[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Rules and Regulations]
[Pages 60426-60438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30360]



[[Page 60425]]

_______________________________________________________________________

Part VI





Department of Education





_______________________________________________________________________



34 CFR Part 682



Postsecondary Education: Federal Family Educational Loan Program; 
Guaranty Agencies--Conflicts of Interest; Final Rule

  Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / 
Rules and Regulations  

[[Page 60426]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC33


Federal Family Education Loan (FFEL) Program; Guaranty Agencies--
Conflicts of Interest

AGENCY: Department of Education.

ACTION: Final regulations.

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

SUMMARY: The Secretary amends the Federal Family Education Loan (FFEL) 
Program regulations. These final 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. The regulations establish conflicts of 
interest restrictions for guaranty agency staff and affiliated 
individuals and prohibit agencies from using Federal reserve funds for 
certain purposes.

DATES: Effective date: These regulations take effect on July 1, 1997. 
However, affected parties do not have to comply with the information 
collection requirement in Sec. 682.418(c) until the Department of 
Education publishes in the Federal Register the control number assigned 
by the Office of Management and Budget (OMB) to this information 
collection requirement. Publication of the control number notifies the 
public that OMB has approved this information collection requirement 
under the Paperwork Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Mr. George Harris, Senior Policy 
Specialist, U.S. Department of Education, 600 Independence Avenue, 
S.W., 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

    On September 19, 1996 the Secretary published a notice of proposed 
rulemaking (NPRM) for this part in the Federal Register (61 FR 49382). 
The NPRM included a discussion of the major issues surrounding the 
proposed changes, which will not be repeated here. The following list 
summarizes those issues and identifies the pages of the preamble of the 
NPRM on which a discussion of those issues may be found:
     The use of FFEL reserve funds to pay a lender's claim if a 
guaranty agency fails to comply with Federal reinsurance requirements. 
(page 49383)
     The addition of a requirement that guaranty agencies 
prohibit conflicts of interest by guaranty agency staff and affiliated 
individuals. (page 49383)
     Prohibition of certain uses of a guaranty agency's reserve 
fund. (page 49384)

Executive Order 12866

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently.
    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.

Summary of Potential Costs and Benefits

    The potential costs and benefits of these final regulations are 
discussed elsewhere in this preamble under the following heading: 
Analysis of Comments and Changes.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 53 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes in the regulations since publication of the 
NPRM follows.
    Major issues are grouped according to subject, with appropriate 
sections of the regulations referenced in parentheses. Other 
substantive issues are discussed under the section of the regulations 
to which they pertain. Technical and other minor changes--and suggested 
changes the Secretary is not legally authorized to make under the 
applicable statutory authority--generally are not addressed.

Paperwork Reduction Act of 1995

    Section 682.418(c) contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995, the U.S. Department of 
Education has submitted a copy of this section to the Office of 
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)). In 
response to the Secretary's invitation in the NPRM to comment on any 
potential paperwork burden associated with this regulation, the 
following comments were received.

Role of a Guaranty Agency as a Trustee or Fiduciary

    Comment: A number of guaranty agencies questioned the Secretary's 
discussion of the role of guaranty agencies in the preamble to the 
NPRM. In particular, the commenters argued that the Secretary was 
overstating the holdings of the court decisions cited in the preamble. 
The commenters suggested that these decisions did not hold them to be 
trustees or fiduciaries for the Federal Government. In addition, they 
noted that neither the HEA nor the agreements between the Department 
and the agencies use the term ``fiduciary'' or ``trustee'' and argued 
that the Secretary's description of their role was not supported by 
legal authority.
    Discussion: The Secretary's position that ``the guaranty agencies' 
role is best characterized as that of a trustee holding money for the 
benefit of another'' is firmly rooted in the HEA. Under section 422(e) 
of the HEA, the reserve funds of the guaranty agencies and any assets 
purchased with those funds are the property of the United States. This 
statute is consistent with court decisions that describe the guaranty 
agency as ``akin to that of a trustee,'' Ohio Student Loan Com'n v. 
Cavazos, 900 F.2d 894, 899 (6th Cir. 1990), cert. denied 111 S.Ct. 245 
(1990) or ``analogous to that of a trustee holding money for the 
benefit of another,'' Education Assistance Corp. v. Cavazos, 902 F.2d 
617, 627 (8th Cir. 1990), cert. denied 111 S.Ct. 246 (1990). Other 
courts have specifically concluded that the guaranty agency does not 
have an ownership interest or property right in its reserve fund and 
that the reserve funds are ultimately under the control of the United 
States. Puerto Rico Higher Education Assistance Corp. v. Riley, 10 F.3d 
847, 851 (D.C. Cir. 1993); State of Colorado v. Cavazos, 962 F.2d 968, 
971 (10th Cir. 1992); Rhode Island Higher Education Assistance Auth. v. 
Secretary, U.S. Dep't of Education, 929 F.2d 844 (1st Cir. 1991); Great 
Lakes Higher Education Corp. v. Cavazos, 911 F.2d 10 (7th Cir. 1990); 
South Carolina State Education Assistance Auth Corp. v. Cavazos, 897, 
F.2d 1272 (4th Cir. 1990), cert. denied 111 S.Ct 243; Delaware v. 
Cavazos, 723 F.Supp. 234 (D.Del. 1989), aff'd without opinion, 919 F.2d 
137 (3d Cir. 1990); Student Loan Fund of Idaho v. Riley, Case No. CV 
94-0413-S-LMB (D.Ida., Memo. Decision, Sept. 14, 1995), appeal pending, 
No. 95-36179

[[Page 60427]]

(9th. Cir.); Connecticut Student Loan Foundation v. Riley, Case No. 
3:93CV02570 (JBA) (D.Conn., Oct. 31, 1996). The guaranty agency 
commenters who challenged the Secretary's reading of the law in this 
area failed to cite any statutes or court decisions that counter this 
authority. A party who holds property for the benefit of another and 
who must carry out specific duties with regard to that property falls 
clearly within the legal definition of a trustee. Black's Law 
Dictionary 1514 (6th ed. 1990). A trustee owes a fiduciary duty to the 
beneficiary. Id. at 1508 (``trust'') and 1514. In the case of guaranty 
agencies, the Secretary (who provides the funds used to maintain the 
reserve funds and reserve funds assets) is the beneficiary and is 
entitled to issue appropriate rules to protect the Federal Government's 
interests in those funds and assets by prohibiting inappropriate uses 
and protecting against conflicts of interest.
    Guaranty agencies are State or private non-private organizations, 
that are required to serve the public good. Thus, even outside the 
legal obligations governing the agencies' relationship to the reserve 
fund and assets, the agencies should have been held to a high standard 
in protecting the public trust. While these regulations provide further 
protection for the Secretary in regard to the agencies' role in the 
FFEL Program and maintenance of Federal property and assets, they are 
consistent with the agencies' long-standing obligations under State and 
common law.
    Changes: None.

Separate Non-FFEL Funds

    Comment: Some guaranty agencies questioned the discussion in the 
preamble to the NPRM that distinguished between funds that are subject 
to these regulations and funds that were consistently funded and 
maintained separate from their reserve funds and that are not covered 
by these regulations. These commenters argued that the requirement that 
non-FFEL program activities must be funded exclusively from sources 
unrelated to the FFEL guaranty agency activities exceeded the 
Secretary's authority. These commenters also contended that the 
prohibition on the use of FFEL funds for non-FFEL purposes was only 
established in regulations issued by the Secretary in 1986 and should 
not be applied prior to the effective date of those rules.
    Discussion: The court decisions cited above reaffirmed that a 
guaranty agency had no legitimate expectation or right at the time it 
joined the FFEL Program that it could use Federal reserve funds for 
other than FFEL purposes. Delaware v. Cavazos, 723 F.Supp. at 240. 
Thus, an agency that wanted to engage in non-FFEL program activities 
has always been required to maintain separate funds. The discussion in 
the preamble to the NPRM is consistent with this requirement. Moreover, 
a guaranty agency has a fiduciary responsibility to protect the reserve 
funds and assets held by it for the Federal Government from uses 
inconsistent with the purposes for which they were provided.
    Changes: None.

