Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682 and 685

[Docket ID ED-2007-OPE-0133]

RIN 1840-AC89

Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Final regulations.

SUMMARY:

The Secretary amends the Federal Perkins Loan (Perkins Loan) Program, Federal Family Education Loan (FFEL) Program, and William D. Ford Federal Direct Loan (Direct Loan) Program regulations. The Secretary is amending these regulations to strengthen and improve the administration of the loan programs authorized under Title IV of the Higher Education Act of 1965, as amended (HEA).

DATES:

Effective Date:

These regulations are effective July 1, 2008.

Implementation Date:

The Secretary has determined, in accordance with section 482(c)(2)(A) of the HEA (20 U.S.C. 1089(c)(2)(A)), that institutions, lenders, guaranty agencies, and loan servicers that administer Title IV, HEA programs may, at their discretion, choose to implement §§ 674.38, 674.45, 674.61, 682.202, 682.208, 682.210, 682.211, 682.401, 682.603, 682.604, 685.204, 685.212, 685.301, and 685.304 of these final regulations on or after November 1, 2007. For further information, see the section entitled Implementation Date of These Regulations in the

SUPPLEMENTARY INFORMATION

section of this preamble.

FOR FURTHER INFORMATION CONTACT:

For information related to Simplification of the Deferment Process, Loan Counseling for Graduate or Professional Student PLUS Loan Borrowers, Mandatory Assignment of Defaulted Perkins Loans, Reasonable Collection Costs, and Child or Family Service Cancellation, Brian Smith. Telephone: (202) 502-7551 or via Internet:

brian.smith@ed.gov.

For information related to Accurate and Complete Copy of a Death Certificate, NSLDS Reporting Requirements, Maximum Loan Period, and Frequency of Capitalization, Nikki Harris. Telephone: (202) 219-7050 or via Internet:

nikki.harris@ed.gov.

For information related to Total and Permanent Disability, Certification of Electronic Signatures on Master Promissory Notes (MPNs) Assigned to the Department, Record Retention Requirements on MPNs Assigned to the Department, Eligible Lender Trustees, and Loan Discharge for False Certification as a Result of Identity Theft, Gail McLarnon. Telephone: (202) 219-7048 or via Internet:

gail.mclarnon@ed.gov.

For information related to Prohibited Inducements and Preferred Lender Lists, Pamela Moran. Telephone: (202) 502-7732 or via Internet:

pamela.moran@ed.gov.

If you use a telecommunications device for the deaf (TDD), you may call the Federal Relay Service (FRS) at 1-800-877-8339.

Individuals with disabilities may obtain this document in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) on request to any of the contact persons listed in this section.

SUPPLEMENTARY INFORMATION:

On June 12, 2007, the Secretary published a notice of proposed rulemaking (NPRM) for the Perkins Loan, FFEL and Direct Loan Programs in the

Federal Register

(72 FR 32410).

In the preamble to the NPRM, the Secretary discussed on pages 32411 through 32427 the major changes proposed in that document to strengthen and improve the administration of the loan programs authorized under Title IV of the HEA. These include the following:

• Amending §§ 674.38, 682.210, and 685.204 to allow institutions that participate in the Perkins Loan Program, FFEL lenders, and the Secretary to grant a deferment under certain circumstances to a borrower if another FFEL lender or the Department has granted the borrower a deferment for the same reason and time period.

• Amending §§ 674.38, 682.210, and 685.204 to allow a Perkins, FFEL or Direct Loan borrower's representative to apply for an armed forces or military service deferment on behalf of the borrower.

• Amending §§ 674.61, 682.402, and 685.212 to allow the use of an accurate and complete photocopy of an original or certified copy of the death certificate, in addition to the original or a certified copy of the death certificate, to support the discharge of a Title IV loan due to death.

• Amending §§ 674.61, 682.402, and 685.213 to restructure the regulations governing the discharge of a Perkins, FFEL or Direct Loan based on the borrower's total and permanent disability to clarify and provide additional explanation of the eligibility requirements.

• Amending §§ 674.61, 682.402, and 685.213 to provide for a prospective conditional discharge period to establish eligibility for a total and permanent disability discharge that is up to three years in length and begins on the date that the Secretary makes the initial determination that the borrower is totally and permanently disabled.

• Amending §§ 674.16, 682.208, and 682.414 to require institutions, lenders, and guaranty agencies to report enrollment and loan status information, or any other Title IV-related data required by the Secretary, to the Secretary by the deadline established by the Secretary.

• Amending §§ 674.19, 674.50, and 682.414 to require an institution or lender to maintain the original electronic promissory note, plus a certification and other supporting information, regarding the creation and maintenance of any electronically-signed Perkins Loan or FFEL promissory note or Master Promissory Note (MPN) and provide this certification to the Department, upon request, should it be needed to enforce an assigned loan. Institutions and lenders are required to maintain the electronic promissory note and supporting documentation for at least three years after all loan obligations evidenced by the note are satisfied.

• Amending §§ 674.19 and 674.50 to require an institution that participates in the Perkins Loan Program to retain records showing the date and amount of each disbursement of each loan made under an MPN for at least three years from the date the loan is canceled, repaid or otherwise satisfied and require the institution to submit disbursement records on an assigned Perkins Loan, upon request, should the Secretary need the records to enforce the loan.

• Amending § 682.409 to require a guaranty agency to submit the record of the lender's disbursement of loan funds to the school for delivery to the borrower when assigning a FFEL loan to the Department

• Amending §§ 682.604 and 685.304 to require entrance counseling for graduate or professional student PLUS Loan borrowers and modify the exit counseling requirements for Stafford Loan borrowers who have also received PLUS Loans.

• Amending §§ 682.401, 682.603, and 685.301 to eliminate the maximum 12-month loan period for annual loan limits in the FFEL and Direct Loan programs.

• Amending §§ 674.8 to permit the Secretary to require assignment of a Perkins Loan if the outstanding principal balance on the loan is $100 or more, the loan has been in default for seven or more years, and a payment has

not been received on the loan in the preceding 12 months, unless payments were not due because the loan was in a period of authorized forbearance or deferment.

• Amending § 674.45 to limit the amount of collection costs a school may assess against a Perkins Loan borrower to 30 percent for first collection efforts; 40 percent for second collection efforts; and, in cases of litigation, 40 percent plus court costs.

• Amending § 674.56 to clarify the eligibility requirements for a Perkins Loan borrower to qualify for a child or family service cancellation.

• Amending §§ 682.200 and 682.401 to incorporate into the regulations specific rules for lenders and guaranty agencies on prohibited inducements and activities and permissible activities in accordance with the recommendations of the Department's Task Force on these issues.

• Amending §§ 682.200 and 682.602 to reflect the provisions of The Third Higher Education Extension Act of 2006, Public Law 109-202, that prohibit a FFEL lender from entering into a new eligible lender trustee (ELT) relationship with a school or a school-affiliated organization as of September 30, 2006, but allowing such relationships in existence prior to that date to continue with certain restrictions.

• Amending § 682.202 to provide that a lender may only capitalize unpaid interest on a Federal Consolidation Loan that accrues during an in-school deferment at the expiration of the deferment.

• Amending §§ 682.208, 682.211, 682.300, 682.302, and 682.411 regarding loan discharge for false certification as a result of identity theft.

• Amending §§ 682.212 and 682.401 to specify requirements that a school must meet if it chooses to provide a list of recommended or preferred FFEL lenders for use by the school's students and their parents, and prohibit the use of a preferred lender list to deny a borrower the right to use a FFEL lender not included on a school's list.

In addition to the changes that strengthen and improve the administration of the loan programs authorized under HEA, these final regulations also incorporate certain statutory changes made to the HEA by the College Cost Reduction and Access Act (CCRAA) (Pub. L. 110-84). These changes are:

• Amending §§ 674.34, 682.210, and 685.204 to extend the military deferment to all Title IV borrowers regardless of when their loans were made, eliminate the 3-year limit on the military deferment and add a 180-day period of deferment following the borrower's demobilization as of October 1, 2007.

• Amending §§ 674.34, 682.210, and 685.204 to authorize a 13-month deferment following conclusion of their military service for certain members of the Armed Forces who were enrolled in a program of instruction at an eligible institution at the time, or within 6 months prior to the time the borrower was called to active duty as of October 1, 2007.

• Amending §§ 674.34 and 682.210 to revise the definition of economic hardship to allow a borrower to earn 150 percent of the poverty line applicable to the borrower's family size as of October 1, 2007.

• Amending §§ 682.202 and 685.202 to reduce interest rates on subsidized Stafford loans made to undergraduate students as of July 1, 2008.

• Amending § 682.302 to reduce special allowance payments for loans first disbursed on or after October 1, 2007 and establish different rates for eligible not-for-profit lenders and other lenders.

• Amending § 682.305 to increase the loan fee a lender must pay to the Secretary from 0.50 to 1.0 percent of the principal amount of the loan for loans first disbursed on or after October 1, 2007.

• Amending § 682.404 to reduce the percentage of collections that a guaranty agency may retain from 23 to 16 percent and to decrease account maintenance fees paid to guaranty agencies from 0.10 to 0.06 percent as of October 1, 2007.

• Removing § 682.415 to eliminate the “exceptional performer” status as of October 1, 2007.

Because these amendments implement changes to the HEA made by the CCRAA, we do not discuss them in the

Analysis of Comments and Changes

section.

Waiver of Proposed Rulemaking—Regulations Implementing the CCRAA

Under the Administrative Procedure Act (5 U.S.C. 553), the Department is generally required to publish a notice of proposed rulemaking and provide the public with an opportunity to comment on proposed regulations prior to issuing final regulations. In addition, all Department regulations for programs authorized under Title IV of the HEA are subject to the negotiated rulemaking requirements of section 492 of the HEA. However, both the APA and HEA provide for exemptions from these rulemaking requirements. The APA provides that an agency is not required to conduct notice-and-comment rulemaking when the agency for good cause finds that notice and comment are impracticable, unnecessary or contrary to the public interest. Similarly, section 492 of the HEA provides that the Secretary is not required to conduct negotiated rulemaking for Title IV, HEA program regulations if the Secretary determines that applying that requirement is impracticable, unnecessary or contrary to the public interest within the meaning of the HEA.

Although the regulations implementing CCRAA are subject to the APA's notice-and-comment and the HEA's negotiated rulemaking requirements, the Secretary has determined that it is unnecessary to conduct negotiated rulemaking or notice-and-comment rulemaking on these regulations. These amendments simply modify the Department's regulations to reflect statutory changes made by the CCRAA, and these statutory changes are either already effective or will be effective within a short period of time. The Secretary does not have discretion in whether or how to implement these changes. Accordingly, negotiated rulemaking and notice-and-comment rulemaking are unnecessary.

There are no significant differences between the NPRM and these final regulations resulting from public comments.

Implementation Date of These Regulations

Section 482(c) of the HEA requires that regulations affecting programs under Title IV of the HEA be published in final form by November 1 prior to the start of the award year (July 1) to which they apply. However, that section also permits the Secretary to designate any regulation as one that an entity subject to the regulation may choose to implement earlier and the conditions under which the entity may implement the provisions early.

Consistent with the intent of this regulatory effort to strengthen and improve the administration of the loan programs authorized under Title IV of the HEA, the Secretary is using the authority granted her under section 482(c) to designate certain provisions of the regulations, identified in the following paragraph, for early implementation at the discretion of each institution, lender, guaranty agency, or servicer, as appropriate.

In accordance with the authority provided by section 482(c) of the HEA, the Secretary has determined that for some provisions there are conditions that must be met in order for an institution, lender, guaranty agency, or servicer, as appropriate, to implement

those provisions early. The provisions subject to early implementation and the conditions are—

Provision:

Sections 674.38, 682.210, and 685.204 that simplify the deferment granting process and allow a borrower's representative to request a military service deferment or an Armed Forces deferment.

Condition:

None.

Provision:

Sections 674.61, 682.402, and 685.212 that allow the use of an accurate and complete photocopy of the original or certified copy of the borrower's death certificate to support the discharge of a Title IV loan due to death.

Condition:

None.

Provision:

Sections 682.603, 682.604, 685.301, and 685.304 that require entrance counseling requirements and modify exit counseling for graduate or professional student PLUS borrowers.

Condition:

None.

Provision:

Section 674.45 that limits the amount of collection costs a school may assess against a Perkins Loan borrower.

Condition:

None.

Provision:

Section 682.202 that limits the frequency of capitalization on Federal Consolidation loans to quarterly, except that a lender may only capitalize unpaid interest that accrues during an in-school deferment at the expiration of the deferment.

Condition:

None.

Provision:

Sections 682.208 and 682.211, which allow a lender to suspend credit bureau reporting for 120 days and grant borrowers a 120-day forbearance on a loan while the lender investigates a false certification as a result of an alleged identity theft.

Condition:

None.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM published on June 12, 2007, 241 parties submitted comments on the proposed regulations. An analysis of the comments and the changes in the regulations since publication of the NPRM and as a result of public comment follows.

We group major issues according to subject, with appropriate sections of the regulations referenced in parentheses. We discuss other substantive issues under the sections of the regulations to which they pertain. Generally, we do not address technical and other minor changes—and suggested changes the law does not authorize the Secretary to make. We also do not address comments pertaining to issues that were not within the scope of the NPRM.

Simplification of Deferment Process (§ 674.38, 682.210, and 685.204)

Comments:

Commenters were generally supportive of our proposal to simplify the deferment process. Some commenters, however, had suggestions for modifications.

The proposed regulations would allow a borrower's representative to request a military service or Armed Forces deferment on behalf of the borrower. Some commenters recommended that we define “borrower's representative” for purposes of a military service or Armed Forces deferment. However, several other commenters did not think it was necessary to define “borrower's representative.”

One commenter recommended that the Department revise the regulations to require (rather than just allow) lenders to grant military service deferments to eligible borrowers based upon a request from the borrower's representative.

With regard to the simplified deferment granting procedures, some commenters recommended that we require, rather than allow, lenders to grant deferments under the proposed procedures.

One commenter noted that interest does not accrue on subsidized FFEL or Direct Loans, or on Perkins Loans, during deferment periods and recommended that borrowers with these types of loans not be required to make an initial deferment request.

One commenter recommended that the notification of a deferment to a borrower of unsubsidized loans include information on the cost of the deferment.

One commenter recommended that we adopt a comparable simplified forbearance process for schools that participate in the Perkins Loan Program. This commenter felt that Perkins Loan schools should be able to grant forbearances based on a forbearance granted on a borrower's FFEL or Direct Loan. This commenter also requested that we allow borrowers in the Perkins Loan Program to verbally request a forbearance on their loans.

