[Federal Register Volume 63, Number 204 (Thursday, October 22, 1998)]
[Rules and Regulations]
[Pages 56756-56761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28403]



[[Page 56755]]

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Part V





Department of Education





_______________________________________________________________________



34 CFR Part 668



Student Assistance General Provisions; Final Rule

  Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / 
Rules and Regulations  

[[Page 56756]]



DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC52


Student Assistance General Provisions

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Student Assistance General Provisions 
regulations, to permit a school to appeal its Direct Loan Program 
cohort rate or weighted average cohort rate on the basis of improper 
servicing or collection of the Direct Loans included in that rate. The 
Secretary also clarifies when a school's rate is considered final.

EFFECTIVE DATE: These regulations take effect on July 1, 1999.

FOR FURTHER INFORMATION CONTACT: Kenneth Smith, U.S. Department of 
Education, 600 Independence Avenue, SW., ROB-3, Room 3045, Washington, 
DC 20202-5447. 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.
    Individuals with disabilities may obtain this document in an 
alternate format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION: On July 13, 1998, the Secretary published a 
notice of proposed rulemaking (NPRM) for the Student Assistance General 
Provisions regulations in the Federal Register (63 FR 37714).
    The NPRM included a discussion of the major issues surrounding the 
proposed changes that will not be repeated here. The following list 
provides summaries of the changes and identifies the pages of the 
preamble to the NPRM on which a discussion of the issues can be found:

Section 668.17(h)  Loan Servicing Appeals

    The Secretary proposed to allow a school to challenge its Direct 
Loan Program cohort rate or weighted average cohort rate on the basis 
of the improper servicing or collection of the Direct Loans included in 
the calculation of the rate. (63 FR 37714)

Section 668.17(i)  Finality of a School's Rate

    The Secretary proposed that once the Secretary initiates a proposed 
limitation, suspension, or termination (LS&T) action under 
Sec. 668.17(a)(2), based on the school's rate, the school may not 
challenge that rate.
    The Higher Education Amendments of 1998 (Pub. L. 105-244, enacted 
October 7, 1998) (the Amendments) make changes that affect the 
calculation of Direct Loan Program and weighted average cohort rates. 
Regulations implementing the requirements contained in the Amendments 
will be drafted through the process provided in that statute. The 
Secretary has determined that these final regulations are not subject 
to the implementation process provided in the Amendments.
    These final regulations contain changes from the NPRM. These 
changes are fully explained in the Analysis of Comments and Changes 
that follows.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, eight 
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. 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.

General

    Comments: All of the commenters supported the Secretary's proposal 
of a process for schools to challenge their Direct Loan Program cohort 
rates or weighted average cohort rates on the basis of allegations of 
the improper servicing or collection of the Direct Loans included in 
the rates. The commenters said they appreciated the Secretary's effort 
to make provisions of the Federal Family Education Loan (FFEL) Program 
and the Direct Loan Program more equal in this area. Two commenters 
also specifically noted their support of the Secretary's clarification 
of when a rate is considered final, at Sec. 668.17(i), agreeing that 
the provision would assist in addressing unnecessary delays.
    Discussion: The Secretary appreciates the commenters' support.
    Changes: None.

Effective Dates for FY 1996 Appeals (Preamble)

    Comments: The preamble to the NPRM (63 FR 37715) stated that the 
Secretary intends to allow a school to appeal its official Direct Loan 
Program cohort rate or weighted average cohort rate for fiscal year 
(FY) 1996 on the basis of the improper servicing or collection of the 
Direct Loans included in the rate as defaulted loans. Two commenters 
asked for clarification of this statement and requested information 
about the effective date, the ending date, and whether the provision is 
retroactive. One commenter reasoned that this information is needed 
because schools participating in the Direct Loan Program were not given 
the opportunity to respond to draft cohort rate data.
    Discussion: The Secretary will allow schools to appeal rates based 
on the improper servicing or collection of Direct Loans when the 
schools are notified of their FY 1996 official rates, later this year. 
Appeals on this basis will be made using the timelines and requirements 
published in these regulations. The provisions in these regulations 
also apply to a school's ability to appeal previous rates on this 
basis. A school may only appeal its FY 1994 or FY 1995 rate based on 
the improper servicing or collection of Direct Loans if the school is 
subject to loss of participation due in part to its FY 1994 or FY 1995 
rate.
    One commenter argued that ``effective'' and ``ending'' dates should 
be provided because schools participating in the Direct Loan Program 
have not been given the opportunity to respond to draft data. This 
comment, however, is based on a misunderstanding of the draft data 
review process. The draft data review process allows schools to review 
the data on which the rate is based; it does not apply to allegations 
of improper servicing or collection. Those allegations can only be 
raised during the appeal after the final rates are issued. The draft 
data review process is essentially the same for a Direct Loan Program 
loan as it is for an FFEL Program loan.
    Changes: None.

