Federal Family Education Loan Program; Due Diligence Requirements

SUMMARY: The Secretary amends 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 and authorized by Title IV, Part

B of the Higher Education Act of 1965, as amended (HEA). The Secretary

is making changes to the due diligence requirements for lenders and

guaranty agencies participating in the FFEL Program.

DATES: Effective date: Except for the revision of Sec. 682.404(f),

these regulations take effect on July 1, 1997. The revision of

Sec. 682.404(f) is effective January 1, 1998 and applicable for

payments received on or after January 1, 1998. However, affected

parties do not have to comply with the information collection

requirement in Sec. 682.411 until the Department of Education publishes

in the Federal Register the control number assigned by the Office of

Management and Budget (OMB) to this information collection requirement.

Publication of the control number notifies the public that OMB has

approved this information collection requirement under the Paperwork

Reduction Act of 1995.

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, SW.

(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 amending 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 regulations will reduce

burden for lenders and improve the collection of outstanding FFEL loans

and potential liabilities owed to the Secretary.

On September 6, 1996, the Secretary published a notice of proposed

rulemaking (NPRM) for Part 682 in the Federal Register (61 FR 47398).

The NPRM proposed changes needed to improve the due diligence

provisions in the FFEL program. The NPRM included a discussion of the

major issues surrounding the proposed changes, and the discussion will

not be repeated here. The following list summarizes those issues:

Guaranty agency retention of collection costs of a

defaulted FFEL loan that are repaid by a consolidation loan;

Requiring a guaranty agency to offer preclaims assistance

to lenders no later than the 75th day of delinquency;

Requiring a guaranty agency to provide counseling and

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

delinquency;

Application of payments made by a borrower on a defaulted

loan to a guaranty agency;

Requiring a guaranty agency to assess a defaulted borrower

the same amount of collection charges assessed by the Department;

Initiating wage garnishment proceedings for borrowers with

sufficient income;

Expanding the length of time in which lenders must send

the first written notice or collection letter to a delinquent borrower;

Modifying the requirements for the two collection letters

that must be sent to a borrower; and

Expanding 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.

Substantive Revisions to the Notice of Proposed Rulemaking

Section 682.404 Federal Reinsurance Agreement

The Secretary amends this section of the regulations to require

guaranty agencies to provide preclaims assistance to lenders no later

than the 90th day of delinquency. The NPRM had proposed a deadline of

the 75th day of delinquency.

This section has also been amended to require that a guaranty

agency provide counseling and consumer information to a borrower within

10 days following the receipt of a preclaims assistance request from

the lender or the servicer. The Secretary has further amended this

section to allow guaranty agencies flexibility in using formats other

than written ones when providing consumer information to the borrower

as part of the guaranty agency's preclaims assistance.

Section 682.410 Fiscal, Administrative, and Enforcement Requirements

The proposal to require a guaranty agency to charge a borrower

collection costs equal to the amount the same borrower would be charged

for the cost of collection if the loan was held by the Department has

been removed. The Secretary has retained the current regulatory

requirement which allows a guaranty agency to use the lesser of the

amount derived from the formula in 34 CFR 30.60 or the amount charged

by the Department.

Section 682.411 Due Diligence by Lenders in the Collection of Guaranty

Agency Loans

Section 682.411 is also amended to move the last sentence in

paragraph (c) in the NPRM that deals with the contents of the first

delinquency notice and insert it in paragraph (d), and to add a

modified statement to paragraph (c).

Executive Order 12866

1. Assessment of Costs and Benefits

These final 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 final regulations are those

resulting from statutory requirements and those determined by the

Secretary as necessary for administering this program effectively and

efficiently. Potential costs and benefits are also discussed in

conjunction with the public comments to which they relate.

In assessing the potential costs and benefits--both quantitative

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

that the benefits of the regulations justify the costs.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 38 parties

submitted comments on the proposed regulations. An analysis of the

comments and of the changes in the regulations since publication of the

NPRM follows. An analysis of the comments received regarding the

[[Page 60479]]

regulatory flexibility certification can be found under the heading

Regulatory Flexibility Act Certification.

Major issues are grouped according to sections and subject. Other

substantive issues are discussed under the section of the regulations

to which they pertain. Technical and other minor changes--and suggested

changes the Secretary is not legally authorized to make under the

applicable statutory authority--are not addressed.

Section 682.401--Basic Program Agreement

Comment: A number of guaranty agency representatives commented on

the Secretary's proposal to modify the regulations to reflect his view

that guaranty agencies may retain collection costs totaling up to 18.5%

of the outstanding principal and accrued interest of a defaulted FFEL

Program loan that is repaid by a consolidation loan if the collection

costs are included in the payoff amount certified by the guaranty

agency. These commenters argued that the HEA allows the guaranty

agencies to retain 27 percent of payments received from borrowers on

defaulted loans including payoffs provided through consolidation. They

also argued that the agency needs to retain these funds to pay certain

costs in connection with a consolidation loan. The agency

representatives suggested that their view is consistent with

Congressional intent as shown by budget ``scoring'' of a budget

reconciliation bill in 1996 that included a provision that the agencies

believe supports their position.

Other commenters, including school organizations and borrower

advocates, supported the proposed regulation limiting collection costs

and the retention by guaranty agencies. These commenters noted that the

addition of collection costs can be a disincentive for a borrower to

consolidate a loan--thus eliminating an important tool to reduce

defaults. These commenters also urged the Department to consider

eliminating the authority for the guaranty agencies to add any

collection costs to a defaulted loan that is consolidated.

