[Federal Register Volume 59, Number 10 (Friday, January 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1008]
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[Federal Register: January 14, 1994]
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Part V
Department of Education
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34 CFR Part 682
Federal Family Education Loan Program; Proposed Rule
DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AB83
Federal Family Education Loan Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the regulations governing the
Federal Family Education Loan (FFEL) Program. The FFEL Program consists
of the Federal Stafford, Federal Supplemental Loans for Students (SLS),
Federal PLUS, and the Federal Consolidation Loan programs. These
amendments are needed to implement changes made to the Higher Education
Act of 1965, as amended (HEA), by the Higher Education Amendments of
1992. The proposed regulations would amend the FFEL Program loan
cancellation provisions and enhance the ability of lenders and guaranty
agencies to service and collect FFEL Program loans.
DATES: Comments must be received on or before February 14, 1994.
ADDRESSES: All comments concerning these proposed regulations should be
addressed to Pamela A. Moran, Acting Chief, Loans Branch, Division of
Policy Development, Policy, Training, and Analysis Service, U.S.
Department of Education, 400 Maryland Avenue, SW. (room 4310, ROB-3),
Washington, DC 20202-5449.
A copy of any comments that concern information collection
requirements should also be sent to the Office of Management and Budget
at the address listed in the Paperwork Reduction Act section of this
preamble.
FOR FURTHER INFORMATION CONTACT: George Harris, Senior Program
Specialist, Loans Branch, Division of Policy Development, Policy,
Training, and Analysis Service, U.S. Department of Education, 400
Maryland Avenue, SW. (room 4310, ROB-3), Washington, DC 20202-5449.
Telephone: (202) 708-8242. Individuals who use a telecommunications
device for the deaf (TDD) may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8 p.m., Eastern
time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
Background
The Secretary is proposing to revise 34 CFR part 682 to implement
changes made to the HEA by the Higher Education Amendments of 1992
(Pub. L. 102-325), enacted July 23, 1992, as well as certain changes
added by Public Law 103-208, enacted December 20, 1993. These
regulations seek to improve the efficiency of federal student aid
programs, and, by so doing, to improve their capacity to enhance
opportunities for postsecondary education.
Summary of Comments From Regional Meetings
In compliance with section 492(a) of the HEA, the Secretary
convened regional meetings during September 1992 to obtain public
involvement in the development of proposed regulations. The purpose of
the meetings was to ``provide for a comprehensive discussion and
exchange of information concerning the implementation'' of certain
parts of Public Law 102-325. In addition, attendees at the regional
meetings were asked to nominate individuals to act as negotiators in
the negotiated rulemaking process required by section 492(b) of the
HEA.
The regional meetings were conducted for two days each in San
Francisco, California; New York, New York; Atlanta, Georgia; and Kansas
City, Missouri. Each participant at the regional meetings was assigned
to one of six groups which were asked to discuss particular issue areas
identified by the Department. Each group at the regional meetings
prepared a report of its discussion and recommendations and those
reports were presented to the Department for consideration during the
preparation of the proposed regulations.
The issues addressed in this Notice of Proposed Rulemaking were
discussed by one of the groups at each regional meeting. The specific
recommendations made at those meetings are addressed below. The
Secretary considered these comments in preparing draft proposed
regulations.
1. Loan Discharge for Borrowers Attending Schools That Close
Public Law 102-325 added section 437(c) to the HEA to provide that
loans will be canceled for student borrowers who are unable to complete
their program of study because the school closed. The specific issues
described below were discussed in connection with this section.
a. Criteria
The statute requires that, to qualify for a cancellation, the
borrower must be ``unable to complete his or her program'' because the
school closed. Participants at the San Francisco meeting recommended
that the cancellation be available to student borrowers who are in
attendance at the school at the time the school closes, or are on a
leave of absence or left the school within 60 days prior to the
school's closure because of deteriorating conditions at the school. The
participants at the New York meeting agreed that students who are
registered at the time the school closed should have their loans
canceled but recommended that the benefit also be provided to borrowers
who left within 90 days prior to the school's closure. Participants at
the Kansas City meeting endorsed the 60-day time frame but also
recommended that the regulations focus on the date of any announcement
that the school is closing if that is earlier than the actual date that
the school closed. Participants at the Atlanta meeting recommended that
loan cancellation be provided to students who are in attendance or on a
leave of absence at the time the school closed.
b. Prior Payments
Participants at all of the meetings agreed that any payments made
by the borrower prior to discharge of the loan should be refunded.
c. Teach-Outs
Participants at the meetings discussed whether a loan made to a
student who is offered a teach-out of the program in which the student
was enrolled should be canceled. The participants at the Atlanta
meeting concluded that a loan should not be discharged if the student
completed a teach-out during the academic year for which the loan was
made, but that the loan should be discharged if the borrower did not
take or did not complete a teach-out during that time. Participants at
the New York and Kansas City meetings concluded that a borrower should
have the option of whether to accept a teach-out and should have the
loan discharged if the student does not choose or does not complete a
teach-out program. Attendees at the San Francisco meeting stated that
they believed that teach-outs do not work well in practice and that
loans should be canceled if a borrower does not choose to complete the
program through a teach-out.
d. Extent of Cancellation
Attendees at each of the meetings also discussed whether loans
should be canceled only for the academic term for which the borrower
received the loan or whether all loans received for the program should
be canceled. Attendees at the Atlanta meeting agreed that only the loan
made for the period in which the school closed should be canceled.
