Transfer of Debts to Treasury for Collection

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

Federal agencies to transfer any nontax debt that is over 180 days

delinquent to the Department of the Treasury for debt collection

action. This is known as ``cross-servicing.'' On April 2, 1998, the

Financial Management Service (FMS) published an interim rule, with

request for comments, which established the procedures and criteria for

transferring delinquent debt to the Department of the Treasury for

cross-servicing, explained the statutory exceptions to this

requirement, and established standards by which the Secretary of the

Treasury will determine whether to grant exemptions. The interim rule

also required that agencies refer debts to private collection

contractors and to debt collection centers in accordance with

procedures established by the FMS. This final rule adopts the interim

rule, with changes, and addresses issues raised in the comments

received in response to the interim rule. In addition, this rule

includes a technical amendment to the final rule published on May 6,

1998 concerning administrative wage garnishment.

EFFECTIVE DATE: May 28, 1999.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Financial Program

Specialist, at (202) 874-6859; or James J. Regan, Attorney-Advisor, at

(202) 874-6680. A copy of this 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(m)(1) of the Debt Collection Improvement Act of 1996

(DCIA), Pub. L. 104-134, 110 Stat. 1321-358 (1996), codified at 31

U.S.C. 3711(g), requires Federal agencies to transfer to the Secretary

of the Treasury any nontax debt that has been delinquent for a period

of 180 days, subject to certain exemptions. This centralized collection

of government-wide debt is known as ``cross-servicing.'' Under the

DCIA, the Secretary is authorized to prescribe regulations to carry out

this requirement. Additionally, the DCIA authorizes the Secretary to

designate other Federal agencies as debt collection centers, and to

maintain a schedule of private collection contractors eligible for

referral of debts owed to the United States.

On April 2, 1998, the Financial Management Service (FMS), a bureau

of the Department of the Treasury responsible for promulgating the

regulations governing this and other provisions of the DCIA, issued an

interim rule, with a request for comments, governing the transfer of

debts to Treasury for collection (63 FR 16354).

Summary of Comments

FMS received comments from five (5) Federal agencies (executive

departments). Following is a discussion of the substantive issues

raised in the comments.

Relationship Between Cross-Servicing and Administrative Offset

Several of the commenters failed to differentiate between (1) the

requirement that agencies transfer debts for general collection

purposes (referred to as ``cross-servicing'') under this rule and (2)

the requirement that agencies notify Treasury of delinquent debts for

the limited purpose of administrative offset.

The DCIA includes separate provisions governing the requirements

that agencies (1) transfer delinquent debts to Treasury for general

collection purposes (cross-servicing) in accordance with 31 U.S.C.

3711(g)(1), and (2) notify Treasury of delinquent debts for the purpose

of administrative offset in accordance with 31 U.S.C. 3716(c)(6).

Section 3711(g)(1) requires an agency to transfer to Treasury all

collection activity for a given debt. Under section 3711(g), Treasury

will use all appropriate debt collection tools to collect the debt

including referral to a designated debt collection center or private

collection agency and administrative offset. Once a debt has been

transferred to Treasury the creditor agency must cease all collection

activity related to that debt. This rule specifies when creditor

agencies are required to transfer debts and when debts are exempt from

the general transfer requirement.

In contrast, administrative offset is one of many debt collection

tools available to Federal agencies for the collection of delinquent

debt. Under section 3716(c)(6), creditor agencies are required to

notify Treasury of debts that are over 180 days delinquent for purposes

of administrative offset. As a practical matter, agencies are required

to notify Treasury of such debts for administrative offset only when a

debt has not been transferred to Treasury pursuant to section

3711(g)(1), i.e., when a debt is exempt from transfer to Treasury under

section 3711(g)(1) and this rule. Since offset is one of the collection

tools used by Treasury for all eligible debts referred to Treasury

pursuant to section 3711(g)(1), referral of a debt to Treasury for

cross-servicing also satisfies the requirement under section

3716(c)(6). With respect to debts that are not referred to Treasury

pursuant to section 3711(g)(1), creditor agencies are required to

continue to collect the delinquent debts using all appropriate debt

collection tools, including administrative offset. Rules governing the

use of administrative offset are being published in separate

regulations in this part, and, as a consequence, questions regarding

administrative offset are not addressed in this rule.

