Student Assistance General Provisions; Federal Family Education Loan Programs; Proposed Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary proposes to amend the Student Assistance General

Provisions and Federal Family Education Loan program regulations. These

amendments are needed to implement changes in the Higher Education Act

of 1965, as amended (HEA), and to improve the monitoring and

accountability of institutions and third-party servicers participating

in the student financial assistance programs authorized by Title IV of

the HEA (Title IV, HEA programs). The changes would establish

requirements governing contracts between institutions and third-party

servicers to administer any aspect of an institution's participation in

those programs. In addition, the changes would strengthen sanctions

against institutions for violations of Title IV, HEA program

requirements and establish similar sanctions for third-party servicers.

The changes also would establish standards of administrative and

financial responsibility for third-party servicers that administer any

aspect of a guaranty agency's or lender's participation in the Federal

Family Education Loan programs.

DATES: Comments must be received on or before April 4, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Mr. Greg Allen, U.S. Department of Education, 400 Maryland

Avenue SW., room 4318, Regional Office Building 3, Washington, DC

20202-5343.

A copy of any comments that concern information collection

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

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

preamble.

FOR FURTHER INFORMATION CONTACT: Mr. Greg Allen. Telephone (202) 708-

7888. 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 6 p.m., Eastern time, Monday through

Friday.

SUPPLEMENTARY INFORMATION: The Student Assistance General Provisions

(34 CFR part 668) currently apply to all institutions that participate

in the Student Financial Assistance Programs authorized by Title IV of

the HEA. For purposes of these regulations, the Title IV, HEA Student

Financial Assistance Programs include the Federal Pell Grant, Federal

Family Education Loan (FFEL), Federal Direct Student Loan, State

Student Incentive Grant (SSIG), Federal Perkins Loan, Federal Work-

Study (FWS), and Federal Supplemental Educational Opportunity Grant

(FSEOG) programs.

The FFEL program regulations (34 CFR part 682) govern the Federal

Stafford Loan Program, the Federal Supplemental Loans for Students

(Federal SLS) Program, the Federal PLUS Program, and the Federal

Consolidation Loan Program, collectively referred to as the Federal

Family Education Loan programs (formerly the Guaranteed Student Loan

(GSL) programs). With respect to 34 CFR part 682, the Federal Stafford

Loan, Federal SLS, Federal PLUS, and Federal Consolidation Loan

programs are hereinafter referred to as the Stafford, SLS, PLUS and

Consolidation Loan programs.

The Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239),

enacted December 19, 1989, amended the HEA to authorize the Secretary

to promulgate regulations governing the limitation, suspension, or

termination of the eligibility of an individual or organization to

contract with an educational institution to administer any aspect of

the institution's participation in any Title IV, HEA program. That act

further amended the HEA to authorize the Secretary to promulgate

regulations to take emergency action against or to fine such an

individual or organization.

The Higher Education Amendments of 1992 (Pub. L. 102-325), enacted

July 23, 1992, amended the HEA to expand the Secretary's authority to

regulate the activities of those individuals and organizations, now

called third-party servicers. Further, Public Law 102-325 authorizes

the Secretary to promulgate regulations that are applicable to third-

party servicers to establish minimum standards with respect to sound

management and accountability of the FFEL programs and include

standards for financial responsibility and the assessment of

liabilities for FFEL program violations. These proposed regulations

would implement those statutory provisions. In addition, these proposed

regulations would strengthen and clarify the procedures for fining an

institution or limiting, suspending, or terminating its participation

in any Title IV, HEA program, and make other minor changes.

The Secretary believes that establishing accountability guidelines

for an institution's continued participation and the participation of

an institution's third-party servicer in the Title IV, HEA programs is

an important element in the general effort for better and more

accountable schools, as called for in the National Education Goals.

Negotiated Rulemaking

Section 492 of the HEA contains procedural requirements that the

Secretary is to follow in developing proposed regulations for parts B,

G, and H of Title IV of the HEA, as amended by the Higher Education

Amendments of 1992. Section 492(a) requires the Secretary to convene

regional meetings to gain input on the content of proposed regulations.

Section 492(b) requires the Secretary, subsequent to these meetings, to

draft and submit regulations implementing parts B, G, and H to a

negotiated rulemaking process.

In accordance with the requirements of section 492, the Secretary

convened four regional meetings to discuss issues related to

implementation of parts B, G, and H. The Secretary invited

representatives of groups involved in student financial assistance

programs, such as students, legal assistance organizations that

represent students, institutions of higher education, guaranty

agencies, lenders, secondary markets, loan servicers, guaranty agency

servicers, and collection agencies. As a precursor to the regional

meetings, the Secretary held a meeting in Washington, DC, in August

1992, to invite comments from interested parties as to the key issues

that should be addressed at the regional meetings. At the four regional

meetings, the Secretary provided participants with a list of issues,

based upon those identified in the meeting in August 1992 that needed

to be addressed in these proposed regulations. Regional meetings were

held in New York, New York; San Francisco, California; Atlanta,

Georgia; and Kansas City, Missouri during September 1992. Participants

in the meetings were invited to nominate individuals to serve as

participants in negotiated rulemaking sessions. The Secretary selected

participants for the negotiations process from individuals nominated by

groups participating in the regional meetings and attempted, to the

extent possible, to have participants reflect the diversity of those

participating in the student aid community.

Negotiated rulemaking sessions were held in April, June, and August

1993 in and around the environs of Washington, DC. Taking into account

views expressed at the regional meetings, the Department of Education

prepared draft regulations on the main issues discussed. The draft

served as the basis for the negotiated rulemaking process.

Regional Meeting Comments

In connection with these regulations, one issue was identified

during the August meeting for discussion at the regional meetings: The

requirement under section 487(c)(1)(C)(i) of the HEA for an audit of a

third-party servicer's administration of an institution's, lender's, or

guaranty agency's Title IV, HEA program. During the regional meetings,

participants were asked for their recommendations on formulating the

compliance standards against which a third-party servicer would be

measured in these proposed regulations. Recommendations from the

regional meetings varied.

Participants involved in the New York meeting suggested that the

compliance standards for third-party servicers contracting with

institutions should parallel institutional compliance standards.

Participants in San Francisco recommended that compliance standards

for third-party servicers should be developed by an independent

accounting firm but that the Department of Education should specify

servicer activities that would need to be included in the annual

compliance audit report. Participants at this meeting further suggested

separate standards for different types of third-party servicers.

Participants meeting in Atlanta suggested that compliance audits of

third-party servicers be limited to the area of their specific

function; for example, with respect to loan servicers, the default rate

of Title IV, HEA program loans should be an indicator of compliance

with Title IV, HEA program requirements. Participants also recommended

that a third-party servicer, and not the institution with which the

servicer contracts, should be cited for any violation of an audit

standard by that servicer. One participant recommended that the

standards developed by the Association of Independent Certified Public

Accountants should be used in the Department of Education's audit

guide.

Participants attending the Kansas City regional meeting suggested

that in devising audit standards for third-party servicers, the

Secretary first should review the audit check list currently in use by

the Office of Inspector General of the Department of Education for

auditing third-party servicers. Participants did not consider

consultants or software providers used by an institution to be included

in the definition of third-party servicer. Participants suggested that

the Department of Education devise a process for grading and validating

software.

Regulatory Changes

The Secretary submitted a draft of the proposed regulatory language

governing third-party servicers along with the issue described above

for discussion at the negotiated rulemaking sessions. Consensus was

reached on all major issues except where noted below.

The following summarizes the major changes in this notice of

proposed rulemaking (NPRM):

Part 668--Student Assistance General Provisions

Section 668.1 Scope. Part 668 governs the administration of the

Title IV, HEA programs by an institution and provides for various

enforcement measures against institutions for any violations of program

requirements by the institution or its agents. A third-party servicer,

as an agent of an institution, must currently apply the requirements of

part 668 to administer properly the Title IV, HEA programs on behalf of

an institution. The Secretary proposes to specify that the requirements

of the Student Assistance General Provisions regulations would be

applied to a third-party servicer (as proposed to be defined in

Sec. 668.2) to the extent that the servicer administers any aspect of

an institution's participation in a Title IV, HEA program. This

proposal would enable the Secretary, for the first time, to directly

oversee the conduct of third-party servicers. The Secretary also

proposes to make clear that although the Secretary would hold a third-

party servicer responsible for compliance with applicable regulations,

an institution that contracts with the servicer always remains

responsible for the servicer's compliance. This clarification merely

restates the Department of Education's long-standing policy and

requirements with respect to institutional responsibility.

Section 668.2 General definitions. These proposed regulations

would incorporate the statutory definition of third-party servicer in

section 481(f) of the HEA. Under that definition (as amended by the

Higher Education Technical Amendments of 1993 (Pub. L. 103-208),

enacted on December 20, 1993), a third-party servicer is an

``individual, or any State, or private, profit or nonprofit

organization'' that contracts with an eligible institution to

administer any aspect of the institution's participation in a Title IV,

HEA program. The statutory definition includes additional elements

applicable to a third-party servicer's administration of the FFEL

programs. These aspects of the definition are addressed in a subsequent

discussion on 34 CFR part 682.

The Secretary also proposes to include as part of the definition of

third-party servicer examples of services which a third-party servicer

could provide to an institution that the Secretary considers to

constitute the administration of the institution's participation in a

Title IV, HEA program. The Secretary believes that examples are

necessary to alert those individuals and organizations that contract

with an eligible institution of the specific activities that would be

subject to the requirements proposed in these regulations.

The examples that the Secretary proposes to include in the

definition of third-party servicer are primarily examples that show an

obvious relationship to the administration of the Title IV, HEA

programs. The Secretary proposes these examples to specifically detail

which activities unequivocally constitute the administration of an

institution's participation in the Title IV, HEA programs. While these

examples are not all-inclusive, they do provide a baseline to judge

other activities that could be deemed an aspect of the administration

of an institution's participation in the Title IV, HEA programs.

The Secretary also proposes to include another set of examples that

the Secretary believes do not constitute the administration of an

institution's participation in the Title IV, HEA programs. For example,

the Secretary does not consider the activity of publishing ability-to-

benefit (ATB) tests to be a third-party servicer activity because

publishers of ATB tests do not contract with institutions and under the

statute would not fall within the definition of a third-party servicer.

As another example, the Secretary does not consider performing

activities as a Multiple Data Entry Processor (MDE) to be included in

the scope of third-party servicer activities. While an MDE could be

considered to administer certain aspects of an institution's

participation in the Title IV, HEA programs, an MDE is bound by other

Department of Education requirements. Therefore, the Secretary does not

believe it necessary to separately regulate MDE activities as part of

these proposed regulations.

In general, the Secretary also proposes to exclude auditing

activities from the scope of these regulations. Entities performing

audits are required to be impartial and independent entities with no

vested interest in the Title IV, HEA programs. Further, while auditors

provide services needed to comply with Title IV, HEA requirements,

their services are not directly connected to the day-to-day

administration of Title IV, HEA assistance. The Secretary, therefore,

believes that auditing activities should not be included in the scope

of these regulations.

Other proposed examples classified as being outside the scope of

these regulatory requirements simply reinforce the Secretary's belief

that certain activities performed by a third-party servicer that do not

substantially affect the delivery of Title IV, HEA program aid do not

constitute the administration of an institution's participation in the

Title IV, HEA programs, (for example, contracting to warehouse

records).

As a result of deliberations during the negotiated rulemaking

sessions, Federal and non-Federal negotiators concluded that it was not

necessary to include or exclude computer services or software providers

from the proposed definition of third-party servicer or the examples

provided. The negotiators concluded that computer software and computer

services are simply technological means to assist in carrying out

specific administrative functions. Accordingly, the Secretary invites

public comment on whether an individual, State, or organization

providing computer software and services represented to satisfy Title

IV, HEA program requirements should specifically be included in what

the Secretary considers to constitute a third-party servicer's

administration of an eligible institution's participation in a Title

IV, HEA program.

These proposed regulations would also make clear that an

individual, State, or organization that engages in an excluded function

is still considered to be a third-party servicer with respect to any

other function that constitutes the administration of a Title IV, HEA

program performed under a contract with an institution.

The Secretary further proposes to remove the terms designated

department official, initiating official, and show-cause official from

subpart G of this part and place them in Sec. 668.2, because this

section contains the general definitions applicable to all of part 668

and to all of the Title IV, HEA programs.

Section 668.11 Scope. The Secretary proposes that a third-party

servicer's violation of an applicable provision of Subpart B of the

Student Assistance General Provisions regulations may subject the

servicer to a proceeding under subpart G. This change implements the

statutory authority under section 487(c)(1) of the HEA to provide for

the accountability of a third-party servicer's administration of any

aspect of an institution's participation in the Title IV, HEA programs.

Subpart G governs emergency actions or fines against an institution and

the limitation, suspension, or termination of the institution's

participation in a Title IV, HEA program. The Secretary proposes to add

references to a third-party servicer in subpart G so as to provide for

emergency actions and fines against a third-party servicer or the

limitation, suspension, or termination of the servicer's eligibility to

contract with an institution to administer any aspect of the

institution's participation in a Title IV, HEA program (see the

discussion beginning with Sec. 668.81).

The Secretary also proposes to provide that if a third-party

servicer violates an applicable provision of this subpart, the

Secretary may also initiate an emergency action, a fine proceeding, or

a limitation, suspension, or termination action against any institution

under whose contract the servicer violated that provision. Because an

institution has agreed to comply with all applicable Title IV, HEA

requirements in its agreement with the Secretary, and because the

institution must demonstrate under Sec. 668.12 the capability to

administer the Title IV, HEA programs, the Secretary emphasizes that

the institution is always responsible for the actions of any of its

employees, officers, or agents.

Section 668.12 Institutional participation agreement. The

Secretary proposes to require an institution to agree, in its

participation agreement, to be liable for all misused Title IV, HEA

program funds, including those received on the institution's behalf by

a third-party servicer, and to be liable for refunds, including those

that a third-party servicer was required to pay on the institution's

behalf. This provision emphasizes that an institution is always liable

for the actions of its employees, officers, and agents regarding its

participation in a Title IV, HEA program.

The Secretary also proposes to amend this section by adding new

paragraph (b)(2)(vi) to reflect a new statutory directive under the HEA

governing the past performance of individuals, agencies, or

organizations affiliated with an institution. Under section 487(a)(16)

of the HEA, an institution may not knowingly contract with or employ

any individual, agency, or organization that has been or whose officers

or employees have been convicted of, or pled nolo contendere or guilty

to, a crime involving the acquisition, use, or expenditure of Title IV,

HEA program funds or been judicially determined to have committed fraud

involving Title IV, HEA program funds. An institution may not contract

with another institution or a third-party servicer that has been

terminated under section 432 of the HEA involving the acquisition, use,

or expenditure of funds under the Title IV, HEA programs, or that has

been judicially determined to have committed fraud involving Title IV,

HEA program funds.

