[Federal Register Volume 59, Number 226 (Friday, November 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29005]


[[Page Unknown]]

[Federal Register: November 25, 1994]


_______________________________________________________________________

Part II





Department of Education





_______________________________________________________________________



34 CFR Part 682




Federal Family Education Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC06

 
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. These amendments are needed to 
implement changes in the Higher Education Act of 1965, as amended 
(HEA), giving the Secretary additional powers to assure the safety of 
reserve funds and assets maintained by guaranty agencies insuring 
educational loans under the FFEL Program pursuant to agreements with 
the Secretary. The amendments further define ``reserve funds and 
assets'' and establish the substantive standard for the return of 
``unnecessary'' reserves. They also provide procedural due process for 
challenges to these orders and for orders requiring that reserve funds 
and assets outside of the guaranty agency's control be returned to it 
or to the Secretary.

EFFECTIVE DATE: These regulations take effect July 1, 1995.

FOR FURTHER INFORMATION CONTACT: Donald M. Feuerstein, Senior Advisor, 
U.S. Department of Education, 600 Independence Avenue SW., (Room 4624, 
ROB-3), Washington, DC 20202-5343. Telephone: (202) 401-2280. 
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 FFEL Program regulations (34 CFR Part 
682) govern the Federal Stafford Loan Program, the Federal Supplemental 
Loans for Students Program, the Federal PLUS Program, and the Federal 
Consolidation Loan Program (formerly the Guaranteed Student Loan 
programs). These programs provide loans to eligible student or parent 
borrowers who might otherwise be unable to finance the costs of 
postsecondary education. The loans are guaranteed by State or private, 
non-profit guaranty agencies designated by the Secretary, which are 
required to maintain reserves to support those guarantees.
    The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66) 
(OBRA), enacted August 10, 1993, added section 422(g)(1) of the HEA, 
which codified the long-standing and judicially-supported principle 
that guaranty agency reserve funds and assets are ``the property of the 
United States to be used in the operation of * * *'' the FFEL Program 
and the Direct Loan Program. To protect the Federal fiscal interest in 
the guaranty agency reserve funds and assets, OBRA authorized the 
Secretary to direct: (1) The return to the Secretary of ``unnecessary'' 
reserves from guaranty agencies (section 422(g)(1)(A)), (2) the return 
to the guaranty agency or to the Secretary under specified 
circumstances of guaranty agency reserves and assets held by, or under 
the control of, any other party (section 422(g)(1)(B)), and (3) 
guaranty agencies to cease any ``misapplication, misuse, or improper 
expenditure'' of reserve funds or assets (section 422(g)(1)(C)).
    On August 10, 1994, the Secretary published a notice of proposed 
rulemaking (NPRM) for the FFEL Program in the Federal Register (59 FR 
41184). Those proposed regulations were developed in accordance with 
section 422(g)(1)(D) of the HEA, which requires that standards and 
procedures for section 422(g)(1)(A) and (B) be developed through 
negotiated rulemaking. Monthly negotiated rulemaking sessions were held 
from January through June 1994 in and around Washington, DC. Consensus 
was reached on all of the rules proposed in the NPRM and on the 
accompanying preamble discussion. The Secretary specifically relies 
upon that consensus and preamble in issuing these final rules without 
substantive change from the NPRM.
    These regulations improve the efficiency of the Federal student aid 
programs, and, by so doing, improve their capacity to enhance 
opportunities for postsecondary education. Encouraging students to 
graduate from high school and to pursue high quality postsecondary 
education are important elements of the National Education Goals. The 
student aid programs also enable current and future workers to have the 
opportunity to acquire both basic and technologically advanced skills 
needed for today's and tomorrow's workplace. They provide the financial 
means for an increasing number of Americans to receive an education 
that will prepare them to think critically, communicate effectively, 
and solve problems efficiently, as called for in the National Education 
Goals.

Substantive Revisions to the Notice of Proposed Rulemaking

    As explained below, the Secretary has not made any substantive 
changes from the NPRM.

