[Federal Register Volume 59, Number 76 (Wednesday, April 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9464]


[[Page Unknown]]

[Federal Register: April 20, 1994]


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Part V





Department of Education





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34 CFR Part 682




Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AB81

 
Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the regulations governing the 
Federal Family Education Loan (FFEL) Program. The FFEL Program consists 
of the Federal Stafford, Federal Supplemental Loans for Students (SLS), 
Federal PLUS, and the Federal Consolidation Loan programs. These 
amendments are needed to implement changes to the Higher Education Act 
(HEA), made by the Higher Education Amendments of 1992, to define the 
performance standards and application procedures under which a lender, 
servicer, or guaranty agency will be designated as an exceptional 
performer. These regulations authorize the Secretary to recognize 
lenders, servicers, and guaranty agencies for their exceptional level 
of performance in collecting delinquent and defaulted FFEL Program 
loans. These regulations will also encourage lenders, servicers, and 
guaranty agencies to provide a higher level of expertise in servicing 
student loan portfolios and to provide strict monitoring of collection 
activities required on delinquent and defaulted FFEL Program loans.

DATES: Comments must be received on or before May 20, 1994.

ADDRESSES: Comments should be addressed to Patricia Newcombe, Acting 
Chief, FFEL Program Section, Loans Branch, Division of Policy 
Development, Policy, Training, and Analysis Service, Department of 
Education, 400 Maryland Avenue, SW., (room 4310, ROB-3), Washington, DC 
20202-5449.
    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: Ron Streets or Doug Laine, Federal 
Family Education Loan Program Section, Loans Branch, Division of Policy 
Development, Policy, Training, and Analysis Service, U.S. Department of 
Education, 400 Maryland Avenue, SW., (room 4310, ROB-3), Washington, DC 
20202-5449, Telephone Number (202) 708-8242. Individuals who use a 
telecommunications device for the deaf (TDD) may call the Federal 
Information Relay Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 
p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: The Higher Education Amendments of 1992 
(Pub. L. 102-325) (the 1992 Amendments) amended the Higher Education 
Act of 1965 (the HEA) by adding a new section 428I to require the 
Secretary to promulgate regulations to identify lenders, servicers, and 
guaranty agencies that perform at an exceptional level in collecting 
delinquent and defaulted FFEL Program loans. The Secretary believes 
that these regulations will significantly reduce the amount of 
reinsurance and other payments associated with defaults in the FFEL 
Program by encouraging lenders, servicers, and guaranty agencies to 
properly collect their student loans while easing the administrative 
burden on program participants who show an exceptionally high level of 
compliance with program requirements. A servicer acting for a lender or 
guaranty agency must meet the definition of a third party servicer 
under Sec. 682.200 and the compliance requirements under Sec. 682.416.

Lender or Lender Servicer

    The HEA provides that a lender or lender servicer that demonstrates 
a 97 percent compliance performance rating in due diligence in 
collecting delinquent loans may be designated by the Secretary for 
exceptional performance and be eligible to receive 100 percent of the 
unpaid principal balance and interest on default claims. Satisfaction 
of this qualification must be demonstrated by an annual financial and 
compliance audit that must be conducted by a qualified independent 
organization. To receive designation as an exceptional performer, the 
lender or servicer must submit a written request for designation 
accompanied by the required audit within 90 days of the end of the 
audit period.
    The Secretary determines a lender's or lender servicer's 
eligibility for designation based on a 97 percent compliance rating of 
the performance standards in the collection of delinquent FFEL Program 
loans in Sec. 682.411(c)-(h), and (m), if applicable, and a 97 percent 
compliance rate with regard to converting FFEL Program loans to 
repayment under Sec. 682.209(a), and timely filing of claims under 
Sec. 682.402(e)(2) and Sec. 682.406(a)(5). The Secretary believes that 
the lender's due diligence standards in collecting guaranty agency 
loans listed in Sec. 682.411(c)-(h), and (m) of the FFEL Program 
regulations and the conversion and timely filing requirements for 
determining and maintaining eligibility for exceptional performance 
designation meet the statutory requirement for providing an indication 
of systems degradation. The Secretary also considers information from 
any guaranty agency suggesting that the lender's or lender servicer's 
request for designation should not be approved, and any information in 
the possession of the Secretary or submitted to the Secretary by any 
other agency or office of the Federal Government in regard to the 
lender's or servicer's request for designation. The Secretary notifies 
the appropriate guaranty agency of the eligible lender's or lender 
servicer's designation within 60 days after the date the Secretary 
receives the lender's or lender servicer's request for designation and 
its annual financial and compliance audit. A lender or lender servicer 
is designated for a one-year period following the date the guaranty 
agency receives notification from the Secretary of the lender's or 
lender servicer's designation, unless the Secretary notifies the 
guaranty agency that the lender's or lender servicer's designation for 
exceptional performance has been revoked.
    The 97 percent compliance rating is equal to the percent of all due 
diligence requirements applicable to each loan, on average. In 
calculating a lender's or lender servicer's compliance rating, the 
Secretary requires that the universe for the audit consist of all loans 
in the lender's or lender servicer's FFEL Program portfolio that are 
serviced during the audit period performed under the Department's 
regulations in Sec. 682.411. Under the proposed regulations the auditor 
is required to use statistical sampling and evaluation techniques 
identified in an audit guide prepared by the Department's Office of 
Inspector General.
    To maintain its status as an exceptional eligible lender or lender 
servicer, the lender or lender servicer must have a quarterly 
compliance audit of the due diligence in collection activities in 
Sec. 682.411(c)-(h), and (m), if applicable. The quarterly audit must 
be conducted by a qualified independent organization. The quarterly 
audit must indicate a compliance performance rating of not less than 97 
percent for each quarter, or 97 percent for two consecutive months, or 
90 percent for one month.
    The Secretary may revoke a lender's or lender servicer's 
designation if the quarterly compliance audit fails to meet the minimum 
compliance rate mandated by statute, the quarterly audit is not 
submitted to the Secretary within 90 days following the end of the 
quarter, the Secretary determines the lender or lender servicer failed 
to maintain an overall level of regulatory compliance consistent with 
the audit, the Secretary has reason to believe the lender or lender 
servicer may have engaged in fraud in securing its designation, or the 
lender or lender servicer fails to service loans in accordance with 
program regulations. The date that the event or condition occurred 
would be the effective date of revocation.

