[Federal Register: September 19, 1996 (Volume 61, Number 183)]
[Proposed Rules]
[Page 49381-49388]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[[Page 49381]]
_______________________________________________________________________
Part II
Department of Education
_______________________________________________________________________
34 CFR Part 682
Federal Family Education Loan (FFEL) Program; Proposed Rule
[[Page 49382]]
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AC33
Federal Family Education Loan (FFEL) Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Secretary proposes to amend the Federal Family Education
Loan (FFEL) Program regulations. These proposed regulations are needed
to implement changes to the Higher Education Act of 1965, as amended
(HEA) giving the Secretary additional powers to assure the safety of
Federal reserve funds and assets maintained by guaranty agencies
insuring educational loans under the FFEL Program pursuant to
agreements with the Secretary. The proposed regulations would establish
appropriate conflicts of interest restrictions for guaranty agency
staff and affiliated individuals and would prohibit agencies from using
Federal reserve funds for certain purposes.
DATES: Comments must be received on or before November 4, 1996.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Ms. Pamela A. Moran, Chief, Loans Branch, Policy
Development Division, Student Financial Assistance Programs, U.S.
Department of Education, 600 Independence Avenue, SW., Room 3053,
Regional Office Building 3, Washington, DC 20202-5449. Comments may
also be sent through the internet to ``ga__reserves@ed.gov''.
To ensure that public comments have maximum effect in developing
the final regulations, the Department urges the commenters to clearly
identify the specific section or sections of the regulations that each
comment addresses and to provide comments in the same order as those
sections appear in the regulations. The Department has found it very
helpful if commenters who wish to modify a proposed provision submit
their version of how they believe the specific regulatory provision
should read.
Comments that concern information collection requirements must be
sent to the Office of Management and Budget at the address listed in
the Paperwork Reduction Act section of this preamble. A copy of those
comments may also be sent to the Department representative named in
this section.
FOR FURTHER INFORMATION CONTACT: Mr. George Harris, Senior Policy
Specialist, U.S. Department of Education, 600 Independence Avenue, SW.,
Room 3045, Regional Office Building 3, Washington, DC 20202-5449.
Telephone: (202) 708-8242. Individuals who use a telecommunications
device for the deaf (TDD) may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern
time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
Background
The FFEL Program regulations (34 CFR Part 682) govern the Federal
Stafford Loan Program, the Federal Supplemental Loans for Students
Program (no longer active), the Federal PLUS Program, and the Federal
Consolidation Loan Program (formerly collectively known as the
Guaranteed Student Loan Programs). A guaranty agency is a State or
private nonprofit entity that performs certain administrative roles in
the FFEL Program. The Department's regulations require the guaranty
agency to deposit all funds received in connection with its FFEL
guaranty activities into a reserve fund to be used solely for its
activities as a guaranty agency under the FFEL Program. The regulations
also specify that the reserve fund may only be used to pay certain
costs associated with those programmatic activities. See 34 CFR
682.410(a). Under section 422(g) of the HEA, the reserve funds and
assets of the guaranty agencies are the property of the United States.
In light of its role in the program and its responsibility for
holding and protecting Federal funds, the guaranty agency's role is
best characterized as that of a trustee holding money for the benefit
of another. See Education Assistance Corp. v. Cavazos, 902 F.2d 617,
627 (8th Cir. 1990), cert. denied 111 S.Ct. 246 (1990); Ohio Student
Loan Com'n v. Cavazos, 900 F.2d 894 (6th Cir. 1990), cert. denied 111
S.Ct. 245 (1990); Student Loan Fund of Idaho v. Riley, Case No. CV 94-
0413-S-LMB (D.Ida, Memo. Decision, Sept. 14, 1995) at 17-19. Under
these circumstances, a guaranty agency is responsible for acting as a
fiduciary responsible for protecting the interests of the Department
and the taxpayers in the reserve funds.
Over the years, some guaranty agencies, both State and private
nonprofit, have become involved in activities outside of their FFEL
guaranty activities. Since the FFEL Program reserve fund may be used
only for FFEL guaranty activities, any other activities should have
been funded exclusively from sources unrelated to the FFEL guaranty
activities. These sources may include specifically designated State
appropriations or private capital raised independently of the agency's
FFEL guaranty activities. If a guaranty agency has consistently funded
and maintained these non-FFEL guaranty funds separate from its reserve
funds, the separate funds are not covered by the restrictions in the
Department's regulations. These proposed regulations cover only
expenditures made from the reserve fund.