Section 285.12(a)--Definitions

In response to a comment by one agency, a definition for the term

``debt collection center'' was moved to section 285.12(a) from section

285.12(f) of the interim rule.

Section 285.12(c)--Mandatory Transfer of Debts to FMS

FMS received several comments regarding the mandatory transfer of

debts and the use of designated debt collection centers (DCCs) and

private collection agencies (PCAs). In particular, the comments related

to whether, and when, agencies may refer debts directly to DCCs and

PCAs, and whether the debts must be referred to such entities through

FMS.

Section 285.12(c) applies only to debts that are more than 180 days

delinquent. Therefore, agencies are not required to refer debts to FMS

during the initial 180 days of delinquency (the pre-180 day period).

During the pre-180 day period agencies should take all appropriate

actions to collect delinquent debts, including referring such debts to

DCCs and PCAs. Agencies may, with the consent of FMS, refer debts

directly to DCCs during the pre-180 day period. Similarly, agencies may

refer debts to PCAs during the pre-180 day period either pursuant to a

contract entered into by the agency directly with a PCA, or by

referring the debts to FMS for referral to PCAs under existing FMS

[[Page 22907]]

contracts (a process known as ``pass-through''). Unlike when debts are

transferred to Treasury as required by section 3711(g)(1), FMS takes no

collection action when debts are referred to FMS for pass-through,

other than referring the debts to a PCA. The pass-through process is

necessary to allow FMS to assess and monitor fully the performance of

its PCA contractors. FMS will provide additional procedural guidance to

agencies regarding use of the ``pass-through'' referral process.

Another agency suggested that section 285.12(c)(3) be clarified

with respect to the transfer of debts that are under appeal.

Specifically, the agency asked FMS to define whether the 180 day period

begins to run on the date the debt was originally due prior to the

filing of the appeal, or the date of the decision of the reviewing

official at which time the amount of the debt is made final.

Alternatively, the agency suggested that the regulation be revised to

allow agencies 60 days, following the date of the appeal decision, to

collect a debt prior to referring amounts to Treasury for cross-

servicing.

FMS agrees that immediate transfer of a debt to FMS following a

decision on an appeal might, in some cases, be impractical. Therefore,

section 285.12(c)(3) has been revised to allow agencies up to 30 days

following a decision on an appeal to transfer debts over 180 days

delinquent to FMS. A 30 day period provides debtors with an opportunity

to pay the debt or to enter into a repayment plan with the creditor

agency before further collection action is taken. Debts should be

transferred to FMS immediately following a decision on an appeal when

the agency determines that it is unlikely that the debtor will pay or

enter into a repayment plan within the 30 day period.

In section 285.12(c)(1) of the final rule, FMS incorporated a

suggestion by one agency that the mandatory requirement to transfer

debts be limited to debts having a balance of more than $25. The

commenter suggested that transferring debts having a balance of less

than $25 would not be cost-effective. Under this final rule, agencies

may, after consulting with FMS, transfer debts in amounts less than $25

when failure to transfer such debts to FMS for collection would weaken

the creditor agency's ability to enforce compliance with the program

(see section 285.12(c)(4) of the final rule). The final rule provides

that agencies may combine small debts owed by the same debtor to meet

the $25 threshold, and that FMS may change the threshold amount from

time to time.

Section 285.12(d)--Exceptions to Mandatory Transfer

One agency questioned whether the foreclosure provisions in

paragraph (d)(2) cover debts referred to private counsel (when an

agency has specific authority to use private counsel) for non-judicial

foreclosure proceedings. The rule has not been revised because

paragraph (d)(2)(ii)(A)(1) of the rule, which provides that a debt is

in foreclosure if pre-foreclosure notice has been issued in a non-

judicial proceeding, does not exclude notices issued by private counsel

on behalf of an agency.

