[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15419]


[[Page Unknown]]

[Federal Register: June 24, 1994]


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Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 682




Federal Family Education Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AB81

 
Federal Family Education Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends 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 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 an 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.

EFFECTIVE DATE: Pursuant to section 482(c) of the Higher Education Act 
of 1965, as amended (20 U.S.C. 1089(c)), these regulations take effect 
July 1, 1995, with the exception of the information collection 
requirements in Sec. 682.415. The information collection requirements 
in Sec. 682.415 will become effective on July 1, 1995, or after these 
requirements have been submitted by the Department of Education and 
approved by the Office of Management and Budget under the Paperwork 
Reduction Act of 1980, whichever is later. A document announcing the 
effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ron Streets, 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, D.C. 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: The Higher Education Amendments of 1992 
(Pub. L. 102-325) (the 1992 Amendments) enacted July 23, 1992 added a 
new section 428I to the HEA 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. These regulations seek to reduce the cost of 
defaults in the FFEL Program by encouraging lenders, servicers, and 
guaranty agencies to properly collect student loans while easing the 
burden on program participants who demonstrate an exceptionally high 
level of compliance with program requirements.
    On April 20, 1994, the Secretary published a notice of proposed 
rulemaking (NPRM) for the FFEL Program in the Federal Register (59 FR 
18928). The NPRM included a discussion of the major issues surrounding 
the proposed changes which will not be repeated here. The following 
list summarizes those issues and identifies the pages of the preamble 
to the NPRM on which a discussion may be found:
     Separating loan portfolios to calculate the 97 percent 
compliance rate (page 18930);
     Qualifying separate servicing centers for exceptional 
performance designation (page 18930); and
     Applicability of the Federal False Claims Act to 
exceptional performers (pages 18931-18932).

