[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10132]


[[Page Unknown]]

[Federal Register: April 29, 1994]


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Part IV





Department of Education





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34 CFR Part 668




Student Assistance General Provisions; Interim Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC09

 
Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Interim final regulations with invitation for comment.

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SUMMARY: On December 20, 1993, the President signed the Higher 
Education Technical Amendments of 1993. These interim final regulations 
implement certain provisions of the technical amendments relating to 
the determination of institutional cohort default rates in the Federal 
Family Education Loan program. The Secretary invites comments on these 
regulations.
DATES: Effective date: These regulations take effect either 45 days 
after publication in the Federal Register or later if Congress takes 
certain adjournments, with the exception of Sec. 668.17 (f) and (h) 
which will become effective after the information collection 
requirements contained in this section have been submitted by the 
Department of Education and approved by the Office of Management and 
Budget under the Paperwork Reduction Act of 1980. If you want to know 
the effective date of these regulations, call or write the Department 
of Education contact person. A document announcing the effective date 
will be published in the Federal Register. Comments on these interim 
final regulations must be received on or before June 13, 1994.
ADDRESSES: All comments concerning these regulations should be 
addressed to Pamela A. Moran, Acting Chief, 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.

FOR FURTHER INFORMATION CONTACT: Doug Laine, Program Specialist, 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 (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: Section 2(c)(55) of Public Law 103-208 
amended section 435 of the Higher Education Act of 1965, as amended 
(HEA), 20 U.S.C. 1085. This section modified the process governing 
institutions' appeals of their cohort default rates based on 
allegations of improper loan servicing and collection.
    In a Federal Register Notice published March 22, 1994, 59 FR 13606, 
the Secretary requested comments on the procedures that should be 
established to implement the statutory amendments.
    The Secretary indicated in the Notice that he intended to issue 
regulations establishing procedures for schools to appeal their default 
rates based on allegations of improper loan servicing or collection. 
The notice solicited public help in developing those procedures. The 
Secretary invited public comment on any aspect of implementing the 
statute, but in particular, the Secretary solicited comments on the 
following issues:
    1. What procedures should the Secretary use in determining whether 
to exclude from the calculation of cohort default rates loans, the 
inclusion of which due to improper servicing or collection, would 
result in an inaccurate or incomplete calculation of a school's cohort 
default rate?
    2. What procedures should be used for sampling of loan servicing 
and collection records?
    3. What procedures should the Secretary provide for schools to 
review the information provided by the guaranty agencies to the 
Secretary for use in determining cohort default rates prior to 
calculation of the final rates?
    The Secretary received 54 comments in response to the request for 
comments. Many of the comments are reflected in these rules. The 
Secretary's response to the suggestions made by the commenters that 
were not accepted is provided after the following discussion of the 
procedures established by these rules.