One commenter questioned whether the recent Supreme Court decision

in Cohen v. Cruz, 118 S.Ct. 1212 (1998), affects this rule. The case

holds that punitive damages, attorney fees and costs related to an

amount awarded as actual fraud, are not dischargeable under the fraud

exception of the Bankruptcy Code. Since the rule does not address

whether or not a particular debt or class of debts is dischargeable in

bankruptcy, the Cohen case does not affect this rule. Creditor agencies

are not required to transfer debts to FMS that are the subject of

pending bankruptcy proceedings regardless of whether the debt is

dischargeable (see section 285.12(d)(2)(i)(B)).

In response to a comment, paragraph (d)(4) has been revised to

clarify that a debt is in the process of being collected by internal

offset (and, therefore, exempt from the mandatory transfer provisions

of the DCIA and this rule) so long as the required pre-offset notice

has been issued by the creditor agency whether issued before or after

the 180 day delinquency period. Note, however, the creditor agency is

required to transfer to Treasury for collection debts over 180 days

delinquent that are not subject to collection by internal offset (or

another exemption). If the creditor agency determines that internal

offset is available after a debt has been transferred to Treasury, the

debt will be returned to the creditor agency for collection by internal

offset.

In response to an agency's request for clarification, paragraph

(d)(5)(i) has been revised. In recognition of the Congressional mandate

to centralize delinquent debt collection at Treasury, requests for

exemption require consideration by a creditor agency's top officials.

Under paragraph (d)(5)(i) of the final rule, an exemption request will

be considered only if it is made by the head of the creditor agency,

the creditor agency's Chief Financial Officer (CFO), or the agency's

Deputy CFO. Heads of subordinate agencies or organizations, such as the

head of a bureau within a department, are not considered heads of

agencies for purposes of this paragraph (d)(5)(i).

One commenter suggested that agencies be permitted to seek

exemptions for individual debts or small groups of debts within a class

of debts. The DCIA limits exemptions to specific classes of debts or

claims (see 31 U.S.C. 3711(g)(2)(B)). As a consequence, requests for

the exemption of individual debts or claims, or small groups of debts

or claims within a specific program or discrete activity, will not be

considered.

Paragraph 285.12(d)(6) was added to the final rule to provide

additional guidance on debts being collected by third parties. Several

agencies, in accordance with statutory or contractual requirements,

have debts more than 180 days past due that are being collected by

third parties such as private lenders or guaranty agencies. In

accordance with the provisions of 31 U.S.C. 3711(g)(2)(B) and this

rule, the Secretary has determined that it is in the best interest of

the Government that debts being collected by third parties be exempt

from the provisions of paragraph 285.12(c)(1) because the transfer of

such debts would interfere with the program goals and requirements of

the subject debts. Debts more than 180 days past-due must be

transferred to FMS for collection under paragraph 285.12(c)(1) upon

their return to a creditor agency by a third party.

Section 285.12(f)--Debt Collection Centers

In response to comments received from one agency, paragraph (f) is

revised to state that debt collection centers may charge and collect

fees (see 31 U.S.C. 3711(g)(6)), and to include a reference to

paragraph (j) which provides additional information on fees that may be

charged.

Section 285.12(i)--Certification

One agency asked whether agencies are required, under the

certification provision, to maintain contact with all debtors to

determine whether the debtor has filed a bankruptcy petition. Agencies

are not required to maintain such contact. However, agencies are

required to notify FMS immediately when they receive notice that a

debtor has filed for bankruptcy protection so that FMS can immediately

take action to stop collection proceedings that would be in violation

of the automatic stay.

Section 285.12(j)--Fees

One agency asked whether FMS or the creditor agency will be

responsible for

[[Page 22908]]

notifying the debtor that fees charged for collecting delinquent debt

will be added, as an administrative cost, to the debt balance. Under

paragraph (i), creditor agencies are required to certify to FMS that

they have complied with all prerequisites to various collection

actions, including any applicable requirements to notify the debtor

regarding the agency's policies with respect to the addition of

interest, penalties, and administrative costs to the principal amount

of the debt if the debt is not paid by the due date.

