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96-L-186 Section I (Questions 40-73) §682.410 40. Section 682.410(b)(5)(vi)(G) implies that an agency is prevented from reporting a defaulted loan to the credit bureau if the borrower and the agency reach agreement as to satisfactory repayment terms. Section 430A of the HEA requires reporting information concerning the date of default and the collection of the loan, including information concerning the repayment status of any defaulted loan. Since an agreement to pay does not ensure payment, is the agency precluded from reporting the default if the borrower and agency agree upon repayment terms? No. The agency must continue to report payments received from the borrower but may not begin reporting adverse credit (e.g., default status, delinquency) until 60 days after the notice specified in section 682.410(b)(5)(ii)(A) and procedures required in section 682.410(b)(6)(iii). The purpose of this section is to avoid adverse credit information from being reported in the case of a borrower who can provide documentation to the guarantor that the loan is not legally enforceable or is not in default. If the borrower makes satisfactory repayment arrangements with the guaranty agency as a result of the notice and begins to make payments as a result of that agreement, the guaranty agency should report the borrower as in repayment but continue not to report adverse credit information unless the borrower fails to live up to the agreement. The guaranty agency is encouraged to arrange a lender repurchase or loan rehabilitation if the borrower continues in repayment as a result of the agreement. 41. Section 682.410(b)(2)(i) refers to the formula described in 34 CFR 30.60 relating to collection costs. However, 34 CFR 30.60 does not include elements appropriate to assessing a guaranty agency's cost of collection. May a guaranty agency develop documented alternative methodology for determining reasonable costs incurred by the guaranty agency? No. Section 484A(b)(1) of the HEA specifies that reasonable costs of collection as regulated by the Secretary will be assessed a borrower who defaults on an FFEL loan. Section 682.410(b)(2) of the regulations reflects the Secretary's formula for determining reasonable collection costs. The Secretary does not agree that the formula in 34 CFR 30.60 is inappropriate to this process. The regulations specifically require that the borrower be charged the lesser of the costs derived using this formula or the amount the borrower would be charged if the loan were held by the Department. The Secretary believes that allowing an agency to develop its own methodology for calculating these costs is contrary to statutory intent and will result in inconsistent treatment for borrowers. 42. If the collection charges calculated in accordance with section 682.410(b)(2) exceed a specific limit on collection charges provided for in the borrower's promissory note, does the limitation stated in the promissory note still apply? Yes. Although no such limits are in the current common Federal Stafford and PLUS applications, old promissory notes may contain such a limit. If the borrower has signed such a note, the regulations may not abrogate the terms of the borrower's promissory note. If the note does not provide for collection costs or does not provide a limit on collection costs, the amount calculated using the formula provided in section 682.410(b)(2) applies. 43. Section 682.410(b)(2) requires assessment of collection charges against a borrower who files for bankruptcy. Must an agency assess these charges prior to discharge of the bankruptcy? May an agency assess these charges during the required stay of collections on the loan? An agency is not required to assess collection costs prior to discharge of the debt because to do so would violate the Bankruptcy Code. However, collection charges must be assessed following receipt of the notice of non-discharge of the loan if the borrower is still in default. 44. Under section 682.410(b)(7)(iv), if an agency chooses to refer a loan to more than one collection contractor, would each referral of the loan be subject to the performance-based standards? Yes, if the following provisions are met: (1) the initial referral of all such loans to a collection contractor occurred during the time period specified in section 682.410(b)(7)(iv)(B) (i.e., 31-180 days after the agency paid a default claim on the loan); and (2) the review to determine whether to litigate against the borrower was conducted within the specified time frames. §682.411 45. In most cases, lenders must send at least six letters and make at least four telephone efforts to collect from delinquent borrowers. Section 682.411(a) provides that, in the case of a borrower who is incarcerated or resides outside the US, Mexico or Canada, the lender may send a collection letter in lieu of each telephone effort, which implies that such a borrower would receive at least ten letters. However, section 682.411(d)(4) provides that the lender does not need to make telephone efforts for a borrower who is incarcerated or resides outside the US, Mexico or Canada, which implies that such a borrower would receive at least six letters. Which is correct? The Secretary excused lenders from TELEPHONE contacts with borrowers residing outside a State, Mexico or Canada in section 682.411(d)(4). However, the lender is required by section 682.411(a) to engage in at least the collection efforts in paragraphs (c)-(l). To complete the collection efforts in these paragraphs, the Secretary has allowed lenders to substitute forceful collection letters for the telephone contacts, not reduce the volume of collection activity. Therefore, the borrower would receive at least ten letters. 