Classification of Guaranty Agencies Under the Regulatory Flexibility 
Act

    Comment: Several commenters stated that the basis for determining 
that guaranty agencies are not small entities for the purposes of 
Regulatory Flexibility Analysis has not been provided. The commenters 
asserted that there are a substantial number of guaranty agencies with 
assets below $100 million. The commenters further recommended that the 
regulations be reviewed by the Small Business Administration.
    Discussion: The Secretary analyzed the assets of the 12 private 
non-profit guaranty agencies that will be covered under these 
regulations. This analysis follows the letter and the spirit of the 
Regulatory Flexibility Act, which dictates the terms of the analysis. 
The analysis of asset levels of the 12 agencies is based on the latest 
audited financial statements that the agencies have provided to the 
Secretary. The analysis used generally accepted accounting principles 
and found that all 12 had asset levels above $100 million. Thus, for 
the purposes of Regulatory Flexibility Analysis, the certification that 
these regulations will not have a substantial impact on a significant 
number of small entities is affirmed.
    On September 16, 1996, a copy of the proposed regulations was 
provided to the Small Business Administration (SBA). The SBA did not 
comment on the proposed regulations.
    Changes: None.

Analysis of Burden Under the Paperwork Reduction Act of 1995

    Comment: Several commenters representing guaranty agencies disputed 
the estimate of one hour recordkeeping burden required by the 
development of a cost allocation plan and maintenance of documentation 
for audit. The commenters believed this analysis of the burden grossly 
understated the amount of time necessary to analyze and comply with OMB 
Circular A-87. One commenter estimated that it would require three or 
four people years of work for an agency to develop and maintain a cost 
allocation system. Another commenter estimated that it would take at 
least 1,000 hours for an agency to develop a cost allocation plan and 
an additional two employees annually to manage it properly. The 
commenters acknowledged that the recordkeeping burden is already 
established in Sec. 682.410(a) of the current regulations and guaranty 
agencies already have established cost allocation plans. However, they 
argued that the scope of the cost allocation provisions in OMB Circular 
A-87 is different in many respects from what is required in the 
regulations and what guaranty agencies have developed to comply with 
applicable Federal and State laws and would involve in most instances 
the development or update, or both, of a different method of cost 
allocation. The commenters stated that this provision would also 
require guaranty agencies in many instances to maintain an additional 
set of financial accounting records.
    Discussion: Since publishing the NPRM, the Secretary has received 
information that indicates that the one-hour estimate given in the NPRM 
was not an accurate estimate of the recordkeeping burden associated 
with the modified requirements. The Secretary continues to believe that 
the scope of the cost allocation provisions in OMB Circular A-87 is not 
radically different, at least not to the extent suggested by some of 
the commenters, from what is already required in existing regulations.
    The Secretary has sought to minimize burden to the extent possible. 
However, in light of the comments received, the Secretary now believes 
that a more appropriate estimate would be 100 hours. The Secretary will 
continue to look at this issue and welcomes additional input from 
guaranty agencies concerning the burden associated with the cost 
allocation plan requirement.
    Changes: See discussion above.

Section 682.401  Basic Program Agreement

    Comment: Several commenters representing guaranty agencies objected 
to Sec. 682.401(b)(28) on the grounds that it was an unnecessary 
attempt to micromanage the operations of a guaranty agency and would 
serve to hamper the effective operations of the guaranty agency. The 
commenters stated that existing regulations mandating a specified level 
of reserves, coupled with the regulations proposed in the NPRM 
mandating reasonable costs, would provide adequate protection of the 
Federal fiscal interest. The commenters

[[Page 60428]]

recommended that, at the very least, the transfer of default records by 
a guaranty agency to third party contractors should be exempted from 
this requirement. One commenter stated that guaranty agencies should be 
encouraged to reduce costs where possible and that the main area in 
which a guarantor could reduce costs was in computer software, 
hardware, and development. One commenter agreed that the Secretary 
should be notified of a conversion to another information or computer 
system, but recommended that the 30-day notification period be 
increased to 45 days so that a guaranty agency could more properly 
prepare its notification to the Secretary and the Secretary would have 
more time to respond. The same commenter opposed the requirement that 
notice must be given in the case of a proposed conversion.
    Discussion: The Secretary does not agree that a notification 
requirement is an attempt to micromanage the operations of a guaranty 
agency. A guarantor's decision to place new guarantees or to convert 
records relating to its existing guarantees 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 system is a major decision that could have 
significant impact on program participants, especially borrowers. The 
Secretary needs advance notification of such proposed conversions 
because the Secretary's statutory duty to administer the FFEL Program 
properly would be hindered if information relating to major changes 
planned by a guaranty agency is not known by the Secretary until after 
the fact. If an agency experiences an emergency situation that would 
make it impossible for the agency to provide that notification to the 
Secretary at least 30 days before a planned conversion, the agency 
should notify the Secretary as soon as practicable before the date of 
the planned conversion.
    As for the comment about reducing costs, the notification 
requirement contained in Sec. 682.401(b)(28) has no effect on an 
agency's attempt to reduce costs. The Secretary encourages guarantors 
to find ways to reduce costs while preserving high quality services, 
and that goal can be achieved simultaneously with the notification 
requirement.
    When developing these regulations, the Secretary did not want to 
require a guaranty agency to provide the notification more than 30 days 
before a planned conversion from one system to another, or before 
solicitation of bids begins. However, if an agency wishes to provide 
that notification more than 30 days before a planned conversion or 
before solicitation of bids begins, it may do so.
    Changes: Section 682.401(b)(28) has been revised to clarify that 
the notification must be provided to the Secretary at least 30 days 
prior to the conversion or before solicitation of bids begins.
    Comment: One commenter representing a collection contractor asked 
the Secretary to clarify that the notification requirement contained in 
Sec. 682.401(b)(28) did not apply to the transfer of copies of records 
from a guaranty agency to a collection contractor.
    Discussion: The commenter's understanding is correct.
    Changes: None.

Section 682.410  Fiscal, Administrative, and Enforcement Requirements

    Comment: Many commenters expressed concern that the provision in 
Sec. 682.410(a)(2) would cause lenders to end their participation with 
any guaranty agency that did not have non-FFEL reserve fund assets 
available to pay lender claims in cases in which the claims did not 
qualify for Federal reinsurance because the agency did not meet its 
Federal requirements. The commenters believed that a lender that 
performs all of the required regulatory and statutory activities should 
be entitled to an insurance payment from the guaranty agency for a 
properly filed claim, even if the agency would not be eligible to 
receive or retain a reinsurance payment from the Secretary because the 
agency failed to meet a reinsurance requirement prescribed under 
Sec. 682.406. The majority of the commenters recommended that the 
Secretary require a guaranty agency to pay all insurance claims that 
qualify for insurance under the terms of the guaranty agency's program, 
even if it meant that the reserve fund would be used to pay claims for 
which the agency could not receive or retain Federal reinsurance 
payments. One guaranty agency went further by stating that all claims 
paid by an agency should be considered proper uses of the reserve fund.
    Most of the commenters recommended the addition of language that 
would permit the payment of a claim if the agency made a good faith 
determination that the claim met the requirements of Sec. 682.406 at 
the time the claim was paid or if the only violation was the guaranty 
agency's inability to meet the claim payment deadlines. Otherwise, the 
commenters believe, the guarantor would be penalized for paying a claim 
that appeared in good faith to be reinsurable but only to discover at a 
later date that it was not (e.g., due to nonpayment of origination 
fees). The suggested language would prevent the penalizing of lenders 
or servicers in the instances where they have done nothing wrong. The 
addition of the language ``in good faith'' would allow for a level of 
tolerance that would be consistent with the provisions of section 
432(g) of the HEA, and would reflect the practicalities of high volume 
claims processing and the situations where critical data not in the 
hands of the guarantor is unavailable or unreliable. The commenters 
stated that section 432(g) only imposes a fine or penalty after a 
hearing upon a showing that a violation was material and knowing and 
would not penalize a guaranty agency for multiple infractions involving 
systemic errors.
    The commenters asked the Secretary to consider that other sources 
of funds are often not available to guaranty agencies or may be 
earmarked for other expenditures by the provisions of State law. One 
commenter noted that the Secretary has repeatedly viewed funds received 
by a guaranty agency for its FFEL Program to be part of the reserve 
fund. The commenter wondered how the Secretary could recommend that an 
agency obtain non-FFEL funding to honor its insurance agreements with 
lenders, while at the same time considering those funds to be part of 
the reserve fund. The commenter believed that by definition, those 
outside funds would become part of the reserve fund and thus would be 
unusable by the guaranty agency for paying claims that did not meet the 
requirements of Sec. 682.406. One commenter objected to the restriction 
in Sec. 682.410(a)(2)(i) and stated that the outcome of such a 
restriction would mean that the fund into which insurance premiums have 
been paid cannot be used to pay a valid insurance claim submitted by 
the holder. One commenter from a State guaranty agency was concerned 
that if a State agency was required to obtain non-FFEL funds to pay 
lender claims that did not meet the requirements of Sec. 682.406, the 
agency would expose the State to a financial liability that had 
previously not existed. The commenter speculated that some State 
guarantors would be forced to look towards privatization as a means of 
maintaining the State's fiscal interests. One commenter from a guaranty 
agency recommended that a guarantor be permitted to use the reserve 
fund to pay

