Barring Delinquent Debtors From Obtaining Federal Loans or Loan Insurance or Guarantees

SUMMARY: The Debt Collection Improvement Act of 1996 (DCIA) mandated a

new eligibility requirement for persons seeking Federal financial

assistance, namely that delinquent Federal debtors are ineligible for

Federal direct and indirect loan assistance (other than disaster

loans). This proposed rule defines when a debt is in delinquent status

and when a delinquency is resolved for purposes of determining whether

the DCIA bars a person from receiving financial assistance. In

addition, this proposed rule prescribes when the Secretary of the

Treasury may exempt a class of delinquent debts from affecting a

debtor's loan eligibility. This proposed rule also sets forth factors

for authorized agency officials to consider when deciding whether to

waive the DCIA eligibility requirement.

DATES: Comments must be received on or before May 22, 1998.

ADDRESSES: All comments should be addressed to Gerry Isenberg,

Financial Program Specialist, Debt Management Services, Financial

Management Service, 401 14th Street SW, Room 151, Washington, D.C.

20227. A copy of this proposed rule is being made available for

downloading from the Financial Management Service web site at the

following address: http://www.fms.treas.gov.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Financial Program

Specialist, at (202) 874-6859; or Ellen Neubauer or Ronda Kent, Senior

Attorneys, at (202) 874-6680.

SUPPLEMENTARY INFORMATION:

Background

Section 31001(j)(1) of the Debt Collection Improvement Act of 1996

(DCIA), Pub. L. 104-134, 110 Stat. 1321-358 (Apr. 26, 1996), codified

at 31 U.S.C. 3720B (section 3720B), provides that a person owing a

delinquent nontax debt to the Federal Government is ineligible for

Federal financial assistance in the form of a loan (other than a

disaster loan) or loan insurance or guarantee. The head of an agency

that administers a Federal financial assistance program may waive this

provision. The waiver authority may be delegated only to the agency's

Chief Financial Officer or Deputy Chief Financial Officer. In addition,

the Secretary of the Treasury may exempt any class of debts from

affecting a person's eligibility for receiving financial assistance.

The DCIA requires the Secretary of the Treasury to prescribe

standards under which agencies will determine whether a person has an

outstanding delinquent debt that would trigger the DCIA bar to Federal

financial assistance. As the lead agency for the collection of nontax

debt in the Federal Government, the Financial Management Service (FMS),

a bureau of the Department of the Treasury, is responsible for

promulgating the regulations governing this and other provisions of the

DCIA. This proposed rule defines when a debt is in delinquent status

and when the delinquency is resolved for purposes of determining

whether the DCIA bars a person from receiving financial assistance.

This proposed rule also prescribes standards under which a Treasury

exemption may be granted and sets forth factors for an agency to

consider when deciding whether an agency waiver is appropriate.

Section Analysis

(a) Definitions

The intent of section 3720B is to prevent persons owing delinquent

nontax obligations to the Government from receiving Federal financial

assistance. The definition of the term ``debt'' in paragraph (a)(3) is

intended to cover all amounts owed to the United States, including

debts administered by a third party as an agent for the Federal

Government, and has the same meaning as set forth in 31 U.S.C.

3701(b)(1).

As stated in paragraph (a)(4), the term ``Federal financial

assistance'' or ``financial assistance'' as defined in section 3720B

means any Federal loan (other than a disaster loan), loan insurance, or

loan guarantee. Although disaster loans are not covered by section

3720B and this proposed rule, nothing in this proposed rule is intended

to suggest that a delinquent debtor is eligible for a disaster loan

unless he or she meets all eligibility requirements under applicable

law.

In paragraph (a)(7), the term person is defined to include all

individuals and organizations, including state and local governments,

but does not include Federal agencies. FMS requests comments on the

extent to which foreign entities are barred from obtaining Federal

financial assistance under the DCIA (31 U.S.C. 3720B).