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 20 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and the changes in the regulations since publication of the 
NPRM follows.
    Technical and other minor changes, and suggested changes the 
Secretary is not legally authorized to make under the applicable 
statutory authority, generally are not addressed.
    Comments: Several commenters suggested that lenders, servicers, and 
guaranty agencies with regional servicing centers should be able to 
qualify each center separately, or as a corporate entity, for 
exceptional performance designation.
    Discussion: Section 428I of the HEA refers to the designation of a 
lender, servicer, or guaranty agency as a single entity and does not 
indicate that separate servicing centers should be evaluated 
separately. Consistent with the statutory language, the Secretary 
believes it is important 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.
    Changes: None.
    Comments: Several commenters recommended that applicants be 
permitted to exclude parts of their portfolio from the exceptional 
performance designation. The commenters 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. Other commenters stated that not allowing an 
exclusion of portions of portfolios may create problems for certain 
lenders and holders in terms of access to servicers and secondary 
markets.
    Discussion: The Secretary does not believe that lenders, servicers, 
or guaranty agencies should be able to exclude portions of their loan 
portfolio for purposes of determining satisfaction of the requirement 
of a 97 percent compliance rating. Section 428I(a)(2) of the HEA 
requires that due diligence on each loan serviced during the audit 
period shall be reviewed in determining the applicable compliance rate. 
Therefore, the Secretary does not believe the statute provides any 
basis for excluding portions of a lender's, servicer's, or guaranty 
agency's loan portfolio. 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.
    Changes: None.
    Comments: Some commenters 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.
    Discussion: The Secretary believes a lender, servicer, or guaranty 
agency that loses exceptional performance status is not entitled to 
receive the benefits of this status beyond the date that the event or 
condition causing the revocation occurred because that entity would no 
longer satisfy the requirements for exceptional performance.
    Changes: None.
    Comments: Some commenters suggested that lenders and servicers 
should be made aware of the progress of their application for 
exceptional performance designation and the endorsement or lack of 
endorsement of key participants. Other commenters suggested that a 30-
day notice and an opportunity for a hearing before the Secretary that 
is provided to guaranty agencies should be extended to lenders and 
lender servicers.
    Discussion: The Secretary does not believe it is necessary to 
provide applicants with periodic status reports of pending 
applications. Paragraph (b)(4) provides that the Secretary notify the 
applicant and the appropriate guaranty agency of his decision to 
approve or deny an applicant's request for designation within 60 days 
of receipt of the information requested under paragraph (a)(2). 
Furthermore, 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, the Secretary may give the lender or servicer an 
opportunity to submit additional information to support its 
application.
    Changes: None.
    Comments: Several commenters objected to the proposed use of 
internal auditors to conduct required quarterly audits, stating that 
this may compromise the proper safeguarding of public funds. The 
commenters recommended that the Secretary require that all audits be 
performed by independent auditors.
    Discussion: A lender servicer or guaranty agency may only request 
permission to have its internal auditors perform the required audits 
after the entity has been designated for exceptional performance for at 
least 15 months. The Secretary will only approve the request if the 
Federal fiscal interest is protected. If the Secretary allows an entity 
to use internal auditors for the quarterly audits, the Secretary 
believes that the required annual independent financial and compliance 
audit is sufficient to assess the reliability of the internal auditor's 
accounting procedures and information provided in the quarterly audits.
    Changes: None.
    Comments: Several commenters argued that it is not clear whether 
all claims submitted beginning on or after October 1, 1993, by lenders 
and lender servicers designated for exceptional performance will be 
reimbursed at the 100 percent rate or will be reimbursed at 98 percent 
reinsurance.
    Discussion: The Secretary has determined that the reduction in the 
reinsurance rate mandated by the Omnibus Budget Reconciliation Act of 
1993 (Pub. L. 103-66) does not apply to lenders or lender servicers 
designated as exceptional performers. Section 428I of the statute 
specifies that lenders and lender servicers designated as exceptional 
performers will receive 100 percent reimbursement on all default claims 
submitted to guaranty agencies during the period of designation as 
stated on page 2 of the Department's Dear Colleague Letter 93-G-246 
(November 1993).
    Changes: None.
    Comments: A few commenters stated that the regulations limit the 
100 percent insurance to ``default claims.'' The commenters stated that 
since death, disability, and bankruptcy claims are eligible for 100 
percent insurance under the HEA, those claims should be eligible for 
coverage under the exceptional performer designation.
    Discussion: The Secretary agrees with the commenters and has made a 
change to the regulations.
    Changes: The Secretary has revised Sec. 682.415(a)(1) to clarify 
