Federal Register Vol No Wednesday November by jennyyingdi


									60478       Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations

DEPARTMENT OF EDUCATION                     integrity of the FFEL Program. By           receipt of a preclaims assistance request
                                            improving program efficiency, these         from the lender or the servicer. The
34 CFR Part 682                             regulations will reduce burden for          Secretary has further amended this
                                            lenders and improve the collection of       section to allow guaranty agencies
RIN 1840–AC35
                                            outstanding FFEL loans and potential        flexibility in using formats other than
Federal Family Education Loan               liabilities owed to the Secretary.          written ones when providing consumer
Program; Due Diligence Requirements            On September 6, 1996, the Secretary      information to the borrower as part of
                                            published a notice of proposed              the guaranty agency’s preclaims
AGENCY:    Department of Education.         rulemaking (NPRM) for Part 682 in the       assistance.
ACTION:   Final regulations.                Federal Register (61 FR 47398). The         Section 682.410 Fiscal,
                                            NPRM proposed changes needed to             Administrative, and Enforcement
SUMMARY:   The Secretary amends the         improve the due diligence provisions in
regulations governing the Federal                                                       Requirements
                                            the FFEL program. The NPRM included
Family Education Loan (FFEL) Program.       a discussion of the major issues              The proposal to require a guaranty
The FFEL regulations govern the             surrounding the proposed changes, and       agency to charge a borrower collection
Federal Stafford Loan Program, the          the discussion will not be repeated here.   costs equal to the amount the same
Federal Supplemental Loans for              The following list summarizes those         borrower would be charged for the cost
Students (Federal SLS) Program, the         issues:                                     of collection if the loan was held by the
Federal PLUS Program, and the Federal          • Guaranty agency retention of           Department has been removed. The
Consolidation Loan Program,                 collection costs of a defaulted FFEL loan   Secretary has retained the current
collectively referred to as the Federal     that are repaid by a consolidation loan;    regulatory requirement which allows a
Family Education Loan Program and              • Requiring a guaranty agency to offer   guaranty agency to use the lesser of the
authorized by Title IV, Part B of the       preclaims assistance to lenders no later    amount derived from the formula in 34
Higher Education Act of 1965, as            than the 75th day of delinquency;           CFR 30.60 or the amount charged by the
amended (HEA). The Secretary is                • Requiring a guaranty agency to         Department.
making changes to the due diligence         provide counseling and written              Section 682.411 Due Diligence by
requirements for lenders and guaranty       consumer information to the borrower        Lenders in the Collection of Guaranty
agencies participating in the FFEL          by the 100th day of delinquency;            Agency Loans
Program.                                       • Application of payments made by a
                                                                                          Section 682.411 is also amended to
DATES: Effective date: Except for the       borrower on a defaulted loan to a
                                                                                        move the last sentence in paragraph (c)
revision of § 682.404(f), these             guaranty agency;                            in the NPRM that deals with the
regulations take effect on July 1, 1997.       • Requiring a guaranty agency to
                                                                                        contents of the first delinquency notice
The revision of § 682.404(f) is effective   assess a defaulted borrower the same        and insert it in paragraph (d), and to add
January 1, 1998 and applicable for          amount of collection charges assessed       a modified statement to paragraph (c).
payments received on or after January 1,    by the Department;
1998. However, affected parties do not         • Initiating wage garnishment            Executive Order 12866
have to comply with the information         proceedings for borrowers with              1. Assessment of Costs and Benefits
collection requirement in § 682.411         sufficient income;
until the Department of Education              • Expanding the length of time in           These final regulations have been
publishes in the Federal Register the       which lenders must send the first           reviewed in accordance with Executive
control number assigned by the Office of    written notice or collection letter to a    Order 12866. Under the terms of the
Management and Budget (OMB) to this         delinquent borrower;                        order the Secretary has assessed the
information collection requirement.            • Modifying the requirements for the     potential costs and benefits of this
Publication of the control number           two collection letters that must be sent    regulatory action.
notifies the public that OMB has            to a borrower; and                             The potential costs associated with
approved this information collection           • Expanding the possible remedial        the final regulations are those resulting
requirement under the Paperwork             action available to the Secretary if a      from statutory requirements and those
Reduction Act of 1995.                      guaranty agency fails to meet the           determined by the Secretary as
                                            requirements of § 682.410 to include        necessary for administering this
                                            mandatory assignment of FFEL loans to       program effectively and efficiently.
Streets, Program Specialist, Loans
                                            the Department at the Secretary’s           Potential costs and benefits are also
Branch, Policy Development Division,
                                            discretion.                                 discussed in conjunction with the
Policy, Training, and Analysis Service,
                                                                                        public comments to which they relate.
U.S. Department of Education, 600           Substantive Revisions to the Notice of         In assessing the potential costs and
Independence Avenue, SW. (room 3053,        Proposed Rulemaking                         benefits—both quantitative and
ROB–3), Washington, DC 20202–5449.                                                      qualitative—of these regulations, the
Telephone: (202) 708–8242. Individuals      Section 682.404 Federal Reinsurance
                                            Agreement                                   Secretary has determined that the
who use a telecommunications device                                                     benefits of the regulations justify the
for the deaf (TDD) may call the Federal       The Secretary amends this section of      costs.