(b) Purpose and Scope

The purpose and scope of this proposed rule are described in

paragraph (b) of this section. Section 3720B and this proposed rule

apply to persons owing delinquent nontax debt to the Government. This

proposed rule sets forth the standards for determining whether a debt

is in delinquent status for the purpose of barring a debtor from

receiving Federal financial assistance as required by section 3720B. In

addition, the proposed rule addresses when an agency waiver or Treasury

exemption is appropriate. Nothing in this proposed rule is intended to

define the term ``delinquent'' for purposes other than the application

of section 3720B.

As stated in paragraph (b)(3), this proposed rule is not intended

to replace agency policies or procedures for determining whether a

person is eligible for financial assistance or for agency review of

denials of such assistance. For example, although the DCIA bar does not

apply to a person owing delinquent Federal tax debt, nothing in this

proposed rule precludes an agency from denying financial assistance to

such a person under other applicable eligibility requirements. The fact

that a debtor has had debts discharged in bankruptcy also may be a

factor that agencies consider in assessing creditworthiness although

the DCIA and this proposed rule do not bar the extension of credit.

Similarly, the granting of a waiver or an exemption under this section

does not mean that a loan application must be approved. For example, a

waiver of this rule by the head of an agency under the provisions of

section 3720B does not prohibit the agency from denying credit to a

person based on general creditworthiness requirements, such as

repayment ability or failure to pay obligations when they become due.

As stated in paragraph (b)(4), this proposed rule does not confer

any new rights or benefits on persons seeking Federal financial

assistance. The DCIA mandated a new eligibility requirement for persons

seeking financial assistance, namely that delinquent Federal debtors

are ineligible for Federal direct and indirect loan assistance (other

than disaster loans). Agencies are not required to add new review

procedures for persons who do not qualify for or are denied financial

assistance based on the DCIA eligibility requirement. Those persons who

are denied financial assistance based on the DCIA requirement are

entitled to the same

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opportunities for review, if any, as those who are denied financial

assistance based on other applicable eligibility requirements.

(c) General Rule

Paragraph (c) of this section states the general rule contained in

the DCIA that a person is ineligible for a Federal direct loan (other

than disaster loans), loan insurance or loan guarantee if that person

owes a delinquent nontax debt to the Federal Government. The DCIA

eligibility requirement applies to all persons seeking Federal

financial assistance and owing an outstanding nontax debt in delinquent

status, including, but not limited to, guarantors. The DCIA eligibility

requirement applies to all Federal loans (other than disaster loans)

including those loans for which creditworthiness or credit history is

not otherwise a factor for eligibility purposes, e.g., student loans.

Since there are many ways in which agencies may obtain delinquent debt

information, this proposed rule does not mandate a particular method of

collecting such information. Agencies may request delinquent debt

information on loan applications, obtain credit reports, and use the

Department of Housing and Urban Development's Credit Alert Interactive

Voice Response System (CAIVRS) to determine whether a person seeking

financial assistance owes a delinquent nontax debt to the Federal

Government. For information about the CAIVRS program, agencies should

contact the Director of Information Technology, Department of Housing

and Urban Development, 451 7th Street, S.W., Washington, DC 20410.

This proposed rule encourages persons seeking financial assistance

to resolve their delinquent debt. Therefore, after a person's

delinquency is resolved in accordance with the provisions of paragraph

(e)(1) of this section, the DCIA and this proposed rule no longer

provide a basis for denying financial assistance to that person. As

noted above, a credit-granting agency may use other factors in

determining whether to grant or deny credit based on other applicable

eligibility requirements.

The DCIA authorizes the head of the agency to waive the application

of the general rule. The head of the agency may delegate the waiver

authority only to the Chief Financial Officer of the agency who may

redelegate the authority only to the Deputy Chief Financial Officer.

Paragraph (g) of this section, discussed below, prescribes the factors

that authorized agency officials should consider when deciding whether

to waive the DCIA requirement.

(d) Delinquent status

Paragraph (d) defines when a debt is in delinquent status for

purposes of section 3720B. As noted above, this proposed rule does not

define the term ``delinquent'' for any purpose other than the

application of section 3720B.