Participants at the meetings in New York and San Francisco (and a
substantial minority in Atlanta) recommended that the regulations
distinguish between students enrolled in certificate programs and
students enrolled in degree programs. The attendees at those meetings
believed that certificate students were unlikely to be able to transfer
the credits earned at the closed school and should have all loans
canceled, but that students attending degree-granting schools are
likely to be able to transfer their credits and should only receive
cancellation of the loan for the period in which the school closed.
e. Process and Documentation Requirements
Attendees at the San Francisco meeting recommended that the
Secretary be responsible for notifying the guaranty agencies when a
school closes and that the agencies would be responsible for notifying
the lenders of the loans eligible for cancellation. The attendees at
that meeting also recommended that collection activity be suspended on
the affected loans and that public service announcements be used to
notify possibly affected students but that the students not be required
to complete any applications or paperwork to prove their entitlement.
The attendees at the Atlanta meeting also recommended that the
Secretary or a State agency be responsible for determining that a
school has closed and that the agencies would notify the affected
lenders. The attendees at that meeting also recommended that the
borrower not be required to provide documentation and recommended that
credit bureau reporting be suspended during the investigation of
possibly affected loans. Attendees at the New York meeting recommended
that the date of a school's closure be determined by the applicable
State licensing authority and also recommended that the student not be
required to provide documentation of eligibility for cancellation of
the loan.
2. Discharge of Loans for Borrowers Whose Eligibility was Falsely
Certified by the School
Section 437(c) to the HEA also provided that loans will be canceled
for borrowers whose eligibility to borrow was falsely certified by the
school. The specific issues described below were discussed in
connection with this section.
a. Definition of ``False Certification''
Participants at the San Francisco meeting recommended that the
Department's regulations provide that the following situations should
be considered ``false certification:'' a school certifies an
application for a borrower who is not eligible because he or she does
not have the ability to benefit from the training offered; there is
fraud by the school in completing or certifying the loan application or
the school cashes checks without the borrower's endorsement; or the
school submits an incorrect budget, wrong expected family contribution,
or other information vital to the determination of the borrower's
eligibility. The participants at the Atlanta meeting recommended that
the definition of ``false certification'' include forged checks,
falsification of the student's program eligibility or eligibility for a
particular loan amount, and falsification of the borrower's signature.
Participants at the New York meeting recommended that the Department
define ``false certification'' as including the situation in which the
school falsely certifies that it is an eligible institution.
b. Need for Showing of Intent
Participants at the San Francisco meeting recommended that the
regulations provide that ``false certification'' must relate to the
school's intent to deceive and not include a clerical error. The
participants at the New York meeting, who also discussed this issue,
did not reach a consensus regarding the requirement for a showing of
intent by the school.
c. Procedures
Only the attendees at the Atlanta meeting discussed the procedures
that should be utilized in implementing the provision for discharge of
loans in cases of false certification. Participants at the Atlanta
meeting recommended that the regulations provide that the determination
of a false certification can be made by the Department, the guaranty
agency, or the courts. They also recommended that if the guaranty
agency makes the decision, the regulations should allow the school to
appeal that decision to the Secretary. Participants at that meeting
also recommended that a lender be required to notify the guaranty
agency within 30 days of receiving a complaint that a loan was falsely
certified and that collection activity be suspended while the agency
investigates the claim. The agency would be required to complete its
investigation within 6 months.
3. Repayment of Bankruptcy Claims
Public Law 102-325 changed the procedure for payment of bankruptcy
claims by the Department and requires the Secretary to repay the loan
if collection of the loan is stayed under Title 11 of the Bankruptcy
Code. Participants at all of the regional meetings recommended that the
Department define ``stay'' in accordance with the current definition in
the Bankruptcy Code. However, in response to the Department's question
regarding the appropriate procedure for handling loans that are not
ultimately discharged in bankruptcy, there were differences of opinion.
The attendees at the San Francisco meeting recommended that if a loan
was not likely to be discharged by the bankruptcy court, the guaranty
agency should obtain the loan from the lender and hold it until the
bankruptcy court action is completed and then return it to the lender.
Attendees at the New York meeting recommended that lenders be permitted
to file bankruptcy claims for payment directly to the Secretary and if
the Secretary wanted the guaranty agency to service the account, the
agency should be permitted to receive at least a portion of any
repayment. They also recommended that the lender be given the option to
repurchase any loan that is not discharged in bankruptcy. Participants
at the Atlanta meeting recommended that lenders be required to
repurchase any loans not discharged on which a claim was paid. Because
this amendment has now been superseded by section 2(c)(63) of Public
Law 103-208, which incorporated the provisions found in current FFEL
Program regulations, these comments are now moot.
4. Garnishment
The last statutory provision reflected in these proposed
regulations is section 488A of the HEA, which establishes a national
wage garnishment law. That section was added by Public Law 102-164, the
Emergency Unemployment Compensation Act of 1991, and was not discussed
during the regional meetings or the negotiated rulemaking sessions.
Negotiated Rulemaking
After completion of the regional meetings, the Department prepared
draft proposed regulations to implement the provisions of Public Law
102-325 relating to the FFEL Program. In accordance with the
requirements of section 492(b) of the HEA, those regulations were
submitted to a negotiated rulemaking process. During the weeks of
January 4-8 and February 1-5, 1993, the Department met with negotiators
selected from among individuals nominated by attendees at the regional
meetings.