[[Page 60429]]

lender claims that did not meet the requirements of Sec. 682.406, 
unless this category of claims exceeds a specified percentage of the 
agency's total claim payments in the fiscal year in question. One 
commenter believed that section 432(o) of the HEA would entitle the 
lender to a claim payment from the Secretary if the guaranty agency 
failed to pay a claim. In addition, one commenter representing a State 
guaranty agency said that under State law, the State was prohibited 
from using State funds to cover the expenses incurred by the State 
guaranty agency. In effect, the commenter argued, the Secretary's 
restriction in Sec. 682.410(a)(2)(i) would prohibit the agency from 
honoring its contractual obligations.
    Discussion: The Secretary agrees that a lender that performs all of 
the regulatory and statutory activities required of the lender should 
be entitled to an insurance payment from the guaranty agency for a 
properly filed claim. Therefore, the Secretary is withdrawing this 
provision of the regulations, and will permit guaranty agencies to use 
reserve funds to pay such claims. However, the Secretary will take 
appropriate action against a guaranty agency that violates regulatory 
requirements.
    Changes: The Secretary is returning this provision of the 
regulations to its current published form.
    Comment: One commenter recommended that the list of costs in 
Sec. 682.410(a)(2)(ii) deemed to be ordinary and necessary for the 
agency to fulfill its responsibilities under the HEA be expanded to 
include costs of customer assistance and education and training on 
laws, regulations, and guarantor policies, procedures, and services. 
The commenter stated that these are basic services provided by guaranty 
agencies.
    Discussion: The use of examples following the word ``including'' in 
Sec. 682.410(a)(2)(ii) does not mean that other examples are not 
applicable. While the Secretary does not disagree that the type of 
costs suggested by the commenter may be ordinary and necessary for the 
agency to fulfill its responsibilities under the HEA, the Secretary 
sees no need to add them to the brief list of examples given in the 
regulations.
    Changes: None.

Section 682.410(a)(11)(iii)  Reasonable Cost

    Comment: Some commenters, while not significantly opposed to the 
definition of ``reasonable cost'' contained in 
Sec. 682.410(a)(11)(iii), nevertheless thought the provisions in 
Sec. 682.410(a)(2)(ii)(B), (C), and (D) were overly broad, vague, and 
duplicative of the definition of ``reasonable cost.'' The commenters 
believed that the reasonable cost definition, together with the 
existing audit requirements for guaranty agencies was sufficient, and 
recommended the deletion of Sec. 682.410(a)(2)(ii)(B), (C), and (D).
    Discussion: The Secretary believes the requirements in 
Sec. 682.410(a)(2)(ii)(B), (C), and (D) are clear, but agrees that the 
provisions in (B) and (C) are addressed in paragraph 
Sec. 682.410(a)(11)(iii)(B) of the ``reasonable cost'' definition. 
However, Sec. 682.410(a)(2)(ii)(D) is intended to apply a specific test 
to determine if a cost, though reasonable for other purposes, can be 
considered an expenditure that is ordinary and necessary for the agency 
to fulfill its responsibilities under the HEA.
    Changes: The provisions in Sec. 682.410(a)(2)(ii)(B) and (C) have 
been removed, and Sec. 682.410(a)(2)(ii)(A)-(G) has been renumbered 
Sec. 682.410(a)(2)(ii)(A)-(E).
    Comment: One commenter stated that in some cases (e.g., collections 
activities) the Secretary's specific requirements may increase costs 
beyond those that would otherwise be required. Therefore, the commenter 
recommended that additional language be added to 
Sec. 682.410(a)(2)(ii)(D) to provide an exception for costs to the 
extent that applicable Federal requirements increase the costs of the 
activities beyond those of equivalent non-Federal activities.
    Discussion: The requirement that costs must not be higher than the 
agency would incur under established policies, regulations, and 
procedures that apply to any non-Federal activities of the guaranty 
agency is intended to apply to expenditures for activities or items 
that are roughly equivalent in both the agency's FFEL and non-FFEL 
activities. This requirement has no effect on the comparison of 
disparate activities or items. For example, if an agency operates a 
non-FFEL loan program which has less stringent due diligence standards 
than found in the FFEL Program, the agency's servicing costs for its 
non-FFEL loan program could be lower than its servicing costs relating 
to the FFEL Program. In this example (and for other similar cost areas) 
the Secretary did not intend for Sec. 682.410(a)(2)(ii)(D) to be 
interpreted to limit the agency's FFEL servicing costs to no more than 
that paid for the agency's non-FFEL loan program, if the services 
provided are not comparable.
    Changes: The Secretary has added the word ``comparable'' before 
``non-Federal activities'' in Sec. 682.410(a)(2)(ii)(D).
    Comment: Some commenters vigorously objected to the provision in 
Sec. 682.410(a)(11)(iii) that requires a guaranty agency to prove that 
costs are reasonable, although one guaranty agency commenter agreed 
with the regulatory language in the NPRM. The objecting commenters 
argued that this provision would stifle the activities of the guaranty 
agency. The commenters feared that every single agency expenditure will 
be subject to retroactive challenge at the Secretary's discretion and 
that the burden of reasonableness will be on the guaranty agency 
without any ``safe harbor'' or ``de minimis'' rule. The commenters 
believed that this requirement would make it difficult, if not 
impossible, to know the standard of duty involved in planning and 
making expenditures and would disrupt the delivery of services to 
students and schools. The commenters recommended a deletion of the 
language placing the burden of proof on the guaranty agency and 
proposed placing the burden of proof on the Secretary to challenge the 
reasonableness of the cost. In addition, the commenters suggested that 
the Secretary's authority to challenge the expenditure should be 
limited to one year from the date of the expenditure, absent a showing 
of fraud and abuse by the agency, and wanted the regulations to be 
prospective in their effect.
    Discussion: These regulations establish clear principles for 
determining if a cost is reasonable. The guaranty agency commenters 
want the Secretary to presume that expenditures made by a guaranty 
agency from the reserve fund reflect costs that the guaranty agency 
believes are reasonable. The Secretary notes that it is the guarantor, 
not the Secretary, that has the information and documentation to show 
that it has complied with the reasonable cost principles prescribed in 
these regulations. In the event the Secretary questions the 
reasonableness of a particular expenditure, the Secretary believes the 
guarantor's unique role as the front-line steward responsible for the 
use of the reserve fund carries with it the obligation to document that 
its use of Federal funds has been appropriate. It is not the 
Secretary's role either to prove or disprove; rather, it is the 
Secretary's role to consider the agency's documentation and rationale 
for a questioned cost and, on behalf of the taxpayers, decide if the 
agency has complied with the Federal requirements.
    Changes: None.
    Comment: A few commenters recommended that 
Sec. 682.410(a)(11)(iii)(A) be modified to

