Acquisition Regulations (FAR), 48 CFR
subpart 9.4. The Secretary further proposes to extend these criteria to
apply to a termination of a third-party servicer's eligibility to
contract with an institution to administer any aspect of the
institution's participation in the Title IV, HEA programs if the basis
for that termination was engaging in substantial misrepresentation.
The Title IV, HEA programs are most effective only if students,
other members of the public, and governmental and other bodies can rely
on the honesty of the representations of an institution or the
institution's agents. The harm that substantial misrepresentation does
to the integrity of the Title IV, HEA programs, to those who rely on
the programs to help meet educational costs, and to the taxpayers who
pay for the programs should carry equal weight with the harm done by
any other violation of a Title IV, HEA program requirement. If an
institution's participation or third-party servicer's eligibility is
terminated because the institution or servicer engaged in substantial
misrepresentation, the consequence of that termination should be no
less than the consequence of a termination for other reasons.
Section 668.97 Removal of limitation. The Secretary proposes to
provide that an institution may not apply for removal of a limitation
before the later of (1) 12 months from the effective date of the
limitation, or (2) the expiration of a debarment or suspension under
E.O. 12549 or the FAR, 48 CFR subpart 9.4. Parallel to the requirement
for institutions, a third-party servicer would be able to apply for
removal of a limitation only after 12 months from the date of the
limitation, unless the servicer was also debarred or suspended.
These changes are necessary to conform to the proposed changes in
the scope of this subpart. The Secretary would include the length of a
debarment or suspension action as a criterion to apply for removal of a
limitation to protect the Title IV, HEA programs, the beneficiaries of
those programs, and the Federal Government from potential effects of
doing business with irresponsible entities.
Sections 668.111 Scope and purpose, 668.112 Definitions, 668.113
Request for review, 668.114 Notification of hearing, and 668.116
Hearing. The Secretary proposes to add references to a third-party
servicer to these sections to parallel institutional appeal procedures
and thus establish procedures for a third-party servicer to appeal a
final audit determination or final program review determination. The
proposed procedures generally would be parallel to the procedures
already established that govern appeals by an institution of a final
audit determination or final program review determination. Under
Sec. 668.116(e), the Secretary proposes to expand the types of evidence
that an institution or servicer requesting review of the final audit or
final program review determination may submit to a hearing official to
include Department of Education program review reports and work papers
for program reviews and institutional or servicer records and other
materials (including records and other materials of institutions with
which the servicer has contracts) provided to the Department in
response to a program review. The Secretary also proposes to notify all
institutions with which a third-party servicer contracts of final audit
report or final program review determinations. The Secretary believes
that an institution that contracts with a third-party servicer should
be kept informed of any activities between the servicer and the
Department that might affect the administration of the institution's
participation in a Title IV, HEA program.
Section 668.123 Collection. The Secretary proposes to modify this
section to conform to the proposed changes to Sec. 668.24.
Part 682--Federal Family Education Loan Programs
Section 682.200 Definitions. The Secretary proposes to amend the
definition of lender to exclude from the definition of an ``eligible
lender'' any lender that (1) is debarred or suspended under E.O. 12549
or the FAR, (2) has principals or affiliates so debarred or suspended,
(3) is an affiliate of any person so debarred or suspended, or (4)
employs to administer or assist in the administration of FFEL program
funds any person so debarred or suspended. The effect of these proposed
changes would be automatically to exclude a debarred or suspended
lender from participation in the FFEL programs for the duration of the
debarment or suspension. A guaranty agency would thus be prohibited
from guaranteeing a new loan made by the lender during this period.
Like the proposed changes governing the standard of conduct of
participating educational institutions and third-party servicers under
34 CFR 668.82, these changes are needed to establish appropriate
safeguards to protect the integrity of the FFEL programs and the
Federal financial interest if serious questions are raised about the
honesty and lawfulness of the conduct of a lender's owners, officers,
directors, management, employees, or affiliates whose duties involve
the administration of or influence over the use of those funds.
The Secretary proposes to amend this section to expand on the
statutory definition of third-party servicer in the proposed
regulations to clarify its applicability in the FFEL programs. Under
that definition, a third-party servicer is an individual or
organization that contracts with a lender or guaranty agency to
administer any aspect of the lender's or guaranty agency's
participation in the FFEL programs, including any applicable function
described in the definition of third-party servicer in 34 CFR part 668.
The Secretary believes that by including the statutory definition as
well as a reference to the proposed definition of third-party servicer
under 34 CFR part 668, that individuals or organizations that contract
with a lender or guaranty agency to administer any aspect of the
lender's or guaranty agency's participation in the FFEL programs will
be able to determine the applicability of these regulations to
themselves.
Section 682.401 Basic Program Agreement. The Secretary proposes to
revise this section of the regulations to clarify a guaranty agency's
responsibilities if it enters into a contract with a third-party
servicer. As discussed previously under Sec. 682.200, the Secretary
proposes to prohibit a guaranty agency from entering into a contract
with a third-party servicer that the Secretary has determined is not
financially responsible or has been determined by the Secretary to have
not complied with the statutes and regulations that govern the FFEL
programs.
Under this proposed provision, a guaranty agency would be required
to provide to the Secretary the names and addresses of any third-party
servicer with which the agency contracts and, if requested by the
Secretary, a copy of that contract. The Secretary is proposing to
require submission by the agency of the name and address of any third-
party servicer with which the agency contracts, and, upon request, the
contract, to assist the Secretary in carrying out his responsibilities
to monitor the performance of third-party servicers.
The Secretary believes that receipt of a copy of the contract is
necessary because it states the services that a third-party servicer
performs for a guaranty agency. With this information, the Secretary
will be better able to monitor program compliance and integrity of the
guaranty agency's portfolio that the servicer is administering. These
changes would parallel the requirements concerning contracts between
institutions and third-party servicers.
Note that section 552 of the Administrative Procedure Act does not
require disclosure to the public, under the Freedom of Information Act
(FOIA), of subject matter that is deemed to be a trade secret or is of
commercial or financial interest or is of a privileged or confidential
nature (note also that the entity submitting the information is
responsible for identifying information that is not subject to the
FOIA's disclosure requirements).
Section 682.413 Remedial actions. The Secretary proposes to revise
this section of the regulations to clarify a lender's and its third-
party servicer's responsibility to pay liabilities if the servicer has
not complied with FFEL program statutes or regulations with respect to
services it has contracted with a lender to perform. Under this
section, a third-party servicer and lender under whose contract the
servicer committed the violation would be considered jointly and
severally liable for paying to the Secretary any interest benefits and
special allowance or any compensation the servicer has received on any
loan from the lender from the date that the servicer fails to comply
with any of the requirements in Sec. 682.406(a)(1)-(a)(6), (a)(9), and
(a)(12), for any period when the loan has lost its eligibility for
reinsurance coverage as a result of the third-party servicer's actions,
and for any period after it erroneously bills the Secretary for
interest benefits and special allowance. The Secretary would vigorously
attempt to collect any of those liabilities first from the lender and,
if the lender does not repay those liabilities within 30 days or does
not make arrangements satisfactory to the Secretary to repay those
liabilities, pursue the third-party servicer for the payment of those
liabilities.
This proposed section would also clarify a guaranty agency's and
its third-party servicer's responsibilities to pay liabilities to the
Secretary if the servicer has not complied with FFEL program statutes
or regulations with respect to services that it has contracted with a
guaranty agency to perform. Under this proposed provision, the
Secretary would require a guaranty agency to repay to the Secretary any
reinsurance payments the guaranty agency received on a loan if the
third-party servicer contracting with the guaranty agency causes a loan
to lose its eligibility for reinsurance. In addition to the repayment
of reinsurance, if a third-party servicer makes an incomplete or
incorrect statement in connection with any agreement entered into under
this part or any other Federal requirement, the guaranty agency with
which it has entered into a contract may be subjected by the Secretary
to return payments made by the Secretary to the agency, have its
payments withheld by the Secretary, or have its participation in the
FFEL programs limited, suspended, or terminated. In addition to these
penalties, the guaranty agency and its third-party servicer may be
fined, may be required to repay any payments the Secretary became
obligated to make to others as a result of an incomplete or incorrect
statement or violation of any Federal requirement, or be responsible
for repaying any interest benefits, special allowance, or reinsurance
paid on a Consolidation loan for a violation of 34 CFR 682.206(f)(1).
The guaranty agency and its third-party servicer would be considered
jointly and severally liable for any of those liabilities. The method
by which the Secretary would collect any liability would parallel the
proposed provisions governing the circumstances under which a lender
and third-party servicer would be jointly and severally liable to the
Secretary.
In the negotiated rulemaking sessions, the issue of third-party
servicer liability generated controversy and dissension among the
negotiators. With regard to liabilities assessed against a third-party
servicer under the FFEL programs, many negotiators raised the same
objections previously discussed in connection with liability for
servicers under 34 CFR part 668. Negotiators raised an additional
objection, suggesting that liabilities assessed against third-party
servicers under the FFEL programs are unnecessary given the ability of
the Secretary to determine a loan to be uninsured and thus able to be
collected directly from a lender or guaranty agency. In response to
these objections, the Secretary offered the same modification of the
concept of joint and several liability discussed previously in 34 CFR
part 668. As noted, no consensus was reached. However, the Secretary
agreed to incorporate language into these proposed regulations to
specify that the Secretary would first attempt collection from a lender
or guaranty agency in the event of liability on the part of a third-
party servicer. The Secretary included this provision at the request of
negotiators because the Secretary believes that this provision would
not adversely impact the integrity of the FFEL programs. The Secretary
specifically invites further public comment on the issue of joint and
several liability for servicers contracting with lenders and guaranty
agencies in order to obtain additional advice from the higher education
community in the development of final regulations.
The Secretary specifically invites public comment on whether, and
how, the Secretary should hold a third-party servicer that administers
FFEL programs jointly and severally liable for any violation of an FFEL
program requirement by that servicer and whether any alternative less
than assumption of full liability is sufficient to protect the public
interest. The Secretary notes that substantial losses have occurred in
the FFEL programs due to third-party servicer violations.
Under these proposed regulations, the Secretary would follow the
fine proceedings contained in 34 CFR part 668, subpart G, in imposing a
fine against a third-party servicer.
Section 682.414 Records, reports, and inspection requirements for
guaranty agency programs. The Secretary proposes to amend this section
to make a third-party servicer's responsibilities under this part
conform to currently existing regulations with respect to a guaranty
agency's obligation to maintain current records. Under this provision,
a third-party servicer acting as an agent for a guaranty agency would
be required to maintain current, complete, and accurate records for all
loans that it services for that agency. These records would have to be
updated at least once every 10 business days. The Secretary is
proposing this provision to ensure that a third-party servicer with
which a guaranty agency contracts is responsible for maintaining
accurate records.
Section 682.416 Requirements for third-party servicers and lenders
contracting with third-party servicers. The Secretary proposes to add a
new section to the FFEL program regulations that would set forth
administrative and financial standards that a third-party servicer
would be required to meet in order to be an eligible third-party
servicer with which a lender or guaranty agency may contract for
purposes of its responsibilities under the FFEL programs. Under these
proposed regulations, a third-party servicer would be considered to be
administratively responsible if it provides the services for which it
has contracted to perform in accordance with the Federal laws and
regulations that govern the FFEL programs, has business systems that
are capable of meeting those requirements and has adequate personnel
who are knowledgeable about the FFEL programs. The Secretary is
proposing these standards because he believes that these are the
minimum administrative standards that an agent or entity must meet to
demonstrate satisfactorily to the Secretary that it is capable of
performing FFEL program services in accordance with applicable statutes
and regulations.
The Secretary proposes to apply the standards governing financial
responsibility under 34 CFR 668.13(c), (d), (g), and (h), governing the
financial responsibility of institutions and third-party servicers
contracting with those institutions, to a third-party servicer that
administers any aspect of the FFEL programs under a contract with a
guaranty agency or lender, for purposes of this part.
During the negotiated rulemaking sessions, the proposed standards
governing financial responsibility of third-party servicers and
institutions generated disagreement among the negotiators. The
Secretary intends that the financial responsibility standards in this
section would parallel, as applicable, similar standards of financial
responsibility for participating institutions that the Secretary
intends to publish in proposed regulations to be published shortly
after these. When published, this future NPRM will provide commenters
with the opportunity to comment on financial responsibility standards
governing both third-party servicers and institutions.
The Secretary proposes these standards to ensure that a third-party
servicer would not be able to maintain a contract with a lender or
guaranty agency to administer any aspect of the lender's or guaranty
agency's FFEL program unless that servicer periodically demonstrates to
the Secretary the ability to meet its financial obligations with that
lender or guaranty agency. Further, these standards would ensure that
the servicer can demonstrate that it is financially stable and will be
able to meet these obligations in the future. The Secretary believes
that these standards are necessary because the financial failure of a
third-party servicer could have an enormous impact on the FFEL programs
that could create substantial losses for the Federal taxpayer.
Under these proposed rules, the Secretary would, as determined
necessary, conduct a special review of a third-party servicer to
determine if it meets the administrative capability and financial
responsibility standards proposed in this section. If the Secretary
conducts that review, the servicer would be required to provide
evidence to the Secretary that it meets these standards. Based on the
review of the materials required by this section the Secretary could
initiate a limitation, suspension, or termination action against the
servicer. If the servicer is unable to demonstrate that it meets the
established standards for administrative capability and financial
responsibility, the servicer could provide evidence to the Secretary
demonstrating that the limitation, suspension, or termination action is
unwarranted. This latter provision was added at the request of
negotiators to govern situations where a third-party servicer may not
be able to meet the defined standards proposed in this section, but the
servicer still considers itself to be administratively capable and
financially responsible. This provision would allow a third-party
servicer the opportunity to demonstrate to the Secretary that it is
still administratively capable and financially responsible.
This section would provide that a third-party servicer is not
financially responsible under this section if the servicer, or the
servicer's owner, majority shareholder, or chief executive officer is
determined to have a questionable past performance. The past
performance criteria in this section would parallel proposed
requirements under 34 CFR 668.12 (implementing statutory requirements
governing the past performance of persons or organizations associated
with institutions that participate in Title IV, HEA programs) and under
34 CFR 668.82 (governing the standard of conduct of institutions and
third-party servicers for purposes of the Title IV, HEA programs).
Furthermore, the Secretary proposes to apply this provision to any
person employed by the servicer or any person, entity, or any officer
or employee of an entity that the servicer contracts with whose past
performance is also questionable. In addition, in order to remain
financially responsible, if a third-party servicer learns of such a
conviction or determination, the servicer would have to take immediate
action to safeguard the Title IV, HEA programs, as explained previously
in the discussion concerning Sec. 668.82.
However, for purposes of this part, the Secretary proposes to
specify that with regard to the conduct of an officer or employee of a
third-party servicer or a person, entity, or officer or employee of an
entity with which the servicer contracts, that conduct would be a
factor in determining the servicer's financial responsibility only if
the individual or entity is used in a capacity that involves
administering any aspect of the Title IV, HEA programs. For example,
the Secretary would not hold the conduct of a custodian employed by a
third-party servicer as an element in determining the servicer's
financial responsibility, if that custodian had no responsibility for
administering a Title IV, HEA program.