The Secretary's proposed rules, in accordance with the consensus

reached at the negotiated rulemaking sessions, would apply the

prohibitions not only to instances of judicial determinations of

criminal or fraudulent activity, but also to administrative

determination of fraud and judicial or administrative determinations of

any other material violations of law. Administrative proceedings are

more frequent and often occur well in advance of related court

proceedings. The Secretary believes that administrative proceedings

afford sufficient due process, including notice, hearing, and review,

to be relied upon for excluding individuals, agencies, or organizations

under these provisions from applicable employment or contracting, if

such a determination of culpability has been made. The Secretary

believes that the reference to material violations of law is necessary,

as Title IV, HEA funds are also endangered by the employment of those

determined to have violated laws governing the handling of those funds,

even if those violations do not rise to the level of fraud. For

example, an institution should not employ a person or organization that

has failed to pay refunds required under law.

Finally, these proposed regulations would include determinations of

misuse of all Federal (as opposed to simply Title IV, HEA programs)

funds and State or local government funds. For example, a person

determined to have committed fraud in the acquisition of State

educational grant funds could foreshadow a potential danger to the

Title IV, HEA programs if that person were employed by an institution.

These additional requirements are needed to establish appropriate

safeguards to protect the Title IV, HEA programs if serious questions

are raised about the honesty and lawful conduct of an individual,

agency, or organization that contracts with or is employed by an

institution.

Section 668.13 Factors of financial responsibility. Section 498(e)

of the HEA introduces the concept of ``substantial control'' over an

institution essentially by adopting the current regulatory concept of

``the ability to affect substantially the actions of'' an institution.

Accordingly, the Secretary substitutes the new phrase where applicable

in these proposed regulations. Further, the Secretary proposes to

establish that an institution is not considered financially

responsible--a condition of participation in the Title IV, HEA

programs--if a person with substantial control over the institution--

(1) Has or had substantial control, either alone or in combination

with members of his or her family, over another institution or a third-

party servicer that owes liabilities for violations of Title IV, HEA

program requirements, if those liabilities are not being properly

repaid;

(2) Has family members who, alone or in combination with one

another, exercise or exercised substantial control over the other

institution or servicer; or

(3) Owes liabilities, or members of his or her family owe

liabilities, for violations committed by the other institution or

servicer, and the liabilities are not being properly repaid.

The institution could continue to be considered financially

responsible if--

(1) The person repays a proportion of the liabilities equivalent to

the amount of control held over the other institution or servicer;

(2) The institution can establish that the person does not, in

fact, have substantial control over the institution; or

(3) The institution can establish that neither the person nor any

of his or her family members in fact has or had substantial control

over the other institution or servicer.

The definition of a family member (as currently defined in

Sec. 668.13(j)) refers to a parent, sibling, spouse, or child; spouse's

parent or sibling; or sibling's or child's spouse.

Finally, the Secretary would apply the concepts of ``substantial

control'' and ``ownership interest'' (as currently defined in section

498(e) of the HEA and Sec. 668.13) to third-party servicers.

These provisions would expand the factors of financial

responsibility of an institution to take into consideration substantial

control over both other existing institutions (as opposed to only

defunct institutions) and third-party servicers. Section 498(e) of the

HEA clearly contemplates this expansion. Furthermore, these

requirements are needed for the same reasons that similar requirements

recently were adopted for persons with substantial control over defunct

institutions. A person might be responsible for incurring liabilities

for Title IV, HEA program violations because of his or her substantial

control over third-party servicers or other institutions. The person

could, nevertheless, have the same level of control over a

participating institution while avoiding responsibility for repayment

of those liabilities. These requirements are intended to prevent those

persons from continuing to participate either directly or indirectly in

the Title IV, HEA programs without assuming responsibility for their

prior actions.

The Secretary also proposes technical changes to this section to

remove as factors of financial responsibility the consideration of

matters that would instead be included in Sec. 668.12 as conditions for

participation in the Title IV, HEA programs, for the reasons given in

the discussion of that section.

Section 668.23 Audits, records, and examination. The Secretary

proposes to specify that in addition to current requirements, an

institution would be required to cooperate with a guaranty agency in

whose program the institution participates and the State postsecondary

review entity designated under subpart 1 of part H of Title IV of the

HEA, in the conduct of audits, investigations, and program reviews.

These requirements would clarify existing responsibilities to be

accountable to authorized persons or organizations for the

institution's activities with respect to the sound management of the

Title IV, HEA programs. The Secretary further proposes to apply these

requirements to a third-party servicer that contracts with an

institution to administer any aspect of that institution's

participation in a Title IV, HEA program. This change would merely

clarify existing responsibilities of a third-party servicer, as an

agent of an institution, to be accountable and provide access to

authorized persons for the servicer's activities on behalf of the

institution's participation in a Title IV, HEA program.

The Secretary proposes to add a requirement that a third-party

servicer that administers funds or determines student eligibility under

contract with an institution would be required to have prepared, at

least annually, a compliance audit of all aspects of the servicer's

administration of the participation in the Title IV, HEA programs of

each institution with which the servicer contracts. (This requirement

would be satisfied by an audit report submitted in accordance with the

Single Audit Act or Office of Management and Budget Circular A-133.)

This requirement is necessitated by section 487(c)(1)(C) of the HEA.

The Secretary, however, believes that the contractual obligations

of some third-party servicers do not necessitate audits of the

servicers' activities. Accordingly, the Secretary proposes to require

annual audits to be performed only by those servicers that administer

funds or determine student eligibility on behalf of institutions. The

consequences of the activities of those servicers to the integrity of

the Title IV, HEA programs justify stricter accountability to the

Secretary.

In addition, the Secretary proposes certain additional exceptions

to the annual audit requirement in the discussion that follows. A

third-party servicer that is required to have an audit performed would

be excused from the annual audit requirement if that servicer contracts

with only one participating institution and if that servicer's

administration of a Title IV, HEA program would still be covered fully

in that institution's compliance audit. (In proposed regulations to be

published shortly after these, the Secretary intends to propose to

excuse certain institutions from having an annual audit performed. If

an institution were to be excused from an audit requirement, the

activities of that institution's third-party servicer would not be

fully covered, and thus the servicer would be required to have an audit

performed to meet the requirements of this section). This provision

would not harm the integrity of the Title IV, HEA programs as the

servicer's activities still would be covered fully by the submission of

an institution's compliance audit.

A third-party servicer that is required to have an audit performed

and that contracts with more than one participating institution could

have performed, to meet the requirements of this section, a single

comprehensive compliance audit that covers all of the servicer's

activities for all of the institutions that the servicer contracts with

for Title IV, HEA program purposes, if the audit is conducted in such a

way as to satisfy each individual audit requirement and if the audit

covers all aspects of the servicer's administration of the

participation in the Title IV, HEA programs of all institutions with

which the servicer contracts. The Secretary believes that, by allowing

third-party servicers to have one inclusive audit performed, instead of

many individual audits, the burden associated with these regulations

would be reduced (regulatory burden reduction is an objective under

Executive Order (E.O.) 12866). Furthermore, the Secretary does not

believe that this provision would in any way affect the soundness of

the information required by these regulations.

A third-party servicer would be required to have an audit performed

at least once every two years if the servicer administers less than

$1,000,000 under the Title IV, HEA programs for the period covered by

the audit, or if the servicer's most recently submitted audit report

did not contain any material deficiencies and was submitted in a timely

fashion. Also, a third-party servicer would not be required to have an

audit performed for any year in which the servicer administers less

than $250,000 under the Title IV, HEA programs.

The Secretary is proposing these Title IV, HEA program fund

thresholds, for purposes of exceptions to the audit requirements of

this section, on the assumption that a large amount of Title IV, HEA

program funds are not at risk in the case of a third-party servicer

that administers less than $250,000 during the audit period. Similarly,

the Secretary believes that a third-party servicer administering less

than $1,000,000 in the Title IV, HEA programs during the audit period

or whose most recently submitted audit report revealed no abnormal

practices or material discrepancies in the servicer's administration of

those funds, provided that the audit report was submitted in a timely

fashion, would not be likely to endanger those funds. By proposing

these exceptions to the audit requirements of this section, and thus

limiting the scope of these provisions, the Secretary believes that the

Department of Education will be able to concentrate on those third-

party servicers that pose the greatest financial risk to the Title IV,

HEA programs; these exceptions also reduce the administrative burden on

those qualifying for the exemptions. The threshold amounts were

extrapolated from similar exemptions to audit submission requirements

for institutions under the Single Audit Act ($100,000 and $25,000) and

increased by a factor of ten in order to cover third-party servicer

activities because these entities generally contract with multiple

clients and thus would administer greater amounts of Title IV, HEA

program funds than any single institution.

These provisions are intended to parallel similar audit

requirements for institutions (in proposed regulations to be published

shortly after these). The intent is to minimize the burden associated

with these regulations, both to the servicing industry and to the

Federal Government, as called for under E.O. 12866. The Secretary

believes that these exceptions would not harm the integrity of the

audit oversight that Congress intended under section 487(c)(1)) of the

HEA. Under that section and these regulations, the Secretary retains

the authority to require any third-party servicer to have an audit

performed on an annual basis if the Secretary believes it is necessary.

This section would be amended to provide that the servicer's first

audit would cover the servicer's first full fiscal year after the

effective date of these regulations and any period on or after the

effective date of these regulations up to the beginning of the

servicer's first full fiscal year. The Secretary believes that initial

audits will be more useful and effective if they encompass an entire

fiscal year. The Secretary also believes that allowing servicers

additional time to prepare for the implementation of these regulations

would enable servicers to comply more fully with these regulations as

well as defray the costs associated with an audit of a partial fiscal

year. Subsequent audits would, as required by statute, encompass the

entire period since the servicer's previous audit.

A third-party servicer that is required to have an audit performed

would be required to submit that audit to the Department of Education's

Inspector General by the deadlines established in the audit guide

developed by the Department's Office of Inspector General. The

Secretary also proposes to apply the statutory requirements of section

487(c) of the HEA to third-party servicers such that the results of

these audits would be made available to the appropriate authorities, as

detailed in the discussion at the beginning of this section. (The

Secretary intends to propose similar requirements for institutions

required to have an audit performed in proposed regulations to be

published shortly after these).

Section 668.24 Audit exceptions and repayments. The Secretary

proposes to extend to a third-party servicer the provisions governing

audit exceptions and determinations of audit liabilities that currently

apply to institutions. These modifications would simply reflect the

Secretary's current practice under this section as applied to a third-

party servicer. In addition, an institution or a third-party servicer

would have an opportunity to demonstrate within 45 days (35 days is

mandated under the current regulations) of the Secretary's notification

that the expenditure or compliance was proper. The Secretary is

proposing 45 days to make the response period consistent with other

reporting requirements in this part.

In addition, this section would be amended to specify additional

steps that the Secretary may take to insure the payment of any

liabilities that are owed. Under this section, if an institution or

third-party servicer owes funds, the Secretary may determine that an

administrative offset (as provided for under 34 CFR 30.28) is an

appropriate alternative to collect those funds.

In the case of an institution or third-party servicer that provides

surety or a guarantee for the benefit of the Secretary, such as a bond

or letter of credit, the Secretary may determine it is necessary to

collect from that surety or guarantee before the procedures under

subpart H of this part are completed, if circumstances warrant.

The Secretary would collect a surety or guarantee before all

available appeal procedures are completed--

(1) Where the need to provide relief to students or borrowers

affected by the institution's or third-party servicer's actions, as

applicable, that led to the assessment of liability, is more important

than deferring collection activities until after the completion of

appeal proceedings (for example, when unpaid refunds to the Title IV,

HEA programs are identified, the Secretary may collect in advance of a

final determination or exhaustion of appeal procedures, as the harm to

students outweighs deferring collection); or

(2) Where the conditions under which a surety or guarantee are held

do not provide adequate assurances that the surety or guarantee will be

available for collection through the completion of available appeal

proceedings.

These modifications would provide clarification in the regulations

of the Secretary's existing practice and authority to collect from

sureties or guarantees in accordance with their terms, prior to final

determinations of liabilities or exhaustion of appeal procedures.

The Secretary also proposes to make clear that an institution is

responsible for repayment of any funds owed by its servicer until those

funds are repaid by the servicer. The Secretary considers this

provision necessary because an institution is always responsible for

the actions of its agents.

The Secretary proposes that if a determination is made to assess a

liability against a third-party servicer, the servicer would be

required to notify each institution under whose contract the servicer

was assessed a liability of the Secretary's determination. The servicer

would also be required to notify every institution that contracts with

the servicer for the same service that the Secretary determined a

liability is owed.

Final consensus on this particular language was not reached as

negotiators believed that this provision essentially requires the

notification of all institutions with which a servicer contracts.

Negotiators objected to a notice being provided to institutions that a

servicer contracts with that would not be directly affected by a

determination from the Secretary to assess liability. A number of

negotiators opposed this language on the ground that such a blanket

notification unnecessarily damages a servicer's reputation among

unaffected institutions. However, the Secretary believes that an

institution that contracts with a third-party servicer should be

informed of determinations by the Department of Education that the

institution's servicer is improperly administering the Title IV, HEA

programs, especially given the potential liability exposure to the

institution. These notification requirements would arise only if the

Secretary determines that a third-party servicer owes a liability based

on an audit finding, after providing the institution or third-party

servicer an opportunity to respond to an audit report response. By

limiting the requirement for notice provided by a third-party servicer

to institutions receiving the same service for which a liability was

assessed, the Secretary believes that he has responded to any

legitimate concerns raised by the negotiators.

Section 668.25 Contracts between an institution and a third-party

servicer. The Secretary proposes to redesignate Sec. 668.25, governing

loss of institutional eligibility, as Sec. 668.26 and to add a new

Sec. 668.25 that would establish minimum requirements for contracts

between an institution and a third-party servicer. Proposed Sec. 668.25

would allow an institution to contract with a servicer to administer

aspects of the institution's participation in a Title IV, HEA program

only to the extent that the servicer's eligibility to contract with

that institution has not been limited, suspended, or terminated under

the proceedings in Subpart G (as proposed to be amended). In addition,

under these proposed regulations, a third-party servicer is considered

eligible to contract with an institution to administer aspects of the

institution's participation in a Title IV, HEA program to the extent

that the servicer is not found to exhibit indicators of questionable

past performance.

Indicators of questionable past performance would be--

(1) A limitation, suspension, or termination action by the

Secretary against the servicer within the preceding five years;

(2) An audit finding during the servicer's two most recent audits

amounting to at least five percent of funds received or administered by

the servicer under the Title IV, HEA programs; and

(3) A citation within the preceding five years for the servicer's

failure to submit a required audit report within an acceptable amount

of time.