Discussion: The comments of the guaranty agency representatives are

based on the view that a consolidation loan payoff amount is a

``payment'' for purposes of section 428(c)(6) of the HEA. The

Secretary, however, believes that the agencies' interpretation is

contrary to the words and intent of the HEA. In defining the

``Secretary's equitable share'' for purposes of the guaranty agency's

retention of collections, the HEA specifically refers to ``the

Secretary's equitable share of payments made by the borrower''. A

consolidation loan payoff amount is not paid by the borrower but

instead is paid by a third party (the consolidating lender) and does

not reduce the borrower's obligation. Thus, a loan consolidation is not

covered by section 428(c)(6).

In addition, in interpreting the HEA, it is appropriate to look at

both the specific statutory language and at the language and design of

the entire statute. See Connecticut Student Loan Foundation v. Riley,

Case No 3:93CV02570 (JBA) (D.Conn., Oct. 31, 1996). The guaranty

agencies' interpretation is also inconsistent with other provisions of

the HEA. Under the agencies' approach, a borrower who consolidated a

defaulted loan would not be responsible for the collection costs on

that loan. Instead, the taxpayer would pick up those costs by allowing

the agency to retain a certain portion of the consolidation loan payoff

amount. This is contrary to section 484A(b) of the HEA. At the same

time, under this approach, the agencies would be allowed to retain an

amount far in excess of their actual collection costs. Numerous audits

of guaranty agencies show that the guaranty agencies' contracts with

collection agencies frequently provided for payments to the collectors

of far less than 27 percent when a defaulted loan is included in a

consolidation loan. The agencies' comments on the NPRM did not address

this issue or provide any supporting information for their claim that

they need a greater retention to pay additional costs. Allowing the

guaranty agencies to retain an amount far in excess of the amount they

have established as the cost of collecting on the loan (in addition to

the reinsurance payment the agency received) would provide an

unnecessary and inappropriate windfall for the agencies. Finally, the

Secretary notes that the agencies' claim that their view is consistent

with Congressional intent based on the budget ``scoring'' of a

provision in a bill that was ultimately vetoed is unpersuasive.

The Secretary appreciates the concerns of the school and borrower

advocates that the addition of collection costs reduces the value of

the option of consolidation. The Secretary is continuing to evaluate

how to address this issue while protecting the Federal fiscal interest.

Changes: None

Section 682.404(a)(2)(ii)--Federal Reinsurance Agreement Deadline for

Preclaims Collection Assistance

Comment: The majority of commenters representing guaranty agencies,

lenders, lender servicers, and secondary markets supported the

Secretary's effort to promote standardization and simplification, but

objected to the proposal that guaranty agencies be required to offer

preclaims collection assistance to lenders on delinquent accounts no

later than the 75th day of delinquency. These commenters recommended

that the deadline be no later than the 90th day of delinquency. Two

other guaranty agency commenters strongly objected to the Department

establishing any deadline for beginning preclaims assistance on the

grounds that many agencies have developed their own default prevention

efforts based on portfolio characteristics and what has been shown to

work best for their agencies. These commenters believe that agencies

should be allowed to continue establishing the beginning date for

preclaims assistance. One of these two commenters suggested that if, as

the Secretary suggested in the preamble to the NPRM, some agencies have

not provided preclaims assistance on a timely basis, the Department

should address the problem with those guarantors. The commenters

representing school and financial aid officer associations supported

the Secretary's proposal, one stating that early intervention can

prevent many defaults and the other that this change will ensure that

delinquent borrowers are treated in a similar manner regardless of the

guaranty agency performing the preclaims activities.

Many commenters indicated that starting preclaims assistance

earlier than the 90th day may confuse borrowers and cited studies

conducted by several major guaranty agencies showing that about one-

third of borrower delinquencies are resolved between the 60th and 90th

day. They also cited a similar study conducted by a major lender that

showed a 41 percent default aversion rate by the lender during this

period. These commenters believe that a ``no later than 90 days'' time

frame will afford borrowers with the opportunity to fulfill their

commitments to their loan holders and servicers without intervention by

guarantors. They also believe such an approach will avoid unnecessary

lender and guaranty agency costs.

Discussion: The Secretary continues to believe that early preclaims

intervention by a guaranty agency is

[[Page 60480]]

critical to default aversion, but agrees with the commenters that how

early that intervention takes place may appropriately depend upon a

number of factors, such as those mentioned by the commenters. The

Secretary has decided that until further discussions with the loan

industry and review of servicing data can take place, agencies should

be given some flexibility in beginning their preclaims collection

activities. However, the Secretary continues to believe that it is

appropriate to establish an outer deadline for a guaranty agency to

offer preclaims assistance to lenders. After consideration of the

comments, the Secretary has decided to accept the suggestion that the

90th day of delinquency is an appropriate deadline.

Changes: The regulations have been amended to require guaranty

agencies to offer preclaims assistance to lenders no later than the

90th day of delinquency.

Information and Counseling Requirements

Comment: Several commenters noted that the use of the phrase

``consolidate the defaulted loan'' in the proposal to require

guarantors to provide counseling and written consumer information to a

delinquent borrower no later than the 100th day of delinquency was not

correct within the context of preclaims assistance and recommended that

the reference should be to ``delinquent'' rather than ``defaulted''

loan.

Discussion: The Secretary agrees that the use of the word

``defaulted'' is incorrect in the context of preclaims assistance

contacts with delinquent borrowers.

Changes: The word ``delinquent'' is substituted for ``defaulted''

in the provision.

