[Federal Register: November 1, 2000 (Volume 65, Number 212)]
[Rules and Regulations]               
[Page 65611-65614]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no00-19]                         


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Part IV

Department of Education

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34 CFR Part 674



Federal Perkins Loan Program; Final Rule


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DEPARTMENT OF EDUCATION

34 CFR Part 674

RIN 1845-AA15

 
Federal Perkins Loan Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Federal Perkins Loan (Perkins Loan) 
Program regulations. These final regulations are intended to improve 
collections in the Perkins Loan Program by providing greater 
flexibility in the process of assigning defaulted Perkins loans to the 
Secretary for collection. They are intended to address the large number 
of Perkins loan accounts that have been in default status for more than 
five years.
    These regulations also allow State institutions participating in 
the Perkins Loan Program to invoke their right to sovereign immunity in 
bankruptcy proceedings and clarify the maximum collection costs that 
may be assessed to a borrower who defaults again on a previously 
rehabilitated defaulted loan.

DATES: These regulations are effective July 1, 2001.

FOR FURTHER INFORMATION CONTACT: Vanessa Freeman, Program Analyst, U.S. 
Department of Education, 400 Maryland Avenue, SW., Room 3045, Regional 
Office Building #3, Washington, DC 20202-5447. Telephone: (202) 708-
8242. If you use a telecommunications device for the deaf (TDD), you 
may call the Federal Information Relay Service (FIRS) at 1-800-877-
8339.
    Individuals with disabilities may obtain this document in an 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed in the preceding 
paragraph.

SUPPLEMENTARY INFORMATION: On July 27, 2000, the Secretary published a 
notice of proposed rulemaking (NPRM) for the Federal Perkins Loan 
Program in the Federal Register (65 FR 46127). In the preamble to the 
NPRM, the Secretary discussed on pages 46128-46130 the major proposed 
changes to the regulations.

Analysis of Comments and Changes

    The regulations in this document were developed through the use of 
negotiated rulemaking. Section 492 of the Higher Education Act requires 
that, before publishing any proposed regulations to implement programs 
under Title IV of the Act, the Secretary obtain public involvement in 
the development of the proposed regulations. After obtaining advice and 
recommendations, the Secretary must conduct a negotiated rulemaking 
process to develop the proposed regulations.
    These regulations were published in proposed form on July 27, 2000, 
in conformance with the consensus of the negotiated rulemaking 
committee. Under the committee's protocols, consensus meant that no 
member of the committee dissented from the agreed-upon language. The 
Secretary invited comments on the proposed regulations by September 11, 
2000 and 10 comments were received. An analysis of the comments 
follows.
    We discuss substantive issues under the sections of the regulations 
to which they pertain. Generally, we do not address technical and other 
minor changes and suggested changes the law does not authorize the 
Secretary to make.

Section 674.49  Bankruptcy of the Borrower

    Comment: All of the commenters expressed support for the proposed 
regulations and specifically applauded the proposal that will allow a 
public institution determined to be an agency of a State to invoke its 
right of sovereign immunity under the eleventh amendment to the 
Constitution of the United States.
    Discussion: We thank the commenters for their support.
    Changes: None.

Section 674.39  Loan Rehabilitation

    Comment: All of the commenters expressed support for the technical 
provision that reflects the Secretary's interpretation that the 24 
percent cap on collection costs that may be charged a borrower on a 
rehabilitated defaulted loan no longer applies if the borrower defaults 
again on that loan.
    Discussion: We thank the commenters for their support.
    Changes: None.

Sections 674.13 and 674.50  Reimbursement to the Fund and Assignment of 
Defaulted Loans to the United States

