Federal Family Education Loan Program; Final Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary amends the regulations governing the Federal

Family Education Loan (FFEL) Program. The FFEL Program consists of the

Federal Stafford, Federal Supplemental Loans for Students (SLS),

Federal PLUS, and Federal Consolidation Loan programs. These amendments

are needed to implement changes to the Higher Education Act (HEA), made

by the Higher Education Amendments of 1992, to define the performance

standards and application procedures under which a lender, servicer, or

guaranty agency will be designated as an exceptional performer. These

regulations authorize the Secretary to recognize lenders, servicers,

and guaranty agencies for an exceptional level of performance in

collecting delinquent and defaulted FFEL Program loans. These

regulations will also encourage lenders, servicers, and guaranty

agencies to provide a higher level of expertise in servicing student

loan portfolios and to provide strict monitoring of collection

activities required on delinquent and defaulted FFEL Program loans.

EFFECTIVE DATE: Pursuant to section 482(c) of the Higher Education Act

of 1965, as amended (20 U.S.C. 1089(c)), these regulations take effect

July 1, 1995, with the exception of the information collection

requirements in Sec. 682.415. The information collection requirements

in Sec. 682.415 will become effective on July 1, 1995, or after these

requirements have been submitted by the Department of Education and

approved by the Office of Management and Budget under the Paperwork

Reduction Act of 1980, whichever is later. A document announcing the

effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ron Streets, Federal Family Education

Loan Program Section, 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, D.C. 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: The Higher Education Amendments of 1992

(Pub. L. 102-325) (the 1992 Amendments) enacted July 23, 1992 added a

new section 428I to the HEA to require the Secretary to promulgate

regulations to identify lenders, servicers, and guaranty agencies that

perform at an exceptional level in collecting delinquent and defaulted

FFEL Program loans. These regulations seek to reduce the cost of

defaults in the FFEL Program by encouraging lenders, servicers, and

guaranty agencies to properly collect student loans while easing the

burden on program participants who demonstrate an exceptionally high

level of compliance with program requirements.

On April 20, 1994, the Secretary published a notice of proposed

rulemaking (NPRM) for the FFEL Program in the Federal Register (59 FR

18928). The NPRM included a discussion of the major issues surrounding

the proposed changes which will not be repeated here. The following

list summarizes those issues and identifies the pages of the preamble

to the NPRM on which a discussion may be found:

Separating loan portfolios to calculate the 97 percent

compliance rate (page 18930);

Qualifying separate servicing centers for exceptional

performance designation (page 18930); and

Applicability of the Federal False Claims Act to

exceptional performers (pages 18931-18932).

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 20 parties

submitted comments on the proposed regulations. An analysis of the

comments and the changes in the regulations since publication of the

NPRM follows.

Technical and other minor changes, and suggested changes the

Secretary is not legally authorized to make under the applicable

statutory authority, generally are not addressed.

Comments: Several commenters suggested that lenders, servicers, and

guaranty agencies with regional servicing centers should be able to

qualify each center separately, or as a corporate entity, for

exceptional performance designation.

Discussion: Section 428I of the HEA refers to the designation of a

lender, servicer, or guaranty agency as a single entity and does not

indicate that separate servicing centers should be evaluated

separately. Consistent with the statutory language, the Secretary

believes it is important to view the applicant as a single entity to

accurately determine its overall compliance rating, regardless of the

number of sites at which it services loans.

Changes: None.

Comments: Several commenters recommended that applicants be

permitted to exclude parts of their portfolio from the exceptional

performance designation. The commenters argued that this would allow

applicants to separate their portfolio into segments which had

previously not been serviced with the same quality to qualify as an

exceptional performer. Other commenters stated that not allowing an

exclusion of portions of portfolios may create problems for certain

lenders and holders in terms of access to servicers and secondary

markets.

Discussion: The Secretary does not believe that lenders, servicers,

or guaranty agencies should be able to exclude portions of their loan

portfolio for purposes of determining satisfaction of the requirement

of a 97 percent compliance rating. Section 428I(a)(2) of the HEA

requires that due diligence on each loan serviced during the audit

period shall be reviewed in determining the applicable compliance rate.

Therefore, the Secretary does not believe the statute provides any

basis for excluding portions of a lender's, servicer's, or guaranty

agency's loan portfolio. The Secretary believes the entire loan

portfolio should be available for review to accurately determine the

applicable compliance rate for possible designation as an exceptional

performer.

Changes: None.

Comments: Some commenters suggested that the effective date of

revocation of the designation should be the date the Secretary notifies

the lender, servicer, or guaranty agency that its designation as an

exceptional performer is terminated.

Discussion: The Secretary believes a lender, servicer, or guaranty

agency that loses exceptional performance status is not entitled to

receive the benefits of this status beyond the date that the event or

condition causing the revocation occurred because that entity would no

longer satisfy the requirements for exceptional performance.

Changes: None.

Comments: Some commenters suggested that lenders and servicers

should be made aware of the progress of their application for

exceptional performance designation and the endorsement or lack of

endorsement of key participants. Other commenters suggested that a 30-

day notice and an opportunity for a hearing before the Secretary that

is provided to guaranty agencies should be extended to lenders and

lender servicers.