Several commenters recommended that we modify the regulations to permit a lender to grant a deferment “during” the same time period as a deferment granted by another lender. This would allow the deferment dates of a deferment granted by one lender to be part of the deferment period granted by another lender. The commenter noted that the dates of the deferment periods may not be exactly the same based on the status of the loans held by each of the lenders and the applicability of the deferments to the separate loans.

Discussion:

The Department agrees with the commenters who recommended that we not define the term “borrower's representative” for purposes of a military service or Armed Forces deferment. A borrower's representative would be a member of the borrower's family, or another reliable source. We do not think it is necessary to regulate a specific definition of the term “borrower's representative.” We believe allowing flexibility in this regard will be especially helpful to borrowers called to active duty and stationed overseas in areas of conflict. Defining “borrower's representative” could unnecessarily limit access to this benefit for those most deserving of it. Commenters also overwhelmingly supported our decision not to define the term “borrower's representative.”

We also agree with the recommendation that lenders should be required to accept a military service or Armed Forces deferment request from a borrower's representative. We believe that the proposed regulations would require lenders to accept such deferment requests and we have not changed that language.

However, we believe the simplified process that applies to other types of deferments should be optional for lenders. While many lenders may welcome the simplified deferment requirements as a convenience, other lenders may prefer to grant deferments based on their own review of a borrower's deferment documentation. We intend that these amended regulations will provide lenders with flexibility in structuring their processes for granting deferment requests; we do not want to unnecessarily limit their flexibility.

We disagree with the suggestion that lenders be allowed to grant deferments to borrowers with subsidized loans or Perkins Loans without a request from the borrower. We believe that the borrower who is ultimately liable for the loan should be responsible for deciding whether to request a deferment.

We disagree with the recommendation that schools participating in the Perkins Loan Program be allowed to grant forbearances based on forbearances granted on the borrower's FFEL Program loans. The mandatory forbearance requirements in the FFEL Program differ from the forbearance requirements in the Perkins Loan Program. Additionally, given that Perkins schools have wide flexibility in granting forbearances in the Perkins Loan Program, the Department sees no value in allowing schools to base Perkins forbearances on

forbearances granted in the FFEL Program.

We also disagree with the recommendation that we allow deferments to be granted “during” the same time period as another deferment under the simplified procedures. If the applicability of the deferment and the status of the separate loans is not the same, the simplified deferment process cannot be used because the loan holder would need to obtain separate documentation verifying the eligibility of the borrower based on different dates.

Changes:

None.

Accurate and Complete Copy of a Death Certificate (§§ 674.61, 682.402 and 685.212)

Comments:

Many commenters supported the proposed changes in §§ 674.61, 682.402, and 685.212 to allow loan holders to use an accurate and complete photocopy of a death certificate to discharge a Title IV loan due to the death of a borrower. The commenters agreed that this approach will reduce the cost of securing additional original or certified copies of a death certificate for the surviving family members and decrease burden for loan holders.

Several commenters suggested that the language in §§ 674.61, 682.402, and 685.212 be revised to allow a loan holder to use other data sources to grant a loan discharge based on the death of the borrower, such as official court documents, the National Student Loan Data System (NSLDS), or the Social Security Administration's (SSA's) Death Master File. Two commenters suggested that the Department allow loan holders to use NSLDS to “look back” and discharge loans for a deceased borrower that were not included in an original discharge due to the death of the borrower.

Discussion:

During the negotiations concerning these regulations, some non-Federal negotiators asked the Department to expand the types of documentation that could be used to support a request for a discharge based on the death of the borrower. Specifically, these negotiators asked that they be allowed to base discharges on documentation from NSLDS, SSA's Master Death file or court documents. We declined to adopt these proposals in order to guard against fraud and abuse in the discharge process. The SSA has publicly acknowledged that its Master Death file contains inaccuracies. For that reason, we do not consider the file to be appropriate for use in granting a death discharge and continue to believe that we should not expand the types of documentation for program integrity reasons.

The Department agrees that using NSLDS to identify the loans of a deceased borrower that were not included in a discharge based on the death of the borrower is worth exploring; however, for program integrity reasons we do not agree that NSLDS information alone should be the basis for discharging loans that were not included in the original discharge. The Department will give further consideration to the commenters' suggestion but declines to adopt the suggestion in these final regulations.

Change:

None.

Comments:

While supporting the Department's efforts to decrease the burden on families applying for a discharge, one commenter expressed concern that fraudulent photocopies would be used to secure a discharge based on the death of the borrower, thus threatening the integrity of the Title IV loan programs. Another commenter recommended that the Secretary conduct a study of how the process for granting requests for discharges based on the death of the borrower will work before issuing final regulations allowing use of a photocopy.

Discussion:

We appreciate the commenter's concern about the possible use of fraudulent photocopies of death certificates and will closely monitor the use of this documentation. We do not believe a study is necessary at this time. An official death certificate is very difficult to alter and we expect loan holders to be vigilant when using a photocopy as the basis for a death discharge. To ensure the integrity of the Title IV loan programs, the granting of a discharge of a Title IV loan based on the accurate and complete photocopy of an original or certified copy of the original death certificate is still at the discretion of lenders and the Secretary.

Change:

None.

Total and Permanent Disability Discharge (§§ 674.61, 682.402, and 685.213)

Comment:

Many commenters supported our proposals to restructure the regulations in §§ 674.61, 682.402, and 685.213 to clarify the eligibility requirements a borrower must meet to receive a total and permanent disability loan discharge and to provide for a similar process across the three loan programs. Several commenters also supported the requirement for a three-year conditional discharge period beginning on the date the Secretary makes an initial determination that the borrower is totally and permanently disabled.

Discussion:

We appreciate the commenters' support. Upon further internal review, we believe that the Perkins Loan Program regulations could be clearer with respect to the information that an institution must provide to a borrower upon receipt of the borrower's discharge application.

Changes:

The Department has made changes to § 674.61(b)(2) of the Perkins Loan Program regulations to provide a more detailed description of the information that must be provided to a borrower upon the institution's receipt of an application for a discharge.

Comment:

Several commenters supported the proposal in §§ 674.61(b)(2)(i), 682.402(c)(2), and 685.213(b)(1) requiring a borrower seeking a total and permanent disability discharge to submit the completed application within 90 days of the date the physician certifies the application, thus ensuring that the loan holder has timely and accurate information on which to base a preliminary determination about the borrower's eligibility for the discharge. However, other commenters believed that the 90-day time limit would be insufficient for a borrower who may be incapable of managing his or her affairs or unable to put together the paperwork necessary to submit the application. The commenters also stated that the proposed time limit would not accommodate delays in the process that are out of the borrower's control. The commenters suggested that the Secretary make exceptions to the 90-day time limit to accommodate extenuating circumstances so that borrowers will not be required to obtain a new physician certification if the borrower misses the 90-day time limit. One commenter suggested that we adopt a 180-day time limit for submission of the discharge application.

Discussion:

The Department continues to believe that the requirement in §§ 674.61(b)(2)(i), 682.402(c)(2), and 685.213(b)(1) that borrowers submit the completed application for a total and permanent disability discharge to the loan holder within 90 days of the date the physician certifies the application is appropriate and reasonable. Allowing exceptions based on extenuating circumstances or allowing a 180-day time limit would not ensure that the Secretary has accurate and timely information on which to base her determination on the borrower's application. Allowing exceptions or a longer time limit would also open up the possibility that a borrower might inadvertently take action that would disqualify the borrower for a final discharge.

Changes:

None.

Comment:

Several commenters noted that the proposed regulations do not provide for a 60-day administrative forbearance that is provided to a borrower under the current FFEL regulations for completion and submission of the discharge application form. The commenters were concerned that the omission of the forbearance would increase delinquency on borrower accounts and penalize the borrower. One commenter recommended that we require lenders to suspend collection activity and provide a forbearance to a borrower who is attempting to complete a discharge application as well as during any period while the application is pending.

Discussion:

Section 682.402(c)(5) of the proposed regulations allows a lender to grant a borrower a forbearance of payment of both principal and interest if the lender does not receive the physician's certification of total and permanent disability within 60 days of the receipt of the physician's letter requesting additional time to complete and certify the borrower's discharge application. Under § 674.33(d)(5) of the Perkins Loan Program regulations, an institution is required to forbear payment on a loan for any acceptable reason. In the Direct Loan Program, § 685.205(b)(5) specifically allows the Secretary to grant a borrower an administrative forbearance for the period of time it takes the borrower to submit appropriate documentation indicating that the borrower has become totally and permanently disabled. Given that these provisions provide a borrower with significant access to forbearance while obtaining a physician's certification and completing the discharge application, the Department believes that requiring the cessation of collection activity is unnecessary until the loan holder actually receives the discharge application.

Changes:

None.

Comment:

Several commenters stated that we should continue our current practice of using the date the borrower became totally and permanently disabled instead of the date the physician certifies the borrower's disability on the application as we proposed in §§ 674.61(b)(3)(ii), 682.402(c)(3)(ii), and 685.213(c)(2) as the date to establish the borrower's eligibility for a discharge. The commenters claimed that using the date the physician certifies the application as the date the borrower became totally and permanently disabled is arbitrary and contradicts statutory intent that disabled borrowers receive immediate relief as of the date the borrower becomes totally and permanently disabled.

Several commenters stated that many borrowers do not realize they have the ability to obtain a discharge of their student loans and as a result do not apply for a total and permanent disability discharge until several years after becoming disabled. These commenters expressed concern that using the date the physician certifies the borrower's application as the disability date combined with a prospective conditional discharge period would subject these borrowers to a long delay in receiving the discharge.

One commenter stated that, in the FFEL Program, using a date identified by a physician as the borrower's disability date ensures that only one date of disability appears on all applications and forms received by the Secretary when the borrower has multiple loans. The commenter believes that under the proposed changes to the disability discharge process, the start date of the three-year conditional discharge period for a borrower who has multiple loans may vary for each loan because loans can be assigned to the Secretary at different times in the discharge process based on when the borrower submits documentation to each lender when the lender files the claim with the guarantor, and when the guarantor reviews and pays the claim.

Several commenters questioned the Department's contention that certifying physicians rely solely on a borrower's statements in determining the borrower's date of disability and that there may not be strong medical evidence for using a different date to establish eligibility for Federal benefits. The commenters did not believe that it was appropriate for the Department to assume that a physician's diagnostic methodology is flawed.

Discussion:

Sections 437(a) and 464(c)(1)(F) of the HEA provide for the discharge of a borrower's Title IV loans if the borrower becomes totally and permanently disabled as determined in accordance with regulations of the Secretary. As discussed in the preamble to the NPRM, the Department proposed these regulatory changes to eliminate the possibility that a final discharge would be made immediately upon assignment of the account to the Department. We believe this result is inconsistent with the intent of these regulations, which is to conform the discharge requirements to those of other Federal programs that only provide for Federal benefits after appropriate monitoring of the applicant's condition.

The Department believes that borrowers are sufficiently informed about the availability of a total and permanent disability discharge. The promissory notes used in the Title IV loan programs notify borrowers of the possibility to have the loan discharged if the borrower becomes totally and permanently disabled. Information on the discharge is also available on the Department's Web site and in numerous Department publications as well as in information from other program participants. Although a borrower may experience a delay before receiving a total and permanent disability discharge under these regulations, we wish to emphasize again our belief that the provision of Federal benefits should be made only after there is sufficient monitoring of the applicant's condition.

We do not agree that using a date identified by a physician as the borrower's disability date instead of the date the physician certifies the borrower's disability on the discharge application means that a borrower with multiple loans assigned to the Department has only one date of disability. The Department addresses this and similar issues frequently under the current total and permanent disability discharge process and resolves discrepancies in disability dates on assigned loans by consulting with the physician that certified the borrower's application. The Department expects to continue this approach to resolve discrepancies under the new process and does not believe the regulations need to specifically address issues related to processing an application.

Lastly, the Department does not agree that the concern we expressed in the NPRM that there may not be strong medical evidence to support using the borrower's disability date assumes a flawed diagnostic methodology on the part of the certifying physician. As we stated in the preamble to the NPRM, we believe that the best date to use as the eligibility date is the date the physician certified the application because that process requires the physician to review the borrower's condition at that time, rather than speculate about the borrower's condition in the past.

Changes:

None.

Comment:

Several commenters disagreed with the Secretary's opinion that a three-year prospective conditional discharge period would help prevent fraud and abuse in the Title IV loan programs by allowing the Secretary to monitor a borrower's status before granting a discharge. The commenters stated that whether the conditional discharge period is prospective or retroactive is irrelevant as long as the Secretary has access to a physician's

certification confirming that the borrower meets the eligibility requirements for a disability discharge.

Several commenters also disagreed with the Department's statement in the preamble to the NPRM that there have been instances when borrowers have received otherwise disqualifying Title IV loans and earnings in excess of allowable levels after the date of the borrower's disability discharge application but also after the date of the borrower's retroactive final discharge. The commenters cited an analysis of a sample of total and permanent disability cases that they claimed did not support the Secretary's view.

Several commenters acknowledged the need to protect the integrity of the Title IV programs in regard to disability discharges and stated that reliance on a single physician's certification or determination of permanent disability may encourage fraud and abuse in the discharge process.

Discussion:

In a Final Audit Report published in November 2005, the Department's Inspector General concluded that the current, three-year conditional discharge period was ineffective for ensuring that a borrower is totally and permanently disabled because it does not always allow the Department to examine the borrower's current earnings and loan information. As a result, a borrower who is not currently disabled could receive a disability discharge even though the borrower has received current disqualifying income or loans. The Inspector General's Audit Report noted that approximately 54 percent of the borrowers who received disability discharges applied for the discharge more than three years after the disability. As a result, for the discharges approved by the Department from July 1, 2002, through June 30, 2004, approximately 54 percent (2,593 borrowers) were based on a three-year period during which there was no examination of the borrower's current income. The Inspector General examined current income information that was available for a limited number of these borrowers who had submitted a Free Application for Federal Student Aid (FAFSA) and found that a number of borrowers who claimed to be totally and permanently disabled also reported current income over the limit for a disability discharge. As a result the Inspector General recommended that the Department revise the regulations to ensure that current income and Title IV loan information is considered when determining whether a borrower is totally and permanently disabled.

The proposed regulations address the Inspector General's concerns and we believe they will discourage fraud and abuse in the disability discharge process. To further ensure against the possibility of fraud and abuse, we have added a provision to the Perkins, FFEL and Direct Loan Program regulations specifically reflecting the Secretary's authority to require a borrower to submit additional medical evidence if the Secretary determines that the borrower's application does not conclusively prove that the borrower is disabled. As part of this review, the Secretary may arrange for an additional review of the borrower's condition by an independent physician at no expense to the applicant.

