Health Education Assistance Loan Program

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

42 CFR Part 60

RIN 0905-AS87

Health Education Assistance Loan Program

AGENCY: Health Resources and Services Administration, HHS.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This proposed rule would amend existing regulations governing

the Health Education Assistance Loan (HEAL) program to establish

performance standards against which lender and holder default rates

would be measured, as mandated by the Health Professions Education

Extension Amendments of 1992. The proposal also amends the regulations

to reflect various statutory provisions related to HEAL performance

standards for schools, lenders, and holders, including the following:

The formula for calculating default rates; the requirement that certain

schools develop default management plans; the borrower's option to

reduce his or her insurance premium by obtaining a credit worthy

cosigner; the waiver of penalty fees for schools, lenders, and holders

with a low volume of loans; and the option to pay off defaulted loans

to reduce default rates.

DATES: Comments on this proposed rule are invited. To be considered,

comments must be received by December 16, 1994.

ADDRESSES: Respondents should address written comments to Fitzhugh

Mullan, M.D., Director, Bureau of Health Professions (BHPr), Health

Resources and Services Administration, Room 8-05, Parklawn Building,

5600 Fishers Lane, Rockville, Maryland 20857. All comments received

will be available for public inspection and copying at the Office of

Program Development, BHPr, Room 8A-55, Parklawn Building, 5600 Fishers

Lane, Rockville, Maryland weekdays (Federal holidays excepted) between

the hours of 8:30 a.m. and 5:00 p.m.

FOR FURTHER INFORMATION CONTACT:

Michael Heningburg, Director, Division of Student Assistance, Bureau of

Health Professions, Health Resources and Services Administration,

Parklawn Building, Room 8-48, 5600 Fishers Lane, Rockville, Maryland

20857; telephone number: 301-443-1173.

SUPPLEMENTARY INFORMATION: Section 707(a) of the Public Health Service

Act (the Act) requires that, not later than 1 year after enactment of

the Health Professions Education Extension Amendments of 1992 (Pub. L.

102-408), the Secretary shall establish performance standards for

lenders and holders of HEAL loans, including fees to be imposed for

failing to meet such standards. In the report accompanying Public Law

102-408, the Congress stated that it expects ``* * * schools, lenders,

and holders to assume and share the responsibility for minimizing HEAL

defaults * * *'' (Conference Report 102-925, p. 112).

In accordance with the above, this Notice of Proposed Rulemaking

(NPRM) proposes to amend the HEAL regulations to establish performance

standards for lenders and holders of HEAL loans. Under this proposal,

the Secretary would establish requirements and fees to be imposed on a

HEAL lender or holder based on the lender or holder's HEAL default

rate. The default rate for lenders and holders would be calculated in

accordance with the statutory default formula set forth in section

719(5) of the Act, except that loans made to students at Historically

Black Colleges and Universities (HBCUs) prior to the end of the first 3

years that the lender/holder performance standard is in effect would be

excluded from the default rate calculation. The proposed performance

standard requirements, including the risk-based fee to be assessed on

each lender and holder, are described below.

In developing these proposals, the Department has relied heavily on

section 708 of the Act, which sets forth fees and performance

requirements for HEAL schools with default rates greater than 5

percent. Schools, lenders, and holders all play a significant role in

helping to assure the collectibility of HEAL loans, and all benefit

from participation in the HEAL program. Accordingly, this approach is

designed to assure similar measures of accountability for all parties

involved in the HEAL program.

This proposal also clarifies various statutory provisions related

to HEAL performance standards for schools, lenders, and holders,

including the following: (1) The formula for calculating default rates;

(2) the requirement that certain schools develop default management

plans; (3) the borrower's option to reduce his or her insurance premium

by obtaining a credit worthy cosigner; (4) the waiver of penalty fees

for schools, lenders, and holders with a low volume of loans; and (5)

the option to pay off defaulted loans to reduce default rates. The

specific amendments proposed are described below according to the

subparts, section numbers, and headings of the HEAL regulations

affected.

Subpart A--General Program Description

Section 60.2 HEAL Default Rate

The Department is proposing to add a new section to the HEAL

regulations which would address the HEAL default rate. Paragraph (a) of

this section, ``Default rate formula,'' would explain that the default

rate of each school, lender, and holder is calculated in accordance

with the formula set forth in section 719(5) of the Act, except that

for lenders and holders, loans made to students at HBCUs prior to the

end of the first 3 years that the lender/holder performance standard is

in effect would be excluded from the default rate calculation.

This approach for calculating lender and holder default rates is

consistent with the statutory school performance standard set forth in

section 708 of the HEAL stature. Section 708(d)(3) provides HBCUs with

a 3-year period during which they remain eligible for participation in

the HEAL program regardless of their default rates. In granting HBCUs a

3-year reprieve from termination due to high default rates, the

Congress indicated concern that the performance standard provision not

cause these schools to lose access to HEAL funding during the initial

years of its implementation.

In developing this proposed rule, the Department was concerned that

lenders and holders, in an effort to maintain low default rates, might

choose not to make or purchase loans for students at HBCUs, which

historically have higher than average default rates. To assure that the

lender/holder performance standard provisions do not unwittingly

undermine the Congress' expressed desire that access to HEAL loans be

maintained for HBCUs, the proposed rule exempts any loans made to

students at HBCUs prior to the end of the first 3 years that the

standard is in effect from being included when lender/holder default

rates are calculated.

