[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Proposed Rules]
[Pages 49382-49388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24013]



[[Page 49381]]


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Part II





Department of Education





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34 CFR Part 682



Federal Family Education Loan (FFEL) Program; Proposed Rule

  Federal Register / Vol. 61, No. 183 / Thursday, September 19, 1996 / 
Proposed Rules  

[[Page 49382]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC33


Federal Family Education Loan (FFEL) Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Family Education 
Loan (FFEL) Program regulations. These proposed regulations are needed 
to implement changes to the Higher Education Act of 1965, as amended 
(HEA) giving the Secretary additional powers to assure the safety of 
Federal reserve funds and assets maintained by guaranty agencies 
insuring educational loans under the FFEL Program pursuant to 
agreements with the Secretary. The proposed regulations would establish 
appropriate conflicts of interest restrictions for guaranty agency 
staff and affiliated individuals and would prohibit agencies from using 
Federal reserve funds for certain purposes.

DATES: Comments must be received on or before November 4, 1996.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Ms. Pamela A. Moran, Chief, Loans Branch, Policy 
Development Division, Student Financial Assistance Programs, U.S. 
Department of Education, 600 Independence Avenue, SW., Room 3053, 
Regional Office Building 3, Washington, DC 20202-5449. Comments may 
also be sent through the internet to ``[email protected]''.
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges the commenters to clearly 
identify the specific section or sections of the regulations that each 
comment addresses and to provide comments in the same order as those 
sections appear in the regulations. The Department has found it very 
helpful if commenters who wish to modify a proposed provision submit 
their version of how they believe the specific regulatory provision 
should read.
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act section of this preamble. A copy of those 
comments may also be sent to the Department representative named in 
this section.

FOR FURTHER INFORMATION CONTACT: Mr. George Harris, Senior Policy 
Specialist, U.S. Department of Education, 600 Independence Avenue, SW., 
Room 3045, Regional Office Building 3, Washington, DC 20202-5449. 
Telephone: (202) 708-8242. Individuals who use a telecommunications 
device for the deaf (TDD) may call the Federal Information Relay 
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern 
time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

    The FFEL Program regulations (34 CFR Part 682) govern the Federal 
Stafford Loan Program, the Federal Supplemental Loans for Students 
Program (no longer active), the Federal PLUS Program, and the Federal 
Consolidation Loan Program (formerly collectively known as the 
Guaranteed Student Loan Programs). A guaranty agency is a State or 
private nonprofit entity that performs certain administrative roles in 
the FFEL Program. The Department's regulations require the guaranty 
agency to deposit all funds received in connection with its FFEL 
guaranty activities into a reserve fund to be used solely for its 
activities as a guaranty agency under the FFEL Program. The regulations 
also specify that the reserve fund may only be used to pay certain 
costs associated with those programmatic activities. See 34 CFR 
682.410(a). Under section 422(g) of the HEA, the reserve funds and 
assets of the guaranty agencies are the property of the United States.
    In light of its role in the program and its responsibility for 
holding and protecting Federal funds, the guaranty agency's role is 
best characterized as that of a trustee holding money for the benefit 
of another. See Education Assistance Corp. v. Cavazos, 902 F.2d 617, 
627 (8th Cir. 1990), cert. denied 111 S.Ct. 246 (1990); Ohio Student 
Loan Com'n v. Cavazos, 900 F.2d 894 (6th Cir. 1990), cert. denied 111 
S.Ct. 245 (1990); Student Loan Fund of Idaho v. Riley, Case No. CV 94-
0413-S-LMB (D.Ida, Memo. Decision, Sept. 14, 1995) at 17-19. Under 
these circumstances, a guaranty agency is responsible for acting as a 
fiduciary responsible for protecting the interests of the Department 
and the taxpayers in the reserve funds.
    Over the years, some guaranty agencies, both State and private 
nonprofit, have become involved in activities outside of their FFEL 
guaranty activities. Since the FFEL Program reserve fund may be used 
only for FFEL guaranty activities, any other activities should have 
been funded exclusively from sources unrelated to the FFEL guaranty 
activities. These sources may include specifically designated State 
appropriations or private capital raised independently of the agency's 
FFEL guaranty activities. If a guaranty agency has consistently funded 
and maintained these non-FFEL guaranty funds separate from its reserve 
funds, the separate funds are not covered by the restrictions in the 
Department's regulations. These proposed regulations cover only 
expenditures made from the reserve fund.
    The Secretary understands that some guaranty agencies involved in 
separately funded non-FFEL guaranty activities use personnel and 
resources to perform both the activities of the FFEL guaranty agency 
and other activities. It is vital for the guaranty agency to establish 
and comply with a plan for allocating costs appropriately between the 
FFEL guaranty activities and other activities to ensure that Federal 
funds are not subsidizing non-FFEL guaranty activity. Thus, under 
Sec. 682.418(c) in these proposed regulations, each guaranty agency 
that shares costs with any other program, agency, or organization must 
develop a cost allocation plan consistent with the requirements 
described in OMB Circular A-87 and maintain the plan and related 
supporting documentation for audit. A guaranty agency would be required 
to submit its cost allocation plans for the Secretary's approval if it 
is specifically requested to do so by the Secretary.
    The Secretary is also aware that some guaranty agencies have 
contracted with other entities associated with the guaranty agency 
(through a shared holding company-like corporate structure or 
interlocking governing boards or officers) for services and goods. 
These arrangements raise the possibility of self-dealing and create 
concerns that the guaranty agency or its contracting officials may have 
a conflict of interest in establishing and monitoring the contracting 
arrangement. These proposed regulations address these issues.
    In developing these proposed regulations, the Secretary has 
attempted to modify various governmentwide rules to fit the unique role 
and structure of guaranty agencies. As noted earlier, guaranty agencies 
receive and hold Federal funds to pay certain FFEL Program costs and 
expenses. They are trustees for the Federal Government and are expected 
to comply with fiduciary standards. Although guaranty agencies are not 
Federal contractors, the Secretary did consider whether, to protect the 
Federal fiscal interest, the Secretary should require agencies to 
conform to the strict rules applicable to government contractors in the 
areas of

