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]
34:4.1.1.1.2.9.1.1.2 : Appendix D
Appendix D to Part 682 - Policy for Waiving the Secretary's Right
To Recover or Refuse To Pay Interest Benefits, Special Allowance,
and Reinsurance on Stafford, Plus, Supplemental Loans for Students,
and Consolidation Program Loans Involving Lenders' Violations of
Federal Regulations Pertaining to Due Diligence in Collection or
Timely Filing of Claims [Bulletin 88-G-138] Note:
The following is a reprint of Bulletin 88-G-138, issued on March
11, 1988, with modifications made to reflect changes in the program
regulations. For a loan that has lost reinsurance prior to December
1, 1992, this policy applies only through November 30, 1995. For a
loan that loses reinsurance on or after December 1, 1992, this
policy applies until 3 years after the default claim filing
deadline. For the purpose of determining the 3-year deadline,
reinsurance is lost on the later of (a) 3 years from the last date
the claim could have been filed for claim payment with the guaranty
agency for a claim that was not filed; or (b) 3 years from the date
the guaranty agency rejected the claim, for a claim that was filed.
These deadlines are extended by periods during which collection
activities are suspended due to the filing of a bankruptcy
petition.
Introduction
(1) This letter sets forth the circumstances under which the
Secretary, pursuant to sections 432(a)(5) and (6) of the Higher
Education Act of 1965 and 34 CFR 682.406(b) and 682.413(f), will
waive certain of the Secretary's rights and claims with respect to
Stafford Loans, PLUS, Supplemental Loans for Students (SLS), and
Consolidation Program loans made under a guaranty agency program
that involve violations of Federal regulations pertaining to due
diligence in collection or timely filing. (These programs are
collectively referred to in this letter as the FFEL Program.) This
policy applies to due diligence violations on loans for which the
first day of delinquency occurred on or after March 10, 1987 (the
effective date of the November 10, 1986 due diligence regulations)
and to timely filing violations occurring on or after December 26,
1986, whether or not the affected loans have been submitted as
claims to the guaranty agency.
(2) The Secretary has been implementing a variety of regulatory
and administrative actions to minimize defaults in the FFEL
Program. As a part of this effort, the Secretary published final
regulations on November 10, 1986, requiring lenders and guaranty
agencies to undertake specific due diligence activities to collect
delinquent and defaulted loans, and establishing deadlines for the
filing of claims by lenders with guaranty agencies. In recognition
of the time required for agencies and lenders to modify their
internal procedures, the Secretary delayed for four months the date
by which lenders were required to comply with the new due diligence
requirements. Thus, § 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 §
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)(vii), 682.302(d)(1)(iv), 682.413(a)(1).
(3) The Department has received inquiries regarding the
procedures by which a lender may cure a violation of § 682.411
regarding diligent loan collection, or of the 90-day deadline for
the filing of default claims found in § 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 §§ 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 §§ 682.406(a)(7) and
682.413(b). As §§ 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(c).
(4) References throughout this letter to “due diligence and
timely filing” rules, requirements, and violations should be
understood to mean only the Federal rules cited above, unless the
context clearly requires otherwise.
A. Scope
This letter outlines the Secretary's waiver policy regarding
certain violations of Federal due diligence or timely filing
requirements on a loan insured by a guaranty agency. Unless your
agency receives notification to the contrary, or the lender's
violation involves fraud or other intentional misconduct, you may
treat as reinsured any otherwise reinsured loan involving such a
violation that has been cured in accordance with this letter.
B. Duty of a Guaranty Agency To Enforce Its Standards
As noted above, a lender's violation of a guaranty agency's
requirement that affects the agency's guarantee coverage also
affects reinsurance coverage. Thus, as a general rule, an agency
that fails to enforce such a requirement and pays a default claim
involving a violation is not eligible to receive reinsurance on the
underlying loan. However, in light of the waiver policy outlined
below, which provides more stringent cure procedures for violations
occurring on or after May 1, 1988 than for pre-May 1, 1988
violations, some guaranty agencies with more stringent policies
than the policy outlined below for the pre-May 1 violations have
indicated that they wish to relax their own policies for violations
of agency rules during that period. While the Secretary does not
encourage any agency to do so, the Secretary will permit an agency
to take either of the following approaches to its enforcement of
its own due diligence and timely filing rules for violations
occurring before May 1, 1988.
