Publication Date: January 20, 2012
| DCL ID: | FP-12-01 |
Subject: Loan Verification Certificate for Special Direct Consolidation Loans
Summary: This letter announces the approval of a Loan Verification Certificate (LVC) for use in connection with the making of Special Direct Consolidation Loans through the William D. Ford Federal Direct Loan (Direct Loan) Program. It also provides Federal Family Education Loan (FFEL) Program lenders and lender servicers with guidance on completing the LVC and explains the LVC process.
Dear Colleague:
In a series of previously posted communications (10/26/2011, 11/23/2011, 12/28/2011, 1/13/2012, and 1/18/2012), we informed the financial aid community about the availability of the Special Direct Consolidation Loan opportunity that the U.S. Department of Education (the Department) will offer through the Direct Loan Program. This short-term consolidation opportunity will be available to eligible borrowers from January 17 – June 30, 2012. As explained in the previous communications, this initiative will allow certain borrowers who have at least one Direct Loan Program loan or Department-held FFEL Program loan and at least one commercially-held FFEL Program loan to consolidate their eligible commercially-held FFEL Program loans into a Special Direct Consolidation Loan.
As with the traditional Direct Consolidation Loan process, the Department will use an LVC to collect certain information from the FFEL Program lenders or lender servicers of the loans that a borrower wishes to consolidate into a Special Direct Consolidation Loan. This information is needed to determine the eligibility of the loans for consolidation and the payoff amounts of those loans, and to ensure that the Special Direct Consolidation Loan is accurately set up for servicing. In this letter we announce the approval of the LVC that will be used for the Special Direct Consolidation Loan process, provide guidance to lenders and lender servicers on completing the LVC, and explain the Special Direct Consolidation Loan LVC process.
The Office of Management and Budget (OMB) has approved an LVC for Special Direct Consolidation Loans (“Federal Special Direct Consolidation Loan Verification Certificate”) under OMB Control Number 1845-0111. Note that this LVC is not the same as the LVC that is used in the traditional Direct Consolidation Loan process (“Federal Direct Consolidation Loan Verification Certificate,” approved under OMB Control Number 1845-0053). Although the Special Direct Consolidation Loan LVC and the traditional Direct Consolidation Loan LVC are similar, the Special Direct Consolidation Loan LVC collects certain information that is not on the traditional Direct Consolidation Loan LVC. This additional information is needed because Special Direct Consolidation Loans have certain terms and conditions that differ from the terms and conditions of traditional Direct Consolidation Loans, as explained in the Department’s earlier communications cited above. In addition, the layout of the special LVC differs in some respects from the layout of the traditional LVC. The differences between the Special Direct Consolidation Loan LVC and the traditional Direct Consolidation Loan LVC are summarized below.
A PDF version of the OMB-approved Special Direct Consolidation Loan LVC is attached to this letter for reference. The special LVC will be made available for FFEL lenders and lender servicers to complete and submit through either a paper or electronic process. We provide detailed guidance on using the Special Direct Consolidation Loan LVC later in this letter.
Differences Between the Special Direct Consolidation Loan LVC and the Traditional Direct Consolidation Loan LVC
Layout
The layout of the section of the paper version of the Special Direct Consolidation Loan LVC that collects information about the loans being consolidated differs significantly from the layout of the corresponding section of the traditional Direct Consolidation Loan LVC. The loan data chart that is on the first page of the traditional Direct Consolidation Loan LVC is on the second page of the Special Direct Consolidation Loan LVC. In addition, to accommodate the additional data elements that are required for Special Direct Consolidation Loans, the required loan data elements are listed vertically in the leftmost column of the chart and the individual loans (#1, #2, etc.) are shown horizontally across the top of the chart. Finally, the space for entering the LVC certification date, which is on the first page of the traditional Direct Consolidation Loan LVC, is on the second page of the special LVC, immediately above the loan data chart.
Data Elements
Most of the data elements on the traditional Direct Consolidation Loan LVC are also needed for Special Direct Consolidation Loans and therefore are included on the Special Direct Consolidation Loan LVC, sometimes with slight variations. Because Special Direct Consolidation Loans include certain terms and conditions that differ from traditional Direct Consolidation Loans, the Special Direct Consolidation Loan LVC includes additional data elements that are not needed on the traditional LVC. These additional data elements are:
Repayment Plan Information (Items 15a to 15d). Because the repayment period for each loan that is consolidated into a Special Direct Consolidation Loan remains the same as it was prior to consolidation, the Department requires information about the current repayment plan for each loan being consolidated to determine the remaining portion of the repayment period for the Special Direct Consolidation Loan and, for borrowers who choose to remain on the same repayment plan they were using to repay their commercially-held FFEL Program loans, the monthly payment amount for the consolidation loan.
