[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Pages 18445-18450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07071]

[[Page 18445]]

Vol. 78


No. 58

March 26, 2013

Part III

Department of Education


Department of the Treasury


Office of Management and Budget


Historically Black College and University (HBCU) Capital Financing 
Program; Modification of Terms and Conditions of Gulf Hurricane 
Disaster Loans; Notice

Federal Register / Vol. 78 , No. 58 / Tuesday, March 26, 2013 / 

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Historically Black College and University (HBCU) Capital 
Financing Program; Modification of Terms and Conditions of Gulf 
Hurricane Disaster Loans

AGENCY: Department of Education, Department of the Treasury, Office of 
Management and Budget.

ACTION: Notice.


SUMMARY: The Secretary of Education (Secretary) is authorized to modify 
the terms and conditions of loans made to the following four 
institutions affected by Hurricanes Katrina and Rita under the 
Historically Black College and University (HBCU) Capital Financing 
Program: Dillard University, Southern University at New Orleans, 
Tougaloo College, and Xavier University. The loan modifications are 
required by statute to be on such terms as the Secretary, the Secretary 
of the Treasury, and the Director of the Office of Management and 
Budget (OMB) jointly determine are in the best interests of both the 
United States and the borrowers and necessary to mitigate the economic 
effects of the hurricanes, provided that the modifications do not 
result in any net cost to the Federal Government. This notice (1) 
establishes the terms and conditions of the loan modifications, (2) 
outlines the methodology undertaken and factors considered in 
evaluating the loan modifications, and (3) describes how the loan 
modifications do not result in any net cost to the Federal Government.

DATES: The effective date of the determination of the loan modification 
terms and conditions that will be available to gulf hurricane disaster 
loan borrowers under the HBCU Capital Financing Program is March 26, 

FOR FURTHER INFORMATION CONTACT: Donald E. Watson at (202) 219-7048 or 
by email at: Donald.Watson@ed.gov.
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-



