Student Assistance General Provisions; Interim Final Rule DEPARTMENT OF EDUCATION

SUMMARY: On December 20, 1993, the President signed the Higher

Education Technical Amendments of 1993. These interim final regulations

implement certain provisions of the technical amendments relating to

the determination of institutional cohort default rates in the Federal

Family Education Loan program. The Secretary invites comments on these

regulations.

DATES: Effective date: These regulations take effect either 45 days

after publication in the Federal Register or later if Congress takes

certain adjournments, with the exception of Sec. 668.17 (f) and (h)

which will become effective after the information collection

requirements contained in this section have been submitted by the

Department of Education and approved by the Office of Management and

Budget under the Paperwork Reduction Act of 1980. If you want to know

the effective date of these regulations, call or write the Department

of Education contact person. A document announcing the effective date

will be published in the Federal Register. Comments on these interim

final regulations must be received on or before June 13, 1994.

ADDRESSES: All comments concerning these regulations should be

addressed to Pamela A. Moran, Acting Chief, Loans Branch, Division of

Policy Development, Policy, Training, and Analysis Service, U.S.

Department of Education, 400 Maryland Avenue, SW. (room 4310, ROB-3),

Washington, DC 20202-5449.

FOR FURTHER INFORMATION CONTACT: Doug Laine, Program Specialist, Loans

Branch, Division of Policy Development, Policy, Training, and Analysis

Service, U.S. Department of Education, 400 Maryland Avenue, SW. (room

4310, ROB-3), Washington, DC. 20202-5449. Telephone (202) 708-8242.

Individuals who use a telecommunications device for the deaf (TDD) may

call the Federal Information Relay Service (FIRS) at 1-800-877-8339

between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: Section 2(c)(55) of Public Law 103-208

amended section 435 of the Higher Education Act of 1965, as amended

(HEA), 20 U.S.C. 1085. This section modified the process governing

institutions' appeals of their cohort default rates based on

allegations of improper loan servicing and collection.

In a Federal Register Notice published March 22, 1994, 59 FR 13606,

the Secretary requested comments on the procedures that should be

established to implement the statutory amendments.

The Secretary indicated in the Notice that he intended to issue

regulations establishing procedures for schools to appeal their default

rates based on allegations of improper loan servicing or collection.

The notice solicited public help in developing those procedures. The

Secretary invited public comment on any aspect of implementing the

statute, but in particular, the Secretary solicited comments on the

following issues:

1. What procedures should the Secretary use in determining whether

to exclude from the calculation of cohort default rates loans, the

inclusion of which due to improper servicing or collection, would

result in an inaccurate or incomplete calculation of a school's cohort

default rate?

2. What procedures should be used for sampling of loan servicing

and collection records?

3. What procedures should the Secretary provide for schools to

review the information provided by the guaranty agencies to the

Secretary for use in determining cohort default rates prior to

calculation of the final rates?

The Secretary received 54 comments in response to the request for

comments. Many of the comments are reflected in these rules. The

Secretary's response to the suggestions made by the commenters that

were not accepted is provided after the following discussion of the

procedures established by these rules.

Appeals Based on Allegations of Improper Loan Servicing

Public Law 103-208 added section 435(a)(3) to the HEA to

specifically provide certain institutions with an opportunity to appeal

the calculation of their cohort default rates on the basis of

allegations of improper loan servicing or collection. In particular,

this opportunity will be available to institutions that: (1) Are

subject to loss of eligibility for the FFEL Program under section

435(a)(2) of the HEA; (2) are subject to loss of eligibility for the

Federal Supplemental Loans for Students (SLS) Program under section

428A(a)(2) of the HEA; or (3) have cohort default rates that equal or

exceed 20 percent for the most recent year for which data are

available. The statute requires the Secretary to take steps to ensure

that these institutions have access to a representative sample of

relevant loan servicing and collection records for a reasonable period

of time, not to exceed 30 calendar days. Upon completion of the appeal,

the Secretary will reduce an institution's cohort default rate to

reflect the percentage of defaulted loans in the sample that are

required to be excluded under section 435(m)(1)(B) of the HEA.

Public Law 103-208 also amended section 435(m)(1)(B) of the HEA to

clearly provide that the Secretary would consider allegations of

improper loan servicing or collection only in considering appeals of

cohort default rate determinations filed by institutions. This change

was made in response to certain court rulings which suggested that the

Secretary was required to determine whether loans were properly

serviced prior to making initial determinations of and releasing cohort

default rates. Section 435(m)(1)(B) of the HEA now provides that, in

considering appeals of cohort default rates under section 435(a)(3) of

the HEA, the Secretary should exclude any loans which, due to improper

servicing or collection, would, as demonstrated by the evidence

submitted in support of the institution's timely appeal to the

Secretary, result in an inaccurate or incomplete calculation of the

cohort default rate.

