[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29037]


[[Page Unknown]]

[Federal Register: November 29, 1994]


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Part VII





Department of Education





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34 CFR Part 668




Student Assistance General Provisions; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-ACO9

 
Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Student Assistance General Provisions 
regulations to further implement changes made to section 435 of the 
Higher Education Act of 1965, (HEA) as amended by the Higher Education 
Technical Amendments of 1993 (Technical Amendments). These regulations 
modify the procedures that the Secretary uses to decide appeals of and 
challenges to the determination of institutional cohort default rates 
in the Federal Family Education Loan (FFEL) Program.

EFFECTIVE DATE: These regulations take effect July 1, 1995. However, 
affected parties do not have to comply with the information collection 
requirements in Sec. 668.17(f) and (h) until the Department of 
Education publishes in the Federal Register the control number assigned 
by the Office of Management and Budget (OMB) to these information 
collection requirements. Publication of the control number notifies the 
public that OMB has approved these information collection requirements 
under the Paperwork Reduction Act of 1980.

FOR FURTHER INFORMATION CONTACT: Geneva Coombs, Default Management 
Section, U.S. Department of Education, 600 Independence Avenue, SW., 
(room 3916, ROB-3), Washington, DC 20202-5449 for information regarding 
deadlines and procedures related to the appeal of cohort default rate 
determinations by institutions. Telephone (202) 708-9396. For 
information on other policy issues related to this regulation, contact 
Pat Newcombe, Federal Family Education Loan Program Section. Telephone 
(202) 708-8242. Individuals who use a telecommunications device for the 
deaf (TDD) may call the Federal Information Relay Service (FIRS) at 1-
800-877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: Section 2(c)(55) of the Technical Amendments 
amended section 435 of the HEA to modify the process governing 
institutions' appeals of their cohort default rates based on 
allegations of improper loan servicing and collection.
    On March 22, 1994, the Secretary published a proposed rule and 
notice in the Federal Register, 59 FR 13606, requesting comments on the 
procedures that should be established to implement the statutory 
amendments. The Secretary indicated that he would issue final 
regulations establishing procedures for institutions to appeal their 
default rates based on allegations of improper loan servicing or 
collection. The Secretary also solicited public help in developing 
those procedures.
    After reviewing the comments received in response to the proposed 
rule, the Secretary issued interim final regulations on April 29, 1994. 
59 FR 22278. These regulations were in final form with a stated 
effective date, but invited additional public comments that could 
result in future revisions to the regulations. Any revisions would have 
a later effective date. The Secretary received 80 comments in response 
to the regulations published on April 29. The Secretary has considered 
all of these comments in preparing these revisions to the final 
regulations. Some of the changes suggested by the commenters are 
reflected in these revisions. The Secretary's response to the 
suggestions made by the commenters is provided after the following 
discussion of the changes made to the final regulations. To ensure that 
the public understands how the revisions affect the final rule, the 
Secretary is publishing complete revised versions of Sec. 668.17(f), 
(g) and (h).