[[Page 60430]]

recognize differences in costs as affected by the differences in 
guaranty agencies. The commenters suggested that what may be 
reasonable, ordinary, and necessary for the operation of a large 
guaranty agency in a low cost geographic area may not be reasonable for 
a smaller guaranty agency in an area with a labor shortage and high 
cost of living. The commenters believed that the regulatory provision, 
as written, would interfere with the intent of Sec. 421(a)(1)(A) of the 
HEA, which recognizes and encourages guaranty agencies to operate 
within different States pursuant to State charters. The commenters 
recommended the regulations take into account the geographic area, 
demographics, higher education community, size, and nature of the 
guaranty agency. Several commenters suggested that 
Sec. 682.410(a)(11)(iii)(B) be expanded to include a balancing of the 
risks and benefits of a particular action as well as an evaluation of 
price, quality, and service. One guaranty agency commenter agreed with 
the regulatory language that was presented in the NPRM.
    Discussion: The regulations do not prohibit a guaranty agency from 
considering reasonable factors, including those presented by the 
commenters, when deciding if a particular expenditure would meet the 
reasonable cost definition in Sec. 682.410(a)(11)(iii). The Secretary 
reminds the commenters that the burden of proof is upon the guaranty 
agency, as a fiduciary, to establish that costs are reasonable.
    Changes: None.
    Comment: Several commenters were concerned about the extent to 
which an agency would be required to go to prove an expenditure was 
reasonable if it was required to document the market prices of 
comparable goods or services under Sec. 682.410(a)(11)(iii)(C). The 
commenters noted that guaranty agencies are involved in numerous 
purchases of goods and services for which the price is not always the 
most important consideration. The commenters recommended that the 
regulations permit an agency to exercise its judgment concerning other 
factors, including the quality of the goods or services or their timely 
delivery. One guaranty agency commenter agreed with the regulatory 
language that was presented in the NPRM.
    Discussion: As discussed above, the regulations do not prohibit a 
guaranty agency from considering reasonable factors, including those 
presented by the commenters, when deciding if a particular expenditure 
would meet the reasonable cost definition in Sec. 682.410(a)(11)(iii). 
However, it is inconceivable that a reasonable cost determination could 
be made without considering the market prices for comparable goods or 
services.
    Changes: None.

Section 682.410(b)(11)  Conflicts of Interest

    Comment: One commenter rejected what the commenter perceived to be 
the underlying premise of Sec. 682.410(b)(11), that the sharing by a 
guaranty agency of a corporate management structure with affiliates 
would necessarily raise issues of self-dealing and conflicts of 
interest. The commenter stated that guaranty agencies, through the 
provisions of the Internal Revenue Code governing section 501(c)(3) 
organizations, State ethics codes, and State non-stock corporation 
provisions, as well as other provisions of State law, are already 
prevented from engaging in the type of conduct being regulated in the 
NPRM. The commenter stated that the Internal Revenue Code explicitly 
forbids a section 501(c)(3) organization from having any part of its 
net earnings inure to the benefit of those who control it or who 
financially support it. The commenter stated that although section 
432(p) of the HEA empowers the Secretary to act when there is a 
conflict of interest, the commenter was unaware of any instance when 
the Secretary exercised that power. Thus, the commenter concluded, the 
regulations proposed by the Secretary are too broad and unnecessary. In 
the commenter's view, the Secretary should instead draft ``firewall'' 
regulations focusing on conflicts of interest between guarantor staff 
and lender/secondary market staff. Another commenter disagreed with the 
scope of the proposed conflicts of interest regulations and recommended 
they be limited, if imposed at all, to decision-making employees.
    Discussion: The Secretary has taken steps in the past to address 
specific instances of actual or potential conflicts of interests 
involving guaranty agencies. However, those steps generally have not 
been completely successful in eliminating or preventing conflicts of 
interests at those specific agencies, nor do those specific steps have 
general applicability to all guaranty agencies. Therefore, the 
Secretary has decided that stronger measures, in the form of these 
comprehensive regulations, are needed to protect the Federal reserve 
funds and assets. The Secretary believes that these FFEL-specific 
regulations should impose no significant additional burdens on any 
guaranty agency covered under the more generic rules of the Internal 
Revenue Code and other requirements that restrict entities and 
individuals from engaging in the type of conduct addressed in the 
Secretary's regulations.
    Furthermore, there is a unique role for the Secretary. The 
existence of a Federal reserve fund in agencies with activities outside 
of the guaranty agency role creates a dangerous incentive for managers 
to find ways to move funds from the restricted-use reserve fund into a 
less regulated operation or affiliate. For example, agencies have been 
found to be enriching their affiliates by moving operations to the 
affiliate, on paper, and then charging the reserve fund a mark-up for 
the services performed. The Inspector General found evidence of 
agencies protecting their affiliates from fines and losses related to 
due diligence violations. The Secretary has responsibility to protect 
the Federal reserve funds entrusted to guaranty agencies. That is the 
Secretary's role, a role that has been clearly defined by Congress when 
it directed the Secretary, in section 422(g)(1)(C) of the HEA, to 
prevent the ``misapplication, misuse, or improper expenditure of 
reserve funds and assets.'' Finally, in response to the comment about 
decision-making employees, the Secretary notes the NPRM proposed to 
apply the conflicts of interest rules only to guaranty agency employees 
who had decision-making authority as to the administration of a 
contract or agreement supported by the reserve fund.
    Changes: None.
    Comment: One commenter opposed the restrictions in 
Sec. 682.410(b)(11)(i) on the grounds that they were too sweeping. The 
commenter recommended that, instead of applying the disclosure 
requirement to financial or other interests in any entity, the 
regulations should limit it to entities ``related to student financial 
aid.''
    Discussion: The regulations are meant to be sweeping, because the 
types of organizations with which a guaranty agency could have actual 
or potential conflicts of interest are not limited to those 
organizations involved in student financial aid.
    Changes: None.
    Comment: A few commenters were concerned that the conflict of 
interest restrictions in Sec. 682.410(b)(11) would force some guaranty 
agencies to modify or abandon affiliation relationships that had been 
in place for years and that they believed were beneficial to the FFEL 
Program. Some commenters suggested that the Secretary's underlying 
motive was to interfere with the ability of guaranty agencies to 
compete with the Federal Direct Loan Program. Several

[[Page 60431]]