Use of ``Shall'' and ``Must'' (Sec. 668.17(h)(3)(iii)(B))

    Comments: Two commenters noted that the use of the words ``shall'' 
and ``must'' appears to be inconsistent when provisions for the FFEL 
Program (Sec. 668.17(h)(3)(ii)(B)) are compared with those for the 
Direct Loan Program (Sec. 668.17(h)(3)(iii)(B)). For example, 
regulations governing the FFEL Program state that ``the guaranty agency 
shall provide'' or ``the guaranty agency must provide,'' while 
regulations for the Direct Loan Program state only that ``the Secretary 
provides.'' The commenters asked that the language be identical in 
order to eliminate misinterpretations and to promote parity.

[[Page 56757]]

    Discussion: The difference in regulatory language is a necessary 
reflection of the difference in the purpose of the regulations, and it 
is consistent with language used in other regulations. In the FFEL 
Program regulations, the Secretary is regulating the activities of 
guaranty agencies; in the Direct Loan requirements, the Secretary is 
providing notice of departmental procedures.
    Changes: No change is made in response to the commenters' request. 
However, to correct an inconsistency in the regulatory language, the 
last sentence of Sec. 668.17(h)(3)(iii)(B)(6) was changed from ``the 
Secretary shall notify'' to ``the Secretary notifies.''

Selection of Representative Sample (Sec. 668.17(h)(3)(iii)(B))

    Comments: One commenter on behalf of a school stated that a school 
is capable of identifying students who have experienced loan servicing 
problems, and the commenter wanted to ensure that those students would 
be included in a school's representative sample. The commenter asked 
that a school be allowed to supply a list of those students for 
inclusion in the representative sample.
    Discussion: The manner in which a representative sample is 
determined is described in Sec. 668.17(h)(3)(ii)(B) for FFEL Program 
loans and in Sec. 668.17(h)(3)(iii)(B) for Direct Loan Program loans. A 
representative sample is not intended to identify each individual 
improperly serviced loan included in the calculation of the school's 
rate. Instead, it is used to calculate a reliable estimate of the 
number of improperly serviced loans included in the school's rate. This 
estimate cannot be valid if it includes pre-selected loans.
    Changes: None.

Documentation of Criteria (Secs. 668.17(h)(3)(iii)(B) and 
668.17(h)(3)(viii))