[[Page 49383]]

permissible costs, required cost allocation, and conflicts of interest. 
However, the Secretary believes that it is not yet necessary to require 
a strict application of those rules to the guaranty agencies. Instead, 
the Secretary is proposing in this NPRM a more limited approach that is 
tailored to address the specific issue of reserve funds and to clarify 
ambiguities that have led to some of the concerns identified 
previously.
    Prior to the publication of these proposed regulations, 
representatives of the Department met in Washington, DC on July 22-23, 
1996 with representatives of guaranty agencies, the National Council of 
Higher Education Loan Programs, Inc., and other interested parties from 
various sectors of the FFEL and student aid community for the purpose 
of learning their views on the direction that the proposed regulations 
should take. Although any regulations the Secretary proposes pursuant 
to section 422(g)(1)(C) of the HEA to prevent the ``misapplication, 
misuse, or improper expenditure of reserve funds and assets'' are not 
required to be developed under a formal negotiated rulemaking process, 
the Department generally has found consultative dialogue with the FFEL 
industry to be helpful. In this respect, the parties at the 
consultation meeting provided useful information concerning some of the 
major points that the Department would need to take into consideration 
while drafting proposed regulations designed to assure the safety of 
reserve funds and assets maintained by guaranty agencies in the FFEL 
Program.

Proposed Regulatory Changes

    The Secretary proposes to amend the following sections of the 
regulations:

Section 682.401  Basic Program Agreement

    These regulations codify, in Sec. 682.401(b)(28), the Department's 
existing policy concerning the conversion of a guaranty agency's loan 
records system if an agency plans to place its new guarantees or 
convert the records relating to its existing guaranty portfolio to an 
information or computer system that is owned by or otherwise under the 
control of an entity that is different than the party that owns or 
controls the agency's existing information or computer system.

