37714 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules

DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840–AC52

Student Assistance General Provisions

AGENCY: Office of Postsecondary

Education, Department of Education.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Secretary proposes to

amend the Student Assistance General

Provisions regulations, 34 CFR part 668,

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 proposes to clarify when

a school’s rate is considered final.

DATES: Comments must be received by

the Department on or before September

11, 1998.

ADDRESSES: All comments concerning

these proposed regulations should be

addressed to Kenneth Smith, U.S.

Department of Education, P.O. Box

23272, Washington, DC 20026–3272.

Comments may also be sent through the

Internet to: cohortlrates@ed.gov.

Comments that concern information

collection requirements must be sent to

the Office of Management and Budget at

the address listed in the Paperwork

Reduction Act section of this preamble.

A copy of those comments may also be

sent to the Department representative

named in this section.

FOR FURTHER INFORMATION CONTACT:

Kenneth Smith, U.S. Department of

Education, 600 Independence Avenue,

SW., ROB–3, Room 3045, Washington,

DC 20202. 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:

Invitation to Comment

Interested persons are invited to

submit comments and recommendations

regarding these proposed regulations.

To ensure that public comments have

maximum effect in developing the final

regulations, the Department urges

commenters to identify clearly the

specific section or sections of the

proposed regulations that each comment

addresses and to arrange comments in

the same order as the proposed

regulations.

All comments submitted in response

to these proposed regulations will be

available for public inspection, during

and after the comment period, in Room

3045, Regional Office Building 3, 7th

and D Streets, SW., Washington, DC,

between the hours of 8:30 a.m. and 4:00

p.m., Eastern time, Monday through

Friday of each week except Federal

holidays.

On request the Department supplies

an appropriate aid, such as a reader or

print magnifier, to an individual with a

disability who needs assistance to

review the comments or other

documents in the public rulemaking

docket for these proposed regulations.

An individual with a disability who

wants to schedule an appointment for

this type of aid may call (202) 205–8113

or (202) 260–9895. An individual who

uses a TDD may call the Federal

Information Relay Service at 1–800–

877–8339, between 8 a.m. and 8 p.m.,

Eastern time, Monday through Friday.

To assist the Department in

complying with the specific

requirements of Executive Order 12866

and its overall requirement of reducing

regulatory burden, the Secretary invites

comments on whether there may be

further opportunities to reduce any

regulatory burdens found in these

proposed regulations.

General

On December 1, 1995, the Secretary

published final regulations (60 FR

61760) that modified the regulations

relating to the default reduction

initiative in the Federal Family

Education Loan (FFEL) Program and

implemented default reduction

measures in the William D. Ford Federal

Direct Loan (Direct Loan) Program.

Those regulations established the

formula for the calculation of rates for

schools that participate in the Direct

Loan Program and revised the appeal

procedures and criteria for schools that

were subject to a loss of eligibility to

participate in the FFEL Program or the

Direct Loan Program due to high FFEL

Program cohort default rates, Direct

Loan Program cohort rates, or weighted

average cohort rates.

The Secretary is proposing to amend

the appeal procedures and criteria in

these regulations. A discussion of each

proposed change is provided below.

Section 668.17(h) Loan Servicing

Appeals

Under the Department’s regulations, a

school may challenge its FFEL Program

cohort default rate or weighted average

cohort rate on the basis of the improper

servicing or collection of the FFEL loans

included in the calculation of that rate.

However, a school may not challenge a

Direct Loan Program cohort rate or a

weighted average cohort rate on the

basis of the improper servicing or

collection of the Direct Loans included

in the calculation of the rate. The

procedures and criteria for loan

servicing appeals were made different

for the two programs because the

historical and structural problems of the

FFEL Program did not exist in the new

Direct Loan Program.

As discussed in the preamble to the

final regulations published on December

1, 1995, Congress’ decision to provide

schools with an FFEL Program loan

servicing appeal was based, in large

measure, on a number of incidents in

which large FFEL Program lenders had

failed to comply with the Department’s

loan servicing requirements. The

lenders’ failure to satisfy FFEL Program

loan servicing requirements had a

demonstrable effect on cohort default

rates (see 60 FR 61769). However, the

detailed loan servicing regulations in

the FFEL Program do not exist in the

Direct Loan Program. Instead, loan

servicing in the Direct Loan Program is

controlled by contracts between the

Department and its Direct Loan

Servicers.

