[Federal Register: August 3, 1999 (Volume 64, Number 148)]
[Proposed Rules]
[Page 42175-42203]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au99-25]
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Part II
Department of Education
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34 CFR Part 682
Federal Family Education Loan (FFEL) Program; Proposed Rule
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DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AC78
Federal Family Education Loan (FFEL) Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Family Education
Loan (FFEL) Program regulations. These proposed regulations implement
changes made to the Higher Education Act of 1965 by the Higher
Education Amendments of 1998 (the ``1998 Amendments''). The proposed
regulations cover a variety of items, including changes to the
financial structure of guaranty agencies in the FFEL Program.
DATES: We must receive your comments on or before September 15, 1999.
ADDRESSES: Address all comments about these proposed regulations to Ms.
Pamela A. Moran, U.S. Department of Education, P.O. Box 23272,
Washington, DC 20202-5449. If you prefer to send your comments through
the Internet, use the following address: ffelnprm@ed.gov
If you want to comment on the information collection requirements,
you must send your comments to the Office of Management and Budget at
the address listed in the Paperwork Reduction Act section of this
preamble. You may also send a copy of these comments to the Department
representative named in this section.
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:
Invitation to Comment
We invite you to submit comments regarding these proposed
regulations. To ensure that your comments have maximum effect in
developing the final regulations, we urge you to identify clearly the
specific section or sections of the proposed regulations that each of
your comments addresses and to arrange your comments in the same order
as the proposed regulations.
We invite you to assist us in complying with the specific
requirements of Executive Order 12866 and its overall requirement of
reducing regulatory burden that might result from these proposed
regulations. Please let us know of any further opportunities we should
take to reduce potential costs or increase potential benefits while
preserving the effective and efficient administration of the program.
During and after the comment period, you may inspect all public
comments about these proposed regulations in Room 3045, ROB-3, 7th and
D Streets, SW., Washington, DC, between the hours of 8:30 a.m. and 4:00
p.m., Eastern time, Monday through Friday of each week except Federal
holidays.
Assistance to Individuals With Disabilities in Reviewing the Rulemaking
Record
On request, we will supply an appropriate aid, such as a reader or
print magnifier, to an individual with a disability who needs
assistance to review the comments or other documents in the public
rulemaking record for these proposed regulations. If you want to
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal
Information Relay Service at 1-800-877-8339.
Background
These proposed regulations are needed to implement and reflect
changes to the Higher Education Act of 1965 (the HEA) made by the 1998
Amendments, Public Law 105-244, enacted October 7, 1998.
The FFEL Program regulations (34 CFR part 682) govern the Federal
Stafford Loan Program (subsidized and unsubsidized), the Federal
Supplemental Loans for Students Program (no longer active), the Federal
PLUS Program, and the Federal Consolidation Loan Program (formerly
collectively known as the Guaranteed Student Loan Programs). A lender
that is eligible under the HEA may make guaranteed loans under the FFEL
Program. A guaranty agency is a State or private nonprofit entity that
has an agreement with the Secretary to perform certain administrative
roles in the FFEL Program. Guaranty agencies receive and hold Federal
funds to pay certain FFEL Program costs and expenses. They are trustees
for the Federal Government and must comply with fiduciary standards.
Negotiated Rulemaking Process
Section 492 of the HEA requires that, before publishing any
proposed regulations to implement programs under Title IV of the HEA,
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
proposed regulations. All published proposed regulations must conform
to agreements resulting from the negotiated rulemaking process unless
the Secretary reopens the negotiated rulemaking process or provides a
written explanation to the participants in that process why the
Secretary has decided to depart from the agreements.
To obtain public involvement in the development of the proposed
regulations, the Secretary published a notice in the Federal Register
(63 FR 59922, November 6, 1998) requesting advice and recommendations
from interested parties concerning what regulations were necessary to
implement Title IV of the HEA. We also invited advice and
recommendations concerning which regulated issues should be subjected
to a negotiated rulemaking process. We further requested advice and
recommendations concerning ways to prioritize the numerous issues in
Title IV, in order to meet statutory deadlines. Additionally, we
requested advice and recommendations concerning how to conduct the
negotiated rulemaking process, given the time available and the number
of regulations that needed to be developed.
In addition to soliciting written comments, we held three public
hearings and several informal meetings to give interested parties an
opportunity to share advice and recommendations with the Department.
The hearings were held in Washington, DC, Chicago, and Los Angeles, and
we posted transcripts of those hearings to the Department's Information
for Financial Aid Professionals website (http://www.ifap.ed.gov).
We then published a second notice in the Federal Register (63 FR
71206, December 23, 1998) to announce the Department's intention to
establish four negotiated rulemaking committees to draft proposed
regulations implementing Title IV of the HEA. The notice announced the
organizations or groups believed to represent the interests that should
participate in the negotiated rulemaking process and announced that the
Department would select participants for the process from
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nominees of those organizations or groups. We requested nominations for
additional participants from anyone who believed that the organizations
or groups listed did not adequately represent the list of interests
outlined in section 492 of the HEA. Once the four committees were
established, they met to develop proposed regulations over the course
of several months, beginning in January.
The proposed regulations contained in this notice of proposed
rulemaking (NPRM) reflect the final consensus of the negotiating
committee, which was made up of the following members:
* American Association of Collegiate Registrars and
* Admissions Officers.
* American Association of State Colleges and Universities.
* American Council on Education.
* Career College Association.
* Consumer Bankers Association.
* Education Finance Council.
* Education Loan Management Resources.
* Guaranty Agency CEO Caucus.
* Legal Services Counsel (a coalition).
* National Association of Independent Colleges and
Universities.
* National Association of State Student Grant and Aid
Programs.
* National Association of State Universities and Land Grant
Colleges.
* National Association of Student Financial Aid
Administrators.
* National Association of Student Loan Administrators.
* National Council of Higher Education Loan Programs.
* National Direct Student Loan Coalition.
* Sallie Mae, Inc.
* State Higher Education Executive Officers Association.
* Student Loan Servicing Alliance.
* United States Department of Education.
* United States Student Association.
* US Public Interest Research Group.
As stated in the committee protocols, consensus means that there
must be no dissent by any member in order for the committee to be
considered to have reached agreement. Consensus was reached on all of
the proposed regulations in this document.
The committee that developed these proposed regulations focused on
issues unique to FFEL Program guaranty agencies and lenders,
particularly in the areas where changes were made to the HEA by the
1998 Amendments affecting guaranty agency financial restructuring.
Issues that affected Title IV borrowers in general, such as deferments,
cancellations, forbearances, loan amounts, interest rates, etc., were
addressed by another negotiating committee. However, the committee
agreed that if it completed its required work early, the negotiators
could propose changes to update or clarify other provisions in the
existing FFEL regulations that were not otherwise being modified as a
result of the 1998 Amendments. The committee reached consensus on its
required work early and, in response to proposals presented by various
negotiators, spent most of its last meeting looking at changes to other
regulatory provisions. Some of those additional changes were agreed to
by the committee and are included in these proposed regulations.
The goal of the negotiations was to develop an NPRM that reflected
a final consensus of the negotiating committee. The proposed
regulations in this document reflect that consensus. The following
discussion includes summaries of some of the points of view expressed
by the negotiators as they sought to reach consensus. This information
will assist you in understanding the rationale for some of these
proposed regulations.
The members of the committee represented lenders, loan servicers,
guaranty agencies, schools, students, and other interested parties from
various sectors of the FFEL Program and student aid community, as well
as the Secretary. We listened to the views and recommendations offered
by the other negotiators during the first meeting of the committee on
January 19-20, 1999, and prepared draft proposed regulations that were
provided to the other negotiators on February 12. The committee
discussed these draft regulations at the second meeting on February 16-
17. Taking into account the information provided at the February
meeting, we revised the draft proposed regulations and provided them to
the other negotiators on March 18. The committee discussed the revised
draft regulations during the third meeting on March 22-24, and
tentative agreement was reached on many issues.
Between the third and fourth meetings, we again revised the draft
proposed regulations and provided them to the other negotiators on
April 15. The negotiators discussed the revised draft regulations at
the fourth meeting, on April 19-20, and tentative agreement was reached
on the entire draft regulations, subject to the edits agreed to by the
negotiators. Those edits were incorporated into a new draft, which the
Department sent to the other negotiators on May 10. The last meeting of
the negotiated rulemaking committee was held May 17-18. On May 17,
after a few refinements to the draft language, the negotiators agreed
to the draft proposed regulations that they had developed without
dissent. After reaching consensus on the regulations that were required
to be developed as a result of the 1998 Amendments, the negotiators
then agreed to examine other existing regulations that some negotiators
believed should be modified. The following discussion of the proposed
regulations covers both sets of regulations: the regulations required
to implement the changes made to the HEA by the 1998 Amendments and
other regulations that the negotiators agreed to propose or revise.
Proposed Regulatory Changes
In accordance with the consensus reached in the negotiated
rulemaking, the Secretary proposes to amend the following sections of
the regulations:
Section 682.205 Disclosure Requirements for Lenders
The proposed regulations would implement the changes made by the
1998 Amendments to section 433 of the HEA. Those changes affect the
loan disclosures that a lender is required to provide to a borrower.