guaranty agency commenters agreed with the regulatory language that was 
presented in the NPRM. One commenter representing schools recommended 
that the Secretary prohibit a guaranty agency from having any 
affiliated business activities.
    Discussion: The Secretary recognizes that some affiliate 
relationships may result in improved services and economies of scale 
that benefit the affiliated parties, including the guaranty agency. 
Thus, the regulations do not require a strict separation of those 
entities. Instead, the regulations require that appropriate safeguards 
be established to ensure that the Federal fiscal interest is not 
jeopardized as a result of those affiliate relationships. The Secretary 
will continue to monitor these relationships closely to ensure that the 
programmatic and other costs of these relationships do not exceed the 
benefits.
    Changes: None.
    Comment: One commenter noted that Congress has continually given 
guaranty agencies authority to expand their participation in the FFEL 
Program. The commenter stated that guarantors have been asked to be 
lenders, lenders of last resort, and escrow agents. The commenter 
believed the Secretary had no authority to regulate a guaranty agency's 
affiliations.
    Discussion: The Secretary has not said that all affiliations are 
prohibited. Only those that result in a real or potential conflict of 
interest are the subject of these regulations. Moreover, the various 
obligations placed on the guaranty agencies are the responsibilities of 
those agencies. Nothing in the HEA authorizes or suggests that the 
agency may shift its responsibilities to an affiliate.
    Changes: None.
    Comment: One commenter suggested that Sec. 682.410(b)(11)(i)(A) 
should be applied to all guaranty agencies, without a special exemption 
for employees of a State agency covered by State codes of conduct. The 
commenter believed that most State codes of conduct are generic and 
focus on preventing individual transgressions that might be committed 
by employees with limited decision-making authority operating within 
well established procurement, contracting, or other decision-making 
parameters. The commenter doubted that many State codes of conduct 
address the broad, more subtle policy issues that the Secretary 
intended to address in the regulations. Several guaranty agency 
commenters agreed with the regulatory language that was presented in 
the NPRM.
    Discussion: The Secretary believes that State codes of conduct 
provide sufficient safeguards to protect the interests of the FFEL 
Program. If that assumption turns out to be invalid, the Secretary will 
consider additional action.
    Changes: None.
    Comment: Several commenters representing guaranty agencies 
recommended the word ``trustee'' be replaced with ``director'' and that 
the word ``agents'' be deleted. The commenters recommended this change 
wherever the words ``trustee'' and ``agents'' are used. Some guaranty 
agency commenters agreed with the regulatory language that was 
presented in the NPRM.
    Discussion: The Secretary acknowledges that the title ``director'' 
appears to be commonly used by guaranty agencies.
    Changes: The Secretary has added the title ``director'' to the list 
of individuals designated in the regulations.
    Comment: One commenter argued that the prohibitions in 
Sec. 682.410(b)(11)(i)(A) should apply only to guarantor employees who 
have financial interests in non-affiliated organizations, not in 
affiliated State agencies or not-for-profit corporations. The commenter 
recommended that the exemption in Sec. 682.410(b)(11)(i)(A) be revised 
to include employees of multiple State agencies within the State 
covered by codes of conduct established under State law or to 
employees, officers, trustees, or agents employed by a not-for-profit 
guarantor and its not-for-profit affiliates covered by a published code 
of conduct that, among other standards, requires disclosures of the 
interests specified in Sec. 682.410(b)(11)(i)(A). One commenter stated 
that some private, not-for-profit guarantors are not State agencies, 
but are nevertheless subject to State statutory codes of conduct. The 
commenter recommended that the exemption in Sec. 682.410(b)(11)(i)(A) 
be expanded to cover those agencies.
    Discussion: The Secretary has seen no evidence showing that 
private, not-for-profit guarantors and their employees, officers, 
directors, trustees, and agents, are covered under State ethics codes 
to the extent that State guaranty agencies are covered. The Secretary 
believes that State guaranty agencies have sufficient authorities and 
responsibilities that allow the Secretary to provide greater deference 
to them than to private, not-for-profit guarantors.
    Changes: None.
    Comment: Several guaranty agency commenters agreed with the 
regulatory language that was presented in Sec. 682.410(b)(11)(i)(A) of 
the NPRM. Another commenter also agreed, but asked that the Secretary 
define the term ``nominal'' with respect to unsolicited favors, 
gratuities, or other items that may be accepted.
    Discussion: Minor and low cost unsolicited favors, gratuities, or 
other items generally may be accepted. The Secretary is reluctant to 
place an absolute dollar value on the unsolicited favors, gratuities, 
or other items that may be accepted, but it would be highly unlikely 
that the agency could justify any case where the value exceeded $25.
    Changes: None.
    Comment: Several commenters objected to the provisions of proposed 
Sec. 682.410(b)(11)(ii). That section proposed that if a guaranty 
agency fails to meet the conflict of interest requirements in the 
regulations, the Secretary may require the agency to comply with 
additional appropriate measures to protect the Federal fiscal interest, 
including the divestiture of the agency's non-FFEL functions and its 
interests in any affiliated organization. The commenters argued that 
this provision exceeded the Secretary's statutory authority. In 
addition, they argued that any divestiture authority that arguably 
exists could only be exercised after providing the affected guaranty 
agency with appropriate due process. In contrast, one commenter agreed 
with the proposed rule and another commenter suggested only that 
divestiture not be required in situations in which the agency failed to 
enforce the prohibition on gifts and gratuities in proposed 
Sec. 682.410(b)(11)(i)(C).
    Discussion: The Secretary notes that divestiture of the agency's 
non-FFEL functions is only one possible measure that may be required to 
protect the Federal fiscal interest. The Secretary acknowledges that 
divestiture might have a significant impact on the guaranty agency's 
operations. However, divestiture would clearly be appropriate if the 
guaranty agency organization had otherwise failed to protect the 
Federal fiscal interest against the impact of conflicts of interest 
among its various activities and among its employees. Before requiring 
this step, the Secretary will provide the agency with an appropriate 
opportunity, consistent with applicable due process requirements, to 
show why the action should not be required. The Secretary further notes 
that the requirement for divestiture to protect the Federal fiscal 
interest is an appropriate limitation of the guaranty agency's 
participation in the FFEL program as authorized by 34 CFR 
682.413(c)(1).
    Changes: None.

[[Page 60432]]

Section 682.418  Prohibited Uses of Reserve Fund Assets

    Comment: Several commenters representing guaranty agencies objected 
to the provisions of Sec. 682.418(a)(1). The commenters stated that 
pre-approval for costs such as professional services is impractical and 
suggested that the pre-approval process will seriously interrupt the 
delivery of services to students and financial aid officials. The 
commenters wanted State agencies to be exempt from this requirement 
because they believed it was redundant for State agencies with State 
contractual regulations. One commenter from a guaranty agency objected 
to the absence of any reference in Sec. 682.418(a)(1) to the Secretary 
taking into consideration the differences in guaranty agencies, or the 
standards by which the Secretary's approval will be granted. Some 
commenters recommended that Sec. 682.418(a)(1) be deleted, or that an 
exception be carved out for contracts awarded by way of a competitive 
bidding process. Otherwise, they suggest, a guaranty agency could end 
up paying more for services provided by a non-affiliate than by its 
affiliate.
    Discussion: The Secretary's pre-approval is only required in those 
rare instances where the agency demonstrates that an unusual 
circumstance exists that warrants paying an affiliate more than cost 
for services rendered. The commenters can be assured that the Secretary 
will take all relevant information into account when deciding if the 
Federal interests would be served if a guaranty agency paid more than 
cost for goods, property, or services provided by its affiliate. The 
Secretary believes that under an affiliation relationship, a guaranty 
agency should be able to obtain goods, property, or services from its 
affiliate at cost.
    The Secretary does not agree that State rules will fully protect 
Federal reserve funds maintained by a State guaranty agency which has 
an affiliated organization.
    Changes: None.
    Comment: One commenter suggested that the Secretary define the term 
``affiliated organization,'' as used in Sec. 682.418(a)(1).
    Discussion: The Secretary believes that a regulatory definition of 
``affiliated organization'' would limit the ability to apply the 
regulations to new forms of affiliations devised in the future. The 
Secretary will determine whether a guaranty agency has a relationship 
with an ``affiliated organization'' based on all the facts and 
circumstances in the particular case. In making this determination, the 
Secretary intends to utilize a working definition of ``affiliated 
organization'' as any organization controlling, controlled by, or under 
common control with, the guaranty agency. A guaranty agency and its 
affiliate may be under common control if they share common board 
members or officers, or if their activities are otherwise directed by 
the same individuals. This definition is based on the definition of 
``affiliate'' generally used by the Securities and Exchange Commission. 
See, for example, 17 CFR 240.12b-2 and 260.0-2(a).
    Changes: None.
    Comment: Some commenters objected that the blanket use of the term 
``assets'' in Sec. 682.418(a)(2) exceeds the statutory language found 
in section 422(g) of the HEA because it is not limited to assets 
purchased with the reserve funds but refers simply to ``assets.'' The 
commenters recommended that this provision specify that it applies only 
to assets purchased with the reserve fund. Other commenters believed 
that the HEA gave the Secretary limited authority in this area, and 
believed the regulations should exempt insurance agreements with 
lenders, agreements with schools, and third party contracts with 
private collection agencies. One commenter was concerned that this 
provision would infringe on the rights of parties to enter into legally 
binding contracts with a guaranty agency.
    Discussion: The Secretary is not regulating how a guarantor handles 
its non-FFEL assets or funds. On the other hand, the Secretary fully 
intends to take steps to protect the Federal reserve fund. Accordingly, 
guarantor contracts with other parties that require the use of Federal 
reserve funds or assets are subject to the 30-day notification 
requirement.
    Changes: None.
    Comment: One commenter from a guaranty agency agreed that the 
Secretary should actively seek to prevent improper depletion of the 
reserve fund, but considered the Secretary's proposed regulations to be 
inadequate for that purpose. In the commenter's judgment, the 
protection of reserve funds cannot be achieved merely by prohibiting a 
limited number of specific types of expenditures which, in the 
aggregate, represent an insignificant share of overall guaranty agency 
costs. Instead, the commenter recommended that the Secretary focus on 
the relative cost effectiveness of individual guarantors in carrying 
out their primary responsibilities under the HEA. The commenter 
suggested an alternative approach that would enable the Secretary to 
focus on whether proper value is being received for reserve funds 
expended. The commenter additionally stated that the alternative 
approach would avoid what the commenter viewed to be ``inevitable, 
tedious, and diversionary arguments'' that the measures proposed by the 
Secretary to restrict specific types of expenditures are punitive in 
nature, represent micromanagement, and are designed to hamper the 
ability of guarantors to compete effectively with the Direct Lending 
Program. The commenter recommended that the regulations be revised to 
require: (1) the expansion of the Secretary's current guarantor 
evaluation model to provide a ``fully loaded'' (all overhead costs 
allocated) analysis of each guarantor's unit costs of delivering its 
services; (2) on-going monitoring of each guarantor's performance 
relative to the model by requiring Part E 1130 data to be submitted 
quarterly rather than annually; (3) establishment of maximum acceptable 
unit cost standards for each primary guarantor service (e.g., 125 
percent of national mean cost); (4) the identification and correction 
of specific factors that result in a guaranty agency exceeding the 
acceptable unit costs in one or more areas; (5) the taking of 
corrective action by a guaranty agency where overall costs exceed 
current revenues (exclusive of investment income); and (6) a targeted 
program review effort designed to ensure that acceptable unit costs are 
not being achieved at the expense of program integrity. The commenter 
believed that under the alternative approach, guaranty agencies that 
manage their operations in a cost-effective manner would be able to 
exercise management discretion and flexibility, and that the 
alternative approach would be consistent with the Secretary's recent 
initiatives to provide incentives for work well done and to encourage 
common sense and good business practices by guarantors.
    Discussion: Although the commenter has presented an interesting 
proposal, the Secretary must decline to pursue it as an alternative to 
fiduciary standards. As long as a guaranty agency holds Federal funds, 
the Secretary believes it is appropriate to hold the agency accountable 
under those standards.
    Changes: None.
    Comment: One commenter thought that all of the prohibitions and 
limitations in Sec. 682.418(b) were unnecessary because the Secretary 
could simply rely on the definition of ``reasonable cost'' found in 
Sec. 682.410(a)(11)(iii). Thus, for example, contributions and 
donations would only

