On Tuesday, June 12, 2007, the Department of Education officially published the Notice of Proposed Rulemaking (NPRM) for proposed regulatory changes to the Federal Perkins Loan, Federal Family Education Loan (FFEL) and William D. Ford Direct Loan (DL) Programs. These changes stem from the discussions that took place during the negotiated rulemaking sessions held from December 2006 through April 2007. As the negotiating panel was unable to reach consensus on the proposed regulatory language, the Secretary is permitted to publish regulations as she sees fit; however, the NPRM in many areas incorporates suggestions from the negotiated rulemaking process.
Comments from the public are due in written form or through the Federal eRulemaking Portal on or before August 13, 2007. Comments will be available for public inspection during and after the comment period via the Portal. Complete instructions for submitting comments in either manner are available in the NPRM.
Below you will find a summary of each proposed regulatory change. CCA will submit comments on behalf of the membership. Those comments will be posted to the CCA website when they are complete. We encourage our members to file comments on any or all of the proposed regulation; the more comments received, the greater the chance for change or modification.
It is important to remember that this summary encompasses proposed regulatory changes; when the final regulations are published on or before November 1, 2007, CCA will issue a summary of the exact changes to the regulations and suggestions for complying with those changes; changes published in the final rule will be effective July 1, 2008.
This summary is intended to provide you with information about proposed changes to the loan regulations, but should not substitute for a careful reading of the NPRM in its entirety. The NPRM is available for download from the Federal Register’swebsite.
For ease of comparison, this summary follows the proposed regulatory changes in the order they are published in the NPRM rather than the order they appear in regulation or statute.
Simplification of Deferment Process (§§674.38, 682.210, 685.204)
FFEL lenders would be permitted to grant graduate fellowship deferments, rehabilitation training program deferments, unemployment deferments, military service deferments, and economic hardship deferments based on information that another FFEL lender or the Department has granted a borrower a deferment for the same reason and the same time period. The Department would be permitted to grant a DL deferment based on information from a FFEL lender, and a Perkins Loan deferment would be permitted by an institution for information received from another Perkins Loan holder, a FFEL lender, or the Department for a DL.
Loan holders would be allowed to rely in good faith on the determination of deferment eligibility made by another lender, including the Department or an institution for a Perkins loan. This determination would be made by contacting the other lender or by checking the National Student Loan Data System (NSLDS). If a loan holder has information that the previous deferment was made in error, it may not knowingly grant an ineligible borrower a deferment until it receives documentation showing eligibility.
Before the actual deferment is made, the institution, lender or Department would be required to contact the borrower to inform him or her that a deferment has been granted and allow them the opportunity to decline the deferment. This simplified deferment process would only be available for Title IV HEA loans made on or after July 1, 1993.
Additionally, the proposed changes would permit a borrower’s representative to apply for a military service deferment on behalf of the borrower.
Accurate and Complete Copy of a Death Certificate (§§674.61, 682.402, and 685.212)
The use of an accurate and complete photocopy of an original or certified copy of a borrower’s death certificate, in addition to the original or certified copy, would be permitted to be used to support the discharge of a Title IV loan due to death. Individuals would not be required to produce the original for lenders to photocopy; rather, the lenders would be allowed to accept a photocopy of the original. Electronic versions or faxed copies would not be permitted.
The Department would appreciate comments identifying how potential fraud could occur under these changes and how to address any such potential fraud.
Total and Permanent Disability Discharge (§§674.61, 682.402, and 685.213)
Borrowers would be required to submit discharge applications for total and permanent disability to loan holders within 90 days of the date the physician certifies the borrower’s application. The date of the borrower’s total and permanent disability would be the date the physician certifies the disability on the discharge application.
A prospective three year conditional discharge period beginning on the date the Secretary makes the initial determination that the borrower is totally and permanently disabled would be required to establish eligibility for a total and permanent disability discharge. During that three year period, the borrower’s income from employment cannot exceed the poverty line for a family of two for any 12-month period, and the borrower cannot take out any additional Title IV loans.
After making the final determination of the borrower’s total and permanent disability, the Secretary will return all payments made on the loan after the date the physician completed and certified the borrower’s loan discharge application. Loan holders would be required to disclose the disability discharge eligibility requirements to borrowers, and to inform them that no further payments on loans are due once the discharge application is sent to the Secretary for the initial eligibility determination.