The Secretary also proposes to specify that a third-party servicer
would not be considered to be financially responsible if the servicer,
or any principal or affiliate of the servicer (as those terms are
defined in 34 CFR part 85), is debarred or suspended under E.O. 12549
or the FAR, or is engaging in activity that is cause under 34 CFR
85.305 or 85.405 for debarment or suspension under E.O. 12549 or the
FAR.
Like the proposed changes governing the past performance of
individuals or organizations associated with institutions that
participate in the Title IV, HEA programs and standard of conduct of
participating institutions and third-party servicers, these changes are
needed to establish appropriate safeguards to protect the integrity of
the FFEL programs and the Federal financial interest if serious
questions are raised about the honest and lawful conduct of a
servicer's owners, officers, directors, employees, or affiliates whose
duties involve the administration of or influence over the use of those
funds.
Under this section, a third-party servicer would be required to
have an annual independent audit of its administration of the FFEL
programs that examines the servicer's compliance with the Act and
applicable regulations and its financial management of FFEL program
activities. These requirements and audit exceptions would parallel the
proposed audit requirements and exceptions under 34 CFR 668.23
(governing audit requirements for third-party servicers contracting
with institutions to administer any aspect of the institution's
participation in the Title IV, HEA programs), except that the report of
the audit would have to be submitted to the Secretary within six months
of the end of the audit report period. A third-party servicer's initial
audit would have to cover the same period required of audits performed
for third-party servicers contracting with institutions to administer
any aspect of the institution's participation in the Title IV, HEA
programs (discussed previously in 34 CFR 668.23). The Secretary
believes that initial audits will be more useful and effective if they
encompass an entire fiscal year. The Secretary also believes that
allowing servicers additional time to prepare for the implementation of
these regulations would enable servicers to comply more fully with
these regulations as well as defray the costs associated with an audit
of a partial fiscal year and minimize the burden associated with
implementing these regulations, as called for under E.O. 12866.
Subsequent audits would, as required by statute, encompass the entire
period since the servicer's previous audit.
In addition, the Secretary proposes that the audit report would be
conducted in accordance with the audit guide developed by the Inspector
General of the Department of Education unless the third-party servicer
is a governmental entity or nonprofit organization. A third-party
servicer that is a governmental entity would be required to have an
audit conducted in accordance with 31 U.S.C. 7502 and 34 CFR part 80,
appendix G (pursuant to the Single Audit Act). A third-party servicer
that is a nonprofit organization would be required to have an audit
conducted in accordance with Office of Management and Budget Circular
A-133, ``Audit of Institutions of Higher Education and Other Nonprofit
Institutions,'' as incorporated in 34 CFR 74.61(h)(3).
These proposed rules would also limit a lender's ability to enter
into a contract with a third-party servicer. As explained previously in
the discussion for Sec. 682.200, under this proposal, a lender may not
enter into a contract with a third-party servicer that the Secretary
has determined does not meet the administrative capability or financial
responsibility standards under this section. Further, a lender that
contracts with a third-party servicer would have to provide the
Secretary with the name and address of the third-party servicer, and,
upon request, a copy of that contract.
Sections 682.700 Purpose and scope, 682.701 Definitions of terms
used in this subpart, 682.702 Effect on participation, 682.703
Informal compliance procedure, 682.704 Emergency action, 682.705
Suspension proceedings, 682.706 Limitation or termination proceedings,
682.707 Appeals in a limitation or termination proceeding, 682.708
Evidence of mailing and receipt dates, 682.709 Reimbursements,
refunds, and offsets, 682.710 Removal of limitation, and 682.711
Reinstatement after termination. The Secretary proposes to amend
subpart G to provide that the Secretary would have the authority to
limit, suspend, or terminate a third-party servicer's ability to
contract with an eligible lender if the Secretary determines the third-
party servicer has violated any FFEL program requirement. Section
432(a)(1) of the Act authorizes the Secretary to take action against
third-party servicers for any violation of any FFEL program
requirement. Under these proposed regulations, the Secretary could also
take emergency action against the servicer if the Secretary receives
reliable information that the servicer is in violation of applicable
requirements pertaining to the lender's portfolio of loans. The
procedures under which the Secretary could take those actions and the
procedures a third-party servicer could use to appeal those actions are
consistent with the long-standing procedures the Secretary uses to take
those actions against a lender, and the procedures a lender may use to
appeal those actions.
Executive Order 12866
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 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 identified and
explained elsewhere in this preamble under the heading Paperwork
Reduction Act of 1980.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these 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.
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 institutions of higher education; small
organizations that contract with educational institutions to administer
aspects of the institutions' participation in the Title IV, HEA
programs; and small organizations that contract with lenders or
guaranty agencies to administer aspects of the lenders' or agencies'
participation in the FFEL programs. However, the regulations would not
have a significant economic 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 668.13, 668.23, 668.25, 668.90, 668.96, 668.113, 682.414,
682.416, and 682.711 contain information collection requirements. As
required by the Paperwork Reduction Act of 1980, the Department of
Education will submit a copy of these sections to the Office of
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h))
Educational institutions that are public or nonprofit institutions
or businesses or other for-profit institutions may participate in the
Title IV, HEA programs. State entities, nonprofit institutions,
businesses or other for-profit organizations, or individuals may
contract with educational institutions to administer aspects of the
institutions' participation in the programs and may contract with
lenders and guaranty agencies to administer aspects of the lenders' and
agencies' participation in the FFEL programs. Individuals may apply for
student financial assistance under the programs. The Department of
Education needs and uses the information to enable the Secretary to
determine whether the States, institutions, organizations, businesses,
and individuals comply with the requirements for eligibility and
participation in the programs.
Annual public reporting and recordkeeping burden contained in the
collection of information proposed in these regulations is estimated to
be 2,786 hours, including the time for searching existing data sources,
gathering and maintaining the data needed, completing and reviewing the
collection of information, and submitting materials.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, room 3002, New Executive
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.
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 4318, 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
34 CFR Part 668
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Grant programs--education, Loan
programs--education, Reporting and recordkeeping requirements, Student
aid.
34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Loan programs--education, Reporting and recordkeeping requirements,
Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal
Supplemental Educational Opportunity Grant Program; 84.032 Federal
Stafford Loan Program; 84.032 Federal PLUS Program; 84.032 Federal
Supplemental Loans for Students Program; 84.033 Federal Work-Study
Program; 84.038 Federal Perkins Loan Program; 84.063 Federal Pell
Grant Program; 84.069 State Student Incentive Grant Program; 84.268
Federal Direct Student Loan Program; and 84.272 National Early
Intervention Scholarship and Partnership Program. Catalog of Federal
Domestic Assistance Number for the Presidential Access Scholarship
Program has not been assigned.)
Dated: February 9, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary proposes to amend parts 668 and 682 of title 34 of
the Code of Federal Regulations as follows:
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
1. The authority citation for part 668 is revised to read as
follows:
Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and
1141, unless otherwise noted.
2. Section 668.1 is amended by revising paragraph (a) to read as
follows:
Sec. 668.1 Scope.
(a) This part establishes general rules that apply to an
institution that participates in any student financial assistance
program authorized by Title IV of the Higher Education Act of 1965, as
amended (Title IV, HEA program). To the extent that an institution
contracts with a third-party servicer to administer any aspect of the
institution's participation in any Title IV, HEA program, the
applicable rules in this part also apply to that servicer. An
institution's use of a third-party servicer does not alter the
institution's responsibility for compliance with the rules in this
part.
* * * * *
3. Section 668.2 is amended by adding definitions of ``Designated
department official'', ``Initiating official'', ``Show-cause
official'', and ``Third-party servicer'' to paragraph (b) in
alphabetical order to read as follows:
Sec. 668.2 General definitions.
* * * * *
(b) * * *
Designated department official: An official of the Department of
Education to whom the Secretary has delegated responsibilities
indicated in this part.
* * * * *
Initiating official: The designated department official authorized
to begin an emergency action under Sec. 668.83.
* * * * *
Show-cause official: The designated department official authorized
to conduct a show-cause proceeding for an emergency action under
Sec. 668.83.
* * * * *
Third-party servicer: An individual or a State or private, profit
or nonprofit organization that enters into a contract with an eligible
institution to administer, through either manual or automated
processing, any aspect of the institution's participation in any Title
IV, HEA program. The Secretary considers administration of
participation in a Title IV, HEA program to--
(1) Include performing any function required by any statutory
provision of or applicable to Title IV of the HEA, any regulatory
provision prescribed under that statutory authority, or any applicable
special arrangement, agreement, or limitation, such as, but not
restricted to--
(i) Processing student financial aid applications;
(ii) Performing need analysis;
(iii) Determining student eligibility and related activities;
(iv) Certifying loan applications;
(v) Processing SARs or output documents for payment to students;
(vi) Receiving, disbursing, or delivering Title IV, HEA program
funds, excluding lock-box processing of loan payments and normal bank
electronic fund transfers;
(vii) Conducting activities required by the provisions governing
student consumer information services in Subpart D of this part;
(viii) Preparing and certifying requests for advance or
reimbursement funding;
(ix) Loan servicing and collection;
(x) Preparing and submitting notices and applications required
under 34 CFR part 600 and subpart B of this part; and
(xi) Preparing a Fiscal Operations Report and Application to
Participate (FISAP);
(2) Exclude the following functions:
(i) Publishing ability-to-benefit tests.
(ii) Performing functions as a Multiple Data Entry Processor (MDE).
(iii) Financial and compliance auditing.
(iv) Mailing of documents prepared by the institution.
(v) Warehousing of records; and
(3) Notwithstanding the exclusions referred to in paragraph (2) of
this definition, include any activity comprised of any function
described in paragraph (1) of this definition.
(Authority: 20 U.S.C. 1088)
* * * * *
4. Section 668.11 is revised to read as follows:
Sec. 668.11 Scope.
(a) This subpart establishes standards that an institution must
meet in order to participate in any Title IV, HEA program.
(b) Noncompliance with these standards by an institution already
participating in any Title IV, HEA program or with applicable standards
in this subpart by a third-party servicer that contracts with the
institution may subject the institution or servicer, or both, to
proceedings under subpart G of this part. These proceedings may lead to
any of the following actions:
(1) An emergency action.
(2) The imposition of a fine.
(3) The limitation, suspension, or termination of the participation
of the institution in a Title IV, HEA program.
(4) The limitation, suspension, or termination of the eligibility
of the servicer to contract with any institution to administer any
aspect of the institution's participation in a Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
5. Section 668.12, as proposed to be amended in a Notice of
Proposed Rulemaking published on July 10, 1992 (57 FR 30830), is
further amended by removing the period at the end of proposed
redesignated paragraph (b)(2)(iv)(B) and adding, in its place, a semi-
colon and adding new paragraphs (b)(2)(v) and (b)(2)(vi) to read as
follows:
Sec. 668.12 Institutional participation agreement.
* * * * *
(b) * * *
(2) * * *
(v) That it is liable for all--
(A) Improperly spent or unspent funds received under the Title IV,
HEA programs, including any funds administered by a third-party
servicer; and
(B) Refunds that the institution or its servicer may be required to
make; and
(vi) That it will not knowingly--
(A) Employ in a capacity that involves the administration of the
Title IV, HEA programs or the receipt of funds under those programs, an
individual who has been convicted of, or has pled nolo contendere or
guilty to, a crime involving the acquisition, use, or expenditure of
Federal, State, or local government funds, or has been administratively
or judicially determined to have committed fraud or any other material
violation of law involving those funds;
(B) Contract with an institution or third-party servicer that has
been terminated under section 432 of the HEA for a reason involving the
acquisition, use, or expenditure of Federal, State, or local government
funds, or that has been administratively or judicially determined to
have committed fraud or any other material violation of law involving
those funds; or
(C) Contract with or employ any individual, agency, or organization
that has been, or any of whose officers or employees have been--
(1) Convicted of, or pled nolo contendere or guilty to, a crime
involving the acquisition, use, or expenditure of Federal, State or
local government funds; or
(2) Administratively or judicially determined to have committed
fraud or any other material violation of law involving Federal, State,
or local funds.
* * * * *
6. Section 668.13 as amended by the regulations published in the
Federal Register on June 8, 1993 (58 FR 32201) (effective date pending)
is amended by removing paragraphs (c)(4) and (g); redesignating
paragraph (c)(5) as (c)(4) and paragraphs (h) through (j) as paragraphs
(g) through (i), respectively; adding the word ``or'' after the semi-
colon in paragraph (c)(3); and revising redesignated paragraph (c)(4),
paragraph (d)(3), and redesignated paragraphs (g) introductory text and
(h) to read as follows:
Sec. 668.13 Factors of financial responsibility.
* * * * *
(c) * * *
(4) A person who exercises substantial control over the institution
or any member or members of the person's family, alone or together--
(i)(A) Exercises or exercised substantial control over another
institution or a third-party servicer that owes a liability for a
violation of a Title IV, HEA program requirement; or
(B) Owes a liability for a violation of a Title IV, HEA program
requirement; and
(ii) That person, family member, institution, or servicer is not
making payments in accordance with an agreement to repay that
liability.
(d) * * *
(3) The Secretary may determine an institution to be financially
responsible even if the institution is not otherwise financially
responsible under paragraph (c)(4) of this section if--
(i) The institution notifies the Secretary, in accordance with 34
CFR 600.30, that the person referenced in paragraph (c)(4) of this
section exercises substantial control over the institution; and
(ii)(A) The person repaid to the Secretary a portion of the
applicable liability, and the portion repaid equals or exceeds the
greater of--
(1) The total percentage of the ownership interest held in the
institution or third-party servicer that owes the liability by that
person or any member or members of that person's family, either alone
or in combination with one another;
(2) The total percentage of the ownership interest held in the
institution or servicer that owes the liability that the person or any
member or members of that person's family, either alone or in
combination with one another, represents or represented under a voting
trust, power of attorney, proxy, or similar agreement; or
(3) Twenty-five percent, if that person or any member of that
person's family is or was a member of the board of directors, chief
executive officer, or other executive officer of the institution or
servicer that owes the liability, or of an entity holding at least a 25
percent ownership interest in the institution or servicer that owes the
liability;
(B) The applicable liability described in paragraph (c)(4)(ii) of
this section is currently being repaid in accordance with a written
agreement with the Secretary; or
(C) The institution demonstrates why--
(1) The person who exercises substantial control over the
institution should nevertheless be considered to lack that control; or
(2) The person who exercises substantial control over the
institution and each member of that person's family nevertheless does
not or did not exercise substantial control over the institution or
servicer that owes the liability.
* * * * *
(g) An ``ownership interest'' is a share of the legal or beneficial
ownership or control of, or a right to share in the proceeds of the
operation of, an institution, institution's parent corporation, a
third-party servicer, or a third-party servicer's parent corporation.
* * * * *
(h) The Secretary generally considers a person to exercise
substantial control over an institution or third-party servicer, if the
person--
(1) Directly or indirectly holds at least a 25 percent ownership
interest in the institution or servicer;
(2) Holds, together with other members of his or her family, at
least a 25 percent ownership interest in the institution or servicer;
(3) Represents, either alone or together with other persons, under
a voting trust, power of attorney, proxy, or similar agreement one or
more persons who hold, either individually or in combination with the
other persons represented or the person representing them, at least a
25 percent ownership in the institution or servicer; or
(4) Is a member of the board of directors, the chief executive
officer, or other executive officer of--
(i) The institution or servicer; or
(ii) An entity that holds at least a 25 percent ownership interest
in the institution or servicer.
