Proposed Regulatory Language

"Contextual Format"

**Loans Committee**

**Origin:** ED

**Issue:** FFEL -- Institutional Preferred Lenders

**Regulatory Cite:** §§682.212 and 682.603

**Summary of Change:** Provide limits and conditions on an institution's
development and use of a list of preferred or recommended list of
lenders in the FFEL Program to protect a borrower's choice of lender as
provided by the HEA.

**Change:**

##### §682.212 Prohibited transactions.

\(a\) No points, premiums, payments, or additional interest of any kind
may be paid or otherwise extended to any eligible lender or other party
in order to---

\(1\) Secure funds for making loans; or

\(2\) Induce a lender to make loans to either the students or the
parents of students of a particular school or particular category of
students or their parents.

\(b\) The following are examples of transactions that, if entered into
for the purposes described in paragraph (a) of this section, are
prohibited:

\(1\) Cash payments by or on behalf of a school made to a lender or
other party.

\(2\) The maintaining of a compensating balance by or on behalf of a
school with a lender.

\(3\) Payments by or on behalf of a school to a lender of servicing
costs on loans that the school does not own.

\(4\) Payments by or on behalf of a school to a lender of unreasonably
high servicing costs on loans that the school does own.

\(5\) Purchase by or on behalf of a school of stock of the lender.

\(6\) Payments ostensibly made for other purposes.

\(c\) Except when purchased by an agency of any State functioning as a
secondary market or in any other circumstances approved by the
Secretary, notes, or any interest in notes, may not be sold or otherwise
transferred at discount if the underlying loans were made---

\(1\) By a school; or

\(2\) To students or parents of students attending a school by a lender
having common ownership with that school.

\(d\) Except to secure a loan from an agency of a State functioning as a
secondary market or in other circumstances approved by the Secretary, a
school or lender (with respect to a loan made to a student, or a parent
of a student, attending a school having common ownership with that
lender), may not use a loan made under the FFEL programs as collateral
for any loan bearing aggregate interest and other charges in excess of
the sum of the interest rate applicable to the loan plus the rate of the
most recently prescribed special allowance under §682.302.

\(e\) The prohibitions described in paragraphs (a), (b), (c), and (d) of
this section apply to any school, lender, or other party that would
participate in a proscribed transaction.

\(f\) This section does not preclude a buyer of loans made by a school
from obtaining from the loan seller a warranty that---

\(1\) Covers future reductions by the Secretary or a guaranty agency in
computing the amount of loss payable on default claims filed on the
loans, if the reductions are attributable to an act, or failure to act,
on the part of the seller or previous holder; and

\(2\) Does not cover matters for which a purchaser is charged with
responsibility under this part, such as due diligence in collecting
loans.

\(g\) Section 490(c) of the Act provides that any person who knowingly
and willfully makes an unlawful payment to an eligible lender as an
inducement to make, or to acquire by assignment, a FFEL loan shall, upon
conviction thereof, be fined not more than \$10,000 or imprisoned not
more than one year, or both.

\(h\) (1) A School may not provide or make available a list of
recommended or suggested lenders [in print or any other medium or
form]{.mark} for use by the school's students or their parents that---

\(i\) Is used to deny or otherwise impede a borrower's choice of lender;

\(ii\) Contains fewer than three lenders who will make loans to
borrowers or students attending the school; and

\(iii\) Includes lenders that have offered, or have been solicited to
offer, financial or other benefits to the school or its borrowers in
exchange for inclusion on the list or any promise that a certain number
of loan applications will be sent to the lender by the school or its
students.

\(2\) A school that provides or makes available a list of recommended or
suggested lenders must---

\(i\) Disclose to prospective borrowers [as part of a list]{.mark} the
method and criteria used by the school to choose the lenders that are
recommended or suggested;

[(ii)]{.mark} Include a prominent statement in any information related
to its list of lenders advising prospective borrowers that they are not
required to use one of the school's recommended or suggested lenders;

([iii)]{.mark} [For first-time borrowers,]{.mark} [n]{.mark}ot assign,
through award packaging or other methods, a borrower's loan to a
particular lender; and

\(iv\) Not cause unnecessary [certification]{.mark} []{.mark}delays for
borrowers who use a lender that has not been recommended or suggested by
the school.

