SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT ("Agreement") is entered into and made effective
this 19th day of January, 2007, by and between the following:
1. Nelnet, Inc., a corporation organized and existing under the laws of the
State of Nebraska with its principal place of business in the State of
Nebraska, its predecessors, successors, assigns, partners, joint venturers,
subsidiaries, affiliates, and divisions (Nelnet). Nelnet was formerly known
as Nelnet Loan Services, Inc.; and
2. United States Department of Education (Department).
Nelnet and the Department have agreed to a settlement of a dispute arising
from Nelnet's receipt of certain Special Allowance Payments from the Department
on certain loans as described in a report entitled "Special Allowance Payments
to Nelnet for Loans Funded by Tax-Exempt Obligations" issued by the Department's
Office of Inspector General (OIG) in September of 2006 (ED-OIG/A07F0017) (OIG
Report).
I. STATEMENT OF FACTS
A. Nelnet holds loans (under an eligible lender trustee arrangement) made
under the Federal Family Education Loan Program (FFELP), which is
authorized by Title IV, Part B of the Higher Education Act of 1965, as
amended (HEA), 20 U.S.C. ss.ss.1071-1087-4, and administered by the
Department. The Department's FFELP regulations are at 34 C.F.R. Part
682.
B. As part of the FFELP, the Department pays the interest on loans made
to borrowers and pays lenders Special Allowance Payments (SAP) on
loans in accordance with the HEA and the regulations.
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C. Under the HEA, certain FFELP loans made or purchased with funds
obtained by the holder from the proceeds of certain qualifying
tax-exempt obligations issued before October 1, 1993, receive SAP
payments calculated under a specific calculation. The quarterly
special allowance payment for these loans is not less than 9.5 percent
minus the applicable interest rate the lender is authorized to charge
the borrower (or the government) under the HEA divided by four. In
this Agreement, the parties refer to this calculation as the "9.5
percent floor." The rate used to determine SAP for loans other than
those derived from tax-exempt sources described here is referred to in
this Agreement as the "taxable rate."
D. Nelnet billed the Department and received payment of the 9.5 percent
floor on certain loans through June 2006. Nelnet considers it was
authorized to do so.
E. In its September 2006 audit of Nelnet's loans, the OIG maintained that
Nelnet implemented an initiative (Project 950) to increase the amount
of loans receiving SAP under the 9.5 percent floor calculation, that
Nelnet transferred loans into and out of an eligible tax-exempt
obligation from taxable obligations and continued to bill for SAP on
the transferred loans after they were transferred, and that Nelnet
repeated this process many times. Nelnet terminated Project 950 in May
2004.
F. The OIG interpretation of the HEA and its implementing regulations
differs from that of Nelnet. The OIG maintained that most of the loans
included in Nelnet's Project 950 were ineligible for the payment of
SAP under the 9.5 percent floor calculation because they were not
first-generation or second-generation loans. OIG recommended that the
Department (1) require Nelnet to repay all SAP payments made on
ineligible Project 950 loans and (2) direct Nelnet to exclude all
Project 950 loans from its claims for payment under the 9.5 percent
floor calculation.
G. The Department concurs with the conclusion of the OIG Report that: (1)
regulations at 34 C.F.R. ss. 682.302(c)(3)(i) list five specific
funding sources that may be used to acquire
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loans that qualify to be paid SAP under the 9.5 percent floor
calculation, 34 C.F.R. ss. 682.302(c)(3)(i)(A) - (E); (2) each
provision includes a category of funds separate and distinct from
those included in any other provision; and (3) loans eligible for SAP
under the 9.5 percent floor rate include only --
i. those loans made directly from funds described in 34 C.F.R. ss.
682.302(c)(3)(i)(A) obtained from the issuance of a qualifying
tax-exempt obligation (referred to in this Agreement as
"first-generation loans") and
ii. those loans made directly from funds described in 34 C.F.R. ss.
682.302(c)(3)(i)(B) - (E), obtained as collections on, interest
benefits or special allowance payments on, or sales of
first-generation loans, or from earnings on investment of funds
obtained directly from the issuance of the qualifying tax-exempt
obligation (referred to in this Agreement as "second-generation
loans").
H. Nelnet disputes the Department's interpretation of the HEA and its
regulations as set forth in section I.G. In its "Response of Nelnet,
Inc. to Final Audit Report, Special Allowance Payments to Nelnet for
Loans Funded by Tax-Exempt Obligations (Control No.
ED-OIG/A07F0017)" filed on November 14, 2006, with the
Department's Federal Student Aid Office, Nelnet disagreed with the
construction of the HEA and its regulations set forth in section I.G
and the OIG's conclusions and recommendations in the OIG Report. In
its response, Nelnet argued, INTER ALIA, that the OIG's conclusions
and recommendation were inconsistent with the Department's payments to
Nelnet, and if adopted by the Department, would be unconstitutional
and violate contract rights and the Administrative Procedures Act.