Nevertheless, to promote parity

between the FFEL Program and the

Direct Loan Program, the Secretary is

proposing to permit a school to appeal

its Direct Loan Program cohort rate or

weighted average cohort rate on the

basis of the improper servicing or

collection of defaulted Direct Loans

included in that rate. Just as for an FFEL

Program loan servicing appeal, this type

of appeal would only be available to a

school—

• With a Direct Loan Program cohort

rate or weighted average cohort rate that

equals or exceeds 20 percent for the

most recent year in which data are

available; or

• That becomes subject to a loss of

eligibility due to rates that equal or

exceed 25 percent for 3 consecutive

years.

While the Secretary continues to

believe that the structure and controls

inherent in the Direct Loan Program

should ensure that Direct Loans are

properly serviced and collected,

establishing appeal provisions for the

Direct Loan Program that are similar to

those available in the FFEL Program

will address concerns that some schools

have raised about this difference

between the two programs.

The procedures for a school’s loan

servicing challenge in the Direct Loan
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules 37715

Program would correspond to those for

a school challenging its FFEL Program

cohort default rate on a similar basis. A

summary of the proposed appeals

process follows:

• Within 10 working days of

receiving notification from the Secretary

that its Direct Loan Program cohort rate

or weighted average cohort rate equals

or exceeds 20 percent for the most

recent year or that it is subject to loss

of participation in the loan programs

based on its rate, the school notifies the

Secretary, in writing, that it is appealing

the calculation of its rate based on

allegations of improper loan servicing or

collection.

• Within 15 working days of

receiving the school’s notice, the

Secretary determines the size of the

representative sample of loan servicing

and collection records to be reviewed

and notifies the school of the amount of

the fee that it must pay to the Secretary

for copying and providing the

documents. Under the proposed

regulations, the Secretary may charge a

fee of up to $10 per borrower file in the

sample. The Secretary intends to charge

a fee of $10 per borrower file.

• Within 15 working days of

receiving the notice of the fee, the

school must pay the fee to the Secretary.

If payment is not received from the

school within the required timeframe,

the records will not be provided and the

school will have waived its right to

challenge the rate.

• Upon timely receipt of the fee, and

within the timelines provided in the

proposed regulations, the Secretary

provides the school with a

representative sample of the loan

servicing and collection records relating

to borrowers whose Direct Loans were

included in the school’s rate.

• After receiving the relevant loan

servicing and collection records from

the Secretary (for Direct Loan Program

loans included in a rate) and from the

appropriate guaranty agency (for FFEL

Program loans included in a rate), the

school has 30 calendar days to file its

appeal with the Secretary.

• If the school is also filing an appeal

based upon allegations that inaccurate

data were used to calculate the rate,

under § 668.17(c)(1)(i)(A), the school

may delay submitting its loan servicing

appeal until the appeal under

§ 668.17(c)(1)(i)(A) is submitted to the

Secretary.

Due to fundamental differences

between the FFEL and Direct Loan

programs, the proposed regulations for

appeals based on loan servicing and

collection in the Direct Loan Program

are not exactly the same as the FFEL

Program regulations. One of the most

significant differences is in the scope of

an appeal. For both FFEL and Direct

Loans, under § 668.17(h)(3)(v)(B), if the

Secretary finds that evidence presented

by the school shows that some loans

included in the sample reviewed by the

school should be excluded from the

calculation of the rate, the Secretary

reduces the rate to reflect the percentage

of defaulted loans in the sample that

should be excluded.

In the FFEL Program, the proportional

reduction applies to all of the FFEL

loans included in the school’s rate,

because an FFEL Program cohort default

rate is a percentage rate of the students

whose loans are in default. However, for

some schools, the Direct Loan Program

cohort rate is not limited to the

percentage rate of students whose loans

are in default. For proprietary nondegree-granting institutions, it may also

include the percentage rate of borrowers

repaying Direct Loans under the

income-contingent repayment (ICR)

plan who have scheduled payments of

less than $15 per month, when those

amounts result in negative amortization

for a period of 270 days or more (see

§§ 668.17(e)(1)(ii) and 668.17(f)(1)(ii)).

If borrowers are included in a school’s

Direct Loan Program cohort rate because

they are repaying under the ICR plan,

rather than because their loans are in

default, the improper loan servicing and

collection criteria do not apply. For

example, the Direct Loan Servicer

would not mail a final demand letter to

a borrower who is making payments

under the ICR plan and is not in default.