##### § 682.603   Certification by a participating school in connection with a loan application.

\(a\) A school shall certify that the information it provides in
connection with a loan application about the borrower and, in the case
of a parent borrower, the student for whom the loan is intended, is
complete and accurate. Except as provided in 34 CFR part 668, subpart E,
a school may rely in good faith upon statements made on the application
by the borrower.

\(b\) The information to be provided by the school about the borrower
making application for the loan pertains to---

\(1\) The borrower\'s eligibility for a loan, as determined in
accordance with §682.201 and §682.204;

\(2\) For a subsidized Stafford loan, the student\'s eligibility for
interest benefits as determined in accordance with §682.301; and

\(3\) The schedule for disbursement of the loan proceeds, which must
reflect the delivery of the loan proceeds as set forth in §682.604(c).

\(c\) Except as provided in paragraph (e) of this section, in certifying
a loan, a school must certify a loan for the lesser of the borrower\'s
request or the loan limits determined under §682.204.

\(d\) A school may not certify a Stafford or PLUS loan application, or
combination of loan applications, for a loan amount that---

\(1\) The school has reason to know would result in the borrower
exceeding the annual or maximum loan amounts in §682.204; or

\(2\) Exceeds the student\'s estimated cost of attendance, less---

\(i\) The student\'s estimated financial assistance for that period; and

\(ii\) In the case of a Subsidized Stafford loan, the borrower\'s
expected family contribution for that period.

\(e\) In certifying loans, a school---

(1) May not refuse to certify, or delay certification, of a Stafford or
    PLUS loan based on the borrower's selection of a particular lender
    or guaranty agency;

(2) [May not, for first-time borrowers, assign through award packaging
    or other methods, a borrower's loan to a particular lender;
    and]{.mark}

([3]{.mark}) May refuse to certify a Stafford or PLUS loan or may reduce
the borrower's determination of need for the loan if the reason for that
action is documented and provided to the borrower in writing,
provided---

\(i\) The determination is made on a case-by-case basis;

\(ii\) The documentation supporting the determination is retained in the
student\'s file; and

[(4)]{.mark} May not, under subsections (1)[,]{.mark} [(2),and
(3)]{.mark} engage in any pattern or practice that results in a denial
of a borrower\'s access to FFEL loans because of the borrower\'s race,
sex, color, religion, national origin, age, handicapped status, or
income, [or selection of a particular lender or guaranty agency.]{.mark}

Proposed Regulatory Language

"Contextual Format"

**Loans Committee**

**Origin:** ED

**Issue:** FFEL -- Prohibited Inducements

**Regulatory Cite:** §§682.200 and 682.401(e)

**Summary of Change:** Provide additional detail beyond the statutory
language of §§ 435(d)(5) and 428(b)(3) of the HEA by specifying
prohibited activities used by lenders or guaranty agencies to secure
loan applications or loan volume in the FFEL Program. Also reference
activities of lenders and guaranty agencies that are permissible because
they are comparable to the support provided to Direct Loan schools by
the Department of Education. The detailed prohibitions reflect guidance
provided by the Department in "Dear Colleague" Letters published in 1989
and 1995 and other guidance provided in response to individual inquiries
received by the Department since the prohibitions were first enacted
into law.

**Change:**

##### §682.200   Definitions.

\(b\) \* \* \*

*Lender.* (1) \* \* \*

\(5\) The term "eligible lender" does not include any lender that the
Secretary determines, after notice and opportunity for a hearing before
a designated Department official, has, directly or through an agent or
contractor---

\(i\) Offered directly or indirectly points, premiums, payments, or
other inducements to any school or other party to secure applications
for FFEL loans or to secure FFEL loan volume, which includes but is not
limited to---

\(A\) Payments or offerings of other benefits, including [prizes
or]{.mark} additional financial aid funds, to a prospective student,
parent, or Consolidation Loan borrower in exchange for applying for or
accepting a [FFEL]{.mark} loan from the lender;

