CUNA Regulatory Comment Call


August 13, 1999

Federal Family Education Loan Program

The Department of Education (DOE) is requesting comments on a proposed rule to amend the Federal Family Education Loan (FFEL) Program rules. Comments are due by September 15. Please submit your comments to CUNA by September 8. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to CUNA's Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you have questions or would like a copy of the rule. The rule is also available on the Internet.

DOE is requesting that commenters identify the specific sections of the proposed rule that each comment addresses and to arrange these comments in the same order as they appear in the rule.

BRIEF BACKGROUND

The proposed rule is required in order to implement certain changes to the Higher Education Act of 1965 (HEA) resulting from the Higher Education Amendments of 1998 (1998 Amendments). The changes affect the FFEL program, which governs the Federal Stafford Loan Program, the Federal Supplemental Loans for Students Program, the Federal PLUS Program, and the Federal Consolidation Loan Program.

DESCRIPTION OF THE PROPOSED RULE

Section 682.205 - Disclosure Requirements for Lenders

Lenders must use "plain English" in the disclosures that they provide to borrowers. Lenders must also include a toll free telephone number that the borrower may use to obtain additional loan information. The disclosures and telephone number may be provided electronically.

Section 682.207 - Due Diligence in Disbursing a Loan

Current policy requires that a lender cancel all future disbursements on a loan whenever the first disbursement is returned to the lender. Under the proposed rule, future disbursements may be made at the request of the school and in the absence of information that the student is no longer enrolled.

Section 682.208 - Due Diligence in Servicing a Loan

The 1998 Amendments established the Student Loan Ombudsman's office that will provide informal resolution of disputes received from loan borrowers. Under the proposed rule, if the lender cannot first resolve the dispute, the borrower is referred to the guaranty agency. If the guaranty agency cannot resolve the dispute, the borrower is then referred to the Student Loan Ombudsman's Office.

Section 682.210 - Deferment

The proposed rule will exclude deferments while the student is enrolled in-school from the requirement that a deferment may not be granted for a period beginning more than six months before the date the lender receives the request and documentation.

Section 682.211 - Forbearance

The proposed rule will incorporate and modify DOE's policy of permitting lenders and guaranty agencies to grant forbearances to assist FFEL borrowers affected by natural disasters. Loan holders will be able to grant such forbearances for up to three months. Lenders will be able to grant forbearances to resolve delinquencies whenever the lender is notified of exceptional circumstances, such as a local or national emergency, military mobilization, or that the area where the borrower or endorser resides has been designated a disaster area.

Section 682.215 - Federal Stafford Loan Forgiveness Demonstration Program

This section will be deleted because under the 1998 Amendments, the Federal Stafford Loan Forgiveness Program has been replaced by new provisions for loan forgiveness for teachers.

Section 682.302 - Payment of Special Allowance on FFEL Loans

DOE pays a special allowance to a lender on all eligible FFEL loans. The proposed rule will reduce the special allowance factor that is used to make this calculation from 3.1 to 2.8. There will be a further reduction to 2.2 during the in-school, grace, and deferment periods.

Section 682.305 - Procedures for Payment of Interest Benefits and Special Allowance and Collection of Origination and Loan Fees

The proposed rule will require DOE to collect origination fees owed by a lender either by offsetting the amount of interest and special allowance payments due the lender or by collecting the amount of origination fees directly from the lender. DOE may also collect the origination fees from any subsequent holders. Lenders will also be required to submit a quarterly ED Form 799, which is a request for interest and special allowance.

Section 682.400 - Agreements Between a Guaranty Agency and the Secretary

The proposed rule will delete the provision regarding payment of administrative cost allowances to guaranty agencies because they were eliminated by the 1998 Amendments.

Section 682.401 - Basic Program Agreement

The proposed rule will require guaranty agencies to receive and respond to written, electronic, and telephone inquiries.

The rule will also specify which loans a "lender-of-last-resort" is required to make and will provide such lender with authorization to expand its lender-of-last-resort program to borrowers other than those it is required to serve. The rule will also outline procedures that will be used by DOE to determine which guaranty agencies will receive federal funds to be used for lender-of-last-resort loans.

