Federal Family Education Loan Program; Proposed Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary proposes to amend the Federal Family Education

Loan (FFEL) Program regulations. These amendments are needed to

implement changes in the Higher Education Act of 1965, as amended

(HEA), giving the Secretary additional powers to assure the safety of

reserve funds and assets maintained by guaranty agencies insuring

educational loans under the FFEL Program pursuant to agreements with

the Secretary. The amendments would further define ``reserve funds and

assets'' and establish the substantive standard for the return of

``unnecessary'' reserves. They would also provide procedural due

process for challenges to these orders and for orders requiring that

reserve funds and assets outside of the guaranty agency's control be

returned to it or to the Secretary.

DATES: Comments must be received on or before October 11, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Mr. Donald M. Feuerstein, U.S. Department of Education,

400 Maryland Avenue SW., room 4624, Regional Office Building 3,

Washington, DC 20202-5343.

A copy of any comments that concern information collection

requirements should also be sent to the Office of Management and Budget

at the address listed in the Paperwork Reduction Act section of this

preamble.

FOR FURTHER INFORMATION CONTACT: Mr. Donald M. Feuerstein, telephone:

(202) 401-2280. 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:

Background

The FFEL Program regulations (34 CFR Part 682) govern the Federal

Stafford Loan Program, the Federal Supplemental Loans for Students

Program, the Federal PLUS Program, and the Federal Consolidation Loan

Program (formerly the Guaranteed Student Loan programs).

The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66)

(OBRA), enacted August 10, 1993, added section 422(g)(1) of the HEA.

The conference report on OBRA states, ``* * * the conferees wish to

emphasize that this language is not intended to diminish the

longstanding and judicially-supported view that a guaranty agency's

assets are dedicated to the loan programs and may not be used for

unauthorized purposes. It is the conferees' further intention that all

references to guaranty agency reserves contained in amendments to

section 422 refer only to the 'federal portion' of such reserves.'' In

the course of the negotiated rulemaking the industry negotiators stated

that ``* * * Section 422 defines the federal portion of reserves as

federal advances and earnings made on those advances, and states that

non-Federal reserves are not subject to recall, repayment or recovery

by the Secretary, except in the case of the termination of the

guarantor's agreement with the Secretary in accordance with Sections

428(c)(9) (E) and (F).'' To protect the Federal fiscal interest, OBRA

authorized the Secretary to direct (1) the return of ``unnecessary''

reserves from guaranty agencies (section 422(g)(1)(A)), (2) the return

to the guaranty agency or to the Secretary of guaranty agency reserves

and assets held by, or under the control of, any other party (section

422(g)(1)(B)), and (3) guaranty agencies to cease and desist from

``misapplication, misuse, or improper expenditure'' of reserve funds

and assets (section 422(g)(1)(C)).

Negotiated Rulemaking

OBRA expressly provides that determinations under section 422(g)(1)

(A) and (B) be based on standards set forth in regulations subject to

negotiated rulemaking. The negotiated regulations are also to contain

procedures for administrative due process. Although no such requirement

was made for determinations under section 422(g)(1)(C), the conference

report on OBRA expressed the conferees' intent that the issue of

``recovery'' in the case of misuse, misapplication, or improper

expenditure be ``addressed'' during the negotiated rulemaking over the

first two subsections.

Monthly negotiated rulemaking sessions were held from January

through June 1994 in and around Washington, DC.

Proposed Regulatory Changes

The Secretary submitted drafts of proposed regulatory language to

implement section 422(g)(1) (A) and (B) for discussion at the

negotiated rulemaking sessions. Although not required by OBRA to be

negotiated, a draft regulation to implement section 422(g)(1)(C) was

also submitted by the Secretary at the request of industry negotiators

but was withdrawn when substantial opposition to its approach was

expressed. Nevertheless, the dialogue with the other negotiators was

quite helpful, and the Secretary intends to reconsider the approach and

propose regulatory language on this subject in the regular course at a

later time after consultation with interested parties. Consensus was

reached on all aspects of the other rules and the accompanying

preamble. In reaching consensus, the negotiators agreed that all of the

rules proposed in this notice properly come within the Secretary's

statutory powers, but they reserve the right to challenge the validity

of the underlying statutes or subsequent interpretations of the rules

by the Secretary.

The following summarizes the major changes in this notice of

proposed rulemaking:

Section 682.410 Fiscal, administrative and enforcement requirements

Paragraph (a) of this section currently establishes fiscal

requirements for guaranty agencies by (1) defining reserve funds in

terms of sources and permitted uses, (2) regulating the investment of

those funds, (3) providing for reimbursement of reserve funds in the

event that revenue is derived from assets developed or purchased with

those funds or those assets are converted to uses unrelated to the FFEL

Program and (4) establishing minimum reserve fund levels. At the outset

of the negotiated rulemaking proceeding industry negotiators requested

a better definition of the reserve fund, and many of the proposed

amendments to this section are intended to be responsive to that

request.

