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). On April 22, 1998, the Financial Management Service issued a

notice of proposed rulemaking proposing rules to define 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. The notice of proposed rulemaking also proposed rules

governing when the Secretary of the Treasury may exempt a class of

delinquent debts from affecting a debtor's loan eligibility, and

proposed factors for authorized agency officials to consider when

deciding whether to waive the DCIA eligibility requirement. This final

rule finalizes the proposed rule, with changes, and addresses issues

raised in comments received on the notice of proposed rulemaking.

EFFECTIVE DATE: January 7, 1999.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Financial Program

Specialist, at (202) 874-6859; Ellen Neubauer or Randall Lewis, Senior

Attorneys, at (202) 874-6680. A copy of this final rule is being made

available for downloading from the Financial Management Service web

site at the following address: http://www.fms.treas.gov/debt.

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

delinquent 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 final 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 final 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.

Summary of Comments

On April 22, 1998, FMS published a Notice of Proposed Rulemaking in

the Federal Register (63 FR 20006) entitled ``Barring Delinquent

Debtors from Obtaining Federal Loans or Loan Insurance or Guarantees.''

FMS received written comments from three Federal agencies, two

financial institutions, and one university.

Delinquency Standards

One commenter recommended that determinations of delinquency and

resolutions of defaults be made based on existing eligibility criteria

under applicable program specific statutes and regulations. Another

commenter suggested that individual creditor agencies be allowed to

determine when its debts are sufficiently delinquent for purposes of

barring a debtor from obtaining additional Federal financial

assistance. A third commenter recommended that the rule authorize

credit-granting agencies to determine when debt reported as delinquent

by a creditor agency is sufficiently delinquent to warrant

ineligibility for assistance.

The DCIA created a new eligibility requirement applicable to all

Federal financial assistance programs and directed the Secretary of the

Treasury to issue government-wide standards for determining when a debt

is delinquent for purposes of barring delinquent debtors from obtaining

additional Federal financial assistance. Thus, as required by the DCIA,

the final rule retains uniform government-wide guidelines. While

government-wide standards apply to this particular eligibility

criteria, nothing in this rule precludes an agency from setting its own

standards with regard to other eligibility criteria applicable to a

specific program. Paragraph 285.13(b)(3) specifically states that

nothing in this rule requires an agency to grant Federal financial

assistance if denial otherwise is authorized by statute, regulation or

agency policies and procedures. For instance, if a delinquent debt is

resolved in accordance with paragraph 285.13(e), an agency still may

deny an application if the applicant fails to meet other requirements

imposed under a specific program. Additionally, under the DCIA and in

accordance with paragraph 285.13(g) of this rule, agencies also may

waive the requirements of this section under appropriate circumstances.

Application of This Rule to Financial Institutions

One commenter requested clarification on whether the regulation

applies to parties other than Federal agencies, such as financial

institutions which issue loans which are federally insured or

guaranteed. Another commenter suggested that the rule be clarified with

regard to who has the responsibility for determining whether a

prospective borrower is delinquent, and whether a delinquent debt has

been resolved.

This rule applies to Federal loans, loan insurance and loan

guarantees. The responsibilities of financial institutions that issue

federally guaranteed or insured loans continue to be governed by

program specific statutes, regulations, and agency policies and

procedures, as well as individual agreements between agencies and

lenders. Federal agencies will have to ensure that such regulations,

policies and procedures, and agreements address the eligibility

requirements of the DCIA and this regulation.

Application of the Equal Credit Opportunity Act

One commenter asked whether protected classes comprise a

significant number of delinquent debtors impacted by this rule, and

expressed concern that denial of credit under this rule might violate

the Equal Credit Opportunity Act.

[[Page 67755]]

The Equal Credit Opportunity Act prohibits a creditor from

discriminating against an applicant on a prohibited basis regarding any

aspect of a credit transaction. The fact that an applicant owes a

delinquent debt to the United States is not a prohibited basis. See 12

CFR 202.2 (Regulation B). Even if the effect of the DCIA and this rule

would be to disadvantage protected classes, as a general matter, a

lender acting pursuant to a regulation or statute when denying credit

would have a non-discriminatory business reason for doing so.

Consequently, compliance with the DCIA and this rule does not, in and

of itself, constitute a violation of the Equal Credit Opportunity Act.

Application of the Fair Credit Reporting Act

Another commenter expressed concern that, under the Fair Credit

Reporting Act, 15 U.S.C. 1681, lenders would be unable to obtain credit

reports relating to the status of loans for which an applicant is a

guarantor. While the commenter is correct, for purposes of the bar

imposed by the DCIA and this rule, the fact that an applicant is a

guarantor on another loan is irrelevant unless the applicant/guarantor

becomes responsible for repaying the loan and subsequently becomes

delinquent. In the event the applicant/guarantor does become

responsible for the loan, any delinquency should appear on the

applicant's credit report.