Revisions to the Final Rules published on April 29, 1994

    The Secretary has revised the standard for determining whether an 
institution has shown that, for purposes of an appeal of a cohort 
default rate, improper servicing or collection is considered to have 
caused a default. In particular, the Secretary has determined that, for 
purposes of appeals of cohort default rate calculations only, a 
lender's failure to perform certain collection actions will be 
considered to have caused a default. The Secretary has revised the 
regulations to provide that improper servicing or collection will be 
considered to have caused a default if the borrower has not made a 
payment on the loan and the institution can prove that the lender 
failed to perform one or more of the following activities (if such 
activities were required on the particular loan): (1) Send at least one 
letter (other than the final demand letter) urging the borrower or 
endorser to make payments on the loan; (2) make at least one attempt to 
reach the borrower by phone; (3) request preclaims assistance from the 
guaranty agency (if required), or (4) send the final demand letter. 
Therefore, the loan will be excluded from the default rate calculation 
if the borrower did not make a payment on the loan and the institution 
can show that the lender missed one of these four activities. If the 
borrower did not make a payment on the loan and the lender did not make 
contact with the borrower because the borrower could not be located, 
the default will be considered to have been caused by improper 
servicing or collection if the loan file does not include a 
certification or any evidence that skip tracing activities were 
performed before the claim was submitted.
    The Secretary has determined that it is appropriate to focus the 
evaluation of cohort default rate appeals on these particular 
activities because these activities are important elements of the loan 
servicing and collection process. Each of the activities considered in 
the cohort default rate appeal process (letters, phone calls, preclaims 
assistance, final demand and skip tracing) represent a different method 
of collecting on a loan. The Secretary believes that if each collection 
technique is used, a default on the loan should not, for cohort default 
rate appeal purposes, be considered to have been caused by improper 
servicing or collection.
    The Secretary receives hundreds of cohort default rate appeals 
annually and resolution of these appeals requires significant staff 
time and resources. In light of these factors and the tight statutory 
time frames for filing and deciding appeals, the Secretary believes it 
is necessary to have an appeal process that will result in the rapid 
and fair adjudication of appeals. The servicing and collection 
activities identified above are reflected in the loan servicing and 
collection records that are available to institutions and the Secretary 
as part of the appeal process. The Secretary will be able to review 
these records and determine, in a relatively straightforward fashion, 
whether the relevant servicing and collection activities have been 
performed. Accordingly, the Secretary believes that the adoption of 
this modified appeal standard will contribute to ensuring a fair and 
workable appeal process.
    The Secretary has determined that if a borrower made a payment on 
the loan, the default on the loan cannot be considered to have been 
caused by improper servicing or collection. The payment by the borrower 
demonstrates that the borrower is aware of his or her repayment 
obligation and reflects an affirmation of the debt. This restriction is 
also consistent with 34 CFR 668.17(e)(1)(ii)(B) which counts as a 
default any loan on which an institution or related individual or 
entity makes a payment in order to avoid a default on the loan.
    The Secretary's decision to revise the appeal standard for cohort 
default rate appeals is based, in large part, on the need to respond to 
Congress' intention that appeals of loss of FFEL Program eligibility 
should be filed and resolved within a relatively short period of time. 
The Department considers the standard included in the April 29 final 
regulations to be faithful to the letter and purpose of section 435 of 
the HEA. However, the Secretary has found that determinations under 
this standard are quite time-consuming for institutions, guaranty 
agencies and the Department. Hence, while the Department continues to 
consider the original appeal standard an appropriate implementation of 
Congressional intent, the Department's experience demonstrates that it 
does not sufficiently contribute to satisfaction of the statutory goal 
of ensuring quick and fair decisions.
    In preparing these final regulations, the Secretary focused on the 
two clear goals of section 435 of the HEA: first, to hold institutions 
with unacceptably high default rates responsible for those rates and 
the costs to the taxpayers of those defaults; and second, to allow 
institutions to appeal the determinations of their rates and provide 
decisions on those appeals in relatively rapid fashion. The standard 
for deciding appeals included in these final regulations will achieve 
these goals. The promulgation of these rules allows institutions to 
avoid responsibility for certain loans where arguably the regulatory 
violations amounted to improper servicing or collection that are 
presumed to have ``caused'' the default for purposes of the cohort 
default rate appeals. In addition, the regulations will allow the 
Secretary to make timely appeal decisions based on a quick review of 
certain records. An appeals process that is based on elaborate rules or 
that requires time-consuming review would not serve either purpose.
    The Secretary believes that this revised standard for evaluating 
cohort default rate appeals based on allegations of improper loan 
servicing or collection may make it easier for institutions to prove 
that loans should be removed from the calculation. The Secretary 
further believes that institutions with pending appeals before the 
Department should receive the benefit of this revised standard. 
Therefore, the Secretary intends to apply the revised standard to 
pending appeals as a matter of administrative adjudication except where 
the standard included in the April 29 regulations would be more 
favorable to the institution.
    The final regulations require the institution to notify the 
Secretary as well as the appropriate guaranty agencies that it is 
appealing its cohort default rate. This requirement will ensure that 
the Secretary is notified that an institution has timely appealed so 
the Secretary does not take action to end the participation of the 
institution.
    The final regulations eliminate the requirement that guaranty 
agencies provide a list of certain dates for each loan included in the 
sample of loan servicing and collection records provided to the 
institution. The Secretary has determined that it is not necessary to 
have these dates listed separately as part of the appeal.
    The final regulations include a definition of ``loan servicing and 
collection records'' for purposes of the cohort default rate appeal 
process. The regulations define the term to mean the default claim 
package submitted by the lender to the guaranty agency on which the 
decision to pay a default claim was based. The Secretary believes these 
records will provide institutions with sufficient information on which 
to appeal under the revised appeal standards in these regulations. The 
Secretary notes that the regulations allow the guaranty agency to 
provide copies of loan servicing and collection records in an 
electronic or other format if the institution agrees.
    The regulations have also been modified to provide some flexibility 
to guaranty agencies in providing loan servicing and collection records 
to institutions. Under existing regulations, guaranty agencies are 
required to provide loan servicing and collection records to a 
requesting institution within 15 working days of receiving the request. 
This deadline is consistent with the statutory time frames that govern 
an appeal by an institution that is subject to loss of FFEL eligibility 
based on default rates in excess of certain thresholds for each of the 
three most recent fiscal years. However, the statutory time limit does 
not apply to institutions which are challenging the calculation of 
their cohort default rate but are not subject to the loss of FFEL 
Program eligibility. While these institutions may wish to challenge a 
cohort default rate calculation, they are not subject to the statutory 
time frames. Therefore, the Secretary has decided that the requirement 
that a guaranty agency respond to a request for a sample of loan 
servicing and collection records within 15 working days will apply only 
to institutions which are subject to loss of FFEL eligibility. A 
guaranty agency will have 30 calendar days to respond to a request for 
servicing and collection records from an institution which is not 
subject to loss of FFEL Program eligibility.
    The regulations have also been modified to clarify that, if the 
guaranty agency chooses to charge for copying and providing the 
servicing and collection records, the institution must pay the amount 
owed to the agency before the agency is required to copy and provide 
the records. The regulations provide that the agency must inform the 
institution of the amount owed within 15 working days of the date the 
agency receives the institution's request for records and the 
institution must pay the amount owed within 15 working days of 
receiving the notice of charges from the agency. If payment is not 
received within this time frame, the institution will be considered to 
have waived its appeal and the guaranty agency will notify the 
institution and the Secretary that the institution has apparently 
waived its appeal in regard to loans guaranteed by that guaranty 
agency. The Secretary will decide that the institution has not met its 
burden of proof in regard to the servicing or collection of loans 
guaranteed by a guaranty agency which the institution did not pay 
unless the institution proves that the agency's conclusion that the 
institution waived its appeal was incorrect.