A third-party servicer that shows these indicators of questionable

past performance with regard to the Title IV, HEA programs could not,

under paragraph (d) of this section, contract with an institution

unless the persons or entities with substantial control over the

servicer agree to be responsible for any potential liability arising

from the servicer's administration of the Title IV, HEA programs. In

the case of a third-party servicer that has been subjected to a

termination action, the servicer could not contract with an institution

unless either the servicer or persons or entities with substantial

control over the servicer (or both) provide financial guarantees

(specified by the Secretary) to the Secretary for potential liabilities

arising from the administration of the Title IV, HEA programs. These

provisions are necessary to hold persons who have substantial control

over a third-party servicer accountable for their past performance in

the administration of the Title IV, HEA programs.

Any contract between an institution and a third-party servicer

would have to require the servicer to agree to comply with all

applicable Title IV, HEA program requirements, including using any

Title IV, HEA program funds that the servicer administers and any

earnings on those funds solely for Title IV, HEA program purposes. The

servicer would have to agree to refer suspected instances of fraud and

criminal activity to the Department of Education's Inspector General.

These requirements would parallel those currently required of

institutions in establishing an institution's administrative capability

but add that the servicer would also have to refer suspected instances

of fraud and criminal activity committed by the institution. The

contract would have to require the servicer to agree to be liable to

the Secretary, jointly and severally with the institution, for any

violation by the servicer of any Title IV, HEA program requirement.

With regard to third-party servicer liability, a number of

negotiators opposed the Secretary's proposed language, submitted to

negotiators at negotiated rulemaking, requiring a third-party servicer

to share liability with an institution for an infraction by the

servicer of any Title IV, HEA program requirement. The negotiators

offered three basic reasons for their opposition.

First, the negotiators stated that any imposition of liability

would improperly interfere with the private contract between the

servicer and the institution. The parties, in the view of the

negotiators, should be free to decide how and if liability should be

divided without Federal regulatory prescription.

The Secretary disagrees with this rationale. To ensure that the

Title IV, HEA programs are properly administered and Federal funds are

safeguarded, the Secretary has always required an institution to

demonstrate that it is administratively capable and financially

responsible. More and more institutions, however, are employing third-

party servicers to administer their programs, thereby delegating

responsibility to entities that the Secretary has not reviewed for

administrative capability or financial responsibility. Because the

Secretary does not directly approve or regulate the qualifications of

these servicers, the Secretary believes that it is reasonable to

require these servicers to stand behind their work and to be

accountable to Federal taxpayers for any losses to Federal funds

through the servicer's administration of the Title IV, HEA programs.

Moreover, if the issue of liability is left to the discretion of the

contracting parties, it is more than likely that some servicers will

assume no responsibility for their actions. In proposing direct third-

party servicer accountability to the Department of Education, the

Secretary believes that institutions employing servicers to administer

aspects of their participation in the Title IV, HEA programs would

benefit from increased servicer integrity in fulfilling contractual

obligations.

Second, the negotiators argued that it would be unreasonable to

require a third-party servicer to be prepared to assume liability

potentially far in excess of the fees earned by the servicer from the

institution. Under this argument, the consequence of requiring third-

party servicers to be liable for their actions would be to increase

servicing fees charged to institutions and could make it economically

impossible, in many cases, for institutions to contract with third

parties for services related to the Title IV, HEA programs. The

negotiators indicated that in some contracts, institutions specifically

give up the right to hold a third-party servicer responsible for the

consequences of the servicer's actions in exchange for a lower fee.

The Secretary does not believe that assumption of liability by

servicers will make servicers unavailable to institutions. The

Secretary believes that most servicers are, or should be, confident

enough in the quality of their work to stand behind it financially. To

the extent that a third-party servicer is unwilling to assume

responsibility, it would seem to indicate that the servicer has no

incentive to ensure compliance with the Title IV, HEA program

requirements.

Third, the negotiators who objected to these proposed provisions

claimed that the Department of Education does not impose similar

constraints on its own contractors to assume contingent liability for

the consequences of their actions.

The Secretary disagrees with this rationale. Those that contract

with the Department of Education have different and more rigorous

requirements imposed on them, both in their selection by the Department

and in contracts into which the Department enters to ensure the proper

use of Federal funds. The Secretary is able to select the Department of

Education's contractors and retains the ability directly to enforce

contractual provisions.

In an effort to respond to these objections during the negotiated

rulemaking sessions, the Secretary suggested a compromise that would

have limited joint and several liability of a third-party servicer for

violations by the servicer of Title IV, HEA program requirements, in

cases where the servicer was not an affiliate of the institution with

which the servicer contracts. In those cases, joint and several

liability would be capped at the fees and compensation received by the

servicer from the institution during the period for which the liability

is assessed. The Secretary suggested that, for the purposes of this

section, an affiliate could be construed as a third-party servicer

that--

(1) Is a parent or subsidiary corporation of the institution;

(2) Shares a person who exercises substantial control over the

institution and servicer as defined in Sec. 668.13; or

(3) Shares a common owner, partner, or officer with the

institution.

The Secretary suggested this alternate language to decrease the

financial risk for servicers that are not related parties to the

institutions with which they contract. However, the Secretary believes

that servicers that are linked to institutions should be fully

accountable to prevent shielding of liability by shifting services to

an affiliate. The Secretary invited reaction from the non-Federal

negotiators on whether this compromise would sufficiently guard the

integrity of the Title IV, HEA programs by providing the Secretary the

means to ensure that a liability is repaid and the violation

contributing to that liability is redressed and alleviate any

legitimate objections raised by the negotiators.

The other negotiators did not accept the Secretary's offered

compromise. Some negotiators would not agree to assumption of any

liability by a third-party servicer. Thus, there was no consensus on

this matter. Because consensus was not reached on either proposal, the

Secretary is under no obligation to modify the position originally

taken at the start of the negotiated rulemaking sessions. The Secretary

therefore proposes regulations consistent with the position taken at

the start of negotiated rulemaking because the Secretary believes that

this proposal will best provide the greatest protection for Federal tax

dollars in the form of Title IV, HEA program funds.

However, because the issue of joint and several liability was

debated throughout the negotiated rulemaking sessions without resulting

in consensus, the Secretary invites specific comment on this issue, and

in particular on the Secretary's compromise rejected by the non-Federal

negotiators, as explained previously.

Other contractual requirements would include, in the case of a

third-party servicer disbursing or delivering funds under the Title IV,

HEA programs or other funds to students, a requirement that the

servicer confirm a student's eligibility before disbursing or

delivering those funds to the student. A contract with that servicer

also would require the servicer to agree to calculate and pay refunds

and repayments in accordance with applicable Title IV, HEA program

regulations.

Any contract with a third-party servicer would have to provide for

the return to the institution of all applicable records and funds held

by the servicer if either party terminates the contract, if the

servicer stops providing services for the administration of a Title IV,

HEA program, or if the servicer goes out of business or files a

petition under the Bankruptcy Code. The servicer would have to return

not only Title IV, HEA program funds, but also institutional or other

funds held by the servicer for the purposes of the Title IV, HEA

program for which the servicer no longer provides services.

Consistent with the time frames for other reporting requirements in

34 CFR part 600 that could affect an institution's eligibility or

participation, this section also would require an institution to notify

the Secretary, within 10 days, each time the institution enters into a

new contract with a third-party servicer or significantly modifies an

existing contract or if such a contract is terminated. The Secretary

intends this provision to cover substantive modifications to existing

contracts, such as the inclusion of additional responsibilities or any

significant increase in the volume of work performed, and not to cover

minor modifications such as a routine adjustment of the compensation

owed to a third-party servicer due to inflation. This section also

would require the institution to notify the Secretary, within 10 days,

if a third-party servicer stops providing services for the

administration of a Title IV, HEA program, goes out of business, or

files a petition under the Bankruptcy Code. Any notification from an

institution would have to include the name and address of the servicer.

Upon the request of the Secretary, an institution that has a contract

with a third-party servicer would have to provide information relevant

to the contract and to the servicer's responsibilities for

administering Title IV, HEA programs as well as a copy of the contract.

These changes are necessary for proper monitoring of and

accountability for Title IV, HEA program funds. The requirement for a

third-party servicer to agree in a contract to observe all applicable

Title IV, HEA program requirements, special arrangements, agreements,

and limitations is necessary to avoid situations where the servicer

improperly argues that it cannot comply with these actions due to

provisions in its contract with an institution.

The provisions governing the circumstances under which a third-

party servicer must return records and funds to an institution are

necessary to protect the interests of participating institutions and

students in the event that a third-party servicer is no longer able to

provide the services promised under a contract. In addition, the

notification provisions would help keep the Secretary informed about

those third-party servicers authorized to administer the Title IV, HEA

programs on behalf of an institution, would assist the Secretary in

providing appropriate materials and funds only to authorized third-

party servicers, and would help the Secretary to obtain timely access

to institutional records.

Section 668.81 Scope and special definitions. The Secretary

proposes to amend this section to provide that the Secretary may

initiate an emergency action against an institution or third-party

servicer, fine an institution or servicer or limit, suspend, or

terminate the institution's participation in a Title IV, HEA program or

the servicer's eligibility to contract with an institution to

administer any aspect of an institution's participation in the Title

IV, HEA programs, if the institution's servicer, acting under contract

with the institution, violates any statutory provision of or applicable

to Title IV of the HEA, any regulatory provision prescribed under that

statutory authority, or any applicable special arrangement, agreement,

or limitation prescribed under the authority of Title IV of the HEA.

This change also makes clear that an institution is always responsible

for the actions of its servicers regarding its participation in the

Title IV, HEA programs and remains subject to possible administrative

action.

Section 668.82 Standard of conduct. The Secretary proposes to

amend paragraph (a) of this section to add that a third-party servicer

is also a fiduciary of the Department of Education. The Secretary also

would amend paragraph (a) to provide that an institution or its third-

party servicers would be required at all times to act with the

competency and integrity sufficient to qualify the institution or

servicer as a fiduciary. This change would clarify and emphasize the

requirement that the fiduciary standard always applies and is not to be

construed narrowly. The Secretary wishes to point out that this

standard is not simply an additional requirement but, rather, it is a

condition of initial and continued participation in or servicing of the

Title IV, HEA programs. An institution or servicer cannot selectively

avoid fiduciary responsibility.

This section would also be amended to specify that the Secretary

would have the authority to initiate proceedings against a third-party

servicer under this subpart if the servicer violates its fiduciary

duty. The Secretary proposes to specify that the Secretary would have

the authority to initiate a proceeding against an institution under

this subpart if the institution's third-party servicer, acting under

contract with the institution, violates the servicer's fiduciary duty.

The Secretary wishes to emphasize that an institution is always

responsible for the actions of its third-party servicers. The Secretary

also proposes to make a technical amendment to clarify the meaning of

paragraph (c) of this section. The Secretary's long-standing

interpretation of these regulations is that a violation of an

institution's fiduciary duty is grounds for termination, limitation,

suspension, and fine proceedings-- individually or in combination. As a

result of the enactment of a statute authorizing the imposition of

emergency actions, the Secretary also proposes to add emergency action

to this list of potential consequences resulting from an institution's

violation of the institution's fiduciary duty. An emergency action also

would be applicable against a third-party servicer that violates its

fiduciary duty.

The Secretary proposes to specify that an institution or third-

party servicer violates its fiduciary duty if the servicer, an officer

or employee of the servicer, or any person with substantial control

over the servicer is guilty of or has been judicially determined to

have committed a crime involving Federal funds. These provisions also

would apply to a person, agency, or organization, or an officer or

employee of an agency or organization with which the servicer

contracts. A violation of fiduciary duty for these reasons would also

constitute grounds for the termination of the participation of an

institution under whose contract the servicer committed the violation.

The Secretary proposes to expand the breadth of paragraph (d) of this

section to parallel similar provisions proposed to be included in

Sec. 668.12, previously discussed, except that, in this case, these

provisions would prohibit a third-party servicer (as opposed to the

provisions of Sec. 668.12 which prohibit institutions) from employing

or contracting with persons or organizations that have questionable

past performance with respect to government funds. Paragraph (d) would

be similarly amended to include misuse of State and local government

funds and administrative determinations of fraud or other material

violations of law.

Finally, the Secretary proposes to amend paragraph (d) of this

section. An institution or servicer, to remain qualified as a

fiduciary, would have to meet the following requirement. If the

institution or servicer becomes aware of a criminal conviction, or an

administrative or judicial determination of fraud or other violation of

law, by a person involved in the servicer's administration of an

institution's participation in a Title IV, HEA program or a person with

substantial control over the servicer, with respect to Federal, State,

or local government funds, the institution or servicer would be

required to protect the Title IV, HEA programs, including removing that

person from Title IV, HEA program involvement or from exercising

substantial control over the institution or servicer, as applicable.

In addition, if an institution or a third-party servicer becomes

aware that a violation of, or failure to carry out, applicable statutes

and regulations by the servicer's principals or affiliates (as those

terms are defined in 34 CFR part 85), the institution or servicer is

required to act to protect the Title IV, HEA programs, the

beneficiaries of those programs, and the Federal Government from the

risks occasioned by those events. These risks may include, but are not

limited to, financial risks and risk to the reputation of the Title IV,

HEA programs. An example of an action that an institution or servicer

must take to protect the Title IV, HEA programs, their beneficiaries,

and the Federal Government is the removal of all Title IV, HEA program

administration duties from the assigned responsibilities of an

individual. A violation of these proposed provisions would constitute

grounds for the termination of the participation of an institution

under whose contract the servicer committed the violation and the

eligibility of the servicer to administer any aspect of an

institution's administration of the Title IV, HEA programs. These

amendments parallel similar changes made to the institutional

participation agreement requirements under Sec. 668.12.

The Secretary also proposes to amend this section to explain how a

basis for debarment and suspension relates to the standard of fiduciary

responsibility. Specifically, the Secretary proposes to redesignate

current paragraph (e) of this section as paragraph (f) and to add a new

paragraph (e). The new paragraph would specify that if an institution

or servicer becomes aware that cause for suspension or debarment of any

of the institution's or servicer's principals or affiliates (as those

terms are defined in 34 CFR part 85) may exist, the institution or

servicer is required to act to protect the Title IV, HEA programs in

the same manner discussed in the previous paragraph, pending the

outcome of a debarment or suspension action against that individual, or

of proceedings that could give rise to suspension or debarment action

against that individual.

A violation of these provisions by a third-party servicer would

constitute grounds for the termination of the participation of an

institution under whose contract the servicer committed the violation,

if the institution knew or should have known of the causes for

suspension or debarment. The violation, of course, would also

constitute grounds for the termination of the eligibility of the

servicer to administer any aspect of the institution's administration

of the Title IV, HEA programs.

The Secretary invites comment on how to apply this requirement to

owners and persons holding critical management positions at an

institution or servicer. In the final regulations, the Secretary may

modify these proposed regulations to address specifically their

application to those persons.