Changes:

We have amended §§ 674.61(b)(4), 682.402(c)(4), and 685.213(d) to provide that the Secretary reserves the right to require additional medical evidence of a borrower's total and permanent and disability as well as an additional review of the borrower's condition by an independent physician at the Secretary's expense.

Comment:

Many commenters disagreed with the Department's proposal in §§ 674.61(b)(5), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) that only payments made on the loan after the date the physician certifies the borrower's total and permanent disability discharge application would be returned to the borrower. The commenters claimed this proposal would harm borrowers who do not obtain a timely certification of disability or who continue to make payments to keep from defaulting or becoming delinquent on their loans. One commenter recommended that repayments be refunded back to the date certified by the physician even if a prospective conditional discharge period is required.

One commenter recommended that no payments previously made on a loan be returned to a borrower if the borrower receives a final discharge based on a total and permanent disability.

One commenter requested that we clarify to whom the Secretary returns payments after a final determination of the borrower's total and permanent disability is made in § 674.61(b)(5)(iii).

Discussion:

As stated in the preamble to the NPRM, the Department proposed this change to be consistent with the decision to rely on the date the physician certifies the borrower's disability on the application and to maintain program integrity in the administration of the discharge process. Under these regulations, the borrower's disability date is the date the physician certifies the borrower's discharge application. In this situation, there is no basis for returning payments made by the borrower, or on the borrower's behalf, before that date. However, it is appropriate to return any payments made by or on behalf of the borrower after that date.

Lastly, the Secretary returns any payments to the individual who made the payments after a final determination of the borrower's total and permanent disability is made. We agree that the regulations should reflect this fact.

Changes:

Sections 674.61(b)(5)(iii), 682.402(c)(4)(iii), and 685.213(d)(3)(ii) have been changed to reflect that any payments made after the date that the physician certified the borrower's application for a disability discharge will be sent to the person who made the payment after the final discharge is issued.

Comment:

Several commenters felt that the prospective three-year conditional discharge period should begin on the date the physician certifies the borrower's total and permanent disability discharge application rather than on the date the Secretary makes an initial determination that the borrower is totally and permanently disabled. The commenters stated that using the date the Secretary makes the initial determination would be unfair to borrowers. The commenters also believed that using the date the Secretary initially determines that a borrower is disabled weakens the Secretary's incentive to make expeditious decisions on disability discharge applications and increases the likelihood that a borrower might inadvertently take an action that would disqualify him or her for a final discharge. One commenter recommended that the final regulations set a time limit for the Department to make a determination of a borrower's initial eligibility for a disability discharge.

Discussion:

The Department has considered the comments and has decided that beginning the prospective three-year conditional discharge period on the date the physician certifies the borrower's total and permanent disability discharge application rather than on the date the Secretary makes an initial determination that the borrower is totally and permanently disabled is appropriate and will not increase the opportunity for fraud in the disability discharge process.

Changes:

We have revised §§ 674.61(b)(3)(i), 682.402(c)(3)(i), and 685.213(c)(2) to provide that the three-year conditional discharge period begins on the date the physician certifies the

borrower's total and permanent disability discharge application.

Comment:

Several commenters requested that we apply the same eligibility standards that apply during the conditional discharge period (which prohibit the receipt of any additional Title IV loans and allow a borrower to earn no more than 100 percent of the poverty line for a family of two, as determined in accordance with the Community Service Block Grant Act) to the period between the date the borrower obtains a physician's certification and the date the Secretary makes her initial determination that the borrower is totally and permanently disabled. The commenters believed that applying different eligibility requirements at different stages in the process would confuse borrowers and jeopardize their ability to qualify for a discharge.

Discussion:

The Department has considered the comments and agrees that applying the same eligibility standards beginning on the date the borrower obtains the physician's certification on the total and permanent disability discharge application and continuing those standards throughout the prospective three-year conditional discharge would reduce the complexity of the process without creating an opportunity for fraud.

Changes:

We have revised §§ 674.61(b)(4)(i), 682.402(c)(4)(i), and 685.213(d)(1) to provide that a borrower may not receive any Title IV loans or earn more than 100 percent of the poverty line for a family of two, as determined in accordance with the Community Service Block Grant Act, beginning on the date the physician certifies the borrower's discharge application and throughout the prospective three-year conditional discharge period.

Comment:

One commenter requested that the proposed regulations be clarified to define the term “new Title IV loan” to exclude subsequent disbursements of a prior loan.

Discussion:

The Department does not believe that such a change is necessary. The regulations in §§ 674.61(b)(2)(iv)(C)(

2

) and (

3

), 682.402(c)(4)(i)(B) and (C), and 685.213(b)(2)(ii)(A) and (B) already differentiate between new loans and subsequent disbursements of prior loans.

Changes:

None.

Comment:

One commenter requested that the effective dates and trigger dates in the proposed regulations be carefully evaluated so that borrowers who are in the process of having discharge forms certified are not subject to the new requirements. Another commenter requested that the effective date of any new regulations governing the disability discharge process be based on the approval date of a new Federal form to eliminate processing confusion and inadvertent delays for applicants.

Discussion:

The Department anticipates that both the new total and permanent disability discharge applications and the final regulations that govern the process will be effective on July 1, 2008, for borrowers who apply for a discharge on or after that date. Borrowers who are in the process of having discharge forms certified as of that date will not be subject to the new regulations.

Changes:

None.

Comment:

One commenter suggested the Secretary return Perkins Loan accounts to the school that assigned them if the Secretary determines that the borrower is not totally and permanently disabled. The commenter stated that if such accounts were returned to the school, the school's Perkins Loan revolving fund would benefit from any repayments made when the school resumes collection.

Discussion:

The current assignment process in § 674.50 of the Perkins Loan Program regulations requires that, upon accepting assignment of a loan, the Secretary acquire all rights, title, and interest of the institution in that loan. Returning an assigned Perkins Loan account to the school if the Secretary determines that a borrower is not totally and permanently disabled would add administrative burden to the process and is inconsistent with current regulatory requirements in § 674.50(f)(1).

Changes:

None.

Comment:

One commenter suggested that if the Secretary makes an initial determination that the borrower's disability is not total and permanent, the borrower should not only resume repayment but should also be required to repay all amounts that would have been due during the cessation of collection on the loan while the application was being processed by the loan holder and the Secretary.

Discussion:

The Department believes that to require a borrower to repay all amounts that would have been due during the cessation of collection on the loan while the application is being processed would unnecessarily discourage borrowers who might qualify for a discharge from applying.

Changes:

None.

Comment:

One commenter felt that the Department should consider disability determinations made by other Federal agencies such as the SSA or the Veteran's Administration (VA) in determining whether borrowers are eligible for a disability discharge on their Title IV loans.

Discussion:

The Department has previously considered the idea of applying the disability standards used by other Federal agencies to borrowers seeking a discharge of their Title IV loans. However, the definition of total and permanent disability used in the Department's discharge process is appropriately more demanding than that used by SSA and the VA. Those agencies use regular medical reviews of applicants over a number of years to ensure that the applicants remain eligible for benefits. In those programs, an individual loses benefits if they are no longer disabled. In contrast, the Department is providing a significant benefit to an individual on a one-time basis without any opportunity to conduct future reviews to determine if the individual is actually disabled. The Secretary believes that the process established in these regulations provides an appropriate process that will ensure that only appropriate discharges are granted.

Changes:

None.

NSLDS Reporting (§§ 674.16, 682.208, 682.401, and 682.414)

Comment:

Many commenters did not agree with proposed § 682.401(b)(20), which would change the timeframe in which guarantors must report certain student enrollment data to the current loan holder from 60 days to 30 days. The commenters believed that this change would not accommodate timely reporting in months that have 31 days. Other commenters stated that guarantors currently report information to NSLDS at least monthly and that changing the requirement for guarantors to report enrollment information to lenders to 30 days would not improve the timeliness of information. One commenter believed that the Secretary did not appropriately consider all the other established reporting periods and deadlines when developing this proposal, and that new NSLDS reporting requirements will unnecessarily burden schools with additional reporting.

One commenter asked how the Department intends to categorize Perkins Loan data that are reported to NSLDS under the new regulations. The commenter noted that historically schools categorized and reported Perkins Loans based on the terms and conditions of the loan and reported disbursements made under these categories as one loan made over a period of years. A school would create a new category of Perkins Loan when

the terms and conditions of Perkins Loans were affected by statutory changes. The commenter believed that reporting Perkins Loans as separate loans each award year would dramatically increase the number of loans reported to NSLDS and increase burden and costs associated with NSLDS reporting. The commenter noted that new NSLDS reporting criteria would increase the number of Perkins Loan account records and associated costs of reporting with no benefit to the institution or borrowers.

Three commenters stated that the language in paragraph (j) of proposed § 674.16 fails to reflect the intent of Section 485B of the HEA which specifically provides that the development of NSLDS reporting timeframes be accomplished according to mutually agreeable solutions based on consultation with guaranty agencies, lenders and institutions. The commenters stated that the Department has not devoted sufficient effort to conducting a meaningful dialogue and information exchange with institutions about reporting needs for research and policy analysis purposes.

Several other commenters suggested that there should be weekly updates to NSLDS instead of the suggested 30 days and believed that guaranty agencies, servicers, students, and schools would benefit from having more accurate and timely information in NSLDS.

Discussion:

The Secretary believes that the new NSLDS reporting timeframes will improve the timeliness and availability of information important to managing the student loan program. The Secretary also believes that the proposed regulatory changes, such as the simplification of the deferment granting process, will be easier and more efficiently implemented if timely and accurate information is more readily available in NSLDS.

The Department appreciates the commenters' concerns about the cost associated with increased reporting of Perkins Loans. Although the costs incurred by institutions to make the systems changes necessary to comply with new NSLDS reporting requirements are difficult to estimate, we believe that requiring institutions to report Perkins Loans on an award year basis, as FFEL and Direct Loan Program loans are reported, will increase the quality and integrity of Perkins Loan data and allow the Department to make meaningful comparisons between the Title IV loan programs for research and budgeting purposes. We also believe that reporting Perkins Loans on an award year basis will provide borrowers with a more accurate picture of their total indebtedness.

The Department regularly consults with program participants in setting NSLDS reporting requirements in established workgroups that meet several times a year. We believe the regulations reflect this consultative process.

With regard to the commenter who suggested that there should be weekly updates to NSLDS instead of the suggested 30-day timeframe, entities that wish to report to NSLDS on a weekly basis are able to so under current protocols. We decline to require weekly reporting requirements for all entities at this time, however, because we believe that small institutions would find such a standard difficult to manage.

The Secretary agrees with commenters that the 30-day reporting timeframe does not leave guarantors adequate time to report data to the current loan holder in months that have 31 days.

Changes:

We have changed the reporting timeframe in § 682.401(b)(20) to 35 days.

Certification of Electronic Signatures on Master Promissory Notes (MPNs) Assigned to the Department (§§ 674.19, 674.50, 682.409, and 682.414)

Comment:

One commenter agreed that proper execution and retention of electronic loan records is necessary for program integrity reasons. Several other commenters stated that the proposed changes in § 674.19(e)(2)(ii) requiring a school participating in the Perkins Loan Program to develop and maintain a certification of its electronic signature process were overly broad, would discourage schools from using electronic notes, and would impose burdensome new record-keeping requirements. Other commenters stated that institutional compliance with these new requirements would be difficult unless the Department clearly defines these new requirements and provides schools with a “safe harbor” of minimum compliance standards for Perkins Loans already signed electronically by borrowers. The commenters stated that the burden of complying with § 674.50(c)(12)(i) for institutions would be difficult to justify given the few borrowers who might dispute the validity of the electronic signature at some future date.

Several commenters stated that the requirement in § 674.50(c)(12)(ii)(B) that a school's certification include screen shots as they would have appeared to the borrower is impractical and unnecessary and asked that this requirement be eliminated.

Discussion:

The Department believes that the requirements in § 674.19(e)(2) that an institution create and maintain a certification regarding the creation and maintenance of electronically signed Perkins Loan promissory notes or MPNs in accordance with § 674.50(c)(12) ensures that the school and the Department have the evidence to enforce an assigned loan if a challenge or factual dispute arises in connection with the validity of the borrower's electronic signature. Schools are required to take legal action to collect on a defaulted Perkins Loan in accordance with § 674.46 of the Perkins Loan Program regulations. If a legal challenge to the validity of an electronic signature should arise in the course of litigating a defaulted Perkins Loan, a school will be in a much stronger legal position to prove that the borrower signed the loan and benefited from the proceeds of the loan. The need to ensure the integrity of the Perkins Loan Program justifies establishing electronic signature safeguards. Perkins Loan schools should generally not be incurring new costs or burden related to the certification of electronic signatures on promissory notes. In July of 2001, the Department published its Standards for Electronic Signature in Electronic Student Loan Transactions (Standards) to facilitate the development of electronic processes under the Electronic Signatures in Global and National Commerce Act (E-Sign Act). These Standards provided guidance to FFEL Program lenders and guaranty agencies, and to schools in their role as lenders under the Perkins Loan Program, regarding the use of electronic signatures in conducting student loan transactions, including using electronic promissory notes. At that time, we informed loan holders and institutions in the FFEL or Perkins Loan Program that if their processes for electronic signature and related records did not satisfy the Standards and the loan was held by a court to be unenforceable based on those processes, the Secretary would determine on a case-by-case basis whether Federal benefits would be denied, in the case of the FFEL Program, or whether a school would be required to reimburse its Perkins Loan Fund, in the case of the Perkins Loan Program. If, as we assume, Perkins Loan holders are complying with the Standards, added burden or cost should not be an issue. The regulations in § 674.50(c)(12) that describe what the certification must include are already very specific and detailed and a “safe harbor” is unnecessary. The only provision of these regulations that is not specific is

§ 674.50(c)(12)(ii)(F), which requires the certification to include “all other documentation and technical evidence requested by the Secretary to support the validity or the authenticity of the electronically signed promissory note.” This provision is not intended to be overly burdensome on schools. This provision is intended to cover whatever documentation a school has that is not already listed in § 674.50(c)(12)(ii)(A) through (E).

Lastly, the Department does not agree with the commenters' suggestion that inclusion of screen shots as they would have appeared to the borrower is impractical or unnecessary. The inclusion of screen shots in the certification is a critical part of the process to ensure that the promissory note is a valid, legal document, that the terms and conditions of the loan were properly represented to the borrower, and that the borrower was fully aware of the fact he or she was receiving a loan.