Analysis of Comments

    Comments: Many commenters suggested that the Secretary should 
remove from the calculation of the cohort default rate any loan that 
was not serviced or collected in strict compliance with the 
Department's due diligence requirements in 34 CFR 682.411. The 
commenters suggested that the standard included in the final rules 
would be inconsistent with statutory intent unless the standard 
required the exclusion of all loans as to which lender servicing did 
not strictly comply with 34 CFR 682.411. The commenters claimed that 
the statutory provisions did not refer to a ``causation'' requirement 
and that the Secretary's approach was thus inconsistent with the 
statute. The commenters complained that the Department's rules reflect 
a bias against certain types of institutions and were part of an 
attempt to force certain institutions to close. Finally, the commenters 
suggested that, without a reference to strict compliance with 34 CFR 
682.411, lenders would not have any incentive to comply with the 
Department's rules.
    Discussion: The Secretary does not agree with the suggestion that 
Congress intended to require the exclusion of all loans on which the 
lender may not have strictly complied with the requirements of 34 CFR 
682.411. The statutory term ``improper servicing or collection'' is not 
defined or used elsewhere in the HEA and the Secretary sees no basis 
for the commenters' claim that it must be defined by strictly 
incorporating other distinct statutory terms (such as ``due 
diligence'') or other specific regulations. The Secretary also does not 
agree with the suggestion that even a minor or technical non-compliance 
with the requirements of 34 CFR 682.411 should be considered to have 
caused a default for cohort default rate purposes. Moreover, the 
commenters did not cite to any legislative history supporting their 
claimed interpretation of the statute. The assertions by some 
commenters that any ``servicing error'' (a term that does not appear in 
the HEA or the regulations and has no clear meaning) requires the 
removal of loans from the cohort default rate calculation similarly has 
no basis in the HEA.
    Many commenters misunderstand the purpose of 34 CFR 682.411. The 
requirements in 34 CFR 682.411 are designed to ensure that lenders and 
guaranty agencies receiving FFEL Program benefits (such as reinsurance 
and interest and special allowance payments) take certain collection 
actions in regard to the loans. These requirements have never been 
intended to set forth standards which, if not followed in their 
entirety, would excuse borrowers who refuse to repay their loans. 
Similarly, they are not intended to provide protection for institutions 
that fail to meet the statutory requirements for continued 
participation in the FFEL Program. In enacting various statutory 
provisions, Congress has stated its determination that institutions 
bear a significant responsibility for defaults in the FFEL Program. 
See, for example, sections 428A(a)(2), 435(a)(2), 494C(b), 496(a)(5)(J) 
of the HEA. The Secretary does not believe that a lender's failure to 
strictly satisfy the requirements for Federal benefits should excuse 
the institution from the statutory consequences of its high default 
rate. Moreover, the commenters' suggestion that 34 CFR 682.411 is 
intended to provide a comprehensive definition of ``due diligence'' is 
inaccurate. The Secretary's decisions regarding payments of reinsurance 
are governed by compliance with other requirements relating to loan 
servicing and collection in addition to 34 CFR 682.411. See 34 CFR 
682.208 and Part 682, Appendix D.
    The claim by some commenters that the statute does not support a 
causation requirement is also incorrect. As noted in the decision of 
the U.S. Court of Appeals for the District of Columbia Circuit in 
Atlanta College of Medical and Dental Technology v. Cavazos, 987 F.2d 
821, 830 (D.C. Cir. 1993), Congress required that a loan would be taken 
out of the default rate calculation only if the institution's cohort 
default rate would be inaccurate or improper due to the improper 
servicing or collection. Congress did not explain how improper 
servicing or collection could cause a default rate to be inaccurate or 
incomplete but left the implementation of this requirement to the 
Secretary. There is no evidence that Congress intended to require the 
Secretary to look behind the guaranty agency's claims payments. In 
fact, a review of every guaranty agency claim payment would be a very 
time consuming and resource intensive process and is inconsistent with 
the tight time frames in section 435(a)(2) of the HEA.
    The statutory requirement that an inaccurate or incomplete cohort 
default rate be ``due to'' improper servicing or collection is the 
source of the causation requirement found in the Secretary's 
regulations at 34 CFR 668.17(f). The Secretary believes that the 
requirement of a causal link comports with the statutory language and 
intent. See Atlanta College, 987 F.2d at 830.
    Despite the Secretary's conclusion that the standard in the interim 
final regulations for determining whether a default was caused by 
improper servicing or collection--i.e., did the borrower receive notice 
that the time for repayment had begun--is consistent with the intent of 
section 435 of the HEA, the Secretary has determined that the revised 
standard included in these regulations is a preferable policy course. 
The statute does not specify the specific causal link that should be 
required to remove a loan from the cohort default rate calculation. 
Thus, implementation of this requirement is within the Secretary's 
discretion. See Atlanta College, 987 F.2d at 830. In exercising that 
discretion, the Secretary has also considered the statutory provision 
which directs the Secretary to resolve appeals within a relatively 
short period of time--45 days. The selection of this time period 
strongly suggests that Congress did not intend the Secretary to have a 
complicated or burdensome appeal process. To satisfy this apparent 
Congressional intent, the Secretary has adopted the revised and 
simplified appeal standard reflected in these final regulations.
    The Secretary strongly rejects the suggestion that the regulations 
themselves are intended to force certain institutions to close, but 
this may be a result of section 435. Section 435(m)(4) of the HEA 
requires the Secretary to publish default rates for institutions 
participating in the FFEL Program. Obviously, Congress has determined 
that it is important for the public to have this information. The 
Secretary has also found that some lenders also use their own measures 
of default rate to measure their risk of loss in relation to loans made 
to students attending a particular institution. The Secretary believes 
that Congress viewed the cohort default rates as a means of allowing 
lenders to compare different institutions with a common measure. Thus, 
the impact of these regulations on any particular type of institution 
results from the statutory provision itself and not from the specific 
regulatory provisions.
    The commenters argue that a lender has no incentive to comply with 
the requirements of 34 CFR 682.411 unless loans on which the servicing 
and collection activities are not in strict compliance with the 
requirements of that section are removed from the calculation of the 
cohort default rate. This argument reflects a misunderstanding of the 
FFEL Program. To receive reinsurance payments on a defaulted loan, the 
guaranty agency must determine that the lender complied with the 
Secretary's due diligence requirements, 34 CFR 682.406. Thus, the 
lender's due diligence activities on the loans are subject to review by 
the guaranty agency and the Secretary. These reviews may result in 
administrative actions against lenders and guaranty agencies, and 
provide a more appropriate method of oversight than the time-sensitive 
cohort default rate appeal process. The Secretary believes that these 
reviews provide reasonable assurance that a lender is satisfying due 
diligence requirements.
    In reviewing individual cohort default rate appeals, the Secretary 
has found that institutions claim violations of due diligence 
requirements in situations where the lender has properly complied with 
the regulations. The various self-proclaimed loan servicing experts 