These changes are needed to establish appropriate safeguards to

protect the Title IV, HEA programs when serious questions are raised

about the honesty and lawfulness of the conduct of an institution's or

servicer's owners, officers, employees, associates, or contracted help

whose duties involve the administration of or influence over the Title

IV, HEA programs.

The Secretary holds an institution to the highest standard of care

and diligence required of a fiduciary. The use of a third-party

servicer confers that same standard on the servicer. However, the

Secretary wishes to emphasize that the use of a third-party servicer

does not in any way reduce the institution's responsibility to ensure

compliance with Title IV, HEA program requirements.

The Secretary also proposes technical changes to this section to

remove provisions governing lender participation in the FFEL programs

that belong in 34 CFR part 682 and to incorporate provisions in 34 CFR

part 682 concerning the consequences of a debarment or suspension on

lender participation.

Section 668.83 Emergency action. The Secretary proposes to provide

that an emergency action may be imposed on an institution or third-

party servicer if the initiating official receives reliable information

that a third-party servicer, acting under contract with the

institution, is violating a Title IV, HEA program requirement. In an

emergency action proceeding against a servicer, the official would also

be required to notify each institution that contracts with the servicer

of the emergency action. The Secretary believes that an institution

that contracts with a third-party servicer should be kept informed of

any administrative actions taken by the Department of Education against

that servicer that might affect the administration of the institution's

participation in the Title IV, HEA programs. To the examples of

violations that may lead to an emergency action, the Secretary proposes

to add a third-party servicer's lack of administrative ability to make

appropriate refunds if students do not complete educational programs or

periods of enrollment.

Any of these violations would be grounds for emergency action

against a third-party servicer under this subpart. However, because an

institution is always responsible for the actions of the institution's

servicers, the Secretary believes that emergency action against the

institution also may be necessary to prevent the likely loss of Title

IV, HEA program funds.

The Secretary also proposes to include fraud committed by an

institution or a third-party servicer as a specific example of a

possible basis for emergency action. The Secretary proposes to provide

an additional list of specific examples of fraud to emphasize the

seriousness of these violations. Emergency actions based upon fraud are

fully appropriate under existing regulations. The examples involve

falsification of documents related to the Title IV, HEA programs,

including--

(1) Documents pertaining to a student's eligibility;

(2) Documents submitted to the Department of Education, a guaranty

agency, an independent auditor, a third-party servicer, or an

institution by a third-party servicer;

(3) Documents pertaining to an institution's legal authorization to

provide postsecondary education or to the accreditation or

preaccreditation of the institution, the institution's educational

programs, or the institution's additional campuses; and

(4) Documents pertaining to a servicer's loan collection activities

(for example, due diligence activities), including activities that are

not specifically required by the HEA or applicable program regulations.

Sections 668.84 Fine proceedings, 668.85 Suspension proceedings,

and 668.86 Limitation or termination proceedings. The Secretary

proposes to include, as a specific basis for any of these proceedings

against an institution or a third-party servicer, a substantial

misrepresentation of the institution's educational program, financial

charges, or employability of the institution's graduates by an

institution or servicer under contract with an institution, as

applicable. The Secretary believes that substantial misrepresentation

represents a clear indication of a deliberate intent to misuse Title

IV, HEA program funds by deceptively encouraging enrollment, thus

abusing the purpose of Title IV, HEA program funds, which is to provide

equal access to a quality education for recipients of these funds. The

Secretary is proposing to employ the full range of sanctions at the

Secretary's disposal against this possible misrepresentation to

preserve the integrity of the Title IV, HEA programs and to ensure the

accountability of those who administer the programs.

The Secretary proposes to amend these sections to provide for the

imposition of a fine against an institution or third-party servicer or

the limitation, suspension, or termination of the institution's

participation or the servicer's eligibility to contract with an

institution to administer any aspect of that institution's

participation in the Title IV, HEA programs if the institution's

servicer, acting under contract with the institution, violates a Title

IV, HEA program requirement. Under Secs. 668.84, 668.85 and 668.86, if

the Secretary begins a fine, suspension, limitation, or termination

proceeding against a third-party servicer, the Secretary may also begin

a fine, limitation, suspension, or termination proceeding against any

institution under whose contract a third-party commits a violation.

These technical changes are needed to conform to the changes proposed

to the scope of this subpart.

With respect to fine proceedings against third-party servicers, the

Secretary proposes to amend Sec. 668.84 to specify under the procedures

for fine proceedings that a designated department official notifies

each institution that is affected by the alleged violations identified

as the basis for the fine proceeding. To the extent possible, the

official also notifies each institution that contracts with the

servicer for the same service affected by the alleged violation. This

change would parallel the notification requirements that the Secretary

has proposed under Sec. 668.24(b). As explained in the prior discussion

regarding notification requirements under Sec. 668.24(b), there was no

consensus during negotiated rulemaking on this proposed provision. Some

negotiators opposed this requirement on the grounds previously noted.

In addition, Secs. 668.85 and 668.86 would require the official to

notify each institution that contracts with a third-party servicer

under a suspension, limitation, or termination proceeding.

Fine, limitation, suspension, and termination proceedings would all

require the official to include in the notice to a third-party servicer

the consequences of the action to the institution, including that the

Secretary may fine, limit, suspend, or terminate the institution, as

applicable. Given the potential consequences to an institution, the

Secretary deems it proper to provide notice to each institution that

could be affected of the Secretary's intent to seek a sanction against

the servicer, whether the Secretary also intends to seek a sanction

against the institution or not. Even if the Secretary does not begin a

fine, limitation, suspension, or termination proceeding against an

institution, the Secretary believes that the institution should be kept

informed of the status of any proposed sanction against the

institution's servicer. Imposition of the sanction could have an effect

on the institution's participation in a Title IV, HEA program. Further,

the Secretary believes that an institution should be informed if its

servicer's administration of a Title IV, HEA program is called into

question. That information would permit the institution to make

informed judgments about the institution's continued use of the

servicer, and take corrective action prior to the outcome of any

administrative proceeding.

Sections 668.87 Prehearing Conference and 668.88 Hearing. The

Secretary proposes to add references to third-party servicers to

conform to the proposed changes in the scope of this subpart.

Section 668.89 Authority and responsibilities of the hearing

official. The Secretary proposes to amend this section to make clear

that a hearing official is bound by all applicable statutes and

regulations. This change would codify in the regulations the existing

responsibility of the hearing official.

Section 668.90 Initial and final decisions--Appeals. This section

would be amended to add references to third-party servicers to conform

to the proposed changes in the scope of this subpart. In addition,

paragraph (a)(3) of this section would be amended to reflect changes

proposed under Secs. 668.12 and 668.82 dealing with the past

performance of individuals, agencies, or organizations that are

affiliated with an institution, including, as applicable, third-party

servicers.

The Secretary proposes to add a new restriction on a hearing

official's authority to modify a proposed sanction against an

institution or third-party servicer. If a designated department

official brings a termination action against an institution or servicer

for engaging in fraud, and a hearing official finds that the

institution or servicer has engaged in fraud, the hearing official must

uphold the termination. The examples of fraud listed in this section

are the same as those proposed for Sec. 668.83 concerning emergency

action.

The Secretary believes that if an institution or third-party

servicer engages in fraud involving a Title IV, HEA program, the

institution's participation in the program should be terminated or the

servicer's eligibility to contract with an institution to administer

any aspect of that institution's participation in the Title IV, HEA

programs, as applicable, should be terminated. The Secretary does not

believe that a lesser sanction that permits the institution or servicer

to continue to participate in the program or in the case of a third-

party servicer to be eligible to contract, is a sufficient safeguard

against the likely abuse of Title IV, HEA program funds.

The Secretary proposes to amend paragraph (c)(1) of this section so

that in a fine, limitation, or termination proceeding, the hearing

official's initial decision automatically becomes the Secretary's final

decision in 30 days (20 days is mandated under the current regulations)

after the initial decision is issued and received by both parties

unless that initial decision is questioned before the Secretary. The

Secretary is proposing these new timeframes to make them consistent

with other reporting requirements in this part. The Secretary does not

believe that a ten-day difference in an institution's or servicer's

right to appeal an initial decision would unduly affect the integrity

of the Title IV, HEA programs.

The Secretary also proposes to make technical changes in paragraph

(a)(3)(iv) of this section to correct typographical errors that

inadvertently appeared in final regulations published in the Federal

Register on July 31, 1991 (56 FR 36698).

Section 668.91 Filing of requests for hearings and appeals;

confirmation of mailing and receipt dates. The Secretary proposes to

add references to third-party servicers to conform to the proposed

changes in the scope of this subpart.

Section 668.92 Fines. The Secretary proposes to add references to

third-party servicers in this section to conform to proposed changes

governing the imposition of fines in other sections of this subpart.

This section would also be amended to provide for the consideration

of the size of the servicer's business (including the number of

institutions and student accounts served by the servicer) in

determining the amount of a fine against a servicer. This provision

would be similar to the provision already in place in this section that

requires consideration of the size of an institution in determining the

amount of a fine against the institution. The Secretary also proposes

to take into account, in the case of a violation by a third-party

servicer, the degree to which the servicer can provide evidence that

the institution contributed to that violation and the extent to which

repeated mechanical systemic unintentional errors contributed to that

violation. For purposes of this section, repeated mechanical systemic

unintentional errors would be counted as a single violation. This

provision was requested by non-Federal negotiators to cover cases where

errors in computer systems result in multiple violations. The Secretary

proposes to adopt these measures in the interest of fairness to a

third-party servicer in cases where a minor programming error leads to

hundreds or thousands of violations. While the Secretary believes that

all resulting losses should be compensated for by the institution or

servicer, fines need not be unduly multiplied. The Secretary

specifically invites comment on whether this provision is sufficiently

specific and not excessively broad and effectively balances the Federal

interest in ensuring compliance with the realities of computer

processing.

The Secretary also proposes to provide for the consideration of the

amount of liability owed by an institution or third-party servicer on

the misuse of Title IV, HEA program funds or refunds in determining the

gravity of the institution's or servicer's violation, as applicable, of

a Title IV requirement. The number of students affected by the

violation also would be a consideration in that determination. The

Secretary intends these provisions to serve as guidelines for

evaluating the gravity of a violation.

Section 668.93 Limitation. The Secretary proposes to add

references to third-party servicers in this section to conform to

proposed changes governing the imposition of limitations in other

sections of this subpart. The Secretary also proposes that a limitation

on a third-party servicer's eligibility to contract with institutions

to administer any aspect of an institution's participation in the Title

IV, HEA programs could include a limit on the number or size of

institutions with which the servicer may contract, the number of

accounts (borrower or loan accounts) that the servicer may service

under contract, an increase or reduction in the responsibilities

allowed or required of the servicer under a contract, or a requirement

for the servicer to obtain surety assuring the servicer's ability to

meet financial obligations.

The Secretary believes that these limitations are necessary to

address the probable causes of improprieties in which a third-party

servicer might engage. By limiting the number or size of institutions

or accounts that a third-party servicer may serve (including, for

example, requiring the servicer to transfer existing accounts back to

the institution) the Secretary may address a problem involving the

servicer's overextended resources. By limiting the responsibilities

performed by the servicer under a contract, the Secretary may restrict

the servicer's administration to a particular Title IV, HEA program

while prohibiting the servicer from administering another Title IV, HEA

program for which the servicer's past performance has been inadequate.

By imposing additional responsibilities under a third-party servicer's

contract, the Secretary may require the servicer to use additional

safeguards before awarding or disbursing Title IV, HEA program funds or

delivering Federal Stafford or Federal SLS loan proceeds.

Section 668.94 Termination. The Secretary proposes to add

references to third-party servicers in this section to conform to

proposed changes governing termination proceedings in other sections of

this subpart. The Secretary proposes to specify that a termination of a

third-party servicer's eligibility to contract with an institution to

administer a Title IV, HEA program ends the authority of the servicer

to administer that program under any existing contract between an

institution and the servicer. In addition, if a third-party servicer's

eligibility is terminated, the servicer would be required to return to

each institution (or otherwise dispose of according to the Secretary's

instructions) any funds received by the servicer under that program for

that institution or the institution's students. The servicer also would

be required to return to the institution all records pertaining to the

servicer's administration of the institution's participation in that

program.

The Secretary believes that the termination of a third-party

servicer's eligibility to contract with an institution should be

treated like the termination of an institution's participation in a

Title IV, HEA program. Not only should new contracts with an

institution be prohibited, but the servicer's existing activities

involving the administration of that program also should cease.

Further, a third-party servicer may possess unexpended funds under that

program for an institution's students at the time that termination

takes effect. The servicer should be required to return those funds to

the institution so that those students may receive their aid. The

return of records to the institution is needed because of the

recordkeeping requirements that the various Title IV, HEA program

requirements that the various Title IV, HEA program regulations apply

to institutions.

Section 668.95 Reimbursements, refunds, and offsets. This section

would be amended to add references to third-party servicers to conform

to the proposed changes in the scope of this subpart.

Section 668.96 Reinstatement after termination. The Secretary

proposes to add references to third-party servicers to conform to

proposed changes in the scope of this subpart. The Secretary also

proposes to eliminate the provision that permits an institution to

apply for reinstatement of its participation after three months if the

institution's participation has been terminated for engaging in

substantial misrepresentation. Like institutions whose participation is

terminated for other violations, the institution would be able to apply

for reinstatement only after 18 months from the date of the

termination, unless the institution also was debarred or suspended

under E.O. 12549 or the Federal Acquisition Regulations (FAR), 48 CFR

subpart 9.4. The Secretary further proposes to extend these criteria to

apply to a termination of a third-party servicer's eligibility to

contract with an institution to administer any aspect of the

institution's participation in the Title IV, HEA programs if the basis

for that termination was engaging in substantial misrepresentation.

The Title IV, HEA programs are most effective only if students,

other members of the public, and governmental and other bodies can rely

on the honesty of the representations of an institution or the

institution's agents. The harm that substantial misrepresentation does

to the integrity of the Title IV, HEA programs, to those who rely on

the programs to help meet educational costs, and to the taxpayers who

pay for the programs should carry equal weight with the harm done by

any other violation of a Title IV, HEA program requirement. If an

institution's participation or third-party servicer's eligibility is

terminated because the institution or servicer engaged in substantial

misrepresentation, the consequence of that termination should be no

less than the consequence of a termination for other reasons.

Section 668.97 Removal of limitation. The Secretary proposes to

provide that an institution may not apply for removal of a limitation

before the later of (1) 12 months from the effective date of the

limitation, or (2) the expiration of a debarment or suspension under

E.O. 12549 or the FAR, 48 CFR subpart 9.4. Parallel to the requirement

for institutions, a third-party servicer would be able to apply for

removal of a limitation only after 12 months from the date of the

limitation, unless the servicer was also debarred or suspended.