that all claims submitted by a lender or lender servicer designated for 
exceptional performance shall receive 100 percent insurance.
    Comments: Some commenters stated that the regulations only allow a 
lender to be designated for exceptional performance for loans that it 
services itself. The commenters argued that a lender should be able to 
apply for exceptional performance designation even if it contracts with 
a servicer for all or a portion of the servicing of its loan portfolio.
    Discussion: The commenters are correct that the regulations allow 
an applicant to apply for designation only based on the loans that it 
actually services. The regulation is consistent with section 
428I(a)(2)(A) of the Act. However, there appears to be a 
misunderstanding within the industry. A lender, servicer, or guaranty 
agency does not have to service its entire loan portfolio to be 
eligible for exceptional performance designation. It may receive 
designation based on loans it actually services itself. However, a 
lender may not receive designation for a portion of its loan portfolio 
serviced by a lender servicer unless the lender servicer has separately 
received designation on its entire loan portfolio.
    Changes: None.
    Comments: Many commenters suggested that paragraph (b)(1)(ii) be 
deleted from the final regulations and argued that the Secretary should 
rely only on ``documentation'' rather than ``any information'' received 
from a guaranty agency indicating that a lender's or servicer's 
application for exceptional performance should be denied.
    Discussion: The language in paragraph (b)(1)(ii) of the regulations 
reflects the statutory language in section 428I(c)(2). Therefore, no 
change has been made.
    Changes: None.
    Comments: A few commenters stated that paragraphs (a)(1) and (b)(4) 
specify that lenders and lender servicers are designated for 
exceptional performance for a 12-month period following the receipt by 
the guarantor of notice of designation. The commenters noted that the 
provision makes no reference to notifications to lenders and lender 
servicers.
    Discussion: The Secretary agrees with the commenters and has 
revised the regulations.
    Changes: The Secretary has revised paragraphs (a)(1) and (b)(4) to 
also require notification to lenders and lender servicers.
    Comments: Several commenters opposed inclusion of the statutory 
provision that a lender or lender servicer designated for exceptional 
performance who fails to service loans or otherwise comply with 
applicable program regulations is considered in violation of the 
Federal False Claims Act. Some commenters suggested that the Secretary 
clarify the circumstances under which a violation of program 
regulations would be considered a violation of the Federal False Claims 
Act. The commenters argued that claims with servicing errors and 
omissions may be submitted inadvertently by lenders and lender 
servicers in the ordinary course of business, and as such should not be 
considered violations of the Federal False Claims Act. Other commenters 
suggested limiting the application of the Federal False Claims Act to 
those loans submitted by an exceptional performer that were not covered 
by the exceptional performance designation.
    Discussion: The regulations properly reflect the statutory language 
in 31 U.S.C. 3729. The Secretary does not believe it is necessary to 
interpret this language further. The Secretary has changed the 
regulation, however, to refer to 31 U.S.C. 3129 rather than the Federal 
False Claims Act. This change conforms the regulations to section 428I 
of the HEA, as modified by the Higher Education Technical Amendments of 
1993, Pub. L. 103-208.
    Changes: Section 682.415(b)(7)(ii) has been changed to refer to 31 
U.S.C. 3729 rather than the Federal False Claims Act.
    Comments: Some commenters recommended clarifying in the regulations 
that insurance payment on a claim by a lender or lender servicer 
designated for exceptional performance may not be denied or repayment 
required based solely on a violation of repayment conversion, due 
diligence requirements, and timely filing requirements.
    Discussion: The Secretary believes that the regulatory language 
clearly states that insurance payments will not be denied based solely 
on a violation of repayment conversion, due diligence requirements, and 
timely filing requirements. 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 at the time 
the claim was submitted.
    Changes: None.
    Comments: One commenter suggested that a lender, servicer, or 
guaranty agency should be able to receive the exceptional performance 
designation even if the annual audit was conducted more than 90 days 
prior to the initial request for designation.
    Discussion: The Secretary believes that the audit period should end 
no more than 90 days prior to requesting exceptional performance 
designation to ensure that the information received from applicants is 
relatively current. Therefore, a change is not warranted.
    Changes: None.
    Comments:  Many commenters objected to guaranty agencies performing 
a detailed review of every default claim submitted by an exceptional 
performer.
    Discussion: The regulations do not require a review of default 
claims submitted by lenders and lender servicers designated for 
exceptional performance. However, as stated in the NPRM and in these 
final regulations, nothing prohibits the guaranty agency or the 
Secretary from reviewing the lender's or lender servicer's activities 
related to claims paid under the exceptional performance designation as 
part of program oversight responsibilities.
    Changes: None.
    Comments: One commenter suggested that the scope of the compliance 
audit be clarified. The commenter indicated that paragraph 
