# Institutions and Lender Requirements Relating to Education Loans, Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-17119

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 28, 2009
- **Citation:** 74 FR 37432

## Text

DEPARTMENT OF EDUCATION
[Docket ID ED-2009-OPE-0003]
34 CFR Parts 601, 668, 674, 682, and 685
RIN 1840-AC95
Institutions and Lender Requirements Relating to Education Loans, Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Secretary proposes to establish new regulations in 34 CFR part 601, Institutions and Lender Requirements Relating to Education Loans, to implement requirements relating to education loans that were added to the Higher Education Act of 1965, as amended (HEA) by the Higher Education Opportunity Act of 2008 (HEOA). The Secretary also proposes to amend the regulations for Student Assistance General Provisions in part 668, the Federal Perkins Loan (Perkins Loan) Program in part 674, the Federal Family Education Loan (FFEL) Program in part 682, and the William D. Ford Federal Direct Loan (Direct Loan) Program in part 685 to implement certain provisions of the HEA that involve school-based loan issues and that were affected by the statutory changes made to the HEA by the HEOA.

DATES:

We must receive your comments on or before August 27, 2009.

ADDRESSES:

Submit your comments through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery. We will not accept comments by fax or by e-mail. Please submit your comments only one time in order to ensure that we do not receive duplicate copies. In addition, please include the Docket ID at the top of your comments.

•
Federal eRulemaking Portal:
Go to
http://www.regulations.gov
to submit your comments electronically. Information on using Regulations.gov, including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “How To Use This Site.”

•
Postal Mail, Commercial Delivery, or Hand Delivery.
If you mail or deliver your comments about these proposed regulations, address them to Brian Smith, U.S. Department of Education, 1990 K Street, NW., room 8033, Washington, DC 20006-8502.

Privacy Note:

The Department's policy for comments received from members of the public (including those comments submitted by mail, commercial delivery, or hand delivery) is to make these submissions available for public viewing in their entirety on the Federal eRulemaking Portal at
http://www.regulations.gov.
Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available on the Internet.

FOR FURTHER INFORMATION CONTACT:

Marty Guthrie, U.S. Department of Education, 1990 K Street, NW., Room 8042, Washington, DC 20006-8502. Telephone: (202) 219-7031 or via the Internet at:
Marty.Guthrie@ed.gov,
or Gail McLarnon, U.S. Department of Education, 1990 K Street, NW., room 8026, Washington, DC 20006-8502. Telephone: (202) 219-7048 or via the Internet at:
Gail.McLarnon@ed.gov.

If you use a telecommunications device for the deaf, call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.

Individuals with disabilities can obtain this document in an accessible format (
e.g.,
Braille, large print, audiotape, or computer diskette) on request to one of the contact persons listed under
FOR FURTHER INFORMATION CONTACT
.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

As outlined in the section of this notice entitled
Negotiated Rulemaking,
significant public participation, through six public hearings and three negotiated rulemaking sessions, has occurred in developing this notice of proposed rulemaking (NPRM). In accordance with the requirements of the Administrative Procedure Act, the Department invites you to submit comments regarding these proposed regulations on or before August 27, 2009. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses and to arrange your comments in the same order as the proposed regulations.

We invite you to assist us in complying with the specific requirements of Executive Order 12866, including its overall requirements to assess both the costs and the benefits of the proposed regulations and feasible alternatives, and to make a reasoned determination that the benefits of these proposed regulations justify their costs. Please let us know of any further opportunities we should take to reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the programs.

As noted elsewhere in this NPRM, two of the Department's negotiated rulemaking committees considered proposed revisions to 34 CFR 674.51 (Special Definitions) in subpart D of part 674 of the Federal Perkins Loan Program regulations. Team I—Loans—Lender General Loan Issues, the negotiating committee responsible for regulations involving issues related to lender and general loan issues, negotiated the proposed definitions of
substantial gainful activity
and
permanent and total disability.
Team II—Loans—School-based Loans Issues negotiated all other changes in this section.

We have included all proposed changes to 34 CFR 674.51 in this NPRM as well as in the notice of proposed rulemaking that we are publishing as a result of the negotiations of Team I—Loans—Lender General Loan Issues. However, we ask that when submitting your comments on the proposed changes to 34 CFR 674.51, you submit any comments on the proposed definitions of
substantial gainful activity
and
total and permanent disability
in the docket (Docket ID ED-2009-OPE-0004) for the Team I notice of proposed rulemaking. Comments on all other provisions in this section should be submitted in the docket (Docket ID ED-2009-OPE-0003) for this NPRM.

In addition, in this NPRM we have included a proposed change to § 668.184(a)(1). As amended by the HEOA, section 498(k) of the HEA states that an institution that conducts a teach-out under certain circumstances is not responsible for any liabilities of the closed institution. As a result of this statutory change, the Department intends to propose, in a separate notice of proposed rulemaking (Docket ID ED-2009-OPE-0005, an amendment to 34 CFR 600.32(d) to provide that the default rate of an institution that establishes an additional location at the site of a closed institution for which it conducted a teach-out would not be affected in any way by the closed institution's cohort default rate. In light of this statutory change and our intended amendment to 34 CFR 600.32(d), the Department also proposes to amend § 668.184(a)(1) to cross-reference 34 CFR 600.32(d) and to include a similar cross-reference to 34 CFR 600.32(d) in new § 668.203(a)(1). We have included the proposed amendment to § 668.184(a)(1) and proposed § 668.203(a)(1) in this NPRM

to enable the public to view all changes to these sections in context. These proposed changes will also be included and discussed in a separate notice of proposed rulemaking based on the negotiations of the negotiating rulemaking committee responsible for regulatory issues involving Title IV general provisions. Accordingly, we ask that when submitting any comments on the proposed changes to §§ 600.32(d) or the proposed cross-references to that section in §§ 668.184(a)(1) and 668.203(a)(1), you submit any comments in the docket for that notice of proposed rulemaking (Docket ID ED-2009-OPE-0005).

During and after the comment period, you may inspect all public comments about these proposed regulations by accessing Regulations.gov. You may also inspect the comments, in person, in room 8031, 1990 K Street, NW., Washington, DC, between the hours of 8:30 a.m. and 4:00 p.m., Eastern time, Monday through Friday of each week except Federal holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking Record

On request, we will supply an appropriate aid, such as a reader or print magnifier, to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for these proposed regulations. If you want to schedule an appointment for this type of aid, please contact one of the persons listed under
FOR FURTHER INFORMATION CONTACT
.

Negotiated Rulemaking

Section 492 of the HEA requires the Secretary, before publishing any proposed regulations for programs authorized by Title IV of the HEA, to obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations from the public, including individuals and representatives of groups involved in the Federal student financial assistance programs, the Secretary must subject the proposed regulations to a negotiated rulemaking process. All proposed regulations that the Department publishes on which the negotiators reached consensus must conform to final agreements resulting from that process unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreements. Further information on the negotiated rulemaking process can be found at:
http://www.ed.gov/policy/highered/leg/hea08/index.html.

On December 31, 2008, the Department published a notice in the
Federal Register
(73 FR 80314) announcing our intent to establish five negotiated rulemaking committees to prepare proposed regulations. One committee would focus on issues related to lender and general loan issues (Team I—Loans—Lender General Loan Issues). A second committee would focus on school-based loan issues (Team II—Loans—School-based Loan Issues). A third committee would focus on accreditation (Team III—Accreditation). A fourth committee would focus on discretionary grants (Team IV—Discretionary Grants). A fifth committee would focus on general and non-loan programmatic issues (Team V—General and Non-Loan Programmatic Issues). The notice requested nominations of individuals for membership on the committees who could represent the interests of key stakeholder constituencies on each committee.

Team II—Loans—School-based Loan Issues (Team II) met to develop proposed regulations during the months of March 2009, April 2009, and May 2009. This NPRM resulted primarily from the work of Team II and, in a couple of instances where the subject matter of the proposed regulations overlapped, the work of Team I—Loans—Lender General Loan Issues (Team I).
1

This NPRM proposes regulations relating to the administration of the Federal student loan programs.

1
As discussed elsewhere in this preamble, Team I—Loans—Lender General Loan Issues was responsible for negotiating the following provisions, which appear in this NPRM: 34 CFR 601.2 (definitions of the terms
lender
and
private education loan
), 34 CFR 601.40 (Disclosure and reporting requirements for lenders), and 34 CFR 674.51 (definitions of the terms
substantial gainful activity
and
total and permanent disability
).

The Department developed a list of proposed regulatory provisions based on the provisions contained in the HEOA and from advice and recommendations submitted by individuals and organizations as testimony to the Department in a series of six public hearings held on:

• September 19, 2008 at Texas Christian University in Fort Worth, Texas;

• September 29, 2008, at the University of Rhode Island, in Providence, Rhode Island;

• October 2, 2008, at Pepperdine University, in Malibu, California;

• October 6, 2008, at Johnson C. Smith University, in Charlotte, North Carolina;

• October 8, 2008, at the U.S. Department of Education in Washington, DC; and

• October 15, 2008, at Cuyahoga Community College, in Cleveland, Ohio.

In addition, the Department accepted written comments on possible regulatory provisions submitted directly to the Department by interested parties and organizations. A summary of all comments received orally and in writing is posted as background material in the docket for this NPRM. Transcripts of the regional meetings can be accessed at
http://www.ed.gov/policy/highered/leg/hea08/index.html.

Staff within the Department also identified issues for discussion and negotiation.

At its first meeting, Team II reached agreement on its protocols. These protocols provided that for each community of interest identified as having interests that were significantly affected by the subject matter of the negotiations, the non-Federal negotiators would represent the organizations listed after their names in the protocols in the negotiated rulemaking process.

Team II included the following members:

• Angela Peoples, United States Student Association, and Rich Williams (alternate), State Public Interest Research Groups representing students.

• Richard Heath, Anne Arundel Community College, and Pat Hurley (alternate), Glendale Community College representing 2-year public institutions.

• Roberta Johnson, Iowa State University, and Mr. Kim Jenerette (alternate), University of South Carolina-Upstate representing 4-year public institutions.

• Elizabeth Hicks, Columbia University, and Nancy Hoover (alternate), Denison University representing private, nonprofit institutions.

• Mary Dorrell, Career Education Corporation, and Nancy Broff (alternate), Dickstein Shapiro LLP representing private, for-profit institutions.

• Thelma Ross, Lincoln University, and Helga Greenfield (alternate), Spelman College representing minority-serving institutions.

• Justin Draeger, National Association of Student Financial Aid Administrators, and Charles “Buddy” Mayfield (alternate), Missouri Valley College representing financial aid administrators.

• Virginia Layton, Miami University, and Anne Gross (alternate), National Association of College and University

Business Officers representing business officers.

• Mary Lyn Hammer, Champion College Solutions, and James B. Parker (alternate), Panhandle Plains Student Loan Center representing institutional and loan servicers.

• Scot Williams, EdFund/CSAC, and Jacqueline Fairbairn (alternate), Great Lakes Higher Education Guaranty Corp. representing guaranty agencies.

• Jackie Ito-Woo, University of California, and Beth Stack (alternate), University of Pittsburgh representing institutions participating in the Perkins Loan Program.

