DCLPublicationDate: 11/1/95 DCLID: 95-G-286 AwardYear: Summary: Guaranty agency retention of payoff amounts of defaulted loans consolidated under the Federal Consolidation Loan Program. NOVEMBER 1995 95-G-286 SUBJECT: Guaranty agency retention of payoff amounts of defaulted loans consolidated under the Federal Consolidation Loan Program. 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. PAYOFF AMOUNTS RECEIVED BEFORE MARCH 29, 1994 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 directives. 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. Sincerely, 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.) |