The Secretary proposes to amend 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

[Federal Register: September 6, 1996 (Volume 61, Number 174)]

[Proposed Rules]               

[Page 47397-47401]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr06se96-44]



[[Page 47397]]



_______________________________________________________________________


Part VII






Department of Education






_______________________________________________________________________




34 CFR Part 682




Federal Family Education Loan Program; Proposed Rule



[[Page 47398]]




DEPARTMENT OF EDUCATION


34 CFR Part 682


RIN 1840-AC35



Federal Family Education Loan Program


AGENCY: Department of Education.


ACTION: Notice of proposed rulemaking.


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


SUMMARY: The Secretary proposes to amend 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. The Secretary is proposing to 

make changes to the due diligence requirements for lenders and guaranty 

agencies participating in the FFEL Program.


DATES: Comments must be received on or before November 5, 1996.


ADDRESSES: All comments concerning these proposed regulations should be 

addressed to Pamela A. Moran, U.S. Department of Education, Post Office 

Box 23272, Washington, DC 20026-3272. Comments may also be sent through 

the internet to due__diligence@ed.gov.

    To ensure that public comments have maximum effect in developing 

the final regulations, the Department urges that each comment clearly 

identify the specific section or sections of the regulations that the 

comment addresses and that comments be in the same order as the 

regulations.

    Comments that concern information collection requirements must be 

sent to the Office of Management and Budget at the address listed in 

the Paperwork Reduction Act section of this preamble. A copy of those 

comments may also be sent to the Department representative named in the 

preceding paragraph.


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, S.W. 

(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 proposing to amend 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 

proposed regulations will reduce burden for lenders and improve the 

collection of outstanding FFEL loans and potential liabilities owed to 

the Secretary.


Proposed Regulatory Changes


    The Secretary proposes to amend the following sections of the 

regulations to reflect changes needed to improve the due diligence 

provisions in the FFEL Program.


Section 682.401  Basic Program Agreement


    The Secretary proposes to amend Sec. 682.401(b)(27) by codifying 

the interpretation outlined in the Department's Dear Colleague Letter 

95-G-286 dated November 1995, to permit guaranty agencies to retain 

collection costs totaling up to 18.5 percent of the outstanding 

principal and accrued interest of a defaulted FFEL loan that is repaid 

by a consolidation loan as long as their collection costs are included 

in the payoff amount certified by the guaranty agency.


Section 682.404  Federal Reinsurance Agreement


    The Secretary proposes to amend Sec. 682.404(a)(2)(ii) by requiring 

guaranty agencies to offer preclaims assistance to lenders no later 

than the 75th day of delinquency. Currently, the regulations do not 

include an explicit deadline by which the guaranty agencies must 

provide this service and some agencies have not provided preclaims 

assistance on a timely basis. This proposal would create uniformity in 

the treatment of delinquent borrowers and ensure that preclaims is 

initiated early enough to successfully avert default.

    This section is also amended to require guaranty agencies, as part 

of their preclaims assistance to lenders, to provide counseling and 

written consumer information to the borrower by the 100th day of 

delinquency informing the borrower of the option to consolidate student 

loans under the FFEL Program or the Federal Direct Consolidation Loan 

Program to avoid default. The Secretary believes that providing this 

information to delinquent borrowers during the preclaims assistance 

process will help reduce defaults by ensuring that borrowers have 

information regarding consolidation when it is critically needed. 

Failure of the agency to provide this information would constitute a 

violation of due diligence in servicing a loan.

    This section is further amended to require that payments made by a 

borrower on a defaulted loan to a guaranty agency must be first applied 

to the agency's collection costs attributable to that payment on the 

loan and then to reinsured interest and principal. This amendment will 

ensure that the borrower remains responsible for paying collection 

costs as required by section 484A(b) of the Higher Education Act of 

1965, as amended. The Secretary also solicits particular comment on 

whether a guaranty agency should be allowed to apply the borrower's 

payment to incidental charges such as late charges first, after 

collection charges, rather than only after all principal and interest 

as is currently the case.


Section 682.410  Fiscal, Administrative, and Enforcement Requirements


    The Secretary proposes to amend Sec. 682.410(b)(2) that governs the 

amount of collection charges guaranty agencies may charge the borrower. 

These regulations propose to require guaranty agencies to assess a 

defaulted borrower the same amount of collection charges assessed by 

the Department for loans held by the Department. The collection rate 

currently assessed by the Department is 25 percent. The Secretary 

believes that standardization of collection costs across the industry 

will both reduce confusion and ensure equitable treatment for borrowers 

whose FFEL loans are guaranteed by multiple guaranty agencies. The 

Secretary will inform guaranty agencies annually what the applicable 

rate is in sufficient time for agencies to make necessary system 

changes. However, the Secretary solicits additional comment on whether 

agencies should be provided with the flexibility to assess less than 

the Department's collection rate if the agency's actual costs of 

collection support this.

