[Federal Register: October 29, 1999 (Volume 64, Number 209)]
[Rules and Regulations]
[Page 58621-58641]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc99-16]
[[Page 58621]]
_______________________________________________________________________
Part V
Department of Education
_______________________________________________________________________
34 CFR Part 682
Federal Family Education Loan (FFEL) Program; Final Rules
[[Page 58622]]
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1845-AA06
Federal Family Education Loan (FFEL) Program
AGENCY: Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the Federal Family Education Loan (FFEL)
Program regulations. These final regulations implement changes made to
the Higher Education Act of 1965 by the Higher Education Amendments of
1998 (the 1998 Amendments). The regulations cover many areas of the
FFEL Program, including changes to the financial structure of guaranty
agencies.
DATES: These regulations are effective July 1, 2000.
FOR FURTHER INFORMATION CONTACT: Mr. George Harris, U.S. Department of
Education, 400 Maryland Avenue, SW., room 3045, ROB-3, Washington, DC
20202-5449. Telephone: (202) 708-8242. If you use a telecommunications
device for the deaf (TDD), you may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternate format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed in the preceding
paragraph.
SUPPLEMENTARY INFORMATION: These regulations implement changes to the
Higher Education Act of 1965 (the HEA) made by the 1998 Amendments,
Public Law 105-244, enacted October 7, 1998.
On August 3, 1999 the Secretary published a notice of proposed
rulemaking (NPRM) for this part in the Federal Register (64 FR 42176).
In the preamble to the NPRM, the Secretary discussed on pages 42177--
42185 the major changes to the regulations resulting from the 1998
Amendments.
In addition to minor technical revisions, these regulations contain
a few significant changes from the NPRM that we fully explain in the
Analysis of Comments and Changes that follows.
Analysis of Comments and Changes
The regulations in this document were developed through the use of
negotiated rulemaking. Section 492 of the Higher Education Act requires
that, before publishing any proposed regulations to implement programs
under Title IV of the Act, the Secretary obtain public involvement in
the development of the proposed regulations. After obtaining advice and
recommendations, the Secretary must conduct a negotiated rulemaking
process to develop the proposed regulations. All proposed regulations
must conform to agreements resulting from the negotiated rulemaking
process unless the Secretary reopens that process or explains any
departure from the agreements to the negotiated rulemaking
participants.
These regulations were published in proposed form on August 3, 1999
in conformance with the consensus of the negotiated rulemaking
committee. Under the committee's protocols, consensus meant that no
member of the committee dissented from the agreed-upon language. The
Secretary invited comments on the proposed regulations by September 15,
1999, and 26 parties submitted comments. An analysis of the comments
and of the changes in the proposed regulations follows. We did not
receive any substantive comments on the following sections:
Secs. 682.208, 682.215, 682.302, 682.400, 682.409, 682.410, 682.412,
682.413, 682.414, 682.417, 682.418, 682.420, 682.421, 682.422, 682.423,
682.800, and Appendix D.
We discuss substantive issues under the sections of the regulations
to which they pertain. Generally, we do not address technical and other
minor changes--and suggested changes the law does not authorize the
Secretary to make.
Section 682.205 Disclosure Requirements for Lenders
Comments: One commenter believed that lenders should not be
required to provide a toll-free telephone number accessible within the
United States for borrowers to use to obtain additional loan
information. The commenter stated that a requirement to have a toll-
free telephone number would impose significant burdens and costs on
small lenders who do not have a toll-free telephone number. The
commenter asked if, instead of having a toll-free telephone number, it
would be permissible for the lender to allow borrowers to make collect
calls to the lender.
Discussion: We agree with the commenter, but no changes to the
regulation are necessary. For the purpose of meeting this requirement,
a lender that discloses to borrowers the phone number at which it will
accept collect calls will be considered to have complied with the
regulatory requirement for a toll-free telephone number.
Changes: None.
Comments: Several commenters recommended that lenders be permitted
to meet their disclosure requirements and obligations to notify
borrowers of their rights and responsibilities by using the plain
language disclosure in Sec. 682.205(g).
Discussion: We agree that the disclosure referred to in
Sec. 682.205(g) will satisfy the lender's disclosure requirements for
subsequent loans made under a Master Promissory Note.
Changes: For subsequent loans made under a Master Promissory Note,
Sec. 682.205(a)(3) has been revised to permit a lender to use either
the Borrower's Rights and Responsibilities statement approved by the
Secretary or the plain language disclosure referred to in
Sec. 682.205(g).
Section 682.207 Due Diligence in Disbursing a Loan
Comments: Several commenters representing lenders recommended that
schools not be required to request the second or subsequent
disbursement of a loan when they return a borrower's unneeded first
disbursement to a lender and the school knows that the borrower will
need the subsequent loan disbursements. The commenters believed it is
logical to assume that the school wanted the subsequent disbursements
to be made unless it notifies the lender to the contrary. The
commenters believed that if schools had to specifically request
subsequent disbursements, that requirement would impose unnecessary and
significant burdens and costs on schools and lenders. In addition, the
commenters believed the authorization to disburse subsequent loan funds
in these situations should not be limited to the Federal Stafford Loan
Program, but should be expanded to include the Federal PLUS Loan
Program. The commenters noted that PLUS disbursements are sent to
schools, and like Stafford Loan borrowers, some PLUS borrowers also may
not need the first disbursement, but may need the loan funds later in
the school year. One commenter recommended that this provision of the
regulations should not be limited to the first disbursement, but should
apply to any disbursement returned to a lender by a school if there
were future disbursements scheduled to be made.
Discussion: We agree with the commenters who recommended an
expansion of this authority to include any disbursement of a Federal
Stafford or Federal PLUS loan. We also agree that this provision should
apply to any future disbursement following the return of a
disbursement. We do not agree, however, to authorize lenders to make
subsequent disbursements following the return of a previous
disbursement without first receiving a
[[Page 58623]]
request from the school for the subsequent disbursement. We believe it
is logical to assume that the school does not want the subsequent
disbursements to be made unless it notifies the lender to the contrary.
Changes: We have revised Sec. 682.207(b)(1)(vii) so that it
includes any future disbursement of a Federal Stafford or Federal PLUS
loan following the return of a disbursement.
Section 682.210 Deferment
Comments: One commenter who agreed with the removal of the 6-month
limit for making in-school (student) deferments effective retroactively
advocated a similar removal of the 6-month limit for other types of
deferments.
Discussion: Removing the 6-month retroactive effective date limit
for a student deferment was extensively discussed during the negotiated
rulemaking sessions. During those discussions, it was generally agreed
that the 6-month limit on establishing retroactive effective dates for
deferments did not present a serious problem for other deferments.
Aside from the student deferment, the two most common types of
deferments are economic hardship and unemployment, both of which rely
upon documentation that the borrower already has or can readily obtain.
In those cases, the borrower has the ability to ensure the submission
of the deferment application on a timely basis. In contrast, the
documentation needed to support a student deferment requires another
party (the school) to certify the borrower's in-school status. Many
borrowers in school erroneously assume that they do not need to notify
their lenders that they are in school, believing that their enrollment
status automatically has been transmitted to the lender or loan
servicer by some other party. By the time the borrower discovers that
the lender is unaware that the borrower is in school, the loan may
already be seriously delinquent, and a delay of just another month or
two in obtaining and providing in-school documentation at that late
point could result in a default claim being filed by the lender. To
address this problem, we believe that the 6-month limit on the period
of time by which a student deferment may be applied retroactively
should be removed. Unlike many other deferments, the borrower's
enrollment status and effective dates for a student deferment are
readily determinable retroactively.
Changes: None.
Section 682.211 Forbearance
Comments: Several commenters recommended that lenders be allowed to
grant administrative forbearances to eliminate borrower delinquencies
that existed at the time the lender granted an optional natural
disaster administrative forbearance under Sec. 682.211(f)(10). The
commenters noted that the NPRM proposed to allow this option only if
the borrower received a mandatory administrative forbearance under
Sec. 682.211(i)(2). The commenters believed that lenders should be
permitted to assist all borrowers who had pre-existing delinquencies
when the natural disaster occurred, regardless of whether the disaster
forbearance is mandatory or optional.
Discussion: We agree with the commenters.
Changes: We have revised Sec. 682.211(f)(2) to include the
administrative forbearances that lenders are authorized to grant under
Sec. 682.211(f)(10) to assist borrowers who have been harmed by natural
disasters.
Section 682.305 Procedures for Payment of Interest Benefits and
Special Allowance and Collection of Origination and Loan Fees
Comments: Some commenters believed that the restrictions in
Sec. 682.305(a)(4) have been rendered obsolete due to the changes made
to Sec. 682.305(a)(3). The commenters believed that the 1998
Amendments, and the changes made to Sec. 682.305(a)(3), make it clear
that the new holder of a loan will be responsible if the origination
fees were not paid by the previous holder or holders.
Discussion: The commenters appear to have misunderstood the purpose
of these changes. The changes to Sec. 682.305(a)(3) do not eliminate
the originating lender's liability to pay the fees owed on the loans.
That liability still exists. The changes simply add another party who
is liable for paying the fees and who may be required to pay them if
the originating lender does not pay them on a timely basis.
Changes: None.
Section 682.401 Basic Program Agreement
Comments: One commenter recommended that a guaranty agency be
permitted to receive Federal funds to operate as a lender-of-last-
resort in another guaranty agency's designated area of service only if
the designated guaranty agency has waived its right to provide lender-
of-last-resort loans in its designated area, or was unable to provide
those loans.
Discussion: The commenter's recommendation suggests a
misunderstanding of a guaranty agency's statutory obligation. A
guaranty agency has a statutory obligation to provide for lender-of-
last-resort loans. This obligation is not a ``right'' that the guaranty
agency can waive. If it is able to provide for lender-of-last-resort
loans in its designated State, it must do so. If necessary, the
Secretary may provide Federal funds in accordance with
Sec. 682.401(c)(5)(i) to assist the agency in providing those loans.
The Secretary may provide Federal funds to another guaranty agency, to
make lender-of-last-resort loans in the State, if the Secretary
determines that the designated guaranty agency does not have the
capacity to do so or the Secretary determines that providing the
designated guaranty agency with Federal funds would not be cost
effective.
Changes: None.
Section 682.402 Death, Disability, Closed School, False Certification,
and Bankruptcy Payments
Comments: Some commenters stated their belief that the provisions
of bankruptcy law require the immediate suspension of collection
activities against all parties to a loan (borrower, co-maker, endorser)
whenever any one of those parties files for a Chapter 12 or Chapter 13
bankruptcy. The commenters recommended that the regulations be revised
accordingly.
Discussion: We agree with the commenters' interpretation of 11
U.S.C. 1201(a) and 1301(a).
Changes: The regulations have been revised to require the immediate
suspension of collection activities against all parties to a loan
(maker, co-maker, endorser) if the lender is informed that any of those
individuals has filed for Chapter 12 or Chapter 13 bankruptcy. For a
bankruptcy petition filed by a borrower, co-maker, or endorser on a
loan under Chapters 7 or 11, lenders may suspend collection activities
against all parties to the loan.
Section 682.404 Federal Reinsurance Agreement
Comments: Several commenters recommended that guaranty agencies be
permitted to establish specific deadlines within the 60th to 120th day
of delinquency during which lenders must submit requests for default
aversion assistance. The commenters stated that many guaranty agencies
have successful default prevention systems designed to initiate default
prevention activities at a specific point in delinquency, e.g., on the
75th day. The commenters believed
[[Page 58624]]
that allowing lenders to submit default aversion assistance requests at
any time from the 60th day through the 120th day of the borrower's
delinquency would complicate the effective default prevention systems
that guaranty agencies currently have in place.
Discussion: The lender has primary responsibility for curing
delinquencies by borrowers. We believe lenders should have flexibility
within the 60th-120th day of delinquency to determine when to seek
assistance from the guaranty agency. Many guaranty agencies have
informed us that having more than one party contacting a delinquent
borrower may confuse the borrower and contribute to default. We have
also been told that many delinquencies cure themselves during the early
stages of delinquency. We believe a lender should be given the
discretion to request assistance from a guaranty agency within the
60th-120th day of delinquency at the point that the lender believes the
assistance will be most effective in complimenting the default aversion
activities being pursued by the lender. If a lender believes that the
guaranty agency can add value to its efforts early in the delinquency,
it may request assistance as early as the 60th day of delinquency.
Changes: Section 682.404(k)(1) has been revised to clarify that
guaranty agencies are prohibited from establishing specific deadlines
within the 60th-120th day of delinquency by which lenders must request
default aversion assistance.
Section 682.406 Conditions For Claim Payments From the Federal Fund
and for Reinsurance Coverage
Comments: One commenter noted an inconsistency between the skip-
tracing requirements in this section and in Sec. 682.411(h)(1) with
respect to contacting the schools the student attended.
Discussion: We agree with the commenter that the requirement to
contact the schools the student attended should be the same in
Sec. 682.406(a)(14) and Sec. 682.411(h)(1).
Changes: We have revised Sec. 682.411(h)(1) to make it consistent
with the guaranty agency's certification in Sec. 682.406(a)(14) that
diligent attempts were made to locate the borrower, including attempts
to contact the schools the student attended.
Section 682.411 Lender Due Diligence in Collecting Guaranty Agency
Loans
Comments: Some commenters noted an error in Sec. 682.411(a) that
had the effect of excluding the first 15 days of delinquency from the
270-day period of required lender collection activities.
Discussion: The commenters are correct. The intention of the
negotiators during the development of the NPRM was to apply the
existing 45-day gap rule to the new 270-day delinquency period by
simply extending the period covered by the rule to 270 days of
delinquency.
Changes: We have revised Sec. 682.411(a) so that the initial
delinquency period (days 1-15) is included in the overall 270-day
period of required lender collection activities. We have also made a
conforming change in Sec. 682.411(b)(2) so that the initial delinquency
period is included in the determination of whether a gap of more than
45 days (or more than 60 days in the case of a transfer) in collection
activity had occurred. The definition of ``gap in collection activity''
found in Sec. 682.411(j) remains accurate and needs no modification.
Section 682.419 Guaranty Agency Federal Fund
Comments: A few commenters stated that they believe that a guaranty
agency should be permitted to deposit default collections into the
agency's Operating Fund for a reasonable period before transferring the
Federal share of those collections to the Federal Fund. The commenters
believed this would give the agency time to ensure that the borrower's
payment does not need to be reversed because of insufficient funds or a
stop payment order and that the collected funds are correctly posted to
the borrower's account. One commenter stated that a reasonable delay in
transferring funds to the Federal Fund would conform to sound
accounting practices that recommend a clean cutoff period for
reconciliation purposes.