• J.D. LaRock, Massachusetts Office of Higher Education representing States.

• Gail McLarnon, U.S. Department of Education representing the Federal Government.

These protocols also provided that, unless agreed to otherwise, consensus on all of the amendments in the proposed regulations had to be achieved for consensus to be reached on the entire NPRM. Consensus means that there must be no dissent by any member.

During the meetings, Team II reviewed and discussed drafts of proposed regulations. At the final meeting in May 2009, Team II reached consensus on all of the proposed regulations in this document except:

• The proposed definitions of the terms
lender
and
private education loan
in 34 CFR 601.2 (Definitions).

• The proposed requirements in 34 CFR 601.40 (Disclosure and reporting requirements for lenders).

• The proposed definitions of the terms
substantial gainful employment
and
total and permanent disability
in 34 CFR 674.51 (Special Definitions).

These proposed regulatory provisions were assigned to Team I for negotiated rulemaking purposes because the substance of the provisions fell within the purview of Team I's expertise. Team I reached consensus on all of its proposed regulations, including the provisions identified in this paragraph, in its final meeting in May 2009.

Team I and Team II were advised that, to ensure transparency and ease of use for public commenters, the Department would propose the entirety of 34 CFR part 601 in a single NPRM. Given Team I's consensus, which included consensus on the definitions of the terms
lender
and
private education loan
in proposed § 601.2 as well as the requirements in § 601.40, Team I members were advised that they may not comment negatively on the provisions they negotiated notwithstanding that they would appear in Team II's NPRM. Likewise, Team II members were advised that, while they may not comment negatively on the majority of proposed 34 CFR part 601 as a result of their consensus agreement, they may comment on the definitions of
lender
and
private education loan
as well as proposed § 601.40.

With regard to the proposed changes to 34 CFR 674.51, the Department determined that it would be helpful for the public to be able to view all proposed changes to this special definitions section for the Perkins Program in both Team I's notice of proposed rulemaking and Team II's NPRM. Team I and Team II were advised that the proposed changes to § 674.51 would appear in their entirety in both documents to provide context and enhance understanding of both committees' proposed changes to this section. Each team was advised by its respective Federal negotiator that its consensus agreement did not apply to the definitions negotiated by the other team and that any comments they may have on the definitions negotiated by the other team should be submitted in response to the notice of proposed rulemaking published as a result of the other team's negotiations.

More information on the work of Team II can be found at
http://www.ed.gov/policy/highered/reg/hearulemaking/2009/loans-school-based.html
and more information on the work of Team I can be found at
http://www.ed.gov/policy/highered/reg/hearulemaking/2009/loans-lender.html.

Summary of Proposed Changes

These proposed regulations would implement the school-based loan provisions of the HEA, as amended by the HEOA. These provisions include:

• An increase in the period used to calculate the cohort default rate (CDR) from 2 to 3 years effective for CDRs calculated for fiscal year 2009 and subsequent years, the requirement that an institution whose CDR is greater than or equal to 30 percent for any fiscal year establish a default prevention plan, and an increase from 25 to 30 percent in the threshold default that would render an institution ineligible to participate in the Pell, FFEL, and Direct Loan Programs (see section 435(a) and (m) of the HEA);

• An expansion of exit counseling requirements in the title IV, HEA loan programs (see section 485(b)(1)(A) of the HEA);

• An expansion of entrance counseling requirements in the FFEL and Direct Loan Programs (see section 485(l) of the HEA);

• Additions to the conditions an institution must agree to in its program participation agreement with the Secretary of Education (the agreement between the institution and the Department that enables the institution to participate in the loan programs under Title IV of the HEA). These conditions include: (1) A requirement that an institution develop, publish, administer and enforce a code of conduct with respect to its FFEL Program activities (see section 487(a)(25) of the HEA); (2) a requirement that an institution compile, maintain and make available to students and their families a list of its preferred lenders if it enters into any preferred lender arrangement (see section 487(a)(27) of the HEA); and (3) a requirement that an institution, upon the request of an applicant of a private education loan, provide the applicant with the private education loan certification form developed by the Secretary (see section 487(a)(28) of the HEA);

• The addition of education loan borrower disclosures by institutions of higher education, and institution-affiliated organizations, including definitions (see sections 151 through 155, 487(a) and 487(h) of the HEA);

• The addition of borrower disclosures by covered institutions and institution-affiliated organizations that participate in a preferred lender arrangement (see section 153(c) of the HEA);

• The addition of reporting requirements for covered institutions and institution-affiliated organizations (see section 153(c)(2) of the HEA);

• Dissemination of information to prospective and enrolled students regarding the terms and conditions of title IV, HEA loans (see section 485(a) of the HEA);

• Disclosure to the Secretary of any reimbursements made to employees of an institution of higher education for service on advisory boards (see section 485(m) of the HEA); and

• An expansion of cancellation benefits for Perkins Loan borrowers, including cancellation benefits for teachers in an educational service agency; staff members in a pre-kindergarten or childcare program; attorneys employed in a Federal Public Defender Organization or community Defender Organization; fire fighters, faculty members of a Tribal College or University, librarians with a master's degree employed in an elementary or secondary school or in a public library that serves one or more schools eligible for funding under title I of the Elementary and Secondary Education Act of 1965, as amended; and speech pathologists with a master's degree who

work exclusively with title I-eligible schools (see section 465(a) of the HEA).

Significant Proposed Regulations

We discuss substantive issues under the sections of the regulations to which they pertain. Generally, we do not address regulatory changes that are technical or otherwise minor in effect.

Part 601—Institution and Lender Requirements Relating to Education Loans

Subpart A—General

Scope (§ 601.1)

Statute:
Sections 120 and 1021(b) of the HEOA added a new part E to title I of the HEA, titled
Lender and Institution Requirements Relating to Education Loans.
Part E, consisting of new sections 151 through 155, requires significant new disclosures to borrowers of education loans and related institutional and lender reporting to the Department. The required borrower disclosures apply to both Title IV student loans and private education loans, and are required of institutions of higher education, institution-affiliated organizations, and lenders.

Current Regulations:
None.

Proposed Regulations:
We propose to add a new part 601 to title 34 of the Code of Federal Regulations to implement the statutory provisions of sections 151 through 155 of the HEA. Proposed § 601.1 would briefly summarize the content of the new part 601.

Reasons:
Proposed § 601.1 would be added to implement part E of title I of the HEA, which was added by the HEOA.

Definitions (§ 601.2)

Statute:
Section 120 of the HEOA added section 151 to the HEA. Section 151 of the HEA sets forth the definitions for terms used in part E of title I of the HEA. These terms include
covered institution,

education loan,

institution-affiliated organization,

preferred lender arrangement,
and
private education loan.

The term
covered institution
is defined as an institution of higher education, as defined in section 102 of the HEA, that receives any Federal funding or assistance. Thus, the term
covered institution
includes any institution of higher education that receives any type of Federal funding or assistance, not just any institution of higher education that receives Title IV, HEA funding or assistance.

The term
institution-affiliated organization
is defined as any organization directly or indirectly related to a covered institution, including alumni organizations, foundations, or social organizations, that recommends, promotes, or endorses education loans for students attending the covered institution.

The term
education loan
is defined as a FFEL Loan, a Direct Loan, or a private education loan. Section 151(9) of the HEA defines the term
private education loan
as that term is defined in section 140 of the Truth in Lending Act (TILA) (15 U.S.C. 1631). Under this definition, a private education loan is a non-Title IV loan provided by a private educational lender to a borrower expressly for postsecondary educational expenses, and that is not an extension of credit under an open-end consumer credit plan, or secured by real property or a dwelling.

The term
preferred lender arrangement
is defined as an arrangement or agreement between a lender and a covered institution or an institution-affiliated organization, under which the lender provides or otherwise issues education loans to the covered institution's students or their families, and that relates to the covered institution or institution-affiliated organization recommending, promoting, or endorsing the lender's education loan products. The term
preferred lender arrangement
does
not
include arrangements or agreements with respect to Direct Loan Program loans or loans that originate through the PLUS Loan auction pilot program, authorized under section 499(b) of the HEA.

Section 151 of the HEA also provides definitions for the terms
agent,

eligible lender,

lender,
and
officer
as those terms are used in title I, part E of the HEA.

Section 151(4) of the HEA states that the term
eligible lender
has the same meaning as provided in section 435(d) of the HEA. The term
lender
is defined in section 151(6) of the HEA as an eligible lender for Federal Family Education Loan (FFEL) Program loans, the Department of Education for William D. Ford Direct Loans, and a
private educational lender
as that term is defined in section 140 of the TILA (15 U.S.C. 1631) for private education loans. The term
lender
includes any other person engaged in the business of securing, making, or extending educational loans on behalf of the lender.

The term
agent
is defined as an officer or employee of a covered institution or an institution-affiliated organization. The definition of the term
officer
includes a director or trustee of a covered institution or institution-affiliated organization, if such individual is treated as an employee of the covered institution or the institution-affiliated organization.

Current Regulations:
None.

Proposed Regulations:
Proposed § 601.2(b) would set forth the definitions for the terms described in the preceding
Statute
section that apply to new part 601. With one exception, the regulatory definitions do not make substantive changes to the corresponding statutory definitions.

The one exception is for the term
preferred lender arrangement.
The definition for
preferred lender arrangement
in proposed § 601.2(b) would track the statutory definition in section 151(8) of the HEA, except that it would specify that an arrangement or agreement does not exist for private education loans that a covered institution makes to its own students, as long as the private education loan is funded by the covered institution's own funds; is funded by donor-directed contributions; is made under title VII or title VIII of the Public Service Health Act; or is made under an institutional payment plan of the covered institution.

Reasons:
The proposed regulations in § 601.2(b) were negotiated by two teams during the negotiated rulemaking process. Team I, which covered general and lender loan issues, negotiated the definitions for the terms
eligible lender,

lender,
and
private education loan.
Team II, which covered school-based loan issues, negotiated the remaining definitions.

The statutory definitions for the terms that would be used in part 601 are detailed and specific. Therefore, except as noted for the definition of
preferred lender arrangement,
the Department has declined to expand on the statutory definitions in the regulations.

The proposed regulations negotiated by Team I reflect the statutory definitions for the terms
lender
and
private education loan.
The definition of
lender,
as reflected in the proposed regulations, would simply provide a cross reference to the definition of that term in current § 682.200(b). The definition of
private education loan
would mirror the definition provided for
private education loan
in section 140 of the TILA (15 U.S.C. 1631). Use of this TILA definition is required by section 151(9) of the HEA.

The Team I non-Federal negotiators raised some concern over the cross references in our proposed regulations to the requirements in the TILA. Specifically, there was discussion about the regulations implementing the TILA, which will not be published in final form before the conclusion of the negotiation process for these regulations. The Department made clear

that, in terms of the definition of
private education loan,
section 151(9) of the HEA requires the Department to use the TILA definition. Under this requirement, the Department has no authority to negotiate that definition for purposes of these proposed regulations.

For Team II, discussions regarding the proposed definitions focused on two terms:
Agent
and
preferred lender arrangement.