[[Page 60433]]

be prohibited to the extent that they were not reasonable.
    Discussion: The commenter's proposal ignores the limited purpose of 
the Federal reserve funds and assets. Those funds and assets are 
provided solely to serve FFEL Program purposes. The Secretary has 
determined that certain uses of those funds and assets are simply 
unreasonable, in light of their intended purpose.
    Changes: None.

Section 682.418(b)(1)  Advertising

    Comment: Some commenters objected to the restrictions on 
advertising in Sec. 682.418(b)(1) and recommended that a guaranty 
agency should be permitted to use reserve funds to advertise the types 
of services that the agency provides. The commenters mentioned many 
types of services, including default prevention software, training 
programs, and Internet sites. A few commenters questioned how an agency 
could perform its customer service functions under Sec. 682.418(b)(9), 
``public relations,'' if the agency was prohibited from advertising 
about those customer service functions.
    The commenters also generally stated that provisions on reasonable 
costs contained in Sec. 682.410(a)(11) and existing provisions on 
guaranty agency reserve levels adequately protect the Federal fiscal 
interest. The commenters noted that OMB Circulars A-87 and A-122 allow 
for advertising costs ``necessary to meet the requirements of the 
Federal award.'' The commenters recommended that guarantors not be 
prohibited from using advertising that was related to the guaranty 
agency's purposes under the HEA. Other commenters believed the 
restrictions on advertising ran counter to the Secretary's, the 
President's, and the Congress' stated support of competition for better 
education loan services and school choice between the FFEL and the 
Direct Loan programs.
    Discussion: A guaranty agency may use the reserve fund to pay for 
activities that are ordinary and necessary for the fulfillment of its 
FFEL guaranty responsibilities under the HEA. In Sec. 682.418(b)(9), 
several examples of these activities are given, such as training of 
program participants and secondary school personnel, dissemination of 
FFEL-related information and materials to schools, loan holders, 
prospective loan applicants, and their parents, and training at 
workshops, conferences, or other forums. When developing the NPRM, the 
Secretary did not intend to bar the use of reserve funds to provide 
notices about those activities and meetings. However, a number of 
commenters believed that this type of notification would be prohibited 
because it was not specifically listed in either Sec. 682.418 (b)(1) or 
(b)(9). To clarify this rule, the Secretary has decided to include such 
notices as an allowable activity related to ``public relations,'' under 
Sec. 682.418(b)(9). The Secretary believes that this clarification, 
together with the overall requirement that advertising costs must be 
ordinary and necessary for the fulfillment of the agency's FFEL 
guaranty responsibilities under the HEA, eliminates the need to have a 
separate regulatory provision devoted solely to advertising.
    Changes: Section 682.418(b)(1) is deleted and sections 682.418 
(b)(2) through (b)(11) will be renumbered (b)(1) through (b)(10). The 
definition of the term ``public relations'' under renumbered 
Sec. 682.418(b)(8) will permit the use of reserve funds to pay 
advertising costs related to providing notice about training of program 
participants and secondary school personnel, customer service functions 
that disseminate FFEL-related information and materials to schools, 
loan holders, prospective loan applicants, and their parents, and 
training at workshops, conferences, or other forums.

Section 682.418(b)(2)  Compensation for Personnel Services

    Comment: Many commenters asked for an explanation of how the 
Secretary's total compensation in Sec. 682.418(b)(2) was calculated to 
be 118.05 percent of the Secretary's salary. The commenters generally 
believed that the calculation did not include all of the Secretary's 
compensation. Several commenters believed the Secretary has no 
authority to put a limit on compensation that is contained in 
Sec. 682.418(b)(2). However, one guaranty agency commenter agreed with 
the regulatory language that was presented in the NPRM.
    The commenters also argued that 18.05 percent would not cover the 
average percentage of a salary attributable to benefits in the non-
profit sector. Some commenters argued that in order to attract and 
retain qualified individuals, particularly those for information 
systems type positions, it is critical for the guaranty agency to be 
able to provide competitive compensation packages to its employees. One 
commenter stated that many other organizations, such as universities 
and hospitals, receive or administer Federal funds, including funds 
issued by the Secretary, yet neither the Secretary or any other Federal 
agency has claimed authority for establishing maximum compensation for 
employees of those entities. Most of the commenters recommended that 
Sec. 682.418(b)(2) be deleted, or if not entirely deleted, the 
reference to compensation and benefits should be deleted and the 
regulations should refer only to salary when discussing the cap.
    Discussion: The Federal reserve funds are provided to guaranty 
agencies to be used for specific program purposes. The Secretary is not 
convinced that paying compensation in excess of the reasonable amounts 
proposed in the NPRM is a necessary or appropriate use of those funds. 
A guaranty agency that chooses to pay compensation that exceeds the 
amounts allowable under Sec. 682.418(b)(1) (as renumbered) may use non-
FFEL resources to fund those excess amounts of compensation.
    Overall responsibility for the FFEL Program is one of the 
Secretary's many duties, whereas the administration of a guaranty 
agency is, by comparison, the logical equivalent of a subset of the 
Secretary's overall duties. The Secretary, as the overall administrator 
of the entire FFEL Program, in addition to many other duties, has a 
wider area of responsibility than any individual associated with any 
guaranty agency. Therefore, the most appropriate salary amount to base 
the compensation restrictions upon is the Secretary's 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). 
Further, the sum of all of the components making up the annual 
compensation received by the Secretary resulted in the calculation that 
all of the benefits received by the Secretary represented a dollar 
value equal to 18.05 percent of the Secretary's annual salary.
    Changes: None.

Section 682.418(b)(3)  Contributions and Donations

    Comment: Some commenters believed that Sec. 682.418(b)(3) would 
prohibit charitable activities by guaranty agency employees and the 
training programs that guaranty agencies provide for the State 
financial aid organizations. The commenters stated that this training 
is an essential element of a guaranty agency function and should not be 
prohibited. They also noted that the OMB Circulars allow expenditures 
for the morale, health, and welfare of employees. The commenters 
recommended that the regulations be revised to comply with the OMB 
Circulars, and that the regulations allow a guaranty agency to make 
contributions

[[Page 60434]]

and donations from the reserve fund if they are for the purpose of 
meeting the agency's functions under the HEA. One commenter recommended 
that the regulations establish a maximum allowable amount to allow a 
reasonable level of guarantor external involvement and support for such 
activities, without prior approval from the Secretary. Another 
commenter recommended that the regulations permit minor contributions, 
especially in the context of matching donations of money by employees 
and allowing employees to volunteer small amounts of time during work 
hours. The commenter stated that these are reasonable and ordinary 
activities engaged in by reasonable organizations, and that guaranty 
agencies should not be prohibited from contributing to their 
communities.
    Discussion: The prohibition against contributions and donations 
does not prohibit guaranty agencies from continuing to provide 
education and information dissemination services to schools, nor does 
it interfere with the ability of a guaranty agency to perform 
activities that are ordinary and necessary for the fulfillment of its 
FFEL guaranty responsibilities under the HEA. However, contributions or 
donations, including the volunteer services of employees during working 
hours, are prohibited, unless the Secretary decides that the Federal 
interests would benefit. In that event, the Secretary will provide 
specific written authorization to the agency. The Secretary also notes 
that, except for the reference to ``guaranty agency'' instead of 
``government unit,'' the prohibition in Sec. 682.418(b)(3) contains the 
exact language found in OMB Circular A-87.
    Changes: None.