Discussion: The Federal Government has a beneficial interest in
loans that are held by guaranty agencies and on which claims have been
paid using Federal funds. The guaranty agency's role in regard to these
loans is that of a trustee. Accordingly, a guaranty agency that
receives collections on those loans has a fiduciary obligation to the
Secretary with respect to the Secretary's share of those collections.
As a fiduciary, a guaranty agency may not use Federal funds or assets
for any purpose not authorized by the HEA or the Secretary. To ensure
that the Secretary's interest in those loans is protected, we have
revised the regulations to require guaranty agencies to deposit the
Federal share of collections into the Federal Fund within 48 hours of
receipt of those funds. A guaranty agency may elect to comply with this
requirement by initially depositing all collections into the Federal
Fund. If this option is selected by the guaranty agency, we will
provide the guaranty agency with authorization to promptly withdraw its
portion from the Federal Fund for deposit into its Operating Fund.
We believe that the requirements in these regulations are
consistent with sound accounting practices as well as the guaranty
agency's obligation to act as a fiduciary. We understand that the
common business practices among lenders and servicers who collect on
loans is to credit the amount of collections received to the
appropriate accounts within 24 hours. In fact, the Department's own
collection contractors for student loans are not permitted to hold
funds for any period before depositing them directly to the appropriate
Department account. We have been assured by some guaranty agencies,
that they already meet the 24-hour standard. In light of these
practices and standards, we believe the 48-hour period provided in
these regulations will provide guaranty agencies with more than enough
time to insure that the proper amount is deposited to the Federal Fund.
A guaranty agency can, if necessary, reverse a credit applied to
the Federal Fund if a borrower's payment is rejected because of
insufficient funds or a stop payment order. We do not believe that it
will be any more difficult for a guaranty agency to make the needed
changes to the Federal Fund than it would have been to the Operating
Fund and, in the meantime, the Federal Government's interest in the
funds is protected.
Changes: We have revised Sec. 682.419(b)(6) of the regulations to
require a guaranty agency to deposit the Federal share of all funds
received on loans on which a claim has been paid, including default
collections, into its Federal Fund within 48 hours of receipt of those
funds.
Section 682.420 Federal Nonliquid Assets
Comments: Some commenters asked for clarification of the treatment
of revenue derived from a Federal nonliquid asset.
Discussion: In reviewing the language referenced by the commenters,
we determined that the proposed regulations did not fully reflect the
details discussed in the preamble to the NPRM. This inconsistency may
have contributed to the commenters' request for clarification.
Changes: We have revised the regulations to specify the
requirements
[[Page 58625]]
that apply when a guaranty agency uses the Federal portion of a
nonliquid asset.
Paperwork Reduction Act of 1995
The Paperwork Reduction Act of 1995 does not require you to respond
to a collection of information unless it displays a valid OMB control
number. We display the valid OMB control numbers assigned to the
collections of information in these final regulations at the end of the
affected sections of the regulations.
Executive Order 12866
We have reviewed these final regulations in accordance with
Executive Order 12866. Under the terms of the order we have assessed
the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those we have determined to
be necessary for administering this program effectively and
efficiently.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these final regulations, we have determined that
the benefits of the regulations justify the costs.
We have also determined that this regulatory action does not unduly
interfere with State, local, and tribal governments in the exercise of
their governmental functions.
Summary of Potential Costs and Benefits
We summarized the potential costs and benefits of these final
regulations in the preamble to the NPRM under the following headings:
Payment of Special Allowance on FFEL Loans (page 42185) and Federal
Reinsurance Agreement (page 42186).
Assessment of Educational Impact
In the NPRM, we requested comments on whether the proposed
regulations would require transmission of information that any other
agency or authority of the United States gathers or makes available.
Based on the response to the NPRM and our own review, we have
determined that these final regulations do not require transmission of
information any other agency or authority of the United States gathers
or makes available.
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Note: The official version of this document is the document
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(Catalog of Federal Domestic Assistance Number 84.032 Federal Family
Education Loan Program)
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan programs--education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
Dated: October 22, 1999.
Richard W. Riley,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary amends
Part 682 of Title 34 of the Code of Federal Regulations as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
1. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. Section 682.205 is amended by:
A. Revising paragraphs (a)(1) and (a)(2)(i).
B. Redesignating paragraphs (a)(2)(ii) through (a)(2)(xvii) as
paragraphs (a)(2)(v) through (a)(2)(xx), respectively.
C. Adding new paragraphs (a)(2)(ii) through (a)(2)(iv).
D. Adding a new paragraph (a)(3).
E. Revising paragraphs (b), (c)(1), (c)(2)(i), (d), and (e).
F. Adding new paragraphs (f), (g), and (h).
Sec. 682.205 Disclosure requirements for lenders.
(a) * * *
(1) A lender must disclose the information described in paragraph
(a)(2) of this section to a borrower, in simple and understandable
terms, before or at the time of the first disbursement on a Federal
Stafford or Federal PLUS loan. The information given to the borrower
must prominently and clearly display, in bold type, a clear and concise
statement that the borrower is receiving a loan that must be repaid.
(2) * * *
(i) The lender's name;
(ii) A toll-free telephone number accessible from within the United
States that the borrower can use to obtain additional loan information;
(iii) The address to which correspondence with the lender and
payments should be sent;
(iv) Notice that the lender may sell or transfer the loan to
another party and, if it does, that the address and identity of the
party to which correspondence and payments should be sent may change;
* * * * *
(3) With the exception of paragraphs (a)(2)(i) through (a)(2)(iii),
(a)(2)(v) through (a)(2)(vii), and (a)(2)(xx) of this section, a
lender's disclosure requirements are met if it provides the borrower
with either--
(i) The borrower's rights and responsibilities statement approved
by the Secretary under paragraph (b) of this section; or
(ii) The plain language disclosure approved by the Secretary under
paragraph (g) of this section for subsequent loans made under a Master
Promissory Note.
(b) Separate statement of borrower rights and responsibilities. In
addition to the disclosures required by paragraph (a) of this section,
the lender must provide the borrower with a separate written statement,
using simple and understandable terms, at or prior to the time of the
first disbursement, that summarizes the rights and responsibilities of
the borrower with respect to the loan. The statement must also warn the
borrower about the consequences described in paragraph (a)(2)(xvi) of
this section if the borrower defaults on the loan. The Borrower's
Rights and Responsibilities statement approved by the Secretary
satisfies this requirement.
(c) * * *
(1) The lender must disclose the information described in paragraph
(c)(2) of this section, in simple and understandable terms, in a
statement provided to the borrower at or prior to the beginning of the
repayment period. In the case of a Federal Stafford or Federal SLS
loan, the disclosures required by this paragraph must be made not less
than 30 days nor more than 240 days before the first payment
[[Page 58626]]
on the loan is due from the borrower. If the borrower enters the
repayment period without the lender's knowledge, the lender must
provide the required disclosures to the borrower immediately upon
discovering that the borrower has entered the repayment period.
(2) * * *
(i) The lender's name, a toll-free telephone number accessible from
within the United States that the borrower can use to obtain additional
loan information, and the address to which correspondence with the
lender and payments should be sent;
* * * * *
(d) Exception to disclosure requirement. In the case of a Federal
PLUS loan, the lender is not required to provide the information in
paragraph (c)(2)(viii) of this section if the lender, instead of that
disclosure, provides the borrower with sample projections of the
monthly repayment amounts assuming different levels of borrowing and
interest accruals resulting from capitalization of interest while the
student is in school. Sample projections must disclose the cost to the
borrower of principal and interest, interest only, and capitalized
interest. The lender may rely on the PLUS promissory note and
associated materials approved by the Secretary for purposes of
complying with this section.
(e) Borrower may not be charged for disclosures. The lender must
provide the information required by this section at no cost to the
borrower.
(f) Method of disclosure. Any disclosure of information by a lender
under this section may be through written or electronic means.
(g) Plain language disclosure. The plain language disclosure text,
as approved by the Secretary, must be provided to a borrower in
conjunction with subsequent loans taken under a previously signed
Master Promissory Note. The requirements of paragraphs (a) and (b) of
this section are satisfied for subsequent loans if the borrower is sent
the plain language disclosure text and an initial disclosure containing
the information required by paragraphs (a)(2)(i) through (iii),
(a)(2)(v), (a)(2)(vi), (a)(2)(vii), and (a)(2)(xx) of this section.
(h) Notice of availability of income-sensitive repayment option.
(1) At the time of offering a borrower a loan and at the time of
offering a borrower repayment options, the lender must provide the
borrower with a notice that informs the borrower of the availability of
income-sensitive repayment. This information may be provided in a
separate notice or as part of the other disclosures required by this
section. The notice must inform the borrower--
(i) That the borrower is eligible for income-sensitive repayment,
including through loan consolidation;
(ii) Of the procedures by which the borrower can elect income-
sensitive repayment; and
(iii) Of where and how the borrower may obtain more information
concerning income-sensitive repayment.
(2) The promissory note and associated materials approved by the
Secretary satisfy the loan origination notice requirements provided for
in paragraph (h)(1) of this section.
* * * * *
3. Section 682.207 is amended by revising paragraph (b)(1)(vi) and
adding a new paragraph (b)(1)(vii) to read as follows:
Sec. 682.207 Due diligence in disbursing a loan.
* * * * *
(b) * * *
(1) * * *
(vi) Except as provided in paragraph (f)(1) of this section, may
not disburse a second or subsequent disbursement of a Federal Stafford
loan to a student who has ceased to be enrolled; and
(vii) May disburse a second or subsequent disbursement of an FFEL
loan, at the request of the school, even if the borrower or the school
returned the prior disbursement, unless the lender has information that
the student is no longer enrolled.
* * * * *
4. Section 682.208 is amended by adding a new paragraph (c)(3) to
read as follows:
Sec. 682.208 Due diligence in servicing a loan.
* * * * *
(c) * * *
(3)(i) If the borrower disputes the terms of the loan in writing
and the lender does not resolve the dispute, the lender's response must
provide the borrower with an appropriate contact at the guaranty agency
for the resolution of the dispute.
(ii) If the guaranty agency does not resolve the dispute, the
agency's response must provide the borrower with information on the
availability of the Student Loan Ombudsman's office.
* * * * *
5. Section 682.210 is amended by revising paragraph (a)(5) to read
as follows:
Sec. 682.210 Deferment.
(a) * * *
(5) An authorized deferment period begins on the date the condition
entitling the borrower to the deferment first exists; however, except
for the deferments described in paragraphs (b)(1)(i), (b)(4), (c), and
(s)(2) of this section, a deferment cannot begin more than six months
before the date the lender receives a request and documentation
required for the deferment.
* * * * *
6. Section 682.211 is amended by revising paragraph (f)(2), and
adding a new paragraph (f)(10) to read as follows:
Sec. 682.211 Forbearance.
* * * * *
(f) * * *
(2) Upon the beginning of an authorized deferment period under
Sec. 682.210, or an administrative forbearance period as specified
under paragraph (f)(10) or (i)(2) of this section;
* * * * *
(10) For a period not to exceed 3 months for a borrower who is
affected by a natural disaster.
* * * * *
Sec. 682.215 [Removed]
7. Section 682.215 is removed.
8. Section 682.302 is amended by:
A. Revising paragraph (b)(1) and the introductory text of paragraph
(b)(2).
B. In paragraph (b)(2)(ii), removing the word ``or'' that appears
after the semi-colon.
C. In paragraph (b)(2)(iii), removing the period and adding, in its
place, ``; or''.
D. Adding a new paragraph (b)(2)(iv).
E. Redesignating paragraphs (c)(1)(iii)(A) through (E) as
paragraphs (c)(1)(iii)(C) through (G), respectively.
F. Revising redesignated paragraph (c)(1)(iii)(C).
G. Adding new paragraphs (c)(1)(iii)(A) and (B).
H. Revising paragraph (c)(3)(i)(A).
I. Adding a new paragraph (c)(4).
Sec. 682.302 Payment of special allowance on FFEL loans.
* * * * *
(b) * * *
(1) Except for non-subsidized Federal Stafford loans disbursed on
or after October 1, 1981, for periods of enrollment beginning prior to
October 1, 1992, or as provided in paragraphs (b)(2) through (b)(4), or
(e) of this section, FFEL loans that otherwise meet program
requirements are eligible for special allowance payments.
(2) For a loan made under the Federal SLS or Federal PLUS Program
on or after July 1, 1987 and prior to July 1, 1994, and for any Federal
PLUS loan made on or after July 1, 1998 or under Sec. 682.209(e) or
(f), no special allowance
[[Page 58627]]
is paid for any period for which the interest rate calculated prior to
applying the interest rate maximum for that loan does not exceed--
* * * * *
(iv) 9 percent in the case of a Federal PLUS loan made on or after
October 1, 1998.
(c) * * *
(1) * * *
(iii) * * *
(A)(1) 2.8 percent to the resulting percentage for a Federal
Stafford loan for which the first disbursement is made on or after July
1, 1998; or
(2) 2.2 percent to the resulting percentage for a Federal Stafford
loan for which the first disbursement is made on or after July 1, 1998
during the borrower's in-school, grace, and authorized period of
deferment;
(B) 2.5 percent to the resulting percentage for a Federal Stafford
loan for which the first disbursement is made on or after July 1, 1995
for interest that accrues during the borrower's in-school, grace, and
authorized period of deferment;
(C) Except as provided in paragraph (c)(1)(iii)(B) of this section,
3.1 percent to the resulting percentage for a Federal Stafford Loan
made on or after October 1, 1992 and prior to July 1, 1998, and for any
Federal SLS, Federal PLUS, or Federal Consolidation Loan made on or
after October 1, 1992;
* * * * *
(3)(i) * * *
(A) The proceeds of tax-exempt obligations originally issued prior
to October 1, 1993, the income from which is exempt from taxation under
the Internal Revenue Code of 1986 (26 U.S.C.);
* * * * *
(4) Loans made or purchased with funds obtained by the holder from
the issuance of obligations originally issued on or after October 1,
1993, and loans made with funds derived from default reimbursement
collections, interest, or other income related to eligible loans made
or purchased with those tax-exempt funds, do not qualify for the
minimum special allowance rate specified in paragraph (c)(3)(iii) of
this section, and are not subject to the 50 percent limitation on the
maximum rate otherwise applicable to loans made with tax-exempt funds.
* * * * *
9. Section 682.305 is amended to read as follows by:
A. Revising the heading and paragraph (a)(1).
B. Adding new paragraphs (a)(3)(iii) through (v).
C. Revising paragraph (c)(1).
D. Revising the Office of Management and Budget control number.
Sec. 682.305 Procedures for payment of interest benefits and special
allowance and collection of origination and loan fees.