Analysis of Comments and Changes

    In response to the NPRM, 23 outside parties submitted timely 
comments on the proposed regulations. Fifteen commenters explicitly 
support the consensus reached at the negotiated rulemaking proceeding, 
and one commenter particularly finds the preamble to the NPRM helpful. 
None of the commenters oppose the proposed regulations as a package. 
Some of the comments suggest minor adjustments to the proposed 
regulations, and an analysis of those comments follows. Other comments 
deal with matters not relevant to the regulations proposed in the NPRM. 
In the spirit of the consensus reached at the negotiated rulemaking 
sessions, the Secretary has decided not to address specifically the 
other comments at this time but may consider alternate approaches such 
as these when the impact of the regulatory changes made here is 
evaluated based on actual experience. Accordingly, they are not 
discussed in the following analysis, although all comments will 
continue to be available for public inspection as stated in the NPRM 
(59 FR 41187).
    Numerous comments refer to an additional rule to implement section 
422(g)(1)(C) of the HEA and to a system of uniform financial 
projections for guaranty agencies. The commenters request a formal 
comment process or at least an opportunity to be consulted before the 
rule or system of projections is adopted. The NPRM (59 FR 41184, 41186) 
describes these items and the Secretary's plans for them and explains 
that the additional rule is not subject to negotiated rulemaking. 
Because of the need under section 482(c) of the HEA to publish these 
regulations by December 1, it was not possible to keep the negotiated 
rulemaking proceeding open on a voluntary basis, as a number of 
commenters suggested. New regulations are generally subject to public 
comment under the Department's normal rulemaking procedures; and, as 
stated in the NPRM, the Secretary intends to engage in prior 
consultation with interested parties on an additional rule under 
section 422(g)(1)(C) of the HEA. In the meantime, as pointed out in the 
Conference Report on OBRA, the Secretary already has the ability to 
deal with improper expenditures of reserve funds and assets. Authority 
for a system of financial projections already exists under section 
428(b)(2)(C) of the HEA and 34 CFR 682.414(b)(5), and the matter is 
more appropriately viewed as a request for information from a guaranty 
agency under that authority than as a new regulatory requirement. A 
preliminary version of a system of financial projections is currently 
under discussion with guaranty agencies.
    One commenter, who was a representative of the guaranty agencies at 
the negotiated rulemaking proceeding, went so far as to argue that the 
later promulgation of a new regulation under section 422(g)(1)(C) of 
the HEA ``would be changing one of the essential terms in the `deal' 
struck in these negotiations,'' and that ``[h]ad the non-federal 
negotiators known of the Department's intention to proceed with a 
separate rulemaking . . . we would not have been so forthcoming in our 
concessions.'' Although the Secretary appreciates that concessions were 
made by all negotiators, including the Department's, in achieving 
consensus, this commenter misunderstands the operation of the 
negotiated rulemaking process. Any interim agreements reached as the 
proceeding progressed were tentative only, subject to final 
confirmation with respect to the entire package. In this case, 
consensus was achieved at the final negotiating session, while the 
Secretary's draft proposal on improper expenditures had been withdrawn 
at a prior meeting.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

Section 682.410(a) Fiscal Requirements

Section 682.410(a)(1) Reserve Fund Assets

    Comments: One commenter requested the Secretary to define sources 
of guaranty agency reserve funds that can be considered ``non-
federal.'' Another urged that funds received from a State be included 
in the reserve fund only if they are ``used'' for guaranty activities.
    Discussion: The Secretary does not see any need to define any 
portion of guaranty agency reserves as ``non-federal'' in these 
regulations. The term ``non-federal'' does not appear in the new 
section 422(g)(1) of the HEA but instead in pre-existing section 
422(a)(2), dealing with a previous authority for the provision and 
recall of Federal advance funds and other reserves. Although the 
excerpt from the conference report on OBRA quoted in the NPRM (59 FR 
41184) did use the term ``federal portion,'' it is not clear what was 
meant by this reference, or what significance it should be given in 
light of the unqualified language of section 422(g)(1) itself and of 
prior court decisions defining the Federal interest in guaranty agency 
reserve funds. In any event, the long-standing definition of reserve 
fund in Sec. 682.410 was based on sections 422, 428, and 432 of the HEA 
as they existed even prior to OBRA and does not require any additional 
authority from section 422(g)(1). All of the sources specified in 
Sec. 682.410 of the regulations may be applied only to the uses also 
specified there. The particular subject of State sources was 
extensively discussed at the negotiated rulemaking proceeding, and the 
proposed language represents a compromise of competing positions that 
was agreed to at the proceeding.
    Changes: None.