Discussion: The Secretary does not believe it is necessary to

provide applicants with periodic status reports of pending

applications. Paragraph (b)(4) provides that the Secretary notify the

applicant and the appropriate guaranty agency of his decision to

approve or deny an applicant's request for designation within 60 days

of receipt of the information requested under paragraph (a)(2).

Furthermore, the statute does not require the Secretary to allow a

lender an opportunity to challenge a decision denying designation for

exceptional performance. However, if the Secretary believes it is

appropriate, the Secretary may give the lender or servicer an

opportunity to submit additional information to support its

application.

Changes: None.

Comments: Several commenters objected to the proposed use of

internal auditors to conduct required quarterly audits, stating that

this may compromise the proper safeguarding of public funds. The

commenters recommended that the Secretary require that all audits be

performed by independent auditors.

Discussion: A lender servicer or guaranty agency may only request

permission to have its internal auditors perform the required audits

after the entity has been designated for exceptional performance for at

least 15 months. The Secretary will only approve the request if the

Federal fiscal interest is protected. If the Secretary allows an entity

to use internal auditors for the quarterly audits, the Secretary

believes that the required annual independent financial and compliance

audit is sufficient to assess the reliability of the internal auditor's

accounting procedures and information provided in the quarterly audits.

Changes: None.

Comments: Several commenters argued that it is not clear whether

all claims submitted beginning on or after October 1, 1993, by lenders

and lender servicers designated for exceptional performance will be

reimbursed at the 100 percent rate or will be reimbursed at 98 percent

reinsurance.

Discussion: The Secretary has determined that the reduction in the

reinsurance rate mandated by the Omnibus Budget Reconciliation Act of

1993 (Pub. L. 103-66) does not apply to lenders or lender servicers

designated as exceptional performers. Section 428I of the statute

specifies that lenders and lender servicers designated as exceptional

performers will receive 100 percent reimbursement on all default claims

submitted to guaranty agencies during the period of designation as

stated on page 2 of the Department's Dear Colleague Letter 93-G-246

(November 1993).

Changes: None.

Comments: A few commenters stated that the regulations limit the

100 percent insurance to ``default claims.'' The commenters stated that

since death, disability, and bankruptcy claims are eligible for 100

percent insurance under the HEA, those claims should be eligible for

coverage under the exceptional performer designation.

Discussion: The Secretary agrees with the commenters and has made a

change to the regulations.

Changes: The Secretary has revised Sec. 682.415(a)(1) to clarify

that all claims submitted by a lender or lender servicer designated for

exceptional performance shall receive 100 percent insurance.

Comments: Some commenters stated that the regulations only allow a

lender to be designated for exceptional performance for loans that it

services itself. The commenters argued that a lender should be able to

apply for exceptional performance designation even if it contracts with

a servicer for all or a portion of the servicing of its loan portfolio.

Discussion: The commenters are correct that the regulations allow

an applicant to apply for designation only based on the loans that it

actually services. The regulation is consistent with section

428I(a)(2)(A) of the Act. However, there appears to be a

misunderstanding within the industry. A lender, servicer, or guaranty

agency does not have to service its entire loan portfolio to be

eligible for exceptional performance designation. It may receive

designation based on loans it actually services itself. However, a

lender may not receive designation for a portion of its loan portfolio

serviced by a lender servicer unless the lender servicer has separately

received designation on its entire loan portfolio.

Changes: None.

Comments: Many commenters suggested that paragraph (b)(1)(ii) be

deleted from the final regulations and argued that the Secretary should

rely only on ``documentation'' rather than ``any information'' received

from a guaranty agency indicating that a lender's or servicer's

application for exceptional performance should be denied.

Discussion: The language in paragraph (b)(1)(ii) of the regulations

reflects the statutory language in section 428I(c)(2). Therefore, no

change has been made.

Changes: None.

Comments: A few commenters stated that paragraphs (a)(1) and (b)(4)

specify that lenders and lender servicers are designated for

exceptional performance for a 12-month period following the receipt by

the guarantor of notice of designation. The commenters noted that the

provision makes no reference to notifications to lenders and lender

servicers.

Discussion: The Secretary agrees with the commenters and has

revised the regulations.

Changes: The Secretary has revised paragraphs (a)(1) and (b)(4) to

also require notification to lenders and lender servicers.

Comments: Several commenters opposed inclusion of the statutory

provision that a lender or lender servicer designated for exceptional

performance who fails to service loans or otherwise comply with

applicable program regulations is considered in violation of the

Federal False Claims Act. Some commenters suggested that the Secretary

clarify the circumstances under which a violation of program

regulations would be considered a violation of the Federal False Claims

Act. The commenters argued that claims with servicing errors and

omissions may be submitted inadvertently by lenders and lender

servicers in the ordinary course of business, and as such should not be

considered violations of the Federal False Claims Act. Other commenters

suggested limiting the application of the Federal False Claims Act to

those loans submitted by an exceptional performer that were not covered

by the exceptional performance designation.

Discussion: The regulations properly reflect the statutory language

in 31 U.S.C. 3729. The Secretary does not believe it is necessary to

interpret this language further. The Secretary has changed the

regulation, however, to refer to 31 U.S.C. 3129 rather than the Federal

False Claims Act. This change conforms the regulations to section 428I

of the HEA, as modified by the Higher Education Technical Amendments of

1993, Pub. L. 103-208.

Changes: Section 682.415(b)(7)(ii) has been changed to refer to 31

U.S.C. 3729 rather than the Federal False Claims Act.

