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96-L-186 Section I (Questions 1-39) Section I QUESTIONS AND ANSWERS Below is the Secretary's response to questions submitted by FFEL program participants on certain provisions of the December 18, 1992 regulations that involved policy changes. We have not included questions on sections of the December 18, 1992 regulations that have been amended through subsequent regulations. The regulatory cites used in this section are from the December 18, 1992 regulations and the May 17, 1994 technical corrections unless otherwise noted. Further information is provided if the cite was changed in subsequent regulations. §682.102 1. Section 682.102(e)(3) provides an overview of SLS repayment begin dates. This section states that a borrower who has both Federal Stafford and Federal SLS loans, but who has not yet entered repayment on the Federal Stafford loan, may request postponement of repayment of the SLS loan until the borrower's grace period on the Federal Stafford loan expires. Does the extension apply to borrowers who have Federal Stafford loans with grace periods longer than six months? Yes. In the 1992 Amendments, Congress enacted a number of provisions intended to support a single payment due date and a single repayment schedule for borrowers with multiple loans and multiple loan types. During the negotiated rulemaking process used to develop regulations to implement those Amendments, the Department agreed that reference to a specific time frame not be included in the regulations to provide for a single repayment begin date for borrowers with Stafford loan grace periods in excess of six months. Although this may only apply to a small number of borrowers, the Secretary believes that the intent of the law was to provide a coordinated repayment schedule for these borrowers. §682.201 2. Section 682.201(a)(3) provides authority for the financial aid administrator to approve an SLS loan for a dependent undergraduate student for whom the financial aid administrator determines and documents in the school's file, that the student's parents will likely be precluded from borrowing a PLUS loan. Does this same provision now apply to the additional unsubsidized Stafford loan amounts provided for dependent students? Yes. Although SLS loans are no longer being originated, the Secretary will issue a technical correction to clarify this point in section 682.201(a)(3). Section 682.204(d) of the regulations was already amended on June 28, 1994 to specify that certain dependent undergraduate students were eligible for additional unsubsidized Federal Stafford loan funds under these same circumstances. 3. Under the authority provided in section 682.201(a)(3), is the parent's ineligibility for a PLUS loan because of an adverse credit determination made under the provisions of section 682.201(b)(7) considered an exceptional circumstance under which the dependent undergraduate student becomes eligible for the additional unsubsidized Stafford loan amounts? Yes. If a parent is denied a PLUS loan as a result of an adverse credit determination, the financial aid administrator can consider this denial an exceptional circumstance for purposes of this provision. Further, if one of a dependent student's parents is denied a PLUS loan, it is not necessary for the other parent to also apply and be determined ineligible for a PLUS loan prior to the financial aid administrator certifying the dependent student for the additional unsubsidized loan amounts. However, if (after the aid administrator certifies the student for the additional unsubsidized Stafford loan amount) the other parent subsequently applies for the PLUS loan and is determined to be eligible for a PLUS loan, future disbursements of the additional unsubsidized Stafford loan amount should be cancelled. The aid administrator is not responsible for cancelling and recovering Stafford loan funds already disbursed for which the student was previously determined eligible, but such funds must be included in estimated financial assistance (EFA) in determining eligibility for the PLUS loan. 4. Section 682.201(a)(4) requires a borrower to reaffirm a prior FFEL program loan on which there has been a write-off (total cessation of collection activity on a defaulted loan) pursuant to a guarantor's write-off as provided for in section 682.401(d)(1). What other requirements must this borrower meet to regain eligibility for additional Title IV student assistance? The borrower must both reaffirm the loan that was written off and meet the requirements for reinstatement of Title IV eligibility prior to becoming eligible for a new loan. Thus, the borrower must reaffirm the prior debt by making a payment or signing a new promissory note or repayment schedule and must qualify for reinstatement of Title IV eligibility by making six consecutive, reasonable and affordable, voluntary, on-time, full monthly payments. The reaffirmation payment may be considered one of these six payments. (A borrower consolidating a defaulted loan must make three consecutive, reasonable and affordable, voluntary, on-time, full monthly payments to make the loan eligible for consolidation. This requirement has been modified in regulations published on December 1, 1995 that become effective July 1, 1996.) 5. Once a borrower reaffirms the loan(s), what are the guarantor servicing requirements? A borrower who reaffirms a debt that was previously writtenn off as described in questio 4 is still considered to be in a default status. Even after the borrower reaffirms the debt and makes satisfactory repayment arrangements as discussed in question 4, a new demand for full payment would be sent and the provisions of section 682.410(b)(6) (guarantor loan servicing provisions) would apply if the borrower fails to either continue to make payments on the loan or arrange with the guarantor for a postponement of payments (forbearance). 