Federal Family Education Loan Program; Final Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary amends the regulations governing the Federal

Family Education Loan (FFEL) Program. 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 further define ``reserve funds and

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

``unnecessary'' reserves. They 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.

EFFECTIVE DATE: These regulations take effect July 1, 1995.

FOR FURTHER INFORMATION CONTACT: Donald M. Feuerstein, Senior Advisor,

U.S. Department of Education, 600 Independence Avenue SW., (Room 4624,

ROB-3), Washington, DC 20202-5343. 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: 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). These programs provide loans to eligible student or parent

borrowers who might otherwise be unable to finance the costs of

postsecondary education. The loans are guaranteed by State or private,

non-profit guaranty agencies designated by the Secretary, which are

required to maintain reserves to support those guarantees.

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

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

which codified the long-standing and judicially-supported principle

that guaranty agency reserve funds and assets are ``the property of the

United States to be used in the operation of * * *'' the FFEL Program

and the Direct Loan Program. To protect the Federal fiscal interest in

the guaranty agency reserve funds and assets, OBRA authorized the

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

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

to the guaranty agency or to the Secretary under specified

circumstances 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 any ``misapplication, misuse, or improper

expenditure'' of reserve funds or assets (section 422(g)(1)(C)).

On August 10, 1994, the Secretary published a notice of proposed

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

41184). Those proposed regulations were developed in accordance with

section 422(g)(1)(D) of the HEA, which requires that standards and

procedures for section 422(g)(1)(A) and (B) be developed through

negotiated rulemaking. Monthly negotiated rulemaking sessions were held

from January through June 1994 in and around Washington, DC. Consensus

was reached on all of the rules proposed in the NPRM and on the

accompanying preamble discussion. The Secretary specifically relies

upon that consensus and preamble in issuing these final rules without

substantive change from the NPRM.

These regulations improve the efficiency of the Federal student aid

programs, and, by so doing, improve their capacity to enhance

opportunities for postsecondary education. Encouraging students to

graduate from high school and to pursue high quality postsecondary

education are important elements of the National Education Goals. The

student aid programs also enable current and future workers to have the

opportunity to acquire both basic and technologically advanced skills

needed for today's and tomorrow's workplace. They provide the financial

means for an increasing number of Americans to receive an education

that will prepare them to think critically, communicate effectively,

and solve problems efficiently, as called for in the National Education

Goals.

Substantive Revisions to the Notice of Proposed Rulemaking

As explained below, the Secretary has not made any substantive

changes from the NPRM.

Analysis of Comments and Changes

In response to the NPRM, 23 outside parties submitted timely

comments on the proposed regulations. Fifteen commenters explicitly

support the consensus reached at the negotiated rulemaking proceeding,

and one commenter particularly finds the preamble to the NPRM helpful.

None of the commenters oppose the proposed regulations as a package.

Some of the comments suggest minor adjustments to the proposed

regulations, and an analysis of those comments follows. Other comments

deal with matters not relevant to the regulations proposed in the NPRM.

In the spirit of the consensus reached at the negotiated rulemaking

sessions, the Secretary has decided not to address specifically the

other comments at this time but may consider alternate approaches such

as these when the impact of the regulatory changes made here is

evaluated based on actual experience. Accordingly, they are not

discussed in the following analysis, although all comments will

continue to be available for public inspection as stated in the NPRM

(59 FR 41187).

Numerous comments refer to an additional rule to implement section

422(g)(1)(C) of the HEA and to a system of uniform financial

projections for guaranty agencies. The commenters request a formal

comment process or at least an opportunity to be consulted before the

rule or system of projections is adopted. The NPRM (59 FR 41184, 41186)

describes these items and the Secretary's plans for them and explains

that the additional rule is not subject to negotiated rulemaking.

Because of the need under section 482(c) of the HEA to publish these

regulations by December 1, it was not possible to keep the negotiated

rulemaking proceeding open on a voluntary basis, as a number of

commenters suggested. New regulations are generally subject to public

comment under the Department's normal rulemaking procedures; and, as

stated in the NPRM, the Secretary intends to engage in prior

consultation with interested parties on an additional rule under

section 422(g)(1)(C) of the HEA. In the meantime, as pointed out in the

Conference Report on OBRA, the Secretary already has the ability to

deal with improper expenditures of reserve funds and assets. Authority

for a system of financial projections already exists under section

428(b)(2)(C) of the HEA and 34 CFR 682.414(b)(5), and the matter is

more appropriately viewed as a request for information from a guaranty

agency under that authority than as a new regulatory requirement. A

preliminary version of a system of financial projections is currently

under discussion with guaranty agencies.