Guaranty Agency or Guaranty Agency Servicer

    The statute provides that a guaranty agency or guaranty agency 
servicer that demonstrates a 97 percent compliance performance rating 
in due diligence in collecting defaulted FFEL Program loans through an 
annual financial and compliance audit including timely claim payment 
and timely reinsurance filing may be designated by the Secretary for 
exceptional performance and eligible to receive the applicable 
reinsurance rate under Sec. 682.404(b) on default claims submitted to 
the Secretary for reinsurance. The annual financial and compliance 
audit must be conducted by a qualified independent organization. A 
written request for designation, and the audit, must be received by the 
Secretary no later than 90 days after the end of the audit period.
    The Secretary determines a guaranty agency's or guaranty agency 
servicer's eligibility for designation as an exceptional performer 
based on a 97 percent compliance rating of the performance standards in 
the collection of defaulted FFEL Program loans in 
Sec. 682.410(b)(6)(iii)-(xii), Sec. 682.406(a)(8) and (a)(9), or 
Sec. 682.410(b)(7) and Sec. 682.406(a)(8) and (a)(9), and any 
information in the possession of the Secretary. The Secretary believes 
that the guaranty agency due diligence standards listed in 
Sec. 682.410(b)(6)(iii)-(xii) or Sec. 682.410(b)(7) and the timely 
claim payment and reinsurance filing requirements for determining and 
maintaining eligibility for exceptional performance designation meet 
the statutory requirement for providing an indication of systems 
degradation. The Secretary notifies the guaranty agency or guaranty 
agency servicer of its designation within 60 days after the date the 
Secretary receives the guaranty agency's or guaranty agency servicer's 
request for designation and its annual financial and compliance audits. 
A guaranty agency or guaranty agency servicer is designated for a one-
year period following the date the guaranty agency or guaranty agency 
servicer receives notification from the Secretary of its designation as 
an exceptional performer, unless the Secretary notifies the guaranty 
agency or guaranty agency servicer that its designation for exceptional 
performance has been revoked.
    The 97 percent compliance rating is equal to the percent of all due 
diligence requirements applicable to each loan, on average. The 
proposed regulations provide that, in calculating a guaranty agency's 
or guaranty agency servicer's compliance rating, the universe used by 
the auditor must consist of all loans in the guaranty agency or 
guaranty agency servicer's FFEL Program portfolio that are serviced 
during the audit period. The proposed regulations would require the 
auditor to use statistical sampling and evaluation techniques 
identified in an audit guide prepared by the Department's Office of 
Inspector General.
    To maintain its status as an exceptional eligible guaranty agency 
or guaranty agency servicer, the guaranty agency or guaranty agency 
servicer must have a quarterly compliance audit of the due diligence in 
collection activities in Sec. 682.410(b)(6)(iii)-(xii), 
Sec. 682.406(a)(8) and (a)(9), or Sec. 682.410(b)(7) and 
Sec. 682.406(a)(8) and (a)(9). The quarterly audit must be conducted by 
a qualified independent organization. The quarterly audit must indicate 
a compliance performance rating of not less than 97 percent for each 
quarter, or 97 percent for two consecutive months, or 90 percent for 
one month.
    Under the HEA the Secretary shall revoke a guaranty agency's or 
guaranty agency servicer's designation as an exceptional performer if 
the quarterly compliance audit fails to meet the minimum compliance 
rate mandated by statute, the quarterly audit is not submitted to the 
Secretary within 90 days following the end of the quarter. The 
Secretary may also revoke the designation as an exceptional performer 
if the Secretary determines that the guaranty agency or guaranty agency 
servicer failed to maintain an acceptable overall level of regulatory 
compliance, or the Secretary has reason to believe the guaranty agency 
or guaranty agency servicer may have engaged in fraud in securing its 
designation. The date that the event or condition occurred would be the 
effective date of revocation.

Summary of Comments From Regional Meetings

    In compliance with section 492(a) of the HEA, the Secretary 
convened regional meetings during September 1992 to obtain public 
involvement in the development of proposed regulations. The purpose of 
the meetings was to ``provide for a comprehensive discussion and 
exchange of information concerning the implementation'' of certain 
parts of Public Law 102-325. In addition, attendees of the regional 
meetings were asked to nominate individuals to act as negotiators in 
the negotiated rulemaking process required by section 492(b) of the 
HEA.
    The regional meetings were conducted for two days each in San 
Francisco, California; New York, New York; Atlanta, Georgia; and Kansas 
City, Missouri. Each participant at the regional meetings was assigned 
to one of six groups which were asked to discuss particular issue areas 
identified by the Department. Each group at the regional meetings 
prepared a report of its discussion and recommendations; those reports 
were presented to the Department for consideration during the 
preparation of the proposed regulations.
    Organizations and individuals representing lenders, servicers, 
guarantors, secondary markets, and auditors convened an industry work 
group, prior to the regional meetings, in an attempt to reach consensus 
among those groups on major issues related to the exceptional 
performance regulations. The industry paper developed by the work group 
was used throughout the four regional meetings as the basis for 
discussion. Following is a brief synopsis of the major issues discussed 
at the regional meetings. Unless otherwise noted, the opinions 
described below were reflected in all four regional meetings.

Application for Designation

    The representatives at the regional meetings recommended that the 
Secretary's decision on whether to designate a lender or servicer be 
based on the required audit, as well as information provided by the 
guaranty agencies. In addition, they recommended that the Secretary 
commit to considering those applications in good faith, and not 
unreasonably withhold designation. The attendees at the San Francisco 
meeting also recommended that the Secretary approve applications for 
exceptional performance on a timely basis, unless the compliance rating 
does not meet statutory requirements or other information 
``persuasively rebuts'' the audit results, and suggested that the 
applicant be allowed an opportunity to correct or respond to the 
information on which a denial is based, prior to issuance of a final 
decision.

Scope of the Designation

    The attendees at the regional meetings recommended that lenders, 
servicers, and guaranty agencies with regional centers be able to 
qualify each center separately, or as a corporate entity, for 
exceptional performance designation. The attendees also recommended 
that applicants be permitted to separate parts of their portfolio as 
being excluded from the exceptional performance designation.

Annual Financial and Compliance Audit

    The attendees at the regional meetings recommended that the 
regulations provide that the annual financial and compliance audit 
required to apply for designation as an exceptional performer review 
only those activities the applicant was required to perform and not 
review the loan itself. In addition, the attendees recommended that 
compliance be evaluated based, whenever possible, on compliance with 
Federal requirements, rather than compliance with guaranty agency 
requirements. The attendees also recommended that the financial audit 
review the portfolio and not the applicant, and that the annual 
financial audit performed in accordance with the Department's 
regulations be considered to satisfy the requirements of this section. 
Finally, the attendees identified particular activities which they 
recommended be evaluated during the audits.