46. According to section 682.411(b), a lender may advance a delinquent borrower's due date if the borrower's payment is within $5.00 of the amount normally required to advance the due date. Does the $5.00 tolerance apply to the installment amount or the amount due? The $5.00 tolerance applies to the amount due. 47. a. Section 682.411(b) requires the lender to establish a Federal Stafford loan borrower's first payment due date no later than 45 days following the end of the grace period, or no later than 75 days after learning that the borrower has entered repayment without the lender's knowledge. If a lender establishes a first payment due date that is later than the permitted 45-or 75-day time frame, does this effect the borrower's delinquency begin date and how does this impact the lender? The lender's failure to properly establish the borrower's first payment due date has no effect on the borrower's delinquency begin date. A delinquency begins the day after the first scheduled payment is due and not made. The lender's failure to properly establish this date would represent a loan servicing violation for the lender. For determining violations associated with a lender's failure to establish the first payment due date in a timely manner, the Secretary provided guidance in the Comments section of the December 18, 1992 regulations (see 57 Fed Reg at 60313-60314). The period between when the first payment due date should have been established and the date of the actual first payment due date should be measured. If this period is 36-45 days, a single violation will be assessed. If this period is greater than 45 days, the loan loses its guarantee and any special allowance received for the period that begins 31 days after the first payment due date should have been established must be returned. When the lender's first payment due date occurs no more than 45 days beyond the established deadline, the guarantee remains intact and due diligence will be monitored on the due date established by the lender. b. For cases where a lender exercises the 30-day extension for establishing the first payment due date as provided in section 682.209(a)(3)(ii)(E) and discussed in question #17, how is timely conversion to repayment established and how are violations of this provision determined? The deadline for establishing the first payment due date is extended by 30 days. The determination of a lender's violation in this area is described in answer 47a. above. 48. Section 682.411(b) requires the lender to establish the first payment due date no later than 45 days following the end of the grace period, or no later than 75 days after learning that the borrower has entered repayment. Section 682.209(a) sets the first payment due date for Federal Consolidation, PLUS and SLS loans within 60 days after full disbursement. Which section must the lender follow? Lenders should follow section 682.209(a)(1)-(2) which establishes the specific rules for establishing the first payment due date for Federal Consolidation, PLUS, and SLS loans. 49. Section 682.411(b)(2) provides that a lender may not permit a gap in collection activity of more than 45 days except in the case of a transfer where the lender has an additional 15 days to perform the required due diligence. For purposes of initiating skip tracing for accounts affected by a transfer, will the lender have an additional 15 days added to the 10-day time frame as set forth in section 682.411(g)(1)? Yes, if the transfer occurred within ten days of the date the lender learned that it did not know the location of the borrower. 50. Regarding section 682.411(d)(3)(i) and (ii), must the lender send letters if the borrower's delinquency "rolls" below 91 or between 91-120 days delinquent? Section 682.411(d) governing due diligence activities between 11- 180 days of delinquency requires the lender to send at least four collection letters exclusive of the final demand letter. In his discussion of comments to the regulations under section 682.411(d) (see 57 Fed Reg at 60314), the Secretary states that the timing of required collection letters is left to the discretion of the lender, however, "the Secretary intends that the two most forceful letters should be sent late in the delinquency cycle, when they are likely to have the greatest effect on the borrower." Therefore, a lender may choose to send one or more of the required collection letters during these periods, provided the timing and forcefulness of the lender's collection letters meet the Secretary's stated intention. If the borrower "rolls" below 91 or between 91-120 days delinquent, the lender is also required to make two diligent efforts to contact the borrower by telephone or one diligent effort, respectively. In addition, the lender would be required to request preclaims assistance unless the guaranty agency offers it at an earlier point of delinquency. 