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 FOR FURTHER INFORMATION CONTACT: Ron 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 addressed. 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 Requirements 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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