Quarterly Compliance Audits

    The industry representatives at the regional meetings recommended 
that the regulations to implement the requirement of quarterly 
compliance audits cover only the lender's activity during that quarter. 
They also recommended that the regulations allow the lender or servicer 
to perform the required audit as long as it is certified by an external 
auditor. The industry representatives also recommended that the 
quarterly audits be broken down by month to ensure that the lender or 
servicer continues to satisfy the statutory eligibility requirements. 
In regard to both annual and quarterly audits, the attendees at the 
regional meetings recommended that the Secretary define the statistical 
methodology for sampling the portfolio and the confidence level and 
error rate qualifications.

Designation of Guaranty Agencies

    Many of the recommendations listed above were made in connection 
with designation of guaranty agencies as exceptional performers. The 
regional meeting attendees did, however, recommend that the compliance 
audit of guaranty agencies review the agency's compliance with the 
requirements in 34 CFR 682.410 regarding phone calls, letters, skip 
tracing, and litigation. Attendees at the Kansas City meeting 
recommended that the Department consider changing the due diligence 
requirements for guaranty agencies to reflect performance requirements 
rather than specific steps. The meetings in Kansas City and New York 
also recommended that quarterly compliance audits not be required for 
guaranty agencies, because guaranty agencies do not have the same 
opportunity for ``dumping'' loans that lenders may have.