Section 285.13(a) Definitions

One commenter requested that the definition of Federal financial

assistance or financial assistance be revised to specifically include

price support loans with non-recourse provisions issued by the

Commodity Credit Corporation of the Department of Agriculture. The

definition of ``Federal financial assistance'' or ``financial

assistance'' includes all loans (other than disaster loans), including

non-recourse loans. Therefore, because price support loans are a type

of loan already covered by the definition, a specific reference to one

type of loan is not necessary.

Section 285.13(b) Purpose and Scope

One commenter requested that the rule be revised to include

guidance regarding whether a person, such as a corporation, would be

barred from obtaining Federal financial assistance where the

corporation seeking Federal financial assistance is not a delinquent

debtor, but a person with a controlling interest in the corporation,

such as an officer, director, or shareholder, is a delinquent debtor.

In response, FMS has revised the rule to clarify that a person seeking

Federal financial assistance may be ineligible for such financial

assistance if that person either controls or is controlled by a person

who owes a delinquent nontax debt to the United States. Whether or not

a person controls or is controlled by a delinquent debtor and the

extent to which such person is ineligible for Federal financial

assistance is to be determined in accordance with standards and

procedures established by the credit granting agency. See paragraph

285.13(c)(2).

Another commenter asked whether this rule applies to applicants for

Federal grants. The DCIA defines Federal financial assistance as any

loan (other than a disaster loan), loan insurance or loan guarantee.

Thus this rule does not apply to applicants for grants.

Section 285.13(c) General Rule

FMS received several comments regarding the methods to determine

whether an applicant has delinquent Federal debts that bar the

applicant from obtaining new Federal financial assistance. Commenters

suggested that the list of possible sources of information included in

the preamble to the proposed rule be added to the text of the final

rule. FMS has incorporated this suggestion. Commenters also suggested

that the list be expanded to include FMS' delinquent debtor database.

FMS is resolving legal and technical issues involved in making the

information contained in FMS' delinquent debtor database available to

Federal agencies. Thus, although not currently available, we anticipate

that FMS' database will be available in the future as one of many

sources of information concerning delinquent debtors. A commenter also

suggested that the rule require applications for Federal financial

assistance to include a self-certification, under penalty of perjury,

by which applicants would be required to list outstanding obligations

to the Federal government and whether such obligations were current.

FMS agrees that a self-certification could assist in identifying

delinquent debtors and recommends that agencies adopt this approach. A

mandatory self-certification requirement is not included in this rule

because loan application procedures are established by the credit-

granting agency.

Two agencies requested clarification regarding the meaning of the

term ``guarantor'' for purposes of this rule. The reference to

``guarantor'' in Sec. 285.13(c)(1) of the final rule is intended to

cover credit applicants who owe delinquent debt as a result of an

obligation to pay under a guaranty. Once the guarantor's obligation to

pay is triggered and the obligation is not paid in accordance with the

terms and conditions of the guaranty, the defaulted obligation would be

an outstanding debt in delinquent status.

The DCIA bar also applies if the entity seeking to guarantee a loan

is a delinquent debtor since the entity seeking to guarantee a loan may

ultimately become obligated for repayment of the loan. Therefore, a

person owing a delinquent debt is ineligible for additional Federal

financial assistance whether applying for such assistance as a direct

borrower or as a guarantor.

As noted above, one commenter requested that the rule be revised to

include guidance under circumstances where an applicant for Federal

financial assistance controls or is controlled by a delinquent debtor.

A new paragraph has been added to Sec. 285.13(c) clarifying that an

agency may, under standards issued by the agency, deny Federal

financial assistance to persons who control or are controlled by a

delinquent debtor.

Section 285.13(d) Delinquent Status

Several commenters objected to the proposed standards in

Sec. 285.13(d)(1) under which a debt would be in delinquent status if

not paid by the payment due date. Commenters pointed out that under the

standards contained in the proposed rule, a debt on which a payment was

one day late would be considered a debt in delinquent status. Under

such a standard agencies would have no practical way to determine if a

debt was delinquent nor any way to distinguish between payments which

are merely late (or timely payments which are posted late) and those

which are seriously delinquent. Additionally, commenters noted that

being a day late on a single payment was not a valid indication of

credit worthiness.

In response to these comments, Sec. 285.13(d)(1) of the final rule

is revised to provide that a debt is delinquent for purposes of barring

additional Federal financial assistance when the debt has not been paid

within 90 days of the due date. FMS agrees that agencies may have no

practical way of knowing about a debt which is less than 90 days past-

due. Credit granting agencies will rely on credit reports as a way to

determine that an applicant owes a delinquent debt to the United

States. Federal agencies must give debtors at least 60 days notice

before reporting a debt to a consumer credit bureau. Thus, providing

that a debt is not in delinquent status for purposes of this

[[Page 67756]]

rule until it is 90 days past-due allows sufficient time for the debt

to be reported to a credit bureau.