The discussion below of the proposed regulations reflects those
areas where the negotiators reached a consensus and the proposed
regulations reflect that agreement. The discussion below also indicates
where consensus was not reached during the negotiations. However, the
negotiators did not choose to discuss every part of the proposed
regulations. Accordingly, the discussion below of those issues not
discussed during the negotiations reflects only the views of the
Secretary.
Proposed Regulatory Changes
Section 682.202 Permissible Charges by Lenders to Borrowers
The proposed regulations would implement the requirements of
section 427A of the HEA. The changes in this section include the
creation of variable interest rates for new Stafford loan borrowers and
the return of excess interest to certain Stafford loan borrowers.
The Secretary estimates that lenders collectively will need an
additional 250,000 hours to comply with the requirement that excess
interest be returned to certain Stafford loan borrowers. This
requirement is taken directly from the HEA.
Section 682.208 Due Diligence in Servicing a Loan
The proposed regulations would implement the requirements of
section 428(b)(2)(F) of the HEA. Under the regulations, in cases where
the holder of the loan remains the same, but there is a servicing
change that results in a change in the identity of the party to whom
the borrower must send payments or direct communications, the Secretary
would apply the same borrower notification requirements that are
required by current regulations at 34 CFR 682.208(e) when a loan is
sold or transferred.
The Secretary does not view this requirement as one that imposes
any additional burden because lenders and servicers already notify
borrowers, as a normal business practice, whenever there is a servicing
change that results in a change in the identity of the party to whom
the borrower must send payments or direct communications. This
requirement is taken directly from the HEA.
Section 682.402 Death, Disability, Closed School, False Certification,
and Bankruptcy Payments
The proposed regulations would implement the requirements of
section 437 of the HEA. The regulations reflect the new statutory
provision for cancellation of a parent's PLUS loan if the student for
whom the parent borrowed died. This was not a subject of controversy at
the regional meetings or during the negotiations.
The proposed regulations implement the requirements of the HEA with
regard to the discharge of a borrower's liability on an FFEL Program
loan if the student was unable to complete an educational program
because of the closure of the school. In developing criteria to be used
to determine a borrower's eligibility for a closed school loan
discharge, the Secretary believes that a student who completed his or
her educational program by transferring academic credits or hours
earned at the closed school to another school, or who completed the
program through a teach-out of the educational program at a different
school, should not qualify for a loan cancellation. The Secretary
believes that the closed school discharge was intended to benefit
students who could not complete their education because their school
closed, and does not believe that a student who was able to complete
the educational program for which the loan paid should be able to avoid
repaying that loan. The Secretary is particularly interested in
receiving public comment as to the appropriate treatment of a
borrower's loan obligations if the educational program for which the
loan was obtained was a multi-year program and the student was able to
complete one or more years of that program.
The Secretary also believes, contrary to the majority sentiment
expressed at the regional meetings and by the negotiators, that a
borrower should submit to the holder a sworn statement that
demonstrates that the borrower is eligible for a closed school
discharge to assist the Secretary or the Secretary's designees in
pursuing claims against the closed school, and to secure the borrowers
written commitment to the representations on which he or she seeks
relief. The Secretary believes that an affidavit or sworn statement is
essential in protecting the interests of the federal taxpayer, and
therefore proposes that one be obtained from the student as a condition
of loan discharge. By virtue of Federal law (28 U.S.C. 1746), this
affidavit or statement need not be notarized, but the borrower must
state in the document that the borrower makes the statement under
penalty of perjury.
The Secretary agrees with the sentiment expressed at the regional
meetings and by the negotiators that conditions at the school
immediately preceding its closing may cause a deterioration in the
educational program that would cause a student to withdraw. A student
who withdraws under these circumstances should be deemed to have been
unable to complete his or her educational program because of the
school's closure. For purposes of considering the borrower eligible for
loan discharge, and to balance the interests of the borrower and the
federal taxpayers (who ultimately must pay the cost of each cancelled
loan), the Secretary proposes to limit this withdrawal period to not
more than 90 days prior to the date the school closed.
False Certification by a School of a Student's Eligibility To Borrow
Participants in the regional meetings and the negotiators offered a
wide variety of different actions by the school or the borrower that
they believed should be considered a false certification of eligibility
to borrow; these included virtually every express or implied
representation in any way related to the FFEL Program made by the
student to the school, or by the school to the lender, guarantor,
accrediting agency, state authority, or the Secretary. The Secretary
has not adopted these views in the proposed regulations, because the
language of the statute itself and its legislative history shows that
the intended scope of the authority to discharge loan obligations is
considerably narrower than these commenters suggest. The statute
authorizes discharge only if the school made a false ``certification of
the student's eligibility,'' a term used only in the FFEL Program
regulations, where it refers, only to those representations made by the
school on the loan application itself regarding the status of the loan
applicant (or the student for whom a parent wishes to obtain a PLUS
loan) as an eligible student, 34 CFR 682.603; 682.201; and 668.7, and
not to other written representations that relate to the borrower's
request for a loan, the school's participation in the FFEL Program, or
the quality of the schools program, facilities, or placement services.
The legislative history further explains that this provision was
intended to provide relief where the student was ``left without the
skills needed to obtain employment'' because of the false certification
of eligibility. H. R. Rep. No. 447, 102d Cong. 2d Sess. 52 (1991). The
scope of the relief proposed by the Secretary here is guided by these
two principles: that the false certification be that made by the school
on the loan application regarding the borrower's eligibility, and that
the falsity of the certification be directly related to the failure to
provide necessary skills for employment.