    The Secretary also proposes to amend Sec. 682.410(b)(6)(vii)(A) 

that currently provides guaranty agencies the option of either 

initiating wage garnishment or instituting a civil suit against the 

borrower whose loans have defaulted. These proposed regulations remove 

that option and instead require that guaranty agencies initiate wage 

garnishment proceedings if the borrower has sufficient income. If the 

agency determines that the borrower has insufficient income to satisfy 

the debt by garnishment, but has assets from


[[Page 47399]]


which the debt can be satisfied, the guaranty agency will be required 

to assign the debt to the Department so the Secretary can file a civil 

suit against the borrower. The Department intends to litigate assigned 

accounts through the Department of Justice in order to place a lien 

against the borrower's assets to satisfy the debt. The Secretary 

believes that this change will result in more effective collection of 

defaulted loans across the country because guaranty agencies have had 

varying success in collecting loans through litigation.


Section 682.411  Due Diligence by Lenders in the Collection of Guaranty 

Agency Loans


    The Secretary proposes to amend Sec. 682.411(c) to expand the 

length of time from 1-10 days delinquent to 1-15 days delinquent that 

lenders will have to send the first written notice or collection letter 

to a delinquent borrower. This change will afford the lender additional 

time to receive payments from a delinquent borrower before it has to 

send out the first warning of delinquency to that borrower. This 

reduces the lender's burden of beginning the due diligence process 

prematurely for delinquent borrowers whose payments are received within 

the maximum proposed 15-day period.

    The Secretary also proposes to amend Sec. 682.411(d)(2) to modify 

the requirements for the two collection letters that must be sent to a 

borrower during the period of 16-180 days delinquent (16-240 days 

delinquent for a loan repayable in installments less frequently than 

monthly) to include additional warnings to the borrower that the 

guaranty agency may: (1) Institute proceedings to offset other payments 

made by the federal government to the borrower; and (2) assign the loan 

to the federal government for litigation against the borrower.


Section 682.413  Remedial Actions


    Section 682.413(b) is amended to expand 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. Currently 

the only penalty available to the Secretary is loss of reinsurance. The 

Secretary does not believe that this is always in the best interest of 

the program.


Executive Order 12866


1. Assessment of Costs and Benefits


    These proposed 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 proposed regulations are 

those determined by the Secretary to be necessary for administering 

this program effectively and efficiently. Burdens specifically 

associated with information collection requirements, if any, are 

identified and explained elsewhere in this preamble under the heading 

Paperwork Reduction Act of 1995.

    In assessing the potential costs and benefits--both quantitative 

and qualitative--of these proposed regulations, the Secretary has 

determined that the benefits of the regulations justify the costs.

    The Secretary has also determined that this regulatory action does 

not unduly interfere with State, local, and tribal governments in the 

exercise of their governmental functions.

    To assist the Department in complying with the specific 

requirements of Executive Order 12866, the Secretary invites comment on 

whether there may be further opportunities to reduce any potential 

costs or increase potential benefits resulting from these proposed 

regulations without impeding the effective and efficient administration 

of the program.


2. Clarity of the Regulations


    Executive Order 12866 requires each agency to write regulations 

that are easy to understand.

    The Secretary invites comments on how to make these proposed 

regulations easier to understand, including answers to questions such 

as the following: (1) Are the requirements in the proposed regulations 

clearly stated? (2) Do the regulations contain technical terms or other 

wording that interferes with their clarity? (3) Does the format of the 

regulations (grouping and order of sections, use of headings, 

paragraphing, etc.) aid or reduce their clarity? Would the regulations 

be easier to understand if they were divided into more (but shorter) 

sections? (A ``section'' is preceded by the symbol ``Sec. '' and a 

numbered heading; for example, Sec. 682.413 Remedial action.) (4) Is 

the description of the regulations in the SUPPLEMENTARY INFORMATION 

section of this preamble helpful in understanding the regulations? (5) 

What else could the Department do to make the regulations easier to 

understand?

    A copy of any comments that concern how the Department could make 

these proposed regulations easier to understand should be sent to 

Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 

Education, 600 Independence Avenue S.W. (Room 5100, FB-10), Washington, 

DC 20202-2241.


Regulatory Flexibility Act Certification


    The Secretary certifies that these proposed regulations would not 

have a significant economic impact on a substantial number of small 

entities.

    According to the U.S. Small Business Administration Size Standards, 

small entities affected by these regulations are lenders with assets 

below $100,000,000. Two provisions of these regulations affect small 

(and large) lenders. The first could provide a positive economic 

benefit to small (and large) lenders by providing additional 

flexibility for regulatory compliance. This provision does not impose a 

significant adverse economic impact. The second provision would impose 

minor economic costs on small (and large) lenders by requiring them to 

modify two letters sent to delinquent borrowers. These letters are 

required by existing regulations. These additional costs would not have 

a significant adverse economic impact. This activity would protect the 

Federal fiscal interest as well as the interests of the borrowers under 

the programs.