Specifically, the HEA now requires a lender to use simple and
understandable terms in its disclosure statements and to provide a
telephone number the borrower can use to obtain additional loan
information. The changes to the HEA also permit a lender to provide the
disclosure information and the lender's phone number electronically.
The negotiators reached consensus on these proposed regulations and
enhanced the telephone number requirement by requiring the lender to
provide a toll free number accessible within the United States.
Section 682.207 Due Diligence in Disbursing a Loan
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The negotiators agreed to propose a change to the Secretary's
longstanding policy that a lender must cancel all future disbursements
on a loan whenever the first disbursement is returned to the lender.
Some negotiators argued that this policy encouraged borrowers to accept
loan funds they did not need at the beginning of a school year. Under
current policy, a borrower who realizes he or she does not need the
first disbursement of a loan and returns the unneeded funds to the
lender is
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required to reapply later in the year to obtain subsequent
disbursements that he or she does need. The extra paperwork and loan
processing creates an unnecessary burden on the borrower, the school,
the lender, and the guaranty agency. The proposed regulations would
leave in place the provision that when a disbursement is returned
because the student withdrew, the remaining disbursements are
cancelled. However, under the proposed regulations, in the absence of
information that the student is no longer enrolled, and at the request
of the school, a lender may disburse subsequent disbursements after the
first disbursement is returned to the lender.
Section 682.208 Due Diligence in Servicing a Loan
The proposed regulations would make changes to reflect the
establishment of a Student Loan Ombudsman's office in the Department,
as provided by section 141(f) of the 1998 Amendments. The Ombudsman's
office would provide informal resolution of complaints received from
Title IV loan borrowers.
The negotiators agreed that the FFEL Program regulations should
require schools, lenders, and guaranty agencies to inform borrowers of
the existence of the Department's Student Loan Ombudsman's office to
resolve disputes borrowers have regarding their FFEL Program loans. The
negotiators believed that a borrower should first try to resolve any
dispute with a lender or loan servicer on the assumption that many of
these disputes are simple misunderstandings. However, if the borrower
informs the lender or servicer in writing that he or she believes the
dispute has not been resolved, the lender or servicer would advise the
borrower to request the guaranty agency to settle the dispute. The
guaranty agency analyzes the information provided by the borrower and
other parties and notifies the borrower of its decision. If the
guaranty agency does not resolve the dispute, the agency's response
must provide the borrower with information about the Department's
Student Loan Ombudsman's office. The negotiators believed this process
would resolve the vast majority of disputes.
In addition to inserting this requirement in Sec. 682.208, the
negotiators also proposed adding a conforming requirement to
Sec. 682.411 so that the lender due diligence regulations would also
contain an Ombudsman notification provision. In addition, guaranty
agencies would be required to inform defaulted borrowers of the
availability of the Department's Student Loan Ombudsman's office. The
negotiators believed this notice to a student loan defaulter would be
most effective if it was part of the notification already required by
Sec. 682.410(b)(5) before a guaranty agency reports the borrower's
default to a credit bureau. Finally, although not part of the proposed
regulations developed by this negotiating committee, another
negotiating committee agreed to propose regulations requiring schools
to provide information about the Department's Student Loan Ombudsman's
office when providing exit counseling to borrowers.
Section 682.210 Deferment
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
These regulations propose to exclude in-school deferments from the
general requirement that a deferment may not be granted for a period
beginning more than 6 months before the date the lender receives the
request and the documentation required for the deferment. The
negotiators believed that the process for obtaining documentation to
support an in-school deferment is almost always beyond the student's
ability to control. Moreover, many students mistakenly assume that the
school notifies their lender that they are in-school. Taken together,
these factors have resulted in misunderstandings and technical problems
that have led to borrowers defaulting while they are enrolled in-school
and eligible for an in-school deferment.
Section 682.211 Forbearance
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The proposed regulations would modify and incorporate into the
regulations the Secretary's policy of permitting lenders and guaranty
agencies to grant administrative forbearances to assist FFEL borrowers
who are residents of areas where natural disasters have occurred. Under
that policy, the Secretary notifies loan holders whenever the Federal
Emergency Management Agency (FEMA) designates an area eligible for
Federal assistance under FEMA's Individual Assistance Program. The
Secretary strongly recommends that loan holders grant forbearances to
borrowers who contact them and indicate that they have been adversely
affected by a natural disaster and need temporary relief from their
loan obligations. If the holder believes that the borrower has been
harmed and needs assistance, the holder may grant a forbearance for up
to 3-months based on the borrower's oral or written request for
assistance, which must be documented in the holder's files. The holder
does not need to obtain supporting documentation or a signed written
agreement from the borrower to justify a forbearance for this initial
3-month period. However, a continuation of the forbearance past this 3-
month period would require supporting documentation and a written
agreement from the borrower.
The proposed regulations would modify that policy by allowing loan
holders to determine if a natural disaster had occurred that affected
the borrower's ability to make payments on the loan. If the holder made
that determination, it could grant an administrative forbearance to the
borrower for up to 3 months consistent with the Secretary's previously
described policy. The determination of whether a borrower is covered by
a natural disaster would be made by the loan holder, with no
requirement that the disaster area be covered under FEMA's Individual
Assistance Program. Because loan holders would decide whether a
borrower is covered by a natural disaster, the Secretary would no
longer need to notify loan holders about the numerous disaster areas
designated by FEMA each year. In addition, the forbearance would not be
limited only to residents of the disaster area, but could include, at
the holder's discretion, borrowers who were adversely affected by the
disaster even if they lived outside the disaster area. For example, if
the county where the borrower resides suffers no actual damage from
tornadoes that destroy the borrower's place of employment in an
adjoining county, the forbearance would be permitted. Under the
proposed regulations, the determination of whether the borrower was
affected by a natural disaster would be made by the holder of the loan,
and the Secretary would not challenge a holder's reasonable exercise of
that judgment.
The proposed regulations would also allow a lender to grant an
administrative forbearance to resolve a borrower's delinquency that
existed at the beginning of a mandatory administrative forbearance
period under Sec. 682.211(j)(2). These forbearances apply whenever the
lender is notified by the Secretary that--
* Exceptional circumstances exist, such as a local or
national emergency or military mobilization; or
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* The geographic area in which the borrower or endorser
resides has been designated as a disaster area by the President of the
United States or Mexico, the Prime Minister of Canada, or a Governor of
a State.
Section 682.215 Federal Stafford Loan Forgiveness Demonstration
Program
The Federal Stafford Loan forgiveness demonstration program was
established under section 428J of the HEA by the Higher Education
Amendments of 1992. The loan forgiveness program was never implemented
because funds were never appropriated for the program. With the
enactment of the 1998 Amendments, the Federal Stafford Loan forgiveness
demonstration program was replaced by a new section 428J titled ``Loan
forgiveness for teachers.'' Consequently, the regulations currently in
Sec. 682.215 for the Federal Stafford Loan forgiveness demonstration
program are no longer needed and would be deleted.
Section 682.302 Payment of Special Allowance on FFEL Loans
The proposed regulations would implement the requirements of
section 438(b)(2)(H) of the HEA, which modified the statutory formula
for calculating the amount of special allowance payable on an FFEL
Program loan. Previously, the general formula subtracted the applicable
interest rate on the loan from the average of the 91-day Treasury bills
auctioned during a quarter, and a special allowance factor of 3.1
percent was added to the result. That calculation produced an
annualized special allowance rate, which was then divided by four to
determine the special allowance paid to the lender for that quarter.
The changes made by section 438(b)(2)(H) of the HEA reduced the special
allowance factor from 3.1 percent to 2.8 percent, with a further
reduction to 2.2 percent during the in-school, grace, and deferment
periods. For example, under the new formula, if the 91-day Treasury
bill average for a quarter was 5.4 percent and the applicable interest
rate on a loan was 7.4 percent, the special allowance calculation for a
loan in repayment and not in deferment would be:
(5.4 - 7.4) + 2.8 4 = 0.2 percent
In addition to reflecting the previously described revisions, these
proposed regulations also reflect the changes made to the HEA relating
to the special allowance calculation for loans made or purchased with
the proceeds of tax-exempt funds. More specifically, these proposed
regulations specify which loans qualify for the minimum (or floor)
special allowance rate and are subject to the 50 percent limitation on
the maximum special allowance rate.
Section 682.305 Procedures for Payment of Interest Benefits and
Special Allowance and Collection of Origination and Loan Fees
The proposed regulations would implement sections 438(c), 438(d),
and 428(b)(1)(U)(iii)(I) of the HEA, requiring the Secretary to collect
origination fees owed by a lender by offsetting the amount of interest
and special allowance payments due the lender or by collecting the
amount of origination fees directly from the lender.
Under the proposed regulations, if the full amount of origination
and loan fees cannot be collected from the originating lender and the
loan has been transferred to a subsequent holder, the Secretary may,
following written notice, collect the fees from the subsequent holder.