(a)(3)(iii)(A) states ``the audit must yield a compliance rating of at 
least 97 percent of all due diligence requirements applicable to each 
loan, on average, with respect to the collection of delinquent loans 
ending no more than. . . .'' The commenter stated that there are other 
activities included in the exceptional performance designation that go 
beyond due diligence on delinquent loans. The commenter suggested that 
the compliance rating reflect the full scope of activities and measure 
the accuracy of performance as a whole.
    Discussion: The Secretary agrees with the commenter. During 
negotiated rulemaking consensus was reached that the audit would review 
compliance with converting FFEL Program loans to repayment under 
Sec. 682.209(a), and compliance with the timely-filing requirements 
under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the 
audit guide published by the U.S Department of Education, Office of 
Inspector General. Consensus was also reached that a guaranty agency's 
compliance audit would review compliance with timely claim payments and 
timely reinsurance filing required for defaulted FFEL Program loans in 
Secs. 682.410(b)(6) (iii)-(xii), 682.406 (a)(8) and (a)(9), or 
Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9).
    Changes: The Secretary has revised paragraph (a)(2)(iii)(A) to 
incorporate a reference to paragraph (b)(1)(iv) for lenders and lender 
servicers and paragraph (c)(2)(i) for guaranty agencies and guaranty 
agency servicers. This cross reference serves the goal identified by 
the commenters.
    Comments: A few commenters pointed out that paragraph (b)(3) 
defines how the 97 percent compliance rating is to be calculated. 
However, the provision should, but does not, include conversion to 
repayment and timely filing activities in that definition.
    Discussion: The Secretary agrees with the commenters.
    Changes: The Secretary has revised paragraph (b)(3) by 
incorporating references to Secs. 682.209(a), 682.402(e)(2), and 
682.406(a)(5).
    Comments: Some commenters stated that paragraph (b)(6) should be 
clarified by specifically incorporating compliance with conversion of 
FFEL Program loans to repayment and timely filing requirements as 
components in the quarterly audit.
    Discussion: The Secretary agrees with the commenters.
    Changes: The Secretary has revised paragraph (b)(6) to clarify that 
quarterly audits must also reflect the lender's and lender servicer's 
compliance with loan conversion to repayment and the timely filing 
requirements.
    Comments: Some commenters recommended that the regulations provide 
that the Secretary will either approve or disapprove an applicant's 
reapplication for exceptional performance designation within 60-days of 
receiving all of the required information from the applicant.
    Discussion: The Secretary agrees with the commenters. The 
commenters' suggestion would provide consistency throughout the 
regulation by providing notification to a lender, servicer, or guaranty 
agency within 60-days of the date the Secretary receives the required 
reapplication information. The regulations already provide a 60-day 
time period for decision on an initial application.
    Changes: The Secretary has revised paragraph (a)(6)(iii) to include 
a 60-day notification to the applicant after receiving the required 
information for reapplication.
    Comments: Several commenters agreed with the Secretary's 
interpretation that section 428(b)(1)(G) of the Higher Education Act, 
as amended by Pub. L. 103-66, does not reduce the insurance rate paid 
by guaranty agencies to exceptional performers.
    Discussion: No comments were received that opposed the Secretary's 
determination of the applicable insurance rate of 100 percent that 
guaranty agencies are required to pay to lenders and lender servicers 
designated for exceptional performance.
    Changes: None.
    Comments: Two commenters suggested that the Secretary clarify in 
the preamble that the 180 days referred to in Sec. 682.415(b)(5)(i) 
means calendar days.
    Discussion: The Secretary agrees with the commenters. Section 
682.415(b)(5(i) restricts the lender's or lender servicer's exceptional 
performance designation to loans that have been serviced by that lender 
or lender servicer for the last 180 calendar days prior to a borrower's 
default.
    Changes: A change has been made. Section 682.415(b)(5)(i) has been 
revised to clarify that the 180 days referred to in that paragraph 
means calendar days.
    Comments: A few commenters noted that the regulations, as written, 
do not clarify that the audit will only cover collection activities 
performed during the audit period for loans serviced during the audit 
period.
    Discussion: The Secretary agrees with the commenters and has made a 
change to the regulations.
    Changes: The Secretary has revised paragraphs (b)(3) and (c)(4) of 
the regulations to clarify that the audits must cover collection 
activities performed only during the audit period for loans serviced 
during the audit period.
    Comments: One commenter stated that the definition of ``servicer'' 
is not consistent with the definition of ``third party servicer'' as 
listed in Sec. 682.200. Another commenter suggested deleting paragraph 
(d)(3)(i) and renumbering to provide for consistency with the 
definition for third party servicers in Sec. 682.416.
    Discussion: The Secretary has no alternative but to retain this 
definition in the regulations because the statute under section 428I 
defines the term ``servicer'' for purposes of qualifying for 
exceptional performance designation.
    Changes: None.
    Comments: Several commenters argued that the insurance rate paid to 
lenders, servicers, and guaranty agencies in paragraph (a)(1) is 
determined by statute and is not optional. The commenters suggested 