Section 682.410  Fiscal, Administrative, and Enforcement Requirements

    Section 682.410(a)(2)--The Secretary proposes to clarify in 
Sec. 682.410(a)(2)(i) that a guaranty agency may use the reserve fund 
to pay an insurance claim only if the claim would meet the Federal 
reinsurance requirements specified in Sec. 682.406 at the time the 
agency pays the claim.
    If a guaranty agency fails to comply with Federal reinsurance 
requirements to the extent that the agency's failure caused a lender's 
properly serviced and submitted claim to be considered an ineligible 
claim for purposes of allowing the agency to receive a Federal 
reinsurance payment from the Secretary, the FFEL reserve fund may not 
be used by the agency to pay the claim. However, the Secretary expects 
that the agency would comply with any contractual agreement it had with 
the lender that would support the lender's demand that the agency use 
or obtain non-FFEL funding to honor the terms of the agency's insurance 
agreement with the lender.
    Section 682.410(a)(11)--The proposed regulations add a definition 
of the term ``reasonable cost'' that would apply to guaranty agency 
reserve fund expenditures.
    Section 682.410(b)(11)--The Secretary proposes to amend the FFEL 
Program regulations to require guaranty agencies to prohibit conflicts 
of interest by guaranty agency staff and affiliated individuals.
    On November 29, 1993, the Director of the Office of Management and 
Budget published OMB Circular A-110 (``Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and other Non-Profit Organizations''). This 
circular contains standards for obtaining consistency and uniformity 
among Federal agencies in the administration of grants to, and 
agreements with, institutions of higher education, hospitals, and other 
nonprofit organizations. OMB Circular A-110 is issued under the 
authority of 31 U.S.C. 503 (the Chief Financial Officers Act), 31 
U.S.C. 1111, 41 U.S.C. 405 (the Office of Federal Procurement Policy 
Act), Reorganization Plan No. 2 of 1970, and E.O. 11541 (``Prescribing 
the Duties of the Office of Management and Budget and the Domestic 
Policy Council in the Executive Office of the President'').
    After reviewing OMB Circular A-110, the Secretary has determined 
that, to maintain program integrity, the Secretary must issue 
regulations restricting actual or potential conflicts of interest among 
guaranty agencies and their personnel. In light of past reviews finding 
significant problems resulting from affiliations between guaranty 
agencies and other FFEL Program participants, such as secondary markets 
and lender servicers, the Secretary initially considered a strict 
prohibition on any connection between guaranty agencies and those other 
organizations. A ``bright line prohibition'' would be easier for the 
Secretary to monitor and would provide the most assurance of program 
integrity. However, given the common and longstanding affiliations in 
the FFEL Program and wishing to minimize the potentially disruptive 
effect on the continuation of loans to students and parents that could 
result from a total divestiture of all guaranty agency affiliations, 
the Secretary is proposing a more conservative approach to determine if 
that approach would achieve the goal of preventing conflicts of 
interest involving guaranty agencies and their personnel. Therefore, 
these proposed regulations would require the adoption by guaranty 
agencies of appropriate procedures and policies to require--(a) 
increased auditing of the agency's claims review process; (b) 
independent reporting lines for agency staff involved in the claim 
review function; and (c) sufficient internal controls to ensure that 
staff involved in originating and servicing loans are not involved in 
the claims review process. In addition, under the proposed ``prohibited 
uses of the reserve fund'' section in Sec. 682.418(a), further 
protection of the Federal fiscal interest would be provided by the 
Secretary's proposal to prohibit an agency from making any payment for 
goods, property, or services provided by an affiliated organization 
that exceeds the affiliated organization's actual and reasonable cost 
of providing those goods, property, or services, unless the guaranty 
agency demonstrates to the Secretary, and receives the Secretary's 
concurrence, that such a payment is in the Federal fiscal interest. 
However, in light of the previous discussion of the ``bright line 
prohibition,'' the Secretary requests comment on that approach.
    When the Department's Inspector General reviewed the management 
structures and affiliations at 12 selected guaranty agencies that held 
$59 billion in loan guarantees for the period ending September 30, 
1992, the Inspector General concluded that those guaranty agencies had 
potential conflicts of interest involving a significant portion of 
their loan portfolios. At the beginning of fiscal year 1996, the 
original principal amount of outstanding loans insured by guaranty 
agencies exceeded $123 billion. Based on the Inspector General's 
previous analysis, this suggests that a substantial portion of the loan 
portfolios held by all agencies may continue to be

[[Page 49384]]