Comments: Some commenters recommended clarifying in the regulations

that insurance payment on a claim by a lender or lender servicer

designated for exceptional performance may not be denied or repayment

required based solely on a violation of repayment conversion, due

diligence requirements, and timely filing requirements.

Discussion: The Secretary believes that the regulatory language

clearly states that insurance payments will not be denied based solely

on a violation of repayment conversion, due diligence requirements, and

timely filing requirements. However, a guaranty agency or the Secretary

may require the lender or lender servicer to repurchase a loan if the

agency determines the loan should not have been submitted as a claim.

For example, repurchase of a claim could be required if the loan was

not delinquent for 180 days for installments due monthly at the time

the claim was submitted.

Changes: None.

Comments: One commenter suggested that a lender, servicer, or

guaranty agency should be able to receive the exceptional performance

designation even if the annual audit was conducted more than 90 days

prior to the initial request for designation.

Discussion: The Secretary believes that the audit period should end

no more than 90 days prior to requesting exceptional performance

designation to ensure that the information received from applicants is

relatively current. Therefore, a change is not warranted.

Changes: None.

Comments: Many commenters objected to guaranty agencies performing

a detailed review of every default claim submitted by an exceptional

performer.

Discussion: The regulations do not require a review of default

claims submitted by lenders and lender servicers designated for

exceptional performance. However, as stated in the NPRM and in these

final regulations, nothing prohibits the guaranty agency or the

Secretary from reviewing the lender's or lender servicer's activities

related to claims paid under the exceptional performance designation as

part of program oversight responsibilities.

Changes: None.

Comments: One commenter suggested that the scope of the compliance

audit be clarified. The commenter indicated that paragraph

(a)(3)(iii)(A) states ``the audit must yield a compliance rating of at

least 97 percent of all due diligence requirements applicable to each

loan, on average, with respect to the collection of delinquent loans

ending no more than. . . .'' The commenter stated that there are other

activities included in the exceptional performance designation that go

beyond due diligence on delinquent loans. The commenter suggested that

the compliance rating reflect the full scope of activities and measure

the accuracy of performance as a whole.

Discussion: The Secretary agrees with the commenter. During

negotiated rulemaking consensus was reached that the audit would review

compliance with converting FFEL Program loans to repayment under

Sec. 682.209(a), and compliance with the timely-filing requirements

under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the

audit guide published by the U.S Department of Education, Office of

Inspector General. Consensus was also reached that a guaranty agency's

compliance audit would review compliance with timely claim payments and

timely reinsurance filing required for defaulted FFEL Program loans in

Secs. 682.410(b)(6) (iii)-(xii), 682.406 (a)(8) and (a)(9), or

Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9).

Changes: The Secretary has revised paragraph (a)(2)(iii)(A) to

incorporate a reference to paragraph (b)(1)(iv) for lenders and lender

servicers and paragraph (c)(2)(i) for guaranty agencies and guaranty

agency servicers. This cross reference serves the goal identified by

the commenters.

Comments: A few commenters pointed out that paragraph (b)(3)

defines how the 97 percent compliance rating is to be calculated.

However, the provision should, but does not, include conversion to

repayment and timely filing activities in that definition.

Discussion: The Secretary agrees with the commenters.

Changes: The Secretary has revised paragraph (b)(3) by

incorporating references to Secs. 682.209(a), 682.402(e)(2), and

682.406(a)(5).

Comments: Some commenters stated that paragraph (b)(6) should be

clarified by specifically incorporating compliance with conversion of

FFEL Program loans to repayment and timely filing requirements as

components in the quarterly audit.

Discussion: The Secretary agrees with the commenters.

Changes: The Secretary has revised paragraph (b)(6) to clarify that

quarterly audits must also reflect the lender's and lender servicer's

compliance with loan conversion to repayment and the timely filing

requirements.

Comments: Some commenters recommended that the regulations provide

that the Secretary will either approve or disapprove an applicant's

reapplication for exceptional performance designation within 60-days of

receiving all of the required information from the applicant.

Discussion: The Secretary agrees with the commenters. The

commenters' suggestion would provide consistency throughout the

regulation by providing notification to a lender, servicer, or guaranty

agency within 60-days of the date the Secretary receives the required

reapplication information. The regulations already provide a 60-day

time period for decision on an initial application.

Changes: The Secretary has revised paragraph (a)(6)(iii) to include

a 60-day notification to the applicant after receiving the required

information for reapplication.

Comments: Several commenters agreed with the Secretary's

interpretation that section 428(b)(1)(G) of the Higher Education Act,

as amended by Pub. L. 103-66, does not reduce the insurance rate paid

by guaranty agencies to exceptional performers.

Discussion: No comments were received that opposed the Secretary's

determination of the applicable insurance rate of 100 percent that

guaranty agencies are required to pay to lenders and lender servicers

designated for exceptional performance.

Changes: None.

Comments: Two commenters suggested that the Secretary clarify in

the preamble that the 180 days referred to in Sec. 682.415(b)(5)(i)

means calendar days.

Discussion: The Secretary agrees with the commenters. Section

682.415(b)(5(i) restricts the lender's or lender servicer's exceptional

performance designation to loans that have been serviced by that lender

or lender servicer for the last 180 calendar days prior to a borrower's

default.