Negotiated Rulemaking

    Section 492(b) of the HEA requires the Secretary to utilize a 
negotiated rulemaking process to prepare proposed regulations to 
implement the 1992 Amendments. Upon conclusion of the regional meetings 
described above, the Secretary invited twenty-five representatives who 
were nominated by individuals attending the regional meetings to 
participate in negotiated rulemaking sessions on January 4-8 and 
February 1-5, 1993. Following is a brief synopsis of the major issues 
discussed during the two weeks of negotiations.
     The industry suggested that lenders, servicers, and 
guaranty agencies with regional centers should be able to qualify each 
center separately, or as a corporate entity, for exceptional 
performance designation.
    The Secretary believes the intent of Congress is to view the 
applicant as a single entity to accurately determine its overall 
compliance rating, regardless of the number of sites at which it 
services loans. Therefore, the entire regulations including 
Sec. 682.415(a)(1) refer to a lender, servicer or guaranty agency and 
do not make allowances for separate centers.
     The industry recommended that applicants be permitted to 
separate parts of their portfolio as being excluded from the 
exceptional performance designation. The industry representatives 
argued that this would allow applicants to separate their portfolio 
into segments which had previously not been serviced with the same 
quality to qualify as an exceptional performer.
    As reflected in Sec. 682.415(a)(2)(iii)(A), the Secretary does not 
believe that Congress intended lenders, servicers or guaranty agencies 
to be able to exclude portions of their loan portfolio for purposes of 
determining the 97 percent compliance rating. The Secretary believes 
the entire loan portfolio should be available for review to accurately 
determine the applicable compliance rate for possible designation as an 
exceptional performer. Moreover, the Secretary believes that 
implementation of this suggestion would increase administrative 
complexity and confusion.
     In meeting the 97 percent compliance rate with the due 
diligence requirements in Sec. 682.411 (c)-(h), and (m), if applicable, 
for determining a lender's or lender servicer's eligibility to 
participate as an exceptional performer, the industry also recommended 
requiring a 97 percent compliance with timely repayment conversions and 
timely filing requirements.
    The Secretary agrees with the industry and has included that change 
in proposed Sec. 682.415(b)(1)(iv).
     Guaranty agency representatives recommended clarifying 
that insurance payment on a claim may not be denied based solely on a 
violation of repayment conversion, due diligence requirements, and 
timely filing requirements.
    Section 682.415 (b)(5) was drafted to reflect that proposal. 
However, a guaranty agency or the Secretary may require the lender or 
lender servicer to repurchase a loan if the agency determines the loan 
should not have been submitted as a claim. For example, repurchase of a 
claim could be required if the loan was not delinquent for 180 days for 
installments due monthly, or 240 days for installments due less 
frequently than monthly, at the time the claim was submitted.
     The Secretary proposed to require that in the case of an 
exceptional lender or lender servicer purchasing or acquiring another 
lender's or lender servicer's portfolio, both entities must hold an 
exceptional performance designation in order for the purchasing or 
acquiring entity to retain its status as an exceptional performer. The 
industry argued that acquiring loans is a normal part of doing business 
and that the holder should not be responsible for activities performed 
by prior holders. The industry proposed that the regulations permit the 
holder to submit a loan under exceptional performer designation if the 
holder has performed the last 180 days of due diligence on that loan.
    The Secretary incorporated the recommendation in 
Sec. 682.415(b)(5)(i), believing it would ensure that portfolios that 
are purchased and converted to a new lender's or lender servicer's 
operation are serviced properly prior to submission as an exceptional 
performer claim.
     The industry recommended that the proposed regulations 
permit the annual and quarterly audits to be submitted within 90 days 
of the end of the audit period, rather than 60 days as suggested by the 
Secretary.
    The Secretary agrees with this proposal, and Sec. 682.415(a)(2), 
(b)(6)(i) and (c)(6)(i) have been amended to reflect the change.
     Some of the industry representatives argued that if the 
Secretary denies the lender's or lender servicer's request for 
designation based on information provided to the Secretary by a 
guaranty agency under Sec. 682.415(b)(1)(ii), the lender or lender 
servicer should be given the opportunity to review the information and 
refute it, if it has additional information not provided by the 
guaranty agency.
    The statute does not require the Secretary to allow a lender an 
opportunity to challenge a decision denying designation for exceptional 
performance. However, if the Secretary believes it is appropriate 
pursuant Sec. 682.415(b)(1)(ii), the Secretary will give the lender or 
servicer an opportunity to submit additional information to support its 
application.
     Some negotiators pointed out that Secs. 682.406 and 
682.413 state that if a claim is paid on an account and there are 
servicing errors, the guarantor could be denied reinsurance.
    A lender or lender servicer that is designated as an exceptional 
performer must meet a 97 percent compliance rate. This means that a 
lender or lender servicer may have no more than a 3 percent error rate 
in its entire loan portfolio to maintain its status as an exceptional 
performer.
     The industry negotiators stated that designation for 
exceptional performance should be expanded to authorize a servicer to 
apply for designation as an exceptional performer on behalf of itself, 
as well as for several or all of its lender clients.
    The Secretary proposes to provide in Sec. 682.415(a)(4) that a 
lender may be designated as an exceptional performer based on loans 
that it services itself. A lender servicer may be designated as an 
exceptional performer only for loans that it services. This means that 
a lender or lender servicer may apply for designation for exceptional 
performance only for loans that it services itself.
     The negotiators recommended that the 12-month designation 
period for exceptional performance should begin on the date the 
guaranty agency ``receives'' (rather than the date the Department 
mails) notification of the Secretary's decision regarding the agency's, 
lender's, or servicer's exceptional performance status.
    The Secretary proposes to revise Sec. 682.415(a)(1) to reflect that 
the effective date of an exceptional performer designation is the date 
the lender, servicer, or guarantee agency receives notification from 
the Secretary. These regulations also would provide that the Secretary 
considers receipt of notification of exceptional performance by the 
lender, servicer, or guaranty agency to be no later than 3 days after 
the date the notice is mailed by the Secretary, unless the lender, 
servicer, or guaranty agency is able to prove otherwise.
     The industry negotiators recommended that the regulations 
permit a lender's, servicer's, and guaranty agency's exceptional 
performance status to continue until the Secretary denies a renewal 
application. Industry participants argued that this process will permit 
an on-going status rather than an on-and-off status.
    Section 682.415(a)(5) of the proposed regulations would permit a 
lender, servicer, and guaranty agency to retain its exceptional 
performance status until the Secretary approves or denies its request 
for redesignation.
     Several lender and servicer representatives recommended 
that the Secretary advise the lender, servicer, and applicable guaranty 
agency of the Secretary's decision to approve or deny its request to 
participate as an exceptional performer and, if applicable, the reason 