The Secretary understands that some guaranty agencies involved in
separately funded non-FFEL guaranty activities use personnel and
resources to perform both the activities of the FFEL guaranty agency
and other activities. It is vital for the guaranty agency to establish
and comply with a plan for allocating costs appropriately between the
FFEL guaranty activities and other activities to ensure that Federal
funds are not subsidizing non-FFEL guaranty activity. Thus, under
Sec. 682.418(c) in these proposed regulations, each guaranty agency
that shares costs with any other program, agency, or organization must
develop a cost allocation plan consistent with the requirements
described in OMB Circular A-87 and maintain the plan and related
supporting documentation for audit. A guaranty agency would be required
to submit its cost allocation plans for the Secretary's approval if it
is specifically requested to do so by the Secretary.
The Secretary is also aware that some guaranty agencies have
contracted with other entities associated with the guaranty agency
(through a shared holding company-like corporate structure or
interlocking governing boards or officers) for services and goods.
These arrangements raise the possibility of self-dealing and create
concerns that the guaranty agency or its contracting officials may have
a conflict of interest in establishing and monitoring the contracting
arrangement. These proposed regulations address these issues.
In developing these proposed regulations, the Secretary has
attempted to modify various governmentwide rules to fit the unique role
and structure of guaranty agencies. As noted earlier, guaranty agencies
receive and hold Federal funds to pay certain FFEL Program costs and
expenses. They are trustees for the Federal Government and are expected
to comply with fiduciary standards. Although guaranty agencies are not
Federal contractors, the Secretary did consider whether, to protect the
Federal fiscal interest, the Secretary should require agencies to
conform to the strict rules applicable to government contractors in the
areas of
[[Page 49383]]
permissible costs, required cost allocation, and conflicts of interest.
However, the Secretary believes that it is not yet necessary to require
a strict application of those rules to the guaranty agencies. Instead,
the Secretary is proposing in this NPRM a more limited approach that is
tailored to address the specific issue of reserve funds and to clarify
ambiguities that have led to some of the concerns identified
previously.
Prior to the publication of these proposed regulations,
representatives of the Department met in Washington, DC on July 22-23,
1996 with representatives of guaranty agencies, the National Council of
Higher Education Loan Programs, Inc., and other interested parties from
various sectors of the FFEL and student aid community for the purpose
of learning their views on the direction that the proposed regulations
should take. Although any regulations the Secretary proposes pursuant
to section 422(g)(1)(C) of the HEA to prevent the ``misapplication,
misuse, or improper expenditure of reserve funds and assets'' are not
required to be developed under a formal negotiated rulemaking process,
the Department generally has found consultative dialogue with the FFEL
industry to be helpful. In this respect, the parties at the
consultation meeting provided useful information concerning some of the
major points that the Department would need to take into consideration
while drafting proposed regulations designed to assure the safety of
reserve funds and assets maintained by guaranty agencies in the FFEL
Program.
Proposed Regulatory Changes
The Secretary proposes to amend the following sections of the
regulations:
Section 682.401 Basic Program Agreement
These regulations codify, in Sec. 682.401(b)(28), the Department's
existing policy concerning the conversion of a guaranty agency's loan
records system if an agency plans to place its new guarantees or
convert the records relating to its existing guaranty portfolio to an
information or computer system that is owned by or otherwise under the
control of an entity that is different than the party that owns or
controls the agency's existing information or computer system.
Section 682.410 Fiscal, Administrative, and Enforcement Requirements
Section 682.410(a)(2)--The Secretary proposes to clarify in
Sec. 682.410(a)(2)(i) that a guaranty agency may use the reserve fund
to pay an insurance claim only if the claim would meet the Federal
reinsurance requirements specified in Sec. 682.406 at the time the
agency pays the claim.
If a guaranty agency fails to comply with Federal reinsurance
requirements to the extent that the agency's failure caused a lender's
properly serviced and submitted claim to be considered an ineligible
claim for purposes of allowing the agency to receive a Federal
reinsurance payment from the Secretary, the FFEL reserve fund may not
be used by the agency to pay the claim. However, the Secretary expects
that the agency would comply with any contractual agreement it had with
the lender that would support the lender's demand that the agency use
or obtain non-FFEL funding to honor the terms of the agency's insurance
agreement with the lender.
Section 682.410(a)(11)--The proposed regulations add a definition
of the term ``reasonable cost'' that would apply to guaranty agency
reserve fund expenditures.
Section 682.410(b)(11)--The Secretary proposes to amend the FFEL
Program regulations to require guaranty agencies to prohibit conflicts
of interest by guaranty agency staff and affiliated individuals.