These changes are necessary to conform to the proposed changes in

the scope of this subpart. The Secretary would include the length of a

debarment or suspension action as a criterion to apply for removal of a

limitation to protect the Title IV, HEA programs, the beneficiaries of

those programs, and the Federal Government from potential effects of

doing business with irresponsible entities.

Sections 668.111 Scope and purpose, 668.112 Definitions, 668.113

Request for review, 668.114 Notification of hearing, and 668.116

Hearing. The Secretary proposes to add references to a third-party

servicer to these sections to parallel institutional appeal procedures

and thus establish procedures for a third-party servicer to appeal a

final audit determination or final program review determination. The

proposed procedures generally would be parallel to the procedures

already established that govern appeals by an institution of a final

audit determination or final program review determination. Under

Sec. 668.116(e), the Secretary proposes to expand the types of evidence

that an institution or servicer requesting review of the final audit or

final program review determination may submit to a hearing official to

include Department of Education program review reports and work papers

for program reviews and institutional or servicer records and other

materials (including records and other materials of institutions with

which the servicer has contracts) provided to the Department in

response to a program review. The Secretary also proposes to notify all

institutions with which a third-party servicer contracts of final audit

report or final program review determinations. The Secretary believes

that an institution that contracts with a third-party servicer should

be kept informed of any activities between the servicer and the

Department that might affect the administration of the institution's

participation in a Title IV, HEA program.

Section 668.123 Collection. The Secretary proposes to modify this

section to conform to the proposed changes to Sec. 668.24.

Part 682--Federal Family Education Loan Programs

Section 682.200 Definitions. The Secretary proposes to amend the

definition of lender to exclude from the definition of an ``eligible

lender'' any lender that (1) is debarred or suspended under E.O. 12549

or the FAR, (2) has principals or affiliates so debarred or suspended,

(3) is an affiliate of any person so debarred or suspended, or (4)

employs to administer or assist in the administration of FFEL program

funds any person so debarred or suspended. The effect of these proposed

changes would be automatically to exclude a debarred or suspended

lender from participation in the FFEL programs for the duration of the

debarment or suspension. A guaranty agency would thus be prohibited

from guaranteeing a new loan made by the lender during this period.

Like the proposed changes governing the standard of conduct of

participating educational institutions and third-party servicers under

34 CFR 668.82, these changes are needed to establish appropriate

safeguards to protect the integrity of the FFEL programs and the

Federal financial interest if serious questions are raised about the

honesty and lawfulness of the conduct of a lender's owners, officers,

directors, management, employees, or affiliates whose duties involve

the administration of or influence over the use of those funds.

The Secretary proposes to amend this section to expand on the

statutory definition of third-party servicer in the proposed

regulations to clarify its applicability in the FFEL programs. Under

that definition, a third-party servicer is an individual or

organization that contracts with a lender or guaranty agency to

administer any aspect of the lender's or guaranty agency's

participation in the FFEL programs, including any applicable function

described in the definition of third-party servicer in 34 CFR part 668.

The Secretary believes that by including the statutory definition as

well as a reference to the proposed definition of third-party servicer

under 34 CFR part 668, that individuals or organizations that contract

with a lender or guaranty agency to administer any aspect of the

lender's or guaranty agency's participation in the FFEL programs will

be able to determine the applicability of these regulations to

themselves.

Section 682.401 Basic Program Agreement. The Secretary proposes to

revise this section of the regulations to clarify a guaranty agency's

responsibilities if it enters into a contract with a third-party

servicer. As discussed previously under Sec. 682.200, the Secretary

proposes to prohibit a guaranty agency from entering into a contract

with a third-party servicer that the Secretary has determined is not

financially responsible or has been determined by the Secretary to have

not complied with the statutes and regulations that govern the FFEL

programs.

Under this proposed provision, a guaranty agency would be required

to provide to the Secretary the names and addresses of any third-party

servicer with which the agency contracts and, if requested by the

Secretary, a copy of that contract. The Secretary is proposing to

require submission by the agency of the name and address of any third-

party servicer with which the agency contracts, and, upon request, the

contract, to assist the Secretary in carrying out his responsibilities

to monitor the performance of third-party servicers.

The Secretary believes that receipt of a copy of the contract is

necessary because it states the services that a third-party servicer

performs for a guaranty agency. With this information, the Secretary

will be better able to monitor program compliance and integrity of the

guaranty agency's portfolio that the servicer is administering. These

changes would parallel the requirements concerning contracts between

institutions and third-party servicers.

Note that section 552 of the Administrative Procedure Act does not

require disclosure to the public, under the Freedom of Information Act

(FOIA), of subject matter that is deemed to be a trade secret or is of

commercial or financial interest or is of a privileged or confidential

nature (note also that the entity submitting the information is

responsible for identifying information that is not subject to the

FOIA's disclosure requirements).

Section 682.413 Remedial actions. The Secretary proposes to revise

this section of the regulations to clarify a lender's and its third-

party servicer's responsibility to pay liabilities if the servicer has

not complied with FFEL program statutes or regulations with respect to

services it has contracted with a lender to perform. Under this

section, a third-party servicer and lender under whose contract the

servicer committed the violation would be considered jointly and

severally liable for paying to the Secretary any interest benefits and

special allowance or any compensation the servicer has received on any

loan from the lender from the date that the servicer fails to comply

with any of the requirements in Sec. 682.406(a)(1)-(a)(6), (a)(9), and

(a)(12), for any period when the loan has lost its eligibility for

reinsurance coverage as a result of the third-party servicer's actions,

and for any period after it erroneously bills the Secretary for

interest benefits and special allowance. The Secretary would vigorously

attempt to collect any of those liabilities first from the lender and,

if the lender does not repay those liabilities within 30 days or does

not make arrangements satisfactory to the Secretary to repay those

liabilities, pursue the third-party servicer for the payment of those

liabilities.

This proposed section would also clarify a guaranty agency's and

its third-party servicer's responsibilities to pay liabilities to the

Secretary if the servicer has not complied with FFEL program statutes

or regulations with respect to services that it has contracted with a

guaranty agency to perform. Under this proposed provision, the

Secretary would require a guaranty agency to repay to the Secretary any

reinsurance payments the guaranty agency received on a loan if the

third-party servicer contracting with the guaranty agency causes a loan

to lose its eligibility for reinsurance. In addition to the repayment

of reinsurance, if a third-party servicer makes an incomplete or

incorrect statement in connection with any agreement entered into under

this part or any other Federal requirement, the guaranty agency with

which it has entered into a contract may be subjected by the Secretary

to return payments made by the Secretary to the agency, have its

payments withheld by the Secretary, or have its participation in the

FFEL programs limited, suspended, or terminated. In addition to these

penalties, the guaranty agency and its third-party servicer may be

fined, may be required to repay any payments the Secretary became

obligated to make to others as a result of an incomplete or incorrect

statement or violation of any Federal requirement, or be responsible

for repaying any interest benefits, special allowance, or reinsurance

paid on a Consolidation loan for a violation of 34 CFR 682.206(f)(1).

The guaranty agency and its third-party servicer would be considered

jointly and severally liable for any of those liabilities. The method

by which the Secretary would collect any liability would parallel the

proposed provisions governing the circumstances under which a lender

and third-party servicer would be jointly and severally liable to the

Secretary.

In the negotiated rulemaking sessions, the issue of third-party

servicer liability generated controversy and dissension among the

negotiators. With regard to liabilities assessed against a third-party

servicer under the FFEL programs, many negotiators raised the same

objections previously discussed in connection with liability for

servicers under 34 CFR part 668. Negotiators raised an additional

objection, suggesting that liabilities assessed against third-party

servicers under the FFEL programs are unnecessary given the ability of

the Secretary to determine a loan to be uninsured and thus able to be

collected directly from a lender or guaranty agency. In response to

these objections, the Secretary offered the same modification of the

concept of joint and several liability discussed previously in 34 CFR

part 668. As noted, no consensus was reached. However, the Secretary

agreed to incorporate language into these proposed regulations to

specify that the Secretary would first attempt collection from a lender

or guaranty agency in the event of liability on the part of a third-

party servicer. The Secretary included this provision at the request of

negotiators because the Secretary believes that this provision would

not adversely impact the integrity of the FFEL programs. The Secretary

specifically invites further public comment on the issue of joint and

several liability for servicers contracting with lenders and guaranty

agencies in order to obtain additional advice from the higher education

community in the development of final regulations.

The Secretary specifically invites public comment on whether, and

how, the Secretary should hold a third-party servicer that administers

FFEL programs jointly and severally liable for any violation of an FFEL

program requirement by that servicer and whether any alternative less

than assumption of full liability is sufficient to protect the public

interest. The Secretary notes that substantial losses have occurred in

the FFEL programs due to third-party servicer violations.

Under these proposed regulations, the Secretary would follow the

fine proceedings contained in 34 CFR part 668, subpart G, in imposing a

fine against a third-party servicer.

Section 682.414 Records, reports, and inspection requirements for

guaranty agency programs. The Secretary proposes to amend this section

to make a third-party servicer's responsibilities under this part

conform to currently existing regulations with respect to a guaranty

agency's obligation to maintain current records. Under this provision,

a third-party servicer acting as an agent for a guaranty agency would

be required to maintain current, complete, and accurate records for all

loans that it services for that agency. These records would have to be

updated at least once every 10 business days. The Secretary is

proposing this provision to ensure that a third-party servicer with

which a guaranty agency contracts is responsible for maintaining

accurate records.

Section 682.416 Requirements for third-party servicers and lenders

contracting with third-party servicers. The Secretary proposes to add a

new section to the FFEL program regulations that would set forth

administrative and financial standards that a third-party servicer

would be required to meet in order to be an eligible third-party

servicer with which a lender or guaranty agency may contract for

purposes of its responsibilities under the FFEL programs. Under these

proposed regulations, a third-party servicer would be considered to be

administratively responsible if it provides the services for which it

has contracted to perform in accordance with the Federal laws and

regulations that govern the FFEL programs, has business systems that

are capable of meeting those requirements and has adequate personnel

who are knowledgeable about the FFEL programs. The Secretary is

proposing these standards because he believes that these are the

minimum administrative standards that an agent or entity must meet to

demonstrate satisfactorily to the Secretary that it is capable of

performing FFEL program services in accordance with applicable statutes

and regulations.

The Secretary proposes to apply the standards governing financial

responsibility under 34 CFR 668.13(c), (d), (g), and (h), governing the

financial responsibility of institutions and third-party servicers

contracting with those institutions, to a third-party servicer that

administers any aspect of the FFEL programs under a contract with a

guaranty agency or lender, for purposes of this part.

During the negotiated rulemaking sessions, the proposed standards

governing financial responsibility of third-party servicers and

institutions generated disagreement among the negotiators. The

Secretary intends that the financial responsibility standards in this

section would parallel, as applicable, similar standards of financial

responsibility for participating institutions that the Secretary

intends to publish in proposed regulations to be published shortly

after these. When published, this future NPRM will provide commenters

with the opportunity to comment on financial responsibility standards

governing both third-party servicers and institutions.

The Secretary proposes these standards to ensure that a third-party

servicer would not be able to maintain a contract with a lender or

guaranty agency to administer any aspect of the lender's or guaranty

agency's FFEL program unless that servicer periodically demonstrates to

the Secretary the ability to meet its financial obligations with that

lender or guaranty agency. Further, these standards would ensure that

the servicer can demonstrate that it is financially stable and will be

able to meet these obligations in the future. The Secretary believes

that these standards are necessary because the financial failure of a

third-party servicer could have an enormous impact on the FFEL programs

that could create substantial losses for the Federal taxpayer.

Under these proposed rules, the Secretary would, as determined

necessary, conduct a special review of a third-party servicer to

determine if it meets the administrative capability and financial

responsibility standards proposed in this section. If the Secretary

conducts that review, the servicer would be required to provide

evidence to the Secretary that it meets these standards. Based on the

review of the materials required by this section the Secretary could

initiate a limitation, suspension, or termination action against the

servicer. If the servicer is unable to demonstrate that it meets the

established standards for administrative capability and financial

responsibility, the servicer could provide evidence to the Secretary

demonstrating that the limitation, suspension, or termination action is

unwarranted. This latter provision was added at the request of

negotiators to govern situations where a third-party servicer may not

be able to meet the defined standards proposed in this section, but the

servicer still considers itself to be administratively capable and

financially responsible. This provision would allow a third-party

servicer the opportunity to demonstrate to the Secretary that it is

still administratively capable and financially responsible.

This section would provide that a third-party servicer is not

financially responsible under this section if the servicer, or the

servicer's owner, majority shareholder, or chief executive officer is

determined to have a questionable past performance. The past

performance criteria in this section would parallel proposed

requirements under 34 CFR 668.12 (implementing statutory requirements

governing the past performance of persons or organizations associated

with institutions that participate in Title IV, HEA programs) and under

34 CFR 668.82 (governing the standard of conduct of institutions and

third-party servicers for purposes of the Title IV, HEA programs).

Furthermore, the Secretary proposes to apply this provision to any

person employed by the servicer or any person, entity, or any officer

or employee of an entity that the servicer contracts with whose past

performance is also questionable. In addition, in order to remain

financially responsible, if a third-party servicer learns of such a

conviction or determination, the servicer would have to take immediate

action to safeguard the Title IV, HEA programs, as explained previously

in the discussion concerning Sec. 668.82.

However, for purposes of this part, the Secretary proposes to

specify that with regard to the conduct of an officer or employee of a

third-party servicer or a person, entity, or officer or employee of an

entity with which the servicer contracts, that conduct would be a

factor in determining the servicer's financial responsibility only if

the individual or entity is used in a capacity that involves

administering any aspect of the Title IV, HEA programs. For example,

the Secretary would not hold the conduct of a custodian employed by a

third-party servicer as an element in determining the servicer's

financial responsibility, if that custodian had no responsibility for

administering a Title IV, HEA program.

The Secretary also proposes to specify that a third-party servicer

would not be considered to be financially responsible if the servicer,

or any principal or affiliate of the servicer (as those terms are

defined in 34 CFR part 85), is debarred or suspended under E.O. 12549

or the FAR, or is engaging in activity that is cause under 34 CFR

85.305 or 85.405 for debarment or suspension under E.O. 12549 or the

FAR.

Like the proposed changes governing the past performance of

individuals or organizations associated with institutions that

participate in the Title IV, HEA programs and standard of conduct of

participating institutions and third-party servicers, these changes are

needed to establish appropriate safeguards to protect the integrity of

the FFEL programs and the Federal financial interest if serious

questions are raised about the honest and lawful conduct of a

servicer's owners, officers, directors, employees, or affiliates whose

duties involve the administration of or influence over the use of those

funds.

