AwardYear: 1995-1996 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 6 SectionTitle: Due Diligence - Billing & Address Searches PageNumbers: 67-76 Due diligence refers to those steps schools must take to collect Federal Perkins Loans and NDSLs-including billing the borrower, sending overdue notices when necessary, and conducting address searches if the borrower cannot be located. If billing procedures fail to get the borrower into repayment, schools must proceed to the second-and more intensive-stage of collection, which may include hiring a collection firm. Finally, in many cases, schools may have to litigate. Due diligence comprises all these procedures, but it can also be as basic as keeping the borrower informed of all changes in the Federal Perkins Loan Program that affect his or her rights and responsibilities and responding promptly to the borrower's inquiries. [[Keep borrower information current]] Keeping current information on a borrower makes it easier for the school to know when repayment must begin and where to send billing notices. The various offices at the school-the admissions, business, alumni, placement, financial aid, and registrar's offices, and others, as necessary-must provide the information they have available about the borrower to those offices responsible for billing and collecting loans to assist them in determining the following information about the borrower: - enrollment status; - expected graduation or termination date; - the date the borrower officially withdraws, drops below half- time enrollment, or is expelled; and - current name, address, telephone number, Social Security number, and driver's license number (if any). EXIT INTERVIEW Contact with the borrower becomes even more important just before he or she leaves school, when the school must hold an exit interview, explaining the borrower's responsibility for repaying the loan and stating when the first payment will be due and whether payments are to be made monthly, bimonthly, or quarterly. If individual interviews are not possible, group interviews are acceptable. The school must document holding an exit interview. [[School must provide certain information]] During the interview, borrowers must be told the terms of the loan, the amount of the outstanding balance, and their obligation to repay according to the repayment schedule. The school must also make them aware of the consequences of default, including the possibility that their account may be referred to a collection firm, that the default will be reported to a national credit bureau, and that legal action may be taken to collect the amount owed. [[Borrower rights and responsibilities]] Borrowers must also be told their rights and responsibilities under the loan(s), including- - their responsibility to inform the school immediately of any change in name, address, telephone number, or Social Security number; - their rights to forbearance, deferment, cancellation, or postponement of repayment, and the procedures for filing for those benefits (see Sections Four and Five of this Chapter for more information); and - their responsibility to contact the school before the due date of any payment they cannot make. [[Additional information school must provide to borrower]] The school must provide the following additional information during the exit interview and must include it either in the borrower's promissory note or in some other written statement the school gives the borrower; if the borrower leaves school without the knowledge of the school, the school must attempt to provide the required information to the borrower in writing: - the name and address of the school to which the debt is owed and the name and address of the official or servicing agent where communications should be sent; - the name and address of the party where payments should be sent; - the estimated amount the borrower owes on the date the repayment period is scheduled to begin, as well as the amount of the total debt (principal and interest); - the interest rate, as well as the projected total interest charges the borrower will pay; - a discussion of the repayment schedule-including the date the first installment is due, and the number, amount, and frequency of required payments; - any special options for loan consolidation or other refinancing; - a statement that the borrower may prepay all or part of the loan without penalty; - a discussion of any fees that will be charged the borrower for not making payments on time; - a description of any charges associated with default, such as liability for loan collection costs reasonably incurred by the school or ED; and - information about the borrower's rights to forbearance, deferment, cancellation or postponement of repayment and the procedures for filing for those benefits. A school is no longer required to give borrowers information about the average indebtedness of students with Federal Perkins Loans at that school. [[Collecting information during the exit interview]] The school must require the borrower to provide the following information during the exit interview: - the borrower's expected permanent address after leaving school (regardless of the reason for leaving); - the name and address of the borrower's expected employer after leaving school; - the address of the borrower's next of kin; and - any corrections in the school's records relating to the borrower's name, address, social security number, personal references, and driver's license number. [[Borrower must sign repayment schedule]] At the time of the exit interview, the borrower must sign the repayment schedule, and the school must give the borrower a copy of the signed schedule and of the signed promissory note. As previously noted, the school must keep the original signed promissory note and repayment schedule in a locked, fireproof container until the loan is repaid or until the originals are needed in order to enforce collection of the loan. If the originals are released to enforce repayment, the school must keep certified true copies of the documents released. [[Mailing exit interview materials]] If the school discovers that a borrower has left without having had an exit interview, the school must either contact the borrower and personally give