One commenter, who was a representative of the guaranty agencies at

the negotiated rulemaking proceeding, went so far as to argue that the

later promulgation of a new regulation under section 422(g)(1)(C) of

the HEA ``would be changing one of the essential terms in the `deal'

struck in these negotiations,'' and that ``[h]ad the non-federal

negotiators known of the Department's intention to proceed with a

separate rulemaking . . . we would not have been so forthcoming in our

concessions.'' Although the Secretary appreciates that concessions were

made by all negotiators, including the Department's, in achieving

consensus, this commenter misunderstands the operation of the

negotiated rulemaking process. Any interim agreements reached as the

proceeding progressed were tentative only, subject to final

confirmation with respect to the entire package. In this case,

consensus was achieved at the final negotiating session, while the

Secretary's draft proposal on improper expenditures had been withdrawn

at a prior meeting.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

Section 682.410(a) Fiscal Requirements

Section 682.410(a)(1) Reserve Fund Assets

Comments: One commenter requested the Secretary to define sources

of guaranty agency reserve funds that can be considered ``non-

federal.'' Another urged that funds received from a State be included

in the reserve fund only if they are ``used'' for guaranty activities.

Discussion: The Secretary does not see any need to define any

portion of guaranty agency reserves as ``non-federal'' in these

regulations. The term ``non-federal'' does not appear in the new

section 422(g)(1) of the HEA but instead in pre-existing section

422(a)(2), dealing with a previous authority for the provision and

recall of Federal advance funds and other reserves. Although the

excerpt from the conference report on OBRA quoted in the NPRM (59 FR

41184) did use the term ``federal portion,'' it is not clear what was

meant by this reference, or what significance it should be given in

light of the unqualified language of section 422(g)(1) itself and of

prior court decisions defining the Federal interest in guaranty agency

reserve funds. In any event, the long-standing definition of reserve

fund in Sec. 682.410 was based on sections 422, 428, and 432 of the HEA

as they existed even prior to OBRA and does not require any additional

authority from section 422(g)(1). All of the sources specified in

Sec. 682.410 of the regulations may be applied only to the uses also

specified there. The particular subject of State sources was

extensively discussed at the negotiated rulemaking proceeding, and the

proposed language represents a compromise of competing positions that

was agreed to at the proceeding.

Changes: None.

Section 682.410(a)(2) Uses of Reserve Fund Assets

Comments: One commenter elaborated on the explanation of new

paragraph (a)(2)(xi) in the preamble by stating that the ``good faith''

proviso in the paragraph ``is a restatement of the basic rule of non-

retroactivity. * * *''

Discussion: The Secretary agrees with the commenter's observation

that this protection against application of certain new regulatory

provisions to conduct that occurred prior to their effective date is

unavailable if the conduct was not consistent with the ``laws, rules,

standards, customs, and practices prevailing'' at the time of

occurrence. It would not be appropriate to offer a safe harbor to

conduct that was questionable even when it occurred.

Change: None

Section 682.410(a)(3) Accounting Basis

Comments: Numerous commenters urged that guaranty agency published

financial statements continue to be based on generally- accepted

accounting principles. A few even urged that ED Form 1130, the basic

form for guaranty agency financial reporting to the Secretary, be

changed to require reporting on an accrual basis, or at least in

accordance with generally-accepted accounting principles, and that

other reserve fund assets be considered in determining satisfaction of

reserve ratio requirements. One commenter requested a specification of

the first fiscal year to which this new paragraph is applicable.

Discussion: The NPRM made clear that Sec. 682.410(a)(3) applies

only to ``reserve fund reporting,'' and in that respect it merely

formalizes the existing instructions to Form 1130 (59 CFR 41185). Thus,

the fact that the effective date of this regulatory requirement is in

the middle of a Federal fiscal year and may be in the middle of an

agency's fiscal year should not be a concern, and there is no need to

specify an effective fiscal year. The new paragraph is not intended to

require any change in a guaranty agency's published financial

statements or the method of computing its fund balance used in those

statements. It would not be appropriate, however, to change the

accounting basis for Form 1130. Certain accrual and deferral items are

already collected by Items E-17 to E-22 of the form. Moreover, the

Secretary believes that the statutory reserve ratios of section

428(c)(9) of the HEA were selected by the Congress on the basis of the

cash reserve data collected on Form 1130, and a change in the method of

computing the reserve ratio would accordingly also require

reconsideration of the appropriateness of the ratio itself. On the

other hand, some agencies publish a so-called reserve ratio that is

computed in a different manner from that required by the statute and

regulations. The Secretary considers it to be misleading for a guaranty

agency to do so without also publishing its statutory reserve ratio and

explaining the difference in computation.