Information Relay Service (FIRS) at 1–      the regulations to require guaranty
800–877–8339 between 8 a.m. and 8           agencies to provide preclaims assistance    Analysis of Comments and Changes
p.m., Eastern time, Monday through          to lenders no later than the 90th day of      In response to the Secretary’s
Friday.                                     delinquency. The NPRM had proposed          invitation in the NPRM, 38 parties
SUPPLEMENTARY INFORMATION:                  a deadline of the 75th day of               submitted comments on the proposed
                                            delinquency.                                regulations. An analysis of the
Background                                    This section has also been amended to     comments and of the changes in the
  The Secretary is amending 34 CFR          require that a guaranty agency provide      regulations since publication of the
Part 682 of the Department’s regulations    counseling and consumer information to      NPRM follows. An analysis of the
to improve the administration and the       a borrower within 10 days following the     comments received regarding the
           Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations                       60479

regulatory flexibility certification can be   payments made by the borrower’’. A          Section 682.404(a)(2)(ii)—Federal
found under the heading Regulatory            consolidation loan payoff amount is not     Reinsurance Agreement Deadline for
Flexibility Act Certification.                paid by the borrower but instead is paid    Preclaims Collection Assistance
   Major issues are grouped according to      by a third party (the consolidating            Comment: The majority of
sections and subject. Other substantive       lender) and does not reduce the             commenters representing guaranty
issues are discussed under the section of     borrower’s obligation. Thus, a loan         agencies, lenders, lender servicers, and
the regulations to which they pertain.        consolidation is not covered by section     secondary markets supported the
Technical and other minor changes—            428(c)(6).                                  Secretary’s effort to promote
and suggested changes the Secretary is
                                                 In addition, in interpreting the HEA,    standardization and simplification, but
not legally authorized to make under the
                                              it is appropriate to look at both the       objected to the proposal that guaranty
applicable statutory authority—are not
                                              specific statutory language and at the      agencies be required to offer preclaims
                                              language and design of the entire           collection assistance to lenders on
Section 682.401—Basic Program                                                             delinquent accounts no later than the
                                              statute. See Connecticut Student Loan
Agreement                                                                                 75th day of delinquency. These
                                              Foundation v. Riley, Case No
   Comment: A number of guaranty                                                          commenters recommended that the
                                              3:93CV02570 (JBA) (D.Conn., Oct. 31,
agency representatives commented on                                                       deadline be no later than the 90th day
                                              1996). The guaranty agencies’
the Secretary’s proposal to modify the                                                    of delinquency. Two other guaranty
                                              interpretation is also inconsistent with    agency commenters strongly objected to
regulations to reflect his view that          other provisions of the HEA. Under the
guaranty agencies may retain collection                                                   the Department establishing any
                                              agencies’ approach, a borrower who          deadline for beginning preclaims
costs totaling up to 18.5% of the
                                              consolidated a defaulted loan would not     assistance on the grounds that many
outstanding principal and accrued
                                              be responsible for the collection costs     agencies have developed their own
interest of a defaulted FFEL Program
loan that is repaid by a consolidation        on that loan. Instead, the taxpayer         default prevention efforts based on
loan if the collection costs are included     would pick up those costs by allowing       portfolio characteristics and what has
in the payoff amount certified by the         the agency to retain a certain portion of   been shown to work best for their
guaranty agency. These commenters             the consolidation loan payoff amount.       agencies. These commenters believe that
argued that the HEA allows the guaranty       This is contrary to section 484A(b) of      agencies should be allowed to continue
agencies to retain 27 percent of              the HEA. At the same time, under this       establishing the beginning date for
payments received from borrowers on           approach, the agencies would be             preclaims assistance. One of these two
defaulted loans including payoffs             allowed to retain an amount far in          commenters suggested that if, as the
provided through consolidation. They          excess of their actual collection costs.    Secretary suggested in the preamble to
also argued that the agency needs to          Numerous audits of guaranty agencies        the NPRM, some agencies have not
retain these funds to pay certain costs in    show that the guaranty agencies’            provided preclaims assistance on a
connection with a consolidation loan.         contracts with collection agencies          timely basis, the Department should
The agency representatives suggested          frequently provided for payments to the     address the problem with those
that their view is consistent with            collectors of far less than 27 percent      guarantors. The commenters
Congressional intent as shown by              when a defaulted loan is included in a      representing school and financial aid
budget ‘‘scoring’’ of a budget                consolidation loan. The agencies’           officer associations supported the
reconciliation bill in 1996 that included     comments on the NPRM did not address        Secretary’s proposal, one stating that
a provision that the agencies believe                                                     early intervention can prevent many
                                              this issue or provide any supporting
supports their position.                                                                  defaults and the other that this change
   Other commenters, including school         information for their claim that they
                                                                                          will ensure that delinquent borrowers
organizations and borrower advocates,         need a greater retention to pay
                                                                                          are treated in a similar manner
supported the proposed regulation             additional costs. Allowing the guaranty     regardless of the guaranty agency
limiting collection costs and the             agencies to retain an amount far in         performing the preclaims activities.
retention by guaranty agencies. These         excess of the amount they have                 Many commenters indicated that
commenters noted that the addition of         established as the cost of collecting on    starting preclaims assistance earlier than
collection costs can be a disincentive for    the loan (in addition to the reinsurance    the 90th day may confuse borrowers and
a borrower to consolidate a loan—thus         payment the agency received) would          cited studies conducted by several
eliminating an important tool to reduce       provide an unnecessary and                  major guaranty agencies showing that
defaults. These commenters also urged         inappropriate windfall for the agencies.    about one-third of borrower
the Department to consider eliminating        Finally, the Secretary notes that the       delinquencies are resolved between the
the authority for the guaranty agencies       agencies’ claim that their view is          60th and 90th day. They also cited a
to add any collection costs to a              consistent with Congressional intent        similar study conducted by a major
defaulted loan that is consolidated.          based on the budget ‘‘scoring’’ of a        lender that showed a 41 percent default
   Discussion: The comments of the            provision in a bill that was ultimately     aversion rate by the lender during this
guaranty agency representatives are           vetoed is unpersuasive.                     period. These commenters believe that a
based on the view that a consolidation                                                    ‘‘no later than 90 days’’ time frame will
loan payoff amount is a ‘‘payment’’ for          The Secretary appreciates the
                                                                                          afford borrowers with the opportunity to
purposes of section 428(c)(6) of the          concerns of the school and borrower
                                                                                          fulfill their commitments to their loan
HEA. The Secretary, however, believes         advocates that the addition of collection   holders and servicers without
that the agencies’ interpretation is          costs reduces the value of the option of    intervention by guarantors. They also
contrary to the words and intent of the       consolidation. The Secretary is             believe such an approach will avoid
HEA. In defining the ‘‘Secretary’s            continuing to evaluate how to address       unnecessary lender and guaranty agency
equitable share’’ for purposes of the         this issue while protecting the Federal     costs.
guaranty agency’s retention of                fiscal interest.                               Discussion: The Secretary continues
collections, the HEA specifically refers         Changes: None                            to believe that early preclaims
to ‘‘the Secretary’s equitable share of                                                   intervention by a guaranty agency is
60480      Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations

critical to default aversion, but agrees      time frame will allow a guaranty agency       borrowers as part of preclaims
with the commenters that how early that       the ability to perform preclaims              assistance activities. One borrower
intervention takes place may                  activities in an orderly and logical          supported the proposal and noted that
appropriately depend upon a number of         sequence even if the lender’s request is      information on consolidation was not
factors, such as those mentioned by the       late. They also pointed out that under        readily available to him when he
commenters. The Secretary has decided         the Secretary’s proposal, if a lender         encountered difficulties in being able to
that until further discussions with the       requests preclaims assistance as early as     repay his loan and that he almost
loan industry and review of servicing         the 60th day of delinquency, the agency       defaulted because his lender did not
data can take place, agencies should be       has up to 40 days to provide the              participate in the Consolidation
given some flexibility in beginning their     required information, whereas if a            program. However, an overwhelming
preclaims collection activities.              lender requests preclaims assistance at       number of commenters strongly
However, the Secretary continues to           the 90th day of delinquency, the agency       objected to what they perceived as a
believe that it is appropriate to establish   would have only 10 days to provide the        proposal that the guaranty agency
an outer deadline for a guaranty agency       information.                                  provide consumer information on only
to offer preclaims assistance to lenders.        Discussion: The Secretary agrees that,     the consolidation loan option. The
After consideration of the comments,          in light of the change in the guaranty        commenters indicated that they believe
the Secretary has decided to accept the       agency’s deadline for offering preclaims      that loan consolidation is not always the
suggestion that the 90th day of               assistance, the 100th day of delinquency      best option for many borrowers because
delinquency is an appropriate deadline.       is no longer an appropriate deadline for      of the potential loss of benefits on the
   Changes: The regulations have been         requiring the guaranty agency to provide      underlying loans being consolidated.