Appeals Based on Allegations of Improper Loan Servicing

    Public Law 103-208 added section 435(a)(3) to the HEA to 
specifically provide certain institutions with an opportunity to appeal 
the calculation of their cohort default rates on the basis of 
allegations of improper loan servicing or collection. In particular, 
this opportunity will be available to institutions that: (1) Are 
subject to loss of eligibility for the FFEL Program under section 
435(a)(2) of the HEA; (2) are subject to loss of eligibility for the 
Federal Supplemental Loans for Students (SLS) Program under section 
428A(a)(2) of the HEA; or (3) have cohort default rates that equal or 
exceed 20 percent for the most recent year for which data are 
available. The statute requires the Secretary to take steps to ensure 
that these institutions have access to a representative sample of 
relevant loan servicing and collection records for a reasonable period 
of time, not to exceed 30 calendar days. Upon completion of the appeal, 
the Secretary will reduce an institution's cohort default rate to 
reflect the percentage of defaulted loans in the sample that are 
required to be excluded under section 435(m)(1)(B) of the HEA.
    Public Law 103-208 also amended section 435(m)(1)(B) of the HEA to 
clearly provide that the Secretary would consider allegations of 
improper loan servicing or collection only in considering appeals of 
cohort default rate determinations filed by institutions. This change 
was made in response to certain court rulings which suggested that the 
Secretary was required to determine whether loans were properly 
serviced prior to making initial determinations of and releasing cohort 
default rates. Section 435(m)(1)(B) of the HEA now provides that, in 
considering appeals of cohort default rates under section 435(a)(3) of 
the HEA, the Secretary should exclude any loans which, due to improper 
servicing or collection, would, as demonstrated by the evidence 
submitted in support of the institution's timely appeal to the 
Secretary, result in an inaccurate or incomplete calculation of the 
cohort default rate.
    These regulations establish the procedures for implementing the 
appeal process provided by sections 435(a)(3) and 435(m)(1)(B) of the 
HEA. The regulations specify that an institution which is subject to 
the loss of participation in the FFEL program because of default rates 
equal to or in excess of 25 percent for the three most recent years for 
which rates are calculated or which has a cohort default rate which 
equals or exceeds 20 percent may appeal the calculation of the rate 
based on allegations of improper loan servicing or collection. These 
regulations do not specifically include institutions that are subject 
to the loss of participation in the Federal SLS Program because that 
program has been repealed by Congress effective July 1, 1994. See 
Public Law 103-66, section 4047(b) and (d). These regulations replace 
the former regulatory provision which related to the loss of SLS 
participation because that subsection becomes moot on the elimination 
of the SLS program. However, an institution that is currently subject 
to a loss of participation in the SLS program will have the opportunity 
to pursue an appeal under these procedures.
    Under these regulations, once an institution receives notice from 
the Secretary that its cohort default rate or rates exceed the levels 
specified in section 435(a)(3) of the HEA, the institution will have 10 
working days to initiate an appeal of the rate based on allegations of 
improper loan servicing or collection. The Secretary's default rate 
notification to the institution will include a list of all borrowers 
included in the calculation of the cohort default rate. To initiate an 
appeal, the institution must include the list of borrowers in its 
notification to the guaranty agencies that it is appealing the 
calculation of the cohort default rate based on allegations of improper 
loan servicing or collection.
    Once the guaranty agency receives the institution's appeal, it must 
provide the institution with the loan servicing or collection records 
for a representative sample of the loans insured by the guaranty agency 
and included in the institution's cohort default rate. The sample must 
be identified by the guaranty agency and the universe estimate derived 
from the sample results must be acceptable at a 95 percent confidence 
level with a plus or minus 5 percent confidence interval. In some 
cases, the result may be that servicing and collection records for all 
the loans guaranteed by the agency and included in the institution's 
default rate will be sent to the institution. Once the sample is 
identified, the guaranty agency must send the loan servicing and 
collection records to the institution within 15 working days of 
receiving the institution's request. The guaranty agency's response to 
the institution must also include a list of certain dates that will 
assist the institution in reviewing the records and the Department in 
resolving the appeal. An agency may charge the institution a reasonable 
fee for copying and production of the records, not to exceed $10 per 
borrower file. The Secretary will charge a similar fee in response to a 
request for records maintained by the Department on behalf of the 
Higher Education Assistance Foundation.
    After receiving the records from the guaranty agency, the 
institution has 30 calendar days to file its appeal with the Secretary. 
The regulations identify the material that must be submitted by the 
institution. The Secretary will review the appeal and issue a decision. 
The Secretary will assume that the records maintained by the guaranty 
agency in the normal course of business in the FFEL Program are correct 
unless the institution provides substantial evidence to the contrary. 
If the Secretary finds that the evidence submitted by the institution 
shows that some of the loans included in the sample of loans should be 
excluded from calculation of the cohort default rate, the Secretary 
will adjust the institution's cohort default rate to reflect the 
percentage of defaulted loans that should be excluded. The Secretary 
will use a statistically valid methodology to determine the estimate of 
the number of loans that should be excluded from the calculation of the 
cohort default rate and the confidence interval of the estimate. In 
determining the exact methodology, the Secretary will need to consider 
the number of loans in the sample, the number of guaranty agencies 
involved and other appropriate factors. The Secretary will notify the 
institution, in writing, of his decision on the appeal.
    Section 435(m)(1)(B) of the HEA includes two prerequisites for 
exclusion of a loan from the cohort default rate calculation. Under the 
law, the institution must prove both (1) that the loans were serviced 
or collected improperly and (2) that the improper loan servicing and 
collection caused the student loan default. If either of these two 
requirements is not proven, the loan will not be excluded from the 
cohort default rate calculation.
    These regulations reflect the Secretary's view, based on 
consideration of past appeals of cohort default rate determinations 
that, for purposes of a cohort default rate appeal, a loan is 
considered to have been serviced or collected improperly only if, under 
applicable rules, the Department would decline to pay reinsurance on 
the principal of the loan by reason of the improper servicing or 
collection. The HEA does not define the term ``improper servicing or 
collection'' used in section 435(m). Therefore, to determine what 