Section 682.410(a)(2)  Uses of Reserve Fund Assets

    Comments: One commenter elaborated on the explanation of new 
paragraph (a)(2)(xi) in the preamble by stating that the ``good faith'' 
proviso in the paragraph ``is a restatement of the basic rule of non-
retroactivity. * * *''
    Discussion: The Secretary agrees with the commenter's observation 
that this protection against application of certain new regulatory 
provisions to conduct that occurred prior to their effective date is 
unavailable if the conduct was not consistent with the ``laws, rules, 
standards, customs, and practices prevailing'' at the time of 
occurrence. It would not be appropriate to offer a safe harbor to 
conduct that was questionable even when it occurred.
    Change: None
    Section 682.410(a)(3) Accounting Basis
    Comments: Numerous commenters urged that guaranty agency published 
financial statements continue to be based on generally- accepted 
accounting principles. A few even urged that ED Form 1130, the basic 
form for guaranty agency financial reporting to the Secretary, be 
changed to require reporting on an accrual basis, or at least in 
accordance with generally-accepted accounting principles, and that 
other reserve fund assets be considered in determining satisfaction of 
reserve ratio requirements. One commenter requested a specification of 
the first fiscal year to which this new paragraph is applicable.
    Discussion: The NPRM made clear that Sec. 682.410(a)(3) applies 
only to ``reserve fund reporting,'' and in that respect it merely 
formalizes the existing instructions to Form 1130 (59 CFR 41185). Thus, 
the fact that the effective date of this regulatory requirement is in 
the middle of a Federal fiscal year and may be in the middle of an 
agency's fiscal year should not be a concern, and there is no need to 
specify an effective fiscal year. The new paragraph is not intended to 
require any change in a guaranty agency's published financial 
statements or the method of computing its fund balance used in those 
statements. It would not be appropriate, however, to change the 
accounting basis for Form 1130. Certain accrual and deferral items are 
already collected by Items E-17 to E-22 of the form. Moreover, the 
Secretary believes that the statutory reserve ratios of section 
428(c)(9) of the HEA were selected by the Congress on the basis of the 
cash reserve data collected on Form 1130, and a change in the method of 
computing the reserve ratio would accordingly also require 
reconsideration of the appropriateness of the ratio itself. On the 
other hand, some agencies publish a so-called reserve ratio that is 
computed in a different manner from that required by the statute and 
regulations. The Secretary considers it to be misleading for a guaranty 
agency to do so without also publishing its statutory reserve ratio and 
explaining the difference in computation.
    Changes: None.

Section 682.410(a)(5)  Investments

    Comments: A commenter requested the Secretary to issue clearer 
guidelines for low-risk investments or to approve individual agencies' 
investment policies.
    Discussion: The courts have confirmed that a guaranty agency's role 
with respect to its reserve fund and assets is ``analogous'' or 
``akin'' to that of a trustee. See e.g., Education Assistance Corp. v. 
Cavasos, 902 F.2d 617, 627 (8th Cir. 1990), cert. denied, 111 S.Ct, 246 
(1990); Ohio Student Loan Commission v. Cavasos, 900 F.2d 894, 899 (6th 
Cir. 1990), cert. denied, 111 S.Ct. 245 (1990). Thus, there is a whole 
body of existing fiduciary law to flesh out the Secretary's regulatory 
provisions for guaranty agency reserve funds and assets. To eliminate 
any uncertainty, however, the Department is willing to review the 
investment policies of agencies at their request.
    Changes: None.

Section 682.410(a)(6)  Development of Assets

    Comments: One commenter requested qualitative or quantitative 
guidance on the meaning of ``substantial'' with respect to situations 
in which asset sharing for program and non-program uses requires cost 
sharing.
    Discussion: As indicated in the NPRM (59 FR 41185), this amendment 
was the subject of intense debate at the negotiated rulemaking 
proceeding. Significant concessions were made by all negotiators to 
reach agreement on the amendment. As one commenter put it, ``the 
guaranty agency negotiators gave up litigable positions'' on this 
provision, among others, to make consensus possible. Therefore, the 
Secretary is particularly gratified that there has not been any 
negative comment on this amendment. With regard to the word 
``substantial,'' the Secretary is using it as an antonym for the word 
``nominal,'' denoting situations in which it would not be productive to 
attempt to quantify the extent of nonprogram use. Although even more 
specificity on substantiality might be desirable, the Secretary 
believes it is preferable to have that arise from case-by-case analysis 
rather than initial regulatory prescription. The Secretary is willing 
to give advance advice on particular situations in which there may be 
uncertainty.
    Finally, although there was no formal comment to this effect, the 
Secretary understands that there may be some misunderstanding of the 
effect of the amendment when a guaranty agency makes a correct cost 
allocation at the outset. The statement in the NPRM (59 FR 41186) that 
subsequent events would be governed by the recorded ownership interest 
of the asset obviously assumes that the recordation is consistent with 
the cost allocation. A guaranty agency may not allocate substantial 
costs to the reserve fund and then not give it credit for a 
proportionate ownership interest in the asset.
    Changes: None.