utilized by institutions appealing cohort default rates appear to have 
used their own standards for due diligence rather than utilizing the 
Secretary's rules and have mistakenly claimed that their own 
interpretation of due diligence somehow defines the statutory term 
``improper servicing or collection''. Thus, the claims by these 
institutions have simply slowed the process of adjudicating cohort 
default rate appeals rather than contributing to the identification of 
improper servicing or collection activities by lenders. Moreover, many 
institutions have previously submitted appeals based on generalized 
claims of improper servicing or collection activity. Section 
435(m)(1)(B) of the HEA, however, requires appeals to be supported by 
``evidence submitted in support of the institution's timely appeal.'' 
The Secretary does not believe that generalized claims of ``servicing 
errors'' satisfy this requirement.
    Changes: The Secretary has retained the requirement that, for a 
loan to be excluded from the calculation of the cohort default rate, 
the improper servicing or collection must have caused the default. 
However, as discussed above, the Secretary has modified the regulations 
to identify specific loan servicing or collection problems that will be 
assumed to have the required causal connection for purposes of section 
435(m)(1)(B) of the HEA.
    Comments: One commenter suggested that the Secretary should 
consider the servicing of a loan to have ``caused'' a default if the 
servicing of the loan made a default more likely.
    Discussion: Section 435 of the HEA does not provide that a default 
was caused by allegedly improper servicing or collection activity 
simply because the activity may arguably have incrementally increased 
the likelihood of default. In fact, the foremost objective of section 
435 is to remove from the FFEL Program institutions whose students 
default at an excessive rate. While the law provides for the removal of 
loans from the default rate calculation where a default was ``due to'' 
improper servicing or collection, there is no support for the 
commenter's claim that any increase in the probability of a default 
should be sufficient.
    Defaults occur for a variety of reasons. Congress, however, did not 
provide that an institution could avoid responsibility for its default 
rate by simply pointing to contributing factors arguably beyond its 
control. The lack of provision for such a general causation defense 
suggests that Congress intended to hold institutions responsible for 
their unacceptably high rates of loan defaults, based on the reasonable 
conclusion that such institutions bear a fair share of responsibility 
for many of those defaults. See S. Rept. 102-58, 102d Cong., 1st. Sess. 
10 (1991).
    The commenter's reading of the requirements in section 435 of the 
HEA does not comport with the statute's goal of establishing 
institutional responsibility for high cohort default rates. In light of 
the statute's goal of institutional responsibility the Secretary does 
not believe that it is appropriate to remove a loan from the cohort 
default rate calculation absent a significant showing of improper 
servicing or collection that seriously affects the collectability of 
the loan.
    Changes: None.
    Comments: One commenter suggested that the institution should not 
have the burden of proving that the improper loan servicing or 
collection occurred, but that the lender should be obligated to prove 
that proper servicing occurred at the time the default claim is 
submitted.
    Discussion: In general, the Secretary agrees with the commenter 
that the lender is responsible, when it submits an insurance claim, for 
showing that a loan was serviced in accordance with the Department's 
requirements. Accordingly, the Secretary refuses to pay (or requires 
repayment of) reinsurance on loans which are not properly serviced. The 
lender's obligation, however, relates to the lender's qualification for 
FFEL Program benefits. In the particular circumstance of an 
institution's appeal of its cohort default rate, the institution bears 
the burden of proving that the default rate, which is calculated based 
on the official records of the FFEL Program, is inaccurate or 
incorrect. Section 435(a)(3) of the HEA appropriately places the burden 
of showing this fact on the institution. The alternative of requiring 
lenders to defend their compliance with the Secretary's servicing and 
collection rules as part of the cohort default rate appeal process 
would significantly complicate the process and seriously delay 
decisions while interfering with the Department's other oversight 
efforts.
    Changes: None.
    Comments: Some commenters proposed that the Secretary remove from 
the calculation of the cohort default rate loans on which the lender 
did not request preclaims assistance from the guaranty agency or the 
guaranty agency did not provide notice of the lender's request for 
preclaims assistance to the institution.
    Discussion: As noted earlier, under the revised regulations, a 
lender's failure to request preclaims assistance from the guaranty 
agency may be considered improper servicing or collection and result in 
the exclusion of the affected loan from the calculation of the 
institution's cohort default rate. The Secretary does not agree with 
the commenter's suggestion, however, that the loan be excluded if the 
guaranty agency did not notify the institution of the request. Since a 
default occurs before the guaranty agency begins servicing and 
collection activity on the loan, the issue for appeals based on 
allegations of improper loan servicing is on the actions of the lender, 
not the guaranty agency. Moreover, consideration of whether the agency 
notifies the institution of the request for preclaims assistance could 
result in unequal treatment of different institutions. A guaranty 
agency is only required to notify an institution of the request for 
preclaims assistance if the institution has requested such notification 
and pays a fee. See section 428(c)(2)(H) of the HEA. An institution 
which had not requested such notice or which did not pay the fee would 
not have a basis for challenging the rate. As a result, questions of 
whether an institution properly requested notification and paid any 
required fee could raise issues of fact that would require a time 
consuming resolution process. In contrast, the guaranty agency records 
which the institution will receive on the sample of loans provided by 
the agency will reflect whether the lender requested preclaims 
assistance.
    The Secretary also determined that consideration of the notice to 
the institution would significantly increase the burden on guaranty 
agencies and the Secretary. Since the guaranty agency's notice to those 
institutions which request notice is not part of the lender claim file 
and is not part of lender due diligence, documentation of that notice 
would have to be located elsewhere in the records of the guaranty 
agency. This additional search would likely delay the appeal process. 
Moreover, it has been the Secretary's experience that even when 
guaranty agency records indicate that the institution was notified of 
the preclaims assistance request, the institution frequently claims 
that it did not receive notice. Resolution of conflicting claims would 
further burden the appeal process. In this situation, the Secretary is 
not satisfied that the effort to produce these additional records is 
justified by the result.
    Changes: The Secretary has modified the regulations to provide that 
a lender's failure to request preclaims assistance, if such a request 
was required, will be considered as improper servicing or collection of 
the loan that caused the default for purposes of a cohort default rate 
appeal.
    Comments: A number of commenters recommended that a loan be 
eliminated from the calculation of the cohort default rate if the 
borrower is not located and the lender did not perform skip tracing.
    Discussion: The Secretary believes that adequate skip tracing 
efforts are necessary to protect the Federal taxpayers' investment in 
the FFEL Program. However, the Secretary notes that skip tracing only 
occurs when the borrower has failed to fulfill his or her obligation to 
notify the lender if the borrower moves. The Department's regulations 
urge institutions to stress the borrowers' responsibility for informing 