    In 1992, the HBCU Capital Financing Program was created under the 
Higher Education Act of 1965, as amended (HEA), to help HBCUs fund 
capital projects, such as repair, renovation, and, in exceptional 
circumstances, construction of physical infrastructure by offering low-
cost loans. 20 U.S.C. 1066. Congress found that HBCUs often face 
significant challenges in accessing traditional funding resources at 
reasonable rates. Operation of the HBCU Capital Financing Program is 
partially contracted to the Designated Bonding Authority (DBA), a 
private issuer of taxable bonds. The DBA finances the loans by issuing 
bonds that are purchased by the Federal Financing Bank (FFB) at an 
interest rate equal to the six-month Treasury bill rate, as determined 
semiannually. The bonds are backed by letters of credit issued by the 
Department of Education (Department). The DBA then loans the proceeds 
from the sale of the bonds to eligible HBCUs.
    In 2006, Congress passed the 2006 Emergency Supplemental 
Appropriations Act for Defense, the Global War on Terror, and Hurricane 
Recovery (Emergency Act), Public Law 109-234. Section 2601 of the 
Emergency Act authorized loans under the HBCU Capital Financing Program 
on special terms for a one-year period to HBCUs that qualified as 
institutions affected by Hurricanes Katrina and Rita. The special loan 
terms included, but were not limited to: exemption from the program 
requirement that borrowing institutions each deposit five percent of 
loan proceeds in a pooled escrow account; interest payable by the 
borrowing institution capped at one percent, with any interest accruing 
on the bonds at higher rates to be paid by the Secretary; and an 
authorization for the Secretary to waive or modify other program 
provisions. To establish eligibility, affected institutions were 
required to demonstrate, among other things, that physical damage 
caused by one of the hurricanes prevented them from fully reopening 
existing facilities or from fully reopening to the levels that had 
existed before the hurricane.
    Loans were made under the Emergency Act to the four aforementioned 
institutions, the first three of which are private non-profit HBCUs and 
the last one is a public HBCU. The loans to the three private nonprofit 
HBCUs are general obligations secured by mortgages, revenue pledges, 
and other collateral. The loan to the public HBCU is a special 
obligation payable solely from the revenues of the dormitory the loan 
proceeds were used to construct. The bonds issued to finance the loans 
are pegged to the six-month Treasury bill rate. As required by the 
Emergency Act, the Secretary is responsible for paying any interest on 
the bonds in excess of one percent. The HBCUs' loan payments also 
include: (1) A monthly ``servicing fee,'' payable to the DBA, that is 
equal to the product of 0.0000833 and the principal amount of the loan 
outstanding; and (2) a monthly ``FFB fee,'' payable to the Secretary, 
that is equal to 0.00125, multiplied by both the percentage of a year 
that has elapsed since the last monthly payment was due and by the 
principal amount of the loan outstanding.
    General Provisions section 307, Title II, Division F of the 
Consolidated Appropriations Act, 2012, Pub. L. 112-74, as extended 
under the Continuing Appropriations Resolution, 2013, Public Law 112-
175 (2012 Appropriations Law), allows for modifications to the loans to 
the four schools as collectively agreed upon by the Secretary, the 
Secretary of the Treasury, and the Director of OMB, as long as: (1) The 
terms of the modifications are in the best interests of both the United 
States and the borrowers and necessary to mitigate the economic effects 
of the hurricanes; and (2) any modifications will not result in any net 
cost to the Federal Government.
    The three agencies have determined that, due to the impact of 
Hurricanes Katrina and Rita, the current financial conditions and 
enrollment levels at the HBCU borrowers remain below expectations, 
despite having made capital improvements since the hurricanes. 
Accordingly, the agencies have agreed that loan modifications are 
appropriate to: Facilitate the original intent of the loans, protect 
the Federal financial interest, put the schools on a path to increased 
enrollment and net income, and align debt payments with enrollment, 
income levels, and operating expenses. This notice establishes the 
significant terms and conditions of the modifications, outlines the 
methodology undertaken and factors considered in evaluating the loan 
modifications, and explains how the loan modifications do not result in 
any net cost to the Federal Government.

Loan Modification Terms and Conditions

    The loan modifications have three principal components: payment 
forbearance, expense-based repayment (EBR),\1\ and debt adjustment. The 
complete terms and conditions of the loan modifications, including the 
terms and conditions described below, will be

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set forth in executed amendments to the original loan documents, 
including an amendment to the promissory note to reflect the school's 
additional indebtedness to the Secretary, and provisions accordingly 
clarifying that in each case the Bond, Trust Indenture, Loan Agreement 
and Note will not terminate upon repayment of the amounts owing to the 

    \1\ As described in the next subsection, each of the four HBCUs' 
payments under EBR will be set at the lesser of the reamortized 
scheduled payments resulting from the modifications to the loans 
(plus DBA servicing and FFB fees) or the prescribed percentage of 
each HBCU's adjusted operating expenses.