Section 682.418(b)(4)  Entertainment

    Comment: Commenters representing guaranty agencies objected to the 
prohibition in Sec. 682.418(b)(4) against the use of the reserve fund 
for entertainment, although one guaranty agency commenter agreed with 
the regulatory language that was presented in the NPRM. The commenters 
argued that guaranty agencies should be allowed to use the reserve fund 
for entertainment that would improve the morale, health, and welfare of 
their employees. Other commenters also wanted agencies to be allowed to 
use the reserve fund for entertainment costs at meetings, conferences, 
and workshops related to the guaranty agency's responsibilities under 
the HEA.
    Discussion: The FFEL reserve fund is intended to be used only for 
the purpose of ensuring that all eligible students and their parents 
have access to FFEL loans. In carrying out its responsibilities under 
the HEA, a guaranty agency, like any other organization, would need to 
provide for the adequate morale, health, and welfare of its employees. 
Such expenditures may include the reasonable costs of health or first-
aid clinics, recreational facilities, employee counseling services, 
child care services, employee information publications, or similar 
activities or services. Those costs are not prohibited, and would fall 
under the ``ordinary and necessary'' rule with respect to reasonable 
costs in Sec. 682.410(a)(11)(iii)(A). However, the Secretary does not 
view the types of activities specified under ``entertainment'' in 
Sec. 682.418(b)(4) of the NPRM to be ordinary and necessary for the 
adequate morale, health, and welfare of a guaranty agency's employees.
    The Secretary does not believe that the entertainment activities 
prohibited by these regulations are necessary to an agency's ability to 
conduct meetings, conferences, and workshops related to the guaranty 
agency's responsibilities under the HEA. The Secretary believes that 
such entertainment costs would divert FFEL resources from the goal of 
ensuring that all eligible students and their parents have access to 
FFEL loans.
    Changes: None.

Section 682.418(b)(5)  Fines, Penalties, Damages, and Other Settlements

    Comment: Several commenters opposed the restrictions in 
Sec. 682.418(b)(5) on the use of reserve funds to pay fines, penalties, 
damages, or settlements against the agency because of the agency's 
violation or alleged violation of a Federal, State, or local law or 
regulation unrelated to the FFEL Program. The commenters believed those 
restrictions would be unfair to the agencies that had no access to 
funds other than the FFEL reserves, and would effectively cut off their 
ability to defend themselves against lawsuits. The commenters argued 
that this provision is unnecessary, especially where a guaranty agency 
makes good faith efforts to comply with Federal and State laws 
unrelated to the FFEL Program.
    The commenters also believed that the provisions in 
Sec. 682.418(b)(5) are more restrictive than the OMB Circulars. They 
recommended that costs needed to defend a guaranty agency for non-FFEL 
related claims where the guaranty agency acted in good faith should be 
allowed, and that the language contained in the OMB Circulars allowing 
legal expenses required in the administration of a Federal program 
should be adopted here. A number of commenters suggested that this 
restriction would actually be contrary to the Federal fiscal interest 
since they believed it would encourage agencies to avoid litigation at 
all costs.
    Discussion: The Secretary has decided to modify this restriction so 
that the interests of the taxpayer will be protected while, at the same 
time, guaranty agency operations will not be jeopardized because the 
agency is unable to use reserve funds or obtain non-FFEL funding to pay 
fines, penalties, damages, and settlements. The Secretary believes that 
a guaranty agency should be permitted to use the reserve fund to pay 
fines for such violations or alleged violations as long as they have 
been assessed against the guaranty agency, do not involve the 
reimbursement of agency employees, do not exceed $1,000, and result 
from non-criminal charges. This approach is in accord with the 
Secretary's understanding of normal business practices. If the penalty 
exceeds $1,000 or involves an actual or alleged criminal violation, the 
agency must receive specific prior approval from the Secretary before 
using the reserve fund.
    Changes: The regulations have been revised accordingly, as 
discussed above.

Section 682.418(b)(6)  Legal Expenses

    Comment: Some commenters believed the prohibition in 
Sec. 682.418(b)(6) of the use of the reserve fund to prosecute claims 
against the Federal Government would violate a guaranty agency's right 
to due process in the case of an agency that had no access to funds 
other than the FFEL reserves. The commenters recommended that, at a 
minimum, actions based on good faith challenges, or where a reasonable 
chance of success can be demonstrated based on precedent, or where 
there is no known precedent to the contrary, should be allowed. The 
commenters recommended the deletion of the Secretary's approval prior 
to reimbursement for legal expenses when the guaranty agency has 
substantially prevailed.
    One commenter stated that if the Secretary was concerned with the 
use of Federal funds for the prosecution of frivolous matters, or 
initiation of legal action purely to avoid compliance, then that 
concern is addressed by existing ethical and court standards that 
prohibit the assertion of a claim by an attorney, that is unwarranted 
under existing law, or which cannot be supported by a good faith 
argument for a revision or change in existing law.
    Discussion: The regulations allow a guaranty agency to use reserve 
funds to appeal findings and determinations of

[[Page 60435]]

the Department by presenting its position in administrative hearings. 
However, the Secretary does not believe that it is an appropriate use 
of taxpayer funds to pay for the agencies' unsuccessful court 
challenges. The Secretary notes that the right to sue the Federal 
Government does not include the right to use Federal property to do so.
    Changes: None.
    Comment: Some commenters questioned the provision in 
Sec. 682.418(b)(6) that, even if the guarantor prevails in its 
litigation, the Secretary will determine the amount of funds to be used 
to reimburse the guarantor. The commenters argued that this provision 
would make it practically impossible for an agency to hire counsel.
    Discussion: The Secretary will reimburse a guaranty agency for all 
documented and reasonable legal expenses incurred by the agency if the 
agency substantially prevails in its claim against the Secretary.
    Changes: None.

Section 682.418(b)(7)  Lobbying Activities

    Comment: Some commenters recommended a revision so that the 
restrictions in Sec. 682.418(b)(7) would not prohibit dues paid to 
membership organizations that do not have lobbying as their principal 
purpose and activity. One guaranty agency commenter agreed with the 
regulatory language that was presented in the NPRM. Another commenter 
asked if the Secretary would consider a guaranty agency's response to 
an inquiry from a legislator to be lobbying. Some commenters 
misinterpreted the restriction in Sec. 682.418(b)(7) to mean that a 
guaranty agency could not be a member of an organization that engages 
in lobbying, even if only to a minor extent.
    Discussion: The regulations do not prohibit guaranty agencies from 
being members of organizations that engage in lobbying. The regulations 
simply prohibit Federal reserve funds from being used to pay that 
portion of the membership dues that would be used for lobbying. This 
restriction is similar to existing restrictions on the activities of 
charitable organizations under the Internal Revenue Code.
    Changes: None.

Section 682.418(b)(8)  Major Expenditures

    Comment: Several commenters representing guaranty agencies objected 
to requirements in Sec. 682.418(b)(8) restricting the use of reserve 
funds to pay for major expenditures on the grounds that it was an 
unnecessary attempt to micromanage the operations of a guaranty agency 
and would serve to hamper the effective operations of the guaranty 
agency. However, one guaranty agency commenter agreed with the 
regulatory language that was presented in the NPRM. One commenter 
acknowledged the Secretary's obligation to regulate and review a 
guaranty agency's investment of Federal reserve funds in major assets 
such as systems or facilities, but did not believe the regulations 
proposed by the Secretary provided enough guidance for how such 
proposed investments should be justified by the guaranty agencies. 
Another commenter recommended a more precise definition of the term 
``major expenditure.'' The commenter stated that such costs as claim 
payments and personnel compensation are surely ``major'' expenditures, 
but doubted that the Secretary intended those expenditures to be 
included in the notification requirement under Sec. 682.418(b)(8).
    Discussion: The use of the term ``such as'' followed by some 
examples of costs to be considered does not mean that costs similar to 
those suggested by the commenters could not be evaluated. The Secretary 
will not require notification of an agency's intended lender claim 
payment. However, the Secretary would want to know about, and would be 
concerned if a guaranty agency intended to pay personnel compensation 
(presumably, a biweekly or monthly payroll) that exceeds 5 percent of 
the agency's reserve fund balance at the time the compensation is paid.
    Changes: None.
    Comment: One commenter representing a collection agency stated that 
it would not be easy to determine if payments made to a collection 
contractor would exceed the 5 percent criterion specified in the 
regulations. The commenter noted that a collection contractor works on 
a contingency basis, therefore, potential expenditures would be 
difficult to predict. The commenter also observed that a collection 
contractor is paid only if it successfully collects a debt, so the 
payment to the contractor may not be a true ``expenditure'' of funds, 
but is simply a fee paid for increasing the balance of the agency's 
Federal reserve fund.
    Discussion: The commenter's point is well taken, but the Secretary 
sees no need to revise the regulations. If a guaranty agency believes 
that its payment to a collection contractor would exceed the 5 percent 
threshold, the Secretary expects to be notified.
    Changes: None.

