AwardYear: 1997-1998 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 6 SectionTitle: Due Diligence - Billing and Address Searches PageNumbers: 67-75 Due diligence is the steps schools must take to collect Federal Perkins Loans and National Direct Student Loans (NDSLs). These steps include, but are not limited to, billing the borrower, sending overdue notices when necessary, and conducting address searches if the borrower cannot be located. If billing procedures fail to get the borrower into repayment, schools must proceed to the second--and more intensive--stage of collection. This stage may include hiring a collection firm. In many cases, schools may have to litigate. Due diligence comprises all these procedures, but it can also be as basic as keeping the borrower informed of all program changes that affect his or her rights and responsibilities and responding promptly to the borrower's inquiries. [[Keep borrower information current]] Keeping current information on a borrower makes it easier for the school to know when repayment must begin and where to send billing notices. The various offices at the school--the admissions, business, alumni, placement, financial aid, and registrar's offices, and others, as necessary--must provide the information they have available about the borrower to those offices responsible for billing and collecting loans to assist them in determining the following information about the borrower: - enrollment status; - expected graduation or termination date; - the date the borrower officially withdraws, drops below half-time enrollment, or is expelled; and - current name, address, telephone number, Social Security Number, and driver's license number (if any). EXIT INTERVIEW Contact with the borrower becomes even more important just before he or she leaves school, when the school must hold an exit interview to explain the borrower's responsibility for repaying the loan and to state when the first payment will be due and whether payments are to be made monthly, bimonthly, or quarterly. If individual interviews are not possible, group interviews are acceptable. The school must document its exit interviews. [[School must provide certain information]] During the interview, a borrower must be informed of the terms of the loan, the amount of the outstanding balance, and his or her obligation to repay according to the repayment schedule. The school must also make the borrower aware of the consequences of default, including the possibility that his or her account may be referred to a collection firm, that the default will be reported to a national credit bureau, and that legal action may be taken to collect the amount owed. [[Borrower rights and responsibilities]] A borrower must also be told his or her rights and responsibilities including - his or her responsibility to inform the school immediately of any change in name, address, telephone number, Social Security Number, or driver's licence number; - his or her rights to forbearance, deferment, cancellation, or postponement of repayment and the procedures for filing for those benefits;*1* and - his or her responsibility to contact the school before the due date of any payment he or she cannot make. [[Additional information school must provide to borrower]] The school must provide the following additional information during the exit interview by including it either in the borrower's promissory note or in some other written statement the school gives the borrower. A school that is unaware that a borrower has left school must attempt to provide the required information to the borrower in writing upon learning that the borrower has left: - the name and address of the school to which the debt is owed and the name and address of the official or servicing agent where communications should be sent; - the name and address of the party where payments should be sent; - the estimated amount the borrower owes on the date the repayment period is scheduled to begin and the amount of the total debt (principal and interest); - the interest rate and the projected total interest charges the borrower will pay; - a discussion of the repayment schedule including the date the first installment is due, and the number, amount, and frequency of required payments; - any special options for loan consolidation or other refinancing; - a statement that the borrower may prepay all or part of the loan without penalty; - a discussion of any fees that will be charged the borrower for not making payments on time; - a description of any charges associated with default, such as liability for loan collection costs reasonably incurred by the school or the Department; and - information about the borrower's rights to forbearance, deferment, cancellation or postponement of repayment and the procedures for filing for those benefits. A school is no longer required to give borrowers information about the average indebtedness of students with Perkins Loans at that school. [[Collecting information during the exit interview]] The school must require the borrower to provide the following information during the exit interview, which the school must keep in its records: - the borrower's expected permanent address after leaving school (regardless of the reason for leaving); - the name and address of the borrower's expected employer after leaving school; - the borrower's driver's license number; - the address of the borrower's next of kin; and - any corrections in the school's records relating to the borrower's name, address, Social Security Number, personal references, and driver's license number. At the time of the exit interview, the borrower must sign the repayment schedule, and the school must give the borrower copies of the signed schedule and the signed promissory note. As previously noted, the school must keep the original signed promissory note and repayment schedule in a locked, fireproof container until the loan is repaid or until the originals are needed to enforce collection of the loan. If the originals are released for enforcement purposes, the school must keep certified true copies of the documents released. [[Mailing exit interview materials]] If the school discovers that a borrower has left without having had an exit interview, the school must either contact the borrower and personally give him or her the information listed on the previous pages or mail this information. The school must also provide the borrower a copy of the signed promissory note and two copies of the repayment