    Comments: One commenter stated that, since the Secretary does not 
regulate the Department's procedures for servicing Direct Loans, a 
school cannot know whether it has received complete loan servicing and 
collection records. The commenter recommended that the requirements for 
loan servicing records in the Direct Loan Program be the same as those 
for a guaranty agency's records in the FFEL Program at 
Sec. 682.414(a)(1)(ii). Further, the commenter believed that procedures 
outlined in the FY 1995 Official Cohort Default Rate Guide (Guide) 
require a proportional reduction of a rate if records are incomplete, 
illegible, or missing, and that a school cannot know whether this 
reduction is appropriate if it is not able to determine whether 
complete records have been provided. Another commenter asked the 
Secretary to clarify that a loan servicing error is considered to have 
occurred when the Direct Loan Servicer is unable to provide complete 
and legible loan servicing records.
    Discussion: The first commenter is correct that the Secretary 
generally does not regulate the Department's own procedures for 
servicing Direct Loans. As explained in the preamble for final 
regulations for the Direct Loan Program published in the Federal 
Register on December 1, 1994 (59 FR 61664), the Secretary is not 
required to issue regulations that control internal agency processes 
but do not affect the substantive or procedural rights of program 
participants (59 FR 61667). For this reason, the Secretary does not 
agree that it is appropriate to issue regulations to govern the loan 
servicing and collection procedures of the Direct Loan Program. The 
Secretary further notes that Sec. 668.17(h), rather than 
Sec. 682.414(a)(1)(ii), determines what constitutes a complete loan 
servicing and collection record for purposes of an appeal under 
Sec. 668.17(h).
    As noted in the ``Direct Loan School Guide,'' the Direct Loan 
Servicer performs collection activities similar to those performed by 
lenders in the FFEL Program. Insofar as those activities relate to the 
servicing and collection criteria included in Sec. 668.17(h)(3)(viii), 
the procedures of the Direct Loan Servicer are generally equivalent to 
the corresponding procedures for an FFEL lender. Therefore, the same 
type of record information needed to determine whether an FFEL Program 
loan is considered to be improperly serviced or collected under 
Sec. 668.17(h)(3)(viii) is needed to determine whether a Direct Loan 
Program loan is considered to be improperly serviced or collected. In 
order to further clarify these requirements for the Direct Loan 
Program, the criteria for determining whether a loan has been 
improperly serviced or collected have been revised to separate the 
requirements for the FFEL Program from those for the Direct Loan 
Program and to include additional guidance.
    Also, the commenters are not correct in stating that missing or 
illegible records are automatically considered to be loan servicing 
errors. The Guide only outlines a procedure for schools to use when 
documenting a guaranty agency's failure to comply with a request to 
supply a required missing record or to replace an illegible record. The 
same procedure is appropriate for a school's documentation of a similar 
request to the Direct Loan Servicer.
    Changes: Section 668.17(h)(3)(viii) is revised to clarify the 
criteria used to determine whether a Direct Loan has been improperly 
serviced or collected.
    Comments: One commenter asked for clarification of the requirements 
for documenting skip tracing in the Direct Loan Program, because the 
Department's procedures for servicing Direct Loans are not provided in 
regulations. The commenter asserted that, without this clarification, a 
school cannot verify that there is adequate documentation to determine 
whether skip tracing, if required, was performed in accordance with the 
Direct Loan Servicer's contract. The commenter recommended that the 
requirements for documenting skip tracing in the Direct Loan Program be 
the same as those for the FFEL Program, at Sec. 682.411(g).
    Discussion: Section 668.17(h)(3)(viii) has been revised to clarify 
the criterion for skip tracing that is used in determining whether a 
Direct Loan was improperly serviced or collected. Additional 
information about the skip tracing criterion for the Direct Loan 
Program will be provided in the same part of the Guide that provides 
similar information for the FFEL Program. Although the FY 1996 Guide 
contains instructions for the FFEL Program only, these instructions may 
be used for the Direct Loan Program as well. The references to a 
``lender'' in that part of the Guide should be understood to refer to 
the Direct Loan Servicer.
    The guidance included in these regulations and the Guide provides 
schools with the information needed to determine if the skip tracing 
requirement was met. Under the regulations, the skip tracing criterion 
looks only at whether skip tracing has been performed and does not 
evaluate timing or other procedural requirements related to skip 
tracing, and it is not governed by Sec. 682.411(g).
    Changes: Section 668.17(h)(3)(viii) is revised to clarify the 
criteria used to determine whether a Direct Loan has been improperly 
serviced or collected.

Additional Criteria (Sec. 668.17(h)(3)(viii))

    Comments: One commenter provided examples of loan servicing 
problems that the commenter believes should be considered improper loan 
servicing or collection under Sec. 668.17(h)(3)(viii): (1) Maintaining 
inaccurate addresses and telephone numbers; (2) failing to apply 
deferments and forbearances to accounts accurately; (3) failing to 
provide accurate, comprehensive information

[[Page 56758]]