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I. On October 6, 2006, the Department notified Nelnet that, until the
audit finding is resolved, the Department would pay Nelnet's request
for its Special Allowance Payments using the generally applicable
special allowance formulas under the HEA and not the 9.5 percent floor
calculation.
J. Nelnet has pending for payment at the Department requests for payment
based upon the 9.5 percent floor calculation for the third and fourth
quarters of calendar year 2006, which the Department has thus far paid
for the third quarter only at the taxable rate and not at the 9.5
percent floor calculation pending resolution of the OIG Report.
Nelnet's fourth quarter billing for calendar year 2006 is pending with
the Department.
K. Nelnet and the Department agree that bona fide, good faith disputes
and controversies exist between them concerning the matters described
above. By reason of such disputes and controversies, Nelnet and the
Department have further agreed to settle those claims and causes of
action arising from Nelnet's receipt of Special Allowance Payments
from the Department on certain loans, all as more fully described in
the September 2006 OIG Nelnet Report.
II. TERMS
The parties to this Agreement understand and agree as follows:
A. To avoid further costs and risks of litigation and in consideration of
the commitments made in this Agreement, the parties have entered into
this Agreement to resolve the issue of Nelnet's past receipt of SAP
payments under the 9.5 percent floor calculation on Project 950 loans
and loans other than first-generation or second-generation loans, as
well as its rights with respect to future claims for SAP at the 9.5
percent floor calculation for such loans.
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With respect to billings submitted by Nelnet to the Department for SAP
at the 9.5 percent floor calculation for loans that are not
first-generation or second-generation loans (as defined in section
I.G), the Department waives, releases, acquits, and forever discharges
Nelnet from any and all past, present or future claims, demands,
obligations, actions, causes of action, rights, damages, costs,
expenses, and compensation of any nature whatsoever, whether based in
tort, contract, or other theory of recovery, that the Department now
has or which may accrue or otherwise acquire, on account of or in any
way growing out of Nelnet's billings for and receipt of SAP prior to
the date of this agreement under the 9.5 percent floor calculation for
(1) any loan that was not a first-generation or second-generation loan
and (2) any loan that is or may be argued by the Department to be
subject to any actual or potential defect, aspect or condition
contained or referenced in the OIG Report that would render ineligible
for SAP at the 9.5 percent rate a loan that was otherwise eligible for
SAP at the 9.5 percent floor rate. Nelnet may retain all payments for
SAP at the 9.5 percent floor rate received by Nelnet prior to the date
of this Agreement on a loan that was otherwise eligible for SAP, and
for SAP at the 9.5 percent floor rate, regardless of whether such
payments were made on loans other than first- or second-generation
loans. For any outstanding or future requests for 9.5 percent floor
SAP, the determination of whether a loan is a first-generation or
second generation loan will be governed by section I.G. If there is a
dispute as to whether loans are eligible as first or second-generation
loans with respect to any currently pending or future billings, the
parties agree that the construction of the HEA and the regulations set
forth in section I.G shall apply.
B. Nelnet agrees to exclude from all future billings (and hereby
withdraws from pending but unpaid billings) for any quarter ending on
or after September 30, 2006, and from
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adjustments for under-billings for any quarter ending before September
30, 2006, any claim for SAP under the 9.5 percent floor calculation
for any loan that was not a first-generation or a second-generation
loan (as defined in section I.G). Nelnet waives, releases, acquits,
and forever discharges the Department from any and all past, present
or future claims, demands, obligations, actions, causes of action,
rights, damages, costs, expenses, and compensation of any nature
whatsoever, whether based on tort, contract, or other theory of
recovery, that Nelnet now has, or which it may hereafter accrue or
otherwise acquire, on account of or in any way growing out of Nelnet's
waiver and agreement to exclude from all billings any claim for SAP
under the 9.5 percent floor calculation for any loan that was not a
first-generation or a second-generation loan for the period on which
the Department has not paid a claim for SAP at the 9.5 percent floor
rate by Nelnet on or after October 6, 2006.
C. This Agreement resolves all issues between the parties that arise out
of or relate to the contents of the OIG Report and the Department's
review of the issues raised therein.
D. The Department will arrange for an audit or similar review of Nelnet's
loans for which SAP is claimed at the 9.5 percent floor rate after the
date of this Agreement by an independent accounting firm in order to
determine which loans are first or second-generation loans. Nelnet
agrees to fully cooperate with this audit or similar review. The
auditor shall apply the Department's construction of the regulations
as described in section I.G to the audit. The Department may rely on
the results of this audit or similar review to evaluate claims by
Nelnet for payments of SAP at the 9.5 percent floor rate. The
Department will pay any claim for SAP submitted by Nelnet at the
taxable rate until the Department has received and evaluated the
results of this audit or similar review. The Department agrees to
consider any objection Nelnet presents to the determination of
eligibility of individual loans for payment of SAP at the 9.5 percent
floor rate.