6. For a defaulted borrower to be eligible to reinstate eligibility for Title IV aid, the borrower must make six consecutive, reasonable and affordable, voluntary, on-time full monthly payments. If the sixth payment is made after the start of the period of enrollment for which the student requests the loan, may a loan be granted for the entire period of enrollment? Yes. Previous to this Dear Colleague Letter, the Secretary's policy on this issue (as provided in response to individual inquiries) allowed the borrower to regain eligibility to borrow an FFEL loan beginning with the next scheduled academic term following the sixth payment. This policy was based on the Secretary's interpretation that section 682.603 required the school to certify information for a period of enrollment for which the student was eligible and that the student would not have been eligible for the entire period of enrollment. After further consideration, however, the Secretary has decided that under these circumstances any delay in certifying a borrower's eligibility is inconsistent with the intent of the law. Therefore, effective as of November 13, 1995 when Department staff first announced this change in Department policy, a borrower who makes satisfactory repayment arrangements on a defaulted loan will regain loan eligibility for the academic year in which the student satisfied the payment requirements to regain Title IV eligibility. Accordingly, the financial aid administrator may certify a loan period that is for the entire academic year. The Secretary will incorporate this policy in the next available regulations package. 7. Once a borrower reaffirms the loan, what terms and conditions apply? Once a borrower reaffirms the loan, the borrower may, after making satisfactory repayment arrangements, regain eligibility to receive further Title IV student financial assistance. Like any other debtor repaying a defaulted loan, the borrower must continue to make scheduled payments to the guaranty agency that holds the loan. However, the borrower would not be eligible for deferment on the loan(s). Therefore, the Department strongly recommends that guarantors postpone loan payments (forbearance) if the borrower is attending school. Most of the terms and conditions of the loan remain the same (e.g., interest rate, maximum repayment period, cancellation provisions, etc.) The borrower would be eligible to participate in the guaranty agency's loan rehabilitation program, and if the loan is repurchased by a lender, the borrower would regain eligibility for any remaining deferment periods. 8. What charges may be included in the reaffirmed loan? The reaffirmed loan amount may include the balance of the loan on the date collection activity ceased (including principal, interest, collection costs, legal costs, and late charges) plus interest which accrued on the loan from the date collection activity ceased to the date the loan was reaffirmed. Any outstanding charges (outstanding interest, collection costs, late charges, legal costs) may be capitalized as of the date the loan is reaffirmed. 9. If the Department of Education is holding a FFEL program loan on which it has previously ceased all collection activity, must the borrower reaffirm the debt prior to being eligible for a new loan? Yes. The same eligibility and reaffirmation rules generally apply to all FFEL program borrowers. However, a borrower with a defaulted loan also has the option of applying for a Federal Consolidation loan or a Federal Direct Consolidation loan for the purpose of consolidating certain eligible loans. Under the Federal Consolidation loan program, the borrower would be eligible to include a defaulted loan in a loan consolidation by making three consecutive, reasonable and affordable, voluntary, on-time, full monthly payments and would, through the consolidation process, regain eligibility to receive further Title IV student financial assistance. Under the Federal Direct Consolidation loan program, if the borrower agrees to repay the loan under the Income Contingent Repayment (ICR) program, the borrower would be eligible for loan consolidation and would then regain eligibility for Title IV student financial assistance. If the borrower does not agree to repay the loan under the ICR program, the borrower would have to make three consecutive monthly payments to regain Title IV student aid eligibility. (Please note: In regulations published on December 1, 1995 that will become effective July 1, 1996, borrowers wishing to include a defaulted loan in a Federal Consolidation loan will be provided with the option of making three consecutive monthly payments or repaying the Consolidation loan under an income-sensitive repayment plan.) 10. If a loan that was reaffirmed subsequently defaults, must the guaranty agency review the entire servicing history of the loan prior to reaffirmation? No. The guaranty agency need only review the servicing history from the date of reaffirmation forward. 11. Section 682.201(a)(4)(ii) allows a borrower to reaffirm his or her obligation on a debt that was written off by signing a new promissory note or repayment schedule, or by making a payment. What note should the borrower sign since the current application/note is unlikely to include the same terms and conditions as the prior note? Since the terms of the original promissory note still apply, the borrower may sign a repayment schedule, a copy of the original promissory note, or a new promissory note containing the terms and conditions in effect at the time that the borrower signed the original note. The document should clearly state that it reflects a reaffirmation of a prior loan. §682.202 12. Section 682.202(b)(3) states that a lender may capitalize interest which accrues during a number of periods, including deferment and forbearance, no more frequently than quarterly. Section 682.202(b)(4), however, appears to require the lender to capitalize interest quarterly during periods in which the PLUS or SLS borrower is: i) in-school full-time; ii) enrolled half-time and the borrower has secured an FFEL program loan for the period; iii) in a graduate fellowship program; or iv) in a rehabilitation program. Which rules are applicable? Section 682.202(b)(3) is correct with regard to the lender's frequency of capitalization. Section 682.202(b)(4) is intended to require the lender to provide SLS and PLUS borrowers the option of either paying interest monthly or having it capitalized. If the borrower consents to capitalization, the lender may do so no more frequently than quarterly. A borrower's failure to make agreed upon interest payments may constitute consent to capitalization if the lender has previously notified the borrower of its intent to use this approach. Section 682.202(b)(4) will be clarified in the next available regulations package to more clearly reflect the Department's interpretation. 