amended to require guaranty agencies to       the required consumer information and         They also pointed out that not all
offer preclaims assistance to lenders no      counseling. The Secretary also agrees         borrowers may be eligible for
later than the 90th day of delinquency.       with commenters that there should be a        consolidation. All the commenters
                                              consistent time period for agencies to        recommended that the consumer
Information and Counseling
                                              provide this important consumer               information provided to the borrower
                                              information. However, the Secretary           include all of the options available to
   Comment: Several commenters noted          believes that it is vital that this           resolve the delinquency, including
that the use of the phrase ‘‘consolidate      information be provided to the borrower       deferment, forbearance, and the
the defaulted loan’’ in the proposal to       through the preclaims assistance              opportunity for an income-sensitive
require guarantors to provide counseling      process as soon as possible after the         repayment schedule. One commenter
and written consumer information to a         lender requests preclaims assistance.         recommended that the Department
delinquent borrower no later than the         The borrower should have every                provide the guaranty agencies with a
100th day of delinquency was not              opportunity to take steps to remedy the       prepared information piece that outlines
correct within the context of preclaims       delinquency before the agency                 all the default aversion options and
assistance and recommended that the           undertakes more intensive                     borrower profiles describing which
reference should be to ‘‘delinquent’’         supplemental preclaims efforts. Under         borrowers might benefit from which
rather than ‘‘defaulted’’ loan.               the commenters’ proposal that the             option.
   Discussion: The Secretary agrees that      information be provided to the borrower          Discussion: The Secretary agrees with
the use of the word ‘‘defaulted’’ is          no later than the 30th day following the      the commenters that the information
incorrect in the context of preclaims         agency’s receipt of the lender’s request      provided to the borrower should
assistance contacts with delinquent           for preclaims collection assistance, this     include all default aversion options
borrowers.                                    goal cannot be met. For example, if an        available to the borrower, not just FFEL
   Changes: The word ‘‘delinquent’’ is        agency offers preclaims assistance on         and Direct Loan Consolidation. The
substituted for ‘‘defaulted’’ in the          the 90th day of delinquency and the           Secretary’s proposal was intended to
provision.                                    lender uses the full 10 days provided in      ensure that consolidation was included
   Comment: All of the guaranty agency,       34 CFR 682.411(h) to request assistance,      as an option in preclaims counseling
lender and loan servicer, and secondary       the borrower might not receive the            and information, but it was not intended
market commenters agreed with the             information until the 130th day of            to suggest that information on other
Secretary that there should be a              delinquency, which is well within the         options should be withheld. The
consistent time period during the             supplemental preclaims period. The            borrower’s comment supports the
preclaims assistance process for the          Secretary believes that this result does      Secretary’s belief that information on
guaranty agency to provide specific           not serve the borrowers. To avoid this        consolidation has not been readily made
information to the borrower on                situation, the Secretary has decided to       available to delinquent borrowers. The
consolidation and other default               require the guaranty agency to provide        Department agrees with the suggestion
prevention options. Because most of           the consumer information and                  that a prepared information piece
these same commenters recommended             counseling no later than 10 working           providing an overview of available
that guaranty agencies be given               days after it receives the lender’s request   options with borrower profiles would be
flexibility, up to the 90th day of            for preclaims assistance.                     useful.
delinquency, to begin the preclaims              Changes: The regulations have been            Changes: The regulations are
effort, they recommended that a               revised to require a guaranty agency to       amended to clarify that the information
consistent standard be achieved by            provide counseling and consumer               provided to the borrower must include
requiring that the information be             information to the borrower no later          all options available to avoid default,
provided to the borrower no later than        than 10 working days after receiving a        including FFEL and Direct Loan
the 30th day following the agency’s           lender’s request for preclaims                Consolidation.
receipt of the preclaims assistance           assistance.                                      Comment: Many loan industry
request from the lender rather than by           Comment: The majority of                   (guaranty agency, lender, and lender
the 100th day of delinquency as the           commenters supported providing                servicer) commenters recommended
Secretary proposed. These commenters          consumer information on default               that the Secretary modify the
indicated that they believed that this        aversion options to delinquent                regulations to allow agencies to provide
           Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations                      60481

the required consumer information in         information and counseling constitutes      percentage of collection costs assessed
formats other than written ones, such as     a violation of the guaranty agency’s        as well as increase the total amount
video and e-mail. The commenters             obligation to perform due diligence in      paid.
believe that the regulations should not      collecting the loan. The commenters            A few guaranty agency commenters
preclude the use of more innovative          objected to what they viewed as the         strongly objected to any change to this
mediums for providing this information.      imposition of punitive sanctions on a       provision of the regulations because
These same commenters questioned the         loan-by-loan basis and requested that       they believe that the application of
advisability of requiring both written       the Department withhold assessing           borrower payments as proposed is not
information and counseling, suggesting       penalties for noncompliance with this       in the best interest of the borrower and
that providing both may cause borrower       provision until the major due diligence     will require the borrower to pay more
confusion. The commenters also               reform effort previously announced by       interest over the life of the loan because
requested clarification as to whether the    the Department is started. These            principal is reduced more slowly. These
written consumer information could be        commenters also requested clarification     commenters believe that collection costs
provided as part of the letter that is one   that a lender would not be harmed by        are a collection tool to be used by the
of the three required preclaims activities   an agency’s failure to comply with this     agency and that the proposed regulation
and whether there are any situations,        requirement and that any penalties          weakens this effective tool. One of these
such as an invalid address or when the       would be paid out of an agency’s reserve    commenters also stated that he believes
borrower has requested that the agency       fund and not passed along to a lender       that this proposal would eliminate an
cease all collection activities, in which    or lender servicer.                         agency’s ability to compromise the debt.
the agency would be relieved of the             Discussion: The Secretary                Some legal advocates who represent
requirement to provide this information.     understands that the use of the phrase      borrowers also strongly objected to the
   Discussion: The Secretary agrees that     ‘‘servicing error’’ in the preamble and     proposed change, stating that this
the regulations should not prevent a         the reference in the regulations to ‘‘due   approach will be counterproductive and
guaranty agency from providing               diligence in collecting’’ may have          will discourage defaulted borrowers
borrowers with required counseling and       confused readers because common             from continuing to make payments
consumer information in formats other        usage in the FFEL program has made a        because they will pay over long periods
than written letters. The Department is      distinction between these terms. The        of time and not see their principal and
primarily concerned with ensuring that       Secretary did not intend to make such       interest diminish appreciably. The
the borrower receives the information in     a distinction by use of these differing     advocates recommended that the
an appropriate manner. Thus, an agency       terms. The Secretary agrees with            current regulations in this area be
may use different methods of providing       commenters that lenders should not be       retained. A school association
the information to the borrower as long      penalized for a guaranty agency’s           commenter also objected to the proposal
as the agency can show that the              violations in this area. To clarify this,   and recommended that agencies be
delinquent borrower received the             the Secretary has decided to relocate       required to apply payments to principal
information. The Secretary also agrees       this provision.                             and interest first, then collection and
that this information may be provided           Changes: The statement citing            late charges. The commenter believes
as part of a preclaims letter, provided      violations of preclaims assistance          that the objective should be repaying the
the default aversion options are clearly     requirements as a due diligence             loan, not creating additional financial
and prominently presented and not            violation of the agency has been            hardship for the borrower.