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E. For each billing for SAP at the 9.5 percent floor rate submitted by
Nelnet after the date of this Agreement, Nelnet agrees it will provide
a written certification in a form satisfactory to the Department,
separate from that certification contained on the LaRS Form 799, that
the billing does not request SAP under the 9.5 percent floor
calculation for any loan excluded from such payment by this Agreement.
The Department may request Nelnet to provide additional documentation
to support the certifications required by this Agreement and may, in
its discretion, deny a requested payment under the 9.5 percent floor
calculation and pay SAP at the taxable rate until such time that the
issues are resolved pursuant to applicable regulations and procedures.
F. Nelnet agrees, as a part of each independent annual compliance audit
required by 34 C.F.R. ss. 682.305(c), to provide an executed
management assertion as to whether Nelnet is in compliance with this
Agreement.
G. Each party to this Agreement agrees to bear all attorneys' fees,
expenses, and costs arising from the actions of its own counsel in
connection with Nelnet's actions contesting OIG's draft and final
audit reports, the negotiation and execution of this Agreement, and
the matters and documents to which this Agreement refers.
H. This Agreement does not constitute an admission of wrongdoing or
financial liability by either party.
I. This Agreement settles only those matters expressly identified in this
Agreement concerning claims for, or receipt of, SAP at the 9.5 percent
floor calculation for loans that are neither first-generation nor
second-generation loans. Neither party waives, compromises, restricts,
or settles any other matter, including compliance by Nelnet with any
Federal or State law or regulation applicable to Nelnet's
administration of the FFELP in connection with matters unrelated to
those described in this Agreement.
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J. This Agreement does not waive, compromise, restrict or settle any
future action or remedies the parties may bring or have pursuant to 34
C.F.R. Part 682, Subparts D and G for any matter not expressly covered
this Agreement. This Agreement does not waive, compromise, restrict or
settle any past, present or future actions pursuant to 34 C.F.R. Part
682, Subparts D and G that are unrelated to the matters described in
this Agreement.
K. The Department does not have the authority to, and this Agreement does
not, waive, compromise, restrict or settle any past, present, or
future violations by Nelnet, its officers, or employees of the
criminal laws of the United States or any action against Nelnet, its
officers or employees for civil fraud against the United States under
31 U.S.C. ss.ss. 3729-33.
L. The Department agrees that neither this Agreement nor the claims set
forth in the OIG Report will constitute a basis for suspension or
limitation of the ability to participate in FFELP by Nelnet.
M. Nelnet and the Department each warrant that its undersigned
representative is authorized to sign this Agreement on its behalf and
bind that party to all of the terms and provisions herein. Nelnet and
the Department each warrant that each has not sold, assigned,
transferred, conveyed or otherwise disposed of any of the claims,
demands, obligations, or payments referenced in this Agreement.
N. This Agreement constitutes the entire Agreement between the parties
with respect to the subject matter of the Agreement and supersedes all
prior oral or written agreements and understandings between counsel
for the parties, and the parties themselves, with respect to the
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matters provided for in this Agreement. Any amendment to this
Agreement must be in writing and signed by the parties to this
Agreement or their successors.
O. Each of the parties participated and cooperated in the drafting and
preparation of this Agreement. Accordingly, the parties agree that
neither this Agreement nor its terms should be construed against
either of the parties by reasons of its lack of participation in the
drafting or preparation of this Agreement.
P. In entering into this Agreement, Nelnet and the Department warrant and
represent that they have relied solely upon their own judgment and the
advice of their attorneys concerning this Agreement; that each has
read this Agreement and understands its terms and provisions; and that
the terms of this Agreement are fully understood and voluntarily
accepted by Nelnet and the Department. Nelnet and the Department each
warrant and represent that no promise, agreement, or representation,
other than those expressed herein, has been made by one party to the
other in order to induce the execution of this Agreement.
Q. Notwithstanding any provision contained in this Agreement to the
contrary, this Agreement does not change Nelnet's responsibility under
applicable regulations, including 34 C.F.R. ss. 682.413, with respect
to any actions Nelnet takes in its capacity as a loan servicer for or
on behalf of non-affiliated lenders, and this Agreement does not apply
to or limit billing for or receipt of SAP at the 9.5 percent floor
rate by Nelnet when acting in its capacity as loan servicer for or on
behalf of non-affiliated third parties.
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EXECUTED THIS 19th DAY OF JANUARY 2007.
NELNET, INC.
By: _________________________________
Name: ____________________________
Title: _____________________________
EXECUTED THIS 19th DAY OF JANUARY 2007.
U.S. DEPARTMENT OF EDUCATION
By: __________________________________
Name: ____________________________
Title: _____________________________