NSLDS Reporting Requirements (§§674.16, 682.208, 682.401, and 682.414)
Perkins and FFEL regulations would be changed to require institutions, lenders, and guaranty agencies to report enrollment and loan status information or any other Title IV loan related data required by the Secretary to the Secretary by the deadline established by the Secretary. Guaranty agencies would be required to report enrollment and loan status information on FFEL borrowers or students to the current holder of any loan within 30 days of any change in the student’s enrollment status.
The Department is interested in receiving comments on how the change from the current 60 day timeframe to a 30 day timeframe for reporting information will impact guaranty agencies’ operations and any costs associated with compliance to this regulatory change.
Certification of Electronic Signatures on Master Promissory Notes (MPNs) Assigned to the Department (§§674.19, 674.50, 682.409, and 682.414)
Institutions would be required to create and maintain a certification regarding the creation and maintenance of any electronically signed Perkins Loan promissory note or MPN. Institutions or the holder of FFEL loans would be required to retain an original of an electronically signed Perkins or FFEL for 3 years after all loans on the MPN are satisfied.
For assigned Perkins or FFEL loans, institutions, guaranty agencies and/or lenders, as appropriate, would be required to cooperate with the Secretary in all matters necessary to enforce an assigned loan that was electronically signed, including providing testimony to ensure the admission of electronic records in legal proceedings and providing the Secretary with the certification regarding the creation of the electronically signed promissory notes. Institutions, guaranty agencies and lenders would also be required to respond, within 10 business days, to any request from the Secretary for information needed to resolve any dispute in connection with an electronically signed promissory note assigned to the Department, and to ensure that all entitled parties have full and complete access to the electronic records associated with an assigned Perkins or FFEL MPN until all loans made on the MPN are satisfied. Guaranty agencies in the FFEL program would be required to provide the Secretary with the name and location of the entity in possession of the original electronically signed MPN that has been assigned to the Department.
Record Retention of Master Promissory Notes (MPNs) Assigned to the Department (§§674.19, 674.50, 682.406, and 682.409)
Institutions participating in the Perkins Loan Program would be required to retain records showing the date and amount of each disbursement of loan funds made under an MPN until the loan is canceled, repaid, or otherwise satisfied. These disbursement records must be maintained for at least three years after the loan is in some way satisfied. Disbursement records on assigned Perkins loans would be required to be submitted to the Department at the Secretary’s request. When assigning FFEL loans to the Department, guaranty agencies would be required to submit a record of the disbursement of loan funds to the institution for delivery to the borrower.
Loan Counseling for Graduate or Professional Student PLUS Loan Borrowers (§§682.603, 682.604(f), 682.604(g), 685.301, 685.304(a), and 685.304(b))
These proposed regulations would require institutions to provide entrance counseling for students borrowing Graduate or Professional Student PLUS loans. The entrance counseling requirements would vary depending on whether or not a student has borrowed a Stafford loan prior to the PLUS loan. Additionally, before certifying the Graduate or Professional Student PLUS loan, institutions would be required to notify students of their eligibility for a Stafford loan and to provide a comparison of the terms and conditions of the PLUS loan and Stafford loan, as well as ensure the student has the opportunity to request a Stafford loan.
During exit counseling, if the borrower has received a combination of Stafford and Graduate or Professional Student PLUS loans, the institution must provide the student with the average anticipated monthly repayment amount information based on the combination of different loan types the borrower has received.
Maximum Loan Period (§§682.401, 682.603, and 685.301)
These regulations would eliminate the maximum 12 month loan period for annual loan limits in the FFEL and Direct Loan programs and the 12 month period of loan guarantee in the FFEL program. This will allow institutions to certify a single loan for students in shorter non-term or nonstandard term programs, and provide greater flexibility in rescheduling disbursements for students who withdraw and return in the permitted 180 day period.
Mandatory Assignment of Defaulted Perkins Loans (§§674.8 and 674.50)
The Program Participation Agreement (PPA) would be modified to contain a provision under which the Department could require the assignment of a Perkins Loan if the outstanding principal balance of the loan is $100 or more, the loan has been in default for seven years or more, and a payment has not been received on the loan in the proceeding 12 months. Mandatorily assigned Perkins Loans may be exempt from the provision that the institution provide a Social Security Number for assigned loans.