Under this section, a third-party servicer would be required to

have an annual independent audit of its administration of the FFEL

programs that examines the servicer's compliance with the Act and

applicable regulations and its financial management of FFEL program

activities. These requirements and audit exceptions would parallel the

proposed audit requirements and exceptions under 34 CFR 668.23

(governing audit requirements for third-party servicers contracting

with institutions to administer any aspect of the institution's

participation in the Title IV, HEA programs), except that the report of

the audit would have to be submitted to the Secretary within six months

of the end of the audit report period. A third-party servicer's initial

audit would have to cover the same period required of audits performed

for third-party servicers contracting with institutions to administer

any aspect of the institution's participation in the Title IV, HEA

programs (discussed previously in 34 CFR 668.23). The Secretary

believes that initial audits will be more useful and effective if they

encompass an entire fiscal year. The Secretary also believes that

allowing servicers additional time to prepare for the implementation of

these regulations would enable servicers to comply more fully with

these regulations as well as defray the costs associated with an audit

of a partial fiscal year and minimize the burden associated with

implementing these regulations, as called for under E.O. 12866.

Subsequent audits would, as required by statute, encompass the entire

period since the servicer's previous audit.

In addition, the Secretary proposes that the audit report would be

conducted in accordance with the audit guide developed by the Inspector

General of the Department of Education unless the third-party servicer

is a governmental entity or nonprofit organization. A third-party

servicer that is a governmental entity would be required to have an

audit conducted in accordance with 31 U.S.C. 7502 and 34 CFR part 80,

appendix G (pursuant to the Single Audit Act). A third-party servicer

that is a nonprofit organization would be required to have an audit

conducted in accordance with Office of Management and Budget Circular

A-133, ``Audit of Institutions of Higher Education and Other Nonprofit

Institutions,'' as incorporated in 34 CFR 74.61(h)(3).

These proposed rules would also limit a lender's ability to enter

into a contract with a third-party servicer. As explained previously in

the discussion for Sec. 682.200, under this proposal, a lender may not

enter into a contract with a third-party servicer that the Secretary

has determined does not meet the administrative capability or financial

responsibility standards under this section. Further, a lender that

contracts with a third-party servicer would have to provide the

Secretary with the name and address of the third-party servicer, and,

upon request, a copy of that contract.

Sections 682.700 Purpose and scope, 682.701 Definitions of terms

used in this subpart, 682.702 Effect on participation, 682.703

Informal compliance procedure, 682.704 Emergency action, 682.705

Suspension proceedings, 682.706 Limitation or termination proceedings,

682.707 Appeals in a limitation or termination proceeding, 682.708

Evidence of mailing and receipt dates, 682.709 Reimbursements,

refunds, and offsets, 682.710 Removal of limitation, and 682.711

Reinstatement after termination. The Secretary proposes to amend

subpart G to provide that the Secretary would have the authority to

limit, suspend, or terminate a third-party servicer's ability to

contract with an eligible lender if the Secretary determines the third-

party servicer has violated any FFEL program requirement. Section

432(a)(1) of the Act authorizes the Secretary to take action against

third-party servicers for any violation of any FFEL program

requirement. Under these proposed regulations, the Secretary could also

take emergency action against the servicer if the Secretary receives

reliable information that the servicer is in violation of applicable

requirements pertaining to the lender's portfolio of loans. The

procedures under which the Secretary could take those actions and the

procedures a third-party servicer could use to appeal those actions are

consistent with the long-standing procedures the Secretary uses to take

those actions against a lender, and the procedures a lender may use to

appeal those actions.

Executive Order 12866

These proposed regulations have been reviewed in accordance with

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

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

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

effectively and efficiently. Burdens specifically associated with

information collection requirements, if any, are identified and

explained elsewhere in this preamble under the heading Paperwork

Reduction Act of 1980.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the proposed regulations justify the

costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the Title IV, HEA programs.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. The small entities that would be affected by these

regulations are small institutions of higher education; small

organizations that contract with educational institutions to administer

aspects of the institutions' participation in the Title IV, HEA

programs; and small organizations that contract with lenders or

guaranty agencies to administer aspects of the lenders' or agencies'

participation in the FFEL programs. However, the regulations would not

have a significant economic impact on these small entities because the

regulations would not impose excessive regulatory burdens or require

unnecessary Federal supervision. The regulations would impose minimal

requirements to ensure the proper expenditure of program funds.

Paperwork Reduction Act of 1980

Sections 668.13, 668.23, 668.25, 668.90, 668.96, 668.113, 682.414,

682.416, and 682.711 contain information collection requirements. As

required by the Paperwork Reduction Act of 1980, the Department of

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

Management and Budget (OMB) for its review. (44 U.S.C. 3504(h))

Educational institutions that are public or nonprofit institutions

or businesses or other for-profit institutions may participate in the

Title IV, HEA programs. State entities, nonprofit institutions,

businesses or other for-profit organizations, or individuals may

contract with educational institutions to administer aspects of the

institutions' participation in the programs and may contract with

lenders and guaranty agencies to administer aspects of the lenders' and

agencies' participation in the FFEL programs. Individuals may apply for

student financial assistance under the programs. The Department of

Education needs and uses the information to enable the Secretary to

determine whether the States, institutions, organizations, businesses,

and individuals comply with the requirements for eligibility and

participation in the programs.

Annual public reporting and recordkeeping burden contained in the

collection of information proposed in these regulations is estimated to

be 2,786 hours, including the time for searching existing data sources,

gathering and maintaining the data needed, completing and reviewing the

collection of information, and submitting materials.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

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

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

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

will be available for public inspection, during and after the comment

period, in room 4318, Regional Office Building 3, 7th and D Streets,

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

through Friday of each week except Federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

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

agency or authority of the United States.

List of Subjects

34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

Consumer protection, Education, Grant programs--education, Loan

programs--education, Reporting and recordkeeping requirements, Student

aid.

34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Loan programs--education, Reporting and recordkeeping requirements,

Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal

Supplemental Educational Opportunity Grant Program; 84.032 Federal

Stafford Loan Program; 84.032 Federal PLUS Program; 84.032 Federal

Supplemental Loans for Students Program; 84.033 Federal Work-Study

Program; 84.038 Federal Perkins Loan Program; 84.063 Federal Pell

Grant Program; 84.069 State Student Incentive Grant Program; 84.268

Federal Direct Student Loan Program; and 84.272 National Early

Intervention Scholarship and Partnership Program. Catalog of Federal

Domestic Assistance Number for the Presidential Access Scholarship

Program has not been assigned.)

Dated: February 9, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary proposes to amend parts 668 and 682 of title 34 of

the Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

1. The authority citation for part 668 is revised to read as

follows:

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

1141, unless otherwise noted.

2. Section 668.1 is amended by revising paragraph (a) to read as

follows:

Sec. 668.1 Scope.

(a) This part establishes general rules that apply to an

institution that participates in any student financial assistance

program authorized by Title IV of the Higher Education Act of 1965, as

amended (Title IV, HEA program). To the extent that an institution

contracts with a third-party servicer to administer any aspect of the

institution's participation in any Title IV, HEA program, the

applicable rules in this part also apply to that servicer. An

institution's use of a third-party servicer does not alter the

institution's responsibility for compliance with the rules in this

part.

* * * * *

3. Section 668.2 is amended by adding definitions of ``Designated

department official'', ``Initiating official'', ``Show-cause

official'', and ``Third-party servicer'' to paragraph (b) in

alphabetical order to read as follows:

Sec. 668.2 General definitions.

* * * * *

(b) * * *

Designated department official: An official of the Department of

Education to whom the Secretary has delegated responsibilities

indicated in this part.

* * * * *

Initiating official: The designated department official authorized

to begin an emergency action under Sec. 668.83.

* * * * *

Show-cause official: The designated department official authorized

to conduct a show-cause proceeding for an emergency action under

Sec. 668.83.

* * * * *

Third-party servicer: An individual or a State or private, profit

or nonprofit organization that enters into a contract with an eligible

institution to administer, through either manual or automated

processing, any aspect of the institution's participation in any Title

IV, HEA program. The Secretary considers administration of

participation in a Title IV, HEA program to--

(1) Include performing any function required by any statutory

provision of or applicable to Title IV of the HEA, any regulatory

provision prescribed under that statutory authority, or any applicable

special arrangement, agreement, or limitation, such as, but not

restricted to--

(i) Processing student financial aid applications;

(ii) Performing need analysis;

(iii) Determining student eligibility and related activities;

(iv) Certifying loan applications;

(v) Processing SARs or output documents for payment to students;

(vi) Receiving, disbursing, or delivering Title IV, HEA program

funds, excluding lock-box processing of loan payments and normal bank

electronic fund transfers;

(vii) Conducting activities required by the provisions governing

student consumer information services in Subpart D of this part;

(viii) Preparing and certifying requests for advance or

reimbursement funding;

(ix) Loan servicing and collection;

(x) Preparing and submitting notices and applications required

under 34 CFR part 600 and subpart B of this part; and

(xi) Preparing a Fiscal Operations Report and Application to

Participate (FISAP);

(2) Exclude the following functions:

(i) Publishing ability-to-benefit tests.

(ii) Performing functions as a Multiple Data Entry Processor (MDE).

(iii) Financial and compliance auditing.

(iv) Mailing of documents prepared by the institution.

(v) Warehousing of records; and

(3) Notwithstanding the exclusions referred to in paragraph (2) of

this definition, include any activity comprised of any function

described in paragraph (1) of this definition.

(Authority: 20 U.S.C. 1088)

* * * * *

4. Section 668.11 is revised to read as follows:

Sec. 668.11 Scope.

(a) This subpart establishes standards that an institution must

meet in order to participate in any Title IV, HEA program.

(b) Noncompliance with these standards by an institution already

participating in any Title IV, HEA program or with applicable standards

in this subpart by a third-party servicer that contracts with the

institution may subject the institution or servicer, or both, to

proceedings under subpart G of this part. These proceedings may lead to

any of the following actions:

(1) An emergency action.

(2) The imposition of a fine.

(3) The limitation, suspension, or termination of the participation

of the institution in a Title IV, HEA program.

(4) The limitation, suspension, or termination of the eligibility

of the servicer to contract with any institution to administer any

aspect of the institution's participation in a Title IV, HEA program.

(Authority: 20 U.S.C. 1094)

5. Section 668.12, as proposed to be amended in a Notice of

Proposed Rulemaking published on July 10, 1992 (57 FR 30830), is

further amended by removing the period at the end of proposed

redesignated paragraph (b)(2)(iv)(B) and adding, in its place, a semi-

colon and adding new paragraphs (b)(2)(v) and (b)(2)(vi) to read as

follows:

Sec. 668.12 Institutional participation agreement.

* * * * *

(b) * * *

(2) * * *

(v) That it is liable for all--

(A) Improperly spent or unspent funds received under the Title IV,

HEA programs, including any funds administered by a third-party

servicer; and

(B) Refunds that the institution or its servicer may be required to

make; and

(vi) That it will not knowingly--

(A) Employ in a capacity that involves the administration of the

Title IV, HEA programs or the receipt of funds under those programs, an

individual who has been convicted of, or has pled nolo contendere or

guilty to, a crime involving the acquisition, use, or expenditure of

Federal, State, or local government funds, or has been administratively

or judicially determined to have committed fraud or any other material

violation of law involving those funds;

(B) Contract with an institution or third-party servicer that has

been terminated under section 432 of the HEA for a reason involving the

acquisition, use, or expenditure of Federal, State, or local government

funds, or that has been administratively or judicially determined to

have committed fraud or any other material violation of law involving

those funds; or

(C) Contract with or employ any individual, agency, or organization

that has been, or any of whose officers or employees have been--

(1) Convicted of, or pled nolo contendere or guilty to, a crime

involving the acquisition, use, or expenditure of Federal, State or

local government funds; or

(2) Administratively or judicially determined to have committed

fraud or any other material violation of law involving Federal, State,

or local funds.

* * * * *

6. Section 668.13 as amended by the regulations published in the

Federal Register on June 8, 1993 (58 FR 32201) (effective date pending)

is amended by removing paragraphs (c)(4) and (g); redesignating

paragraph (c)(5) as (c)(4) and paragraphs (h) through (j) as paragraphs

(g) through (i), respectively; adding the word ``or'' after the semi-

colon in paragraph (c)(3); and revising redesignated paragraph (c)(4),

paragraph (d)(3), and redesignated paragraphs (g) introductory text and

(h) to read as follows:

Sec. 668.13 Factors of financial responsibility.

* * * * *

(c) * * *

(4) A person who exercises substantial control over the institution

or any member or members of the person's family, alone or together--

(i)(A) Exercises or exercised substantial control over another

institution or a third-party servicer that owes a liability for a

violation of a Title IV, HEA program requirement; or

(B) Owes a liability for a violation of a Title IV, HEA program

requirement; and

(ii) That person, family member, institution, or servicer is not

making payments in accordance with an agreement to repay that

liability.

(d) * * *

(3) The Secretary may determine an institution to be financially

responsible even if the institution is not otherwise financially

responsible under paragraph (c)(4) of this section if--

(i) The institution notifies the Secretary, in accordance with 34

CFR 600.30, that the person referenced in paragraph (c)(4) of this

section exercises substantial control over the institution; and

(ii)(A) The person repaid to the Secretary a portion of the

applicable liability, and the portion repaid equals or exceeds the

greater of--

(1) The total percentage of the ownership interest held in the

institution or third-party servicer that owes the liability by that

person or any member or members of that person's family, either alone

or in combination with one another;

(2) The total percentage of the ownership interest held in the

institution or servicer that owes the liability that the person or any

member or members of that person's family, either alone or in

combination with one another, represents or represented under a voting

trust, power of attorney, proxy, or similar agreement; or

(3) Twenty-five percent, if that person or any member of that

person's family is or was a member of the board of directors, chief

executive officer, or other executive officer of the institution or

servicer that owes the liability, or of an entity holding at least a 25

percent ownership interest in the institution or servicer that owes the

liability;

(B) The applicable liability described in paragraph (c)(4)(ii) of

this section is currently being repaid in accordance with a written

agreement with the Secretary; or

(C) The institution demonstrates why--

(1) The person who exercises substantial control over the

institution should nevertheless be considered to lack that control; or

(2) The person who exercises substantial control over the

institution and each member of that person's family nevertheless does

not or did not exercise substantial control over the institution or

servicer that owes the liability.

* * * * *

(g) An ``ownership interest'' is a share of the legal or beneficial

ownership or control of, or a right to share in the proceeds of the

operation of, an institution, institution's parent corporation, a

third-party servicer, or a third-party servicer's parent corporation.