for denial.
    The proposed regulations provide that the Secretary notify the 
lender, servicer, and applicable guaranty agency of his decision to 
approve or deny an applicant's request for designation and, if 
applicable, the reason for denial. The regulatory provisions are found 
in Sec. 684.415(b)(2) for lenders and Sec. 682.415(c)(3) for guaranty 
agencies.
     Several negotiators recommended that the Secretary 
eliminate the need for a quarterly independent third-party audit. As an 
alternative, the industry suggested that a lender, servicer, or 
guaranty agency that has been designated for exceptional performance 
for at least 15 months be permitted to petition the Secretary for 
permission to have its internal auditors perform subsequent quarterly 
compliance audits. The annual audit would assess the reliability of the 
procedures used by the lender's, servicer's, or guaranty agency's 
internal auditor in performing the quarterly audits.
    The proposed regulations under Sec. 682.415(b)(6)(ii) and 
(c)(6)(ii) reflect the consensus of the negotiators to permit the 
Secretary to approve the use of internal auditors in certain cases. 
However, the Secretary reserves the right to deny any lender's, 
servicer's, or guaranty agency's petition to use its internal auditors 
if necessary to protect the Federal fiscal interest.
     Many industry negotiators suggested that the effective 
date of revocation of the designation should be the date the Secretary 
notifies the lender, servicer, or guaranty agency that its designation 
as an exceptional performer is terminated.
    As reflected in Sec. 682.415(a)(8)(iii) of the regulations, the 
Secretary believes a lender, servicer, or guaranty agency that loses 
exceptional performance status should not be entitled to receive the 
benefits of such status beyond the date the event or condition causing 
the revocation occurred.
     Guaranty agency representatives argued that the Secretary 
should permit guaranty agency servicers to apply for designation for 
exceptional performance. Prohibiting guaranty agency servicers from 
applying could prevent some agencies from qualifying as exceptional 
performers.
    The proposed regulations under Sec. 682.415(c)(1)(iii) permit 
guaranty agency servicers to apply for designation as an exceptional 
performer. This revision reflects the consensus of the negotiators and 
permits guaranty agency servicers to apply for designation for 
exceptional performance. The proposed regulations are consistent with 
the provisions of the statute that authorize lender servicers to apply 
for exceptional performance designation. However, a guaranty agency 
servicer may be designated for exceptional performance only for loans 
it services.
     Guaranty agency representatives suggested that the 
proposed regulations should recognize the alternative guarantor due 
diligence procedures included in the Department's regulations (34 CFR 
682.410(b)(7) as published in the Federal Register on December 18, 
1992, 57 FR 60280). Agency representatives stated that if the 
alternative procedures are not recognized, an agency could lose the 
opportunity to apply for exceptional performance designation, or lose 
the option to use alternative collection methods.
    Section 682.415(d)(1) of the proposed regulations reflects the 
consensus of the negotiators and defines ``due diligence requirements'' 
incorporating the guaranty agency alternative due diligence 
requirements in Sec. 682.410(b)(7).
     Many industry negotiators stated that the statutory 
language regarding the Federal False Claims Act would unnecessarily 
penalize designated lenders, servicers, and guaranty agencies for 
failing to service loans or otherwise comply with applicable 
regulations beyond what would normally be provided for under program 
regulations. The negotiators believed that this would discourage 
eligible entities from applying for exceptional designation.
    During the negotiations, the Secretary advised the negotiators to 
seek a technical amendment if they wished to do so. However, because 
the recent technical amendments to the HEA enacted on December 20, 
1993, did not repeal this provision from the law, the Secretary has 
decided to reflect the statutory provision in the regulations under 
Sec. 682.415(b)(7) and (c)(7).
     Several negotiators recommended that the calculation of 
the 97 percent compliance rate be based upon all collection activities 
correctly performed divided by all collection activities required to be 
performed.
    The Secretary agrees with the negotiators and has incorporated 
language in the regulations under Sec. 682.415(b)(3) and (c)(4) for 
lenders and guaranty agencies respectively. This language previously 
appeared in earlier drafts of the regulations and was subsequently 
deleted. However, the Secretary believes that the elements for 
determining the 97 percent compliance rate should be published in the 
regulations. The Secretary and negotiators agreed that the methodology 
for determining statistical sampling and evaluation techniques will be 
identified in an audit guide prepared by the Department's Office of 
Inspector General.
     The negotiators requested that the Secretary recognize 
that conditions may occur that are beyond the designee's control and 
therefore should not have its designation for exceptional performance 
revoked under these circumstances.
    The Secretary agrees with the negotiators and therefore has 
incorporated the phrase ``serious and material violations'' into the 
conditions for revocation under Sec. 682.415(b)(8)(ii)(C) at the 
request of the negotiators. The Secretary recognizes that minor due 
diligence violations or temporary systems failure (e.g., loss of power 
that delays required letters) may occur which are beyond the designee's 
control and should not result in the immediate revocation for 
conditions applicable to the quarterly audit process.
    The Secretary has incorporated the preceding provisions in the 
regulatory document. The following provides a general guide to the 
structural layout of the regulatory provisions pertaining to lenders 
under Sec. 682.415(b) and guaranty agencies under Sec. 682.415(c) of 
these regulations.
    Section 682.415(b)(1), (b)(2) and (b)(3) incorporate eligibility 
criteria for qualifying for exceptional performance; Sec. 682.415(b)(4) 
pertains to notification by the Secretary of approval or denial of 
request for designation; Sec. 682.415(b)(5) discusses insurance 
payments to lenders and lender servicers on defaulted loans; 
Sec. 682.415(b)(6) contains requirements regarding maintenance of 
designation through quarterly audits; Sec. 682.415 (b)(7) pertains to 
submission of claims by a lender to a guaranty agency; 
Sec. 682.415(b)(8) provides conditions for revocation of designation 
for exceptional performance; and Sec. 682.415(b)(9) pertains to 
qualified independent organizations that may complete the annual and 
quarterly audits.
    Section 682.415(c)(1), (c)(2), (c)(3), and (c)(4) incorporate 
eligibility criteria for qualifying for exceptional performance; 
Sec. 682.415(c)(5) pertains to notification by the Secretary of 
approval or denial of the request for designation; Sec. 682.415(c)(6) 
contains requirements regarding maintenance of designation through 
quarterly audits; Sec. 682.415(c)(7) pertains to submission of claims; 
Sec. 682.415(c)(8) provides conditions for revocation of designation 
for exceptional performance; and Sec. 682.415(c)(9) pertains to 
qualified independent organizations for completing the annual and 
quarterly audits.
    The Secretary particularly invites comments on two issues: (1) How 
the regulations should be implemented in light of the change made by 
the Student Loan Reform Act (Pub. L. 103-66) that reduced the amount of 
insurance paid to lenders under a guaranty agency program from 100 
percent to 98 percent and which is not currently reflected in the 
regulations; and
    (2) whether the standards established to designate a guaranty 
agency as an exceptional performer should be revised in light of other 
changes impacting guaranty agencies that were made by Public Law 103-
66.