13. Section 682.202(b)(5) authorizes the lender to capitalize interest which accrues on a non-subsidized Federal Stafford loan during the in-school period if the borrower agrees to pay the interest but fails to do so. Does this provision also apply to an unsubsidized Federal Stafford loan made under section 428H of the Higher Education Act of 1965, as amended (HEA)? Yes. This authorization extends to the Federal Unsubsidized Stafford loan program. The Department clarified the distinction between non-subsidized and unsubsidized Federal Stafford loans in the definition section of the FFEL program regulations published on June 28, 1994. SEE 34 CFR 682.200 ("Nonsubsidized Stafford loan") and ("Unsubsidized Stafford loan"). 14. Section 682.202(c) states the lender MAY charge the borrower the origination fee on a subsidized Federal Stafford loan yet MUST charge the fee on an unsubsidized Federal Stafford loan, PLUS and SLS loan. Is it permissible for a lender not to collect all or a portion of the origination fee from a borrower and instead to pay these costs on behalf of the borrower? No. The difference in regulatory language directly reflects the differing language in the law. In those instances where the lender is required by law to charge the borrower an origination fee, the lender may not pay the fee on the borrower's behalf. The lender must pay the origination fee to the Secretary in all cases. §682.204 15. Section 682.204 (g) (currently section 682.204 (j)) defines how Federal Consolidation loans are to be treated for purposes of determining the aggregate loan limits. Under what circumstances, if any, should information be secured from the borrower to support this determination? If a borrower is applying for a subsidized Federal Stafford loan, it may be assumed that the previously borrowed Federal Consolidation loan includes only subsidized Federal Stafford loans. If a borrower is applying for an unsubsidized loan, it may be assumed that the previously borrowed Federal Consolidation loan includes only unsubsidized Federal Stafford loans. If, based on these assumptions, the borrower exceeds the aggregate loan limits, then appropriate documentation should be secured from available sources (e.g., the borrower, the school or through the National Student Loan Data System) and should be retained by the consolidating lender. §682.208 16. Section 682.208(b)(1)(iii) requires a lender to report information on a borrower's repayment status. Is the lender to report information to at least one national credit bureau on borrowers only when they become 90 days past due? Or, is the lender to report any borrower who becomes delinquent (even one day late) within 90 days of the delinquency? Lenders are required to regularly report the repayment status of delinquent loans. The reference to 90 days in section 682.208(b)(1)(iii) was intended to dictate the minimum frequency with which a lender reported status changes to at least one national credit bureau. The Secretary understands that virtually all lenders do this reporting monthly-much more frequently than the 90-day (quarterly) standard of the regulations. The Secretary encourages holders of student loans to continue their current frequency of reporting if it is greater than the minimum 90-day standard of the regulations. However, in order to avoid unnecessary confusion and damage to the borrower's credit history, the Secretary recommends that lenders wait until a borrower is at least 60 days delinquent before reporting that borrower to a credit bureau. §682.209 17. Section 682.209 (a)(3)(ii)(A)-(D) provides the deadlines for establishing the payment due date on a Federal Stafford loan after the expiration of a grace period, deferment, or forbearance, and in instances where the lender learns after the fact that the borrower has entered repayment. Additionally, section 682.209(a)(3)(ii)(E) provides for the first payment due date to be an additional 30 days beyond these periods if necessary for the lender to provide the disclosure information to Federal Stafford loan borrowers required in section 682.205(c)(2) by the deadlines specified in section 682.205(c)(1). The regulations do not include such an extension in the case of a Federal SLS, Federal PLUS, or Federal Consolidation loan. Does the additional 30-day extension, which provides time to give the borrower adequate notice of reentry into repayment, apply to the Federal SLS, Federal PLUS, and Federal Consolidation loan time frames included in section 682.209(a)(2)? The 30-day extension applies only to Federal Stafford and SLS loans because the deadlines for the required disclosure specified in section 682.205(c)(1) only relate to providing disclosures to Federal Stafford and SLS borrowers prior to repayment. These deadlines are specified in section 433(b) of the HEA and are not applicable to a loan made under sections 428B or 428C of the HEA. The Department will amend section section 682.209 of the regulations to clarify that the additional 30 days applies to a SLS loan entering or reentering repayment in the next available regulations package. 