Federal Family Education Loan Program

SUMMARY: The Secretary proposes to amend the regulations governing the

Federal Family Education Loan (FFEL) Program. The FFEL regulations

govern the Federal Stafford Loan Program, the Federal Supplemental

Loans for Students (Federal SLS) Program, the Federal PLUS Program, and

the Federal Consolidation Loan Program, collectively referred to as the

Federal Family Education Loan Program. The Secretary is proposing to

make changes to the due diligence requirements for lenders and guaranty

agencies participating in the FFEL Program.

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

ADDRESSES: All comments concerning these proposed regulations should be

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

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

the internet to [email protected].

To ensure that public comments have maximum effect in developing

the final regulations, the Department urges that each comment clearly

identify the specific section or sections of the regulations that the

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

regulations.

Comments that concern information collection requirements must be

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

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

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

preceding paragraph.

FOR FURTHER INFORMATION CONTACT: Ron Streets, Program Specialist, Loans

Branch, Policy Development Division, Policy, Training, and Analysis

Service, U.S. Department of Education, 600 Independence Avenue, S.W.

(room 3053, ROB-3), Washington, DC 20202-5449. Telephone: (202) 708-

8242. Individuals who use a telecommunications device for the deaf

(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-

877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through

Friday.

SUPPLEMENTARY INFORMATION:

Background

The Secretary is proposing to amend 34 CFR Part 682 of the

Department's regulations to improve the administration and the

integrity of the FFEL Program. By improving program efficiency, these

proposed regulations will reduce burden for lenders and improve the

collection of outstanding FFEL loans and potential liabilities owed to

the Secretary.

Proposed Regulatory Changes

The Secretary proposes to amend the following sections of the

regulations to reflect changes needed to improve the due diligence

provisions in the FFEL Program.

Section 682.401 Basic Program Agreement

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

the interpretation outlined in the Department's Dear Colleague Letter

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

collection costs totaling up to 18.5 percent of the outstanding

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

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

in the payoff amount certified by the guaranty agency.

Section 682.404 Federal Reinsurance Agreement

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

guaranty agencies to offer preclaims assistance to lenders no later

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

include an explicit deadline by which the guaranty agencies must

provide this service and some agencies have not provided preclaims

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

the treatment of delinquent borrowers and ensure that preclaims is

initiated early enough to successfully avert default.

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

of their preclaims assistance to lenders, to provide counseling and

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

delinquency informing the borrower of the option to consolidate student

loans under the FFEL Program or the Federal Direct Consolidation Loan

Program to avoid default. The Secretary believes that providing this

information to delinquent borrowers during the preclaims assistance

process will help reduce defaults by ensuring that borrowers have

information regarding consolidation when it is critically needed.

Failure of the agency to provide this information would constitute a

violation of due diligence in servicing a loan.

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

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

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

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

ensure that the borrower remains responsible for paying collection

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

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

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

payment to incidental charges such as late charges first, after

collection charges, rather than only after all principal and interest

as is currently the case.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

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

amount of collection charges guaranty agencies may charge the borrower.

These regulations propose to require guaranty agencies to assess a

defaulted borrower the same amount of collection charges assessed by

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

currently assessed by the Department is 25 percent. The Secretary

believes that standardization of collection costs across the industry

will both reduce confusion and ensure equitable treatment for borrowers

whose FFEL loans are guaranteed by multiple guaranty agencies. The

Secretary will inform guaranty agencies annually what the applicable

rate is in sufficient time for agencies to make necessary system

changes. However, the Secretary solicits additional comment on whether

agencies should be provided with the flexibility to assess less than

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

collection support this.

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

that currently provides guaranty agencies the option of either

initiating wage garnishment or instituting a civil suit against the

borrower whose loans have defaulted. These proposed regulations remove

that option and instead require that guaranty agencies initiate wage

garnishment proceedings if the borrower has sufficient income. If the

agency determines that the borrower has insufficient income to satisfy

the debt by garnishment, but has assets from

[[Page 47399]]

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

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

suit against the borrower. The Department intends to litigate assigned

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

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

believes that this change will result in more effective collection of

defaulted loans across the country because guaranty agencies have had

varying success in collecting loans through litigation.