constitutes improper loan servicing and collection, the Secretary looks 
to its due diligence regulations, its published policies such as 
Appendix D to 34 CFR part 682 and other applicable policies and 
practices. There is no indication that the 1993 amendments to section 
435(m) were intended to establish new concepts regarding what does and 
does not constitute improper loan servicing and collection. For that 
reason, the Secretary construes section 435(m) by reference to concepts 
developed over a period of years in the administration of the FFEL 
Program.
    Section 435(m) of the HEA also specifies that a loan which has been 
subject to improper servicing or collection is excluded from 
calculation of the cohort default rate only if the default on the loan 
was ``due to'' improper servicing or collection and results in an 
inaccurate or incomplete calculation of the cohort default rate. The 
statute does not explain how improper servicing or collection could 
cause a cohort default rate to be inaccurate or incomplete. In Atlanta 
College of Medical and Dental Careers, Inc. v. Riley, 987 F.2d 821, 830 
(D.C. Cir. 1993), however, the Court of Appeals assumed that a cohort 
default rate would be inaccurate or incomplete if it contained loans 
which defaulted due to improper servicing or collection. The Secretary 
considers that interpretation to be reasonable. The Court of Appeals in 
Atlanta College also concluded that the type of causal link between 
improper servicing and default on a loan is properly left to the 
Secretary. The Secretary believes that a stringent showing of default 
causation is appropriate. Section 435(m) of the HEA does not include 
any general ``causation'' challenge that would permit an institution to 
appeal the calculation of its default rates on the basis that its 
students defaulted for reasons beyond the institution's control. 
Moreover, Congress set tight constraints on the time periods for 
challenges to the calculation of the cohort default rates and clearly 
did not contemplate a time-consuming, heavily burdensome process for 
determining default causation.
    Based on these factors, the Secretary has determined that section 
435(m) should be interpreted to allow only a limited loan servicing 
challenge. Accordingly, these regulations reflect the Secretary's 
determination that, for purposes of the calculation of a cohort default 
rate, improper servicing or collection is considered to have caused a 
default only if the improper servicing or collection resulted in a lack 
of notification to the borrower that he or she must begin repaying the 
loan. The Secretary believes that once the borrower has been informed 
of the obligation to repay the loan, the institution cannot show that a 
resulting default was due to the alleged improper servicing. The 
position reflected in these regulations has its genesis in certain 
decisions of the Secretary which resolved appeals of cohort default 
rate determinations on a case-by-case basis. Case-by-case adjudication 
is a permissible approach to decision making under applicable law. See 
NLRB v. Bell Aerospace Corp., 416 U.S. 267, 294 (1974). However, the 
Secretary's adjudications resolving individual appeals have not 
established rules of general applicability. As explained in more detail 
in the comment and response section of this document, the Secretary has 
considered a variety of proposed standards for adjudication of appeals 
based on allegations of improper servicing and collection. Some of 
these approaches would arguably broaden the appeal standard for 
institutions, while others reflect a more narrow scope than is 
reflected in the Secretary's adjudications to date. After careful 
consideration of these alternatives, the Secretary concludes that the 
general construction of section 435(m) of the HEA reflected in his most 
recent appeal decisions faithfully implements Congressional intent and 
fairly balances the rights of all those affected by those decisions. 
The Secretary particularly invites comments as to whether there are 
other types of improper servicing that should be considered to have 
``caused'' a default for purposes of calculation of a cohort default 
rate and the rationale for any such suggestion. Review of cohort 
default rate information.
    Public Law 103-208 also amended section 435(m)(1)(A) of the HEA to 
provide, effective October 1, 1994, that institutions will have an 
opportunity to review and correct errors in the information provided by 
the guaranty agencies to the Secretary for use in calculating cohort 
default rates. These regulations add paragraph (h) to Sec. 668.17 to 
establish procedures for this review.
    Under the regulations, the Secretary will provide each institution 
which has a draft default rate equal to or in excess of 20 percent with 
a copy of the records provided by each guaranty agency in regard to 
loans made to borrowers for attendance at the institution which were 
insured by that guaranty agency. Institutions with draft default rates 
under 20 percent may request copies of the records. These records will 
be accompanied by a notice indicating the institution's draft default 
rate. This draft default rate will not be considered a final agency 
decision and will not be otherwise voluntarily released by the 
Secretary.
    After receiving the information from the Secretary, the institution 
will have 30 calendar days to review the information and notify, in 
writing, the appropriate guaranty agency of any information included in 
the cohort default rate which it believes is incorrect. The institution 
should also send the agency any evidence which it believes supports its 
contention that the information provided by the guaranty agency to the 
Secretary is inaccurate. The guaranty agency shall review the 
institution's challenge and respond within 30 calendar days. If the 
guaranty agency agrees with the institution, the information used to 
calculate the cohort default rate will be adjusted prior to the release 
of the official cohort default rates. If the guaranty agency does not 
confirm the error alleged by the institution, the institution may use 
the data provided by the guaranty agency as part of an appeal of the 
calculation of the default rate based on the allegedly erroneous data 
after the rates are released.
    The Secretary intends to continue his practice of allowing 
institutions with a cohort default rate equal to or in excess of 20 
percent for the most recent year for which rates have been calculated 
to challenge the calculation of the rate based on allegations that 
erroneous data were included in the calculation. However, all 
institutions must satisfy the time deadlines for filing challenges 
under the regulations.
    The Secretary believes that section 435 only provides an 
opportunity for the institution to review and correct errors in the 
information provided to the Secretary by the guaranty agency. The 
statute does not contemplate that all allegations of error will be 
resolved prior to release of the final default rates. The regulations, 
therefore, allow an institution to appeal the calculation of a cohort 
default rate based solely on allegations of erroneous data. However, to 
ensure that appeals can be decided on a timely basis, the regulations 
provide that an institution can only base an appeal on allegations that 
were raised to the guaranty agency during the review of the draft 
cohort default rate. The Secretary believes that this process will 
benefit the institutions, guaranty agencies and the public by 
shortening delays that have been experienced in the appeal process and 
will result in more timely decisions.