18. Several changes were made as part of the December 18, 1992 regulations to provide for day-specific enrollment reporting and servicing. Schools will be required to provide a lender or guarantor with the month/day/year when reporting enrollment data. Lenders must also establish a day-specific grace end date and repayment begin date. The Department has stated previously that the enforcement of the day-specific reporting requirements would be postponed until the common Student Status Confirmation Report (SSCR) format contained in Appendix B of the regulations was implemented. In light of the development of the National Student Loan Data System (NSLDS), what is the status of Appendix B, and how and when are lenders to comply with the day-specific reporting and servicing requirements? As part of Phase II of the NSLDS, the Department and Title IV participants will be developing a common electronic SSCR format that will require day-specific enrollment reporting. Therefore, Appendix B of the regulations has been superseded by the NSLDS process. Until the NSLDS SSCR process has been implemented, the following guidelines apply: - Institutions should provide month/day/year of enrollment if the SSCR format provided to the institution by the guaranty agency requests day-specific information. If the form or electronic format requests only the month/year, the institution may provide either the month/day/year or month/year. - The lender or guarantor should, if practicable, provide for day- specific grace end dates and repayment begin dates for enrollment information received on a day-specific basis. If the lender or guarantor receives enrollment information and the "day" is not included, the lender/guarantor should use the last day of the month. - If a repayment disclosure has already been provided by a lender to the borrower, and the lender receives new enrollment information which is in the same month and year as the previously reported information, but the "day" is different, the lender may continue to service the loan based on the previously supplied information. If the repayment disclosure has not been generated, or the new information is not within the same month and year as the prior information, the lender must service the loan based on the new information. 19. Section 682.209(a)(2)(iii) authorizes a Federal SLS borrower to postpone repayment of the Federal SLS loan if the borrower has a Federal Stafford loan that has not yet entered repayment. Does the postponement option apply even in cases where the borrower does not meet the full-time or half-time deferment eligibility criteria? Yes. The law clearly provides Federal SLS borrowers who also have Federal Stafford loans on which they have not yet entered repayment the option to align the repayment periods of their Federal Stafford and SLS loans. In those instances where the borrower's SLS loan is not eligible for in-school deferment but the borrower is enrolled on at least a half-time basis, the borrower can still elect this option. The lender should grant the borrower forbearance on the Federal SLS loan during the borrower's in-school period and grace period on the Federal Stafford loan to align the repayment start date. 20. Section 682.209 (b)(2) of the regulations addresses the application of a prepayment to future installments when the borrower does not provide the lender with instructions as to how these payments should be applied and the prepayment amount equals or exceeds three full payments. Was it the Secretary's intent to not allow the advancement of the borrower's next payment due date when a prepayment is less than three full payments? Yes. The intent of section 682.209(b)(2), as the preamble discussion to the December 18, 1992 regulations (see 57 Fed Reg 60280, 60297) states, was to identify a realistic threshold amount of excess payments necessary for a lender to assume, ABSENT INSTRUCTIONS FROM THE BORROWER, that the borrower wanted to have the excess payments applied to future payment installments. The Department has reduced the minimum threshold amount of excess payments necessary to interpret the borrower's intent in FFEL regulations published on December 1, 1995. Those new regulations are effective July 1, 1996. In the meantime, however, the three-payment threshold is the applicable requirement. Instructions from the borrower directing the lender to apply excess payments to future installments includes, but is not limited to, the borrower's submission of multiple payment coupons with the excess payment amount. A payment received early for the next scheduled payment due date without instructions from the borrower does not have to be treated by the lender as a prepayment. §682.210 21. Section 682.210(a)(4) requires that, to receive a deferment, a borrower must request the deferment and provide documentation of his or her eligibility. Section 682.210(c)(1) further provides that, to document eligibility for a student deferment based on full- time or half-time study at a school, the borrower may provide the lender with a certified loan application and a statement, which may be on the loan application, completed by an official of the school, that the borrower is enrolled full-time or half-time. The deferment question on the common application says, "I am requesting postponement (deferment) for my Stafford and prior SLS loan(s)..." If the borrower requests deferment on the common application, should the lender defer all the borrower's loans, including the new loan the borrower is applying for, or just the prior Federal SLS loans? The in-school deferment request on the common application should be applied to all the borrower's loans. Sections 682.210(c)(1) and (c)(3) contemplate that the lender will use the completed application as the borrower's request and documentation of eligibility as required by section 682.210(a)(4) for an in-school deferment. 