20 U.S.C. § 1099d — Competitive loan auction pilot program

(a) Definitions. In this section: (1) “Eligible Federal PLUS Loan” means a loan described in section 1078–2 made to a parent of a dependent student who becomes a new borrower on or after July 1, 2009. (2) “Eligible lender” has the meaning given that term in section 1085. This section does not define that quoted term. (b) Pilot program. The Secretary must run a pilot program using an auction mechanism for eligible Federal PLUS Loans under these rules: (1) Planning and implementation. From September 27, 2007, through June 30, 2009, the Secretary must plan and implement the pilot program. During that work, the Secretary must consult other Federal agencies with knowledge of and experience with auctions, including the Federal Communication Commission and the Department of the Treasury. (2) Origination and disbursement; applicability of section 1078–2. Starting July 1, 2009, the Secretary must arrange for all eligible Federal PLUS Loans to be originated and paid out under this subsection and under the parts of section 1078–2 that do not conflict with this subsection. (3) Loan origination mechanism. The Secretary must create an auction mechanism with these requirements: (A) Auction for each State. The Secretary must run an auction for each State. Eligible lenders compete to originate these loans at every institution of higher education in that State. (B) Prequalification process. The Secretary must create a prequalification process for lenders that want to bid. At minimum, it must include (i) borrower benefits and servicing requirements each lender must meet to participate, (ii) an assessment of each lender’s ability, including capital ability, to participate effectively, and (iii) the lender’s commitment to sign the agreement required by subparagraph (G) if it wins a bid. (C) Timing and origination. Each State auction occurs every two years. The lenders with winning bids are the only lenders allowed to originate these loans for the group of students at institutions in that State until the students graduate or leave those institutions. (D) Bids. Each bid is the amount of the special-allowance payment, after applying section 1087–1(b)(2)(I)(v), that the lender proposes to accept from the Secretary for these loans instead of the amount determined under section 1087–1(b)(2)(I). (E) Maximum bid. A bid may not exceed the special allowance payable on these loans calculated under section 1087–1(b)(2)(I), excluding clauses (ii), (iii), (iv), and (vi). For this calculation, section 1087–1(b)(2)(I)(i)(III) must use 1.79 percent instead of 2.34 percent. (F) Winning bids. Subject to subparagraph (E), the winning bids in each State are the two bids proposing the lowest and second-lowest special-allowance payments. (G) Agreement with Secretary; compliance. (i) Agreement. Each lender with a winning bid must sign an agreement with the Secretary. The lender must (I) originate these loans for every borrower who (aa) seeks one to let a dependent student attend an institution in the State, (bb) is eligible for one, and (cc) chooses that lender, and (II) accept from the Secretary, after applying section 1087–1(b)(2)(I)(v), the special-allowance payment proposed in the second-lowest winning bid for that State. (ii) Compliance. If a winning lender does not sign the agreement or does not follow it, the Secretary may impose one or more sanctions: (I) a penalty for each loan the lender fails to originate as required, equal to the Secretary’s additional costs, including increased special-allowance payments, of finding another lender. The Secretary may collect it by (aa) reducing payments otherwise owed by the Secretary to the lender or (bb) asking another Federal agency to reduce payments it owes the lender under section 3716 of title 31; (II) barring the lender from bidding in other auctions under this section; (III) limiting, suspending, or ending the lender’s participation in the part B loan program; and (IV) taking any other enforcement action authorized under part B. (H) Sealed bids; confidentiality. All bids must be sealed. The Secretary must keep them confidential even after announcing the winners. (I) Eligible lender of last resort. (i) If there is no winning bid, a lender of last resort chosen by the Secretary must serve the students at institutions in the State involved in the auction. (ii) Before an auction begins, lenders wanting to be lenders of last resort must apply at the time and in the manner the Secretary sets. The application must promise that the lender will meet the prequalification requirements in subparagraph (B). (iii) The Secretary must identify one lender of last resort for each State. (iv) The Secretary may not identify it until after announcing all winning bids for that State’s auction for that year. (v) The Secretary may set the special-allowance payment to be paid to that lender. The payment must remain confidential even after winning bids are announced. The Secretary must set it to create the lowest possible cost to the Federal Government, considering the lowest bid for that State and the lowest bid in a similar State, as the Secretary decides. (J) Guarantee against losses. Each loan originated under this paragraph must be insured by a guaranty agency under part B. Despite section 1078(b)(1)(G), the insurance must equal 99 percent of the loan’s unpaid principal and interest. (K) Loan fees. The Secretary may not collect the loan fee under section 1087–1(d) for a loan originated under this paragraph. (L) Consolidation. (i) A lender allowed to originate these loans for a borrower may choose to consolidate those loans into one loan. (ii) If the borrower wants to consolidate them, the borrower must notify the originating lender. (iii) The lender’s option does not apply if (I) the borrower gives the notification with proof of consolidation terms offered by another lender and (II) within 10 days after receiving it, the originating lender does not agree to match those terms or offer more favorable ones. (iv) If the borrower has a Federal Direct PLUS Loan or a loan made for a dependent student under section 1078–2 and seeks to combine it with one of these loans, the originating lender may include that additional loan only if (I), for a Federal Direct PLUS Loan, within 10 days it agrees to match the consolidation terms that would otherwise be available under part D, or (II), for a section 1078–2 loan, within 10 days it agrees to match terms offered by another lender. (v) The special-allowance payment for loans consolidated under this paragraph is the lesser of (I) the weighted average special-allowance payment on the loans, excluding any Federal Direct PLUS Loan from the calculation, or (II) the average, for each day in the quarter, of the bond-equivalent rates quoted for three-month financial commercial paper and reported by the Federal Reserve in Publication H–15 or its successor for that three-month period, plus 1.59 percent. (vi) A loan under section 1078–3 that is consolidated under this paragraph is not subject to the interest-payment rebate fee under section 1078–3(f). (c) Required initial evaluation. The Secretary and the Secretary of the Treasury must jointly evaluate the pilot program, consulting the Office of Management and Budget, the Congressional Budget Office, and the Comptroller General. The evaluation must determine— (1) the savings the pilot program creates for the Federal Government compared with what operating the section 1078–2 PLUS loan program without the pilot would have cost; (2) how many lenders participated and how much competition the pilot created; (3) the number and dollar volume of loans made in each State; (4) how the transition to and operation of the pilot affected the ability of (A) participating lenders to originate loans smoothly and efficiently, (B) participating institutions to pay out loans smoothly and efficiently, and (C) parents to obtain loans promptly and efficiently; (5) any different effects of the auction among States, including rural and non-rural States; and (6) whether the tested mechanism could be used to operate the other part B loan programs in this subchapter. (d) Reports. (1) General rule. The Secretary and the Secretary of the Treasury must send the authorizing committees (A) a preliminary report on the evaluation findings by September 1, 2010, (B) an interim report by September 1, 2012, and (C) a final report by September 1, 2013. (2) Contents. Each report must include any recommendations based on the evaluation for (A) improving the auction’s operation and administration and (B) improving the operation and administration of other part B loan programs.