Paragraph (a)(1) specifies the receipts that must be credited to

the reserve fund. The Secretary proposes to amend that paragraph to

clarify certain matters. First, paragraph (a)(1)(ii) currently refers

only to funds ``appropriated by'' a State for the loan guaranty

programs, but funds received from a State in any other manner for that

purpose are already covered by paragraph (a)(1)(ix). Accordingly, the

Secretary proposes to substitute the broader phrase ``received from''

in paragraph (a)(1)(ii) to obviate any possibility of confusion.

Second, paragraph (a)(1)(vi), which now refers to administrative cost

allowance payments, is proposed to be amended to add transitional

support payments under section 458(a) of the HEA, which Congress

created in OBRA when it eliminated the administrative cost allowance.

Third, although paragraph (a)(1)(vii) currently includes funds

collected by the guaranty agency without any qualification, this

paragraph has always been understood to apply only to collections on

FFEL loans on which a claim has been paid. That qualification is now

proposed to be made explicit. Finally, the Secretary proposes to

rearrange the wording of paragraph (a)(1)(ix) for stylistic reasons

only.

Paragraphs (a) (2) and (3) currently specify the permitted uses of

the reserve fund. Since the former statutory provisions that segregated

certain reserve fund receipts for restricted uses were later repealed,

it is no longer necessary to have two different sets of permitted uses.

To simplify the regulation the Secretary proposes to combine the two

paragraphs by redesignating current paragraph (a)(3)(i) as paragraph

(a)(2)(x) and removing the balance of the current paragraph (a)(3).

Although it is already well understood that neither the current

paragraph (a)(3) nor the current paragraph (a)(2)(ii) was meant to

permit excessive or otherwise unreasonable expenditures, the Secretary

plans to make that understanding explicit in the subsequent rule

proposal on misuse, misapplication, and improper expenditures. The

Secretary now also proposes to add three new paragraphs to paragraph

(a)(2). Paragraph (a)(2)(viii) would make explicit the currently-

understood authority for guaranty agencies to use reserve funds to make

borrower refunds arising from claims and defenses. Paragraph (a)(2)(ix)

would authorize the reversal of prior credits to the reserve funds

under certain conditions, including contemporaneous documentation that

the amounts were received as only temporary infusions of capital.

Finally, the guaranty agency representatives questioned the legality

and fairness of any retroactive application of the other proposed

amendments to this section and requested that paragraph (a)(2)(xi) be

added. Under this provision prior actions would remain lawful if a

guaranty agency had acted in good faith, as measured by the laws,

rules, standards, customs, and practices prevailing at the times of the

actions. Although the Secretary's representatives defended the general

power of the Secretary to amend retroactively regulations governing

guaranty agencies, they agreed to the requested paragraph in the

interest of fairness.

The Secretary recognizes that the customary problems involved in

allocating shared expenses among different activities conducted within

a single entity or among related entities and the particular problems

created by the limited life expectancies of some guaranty agencies as a

result of OBRA may pose difficulties for the agencies in determining

the propriety of payments from the reserve fund under paragraph (a)(2).

In the subsequent rulemaking proceeding on misuse, misallocation, and

improper expenditures the Secretary plans to establish procedures for

the formal review of cost allocation programs and major capital

expenditures by guaranty agencies. In the meantime, the staff of the

Department of Education stands ready to assist program participants by

providing informal advice in these areas.

The Secretary proposes to add a new paragraph (a)(3) to clarify the

appropriate accounting method for reserve fund reporting. Generally-

accepted accounting principles provide for the deferral of certain

items of income and the accrual of certain items of expenses on

financial statements to match related income and expenses, and many

guaranty agencies have established these accounts. On the other hand,

part E of ED Form 1130, the annual report for guaranty agencies,

requires that sources and uses of program funds be reported to the

Secretary strictly on a cash basis. See ED Form 1130 Instructions (May

1993 ed.), pp. 79-80. To avoid any confusion, the new paragraph (a)(3)

would expressly provide that deferrals and accruals for reserve fund

reporting be made only with the prior approval of the Secretary.

The Secretary also proposes to add a new paragraph (a)(4) to

clarify the obligation of guaranty agencies to reflect accurately in

their accounting records the computation of reserve fund balances in

accordance with this section and to provide a mechanism for correcting

those records. Paragraphs (a)(4)(i) and (a)(4)(iii) would restate the

general obligation to maintain correct accounting records and to

correct them when necessary. Paragraphs (a)(4)(ii) and (a)(4)(iv) would

establish specific mechanisms for the correction of erroneous credits

to the reserve fund and for general accounting record reconstructions.