These regulations establish the procedures for implementing the

appeal process provided by sections 435(a)(3) and 435(m)(1)(B) of the

HEA. The regulations specify that an institution which is subject to

the loss of participation in the FFEL program because of default rates

equal to or in excess of 25 percent for the three most recent years for

which rates are calculated or which has a cohort default rate which

equals or exceeds 20 percent may appeal the calculation of the rate

based on allegations of improper loan servicing or collection. These

regulations do not specifically include institutions that are subject

to the loss of participation in the Federal SLS Program because that

program has been repealed by Congress effective July 1, 1994. See

Public Law 103-66, section 4047(b) and (d). These regulations replace

the former regulatory provision which related to the loss of SLS

participation because that subsection becomes moot on the elimination

of the SLS program. However, an institution that is currently subject

to a loss of participation in the SLS program will have the opportunity

to pursue an appeal under these procedures.

Under these regulations, once an institution receives notice from

the Secretary that its cohort default rate or rates exceed the levels

specified in section 435(a)(3) of the HEA, the institution will have 10

working days to initiate an appeal of the rate based on allegations of

improper loan servicing or collection. The Secretary's default rate

notification to the institution will include a list of all borrowers

included in the calculation of the cohort default rate. To initiate an

appeal, the institution must include the list of borrowers in its

notification to the guaranty agencies that it is appealing the

calculation of the cohort default rate based on allegations of improper

loan servicing or collection.

Once the guaranty agency receives the institution's appeal, it must

provide the institution with the loan servicing or collection records

for a representative sample of the loans insured by the guaranty agency

and included in the institution's cohort default rate. The sample must

be identified by the guaranty agency and the universe estimate derived

from the sample results must be acceptable at a 95 percent confidence

level with a plus or minus 5 percent confidence interval. In some

cases, the result may be that servicing and collection records for all

the loans guaranteed by the agency and included in the institution's

default rate will be sent to the institution. Once the sample is

identified, the guaranty agency must send the loan servicing and

collection records to the institution within 15 working days of

receiving the institution's request. The guaranty agency's response to

the institution must also include a list of certain dates that will

assist the institution in reviewing the records and the Department in

resolving the appeal. An agency may charge the institution a reasonable

fee for copying and production of the records, not to exceed $10 per

borrower file. The Secretary will charge a similar fee in response to a

request for records maintained by the Department on behalf of the

Higher Education Assistance Foundation.

After receiving the records from the guaranty agency, the

institution has 30 calendar days to file its appeal with the Secretary.

The regulations identify the material that must be submitted by the

institution. The Secretary will review the appeal and issue a decision.

The Secretary will assume that the records maintained by the guaranty

agency in the normal course of business in the FFEL Program are correct

unless the institution provides substantial evidence to the contrary.

If the Secretary finds that the evidence submitted by the institution

shows that some of the loans included in the sample of loans should be

excluded from calculation of the cohort default rate, the Secretary

will adjust the institution's cohort default rate to reflect the

percentage of defaulted loans that should be excluded. The Secretary

will use a statistically valid methodology to determine the estimate of

the number of loans that should be excluded from the calculation of the

cohort default rate and the confidence interval of the estimate. In

determining the exact methodology, the Secretary will need to consider

the number of loans in the sample, the number of guaranty agencies

involved and other appropriate factors. The Secretary will notify the

institution, in writing, of his decision on the appeal.

Section 435(m)(1)(B) of the HEA includes two prerequisites for

exclusion of a loan from the cohort default rate calculation. Under the

law, the institution must prove both (1) that the loans were serviced

or collected improperly and (2) that the improper loan servicing and

collection caused the student loan default. If either of these two

requirements is not proven, the loan will not be excluded from the

cohort default rate calculation.

These regulations reflect the Secretary's view, based on

consideration of past appeals of cohort default rate determinations

that, for purposes of a cohort default rate appeal, a loan is

considered to have been serviced or collected improperly only if, under

applicable rules, the Department would decline to pay reinsurance on

the principal of the loan by reason of the improper servicing or

collection. The HEA does not define the term ``improper servicing or

collection'' used in section 435(m). Therefore, to determine what

constitutes improper loan servicing and collection, the Secretary looks

to its due diligence regulations, its published policies such as

Appendix D to 34 CFR part 682 and other applicable policies and

practices. There is no indication that the 1993 amendments to section

435(m) were intended to establish new concepts regarding what does and

does not constitute improper loan servicing and collection. For that

reason, the Secretary construes section 435(m) by reference to concepts

developed over a period of years in the administration of the FFEL

Program.