Changes: A change has been made. Section 682.415(b)(5)(i) has been

revised to clarify that the 180 days referred to in that paragraph

means calendar days.

Comments: A few commenters noted that the regulations, as written,

do not clarify that the audit will only cover collection activities

performed during the audit period for loans serviced during the audit

period.

Discussion: The Secretary agrees with the commenters and has made a

change to the regulations.

Changes: The Secretary has revised paragraphs (b)(3) and (c)(4) of

the regulations to clarify that the audits must cover collection

activities performed only during the audit period for loans serviced

during the audit period.

Comments: One commenter stated that the definition of ``servicer''

is not consistent with the definition of ``third party servicer'' as

listed in Sec. 682.200. Another commenter suggested deleting paragraph

(d)(3)(i) and renumbering to provide for consistency with the

definition for third party servicers in Sec. 682.416.

Discussion: The Secretary has no alternative but to retain this

definition in the regulations because the statute under section 428I

defines the term ``servicer'' for purposes of qualifying for

exceptional performance designation.

Changes: None.

Comments: Several commenters argued that the insurance rate paid to

lenders, servicers, and guaranty agencies in paragraph (a)(1) is

determined by statute and is not optional. The commenters suggested

that the Secretary delete the term ``may'' and insert ``shall''

instead.

Discussion: The Secretary agrees with the commenters that the

insurance and reinsurance rates are determined by statute.

Changes: The Secretary has revised paragraph (a)(1) by replacing

the term ``may'' with the term ``shall''.

Comments: One commenter noted that paragraphs (b)(6) and

(b)(8)(i)(A) would allow a lender who met the 90-percent benchmark for

a single month, but failed to meet that threshold for each of the other

two months during the audit period, to be designated as an exceptional

performer.

Discussion: The Secretary agrees with the commenter that the

proposed rule did not clearly reflect the statutory requirement.

Section 428I of the HEA requires lenders, servicers, and guaranty

agencies to reach a minimum of 90 percent compliance in due diligence

in collecting delinquent and defaulted FFEL Program loans for each

month of a quarter.

Changes: The Secretary has revised paragraphs (b)(6)(i) and

(b)(8)(i)(A) to clarify that a minimum of 90 percent compliance for

each month of the quarter must be met by a lender, servicer, or

guaranty agency in order to maintain its exceptional performance

status.

Comments: A few commenters stated that the Secretary clarify in the

regulations that complete claim packages are not required on claims

submitted by lenders and lender servicers designated for exceptional

performance.

Discussion: The Secretary believes it is important for purposes of

program oversight to require all lenders and lender servicers to file

complete claim packages that include documents and information that is

normally required to be submitted by guaranty agencies.

Changes: None.

Comments: One commenter suggested that the Secretary clarify that

unreinsured loans and loans that have not been serviced by the servicer

for at least 180 days should be excluded from the compliance rate

calculation.

Discussion: Loans that are unreinsured because due diligence

violations of due diligence requirements in Sec. 682.411 cannot be

excluded from the compliance rate calculation. It would not be in the

Federal interest to allow a lender or lender servicer to exclude, from

calculation of its compliance rate, loans that lost reinsurance due to

the lender's or servicer's failure to perform required due diligence

activities.

Changes: None.

Comments: Some commenters stated that if the audit period ended

more than 90 days prior to enactment of the regulations, the agency

should be permitted to submit a request for designation immediately.

The commenters further stated that applicants should not be required to

wait until the following year, after another annual audit has been

performed, to apply for an exceptional performance designation.

Discussion: The 90-day audit restriction provides the Secretary

with the necessary assurance that the most recent information has been

reported to determine an applicant's eligibility for exceptional

performance designation. The earliest a lender, servicer, or guaranty

agency may apply for designation is July 1, 1995.

Changes: None.

Comments: One commenter stated that the 180-day servicing

requirements referenced in paragraph (b)(5) should not apply to non-

default claims, e.g., bankruptcy, death, disability, etc.

Discussion: The Secretary believes that the 180-day servicing

requirement should apply to all loans for which a claim will be filed

to ensure that due diligence is being properly performed. However, if

the borrower dies, becomes disabled, or files for bankruptcy prior to

completion of the 180-day servicing period, the lender, servicer, or

guaranty agency may submit its claim immediately.

Changes: None.

The Secretary incorporated a general guide to the structural layout

of the regulatory provisions pertaining to lenders and guaranty

agencies on page 18392 of the NPRM.

The NPRM solicited comments as to whether the standards to

designate a guaranty agency as an exceptional performer should be

revised in light of other changes impacting guaranty agencies that were

made by Pub. L. 103-66. The Secretary received the following comments

in response to this request.

Comments: One commenter recommended that a guaranty agency that is

exceptional which merges or assumes the guarantees of another guarantor

should maintain its designation as an exceptional performer.

Discussion: The Secretary believes that a lender, servicer, or

guaranty agency that is designated for exceptional performance and

subsequently merges with another lender, servicer, or guaranty agency

should lose its designation for exceptional performance unless both

parties hold exceptional performance designations at the time of the

merger.

Changes: None.

Comments: One commenter argued that guaranty agencies that are

exceptional performers should not be subject to the termination

provision of section 428(c)(9) of the HEA.