In both cases, the Secretary would not allow a guaranty agency to

change its accounting records if other parties, such as lenders or

students who had relied on the guaranty agency's stated financial

condition, would be unfairly prejudiced. In the case of general

accounting record reconstructions, the Secretary intends to grant the

required approval only on the basis of an audit plan submitted before

any work on the reconstruction actually commences.

The current paragraph (a)(4) limits the investment of reserve funds

to low-risk securities and restates the fiduciary duty of guaranty

agencies in making those investments. This paragraph would be

redesignated as paragraph (a)(5) in the proposed amendment, and the

wording of the paragraph would be rearranged for stylistic purposes.

The Secretary understands that investment risk can arise from the

maturity of securities investments as well as from the identity of

their issuers and will deal with this subject in the subsequent rule

proposal on misuse, misapplication and improper expenditures.

The current paragraph (a)(5) requires proportionate reimbursement

to the reserve fund when a guaranty agency derives revenue from an

asset developed or purchased with the reserve fund or converts the

asset to a use not related to the FFEL Program. This paragraph is based

on the fundamental principle that reserve funds are to be used solely

for the FFEL Program and retain that character when incorporated into

other assets. It provides a remedy for any deviation from this

principle in addition to disallowance of any payment that was not

permitted by paragraph (a)(2) in the first place. The Secretary does

recognize, however, that there may be economies in having assets shared

by program and nonprogram activities. For example, purchasing a single

computer with sufficient capacity for both the FFEL Program and an

unrelated agency activity will ordinarily cost less than the total of

separate computers for each, thereby creating a saving to be shared

between the two activities. Such legitimate joint utilization of assets

should not be stifled by regulation.

The proper scope of this paragraph was discussed in the negotiated

rulemaking proceeding at great length. The basic policy issue was

whether the additional remedy provided by the paragraph should be

limited to situations in which assets are acquired by the guaranty

agency with reserve funds in a technical purchase-and-sale transaction

or should apply to all asset-related transactions in which reserve

funds are used. The basic legal issue was whether the use of the word

``purchase'' in section 422(g)(1) of the HEA precludes the latter

result. The Secretary's position is that, although ``purchase'' and

``develop'' are not synonymous in their everyday usage, the word

``develop'' was added to this paragraph in a 1992 rulemaking proceeding

(57 FR 60355) merely to emphasize the broad meaning traditionally given

to the word ``purchase'' in the law. See, for example, 26 U.S.C.

Sec. 338(h)(3); Dasho v. Susquehanna Corp., 380 F.2d 262 (7th Cir.

1967); U.C.C. Sec. 1-201(32). The industry negotiators argued, on the

other hand, that ``purchase'' is a different term from ``develop,'' and

the Secretary was not authorized to expand the statutory scope by

rulemaking. In addition to disagreeing with this narrow reading of the

statute, the Secretary's representatives expressed concern over

attempting to accommodate the other negotiators' comments on its

original rulemaking proposals only to have them undermine any consensus

by later claiming that the Secretary was acting outside the scope of

statutory authority in adopting the very regulation to which they had

consented. After extensive discussion of these issues, all the

negotiators agreed to substitute a more discriminating set of remedies

for the current monolithic approach of the paragraph, to put aside

their differences over the proper scope of the paragraph by using only

the word ``develop'' in the rule, and not to question the Secretary's

authority to promulgate a rule in this form.

In current paragraph (a)(5), redesignated as paragraph (a)(6), the

proposed revision would provide different consequences, depending upon

the relationship between the initial cost allocation and the use for

nonprogram purposes. If the use for nonprogram purposes was not

substantial, no remedy at all would be necessary. If the use was

substantial but the initial cost allocation was correct, the

consequences of revenue receipts or subsequent conversion to nonprogram

purposes would be governed by the reserve fund's recorded ownership

interest in the asset. If the use was substantial and the agency had

attempted in good faith to allocate the cost between the program and

nonprogram purposes but had done so erroneously, the agency would only

be required to correct the allocation. If there was no such good faith

allocation attempt at the outset, however, the Secretary would be given

a choice of remedies: The Secretary could either require the agency to

correct the allocation or require it to correct the recorded ownership

of the asset to reflect the fair proportionate interests of the

Department. This proposed election of remedies for the Secretary is

based on the traditional legal principle that a beneficiary has the

choice of either disavowing or ratifying a misuse of assets by a

fiduciary. An analysis of fair proportionate interests would utilize

the criteria customarily used in the financial world with regard to the

development of new businesses, would include both monetary and other

contributions to the total development cost, and would consider both

the magnitude and the relative risk of all of these contributions.

The Secretary proposes to add a new paragraph (a)(7) to state the

principle that any claim by a guaranty agency to recover funds and

assets for the reserve fund from a third party is also Federal

property.