    Payment Forbearance: Beginning on execution of the amendments to 
the loan documents, and absent default or prepayment, the participating 
schools will receive a five-year forbearance during which no principal, 
interest, servicing fees, or FFB fees will be due on the loans made to 
these schools in 2007. During the forbearance, the Department will pay 
to the FFB the principal and interest due on the 2007 bonds and the 
DBA's servicing fees. The Department will also defer borrower payment 
of the FFB fees.
    The payment support by the Department will not reduce the amount 
owed by the schools on their loans, and the Department will become the 
holder of the bonds to the extent of its payments on behalf of a 
borrower and deferment of borrower repayments. The amount of that 
payment support, together with outstanding principal, interest, and 
late fees, will be due in the event of default or prepayment.
    At the end of forbearance, the accrued interest, together with the 
unpaid servicing and FFB fees that the Department paid on the schools' 
behalf or deferred, will be capitalized into principal. The balance of 
each loan, with interest accruing at up to one percent, will then be 
reamortized at substantially level semiannual payments, due each April 
1 and October 1, until June 1, 2037, the original maturity date for 
each of the loans. In addition, the schools will resume their monthly 
payments of servicing and FFB fees.
    Each school will be charged an insurance fee based on the school's 
individual circumstances. This fee will be the amount necessary to 
offset the cost of delaying repayments and to compensate for the 
increased risk assumed by the taxpayer for delaying principal and 
interest payments as well as offset the cost of the Secretary's payment 
of the DBA servicing fees and the deferral of the FFB fees during the 
forbearance period. A pro rata portion of the insurance fee, with 
accrued interest at up to one percent, becomes payable if default or 
prepayment occurs before the five-year forbearance ends; otherwise, the 
insurance fee and accrued interest on it is included in the 
amortization schedule of substantially level semiannual payments 
established by the Secretary at the end of the forbearance.
    Beginning 60 days after execution of the modification documents, 
and every February thereafter, each participating institution seeking 
to establish or maintain eligibility for EBR will provide the Secretary 
with a detailed operating plan and performance data addressing goals 
agreed to by the school and the Secretary. The content required to be 
submitted as part of the operating plan includes financial statements, 
budgets (including narrative analyses of the budget's line items), 
census information on employees and students, and short-term and long-
term strategies regarding enrollment, auxiliary services income, and 
the academic core. Performance data must address benchmarks approved by 
the Secretary to evaluate financial health as well as core revenue-
generating and cost-saving strategies. If the Secretary determines that 
a school's submissions for the first four years of forbearance reflect 
a good faith effort to devise and implement a reasonable strategic 
plan, and that the performance data reflect reasonable progress in the 
circumstances towards the benchmarks adopted, the Secretary will 
designate the Borrower as eligible for EBR.
    Thereafter, the Secretary will carry out a similar review annually 
of the operating plan and performance data a school submits, to 
determine if it reflects a reasonable effort and approach to improving 
the school's financial standing. If it does, eligibility for EBR will 
continue. A number of options is available to the Secretary in the 
event a school's submissions are deficient, ranging from providing 
technical assistance to enable the school to correct the deficiencies 
in its plan, to denying eligibility for EBR for a year or more until a 
satisfactory plan and performance data are submitted, to determining a 
school with a consistent history of deficient submissions ineligible to 
participate in EBR for the remainder of the term of the loan. Under the 
modifications, an uncured material failure to perform the terms and 
conditions of the operating plan, or the making of any false or 
incorrect material warranty or representation in connection with the 
operating plan, is an event of default, with remedies available to the 
Trustee and Secretary including, but not limited to, acceleration of 
the entire outstanding balance, including all EBR payments previously 
made by the Secretary on behalf of the school, or establishment of a 
reamortization schedule that includes all EBR payments previously made.
    Expense-Based Repayment: Once a school has been initially 
determined eligible for EBR and the five-year forbearance has ended, 
the payments to be made by an EBR-eligible school will be based on the 
individual school's adjusted operating expenses. For purposes of these 
payments, ``adjusted operating expenses'' are the operating expenses as 
reported on the school's audited financial statements for the most 
recently completed fiscal year, less depreciation and amortization as 
reported on those statements. ``Depreciation'' shall mean the 
allocation of the cost of tangible assets over the assets' useful 
lives, if reported by the Borrower as depreciation on its audited year-
end financial statements. ``Amortization'' shall mean the allocation of 
the cost of intangible assets over the assets' useful lives, if 
reported by the Borrower as amortization on its audited year-end 
financial statements.
    For the three non-profit schools, payments will be set at the 
lesser of the reamortized scheduled payments (plus servicing and FFB 
fees) or six percent of the adjusted operating expenses. Based on 
reviews of both private sector analyses and the Department's analysis, 
including institutional enrollment and tuition demand, incremental 
revenue sources, historical financial statements, budget projections, 
and other information, we have determined that a manageable debt 
service payment equates to six percent of net adjusted operating 
expenses for the three non-profit schools. For the public school, 
payments will be set at the lesser of the reamortized scheduled payment 
(plus servicing and FFB fees) or three percent of the net adjusted 
operating expenses. The public school's rate is lower because its 
existing loan agreement finances only a specific asset--the dormitory--
and the Federal Government has rights only to the revenues of the 
    If a school's EBR payment amount is less than the reamortized 
scheduled payment, the school will pay the EBR payment amount, and the 
Department will pay, on its behalf, the difference. As with the amounts 
paid by the Department on a school's behalf during the forbearance, the 
EBR payment support by the Department will not reduce the amount owed 
by the schools on their loans; and those amounts, plus interest and 
late fees, will be due in the event of default or prepayment.
    Debt Adjustment: Provided that a school has made payments in the 
amounts and at the times specified in the loan documents as modified 
throughout the term of the loan, without default except such default as 
has been