Discussion: Exceptional performance designation relates to loan

collection activities but does not reflect a judgment on an agency's

overall economic conditions or program performance. Therefore,

termination of an agency's agreements with the Secretary may still be

appropriate even if the agency has been designated for exceptional

performance.

Changes: None.

Comments: One commenter argued that guarantors that are exceptional

performers should be subject to mandatory assignment of defaulted loans

to the Secretary as by definition it is in the Federal Government's

best interest for loans to be serviced by the guarantor.

Discussion: The Secretary does not agree that there is any

connection between designation of exceptional performance and the

criteria for mandatory assignment of defaulted loans.

Changes: None.

Assessment of Educational Impact

In the notice of proposed rulemaking, the Secretary requested

comments on whether the proposed regulations would require transmission

of information that is being gathered by, or is available from, any

other agency or authority of the United States.

Based on the response to the proposed rules and on its own review,

the Department has determined that the regulations in this document do

not require transmission of information that is being gathered by or is

available from any other agency or authority of the United States.

Executive Order 12866

These final regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those

resulting from statutory requirements and those determined by the

Secretary to be necessary for administering this program effectively

and efficiently.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions. In assessing the potential

costs and benefits--both quantitative and qualitative--of these final

regulations, the Secretary has determined that the benefits of the

final regulations justify the costs.

List of Subjects in 34 CFR Part 682

Administrative practice or procedure, Colleges and universities,

Education, Loan programs--education, Student aid, Vocational education.

Dated: June 15, 1994.

Richard W. Riley,

Secretary of Education.

(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal

Family Education Loan Program)

The Secretary amends Part 682 of Title 34 of the Code of Federal

Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAM

1. The authority citation for Part 682 continues to read as

follows:

Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

2. A new Sec. 682.415 is added to read as follows:

Sec. 682.415 Special insurance and reinsurance rules.

(a) (1) A lender or lender servicer (as an agent for an eligible

lender) designated for exceptional performance under paragraph (b) of

this section shall receive 100 percent reimbursement on all claims

submitted for insurance during the 12-month period following the date

the lender or lender servicer and appropriate guaranty agencies receive

notification of the designation of the eligible lender or lender

servicer under paragraph (b) of this section. A guaranty agency or a

guaranty agency servicer (as an agent for a guaranty agency) designated

for exceptional performance under paragraph (c) of this section shall

receive the applicable reinsurance rate under section 428(c)(1) of the

Act on all claims submitted for payments by the guaranty agency or

guaranty agency servicer during the 12-month period following the date

the guaranty agency receives notification of its designation, or its

servicer's designation, under paragraph (c) of this section. A notice

of designation for exceptional performance under this section is deemed

to have been received by the lender, servicer, or guaranty agency no

later than 3 days after the date the notice is mailed, unless the

lender, servicer, or guaranty agency is able to prove otherwise.

(2) To receive a designation for exceptional performance under

paragraph (a)(1) of this section, a lender, servicer, and guaranty

agency must submit to the Secretary--

(i) A written request for designation for exceptional performance

that includes--

(A) The applicant's name and address;

(B) A contact person;

(C) Its ED identification number, if applicable;

(D) The name and address of applicable guarantors; and

(E) A copy of an annual financial audit performed in accordance

with the Audit Guide developed by the U.S. Department of Education,

Office of Inspector General, or one of the following as appropriate:

(1) A lender may submit a copy of an annual audit required under

Sec. 682.305(c), if the audit period ends no more than 90 days prior to

the date the lender submits its request for designation.

(2) A servicer may submit a copy of the annual financial audit, as

defined, completed and submitted under 34 CFR 682.416(e), if the audit

period ends no more than 90 days prior to the date the servicer submits

its request for designation.

(3) A guaranty agency may submit a copy of the annual audit

required under section 428(b)(2)(D) of the Higher Education Act of

1965, as amended, if the audit period ends no more than 90 days prior

to the date the guaranty agency submits its request for designation;

(ii) If the applicant is a servicer, a statement signed by the

owner or chief executive officer of the applicant certifying that the

applicant meets the definition of a servicer contained in paragraph

(d)(3) of this section; and

(iii) (A) A compliance audit of its loan portfolio, conducted by a

qualified independent organization meeting the criteria in paragraph

(b)(9) of this section, that yields a compliance performance rating of

97 percent or higher of all due diligence requirements applicable to

each loan, on average, with respect to the collection of delinquent or

defaulted loans and satisfying the requirements in paragraph (b)(1)(iv)

of this section or, if applicable, paragraph (c)(2)(i) of this section.

The audit period may end no more than 90 days prior to the date the

lender, servicer or guaranty agency submits its request for

designation.

(B) To satisfy the requirement of paragraph (a)(2)(iii)(A) of this

section, a servicer may submit its annual compliance audit under 34 CFR

682.416(e), if the servicer includes in its report a measure of its

compliance performance rating required under paragraph (a)(2)(iii)(A)

of this section, if this audit is performed in accordance with an audit

guide developed by the U.S. Department of Education, Office of

Inspector General.

(3) The cost of audits for determining eligibility and continued

compliance under this section is the responsibility of the lender,

servicer, or guaranty agency.

(4) A lender or servicer shall also submit the information in

paragraph (a)(2) (i), (ii), or (iii) of this section to each

appropriate guaranty agency.

(5) A lender may be designated for exceptional performance for

loans that it services itself. A lender servicer may be designated for

exceptional performance only for all loans it services.