* * * * *

(h) The Secretary generally considers a person to exercise

substantial control over an institution or third-party servicer, if the

person--

(1) Directly or indirectly holds at least a 25 percent ownership

interest in the institution or servicer;

(2) Holds, together with other members of his or her family, at

least a 25 percent ownership interest in the institution or servicer;

(3) Represents, either alone or together with other persons, under

a voting trust, power of attorney, proxy, or similar agreement one or

more persons who hold, either individually or in combination with the

other persons represented or the person representing them, at least a

25 percent ownership in the institution or servicer; or

(4) Is a member of the board of directors, the chief executive

officer, or other executive officer of--

(i) The institution or servicer; or

(ii) An entity that holds at least a 25 percent ownership interest

in the institution or servicer.

* * * * *

7. Section 668.23 is amended by redesignating paragraph (c)(3) as

paragraph (c)(3)(i), revising paragraphs (b) and (c)(1), adding

paragraph (c)(3) (ii) through (vi) and paragraph (c)(4)(iii), revising

paragraph (c)(5), adding a new paragraph (c)(6), and revising paragraph

(e) and the authority citation to read as follows:

Sec. 668.23 Audits, records, and examinations.

* * * * *

(b)(1) An institution that participates in any Title IV, HEA

program shall cooperate with an independent auditor, the Secretary, the

Department of Education's Inspector General, and the Comptroller

General of the United States, or their authorized representatives, a

guaranty agency in whose program the institution participates, and the

State postsecondary review entity designated under subpart 1 of part H

of Title IV of the HEA, in the conduct of audits, investigations, and

program reviews authorized by law.

(2) A third-party servicer shall cooperate with an independent

auditor, the Secretary, the Department of Education's Inspector

General, and the Comptroller General of the United States, or their

authorized representatives, a guaranty agency in whose program the

institution contracting with the servicer participates, and the State

postsecondary review entity designated under subpart 1 of part H of

Title IV of the HEA, in the conduct of audits, investigations, and

program reviews authorized by law.

(3) The institution's or servicer's cooperation must include--

(i) Providing timely access, for examination and copying, to the

records (including computerized records) required by the applicable

regulations and to any other pertinent books, documents, papers,

computer programs, and records;

(ii) Providing reasonable access to personnel associated with the

institution's or servicer's administration of the Title IV, HEA

programs for the purpose of obtaining relevant information. In

providing reasonable access, the institution or servicer may not--

(A) Refuse to supply any relevant information;

(B) Refuse to permit interviews with those personnel that do not

include the presence of representatives of the institution's or

servicer's management; or

(C) Refuse to permit interviews with those personnel that are not

tape recorded by the institution or servicer.

(c)(1)(i) An institution that participates in the FDSL, Federal

Perkins Loan, FWS, FSEOG, Federal Stafford Loan, Federal PLUS, Federal

SLS, Federal Pell Grant, or PAS programs shall have performed a

compliance audit of that program.

(ii) A third-party servicer that administers funds or determines

student eligibility shall have a compliance audit performed of every

aspect of the servicer's administration of the participation in the

Title IV, HEA programs of each institution with which the servicer has

a contract, unless--

(A) The servicer contracts with only one participating institution;

and

(B) The audit of that institution's participation involves every

aspect of the servicer's administration of that Title IV, HEA program.

(iii) To meet the requirements of paragraph (c)(1)(ii) of this

section, a third-party servicer that contracts with more than one

participating institution may submit a single compliance audit report

that covers every aspect of the servicer's administration of the

participation in the Title IV, HEA programs for each institution with

which the servicer contracts.

(iv) The audit required under paragraph (c)(1) (i) or (ii) of this

section must be conducted by an independent auditor in accordance with

the general standards and the standards for audits in the U.S. General

Accounting Office's (GAO's) Standards for Audit of Governmental

Organizations, Programs, Activities, and Functions.

* * * * *

(3) * * *

(ii) The servicer shall have an audit performed at least once every

year.

(iii) Notwithstanding paragraph (c)(3)(ii) of this section, the

servicer shall have an audit performed at least once every two years

if--

(A) The servicer administers less than $1,000,000 under the Title

IV, HEA programs for the period covered by the audit; or

(B) The servicer had no material exceptions identified in the

servicer's most recently submitted audit report and that report was

submitted in a timely fashion.

(iv) The servicer is not required to have an audit performed for

any year in which the servicer administers less than $250,000 under the

Title IV, HEA programs.

(v) The servicer's first audit must cover the servicer's activities

for its first full fiscal year beginning after July 1, 1994, and

include any period from that date to the beginning of the first full

fiscal year. Each subsequent audit that the servicer has performed must

cover the servicer's activities for the entire period of time since the

servicer's preceding audit.

(vi) Notwithstanding paragraph (c)(3)(iii) of this section, the

Secretary may, as the Secretary deems necessary, request any third-

party servicer to have an audit performed on an annual basis.

(4) * * *

(iii) The servicer shall submit its audit to the Department of

Education's Inspector General in accordance with the deadlines

established in audit guides developed by the Department of Education's

Office of Inspector General.

(5)(i) An institution or third-party servicer that has an audit

conducted in accordance with this section shall--

(A) Give the Secretary and the Inspector General access to records

or other documents necessary to review the audit; and

(B) Include in any arrangement with an individual or firm

conducting an audit described in this section a requirement that the

individual or firm shall give the Secretary and the Inspector General

access to records or other documents necessary to review the audit.

(ii) A third-party servicer shall give the Secretary and the

Inspector General access to records or other documents necessary to

review an institution's audit.

(iii) An institution shall give the Secretary and the Inspector

General access to records or other documents necessary to review a

third-party servicer's audit.

(6) The Secretary may require the institution or servicer to

provide, upon request, to cognizant guaranty agencies and eligible

lenders under the FFEL programs, State agencies, nationally recognized

accrediting agencies, and State postsecondary review entities

designated under Subpart 1 of part H of Title IV of the HEA, the

results of any audit conducted under this section.

* * * * *

(e) Upon written request, an institution or third-party servicer

shall give the Secretary access to all Title IV, HEA program and fiscal

records, including records reflecting transactions with any financial

institution with which the institution or servicer deposits or has

deposited any Title IV, HEA program funds.

* * * * *

(Authority: 20 U.S.C. 1088, 1094, 1099c, 1141 and section 4 of Pub.

L. 95-452, 92 Stat. 1101-1109)

8. Section 668.24 is revised to read as follows:

Sec. 668.24 Audit exceptions and repayments.

(a)(1) If, as a result of a Federal audit or an audit performed at

the direction of an institution or third-party servicer, an expenditure

made by the institution or servicer or the institution's or servicer's

compliance with an applicable requirement (including the lack of proper

documentation), is questioned, the Secretary notifies the institution

or servicer of the questioned expenditure or compliance.

(2) If the institution or servicer believes that the questioned

expenditure or compliance was proper, the institution or servicer shall

notify the Secretary in writing of the institution's or servicer's

position and the reasons for that position.

(3) The institution's or servicer's response must be certified as

to accuracy and completeness by an independent auditor in accordance

with the general standards and the standards for audits in the U.S.

General Accounting Office's (GAO's) Standards for Audit of Governmental

Organizations, Programs, Activities, and Functions and must be received

by the Secretary within 45 days of the date of the Secretary's

notification to the institution or servicer.

(b)(1) Based on the audit finding and the institution's or third-

party servicer's response, the Secretary determines the amount of

liability, if any, owed by the institution or servicer and instructs

the institution or servicer as to the manner of repayment.

(2) If the Secretary determines that a third-party servicer owes a

liability for its administration of an institution's Title IV, HEA

programs, the servicer shall notify each institution under whose

contract the servicer owes a liability of the determination. The

servicer shall also notify every institution that contracts with the

servicer for the same service that the Secretary determined that a

liability was owed.

(c)(1) An institution or third-party servicer that must repay funds

under the procedures in this section shall repay those funds at the

direction of the Secretary within 45 days of the date of the

Secretary's notification, unless--

(i) The institution or servicer files an appeal under the

procedures established in subpart H of this part; or

(ii) The Secretary permits a longer repayment period.

(2) Notwithstanding paragraphs (b) and (c)(1) of this section--

(i) If an institution or third-party servicer has posted surety or

has provided a third-party guarantee and the Secretary questions

expenditures or compliance with applicable requirements and identifies

liabilities, then the Secretary may determine that deferring recourse

to the surety or guarantee is not appropriate because--

(A) The need to provide relief to students or borrowers affected by

the act or omission giving rise to the liability outweighs the

importance of deferring collection action until completion of available

appeal proceedings; or

(B) The terms of the surety or guarantee do not provide complete

assurance that recourse to that protection will be fully available

through the completion of available appeal proceedings; or

(ii) The Secretary may determine that an administrative offset to

collect the funds owed under the procedures of this section is

appropriate under 34 CFR 30.28.

(3) If, under the proceedings in subpart H, liabilities asserted in

the notification against the institution or third-party servicer are

upheld, the institution or third-party servicer shall repay those funds

at the direction of the Secretary within 30 days of the final

determination under subpart H of this part unless--

(i) The Secretary permits a longer repayment period; or

(ii) The Secretary determines that earlier collection action is

appropriate pursuant to paragraph (c)(2) of this section.

(d) An institution is held responsible for any liability owed by

the institution's third-party servicer for a violation incurred in

servicing any aspect of that institution's participation in the Title

IV, HEA programs and remains responsible for that amount until that

amount is repaid in full.

(Authority: 20 U.S.C. 1094)

9. Section 668.25 is redesignated as Sec. 668.26 and a new

Sec. 668.25 is added to read as follows:

Sec. 668.25 Contracts between an institution and a third-party

servicer.

(a) An institution may enter into a written contract with a third-

party servicer for the administration of any aspect of the

institution's participation in any Title IV, HEA program only to the

extent that the servicer's eligibility to contract with the institution

has not been limited, suspended, or terminated under the proceedings of

subpart G of this part.

(b) Subject to the provisions of paragraph (d) of this section, a

third-party servicer is eligible to enter into a written contract with

an institution for the administration of any aspect of the

institution's participation in any Title IV, HEA program only to the

extent that the servicer's eligibility to contract with the institution

has not been limited, suspended, or terminated under the proceedings of

subpart G of this part.

(c) In a contract with an institution, a third-party servicer shall

agree to--

(1) Comply with all statutory provisions of or applicable to Title

IV of the HEA, all regulatory provisions prescribed under that

statutory authority, and all applicable special arrangements,

agreements, limitations, suspensions, and terminations, including the

requirement to use any funds that the servicer administers under any

Title IV, HEA program and any interest or other earnings thereon solely

for the purposes specified in and in accordance with that program;

(2) Refer to the Office of Inspector General of the Department of

Education for investigation of any information indicating there is

reasonable cause to believe that the institution might have engaged in

fraud or other criminal misconduct in connection with the institution's

administration of any Title IV, HEA program or an applicant for Title

IV, HEA program assistance might have engaged in fraud or other

criminal misconduct in connection with his or her application. Examples

of the type of information that must be referred are--

(i) False claims by the institution for Title IV, HEA program

assistance;

(ii) False claims of independent student status;

(iii) False claims of citizenship;

(iv) Use of false identities;

(v) Forgery of signatures or certifications; and

(vi) False statements of income;

(3) Be jointly and severally liable with the institution to the

Secretary for any violation by the servicer of any statutory provision

of or applicable to Title IV of the HEA, any regulatory provision

prescribed under that statutory authority, and any applicable special

arrangements, agreements, and limitations;

(4) In the case of a third-party servicer that disburses funds

(including funds received under the Title IV, HEA programs) or delivers

Federal Stafford Loan or Federal SLS Program proceeds to a student--

(i) Confirm the eligibility of the student before making that

disbursement or delivering those proceeds. This confirmation must

include, but is not limited to, any applicable information contained in

the records required under Sec. 668.23(f); and

(ii) Calculate and pay refunds and repayments due a student, the

Title IV, HEA program accounts, and the student's lender under the

Federal Stafford Loan, Federal PLUS, and Federal SLS programs in

accordance with the institution's refund policy, the provisions of

Secs. 668.21 and 668.22, and applicable program regulations; and

(5) If the servicer or institution terminates the contract, or if

the servicer stops providing services for the administration of a Title

IV, HEA program, goes out of business, or files a petition under the

Bankruptcy Code, return to the institution all--

(i) Records in the servicer's possession pertaining to the

institution's participation in the program or programs for which

services are no longer provided; and

(ii) Funds, including Title IV, HEA program funds, received from or

on behalf of the institution or the institution's students, for the

purposes of the program or programs for which services are no longer

provided.

(d) A third-party servicer may not enter into a written contract

with an institution for the administration of any aspect of the

institution's participation in any Title IV, HEA program, if--

(1)(i) The servicer has been limited, suspended, or terminated by

the Secretary within the preceding five years;

(ii) The servicer has had, during the servicer's two most recent

audits of the servicer's administration of the Title IV, HEA programs,

an audit finding that resulted in the servicer's being required to

repay an amount greater than five percent of the funds that the

servicer administered under the Title IV, HEA programs for any award

year; or

(iii) The servicer has been cited during the preceding five years

for failure to submit audit reports required under Title IV of the HEA

in a timely fashion; and

(2)(i) In the case of a servicer that has been subjected to a

termination action by the Secretary, either the servicer, or one or

more persons or entities that the Secretary determines (under the

provisions of Sec. 668.13) exercise substantial control over the

servicer, or both, have not submitted to the Secretary financial

guarantees in an amount determined by the Secretary to be sufficient to

satisfy the servicer's potential liabilities arising from the

servicer's administration of the Title IV, HEA programs; or

(ii) One or more persons or entities that the Secretary determines

(under the provisions of Sec. 668.13) exercise substantial control over

the servicer have not agreed to be jointly or severally liable for any

liabilities arising from the servicer's administration of the Title IV,

HEA programs and civil and criminal monetary penalties authorized under

Title IV of the HEA.

(e)(1)(i) An institution that participates in a Title IV, HEA

program shall notify the Secretary within 10 days of the date that--

(A) The institution enters into a new contract or significantly

modifies an existing contract with a third-party servicer to administer

any aspect of that program;

(B) The institution or a third-party servicer terminates a contract

for the servicer to administer any aspect of that program; or

(C) A third-party servicer that administers any aspect of the

institution's participation in that program stops providing services

for the administration of that program, goes out of business, or files

a petition under the Bankruptcy Code.

(ii) The institution's notification must include the name and

address of the servicer.

(2) An institution that contracts with a third-party servicer to

administer any aspect of the institution's participation in a Title IV,

HEA program shall provide to the Secretary, upon request, a copy of the

contract, including any modifications, and provide information

pertaining to the contract or to the servicer's administration of the

institution's participation in any Title IV, HEA program.

(Authority: 20 U.S.C. 1094)

10. Section 668.81 is amended by removing paragraph (f); revising

paragraphs (a)(1) introductory text, (b), (c) introductory text, and

(c)(1); and adding a new paragraph (a)(1)(iv) to read as follows:

Sec. 668.81 Scope and special definitions.