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timely cured, and has not prepaid the loan, upon certification of 
foregoing by the Trustee and approval by the Secretary, any loan 
amounts outstanding, due to the difference between the EBR payment 
amounts and reamortized scheduled payment amounts, at the original loan 
maturity date--June 1, 2037--will be forgiven. The Secretary reserves 
the right to deny forgiveness if the borrower has breached, falsified, 
or misrepresented (i) any covenants, representations or warranties in 
any loan document, or (ii) any information delivered to the Secretary, 
the DBA or the Trustee in connection with the loan, the loan documents 
or any payments of the Borrower or the Secretary.
    The Secretary and the Trustee must both agree that the conditions 
for forgiveness have been met for it to apply, due to their distinct 
contractual responsibilities for monitoring borrower compliance with 
the operating plan and repayment requirements.
    Final Terms and Conditions; Administration of the Modification: The 
terms and conditions will include those terms generally described 
above, as well as restrictive covenants that will govern the operations 
of the schools during the terms of the loans and other customary terms. 
The Secretary will provide each school in writing an option to elect to 
modify the school's loan, which will expire on March 28, 2013 unless 
exercised by the school through written notice to the Secretary in the 
form and in the manner specified in the option. The Secretary will 
provide each school, together with the option, copies of the documents 
that would amend the school's existing loans, as well as a description 
of the authorizing documents, legal opinion, consents, and any other 
documentation the school would need to supply at closing. It is 
expected that the option and accompanying documents will be finalized 
and sent to the four schools within [15] business days of the 
publication of this notice.