On November 29, 1993, the Director of the Office of Management and
Budget published OMB Circular A-110 (``Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and other Non-Profit Organizations''). This
circular contains standards for obtaining consistency and uniformity
among Federal agencies in the administration of grants to, and
agreements with, institutions of higher education, hospitals, and other
nonprofit organizations. OMB Circular A-110 is issued under the
authority of 31 U.S.C. 503 (the Chief Financial Officers Act), 31
U.S.C. 1111, 41 U.S.C. 405 (the Office of Federal Procurement Policy
Act), Reorganization Plan No. 2 of 1970, and E.O. 11541 (``Prescribing
the Duties of the Office of Management and Budget and the Domestic
Policy Council in the Executive Office of the President'').
After reviewing OMB Circular A-110, the Secretary has determined
that, to maintain program integrity, the Secretary must issue
regulations restricting actual or potential conflicts of interest among
guaranty agencies and their personnel. In light of past reviews finding
significant problems resulting from affiliations between guaranty
agencies and other FFEL Program participants, such as secondary markets
and lender servicers, the Secretary initially considered a strict
prohibition on any connection between guaranty agencies and those other
organizations. A ``bright line prohibition'' would be easier for the
Secretary to monitor and would provide the most assurance of program
integrity. However, given the common and longstanding affiliations in
the FFEL Program and wishing to minimize the potentially disruptive
effect on the continuation of loans to students and parents that could
result from a total divestiture of all guaranty agency affiliations,
the Secretary is proposing a more conservative approach to determine if
that approach would achieve the goal of preventing conflicts of
interest involving guaranty agencies and their personnel. Therefore,
these proposed regulations would require the adoption by guaranty
agencies of appropriate procedures and policies to require--(a)
increased auditing of the agency's claims review process; (b)
independent reporting lines for agency staff involved in the claim
review function; and (c) sufficient internal controls to ensure that
staff involved in originating and servicing loans are not involved in
the claims review process. In addition, under the proposed ``prohibited
uses of the reserve fund'' section in Sec. 682.418(a), further
protection of the Federal fiscal interest would be provided by the
Secretary's proposal to prohibit an agency from making any payment for
goods, property, or services provided by an affiliated organization
that exceeds the affiliated organization's actual and reasonable cost
of providing those goods, property, or services, unless the guaranty
agency demonstrates to the Secretary, and receives the Secretary's
concurrence, that such a payment is in the Federal fiscal interest.
However, in light of the previous discussion of the ``bright line
prohibition,'' the Secretary requests comment on that approach.
When the Department's Inspector General reviewed the management
structures and affiliations at 12 selected guaranty agencies that held
$59 billion in loan guarantees for the period ending September 30,
1992, the Inspector General concluded that those guaranty agencies had
potential conflicts of interest involving a significant portion of
their loan portfolios. At the beginning of fiscal year 1996, the
original principal amount of outstanding loans insured by guaranty
agencies exceeded $123 billion. Based on the Inspector General's
previous analysis, this suggests that a substantial portion of the loan
portfolios held by all agencies may continue to be
[[Page 49384]]
at risk because of guaranty agency organizational structures and
affiliations that have caused real or potential conflicts of interest.
Therefore, given the magnitude of the Federal interest that guaranty
agencies administer under their agreements with the Secretary, the
Secretary has decided to couple the protections proposed in these
regulations with a provision stating that the Secretary may impose more
stringent requirements, including requiring the agency's total
divestiture of any interest in an affiliated organization, if the
agency fails to comply with these requirements or there is evidence of
a compromised claims review process. The Secretary expects that the
more limited restrictions will eliminate the need for stricter
measures. However, public comment is solicited as to whether a strict
prohibition against an agency having any affiliation with another
organization would be more appropriate at this time.
These proposed regulations are intended to avoid the potential
misuse of a guaranty agency's reserve fund if the guaranty agency
contracts for goods, property, or services with an organization with
which it is affiliated or with which it has overlapping personnel or
financial interests. As the Secretary has previously stated, ``it is
already well understood that * * * [existing regulations were not]
meant to permit excessive or unreasonable expenditures.'' 59 FR 41184-
85 (August 10, 1994). This current understanding would be made explicit
in proposed Sec. 682.418(a)(1). In addition, under existing law, the
guaranty agency and its personnel must act consistently with their
fiduciary obligations in all procurement activities. Nevertheless, the
Secretary is concerned that a guaranty agency may have an incentive to
use its reserve fund to pay unreasonable prices and fees for supplies,
equipment, property, and services provided by an affiliated
organization or one with overlapping personnel or financial interests,
and the Secretary is now proposing the requirement of specific conflict
of interest codes to deal with this potential for abuse.
If there are overlapping personnel or financial interests or both
between the guaranty agency and another party to a procurement, it is
possible that decisions concerning the appropriate use of the guaranty
agency's reserve fund could be improperly influenced by prospects of
personal gain resulting from the guaranty agency's payment of
unreasonable prices and fees. In this instance, the interests of
borrowers and taxpayers would be relegated to a secondary
consideration. The proposed conflict of interest codes address this
potential influence by prohibiting guaranty agency personnel from
participating in the procurement process if they have a real or
potential conflict of interest.