22. If a borrower requests deferment on a new loan application and has a Federal Consolidation loan, may the Federal Consolidation loan also be deferred to the anticipated graduation date? Although section 682.210(c) of the regulations does not currently specify that a Federal Consolidation loan can be deferred using this approach, the Secretary believes that all the borrower's loans should be treated consistently. Therefore, the Secretary will allow lenders to use information received VIA the common application for this purpose and will publish a technical correction to the regulations shortly to reference Federal Consolidation loans. 23. Section 682.210(c) allows a lender to grant an in-school deferment to a borrower through the borrower's anticipated graduation date when the deferment is granted "on the basis of a certified loan application." May a lender also grant an in-school deferment through the borrower's anticipated graduation date when the deferment is granted on the basis of other forms of documentation? Yes, the lender may grant an in-school deferment through the borrower's anticipated graduation date if that information is certified by the school on a deferment form or through other written means, or is provided by the school as part of the SSCR process. The Secretary will publish a technical correction to the regulations shortly to clarify this point. 24. Question #13 on the common Federal Stafford loan application asks the borrower if he or she would like to postpone repayment of his or her Federal Stafford and prior Federal SLS loans during the in-school and grace periods. Section 682.210(c)(2) states that the lender may grant such an in-school deferment through the anticipated graduation date based on the certified loan application. Is a borrower eligible for postponement of repayment on the borrower's unsubsidized Federal Stafford and SLS loans through the grace period based on the application request? Yes. Although the current phrasing of item #13 on the common Federal Stafford loan application does not explicitly address the option of aligning repayment of the borrower's Federal Stafford and SLS loans through the end of the grace period, the Secretary will allow the borrower's affirmative answer to this item to be interpreted as authorization to the lender to align the repayment on the borrower's loans. However, consistent with the statutory requirements related to repayment alignment, the borrower must be notified that the lender is providing for this and of the borrower's option to commence repayment on the SLS earlier than the beginning of the aligned repayment period. 25. Section 682.210(c)(1), paragraphs (i) and (ii) require that, for a borrower to document eligibility for a deferment based on full- time or half-time study at a school, he or she must provide: 1) a completed deferment application or certified loan application, and 2) a statement from the authorized official of the school certifying the borrower's enrollment status. Many lenders receive a verbal request for deferment from the borrower and combine it with a statement from the authorized official of the school to accomplish the granting of the deferment. Is the practice still permitted? Yes. As stated in the Secretary's comment in the preamble of the December 18, 1992 regulations (see 57 Fed Reg at 60298), it is appropriate to allow the lender to accept the borrower's verbal request that is supported by the statement required in section 682.210(c)(1)(ii). Although many borrowers may request their deferments by completing the common deferment form approved by the Secretary, section 682.210(a)(4) does not specifically require that a borrower's request for deferment be written. Therefore, if the borrower makes an oral request for a deferment and the lender is able to secure the statement required in section 682.210(c)(1)(ii) certifying to the borrower's enrollment status (and, if applicable, receipt of a loan for the period of enrollment) from an authorized official of the school, the lender may grant the deferment. The acceptance of a borrower's oral request for a deferment is also permissible with other types of deferment. §682.211 26. Section 682.211(d) permits lenders to grant forbearance after default if the borrower signs a new "agreement to repay the debt." Must the agreement be in the form of a repayment disclosure? No. The regulations were amended as part of the May 17, 1994 technical corrections to refer to "an agreement to repay the debt." Thus, the documentation signed by the borrower is not limited to a "repayment disclosure." §682.213 27. Does section 682.213 require a loan disclosed under the Rule of 78's methodology to be serviced as a Rule of 78's loan for the life of the loan? As discussed in the comments under section 682.213 of the December 18, 1992 regulations (see 57 Fed Reg at 60303), the Rule of 78's still might apply to loans that entered repayment before June 26, 1987 that had the principal balance calculated using the Rule of 78's. The Secretary stated that the Rule of 78's should be used for the life of the loan. However, the Secretary is aware that many lenders and servicers have procedures to convert a Rule of 78's loan to simple interest methodology. The Secretary does not object, with the agreement of the borrower, if a loan subject to the Rule of 78's is converted to simple interest methodology. §682.302 28. Sections 682.302(d)(1)(v) and (d)(1)(vii) provide for termination of special allowance during the claim filing and claim return processes. Do the following statements correctly summarize the combined impact of these provisions? (a) Payment of special allowance on a loan ceases on the 60th day following the borrower's date of default unless the lender files a default claim with the guarantor by the 60th day. If the claim filed date is after the 60th day following the day of the borrower's default, the lender must cease billing for special allowance on the 61st day. For a loan with a claim filed date that occurs