* * * * *
7. Section 668.23 is amended by redesignating paragraph (c)(3) as
paragraph (c)(3)(i), revising paragraphs (b) and (c)(1), adding
paragraph (c)(3) (ii) through (vi) and paragraph (c)(4)(iii), revising
paragraph (c)(5), adding a new paragraph (c)(6), and revising paragraph
(e) and the authority citation to read as follows:
Sec. 668.23 Audits, records, and examinations.
* * * * *
(b)(1) An institution that participates in any Title IV, HEA
program shall cooperate with an independent auditor, the Secretary, the
Department of Education's Inspector General, and the Comptroller
General of the United States, or their authorized representatives, a
guaranty agency in whose program the institution participates, and the
State postsecondary review entity designated under subpart 1 of part H
of Title IV of the HEA, in the conduct of audits, investigations, and
program reviews authorized by law.
(2) A third-party servicer shall cooperate with an independent
auditor, the Secretary, the Department of Education's Inspector
General, and the Comptroller General of the United States, or their
authorized representatives, a guaranty agency in whose program the
institution contracting with the servicer participates, and the State
postsecondary review entity designated under subpart 1 of part H of
Title IV of the HEA, in the conduct of audits, investigations, and
program reviews authorized by law.
(3) The institution's or servicer's cooperation must include--
(i) Providing timely access, for examination and copying, to the
records (including computerized records) required by the applicable
regulations and to any other pertinent books, documents, papers,
computer programs, and records;
(ii) Providing reasonable access to personnel associated with the
institution's or servicer's administration of the Title IV, HEA
programs for the purpose of obtaining relevant information. In
providing reasonable access, the institution or servicer may not--
(A) Refuse to supply any relevant information;
(B) Refuse to permit interviews with those personnel that do not
include the presence of representatives of the institution's or
servicer's management; or
(C) Refuse to permit interviews with those personnel that are not
tape recorded by the institution or servicer.
(c)(1)(i) An institution that participates in the FDSL, Federal
Perkins Loan, FWS, FSEOG, Federal Stafford Loan, Federal PLUS, Federal
SLS, Federal Pell Grant, or PAS programs shall have performed a
compliance audit of that program.
(ii) A third-party servicer that administers funds or determines
student eligibility shall have a compliance audit performed of every
aspect of the servicer's administration of the participation in the
Title IV, HEA programs of each institution with which the servicer has
a contract, unless--
(A) The servicer contracts with only one participating institution;
and
(B) The audit of that institution's participation involves every
aspect of the servicer's administration of that Title IV, HEA program.
(iii) To meet the requirements of paragraph (c)(1)(ii) of this
section, a third-party servicer that contracts with more than one
participating institution may submit a single compliance audit report
that covers every aspect of the servicer's administration of the
participation in the Title IV, HEA programs for each institution with
which the servicer contracts.
(iv) The audit required under paragraph (c)(1) (i) or (ii) of this
section must be conducted by an independent auditor in accordance with
the general standards and the standards for audits in the U.S. General
Accounting Office's (GAO's) Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions.
* * * * *
(3) * * *
(ii) The servicer shall have an audit performed at least once every
year.
(iii) Notwithstanding paragraph (c)(3)(ii) of this section, the
servicer shall have an audit performed at least once every two years
if--
(A) The servicer administers less than $1,000,000 under the Title
IV, HEA programs for the period covered by the audit; or
(B) The servicer had no material exceptions identified in the
servicer's most recently submitted audit report and that report was
submitted in a timely fashion.
(iv) The servicer is not required to have an audit performed for
any year in which the servicer administers less than $250,000 under the
Title IV, HEA programs.
(v) The servicer's first audit must cover the servicer's activities
for its first full fiscal year beginning after July 1, 1994, and
include any period from that date to the beginning of the first full
fiscal year. Each subsequent audit that the servicer has performed must
cover the servicer's activities for the entire period of time since the
servicer's preceding audit.
(vi) Notwithstanding paragraph (c)(3)(iii) of this section, the
Secretary may, as the Secretary deems necessary, request any third-
party servicer to have an audit performed on an annual basis.
(4) * * *
(iii) The servicer shall submit its audit to the Department of
Education's Inspector General in accordance with the deadlines
established in audit guides developed by the Department of Education's
Office of Inspector General.
(5)(i) An institution or third-party servicer that has an audit
conducted in accordance with this section shall--
(A) Give the Secretary and the Inspector General access to records
or other documents necessary to review the audit; and
(B) Include in any arrangement with an individual or firm
conducting an audit described in this section a requirement that the
individual or firm shall give the Secretary and the Inspector General
access to records or other documents necessary to review the audit.
(ii) A third-party servicer shall give the Secretary and the
Inspector General access to records or other documents necessary to
review an institution's audit.
(iii) An institution shall give the Secretary and the Inspector
General access to records or other documents necessary to review a
third-party servicer's audit.
(6) The Secretary may require the institution or servicer to
provide, upon request, to cognizant guaranty agencies and eligible
lenders under the FFEL programs, State agencies, nationally recognized
accrediting agencies, and State postsecondary review entities
designated under Subpart 1 of part H of Title IV of the HEA, the
results of any audit conducted under this section.
* * * * *
(e) Upon written request, an institution or third-party servicer
shall give the Secretary access to all Title IV, HEA program and fiscal
records, including records reflecting transactions with any financial
institution with which the institution or servicer deposits or has
deposited any Title IV, HEA program funds.
* * * * *
(Authority: 20 U.S.C. 1088, 1094, 1099c, 1141 and section 4 of Pub.
L. 95-452, 92 Stat. 1101-1109)
8. Section 668.24 is revised to read as follows:
Sec. 668.24 Audit exceptions and repayments.
(a)(1) If, as a result of a Federal audit or an audit performed at
the direction of an institution or third-party servicer, an expenditure
made by the institution or servicer or the institution's or servicer's
compliance with an applicable requirement (including the lack of proper
documentation), is questioned, the Secretary notifies the institution
or servicer of the questioned expenditure or compliance.
(2) If the institution or servicer believes that the questioned
expenditure or compliance was proper, the institution or servicer shall
notify the Secretary in writing of the institution's or servicer's
position and the reasons for that position.
(3) The institution's or servicer's response must be certified as
to accuracy and completeness by an independent auditor in accordance
with the general standards and the standards for audits in the U.S.
General Accounting Office's (GAO's) Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions and must be received
by the Secretary within 45 days of the date of the Secretary's
notification to the institution or servicer.
(b)(1) Based on the audit finding and the institution's or third-
party servicer's response, the Secretary determines the amount of
liability, if any, owed by the institution or servicer and instructs
the institution or servicer as to the manner of repayment.
(2) If the Secretary determines that a third-party servicer owes a
liability for its administration of an institution's Title IV, HEA
programs, the servicer shall notify each institution under whose
contract the servicer owes a liability of the determination. The
servicer shall also notify every institution that contracts with the
servicer for the same service that the Secretary determined that a
liability was owed.
(c)(1) An institution or third-party servicer that must repay funds
under the procedures in this section shall repay those funds at the
direction of the Secretary within 45 days of the date of the
Secretary's notification, unless--
(i) The institution or servicer files an appeal under the
procedures established in subpart H of this part; or
(ii) The Secretary permits a longer repayment period.
(2) Notwithstanding paragraphs (b) and (c)(1) of this section--
(i) If an institution or third-party servicer has posted surety or
has provided a third-party guarantee and the Secretary questions
expenditures or compliance with applicable requirements and identifies
liabilities, then the Secretary may determine that deferring recourse
to the surety or guarantee is not appropriate because--
(A) The need to provide relief to students or borrowers affected by
the act or omission giving rise to the liability outweighs the
importance of deferring collection action until completion of available
appeal proceedings; or
(B) The terms of the surety or guarantee do not provide complete
assurance that recourse to that protection will be fully available
through the completion of available appeal proceedings; or
(ii) The Secretary may determine that an administrative offset to
collect the funds owed under the procedures of this section is
appropriate under 34 CFR 30.28.
(3) If, under the proceedings in subpart H, liabilities asserted in
the notification against the institution or third-party servicer are
upheld, the institution or third-party servicer shall repay those funds
at the direction of the Secretary within 30 days of the final
determination under subpart H of this part unless--
(i) The Secretary permits a longer repayment period; or
(ii) The Secretary determines that earlier collection action is
appropriate pursuant to paragraph (c)(2) of this section.
(d) An institution is held responsible for any liability owed by
the institution's third-party servicer for a violation incurred in
servicing any aspect of that institution's participation in the Title
IV, HEA programs and remains responsible for that amount until that
amount is repaid in full.
(Authority: 20 U.S.C. 1094)
9. Section 668.25 is redesignated as Sec. 668.26 and a new
Sec. 668.25 is added to read as follows:
Sec. 668.25 Contracts between an institution and a third-party
servicer.
(a) An institution may enter into a written contract with a third-
party servicer for the administration of any aspect of the
institution's participation in any Title IV, HEA program only to the
extent that the servicer's eligibility to contract with the institution
has not been limited, suspended, or terminated under the proceedings of
subpart G of this part.
(b) Subject to the provisions of paragraph (d) of this section, a
third-party servicer is eligible to enter into a written contract with
an institution for the administration of any aspect of the
institution's participation in any Title IV, HEA program only to the
extent that the servicer's eligibility to contract with the institution
has not been limited, suspended, or terminated under the proceedings of
subpart G of this part.
(c) In a contract with an institution, a third-party servicer shall
agree to--
(1) Comply with all statutory provisions of or applicable to Title
IV of the HEA, all regulatory provisions prescribed under that
statutory authority, and all applicable special arrangements,
agreements, limitations, suspensions, and terminations, including the
requirement to use any funds that the servicer administers under any
Title IV, HEA program and any interest or other earnings thereon solely
for the purposes specified in and in accordance with that program;
(2) Refer to the Office of Inspector General of the Department of
Education for investigation of any information indicating there is
reasonable cause to believe that the institution might have engaged in
fraud or other criminal misconduct in connection with the institution's
administration of any Title IV, HEA program or an applicant for Title
IV, HEA program assistance might have engaged in fraud or other
criminal misconduct in connection with his or her application. Examples
of the type of information that must be referred are--
(i) False claims by the institution for Title IV, HEA program
assistance;
(ii) False claims of independent student status;
(iii) False claims of citizenship;
(iv) Use of false identities;
(v) Forgery of signatures or certifications; and
(vi) False statements of income;
(3) Be jointly and severally liable with the institution to the
Secretary for any violation by the servicer of any statutory provision
of or applicable to Title IV of the HEA, any regulatory provision
prescribed under that statutory authority, and any applicable special
arrangements, agreements, and limitations;
(4) In the case of a third-party servicer that disburses funds
(including funds received under the Title IV, HEA programs) or delivers
Federal Stafford Loan or Federal SLS Program proceeds to a student--
(i) Confirm the eligibility of the student before making that
disbursement or delivering those proceeds. This confirmation must
include, but is not limited to, any applicable information contained in
the records required under Sec. 668.23(f); and
(ii) Calculate and pay refunds and repayments due a student, the
Title IV, HEA program accounts, and the student's lender under the
Federal Stafford Loan, Federal PLUS, and Federal SLS programs in
accordance with the institution's refund policy, the provisions of
Secs. 668.21 and 668.22, and applicable program regulations; and
(5) If the servicer or institution terminates the contract, or if
the servicer stops providing services for the administration of a Title
IV, HEA program, goes out of business, or files a petition under the
Bankruptcy Code, return to the institution all--
(i) Records in the servicer's possession pertaining to the
institution's participation in the program or programs for which
services are no longer provided; and
(ii) Funds, including Title IV, HEA program funds, received from or
on behalf of the institution or the institution's students, for the
purposes of the program or programs for which services are no longer
provided.
(d) A third-party servicer may not enter into a written contract
with an institution for the administration of any aspect of the
institution's participation in any Title IV, HEA program, if--
(1)(i) The servicer has been limited, suspended, or terminated by
the Secretary within the preceding five years;
(ii) The servicer has had, during the servicer's two most recent
audits of the servicer's administration of the Title IV, HEA programs,
an audit finding that resulted in the servicer's being required to
repay an amount greater than five percent of the funds that the
servicer administered under the Title IV, HEA programs for any award
year; or
(iii) The servicer has been cited during the preceding five years
for failure to submit audit reports required under Title IV of the HEA
in a timely fashion; and
(2)(i) In the case of a servicer that has been subjected to a
termination action by the Secretary, either the servicer, or one or
more persons or entities that the Secretary determines (under the
provisions of Sec. 668.13) exercise substantial control over the
servicer, or both, have not submitted to the Secretary financial
guarantees in an amount determined by the Secretary to be sufficient to
satisfy the servicer's potential liabilities arising from the
servicer's administration of the Title IV, HEA programs; or
(ii) One or more persons or entities that the Secretary determines
(under the provisions of Sec. 668.13) exercise substantial control over
the servicer have not agreed to be jointly or severally liable for any
liabilities arising from the servicer's administration of the Title IV,
HEA programs and civil and criminal monetary penalties authorized under
Title IV of the HEA.
(e)(1)(i) An institution that participates in a Title IV, HEA
program shall notify the Secretary within 10 days of the date that--
(A) The institution enters into a new contract or significantly
modifies an existing contract with a third-party servicer to administer
any aspect of that program;
(B) The institution or a third-party servicer terminates a contract
for the servicer to administer any aspect of that program; or
(C) A third-party servicer that administers any aspect of the
institution's participation in that program stops providing services
for the administration of that program, goes out of business, or files
a petition under the Bankruptcy Code.
(ii) The institution's notification must include the name and
address of the servicer.
(2) An institution that contracts with a third-party servicer to
administer any aspect of the institution's participation in a Title IV,
HEA program shall provide to the Secretary, upon request, a copy of the
contract, including any modifications, and provide information
pertaining to the contract or to the servicer's administration of the
institution's participation in any Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
10. Section 668.81 is amended by removing paragraph (f); revising
paragraphs (a)(1) introductory text, (b), (c) introductory text, and
(c)(1); and adding a new paragraph (a)(1)(iv) to read as follows:
Sec. 668.81 Scope and special definitions.
(a)(1) This subpart establishes regulations for the following
actions with respect to a participating institution or third-party
servicer:
* * * * *
(iv) The limitation, suspension, or termination of the eligibility
of the servicer to contract with any institution to administer any
aspect of the institution's participation in a Title IV, HEA program.
* * * * *
(b) This subpart applies to an institution or a third-party
servicer that violates any statutory provision of or applicable to
Title IV, of the HEA, any regulatory provision prescribed under that
statutory authority, or any applicable special arrangement, agreement,
or limitation prescribed under authority of Title IV of the HEA.
(c) This subpart does not apply to a determination that--
(1) An institution or any of its locations or educational programs
fails to qualify for initial designation as an eligible institution,
location, or educational program because the institution, location, or
educational program fails to satisfy the statutory and regulatory
provisions that define an eligible institution or educational program
with respect to the Title IV, HEA program for which a designation of
eligibility is sought; or
* * * * *
11. Section 668.82 is revised to read as follows:
Sec. 668.82 Standard of conduct.
(a) A participating institution or a third-party servicer that
contracts with that institution acts in the nature of a fiduciary in
the administration of the Title IV, HEA programs. To participate in any
Title IV, HEA program, the institution or servicer must at all times
act with the competency and integrity necessary to qualify as a
fiduciary.