(a) * * *
(1) If a lender owes origination fees or loan fees under paragraph
(a) of this section, it must submit quarterly reports to the Secretary
on a form provided or prescribed by the Secretary, even if the lender
is not owed, or does not wish to receive, interest benefits or special
allowance from the Secretary.
* * * * *
(3) * * *
(iii) The Secretary collects from an originating lender the amount
of origination fees the originating lender was authorized to collect
from borrowers during the quarter whether or not the originating lender
actually collected those fees. The Secretary also collects the fees the
originating lender is required to pay under paragraph (a)(3)(ii) of
this section. Generally, the Secretary collects the fees from the
originating lender by offsetting the amount of interest benefits and
special allowance payable to the originating lender in a quarter, and,
if necessary, the amount of interest benefits and special allowance
payable in subsequent quarters may be offset until the total amount of
fees has been recovered.
(iv) If the full amount of the fees cannot be collected within two
quarters by reducing interest and special allowance payable to the
originating lender, the Secretary may collect the unpaid amount
directly from the originating lender.
(v) If the full amount of the fees cannot be collected within two
quarters from the originating lender in accordance with paragraphs
(a)(3)(iii) and (iv) of this section and if the originating lender has
transferred the loan to a subsequent holder, the Secretary may,
following written notice, collect the unpaid amount from the holder by
using the same steps described in paragraphs (a)(3)(iii) and (iv) of
this section, with the term ``holder'' substituting for the term
``originating lender''.
* * * * *
(c) * * *
(1) If a lender originates or holds more than $5 million in FFEL
loans during its fiscal year, it must submit an independent annual
compliance audit for that year, conducted by a qualified independent
organization or person. The Secretary may, following written notice,
suspend the payment of interest benefits and special allowance to a
lender that does not submit its audit within the time period prescribed
in paragraph (c)(2) of this section.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0020)
* * * * *
Sec. 682.400 [Amended]
10. Section 682.400 is amended by:
A. In paragraph (b)(1)(i), adding the word ``and'' after the semi-
colon.
B. In paragraph (b)(1)(ii), removing ``; and'' and adding, in its
place, a period.
C. Removing paragraph (b)(1)(iii).
11. Section 682.401 is amended by:
A. Revising paragraph (b)(11).
B. In the introductory text of paragraph (b)(23)(i), removing the
words ``as defined in Sec. 682.800(d)''.
C. Adding a heading to paragraph (c).
D. Revising paragraphs (c)(1), (c)(2), and (c)(3).
E. Adding a new paragraph (c)(5).
F. Revising paragraphs (e)(1) and (e)(3).
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(11) Inquiries. The agency must be able to receive and respond to
written, electronic, and telephone inquiries.
* * * * *
(c) Lender-of-last-resort. (1) The guaranty agency must ensure that
it, or an eligible lender described in section 435(d)(1)(D) of the Act,
serves as a lender-of-last-resort in the State in which the guaranty
agency is the designated guaranty agency. The guaranty agency or an
eligible lender described in section 435(d)(1)(D) of the Act may
arrange for a loan required to be made under paragraph (c)(2) of this
section to be made by another eligible lender. As used in this
paragraph, the term ``designated guaranty agency'' means the guaranty
agency in the State for which the Secretary has signed a Basic Program
Agreement under this section.
(2) The lender-of-last-resort must make subsidized Federal Stafford
loans and unsubsidized Federal Stafford loans to any eligible student
who--
(i) Qualifies for interest benefits pursuant to Sec. 682.301;
(ii) Qualifies for a combined loan amount of at least $200; and
(iii) Has been otherwise unable to obtain loans from another
eligible lender for the same period of enrollment.
(3) The lender-of-last resort may make unsubsidized Federal
Stafford and Federal PLUS loans to borrowers who have been otherwise
unable to obtain those loans from another eligible lender.
* * * * *
[[Page 58628]]
(5)(i) Upon request of the guaranty agency, the Secretary may
advance Federal funds to the agency, on terms and conditions agreed to
by the Secretary and the agency, to ensure the availability of loan
capital for subsidized and unsubsidized Federal Stafford and Federal
PLUS loans to borrowers who are otherwise unable to obtain those loans
if the Secretary determines that--
(A) Eligible borrowers in a State who qualify for subsidized
Federal Stafford loans are seeking and are unable to obtain subsidized
Federal Stafford loans;
(B) The guaranty agency designated for that State has the
capability for providing lender-of-last-resort loans in a timely
manner, either directly or indirectly using a third party, in
accordance with the guaranty agency's obligations under the Act, but
cannot do so without advances provided by the Secretary; and
(C) It would be cost-effective to advance Federal funds to the
agency.
(ii) If the Secretary determines that the designated guaranty
agency does not have the capability to provide lender-of-last-resort
loans, in accordance with paragraph (c)(5)(i) of this section, the
Secretary may provide Federal funds to another guaranty agency, under
terms and conditions agreed to by the Secretary and the agency, to make
lender-of-last-resort loans in that State.
* * * * *
(e) * * *
(1) Offer directly or indirectly any premium, payment, or other
inducement to an employee or student of a school, or an entity or
individual affiliated with a school, to secure applicants for FFEL
loans, except that a guaranty agency is not prohibited from providing
assistance to schools comparable to the kinds of assistance provided by
the Secretary to schools under, or in furtherance of, the Federal
Direct Loan Program;
* * * * *
(3) Mail or otherwise distribute unsolicited loan applications to
students enrolled in a secondary school or a postsecondary institution,
or to parents of those students, unless the potential borrower has
previously received loans insured by the guaranty agency;
* * * * *
12. Section 682.402 is amended to read as follows by:
A. Revising the heading.
B. Revising the introductory text following the heading of
paragraph (d)(3).
C. Adding a new paragraph (d)(8).
D. Revising paragraph (f)(2).
E. Revising the Office of Management and Budget control number.
Sec. 682.402 Death, disability, closed school, false certification,
unpaid refunds, and bankruptcy payments.
* * * * *
(d) * * *
(3) * * * Except as provided in paragraph (d)(8) of this section,
in order to qualify for a discharge of a loan under paragraph (d) of
this section, a borrower must submit a written request and sworn
statement to the holder of the loan. The statement need not be
notarized, but must be made by the borrower under the penalty of
perjury, and, in the statement, the borrower must state--
* * * * *
(8) Discharge without an application. A borrower's obligation to
repay an FFEL Program loan may be discharged without an application
from the borrower if the--
(i) Borrower received a discharge on a loan pursuant to 34 CFR
674.33(g) under the Federal Perkins Loan Program, or 34 CFR 685.213
under the William D. Ford Federal Direct Loan Program; or
(ii) The Secretary or the guaranty agency, with the Secretary's
permission, determines that the borrower qualifies for a discharge
based on information in the Secretary or guaranty agency's possession.
* * * * *
(f) * * *
(2) Suspension of collection activity. (i) If the lender is
notified that a borrower has filed a petition for relief in bankruptcy,
the lender must immediately suspend any collection efforts outside the
bankruptcy proceeding against the borrower and--
(A) Must suspend any collection efforts against any co-maker or
endorser if the borrower has filed for relief under Chapters 12 or 13
of the Bankruptcy Code; or
(B) May suspend any collection efforts against any co-maker or
endorser if the borrower has filed for relief under Chapters 7 or 11 of
the Bankruptcy Code.
(ii) If the lender is notified that a co-maker or endorser has
filed a petition for relief in bankruptcy, the lender must immediately
suspend any collection efforts outside the bankruptcy proceeding
against the co-maker or endorser and--
(A) Must suspend collection efforts against the borrower and any
other parties to the note if the co-maker or endorser has filed for
relief under Chapters 12 or 13 of the Bankruptcy Code; or
(B) May suspend any collection efforts against the borrower and any
other parties to the note if the co-maker or endorser has filed for
relief under Chapters 7 or 11 of the Bankruptcy Code.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0020)
* * * * *
13. Section 682.404 is amended to read as follows by:
A. Revising the introductory text of paragraph (a)(1).
B. Redesignating paragraph (a)(1)(ii) as (a)(1)(iii).
C. Revising paragraph (a)(1)(i), adding a new paragraph (a)(1)(ii),
and revising redesignated paragraph (a)(1)(iii) introductory text, and
paragraph (a)(1)(iii)(A).
D. Removing paragraphs (a)(2)(iii) and (a)(3), and revising
paragraph (a)(2)(ii).
E. Redesignating paragraphs (a)(4) and (a)(5) as paragraphs (a)(3)
and (a)(4), respectively.
F. Revising the redesignated paragraph (a)(4).
G. Revising the heading for paragraph (b), and removing the word
``or'' at the end of paragraph (b)(1)(i).
H. Revising paragraphs (b)(1)(i) and (b)(1)(ii).
I. Adding a new paragraph (b)(1)(iii).
J. Removing the word ``or'' after the semi-colon in paragraph
(b)(2)(i).
K. Revising paragraphs (b)(2)(i) and (b)(2)(ii).
L. Adding a new paragraph (b)(2)(iii).
M. Revising the heading for paragraph (g).
N. Revising paragraphs (g)(1) and (g)(2), and removing paragraph
(g)(3).
O. Redesignating paragraph (i) as paragraph (l).
P. Adding new paragraphs (i), (j), and (k).
Q. Revising the Office of Management and Budget control number.
Sec. 682.404 Federal reinsurance agreement.
(a) * * *
(1) The Secretary may enter into a reinsurance agreement with a
guaranty agency that has a basic program agreement. Except as provided
in paragraph (b) of this section, under a reinsurance agreement, the
Secretary reimburses the guaranty agency for--
(i) 95 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998;
(ii) 98 percent of its losses on default claim payments to lenders
for loans for which the first disbursement is made on or after October
1, 1993, and before October 1, 1998; or
[[Page 58629]]
(iii) 100 percent of its losses on default claim payments to
lenders--
(A) For loans for which the first disbursement is made prior to
October 1, 1993;
* * * * *
(2) * * *
(ii) Default aversion assistance means the activities of a guaranty
agency that are designed to prevent a default by a borrower who is at
least 60 days delinquent and that are directly related to providing
collection assistance to the lender.
* * * * *
(4) If a lender has requested default aversion assistance as
described in paragraph (a)(2)(ii) of this section, the agency must,
upon request of the school at which the borrower received the loan,
notify the school of the lender's request. The guaranty agency may not
charge the school or the school's agent for providing this notification
and must accept a blanket request from the school to be notified
whenever any of the school's current or former students are the subject
of a default aversion assistance request. The agency must notify
schools annually of the option to make this blanket request.
(b) Reduction in reinsurance rate. (1) * * *
(i) 90 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made before October 1,
1993 or transferred under a plan approved by the Secretary from an
insolvent guaranty agency or a guaranty agency that withdraws its
participation in the FFEL Program;
(ii) 88 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1993, and before October 1, 1998; or
(iii) 85 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998.
(2) * * *
(i) 80 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made before October 1,
1993 or transferred under a plan approved by the Secretary from an
insolvent guaranty agency or a guaranty agency that withdraws its
participation in the FFEL Program;
(ii) 78 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1993, and before October 1, 1998; or
(iii) 75 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998.
* * * * *
(g) Share of borrower payments returned to the Secretary. (1) After
an agency pays a default claim to a holder using assets of the Federal
Fund, the agency must pay to the Secretary the portion of payments
received on those defaulted loans remaining after--
(i) The agency deposits into the Federal Fund the amount of those
payments equal to the applicable complement of the reinsurance
percentage that was in effect at the time the claim was paid; and
(ii) The agency has deducted an amount equal to--
(A) 30 percent of borrower payments received before October 1,
1993;
(B) 27 percent of borrower payments received on or after October 1,
1993, and before October 1, 1998;
(C) 24 percent of borrower payments received on or after October 1,
1998, and before October 1, 2003; and
(D) 23 percent of borrower payments received on or after October 1,
2003.
(2) Unless the Secretary approves otherwise, the guaranty agency
must pay to the Secretary the Secretary's share of borrower payments
within 45 days of its receipt of the payments.
* * * * *
(i) Account maintenance fee. A guaranty agency is paid an account
maintenance fee based on the original principal amount of outstanding
FFEL Program loans insured by the agency. For fiscal years 1999 and
2000, the fee is 0.12 percent of the original principal amount of
outstanding loans. After fiscal year 2000, the fee is 0.10 percent of
the original principal amount of outstanding loans.
(j) Loan processing and issuance fee. A guaranty agency is paid a
loan processing and issuance fee based on the principal amount of FFEL
Program loans originated during a fiscal year that are insured by the
agency. The fee is paid quarterly. No payment is made for loans for
which the disbursement checks have not been cashed or for which
electronic funds transfers have not been completed. For fiscal years
1999 through 2003, the fee is 0.65 percent of the principal amount of
loans originated. Beginning October 1, 2003, the fee is 0.40 percent.
(k) Default aversion fee.--(1) General. If a guaranty agency
performs default aversion activities on a delinquent loan in response
to a lender's request for default aversion assistance on that loan, the
agency receives a default aversion fee. The fee may not be paid more
than once on any loan. The lender's request for assistance must be
submitted to the guaranty agency no earlier than the 60th day and no
later than the 120th day of the borrower's delinquency. A guaranty
agency may not restrict a lender's choice of the date during this
period on which the lender submits a request for default aversion
assistance.
(2) Amount of fees transferred. No more frequently than monthly, a
guaranty agency may transfer default aversion fees from the Federal
Fund to its Operating Fund. The amount of the fees that may be
transferred is equal to--
(i) One percent of the unpaid principal and accrued interest owed
on loans that were submitted by lenders to the agency for default
aversion assistance; minus
(ii) One percent of the unpaid principal and accrued interest owed
by borrowers on default claims that--
(A) Were paid by the agency for the same time period for which the
agency transferred default aversion fees from its Federal Fund; and
(B) For which default aversion fees have been received by the
agency.
(3) Calculation of fee. (i) For purposes of calculating the one
percent default aversion fee described in paragraph (k)(2)(i) of this
section, the agency must use the total unpaid principal and accrued
interest owed by the borrower as of the date the default aversion
assistance request is submitted by the lender.
(ii) For purposes of paragraph (k)(2)(ii) of this section, the
agency must use the total unpaid principal and accrued interest owed by
the borrower as of the date the agency paid the default claim.
(4) Prohibition against conflicts. If a guaranty agency contracts
with an outside entity to perform any default aversion activities, that
outside entity may not--
(i) Hold or service the loan; or
(ii) Perform collection activities on the loan in the event of
default within 3 years of the claim payment date.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0020)
* * * * *
14. Section 682.406 is amended by revising the heading, the
introductory text of paragraph (a), and paragraph (a)(14) to read as
follows:
Sec. 682.406 Conditions for claim payments from the Federal Fund and
for reinsurance coverage.