Changes:

None.

Comment:

One commenter suggested that the Department require each institution that participates in the Perkins Loan Program to designate an “E-Sign Contact Person” on its FISAP submission to enable institutions to meet documentation requests from the Secretary in a timely manner.

Discussion:

The Department believes this suggestion has merit and will consider implementing this proposal administratively. However, no change to the regulations is necessary.

Changes:

None.

Comment:

Many commenters stated that the 10-business day deadline required by §§ 674.50(c)(12)(iii) and 682.414(a)(6)(iii) within which Perkins Loan and FFEL loan holders must respond to a request for evidence that may be needed to resolve a dispute with a borrower on a loan assigned from the Secretary was too short. One commenter recommended a 10-business day standard only if the request relates to pending litigation and an alternative, 30-day standard if the request is not related to litigation. One commenter recommended delaying implementation of the 10-business day deadline by one year to give institutions the opportunity to put in place the systems, policies, and capability to comply and produce the requested documentation. One commenter suggested adopting a 15-business day deadline with an option to appeal if the institution faces a special situation. Another commenter suggested a 25-business day deadline. One commenter requested that the Secretary withdraw this proposal completely.

Discussion:

The Department does not believe that a 10-business day deadline to respond to requests from the Secretary for evidence needed to resolve a dispute involving an electronically-signed loan that has been assigned to the Secretary is burdensome. The Department believes that 10 business days provides sufficient time for loan holders. The Secretary believes that a timely response to a request for information is essential to proper enforcement of a promissory note, especially when a borrower is contesting the validity of an electronic signature and that challenge involves court proceedings or court-imposed deadlines. Finally, we believe that delaying implementation of this deadline or not imposing any deadline would threaten the integrity of the FFEL and Perkins Loan Programs.

Changes:

None.

Comment:

Several commenters expressed concern regarding the provision in proposed § 674.50(c)(12)(i)(B), under which the Department would require a Perkins Loan holder to provide testimony to ensure the admission of electronic records in a legal proceeding. These commenters requested that the Department clarify that the institution will not be responsible for any expenses related to this requirement.

Discussion:

Section 489 of the HEA and 34 CFR § 673.7 of the General Provisions regulations for the Federal Perkins Loan, Federal Work Study, and Federal Supplemental Educational Opportunity Grant Programs provide for an administrative cost allowance that an institution may use to offset its cost of administering the campus-based programs, including the costs related to the provision of testimony.

Changes:

None.

Comment:

One commenter requested that the Department revise § 682.409(c)(4)(viii), which would require a guaranty agency to provide the Secretary with the name and location of the entity in possession of an original, electronically signed MPN that has been assigned to the Department. The commenter asked that we change this provision to give guaranty agencies the option of providing the Secretary the name and location of the entity that created the original MPN or promissory note in response to the Secretary's request. The commenter believed this approach would provide flexibility for loan holders to continue to track the entity that created the original electronically signed MPN, while providing flexibility for new technological changes that may allow subsequent holders to obtain possession of an original electronic MPN record. This commenter also recommended a change in § 682.414(a)(6)(i) to allow the “entity” that created or the “entity in possession” of an original electronically signed promissory note respond to a request for information from the Secretary rather than the guaranty agency or lender that created the note for the same reason.

Discussion:

We disagree with the commenter that allowing a guaranty agency the option of providing the Secretary with the name and location of the entity that created the original MPN or promissory note meets the Department's needs. We also disagree that the “entity” that created or that is in possession of the original electronically signed promissory note would be the more appropriate party to respond to a request for information from the Department. If the Department needs the original, electronically signed MPN, it should be a simple matter for a guaranty agency to provide the name and location of the entity that possesses the document. Moreover, the lender and guaranty agency are the program participants that have the legal obligation to maintain program records and cooperate with the Secretary to enforce loan obligations.

Changes:

None.

Comment:

One commenter supported the provisions in §§ 674.19(e)(4)(ii) and 682.414(a)(5)(iv) requiring loan holders to retain an original of an electronically-signed MPN for three years until all the loans on the MPN are satisfied but requested clarification in the regulations as to the meaning of the term “satisfied.”

Discussion:

The FFEL, Perkins and Direct Loan Program regulations already define when a loan is “satisfied.” In all three programs, a loan is “satisfied” if the loan has been canceled, repaid in full or discharged in full. In the Perkins Loan Program, a loan is also considered “satisfied” if the loan has been repaid in full in accordance with an institution's authority to compromise on the repayment of a defaulted loan in accordance with § 674.33(e) or the institution writes off the loan in accordance with § 674.47(h). Accordingly, we do not believe any further clarification in the regulations is needed.

Changes:

None.

Comment:

One commenter stated that the proposed regulations requiring a FFEL Program loan holder to retain an original of an electronically-signed MPN for three years after all the loans are satisfied is unmanageable. This commenter recommended that FFEL Program lenders be required to submit

electronic signature certifications and authentication records to the guarantor at the time a claim is submitted. The commenter believed that this approach would ensure that certification and authentication records are available and submitted consistently and promptly with each loan the guarantor assigns to the Department.

Discussion:

The Department carefully considered this approach during negotiated rulemaking, but after considering comments made during that process, we determined that, at this time, it would not be necessary to require FFEL Program lenders to submit electronic signature certifications and authentication records to the guarantor at the time a claim is submitted. Instead, consistent with our understanding of how paper notes are being handled in the student loan industry, we have adopted the framework contained in these final regulations, which puts the responsibility for managing the electronic promissory notes and ensuring their continued enforceability on the lenders and guaranty agencies that created them.

Changes:

None.

Comment:

One commenter recommended that the Department adopt the accessibility standards of section 101(d) of the E-Sign Act, which requires that electronic records “remain accessible to all persons who are entitled to access * * * in a form that is capable of being accurately reproduced for later reference” rather than the standard in proposed § 682.414(a)(6)(iv), which requires a guaranty agency to provide the Secretary with “full and complete access” to electronic loan records. The commenter believed that the standard as currently proposed is burdensome and ambiguous. The commenter also requested a change in terminology in § 682.414(a)(6)(iv) that would require the “entity in possession” of the original electronically signed promissory note rather than the holder be responsible for ensuring access to electronic loan records.

Discussion:

The Department disagrees that using the accessibility standards of section 101(d) of the E-Sign Act rather than the standard in proposed § 682.414(a)(6)(iv) is appropriate and believes that the term “full and complete access” is clear and straight forward. The Department also does not agree with the suggestion that we substitute the term “entity in possession” of the original electronically signed for “holder” in § 682.414(a)(6)(iv). We believe the term “entity” is too vague for the purposes of these regulations.

Changes:

None.

Comment:

Several commenters suggested that the Department modify the regulations to include a provision that would end the requirement for certification of electronic signatures on MPNs after five years to evaluate the impact of the provisions on schools that participate in the Perkins Loan Program.

Discussion:

The Department does not believe it is necessary or advisable to “sunset” the provisions requiring the certification of electronic signature on MPNs after five years. These requirements are essential to the integrity of the Title IV loan programs and the Department's ability to enforce electronically-signed, assigned promissory notes. Additionally, the Department can evaluate the impact of these regulations without establishing a sunset date for these provisions.

Changes:

None.

Comment:

Several commenters requested that we establish a prospective effective date for the provisions requiring the certification of electronically-signed notes that includes only promissory notes signed on or after the effective date of the final regulations to allow program participants sufficient lead time to implement the changes.

Discussion:

The Department does not agree that these requirements should only apply to electronically-signed promissory notes made on or after July 1, 2008. As stated above in response to another comment, in July of 2001, the Department published Standards to facilitate the development of electronic processes under the E-Sign Act. We assume that FFEL Loan and Perkins Loan holders are complying with those standards and, therefore, should be ready to comply with these new requirements on July 1, 2008.

Changes:

None.

Record Retention Requirements on Master Promissory Notes (MPNs) Assigned to the Department (§§ 674.19, 674.50, 682.406, and 682.409)

Comment:

One commenter suggested that the Department collect the Perkins Loan Program MPN and the records showing the date and amount of each disbursement of Perkins Loan Program funds at the time the loan is assigned to the Department and require an institution to respond to requests for information on an assigned loan for three years following assignment, rather than require the institution to retain the MPNs and disbursement records. The commenter believed that this approach would reduce burden and prevent data corruption or archiving problems for Perkins Loan Program institutions and would allow the Department immediate access to MPNs and disbursement records if the records were needed to enforce the loan.

Discussion:

The current Perkins Loan Program assignment procedures outlined in Dear Colleague Letter CB-06-12 (August 1, 2006) require a school to submit the original or a certified true copy of the promissory note upon assignment of the loan to the Department. The requirement in § 674.19(e)(4)(ii) that an institution retain an original electronically signed MPN for three years after all the loans made on the MPN are satisfied applies to loans that have not been assigned to the Department. The regulations in § 674.50(c)(11) allow the Secretary to request a record of disbursements for each loan made to a borrower on an MPN that shows the date and amount of each disbursement on a Perkins Loan that has been assigned to the Department. If a school wishes to submit the disbursement records to the Department when assigning a Perkins Loan, the school may do so.

Changes:

None.

Comment:

Several commenters asked that the Department implement a process to notify a Perkins Loan Program school when an assigned loan has been satisfied so that the school does not incur additional cost and burden when determining when it can destroy documentation supporting its electronic authentication and signature process and disbursement records.

One commenter suggested that the Department provide schools the option to retain documentation supporting the school's electronic signature process and disbursement records for at least three years after the loan is assigned to the Secretary, rather than when the loan is satisfied, so that schools would know exactly when the three-year period begins and ends.

Discussion:

The Department believes that implementing a process to notify a school participating in the Perkins Loan Program that an assigned loan has been satisfied has merit and will explore the possibility for implementing such a process. Such a process, however, does not need to be reflected in the regulations.

The Department continues to believe that it is vital for a school to retain disbursement records and documentation supporting its authentication and electronic signature process for at least three years from the date the loan is canceled, repaid or otherwise satisfied so that the Department has access to the documents if needed to enforce an assigned loan and to ensure the continued integrity of the Perkins Loan Program.

Changes:

None.

Comment:

Several commenters stated that the new record retention provisions requiring schools participating in the Perkins Loan Program to retain disbursement and electronic authentication and signature records for each loan made using an MPN for at least three years from the date the loan is canceled, repaid or otherwise satisfied were unduly burdensome.

The commenters requested that instead of retaining a copy of each screen shot as it would have appeared to the borrower, the Department should require institutions to retain a “description” of each screen shot. The commenter also stated that requiring schools to retain “all other documentary and technical evidence supporting the validity and authenticity of an electronically-signed note” was so open-ended that schools would be forced to retain all material on the chance that the Department might request it at some future date.

Discussion:

As discussed earlier in this section, the Department believes that the retention of records will make it easier for the Department or the school to prove that a borrower benefited from the proceeds of a loan and will preserve program integrity. Moreover, we do not believe this requirement is overly burdensome or costly because it is consistent with the Department's current requirements and record storage experience. When the MPN was implemented in the Perkins Loan Program, schools were advised in Dear Colleague Letter CB-03-14 to retain documentation to support a borrower's loan transactions should the school need to enforce a loan made under a Perkins MPN. When the Perkins Loan Program MPN was updated and reissued in June of 2006, schools were specifically directed in Dear Colleague Letter CB-06-10 to retain disbursement records to support a borrower's loan transactions. This guidance, together with the record retention provisions in 34 CFR 668.24 that require a school to retain disbursement records for three years after the disbursement is made, ensures that schools should be in possession of the required records already. Further, existing Assignment Procedures in Dear Colleague Letter CB-06-12 specifically require schools to retain disbursement records on assigned loans made under an MPN until the loan is paid-in-full or otherwise satisfied and submit those records if requested to do so by the Department. As we stated in response to an earlier comment, screen shots are part of the loan making process and also provide evidence that a borrower who signed an MPN or promissory note electronically was aware that he or she was receiving a loan. It is the Department's experience that electronic storage of records supporting Title IV loans transactions are generally cost efficient.

Changes:

None.

Comment:

One commenter requested that the Department confirm that an institution is only required to retain the documentation and templates that apply to electronically-signed MPNs signed for a specified time period during which the institution's process remained unchanged, and that it will not be necessary for institutions to retain this documentation on a loan-by-loan basis.

Discussion:

The commenter is correct that an institution is required to retain the documentation and templates that apply to all of an institution's electronically-signed MPNs for discrete periods of time. We wish to emphasize that should any aspect of an institution's electronic signature process change, the institution must document the new process in the affidavit or certification required by § 674.50(c)(12).

Changes:

None.

Comment:

One commenter requested that we clarify what would constitute an “original” electronically-signed MPN under the proposed Perkins Loan record retention requirements. The commenter stated that if an “original” electronically-signed MPN means that a school can print a copy of the signed MPN, the Department should not use the word “original.” However, if the Department's intent is to require a school to produce something more than a paper copy of the MPN, the commenter requested that the Secretary provide schools and servicers additional time to ensure their ability to meet the new requirements before the regulations take effect.

Discussion:

An institution or its servicers should have a system designed so that the signed electronic record is designated as the “authoritative” copy of the promissory note and must be able to reproduce an electronically signed promissory note, when printed or viewed, as accurately as if it were a paper record. The institution or its servicer should enable the viewing or printing of electronic records using commonly available operating systems and hardware. Designation of the electronic note created by the institution as the “original” is a useful means for designating the electronic note that the institution must retain under these regulations.

Changes:

None.

Comment:

One commenter asked that we clarify whether the requirement to retain documentation of the “date and amount of each disbursement” of Perkins Loan Program funds referred to records reflecting the date the money was applied to a borrower's account or to records showing the date the funds were awarded. Another commenter requested clarification on the timeframe under which an institution would be required to submit Perkins Loan disbursement records.

Discussion:

The requirement to retain documentation of the “date and amount of each disbursement” of loan funds refers to the amount and date that Perkins Loan Program funds were applied to a borrower's account. An institution may, but is not required to, submit disbursement records to the Department when it assigns a Perkins Loan. If an institution does not submit the disbursement records to the Secretary when assigning a Perkins Loan, it must retain the records for three years from the date the loan is canceled, repaid, or otherwise satisfied in case the Secretary needs the records to enforce the loan.

Changes:

None.

