Federal Updates

Taking a closer look at the final rules: Prohibited inducements and preferred lender lists

We continue this week with our series of articles focusing on areas of the November 1, 2007, final rules that are proving especially challenging for FFELP industry participants to interpret and implement. Last week in Shoptalk Online edition 439, we explored the topic of loan entrance counseling for Grad PLUS borrowers. This week, we will examine prohibited inducements and preferred lender lists.

Prohibited inducements
The final rules provide an exhaustive list of permitted activities for lenders and guarantors, and a non-exhaustive list of prohibited inducements for lenders and guarantors. Most of the permitted and prohibited activities are the same for lenders and guarantors. However, the preamble to the final rules (page 61980) clearly explains that the role and responsibilities of a guarantor are very different from those of a lender: "Unlike lenders, guaranty agencies are responsible for lender and school oversight, school and lender training, default aversion services, lender claim review and approval, and outreach services to students, parents, and schools." The new rules reflect those different roles, and we've broken down the permitted and prohibited activities accordingly.

Exhaustive list of permitted activities by guarantors

• Assistance to a school that is comparable to that provided by the Secretary of Education to a school under the Direct Loan Program, as identified by the Secretary in a public announcement, such as a notice in the Federal Register.
• Default aversion activities approved by the Secretary of Education.
• Student aid and financial literacy-related outreach activities, excluding in-person school-required entrance and exit counseling, as long as the name of the entity that developed and paid for any materials is provided to participants and the guaranty agency does not promote its student loan or other products; but a guaranty agency may promote benefits provided under other federal or state programs administered by the guaranty agency.
• Meals and refreshments that are reasonable in cost and provided in connection with guaranty agency-provided training of program participants and elementary, secondary, and postsecondary school personnel, and with workshops and forums customarily used by the agency to fulfill its responsibilities under the Higher Education Act (HEA).
• Meals, refreshments and receptions that are reasonable in cost and scheduled in conjunction with training, meeting, or conference events if those meals, refreshments, or receptions are open to all training, meeting, or conference attendees.
• Travel and lodging costs that are reasonable as to cost, location, and duration to facilitate the attendance of school staff in training or service facility tours that they would otherwise not be able to undertake; or to participate in the activities of an agency's governing board, a standing official advisory committee, or in support of other official activities of the agency.
• Toll-free telephone numbers for use by schools or others to obtain information about FFELP loans and free data transmission services for use by schools to electronically submit applicant loan processing information or student status confirmation data.
• Payment of federal default fees in accordance with the HEA.
• Items of nominal value to schools, school-affiliated organizations, and borrowers that are offered as a form of generalized marketing or advertising, or to create goodwill.
• Loan forgiveness programs for public service and other targeted purposes approved by the Secretary, provided the programs are not marketed to secure loan applications or loan guarantees.
• Other services as identified and approved by the Secretary through a public announcement, such as a notice in the Federal Register.