Currently, in the case of an affiliation between a guaranty agency
and the party supplying goods, property, or services to the agency, the
existing fiduciary obligations of guaranty agencies and their personnel
preclude them from delegating to affiliated organizations functions
previously performed by the guaranty agency itself, unless the
affiliated organization provides those goods, property, or services to
the guaranty agency at its actual cost. Although no occasion has yet
come to the Secretary's attention in which the delegated function had
never been performed by the guaranty agency itself, similar fiduciary
principles would also be applicable to this latter situation. The
proposed regulations would codify the effect of these existing
fiduciary requirements by prohibiting a guaranty agency from making any
payments to affiliated organizations for goods, property, or services
if those payments exceed the affiliated organization's actual and
reasonable cost of providing them. Since there may be exceptional
circumstances in which a compelling reason justifies payments that may
appear to exceed the reasonable costs for supplies, equipment,
property, and services provided to a guaranty agency by an affiliate, a
guaranty agency may demonstrate to the Secretary, on a case-by-case
basis, that such a payment would be in the Federal fiscal interest. If
the Secretary agrees with the guaranty agency's proposed payment, the
Secretary would notify the guaranty agency that it may use its reserve
fund to pay for the goods, property, or services in question.
The proposed regulations generally follow the governmentwide codes
of conduct provisions established in OMB Circular A-110. The Secretary
has determined that a guaranty agency administered under the authority
of a State as a political subdivision or agency of the State is subject
to oversight pursuant to State codes of conduct rules affecting
personnel and contracting procedures. In the Secretary's view, the
various State codes of conduct laws provide protection of the Federal
fiscal interest that would meet some of the requirements of the
conflict of interest provisions proposed in these regulations and
provide special protection of the Federal fiscal interest unavailable
in other agencies. Therefore, for purposes of these proposed
regulations, a State guaranty agency whose employees are covered under
codes of conduct established by State law would be exempted from the
general prohibition proposed in Sec. 682.410(b)(11)(i)(A) against
agency employees, officers, trustees, or agents being engaged in the
selection, award, and administration of contracts or agreements.
However, a State guaranty agency would not be exempted from either the
specific provisions proposed in Sec. 682.410(b)(11)(i)(B) relating to
claims processing or the prohibition proposed in
Sec. 682.410(b)(11)(i)(C) relating to the solicitation or acceptance of
gratuities, favors, or anything of monetary value from contractors or
parties to agreements. This exemption for States is designed to tailor
the regulations to only those situations in which Federal action is
necessary.
Section 682.418 Prohibited Uses of Reserve Fund Assets
The Secretary proposes to add a new Sec. 682.418 to specify certain
uses of a guaranty agency's reserve fund that are prohibited.
The Secretary, Congress, and other parties have been concerned
about the improper uses of the Federal reserve funds by guaranty
agencies. In the course of conducting program reviews of guaranty
agencies, the Department has found that some guaranty agencies have
used the reserve fund, which is intended to be used for the benefit of
students and taxpayers, to pay excessive compensation to their officers
and employees or have spent excessive amounts of the reserve fund on
buildings or equipment and other assets. The Department's reviewers
have also found that some guaranty agencies frequently use the reserve
fund for costs of entertaining school personnel and other individuals
for purposes unrelated to the fulfillment of the agency's
responsibilities under the HEA. The use of Federal funds to pay for a
guaranty agency's hospitality suite or entertainment at functions such
as school association meetings clearly is not the type of expense for
which the reserve fund is intended, nor should the assets of the
reserve fund be used by the agency to pay its legal expenses in
contesting the Secretary's efforts to enforce regulatory or statutory
requirements against the agency. The concerns that Congress had about
these abuses were instrumental in its decision to legislate in this
area. The Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66)
was enacted on August 10, 1993, and added section 422(g)(1)(C) of the
HEA, which authorized the Secretary to direct guaranty agencies to
[[Page 49385]]
cease and desist from any misapplication, misuse, or improper
expenditure of reserve funds and assets.
To implement this requirement, the Secretary has determined that it
is appropriate to issue regulations governing cost principles and cost
allocation for guaranty agencies and identifying prohibited costs that
a guaranty agency may not charge to the reserve fund under the FFEL
Program. As explained in the following paragraphs, under existing
regulations the Secretary has expected guaranty agencies to follow, as
appropriate, OMB Circular A-87 (``Cost Principles for State and Local
Governments'') and OMB Circular A-122 (``Cost Principles for Nonprofit
Organizations''). However, the Secretary has determined that the OMB
circulars do not fully address the issues raised by the activities of
guaranty agencies. Accordingly, the Secretary has decided to issue
these proposed regulations based in large measure on the OMB circulars.