Comment:

Several commenters stated that guarantors are not currently required to collect the record of the lender's disbursement of Stafford and PLUS loan funds to a school for delivery to the borrower as part of the claims process nor are they required to submit loan disbursement data under the current process for assigning loans to the Secretary. For these reasons, the commenters stated that disbursement records may not be readily available for submission in the FFEL mandatory assignment process as required by proposed § 682.409(c)(4)(vii). The commenters requested that the Department implement any new guaranty agency reporting obligation prospectively for new Stafford and PLUS loans made under an MPN on and after July 1, 2008 to give sufficient lead time to guarantors and lenders to establish the processes to support this new requirement. Another commenter, again citing the lack of availability of disbursement records through the claims process, recommended that the Secretary require the submission of the record reflecting the date of guarantee instead and only for loans that are under investigation by the Secretary.

Discussion:

The Department's longstanding regulations in § 682.414(a)(4)(ii)(D) have directed guaranty agencies to require a participating lender to maintain current, complete, and accurate records of each loan that it holds, including but not limited to, a copy of a record of each disbursement of loan proceeds. Although these records are not collected

as part of the claims process, these records must be retained in accordance with § 682.414(a)(4)(ii)(D). For this reason, the Department sees no reason to implement these new regulations prospectively and is confident that guaranty agencies and lenders can implement a process that provides for the submission of disbursement records as part of the mandatory assignment process before the regulations become effective on July 1, 2008.

Changes:

None.

Comment:

Several commenters suggested that we revise the provision in § 682.414(a)(5)(iv) requiring a lender to retain an original electronically signed Stafford or PLUS MPN for three years after all loans made under the MPN are satisfied to require the “entity in possession” of the original electronically signed MPN, rather than the “holder,” to retain the note for a period ending on the earlier of 20 years from the date of signature or the date all the loans on the MPN have been satisfied. The commenters stated that this change would address cases when a loan is assigned to another party, such as the guarantor or Secretary, and the lender has no way of knowing when all the loans under the MPN are satisfied. The commenter stated that this change would also address the fact that the life span of record retention technology has a practical limit.

Discussion:

As stated in response to comments discussed earlier, the Department believes using the term “entity” in the context of § 682.414 is too vague. The intent of the regulations is to create a legal obligation on the lender and guaranty agency that created the promissory note to cooperate with the Secretary.

Changes:

None.

Loan Counseling for Graduate or Professional Student PLUS Loan Borrowers (§§ 682.603, 682.604, 685.301, and 685.304)

Comments:

Overall, commenters were supportive of the proposed changes to the loan counseling regulations, but some commenters had questions or concerns regarding the proposed changes.

One commenter asked if the notification requirements specified in § 682.603(d) would be met if the information listed were provided to borrowers through the school's financial aid award letter process.

Several commenters noted that the proposed regulations would require schools to provide one set of initial counseling materials to student PLUS borrowers who have received prior Stafford Loans and another set of initial counseling materials to student PLUS borrowers who have not received prior Stafford Loans. The commenters acknowledged that establishing less comprehensive initial counseling requirements for student PLUS borrowers who have already received Stafford Loan initial counseling was intended to minimize burden on schools. However, these commenters stated that separate initial counseling requirements would actually be more burdensome. For some schools, separating student PLUS borrowers into different categories for initial counseling purposes would be more cumbersome than providing the same initial counseling to all student PLUS borrowers.

Several commenters noted that proposed § 682.604(f) is disjointed and hard to follow. These commenters recommended restructuring § 682.604(f).

Discussion:

The regulations do not specify a method a school must use to notify a student PLUS Loan borrower of the student's eligibility for a Stafford Loan, the different terms and conditions of PLUS and Stafford loans, and the opportunity to request a Stafford Loan instead of a PLUS Loan. The regulations only specify that this information must be provided to the student before the loan is certified, in the case of a FFEL Loan (see § 682.603(d)), or before the loan is originated, in the case of a Direct Loan (see § 685.301(a)(3)). If the financial aid award letter includes the required information, and is provided to the student before the loan is certified or originated, it would meet the requirements of § 682.603(d) or § 685.301(a)(3), as the case may be.

Many schools no longer provide in-person loan counseling, and instead use electronic, interactive counseling programs. Often these electronic, interactive counseling programs are developed by guaranty agencies and provided to schools. We believe that the benefits of a more informed borrower, particularly for graduate and professional PLUS borrowers who have access to significantly increased loan amounts, outweigh the costs of providing the additional loan counseling. In addition, schools are not required to provide separate counseling for student PLUS borrowers. Schools are not required to develop separate initial counseling materials for student PLUS borrowers with prior Stafford Loans and student PLUS borrowers without prior Stafford Loans. The regulations only specify minimum initial counseling requirements. Schools must provide certain information to PLUS borrowers who have received prior Stafford loans, and must provide certain information to PLUS borrowers who have not received prior Stafford Loans. The regulations do not prohibit schools from exceeding the minimum initial counseling requirements. If a school finds that providing comprehensive initial counseling to all student PLUS borrowers is more cost effective than providing the limited counseling required by the regulations, a school may provide the comprehensive counseling to all student PLUS borrowers.

We agree with the commenters' recommendations regarding the restructuring of § 682.604(f).

Changes:

We have restructured § 682.604(f). Revised § 682.402(f) begins with a discussion of initial counseling requirements for Stafford Loan borrowers, then discusses initial counseling requirements for student PLUS Loan borrowers, and ends with a discussion of general initial counseling requirements.

Maximum Length of Loan Period (§§ 682.401, 682.603, and 685.301)

Comment:

Commenters were in unanimous support of the Secretary's proposal to eliminate the maximum 12-month loan period for annual loan limits in the FFEL and Direct Loan programs and the 12-month period of loan guarantee in the FFEL Programs. One commenter noted that the regulatory change would require loan origination systems changes. Another commenter noted that the change would require the removal of a system edit used by some guaranty agencies to monitor school loan certification. This commenter asked the Secretary to confirm that this regulatory change would have no impact on a school's reporting to NSLDS.

One commenter asked the Secretary to further clarify in the preamble to these final regulations the relationship of the longer loan period to loan limits and the definition of

academic year.

Another commenter asked that we clarify in the preamble that the intent of the regulations is to avoid potential misunderstandings among schools that might lead to the application of a single Stafford annual loan limit for a period spanning multiple academic years.

Discussion:

The Secretary appreciates the commenters' support. The Secretary understands that this regulatory change may require lenders and guaranty agencies to make changes in their loan origination systems. The Secretary believes that the effective date of the regulations under the master calendar provisions of the HEA provides sufficient time for these changes to be made.

The intent of the regulations generally is not to allow schools to certify a single Stafford annual loan limit for a period spanning multiple years, although borrowers attending non-term and certain nonstandard term programs on a less-than-full-time basis may have loan periods that span more than the period associated with an academic year for a full-time student. Schools are still expected to monitor annual loan limit progression by the school's academic year, which must meet at least the minimum standards defined in 34 CFR 668.3. Annual loan limits continue to apply to the academic year or the period of time necessary for a student to progress to the next grade level as referenced in § 682.401(b)(2)(ii). Unless a school uses standard terms and is authorized to certify loans by the term, most loan certifications will also continue to be for the academic year according to the school's defined Title IV academic year.

The proposed changes to §§ 682.401, 682.603, and 685.301 are intended to allow a school to certify a single loan for students in shorter, non-term or nonstandard term programs (for example, a 15 month program when the school's Title IV academic year encompasses 10 months). The change will also provide greater flexibility in rescheduling loan disbursements for students in non-term and certain nonstandard term programs who are progressing academically in their programs more slowly than anticipated, or who drop out and return within the permitted 180-day period to retain Title IV disbursements. The Secretary clarifies that this change has no impact on school reporting to the Department's NSLDS.

Change:

None.

Mandatory Assignment of Defaulted Perkins Loans (§§ 674.8 and 674.50)

Justification for Mandatory Assignment

Comments:

A large number of schools commented on this proposal, challenging the Department's justification for requiring mandatory assignment of defaulted Perkins Loans. These schools acknowledged that the Department has collection methods unavailable to the schools, but noted that schools have collection methods, such as withholding transcripts and placing administrative holds on services, that the Department does not have.

Many of these schools identified the amount of outstanding Perkins Loan balances they would lose upon implementation of these regulations. These schools argued that the loss of potential collections on these loans removes an income source for their Perkins Loan Fund, and reduces the number of Perkins Loans available to future borrowers. These commenters pointed out that there has been no Federal Capital Contribution (FCC) in the Perkins Loan Program in recent years, and asserted that the mandatory assignment proposal would further deplete a school's Perkins Loan Fund.

These schools also identified their recovery rates on Perkins Loans they hold that are in default for seven or more years. They based their calculations on the outstanding amounts on these loans, and the amounts collected in the preceding three years. Recovery rates reported by the commenters ranged from a low of seven percent to a high of 79 percent. The schools argued that the Department has not demonstrated that it has a higher recovery rate on defaulted Perkins Loans than the schools.

Discussion:

The Department acknowledges that schools have collection tools that are unavailable to the Department. However, the low recovery rates reported by many schools indicate that these tools are not generally effective. The mandatory assignment requirements will have little impact on schools that do use these tools effectively to collect on defaulted loans. If even one payment is received on a defaulted loan in the year prior to the Department requiring assignment, the loan would not be eligible for mandatory assignment. In addition, it is our experience that many schools maintain holds on transcripts and other administrative services after they assign Perkins Loans to the Department. We expect that schools will continue this practice for mandatorily assigned loans. The Department's estimated savings resulting from mandatory assignment are provided in the

Accounting Statement

in Table 1 of the Regulatory Impact Analysis.

The Department is aware of the large amount of aged, defaulted Perkins Loans held by schools with little or no collection activity. As noted in the preamble to the NPRM, our records show that schools are holding more than $400,000,000 in such loans. The commenters' submissions identifying the amounts of Perkins Loan funds schools may lose under the regulations illustrate the magnitude of the problem. The data showing large amounts of old defaulted Perkins Loans which schools have been unable to collect supports requiring mandatory assignment.

With respect to the Department's recovery rates, defaulted Perkins Loans that are assigned to the Department under the current voluntary assignment procedures are assigned for such reasons as hardship, incarceration, refusal to pay, and the school's inability to locate the borrower. Schools are required to undertake first-year and second-year collection efforts before assigning Perkins Loans to the Department, although schools may dispense with the second-year collection efforts and assign a loan to the Department after the first year collection efforts have failed. Thus, the defaulted Perkins Loans that are assigned to the Department through voluntary assignment are loans that schools consider uncollectible.

The Department's analysis of its recovery rate on these defaulted Perkins Loans shows that, as of August 30, 2007, the Department's recovery rate is:

• 53.90 percent for loans assigned to us in 2002.

• 45.90 percent for loans assigned to us in 2003.

• 36.02 percent for loans assigned to us in 2004.

The recovery rates show increased collections on defaulted Perkins Loans the longer the Department holds the loans. We believe the Department's recovery rate on defaulted Perkins Loans compares favorably to the schools' self-reported recovery rates. Therefore, we strongly believe that requiring assignment of these loans to the Department, as described in these regulations, is in the best interests of the taxpayers and the government.

Changes:

None.

Alternatives to Mandatory Assignment

Comments:

Several commenters suggested alternatives to the mandatory assignment proposal. Some commenters suggested that the Secretary re-institute a version of the referral program that existed in the 1980s. Under a referral program, schools could voluntarily assign loans to the Department; the Department would collect on the loans, and would return a portion of the collections to the school that assigned the loan. Other commenters suggested a variation of the referral program under which the Department would return funds not to individual schools, but to the Perkins Loan Program generally. Under this proposal, the amounts the Department collects on assigned loans would be re-allocated to schools participating in the Perkins Loan Program, using the standard allocation formula.

Commenters recommended streamlining the voluntary assignment process, improving the Default Reduction Assistance Program (DRAP), and re-instituting the IRS Skiptracing

Service, as alternatives to mandatory assignment.

Discussion:

As discussed in the preamble to the NPRM, the referral program the Department administered in the 1980s was not a success. We continue to believe, and the commenters did not provide us with any basis for modifying our position, that a revival of that program would not be in the Federal fiscal interest.

With regard to the proposals for a streamlined voluntary assignment process and for re-instituting the IRS Skiptracing Service, we note that the Department has already streamlined the voluntary assignment process significantly. We have reduced the supporting documentation required for assignment, simplified the assignment form, and implemented a process allowing for the submission of assignment packages in groups. However, these changes have not significantly increased the number of voluntarily assigned Perkins Loans.

The commenter requesting that we improve DRAP did not indicate what the perceived deficiencies of that program are, or make any specific recommendations for improvements. DRAP is intended as a final effort to prevent a loan that is about to go into default from going into default. Any improvements to DRAP would have little impact on loans that have been in default for seven or more years.

The Department is renewing its computer-matching agreement with the Internal Revenue Service to re-institute the IRS Skiptracing Service. Schools and guaranty agencies that have an approved Safeguard Report will be able to access the Student Aid Internet Gateway (SAIG) to request and receive data through their mailboxes. The Department is currently working to make this service available to guaranty agencies and schools. Announcements on the availability of the IRS Skiptracing Service will be posted to the Department's Information for Financial Aid Professionals (IFAP) Web site. To the extent that the IRS Skiptracing Service is helpful to schools in locating borrowers of defaulted Perkins Loans, it should reduce the number of loans that will meet the criteria for mandatory assignment. We will also consider improving the DRAP program in the future.

Changes:

None.

Criteria for Mandatory Assignment

Comments:

Many commenters suggested that if the Department requires mandatory assignment of Perkins Loans, it should modify the criteria for mandatory assignment. Generally, commenters recommended increasing the outstanding loan balance and the number of years in default that would trigger assignment from $100 to $1,000 and from seven years to ten years, respectively. Commenters argued that a ten-year period of default made sense, because the maximum repayment period for a Perkins Loan is ten years. One commenter claimed that many defaulted borrowers are willing and able to repay their defaulted loans after five to ten years in default. The commenter asserted that a borrower who has been in default for this length of time is often in a position to take out a mortgage on a home or to obtain a loan for some other large purchase. Such a borrower would seek to repay defaulted Perkins Loans to improve his or her credit report. Another commenter stated that this often occurs after 15 years in default.

Several commenters recommended that we exempt schools with low default rates from the mandatory assignment requirements. Commenters also recommended that accounts on which the schools have acquired a judgment against the borrower be exempted. The commenters noted that schools spend a significant amount of time and effort securing judgments on loans and stated that it was not fair to require schools to assign judgment accounts. One school noted that a judgment may include both private loans and Perkins Loans, making it difficult for the school to separate the Perkins Loan from the private debt for assignment purposes.