(6) (i) To prevent a lapse of a lender's, servicer's, or guaranty

agency's exceptional performance status after the end of the 12-month

period, the lender, servicer, or guaranty agency shall submit updated

information required under paragraph (a)(2) of this section to the

Secretary no later than 90 days after the end of the annual audit

period.

(ii) Upon the Secretary's determination that the lender, servicer,

or guaranty agency maintained at least a 97 percent compliance

performance rate and satisfies the other requirements for designation,

the Secretary notifies the lender, servicer, or guaranty agency that

its redesignation for exceptional performance begins on the date

following the last day of the previous 12-month period for which it

received designation for exceptional performance. However, a lender's,

servicer's, or guaranty agency's designation for exceptional

performance continues until it receives notification from the Secretary

that its request for redesignation is approved, or that its designation

is revoked, under the provisions of paragraph (b)(8)(iii) of this

section.

(iii) The Secretary notifies the lender or lender servicer and the

appropriate guaranty agency within 60 days after the date the Secretary

receives the information, listed in paragraph (a)(2) of this section,

from the eligible lender or lender servicer, that the lender's or

lender servicer's reapplication for designation for exceptional

performance has been approved or denied. A notice under paragraph

(a)(6) of this section is determined to have been received by the

lender, servicer, or guaranty agency no later than 3 days after the

notice is mailed, unless the lender, servicer, or guaranty agency is

able to prove otherwise.

(b) Determination of eligibility. (1) The Secretary determines

whether to designate a lender or lender servicer for exceptional

performance based upon--

(i) The annual compliance audit of collection activities required

for FFEL Program loans under Sec. 682.411(c) through (h), and (m), if

applicable, serviced during the audit period;

(ii) Information from any guaranty agency regarding an eligible

lender or lender servicer desiring designation, including, but not

limited to, any information suggesting that the lender's or lender

servicer's request for designation should not be approved;

(iii) Any other information in the possession of the Secretary, or

submitted to the Secretary by any other agency or office of the Federal

Government; and

(iv) Evidence indicating that the lender or lender servicer has

complied with the requirements for converting FFEL Program loans to

repayment under Sec. 682.209(a), and the timely filing requirements

under Secs. 682.402(e)(2) and 682.406(a)(5), in accordance with the

audit guide as published by the U.S. Department of Education, Office of

Inspector General. The audit submitted under paragraph (b)(1)(i) of

this section may satisfy this requirement, if a separate sample of

loans is used.

(2) The Secretary informs the eligible lender or lender servicer,

and the appropriate guaranty agency, that the lender's or lender

servicer's request for designation as an exceptional lender or lender

servicer has been approved, unless the results of the audit are

persuasively rebutted by information under paragraphs (b) (1)(ii) or

(iii) of this section. If the request for designation is not approved,

the Secretary informs the lender or lender servicer and the appropriate

guaranty agency or agencies of the reason the application is not

approved.

(3) In calculating a lender's or lender servicer's compliance

rating, as referenced in paragraph (a)(2)(ii) of this section, the

universe for the audit must include all loans in the lender's or lender

servicer's FFEL Program portfolio that are serviced during the audit

period performed under the Department's regulations in Secs. 682.411,

682.209(a), 682.402(e)(2), and 682.406(a)(5). The calculation may

consider only due diligence activities applicable to the audit period.

The numerator must include the total number of collection activities

successfully completed, in accordance with program regulations, that

are serviced during the audit period. The denominator must include the

total number of collection activities required to be performed, in

compliance with program regulations, that are serviced during the audit

period. Using statistical sampling and evaluation techniques identified

in an audit guide prepared by the Department's Office of Inspector

General, a random sample of loans must be selected and evaluated.

(4) The Secretary notifies the lender or lender servicer and the

appropriate guaranty agency within 60 days after the date the Secretary

receives the information, listed in paragraph (a)(2) of this section,

from the eligible lender or lender servicer, that the lender's or

lender servicer's application for designation for exceptional

performance has been approved or denied. (5) (i) Except as provided

under paragraph (b)(8) of this section, a guaranty agency may not

refuse, solely on the basis of a violation of repayment conversion, due

diligence requirements, or timely filing requirements, to pay an

eligible lender or lender servicer, designated for exceptional

performance, 100 percent of the unpaid principal and interest of all

loans for which eligible claims are submitted for insurance payment by

that eligible lender or lender servicer. The designation of a lender or

lender servicer for exceptional performance applies to loans that have

been serviced by the lender or lender servicer for the last 180 days

prior to a borrower's default or earlier in the case of death,

disability, or bankruptcy.

(ii) A guaranty agency or the Secretary may require the lender or

lender servicer to repurchase a loan if the agency determines the loan

should not have been submitted as a claim. A guaranty agency may not

require repurchase of a loan based solely on the lender's violation of

the requirement relating to repayment conversion, due diligence, or

timely filing. The guaranty agency must pay claims to a lender or

lender servicer designated for exceptional performance in accordance

with this paragraph for the one-year period following the date the

guaranty agency receives notification of the lender's or lender

servicer's designation under paragraph (b)(2) of this section, unless

the Secretary notifies the guaranty agency that the lender's or lender

servicer's designation for exceptional performance has been revoked.