Comment: All of the guaranty agency, lender and loan servicer, and

secondary market commenters agreed with the Secretary that there should

be a consistent time period during the preclaims assistance process for

the guaranty agency to provide specific information to the borrower on

consolidation and other default prevention options. Because most of

these same commenters recommended that guaranty agencies be given

flexibility, up to the 90th day of delinquency, to begin the preclaims

effort, they recommended that a consistent standard be achieved by

requiring that the information be provided to the borrower no later

than the 30th day following the agency's receipt of the preclaims

assistance request from the lender rather than by the 100th day of

delinquency as the Secretary proposed. These commenters indicated that

they believed that this time frame will allow a guaranty agency the

ability to perform preclaims activities in an orderly and logical

sequence even if the lender's request is late. They also pointed out

that under the Secretary's proposal, if a lender requests preclaims

assistance as early as the 60th day of delinquency, the agency has up

to 40 days to provide the required information, whereas if a lender

requests preclaims assistance at the 90th day of delinquency, the

agency would have only 10 days to provide the information.

Discussion: The Secretary agrees that, in light of the change in

the guaranty agency's deadline for offering preclaims assistance, the

100th day of delinquency is no longer an appropriate deadline for

requiring the guaranty agency to provide the required consumer

information and counseling. The Secretary also agrees with commenters

that there should be a consistent time period for agencies to provide

this important consumer information. However, the Secretary believes

that it is vital that this information be provided to the borrower

through the preclaims assistance process as soon as possible after the

lender requests preclaims assistance. The borrower should have every

opportunity to take steps to remedy the delinquency before the agency

undertakes more intensive supplemental preclaims efforts. Under the

commenters' proposal that the information be provided to the borrower

no later than the 30th day following the agency's receipt of the

lender's request for preclaims collection assistance, this goal cannot

be met. For example, if an agency offers preclaims assistance on the

90th day of delinquency and the lender uses the full 10 days provided

in 34 CFR 682.411(h) to request assistance, the borrower might not

receive the information until the 130th day of delinquency, which is

well within the supplemental preclaims period. The Secretary believes

that this result does not serve the borrowers. To avoid this situation,

the Secretary has decided to require the guaranty agency to provide the

consumer information and counseling no later than 10 working days after

it receives the lender's request for preclaims assistance.

Changes: The regulations have been revised to require a guaranty

agency to provide counseling and consumer information to the borrower

no later than 10 working days after receiving a lender's request for

preclaims assistance.

Comment: The majority of commenters supported providing consumer

information on default aversion options to delinquent borrowers as part

of preclaims assistance activities. One borrower supported the proposal

and noted that information on consolidation was not readily available

to him when he encountered difficulties in being able to repay his loan

and that he almost defaulted because his lender did not participate in

the Consolidation program. However, an overwhelming number of

commenters strongly objected to what they perceived as a proposal that

the guaranty agency provide consumer information on only the

consolidation loan option. The commenters indicated that they believe

that loan consolidation is not always the best option for many

borrowers because of the potential loss of benefits on the underlying

loans being consolidated. They also pointed out that not all borrowers

may be eligible for consolidation. All the commenters recommended that

the consumer information provided to the borrower include all of the

options available to resolve the delinquency, including deferment,

forbearance, and the opportunity for an income-sensitive repayment

schedule. One commenter recommended that the Department provide the

guaranty agencies with a prepared information piece that outlines all

the default aversion options and borrower profiles describing which

borrowers might benefit from which option.

Discussion: The Secretary agrees with the commenters that the

information provided to the borrower should include all default

aversion options available to the borrower, not just FFEL and Direct

Loan Consolidation. The Secretary's proposal was intended to ensure

that consolidation was included as an option in preclaims counseling

and information, but it was not intended to suggest that information on

other options should be withheld. The borrower's comment supports the

Secretary's belief that information on consolidation has not been

readily made available to delinquent borrowers. The Department agrees

with the suggestion that a prepared information piece providing an

overview of available options with borrower profiles would be useful.

Changes: The regulations are amended to clarify that the

information provided to the borrower must include all options available

to avoid default, including FFEL and Direct Loan Consolidation.

Comment: Many loan industry (guaranty agency, lender, and lender

servicer) commenters recommended that the Secretary modify the

regulations to allow agencies to provide

[[Page 60481]]

the required consumer information in formats other than written ones,

such as video and e-mail. The commenters believe that the regulations

should not preclude the use of more innovative mediums for providing

this information. These same commenters questioned the advisability of

requiring both written information and counseling, suggesting that

providing both may cause borrower confusion. The commenters also

requested clarification as to whether the written consumer information

could be provided as part of the letter that is one of the three

required preclaims activities and whether there are any situations,

such as an invalid address or when the borrower has requested that the

agency cease all collection activities, in which the agency would be

relieved of the requirement to provide this information.

Discussion: The Secretary agrees that the regulations should not

prevent a guaranty agency from providing borrowers with required

counseling and consumer information in formats other than written

letters. The Department is primarily concerned with ensuring that the

borrower receives the information in an appropriate manner. Thus, an

agency may use different methods of providing the information to the

borrower as long as the agency can show that the delinquent borrower

received the information. The Secretary also agrees that this

information may be provided as part of a preclaims letter, provided the

default aversion options are clearly and prominently presented and not

buried in the text of the letter. The Secretary does not agree that

reinforcing the written consumer information with counseling will

confuse borrowers. The Secretary believes that it is important for the

agency to follow up with the borrower to determine that the borrower

received and understood the information, to answer any questions the

borrower may have about the available options, especially the loan

consolidation programs, and to encourage the borrower to act on one of

the options to halt the increasing delinquency. The Secretary expects

an agency to provide this information to the extent that a valid

address or telephone number is available for the borrower.

Changes: The regulations have been modified to specify that an

agency may provide written consumer information on default aversion

options as part of the required preclaims letter and/or in other

written materials or other formats as a separate information piece.