To ensure that originating lenders report origination and loan fees due
the Secretary, the negotiators proposed that all participating lenders
be required to submit a quarterly ED Form 799 (request for interest and
special allowance), or comply with whatever successor process to the ED
Form 799 may exist in the future. These proposed regulations would
require lenders to report quarterly even if the lender is not owed, or
does not wish to receive, interest benefits or special allowance
payments from the Secretary.
Section 682.400 Agreements Between a Guaranty Agency and the
Secretary
The proposed regulations would delete the reference to the payment
of administrative cost allowances to guaranty agencies. Those
allowances were eliminated by the 1998 Amendments.
Section 682.401 Basic Program Agreement
The proposed regulations would implement changes made by the 1998
Amendments to sections 422(c)(6)(B)(i) and 428(j)(3) of the HEA. The
negotiators agreed to propose that guaranty agencies be required to
receive and respond to written, electronic, and telephone inquiries.
A guaranty agency must ensure that it or an eligible lender as
described in section 435(d)(1)(D) of the HEA serves as a lender-of-
last-resort in the State in which the guaranty agency is the designated
guaranty agency. The designated guaranty agency is the guaranty agency
with which the Secretary has signed a Basic Program Agreement under
Sec. 682.401 to serve the State. The guaranty agency or the lender-of-
last-resort may arrange lender-of-last-resort loans to be made by
another eligible lender. The proposed regulations specify which loans a
lender-of-last-resort is required to make in order to satisfy its
statutory obligation. In addition, the proposed regulations provide a
lender-of-last-resort with authorization to expand its lender-of-last-
resort program to borrowers other than those it is required to serve to
meet its statutory obligation.
The proposed regulations describe the procedures that would be used
by the Secretary to determine which guaranty agencies would receive
Federal funds to be used to make lender-of-last-resort loans. A
guaranty agency using Federal funds would be required to provide
lender-of-last-resort subsidized and unsubsidized Federal Stafford
loans and Federal PLUS loans to borrowers who are otherwise unable to
obtain loans under the agency's lender-of-last-resort program. The
funds would be advanced on terms and conditions agreed to by the
Secretary and the agency if the Secretary determines that--
* Eligible borrowers in a State who qualify for subsidized
Federal Stafford loans are seeking and are unable to obtain subsidized
Federal Stafford loans;
* The guaranty agency designated for that State has the
capability to provide lender-of-last-resort loans in a timely manner,
either directly or indirectly using a third party, but cannot do so
without Federal capital; and
* It would be cost effective to advance Federal funds to the
agency.
The Secretary may provide Federal funds to another guaranty agency,
other than the designated agency, to serve a State if the Secretary
determines that the designated guaranty agency does not have the
capability to provide lender-of-last-resort loans in a timely manner or
that it would not be cost effective to provide Federal funds to the
designated agency.
In the area of prohibited inducements, the proposed regulations
prohibit a guaranty agency from mailing or otherwise distributing
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.
The negotiators extensively discussed the change made to section
428(b)(3) of the HEA. For many years, there has been a regulatory
prohibition, based on section 428(b)(3) of the HEA, against a guaranty
agency's offering, directly or indirectly, any premium, payment, or
other inducement to an employee or
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student of a school, or an entity or individual affiliated with a
school, to secure applicants for FFEL Program loans. The statutory
prohibition was amended by the 1998 Amendments by adding an exception
so that it would not be considered a prohibited inducement for a
guaranty agency to provide assistance to schools comparable to the
kinds of assistance provided by the Secretary. The Department took the
view that the intent of the provision is to provide the exception to
assistance comparable to the kinds of assistance provided by the
Secretary to schools under the Federal Direct Loan Program. Some
negotiators argued that the Secretary could provide assistance under
one of the many programs administered by the Department that could also
benefit Federal Direct Loan schools' administration of the program.
After discussion, the negotiators agreed that it would not be a
prohibited inducement for a guaranty agency to provide 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.
Section 682.402 Death, Disability, Closed School, False Certification,
and Bankruptcy Payments
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The proposed regulations would make it easier for some borrowers to
obtain closed school discharges of their loan obligations. Current
regulations require a borrower to file an application if the borrower
wants a discharge of his or her loan obligation based on the school
closure. Under the proposed regulations, the Secretary or a guaranty
agency may discharge a borrower's FFEL Program loan, without an
application, if the borrower's loan was made for the same program of
study and time period at the same school as a loan for which the
borrower has qualified for and received a closed school discharge under
the Federal Perkins Loan Program or the Federal Direct Loan Program. In
addition, the Secretary, or a guaranty agency with the Secretary's
approval, may discharge a borrower's FFEL Program loan, without an
application, if the borrower qualifies for a discharge based on
information in the Secretary's or guaranty agency's possession that
would satisfy the conditions for discharging the borrower's loan
obligation.
The proposed regulations also permit a lender to suspend collection
efforts against an endorser (or other party that is secondarily liable)
on a loan if the borrower files a petition for relief in bankruptcy.
Lenders are required by the Bankruptcy Code to immediately suspend any
collection efforts outside the bankruptcy proceeding against the
individual who has filed. Lenders have been required by the FFEL
regulations to continue collection efforts against an endorser who has
not filed for bankruptcy. The non-Federal negotiators believed that
this situation creates complicated servicing issues for a lender or
guaranty agency and creates confusion among participants. The proposed
regulations would provide for more consistent treatment of borrowers
and endorsers when the borrower files a bankruptcy petition.
Section 682.404 Federal Reinsurance Agreement
The Secretary proposes to modify Sec. 682.404 to reflect sections
422A, 422B, 428(c)(1), 428(c)(6), 428(c)(9)(A), 428(f), 428(l),
438(c)(2)(H)(ii), and 458 of the HEA, as added or modified by the 1998
Amendments.
These proposed regulations reflect the changes made by the 1998
Amendments to the reinsurance rates paid on a defaulted loan for which
the first disbursement was made on or after October 1, 1998.
Section 682.404(g) describes the portion of borrower payments on
defaulted loans that guaranty agencies are required to return to the
Secretary. Specifically, the Secretary is entitled to a share of
borrower payments on default claims paid using assets of the Federal
Fund. The 1998 Amendments reduced the portion of collections on
defaulted loans that a guaranty agency may retain and specified that
the guaranty agency share must be deposited into the agency's Operating
Fund. Under current regulations, guaranty agencies are authorized to
retain a portion of borrower payments received on defaulted loans on
which the Secretary has paid a reinsurance claim. Thus, if a borrower
payment is received by a guaranty agency after the default claim was
paid but before reinsurance is paid, the guaranty agency may not retain
any portion of the payment. In addition to reflecting the reduced
percentage a guaranty agency is authorized to retain, the Secretary is
also proposing to permit guaranty agencies to retain that portion of
collections on default claims paid using assets of the Federal Fund
instead of default claims on which reinsurance has been paid. The
Secretary believes this change would provide guaranty agencies with an
incentive to promptly pursue collections on defaulted loans.
Section 682.404(k) of the proposed regulations addresses the
default aversion fee. The default aversion fee is part of the new
funding model established by the 1998 Amendments for guaranty agencies.
The fee is designed to provide an incentive for guaranty agencies to
provide effective default aversion efforts and lower default costs.
Section 428(l) of the HEA authorizes the payment of a default
aversion fee to a guaranty agency if the agency is instrumental in
averting a default by a borrower who becomes 60 days delinquent in
repaying a loan. Section 428(l)(2) of the HEA permits a guaranty agency
to transfer a default aversion fee from the Federal Fund to the
agency's Operating Fund for any loan on which a claim for default has
not been paid as a result of the loan being brought into current
repayment status by the guaranty agency on or before the 360th day of
delinquency. For purposes of a guaranty agency's earning the default
aversion fee, section 428(l)(2)(C) of the HEA defines the term
``current repayment status'' as ``* * * the borrower is not delinquent
in the repayment of any principal or interest on the loan.''
The negotiators agreed that a borrower who pays all past due
amounts should be considered in current repayment status, but there was
considerable debate concerning other conditions under which the
borrower should be considered as in ``current repayment status.'' In
particular, the issue of whether a borrower who was granted forbearance
by the lender to resolve a delinquency should be considered ``current
repayment status'' for purposes of earning the default aversion fee was
extensively discussed. Some negotiators were concerned that if granting
forbearance earned the guaranty agency the default aversion fee,
without regard to the borrower's later default, guaranty agencies would
have an economic incentive to encourage lenders to be less diligent in
determining the appropriate use of forbearances. Thus, some negotiators
objected that this practice could result in forbearances delaying
defaults but not preventing them.
Guaranty agency representatives stated that they would not be
motivated by a financial incentive to earn the maximum amount of income
from default aversion fees. They maintained that the potential amount
they would earn (one percent of the loan balances) would be less than
their costs in providing default aversion assistance. A proposal to
track loans brought into
[[Page 42181]]
``current repayment status'' through the granting of forbearance, such
that the guaranty agency would earn the default aversion fee only on
those that remained current for some period of time following the end
of the forbearance period, was discussed extensively. Although the
guaranty agency representatives were supportive of the concept, they
expressed concern about the expense associated with making system
modifications necessary to track individual loans.
