[Federal Register Volume 59, Number 220 (Wednesday, November 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28321]
[[Page Unknown]]
[Federal Register: November 16, 1994]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Public Health Service
42 CFR Part 60
RIN 0905-AS87
Health Education Assistance Loan Program
AGENCY: Health Resources and Services Administration, HHS.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This proposed rule would amend existing regulations governing
the Health Education Assistance Loan (HEAL) program to establish
performance standards against which lender and holder default rates
would be measured, as mandated by the Health Professions Education
Extension Amendments of 1992. The proposal also amends the regulations
to reflect various statutory provisions related to HEAL performance
standards for schools, lenders, and holders, including the following:
The formula for calculating default rates; the requirement that certain
schools develop default management plans; the borrower's option to
reduce his or her insurance premium by obtaining a credit worthy
cosigner; the waiver of penalty fees for schools, lenders, and holders
with a low volume of loans; and the option to pay off defaulted loans
to reduce default rates.
DATES: Comments on this proposed rule are invited. To be considered,
comments must be received by December 16, 1994.
ADDRESSES: Respondents should address written comments to Fitzhugh
Mullan, M.D., Director, Bureau of Health Professions (BHPr), Health
Resources and Services Administration, Room 8-05, Parklawn Building,
5600 Fishers Lane, Rockville, Maryland 20857. All comments received
will be available for public inspection and copying at the Office of
Program Development, BHPr, Room 8A-55, Parklawn Building, 5600 Fishers
Lane, Rockville, Maryland weekdays (Federal holidays excepted) between
the hours of 8:30 a.m. and 5:00 p.m.
FOR FURTHER INFORMATION CONTACT:
Michael Heningburg, Director, Division of Student Assistance, Bureau of
Health Professions, Health Resources and Services Administration,
Parklawn Building, Room 8-48, 5600 Fishers Lane, Rockville, Maryland
20857; telephone number: 301-443-1173.
SUPPLEMENTARY INFORMATION: Section 707(a) of the Public Health Service
Act (the Act) requires that, not later than 1 year after enactment of
the Health Professions Education Extension Amendments of 1992 (Pub. L.
102-408), the Secretary shall establish performance standards for
lenders and holders of HEAL loans, including fees to be imposed for
failing to meet such standards. In the report accompanying Public Law
102-408, the Congress stated that it expects ``* * * schools, lenders,
and holders to assume and share the responsibility for minimizing HEAL
defaults * * *'' (Conference Report 102-925, p. 112).
In accordance with the above, this Notice of Proposed Rulemaking
(NPRM) proposes to amend the HEAL regulations to establish performance
standards for lenders and holders of HEAL loans. Under this proposal,
the Secretary would establish requirements and fees to be imposed on a
HEAL lender or holder based on the lender or holder's HEAL default
rate. The default rate for lenders and holders would be calculated in
accordance with the statutory default formula set forth in section
719(5) of the Act, except that loans made to students at Historically
Black Colleges and Universities (HBCUs) prior to the end of the first 3
years that the lender/holder performance standard is in effect would be
excluded from the default rate calculation. The proposed performance
standard requirements, including the risk-based fee to be assessed on
each lender and holder, are described below.
In developing these proposals, the Department has relied heavily on
section 708 of the Act, which sets forth fees and performance
requirements for HEAL schools with default rates greater than 5
percent. Schools, lenders, and holders all play a significant role in
helping to assure the collectibility of HEAL loans, and all benefit
from participation in the HEAL program. Accordingly, this approach is
designed to assure similar measures of accountability for all parties
involved in the HEAL program.
This proposal also clarifies various statutory provisions related
to HEAL performance standards for schools, lenders, and holders,
including the following: (1) The formula for calculating default rates;
(2) the requirement that certain schools develop default management
plans; (3) the borrower's option to reduce his or her insurance premium
by obtaining a credit worthy cosigner; (4) the waiver of penalty fees
for schools, lenders, and holders with a low volume of loans; and (5)
the option to pay off defaulted loans to reduce default rates. The
specific amendments proposed are described below according to the
subparts, section numbers, and headings of the HEAL regulations
affected.
Subpart A--General Program Description
Section 60.2 HEAL Default Rate
The Department is proposing to add a new section to the HEAL
regulations which would address the HEAL default rate. Paragraph (a) of
this section, ``Default rate formula,'' would explain that the default
rate of each school, lender, and holder is calculated in accordance
with the formula set forth in section 719(5) of the Act, except that
for lenders and holders, loans made to students at HBCUs prior to the
end of the first 3 years that the lender/holder performance standard is
in effect would be excluded from the default rate calculation.
This approach for calculating lender and holder default rates is
consistent with the statutory school performance standard set forth in
section 708 of the HEAL stature. Section 708(d)(3) provides HBCUs with
a 3-year period during which they remain eligible for participation in
the HEAL program regardless of their default rates. In granting HBCUs a
3-year reprieve from termination due to high default rates, the
Congress indicated concern that the performance standard provision not
cause these schools to lose access to HEAL funding during the initial
years of its implementation.
In developing this proposed rule, the Department was concerned that
lenders and holders, in an effort to maintain low default rates, might
choose not to make or purchase loans for students at HBCUs, which
historically have higher than average default rates. To assure that the
lender/holder performance standard provisions do not unwittingly
undermine the Congress' expressed desire that access to HEAL loans be
maintained for HBCUs, the proposed rule exempts any loans made to
students at HBCUs prior to the end of the first 3 years that the
standard is in effect from being included when lender/holder default
rates are calculated.