Paragraph (b) of this section would establish the effective dates

of the default rate calculations, for purposes of determining risk-

based insurance premiums and program eligibility. The Department is

proposing in this paragraph that default rates be calculated as of

September 30 of each year, and that these rates be used to determine

risk-based insurance premiums and program eligibility, for purposes of

loans made or purchased on or after July 1 of the following year. These

timeframes are designed to provide adequate time for schools, lenders,

and holders to pay off defaulted loans, if desired, in order to reduce

their risk category or maintain eligibility, and to plan for the costs

associated with continued HEAL activity if their default rates are

greater than 5 percent. The Department developed this provision in

response to concerns that the initial implementation of the school

risk-based premiums on January 1, 1993, did not provide adequate time

for schools with default rates greater than 5 percent to evaluate their

options regarding the pay off of defaulted loans and to prepare for the

costs of continued participation in the HEAL program.

Paragraph (c) of this section would set forth the procedures for

schools, lenders, and holders to follow if they want to pay off

defaulted HEAL loans to reduce their risk category or maintain

eligibility. This proposal would require that if a school, lender, or

holder chooses to pay off one or more HEAL loans, it must, for each

borrower it chooses, pay off the outstanding principal and interest of

all HEAL loans held by the Department for that borrower. This proposal

is designed to prevent the confusion that is likely to arise during the

collection process if a borrower's HEAL portfolio were divided, with a

portion sold to the purchasing entity and a portion remaining with the

Department. The proposal also would clarify that any defaulted HEAL

loans paid off by a school, lender, or holder are assigned to that

entity and may be collected by that entity using any collection methods

available to it. Finally, this provision would require that a payoff be

completed by May 31 in order to reduce the school, lender, or holder's

default rate that would be used to determine the risk category (or

program eligibility) for loans made or purchased on or after July 1 of

the same year.

Subpart B--The Borrower

Section 60.8 What Are the Borrower's Major Rights and

Responsibilities?

Paragraph (b)(1) of this section would be amended to clarify that

the borrower must pay the borrower's insurance premium, as more fully

described in Sec. 60.14(b)(1).

Subpart C--The Loan

Section 60.10 How Much Can be Borrowed?

Paragraph (b)(1) of this section would be amended to clarify that

the non-student borrower may not receive a loan that is greater than

the sum of the borrower's insurance premium plus the interest that must

be paid on the borrower's HEAL loans during the period for which the

new loan is intended.

Section 60.13 Interest

The Department is proposing to delete paragraph (a)(4) of this

section, which states that the Secretary announces the HEAL interest

rate on a quarterly basis through a notice published in the Federal

Register. Since the Department notifies all lenders of the HEAL

interest rate at the beginning of each quarter, and since students and

schools can contact either the Department or a HEAL lender for

information on the HEAL interest rate, the Federal Register notice is

no longer necessary.

Section 60.14 The Insurance Premium

The Department is proposing to change the heading of this section

to ``Risk-based insurance premiums.'' The section would be amended to

reflect the new statutory provisions for determining borrower and

school insurance premiums and to include the proposed lender and holder

premiums.

Paragraph (a)(1) of this section would be redesignated as paragraph

(a), and would be amended to state that a risk-based insurance premium

is charged to the borrower, school, lender, and holder, in accordance

with the procedures set forth in paragraph (b) of this section.

The reference in paragraph (a)(1) to the date that the premium is

due to the Secretary would be moved to newly designated paragraph (c),

described below, which would address procedures for collecting

insurance premiums. In addition, existing paragraphs (a)(2) through

(5), which also deal with the collection of the insurance premiums,

would be moved to newly designated paragraph (c) and amended as

described below.

Paragraph (b), which addresses the insurance premium rate, would be

amended to reflect the various insurance premium rates for borrowers,

schools, lenders, and holders. Paragraphs (b)(1) and (2) would set

forth the statutory insurance premium rates that apply to borrowers and

schools, including the borrower's option to reduce the insurance

premium by 50 percent by obtaining a credit worthy cosigner, and the 3-

year special consideration provided for Historically Black Colleges and

Universities.

Paragraphs (b)(1) and (2) also would include clarification of the

statutory provision which provides special consideration in determining

the borrower and school insurance premium rate for schools with a low

volume of HEAL loan activity. Under this proposal, any school which,

for purposes of the default rate calculation, has made a total of 50 or

less loans would be placed in the low-risk category, regardless of its

default rate. In establishing the low volume threshold, the Department

first considered the Conference report language accompanying Public Law

102-408, which states the following:

``The Secretary may grant an institution a wavier of the

requirements of the risk categories only if the Secretary determines

that the default rate is not an accurate indicator because the

volume of loans has been insufficient. For example, some schools of

public health may have default rates that exceed 30%. However, since

these default rates are based on a small number of loans (in some

cases, only two to five loans) they may be a misleading measure of

the institution's ability to control defaults.'' (Conference Report

102-925, p.111)