After considerable discussion on this topic among the negotiators,
those negotiators representing guaranty agencies proposed a compromise
approach that resulted in a consensus on this issue. Under the proposed
regulations, a guaranty agency could transfer its calculated net amount
of default aversion fees from its Federal Fund to its Operating Fund in
response to lender requests for default aversion assistance on
delinquent loans. However, if a loan on which the agency has received
the default aversion fee is subsequently paid as a default claim, the
agency must rebate funds to the Federal Fund. The fees may be
transferred from the Federal Fund to the Operating Fund no more
frequently than monthly, may not be paid more than once on any loan,
and must be equal to the net amount of--
* One percent of the unpaid principal and accrued interest
on loans at the time the request for default aversion assistance is
submitted by lenders to the agency during a given time period; minus
* One percent of the unpaid principal and accrued interest
owed by borrowers on default claims paid by the agency during the same
time period for which the fees are transferred.
Thus, if the guaranty agency is successful in assisting delinquent
borrowers to avoid default, the default aversion fees are retained by
the agency. However, if a delinquent borrower for whom the agency has
received the default aversion fee subsequently defaults, the guaranty
agency must return to the Federal Fund 1 percent of the outstanding
principal and accrued interest owed by the borrower. Accordingly, if
the borrower does not make any intervening payments on the loan, the
agency would be required to return an amount to the Federal Fund for
that borrower that is greater than the amount originally received from
the Federal Fund. The returned amount would be increased by 1 percent
of the interest that accrues from the date the lender submitted the
default aversion request until the date the agency pays the default
claim to the lender. The Secretary believes the return of this
increased amount fairly compensates the Federal Fund for the loss of
the funds for the time period they were held by the guaranty agency in
its Operating Fund. The committee concluded that this gross basis
calculation of the default aversion fee payments results in default
aversion fee payments equivalent to the amount specified in section
428(l) of the HEA without requiring a loan-by-loan tracking. In
addition, the negotiators agreed that this approach is consistent with
the intent of the statute and creates positive incentives for guaranty
agencies to aggressively pursue default reduction.
The proposed regulations would also permit a lender to submit a
request for default aversion assistance during the 60th day through the
120th day of the borrower's delinquency. If a lender submits the
request after the 120th day of delinquency, the guaranty agency must
provide the default aversion assistance for which it may receive the
default aversion fee.
Finally, the proposed regulations include requirements that govern
who can be hired to collect loans on which default aversion assistance
payments have been made. Other than the guaranty agency, which is
statutorily authorized to perform both roles, the same party may not
perform default aversion assistance on a loan and collect on that loan
during a 3-year period following the date a default claim is paid.
Because the compensation for collecting on a defaulted loan is usually
much greater than that received for preventing default, this regulatory
provision is intended to prevent corruption of the default aversion
process.
Section 682.406 Conditions for Claim Payments From the Federal Fund
and for Reinsurance Coverage
The proposed regulations reflect the changes made by the 1998
Amendments to section 428(c)(2) of the HEA. The negotiators agreed that
a default claim should be paid only if diligent attempts were made by
the lender and guaranty agency to locate the borrower through the use
of effective commercial skip tracing techniques, including contact with
the school the student attended. Further, as a condition for receiving
a reinsurance payment, the guaranty agency must certify to the
Secretary that those diligent skip-tracing efforts were made.
Section 682.409 Mandatory Assignment by Guaranty Agencies of Defaulted
Loans to the Secretary
The proposed regulations reflect the changes made by the 1998
Amendments to section 428(c)(8) of the HEA to the standards for
requiring mandatory assignment of defaulted loans by removing the
transition to the Federal Direct Loan Program as one of the criteria.
Section 682.410 Fiscal, Administrative, and Enforcement Requirements
The proposed regulations would make a change to Sec. 682.410 to
reflect the establishment of a Student Loan Ombudsman's office in the
Department. The proposed changes to Sec. 682.410(b)(5) would add a
requirement that a guaranty agency must inform the borrower that the
Department's Student Loan Ombudsman's office is available as a dispute
resolving office before the agency reports the borrower's default to a
credit bureau.
Section 682.411 Lender Due Diligence in Collecting Guaranty Agency
Loans
The proposed changes to this section would add a provision in
Sec. 682.411(b)(3) requiring a lender to inform a delinquent borrower
that the Department's Student Loan Ombudsman's office is available as a
dispute resolving office. Under the proposed regulations, a lender's
failure to inform a borrower about the availability of the Student Loan
Ombudsman's office would not be considered a violation of the lender
due diligence requirements in Sec. 682.411 that would cause the loan to
lose insurance or reinsurance coverage.
The proposed regulations also implement the requirements of
sections 428(c)(2) and 435(l) of the HEA, as modified by the 1998
Amendments. Prior to the enactment of the 1998 Amendments, section
435(l) of the HEA defined ``default'' in the FFEL Program as a
delinquency that persisted for 180 days for loans scheduled to be
repaid in monthly installments, and 240 days for loans scheduled to be
repaid in less frequent installments. This definition was changed by
the 1998 Amendments to 270 days and 330 days, respectively, for loans
for which the first day of the 270/330-day delinquency period occurs on
or after October 7, 1998. These proposed regulations would change the
due diligence requirements for lenders to accommodate this new
definition of default.
A lender must send a final demand letter to a delinquent borrower
at least 31 days before filing a claim with the guaranty agency. When
the definition of default was 180/240 days, the final demand letter was
sent on or after the 151st/211th day of delinquency. Accordingly, these
proposed regulations
[[Page 42182]]
move the timing of the final demand letter to have it sent on or after
the 241st day of delinquency, or the 301st day if the loan was
scheduled to be repaid less frequently than monthly.
The negotiators also discussed the collection activities that
should be required during the additional 90 days of delinquency prior
to default. The proposed regulations preserve the current regulatory
prohibition against any ``gap'' in collection efforts that exceed 45
days (or 60 days for loans being transferred from one lender or
servicer to another). However, other than the timing of the final
demand letter, the proposed regulations do not make any additional
changes to Sec. 682.411 at this time (other than including notification
of the Ombudsman, as discussed earlier).
The proposed regulations require a lender to request default
aversion assistance not earlier than the 60th day and no later than the
120th day of delinquency. If a lender fails to request default aversion
assistance between the 60th and 120th day of delinquency, and the
lender later submits a claim on that loan, the lender would be subject
to the interest penalty described in section I.C.3.b. of Appendix D to
Part 682. A default aversion assistance request must be made before the
330th day of delinquency. If the lender fails to request default
aversion assistance 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.
The current due diligence requirements in Sec. 682.411 provide for
a detailed set of requirements pertaining to the collection of
delinquent loans by lenders. The Department and the FFEL community are
interested in moving toward a performance-based model for due
diligence. Thus, the Secretary provides notice that the Department will
entertain proposals from FFEL participants to exercise the Secretary's
authority to waive potential liabilities in conjunction with approved
experiments with performance-based approaches to default prevention.
The Secretary will evaluate proposals and may authorize the
implementation of one or more experiments to test new performance-based
approaches to default prevention. The Secretary encourages FFEL
participants to consider proposals that create positive incentives for
default prevention and that incorporate collection approaches that have
been used successfully in the private sector.
Section 682.412 Consequences of the Failure of a Borrower or Student
To Establish Eligibility
The proposed regulations make a conforming change to reflect a
revised regulatory citation for the final demand letter required by
Sec. 682.411(f).
Section 682.413 Remedial Actions
The proposed regulations would amend this section to reflect
changes made to section 428(c)(9)(I) of the HEA by the 1998 Amendments.
The HEA provides that the Secretary's decision to terminate a guaranty
agency's participation in the FFEL Program after September 24, 1998,
based on certain failures specified in the HEA, does not become final
until the Secretary provides the agency with an opportunity for a
hearing on the record. The HEA requires a hearing on the record only in
those cases in which the proposed termination is based on the specific
grounds included in section 428(c)(9) of the HEA. The Department's
regulations have long identified other grounds on which a guaranty
agency's participation could be terminated, and the Department could
have applied the new statutory requirement to only the limited number
of statutory terminations. The Secretary suggested, however, that the
hearing on the record requirement apply to any proposed termination
action against a guaranty agency, and the committee agreed to this
expansion.
Section 682.414 Records, Reports, and Inspection Requirements for
Guaranty Agency Programs
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The Secretary published final regulations in the Federal Register
(61 FR 60490, November 27, 1996) reducing the 5-year record retention
requirement for schools to 3 years as a result of changes made to the
General Education Practices Act (GEPA) by the Improving America's
Schools Act of 1994 (Pub. L. 103-382). At that time, the Secretary
received requests that the 5-year record retention requirement for
lenders be similarly reduced. The Secretary declined to do so and noted
that the GEPA changes did not apply to lenders in the FFEL Program.
However, the Secretary made a commitment to consider a future
reduction in lender record retention requirements in the interest of
reducing lender burden. The proposed regulations reduce the length of
time a lender must retain required loan records for loans paid in full
by the borrower from 5 years to 3 years from the date the loan is
repaid in full by the borrower. For all other loans for which the
lender receives payment in full from any other source (for example, a
claim payment or a consolidation payoff), or for those loans that are
not paid in full, the 5-year retention period will continue to be in
effect, except that in particular cases, the Secretary or the guaranty
agency may require the retention of records beyond the 3-year or 5-year
minimum periods. The Secretary notes that a guaranty agency could serve
as a lender's agent for the purpose of maintaining the lender's records
for the required time periods. The Secretary believes that the limited
exception to the 5-year rule included in these proposed regulations
would not interfere with appropriate program administration.