Outline of Methodology and Factors in Determining Loan Modifications

    The 2012 Appropriations Law allows for the modification of the four 
loans only upon terms and conditions that the Secretary, the Secretary 
of the Treasury, and the Director of OMB jointly determine are in the 
best interests of both the United States and the borrowers and are 
necessary to mitigate the economic effects of the hurricanes. The 
Secretaries and the Director have jointly determined that the loan 
modifications meet these requirements. In making this determination, 
they considered, among other factors:
     The importance of HBCUs as a national resource;
     The financial condition and enrollment levels of the four 
HBCUs prior to and after the gulf hurricanes;
     The original intent of the loans; and
     The U.S. Government's interest in maximizing its return on 
investment by reducing the likelihood of default on program loans.
    The five-year forbearance will give the schools adequate time to 
strengthen their financial status and prepare for their first payments. 
This is an important first step in the path to financial recovery for 
these institutions and will ensure adequate working capital to make 
necessary investments that improve the operations of each campus.
    Since these schools' campuses will depreciate in value over time 
and lose their ability to generate revenue without the school taking 
out more debt to repair the facilities, it seems unlikely that the 
financed assets will continue to service debt obligation beyond twenty-
five years. For this reason, outstanding debts from this program that 
exist beyond the year 2037 will be forgiven in the circumstances 
described above, provided a school has complied with all other terms of 
the loan. Enforcing any remaining debt obligation beyond twenty-five 
years would most likely be debilitating to the institutions in the 
future when they must borrow additional funds for maintenance and 
repair of their existing facilities.
    The following are detailed explanations of how the loan 
modifications meet applicable requirements.
    Best interest of the borrower: The terms and conditions of 
modification offer the schools time and resources to establish 
financial and institutional reforms that will help the schools' long-
term health. The future debt burden is calibrated to the size of each 
school's operating budget, significantly reducing the likelihood that 
the schools will be overextended and default. By decreasing the 
scheduled debt burden in the event that the schools' operation cannot 
reasonably support it, the modification supports the long term growth 
and viability of the schools.
    Best interest of the United States: It is in the best interest of 
the United States to mitigate the risk of loan default in the short 
term, maximize the prospect of repayment in the long term, and maintain 
viable HBCUs as a national educational and cultural resource. The 
modifications further these objectives.
    While the four institutions have made significant progress toward 
recovery since Hurricanes Katrina and Rita, their financial climate is 
still difficult, and enrollment levels remain below expectations. 
Reduced governmental grant and contract funding also puts downward 
pressure on the institutions' revenue sources. Accordingly, 
institutional expenses and debt service need to be realigned with the 
current revenue environment. This action is necessary to facilitate 
further recovery by the schools and to ensure the schools' respective 
debt burdens do not lead to serious financial consequences that could, 
in turn, result in problems repaying their debt. Setting reasonable 
payments amounts as a percentage of adjusted operating expenses will 
allow the schools to satisfactorily meet the obligations of these loans 
and continue operating.
    In addition to the cost neutrality estimates described below in the 
No Net Cost to the Federal Government section, the Secretaries and 
Director also considered an analysis of expected payments from the 
borrowers, based on their most recent financial statements and on 
budgetary projections. While each school has a unique financial 
circumstance, the schools seem overextended and may not be able to make 
the current scheduled debt service payments without serious 
consequences to the long-term viability of the institutions. The 
schools have either generated negative net income, putting pressure on 
liquid assets, or have such anemic net revenue that operations are 
constrained. Revenue and expense forecasts indicate financial 
improvement to meet current debt obligations is highly unlikely in some 
cases. Therefore, the modifications increase the likelihood that the 
taxpayer will be repaid. Analyses also indicate the designated expense 
based repayment thresholds align each institution's future payments 
with their unique financial circumstance and maximizes the ability to 
make debt service payments.
    Necessary to mitigate the impact of Hurricanes Katrina or Rita: The 
intent of the original loans was to mitigate the effects of these two 
hurricanes, which included damage to school facilities, enrollment 
reductions, and increased debt levels. While the loans have helped the 
schools reconstruct damaged facilities, the institutions still suffer 
from increased debt burdens disproportionate with enrollment levels. 
The modifications put the schools on a path to increase enrollment and 
net income, and align debt payments with enrollment and income levels.

