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The Secretary amends the regulations governing the Federal Family Education Loan (FFEL) Program. The FFEL regulations govern the Federal Stafford Loan Program, the Federal Supplemental Loans for Students (Federal SLS) Program, the Federal PLUS Program, a

FR part
VIII
Attachments:
PublicationDate: 11/27/96
FRPart: VIII
RegPartsAffected: Citation : (R)682.401
Citation : (R)682.404
Citation : (R)682.406
Citation : (R)682.410
Citation : (R)682.411
Citation : (R)682.413
PageNumbers: 60477-60487
Summary: The Secretary amends the regulations governing the Federal Family Education Loan (FFEL) Program. The FFEL regulations govern the Federal Stafford Loan Program, the Federal Supplemental Loans for Students (Federal SLS) Program, the Federal PLUS Program, and the Federal Consolidation Loan Program, collectively referred to as the Federal Family Education Loan Program and authorized by Title IV, Part B of the Higher Education Act of 1965, as amended (HEA). The Secretary is making changes to the due diligence requirements for lenders and guaranty agencies participating in the FFEL Program.
CommentDueDate:

  
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[


[Federal Register: November 27, 1996 (Volume 61, Number 230)]
[Rules and Regulations]
[Page 60477-60487]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27no96-22]


[[Page 60477]]

_______________________________________________________________________

Part VIII





Department of Education





_______________________________________________________________________



34 CFR Part 682



Postsecondary Education: Federal Family Loan Program; Due Diligence
Requirements; Final Rule


[[Page 60478]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC35


Federal Family Education Loan Program; Due Diligence Requirements

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the regulations governing the Federal
Family Education Loan (FFEL) Program. The FFEL regulations govern the
Federal Stafford Loan Program, the Federal Supplemental Loans for
Students (Federal SLS) Program, the Federal PLUS Program, and the
Federal Consolidation Loan Program, collectively referred to as the
Federal Family Education Loan Program and authorized by Title IV, Part
B of the Higher Education Act of 1965, as amended (HEA). The Secretary
is making changes to the due diligence requirements for lenders and
guaranty agencies participating in the FFEL Program.

DATES: Effective date: Except for the revision of Sec. 682.404(f),
these regulations take effect on July 1, 1997. The revision of
Sec. 682.404(f) is effective January 1, 1998 and applicable for
payments received on or after January 1, 1998. However, affected
parties do not have to comply with the information collection
requirement in Sec. 682.411 until the Department of Education publishes
in the Federal Register the control number assigned by the Office of
Management and Budget (OMB) to this information collection requirement.
Publication of the control number notifies the public that OMB has
approved this information collection requirement under the Paperwork
Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Ron Streets, Program Specialist, Loans
Branch, Policy Development Division, Policy, Training, and Analysis
Service, U.S. Department of Education, 600 Independence Avenue, SW.
(room 3053, ROB-3), Washington, DC 20202-5449. Telephone: (202) 708-
8242. Individuals who use a telecommunications device for the deaf
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through
Friday.

SUPPLEMENTARY INFORMATION:

Background

The Secretary is amending 34 CFR Part 682 of the Department's
regulations to improve the administration and the integrity of the FFEL
Program. By improving program efficiency, these regulations will reduce
burden for lenders and improve the collection of outstanding FFEL loans
and potential liabilities owed to the Secretary.
On September 6, 1996, the Secretary published a notice of proposed
rulemaking (NPRM) for Part 682 in the Federal Register (61 FR 47398).
The NPRM proposed changes needed to improve the due diligence
provisions in the FFEL program. The NPRM included a discussion of the
major issues surrounding the proposed changes, and the discussion will
not be repeated here. The following list summarizes those issues:
<bullet> Guaranty agency retention of collection costs of a
defaulted FFEL loan that are repaid by a consolidation loan;
<bullet> Requiring a guaranty agency to offer preclaims assistance
to lenders no later than the 75th day of delinquency;
<bullet> Requiring a guaranty agency to provide counseling and
written consumer information to the borrower by the 100th day of
delinquency;
<bullet> Application of payments made by a borrower on a defaulted
loan to a guaranty agency;
<bullet> Requiring a guaranty agency to assess a defaulted borrower
the same amount of collection charges assessed by the Department;
<bullet> Initiating wage garnishment proceedings for borrowers with
sufficient income;
<bullet> Expanding the length of time in which lenders must send
the first written notice or collection letter to a delinquent borrower;
<bullet> Modifying the requirements for the two collection letters
that must be sent to a borrower; and
<bullet> Expanding the possible remedial action available to the
Secretary if a guaranty agency fails to meet the requirements of
Sec. 682.410 to include mandatory assignment of FFEL loans to the
Department at the Secretary's discretion.

Substantive Revisions to the Notice of Proposed Rulemaking

Section 682.404 Federal Reinsurance Agreement

The Secretary amends this section of the regulations to require
guaranty agencies to provide preclaims assistance to lenders no later
than the 90th day of delinquency. The NPRM had proposed a deadline of
the 75th day of delinquency.
This section has also been amended to require that a guaranty
agency provide counseling and consumer information to a borrower within
10 days following the receipt of a preclaims assistance request from
the lender or the servicer. The Secretary has further amended this
section to allow guaranty agencies flexibility in using formats other
than written ones when providing consumer information to the borrower
as part of the guaranty agency's preclaims assistance.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

The proposal to require a guaranty agency to charge a borrower
collection costs equal to the amount the same borrower would be charged
for the cost of collection if the loan was held by the Department has
been removed. The Secretary has retained the current regulatory
requirement which allows a guaranty agency to use the lesser of the
amount derived from the formula in 34 CFR 30.60 or the amount charged
by the Department.

Section 682.411 Due Diligence by Lenders in the Collection of Guaranty
Agency Loans

Section 682.411 is also amended to move the last sentence in
paragraph (c) in the NPRM that deals with the contents of the first
delinquency notice and insert it in paragraph (d), and to add a
modified statement to paragraph (c).

Executive Order 12866

1. Assessment of Costs and Benefits

These final regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those determined by the
Secretary as necessary for administering this program effectively and
efficiently. Potential costs and benefits are also discussed in
conjunction with the public comments to which they relate.
In assessing the potential costs and benefits--both quantitative
and qualitative--of these regulations, the Secretary has determined
that the benefits of the regulations justify the costs.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 38 parties
submitted comments on the proposed regulations. An analysis of the
comments and of the changes in the regulations since publication of the
NPRM follows. An analysis of the comments received regarding the

[[Page 60479]]

regulatory flexibility certification can be found under the heading
Regulatory Flexibility Act Certification.
Major issues are grouped according to sections and subject. Other
substantive issues are discussed under the section of the regulations
to which they pertain. Technical and other minor changes--and suggested
changes the Secretary is not legally authorized to make under the
applicable statutory authority--are not addressed.