Comment: Loan industry commenters expressed concern about the

provision that specifies that an agency's failure to provide the

required consumer information and counseling constitutes a violation of

the guaranty agency's obligation to perform due diligence in collecting

the loan. The commenters objected to what they viewed as the imposition

of punitive sanctions on a loan-by-loan basis and requested that the

Department withhold assessing penalties for noncompliance with this

provision until the major due diligence reform effort previously

announced by the Department is started. These commenters also requested

clarification that a lender would not be harmed by an agency's failure

to comply with this requirement and that any penalties would be paid

out of an agency's reserve fund and not passed along to a lender or

lender servicer.

Discussion: The Secretary understands that the use of the phrase

``servicing error'' in the preamble and the reference in the

regulations to ``due diligence in collecting'' may have confused

readers because common usage in the FFEL program has made a distinction

between these terms. The Secretary did not intend to make such a

distinction by use of these differing terms. The Secretary agrees with

commenters that lenders should not be penalized for a guaranty agency's

violations in this area. To clarify this, the Secretary has decided to

relocate this provision.

Changes: The statement citing violations of preclaims assistance

requirements as a due diligence violation of the agency has been

relocated to 34 CFR 682.406(a)(12) as a condition of reinsurance.

Section 682.404(f)--Application of Borrower Payments

Comment: Many loan industry commenters agreed that only an

appropriate amount from each borrower payment on a defaulted loan

should be applied to collection costs, but objected to the proposed

language that would prohibit the up-front assessment of collection

costs after default claim payment and require that collection costs be

assessed on each payment received. The commenters indicated that many

guarantor systems are programmed currently to calculate up-front

collection costs according to the limits established in

Sec. 682.410(b)(2) and would require significant changes to make a per

payment assessment. These commenters stated that, at the very least,

retroactive recalculation of collection costs should not be required

except on accounts on which the agency had not previously assessed

fees. In the commenters' view, such reassessment on an account on which

a borrower has been making payments may increase the percentage of

collection costs assessed as well as increase the total amount paid.

A few guaranty agency commenters strongly objected to any change to

this provision of the regulations because they believe that the

application of borrower payments as proposed is not in the best

interest of the borrower and will require the borrower to pay more

interest over the life of the loan because principal is reduced more

slowly. These commenters believe that collection costs are a collection

tool to be used by the agency and that the proposed regulation weakens

this effective tool. One of these commenters also stated that he

believes that this proposal would eliminate an agency's ability to

compromise the debt. Some legal advocates who represent borrowers also

strongly objected to the proposed change, stating that this approach

will be counterproductive and will discourage defaulted borrowers from

continuing to make payments because they will pay over long periods of

time and not see their principal and interest diminish appreciably. The

advocates recommended that the current regulations in this area be

retained. A school association commenter also objected to the proposal

and recommended that agencies be required to apply payments to

principal and interest first, then collection and late charges. The

commenter believes that the objective should be repaying the loan, not

creating additional financial hardship for the borrower.

Discussion: The Secretary understands that some commenters would

prefer that defaulted borrowers not be discouraged from repaying on a

defaulted loan by having to pay collection costs. However, section 484A

of the Higher Education Act requires that these borrowers, rather than

the taxpayers, bear reasonable costs of collection. The current

regulations giving the guaranty agency the option of determining how

payments are to be applied has led in some instances to the borrower

paying few if any collection costs and the regulations do not comply

with the Federal Claims Collection Standards. Therefore, the Secretary

does not believe that retaining the current requirements, as suggested

by many commenters, is an option. The Secretary does not agree that

this change prevents an agency from compromising a portion of the

collection costs if a borrower makes a lump sum payment to satisfy the

debt.

The loan industry commenters are correct that the proposed change

precludes agencies from continuing to assess collection costs upfront

at a time when the agency has not yet incurred

[[Page 60482]]

those costs. The Secretary notes that the borrower is not legally

obligated to pay costs which have not been incurred. This regulatory

change is intended to require the guaranty agencies to charge only

those costs that have been incurred and to prohibit the upfront loading

of collection costs on a borrower's account because it discourages

repayment and does not reflect the agencies' actual collection

expenses. In its own collection efforts, the Department calculates and

displays in its billing statements the projected contingent fee charges

that will be incurred and assessed against the borrower if the full

amount of principal and interest owed is not immediately repaid. The

Department incurs a contingent fee cost only as the borrower repays and

then passes that cost on to the borrower as it is incurred on a

payment-by-payment basis. The Department does not assess costs to the

borrower it has not incurred and attempts to make this distinction

clear in its notices to borrowers.

The Secretary understands that some agencies may be required to

make significant systems changes to inform borrowers clearly that they

will be assessed collection costs on a per payment basis. Because of

the time and complexity involved in making the necessary systems

changes, the Secretary agrees that a delayed effective date for

implementation of the regulations is appropriate as reflected in the

effective date section of this document. The Secretary notes, however,

that there has never been a legal basis for an agency to charge

collection costs it has not incurred to a borrower and the delayed

effective date is not intended to justify failure to conform to the

law.

Changes: No changes have been made to the regulations. However, the

Secretary has provided a delayed effective date for implementation of

this provision of the regulations.

Comment: In response to the Secretary's solicitation on whether a

guaranty agency should be allowed to apply borrower payments to

incidental charges, after collection costs, rather that only after all

principal and interest is satisfied, loan industry commenters

overwhelmingly recommended that this decision be the option of the

guarantor. They believe guarantors should be allowed to apply payments

to incidental charges, such as late charges and court fees, when they

are assessed, and as the agency deems appropriate. Some legal advocates

for borrowers recommended that the current requirements, which provide

that payments be applied to these costs only after the repayment of all

principal and interest, be retained.