As stated in paragraph (d)(2)(i), a debt is not in delinquent

status if the creditor agency has released the person seeking Federal

financial assistance from the obligation to pay the debt. A creditor

agency may release a person from an obligation because the person has

paid the debt in an amount acceptable to the creditor agency, the debt

was determined not to be owed, or for other reasons. The release of an

individual obligor does not mean that all obligors on the debt have

been released. In addition, as stated in paragraph (d)(2)(i), a debt is

not in delinquent status if an adjudication or determination has been

made that the person does not owe or does not have to pay the debt.

As stated in paragraph (d)(2)(ii), a debt is not in delinquent

status for purposes of this proposed rule if the debtor is the subject

of a bankruptcy proceeding or has been discharged in bankruptcy. In

this circumstance the debt is not in delinquent status so long as the

debtor is current on any applicable court authorized repayment plan.

Nothing in this proposed rule is intended to deny persons seeking

financial assistance the opportunity to contest a creditor agency's

determination that a debt is owed. Therefore, as stated in paragraph

(d)(2)(iii), for purposes of this proposed rule a debt is not

considered to be in ``delinquent status'' if a timely-filed appeal

challenging the creditor agency's determination that the debt exists or

is delinquent is pending. The purpose of requiring that an appeal be

filed timely is to prevent debtors from appealing an agency's

determination solely to avoid the application of section 3720B. To the

extent permissible, agencies should defer making a determination as to

whether or not to extend credit until the appeal process is completed.

(e) Delinquency resolution

A person may remove the bar to financial assistance mandated by the

DCIA by resolving a delinquency in accordance with the provisions of

paragraph (e)(1). The debtor must resolve the debt with the creditor

agency responsible for the collection of the debt or with the agency to

which the creditor agency has referred the debt for collection. For

purposes of this proposed rule, the debt is ``resolved'' if the debtor

pays the debt in full, pays a compromise amount agreed to by the

creditor agency, brings the debt current i.e., makes up all past due

monthly payments, including interest, fees, and penalties, or enters

into a written agreement with the creditor agency to pay the debt under

terms acceptable to the creditor agency. The fact that the creditor

agency has ceased its collection efforts for a reason other than one

set forth in paragraph (e)(1) of this section does not mean that the

delinquency has been resolved. For example, unless one of the

provisions of paragraph (e)(1) apply, a delinquent nontax debt that has

been written off the books of the creditor agency or reported to the

Internal Revenue Service as discharged (i.e., cancelled) would not be

deemed ``resolved.''

(f) Exemptions by the Secretary

Upon the written request and recommendation of the head of an

agency, the Secretary of the Treasury may exempt any class of

delinquent debt from affecting a debtor's eligibility for financial

assistance based on Section 3720B. Paragraph (f)(2) specifies the

information that an agency should provide when recommending an

exemption. Generally, an exemption will not be granted unless

compelling reasons justify the elimination of the bar to Federal

financial assistance for a class of delinquent debtors. Paragraph

(f)(3) contains the circumstances under which Treasury may grant an

exemption.

(g) Waivers by the Agency

The DCIA authorizes the head of the agency, on a person by person

basis, to grant a waiver of the DCIA eligibility requirement. The head

of the agency may delegate the waiver authority only to the Chief

Financial Officer of the agency who may redelegate the authority only

to the Deputy Chief Financial Officer. Paragraph (g) prescribes factors

that an agency official should consider when deciding whether to grant

a waiver of the DCIA requirement that financial assistance be denied. A

waiver will be granted only when compelling circumstances require.

(h) Effect of Denial of Federal Financial Assistance

Paragraph (h) states that nothing in this proposed rule precludes a

person from obtaining Federal financial assistance after a delinquent

debt has been resolved.

Regulatory Analysis

This proposed rule is not a significant regulatory action as

defined in Executive Order 12866. It is hereby

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certified that this rule will not have a significant economic impact on

a substantial number of small entities. The basis for this

certification is that the DCIA provides that entities owing delinquent

debt to the Federal Government are ineligible for Federal direct and

indirect loan assistance (other than disaster loans). This proposed

rule provides definitions for purposes of determining whether the DCIA

mandate applies. Therefore a regulatory flexibility analysis is not

required.

List of Subjects in 31 CFR Part 285

Administrative practice and procedure, Credit, Debt, Loan programs.