Section 682.401--Basic Program Agreement

Comment: A number of guaranty agency representatives commented on
the Secretary's proposal to modify the regulations to reflect his view
that guaranty agencies may retain collection costs totaling up to 18.5%
of the outstanding principal and accrued interest of a defaulted FFEL
Program loan that is repaid by a consolidation loan if the collection
costs are included in the payoff amount certified by the guaranty
agency. These commenters argued that the HEA allows the guaranty
agencies to retain 27 percent of payments received from borrowers on
defaulted loans including payoffs provided through consolidation. They
also argued that the agency needs to retain these funds to pay certain
costs in connection with a consolidation loan. The agency
representatives suggested that their view is consistent with
Congressional intent as shown by budget ``scoring'' of a budget
reconciliation bill in 1996 that included a provision that the agencies
believe supports their position.
Other commenters, including school organizations and borrower
advocates, supported the proposed regulation limiting collection costs
and the retention by guaranty agencies. These commenters noted that the
addition of collection costs can be a disincentive for a borrower to
consolidate a loan--thus eliminating an important tool to reduce
defaults. These commenters also urged the Department to consider
eliminating the authority for the guaranty agencies to add any
collection costs to a defaulted loan that is consolidated.
Discussion: The comments of the guaranty agency representatives are
based on the view that a consolidation loan payoff amount is a
``payment'' for purposes of section 428(c)(6) of the HEA. The
Secretary, however, believes that the agencies' interpretation is
contrary to the words and intent of the HEA. In defining the
``Secretary's equitable share'' for purposes of the guaranty agency's
retention of collections, the HEA specifically refers to ``the
Secretary's equitable share of payments made by the borrower''. A
consolidation loan payoff amount is not paid by the borrower but
instead is paid by a third party (the consolidating lender) and does
not reduce the borrower's obligation. Thus, a loan consolidation is not
covered by section 428(c)(6).
In addition, in interpreting the HEA, it is appropriate to look at
both the specific statutory language and at the language and design of
the entire statute. See Connecticut Student Loan Foundation v. Riley,
Case No 3:93CV02570 (JBA) (D.Conn., Oct. 31, 1996). The guaranty
agencies' interpretation is also inconsistent with other provisions of
the HEA. Under the agencies' approach, a borrower who consolidated a
defaulted loan would not be responsible for the collection costs on
that loan. Instead, the taxpayer would pick up those costs by allowing
the agency to retain a certain portion of the consolidation loan payoff
amount. This is contrary to section 484A(b) of the HEA. At the same
time, under this approach, the agencies would be allowed to retain an
amount far in excess of their actual collection costs. Numerous audits
of guaranty agencies show that the guaranty agencies' contracts with
collection agencies frequently provided for payments to the collectors
of far less than 27 percent when a defaulted loan is included in a
consolidation loan. The agencies' comments on the NPRM did not address
this issue or provide any supporting information for their claim that
they need a greater retention to pay additional costs. Allowing the
guaranty agencies to retain an amount far in excess of the amount they
have established as the cost of collecting on the loan (in addition to
the reinsurance payment the agency received) would provide an
unnecessary and inappropriate windfall for the agencies. Finally, the
Secretary notes that the agencies' claim that their view is consistent
with Congressional intent based on the budget ``scoring'' of a
provision in a bill that was ultimately vetoed is unpersuasive.
The Secretary appreciates the concerns of the school and borrower
advocates that the addition of collection costs reduces the value of
the option of consolidation. The Secretary is continuing to evaluate
how to address this issue while protecting the Federal fiscal interest.
Changes: None

Section 682.404(a)(2)(ii)--Federal Reinsurance Agreement Deadline for
Preclaims Collection Assistance

Comment: The majority of commenters representing guaranty agencies,
lenders, lender servicers, and secondary markets supported the
Secretary's effort to promote standardization and simplification, but
objected to the proposal that guaranty agencies be required to offer
preclaims collection assistance to lenders on delinquent accounts no
later than the 75th day of delinquency. These commenters recommended
that the deadline be no later than the 90th day of delinquency. Two
other guaranty agency commenters strongly objected to the Department
establishing any deadline for beginning preclaims assistance on the
grounds that many agencies have developed their own default prevention
efforts based on portfolio characteristics and what has been shown to
work best for their agencies. These commenters believe that agencies
should be allowed to continue establishing the beginning date for
preclaims assistance. One of these two commenters suggested that if, as
the Secretary suggested in the preamble to the NPRM, some agencies have
not provided preclaims assistance on a timely basis, the Department
should address the problem with those guarantors. The commenters
representing school and financial aid officer associations supported
the Secretary's proposal, one stating that early intervention can
prevent many defaults and the other that this change will ensure that
delinquent borrowers are treated in a similar manner regardless of the
guaranty agency performing the preclaims activities.
Many commenters indicated that starting preclaims assistance
earlier than the 90th day may confuse borrowers and cited studies
conducted by several major guaranty agencies showing that about one-
third of borrower delinquencies are resolved between the 60th and 90th
day. They also cited a similar study conducted by a major lender that
showed a 41 percent default aversion rate by the lender during this
period. These commenters believe that a ``no later than 90 days'' time
frame will afford borrowers with the opportunity to fulfill their
commitments to their loan holders and servicers without intervention by
guarantors. They also believe such an approach will avoid unnecessary
lender and guaranty agency costs.
Discussion: The Secretary continues to believe that early preclaims
intervention by a guaranty agency is

[[Page 60480]]

critical to default aversion, but agrees with the commenters that how
early that intervention takes place may appropriately depend upon a
number of factors, such as those mentioned by the commenters. The
Secretary has decided that until further discussions with the loan
industry and review of servicing data can take place, agencies should
be given some flexibility in beginning their preclaims collection
activities. However, the Secretary continues to believe that it is
appropriate to establish an outer deadline for a guaranty agency to
offer preclaims assistance to lenders. After consideration of the
comments, the Secretary has decided to accept the suggestion that the
90th day of delinquency is an appropriate deadline.
Changes: The regulations have been amended to require guaranty
agencies to offer preclaims assistance to lenders no later than the
90th day of delinquency.