Paragraph (b) of this section would establish the effective dates
of the default rate calculations, for purposes of determining risk-
based insurance premiums and program eligibility. The Department is
proposing in this paragraph that default rates be calculated as of
September 30 of each year, and that these rates be used to determine
risk-based insurance premiums and program eligibility, for purposes of
loans made or purchased on or after July 1 of the following year. These
timeframes are designed to provide adequate time for schools, lenders,
and holders to pay off defaulted loans, if desired, in order to reduce
their risk category or maintain eligibility, and to plan for the costs
associated with continued HEAL activity if their default rates are
greater than 5 percent. The Department developed this provision in
response to concerns that the initial implementation of the school
risk-based premiums on January 1, 1993, did not provide adequate time
for schools with default rates greater than 5 percent to evaluate their
options regarding the pay off of defaulted loans and to prepare for the
costs of continued participation in the HEAL program.
Paragraph (c) of this section would set forth the procedures for
schools, lenders, and holders to follow if they want to pay off
defaulted HEAL loans to reduce their risk category or maintain
eligibility. This proposal would require that if a school, lender, or
holder chooses to pay off one or more HEAL loans, it must, for each
borrower it chooses, pay off the outstanding principal and interest of
all HEAL loans held by the Department for that borrower. This proposal
is designed to prevent the confusion that is likely to arise during the
collection process if a borrower's HEAL portfolio were divided, with a
portion sold to the purchasing entity and a portion remaining with the
Department. The proposal also would clarify that any defaulted HEAL
loans paid off by a school, lender, or holder are assigned to that
entity and may be collected by that entity using any collection methods
available to it. Finally, this provision would require that a payoff be
completed by May 31 in order to reduce the school, lender, or holder's
default rate that would be used to determine the risk category (or
program eligibility) for loans made or purchased on or after July 1 of
the same year.
Subpart B--The Borrower
Section 60.8 What Are the Borrower's Major Rights and
Responsibilities?
Paragraph (b)(1) of this section would be amended to clarify that
the borrower must pay the borrower's insurance premium, as more fully
described in Sec. 60.14(b)(1).
Subpart C--The Loan
Section 60.10 How Much Can be Borrowed?
Paragraph (b)(1) of this section would be amended to clarify that
the non-student borrower may not receive a loan that is greater than
the sum of the borrower's insurance premium plus the interest that must
be paid on the borrower's HEAL loans during the period for which the
new loan is intended.
Section 60.13 Interest
The Department is proposing to delete paragraph (a)(4) of this
section, which states that the Secretary announces the HEAL interest
rate on a quarterly basis through a notice published in the Federal
Register. Since the Department notifies all lenders of the HEAL
interest rate at the beginning of each quarter, and since students and
schools can contact either the Department or a HEAL lender for
information on the HEAL interest rate, the Federal Register notice is
no longer necessary.
Section 60.14 The Insurance Premium
The Department is proposing to change the heading of this section
to ``Risk-based insurance premiums.'' The section would be amended to
reflect the new statutory provisions for determining borrower and
school insurance premiums and to include the proposed lender and holder
premiums.
Paragraph (a)(1) of this section would be redesignated as paragraph
(a), and would be amended to state that a risk-based insurance premium
is charged to the borrower, school, lender, and holder, in accordance
with the procedures set forth in paragraph (b) of this section.
The reference in paragraph (a)(1) to the date that the premium is
due to the Secretary would be moved to newly designated paragraph (c),
described below, which would address procedures for collecting
insurance premiums. In addition, existing paragraphs (a)(2) through
(5), which also deal with the collection of the insurance premiums,
would be moved to newly designated paragraph (c) and amended as
described below.
Paragraph (b), which addresses the insurance premium rate, would be
amended to reflect the various insurance premium rates for borrowers,
schools, lenders, and holders. Paragraphs (b)(1) and (2) would set
forth the statutory insurance premium rates that apply to borrowers and
schools, including the borrower's option to reduce the insurance
premium by 50 percent by obtaining a credit worthy cosigner, and the 3-
year special consideration provided for Historically Black Colleges and
Universities.