Finally, a large number of commenters noted that if the Department required assignment of all loans that meet the criteria for assignment in the proposed regulations, it would result in a huge inventory of assignments. The Department would have difficulty absorbing such a large influx of assigned loans. These commenters recommended that the Department begin mandatory assignment with loans that are 15 years past due, and gradually move towards loans that are seven years past due.

Discussion:

In the preamble to the NPRM, we discussed in considerable detail different alternatives for requiring the assignment of defaulted Perkins Loans to the Department.

Rather than attempting to pinpoint a specific time when borrowers tend to be motivated to pay off their defaulted loans, the Department proposed to model the Perkins Loan mandatory assignment requirements on the mandatory assignment requirements in the FFEL Program. Under the mandatory assignment process in the FFEL Program, a FFEL Loan is in default for a little over six years before it is assigned to the Department. Based on that precedent, in these final regulations, the Department has adopted a standard of seven years for Perkins Loans.

Similarly, the standard of a balance of $100 or more on a loan before mandatory assignment will be required is consistent with the requirement for mandatory assignment of FFEL loans. We continue to believe that these standards are reasonable.

We do not agree with the proposal to exempt schools with low cohort default rates from the mandatory assignment requirement. Cohort default rates are based on collections in the first three years after a loan enters repayment status. Cohort default rates do not measure a school's success at collecting on loans that have been in default for several years and are not relevant to the loans that will be subject to mandatory assignment. While it may be correct that schools with low cohort default rates have fewer loans in default for seven years or more than schools with higher cohort default rates, this fact does not support a conclusion that the schools with low cohort default rates are successful at collecting on loans that have been default for seven years or more.

The Department also disagrees with the recommendation that loans on which the school has secured a judgment be exempted from mandatory assignment. Securing a judgment on an account is a helpful collection tool, but it does not ensure that the borrower will make payments on the debt. We acknowledge that Perkins Loans that have been merged into judgments may need to be handled differently than regular Perkins Loans for purposes of mandatory assignment. The Department will develop procedures for the assignment of judgment accounts as the Department operationalizes the mandatory assignment process.

We agree with the recommendation by many commenters that we phase-in mandatory assignment. The regulations establish the minimum criteria for mandatory assignment. The regulations do not preclude the Department from phasing-in mandatory assignment by starting the process with loans that have been in default for more than the seven-year minimum. Phasing-in mandatory assignment will ease disruption to both the schools and the Department.

Changes:

None.

Legal Basis for Mandatory Assignment in the Perkins Loan Program

Comments:

Some commenters questioned the Department's legal

authority to require the assignment of Perkins Loans, arguing that section 463(a)(4)(A) of the HEA provides for mandatory assignment in certain limited circumstances and precludes the Secretary from requiring mandatory assignment in other circumstances.

Discussion:

Section 463(a)(9) of the HEA authorizes the Secretary to add provisions to the program participation agreement for schools where the Secretary has determined that the provision is necessary to protect the United States from unreasonable risk of loss. For the reasons discussed in the NPRM and these final regulations, the Secretary has determined that the mandatory assignment regulations as proposed, which will allow the Secretary to require participating schools to assign defaulted loans that meet the criteria in the regulations, are necessary to protect the United States from unreasonable risk of loss. The sections of the HEA cited by the commenters do not prevent the Secretary from exercising her authority under section 463(a)(9) of the HEA.

Changes:

None.

Reasonable Collection Costs (§ 674.45)

Collection Cost Caps

Comments:

Several commenters stated that the proposed caps on the collection costs that may be charged to borrowers in the Perkins Loan Program are too high, and should be reduced. Generally, these commenters recommended reducing the cap to 24 percent, which would be consistent with the cap on collection costs in the FFEL Program.

One commenter stated that the proposed regulations would not sufficiently limit collection costs. This commenter noted that the Perkins Loan Program is intended to benefit needy students. The commenter argued that it is reasonable to expect that a portion of low-income borrowers receiving Perkins Loans would have difficulty repaying these loans. These borrowers are often the ones least likely to be aware of their repayment options, and most likely to get caught in a spiral of increasing collection costs. As collection costs are added to the loan, the outstanding balance increases so rapidly that the ability to pay off the loan becomes further and further out of reach.

This commenter also challenged the fee-on-fee method of assessing collection costs. Under the fee-on-fee method, collection agencies that charge contingency fees charge a “make whole rate” to borrowers. The commenter asserted that many States prohibit or limit the use of make whole rates for other types of consumer debt, and the Department should do likewise for Perkins Loans.

Other commenters, who believed the collection cost caps are too low, supported the use of a make whole rate, and asked the Department not to abandon this approach for the Perkins Loan Program.

Several commenters recommended increasing the collection cost caps. Generally, these commenters recommended increasing the collection cost caps to:

• 33 percent for first collection efforts.

• 40 percent for second collection efforts.

• 50 percent for collection efforts arising out of litigation.

• 50 percent for collection efforts against borrowers living abroad.

Several commenters who recommended increasing or eliminating the collection cost caps argued that the proposed caps will make it financially difficult for schools to collect on defaulted Perkins Loans. These commenters said that schools will have to pay more for collections than they can charge to the students. As a result, schools would charge the difference to the Perkins Loan Fund, thus depleting the Fund. The amount of funds that could then be lent out to future students would be reduced. In response to these comments, other commenters noted that the purpose of assessing collection costs against a borrower is not to create an income stream for schools' Perkins Loan Funds.

Several commenters also argued that the quality of collection efforts will suffer under the proposed collection cost caps.

Discussion:

The Department declines to adopt the commenters' recommendation to reduce the collection cost caps to the same level as those in the FFEL Program. Perkins Loans are low-balance loans compared to FFEL loans, but the cost of collection is about the same. Because the return on collecting Perkins Loans is smaller than the return on collecting FFEL loans, we believe that higher collection cost caps are warranted in the Perkins Loan Program. The Department also disagrees with the commenters' recommendations for increasing the collection cost caps. We believe that the caps as proposed strike a fair balance between the concerns of borrowers and the concerns of the Perkins Loan Program schools and collection agencies.

With regard to contingency fees, the Department is not abandoning the make whole rate for Perkins Loan collections. The Department does not regulate the establishment of fees in a contract between a Perkins Loan Program school and a collection agency. However, institutional contracts must provide for the recovery to the Perkins Loan Fund of the outstanding balance of the loan. Since a collection agency incurs additional expenses associated with collecting these amounts, the school may authorize the collection agency to also recover these expenses from the borrower.

Collection agencies frequently charge contingency fees to borrowers. The Department's rule on assessing collection costs on a contingency fee basis to an individual who owes a debt to the Department is in 34 CFR 30.60 and is commonly referred to as the fee-on-fee method. While this method of assessing collection costs is not required in the Perkins Loan Program, many schools and servicers use it because it makes the Fund whole. The make whole rate is the amount by which the borrower's debt is multiplied to determine the amount that the collection agency needs to collect to recover 100 percent of the outstanding balance.

Thus, a collection cost cap of 30 percent means that, for loans collected on a contingency fee basis, the actual collection costs charged to the borrower must be less than 30 percent.

We expect that when these regulations take effect, collection agencies that collect on Perkins Loans will adjust their contingency fees to comply with the new regulatory requirements. Collection agencies that charge a make whole rate to borrowers will have to take that into account when adjusting their contingency fees.

Some schools argue that they have little choice but to agree to high contingency fees when they negotiate contracts with collection agencies. Given the inability of many schools to secure favorable terms with collection agencies collecting on Perkins Loans, the Department believes that the most effective way to reduce these collection costs in the Perkins Loan Program is to mandate collection cost limits.

We agree with the commenters who argued that the purpose of assessing collection costs is not to create an income stream for a school's Perkins Loan Fund. Additionally, § 674.47(e)(3) and (4) limits the amount of unpaid collection costs that a school may charge to the Fund to 30 percent for first collection efforts, and 40 percent for second collection efforts. These limits match the limits on collection costs that may be charged to borrowers established in the final regulations.

Changes:

None.

Additional Concerns

Comments:

Several commenters raised additional concerns with regard to the proposed caps, or recommended modifications to the proposed regulations. One commenter recommended restricting the amount of collection charges that may be charged to a borrower from average costs to actual costs. This commenter stated that allowing agencies to assess average costs against a borrower is unfair, since the actual collection cost incurred with respect to a particular borrower may be lower than the average costs that the borrower is charged.

Some commenters recommended applying the caps only to collection costs incurred by collection agencies on a contingency fee basis, not on the costs incurred by schools for their own internal collection efforts. These commenters argued that the unreasonably high collection costs seen in the Perkins Loan Program are due to collection agency contingency fees, not collection activities carried out by Perkins Loan Program schools.

Other commenters recommended that the cap on litigated loans be removed, and be replaced by an amount defined by the court.

Another commenter argued that informing borrowers of the new collection cost caps would be administratively burdensome.

Another commenter said the regulations would be inconsistent with § 674.45(e), which requires schools to assess all reasonable collection costs to borrowers.

Discussion:

Allowing schools to charge only actual costs to the borrower is unworkable and inconsistent with standard collection practices on student loans and other debts. Requiring lenders to identify specific actual costs for every borrower that the lender collects on would be administratively burdensome and not cost effective.

We do not see any justification for applying the caps only to collection costs incurred by collection agencies. From a borrower's perspective, collection costs are collection costs. It makes little difference whether the costs were incurred by a collection agency or by the school.

With regard to litigated loans, a court may remove all collection charges from a loan as part of a judgment. The regulations establishing collection cost caps on loans that are litigated do not preclude a court from lowering the collection charges or eliminating the collection charges altogether when the court issues a judgment.

The regulations do not impose a requirement that schools notify borrowers of the collection cost caps. Collection costs also are not among the items that a school must discuss during its exit interviews with borrowers.

Finally, the regulations do not conflict with the reasonable collection costs provisions in the existing regulations. As amended by these final regulations, § 674.45 defines “reasonable collection costs” chargeable to the borrower as costs within the proposed caps.

Changes:

None.

Child or Family Service Cancellation (§ 674.56)

Comment:

Commenters were overwhelmingly supportive of the proposed clarifications to § 674.56, regarding cancellation of loans for individuals working in the child or family service areas. However, two commenters had questions about this provision.

To qualify for a child or family service cancellation, among other requirements, an otherwise eligible borrower must be employed full-time by a child or family service agency. One commenter asked if employment by a child or family service agency would disqualify an attorney for the cancellation, because the agency, rather than the children the agency serves, is considered to be the attorney's client.

A second commenter noted that the child or family service cancellation would be one of the hardest cancellations in the Perkins Loan Program to qualify for, and asked if that was the intent of Congress when the law was passed.

Discussion:

An attorney who is an employee of a child or family service agency must meet the same eligibility requirements as any other non-supervisory employee of a child or family service agency to qualify for the loan cancellation. The attorney must provide services directly and exclusively to high-risk children from low-income communities.

The determination of whether a borrower qualifies for a discharge is made on a case-by-case basis and would require consideration of the attorney's specific responsibilities. However, in general, if the attorney represents the agency in court, the attorney is not providing services directly to the child.

If the attorney represents children in court such as in the role of a guardian ad litem, the attorney would be considered to be providing services directly to the child. If the other eligibility criteria for the cancellation are met, the attorney would qualify for a child or family service cancellation.

With respect to the comment about the difficulty of qualifying for this cancellation, section 465(a)(2)(I) of the HEA, which establishes the child or family service cancellation, is very narrowly written. The statute requires employment at a certain type of agency and the provision of services to a specific population. The borrower must provide services to children who are both “high-risk” and come from “low-income communities.” Section 469(a) and (b) of the HEA defines both of these terms. The final regulations are consistent with the statutory language.

Changes:

None.

Prohibited Inducements (§§ 682.200 and 682.401)

Comment:

Many commenters endorsed the Secretary's efforts to clarify the regulations on improper inducements and improve enforcement of the law, but disagreed with various aspects of the proposed regulations. Several commenters thought the proposed regulations were not sufficiently strict. Several U.S. Senators commended the Secretary on the proposed regulations, particularly the use of the rebuttable presumption to more effectively enforce the anti-inducement requirements. Several commenters thought that the Department's lack of oversight and enforcement of current requirements was a bigger problem than the content of the regulations. One association representing school business officers cautioned against the unintended consequences of the proposed regulations and expressed concern that the regulations could affect the wide range of relationships between colleges and universities and financial institutions. That commenter also noted that financial institutions were very heavily engaged in philanthropic endeavors in higher education and expressed concern that any perceived risk to the lender could result in those needed dollars being invested elsewhere.

One commenter saw no basis for having different rules for lenders and guaranty agencies in regard to prohibited inducements.

Discussion:

The Secretary thanks the commenters for their support and comments on this very complex and urgent issue affecting the FFEL Program. The Secretary believes that this regulatory effort will result in clearer regulatory guidelines for schools, lenders, and guaranty agencies participating in the FFEL program. The detailed provisions in the form of permissible and impermissible activities that govern the interaction between lenders, guaranty agencies, and schools will assist these parties in avoiding

violations of the law. The increased regulatory clarity and specificity will also improve the Secretary's ability to enforce the law in this area. Student and parents served by the program, and the taxpayers that support it, will have renewed trust in the integrity and transparency of the loan process. Students and parents will clearly understand that they have a choice of lender and can exercise that choice. Absent questionable payments and activities between schools and lenders, students and parents will view a school's financial aid office once again as an unbiased source of information on the FFEL loan process and on the factors a prospective borrower should consider in selecting a lender. Borrowers will be more likely to receive clear comparisons between the benefits offered under the Federal student loan programs and under private education loan programs without concern that prohibited payments or other forms of assistance by a lender to a school will influence a school's counseling such that a borrower receives a loan with less favorable terms and conditions.

The Secretary understands commenters' concerns about unintended consequences for other contractual services performed for schools by financial institutions and their affiliates, and on philanthropic giving to higher education. However, she believes that contracted services between financial institutions and schools in non-student aid related areas will not be affected by these regulations as long as the arrangements are negotiated in good faith and are not undertaken to secure FFEL loan applications or limit a borrower's choice of lender. Likewise, the Secretary believes that financial institutions will continue to provide philanthropic support to institutions. These philanthropic relationships need not change as long as they have not been undertaken to secure FFEL loan applications or limit a borrower's choice of lender. She feels confident that schools and financial institutions will take all the prudent steps necessary to ensure that there are no conflicts of interest between the financial institution's role as a FFEL lender and its philanthropic support of higher education.

Finally, the Department believes that the regulations properly treat guaranty agencies and lenders differently for purposes of improper inducements. Guaranty agencies are responsible for lender and school oversight and training, default prevention, outreach and financial literacy, and lender claim review and payment and the regulations need to recognize the important roles these agencies play in these areas. In contrast, under the HEA, the lender's roles are to provide loans for eligible borrowers and collect those loans in accordance with the Secretary's regulations.