Information and Counseling Requirements

Comment: Several commenters noted that the use of the phrase
``consolidate the defaulted loan'' in the proposal to require
guarantors to provide counseling and written consumer information to a
delinquent borrower no later than the 100th day of delinquency was not
correct within the context of preclaims assistance and recommended that
the reference should be to ``delinquent'' rather than ``defaulted''
loan.
Discussion: The Secretary agrees that the use of the word
``defaulted'' is incorrect in the context of preclaims assistance
contacts with delinquent borrowers.
Changes: The word ``delinquent'' is substituted for ``defaulted''
in the provision.
Comment: All of the guaranty agency, lender and loan servicer, and
secondary market commenters agreed with the Secretary that there should
be a consistent time period during the preclaims assistance process for
the guaranty agency to provide specific information to the borrower on
consolidation and other default prevention options. Because most of
these same commenters recommended that guaranty agencies be given
flexibility, up to the 90th day of delinquency, to begin the preclaims
effort, they recommended that a consistent standard be achieved by
requiring that the information be provided to the borrower no later
than the 30th day following the agency's receipt of the preclaims
assistance request from the lender rather than by the 100th day of
delinquency as the Secretary proposed. These commenters indicated that
they believed that this time frame will allow a guaranty agency the
ability to perform preclaims activities in an orderly and logical
sequence even if the lender's request is late. They also pointed out
that under the Secretary's proposal, if a lender requests preclaims
assistance as early as the 60th day of delinquency, the agency has up
to 40 days to provide the required information, whereas if a lender
requests preclaims assistance at the 90th day of delinquency, the
agency would have only 10 days to provide the information.
Discussion: The Secretary agrees that, in light of the change in
the guaranty agency's deadline for offering preclaims assistance, the
100th day of delinquency is no longer an appropriate deadline for
requiring the guaranty agency to provide the required consumer
information and counseling. The Secretary also agrees with commenters
that there should be a consistent time period for agencies to provide
this important consumer information. However, the Secretary believes
that it is vital that this information be provided to the borrower
through the preclaims assistance process as soon as possible after the
lender requests preclaims assistance. The borrower should have every
opportunity to take steps to remedy the delinquency before the agency
undertakes more intensive supplemental preclaims efforts. Under the
commenters' proposal that the information be provided to the borrower
no later than the 30th day following the agency's receipt of the
lender's request for preclaims collection assistance, this goal cannot
be met. For example, if an agency offers preclaims assistance on the
90th day of delinquency and the lender uses the full 10 days provided
in 34 CFR 682.411(h) to request assistance, the borrower might not
receive the information until the 130th day of delinquency, which is
well within the supplemental preclaims period. The Secretary believes
that this result does not serve the borrowers. To avoid this situation,
the Secretary has decided to require the guaranty agency to provide the
consumer information and counseling no later than 10 working days after
it receives the lender's request for preclaims assistance.
Changes: The regulations have been revised to require a guaranty
agency to provide counseling and consumer information to the borrower
no later than 10 working days after receiving a lender's request for
preclaims assistance.
Comment: The majority of commenters supported providing consumer
information on default aversion options to delinquent borrowers as part
of preclaims assistance activities. One borrower supported the proposal
and noted that information on consolidation was not readily available
to him when he encountered difficulties in being able to repay his loan
and that he almost defaulted because his lender did not participate in
the Consolidation program. However, an overwhelming number of
commenters strongly objected to what they perceived as a proposal that
the guaranty agency provide consumer information on only the
consolidation loan option. The commenters indicated that they believe
that loan consolidation is not always the best option for many
borrowers because of the potential loss of benefits on the underlying
loans being consolidated. They also pointed out that not all borrowers
may be eligible for consolidation. All the commenters recommended that
the consumer information provided to the borrower include all of the
options available to resolve the delinquency, including deferment,
forbearance, and the opportunity for an income-sensitive repayment
schedule. One commenter recommended that the Department provide the
guaranty agencies with a prepared information piece that outlines all
the default aversion options and borrower profiles describing which
borrowers might benefit from which option.
Discussion: The Secretary agrees with the commenters that the
information provided to the borrower should include all default
aversion options available to the borrower, not just FFEL and Direct
Loan Consolidation. The Secretary's proposal was intended to ensure
that consolidation was included as an option in preclaims counseling
and information, but it was not intended to suggest that information on
other options should be withheld. The borrower's comment supports the
Secretary's belief that information on consolidation has not been
readily made available to delinquent borrowers. The Department agrees
with the suggestion that a prepared information piece providing an
overview of available options with borrower profiles would be useful.
Changes: The regulations are amended to clarify that the
information provided to the borrower must include all options available
to avoid default, including FFEL and Direct Loan Consolidation.
Comment: Many loan industry (guaranty agency, lender, and lender
servicer) commenters recommended that the Secretary modify the
regulations to allow agencies to provide

[[Page 60481]]

the required consumer information in formats other than written ones,
such as video and e-mail. The commenters believe that the regulations
should not preclude the use of more innovative mediums for providing
this information. These same commenters questioned the advisability of
requiring both written information and counseling, suggesting that
providing both may cause borrower confusion. The commenters also
requested clarification as to whether the written consumer information
could be provided as part of the letter that is one of the three
required preclaims activities and whether there are any situations,
such as an invalid address or when the borrower has requested that the
agency cease all collection activities, in which the agency would be
relieved of the requirement to provide this information.
Discussion: The Secretary agrees that the regulations should not
prevent a guaranty agency from providing borrowers with required
counseling and consumer information in formats other than written
letters. The Department is primarily concerned with ensuring that the
borrower receives the information in an appropriate manner. Thus, an
agency may use different methods of providing the information to the
borrower as long as the agency can show that the delinquent borrower
received the information. The Secretary also agrees that this
information may be provided as part of a preclaims letter, provided the
default aversion options are clearly and prominently presented and not
buried in the text of the letter. The Secretary does not agree that
reinforcing the written consumer information with counseling will
confuse borrowers. The Secretary believes that it is important for the
agency to follow up with the borrower to determine that the borrower
received and understood the information, to answer any questions the
borrower may have about the available options, especially the loan
consolidation programs, and to encourage the borrower to act on one of
the options to halt the increasing delinquency. The Secretary expects
an agency to provide this information to the extent that a valid
address or telephone number is available for the borrower.
Changes: The regulations have been modified to specify that an
agency may provide written consumer information on default aversion
options as part of the required preclaims letter and/or in other
written materials or other formats as a separate information piece.
Comment: Loan industry commenters expressed concern about the
provision that specifies that an agency's failure to provide the
required consumer information and counseling constitutes a violation of
the guaranty agency's obligation to perform due diligence in collecting
the loan. The commenters objected to what they viewed as the imposition
of punitive sanctions on a loan-by-loan basis and requested that the
Department withhold assessing penalties for noncompliance with this
provision until the major due diligence reform effort previously
announced by the Department is started. These commenters also requested
clarification that a lender would not be harmed by an agency's failure
to comply with this requirement and that any penalties would be paid
out of an agency's reserve fund and not passed along to a lender or
lender servicer.
Discussion: The Secretary understands that the use of the phrase
``servicing error'' in the preamble and the reference in the
regulations to ``due diligence in collecting'' may have confused
readers because common usage in the FFEL program has made a distinction
between these terms. The Secretary did not intend to make such a
distinction by use of these differing terms. The Secretary agrees with
commenters that lenders should not be penalized for a guaranty agency's
violations in this area. To clarify this, the Secretary has decided to
relocate this provision.
Changes: The statement citing violations of preclaims assistance
requirements as a due diligence violation of the agency has been
relocated to 34 CFR 682.406(a)(12) as a condition of reinsurance.