Effect on Pending Default Rates

    The Secretary received a number of comments regarding the effect of 
the changes to section 435(a)(3) and (m) on the current official cohort 
default rates. As the Secretary noted in the Federal Register notice, 
Public Law 103-208 does not specifically provide for reopening prior 
final determinations. However, the Secretary has been convinced by the 
commenters to allow institutions to challenge their current cohort 
default rates on the basis of allegations of improper loan servicing or 
collection. Accordingly, the regulation allows institutions identified 
in section 435(a)(3) of the HEA to file an appeal of the current cohort 
default rates based on allegations of improper loan servicing. Thus, 
institutions with cohort default rates equal to or in excess of 20 
percent for fiscal year 1991 (including institutions subject to the 
loss of SLS participation based on a fiscal year 1991 cohort default 
rate in excess of 30 percent) may challenge the 1991 cohort default 
rate. Similarly, institutions which are subject to the loss of FFEL 
program participation based on cohort default rates for fiscal years 
1989, 1990 and 1991 may challenge those rates. The regulation specifies 
that the time limits for challenging these rates will begin on the date 
that the regulations become effective. The Secretary intends to notify 
institutions of the effective date of these regulations once that date 
is determined. The prior default rates will be considered effective 
until the appeal process is completed and a new rate issued.
    The Secretary notes that cohort default rates for fiscal year 1992 
will be issued during the summer of 1994. Institutions which are 
interested in challenging their current cohort default rates may want 
to wait until after the new rates are issued. An institution with a 
cohort default rate in excess of one of the threshold levels for fiscal 
year 1991 may find that its fiscal year 1992 cohort default rate is 
below the threshold and that the institution is no longer subject to 
sanctions based on excessive cohort default rates. Thus, an institution 
may want to consider whether filing a challenge of the current default 
rates is worth the time, expense and resources needed to prepare and 
submit an appeal of a rate that may soon be irrelevant. The Secretary 
also notes that the regulations provide that once an institution has 
challenged a cohort default rate for a particular year and received a 
final decision from the Secretary, that decision is binding in any 
future challenge to the default rate filed by the institution.