Section 682.417  Determination of Reserve Funds or Assets To Be 
Returned

Section 682.417(b)  Return of Unnecessary Reserve Funds

    Comments: One commenter requested that the Secretary analyze the 
economic impact of OBRA on guaranty agencies before requiring the 
return of any reserves. Another commenter urged that the Secretary 
consider 10-year rather than five-year projections in determining 
whether a guaranty agency has ``unnecessary'' reserves to be returned. 
Other commenters questioned the sufficiency of the 60 days provided for 
the agency to provide the projections.
    Discussion: Requiring a complete analysis of the economic impact of 
OBRA before allowing the use of the Secretary's new power under section 
422(g)(1)(A) of the HEA would be the practical equivalent of delaying 
the effective date of the implementing regulation. The issue of the 
first Federal fiscal year in which reserves could be called back under 
this new rule was thoroughly discussed at the negotiated rulemaking 
proceeding. The Secretary's position that the rule should not be 
delayed beyond July 1, 1995, was ultimately accepted as part of the 
overall consensus. By that time actual data will be available on the 
impact of the profit margin reductions resulting from various changes 
made to the HEA by OBRA and on the first academic year of the Direct 
Loan Program. OBRA's future impact will be assessed through the 
agencies' projections for the 1995 and next four Federal fiscal years. 
The Secretary considers the assumptions necessary for 10-year 
projections, however, such as aggregate student loan volume and general 
rates of interest and inflation, to be too unreliable to be used as a 
basis for decision. This issue was specifically discussed at the 
negotiated rulemaking proceeding, and five years was agreed upon as the 
term for the projections. Finally, since the guaranty agency should 
already have provided the Secretary with projections under the new data 
collection program, 60 days should be ample time to supplement them for 
this purpose.
    Changes: None.

Section 682.417(c)  Notice

    Comments: One commenter suggested that a guaranty agency should be 
able to request additional information if the notice initiating a 
proceeding for the return of reserve funds or assets does not contain 
sufficient information for it to prosecute its appeal. Another asked 
that any protective order under paragraph (c)(2)(v) not be allowed to 
endanger its daily operations in the absence of fraud or abuse.
    Discussion: No specific procedure is necessary for a party to 
request additional information from the Secretary. If the information 
is in fact necessary, the notice directing the return would be 
defective if the information were not provided. Since any protective 
order would only affect reserves to the extent that they had already 
been determined to be ``unnecessary,'' it is hard to understand how it 
could endanger the agency's daily operations. In any event, the 
deciding official could expedite this aspect of any appeal.
    Changes: None.

Section 682.417(d)  Appeal

    Comments: One commenter expressly agreed with the appeal procedure 
included in the proposed rule, while another requested that the appeal 
be heard by a neutral third-party arbitrator.
    Discussion: The latter commenter misunderstands the nature of the 
appeal process. This is not a quasi-judicial administrative proceeding. 
The appeal is merely an opportunity for the guaranty agency to have the 
authorized Departmental official's action reviewed by a superior or 
peer within the Department. It would be inappropriate to place the 
Department's responsibility on an outside decisionmaker.
    Changes: None.

Section 682.417(e)  Third-Party Participation

    Comments: One commenter requested the Secretary to delete the 
provision for third-party participation in appeals, or at least to 
specify the information that third parties may provide.
    Discussion: Third-party participation was an important component of 
the consensus reached at the negotiated rulemaking proceeding. 
Students, schools, and lenders are the parties most affected by the 
financial condition of guaranty agencies, and they should not be denied 
an opportunity to provide information in these proceedings. The 
Secretary does not believe that it is appropriate to limit the 
information that third parties may provide.
    Changes: None.

Section 682.417(f)  Adverse Information

    Comments: Two commenters requested that all third-party information 
be provided to the guaranty agency without a formal request under the 
Freedom of Information Act (FOIA), not just adverse information 
considered by the deciding official.
    Discussion: This matter was also discussed at the negotiated 
rulemaking proceeding, and the guaranty agency negotiators agreed that 
the agencies would usually already be aware of any favorable 
information that was submitted by third parties. In any event, under 
Sec. 682.417(e)(2) all information submitted by third parties is 
available for public inspection and copying. No formal FOIA request is 
necessary.
    Changes: None.

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 the Title IV, HEA programs 
effectively and efficiently. Burdens specifically associated with 
information collection requirements were identified and justified in 
the NPRM.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these regulations, the Secretary has determined 
that the benefits of these regulations justify the costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.