Section 435(m) of the HEA also specifies that a loan which has been

subject to improper servicing or collection is excluded from

calculation of the cohort default rate only if the default on the loan

was ``due to'' improper servicing or collection and results in an

inaccurate or incomplete calculation of the cohort default rate. The

statute does not explain how improper servicing or collection could

cause a cohort default rate to be inaccurate or incomplete. In Atlanta

College of Medical and Dental Careers, Inc. v. Riley, 987 F.2d 821, 830

(D.C. Cir. 1993), however, the Court of Appeals assumed that a cohort

default rate would be inaccurate or incomplete if it contained loans

which defaulted due to improper servicing or collection. The Secretary

considers that interpretation to be reasonable. The Court of Appeals in

Atlanta College also concluded that the type of causal link between

improper servicing and default on a loan is properly left to the

Secretary. The Secretary believes that a stringent showing of default

causation is appropriate. Section 435(m) of the HEA does not include

any general ``causation'' challenge that would permit an institution to

appeal the calculation of its default rates on the basis that its

students defaulted for reasons beyond the institution's control.

Moreover, Congress set tight constraints on the time periods for

challenges to the calculation of the cohort default rates and clearly

did not contemplate a time-consuming, heavily burdensome process for

determining default causation.

Based on these factors, the Secretary has determined that section

435(m) should be interpreted to allow only a limited loan servicing

challenge. Accordingly, these regulations reflect the Secretary's

determination that, for purposes of the calculation of a cohort default

rate, improper servicing or collection is considered to have caused a

default only if the improper servicing or collection resulted in a lack

of notification to the borrower that he or she must begin repaying the

loan. The Secretary believes that once the borrower has been informed

of the obligation to repay the loan, the institution cannot show that a

resulting default was due to the alleged improper servicing. The

position reflected in these regulations has its genesis in certain

decisions of the Secretary which resolved appeals of cohort default

rate determinations on a case-by-case basis. Case-by-case adjudication

is a permissible approach to decision making under applicable law. See

NLRB v. Bell Aerospace Corp., 416 U.S. 267, 294 (1974). However, the

Secretary's adjudications resolving individual appeals have not

established rules of general applicability. As explained in more detail

in the comment and response section of this document, the Secretary has

considered a variety of proposed standards for adjudication of appeals

based on allegations of improper servicing and collection. Some of

these approaches would arguably broaden the appeal standard for

institutions, while others reflect a more narrow scope than is

reflected in the Secretary's adjudications to date. After careful

consideration of these alternatives, the Secretary concludes that the

general construction of section 435(m) of the HEA reflected in his most

recent appeal decisions faithfully implements Congressional intent and

fairly balances the rights of all those affected by those decisions.

The Secretary particularly invites comments as to whether there are

other types of improper servicing that should be considered to have

``caused'' a default for purposes of calculation of a cohort default

rate and the rationale for any such suggestion. Review of cohort

default rate information.

Public Law 103-208 also amended section 435(m)(1)(A) of the HEA to

provide, effective October 1, 1994, that institutions will have an

opportunity to review and correct errors in the information provided by

the guaranty agencies to the Secretary for use in calculating cohort

default rates. These regulations add paragraph (h) to Sec. 668.17 to

establish procedures for this review.

Under the regulations, the Secretary will provide each institution

which has a draft default rate equal to or in excess of 20 percent with

a copy of the records provided by each guaranty agency in regard to

loans made to borrowers for attendance at the institution which were

insured by that guaranty agency. Institutions with draft default rates

under 20 percent may request copies of the records. These records will

be accompanied by a notice indicating the institution's draft default

rate. This draft default rate will not be considered a final agency

decision and will not be otherwise voluntarily released by the

Secretary.

After receiving the information from the Secretary, the institution

will have 30 calendar days to review the information and notify, in

writing, the appropriate guaranty agency of any information included in

the cohort default rate which it believes is incorrect. The institution

should also send the agency any evidence which it believes supports its

contention that the information provided by the guaranty agency to the

Secretary is inaccurate. The guaranty agency shall review the

institution's challenge and respond within 30 calendar days. If the

guaranty agency agrees with the institution, the information used to

calculate the cohort default rate will be adjusted prior to the release

of the official cohort default rates. If the guaranty agency does not

confirm the error alleged by the institution, the institution may use

the data provided by the guaranty agency as part of an appeal of the

calculation of the default rate based on the allegedly erroneous data

after the rates are released.

The Secretary intends to continue his practice of allowing

institutions with a cohort default rate equal to or in excess of 20

percent for the most recent year for which rates have been calculated

to challenge the calculation of the rate based on allegations that

erroneous data were included in the calculation. However, all

institutions must satisfy the time deadlines for filing challenges

under the regulations.

