Proposed Regulations Offer New Guidelines for Prohibited Inducements, Preferred-Lender Lists

The U.S. Department of Education is preparing to publish a notice of proposed rulemaking that outlines new regulations governing federal student-loan programs. The topics covered in the notice were the subject of negotiated rulemaking earlier this year, but the negotiators were unable to reach consensus. As a result, Education Secretary Margaret Spellings, in consultation with her task force on student loans, drafted the proposed regulations.

Included are new guidelines covering the much-publicized topics of prohibited inducements and preferred-lender lists.

The proposed regulations would add a detailed list of new items considered as prohibited inducements for lenders and guarantors. Lenders would be prohibited from:

• Providing prizes or additional financial aid to prospective borrowers for the purpose of obtaining loan applications or volume.
• Providing a school with access to a lender’s other financial products or computer hardware, or making payment for the cost of printing and distribution of college catalogs and other materials at less-than-market rates.
• Undertaking philanthropic activities by providing grants, scholarships, restricted gifts or financial contributions to secure loan volume or gain placement on a school’s preferred-lender list.
• Paying conference or training registration, transportation and lodging costs, or any entertainment expenses related to lender-sponsored functions and activities for school and school-affiliated-organization employees.
• Providing staff support to a school’s financial-aid office on more than a short-term, non-recurring emergency basis.
• Paying loan-application-referral or processing fees to another lender.

Lenders would be permitted to:

• Offer schools assistance comparable to that offered through the direct-loan program.
• Reduce borrower origination fees.
• Offer borrowers reduced interest rates.
• Pay federal default fees.
• Purchase loans from another loan holder at a premium.
• Participate in a school’s or guarantor’s financial-aid and financial-literacy-outreach activities, as long as the lender’s sponsorship is disclosed and the activity does not promote the lender’s loan services.
• Provide toll-free telephone numbers and free data transmission to schools and borrowers.
• Offer borrower benefits based on borrowers making one or more scheduled payments.
• Sponsor meals, refreshments and receptions for school employees in conjunction with training, meetings or conferences, as long as the lender function is open to all attendees and the costs are reasonable.
• Provide schools, school-affiliated organizations and borrowers with items of nominal value for marketing purposes.

The new prohibited-inducement guidelines for guarantors generally mirror those for lenders, with some exceptions. For example, guarantors would be permitted to:

• Provide meals and refreshments that are reasonable in cost in conjunction with training that the guarantor sponsors for schools and lenders and for workshops for personnel from schools for grades kindergarten through 12.
• Pay reasonable travel and lodging costs for training for school staff and tours of service facilities.
• Pay reasonable costs for school officials to participate on a guarantor’s governing board or an advisory council.

Proposed rules governing preferred-lender lists include the following requirements:

• At least three unaffiliated lenders must be included.
• Schools would be prohibited from including on their lists lenders that have offered or have been solicited by the school to offer financial or other benefits to the school in return for placement on the preferred-lender list.
• Preferred lenders would be required to offer all borrowers at a school the same borrower benefits.
• Schools would be required to disclose to prospective borrowers the selection methods and criteria used to establish the preferred-lender list.
• Schools would be required to provide borrowers with comparative information about the interest rates and other benefits offered by their preferred lenders and advise borrowers that they are not required to use a preferred lender.
• Schools would be prohibited from assigning a lender to first-time borrowers and from delaying certification of a loan because the borrower chose a lender not on the school’s list.

Following publication in the Federal Register, the department will take comments on the proposed regulations for 60 days before finalizing the new requirements. You will need Adobe Reader to access the notice of proposed rulemaking on the U.S. Department of Education Web site.