Some negotiators urged that grounds for cancellation should include
such falsifications as forgery of the borrower's signature on the loan
application or on the loan disbursement check. However, these
representations are not part of the process of the ``certification of
the student's eligibility to borrow.'' Moreover, as a practical matter,
a borrower victimized by a forged loan application can be injured only
if the borrower's endorsement is then forged on the loan disbursement
check, or the check is negotiated without the borrower's endorsement at
all. In either case, the borrower is generally not liable because such
a loan is generally not legally enforceable. Therefore, not only does
forgery not constitute a falsification in the loan ``certification''
process, but the borrower who is the victim of a forgery and did not
receive the proceeds of the loan already has a complete defense to
repayment of the loan, and needs no cancellation relief under this new
section.
Other negotiation participants suggested that erroneous school
representations on a loan application regarding such matters as the
borrower's (or student's) income, resources, family contribution, or
recommended loan amount should be sufficient to constitute grounds for
cancellation under this section. This kind of error could result in the
borrower receiving a loan in a larger amount than he or she qualifies
to receive. However, that student may nevertheless receive quality
training at the school, and this kind of error or misrepresentation
does not directly or invariably cause the borrower to be ``left without
the skills needed to obtain employment.'' In addition, errors or
misstatements of the borrower's financial need frequently result in the
borrower receiving a loan either that only marginally exceeds the
amount for which he or she actually qualified, or that qualified only
for reinsurance but not for interest subsidies. Section 437(c) directs
the discharge of the ``borrower's liability on the loan''--language
that does not suggest that a partial discharge was contemplated or
intended; discharging the borrower from financial obligation for the
entire loan in such circumstances where the misstatement of financial
need affects only part of the loan, or only the borrower's right to
interest subsidies on all or part of that loan, is a remedy completely
out of proportion to any injury suffered by the borrower as a result of
the erroneous certification of his or her financial need. For these
reasons, the Secretary concludes that erroneous representations of the
borrower's financial need are not the kind of false certifications for
which section 437 was intended to provide relief.
In general, participants at the regional meetings and the
negotiations recognized that grounds for cancellation of a loan
obligation under section 437 of the HEA should include a case where a
student was unable to obtain employment after attending the school, and
the school had falsely certified that the student had the ability to
benefit from the school's training. This kind of falsification is both
part of the loan certification process and results in a student being
left without needed skills. Therefore, the proposed regulations focus
on the school's false representation that the student had the ability
to benefit as the grounds for cancellation under this new provision.
The statute and regulations have addressed the ability-to-benefit
requirement for many years, and the proposed regulations reflect both
the legal elements of that requirement and some enforcement
perspectives developed in implementing it. For example, the school has
always been required to test the ability to benefit only of those
applicants who did not have a high school diploma, and the school
therefore does not certify anything regarding the ability to benefit of
high school graduates. Since 1987, students who had a general education
diploma, or obtained one after enrolling, and students who lacked both
a GED and a high school diploma but completed an institutionally
prescribed remedial education program, have been deemed by Congress to
have the ability to benefit, and the rule would incorporate that
congressional judgement.
The regulations therefore would generally permit relief in the case
of a student whom the school was required to test for ability to
benefit, but either failed to test at all, or tested in disregard of
the requirements for proper use of the test adopted. Schools have a
continuing legal obligation to administer tests, subject to criteria
developed by the school's accreditor, in compliance with test
protocols. These criteria and protocols may include requirements
related both to the accuracy of the test results as to the individual
tested and to the continuing development and validation of the test
mechanism. Non-compliance with testing requirements may warrant
administrative sanctions against the school, but a false certification
claim under this provision requires the Department to determine a
different question.
A false certification claim depends not on whether the school met
all its obligations with regard to testing, but on whether a test
already given lacks credibility as a measure of the student's ability
to benefit so that the Department should, in the absence of other
evidence, regard the student as lacking that ability. The Secretary
expects that practical, specific standards will be needed to help
identify those deviations from testing requirements that support an
inference that the student lacked ability to benefit. For example, use
of photocopied versions of tests by the school or test administrator
may violate the requirements of the test publisher, but may have no
direct effect on the accuracy of the assessment of the student's
ability to benefit. Use of an indefensibly low cutoff score by the
school on an ability-to-benefit test does not discredit an assessment
of the ability of those students who score above a legitimate cutoff
score, such as those now published by the Secretary. Similarly, minor
deviations from required time limits may have little effect on the
validity of the test results. The Secretary intends to address these
practical considerations in the final regulations, and invites public
comment on the content of those standards or guidelines.
In applying these standards, moreover, the Secretary has
consistently recognized that a student may actually have the ability to
benefit from the school's training even though the school does not test
that student's ability or does so improperly. The proposed regulations
therefore recognize that a student who actually obtains employment in
the occupation for which the school's program was designed to prepare
him or her had the actual ability to benefit from that training without
regard to whether the school falsified its test of ability to benefit.
A student not properly tested for ability to benefit who
nevertheless completes the program of instruction can reasonably be
considered to have found the training consistent with his or her
aptitude, and the proposed regulations would provide for cancellation
only if the a student had unsuccessfully tried to find employment in
the occupation for which the program was designed to prepare him or
her. Conversely, a student not properly tested who withdraws from the
course can be reasonably regarded as having found the training not
consistent with his or her aptitude, and the proposed regulations grant
relief to this kind of student (or a parent PLUS borrower who borrowed
on behalf of the student) unless the student actually obtained
employment in that occupation.