schedule, one of which the borrower must sign and return to the school. CONTACT DURING GRACE PERIODS [[Three contacts in nine-month grace period]] [[Two contacts in six-month grace period]] The school must contact the borrower during both initial and post- deferment grace periods to remind him or her when repayment will begin or resume. For a loan with a nine-month initial grace period, the school must contact the borrower three times during the grace period. For a loan with a six-month initial grace period, the school must contact the borrower twice during that period. Most loans also have POST-DEFERMENT grace periods of six months. For such a loan, the school must also contact the borrower twice during any post- deferment grace period. The chart below shows the length of initial and post-deferment grace periods for NDSLs and Perkins Loans. [[The chart "Grace Periods (Borrowers Attending at Least Half Time)" on page 6-70 is currently unavailable for viewing. Please reference your paper document for additional information.]] The FIRST CONTACT must be 90 DAYS after any grace period (initial or post-deferment) begins. The school must remind the borrower of the responsibility to repay the loan and must send the borrower information about the total amount to be repaid (or remaining to be paid, if a payment has been made in the past). This information must include the amount of principal and interest over the remaining life of the loan and the due date and amount of the first payment (or next payment, if a payment has been made previously). The SECOND CONTACT must be 150 DAYS after any grace period begins, when the school must again remind the borrower of the due date and amount of the first (or next) payment. The second contact is timed to coincide with the first billing notice for a loan with a six-month grace period (30 days before the first payment is due). These two notices may be combined. For a borrower with a NINE-MONTH initial grace period, the school must make a THIRD CONTACT 240 DAYS after the grace period begins to remind the borrower of the date and amount of the first payment. Like the second contact for a loan with a six-month grace period, this 240-day contact is timed to coincide with the first billing notice. Again, the school may combine the two notices. (Refer to the chart below.) [[The "Contact with Borrower During Grace Period" timeline on page 6-71 is currently unavailable for viewing. Please reference your paper document for additional information.]] BILLING PROCEDURES Billing refers to that series of actions the school routinely performs to notify borrowers of payments due, remind them of overdue payments, and demand payment of overdue amounts. The school may choose a coupon payment system as its method of billing. If so, the school must send the coupons to the borrower at least 30 days before the first payment is due. If the school does not use a coupon system, it must, at least 30 DAYS before the first payment is due, send the borrower a statement of account and a written notice giving the name and address of the party to which payments should be sent. The statement of account includes information such as the total amount borrowed, the interest rate on the loan, and the amount of the monthly payment. For subsequent payments, the school must send the borrower a statement of account at least 15 DAYS before the due date of the payment.*2* [[First overdue notice]] If a payment is overdue and the school has not received a request for forbearance, deferment, postponement, or cancellation, the school must send the borrower an OVERDUE NOTICE within 15 DAYS after the due date. [[Late charge required]] For loans made for periods of enrollment beginning on or after January 1, 1986, schools are required to impose a late charge when the borrower's payment becomes overdue.*3* The charge is based either on the actual costs the school incurs in taking steps to obtain the overdue amount or on average costs incurred in similar attempts with other borrowers. The charge may not exceed 20% of the installment payment most recently due. The school must also impose a late charge if the borrower's payment is overdue and the borrower has not filed a complete request for forbearance, deferment, cancellation, or postponement on time.*3* To be considered complete, the request must contain enough information for the school to determine whether the borrower is entitled to the relief requested. Late charges on loans made for periods of enrollment that began on or after January 1, 1986 may be assessed only during the billing process; they may not be imposed once the school begins collection procedures. For a borrower who repays the full amount of past-due payments, the school may waive any late charges that were imposed. [[Optional penalty charge before 1/1/86]] Schools are authorized but not required to assess a penalty charge for an overdue payment on a loan made for a period of enrollment that began before January 1, 1986. The maximum penalty charge that may be assessed on a loan payable monthly is $1 for the first month and $2 for each additional month a payment is overdue; the maximum penalty for a loan payable bimonthly is $3; the maximum penalty for loans payable quarterly is $6. Penalty charges on these loans may be assessed only during the billing process. The school may either add the penalty or late charge to the principal amount of the loan as of the first day the payment was due or may include the charge with the next payment that is scheduled after the date it notifies the borrower that the charge must be paid in full by the next payment due date. Schools may wish to use the first overdue notice to inform the borrower of the late charge. [[Second notice]] If the borrower does not satisfactorily respond to the first overdue notice, the school must continue to contact him or her. A SECOND OVERDUE NOTICE must be sent within 30 DAYS after the first. If there is still no response, a FINAL DEMAND LETTER must be sent within 15 DAYS after the second notice. The letter may be (but does not have to be) sent by certified mail. The final demand letter must inform the borrower that unless the school receives a payment or a request for forbearance, deferment, postponement, or cancellation WITHIN 30 DAYS of the date of the letter, the school will refer the account for collection*4* or litigation and will report the default to a credit bureau as required by law. [[Final demand]] The school may skip the first two letters and send