Section 682.417 Determination of Federal Fund or Assets To Be Returned
The changes in these proposed regulations are needed to conform
this section to the new financial structure for guaranty agencies under
section 422A of the HEA, which was added to the HEA by the 1998
Amendments. The Secretary proposes to change all references to
``reserve funds'' (or ``reserve fund'') in Sec. 682.417 to ``Federal
Fund'' to reflect the new financing model established by the 1998
Amendments. As this is done, minor grammatical changes will be made to
the current regulations to accommodate the switch from the plural form
of ``reserve funds'' to the singular form of ``Federal Fund.''
Section 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
The proposed regulations would implement the requirements of
section 422B(e)(3)(B) of the HEA, which authorizes the Secretary to
regulate the uses or expenditures of a guaranty agency's Operating Fund
during any period in which funds transferred from the Federal Fund are
in the Operating Fund. The negotiators agreed that the restrictions
governing the use of the reserve fund in Sec. 682.418 would be
acceptable restrictions for the use of the Operating Fund during these
periods. Changing the references to ``reserve fund'' in the existing
Sec. 682.418 to ``Operating Fund'' required no new regulations.
[[Page 42183]]
Section 682.419 Guaranty Agency Federal Fund
The proposed regulations reflect section 422A of the HEA, as added
by the 1998 Amendments, which requires each guaranty agency to
establish a Federal Student Loan Reserve Fund (the ``Federal Fund'')
within 60 days of enactment of the 1998 Amendments.
On January 27, 1999, the Secretary issued a ``Dear Colleague
Letter'' (99-G-316) that provided the Secretary's initial guidance to
the guaranty agencies concerning the implementation of the new guaranty
agency funding model. Specifically, among other issues, the Secretary
stated ``* * * all of the funds, securities, and other liquid assets in
the agency's reserve fund as of September 30, 1998, as described in 34
CFR 682.410(a), must be deposited into the Federal Fund when it is
established.'' The committee agreed that the date to be used for
determining the amount of Federal reserve fund assets to be deposited
into the newly established Federal Fund should not be included in these
proposed regulations since that date was relevant at only one point in
time.
In addition to other receipts, as specified in the Department's
regulations, the HEA requires a guaranty agency to deposit revenue from
the following sources into the Federal Fund:
* Default reinsurance payments received from the Secretary.
* A percentage of collections equal to the complement of the
reinsurance percentage paid on a defaulted loan.
* Insurance premiums collected from borrowers pursuant to
Sec. 428(b)(1)(H) and Sec. 428H(h) of the HEA.
* All amounts received from the Secretary as payment for
supplemental preclaims activity performed on or before September 30,
1998.
* 70 percent of amounts received on or after October 1,
1998, as payment for administrative cost allowances for loans upon
which insurance was issued on or before September 30, 1998.
The negotiators also agreed that, in addition to the deposits
specifically listed in the HEA, the proposed regulations should also
require the following other amounts to be deposited into the Federal
Fund:
* Payments made to the agency by the Secretary on death,
disability, bankruptcy, and loan cancellation and discharge claims.
* All funds received by the guaranty agency from any source
(including collections from defaulted borrowers) on FFEL Program loans
on which the Secretary has paid a claim, minus the portion the agency
is authorized to deposit in its Operating Fund.
* Investment earnings on the Federal Fund assets.
* Revenue derived from the Federal portion of a nonliquid
asset, in accordance with Sec. 682.420.
* Other funds received by the guaranty agency from any
source that are specifically designated for deposit in the Federal
Fund.
As written, section 422A(d) of the HEA would permit the assets of
the Federal Fund to be used only to pay lender claims and to transfer
earned default aversion fees to the agency's Operating Fund. However,
other provisions of the HEA authorize or require that the Federal Fund
be used for other purposes. These proposed regulations recognize that
the Federal Fund has to be used for other purposes, including--
* Transferring account maintenance fees to the agency's
Operating Fund, if directed by the Secretary;
* Refunding payments made by or on behalf of a borrower on a
loan that has been discharged due to death, disability, bankruptcy,
closed school, false certification, or unpaid refund, in accordance
with Sec. 682.402;
* Paying the Secretary's share of collections on defaulted
loans, in accordance with Sec. 682.404(g);
* Transferring funds to the agency's Operating Fund,
pursuant to Sec. 682.421;
* Refunding insurance premiums related to loans cancelled or
refunded, in whole or in part;
* Returning to the Secretary portions of the Federal Fund
required to be returned by law; and
* Any other purpose authorized by the Secretary.
The Federal Fund (and amounts in the Operating Fund that are
transferred from the Federal Fund) must be invested in securities
issued or guaranteed by the United States or a State or, with the
approval of the Secretary, in other similarly low-risk securities
selected by the guaranty agency. Guaranty agencies that have invested
the Federal reserve funds in ``pooled'' investments as part of a State
investment program may continue using that investment vehicle for the
new Federal Fund without requesting specific approval from the
Secretary. Earnings on the investment of the Federal Fund are the sole
property of the Federal Government.
Guaranty agencies serve as fiduciaries in safeguarding Federal
assets and funds entrusted to their care. Thus, guaranty agencies may
not use assets of the Federal Fund for any purpose not authorized by
the HEA or the Secretary. Consistent with this obligation, the proposed
regulations provide that 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.
The HEA requires a guaranty agency to maintain a minimum Federal
Fund level equal to at least 0.25 percent. For the purpose of
calculating this ratio, these proposed regulations provide that the
numerator is the total assets of the Federal Fund including the amount
of funds transferred from the Federal Fund that are in the Operating
Fund, using an accrual basis of accounting. The denominator in the
above ratio is the original principal amount of loans outstanding and
guaranteed by the agency.
Section 682.420 Federal Nonliquid Assets
The proposed regulations reflect section 422A of the HEA, as added
by the 1998 Amendments, that restates the longstanding principle that
the Federal Fund, and nonliquid assets (such as buildings or equipment)
developed or purchased by an agency in whole or in part with Federal
reserve funds, regardless of who holds or controls the Federal reserve
funds or assets, are the property of the United States. Under the 1998
Amendments, the ownership of an asset is prorated based on the
percentage of the asset developed or purchased with Federal funds.
Section 422A of the HEA, on its face, appears to limit the use of
the Federal portion of nonliquid assets to the payment of claims to
lenders and the transfer of default aversion fees to the Operating
Fund. Such a literal reading of the statute would prohibit an agency
from using the Federal portion of nonliquid assets (such as a computer
or building) for any other purpose and would significantly burden the
guaranty agency's performance of its responsibilities as a guaranty
agency in the FFEL Program. The HEA authorizes the Secretary to
restrict or regulate the use of the Federal portion of nonliquid assets
to the extent necessary to reasonably protect the Federal share of the
value of those assets. The Federal regulations in effect prior to the
1998 Amendments authorized guaranty agencies to use the Federal portion
of nonliquid assets for other allowable purposes, and the negotiators,
including the Secretary, agreed to propose a continuation of that
policy. In addition, the negotiators agreed to propose that, if a
guaranty agency uses the Federal portion of a nonliquid asset (other
than an intangible or intellectual property asset or a tangible asset
of nominal value) in the performance of its guaranty
[[Page 42184]]
activities, the agency must promptly deposit into the Federal Fund an
amount representing the net fair value of the use of the asset. The net
fair value is the amount that would be paid to use a similar non-
Federal asset, minus amounts paid by the agency for expenses that
normally would be paid by the owner of the asset.
Guaranty agencies must exercise the level of care required of a
fiduciary charged with protecting, investing, and administering the
property of others in maintaining and using the Federal portion of
nonliquid assets under their control. Accordingly, if the guaranty
agency converts the Federal portion of a nonliquid asset, in whole or
in part, to a use unrelated to its guaranty activities, the agency
promptly must deposit into the Federal Fund a fair percentage of the
fair market value or, in the case of a temporary conversion, the net
fair value of the portion of the asset employed for the unrelated use.
Section 682.421 Funds Transferred From the Federal Fund to the
Operating Fund by a Guaranty Agency
The proposed regulations reflect section 422A(f) of the HEA, as
added by the 1998 Amendments, permitting a guaranty agency to transfer
a limited amount of funds from the Federal Fund for deposit into the
agency's Operating Fund. Upon receiving the Secretary's approval, an
agency may transfer from the Federal Fund an amount up to the
equivalent of 180 days of cash expenses (not including claim payments)
for normal operating expenses for deposit 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 (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. During any period that an
agency's Operating Fund contains funds transferred from its Federal
Fund, the Operating Fund may be used only as permitted by
Sec. 682.410(a)(2) and Sec. 682.418.
The negotiators agreed on the application procedures that guaranty
agencies are to use in requesting approval to transfer funds from their
Federal Funds to their Operating Funds. Specifically, a guaranty agency
must provide the Secretary with an application containing the
following:
* 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.