The guaranty agencies requested the addition of proposed paragraph

(a)(8), which would apply one of the traditional fiduciary standards

for non-arm's length transactions to guaranty agencies' use of reserve

funds and assets.

Finally, the guaranty agency negotiators also requested the

addition of the first sentence of paragraph (a)(9) to clarify the

applicability of the definition of reserve funds and assets in this

section throughout sections 422 and 428 of the HEA. The departmental

negotiators, in response, added the second sentence to reference the

Secretary's authority under section 428(c)(9)(F)(vi) of the HEA to use

all funds and assets of the guaranty agency under the circumstances

specified in that section.

Section 682.417 Determination of reserve funds or assets to be

returned

The Secretary proposes to add a new section to establish the

substantive standard for orders to guaranty agencies to return

unnecessary reserves. The section would also establish a process by

which a guaranty agency may challenge an order that it return reserves

or an order that it require the return to itself or to the Secretary of

reserve funds or assets that are held by, or under the control of,

another party. Since the Secretary is not aware of any circumstances

under which all of those funds and assets would not be required for the

orderly termination of the agency's operations or the orderly

liquidation of its assets, no further substantive standard has been

proposed for orders for the return of property not in the hands of the

guaranty agencies.

Proposed paragraph (a) would simply restate the statutory

provisions.

In paragraph (b) the Secretary proposes the substantive standard

for ``unnecessary'' reserves. Under this paragraph the Secretary would

not initiate a proceeding for the recovery of unnecessary reserves

unless the guaranty agency's reserve fund ratio exceeded a specified

level for each of the two preceding Federal fiscal years. In exercising

discretion whether to initiate such a proceeding during the first two

years that this rule is effective, the Secretary will consider that the

effects of OBRA on guaranty agencies were not reflected at all in the

1993 fiscal year and will probably not have been fully reflected in the

1994 fiscal year, either. If the Secretary does initiate a proceeding,

projections of the agency's future financial condition would be used as

the basis for the decision. As soon as possible, the Secretary intends

to propose a system of uniform financial projections for guaranty

agencies that could not only be used in these proceedings, but would

also give the Secretary better general information on the current and

future financial health of the guaranty agency industry. In the

meantime, the Secretary would be able to require a guaranty agency to

submit special projections for the proceeding. If the Secretary

determined to recover reserves from an agency, the agency would be

entitled to retain sufficient reserves at least to satisfy the

``trigger'' level specified in the regulation and to maintain a

sufficient cushion over the statutorily-mandated reserve requirements

to perform its responsibilities as a guaranty agency over a specified

future period. The Secretary proposes to use a higher standard than the

statutory minimum in order to enable agencies to continue to guarantee

new loans and perform their other obligations as guaranty agencies, not

simply to satisfy their existing guarantees and service out their

existing portfolios.

Proposed paragraph (c) would set forth the contents and procedural

requirements for the notice by which the Secretary or an authorized

Departmental official would initiate a proceeding under this section.

The proposed notice is designed to provide the agency with the

information that it needs to respond to the officer's initial

determination. The notice would also include a description of any

actions that the guaranty agency would be required to take to assure

the safety of the reserve funds or assets that are the subject of the

proceeding while the proceeding was pending.

In paragraph (d) the Secretary proposes to provide the procedural

and substantive requirements for the appeal of an initial determination

under paragraph (c). The appeal would be decided by a different

Departmental official who was not a subordinate of the one who made the

initial determination. The guaranty agency would have the burden of

production and persuasion in such an appeal. It would be entitled to an

oral argument to the deciding official promptly after submitting all

material that is required for the appeal but not to a formal hearing.

The record would be closed to evidence before this oral argument unless

the deciding official determined otherwise.

Under section 428(c)(9)(J) of the HEA, the Secretary is required to

protect the confidentiality of financial information collected by the

Secretary under that section. In light of this requirement, only the

guaranty agency and the Department would be considered parties to a

proceeding under this section with any formal rights of participation.

The Department, however, always appreciates receiving information from

all persons having relevant information about matters within its

jurisdiction, and it particularly solicits input from students and

schools in these proceedings. Accordingly, in paragraph (e) the

Secretary proposes to provide an opportunity for public input by

publishing a notice of the initial determination of funds or assets to

be returned in the Federal Register. In the interest of fairness, the

guaranty agency would be given a reasonable opportunity to respond to

any public input if the deciding official considered the information

adverse to the agency.

In paragraph (f) the Secretary proposes to specify the procedures

for, and content of, the decision on appeal. Judicial review could not

be sought until this decision was issued.

Paragraph (g) would contain the substantive and procedural

requirements for compliance with any order of the Secretary issued

under this section.

