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(00-G-328) Regulatory and Operational Guidance to All Guaranty Agencies Concerning the Federal Share of Collections

DCLPublicationDate: 7/1/2000
DCLID: 00-G-328
AwardYear:
Summary: Regulatory and Operational Guidance to All Guaranty Agencies Concerning the Federal Share of Collections


July 2000

G-00-328

Dear Guaranty Agency Director:

The purpose of this letter is to provide regulatory and operational guidance to all guaranty agencies concerning the federal share of collections. During last year’s negotiated rulemaking process, the Department worked with guaranty agency representatives and other members of the student financial aid community to develop regulations implementing changes made to the Higher Education Act of 1965 (HEA) by the Higher Education Amendments of 1998 (Pub. L. 105-244). Those final regulations were published in the Federal Register on October 29, 1999 (64 FR 58624). As noted in the preamble of the final regulations, the 48-hour requirement for deposit of funds is consistent with common business practice, and compliance with that standard would be consistent with the agency’s fiduciary obligation. In addition, a Dear Guaranty Agency Partner letter was sent to you on November 15, 1999 reminding guaranty agencies of the obligation to promptly deposit the Federal share of collections into the Federal Fund.


Federal Share of Collections

The fundamental principal rule governing the deposit of the Federal share of default collections is as follows:

In accordance with 34 CFR 682.419 (b)(6), a guaranty agency is required to deposit into its Federal Fund all funds received on loans on which a claim has been paid, including default collections, within 48 hours of receipt of those funds, minus any portion that the agency is authorized to deposit into the Operating Fund. [Forty-eight hours means two (2) business days. Receipt of Funds means actual receipt of funds by the guaranty agency or its agent, whichever is earlier].

A guaranty agency can comply with the 48-hour requirement using either of the following approaches:

Depositing all collections into the Federal Fund. If the agency chooses this approach, the Department will authorize the agency to promptly withdraw its portion (including investment income earned on that portion) from the Federal Fund for deposit into its Operating Fund.

To exercise this option, the guaranty agency must request approval from the Department prior to the initial withdrawal of funds (the request may be forwarded to its cognizant Regional office of the Financial Analysis and Oversight Division). The Department’s response will serve as a “blanket approval” of the guarantor’s authority to make such withdrawals from the Federal Fund.

Deposit the Federal share of collections into a separate agency-controlled account or an agency-controlled escrow account. This account may only be used to hold collections and disburse the proper shares to the Federal Fund and Operating fund. The agency must provide detailed documentation outlining the structure and operation of the account. After reviewing the documentation submitted by the agency, we may request additional information and/or modifications to the account to ensure that Federal interests are protected. The agency must transfer the Federal share (including investment income earned on the Federal share) into the agency-controlled account or agency-controlled escrow account within 48 hours of receipt of funds and the procedures submitted by the agency must provide that the Federal share of the collections and interest are deposited into the Federal Fund no later than 30 days after receipt. [REMINDER: Any account that contains Federal funds is considered part of the “Federal Fund” and is subject to the restrictions in the HEA and the Department’s regulations].

We understand that some guaranty agencies may have operational and/or state law concerns or problems in complying with the 48-hour requirement. If so, we are willing to work with the agency to resolve these issues on a case-by-case basis. We request that you provide a precise description of the problem(s) encountered to your cognizant Regional office of the Financial Analysis and Oversight Division.

The Guaranty Agency’s Fiduciary Responsibility in Regard to Federal Funds and Investment Income Earned on Federal Funds

In accordance with Section 422A of the HEA (as amended), earnings from the Federal Fund are the sole property of the Federal Government, and under Section 422A of the HEA and 34 C.F.R. Section 682.419, the assets of the Federal Fund and the earnings on those assets are, at all times, the property of the United States. The Federal portion of guaranty agency collections on defaulted loans must be deposited in the Federal Fund.

Guaranty agencies must exercise the level of care required of a fiduciary charged with the duty of protecting, investing and administering the money of others.


Guaranty agencies must deposit the Federal share of collections and investment income earned on the Federal share that remained in a non-Federal designated account to the Federal Fund by July 1, 2000. [NOTE: We recognize that this date (as specified in the Final Regulations dated October 29, 1999) has passed. Therefore, we have extended the date to September 1, 2000].

Guaranty agencies must deposit any investment income earned on the Federal share of collections from October 1, 1998 to September 1, 2000.

In order to ensure the proper accounting of these Federal funds, immediate compliance is essential for the integrity of the Federal Family Education Loan Program (FFEL). Therefore, guaranty agencies must notify their cognizant Regional office of the Financial Analysis and
Oversight Division, Regional office when they have made the retroactive deposits and transfer of the Federal share of collections, including income earned on the Federal share.

Thank you for cooperation throughout this process. If you have any questions or concerns, please contact Katrina Turner at (202) 401-2280.

Sincerely,


Linda W. Hall
Acting General Manager
Financial Partners


cc: Katrina Turner, Director, FAOD
FAOD Regional Directors
Brian Siegal, Attorney, OGC
Pamela Moran, Chief of the Loan Branch, Analysis

Last Modified: 08/16/2000