Assessment of Educational Impact

    In the NPRM, 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.

List of Subjects in 34 CFR Part 682

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

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

    Dated: November 18, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary amends part 682 of title 34 of the Code of Federal 
Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS

    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. Section 682.410(a) is revised, and the OMB control number is 
republished to read as follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

    (a) Fiscal requirements (1) Reserve fund assets. A guaranty agency 
shall establish and maintain a reserve fund to be used solely for its 
activities as a guaranty agency under the FFEL Program (``guaranty 
activities''). The guaranty agency shall credit to the reserve fund--
    (i) The total amount of insurance premiums collected;
    (ii) Funds received from a State for the agency's guaranty 
activities, including matching funds under section 422(a) of the Act;
    (iii) Federal advances obtained under sections 422(a) and (c) of 
the Act;
    (iv) Federal payments for default, bankruptcy, death, disability, 
closed schools, and false certification claims;
    (v) Supplemental preclaims assistance payments;
    (vi) Administrative cost allowance payments received under 
Sec. 682.407 and transitional support payments received under section 
458(a) of the Act;
    (vii) Funds collected by the guaranty agency on FFEL Program loans 
on which a claim has been paid;
    (viii) Investment earnings on the reserve fund; and
    (ix) Other funds received by the guaranty agency from any source 
for the agency's guaranty activities.
    (2) Uses of reserve fund assets. A guaranty agency may use the 
assets of the reserve fund established under paragraph (a)(1) of this 
section to pay only--
    (i) Insurance claims;
    (ii) Operating costs for the agency's guaranty activities, 
including payments necessary in collecting loans, providing preclaims 
assistance, monitoring enrollment and repayment status, and carrying 
out any other guaranty activities;
    (iii) Lenders for their participation in a loan referral service 
under section 428(e) of the Act;
    (iv) The Secretary's equitable share of collections;
    (v) Federal advances and other funds owed to the Secretary;
    (vi) Reinsurance fees;
    (vii) Insurance premiums related to cancelled loans;
    (viii) Borrower refunds, including those arising out of student or 
other borrower claims and defenses;
    (ix) (A) The repayment, on or after December 29, 1993, of amounts 
credited under paragraphs (a)(1)(ii) or (a)(1)(ix) of this section, if 
the agency provides the Secretary 30 days prior notice of the repayment 
and demonstrates that--
    (1) These amounts were originally received by the agency under 
appropriate contemporaneous documentation specifying that receipt was 
on a temporary basis only;
    (2) The objective for which these amounts were originally received 
by the agency has been fully achieved; and
    (3) Repayment of these amounts would not cause the agency to fail 
to comply with the minimum reserve levels provided by paragraph (a)(10) 
of this section, except that the Secretary may, for good cause, provide 
written permission for a payment that meets the other requirements of 
this paragraph (a)(2)(ix)(A).
    (B) The repayment, prior to December 29, 1993, of amounts credited 
under paragraphs (a)(1)(ii) or (a)(1)(ix) of this section, if the 
agency demonstrates that--
    (1) These amounts were originally received by the agency under 
appropriate contemporaneous documentation that receipt was on a 
temporary basis only; and
    (2) The objective for which these amounts were originally received 
by the agency has been fully achieved.
    (x) Any other payments necessary to perform functions directly 
related to the agency's guaranty activities and for their proper 
administration;
    (xi) Notwithstanding any other provision of this section, any other 
payment that was allowed by law or regulation at the time it was made, 
if the agency acted in good faith when it made the payment or the 
agency would otherwise be unfairly prejudiced by the nonallowability of 
the payment at a later time; and
    (xii) Any other amounts authorized or directed by the Secretary.
    (3) Accounting basis. Except as approved by the Secretary, a 
guaranty agency shall credit the items listed in paragraph (a)(1) of 
this section to its reserve fund upon their receipt, without any 
deferral for accounting purposes, and shall deduct the items listed in 
paragraph (a)(2) of this section from its reserve fund upon their 
payment, without any accrual for accounting purposes.
    (4) Accounting records. (i) The accounting records of a guaranty 
agency must reflect the correct amount of sources and uses of funds 
under paragraph (a) of this section.
    (ii) A guaranty agency may reverse prior credits to its reserve 
fund if--
    (A) The agency gives the Secretary prior notice setting forth a 
detailed justification for the action;
    (B) The Secretary determines that such credits were made 
erroneously and in good faith; and
    (C) The Secretary determines that the action would not unfairly 
prejudice other parties.
    (iii) A guaranty agency shall correct any other errors in its 