Paragraphs (b)(1) and (2) also would include clarification of the
statutory provision which provides special consideration in determining
the borrower and school insurance premium rate for schools with a low
volume of HEAL loan activity. Under this proposal, any school which,
for purposes of the default rate calculation, has made a total of 50 or
less loans would be placed in the low-risk category, regardless of its
default rate. In establishing the low volume threshold, the Department
first considered the Conference report language accompanying Public Law
102-408, which states the following:
``The Secretary may grant an institution a wavier of the
requirements of the risk categories only if the Secretary determines
that the default rate is not an accurate indicator because the
volume of loans has been insufficient. For example, some schools of
public health may have default rates that exceed 30%. However, since
these default rates are based on a small number of loans (in some
cases, only two to five loans) they may be a misleading measure of
the institution's ability to control defaults.'' (Conference Report
102-925, p.111)
It seems apparent from this language that the Congress, while not
defining ``low volume,'' intended for this exclusion to be limited to
schools with a small amount of HEAL activity. The Department next
considered the Department of Education's (ED) low-volume threshold for
default penalties. ED uses a threshold of 30 loans for determining
whether schools are subject to modified procedures for determining
default rates. However, the ED procedures involve a comparison of data
over a 3-year period for low volume entities, whereas the HEAL statute
requires that any entity not meeting the low volume exclusion be
subject to the same default formula applied to high volume entities. As
a result, the Department determined that it would be most equitable to
allow a higher threshold for the HEAL ``low volume'' definition. At the
same time, given the Conference report language, the Department could
not justify a level that would be so high as to reduce the
effectiveness of the performance standard requirements. Further
analysis of HEAL school data supported a threshold of 50 loans, since
this level resulted in 34.6% of HEAL schools, representing only 1.3% of
HEAL loans in repayment, being excluded from the performance standard
penalties during Fiscal Year 1993. Based on the above, the Department
considers a threshold of 50 loans to be more than adequate to prevent
unfair penalties being imposed on schools with a small volume of HEAL
activity, while at the same time assuring that this exemption is not so
lenient as to make the performance standard requirements meaningless.
Paragraphs (b)(3) and (4) would describe the proposed insurance
premium rates for lenders and holders. The proposed rates for lenders
included in paragraph (b)(3) would be as follows:
Low-risk: A lender with a default rate of not to exceed 5 percent
would not be required to pay an insurance premium. In addition, a
lender whose volume of HEAL loans made (for purposes of the default
rate calculation) is 50 or less, would not be required to pay an
insurance premium.
Medium-risk: A lender with a default rate in excess of 5 percent
but not to exceed 10 percent would be assessed an insurance premium
equal to 5 percent of the principal amount of any new loans made.
High-risk: A lender with a default rate in excess of 10 percent but
not to exceed 20 percent would be assessed an insurance premium equal
to 10 percent of the principal amount of any new loans made.
Ineligible: A lender with a fault rate in excess of 20 percent
would not be eligible to make new HEAL loans.
The proposed rates for holders included in paragraph (b)(4) would
be as follows:
Low-risk: A holder with a default rate of not to exceed 5 percent
would not be required to pay an insurance premium. In addition, a
holder whose volume of HEAL loans held (for purposes of the default
rate calculation) is 50 or less, would not be required to pay an
insurance premium.
Medium-risk: A holder with a default rate in excess of 5 percent
but not to exceed 10 percent would be assessed an insurance premium
equal to 5 percent of the original principal amount of any loans newly
purchased.
High-risk: A holder with a default rate in excess of 10 percent but
not to exceed 20 percent would be assessed an insurance premium equal
to 10 percent of the original principal amount of any loans newly
purchased.
Ineligible: A holder with a default rate in excess of 20 percent
would not be eligible to purchase new HEAL loans.
The proposed lender and holder insurance premiums are the same as
the school insurance premiums which were enacted as part of Public Law
102-408 and became effective January 1, 1993. The proposal to make
lenders and holders with default rates greater than 20 percent
ineligible for the HEAL program is also consistent with Public Law 102-
408, which generally prohibits students at schools with default rates
in excess of 20 percent from borrowing from the HEAL program at all.
Since schools, lenders, and holders all play an important role in
assuring the collectibility of HEAL loans, and all benefit from
participation in the HEAL program, the Department considers it most
equitable for all parties to be subject to the same basic insurance
premium rate structure. This is also consistent with the Conference
report language accompanying Public Law 102-408, which indicated that
schools, lenders, and holders should assume and share the
responsibility for minimizing HEAL defaults.
Although the Department's proposed approach is modeled after the
school risk-based insurance premiums established in the HEAL statute,
the Department is interested in comments on an alternate approach which
would create a more gradual continuum of risk-based premiums for
lenders and holders. This alternate approach would be structured such
that lenders and holders with default rates: (1) Greater than 5 percent
but less than 6 percent pay a 1 percent premium; (2) Greater than 6
percent but less than 7 percent pay a 3 percent premium; (3) Greater
than 7 percent but less than 8 percent pay a 5 percent premium; (4)
Greater than 8 percent but less than 9 percent pay a 7 percent premium;
and (5) Greater than 9 percent but less than 10 percent pay a 9 percent
premium. This approach would still result in an average risk premium of
5 percent for lenders and holders in the 5-10 percent range, but would
phase the penalties in more gradually and provide less harsh penalties
for lenders and holders at the lower end of the default rate spectrum.
The Department is interested in comments regarding whether this
alternate approach would be considered preferable to the ``notched''
approach that is being proposed.
A new paragraph (b)(5) would prohibit schools, lenders, or holders
from passing their insurance premium costs to borrowers.
Existing paragraphs (c) (1) and (2), which address the method of
calculating the insurance premium for loans made before July 22, 1986,
when premium amounts were determined based on the amount of time
remaining until graduation, would be deleted and replaced by a new
paragraph (c), which would set forth procedures for the collection of
insurance premiums. New paragraph (c)(1), dealing with the borrower
premium, would address provisions previously included in paragraphs (a)
(1) and (2). This paragraph would state that the premium charged to the
borrower must be collected by the lender through a deduction from the
HEAL loan proceeds and is due to the Secretary, along with
documentation identifying the loan for which the premium is being paid,
no later than 30 days after the date of disbursement of the HEAL loan.
It also would require the lender to identify clearly to the borrower
the amount of the borrower's insurance premium.