51. Section 682.411(d)(3)(i) requires that if a borrower is less than 91 days delinquent, the lender must make two diligent efforts to contact the borrower by telephone upon the lender's receipt of a payment, correct address, returned check, or the expiration of a deferment or forbearance. Does this section apply in the following examples? 1) A borrower makes a payment on the 20th day of delinquency and subsequently "rolls" to 30 days delinquent upon the lender's receipt of a notice that the borrower's check was dishonored. The borrower then proceeds to make no further payments. 2) A borrower is 35 days delinquent and makes a payment which "rolls" the delinquency back to 5 days. The Secretary assumes that most lenders and servicers establish preset schedules of due diligence activities. Lenders and servicers are strongly encouraged to continue these schedules for addressing delinquencies. In the situation described in number 1), the lender or servicer would be required to make at least two diligent efforts to contact the borrower by telephone and may opt to send one or more of the four required collection letters during this period. In situation 2), because the delinquency was reduced to less than that described in section 682.411(d) (11-180 days delinquent), the lender or servicer must complete all applicable due diligence described in section 682.411(d) only if the delinquency subsequently reaches 11 days or more. 52. Under section 682.411(d), the lender must perform reduced due diligence upon receipt of a payment, correct address, dishonored check as payment, correct telephone number, expiration of a deferment or forbearance. However, under sections 682.411(d)(3)(i) and (ii) and 682.411(d)(4)(iv) receipt of correct telephone number is not specifically mentioned with respect to reduced due diligence requirements in these sections. Was the mention of RECEIPT OF CORRECT TELEPHONE NUMBER inadvertently omitted? Yes. The Department will amend sections 682.411(d)(3)(i) and (ii) and 682.411(d)(4)(iv) to include a reference to the receipt of a correct telephone number. 53. Regarding section 682.411(d)(1), does a diligent effort to contact the borrower by telephone performed on the 90th day of delinquency count as occurring before or after the 90th day? A diligent effort performed on the 90th day of delinquency should be counted as satisfying the 1-90 day period. A technical amendment to the regulations to clarify this issue will be made shortly. 54. The regulations require that between the 11th and 180th days of delinquency the lender make certain written and telephone efforts to bring the borrower current and that the final demand letter be sent on or after the 151st day of delinquency. Is it acceptable to continue collection efforts like those required in the 11-180 day window after sending the final demand? Yes, but those collection efforts should be restricted to telephone contacts to support the final demand letter. The final demand letter demands payment in full and provides the borrower 30 days to respond. The Secretary believes that any collection letter sent out after the final demand letter could undermine the forcefulness and significance of that demand. 55. Do the address skip-tracing requirements in section 682.411(g)(1) (i.e., 10-day initiation requirement and the 45-day gap requirement) apply to non-delinquent skips (such a borrower who skips during the grace period)? No. The requirements in section 682.411(g) only apply to delinquent borrowers. However the Secretary strongly encourages lenders to begin skip-tracing as soon as the whereabouts of the borrower are unknown, even if the borrower has not entered repayment, and to continue those efforts until completed. If the lender begins address skip-tracing before the borrower becomes delinquent and completes all required skip-tracing activities before the borrower becomes delinquent, or is continuing ongoing efforts to complete all required activities and that effort overlaps into the delinquency period, the 10- day initiation requirement does not apply. The 45-day gap rule applies only once the borrower becomes delinquent and ends upon completion of skip-tracing or the date of default, whichever is earlier. Activities performed prior to the delinquency need not be repeated. If the lender completed all required skip-tracing prior to the delinquency, it need not repeat any skip-tracing during the delinquency period. 56. Is it permissible for a lender to use only letters when contacting schools in an attempt to locate borrowers? Yes. "Diligent efforts" in section 682.411(g)(1) are not limited to telephone calls. Prohibiting a lender from using letters in place of phone calls could inundate schools with skip-tracing telephone calls. 57. Are gaps measured for endorser due diligence? Gaps are not measured for endorser due diligence collection activities; gaps are measured only for borrower collection activities. Endorser due diligence does not start or end a gap for borrower due diligence. However, contact with (or an attempt to contact) an endorser to locate a skipped borrower is a collection activity that starts and ends a gap, because it is considered to be a due diligence activity with the borrower. 