(a)(1) This subpart establishes regulations for the following

actions with respect to a participating institution or third-party

servicer:

* * * * *

(iv) The limitation, suspension, or termination of the eligibility

of the servicer to contract with any institution to administer any

aspect of the institution's participation in a Title IV, HEA program.

* * * * *

(b) This subpart applies to an institution or a third-party

servicer that violates any statutory provision of or applicable to

Title IV, of the HEA, any regulatory provision prescribed under that

statutory authority, or any applicable special arrangement, agreement,

or limitation prescribed under authority of Title IV of the HEA.

(c) This subpart does not apply to a determination that--

(1) An institution or any of its locations or educational programs

fails to qualify for initial designation as an eligible institution,

location, or educational program because the institution, location, or

educational program fails to satisfy the statutory and regulatory

provisions that define an eligible institution or educational program

with respect to the Title IV, HEA program for which a designation of

eligibility is sought; or

* * * * *

11. Section 668.82 is revised to read as follows:

Sec. 668.82 Standard of conduct.

(a) A participating institution or a third-party servicer that

contracts with that institution acts in the nature of a fiduciary in

the administration of the Title IV, HEA programs. To participate in any

Title IV, HEA program, the institution or servicer must at all times

act with the competency and integrity necessary to qualify as a

fiduciary.

(b) In the capacity of a fiduciary--

(1) A participating institution is subject to the highest standard

of care and diligence in administering the programs and in accounting

to the Secretary for the funds received under those programs; and

(2) A third-party servicer is subject to the highest standard of

care and diligence in administering any aspect of the programs on

behalf of the institutions with which the servicer contracts and in

accounting to the Secretary and those institutions for any funds

administered by the servicer under those programs.

(c) The failure of a participating institution or any of the

institution's third-party servicers to administer a Title IV, HEA

program, or to account for the funds that the institution or servicer

receives under that program, in accordance with the highest standard of

care and diligence required of a fiduciary, constitutes grounds for--

(1) An emergency action against the institution, a fine on the

institution, or the limitation, suspension, or termination of the

institution's participation in that program; or

(2) An emergency action against the servicer, a fine on the

servicer, or the limitation, suspension, or termination of the

servicer's eligibility to contract with any institution to administer

any aspect of the institution's participation in that program.

(d)(1) A participating institution or a third-party servicer with

which the institution contracts violates its fiduciary duty if--

(i)(A) The servicer has been convicted of, or has pled nolo

contendere or guilty to, a crime involving the acquisition, use, or

expenditure of Federal, State, or local government funds, or has been

administratively or judicially determined to have committed fraud or

any other material violation of law involving those funds;

(B) A person who exercises substantial control over the servicer,

as determined according to Sec. 668.13, has been convicted of, or has

pled nolo contendere or guilty to, a crime involving the acquisition,

use, or expenditure of Federal, State, or local government funds, or

has been administratively or judicially determined to have committed

fraud or any other material violation of law involving those funds;

(C) The servicer employs a person in a capacity that involves the

administration of Title IV, HEA programs or the receipt of Title IV,

HEA program funds who has been convicted of, or has pled nolo

contendere or guilty to, a crime involving the acquisition, use, or

expenditure of Federal, State, or local government funds, or who has

been administratively or judicially determined to have committed fraud

or any other material violation of law involving those funds; or

(D) The servicer uses or contracts with any other person, agency,

or organization that has been or whose officers or employees have

been--

(1) Convicted of, or pled nolo contendere or guilty to, a crime

involving the acquisition, use, or expenditure of Federal, State, or

local government funds; or

(2) Administratively or judicially determined to have committed

fraud or any other material violation of law involving Federal, State,

or local government funds; and

(ii) Upon learning of a conviction, plea, or administrative or

judicial determination described in paragraph (d)(1)(i) (B) through (D)

of this section, the institution or servicer, as applicable, does not

promptly remove the person, agency, or organization from any

involvement in the administration of the institution's participation in

Title IV, HEA programs, or, as applicable, the removal or elimination

of any substantial control, as determined according to Sec. 668.13,

over the servicer.

(2)(i) A participating institution or a third-party servicer with

which the institution contracts violates its fiduciary responsibility

if the servicer commits a violation of a statutory provision of or

applicable to Title IV of the HEA, a regulatory provision prescribed

under that statutory authority, or any applicable special arrangement,

agreement, or limitation by, a principal or affiliate of the servicer

(as those terms are defined in 34 CFR part 85); and

(ii) Upon learning of a conviction, plea, or administrative or

judicial determination described in paragraph (d)(2)(i) of this

section, the institution or servicer, as applicable, does not promptly

remove the person, agency, or organization from any involvement in the

administration of the institution's participation in Title IV, HEA

programs, or, as applicable, the removal or elimination of any

substantial control, as determined according to Sec. 668.13, over the

servicer.

(3) A violation for a reason contained in paragraphs (d) (1) and

(2) of this section is grounds for terminating--

(i) The servicer's eligibility to contract with any institution to

administer any aspect of the institution's participation in a Title IV,

HEA program; and

(ii) The participation in any Title IV, HEA program of any

institution under whose contract the servicer committed the violation,

if that institution had been aware of the violation and had failed to

take the appropriate action described in paragraphs (d)(1)(ii) and

(d)(2)(ii) of this section.

(e)(1) A participating institution or third-party servicer, as

applicable, violates its fiduciary duty if--

(i)(A) The institution or servicer, as applicable, is debarred or

suspended under Executive Order (E.O.) 12549 (3 CFR, 1987 Comp., p.

189) or the Federal Acquisition Regulations (FAR), 48 CFR part 9,

subpart 9.4; or

(B) Cause exists under 34 CFR 85.305 or 85.405 for debarring or

suspending the institution, servicer, or any principal or affiliate of

the institution or servicer under E.O. 12549 or the FAR, 48 CFR part 9,

subpart 9.4; and

(ii) Upon learning of the debarment, suspension, or cause for

debarment or suspension, the institution or servicer, as applicable,

does not promptly--

(A) Discontinue the affiliation; or

(B) Remove the principal from responsibility for any aspect of the

administration of an institution's or servicer's participation in the

Title IV, HEA programs.

(2) A violation for a reason contained in paragraph (e)(1) of this

section is grounds for terminating--

(i) The institution's participation in any Title IV, HEA program;

and

(ii) The servicer's eligibility to contract with any institution to

administer any aspect of the institution's participation in any Title

IV, HEA program. The violation is also grounds for terminating, under

this subpart, the participation in any Title IV, HEA program of any

institution under whose contract the servicer committed the violation,

if that institution knew or should have known of the violation.

(f)(1) The debarment of a participating institution or third-party

servicer, as applicable, under E.O. 12549 or the FAR, 48 CFR part 9,

subpart 9.4, by the Department of Education or another Federal agency

from participation in Federal programs, under procedures that comply

with 5 U.S.C. 554-557 (formal adjudication requirements under the

Administrative Procedure Act), terminates, for the duration of the

debarment--

(i) The institution's participation in any Title IV, HEA program;

and

(ii) The servicer's eligibility to contract with any institution to

administer any aspect of the institution's participation in any Title

IV, HEA program.

(2)(i) The suspension of a participating institution or third-party

servicer, as applicable, under E.O. 12549 or the FAR, 48 CFR part 9,

subpart 9.4, by the Department of Education or another Federal agency

from participation in Federal programs, under procedures that comply

with 5 U.S.C. 554-557, suspends--

(A) The institution's participation in any Title IV, HEA program;

and

(B) The servicer's eligibility to contract with any institution to

administer any aspect of the institution's participation in any Title

IV, HEA program.

(ii) A suspension under this paragraph lasts for a period of 60

days, beginning on the date of the suspending official's decision,

except that the suspension may last longer if--

(A) The institution or servicer, as applicable, and the Secretary,

agree to an extension of the suspension; or

(B) The Secretary begins a limitation or termination proceeding

against the institution or servicer, as applicable, under this subpart

before the 60th day of the suspension.

(Authority: E.O. 12549 (3 CFR, 1987 Comp., p. 189), 12689 (3 CFR,

1989 Comp., p. 235); 20 U.S.C. 1070, et seq., 1082(a)(1) and (h)(1),

1094(c)(1) (D) and (H), and 3474)

12. Section 668.83 is revised to read as follows:

Sec. 668.83 Emergency action.

(a) Under an emergency action, the Secretary may--

(1) Withhold Title IV, HEA program funds from a participating

institution or its students, or from a third-party servicer, as

applicable;

(2)(i) Withdraw the authority of the institution or servicer, as

applicable, to commit, disburse, deliver, or cause the commitment,

disbursement, or delivery of Title IV, HEA program funds; or

(ii) Withdraw the authority of the institution or servicer, as

applicable, to commit, disburse, deliver, or cause the commitment,

disbursement, or delivery of Title IV, HEA program funds except in

accordance with a particular procedure; and

(3)(i) Withdraw the authority of the servicer to administer any

aspect of any institution's participation in any Title IV, HEA program;

or

(ii) Withdraw the authority of the servicer to administer any

aspect of any institution's participation in any Title IV, HEA program

except in accordance with a particular procedure.

(b)(1) An initiating official begins an emergency action against an

institution or third-party servicer by sending the institution or

servicer a notice by registered mail, return receipt requested. In an

emergency action against a third-party servicer, the official also

sends the notice to each institution that contracts with the servicer.

The official also may transmit the notice by other, more expeditious

means if practical.

(2) The emergency action takes effect on the date the initiating

official mails the notice to the institution or servicer, as

applicable.

(3) The notice states the grounds on which the emergency action is

based, the consequences of the emergency action, and that the

institution or servicer, as applicable, may request an opportunity to

show cause why the emergency action is unwarranted.

(c)(1) An initiating official takes emergency action against an

institution or third-party servicer only if that official--

(i) Receives information, determined by the official to be

reliable, that the institution or servicer, as applicable, is violating

any statutory provision of or applicable to Title IV of the HEA, any

regulatory provision prescribed under that statutory authority, or any

applicable special arrangement, agreement, or limitation;

(ii) Determines that immediate action is necessary to prevent

misuse of Title IV, HEA program funds; and

(iii) Determines that the likelihood of loss from that misuse

outweighs the importance of awaiting completion of any proceeding that

may be initiated to limit, suspend, or terminate, as applicable--

(A) The participation of the institution in one or more Title IV,

HEA programs; or

(B) The eligibility of the servicer to contract with any

institution to administer any aspect of the institution's participation

in a Title IV, HEA program.

(2) Examples of violations of a Title IV, HEA program requirement

that cause misuse and the likely loss of Title IV, HEA program funds

include--

(i) Causing the commitment, disbursement, or delivery by any party

of Title IV, HEA program funds in an amount that exceeds--

(A) The amount for which students are eligible; or

(B) The amount of principal, interest, or special allowance

payments that would have been payable to the holder of a Federal

Stafford, Federal PLUS, or Federal SLS loan if a refund allocable to

that loan had been made in the amount and at the time required;

(ii) Using, offering to make available, or causing the use or

availability of Title IV, HEA program funds for educational services

if--

(A) The institution, servicer, or agents of the institution or

servicer have made a substantial misrepresentation as described in

Secs. 668.72, 668.73, or 668.74 related to those services;

(B) The institution lacks the administrative or financial ability

to provide those services in full; or

(C) The institution, or servicer, as applicable, lacks the

administrative or financial ability to compensate by appropriate refund

for any portion of an educational program not completed by a student;

and

(iii) Engaging in fraud involving the administration of a Title IV,

HEA program. Examples of fraud include--

(A) Falsification of any document received from a student or

pertaining to a student's eligibility for assistance under a Title IV,

HEA program;

(B) Falsification, including false certifications, of any document

submitted by the institution or servicer to the Department of

Education;

(C) Falsification, including false certifications, of any document

used for or pertaining to--

(1) The legal authority of an institution to provide postsecondary

education in the State in which the institution is located; or

(2) The accreditation or preaccreditation of an institution or any

of the institution's educational programs or locations;

(D) Falsification, including false certifications, of any document

submitted to a guaranty agency under the Federal Stafford Loan, Federal

PLUS, and Federal SLS programs or an independent auditor;

(E) Falsification of any document submitted to a third-party

servicer by an institution or to an institution by a third-party

servicer pertaining to the institution's participation in a Title IV,

HEA program; and

(F) Falsification, including false certifications, of any document

pertaining to the performance of any loan collection activity,

including activity that is not required by the HEA or applicable

program regulations.

(3) If the Secretary begins an emergency action against a third-

party servicer, the Secretary may also begin an emergency action

against any institution under whose contract a third-party servicer

commits the violation.

(d)(1) Except as provided in paragraph (d)(2) of this section,

after an emergency action becomes effective, an institution or third-

party servicer, as applicable, may not--

(i) Make or increase awards or make other commitments of aid to a

student under the applicable Title IV, HEA program;

(ii) Disburse either program funds, institutional funds, or other

funds as assistance to a student under that Title IV, HEA program;

(iii) In the case of an emergency action pertaining to

participation in the Federal Stafford Loan, Federal PLUS, or Federal

SLS Program--

(A) Certify an application for a loan under that program;

(B) Deliver loan proceeds to a student under that program; or

(C) Retain the proceeds of a loan made under that program that are

received after the emergency action takes effect; or

(iv) In the case of an emergency action against a third-party

servicer, administer any aspect of any institution's participation in

any Title IV, HEA program.

(2) If the initiating official withdraws, by an emergency action,

the authority of the institution or servicer to commit, disburse,

deliver, or cause the commitment, disbursement, or delivery of Title

IV, HEA program funds, or the authority of the servicer to administer

any aspect of any institution's participation in any Title IV, HEA

program, except in accordance with a particular procedure specified in

the notice of emergency action, the institution or servicer, as

applicable, may not take any action described in paragraph (d)(1) of

this section except in accordance with the procedure specified in the

notice.

(e)(1) Upon request by the institution or servicer, as applicable,

the Secretary provides the institution or servicer, as soon as

practicable, with an opportunity to show cause that the emergency

action is unwarranted or should be modified.

(2) An opportunity to show cause consists of an opportunity to

present evidence and argument to a show-cause official. The initiating

official does not act as the show-cause official for any emergency

action that the initiating official has begun. The show-cause official

is authorized to grant relief from the emergency action. The

institution or servicer may make its presentation in writing or, upon

its request, at an informal meeting with the show-cause official.

(3) The show-cause official may limit the time and manner in which

argument and evidence may be presented in order to avoid unnecessary

delay or the presentation of immaterial, irrelevant, or repetitious

matter.

(4) The institution or servicer, as applicable, has the burden of

persuading the show-cause official that the emergency action imposed by

the notice is unwarranted or should be modified because--

(i) The grounds stated in the notice did not, or no longer, exist;

(ii) The grounds stated in the notice will not cause loss or misuse

of Ti

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