accounting or reporting as soon as practicable after the errors become 
known to the agency.
    (iv) If a general reconstruction of a guaranty agency's historical 
accounting records is necessary to make a change under paragraphs 
(a)(4)(ii) and (a)(4)(iii) of this section or any other retroactive 
change to its accounting records, the agency may make this 
reconstruction only upon prior approval by the Secretary and without 
any deduction from its reserve fund for the cost of the reconstruction.
    (5) Investments. The guaranty agency shall exercise the level of 
care required of a fiduciary charged with the duty of investing the 
money of others when it invests the assets of the reserve fund 
described in paragraph (a)(1) of this section. It may invest these 
assets only in low-risk securities, such as obligations issued or 
guaranteed by the United States or a State.
    (6) Development of assets. (i) If the guaranty agency uses in a 
substantial way for purposes other than the agency's guaranty 
activities any funds required to be credited to the reserve fund under 
paragraph (a)(1) of this section or any assets derived from the reserve 
fund to develop an asset of any kind and does not in good faith 
allocate a portion of the cost of developing and maintaining the 
developed asset to funds other than the reserve fund, the Secretary may 
require the agency to--
    (A) Correct this allocation under paragraph (a)(4)(iii) of this 
section; or
    (B) Correct the recorded ownership of the asset under paragraph 
(a)(4)(iii) of this section so that--
    (1) If, in a transaction with an unrelated third party, the agency 
sells or otherwise derives revenue from uses of the asset that are 
unrelated to the agency's guaranty activities, the agency promptly 
shall deposit into the reserve fund described in paragraph (a)(1) of 
this section a percentage of the sale proceeds or revenue equal to the 
fair percentage of the total development cost of the asset paid with 
the reserve fund monies or provided by assets derived from the reserve 
fund; or
    (2) If the agency otherwise converts the asset, in whole or in 
part, to a use unrelated to its guaranty activities, the agency 
promptly shall deposit into the reserve fund described in paragraph 
(a)(1) of this section a fair percentage of the fair market value or, 
in the case of a temporary conversion, the rental value of the portion 
of the asset employed for the unrelated use.
    (ii) If the agency uses funds or assets described in paragraph 
(a)(6)(i) of this section in the manner described in that paragraph and 
makes a cost and maintenance allocation erroneously and in good faith, 
it shall correct the allocation under paragraph (a)(4)(iii) of this 
section.
    (7) Third-party claims. If the guaranty agency has any claim 
against any other party to recover funds or other assets for the 
reserve fund, the claim is the property of the United States.
    (8) Related-party transactions. All transactions between a guaranty 
agency and a related organization or other person that involve funds 
required to be credited to the agency's reserve fund under paragraph 
(a)(1) of this section or assets derived from the reserve fund must be 
on terms that are not less advantageous to the reserve fund than would 
have been negotiated on an arm's-length basis by unrelated parties.
    (9) Scope of definition. The provisions of this Sec. 682.410(a) 
define reserve funds and assets for purposes of sections 422 and 428 of 
the Act. These provisions do not, however, affect the Secretary's 
authority to use all funds and assets of the agency pursuant to section 
428(c)(9)(F)(vi) of the Act.
    (10) Minimum reserve fund level. The guaranty agency must maintain 
a current minimum reserve level of not less than--
    (i) .5 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1993;
    (ii) .7 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1994;
    (iii) .9 percent of the amount of loans outstanding, for the fiscal 
year of the agency that begins in calendar year 1995; and
    (iv) 1.1 percent of the amount of loans outstanding, for each 
fiscal year of the agency that begins on or after January 1, 1996.
    (11) Definitions. For purposes of this section--
    (i) Reserve fund level means--
    (A) The total of reserve fund assets as defined in paragraph (a)(1) 
of this section;
    (B) Minus the total amount of the reserve fund assets used in 
accordance with paragraphs (a)(2) and (a)(3) of this section; and
    (ii) Amount of loans outstanding means--
    (A) The sum of--
    (1) The original principal amount of all loans guaranteed by the 
agency; and
    (2) The original principal amount of any loans on which the 
guarantee was transferred to the agency from another guarantor, 
excluding loan guarantees transferred to another agency pursuant to a 
plan of the Secretary in response to the insolvency of the agency;
    (B) Minus the original principal amount of all loans on which--
    (1) The loan guarantee was cancelled;
    (2) The loan guarantee was transferred to another agency;
    (3) Payment in full has been made by the borrower;
    (4) Reinsurance coverage has been lost and cannot be regained; and
    (5) The agency paid claims.
* * * * *
(Approved by the Office of Management and Budget under Control 
Number 1840-0538)

    3. A new Sec. 682.417 is added to subpart D to read as follows:


Sec. 682.417  Determination of reserve funds or assets to be returned.