Discussion: The Secretary has decided that, consistent with 4 CFR

Chapter II, section 102.13(f) of the Federal Claims Collection

standards, the borrower's payment must be applied to incidental charges

(which the Secretary understands will be nominal amounts, such as late

charges) after collection costs are paid and before the payment is

applied to accrued interest and outstanding principal.

Changes: The regulations have been revised to require that borrower

payments on a defaulted loan be applied to any incidental charges after

the appropriate amount of collection costs is paid and before the

payment is applied to accrued interest and outstanding principal.

Comment: Loan industry commenters proposed that the phrase

``reinsured interest'' in the current regulations be changed to

``accrued interest'' because the borrower owes all accrued interest

whether or not the agency paid the lender insurance on the interest or

the agency filed for reinsurance with the Secretary. The commenters

pointed out that interest that accrues after the lender's claim is paid

is not reinsured.

Discussion: The Secretary agrees with the commenters that the

regulations should reference accrued interest in this provision.

Changes: The regulations have been revised to provide that borrower

payments are applied to ``accrued'' interest rather than to

``reinsured'' interest.

Comment: One commenter pointed out that Sec. 682.404(f) fails to

identify that the payments being described are being applied to a

defaulted loan and recommends a change to reflect this.

Discussion: The Secretary agrees with the commenter.

Changes: The regulations have been modified to refer to a defaulted

loan.

Section 682.410(b)(2)--Assessment of Collection Charges

Comment: An overwhelming number of commenters objected to the

proposal that would require a guaranty agency to assess a borrower in

default the collection costs that the same borrower would be charged if

the loan was held by the Department and recommended that the current

regulatory standard be retained. Loan industry commenters, although

appreciating the Secretary's goal of standardization, believe that the

flat rate proposed in the NPRM is not reasonable if it bears no

relation to the actual costs incurred in the collection process. These

commenters believe a flat rate is inconsistent with section

428(c)(6)(B)(i) of the HEA which states that collection costs are those

costs incurred by a guaranty agency in relation to collecting on

defaulted loans. Finally, loan industry commenters contended that fair

treatment of borrowers is preferable to uniform treatment if the result

would be that borrowers would be assessed more than they otherwise

would be charged. They believe a flat rate assessment will also prevent

an agency from continuing to compromise collection costs when it deems

it appropriate.

Some school associations supported the Secretary's proposal to

mandate a maximum amount of collection costs that agencies would be

authorized to assess, but strongly recommended that guaranty agencies

have the flexibility to assess less than the flat rate when the actual

cost is less.

Borrower representatives strongly opposed the Secretary's proposal

on the grounds that the imposition of uniform collection rates is not

beneficial to borrowers if uniformity means higher collection fees.

They recommended that reasonable collection costs be defined as the

lesser of the percent limitation in the borrower's promissory note or

other repayment agreement or the guarantor's actual costs of

collection.

Discussion: After further consideration, the Secretary agrees with

the commenters that the assessment of a uniform rate may not be the

fairest approach to assessing collection costs, and could prove

counterproductive if it creates a disincentive to borrowers continuing

to make payments on defaulted loans. In regard to the borrower

representatives' recommendation to define reasonable collection costs

by referencing the borrower's promissory note, the Secretary notes that

the common promissory notes approved by the Secretary do not include

any such limitation and may not be changed to provide for one.

Changes: The Secretary has decided to retain current regulations

governing the maximum collection costs that may be assessed a defaulted

borrower, except specifically to note that such costs are subject to

limitations in the borrower's promissory note, if any.

Section 682.410(b)(6)(vii)(A)--Collection Efforts on Defaulted Loans

Comment: Loan industry commenters recommended that the Secretary

withdraw the proposed change to post-default collections that would

require guaranty agencies to undertake ``administrative wage

garnishment'' no later than the 225th day of a borrower's delinquency

because it was unclear how that proposal related to the entire text of

paragraph (vii) of the current rule that

[[Page 60483]]

addresses guaranty agency collection efforts. The commenters noted that

the term administrative wage garnishment did not appear in the text of

the regulations, but that they understood that the Department's intent

was to require the agencies to use administrative wage garnishment

exclusively. With that understanding, the commenters strongly objected

to the loss of the guaranty agency's option to undertake judicial wage

garnishment which they claimed was an efficient and cost-effective

means to satisfy the debt in some states. They strongly recommended

that agencies be allowed to continue to use judicial wage garnishment

as a collection tool and to determine whether administrative wage

garnishment or judicial wage garnishment is the most appropriate

collection tool in particular cases. Borrower representatives indicated

that they believe that the proposal to require administrative wage

garnishment may be unworkable and contrary to the borrower's best

interest. These commenters believe that difficulties in obtaining

accurate employment data through state labor or unemployment insurance

departments may result in a high volume of nonproductive and harassing

wage garnishment attempts, leading to increased legal challenges to

garnishment. They believe that litigation affords a borrower with more

due process protection and recommend that the Secretary withdraw the

proposal.

Discussion: The Secretary believes that program experience has

shown that administrative wage garnishment is a far more efficient and

cost-effective collection tool than across-the-board litigation of all

defaulted accounts. In regard to the loan industry comments about the

alleged benefits features of judicial wage garnishment, the Secretary

notes that the administrative wage garnishment authority was added to

the HEA only after attempts to promote judicial wage garnishment by

guaranty agencies proved ineffective. The guaranty agencies have

presented no significant evidence of increased collections through the

judicial wage garnishment process to justify the significant expense

and complications created by that process. The Secretary also believes

that the notice and opportunity for a hearing provisions in the

regulations governing administrative wage garnishment afford a

defaulted borrower adequate due process and an opportunity to contest

the debt or enter into a repayment agreement on the loan with the

guaranty agency and avoid the problems identified by the borrower

commenters. The Secretary notes that this discussion is not intended to

preclude a guaranty agency's use of a state administrative wage

garnishment process that would provide similar benefits and protections

to the government and the borrower as the HEA. The Secretary invites

any agency that believes it has such authority to discuss the use of

such authority with the Secretary. The Secretary also notes that this

regulation is not intended to prohibit an agency from using state tax

refund offset authority that may be available.