The Secretary believes that section 435 only provides an

opportunity for the institution to review and correct errors in the

information provided to the Secretary by the guaranty agency. The

statute does not contemplate that all allegations of error will be

resolved prior to release of the final default rates. The regulations,

therefore, allow an institution to appeal the calculation of a cohort

default rate based solely on allegations of erroneous data. However, to

ensure that appeals can be decided on a timely basis, the regulations

provide that an institution can only base an appeal on allegations that

were raised to the guaranty agency during the review of the draft

cohort default rate. The Secretary believes that this process will

benefit the institutions, guaranty agencies and the public by

shortening delays that have been experienced in the appeal process and

will result in more timely decisions.

Effect on Pending Default Rates

The Secretary received a number of comments regarding the effect of

the changes to section 435(a)(3) and (m) on the current official cohort

default rates. As the Secretary noted in the Federal Register notice,

Public Law 103-208 does not specifically provide for reopening prior

final determinations. However, the Secretary has been convinced by the

commenters to allow institutions to challenge their current cohort

default rates on the basis of allegations of improper loan servicing or

collection. Accordingly, the regulation allows institutions identified

in section 435(a)(3) of the HEA to file an appeal of the current cohort

default rates based on allegations of improper loan servicing. Thus,

institutions with cohort default rates equal to or in excess of 20

percent for fiscal year 1991 (including institutions subject to the

loss of SLS participation based on a fiscal year 1991 cohort default

rate in excess of 30 percent) may challenge the 1991 cohort default

rate. Similarly, institutions which are subject to the loss of FFEL

program participation based on cohort default rates for fiscal years

1989, 1990 and 1991 may challenge those rates. The regulation specifies

that the time limits for challenging these rates will begin on the date

that the regulations become effective. The Secretary intends to notify

institutions of the effective date of these regulations once that date

is determined. The prior default rates will be considered effective

until the appeal process is completed and a new rate issued.

The Secretary notes that cohort default rates for fiscal year 1992

will be issued during the summer of 1994. Institutions which are

interested in challenging their current cohort default rates may want

to wait until after the new rates are issued. An institution with a

cohort default rate in excess of one of the threshold levels for fiscal

year 1991 may find that its fiscal year 1992 cohort default rate is

below the threshold and that the institution is no longer subject to

sanctions based on excessive cohort default rates. Thus, an institution

may want to consider whether filing a challenge of the current default

rates is worth the time, expense and resources needed to prepare and

submit an appeal of a rate that may soon be irrelevant. The Secretary

also notes that the regulations provide that once an institution has

challenged a cohort default rate for a particular year and received a

final decision from the Secretary, that decision is binding in any

future challenge to the default rate filed by the institution.

Analysis of Comments and Responses

Comment: The commenters provided a number of different definitions

of the term ``improper servicing or collection'' of a loan. A number of

respondents to the request for comments suggested that the Secretary

should remove from the calculation of the cohort default rate any loan

that was not serviced in strict compliance with the Department's due

diligence requirements in 34 CFR 682.411. Some commenters suggested

that a loan on which a default claim has been paid should be considered

properly serviced or collected on the grounds that a claim would not

have been paid if servicing was not proper. Other commenters suggested

that the Secretary should consider a lender's failure to grant a

deferment to be improper loan servicing or collection. Some commenters

also suggested that guaranty agency collection efforts should be

considered in evaluating whether improper servicing or collection has

occurred.

Response: The Secretary's view of the satutory term ``improper

servicing or collection'' is discussed earlier in this document. The

Secretary does not agree with the suggestion that Congress intended to

establish a new standard for proper servicing or collection. Instead,

the Secretary believes it is appropriate to rely on the concepts and

requirements developed and applied by the Department over the years.

The requirements in Sec. 682.411 are designed to ensure that lenders

and guaranty agencies that are requesting Federal benefits meet certain

standards in collection as a requirement for receiving those benefits.

These requirements have never been intended to set forth standards

which if not followed in their entirety provide an excuse for borrowers

to refuse to repay their loans. Similarly, they are not intended to

provide protection for institutions that fail to meet the statutory

requirements for continued participation in the loan programs. Congress

has determined that the institutions bear a significant responsibility

for defaults in the FFEL program. The Secretary does not believe that a

lender's failure to strictly satisfy the requirements for Federal

benefits should excuse the institution from the statutory consequences

of its high default rate.

The Secretary also does not agree that it would be appropriate to

assume that all claims which have been paid as defaults have been

properly serviced or collected. While failure to pay a default claim

may be based on a finding of improper servicing or collection, payment

of a default claim is not absolute proof of compliance with the

Secretary's requirements. Accordingly, institutions should have the

opportunity to review servicing and collection records relating to

these loans.