(6) (i) To maintain its designation for exceptional performance,

the lender or lender servicer must have a quarterly compliance audit of

the due diligence in collection activities required for FFEL Program

loans under Sec. 682.411(c)-(h), and (m), if applicable, and for

converting FFEL Program loans to repayment under Sec. 682.209(a) and

timely filing requirements under Secs. 682.402(e)(2) and 682.406(a)(5)

conducted by a qualified independent organization meeting the criteria

in paragraph (b)(9) of this section that results in a compliance rating

for the quarter of not less than 97 percent. The audit must indicate a

compliance performance rating of not less than 97 percent for two

consecutive months or 90 percent for any month. The quarterly audit may

not include any period covered by the annual financial and compliance

audit under paragraph (a)(2) of this section. The results of the

quarterly compliance audit must be submitted to the Secretary and to

the appropriate guaranty agencies within 90 days following the end of

each quarter.

(ii) If a lender or lender servicer has been designated for

exceptional performance for at least 15 months, a lender or lender

servicer may petition the Secretary for permission to have its internal

auditors perform the subsequent quarterly compliance audits required by

paragraph (b)(6)(i) of this section. If the Secretary approves the

request, the lender's or lender servicer's annual audit must assess the

reliability of the procedures used by the lender's or lender servicer's

internal auditor in performing the quarterly audits.

(iii) The lender or lender servicer shall perform three quarterly

audits and one annual audit that includes a representative sample of

fourth quarter collection activities to satisfy the requirements of

this paragraph.

(7) (i) Insurance payments made on eligible claims submitted by a

lender or lender servicer designated for exceptional performance are

not subject to additional review of repayment conversion, due

diligence, and timely filing requirements, or to required repurchase by

the lender or lender servicer, unless the Secretary determines that the

eligible lender or lender servicer engaged in fraud or other purposeful

misconduct in obtaining designation for exceptional performance.

Notwithstanding the payment requirements in this paragraph, nothing

prohibits the guaranty agency or the Secretary from reviewing the

lender's or lender servicer's activities in regard to the loans paid

under this paragraph as part of program oversight responsibilities, or

for requiring the lender to repurchase a loan if the agency determines

the loan should not have been submitted as a claim. The lender shall

file, and the guaranty agency shall maintain, the documentation the

guaranty agency normally requires its lenders to file with respect to

the collection history of each loan.

(ii) A lender or lender servicer designated under this section that

fails to service loans or otherwise comply with applicable program

regulations is considered in violation of 31 U.S.C. 3729.

(8) (i) The Secretary revokes the designation of a lender or lender

servicer for exceptional performance if--

(A) The quarterly compliance audit required under paragraph (b)(6)

of this section is submitted to the Secretary and indicates that the

lender or lender servicer failed to maintain not less than 97 percent

compliance with due diligence standards for the quarter, or not less

than 97 percent compliance for 2 consecutive months, or 90 percent for

any month; or

(B) Any quarterly audit required in paragraph (b)(6) of this

section is not received by the Secretary within 90 days following the

end of each quarter.

(ii) The Secretary may revoke the designation of an exceptional

lender or lender servicer if--

(A) The Secretary determines the eligible lender or lender servicer

failed to maintain an overall level of regulatory compliance consistent

with the audit submitted by the lender or lender servicer;

(B) The Secretary has reason to believe the lender or lender

servicer may have engaged in fraud in securing its designation for

exceptional performance; or

(C) The lender or lender servicer fails to service loans in

accordance with program regulations. For purposes of this paragraph, a

lender or lender servicer fails to service loans in accordance with

program regulations if the Secretary determines that the lender or

lender servicer has committed serious and material violations of the

regulations.

(iii) The date on which the event or condition occurred is the

effective date of the revocation, except for revocation under paragraph

(a)(6) of this section, which is effective at the close of the 12-month

period for which the lender or lender servicer received designation for

exceptional performance.

(9) Public accountants, public accounting firms, and external

government audit organizations that meet the qualification and

independence standards contained in Government Auditing Standards

published by the Comptroller General of the United States are

acceptable entities to perform the audits required under paragraphs

(a)(3)(iii)(A) and (b)(6) of this section.

(c)(1)(i) Except as provided under paragraph (c)(8) of this

section, the Secretary pays the applicable reinsurance rate under

section 428(b)(1)(G) of the Act on all claims submitted by a guaranty

agency or guaranty agency servicer that has been designated for

exceptional performance.

(ii) A guaranty agency may be designated for exceptional

performance for loans that it services itself.

(iii) A guaranty agency servicer may be designated for exceptional

performance for loans it services.

(iv) A guaranty agency or guaranty agency servicer is designated

for exceptional performance for a 12-month period following the

receipt, by the guaranty agency or guaranty agency servicer, of the

Secretary's notification of designation.

(v) A notice under this paragraph is determined to have been

received no later than 3 days after the date the notice is mailed,

unless the guaranty agency or guaranty agency servicer is able to prove

otherwise.

(2) The Secretary determines whether to designate a guaranty agency

or guaranty agency servicer for exceptional performance based upon--

(i) The annual financial audit and a compliance audit of collection

activities, including timely claim payment and timely reinsurance

filing required for FFEL Program loans under Secs. 682.410(b)(6) (iii)

through (xii), and 682.406 (a)(8) and (a)(9), or Secs. 682.410(b)(7)

and 682.406 (a)(8) and (a)(9); and

(ii) Any other information in the possession of the Secretary.