Section 682.404(f)--Application of Borrower Payments

Comment: Many loan industry commenters agreed that only an
appropriate amount from each borrower payment on a defaulted loan
should be applied to collection costs, but objected to the proposed
language that would prohibit the up-front assessment of collection
costs after default claim payment and require that collection costs be
assessed on each payment received. The commenters indicated that many
guarantor systems are programmed currently to calculate up-front
collection costs according to the limits established in
Sec. 682.410(b)(2) and would require significant changes to make a per
payment assessment. These commenters stated that, at the very least,
retroactive recalculation of collection costs should not be required
except on accounts on which the agency had not previously assessed
fees. In the commenters' view, such reassessment on an account on which
a borrower has been making payments may increase the percentage of
collection costs assessed as well as increase the total amount paid.
A few guaranty agency commenters strongly objected to any change to
this provision of the regulations because they believe that the
application of borrower payments as proposed is not in the best
interest of the borrower and will require the borrower to pay more
interest over the life of the loan because principal is reduced more
slowly. These commenters believe that collection costs are a collection
tool to be used by the agency and that the proposed regulation weakens
this effective tool. One of these commenters also stated that he
believes that this proposal would eliminate an agency's ability to
compromise the debt. Some legal advocates who represent borrowers also
strongly objected to the proposed change, stating that this approach
will be counterproductive and will discourage defaulted borrowers from
continuing to make payments because they will pay over long periods of
time and not see their principal and interest diminish appreciably. The
advocates recommended that the current regulations in this area be
retained. A school association commenter also objected to the proposal
and recommended that agencies be required to apply payments to
principal and interest first, then collection and late charges. The
commenter believes that the objective should be repaying the loan, not
creating additional financial hardship for the borrower.
Discussion: The Secretary understands that some commenters would
prefer that defaulted borrowers not be discouraged from repaying on a
defaulted loan by having to pay collection costs. However, section 484A
of the Higher Education Act requires that these borrowers, rather than
the taxpayers, bear reasonable costs of collection. The current
regulations giving the guaranty agency the option of determining how
payments are to be applied has led in some instances to the borrower
paying few if any collection costs and the regulations do not comply
with the Federal Claims Collection Standards. Therefore, the Secretary
does not believe that retaining the current requirements, as suggested
by many commenters, is an option. The Secretary does not agree that
this change prevents an agency from compromising a portion of the
collection costs if a borrower makes a lump sum payment to satisfy the
debt.
The loan industry commenters are correct that the proposed change
precludes agencies from continuing to assess collection costs upfront
at a time when the agency has not yet incurred

[[Page 60482]]

those costs. The Secretary notes that the borrower is not legally
obligated to pay costs which have not been incurred. This regulatory
change is intended to require the guaranty agencies to charge only
those costs that have been incurred and to prohibit the upfront loading
of collection costs on a borrower's account because it discourages
repayment and does not reflect the agencies' actual collection
expenses. In its own collection efforts, the Department calculates and
displays in its billing statements the projected contingent fee charges
that will be incurred and assessed against the borrower if the full
amount of principal and interest owed is not immediately repaid. The
Department incurs a contingent fee cost only as the borrower repays and
then passes that cost on to the borrower as it is incurred on a
payment-by-payment basis. The Department does not assess costs to the
borrower it has not incurred and attempts to make this distinction
clear in its notices to borrowers.
The Secretary understands that some agencies may be required to
make significant systems changes to inform borrowers clearly that they
will be assessed collection costs on a per payment basis. Because of
the time and complexity involved in making the necessary systems
changes, the Secretary agrees that a delayed effective date for
implementation of the regulations is appropriate as reflected in the
effective date section of this document. The Secretary notes, however,
that there has never been a legal basis for an agency to charge
collection costs it has not incurred to a borrower and the delayed
effective date is not intended to justify failure to conform to the
law.
Changes: No changes have been made to the regulations. However, the
Secretary has provided a delayed effective date for implementation of
this provision of the regulations.
Comment: In response to the Secretary's solicitation on whether a
guaranty agency should be allowed to apply borrower payments to
incidental charges, after collection costs, rather that only after all
principal and interest is satisfied, loan industry commenters
overwhelmingly recommended that this decision be the option of the
guarantor. They believe guarantors should be allowed to apply payments
to incidental charges, such as late charges and court fees, when they
are assessed, and as the agency deems appropriate. Some legal advocates
for borrowers recommended that the current requirements, which provide
that payments be applied to these costs only after the repayment of all
principal and interest, be retained.
Discussion: The Secretary has decided that, consistent with 4 CFR
Chapter II, section 102.13(f) of the Federal Claims Collection
standards, the borrower's payment must be applied to incidental charges
(which the Secretary understands will be nominal amounts, such as late
charges) after collection costs are paid and before the payment is
applied to accrued interest and outstanding principal.
Changes: The regulations have been revised to require that borrower
payments on a defaulted loan be applied to any incidental charges after
the appropriate amount of collection costs is paid and before the
payment is applied to accrued interest and outstanding principal.
Comment: Loan industry commenters proposed that the phrase
``reinsured interest'' in the current regulations be changed to
``accrued interest'' because the borrower owes all accrued interest
whether or not the agency paid the lender insurance on the interest or
the agency filed for reinsurance with the Secretary. The commenters
pointed out that interest that accrues after the lender's claim is paid
is not reinsured.
Discussion: The Secretary agrees with the commenters that the
regulations should reference accrued interest in this provision.
Changes: The regulations have been revised to provide that borrower
payments are applied to ``accrued'' interest rather than to
``reinsured'' interest.
Comment: One commenter pointed out that Sec. 682.404(f) fails to
identify that the payments being described are being applied to a
defaulted loan and recommends a change to reflect this.
Discussion: The Secretary agrees with the commenter.
Changes: The regulations have been modified to refer to a defaulted
loan.