Executive Order 12866

1. Assessment of costs and benefits

These proposed 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 proposed regulatory

action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering the Title IV, HEA programs

effectively and efficiently. Burdens specifically associated with

information collection requirements, if any, are explained elsewhere in

this preamble under the heading of Paperwork Reduction Act of 1980.

In assessing the potential costs and benefits--both quantitative

and qualitative--of these proposed regulations, the Secretary has

determined that the benefits of the proposed regulations justify the

costs.

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.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the Title IV, HEA programs.

2. Clarity of the regulations

Executive order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these regulations

easier to understand, including answers to questions such as the

following: (1) Are the requirements in the regulations clearly stated?

(2) Do the regulations contain technical terms or other wording that

interferes with their clarity? (3) Does the format of the regulations

(grouping and order of sections, use of headings, paragraphing, etc.)

aid or reduce their clarity? Would the regulations be easier to

understand if they were divided into more (but shorter) sections? (A

``section'' is preceded by the symbol ``Sec. '' and a numbered heading;

for example, Sec. 682.410 Fiscal, administrative, and enforcement

requirements.) (4) Is the description of the proposed regulations in

the ``Supplementary Information'' section of this preamble helpful in

the understanding of the proposed regulations? How could this

description be more helpful in making the proposed regulations easier

to understand? (5) What else could the Department do to make the

regulations easier to understand?

A copy of any comments that concern whether these proposed

regulations are easy to understand should also be sent to Stanley

Cohen, Regulations Quality Officer, U.S. Department of Education, 400

Maryland Avenue, SW., (Room 5125 FOB-6), Washington, DC 20202-2241.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. The small entities that would be affected by these

regulations are small organizations that contract with guaranty

agencies to administer aspects of the agencies' participation in the

FFEL programs. However, the regulations would not have a significant

impact on these small entities, because the regulations would not

impose excessive regulatory burdens or require unnecessary Federal

supervision. The regulations would impose minimal requirements to

ensure the proper expenditure of program funds.

Paperwork Reduction Act of 1980

Sections 682.410 and 682.417 contain information collection

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

Secretary will submit a copy of these sections to the Office of

Management and Budget (OMB) for its review.

Guaranty agencies receive payments from the Secretary and others

for exclusive use in the FFEL programs, and the accumulated surplus of

those payments over permissible expenditures are Federal property, to

be returned to the Secretary upon the agency's termination or under

certain other circumstances. The Secretary needs and uses the

information to enable him to determine whether the guaranty agencies

comply with the requirements for safeguarding this Federal property and

the limitations on its use.

Annual public reporting and recordkeeping burden contained in the

collection of information proposed in these regulations is estimated to

be 90 hours, including the time for searching existing data sources,

gathering and maintaining the data needed, completing and reviewing the

collection information, and submitting materials.

Organizations and individuals desiring to submit comments on the

information collection requirements should submit them to the Office of

Information and Regulatory Affairs, OMB, room 10235, New Executive

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

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations. All comments

submitted in response to these proposed regulations will be available

for public inspection, during and after the comment period, in room

4624, Regional Office Building 3, 7th and D Streets, SW., Washington,

DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of

each week except federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

information that is being gathered by or is available from any other

agency or authority of the United States.

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program)

Dated: July 29, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary proposes to amend part 682 of title 34 of the Code of

Federal Regulations as follows:

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS

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. Section 682.410 is amended by redesignating paragraphs (a)(6)

through (8) as (a)(10) through (12), respectively; by revising

paragraphs (a)(1) through (5); and by adding new paragraphs (a)(6)

through (8) and (a)(9) to read as follows:

Sec. 682.410 Fiscal, administrative, and enforcement requirements.

(a) Fiscal requirements. (1) Reserve fund assets. A guaranty agency

shall establish and maintain a reserve fund to be used solely for its

activities as a guaranty agency under the FFEL Program (``guaranty

activities''). The guaranty agency shall credit to the reserve fund--

(i) The total amount of insurance premiums collected;

(ii) Funds received from a State for the agency's guaranty

activities, including matching funds under section 422(a) of the Act;

(iii) Federal advances obtained under sections 422(a) and (c) of

the Act;

(iv) Federal payments for default, bankruptcy, death, disability,

closed school, and false certification claims;

(v) Supplemental preclaims assistance payments;

(vi) Administrative cost allowance payments received under

Sec. 682.407 and transitional support payments received under section

458(a) of the Act;

(vii) Funds collected by the guaranty agency on FFEL Program loans

on which a claim has been paid;

(viii) Investment earnings on the reserve fund; and

(ix) Other funds received by the guaranty agency from any source

for the agency's guaranty activities.