(a) A guaranty agency may make a claim payment from the Federal
Fund and receive a reinsurance payment on a loan only if--
* * * * *
(14) The guaranty agency certifies to the Secretary that diligent
attempts have been made by the lender and the
[[Page 58630]]
guaranty agency under Sec. 682.411(h) to locate the borrower through
the use of effective skip-tracing techniques, including contact with
the schools the student attended.
* * * * *
15. Section 682.409 is amended by revising the introductory text of
paragraph (a)(1) to read as follows:
Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted
loans to the Secretary.
(a)(1) If the Secretary determines that action is necessary to
protect the Federal fiscal interest, the Secretary directs a guaranty
agency to promptly assign to the Secretary any loans held by the agency
on which the agency has received payment under Sec. 682.402(f),
682.402(k), or 682.404. The collection of unpaid loans owed by Federal
employees by Federal salary offset is, among other things, deemed to be
in the Federal fiscal interest. Unless the Secretary notifies an
agency, in writing, that other loans must be assigned to the Secretary,
an agency must assign any loan that meets all of the following criteria
as of April 15 of each year:
* * * * *
16. Section 682.410 is amended by adding a new paragraph
(b)(5)(vii) to read as follows:
Sec. 682.410 Fiscal, administrative, and enforcement requirements.
* * * * *
(b) * * *
(5) * * *
(vii) As part of the guaranty agency's response to a borrower who
appeals an adverse decision resulting from the agency's administrative
review of the loan obligation, the agency must provide the borrower
with information on the availability of the Student Loan Ombudsman's
office.
* * * * *
17. Section 682.411 is revised to read as follows:
Sec. 682.411 Lender due diligence in collecting guaranty agency loans.
(a) General. In the event of delinquency on an FFEL Program loan,
the lender must engage in at least the collection efforts described in
paragraphs (c) through (n) of this section, except that in the case of
a loan made to a borrower who is incarcerated, residing outside a
State, Mexico, or Canada, or whose telephone number is unknown, the
lender may send a forceful collection letter instead of each telephone
effort required by this section.
(b) Delinquency. (1) For purposes of this section, delinquency on a
loan begins on the first day after the due date of the first missed
payment that is not later made. The due date of the first payment is
established by the lender but must occur by the deadlines specified in
Sec. 682.209(a) or, if the lender first learns after the fact that the
borrower has entered the repayment period, no later than 75 days after
the day the lender so learns, except as provided in
Sec. 682.209(a)(2)(v) and (a)(3)(ii)(E). If a payment is made late, the
first day of delinquency is the day after the due date of the next
missed payment that is not later made. A payment that is within five
dollars of the amount normally required to advance the due date may
nevertheless advance the due date if the lender's procedures allow for
that advancement.
(2) At no point during the periods specified in paragraphs (c),
(d), and (e) of this section may the lender permit the occurrence of a
gap in collection activity, as defined in paragraph (j) of this
section, of more than 45 days (60 days in the case of a transfer).
(3) As part of one of the collection activities provided for in
this section, the lender must provide the borrower with information on
the availability of the Student Loan Ombudsman's office.
(c) 1-15 days delinquent. Except in the case in which a loan is
brought into this period by a payment on the loan, expiration of an
authorized deferment or forbearance period, or the lender's receipt
from the drawee of a dishonored check submitted as a payment on the
loan, the lender during this period must send at least one written
notice or collection letter to the borrower informing the borrower of
the delinquency and urging the borrower to make payments sufficient to
eliminate the delinquency. The notice or collection letter sent during
this period must include, at a minimum, a lender or servicer contact, a
telephone number, and a prominent statement informing the borrower that
assistance may be available if he or she is experiencing difficulty in
making a scheduled repayment.
(d) 16-180 days delinquent (16-240 days delinquent for a loan
repayable in installments less frequently than monthly). (1) Unless
exempted under paragraph (d)(4) of this section, during this period the
lender must engage in at least four diligent efforts to contact the
borrower by telephone and send at least four collection letters urging
the borrower to make the required payments on the loan. At least one of
the diligent efforts to contact the borrower by telephone must occur on
or before, and another one must occur after, the 90th day of
delinquency. Collection letters sent during this period must include,
at a minimum, information for the borrower regarding deferment,
forbearance, income-sensitive repayment and loan consolidation, and
other available options to avoid default.
(2) At least two of the collection letters required under paragraph
(d)(1) of this section must warn the borrower that, if the loan is not
paid, the lender will assign the loan to the guaranty agency that, in
turn, will report the default to all national credit bureaus, and that
the agency may institute proceedings to offset the borrower's State and
Federal income tax refunds and other payments made by the Federal
Government to the borrower or to garnish the borrower's wages, or to
assign the loan to the Federal Government for litigation against the
borrower.
(3) Following the lender's receipt of a payment on the loan or a
correct address for the borrower, the lender's receipt from the drawee
of a dishonored check received as a payment on the loan, the lender's
receipt of a correct telephone number for the borrower, or the
expiration of an authorized deferment or forbearance period, the lender
is required to engage in only--
(i) Two diligent efforts to contact the borrower by telephone
during this period, if the loan is less than 91 days delinquent (121
days delinquent for a loan repayable in installments less frequently
than monthly) upon receipt of the payment, correct address, correct
telephone number, or returned check, or expiration of the deferment or
forbearance; or
(ii) One diligent effort to contact the borrower by telephone
during this period if the loan is 91-120 days delinquent (121-180 days
delinquent for a loan repayable in installments less frequently than
monthly) upon receipt of the payment, correct address, correct
telephone number, or returned check, or expiration of the deferment or
forbearance.
(4) A lender need not attempt to contact by telephone any borrower
who is more than 120 days delinquent (180 days delinquent for a loan
repayable in installments less frequent than monthly) following the
lender's receipt of--
(i) A payment on the loan;
(ii) A correct address or correct telephone number for the
borrower;
(iii) A dishonored check received from the drawee as a payment on
the loan; or
(iv) The expiration of an authorized deferment or forbearance.
(e) 181-270 days delinquent (241-330 days delinquent for a loan
repayable in installments less frequently than monthly). During this
period the lender
[[Page 58631]]
must engage in efforts to urge the borrower to make the required
payments on the loan. These efforts must, at a minimum, provide
information to the borrower regarding options to avoid default and the
consequences of defaulting on the loan.
(f) Final demand. On or after the 241st day of delinquency (the
301st day for loans payable in less frequent installments than monthly)
the lender must send a final demand letter to the borrower requiring
repayment of the loan in full and notifying the borrower that a default
will be reported to a national credit bureau. The lender must allow the
borrower at least 30 days after the date the letter is mailed to
respond to the final demand letter and to bring the loan out of default
before filing a default claim on the loan.
(g) Collection procedures when borrower's telephone number is not
available. Upon completion of a diligent but unsuccessful effort to
ascertain the correct telephone number of a borrower as required by
paragraph (m) of this section, the lender is excused from any further
efforts to contact the borrower by telephone, unless the borrower's
number is obtained before the 211th day of delinquency (the 271st day
for loans repayable in installments less frequently than monthly).
(h) Skip-tracing. (1) Unless the letter specified under paragraph
(f) of this section has already been sent, within 10 days of its
receipt of information indicating that it does not know the borrower's
current address, the lender must begin to diligently attempt to locate
the borrower through the use of effective commercial skip-tracing
techniques. These efforts must include, but are not limited to, sending
a letter to or making a diligent effort to contact each endorser,
relative, reference, individual, and entity, identified in the
borrower's loan file, including the schools the student attended. For
this purpose, a lender's contact with a school official who might
reasonably be expected to know the borrower's address may be with
someone other than the financial aid administrator, and may be in
writing or by phone calls. These efforts must be completed by the date
of default with no gap of more than 45 days between attempts to contact
those individuals or entities.
(2) Upon receipt of information indicating that it does not know
the borrower's current address, the lender must discontinue the
collection efforts described in paragraphs (c) through (f) of this
section.
(3) If the lender is unable to ascertain the borrower's current
address despite its performance of the activities described in
paragraph (h)(1) of this section, the lender is excused thereafter from
performance of the collection activities described in paragraphs (c)
through (f) and (l)(1) through (l)(3) and (l)(5) of this section unless
it receives communication indicating the borrower's address before the
241st day of delinquency (the 301st day for loans payable in less
frequent installments than monthly).
(4) The activities specified by paragraph (m)(1)(i) or (ii) of this
section (with references to the ``borrower'' understood to mean
endorser, reference, relative, individual, or entity as appropriate)
meet the requirement that the lender make a diligent effort to contact
each individual identified in the borrower's loan file.
(i) Default aversion assistance. Not earlier than the 60th day and
no later than the 120th day of delinquency, a lender must request
default aversion assistance from the guaranty agency that guarantees
the loan.
(j) Gap in collection activity. For purposes of this section, the
term gap in collection activity means, with respect to a loan, any
period--
(1) Beginning on the date that is the day after--
(i) The due date of a payment unless the lender does not know the
borrower's address on that date;
(ii) The day on which the lender receives a payment on a loan that
remains delinquent notwithstanding the payment;
(iii) The day on which the lender receives the correct address for
a delinquent borrower;
(iv) The day on which the lender completes a collection activity;
(v) The day on which the lender receives a dishonored check
submitted as a payment on the loan;
(vi) The expiration of an authorized deferment or forbearance
period on a delinquent loan; or
(vii) The day the lender receives information indicating it does
not know the borrower's current address; and
(2) Ending on the date of the earliest of--
(i) The day on which the lender receives the first subsequent
payment or completed deferment request or forbearance agreement;
(ii) The day on which the lender begins the first subsequent
collection activity;
(iii) The day on which the lender receives written communication
from the borrower relating to his or her account; or
(iv) Default.
(k) Transfer. For purposes of this section, the term transfer with
respect to a loan means any action, including, but not limited to, the
sale of the loan, that results in a change in the system used to
monitor or conduct collection activity on a loan from one system to
another.
(l) Collection activity. For purposes of this section, the term
collection activity with respect to a loan means--
(1) Mailing or otherwise transmitting to the borrower at an address
that the lender reasonably believes to be the borrower's current
address a collection letter or final demand letter that satisfies the
timing and content requirements of paragraph (c), (d), (e), or (f) of
this section;
(2) Making an attempt to contact the borrower by telephone to urge
the borrower to begin or resume repayment;
(3) Conducting skip-tracing efforts, in accordance with paragraph
(h)(1) or (m)(1)(iii) of this section, to locate a borrower whose
correct address or telephone number is unknown to the lender;
(4) Mailing or otherwise transmitting to the guaranty agency a
request for default aversion assistance available from the agency on
the loan at the time the request is transmitted; or
(5) Any telephone discussion or personal contact with the borrower
so long as the borrower is apprised of the account's past-due status.
(m) Diligent effort for telephone contact. (1) For purposes of this
section, the term diligent effort with respect to telephone contact
means--
(i) A successful effort to contact the borrower by telephone;
(ii) At least two unsuccessful attempts to contact the borrower by
telephone at a number that the lender reasonably believes to be the
borrower's correct telephone number; or
(iii) An unsuccessful effort to ascertain the correct telephone
number of a borrower, including, but not limited to, a directory
assistance inquiry as to the borrower's telephone number, and sending a
letter to or making a diligent effort to contact each reference,
relative, and individual identified in the most recent loan application
or most recent school certification for that borrower held by the
lender. The lender may contact a school official other than the
financial aid administrator who reasonably may be expected to know the
borrower's address or telephone number.
(2) If the lender is unable to ascertain the borrower's correct
telephone number despite its performance of the activities described in
paragraph (m)(1)(iii) of this section, the lender is excused thereafter
from attempting to contact the borrower by telephone unless it receives
a communication
[[Page 58632]]
indicating the borrower's current telephone number before the 211th day
of delinquency (the 271st day for loans repayable in installments less
frequently than monthly).
(3) The activities specified by paragraph (m)(1) (i) or (ii) of
this section (with references to ``the borrower'' understood to mean
endorser, reference, relative, or individual as appropriate), meet the
requirement that the lender make a diligent effort to contact each
endorser or each reference, relative, or individual identified on the
borrower's most recent loan application or most recent school
certification.
(n) Due diligence for endorsers. (1) Before filing a default claim
on a loan with an endorser, the lender must--
(i) Make a diligent effort to contact the endorser by telephone;
and
(ii) Send the endorser on the loan two letters advising the
endorser of the delinquent status of the loan and urging the endorser
to make the required payments on the loan with at least one letter
containing the information described in paragraph (d)(2) of this
section (with references to ``the borrower'' understood to mean the
endorser).
(2) On or after the 241st day of delinquency (the 301st day for
loans payable in less frequent installments than monthly) the lender
must send a final demand letter to the endorser requiring repayment of
the loan in full and notifying the endorser that a default will be
reported to a national credit bureau. The lender must allow the
endorser at least 30 days after the date the letter is mailed to
respond to the final demand letter and to bring the loan out of default
before filing a default claim on the loan.
(3) Unless the letter specified under paragraph (n)(2) of this
section has already been sent, upon receipt of information indicating
that it does not know the endorser's current address or telephone
number, the lender must diligently attempt to locate the endorser
through the use of effective commercial skip-tracing techniques. This
effort must include an inquiry to directory assistance.
(o) Preemption of State law. The provisions of this section preempt
any State law, including State statutes, regulations, or rules, that
would conflict with or hinder satisfaction of the requirements or
frustrate the purposes of this section.
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1080a, 1082,
1087)
Sec. 682.412 [Amended]
18. Section 682.412 is amended by removing ``Sec. 682.411(e)'' in
paragraph (a) and adding, in its place, ``Sec. 682.411(f)''.
19. Section 682.413 is amended by revising paragraph (e)(1) to read
as follows:
Sec. 682.413 Remedial actions.
* * * * *
(e)(1)(i) The Secretary's decision to require repayment of funds,
withhold funds, or to limit or suspend a lender, guaranty agency, or
third party servicer from participation in the FFEL Program or to
terminate a lender or third party from participation in the FFEL
Program does not become final until the Secretary provides the lender,
agency, or servicer with written notice of the intended action and an
opportunity to be heard. The hearing is at a time and in a manner the
Secretary determines to be appropriate to the resolution of the issues
on which the lender, agency, or servicer requests the hearing.
(ii) The Secretary's decision to terminate a guaranty agency's
participation in the FFEL Program after September 24, 1998 does not
become final until the Secretary provides the agency with written
notice of the intended action and provides an opportunity for a hearing
on the record.