him or her the information listed above, or mail it. The school must also provide the borrower a copy of the signed promissory note and two copies of the repayment schedule, one of which the borrower must sign and return to the school. CONTACT DURING INITIAL AND POST-DEFERMENT GRACE PERIODS [[Three contacts in 9-month grace period]] [[Two contacts in 6-month grace period]] The school must contact the borrower during both initial and post- deferment grace periods to remind him or her when repayment will begin. For loans with a 9-month initial grace period, the school must contact the borrower three times. For loans with a 6-month initial grace period, the school must contact the borrower twice. Most loans also have a POST-DEFERMENT grace period of 6 months. The school must also contact the borrower twice during the post- deferment grace period. The chart below shows the length of initial and post-deferment grace periods for NDSLs made on or after October 1, 1980 and for Federal Perkins Loans. [[The chart "Grace Periods" on page 6-70 is currently unavailable for viewing. Please reference your paper document for additional information.]] The FIRST CONTACT must be 90 DAYS after any grace period (initial or post-deferment) begins. The school must remind the borrower of the responsibility to repay the loan and must send the borrower information about the total amount to be repaid (or remaining to be paid, if a payment has been made in the past). This information must include the amount of principal and interest over the remaining life of the loan, and the date and amount of the first payment (or next payment, if a payment has been made previously). The SECOND CONTACT must be 150 DAYS after any grace period begins, and the school must again remind the borrower of the date and amount of the first (or next) payment. The second contact is timed to coincide with the first billing notice for a loan with a 6- month grace period (30 days before the first payment is due). These two notices may be combined. For borrowers with a 9-MONTH initial grace period, the school must make a THIRD CONTACT 240 DAYS after the grace period begins to again remind the borrower of the date and amount of the first payment. As in the case of a 6-month grace period, this notice is timed to coincide with the first billing notice. Again, the school may combine the two notices (refer to the chart below). [[The graphic "Contact with Borrower During Grace Period" on page 6-71 is currently unavailable for viewing. Please reference your paper document for additional information.]] BILLING PROCEDURES Billing refers to that series of actions the school routinely performs to notify borrowers of payments due, remind them of overdue payments, and demand payment of overdue amounts. [[Coupon systems, written notice, or automatic funds transfer system]] The school may choose a coupon payment system as its method of billing. If so, the school must send the coupons to the borrower at least 30 days before the first payment is due. If the school does not use a coupon system, it must send the borrower, at least 30 DAYS before the first payment is due, a written notice giving the name and address of the party where payments should be sent and a statement of account; for subsequent payments, the school must send the borrower a statement of account at least 15 DAYS before the due date of the payment.*1* (The statement of account includes information such as the total amount borrowed, the interest rate on the loan, and the amount of the monthly payment.) [[First overdue notice]] If a payment is overdue and the school has not received a request for forbearance, deferment, postponement, or cancellation, the school must send the borrower an OVERDUE NOTICE within 15 DAYS after the due date. [[Late charge required]] For loans made for periods of enrollment beginning on or after January 1, 1986, schools are required, beginning July 1, 1987, to impose a charge when the borrower's payment becomes overdue.*2* The charge (called a LATE charge) is based either on the actual costs the school incurs in taking steps to obtain the overdue amount, or on average costs incurred in similar attempts with other borrowers. The charge may not exceed 20 percent of the installment payment most recently due. The school must also impose a late charge if the borrower's payment is overdue and the borrower has not filed a request for forbearance, deferment, cancellation, or postponement on time.*2* The request must contain enough information for the school to determine whether the borrower is entitled to the relief requested. [[School may waive late charges if past-due payments are paid in full]] Late charges on loans made for periods of enrollment that began on or after January 1, 1986, may be assessed only during the billing process; they may not be imposed once the school begins collection procedures. The school may waive late charges against a borrower who repays the full amount of past-due payments. [[Optional penalty charge before 1/1/86]] Schools are authorized but not required to assess a penalty charge for an overdue payment on a loan made for a period of enrollment that began before January 1, 1986. The maximum penalty charge that may be assessed on a loan payable monthly is $1 for the first month and $2 for each additional month a payment is overdue; the maximum penalty for a loan payable bimonthly is $3; the maximum penalty for loans payable quarterly is $6. Penalty charges on these loans may be assessed only during the billing process. The school may either add the penalty or late charge to the principal amount of the loan as of the first day the payment was due, or may include the charge with the next scheduled payment after the borrower receives notice that the charge must be paid in full by the next payment due date. Schools may wish to include this notice as part of the first overdue notice. [[Second notice]] [[Final demand]] If the borrower does not satisfactorily respond to the first overdue notice, the school must continue to contact him or her. A SECOND OVERDUE NOTICE must be sent within 30 DAYS after the first. If there is still no response, a FINAL DEMAND LETTER must be sent within 15 DAYS after the second notice. The letter may be (but