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(99-L-220) (99-L-220) This letter provides our lender and guaranty agency partners with information pertaining to loan processing and disbursement options and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise wh

DCLPublicationDate: 12/1/99
DCLID: 99-L-220
AwardYear:
Summary: This letter provides our lender and guaranty agency partners with information pertaining to loan processing and disbursement options and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise when processing or disbursing loans.


December 1999



99-L-220

Dear Partner:

Secretary Riley has asked me to advise you about our Year 2000 Contingency Plan and describe the conditions under which a guaranty agency or lender may use the plan to carryout critical financial aid activities without incurring program liabilities.

Representatives of the Department and organizations representing lenders, guaranty agencies and servicers participating in the Federal Family Education Loan Program (FFELP) have been meeting to review Year 2000 readiness along with contingency planning. Contingency planning includes those actions one would take in the event of a failure within a critical business function. Detailed information about the Department’s plan can be found at http://www.ed.gov/offices/OCIO/year/e3toc.html.

In June of this year, a planning forum was held where FFELP representatives prepared model risk mitigation and contingency plans. Those plans were shared within the industry and provided to the Department. Included in those model plans were proposals that the Secretary exercise his authority under section 432(a) of the Higher Education Act of 1965, as amended, to waive any financial liability as a result of a lender’s or guaranty agency’s system failure due to Y2K related problems along with certain recommended actions to be taken by the Department. One such recommendation was for the Department to issue guidance on processing procedures and for the Department to exercise its authority to waive financial liabilities for regulatory violations that may occur due to Y2K related problems. Based on that recommendation, the Department is issuing a series of letters to lenders, guaranty agencies and institutions to provide recommendations and information to participants on special provisions relating to the Year 2000. This letter will focus on loan processing and disbursement within the FFELP. Other letters will include information on loan servicing and delinquency processing.

In the event of a Y2K failure at a guaranty agency or lender, the Department of Education may waive liabilities that could relate to the enforcement of certain regulations for a limited period of time. For each Y2K failure and the related regulation, a time period to which a waiver will apply is specifically defined. For a guaranty agency or lender to take advantage of the waiver within the defined time period, the guaranty agency or lender must:

1. Notify Barry Morrow, General Manager, Financial Partners, immediately that it has a specific Y2K failure and cite the specific regulation;
2. Document the Y2K failure (a description of the failure, dates of the failure and completion of the repair, and the guaranty agency or lender efforts to repair the system); and
3. At the time the guaranty agency or lender has its annual audit covering the time period of the Y2K failure,
· notify the auditor of the regulation non-compliance and
· respond to the audit finding with a letter signed by the CEO that includes the following:

(a) A statement that the guaranty agency or lender had a Y2K compliance plan. The plan should have included the following five phases and the dates the phases were completed: awareness, assessment, renovation, validation, and implementation.
(b) A statement that the guaranty agency or lender had a Y2K failure and citing the specific failure and regulation not to be enforced.
(c) The documentation from item 2.

We appreciate the work and recommendations put forward by the forum participants. If your organization has any questions or additional suggestions, please contact me at (202) 401-2280.

Yours Sincerely,


Barry Morrow
General Manager, Financial Partners
Office of Student Financial Assistance

YEAR 2000 CONTINGENCY PLANNING
ED WAIVERS AND RECOMMENDED ACTIONS


Section A - Loan Application Process


Summary of Activities: Generally, students submit application data to their lender or lender servicer or school. The application data is reviewed to ensure completeness and borrower eligibility to receive an FFELP loan. The application data is sent to the guarantor via paper or electronically via CommonLine, on-line processing, school-based software, etc. The guarantor edits the application data to ensure completeness and confirm that the borrower meets guarantor requirements and is not in default on a prior student loan. If the application information is valid, the guarantor transmits guarantee results to the lender and school.

For the application and guarantee process to be complete and prior to disbursement of the loan, the lender must have obtained a signed promissory note from the borrower and, for PLUS loans, must perform a credit check on the parent borrower.

While the flow of steps differs based on the school’s processing preferences, the above steps are necessary prior to loan disbursement. This DPL does not assume all schools follow the above flow; however, this guidance will provide information on each of the activities outlined in the above-generated processing flow.

Contingency Options

The Department is committed to working with lenders and guarantors to support a smooth transition on or after January 1, 2000. If a lender or guarantor’s system fails, or a subset is not performing, many lenders and guarantors have contingency plans in place. These plans include options such as manual processing (and re-assigning cross-trained staff to support manual processing), rolling systems back to 1999 to support process or entering into a pre-arranged third party servicing agreement to support the functions.

To support lender and guaranty agency contingency planning efforts, the Department is providing advance notice of certain liability waivers.