(1) The agency may continue to enforce its rules, even if they
result in the denial of guarantee coverage by the agency on
otherwise reinsurable loans; or
(2) The agency may decline to enforce its rules as to any loan
that would be reinsured under the retrospective waiver policy
outlined below. In other words, for violations of a guaranty
agency's due diligence and timely filing rules occurring before May
1, 1988, a guaranty agency is authorized, but not required, to
retroactively revise its own due diligence and timely filing
standards to treat as guaranteed any loan amount that is reinsured
under the retrospective enforcement policy outlined in section
I.C.1. However, for any violation of an agency's due diligence or
timely filing rules occurring on or after May 1, 1988, the agency
must resume enforcing those rules in accordance with their terms,
in order to receive reinsurance payments on the underlying loan.
For these post-April 30 violations, and for any other violation of
an agency's rule affecting its guarantee coverage, the Secretary
will treat as reinsured all loans on which the agency has engaged
in, and documented, a case-by-case exercise of reasonable
discretion allowing for guarantee coverage to be continued or
reinstated notwithstanding the violation. But any agency that
otherwise fails, or refuses, to enforce such a rule does so without
the benefit of reinsurance coverage on the affected loans, and the
lenders continue to be ineligible for interest benefits and special
allowance thereon.
C. Due Diligence
Under 34 CFR 682.200, default on a FFEL Program loan occurs when
a borrower fails to make a payment when due, provided this failure
persists for 270 days for loans payable in monthly installments, or
for 330 days for loans payable in less frequent installments. The
270/330-day default period applies regardless of whether payments
were missed consecutively or intermittently. For example, if the
borrower, on a loan payable in monthly installments, makes his
January 1st payment on time, his February 1st payment two months
late (April 1st), his March 1st payment 3 months late (June 1st),
and makes no further payments, the delinquency period begins on
February 2nd, with the first delinquency, and default occurs on
December 27th, when the April payment becomes 270 days past due.
The lender must treat the payment made on April 1st as the February
1st payment, since the February 1st payment had not been made prior
to that time. Similarly, the lender must treat the payment made on
June 1st as the March 1st payment, since the March payment had not
been made prior to that time.
Note:
Lenders are strongly encouraged to exercise forbearance, prior
to default, for the benefit of borrowers who have missed payments
intermittently but have otherwise indicated willingness to repay
their loans. See 34 CFR 682.211. The forbearance process
helps to reduce the incidence of default, and serves to emphasize
for the borrower the importance of compliance with the repayment
obligation.
D. Timely Filing
(1) The 90-day filing period applicable to FFEL Program default
claims is described in 34 CFR 682.406(a)(5). The 90-day filing
period begins at the end of the 270/330-day default period. The
lender ordinarily must file a default claim on a loan in default by
the end of the filing period. However, the lender may, but need
not, file a claim on that loan before the 360th day of delinquency
(270-day default period plus 90-day filing period) if the borrower
brings the account less than 270 days delinquent before the 360th
day. Thus, in the above example, if the borrower makes the April
1st payment on December 28th, that payment makes the loan 241 days
delinquent, and the lender may, but need not, file a default claim
on the loan at that time. If, however, the loan again becomes 270
days delinquent, the lender must file a default claim within 90
days thereafter (unless the loan is again brought to less than 270
days delinquent prior to the end of that 90-day period). In other
words, the Secretary will permit a lender to treat payments made
during the filing period as curing the default if those payments
are sufficient to make the loan less than 270 days delinquent.
(2) Section I of this letter outlines the Secretary's waiver
policy for due diligence and timely filing violations. As noted
above, to the extent that it results in the imposition of a lesser
sanction than that available to the Secretary by statute or
regulation, this policy reflects the exercise of the Secretary's
authority to waive the Secretary's rights and claims in this area.