It seems apparent from this language that the Congress, while not

defining ``low volume,'' intended for this exclusion to be limited to

schools with a small amount of HEAL activity. The Department next

considered the Department of Education's (ED) low-volume threshold for

default penalties. ED uses a threshold of 30 loans for determining

whether schools are subject to modified procedures for determining

default rates. However, the ED procedures involve a comparison of data

over a 3-year period for low volume entities, whereas the HEAL statute

requires that any entity not meeting the low volume exclusion be

subject to the same default formula applied to high volume entities. As

a result, the Department determined that it would be most equitable to

allow a higher threshold for the HEAL ``low volume'' definition. At the

same time, given the Conference report language, the Department could

not justify a level that would be so high as to reduce the

effectiveness of the performance standard requirements. Further

analysis of HEAL school data supported a threshold of 50 loans, since

this level resulted in 34.6% of HEAL schools, representing only 1.3% of

HEAL loans in repayment, being excluded from the performance standard

penalties during Fiscal Year 1993. Based on the above, the Department

considers a threshold of 50 loans to be more than adequate to prevent

unfair penalties being imposed on schools with a small volume of HEAL

activity, while at the same time assuring that this exemption is not so

lenient as to make the performance standard requirements meaningless.

Paragraphs (b)(3) and (4) would describe the proposed insurance

premium rates for lenders and holders. The proposed rates for lenders

included in paragraph (b)(3) would be as follows:

Low-risk: A lender with a default rate of not to exceed 5 percent

would not be required to pay an insurance premium. In addition, a

lender whose volume of HEAL loans made (for purposes of the default

rate calculation) is 50 or less, would not be required to pay an

insurance premium.

Medium-risk: A lender with a default rate in excess of 5 percent

but not to exceed 10 percent would be assessed an insurance premium

equal to 5 percent of the principal amount of any new loans made.

High-risk: A lender with a default rate in excess of 10 percent but

not to exceed 20 percent would be assessed an insurance premium equal

to 10 percent of the principal amount of any new loans made.

Ineligible: A lender with a fault rate in excess of 20 percent

would not be eligible to make new HEAL loans.

The proposed rates for holders included in paragraph (b)(4) would

be as follows:

Low-risk: A holder with a default rate of not to exceed 5 percent

would not be required to pay an insurance premium. In addition, a

holder whose volume of HEAL loans held (for purposes of the default

rate calculation) is 50 or less, would not be required to pay an

insurance premium.

Medium-risk: A holder with a default rate in excess of 5 percent

but not to exceed 10 percent would be assessed an insurance premium

equal to 5 percent of the original principal amount of any loans newly

purchased.

High-risk: A holder with a default rate in excess of 10 percent but

not to exceed 20 percent would be assessed an insurance premium equal

to 10 percent of the original principal amount of any loans newly

purchased.

Ineligible: A holder with a default rate in excess of 20 percent

would not be eligible to purchase new HEAL loans.

The proposed lender and holder insurance premiums are the same as

the school insurance premiums which were enacted as part of Public Law

102-408 and became effective January 1, 1993. The proposal to make

lenders and holders with default rates greater than 20 percent

ineligible for the HEAL program is also consistent with Public Law 102-

408, which generally prohibits students at schools with default rates

in excess of 20 percent from borrowing from the HEAL program at all.

Since schools, lenders, and holders all play an important role in

assuring the collectibility of HEAL loans, and all benefit from

participation in the HEAL program, the Department considers it most

equitable for all parties to be subject to the same basic insurance

premium rate structure. This is also consistent with the Conference

report language accompanying Public Law 102-408, which indicated that

schools, lenders, and holders should assume and share the

responsibility for minimizing HEAL defaults.

Although the Department's proposed approach is modeled after the

school risk-based insurance premiums established in the HEAL statute,

the Department is interested in comments on an alternate approach which

would create a more gradual continuum of risk-based premiums for

lenders and holders. This alternate approach would be structured such

that lenders and holders with default rates: (1) Greater than 5 percent

but less than 6 percent pay a 1 percent premium; (2) Greater than 6

percent but less than 7 percent pay a 3 percent premium; (3) Greater

than 7 percent but less than 8 percent pay a 5 percent premium; (4)

Greater than 8 percent but less than 9 percent pay a 7 percent premium;

and (5) Greater than 9 percent but less than 10 percent pay a 9 percent

premium. This approach would still result in an average risk premium of

5 percent for lenders and holders in the 5-10 percent range, but would

phase the penalties in more gradually and provide less harsh penalties

for lenders and holders at the lower end of the default rate spectrum.

The Department is interested in comments regarding whether this

alternate approach would be considered preferable to the ``notched''

approach that is being proposed.

A new paragraph (b)(5) would prohibit schools, lenders, or holders

from passing their insurance premium costs to borrowers.

Existing paragraphs (c) (1) and (2), which address the method of

calculating the insurance premium for loans made before July 22, 1986,

when premium amounts were determined based on the amount of time

remaining until graduation, would be deleted and replaced by a new

paragraph (c), which would set forth procedures for the collection of

insurance premiums. New paragraph (c)(1), dealing with the borrower

premium, would address provisions previously included in paragraphs (a)

(1) and (2). This paragraph would state that the premium charged to the

borrower must be collected by the lender through a deduction from the

HEAL loan proceeds and is due to the Secretary, along with

documentation identifying the loan for which the premium is being paid,

no later than 30 days after the date of disbursement of the HEAL loan.

It also would require the lender to identify clearly to the borrower

the amount of the borrower's insurance premium.