New paragraph (c)(2), addressing the school premium, would state
that for schools required to pay an insurance premium, in accordance
with paragraph (b)(2) of this section, the premium would be collected
by the Secretary on a quarterly basis, and would be due to the
Secretary no later than 30 days after the date of the quarterly billing
notice.
New paragraph (c)(3), addressing the lender premium, would state
that for lenders required to pay an insurance premium, in accordance
with paragraph (b)(3) of this section, the premium, including
documentation identifying the loan for which the premium is being paid,
would be due to the Secretary 30 days after the date of disbursement of
the HEAL loan.
New paragraph (c)(4), addressing the holder premium, would state
that for holders required to pay an insurance premium, in accordance
with paragraph (b)(4) of this section, the premium, including
documentation identifying the loan for which the premium is being paid,
would be due to the Secretary 30 days after the date that the loan
transfer takes place.
Existing paragraph (a)(3), which establishes penalties for late
payment of the insurance premium, would be redesignated as paragraph
(c)(5)(i). As amended, this paragraph would require that if the
insurance premium due from a school, lender, or holder is not paid by
the due date, a late fee will be charged in accordance with the
Department's Claims Collection Regulation (45 CFR part 30). This
paragraph also would prohibit the late fee from being passed on to the
borrower.
Existing paragraph (a)(4) would be redesignated as paragraph
(c)(5)(ii). As amended, this paragraph would state that if the borrower
or lender insurance premium is not paid within 60 days of disbursement
of the loan, the Secretary may deny insurance coverage on the loan.
This paragraph also would state that if the school premium is not paid
within 60 days of the date of the quarterly billing notice, the
Secretary may immediately suspend the school and may initiate
termination proceedings against the school. Finally, if the holder
premium is not paid within 60 days of the loan transfer, the Secretary
may cancel the insurance coverage on the loan.
Existing paragraph (a)(5), which addresses refunds of premiums,
would be redesignated as paragraph (c)(6) and would be amended to
clarify that premiums are not refundable except in cases of error, or
unless the loan, including any accrued interest, is canceled within 120
days of the date of disbursement. Previously, the regulations did not
provide for the refund of the insurance premium once a loan was
disbursed, even if it was canceled soon thereafter. Accordingly, this
amendment is intended to assure that if cancellation of the loan,
including any accrued interest, occurs within a reasonable period of
time, a full refund of the premium(s) may be made. This is consistent
with Department of Education policies governing the Federal Family
Education Loan (FFEL) programs.
Existing paragraph (c)(3), which addresses the charging of premiums
for loans disbursed in multiple installments, would be redesignated as
new paragraph (d).
Section 60.15 Other Charges to the Borrower
Paragraph (c) of this section would be amended to clarify that, in
making a HEAL loan, the lender may pass on to the borrower only the
cost of the borrower's insurance premium.
Section 60.17 Security and Endorsement
Paragraph (b) of this section would be amended by deleting the
first sentence, which requires a HEAL loan to be made without
endorsement unless the borrower is a minor. In addition, a new
paragraph (c) would be added to this section to state that a credit
worthy parent or other responsible individual, other than a spouse, may
cosign the loan note. This is consistent with section 708(c) of the
Act, which allows a HEAL borrower to obtain a cosigner to reduce the
cost of the borrower insurance premium by 50 percent.
Subpart D--The Lender and Holder
Section 60.31 The Application To Be a HEAL Lender or Holder
A new paragraph (e) would be added to this section to state that
any lender or holder which is in the medium- or high-risk categories,
as described in Sec. 60.14, must submit a default management plan with
its HEAL application. The default management plan must specify the
detailed short-term and long-term procedures that the lender or holder
will have in place to minimize defaults on loans to HEAL borrowers.
Under the plan the lender or holder must, among other measures, assure
that borrowers receive information concerning repayment options,
deferments, forbearance, and the consequences of default. This
requirement is consistent with a statutory provision which requires
default management plans from schools in the medium- or high-risk
categories.
A new paragraph (f) would be added to this section to state that a
lender or holder with a HEAL default rate, as calculated in accordance
with Sec. 60.2, that exceeds 20 percent (except for lenders or holders
with a total loan volume, for purposes of the default rate calculation,
of 50 loans or less) would be ineligible to make or purchase HEAL
loans.
Section 60.33 Making a HEAL Loan
Existing paragraphs (g) and (h) would be redesignated as paragraphs
(h) and (i), respectively, and a new paragraph (g) would be added to
this section to set forth requirements for cosigners. This paragraph
would provide clarification of procedures for implementing the
statutory provision which allows a borrower to reduce the insurance
premium by 50 percent by obtaining a credit worthy cosigner. Under this
provision, a lender would be required to follow procedures similar to
those used in making commercial or private loans without a Federal
guarantee to determine whether a cosigner is credit worthy.
Section 60.35 HEAL Loan Collection
This section would be amended to clarify that, in collecting a HEAL
loan with a cosigner, the lender or holder must apply to the cosigner,
collection procedures that are at least as stringent as those it would
follow in attempting to collect a commercial or private loan with a
cosigner. In addition, this section would be amended to more clearly
delineate that the lender or holder must apply to the cosigner due
diligence procedures similar to those that are applied to the borrower.
Subpart E--The School
Section 60.50 Which Schools Are Eligible To Be HEAL Schools?