Section II discusses the issue of the due date of the first payment
on a loan and the application of the waiver policy to that issue.
Section III provides guidance on several issues related to due
diligence and timely filing as to which clarification has been
requested by some program participants.
I. Waiver Policy A. Definitions
The following definitions apply to terms used throughout this
letter:
Full payment means payment by the borrower, or another
person (other than the lender) on the borrower's behalf, in an
amount at least as great as the monthly payment amount required
under the existing terms of the loan, exclusive of any forbearance
agreement in force at the time of the default. (For example, if the
original repayment schedule or agreement called for payments of $50
per month, but a forbearance agreement was in effect at the time of
default that allowed the borrower to pay $25 per month for a
specified time, and the borrower defaulted in making the reduced
payments, a full payment would be $50, or two $25 payments in
accordance with the original repayment schedule or agreement.) In
the case of a payment made by cash, money order, or other means
that do not identify the payor that is received by a lender after
the date of this letter, that payment may constitute a full payment
only if a senior officer of the lender or servicing agent certifies
that the payment was not made by or on behalf of the lender or
servicing agent.
Earliest unexcused violation means:
(a) In cases when reinsurance is lost due to a failure to timely
establish a first payment due date, the earliest unexcused
violation would be the 46th day after the date the first payment
due date should have been established.
(b) In cases when reinsurance is lost due to a gap of 46 days,
the earliest unexcused violation date would be the 46th day
following the last collection activity.
(c) In cases when reinsurance is lost due to three or more due
diligence violations of 6 days or more, the earliest unexcused
violation would be the day after the date of default.
(d) In cases when reinsurance is lost due to a timely filing
violation, the earliest unexcused violation would be the day after
the filing deadline.
Reinstatement with respect to reinsurance coverage means
the reinstatement of the guaranty agency's right to receive
reinsurance payments on the loan after the date of reinstatement.
Upon reinstatement of reinsurance, the borrower regains the right
to receive forbearance or deferments, as appropriate. Reinstatement
with respect to reinsurance on a loan also includes reinstatement
of the lender's right to receive interest and special allowance
payments on that loan.
Gap in collection activity on a loan means:
(a) The period between the initial delinquency and the first
collection activity;
(b) The period between collection activities (a request for
preclaims assistance is considered a collection activity);
(c) The period between the last collection activity and default;
or
(d) The period between the date a lender discovers a borrower
has “skipped” and the lender's first skip-tracing activity.
Note:
The concept of “gap” is used herein simply as one measure of
collection activity. This definition applies to loans subject to
the FFEL and PLUS programs regulations published on or after
November 10, 1986. For those loans, not all gaps are violations of
the due diligence rules.
Violation with respect to the due diligence requirements
in § 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:
a. The guaranty agency and lender must ensure that the lender
repays all interest benefits and special allowance received on
loans involving violations occurring prior to May 1, 1988, for
which the lender is ineligible under the waiver policy for the
“retrospective period” described in section I.C.1., or under the
waiver policy for timely filing violations described in section
I.E.1., by an adjustment to one of the next three quarterly
billings for interest benefits and special allowance submitted by
the lender in a timely manner after May 1, 1988. The guaranty
agency's responsibility in this regard is satisfied by receipt of a
certification from the lender that this repayment has been made in
full.
b. The guaranty agency, on or before October 1, 1988, must repay
all reinsurance received on loans involving violations occurring
prior to May 1, 1988, for which the agency is ineligible under the
waiver policy for the “retrospective period” described in section
I.C.1., or under the waiver policy for timely filing violations
described in section I.E.1. Pending completion of the repayment
described above, a lender or guaranty agency may submit billings to
the Secretary on loans that are eligible for reinsurance under the
waiver policy in this letter until it learns that repayment in full
will not be made, or until the deadline for a repayment has passed
without it being made, whichever is earlier. Of course, a lender or
guaranty agency is prohibited from billing the Secretary for
program payments on any loan amount that is not eligible for
reinsurance under the waiver policy outlined in this letter. In
addition to the repayments required above, any amounts received in
the future in violation of this prohibition must immediately be
repaid to the Secretary.