Analysis of Comments and Responses

    Comment: The commenters provided a number of different definitions 
of the term ``improper servicing or collection'' of a loan. A number of 
respondents to the request for comments suggested that the Secretary 
should remove from the calculation of the cohort default rate any loan 
that was not serviced in strict compliance with the Department's due 
diligence requirements in 34 CFR 682.411. Some commenters suggested 
that a loan on which a default claim has been paid should be considered 
properly serviced or collected on the grounds that a claim would not 
have been paid if servicing was not proper. Other commenters suggested 
that the Secretary should consider a lender's failure to grant a 
deferment to be improper loan servicing or collection. Some commenters 
also suggested that guaranty agency collection efforts should be 
considered in evaluating whether improper servicing or collection has 
occurred.
    Response: The Secretary's view of the satutory term ``improper 
servicing or collection'' is discussed earlier in this document. The 
Secretary does not agree with the suggestion that Congress intended to 
establish a new standard for proper servicing or collection. Instead, 
the Secretary believes it is appropriate to rely on the concepts and 
requirements developed and applied by the Department over the years. 
The requirements in Sec. 682.411 are designed to ensure that lenders 
and guaranty agencies that are requesting Federal benefits meet certain 
standards in collection as a requirement for receiving those benefits. 
These requirements have never been intended to set forth standards 
which if not followed in their entirety provide an excuse for borrowers 
to refuse to repay their loans. Similarly, they are not intended to 
provide protection for institutions that fail to meet the statutory 
requirements for continued participation in the loan programs. Congress 
has determined that the institutions bear a significant responsibility 
for defaults in the FFEL program. The Secretary does not believe that a 
lender's failure to strictly satisfy the requirements for Federal 
benefits should excuse the institution from the statutory consequences 
of its high default rate.
    The Secretary also does not agree that it would be appropriate to 
assume that all claims which have been paid as defaults have been 
properly serviced or collected. While failure to pay a default claim 
may be based on a finding of improper servicing or collection, payment 
of a default claim is not absolute proof of compliance with the 
Secretary's requirements. Accordingly, institutions should have the 
opportunity to review servicing and collection records relating to 
these loans.
    In regard to the issue of a lender's failure to respond to 
deferment requests, the Secretary notes that he has consistently 
treated deferment errors as ``erroneous data'' in adjudicating appeals 
of cohort default rate determinations. This treatment benefits the 
appealing institution since a determination that erroneous data was 
reported results in the affected loan being removed from the 
calculation of defaulted loans (the numerator), but it remains in the 
calculation of loans in repayment (the denominator). In contrast, loans 
which are excluded from the calculation of the cohort default rate 
based on improper servicing or collection are excluded from both the 
numerator and the denominator. The Secretary does not believe there is 
any reason to change his treatment of deferment errors.
    Finally, the Secretary notes that guaranty agency servicing is not 
relevant to the default rate calculation. A guaranty agency does not 
begin to service a loan until it has already defaulted and, thus, its 
servicing does not affect the institution's cohort default rate.
    Comment: Some commenters proposed that the Secretary remove from 
the calculation of the cohort default rate loans on which the lender 
did not request preclaims assistance from the guaranty agency or on 
which the agency did not provide notice of the request to the 
institution.
    Response: A lender's failure to request preclaims assistance could, 
in certain circumstances, be considered improper servicing or 
collection if it would result in the loss of reinsurance on the 
principal of the loan based on the applicable rules and policies and if 
the borrower defaulted due to lack of notification that the time for 
repayment had begun.
    Comment: Some commenters suggested that an institution should 
remain eligible to participate in the FFEL program during the appeal 
process.
    Response: As provided in current regulations, an eligible 
institution that files and pursues an appeal in accordance with the 
regulatory requirements will be able to continue to participate in the 
FFELP until and unless the Secretary issues a decision determining that 
the institution's cohort default rates remain above the threshold 
limits.
    Comment: Some commenters urged the Secretary to allow all 
institutions to challenge their default rates on the basis of improper 
servicing or collection.
    Response: Section 435(a)(3) specifically allows only institutions 
with cohort default rates above certain threshold levels to challenge 
their rate based on allegations of improper loan servicing. The 
Secretary believes that this limitation was intentional and reasonable 
in light of the significant burdens placed on guaranty agencies and the 
Secretary in reviewing challenges based on allegations of improper loan 
servicing or collection.
    Comment: Some commenters urged the Secretary to require 
institutions to provide evidence of improper loan servicing prior to 
requesting access to loan servicing records.
    Response: The HEA does not require institutions to provide evidence 
of improper loan servicing or collection prior to filing a challenge of 
its cohort default rates.
    Comment: Some commenters requested that institutions be required to 
submit a complete appeal before the guaranty agency is required to meet 
the time deadlines required by the regulations.
    Response: These comments were based on the assumption by the 
commenters that the institution would be required to submit evidence of 
improper loan servicing before the guaranty agency would be required to 
respond to the institution's appeal. Under these regulations, the 
institution will only need to notify the guaranty agency that it is 
appealing the calculation of the cohort default rate and provide a copy 
of the list of borrowers included in the calculation of the rate. 
Accordingly, the Secretary believes it is unlikely that an institution 
will not submit a complete notification to the guaranty agency. 
However, an institution which does not submit the notice and list to 
the guaranty agency as required by the regulation may be barred from 
pursuing an appeal.
    Comment: Some commenters suggested that loans serviced by lenders 
or servicers who have been designated as exceptional performers under 
section 428I of the HEA should not be included in any loans reviewed 
for improper servicing or collection on the ground that these loans are 
presumed to be serviced or collected properly.
    Response: The Secretary does not believe that it is appropriate to 
exclude loans serviced by exceptional performers from the process for 
determining appeals based on allegations of improper servicing or 
collection. The exceptional performer designation is related only to 
the lender's receipt of payments from the guaranty agency. It should 
not be used to limit the institution's opportunity to challenge the 
calculation of its cohort default rate.
    Comment: A number of commenters urged the Secretary to provide 
institutions more time to complete and submit appeals to the guaranty 
agencies and the Secretary.
    Response: The Secretary believes that the regulations provide 
sufficient time for an institution to complete and submit appeals. The 
Secretary believes that the regulations are consistent with the tight 
time constraints on the time period for appeals included in the HEA.
    Comment: Some commenters recommended that the Secretary consider 
the quality of education provided by an institution in determining 
whether an institution should be sanctioned based on its excessive 
default rates.
    Response: The statute sets forth specific grounds for challenges to 
an institution's cohort default rates. The quality of education is not 
included as a basis for appeal of a default rate based on allegations 
of improper loan servicing or collection. The Secretary notes, however, 
that institutions which are subject to the loss of FFEL Program 
participation under section 435(a)(2) of the HEA may appeal on the 
grounds of exceptional mitigating circumstances as defined by the 
Secretary's regulations.
    Comment: Some commenters recommended that the Secretary grant an 
institution's appeal if the guaranty agency does not provide the 
servicing and collection records within the time set forth in the 
regulations.
    Response: The Secretary does not believe it is appropriate to 
automatically grant an institution's appeal if the guaranty agency 
misses a deadline to provide records to the institution. In most cases, 
the institution continues to participate in the program and is not 
harmed by a short delay. The Secretary believes that the guaranty 
agencies must take appropriate steps to provide records within the 
regulatory time frames. However, in appropriate cases, the Secretary 
may consider taking action to levy a financial penalty or limit, 
suspend or terminate a guaranty agency's participation in the FFEL 
program based on violations of the regulatory time frames.
    Comment: One commenter recommended that loans which have been 
improperly serviced or collected be removed only from the numerator of 
the calculation of the cohort default rate but not from the 
denominator.
    Response: The Secretary construes section 435(a)(3) to require that 
loans which are determined to have defaulted due to improper loan 
servicing or collection be ``exclude[d]'' from the calculation of the 
cohort default rate entirely.