New paragraph (c)(2), addressing the school premium, would state

that for schools required to pay an insurance premium, in accordance

with paragraph (b)(2) of this section, the premium would be collected

by the Secretary on a quarterly basis, and would be due to the

Secretary no later than 30 days after the date of the quarterly billing

notice.

New paragraph (c)(3), addressing the lender premium, would state

that for lenders required to pay an insurance premium, in accordance

with paragraph (b)(3) of this section, the premium, including

documentation identifying the loan for which the premium is being paid,

would be due to the Secretary 30 days after the date of disbursement of

the HEAL loan.

New paragraph (c)(4), addressing the holder premium, would state

that for holders required to pay an insurance premium, in accordance

with paragraph (b)(4) of this section, the premium, including

documentation identifying the loan for which the premium is being paid,

would be due to the Secretary 30 days after the date that the loan

transfer takes place.

Existing paragraph (a)(3), which establishes penalties for late

payment of the insurance premium, would be redesignated as paragraph

(c)(5)(i). As amended, this paragraph would require that if the

insurance premium due from a school, lender, or holder is not paid by

the due date, a late fee will be charged in accordance with the

Department's Claims Collection Regulation (45 CFR part 30). This

paragraph also would prohibit the late fee from being passed on to the

borrower.

Existing paragraph (a)(4) would be redesignated as paragraph

(c)(5)(ii). As amended, this paragraph would state that if the borrower

or lender insurance premium is not paid within 60 days of disbursement

of the loan, the Secretary may deny insurance coverage on the loan.

This paragraph also would state that if the school premium is not paid

within 60 days of the date of the quarterly billing notice, the

Secretary may immediately suspend the school and may initiate

termination proceedings against the school. Finally, if the holder

premium is not paid within 60 days of the loan transfer, the Secretary

may cancel the insurance coverage on the loan.

Existing paragraph (a)(5), which addresses refunds of premiums,

would be redesignated as paragraph (c)(6) and would be amended to

clarify that premiums are not refundable except in cases of error, or

unless the loan, including any accrued interest, is canceled within 120

days of the date of disbursement. Previously, the regulations did not

provide for the refund of the insurance premium once a loan was

disbursed, even if it was canceled soon thereafter. Accordingly, this

amendment is intended to assure that if cancellation of the loan,

including any accrued interest, occurs within a reasonable period of

time, a full refund of the premium(s) may be made. This is consistent

with Department of Education policies governing the Federal Family

Education Loan (FFEL) programs.

Existing paragraph (c)(3), which addresses the charging of premiums

for loans disbursed in multiple installments, would be redesignated as

new paragraph (d).

Section 60.15 Other Charges to the Borrower

Paragraph (c) of this section would be amended to clarify that, in

making a HEAL loan, the lender may pass on to the borrower only the

cost of the borrower's insurance premium.

Section 60.17 Security and Endorsement

Paragraph (b) of this section would be amended by deleting the

first sentence, which requires a HEAL loan to be made without

endorsement unless the borrower is a minor. In addition, a new

paragraph (c) would be added to this section to state that a credit

worthy parent or other responsible individual, other than a spouse, may

cosign the loan note. This is consistent with section 708(c) of the

Act, which allows a HEAL borrower to obtain a cosigner to reduce the

cost of the borrower insurance premium by 50 percent.

Subpart D--The Lender and Holder

Section 60.31 The Application To Be a HEAL Lender or Holder

A new paragraph (e) would be added to this section to state that

any lender or holder which is in the medium- or high-risk categories,

as described in Sec. 60.14, must submit a default management plan with

its HEAL application. The default management plan must specify the

detailed short-term and long-term procedures that the lender or holder

will have in place to minimize defaults on loans to HEAL borrowers.

Under the plan the lender or holder must, among other measures, assure

that borrowers receive information concerning repayment options,

deferments, forbearance, and the consequences of default. This

requirement is consistent with a statutory provision which requires

default management plans from schools in the medium- or high-risk

categories.

A new paragraph (f) would be added to this section to state that a

lender or holder with a HEAL default rate, as calculated in accordance

with Sec. 60.2, that exceeds 20 percent (except for lenders or holders

with a total loan volume, for purposes of the default rate calculation,

of 50 loans or less) would be ineligible to make or purchase HEAL

loans.

Section 60.33 Making a HEAL Loan

Existing paragraphs (g) and (h) would be redesignated as paragraphs

(h) and (i), respectively, and a new paragraph (g) would be added to

this section to set forth requirements for cosigners. This paragraph

would provide clarification of procedures for implementing the

statutory provision which allows a borrower to reduce the insurance

premium by 50 percent by obtaining a credit worthy cosigner. Under this

provision, a lender would be required to follow procedures similar to

those used in making commercial or private loans without a Federal

guarantee to determine whether a cosigner is credit worthy.

Section 60.35 HEAL Loan Collection

This section would be amended to clarify that, in collecting a HEAL

loan with a cosigner, the lender or holder must apply to the cosigner,

collection procedures that are at least as stringent as those it would

follow in attempting to collect a commercial or private loan with a

cosigner. In addition, this section would be amended to more clearly

delineate that the lender or holder must apply to the cosigner due

diligence procedures similar to those that are applied to the borrower.

Subpart E--The School

Section 60.50 Which Schools Are Eligible To Be HEAL Schools?