Consistent with the approach that the student's ability to benefit
should be evaluated realistically, the proposed regulations would
recognize that those individuals admitted on the basis of their ability
to benefit who met one or more of the several statutory requirements
would nevertheless be regarded as not having had that ability if they
had a physical, mental, or personal impediment to employment in, or
performance of the physical duties of, the occupation for which the
program was designed. Individuals with certain kinds of criminal
records or a history of mental illness may be barred from some
positions for which the school proposed to train them, and these
students could not benefit from the training even if they successfully
completed a test sanctioned by both the industry and school's
accrediting agency. Other students may lack the physical ability to
perform a job for which their grades on an industry and accreditor-
approved test might otherwise show an ability to perform. Both kinds of
students would qualify (or qualify the parent PLUS borrower) for relief
under these regulations.
A number of other kinds of falsification were considered as
potential grounds for discharge of the loan under this provision,
including a school's acceptance of a student into an ineligible
program, but they were not adopted in these proposed regulations. As
explained earlier, the statute uses fairly precise language to describe
the grounds for discharge under this provision, and that language, by
authorizing discharge where there has been a false certification ``by
the eligible institution,'' does not authorize relief where the falsity
relates to the eligibility of the institution itself. Thus, although
misrepresentations regarding the school's financial or administrative
capability, including the school's placement services or the quality of
the school's facilities, faculty, or equipment, may well have induced
the individual to enroll at the school, those representations are not
part of the process of ``certification'' of the student's eligibility
to borrow, tend to constitute claims that the institution was in fact
not an ``eligible institution,'' and are not the kind of
representations for which this statute authorizes relief. These
proposed regulations therefore do not treat falsifications by the
institution about itself as grounds for discharge.
For the vocational schools that are the primary focus of this
statutory provision, representations about the eligibility of the
institution include representations about the eligibility of its
programs, and, under the statute and regulations, the institution is
virtually defined in terms of the programs it offers. 20 U.S.C. 1088
(1992); 34 CFR 600.7, 668.7(a)(2)(v). Therefore, because the statute
confines relief precisely to instances of false certifications
regarding the eligibility of the student, not on representations that
would tend to show that the institution itself was not eligible, the
Secretary does not believe that the statute authorizes relief where the
alleged misrepresentation goes to the eligibility of the program in
which the student was enrolled. For these reasons, relief under the
proposed regulations would not permit a borrower to secure cancellation
by challenging the eligibility of the program or the school itself, but
would require a demonstration by the student that the school failed to
test (or tested improperly) his or her ability to benefit and that he
or she did not secure employment in the occupation for which the school
stated its program was designed to prepare the student.
Bankruptcy Claims
Section 437(a) of the HEA as amended by the Higher Education
Amendments of 1992 allowed a lender to submit and receive payment on a
bankruptcy claim on the date on which the borrower filed for relief in
bankruptcy, an action that ``stays collection'' of the loan, rather
than when the loan was discharged, as under prior law. The proposed
regulations submitted to the negotiation process would have revised
current regulations as needed to implement this change. Other features
of current bankruptcy claim processing were to remain unchanged.
Section 2(c)(63) of Public Law 103-208 reinstated standards for payment
of bankruptcy claims consistent with those now found in FFEL Program
regulations at 34 CFR 682.402(d)(5); pursuant to section 5 of Public
Law 103-208, this most recent change took effect as if enacted as part
of the 1992 amendments. Any regulations needed to implement this
change, moreover, are not subject to negotiated rulemaking requirements
of section 492. To implement the new law, the Secretary is here
withdrawing those proposals found in 34 CFR 682.402(f)(5) and (g)(2)
(iv) and (v) as presented to the negotiators prior to the enactment of
Public Law 103-208, and will leave in effect the provisions of current
34 CFR 682.402(d)(5), redesignated here as Sec. 682.402(g)(5), and
current Sec. 682.402(e)(2)(ii), redesignated here as
Sec. 682.402(g)(2)(iv).
By allowing a filing of a claim on the date ``collection of the
loan is stayed''--the date of the filing of the petition by the
borrower, or, in a Chapter 13 case, by the endorser or the borrower--
rather than the date a borrower receives a discharge, the statute might
be read to permit claims to be submitted if an endorser files, rather
than, as under prior law, only in borrower bankruptcies. Nothing in the
amendments suggested that such a result was intended, and the proposed
regulations would permit the submission of a bankruptcy claim only in
the case of a borrower bankruptcy.
The proposed regulations would continue to require lenders to file
proofs of claim in the bankruptcy proceeding, unless the guaranty
agency directs otherwise or the holder is officially notified by the
court that no assets are available for distribution. If the guaranty
agency later receives notice that assets have become available, the
guarantor must file a proof of claim at that point.
Participants in the negotiated rulemaking proceedings noted that a
growing number of discharges were being received by borrowers who file
sequential bankruptcy petitions, particularly those who first file for
relief in Chapter 13. During the pendency of the prior bankruptcy case,
loans in repayment less than seven years are non-dischargeable without
proof of undue hardship, yet cannot be enforced by the holder according
to their original terms; little or nothing may be paid on those loans
during the proceeding. Rather than attempting to show that repayment
would constitute an undue hardship, or negotiating an income-sensitive
repayment arrangement with the holder, borrowers who complete their
Chapter 13 proceeding may then file a second bankruptcy petition,
making sure that the second is filed more than seven years after the
loan entered repayment.