Authority and Issuance

For the reasons set forth in the preamble, 31 CFR Part 285 is

proposed to be amended as follows:

1. The authority citation for Part 285 is proposed to be revised to

read as follows:

Authority: 26 U.S.C. 6402; 31 U.S.C. 321, 3701, 3711, 3716,

3720A, 3720B, 3720D; E.O. 13019; 3 CFR, 1996 Comp., p. 216.

2. Section 285.13 is proposed to be added to Subpart B to read as

follows:

Sec. 285.13 Barring delinquent debtors from obtaining federal loans or

loan insurance or guarantees.

(a) Definitions. For purposes of this section:

Agency means a department, agency, court, court administrative

office, or instrumentality in the executive, judicial, or legislative

branch of the Federal Government, including government corporations.

Creditor agency means any Federal agency that is owed a debt.

Debt means any amount of money, funds or property that has been

determined by an appropriate official of the Federal Government to be

owed to the United States or an agency thereof by a person, including

debt administered by a third party as an agent for the Federal

Government.

Federal financial assistance or financial assistance means any

Federal loan (other than a disaster loan), loan insurance, or loan

guarantee.

FMS means the Financial Management Service, a bureau of the

Department of the Treasury.

Nontax debt means any debt other than a debt under the Internal

Revenue Code of 1986 (26 U.S.C.).

Person means an individual, corporation, partnership, association,

organization, State or local government, or any other type of entity

other than a Federal agency.

Secretary means the Secretary of the Treasury.

(b) Purpose and scope. (1) This section prescribes standards for

determining whether an outstanding nontax debt owed to the Federal

Government is in delinquent status and whether such delinquency is

resolved for the purpose of denying Federal financial assistance to a

debtor. In addition, this section prescribes the circumstances under

which the Secretary may exempt a class of debts from affecting a

debtor's loan eligibility. This section also outlines the factors an

agency should consider when determining whether waiver of the general

rule in paragraph (c) of this section is appropriate.

(2) FMS may provide additional guidance in ``Managing Federal

Receivables'' and other FMS publications concerning debt collection and

debt management.

(3) Nothing in this section requires an agency to grant Federal

financial assistance if denial otherwise is authorized by statute,

regulation, or agency policies and procedures. For example, if an

agency requires borrowers to have a satisfactory credit history, the

agency may deny financial assistance even if a delinquent debt has been

resolved.

(4) This section does not confer any new rights or benefits on

persons seeking Federal financial assistance.

(5) This section applies to any person owing delinquent nontax debt

and to any agency that administers a program that grants Federal

financial assistance.

(c) General rule. As required by the provisions of 31 U.S.C. 3720B,

a person owing an outstanding nontax debt that is in delinquent status

shall not be eligible for Federal financial assistance. This

eligibility requirement applies to all persons seeking Federal

financial assistance and owing an outstanding nontax debt in delinquent

status, including, but not limited to, guarantors. This eligibility

requirement applies to all Federal financial assistance even if

creditworthiness or credit history is not otherwise a factor for

eligibility purposes, e.g., student loans. A person may be eligible for

Federal financial assistance only after the delinquency is resolved in

accordance with this section. An agency may waive this eligibility

requirement in accordance with paragraph (g) of this section.

(d) Delinquent status. (1) Except as otherwise provided in

paragraph (d)(2) of this section, a debt is in ``delinquent status''

for purposes of this section if the debt has not been paid by the

payment due date or by the end of any grace period provided by statute,

regulation, contract, or agreement. The payment due date is the date

specified in the creditor agency's initial written demand for payment

or applicable agreement or instrument (including a post-delinquency

repayment agreement).

(2) For purposes of this section, a debt is not in delinquent

status if:

(i) The person seeking Federal financial assistance has been

released by the creditor agency from any obligation to pay the debt, or

there has been an adjudication or determination that such person does

not owe or does not have to pay the debt;

(ii) The debtor is the subject of, or has been discharged in, a

bankruptcy proceeding, and if applicable, the person seeking Federal

financial assistance is current on any court authorized repayment plan;

or

(iii) The existence of the debt or the agency's determination that

the debt is delinquent is being challenged under an ongoing

administrative appeal or contested judicial proceeding and the appeal

was filed by the debtor in a timely manner. Unless otherwise

prohibited, an agency may defer making a determination as to whether or

not to extend credit until the appeal process is completed.