Income-Based Repayment (IBR) Information (Items 16a to 16h). Two of the IBR data elements (IBR Start Date and Days of Economic Hardship Deferment) are also included on the traditional Direct Consolidation Loan LVC. Because the repayment period does not start over on a Special Direct Consolidation Loan and because qualifying IBR payments made prior to consolidation will continue to count toward the 25 years of repayment required for IBR loan forgiveness if the borrower also repays the Special Direct Consolidation Loan under the IBR Plan, certain additional IBR-related information is needed on the special LVC. The Department requires this information to determine the beginning date of the 25-year IBR loan forgiveness period and the number of qualifying IBR payments that a borrower has already made on the loans being consolidated. This information is also required to determine IBR eligibility and the IBR payment amount for borrowers who repay the Special Direct Consolidation Loan under the IBR Plan.
Number of Days Past Due (Item 17). This data element is required to determine the eligibility of a loan for consolidation. Loans that are 270 or more days delinquent are not eligible for consolidation into a Special Direct Consolidation Loan.
Deferment/Forbearance Information (Items 18a and 18b). If a loan is in a period of deferment or forbearance status at the time it is consolidated, the Special Direct Consolidation Loan will be placed in that same status for the remainder of the deferment or forbearance period that began prior to consolidation. These data elements will allow the Department to determine which type of deferment or forbearance to apply to the Special Direct Consolidation Loan and to identify the date that period of deferment/forbearance is scheduled to end.
Parent PLUS Loan Information (Items 19a and 19b). These data elements will assist the Department in properly servicing a parent PLUS loan that is included in a Special Direct Consolidation Loan.
The Special Direct Consolidation Loan LVC includes detailed instructions for completing each data element.
Loan Type for Federal Consolidation Loans
Both the traditional and special LVCs require the FFEL lender or lender servicer to report the loan type for each loan that is to be consolidated. The instructions for completing this data element on both LVCs specify that Federal Consolidation Loans should be reported either with code “J” for Unsubsidized Federal Consolidation Loans or code “O” for Subsidized Federal Consolidation Loans. The codes “J” and “O” refer to the unsubsidized and subsidized portions of a Federal Consolidation Loan, respectively.
In the “Special Direct Consolidation Loan LVC Process” section below, we explain the electronic and paper LVC distribution/return methods that will be available to lenders and lender servicers. Depending on which distribution/return method is used, the lender or lender servicer will report the loan type for Federal Consolidation Loans as follows:
For the paper LVC method, the lender or lender servicer will enter the correct loan type code – “J” for the unsubsidized portion of a Federal Consolidation Loan or “O” for the subsidized portion of a Federal Consolidation Loan.
For the electronic LVC method, the LVC will not be pre-populated with a loan type code. Our source for prepopulating electronic LVCs is the National Student Loan Data System (NSLDS). Because the unsubsidized and subsidized portions of Federal Consolidation Loans generally are not identified in the NSLDS, we will need lenders and lender servicers to provide us with the correct code.
When using the electronic LVC method, the lender or lender servicer must report back about the loan type codes for the unsubsidized and subsidized portions of a Federal Consolidation Loan in one of the following ways:
1) | If a Federal Consolidation Loan is entirely unsubsidized, the lender or lender service will add “J” (Unsubsidized Federal Consolidation Loan) as the correct loan type code before returning the LVC. | |
2) | If a Federal Consolidation Loan is entirely subsidized, the lender or lender servicer will add "O” (Subsidized Federal Consolidation Loan) as the correct loan type code before returning the LVC. | |
3) | If a Federal Consolidation Loan contains both unsubsidized and subsidized portions, the lender or lender servicer will ensure that each portion of the Federal Consolidation Loan is included and identified with the correct loan type code (“J” for Unsubsidized Federal Consolidation Loan or “O” for Subsidized Federal Consolidation Loan) before returning the LVC. |
Current Annual Interest Rate
Both the traditional and special LVCs require the FFEL lender or lender servicer to report the interest rate for each loan that is to be consolidated. The instructions for completing this data element on both LVCs specify that the current annual interest rate that is assessed on each loan is to be reported.
For the purpose of Special Direct Consolidation Loans, the current annual interest rate is the interest rate that the lender or lender servicer is using to calculate interest on the loan at the time the lender or lender servicer completes the LVC. The current rate reflects any adjustments to the statutory interest rate on the loan because the borrower is repaying through automatic debit and/or the borrower is receiving any other interest rate reduction. Examples of what is meant by current annual interest rate are:
Example 1 – The statutory interest rate on the borrower’s loan is 5.60 percent. The borrower repays through automatic debit and receives a 0.25 percent interest rate reduction, making the current interest rate on the loan 5.35 percent. In this case, the FFEL lender or lender servicer would report the current rate of 5.35 percent on the LVC.