Non-exhaustive list of prohibited inducements by guarantors

• Payments or offerings of other benefits, including prizes or additional financial aid funds, to a prospective borrower in exchange for processing a loan using the agency's loan guarantee.
• Payments or other benefits, including prizes or additional financial aid funds under any Title IV or state or private program, to a school or school-affiliated organization based on the school's or organization's voluntary or coerced agreement to use the guaranty agency for processing loans, or to provide a specified volume of loans using the agency's loan guarantee.
• Payments or other benefits to a school or any school-affiliated organization, or to any individual in exchange for FFEL loan applications or application referrals, a specified volume or dollar amount of FFEL loans using the agency's loan guarantee, or the placement of a lender that uses the agency's loan guarantee on a school's list of recommended or suggested lenders.
• Payment of entertainment expenses, including expenses for private hospitality suites, tickets to shows or sporting events, meals, alcoholic beverages, and any lodging, rental, transportation or other gratuities offered by a guaranty agency or a lender participating in the agency's program, for school employees or employees of school-affiliated organizations.
• Philanthropic activities, including providing scholarships, grants, restricted gifts, or financial contributions in exchange for FFEL loan applications or application referrals, a specified volume or dollar amount of FFELP loans using the agency's loan guarantee, or the placement of a lender that uses the agency's loan guarantee on a school's list of recommended or suggested lenders.
• Staffing services to a school, except for services provided to participating foreign schools at the direction of the Secretary, as a third-party servicer or otherwise on more than a short-term, emergency basis, which is non-recurring, to assist the institution with financial aid-related functions. "Non-recurring, emergency basis" means a state- or federally-declared natural disaster, a federally-declared national disaster, and other localized disasters and emergencies identified by the Secretary of Education.
• Assessing additional costs or denying benefits otherwise provided to schools and lenders participating in the agency's program on the basis of the lender's or school's failure to agree to participate in the agency's program, or to provide a specified volume of loan applications or loan volume to the agency's program or to place a lender that uses the agency's loan guarantee on a school's list of recommended or suggested lenders.
• Compensation to lenders or their representatives for the purpose of securing loan applications for guarantee.
• Performance of functions normally performed by lenders without appropriate compensation.
• The providing of equipment or supplies to lenders at below-market cost or rental.
• The offer to pay a lender that does not hold loans guaranteed by the agency a fee for each application forwarded for the agency's guarantee.
• The mailing or distribution of unsolicited loan applications to students enrolled in a secondary school or a postsecondary institution, or to parents of those students, unless the potential borrower has previously received loans insured by the guaranty agency.
• Fraudulent or misleading advertising concerning loan availability.

Exhaustive list of permitted activities by lenders:

• Assistance to a school that is comparable to the kinds of assistance provided to a school by the Secretary under the Direct Loan Program, as identified by the Secretary in a public announcement, such as a notice in the Federal Register.
• Support of and participation in a school's or a guaranty agency's student aid and financial literacy-related outreach activities, excluding in-person school-required entrance or exit counseling, as long as the name of the entity that developed and paid for any materials is provided to the participants and the lender does not promote its student loan or other products.
• Meals, refreshments, and receptions that are reasonable in cost and scheduled in conjunction with training, meeting, or conference events if those meals, refreshments, or receptions are open to all training, meeting, or conference attendees.
• Toll-free telephone numbers for use by schools or others to obtain information about FFELP loans and free data transmission service for use by schools to electronically submit applicant loan processing information or student status confirmation data.
• A reduced origination fee.
• A reduced interest rate as provided under the HEA.
• Payment of federal default fees in accordance with the HEA.
• Purchase of a loan made by another lender at a premium.
• Other benefits to a borrower under a repayment incentive program that requires, at a minimum, one or more scheduled payments to receive or retain the benefit, or under a loan forgiveness program for public service or other targeted purposes approved by the Secretary, provided those benefits are not marketed to secure loan applications or loan guarantees.
• Items of nominal value to schools, school-affiliated organizations, and borrowers that are offered as a form of generalized marketing or advertising, or to create good will.
• Other services as identified and approved by the Secretary through a public announcement, such as a notice in the Federal Register.

Non-exhaustive list of prohibited inducements by lenders:

• Payments or offerings of other benefits, including prizes or additional financial aid funds, to a prospective borrower in exchange for applying for or accepting a FFELP loan from the lender.
• Payments or other benefits to a school, any school-affiliated organization or to any individual in exchange for FFELP loan applications, application referrals, or a specified volume or dollar amount of loans made, or placement on a school's list of recommended or suggested lenders.
• Payments or other benefits provided to a student at a school who acts as the lender's representative to secure FFELP loan applications from individual prospective borrowers.
• Payments or other benefits to a loan solicitor or sales representative of a lender who visits schools to solicit individual prospective borrowers to apply for FFELP loans from the lender.
• Payment to another lender or any other party of referral fees or processing fees, except those processing fees necessary to comply with federal or state law.
• Solicitation of an employee of a school or school-affiliated organization to serve on a lender's advisory board or committee and/or payment of costs incurred on behalf of an employee of a school or school-affiliated organization to serve on a lender's advisory board or committee.
• Payment of conference or training registration, transportation, and lodging costs for an employee of a school or school-affiliated organization.
• Payment of entertainment expenses, including expenses for private hospitality suites, tickets to shows or sporting events, meals, alcoholic beverages, and any lodging, rental, transportation, and other gratuities related to lender-sponsored activities for employees of a school or a school-affiliated organization.
• Philanthropic activities, including providing scholarships, grants, restricted gifts, or financial contributions in exchange for FFELP loan applications or application referrals, or a specified volume or dollar amount of FFELP loans made, or placement on a school's list of recommended or suggested lenders.
• Staffing services to a school, except for services provided to participating foreign schools at the direction of the Secretary, as a third-party servicer or otherwise on more than a short-term, emergency basis, and which is non-recurring, to assist a school with financial aid-related functions. "Non-recurring, emergency basis" means a state- or federally-declared natural disaster, a federally-declared national disaster, and other localized disasters and emergencies identified by the Secretary of Education.
• Unsolicited mailings to a student or a student's parents of FFELP loan application forms, except to a student who previously has received a FFELP loan from the lender or to a student's parent who previously has received a FFELP loan from the lender.
• The offering, directly or indirectly, of a FFELP loan to a prospective borrower to induce the purchase of a policy of insurance or other product or service by the borrower or other person.
• Fraudulent or misleading advertising with respect to a lender's FFELP loan activities.