about a borrower's delinquency status on multiple accounts to a school; 
and (4) failing to maintain the most recent information on accounts 
supplied by the school.
    Discussion: In proposing these regulations, it was not the 
Secretary's intent to expand the criteria used to determine whether a 
loan is considered to have been improperly serviced or collected. None 
of the examples listed by the commenter are considered improper loan 
servicing or collection of an FFEL Program loan under 
Sec. 668.17(h)(3)(viii) of the previous regulations, and none of these 
circumstances would be considered improper loan servicing under these 
regulations. The only criteria used to determine whether an FFEL or 
Direct Loan program loan has been improperly serviced or collected for 
purposes of an appeal of a rate under Sec. 668.17(h) are those listed 
at Sec. 668.17(h)(3)(viii).
    Changes: None.
    Comments: Two commenters asked that the criteria for improper loan 
servicing or collection be expanded to include an additional criterion 
for a Direct Loan Program loan. The proposed new criterion would 
correspond to the criterion for an FFEL Program cohort default rate 
appeal concerning a lender's submission of a request for preclaims 
assistance to the guaranty agency, at Sec. 668.17(h)(3)(viii)(A)(2) of 
these regulations. Both commenters recommended that the timely 
notification to schools of a borrower's delinquency be used as this 
additional criterion for Direct Loans, reasoning that this notification 
would be extremely useful to schools in working with borrowers to avoid 
default. One commenter argued that adding this criterion would provide 
an appropriate parallel to the preclaims notification process for the 
FFEL Program. The other commenter, noting that there was no equivalent 
for the FFEL Program's preclaims process in the Direct Loan Program, 
asked that the criterion be added in order to maintain an equivalent 
number of criteria in the two programs, and thus a more equivalent 
level of assurance that loan servicing and collection have been 
conducted properly.
    Discussion: The purpose of preclaims assistance in the FFEL Program 
is to require a guaranty agency to assist a lender in collecting on a 
loan before the loan goes into default. There is no parallel for this 
activity in the Direct Loan Program because the Department's Direct 
Loan Servicer performs all of the collection activities on a Direct 
Loan.
    In the FFEL Program, a guaranty agency is required to notify 
schools of preclaims requests when the schools request that 
notification (Sec. 682.404(a)(5)), but there is no requirement that all 
schools be notified at the time that a preclaims request is filed. The 
Direct Loan Servicer currently makes monthly reports available to a 
school concerning the delinquency of borrowers who attended the school. 
These reports may be used by schools to contact borrowers and to assist 
in reducing the schools' rates, but schools are not required to receive 
or use the reports. Accepting the commenters' recommended criterion and 
requiring receipt of these reports by Direct Loan schools would place 
an additional burden on Direct Loan schools and would create dissimilar 
requirements in the FFEL and Direct Loan programs.
    Changes: None.

Executive Order 12866

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order, the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary as necessary for administering these programs effectively and 
efficiently. Burdens specifically associated with information 
collection requirements, if any, were identified and explained in the 
preamble to the NPRM.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, the Secretary has 
determined that the benefits of the regulations justify the costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    The potential costs and benefits of these final regulations were 
discussed in the preamble to the NPRM (63 FR 37714).

Paperwork Reduction Act of 1995

    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it displays a valid 
OMB control number. The valid OMB control number assigned to the 
collection of information in these final regulations is displayed at 
the end of the affected section of the regulations.

Intergovernmental Review

    The Federal Supplemental Educational Opportunity Grant Program and 
the State Student Incentive Grant Program are subject to the 
requirements of Executive Order 12372 and the regulations in 34 CFR 
part 79. The objective of the Executive order is to foster an 
intergovernmental partnership and a strengthened federalism by relying 
on processes developed by State and local governments for coordination 
and review of proposed Federal financial assistance.
    In accordance with this order, this document is intended to provide 
early notification of the Department's specific plans and actions for 
these programs.
    The Federal Family Education Loan, Federal Supplemental Loans for 
Students, Federal Work-Study, Federal Perkins Loan, Federal Pell Grant, 
Income Contingent Loan, and William D. Ford Federal Direct Loan 
programs are not subject to the requirements of Executive Order 12372 
and the regulations in 34 CFR part 79.

Assessment of Educational Impact

    In the NPRM, the Secretary requested comments on whether the 
proposed regulations would require transmission of information that is 
being gathered by or is available from any other agency or authority of 
the United States.
    Based on the responses to the NPRM 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.

Electronic Access to This Document

    Anyone may view this document, as well as other Department of 
Education documents published in the Federal Register, in text or 
portable document format (pdf) on the World Wide Web at the following 
sites:

http://ifap.ed.gov/csb__html/fedlreg.htm
http://gcs.ed.gov/fedreg.htm
http://www.ed.gov/news.html

To use the pdf you must have the Adobe Acrobat Reader Program with 
Search, which is available free at either of the second and third of 
the previously listed sites. If you have questions about using the pdf, 
call the U.S. Government Printing Office toll free at 1-888-293-6498.
    Anyone may also view these documents in text copy only on an 
electronic bulletin board of the Department. Telephone: (202) 219-1511 
or, toll free, 1-800-222-4922. The documents are located under Option 
G--Files/Announcements, Bulletins and Press Releases.