58. Does telephone skip-tracing start and end a gap? Yes. A "diligent effort for telephone contact" as defined in section 682.411(1) is an "attempt to contact the borrower by telephone" for the purposes of section 682.411(k)(2). 59. If an account "rolls" forward late in delinquency, must all endorser due diligence be completed? Yes. Lenders are expected to complete the due diligence activities specified for endorsers. The Secretary believes an endorser must be given notice of the severe delinquency and ample opportunity to honor the debt before the loan is declared a default. 60. If the endorser is in forbearance, what collection activity under section 682.411 is required? If either the borrower or the endorser is granted forbearance, collection activities under section 682.411 are suspended on the loan. The Secretary strongly encourages lenders to initiate skip-tracing on the borrower or endorser, even if they are not delinquent, if their whereabouts become unknown during the forbearance period. 61. What are the telephone skip-tracing requirements when "normal" diligent efforts have been completed and then the telephone number becomes invalid prior to the 120th day of delinquency? For instance, all four diligent efforts have been completed with no gap greater than 45 days in the servicing and then the telephone number becomes invalid (either on the lender's last required attempt or after all required attempts are completed). Is the telephone skip-tracing required, since all diligent efforts required by section 682.411(d) have been completed? If the lender discovers the borrower's telephone number is invalid on the last required attempt to make a "diligent effort" to contact the borrower, the lender could not complete that diligent effort without following the procedures set forth in section 682.411(l)(1)(iii). APPENDIX D 62. Appendix D provides that, "There will be no reduction or recovery by the Secretary ... if there is no violation of federal requirements of six days or more (21 days or more for a transfer)." Is this rule applicable to every time frame and deadline in section 682.411? Yes. 63. Does the $5 payment tolerance apply to a curing payment? No. The $5 tolerance provided in section 682.411(b)(1) is for the purpose of advancing the borrower's due date even though the payment is less than that normally required and is not applicable to a curing payment as defined in Appendix D. A full payment as defined in section I.A. of Appendix D is required to be " in an amount at least as great as the monthly payment amount required under the existing terms of the loan...." 64. When is reinsurance deemed to be lost for the purpose of determining the three year deadline for applying the cure policy? Reinsurance on a loan is lost on the later of: a) three years from the last date it could have been filed for claim payment with the guaranty agency (270th day of delinquency) FOR A CLAIM THAT WAS NOT FILED or b) three years from the date the guaranty agency rejected the claim, FOR A CLAIM THAT WAS FILED. 65. Does a timely filing violation on a non-default claim require a cure by the lender? The Department will honor reinsurance on a non-default claim even it there is a violation of the timely filing requirements under the conditions set forth under I.E.2. of Appendix D. 66. The definition of "gap" in section I.A. of Appendix D differs from the definition in §682.411(i). Which is correct? The definition of "gap" in Appendix D is specific to the due diligence in collection activity required of lenders under the original due diligence regulations published on November 10, 1986 and applies to loans serviced under those collection requirements. The definition of "gap" that is contained in section 682.411(i) applies to loans serviced under the due diligence requirements in the December 18, 1992 regulations. 67. If a lender missed the filing deadline for a bankruptcy claim and the debt is not discharged, the regulations state that the lender must "return the borrower to the appropriate status that existed prior to the filing of the bankruptcy claim." Often the bankruptcy proceeding takes many months, so the true status of the borrower may have changed (e.g., from in-school to repayment status). Why would the lender not use the current status? The lender should return the borrower to the status that existed prior to the bankruptcy filing, unless the status has changed due to the passage of time. In that case, the lender must place the borrower in the status that would exist had no bankruptcy claim been filed. The Department will amend Appendix D to clarify this point. 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 for in section 682.211(f)(5). 68. What is the date of the earliest unexcused violation under the new collection procedures contained in the December 18, 1992 regulations? 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 3 or more due diligence violations of 6 days or more, the earliest unexcused violation would be 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. 