buried in the text of the letter. The        relocated to 34 CFR 682.406(a)(12) as a        Discussion: The Secretary
Secretary does not agree that reinforcing    condition of reinsurance.                   understands that some commenters
the written consumer information with                                                    would prefer that defaulted borrowers
                                             Section 682.404(f)—Application of
counseling will confuse borrowers. The                                                   not be discouraged from repaying on a
                                             Borrower Payments
Secretary believes that it is important                                                  defaulted loan by having to pay
for the agency to follow up with the            Comment: Many loan industry              collection costs. However, section 484A
borrower to determine that the borrower      commenters agreed that only an              of the Higher Education Act requires
received and understood the                  appropriate amount from each borrower       that these borrowers, rather than the
information, to answer any questions         payment on a defaulted loan should be       taxpayers, bear reasonable costs of
the borrower may have about the              applied to collection costs, but objected   collection. The current regulations
available options, especially the loan       to the proposed language that would         giving the guaranty agency the option of
consolidation programs, and to               prohibit the up-front assessment of         determining how payments are to be
encourage the borrower to act on one of      collection costs after default claim        applied has led in some instances to the
the options to halt the increasing           payment and require that collection         borrower paying few if any collection
delinquency. The Secretary expects an        costs be assessed on each payment           costs and the regulations do not comply
agency to provide this information to        received. The commenters indicated          with the Federal Claims Collection
the extent that a valid address or           that many guarantor systems are             Standards. Therefore, the Secretary does
telephone number is available for the        programmed currently to calculate up-       not believe that retaining the current
borrower.                                    front collection costs according to the     requirements, as suggested by many
   Changes: The regulations have been        limits established in § 682.410(b)(2) and   commenters, is an option. The Secretary
modified to specify that an agency may       would require significant changes to        does not agree that this change prevents
provide written consumer information         make a per payment assessment. These        an agency from compromising a portion
on default aversion options as part of       commenters stated that, at the very         of the collection costs if a borrower
the required preclaims letter and/or in      least, retroactive recalculation of         makes a lump sum payment to satisfy
other written materials or other formats     collection costs should not be required     the debt.
as a separate information piece.             except on accounts on which the agency         The loan industry commenters are
   Comment: Loan industry commenters         had not previously assessed fees. In the    correct that the proposed change
expressed concern about the provision        commenters’ view, such reassessment         precludes agencies from continuing to
that specifies that an agency’s failure to   on an account on which a borrower has       assess collection costs upfront at a time
provide the required consumer                been making payments may increase the       when the agency has not yet incurred
60482      Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations

those costs. The Secretary notes that the       Discussion: The Secretary has decided       incurred by a guaranty agency in
borrower is not legally obligated to pay     that, consistent with 4 CFR Chapter II,        relation to collecting on defaulted loans.
costs which have not been incurred.          section 102.13(f) of the Federal Claims        Finally, loan industry commenters
This regulatory change is intended to        Collection standards, the borrower’s           contended that fair treatment of
require the guaranty agencies to charge      payment must be applied to incidental          borrowers is preferable to uniform
only those costs that have been incurred     charges (which the Secretary                   treatment if the result would be that
and to prohibit the upfront loading of       understands will be nominal amounts,           borrowers would be assessed more than
collection costs on a borrower’s account     such as late charges) after collection         they otherwise would be charged. They
because it discourages repayment and         costs are paid and before the payment          believe a flat rate assessment will also
does not reflect the agencies’ actual        is applied to accrued interest and             prevent an agency from continuing to
collection expenses. In its own              outstanding principal.                         compromise collection costs when it
collection efforts, the Department              Changes: The regulations have been          deems it appropriate.
calculates and displays in its billing       revised to require that borrower                  Some school associations supported
statements the projected contingent fee      payments on a defaulted loan be applied        the Secretary’s proposal to mandate a
charges that will be incurred and            to any incidental charges after the            maximum amount of collection costs
assessed against the borrower if the full    appropriate amount of collection costs         that agencies would be authorized to
amount of principal and interest owed        is paid and before the payment is              assess, but strongly recommended that
is not immediately repaid. The               applied to accrued interest and                guaranty agencies have the flexibility to
Department incurs a contingent fee cost      outstanding principal.                         assess less than the flat rate when the
only as the borrower repays and then            Comment: Loan industry commenters           actual cost is less.
passes that cost on to the borrower as it    proposed that the phrase ‘‘reinsured              Borrower representatives strongly
is incurred on a payment-by-payment          interest’’ in the current regulations be       opposed the Secretary’s proposal on the
basis. The Department does not assess        changed to ‘‘accrued interest’’ because        grounds that the imposition of uniform
costs to the borrower it has not incurred    the borrower owes all accrued interest         collection rates is not beneficial to
and attempts to make this distinction        whether or not the agency paid the             borrowers if uniformity means higher
clear in its notices to borrowers.           lender insurance on the interest or the        collection fees. They recommended that
   The Secretary understands that some       agency filed for reinsurance with the          reasonable collection costs be defined as
agencies may be required to make             Secretary. The commenters pointed out          the lesser of the percent limitation in
significant systems changes to inform        that interest that accrues after the           the borrower’s promissory note or other
borrowers clearly that they will be          lender’s claim is paid is not reinsured.       repayment agreement or the guarantor’s
assessed collection costs on a per              Discussion: The Secretary agrees with       actual costs of collection.
payment basis. Because of the time and       the commenters that the regulations               Discussion: After further
complexity involved in making the            should reference accrued interest in this      consideration, the Secretary agrees with
necessary systems changes, the               provision.                                     the commenters that the assessment of
Secretary agrees that a delayed effective       Changes: The regulations have been          a uniform rate may not be the fairest
date for implementation of the               revised to provide that borrower               approach to assessing collection costs,
regulations is appropriate as reflected in   payments are applied to ‘‘accrued’’            and could prove counterproductive if it
the effective date section of this           interest rather than to ‘‘reinsured’’          creates a disincentive to borrowers
document. The Secretary notes,               interest.                                      continuing to make payments on
however, that there has never been a            Comment: One commenter pointed              defaulted loans. In regard to the
legal basis for an agency to charge          out that § 682.404(f) fails to identify that   borrower representatives’
collection costs it has not incurred to a    the payments being described are being         recommendation to define reasonable
borrower and the delayed effective date      applied to a defaulted loan and                collection costs by referencing the
is not intended to justify failure to        recommends a change to reflect this.           borrower’s promissory note, the
conform to the law.                             Discussion: The Secretary agrees with       Secretary notes that the common
   Changes: No changes have been made        the commenter.                                 promissory notes approved by the
to the regulations. However, the                Changes: The regulations have been          Secretary do not include any such
Secretary has provided a delayed             modified to refer to a defaulted loan.         limitation and may not be changed to
effective date for implementation of this                                                   provide for one.