Therefore, as reflected in the proposed

§ 668.17(h)(2)(iii), the proportional

reduction of the rate would apply only

to borrowers with defaulted loans who

were included in a school’s rate, not to

any borrowers who have been included

because they made certain payments

under the ICR plan.

The most significant remaining

differences between the requirements

for a loan servicing appeal in the FFEL

Program and those proposed for the

Direct Loan Program are the following:

• For FFEL, the regulations in

§ 668.17(h)(3)(ii) require a school to

include in its notice of appeal to the

guaranty agency a list of the students

included in its rate. No similar

requirement is provided for Direct

Loans because the Department already

has that information.

• When sending the school a list of

the loans and a description of how the

sample of loans was chosen, a guaranty

agency is required, in

§ 668.17(h)(3)(ii)(B)(5), to send a copy of

the list to the Secretary. No

corresponding action is provided for the

Direct Loan Program because it would

be redundant.

• In § 668.17(h)(3)(ii)(B)(6), a

guaranty agency is required to notify a

school that has failed to pay a fee that

the school has apparently waived its

right to challenge the calculation of its

rate with regard to the loans guaranteed

by that agency. The guaranty agency

also notifies the Secretary. The

Secretary then determines whether the

guaranty agency’s conclusion was

correct. No similar provision is needed

for Direct Loans because the Secretary

issues the original notification of the

waiver determination.

• For FFEL, a school is required in

§ 668.17(h)(3)(iv)(C) to send the

Secretary a copy of the lists provided to

it by the guaranty agencies when it is

filing an appeal. No similar list is

required for Direct Loans because the

Department will have the information

that it provided to the institution.

• Section § 668.17(h)(3)(viii)(C)

provides that a lender’s failure to submit

a request for preclaims assistance to the

guaranty agency, if required, is a factor

in determining whether a default on an

FFEL Program loan may be considered

to have been due to improper servicing

or collection. No similar factor is

included for Direct Loans because no

similar process exists for the Direct

Loan Servicer. The Direct Loan Servicer

services the loan until its transfer to the

Department’s Debt Collection Service at

271 days of delinquency, the date on

which the loan is considered, under

§ 668.17(e)(3), to be in default for rate

calculations purposes.

The revisions in this NPRM would

provide the regulatory changes needed

to properly reflect the proposed changes

to the appeal process for Direct Loans.

The proposed regulations would not

revise the current regulations for an

FFEL Program appeal on the basis of

improper servicing or collection.

Official rates for fiscal year (FY) 1996

are scheduled to be issued later this

year. The Secretary intends to allow a

school to appeal its official Direct Loan

Program cohort rate or weighted average

cohort rate for FY 1996 on the basis of

the improper servicing or collection of

the Direct Loans included in the rate as

defaulted loans. This type of appeal

would be available only to schools with

rates of 20 percent or greater and to

schools that are subject to loss of

participation in the loan programs based

on their rates.

Section 668.17(i) Finality of a School’s

Rate

Under § 668.17(a)(2), a school with an

FFEL Program cohort default rate, Direct

Loan Program cohort rate, or a weighted
37716 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules

average cohort rate that is over 40

percent for the most recent fiscal year

for which rates have been calculated

may be subject to an action to limit,

suspend, or terminate its participation

in all of the Federal student financial

aid programs authorized by Title IV of

the Higher Education Act of 1965, as

amended (HEA). If the Secretary

initiates such an action, the school may

appeal under 34 CFR part 668, Subpart

G.

The Secretary has found, however,

that some schools with a rate over 40

percent do not challenge the rate when

they are notified. Rather, these schools

wait to challenge the calculation of that

rate until they have 3 consecutive years

of rates over 25 percent. As a result, the

administrative review process provided

under Subpart G is delayed while the

school’s new appeal is evaluated. The

Secretary believes that some schools

wait to appeal in these circumstances

solely to delay a final determination of

the limitation, suspension, or

termination action. Because a school

may continue to make loans while the

appeal process is pending, any

unnecessary delay increases the

likelihood of program abuse.

It was not the intent of the Secretary

to permit this type of delay—which may

last a year or more—between the date a

school is notified of its rate and the

resolution of the school’s appeal of a

sanction resulting from the rate. The

Secretary proposes to address the

problem of unnecessary delays in

Subpart G proceedings by providing that

once the Secretary initiates a proposed

limitation, suspension, or termination

action under § 668.17(a)(2), based on the

school’s rate, the school may not

challenge that rate.