* * * * *
20. Section 682.414 is amended by:
A. Revising paragraph (a)(4)(iii).
B. Revising the Office of Management and Budget control number.
Sec. 682.414 Records, reports, and inspection requirements for
guaranty agency programs.
(a) * * *
(4) * * *
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a
lender must retain the records required for each loan for not less than
3 years following the date the loan is repaid in full by the borrower,
or for not less than five years following the date the lender receives
payment in full from any other source. However, in particular cases,
the Secretary or the guaranty agency may require the retention of
records beyond this minimum period.
* * * * *
(Approved by the Office of Management and Budget under control
number 1845-0020)
* * * * *
21. Section 682.417 is revised to read as follows:
Sec. 682.417 Determination of Federal funds or assets to be returned.
(a) General. The procedures described in this section apply to a
determination by the Secretary that--
(1) A guaranty agency must return to the Secretary a portion of its
Federal Fund that the Secretary has determined is unnecessary to pay
the program expenses and contingent liabilities of the agency; and
(2) A guaranty agency must require the return to the agency or the
Secretary of Federal funds or assets within the meaning of section
422(g)(1) of the Act held by or under the control of any other entity
that the Secretary determines are necessary to pay the program expenses
and contingent liabilities of the agency or that are required for the
orderly termination of the guaranty agency's operations and the
liquidation of its assets.
(b) Return of unnecessary Federal funds. (1) The Secretary may
initiate a process to recover unnecessary Federal funds under paragraph
(a)(1) of this section if the Secretary determines that a guaranty
agency's Federal Fund ratio under Sec. 682.410(a)(10) for each of the
two preceding Federal fiscal years exceeded 2.0 percent.
(2) If the Secretary initiates a process to recover unnecessary
Federal funds, the Secretary requires the return of a portion of the
Federal funds that the Secretary determines will permit the agency to--
(i) Have a Federal Fund ratio of at least 2.0 percent under
Sec. 682.410(a)(10) at the time of the determination; and
(ii) Meet the minimum Federal Fund requirements under
Sec. 682.410(a)(10) and retain sufficient additional Federal funds to
perform its responsibilities as a guaranty agency during the current
Federal fiscal year and the four succeeding Federal fiscal years.
(3)(i) The Secretary makes a determination of the amount of Federal
funds needed by the guaranty agency under paragraph (b)(2) of this
section on the basis of financial projections for the period described
in that paragraph. If the agency provides projections for a period
longer than the period referred to in that paragraph, the Secretary may
consider those projections.
(ii) The Secretary may require a guaranty agency to provide
financial projections in a form and on the basis of assumptions
prescribed by the Secretary. If the Secretary requests the agency to
provide financial projections, the agency must provide the projections
within 60 days of the Secretary's request. If the agency does not
provide the projections within the specified time period, the Secretary
determines the amount of Federal funds needed by the agency on the
basis of other information.
(c) Notice. (1) The Secretary or an authorized Departmental
official begins a proceeding to order a guaranty agency to return a
portion of its Federal funds,
[[Page 58633]]
or to direct the return of Federal funds or assets subject to return,
by sending the guaranty agency a notice by certified mail, return
receipt requested.
(2) The notice--
(i) Informs the guaranty agency of the Secretary's determination
that Federal funds or assets must be returned;
(ii) Describes the basis for the Secretary's determination and
contains sufficient information to allow the guaranty agency to prepare
and present an appeal;
(iii) States the date by which the return of Federal funds or
assets must be completed;
(iv) Describes the process for appealing the determination,
including the time for filing an appeal and the procedure for doing so;
and
(v) Identifies any actions that the guaranty agency must take to
ensure that the Federal funds or assets that are the subject of the
notice are maintained and protected against use, expenditure, transfer,
or other disbursement after the date of the Secretary's determination,
and the basis for requiring those actions. The actions may include, but
are not limited to, directing the agency to place the Federal funds in
an escrow account. If the Secretary has directed the guaranty agency to
require the return of Federal funds or assets held by or under the
control of another entity, the guaranty agency must ensure that the
agency's claims to those funds or assets and the collectability of the
agency's claims will not be compromised or jeopardized during an
appeal. The guaranty agency must also comply with all other applicable
regulations relating to the use of Federal funds and assets.
(d) Appeal. (1) A guaranty agency may appeal the Secretary's
determination that Federal funds or assets must be returned by filing a
written notice of appeal within 20 days of the date of the guaranty
agency's receipt of the notice of the Secretary's determination. If the
agency files a notice of appeal, the requirement that the return of
Federal funds or assets be completed by a particular date is suspended
pending completion of the appeal process. If the agency does not file a
notice of appeal within the period specified in this paragraph, the
Secretary's determination is final.
(2) A guaranty agency must submit the information described in
paragraph (d)(4) of this section within 45 days of the date of the
guaranty agency's receipt of the notice of the Secretary's
determination unless the Secretary agrees to extend the period at the
agency's request. If the agency does not submit that information within
the prescribed period, the Secretary's determination is final.
(3) A guaranty agency's appeal of a determination that Federal
funds or assets must be returned is considered and decided by a
Departmental official other than the official who issued the
determination or a subordinate of that official.
(4) In an appeal of the Secretary's determination, the guaranty
agency must--
(i) State the reasons the guaranty agency believes the Federal
funds or assets need not be returned;
(ii) Identify any evidence on which the guaranty agency bases its
position that Federal funds or assets need not be returned;
(iii) Include copies of the documents that contain this evidence;
(iv) Include any arguments that the guaranty agency believes
support its position that Federal funds or assets need not be returned;
and
(v) Identify the steps taken by the guaranty agency to comply with
the requirements referred to in paragraph (c)(2)(v) of this section.
(5)(i) In its appeal, the guaranty agency may request the
opportunity to make an oral argument to the deciding official for the
purpose of clarifying any issues raised by the appeal. The deciding
official provides this opportunity promptly after the expiration of the
period referred to in paragraph (d)(2) of this section.
(ii) The agency may not submit new evidence at or after the oral
argument unless the deciding official determines otherwise. A
transcript of the oral argument is made a part of the record of the
appeal and is promptly provided to the agency.
(6) The guaranty agency has the burden of production and the burden
of persuading the deciding official that the Secretary's determination
should be modified or withdrawn.
(e) Third-party participation. (1) If the Secretary issues a
determination under paragraph (a)(1) of this section, the Secretary
promptly publishes a notice in the Federal Register announcing the
portion of the Federal Fund to be returned by the agency and providing
interested persons an opportunity to submit written information
relating to the determination within 30 days after the date of
publication. The Secretary publishes the notice no earlier than five
days after the agency receives a copy of the determination.
(2) If the guaranty agency to which the determination relates files
a notice of appeal of the determination, the deciding official may
consider any information submitted in response to the Federal Register
notice. All information submitted by a third party is available for
inspection and copying at the offices of the Department of Education in
Washington, D.C., during normal business hours.
(f) Adverse information. If the deciding official considers
information in addition to the evidence described in the notice of the
Secretary's determination that is adverse to the guaranty agency's
position on appeal, the deciding official informs the agency and
provides it a reasonable opportunity to respond to the information
without regard to the period referred to in paragraph (d)(2) of this
section.
(g) Decision. (1) The deciding official issues a written decision
on the guaranty agency's appeal within 45 days of the date on which the
information described in paragraphs (d)(4) and (d)(5)(ii) of this
section is received, or the oral argument referred to in paragraph
(d)(5) of this section is held, whichever is later. The deciding
official mails the decision to the guaranty agency by certified mail,
return receipt requested. The decision of the deciding official becomes
the final decision of the Secretary 30 days after the deciding official
issues it. In the case of a determination that a guaranty agency must
return Federal funds, if the deciding official does not issue a
decision within the prescribed period, the agency is no longer required
to take the actions described in paragraph (c)(2)(v) of this section.
(2) A guaranty agency may not seek judicial review of the
Secretary's determination to require the return of Federal funds or
assets until the deciding official issues a decision.
(3) The deciding official's written decision includes the basis for
the decision. The deciding official bases the decision only on evidence
described in the notice of the Secretary's determination and on
information properly submitted and considered by the deciding official
under this section. The deciding official is bound by all applicable
statutes and regulations and may neither waive them nor rule them
invalid.
(h) Collection of Federal funds or assets. (1) If the deciding
official's final decision requires the guaranty agency to return
Federal funds, or requires the guaranty agency to require the return of
Federal funds or assets to the agency or to the Secretary, the decision
states a new date for compliance with the decision. The new date is no
earlier than the date on which the decision becomes the final decision
of the Secretary.
[[Page 58634]]
(2) If the guaranty agency fails to comply with the decision, the
Secretary may recover the Federal funds from any funds due the agency
from the Department without any further notice or procedure and may
take any other action permitted or authorized by law to compel
compliance.
(Approved by the Office of Management and Budget under control
number 1845-0020).
22. Section 682.418 is amended by revising the heading and
paragraph (a)(1), and removing the words ``reserve fund'' and adding,
in their place, the words ``Operating Fund'', respectively, wherever
they appear. The revised heading and text follows:
Sec. 682.418 Prohibited uses of the assets of the Operating Fund
during periods in which the Operating Fund contains transferred funds
owed to the Federal Fund.
(a) * * *
(1) During periods in which the Operating Fund contains transferred
funds owed to the Federal Fund, a guaranty agency may not use the
assets of the Operating Fund to pay costs prohibited under paragraph
(b) of this section and may not use the assets of the Operating Fund to
pay for goods, property, or services provided by an affiliated
organization unless the agency applies and demonstrates to the
Secretary, and receives the Secretary's approval, that the payment
would be in the Federal fiscal interest and would not exceed the
affiliated organization's actual and reasonable cost of providing those
goods, property, or services.
* * * * *
23. A new Sec. 682.419 is added to subpart D to read as follows:
Sec. 682.419 Guaranty agency Federal Fund.
(a) Establishment and control. A guaranty agency must establish and
maintain a Federal Student Loan Reserve Fund (referred to as the
``Federal Fund'') to be used only as permitted under paragraph (c) of
this section. The assets of the Federal Fund and the earnings on those
assets are, at all times, the property of the United States. The
guaranty agency must exercise the level of care required of a fiduciary
charged with the duty of protecting, investing, and administering the
money of others.
(b) Deposits. The agency must deposit into the Federal Fund--
(1) All funds, securities, and other liquid assets of the reserve
fund that existed under Sec. 682.410;
(2) The total amount of insurance premiums collected;
(3) Federal payments for default, bankruptcy, death, disability,
closed school, false certification, and other claims;
(4) Federal payments for supplemental preclaims assistance
activities performed before October 1, 1998;
(5) 70 percent of administrative cost allowances received on or
after October 1, 1998 for loans upon which insurance was issued before
October 1, 1998;
(6) All funds received by the guaranty agency from any source on
FFEL Program loans on which a claim has been paid, within 48 hours of
receipt of those funds, minus the portion the agency is authorized to
deposit in its Operating Fund;
(7) Investment earnings on the Federal Fund;
(8) Revenue derived from the Federal portion of a nonliquid asset,
in accordance with Sec. 682.420; and
(9) Other funds received by the guaranty agency from any source
that are specifically designated for deposit in the Federal Fund.
(c) Uses. A guaranty agency may use the assets of the Federal Fund
only--
(1) To pay insurance claims;
(2) To transfer default aversion fees to the agency's Operating
Fund;
(3) To transfer account maintenance fees to the agency's Operating
Fund, if directed by the Secretary;
(4) To refund payments made by or on behalf of a borrower on a loan
that has been discharged in accordance with Sec. 682.402;
(5) To pay the Secretary's share of borrower payments, in
accordance with Sec. 682.404(g);
(6) For transfers to the agency's Operating Fund, pursuant to
Sec. 682.421;
(7) To refund insurance premiums related to loans cancelled or
refunded, in whole or in part;
(8) To return to the Secretary portions of the Federal Fund
required to be returned by the Act; and
(9) For any other purpose authorized by the Secretary.
(d) Prohibition against prepayment. A guaranty agency may not
prepay obligations of the Federal Fund unless it demonstrates, to the
satisfaction of the Secretary, that the prepayment is in the best
interests of the United States.
(e) Minimum Federal Fund level. The guaranty agency must maintain a
minimum Federal Fund level equal to at least 0.25 percent of its
insured original principal amount of loans outstanding.
(f) Definitions. For purposes of this section--
(1) Federal Fund level means the total of Federal Fund assets
identified in paragraph (b) of this section plus the amount of funds
transferred from the Federal Fund that are in the Operating Fund, using
an accrual basis of accounting.
(2) Original principal amount of loans outstanding means--
(i) The sum of--
(A) The original principal amount of all loans guaranteed by the
agency; and
(B) The original principal amount of any loans on which the
guarantee was transferred to the agency from another guarantor,
excluding loan guarantees transferred to another agency pursuant to a
plan of the Secretary in response to the insolvency of the agency;
(ii) Minus the original principal amount of all loans on which--
(A) The loan guarantee was cancelled;
(B) The loan guarantee was transferred to another agency;
(C) Payment in full has been made by the borrower;
(D) Reinsurance coverage has been lost and cannot be regained; and
(E) The agency paid claims.
(Authority: 20 U.S.C. 1072-1)
24. A new Sec. 682.420 is added to subpart D to read as follows:
Sec. 682.420 Federal nonliquid assets.
(a) General. The Federal portion of a nonliquid asset developed or
purchased in whole or in part with Federal reserve funds, regardless of
who held or controlled the Federal reserve funds or assets, is the
property of the United States. The ownership of that asset must be
prorated based on the percentage of the asset developed or purchased
with Federal reserve funds. In maintaining and using the Federal
portion of a nonliquid asset under this section, the guaranty agency
must exercise the level of care required of a fiduciary charged with
protecting, investing, and administering the property of others.
(b) Treatment of revenue derived from a nonliquid Federal asset. If
a guaranty agency derives revenue from the Federal portion of a
nonliquid asset, including its sale or lease, the agency must promptly
deposit the percentage of the net revenue received into the Federal
Fund equal to the percentage of the asset owned by the United States.
(c) Guaranty agency use of the Federal portion of a nonliquid
asset. (1)(i) If a guaranty agency uses the Federal portion of a
nonliquid asset in the performance of its guaranty activities (other
than an intangible or intellectual property asset or a tangible asset
of nominal value), the agency must promptly deposit into the Federal
Fund an amount representing the net fair value of the use of the asset.
(ii) If a guaranty agency uses the Federal portion of a nonliquid
asset for purposes other than the performance of
[[Page 58635]]
its guaranty activities, the agency must promptly deposit into the
Federal Fund an amount representing the net fair value of the use of
the asset.