the lender of any new address as part of the institution's default 
reduction efforts. 34 CFR Part 668, Appendix D. Moreover, the 
regulations also require institutions to provide information on new 
addresses of borrowers to lenders. 34 CFR 682.610(f). Thus, a lender is 
only required to begin skip tracing efforts when the borrower (and in 
some cases, the institution) has failed to fulfill his or her 
obligations. Therefore, the Secretary does not believe that a lender's 
failure to perform specific skip tracing steps should be considered to 
have caused a default for cohort default rate appeal purposes.
    The Secretary believes, however, that a lender's failure to perform 
skip tracing at all could, in appropriate cases, be considered to cause 
a default for cohort default rate purposes. The Secretary notes that 
while lenders maintain records of their skip tracing efforts, those 
records are not generally submitted to the guaranty agency as part of 
the claim file. Instead, the lender certifies that skip tracing was 
performed. The accuracy of the certification is subject to review by 
the guaranty agency and the Department and a false certification could 
subject the lender to a claim under the False Claims Act. In this 
situation, the Secretary believes that the lender has a strong 
incentive to provide an accurate certification. Moreover, efforts to 
determine in detail what skip tracing efforts were performed by a 
lender would require a search of the lender's records and would be very 
complicated and time-consuming. (The same is true, in general, of the 
suggestion that the Secretary assess the quality of the lender's 
letters and phone calls as part of the appeal process.) Hence, the 
Secretary will limit the inquiry regarding skip tracing to a simple, 
mechanical question. As long as the claim file submitted by a lender 
includes a certification (or, if required by the guaranty agency, other 
evidence) that skip tracing was performed, the Secretary will conclude 
that the loan was not improperly serviced or collected with regard to 
skip tracing. However, absent such evidence, a loan on which no payment 
or contact has been made will be excluded from the cohort default rate 
on appeal.
    Changes: The Secretary has changed the regulations to provide that 
if the borrower does not make a payment and no contact was made with 
the borrower, a lender's failure to provide a certification (or other 
evidence) that skip tracing, if required, was performed will result in 
exclusion of the loan from the calculation of the cohort default rate 
on appeal.
    Comments: A number of commenters urged the Secretary to provide 
institutions more time to complete and submit appeals to the guaranty 
agencies and the Secretary. Some commenters also proposed that the 
guaranty agency be permitted to extend the time for the institution to 
submit its appeal based on a showing by the institution of good cause, 
such as the number of records involved, other activities such as a 
visit by an accreditation team or staff illnesses.
    Discussion: The Secretary believes that the regulations provide 
sufficient time for an institution to complete and submit appeals and 
are consistent with the strict time periods for appeals included in 
section 435(a)(2) of the HEA.
    Changes: None.
    Comments: Some commenters recommended that the Secretary grant an 
institution's appeal if the guaranty agency does not provide the 
complete loan servicing and collection records within the time set 
forth in the regulations. A couple of commenters also recommended that 
the regulations require the Secretary to issue a decision on the 
institution's appeal within a specified time period.
    Discussion: The Secretary does not believe it is appropriate to 
automatically grant an institution's appeal if the guaranty agency 
misses a deadline to provide records to the institution. An institution 
that brings a timely appeal continues to participate in the FFEL 
programs while it completes the appeal and is not harmed by a delay. 
The Secretary believes that the guaranty agencies will take appropriate 
steps to provide records within the regulatory time frames. However, in 
appropriate cases, the Secretary may consider taking action to levy a 
financial penalty or to limit, suspend or terminate a guaranty agency's 
participation in the FFEL Program based on violations of the regulatory 
time frames.
    The Secretary agrees with the commenters that it is important to 
decide appeals within a reasonable period of time. However, it is 
impossible for the Secretary to anticipate how many appeals will be 
filed in a particular year, how complex those appeals will be and what 
resources can be applied to deciding those appeals. The Secretary fully 
intends to take appropriate steps to satisfy the statutory requirement 
that appeals be decided within 45 days. However, this statutory 
requirement clearly does not mean that the institution's appeal must be 
granted if the Secretary cannot complete consideration of the appeal 
within 45 days. Pro Schools, Inc. v. Alexander, 824 F.Supp. 1413 (E.D. 
Wisc., 1993).
    The Secretary appreciates the institutions' interest in a timely 
decision on a cohort default rate appeal. Indeed, a primary reason for 
the adoption of the revised appeal standard reflected in these final 
regulations is to reduce the complexity of the appeal process for all 
parties. The Secretary believes that the revised appeal standard will 
permit guaranty agencies to provide records to institutions more 
quickly, allow institutions to complete their appeals and permit the 
Secretary to resolve those appeals more rapidly. A more complicated 
appeal standard would not fulfill Congress' direction (and the 
commenters' request) that appeals be decided expeditiously.
    Changes: None.
    Comments: Some commenters recommended that a loan be removed from 
the calculation of the institution's cohort default rate if the loan 
was sold or transferred and the borrower was not properly notified of 
the sale or transfer of the loan.
    Discussion: The Secretary acknowledges that, in the past, the sale 
or transfer of a loan may have been a confusing situation for some 
borrowers; however, the commenters did not provide any evidence that a 
sale or transfer of a loan contributes to a default. Moreover, since 
1991 the Secretary has required both the buyer and the seller of a loan 
to notify the borrower if the transaction results in a change in the 
identity or address of the party to whom payments should be sent. The 
Secretary believes that these notices have generally addressed any 
confusion on the part of the borrowers. Finally, the Secretary notes 
that the revised standard for deciding servicing-based appeals 
addresses the situation in which it is claimed that the borrower did 
not receive notice of a loan transfer, since it will ensure that the 
borrower has been notified of the obligation to repay the loan.
    Changes: None.
    Comments: Some commenters complained that the failure of a lender 
or servicer to timely apply a refund payment to a student's account 
should be considered to have ``caused'' a default and result in the 
elimination of the affected loan from the calculation of the cohort 
default rate.
    Discussion: The Secretary shares the commenters' concern regarding 
the effect that a lender's failure to receive or apply a refund to a 
borrower's account may have on the borrower's repayment record. The 
Secretary, however, believes that an evaluation of whether the fact 
that the borrower's account does not reflect a required refund 
``caused'' the default would be largely speculative since the only 
issue would be the amount of the default. Moreover, documentation of 
payment of a refund is not generally included in the claim file 
submitted by the lender to the guaranty agency and is not generally 
considered a part of the lender's due diligence efforts. Thus, 
consideration of this issue would require an extensive, time-consuming 
review of the lender's own records. In the Department's experience, it 
is more typical that the institution failed to pay the refund to the 
lender on a timely basis or failed to pay the appropriate refund. The 
Secretary does not believe it would be appropriate for a high default 
institution to reduce its default rate because of its failure to 
fulfill its obligation to make timely refunds.