In regard to the issue of a lender's failure to respond to

deferment requests, the Secretary notes that he has consistently

treated deferment errors as ``erroneous data'' in adjudicating appeals

of cohort default rate determinations. This treatment benefits the

appealing institution since a determination that erroneous data was

reported results in the affected loan being removed from the

calculation of defaulted loans (the numerator), but it remains in the

calculation of loans in repayment (the denominator). In contrast, loans

which are excluded from the calculation of the cohort default rate

based on improper servicing or collection are excluded from both the

numerator and the denominator. The Secretary does not believe there is

any reason to change his treatment of deferment errors.

Finally, the Secretary notes that guaranty agency servicing is not

relevant to the default rate calculation. A guaranty agency does not

begin to service a loan until it has already defaulted and, thus, its

servicing does not affect the institution's cohort default rate.

Comment: Some commenters proposed that the Secretary remove from

the calculation of the cohort default rate loans on which the lender

did not request preclaims assistance from the guaranty agency or on

which the agency did not provide notice of the request to the

institution.

Response: A lender's failure to request preclaims assistance could,

in certain circumstances, be considered improper servicing or

collection if it would result in the loss of reinsurance on the

principal of the loan based on the applicable rules and policies and if

the borrower defaulted due to lack of notification that the time for

repayment had begun.

Comment: Some commenters suggested that an institution should

remain eligible to participate in the FFEL program during the appeal

process.

Response: As provided in current regulations, an eligible

institution that files and pursues an appeal in accordance with the

regulatory requirements will be able to continue to participate in the

FFELP until and unless the Secretary issues a decision determining that

the institution's cohort default rates remain above the threshold

limits.

Comment: Some commenters urged the Secretary to allow all

institutions to challenge their default rates on the basis of improper

servicing or collection.

Response: Section 435(a)(3) specifically allows only institutions

with cohort default rates above certain threshold levels to challenge

their rate based on allegations of improper loan servicing. The

Secretary believes that this limitation was intentional and reasonable

in light of the significant burdens placed on guaranty agencies and the

Secretary in reviewing challenges based on allegations of improper loan

servicing or collection.

Comment: Some commenters urged the Secretary to require

institutions to provide evidence of improper loan servicing prior to

requesting access to loan servicing records.

Response: The HEA does not require institutions to provide evidence

of improper loan servicing or collection prior to filing a challenge of

its cohort default rates.

Comment: Some commenters requested that institutions be required to

submit a complete appeal before the guaranty agency is required to meet

the time deadlines required by the regulations.

Response: These comments were based on the assumption by the

commenters that the institution would be required to submit evidence of

improper loan servicing before the guaranty agency would be required to

respond to the institution's appeal. Under these regulations, the

institution will only need to notify the guaranty agency that it is

appealing the calculation of the cohort default rate and provide a copy

of the list of borrowers included in the calculation of the rate.

Accordingly, the Secretary believes it is unlikely that an institution

will not submit a complete notification to the guaranty agency.

However, an institution which does not submit the notice and list to

the guaranty agency as required by the regulation may be barred from

pursuing an appeal.

Comment: Some commenters suggested that loans serviced by lenders

or servicers who have been designated as exceptional performers under

section 428I of the HEA should not be included in any loans reviewed

for improper servicing or collection on the ground that these loans are

presumed to be serviced or collected properly.

Response: The Secretary does not believe that it is appropriate to

exclude loans serviced by exceptional performers from the process for

determining appeals based on allegations of improper servicing or

collection. The exceptional performer designation is related only to

the lender's receipt of payments from the guaranty agency. It should

not be used to limit the institution's opportunity to challenge the

calculation of its cohort default rate.

Comment: A number of commenters urged the Secretary to provide

institutions more time to complete and submit appeals to the guaranty

agencies and the Secretary.

Response: The Secretary believes that the regulations provide

sufficient time for an institution to complete and submit appeals. The

Secretary believes that the regulations are consistent with the tight

time constraints on the time period for appeals included in the HEA.

Comment: Some commenters recommended that the Secretary consider

the quality of education provided by an institution in determining

whether an institution should be sanctioned based on its excessive

default rates.

Response: The statute sets forth specific grounds for challenges to

an institution's cohort default rates. The quality of education is not

included as a basis for appeal of a default rate based on allegations

of improper loan servicing or collection. The Secretary notes, however,

that institutions which are subject to the loss of FFEL Program

participation under section 435(a)(2) of the HEA may appeal on the

grounds of exceptional mitigating circumstances as defined by the

Secretary's regulations.