Section 682.410(b)(2)--Assessment of Collection Charges

Comment: An overwhelming number of commenters objected to the
proposal that would require a guaranty agency to assess a borrower in
default the collection costs that the same borrower would be charged if
the loan was held by the Department and recommended that the current
regulatory standard be retained. Loan industry commenters, although
appreciating the Secretary's goal of standardization, believe that the
flat rate proposed in the NPRM is not reasonable if it bears no
relation to the actual costs incurred in the collection process. These
commenters believe a flat rate is inconsistent with section
428(c)(6)(B)(i) of the HEA which states that collection costs are those
costs incurred by a guaranty agency in relation to collecting on
defaulted loans. Finally, loan industry commenters contended that fair
treatment of borrowers is preferable to uniform treatment if the result
would be that borrowers would be assessed more than they otherwise
would be charged. They believe a flat rate assessment will also prevent
an agency from continuing to compromise collection costs when it deems
it appropriate.
Some school associations supported the Secretary's proposal to
mandate a maximum amount of collection costs that agencies would be
authorized to assess, but strongly recommended that guaranty agencies
have the flexibility to assess less than the flat rate when the actual
cost is less.
Borrower representatives strongly opposed the Secretary's proposal
on the grounds that the imposition of uniform collection rates is not
beneficial to borrowers if uniformity means higher collection fees.
They recommended that reasonable collection costs be defined as the
lesser of the percent limitation in the borrower's promissory note or
other repayment agreement or the guarantor's actual costs of
collection.
Discussion: After further consideration, the Secretary agrees with
the commenters that the assessment of a uniform rate may not be the
fairest approach to assessing collection costs, and could prove
counterproductive if it creates a disincentive to borrowers continuing
to make payments on defaulted loans. In regard to the borrower
representatives' recommendation to define reasonable collection costs
by referencing the borrower's promissory note, the Secretary notes that
the common promissory notes approved by the Secretary do not include
any such limitation and may not be changed to provide for one.
Changes: The Secretary has decided to retain current regulations
governing the maximum collection costs that may be assessed a defaulted
borrower, except specifically to note that such costs are subject to
limitations in the borrower's promissory note, if any.

Section 682.410(b)(6)(vii)(A)--Collection Efforts on Defaulted Loans

Comment: Loan industry commenters recommended that the Secretary
withdraw the proposed change to post-default collections that would
require guaranty agencies to undertake ``administrative wage
garnishment'' no later than the 225th day of a borrower's delinquency
because it was unclear how that proposal related to the entire text of
paragraph (vii) of the current rule that

[[Page 60483]]

addresses guaranty agency collection efforts. The commenters noted that
the term administrative wage garnishment did not appear in the text of
the regulations, but that they understood that the Department's intent
was to require the agencies to use administrative wage garnishment
exclusively. With that understanding, the commenters strongly objected
to the loss of the guaranty agency's option to undertake judicial wage
garnishment which they claimed was an efficient and cost-effective
means to satisfy the debt in some states. They strongly recommended
that agencies be allowed to continue to use judicial wage garnishment
as a collection tool and to determine whether administrative wage
garnishment or judicial wage garnishment is the most appropriate
collection tool in particular cases. Borrower representatives indicated
that they believe that the proposal to require administrative wage
garnishment may be unworkable and contrary to the borrower's best
interest. These commenters believe that difficulties in obtaining
accurate employment data through state labor or unemployment insurance
departments may result in a high volume of nonproductive and harassing
wage garnishment attempts, leading to increased legal challenges to
garnishment. They believe that litigation affords a borrower with more
due process protection and recommend that the Secretary withdraw the
proposal.
Discussion: The Secretary believes that program experience has
shown that administrative wage garnishment is a far more efficient and
cost-effective collection tool than across-the-board litigation of all
defaulted accounts. In regard to the loan industry comments about the
alleged benefits features of judicial wage garnishment, the Secretary
notes that the administrative wage garnishment authority was added to
the HEA only after attempts to promote judicial wage garnishment by
guaranty agencies proved ineffective. The guaranty agencies have
presented no significant evidence of increased collections through the
judicial wage garnishment process to justify the significant expense
and complications created by that process. The Secretary also believes
that the notice and opportunity for a hearing provisions in the
regulations governing administrative wage garnishment afford a
defaulted borrower adequate due process and an opportunity to contest
the debt or enter into a repayment agreement on the loan with the
guaranty agency and avoid the problems identified by the borrower
commenters. The Secretary notes that this discussion is not intended to
preclude a guaranty agency's use of a state administrative wage
garnishment process that would provide similar benefits and protections
to the government and the borrower as the HEA. The Secretary invites
any agency that believes it has such authority to discuss the use of
such authority with the Secretary. The Secretary also notes that this
regulation is not intended to prohibit an agency from using state tax
refund offset authority that may be available.
The Secretary does agree with the commenters that conforming
changes are necessary to Sec. 682.410(b)(6)(vii) and (b)(7) to clarify
the use of wage garnishment within the greater context of the 181-545
day due diligence period and has made appropriate changes to these
regulations. The Secretary notes that he will review these changes
further during the planned consideration of guaranty agency due
diligence requirements next year.
Changes: Conforming changes have been made to clarify this
requirement within the context of the other provisions of the 181 to
545-day period specified in the regulations. References to required
collection activities at the 545th day of delinquency have been deleted
from the regulations.
Comment: Guaranty agency commenters overwhelmingly disagreed with
the proposal that defaulted borrower accounts be assigned to the
Department for litigation by the federal government if the borrower has
no income that could be attached through wage garnishment, but has
assets which could be attached through a court order. The commenters
believe that the agencies should be permitted to choose to litigate or
assign the account to the Department. They believe that agencies have
the resources and procedures already in place to determine the most
appropriate and cost-effective method of recovery and that assignment
to the Department will not increase collections.
Discussion: The Secretary disagrees with the commenters. It is the
Secretary's experience that the guaranty agencies are frequently
inconsistent in pursuing and enforcing judgments.
Moreover, the process for transferring these judgments when a loan
is assigned to the Secretary or transferred to another agency when the
original agency closes can be complex and confusing for the agencies,
the Secretary and the borrower. Thus the Secretary believes that
centralized litigation by the federal government is the most cost-
effective means of collecting these accounts. The Secretary believes
that the number of defaulted accounts where the borrower has no income
to be garnished but assets which could be attached will not be an
overwhelming number and is convinced that the federal government has
sufficient resources to litigate these accounts efficiently.
The Secretary does not intend that guaranty agencies immediately
cease collection activity on judgments on which they are collecting. It
is the Secretary's intention to eliminate the need for guaranty agency
litigation on future defaults. However, the Secretary believes that
guaranty agencies should continue to collect on current paying
judgments. To avoid confusion, therefore, the Secretary has decided not
to delete all references to litigation in the current regulation. The
Secretary will make the necessary technical changes to the regulations
at a later date.
Changes: None.