A new paragraph (a)(3) would be added to this section to require

that any school in the medium- or high-risk categories, as set forth in

Sec. 60.14, must submit a default management plan annually in

accordance with timeframes established by the Secretary. The default

management plan must specify the detailed short-term and long-term

procedures that the school will have in place to minimize defaults on

loans to HEAL borrowers. Under the plan the school must, among other

measures, assure that borrowers receive information concerning

repayment options, deferments, forbearance, and the consequences of

default. This provision is consistent with section 708(b) of the Act.

A new paragraph (a)(4) would be added to this section to state that

a school must have a HEAL default rate that does not exceed 20 percent

in order to be eligible to make HEAL loans, except as follows: (1) A

default rate in excess of 20 percent does not affect the eligibility of

a Historically Black College or University until after October 13,

1995; and (2) a default rate in excess of 20 percent does not affect

the eligibility of any school that has 50 or less loans in repayment,

for purposes of the HEAL default rate calculation described in

Sec. 60.2. This provision is consistent with section 708(d) of the Act

and with the low volume threshold proposed in Sec. 60.14(b).

Economic Impact

Executive Order 12866 requires that all regulations reflect

consideration of alternatives, of costs, of benefits, of incentives, of

equity, and of available information. Regulations must meet certain

standards, such as avoiding unnecessary burden. Regulations which are

``significant'' because of cost, adverse effects on the economy,

inconsistency with other agency actions, effects on the budget, or

novel legal or policy issues, require special analysis. The Regulatory

Flexibility Act requires that we analyze regulatory proposals to

determine whether they create a significant impact on a substantial

number of small entities.

The Department believes that the resources required to implement

the proposed requirements in these regulations are minimal. The

proposed rule would establish performance standards against which

lender and holder default rates would be measured, and would establish

fees which would be paid by lenders and holders with default rates over

5 percent as a condition for continued program participation. Since

most active HEAL lenders and holders do not have default rates over 5

percent, these provisions should not require significant additional

resources for the majority of lenders and holders. Therefore, in

accordance with the Regulatory Flexibility Act of 1980, the Secretary

certifies that these regulations will not have a significant impact on

a substantial number of small entities.

OMB has reviewed this proposed rule under Executive Order 12866.

The Department requests comments on whether there are any aspects of

this proposed rule which can be improved to make the HEAL program more

effective, more equitable, or less costly.

Paperwork Reduction Act of 1980

This proposed rule contains information collections which are

subject to review by the Office of Management and Budget (OMB) under

the Paperwork Reduction Act of 1980. The title, description, and

respondent description of the information collections are shown below

with an estimate of the time for reviewing instructions, searching

existing data sources, gathering and maintaining the data needed, and

completing and reviewing the collection of information.

Title: Health Education Assistance Loan (HEAL) Program: Lender and

Holder Performance Standards.

Description of Respondents: Non-profit institutions and Businesses

or other for-profit.

Description: Lenders and holders must provide the Secretary with

documentation identifying the loan for which a premium is being paid.

Lenders and schools with default rates greater than 5 percent must

submit annual default management plans to the Secretary.

Estimated Annual Reporting and Recordkeeping Burden:

----------------------------------------------------------------------------------------------------------------

Responses Total

Section No. of per annual Hours per Total burden

respond. respond. response response hours

----------------------------------------------------------------------------------------------------------------

60.14(c)(1)............................... 20 1,500 30,000 1min. 500 hrs.

60.14(c)(3)\1\............................ 0 0 0 0 min. 0 hrs.

60.14(c)(4)\1\............................ 0 0 0 0 min. 0 hrs.

60.31(e)\1\............................... 0 0 0 0 min. 0 hrs.

60.35(a)(1)\2\............................ 20 500 10,000 .083 hrs. (833 hrs.)

60.50(a)(3)............................... 87 1 87 10 hrs. 870 hrs.

---------------

Total Burden Hours.................. ........... ........... ........... ............. 1370 hrs.

----------------------------------------------------------------------------------------------------------------

\1\No burden is estimated for these sections, since it is anticipated that any lender or holder required to pay

an insurance premium will cease participation in the program.

\2\This recordkeeping burden has been approved under OMB No. 0915-0108. There is no change in the burden because

this OMB approval includes burden for all borrowers who are in default regardless of whether the loan is held

by a lender or holder.

We have submitted a copy of this proposed rule to OMB for its

review of these information collections. Send comments regarding this

burden estimate or any other aspect of this collection of information,

including suggestions for reducing this burden, to the agency official

designated for this purpose whose name appears in this preamble, and to

the Office of Information and Regulatory Affairs, OMB, Washington, D.C.

20503.

List of Subjects in 42 CFR Part 60

Educational study programs, Health professions, Loan programs-

education, Loan programs-health, Medical and dental schools, Reporting

requirements, Student aid.

Accordingly, the Department of Health and Human Services proposes

to amend 42 CFR part 60 as follows:

Dated: February 9, 1994.

Philip R. Lee,

Assistant Secretary for Health.

Approved: August 5, 1994.

Donna E. Shalala,

Secretary.