4. Applicability of the Waiver Policy to Particular Classes
of Loans. The policy outlined in this letter applies only to a
loan for which the first day of the 180/240-day or 270/330-day
default period (as applicable) that ended with default by the
borrower occurred on or after March 10, 1987, or, in the case of a
timely filing violation, December 26, 1986, and that involves
violations only of the due diligence or timely filing requirements
or both. For a loan that has lost reinsurance prior to December 1,
1992, this policy applies only through November 30, 1995. For a
loan that loses reinsurance on or after December 1, 1992, this
policy applies until 3 years after the default claim filing
deadline.
5. Excuse of Certain Due Diligence Violations. Except as
noted in section II, if a loan has due diligence violations but was
later cured and brought current, those violations will not be
considered in determining whether a loan was serviced in accordance
with 34 CFR 682.411. Guarantors must review the due diligence for
the 180/240 or 270/330-day period (as applicable) prior to the
default date ensuring the due date of the first payment not later
made is the correct payment due date for the borrower.
6. Excuse of Timely Filing Violations Due to Performance of a
Guaranty Agency's Cure Procedures. If, prior to May 1, 1988,
and prior to the filing deadline, a lender commenced the
performance of collection activities specifically required by the
guaranty agency to cure a due diligence violation on a loan, the
Secretary will excuse the lender's timely filing violation if the
lender completes the additional activities within the time period
permitted by the guaranty agency and files a default claim on the
loan not more than 45 days after completing the additional
activities.
7. Treatment of Accrued Interest on “Cured” Claims. For
any loan involving any violation of the due diligence or timely
filing rules for which a “cure” is required under section I.C. or
I.E., for the agency to receive a reinsurance payment, the
Secretary will not reimburse the guaranty agency for any unpaid
interest accruing after the date of the earliest unexcused
violation occurring after the last payment received before the cure
is accomplished, and prior to the date of reinstatement of
reinsurance coverage. The lender may capitalize unpaid interest
accruing on the loan from the date of the earliest unexcused
violation to the date of the reinstatement of reinsurance coverage.
However, if the agency later files a claim for reinsurance on that
loan, the agency must deduct this capitalized interest from the
amount of the claim. Some cures will not reinstate coverage. For
treatment of accrued interest in those cases, see section
I.E.1.c.
C. Waiver Policy for Violations of the Federal Due Diligence
in Collection Requirements (34 CFR 682.411)
A violation of the due diligence in collection rules occurs when
a lender fails to meet the requirements found in 34 CFR 682.411.
However, if a lender makes all required calls and sends all
required letters during any of the delinquency periods described in
that section, the lender is considered to be in compliance with
that section for that period, even if the letters were sent before
the calls were made. The special provisions for transfers apply
whenever the violation(s) and, if applicable, the gap, were due to
a transfer, as defined in section I.A.
1. Retrospective Period. For one or more due diligence
violations occurring during the period March 10, 1987-April 30,
1988 -
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if no gap of 46 days or
more (61 days or more for a transfer) exists.
b. If a gap of 46-60 days (61-75 days for a transfer) exists,
principal will be reinsured, but accrued interest, interest
benefits, and special allowance otherwise payable by the Secretary
for the delinquency period are limited to amounts accruing through
the date of default.
c. If a gap of 61 days or more (76 days or more for a transfer)
exists, the borrower must be located after the gap, either by the
agency or the lender, in order for reinsurance on the loan to be
reinstated. (See section I.E.1.d., for a description of
acceptable evidence of location.) In addition, if the loan is held
by the lender or after March 15, 1988, the lender must follow the
steps described in section I.E.1., or receive a full payment or a
new signed repayment agreement, in order for the loan to again be
eligible for reinsurance. The lender must repay all interest
benefits and special allowance received for the period beginning
with its earliest unexcused violation, occurring after the last
payment received before the cure is accomplished, and ending with
the date, if any, that reinsurance on the loan is reinstated.