* 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.
* A certification by the agency that, during the period the
transferred funds are outstanding, sufficient funds will remain in the
Federal Fund to pay lender claims.
* A certification by the agency that it will be able to meet
the reserve recall requirements of section 422 of the HEA, and the
statutory minimum reserve level of 0.25 percent, as mandated by section
428(c)(9) of the HEA.
* A certification by the agency that no legal prohibition
exists that would prevent the agency from obtaining or repaying the
transferred funds.
Section 422A(f)(2) of the HEA also authorizes the Secretary to
permit a limited number of guaranty agencies, in certain limited cases,
to transfer an amount greater than 180 days of operating expenses (not
including claim payments). The Secretary may authorize an agency to
exceed the 180-day limit by the amount of income earned on the
investment of the Federal Fund during the 3-year period following
October 7, 1998 (the date of enactment of the 1998 Amendments.) During
any period that an agency's Operating Fund contains funds transferred
from its Federal Fund, the Operating Fund may be used only as permitted
by Sec. 682.410(a)(2) and Sec. 682.418.
To obtain approval to transfer the investment income, an agency
must have transferred, and have outstanding, the maximum amount it is
otherwise eligible to transfer. In addition to the previously listed
application items required for transferring principal amounts from the
Federal Fund, an agency seeking to transfer investment income must
demonstrate to the Secretary that the cash flow in the Operating Fund
will be negative without the transfer of the investment earnings of the
Federal Fund and that the transfer of those earnings will substantially
improve the financial circumstances of the guaranty agency.
If the Secretary has neither approved nor disapproved a guaranty
agency's requested transfer of principal or the investment earnings of
the Federal Fund within 30 days after receiving the previously
described application items, the agency may proceed with the transfer.
The Secretary recognizes that guaranty agencies may have
transferred funds from the Federal Fund to the Operating Fund as a
working capital reserve before receiving the Department's January 27,
1999 ``Dear Colleague Letter'' (99-G-316) guidance concerning the
implementation of the new guaranty agency funding model. A guaranty
agency that transferred funds (that are still outstanding) without
obtaining the Secretary's approval prior to receiving the Department's
guidance will be held harmless, subject to the agency providing the
Secretary with the previously described application material. Agencies
that transferred Federal Fund assets into their Operating Funds are
requested to provide the required application material within 60 days
following publication of these proposed regulations.
Section 682.422 Guaranty Agency Repayment of Funds Transferred From
the Federal Fund
The proposed regulations would implement the requirements of
section 422A(f) of the HEA, as added by the 1998 Amendments.
Except in regard to the repayment of investment earnings
transferred from the Federal Fund to the Operating Fund, the HEA
requires an agency to begin repayment of principal transferred from the
Federal Fund not later than the start of the fourth year after the
establishment of the Operating Fund. All amounts transferred must be
repaid in full not later than 5 years after the date the Operating Fund
is established.
Generally, a guaranty agency must repay investment earnings
transferred under section 422A(f)(2) of the HEA within 2 years. The HEA
authorizes the Secretary to extend the period for repayment of
investment earnings from 2 years to 5 years if the Secretary determines
that the cash flow of the agency's Operating Fund will be negative if
the transferred investment earnings were required to be repaid earlier
or the repayment of the earnings would substantially diminish the
financial circumstances of the agency. To receive an extension, the
agency must demonstrate that it will be able to repay all transferred
funds by the end of the eighth year following the date of establishment
of the Operating Fund and that the agency will be financially sound
upon the completion of repayment. Repayment of amounts transferred from
the Federal Fund pursuant to section 422A(f)(2) of the HEA that are
repaid during the sixth, seventh, and eighth years following the
establishment of the Operating Fund must include the amount
transferred, plus any income earned after the fifth year from the
investment of the transferred amount. In determining the amount of
income earned on the
[[Page 42185]]
transferred amount, the negotiators agreed that the proposed
regulations should provide that the Secretary will use the average
investment income earned on all the agency's investments, including
investments that are not part of the agency's Operating Fund.
In accordance with section 422A(f) of the HEA, if an agency fails
to make a scheduled repayment to the Federal Fund, the agency may not
receive any other Federal funds until the agency becomes current in
making all scheduled payments, unless the Secretary waives this
restriction.
Section 682.423 Guaranty Agency Operating Fund
The proposed regulations would implement section 422B of the HEA,
as added by the 1998 Amendments, which requires each guaranty agency to
establish a fund designated as the ``Operating Fund'' within 60 days
after the enactment of the 1998 Amendments. The Operating Fund must be
in an account that is separate from the Federal Fund. The HEA requires
an agency to deposit into the Operating Fund:
* Loan processing and issuance fees.
* 30 percent of administrative cost allowances received
after October 1, 1998, for loans upon which insurance was issued before
October 1, 1998.
* Account maintenance fees.
* Default aversion fees.
* Amounts remaining from collections of defaulted loans
after payment of the Secretary's equitable share and depositing the
complement of the reinsurance percentage into the Federal Fund.
* Amounts transferred from the Federal Fund.
* Other receipts as specified in the Secretary's
regulations.
Except for funds an agency transfers from the Federal Fund under
section 422A(f) of the HEA, the Operating Fund is considered the
property of the guaranty agency. The HEA authorizes the Secretary to
regulate the uses or expenditure of the Operating Fund during any
period in which a guaranty agency owes money to the Federal Fund. These
proposed regulations would implement these requirements by providing
that Sec. 682.410(a)(2) and Sec. 682.418 apply to the use of the
Operating Fund during periods in which transfers from the Federal Fund
are outstanding.
Section 422B(d)(1) of the HEA specifies that funds in the Operating
Fund must be used for certain activities. Those activities are
application processing, loan disbursement, enrollment and repayment
status management, default aversion, collection activities, school and
lender training, financial aid awareness and outreach activities,
compliance monitoring, and other student financial aid related
activities, as selected by the guaranty agency. In addition to those
specified activities, the negotiators agreed that the Operating Fund
should also be permitted to be used to pay for other ``guaranty agency-
related activities.'' Some of the negotiators, however, expressed
concern that ``other student aid-related activities, as selected by the
guaranty agency'' was too ambiguous and proposed that more specificity
be included in the proposed regulations to more narrowly focus the use
of the funds in the Operating Fund for this purpose. The negotiators
ultimately agreed to include a requirement that the financial aid-
related activities must be for the benefit of students. The Secretary
will gather data concerning the use of funds in agencies' Operating
Funds for financial aid-related activities that benefit students and
will make the data available to the public.
Section 682.800 Prohibition Against Discrimination as a Condition for
Receiving Special Allowance Payments
The 1998 Amendments repealed the requirements of the ``Plan for
doing business'' for authorities using tax-exempt financing, except for
the non-discrimination provisions. In addition, the reference to
``handicapped status'' in the nondiscrimination factors listed in
section 438(e) of the HEA was changed to ``disability status.''
Appendix D--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]
The proposed regulations would revise Appendix D to incorporate the
new default definition (270 days of delinquency or 330 days for loans
paid less frequently than monthly).
Executive Order 12866
1. Potential Costs and Benefits
Under Executive Order 12866, we have assessed the potential costs
and benefits of this regulatory action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those we have
determined as necessary for administering this program effectively and
efficiently. Elsewhere in this SUPPLEMENTARY INFORMATION section we
identify and explain burdens specifically associated with information
collection requirements. See the heading Paperwork Reduction Act of
1995.
In assessing the potential costs and benefits--both quantitative
and qualitative--of this regulatory action, we have determined that the
benefits would justify the costs.
We have also determined that this regulatory action would not
unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
We note that, as these proposed regulations were subject to
negotiated rulemaking, the costs and benefits of the various
requirements were discussed thoroughly by negotiators. The resultant
consensus reached on a particular requirement generally reflected
agreement on the best possible approach to that requirement in terms of
cost and benefit.
Summary of Potential Costs and Benefits
The following is an analysis of the costs and benefits of the most
significant provisions of the proposed regulations, all of which
reflect statutory changes included in the 1998 Amendments. There are
additional proposed changes, some of which do not result from the 1998
Amendments, intended to further improve the administration of the FFEL
Program, which are discussed elsewhere in this preamble under the
heading Proposed Regulatory Changes. The Department does not consider
there to be significant costs associated with those provisions.
Payment of Special Allowance on FFEL Loans
Section 682.302 incorporates the statutory modification of the
formula for calculating the amount of special allowance payable on FFEL
Program loans. Loan holders in the FFEL Program may receive an interest
subsidy, called special allowance, from the Government to ensure a
guaranteed rate of return on their loans.
Prior to the passage of the 1998 Amendments, the special allowance
formula for new Federal Stafford loans (subsidized or unsubsidized) was
to be based on a security of comparable maturity (the 10-20 year bond
interest rate) plus 1 percent. As such, the Government would have paid
loan holders a special allowance if the 10-20 year bond interest rate
plus 1 percent for in-school, grace, deferment, and repayment periods
was higher than the
[[Page 42186]]
interest rates charged to borrowers (which are capped at 8.25 percent).