A new paragraph (a)(3) would be added to this section to require
that any school in the medium- or high-risk categories, as set forth in
Sec. 60.14, must submit a default management plan annually in
accordance with timeframes established by the Secretary. The default
management plan must specify the detailed short-term and long-term
procedures that the school will have in place to minimize defaults on
loans to HEAL borrowers. Under the plan the school must, among other
measures, assure that borrowers receive information concerning
repayment options, deferments, forbearance, and the consequences of
default. This provision is consistent with section 708(b) of the Act.
A new paragraph (a)(4) would be added to this section to state that
a school must have a HEAL default rate that does not exceed 20 percent
in order to be eligible to make HEAL loans, except as follows: (1) A
default rate in excess of 20 percent does not affect the eligibility of
a Historically Black College or University until after October 13,
1995; and (2) a default rate in excess of 20 percent does not affect
the eligibility of any school that has 50 or less loans in repayment,
for purposes of the HEAL default rate calculation described in
Sec. 60.2. This provision is consistent with section 708(d) of the Act
and with the low volume threshold proposed in Sec. 60.14(b).
Economic Impact
Executive Order 12866 requires that all regulations reflect
consideration of alternatives, of costs, of benefits, of incentives, of
equity, and of available information. Regulations must meet certain
standards, such as avoiding unnecessary burden. Regulations which are
``significant'' because of cost, adverse effects on the economy,
inconsistency with other agency actions, effects on the budget, or
novel legal or policy issues, require special analysis. The Regulatory
Flexibility Act requires that we analyze regulatory proposals to
determine whether they create a significant impact on a substantial
number of small entities.
The Department believes that the resources required to implement
the proposed requirements in these regulations are minimal. The
proposed rule would establish performance standards against which
lender and holder default rates would be measured, and would establish
fees which would be paid by lenders and holders with default rates over
5 percent as a condition for continued program participation. Since
most active HEAL lenders and holders do not have default rates over 5
percent, these provisions should not require significant additional
resources for the majority of lenders and holders. Therefore, in
accordance with the Regulatory Flexibility Act of 1980, the Secretary
certifies that these regulations will not have a significant impact on
a substantial number of small entities.
OMB has reviewed this proposed rule under Executive Order 12866.
The Department requests comments on whether there are any aspects of
this proposed rule which can be improved to make the HEAL program more
effective, more equitable, or less costly.
Paperwork Reduction Act of 1980
This proposed rule contains information collections which are
subject to review by the Office of Management and Budget (OMB) under
the Paperwork Reduction Act of 1980. The title, description, and
respondent description of the information collections are shown below
with an estimate of the time for reviewing instructions, searching
existing data sources, gathering and maintaining the data needed, and
completing and reviewing the collection of information.
Title: Health Education Assistance Loan (HEAL) Program: Lender and
Holder Performance Standards.
Description of Respondents: Non-profit institutions and Businesses
or other for-profit.
Description: Lenders and holders must provide the Secretary with
documentation identifying the loan for which a premium is being paid.
Lenders and schools with default rates greater than 5 percent must
submit annual default management plans to the Secretary.
Estimated Annual Reporting and Recordkeeping Burden:
----------------------------------------------------------------------------------------------------------------
Responses Total
Section No. of per annual Hours per Total burden
respond. respond. response response hours
----------------------------------------------------------------------------------------------------------------
60.14(c)(1)............................... 20 1,500 30,000 1min. 500 hrs.
60.14(c)(3)\1\............................ 0 0 0 0 min. 0 hrs.
60.14(c)(4)\1\............................ 0 0 0 0 min. 0 hrs.
60.31(e)\1\............................... 0 0 0 0 min. 0 hrs.
60.35(a)(1)\2\............................ 20 500 10,000 .083 hrs. (833 hrs.)
60.50(a)(3)............................... 87 1 87 10 hrs. 870 hrs.
---------------
Total Burden Hours.................. ........... ........... ........... ............. 1370 hrs.
----------------------------------------------------------------------------------------------------------------
\1\No burden is estimated for these sections, since it is anticipated that any lender or holder required to pay
an insurance premium will cease participation in the program.
\2\This recordkeeping burden has been approved under OMB No. 0915-0108. There is no change in the burden because
this OMB approval includes burden for all borrowers who are in default regardless of whether the loan is held
by a lender or holder.
We have submitted a copy of this proposed rule to OMB for its
review of these information collections. Send comments regarding this
burden estimate or any other aspect of this collection of information,
including suggestions for reducing this burden, to the agency official
designated for this purpose whose name appears in this preamble, and to
the Office of Information and Regulatory Affairs, OMB, Washington, D.C.
20503.
List of Subjects in 42 CFR Part 60
Educational study programs, Health professions, Loan programs-
education, Loan programs-health, Medical and dental schools, Reporting
requirements, Student aid.
Accordingly, the Department of Health and Human Services proposes
to amend 42 CFR part 60 as follows:
Dated: February 9, 1994.
Philip R. Lee,
Assistant Secretary for Health.
Approved: August 5, 1994.
Donna E. Shalala,
Secretary.