(b) In the capacity of a fiduciary--
(1) A participating institution is subject to the highest standard
of care and diligence in administering the programs and in accounting
to the Secretary for the funds received under those programs; and
(2) A third-party servicer is subject to the highest standard of
care and diligence in administering any aspect of the programs on
behalf of the institutions with which the servicer contracts and in
accounting to the Secretary and those institutions for any funds
administered by the servicer under those programs.
(c) The failure of a participating institution or any of the
institution's third-party servicers to administer a Title IV, HEA
program, or to account for the funds that the institution or servicer
receives under that program, in accordance with the highest standard of
care and diligence required of a fiduciary, constitutes grounds for--
(1) An emergency action against the institution, a fine on the
institution, or the limitation, suspension, or termination of the
institution's participation in that program; or
(2) An emergency action against the servicer, a fine on the
servicer, or the limitation, suspension, or termination of the
servicer's eligibility to contract with any institution to administer
any aspect of the institution's participation in that program.
(d)(1) A participating institution or a third-party servicer with
which the institution contracts violates its fiduciary duty if--
(i)(A) The servicer has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or
expenditure of Federal, State, or local government funds, or has been
administratively or judicially determined to have committed fraud or
any other material violation of law involving those funds;
(B) A person who exercises substantial control over the servicer,
as determined according to Sec. 668.13, has been convicted of, or has
pled nolo contendere or guilty to, a crime involving the acquisition,
use, or expenditure of Federal, State, or local government funds, or
has been administratively or judicially determined to have committed
fraud or any other material violation of law involving those funds;
(C) The servicer employs a person in a capacity that involves the
administration of Title IV, HEA programs or the receipt of Title IV,
HEA program funds who has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or
expenditure of Federal, State, or local government funds, or who has
been administratively or judicially determined to have committed fraud
or any other material violation of law involving those funds; or
(D) The servicer uses or contracts with any other person, agency,
or organization that has been or whose officers or employees have
been--
(1) Convicted of, or pled nolo contendere or guilty to, a crime
involving the acquisition, use, or expenditure of Federal, State, or
local government funds; or
(2) Administratively or judicially determined to have committed
fraud or any other material violation of law involving Federal, State,
or local government funds; and
(ii) Upon learning of a conviction, plea, or administrative or
judicial determination described in paragraph (d)(1)(i) (B) through (D)
of this section, the institution or servicer, as applicable, does not
promptly remove the person, agency, or organization from any
involvement in the administration of the institution's participation in
Title IV, HEA programs, or, as applicable, the removal or elimination
of any substantial control, as determined according to Sec. 668.13,
over the servicer.
(2)(i) A participating institution or a third-party servicer with
which the institution contracts violates its fiduciary responsibility
if the servicer commits a violation of a statutory provision of or
applicable to Title IV of the HEA, a regulatory provision prescribed
under that statutory authority, or any applicable special arrangement,
agreement, or limitation by, a principal or affiliate of the servicer
(as those terms are defined in 34 CFR part 85); and
(ii) Upon learning of a conviction, plea, or administrative or
judicial determination described in paragraph (d)(2)(i) of this
section, the institution or servicer, as applicable, does not promptly
remove the person, agency, or organization from any involvement in the
administration of the institution's participation in Title IV, HEA
programs, or, as applicable, the removal or elimination of any
substantial control, as determined according to Sec. 668.13, over the
servicer.
(3) A violation for a reason contained in paragraphs (d) (1) and
(2) of this section is grounds for terminating--
(i) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in a Title IV,
HEA program; and
(ii) The participation in any Title IV, HEA program of any
institution under whose contract the servicer committed the violation,
if that institution had been aware of the violation and had failed to
take the appropriate action described in paragraphs (d)(1)(ii) and
(d)(2)(ii) of this section.
(e)(1) A participating institution or third-party servicer, as
applicable, violates its fiduciary duty if--
(i)(A) The institution or servicer, as applicable, is debarred or
suspended under Executive Order (E.O.) 12549 (3 CFR, 1987 Comp., p.
189) or the Federal Acquisition Regulations (FAR), 48 CFR part 9,
subpart 9.4; or
(B) Cause exists under 34 CFR 85.305 or 85.405 for debarring or
suspending the institution, servicer, or any principal or affiliate of
the institution or servicer under E.O. 12549 or the FAR, 48 CFR part 9,
subpart 9.4; and
(ii) Upon learning of the debarment, suspension, or cause for
debarment or suspension, the institution or servicer, as applicable,
does not promptly--
(A) Discontinue the affiliation; or
(B) Remove the principal from responsibility for any aspect of the
administration of an institution's or servicer's participation in the
Title IV, HEA programs.
(2) A violation for a reason contained in paragraph (e)(1) of this
section is grounds for terminating--
(i) The institution's participation in any Title IV, HEA program;
and
(ii) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program. The violation is also grounds for terminating, under
this subpart, the participation in any Title IV, HEA program of any
institution under whose contract the servicer committed the violation,
if that institution knew or should have known of the violation.
(f)(1) The debarment of a participating institution or third-party
servicer, as applicable, under E.O. 12549 or the FAR, 48 CFR part 9,
subpart 9.4, by the Department of Education or another Federal agency
from participation in Federal programs, under procedures that comply
with 5 U.S.C. 554-557 (formal adjudication requirements under the
Administrative Procedure Act), terminates, for the duration of the
debarment--
(i) The institution's participation in any Title IV, HEA program;
and
(ii) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program.
(2)(i) The suspension of a participating institution or third-party
servicer, as applicable, under E.O. 12549 or the FAR, 48 CFR part 9,
subpart 9.4, by the Department of Education or another Federal agency
from participation in Federal programs, under procedures that comply
with 5 U.S.C. 554-557, suspends--
(A) The institution's participation in any Title IV, HEA program;
and
(B) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program.
(ii) A suspension under this paragraph lasts for a period of 60
days, beginning on the date of the suspending official's decision,
except that the suspension may last longer if--
(A) The institution or servicer, as applicable, and the Secretary,
agree to an extension of the suspension; or
(B) The Secretary begins a limitation or termination proceeding
against the institution or servicer, as applicable, under this subpart
before the 60th day of the suspension.
(Authority: E.O. 12549 (3 CFR, 1987 Comp., p. 189), 12689 (3 CFR,
1989 Comp., p. 235); 20 U.S.C. 1070, et seq., 1082(a)(1) and (h)(1),
1094(c)(1) (D) and (H), and 3474)
12. Section 668.83 is revised to read as follows:
Sec. 668.83 Emergency action.
(a) Under an emergency action, the Secretary may--
(1) Withhold Title IV, HEA program funds from a participating
institution or its students, or from a third-party servicer, as
applicable;
(2)(i) Withdraw the authority of the institution or servicer, as
applicable, to commit, disburse, deliver, or cause the commitment,
disbursement, or delivery of Title IV, HEA program funds; or
(ii) Withdraw the authority of the institution or servicer, as
applicable, to commit, disburse, deliver, or cause the commitment,
disbursement, or delivery of Title IV, HEA program funds except in
accordance with a particular procedure; and
(3)(i) Withdraw the authority of the servicer to administer any
aspect of any institution's participation in any Title IV, HEA program;
or
(ii) Withdraw the authority of the servicer to administer any
aspect of any institution's participation in any Title IV, HEA program
except in accordance with a particular procedure.
(b)(1) An initiating official begins an emergency action against an
institution or third-party servicer by sending the institution or
servicer a notice by registered mail, return receipt requested. In an
emergency action against a third-party servicer, the official also
sends the notice to each institution that contracts with the servicer.
The official also may transmit the notice by other, more expeditious
means if practical.
(2) The emergency action takes effect on the date the initiating
official mails the notice to the institution or servicer, as
applicable.
(3) The notice states the grounds on which the emergency action is
based, the consequences of the emergency action, and that the
institution or servicer, as applicable, may request an opportunity to
show cause why the emergency action is unwarranted.
(c)(1) An initiating official takes emergency action against an
institution or third-party servicer only if that official--
(i) Receives information, determined by the official to be
reliable, that the institution or servicer, as applicable, is violating
any statutory provision of or applicable to Title IV of the HEA, any
regulatory provision prescribed under that statutory authority, or any
applicable special arrangement, agreement, or limitation;
(ii) Determines that immediate action is necessary to prevent
misuse of Title IV, HEA program funds; and
(iii) Determines that the likelihood of loss from that misuse
outweighs the importance of awaiting completion of any proceeding that
may be initiated to limit, suspend, or terminate, as applicable--
(A) The participation of the institution in one or more Title IV,
HEA programs; or
(B) The eligibility of the servicer to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program.
(2) Examples of violations of a Title IV, HEA program requirement
that cause misuse and the likely loss of Title IV, HEA program funds
include--
(i) Causing the commitment, disbursement, or delivery by any party
of Title IV, HEA program funds in an amount that exceeds--
(A) The amount for which students are eligible; or
(B) The amount of principal, interest, or special allowance
payments that would have been payable to the holder of a Federal
Stafford, Federal PLUS, or Federal SLS loan if a refund allocable to
that loan had been made in the amount and at the time required;
(ii) Using, offering to make available, or causing the use or
availability of Title IV, HEA program funds for educational services
if--
(A) The institution, servicer, or agents of the institution or
servicer have made a substantial misrepresentation as described in
Secs. 668.72, 668.73, or 668.74 related to those services;
(B) The institution lacks the administrative or financial ability
to provide those services in full; or
(C) The institution, or servicer, as applicable, lacks the
administrative or financial ability to compensate by appropriate refund
for any portion of an educational program not completed by a student;
and
(iii) Engaging in fraud involving the administration of a Title IV,
HEA program. Examples of fraud include--
(A) Falsification of any document received from a student or
pertaining to a student's eligibility for assistance under a Title IV,
HEA program;
(B) Falsification, including false certifications, of any document
submitted by the institution or servicer to the Department of
Education;
(C) Falsification, including false certifications, of any document
used for or pertaining to--
(1) The legal authority of an institution to provide postsecondary
education in the State in which the institution is located; or
(2) The accreditation or preaccreditation of an institution or any
of the institution's educational programs or locations;
(D) Falsification, including false certifications, of any document
submitted to a guaranty agency under the Federal Stafford Loan, Federal
PLUS, and Federal SLS programs or an independent auditor;
(E) Falsification of any document submitted to a third-party
servicer by an institution or to an institution by a third-party
servicer pertaining to the institution's participation in a Title IV,
HEA program; and
(F) Falsification, including false certifications, of any document
pertaining to the performance of any loan collection activity,
including activity that is not required by the HEA or applicable
program regulations.
(3) If the Secretary begins an emergency action against a third-
party servicer, the Secretary may also begin an emergency action
against any institution under whose contract a third-party servicer
commits the violation.
(d)(1) Except as provided in paragraph (d)(2) of this section,
after an emergency action becomes effective, an institution or third-
party servicer, as applicable, may not--
(i) Make or increase awards or make other commitments of aid to a
student under the applicable Title IV, HEA program;
(ii) Disburse either program funds, institutional funds, or other
funds as assistance to a student under that Title IV, HEA program;
(iii) In the case of an emergency action pertaining to
participation in the Federal Stafford Loan, Federal PLUS, or Federal
SLS Program--
(A) Certify an application for a loan under that program;
(B) Deliver loan proceeds to a student under that program; or
(C) Retain the proceeds of a loan made under that program that are
received after the emergency action takes effect; or
(iv) In the case of an emergency action against a third-party
servicer, administer any aspect of any institution's participation in
any Title IV, HEA program.
(2) If the initiating official withdraws, by an emergency action,
the authority of the institution or servicer to commit, disburse,
deliver, or cause the commitment, disbursement, or delivery of Title
IV, HEA program funds, or the authority of the servicer to administer
any aspect of any institution's participation in any Title IV, HEA
program, except in accordance with a particular procedure specified in
the notice of emergency action, the institution or servicer, as
applicable, may not take any action described in paragraph (d)(1) of
this section except in accordance with the procedure specified in the
notice.
(e)(1) Upon request by the institution or servicer, as applicable,
the Secretary provides the institution or servicer, as soon as
practicable, with an opportunity to show cause that the emergency
action is unwarranted or should be modified.
(2) An opportunity to show cause consists of an opportunity to
present evidence and argument to a show-cause official. The initiating
official does not act as the show-cause official for any emergency
action that the initiating official has begun. The show-cause official
is authorized to grant relief from the emergency action. The
institution or servicer may make its presentation in writing or, upon
its request, at an informal meeting with the show-cause official.
(3) The show-cause official may limit the time and manner in which
argument and evidence may be presented in order to avoid unnecessary
delay or the presentation of immaterial, irrelevant, or repetitious
matter.
(4) The institution or servicer, as applicable, has the burden of
persuading the show-cause official that the emergency action imposed by
the notice is unwarranted or should be modified because--
(i) The grounds stated in the notice did not, or no longer, exist;
(ii) The grounds stated in the notice will not cause loss or misuse
of Title IV, HEA program funds; or
(iii) The institution or servicer, as applicable, will use
procedures that will reliably eliminate the risk of loss from the
misuse described in the notice.
(5) The show-cause official continues, modifies, or revokes the
emergency action promptly after consideration of any argument and
evidence presented by the institution or servicer, as applicable, and
the initiating official.
(6) The show-cause official notifies the institution or servicer,
as applicable, of that official's determination promptly after the
completion of the show-cause meeting or, if no meeting is requested,
after the official receives all the material submitted by the
institution in opposition to the emergency action. In the case of a
notice to a third-party servicer, the official also notifies each
institution that contracts with the servicer of that determination. The
show-cause official may explain that determination by adopting or
modifying the statement of reasons provided in the notice of emergency
action.
(f)(1) An emergency action does not extend more than 30 days after
initiated unless the Secretary initiates a limitation, suspension, or
termination proceeding under this part or under 34 CFR part 600 against
the institution or servicer, as applicable, within that 30-day period,
in which case the emergency action continues until a final decision is
issued in that proceeding, as provided in Sec. 668.90 (c) or (f), as
applicable.
(2) Until a final decision is issued by the Secretary in a
proceeding described in paragraph (f)(1) of this section, the
continuation, modification, or revocation of the emergency action is at
the sole discretion of the initiating official, or, if a show-cause
proceeding is conducted, the show-cause official.
(3) If an emergency action extends beyond 180 days by virtue of
paragraph (f)(1) of this section, the institution or servicer, as
applicable, may then submit written material to the show-cause official
to demonstrate that because of facts occurring after the later of the
notice by the initiating official or the show-cause meeting,
continuation of the emergency action is unwarranted and the emergency
action should be modified or ended. The show-cause official considers
any written material submitted and issues a determination that
continues, modifies, or revokes the emergency action.
(g) The expiration, modification, or revocation of an emergency
action against an institution or third-party servicer does not bar
subsequent emergency action against that institution on grounds other
than those specifically identified in the notice imposing the prior
emergency action. Separate grounds may include violation by an
institution or third-party servicer of an agreement or limitation
imposed or resulting from the prior emergency action.
(Authority: 20 U.S.C. 1094)
13. Section 668.84 is revised to read as follows:
Sec. 668.84 Fine proceedings.
