The Department of Education & Third-Party Servicers: An Evolving Landscape Dennis Cariello DLA Piper, LLP (US) NCHER

DISCLAIMERS The contents of these materials and the accompanying discussion do not constitute legal or regulatory advice. No party should act or refrain from acting on the basis of any statements made today without seeking individualized, professional counsel as appropriate. These materials and the accompanying discussion are primarily focused on certain aspects of Title IV requirements and are not intended to be comprehensive of all Title IV requirements applicable to all educational agencies and institutions.

INTRODUCTION Dennis Cariello: Chair of the Regulatory Compliance and Strategies section of DLA Piper’s Education Services industry sector group. Previously served as Deputy General Counsel for Postsecondary Education and Regulatory Services at the U.S. Department of Education in the Bush and Obama Administrations.

AGENDA  The Law on Third-Party Servicers  January 9, 2015 Dear Colleague Letter  February 12, 2015 Electronic Announcement & Third Party Servicer Data Form  Who is Affected?  What Does this Mean for those Affected?  Any Basis for Challenges?  What Do I Do Now  Questions?

The Law on Third-Party Servicers 20 USC 1088 (c) Third party servicer For purposes of this subchapter and part C of subchapter I of chapter 34 of title 42, the term ‘‘third party servicer’’ means any individual, any State, or any private, for-profit or nonprofit organization, which enters into a contract with— (1) any eligible institution of higher education to administer, through either manual or automated processing, any aspect of such institution’s student assistance programs under this subchapter and part C of subchapter I of chapter 34 of title 42; or (2) any guaranty agency, or any eligible lender, to administer, through either manual or automated processing, any aspect of such guaranty agency’s or lender’s student loan programs under part B of this subchapter, including originating, guaranteeing, monitoring, processing, servicing, or collecting loans.

The Law on Third-Party Servicers 34 CFR Third-party servicer: (1) An individual or a State, or a private, profit or nonprofit organization that enters into a contract with an eligible institution to administer, through either manual or automated processing, any aspect of the institution’s participation in any Title IV, HEA program. The Secretary considers administration of participation in a Title IV, HEA program to— (i) Include performing any function required by any statutory provision of or applicable to Title IV of the HEA, any regulatory provision prescribed under that statutory authority, or any applicable special arrangement, agreement, or limitation entered into under the authority of statutes applicable to Title IV of the HEA, such as, but not restricted to—

The Law on Third-Party Servicers (A) Processing student financial aid applications; (B) Performing need analysis; (C) Determining student eligibility and related activities; (D) Certifying loan applications; (E) Processing output documents for payment to students; (F) Receiving, disbursing, or delivering Title IV, HEA program funds, excluding lock-box processing of loan payments and normal bank electronic fund transfers; (G) Conducting activities required by the provisions governing student consumer information services in subpart D of this part; (H) Preparing and certifying requests for advance or reimbursement funding; (I) Loan servicing and collection; (J) Preparing and submitting notices and applications required under 34 CFR part 600 and subpart B of this part; and (K) Preparing a Fiscal Operations Report and Application to Participate (FISAP)

The Law on Third-Party Servicers (ii) Exclude the following functions— (A) Publishing ability-to-benefit tests; (B) Performing functions as a Multiple Data Entry Processor (MDE); (C) Financial and compliance auditing; (D) Mailing of documents prepared by the institution; (E) Warehousing of records; and (F) Providing computer services or software; and

The Law on Third-Party Servicers February 17, 1994 Notice of Proposed Rulemaking (59 FR 8044):  “The examples that the Secretary proposes to include in the definition of third-party servicer are primarily examples that show an obvious relationship to the administration of the Title IV, HEA programs. The Secretary proposes these examples to specifically detail which activities unequivocally constitute the administration of an institution's participation in the Title IV, HEA programs. While these examples are not all-inclusive, they do provide a baseline to judge other activities that could be deemed an aspect of the administration of an institution's participation in the Title IV, HEA programs.”

The Law on Third-Party Servicers February 17, 1994 Notice of Proposed Rulemaking (59 FR 8044):  “Other proposed examples classified as being outside the scope of these regulatory requirements simply reinforce the Secretary's belief that certain activities performed by a third- party servicer that do not substantially affect the delivery of Title IV, HEA program aid do not constitute the administration of an institution's participation in the Title IV, HEA programs, (for example, contracting to warehouse records).”

The Law on Third-Party Servicers Interim Final Rule, published on April 29, 1994 (59 FR 22418):  “The Secretary agrees with those commenters who either objected to the inclusion of computer services or software providers in the examples of Title IV-related activities, or who saw no need to separately include such providers. In adopting the definition of third-party servicer, the Secretary is not including providers of those services or software because the Secretary believes that this type of service is simply a technological means to assist in carrying out certain administrative functions that are already included in the proposed definition of a third-party servicer.”

January 9, 2015 Dear Colleague Letter “Under the regulations at 34 C.F.R. § 668.2, a third-party servicer is any individual or entity that contracts with or performs work on behalf of an institution to administer, through manual or automated processing, any aspect of an institution’s responsibilities under the Title IV, HEA programs.” Compare: “The Secretary considers administration of participation in a Title IV, HEA program to— (i) Include performing any function required by any statutory provision of or applicable to Title IV of the HEA, any regulatory provision prescribed under that statutory authority....”

