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(95-G-286) Guaranty agency retention of payoff amounts of defaulted loans consolidated under the Federal Consolidation Loan Program.

DCLPublicationDate: 11/1/95
DCLID: 95-G-286
Summary: Guaranty agency retention of payoff amounts of defaulted loans consolidated under the Federal Consolidation Loan Program.


SUBJECT: Guaranty agency retention of payoff
amounts of defaulted loans consolidated
under the Federal Consolidation Loan

REFERENCE: Sections 428(c)(2)(D) and 428(c)(6) of the
HEA, and Dear Guaranty Agency Director
Letter of March 29, 1994.

Dear Colleague:

Section 428C of the Higher Education Act ("HEA") was
amended by the Higher Education Amendments of 1992 (Pub.
L. 102-325) to permit a borrower to consolidate the amount of
a defaulted Federal Family Education Loan into a Federal
Consolidation Loan. This letter reaffirms the Department's
previously announced interpretation of the HEA relating to the
application of §§428(c)(2)(D) and 428(c)(6) of the HEA to
payoff amounts received by guaranty agencies on defaulted
loans that are being consolidated under this provision.

Section 428(c)(2)(D) of the HEA provides for the Secretary to
receive an equitable share of any borrower payments received
by the guaranty agency on a defaulted loan on which the
Secretary has previously paid a reinsurance claim to a guaranty
agency. Under §428(c)(6) of the HEA, a guaranty agency is
authorized to retain an amount of the borrower's payment
equal to the sum of the complement of the reinsurance
percentage in effect when the Secretary paid the agency's
reinsurance claim plus 27 percent of the payment
amount for administrative costs related to collection and
default prevention.

However, the payoff amount received by a guaranty agency
for a defaulted loan included in a Federal Consolidation Loan
is not a payment "made by the borrower," as that term is used
in §428(c)(6) of the HEA. The HEA does not specifically
authorize guaranty agencies to retain any part of the payoff
amount on defaulted loans that are consolidated. Instead,
consolidation of the defaulted loan involves a new loan made
by another party (the consolidating lender) that is not a party
to the borrower's legal obligation to the guaranty agency as
holder of the defaulted loan. In most cases, the guaranty
agency's collection efforts had little or nothing to do with the
borrower's receipt of the Federal Consolidation Loan.

Consolidation loan payoff amounts are similar to amounts
received as a result of a tax refund offset by the Internal
Revenue Service. The Department has never viewed a
payment from a tax refund offset as resulting from the
guaranty agency's collection efforts, and a guaranty agency has
never been permitted to retain a share of a payment received
through that process.

On March 29, 1994, the Department issued a letter to guaranty
agencies that provided guidance about the inclusion of
collection costs related to an agency's servicing of defaulted
loans that are rehabilitated or become eligible for loan
consolidation. This guidance, which has been incorporated
into 34 CFR 682.401, permits a guaranty agency to charge a
defaulter up to 18.5 percent of the outstanding principal and
accrued interest as collection costs on the defaulted loan at the
time the agency certifies the payoff amount on the loan to the
consolidating lender. In providing for this assessment of
collection costs, the Department believes it has balanced the
statutory requirement that a defaulter pay the costs related to
collection of a defaulted loan with the need to allow the
borrower to eliminate the default through loan consolidation.

While the HEA does not authorize guaranty agencies to retain a
share of consolidation loan payoff amounts, the Department
believes that the agencies' retention of 18.5 percent of a
consolidation loan payoff amount that includes collection
costs is consistent with other provisions of the HEA. In
particular, §428F of the HEA allows an agency to retain 18.5
percent of the principal amount of a defaulted loan which is
rehabilitated. This provision reflects the fact that agencies may
have some fixed costs related to third party collection
contracts that need to be paid. This same consideration
applies to defaulted loans which are repaid by a consolidation
loan. Therefore, the Secretary decided to permit guaranty
agencies to include up to 18.5 percent in the certified
consolidation loan payoff amount to pay for the costs related
to the loan that is being consolidated.


The Department is aware that some guaranty agencies may
have retained collection costs in excess of 18.5 percent on
loan consolidation payoff amounts received on defaulted loans
before the Department clarified the law on this issue in early
1994. Therefore, we have decided to allow a guaranty
agency to retain 18.5 percent of any payoff amount received
prior to March 29, 1994, even if it was not included in the
agency's calculated payoff amount certified to the
consolidating lender. However, any amount retained by the
agency in excess of 18.5 percent of the payoff amount must
be remitted to the Department. We expect that, since March
29, 1994, all agencies have been in compliance with our

To remit these excess amounts a guaranty agency may request,
in writing, that the Department offset excess amounts from the
monthly Statement of Account generated by the Guaranty
Agency Monthly Claims and Collections Report,
ED Form 1189, or the agency can remit the excess amount by
check. When remitting these excess amounts by check, the
agency should provide the following information:

(1) Number of accounts;
(2) Total outstanding principal and accrued interest at
time of payoff;
(3) Original amount retained; and
(4) The refund amount due ED (the difference
between the original amount retained and up to
18.5 percent of the payoff amount).

To properly report Federal Consolidation Loan payoff
amounts in the future, the Department has provided a
suggested format (Attachment A).

All transactions will be shown on the agency's monthly
Statement of Account as Department Directed Transactions
(DDT's). All correspondence should be addressed to:

U.S. Department of Education
Guaranty Agency Reporting
P.O. Box 23457
L'Enfant Plaza Station
Washington, DC 20026

We trust that this letter clarifies the Department's position on
this issue. Please contact Ms. Sandra Simmons of the Loans
Financial Management Division, FFELP at (202) 708-9223 if
you have any questions related to the reporting instructions
provided in this letter. Other questions should be directed to
Ms. Pamela Moran, Chief of the Loans Branch, Policy
Development Division, or to Ms. Patricia Newcombe, Chief of
the FFEL Policy Section, Policy Development Division. They
may both be reached at (202) 708-8242.


Elizabeth M. Hicks
Deputy Assistant Secretary
for Student Financial Assistance

Attachment (This letter's attachment is identified as 95-G-286a of the Dear
Colleague Letter topic entries. To obtain a copy of the form please open
that entry and follow the instructions for downloading listed.)

Last Modified: 10/31/1995