at risk because of guaranty agency organizational structures and 
affiliations that have caused real or potential conflicts of interest. 
Therefore, given the magnitude of the Federal interest that guaranty 
agencies administer under their agreements with the Secretary, the 
Secretary has decided to couple the protections proposed in these 
regulations with a provision stating that the Secretary may impose more 
stringent requirements, including requiring the agency's total 
divestiture of any interest in an affiliated organization, if the 
agency fails to comply with these requirements or there is evidence of 
a compromised claims review process. The Secretary expects that the 
more limited restrictions will eliminate the need for stricter 
measures. However, public comment is solicited as to whether a strict 
prohibition against an agency having any affiliation with another 
organization would be more appropriate at this time.
    These proposed regulations are intended to avoid the potential 
misuse of a guaranty agency's reserve fund if the guaranty agency 
contracts for goods, property, or services with an organization with 
which it is affiliated or with which it has overlapping personnel or 
financial interests. As the Secretary has previously stated, ``it is 
already well understood that * * * [existing regulations were not] 
meant to permit excessive or unreasonable expenditures.'' 59 FR 41184-
85 (August 10, 1994). This current understanding would be made explicit 
in proposed Sec. 682.418(a)(1). In addition, under existing law, the 
guaranty agency and its personnel must act consistently with their 
fiduciary obligations in all procurement activities. Nevertheless, the 
Secretary is concerned that a guaranty agency may have an incentive to 
use its reserve fund to pay unreasonable prices and fees for supplies, 
equipment, property, and services provided by an affiliated 
organization or one with overlapping personnel or financial interests, 
and the Secretary is now proposing the requirement of specific conflict 
of interest codes to deal with this potential for abuse.
    If there are overlapping personnel or financial interests or both 
between the guaranty agency and another party to a procurement, it is 
possible that decisions concerning the appropriate use of the guaranty 
agency's reserve fund could be improperly influenced by prospects of 
personal gain resulting from the guaranty agency's payment of 
unreasonable prices and fees. In this instance, the interests of 
borrowers and taxpayers would be relegated to a secondary 
consideration. The proposed conflict of interest codes address this 
potential influence by prohibiting guaranty agency personnel from 
participating in the procurement process if they have a real or 
potential conflict of interest.
    Currently, in the case of an affiliation between a guaranty agency 
and the party supplying goods, property, or services to the agency, the 
existing fiduciary obligations of guaranty agencies and their personnel 
preclude them from delegating to affiliated organizations functions 
previously performed by the guaranty agency itself, unless the 
affiliated organization provides those goods, property, or services to 
the guaranty agency at its actual cost. Although no occasion has yet 
come to the Secretary's attention in which the delegated function had 
never been performed by the guaranty agency itself, similar fiduciary 
principles would also be applicable to this latter situation. The 
proposed regulations would codify the effect of these existing 
fiduciary requirements by prohibiting a guaranty agency from making any 
payments to affiliated organizations for goods, property, or services 
if those payments exceed the affiliated organization's actual and 
reasonable cost of providing them. Since there may be exceptional 
circumstances in which a compelling reason justifies payments that may 
appear to exceed the reasonable costs for supplies, equipment, 
property, and services provided to a guaranty agency by an affiliate, a 
guaranty agency may demonstrate to the Secretary, on a case-by-case 
basis, that such a payment would be in the Federal fiscal interest. If 
the Secretary agrees with the guaranty agency's proposed payment, the 
Secretary would notify the guaranty agency that it may use its reserve 
fund to pay for the goods, property, or services in question.
    The proposed regulations generally follow the governmentwide codes 
of conduct provisions established in OMB Circular A-110. The Secretary 
has determined that a guaranty agency administered under the authority 
of a State as a political subdivision or agency of the State is subject 
to oversight pursuant to State codes of conduct rules affecting 
personnel and contracting procedures. In the Secretary's view, the 
various State codes of conduct laws provide protection of the Federal 
fiscal interest that would meet some of the requirements of the 
conflict of interest provisions proposed in these regulations and 
provide special protection of the Federal fiscal interest unavailable 
in other agencies. Therefore, for purposes of these proposed 
regulations, a State guaranty agency whose employees are covered under 
codes of conduct established by State law would be exempted from the 
general prohibition proposed in Sec. 682.410(b)(11)(i)(A) against 
agency employees, officers, trustees, or agents being engaged in the 
selection, award, and administration of contracts or agreements. 
However, a State guaranty agency would not be exempted from either the 
specific provisions proposed in Sec. 682.410(b)(11)(i)(B) relating to 
claims processing or the prohibition proposed in 
Sec. 682.410(b)(11)(i)(C) relating to the solicitation or acceptance of 
gratuities, favors, or anything of monetary value from contractors or 
parties to agreements. This exemption for States is designed to tailor 
the regulations to only those situations in which Federal action is 
necessary.

Section 682.418  Prohibited Uses of Reserve Fund Assets

    The Secretary proposes to add a new Sec. 682.418 to specify certain 
uses of a guaranty agency's reserve fund that are prohibited.
    The Secretary, Congress, and other parties have been concerned 
about the improper uses of the Federal reserve funds by guaranty 
agencies. In the course of conducting program reviews of guaranty 
agencies, the Department has found that some guaranty agencies have 
used the reserve fund, which is intended to be used for the benefit of 
students and taxpayers, to pay excessive compensation to their officers 
and employees or have spent excessive amounts of the reserve fund on 
buildings or equipment and other assets. The Department's reviewers 
have also found that some guaranty agencies frequently use the reserve 
fund for costs of entertaining school personnel and other individuals 
for purposes unrelated to the fulfillment of the agency's 
responsibilities under the HEA. The use of Federal funds to pay for a 
guaranty agency's hospitality suite or entertainment at functions such 
as school association meetings clearly is not the type of expense for 
which the reserve fund is intended, nor should the assets of the 
reserve fund be used by the agency to pay its legal expenses in 
contesting the Secretary's efforts to enforce regulatory or statutory 
requirements against the agency. The concerns that Congress had about 
these abuses were instrumental in its decision to legislate in this 
area. The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66) 
was enacted on August 10, 1993, and added section 422(g)(1)(C) of the 
HEA, which authorized the Secretary to direct guaranty agencies to