Currently, under Sec. 682.410(b)(1)(i), a guaranty agency that is a
State agency must have an audit conducted in accordance with 31 U.S.C.
chapter 75 (the ``Single Audit Act''). Under the Single Audit Act, the
Director of the Office of Management and Budget has issued OMB Circular
A-128 (``Audits of State and Local Governments''), which requires the
auditor to determine that amounts claimed are determined in accordance
with OMB Circular A-87. Thus, while there is no explicit provision in
the Department's regulations requiring a State guaranty agency to
follow the cost principles of OMB Circular A-87, a failure to do so
could result in an audit finding that the agency violated the
Department's regulations by failing to comply with these principles.
With regard to nonprofit guaranty agencies, Sec. 682.410(b)(1)(ii)
currently requires that an audit be conducted in accordance with OMB
Circular A-133 (``Audits of Institutions of Higher Education and other
Non-Profit Institutions''). OMB Circular A-133 requires the auditor to
determine that amounts claimed were determined in accordance with OMB
Circular A-122. Some guaranty agencies have misinterpreted the language
in OMB Circular A-133 that states ``* * * the auditor shall determine
whether * * * amounts claimed or used for matching were determined in
accordance with * * * Circular A-122.'' These guaranty agencies
interpreted this to mean that the only funds covered by the circular
are matching funds. The Secretary believes that such an interpretation
is incorrect. The definition of Federal financial assistance in
Circular A-133 does not limit that assistance to matching funds.
The proposed regulations generally follow existing governmentwide
cost principles established in OMB Circulars A-87 and A-122. The
Secretary has determined, however, that to ensure the efficient and
effective operation of the FFEL Program, some cost items prohibited
under those OMB circulars should be allowable under the FFEL Program,
and some limits specific to the guaranty agencies should be imposed.
OMB Circular A-122 also includes definitions of items of cost that the
Secretary believes should apply to guaranty agency operations in these
proposed regulations.
Executive Order 12866
1. Potential Costs and Benefits
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order, the Secretary has
assessed the potential costs and benefits of this proposed regulatory
action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the title IV, HEA programs
effectively and efficiently. Burdens specifically associated with
information collection requirements, if any, are identified and
explained elsewhere in this preamble under the heading of Paperwork
Reduction Act of 1995.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these proposed regulations, the Secretary has
determined that the benefits of the proposed regulations justify the
costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comment on
whether there may be further opportunities to reduce any potential
costs or increase potential benefits resulting from these proposed
regulations without impeding the effective and efficient administration
of the title IV, HEA programs.
Summary of Potential Costs and Benefits
The potential costs and benefits of these proposed regulations are
discussed elsewhere in this preamble under the headings Proposed
Regulatory Changes and Paperwork Reduction Act of 1995.
2. Clarity of the Regulations
Executive Order 12866 requires each agency to write regulations
that are easy to understand.
The Secretary invites comments on how to make these proposed
regulations easier to understand, including answers to questions such
as the following: (1) Are the requirements in the proposed regulations
clearly stated? (2) Do the proposed regulations contain technical terms
or other wording that interferes with their clarity? (3) Does the
format of the proposed regulations (grouping and order of sections, use
of headings, paragraphing, etc.) aid or reduce their clarity? Would the
proposed regulations be easier to understand if they were divided into
more (but shorter) sections? (A section is preceded by the symbol
``Sec. '' and a numbered heading; for example, Sec. 682.410 Fiscal,
administrative, and enforcement requirements.) (4) Is the description
of the proposed regulations in the ``Supplementary Information''
section of this preamble helpful in understanding the proposed
regulations? How could this description be more helpful in making the
proposed regulations easier to understand? (5) What else could the
Department do to make the proposed regulations easier to understand?
A copy of any comments that concern how the Department could make
these proposed regulations easier to understand should be sent to
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of
Education, 600 Independence Avenue, S.W. (Room 5100, FB-10B),
Washington, DC 20202-2241.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities.
Guaranty agencies are financial organizations. According to the
U.S. Small Business Administration Size Standards, financial
organizations with less than $100 million in assets are classified as
small entities. All guaranty agencies have at least $100 million in
assets. Therefore, there are no small entities affected by these
proposed regulations.
Paperwork Reduction Act of 1995
Section 682.418 contains information collection requirements. As
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)),
the Department of Education has submitted a copy of this
[[Page 49386]]
section to the Office of Management and Budget (OMB) for its review.
Collection of Information: Federal Family Education Loan Program.
Documentation and notification requirements.