Changes: None.

Section 682.410(a)(5) Investments

Comments: A commenter requested the Secretary to issue clearer

guidelines for low-risk investments or to approve individual agencies'

investment policies.

Discussion: The courts have confirmed that a guaranty agency's role

with respect to its reserve fund and assets is ``analogous'' or

``akin'' to that of a trustee. See e.g., Education Assistance Corp. v.

Cavasos, 902 F.2d 617, 627 (8th Cir. 1990), cert. denied, 111 S.Ct, 246

(1990); Ohio Student Loan Commission v. Cavasos, 900 F.2d 894, 899 (6th

Cir. 1990), cert. denied, 111 S.Ct. 245 (1990). Thus, there is a whole

body of existing fiduciary law to flesh out the Secretary's regulatory

provisions for guaranty agency reserve funds and assets. To eliminate

any uncertainty, however, the Department is willing to review the

investment policies of agencies at their request.

Changes: None.

Section 682.410(a)(6) Development of Assets

Comments: One commenter requested qualitative or quantitative

guidance on the meaning of ``substantial'' with respect to situations

in which asset sharing for program and non-program uses requires cost

sharing.

Discussion: As indicated in the NPRM (59 FR 41185), this amendment

was the subject of intense debate at the negotiated rulemaking

proceeding. Significant concessions were made by all negotiators to

reach agreement on the amendment. As one commenter put it, ``the

guaranty agency negotiators gave up litigable positions'' on this

provision, among others, to make consensus possible. Therefore, the

Secretary is particularly gratified that there has not been any

negative comment on this amendment. With regard to the word

``substantial,'' the Secretary is using it as an antonym for the word

``nominal,'' denoting situations in which it would not be productive to

attempt to quantify the extent of nonprogram use. Although even more

specificity on substantiality might be desirable, the Secretary

believes it is preferable to have that arise from case-by-case analysis

rather than initial regulatory prescription. The Secretary is willing

to give advance advice on particular situations in which there may be

uncertainty.

Finally, although there was no formal comment to this effect, the

Secretary understands that there may be some misunderstanding of the

effect of the amendment when a guaranty agency makes a correct cost

allocation at the outset. The statement in the NPRM (59 FR 41186) that

subsequent events would be governed by the recorded ownership interest

of the asset obviously assumes that the recordation is consistent with

the cost allocation. A guaranty agency may not allocate substantial

costs to the reserve fund and then not give it credit for a

proportionate ownership interest in the asset.

Changes: None.

Section 682.417 Determination of Reserve Funds or Assets To Be

Returned

Section 682.417(b) Return of Unnecessary Reserve Funds

Comments: One commenter requested that the Secretary analyze the

economic impact of OBRA on guaranty agencies before requiring the

return of any reserves. Another commenter urged that the Secretary

consider 10-year rather than five-year projections in determining

whether a guaranty agency has ``unnecessary'' reserves to be returned.

Other commenters questioned the sufficiency of the 60 days provided for

the agency to provide the projections.

Discussion: Requiring a complete analysis of the economic impact of

OBRA before allowing the use of the Secretary's new power under section

422(g)(1)(A) of the HEA would be the practical equivalent of delaying

the effective date of the implementing regulation. The issue of the

first Federal fiscal year in which reserves could be called back under

this new rule was thoroughly discussed at the negotiated rulemaking

proceeding. The Secretary's position that the rule should not be

delayed beyond July 1, 1995, was ultimately accepted as part of the

overall consensus. By that time actual data will be available on the

impact of the profit margin reductions resulting from various changes

made to the HEA by OBRA and on the first academic year of the Direct

Loan Program. OBRA's future impact will be assessed through the

agencies' projections for the 1995 and next four Federal fiscal years.

The Secretary considers the assumptions necessary for 10-year

projections, however, such as aggregate student loan volume and general

rates of interest and inflation, to be too unreliable to be used as a

basis for decision. This issue was specifically discussed at the

negotiated rulemaking proceeding, and five years was agreed upon as the

term for the projections. Finally, since the guaranty agency should

already have provided the Secretary with projections under the new data

collection program, 60 days should be ample time to supplement them for

this purpose.

Changes: None.

Section 682.417(c) Notice

Comments: One commenter suggested that a guaranty agency should be

able to request additional information if the notice initiating a

proceeding for the return of reserve funds or assets does not contain

sufficient information for it to prosecute its appeal. Another asked

that any protective order under paragraph (c)(2)(v) not be allowed to

endanger its daily operations in the absence of fraud or abuse.