does not have to be) sent by certified mail. The final demand letter must inform the borrower that, unless the school receives a payment or a request for forbearance, deferment, postponement, or cancellation WITHIN 30 DAYS of the date of the letter, the school will refer the account for collection or litigation and will report the default to a credit bureau, as required by law. [[In some cases, may send just a final demand]] The school may skip the first two letters and send just the final demand letter within 15 DAYS after the payment is overdue if the borrower's repayment history has been unsatisfactory, or if the school can reasonably conclude the borrower does not intend to repay or to seek forbearance, deferment, postponement, or cancellation. Unsatisfactory repayment history means a borrower has previously failed to make payments when due, to request deferment, postponement, or cancellation on time, or has previously received a final demand letter. [[The graphic "Billing Procedures" on page 6-73 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[Telephone contact]] If the borrower does not respond to the final demand letter within 30 days, the school must try to make contact by telephone before beginning collection procedures. As telephoning is often very effective in getting the borrower to begin repayment, the school may be able to avoid the more costly procedures of collection. If the school calls a number and there is no answer, at least one other attempt to reach the borrower on a different day and at a different time should be made. If the borrower has an unlisted telephone number, the school must make reasonable attempts to obtain it by contacting sources such as the borrower's employer or parents. If the school is still unsuccessful, it should document that fact in its files. If the borrower does not respond satisfactorily to the final demand letter, the school must try and recover the amount owed from the borrower-and for loans made prior to July 23, 1992, also from any endorser of the loan. Often, schools send the endorser a copy of the final demand letter sent to the borrower, as well as copies of all future communications about the borrower's debt, including dunning letters, in an effort to recover the loan from one party or the other. For loans made on or after July 23, 1992, the school is not required to try to recover the amount owed from an endorser other than the borrower. [[Acceleration]] The school may choose to accelerate a loan if the borrower misses a payment or does not file for deferment or cancellation on time. Acceleration means making payable immediately the entire outstanding balance, including interest and any applicable late charges or collection fees. Because this marks a serious stage of default (afterwards, deferment and cancellation rights lapse, and enforcement action begins), the borrower should have one last chance to bring his or her account current. For that reason, if the school plans to accelerate the loan, it must send the borrower at least 30 days advance written notice. The notice may be included in the final demand letter, or in some other written notice to the borrower. If the loan is accelerated, the school must subsequently send the borrower a second notice, informing him or her of the date the loan was accelerated and the total amount due. Remember that acceleration is an option, not a requirement. However, if a school plans to assign the loan to ED for collection, the school must first accelerate the loan. ADDRESS SEARCHES The school must take the following steps to locate the borrower if communications are returned undelivered (other than unclaimed mail) - review the records of all appropriate institutional offices and - review telephone directories or check with information operators in the area of the borrower's last known address. [[IRS/ED Skip-tracing]] If these methods are unsuccessful, the school must either use its own personnel to try to locate the borrower (employing and documenting efforts comparable to commercial skip-tracing services), or must use a commercial skip-trace firm. The school may elect to use the Internal Revenue Service skip-tracing service. If the school still cannot locate the borrower after taking these steps, it must continue to make reasonable attempts at least twice a year until- - the loan is recovered through litigation; - the account is assigned to the U.S. Department of Education; or - the account is written off (see page 6-78). To help locate borrowers whose collection notices are returned undelivered, schools may participate in the IRS/ED Skip-tracing Service. The Higher Education Amendments of 1992 have eliminated the REQUIREMENT that schools use the IRS/ED skip- tracing service in carrying out the provisions of due diligence. However, ED strongly encourages schools to continue to use this service. ED will continue to send a "Dear Colleague" letter to schools that participate in the Federal Perkins Loan Program giving instructions for completing the report (refer to "Dear Colleague" letter CB-93-14(LD), August 1993). This is a valuable collection tool to use for tracing defaulted borrowers, and ED will continue to make it available to schools. In order to maintain eligibility to participate in the IRS/ED Skip- tracing Service, each participating school must submit the annual Safeguard Activity Report, in accordance with the IRS publication 1075. The Reports are needed to help ensure that procedures are established and utilized to safeguard the names and addresses of defaulted borrowers under the Federal Perkins Loan Program. General questions should be directed to ED's Program Systems Service, Campus-Based Programs Systems Division. The telephone number is (202) 708-6726. *1* If the borrower elects to make payments by means of an elctronic transfer of funds from the borrowerÂ’s bank account, the school is not required to send the borrower a statement of account at least 15 days before the due date of each subsequent payment. However, the school must send the borrower an annual statement of account. *2* The mandatory late charges do not apply retroactively to loans made before July 1, 1987, but would apply to any NDSL borrowers who have re-signed revised promissory notes. |