Can an institution fail to deliver a stock on a legal short-sale? If so, does it continue to pay interest to the stock lender?

Can an institution fail to deliver (FTD) on a legal short-sale? If so, does the institution continue to pay interest (e.g. 9% apr) to a lender on the shares it borrowed to make the short sale?

My understanding is that FTDs have to do with settlement, when buying from a broker, and 100% of what I know comes from Patrick Byrne's explanation of FTDs. Will link in comments.

I know there is an MM exemption:

35 days is wildly long.

https://www.law.cornell.edu/cfr/text/17/242.203

(b) Short Sales:

"(i) A broker or dealer that has accepted a short sale order from another registered broker or dealer that is required to comply with paragraph (b)(1) of this section, unless the broker or dealer relying on this exception contractually undertook responsibility for compliance with paragraph (b)(1) of this section;

(ii) Any sale of a security that a person is deemed to own pursuant to § 242.200, provided that the broker or dealer has been reasonably informed that the person intends to deliver such security as soon as all restrictions on delivery have been removed. If the person has not delivered such security within 35 days after the trade date, the broker-dealer that effected the sale must borrow securities or close out the short position by purchasing securities of like kind and quantity;

(iii) Short sales effected by a market maker in connection with bona-fide market making activities in the security for which this exception is claimed; and

(iv) Transactions in security futures.