(a) Scope and consequences. (1) The Secretary may impose a fine of
up to $25,000 per violation on a participating institution or third-
party servicer that--
(i) Violates any statutory provision of or applicable to Title IV
of the HEA, any regulatory provision prescribed under that statutory
authority, or any applicable special arrangement, agreement, or
limitation; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a fine proceeding against a third-party
servicer, the Secretary also may begin a fine, limitation, suspension,
or termination proceeding against any institution under whose contract
a third-party servicer commits the violation.
(b) Procedures. (1) A designated department official begins a fine
proceeding by sending the institution or servicer, as applicable, a
notice by certified mail, return receipt requested. In the case of a
fine proceeding against a third-party servicer, the official also sends
the notice to each institution that is affected by the alleged
violations identified as the basis for the fine action, and, to the
extent possible, to each institution that contracts with the servicer
for the same service affected by the violation. This notice--
(i) Informs the institution or servicer of the Secretary's intent
to fine the institution or servicer, as applicable, and the amount of
the fine and identifies the alleged violations that constitute the
basis for the action;
(ii) Specifies the proposed effective date of the fine, which is at
least 20 days from mailing of the notice of intent;
(iii) Informs the institution or servicer that the fine will not be
effective on the date specified in the notice if the designated
department official receives from the institution or servicer, as
applicable, by that date a written request for a hearing or written
material indicating why the fine should not be imposed; and
(iv) In the case of a fine proceeding against a third-party
servicer, informs each institution that is affected by the alleged
violations of the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution affected by
the alleged violations that--
(i) The fine will not be imposed; or
(ii) The fine is imposed as of a specified date, and in a specified
amount.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceedings. With the approval of the hearing
official and the consent of the designated department official and the
institution or servicer, any time schedule specified in this section
may be shortened.
(Authority: 20 U.S.C. 1094)
14. Section 668.85 is revised to read as follows:
Sec. 668.85 Suspension proceedings.
(a) Scope and consequences. (1) The Secretary may suspend an
institution's participation in a Title IV, HEA program or the
eligibility of a third-party servicer to contract with any institution
to administer any aspect of the institution's participation in any
Title IV, HEA program, if the institution or servicer--
(i) Violates any statutory provision of or applicable to Title IV
of the HEA, any regulatory provision prescribed under that statutory
authority, or any applicable special arrangement, agreement, or
limitation; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a suspension proceeding against a
third-party servicer, the Secretary also may begin a fine, limitation,
suspension, or termination proceeding against any institution under
whose contract a third-party servicer commits the violation.
(3) The suspension may not exceed 60 days unless--
(i) The institution or servicer and the Secretary agree to an
extension if the institution or servicer, as applicable, has not
requested a hearing; or
(ii) The designated department official begins a limitation or
termination proceeding under Sec. 668.86.
(b) Procedures. (1) A designated department official begins a
suspension proceeding by sending a notice to an institution or third-
party servicer by certified mail, return receipt requested. In the case
of a suspension proceeding against a third-party servicer, the official
also sends the notice to each institution that contracts with the
servicer. The designated department official may also transmit the
notice by other, more expeditious means if practical. The notice--
(i) Informs the institution or servicer of the intent of the
Secretary to suspend the institution's participation or the servicer's
eligibility, as applicable, cites the consequences of that action, and
identifies the alleged violations that constitute the basis for the
action;
(ii) Specifies the proposed effective date of the suspension, which
is at least 20 days after the date of mailing of the notice of intent;
(iii) Informs the institution or servicer that the suspension will
not be effective on the date specified in the notice, except as
provided in Sec. 668.90(b)(2), if the designated department official
receives from the institution or servicer, as applicable, by that date
a request for a hearing or written material indicating why the
suspension should not take place; and
(iv) In the case of a suspension proceeding against a third-party
servicer, informs each institution that contracts with the servicer of
the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing, but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution that
contracts with the servicer that--
(i) The proposed suspension is dismissed; or
(ii) The suspension is effective as of a specified date.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
The suspension does not take place until after the requested hearing is
held.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceedings. With the approval of the hearing
official and the consent of the designated department official and the
institution or servicer, as applicable, any time period specified in
this section may be shortened.
(Authority: 20 U.S.C. 1094)
15. Section 668.86 is revised to read as follows:
Sec. 668.86 Limitation or termination proceedings.
(a) Scope and consequences. (1) The Secretary may limit or
terminate an institution's participation in a Title IV, HEA program or
the eligibility of a third-party servicer to contract with any
institution to administer any aspect of the institution's participation
in any Title IV, HEA program, if the institution or servicer--
(i) Violates any statutory provision of or applicable to Title IV
of the HEA, any regulatory provision prescribed under that statutory
authority, or any applicable special arrangement, agreement, or
limitation; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a limitation or termination proceeding
against a third-party servicer, the Secretary also may begin a fine,
limitation, suspension, or termination proceeding against any
institution under whose contract a third-party servicer commits the
violation.
(3) The consequences of the limitation or termination of the
institution's participation or the servicer's eligibility are described
in Secs. 668.93 and 668.94, respectively.
(b) Procedures. (1) A designated department official begins a
limitation or termination proceeding by sending an institution or
third-party servicer a notice by certified mail, return receipt
requested. In the case of a limitation or termination proceeding
against a third-party servicer, the official also sends the notice to
each institution that contracts with the servicer. The designated
department official may also transmit the notice by other, more
expeditious means if practical. This notice--
(i) Informs the institution or servicer of the intent of the
Secretary to limit or terminate the institution's participation or
servicer's eligibility, as applicable, cites the consequences of that
action, and identifies the alleged violations that constitute the basis
for the action, and, in the case of a limitation proceeding, states the
limits to be imposed;
(ii) Specifies the proposed effective date of the limitation or
termination, which is at least 20 days after the date of mailing of the
notice of intent;
(iii) Informs the institution or servicer that the limitation or
termination will not be effective on the date specified in the notice
if the designated department official receives from the institution or
servicer, as applicable, by that date a request for a hearing or
written material indicating why the limitation or termination should
not take place; and
(iv) In the case of a limitation or termination proceeding against
a third-party servicer, informs each institution that contracts with
the servicer of the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution that
contracts with the servicer that--
(i) The proposed action is dismissed;
(ii) Limitations are effective as of a specified date; or
(iii) The termination is effective as of a specified date.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
The limitation or termination does not take place until after the
requested hearing is held.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceeding. With the approval of the hearing official
and the consent of the designated department official and the
institution or servicer, as applicable, any time schedule specified in
this section may be shortened.
(Authority: 20 U.S.C. 1094)
16. Section 668.87 is revised to read as follows:
Sec. 668.87 Prehearing conference.
(a) A hearing official may convene a prehearing conference if he or
she thinks that the conference would be useful, or if the conference is
requested by--
(1) The designated department official who brought a proceeding
against an institution or third-party servicer under this subpart; or
(2) The institution or servicer, as applicable.
(b) The purpose of a prehearing conference is to allow the parties
to settle or narrow the dispute.
(c) If the hearing official, the designated department official,
and the institution, or servicer, as applicable, agree, a prehearing
conference may consist of--
(1) A conference telephone call;
(2) An informal meeting; or
(3) The submission and exchange of written material.
(Authority: 20 U.S.C. 1094)
17. Section 668.88 is amended by revising paragraph (b)
introductory text and paragraph (d) to read as follows:
Sec. 668.88 Hearing.
* * * * *
(b) If the hearing official, the designated department official who
brought a proceeding against an institution or third-party servicer
under this subpart, and the institution or servicer, as applicable,
agree, the hearing process may be expedited. Procedures to expedite the
hearing process may include, but are not limited to, the following--
* * * * *
(d) The designated department official makes a transcribed record
of the proceeding and makes the record available to the institution or
servicer, as applicable, upon request and upon the institution's or
servicer's payment of a fee comparable to that prescribed under the
Department of Education Freedom of Information Act regulations (34 CFR
part 5).
(Authority: 20 U.S.C. 1094)
18. Section 668.89 is amended by revising paragraphs (a), (b)(2),
and (c) introductory text, and adding a new paragraph (d) to read as
follows:
Sec. 668.89 Authority and responsibilities of the hearing official.
(a) The hearing official regulates the course of a hearing and the
conduct of the parties during the hearing. The hearing official takes
all necessary steps to conduct a fair and impartial hearing.
(b) * * *
(2) If requested by the hearing official, the parties to a hearing
shall provide available personnel who have knowledge about the matter
under review for oral or written examination.
(c) The hearing official takes whatever measures are appropriate to
expedite a hearing. These measures may include, but are not limited to,
the following--
* * * * *
(d) The hearing official is bound by all applicable statutes and
regulations. The hearing official may not--
(1) Waive applicable statutes and regulations; or
(2) Rule them invalid.
(Authority: 20 U.S.C. 1094)
19. Section 668.90 is revised to read as follows:
Sec. 668.90 Initial and final decisions--Appeals.
(a)(1)(i) A hearing official issues a written initial decision in a
hearing by certified mail, return receipt requested to--
(A) The designated department official who began a proceeding
against an institution or third-party servicer;
(B) The institution or servicer, as applicable; and
(C) In the case of a proceeding against a third-party servicer,
each institution that contracts with the servicer.
(ii) The hearing official may also transmit the notice by other,
more expeditious means if practical.
(iii) The hearing official issues the decision within the latest of
the following dates:
(A) The 30th day after the last submission is filed with the
hearing official.
(B) The 60th day after the last submission is filed with the
hearing official if the Secretary, upon request of the hearing
official, determines that the unusual complexity of the case requires
additional time for preparation of the decision.
(C) The 50th day after the last day of the hearing, if the hearing
official does not request the parties to make any posthearing
submission.
(2) The hearing official's initial decision states whether the
imposition of the fine, limitation, suspension, or termination sought
by the designated department official is warranted, in whole or in
part. If the designated department official brought a termination
action against the institution or servicer, the hearing official may,
if appropriate, issue an initial decision to fine the institution or
servicer, as applicable, or, rather than terminating the institution's
participation or servicer's eligibility, as applicable, impose one or
more limitations on the institution's participation or servicer's
eligibility.
(3) Notwithstanding the provisions of paragraph (a)(2) of this
section--
(i) If, in a termination action against an institution, the hearing
official finds that the institution has violated the provisions of
Sec. 668.12(b)(2)(vi), the hearing official also finds that termination
of the institution's participation is warranted;
(ii) If, in a termination action against a third-party servicer,
the hearing official finds that the servicer has violated the
provisions of Sec. 668.82(d) (1) and (2), the hearing official also
finds that termination of the institution's participation or servicer's
eligibility, as applicable, is warranted;
(iii) If an action brought against an institution or third-party
servicer involves its failure to provide surety in the amount specified
by the Secretary under Sec. 668.13, the hearing official must find that
the amount of the surety established by the Secretary was appropriate
unless the institution can demonstrate that the amount was
unreasonable;
(iv) In a limitation, suspension, or termination proceeding
commenced on the grounds described in Sec. 668.15(b)(1), if the hearing
official finds that an institution's Federal Stafford loan and Federal
SLS cohort default rate, as defined in Sec. 668.15(f), meets the
conditions specified in Sec. 668.15(b)(1) for initiation of limitation,
suspension, or termination proceedings, the hearing official finds that
the sanction sought by the designated department official is warranted,
except that the hearing official finds that no sanction is warranted if
the institution demonstrates that it has acted diligently to implement
the default reduction measures described in Appendix D to this part;
(v) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer
failed to comply with the requirements of Sec. 668.23(c)(4), if the
hearing official finds that the institution or servicer failed to meet
those requirements, the hearing official finds that the termination is
warranted;
(vi) In a termination action against an institution based on the
grounds that the institution is not financially responsible under
Sec. 668.13(c)(4), the hearing official finds that the termination is
warranted unless the institution demonstrates that all applicable
conditions described in Sec. 668.13(d)(3) have been met; and
(vii) In a termination action against an institution or third-party
servicer on the grounds that the institution or servicer, as
applicable, engaged in fraud involving the administration of any Title
IV, HEA program, the hearing official finds that the termination action
is warranted if the hearing official finds that the institution or
servicer, as applicable, engaged in that fraud. Examples of fraud
include--
(A) Falsification of any document received from a student or
pertaining to a student's eligibility for assistance under a Title IV,
HEA program;
(B) Falsification, including false certifications, of any document
submitted by the institution or servicer to the Department of
Education;
(C) Falsification, including false certifications, of any document
used for or pertaining to--
(1) The legal authority of an institution to provide postsecondary
education in the State in which the institution is located; or
(2) The accreditation or preaccreditation of an institution or any
of the institution's educational programs or locations;
(D) Falsification, including false certifications, of any document
submitted to a guaranty agency under the Federal Stafford Loan, Federal
PLUS, and Federal SLS programs, an independent auditor, an eligible
institution, or a third-party servicer;
(E) Falsification of any document submitted to a third-party
servicer by an institution or to an institution by a third-party
servicer pertaining to the institution's participation in a Title IV,
HEA program; and
(F) Falsification, including false certifications, of any document
pertaining to the performance of any loan collection activity,
including activity that is not required by the HEA or applicable
program regulations.
(4) The hearing official bases findings of fact only on evidence
considered at the hearing and on matters given judicial notice. If a
hearing is conducted solely through written submissions, the parties
must agree to findings of fact.
(b)(1) In a suspension proceeding, the Secretary reviews the
hearing official's initial decision and issues a final decision within
20 days after the initial decision. The Secretary adopts the initial
decision unless it is clearly unsupported by the evidence presented at
the hearing.
(2) The Secretary notifies the institution or servicer and, in the
case of a suspension proceeding against a third-party servicer, each
institution that contracts with the servicer of the final decision. If
the Secretary suspends the institution's participation or servicer's
eligibility, the suspension takes effect on the later of--
(i) The day that the institution or servicer receives the notice;
or
(ii) The date specified in the designated department official's
original notice of intent to suspend the institution's participation or
servicer's eligibility.
(3) A suspension may not exceed 60 days unless a designated
department official begins a limitation or termination proceeding under
this subpart before the expiration of that period. In that case, the
period may be extended until a final decision is issued in that
proceeding according to paragraph (c) of this section.
(c)(1) In a fine, limitation, or termination proceeding, the
hearing official's initial decision automatically becomes the
Secretary's final decision 30 days after the initial decision is issued
and received by both parties unless, within that 30-day period, the
institution or servicer, as applicable, or the designated department
official appeals the initial decision to the Secretary.
(2)(i) A party may appeal the hearing official's initial decision
by submitting to the Secretary, within 30 days after the party receives
the initial decision, a brief or other written statement that explains
why the party believes that the Secretary should reverse or modify the
decision of the hearing official.
(ii) At the time the party files its appeal submission, the party
shall provide a copy of that submission to the opposing party.
(iii) The opposing party shall submit its brief or other responsive
statement to the Secretary, with a copy to the appellant, within 30
days after the opposing party receives the appellant's brief or written
statement.
(iv) The appealing party may submit proposed findings of fact or
conclusions of law. However, the proposed findings of fact must be
supported by--
(A) The evidence introduced into the record at the hearing;
(B) Stipulations of the parties if the hearing consisted of written
submissions; or
(C) Matters that may be judicially noticed.
(v) Neither party may introduce new evidence on appeal.
(vi) The initial decision of the hearing official imposing a fine
or limiting or terminating the institution's participation or
servicer's eligibility does not take effect pending the appeal.
(vii) The Secretary renders a final decision. The Secretary may
delegate to a designated department official the functions described in
paragraph (c)(2) (vii) through (ix) of this section.