(3) Unless the provisions of paragraph (d)(2) apply, a debt is in

delinquent status even if the creditor agency has suspended or

terminated collection activity with respect to such debt. For example,

a delinquent nontax debt that has been written off the books of the

creditor agency or reported to the Internal Revenue Service as

discharged (i.e., canceled) is in delinquent status for purposes of

this section.

(e) Delinquency resolution. (1) For purposes of this section, a

person's delinquent debt is resolved only if the person:

(i) Pays or otherwise satisfies the delinquent debt in full;

(ii) Pays the delinquent debt in part if the creditor agency

accepts such part payment as a compromise in lieu of payment in full;

(iii) Cures the delinquency under terms acceptable to the creditor

agency in that the person pays any overdue payments, plus all interest,

penalties, late charges, and administrative charges assessed by the

creditor agency as a result of the delinquency; or

(iv) Enters into a written repayment agreement with the creditor

agency to pay the debt, in whole or in part, under terms and conditions

acceptable to the creditor agency.

(2) Unless the provisions of paragraph (e)(1) apply, a delinquent

debt is not resolved even if the creditor agency has

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suspended or terminated collection activity with respect to such debt.

For example, a delinquent nontax debt that has been written off the

books of the creditor agency or reported to the Internal Revenue

Service as discharged (i.e., cancelled) would not be ``resolved.''

(f) Exemptions by the Secretary. (1) Upon the written request and

recommendation of an agency, the Secretary may exempt any class of

debts from affecting a debtor's eligibility for Federal financial

assistance based on the provisions of 31 U.S.C. 3720B and this section.

(2) The agency recommending an exemption for a class of debts will

provide the Secretary with information about:

(i) The nature of the program under which the delinquencies have

arisen;

(ii) The number, dollar amount, and age of the debts in the program

for which exemption is recommended;

(iii) The reasons why an exemption is justified, including why the

granting of financial assistance to persons owing the type of debt for

which exemption is requested would not be contrary to the Government's

goal to reduce losses by requiring proper screening of potential

borrowers; and,

(iv) Other information the Secretary deems necessary to consider

the exemption request.

(3) The Secretary may exempt a class of debts if exemption is in

the best interests of the Federal Government.

(g) Waivers by the agency. (1) The head of an agency from which a

person seeks to obtain Federal financial assistance may waive the

eligibility requirement described in paragraph (c) of this section.

Waivers shall be granted only on a person by person basis. The head of

the agency may delegate the waiver authority only to the Chief

Financial Officer of the agency. The Chief Financial Officer may

redelegate the authority only to the Deputy Chief Financial Officer of

the agency.

(2) The authorized agency official should balance the following

factors when deciding whether to grant a waiver under paragraph (g)(1)

of this section:

(i) Whether the denial of the financial assistance to the person

would tend to interfere substantially with or defeat the purposes of

the financial assistance program or otherwise would not be in the best

interests of the Federal Government; and

(ii) Whether the agency's granting of the financial assistance to

the person is contrary to the Government's goal to reduce losses from

debt management activities by requiring proper screening of potential

borrowers.

(3) When balancing the factors described in paragraph (d)(2) of

this section, the authorized agency official should consider:

(i) The age, amount, and cause(s) of the delinquency and the

likelihood that the person will resolve the delinquent debt; and

(ii) The amount of total debt, delinquent or otherwise, owed by the

person and the person's credit history with respect to repayment of

debt.

(4) Each agency shall retain a centralized record of the number and

type of waivers granted under this section.

(h) Effect of denial of Federal financial assistance. Nothing

contained in this section precludes a person who has been denied

Federal financial assistance from obtaining such assistance after that

person's delinquent debt has been resolved in accordance with paragraph

(e)(1) of this section.

Dated: April 16, 1998.

Richard L. Gregg,

Commissioner.

[FR Doc. 98-10588 Filed 4-21-98; 8:45 am]

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