\(B\) Payments or other benefits to a school or any
[school-affiliated]{.mark} organization in exchange for [FFEL
Loan]{.mark} applications, [or]{.mark} application referrals, a
specified volume or dollar amount of loans made, or placement on a
school's list of recommended or suggested lenders;

\(C\) Payments or other benefits provided to a school or
[school-affiliated]{.mark} organization under a practice or policy that
such payments or other benefits are provided to the school or
organization to secure applications for FFEL loans or to secure FFEL
loan volume;

\(D\) Payments or other benefits provided to a student at a school who
acts as the lender's representative to secure [FFEL]{.mark} loan
[applications from]{.mark} [individual prospective borrowers]{.mark}
[(E) Payments or other benefits to a loan solicitor or sales
representative of a lender who visits schools to solicit individual
prospective borrowers to apply for FFEL loans]{.mark} [from]{.mark} [the
lender;]{.mark}

([-F)]{.mark} Payment of referral or processing fees to another lender
that exceed reasonable compensation for the administrative handling and
marketing of [FFEL]{.mark} loans by the referring or processing lender,
or that are based on [volume or dollar amount of FFEL]{.mark} loans
made;

([G)]{.mark} Payment of conference or training registration,
transportation, and lodging costs for an employee of a school or
[school-affiliated organization]{.mark}

([H]{.mark}) Payment of entertainment expenses for employees of a school
or [a school-affiliated]{.mark} organization, including private
hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation, and other
gratuities related to lender-sponsored social activities; and

[(I) Undertaking philanthropic activities including]{.mark} [providing
scholarships, grants,]{.mark} [restricted gifts or financial
contributions in exchange for FFEL loan applications or application
referrals, or specified volume or dollar amount of FFEL loans made, or
placement on a school's list of recommended or suggested
lenders.]{.mark}

\(ii\) For these purposes, [a]{.mark} [school-affiliated]{.mark}
organization is defined in section 682.200. The term "applications"
includes the [Free]{.mark}Application for [Federal Student]{.mark} Aid
(FAFSA) and [FFEL loan]{.mark} master promissory notes. The term "other
benefits" includes, but is not limited to, preferential rates for or
access to the lender's other financial products, computer hardware or
non-loan processing [or non-financial aid]{.mark} related computer
software at below market rental or purchase cost, [and]{.mark} printing
and distribution of college catalogs and other materials at reduced or
no cost[.]{.mark}

\(iii\) A lender may provide---

\(A\) Assistance to a school that is comparable to [the kinds of]{.mark}
assistance provided by the Department of Education to a school in the
William D. Ford Direct Loan Program as identified by the Secretary in a
notice in the Federal Register.

\(B\) Staffing services to a school [as a third-party servicer or
otherwise]{.mark} on an occasional, short-term, emergency basis [to
assist the school with financial aid related functions]{.mark};

\(C\) Support of and participation in a [school's or a]{.mark} guaranty
agency's student aid related outreach activities;

\(D\) [M]{.mark}eals, refreshments, and receptions that are scheduled in
conjunction with meeting[, training,]{.mark} or conference events if
those [meals, refreshments, or receptions]{.mark} are open to all
meeting or conference attendees;

\(E\) Toll-free telephone numbers for use by schools or others to obtain
information about FFEL program loans, or for use by schools to
electronically submit applicant loan processing information or student
status confirmation data;

\(F\) A reduced origination fee in accordance with §682.202(c);

\(G\) A reduced interest rate as provided under the Act;

\(H\) Payment of Federal default fees in [accordance with the
Act]{.mark};

\(I\) Other benefits to a borrower under a repayment incentive program
that requires, at a minimum, one or more [scheduled]{.mark} payments to
receive or retain the benefit; and

\(J\) Items of a nominal value [to school-affiliated organizations, and
borrowers that are]{.mark} offered as a form of general[ized marketing
or]{.mark} advertising or to creat[e]{.mark} []{.mark}good will.

\(iv\) Conducted unsolicited mailings to a student or a student\'s
parents of FFEL loan application forms, except to a student who
previously has received a FFEL loan from the lender or to a student\'s
parent who previously has received a FFEL loan from the lender;

\(v\) Offered, directly or indirectly, a FFEL loan to a prospective
borrower to induce the purchase of a policy of insurance or other
product or service by the borrower or other person; or

\(vi\) Engaged in fraudulent or misleading advertising with respect to
its FFEL program loan activities.