after the 60th day following default, the lender may not resume billing for special allowance unless the default is averted or the claim is rejected and subsequently cured. (b) For a loan on which a default claim is filed no later than the 60th day after the borrower's default, the lender may continue to receive special allowance, if otherwise eligible, until the claim is paid. (c) Provided a lender has submitted the default claim no later than the 60th day after the borrower's default, if the guarantor subsequently returns the claim to the lender because of inadequate documentation ONLY, the lender may receive special allowance on the returned loan. If a default is returned by the guarantor for inadequate documentation ONLY, the lender may receive special allowance only if the claim is refiled on or before the 30th day after the lender received the returned claim from the guarantor. If the lender refiles the claim after the 30th day following its receipt of the returned claim, the lender must cease billing for special allowance on the 31st day. The lender may not resume billing for special allowance unless the default is averted or the claim is rejected and subsequently cured. Yes. (a)-(c) above accurately summarize the interaction of the special allowance termination provisions of sections 682.302(d)(v) and (d)(vii). 29. Sections 682.302(d)(1)(vii) and 682.406(a)(6) provide for the termination of special allowance and reinsurance interest in the case of a loan returned by the guarantor to the lender solely for inadequate documentation. Are claims returned for other reasons, such as mathematical errors on the claim request form, subject to this same special allowance and reinsured interest termination provision? No. Currently the regulations only address claims returned due to inadequate documentation. The Secretary adopted a policy, as reflected in the regulations, that would ensure that lenders file complete claim packages as early as possible, thus supporting a streamlined claim review and claim payment process. Therefore, this provision is only applicable in cases where the lender did not provide complete documentation; it does not apply for cases where erroneous information was provided. 30. Section 682.302(e), which pertains to eligibility for special allowance for loans made or acquired with obligations on which the interest is exempt from taxation (tax-exempt obligations), has been revised in the 1992 regulations. What is the significance of the change and what is the effective date of the change? Section 682.302(e) was revised to reflect a shift in the Department's policy regarding loans made or acquired with the proceeds of tax- exempt obligations. The regulations in effect prior to December 18, 1992 stated that a lender was paid special allowance on a loan made or acquired with the proceeds of a tax-exempt obligation based on the rules applicable to loans financed with taxable obligations after the loan was refinanced with the proceeds of a taxable obligation and the prior tax-exempt obligation was retired or defeased. The regulations were silent as to the method of calculating the applicable special allowance rate for a loan made or acquired with a tax-exempt obligation that was subsequently refinanced with the proceeds of a taxable obligation, but the prior tax-exempt obligation remained outstanding. The Department's prior guidance stated that the current funding source defined the applicable special allowance provisions -- if a loan was financed with the proceeds of a tax-exempt obligation, the tax-exempt special allowance rule applied. If the loan was financed with the proceeds of a taxable obligation, the taxable special allowance rules applied. In the December 18, 1992 regulations, the Department changed this policy. Under the regulations, if a loan made or acquired with the proceeds of a tax-exempt obligation is refinanced with the proceeds of a taxable obligation, the loan remains subject to the tax-exempt special allowance provisions if the authority retains legal interest in the loan. If, however, the original tax-exempt obligation is retired or defeased, special allowance is paid based on the rules applicable to the new funding source (taxable or tax-exempt). This change is effective as of the effective date of the 1992 regulations, February 1, 1993, and applies to all loans transferred from a tax-exempt obligation to a taxable obligation on or after that date. Adjustments to ED 799 billings and current billings for any loans covered by this policy should be made using the applicable tax- exempt special allowance codes for the periods that the holder retains legal interest in the loan and the original tax-exempt obligation has not been retired or defeased. §682.401 31. Section 682.202(c)(5) provides for the refund of the origination fee whenever: i) the school returns the full amount of the disbursement; ii) the loan disbursement is repaid within 120 days of disbursement; or iii) the loan disbursement is not delivered within 120 days of disbursement. Section 682.401(b)(10) provides for the refund of the insurance premium whenever: i) the loan disbursement is repaid within 120 days; or ii) the loan disbursement is not delivered within 120 days. Therefore, if a school returns the disbursement amount after the 120th day, the borrower receives a refund of the origination fee but not the insurance premium. May a guaranty agency refund the insurance premium when a school returns the loan proceeds after the 120th day of disbursement? Yes, the guaranty agency may, but is not required, to refund the insurance premium under these circumstances. However, please note that section 682.401(b)(10)(vi) of the final regulations published on December 1, 1995, (effective July 1, 1996) will require the lender to refund the insurance premium, by credit to the borrower's account, whenever a school makes a refund to the lender regardless of whether the refund is the full amount