Executive Order 12866

    The contents of this final rule 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 the procedures in this 
rule.
    The potential costs associated with the contents of this rule are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering the FFEL program 
effectively and efficiently. In assessing the potential costs of these 
procedures, the Secretary has determined that the benefits of these 
procedures justify the costs.
    The Secretary has also determined that the contents of this rule do 
not unduly interfere with State, local and tribal governments in the 
exercise of their governmental functions.
    The contents of this rule are consistent with the requirements of 
the HEA and promote the President's priorities.
    Sections 668.17 (f) and (h) 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. These regulations 
affect institutions of higher education and guaranty agencies that 
participate in the Federal Family Education Loan Program. The Secretary 
needs the information to properly administer certain aspects of that 
program. The collection and reporting burden for the 300 institutions 
which challenge the calculation of their cohort default rates under 
these provisions is expected to increase by 15,600 hours. The 
collection and reporting burden for the 46 guaranty agencies which must 
respond to the institutions' requests under these regulations is 
expected to increase by 2,576 hours.
    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. 
Comments on the burden estimate must be received on or before May 31, 
1994.

Invitation to Comment

    The Secretary recognizes that many participants in the FFEL program 
have an interest in these procedural rules. In light of that interest, 
the Secretary is requesting comment on these rules. The Secretary will 
consider any comments received within the designated comment period in 
determining whether to make any changes in these rules. After reviewing 
any comments received during the comment period, the Secretary will 
publish changes to the regulation or will publish a notice in the 
Federal Register indicating that no further changes will be made.

Waiver of Rulemaking

    It is the practice of the Secretary to offer interested parties an 
opportunity to comment on proposed regulations. However, the Secretary 
has determined that the public interest requires the immediate issuance 
of this interim final rule.
    Under the Administrative Procedure Act, 5 U.S.C. section 551, et 
seq., procedural amendments to regulations do not require prior public 
notice and an opportunity for public comment. The changes being made by 
this rule do not affect the substantive requirements or the underlying 
laws or rules; nor do they modify or revoke existing rights or 
obligations, or create new ones. These regulations merely establish 
procedures to implement the requirements of sections 435(a)(3) and 
435(m)(1)(B) of the HEA. Therefore, public comment is not required 
under 5 U.S.C. 553(b)(A).
    In addition, the Secretary has determined that notice and comment 
is impracticable, unnecessary and contrary to the public interest. The 
procedures included in these rules are needed to adjudicate appeals 
from the initial determinations of cohort default rates for 
institutions. The Secretary is required by section 435(m)(4) of the HEA 
to publish cohort default rates for each institution for which a rate 
is calculated at least every fiscal year. The cohort default rates to 
be released for the current fiscal year are currently scheduled to be 
released during the summer of 1994. For the appeal procedures to be in 
place prior to the release of the default rates, the procedures must be 
published by May 1, 1994. Moreover, the Secretary invited public 
comment on what the procedures should be and received and considered 
the comments received in preparing this interim final rule. 
Accordingly, the Secretary has determined that public comment on this 
interim final rule is not required under 5 U.S.C. 553(b)(B).

List of Subjects in 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.

(Catalog of Federal Domestic Assistance Number 84.032, Federal 
Family Education Loan Program.)

    Dated: April 21, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary amends part 668 of title 34 of the Code of Federal 
Regulations as follows:
    The authority citation for part 668 continues to read as follows:

    Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c and 
1141, unless otherwise noted.

    1. Section 668.17 is amended by adding paragraphs (f), (g) and (h) 
as follows:


Sec. 668.17  Default reduction measures.