that the Secretary delete the term ``may'' and insert ``shall'' 
instead.
    Discussion: The Secretary agrees with the commenters that the 
insurance and reinsurance rates are determined by statute.
    Changes: The Secretary has revised paragraph (a)(1) by replacing 
the term ``may'' with the term ``shall''.
    Comments: One commenter noted that paragraphs (b)(6) and 
(b)(8)(i)(A) would allow a lender who met the 90-percent benchmark for 
a single month, but failed to meet that threshold for each of the other 
two months during the audit period, to be designated as an exceptional 
performer.
    Discussion: The Secretary agrees with the commenter that the 
proposed rule did not clearly reflect the statutory requirement. 
Section 428I of the HEA requires lenders, servicers, and guaranty 
agencies to reach a minimum of 90 percent compliance in due diligence 
in collecting delinquent and defaulted FFEL Program loans for each 
month of a quarter.
    Changes:  The Secretary has revised paragraphs (b)(6)(i) and 
(b)(8)(i)(A) to clarify that a minimum of 90 percent compliance for 
each month of the quarter must be met by a lender, servicer, or 
guaranty agency in order to maintain its exceptional performance 
status.
    Comments: A few commenters stated that the Secretary clarify in the 
regulations that complete claim packages are not required on claims 
submitted by lenders and lender servicers designated for exceptional 
performance.
    Discussion: The Secretary believes it is important for purposes of 
program oversight to require all lenders and lender servicers to file 
complete claim packages that include documents and information that is 
normally required to be submitted by guaranty agencies.
    Changes: None.
    Comments: One commenter suggested that the Secretary clarify that 
unreinsured loans and loans that have not been serviced by the servicer 
for at least 180 days should be excluded from the compliance rate 
calculation.
    Discussion: Loans that are unreinsured because due diligence 
violations of due diligence requirements in Sec. 682.411 cannot be 
excluded from the compliance rate calculation. It would not be in the 
Federal interest to allow a lender or lender servicer to exclude, from 
calculation of its compliance rate, loans that lost reinsurance due to 
the lender's or servicer's failure to perform required due diligence 
activities.
    Changes: None.
    Comments: Some commenters stated that if the audit period ended 
more than 90 days prior to enactment of the regulations, the agency 
should be permitted to submit a request for designation immediately. 
The commenters further stated that applicants should not be required to 
wait until the following year, after another annual audit has been 
performed, to apply for an exceptional performance designation.
    Discussion: The 90-day audit restriction provides the Secretary 
with the necessary assurance that the most recent information has been 
reported to determine an applicant's eligibility for exceptional 
performance designation. The earliest a lender, servicer, or guaranty 
agency may apply for designation is July 1, 1995.
    Changes: None.
    Comments: One commenter stated that the 180-day servicing 
requirements referenced in paragraph (b)(5) should not apply to non-
default claims, e.g., bankruptcy, death, disability, etc.
    Discussion: The Secretary believes that the 180-day servicing 
requirement should apply to all loans for which a claim will be filed 
to ensure that due diligence is being properly performed. However, if 
the borrower dies, becomes disabled, or files for bankruptcy prior to 
completion of the 180-day servicing period, the lender, servicer, or 
guaranty agency may submit its claim immediately.
    Changes: None.
    The Secretary incorporated a general guide to the structural layout 
of the regulatory provisions pertaining to lenders and guaranty 
agencies on page 18392 of the NPRM.
    The NPRM solicited comments as to whether the standards to 
designate a guaranty agency as an exceptional performer should be 
revised in light of other changes impacting guaranty agencies that were 
made by Pub. L. 103-66. The Secretary received the following comments 
in response to this request.
    Comments: One commenter recommended that a guaranty agency that is 
exceptional which merges or assumes the guarantees of another guarantor 
should maintain its designation as an exceptional performer.
    Discussion: The Secretary believes that a lender, servicer, or 
guaranty agency that is designated for exceptional performance and 
subsequently merges with another lender, servicer, or guaranty agency 
should lose its designation for exceptional performance unless both 
parties hold exceptional performance designations at the time of the 
merger.
    Changes: None.
    Comments: One commenter argued that guaranty agencies that are 
exceptional performers should not be subject to the termination 
provision of section 428(c)(9) of the HEA.
    Discussion: Exceptional performance designation relates to loan 
collection activities but does not reflect a judgment on an agency's 
overall economic conditions or program performance. Therefore, 
termination of an agency's agreements with the Secretary may still be 
appropriate even if the agency has been designated for exceptional 
performance.
    Changes: None.
    Comments: One commenter argued that guarantors that are exceptional 
performers should be subject to mandatory assignment of defaulted loans 
to the Secretary as by definition it is in the Federal Government's 
best interest for loans to be serviced by the guarantor.
    Discussion: The Secretary does not agree that there is any 
connection between designation of exceptional performance and the 
criteria for mandatory assignment of defaulted loans.
    Changes: None.