Comment: Some commenters recommended that the Secretary grant an

institution's appeal if the guaranty agency does not provide the

servicing and collection records within the time set forth in the

regulations.

Response: The Secretary does not believe it is appropriate to

automatically grant an institution's appeal if the guaranty agency

misses a deadline to provide records to the institution. In most cases,

the institution continues to participate in the program and is not

harmed by a short delay. The Secretary believes that the guaranty

agencies must take appropriate steps to provide records within the

regulatory time frames. However, in appropriate cases, the Secretary

may consider taking action to levy a financial penalty or limit,

suspend or terminate a guaranty agency's participation in the FFEL

program based on violations of the regulatory time frames.

Comment: One commenter recommended that loans which have been

improperly serviced or collected be removed only from the numerator of

the calculation of the cohort default rate but not from the

denominator.

Response: The Secretary construes section 435(a)(3) to require that

loans which are determined to have defaulted due to improper loan

servicing or collection be ``exclude[d]'' from the calculation of the

cohort default rate entirely.

Executive Order 12866

The contents of this final rule have been reviewed in accordance

with Executive Order 12866. Under the terms of the order, the Secretary

has assessed the potential costs and benefits of the procedures in this

rule.

The potential costs associated with the contents of this rule are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering the FFEL program

effectively and efficiently. In assessing the potential costs of these

procedures, the Secretary has determined that the benefits of these

procedures justify the costs.

The Secretary has also determined that the contents of this rule do

not unduly interfere with State, local and tribal governments in the

exercise of their governmental functions.

The contents of this rule are consistent with the requirements of

the HEA and promote the President's priorities.

Sections 668.17 (f) and (h) contain information collection

requirements. As required by the Paperwork Reduction Act of 1980, the

Department of Education will submit a copy of these sections to the

Office of Management and Budget (OMB) for its review. These regulations

affect institutions of higher education and guaranty agencies that

participate in the Federal Family Education Loan Program. The Secretary

needs the information to properly administer certain aspects of that

program. The collection and reporting burden for the 300 institutions

which challenge the calculation of their cohort default rates under

these provisions is expected to increase by 15,600 hours. The

collection and reporting burden for the 46 guaranty agencies which must

respond to the institutions' requests under these regulations is

expected to increase by 2,576 hours.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, Room 3002, New Executive

Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.

Comments on the burden estimate must be received on or before May 31,

1994.

Invitation to Comment

The Secretary recognizes that many participants in the FFEL program

have an interest in these procedural rules. In light of that interest,

the Secretary is requesting comment on these rules. The Secretary will

consider any comments received within the designated comment period in

determining whether to make any changes in these rules. After reviewing

any comments received during the comment period, the Secretary will

publish changes to the regulation or will publish a notice in the

Federal Register indicating that no further changes will be made.

Waiver of Rulemaking

It is the practice of the Secretary to offer interested parties an

opportunity to comment on proposed regulations. However, the Secretary

has determined that the public interest requires the immediate issuance

of this interim final rule.

Under the Administrative Procedure Act, 5 U.S.C. section 551, et

seq., procedural amendments to regulations do not require prior public

notice and an opportunity for public comment. The changes being made by

this rule do not affect the substantive requirements or the underlying

laws or rules; nor do they modify or revoke existing rights or

obligations, or create new ones. These regulations merely establish

procedures to implement the requirements of sections 435(a)(3) and

435(m)(1)(B) of the HEA. Therefore, public comment is not required

under 5 U.S.C. 553(b)(A).

In addition, the Secretary has determined that notice and comment

is impracticable, unnecessary and contrary to the public interest. The

procedures included in these rules are needed to adjudicate appeals

from the initial determinations of cohort default rates for

institutions. The Secretary is required by section 435(m)(4) of the HEA

to publish cohort default rates for each institution for which a rate

is calculated at least every fiscal year. The cohort default rates to

be released for the current fiscal year are currently scheduled to be

released during the summer of 1994. For the appeal procedures to be in

place prior to the release of the default rates, the procedures must be

published by May 1, 1994. Moreover, the Secretary invited public

comment on what the procedures should be and received and considered

the comments received in preparing this interim final rule.

Accordingly, the Secretary has determined that public comment on this

interim final rule is not required under 5 U.S.C. 553(b)(B).

List of Subjects in 34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

Consumer protection, Education, Grant programs-education, Loan

programs-education, Reporting and recordkeeping requirements, Student

aid.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program.)

Dated: April 21, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary amends part 668 of title 34 of the Code of Federal

Regulations as follows:

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

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

1141, unless otherwise noted.

1. Section 668.17 is amended by adding paragraphs (f), (g) and (h)

as follows:

Sec. 668.17 Default reduction measures.