69. Is a gap a violation? For a loan serviced under the November 10, 1986 regulations, reinsurance is only lost if there is a gap between collection activities and a violation of the (old) due diligence requirements outlined in section 682.411. For a loan serviced under the December 18, 1992 regulations, a gap in excess of 45 days is a violation which causes reinsurance to be lost. 70. Section II, which addresses the establishment of the first payment due date, and penalties assessed for establishing a due date beyond the deadline, contains some rules that appear to be relevant only to the 1986 regulations (e.g., the provision that a lender may disclose as late as the 65th day after notification that the borrower has entered repayment, yet must set a first payment due date within 75 days) and some provisions that appear applicable only to the December 18, 1992 regulations (e.g., the language changes resulting from the May 17, 1994 Technical Corrections to the December 18, 1992 regulations). In addition, there appears to be an incorrect reference to the lender's responsibility to "send both of the collection letters required by section 682.411(c) to be sent within the first 20 days of delinquency," which reflects neither 1986 or the 1992 regulations. How should the discrepancy between Appendix D and the regulations be resolved? To establish the first payment due date on the loan and ensure timely conversion to repayment, the guidance provided in the comment section of the December 18, 1992 regulations should be followed (see question 47). 71. Subsection I.B.5. - Excuse of Certain Due Diligence Violations currently states (July 1, 1995) "Except as noted in subsection II, below, if a loan has due diligence violations but was later CURED AND (emphasis added) brought current, those violations will not be considered in determining whether a loan was serviced in accordance with section 682.411. Guarantors must review the due diligence for the 180-day period prior to the default date ensuring the due date of the first payment not later made is the correct payment due date for the borrower." What was the reason for the changes to this paragraph? The reason for amending this paragraph was to clarify the Secretary's original intent. When Dear Guaranty Agency Director Letter 88-G- 138 was being developed, many holders of student loans expressed concern that a guaranty agency might refuse to pay a default claim on a loan under certain conditions. These conditions involved a loan that had lost reinsurance, was cured, and then subsequently went into default. Holders were concerned that a guaranty agency could deny the default claim on the loan on the basis of the prior due diligence failure. In response to this concern, the Secretary added the provision to 88-G-138 that indicated that the guarantor should make a determination regarding the due diligence performed on the loan based only on the 180-day delinquency period that resulted in the claim being filed. This statement was intended to clarify that a prior due diligence violation that was subsequently cured could not serve as a guarantor's basis for denying an otherwise eligible default claim. Unfortunately, some guarantors interpreted this provision to require them to only review the most recent 180-days of due diligence prior to the date of default. This practice is not correct because it ignored the fact that due diligence violations most often occur because of a failure to begin or resume due diligence in a timely fashion. Accordingly, guarantors are required to examine the conversion to repayment date and established first payment due date on the loan in addition to the most recent 180 days of due diligence collection activity preceding claim filing. 72. Currently, Appendix D States that for a loan that lost reinsurance prior to December 1, 1992, this policy applies through November 30, 1995 and for a loan that lost reinsurance on or after December 1, 1992, this policy applies until three years after the claim filing deadline. What is the effect of the Secretary's enforcement waiver on these time frames? For those lenders that had been notified by a guaranty agency to implement the December 18, 1992 regulations and Appendix D, there is no effect. However, for those lenders who had not been so notified, reinsurance on a loan is lost on the later of: a) three years from the last date it could have been filed for claim payment with the guaranty agency (270th day of delinquency) FOR A CLAIM THAT WAS NOT FILED or b) three years from the date the guaranty agency rejected the claim, FOR A CLAIM THAT WAS FILED, based on the FINAL IMPLEMENTATION DATE SPECIFIED IN APPENDIX A. 73. Appendix D, Section I.E.2., provides guidance on the treatment of interest on loans for which a bankruptcy claim was not filed timely, but the loan was not discharged in the bankruptcy action. Specifically, the last sentence of this section states, "The Secretary will not reimburse the guaranty agency for interest accruing beyond the filing deadline for the bankruptcy claim." Does this statement apply regardless of the amount of time that may elapse between the time that the bankruptcy claim should have been filed and the point at which some other claim type is to be filed with the guarantor? Interest is not reinsured for the period that begins with the latest date when the claim should have been filed and ending when the claim is filed or becomes eligible again for reinsurance. |