                                             Section 682.410(b)(2)—Assessment of
provision of the regulations.                                                                  Changes: The Secretary has decided
   Comment: In response to the               Collection Charges
                                                                                            to retain current regulations governing
Secretary’s solicitation on whether a           Comment: An overwhelming number             the maximum collection costs that may
guaranty agency should be allowed to         of commenters objected to the proposal         be assessed a defaulted borrower, except
apply borrower payments to incidental        that would require a guaranty agency to        specifically to note that such costs are
charges, after collection costs, rather      assess a borrower in default the               subject to limitations in the borrower’s
that only after all principal and interest   collection costs that the same borrower        promissory note, if any.
is satisfied, loan industry commenters       would be charged if the loan was held
overwhelmingly recommended that this         by the Department and recommended              Section 682.410(b)(6)(vii)(A)—Collection
decision be the option of the guarantor.     that the current regulatory standard be        Efforts on Defaulted Loans
They believe guarantors should be            retained. Loan industry commenters,               Comment: Loan industry commenters
allowed to apply payments to incidental      although appreciating the Secretary’s          recommended that the Secretary
charges, such as late charges and court      goal of standardization, believe that the      withdraw the proposed change to post-
fees, when they are assessed, and as the     flat rate proposed in the NPRM is not          default collections that would require
agency deems appropriate. Some legal         reasonable if it bears no relation to the      guaranty agencies to undertake
advocates for borrowers recommended          actual costs incurred in the collection        ‘‘administrative wage garnishment’’ no
that the current requirements, which         process. These commenters believe a            later than the 225th day of a borrower’s
provide that payments be applied to          flat rate is inconsistent with section         delinquency because it was unclear how
these costs only after the repayment of      428(c)(6)(B)(i) of the HEA which states        that proposal related to the entire text of
all principal and interest, be retained.     that collection costs are those costs          paragraph (vii) of the current rule that
          Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations                        60483

addresses guaranty agency collection        this discussion is not intended to           defaulted accounts where the borrower
efforts. The commenters noted that the      preclude a guaranty agency’s use of a        has no income to be garnished but assets
term administrative wage garnishment        state administrative wage garnishment        which could be attached will not be an
did not appear in the text of the           process that would provide similar           overwhelming number and is convinced
regulations, but that they understood       benefits and protections to the              that the federal government has
that the Department’s intent was to         government and the borrower as the           sufficient resources to litigate these
require the agencies to use                 HEA. The Secretary invites any agency        accounts efficiently.
administrative wage garnishment             that believes it has such authority to         The Secretary does not intend that
exclusively. With that understanding,       discuss the use of such authority with       guaranty agencies immediately cease
the commenters strongly objected to the     the Secretary. The Secretary also notes      collection activity on judgments on
loss of the guaranty agency’s option to     that this regulation is not intended to      which they are collecting. It is the
undertake judicial wage garnishment         prohibit an agency from using state tax      Secretary’s intention to eliminate the
which they claimed was an efficient and     refund offset authority that may be          need for guaranty agency litigation on
cost-effective means to satisfy the debt    available.                                   future defaults. However, the Secretary
in some states. They strongly                 The Secretary does agree with the          believes that guaranty agencies should
recommended that agencies be allowed        commenters that conforming changes           continue to collect on current paying
to continue to use judicial wage            are necessary to § 682.410(b)(6)(vii) and    judgments. To avoid confusion,
garnishment as a collection tool and to     (b)(7) to clarify the use of wage            therefore, the Secretary has decided not
determine whether administrative wage       garnishment within the greater context       to delete all references to litigation in
garnishment or judicial wage                of the 181–545 day due diligence period      the current regulation. The Secretary
garnishment is the most appropriate         and has made appropriate changes to          will make the necessary technical
collection tool in particular cases.        these regulations. The Secretary notes       changes to the regulations at a later date.
Borrower representatives indicated that     that he will review these changes              Changes: None.
they believe that the proposal to require   further during the planned                   Section 682.411—Due Diligence By
administrative wage garnishment may         consideration of guaranty agency due         Lenders in the Collection of Guaranty
be unworkable and contrary to the           diligence requirements next year.            Agency Loans
borrower’s best interest. These               Changes: Conforming changes have
                                            been made to clarify this requirement           Comment: Many loan industry
commenters believe that difficulties in                                                  commenters strongly supported the
obtaining accurate employment data          within the context of the other
                                            provisions of the 181 to 545-day period      Secretary’s effort to change the timing of
through state labor or unemployment                                                      the first delinquency notice required in
insurance departments may result in a       specified in the regulations. References
                                            to required collection activities at the     § 682.411(c) of the regulations and the
high volume of nonproductive and                                                         resulting change in the timing of the
                                            545th day of delinquency have been
harassing wage garnishment attempts,                                                     subsequent due diligence period in
                                            deleted from the regulations.
leading to increased legal challenges to      Comment: Guaranty agency                   § 682.411(d), but recommended that the
garnishment. They believe that litigation   commenters overwhelmingly disagreed          1- to 15-day period be extended to a 1–
affords a borrower with more due            with the proposal that defaulted             20-day period. The commenters
process protection and recommend that       borrower accounts be assigned to the         indicated that they believe that
the Secretary withdraw the proposal.        Department for litigation by the federal     borrowers assume that a 15-day grace
   Discussion: The Secretary believes       government if the borrower has no            period, similar to that available on many
that program experience has shown that      income that could be attached through        consumer loans, is available on their
administrative wage garnishment is a far    wage garnishment, but has assets which       student loans. They believe that the
more efficient and cost-effective           could be attached through a court order.     additional five days they are requesting
collection tool than across-the-board       The commenters believe that the              would allow borrowers to mail
litigation of all defaulted accounts. In    agencies should be permitted to choose       payments within 15 days of the due date
regard to the loan industry comments        to litigate or assign the account to the     without adverse consequences. The
about the alleged benefits features of      Department. They believe that agencies       commenters believe that the use of the
judicial wage garnishment, the Secretary    have the resources and procedures            20-day standard will eliminate
notes that the administrative wage          already in place to determine the most       unnecessary collection letters from
garnishment authority was added to the      appropriate and cost-effective method of     being generated. Another commenter
HEA only after attempts to promote          recovery and that assignment to the          recommended that either a 15-day
judicial wage garnishment by guaranty       Department will not increase                 period or a 20-day period be used,
agencies proved ineffective. The            collections.                                 depending upon the lender’s policy for
guaranty agencies have presented no           Discussion: The Secretary disagrees        reporting delinquencies to credit
significant evidence of increased           with the commenters. It is the               bureaus. The majority of loan industry
collections through the judicial wage       Secretary’s experience that the guaranty     commenters urged the Secretary to
garnishment process to justify the          agencies are frequently inconsistent in      allow lenders to implement the change
significant expense and complications       pursuing and enforcing judgments.            in the time period for delinquent notices
created by that process. The Secretary        Moreover, the process for transferring     or collection letters ‘‘no later than July
also believes that the notice and           these judgments when a loan is assigned      1, 1997.’’