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cease and desist from any misapplication, misuse, or improper 
expenditure of reserve funds and assets.
    To implement this requirement, the Secretary has determined that it 
is appropriate to issue regulations governing cost principles and cost 
allocation for guaranty agencies and identifying prohibited costs that 
a guaranty agency may not charge to the reserve fund under the FFEL 
Program. As explained in the following paragraphs, under existing 
regulations the Secretary has expected guaranty agencies to follow, as 
appropriate, OMB Circular A-87 (``Cost Principles for State and Local 
Governments'') and OMB Circular A-122 (``Cost Principles for Nonprofit 
Organizations''). However, the Secretary has determined that the OMB 
circulars do not fully address the issues raised by the activities of 
guaranty agencies. Accordingly, the Secretary has decided to issue 
these proposed regulations based in large measure on the OMB circulars.
    Currently, under Sec. 682.410(b)(1)(i), a guaranty agency that is a 
State agency must have an audit conducted in accordance with 31 U.S.C. 
chapter 75 (the ``Single Audit Act''). Under the Single Audit Act, the 
Director of the Office of Management and Budget has issued OMB Circular 
A-128 (``Audits of State and Local Governments''), which requires the 
auditor to determine that amounts claimed are determined in accordance 
with OMB Circular A-87. Thus, while there is no explicit provision in 
the Department's regulations requiring a State guaranty agency to 
follow the cost principles of OMB Circular A-87, a failure to do so 
could result in an audit finding that the agency violated the 
Department's regulations by failing to comply with these principles.
    With regard to nonprofit guaranty agencies, Sec. 682.410(b)(1)(ii) 
currently requires that an audit be conducted in accordance with OMB 
Circular A-133 (``Audits of Institutions of Higher Education and other 
Non-Profit Institutions''). OMB Circular A-133 requires the auditor to 
determine that amounts claimed were determined in accordance with OMB 
Circular A-122. Some guaranty agencies have misinterpreted the language 
in OMB Circular A-133 that states ``* * * the auditor shall determine 
whether * * * amounts claimed or used for matching were determined in 
accordance with * * * Circular A-122.'' These guaranty agencies 
interpreted this to mean that the only funds covered by the circular 
are matching funds. The Secretary believes that such an interpretation 
is incorrect. The definition of Federal financial assistance in 
Circular A-133 does not limit that assistance to matching funds.
    The proposed regulations generally follow existing governmentwide 
cost principles established in OMB Circulars A-87 and A-122. The 
Secretary has determined, however, that to ensure the efficient and 
effective operation of the FFEL Program, some cost items prohibited 
under those OMB circulars should be allowable under the FFEL Program, 
and some limits specific to the guaranty agencies should be imposed. 
OMB Circular A-122 also includes definitions of items of cost that the 
Secretary believes should apply to guaranty agency operations in these 
proposed regulations.

Executive Order 12866

1. Potential Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order, the Secretary has 
assessed the potential costs and benefits of this proposed regulatory 
action.
    The potential costs associated with the proposed 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, if any, are identified and 
explained elsewhere in this preamble under the heading of Paperwork 
Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed 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.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the title IV, HEA programs.

Summary of Potential Costs and Benefits

    The potential costs and benefits of these proposed regulations are 
discussed elsewhere in this preamble under the headings Proposed 
Regulatory Changes and Paperwork Reduction Act of 1995.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following: (1) Are the requirements in the proposed regulations 
clearly stated? (2) Do the proposed regulations contain technical terms 
or other wording that interferes with their clarity? (3) Does the 
format of the proposed regulations (grouping and order of sections, use 
of headings, paragraphing, etc.) aid or reduce their clarity? Would the 
proposed regulations be easier to understand if they were divided into 
more (but shorter) sections? (A section is preceded by the symbol 
``Sec. '' and a numbered heading; for example, Sec. 682.410 Fiscal, 
administrative, and enforcement requirements.) (4) Is the description 
of the proposed regulations in the ``Supplementary Information'' 
section of this preamble helpful in understanding the proposed 
regulations? How could this description be more helpful in making the 
proposed regulations easier to understand? (5) What else could the 
Department do to make the proposed regulations easier to understand?
    A copy of any comments that concern how the Department could make 
these proposed regulations easier to understand should be sent to 
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 
Education, 600 Independence Avenue, S.W. (Room 5100, FB-10B), 
Washington, DC 20202-2241.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities.
    Guaranty agencies are financial organizations. According to the 
U.S. Small Business Administration Size Standards, financial 
organizations with less than $100 million in assets are classified as 
small entities. All guaranty agencies have at least $100 million in 
assets. Therefore, there are no small entities affected by these 
proposed regulations.