[(vii) Presumptions- (a) For purposes of any action to enforce the
limitations included in paragraph(5), the Secretary applies a rebuttable
presumption that the payments or activities listed in (5)(i)]{.mark}
[were offered or provided to secure applications for FFEL loans.]{.mark}

[(b) For purposes of any action to enforce the limitations included in
paragraph(5), the Secretary applies a rebuttable presumption that the
payments or activities listed in paragraph (5)(ii) were not offered or
provided to secure applications for FFEL loans.]{.mark}

682.401 Basic program agreement.

\* \* \* \* \*

\(e\) *Prohibited inducements.* (1) A guaranty agency may not [directly
or through an agent or contractor]{.mark}---

\(i\) Offer directly or indirectly from any fund or assets available to
the guaranty agency, any premium, payment, or other inducement to a
student or a student's parents[, a prospective borrower of a FFEL
loan,]{.mark} or an employee [of]{.mark} or an entity or individual
affiliated with a school, to secure applica[tions]{.mark} for FFEL
loans, which includes, but is not limited to---

\(A\) Payments or offerings of other benefits, including [prizes
or]{.mark} additional financial aid funds[,]{.mark} to a prospective
student or parent borrower in exchange for processing a loan using the
agency's loan guarantee;

\(B\) Payments or other benefits, including [prizes or
additional]{.mark} financial aid funds under any [title IV or]{.mark}
State or private program, to a school based on the school's voluntary or
coerced agreement to use the guaranty agency for processing loans, or a
specified volume of loans, using the agency's loan guarantee;

\(C\) Payments or other benefits to a school or any
[school-affiliated]{.mark} organization[,]{.mark} []{.mark} or to any
individual in exchange for [FFEL loan]{.mark} applications [or]{.mark}
application referrals[,]{.mark} []{.mark}a specified volume or dollar
amount of [FFEL]{.mark} loans, or the placement of a lender that uses
the agency's loan guarantee on a school's list of recommended or
suggested lenders; and

\(D\) Payments or other benefits provided to a school or
[school-]{.mark} [affiliated]{.mark} [organization]{.mark} [under a
practice or policy that such payments or other benefits are provided to
the school or organization to secure applications for FFEL loans or to
secure FFEL loan volume for the guaranty agency or a lender that uses
the agency's loan guarantee;]{.mark}

\(E\) Payment of entertainment expenses for school employees or
employees of [school-affiliated]{.mark} organizations, including private
hospitality suites, tickets to shows or sporting events, meals,
alcoholic beverages, and any lodging, rental, transportation or other
gratuities related to any social activity sponsored by the guaranty
agency or a lender participating in the agency's program[;]{.mark}
[and]{.mark}

[(F) Undertaking philanthropic activities including providing
scholarships, grants, restricted]{.mark} [gifts or financial
contributions]{.mark} [in exchange for FFEL loan applications or
application]{.mark} [referrals, a specified volume or dollar amount of
FFEL loans using the agency's]{.mark} [loan]{.mark} [guarantee, or the
placement of]{.mark} [a lender that uses the agency's]{.mark} [loan
guarantee on a school's]{.mark} [list of recommended or suggested
lenders.]{.mark}

\(ii\) For these purposes, [school-affiliated]{.mark} organization is
defined in section 682.200. the term "applications" includes the
[Free]{.mark}Application for [Federal Student]{.mark} Aid (FAFSA) and
[FFEL loan]{.mark} master promissory notes. The term "other benefits"
includes, but is not limited to, preferential rates for or access to a
guaranty agency's products and services, computer hardware at below
market rental or purchase cost, [and the]{.mark} printing and
distribution of college catalogs and other non-counseling or non-student
financial aid related materials at reduced or no cost.