(2) Payments to the Federal Fund required by paragraph (c)(1) of
this section must be made not less frequently than quarterly.
(Authority: 20 U.S.C. 1072-1)
25. A new Sec. 682.421 is added to subpart D to read as follows:
Sec. 682.421 Funds transferred from the Federal Fund to the Operating
Fund by a guaranty agency.
(a) General. In accordance with this section, a guaranty agency may
request the Secretary's permission to transfer a limited amount of
funds from the Federal Fund to the Operating Fund. Upon receiving the
Secretary's approval, the agency may transfer the requested funds at
any time within 6 months following the date specified by the Secretary.
If the Secretary has not approved or disapproved the agency's request
within 30 days after receiving it, the agency may transfer the
requested funds at any time within the 6-month period beginning on the
31st day after the Secretary received the agency's request. The
transferred funds may be used only as permitted by Secs. 682.410(a)(2)
and 682.418.
(b) Transferring the principal balance of the Federal Fund.--(1)
Amount that may be transferred. Upon receiving the Secretary's
approval, an agency may transfer an amount up to the equivalent of 180
days of cash expenses for purposes allowed by Secs. 682.410(a)(2) and
682.418 (not including claim payments) for normal operating expenses to
be deposited into the agency's Operating Fund. The amount transferred
and outstanding at any time during the first 3 years after establishing
the Operating Fund may not exceed the lesser of 180 days cash expenses
for purposes allowed by Secs. 682.410(a)(2) and 682.418 (not including
claim payments), or 45 percent of the balance in the Federal reserve
fund that existed under Sec. 682.410 as of September 30, 1998.
(2) Requirements for requesting a transfer. A guaranty agency that
wishes to transfer principal from the Federal Fund must provide the
Secretary with a proposed repayment schedule and evidence that it can
repay the transfer according to its proposed schedule. The agency must
provide the Secretary with the following:
(i) A request for the transfer that specifies the desired amount,
the date the funds will be needed, and the agency's proposed terms of
repayment;
(ii) A projected revenue and expense statement, to be updated
annually during the repayment period, that demonstrates that the agency
will be able to repay the transferred amount within the repayment
period requested by the agency; and
(iii) Certifications by the agency that during the period while the
transferred funds are outstanding--
(A) Sufficient funds will remain in the Federal Fund to pay lender
claims during the period the transferred funds are outstanding;
(B) The agency will be able to meet the reserve recall requirements
of section 422 of the Act;
(C) The agency will be able to meet the statutory minimum reserve
level of 0.25 percent, as mandated by section 428(c)(9) of the Act; and
(D) No legal prohibition exists that would prevent the agency from
obtaining or repaying the transferred funds.
(c) Transferring interest earned on the Federal Fund. (1) Amount
that may be transferred. The Secretary may permit an agency that owes
the Federal Fund the maximum amount allowable under paragraph (b) of
this section to transfer the interest income earned on the Federal Fund
during the 3-year period following October 7, 1998. The combined amount
of transferred interest and the amount of principal transferred under
paragraph (b) of this section may exceed 180 days cash expenses for
purposes allowed by Secs. 682.410(a)(2) and 682.418 (not including
claim payments), but may not exceed 45 percent of the balance in the
Federal reserve fund that existed under Sec. 682.410 as of September
30, 1998.
(2) Requirements for requesting a transfer. To be allowed to
transfer the interest income, in addition to the items in paragraph
(b)(2) of this section, the agency must demonstrate to the Secretary
that the cash flow in the Operating Fund will be negative if the agency
is not authorized to transfer the interest, and, by transferring the
interest, the agency will substantially improve its financial
circumstances.
(Authority: 20 U.S.C. 1072-1)
(Approved by the Office of Management and Budget under control
number 1845-0020)
26. A new Sec. 682.422 is added to subpart D to read as follows:
Sec. 682.422 Guaranty agency repayment of funds transferred from the
Federal Fund.
(a) General. A guaranty agency must begin repayment of money
transferred from the Federal Fund not later than the start of the 4th
year after the agency establishes its Operating Fund. All amounts
transferred must be repaid not later than five years after the date the
Operating Fund is established.
(b) Extension for repaying the interest transferred.--(1) General.
The Secretary may extend the period for repayment of interest
transferred from the Federal Fund from two years to five years if the
Secretary determines that the cash flow of the Operating Fund will be
negative if the transferred interest had to be repaid earlier or the
repayment of the interest would substantially diminish the financial
circumstances of the agency.
(2) Agency eligibility for an extension. To receive an extension,
the agency must demonstrate that it will be able to repay all
transferred funds by the end of the 8th year following the date of
establishment of the Operating Fund and that the agency will be
financially sound upon the completion of repayment.
(3) Repayment of interest earned on transferred funds. If the
Secretary extends the period for repayment of interest transferred from
the Federal Fund for a guaranty agency, the agency must repay the
amount of interest during the 6th, 7th, and 8th years following the
establishment of the Operating Fund. In addition to repaying the amount
of interest, the guaranty agency must also pay to the Secretary any
income earned after the 5th year from the investment of the transferred
amount. In determining the amount of income earned on the transferred
amount, the Secretary uses the average investment income earned on the
agency's Operating Fund.
(c) Consequences if a guaranty agency fails to repay transfers from
the Federal Fund. If a guaranty agency fails to make a scheduled
repayment to the Federal Fund, the agency may not receive any other
Federal funds until it becomes current in making all scheduled
payments, unless the Secretary waives this restriction.
(Authority: 20 U.S.C. 1072-1)
27. A new Sec. 682.423 is added to subpart D to read as follows:
Sec. 682.423 Guaranty agency Operating Fund.
(a) Establishment and control. A guaranty agency must establish and
maintain an Operating Fund in an account separate from the Federal
Fund. Except for funds that have been transferred from the Federal
Fund, the Operating Fund is considered the property of the guaranty
agency. During periods in which the Operating Fund contains funds
transferred from the Federal Fund, the Operating Fund may
[[Page 58636]]
be used only as permitted by Secs. 682.410(a)(2) and 682.418.
(b) Deposits. The guaranty agency must deposit into the Operating
Fund--
(1) Amounts authorized by the Secretary to be transferred from the
Federal Fund;
(2) Account maintenance fees;
(3) Loan processing and issuance fees;
(4) Default aversion fees;
(5) 30 percent of administrative cost allowances received on or
after October 1, 1998 for loans upon which insurance was issued before
October 1, 1998;
(6) The portion of the amounts collected on defaulted loans that
remains after the Secretary's share of collections has been paid and
the complement of the reinsurance percentage has been deposited into
the Federal Fund;
(7) The agency's share of the payoff amounts received from the
consolidation or rehabilitation of defaulted loans; and
(8) Other receipts as authorized by the Secretary.
(c) Uses. A guaranty agency may use the Operating Fund for--
(1) Guaranty agency-related activities, including--
(i) Application processing;
(ii) Loan disbursement;
(iii) Enrollment and repayment status management;
(iv) Default aversion activities;
(v) Default collection activities;
(vi) School and lender training;
(vii) Financial aid awareness and related outreach activities; and
(viii) Compliance monitoring; and
(2) Other student financial aid-related activities for the benefit
of students, as selected by the guaranty agency.
(Authority: 20 U.S.C. 1072-2)
Subpart H--[Amended]
28. Sections 682.800 through 682.839 are removed, Sec. 682.840 is
redesignated as Sec. 682.800, and the term ``handicapped status'' in
the redesignated Sec. 682.800(a) is removed and ``disability status''
is added in its place.
29. Appendix D to part 682 is revised to read as follows:
Appendix D to Part 682--Policy for Waiving the Secretary's Right To
Recover or Refuse To Pay Interest Benefits, Special Allowance, and
Reinsurance on Stafford, Plus, Supplemental Loans for Students, and
Consolidation Program Loans Involving Lenders' Violations of
Federal Regulations Pertaining to Due Diligence in Collection or
Timely Filing of Claims [Bulletin 88-G-138]
Note: The following is a reprint of Bulletin 88-G-138, issued on
March 11, 1988, with modifications made to reflect changes in the
program regulations. For a loan that has lost reinsurance prior to
December 1, 1992, this policy applies only through November 30,
1995. For a loan that loses reinsurance on or after December 1,
1992, this policy applies until 3 years after the default claim
filing deadline. For the purpose of determining the 3-year deadline,
reinsurance is lost on the later of (a) 3 years from the last date
the claim could have been filed for claim payment with the guaranty
agency for a claim that was not filed; or (b) 3 years from the date
the guaranty agency rejected the claim, for a claim that was filed.
These deadlines are extended by periods during which collection
activities are suspended due to the filing of a bankruptcy petition.
Introduction
(1) This letter sets forth the circumstances under which the
Secretary, pursuant to sections 432(a)(5) and (6) of the Higher
Education Act of 1965 and 34 CFR 682.406(b) and 682.413(f), will
waive certain of the Secretary's rights and claims with respect to
Stafford Loans, PLUS, Supplemental Loans for Students (SLS), and
Consolidation Program loans made under a guaranty agency program
that involve violations of Federal regulations pertaining to due
diligence in collection or timely filing. (These programs are
collectively referred to in this letter as the FFEL Program.) This
policy applies to due diligence violations on loans for which the
first day of delinquency occurred on or after March 10, 1987 (the
effective date of the November 10, 1986 due diligence regulations)
and to timely filing violations occurring on or after December 26,
1986, whether or not the affected loans have been submitted as
claims to the guaranty agency.
(2) The Secretary has been implementing a variety of regulatory
and administrative actions to minimize defaults in the FFEL Program.
As a part of this effort, the Secretary published final regulations
on November 10, 1986, requiring lenders and guaranty agencies to
undertake specific due diligence activities to collect delinquent
and defaulted loans, and establishing deadlines for the filing of
claims by lenders with guaranty agencies. In recognition of the time
required for agencies and lenders to modify their internal
procedures, the Secretary delayed for four months the date by which
lenders were required to comply with the new due diligence
requirements. Thus, Sec. 682.411 of the regulations, which
established minimum due diligence procedures that a lender must
follow in order for a guaranty agency to receive reinsurance on a
loan, became effective for loans for which the first day of
delinquency occurred on or after March 10, 1987. The regulations
make clear that compliance with these minimum requirements, and with
the new timely filing deadlines, is a condition for an agency's
receiving or retaining reinsurance payments made by the Secretary on
a loan. See 34 CFR 682.406(a)(3), (a)(5), (a)(6), and 682.413(b).
The regulations also specify that a lender must comply with
Sec. 682.411 and with the applicable filing deadline as a condition
for its right to receive or retain interest benefits and special
allowance on a loan for certain periods. See 34 CFR
682.300(b)(2)(vi), 682.300(b)(2)(vii), 682.413(a)(1).
(3) The Department has received inquiries regarding the
procedures by which a lender may cure a violation of Sec. 682.411
regarding diligent loan collection, or of the 90-day deadline for
the filing of default claims found in Sec. 682.406(a)(3) and (a)(5),
in order to reinstate the agency's right to reinsurance and the
lender's right to interest benefits and special allowance.
Preliminarily, please note that, absent an exercise of the
Secretary's waiver authority, a guaranty agency may not receive or
retain reinsurance payments on a loan on which the lender has
violated the Federal due diligence or timely filing requirements,
even if the lender has followed a cure procedure established by the
agency. Under Secs. 682.406(b) and 682.413(f), the Secretary--not
the guaranty agency--decides whether to reinstate reinsurance
coverage on a loan involving such a violation or any other violation
of Federal regulations. A lender's violation of a guaranty agency's
requirement that affects the agency's guarantee coverage also
affects reinsurance coverage. See Secs. 682.406(a)(7) and
682.413(b). As Secs. 682.406(a)(7) and 682.413(b) make clear, a
guaranty agency's cure procedures are relevant to reinsurance
coverage only insofar as they allow for cure of violations of
requirements established by the agency affecting the loan insurance
it provides to lenders. In addition, all those requirements must be
submitted to the Secretary for review and approval under 34 CFR
682.401(d).
(4) References throughout this letter to ``due diligence and
timely filing'' rules, requirements, and violations should be
understood to mean only the Federal rules cited above, unless the
context clearly requires otherwise.
A. Scope
This letter outlines the Secretary's waiver policy regarding
certain violations of Federal due diligence or timely filing
requirements on a loan insured by a guaranty agency. Unless your
agency receives notification to the contrary, or the lender's
violation involves fraud or other intentional misconduct, you may
treat as reinsured any otherwise reinsured loan involving such a
violation that has been cured in accordance with this letter.
B. Duty of a Guaranty Agency To Enforce Its Standards
As noted above, a lender's violation of a guaranty agency's
requirement that affects the agency's guarantee coverage also
affects reinsurance coverage. Thus, as a general rule,
[[Page 58637]]
an agency that fails to enforce such a requirement and pays a
default claim involving a violation is not eligible to receive
reinsurance on the underlying loan. However, in light of the waiver
policy outlined below, which provides more stringent cure procedures
for violations occurring on or after May 1, 1988 than for pre-May 1,
1988 violations, some guaranty agencies with more stringent policies
than the policy outlined below for the pre-May 1 violations have
indicated that they wish to relax their own policies for violations
of agency rules during that period. While the Secretary does not
encourage any agency to do so, the Secretary will permit an agency
to take either of the following approaches to its enforcement of its
own due diligence and timely filing rules for violations occurring
before May 1, 1988.
(1) The agency may continue to enforce its rules, even if they
result in the denial of guarantee coverage by the agency on
otherwise reinsurable loans; or
(2) The agency may decline to enforce its rules as to any loan
that would be reinsured under the retrospective waiver policy
outlined below. In other words, for violations of a guaranty
agency's due diligence and timely filing rules occurring before May
1, 1988, a guaranty agency is authorized, but not required, to
retroactively revise its own due diligence and timely filing
standards to treat as guaranteed any loan amount that is reinsured
under the retrospective enforcement policy outlined in section
I.C.1. However, for any violation of an agency's due diligence or
timely filing rules occurring on or after May 1, 1988, the agency
must resume enforcing those rules in accordance with their terms, in
order to receive reinsurance payments on the underlying loan. For
these post-April 30 violations, and for any other violation of an
agency's rule affecting its guarantee coverage, the Secretary will
treat as reinsured all loans on which the agency has engaged in, and
documented, a case-by-case exercise of reasonable discretion
allowing for guarantee coverage to be continued or reinstated
notwithstanding the violation. But any agency that otherwise fails,
or refuses, to enforce such a rule does so without the benefit of
reinsurance coverage on the affected loans, and the lenders continue
to be ineligible for interest benefits and special allowance
thereon.