(Catalog of Federal Domestic Assistance, No. 13.108, Health

Education Assistance Loan Program)

PART 60--HEALTH EDUCATION ASSISTANCE LOAN PROGRAM

1. The authority citation for 42 CFR part 60 continues to read as

follows:

Authority: Section 215 of the Public Health Service Act, 58

Stat. 690, as amended, 63 Stat. 35 (42 U.S.C. 216); secs. 727-739A,

Public Health Service Act, 90 Stat. 2243, as amended, 93 Stat. 582,

99 Stat. 529-532, 102 Stat. 3122-3125 (42 U.S.C. 294-2941-1);

renumbered as secs. 701-720, as amended by 106 Stat. 1994-2011 (42

U.S.C. 292-292p).

2. A new section 60.2, in subpart A, is added to read as follows:

Subpart A--General Program Description

* * * * *

Sec. 60.2 HEAL default rate.

(a) Default rate formula. The HEAL default rate for each school,

lender, and holder is calculated in accordance with the formula set

forth in section 719(5) of the Public Health Service Act (42 U.S.C.

292o), except that for lenders and holders, loans made to students at

Historically Black Colleges and Universities prior to [insert date 3

years after date of publication of final rule] are excluded from the

default rate calculation.

(b) Effective date of default rate calculations. HEAL default rates

are calculated as of September 30 of each year. These rates are used to

determine risk-based insurance premiums and program eligibility, for

purposes of loans made or purchased on or after July 1 of the following

year.

(c) Payoff of defaulted loans to reduce default rate. A school,

lender, or holder may pay off the defaulted loans of one or more HEAL

borrowers to reduce its default rate. If a school, lender, or holder

chooses to exercise this option, it must, for each defaulted HEAL

borrower chosen, pay the outstanding principal and interest for all of

the borrower's HEAL loans held by the Secretary. Any defaulted HEAL

loans paid by a school, lender, or holder are assigned to that entity,

and may be collected using only collection methods available to that

entity. In order to reduce the school, lender, or holder default rate

used to determine the level of the risk-based insurance premium (or

program eligibility) for loans made or purchased on or after July 1 of

any year, a payoff must be completed by May 31 of that same year.

3. Section 60.8, in subpart B, is amended by revising paragraph

(b)(1) to read as follows:

Subpart B--The Borrower

* * * * *

Sec. 60.8 What are the borrower's major rights and responsibilities?

* * * * *

(b) * * *

(1) The borrower must pay the borrower's insurance premium as more

fully described in Sec. 60.14(b)(1).

* * * * *

4. Section 60.10, in subpart C, is amended by revising paragraph

(b)(1) to read as follows:

Subpart C--The Loan

Sec. 60.10 How much can be borrowed?

* * * * *

(b) * * *

(1) In no case may an eligible non-student borrower receive a loan

that is greater than the sum of the borrower's insurance premium plus

the interest that must be paid on the borrower's HEAL loans during the

period for which the new loan is intended.

* * * * *

Sec. 60.13 [Amended]

5. Section 60.13 is amended by removing paragraph (a)(4).

6. Section 60.14 is revised to read as follows:

Sec. 60.14 Risk-based insurance premiums.

(a) General. The Secretary insures each lender or holder for the

losses of principal and interest it may incur in the event that a

borrower dies; becomes totally and permanently disabled; files for

bankruptcy under chapter 11 or 13 of the Bankruptcy Act; files for

bankruptcy under chapter 7 of the Bankruptcy Act and files a complaint

to determine the dischargeability of the HEAL loan; or defaults on his

or her loan. For this insurance, the Secretary charges an insurance

premium to the borrower, and to the school, lender, and subsequent

holder, if any, in accordance with the procedures outlined in this

section.

(b) Rate of insurance premium. The rate of the HEAL insurance

premium charged to a HEAL borrower, school, lender, and holder shall be

determined in accordance with the procedures outlined in this

paragraph.

(1) Borrower insurance premium. (i) Low-risk rate. A borrower

attending a school with a default rate of not to exceed 5 percent, or

attending a school for which the volume of HEAL loans made for purposes

of the default rate calculation is 50 or less, shall be assessed a

risk-based premium in an amount equal to 6 percent of the principal

amount of the loan.

(ii) Medium-risk and high-risk rate. A borrower attending a school

with a default rate in excess of 5 percent but not exceeding 20 percent

(excluding schools for which the volume of HEAL loans made for purposes

of the default rate calculation is 50 or less) shall be assessed a

risk-based premium in an amount equal to 8 percent of the principal

amount of the loan.

(iii) Reduction of borrower premium. A borrower shall have his or

her insurance premium reduced by 50 percent if a credit worthy parent

or other responsible party co-signs the loan note.

(2) School insurance premium. (i) Low-risk rate. A school with a

default rate of not to exceed 5 percent, or for which the volume of

HEAL loans made for purposes of the default rate calculation is 50 or

less, shall not be assessed an insurance premium.

(ii) Medium-risk rate. A school with a default rate in excess of 5

percent but not exceeding 10 percent (excluding schools for which the

volume of HEAL loans made for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 5 percent of the principal amount of each HEAL loan approved

by the school and disbursed to the borrower.

(iii) High-risk rate. A school with a default rate in excess of 10

percent but not exceeding 20 percent (excluding schools for which the

volume of HEAL loans made for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 10 percent of the principal amount of each HEAL loan approved

by the school and disbursed to the borrower.