Additional prohibited inducement changes

The final rules also:

• Prohibit a guaranty agency from making a claim payment to a lender, or requesting a reinsurance payment from ED, if the agency determines or is notified by the Secretary that the lender offered or provided an improper inducement.
• Establish a "rebuttable presumption" providing the lender or guaranty agency with an opportunity to show that a questioned activity or payment was made for reasons unrelated to securing loan applications or loan volume.
• Clarify and expand a borrower's legal rights under the Federal Trade Commission's (FTC) Holder Rule by applying the rule to all loans made under the FFELP and specifying that it applies if the lender making the loan offered or provided an improper inducement to the school or any other party in connection with the making of the loan.

Preferred lender lists
Lender lists have not, until now, been regulated in the FFELP. The final rules continue to permit a school to have a preferred lender list, but state that any such list cannot:

• Be used to deny or otherwise impede a borrower's choice of lender.
• Include lenders that have offered, or have offered in response to a solicitation by the school, financial or other benefits to the school in exchange for inclusion on the school's list.
• Contain fewer than three unaffiliated lenders. For the purposes of a preferred lender list, a lender is affiliated with another lender if:
  • The lenders are owned or controlled by the same entity or individuals;
  • The lenders are wholly- or partly-owned subsidiaries of the same parent company; or
  • The directors, trustees, or general partners of one of the lenders constitute a majority of the persons holding similar positions with the other lender.

The final rules clarify that the definition of "affiliated" does not include relationships that involve only post-disbursement servicing or secondary market activities.

The final rules also require that such a list provided by a school must:

• Disclose the method and criteria used by the school in selecting lenders the school recommends to prospective borrowers.
• Provide comparative information about interest rates and other benefits offered by the lenders to prospective borrowers.
• Include a prominent statement in any information related to its list of lenders advising prospective borrowers that they are not required to use one of the school's recommended lenders.
• For first time borrowers, not assign a borrower's loan to a particular lender through award packaging or other methods.
• Not cause any unnecessary delays for borrowers who use a lender not on the school's list.
• Be updated at least annually, as well as the accompanying information.

A school cannot solicit payments and other benefits, except borrower benefits, from a lender in exchange for the lender's placement on the school's list. In the final rules, ED clarified that a school does not have to ensure that any lender included on its preferred lender list offers the same benefits to all borrowers at the school.

ED is developing a model format that a school may use in providing comparative interest rate and benefit information as well as the method and criteria used to select lenders for a list. Shoptalk Online will notify readers when this resource is available.

For more information
These changes will be effective July 1, 2008. We encourage our readers to review not only the final regulatory language, but also the preamble discussions to the proposed and final rules; these documents are available, respectively, on line at http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-15314.pdf and http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-21083.pdf. The integrated regulations, incorporating the final rules that were published on November 1, 2007, are available on TG Online at www.tgslc.org/policy/intreg.cfm.

If you have any questions, please contact TG customer assistance at (800) 845-6267, or send an e-mail message to cust.assist@tgslc.org.

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