[[Page 56759]]


    Note: The official version of this document is the document 
published in the Federal Register.

List of Subjects in 34 CFR Part 668

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

    Dated: October 19, 1998.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Numbers: 84.007: Federal 
Supplemental Educational Opportunity Grant Program; 84.032: Federal 
Family Education Loan Program; 84.032: Federal PLUS Program; 84.032: 
Federal Supplemental Loans for Students Program; 84.033: Federal 
Work-Study Program; 84.038: Federal Perkins Loan Program; 84.063: 
Federal Pell Grant Program; 84.069: State Student Incentive Grant 
Program; 84.226: Income Contingent Loan Program; and 84.268: William 
D. Ford Federal Direct Loan Program)

    The Secretary amends part 668 of title 34 of the Code of Federal 
Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    1. The authority citation for part 668 continues to read as 
follows:

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

    2. Section 668.17 is amended by revising the heading, paragraph 
(h), and paragraph (i) and by republishing the OMB control number 
following the section to read as follows:


Sec. 668.17  Default reduction and prevention measures.

* * * * *
    (h) Appeal based on allegations of improper loan servicing or 
collection--(1) General. An institution that is subject to loss of 
participation in the FFEL Program or the Direct Loan Program under 
paragraph (a)(3), (b)(1), or (b)(2) of this section or that has been 
notified by the Secretary that its FFEL Program cohort default rate, 
Direct Loan Program cohort rate, or weighted average cohort rate equals 
or exceeds 20 percent for the most recent year for which data are 
available may include in its appeal of that loss or rate a challenge 
based on allegations of improper loan servicing or collection. This 
challenge may be raised in addition to other challenges permitted under 
this section.
    (2) Standard of review. (i) An appeal based on allegations of 
improper loan servicing or collection must be submitted to the 
Secretary in accordance with the requirements of this paragraph.
    (ii) The Secretary excludes any loans from the FFEL Program cohort 
default rate, Direct Loan Program cohort rate, or weighted average 
cohort rate calculation that, due to improper servicing or collection, 
would, as demonstrated by the evidence submitted in support of the 
institution's timely appeal to the Secretary, result in an inaccurate 
or incomplete calculation of that rate.
    (iii) For the purposes of paragraph (h) of this section, a Direct 
Loan that has been included in a Direct Loan Program cohort rate, under 
paragraph (e)(1)(ii) of this section, or a weighted average cohort 
rate, under paragraph (f)(1)(ii) of this section, because it has been 
in repayment under the income contingent repayment plan for 270 days, 
with scheduled payments that are less than $15 per month and with those 
payments resulting in negative amortization, is not considered to have 
been included in that rate as a defaulted loan. An institution's appeal 
under this paragraph does not affect the inclusion of these loans in an 
institution's rate.
    (3) Procedures. The following procedures apply to appeals from FFEL 
Program cohort default rates, Direct Loan Program cohort rates, and 
weighted average cohort rates issued by the Secretary:
    (i) Notice of rate. Upon receiving notice from the Secretary that 
the institution's FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate exceeds the thresholds 
specified in paragraph (a)(3), (b)(1), or (b)(2) of this section or 
that its most recent rate equals or exceeds 20 percent, the institution 
may appeal the calculation of that rate based on allegations of 
improper loan servicing or collection. The Secretary's notice includes 
a list of all borrowers included in the calculation of the 
institution's rate.
    (ii) Appeals for FFEL Program loans. (A) To initiate an appeal 
under this paragraph for FFEL Program loans included in the 
institution's rate, the institution must notify, in writing, the 
Secretary and each guaranty agency that guaranteed loans included in 
the institution's FFEL Program cohort default rate or weighted average 
cohort rate that it is appealing the calculation of that rate. The 
notification must be received by the guaranty agency and the Secretary 
within 10 working days of the date the institution received the 
Secretary's notification. The institution's notification to the 
guaranty agency must include a copy of the list of students provided by 
the Secretary to the institution.
    (B) Within 15 working days of receiving the notification from an 
institution subject to loss of participation in the FFEL or Direct Loan 
programs under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 
within 30 calendar days of receiving that notification from any other 
institution that may file a challenge to its FFEL Program cohort 
default rate or weighted average cohort rate under this paragraph, the 
guaranty agency shall provide the institution with a representative 
sample of the loan servicing and collection records relating to 
borrowers whose loans were guaranteed by the guaranty agency and that 
were included as defaulted loans in the calculation of the 
institution's rate. For purposes of this section, when used for FFEL 
Program loans, the term ``loan servicing and collection records'' 
refers only to the records submitted by the lender to the guaranty 
agency to support the lender's submission of a default claim and 
included in the claim file. In selecting the representative sample of 
records, the guaranty agency shall use the following procedures:
    (1) The guaranty agency shall identify in social security number 
order all loans guaranteed by the guaranty agency and included as 
defaulted loans in the calculation of the FFEL Program cohort default 
rate or weighted average cohort rate that is being challenged by the 
institution.
    (2) From the population of loans identified by the guaranty agency, 
the guaranty agency shall identify a sample of the loans. The sample 
must be of a size such that the universe estimate derived from the 
sample is acceptable at a 95 percent confidence level with a plus or 
minus 5 percent confidence interval. The sampling procedure must result 
in a determination of the number of FFEL Program loans that should be 
excluded from the calculation of the FFEL Program cohort default rate 
or weighted average cohort rate under this paragraph.
    (3) The guaranty agency shall provide a copy of all servicing and 
collection records relating to each loan in the sample to the 
institution in hard copy format unless the guaranty agency and 
institution agree that all or some of the records may be provided in 
another format.
    (4) The guaranty agency may charge the institution a reasonable fee 
for copying and providing the documents, not to exceed $10 per borrower 
file.