of the loan or a portion of it. 32. Section 682.401(b)(17) states that a guaranty agency shall allow a loan to be assigned to an educational institution (whether or not it is an eligible lender) in connection with the institution's repayment on a loan that was ineligible. Must the educational institution enforce the debt in accordance with all FFEL program rules (e.g., deferment, forbearance)? The institution may only collect on the loan based on the terms of its legal contract with the borrower--in other words, based on the terms of the promissory note. Therefore, the institution must observe the terms and provide any benefits for which a borrower is eligible based on the terms of the promissory note (e.g., deferments, forbearance). However, since for FFEL program purposes, an ineligible loan has lost its federal reinsurance, the school may not bill the Secretary for any interest or special allowance on the loan nor submit the loan to a guarantor or the Secretary for claim payment. However, the loan remains a debt owed by the borrower and both parties can be required to comply with its terms. §682.402 33. What is the lender's responsibility if a co-maker or an endorser files for bankruptcy? Section 682.402(d) (current section 682.402(f)) of the regulations specifies that when a lender is notified that a borrower has filed a petition in bankruptcy, the lender must suspend collection efforts against the borrower. If the borrower has filed for relief under chapter 7 or 11 of the Bankruptcy Code, the suspension of collection activities does not apply to a co-maker on the loan. The lender is also expected, in the case of a chapter 7 or 11 bankruptcy filing, if the collection activities have expanded to include the endorser at the time of the borrower's bankruptcy filing, to continue to collect on the loan against the endorser. If an endorser or co-maker files for relief under chapter 12 or 13, the lender must suspend collection activities against the co-maker or endorser, and, unless and until court approval is received, against the debtor. Section 437(b) of the HEA does not provide for the lender to file a bankruptcy claim based solely on a co-maker's or endorser's filing for relief in bankruptcy under any chapter. 34. Section 682.402(f) (current section 682.402 (h)) provides for the calculation of reinsured interest payments on "nondefault claims" such as death, disability, and bankruptcy claims. To be certain the combined impact of the provisions in this section are consistently interpreted for claims returned due to inadequate documentation, is the following statement correct? If the guarantor pays interest on claims, the interest eligible for reinsurance includes: a. The interest that accrues from the lender's current interest paid through the date the lender receives notification of the condition; b. The interest that accrues during the claim preparation period through the date the lender files the claim with the guarantor, not to exceed the periods provided for under current section 682.402(g)(2); c. Interest that accrues from the lender's receipt of a claim returned by the guarantor for additional documentation through the date the lender refiles the claim provided that period does not exceed 30 days following the return of the claim to the lender by the guaranty agency; and d. Interest that accrues from the lender's claim filing or refiling date through the date the guaranty agency pays or returns the claim, not to exceed 45 days for death, disability, or bankruptcy claims or 90 days for closed school and false certification claims. Yes. The above statement correctly summarizes the regulatory requirements. §682.406 35. If the lender files a claim within 90 days after default (or 60 days in the case of a returned claim) but the guarantor does not pay the claim within 60 days following the guarantor's receipt date, does the lender receive all interest up to the date the claim is paid? In the comments section of the December 18, 1992 regulations (see 57 Fed Reg at 60311), the Secretary stated that, in this situation, if the guaranty agency's agreement with the lender covers accrued interest, the guaranty agency is required to pay the interest accruing after the 60th day even though this interest is not eligible for reinsurance. However, a guaranty agency may not use money from its reserve fund to pay any amount of a claim that is not eligible for reinsurance. 36. There appears to be a discrepancy between sections 682.406(a)(6) and 682.406(a)(8), with regard to when eligibility for reinsured interest ceases in the case of a returned claim. While section 682.406(a)(6) indicates that eligibility for reinsured interest continues as long as a lender resubmits the claim within 30 days of its receipt of the returned claim, section 682.406(a)(8) indicates that interest accrued beyond the 60th day after the claim is originally filed is not reinsured. Does a discrepancy exist between these two sections and is it the Department's intent to limit reinsurance on interest that accrues after the 60th day after the claim is originally filed or resubmitted? The Secretary does not believe that there is a discrepancy between these two provisions. Both provisions are intended to provide significant incentives to the lender and guaranty agency, respectively, to submit and process claims in an expeditious manner. As regards section 682.406(a)(6), consistent with the requirements governing the payment of special allowance to the lender in § 682.302(d)(vii) on resubmitted claims, interest is not reinsured unless the lender resubmits a claim returned by the guarantor (only due to inadequate documentation) by the 30th day. This effectively limits the interest due the lender beyond the 30th day unless the lender resubmits the claim with all required documentation by the 30th day. As the Secretary indicated under changes in the discussion of comments of the December 18, 1992 regulations (see 57 Fed Reg at 