[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





_______________________________________________________________________



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