The meaning of the term
agent
came up as part of the discussion around the code of conduct requirements in proposed § 601.21. This discussion is summarized in the code of conduct section of the preamble.

The meaning of the term
preferred lender arrangement
came up frequently during the negotiated rulemaking sessions, and is discussed in the following paragraphs.

Several of the Team II non-Federal negotiators argued that a preferred lender arrangement can exist only if there is a written or verbal agreement between a lender and a covered institution or institution-affiliated organization. One of the non-Federal negotiators submitted an alternative definition for
preferred lender arrangement
that would have built this written or verbal agreement requirement into the definition, only allowing exceptions to this requirement in cases when a course of conduct evidencing intention by the parties to create an arrangement exists.

The Department declined to adopt this proposed alternative definition because the statutory definition of
preferred lender arrangement
does not address how the arrangement comes about, nor does it specify that a written or verbal agreement must exist. Instead, section 151(8) of the HEA provides that two conditions must be met for a preferred lender arrangement to exist between a lender and a covered institution or an institution-affiliated organization. These conditions are that—

(1) A lender provides or issues education loans to students, or the families of such students, attending a covered institution; and

(2) The covered institution or an institution-affiliated organization recommends, promotes, or endorses the education loan products of the lender.

If both of those conditions are met, a preferred lender arrangement exists, whether or not the covered institution and the lender entered into a formal agreement.

Several non-Federal negotiators asked whether the Department viewed institutional loans—that is, loans made directly by a covered institution to its own students—as being covered by the term
preferred lender arrangement.
These non-Federal negotiators identified several preferred lender arrangement requirements in section 487(e) of the HEA (and proposed § 601.21) that they believed would be impossible or impractical for a covered institution to comply with if the preferred lender arrangement requirements applied to institutional loans (
i.e.,
loans made directly by a covered institution to its own students). For example, non-Federal negotiators noted that a school, in its capacity as a lender, could be prohibited from paying its own employees. They argued that, if we applied the code of conduct requirement that a
lender
not provide gifts to employees of a covered institution's financial aid office to a covered institution that makes loans directly to their students (and, therefore, falls within the definition of “lender”), these covered institutions would be prohibited from paying the employees in its financial aid office.

To avoid this unintended consequence, some of the Team II non-Federal negotiators recommended that the Department exempt institutional loans from the definition of
private education loan.
As noted earlier in this preamble, the definition of the term
private education loan
is established by the TILA and any regulations the Federal Reserve issues in connection with this statutory definition. The Department has no authority to alter the statutory definition of private education loan.

Furthermore, we do not agree that the Federal Reserve should interpret, through its regulations implementing TILA, that the term
private education loan
does not include institutional loans. If the Federal Reserve did so, such loans would not only be exempt from the preferred lender arrangement requirements in part E, title I of the HEA, and proposed 34 CFR part 601, but they would also be exempt from certain TILA requirements that the Department believes provide beneficial protections to student borrowers (such as requiring private educational lenders to inform a potential private education loan borrower that the borrower may qualify for title IV, HEA student financial assistance in addition to or in lieu of the private education loan, as required under section 128(e)(1)(M) of the TILA).

Recognizing that the Department cannot modify the definition of
private education loan,
non-Federal negotiators asked that institutional loans, and other Federal Loans, be excluded from the definition of
preferred lender arrangement.
As an alternative, if that approach could not be accepted, several non-Federal negotiators offered a proposal in which certain types of institutional loans, with certain types of terms and conditions, would be exempt from some or all of the requirements governing loans made pursuant to a preferred lender arrangement.

After considering the proposals from the non-Federal negotiators, the Department declined to adopt this approach. The term
preferred lender arrangement
defines a relationship between two parties regarding loans offered to student borrowers and their families. Nothing in the statutory definition of the term suggests that the relationship is contingent on the terms and conditions of the loans being provided. The relationship is defined by the actions of the two parties—that is, the lender provides or issues education loans and the covered institution or institution-affiliated organization recommends, promotes or endorses the education loan products of the lender.

The Department believes that these actions must be taken by at least two separate parties for a preferred lender arrangement to exist. The definition of the term
preferred lender arrangement
refers to “an arrangement or agreement between a lender and a covered institution or institution-affiliated organization.” Implicit in the definition is the understanding that the lender and the covered institution are not one and the same entity.

The Department responded to the non-Federal negotiators by proposing to expand the regulatory definition for
preferred lender arrangement
in proposed § 601.2(b) by specifying that such an arrangement does not exist for a private education loan made by a covered institution to the covered institution's students.

The proposed definition for
preferred lender arrangement
also would clarify that a preferred lender arrangement does would not exist for a private education loan made by a covered institution to the covered institution's students, but only if the covered institution made the loan using its own funds.

Some non-Federal negotiators requested clarification of the phrase “own funds” as used in the proposed definition of
preferred lender arrangement.
For example, they presented a scenario in which a lender provides funds to a covered institution, the covered institution uses the funds to make loans to its students, and then the covered institution sells the loans to the lender (possibly immediately after the loan is made). These non-Federal negotiators requested that funds

provided under these conditions be considered the covered institution's “own funds” for purposes of the proposed definition of
preferred lender arrangement.
The Department strongly disagreed with this suggestion. In the current context, the Department does not consider funds obtained by covered institutions under this or similar scenarios in which loans are sold shortly after they are made to be the covered institution's “own funds” because the covered institution is merely acting as a pass-through for the lender's funds in these cases. The Department believes that exempting loans made under these conditions from the preferred lender arrangement requirements would open the door to abuse, potentially creating a loophole that covered institutions might use to evade the preferred lender arrangement requirements. The Department has long been concerned about this type of arrangement involving schools which are lenders in the FFEL Program but which use funds provided by FFEL lenders to make the loans and then immediately sell the loans. The Department believes that such arrangements could be a loophole for institutions to avoid the limitation on improper inducements in the FFEL Program. Moreover, these arrangements may be deceptive to students who believe they are making an arrangement with the institution but are quickly dealing with a different lender. The Department does not want to repeat those problems in the area of preferred lender arrangements. As the Department's negotiator emphasized to the negotiated rulemaking committee, the Department intends for the proposed definition of
preferred lender arrangement
to be applied in such a manner as to avoid the masking of the true source of loan funds.

Team II's discussions concerning the definition of the term
preferred lender arrangement
also focused on the requirements surrounding preferred lender lists under section 487(h)of the HEA (and proposed § 668.14(b)(28)). Proposed § 668.14 of the program participation agreement regulations, which would implement changes made to section 487(h) of the HEA by section 493(c) of the HEOA, would specify that for any year in which an institution has a preferred lender arrangement, the institution must compile, maintain, and make available for students attending the institution, and their families, a preferred lender list. The non-Federal negotiators asked for clarification from the Department regarding what constitutes a preferred lender list.

The Department referred non-Federal negotiators to Dear Colleague Letter GEN-08-06
2

in which we stated that if a school provides to its students a neutral, comprehensive list of lenders who have made loans to students at the covered institution within a set period of time, such as three to five years, and the school provides a clear statement on the list that a borrower can choose to use any FFEL lender, not just the lenders identified on the list, the list is not a preferred lender list.

2
GEN-08-06 was issued by the Department on May 9, 2008, and can be accessed on
http://www.ifap.ed.gov/dpcletters/GEN0806.html.

The Department also clarified for the non-Federal negotiators that if a covered institution provides a list of lenders to students, and the list includes some lenders who lend to students at the school but not others, the Department views the covered institution as inherently showing a preference for the lenders it includes on the list. In this case, therefore, the covered institution would be considered to have created a preferred lender list.

If a covered institution includes certain lenders on the list and leaves other lenders off the list, the Department views the covered institution as recommending, promoting, or endorsing the lenders on the list over the lenders that it has chosen to leave off the list regardless of whether the covered institution includes a disclaimer on the list, asserting that the covered institution does not recommend, promote, or endorse the lenders on its list. Unless the list is a neutral, comprehensive list of lenders who lent to students at the school, the list serves to recommend, promote, or endorse the lenders on the list, despite whatever disclaimers the school may attach to the list.

Subpart B—Loan Information To Be Disclosed by Covered Institutions and Institution-Affiliated Organizations

Preferred Lender Arrangement Disclosures (§ 601.10)

Statute:
Section 152(a)(1)(A)(i) of the HEA, as amended by section 120 of the HEOA, requires a covered institution or an institution-affiliated organization with a preferred lender arrangement to provide on its Web site and in all informational materials including publications, mailings, electronic messages, or materials that are distributed to current or prospective students and that describe or discuss education loans, the following disclosures:

• The maximum amount of Title IV grant and loan aid available to students in an easy to understand format.

• Information on the model disclosure form for each FFEL loan offered pursuant to a preferred lender arrangement, to be determined by the Department of Education in coordination with the Board of Governors of the Federal Reserve System.

• A statement that the institution is required to process documents necessary to obtain a FFEL loan from any eligible lender the student selects.

Section 152(a)(1)(A)(ii) of the HEA also requires a covered institution or institution-affiliated organization's Web site or other information materials, including publications, electronic messages or materials, that describe or discuss private education loans made to students or the families of such students pursuant to a preferred lender arrangement to provide the disclosures specified in the TILA. A covered institution must provide the information required by section 128(e)(11) of the TILA and an institution-affiliated organization must provide the information required by section 128(e)(1) of the TILA.

Section 493(c) of the HEOA amended section 487 of the HEA by adding a new subsection (h). Section 487(h)(1)(A) of the HEA requires that if a covered institution compiles, maintains, and makes available a preferred lender list, the institution must clearly and fully disclose on the preferred lender list (a) at least the information required to be disclosed under Section 153(a)(2)(A) of the HEA; (b) why the institution participates in a preferred lender arrangement with each lender on the preferred lender list, particularly with respect to terms and conditions or provisions favorable to the borrower; and (c) that the students attending the institution, or the families of such students, do not have to borrow from a lender on the preferred lender list.

Section 487(h)(1)(B) of the HEA requires covered institutions to ensure, through the use of the list of lender affiliates provided by the Secretary under Section 487(h)(2) of the HEA, that there are not less than three FFEL lenders that are not affiliates of each other included on the preferred lender list and, for institutions that recommend, promote, or endorse private education loans, that there are not less than two lenders of private education loans that are not affiliates of each other included on the preferred lender list.

The preferred lender list must specifically indicate, for each listed

lender, whether the lender is or is not an affiliate of another lender on the preferred lender list; and if a lender is an affiliate of another lender on the preferred lender list, must describe the details of such affiliation.

Section 487(h)(1)(C) of the HEA requires institutions to prominently disclose the method and criteria used by the institution in selecting lenders with which to participate in preferred lender arrangements to ensure that such lenders are selected on the basis of the best interests of the borrowers. These criteria include payment of origination or other fees on behalf of the borrower; highly competitive interest rates, or other terms and conditions or provisions of Title IV, HEA program loans or private education loans; high-quality servicing; or additional benefits beyond the standard terms and conditions or provisions for such loans.

Section 487(h)(1)(D) of the HEA requires institutions to exercise a duty of care and a duty of loyalty to compile the preferred lender list without prejudice and for the sole benefit of the students attending the institution, or the families of such students.