opportunity for a hearing provisions in     to the Secretary or transferred to another      Discussion: The Secretary believes
the regulations governing administrative    agency when the original agency closes       that because a student loan may be a
wage garnishment afford a defaulted         can be complex and confusing for the         borrower’s first consumer loan
borrower adequate due process and an        agencies, the Secretary and the              experience, lenders must exercise
opportunity to contest the debt or enter    borrower. Thus the Secretary believes        greater diligence than they might on
into a repayment agreement on the loan      that centralized litigation by the federal   other consumer loans in order to
with the guaranty agency and avoid the      government is the most cost-effective        monitor borrower delinquency and take
problems identified by the borrower         means of collecting these accounts. The      proactive steps to ensure that a borrower
commenters. The Secretary notes that        Secretary believes that the number of        establishes a successful repayment
60484      Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations

pattern. The Secretary believes that         scheduled payments is inappropriate in          the loan. The commenters also stated
adopting the 15-day period for the first     the first notice of delinquency. Given          that the regulations should define the
notice of delinquency will eliminate the     the current due diligence requirements          circumstances under which the
possibility of unnecessary collection        for issuing second and subsequent               assignment option will be used rather
notices. In response to the request for      collection letters, there will be a             than the loss of reinsurance option and
early implementation of this change, the     significant delay before the next               provide that it is the guarantor’s choice
Secretary notes that, under section          collection letter is issued in which this       as to which option will be used. These
482(c) of the HEA, this change cannot be     information could be provided. The              same commenters recommended that
effective until July 1, 1997.                Secretary notes that he did not intend to       guaranty agencies be provided with a
   Changes: A conforming change to           require that the first notice of                ‘‘curing’’ process for due diligence
reference the 15-day standard for            delinquency contain detailed                    violations comparable to that provided
generating the first delinquency notice      information on loan consolidation,              for lenders and an appeal process
has been made in § 682.202(f)(2) of the      forbearance, deferments, and other              related to any actions taken by the
regulations.                                 default aversion options. This sentence         Secretary under this section.
   Comment: Many loan industry               was placed in paragraph (c) in error and           Discussion: The option of assignment
commenters disagreed with the proposal       was intended instead to be included in          is intended as additional discretionary
that the first notice of delinquency         the 16–180 day delinquency collection           authority that will allow the Secretary to
required by § 682.411(c) provide the         timeframe. The Secretary recognizes             address guaranty agency violations of
borrower with information on loan            that not all borrowers may be                   any of the fiscal, administrative and
consolidation, forbearance, and other        experiencing difficulties at this stage         enforcement requirements of § 682.410
available options to avoid default. The      and that the billing format generally           in a manner that best serves the interests
commenters point out that the                used to issue the first notice has limited      of the FFEL program. The Secretary has
borrower’s initial delinquency is not        space. Therefore, the Secretary has             the responsibility to determine the
necessarily a sign of either financial       decided that it is sufficient to include        appropriate sanction and he does not
difficulty in making scheduled               on the first notice a prominent                 agree that the guaranty agency should be
payments or of impending default. They       statement, which includes the name and          able to choose how its violation should
believe that the initial notice should       a telephone number of a contact person,         be addressed. The Secretary will
simply remind the borrower of the            and that informs the borrower that other        determine the appropriate action on a
delinquency and that he or she should        options are available if he or she is           case-by-case basis. Therefore, he also
call the lender or lender servicer if he     experiencing difficulties making                declines to incorporate into the
or she is having difficulty making           scheduled payments.                             regulations a list of circumstances under
scheduled payments. They also point             In regard to the later collection letters,   which he would decide to use the
out that a first notice of delinquency is    however, the Secretary believes that            option of mandatory assignment. The
generally issued in a billing statement      providing information on default                Secretary further notes that 34 CFR
format that is not intended to alienate or   aversion options and the proceedings            682.413(d) already addresses the
intimidate the borrower and that space       that may be instituted against the              procedures the Secretary will follow in
for providing extensive information is       borrower are even more critical. The            imposing a fine or penalties under this
limited.                                     Secretary believes that borrowers are           section of the regulations and provides
   Many of these same commenters also        capable of understanding the required           guarantors with appropriate due
objected to adding the additional notice     notice related to tax offset, wage              process. The Secretary believes any
to subsequent collection letters required    garnishment, and litigation by the              discussions related to guaranty agency
under § 682.411(d). The commenters           federal government and notes that               due diligence and proposed cures
argued that lenders and lender servicers     nothing prevents a lender from                  should be left to the due diligence
should be allowed to insert a notice of      explaining these terms in simpler               reform effort that the Department will
their own design that they believe will      language after providing the notice if the      undertake in 1997.
elicit the best response from the            lender believes it is necessary.                   Changes: None.
borrower and further recommended that           Changes: Section 682.411(c) has been            Comment: A number of commenters
the specific references in the notice to     modified to require the lender to               proposed various technical changes to
wage garnishment, tax offset, and            include a prominent message in the first        the regulations included in the NPRM.
litigation be replaced with a more           delinquency notice briefly mentioning              Discussion: The Secretary appreciates
generic reference to the lender taking       that various forms of assistance are            the commenters’ suggestions for
‘‘other actions as authorized by law.’’      available to borrowers experiencing             technical changes and agrees with many
The commenters believe that many             repayment difficulties and providing a          of the suggestions. However, in some
borrowers do not understand what these       telephone contact number for further            cases, those suggestions go beyond the
terms mean and that the lender should        information. Section 682.411(d) has             scope of this rule. Accordingly, the
be allowed to explain these legal actions    been modified to incorporate the more           Secretary will incorporate those changes
in simple language that borrowers will       complete information disclosure                 in a separate publication that will be
understand. They also indicated that a       originally proposed in § 682.411(c).            issued shortly.
listing of specific consequences may                                                            Changes: None.
suggest to the borrower that this list       Section 682.413—Remedial Actions                   Comment: One commenter asked the
supersedes any right the guarantor or          Comment: The majority of guaranty             Secretary to address the issue of
the Secretary has to pursue collection as    agency commenters stated that the               whether the Federal Fair Debt
provided for in the borrower’s               Secretary should only exercise the              Collection Practices Act (FDCPA)
promissory note.                             remedial action of loan assignment in           applies to guaranty agency collection
   Discussion: The Secretary disagrees       circumstances involving repetitive              activities on defaulted loans.