C. Due Diligence
Under 34 CFR 682.200, default on a FFEL Program loan occurs when
a borrower fails to make a payment when due, provided this failure
persists for 270 days for loans payable in monthly installments, or
for 330 days for loans payable in less frequent installments. The
270/330-day default period applies regardless of whether payments
were missed consecutively or intermittently. For example, if the
borrower, on a loan payable in monthly installments, makes his
January 1st payment on time, his February 1st payment two months
late (April 1st), his March 1st payment 3 months late (June 1st),
and makes no further payments, the delinquency period begins on
February 2nd, with the first delinquency, and default occurs on
December 27th, when the April payment becomes 270 days past due. The
lender must treat the payment made on April 1st as the February 1st
payment, since the February 1st payment had not been made prior to
that time. Similarly, the lender must treat the payment made on June
1st as the March 1st payment, since the March payment had not been
made prior to that time.
Note: Lenders are strongly encouraged to exercise forbearance,
prior to default, for the benefit of borrowers who have missed
payments intermittently but have otherwise indicated willingness to
repay their loans. See 34 CFR 682.211. The forbearance process helps
to reduce the incidence of default, and serves to emphasize for the
borrower the importance of compliance with the repayment obligation.
D. Timely Filing
(1) The 90-day filing period applicable to FFEL Program default
claims is described in 34 CFR 682.406(a)(5). The 90-day filing
period begins at the end of the 270/330-day default period. The
lender ordinarily must file a default claim on a loan in default by
the end of the filing period. However, the lender may, but need not,
file a claim on that loan before the 360th day of delinquency (270-
day default period plus 90-day filing period) if the borrower brings
the account less than 270 days delinquent before the 360th day.
Thus, in the above example, if the borrower makes the April 1st
payment on December 28th, that payment makes the loan 241 days
delinquent, and the lender may, but need not, file a default claim
on the loan at that time. If, however, the loan again becomes 270
days delinquent, the lender must file a default claim within 90 days
thereafter (unless the loan is again brought to less than 270 days
delinquent prior to the end of that 90-day period). In other words,
the Secretary will permit a lender to treat payments made during the
filing period as curing the default if those payments are sufficient
to make the loan less than 270 days delinquent.
(2) Section I of this letter outlines the Secretary's waiver
policy for due diligence and timely filing violations. As noted
above, to the extent that it results in the imposition of a lesser
sanction than that available to the Secretary by statute or
regulation, this policy reflects the exercise of the Secretary's
authority to waive the Secretary's rights and claims in this area.
Section II discusses the issue of the due date of the first payment
on a loan and the application of the waiver policy to that issue.
Section III provides guidance on several issues related to due
diligence and timely filing as to which clarification has been
requested by some program participants.
I. Waiver Policy
A. Definitions
The following definitions apply to terms used throughout this
letter:
Full payment means payment by the borrower, or another person
(other than the lender) on the borrower's behalf, in an amount at
least as great as the monthly payment amount required under the
existing terms of the loan, exclusive of any forbearance agreement
in force at the time of the default. (For example, if the original
repayment schedule or agreement called for payments of $50 per
month, but a forbearance agreement was in effect at the time of
default that allowed the borrower to pay $25 per month for a
specified time, and the borrower defaulted in making the reduced
payments, a full payment would be $50, or two $25 payments in
accordance with the original repayment schedule or agreement.) In
the case of a payment made by cash, money order, or other means that
do not identify the payor that is received by a lender after the
date of this letter, that payment may constitute a full payment only
if a senior officer of the lender or servicing agent certifies that
the payment was not made by or on behalf of the lender or servicing
agent.
Earliest unexcused violation means:
(a) In cases when reinsurance is lost due to a failure to timely
establish a first payment due date, the earliest unexcused violation
would be the 46th day after the date the first payment due date
should have been established.
(b) In cases when reinsurance is lost due to a gap of 46 days,
the earliest unexcused violation date would be the 46th day
following the last collection activity.
(c) In cases when reinsurance is lost due to three or more due
diligence violations of 6 days or more, the earliest unexcused
violation would be the day after the date of default.
(d) In cases when reinsurance is lost due to a timely filing
violation, the earliest unexcused violation would be the day after
the filing deadline.
Reinstatement with respect to reinsurance coverage means the
reinstatement of the guaranty agency's right to receive reinsurance
payments on the loan after the date of reinstatement. Upon
reinstatement of reinsurance, the borrower regains the right to
receive forbearance or deferments, as appropriate. Reinstatement
with respect to reinsurance on a loan also includes reinstatement of
the lender's right to receive interest and special allowance
payments on that loan.
Gap in collection activity on a loan means:
(a) The period between the initial delinquency and the first
collection activity;
(b) The period between collection activities (a request for
preclaims assistance is considered a collection activity);
(c) The period between the last collection activity and default;
or
(d) The period between the date a lender discovers a borrower
has ``skipped'' and the lender's first skip-tracing activity.
Note: The concept of ``gap'' is used herein simply as one
measure of collection activity. This definition applies to loans
subject to the FFEL and PLUS programs regulations published on or
after November 10, 1986. For those loans, not all gaps are
violations of the due diligence rules.
Violation with respect to the due diligence requirements in
Sec. 682.411 means the failure to timely complete a required
diligent phone contact effort, the failure to timely send a required
letter (including a request for preclaims assistance), or the
failure to timely engage in a required skip-tracing activity. If
[[Page 58638]]
during the delinquency period a gap of more than 45 days occurs
(more than 60 days for loans with a transfer), the lender must
satisfy the requirement outlined in I.D.1. for reinsurance to be
reinstated. The day after the 45-day gap (or 60 for loans with a
transfer) will be considered the date that the violation occurred.
Transfer means any action, including, but not limited to, the
sale of the loan, that results in a change in the system used to
monitor or conduct collection activity on a loan from one system to
another.
B. General
1. Resumption of Interest and Special Allowance Billing on Loans
Involving Due Diligence or Timely Filing Violations. For any loan on
which a cure is required under this letter in order for the agency
to receive any reinsurance payment, the lender may resume billing
for interest and special allowance on the loan only for periods
following its completion of the required cure procedure.
2. Reservation of the Secretary's Right to Strict Enforcement.
While this letter describes the Secretary's general waiver policy,
the Secretary retains the option of refusing to permit or recognize
cures, or of insisting on strict enforcement of the remedies
established by statute or regulation, in cases where, in the
Secretary's judgment, a lender has committed an excessive number of
severe violations of due diligence or timely filing rules and in
cases where the best interests of the United States otherwise
require strict enforcement. More generally, this bulletin states the
Secretary's general policy and is not intended to limit in any way
the authority and discretion afforded the Secretary by statute or
regulation.
3. Interest, Special Allowance, and Reinsurance Repayment
Required as a Condition for Exercise of the Secretary's Waiver
Authority. The Secretary's waiver of the right to recover or refuse
to pay reinsurance, interest benefits, or special allowance
payments, and recognition of cures for due diligence and timely
filing violations, are conditioned on the following:
a. The guaranty agency and lender must ensure that the lender
repays all interest benefits and special allowance received on loans
involving violations occurring prior to May 1, 1988, for which the
lender is ineligible under the waiver policy for the ``retrospective
period'' described in section I.C.1., or under the waiver policy for
timely filing violations described in section I.E.1., by an
adjustment to one of the next three quarterly billings for interest
benefits and special allowance submitted by the lender in a timely
manner after May 1, 1988. The guaranty agency's responsibility in
this regard is satisfied by receipt of a certification from the
lender that this repayment has been made in full.
b. The guaranty agency, on or before October 1, 1988, must repay
all reinsurance received on loans involving violations occurring
prior to May 1, 1988, for which the agency is ineligible under the
waiver policy for the ``retrospective period'' described in section
I.C.1., or under the waiver policy for timely filing violations
described in section I.E.1. Pending completion of the repayment
described above, a lender or guaranty agency may submit billings to
the Secretary on loans that are eligible for reinsurance under the
waiver policy in this letter until it learns that repayment in full
will not be made, or until the deadline for a repayment has passed
without it being made, whichever is earlier. Of course, a lender or
guaranty agency is prohibited from billing the Secretary for program
payments on any loan amount that is not eligible for reinsurance
under the waiver policy outlined in this letter. In addition to the
repayments required above, any amounts received in the future in
violation of this prohibition must immediately be repaid to the
Secretary.
4. Applicability of the Waiver Policy to Particular Classes of
Loans. The policy outlined in this letter applies only to a loan for
which the first day of the 180/240-day or 270/330-day default period
(as applicable) that ended with default by the borrower occurred on
or after March 10, 1987, or, in the case of a timely filing
violation, December 26, 1986, and that involves violations only of
the due diligence or timely filing requirements or both. For a loan
that has lost reinsurance prior to December 1, 1992, this policy
applies only through November 30, 1995. For a loan that loses
reinsurance on or after December 1, 1992, this policy applies until
3 years after the default claim filing deadline.
5. Excuse of Certain Due Diligence Violations. Except as noted
in section II, if a loan has due diligence violations but was later
cured and brought current, those violations will not be considered
in determining whether a loan was serviced in accordance with 34 CFR
682.411. Guarantors must review the due diligence for the 180/270 or
270/330-day period (as applicable) prior to the default date
ensuring the due date of the first payment not later made is the
correct payment due date for the borrower.
6. Excuse of Timely Filing Violations Due to Performance of a
Guaranty Agency's Cure Procedures. If, prior to May 1, 1988, and
prior to the filing deadline, a lender commenced the performance of
collection activities specifically required by the guaranty agency
to cure a due diligence violation on a loan, the Secretary will
excuse the lender's timely filing violation if the lender completes
the additional activities within the time period permitted by the
guaranty agency and files a default claim on the loan not more than
45 days after completing the additional activities.
7. Treatment of Accrued Interest on ``Cured'' Claims. For any
loan involving any violation of the due diligence or timely filing
rules for which a ``cure'' is required under section I.C. or I.E.,
for the agency to receive a reinsurance payment, the Secretary will
not reimburse the guaranty agency for any unpaid interest accruing
after the date of the earliest unexcused violation occurring after
the last payment received before the cure is accomplished, and prior
to the date of reinstatement of reinsurance coverage. The lender may
capitalize unpaid interest accruing on the loan from the date of the
earliest unexcused violation to the date of the reinstatement of
reinsurance coverage. However, if the agency later files a claim for
reinsurance on that loan, the agency must deduct this capitalized
interest from the amount of the claim. Some cures will not reinstate
coverage. For treatment of accrued interest in those cases, see
section I.E.1.c.
C. Waiver Policy for Violations of the Federal Due Diligence in
Collection Requirements (34 CFR 682.411)
A violation of the due diligence in collection rules occurs when
a lender fails to meet the requirements found in 34 CFR 682.411.
However, if a lender makes all required calls and sends all required
letters during any of the delinquency periods described in that
section, the lender is considered to be in compliance with that
section for that period, even if the letters were sent before the
calls were made. The special provisions for transfers apply whenever
the violation(s) and, if applicable, the gap, were due to a
transfer, as defined in section I.A.
1. Retrospective Period. For one or more due diligence
violations occurring during the period March 10, 1987-April 30,
1988--
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if no gap of 46 days or
more (61 days or more for a transfer) exists.
b. If a gap of 46-60 days (61-75 days for a transfer) exists,
principal will be reinsured, but accrued interest, interest
benefits, and special allowance otherwise payable by the Secretary
for the delinquency period are limited to amounts accruing through
the date of default.
c. If a gap of 61 days or more (76 days or more for a transfer)
exists, the borrower must be located after the gap, either by the
agency or the lender, in order for reinsurance on the loan to be
reinstated. (See section I.E.1.d., for a description of acceptable
evidence of location.) In addition, if the loan is held by the
lender or after March 15, 1988, the lender must follow the steps
described in section I.E.1., or receive a full payment or a new
signed repayment agreement, in order for the loan to again be
eligible for reinsurance. The lender must repay all interest
benefits and special allowance received for the period beginning
with its earliest unexcused violation, occurring after the last
payment received before the cure is accomplished, and ending with
the date, if any, that reinsurance on the loan is reinstated.
2. Prospective Period. For due diligence violations occurring on
or after May 1, 1988 based on due dates prior to October 6, 1998--
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if there is no violation
of Federal requirements of 6 days or more (21 days or more for a
transfer.)
b. If there exist not more than two violations of 6 days or more
each (21 days or more for a transfer), and no gap of 46 days or more
(61 days or more for a transfer) exists, principal will be
reinsured, but accrued interest, interest benefits, and special
allowance otherwise payable by the Secretary for the delinquency
period will be limited to amounts accruing through the date of
default. However, the lender must complete all required activities
before the claim filing deadline, except that a preclaims assistance
request must be made before the 240th day of delinquency. If the
lender fails to make
[[Page 58639]]
this request by the 240th day, the Secretary will not pay any
accrued interest, interest benefits, and special allowance for the
most recent 180 days prior to default. If the lender fails to
complete any other required activity before the claim filing
deadline, accrued interest, interest benefits, and special allowance
otherwise payable by the Secretary for the delinquency period will
be limited to amounts accruing through the 90th day before default.
c. If there exist three violations of 6 days or more each (21
days or more for a transfer) and no gap of 46 days or more (61 days
or more for a transfer), the lender must satisfy the requirements
outlined in I.E.1., or receive a full payment or a new signed
repayment agreement in order for reinsurance on the loan to be
reinstated. The Secretary does not pay any interest benefits or
special allowance for the period beginning with the lender's
earliest unexcused violation occurring after the last payment
received before the cure is accomplished, and ending with the date,
if any, that reinsurance on the loan is reinstated.
d. If there exist more than three violations of 6 days or more
each (21 days or more for a transfer) of any type, or a gap of 46
days (61 days for a transfer) or more and at least one violation,
the lender must satisfy the requirement outlined in section I.D.1.,
for reinsurance on the loan to be reinstated. The Secretary does not
pay any interest benefits or special allowance for the period
beginning with the lender's earliest unexcused violation occurring
after the last payment received before the cure is accomplished, and
ending with the date, if any, that reinsurance on the loan is
reinstated.
3. Post 1998 Amendments. For due diligence violations based on
due dates on or after October 6, 1998--
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if there is no violation
of Federal requirements of 6 days or more (21 days or more for a
transfer).
b. If there exist not more than two violations of 6 days or more
each (21 days or more for a transfer), and no gap of 46 days or more
(61 days or more for a transfer) exists, principal will be
reinsured, but accrued interest, interest benefits, and special
allowance otherwise payable by the Secretary for the delinquency
period will be limited to amounts accruing through the date of
default. However, the lender must complete all required activities
before the claim filing deadline, except that a default aversion
assistance request must be made before the 330th day of delinquency.