[[Page 56760]]

    (5) After compiling the servicing and collection records for the 
loans in the sample, the guaranty agency shall send the records, a list 
of the loans included in the sample, and a description of how the 
sample was chosen to the institution. The guaranty agency shall also 
send a copy of the list of the loans included in the sample, listed in 
order by social security number, and the description of how the sample 
was chosen to the Secretary at the same time the material is sent to 
the institution.
    (6) If the guaranty agency charges the institution a fee for 
copying and providing the documents under paragraph (h)(3)(ii)(B)(4) of 
this section, the guaranty agency is not required to provide the 
documents to the institution until payment is received by the agency. 
If payment of a fee is required, the guaranty agency shall notify the 
institution, in writing, within 15 working days of receipt of the 
institution's request, of the amount of the fee. If the guaranty agency 
does not receive payment of the fee from the institution within 15 
working days of the date the institution receives notice of the fee, 
the institution shall be considered to have waived its right to 
challenge the calculation of its FFEL Program cohort default rate or 
weighted average cohort rate based on allegations of improper loan 
servicing or collection in regard to the loans guaranteed by that 
guaranty agency. The guaranty agency shall notify the institution and 
the Secretary, in writing, that the institution has failed to pay the 
fee and has apparently waived its right to challenge the calculation of 
its rate for this purpose. The Secretary determines that an institution 
that does not pay the required fee to the guaranty agency has not met 
its burden of proof in regard to the loans insured by that guaranty 
agency unless the institution proves that the agency's conclusion that 
the institution waived its appeal is incorrect.
    (iii) Appeals for Direct Loan Program loans. (A) To initiate an 
appeal under this paragraph for Direct Loans included in the 
institution's rate, the institution must notify the Secretary, in 
writing, that it is appealing the calculation of its Direct Loan 
Program cohort rate or weighted average cohort rate. The notification 
must be received by the Secretary within 10 working days of the date 
the institution received the Secretary's notification.
    (B) Within 15 working days of receiving the notification from an 
institution subject to loss of participation in the FFEL or Direct Loan 
Program under paragraph (a)(3), (b)(1), or (b)(2) of this section, or 
within 30 calendar days of receiving that notification from any other 
institution that may file a challenge to its Direct Loan Program cohort 
rate or weighted average cohort rate under this paragraph, the 
Secretary provides the institution with a representative sample of the 
loan servicing and collection records relating to borrowers whose 
Direct Loans were included as defaulted loans in the calculation of the 
institution's rate. For purposes of this section, when used for Direct 
Loans, the term ``loan servicing and collection records'' refers only 
to the records maintained by the Department's Direct Loan Servicer with 
respect to the servicing and collecting of delinquent loans prior to 
the default. In selecting the representative sample of records, the 
Secretary uses the following procedures:
    (1) The Secretary identifies in social security number order all 
Direct Loans included as defaulted loans in the calculation of the 
Direct Loan Program cohort rate or weighted average cohort rate that is 
being challenged by the institution.
    (2) From the population of loans identified by the Secretary, the 
Secretary identifies a sample of the loans. The sample is of a size 
such that the universe estimate derived from the sample is acceptable 