    The Secretary notes that if the institution shows that a loan 
should have been canceled because the student did not attend and the 
institution returned the funds to the lender, the default is removed 
from the default rate calculation as an issue of erroneous data, not as 
a loan servicing or collection issue.
    Changes: None.
    Comments: A number of commenters proposed that the Secretary simply 
remove loans made or held by certain lenders or guaranty agencies from 
the calculation of the cohort default rates. For example, some 
commenters suggested that any loan made by a lender who was later 
subject to action by the Resolution Trust Corporation should be removed 
from the calculation. Other commenters suggested that if the 
institution could show that a particular lender or guaranty agency had 
a high default rate or did not service loans effectively, all the loans 
made by that lender or insured by that agency would be eliminated from 
the calculation of the default rate for that institution.
    Discussion: The Secretary does not agree that all the loans made by 
a certain lender or guaranteed by a certain agency should be removed 
from the calculation of the cohort default rates. First, the Secretary 
notes that, under the law, the issue is whether the institution's 
inaccurate or incomplete cohort default rate is caused by lenders' 
improper servicing or collection. Generalized assertions that a given 
lender has ``high levels'' of ``servicing errors'' have little 
probative value when the issue is whether a given loan should be 
excluded from the default rate calculation because the loan defaulted 
``due to'' improper servicing or collection. A mere allegation that a 
lender does not properly service loans in general does not show that 
the alleged improper servicing or collection affected a particular 
institution's rate. Generalized condemnations of the actions of a 
guaranty agency--which insures loans from many lenders made to 
borrowers for attendance at many different institutions--are even less 
valuable. More importantly, Congress was aware of the broad general 
complaints by institutions about loan servicing and expressly required 
that the Department base loan servicing appeal decisions on a review of 
a representative sample of individual loan servicing records rather 
than broad allegations.
    The Secretary also notes that, in the limited situations in the 
past in which large scale loan servicing and collection problems have 
occurred, individual loans which were identified as having been 
affected were determined to be ineligible for reinsurance. As a result, 
those loans were not included in the calculation of the default rates.
    Changes: None.
    Comments: Two commenters suggested that the regulation specify the 
information that the Secretary will provide to institutions with their 
default rate notification letters.
    Discussion: The Secretary acknowledges that the institution should 
be provided basic information necessary to evaluate the data on which 
the default rate calculation is based and will continue to provide that 
information. However, the Secretary does not believe it is necessary or 
appropriate to specify, in regulations, the specific data elements that 
will be included in the information provided to institutions with the 
default rate notification letters. Specification of the data elements 
in the regulations would needlessly restrict the Secretary's 
flexibility in implementing a relatively new procedure.
    Changes: None.
    Comments: An organization of guaranty agencies noted that the 
institution has 10 working days from the date it receives the default 
rate notice from the Secretary to begin the appeal process by 
submitting its request for records to the guaranty agency. However, the 
agency may not know the date on which the institution received the 
notice and will not know whether the institution's appeal is timely. 
The commenter suggested that the guaranty agency be permitted to use 
the date of the notice plus 3 days in the absence of other official 
documentation of receipt.
    Discussion: The Secretary does not believe that it is necessary to 
establish regulatory guidelines for determining when the institution 
receives the default rate notice. The Secretary generally sends default 
rate notices to institutions by overnight mail and can generally 
determine when the institution actually received the notice. The 
Secretary does not anticipate that there will be many cases in which a 
guaranty agency has questions about the timeliness of an institution's 
appeal. However, in those cases, the guaranty agency should contact the 
Department to determine the date the institution was notified of its 
rate and calculate the appeal deadline based on the information 
provided by the Department.
    Changes: None.
    Comments: A number of commenters complained that a guaranty agency 
did not have enough time to provide records to the institution. Some 
commenters suggested that the guaranty agency should have up to 60 days 
to provide records. Other commenters suggested that the time in which 
the agency would have to provide records should not run from the date 
the agency receives the institution's request, but should begin with 
the date the institution pays any applicable fee for the records. Other 
commenters objected to the regulations allowing the guaranty agencies 
to charge reasonable fees for providing records and requested that the 
Secretary strictly enforce the time deadlines on the guaranty agencies.
    Discussion: The Secretary understands that the 15-day deadline for 
providing records to institutions places a burden on guaranty agencies 
because most institutions submit their requests for documents at about 
the same time. However, section 435(a)(2)(A) of the HEA establishes a 
limited time in which an institution can submit an appeal of its loss 
of FFEL Program eligibility based on its default rate. Accordingly, the 
Secretary believes that it is necessary for the guaranty agency to 
provide the records within 15 working days in cases in which the 
institution may lose FFEL Program eligibility. There is no statutory 
deadline for an institution with a default rate over 20 percent but 
which is not subject to the loss of eligibility to file its appeal. 
Accordingly, the Secretary believes that guaranty agencies should have 
a limited amount of additional time to provide records to this latter 
group of institutions. The Secretary believes that this revision will 
allow guaranty agencies to better manage their obligations under the 
regulations, while a longer time period would unduly delay the appeal 
process.
    In addition, the Secretary notes that some guaranty agencies have 
taken the position that institutions must pay the fee for the records 
before the agency provides the records. The Secretary sees no reason to 
require guaranty agencies to supply records free of charge and 
previously authorized guaranty agencies to charge a reasonable fee not 
to exceed $10 per file. The Secretary has now amended the regulations 
to specifically authorize guaranty agencies to require payment of the 
fee before providing the documents. The guaranty agency must notify the 
institution of the amount of the fee within 15 working days of the 
receipt of the institution's request for records. If the institution 
pays the fee on time, the guaranty agency must provide the records to 
the institution within 15 working days and the institution has 30 
calendar days from the date it receives the records to file its appeal. 
The regulations have also been amended to provide that if the guaranty 
agency does not receive payment of the fee from the institution within 
15 working days of the date the institution received the notice of the 
amount of fee from the agency, the institution will be deemed to have 
waived its right to appeal. The Secretary reminds guaranty agencies 
that they should notify the institution of the amount of the fee 
through a method (such as a return receipt) that identifies the date 
the institution received the fee notice. The institution may also wish 
to use a similar delivery method that ensures that the guaranty agency 
receives the institution's payment on time.
    Changes: The regulations have been amended to allow the guaranty 
agencies up to 30 calendar days to provide loan servicing and 
collection records to an institution which is not subject to loss of 