Section 487(h)(1)(E) of the HEA requires institutions to not deny or otherwise impede the borrower's choice of a lender or cause unnecessary delay in certification of a Title IV loan for those borrowers who choose a lender that is not included on the preferred lender list.

Current Regulations:
None.

Proposed Regulations:
Under proposed § 601.10(a)(1), a covered institution, or an institution-affiliated organization of a covered institution, that participates in a preferred lender arrangement would be required to disclose to students the maximum amount of Federal grant and loan aid available under Title IV of the HEA; the information identified on the model disclosure form developed by the Secretary for each type of education loan that is offered pursuant to a preferred lender arrangement; and a statement that the institution is required to process the documents required to obtain a loan under the FFEL Program from any eligible lender the student selects.

Consistent with section 152(a)(1)(A)(ii) of the HEA, proposed § 601.10(a) would require that these disclosures be provided on the covered institution's or institution-affiliated organization's Web site and in all informational materials such as publications, mailings, or electronic messages or materials that are distributed to prospective or current students of a covered institution and families of such students and that describe or discuss the financial aid opportunities available to students at an institution of higher education.

Proposed § 601.10(a)(2)(i) would require a covered institution to provide the disclosures required under section 128(e)(11) of the TILA for each type of private education loan offered pursuant to a preferred lender arrangement. For an institution-affiliated organization, proposed § 601.10(a)(2)(ii) would require the institution-affiliated organization to provide the disclosures required under section 128(e)(1) of TILA for each type of private education loan offered pursuant to a preferred lender arrangement.

Proposed § 601.10(c) would require covered institutions and institution-affiliated organizations that participate in a preferred lender arrangement to provide the information described in proposed § 601.10(a)(1)(ii), and the information described in proposed §§ 601.10(a)(2)(i) and (a)(2)(ii), respectively, for each type of education loan offered pursuant to the preferred lender arrangement. Covered institutions and institution-affiliated organizations would be required to provide this information to students attending the covered institution, or the families of such students, as applicable. The information would be provided annually and must be provided in a manner that allows for the students or their families to take the information into account before selecting a lender or applying for an education loan.

Consistent with new section 487(h)(1)(A) of the HEA, proposed § 601.10(d) would require that if a covered institution compiles, maintains, and makes available a preferred lender list, the covered institution clearly and fully disclose on the preferred lender list (a) at least the information required to be disclosed under section 153(a)(2)(A) of the HEA; (b) why the institution participates in a preferred lender arrangement with each lender on the preferred lender list, particularly with respect to terms and conditions or provisions favorable to the borrower; and (c) that the students attending the institution, or the families of such students, do not have to borrow from a lender on the preferred lender list.

Proposed § 601.10(d)(2) would track the statutory requirement reflected in section 487(h)(1)(B)(i) of the HEA, which requires the covered institution to ensure, through the use of the list of lender affiliates provided by the Secretary under section 487(h)(2) of the HEA, that there are not less than three FFEL lenders that are not affiliates of each other included on the preferred lender list and, if the institution recommends, promotes, or endorses private education loans, that there are not less than two lenders of private education loans that are not affiliates of each other included on the preferred lender list.

Proposed § 601.10(d)(2) would incorporate the statutory requirements in section 487(h)(1)(B)(ii) of the HEA that the preferred lender list (a) specifically indicate, for each listed lender, whether the lender is or is not an affiliate of another lender on the preferred lender list, and (b) if a lender is an affiliate of another lender on the preferred lender list, must describe the details of such affiliation.

Proposed § 601.10(d)(3) would incorporate the requirement in section 487(h)(1)(C) of the HEA that requires the preferred lender list to prominently disclose the method and criteria used by the institution in selecting lenders with which to participate in preferred lender arrangements to ensure that such lenders are selected on the basis of the best interests of the borrowers.

Under proposed § 601.10(d)(4) and consistent with section 487(h)(1)(D) of the HEA, covered institutions would be required to exercise a duty of care and a duty of loyalty to compile the preferred lender list without prejudice and for the sole benefit of the students attending the institution, or the families of such students. Proposed § 601.10(d)(5) would incorporate the requirement from section 487(h)(1)(E) of the HEA that requires a covered institution to not deny or otherwise impede the borrower's choice of a lender or cause unnecessary delay in certification of a Title IV loan for those borrowers who choose a lender that is not included on the preferred lender list.

Reasons:
Proposed § 601.10 would be included in new part 601 in order to implement the provisions relating to preferred lender arrangement disclosures in new part E, title I of the HEA.

Some non-Federal negotiators expressed a concern regarding proposed § 601.10(a)(1)(iii), which would require a covered institution that participates in a preferred lender arrangement to include a statement on its Web site and other informational materials that the covered institution is required to process loan documents from any eligible FFEL Program lender. The non-Federal negotiators pointed out that a Direct Loan school could have a preferred lender arrangement with a private education lender (and, therefore, be covered by the requirements in proposed § 601.10), but that most Direct

Loan schools do not also participate in the FFEL program, and would not be able to process FFEL loans.

The Department responded that the requirement in proposed § 601.10(a)(1)(iii) is not applicable to Direct Loan-only schools, and such schools would not be required to provide this statement on their Web sites or other informational materials.

The non-Federal negotiators asked for clarification regarding the information that a covered institution is required to provide on the informational materials referenced in proposed § 601.10(b)(1). The informational materials are publications, mailings, or electronic materials that the covered institution makes available to prospective and current students and their families. The non-Federal negotiators asked whether a brochure would be required to provide all of the information specified in proposed § 601.10(a), or whether the brochure could provide a link to an institutional Web site with the required information.

The non-Federal negotiators were particularly concerned about “first touch” information provided to prospective students, which is intended to provide basic information regarding the institution, and might briefly summarize financial aid opportunities at the school. The non-Federal negotiators were concerned that including the detailed student loan information required by proposed § 601.10(a) in such “first touch” materials would be overwhelming to potential students.

The non-Federal negotiators also pointed out that information provided in print publications can quickly become outdated, whereas information provided on a Web site can be updated easily, on an as-needed basis.

The Department responded that a link to a Web site that contains information that meets the requirements in proposed § 601.10(a) would be sufficient for printed materials provided to potential borrowers, as long as the printed materials provide the potential borrower with information for a point of contact at the school where the potential borrower can obtain the information in printed form.

Non-Federal negotiators expressed concerns about proposed § 601.10(c)(2), which would require a covered institution to “provide” certain information to students in a manner that allows the students to take that information into account before selecting a lender or applying for an education loan. The non-Federal negotiators requested the Department to change this requirement from “provide” to “make available.”

The Department declined to make this requested change. The purpose of the requirement to provide the described information is to give students current information on education loans available at the school before the student selects a lender or applies for an education loan. The term “make available” is more passive than the term “provide.” The Department expects schools to be more proactive in providing this information to borrowers than the phrase “make available” implies. However, the Department recognizes that, regardless of how proactive a school may be, the school cannot guaranty that every student attending the school will receive the information. A school that makes reasonable efforts to give this information to its students at the appropriate time in the award year would be in compliance with proposed § 601.10(c)(2), even if not all students at the school actually receive the information.

Non-Federal negotiators asked if the requirements for a preferred lender list specified in proposed § 601.10(d) would apply to a neutral, comprehensive list of lenders who lent at the school, as discussed earlier in the preamble discussion regarding proposed § 601.2 (Definitions). The Department responded that a neutral, comprehensive list of lenders that have provided loans to students at a covered institution is not a preferred lender list under the HEA or these proposed regulations. If the covered institution has not made a judgment regarding which lenders to include on the list, it is not using the list to identify the lenders it prefers its students to use. A comprehensive, neutral list of lenders is not a preferred lender list and is not covered by the requirements in proposed § 601.10(c).

Private Education Loan Disclosures and Self-Certification Form (§ 601.11)

Statute:
Section 152(a)(1)(B) of the HEA, which was added by section 120 of the HEOA, requires a covered institution, or an institution-affiliated organization, that provides information regarding a private education loan from a lender to a prospective borrower, regardless of whether the covered institution or institution-affiliated organization participates in a preferred lender arrangement, to provide the following disclosures:

• The information required by section 128(e)(1) of the TILA.

• Information on the availability of Title IV loans or other assistance.

• That the terms and conditions of Title IV loans or assistance may be more beneficial than the terms and conditions of private education loans.

Section 153(c)(1)(B) of the HEA, which also was added by section 120 of the HEOA, requires covered institutions and institution-affiliated organizations to provide the information described in the previous paragraphs in a manner that allows students or their families to take that information into account before selecting a lender or applying for an education loan.

Section 152(a)(1)(B)(iii) of the HEA specifies that the information regarding private education loans must be presented in a manner that is distinct from information regarding Title IV, HEA program loans.

Covered institutions or institution-affiliated organizations must provide these disclosures whether or not they have a preferred lender arrangement with the lender.

Section 155(a) of the HEA, as amended by section 1021(b) of the HEOA, requires the Department, in consultation with the Board of Governors of the Federal Reserve System, to develop a self-certification form for private education loans. The form must be provided to an applicant for a private education loan by an institution of higher education at the request of the applicant. In addition, the institution of higher education is required to provide to the applicant the information needed to complete the form, if the institution of higher education has that information. Under section 155(a)(4) of the HEA, information required to complete the self-certification form includes the applicant's cost of attendance at the institution, the applicant's expected family contribution, and the applicant's estimated financial assistance.

Current Regulations:
None.

Proposed Regulations:
Proposed § 601.11(a) would provide that a covered institution, or an institution-affiliated organization of a covered institution, that provides information regarding a private education loan from a lender to a prospective borrower must provide private education loan disclosures to the prospective borrower. These disclosures would need to be provided regardless of whether the covered institution or institution-affiliated organization participates in a preferred lender arrangement.

The private education loan disclosures required under proposed § 601.11(b)(1) and (b)(2) would need to provide the prospective borrower with the information required under section 128(e)(1) of the TILA; and would need

to inform the prospective borrower that he or she may qualify for loans or other assistance under title IV of the HEA; and that the terms and conditions of Title IV, HEA program loans may be more favorable than the provisions of private education loans.

Under proposed § 601.11(c), the covered institution or institution-affiliated organization would need to ensure that information regarding private education loans is presented in such a manner as to be distinct from information regarding Title IV, HEA program loans.

Proposed § 601.11(d) would require that, upon an enrolled or admitted student applicant's request for a private education loan self-certification form, an institution must provide to the applicant, in written or electronic form, the self-certification form for private education loans developed by the Secretary to satisfy the requirements of section 128(e)(3) of the TILA. The institution would also be required to provide the information necessary to complete the form, if the institution possesses that information.

Reasons:
The Department would include proposed § 601.11 in new part 601 to implement the HEOA provisions relating to private education loan disclosures and the self-certification form the Department is required to develop pursuant to section 155(a) of the HEA.

Non-Federal negotiators questioned the value of requiring a school to provide an applicant with the private education loan self-certification form in cases where the applicant is applying for a private education loan made by the covered institution. Non-Federal negotiators asserted that in these cases the covered institution would simply be providing the private education loan self-certification form to itself.