The Bankruptcy Code excludes the period of ``any applicable
suspension of the repayment period'' from the seven-year period during
which loans are dischargeable only for undue hardship. 11 U.S.C.
523(a)(8)(A). If the term ``suspension of the repayment period'' is
read, as these borrowers contend, to include only forbearance or
deferments granted by the holder of the loan, the reality of the
forbearance imposed by virtue of the automatic stay in the prior
bankruptcy--which barred enforcement of the loan according to its terms
during the pendency of the bankruptcy--would be ignored, and borrowers
who have neither made the required seven-year attempt to repay nor
demonstrated undue hardship would obtain a discharge in the second
bankruptcy. The Secretary does not consider this interpretation of the
statute to be consistent with its purpose, and the only court that has
addressed this precise issue has concluded that the period during which
enforcement of a loan is stayed in a prior bankruptcy is an
``applicable suspension of the repayment period'' for purposes of
computing the seven-year period for a subsequent bankruptcy. In re
Saburah, 136 B.R. 246, 254 (Bankr. C.D. Cal. 1992).
In light of the above discussion, the Secretary proposes to
interpret the term ``applicable suspension of the repayment period'' to
include periods during which the automatic stay in a bankruptcy
proceeding is in effect. The Secretary further recognizes that a
borrower who in fact meets his or her obligation under the original
repayment agreement during the bankruptcy has acted in a manner
consistent with the intent of the statute, and this proposed
interpretation would not regard the period of the first bankruptcy as a
period of suspension of repayment for the borrower.
The death and bankruptcy requirements in proposed Sec. 682.402 are
taken directly from the HEA. There is no change to the current
disability cancellation.
Closed School Cancellations
The closed school cancellation provision is taken, in large part,
directly from the mandates of the HEA, although the proposed
regulations reflect some areas of necessary interpretation. The
discussion that follows is grouped into three major areas where the
Secretary and the negotiators had discretion to interpret the statutory
closed school cancellation provision:
1. Student Withdrawal Prior to the Closing of the School
There was unanimous agreement among the negotiators and the
Secretary that it would be inequitable to strictly limit a closed
school cancellation to only those students who were in attendance at
the school on the date that the school officially closed. As discussed
earlier, conditions at the school immediately preceding its closing may
have caused a deterioration in the educational program that would have
prompted a student to withdraw. Such a student should not lose
entitlement to a loan cancellation because of his or her prescience or
inability to tolerate the school's deterioration. To balance the
interests of students and the federal taxpayers (who ultimately must
pay the cost of each cancelled loan), the Secretary proposes to limit
this withdrawal period to not more than 90 days prior to the date the
school closed.
2. Student Use of Teach-out or Transfer of Academic Credits
As discussed earlier, the Secretary does not believe that a student
who completed the educational program for which the loan was intended,
even though the completion occurred through a teach-out at another
school or by the student's transfer of academic credits earned at the
closed school, should be able to avoid repaying that loan. The student
is not required to transfer those credits or make use of a teach-out
opportunity, but if the student chooses to do so, then the Secretary
believes that, because the student was able to complete the educational
program, it would be unfair to require the Federal taxpayer to pay the
student's loan.
3. Student Statement Requirement
The Secretary believes that a statement made by the student under
penalty of perjury demonstrating eligibility for a closed school
discharge should be obtained from the student to assist the Secretary
or the Secretary's designees in pursuing claims against the closed
school. Without this statement, the Secretary's ability to protect the
interests of the Federal taxpayer would be frustrated.
Section 682.410 Fiscal, Administrative, and Enforcement Requirements
The administrative wage garnishment requirements are taken directly
from the HEA.
The proposed regulations provide an alternative to the prescribed
collection requirements in Sec. 682.410(b) if a guaranty agency uses
collection agencies and administrative wage garnishment. Through these
regulations, the Secretary expects to maximize default collections by
the Department of Education, guaranty agencies, and the Internal
Revenue Service.
The proposed regulations implement the national wage garnishment
provision in section 488A of the HEA, under which guaranty agencies or
the Secretary may garnish up to 10 percent of the wages of a borrower
who has defaulted on an FFEL Program loan or who is not making required
payments under a repayment agreement. Under the proposed regulations,
at least 30 days before garnishment proceedings are initiated the
borrower must be given written notice informing him or her of the
nature and amount of the loan obligation to be collected, the intention
of the guaranty agency to initiate proceedings to collect the debt
through deductions from pay, and an explanation of the borrower's
rights regarding the proposed action.
The proposed regulations provide the borrower with an opportunity
to inspect and copy records related to the debt, establish a new
repayment agreement, and receive a hearing concerning the existence or
amount of the debt and the terms of a repayment schedule. In addition,
no withholding of a debtor's wages may occur in the case of an
individual who has been involuntarily separated from employment until
that individual has been reemployed continuously for at least 12
months. These proposed regulations would replace current regulatory
provisions that authorize wage garnishment by guaranty agencies in
certain circumstances.
Section 488A of the HEA protects borrowers by prohibiting employers
from taking disciplinary action against an individual based on the fact
that the individual's wages are subject to garnishment. The statute
permits a borrower to sue an employer who takes such an action, and
authorizes the court to award attorneys' fees, punitive damages, back
pay, reinstatement, or other remedies the court believes reasonably
necessary.