A school that initiates an appeal of a

rate over 40 percent in a timely manner,

within 10 working days of the date that

the school is notified of the rate, would

not be affected by this revision. The

Secretary does not initiate an action

under § 668.17(a)(2) during the period

in which a school may file a timely

appeal of its rate. Also, if a school does

file a timely appeal, the Secretary does

not initiate an action under

§ 668.17(a)(2) until a determination has

been made on the appeal. Note that

current provisions in § 668.17(i) are not

changed other than to number

paragraphs and to update references to

types of rates; the only substantive

change to the current § 668.17(i) is in

the proposed § 668.17(i)(3).

The proposed revision would help the

Department, guaranty agencies, and

institutions to research appeals more

efficiently and to resolve appeals and

limitation, suspension, and termination

actions promptly. Ensuring timely

appeals and resolutions is particularly

important because schools remain

eligible to participate in the FFEL and

Direct Loan programs until the appeal

process is complete.

Executive Order 12866

Clarity of the Regulations

Executive Order 12866 requires each

agency to write regulations that are easy

to understand.

The Secretary invites comments on

how to make these proposed regulations

easier to understand, including answers

to questions such as the following: (1)

Are the requirements in the proposed

regulations clearly stated? (2) Do the

proposed regulations contain technical

terms or other wording that interferes

with their clarity? (3) Does the format of

the proposed regulations (grouping and

order of sections, use of headings,

paragraphing, etc.) aid or reduce their

clarity? Would the proposed regulations

be easier to understand if they were

divided into more (but shorter) sections?

(A ‘‘section’’ is preceded by the symbol

‘‘§ ’’ and a numbered heading; for

example, § 668.17 Default reduction and

prevention measures.) (4) Is the

description of the proposed regulations

in the ‘‘Supplementary Information’’

section of this preamble helpful in

understanding the proposed

regulations? How could this description

be more helpful in making the proposed

regulations easier to understand? (5)

What else could the Department do to

make the proposed regulations easier to

understand?

A copy of any comments that concern

how the Department could make these

proposed regulations easier to

understand should be sent to Stanley M.

Cohen, Regulations Quality Officer, U.S.

Department of Education, 600

Independence Avenue, SW. (room 5121,

FB–10), Washington, DC 20202–2241.

Regulatory Flexibility Act Certification

The Secretary has determined that

these proposed regulations would not

have a significant adverse economic

impact on a substantial number of small

entities. A Preliminary Regulatory

Flexibility Analysis (PRFA) was

performed. The provision that extends

the appeals of improper loan servicing

to Direct Loans will provide a positive

benefit to schools. The provision on the

finality of appeals was analyzed in more

detail. The PRFA determined that the

number of small and large entities

experiencing adverse economic impacts

from the appeal finality provisions is

expected to be between one and eight

per year, which is not a substantial

number.

Estimate of the Number of Entities

Experiencing Adverse Economic

Impacts From Finality of Appeal

Provision

Although no school has successfully

used the delaying tactic these

regulations would prohibit, 2 schools

could have used this tactic for fiscal

year 1994 rates, and it is possible that

up to 16 schools could use this tactic for

fiscal year 1995 rates. There is no reason

to believe that this will apply to more

schools in the future. Thus, the estimate

of the number of small and large entities

to which these regulations would apply

is between 2 and 16 each year. In the

year when two schools could have used

this delaying tactic, one school

unsuccessfully attempted to employ it

or half of the eligible schools. The PRFA

estimates that about half of the schools

to which these regulations would apply

will attempt to employ this delaying

tactic, or between one and eight per

year. Thus, the number of small and

large entities to which these regulations

would impose adverse economic

impacts is small and not considered a

substantial number.

Estimate of the Adverse Economic

Impacts of Finality of Appeal Provision

One school attempted to use this

delaying tactic, but that appeal was

denied on technical grounds. Had that

school been successful, the economic

impact would have been to delay the

school’s removal from the Title IV

programs for an estimated six months.

During those six months, the school was

estimated to have potentially earned an

additional $135,000 in Title IV revenue.

Using a 5 percent profit rate, which is

typical for proprietary schools

participating in Title IV programs, the

adverse economic impact on this school

would have been to lose about $6,750 in

profit. The PRFA did not address

whether this was a significant economic

impact, since it was previously

determined that a full Regulatory

Flexibility analysis was not required

because of the small number of entities

to which these regulations would apply.

The Secretary particularly invites

comments on the impact of these

proposed regulations on small entities.