January 9, 2015 Dear Colleague Letter Purported Third-Party Servicer Functions  Processing of student financial aid applications, including Free Application for Federal Student Aid (FAFSA) or pre-FAFSA completion services performed on behalf of an eligible institution;  Collecting, reviewing, and/or maintaining supporting documentation required to process Title IV funds;  Awarding, certifying, originating, and/or disbursing Title IV funds;  Delivering Title IV credit balance refunds to students or parents (via cash, check, Automated Clearing House (ACH), debit card, or other means);  Providing financial aid counseling, including assistance to students or parents in person, over the phone, or by any electronic means, including operation of call centers;

January 9, 2015 Dear Colleague Letter  Performing default prevention/management functions for Direct Loan, Federal Family Education Loan, and/or Perkins Loan programs, including cohort default analysis, enhanced loan counseling, delinquency assistance, development/implementation of a default management plan, and/or other default prevention outreach activities;  Providing entrance and exit loan counseling, including in person, by mail, or electronically;  Performing Federal Perkins Loan servicing or collections;  Financial aid consulting, including financial aid staffing, interim management, processing support, and/or development and maintenance of written policies and procedures;

January 9, 2015 Dear Colleague Letter  Preparing and/or submitting required reports including enrollment reporting to the National Student Loan Data System, the Integrated Postsecondary Education Data System, Campus Crime and Security, and the Fiscal Operations Report and Application to Participate reporting; and  Preparing or disseminating required consumer information disclosures, including general, campus crime, drug and alcohol prevention, graduation rates, placement rates, and gainful employment disclosures.

January 9, 2015 Dear Colleague Letter Exceptions  Publishing, providing, and administering ability-to-benefit tests;  Financial and compliance auditing, including preparation of financial statements;  Mailing of documents prepared by the institution;  Warehousing of records; and  Providing computer services or software as long as the provider is not responsible for using the software for the institution’s student aid purposes.

January 9, 2015 Dear Colleague Letter BUT!  The exclusion for “providing computer services or software” is limited to computer products and/or services that reside at and are under the control of the institution. The exclusion does not apply if the provider performs any Title IV activity and/or maintains any student level information. Similarly, the exclusion for the “warehousing of records” is restricted to the physical storage of Title IV related records. Entities that host secure portals or similar technologies for the transmission and/or electronic storage of and access to Title IV-related documents are considered third-party servicers and must comply with all regulatory requirements.

January 9, 2015 Dear Colleague Letter Discussion of Consequences  FERPA Compliance  Audit Submissions  Required Contractual Provisions:  Refer matters to the Office of Inspector General (OIG);  Be jointly and severally liable with the institution for any violation of Title IV, HEA requirements resulting from the functions performed by the servicer;  Confirm student eligibility before disbursing Title IV funds to a student and to calculate and return any unearned Title IV funds in the case of a third-party servicer that is involved in the process of disbursing Title IV funds; and  Return to the institution all of its records and Title IV funds in the servicer’s possession if the servicer or institution terminates the contract or if the servicer files for bankruptcy.

January 9, 2015 Dear Colleague Letter In addition, third-party servicers that did not submit a required audit for one or more years must:  Submit a compliance audit no later than one fiscal year subsequent to the date of this letter; and  Submit a letter to the Department within 60 days of the date of this letter [March 10] describing the Title IV-related functions the entity performs on behalf of higher education institutions along with an explanation of the reason(s) the servicer did not submit its required compliance audits.

February 12, 2015 Electronic Announcement  Entities that meet the definition of a Third Party Servicer are required to submit a Third Party Servicer Data Form within 30 days of the date of this announcement [March 14, a Saturday] or within 30 days of receiving notification of the requirement from the Department.  In addition, third party servicers are required to update information within 10 days of the date, if:  The servicer changes its name;  The servicer changes the address or contact information for its primary location or additional location;  The servicer adds or terminates a contract with an eligible Title IV institution; or  The servicer buys, sells, or merges with another third party servicer.

Who is Affected?  Default Management Services not otherwise required  Software as Service / Hosting of Electronic Data  Compliance Professionals  Financial Institutions (cutting checks = disbursement of funds?)  Providers of Consumer Information to Students During Recruitment Process  Net Price Calculator?  Others?

What Does this Mean for those Affected?  Increased Costs  Audits  Lack of clarity on what is being audited or whether every relationship must be audited  Joint & Several Liability  Lack of clarity on what the basis for liability is  Revising all Contracts with Higher Education Institutions

Any Basis for Challenge?  Given the language in the regulation limiting the scope to functions Required by the Law, it seems an Administrative Procedures Act challenge would have merit  Can’t change regulation by sub-regulatory guidance  May be a Subject for HEA Reauthorization

What Do I Do Now?  Send in a letter March 10  Set forth what you do  Explain why you are not a third-party servicer  Explain you haven’t submitted audits because you aren’t a third- party servicer  Say you will consider filing other forms if it is determined you are a third-party servicer  Consider whether sending in the Form is the right move

Questions?

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