(viii) In rendering a final decision, the Secretary considers only
evidence introduced into the record at the hearing and facts agreed to
by the parties if the hearing consisted only of written submissions and
matters that may be judicially noticed.
(ix) If the hearing official finds that a termination is warranted
pursuant to paragraph (a)(3) of this section, the Secretary affirms
that decision. In any other case, the Secretary may affirm, modify, or
reverse the initial decision, or may remand the case to the hearing
official for further proceedings consistent with the Secretary's
decision. If the Secretary affirms the initial decision without issuing
a statement of reasons, the Secretary adopts the opinion of the hearing
official as the decision of the Secretary. If the Secretary modifies,
remands, or reverses the initial decision, in whole or in part, the
Secretary's decision states the reasons for the action taken.
(Authority: 20 U.S.C. 1082, 1094)
20. Section 668.91 is amended by revising the heading; and revising
paragraphs (a)(1), (a)(2), (b) heading, (b)(1), (b)(2) introductory
text, and (c) to read as follows:
Sec. 668.91 Filing of requests for hearings and appeals; confirmation
of mailing and receipt dates.
(a) * * *
(1) A request by an institution or third-party servicer for a
hearing or show-cause opportunity, other material submitted by an
institution or third-party servicer in response to a notice of proposed
action under this subpart, or an appeal to the Secretary under this
subpart must be filed with the designated department official by hand-
delivery, mail, or facsimile transmission.
(2) Documents filed by facsimile transmission must be transmitted
to the designated department official identified, either in the notice
initiating the action, or, for an appeal, in instructions provided by
the hearing official, as the individual responsible to receive them. A
party filing a document by facsimile transmission must confirm that a
complete and legible copy of the document was received by the
Department of Education, and may be required by the designated
department official to provide a hard copy of the document.
* * * * *
(b) Confirmation of mailing and receipt dates. (1) The mailing date
of a notice from a designated department official initiating an action
under this subpart is the date evidenced on the original receipt of
mailing from the U.S. Postal Service.
(2) The date on which a request for a show-cause opportunity, a
request for a hearing, other material submitted in response to a notice
of action under this subpart, a decision by a hearing official, or a
notice of appeal is received is, as applicable--
* * * * *
(c) Refusals. If an institution or third-party servicer refuses to
accept a notice mailed under this subpart, the Secretary considers the
notice as being received on the date that the institution or servicer
refuses to accept the notice.
(Authority: 20 U.S.C. 1094)
21. Section 668.92 is revised to read as follows:
Sec. 668.92 Fines.
(a) In determining the amount of a fine, the designated department
official, hearing official, and Secretary take into account--
(1)(i) The gravity of an institution's or third-party servicer's
violation or failure to carry out the relevant statutory provision,
regulatory provision, special arrangement, agreement, or limitation; or
(ii) The gravity of the institution's or servicer's
misrepresentation;
(2) The size of the institution;
(3) The size of the servicer's business, including the number of
institutions and students served by the servicer;
(4) In the case of a violation by a third-party servicer, the
extent to which the servicer can document that the institution
contributed to that violation; and
(5)(i) For purposes of assessing a fine on a third-party servicer,
the extent to which violations are caused by repeated mechanical
systemic unintentional errors.
(ii) The Secretary counts the total of violations caused by
repeated mechanical systemic unintentional errors as a single
violation.
(b) In determining the gravity of the institution's or servicer's
violation, failure, or misrepresentation under paragraph (a) of this
section, the designated department official, hearing official, and
Secretary take into account the amount of any liability owed by the
institution and any third-party servicer that contracts with the
institution, and the number of students affected as a result of that
violation, failure, or misrepresentation on--
(1) Improperly expended or unspent Title IV, HEA program funds
received by the institution or servicer, as applicable; or
(2) Required refunds.
(c) Upon the request of the institution or third-party servicer,
the Secretary may compromise the fine.
(Authority: 20 U.S.C. 1094)
22. Section 668.93 is revised to read as follows:
Sec. 668.93 Limitation.
A limitation may include, as appropriate to the Title IV, HEA
program in question--
(a) A limit on the number or percentage of students enrolled in an
institution who may receive Title IV, HEA program funds;
(b) A limit, for a stated period of time, on the percentage of an
institution's total receipts from tuition and fees derived from Title
IV, HEA program funds;
(c) A limit on the number or size of institutions with which a
third-party servicer may contract;
(d) A limit on the number of borrower or loan accounts that a
third-party servicer may service under a contract with an institution;
(e) A limit on the responsibilities that a third-party servicer may
perform under a contract with an institution;
(f) A requirement for a third-party servicer to perform additional
responsibilities under a contract with an institution;
(g) A requirement that an institution obtain surety, in a specified
amount, to assure its ability to meet its financial obligations to
students who receive Title IV, HEA program funds;
(h) A requirement that a third-party servicer obtain surety, in a
specified amount, to assure the servicer's ability to meet the
servicer's financial obligations under a contract; or
(i) Other conditions as may be determined by the Secretary to be
reasonable and appropriate.
(Authority: 20 U.S.C. 1094)
23. Section 668.94 is revised to read as follows:
Sec. 668.94 Termination.
(a) A termination--
(1) Ends an institution's participation in a Title IV, HEA program
or ends a third-party servicer's eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program;
(2) Ends the authority of a third-party servicer to administer any
aspect of any institution's participation in that program;
(3) Prohibits an institution or third-party servicer, as
applicable, or the Secretary from making or increasing awards under
that program;
(4) Prohibits an institution or third-party servicer, as
applicable, from making any other new commitments of funds under that
program; and
(5) If an institution's participation in the Federal Stafford Loan,
Federal PLUS, or Federal SLS Program has been terminated, prohibits
further guarantee commitments by the Secretary for loans under that
program to students to attend that institution, and, if the institution
is a lender under that program, prohibits further disbursements by the
institution (whether or not guarantee commitments have been issued by
the Secretary or a guaranty agency for those disbursements).
(b) After its participation in a Title IV, HEA program has been
terminated, an institution may disburse or deliver funds under that
Title IV, HEA program to students enrolled at the institution only in
accordance with Sec. 668.26 and with any additional requirements
imposed under this part.
(c) If a third-party servicer's eligibility is terminated, the
servicer must return to each institution that contracts with the
servicer any funds received by the servicer under the applicable Title
IV, HEA program on behalf of the institution or the institution's
students or otherwise dispose of those funds under instructions from
the Secretary. The servicer also must return to each institution that
contracts with the servicer all records pertaining to the servicer's
administration of that program on behalf of that institution.
(Authority: 20 U.S.C. 1094)
24. Section 668.95 is revised to read as follows:
Sec. 668.95 Reimbursements, refunds, and offsets.
(a) The designated department official, hearing official, or
Secretary may require an institution or third-party servicer to take
reasonable and appropriate corrective action to remedy the
institution's or servicer's violation, as applicable, of any statutory
provision of or applicable to Title IV of the HEA, any regulatory
provision prescribed under that statutory authority, or any applicable
special arrangement, agreement, or limitation.
(b) The corrective action may include payment of any funds to the
Secretary, or to designated recipients, that the institution or
servicer, as applicable, improperly received, withheld, disbursed, or
caused to be disbursed. Corrective action may, for example, relate to--
(1) With respect to the Federal Stafford Loan, Federal PLUS, and
Federal SLS programs--
(i) Ineligible interest benefits, special allowances, or other
claims paid by the Secretary; and
(ii) Discounts, premiums, or excess interest paid in violation of
34 CFR part 682; and
(2) With respect to all Title IV, HEA programs--
(i) Refunds required under program regulations; and
(ii) Any grants, work-study assistance, or loans made in violation
of program regulations.
(c) If any final decision requires an institution or third-party
servicer to reimburse or make any other payment to the Secretary, the
Secretary may offset these claims against any benefits or claims due to
the institution or servicer.
(Authority: 20 U.S.C. 1094)
25. Section 668.96 is revised to read as follows:
Sec. 668.96 Reinstatement after termination.
(a)(1) An institution whose participation in a Title IV, HEA
program has been terminated may file a request for reinstatement of
that participation.
(2) A third-party servicer whose eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program has been terminated may file a request for
reinstatement of that eligibility.
(b) An institution whose participation has been terminated or a
third-party servicer whose eligibility has been terminated may request
reinstatement only after the later of the expiration of--
(1) Eighteen months from the effective date of the termination; or
(2) A debarment or suspension under Executive Order 12549 or the
Federal Acquisition Regulations, 48 CFR part 9, subpart 9.4.
(c) To be reinstated, an institution or third-party servicer must
submit its request for reinstatement in writing to the Secretary and
must--
(1) Demonstrate to the Secretary's satisfaction that it has
corrected the violation or violations on which its termination was
based, including payment in full to the Secretary or to other
recipients of funds that the institution or servicer, as applicable,
has improperly received, withheld, disbursed, or caused to be
disbursed;
(2) Meet all applicable requirements of this part; and
(3) In the case of an institution, enter into a new program
participation agreement with the Secretary.
(d) The Secretary, within 60 days of receiving the reinstatement
request--
(1) Grants the request;
(2) Denies the request; or
(3) Grants the request subject to a limitation or limitations.
(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1987 Comp., p. 189),
12689 (3 CFR, 1989 Comp., p. 235))
26. Section 668.97 is revised to read as follows:
Sec. 668.97 Removal of limitation.
(a) An institution whose participation in a Title IV, HEA program
has been limited may not apply for removal of the limitation before the
expiration of 12 months from the effective date of the limitation.
(b) A third-party servicer whose eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program has been limited may request removal of the
limitation.
(c) The institution or servicer may not apply for removal of the
limitation before the later of the expiration of--
(1) Twelve months from the effective date of the limitation; or
(2) A debarment or suspension under Executive Order 12549 or the
Federal Acquisition Regulations, 48 CFR part 9, subpart 9.4.
(d) If the institution or servicer requests removal of the
limitation, the request must be in writing and show that the
institution or servicer, as applicable, has corrected the violation or
violations on which the limitation was based.
(e) No later than 60 days after the Secretary receives the request,
the Secretary responds to the institution or servicer--
(1) Granting its request;
(2) Denying its request; or
(3) Granting the request subject to other limitation or
limitations.
(f) If the Secretary denies the request or establishes other
limitations, the Secretary grants the institution or servicer, upon the
institution's or servicer's request, an opportunity to show cause why
the participation or eligibility, as applicable, should be fully
reinstated.
(g) The institution's or servicer's request for an opportunity to
show cause does not waive--
(1) The institution's right to participate in any or all Title IV,
HEA programs if it complies with the continuing limitation or
limitations pending the outcome of the opportunity to show cause; and
(2) The servicer's right to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program, if the servicer complies with the continuing
limitation pending the outcome of the opportunity to show cause.
(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1987 Comp., p. 189),
12689 (3 CFR, 1989 Comp., p. 235))
27. Section 668.111 is amended by revising paragraphs (a) and (b)
to read as follows:
Sec. 668.111 Scope and purpose.
(a) This subpart establishes rules governing the appeal by an
institution or third-party servicer from a final audit determination or
a final program review determination arising from an audit or program
review of the institution's participation in any Title IV, HEA program
or of the servicer's administration of any aspect of an institution's
participation in any Title IV, HEA program.
(b) This subpart applies to any participating institution or third-
party servicer that appeals a final audit determination or final
program review determination.
* * * * *
28. Section 668.112 is revised to read as follows:
Sec. 668.112 Definitions.
The following definitions apply to this subpart:
(a) Final audit determination means the written notice of a
determination issued by a designated department official based on an
audit of--
(1) An institution's participation in any or all of the Title IV,
HEA programs; or
(2) A third-party servicer's administration of any aspect of an
institution's participation in any or all of the Title IV, HEA
programs.
(b) Final program review determination means the written notice of
a determination issued by a designated department official and
resulting from a program compliance review of--
(1) An institution's participation in any or all of the Title IV,
HEA programs; or
(2) A third-party servicer's administration of any aspect of an
institution's participation in any Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
29. Section 668.113 is revised to read as follows:
Sec. 668.113 Request for review.
(a) An institution or third-party servicer seeking the Secretary's
review of a final audit determination or a final program review
determination shall file a written request for review with the
designated department official.
(b) The institution or servicer shall file its request for review
and any records or materials admissible under the terms of Sec. 668.116
(e) and (f), no later than 45 days from the date that the institution
or servicer receives the final audit determination or final program
review determination.
(c) The institution or servicer shall attach to the request for
review a copy of the final audit determination or final program review
determination, and shall--
(1) Identify the issues and facts in dispute; and
(2) State the institution's or servicer's position, as applicable,
together with the pertinent facts and reasons supporting that position.
(Authority: 20 U.S.C. 1094)
30. Section 668.114 is revised to read as follows:
Sec. 668.114 Notification of hearing.
(a) Upon receipt of an institution's or third-party servicer's
request for review, the designated department official arranges for a
hearing before a hearing official.
(b) Within 30 days of the designated department official's receipt
of an institution's or third-party servicer's request for review, the
hearing official notifies the designated department official and the
institution or, in the case of a third-party servicer, the servicer and
each institution that contracts with the servicer of the schedule for
the submission of briefs by both the designated department official
and, as applicable, the institution or servicer.
(c) The hearing official schedules the submission of briefs and of
accompanying evidence admissible under the terms of Sec. 668.116 (e)
and (f) to occur no later than 120 days from the date that the hearing
official notifies the institution or servicer.
(Authority: 20 U.S.C. 1094)
31. Section 668.116 is amended by revising paragraphs (b), (d),
(e)(1), (f), and (g) to read as follows:
Sec. 668.116 Hearing.
* * * * *
(b) The hearing process consists of the submission of written
briefs to the hearing official by the institution or third-party
servicer, as applicable, and by the designated department official,
unless the hearing official determines, under paragraph (g) of this
section, that an oral hearing is also necessary.
* * * * *
(d) An institution or third-party servicer requesting review of the
final audit determination or final program review determination issued
by the designated department official shall have the burden of proving
the following matters, as applicable:
(1) That expenditures questioned or disallowed were proper.
(2) That the institution or servicer complied with program
requirements.
(e)(1) A party may submit as evidence to the hearing official only
materials within one or more of the following categories:
(i) Department of Education audit reports and audit work papers for
audits performed by the department's Office of Inspector General.
(ii) In the case of an institution, institutional audit work
papers, records, and other materials, if the institution provided those
work papers, records, or materials to the department no later than the
date by which the institution was required to file its request for
review in accordance with Sec. 668.113.
(iii) In the case of a third-party servicer, the servicer's audit
work papers and the records and other materials of the servicer or any
institution that contracts with the servicer, if the servicer provided
those work papers, records, or materials to the Department of Education
no later than the date that the servicer was required to file the
request for review under Sec. 668.113.
(iv) Department of Education program review reports and work papers
for program reviews.
(v) Institutional or servicer records and other materials
(including records and other materials of any institution that
contracts with the servicer) provided to the Department of Education in
response to a program review, if the records or materials were provided
to the Department of Education by the institution or servicer no later
than the date by which the institution or servicer was required to file
its request for review in accordance with Sec. 668.113.
(vi) Other Department of Education records and materials if the
records and materials were provided to the hearing official no later
than 3 days after the institution's or servicer's filing of its request
for review.