    (a) General. The procedures described in this section apply to a 
determination by the Secretary that--
    (1) A guaranty agency must return to the Secretary a portion of its 
reserve funds which the Secretary has determined is unnecessary to pay 
the program expenses and contingent liabilities of the agency; and
    (2) A guaranty agency must require the return to the agency or the 
Secretary of reserve funds or assets within the meaning of section 
422(g)(1) of the Act held by or under the control of any other entity, 
which the Secretary determines are necessary to pay the program 
expenses and contingent liabilities of the agency or which are required 
for the orderly termination of the guaranty agency's operations and the 
liquidation of its assets.
    (b) Return of unnecessary reserve funds. (1) The Secretary may 
initiate a process to recover unnecessary reserve funds under paragraph 
(a)(1) of this section if the Secretary determines that a guaranty 
agency's reserve fund ratio under Sec. 682.410(a)(10) for each of the 
two preceding Federal fiscal years exceeded 2.0 percent.
    (2) If the Secretary initiates a process to recover unnecessary 
reserve funds, the Secretary requires the return of a portion of the 
reserve funds that the Secretary determines will permit the agency to--
    (i) Have a reserve fund ratio of at least 2.0 percent under 
Sec. 682.410(a)(10) at the time of the determination; and
    (ii) Meet the minimum reserve fund requirements under 
Sec. 682.410(a)(10) and retain sufficient additional reserve funds to 
perform its responsibilities as a guaranty agency during the current 
Federal fiscal year and the four succeeding Federal fiscal years.
    (3)(i) The Secretary makes a determination of the amount of the 
reserve funds needed by the guaranty agency under paragraph (b)(2) of 
this section on the basis of financial projections for the period 
described in that paragraph. If the agency provides projections for a 
period longer than the period referred to in that paragraph, the 
Secretary may consider those projections.
    (ii) The Secretary may require a guaranty agency to provide 
financial projections in a form and on the basis of assumptions 
prescribed by the Secretary. If the Secretary requests the agency to 
provide financial projections, the agency shall provide the projections 
within 60 days of the Secretary's request. If the agency does not 
provide the projections within the specified time period, the Secretary 
determines the amount of reserve funds needed by the agency on the 
basis of other information.
    (c) Notice. (1) The Secretary or an authorized Departmental 
official begins a proceeding to order a guaranty agency to return a 
portion of its reserve funds, or to direct the return of reserve funds 
or assets subject to return, by sending the guaranty agency a notice by 
certified mail, return receipt requested.
    (2) The notice--
    (i) Informs the guaranty agency of the Secretary's determination 
that the reserve funds or assets must be returned;
    (ii) Describes the basis for the Secretary's determination and 
contains sufficient information to allow the guaranty agency to prepare 
and present an appeal;
    (iii) States the date by which the return of reserve funds or 
assets must be completed;
    (iv) Describes the process for appealing the determination, 
including the time for filing an appeal and the procedure for doing so; 
and
    (v) Identifies any actions that the guaranty agency must take to 
ensure that the reserve funds or assets that are the subject of the 
notice are maintained and protected against use, expenditure, transfer, 
or other disbursement after the date of the Secretary's determination, 
and the basis for requiring those actions. The actions may include, but 
are not limited to, directing the agency to place the reserve funds in 
an escrow account. If the Secretary has directed the guaranty agency to 
require the return of reserve funds or assets held by or under the 
control of another entity, the guaranty agency shall ensure that the 
agency's claims to those funds or assets and the collectability of the 
agency's claims will not be compromised or jeopardized during an 
appeal. The guaranty agency shall also comply with all other applicable 
regulations relating to the use of reserve funds and assets.
    (d) Appeal. (1) A guaranty agency may appeal the Secretary's 
determination that reserve funds or assets must be returned by filing a 
written notice of appeal within 20 days of the date of the guaranty 
agency's receipt of the notice of the Secretary's determination. If the 
agency files a notice of appeal, the requirement that the return of 
reserve funds or assets be completed by a particular date is suspended 
pending completion of the appeal process. If the agency does not file a 
notice of appeal within the period specified in this paragraph, the 
Secretary's determination is final.
    (2) A guaranty agency shall submit the information described in 
paragraph (d)(4) of this section within 45 days of the date of the 
guaranty agency's receipt of the notice of the Secretary's 
determination unless the Secretary agrees to extend the period at the 
agency's request. If the agency does not submit that information within 
the prescribed period, the Secretary's determination is final.