In the Department's view, the purpose of the private education loan self-certification form is to provide disclosure information to the borrower, not to the lender. In cases where the covered institution is also the lender, the Department believes that the borrower should still receive and complete the private education loan self-certification form before obtaining the institutional loan.

In addition, the TILA requires private education lenders to obtain the completed private education loan self-certification form from a borrower before it makes a private education loan. In that regard, the Department advised the non-Federal negotiators that submitting public comment on the Federal Reserve's TILA proposed regulations may be an appropriate forum for addressing this issue.

Further discussion of the private education loan self-certification form is provided under the program participation agreement section of this preamble.

Use of Institution and Lender Name (§ 601.12)

Statute:
Section 152(a)(2) of the HEA, added by section 120 of the HEOA, prohibits a covered institution or an institution-affiliated organization from allowing a lender with which it has a preferred lender arrangement to use the name, emblem, mascot, logo, or other identifiable symbol of the covered institution or institution-affiliated organization to market private education loans to students.

Section 152(a)(3) of the HEA, added by section 120 of the HEOA, requires a covered institution or an institution-affiliated organization to ensure that the name of a lender with which it has a preferred lender arrangement is displayed in all information and documentation related to private education loans offered by the lender.

Current Regulations:
None.

Proposed Regulations:
Under proposed § 601.12(a), a covered institution, or an institution-affiliated organization of a covered institution, that participates in a preferred lender arrangement regarding private education loans would be prohibited from agreeing to the lender's use of the name, emblem, mascot, or logo of the institution or organization, or other words, pictures, or symbols readily identified with the institution or organization, in the marketing of private education loans to students attending the institution in any way that implies that the loan is offered or made by the institution or organization instead of the lender.

Proposed § 601.12(b) also would require covered institutions or institution-affiliated organizations that participate in preferred lender arrangements regarding private education loans to ensure that the name of the lender is displayed in all information and documentation related to the private education loans.

Reasons:
We propose to include proposed § 601.12 in new part 601 to implement the provisions relating to the use of institution and lender name in section 152 of the HEA.

During the negotiated rulemaking process, non-Federal negotiators expressed concern about the use of the term “ensure” in proposed § 601.12(b). The non-Federal negotiators argued that covered institutions have no direct control over lenders with which they have preferred lender arrangements, particularly if there is no formal agreement between the covered institution and the lender. Therefore, argued the non-Federal negotiators, a covered institution cannot ensure that the lender displays its name in all information and documentation relating to the lender's private education loans.

The Department understands that a covered institution cannot control a lender with which it has a preferred lender arrangement. However, we believe that a covered institution does have leverage over such lenders, and can use that leverage to require the lender to display the lender's own name on information or documentation about private education loans provided by the lender. If a lender refuses to display its own name on private education loan marketing materials that the lender provides to students at the covered institution, and the covered institution cannot convince the lender to do so, the covered institution always has the option to end the preferred lender arrangement with the lender and remove the lender from its preferred lender list.

Non-Federal negotiators asked whether a credit union that shares its name with the name of a covered institution would be prohibited under proposed § 601.12(a) from using its own name in its marketing materials regarding private education loans. The Department responded that if the name of the covered institution is part of the name of the credit union, the prohibition against allowing the lender to use the institution's name would not apply. In these cases, the credit union is using its own name, not the institution's name.

This interpretation is consistent with the Manager's Report for the Higher Education Opportunity Act, which states that “the Conferees understand that some credit unions share the names of the institutions of higher education whose communities they serve. Nothing in [section 140 of the TILA] is intended to prohibit a credit union whose name includes the name of a covered educational institution from using its own name in marketing its private education loans” (Joint Explanatory Statement of the Committee of Conference, p. 198).

Subpart C—Responsibilities of Covered Institutions and Institution-Affiliated Organizations

Annual Report (§ 601.20)

Statute:
Section 153(c)(2)(A)(i) of the HEA, added by section 120 of the HEOA, requires a covered institution

and an institution-affiliated organization that has a preferred lender arrangement to submit to the Department of Education an annual report that provides the information described in section 153(c)(1)(A)(i) and (ii) of the HEA. This is the same information required under section 152(a)(1)(A)(i) and (a)(1)(A)(ii) of the HEA, and discussed earlier in the preamble discussion for proposed subpart B of part 601.

Section 153(c)(2)(A)(ii) of the HEA, added by section 120 of the HEOA, requires that the annual report include a detailed explanation of why the covered institution or institution-affiliated organization entered into a preferred lender arrangement with each lender. The explanation must explain how the terms, conditions, and provisions of each type of education loan provided pursuant to the preferred lender arrangement are beneficial to students attending the covered institution.

Section 153(c)(2)(B) of the HEA requires the covered institution and institution-affiliated organization to ensure that the annual report is made available to the public, and is provided to students attending or planning to attend the covered institution.

Current Regulations:
None.

Proposed Regulations:
Proposed § 601.20(a) would require a covered institution and an institution-affiliated organization that participates in a preferred lender arrangement to prepare and submit to the Secretary an annual report, by a date determined by the Secretary. The annual report would include, for each lender that participates in a preferred lender arrangement with the covered institution or organization, the information described in proposed § 601.10(c); and a detailed explanation of why the covered institution or institution-affiliated organization participates in a preferred lender arrangement with the lender. Under the proposed regulations, this explanation would need to include an explanation of why the terms, conditions, and provisions of each type of education loan provided pursuant to the preferred lender arrangement are beneficial for students attending the institution, or the families of such students, as applicable.

Proposed § 601.20(b) would require a covered institution or institution-affiliated organization to ensure that the annual report is made available to the public and provided to students attending or planning to attend the covered institution and the families of such students.

Reasons:
Proposed § 601.20 would implement the annual report requirements governing covered institutions and institution-affiliated organizations that have a preferred lender arrangement in section 153(c) of the HEA.

There was significant discussion among the negotiators regarding the timing and content of the annual report required under 153(c)(2) of the HEA. Non-Federal negotiators believed it would be reasonable for the annual report to be due by July 1st each year. However, negotiators decided that determining the due date for the annual report is an operational issue, not a regulatory issue. For this reason, the Department does not propose to specify a due date for the annual report in the regulations.

The non-Federal negotiators also pointed out that in the course of a year, lenders on a preferred lender list can change. Some lenders might drop off the list, or new lenders might be added. The negotiators agreed that the annual report would have most utility for the Department and for potential borrowers if it identified the lenders on the covered institution's preferred lender list at the time the report is submitted to the Department, providing a snapshot of the lenders on its preferred lender list at that time. The Department agreed that covered institutions would not be required to update the annual report during the year as lenders are added or dropped from the preferred lender list. The Department believed that a yearly snapshot would provide it with adequate information to monitor the preferred lender activities of covered institutions.

Code of Conduct (§ 601.21)

Statute:
Section 153(c)(3)(A) of the HEA, added by Section 120 of the HEOA, requires a covered institution and an institution-affiliated organization that has a preferred lender arrangement to comply with the code of conduct requirements in section 487(a)(25)(A) through (C) of the HEA.

Section 153(c)(3)(B) of the HEA requires an institution-affiliated organization of a covered institution to comply with the code of conduct developed and published by the covered institution; publish the code of conduct prominently on its Web site, if it has one; and administer and enforce the code of conduct. At a minimum, the institution-affiliated organization must require that all of the organization's agents with responsibilities with respect to education loans are annually informed of the provisions of the code of conduct.

In accordance with section 487(e)(1) through (e)(7) of the HEA, as amended by section 493(c) of the HEOA, the code of conduct must ban revenue-sharing arrangements; gifts; consulting or other contracting arrangements; directing borrowers to particular lenders or delaying loan certification; offers of funds for private loans, including opportunity pool loans; staffing assistance; and advisory board compensation, as these terms are defined and further explained in section 487(e) of the HEA.

Current Regulations:
None.

Proposed Regulations:
A covered institution that participates in a preferred lender arrangement would be required to comply with the code of conduct requirements described in proposed § 601.21. Under this section, the covered institution would be required to develop a code of conduct with respect to FFEL Program loans and private education loans with which the institution's agents must comply.

Proposed § 601.21(a)(2)(i) would require the code of conduct to prohibit a conflict of interest with the responsibilities of an agent of an institution with respect to FFEL Program loans and private education loans and, at a minimum, include the provisions specified in the following paragraphs. Under proposed § 601.21(a)(2)(ii) and (iii), the institution would be required to publish the code of conduct prominently on the institution's Web site and administer and enforce the code by, at a minimum, requiring that all of the institution's agents with responsibilities with respect to FFEL Program loans or private education loans be annually informed of the provisions of the code of conduct.

Proposed § 601.21(b)(1) and (b)(2) would require any institution-affiliated organization of a covered institution that participates in a preferred lender arrangement to comply with the code of conduct developed and published by the covered institution and, if the institution-affiliated organization has a Web site, publish the code of conduct prominently on the Web site.

Under proposed § 601.21(b)(3), the institution-affiliated organization would be required to administer and enforce the code of conduct by, at a minimum, requiring that all of the institution-affiliated organization's agents with responsibilities with respect to FFEL Program loans or private education loans be annually informed of the provisions of the code of conduct.

Proposed § 601.21(c) would prescribe the minimum requirements of a covered institution's code of conduct. Under this section, an institution's code of conduct would be required to prohibit—

• Revenue-sharing arrangements with any lender;

• Soliciting or accepting gifts from a lender, guarantor, or servicer;

• Accepting any fee, payment, or other financial benefit as compensation for any type of consulting or any contractual relationship with a lender;

• Assigning a first-time borrower's loan to a particular lender or refusing to certify, or delaying certification of, any loan based on a borrower's selection of a particular lender;

• Requesting offers of funds for private education loans, including opportunity pool loans, from a lender in exchange for providing the lender with a specified number or loan volume of FFEL Program loans or private education loans or a preferred lender arrangement;

• Requesting or accepting staffing assistance from a lender; and

• Receipt of compensation for serving on an advisory board, commission, or group established by a lender, guarantor, or group of lenders or guarantors.

Proposed § 601.21(c)(6) would incorporate language from section 487(e)(6) of the HEA and set forth exceptions to the ban on staffing assistance, such as staffing assistance related to professional development or training; providing educational counseling materials, or short-term, nonrecurring staffing assistance during disasters or emergencies.

In addition, the proposed regulations would include the statutory definitions provided for the terms
revenue-sharing arrangement,

gift,
and
opportunity pool loan.

Proposed § 601.21(c)(1) would incorporate the definition of the term
revenue-sharing arrangement
from section 487(e)(1)(B)of the HEA: An arrangement between a covered institution and FFEL lender or a private education loan lender in which the lender pays a fee or provides material benefits in exchange for the covered institution recommending the lender or its loan products to students attending the institution or to the families of such students.

Proposed § 601.21(c)(2)(ii) would incorporate the definition of the term
gift
from section 487(e)(2)(B)of the HEA: As any gratuity, favor, discount, entertainment, hospitality, loan or other item with a monetary value of more than a de minimus amount, including gifts of services, transportation, lodging or meals. Proposed § 601.21(c)(2)(iii)(A) through (F) would identify the items of monetary value that are excluded from the definition of
gift.