Assessment of Educational Impact

    In the notice of proposed rulemaking, the Secretary requested 
comments on whether the proposed regulations would require transmission 
of information that is being gathered by, or is available from, any 
other agency or authority of the United States.
    Based on the response to the proposed rules and on its own review, 
the Department has determined that the regulations in this document do 
not 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

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions. In assessing the potential 
costs and benefits--both quantitative and qualitative--of these final 
regulations, the Secretary has determined that the benefits of the 
final regulations justify the costs.

List of Subjects in 34 CFR Part 682

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

    Dated: June 15, 1994.
Richard W. Riley,
Secretary of Education.

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

    The Secretary amends Part 682 of Title 34 of the Code of Federal 
Regulations 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 shall receive 100 percent reimbursement on all claims 
submitted for insurance during the 12-month period following the date 
the lender or lender servicer and appropriate guaranty agencies receive 
notification of the designation of the eligible lender or lender 
servicer 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 shall 
receive the applicable reinsurance rate under section 428(c)(1) of the 
Act on all claims submitted for 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, and 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 34 CFR 682.416(e), 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 the 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 or 
defaulted loans and satisfying the requirements in paragraph (b)(1)(iv) 
of this section or, if applicable, paragraph (c)(2)(i) of this section. 
The audit period may end no more than 90 days prior to the date the 
lender, servicer or guaranty agency submits its request for 
designation.
    (B) To satisfy the requirement of paragraph (a)(2)(iii)(A) of this 
section, a servicer may submit its annual compliance audit under 34 CFR 
682.416(e), 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 audit is performed in accordance with an 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 is 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 annual 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 that its designation 
is revoked, under the provisions of paragraph (b)(8)(iii) of this 
section.
    (iii) The Secretary notifies the lender or lender servicer and the 
appropriate 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 reapplication for designation for exceptional 
performance has been approved or denied. 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 FFEL Program loans under Sec. 682.411(c) through (h), and (m), if 
applicable, serviced during the audit period;
    (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's 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 under paragraphs (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 or agencies 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 Secs. 682.411, 
682.209(a), 682.402(e)(2), and 682.406(a)(5). The calculation may 
consider only due diligence activities applicable to the audit period. 
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 the lender or lender servicer and the 
appropriate 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 eligible 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 a borrower's default or earlier in the case of death, 
disability, or bankruptcy.
    (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. A guaranty agency may not 
require repurchase of a loan based solely on the lender's violation of 
the requirement relating to repayment conversion, due diligence, or 
timely filing. The guaranty agency must pay claims to a lender or 
lender servicer designated for exceptional performance in accordance 
with this paragraph 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 FFEL Program 
loans under Sec. 682.411(c)-(h), and (m), if applicable, and for 
converting FFEL Program loans to repayment under Sec. 682.209(a) and 
timely filing requirements under Secs. 682.402(e)(2) and 682.406(a)(5) 
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 any 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 of 
this paragraph.
    (7) (i) Insurance payments made on eligible 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 this paragraph, 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 this paragraph 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 31 U.S.C. 3729.
    (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 
any 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 this paragraph, 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 on which the event or condition occurred is the 
effective date of the revocation, except for revocation under paragraph 
(a)(6) 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 
(a)(3)(iii)(A) 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 
section 428(b)(1)(G) of the Act on all claims submitted 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 for 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 this paragraph 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 FFEL Program loans under Secs. 682.410(b)(6) (iii) 
through (xii), and 682.406 (a)(8) and (a)(9), or Secs. 682.410(b)(7) 
and 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 other information received by the Secretary. 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 
Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9) 
or Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9). The calculation 
may consider only the due diligence activities that were or should have 
been conducted during the audit period. The numerator must include the 
total number of collection activities successfully completed in 
accordance with program regulations on loans that were serviced during 
the audit period. The denominator must include the total number of 
collection activities required to be performed in compliance with 
program regulations on loans that were 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 whether 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 under 
Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9) 
or 682.410(b)(7) and 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 claims, under the FFEL 
Program, submitted by a 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 during 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 
servicer loans or otherwise comply with applicable program regulations 
is considered in violation of 31 U.S.C. 3729.
    (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 Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and 
(a)(9) or Secs. 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. 94-15419 Filed 6-23-94; 8:45 am]
BILLING CODE 4000-01-P