This provision was very controversial at negotiated rulemaking. Several non-Federal negotiators argued that they should be permitted to retain these loans in their portfolios for extended periods of time because ten years after graduating from college puts many students at the stage of life where they are taking out mortgages or doing other activities that motivate them into clearing up their credit, including taking action on defaulted loans. This allows institutions to then collect on these loans and retain the funds in their Perkins portfolio to assist additional needy students. It would be helpful if the Department received comments providing examples of how institutions have been able to collect on defaulted Perkins loans after extended periods of time.
Reasonable Collection Costs (§674.45)
Beginning with placements made after July 1, 2008, institutions would be limited in the amount of collection costs they may assess against a Perkins Loan borrower to 30% of the total of the principal, interest, and late charges collected for first collection effort; 40% of the total of the principal, interest, and late charges collected for second collection efforts; and 40% of the total of the principal, interest and late charges collected plus court costs in cases of litigation.
Child or Family Service Cancellation (§674.56)
The regulations would be modified to specify that to qualify for a child or family service cancellation, a borrower who is a full-time, non-supervisory employee of a child or family service agency must be providing services directly and exclusively to high-risk children from low-income communities. If the employee provides services to families of high-risk children, these services must be secondary to the services provided to the high-risk children from low-income communities.
Prohibited Inducements (§§682.20 and 682.401)
The proposed regulation codifies previous subregulatory guidance, with some changes. The proposed regulations for lenders and guaranty agencies include a non-exhaustive list of examples of prohibited inducements and activities and an exhaustive list of permissible activities. Lenders would be permitted to provide services to schools that are comparable to the types of assistance the Department provides to institutions through the Direct Loan Program; the Department will publish a list of these services on or before the publication of the final rule.
Lenders would be prohibited from offering directly or indirectly any points, premiums, payments or other benefits to any school or other party to secure FFEL loan applications or loan volume. A broad definition of “school-affiliated organization” would be added to the regulation and would include alumni organizations, foundations, athletic organizations, and social, academic, and professional organizations.
“Other benefits” provided to a school that would be prohibited include access to a lender’s other financial products, computer hardware, and the payment of costs at less than market rate or no cost for the printing and distribution of college catalogs. Lenders would also be prohibited from providing staffing services to a school as a third-party servicer or otherwise assisting a school with financial aid related functions on more than a short-term, non-recurring emergency basis. The Department is specifically soliciting comments on whether an emergency should be limited to a State- or Federally-declared natural or national disaster that affects a school or whether an “emergency” should encompass broader circumstances.
Lenders may participate in a school’s or guaranty agency’s student financial aid and financial literacy outreach as long as they do not promote their student loan or other services, and they must provide full disclosure of any sponsorship including the development and printing of materials. Lenders may provide toll-free telephone numbers and free data transmission services to schools participating in FFEL with the lender and to the school’s borrowers and prospective borrowers for FFEL loan communications.
Lenders could not provide grants, scholarships, restricted gifts, or financial contributions to secure loan applications, loan volume, or placement on a Preferred Lender List (PPL). The payment of loan application referral or processing fees between lenders or between lenders and any other entity would be prohibited. Lenders may pay Federal default fees that would otherwise be paid by borrowers. They may purchase loans from another loan holder at a premium.
Lenders would be prohibited from paying conference or training registration, transportation and lodging expenses for employees of school and school-affiliated organizations. Payment of any entertainment expenses related to lender-sponsored functions and activities for employees of schools and school-affiliated organizations would also be prohibited. Lenders would be permitted to sponsor meals, refreshments, and receptions for school employees or officials that are reasonable in cost and that are scheduled in conjunction with meeting or conference events if those functions are open to all meeting or conference attendees.
Prohibited payments and benefits to prospective borrowers would include prizes or additional financial aid funds. Lenders could, however, provide schools, school-affiliated organizations, and borrowers items of nominal value that constitute a form of generalized marketing or are intended to create good will.
Lenders may provide benefits to borrowers including offering reduced origination fees and offering reduced borrower interest rates. They may also offer repayment incentive programs to borrowers, such as reduced interest rates or forgiveness of part of the loan principal in exchange for the borrower making one or more scheduled payments.