The Secretary does agree with the commenters that conforming

changes are necessary to Sec. 682.410(b)(6)(vii) and (b)(7) to clarify

the use of wage garnishment within the greater context of the 181-545

day due diligence period and has made appropriate changes to these

regulations. The Secretary notes that he will review these changes

further during the planned consideration of guaranty agency due

diligence requirements next year.

Changes: Conforming changes have been made to clarify this

requirement within the context of the other provisions of the 181 to

545-day period specified in the regulations. References to required

collection activities at the 545th day of delinquency have been deleted

from the regulations.

Comment: Guaranty agency commenters overwhelmingly disagreed with

the proposal that defaulted borrower accounts be assigned to the

Department for litigation by the federal government if the borrower has

no income that could be attached through wage garnishment, but has

assets which could be attached through a court order. The commenters

believe that the agencies should be permitted to choose to litigate or

assign the account to the Department. They believe that agencies have

the resources and procedures already in place to determine the most

appropriate and cost-effective method of recovery and that assignment

to the Department will not increase collections.

Discussion: The Secretary disagrees with the commenters. It is the

Secretary's experience that the guaranty agencies are frequently

inconsistent in pursuing and enforcing judgments.

Moreover, the process for transferring these judgments when a loan

is assigned to the Secretary or transferred to another agency when the

original agency closes can be complex and confusing for the agencies,

the Secretary and the borrower. Thus the Secretary believes that

centralized litigation by the federal government is the most cost-

effective means of collecting these accounts. The Secretary believes

that the number of defaulted accounts where the borrower has no income

to be garnished but assets which could be attached will not be an

overwhelming number and is convinced that the federal government has

sufficient resources to litigate these accounts efficiently.

The Secretary does not intend that guaranty agencies immediately

cease collection activity on judgments on which they are collecting. It

is the Secretary's intention to eliminate the need for guaranty agency

litigation on future defaults. However, the Secretary believes that

guaranty agencies should continue to collect on current paying

judgments. To avoid confusion, therefore, the Secretary has decided not

to delete all references to litigation in the current regulation. The

Secretary will make the necessary technical changes to the regulations

at a later date.

Changes: None.

Section 682.411--Due Diligence By Lenders in the Collection of Guaranty

Agency Loans

Comment: Many loan industry commenters strongly supported the

Secretary's effort to change the timing of the first delinquency notice

required in Sec. 682.411(c) of the regulations and the resulting change

in the timing of the subsequent due diligence period in

Sec. 682.411(d), but recommended that the 1- to 15-day period be

extended to a 1-20-day period. The commenters indicated that they

believe that borrowers assume that a 15-day grace period, similar to

that available on many consumer loans, is available on their student

loans. They believe that the additional five days they are requesting

would allow borrowers to mail payments within 15 days of the due date

without adverse consequences. The commenters believe that the use of

the 20-day standard will eliminate unnecessary collection letters from

being generated. Another commenter recommended that either a 15-day

period or a 20-day period be used, depending upon the lender's policy

for reporting delinquencies to credit bureaus. The majority of loan

industry commenters urged the Secretary to allow lenders to implement

the change in the time period for delinquent notices or collection

letters ``no later than July 1, 1997.''

Discussion: The Secretary believes that because a student loan may

be a borrower's first consumer loan experience, lenders must exercise

greater diligence than they might on other consumer loans in order to

monitor borrower delinquency and take proactive steps to ensure that a

borrower establishes a successful repayment

[[Page 60484]]

pattern. The Secretary believes that adopting the 15-day period for the

first notice of delinquency will eliminate the possibility of

unnecessary collection notices. In response to the request for early

implementation of this change, the Secretary notes that, under section

482(c) of the HEA, this change cannot be effective until July 1, 1997.

Changes: A conforming change to reference the 15-day standard for

generating the first delinquency notice has been made in

Sec. 682.202(f)(2) of the regulations.

Comment: Many loan industry commenters disagreed with the proposal

that the first notice of delinquency required by Sec. 682.411(c)

provide the borrower with information on loan consolidation,

forbearance, and other available options to avoid default. The

commenters point out that the borrower's initial delinquency is not

necessarily a sign of either financial difficulty in making scheduled

payments or of impending default. They believe that the initial notice

should simply remind the borrower of the delinquency and that he or she

should call the lender or lender servicer if he or she is having

difficulty making scheduled payments. They also point out that a first

notice of delinquency is generally issued in a billing statement format

that is not intended to alienate or intimidate the borrower and that

space for providing extensive information is limited.

Many of these same commenters also objected to adding the

additional notice to subsequent collection letters required under

Sec. 682.411(d). The commenters argued that lenders and lender

servicers should be allowed to insert a notice of their own design that

they believe will elicit the best response from the borrower and

further recommended that the specific references in the notice to wage

garnishment, tax offset, and litigation be replaced with a more generic

reference to the lender taking ``other actions as authorized by law.''

The commenters believe that many borrowers do not understand what these

terms mean and that the lender should be allowed to explain these legal

actions in simple language that borrowers will understand. They also

indicated that a listing of specific consequences may suggest to the

borrower that this list supersedes any right the guarantor or the

Secretary has to pursue collection as provided for in the borrower's

promissory note.