Example 2 – The statutory interest rate on the borrower’s loan is 5.60 percent. The borrower is receiving a 1.50 percent interest rate reduction because the borrower is making on-time payments, making the current interest rate on the loan 4.10 percent. In this case, the FFEL lender or lender servicer would report the current rate of 4.10 percent on the LVC.
Example 3 – The statutory interest rate on the borrower’s loan is 5.60 percent. The borrower is receiving a 1.50 percent interest rate reduction by making on-time payments. In addition, the borrower repays through automatic debit and receives an additional 0.25 percent interest rate reduction. The combined reductions make the current interest rate on the loan 3.85 percent. In this case, the FFEL lender or lender servicer would report the current rate of 3.85 percent on the LVC.
Note: For borrowers on active duty military service with loans that are subject to a limitation on the interest rate in accordance with the Servicemembers Civil Relief Act (SCRA) at the time the lender or lender servicer completes the LVC, the statutory interest rate on these loans is the maximum interest rate that can be assessed under the SCRA.
Special Direct Consolidation Loan LVC Process
As we have previously communicated, all borrowers who are potentially eligible for the Special Direct Consolidation Loan opportunity will be contacted by one of four federal loan servicers. The four servicers that will be assigned potentially eligible borrowers to contact are FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae. Borrowers who choose to apply for special consolidation of their eligible commercially-held FFEL loans will follow the online application instructions provided by the assigned federal loan servicer. After receiving a borrower’s application, the federal loan servicer will send the Special Direct Consolidation Loan LVC to the FFEL lender or lender servicer to verify the eligibility and payoff amounts of the commercially-held FFEL loans the borrower wishes to consolidate. Following the verification process, lenders will receive payoff funding from the Department.
LVC Distribution/Return Methods
FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae will communicate with each FFEL lender and lender servicer that holds loans that a borrower wishes to include in a Special Direct Consolidation Loan to determine the best method for Special Direct Consolidation Loan LVC distribution and return. In addition to determining the LVC distribution/return method or methods that will be used, the necessary contact information will be exchanged with each lender or lender servicer.
Each federal loan servicer will work with FFEL lenders and lender servicers regarding available methods for distributing and returning electronic and paper LVCs. The available methods will vary across the four federal loan servicers; however, they generally include the following options:
Electronically exchanging the LVC via FTP to a secure mailbox
Electronically exchanging the LVC via encrypted e-mail
E-mailing a PDF of the paper LVC to a secure mailbox or via encrypted e-mail
Faxing the paper LVC
Mailing the paper LVC via the U.S. Postal Service
Standardized E-LVC Use
To ensure consistency for FFEL lenders and lender servicers that choose to electronically exchange the LVC with FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae via FTP to a secure mailbox or via encrypted e-mail, all four federal loan servicers will use the same electronic version of the LVC (e-LVC). The e-LVC, which will be in comma-delimited format, includes the same data elements as the paper LVC. The only difference will be in the order of the data elements within the e-LVC comma-delimited file. A lender or lender servicer that chooses the e-LVC method will be provided with the layout for the comma-delimited file. In addition, the four federal loan servicers will use standardized e-mail text when transmitting the e-LVC comma-delimited file and accompanying instructions to lenders and lender servicers.
Paper LVC or E-LVC Completion Timeframe
As is true with the traditional Direct Consolidation Loan process, accurate and timely completion of an LVC is critical. Regardless of the distribution/return method chosen, each FFEL lender or lender servicer must complete and return the special LVC within 10 days of the date received. This timeframe is the same as the timeframe for the traditional consolidation process pursuant to 34 CFR 685.220(f)(1)(i). We appreciate the assistance lenders and lender servicers will provide in complying with this requirement.
Further Information
We look forward to offering the Special Direct Consolidation Loan opportunity to eligible borrowers and we thank FFEL lenders and lender servicers for the support they will provide as we implement this initiative.
We will continue to keep the community informed of developments with the Special Direct Consolidation Loan initiative through subsequent communications on the IFAP Web site (and on the Financial Partners Portal Web site when applicable). Generally, these communications will be Electronic Announcements that include the words “Special Direct Consolidation Loan Information” in the subject line. Borrower information is available on our Special Direct Consolidation Loans Web page.
Sincerely,
Jeff Baker, Director
Policy Liaison and Implementation
Federal Student Aid