(iv) Special consideration for Historically Black Colleges and

Universities. An Historically Black College or University with a

default rate in excess of 20 percent may continue to make HEAL loans to

its borrowers until October 13, 1995. A borrower at such a school will

be subject to the high-risk insurance premium rate set forth in

paragraph (b)(1)(ii) of this section, and the school will be subject to

the high-risk insurance premium rate set forth in paragraph (b)(2)(iii)

of this section.

(3) Lender insurance premium. (i) Low-risk rate. A lender with a

default rate of not to exceed 5 percent, or for which the volume of

HEAL loans made for purposes of the default rate calculation is 50 or

less, shall not be assessed an insurance premium.

(ii) Medium-risk rate. A lender with a default rate in excess of 5

percent but not exceeding 10 percent (including lenders for which the

volume of HEAL loans made for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 5 percent of the principal amount of each HEAL loan made.

(iii) High-risk rate. A lender with a default rate in excess of 10

percent but not exceeding 20 percent (excluding lenders for which the

volume of HEAL loans made for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 10 percent of the principal amount of each HEAL loan made.

(4) Holder insurance premium. (i) Low-risk rate. A holder with a

default rate of not to exceed 5 percent, or for which the volume of

HEAL loans held for purposes of the default rate calculation is 50 or

less, shall not be assessed an insurance premium.

(ii) Medium-risk rate. A holder with a default rate in excess of 5

percent but not exceeding 10 percent (excluding holders for which the

volume of HEAL loans held for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 5 percent of the principal amount of each HEAL loan purchased.

(iii) High-risk rate. A holder with a default rate in excess of 10

percent but not exceeding 20 percent (excluding holders for which the

volume of HEAL loans held for purposes of the default rate calculation

is 50 or less) shall be assessed a risk-based premium in an amount

equal to 10 percent of the principal amount of each HEAL loan

purchased.

(5) Rules regarding insurance premium costs. Schools, lenders, and

holders are prohibited from requiring the borrower to pay the school,

lender, or holder portion of the insurance premium.

(c) Collection of insurance premiums. HEAL insurance premiums due

from borrowers, schools, lenders, and holders shall be collected in

accordance with the procedures outlined in this paragraph.

(1) Borrower insurance premium. The premium charged to the borrower

must be collected by the lender through a deduction from the HEAL loan

proceeds. The borrower premium, including documentation identifying the

loan for which the premium is being paid, is due to the Secretary no

later than 30 days after the date of each HEAL loan disbursement. The

lender must clearly identify to the borrower the amount of the

insurance premium.

(2) School insurance premium. For schools required to pay an

insurance premium, in accordance with paragraph (b)(2) of this section,

the premium shall be collected by the Secretary on a quarterly basis,

and is due to the Secretary no later than 30 days after the date of the

quarterly billing notice.

(3) Lender insurance premium. For lenders required to pay an

insurance premium, in accordance with paragraph (b)(3) of this section,

the premium, including documentation identifying the loan for which the

premium is being paid, is due to the Secretary no later than 30 days

after the date of each HEAL loan disbursement.

(4) Holder insurance premium. For holders required to pay an

insurance premium, in accordance with paragraph (b)(4) of this section,

the premium, including documentation identifying the loan for which the

premium is being paid, is due to the Secretary no later than 30 days

after the date of each HEAL loan purchase.

(5) Penalties for late payment. (i) If the insurance premium is not

paid by the due date a late fee will be charged to the school, lender,

or holder, as appropriate, in accordance with the Department's Claims

Collection Regulation (45 CFR part 30). These late fees may not be

passed on to the borrower.

(ii) If the borrower or lender insurance premium is not paid within

60 days of disbursement of the loan, the insurance shall cease to be

effective on the loan. If the school premium is not paid within 60 days

of the date of the quarterly billing notice, the Secretary will

immediately suspend the school and initiate termination proceedings

against the school. If the holder premium is not paid within 60 days of

the loan transfer, the Secretary will cancel the insurance coverage on

the loan.

(6) Refund of premiums. Premiums are not refundable except in cases

of error, or unless the loan, including any accrued interest, is

canceled within 120 days of the date of disbursement.

(d) Multiple installments. In cases where the lender disburses the

loan in multiple installments, the insurance premium is calculated for

each disbursement.

7. Section 60.15 is amended by revising paragraph (c) to read as

follows:

Sec. 60.15 Other charges to the borrower.

* * * * *

(c) Other loan making costs. A lender may not pass on to the

borrower any cost of making a HEAL loan other than the costs of the

borrower's insurance premium.

8. Section 60.17 is amended by revising paragraph (b) and adding a

new paragraph (c) to read as follows:

Sec. 60.17 Security and endorsement.

* * * * *

(b) If a borrower is a minor and cannot under State law create a

legally binding obligation by his or her own signature, a lender may

require an endorsement by another person on the borrower's HEAL note.

For purposes of this paragraph, an ``endorsement'' means a signature of

anyone other than the borrower who is to assume either primary or

secondary liability on the note.

(c) A credit worthy parent or other responsible individual (other

than a spouse) may cosign the loan note.

9. Section 60.31, in subpart D, is amended by adding new paragraphs

(e) and (f) to read as follows:

Subpart D--The Lender and Holder

Sec. 60.31 The application to be a HEAL lender or holder.