* * * * *
(f) The hearing official accepts only evidence that is both
admissible and timely under the terms of paragraph (e) of this section,
and relevant and material to the appeal. Examples of evidence that
shall be deemed irrelevant and immaterial except upon a clear showing
of probative value respecting the matters described in paragraph (d) of
this section include--
(1) Evidence relating to a period of time other than the period of
time covered by the audit or program review;
(2) Evidence relating to an audit or program review of an
institution or third-party servicer other than the institution or
servicer bringing the appeal, or the resolution thereof; and
(3) Evidence relating to the current practice of the institution or
servicer bringing the appeal in the program areas at issue in the
appeal.
(g)(1) The hearing official may schedule an oral argument if he or
she determines that an oral argument is necessary to clarify the issues
and the positions of the parties as presented in the parties' written
submissions.
(2) In the event that an oral argument is conducted, the designated
department official makes a transcribed record of the proceedings and
makes that record available to the institution or servicer and any
institution that contracts with the servicer upon the institution's or
servicer's request and upon its payment of a fee consistent with that
prescribed under the Department of Education Freedom of Information Act
regulations (34 CFR Part 5).
* * * * *
32. Section 668.123 is revised to read as follows:
Sec. 668.123 Collection.
To the extent that the decision of the Secretary sustains the final
audit determination or program review determination, subject to the
provisions of Sec. 668.24(c)(3), the Department of Education will take
steps to collect the debt at issue or otherwise effect the
determination that was subject to the request for review.
(Authority: 20 U.S.C. 1094)
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS
33. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C 1071 to 1087-2, unless otherwise noted.
34. Section 682.200 is amended in paragraph (b) by revising
paragraph (1) and adding a new paragraph (5) in the definition of
``Lender'' and adding a new definition of ``Third- party servicer'' in
alphabetical order, and by revising the authority citation to read as
follows:
Sec. 682.200 Definitions.
* * * * *
(b) * * *
Lender. (1) The term ``eligible lender'' is defined in section
435(d) of the Act, and in paragraphs (2) through (5) of this
definition.
* * * * *
(5) The term eligible lender does not include any lender that--
(i) Is debarred or suspended, or any of whose principals or
affiliates (as those terms are defined in 34 CFR part 85) is debarred
or suspended under Executive Order (E.O.) 12549 (3 CFR, 1987 Comp., p.
189) or the Federal Acquisition Regulation (FAR), 48 CFR part 9,
subpart 9.4;
(ii) Is an affiliate, as defined in 34 CFR part 85, of any person
who is debarred or suspended under E.O. 12549 or the FAR, 48 CFR part
9, subpart 9.4; or
(iii) Employs a person who is debarred or suspended under E.O.
12549 or the FAR, 48 CFR part 9, subpart 9.4, in a capacity that
involves the administration or receipt of FFEL Program funds.
* * * * *
Third-party servicer. Any State or private, profit or nonprofit
organization or any individual that enters into a contract with a
lender or guaranty agency to administer, through either manual or
automated processing, any aspect of the lender's or guaranty agency's
FFEL programs required by any statutory provision of or applicable to
title IV of the HEA, any regulatory provision prescribed under that
statutory authority, or any applicable special arrangement, agreement,
or limitation that governs the FFEL programs, including, any applicable
function described in the definition of third-party servicer in 34 CFR
part 668; originating, guaranteeing, monitoring, processing, servicing,
or collecting loans; claims submission; or billing for interest
benefits and special allowance.
* * * * *
(Authority: 8 U.S.C 1101; 20 U.S.C. 1070 to 1087-2, 1088-1098, 1141;
E.O. 12549 (3 CFR, 1987 Comp., p. 189), 12689 (3 CFR, 1989 Comp., p.
235))
35. Section 682.401 is amended by adding a new paragraph (b)(23) to
read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(23) Third-party servicers. The guaranty agency may not enter into
a contract with a third-party servicer that the Secretary has
determined does not meet the financial and compliance standards under
Sec. 682.416. The guaranty agency shall provide the Secretary with the
name and address of any third-party servicer with which the agency
enters into a contract and, upon request by the Secretary, a copy of
that contract.
* * * * *
36. Section 682.413 is amended by revising paragraphs (a), (b),
(c), and (d) to read as follows:
Sec. 682.413 Remedial actions.
(a)(1) The Secretary requires a lender and its third-party servicer
administering any aspect of the FFEL programs under a contract with the
lender to repay interest benefits and special allowance or other
compensation received on a loan guaranteed by a guaranty agency,
pursuant to paragraph (a)(2) of this section--
(i) For any period beginning on the date of a failure by the lender
or servicer, with respect to the loan, to comply with any of the
requirements set forth in Sec. 682.406(a)(1)-(a)(6), (a)(9), and
(a)(12);
(ii) For any period beginning on the date of a failure by the
lender or servicer, with respect to the loan, to meet a condition of
guarantee coverage established by the guaranty agency, to the date, if
any, on which the guaranty agency reinstated the guarantee coverage
pursuant to policies and procedures established by the agency;
(iii) For any period in which the lender or servicer, with respect
to the loan, violates the requirements of subpart C of this part; and
(iv) For any period beginning on the day after the Secretary's
obligation to pay special allowance on the loan terminates under
Sec. 682.302(d).
(2) For purposes of this section, a lender and any applicable
third-party servicer shall be considered jointly and severally liable
for the repayment of any interest benefits and special allowance paid
as a result of a violation of applicable requirements by the servicer
in administering the lender's FFEL programs.
(3) For purposes of paragraph (a)(2) of this section, the relevant
third party servicer shall repay any outstanding liabilities under
paragraph (a)(2) of this section only if--
(i) The lender has not repaid in full the amount of the liability
within 30 days; or
(ii) The lender has not made other satisfactory arrangements to pay
the amount of the liability.
(b) The Secretary requires a guaranty agency to repay reinsurance
payments received on a loan if the lender, third-party servicer, if
applicable, or the agency failed to meet the requirements of
Sec. 682.406(a).
(c)(1) In addition to requiring repayment of reinsurance payments
pursuant to paragraph (b) of this section, the Secretary may take one
or more of the following remedial actions against a guaranty agency or
third-party servicer administering any aspect of the FFEL programs
under a contract with the guaranty agency, that makes an incomplete or
incorrect statement in connection with any agreement entered into under
this part or violates any applicable Federal requirement:
(i) Require the agency to return payments made by the Secretary to
the agency.
(ii) Withhold payments to the agency.
(iii) Limit the terms and conditions of the agency's continued
participation in the FFEL programs.
(iv) Suspend or terminate agreements with the agency.
(v) Impose a fine on the agency or servicer. For purposes of
assessing a fine, repeated mechanical systemic unintentional errors
shall be counted as one violation.
(vi) Require repayment from the agency and servicer pursuant to
paragraph (c)(2) of this section, of interest, special allowance, and
reinsurance paid on Consolidation loan amounts attributed to
Consolidation loans that violate Sec. 682.206(f)(1).
(vii) Require repayment from the agency or servicer, pursuant to
paragraph (c)(2) of this section, of any related payments that the
Secretary became obligated to make to others as a result of an
incomplete or incorrect statement or a violation of an applicable
Federal requirement.
(2) For purposes of this section, a guaranty agency and any
applicable third-party servicer shall be considered jointly and
severally liable for the repayment of any interest benefits, special
allowance, reinsurance paid, or other compensation on Consolidation
loan amounts attributed to Consolidation loans that violate
Sec. 682.206(f)(1) as a result of a violation by the servicer
administering any aspect of the FFEL programs under a contract with
that guaranty agency.
(3) For purposes of paragraph (c)(2) of this section, the relevant
third-party servicer shall repay any outstanding liabilities under
paragraph (c)(2) of this section only if--
(i) The Secretary has determined that the servicer is jointly and
severally liable for the liabilities; and
(ii)(A) The guaranty agency has not repaid in full the amount of
the liability within 30 days; or
(B) The guaranty agency has not made other satisfactory
arrangements to pay the amount of the liability.
(d)(1) The Secretary follows the procedures described in 34 CFR
part 668, subpart G, applicable to fine proceedings against schools, in
imposing a fine against a lender, guaranty agency, or third-party
servicer. References to ``the institution'' in those regulations shall
be understood to mean the lender, guaranty agency, or third-party
servicer, as applicable, for this purpose.
(2) The Secretary also follows the provisions of section 432(g) of
the Act in imposing a fine against a guaranty agency or lender.
* * * * *
37. Section 682.414 is amended by revising paragraph (a)(1)(i) to
read as follows:
Sec. 682.414 Records, reports, and inspection requirements for
guaranty agency programs.
(a) Records. (1)(i) The guaranty agency shall maintain current,
complete, and accurate records of each loan that it holds, including,
but not limited to, the records described in paragraph (a)(1)(ii) of
this section. The records must be maintained in a system that allows
ready identification of each loan's current status, updated at least
once every 10 business days. Any reference to a guaranty agency under
this section includes a third-party servicer that administers any
aspect of the FFEL programs under a contract with the guaranty agency,
if applicable.
* * * * *
38. A new Sec. 682.416 is added to subpart D to read as follows:
Sec. 682.416 Requirements for third-party servicers and lenders
contracting with third-party servicers.
(a) Standards for administrative capability. A third-party servicer
is considered administratively responsible if it--
(1) Provides the services and administrative resources necessary to
fulfill its contract with a lender or guaranty agency, and conducts all
of its contractual obligations that apply to the FFEL program in
accordance with FFEL program regulations;
(2) Has business systems that are capable of meeting the
requirements of part B of Title IV of the Act and with the FFEL program
regulations; and
(3) Has adequate personnel who are knowledgeable about the FFEL
programs.
(b) Standards of financial responsibility. The Secretary applies
the provisions of 34 CFR 668.13(c), (d), (g), and (h) to determine that
a third-party servicer is financially responsible under this part.
References to ``the institution'' in those provisions shall be
understood to mean the third-party servicer, for this purpose.
(c) Special review of third-party servicer. (1) The Secretary may
review a third-party servicer to determine that it meets the
administrative capability and financial responsibility standards in
this section.
(2) In response to a request from the Secretary, the servicer shall
provide evidence to demonstrate that it meets the administrative
capability and financial responsibility standards in this section.
(3) The servicer may also provide evidence of why administrative
action is unwarranted if it is unable to demonstrate that it meets the
standards of this section.
(4) Based on the review of the materials provided by the servicer,
the Secretary determines if the servicer meets the standards in this
part. If the servicer does not, the Secretary may initiate an
administrative proceeding under subpart G.
(d) Past performance of third-party servicer or persons affiliated
with servicer. Notwithstanding paragraph (b) of this section, a third-
party servicer is not financially responsible if--
(1) (i) The servicer; its owner, majority shareholder, or chief
executive officer; any person employed by the servicer in a capacity
that involves the administration of a Title IV, HEA program or the
receipt of Title IV, HEA program funds; any person, entity, or officer
or employee of an entity with which the servicer contracts in a
capacity that involves the administration of a Title IV, HEA program or
the receipt of Title IV, HEA program funds has been convicted of, or
has pled nolo contendere or guilty to, a crime involving the
acquisition, use, or expenditure of Federal, State, or local government
funds, or has been administratively or judicially determined to have
committed fraud or any other material violation of law involving such
funds, unless--
(A) The funds that were fraudulently obtained, or criminally
acquired, used, or expended have been repaid to the United States, and
any related financial penalty has been paid;
(B) The persons who were convicted of, or pled nolo contendere or
guilty to, a crime involving the acquisition, use, or expenditure of
the funds are no longer incarcerated for that crime; and
(C) At least five years have elapsed from the date of the
conviction, nolo contendere plea, guilty plea, or administrative or
judicial determination; or
(ii) The servicer, or any principal or affiliate of the servicer
(as those terms are defined in 34 CFR part 85), is--
(A) Debarred or suspended under Executive Order (E.O.) 12549 or the
Federal Acquisition Regulations (FAR), 48 CFR part 9, subpart 9.4; or
(B) Engaging in any activity that is a cause under 34 CFR 85.305 or
85.405 for debarment or suspension under E.O. 12549 or the FAR, 48 CFR
part 9, subpart 9.4; and
(2) Upon learning of a conviction, plea, or administrative or
judicial determination described in paragraph (d)(1) of this section,
the servicer does not promptly remove the person, agency, or
organization from any involvement in the administration of the
servicer's participation in Title IV, HEA programs, including, as
applicable, the removal or elimination of any substantial control, as
determined under 34 CFR 668.13, over the servicer.
(e) Independent audits. (1) A third-party servicer shall arrange
for an independent audit of its administration of the FFEL program loan
portfolio unless--
(i) The servicer contracts with only one lender or guaranty agency;
and
(ii) The audit of that lender's or guaranty agency's FFEL programs
involves every aspect of the servicer's administration of those FFEL
programs.
(2) The audit must--
(i) Examine the servicer's compliance with the Act and applicable
regulations;
(ii) Examine the servicer's financial management of its FFEL
program activities;
(iii) Be conducted in accordance with the standards for audits
issued by the United States General Accounting Office's (GAO's)
Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions. Procedures for audits are contained in an
audit guide developed by and available from the Office of Inspector
General of the Department of Education; and
(iv) Except for the initial audit, be conducted at least annually
and be submitted to the Secretary within six months of the end of the
audit period. The initial audit must be an annual audit of the
servicer's first full fiscal year beginning after July 1, 1994, and
include any period from the beginning of the first full fiscal year.
The audit report must be submitted to the Secretary within six months
of the end of the audit period. Each subsequent audit must cover the
servicer's activities for the one-year period beginning no later than
the end of the period covered by the preceding audit.
(3) Notwithstanding paragraph (e)(2)(iv) of this section the
servicer shall have an audit performed at least once every two years
if--
(i) The servicer administers less than $1,000,000 under the Title
IV, HEA programs for the period covered by the audit; or
(ii) The servicer had no material exceptions identified in its most
recently submitted audit report and that report was submitted in a
timely fashion.
(4) The servicer is not required to have an audit performed for any
year in which the servicer administers less than $250,000 of the
principal value of the loans under the Title IV, HEA programs.
(5) Notwithstanding paragraphs (e)(3) and (4) of this section, the
Secretary may, as the Secretary deems necessary, request any third-
party servicer to have an audit performed on an annual basis.
(6) With regard to a third-party servicer that is a governmental
entity, the audit required by this paragraph must be conducted in
accordance with 31 U.S.C. 7502 and 34 CFR part 80, appendix G.
(7) With regard to a third-party servicer that is a nonprofit
organization, the audit required by this paragraph must be conducted in
accordance with Office of Management and Budget (OMB) Circular A-133,
``Audit of Institutions of Higher Education and Other Nonprofit
Institutions,'' as incorporated in 34 CFR 74.61(h)(3).
(f) Contract responsibilities. A lender that participates in the
FFEL programs may not enter into a contract with a third-party servicer
that the Secretary has determined does not meet the requirements of
this section. The lender must provide the Secretary with the name and
address of any third-party servicer with which the lender enters into a
contract and, upon request by the Secretary, a copy of that contract. A
third-party servicer that is under contract with a lender to perform
any activity for which the records in Sec. 682.414(a)(3)(ii) are
relevant to perform the services for which the servicer has contracted
shall maintain current, complete, and accurate records pertaining to
each loan that the servicer is under contract to administer on behalf
of the lender. The records must be maintained in a system that allows
ready identification of each loan's current status.