* * * * *
    (f) Appeal based on allegations of improper loan servicing or 
collection--(1) General. An institution that is subject to loss of 
participation in the FFEL programs under paragraph (a)(1) of this 
section or has been notified by the Secretary that its cohort default 
rate equals or exceeds 20 percent for the most recent year for which 
data are available may include in its appeal of that loss or rate a 
challenge based on allegations of improper loan servicing or 
collection. This challenge may be raised in addition to other 
challenges permitted under this section.
    (2) Standard of review. An appeal based on allegations of improper 
loan servicing or collection must be submitted to the Secretary in 
accordance with the requirements of this paragraph. The Secretary 
excludes any loans from the cohort default rate calculation which, due 
to improper servicing or collection, would, as demonstrated by the 
evidence submitted in support of the institution's complete and timely 
appeal to the Secretary, result in an inaccurate or incomplete 
calculation of the cohort default rate.
    (3) Procedures. (i) The following procedures apply to appeals from 
cohort default rates issued by the Secretary during Federal fiscal year 
1994 and subsequent years. Upon receiving notice from the Secretary 
that the institution's cohort default rate exceeds the thresholds 
specified in paragraph (c)(2) of this section or that its most recent 
cohort default rate equals or exceeds 20 percent, the institution may 
appeal the calculation of the cohort default rate based on allegations 
of improper loan servicing or collection. The Secretary's notice 
includes a list of all borrowers included in the calculation of the 
institution's cohort default rate.
    (ii) To initiate an appeal under this paragraph, the institution 
must notify, in writing, each guaranty agency that guaranteed loans 
included in the institution's cohort default rate that it is appealing 
the calculation of the cohort default rate. The notification must be 
received by the guaranty agency within 10 working days of the date the 
institution received the Secretary's notification. The institution's 
notification to the guaranty agency must include a copy of the list of 
students provided by the Secretary to the institution.
    (iii) Within 15 working days of receiving the notification from the 
institution, the guaranty agency must provide the institution with a 
representative sample of the loan servicing and collection records 
relating to borrowers whose loans were guaranteed by the guaranty 
agency and that were included as defaulted loans in the calculation of 
the institution's cohort default rate. In selecting the representative 
sample of records, the guaranty agency must use the following 
procedures:
    (A) The guaranty agency shall list in social security number order 
all loans made to borrowers for attendance at the institution and 
guaranteed by the guaranty agency and included as defaulted loans in 
the calculation of the cohort default rate which is being challenged by 
the institution.
    (B) From the population of loans identified by the guaranty agency, 
the guaranty agency shall identify a sample of the loans. The sample 
must be of a size such that the universe estimate derived from the 
sample is acceptable at a 95 percent confidence level with a plus or 
minus 5 percent confidence interval. The sampling procedure must result 
in a determination of the number of loans that should be excluded from 
the calculation of the cohort default rate under this paragraph.
    (C) Once the sample of loans has been established, the guaranty 
agency shall provide a copy of all servicing and collection records 
relating to each loan in the sample to the institution in hard copy 
format unless the guaranty agency and institution agree that all or 
some of the records can be provided in another format.
    (D) The guaranty agency may charge the institution a reasonable fee 
for copying and providing the documents, not to exceed $10 per borrower 
file.
    (E) After compiling the servicing and collection records for the 
loans in the sample, the guaranty agency shall send the records, a list 
of the loans included in the sample, and a description of how the 
sample was chosen to the institution. The guaranty agency shall also 
send a copy of the list of the loans included in the sample and the 
description of how the sample was chosen to the Secretary at the same 
time the material is sent to the institution. The list of loans 
included in the sample must include the following information:
    (1) The loans included in the sample listed in order by social 
security number;
    (2) For each loan listed, the last date of attendance, the date 
entered repayment, the date of the first payment missed by the borrower 
and the default date listed in the guaranty agency's records.
    (iv) After receiving the relevant loan servicing and collection 
records from all of the guaranty agencies that insured loans which are 
included in the cohort default rate calculation, the institution has 30 
calendar days to file its appeal with the Secretary. An appeal is 
considered filed when it is received by the Secretary. If the 
institution is also filing an appeal under paragraph (d)(1)(i) of this 
section, the institution may delay submitting its appeal under this 
paragraph until the appeal under paragraph (d)(1)(i) is submitted to 
the Secretary. As part of the appeal, the institution must submit the 
following information to the Secretary:
    (A) A list of the loans which the institution alleges would, due to 
improper loan servicing or collection, result in an inaccurate or 
incomplete calculation of the cohort default rate.
    (B) Copies of all of the loan servicing or collection records and 
any other evidence relating to a loan that the institution believes has 
been subject to improper servicing or collection. The records must be 
in hard copy or microfiche format.
    (C) An explanation of how the alleged improper servicing or 
collection resulted in an inaccurate or incomplete calculation of the 
cohort default rate.