Discussion: No specific procedure is necessary for a party to

request additional information from the Secretary. If the information

is in fact necessary, the notice directing the return would be

defective if the information were not provided. Since any protective

order would only affect reserves to the extent that they had already

been determined to be ``unnecessary,'' it is hard to understand how it

could endanger the agency's daily operations. In any event, the

deciding official could expedite this aspect of any appeal.

Changes: None.

Section 682.417(d) Appeal

Comments: One commenter expressly agreed with the appeal procedure

included in the proposed rule, while another requested that the appeal

be heard by a neutral third-party arbitrator.

Discussion: The latter commenter misunderstands the nature of the

appeal process. This is not a quasi-judicial administrative proceeding.

The appeal is merely an opportunity for the guaranty agency to have the

authorized Departmental official's action reviewed by a superior or

peer within the Department. It would be inappropriate to place the

Department's responsibility on an outside decisionmaker.

Changes: None.

Section 682.417(e) Third-Party Participation

Comments: One commenter requested the Secretary to delete the

provision for third-party participation in appeals, or at least to

specify the information that third parties may provide.

Discussion: Third-party participation was an important component of

the consensus reached at the negotiated rulemaking proceeding.

Students, schools, and lenders are the parties most affected by the

financial condition of guaranty agencies, and they should not be denied

an opportunity to provide information in these proceedings. The

Secretary does not believe that it is appropriate to limit the

information that third parties may provide.

Changes: None.

Section 682.417(f) Adverse Information

Comments: Two commenters requested that all third-party information

be provided to the guaranty agency without a formal request under the

Freedom of Information Act (FOIA), not just adverse information

considered by the deciding official.

Discussion: This matter was also discussed at the negotiated

rulemaking proceeding, and the guaranty agency negotiators agreed that

the agencies would usually already be aware of any favorable

information that was submitted by third parties. In any event, under

Sec. 682.417(e)(2) all information submitted by third parties is

available for public inspection and copying. No formal FOIA request is

necessary.

Changes: None.

Executive Order 12866

These final regulations have been reviewed in accordance with

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

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those

resulting from statutory requirements and those determined by the

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

effectively and efficiently. Burdens specifically associated with

information collection requirements were identified and justified in

the NPRM.

In assessing the potential costs and benefits--both quantitative

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

that the benefits of these 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.

Assessment of Educational Impact

In the NPRM, the Secretary requested comments on whether the

proposed regulations would require transmission of information that is

being gathered by or is available from any other agency or authority of

the United States.

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

the Department has determined that the regulations in this document do

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

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

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: November 18, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary amends 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(a) is revised, and the OMB control number is

republished 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 schools, 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 (a)(1)(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).

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

under paragraphs (a)(1)(ii) or (a)(1)(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 such 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 (a)(4)(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.

(10) Minimum reserve fund level. The guaranty agency must maintain

a current minimum reserve level of not less than--

(i) .5 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1993;

(ii) .7 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1994;

(iii) .9 percent of the amount of loans outstanding, for the fiscal

year of the agency that begins in calendar year 1995; and

(iv) 1.1 percent of the amount of loans outstanding, for each

fiscal year of the agency that begins on or after January 1, 1996.

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

(i) Reserve fund level means--

(A) The total of reserve fund assets as defined in paragraph (a)(1)

of this section;

(B) Minus the total amount of the reserve fund assets used in

accordance with paragraphs (a)(2) and (a)(3) of this section; and

(ii) Amount of loans outstanding means--

(A) The sum of--

(1) The original principal amount of all loans guaranteed by the

agency; and

(2) The original principal amount of any loans on which the

guarantee was transferred to the agency from another guarantor,

excluding loan guarantees transferred to another agency pursuant to a

plan of the Secretary in response to the insolvency of the agency;

(B) Minus the original principal amount of all loans on which--

(1) The loan guarantee was cancelled;

(2) The loan guarantee was transferred to another agency;

(3) Payment in full has been made by the borrower;

(4) Reinsurance coverage has been lost and cannot be regained; and

(5) The agency paid claims.

* * * * *

(Approved by the Office of Management and Budget under Control

Number 1840-0538)

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 which 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,

which the Secretary determines are necessary to pay the program

expenses and contingent liabilities of the agency or which 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 paragraph (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.

(Authority: 20 U.S.C. 1072(g)(1))

(Approved by the Office of Management and Budget under Control

Number 1840-0538)

[FR Doc. 94-29005 Filed 11-23-94; 8:45 am]

BILLING CODE 4000-01-P