Section 488A(a) of the HEA preempts state laws that might prohibit
garnishment to collect student loan debts. The Secretary particularly
requests comments on whether there are other state laws that might
frustrate the purpose of section 488A and should be preempted. The
Secretary asks commenters to provide specific information on those
laws.
Section 682.411 Due Diligence by Lenders in the Collection of Guaranty
Agency Loans
The proposed regulations implement the requirements of the HEA by
requiring lenders to warn borrowers and endorsers about the possibility
that their wages may be garnished by the guaranty agency if they
default on their repayment obligations.
There are minimal burdens, if any, that will be associated with
including a warning about possible wage garnishment in the delinquency
letters that are already required to be sent to borrowers.
Executive Order 12866
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering this program effectively
and efficiently, as discussed in those sections of the preamble that
relate to specific sections of the regulations. Burdens specifically
associated with information collection requirements, if any, are
identified and explained elsewhere in this preamble under the heading
Paperwork Reduction Act of 1980
In assessing the potential costs and benefits--both quantitative
and qualitative--of these proposed regulations, the Secretary has
determined that the benefits of the proposed regulations justify the
costs, and do not interfere with State, local, and tribal governments
in the exercise of their governmental functions.
To assist the Department in complying with the specific
requirements of Executive Order 12866, the Secretary invites comment on
whether there may be further opportunities to reduce any potential
costs or increase potential benefits resulting from these proposed
regulations without impeding the effective and efficient administration
of the program.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities.
Certain reporting, recordkeeping, and compliance requirements are
imposed on guaranty agencies, lenders, and schools by the regulations.
These requirements, however, would not have a significant impact
because they would not impose excessive regulatory burdens or require
unnecessary Federal supervision.
Paperwork Reduction Act of 1980
Sections 682.208, 682.402, and 682.410 contain information
collection requirements. As required by the Paperwork Reduction Act of
1980, the Department of Education will submit a copy of these sections
to the Office of Management and Budget (OMB) for its review. (44 U.S.C.
3504(h))
These regulations affect the following types of entities that
participate in the FFEL Program: Guaranty agencies, lenders, and
schools. The Department needs and uses this information to properly
carry out its responsibility to administer certain aspects of the HEA.
Annual public reporting burden for this collection of information
is not expected to significantly increase. The collection and reporting
of the information in Secs. 682.208 and 682.410 reflect normal business
practice, whereas the closed school cancellation provision of
Sec. 682.402 essentially substitutes a closed school claim for a
default claim that normally would have occurred if the student did not
repay a loan made for attendance at a school that closed.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, room 3002, New Executive
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.
Invitation To Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations.
All comments submitted in response to these proposed regulations
will be available for public inspection, during and after the comment
period, in ROB-3, room 4310, 7th and D Streets, SW., Washington, DC,
between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of
each week except Federal holidays.
Assessment of Educational Impact
The Secretary particularly requests comments on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan programs-education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
(Catalog of Federal Domestic Assistance Numbers: 84.032 Federal
Family Education Loan Program)
Dated: January 11, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary proposes to amend title 34 of the Code of Federal
Regulations by revising part 682 as follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN 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 has been amended by revising paragraphs (a)
introductory text, and (a)(1) through (a)(4); adding a new paragraph
(a)(6); and revising paragraphs (c) and (d) to read as follows:
Sec. 682.202 Permissible charges by lenders to borrowers.
* * * * *
(a) Interest. The applicable interest rates for FFEL Program loans
are given in paragraphs (a)(1) through (a)(4) of this section.
(1) Stafford Loan Program. (i) If the borrower, on the date the
promissory note evidencing the loan is signed, has an outstanding
balance of principal or interest on a previous Stafford loan, the
interest rate is the applicable interest rate on that previous Stafford
loan.
(ii) If the borrower, on the date the promissory note evidencing
the loan is signed, has no outstanding balance on any FFEL Program
loan, and the first disbursement is made--
(A) Prior to October 1, 1992, for a loan covering a period of
instruction beginning on or after July 1, 1988, the interest rate is 8
percent until 48 months elapse after the repayment period begins, and
10 percent thereafter; or
(B) On or after October 1, 1992, the interest rate is a variable
rate, applicable to each July 1-June 30 period, that equals the lesser
of--
(1) The bond equivalent rate of the 91-day Treasury bills auctioned
at the final auction prior to the June 1 immediately preceding the July
1-June 30 period, plus 3.10 percent; or
(2) 9 percent.
(iii) For a Stafford loan for which the first disbursement is made
before October 1, 1992--
(A) If the borrower, on the date the promissory note evidencing the
loan is signed, has no outstanding balance on a Stafford loan but has
an outstanding balance of principal or interest on a PLUS or SLS loan
made for a period of enrollment beginning before July 1, 1988, or on a
Consolidation loan that repaid a loan made for a period of enrollment
beginning before July 1, 1988, the interest rate is 8 percent; or
(B) If the borrower, on the date the promissory note evidencing the
loan is signed, has an outstanding balance of principal or interest on
a PLUS or SLS loan made for a period of enrollment beginning on or
after July 1, 1988, or on a Consolidation loan that repaid a loan made
for a period of enrollment beginning on or after July 1, 1988, the
interest rate is 8 percent until 48 months elapse after the repayment
period begins, and 10 percent thereafter.
(iv) For a Stafford loan for which the first disbursement is made
on or after October 1, 1992, if the borrower, on the date the
promissory note evidencing the loan is signed, has no outstanding
balance on a Stafford loan but has an outstanding balance of principal
or interest on a PLUS, SLS, or Consolidation loan, the interest rate is
8 percent.