(3) The Secretary informs the guaranty agency or guaranty agency

servicer that its request for designation for exceptional performance

has been approved, unless the results of the audit are persuasively

rebutted by other information received by the Secretary. If the

Secretary does not approve the guaranty agency's or guaranty agency

servicer's request for designation, the Secretary informs the guaranty

agency or guaranty agency servicer of the reason the application was

not approved.

(4) In calculating a guaranty agency's or guaranty agency

servicer's compliance rating, as referenced in paragraph (a)(2)(ii) of

this section, the Secretary requires that the universe of loans in the

audit sample must consist of all loans in the guaranty agency's or

guaranty agency servicer's FFEL Program portfolio that are serviced

during the audit period performed under the Department's regulations in

Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9)

or Secs. 682.410(b)(7) and 682.406 (a)(8) and (a)(9). The calculation

may consider only the due diligence activities that were or should have

been conducted during the audit period. The numerator must include the

total number of collection activities successfully completed in

accordance with program regulations on loans that were serviced during

the audit period. The denominator must include the total number of

collection activities required to be performed in compliance with

program regulations on loans that were serviced during the audit

period. Using statistical sampling and evaluation techniques identified

in an audit guide prepared by the Department's Office of Inspector

General, a random sample of loans must be selected and evaluated.

(5) The Secretary notifies a guaranty agency or guaranty agency

servicer, within 60 days after the date the Secretary receives the

information listed in paragraph (a)(2) of this section whether the

guaranty agency's or guaranty agency servicer's application for

designation for exceptional performance has been approved or denied.

(6) (i) To maintain its status as an exceptional guaranty agency or

guaranty agency servicer, the guaranty agency or guaranty agency

servicer must have a quarterly compliance audit of the due diligence in

collection activities of defaulted FFEL Program loans under

Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and (a)(9)

or 682.410(b)(7) and 682.406(a)(8) and (a)(9) conducted by a qualified

independent organization meeting the criteria in paragraph (c)(9) of

this section. The audit must yield a compliance performance rating of

not less than 97 percent. The quarterly audit may not include any

period covered by the annual financial and compliance audit required

under paragraph (a)(2) of this section. The results of the quarterly

compliance audit must be submitted to the Secretary within 90 days

following the end of each quarter.

(ii) If the guaranty agency or guaranty agency servicer has been

designated for exceptional performance for at least 15 months, the

guaranty agency or a guaranty agency servicer may petition the

Secretary for permission to have its internal auditors perform

subsequent quarterly compliance audits required by paragraph (c)(6)(i)

of this section. If the Secretary approves the request, the guaranty

agency's or guaranty agency servicer's annual audit must assess the

reliability of the procedures used by the guaranty agency's or the

guaranty agency servicer's internal auditor in performing the quarterly

audits.

(7) (i) Payments of reinsurance made on claims, under the FFEL

Program, submitted by a guaranty agency or guaranty agency servicer

designated for exceptional performance are not subject to repayment

based on additional review of due diligence activities, including

timely claim payment, or timely filing for reinsurance covering a

period during which the guaranty agency or guaranty agency servicer was

designated for any reason other than a determination by the Secretary

that the eligible guaranty agency or guaranty agency servicer engaged

in fraud or other purposeful misconduct in obtaining designation for

exceptional performance.

(ii) A guaranty agency designated under this section that fails to

servicer loans or otherwise comply with applicable program regulations

is considered in violation of 31 U.S.C. 3729.

(8) (i) The Secretary may revoke the designation of a guaranty

agency or guaranty agency servicer for exceptional performance if the

Secretary has reason to believe the guaranty agency or guaranty agency

servicer fraudulently obtained its designation for exceptional

performance.

(ii) The Secretary may revoke the designation for exceptional

performance upon 30 days' notice, and an opportunity for a hearing

before the Secretary, if the Secretary finds that the guaranty agency

or guaranty agency servicer failed to maintain an acceptable overall

level of regulatory compliance.

(9) A qualified independent organization is an organization that

meets the criteria in paragraph (b)(9) of this section.

(d) Definitions. For purposes of this section--

(1) Due diligence requirements means the activities required to be

performed by lenders or guaranty agencies on delinquent or defaulted

loans pursuant to Sec. 682.411 (c) through (h), and (m), if applicable

and Secs. 682.410(b)(6) (iii) through (xii) and 682.406 (a)(8) and

(a)(9) or Secs. 682.410(b)(7) and 682.406(a)(8) and (a)(9);

(2) Eligible loan means a loan made, insured, or guaranteed under

part B of title IV of the Act; and

(3) Servicer means an entity that services and collects student

loans and that--

(i) Has substantial experience in servicing and collecting consumer

loans or student loans;

(ii) Has an annual independent financial audit that is furnished to

the Secretary and any other parties designated by the Secretary;

(iii) Has business systems capable of meeting the requirements of

part B of title IV of the Act and applicable regulations;

(iv) Has adequate personnel knowledgeable about the student loan

programs authorized by part B of title IV of the Act; and

(v) Does not knowingly have any owner, majority shareholder,

director, or officer of the entity who has been convicted of a felony.

(Authority: 20 U.S.C. 1078-9)

[FR Doc. 94-15419 Filed 6-23-94; 8:45 am]

BILLING CODE 4000-01-P