    Comment: One commenter recommended that we actively seek input from 
institutions participating in the Federal Perkins Loan Program to 
ensure the success of voluntary assignment of Perkins loans to the 
Department. The commenter believes that if the process is developed in 
a vacuum without the advice and input of Perkins Loan Program 
participants, the program will have a very high probability of failure. 
The commenter also recommended that, in the event the new process is 
not successful, the Secretary determine the reasons for the lack of 
success before proposing new requirements, specifically any form of 
mandatory assignment.
    Discussion: We appreciate the commenter's concern and are committed 
to developing a simplified voluntary assignment process for aging 
accounts. We will work with interested institutions and organizations 
to develop a less administratively burdensome process that institutions 
will readily use. However, should the voluntary process prove 
unsuccessful, we believe that to preserve program integrity and 
support, the Secretary must consider all other possible alternatives, 
including mandatory assignment of these aging accounts. In that event, 
any proposed changes would be subject to the negotiated rulemaking 
process, which provides for active participation by the student 
financial aid community.
    Changes: None.
    Comment: One commenter expressed the view that loan assignments by 
schools reduce funds available for future students. The commenter 
believes that it is not in the best interest of an institution to 
assign loans to the Department since funds collected by the Department 
are not returned to the Perkins Loan Program.
    Discussion: We have researched the issue of whether collections 
received by us on assigned Federal Perkins Loans can remain in the 
program. We have determined that these funds may be redistributed 
within the Perkins Loan Program, although not specifically to the 
school that assigned the loan, and we are committed to doing so.
    Changes: None.
    Comment: One commenter suggested a list of documents that should be 
required when a loan is assigned to us for collection.
    Discussion: We appreciate the commenter's suggestions. However, the 
change in section 674.50(c) of the regulations, which lists all 
possible documentation that may be required for assignment, is intended 
to improve Perkins loan collections by providing greater flexibility in 
the process of assigning certain defaulted Perkins Loans to us. We plan 
to work closely with the student aid community to develop the 
procedural guidelines for assignment, including identifying the minimum 
required documentation necessary for us to collect effectively on the 
assigned loans. We believe that separately codifying the required

[[Page 65613]]

documentation for certain categories of assignments undermines the 
flexibility achieved through this regulatory change.
    Changes: None.
    Comment: One commenter recommended that we establish a referral 
process on aged Perkins accounts. The commenter stated that a referral 
process would increase the collection tools available to institutions 
while preserving institutional control of the accounts.
    Discussion: Our experience with an earlier Perkins Loan referral 
program was that the program was difficult to administer for both 
schools and the Department. More importantly, we have collection tools 
that are not available to schools, such as administrative wage 
garnishment, federal offset, and litigation by the Department of 
Justice that cannot be used if we do not hold legal title to the loan. 
We believe that under certain circumstances, such as an institution's 
inability to collect on a portion of its default portfolio for a 
lengthy period of time, maintaining program integrity and returning 
dollars generally to the Perkins Loan program outweighs preserving 
institutional control of these accounts.
    Changes: None.
    Comment: One commenter expressed the view that we should recognize 
the fact that accounts that are more than five years in default are 
still collectible. The commenter believes that schools that have loans 
in default over five years would have already obtained judgments that 
enable the schools to enforce wage garnishments. The commenter stated 
that borrowers must often satisfy such judgments before buying and 
selling real estate and are therefore highly motivated to pay the loan 
in full.
    Discussion: We understand that some schools may have undertaken 
judicial wage garnishment to collect some of these aging, defaulted 
accounts. Clearly, if payments related to judicial wage garnishment are 
being received, the account would be an unlikely candidate for 
voluntary assignment. However, we believe that administrative wage 
garnishment, which only the Secretary can undertake on Federal Perkins 
loans, is a far more efficient and cost-effective collection tool than 
across-the-board litigation on aging, non-paying accounts. Such 
litigation poses significant costs to the school's fund and reduces 
dollars available for future students. Further, we believe that some 
schools may have exhausted all available collection efforts on some 
unknown number of these accounts and that we should have the 
opportunity to make use of our collection advantages to return money to 
the Perkins Loan Program.
    Changes: None.
    Comment: One commenter feels that we should eliminate the provision 
that requires institutions to reimburse the Fund for all loans not 
accepted for assignment.
    Discussion: The proposed change in Sec. 674.13 modifies this 
provision of the regulations to allow us discretion in deciding when to 
require a school to reimburse its Perkins Fund. We believe that there 
will still be circumstances under which reimbursement of a school's 
fund would be appropriate, such as when the actions of a school render 
a loan legally unenforceable. Therefore, we decline to eliminate all 
possibility of reimbursement associated with assignment.
    Changes: None.

Section 674.49  Bankruptcy of Borrower

    Comment: One commenter noted that the proposed regulation that 
eliminates the requirement that an institution file a proof of claim if 
it wishes to invoke its right of sovereign immunity appeared to apply 
only to Chapter 7 bankruptcy filings.
    Discussion: We would like to clarify that although the preamble to 
the proposed regulation only referenced Chapter 7 bankruptcy 
proceedings as it relates to claims of sovereign immunity, the proposed 
regulatory language itself also eliminated the proof of claim filing 
requirement for Chapter 13 bankruptcy proceedings.
    Changes: None.