Technical Amendment to Section 285.11 (Administrative Wage

Garnishment)

On May 6, 1998, FMS published a final rule implementing the

administrative wage garnishment provisions of section 31001(o) of the

DCIA, codified at 31 U.S.C. 3720D. This rule amends section

285.11(g)(2) by deleting the words ``on the agency's letterhead.'' This

non-substantive, technical amendment allows Federal agencies to use the

form to be prescribed by the Secretary for the issuance of an

administrative wage garnishment order without preparing the form on

agency letterhead. The requirement that agencies issue the order on

agency letterhead was impractical and interfered with the requirement

that agencies use a standard form prescribed by Treasury. The agency

issuing the wage garnishment order will be clearly identified on the

form without the use of agency letterhead.

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 impact on a substantial number of small

entities. The basis for this certification is that the DCIA requires

agencies to transfer debts that have been delinquent for more than 180

days to Treasury for further collection action unless the debts have

been granted an exemption by the Secretary of the Treasury. This rule

establishes the procedures and criteria for transferring such debts,

explains the statutory exceptions to this requirement, and establishes

the required standards under which the Secretary of the Treasury will

grant exemptions. Therefore a regulatory flexibility analysis is not

required.

Authority and Issuance

Accordingly, the interim rule amending 31 CFR part 285 which was

published at 63 FR 16354 on April 2, 1998, is adopted as a final rule

with the following changes:

PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION

IMPROVEMENT ACT OF 1996

1. The authority citation for part 285 continues 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 285.11 is amended by revising paragraph (g)(2) to read

as follows:

Sec. 285.11 Administrative wage garnishment.

* * * * *

(g) Wage garnishment order.

* * * * *

(2) The withholding order sent to the employer under paragraph

(g)(1) of this section shall be in a form prescribed by the Secretary

of the Treasury and signed by the head of the agency or his/her

delegatee. The order shall contain only the information necessary for

the employer to comply with the withholding order. Such information

includes the debtor's name, address, and social security number, as

well as instructions for withholding and information as to where

payments should be sent.

* * * * *

3. Section 285.12 is amended to correct the heading; to revise the

definition for ``debt'' and add a definition for ``debt collection

center'' in paragraph (a); to revise paragraphs (b) and (c)(3); to add

paragraphs (c)(4), (d)(5)(iii) and (d)(6); and to revise paragraphs

(d)(4), (f), (g), (h), and (j) to read as follows:

Sec. 285.12 Transfer of debts to Treasury for collection.

(a) * * *

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 by a person. As used in this section, the

term ``debt'' does not include debts arising under the Internal Revenue

Code of 1986.

Debt collection center means an agency or a unit or subagency

within an agency that has been designated by the Secretary of the

Treasury to collect debt owed to the United States. FMS is a debt

collection center.

* * * * *

(b) In general. Cross-servicing means that FMS or another debt

collection center is taking appropriate debt collection action on

behalf of one or more Federal agencies or a unit or subagency thereof.

(c) * * *

(3)(i) A debt is considered 180 days delinquent for purposes of

this section if it is 180 days past due and is legally enforceable. A

debt is past-due if it has not been paid by the date specified in the

agency's initial written demand for payment or applicable agreement or

instrument (including a post-delinquency payment agreement) unless

other satisfactory payment arrangements have been made. A debt is

legally enforceable if there has been a final agency determination that

the debt, in the amount stated, is due and there are no legal bars to

collection action. Where, for example, a debt is the subject of a

pending administrative review process required by statute or regulation

and collection action during the review process is prohibited, the debt

is not considered legally enforceable for purposes of mandatory

transfer to FMS and is not to be transferred even if the debt is more

than 180 days past-due.

(ii) When a final agency determination is made after an

administrative appeal or review process, the creditor agency must

transfer such debt to FMS, if more than 180 days delinquent, within 30

days after the date of the final decision.

(iii) Nothing in this section is intended to impact the date of

delinquency of a debt for other purposes such as for purposes of

accruing interest and penalties.