Changes:

None.

Comment:

Some commenters recommended that the Department clarify in the final regulations that State laws relating to the inducement practices of lenders, schools and loan guarantors within the FFEL Program are preempted.

Discussion:

The Department appreciates the commenters' concerns about potential State law conflicts with the Department's inducement-related regulations. It is well settled that any State law that conflicts with or “stands as an obstacle to the accomplishment and execution of the full purposes and objectives” of a Federal law is preempted.

Hillsborough County, Fla.

v.

Automated Med. Laboratories, Inc.,

471 U.S. 707, 713 (1985). Moreover, “[f]ederal regulations have no less pre-emptive effect than federal statutes.”

Fid. Fed. Sav. & Loan Ass'n

v.

de la Cuesta,

458 U.S. 141, 153 (1982). Accordingly, State statutes, regulations, or rules that conflict with or hinder the accomplishment and execution of the Department's rulemaking relating to inducement practices are preempted. We anticipate future negotiated rulemaking to implement the CCRAA and expect to include this issue among those considered for rulemaking at that time.

Changes:

None.

Use of a Rebuttable Presumption (§§ 682.413, 682.705(c), and 682.706(d))

Comment:

A number of commenters representing students and other members of the public supported the proposal to strengthen the Secretary's enforcement of the prohibition on improper inducements in the FFEL Program.

Many commenters representing various FFEL Program participants objected to the Secretary's proposal to adopt a rebuttable presumption in administrative actions against lenders or guaranty agencies involving violations of the prohibited inducement provisions. One of these commenters argued that the use of a rebuttable presumption was inconsistent with the statutory requirement that the Secretary determine that an inducement was offered in order to secure loan applications. The commenter argued that the HEA includes a broad definition of a prohibited inducement and, as a result, a number of activities would automatically be presumed by the Department to be a violation under the rebuttable presumption approach.

Other loan industry commenters stated that the adoption of a rebuttable presumption was unnecessary given the Department's existing authority to gather information through reviews and audits conducted by the Office of Federal Student Aid and the Office of Inspector General. These commenters claimed that the use of a rebuttable presumption is inconsistent with procedural due process rights and urged that the proposal be withdrawn. These commenters argued that, if the presumption is retained, the regulations must require the Department to have a factual basis supporting the finding of an improper inducement before commencing any proceeding that could result in the lender's limitation, suspension, or termination from the FFEL Program. The commenters also urged that if retained in the regulations, the presumption be applied only with respect to activities occurring prospectively from the general effective date of the regulations.

Discussion:

The Secretary thanks the commenters who supported the proposed regulations.

The Secretary has carefully considered the legal arguments presented by the lenders, guaranty agencies and their supporters. However, contrary to those arguments, it is well established that the Secretary has broad authority to establish appropriate regulations and procedures for resolving administrative cases under the HEA, including rules for consideration of evidence and determining the burden of proof. 20 U.S.C. 1082(a)(1);

USA Group Services

v.

Riley

, 82 F.3d 708 (7th Cir. 1996);

Career College Ass'n.

v.

Riley,

74 F.3d 1265 (D.C. Cir. 1996). The establishment of a rebuttable presumption is within that legal authority. Moreover, the commenters have misinterpreted the effect of a rebuttable presumption. The rebuttable presumption does not eliminate the Secretary's obligation to make a finding that an inducement was provided in exchange for loan applications. Instead, under these procedures, once the Department establishes that a lender or guaranty agency engaged in one of the activities established in these regulations as creating an improper inducement, the lender or guaranty agency then has the opportunity and obligation to show that its purpose for engaging in the activity was unrelated to securing loan applications. The Secretary is still required to make the ultimate finding that the lender or guaranty agency offered an improper

inducement and that the inducement was provided to secure loan applications.

The Secretary's list of improper inducements included in § 682.401(d) that are presumed to be offered to secure loan applications is based on our experience in administering the FFEL Program since the publication of Dear Colleague Letter 89-L-129 in February 1989, which addressed improper inducements. Moreover, recent reviews, investigations and reports by the Department's Office of Inspector General, the Comptroller General, Congress and various State Attorneys General have consistently shown that lenders undertake the activities listed in the regulations to secure FFEL Program loan applications. For example, a recent Congressional report documented how a lender that wanted to make loans to students at schools where the lender had not previously made loans began providing services and benefits to the schools. The report quotes directly from internal lender and school documents clearly indicating that the lender performed these activities for the purpose of gaining more loan volume at the schools, and in fact, the lender was successful. In contrast, none of the recent public reports, investigations, testimony and settlement agreements or any of the comments on the proposed regulations suggest that lenders provided services and benefits to schools for any purpose other than to secure loan applicants.

With this background, it is appropriate for the Secretary to place the burden on the lender or guaranty agency to explain its purpose in providing benefits or services to schools. Moreover, in the great majority of cases, the evidence of intent will be directly and solely under the control of the lender or guaranty agency. Accordingly, the Secretary has determined that it is appropriate and consistent with due process to require the lender or guaranty to have the obligation to present that evidence and explain its purpose.

Some of the commenters asked the Secretary to exempt from the improper inducement provisions the situation in which a State guaranty agency or an affiliated lender is performing services for small institutions in accordance with its responsibilities under State law. The Secretary notes that, as described by these commenters, the provision of these services may have a purpose (compliance with State law) other than securing loan applications. This example shows the appropriateness of placing the burden of explanation on the party most likely to have evidence of that purpose.

The Secretary also notes that the rebuttable presumption will only be applied after the Department has previously gathered information from the lender and the lender has had an opportunity to provide an alternative explanation for its actions. The Secretary intends to apply the rebuttable presumption only in those situations where there is significant evidence that the lender or guaranty agency offered or provided the payments or activities to secure FFEL loan applications or FFEL loan volume. Since the rebuttable presumption is a rule of procedure and does not affect any substantive rights or obligations, there is no basis for the delayed effective date suggested by some commenters.

Changes:

None.

Application of the Federal Trade Commission (FTC) Holder Rule (§ 682.209(k))

Comment:

Several commenters representing FFEL Program loan industry participants opposed our proposal to apply the principles of the Federal Trade Commission's (FTC's) Holder Rule to all FFEL Program loans. These commenters argued that implementation of this proposal will result in significant costs and administrative burden to FFEL Program participants who will be required to defend meritless legal claims brought by borrowers challenging their student loan debts. The commenters urged the Secretary to withdraw the proposal and conduct further studies to identify a sufficient factual basis identifying harm to the FFEL Program that necessitates a regulatory solution of this nature. The commenters believe that any harm intended to be addressed by the proposal is far outweighed by the costs of the proposal. The commenters also believe that the proposal effectively creates a private right of action for borrowers in clear disregard of case law that holds that there is no private right of action under the HEA. The commenters noted that the application of this rule could leave a State court in a position to interpret the Federal inducement regulations to determine whether the Department's version of the FTC Holder Rule applies. The commenters indicated that if the Secretary adopts this proposal the regulations should provide that the claims and defenses that a borrower may assert against a lender are limited to claims or defenses that the borrower could assert against the school, and that the borrower's recovery may not exceed the amount paid on the loan. The commenters indicated that the Secretary should also clarify that the mere existence of a preferred or recommended lender relationship with a school does not trigger application of this Rule.

Other commenters representing consumer and student organizations, and the office of a State attorney general agreed with the Secretary's proposal to adopt and apply the principles of the FTC Holder Rule to the FFEL Program. The commenters argued, however, that our proposed regulations should mirror the FTC Holder Rule in two important areas. The commenters recommended that the regulations be modified to provide that all subsequent holders of a FFEL loan, not just the immediate holder of the loan, are subject to potential claims, and that the full range of FTC claims and defenses apply, not just those related to the loan.

Discussion:

We thank those commenters who supported the proposal to incorporate the principles of the FTC Holder Rule into the regulations of the FFEL Program. However, we do not agree with the suggestion from many of those commenters that the Department adopt the specific language of the FTC's own rule. When the Department first incorporated the terms of the FTC Holder Rule into the FFEL Program promissory notes, we made necessary and appropriate modifications to the language of the FTC Holder Rule to correspond to the requirements and regulations of the FFEL Program. The Secretary is incorporating that existing language into these regulations to ensure that they apply to all borrowers in the FFEL Program, no matter what type of school the borrower attends. Accordingly, the Secretary does not believe that a direct incorporation of the FTC Holder Rule into the FFEL Program regulations is appropriate.

The Secretary does not agree with those commenters who generally opposed the inclusion of the principles of the FTC Holder Rule into the FFEL Program regulations. The Secretary believes that this change will eliminate the current difference in legal rights between borrowers attending for-profit institutions (who are covered by the FTC Holder Rule under the FTC's own authority and the FFEL Program promissory note) and those attending non-profit institutions. That distinction arose not because of any education-based policy distinction, but solely because the FTC Holder Rule governed only for-profit institutions with specified lender relationships. Moreover, this change is consistent with a long line of court decisions that found

that the HEA does not preempt State laws that allow borrowers to raise State law claims as a defense against collection of a FFEL Program loan unless particular State laws actually conflict with the objectives of the HEA.

Armstrong

v.

Accrediting Council for Continuing Educ. & Training, Inc.,

168 F.3d 1362 (D.C. Cir. 1999),

cert. denied,

528 U.S. 1173 (2000). Courts have also concluded that the lack of a private right of action does not preclude the use of violations of the HEA as evidence of the violation of State laws.

College Loan Corp.

v.

SLM Corp.,

396 F.3d 588, 598-599 (4th Cir. 2005);

Cliff

v.

Payco American Credit, Inc.,

365 F.3d 1113, 1127-1130 (11th Cir. 2004). Lastly, contrary to the commenters' claims, we do not anticipate a significant increase in risk or costs to lenders. The principles of the FTC Holder Rule have been in the FFEL Program promissory note and applied to loans for attendance at for-profit schools since 1994. The Secretary is not aware of any significant litigation based on this language since that time and the commenters did not present any facts supporting their claims.

Given that the FTC Holder Rule has applied to some student loan borrowers for more than a decade and that the commenters did not present any support based on that experience for their claim that including this provision will increase costs, we do not accept the recommendation for further studies.

We do not believe it is necessary to clarify the effect that a preferred or recommended lender relationship would have on application of the regulation. The regulation is consistent with the language that has been in the FFEL Program promissory notes and the FTC Holder Rule itself in providing that the borrower may assert the actions of the school as a defense against the lender if the school refers borrowers to the lender.

Changes:

None.

Exhaustive List of Permissible Activities (§§ 682.200(b) and 682.401(e)(2))

Comment:

Many loan industry commenters objected to the inclusion in the regulations of an “exhaustive” list of permissible inducement activities for lenders and guaranty agencies, while including a non-exhaustive, illustrative list of prohibited inducement activities. The commenters requested that both lists be illustrative in nature. The commenters stated that the exhaustive nature of the list of permissible activities fails to recognize the dynamic nature of the marketplace and the continual innovation in product delivery and services that result from private sector competition. The commenters believe that it is impossible to prescribe a finite list of permissible activities today that will provide effective guidance for activities developed in the future. The commenters noted that the Secretary declined for this same reason to provide a definitive list of types of assistance to schools that is comparable to the assistance that the Department provides to schools that participate in the Direct Loan Program and in which lenders and guaranty agencies may engage without providing an improper inducement. These commenters recommended that the Secretary follow that same approach with the proposed list of inducement-related permissible activities.

Discussion:

The Secretary disagrees with the commenters. She believes that greater clarity is achieved for program participants if a clear and definitive list of permissible activities is provided. She also believes that this approach enhances the Department's ability to enforce the restrictions on improper inducements. The permissible activities listed represent the only ones the Secretary has approved at the current time. The Secretary understands, however, that both statutory changes and the evolution of business practices may require consideration of additional permissible activities in the future. Therefore, similar to the approach for notifying lenders and guaranty agencies of approved activities that are comparable to those provided by the Secretary under the Direct Loan Program, the Secretary will notify lenders and guaranty agencies, through a public announcement, such as a notice in the

Federal Register

, of any additional permissible activities that lenders and guaranty agencies may be authorized to undertake.

Changes:

We have revised the definition of

lender

in § 682.200(b) and revised § 682.401(e)(2) to provide for the identification and approval by the Secretary of other permissible services through a public announcement, such as a notice published in the

Federal Register

.

Payments to Individuals and Lender Referral and Processing Fees (§ 682.200(b))

Comment:

Several loan industry commenters claimed that the preamble of the NPRM was incorrect in stating that “Compensation or fees based on the numbers of applications or the volume of loans made or disbursed are improper, regardless of label, under the Department's current and prior policy and would continue to be improper under these proposed regulations.” The commenters stated that the Department had previously allowed lenders to pay marketing compensation based on the number of applications received, but not based on the number of applications that resulted in funded loans. The commenters asked that the Secretary clarify that this interpretation continues to apply until the effective date of the final regulations, and that any change in policy be applicable to activities occurring on or after July 1, 2008.

The commenters also requested that the reference in the regulation to prohibited payments to “any individual” in paragraph (5)(i)(A)(

2

) of the definition of

lender

in § 682.200(b) be removed and replaced with “any employee of a school or school-affiliated organization” to clarify the group to which the prohibitions apply. The commenters further requested that the reference to “processing” fees be removed in paragraph (5)(i)(A)(

5

) of the definition of

lender

in § 682.200(b) because use of this term could be interpreted as prohibiting longstanding commercial contractual relationships with third-party servicers and other parties that provide anti-money laundering and PATRIOT Act screening, electronic signature processing, loan origination services, loan disbursement services, and escrow agent services to lenders and guaranty agencies.

The loan industry commenters also argued that the regulations would effectively prevent some small non-participating lenders from meeting their Community Reinvestment Act requirements through the student loan program.

Discussion:

The commenters did not correctly describe the Department's prior policy guidance regarding application referral programs between lenders and marketing arrangements between lenders and other parties. The Department's policy on marketing and referral fees was specified in Dear Colleague Letter 89-L-129 (February 1989). The Dear Colleague Letter stated that any fee paid for loan applications under a lender referral program or marketing arrangement would be considered a prohibited inducement if the amount exceeded reasonable compensation for the referring lender's or party's processing of loan applications and advertising. Under this policy, the Department approved or did not object if the compensation paid was reasonable compensation for processing of loan applications and advertising. The permitted reasonable compensation could be based on applications referred but not on loans funded or disbursed. This policy statement remains in effect

until the effective date of these regulations.