just the final demand letter within 15 DAYS after the payment is overdue if the borrower's repayment history has been unsatisfactory or if the school can reasonably conclude the borrower does not intend to repay or to seek forbearance, deferment, postponement, or cancellation. A borrower is considered to have an unsatisfactory repayment history if he or she has previously failed to make payments when due, has previously failed to request deferment, forbearance, postponement, or cancellation on time, or has previously received a final demand letter. [[The "Billing Procedures" timeline on page 6-73 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Telephone contact]] If the borrower does not respond to the final demand letter within 30 days, the school must try to contact him or her by telephone before beginning collection procedures. As telephone contact is often very effective in getting the borrower to begin repayment, the school may be able to avoid the more costly procedures of collection. If the school calls a number and there is no answer, the school should make at least one other attempt to reach the borrower on a different day and at a different time. If the borrower has an unlisted telephone number, the school must make reasonable attempts to obtain it by contacting sources such as the borrower's employer or parents. If the school is still unsuccessful, it should document that fact in its files. If the borrower does not respond satisfactorily to the final demand letter, the school must try and recover the amount owed from the borrower. For loans made prior to July 23, 1992, the school must also try to collect the amount owed from any endorser of the loan. In an effort to recover the loan from one party or the other, a school often sends the endorser a copy of the final demand letter that was sent to the borrower and copies of all future communications about the borrower's debt, including dunning letters. For loans made on or after July 23, 1992, an endorser is no longer required. [[Acceleration]] The school may choose to accelerate a loan if the borrower misses a payment or does not file for deferment, forbearance, postponement, or cancellation on time. Acceleration means making payable immediately the entire outstanding balance including interest and any applicable late charges or collection fees. Because this marks a serious stage of default, the borrower should have one last chance to bring his or her account current. For that reason, if the school plans to accelerate the loan, it must send the borrower written acceleration notice at least 30 days in advance. The notice may be included in the final demand letter or in some other written notice sent to the borrower. If the loan is accelerated, the school must subsequently send the borrower a second notice to inform him or her of the date the loan was accelerated and the total amount due. Remember that acceleration is an option, not a requirement. However, if a school plans to assign the loan to the Department for collection, the school must first accelerate the loan. Once a loan has been accelerated, the borrower loses all rights to deferment and cancellation benefits for qualifying service performed after the date of acceleration. ADDRESS SEARCHES The school must take the following steps to locate the borrower if communications are returned undelivered (other than unclaimed mail): - review the records of all appropriate institutional offices and - review telephone directories or check with information operators in the area of the borrower's last known address. If these methods are unsuccessful, the school must either use its own personnel to try to locate the borrower (employing and documenting efforts comparable to commercial skip-tracing services), or must use a commercial skip-trace firm. The school may elect to use the Internal Revenue Service skip-tracing service provided through the Department, discussed below. If the school still cannot locate the borrower after taking these steps, it must continue to make reasonable attempts at least twice a year until - the loan is recovered through litigation; - the account is assigned to the Department; or - the account is written off. (See Section 7.) [[IRS/ED skip-tracing service]] To help locate a borrower whose collection notices are returned undelivered, a school may participate in the IRS/ED skip-tracing service. The Higher Education Amendments of 1992 eliminated the REQUIREMENT that schools use the IRS/ED skip-tracing service in carrying out the provisions of due diligence. However, the Department strongly encourages schools to continue to use this service. The IRS/ED skip-tracing service is one of the most powerful tools available to schools for locating defaulted borrowers. The Department will continue to send schools that participate in the Perkins Loan Program periodic "Dear Colleague" letters that give instructions for completing the report. "Dear Colleague" Letter CB- 96-15 (LD), dated July 1996, included instructions for completing the Report that was due by August 31, 1996. [[Filing a Safeguard Activity Report to use IRS/ED skip tracing]] In order to maintain eligibility to participate in the IRS/ED skip- tracing service, each participating school must submit an annual Safeguard Activity Report, in accordance with the IRS publication 1075. If a school fails to submit the Report, it will lose its eligibility to participate in the service. The reports help ensure that procedures are established and utilized to safeguard the names and addresses of defaulted borrowers under the Perkins Loan Program. General questions should be directed to the Department's Program Systems Service, Campus-Based Programs Systems Division. The telephone number is (202) 708-6726. *1* See Sections 4 and 5 of this chapter for more information *2* If the borrower elects to make payments by means of an electronic transfer of funds from the borrower's bank account, the school is not required to send the borrower a statement of account at least 15 days before the due date of each subsequent payment. However, the school must send the borrower an annual statement of account. *3* The mandatory late charges do not apply retroactively to loans made before July 1, 1987, but would apply to any NDSL borrower who has a re-signed revised promissory note. *4* The school can use the services of the Department's Default Reduction Assistance Project (DRAP) before the loan goes to a collection firm; DRAP is discussed in Section 8, "Default." |