Guaranty agencies receive payments from the Secretary and others
for exclusive use in the FFEL Program, and the accumulated surplus of
those payments over permissible expenditures is Federal property to be
returned to the Secretary upon the guaranty agency's termination or
under certain other circumstances. The Secretary needs and uses the
information to determine whether the guaranty agencies comply with the
requirements for safeguarding this property and the limitations on its
use.
Section 682.418(c) of these regulations requires a guaranty agency
that shares costs with any other program, agency, or organization to
develop a cost allocation plan consistent with the requirements
described in OMB Circular A-87 and to maintain the plan and related
supporting documentation for audit. A guaranty agency is not required
to submit its cost allocation plans for the Secretary's approval unless
it is specifically requested to do so by the Secretary. There is no
requirement to annually report this information to the Secretary.
However, the annual recordkeeping burden required by the development of
an agency's cost allocation plan and the maintenance of required
supporting documentation for audit is estimated to be one hour for each
of the agencies that would be subject to this requirement. There are 36
existing guaranty agencies. Approximately 25 of those agencies share
costs with other programs, agencies, or organizations. The Secretary
estimates that it will take each of the 25 agencies approximately 1
hour to develop its cost allocation plan, resulting in a collective
annual recordkeeping burden of 25 hours for all of those agencies. The
maintenance of documentation supporting an agency's shared costs is
already required under existing regulations in Sec. 682.410(a); thus,
these proposed regulations add no new burden in that area.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for U.S.
Department of Education.
The Department considers comments by the public on this proposed
collection of information in--
* Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Department, including whether the information will have practical use;
* Evaluating the accuracy of the Department's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
* Enhancing the quality, usefulness, and clarity of the
information to be collected; and
* Minimizing the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this documentation in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Department on the
proposed regulations.
Invitation to Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations.
All comments submitted in response to these proposed regulations
will be available for public inspection, during and after the comment
period, in room 3042, Regional Office Building 3, 7th and D Streets,
SW., Washington, DC, between the hours of 8:30 a.m. and 4:00 p.m.,
Monday through Friday of each week except Federal holidays.
Assessment of Educational Impact
The Secretary particularly requests comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan Programs, Reporting and recordkeeping requirements,
Student aid, Vocational education.
Dated: September 12, 1996.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Number 84.032 Federal Family
Education Loan Program)
The Secretary proposes to amend title 34 of the Code of Federal
Regulations by revising Part 682 as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
1. The authority citation for Part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. Section 682.401 is amended by adding a new paragraph (b)(28) to
read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(28) Change in agency's records system. The agency shall provide
written notification to the Secretary 30 days prior to placing its new
guarantees or converting the records relating to its existing guaranty
portfolio to an information or computer system that is owned by or
otherwise under the control of an entity that is different than the
party that owns or controls the agency's existing information or
computer system. If the agency is soliciting bids from third parties
with respect to a proposed conversion, the agency shall provide written
notice to the Secretary as soon as the solicitation begins. The
notifications described in this paragraph must include a concise
description of the agency's conversion project and the actual or
estimated cost of the project.
* * * * *
3. Section 682.410 is amended by revising the introductory text in
paragraph (a)(2), revising paragraphs (a)(2) (i), (ii), and (x), and
adding new paragraphs (a)(11)(iii) and (b)(11) to read as follows:
Sec. 682.410 Fiscal, administrative, and enforcement requirements.
(a) * * *
(2) Uses of reserve fund assets. A guaranty agency may not use the
assets of the reserve fund established under paragraph (a)(1) of this
section to pay costs prohibited under Sec. 682.418, but shall use the
assets of the reserve fund to pay only--
(i) Insurance claims that meet the requirements of Sec. 682.406 at
the time the claims are paid;
(ii) Costs that are reasonable, as defined under
Sec. 682.410(a)(11)(iii), and that are ordinary and necessary for the
[[Page 49387]]
agency to fulfill its responsibilities under the Act, including costs
of collecting loans, providing preclaims assistance, monitoring
enrollment and repayment status, and carrying out any other guaranty
activities. Those costs must be--
(A) Allocable to the FFEL Program;
(B) Not prohibited under applicable Federal, State, or local laws
or regulations;
(C) In compliance with any limitations or exclusions contained in
the regulations in this part, Federal laws, terms and conditions of the
agency's agreements with the Secretary, or other governing regulations
as to types or amounts of cost items;
(D) Not higher than the agency would incur under established
policies, regulations, and procedures that apply to any non-Federal
activities of the guaranty agency;
(E) Not included as a cost or used to meet cost sharing or matching
requirements of any other federally supported activity, except as
specifically provided by Federal law;
(F) The net of all applicable credits; and
(G) Documented in accordance with applicable legal and accounting
standards;
* * * * *
(x) Any other costs or payments ordinary and necessary to perform
functions directly related to the agency's responsibilities under the
Act and for their proper and efficient administration;
* * * * *
(11) * * *
(iii) Reasonable cost means a cost that, in its nature and amount,
does not exceed that which would be incurred by a prudent person under
the circumstances prevailing at the time the decision was made to incur
the cost. The burden of proof is upon the guaranty agency, as a
fiduciary under its agreements with the Secretary, to establish that
costs are reasonable. In determining reasonableness of a given cost,
consideration must be given to--
(A) Whether the cost is of a type generally recognized as ordinary
and necessary for the proper and efficient performance and
administration of the guaranty agency's responsibilities under the Act;
(B) The restraints or requirements imposed by factors such as sound
business practices, arms-length bargaining, Federal, State, and other
laws and regulations, and the terms and conditions of the guaranty
agency's agreements with the Secretary; and
(C) Market prices of comparable goods or services.