(Catalog of Federal Domestic Assistance, No. 13.108, Health
Education Assistance Loan Program)
PART 60--HEALTH EDUCATION ASSISTANCE LOAN PROGRAM
1. The authority citation for 42 CFR part 60 continues to read as
follows:
Authority: Section 215 of the Public Health Service Act, 58
Stat. 690, as amended, 63 Stat. 35 (42 U.S.C. 216); secs. 727-739A,
Public Health Service Act, 90 Stat. 2243, as amended, 93 Stat. 582,
99 Stat. 529-532, 102 Stat. 3122-3125 (42 U.S.C. 294-2941-1);
renumbered as secs. 701-720, as amended by 106 Stat. 1994-2011 (42
U.S.C. 292-292p).
2. A new section 60.2, in subpart A, is added to read as follows:
Subpart A--General Program Description
* * * * *
Sec. 60.2 HEAL default rate.
(a) Default rate formula. The HEAL default rate for each school,
lender, and holder is calculated in accordance with the formula set
forth in section 719(5) of the Public Health Service Act (42 U.S.C.
292o), except that for lenders and holders, loans made to students at
Historically Black Colleges and Universities prior to [insert date 3
years after date of publication of final rule] are excluded from the
default rate calculation.
(b) Effective date of default rate calculations. HEAL default rates
are calculated as of September 30 of each year. These rates are used to
determine risk-based insurance premiums and program eligibility, for
purposes of loans made or purchased on or after July 1 of the following
year.
(c) Payoff of defaulted loans to reduce default rate. A school,
lender, or holder may pay off the defaulted loans of one or more HEAL
borrowers to reduce its default rate. If a school, lender, or holder
chooses to exercise this option, it must, for each defaulted HEAL
borrower chosen, pay the outstanding principal and interest for all of
the borrower's HEAL loans held by the Secretary. Any defaulted HEAL
loans paid by a school, lender, or holder are assigned to that entity,
and may be collected using only collection methods available to that
entity. In order to reduce the school, lender, or holder default rate
used to determine the level of the risk-based insurance premium (or
program eligibility) for loans made or purchased on or after July 1 of
any year, a payoff must be completed by May 31 of that same year.
3. Section 60.8, in subpart B, is amended by revising paragraph
(b)(1) to read as follows:
Subpart B--The Borrower
* * * * *
Sec. 60.8 What are the borrower's major rights and responsibilities?
* * * * *
(b) * * *
(1) The borrower must pay the borrower's insurance premium as more
fully described in Sec. 60.14(b)(1).
* * * * *
4. Section 60.10, in subpart C, is amended by revising paragraph
(b)(1) to read as follows:
Subpart C--The Loan
Sec. 60.10 How much can be borrowed?
* * * * *
(b) * * *
(1) In no case may an eligible non-student borrower receive a loan
that is greater than the sum of the borrower's insurance premium plus
the interest that must be paid on the borrower's HEAL loans during the
period for which the new loan is intended.
* * * * *
Sec. 60.13 [Amended]
5. Section 60.13 is amended by removing paragraph (a)(4).
6. Section 60.14 is revised to read as follows:
Sec. 60.14 Risk-based insurance premiums.
(a) General. The Secretary insures each lender or holder for the
losses of principal and interest it may incur in the event that a
borrower dies; becomes totally and permanently disabled; files for
bankruptcy under chapter 11 or 13 of the Bankruptcy Act; files for
bankruptcy under chapter 7 of the Bankruptcy Act and files a complaint
to determine the dischargeability of the HEAL loan; or defaults on his
or her loan. For this insurance, the Secretary charges an insurance
premium to the borrower, and to the school, lender, and subsequent
holder, if any, in accordance with the procedures outlined in this
section.
(b) Rate of insurance premium. The rate of the HEAL insurance
premium charged to a HEAL borrower, school, lender, and holder shall be
determined in accordance with the procedures outlined in this
paragraph.
(1) Borrower insurance premium. (i) Low-risk rate. A borrower
attending a school with a default rate of not to exceed 5 percent, or
attending a school for which the volume of HEAL loans made for purposes
of the default rate calculation is 50 or less, shall be assessed a
risk-based premium in an amount equal to 6 percent of the principal
amount of the loan.
(ii) Medium-risk and high-risk rate. A borrower attending a school
with a default rate in excess of 5 percent but not exceeding 20 percent
(excluding schools for which the volume of HEAL loans made for purposes
of the default rate calculation is 50 or less) shall be assessed a
risk-based premium in an amount equal to 8 percent of the principal
amount of the loan.
(iii) Reduction of borrower premium. A borrower shall have his or
her insurance premium reduced by 50 percent if a credit worthy parent
or other responsible party co-signs the loan note.
(2) School insurance premium. (i) Low-risk rate. A school with a
default rate of not to exceed 5 percent, or for which the volume of
HEAL loans made for purposes of the default rate calculation is 50 or
less, shall not be assessed an insurance premium.
(ii) Medium-risk rate. A school with a default rate in excess of 5
percent but not exceeding 10 percent (excluding schools for which the
volume of HEAL loans made for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 5 percent of the principal amount of each HEAL loan approved
by the school and disbursed to the borrower.
(iii) High-risk rate. A school with a default rate in excess of 10
percent but not exceeding 20 percent (excluding schools for which the
volume of HEAL loans made for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 10 percent of the principal amount of each HEAL loan approved
by the school and disbursed to the borrower.