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.
    Certain compliance requirements are imposed on guaranty agencies, 
lenders, and servicers by the regulations. These requirements, however, 
would not have a significant impact, because they would not impose 
excessive regulatory burdens or require unnecessary federal 
supervision.

Paperwork Reduction Act of 1980

    Section 682.415 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1980, the Department of 
Education will submit a copy of this section to the Office of 
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h))
    Lenders, servicers, and guaranty agencies may apply for designation 
as an exceptional performer in collecting delinquent and defaulted 
Federal Family Education Loans under these regulations. The Department 
needs and uses the information to determine an applicant's eligibility 
to receive federal benefits as an exceptional performer and to increase 
the accountability of recipients.
    Annual reporting burden associated with the quarterly audits 
required to maintain the status as an exceptional lender, servicer, or 
guaranty agency is estimated to average 100 hours per lender, and 960 
hours respectively per guaranty agency and servicer. There are a total 
of 8,060 respondents. Therefore, the net total burden hours applicable 
to all respondents is approximately 975,680. This includes the time for 
gathering and maintaining the data needed, reviewing the collection of 
information, and preparing a final document. Also, the average time it 
takes a guaranty agency to process a default claim is 45 minutes. 
However, the administrative burden required of guaranty agencies 
designated for exceptional performance in processing default claims is 
reduced by approximately 50 percent because of its exceptional status 
in collecting defaulted loans.
    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 4310, ROB-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.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action. 
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.
    These regulations do not impose any undue burden on lenders, 
servicers, and guaranty agencies. These regulations are needed to 
define the performance standards and application procedures under which 
a lender, servicer, or guaranty agency will be designated as an 
exceptional performer in student loan collection. To a great extent, 
the regulatory context was taken directly from the HEA. As reflected 
earlier in the preamble, several alternatives and interpretations 
pertaining to the statute were suggested during the regional meetings 
discussions and subsequent negotiations. However, for the most part, 
the language left very little room for interpretation on substantive 
issues. These regulations meet the statutory mandate by allowing the 
Secretary to determine an applicant's ability to collect delinquent and 
defaulted FFEL Program loans at an acceptable level of 97 percent 
compliance.
    The requirements of these regulations will not significantly 
increase the costs associated with loan servicing and collection for 
applicants participating as exceptional performers. The Secretary also 
believes that the costs of maintaining the high standard of at least a 
97 percent compliance rate required by statute to participate as an 
exceptional performer will be incurred instead of the costs normally 
associated with guaranty agencies' review of default claims. These 
savings would result from a significant reduction in the administrative 
burden currently imposed on guaranty agencies in the claim review 
process.
    Because it is a new program in the law, there are no data available 
to effectively evaluate the costs and benefits of the exceptional 
performers program. Therefore, to determine the expected benefits of 
implementing these regulations, the Secretary has examined the 
delinquency rate of the largest 100 lenders participating in the FFEL 
Program. These participants held approximately 82 percent of all 
outstanding FFEL Program loans as of September 30, 1991. For purposes 
of this analysis, the Secretary identified a median rate for the 
largest 100 holders of 13 percent of all FFEL Program loans 30 days 
past-due in relation to all FFEL Program loans in repayment. The median 
represents the 50th percentile of the ranked order of the largest 100 
lenders' delinquency rates. In other words, one-half of the largest 100 
lenders were above the median or acceptable rate, and one half were 
below the median. Currently, the combined dollar amount of loans past-
due for the largest 100 lenders above the median delinquency rate 
totals $3,728,686,506 and represents 15 percent of all FFEL loans in 
repayment. The combined dollar amount of loans past-due for these 
lenders that are below the median delinquency rate totals $842,388,045 
and represents 10 percent of FFEL loans in repayment. The Secretary 
believes that efforts by program participants made to improve servicing 
and collection to meet the exceptional performer standards will result 
in an overall reduction in delinquency rates and resulting default 
claims submitted for reinsurance payment, resulting in a substantial 
financial benefit over an approximate three-year period.
    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 program.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
    (1) Are the requirements in the proposed regulations clearly 
stated?
    (2) Do the regulations contain technical terms or other wording 
that interferes with their clarity?
    (3) Does the format of the regulations (grouping and order of 
sections, use of headings, paragraphing, etc.) aid or reduce their 
clarity? Would the regulations be easier to understand if they were 
divided into more (but shorter) sections? (A ``section'' is preceded by 
the symbol ``Sec. '' and a numbered heading; for example, Sec. 682.415 
Special insurance and reinsurance rules.)
    (4) Is the description of the regulations in the ``Supplementary 
Information'' section of this preamble helpful in understanding the 
regulations? How could this description be more helpful in making the 
regulations easier to understand?
    (5) What else could the Department do to make the regulations 
easier to understand?