* * * * *
(b) * * *
(11) Conflicts of interest. (i) A guaranty agency shall maintain
and enforce written standards of conduct governing the performance of
its employees, officers, trustees, and agents engaged in the selection,
award, and administration of contracts or agreements. The standards of
conduct must, at a minimum, require disclosure of financial or other
interests and must mandate disinterested decisionmaking. The standards
must provide for appropriate disciplinary actions to be applied for
violations of the standards by employees, officers, trustees, or agents
of the guaranty agency, and must include provisions to--
(A) Prohibit any employee, officer, trustee, or agent participating
in the selection, award, or decisionmaking as to the administration of
a contract or agreement supported by the reserve fund described in
paragraph (a) of this section if that participation would create a
conflict of interest. Such a conflict would arise if the employee,
officer, trustee, or agent, or any member of his or her immediate
family, his or her partner, or an organization that employs or is about
to employ any of those parties has a financial or ownership interest in
the organization selected for an award or would benefit from the
decision made in the administration of the contract or agreement. The
prohibitions described in this paragraph do not apply to employees of a
State agency covered by codes of conduct established under State law;
(B) Ensure sufficient separation of responsibility and authority
between its lender claims processing as a guaranty agency and its
lending or loan servicing activities or both within the guaranty agency
or between that agency and one or more affiliates, including
independence in direct reporting requirements and such management and
systems controls as may be necessary to demonstrate, in the independent
audit required under Sec. 682.410(b)(1), that claims filed by another
arm of the guaranty agency or by an affiliate of that agency receive no
more favorable treatment than that accorded the claims filed by a
lender or servicer that is not an affiliate or part of the guaranty
agency; and
(C) Prohibit the employees, officers, trustees, and agents of the
guaranty agency from soliciting or accepting gratuities, favors, or
anything of monetary value from contractors or parties to agreements,
except that nominal and unsolicited gratuities, favors, or items may be
accepted.
(ii) Guaranty agency restructuring. If the Secretary determines
that action is necessary to protect the Federal fiscal interest because
of an agency's failure to meet the requirements of
Sec. 682.410(b)(11)(i), the Secretary may require the agency to comply
with any additional measures that the Secretary believes are
appropriate, including the total divestiture of the agency's non-FFEL
functions and the agency's interests in any affiliated organization.
* * * * *
4. A new Sec. 682.418 is added to subpart D to read as follows:
Sec. 682.418 Prohibited uses of reserve fund assets.
(a) General. (1) A guaranty agency may not use the assets of the
reserve fund established under Sec. 682.410(a)(1) to pay costs
prohibited under paragraph (b) of this section and may not use the
assets of the reserve fund to pay for goods, property, or services
provided by an affiliated organization that would exceed the affiliated
organization's actual and reasonable cost of providing those goods,
property, or services, unless the agency demonstrates to the Secretary,
and receives the Secretary's concurrence, that such a payment would be
in the Federal fiscal interest.
(2) All guaranty agency contracts with respect to its reserve fund
or assets must include a provision stating that the contract is
terminable by the Secretary upon 30 days notice to the contracting
parties if the Secretary determines that the contract includes an
impermissible transfer of the reserve fund or assets or is otherwise
inconsistent with the terms and purposes of section 422 of the HEA.