The rule will also prohibit a guaranty agency from distributing unsolicited loan applications to students enrolled in a secondary or postsecondary school, or to parents of those students, unless the student has previously received loans insured by the guaranty agency. However, guaranty agencies will be permitted to provide assistance to schools that is comparable to assistance provided by DOE under the Federal Direct Loan Program.

Section 682.402 - Death, Disability, Closed School, False Certification, and Bankruptcy Payments

The proposed rule will permit DOE or a guaranty agency to discharge a borrower's FFEL loan, without an application, if the loan was made for the same program of study and time period and at the same school as a loan for which the borrower has received a closed school discharge under the Perkins Loan Program or the Federal Direct Loan Program. The FFEL loan may also be discharged, without an application, if the borrower qualifies for such a discharge based on information in DOE's or the guaranty agency's possession.

The U.S. Bankruptcy Code requires lenders to immediately suspend collection efforts against a borrower if such efforts are outside of the bankruptcy proceedings. The proposed rule will also permit a lender to suspend collection efforts against an endorser, or other party that is secondarily liable.

Section 682.404 - Federal Reinsurance Agreement

The proposed rule will reduce the reinsurance rates that must be paid on defaulted loans. The rule will also reduce the portion of collections on defaulted loans that a guaranty agency may retain and specifies that the guaranty agency share must be deposited in the agency's operating fund. The rule will also permit guaranty agencies to retain that portion of collections on default claims paid with assets of the Federal Fund instead of default claims on which reinsurance has been paid. This is designed to provide these agencies with an incentive to pursue collections on defaulted loans in a timely manner.

The rule will also permit the payment of a default aversion fee to a guaranty agency if the agency is instrumental in averting a default by a borrower who becomes 60 days delinquent in repaying a loan.

Section 682.406 - Condition for Claim Payments from the Federal Fund and Reinsurance Coverage.

The proposed rule will permit payment of default claims only if diligent efforts were made by the lender and guaranty agency to locate the borrower through the use of commercial skip tracing techniques.

Section 682.409 - Mandatory Assignment by Guaranty Agencies of Defaulted Loans to the Secretary

The proposed rule will no longer require transition to the Federal Direct Loan Program as one of the criteria for mandatory assignment by guaranty agencies of defaulted loans to DOE.

Section 682.410 - Fiscal, Administrative, and Enforcement Requirements

The proposed rule will require a guaranty agency to inform the borrower about the services provided by the Student Loan Ombudsman's Office before the agency reports a default to a credit bureau.

Section 682.411 - Lender Due Diligence in Collecting Guaranty Agency Loans

Under the proposed rule, a lender's failure to inform a borrower about the Student Loan Ombudsman's Office will not be considered a violation of the lender due diligence requirements that would cause the loan to lose insurance or reinsurance coverage.

The 1998 Amendments changed the definition of default so that it is now defined as 270 days for loans paid on a monthly basis and 330 days for loans paid in less frequent installments. The proposed rule will change the due diligence requirements for lenders in order to be consistent with this change.

The proposed rule will also require that a lender pay an interest penalty if the lender files a claim on a defaulted loan but fails to request default aversion assistance between the 60th and 120th day of delinquency. If the lender fails to request such assistance before the 330th day of delinquency, then DOE will not pay accrued interest, interest benefits, and special allowance for the most recent 270 days prior to default.

DOE is encouraging the development of positive incentives for default prevention, which incorporate collection approaches that have been successfully used in the private sector. DOE will evaluate such approaches and may authorize implementation of such approaches for testing purposes.

Section 682.413 - Remedial Actions

The proposed rule will require a hearing in connection with any proposed termination action against a guaranty agency.

Section 682.414 - Records, Reports, and Inspection Requirements for Guaranty Agency Programs

Currently, the lender must retain for 5 years the required records for loans paid in full by the borrower. The 5-year time period begins on the date that the loan is paid in full. The proposed rule will reduce this time period to 3 years.

QUESTIONS TO CONSIDER REGARDING THE FEDERAL FAMILY EDUCATION LOAN PROGRAM

(Note: Most of the substantive provisions are required by statute under the 1998 amendments. The following questions focus on areas that are not required by the statute.)

Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Jeffrey Bloch at jbloch@cuna.com or mail them to CUNA's Regulatory Advocacy Department, Suite 300, 805 15th Street, NW, Washington, DC 20005. Thank you!!

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com