Section 682.411 Due Diligence by Lenders in the Collection of Guaranty

Agency Loans

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

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

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

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

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

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

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

prematurely for delinquent borrowers whose payments are received within

the maximum proposed 15-day period.

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

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

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

delinquent for a loan repayable in installments less frequently than

monthly) to include additional warnings to the borrower that the

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

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

to the federal government for litigation against the borrower.

Section 682.413 Remedial Actions

Section 682.413(b) is amended to expand the possible remedial

action available to the Secretary if a guaranty agency fails to meet

the requirements of Sec. 682.410 to include mandatory assignment of

FFEL loans to the Department at the Secretary's discretion. Currently

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

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

the program.

Executive Order 12866

1. Assessment of Costs and Benefits

These proposed regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the Order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those determined by the Secretary to be necessary for administering

this program effectively and efficiently. Burdens specifically

associated with information collection requirements, if any, are

identified and explained elsewhere in this preamble under the heading

Paperwork Reduction Act of 1995.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the regulations justify the costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the program.

2. Clarity of the Regulations

Executive Order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these proposed

regulations easier to understand, including answers to questions such

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

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

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

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

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

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

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

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

the description of the regulations in the SUPPLEMENTARY INFORMATION

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

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

understand?

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

these proposed regulations easier to understand should be sent to

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

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

DC 20202-2241.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities.

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

small entities affected by these regulations are lenders with assets

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

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

benefit to small (and large) lenders by providing additional

flexibility for regulatory compliance. This provision does not impose a

significant adverse economic impact. The second provision would impose

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

modify two letters sent to delinquent borrowers. These letters are

required by existing regulations. These additional costs would not have

a significant adverse economic impact. This activity would protect the

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

the programs.

The Secretary particularly requests comments from small lenders on

whether the proposed changes would have a significant economic impact

on them.

Paperwork Reduction Act of 1995

Section 682.411 contains information collection requirements. As

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

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

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

Collection of Information: Federal Family Education Loan Program

These regulations strengthen the collectibility of delinquent FFEL

loans by participating lenders. Monies collected under these

regulations enable new and continuing students to borrow to help defray

the cost of education.

The public reporting and recordkeeping burden for this collection

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

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

existing collection letters sent to delinquent borrowers and (2)

increasing the period

[[Page 47400]]

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

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

activity.

The estimated burden for incorporating the additional warning

paragraphs into the existing collection letters was calculated as

follows:

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

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

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

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

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

The estimated burden associated with expanding the window regarding

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

calculated as follows:

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

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

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

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

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

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

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

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

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

U.S. Department of Education.

The Department considers comments by the public on this proposed

collection of information in--

Evaluating whether the proposed collection of information

is necessary for the proper performance of the functions of the

Department, including whether the information will have a practical

use;

Evaluating the accuracy of the Department's estimate of

the burden of the proposed collection of information, including the

validity of the methodology and assumptions used;

Enhancing the quality, usefulness, and clarity of the

information to be collected; and

Minimizing the burden of collection of information on

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

automated electronic, mechanical, or other technological collection

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

electronic submission of responses.

OMB is required to make a decision concerning the collection of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

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

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

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

proposed regulations.

Invitation To Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

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

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

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

through Friday of each week except federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

information that is being gathered by or is available from any other

agency or authority of the United States.

List of Subjects in 34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

Dated: July 31, 1996.

Richard W. Riley,

Secretary of Education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program)

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

Federal Regulations as follows:

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

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

follows:

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

2. Section 682.401 is amended by revising paragraph (b)(27) to read

as follows:

Sec. 682.401 Basic program agreement.

* * * * *

(b) * * *

(27) Collection Charges and Late Fees on Defaulted FFEL loans being

Consolidated. (i) A guaranty agency may add collection costs in an

amount not to exceed 18.5 percent of the outstanding principal and

interest to a defaulted FFEL Program loan that is included in a Federal

Consolidation loan.

(ii) When returning the proceeds from the consolidation of a

defaulted loan to the Secretary, a guaranty agency may only retain the

amount added to the borrower's balance pursuant to paragraph (b)(27)(i)

of this section.

* * * * *

3. Section 682.404 is amended by revising paragraph (a)(2)(ii) and

paragraph (f) to read as follows:

Sec. 682.404 Federal reinsurance agreement.