Executive Order 12866

    We have reviewed these final regulations in accordance with 
Executive Order 12866. Under the terms of the order we have assessed 
the potential costs and benefits of this regulatory action.
    The potential costs associated with these final regulations are 
those resulting from statutory requirements and those we have 
determined as necessary for administering this program effectively and 
efficiently. Elsewhere in this SUPPLEMENTARY INFORMATION section, we 
identify and explain any burdens associated with information collection 
requirements. See the heading Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, we have determined that 
the benefits would justify the costs.
    We have also determined that these final regulations do not unduly 
interfere with State, local, and tribal governments in the exercise of 
their governmental functions.
    We discussed the potential costs and benefits of these final 
regulations in the preamble to the NPRM (65 FR 46129). We include 
additional discussion of potential costs and benefits in the section of 
this preamble titled Analysis of Comments and Changes.

Paperwork Reduction Act of 1995

    The Paperwork Reduction Act of 1995 does not require you to respond 
to a collection of information unless it displays a valid OMB control 
number. We display the valid OMB control numbers assigned to the 
collections of information in these final regulations at the end of the 
affected sections of the regulations.

Assessment of Educational Impact

    In the NPRM we requested comments on whether the proposed 
regulation would require transmission of information that any other 
agency or authority of the United States gathers or makes available.
    Based on the response to the NPRM and on our review, we have 
determined that these final regulations do not require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.

Electronic Access to This Document

    You may view this document, as well as other Department of 
Education documents published in the Federal Register in text or Adobe 
Portable Document Format (PDF) on the Internet at the following sites:

http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb_html/fedlreg.htm

To use the PDF you must have the Adobe Acrobat Reader Program with 
Search, which is available free at the previous sites. If you have 
questions about using the PDF, call the U.S. Government Printing Office 
(GPO), toll free, at 1-888-293-6498; or in the Washington, DC, area at 
(202) 512-1530.

    Note: The official version of this document is the document 
published in the Federal Register. Free Internet access to the 
official edition of the Federal Register and the Code of Federal 
Regulations is available on GPO Access at: http://
www.access.gpo.gov/nara/index.html


(Catalog of Federal Domestic Assistance Number: 84.037 Federal 
Perkins Loan Program)

List of Subjects in 34 CFR Part 674

    Loan programs--education, Student aid, Reporting and recordkeeping 
requirements.


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    Dated: October 24, 2000.
Richard W. Riley,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary amends 
part 674 of title 34 of the Code of Federal Regulations as follows:

PART 674--FEDERAL PERKINS LOAN PROGRAM

    1. The authority citation for part 674 continues to read as 
follows:

    Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless 
otherwise noted.


    2. Section 674.13 is amended by revising the introductory text in 
paragraph (a) and adding an OMB control number following the section to 
read as follows:


Sec. 674.13  Reimbursement to the Fund.

    (a) The Secretary may require an institution to reimburse its Fund 
in an amount equal to that portion of the outstanding balance of--
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)


    3. Section 674.39 is amended by revising paragraph (c) and revising 
the OMB control number following the section to read as follows:


Sec. 674.39  Loan rehabilitation.

* * * * *
    (c) Collection costs on a rehabilitated loan--
    (1) If charged to the borrower, may not exceed 24 percent of the 
unpaid principal and accrued interest as of the date following 
application of the twelfth payment;
    (2) That exceed the amounts specified in paragraph (c)(1) of this 
section, may be charged to an institution's Fund until July 1, 2002 in 
accordance with Sec. 674.47(e)(5); and
    (3) Are not restricted to 24 percent in the event the borrower 
defaults on the rehabilitated loan.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)


    4. Section 674.49 is amended by revising paragraph (b) and revising 
the OMB control number following the section to read as follows:


Sec. 674.49  Bankruptcy of borrower.

* * * * *
    (b) Proof of claim. The institution must file a proof of claim in 
the bankruptcy proceeding unless--
    (1) In the case of a proceeding under chapter 7 of the Bankruptcy 
Code, the notice of meeting of creditors states that the borrower has 
no assets, or
    (2) In the case of a bankruptcy proceeding under either Chapter 7 
or Chapter 13 of the Bankruptcy Code in which the repayment plan 
proposes that the borrower repay less than the full amount owed on the 
loan, the institution has an authoritative determination by an 
appropriate State official that in the opinion of the State official, 
the institution is an agency of the State and is, on that basis, under 
applicable State law, immune from suit.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0023)


    5. Section 674.50 is amended by revising paragraph (c) introductory 
text and by revising the OMB control number following the section to 
read as follows:


Sec. 674.50  Assignment of defaulted loans to the United States.

* * * * *
    (c) The Secretary may require an institution to submit the 
following documents for any loan it proposes to assign--
* * * * *
(Approved by the Office of Management and Budget under control 
number 1845-0019)

[FR Doc. 00-27739 Filed 10-31-00; 8:45 am]
BILLING CODE 4000-01-P