To benefit from this waiver, a lender or guaranty agency is required to notify the Department of the Y2K system failure and the expected timeframe for resolution. The guaranty agency's or lender's notice should be sent to:

Barry Morrow
General Manager
Financial Partners
U.S. Department of Education
ROB 3, Room 4616
7th and D Streets, SW
Washington, DC 20202

The areas covered by this policy for a limited period of time include:

· Authorization for a guarantor to transfer guarantees. See 34 C.F.R. 682.401(b)(18). Under this scenario, a guarantor would be authorized to have another guarantor process and guarantee loans and such guarantees could be transferred to the original “intended” guarantor up to the earlier of 90-days of the date the guarantor's system failed or resumption of the system.

· The Department authorizes lenders, in the case of a Y2K system related failure, the earlier of 90-days to work with other lenders to originate loans or resumption of the system.

· To avoid delays in PLUS loan approvals in the event of a failure in credit bureau access or analysis, a lender may rely on the most recent report in its file (in the case of a repeat borrower) or for a period not to exceed 30 days may issue PLUS approvals for new borrowers who borrow a PLUS loan on or after January 1, 2000 without credit bureau files. See 34 CFR 682.201(b).

· In addition, the Department authorizes the use of a blanket guarantee (if the agency has not otherwise been granted this option in the pilot program).


Section B- Disbursement, Delivery and Reconciliation of Funds



Summary of Activities: Prior to or at the time of disbursement, there are a number of required notices informing the student or parent borrower of the guarantee of the loan (notice of guarantee), details of their loan and the disbursement of funds (lender disclosures) and their right to cancel or reduce their loan (school disclosure). All disclosures are generally mailed through standard U.S. Postal Service delivery or sent electronically.

A school sets the disbursement date(s) for the loan proceeds in accordance with federal regulations and in conjunction with the academic term. Upon disbursement of the funds, schools must verify that the borrower still meets eligibility requirements (i.e., recertifying the student’s eligibility) prior to delivery of the funds. Some schools utilize a Just in Time (JIT) disbursement process by which disbursement agents hold the funds until the school sends a “release” file authorizing the disbursement. The lender or disbursement agent either electronically sends the funds to the school’s bank (EFT) or produces a paper check which is mailed to the school.

If the funds are received via EFT, the school moves the funds from the school’s bank account to the student’s account at the school and notifies the borrower of the transfer. Amounts in excess of the school charges assessed on the student’s account are either delivered to the borrower or, if authorization has been provided, maintained on the student’s account. The school returns, to the lender, all or a portion of any funds for which the student is no longer eligible.

Any applicable guarantee fees are withheld from each disbursement prior to sending to the school. Lenders remit these fees to the guarantor via a guarantee fee-billing invoice. Upon reconciliation of the invoice, the lender submits the fees withheld from the disbursements to the guarantor.

Contingency Options

If the Notice of Guarantee (NOG), lender disclosure or school notification cannot be delivered due to a U.S. Postal Service failure, the notices may be delivered using alternative means, i.e., premium carriers, fax, courier, or electronically.

If loan funds cannot be electronically transferred due to a Y2K systems related failure of the lender, disbursement agent or school’s bank, the lender or disbursing agent could arrange for the issuance of a master check or individual checks to be generated and sent to the school.

As with the waiver granted in Section B of this letter, a lender or guarantor seeking to use this policy must notify the Department. Guaranty agencies and lenders must provide its notification to:

Barry Morrow
General Manager, Financial Partners
U.S. Department of Education
ROB 3, Room 4616
7th and D Streets, SW
Washington, DC 20202


Section C - Loan Consolidation Origination



Summary of Activities: Prior to disbursement of a consolidation loan, the originator of the consolidation loan must obtain a verification certificate (LVC) for each loan to be included in the consolidation. The consolidating lender generates and sends an LVC to the holder(s) of the underlying loan(s). The holder must respond to the consolidating lender’s request for an LVC within ten business days. The consolidating lender uses the LVC information to determine the borrower’s current education loan obligations and the payoff amount of the loan(s).

Contingency Options

Consolidation lender contingency plans generally provide for the option to manually initiate an LVC if the system generated process cannot be supported. In addition, if a holder is unable to complete an LVC within 10 days, lenders are reminded of the requirement to notify the consolidation lender of the delay.

In addition, to support processing in this area, the originating consolidation lender may use borrower-provided information from recent billing statements to replace the information obtained on the LVC. The use of such alternative sources of data is limited to those cases where the holder notifies the consolidating lender that such data will be unavailable for a period in excess of 20 days. Alternatively, the consolidating lender may delay processing of the consolidation loan until the LVC can be completed.

In all instances in which the LVC cannot be completed and/or will be delayed, borrowers may be granted an administrative forbearance on existing loans intended to be consolidated for the duration of the delay until the consolidation can be completed. See 34 C.F.R. 682.211. Interest accruing during the Y2K system related failure may not be capitalized.

Last Modified: 12/27/1999