* * * * *

(a) * * *

(2) * * *

(ii) Preclaims assistance means collection assistance made

available to the lender by the guaranty agency no later than the 75th

day of delinquency. This assistance must include collection activities

that are at least as forceful as the level of preclaims assistance

performed by the guaranty agency as of October 16, 1990, and involves

the initiation by the guaranty agency of at least 3 collection

activities, one of which is a letter designed to encourage the borrower

to begin or resume repayment. As part of their preclaims assistance,

guaranty agencies must provide counseling and written consumer

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

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

under the FFEL Program or the Federal Direct Consolidation Loan Program

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

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

due diligence in collecting a loan; and

* * * * *

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

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

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

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

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

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

* * * * *

4. Section 682.410 is amended by revising paragraphs (b)(2) and

(b)(6)(vii)(A) to read as follows:

Sec. 682.410 Fiscal, administrative, and enforcement requirements.

* * * * *

(b) * * *

(2) Collection charges. Whether or not provided for in the

borrower's promissory note, the guaranty agency

[[Page 47401]]

shall charge a borrower an amount equal to reasonable costs incurred by

the agency in collecting a loan on which the agency has paid a default

or bankruptcy claim. These costs may include, but are not limited to,

all attorney's fees, collection agency charges, and court costs. The

amount charged a borrower must equal the amount the same borrower would

be charged for the cost of collection if the loan was held by the U.S.

Department of Education.

* * * * *

(6) * * *

(vii) * * *

(A) Except as provided in paragraph (b)(6)(vii)(B) of this section,

during this period but not sooner than 30 days after sending the notice

described in paragraph (b)(5)(vi) of this section, the agency shall

initiate proceedings to offset the borrower's state and federal income

tax refunds and other payments made by the federal government to a

borrower, and shall initiate wage garnishment proceedings against the

borrower by the 225th day. If the agency determines that the borrower

has insufficient income to satisfy the debt through wage garnishment,

but has assets from which the debt can be satisfied, the agency shall

assign the loan to the Department by the 545th day.

* * * * *

5. Section 682.411 is amended by revising paragraphs (c) and (d) to

read as follows:

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

agency loans.

* * * * *

(c) 1-15 days delinquent: Except in the case where a loan is

brought into this period by a payment on the loan, expiration of an

authorized deferment or forbearance period, or the lender's receipt

from the drawee of a dishonored check submitted as a payment on the

loan, the lender during this period shall send at least one written

notice or collection letter to the borrower informing the borrower of

the delinquency and urging the borrower to make payments sufficient to

eliminate the delinquency. The notice or collection letter sent during

this period must include, at a minimum, information for the borrower

regarding loan consolidation, forbearance and other available options

to avoid default.

(d) 16-180 days delinquent (16-240 days delinquent for a loan

repayable in installments less frequent than monthly): (1) Unless

exempted under paragraph (d)(4) of this section, during this period the

lender shall engage in at least four diligent efforts to contact the

borrower by telephone and send at least four collection letters urging

the borrower to make the required payments on the loan. At least one of

the diligent efforts to contact the borrower by phone must occur

before, and another one must occur after, the 90th day of delinquency.

(2) At least two of the collection letters required under paragraph

(d)(1) of this section must warn the borrower that if the loan is not

paid, the lender will assign the loan to the guaranty agency that, in

turn, will report the default to all national credit bureaus, and that

the agency may institute proceedings to offset the borrower's state and

federal income tax refunds and other payments made by the federal

government to a borrower or to garnish the borrower's wages, or assign

the loan to the federal government for litigation against the borrower.

* * * * *

6. Section 682.413 is amended by redesignating paragraph (b) as

paragraph (b)(1) and adding a new paragraph (b)(2) to read as follows:

Sec. 682.413 Remedial actions.

* * * * *

(b)(1) The Secretary requires a guaranty agency to repay

reinsurance payments received on a loan if the lender, third-party

servicer, if applicable, or the agency fails to meet the requirements

of Sec. 682.406(a).

(2) The Secretary may require a guaranty agency to repay

reinsurance payments received on a loan or to assign FFEL loans to the

Department if the agency fails to meet the requirements of

Sec. 682.410.

* * * * *

[FR Doc. 96-22812 Filed 9-5-96; 8:45 am]

BILLING CODE 4000-01-P