Paperwork Reduction Act of 1995

    Section 682.418 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the Department of Education has submitted a copy of this

[[Page 49386]]

section to the Office of Management and Budget (OMB) for its review.
    Collection of Information: Federal Family Education Loan Program. 
Documentation and notification requirements.
    Guaranty agencies receive payments from the Secretary and others 
for exclusive use in the FFEL Program, and the accumulated surplus of 
those payments over permissible expenditures is Federal property to be 
returned to the Secretary upon the guaranty agency's termination or 
under certain other circumstances. The Secretary needs and uses the 
information to determine whether the guaranty agencies comply with the 
requirements for safeguarding this property and the limitations on its 
use.
    Section 682.418(c) of these regulations requires a guaranty agency 
that shares costs with any other program, agency, or organization to 
develop a cost allocation plan consistent with the requirements 
described in OMB Circular A-87 and to maintain the plan and related 
supporting documentation for audit. A guaranty agency is not required 
to submit its cost allocation plans for the Secretary's approval unless 
it is specifically requested to do so by the Secretary. There is no 
requirement to annually report this information to the Secretary. 
However, the annual recordkeeping burden required by the development of 
an agency's cost allocation plan and the maintenance of required 
supporting documentation for audit is estimated to be one hour for each 
of the agencies that would be subject to this requirement. There are 36 
existing guaranty agencies. Approximately 25 of those agencies share 
costs with other programs, agencies, or organizations. The Secretary 
estimates that it will take each of the 25 agencies approximately 1 
hour to develop its cost allocation plan, resulting in a collective 
annual recordkeeping burden of 25 hours for all of those agencies. The 
maintenance of documentation supporting an agency's shared costs is 
already required under existing regulations in Sec. 682.410(a); thus, 
these proposed regulations add no new burden in that area.
    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 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for U.S. 
Department of Education.
    The Department considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have practical use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this documentation in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in room 3042, Regional Office Building 3, 7th and D Streets, 
SW., Washington, DC, between the hours of 8:30 a.m. and 4:00 p.m., 
Monday through Friday of each week except Federal holidays.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.

List of Subjects in 34 CFR Part 682

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

    Dated: September 12, 1996.
Richard W. Riley,
Secretary of Education.

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

    The Secretary proposes to amend title 34 of the Code of Federal 
Regulations by revising Part 682 as follows:

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

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

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

    2. Section 682.401 is amended by adding a new paragraph (b)(28) to 
read as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (28) Change in agency's records system. The agency shall provide 
written notification to the Secretary 30 days prior to placing its new 
guarantees or converting the records relating to its existing guaranty 
portfolio to an information or computer system that is owned by or 
otherwise under the control of an entity that is different than the 
party that owns or controls the agency's existing information or 
computer system. If the agency is soliciting bids from third parties 
with respect to a proposed conversion, the agency shall provide written 
notice to the Secretary as soon as the solicitation begins. The 
notifications described in this paragraph must include a concise 
description of the agency's conversion project and the actual or 
estimated cost of the project.
* * * * *
    3. Section 682.410 is amended by revising the introductory text in 
paragraph (a)(2), revising paragraphs (a)(2) (i), (ii), and (x), and 
adding new paragraphs (a)(11)(iii) and (b)(11) to read as follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

    (a) * * *
    (2) Uses of reserve fund assets. A guaranty agency may not use the 
assets of the reserve fund established under paragraph (a)(1) of this 
section to pay costs prohibited under Sec. 682.418, but shall use the 
assets of the reserve fund to pay only--
    (i) Insurance claims that meet the requirements of Sec. 682.406 at 
the time the claims are paid;
    (ii) Costs that are reasonable, as defined under 
Sec. 682.410(a)(11)(iii), and that are ordinary and necessary for the

[[Page 49387]]