* * * * *

(e) Any lender or holder in the medium-risk or high-risk

categories, as described in Sec. 60.14, must submit a default

management plan with its application to be a HEAL lender or holder. The

default management plan must specify the detailed short-term and long-

term procedures that the lender or holder will have in place to

minimize defaults on loans to HEAL borrowers. Under the plan the lender

or holder must, among other measures, assure that borrowers receive

information concerning repayment options, deferments, forbearance, and

the consequences of default.

(f) A lender with a default rate that exceeds 20 percent (except

for a lender with a total loan volume, for purposes of the default rate

calculation, of 50 loans or less) is ineligible to make HEAL loans. A

holder with a default rate that exceeds 20 percent (except for a holder

with a total loan volume, for purposes of the default rate calculation,

of 50 loans or less) is ineligible to purchase HEAL loans.

10. Section 60.33 is amended by redesignating paragraphs (g) and

(h) as paragraphs (h) and (i), respectively; and by adding a new

paragraph (g) to read as follows:

Sec. 60.33 Making a HEAL loan.

* * * * *

(g) HEAL loans with cosigners. In determining whether a cosigner is

creditworthy, a lender must follow procedures for determining

creditworthiness that are at least as stringent as those it would

follow in making commercial loans or private loans without a Federal

guarantee. If a lender does not make commercial loans or private loan

without a Federal guarantee, it must obtain and follow creditworthiness

procedures that are used by a commercial lender who does make such

loans.

* * * * *

11. Section 60.35 is amended by revising the introductory

paragraph, paragraphs (a)(1) and (2), and paragraphs (e) and (f) to

read as follows:

Sec. 60.35 HEAL loan collection.

A lender or holder must exercise due diligence in the collection of

a HEAL loan with respect to both a borrower and any endorser or

cosigner. In collecting a loan with an endorser or cosigner, the lender

or holder must apply to the endorser or cosigner collection procedures

that are at least as stringent as those it would follow in attempting

to collect a commercial or private loan with an endorser or cosigner.

At a minimum, in order to exercise due diligence, a lender or holder

must implement the following procedures when a borrower fails to honor

his or her payment obligations:

(a)(1) When a borrower is delinquent is making payment, the lender

or holder must remind the borrower within 15 days of the date the

payment was due by means of a written contact. If payments do not

resume, the lender or holder must contact both the borrower and any

endorser or cosigner at least 3 more times at regular intervals during

the 120-day delinquent period following the first missed payment of

that 120-day period. The second demand notice for a delinquent account

must inform the borrower that the continued delinquent status of the

account will be reported to consumer credit reporting agencies if

payment is not made. Each of the required four contacts must consist of

at least a written contact which has an address correction request on

the envelope. The last contact must consist of a telephone contact, in

addition to the required letter, unless the borrower and any endorser

or cosigner cannot be contacted by telephone. The lender or holder may

choose to substitute a personal contact for a telephone contact. A

record must be made of each attempt to contact and each actual contact,

and that record must be placed in the borrower's file. Each contact

must become progressively firmer in tone. If the lender or holder is

unable to locate the borrower and any endorser or cosigner at any time

during the period when the borrower is delinquent, the lender or holder

must initiate the skip-tracing procedures described in paragraph (a)(2)

of this section.

(2) If the lender or holder is unable to locate either the borrower

or any endorser or cosigner at any time, the lender or holder must

initiate and use skip-tracing activities which are at least as

extensive and effective as those it uses to locate borrowers delinquent

in the repayment of its other loans of comparable dollar value. To

determine the correct address of the borrower and any endorser or

cosigner, these skip-tracing procedures should include, but need not be

limited to, contacting any other individual named on the borrower's

HEAL application or promissory note (or the endorser or cosigner's

application), using such sources as telephone directories, city

directories, postmasters, drivers license records in State and local

government agencies, records of members of professional associations,

consumer credit reporting agencies, skip locator services, and records

at any school attended by the borrower. All skip-tracing activities

used must be documented. This documentation must consist of a written

record of the action taken and its date and must be presented to the

Secretary when requesting preclaim assistance or when filing a default

claim for HEAL insurance.

* * * * *

(e) If a lender or holder does not sue the borrower or any endorser

or cosigner, it must send a final demand letter to the borrower and the

endorser or cosigner at least 30 days before a default claim is filed.

(f) If a lender or holder sues a defaulted borrower or endorser or

cosigner, it may first apply the proceeds of any judgment against its

reasonable attorney's fees and court costs, whether or not the judgment

provides for these fees and costs.

* * * * *

12. Section 60.50, in subpart E, is amended by adding new

paragraphs (a) (3) and (4) to read as follows:

Subpart E--The School

Sec. 60.50 Which schools are eligible to be HEAL schools?

(a) * * *

(3) If the school is in the medium-risk or high-risk categories, as

set forth in Sec. 60.14, it must submit a default management plan to

the Secretary on an annual basis in accordance with timeframes

established by the Secretary.

(4) The school must have a HEAL default rate that does not exceed

20 percent, except as follows:

(i) A default rate in excess of 20 percent shall not affect the

eligibility of a Historically Black College or University until after

October 13, 1995; and

(ii) A default rate in excess of 20 percent shall not affect the

eligibility of a school that has 50 or less loans in repayment, for

purposes of the HEAL default rate calculation described in Sec. 60.2.

* * * * *

[FR Doc. 94-28321 Filed 11-15-94; 8:45 am]

BILLING CODE 4160-15-M