Section 682.411--Due Diligence By Lenders in the Collection of Guaranty
Agency Loans

Comment: Many loan industry commenters strongly supported the
Secretary's effort to change the timing of the first delinquency notice
required in Sec. 682.411(c) of the regulations and the resulting change
in the timing of the subsequent due diligence period in
Sec. 682.411(d), but recommended that the 1- to 15-day period be
extended to a 1-20-day period. The commenters indicated that they
believe that borrowers assume that a 15-day grace period, similar to
that available on many consumer loans, is available on their student
loans. They believe that the additional five days they are requesting
would allow borrowers to mail payments within 15 days of the due date
without adverse consequences. The commenters believe that the use of
the 20-day standard will eliminate unnecessary collection letters from
being generated. Another commenter recommended that either a 15-day
period or a 20-day period be used, depending upon the lender's policy
for reporting delinquencies to credit bureaus. The majority of loan
industry commenters urged the Secretary to allow lenders to implement
the change in the time period for delinquent notices or collection
letters ``no later than July 1, 1997.''
Discussion: The Secretary believes that because a student loan may
be a borrower's first consumer loan experience, lenders must exercise
greater diligence than they might on other consumer loans in order to
monitor borrower delinquency and take proactive steps to ensure that a
borrower establishes a successful repayment

[[Page 60484]]

pattern. The Secretary believes that adopting the 15-day period for the
first notice of delinquency will eliminate the possibility of
unnecessary collection notices. In response to the request for early
implementation of this change, the Secretary notes that, under section
482(c) of the HEA, this change cannot be effective until July 1, 1997.
Changes: A conforming change to reference the 15-day standard for
generating the first delinquency notice has been made in
Sec. 682.202(f)(2) of the regulations.
Comment: Many loan industry commenters disagreed with the proposal
that the first notice of delinquency required by Sec. 682.411(c)
provide the borrower with information on loan consolidation,
forbearance, and other available options to avoid default. The
commenters point out that the borrower's initial delinquency is not
necessarily a sign of either financial difficulty in making scheduled
payments or of impending default. They believe that the initial notice
should simply remind the borrower of the delinquency and that he or she
should call the lender or lender servicer if he or she is having
difficulty making scheduled payments. They also point out that a first
notice of delinquency is generally issued in a billing statement format
that is not intended to alienate or intimidate the borrower and that
space for providing extensive information is limited.
Many of these same commenters also objected to adding the
additional notice to subsequent collection letters required under
Sec. 682.411(d). The commenters argued that lenders and lender
servicers should be allowed to insert a notice of their own design that
they believe will elicit the best response from the borrower and
further recommended that the specific references in the notice to wage
garnishment, tax offset, and litigation be replaced with a more generic
reference to the lender taking ``other actions as authorized by law.''
The commenters believe that many borrowers do not understand what these
terms mean and that the lender should be allowed to explain these legal
actions in simple language that borrowers will understand. They also
indicated that a listing of specific consequences may suggest to the
borrower that this list supersedes any right the guarantor or the
Secretary has to pursue collection as provided for in the borrower's
promissory note.
Discussion: The Secretary disagrees with commenters that informing
the borrower that there are various options available to assist the
borrower if he or she is having difficulty making scheduled payments is
inappropriate in the first notice of delinquency. Given the current due
diligence requirements for issuing second and subsequent collection
letters, there will be a significant delay before the next collection
letter is issued in which this information could be provided. The
Secretary notes that he did not intend to require that the first notice
of delinquency contain detailed information on loan consolidation,
forbearance, deferments, and other default aversion options. This
sentence was placed in paragraph (c) in error and was intended instead
to be included in the 16-180 day delinquency collection timeframe. The
Secretary recognizes that not all borrowers may be experiencing
difficulties at this stage and that the billing format generally used
to issue the first notice has limited space. Therefore, the Secretary
has decided that it is sufficient to include on the first notice a
prominent statement, which includes the name and a telephone number of
a contact person, and that informs the borrower that other options are
available if he or she is experiencing difficulties making scheduled
payments.
In regard to the later collection letters, however, the Secretary
believes that providing information on default aversion options and the
proceedings that may be instituted against the borrower are even more
critical. The Secretary believes that borrowers are capable of
understanding the required notice related to tax offset, wage
garnishment, and litigation by the federal government and notes that
nothing prevents a lender from explaining these terms in simpler
language after providing the notice if the lender believes it is
necessary.
Changes: Section 682.411(c) has been modified to require the lender
to include a prominent message in the first delinquency notice briefly
mentioning that various forms of assistance are available to borrowers
experiencing repayment difficulties and providing a telephone contact
number for further information. Section 682.411(d) has been modified to
incorporate the more complete information disclosure originally
proposed in Sec. 682.411(c).

Section 682.413--Remedial Actions

Comment: The majority of guaranty agency commenters stated that the
Secretary should only exercise the remedial action of loan assignment
in circumstances involving repetitive violations and consistent
patterns of noncompliance, not isolated or occasional violations that
do not materially impact the collectability of the loan. The commenters
also stated that the regulations should define the circumstances under
which the assignment option will be used rather than the loss of
reinsurance option and provide that it is the guarantor's choice as to
which option will be used. These same commenters recommended that
guaranty agencies be provided with a ``curing'' process for due
diligence violations comparable to that provided for lenders and an
appeal process related to any actions taken by the Secretary under this
section.
Discussion: The option of assignment is intended as additional
discretionary authority that will allow the Secretary to address
guaranty agency violations of any of the fiscal, administrative and
enforcement requirements of Sec. 682.410 in a manner that best serves
the interests of the FFEL program. The Secretary has the responsibility
to determine the appropriate sanction and he does not agree that the
guaranty agency should be able to choose how its violation should be
addressed. The Secretary will determine the appropriate action on a
case-by-case basis. Therefore, he also declines to incorporate into the
regulations a list of circumstances under which he would decide to use
the option of mandatory assignment. The Secretary further notes that 34
CFR 682.413(d) already addresses the procedures the Secretary will
follow in imposing a fine or penalties under this section of the
regulations and provides guarantors with appropriate due process. The
Secretary believes any discussions related to guaranty agency due
diligence and proposed cures should be left to the due diligence reform
effort that the Department will undertake in 1997.
Changes: None.
Comment: A number of commenters proposed various technical changes
to the regulations included in the NPRM.
Discussion: The Secretary appreciates the commenters' suggestions
for technical changes and agrees with many of the suggestions. However,
in some cases, those suggestions go beyond the scope of this rule.
Accordingly, the Secretary will incorporate those changes in a separate
publication that will be issued shortly.
Changes: None.
Comment: One commenter asked the Secretary to address the issue of
whether the Federal Fair Debt Collection Practices Act (FDCPA) applies
to guaranty agency collection activities on defaulted loans.
Discussion: It has been the longstanding view of the Secretary and
the Federal Trade Commission that the FDCPA does not apply to guaranty