FFEL eligibility based on default rates. The regulations have also been 
changed to require a guaranty agency which charges a fee to notify the 
institution of the amount due within 15 working days of the date the 
agency receives the institution's request and allow the guaranty agency 
to withhold records until the appropriate fee has been paid. The 
regulations also provide that if the guaranty agency does not receive 
payment from the institution within 15 working days of the date the 
institution received the guaranty agency's fee notice, the institution 
will be considered to have waived its appeal. The guaranty agency must 
notify the institution and the Secretary in writing of the apparent 
waiver. The Secretary will determine that an institution which does not 
pay a required fee has not met its burden of proof in regard to the 
loans insured by that guaranty agency unless the institution can first 
show that the agency's conclusion that the institution waived its 
appeal was incorrect. An institution could meet this requirement by 
presenting evidence, such as a return receipt, proving that the 
institution delivered timely payment to the guaranty agency.
    Comments: A number of commenters suggested changes in the method 
used to pick the sample of loans for which the institution will receive 
loan servicing and collection records. Some commenters suggested 
methods other than the method established in the regulations or 
recommended that the institution or an independent auditor be required 
to pick the sample.
    Discussion: The Secretary has not seen any problems with the 
standard for picking the sample included in the interim final 
regulations and is satisfied that the standard is appropriate. The 
Secretary issued a letter to all guaranty agencies in June 1994 
providing suggestions as to how the sample could be selected. An agency 
which follows that guidance will have complied with the regulatory 
requirements. However, the Secretary understands that there are other 
methods an agency may use to pick the sample that also satisfy the 
regulatory requirements, and the Secretary does not wish to bar the use 
of these other methods. Accordingly, the Secretary does not believe it 
is necessary to change the regulations at this time. As the Department 
develops more experience with the appeal process, however, the 
Secretary may consider issuing further guidance in this area.
    Changes: None.
    Comments: One commenter objected to the requirement that the 
guaranty agency provide a list of certain dates as well as provide the 
servicing and collection records. The commenter pointed out that this 
requirement forced the agency to review all of the records rather than 
just providing copies to the institution.
    Discussion: In light of the revised standard for reviewing appeals 
based on allegations of improper loan servicing and collection, the 
Secretary has determined that it is no longer necessary to require the 
guaranty agency to provide a list of certain dates for the loans in the 
sample.
    Changes: The requirement in Sec. 668.17(f)(3)(E)(2) that the agency 
provide a list of certain dates for the loans in the sample has been 
deleted.
    Comments: One commenter stated that institutions should not have to 
provide the Department with a list of the number of loans insured by 
each guaranty agency that were included in the calculation of the 
default rate since that information will be available from the National 
Student Loan Data System (NSLDS).
    Discussion: The Secretary needs the list of loans to fully evaluate 
an appeal. However, NSLDS is not fully operational at this time and the 
necessary information is not yet available from that system. Once NSLDS 
is fully operational, the Secretary may reconsider whether it is 
necessary for institutions to submit this information. In the meantime, 
however, the information is easily available to institutions and the 
Secretary believes that placing this minor burden on the many 
institutions which appeal will contribute to timely resolution of 
appeals.
    Changes: None.
    Comments: One commenter recommended that after the institution 
files its appeal with the Department, the guaranty agency should have 
an opportunity to respond to any allegations of improper loan servicing 
and collection before the Secretary makes a decision.
    Discussion: The Secretary does not believe that it is useful to 
provide the guaranty agency an opportunity to respond to allegations of 
improper loan servicing and collection as part of the cohort default 
rate appeal process. The guaranty agency is not a party to the 
proceeding but merely provides evidence necessary for the Secretary to 
make the decision. Participation by guaranty agencies in the cohort 
default rate appeal process would add needless complexity and delay. If 
the Department determines, based on evidence resulting from cohort 
default rate appeals, that a guaranty agency improperly received 
reinsurance, the agency will have an opportunity to respond to this 
determination prior to the imposition of any liabilities.
    Changes: None.
    Comments: One commenter objected to the requirement that an 
institution must submit ``substantial evidence'' to rebut the guaranty 
agency's records. Another commenter asked the Secretary to define 
``substantial evidence''.
    Discussion: The guaranty agency's records are the official records 
of the FFEL Program and are generally presumed to be accurate. To 
overcome this presumption, the Secretary believes it is appropriate to 
require the institution to present more than a mere minimum of 
evidence. ``Substantial evidence'' is a well defined term in 
administrative law. In general, ``substantial evidence'' is ``more than 
a mere scintilla. It means such relevant evidence as a reasonable mind 
might accept as adequate to support a conclusion.'' Consolidated Edison 
Co. v. NLRB, 305 U.S. 197, 229 (1938). The Secretary does not believe 
it is necessary to include this definition in the regulations.
    The alternative to this rule would require the Secretary to conduct 
a painstaking document-by-document review to validate guaranty agency 
records. The Secretary does not believe that such an effort would be 
productive or consistent with the objective of deciding appeals 
expeditiously.
    Changes: None.
    Comments: One commenter asked the Secretary to clarify that an 
institution cannot challenge its default rate in any other proceeding 
before the Department or a guaranty agency if it does not file a timely 
appeal. Another commenter objected to the provision limiting an 
institution to one appeal of a default rate. The commenter noted that 
the default rates are generally released during the busiest time of the 
year for institutions, and that institutions which are not faced with 
the loss of eligibility should have additional time to submit a notice 
of appeal to the guaranty agency.
    Discussion: The regulations clearly specify that an institution 
which does not timely appeal its cohort default rate cannot challenge 
that rate in any other proceeding before the Department. The Secretary 
does not believe it is appropriate to include a restriction on 
challenges in proceedings governed by guaranty agency rules. However, 
the Secretary encourages guaranty agencies to include such a 
restriction in their own rules. The Secretary further notes that the 
Department, not guaranty agencies, determine cohort default rates. 
Accordingly, a guaranty agency's claimed determination of an 
institution's default rate does not constitute a decision by the 
Secretary.
    The Secretary also believes that it is appropriate and necessary to 
limit institutions to one timely appeal opportunity for each default 
rate calculation. Multiple appeals by an institution place a 
significant additional burden on the Department and the guaranty 
agencies. The Secretary also does not deem it appropriate to allow 
institutions to delay certain appeals. Cohort default rates are 
released annually and expeditious consideration and resolution of 
appeals will maximize the period during which the institution has a 
definitive default rate. To provide institutions with multiple appeals 
would result in a substantial waste of resources and might encourage 
institutions to engage in strategies to delay final decisions regarding 
their rates.
    Changes: None.
    Comments: A number of commenters suggested changes to 