Proposed § 601.21(c)(5)(ii) would incorporate the definition of the term
opportunity pool loan
from section 487(e)(5)(B)of the HEA: As a private education loan made by a lender to a student, or a family member of a student, attending the institution that involves a payment, directly or indirectly, by the institution of points, premiums, additional interest, or financial support to the lender for the purpose of the lender extending credit to the student or the student's family.

Reasons:
Proposed § 601.21(c) would be included in new part 601 to implement the code of conduct provisions added to section 487(e) of the HEA.

Numerous questions and concerns relating to the code of conduct were discussed during the negotiated rulemaking sessions. For example, non-Federal negotiators asked if the prohibition against revenue-sharing arrangements would apply to a servicer collecting student loans on behalf a school. The Department responded that this is a standard service provided by loan servicers, and that it does not view this service as a revenue-sharing arrangement that is prohibited under section 487(e)(1) of the HEA.

Non-Federal negotiators pointed out that, in some cases, if a borrower selects a lender that the covered institution does not normally do business with, there could be delays in processing the borrower's student loans due to compatibility issues with the computer programs used by the lender and covered institution. These delays would not be due to the school deliberately attempting to impede the borrower's choice of lender, but simply due to processing complications that may occur when a school is working with an unfamiliar lender. The Department agrees that processing delays may occur if a borrower selects a lender with which the school is unaccustomed to doing business. We expect the covered institution to do everything it can to minimize such delays, but it is the Department's view that reasonable delays in situations such as these would not be considered to be a violation of the code of conduct. That said, the Department also points out that the requirement in the code of conduct refers to certifying a loan, not other aspects of processing a loan. Because certification of a loan is an internal school process, we do not believe that choice of a lender would normally affect a school's ability to certify a loan in a timely manner.

Non-Federal negotiators asked about proposed § 601.21(c)(4)(ii), which states that a borrower may choose a particular lender or guaranty agency. The non-Federal negotiators asked about the reference to guaranty agencies, pointing out that the guaranty agency that guarantees a borrower's loan depends on the borrower's choice of lender. They argued that this provision does not make sense because a borrower does not have the ability to select from among different guaranty agencies, except to the extent that a borrower does have the ability to select from among different lenders. The Department clarified that guaranty agencies are included in this proposed provision because they can serve as lenders-of-last-resort. When a borrower is using a guaranty agency as a lender-of-last-resort, the borrower can choose among different guaranty agencies.

Non-Federal negotiators asked about proposed § 601.21(c)(2)(iii)(C), which would exclude from the definition of the term
gift,
favorable terms, conditions, and borrower benefits on a loan provided to students employed at a covered institution, if the terms, conditions, or benefits are comparable to those provided to all students at the institution. The non-Federal negotiators asked the Department to clarify whether the reference to “all students” at the institution meant the general student population, or if it meant other similarly situated students. The intent of proposed § 601.21(c)(2)(iii)(C) is to allow student employees of a covered institution's financial aid office to receive favorable terms, conditions, or benefits on a student loan, as long as those favorable terms, conditions, and benefits are comparable to the benefits other students at the school receive. In recognition of the fact that a lender may offer favorable terms, conditions and borrower benefits to certain types of students at an institution—such as students at a particular grade level or in a particular program of study—we believe that it would be acceptable for a school to use benefits offered to similarly situated students as a benchmark, rather than benefits available to all students at the institution.

Non-Federal negotiators asked if recourse loans qualify as
opportunity pool loans,
as defined in proposed § 0601.21(c)(5)(ii). Recourse loan arrangements are arrangements between schools and lenders, in which the school provides funds to a lender to offset the risk of the lender providing loans to students at the school who have a high risk of default. As discussed earlier in this preamble, an
opportunity pool loan
is defined in section 487(e)(5)(B) of the HEA as a private education loan that involves a payment,

either directly or indirectly, from an institution to the lender for the purpose of the lender offering a loan to a borrower at the school. Because the Department sees no real distinction between the meaning of the terms
opportunity pool loan
and
recourse loan,
we believe that recourse loans would be covered by the requirements in proposed § 601.21(c)(5)(i). However, the Department notes that proposed § 601.21(c)(5)(i) would not prohibit opportunity pool loans or recourse loans in all cases. It would only prohibit such loans if the funds for the opportunity pool loan or recourse loan are provided in exchange for concessions or promises regarding providing the lender with a specified number or loan volume of FFEL or private education loans, or a preferred lender arrangement for FFEL or private education loans.

Consistent with section 487(e)(7) of the HEA, proposed § 601.21(c)(7) would prohibit compensation from a lender, guarantor, or group of lenders or guarantors for service on an advisory board established by such group. This provision would, however, allow for reimbursement for reasonable expenses incurred for serving on such an advisory board. The non-Federal negotiators asked that we clarify the meaning of the term
reasonable expenses
for this purpose. We agreed that such clarification would be useful, and added a cross-reference to § 668.16(d)(2)(ii) in proposed § 601.21(c)(7). For further discussion of this topic, see the preamble discussion under “Standards of administrative capability.”

Non-Federal negotiators asked if the code of conduct covers employees of a covered institution who work on the back end of the student loan process, such as employees who work on default prevention with lenders. In general, it is the view of the Department that the code of conduct regulations apply to agents of a covered institution who are employed in the financial aid office of a covered institution, or who otherwise have responsibilities with respect to FFEL program loans or private education loans. Nothing in the HEA, as amended by the HEOA or these proposed regulations would exempt agents of a covered institution who are involved in the back end of the student loan process. We believe that employees working at this stage of the process have responsibilities with regard to student loans and, therefore, are covered by the code of conduct.

Non-Federal negotiators noted that the term
agent
is defined as an officer or an employee in section 151(1) of the HEA (and proposed § 601.2(b)) and asked whether there is a distinction between the meaning of agents of a covered institution and officers or employees of a covered institution.

The Department agreed that, when coupled with the terms “officer” and “employee”, the term
agent
is redundant. The Department also agreed that use of all three terms in the code of conduct section of the regulations could potentially be confusing, given that use of all three terms implies that the term
agent
is intended to include individuals who are not officers or employees of a covered institution, but have some other connection to the covered institution. To avoid this confusion, the Department agreed to remove the terms “officer” and “employee” from those sections of the code of conduct regulations where the term agent is sufficient.

Further discussion of the code of conduct requirements is provided in the program participation agreement section of this preamble.

Duties of Institutions Participating in the William D. Ford Direct Loan Program (§ 601.30)

Statute:
Section 154(a) of the HEA, as amended by section 120 of the HEOA, requires a school participating in the William D. Ford Direct Loan Program (Direct Loan Program) to provide the information on a Direct Loan model disclosure form developed by the Department to students attending or planning to attend the school, or to their families. If the Direct Loan school provides information regarding a private education loan to a prospective borrower, it must provide the information from the Direct Loan model disclosure form at the same time.

The Direct Loan school may use the Direct Loan model disclosure form for this purpose, or may use a comparable form designed by the school.

Current Regulations:
None.

Proposed Regulations:
Under proposed § 601.30(a), a covered institution participating in the Direct Loan Program would be required to make the information identified in a model disclosure form developed by the Secretary available to students attending or planning to attend the institution, or the families of such students. If the institution provides information regarding a private education loan to a prospective borrower, the institution would concurrently provide the borrower with the information identified on the model disclosure form. Proposed § 601.30(b) would allow a covered institution to use a comparable form designed by the institution to provide this information, instead of the model disclosure form.

Reasons:
We would include proposed § 601.30(b) in new part 601 to implement the requirements in section 154(a) of the HEA.

Subpart E—Lender Responsibilities

Statute:
Section 152 of the HEA requires lenders to disclose certain information to borrowers of a FFEL or Federal Direct Loan. These disclosures include the information described in section 433(a) and (c) of the HEA. In addition, for each lender's private education loans, the lender must comply with the disclosure requirements of section 128(e) of the TILA.

Section 152 of the HEA also requires lenders to report certain information about its FFEL Program preferred lender arrangements to the Secretary. This report must include information about expenses paid or provided by the lender to any agent of a covered institution employed in the financial aid office of that institution or who otherwise has responsibility with respect to education loan or other financial aid of the institution for service by that employee on an advisory board, commission or group established by a lender or group of lenders. The lender must also report this information for expenses paid or provided to any agent of an institution-affiliated organization involved in recommending, promoting or endorsing education loans.

Section 153 of the HEA also requires FFEL lenders that participate in one or more preferred lender arrangements, to certify annually to the Secretary, that they are in compliance with the requirements of the HEA. If the lender submits an audit under section 428(b)(1)(U)(iii) of the HEA, the auditor may provide this certification as part of that audit. If the lender is not required to submit an audit, it must provide the certification separately.

Section 153 of the HEA requires lenders to provide an annual report to covered institutions or a covered institution's affiliated organization and to the Secretary, disclosing certain information about its loans. The Secretary, in consultation with the Federal Reserve will determine the information to be disclosed. The information will have to address each type of FFEL loan the lender plans to offer pursuant to the preferred lender arrangement to the students or families of students attending that institution for the next award year.

Current Regulations:
None.

Proposed Regulations:
Proposed § 601.40(a) would require FFEL lenders to provide FFEL borrowers the disclosures required under current

§ 682.205(a) and (b). Proposed § 601.40(a) would require that a lender offering private education loans comply with the disclosures required under section 128(e) of TILA for each type of private loan.

Proposed § 601.40(b) would set forth the information the lenders will have to provide to the Secretary on an annual basis regarding any reasonable expenses paid or provided to any agent of a covered institution who is employed in the financial aid office or has responsibilities with respect to education loans or other financial aid of the institution for service by the employee on an advisory board, commission or group established by a lender or a group of lenders. Under proposed § 601.40(b), lenders would be required to report this information for expenses paid or provided to any agent of an institution-affiliated organization involved in recommending, promoting or endorsing education loans. Lenders would be required to report the amount of the expenses paid and the specific instances for which it was paid; the names of the agent to whom expenses were paid; and the date and description of each activity for which expenses were paid.

Proposed § 601.40(c) would also require the lender to submit a certification of compliance to the Secretary.

Proposed § 601.40(c) would require any FFEL lender participating in one or more preferred lender arrangements to annually certify to the Secretary its compliance with the HEA. Under this proposed provision, lenders required to file an audit under § 682.305(c) would need to include the certification as part of the audit and lenders that are not required to submit an audit would be required to provide the certification separately.

Proposed § 601.40(d) would require FFEL lenders with a preferred lender arrangement with a covered institution or an institution-affiliated organization to annually provide to the institution, institution-affiliated organization, and the Secretary information regarding the FFEL loans the lender will provide to students and families pursuant to the preferred lender arrangement for the next award year. The information that would be provided will be prescribed by the Secretary, after consultation with the Federal Reserve, pursuant to section 153(a)(2)(A)(i) of the HEA.

Reasons:
These regulations are provided to implement statutory requirements.