(2) Uses of reserve fund assets. A guaranty agency may use the

assets of the reserve fund established under paragraph (a)(1) of this

section to pay only--

(i) Insurance claims;

(ii) Operating costs for the agency's guaranty activities,

including payments necessary in collecting loans, providing preclaims

assistance, monitoring enrollment and repayment status, and carrying

out any other guaranty activities;

(iii) Lenders for their participation in a loan referral service

under section 428(e) of the Act;

(iv) The Secretary's equitable share of collections;

(v) Federal advances and other funds owed to the Secretary;

(vi) Reinsurance fees;

(vii) Insurance premiums related to cancelled loans;

(viii) Borrower refunds, including those arising out of student or

other borrower claims and defenses;

(ix) (A) The repayment, on or after December 29, 1993, of amounts

credited under paragraphs (a)(1)(ii) or (ix) of this section, if the

agency provides the Secretary 30 days prior notice of the repayment and

demonstrates that--

(1) These amounts were originally received by the agency under

appropriate contemporaneous documentation specifying that receipt was

on a temporary basis only;

(2) The objective for which these amounts were originally received

by the agency has been fully achieved; and

(3) Repayment of these amounts would not cause the agency to fail

to comply with the minimum reserve levels provided by paragraph (a)(10)

of this section, except that the Secretary may, for good cause, provide

written permission for a payment that meets the other requirements of

this paragraph (a)(2)(ix)(A) of this section.

(B) The repayment, prior to December 29, 1993, of amounts credited

under paragraphs (a)(1) (ii) or (ix) of this section, if the agency

demonstrates that--

(1) These amounts were originally received by the agency under

appropriate contemporaneous documentation that receipt was on a

temporary basis only; and

(2) The objective for which these amounts were originally received

by the agency has been fully achieved.

(x) Any other payments necessary to perform functions directly

related to the agency's guaranty activities and for their proper

administration;

(xi) Notwithstanding any other provision of this section, any other

payment that was allowed by law or regulation at the time it was made,

if the agency acted in good faith when it made the payment or the

agency would otherwise be unfairly prejudiced by the nonallowability of

the payment at a later time; and

(xii) Any other amounts authorized or directed by the Secretary.

(3) Accounting basis. Except as approved by the Secretary, a

guaranty agency shall credit the items listed in paragraph (a)(1) of

this section to its reserve fund upon their receipt, without any

deferral for accounting purposes, and shall deduct the items listed in

paragraph (a)(2) of this section from its reserve fund upon their

payment, without any accrual for accounting purposes.

(4) Accounting records. (i) The accounting records of a guaranty

agency must reflect the correct amount of sources and uses of funds

under paragraph (a) of this section.

(ii) A guaranty agency may reverse prior credits to its reserve

fund if--

(A) The agency gives the Secretary prior notice setting forth a

detailed justification for the action;

(B) The Secretary determines that the credits were made erroneously

and in good faith; and

(C) The Secretary determines that the action would not unfairly

prejudice other parties.

(iii) A guaranty agency shall correct any other errors in its

accounting or reporting as soon as practicable after the errors become

known to the agency.

(iv) If a general reconstruction of a guaranty agency's historical

accounting records is necessary to make a change under paragraphs

(a)(4) (ii) and (iii) of this section or any other retroactive change

to its accounting records, the agency may make this reconstruction only

upon prior approval by the Secretary and without any deduction from its

reserve fund for the cost of the reconstruction.

(5) Investments. The guaranty agency shall exercise the level of

care required of a fiduciary charged with the duty of investing the

money of others when it invests the assets of the reserve fund

described in paragraph (a)(1) of this section. It may invest these

assets only in low-risk securities, such as obligations issued or

guaranteed by the United States or a State.

(6) Development of assets. (i) If the guaranty agency uses in a

substantial way for purposes other than the agency's guaranty

activities any funds required to be credited to the reserve fund under

paragraph (a)(1) of this section or any assets derived from the reserve

fund to develop an asset of any kind and does not in good faith

allocate a portion of the cost of developing and maintaining the

developed asset to funds other than the reserve fund, the Secretary may

require the agency to--

(A) Correct this allocation under paragraph (a)(4)(iii) of this

section; or

(B) Correct the recorded ownership of the asset under paragraph

(a)(4)(iii) of this section so that--

(1) If, in a transaction with an unrelated third party, the agency

sells or otherwise derives revenue from uses of the asset that are

unrelated to the agency's guaranty activities, the agency promptly

shall deposit into the reserve fund described in paragraph (a)(1) of

this section a percentage of the sale proceeds or revenue equal to the

fair percentage of the total development cost of the asset paid with

the reserve fund monies or provided by assets derived from the reserve

fund; or

(2) If the agency otherwise converts the asset, in whole or in

part, to a use unrelated to its guaranty activities, the agency

promptly shall deposit into the reserve fund described in paragraph

(a)(1) of this section a fair percentage of the fair market value or,

in the case of a temporary conversion, the rental value of the portion

of the asset employed for the unrelated use.