The regulations governing prohibited activities for guaranty agencies generally mirror the regulations for lenders. One exception is that guaranty agencies would be permitted to provide meals and refreshments that are reasonable in cost and provided in connection with guaranty agency provided training for school and lenders program participants and for elementary, secondary, and postsecondary school personnel and in conjunction with other workshops and forums customarily used by the agency to fulfill it’s obligations under the HEA. The guaranty agency may also pay reasonable travel and lodging costs for school staff to attend training programs and facility tours that they would otherwise be unable to attend, as well as the reasonable costs school officials to participate on an agency’s governing board, a standing official advisory committee, or in support of other official activities.
Guaranty agencies would be permitted to pay Federal default fees that would otherwise be paid by borrowers as well as to undertake default aversion activities approved by the Secretary.
The proposed regulations lay out three provisions related to the Department’s ability to enforce the improper inducement regulations. First, in formal actions against a lender or guaranty agency based on a violation of the prohibited inducement provisions, the Secretary will apply a “rebuttable presumption” that the activity or payment was undertaken to secure FFEL loan applications or volume. The lender or guaranty agency will have the opportunity to show that this is not the case. Second, guaranty agencies may not make a claim payment from its Federal Fund to a lender or request a reinsurance payment from the Department on a loan if the lender offered or provided an improper inducement to a school or other party in order to make the loan. Finally, the regulations clarify and expand borrower’s legal rights by expanding the Federal Trade Commission’s Holder Rule to apply to all loans made in the FFEL program and specifying that it applies if the lender making the loan offered or provided an improper inducement to the school or any other party in connection with making the loan. The Holder Rule states that any lender holding the borrower’s loan is subject to all claims and defenses that the borrower could assert against the school with respect to the loan. Previously, the Holder Rule only applied to loans made at for-profit institutions or loans made to borrowers referred to a lender by a for-profit school.
Eligible Lender Trustees (ELTs) (§§682.200 and 682.602)
These regulations would prohibit a FFEL lender from entering into a new ELT relationship with a school or school affiliated organization after September 30, 2006; ELT relationships in existence prior to this date would be allowed to continue with some restrictions. The same limits imposed on FFEL school lenders by the Higher Education Reconciliation Act (HERA) would be extended to schools and school-affiliated ELT arrangements entered into after January 1, 2007.
School-related organization will be defined as any organization that is directly or indirectly related to a school and includes but is not limited to alumni organizations, foundations, athletic organizations, and social, academic, and professional organizations. It would be helpful if, in your comments to the Department, you provide examples of associations or organizations that your students, staff, or institution itself belong to that could be deemed a “school-related organization” under this definition that could potentially cause you to be in violation of the regulation when you have no say in the operation of that organization.
Frequency of Capitalization (§682.202)
The frequency of capitalization on Federal Consolidation loans would be limited to quarterly. Unpaid interest that accrues during an in-school deferment could only be capitalized at the end of the deferment.
Loan Discharge for False Certification as a Result of Identity Theft (§§682.208, 682.211, 682.300, 682.302 and 682.411)
Lenders would be permitted to suspend credit bureau reporting on a loan for 120 days while investigating a borrower’s claim of identity theft. Lenders would also be allowed to grant a 120 day administrative forbearance to a borrower upon receipt of a valid identity theft report as defined under the Fair Credit Reporting Act.
Preferred Lender Lists (§§682.212 and 682.401)
The requirements a school must meet if it chooses to provide a list of preferred or recommended lenders to students are codified in the regulation. Institutions are prohibited from including any lender on the preferred list that offers or has been solicited by the school to offer any financial or other benefits to the school for inclusion on the list. Preferred lender lists must contain a minimum of three unaffiliated lenders. Institutions must ensure that any lender included on the preferred list that offers a benefit to students must offer that benefit to all borrowers at the institution.
Institutions will be required to disclose to prospective borrowers the method and criteria used to select lenders for inclusion on the preferred list, as well as provide comparative information about interest rates and other benefits offered by the lenders. Included in any information related to a list of lenders must be a prominent statement advising prospective borrowers that they are not required to use a lender suggested or recommended by the school.
Institutions are prohibited from using a preferred lender list to deny or impede a borrower’s choice of lender. Schools may not refuse or delay certification of a loan because of the borrower’s choice of lender, including status on the institution’s preferred list or if the lender does not participate in the electronic processing system the school uses. Schools are also prohibited through award packaging or other methods from assigning a lender to first-time borrowers.