List of Subjects in 34 CFR Part 682

    Administrative practice or procedure, Colleges and universities, 
Education, Loan programs-education, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal 
Family Education Loan Program)

    Dated: January 26, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary proposes to amend title 34 of the Code of Federal 
Regulations by amending part 682 as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAM

    1. The authority citation for Part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

    2. A new Sec. 682.415 is added to read as follows:


Sec. 682.415  Special insurance and reinsurance rules.

    (a) (1) A lender or lender servicer (as an agent for an eligible 
lender) designated for exceptional performance under paragraph (b) of 
this section may receive 100 percent reimbursement on all default 
claims submitted for insurance during the 12-month period following the 
date the appropriate guaranty agencies receive notification of the 
designation of the eligible lenders or lender servicers under paragraph 
(b) of this section. A guaranty agency or a guaranty agency servicer 
(as an agent for a guaranty agency) designated for exceptional 
performance under paragraph (c) of this section may receive the 
applicable reinsurance rate under section 428(c)(1) of the Higher 
Education Act of 1965, as amended by the Omnibus Budget Reconciliation 
Act (Pub. L. 103-66) on all default claims submitted for reinsurance 
payments by the guaranty agency or guaranty agency servicer during the 
12-month period following the date the guaranty agency receives 
notification of its designation, or its servicer's designation, under 
paragraph (c) of this section. A notice of designation for exceptional 
performance under this section is deemed to have been received by the 
lender, servicer or guaranty agency no later than 3 days after the date 
the notice is mailed, unless the lender, servicer or guaranty agency is 
able to prove otherwise.
    (2) To receive a designation for exceptional performance under 
paragraph (a)(1) of this section, a lender, servicer, or guaranty 
agency must submit to the Secretary--
    (i) A written request for designation for exceptional performance 
that includes--
    (A) The applicant's name and address;
    (B) A contact person;
    (C) Its ED identification number, if applicable;
    (D) The name and address of applicable guarantors; and
    (E) A copy of an annual financial audit performed in accordance 
with the Audit Guide developed by the U.S. Department of Education, 
Office of Inspector General, or one of the following as appropriate:
    (1) A lender may submit a copy of an annual audit required under 
Sec. 682.305(c), if the audit period ends no more than 90 days prior to 
the date the lender submits its request for designation.
    (2) A servicer may submit a copy of the annual financial audit, as 
defined, completed and submitted under part G, if the audit period ends 
no more than 90 days prior to the date the servicer submits its request 
for designation.
    (3) A guaranty agency may submit a copy of an annual audit required 
under section 428(b)(2)(D) of the Higher Education Act of 1965, as 
amended, if the audit period ends no more than 90 days prior to the 
date the guaranty agency submits its request for designation;
    (ii) If the applicant is a servicer, a statement signed by the 
owner or chief executive officer of the applicant certifying that the 
applicant meets the definition of a servicer contained in paragraph 
(d)(3) of this section; and
    (iii) (A) A compliance audit of its loan portfolio, conducted by a 
qualified independent organization meeting the criteria in paragraph 
(b)(9) of this section, that yields a compliance performance rating of 
97 percent or higher of all due diligence requirements applicable to 
each loan, on average, with respect to the collection of delinquent 
loans ending no more than 90 days before the date the lender, servicer 
or guaranty agency submits its request for designation.
    (B) To satisfy the requirement of paragraph (a)(2)(iii) of this 
section, a servicer may submit its annual compliance audit under part G 
if the servicer includes in its report a measure of its compliance 
performance rating required under paragraph (a)(2)(iii)(A) of this 
section, if this report is performed in accordance with the Audit Guide 
developed by the U.S. Department of Education, Office of Inspector 
General.
    (3) The cost of audits for determining eligibility and continued 
compliance under this section are the responsibility of the lender, 
servicer, or guaranty agency.
    (4) A lender or servicer shall also submit the information in 
paragraph (a)(2) (i), (ii), or (iii) of this section to each 
appropriate guaranty agency.
    (5) A lender may be designated for exceptional performance for 
loans that it services itself. A lender servicer may be designated for 
exceptional performance only for all loans it services.
    (6) (i) To prevent a lapse of a lender's, servicer's, or guaranty 
agency's exceptional performance status after the end of the 12-month 
period, the lender, servicer, or guaranty agency shall submit updated 
information required under paragraph (a)(2) of this section to the 
Secretary no later than 90 days after the end of the audit period.
    (ii) Upon the Secretary's determination that the lender, servicer 
or guaranty agency maintained at least a 97 percent compliance 
performance rate and satisfies the other requirements for designation, 
the Secretary notifies the lender, servicer or guaranty agency that its 
redesignation for exceptional performance begins on the date following 
the last day of the previous 12-month period for which it received 
designation for exceptional performance. However, a lender's, 
servicer's, or guaranty agency's designation for exceptional 
performance continues until it receives notification from the Secretary 
that its request for redesignation is approved, or its designation is 
revoked, under the provisions of paragraph (b)(8)(iii) of this section.
    (iii) A notice under paragraph (a)(6) of this section is determined 
to have been received by the lender, servicer or guaranty agency no 
later than 3 days after the notice is mailed, unless the lender, 
servicer or guaranty agency is able to prove otherwise.
    (b) Determination of eligibility. (1) The Secretary determines 
whether to designate a lender or lender servicer for exceptional 
performance based upon--
    (i) The annual compliance audit of collection activities required 
for delinquent FFEL Program loans in Sec. 682.411(c) through (h), and 
(m), if applicable, submitted under this section;
    (ii) Information from any guaranty agency regarding an eligible 
lender or lender servicer desiring designation, including, but not 
limited to, any information suggesting that the lender's or lender 
servicer's request for designation should not be approved;
    (iii) Any other information in the possession of the Secretary, or 
submitted to the Secretary by any other agency or office of the Federal 
Government; and
    (iv) Evidence indicating that the lender or lender servicer has 
complied with the requirements for converting FFEL Program loans to 
repayment under Sec. 682.209(a), and the timely filing requirements 
under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the 
audit guide as published by the U.S. Department of Education, Office of 
Inspector General. The audit submitted under paragraph (b)(1)(i) of 
this section may satisfy this requirement, if a separate sample of 
loans is used.
    (2) The Secretary informs the eligible lender or lender servicer, 
and the appropriate guaranty agency, that the lender or lender 
servicer's request for designation as an exceptional lender or lender 
servicer has been approved, unless the results of the audit are 
persuasively rebutted by information in paragraph (b)(1) (ii) or (iii) 
of this section. If the request for designation is not approved, the 
Secretary informs the lender or lender servicer and the appropriate 
guaranty agency(s) of the reason the application is not approved.
    (3) In calculating a lender's or lender servicer's compliance 
rating, as referenced in paragraph (a)(2)(ii) of this section, the 
universe for the audit must include all loans in the lender's or lender 
servicer's FFEL Program portfolio that are serviced during the audit 
period performed under the Department's regulations in Sec. 682.411. 
The numerator must include the total number of collection activities 
successfully completed, in accordance with program regulations, that 
are serviced during the audit period. The denominator must include the 
total number of collection activities required to be performed, in 
compliance with program regulations, that are serviced during the audit 
period. Using statistical sampling and evaluation techniques identified 
in an audit guide prepared by the Department's Office of Inspector 
General, a random sample of loans must be selected and evaluated.
    (4) The Secretary notifies a guaranty agency within 60 days after 
the date the Secretary receives the information, listed in paragraph 
(a)(2) of this section, from the eligible lender or lender servicer, 
that the lender's or lender servicer's application for designation for 
exceptional performance has been approved or denied.
    (5) (i) Except as provided under paragraph (b)(8) of this section, 
a guaranty agency may not refuse, solely on the basis of a violation of 
repayment conversion, due diligence requirements or timely filing 
requirements, to pay an eligible lender or lender servicer, designated 
for exceptional performance, 100 percent of the unpaid principal and 
interest of all loans for which default claims are submitted for 
insurance payment by that eligible lender or lender servicer. The 
designation of a lender or lender servicer for exceptional performance 
applies to loans that have been serviced by the lender or lender 
servicer for the last 180 days prior to default.
    (ii) A guaranty agency or the Secretary may require the lender or 
lender servicer to repurchase a loan if the agency determines the loan 
should not have been submitted as a claim. The guaranty agency must pay 
default claims to a lender or lender servicer designated for 
exceptional performance in accordance with this subsection for the one-
year period following the date the guaranty agency receives 
notification of the lender's or lender servicer's designation under 
paragraph (b)(2) of this section, unless the Secretary notifies the 
guaranty agency that the lender's or lender servicer's designation for 
exceptional performance has been revoked.
    (6) (i) To maintain its designation for exceptional performance, 
the lender or lender servicer must have a quarterly compliance audit of 
the due diligence in collection activities required for delinquent FFEL 
Program loans in Sec. 682.411(c) through (h), and (m), if applicable, 
conducted by a qualified independent organization meeting the criteria 
in paragraph (b)(9) of this section that results in a compliance rating 
for the quarter of not less than 97 percent. The audit must indicate a 
compliance performance rating of not less than 97 percent for two 
consecutive months or 90 percent for one month. The quarterly audit may 
not include any period covered by the annual financial and compliance 
audit under paragraph (a)(2) of this section. The results of the 
quarterly compliance audit must be submitted to the Secretary and to 
the appropriate guaranty agencies within 90 days following the end of 
each quarter.
    (ii) If a lender or lender servicer has been designated for 
exceptional performance for at least 15 months, a lender or lender 
servicer may petition the Secretary for permission to have its internal 
auditors perform the subsequent quarterly compliance audits required by 