    (3) A guaranty agency's appeal of a determination that reserve 
funds or assets must be returned is considered and decided by a 
Departmental official other than the official who issued the 
determination or a subordinate of that official.
    (4) In an appeal of the Secretary's determination, the guaranty 
agency shall--
    (i) State the reasons the guaranty agency believes the reserve 
funds or assets need not be returned;
    (ii) Identify any evidence on which the guaranty agency bases its 
position that the reserve funds or assets need not be returned;
    (iii) Include copies of the documents that contain this evidence;
    (iv) Include any arguments that the guaranty agency believes 
support its position that the reserve funds or assets need not be 
returned; and
    (v) Identify the steps taken by the guaranty agency to comply with 
the requirements referred to in paragraph (c)(2)(v) of this section.
    (5)(i) In its appeal, the guaranty agency may request the 
opportunity to make an oral argument to the deciding official for the 
purpose of clarifying any issues raised by the appeal. The deciding 
official provides such an opportunity promptly after the expiration of 
the period referred to in paragraph (d)(2) of this section.
    (ii) The agency may not submit new evidence at or after the oral 
argument unless the deciding official determines otherwise. A 
transcript of the oral argument is made a part of the record of the 
appeal and is promptly provided to the agency.
    (6) The guaranty agency has the burden of production and the burden 
of persuading the deciding official that the Secretary's determination 
should be modified or withdrawn.
    (e) Third-party participation. (1) If the Secretary issues a 
determination under paragraph (a)(1) of this section, the Secretary 
promptly publishes a notice in the Federal Register announcing the 
portion of the reserve fund to be returned by the agency and providing 
interested persons an opportunity to submit written information 
relating to the determination within 30 days after the date of 
publication. The Secretary publishes the notice no earlier than five 
days after the agency receives a copy of the determination.
    (2) If the guaranty agency to which the determination relates files 
a notice of appeal of the determination, the deciding official may 
consider any information submitted in response to the Federal Register 
notice. All information submitted by a third party is available for 
inspection and copying at the offices of the Department of Education in 
Washington, D.C., during normal business hours.
    (f) Adverse information. If the deciding official considers 
information in addition to the evidence described in the notice of the 
Secretary's determination that is adverse to the guaranty agency's 
position on appeal, the deciding official informs the agency and 
provides it a reasonable opportunity to respond to the information 
without regard to the period referred to in paragraph (d)(2) of this 
section.
    (g) Decision. (1) The deciding official issues a written decision 
on the guaranty agency's appeal within 45 days of the date on which the 
information described in paragraph (d)(4) and (d)(5)(ii) of this 
section is received, or the oral argument referred to in paragraph 
(d)(5) of this section is held, whichever is later. The deciding 
official mails the decision to the guaranty agency by certified mail, 
return receipt requested. The decision of the deciding official becomes 
the final decision of the Secretary 30 days after the deciding official 
issues it. In the case of a determination that a guaranty agency must 
return reserve funds, if the deciding official does not issue a 
decision within the prescribed period, the agency is no longer required 
to take the actions described in paragraph (c)(2)(v) of this section.
    (2) A guaranty agency may not seek judicial review of the 
Secretary's determination to require the return of reserve funds or 
assets until the deciding official issues a decision.
    (3) The deciding official's written decision includes the basis for 
the decision. The deciding official bases the decision only on evidence 
described in the notice of the Secretary's determination and on 
information properly submitted and considered by the deciding official 
under this section. The deciding official is bound by all applicable 
statutes and regulations and may neither waive them nor rule them 
invalid.
    (h) Collection of reserve funds or assets. (1) If the deciding 
official's final decision requires the guaranty agency to return 
reserve funds, or requires the guaranty agency to require the return of 
reserve funds or assets to the agency or to the Secretary, the decision 
states a new date for compliance with the decision. The new date is no 
earlier than the date on which the decision becomes the final decision 
of the Secretary.
    (2) If the guaranty agency fails to comply with the decision, the 
Secretary may recover the reserve funds from any funds due the agency 
from the Department without any further notice or procedure and may 
take any other action permitted or authorized by law to compel 
compliance.

(Authority: 20 U.S.C. 1072(g)(1))

(Approved by the Office of Management and Budget under Control 
Number 1840-0538)

[FR Doc. 94-29005 Filed 11-23-94; 8:45 am]
BILLING CODE 4000-01-P