60310-60311) [mislabeled under section 682.406(a)(5)], the Secretary modified the provision as originally proposed "to provide that a lender may receive full reimbursement for outstanding principal, accrued interest and special allowance if an otherwise eligible claim that has been returned solely because of inadequate documentation is resubmitted within 30 days after the date the agency has returned the claim. If the lender resubmits the claim by the 60th day.principal is reinsured but interest payments will be limited to the 30th day after the claim is returned." The requirements of section 682.406(a)(8), on the other hand, restrict the amount of reinsured interest payable to the agency by the Secretary if the agency takes more than 60 days to pay or return a lender's default claim. This does not restrict the interest payable to the lender if the lender has submitted or resubmitted a claim within the guidelines contained in sections 682.406(a)(5) and (6). The agency is required to pay the interest beyond the 60th day if the lender has met all applicable requirements. However, the requirements of section 682.406(a)(8) restrict how much accrued interest the agency may receive in reimbursement from the Secretary. As the Secretary's discussion of comments explaining the decision to modify the 45-day limit proposed in the notice of proposed rulemaking to the final 60-day limit indicates, (see 57 Fed Reg at 60311) [mislabeled as section 682.406(a)(7)] the Secretary "has extended to 60 days the deadline by which a guaranty agency must pay a default claim to receive reinsurance on all otherwise eligible accrued interest. The Secretary wishes to clarify that if a claim is paid after the 60th day, and the agency's agreement with the lender covers accrued interest, the guaranty agency is required to pay the interest accruing after the 60th day to the lender even though the interest is not eligible for reinsurance." 37. Sections 682.406 (a)(6) and (a)(8) provide for the termination of reinsurance during the claim filing, claim payment, and claim return processes. Do the following statements correctly summarize the interaction of these two provisions? (a) For a lender to be eligible for all accrued interest on a default claim, the lender's claim filed date must be on or before the 90th day after the default on an original submission and on or before the 30th day on a resubmitted claim returned only for inadequate documentation. If the claim filed date is the 91st day after default or greater, the loan is not eligible for reinsurance. If the lender resubmits a claim on or after the 31st day after return of the claim by the agency, the lender is only due accrued interest through the 30th day. (b) For a guaranty agency to receive full reinsured interest on a claim submitted "on time" (i.e., no later than 90 days [original claim] or resubmitted no later than 60 days after return of a claim returned due to inadequate documentation), the guaranty agency must: 1) pay the default claim within 60 days of its receipt of the original default claim, or within 60 days of its receipt of additional documentation needed on a resubmitted claim, whichever is greater; or 2) return the original claim (if applicable) within 60 days of its receipt of the claim or additional documentation on a resubmitted claim, whichever is greater. Yes. The above statements accurately summarize the requirements and interactions of these two provisions of the regulations. 38. Section 682.406(a)(9) states that an agency must request reinsurance no later than 45 days following the payment of a default claim, which must take place no earlier than 90 days after the default date. Taken literally, this could be interpreted to mean that an agency cannot pay a claim prior to the 270th day of delinquency. Is this an accurate interpretation? No. When this regulation was issued, section 428(c)(1) of the HEA provided that, "In no case shall a guaranty agency file a claim under this section for reimbursement with respect to losses prior to 270 days after the loan becomes delinquent with respect to any installment thereon, or later than 45 days after the guaranty agency discharges its insurance obligation on the loan." However, the 1993 Technical Amendments amended the HEA to read, " A guaranty agency shall file a claim for reimbursement with respect to losses under this subsection within 45 days after the guaranty agency discharges its insurance obligation on the loan." Thus, the requirement in the regulations that the agency must pay a default claim "no earlier than the 90th day following default" is no longer applicable. The Department will amend the program regulations to reflect this self-implementing statutory change shortly. 39. Section 682.406(a)(12) states that a guaranty agency is entitled to reinsurance only if the agency and the lender complied with all other federal requirements. Under section 682.411(g) in the Comments section of the December 18, 1992 regulations (see 57 Fed Reg at 60315), the Secretary provides guidance on assessing violations when there are errors in conducting skip-tracing activity as specified in section 682.411(g). The Secretary advises that one violation is assessed for cases where "the lender does not contact one or more of the individuals or entities identified in the borrower's loan file" (as long as there is no gap of greater than 45 days). This would result in the guarantor paying a claim with interest penalties when the skip-tracing has not been completed exactly as defined in section 682.411(g). Does this eliminate the agency's right to file for reinsurance in light of the requirement in section 428(c)(2)(G) of the Higher Education Act? No. Although the lender may have violated certain due diligence requirements, the loan has not lost reinsurance. The loan is still considered eligible for reinsurance despite the error(s) that led to the limitation on interest, interest benefits, and special allowance. |