Discussion: The Secretary disagrees with commenters that informing

the borrower that there are various options available to assist the

borrower if he or she is having difficulty making scheduled payments is

inappropriate in the first notice of delinquency. Given the current due

diligence requirements for issuing second and subsequent collection

letters, there will be a significant delay before the next collection

letter is issued in which this information could be provided. The

Secretary notes that he did not intend to require that the first notice

of delinquency contain detailed information on loan consolidation,

forbearance, deferments, and other default aversion options. This

sentence was placed in paragraph (c) in error and was intended instead

to be included in the 16-180 day delinquency collection timeframe. The

Secretary recognizes that not all borrowers may be experiencing

difficulties at this stage and that the billing format generally used

to issue the first notice has limited space. Therefore, the Secretary

has decided that it is sufficient to include on the first notice a

prominent statement, which includes the name and a telephone number of

a contact person, and that informs the borrower that other options are

available if he or she is experiencing difficulties making scheduled

payments.

In regard to the later collection letters, however, the Secretary

believes that providing information on default aversion options and the

proceedings that may be instituted against the borrower are even more

critical. The Secretary believes that borrowers are capable of

understanding the required notice related to tax offset, wage

garnishment, and litigation by the federal government and notes that

nothing prevents a lender from explaining these terms in simpler

language after providing the notice if the lender believes it is

necessary.

Changes: Section 682.411(c) has been modified to require the lender

to include a prominent message in the first delinquency notice briefly

mentioning that various forms of assistance are available to borrowers

experiencing repayment difficulties and providing a telephone contact

number for further information. Section 682.411(d) has been modified to

incorporate the more complete information disclosure originally

proposed in Sec. 682.411(c).

Section 682.413--Remedial Actions

Comment: The majority of guaranty agency commenters stated that the

Secretary should only exercise the remedial action of loan assignment

in circumstances involving repetitive violations and consistent

patterns of noncompliance, not isolated or occasional violations that

do not materially impact the collectability of the loan. The commenters

also stated that the regulations should define the circumstances under

which the assignment option will be used rather than the loss of

reinsurance option and provide that it is the guarantor's choice as to

which option will be used. These same commenters recommended that

guaranty agencies be provided with a ``curing'' process for due

diligence violations comparable to that provided for lenders and an

appeal process related to any actions taken by the Secretary under this

section.

Discussion: The option of assignment is intended as additional

discretionary authority that will allow the Secretary to address

guaranty agency violations of any of the fiscal, administrative and

enforcement requirements of Sec. 682.410 in a manner that best serves

the interests of the FFEL program. The Secretary has the responsibility

to determine the appropriate sanction and he does not agree that the

guaranty agency should be able to choose how its violation should be

addressed. The Secretary will determine the appropriate action on a

case-by-case basis. Therefore, he also declines to incorporate into the

regulations a list of circumstances under which he would decide to use

the option of mandatory assignment. The Secretary further notes that 34

CFR 682.413(d) already addresses the procedures the Secretary will

follow in imposing a fine or penalties under this section of the

regulations and provides guarantors with appropriate due process. The

Secretary believes any discussions related to guaranty agency due

diligence and proposed cures should be left to the due diligence reform

effort that the Department will undertake in 1997.

Changes: None.

Comment: A number of commenters proposed various technical changes

to the regulations included in the NPRM.

Discussion: The Secretary appreciates the commenters' suggestions

for technical changes and agrees with many of the suggestions. However,

in some cases, those suggestions go beyond the scope of this rule.

Accordingly, the Secretary will incorporate those changes in a separate

publication that will be issued shortly.

Changes: None.

Comment: One commenter asked the Secretary to address the issue of

whether the Federal Fair Debt Collection Practices Act (FDCPA) applies

to guaranty agency collection activities on defaulted loans.

Discussion: It has been the longstanding view of the Secretary and

the Federal Trade Commission that the FDCPA does not apply to guaranty

[[Page 60485]]

agencies collecting defaulted FFEL Program loans in their own names and

protecting the financial interests of their guarantee programs. The

FDCPA does not apply to an entity collecting a debt it is owed.

Moreover, application of the FDCPA to the guaranty agencies would

potentially penalize them for compliance with the requirements in 34

CFR 682.410 and, thus, is inconsistent with the Secretary's goal of

ensuring a minimum standard of collection action. The Secretary notes,

however, that the FDCPA clearly applies to a collection contractor

acting for the guaranty agency. Such contractors are collecting a debt

owed to another and are clearly subject to the FDCPA.

Change: None.

Regulatory Flexibility Act Certification

Comment: Many commenters stated that Sec. 682.404, requiring the

guaranty agency to offer preclaims assistance no later than the 75th

day of delinquency, could have a significant impact on lenders,

particularly small lenders. The commenters also stated that many loans

that become 60 to 90 days delinquent are ``self-cured'' through the

borrower or other party providing documentation for deferment or

forbearance. In addition, the commenters noted that requiring

assistance from the guaranty agency earlier in the process could result

in unnecessary requests for preclaims assistance and the unnecessary

loading and processing of the preclaims assistance request by the

guarantor.

Discussion: The Secretary agrees with the commenters and believes

that it would be more advantageous for collection assistance to be made

available to the lender by the guaranty agency no later than the 90th

day of delinquency.

Change: The regulations have been revised to provide that preclaims

assistance be made available no later than the 90th day of delinquency.

Comment: Many commenters stated that the Sec. 682.411 provision

establishing a minimum of information to be included in the letters

sent by lenders to delinquent borrowers during the 1-15 days of

delinquency provides too much information and reduces the clarity of

the letters making the letters less effective. The commenters expressed

concern that requiring additional information in the notice sent during

this period could create a significant burden on lenders, since the

first notice is generally a billing statement.