    (D) A summary of the institution's appeal, listing the number of 
loans insured by each guaranty agency that were included in the 
calculation of the institution's cohort default rate, and the number of 
loans that would be excluded from the calculation of that rate by 
application of the results of the review of the sample of loans 
provided to the institution to the population of loans for each 
guaranty agency.
    (E) A certification by an authorized official of the institution 
that all information provided by the institution in the appeal is true 
and correct.
    (v) The Secretary or his designee reviews the information submitted 
by the institution and issues a decision.
    (A) In making a decision under this paragraph the Secretary 
presumes that the information provided by the guaranty agency is 
correct unless the institution provides substantial evidence showing 
that the information maintained by the guaranty agency is not correct.
    (B) If the Secretary finds that the evidence presented by the 
institution shows that some of the loans included in the sample of loan 
records reviewed by the institution should be excluded from calculation 
of the cohort default rate under paragraph (f)(2) of this section, the 
Secretary reduces the institution's cohort default rate, in accordance 
with a statistically valid methodology, to reflect the percentage of 
defaulted loans in the sample that should be excluded.
    (vi) The Secretary notifies the institution, in writing, of the 
decision.
    (vii) An institution may not seek judicial review of the 
Secretary's determination of the institution's cohort default rates 
until the Secretary or his designee issues the decision under paragraph 
(f)(3)(v) of this section.
    (viii) For purposes of this paragraph a loan is considered to have 
been serviced or collected improperly only if, under applicable rules, 
the Department would decline to pay reinsurance on the principal of the 
loan.
    (ix) For purposes of this paragraph, improper servicing or 
collection is considered to have caused a loan to default for purposes 
of the calculation of the cohort default rate only if the improper 
servicing or collection resulted in a failure to notify the borrower 
that he or she must begin repaying the loan.
    (x) For cohort default rates issued by the Secretary for federal 
fiscal years from 1989 to 1991, the procedures in this paragraph apply, 
except that the 10-day period for initiating an appeal with the 
guaranty agency starts on the effective date of these regulations.
    (g) Effect of decision. An institution may challenge the 
calculation of a cohort default rate under this section no more than 
once. The Secretary's determination of an institution's appeal of the 
calculation of a cohort default rate is binding on any future appeal by 
the institution. An institution that fails to challenge the calculation 
of a cohort default rate under this section within 10 working days of 
receiving notice of the determination of the cohort default rate is 
prohibited from challenging that rate in any other proceeding before 
the Department.
    (h) Review of default rate data. Effective on October 1, 1994, an 
institution has an opportunity to review and correct the information 
provided to the Secretary by the guaranty agencies for the purpose of 
calculating a cohort default rate on the loans to be included in the 
calculation of the institution's cohort default rate before the final 
rate is calculated.
    (1) (i) Once the Secretary has received the information used in 
calculating the cohort default rates from the guaranty agencies, the 
Secretary calculates draft cohort default rates for each institution.
    (ii) The Secretary sends all institutions with draft cohort default 
rates equal to or in excess of 20 percent a copy of the information 
provided by the guaranty agencies in regard to loans included in the 
institution's cohort default rate.
    (iii) An institution with a draft cohort default rate less than 20 
percent will receive a notice of the draft default rate and may request 
a copy of the information provided by the guaranty agencies within 10 
working days of receiving the notice from the Secretary. Upon receiving 
the request from the institution, the Secretary will send the 
institution a copy of the information requested. The time frames 
provided in this paragraph will not start until the institution 
receives or should have received the information from the Secretary.
    (2) Within 30 calendar days of receiving the default rate 
information from the Secretary, the institution must notify the 
guaranty agency of any information included in the default rate data 
that it believes is incorrect. The institution must also provide the 
guaranty agency with any evidence that it believes supports its 
contention that the default rate data are incorrect.
    (3) Within 30 calendar days of receiving the institution's 
challenge under paragraph (h)(2) of this section, the guaranty agency 
shall respond to the institution's challenge. The guaranty agency's 
response must include a response to each allegation of error made by 
the institution and any evidence supporting the agency's position.
    (4) The guaranty agency shall provide a copy of its response to the 
institution to the Secretary and identify any errors in the information 
previously submitted to the Secretary.
    (5) The information used to calculate cohort default rates will be 
changed to reflect allegations of error made by an institution and 
confirmed by the guaranty agency prior to releasing final cohort 
default rates.
    (6) The draft default rate issued by the Secretary under paragraph 
(h)(1) of this section may not be considered public information and may 
not be otherwise voluntarily released by the Secretary or the guaranty 
agency.
    (7) An institution may not appeal a cohort default rate under 
paragraph (d)(1) of this section on the basis of any alleged errors in 
the default rate information unless errors were identified by the 
institution in a challenge to its preliminary default rate under 
paragraph (h) of this section.

[FR Doc. 94-10132 Filed 04-28-94; 8:45 am]
BILLING CODE 4000-01-P