at a 95 percent confidence level with a plus or minus 5 percent 
confidence interval. The sampling procedure must result in a 
determination of the number of Direct Loans included in the rate as 
defaulted loans that should be excluded from the calculation of the 
Direct Loan Program cohort rate or weighted average cohort rate under 
this paragraph.
    (3) The Secretary provides a copy of all servicing and collection 
records relating to each loan in the sample to the institution in hard 
copy format unless the Secretary and institution agree that all or some 
of the records may be provided in another format.
    (4) The Secretary may charge the institution a reasonable fee for 
copying and providing the documents, not to exceed $10 per borrower 
file.
    (5) After compiling the servicing and collection records for the 
loans in the sample, the Secretary sends the records, a list of the 
loans included in the sample, and a description of how the sample was 
chosen to the institution.
    (6) If the Secretary charges the institution a fee for copying and 
providing the documents under paragraph (h)(3)(iii)(B)(4) of this 
section, the Secretary does not provide the documents to the 
institution until payment is received by the Secretary. If payment of a 
fee is required, the Secretary notifies the institution, in writing, 
within 15 working days of receipt of the institution's request, of the 
amount of the fee. If the Secretary does not receive payment of the fee 
from the institution within 15 working days of the date the institution 
receives notice of the fee, the institution shall be considered to have 
waived its right to challenge the calculation of its Direct Loan 
Program cohort rate or weighted average cohort rate based on 
allegations of improper loan servicing or collection in regard to the 
Direct Loans included in that rate. The Secretary notifies the 
institution, in writing, that the institution has failed to pay the fee 
and has waived its right to challenge the calculation of its rate on 
the basis of those allegations.
    (iv) Procedures for filing an appeal. After receiving the relevant 
loan servicing and collection records from the Secretary (for defaulted 
Direct Loan Program loans included in a Direct Loan Program cohort rate 
or weighted average cohort rate) and from all of the guaranty agencies 
that insured loans included in the institution's FFEL Program cohort 
default rate or weighted average cohort rate calculation (for defaulted 
FFEL Program loans included in a rate), the institution has 30 calendar 
days to file its appeal with the Secretary. An appeal is considered 
filed when it is received by the Secretary. If the institution is also 
filing an appeal under paragraph (c)(1)(i) of this section, the 
institution may delay submitting its appeal under this paragraph until 
the appeal under paragraph (c)(1)(i) is submitted to the Secretary. As 
part of the appeal, the institution shall submit the following 
information to the Secretary:
    (A) A list of the loans that the institution alleges would, due to 
improper loan servicing or collection, result in an inaccurate or 
incomplete calculation of the rate.
    (B) Copies of all of the loan servicing or collection records and 
any other evidence relating to a loan that the institution believes has 
been subject to improper servicing or collection. The records must be 
in hard copy or microfiche format.
    (C) For FFEL Program loans, a copy of the lists provided by the 
guaranty agencies under paragraph (h)(3)(ii)(B) of this section.
    (D) An explanation of how the alleged improper servicing or 
collection resulted in an inaccurate or incomplete calculation of the 
institution's rate.
    (E) A summary of the institution's appeal listing the following:
    (1) For FFEL Program cohort default rates, the number of loans 
insured by each guaranty agency that were included as defaulted loans 
in the