Sec. 668.17(h) which provides for pre-publication review of default 
rate data by institutions. One organization of guaranty agency 
representatives requested that the agency be given additional time to 
respond to requests for correction of information. This organization 
also suggested that the opportunity to correct data should only be 
provided to institutions with a most recent cohort default rate above 
20%.
    Discussion: The Secretary believes that the regulations provide 
sufficient time for a guaranty agency to respond to allegations of 
erroneous data by institutions. The pre-publication review process must 
be completed in sufficient time for the Secretary to incorporate 
corrections into the default rate calculations and issue rates at 
approximately the same time each year. The Secretary will, of course, 
monitor the progress of this system.
    At this time the Secretary has decided that it is not appropriate 
to restrict the right to pre-publication review to certain 
institutions. The Secretary will monitor the impact and benefit to 
institutions of pre-publication review to determine if changes are 
appropriate in the future.
    Changes: None.
    Comments: A few institutional commenters objected to the provision 
preventing an institution from alleging errors in the data unless the 
allegations had been asserted in the pre-publication review process. 
The institutions argued that new challenges should be permitted because 
new information might be developed. Another institution asked the 
Secretary to delete the statement that the time for filing a request 
for correction with the guaranty agency begins at the time the 
institution receives or should have received the information from the 
Secretary.
    Discussion: The Secretary strongly believes that it is vital to 
have a cohort default rate appeal process that results in timely, final 
appeal decisions by the Department. This goal has been frustrated in 
the past by institutions which constantly raise new objections to their 
default rate data after receiving unfavorable decisions on earlier 
complaints. In the vast majority of cases, these complaints do not 
justify significant further changes in the institution's default rate 
and appear designed simply to delay the final resolution of the 
institution's cohort default rate. Thus, the Secretary believes it is 
reasonable and appropriate to limit the institution to one opportunity 
to raise allegations of inaccurate data.
    The Secretary also believes that it is appropriate to start the 
process for challenging data with the date the institution received or 
should have received default rate information from the Secretary. In 
the past, some institutions have tried to delay their appeal deadlines 
by refusing to accept delivery of the default rate notification letter 
or have claimed after the fact that they did not receive it although 
the Secretary has a signed return receipt showing receipt. These 
regulations seek to eliminate the use of this tactic.
    Changes: None.
    Comments: An organization of guaranty agencies suggested that 
Sec. 668.17(h)(2) be modified to change the requirement that an 
institution provide the guaranty agency with ``any evidence'' it 
believes supports its contention that the default rate data are 
incorrect. The organization recommended the deletion of the word 
``any'' to clarify that the institution must submit evidence to support 
its claim, rather than simply making the allegation. The organization 
also asked the Secretary to address the treatment of situations where 
an institution submits questionable documentation to the guaranty 
agency.
    Discussion: The Secretary agrees with the commenter's suggestion 
that the regulation be modified to require an institution to submit 
evidence to support a claim that the default rate data are inaccurate.
    The Secretary also agrees that the issue of questionable 
documentation needs to be addressed. The guaranty agencies and the 
Secretary share the responsibility to identify questionable 
information. To ensure that issues of questionable documentation are 
addressed, the Secretary has modified Sec. 668.17(h)(5) to clarify that 
the changes to default rate data will only be made when the error is 
confirmed by the guaranty agency and approved by the Department. This 
change clarifies the Secretary's authority to question a change 
accepted by the guaranty agency that may have been based on 
questionable documentation. In any cases in which the Secretary or 
guaranty agency identifies questionable documentation, the Secretary or 
the agency will notify appropriate investigative offices and request 
appropriate action.
    Changes: The word ``any'' has been deleted from Sec. 668.17(h)(2). 
In addition, Sec. 668.17(h)(5) has been changed to provide that the 
information used to calculate default rates will be changed to reflect 
allegations of error made by institutions which are confirmed by the 
guaranty agency and accepted by the Secretary.
    Comments: One commenter requested that the Department not publish 
the default rates for lenders, holders and guaranty agencies until 
those organizations have an opportunity for pre-publication review of 
the data.
    Discussion: The Secretary does not believe that lenders, holders 
and guaranty agencies need pre-publication review of the default rate 
data. Congress provided for pre-publication error correction for 
institutions only, but made no such provision for lenders, holders and 
guaranty agencies. Moreover, most of the information regarding default 
rates comes directly from those sources and should be correct. In 
addition, although the HEA requires the publication of these rates for 
purposes of public information, there is no loss of eligibility related 
to those rates. Congress has provided the opportunity for institutions 
to review the data because of certain consequences resulting from those 
calculations. Lenders, loan holders and guaranty agencies do not have a 
similar need for protection.
    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 contents of the final 
regulations are those resulting from statutory requirements and those 
determined by the Secretary to be necessary for administering the FFEL 
Program effectively and efficiently. Burdens specifically associated 
with information requirements, if any, are identified and explained 
elsewhere in this preamble under the heading Paperwork Reduction Act of 
1980.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, the Secretary has 
determined that the benefits of the final 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.

Paperwork Reduction Act of 1980

    Sections 668.17(f) and (h) contain information collection 
requirements. As required by the Paperwork Reduction Act of 1980, the 
Department of Education will submit a copy of these sections to the 
Office of Management and Budget (OMB) for its review. (44 U.S.C. 
3504(h)).
    These regulations affect institutions of higher education and 
guaranty agencies that participate in the Federal Family Education Loan 
Program. The Secretary needs the information to properly administer 
certain aspects of that program. The collection and reporting burden 
for the 300 institutions which challenge the calculation of their 
cohort default rates under these provisions is expected to increase by 
15,600 hours. The collection and reporting burden for the 46 guaranty 
agencies which must respond to the institutions' requests under these 
regulations is expected to increase by 2,576 hours.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 3002, New Executive 
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok. 
Comments on the burden estimate must be received on or before December 
29, 1994.

List of Subjects in 34 CFR Part 668

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

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

    Dated: November 18, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary amends part 668 of title 34 of the Code of Federal 
Regulations as follows:
    The authority citation for part 668 continues to read as follows:

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

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


Sec. 668.17  Default Reduction Measures

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

[FR Doc. 94-29037 Filed 11-28-94; 8:45 am]
BILLING CODE 4000-01-P