agency to fulfill its responsibilities under the Act, including costs 
of collecting loans, providing preclaims assistance, monitoring 
enrollment and repayment status, and carrying out any other guaranty 
activities. Those costs must be--
    (A) Allocable to the FFEL Program;
    (B) Not prohibited under applicable Federal, State, or local laws 
or regulations;
    (C) In compliance with any limitations or exclusions contained in 
the regulations in this part, Federal laws, terms and conditions of the 
agency's agreements with the Secretary, or other governing regulations 
as to types or amounts of cost items;
    (D) Not higher than the agency would incur under established 
policies, regulations, and procedures that apply to any non-Federal 
activities of the guaranty agency;
    (E) Not included as a cost or used to meet cost sharing or matching 
requirements of any other federally supported activity, except as 
specifically provided by Federal law;
    (F) The net of all applicable credits; and
    (G) Documented in accordance with applicable legal and accounting 
standards;
* * * * *
    (x) Any other costs or payments ordinary and necessary to perform 
functions directly related to the agency's responsibilities under the 
Act and for their proper and efficient administration;
* * * * *
    (11) * * *
    (iii) Reasonable cost means a cost that, in its nature and amount, 
does not exceed that which would be incurred by a prudent person under 
the circumstances prevailing at the time the decision was made to incur 
the cost. The burden of proof is upon the guaranty agency, as a 
fiduciary under its agreements with the Secretary, to establish that 
costs are reasonable. In determining reasonableness of a given cost, 
consideration must be given to--
    (A) Whether the cost is of a type generally recognized as ordinary 
and necessary for the proper and efficient performance and 
administration of the guaranty agency's responsibilities under the Act;
    (B) The restraints or requirements imposed by factors such as sound 
business practices, arms-length bargaining, Federal, State, and other 
laws and regulations, and the terms and conditions of the guaranty 
agency's agreements with the Secretary; and
    (C) Market prices of comparable goods or services.
* * * * *
    (b) * * *
    (11) Conflicts of interest. (i) A guaranty agency shall maintain 
and enforce written standards of conduct governing the performance of 
its employees, officers, trustees, and agents engaged in the selection, 
award, and administration of contracts or agreements. The standards of 
conduct must, at a minimum, require disclosure of financial or other 
interests and must mandate disinterested decisionmaking. The standards 
must provide for appropriate disciplinary actions to be applied for 
violations of the standards by employees, officers, trustees, or agents 
of the guaranty agency, and must include provisions to--
    (A) Prohibit any employee, officer, trustee, or agent participating 
in the selection, award, or decisionmaking as to the administration of 
a contract or agreement supported by the reserve fund described in 
paragraph (a) of this section if that participation would create a 
conflict of interest. Such a conflict would arise if the employee, 
officer, trustee, or agent, or any member of his or her immediate 
family, his or her partner, or an organization that employs or is about 
to employ any of those parties has a financial or ownership interest in 
the organization selected for an award or would benefit from the 
decision made in the administration of the contract or agreement. The 
prohibitions described in this paragraph do not apply to employees of a 
State agency covered by codes of conduct established under State law;
    (B) Ensure sufficient separation of responsibility and authority 
between its lender claims processing as a guaranty agency and its 
lending or loan servicing activities or both within the guaranty agency 
or between that agency and one or more affiliates, including 
independence in direct reporting requirements and such management and 
systems controls as may be necessary to demonstrate, in the independent 
audit required under Sec. 682.410(b)(1), that claims filed by another 
arm of the guaranty agency or by an affiliate of that agency receive no 
more favorable treatment than that accorded the claims filed by a 
lender or servicer that is not an affiliate or part of the guaranty 
agency; and
    (C) Prohibit the employees, officers, trustees, and agents of the 
guaranty agency from soliciting or accepting gratuities, favors, or 
anything of monetary value from contractors or parties to agreements, 
except that nominal and unsolicited gratuities, favors, or items may be 
accepted.
    (ii) Guaranty agency restructuring. If the Secretary determines 
that action is necessary to protect the Federal fiscal interest because 
of an agency's failure to meet the requirements of 
Sec. 682.410(b)(11)(i), the Secretary may require the agency to comply 
with any additional measures that the Secretary believes are 
appropriate, including the total divestiture of the agency's non-FFEL 
functions and the agency's interests in any affiliated organization.
* * * * *
    4. A new Sec. 682.418 is added to subpart D to read as follows:


Sec. 682.418  Prohibited uses of reserve fund assets.

    (a) General. (1) A guaranty agency may not use the assets of the 
reserve fund established under Sec. 682.410(a)(1) to pay costs 
prohibited under paragraph (b) of this section and may not use the 
assets of the reserve fund to pay for goods, property, or services 
provided by an affiliated organization that would exceed the affiliated 
organization's actual and reasonable cost of providing those goods, 
property, or services, unless the agency demonstrates to the Secretary, 
and receives the Secretary's concurrence, that such a payment would be 
in the Federal fiscal interest.
    (2) All guaranty agency contracts with respect to its reserve fund 
or assets must include a provision stating that the contract is 
terminable by the Secretary upon 30 days notice to the contracting 
parties if the Secretary determines that the contract includes an 
impermissible transfer of the reserve fund or assets or is otherwise 
inconsistent with the terms and purposes of section 422 of the HEA.
    (b) Prohibited uses of reserve fund assets. A guaranty agency may 
use the assets of the reserve fund established under Sec. 682.410(a)(1) 
only as prescribed in Sec. 682.410(a)(2). Uses of the reserve fund that 
are not allowable under Sec. 682.410(a)(2) include, but are not limited 
to--
    (1) Advertising, either directly or through a third party, except 
for those advertising costs solely related to recruitment of personnel, 
procurement of goods or services, or disposal of surplus materials;
    (2) Compensation for personnel services, including wages, salaries, 
pension plan costs, post-retirement health benefits, employee life 
insurance, unemployment benefit plans, severance pay, costs of leave, 
and other benefits, to the extent that total compensation to an 
employee, officer, trustee, or agent of the guaranty agency is not 
reasonable