Under the proposed regulations, for new Federal Stafford loans, the
Government would pay loan holders a special allowance if the 91-day
Treasury-bill (T-bill) interest rate for a given quarter, plus 2.8
percent (or 2.2 percent during in-school, grace, and deferment periods)
is higher than the current interest rates charged to borrowers (with
borrower interest rates capped at 8.25 percent).
The 1998 Amendments also changed the basis for calculating borrower
interest rates on new Federal Stafford loans from a security of
comparable maturity plus 1 percent for both in-school and repayment
periods to the 91-day T bill interest rate plus 1.7 percent for in-
school, grace, and deferment periods, and the 91-day T-bill interest
rate plus 2.3 percent for repayment. When the 1998 Amendments was
enacted, the 91-day T-bill interest rate plus 2.3 percent was equal to
the 10-20 year bond interest rate plus 1 percent. As a result, this
change had no financial impact for loans in repayment.
The 1998 Amendments included, in addition to the traditional
special allowance payments, a loan-holder special interest subsidy of
0.50 percent above the borrower interest rates at all times. This new
subsidy would provide loan holders $183 million for loans during in-
school, grace, and deferment status, and $407 million for loans in
repayment, for a total benefit to loan holders and a cost to the
Federal Government of $590 million for loans originated in FY 2000.
Federal Reinsurance Agreement
Section 682.404 incorporates several changes, discussed in detail
elsewhere in this preamble under the heading Proposed Regulatory
Changes, associated with the restructuring of guaranty agencies under
the 1998 Amendments. The statute moves toward a more performance-based
system with the establishment of a new funding and operating structure
for guaranty agencies.
The changes incorporated in Sec. 682.404 that have costs and
benefits for the Federal Government and for guaranty agencies are
outlined in the following discussion. For comparison purposes, the
amounts shown (except where noted) are for the life of loans originated
in FY 2000, as determined by the Credit Reform Act of 1990.
* The default reinsurance payment--the amount guaranty
agencies are reimbursed for claim payments to loan holders on defaulted
loans made on or after October 1, 1998--was reduced from 98 percent to
95 percent.
* The default collection retention percentage--the
percentage guaranty agencies may retain on defaulted loan collections--
was reduced from 27 percent to 24 percent, until October 1, 2003 when
the rate is further reduced to 23 percent.
* New fees were created that replace the Administrative Cost
Allowance. The new loan processing and issuance fee is 0.65 percent of
the total principal amount of the loans on which a guaranty agency
issued insurance in a given fiscal year. Beginning October 1, 2003 the
percentage is reduced to 0.40 percent. The account maintenance 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.
Reducing guaranty agency default reinsurance and default retention
would decrease guaranty agency revenues by $111 million and $68
million, respectively, for loans originated in FY 2000. Guaranty agency
revenue for loans originated in FY 2000 would increase by $154 million
for the loan processing and issuance fee and $213 million for the
account maintenance fee. (The account maintenance fee is paid on all
outstanding loans; for FY 2000, guaranty agencies are expected to
receive $212 million in cash for this fee.) The net benefit to guaranty
agencies, and the net cost to the Federal Government, would be $188
million for loans originated in FY 2000. These revenues and costs are a
direct result of changes made to the HEA by the 1998 Amendments, and
have been implemented prior to the development of these proposed
regulations.
[In millions of dollars]
------------------------------------------------------------------------
Costs to Costs to
Provision the guaranty
Government agencies
------------------------------------------------------------------------
Reducing guaranty agency default reinsurance.. ($111) $111
Reducing guaranty agency default retention.... (68) 68
New loan processing and issuance fee.......... 154 (154)
New account maintenance fee................... 213 (213)
-------------------------
Net Total................................. 188 (188)
------------------------------------------------------------------------
The 1998 Amendments also made a number of changes to the
qualifications and procedures for certain transfers between the Federal
Fund and the Operating Fund, which will not have an effect on the
overall assets managed by the guaranty agencies.
2. Clarity of the Regulations
Executive Order 12866 and the President's Memorandum of June 1,
1998 on ``Plain Language in Government Writing'' require each agency to
write regulations that are easy to understand.
The Secretary invites comments on how to make these proposed
regulations easier to understand, including answers to questions such
as the following:
* Are the requirements in the proposed regulations stated
clearly?
* Do the proposed regulations contain technical terms or
other wording that interferes with their clarity?
* Does the format of the proposed regulations (groupings and
order of sections, use of headings, paragraphing, etc.) aid or reduce
their clarity?
* Would the proposed regulations be easier to understand if
we divided them into more (but shorter) sections? (A ``section'' is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 682.205 Disclosure requirements for lenders.)
* Could the description of the proposed regulations in the
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in
making the proposed regulations easier to understand? If so, how?
* What else could we do to make the proposed regulations
easier to understand?
Send any comments that concern how the Department could make these
proposed regulations easier to understand to the person listed in the
ADDRESSES section of the preamble.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities.
[[Page 42187]]
Entities affected by these proposed regulations are guaranty
agencies and lenders that participate in the Title IV, HEA programs.
The 36 guaranty agencies are State and private nonprofit entities that
act as agents of the Federal Government and are not considered small
entities for this purpose. Nearly all of the roughly 4,800
participating FFEL loan holders would be defined as small entities
under U.S. Small Business Administration (SBA) guidelines. (Student
loans are originated by lenders and are often sold in packages to
larger secondary market participants.) Small lenders originate only 16
percent of new loans. The economic impact for loans originated in FY
2000 would be $30 million or approximately $6,300 per average lender.
The Secretary invites comments on this determination, and welcomes
proposals on any significant alternatives that would satisfy the same
legal and policy objectives of these proposals while minimizing the
economic impact on small entities.
Paperwork Reduction Act of 1995
Sections 682.305, 682.402, 682.404, 682.414, and 682.421 contain
information collection requirements. Under the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted
a copy of these sections to the Office of Management and Budget (OMB)
for its review.
Collection of Information: Federal Family Education Loan Program.
Documentation and notification requirements.
Guaranty agencies receive payments from the Secretary and others
for exclusive use in the FFEL Program. With respect to a guaranty
agency's Federal Fund, the accumulated surplus of those payments over
permissible expenditures is Federal property to be returned to the
Secretary upon the guaranty agency's termination or under certain other
circumstances. The same is true with respect to the guaranty agency's
Operating Fund if the Operating Fund contains Federal money. The
Secretary needs and uses the information to determine whether the
guaranty agencies comply with the requirements for safeguarding this
property and the limitations on it.
Collection of Information: Requirement for lenders to submit ED
Form 799 (request for interest and special allowance).
These proposed regulations would affect all FFEL lenders who owe
origination and loan fees to the Secretary. The 1998 Amendments
requires the Secretary to collect origination and loan fees owed by a
lender by offsetting the amount of interest and special allowance
payments due the lender or by collecting the amount of fees directly
from the lender. These proposed regulations would require a lender that
owes fees to the Secretary to submit a quarterly ED Form 799 (or comply
with whatever successor process to the ED Form 799 may exist in the
future) even if the lender is not owed, or does not wish to receive,
interest benefits or special allowance payments from the Secretary. The
Department already estimates the amount of hours a lender needs each
year to prepare and submit ED Form 799s under currently approved OMB
inventory control number 1840-0034. Under existing regulations, a
lender is required to submit an ED Form 799 only if it wants to receive
interest and special allowance payments from the Federal Government.
The Secretary will ask OMB to adjust the estimate of reporting hours on
OMB inventory control number 1840-0034 to reflect that the proposed
regulations would change the lender's option to submit an ED Form 799
to a requirement to submit the form (or comply with whatever successor
process to the ED Form 799 may exist in the future).
Collection of Information: Closed school discharge of a borrower's
loan obligation without an application form.
These proposed regulations would affect the potential loan
discharge for FFEL borrowers who have received a discharge of their
Federal Perkins Loan or their Federal Direct Loan, or who the Secretary
or the guaranty agency, with the Secretary's permission, determines
qualify for a discharge based on information in the Secretary or
guaranty agency's possession. These FFEL borrowers would not need to
submit a closed school loan discharge application to receive a
discharge. The total burden hour reduction (based on approximately 30
minutes per application) is not expected to be substantial because of
the small number of borrowers who would fall within these criteria.
Collection of Information: Annual notification to schools by
guaranty agencies that schools can request an automatic notification of
default aversion assistance requests.
The proposed regulations require a guaranty agency to accept a
blanket request from a 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. Currently, there are 5,899
schools in the FFEL Program, and many of them participate with more
than one guaranty agency. Although the number of schools participating
with multiple guaranty agencies is not known, the collective burden for
the agencies should be minimal. It probably should not take a guaranty
agency more than an average of 6 minutes to notify each school.
Collection of Information: Submissions of default aversion
assistance requests by lenders and performance of default aversion
assistance activities by guaranty agencies.
Under these proposed regulations, default aversion assistance
essentially replaces the former preclaims and supplemental preclaims
assistance process. The renaming of this process, whereby a guaranty
agency assists the lender in attempting to prevent a default by a
borrower who is at least 60 days delinquent, should not result in a
change to the current burden hour estimate associated with the former
process of requesting and providing such assistance.