Paperwork Reduction Act of 1995

Section 668.17 contains information

collection requirements. As required by

the Paperwork Reduction Act of 1995

(44 U.S.C. 3507(d)), the Department of

Education has submitted a copy of this

section to the Office of Management and

Budget (OMB) for its review.
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules 37717

Collection of Information: Student

Assistance General Provisions—

668.17—Default reduction and

prevention measures.

The Secretary proposes to provide

schools the opportunity to challenge

Direct Loan Program cohort rates or

weighted average cohort rates on the

basis of allegations of improper loan

servicing or collection of the Direct

Loans included in that rate as defaulted

loans. Annual public reporting burden

for the portion of this collection of

information that is attributable to

§ 668.17(h) remains unchanged and is

estimated to average 128 hours per

response for 160 non-degree-granting

school respondents, 96 hours per

response for 20 degree-granting school

respondents, and 16 hours per response

for 20 low borrower school respondents,

including the time for reviewing

instructions, searching existing data

sources, gathering and maintaining the

data needed, and completing and

reviewing the collection of information.

The collection’s total estimated annual

recordkeeping and reporting burden

hours for this section equals 22,720

hours.

There is no change to the current

burden for this collection because

neither the estimated number of

respondents nor the amount of time

needed to respond is expected to

change. At the time that previous

regulations were published, no rates had

been issued that included Direct Loans;

all schools received rates that included

only FFEL loans. A school appealing its

rate due to improper loan servicing or

collection, under these proposed

regulations, would have been subject to

the same requirements for the appeal of

its FFEL Program cohort default rate.

Organizations and individuals

desiring to submit comments on the

information collection requirements

should direct them to the Office of

Information and Regulatory Affairs,

OMB, Room 10235, New Executive

Office Building, Washington, DC 20503;

Attention: Desk Officer for U.S.

Department of Education.

The Department considers comments

by the public on this proposed

collection of information in—

• Evaluating whether the proposed

collection of information is necessary

for the proper performance of the

functions of the Department, including

whether the information will have

practical use;

• Evaluating the accuracy of the

Department’s estimate of the burden of

the proposed collection of information,

including the validity of the

methodology and assumptions used;

• Enhancing the quality, usefulness,

and clarity of the information to be

collected; and

• Minimizing the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques of

other forms of information technology;

e.g., permitting electronic submission of

responses.

OMB is required to make a decision

concerning the collection of information

contained in these proposed regulations

between 30 and 60 days after

publication of this document in the

Federal Register. Therefore, a comment

to OMB is best assured of having its full

effect if OMB receives it within 30 days

of publication. This does not affect the

deadline for the public to comment to

the Department on the proposed

regulations.

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

The Secretary particularly requests

comments on whether the proposed

regulations in this document would

require transmission of information that

is being gathered by or is available from

any other agency or authority of the

United States.

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/csblhtml/

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.

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 programseducation, Reporting and recordkeeping

requirements, Student aid, Vocational

education.

Dated: July 7, 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 WorkStudy 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 proposes to amend 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, and paragraphs (h)

and (i) to read as follows:

§ 668.17 Default reduction and prevention

measures.

* * * * *

(h) Appeal based on allegations of

improper loan servicing or collection—
37718 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules

(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 this

paragraph, 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, 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 list in

social security number order all loans

made to borrowers for attendance at the

institution and guaranteed by the

guaranty agency and included as

defaulted loans in the calculation of the

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.

(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
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules 37719

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, 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 lists in social

security number order all Direct Loans

made to borrowers for attendance at the

institution and 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 shall notify

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) of this section 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

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)
37720 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules

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 the

institution proves that the lender (for an

FFEL Program loan) or the Direct Loan

Servicer (for a Direct Loan Program

loan) failed to perform one or more of

the following activities, if that activity

was required:

(A) Send at least one letter (other than

the final demand letter) urging the

borrower or endorser to make payments

on the loan.

(B) Attempt at least one phone call to

the borrower or endorser.

(C) For an FFEL Program loan, submit

a request for preclaims assistance to the

guaranty agency.

(D) Send a final demand letter to the

borrower.

(E)(1) For an FFEL Program loan,

submit a certification (or other

evidence) that skip tracing was

performed; or

(2) For a Direct Loan Program loan,

document that skip tracing was

performed.

(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.

* * * * *

[FR Doc. 98–18514 Filed 7–10–98; 8:45 am]

BILLING CODE 4000–01–P