If the lender fails to make this request by the 330th day, the
Secretary will not pay any accrued interest, interest benefits, and
special allowance for the most recent 270 days prior to default. If
the lender fails to complete any other required activity before the
claim filing deadline, accrued interest, interest benefits, and
special allowance otherwise payable by the Secretary for the
delinquency period will be limited to amounts accruing through the
90th day before default.
c. If there exist three violations of 6 days or more each (21
days or more for a transfer) and no gap of 46 days or more (61 days
or more for a transfer), the lender must satisfy the requirements
outlined in I.E.1. or receive a full payment or a new signed
repayment agreement in order for reinsurance on the loan to be
reinstated. The Secretary does not pay any interest benefits or
special allowance for the period beginning with the lender's
earliest unexcused violation occurring after the last payment
received before the cure is accomplished, and ending with the date,
if any, that reinsurance on the loan is reinstated.
d. If there exist more than three violations of 6 days or more
each (21 days or more for a transfer) of any type, or a gap of 46
days (61 days for a transfer) or more and at least one violation,
the lender must satisfy the requirement outlined in section I.D.1.
for reinsurance on the loan to be reinstated. The Secretary does not
pay any interest benefits or special allowance for the period
beginning with the lender's earliest unexcused violation occurring
after the last payment received before the cure is accomplished and
ending with the date, if any, that reinsurance on the loan is
reinstated.
D. Reinstatement of Reinsurance Coverage for Certain Egregious
Due Diligence Violations.
1. Cures. In the case of a loan involving violations described
in section I.C.2.d. or I.C.3.d., the lender may utilize either of
the two procedures described in section I.D.1.a or I.D.1.b. for
obtaining reinstatement of reinsurance coverage on the loan.
a. After the violations occur, the lender obtains a new
repayment agreement signed by the borrower. The repayment agreement
must comply with the ten-year repayment limitations set out in 34
CFR 682.209(a)(7); or
b. After the violations occur, the lender obtains one full
payment. If the borrower later defaults, the guaranty agency must
obtain evidence of this payment (e.g., a copy of the check) from the
lender.
2. Borrower Deemed Current as of Date of Cure. On the date the
lender receives a new signed repayment agreement or the curing
payment under section I.D.1., reinsurance coverage on the loan is
reinstated, and the borrower must be deemed by the lender to be
current in repaying the loan and entitled to all rights and benefits
available to borrowers who are not in default. The lender must then
follow the collection and timely filing requirements applicable to
the loan.
E. Cures for Timely Filing Violations and Certain Due Diligence
Violations
1. Default Claims.
a. Reinstatement of Insurance Coverage. Except as noted in
section I.B.6., in order to obtain reinstatement of reinsurance
coverage on a loan in the case of a timely filing violation, a due
diligence violation described in section I.C.2.c. or I.C.3.c., or a
due diligence violation described in section I.C.1.c. where the
lender holds the loan on or after March 15, 1988, the lender must
first locate the borrower after the gap, or after the date of the
last violation, as applicable. (See section I.E.1.d. for description
of acceptable evidence of location.) Within 15 days thereafter, the
lender must send to the borrower, at the address at which the
borrower was located, (i) a new repayment agreement, to be signed by
the borrower, that complies with the ten-year repayment limitations
in 34 CFR 682.209(a)(7), along with (ii) a collection letter
indicating in strong terms the seriousness of the borrower's
delinquency and its potential effect on his or her credit rating if
repayment is not commenced or resumed. If, within 15 days after the
lender sends these items, the borrower fails to make a full payment
or to sign and return the new repayment agreement, the lender must,
within 5 days thereafter, diligently attempt to contact the borrower
by telephone. Within 5-10 days after completing these efforts, the
lender must again diligently attempt to contact the borrower by
telephone. Finally, within 5-10 days after completing these efforts,
the lender must send a forceful collection letter indicating that
the entire unpaid balance of the loan is due and payable, and that,
unless the borrower immediately contacts the lender to arrange
repayment, the lender will be filing a default claim with the
guaranty agency.
b. Borrower Deemed Current Under Certain Circumstances. If, at
any time on or before the 30th day after the lender completes the
additional collection efforts described in section I.E.1.a., or the
270th day of delinquency, whichever is later, the lender receives a
full payment or a new signed repayment agreement, reinsurance
coverage on the loan is reinstated on the date the lender receives
the full payment or new agreement. The borrower must be deemed by
the lender to be current in repaying the loan and entitled to all
rights and benefits available to borrowers who are not in default.
In the case of a timely filing violation on a loan for which the
borrower is deemed current under this paragraph, the lender is
ineligible to receive interest benefits and special allowance
accruing from the date of the violation to the date of reinstatement
of reinsurance coverage on the loan.
c. Borrower Deemed in Default Under Certain Circumstances. If
the borrower does not make a full payment, or sign and return the
new repayment agreement, on or before the 30th day after the lender
completes the additional collection efforts described in section
I.E.1.a., or the 270th day of delinquency, whichever is later, the
lender must deem the borrower to be in default. The lender must then
file a default claim on the loan, accompanied by acceptable evidence
of location (see section I.E.1.d.), within 30 days after the end of
the 30-day period. Reinsurance coverage, and therefore the lender's
right to receive interest benefits and special allowance, is not
reinstated on a loan involving these circumstances. However, the
Secretary will honor reinsurance claims submitted in accordance with
this paragraph on the outstanding principal balance of those loans,
on unpaid interest as provided in section I.B.7., and for
reimbursement of eligible supplemental preclaims assistance costs.
In the case of a timely filing violation on a loan for which the
borrower is deemed in default under this paragraph, the lender is
ineligible to receive interest benefits and special allowance
accruing from the date of the violation.
d. Acceptable Evidence of Location. Only the following
documentation is acceptable as
[[Page 58640]]
evidence that the lender has located the borrower:
(1) A postal receipt signed by the borrower not more than 15
days prior to the date on which the lender sent the new repayment
agreement, indicating acceptance of correspondence from the lender
by the borrower at the address shown on the receipt; or
(2) Documentation submitted by the lender showing--
(i) The name, identification number, and address of the lender;
(ii) The name and Social Security number of the borrower; and
(iii) A signed certification by an employee or agent of the
lender, that--
(A) On a specified date, he or she spoke with or received
written communication (attached to the certification) from the
borrower on the loan underlying the default claim, or a parent,
spouse, sibling, roommate, or neighbor of the borrower;
(B) The address and, if available, telephone number of the
borrower were provided to the lender in the telephone or written
communication; and
(C) In the case of a borrower whose address or telephone number
was provided to the lender by someone other than the borrower, the
new repayment agreement and the letter sent by the lender pursuant
to section I.E.1.a., had not been returned undelivered as of 20 days
after the date those items were sent, for due diligence violations
described in section I.C.1.c. where the lender holds the loan on the
date of this letter, and as of the date the lender filed a default
claim on the cured loan, for all other violations.
2. Death, Disability, and Bankruptcy Claims. The Secretary will
honor a death or disability claim on an otherwise eligible loan
notwithstanding the lender's failure to meet the 60-day timely
filing requirement (See 34 CFR 682.402(g)(2)(i)). However, the
Secretary will not reimburse the guaranty agency if, before the date
the lender determined that the borrower died or was totally and
permanently disabled, the lender had violated the Federal due
diligence or timely filing requirements applicable to that loan,
except in accordance with the waiver policy described above.
Interest that accrued on the loan after the expiration of the 60-day
filing period remains ineligible for reimbursement by the Secretary,
and the lender must repay all interest and special allowance
received on the loan for periods after the expiration of the 60-day
filing period. The Secretary has determined that, in the vast
majority of cases, the failure of a lender to comply with the timely
filing requirement applicable to bankruptcy claims
(Sec. 682.402(g)(2)(iv)) causes irreparable harm to the guaranty
agency's ability to contest the discharge of the loan by the court,
or to otherwise collect from the borrower. Therefore, the Secretary
has decided not to excuse violations of the timely filing
requirement applicable to bankruptcy claims, except when the lender
can demonstrate that the bankruptcy action has concluded and that
the loan has not been discharged in bankruptcy or, if previously
discharged, has been the subject of a reversal of the discharge. In
that case, the lender must return the borrower to the appropriate
status that existed prior to the filing of the bankruptcy claim
unless the status has changed due solely to passage of time. In the
latter case, the lender must place the borrower in the status that
would exist had no bankruptcy claim been filed. If the borrower is
delinquent after the loan is determined nondischargeable, the lender
should grant administrative forbearance to bring the borrower's
account current as provided in Sec. 682.211(f)(4). The Secretary
will not reimburse the guaranty agency for interest for the period
beginning on the filing deadline for the bankruptcy claim and ending
on the date the loan becomes eligible again for reinsurance.
Reinsurance is reinstated on the date the bankruptcy action
concludes and the loan is not discharged or on the date a previous
discharge is reversed.
II. Due Date of First Payment. Section 682.411(b)(1) refers to
the ``due date of the first missed payment not later made'' as one
way to determine the first day of delinquency on a loan. Section
682.209(a)(3) states that, generally, the repayment period on an
FFEL Program loan begins some number of months after the month in
which the borrower ceases at least half-time study. Where the
borrower enters the repayment period with the lender's knowledge,
the first payment due date may be set by the lender, provided it
falls within a reasonable time after the first day of the month in
which the repayment period begins. In this situation, the Secretary
generally permits a lender to allow the borrower up to 45 days from
the first day of repayment to make the first payment (unless the
lender establishes the first day of repayment under
Sec. 682.209(a)(3)(ii)(E)).
1. In cases where the lender learns that the borrower has
entered the repayment period after the fact, current Sec. 682.411
treats the 30th day after the lender receives this information as
the first day of delinquency. In the course of discussion with
lenders, the Secretary has learned that many lenders have not been
using the 30th day after receipt of notice that the repayment period
has begun (``the notice'') as the first payment due date. In
recognition of this apparently widespread practice, the Secretary
has decided that, both retrospectively and prospectively, a lender
should be allowed to establish a first payment due date within 60
days after receipt of the notice, to capitalize interest accruing up
to the first payment due date, and to exercise forbearance with
respect to the period during which the borrower was in the repayment
period but made no payment. In effect, this means that, if the
lender sends the borrower a coupon book, billing notice, or other
correspondence establishing a new first payment due date, on or
before the 60th day after receipt of the notice, the lender is
deemed to have exercised forbearance up to the new first payment due
date. The new first payment due date must fall no later than 75 days
after receipt of the notice (unless the lender establishes the first
day of repayment under Sec. 682.209(a)(3)(ii)(E)). In keeping with
the 5-day tolerance permitted under section I.C.2.a., for the
``prospective period,'' or section I.C.3.a., for the ``post 1998
amendment period,'' a lender that sends the above-described material
on or before the 65th day after receipt of the notice will be held
harmless. However, a lender that does so on the 66th day will have
failed by more than 5 days to send both of the collection letters
required by Sec. 682.411(c) to be sent within the first 30 days of
delinquency and will thus have committed two violations of more than
five days of that rule.
2. If the lender fails to send the material establishing a new
first payment due date on or before the 65th day after receipt of
the notice, it may thereafter send material establishing a new first
payment due date falling not more than 45 days after the materials
are sent and will be deemed to have exercised forbearance up to the
new first payment due date. However, all violations and gaps
occurring prior to the date on which the material is sent are
subject to the waiver policies described in section I for violations
falling in either the retrospective or prospective periods. This is
an exception to the general policy set forth in section I.B.5., that
only violations occurring during the most recent 180 or 270 days (as
applicable) of the delinquency period on a loan are relevant to the
Secretary's examination of due diligence.
Please Note: References to the ``65th day after receipt of the
notice'' and ``66th day'' in the preceding paragraphs should be
amended to read ``95th day'' and ``96th day'' respectively for
lenders subject to Sec. 682.209(a)(3)(ii)(E).
III. Questions and Answers
The waiver policy outlined in this letter was developed after
extensive discussion and consultation with participating lenders and
guaranty agencies. In the course of these discussions, lenders and
agencies raised a number of questions regarding the due diligence
rules as applied to various circumstances. The Secretary's responses
to these questions follow.
Note: The answer to questions 1 and 4 are applicable only to
loans subject to Sec. 682.411 of the FFEL and PLUS program
regulations published on or after November 10, 1986.
1. Q: Section 682.411 of the program regulations requires the
lender to make ``diligent efforts to contact the borrower by
telephone'' during each 30-day period of delinquency beginning after
the 30th day of delinquency. What must a lender do to comply with
this requirement?
A: Generally speaking, one actual telephone contact with the
borrower, or two attempts to make such contact on different days and
at different times, will satisfy the ``diligent efforts''
requirement for any of the 30-day delinquency periods described in
the rule. However, the ``diligent efforts'' requirement is intended
to be a flexible one, requiring the lender to act on information it
receives in the course of attempting telephone contact regarding the
borrower's actual telephone number, the best time to call to reach
the borrower, etc. For instance, if the lender is told during its
second telephone contact attempt that the borrower can be reached at
another number or at a different time of day, the lender must then
attempt to reach the borrower by telephone at that number or that
time of day.
2. Q: What must a lender do when it receives conflicting
information regarding the date a borrower ceased at least half-time
study?
[[Page 58641]]
A: A lender must promptly attempt to reconcile conflicting
information regarding a borrower's in-school status by making
inquiries of appropriate parties, including the borrower's school.
Pending reconciliation, the lender may rely on the most recent
credible information it has.
3. Q: If a loan is transferred from one lender to another, is
the transferee held responsible for information regarding the
borrower's status that is received by the transferor but is not
passed on to the transferee?
A: No. A lender is responsible only for information received by
its agents and employees. However, if the transferee has reason to
believe that the transferor has received additional information
regarding the loan, the transferee must make a reasonable inquiry of
the transferor as to the nature and substance of that information.
4. Q: What are a lender's due diligence responsibilities where a
check received on a loan is dishonored by the bank on which it was
drawn?
A: Upon receiving notice that a check has been dishonored, the
lender must treat the payment as having never been made for purposes
of determining the number of days that the borrower is delinquent at
that time. The lender must then begin (or resume) attempting
collection on the loan in accordance with Sec. 682.411, commencing
with the first 30-day delinquency period described in Sec. 682.411
that begins after the 30-day delinquency period in which the notice
of dishonor is received. The same result occurs when the lender
successfully obtains a delinquent borrower's correct address through
skip-tracing, or when a delinquent borrower leaves deferment or
forbearance status.
[FR Doc. 99-28172 Filed 10-28-99; 8:45 am]
BILLING CODE 4000-01-U