[[Page 60485]]

agencies collecting defaulted FFEL Program loans in their own names and
protecting the financial interests of their guarantee programs. The
FDCPA does not apply to an entity collecting a debt it is owed.
Moreover, application of the FDCPA to the guaranty agencies would
potentially penalize them for compliance with the requirements in 34
CFR 682.410 and, thus, is inconsistent with the Secretary's goal of
ensuring a minimum standard of collection action. The Secretary notes,
however, that the FDCPA clearly applies to a collection contractor
acting for the guaranty agency. Such contractors are collecting a debt
owed to another and are clearly subject to the FDCPA.
Change: None.

Regulatory Flexibility Act Certification

Comment: Many commenters stated that Sec. 682.404, requiring the
guaranty agency to offer preclaims assistance no later than the 75th
day of delinquency, could have a significant impact on lenders,
particularly small lenders. The commenters also stated that many loans
that become 60 to 90 days delinquent are ``self-cured'' through the
borrower or other party providing documentation for deferment or
forbearance. In addition, the commenters noted that requiring
assistance from the guaranty agency earlier in the process could result
in unnecessary requests for preclaims assistance and the unnecessary
loading and processing of the preclaims assistance request by the
guarantor.
Discussion: The Secretary agrees with the commenters and believes
that it would be more advantageous for collection assistance to be made
available to the lender by the guaranty agency no later than the 90th
day of delinquency.
Change: The regulations have been revised to provide that preclaims
assistance be made available no later than the 90th day of delinquency.
Comment: Many commenters stated that the Sec. 682.411 provision
establishing a minimum of information to be included in the letters
sent by lenders to delinquent borrowers during the 1-15 days of
delinquency provides too much information and reduces the clarity of
the letters making the letters less effective. The commenters expressed
concern that requiring additional information in the notice sent during
this period could create a significant burden on lenders, since the
first notice is generally a billing statement.
Discussion: The Secretary notes that it was not the Department's
intent to require that the notice or collection letter sent during the
1-15 days of delinquency contain detailed information for the borrower
regarding loan consolidation, forbearance and other available options
to avoid default. This sentence was placed in paragraph (c) in error.
This requirement should have been included in the collection timeframe
of 16-180 days of delinquency. However, the Secretary does want a
statement in the collection letter relating to the 1-15 day delinquency
that indicates that other options are available if a borrower is having
difficulty making payments. The name and telephone number of a contact
person should also be included in this letter.
Change: The regulations have been amended to remove this
requirement from paragraph (c) and insert it in paragraph (d). A
modified statement has been added to paragraph (c).

Paperwork Reduction Act of 1995

Section 682.411 contains information collection requirements. As
required by the Paperwork Reduction Act of 1995, the U.S. Department of
Education has submitted a copy of this section to the Office of
Management and Budget (OMB) for its review. (44 U.S.C 3504(h)). In
response to the Secretary's invitation in the NPRM to comment on any
potential paperwork burden associated with this regulation, the
following comments were received.
Comment: Many commenters suggested that the Secretary amend
Sec. 682.411(c) to expand the length of the current timeframe that
lenders will have to send the first written collection notice or
collection letter to a delinquent borrower from 1-10 days (1-15 in
NPRM) to 1-20 days. The commenters stated that consumer loans often
offer a 15-day grace period on payment due dates. They suggested that
many borrowers believe that the student loan has a similar payment
grace period and may delay mailing their payment. The commenters
believe that many unnecessary collection letters will be eliminated by
expanding the timeframe to 20 days.
Discussion: The Secretary declines to extend the timeframe
specified in the NPRM (1-15 days) to 1-20 days. The Secretary believes
that the expanded timeframe in the NPRM is sufficient to eliminate the
majority of unnecessary collection notices that have been generated
under the current 10-day period.
Change: None.
Comment: Many commenters stated that the Sec. 682.411 provision
establishing a minimum of information to be included in the letters
sent by lenders to delinquent borrowers during the 1-15 days of
delinquency provides too much information and reduces the clarity of
the letters making the letters less effective. The commenters expressed
concern that requiring that additional information be added to the
notice sent during this period could create a significant burden on
lenders, since the first notice is generally a billing statement.
Discussion: The Secretary notes that it was not the Department's
intent to require that the notice or collection letter sent during the
1-15 days of delinquency contain detailed information for the borrower
regarding loan consolidation, forbearance and other available options
to avoid default. This sentence was placed in paragraph (c) in error.
This requirement should have been included in the collection timeframe
for the 16-180 days of delinquency. However, the Secretary does intend
that a statement in the collection letter relating to the day 1-15
delinquency indicate that other options are available if a borrower is
having difficulty making payments. The name and telephone number of a
contact person should also be included in this letter.
Change: The regulations have been amended to remove the statement
in the NPRM from paragraph (c) and insert it in paragraph (d). A
modified statement has been inserted in paragraph (c).

Assessment of Educational Impact

In the NPRM, the Secretary requested comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
Based on the response to the proposed regulations and on its own
review, the Department has determined that the regulations in this
document do not require transmission of information that is being
gathered by or is available from any other agency or authority of the
United States.

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal
Family Education Loan Program)

Dated: November 21, 1996.
Richard W. Riley,
Secretary of Education.
The Secretary amends part 682 of title 34 of the Code of Federal
Regulations as follows:

[[Page 60486]]

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

1. The authority citation for part 682 continues to read as
follows:

Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

2. Section 682.202 is amended by removing the number ``10'' from
paragraph (f)(2) and adding in its place the number ``15''.
3. Section 682.401 is amended by revising paragraph (b)(27) to read
as follows:


Sec. 682.401 Basic program agreement.