    The Secretary particularly requests comments from small lenders on 

whether the proposed changes would have a significant economic impact 

on them.


Paperwork Reduction Act of 1995


    Section 682.411 contains information collection requirements. As 

required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 

the Department of Education has submitted a copy of this section to the 

Office of Management and Budget (OMB) for its review.

    Collection of Information: Federal Family Education Loan Program

    These regulations strengthen the collectibility of delinquent FFEL 

loans by participating lenders. Monies collected under these 

regulations enable new and continuing students to borrow to help defray 

the cost of education.

    The public reporting and recordkeeping burden for this collection 

of information is estimated to be 3,398.31 hours in order to make the 

necessary system changes to: (1) add additional warnings to the 

existing collection letters sent to delinquent borrowers and (2) 

increasing the period


[[Page 47400]]


of time lenders will have to send the first written notice or 

collection letter to a delinquent borrower. This is a one-time 

activity.

    The estimated burden for incorporating the additional warning 

paragraphs into the existing collection letters was calculated as 

follows:


Respondents.......................         5,829                        

Responses.........................    x    1                            

Hours per respondent..............    x    0.083 (5 minutes)            

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

Annual reporting burden...........         483.81 hours                 



    The estimated burden associated with expanding the window regarding 

when the first collection letter is sent to a delinquent borrower was 

calculated as follows:


Respondents......................         5,829                         

Responses........................    x    1                             

Hours per respondent.............    x    0.5 (30 Minutes)              

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

    Annual reporting burden......         2,914.50 hours                

      Total annual burden hours=3,398,31................................



    Organizations and individuals desiring to submit comments on the 

information collection requirements should direct them to the Office of 

Information and Regulatory Affairs, OMB, Room 10235, New Executive 

Office Building, Washington, D.C. 20503; Attention: Desk Officer for 

U.S. Department of Education.

    The Department considers comments by the public on this proposed 

collection of information in--

    <bullet> Evaluating whether the proposed collection of information 

is necessary for the proper performance of the functions of the 

Department, including whether the information will have a practical 

use;

    <bullet> Evaluating the accuracy of the Department's estimate of 

the burden of the proposed collection of information, including the 

validity of the methodology and assumptions used;

    <bullet> Enhancing the quality, usefulness, and clarity of the 

information to be collected; and

    <bullet> Minimizing the burden of collection of information on 

those who are to respond, including through the use of appropriate 

automated electronic, mechanical, or other technological collection 

techniques or other forms of information technology; e.g., permitting 

electronic submission of responses.

    OMB is required to make a decision concerning the collection of 

information contained in these proposed regulations between 30 and 60 

days after publication of this document in the Federal Register. 

Therefore, a comment to OMB is best assured of having its full effect 

if OMB receives it within 30 days of publication. This does not affect 

the deadline for the public to comment to the Department on the 

proposed regulations.


Invitation To Comment


    Interested persons are invited to submit comments and 

recommendations regarding these proposed regulations.

    All comments submitted in response to these proposed regulations 

will be available for public inspection, during and after the comment 

period, in room 3053, Regional Office Building 3, 7th and D Streets, 

S.W., Washington, DC between the hours of 8:30 a.m. and 4 p.m., Monday 

through Friday of each week except federal holidays.


Assessment of Educational Impact


    The Secretary particularly requests 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.


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.


    Dated: July 31, 1996.

Richard W. Riley,

Secretary of Education.


(Catalog of Federal Domestic Assistance Number 84.032, Federal 

Family Education Loan Program)


    The Secretary proposes to amend part 682 of title 34 of the Code of 

Federal Regulations as follows:


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 682.401 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.

* * * * *

    3. 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 75th 

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 written consumer 

information to the borrower by the 100th day of delinquency informing 

the borrower of the borrower's option to consolidate the defaulted loan 

under the FFEL Program or the Federal Direct Consolidation Loan Program 

to avoid default. Failure of the agency to provide this information 

constitutes a violation of the guaranty agency's obligation to perform 

due diligence in collecting a loan; and

* * * * *

    (f) Application of borrower payments. A payment made to a guaranty 

agency by a borrower must be applied first to the collection costs due 

only for the amount collected in the particular payment month on the 

loan and then to reinsured interest and then to principal. The 

borrower's payments may be applied to other incidental charges, such as 

late charges, only after the repayment of all principal and interest.

* * * * *

    4. 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, the guaranty agency


[[Page 47401]]


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. The 

amount charged a borrower must equal 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) * * *

    (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 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 by the 545th day.

* * * * *

    5. Section 682.411 is amended by revising paragraphs (c) and (d) 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, information for the borrower 

regarding loan consolidation, forbearance and other available options 

to avoid default.

    (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.

    (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, 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.

* * * * *

    6. 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. 96-22812 Filed 9-5-96; 8:45 am]

BILLING CODE 4000-01-P