During the negotiations, some negotiators raised a question as to the lender certification requirements proposed as part of § 601.40. In particular, a negotiator asked the Department to clarify the application of the certification requirements to holders of FFEL Program loans who make private education loans. The Department explained that the certification requirements apply to any lender who holds FFEL loans and has a preferred lender arrangement that relates to FFEL loans or to private education loans. A lender who holds FFEL Program loans and has a preferred lender arrangement relating to private education loans has to provide the required certifications even if the lender is not actively making new FFEL loans and does not have a preferred lender arrangement for FFEL loans.

Under section 152(b)(2) of the HEA, a FFEL loan holder that has a preferred lender arrangement for FFEL or private education loans has to annually certify that it is in compliance with the HEA, whether or not the lender is actively making FFEL Program loans. A lender that is required to have an independent financial and compliance audit can provide the certification through that process. The HEA requires a lender to provide two specific certifications about its private education loans: (1) A certification that it is in compliance with the disclosure requirements under section 128(e) of the Truth in Lending Act (reflected in section 152(b)(1)(A)(ii) of the HEA); and (2) that it has provided the required annual report to the Secretary on any reasonable expenses paid or provided to any agent of a covered institution who is employed in the institution's financial aid office or who otherwise has responsibilities with respect to education loans or other financial aid of the institution and any similar expenses paid or provided to any agent of an institution-affiliated organization who is involved in the practice of recommending, promoting or endorsing education loans (see section 152(b)(1)(B) of the HEA). The specific requirements for these certifications will be addressed in audit guides issued by the Department.

Program Participation Agreement (§ 668.14)

Statute:
Section 493(e) of the HEOA amended section 487(a)(25) of the HEA by adding to the program participation agreement (PPA) requirements a requirement that an institution participating in a Title IV loan program develop, publish, administer, and enforce a code of conduct that prohibits a conflict of interest with the responsibilities of an officer, employee or agent of the institution with respect to any Title IV loan and that contains, at a minimum, the provisions described in section 487(e) of the HEA. Under section 487(a)(25)(B) and (C), the institution must publish the code of conduct prominently on its Web site and annually inform its officers, employees, and agents with responsibilities for loans made, insured, or guaranteed under Title IV loan programs of the provisions of the code of conduct.

Current Regulations:
The Department's current regulations governing PPA requirements appear in § 668.14.

Proposed Regulations:
Consistent with section 487(a)(25) of the HEA, we propose to amend § 668.14 (Program participation agreement) by adding a new paragraph (b)(27) that would reflect the requirement that institutions agree, as part of their PPA, to develop, publish, administer, and enforce a code of conduct with respect to loans made, insured, or guaranteed under Title IV loan programs.

Reason:
We propose to add paragraph (b)(27) to § 668.14 in order to implement the new statutory requirement in section 487(a)(25) of the HEA.

Statute:
Section 493(a)(1)(A) of the HEOA amended section 487(a)(28)(A) of the HEA by adding to the PPA requirements a requirement that an institution will, at the request of an applicant for a private education loan, provide the applicant with the self-certification form required under section 128(e)(3) of the TILA (15 U.S.C. 1638(e)(3)). This section also requires the institution to provide the applicant with the specific information needed to complete the form, to the extent that the institution possesses the information.

Section 487(a)(28)(B) of the HEA states that the term “private education loan” has the meaning given to the term in section 140(a)(7) of the TILA. That statute defines “private education loan” as a loan provided by a private educational lender that is not made, insured, or guaranteed under Title IV of the HEA and is issued expressly for postsecondary educational expenses to a borrower. It does not include an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan secured by real property or a dwelling.

Under section 155(a)(4) of the HEA, the information to be supplied to the applicant by the institution (if available) includes cost of attendance and resource information regarding the applicant.

Current Regulations:
The Department's current regulations governing PPA requirements appear in § 668.14.

Proposed Regulations:
Proposed § 668.14(b)(29) would incorporate the requirement for an institution participating in the Title IV, HEA programs to agree as part of its PPA to provide, upon request, an enrolled or admitted applicant for a private education loan with the self-certification form and the information to complete it, to the extent the institution possesses that information.

In addition, proposed § 668.14(b)(29)(ii) would require the institution, at the request of the applicant for a private education loan, to discuss with the applicant the Federal, State, and institutional student aid that may be available.

Reasons:
This section implements the new statutory requirement in section 487(a)(25) of the HEA that an institution provide a private education loan applicant with a self-certification form, and the information required to complete the form to the extent the institution possesses such information, in order to participate in the Title IV, HEA programs.

The non-Federal negotiators engaged in considerable discussion about the information items to be supplied to the applicant for a private education loan. Negotiators were concerned about several aspects, including how an institution should provide the information to an applicant, how an applicant might use the information provided by the institution, and how the institution could ensure that an applicant would complete the self-certification form accurately using the information the institution supplies. In addition, non-Federal negotiators were concerned about whether the self-certification information would need to be updated if the institution received additional information after initially providing the self-certification information to the applicant.

The Department explained during negotiations that it is bound by the specific items and processes required in the HEA. We believe that the intent of the self-certification form is to prevent over-borrowing and provide for a more educated private education loan consumer by ensuring the provision of disclosures, through the institution, regarding the availability of Federal student aid, information on the cost of attendance, expected family contribution and the applicant's estimated financial assistance so that the applicant will be aware of the amount that must be borrowed to cover any gaps before consummating a private education loan. New section 487(a)(28) of the HEA requires that the institution provide the form and the required information to the applicant. As we discussed during negotiations, an institution may post the self-certification form on its Web site for the applicant to download or it may provide the self-certification form directly through its financial aid or other designated office. While the Department believes that contact between the institution and the applicant is an essential component of this process, once the form and information has been disseminated to the applicant, nothing in the HEA or the proposed regulations require institutions to track the status of private education loans. A non-Federal negotiator asked whether updates to the information provided to the applicant would be needed if the applicant subsequently filed or updated an application. The Department responded that when an institution is asked for the self-certification form and the required information, it should supply the form and information available to the institution at that time. There is no requirement to update it.

In response to concerns about the potential for fraudulent use of the self-certification form, the negotiating committee agreed to specify in the proposed regulations that the required self-certification form and information that must be provided to an applicant for a private education loan must be provided only to an applicant who is “enrolled or admitted” to the institution rather than to any student who requests the information. The non-Federal negotiators believed that this modification would minimize the possibility that a student who is not enrolled or admitted to the institution may request the form and the requisite information—which, if the student has not completed a Free Application for Federal Student Aid (FAFSA), may be limited to the cost of attendance only—and receive a private education loan for which the student is not eligible.

The committee also agreed to add a provision to the proposed regulations requiring an institution to discuss the availability of Federal, State, and institutional aid with the applicant, at the request of the applicant. The addition of this requirement (reflected in proposed § 668.14(b)(29)(ii)) addressed the concerns of several non-Federal negotiators who wanted to assure that an applicant for a private education loan could receive as much information as possible regarding available aid options.

The Department agrees that it is important to call attention to the availability of other more favorable types of aid and believes that the addition of the requirement in § 668.14(b)(29)(ii) will support this purpose. A request by the applicant for a private education loan will initiate the discussion about other aid options, permit the financial aid administrator to counsel the applicant about such options, and offer the applicant the opportunity to ask any questions he or she may have about the aid options or how to apply for the aid.

Statute:
The HEOA amended section 487(h) of the HEA by adding a new paragraph (27) to require any institution that enters into a preferred lender arrangement to agree, as a condition of program participation under the PPA, to compile, maintain, and make available to students and their families a list of the specific lenders for loans made under a Title IV program and for private education loans the institution recommends or promotes in accordance with its lender arrangement. New section 487(h)(27) of the HEA also requires that the institution must, at least annually, compile and make the list available in print or other medium.

Current Regulations:
While current § 668.14(b) does not include any information related to preferred lender arrangements, current § 682.212(h) contains, consistent with our authority under sections 432(m)(1)(B)(ii) and 479A(c) of the HEA, the Department's restrictions on the development and content of a preferred lender list.

Proposed Regulations:
Proposed § 668.14(b)(28) would add the requirements reflected in section 487(h)(27) of the HEA to the Department's regulations governing the PPA requirements. In conjunction with this proposed addition, we also propose to amend § 682.212(h) to remove information about the preferred lender list restrictions and instead provide a cross-reference to the requirements in proposed § 602.10. We propose to include the preferred lender list requirements in new § 602.10, rather than part 682, because, under section 152(a)(1)(A) of the HEA, as amended by the HEOA, all covered institutions (as defined in section 151(2) of the HEA) that have preferred lender arrangements must comply with these requirements. Part 682 only covers the FFEL program.

Reasons:
Proposed § 668.14(b)(28) would implement the new statutory requirements any institution that has established a preferred lender arrangement must meet in order to participate in the Title IV, HEA programs. Please refer to the preamble discussions regarding proposed §§ 601.2 and 601.10 for more information on the definition of a
preferred lender arrangement
and the requirements

associated with such an arrangement and preferred lender lists.

Standards of Administrative Capability (§ 668.16)

Statute:
The HEOA amended section 485(m) of the HEA by adding a requirement that an institution participating in any Title IV program must report annually to the Secretary, any reasonable reimbursements paid or provided by a private educational lender or group of such lenders for service on an advisory board, commission, or group established by such lenders.

Under section 485(m) of the HEA, the reports must include, among other items, the amount for each specific instance of reasonable expenses paid or provided and a brief description of the activity for which the expenses were paid or provided.

Current Regulations:
None.

Proposed Regulations:
We propose to amend § 668.16 (Standards of administrative capability) to incorporate the requirement from section 485(m) of the HEA that institutions participating in the Title IV, HEA Program report annually to the Secretary any reasonable expenses paid or provided to any employee of the financial aid office, or any employee who otherwise has responsibilities with respect to education loans or other financial aid at the institution, for service on an advisory board, commission, or group established by a private educational lender or group of lenders. Consistent with section 485(m)(1)(A) through (D) of the HEA, the information to be reported pursuant to proposed § 668.16(d)(2)(i) would consist of: (1) The amount for each specific instance of reasonable expenses paid or provided; (2) The name of the individual to whom the expenses were paid or provided; (3) The dates of the activity for which the expenses were paid or provided; and (4) A brief description of the activity for which the expenses were paid or provided.

Under proposed § 668.16(d)(2)(ii), expenses would be considered “reasonable” if the expenses meet the standards of and are paid in accordance with an applicable State government reimbursement policy or, if no applicable State policy exists, in accordance with applicable Federal cost principles. In addition, for purposes of determining whether expenses are “reasonable” under this provision, the applicable policy would need to be consistently applied to an institution's employees being reimbursed.

Reasons:
Proposed § 668.16(d)(2)(i) would implement the changes made to section 485(m) of the HEA by the HEOA. We propose to include the requirements from section 485(m) of the HEA in current § 668.16, because this section identifies standards of administrative capability applicable to all institutions that participate in any Title IV program and includes similar requirements not specified in the PPA.