(ii) If the agency uses funds or assets described in paragraph

(a)(6)(i) of this section in the manner described in that paragraph and

makes a cost and maintenance allocation erroneously and in good faith,

it shall correct the allocation under paragraph (a)(4)(iii) of this

section.

(7) Third-party claims. If the guaranty agency has any claim

against any other party to recover funds or other assets for the

reserve fund, the claim is the property of the United States.

(8) Related-party transactions. All transactions between a guaranty

agency and a related organization or other person that involve funds

required to be credited to the agency's reserve fund under paragraph

(a)(1) of this section or assets derived from the reserve fund must be

on terms that are not less advantageous to the reserve fund than would

have been negotiated on an arm's-length basis by unrelated parties.

(9) Scope of definition. The provisions of this Sec. 682.410(a)

define reserve funds and assets for purposes of sections 422 and 428 of

the Act. These provisions do not, however, affect the Secretary's

authority to use all funds and assets of the agency pursuant to section

428(c)(9)(F)(vi) of the Act.

* * * * *

3. A new Sec. 682.417 is added to subpart D to read as follows:

Sec. 682.417 Determination of reserve funds or assets to be returned.

(a) General. The procedures described in this section apply to a

determination by the Secretary that--

(1) A guaranty agency must return to the Secretary a portion of its

reserve funds that the Secretary has determined is unnecessary to pay

the program expenses and contingent liabilities of the agency; and

(2) A guaranty agency must require the return to the agency or the

Secretary of reserve funds or assets within the meaning of section

422(g)(1) of the Act held by or under the control of any other entity,

that the Secretary determines are necessary to pay the program expenses

and contingent liabilities of the agency or that are required for the

orderly termination of the guaranty agency's operations and the

liquidation of its assets.

(b) Return of unnecessary reserve funds. (1) The Secretary may

initiate a process to recover unnecessary reserve funds under paragraph

(a)(1) of this section if the Secretary determines that a guaranty

agency's reserve fund ratio under Sec. 682.410(a)(10) for each of the

two preceding Federal fiscal years exceeded 2.0 percent.

(2) If the Secretary initiates a process to recover unnecessary

reserve funds, the Secretary requires the return of a portion of the

reserve funds that the Secretary determines will permit the agency to--

(i) Have a reserve fund ratio of at least 2.0 percent under

Sec. 682.410(a)(10) at the time of the determination; and

(ii) Meet the minimum reserve fund requirements under

Sec. 682.410(a)(10) and retain sufficient additional reserve funds to

perform its responsibilities as a guaranty agency during the current

Federal fiscal year and the four succeeding Federal fiscal years.

(3)(i) The Secretary makes a determination of the amount of the

reserve funds needed by the guaranty agency under paragraph (b)(2) of

this section on the basis of financial projections for the period

described in that paragraph. If the agency provides projections for a

period longer than the period referred to in that paragraph, the

Secretary may consider those projections.

(ii) The Secretary may require a guaranty agency to provide

financial projections in a form and on the basis of assumptions

prescribed by the Secretary. If the Secretary requests the agency to

provide financial projections, the agency shall provide the projections

within 60 days of the Secretary's request. If the agency does not

provide the projections within the specified time period, the Secretary

determines the amount of reserve funds needed by the agency on the

basis of other information.

(c) Notice. (1) The Secretary or an authorized Departmental

official begins a proceeding to order a guaranty agency to return a

portion of its reserve funds, or to direct the return of reserve funds

or assets subject to return, by sending the guaranty agency a notice by

certified mail, return receipt requested.

(2) The notice--

(i) Informs the guaranty agency of the Secretary's determination

that the reserve funds or assets must be returned;

(ii) Describes the basis for the Secretary's determination and

contains sufficient information to allow the guaranty agency to prepare

and present an appeal;

(iii) States the date by which the return of reserve funds or

assets must be completed;

(iv) Describes the process for appealing the determination,

including the time for filing an appeal and the procedure for doing so;

and

(v) Identifies any actions that the guaranty agency must take to

ensure that the reserve funds or assets that are the subject of the

notice are maintained and protected against use, expenditure, transfer,

or other disbursement after the date of the Secretary's determination,

and the basis for requiring those actions. The actions may include, but

are not limited to, directing the agency to place the reserve funds in

an escrow account. If the Secretary has directed the guaranty agency to

require the return of reserve funds or assets held by or under the

control of another entity, the guaranty agency shall ensure that the

agency's claims to those funds or assets and the collectability of the

agency's claims will not be compromised or jeopardized during an

appeal. The guaranty agency shall also comply with all other applicable

regulations relating to the use of reserve funds and assets.