* * * * *

(f) Appeal based on allegations of improper loan servicing or

collection--(1) General. An institution that is subject to loss of

participation in the FFEL programs under paragraph (a)(1) of this

section or has been notified by the Secretary that its cohort default

rate equals or exceeds 20 percent for the most recent year for which

data are available may include in its appeal of that loss or rate a

challenge based on allegations of improper loan servicing or

collection. This challenge may be raised in addition to other

challenges permitted under this section.

(2) Standard of review. An appeal based on allegations of improper

loan servicing or collection must be submitted to the Secretary in

accordance with the requirements of this paragraph. The Secretary

excludes any loans from the cohort default rate calculation which, due

to improper servicing or collection, would, as demonstrated by the

evidence submitted in support of the institution's complete and timely

appeal to the Secretary, result in an inaccurate or incomplete

calculation of the cohort default rate.

(3) Procedures. (i) The following procedures apply to appeals from

cohort default rates issued by the Secretary during Federal fiscal year

1994 and subsequent years. Upon receiving notice from the Secretary

that the institution's cohort default rate exceeds the thresholds

specified in paragraph (c)(2) of this section or that its most recent

cohort default rate equals or exceeds 20 percent, the institution may

appeal the calculation of the cohort default rate based on allegations

of improper loan servicing or collection. The Secretary's notice

includes a list of all borrowers included in the calculation of the

institution's cohort default rate.

(ii) To initiate an appeal under this paragraph, the institution

must notify, in writing, each guaranty agency that guaranteed loans

included in the institution's cohort default rate that it is appealing

the calculation of the cohort default rate. The notification must be

received by the guaranty agency within 10 working days of the date the

institution received the Secretary's notification. The institution's

notification to the guaranty agency must include a copy of the list of

students provided by the Secretary to the institution.

(iii) Within 15 working days of receiving the notification from the

institution, the guaranty agency must provide the institution with a

representative sample of the loan servicing and collection records

relating to borrowers whose loans were guaranteed by the guaranty

agency and that were included as defaulted loans in the calculation of

the institution's cohort default rate. In selecting the representative

sample of records, the guaranty agency must use the following

procedures:

(A) The guaranty agency shall list in social security number order

all loans made to borrowers for attendance at the institution and

guaranteed by the guaranty agency and included as defaulted loans in

the calculation of the cohort default rate which is being challenged by

the institution.

(B) From the population of loans identified by the guaranty agency,

the guaranty agency shall identify a sample of the loans. The sample

must be of a size such that the universe estimate derived from the

sample is acceptable at a 95 percent confidence level with a plus or

minus 5 percent confidence interval. The sampling procedure must result

in a determination of the number of loans that should be excluded from

the calculation of the cohort default rate under this paragraph.

(C) Once the sample of loans has been established, the guaranty

agency shall provide a copy of all servicing and collection records

relating to each loan in the sample to the institution in hard copy

format unless the guaranty agency and institution agree that all or

some of the records can be provided in another format.

(D) The guaranty agency may charge the institution a reasonable fee

for copying and providing the documents, not to exceed $10 per borrower

file.

(E) After compiling the servicing and collection records for the

loans in the sample, the guaranty agency shall send the records, a list

of the loans included in the sample, and a description of how the

sample was chosen to the institution. The guaranty agency shall also

send a copy of the list of the loans included in the sample and the

description of how the sample was chosen to the Secretary at the same

time the material is sent to the institution. The list of loans

included in the sample must include the following information:

(1) The loans included in the sample listed in order by social

security number;

(2) For each loan listed, the last date of attendance, the date

entered repayment, the date of the first payment missed by the borrower

and the default date listed in the guaranty agency's records.

(iv) After receiving the relevant loan servicing and collection

records from all of the guaranty agencies that insured loans which are

included in the cohort default rate calculation, the institution has 30

calendar days to file its appeal with the Secretary. An appeal is

considered filed when it is received by the Secretary. If the

institution is also filing an appeal under paragraph (d)(1)(i) of this

section, the institution may delay submitting its appeal under this

paragraph until the appeal under paragraph (d)(1)(i) is submitted to

the Secretary. As part of the appeal, the institution must submit the

following information to the Secretary:

(A) A list of the loans which the institution alleges would, due to

improper loan servicing or collection, result in an inaccurate or

incomplete calculation of the cohort default rate.

(B) Copies of all of the loan servicing or collection records and

any other evidence relating to a loan that the institution believes has

been subject to improper servicing or collection. The records must be

in hard copy or microfiche format.

(C) An explanation of how the alleged improper servicing or

collection resulted in an inaccurate or incomplete calculation of the

cohort default rate.