Section 682.418(b)(9)  Public Relations.

    Comment: One commenter from a school was opposed to the 
restrictions on public relations costs in Sec. 682.418(b)(9). The 
commenter believed that it was appropriate for guaranty agencies to 
sponsor school training sessions, workshops, and conferences on all 
aspects of the title IV programs. The commenter stated that schools 
generally had insufficient resources available for funding such 
training, and without the financial assistance of guaranty agencies, it 
would be severely curtailed or eliminated.
    Discussion: A guaranty agency is permitted to use the reserve fund 
to pay for activities that are ordinary and necessary for the 
fulfillment of the agency's FFEL guaranty responsibilities under the 
HEA, such as training of program participants and secondary school 
personnel, customer service functions that disseminate FFEL-related 
information and materials to schools, loan holders, prospective loan 
applicants, and their parents, and training at workshops and 
conferences. The Secretary does not believe it is appropriate for a 
guaranty agency to use Federal reserve funds to pay for an activity 
that is not necessary for the agency's fulfillment of its FFEL guaranty 
responsibilities.
    Changes: None.
    Comment: Commenters representing guaranty agencies recommended that 
the list of permissible public relations expenditures needs to include 
the furnishing of lodging, transportation, and honorarium to 
participants in FFEL related functions. Otherwise, according to the 
commenters, the performance of a guaranty agency's functions under the 
HEA will be hindered. They also recommended the addition of language 
prohibiting such expenditures where the sole purpose of the expenditure 
is to promote a favorable image of the guaranty agency. One guaranty 
agency commenter agreed with the regulatory language that was presented 
in the NPRM.
    Discussion: Allowable public relations costs may include associated 
costs that are reasonable, including costs of the nature discussed by 
the commenters. The Secretary declines to list specific costs items in 
the regulations because of the number of different items that can be 
associated with allowable public relations costs. The Secretary also 
believes it would be superfluous to add language prohibiting such 
expenditures if the sole purpose of the expenditure is to promote a 
favorable image of the guaranty agency, because such expenditures 
already

[[Page 60436]]

would fail to meet the regulatory requirements pertaining to allowable 
public relations costs.
    Changes: None.
    Comment: One commenter asked if the restrictions on the use of 
reserve funds for public relations costs would mean that a guaranty 
agency could not publish an annual report.
    Discussion: The Secretary does not consider a guaranty agency's 
annual report to be a public relations activity. In the Secretary's 
view, an annual report is a normal and customary business document. The 
key test concerning such a report would be for the agency to be able to 
document that the cost of the report was reasonable.
    Changes: None.

Section 682.418(b)(10)  Relocation of Employees

    Comment: One commenter believed that Sec. 682.418(b)(10) should be 
deleted because, in the commenter's opinion, the IRS rules regarding 
relocation expenses are sufficient.
    Discussion: The issue of whether relocation expenses are income to 
a taxpayer for IRS purposes is irrelevant to the issue of whether the 
Federal reserve funds should pay for those costs.
    Changes: None.

Section 682.410(b)(11)  Travel Expenses

    Comment: Commenters representing guaranty agencies stated that 
travel rates available to Federal employees are not available to 
guaranty agency employees and, therefore, Sec. 682.418(b)(11) is not 
workable, but one guaranty agency commenter agreed with the regulatory 
language that was presented in the NPRM. The commenters also stated 
there are no standards provided by which a guaranty agency can develop 
a travel policy that will be approved by the Secretary. The commenters 
recommended a deletion of Sec. 682.418(b)(11), and suggested that a 
guaranty agency should submit its travel plan and be able to use it 
unless expressly disallowed by the Secretary. Several commenters 
believed the restrictions on travel costs in Sec. 682.418(b)(11) were 
unnecessary because the general rules governing reasonable costs would 
be sufficient.
    Discussion: The Secretary has an obligation to protect diligently 
the Federal reserve funds and assets administered by guaranty agencies. 
Although there may be a number of alternative approaches that could be 
taken to protect those reserve funds and assets, the Secretary has not 
been persuaded by the commenters that the approach proposed in the NPRM 
was unreasonable, burdensome, or failed to protect the Federal 
interests.
    Changes: None.

Section 682.418(c)  Cost Allocation

    Comment: One commenter supported the requirement that guarantors be 
required to develop cost allocation plans subject to audit, and also 
supported the requirement that the plans be reasonable, as that term is 
used in Sec. 682.410, specifically that the plan pass the ``prudent 
person'' test. However, the commenter disagreed with the requirement 
that the plan must be consistent with OMB Circular A-87. In the 
commenter's view, OMB Circular A-87 is designed for a different class 
of entities than guaranty agencies, thus, the required application of 
it to guarantors would create ambiguities and contradictions that will 
be difficult to resolve. The commenter stated that the guarantor 
agreements with the Secretary are neither grants nor cost-reimbursement 
contracts; they are fee-for-service contracts, with the Secretary 
paying the guarantor a fee for each loan guaranteed, for each loan 
successfully prevented from default, and for each defaulted loan 
collected. The commenter believed the only element of the guarantor's 
agreement with the Secretary that resembles cost reimbursement is the 
partial reimbursement of claims paid by the guarantor to lenders.
    Discussion: The Secretary has stated that OMB Circular A-87 applies 
to guaranty agencies. The Secretary does not agree that the fee-for-
service rules apply to guaranty agencies. The guaranty agencies are not 
paid for services provided, but instead receive Federal funds to use in 
performing certain roles in the FFEL Program.
    Changes: None.

Assessment of Educational Impact

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

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.

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

    Dated: November 21, 1996.
Richard W. Riley,
Secretary of Education.

    The Secretary amends 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 at least 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)(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--
* * * * *
    (ii) Costs that are reasonable, as defined under 
Sec. 682.410(a)(11)(iii), and

[[Page 60437]]

that are ordinary and necessary for the agency to fulfill its 
responsibilities under the HEA, 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 higher than the agency would incur under established 
policies, regulations, and procedures that apply to any comparable non-
Federal activities of the guaranty agency;
    (C) 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;
    (D) Net of all applicable credits; and
    (E) 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 
HEA 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 HEA;
    (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, directors, 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 decision-
making. The standards must provide for appropriate disciplinary actions 
to be applied for violations of the standards by employees, officers, 
directors, trustees, or agents of the guaranty agency, and must include 
provisions to--
    (A) Prohibit any employee, officer, director, trustee, or agent 
from participating in the selection, award, or decision-making related 
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, director, 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, directors, trustees, and 
agents of the guaranty agency, his or her partner, or any member of his 
or her immediate family, 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) 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, director, trustee, or agent of the guaranty agency 
is not reasonable 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

[[Page 60438]]

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).
    (2) 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;
    (3) 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;
    (4) 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, unless specifically approved by the 
Secretary. This prohibition does not apply if a non-criminal violation 
or alleged violation has been assessed against the guaranty agency, the 
payment does not reimburse an agency employee, and the payment does not 
exceed $1,000, or if it occurred as a result of compliance with 
specific requirements of the FFEL Program or in accordance with written 
instructions from the Secretary. The use of the reserve fund in any 
other case must be requested by the agency and specifically approved in 
advance by the Secretary;
    (5) 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;
    (6) 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;
    (7) 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;
    (8) 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 HEA, including appropriate and reasonable 
advertising designed specifically to communicate with the public and 
program participants for the purpose of facilitating the agency's 
ability to fulfill its FFEL guaranty responsibilities under the HEA. 
Ordinary and necessary public relations activities include 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 HEA, the agency may provide 
light meals and refreshments of a reasonable nature and amount to the 
participants;
    (9) 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
    (10) 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. 96-30360 Filed 11-26-96; 8:45 am]
BILLING CODE 4000-01-P