(b) Prohibited uses of reserve fund assets. A guaranty agency may
use the assets of the reserve fund established under Sec. 682.410(a)(1)
only as prescribed in Sec. 682.410(a)(2). Uses of the reserve fund that
are not allowable under Sec. 682.410(a)(2) include, but are not limited
to--
(1) Advertising, either directly or through a third party, except
for those advertising costs solely related to recruitment of personnel,
procurement of goods or services, or disposal of surplus materials;
(2) Compensation for personnel services, including wages, salaries,
pension plan costs, post-retirement health benefits, employee life
insurance, unemployment benefit plans, severance pay, costs of leave,
and other benefits, to the extent that total compensation to an
employee, officer, trustee, or agent of the guaranty agency is not
reasonable
[[Page 49388]]
for the services rendered. Compensation is considered reasonable to the
extent that it is comparable to that paid in the labor market in which
the guaranty agency competes for the kind of employees involved. Costs
that are otherwise unallowable may not be considered allowable solely
on the basis that they constitute personnel compensation. In no case
may the reserve fund be used to pay any compensation, whether
calculated on an hourly basis or otherwise, that would be
proportionately greater than 118.05 percent of the total salary paid
(as calculated on an hourly basis) under section 5312 of title 5,
United States Code (relating to Level I of the Executive Schedule).
(3) Contributions and donations, including cash, property, and
services, by the guaranty agency to others, regardless of the recipient
or purpose, unless pursuant to written authorization from the
Secretary;
(4) Entertainment, including amusement, diversion, hospitality
suites, and social activities, and any costs associated with those
activities, such as tickets to shows or sports events, meals, alcoholic
beverages, lodging, rentals, transportation, and gratuities;
(5) Fines, penalties, damages, and other settlements resulting from
violations or alleged violations of the guaranty agency's failure to
comply with Federal, State, or local laws and regulations that are
unrelated to the FFEL Program. This prohibition does not apply if the
violation or alleged violation occurred as a result of compliance with
specific requirements of the FFEL Program or in accordance with written
instructions from the Secretary;
(6) Legal expenses for prosecution of claims against the Federal
government, unless the guaranty agency substantially prevails on those
claims. In that event, the Secretary approves the reimbursement of
reasonable legal expenses incurred by the guaranty agency;
(7) Lobbying activities, as defined in section 501(h) of the
Internal Revenue Code, including dues to membership organizations to
the extent that those dues are used for lobbying;
(8) Major expenditures, including those for land, buildings,
equipment, or information systems, whether singly or as a related group
of expenditures, that exceed 5 percent of the guaranty agency's reserve
fund balance at the time the expenditures are made, unless the agency
has provided written notice of the intended expenditure to the
Secretary 30 days before the agency makes or commits itself to the
expenditure. For those expenditures involving the purchase of an asset,
the term ``major expenditure'' applies to costs such as the cost of
purchasing the asset and making improvements to it, the cost to put it
in place, the net invoice price of the asset, ancillary charges, such
as taxes, duty, protective in transit insurance, freight, and
installation costs, and the costs of any modifications, attachments,
accessories, or auxiliary apparatus necessary to make the asset usable
for the purpose for which it was acquired, whether the expenditures are
classified as capital or operating expenses;
(9) Public relations, and all associated costs, paid directly or
through a third party, to the extent that those costs are used to
promote or maintain a favorable image of the guaranty agency. The term
``public relations'' does not include any activity that is ordinary and
necessary for the fulfillment of the agency's FFEL guaranty
responsibilities under the Act, such as training of program
participants and secondary school personnel and customer service
functions that disseminate FFEL-related information and materials to
schools, loan holders, prospective loan applicants, and their parents.
In providing that training at workshops, conferences, or other ordinary
and necessary forums customarily used by the agency to fulfill its
responsibilities under the Act, the agency may provide light meals and
refreshments of a reasonable nature and amount to the participants;
(10) Relocation of employees in excess of an employee's actual or
reasonably estimated expenses or for purposes that do not benefit the
administration of the guaranty agency's FFEL program. Except as
approved by the Secretary, reimbursement must be in accordance with an
established written policy; and
(11) Travel expenses that are not in accordance with a written
policy approved by the Secretary or a State policy. If the guaranty
agency does not have such a policy, it may not use the assets of the
reserve fund to pay for travel expenses that exceed those allowed for
lodging and subsistence under subchapter I of chapter 57 of title 5,
United States Code, or in excess of commercial airfare costs for
standard coach airfare, unless those accommodations would require
circuitous routing, travel during unreasonable hours, excessively
prolonged travel, would result in increased cost that would offset
transportation savings, or would offer accommodations not reasonably
adequate for the medical needs of the traveler.
(c) Cost allocation. Each guaranty agency that shares costs with
any other program, agency, or organization shall develop a cost
allocation plan consistent with the requirements described in OMB
Circular A-87 and maintain the plan and related supporting
documentation for audit. A guaranty agency is required to submit its
cost allocation plans for the Secretary's approval if it is
specifically requested to do so by the Secretary.
(Authority: 20 U.S.C. 1078)
[FR Doc. 96-24013 Filed 9-18-96; 8:45 am]
BILLING CODE 4000-01-P