2. Prospective Period. For due diligence violations
occurring on or after May 1, 1988 based on due dates prior to
October 6, 1998 -
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if there is no violation
of Federal requirements of 6 days or more (21 days or more for a
transfer.)
b. If there exist not more than two violations of 6 days or more
each (21 days or more for a transfer), and no gap of 46 days or
more (61 days or more for a transfer) exists, principal will be
reinsured, but accrued interest, interest benefits, and special
allowance otherwise payable by the Secretary for the delinquency
period will be limited to amounts accruing through the date of
default. However, the lender must complete all required activities
before the claim filing deadline, except that a preclaims
assistance request must be made before the 240th day of
delinquency. If the lender fails to make this request by the 240th
day, the Secretary will not pay any accrued interest, interest
benefits, and special allowance for the most recent 180 days prior
to default. If the lender fails to complete any other required
activity before the claim filing deadline, accrued interest,
interest benefits, and special allowance otherwise payable by the
Secretary for the delinquency period will be limited to amounts
accruing through the 90th day before default.
c. If there exist three violations of 6 days or more each (21
days or more for a transfer) and no gap of 46 days or more (61 days
or more for a transfer), the lender must satisfy the requirements
outlined in I.E.1., or receive a full payment or a new signed
repayment agreement in order for reinsurance on the loan to be
reinstated. The Secretary does not pay any interest benefits or
special allowance for the period beginning with the lender's
earliest unexcused violation occurring after the last payment
received before the cure is accomplished, and ending with the date,
if any, that reinsurance on the loan is reinstated.
d. If there exist more than three violations of 6 days or more
each (21 days or more for a transfer) of any type, or a gap of 46
days (61 days for a transfer) or more and at least one violation,
the lender must satisfy the requirement outlined in section I.D.1.,
for reinsurance on the loan to be reinstated. The Secretary does
not pay any interest benefits or special allowance for the period
beginning with the lender's earliest unexcused violation occurring
after the last payment received before the cure is accomplished,
and ending with the date, if any, that reinsurance on the loan is
reinstated.
3. Post 1998 Amendments. For due diligence violations
based on due dates on or after October 6, 1998 -
a. There will be no reduction or recovery by the Secretary of
payments to the lender or guaranty agency if there is no violation
of Federal requirements of 6 days or more (21 days or more for a
transfer).
b. If there exist not more than two violations of 6 days or more
each (21 days or more for a transfer), and no gap of 46 days or
more (61 days or more for a transfer) exists, principal will be
reinsured, but accrued interest, interest benefits, and special
allowance otherwise payable by the Secretary for the delinquency
period will be limited to amounts accruing through the date of
default. However, the lender must complete all required activities
before the claim filing deadline, except that a default aversion
assistance request must be made before the 330th day of
delinquency. If the lender fails to make this request by the 330th
day, the Secretary will not pay any accrued interest, interest
benefits, and special allowance for the most recent 270 days prior
to default. If the lender fails to complete any other required
activity before the claim filing deadline, accrued interest,
interest benefits, and special allowance otherwise payable by the
Secretary for the delinquency period will be limited to amounts
accruing through the 90th day before default.
c. If there exist three violations of 6 days or more each (21
days or more for a transfer) and no gap of 46 days or more (61 days
or more for a transfer), the lender must satisfy the requirements
outlined in I.E.1. or receive a full payment or a new signed
repayment agreement in order for reinsurance on the loan to be
reinstated. The Secretary does not pay any interest benefits or
special allowance for the period beginning with the lender's
earliest unexcused violation occurring after the last payment
received before the cure is accomplished, and ending with the date,
if any, that reinsurance on the loan is reinstated.
d. If there exist more than three violations of 6 days or more
each (21 days or more for a transfer) of any type, or a gap of 46
days (61 days for a transfer) or more and at least one violation,
the lender must satisfy the requirement outlined in section I.D.1.
for reinsurance on the loan to be reinstated. The Secretary does
not pay any interest benefits or special allowance for the period
beginning with the lender's earliest unexcused violation occurring
after the last payment received before the cure is accomplished and
ending with the date, if any, that reinsurance on the loan is
reinstated.