(4) Agencies are not required to transfer to FMS debts which are

less than $25 (including interest, penalties, and administrative

costs), or such other amount as FMS may determine. Agencies may

transfer debts less than $25 to FMS if the creditor agency, in

consultation with FMS, determines that transfer is important to ensure

compliance with the agency's policies or programs. Agencies may combine

individual debts of less than $25 owed by the same debtor for purposes

of meeting the $25 threshold.

(d) * * *

(4) A debt is being collected by internal offset if a creditor

agency expects the debt to be collected in full within three (3) years

from the date of delinquency through internal offset. A debt is being

collected by internal offset if the creditor agency is withholding

funds payable to the debtor by the creditor agency, or if the creditor

agency has issued notice to the debtor of the creditor agency's intent

to offset such funds.

(5) * * *

(iii) Requests for exemption must be made by the head of the agency

requesting the exemption, the Chief Financial Officer of the agency, or

the Deputy Chief Financial Officer of the

[[Page 22909]]

agency. For purposes of this section, the head of an agency does not

include the head of a subordinate organization within a department or

agency.

(6) In accordance with paragraph (d)(5)(i) of this section, debts

being serviced and/or collected in accordance with applicable statutes

and/or regulations by third parties, such as private lenders or

guaranty agencies are exempt from the requirements in paragraph (c)(1)

of this section.

* * * * *

(f) Debt collection centers. A creditor agency may transfer debt

that has not been transferred to FMS, such as debt less than 180 days

delinquent, to a Treasury-designated debt collection center, with the

consent of, and in accordance with procedures established by FMS. Debt

collection centers will take action upon a debt in accordance with the

statutory or regulatory requirements and other authorities that apply

to the debt or to the particular action being taken. Debt collection

centers may, on behalf of the creditor agency and subject to the terms

under which the debt collection center has been designated as such by

the Secretary, take any action to collect, compromise, suspend or

terminate collection action on debts, in accordance with terms and

conditions agreed upon in writing by the creditor agency and the debt

collection center or FMS. Debt collection centers may charge fees for

the debt collection services in accordance with the provisions of

paragraph (j) of this section.

(g) Administrative offset. As described in paragraph (c) of this

section, under the DCIA, agencies are required to transfer all debts

over 180 days delinquent to FMS for purposes of debt collection (i.e.,

cross-servicing). Agencies are also required, under the DCIA, to notify

the Secretary of all debts over 180 days delinquent for purposes of

administrative offset. Administrative offset is one type of collection

tool used by FMS and Treasury-designated debt collection centers to

collect debts transferred under this section. Thus, by transferring

debt to FMS or to a Treasury-designated debt collection center under

this section, Federal agencies will satisfy the requirement to notify

the Secretary of debts for purposes of administrative offset and

duplicate referrals are not required. A debt which is not transferred

to FMS for purposes of debt collection, however, such as a debt which

falls within one of the exempt categories listed in paragraph (d) of

this section, nevertheless may be subject to the DCIA requirement of

notification to the Secretary for purposes of administrative offset.

(h) Voluntary referral of debts less than 180 days delinquent. A

creditor agency may refer any debt that is less than 180 days

delinquent to FMS or, with the consent of FMS, to a Treasury-designated

debt collection center for debt collection services.

* * * * *

(j) Fees. FMS and other debt collection centers (as defined in

paragraph (a) of this section) may charge fees sufficient to cover the

full cost of providing debt collection services authorized by this

section. Fees paid to recover amounts owed may not exceed amounts

collected. Nothing in this rule precludes a creditor agency from

agreeing to pay fees for debt collection services which are not based

on amounts collected. FMS and debt collection centers are authorized to

retain fees from amounts collected and may deposit and use such fees in

accordance with 31 U.S.C. 3711(g). Fees charged by FMS and other debt

collection centers may be added to the debt as an administrative cost

if authorized under 31 U.S.C. 3717(e).

Dated: November 2, 1998.

Kenneth R. Papaj,

Acting Commissioner.

[FR Doc. 99-10136 Filed 4-27-99; 8:45 am]

BILLING CODE 4810-35-P