* * * * *
(b) * * *
(27) Collection Charges and Late Fees on Defaulted FFEL loans being
Consolidated. (i) A guaranty agency may add collection costs in an
amount not to exceed 18.5 percent of the outstanding principal and
interest to a defaulted FFEL Program loan that is included in a Federal
Consolidation loan.
(ii) When returning the proceeds from the consolidation of a
defaulted loan to the Secretary, a guaranty agency may only retain the
amount added to the borrower's balance pursuant to paragraph (b)(27)(i)
of this section.
* * * * *
4. Section 682.404 is amended by revising paragraph (a)(2)(ii) and
paragraph (f) to read as follows:


Sec. 682.404 Federal reinsurance agreement.

* * * * *
(a) * * *
(2) * * *
(ii) Preclaims assistance means collection assistance made
available to the lender by the guaranty agency no later than the 90th
day of delinquency. This assistance must include collection activities
that are at least as forceful as the level of preclaims assistance
performed by the guaranty agency as of October 16, 1990, and involves
the initiation by the guaranty agency of at least 3 collection
activities, one of which is a letter designed to encourage the borrower
to begin or resume repayment. As part of their preclaims assistance,
guaranty agencies must provide counseling and consumer information (in
written or other format) to the borrower by the 10th working day after
the agency receives the lender's request for preclaims assistance
informing the borrower of all of the borrower's options to avoid
default, including the availability of consolidating delinquent loans
under the FFEL Program or the Federal Direct Consolidation Loan
Program.
* * * * *
(f) Application of borrower payments. A payment made to a guaranty
agency by a borrower on a defaulted loan must be applied first to the
collection costs incurred to collect that amount and then to other
incidental charges, such as late charges, then to accrued interest and
then to principal.
* * * * *
5. Section 682.406 is amended by revising paragraph (a)(12) to read
as follows:


Sec. 682.406 Conditions of reinsurance coverage.

* * * * *
(a) * * *
(12) The agency and lender complied with all other Federal
requirements with respect to the loan including the payment of
origination fees and compliance with all preclaims assistance
requirements in Sec. 682.404(a)(2)(ii);
* * * * *
6. Section 682.410 is amended by revising paragraphs (b)(2)
and(b)(6)(vii)(A) to read as follows:


Sec. 682.410 Fiscal, administrative, and enforcement requirements.

* * * * *
(b) * * *
(2) Collection charges. Whether or not provided for in the
borrower's promissory note and subject to any limitation on the amount
of those costs in that note, the guaranty agency shall charge a
borrower an amount equal to reasonable costs incurred by the agency in
collecting a loan on which the agency has paid a default or bankruptcy
claim. These costs may include, but are not limited to, all attorney's
fees, collection agency charges, and court costs. Except as provided in
Secs. 682.401(b)(27) and 682.405(b)(1)(iv), the amount charged a
borrower must equal the lesser of--
(i) The amount the same borrower would be charged for the cost of
collection under the formula in 34 CFR 30.60; or
(ii) The amount the same borrower would be charged for the cost of
collection if the loan was held by the U.S. Department of Education.
* * * * *
(6) * * *
(vii) After 181 days:
(A) Except as provided in paragraph (b)(6)(vii)(B) of this section,
during this period but not sooner than 30 days after sending the notice
described in paragraph (b)(5)(vi) of this section, the agency shall
initiate proceedings to offset the borrower's state and federal income
tax refunds and other payments made by the federal government to a
borrower, and shall initiate administrative wage garnishment
proceedings against the borrower by the 225th day. If the agency
determines that the borrower has insufficient income to satisfy the
debt through wage garnishment, but has assets from which the debt can
be satisfied, the agency shall assign the loan to the Department. The
agency must not file suit to collect a loan from a borrower unless
directed to do so by the Secretary.
* * * * *
7. Section 682.411 is amended by revising paragraphs (c), (d)
introductory text, (d)(1), and (d)(2) to read as follows:


Sec. 682.411 Due diligence by lenders in the collection of guaranty
agency loans.

* * * * *
(c) 1-15 days delinquent: Except in the case where a loan is
brought into this period by a payment on the loan, expiration of an
authorized deferment or forbearance period, or the lender's receipt
from the drawee of a dishonored check submitted as a payment on the
loan, the lender during this period shall send at least one written
notice or collection letter to the borrower informing the borrower of
the delinquency and urging the borrower to make payments sufficient to
eliminate the delinquency. The notice or collection letter sent during
this period must include, at a minimum, a lender/servicer contact and
telephone number, and a prominent statement informing the borrower that
assistance may be available if he or she is experiencing difficulty in
making a scheduled repayment.
(d) 16-180 days delinquent (16-240 days delinquent for a loan
repayable in installments less frequent than monthly): (1) Unless
exempted under paragraph (d)(4) of this section, during this period the
lender shall engage in at least four diligent efforts to contact the
borrower by telephone and send at least four collection letters urging
the borrower to make the required payments on the loan. At least one of
the diligent efforts to contact the borrower by phone must occur
before, and another one must occur after, the 90th day of delinquency.
The notice or collection letter sent during this period must include,
at a minimum, information for the borrower regarding deferment,
forbearance, income-sensitive repayment and loan consolidation and
other available options to avoid default.
(2) At least two of the collection letters required under paragraph
(d)(1) of this section must warn the borrower that if the loan is not
paid, the lender will assign the loan to the guaranty agency that, in
turn, will report the default to all national credit bureaus,

[[Page 60487]]

and that the agency may institute proceedings to offset the borrower's
state and federal income tax refunds and other payments made by the
federal government to a borrower or to garnish the borrower's wages, or
assign the loan to the federal government for litigation against the
borrower.
* * * * *
8. Section 682.413 is amended by redesignating paragraph (b) as
paragraph (b)(1) and adding a new paragraph (b)(2) to read as follows:


Sec. 682.413 Remedial actions.

* * * * *
(b)(1) The Secretary requires a guaranty agency to repay
reinsurance payments received on a loan if the lender, third-party
servicer, if applicable, or the agency fails to meet the requirements
of Sec. 682.406(a).
(2) The Secretary may require a guaranty agency to repay
reinsurance payments received on a loan or to assign FFEL loans to the
Department if the agency fails to meet the requirements of
Sec. 682.410.
* * * * *
[FR Doc. 96-30359 Filed 11-26-96; 8:45 am]
BILLING CODE 4000-01-P




]

Last Modified: 06/23/1998