Proposed § 668.16(d)(2)(ii) would clarify how to determine whether expenses are “reasonable expenses” under section 485(m) of the HEA and proposed § 668.16(d)(2)(i). Many negotiators asked for clarification about what constitutes a “reasonable” expense. While the Department declined to define the term “reasonable,” the Department developed language loosely modeled after the language included in § 682.418(b)(10). The language reflected in proposed § 668.16(d)(2)(ii) describes reasonable expenses as those paid in accordance with an applicable State government reimbursement policy or with applicable Federal cost principles. Federal cost principles would include those contained in the Office of Management and Budget (OMB) circulars A-21 and A-122.

We propose to tie “reasonable expenses” to State policies or the applicable Federal cost principles because we envision that a public institution generally would use the State government reimbursement policy of the State in which the institution is located and that a private institution generally would use the applicable Federal cost principles contained in either OMB Circular A-21 or Circular A-122.

In addition, we understand that there may be circumstances under which a private institution receives funding from a State and may therefore use the State government reimbursement policy. In such cases, private schools may choose whether to use a State policy or the Federal cost principles. Proposed § 668.16(d)(2)(ii) would not specify which policy or principles must be used, but rather would provide institutions with some flexibility as long as the policy or principle is consistently applied to an institution's employees.

The non-Federal negotiators also had concerns regarding how an institution is to determine the correct amount to report for each expense. The Department believes that an institution can rely on information provided by a third party (in this case, the lender or lenders) in reporting the amount of reasonable expenses.

Lastly, non-Federal negotiators requested clarification on whether an annual report must be filed with the Secretary if no employee has received reimbursements. After the required form is developed, the Department will provide clarification on this issue through the
Federal Register
notice that announces and describes the reporting process.

Financial Assistance Information (§ 668.42)

Statute:
The HEOA amended section 485(a)(1)(M) of the HEA by adding a requirement that institutions that participate in the Title IV programs describe—for prospective and enrolled students—the terms and conditions of the loans students receive under the FFEL, Direct Loan and Perkins Loan programs.

The HEOA removed from section 485(a)(1)(M) of the HEA the requirement that institutions provide information about the terms and conditions under which FFEL and Perkins Loans could be deferred or partially cancelled for service under the Peace Corps Act or the Domestic Volunteer Service Act.

Current Regulations:
Current § 668.42(a)(1) requires that an institution provide a description of all student financial assistance programs to prospective and enrolled students.

For students receiving financial assistance, current § 668.42(c)(4) requires an institution to provide specific information about any loan received by the student as part of the aid package.

Proposed Regulations:
Proposed § 668.42(a)(4) would require institutions to describe for prospective and enrolled students the terms and conditions of loans students receive under the FFEL, Direct Loan, and Perkins Loan programs in addition to a general description of the programs.

The proposed regulations also would remove the requirement, reflected in current § 668.42(c)(7), to describe the terms and conditions under which FFEL and Perkins Loans could be deferred for service under the Peace Corps Act or the Domestic Volunteer Service Act.

Reason:
We propose to amend § 668.42 to incorporate the expanded information dissemination requirement for prospective and enrolled students reflected in the new statutory language and to remove the description of the Peace Corps Act and Domestic Volunteer Service Act deferments and partial cancellations in accordance with changes made to section 485(a)(1)(M) of the HEA by the HEOA.

Cohort Default Rates

Three-Year Cohort Default Rate (§§ 668.200 Through 668.217)

Statute:
The HEOA amended section 435(m) of the HEA by increasing the period used to calculate the cohort default rate from two to three years. Under the new three-year method, the cohort default rate is the percentage of borrowers who default on their FFEL or Direct Loans before the end of the second fiscal year (instead of the first fiscal year) following the fiscal year in which the borrowers entered repayment. The three-year method is effective for cohort default rates calculated for fiscal year 2009 and subsequent years. However, section 436(e)(2) of the HEA provides for a transition period during which sanctions will continue to be imposed based on the two-year cohort default rates until rates based on the three-year method are calculated for three consecutive years.

Current Regulations:
Current § 668.183 under subpart M of part 668 provides for a two-year cohort default rate. The two-year rate is the percentage of borrowers who default on their loans by the end of the fiscal year following the year those borrowers entered repayment.

Proposed Regulations:
We propose to add a new subpart N to part 668 to provide for regulations for calculating the three-year cohort default rate. Proposed § 668.202 would describe the four steps that the Department follows to calculate and apply the three-year cohort default rate for a fiscal year. With regard to the transition period, proposed §§ 668.181 and 668.200(b) would specify that the Department will issue annually two sets of draft and official cohort default rates for fiscal years 2009, 2010, and 2011. For each of these years, an institution would receive one set of draft and official rates under proposed subpart N and another set under subpart M, and could take administrative appeals as outlined in those subparts from the two-year rates, the three-year rates, or both. For consistency with the HEOA's transition provision, proposed § 668.206(a)(1) would specify that institutions would not lose eligibility based on one three-year rate of 40 percent or higher until the Department's issuance of official three-year rates for the fiscal year 2011 cohort (i.e., in 2014).

Reasons:
Proposed subpart N would include the three-year calculation as well as all of the statutory and regulatory changes relating to the three-year default rates. In most other respects, the provisions in proposed subpart N would parallel the two-year provisions in current subpart M. We believe that having two subparts for the two cohort default rates provides the best solution for dealing with the transition period during which some provisions from both subparts would apply. After the transition period, an institution would rely solely on the provisions in subpart N because the Department would no longer be calculating or issuing two-year cohort default rates.

Institutional Eligibility and Appeals (§ 668.16(m))

Statute:
For three-year cohort default rates, issued beginning in fiscal year 2012 with the three-year rate for fiscal year 2009, section 435(a)(2)(B) of the HEA imposes a threshold default rate of 30 percent (an increase from the 25 percent rate applicable to the two-year default rates under the transition provision in section 436(e)(2) of the HEOA). Under section 435(a)(2)(B) of the HEA, an institution may lose its eligibility to participate in the Pell Grant, FFEL, and Direct Loan programs if its three-year default rate is equal to or greater than 30 percent for three consecutive years. However, section 435(a)(3) of the HEA allows an institution whose three-year default rate is 30 percent or more for two consecutive years to file an appeal demonstrating exceptional mitigating circumstances as described in section 435(a)(5) of the HEA (this appeal is referred to as the “economically disadvantaged” appeal in the regulations). The institution must file the appeal no later than 30 days after it receives a notice from the Department regarding its second successive three-year default rate that exceeds the 30 percent threshold. If the Department determines that the institution satisfies the requirements specified for the appeal, the Department will not place the institution on provisional certification based solely on its default rate.

In addition, the HEOA increased the participation rate index, as reflected in section 435(a)(8) of the HEA, from 0.0375 to 0.0625. Under this section, an institution may avoid sanctions based on three consecutive years of three-year default rates that are 30 percent or higher if its participation rate index for any of the three years is equal to or lower than 0.0625.

Current Regulations:
Under current §§ 668.16(m) and 668.187, an institution is subject to loss of eligibility if its three most recent cohort default rates are 25 percent but less than 40 percent, or if its most recent cohort default rate is 40 percent or more, and it is subject to provisional certification if any of its three most recent two-year cohort default rates are 25 percent or more. The threshold for a participation rate index appeal under current § 668.195(a)(2) is 0.0375.

Proposed Regulations:
Proposed § 668.16(m)(1)(ii) would apply the current rules for administrative capability based on two-year cohort default rates during the transition period. Thereafter, a school would be administratively capable if two of its three most recent three-year rates are less than 30 percent. Under proposed § 668.16(m)(2), the current rules for provisional certification based on two-year cohort default rates of 25 percent or more but less than 40 percent would continue to apply during the transition period. Thereafter, an institution whose three-year default rates are 30 percent or more, but less than 40 percent, for two years would not be provisionally certified based solely on its default rates under the following circumstances:

(1) The institution files timely a request for adjustment or appeal from the second such rate under proposed §§ 668.209 (Uncorrected data adjustments), 668.210 (New data adjustments), or 668.212 (Loan servicing appeals) and the request or appeal is pending or succeeds in reducing the institution's three-year rate below 30 percent.

(2) The institution files timely an appeal under proposed § 668.213 (Economically disadvantaged appeals) from the second such rate and the appeal is pending or successful. Proposed § 668.213 provides that the two rates of 30 percent or more must be successive to permit the appeal.

(3) The institution files a timely participation rate index appeal under § 668.214 and the appeal is pending or successful.

(4) The institution had 30 or fewer borrowers in the three most recent cohorts of borrowers used to calculate the institution's rates.

(5) A three-year rate that would otherwise potentially subject the institution to provisional certification was calculated as an average rate.

To avoid provisional certification by invoking exceptions (1), (2) or (3), the institution would file a request for adjustment or appeal in response to a notice from the Department that the institution's second three-year cohort default rate, or second successive three-year default rate for an economically disadvantaged appeal, is 30 percent or more, but less than 40 percent.

Under proposed § 668.214, a participation rate index appeal could be taken from a loss of eligibility, or

potential placement on provisional certification, based on three-year cohort default rates if the participation rate index for any of the excessive rates was .0625 or less. The appeal would be taken within 30 days of receiving the most recent excessive official rate.

In addition, under proposed § 668.204(c)(1)(iii), an institution would be allowed to challenge a potential placement on provisional certification because its three-year cohort default rates for two of the most recent three years would be 30 percent or more, but less than 40 percent, even though the second such rate was available only as a draft rate, if its participation rate index was equal to or less than 0.0625 for either its draft rate, or its most recent official rate equaling or exceeding 30 percent but less than 40 percent. The challenge would be taken following notice to the school of its draft rate.

Reasons:
The proposed amendments to § 668.16(m) would incorporate into the Department's cohort default rate regulations the statutory requirements relating to appeals for extenuating circumstances and raising the ceiling for the participation rate index appeal.

The proposed regulations would also allow data appeals to ensure that schools are not provisionally certified based on incorrect data.

In addition, the Department proposes to exempt from provisional certification based solely on cohort default rates any school that has thirty or fewer borrowers included in its most recent three cohort default rates, or had its excessive rates calculated by the “average rates” method, or that qualifies for a successful participation rate challenge or appeal. The Department believes that two relatively high cohort default rates that are average rates, or that pertain to very small schools, or to schools that certify loans for only a very small portion of their enrollment, are not necessarily indicative of a lack of administrative capability necessitating provisional certification.

Default Prevention Plans (§ 668.217)

Statute:
Section 435(a)(7) of the HEA requires an institution whose 3-year cohort default rate for a fiscal year is 30 percent or more to establish a default prevention task force to prepare a default prevention plan to (1) identify the factors causing the institution's rate to be 30 percent or more, (2) establish measurable objectives and steps to improve its default rate, and (3) specify actions that can be taken to improve student loan repayment, including counseling regarding loan repayment options. The institution must submit the plan to the Department, and, after reviewing the plan, the Department offers technical assistance to the institution to help improve the default rate.

In cases where the institution's default rate is 30 percent or more for two consecutive fiscal years, the institution's default prevention task force must review and revise its plan. The institution must send the revised plan to the Department, and, after reviewing the plan, we may require the institution to take actions that promote student loan repayment.

Current Regulations:
The Department's current regulations do not address default prevention

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-17119. Public record. Not legal advice.