(d) Appeal. (1) A guaranty agency may appeal the Secretary's

determination that reserve funds or assets must be returned by filing a

written notice of appeal within 20 days of the date of the guaranty

agency's receipt of the notice of the Secretary's determination. If the

agency files a notice of appeal, the requirement that the return of

reserve funds or assets be completed by a particular date is suspended

pending completion of the appeal process. If the agency does not file a

notice of appeal within the period specified in this paragraph, the

Secretary's determination is final.

(2) A guaranty agency shall submit the information described in

paragraph (d)(4) of this section within 45 days of the date of the

guaranty agency's receipt of the notice of the Secretary's

determination unless the Secretary agrees to extend the period at the

agency's request. If the agency does not submit that information within

the prescribed period, the Secretary's determination is final.

(3) A guaranty agency's appeal of a determination that reserve

funds or assets must be returned is considered and decided by a

Departmental official other than the official who issued the

determination or a subordinate of that official.

(4) In an appeal of the Secretary's determination, the guaranty

agency shall--

(i) State the reasons the guaranty agency believes the reserve

funds or assets need not be returned;

(ii) Identify any evidence on which the guaranty agency bases its

position that the reserve funds or assets need not be returned;

(iii) Include copies of the documents that contain this evidence;

(iv) Include any arguments that the guaranty agency believes

support its position that the reserve funds or assets need not be

returned; and

(v) Identify the steps taken by the guaranty agency to comply with

the requirements referred to in paragraph (c)(2)(v) of this section.

(5)(i) In its appeal, the guaranty agency may request the

opportunity to make an oral argument to the deciding official for the

purpose of clarifying any issues raised by the appeal. The deciding

official provides such an opportunity promptly after the expiration of

the period referred to in paragraph (d)(2) of this section.

(ii) The agency may not submit new evidence at or after the oral

argument unless the deciding official determines otherwise. A

transcript of the oral argument is made a part of the record of the

appeal and is promptly provided to the agency.

(6) The guaranty agency has the burden of production and the burden

of persuading the deciding official that the Secretary's determination

should be modified or withdrawn.

(e) Third-party participation. (1) If the Secretary issues a

determination under paragraph (a)(1) of this section, the Secretary

promptly publishes a notice in the Federal Register announcing the

portion of the reserve fund to be returned by the agency and providing

interested persons an opportunity to submit written information

relating to the determination within 30 days after the date of

publication. The Secretary publishes the notice no earlier than five

days after the agency receives a copy of the determination.

(2) If the guaranty agency to which the determination relates files

a notice of appeal of the determination, the deciding official may

consider any information submitted in response to the Federal Register

notice. All information submitted by a third party is available for

inspection and copying at the offices of the Department of Education in

Washington, D.C., during normal business hours.

(f) Adverse information. If the deciding official considers

information in addition to the evidence described in the notice of the

Secretary's determination that is adverse to the guaranty agency's

position on appeal, the deciding official informs the agency and

provides it a reasonable opportunity to respond to the information

without regard to the period referred to in paragraph (d)(2) of this

section.

(g) Decision. (1) The deciding official issues a written decision

on the guaranty agency's appeal within 45 days of the date on which the

information described in paragraphs (d)(4) and (d)(5)(ii) of this

section is received, or the oral argument referred to in paragraph

(d)(5) of this section is held, whichever is later. The deciding

official mails the decision to the guaranty agency by certified mail,

return receipt requested. The decision of the deciding official becomes

the final decision of the Secretary 30 days after the deciding official

issues it. In the case of a determination that a guaranty agency must

return reserve funds, if the deciding official does not issue a

decision within the prescribed period, the agency is no longer required

to take the actions described in paragraph (c)(2)(v) of this section.

(2) A guaranty agency may not seek judicial review of the

Secretary's determination to require the return of reserve funds or

assets until the deciding official issues a decision.

(3) The deciding official's written decision includes the basis for

the decision. The deciding official bases the decision only on evidence

described in the notice of the Secretary's determination and on

information properly submitted and considered by the deciding official

under this section. The deciding official is bound by all applicable

statutes and regulations and may neither waive them nor rule them

invalid.

(h) Collection of reserve funds or assets. (1) If the deciding

official's final decision requires the guaranty agency to return

reserve funds, or requires the guaranty agency to require the return of

reserve funds or assets to the agency or to the Secretary, the decision

states a new date for compliance with the decision. The new date is no

earlier than the date on which the decision becomes the final decision

of the Secretary.

(2) If the guaranty agency fails to comply with the decision, the

Secretary may recover the reserve funds from any funds due the agency

from the Department without any further notice or procedure and may

take any other action permitted or authorized by law to compel

compliance.

[FR Doc. 94-19434 Filed 8-9-94; 8:45 am]

BILLING CODE 4000-01-P