Discussion: The Secretary notes that it was not the Department's

intent to require that the notice or collection letter sent during the

1-15 days of delinquency contain detailed information for the borrower

regarding loan consolidation, forbearance and other available options

to avoid default. This sentence was placed in paragraph (c) in error.

This requirement should have been included in the collection timeframe

of 16-180 days of delinquency. However, the Secretary does want a

statement in the collection letter relating to the 1-15 day delinquency

that indicates that other options are available if a borrower is having

difficulty making payments. The name and telephone number of a contact

person should also be included in this letter.

Change: The regulations have been amended to remove this

requirement from paragraph (c) and insert it in paragraph (d). A

modified statement has been added to paragraph (c).

Paperwork Reduction Act of 1995

Section 682.411 contains information collection requirements. As

required by the Paperwork Reduction Act of 1995, the U.S. Department of

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

Management and Budget (OMB) for its review. (44 U.S.C 3504(h)). In

response to the Secretary's invitation in the NPRM to comment on any

potential paperwork burden associated with this regulation, the

following comments were received.

Comment: Many commenters suggested that the Secretary amend

Sec. 682.411(c) to expand the length of the current timeframe that

lenders will have to send the first written collection notice or

collection letter to a delinquent borrower from 1-10 days (1-15 in

NPRM) to 1-20 days. The commenters stated that consumer loans often

offer a 15-day grace period on payment due dates. They suggested that

many borrowers believe that the student loan has a similar payment

grace period and may delay mailing their payment. The commenters

believe that many unnecessary collection letters will be eliminated by

expanding the timeframe to 20 days.

Discussion: The Secretary declines to extend the timeframe

specified in the NPRM (1-15 days) to 1-20 days. The Secretary believes

that the expanded timeframe in the NPRM is sufficient to eliminate the

majority of unnecessary collection notices that have been generated

under the current 10-day period.

Change: None.

Comment: Many commenters stated that the Sec. 682.411 provision

establishing a minimum of information to be included in the letters

sent by lenders to delinquent borrowers during the 1-15 days of

delinquency provides too much information and reduces the clarity of

the letters making the letters less effective. The commenters expressed

concern that requiring that additional information be added to the

notice sent during this period could create a significant burden on

lenders, since the first notice is generally a billing statement.

Discussion: The Secretary notes that it was not the Department's

intent to require that the notice or collection letter sent during the

1-15 days of delinquency contain detailed information for the borrower

regarding loan consolidation, forbearance and other available options

to avoid default. This sentence was placed in paragraph (c) in error.

This requirement should have been included in the collection timeframe

for the 16-180 days of delinquency. However, the Secretary does intend

that a statement in the collection letter relating to the day 1-15

delinquency indicate that other options are available if a borrower is

having difficulty making payments. The name and telephone number of a

contact person should also be included in this letter.

Change: The regulations have been amended to remove the statement

in the NPRM from paragraph (c) and insert it in paragraph (d). A

modified statement has been inserted in paragraph (c).

Assessment of Educational Impact

In the NPRM, the Secretary requested 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.

Based on the response to the proposed regulations and on its own

review, the Department has determined that the regulations in this

document do not 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.

(Catalog of Federal Domestic Assistance Number 84.032, Federal

Family Education Loan Program)

Dated: November 21, 1996.

Richard W. Riley,

Secretary of Education.

The Secretary amends part 682 of title 34 of the Code of Federal

Regulations as follows:

[[Page 60486]]

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 682.202 is amended by removing the number ``10'' from

paragraph (f)(2) and adding in its place the number ``15''.

3. 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.

* * * * *

4. 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 90th

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 consumer information (in

written or other format) to the borrower by the 10th working day after

the agency receives the lender's request for preclaims assistance

informing the borrower of all of the borrower's options to avoid

default, including the availability of consolidating delinquent loans

under the FFEL Program or the Federal Direct Consolidation Loan

Program.

* * * * *

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

agency by a borrower on a defaulted loan must be applied first to the

collection costs incurred to collect that amount and then to other

incidental charges, such as late charges, then to accrued interest and

then to principal.

* * * * *

5. Section 682.406 is amended by revising paragraph (a)(12) to read

as follows:

Sec. 682.406 Conditions of reinsurance coverage.

* * * * *

(a) * * *

(12) The agency and lender complied with all other Federal

requirements with respect to the loan including the payment of

origination fees and compliance with all preclaims assistance

requirements in Sec. 682.404(a)(2)(ii);

* * * * *

6. 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 and subject to any limitation on the amount

of those costs in that note, the guaranty agency 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. Except as provided in

Secs. 682.401(b)(27) and 682.405(b)(1)(iv), the amount charged a

borrower must equal the lesser of--

(i) The amount the same borrower would be charged for the cost of

collection under the formula in 34 CFR 30.60; or

(ii) 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) After 181 days:

(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 administrative 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. The

agency must not file suit to collect a loan from a borrower unless

directed to do so by the Secretary.

* * * * *

7. Section 682.411 is amended by revising paragraphs (c), (d)

introductory text, (d)(1), and (d)(2) 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, a lender/servicer contact and

telephone number, and a prominent statement informing the borrower that

assistance may be available if he or she is experiencing difficulty in

making a scheduled repayment.

(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.

The notice or collection letter sent during this period must include,

at a minimum, information for the borrower regarding deferment,

forbearance, income-sensitive repayment and loan consolidation and

other available options to avoid default.

(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,

[[Page 60487]]

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.

* * * * *

8. 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. 96-30359 Filed 11-26-96; 8:45 am]

BILLING CODE 4000-01-P