The Secretary disagrees that reference to “individuals” should be struck from paragraph (5)(i)(A)(

2

) of the definition of

lender

in § 682.200(b). Section 435(d)(5) of the HEA effectively defines an improper inducement as a payment or other inducements “to any educational institution or individual” to secure loan applications. The Secretary has never interpreted the reference to “individuals” as limited to employees of a school or a school-affiliated organization.

The Secretary notes that the reference to “processing” in paragraph (5)(i)(A)(

5

) of the definition of

lender

in § 682.200(b) was intended to convey, consistent with the Department's longstanding guidance, that the referring party was being compensated for some level of administrative work in processing the application, not just for forwarding the application to the originating lender. However, the Department understands that the term “processing” may be confusing and has clarified the language for purposes of the provision.

The Secretary believes that the payment of these referral fees should be treated as an improper inducement for several reasons. The growth of national lenders and banking means that the payment of referral fees paid to non-participating lenders is no longer necessary to ensure nationwide borrower access to the FFEL Program. Moreover, most referral fee arrangements identified by the Department do not involve small local lending institutions, but involve payments by large lenders to school-related organizations. Finally, we note that with the adoption of the MPN and expanded eligibility standards, there is no longer any distinction between applications received and loans made, so there is no reason for distinguishing between them based on these different standards.

The Secretary further believes that payment of referral fees has eroded the integrity of the FFEL Program. Many of these fees are being paid to school-affiliated organizations that have access to certain personal information of students and alumni and are held in a certain level of esteem by students, alumni, and their parents. We believe that these arrangements and payments represent a conflict of interest for the organization and the school with which it is affiliated because the arrangement is interpreted as an endorsement of the lender by the organization and the school. Additionally, these fees do not appear to be paid to compensate the referring party for any administrative work done in processing the application, thus making them a prohibited inducement under the Department's standing interpretive guidance. The Department is also aware that such fees are being paid to individuals and organizations that are not under contract to any lender or its affiliate in an eligible lender trustee arrangement, and that operate as independent brokers collecting FFEL applications and marketing them to various FFEL lenders for the highest fee per application.

Finally, in response to the comments about small lenders who have referred borrowers in exchange for fees to satisfy other legal obligations, we note that the purpose of the FFEL Program is to provide loans for student and parent borrowers, not to provide an opportunity for lenders who do not participate in the program to meet other legal requirements. We expect that these lenders will find other appropriate ways to meet those requirements.

Changes:

Paragraph (5)(i)(A)(

5

) of the definition of

lender

in § 682.200(b) has been modified to clarify that prohibited “processing” fees do not include fees paid to meet the requirements of other Federal or State laws.

Definition of School-Affiliated Organization (§ 682.200)

Comment:

Many commenters objected to the proposed definition of a

school-affiliated organization,

which applies to lender and guaranty agency prohibited inducement activities outlined in §§ 682.200(b) and 682.401(e). The commenters indicated that the definition was overly broad and unworkable. One commenter from a school was concerned that the regulatory changes would restrict these organizations from promoting special arrangements and that it will limit student services through these organizations. The commenters also indicated that the broad definition could include national membership organizations, school trade organizations and other associations that have no ability to establish and administer school policies or control school activities. The commenters also believe that the definition is so broad that it could be applied to cover school credit unions or bookstores that are privately owned but located on or near a campus, or that include a reference to the school in their name. The commenters recommended that the definition be limited to only include those organizations that are part of the school structure even if they are separate legal entities. The commenters believe that those organizations that have a

de minimus

or peripheral connection to the school, and whose activities are organized and conducted separate and distinct from the school, should not be covered by the definition.

Discussion:

The Secretary believes that special FFEL student loan marketing or other student loan arrangements with organizations that are affiliated with a school undermine program integrity, and have been used to limit borrowers' choice of FFEL lenders. The Department believes that the definition of

school-affiliated organization

needs to be broad to protect borrowers and the program generally. The definition is intended to include both organizations that exist only by virtue of the school's existence, whether inside or outside of the school's structure and control, and other organizations not dependent upon the school's existence, which provide financial and vocational services to the school's students, employees, or alumni. However, we stress that payments or inducements provided to school-affiliated organizations are only improper if they are undertaken to secure loan applications or loan volume. This regulation does not affect contractual arrangements between the school-affiliated organizations and financial institutions to provide other non-student loan related services. The Secretary fails to see a basis for the organizations identified by the commenters to be engaged in the marketing or making of FFEL Program loans.

Changes:

None.

Loan Forgiveness Benefits (§§ 682.200(b) and 682.401(e))

Comment:

Many commenters from schools, lenders, guaranty agencies, and State-designated secondary markets objected to the proposal to treat a lender's or guaranty agency's loan forgiveness programs as an improper inducement unless loan forgiveness is provided under a repayment incentive program that requires satisfactory payment performance by the borrower to receive or retain the benefit. Some loan industry commenters stated that this limitation on guaranty agencies and private lenders was contrary to the HEA. They requested that the Department clarify that borrower benefit programs or other loan forgiveness or assistance programs for students for service, academic achievement, disaster assistance, or other targeted activities continue to be allowed. Several commenters representing not-for-profit State and State-affiliated guarantors and secondary markets noted that existing

State targeted and administered loan forgiveness programs for teachers, nurses, and members of the armed forces could be considered prohibited inducements. The commenters believe such a result impinges on State sovereignty and is contrary to the Department's regulatory view that guaranty agencies have responsibility for outreach to students and parents. The commenters noted that these public service loan forgiveness programs are not part of guaranty agency marketing campaigns for applications and request that they be considered a permissible activity by a guaranty agency or State secondary market.

Discussion:

The Secretary acknowledges that FFEL Program lenders are authorized under statute to offer borrowers reduced fees and interest rates. The regulations specifically acknowledge that these benefits are not considered improper inducements under § 682.200(b)(5)(ii). The Secretary also acknowledges that the HEA specifically provides for loan discharges for certain targeted forms of employment and public service.

With this provision, however, the Secretary is attempting to distinguish appropriate forms of repayment assistance that may be provided to borrowers by lenders and guaranty agencies that would not be considered an improper inducement from those that are clearly provided in order for the lender to secure loan applications. The regulation incorporates the standard for incentive and reward programs for successful borrower repayment that the Secretary has previously applied. In this regard, the Secretary has previously found that repayment incentive programs do not provide an improper inducement if they provide up-front rebates that are applied to the borrower's account at or shortly after loan disbursement and that the borrower retains if he or she establishes a satisfactory repayment pattern, or provide a similar reduction in loan principal earned on the same basis after the borrower enters repayment. These programs do not involve cash payments to borrowers. These regulations are consistent with this standard.

The Secretary thanks the commenters for informing her of the many public service oriented loan forgiveness programs that have been initiated, some of which are State-mandated or State-approved. The Secretary is convinced that these programs are not used generally for marketing purposes and agrees that these programs should not be considered an improper inducement as long as they are not marketed to secure loan applications or loan guarantees.

Changes:

We have revised the definition of

lender

in § 682.200(b) and revised § 682.401(e)(2) to include as

permissible

activities loan forgiveness programs for public service and other targeted purposes approved by the Secretary, provided the benefits are not marketed to secure loan applications or loan guarantees.

Service on Lender and Guaranty Agency Advisory Boards and Payment of Related Costs (§§ 682.200(b) and 682.401(e)(2)(v))

Comment:

Several commenters objected to our proposal to treat as an improper inducement, arrangements in which employees of school and school-affiliated organizations serve on lender advisory committees, while allowing these employees to serve on a guaranty agency's governing board or official advisory board. The commenters stated that the lender advisory committee meetings provide meaningful opportunities for lenders and schools to exchange information that benefit borrowers. The commenters argued that uncompensated service of this nature should be permissible, but that reasonable travel costs should be covered to be consistent with the treatment of guaranty agencies. Another commenter representing a lender noted that the regulations did not contain any explicit prohibition on school employees serving on a lender advisory board, or of paid consulting arrangements between lenders and school employees, and that this represented a loophole in the regulations. This commenter also said the Department should not allow school-affiliated organization employees to serve on guaranty agency advisory boards, or allow agencies to pay for travel and lodging costs to facilitate school staff service on an advisory board, attendance at training sessions, or tours of the guaranty agency's service facility. The commenter believes this treatment creates an avenue for guaranty agencies to provide these benefits on behalf of their lender partners and that a guaranty agency's financial support should be limited to meals and refreshments at training conferences.

Discussion:

The Secretary notes that the absence of a specific provision permitting school and school-affiliated organization employee service on lender advisory boards, comparable to what is provided for service on guaranty agency advisory boards, means that any compensation for this service is considered to be an improper inducement if provided to secure loan applications. The Secretary disagrees with the commenters who recommended that school and school-affiliated organization employees be permitted to continue service on lender advisory boards, on a paid or unpaid basis, and with travel and lodging expenses paid by the lender. Recent investigations have shown that many of these meetings have largely been designed as expense-paid vacations for the school employees in support of continued or increased loan volume for that FFEL lender from the school. The Secretary believes that these board meetings are not necessary to the proper administration of the FFEL Program.

Unlike lenders, guaranty agencies are responsible for lender and school oversight, school and lender training, default aversion services, lender claim review and approval, and outreach services to students, parents, and schools in their respective areas of service. The Secretary believes that school employee service on a guaranty agency's board, if used effectively, can be important for those aspects of FFEL program administration for which the agency is responsible. In addition, in its role in providing training on the Title IV student aid programs, the agency is in a good position to identify the training needs of staff at schools that may not have sufficient resources to provide or pay for needed training, regardless of whether the school participates in the FFEL Program. Moreover, under § 682.423, a guaranty agency is authorized to use its Operating Fund for school and lender training. The Secretary believes, therefore, that it is appropriate for a guaranty agency to cover the travel and lodging costs of school staff if the agency identifies, on a limited, case-by case basis, that those individuals would otherwise be unable to attend needed training, provide needed service on the agency's governing or advisory board, or on another of the agency's formal working committees.

Changes:

For purposes of clarity, we have modified paragraph (5)(i)(A)(

6

) of the definition of

lender

to specifically prohibit a lender from soliciting school employees to serve on a lender's advisory board and paying costs related to this service.

Lender and Guaranty Agency Sponsored Meals, Refreshments, and Receptions at Meetings and Conferences (§§ 682.200(b) and 682.401(e)(2)(iii))

Comment:

One commenter representing a lender objected to our proposal to allow lenders and guaranty agencies to continue to sponsor meals, refreshments, and receptions that are reasonable in cost for school officials or employees in connection with meetings

and conferences. The commenter believes that permitting these activities will allow abuses that have received negative media attention to continue because there are no defined parameters provided in the regulations about what is “reasonable” or what constitutes a “reception.” The commenter recommended that these activities be prohibited.

Discussion:

The Secretary believes that sponsorship by a lender or guaranty agency of meals, refreshments, and receptions at conferences and other training meetings that are open to all attendees at a conference or meeting do not represent an inducement of the individual attendees or their schools to secure loan applications or loan guarantees for the sponsoring lender or guarantor. This form of sponsorship is a form of generalized marketing that is not prohibited under the law. These arrangements also assist in reducing the cost of needed training conferences and meetings for individual attendees. In using the term “reception,” the Secretary does not envision private parties of lender-selected groups of conference attendees, or of school or school-affiliated organization employees. Instead, the Secretary expects that the receptions permitted under the regulations will be general gatherings that are open to all conference or meeting attendees, are held in conjunction with the conference or meeting, and are generally held at the conference site. The Secretary believes this kind of reception provides attendees with an appropriate opportunity for information sharing on the training being conducted.

By “reasonable cost,” the Secretary anticipates that conference managers and sponsoring lenders and guaranty agencies will adhere to the “prudent person test” under which the cost per person for the sponsored event does not exceed the cost that would be incurred by a prudent person under the circumstances at the time the decision was made to incur the cost. The burden of proof will be on conference managers and sponsors to show that the costs are consistent with the normal per person cost of such events.

The Secretary also notes that she neglected to specify in § 682.401(e)(2)(v) that such meals, refreshments, and receptions sponsored by a guaranty agency must be “reasonable in cost,” and has added that condition to the regulations.

Changes:

Section 682.401(e)(2)(iv) has been modified to require that guaranty agency-sponsored meals, refreshments, and receptions be “reasonable in cost.”

Lender and Guaranty Agency Performance of School-Based Functions as a Contractual Third-Party Servicer, With Appropriate Compensation, and to Participating Foreign Schools (§§ 682.200(b) and 682.401(e)(1)(i)(F))

Comment:

Many commenters representing lenders, lender servicers, and guaranty agencies objected to the provision in the proposed regulations that would prohibit a lender or guaranty agency from performing functions on behalf of a school except on a short-term, non-recurring, emergency basis. The commenters noted that this provision represents a change from longstanding Department policy that allowed a guaranty agency or lender to perform functions on behalf of a school as long as the services were performed with appropriate compensation. The commenters also note that regulations governing third-party servicers in 34 CFR § 668.2 do not include these same restrictions and permit any individual or organization to enter into a contract with a school to administer any aspect of the school's Title IV programs. The commenters indicated implementing this regulation would force FFEL Program participants to immediately cease performing certain activities that benefit schools and their borrowers. Several commenters from small schools claimed that if they could not contract with their State guaranty agency as a third-party servicer to administer certain aspects of the FFEL Program, they would be forced to procure services from less well-informed, less reliable, and more costly third-party servicers.

Some lender and guaranty agency commenters noted that the limitation on lenders and guaranty agencies providing staffing services to schools will result in the elimination of previously Department-sanctioned and directed eligibility determination services provided to eligible foreign schools at the school's request. The commenters recommended that the Secretary provide an exception in the regulations to allow these services to continue.

A national association stated that the proposed regulations did not explicitly allow lenders and guaranty agencies to perform student loan entrance and exit counseling activities, and expressed concern that the Department would be effectively prohibiting lenders, guaranty agencies, and secondary market lenders from supporting or participating in educational outreach and financial literacy efforts. Another national organization asked that the regulations explicitly permit lenders and guaranty agencies to provide staff training, computer support, and printing and distribution of financial aid-related information, and to perform other school functions with appropriate compensation.

A commenter representing a national consumer organization and national student associations recommended that the Department impose a blanket prohibition on lenders providing assistance to schools to perform school-based financial aid duties, noting that many schools had already agreed to this restriction under voluntary agreements with state attorney generals. Several U.S. Senators strongly urged the Secretary to prohibit all lender or guaranty agency performance of school financial aid-related functions, even on an emergency basis, because these activities promoted particular lenders and created a serious loophole in t

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