(iv) Special consideration for Historically Black Colleges and
Universities. An Historically Black College or University with a
default rate in excess of 20 percent may continue to make HEAL loans to
its borrowers until October 13, 1995. A borrower at such a school will
be subject to the high-risk insurance premium rate set forth in
paragraph (b)(1)(ii) of this section, and the school will be subject to
the high-risk insurance premium rate set forth in paragraph (b)(2)(iii)
of this section.
(3) Lender insurance premium. (i) Low-risk rate. A lender with a
default rate of not to exceed 5 percent, or for which the volume of
HEAL loans made for purposes of the default rate calculation is 50 or
less, shall not be assessed an insurance premium.
(ii) Medium-risk rate. A lender with a default rate in excess of 5
percent but not exceeding 10 percent (including lenders for which the
volume of HEAL loans made for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 5 percent of the principal amount of each HEAL loan made.
(iii) High-risk rate. A lender with a default rate in excess of 10
percent but not exceeding 20 percent (excluding lenders for which the
volume of HEAL loans made for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 10 percent of the principal amount of each HEAL loan made.
(4) Holder insurance premium. (i) Low-risk rate. A holder with a
default rate of not to exceed 5 percent, or for which the volume of
HEAL loans held for purposes of the default rate calculation is 50 or
less, shall not be assessed an insurance premium.
(ii) Medium-risk rate. A holder with a default rate in excess of 5
percent but not exceeding 10 percent (excluding holders for which the
volume of HEAL loans held for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 5 percent of the principal amount of each HEAL loan purchased.
(iii) High-risk rate. A holder with a default rate in excess of 10
percent but not exceeding 20 percent (excluding holders for which the
volume of HEAL loans held for purposes of the default rate calculation
is 50 or less) shall be assessed a risk-based premium in an amount
equal to 10 percent of the principal amount of each HEAL loan
purchased.
(5) Rules regarding insurance premium costs. Schools, lenders, and
holders are prohibited from requiring the borrower to pay the school,
lender, or holder portion of the insurance premium.
(c) Collection of insurance premiums. HEAL insurance premiums due
from borrowers, schools, lenders, and holders shall be collected in
accordance with the procedures outlined in this paragraph.
(1) Borrower insurance premium. The premium charged to the borrower
must be collected by the lender through a deduction from the HEAL loan
proceeds. The borrower premium, including documentation identifying the
loan for which the premium is being paid, is due to the Secretary no
later than 30 days after the date of each HEAL loan disbursement. The
lender must clearly identify to the borrower the amount of the
insurance premium.
(2) School insurance premium. For schools required to pay an
insurance premium, in accordance with paragraph (b)(2) of this section,
the premium shall be collected by the Secretary on a quarterly basis,
and is due to the Secretary no later than 30 days after the date of the
quarterly billing notice.
(3) Lender insurance premium. For lenders required to pay an
insurance premium, in accordance with paragraph (b)(3) of this section,
the premium, including documentation identifying the loan for which the
premium is being paid, is due to the Secretary no later than 30 days
after the date of each HEAL loan disbursement.
(4) Holder insurance premium. For holders required to pay an
insurance premium, in accordance with paragraph (b)(4) of this section,
the premium, including documentation identifying the loan for which the
premium is being paid, is due to the Secretary no later than 30 days
after the date of each HEAL loan purchase.
(5) Penalties for late payment. (i) If the insurance premium is not
paid by the due date a late fee will be charged to the school, lender,
or holder, as appropriate, in accordance with the Department's Claims
Collection Regulation (45 CFR part 30). These late fees may not be
passed on to the borrower.
(ii) If the borrower or lender insurance premium is not paid within
60 days of disbursement of the loan, the insurance shall cease to be
effective on the loan. If the school premium is not paid within 60 days
of the date of the quarterly billing notice, the Secretary will
immediately suspend the school and initiate termination proceedings
against the school. If the holder premium is not paid within 60 days of
the loan transfer, the Secretary will cancel the insurance coverage on
the loan.
(6) Refund of premiums. Premiums are not refundable except in cases
of error, or unless the loan, including any accrued interest, is
canceled within 120 days of the date of disbursement.
(d) Multiple installments. In cases where the lender disburses the
loan in multiple installments, the insurance premium is calculated for
each disbursement.
7. Section 60.15 is amended by revising paragraph (c) to read as
follows:
Sec. 60.15 Other charges to the borrower.
* * * * *
(c) Other loan making costs. A lender may not pass on to the
borrower any cost of making a HEAL loan other than the costs of the
borrower's insurance premium.
8. Section 60.17 is amended by revising paragraph (b) and adding a
new paragraph (c) to read as follows:
Sec. 60.17 Security and endorsement.
* * * * *
(b) If a borrower is a minor and cannot under State law create a
legally binding obligation by his or her own signature, a lender may
require an endorsement by another person on the borrower's HEAL note.
For purposes of this paragraph, an ``endorsement'' means a signature of
anyone other than the borrower who is to assume either primary or
secondary liability on the note.
(c) A credit worthy parent or other responsible individual (other
than a spouse) may cosign the loan note.
9. Section 60.31, in subpart D, is amended by adding new paragraphs
(e) and (f) to read as follows:
Subpart D--The Lender and Holder
Sec. 60.31 The application to be a HEAL lender or holder.