Collection of Information: Reduction in the length of time a lender
must retain loan records.
These proposed regulations would affect all FFEL lenders by
reducing the length of time a lender must retain required loan records
for loans paid in full by the borrower from 5 years to 3 years from the
date the loan is repaid in full by the borrower. For all other loans
for which the lender receives payment in full from any other source
(for example, a claim payment or a consolidation payoff), or for those
loans that are not paid in full, the 5-year retention period will
continue to be in effect, except that in particular cases, the
Secretary or the guaranty agency may require the retention of records
beyond the 3-year or 5-year minimum periods. A guaranty agency could
serve as a lender's agent for the purpose of maintaining the lender's
records for the required time periods.
The Department already estimates the financial cost and amount of
hours a lender needs each year to maintain loan records under currently
approved OMB inventory control number 1840-0538. The estimate of lender
burden hours required to maintain loan records will not be shown in
these proposed regulations because that estimate is not affected by the
proposed reduction in the length of the minimum record retention
period. The Secretary will ask OMB to adjust the financial cost
estimate on OMB inventory control number 1840-0538 to reflect the
reduction in the length of the minimum record retention period.
[[Page 42188]]
Collection of Information: Guaranty agency option to transfer funds
from the Federal Fund into the agency's Operating Fund.
A guaranty agency that wants to transfer money from the Federal
Fund to its Operating Fund must provide the Secretary with the
information and certifications specified in these proposed regulations.
There are 36 guaranty agencies. Some may decline the opportunity to
transfer funds, while others may choose to do so more than once. The
amount of time required for an agency to assemble its request to the
Secretary is not known at this time, but it should not be substantial
because the required information and certifications either should
already be known by the agency or should be easily collected.
If you want to comment on the information collection requirements,
please send your comments to the Office of Information and Regulatory
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC
20503; Attention: Desk Officer for U.S. Department of Education. You
may also send a copy of these comments to the Department representative
named in the ADDRESSES section of this preamble.
We consider your comments on these proposed collections of
information in--
* Deciding whether the proposed collections are necessary
for the proper performance of our functions, including whether the
information will have practical use;
* Evaluating the accuracy of our estimate of the burden of
the proposed collections, including the validity of our methodology and
assumptions;
* Enhancing the quality, usefulness, and clarity of the
information we collect; and
* Minimizing the burden on those who must respond. This
includes exploring the use of appropriate automated, electronic,
mechanical, or other technological collection techniques or other forms
of information technology; e.g., permitting electronic submission of
responses.
OMB is required to make a decision concerning the collections of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, to ensure that OMB gives your comments full consideration,
it is important that OMB receives the comments within 30 days of
publication. This does not affect the deadline for your comments to us
on the proposed regulations.
Intergovernmental Review
The FFEL Program is not subject to Executive Order 12372 and the
regulations in 34 CFR part 79.
Assessment of Educational Impact
The Secretary particularly requests comments on whether these
proposed regulations would require transmission of information that any
other agency or authority of the United States gathers or makes
available.
Electronic Access to This Document
You may view this document in text or Adobe Portable Document
Format (PDF) on the Internet at the following sites:
http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb__html/fedlreg.htm
http://www.ed.gov/legislation/HEA/rulemaking/
To use the PDF, you must have the Adobe Acrobat Reader Program with
Search, which is available free at the first of the previous sites. If
you have questions about using the PDF, call the U.S. Government
Printing Office (GPO), toll free, at 1-888-293-6498; or in the
Washington, DC, area at (202) 512-1530.
Note: The official version of this document is the document
published in the Federal Register. Free Internet access to the
official edition of the Federal Register and the Code of Federal
Regulations is available on GPO Access at:
http://www.access.gpo.gov/nara/index.html
(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: July 12, 1999.
Richard W. Riley,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary proposes
to amend 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, the
promissory note approved by the Secretary satisfies these disclosure
requirements.
(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
[[Page 42189]]
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 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, in lieu 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 (d)(2) 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 disbursement of a Federal Stafford
loan, at the request of the school, even if the student or the school
returned the first 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) 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 a mandatory administrative forbearance period as
specified under paragraph (j)(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 to read as follows 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''.
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
[[Page 42190]]
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 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;
* * * * *
(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 by:
A. Revising the heading and paragraph (a)(1).
B. Adding new paragraphs (a)(3)(iii) through (v).
C. Revising paragraph (c)(1).
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.
* * * * *
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 HEA,
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 HEA 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 Sec. 682.401.
(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.
* * * * *
(5)(i) Upon request of the guaranty agency, the Secretary may
advance
[[Page 42191]]
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 HEA, 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 by:
A. Revising the introductory text following the heading of
paragraph (d)(3).
B. Adding a new paragraph (d)(8).
C. Revising paragraph (f)(2).
Sec. 682.402 Death, disability, closed school, false certification,
and bankruptcy payments.
* * * * *
(d) * * *
(3) * * * Except as provided in paragraph (d)(7) 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. 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 may suspend collection
efforts against any co-maker or endorser on the loan.
* * * * *
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.
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)(ii) and (b)(2)(ii), and adding a new
paragraph (b)(1)(iii).
I. Removing the word ``or'' after the semi-colon in paragraph
(b)(2)(i).
J. Adding a new paragraph (b)(2)(iii).
K. Revising the heading for paragraph (g).
L. Revising paragraphs (g)(1) and (g)(2), and removing paragraph
(g)(3).
M. Redesignating paragraph (i) as paragraph (l).
N. Adding new paragraphs (i), (j), and (k).
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 made on or after October 1, 1993, and before October 1, 1998;
or
(iii) 100 percent of its losses on default claim payments to
lenders--
* * * * *
(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) * * *
(ii) 88 percent of its losses on default claim payments to lenders
on loans 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) * * *
[[Page 42192]]
(ii) 78 percent of its losses on default claim payments to lenders
on loans 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.
(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.
* * * * *
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 guaranty agency under
Sec. 682.411(h) to locate the borrower through the use of effective
skip tracing techniques, including contact with the school 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 Secs. 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 (d) through (n) of this section, except that in the case of
a loan made to a borrower who is incarcerated or to a borrower residing
outside a State, Mexico, or Canada, the lender may send
[[Page 42193]]
a forceful collection letter in lieu 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 (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--
(i) Who is incarcerated;
(ii) Who is residing outside of a State, Mexico or Canada;
(iii) Whose telephone number is unknown;
(iv) 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--
(A) A payment on the loan;
(B) A correct address or correct telephone number for the borrower;
(C) A dishonored check received from the drawee as a payment on the
loan; or
(D) 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 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, including the school the student most recently
attended, identified in the borrower's loan file. 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
[[Page 42194]]
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 paragraphs (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 paragraphs (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 paragraphs
(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 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
[[Page 42195]]
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 revising paragraph (a)(4)(iii) to
read as follows:
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
three 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.
* * * * *
21. Section 682.417 is amended by revising the heading and
paragraphs (a) through (h) by removing the words ``reserve fund'' and
``reserve funds'' and adding, in their place, the words ``Federal
Fund'' and ``Federal funds'', respectively, wherever they appear, and
making minor grammatical adjustments wherever needed to accommodate the
change from a plural noun (``funds'') to a singular noun (``Fund''). As
revised, Sec. 682.417 reads 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 which 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 HEA held by or under the control of any other entity,
which the Secretary determines are necessary to pay the program
expenses and contingent liabilities of the agency or which 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, 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.
[[Page 42196]]
(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 paragraph (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.
(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.
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:
[[Page 42197]]
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.
Consequently, 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, 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 HEA; 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) If a guaranty agency uses the Federal portion of a nonliquid
asset (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.
(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
[[Page 42198]]
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 HEA;
(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 HEA; 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 three-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)
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 will use 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 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. Subpart H is amended as follows by:
A. Removing Secs. 682.800 through 682.839.
B. Redesignating Sec. 682.840 as Sec. 682.800.
C. Removing the term ``handicapped status'' in the redesignated
Sec. 682.800(a)
[[Page 42199]]
and adding ``disability status'' 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 three years after the default claim
filing deadline. For the purpose of determining the three-year
deadline, reinsurance is lost on the later of (a) three years from
the last date the claim could have been filed for claim payment with
the guaranty agency (271st or 331st day of delinquency, as
applicable) for a claim that was not filed; or (b) three years from
the date the guaranty agency rejected the claim, for a claim that
was filed. These deadlines are extended by periods during which the
court imposes a stay of collection activities due to the borrower's
filing a bankruptcy petition.
Introduction
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.
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).
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).
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, 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,
[[Page 42200]]
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 three 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
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.
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
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:
(1) 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
[[Page 42201]]
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.
(2) 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
three 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 or 270-day period 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 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)
[[Page 42202]]
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 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,
[[Page 42203]]
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(e)(2)(ii))
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 34 CFR
682.211(f)(5). The Secretary will not reimburse the guaranty agency
for interest for the period beginning on the filing deadline for the
bankruptcy claim and ending when the claim is filed or becomes
eligible again for reinsurance.
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)).
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.
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?
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. 99-19308 Filed 8-2-99; 8:45 am]
BILLING CODE 4000-01-P