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082; E.O. 12549
(3 CFR, 1987 Comp., p. 189), 12689 (3 CFR, 1989 Comp., p. 235))
39. The title of subpart G is revised to read as follows: Subpart
G--Limitation, Suspension, or Termination of Lender or Third-party
Servicer Eligibility and Disqualification of Lenders and Schools
40. Section 682.700 is amended by revising paragraphs (a) and
(b)(1) to read as follows:
Sec. 682.700 Purpose and scope.
(a) This subpart governs the limitation, suspension, or termination
by the Secretary of the eligibility of an otherwise eligible lender to
participate in the FFEL programs or the eligibility of a third-party
servicer to enter into a contract with an eligible lender to administer
any aspect of the lender's FFEL programs. The regulations in this
subpart apply to a lender or third-party servicer that violates any
statutory provision governing the FFEL programs or any regulations,
special arrangements, agreements, or limitations prescribed under those
programs. These regulations apply to lenders that participate only in a
guaranty agency program, lenders that participate in the FFEL programs,
and third-party servicers that administer aspects of a lender's FFEL
program portfolio. These regulations also govern the Secretary's
disqualification of a lender or school from participation in the FFEL
programs under section 432 (h)(2) and (h)(3) of the Act.
(b) * * *
(1) (i) To a determination that an organization fails to meet the
definition of ``eligible lender'' in section 435(d)(1) of the Act or
the definition of ``lender'' in Sec. 682.200, for any reason other than
a violation of the prohibitions in section 435(d)(5) of the Act; or
(ii) To a determination that an organization fails to meet the
standards in Sec. 682.416;
* * * * *
41. Section 682.701 is amended by revising the definitions of
``Limitation'', ``Suspension'', and ``Termination'' to read as follows:
Sec. 682.701 Definitions of terms used in this subpart.
* * * * *
Limitation: The continuation of a lender's or third-party
servicer's eligibility subject to compliance with special conditions
established by agreement with the Secretary or a guaranty agency, as
applicable, or imposed as the result of a limitation or termination
proceeding.
Suspension: The removal of a lender's eligibility, or a third-party
servicer's eligibility to contract with a lender or guaranty agency,
for a specified period of time or until the lender or servicer fulfills
certain requirements.
Termination: (1) The removal of a lender's eligibility for an
indefinite period of time--
(i) By a guaranty agency; or
(ii) By the Secretary, based on an action taken by the Secretary,
or a designated Departmental official under Sec. 682.706; or
(2) The removal of a third-party servicer's eligibility to contract
with a lender or guaranty agency for an indefinite period of time by
the Secretary based on an action taken by the Secretary, or a
designated Departmental official under Sec. 682.706.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
42. Section 682.702 is amended by redesignating paragraph (c) as
paragraph (d); adding a new paragraph (c); and removing ``(c)'' in
paragraph (a) and adding, in its place ``(d)'' to read as follows:
Sec. 682.702 Effect on participation.
* * * * *
(c) A limitation imposes on a third-party servicer--
(1) A limit on the number of loans or accounts or total amount of
loans that the servicer may service;
(2) A limit on the number of loans or accounts or total amount of
loans that the servicer is administering under its contract with a
lender or guaranty agency; or
(3) Other reasonable requirements or conditions, including those
described in Sec. 682.709.
* * * * *
43. Section 682.703 is amended by revising paragraph (a) and
paragraph (b) introductory text to read as follows:
Sec. 682.703 Informal compliance procedure.
(a) The Secretary may use the informal compliance procedure in
paragraph (b) of this section if the Secretary receives a complaint or
other reliable information indicating that a lender or third-party
servicer may be in violation of applicable laws, regulations, special
arrangements, agreements, or limitations.
(b) Under the informal compliance procedure, the Secretary gives
the lender or servicer a reasonable opportunity to--
* * * * *
44. Section 682.704 is amended by revising paragraphs (a)(1), (b),
(c), and (d)(2)(ii) to read as follows:
Sec. 682.704 Emergency action.
(a) * * *
(1) Receives reliable information that the lender or a third-party
servicer with which the lender contracts is in violation of applicable
laws, regulations, special arrangements, agreements, or limitations
pertaining to the lender's portfolio of loans;
* * * * *
(b) The Secretary begins an emergency action by notifying the
lender or third-party servicer, by certified mail, return receipt
requested, of the action and the basis for the action.
(c) The action becomes effective on the date the notice is mailed
to the lender or third-party servicer.
(d) * * *
(2) * * *
(ii) Upon the written request of the lender or third-party
servicer, the Secretary may provide the lender or servicer with an
opportunity to demonstrate that the emergency action is unwarranted.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
45. Section 682.705 is revised to read as follows:
Sec. 682.705 Suspension proceedings.
(a) Scope. (1) A suspension by the Secretary removes a lender's
eligibility under the FFEL programs or a third-party servicer's ability
to enter into contracts with eligible lenders, and the Secretary does
not guarantee or reinsure a new loan made by the lender or new loan
serviced by the servicer during a period not to exceed 60 days from the
date the suspension becomes effective, unless--
(i) The lender or servicer and the Secretary agree to an extension
of the suspension period, if the lender or third-party servicer has not
requested a hearing; or
(ii) The Secretary begins a limitation or a termination proceeding.
(2) If the Secretary begins a limitation or a termination
proceeding before the suspension period ends, the Secretary may extend
the suspension period until the completion of that proceeding,
including any appeal to the Secretary.
(b) Notice. (1) The Secretary, or a designated Departmental
official, begins a suspension proceeding by sending the lender or
servicer a notice by certified mail with return receipt requested.
(2) The notice--
(i) Informs the lender or servicer of the Secretary's intent to
suspend the lender's or servicer's eligibility for a period not to
exceed 60 days;
(ii) Describes the consequences of a suspension;
(iii) Identifies the alleged violations on which the proposed
suspension is based;
(iv) States the proposed date the suspension becomes effective,
which is at least 20 days after the date of mailing of the notice;
(v) Informs the lender or servicer that the suspension will not
take effect on the proposed date, except as provided in paragraph
(c)(8) of this section, if the Secretary receives at least five days
prior to that date a request for an oral hearing or written material
showing why the suspension should not take effect; and
(vi) Asks the lender or servicer to correct voluntarily any alleged
violations.
(c) Hearing. (1) If the lender or servicer does not request an oral
hearing but submits written material, the Secretary, or a designated
Departmental official, considers the material and--
(i) Dismisses the proposed suspension; or
(ii) Determines that the proposed suspension should be implemented
and notifies the lender or servicer of the effective date of the
suspension.
(2) If the lender or servicer requests an oral hearing within the
time specified in paragraph (b)(2)(v) of this section, the Secretary
schedules the date and place of the hearing. The date is at least 15
days after receipt of the request from the lender or servicer. No
proposed suspension takes effect until a hearing is held.
(3) The oral hearing is conducted by a presiding officer who--
(i) Ensures that a written record of the hearing is made;
(ii) Considers relevant written material presented before the
hearing and other relevant evidence presented during the hearing; and
(iii) Issues a decision based on findings of fact and conclusions
of law that may suspend the lender's or servicer's eligibility only if
the presiding officer is persuaded that the suspension is warranted by
the evidence.
(4) The formal rules of evidence do not apply, and no discovery, as
provided in the Federal Rules of Civil Procedure (28 U.S.C. Appendix),
is required.
(5) The presiding officer shall base findings of fact only on
evidence considered at or before the hearing and matters given official
notice.
(6) The initial decision of the presiding officer is mailed to the
lender or servicer.
(7) The Secretary automatically reviews the initial decision of the
presiding officer. The Secretary notifies the lender or servicer of the
Secretary's decision by mail.
(8) A suspension takes effect on either a date that is at least 20
days after the date the notice of a decision imposing the suspension is
mailed to the lender or servicer, or on the proposed effective date
stated in the notice sent under paragraph (b) of this section,
whichever is later.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
46. Section 682.706 is revised to read as follows:
Sec. 682.706 Limitation or termination proceedings.
(a) Notice. (1) The Secretary, or a designated Departmental
official, begins a limitation or termination proceeding, whether a
suspension proceeding has begun, by sending the lender or third-party
servicer a notice by certified mail with return receipt requested.
(2) The notice--
(i) Informs the lender or servicer of the Secretary's intent to
limit or terminate the lender's or servicer's eligibility;
(ii) Describes the consequences of a limitation or termination;
(iii) Identifies the alleged violations on which the proposed
limitation or termination is based;
(iv) States the limits which may be imposed, in the case of a
limitation proceeding;
(v) States the proposed date the limitation or termination becomes
effective, which is at least 20 days after the date of mailing of the
notice;
(vi) Informs the lender or servicer that the limitation or
termination will not take effect on the proposed date if the Secretary
receives, at least five days prior to that date, a request for an oral
hearing or written material showing why the limitation or termination
should not take effect;
(vii) Asks the lender or servicer to correct voluntarily any
alleged violations; and
(viii) Notifies the lender or servicer that the Secretary may
collect any amount owed by means of offset against amounts owed to the
lender by the Department and other Federal agencies.
(b) Hearing. (1) If the lender or servicer does not request an oral
hearing but submits written material, the Secretary, or a designated
Departmental official, considers the material and--
(i) Dismisses the proposed limitation or termination; or
(ii) Notifies the lender or servicer of the date the limitation or
termination becomes effective.
(2) If the lender or servicer requests a hearing within the time
specified in paragraph (a)(2)(vi) of this section, the Secretary
schedules the date and place of the hearing. The date is at least 15
days after receipt of the request from the lender or servicer. No
proposed limitation or termination takes effect until a hearing is
held.
(3) The hearing is conducted by a presiding officer who--
(i) Ensures that a written record of the hearing is made;
(ii) Considers relevant written material presented before the
hearing and other relevant evidence presented during the hearing; and
(iii) Issues an initial decision, based on findings of fact and
conclusions of law, that may limit or terminate the lender's or
servicer's eligibility if the presiding officer is persuaded that the
limitation or termination is warranted by the evidence.
(4) The formal rules of evidence do not apply, and no discovery, as
provided in the Federal Rules of Civil Procedure, is required.
(5) The presiding officer shall base findings of fact only on
evidence presented at or before the hearing and matters given official
notice.
(6) If a termination action is brought against a lender or third-
party servicer and the presiding officer concludes that a limitation is
more appropriate, the presiding officer may issue a decision imposing
one or more limitations on a lender or third-party servicer rather than
terminating the lender's or servicer's eligibility.
(7) The initial decision of the presiding officer is mailed to the
lender or servicer.
(8) Any time schedule specified in this section may be shortened
with the approval of the presiding officer and the consent of the
lender or servicer and the Secretary or designated Departmental
official.
(9) The presiding officer's initial decision automatically becomes
the Secretary's final decision 20 days after it is issued and received
by both parties unless the lender, servicer, or designated Departmental
official appeals the decision to the Secretary within this period.
(c) Notwithstanding the other provisions of this section, if a
lender or a lender's owner or officer or third-party servicer or
servicer's owner or officer, respectively, is convicted of or pled nolo
contendere or guilty to a crime involving the unlawful acquisition,
use, or expenditure of FFEL program funds, that conviction or guilty
plea is grounds for terminating the lender's or servicer's eligibility,
respectively, to participate in the FFEL programs.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
47. Section 682.707 is amended by revising paragraphs (a)
introductory text and (d) to read as follows:
Sec. 682.707 Appeals in a limitation or termination proceeding.
(a) If the lender, third-party servicer, or designated Departmental
official appeals the initial decision of the presiding officer in
accordance with Sec. 682.706(b)(9)--
* * * * *
(d) If the presiding officer's initial decision would limit or
terminate the lender's or servicer's eligibility, it does not take
effect pending the appeal unless the Secretary determines that a stay
of the date it becomes effective would seriously and adversely affect
the FFEL programs or student or parent borrowers.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
48. Section 682.708 is amended by revising paragraph (b) to read as
follows:
Sec. 682.708 Evidence of mailing and receipt dates.
* * * * *
(b) If a lender or third-party servicer refuses to accept a notice
mailed under this subpart, the Secretary considers the notice as being
received on the date that the lender or servicer refuses to accept the
notice.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
49. Section 682.709 is revised to read as follows:
Sec. 682.709 Reimbursements, refunds, and offsets.
(a) As part of a limitation or termination proceeding, the
Secretary, or a designated Departmental official, may require a lender
or third-party servicer to take reasonable corrective action to remedy
a violation of applicable laws, regulations, special arrangements,
agreements, or limitations.
(b) The corrective action may include payment to the Secretary or
recipients designated by the Secretary of any funds, and any interest
thereon, that the lender, or, in the case of a third-party servicer,
the servicer or the lender that has a contract with a third-party
servicer, improperly received, withheld, disbursed, or caused to be
disbursed. A third-party servicer may be held liable up to the amounts
specified in Sec. 682.413(a)(2).
(c) If a final decision requires a lender, a lender that has a
contract with a third-party servicer, or a third-party servicer to
reimburse or make any payment to the Secretary, the Secretary may,
without further notice or opportunity for a hearing, proceed to offset
or arrange for another Federal agency to offset the amount due against
any interest benefits, special allowance, or other payments due to the
lender, the lender that has a contract with the third-party servicer,
or the third-party servicer. A third-party servicer may be held liable
up to the amounts specified in Sec. 682.413(a)(2).
(Authority: 20 U.S.C. 1080, 1082, 1094)
50. Section 682.710 is amended by revising paragraphs (a), (b), and
(d) to read as follows:
Sec. 682.710 Removal of limitation.
(a) A lender or third-party servicer may request removal of a
limitation imposed by the Secretary in accordance with the regulations
in this subpart at any time more than 12 months after the date the
limitation becomes effective.
(b) The request must be in writing and must show that the lender or
servicer has corrected any violations on which the limitation was
based.
* * * * *
(d)(1) If the Secretary denies the request or establishes other
limitations, the lender or servicer, upon request, is given an
opportunity to show why all limitations should be removed.
(2) A lender or third-party servicer may continue to participate in
the FFEL programs, subject to any limitation imposed by the Secretary
under paragraph (c)(3) of this section, pending a decision by the
Secretary on a request under paragraph (d)(1) of this section.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
51. Section 682.711 is amended by revising paragraphs (a), (b)(1),
(b)(2), (e), and the authority citation following the section to read
as follows:
Sec. 682.711 Reinstatement after termination.
(a) A lender or third-party servicer whose eligibility has been
terminated by the Secretary in accordance with the regulations in this
subpart may request reinstatement of its eligibility at any time more
than 18 months after the date the termination becomes effective.
(b) * * *
(1) The lender or servicer has corrected any violations on which
the termination was based; and
(2) The lender or servicer meets all requirements for eligibility.
* * * * *
(e)(1) If the Secretary denies the lender's or servicer's request
or allows reinstatement subject to limitations, the lender or servicer,
upon request, is given an opportunity to show why its eligibility
should be reinstated and all limitations removed.
(2) A lender or third-party servicer whose eligibility to
participate in the FFEL programs is reinstated subject to limitations
imposed by the Secretary pursuant to paragraph (d)(3) of this section,
may participate in those programs, subject to those limitations,
pending a decision by the Secretary on a request under paragraph (e)(1)
of this section.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
[FR Doc. 94-3422 Filed 2-16-94; 8:45 am]
BILLING CODE 4000-01-U