D. Reinstatement of Reinsurance Coverage for Certain
Egregious Due Diligence Violations.
1. Cures. In the case of a loan involving violations
described in section I.C.2.d. or I.C.3.d., the lender may utilize
either of the two procedures described in section I.D.1.a or
I.D.1.b. for obtaining reinstatement of reinsurance coverage on the
loan.
a. After the violations occur, the lender obtains a new
repayment agreement signed by the borrower. The repayment agreement
must comply with the repayment period limitations set out in 34 CFR
682.209(a)(8) and 682.209(h)(2); 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, 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 (§ 682.402(g)(2)(iv)) causes irreparable harm to
the guaranty agency's ability to contest the discharge of the loan
by the court, or to otherwise collect from the borrower. Therefore,
the Secretary has decided not to excuse violations of the timely
filing requirement applicable to bankruptcy claims, except when the
lender can demonstrate that the bankruptcy action has concluded and
that the loan has not been discharged in bankruptcy or, if
previously discharged, has been the subject of a reversal of the
discharge. In that case, the lender must return the borrower to the
appropriate status that existed prior to the filing of the
bankruptcy claim unless the status has changed due solely to
passage of time. In the latter case, the lender must place the
borrower in the status that would exist had no bankruptcy claim
been filed. If the borrower is delinquent after the loan is
determined nondischargeable, the lender should grant administrative
forbearance to bring the borrower's account current as provided in
§ 682.211(f)(4) and § 682.402(f)(5)(ii) and (f)(6). The Secretary
will not reimburse the guaranty agency for interest for the period
beginning on the filing deadline for the bankruptcy claim and
ending on the date the loan becomes eligible again for reinsurance.
Reinsurance is reinstated on the date the bankruptcy action
concludes and the loan is not discharged or on the date a previous
discharge is reversed.
II. Due Date of First Payment. Section 682.411(b)(1)
refers to the “due date of the first missed payment not later made”
as one way to determine the first day of delinquency on a loan.
Section 682.209(a)(3) states that, generally, the repayment period
on an FFEL Program loan begins some number of months after the
month in which the borrower ceases at least half-time study. Where
the borrower enters the repayment period with the lender's
knowledge, the first payment due date may be set by the lender,
provided it falls within a reasonable time after the first day of
the month in which the repayment period begins. In this situation,
the Secretary generally permits a lender to allow the borrower up
to 45 days from the first day of repayment to make the first
payment (unless the lender establishes the first day of repayment
under § 682.209(a)(3)(ii)(E)).
1. In cases where the lender learns that the borrower has
entered the repayment period after the fact, current § 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 § 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 § 682.411(c) to be sent within the first 30 days of
delinquency and will thus have committed two violations of more
than five days of that rule.
2. If the lender fails to send the material establishing a new
first payment due date on or before the 65th day after receipt of
the notice, it may thereafter send material establishing a new
first payment due date falling not more than 45 days after the
materials are sent and will be deemed to have exercised forbearance
up to the new first payment due date. However, all violations and
gaps occurring prior to the date on which the material is sent are
subject to the waiver policies described in section I for
violations falling in either the retrospective or prospective
periods. This is an exception to the general policy set forth in
section I.B.5., that only violations occurring during the most
recent 180 or 270 days (as applicable) of the delinquency period on
a loan are relevant to the Secretary's examination of due
diligence.
Please Note: References to the “65th day after receipt of
the notice” and “66th day” in the preceding paragraphs should be
amended to read “95th day” and “96th day” respectively for lenders
subject to § 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 § 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 §
682.411, commencing with the first 30-day delinquency period
described in § 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.
[64 FR 58636, Oct. 29, 1999, as amended at 66 FR 34765, June 29,
2001; 78 FR 65823, Nov. 1, 2013]