with commenters that informing the           violations and consistent patterns of              Discussion: It has been the
borrower that there are various options      noncompliance, not isolated or                  longstanding view of the Secretary and
available to assist the borrower if he or    occasional violations that do not               the Federal Trade Commission that the
she is having difficulty making              materially impact the collectability of         FDCPA does not apply to guaranty
           Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations                       60485

agencies collecting defaulted FFEL            information for the borrower regarding      information and reduces the clarity of
Program loans in their own names and          loan consolidation, forbearance and         the letters making the letters less
protecting the financial interests of their   other available options to avoid default.   effective. The commenters expressed
guarantee programs. The FDCPA does            This sentence was placed in paragraph       concern that requiring that additional
not apply to an entity collecting a debt      (c) in error. This requirement should       information be added to the notice sent
it is owed. Moreover, application of the      have been included in the collection        during this period could create a
FDCPA to the guaranty agencies would          timeframe of 16–180 days of                 significant burden on lenders, since the
potentially penalize them for                 delinquency. However, the Secretary         first notice is generally a billing
compliance with the requirements in 34        does want a statement in the collection     statement.
CFR 682.410 and, thus, is inconsistent        letter relating to the 1–15 day                Discussion: The Secretary notes that it
with the Secretary’s goal of ensuring a       delinquency that indicates that other       was not the Department’s intent to
minimum standard of collection action.        options are available if a borrower is      require that the notice or collection
The Secretary notes, however, that the        having difficulty making payments. The      letter sent during the 1–15 days of
FDCPA clearly applies to a collection         name and telephone number of a              delinquency contain detailed
contractor acting for the guaranty            contact person should also be included      information for the borrower regarding
agency. Such contractors are collecting       in this letter.                             loan consolidation, forbearance and
a debt owed to another and are clearly           Change: The regulations have been        other available options to avoid default.
subject to the FDCPA.                         amended to remove this requirement          This sentence was placed in paragraph
   Change: None.                              from paragraph (c) and insert it in         (c) in error. This requirement should
                                              paragraph (d). A modified statement has     have been included in the collection
Regulatory Flexibility Act Certification
                                              been added to paragraph (c).                timeframe for the 16–180 days of
   Comment: Many commenters stated                                                        delinquency. However, the Secretary
that § 682.404, requiring the guaranty        Paperwork Reduction Act of 1995
                                                                                          does intend that a statement in the
agency to offer preclaims assistance no          Section 682.411 contains information     collection letter relating to the day 1–15
later than the 75th day of delinquency,       collection requirements. As required by     delinquency indicate that other options
could have a significant impact on            the Paperwork Reduction Act of 1995,        are available if a borrower is having
lenders, particularly small lenders. The      the U.S. Department of Education has        difficulty making payments. The name
commenters also stated that many loans        submitted a copy of this section to the     and telephone number of a contact
that become 60 to 90 days delinquent          Office of Management and Budget             person should also be included in this
are ‘‘self-cured’’ through the borrower or    (OMB) for its review. (44 U.S.C 3504(h)).   letter.
other party providing documentation for       In response to the Secretary’s invitation      Change: The regulations have been
deferment or forbearance. In addition,        in the NPRM to comment on any               amended to remove the statement in the
the commenters noted that requiring           potential paperwork burden associated       NPRM from paragraph (c) and insert it
assistance from the guaranty agency           with this regulation, the following         in paragraph (d). A modified statement
earlier in the process could result in        comments were received.                     has been inserted in paragraph (c).
unnecessary requests for preclaims               Comment: Many commenters
                                              suggested that the Secretary amend          Assessment of Educational Impact
assistance and the unnecessary loading
and processing of the preclaims               § 682.411(c) to expand the length of the       In the NPRM, the Secretary requested
assistance request by the guarantor.          current timeframe that lenders will have    comments on whether the proposed
   Discussion: The Secretary agrees with      to send the first written collection        regulations in this document would
the commenters and believes that it           notice or collection letter to a            require transmission of information that
would be more advantageous for                delinquent borrower from 1–10 days (1–      is being gathered by or is available from
collection assistance to be made              15 in NPRM) to 1–20 days. The               any other agency or authority of the
available to the lender by the guaranty       commenters stated that consumer loans       United States.
agency no later than the 90th day of          often offer a 15-day grace period on           Based on the response to the proposed
delinquency.                                  payment due dates. They suggested that      regulations and on its own review, the
   Change: The regulations have been          many borrowers believe that the student     Department has determined that the
revised to provide that preclaims             loan has a similar payment grace period     regulations in this document do not
assistance be made available no later         and may delay mailing their payment.        require transmission of information that
than the 90th day of delinquency.             The commenters believe that many            is being gathered by or is available from
   Comment: Many commenters stated            unnecessary collection letters will be      any other agency or authority of the
that the § 682.411 provision establishing     eliminated by expanding the timeframe       United States.
a minimum of information to be                to 20 days.                                 List of Subjects in 34 CFR Part 682
included in the letters sent by lenders          Discussion: The Secretary declines to
to delinquent borrowers during the 1–15                                                     Administrative practice and
                                              extend the timeframe specified in the
days of delinquency provides too much                                                     procedure, Colleges and universities,
                                              NPRM (1–15 days) to 1–20 days. The
information and reduces the clarity of                                                    Education, Loan programs-education,
                                              Secretary believes that the expanded
the letters making the letters less                                                       Reporting and recordkeeping
                                              timeframe in the NPRM is sufficient to
effective. The commenters expressed                                                       requirements, Student aid, Vocational
                                              eliminate the majority of unnecessary
concern that requiring additional                                                         education.
                                              collection notices that have been
information in the notice sent during         generated under the current 10-day          (Catalog of Federal Domestic Assistance
this period could create a significant        period.                                     Number 84.032, Federal Family Education
burden on lenders, since the first notice        Change: None.                            Loan Program)
is generally a billing statement.                Comment: Many commenters stated            Dated: November 21, 1996.
   Discussion: The Secretary notes that it    that the § 682.411 provision establishing   Richard W. Riley,
was not the Department’s intent to            a minimum of information to be              Secretary of Education.
require that the notice or collection         included in the letters sent by lenders       The Secretary amends part 682 of title
letter sent during the 1–15 days of           to delinquent borrowers during the 1–15     34 of the Code of Federal Regulations as
delinquency contain detailed                  days of delinquency provides too much       follows:
60486       Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations

PART 682—FEDERAL FAMILY                         (f) Application of borrower payments.       administrative wage garnishment
EDUCATION LOAN (FFEL) PROGRAM                 A payment made to a guaranty agency           proceedings against the borrower by the
                                              by a borrower on a defaulted loan must        225th day. If the agency determines that
  1. The authority citation for part 682      be applied first to the collection costs      the borrower has insufficient income to
continues to read as follows:                 incurred to collect that amount and then      satisfy the debt through wage
  Authority: 20 U.S.C. 1071 to 1087–2,        to other incidental charges, such as late     garnishment, but has assets from which
unless otherwise noted.                       charges, then to accrued interest and         the debt can be satisfied, the agency
  2. Section 682.202 is amended by            then to principal.                            shall assign the loan to the Department.
removing the number ‘‘10’’ from               *     *     *     *     *                     The agency must not file suit to collect
paragraph (f)(2) and adding in its place        5. Section 682.406 is amended by            a loan from a borrower unless directed
the number ‘‘15’’.                            revising paragraph (a)(12) to read as         to do so by the Secretary.