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    No Net Cost to the Federal Government: In accordance with the 2012 
Appropriations Law, the Secretary, the Secretary of the Treasury, and 
the Director of OMB have jointly determined that the loan modifications 
will not result in any net cost to the Federal Government, beginning on 
the date on which the Secretary modifies the loans.
    The cost-neutrality analysis used credit subsidy modification cost 
estimation procedures established under the Federal Credit Reform Act 
of 1990 (FCRA, 2 U.S.C. 661a et seq.), as amended, and OMB Circular A-
11. Per FCRA and the implementing guidance, the cost estimates compare 
the present value of future cash flows to and from the Government under 
the original contracts from the point of modification, and the present 
value of the cash flows under the contracts as modified. To estimate 
the present value cost, the analysis used discount rates provided by 
OMB to estimate credit subsidy costs for all Federal credit programs. 
The results of the analysis were estimates expressed as a dollar amount 
of the change in Federal costs of modifying the contractual terms of 
the loans.
    The metric to determine cost neutrality was that the modification 
costs under the modified contract should not exceed costs expected 
under the current loan contracts, had no changes to the contracts taken 
place. Thus, all costs of the modified loans were compared to estimates 
in the President's Budget baseline assumptions for such loans.
    Consistent with the requirements included in the 2012 
Appropriations Law that any modification under this authority shall not 
result in any net cost to the Federal Government as jointly determined 
by the Secretaries and the Director, separate credit reform 
modification cost estimates were developed to assess the Federal cost 
incurred for modifying the terms of loans to each of the four schools. 
This discussion outlines the analysis of the changes to the loan 
contracts with respect to the following critical aspects affecting the 
Federal cost:
     Terms of the modification;
     Default assumptions; and
     Administrative costs.
    Terms of the modification. Under the current loan contracts, 
borrowers are required to make monthly payments to the Trustee, which, 
in turn, makes semiannual payments to the FFB. Under the budget 
baseline assumptions, for each of the schools, those payments began in 
2011 and are scheduled to end in 2037. Under the modified loan 
contracts, schools would receive a five-year forbearance starting on 
April 1, 2013, and no principal, interest, servicing or FFB payments 
would be paid by the schools. The Trustee would not make principal or 
interest payments during that period. The Secretary also would make the 
monthly servicing fee payments due from the borrower during the 
forbearance as they came due. Loans would still mature in 2037, but the 
insurance fee plus forborn servicing and FFB fees would be capitalized 
into the principal and interest payment schedule. The payment schedule 
would be re-amortized in substantially level, semiannual payments after 
the end of the forbearance.
    To reach cost neutrality, the modified contract terms include for 
each of the schools an insurance fee, calculated as described above. 
The fee is added to the principal of the loan at the start of 
forbearance and accrues interest at the borrowers' interest rates, 
which is also capitalized. These amounts are included in the 
reamortized repayments. This increase to the scheduled payments 
including the insurance fee offsets the additional costs of the 
modification to reach cost neutrality.
    Default assumptions. As required by FCRA, the modifications used 
the technical assumptions from the latest President's Budget, including 
the default and other borrower performance assumptions. For the 
purposes of the cost estimate, the borrower performance assumptions 
were assumed to represent the likelihood of EBR trigger and loan 
forgiveness. Those assumptions include a high expectation of repayment 
from each of the schools. However, because time has passed since the 
budget borrower performance assumptions were determined, the 
Secretaries and Director also considered an analysis that relied on the 
most recent annual operating expenses reported by the schools in their 
audited financial statements, discussed above in the Best Interest of 
the United States section.
    Administrative Costs. Under FCRA, Federal administrative costs are 
not included in credit subsidy cost calculations. Instead, those costs 
are appropriated or obligated at their nominal value at the year they 
are incurred. The analysis assumed no change in the future federal cost 
of administering the modified loans versus the administering the loans 
under the current contract; thus the administrative costs associated 
with the modifications are necessarily zero.
    Conclusion. After taking into account alternative borrower 
performance scenarios and appropriate risk factors, the Secretaries and 
Director determine that modified terms of the contracts to the four 
schools will result in no net cost to the Federal Government.

          Table--Historically Black College and University Capital Financing Program Cost Estimates for Modified Gulf Hurricane Disaster Loans
                                                                [In millions of dollars]
                                                  Loan characteristics                                                              Value/costs
                                                            Outstanding     Outstanding                                    PV  cashflows
                                                             principal       principal       Scheduled       Insurance       with the      Subsidy  cost
                                                            April 2013      April 2018       interest          fees           public
Baseline................................................             353             324              53             N/A             246             108
Modified................................................             353             405              45              30             246             108
Note: Estimates reflect a loan modification effective date of April 1st, 2013.

    Accessible Format: Individuals with disabilities can obtain this 
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Internet access to the official edition of the Federal Register and the 
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well as all other documents published in the

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    Dated: March 22, 2013.
Arne Duncan,
Secretary of Education.
Jacob J. Lew,
Secretary of the Treasury.
Jeffrey Zients,
Acting Director, Office of Management and Budget.
[FR Doc. 2013-07071 Filed 3-22-13; 4:15 pm]