[[Page 56761]]

calculation of the institution's rate and the number of loans that 
would be excluded from the calculation of that rate by application of 
the results of the review of the sample of loans provided to the 
institution to the population of loans for each guaranty agency.
    (2) For Direct Loan Program cohort rates, the number of Direct 
Loans that were included as defaulted loans in the calculation of the 
institution's rate and the number of loans that would be excluded from 
the calculation of that rate by application of the results of the 
review of the sample of loans provided to the institution to the 
population of loans serviced by the Secretary.
    (3) For weighted average cohort rates--
    (i) The number of FFEL Program loans insured by each guaranty 
agency that were included as defaulted loans in the calculation of the 
institution's rate and the number of loans that would be excluded from 
the calculation of that rate by application of the results of the 
review of the sample of loans provided to the institution to the 
population of loans for each guaranty agency; and
    (ii) The number of Direct Loans that were included as defaulted 
loans in the calculation of the institution's rate and the number of 
loans that would be excluded from the calculation of that rate by 
application of the results of the review of the sample of loans 
provided to the institution to the population of loans serviced by the 
Secretary.
    (F) A certification by an authorized official of the institution 
that all information provided by the institution in the appeal is true 
and correct.
    (v) Decision. The Secretary or the Secretary's designee reviews the 
information submitted by the institution and issues a decision.
    (A) In making a decision under this paragraph, the Secretary 
presumes that the information provided to the institution by the 
guaranty agency or Secretary under paragraphs (h)(3)(ii)(B) and 
(iii)(B) of this section is correct unless the institution provides 
substantial evidence showing that the information is not correct.
    (B) If the Secretary finds that the evidence presented by the 
institution shows that some of the loans included in the sample of loan 
records reviewed by the institution should be excluded from calculation 
of the FFEL Program cohort default rate, Direct Loan Program cohort 
rate, or weighted average cohort rate under paragraph (h)(2) of this 
section, the Secretary reduces the institution's rate, in accordance 
with a statistically valid methodology, to reflect the percentage of 
defaulted loans in the sample that should be excluded.
    (vi) Notification. The Secretary notifies the institution, in 
writing, of the decision.
    (vii) Seeking judicial review. An institution may not seek judicial 
review of the Secretary's determination of the institution's FFEL 
Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate until the Secretary or the Secretary's 
designee issues the decision under paragraph (h)(3)(v) of this section.
    (viii) Improper loan servicing or collection criteria. For purposes 
of this paragraph, a default is considered to have been due to improper 
servicing or collection only if the borrower did not make a payment on 
the loan and--
    (A) For an FFEL Program loan, the institution proves that the 
lender failed to perform one or more of the following activities, if 
that activity was required:
    (1) Send at least one letter (other than the final demand letter) 
urging the borrower or endorser to make payments on the loan.
    (2) Attempt at least one phone call to the borrower or endorser.
    (3) Submit a request for preclaims assistance to the guaranty 
agency.
    (4) Send a final demand letter to the borrower.
    (5) Submit a certification (or other evidence) that skip tracing 
was performed.
    (B) For a Direct Loan Program loan, the institution proves that the 
Direct Loan Servicer failed to perform one or more of the following 
activities, if that activity is applicable to the loan:
    (1) Send at least one letter (other than the final demand letter) 
urging the borrower or endorser to make payments on the loan.
    (2) Attempt at least one phone call to the borrower or endorser 
unless the borrower or endorser is incarcerated or is residing outside 
a State, Mexico, or Canada.
    (3) Send a final demand letter to the borrower.
    (4) Document that skip tracing was performed if the Direct Loan 
Servicer determined it did not have the borrower's current address.
    (i) Effect of decision. (1) An institution may challenge the 
calculation of an FFEL Program cohort default rate, Direct Loan Program 
cohort rate, or weighted average cohort rate under this section no more 
than once. The Secretary's determination of an institution's appeal of 
the calculation of such a rate is binding on any future appeal by the 
institution.
    (2) An institution that fails to challenge the calculation of an 
FFEL Program cohort default rate, Direct Loan Program cohort rate, or 
weighted average cohort rate under this section within 10 working days 
of receiving notice of the determination of that rate is prohibited 
from challenging that rate in any other proceeding before the 
Department.
    (3) If the Secretary has initiated an action under paragraph (a)(2) 
of this section, the institution may not challenge the calculation of 
the FFEL Program cohort default rate, Direct Loan Program cohort rate, 
or weighted average cohort rate on which the action is based.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1840-0537)

[FR Doc. 98-28403 Filed 10-21-98; 8:45 am]
BILLING CODE 4000-01-U