* * * * *
(e) Any lender or holder in the medium-risk or high-risk
categories, as described in Sec. 60.14, must submit a default
management plan with its application to be a HEAL lender or holder. The
default management plan must specify the detailed short-term and long-
term procedures that the lender or holder will have in place to
minimize defaults on loans to HEAL borrowers. Under the plan the lender
or holder must, among other measures, assure that borrowers receive
information concerning repayment options, deferments, forbearance, and
the consequences of default.
(f) A lender with a default rate that exceeds 20 percent (except
for a lender with a total loan volume, for purposes of the default rate
calculation, of 50 loans or less) is ineligible to make HEAL loans. A
holder with a default rate that exceeds 20 percent (except for a holder
with a total loan volume, for purposes of the default rate calculation,
of 50 loans or less) is ineligible to purchase HEAL loans.
10. Section 60.33 is amended by redesignating paragraphs (g) and
(h) as paragraphs (h) and (i), respectively; and by adding a new
paragraph (g) to read as follows:
Sec. 60.33 Making a HEAL loan.
* * * * *
(g) HEAL loans with cosigners. In determining whether a cosigner is
creditworthy, a lender must follow procedures for determining
creditworthiness that are at least as stringent as those it would
follow in making commercial loans or private loans without a Federal
guarantee. If a lender does not make commercial loans or private loan
without a Federal guarantee, it must obtain and follow creditworthiness
procedures that are used by a commercial lender who does make such
loans.
* * * * *
11. Section 60.35 is amended by revising the introductory
paragraph, paragraphs (a)(1) and (2), and paragraphs (e) and (f) to
read as follows:
Sec. 60.35 HEAL loan collection.
A lender or holder must exercise due diligence in the collection of
a HEAL loan with respect to both a borrower and any endorser or
cosigner. In collecting a loan with an endorser or cosigner, the lender
or holder must apply to the endorser or cosigner collection procedures
that are at least as stringent as those it would follow in attempting
to collect a commercial or private loan with an endorser or cosigner.
At a minimum, in order to exercise due diligence, a lender or holder
must implement the following procedures when a borrower fails to honor
his or her payment obligations:
(a)(1) When a borrower is delinquent is making payment, the lender
or holder must remind the borrower within 15 days of the date the
payment was due by means of a written contact. If payments do not
resume, the lender or holder must contact both the borrower and any
endorser or cosigner at least 3 more times at regular intervals during
the 120-day delinquent period following the first missed payment of
that 120-day period. The second demand notice for a delinquent account
must inform the borrower that the continued delinquent status of the
account will be reported to consumer credit reporting agencies if
payment is not made. Each of the required four contacts must consist of
at least a written contact which has an address correction request on
the envelope. The last contact must consist of a telephone contact, in
addition to the required letter, unless the borrower and any endorser
or cosigner cannot be contacted by telephone. The lender or holder may
choose to substitute a personal contact for a telephone contact. A
record must be made of each attempt to contact and each actual contact,
and that record must be placed in the borrower's file. Each contact
must become progressively firmer in tone. If the lender or holder is
unable to locate the borrower and any endorser or cosigner at any time
during the period when the borrower is delinquent, the lender or holder
must initiate the skip-tracing procedures described in paragraph (a)(2)
of this section.
(2) If the lender or holder is unable to locate either the borrower
or any endorser or cosigner at any time, the lender or holder must
initiate and use skip-tracing activities which are at least as
extensive and effective as those it uses to locate borrowers delinquent
in the repayment of its other loans of comparable dollar value. To
determine the correct address of the borrower and any endorser or
cosigner, these skip-tracing procedures should include, but need not be
limited to, contacting any other individual named on the borrower's
HEAL application or promissory note (or the endorser or cosigner's
application), using such sources as telephone directories, city
directories, postmasters, drivers license records in State and local
government agencies, records of members of professional associations,
consumer credit reporting agencies, skip locator services, and records
at any school attended by the borrower. All skip-tracing activities
used must be documented. This documentation must consist of a written
record of the action taken and its date and must be presented to the
Secretary when requesting preclaim assistance or when filing a default
claim for HEAL insurance.
* * * * *
(e) If a lender or holder does not sue the borrower or any endorser
or cosigner, it must send a final demand letter to the borrower and the
endorser or cosigner at least 30 days before a default claim is filed.
(f) If a lender or holder sues a defaulted borrower or endorser or
cosigner, it may first apply the proceeds of any judgment against its
reasonable attorney's fees and court costs, whether or not the judgment
provides for these fees and costs.
* * * * *
12. Section 60.50, in subpart E, is amended by adding new
paragraphs (a) (3) and (4) to read as follows:
Subpart E--The School
Sec. 60.50 Which schools are eligible to be HEAL schools?
(a) * * *
(3) If the school is in the medium-risk or high-risk categories, as
set forth in Sec. 60.14, it must submit a default management plan to
the Secretary on an annual basis in accordance with timeframes
established by the Secretary.
(4) The school must have a HEAL default rate that does not exceed
20 percent, except as follows:
(i) A default rate in excess of 20 percent shall not affect the
eligibility of a Historically Black College or University until after
October 13, 1995; and
(ii) A default rate in excess of 20 percent shall not affect the
eligibility of a school that has 50 or less loans in repayment, for
purposes of the HEAL default rate calculation described in Sec. 60.2.
* * * * *
[FR Doc. 94-28321 Filed 11-15-94; 8:45 am]
BILLING CODE 4160-15-M