  3. Section 682.401 is amended by            follows:                                      *      *     *     *     *
revising paragraph (b)(27) to read as                                                          7. Section 682.411 is amended by
                                              § 682.406 Conditions of reinsurance           revising paragraphs (c), (d) introductory
follows:                                      coverage.                                     text, (d)(1), and (d)(2) to read as follows:
§ 682.401   Basic program agreement.          *     *     *     *     *
                                                (a) * * *                                   § 682.411 Due diligence by lenders in the
*      *    *     *    *                                                                    collection of guaranty agency loans.
  (b) * * *                                     (12) The agency and lender complied
  (27) Collection Charges and Late Fees       with all other Federal requirements with      *      *     *     *     *
                                              respect to the loan including the                (c) 1–15 days delinquent: Except in
on Defaulted FFEL loans being
                                              payment of origination fees and               the case where a loan is brought into
Consolidated. (i) A guaranty agency may
                                              compliance with all preclaims                 this period by a payment on the loan,
add collection costs in an amount not to
                                              assistance requirements in                    expiration of an authorized deferment or
exceed 18.5 percent of the outstanding
                                              § 682.404(a)(2)(ii);                          forbearance period, or the lender’s
principal and interest to a defaulted
                                              *     *     *     *     *                     receipt from the drawee of a dishonored
FFEL Program loan that is included in                                                       check submitted as a payment on the
a Federal Consolidation loan.                   6. Section 682.410 is amended by
                                              revising paragraphs (b)(2)                    loan, the lender during this period shall
  (ii) When returning the proceeds from                                                     send at least one written notice or
the consolidation of a defaulted loan to      and(b)(6)(vii)(A) to read as follows:
                                                                                            collection letter to the borrower
the Secretary, a guaranty agency may          § 682.410 Fiscal, administrative, and         informing the borrower of the
only retain the amount added to the           enforcement requirements.                     delinquency and urging the borrower to
borrower’s balance pursuant to                                                              make payments sufficient to eliminate
                                              *      *     *     *     *
paragraph (b)(27)(i) of this section.           (b) * * *                                   the delinquency. The notice or
*      *    *     *    *                        (2) Collection charges. Whether or not      collection letter sent during this period
  4. Section 682.404 is amended by            provided for in the borrower’s                must include, at a minimum, a lender/
revising paragraph (a)(2)(ii) and             promissory note and subject to any            servicer contact and telephone number,
paragraph (f) to read as follows:             limitation on the amount of those costs       and a prominent statement informing
                                              in that note, the guaranty agency shall       the borrower that assistance may be
§ 682.404   Federal reinsurance agreement.
                                              charge a borrower an amount equal to          available if he or she is experiencing
*       *    *    *      *                    reasonable costs incurred by the agency       difficulty in making a scheduled
   (a) * * *                                  in collecting a loan on which the agency      repayment.
   (2) * * *                                  has paid a default or bankruptcy claim.          (d) 16–180 days delinquent (16–240
   (ii) Preclaims assistance means            These costs may include, but are not          days delinquent for a loan repayable in
collection assistance made available to       limited to, all attorney’s fees, collection   installments less frequent than
the lender by the guaranty agency no          agency charges, and court costs. Except       monthly): (1) Unless exempted under
later than the 90th day of delinquency.       as provided in §§ 682.401(b)(27) and          paragraph (d)(4) of this section, during
This assistance must include collection       682.405(b)(1)(iv), the amount charged a       this period the lender shall engage in at
activities that are at least as forceful as   borrower must equal the lesser of—            least four diligent efforts to contact the
the level of preclaims assistance               (i) The amount the same borrower            borrower by telephone and send at least
performed by the guaranty agency as of        would be charged for the cost of              four collection letters urging the
October 16, 1990, and involves the            collection under the formula in 34 CFR        borrower to make the required payments
initiation by the guaranty agency of at       30.60; or                                     on the loan. At least one of the diligent
least 3 collection activities, one of           (ii) The amount the same borrower           efforts to contact the borrower by phone
which is a letter designed to encourage       would be charged for the cost of              must occur before, and another one
the borrower to begin or resume               collection if the loan was held by the        must occur after, the 90th day of
repayment. As part of their preclaims         U.S. Department of Education.                 delinquency. The notice or collection
assistance, guaranty agencies must            *      *     *     *     *                    letter sent during this period must
provide counseling and consumer                 (6) * * *                                   include, at a minimum, information for
information (in written or other format)        (vii) After 181 days:                       the borrower regarding deferment,
to the borrower by the 10th working day         (A) Except as provided in paragraph         forbearance, income-sensitive
after the agency receives the lender’s        (b)(6)(vii)(B) of this section, during this   repayment and loan consolidation and
request for preclaims assistance              period but not sooner than 30 days after      other available options to avoid default.
informing the borrower of all of the          sending the notice described in                  (2) At least two of the collection
borrower’s options to avoid default,          paragraph (b)(5)(vi) of this section, the     letters required under paragraph (d)(1)
including the availability of                 agency shall initiate proceedings to          of this section must warn the borrower
consolidating delinquent loans under          offset the borrower’s state and federal       that if the loan is not paid, the lender
the FFEL Program or the Federal Direct        income tax refunds and other payments         will assign the loan to the guaranty
Consolidation Loan Program.                   made by the federal government to a           agency that, in turn, will report the
*       *    *    *      *                    borrower, and shall initiate                  default to all national credit bureaus,
          Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Rules and Regulations                     60487

and that the agency may institute          (b)(1) and adding a new paragraph (b)(2)     (2) The Secretary may require a
proceedings to offset the borrower’s       to read as follows:                        guaranty agency to repay reinsurance
state and federal income tax refunds and                                              payments received on a loan or to assign
other payments made by the federal         § 682.413   Remedial actions.
                                                                                      FFEL loans to the Department if the
government to a borrower or to garnish     *     *     *    *     *                   agency fails to meet the requirements of
the borrower’s wages, or assign the loan     (b)(1) The Secretary requires a          § 682.410.
to the federal government for litigation   guaranty agency to repay reinsurance
against the borrower.                                                                 *     *    *     *     *
                                           payments received on a loan if the
                                                                                      [FR Doc. 96–30359 Filed 11–26–96; 8:45 am]
*     *     *    *     *                   lender, third-party servicer, if
  8. Section 682.413 is amended by         applicable, or the agency fails to meet    BILLING CODE 4000–01–P

redesignating paragraph (b) as paragraph   the requirements of § 682.406(a).

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