\(iii\) Assess additional costs or deny benefits otherwise provided to
schools and lenders participating in the agency's program on the basis
of the lender's or school's failure to agree to participate in, or to
provide a specified volume of loan applications or loan volume to the
agency's program [or to]{.mark} [place a lender that uses the agency's
loan guarantee on a school's list of recommended or suggested
lenders.]{.mark}

\(2\) A guaranty agency is not prohibited from providing -

\(i\) Assistance to a school that is comparable to that provided by the
Department of Education to a school in the William D. Ford Direct Loan
Program, [as identified by the]{.mark} [Secretary in a notice in the
Federal Register]{.mark};

\(ii\) Staffing services to a school [as a third-party servicer or
otherwise]{.mark} on an occasional, short-term, [or]{.mark} emergency
basis [to assist in carrying out the school's financial aid related
functions or assist the school in resolving identified
compliance-related issues]{.mark};

> \(iii\) [M]{.mark}eals and refreshments [that are reasonable in cost
> and provided in connection]{.mark} with guaranty agency sponsored
> training of program participants and [elementary,]{.mark} secondary[,
> and postsecondary]{.mark} school personnel and with workshops and
> forums customarily used by the agency to fulfill it responsibilities
> under the Act;
>
> \(iv\) [Meals, refreshments and]{.mark} receptions that are scheduled
> [in conjunction with]{.mark} training, meeting or conference events if
> those [meals, refreshments, and receptions]{.mark} are open to all
> training, meeting or conference attendees;
>
> \(v\) Travel and lodging costs that are reasonable as to cost,
> location, and duration to facilitate the attendance of school staff in
> training [or service facility tours]{.mark} that they would otherwise
> not be able to undertake, or to participate in the activities of an
> agency's governing board, a standing official advisory committee, or
> in support of other official activities of the agency;

\(vi\) Toll-free telephone numbers for use by schools or others to
obtain information about FFEL program loans, or for use by schools to
electronically submit applicant loan processing information or student
status confirmation data; and

\(vii\) Payment of Federal default fees in [accordance with the
Act.]{.mark}

[(viii) Items of nominal value to schools, school-affiliated
organizations, and borrowers that are offered as a form of generalized
marketing or advertising, or to create good will]{.mark}

(3)(i) Offer, directly or indirectly, any premium, incentive payment, or
other inducement to any lender, or any person acting as an agent,
employee, or independent contractor of any lender or other guaranty
agency to administer or market FFEL loans, other than unsubsidized
Stafford loans or subsidized Stafford loans made under a guaranty
agency\'s lender-of-last-resort program, in an effort to secure the
guaranty agency as an insurer of FFEL loans. Examples of prohibited
inducements include, but are not limited to---

\(A\) Compensating lenders or their representatives for the purpose of
securing loan applications for guarantee;

\(B\) Performing functions normally performed by lenders without
appropriate compensation;

\(C\) Providing equipment or supplies to lenders at below market cost or
rental; or

\(D\) Offering to pay a lender, that does not hold loans guaranteed by
the agency, a fee for each application forwarded for the agency\'s
guarantee.

\(ii\) For the purposes of this section, the terms "premium",
"inducement", and "incentive" do not include services directly related
to the enhancement of the administration of the FFEL Program the
guaranty agency generally provides to lenders that participate in its
program. However, the terms "premium", "inducement", and "incentive" do
apply to other activities specifically intended to secure a lender\'s
participation in the agency\'s program.

([-4]{.mark}) Mail or otherwise distribute unsolicited loan applications
to students enrolled in a secondary school or a postsecondary
institution, or to parents of those students, unless the potential
borrower has previously received loans insured by the guaranty agency;

([5]{.mark}) Conduct fraudulent or misleading advertising concerning
loan availability.

[(6) Presumptions-]{.mark} [(a) For purposes of any action to enforce
the prohibition on inducements included in paragraph (e),the Secretary
applies a rebuttable presumption that the payments or activities listed
in paragraph(e)(1) were offered or provided to secure applications for
FFEL Loans or guarantees.]{.mark}

[(b) For purposes of any action to enforce the prohibition on
inducements included in paragraph (e), the Secretary applies a
rebuttable]{.mark} [presumption that the payments or activities listed
in paragraph (e)(2) were not offered or provided to secure applications
for loans or guarantees.]{.mark}