paragraph (b)(6)(i) of this section. If the Secretary approves the 
request, the lender's or lender servicer's annual audit must assess the 
reliability of the procedures used by the lender's or lender servicer's 
internal auditor in performing the quarterly audits.
    (iii) The lender or lender servicer shall perform three quarterly 
audits and one annual audit that includes a representative sample of 
fourth quarter collection activities to satisfy the requirements in 
paragraph (b)(6)(i) of this section.
    (7) (i) Insurance payments made on default claims submitted by a 
lender or lender servicer designated for exceptional performance are 
not subject to additional review of repayment conversion, due diligence 
and timely filing requirements, or to required repurchase by the lender 
or lender servicer, unless the Secretary determines that the eligible 
lender or lender servicer engaged in fraud or other purposeful 
misconduct in obtaining designation for exceptional performance. 
Notwithstanding the payment requirements in paragraph (b)(7)(i) of this 
section, nothing prohibits the guaranty agency or the Secretary from 
reviewing the lender's or lender servicer's activities in regard to the 
loans paid under paragraph (b)(7)(i) of this section as part of program 
oversight responsibilities, or for requiring the lender to repurchase a 
loan if the agency determines the loan should not have been submitted 
as a claim. The lender shall file, and the guaranty agency shall 
maintain, the documentation the guaranty agency normally requires its 
lenders to file with respect to the collection history of each loan.
    (ii) A lender or lender servicer designated under this section that 
fails to service loans or otherwise comply with applicable program 
regulations is considered in violation of the Federal False Claims Act.
    (8) (i) The Secretary revokes the designation of a lender or lender 
servicer for exceptional performance if--
    (A) The quarterly compliance audit required under paragraph (b)(6) 
of this section is submitted to the Secretary and indicates that the 
lender or lender servicer failed to maintain not less than 97 percent 
compliance with due diligence standards for the quarter, or not less 
than 97 percent compliance for 2 consecutive months, or 90 percent for 
1 month; or
    (B) Any quarterly audit required in paragraph (b)(6) of this 
section is not received by the Secretary within 90 days following the 
end of each quarter.
    (ii) The Secretary may revoke the designation of an exceptional 
lender or lender servicer if--
    (A) The Secretary determines the eligible lender or lender servicer 
failed to maintain an overall level of regulatory compliance consistent 
with the audit submitted by the lender or lender servicer;
    (B) The Secretary has reason to believe the lender or lender 
servicer may have engaged in fraud in securing its designation for 
exceptional performance; or
    (C) The lender or lender servicer fails to service loans in 
accordance with program regulations. For purposes of paragraph 
(b)(8)(ii)(C) of this section, a lender or lender servicer fails to 
service loans in accordance with program regulations if the Secretary 
determines that the lender or lender servicer has committed serious and 
material violations of the regulations.
    (iii) The date that which the event or condition occurred is the 
effective date of the revocation, except for revocation under paragraph 
(a)(5) of this section, which is effective at the close of the 12-month 
period for which the lender or lender servicer received designation for 
exceptional performance.
    (9) Public accountants, public accounting firms, and external 
government audit organizations that meet the qualification and 
independence standards contained in Government Auditing Standards 
published by the Comptroller General of the United States are 
acceptable entities to perform the audits required under paragraphs 
(b)(3) and (b)(6) of this section.
    (c)(1) (i) Except as provided under paragraph (c)(8) of this 
section, the Secretary pays the applicable reinsurance rate under 
Sec. 682.404(b) on the unpaid principal balance and interest of all 
default claims submitted for reinsurance by a guaranty agency or 
guaranty agency servicer that has been designated for exceptional 
performance.
    (ii) A guaranty agency may be designated for exceptional 
performance for loans that it services itself.
    (iii) A guaranty agency servicer may be designated for exceptional 
performance only for all loans it services.
    (iv) A guaranty agency or guaranty agency servicer is designated 
for exceptional performance for a 12-month period following the 
receipt, by the guaranty agency or guaranty agency servicer, of the 
Secretary's notification of designation.
    (v) A notice under paragraph (c)(1)(v) of this section is 
determined to have been received no later than 3 days after the date 
the notice is mailed, unless the guaranty agency or guaranty agency 
servicer is able to prove otherwise.
    (2) The Secretary determines whether to designate a guaranty agency 
or guaranty agency servicer for exceptional performance based upon--
    (i) The annual financial audit and a compliance audit of collection 
activities, including timely claim payment and timely reinsurance 
filing required for defaulted FFEL Program loans in 
Sec. 682.410(b)(6)(iii) through (xii), Sec. 682.406 (a)(8) and (a)(9), 
or Sec. 682.410(b)(7) and, Sec. 682.406 (a)(8) and (a)(9); and
    (ii) Any other information in the possession of the Secretary.
    (3) The Secretary informs the guaranty agency or guaranty agency 
servicer that its request for designation for exceptional performance 
has been approved, unless the results of the audit are persuasively 
rebutted by information in paragraph (c)(2)(ii) of this section. If the 
Secretary does not approve the guaranty agency's or guaranty agency 
servicer's request for designation, the Secretary informs the guaranty 
agency or guaranty agency servicer of the reason the application was 
not approved.
    (4) In calculating a guaranty agency's or guaranty agency 
servicer's compliance rating, as referenced in paragraph (a)(2)(ii) of 
this section, the Secretary requires that the universe of loans in the 
audit sample must consist of all loans in the guaranty agency's or 
guaranty agency servicer's FFEL Program portfolio that are serviced 
during the audit period performed under the Department's regulations in 
Sec. 682.410(b)(6)(iii) through (xii) and Sec. 682.406 (a)(8) and 
(a)(9) or Sec. 682.410(b)(7), and Sec. 682.406 (a)(8) and (a)(9). The 
numerator must include the total number of collection activities 
successfully completed, in accordance with program regulations, that 
are serviced during the audit period. The denominator must include the 
total number of collection activities required to be performed, in 
compliance with program regulations, that are serviced during the audit 
period. Using statistical sampling and evaluation techniques identified 
in an audit guide prepared by the Department's Office of Inspector 
General, a random sample of loans must be selected and evaluated.
    (5) The Secretary notifies a guaranty agency or guaranty agency 
servicer, within 60 days after the date the Secretary receives the 
information, listed in paragraph (a)(2) of this section from the 
guaranty agency's or guaranty agency servicer's application for 
designation for exceptional performance has been approved or denied.
    (6) (i) To maintain its status as an exceptional guaranty agency or 
guaranty agency servicer, the guaranty agency or guaranty agency 
servicer must have a quarterly compliance audit of the due diligence in 
collection activities of defaulted FFEL Program loans in 
Sec. 682.410(b)(6)(iii) through (xii) and Sec. 682.406 (a)(8) and 
(a)(9) or Sec. 682.410(b)(7), and Sec. 682.406 (a)(8) and (a)(9) 
conducted by a qualified independent organization meeting the criteria 
in paragraph (c)(9) of this section. The audit must yield a compliance 
performance rating of not less than 97 percent. The quarterly audit may 
not include any period covered by the annual financial and compliance 
audit required under paragraph (a)(2) of this section. The results of 
the quarterly compliance audit must be submitted to the Secretary 
within 90 days following the end of each quarter.
    (ii) If the guaranty agency or guaranty agency servicer has been 
designated for exceptional performance for at least 15 months, the 
guaranty agency or a guaranty agency servicer may petition the 
Secretary for permission to have its internal auditors perform 
subsequent quarterly compliance audits required by paragraph (c)(6)(i) 
of this section. If the Secretary approves the request, the guaranty 
agency's or guaranty agency servicer's annual audit must assess the 
reliability of the procedures used by the guaranty agency's or the 
guaranty agency servicer's internal auditor in performing the quarterly 
audits.
    (7) (i) Payments of reinsurance made on defaulted FFEL Program 
loans submitted by an eligible guaranty agency or guaranty agency 
servicer designated for exceptional performance are not subject to 
repayment based on additional review of due diligence activities, 
including timely claim payment, or timely filing for reinsurance 
covering a period for which the guaranty agency or guaranty agency 
servicer was designated for any reason other than a determination by 
the Secretary that the eligible guaranty agency or guaranty agency 
servicer engaged in fraud or other purposeful misconduct in obtaining 
designation for exceptional performance.
    (ii) A guaranty agency designated under this section that fails to 
service loans or otherwise comply with applicable program regulations 
is considered in violation of the Federal False Claims Act.
    (8) (i) The Secretary may revoke the designation of a guaranty 
agency or guaranty agency servicer for exceptional performance if the 
Secretary has reason to believe the guaranty agency or guaranty agency 
servicer fraudulently obtained its designation for exceptional 
performance.
    (ii) The Secretary may revoke the designation for exceptional 
performance upon 30 days' notice, and an opportunity for a hearing 
before the Secretary, if the Secretary finds that the guaranty agency 
or guaranty agency servicer failed to maintain an acceptable overall 
level of regulatory compliance.
    (9) A qualified independent organization is an organization that 
meets the criteria in paragraph (b)(9) of this section.
    (d) Definitions. For purposes of this section--
    (1) Due diligence requirements means the activities required to be 
performed by lenders or guaranty agencies on delinquent or defaulted 
loans pursuant to Sec. 682.411 (c) through (h), and (m), if applicable 
and Sec. 682.410 (b)(6) (iii) through (xii) and Sec. 682.406 (a)(8) and 
(a)(9) or Sec. 682.410 (b)(7) and, 682.406 (a)(8) and (a)(9);
    (2) Eligible loan means a loan made, insured, or guaranteed under 
Part B of Title IV of the Act; and
    (3) Servicer means an entity that services and collects student 
loans and that--
    (i) Has substantial experience in servicing and collecting consumer 
loans or student loans;
    (ii) Has an annual independent financial audit that is furnished to 
the Secretary and any other parties designated by the Secretary;
    (iii) Has business systems capable of meeting the requirements of 
part B of Title IV of the Act and applicable regulations;
    (iv) Has adequate personnel knowledgeable about the student loan 
programs authorized by part B of Title IV of the Act; and
    (v) Does not knowingly have any owner, majority shareholder, 
director, or officer of the entity who has been convicted of a felony.

(Authority: 20 U.S.C. 1078-9)

[FR Doc. 94-9464 Filed 4-19-94; 8:45 am]
BILLING CODE 4000-01-P