Additionally, the 90-day period ensures that only those debtors

owing debts in delinquent status, and not debtors whose payments are

late or untimely posted, will be denied financial assistance as

required by the DCIA. Consistent with standard lending practices which

classify a loan as non-performing when the loan is 90 days past-due,

the final rule classifies a debt as being in a delinquent status when

the debt is 90 days past-due. See, e.g., 12 CFR 933.1(u), 26 CFR 1.585-

6(d)(iii)(A). The 90-day provision protects against an applicant being

denied financial assistance merely because of a late payment or an

untimely posting. At the same time the rule furthers the intent of the

DCIA to reduce losses by screening potential borrowers.

As noted in the preamble to the proposed rule, nothing in this rule

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

application of section 3720B of the DCIA and this rule. In addition,

nothing in this rule precludes a credit-granting agency from denying

loans if an applicant owes a delinquent debt which is less than 90 days

past-due if otherwise authorized.

Section 285.13(e) Delinquency Resolution

One commenter suggested that the rule be revised to clarify the

difference between portions of debt that have been written-off after a

compromise, and debts that have been written-off because they were

uncollectible. Under Sec. 285.13(e)(2), a delinquent debt which has

been written off is not considered resolved unless the provisions of

paragraph (e)(1) apply. Under paragraph (e)(1), a debt is resolved if a

compromise amount has been paid in full. Thus, where a debt has been

compromised and the debtor pays the full compromised amount, the

compromised portion of the debt which has been written-off is not in

delinquent status. Clarifying language has been added to paragraph

(e)(2) of the final rule.

Another commenter suggested that the rule be revised to include a

requirement that a lender determine whether an applicant is in default

on a repayment agreement before approving additional Federal financial

assistance. The rule does not need to be revised because

Sec. 285.13(d)(1) addresses this concern. The definition of delinquent

status in Sec. 285.13(d)(1) of the final rule provides that a debt is

delinquent if not paid within 90 days of the due date. Due date is

defined in that paragraph as the date specified in, among other things,

an applicable agreement, including a post-delinquency repayment

agreement. Therefore, the rule does require that Federal financial

assistance be denied if a repayment agreement is in a delinquent

status.

Section 285.13(f) Exemptions by the Secretary

One commenter suggested that the language of the proposed rule be

revised to clarify whether, under Sec. 285.13(f), exemptions may be

requested by both the credit-granting agency and/or the creditor

agency. In response to this comment, paragraph 285.13(f) has been

revised to clearly state that requests for exemptions may be made only

by ``creditor'' agencies. Because the authority of the Secretary to

grant exemptions in 31 U.S.C. 3720B(a) is limited to classes of debt,

only the agency which holds the debt, i.e., the creditor agency, may

request such exemptions. Section 285.13(g) governs the authority of

credit-granting agencies to waive the ineligibility requirement

contained in the DCIA on a person by person basis under appropriate

circumstances.

Regulatory Analysis

This final rule is not a significant regulatory action as defined

in Executive Order 12866. It is hereby 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 final 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

amended as follows:

1. The authority citation for part 285 is 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 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. 1 et seq.).

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) Additional guidance concerning debt collection and debt

management is provided in ``Managing Federal Receivables'' and other

FMS publications.

(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

[[Page 67757]]

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. (1) 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.

(2) An agency from which a person seeks Federal financial

assistance may determine, under standards issued by the agency, that a

person is ineligible for Federal financial assistance under this

section if:

(i) The person is controlled by a person owing an outstanding

nontax debt that is in delinquent status (e.g., a corporation is

controlled by an officer, director, or shareholder who owes a debt); or

(ii) The person controls a person owing an outstanding nontax debt

that is in delinquent status (e.g., a corporation controls a wholly-

owned or partially-owned subsidiary which owes a debt).

(3) A creditor agency may obtain information concerning whether or

not a person seeking Federal financial assistance owes a delinquent

debt from, among other sources, credit reports, information contained

on credit applications, and the Department of Housing and Urban

Development's Credit Alert Interactive Voice Response System (CAIVRS).

For information about participating in the CAIVRS program, agencies

should contact the Director of Information Resources Management, Policy

and Management Division, Office of Information Technology, Department

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

20410.

(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 within 90

days of the payment due date. 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.

(4) Nothing in this section defines the terms ``delinquent'' or

``delinquent status'' for any purposes other than those described in

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) of this section

apply, a delinquent debt is not resolved 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) would not be ``resolved.'' If

the provisions of paragraph (e)(1) of this section do apply, a

delinquent debt is considered resolved. For example, if a portion of a

debt has been written off after the person has paid the debt in part

where the creditor agency accepts such part payment as a compromise in

lieu of payment in full, the entire debt would be deemed ``resolved''

for purposes of this section in accordance with paragraph (e)(1)(ii) of

this section.

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

recommendation of the head of the creditor agency to which a class of

debts is owed, 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 creditor 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.

[[Page 67758]]

(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: December 2, 1998.

Richard L. Gregg,

Commissioner.

[FR Doc. 98-32479 Filed 12-7-98; 8:45 am]

BILLING CODE 4810-35-P