(D) A summary of the institution's appeal, listing the number of

loans insured by each guaranty agency that were included in the

calculation of the institution's cohort default rate, and the number of

loans that would be excluded from the calculation of that rate by

application of the results of the review of the sample of loans

provided to the institution to the population of loans for each

guaranty agency.

(E) A certification by an authorized official of the institution

that all information provided by the institution in the appeal is true

and correct.

(v) The Secretary or his designee reviews the information submitted

by the institution and issues a decision.

(A) In making a decision under this paragraph the Secretary

presumes that the information provided by the guaranty agency is

correct unless the institution provides substantial evidence showing

that the information maintained by the guaranty agency is not correct.

(B) If the Secretary finds that the evidence presented by the

institution shows that some of the loans included in the sample of loan

records reviewed by the institution should be excluded from calculation

of the cohort default rate under paragraph (f)(2) of this section, the

Secretary reduces the institution's cohort default rate, in accordance

with a statistically valid methodology, to reflect the percentage of

defaulted loans in the sample that should be excluded.

(vi) The Secretary notifies the institution, in writing, of the

decision.

(vii) An institution may not seek judicial review of the

Secretary's determination of the institution's cohort default rates

until the Secretary or his designee issues the decision under paragraph

(f)(3)(v) of this section.

(viii) For purposes of this paragraph a loan is considered to have

been serviced or collected improperly only if, under applicable rules,

the Department would decline to pay reinsurance on the principal of the

loan.

(ix) For purposes of this paragraph, improper servicing or

collection is considered to have caused a loan to default for purposes

of the calculation of the cohort default rate only if the improper

servicing or collection resulted in a failure to notify the borrower

that he or she must begin repaying the loan.

(x) For cohort default rates issued by the Secretary for federal

fiscal years from 1989 to 1991, the procedures in this paragraph apply,

except that the 10-day period for initiating an appeal with the

guaranty agency starts on the effective date of these regulations.

(g) Effect of decision. An institution may challenge the

calculation of a cohort default rate under this section no more than

once. The Secretary's determination of an institution's appeal of the

calculation of a cohort default rate is binding on any future appeal by

the institution. An institution that fails to challenge the calculation

of a cohort default rate under this section within 10 working days of

receiving notice of the determination of the cohort default rate is

prohibited from challenging that rate in any other proceeding before

the Department.

(h) Review of default rate data. Effective on October 1, 1994, an

institution has an opportunity to review and correct the information

provided to the Secretary by the guaranty agencies for the purpose of

calculating a cohort default rate on the loans to be included in the

calculation of the institution's cohort default rate before the final

rate is calculated.

(1) (i) Once the Secretary has received the information used in

calculating the cohort default rates from the guaranty agencies, the

Secretary calculates draft cohort default rates for each institution.

(ii) The Secretary sends all institutions with draft cohort default

rates equal to or in excess of 20 percent a copy of the information

provided by the guaranty agencies in regard to loans included in the

institution's cohort default rate.

(iii) An institution with a draft cohort default rate less than 20

percent will receive a notice of the draft default rate and may request

a copy of the information provided by the guaranty agencies within 10

working days of receiving the notice from the Secretary. Upon receiving

the request from the institution, the Secretary will send the

institution a copy of the information requested. The time frames

provided in this paragraph will not start until the institution

receives or should have received the information from the Secretary.

(2) Within 30 calendar days of receiving the default rate

information from the Secretary, the institution must notify the

guaranty agency of any information included in the default rate data

that it believes is incorrect. The institution must also provide the

guaranty agency with any evidence that it believes supports its

contention that the default rate data are incorrect.

(3) Within 30 calendar days of receiving the institution's

challenge under paragraph (h)(2) of this section, the guaranty agency

shall respond to the institution's challenge. The guaranty agency's

response must include a response to each allegation of error made by

the institution and any evidence supporting the agency's position.

(4) The guaranty agency shall provide a copy of its response to the

institution to the Secretary and identify any errors in the information

previously submitted to the Secretary.

(5) The information used to calculate cohort default rates will be

changed to reflect allegations of error made by an institution and

confirmed by the guaranty agency prior to releasing final cohort

default rates.

(6) The draft default rate issued by the Secretary under paragraph

(h)(1) of this section may not be considered public information and may

not be otherwise voluntarily released by the Secretary or the guaranty

agency.

(7) An institution may not appeal a cohort default rate under

paragraph (d)(1) of this section on the basis of any alleged errors in

the default rate information unless errors were identified by the

institution in a challenge to its preliminary default rate under

paragraph (h) of this section.

[FR Doc. 94-10132 Filed 04-28-94; 8:45 am]

BILLING CODE 4000-01-P