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(99-L-221) (99-L-221) This letter provides our lender and guaranty agency partners with information pertaining to student loan servicing and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise when servicing loans

DCLPublicationDate: 12/1/99
DCLID: 99-L-221
AwardYear:
Summary: This letter provides our lender and guaranty agency partners with information pertaining to student loan servicing and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise when servicing loans.


December 1999

99-L-221

Summary: This letter provides our lender and guaranty agency partners with information pertaining to student loan servicing and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise when servicing loans.

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 servicing within the FFELP. Other letters will include information on loan origination and disbursement 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 - Enrollment Reporting


Summary of Activities: Once an FFELP loan is originated, the borrower's enrollment data is reported by the school. Based on this data, lenders and guarantors update enrollment information and take the necessary actions to convert the borrower to repayment at the end of the enrollment period (if deferred) or the grace period (if applicable). Enrollment data may be provided via the National Student Loan Data System (NSLDS), the National Student Loan Clearinghouse, or there is a change in status and an SSCR is not to be submitted within 60 days, the school is required to notify the guarantor or lender of the change in enrollment. In addition, borrowers must be converted to repayment on a timely basis following the end of the grace period or a deferment or forbearance, or upon loan disbursement (PLUS and Consolidation).

ED Commitment:

The Department of Education has modified the NSLDS and tested this system to ensure proper enrollment processing. In addition, schools and guarantors have been testing their own Year 2000 compliance through a series of test-windows during 1999. The Department is confident NSLDS can support enrollment tracking and reporting on or after January 1, 2000. ED is committed to working with any participant who may have unanticipated issues arise in reporting or processing enrollment data or in the area of timely conversion to repayment. This commitment applies to issues that arise upon conversion to January 1, 2000, as well as issues that are discovered after the fact.

Contingency Options

Schools, lenders and guaranty agencies have developed a range of contingency options for supporting enrollment processing. For example, if electronic exchanges are not functional, contingencies often include a manual back-up alternative. The Department is providing the following regulatory waiver to support entities that may have difficulties in reporting or processing enrollment data because of a Y2K-related system failure:

Ø 34 C.F.R. - §682.401(b)(20) requires guarantors to report to the current holder of a loan, within 60 days, any change in the student’s enrollment status. If a guarantor cannot meet this requirement, the guarantor will, upon notice to the Department, receive an extension to provide the enrollment data within the earlier of 90 days of the date the system failed or resumption of the system. If the delay is expected to last longer than 90 days, the guarantor should contact the General Manager, Financial Partners, for assistance.

Ø 34 C.F.R. - §682.209 requires lenders to convert a loan to repayment on a timely basis. Generally the first/next payment is due within 45 days of the date repayment begins or resumes. Exceptions to these timeframes are provided for enrollment dates that are reported late in the grace period or early in the repayment period. If a lender cannot meet these requirements, the lender will, upon notice to the General Manager, Financial Partners, receive an extension to establish the first/next due dates within 90 days after the system is restored. The lender may apply an administrative forbearance for any period prior to the first/next payment due, as scheduled by the lender to avoid a delinquency status. Interest accruing during any period that a lender's system failed may not be capitalized. If the delay is expected to last longer than 90 days, the lender should contact the General Manager, Financial Partners, for assistance.

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 lender’s or guaranty agency’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

Section B - Deferments, Forbearances, or Other Suspensions of Repayment


Summary of Activities: During the repayment period, deferment may be granted to borrowers meeting the deferment eligibility criteria defined in 34 C.F.R. §682.210. In the case of in-school deferments, deferment may be granted based on the lender’s receipt of enrollment data and with notice to the borrower that the deferment has been granted. For other types of deferments, the borrower must submit documentation to the lender. In addition to deferment, borrowers may be granted a period of forbearance to assist the borrower in meeting a temporary inability to meeting monthly repayment obligations. There are several types of forbearance, and the documentation requirements for these benefits are outlined in 34 C.F.R. §682.211. Lenders may also extend the grace period for borrowers called to active duty due to a national conflict (see 34 C.F.R. - §682.209).

Contingency Options

Lenders have developed a range of contingency options for supporting deferment and forbearance processing. For example, if automated review of deferment or forbearance eligibility is not functional, contingencies often include a manual review process. In addition, the Department declines to enforce the following regulatory provisions to support entities that may have difficulties in processing and granting deferment, forbearance or military grace period extensions because of a Y2K-related system failure:

Ø If a lender is unable to process or grant a deferment or forbearance, the lender may apply an administrative forbearance or hold of up to 90 days on the account and process the deferment or forbearance thereafter. If the borrower was eligible for the deferment or forbearance, such benefits must be granted from the date the borrower met the eligibility requirements.

Ø If a lender is unable to review deferment or forbearance information to determine eligibility, the lender may proceed to apply the deferment or forbearance to the account. The period during which deferment or forbearance may be posted without a determination of eligibility may not exceed the earlier of 90 days or resumption of proper operation of the lender's system. If upon resumption of systems, it is determined that the borrower did not meet the eligibility criteria, the deferment or forbearance must be reversed, however, the lender may grant an administrative forbearance to cover any payments due during the removed period of deferment or forbearance. Interest accruing during any period that a lender's system failed may not be capitalized.

Ø If a deferment or forbearance is granted during the first quarter of 2000 without consideration of the borrower’s remaining eligibility for the maximum deferment or forbearance length due to the lender's system failure (for deferments and forbearances with time limits), upon discovery of the issue, the lender or guarantor may apply a period of administrative forbearance to the account. Interest accruing during any period that a lender's system failed may not be capitalized.

As previously described in Section A of this letter, a lender or guaranty agency requesting a waiver must send the notice to Mr. Barry Morrow, General Manager, Financial Partners, at the address provided at the end of Section A above.
Section C - Borrower Inquiries and Communications


Summary of Actions: Throughout the loan repayment period, lenders respond to borrower inquiries on a variety of topics including loan status, loan balance, payment schedule, etc. In addition, based on media suggestions, an increased number of borrowers may contact the lender/servicer or guarantor (in the case of a defaulted loan) late in 1999 to secure account balance information.

Contingency Options

34 C.F.R. - §682.208 requires lenders to respond to borrower and endorser inquiries within 30 days of receipt. If any entity cannot meet the 30-day requirement because of a Y2K-related system failure, the Department will, upon notice by the entity to the Department, grant an extension to allow the earlier of 60 days or resumption of the system to respond to such inquires. Such extension is granted upon notice to the Department, along with an explanation of the rationale for the need for the extension, and information on when the standard 30-day response timeframe will be reinstated.

As with the other provisions included in this letter, any notice should be sent to Mr. Barry Morrow, General Manager, Financial Partners, at the address provided at the end of Section A above.

Last Modified: 12/27/1999