[[Page 49388]]

for the services rendered. Compensation is considered reasonable to the 
extent that it is comparable to that paid in the labor market in which 
the guaranty agency competes for the kind of employees involved. Costs 
that are otherwise unallowable may not be considered allowable solely 
on the basis that they constitute personnel compensation. In no case 
may the reserve fund be used to pay any compensation, whether 
calculated on an hourly basis or otherwise, that would be 
proportionately greater than 118.05 percent of the total salary paid 
(as calculated on an hourly basis) under section 5312 of title 5, 
United States Code (relating to Level I of the Executive Schedule).
    (3) Contributions and donations, including cash, property, and 
services, by the guaranty agency to others, regardless of the recipient 
or purpose, unless pursuant to written authorization from the 
Secretary;
    (4) Entertainment, including amusement, diversion, hospitality 
suites, and social activities, and any costs associated with those 
activities, such as tickets to shows or sports events, meals, alcoholic 
beverages, lodging, rentals, transportation, and gratuities;
    (5) Fines, penalties, damages, and other settlements resulting from 
violations or alleged violations of the guaranty agency's failure to 
comply with Federal, State, or local laws and regulations that are 
unrelated to the FFEL Program. This prohibition does not apply if the 
violation or alleged violation occurred as a result of compliance with 
specific requirements of the FFEL Program or in accordance with written 
instructions from the Secretary;
    (6) Legal expenses for prosecution of claims against the Federal 
government, unless the guaranty agency substantially prevails on those 
claims. In that event, the Secretary approves the reimbursement of 
reasonable legal expenses incurred by the guaranty agency;
    (7) Lobbying activities, as defined in section 501(h) of the 
Internal Revenue Code, including dues to membership organizations to 
the extent that those dues are used for lobbying;
    (8) Major expenditures, including those for land, buildings, 
equipment, or information systems, whether singly or as a related group 
of expenditures, that exceed 5 percent of the guaranty agency's reserve 
fund balance at the time the expenditures are made, unless the agency 
has provided written notice of the intended expenditure to the 
Secretary 30 days before the agency makes or commits itself to the 
expenditure. For those expenditures involving the purchase of an asset, 
the term ``major expenditure'' applies to costs such as the cost of 
purchasing the asset and making improvements to it, the cost to put it 
in place, the net invoice price of the asset, ancillary charges, such 
as taxes, duty, protective in transit insurance, freight, and 
installation costs, and the costs of any modifications, attachments, 
accessories, or auxiliary apparatus necessary to make the asset usable 
for the purpose for which it was acquired, whether the expenditures are 
classified as capital or operating expenses;
    (9) Public relations, and all associated costs, paid directly or 
through a third party, to the extent that those costs are used to 
promote or maintain a favorable image of the guaranty agency. The term 
``public relations'' does not include any activity that is ordinary and 
necessary for the fulfillment of the agency's FFEL guaranty 
responsibilities under the Act, such as training of program 
participants and secondary school personnel and customer service 
functions that disseminate FFEL-related information and materials to 
schools, loan holders, prospective loan applicants, and their parents. 
In providing that training at workshops, conferences, or other ordinary 
and necessary forums customarily used by the agency to fulfill its 
responsibilities under the Act, the agency may provide light meals and 
refreshments of a reasonable nature and amount to the participants;
    (10) Relocation of employees in excess of an employee's actual or 
reasonably estimated expenses or for purposes that do not benefit the 
administration of the guaranty agency's FFEL program. Except as 
approved by the Secretary, reimbursement must be in accordance with an 
established written policy; and
    (11) Travel expenses that are not in accordance with a written 
policy approved by the Secretary or a State policy. If the guaranty 
agency does not have such a policy, it may not use the assets of the 
reserve fund to pay for travel expenses that exceed those allowed for 
lodging and subsistence under subchapter I of chapter 57 of title 5, 
United States Code, or in excess of commercial airfare costs for 
standard coach airfare, unless those accommodations would require 
circuitous routing, travel during unreasonable hours, excessively 
prolonged travel, would result in increased cost that would offset 
transportation savings, or would offer accommodations not reasonably 
adequate for the medical needs of the traveler.
    (c) Cost allocation. Each guaranty agency that shares costs with 
any other program, agency, or organization shall develop a cost 
allocation plan consistent with the requirements described in OMB 
Circular A-87 and maintain the plan and related supporting 
documentation for audit. A guaranty agency is required to submit its 
cost allocation plans for the Secretary's approval if it is 
specifically requested to do so by the Secretary.

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

[FR Doc. 96-24013 Filed 9-18-96; 8:45 am]
BILLING CODE 4000-01-P