(2) PLUS Program. (i) For a combined repayment schedule under
Sec. 682.209(d), the interest rate is the weighted average of the rates
of all loans included under that schedule.
(ii) For a loan disbursed on or after July 1, 1987 but prior to
October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f),
the interest rate is a variable rate, applicable to each July 1-June 30
period, that equals the lesser of--
(A) The bond equivalent rate of the 52-week Treasury bills
auctioned at the final auction prior to the June 1 immediately
preceding the July 1-June 30 period, plus 3.25 percent; or
(B) 12 percent.
(iii) For a loan disbursed on or after October 1, 1992, the
interest rate is a variable rate, applicable to each July 1-June 30
period, that equals the lesser of--
(A) The bond equivalent rate of the 52-week Treasury bills
auctioned at the final auction prior to the June 1 immediately
preceding the July 1-June 30 period, plus 3.10 percent; or
(B) 10 percent.
(3) SLS Program. (i) For a combined repayment schedule under
Sec. 682.209(d), the interest rate is the weighted average of the rates
of all loans included under that schedule.
(ii) For a loan disbursed on or after July 1, 1987 but prior to
October 1, 1992, and for any loan made under Sec. 682.209 (e) or (f),
the interest rate is a variable rate, applicable to each July 1-June 30
period, that equals the lesser of--
(A) The bond equivalent rate of the 52-week Treasury bills
auctioned at the final auction prior to the June 1 immediately
preceding the July 1-June 30 period, plus 3.25 percent; or
(B) 12 percent.
(iii) For a loan disbursed on or after October 1, 1992, the
interest rate is a variable rate, applicable to each July 1-June 30
period, that equals the lesser of--
(A) The bond equivalent rate of the 52-week Treasury bills
auctioned at the final auction prior to the June 1 immediately
preceding the July 1-June 30 period, plus 3.10 percent; or
(B) 11 percent.
(4) Consolidation Program. A Consolidation Program loan bears
interest at the rate that is the greater of--
(i) The weighted average of interest rates on the loans
consolidated, rounded to the nearest whole percent; or
(ii) 9 percent.
* * * * *
(6) Refund of excess interest paid on Stafford loans.
(i) For a loan with an applicable interest rate of 10 percent made
prior to July 23, 1992, and for a loan with an applicable interest rate
of 10 percent made from July 23, 1992 through September 30, 1992 to a
borrower with no outstanding FFEL Program loans--
(A) If at the end of any calendar quarter, the sum of the average
of the bond equivalent rates of the 91-day Treasury bills auctioned for
that quarter, plus 3.25 percent, is less than 10 percent, the lender
shall calculate an adjustment and credit the adjustment to reduce the
outstanding principal balance of the loan as specified under paragraph
(a)(6)(i)(B) of this section if the borrower's account is not more than
30 days delinquent on December 31. The amount of an adjustment for a
calendar quarter is equal to--
(1) 10 percent minus the sum of the average of the bond equivalent
rates of the 91-day Treasury bills auctioned for the applicable quarter
plus 3.25 percent;
(2) Multiplied by the outstanding principal balance of the loan
(not including unearned interest added to principal);
(3) Divided by 4.
(B) No later than 30 calendar days after the end of the calendar
year, the holder of the loan shall apply any amounts computed under
this paragraph to reduce the outstanding principal balance as of the
date the holder adjusts the borrower's account, provided that the
borrower's account was not more than 30 days delinquent on that
December 31.
(ii) For a fixed interest rate loan made on or after July 23, 1992
to a borrower with an outstanding FFEL Program loan--
(A) If at the end of any calendar quarter, the sum of the average
of the bond equivalent rates of the 91-day Treasury bills auctioned for
that quarter, plus 3.10 percent, is less than the applicable interest
rate, the lender shall calculate an adjustment and credit the
adjustment to reduce the outstanding principal balance of the loan as
specified under paragraph (a)(6)(ii)(C) of this section if the
borrower's account is not more than 30 days delinquent on December 31.
The amount of an adjustment for a calendar quarter is equal to--
(1) The applicable interest rate minus the sum of the average of
the bond equivalent rates of the 91-day Treasury bills auctioned for
the applicable quarter plus 3.10 percent;
(2) Multiplied by the outstanding principal balance of the loan
(not including unearned interest added to principal);
(3) Divided by 4.
(B) For any quarter or portion thereof that the Secretary was
obligated to pay interest subsidy on behalf of the borrower, the holder
of the loan shall refund to the Secretary, no later than the end of the
following quarter, any excess interest calculated in accordance with
this paragraph.
(C) For any other quarter, the holder of the loan shall, within 30
days of the end of the calendar year, reduce the borrower's outstanding
principal by the amount of excess interest calculated in paragraph
(a)(6)(ii)(A) of this section, provided that the borrower's account was
not more than 30 days delinquent as of December 31.
(D) Notwithstanding paragraphs (a)(6)(ii)(B) and (C) of this
section, if the loan was disbursed during a quarter, the amount of any
adjustment refunded to the Secretary or credited to the borrower for
that quarter shall be prorated accordingly.
* * * * *
(c) Fees for FFEL Program loans. A lender--
(1) May charge a borrower an origination fee on a subsidized
Stafford loan not to exceed the maximum rate specified by federal
statute;
(2) Shall charge a borrower an origination fee or insurance premium
on an unsubsidized Stafford loan of 6.5 percent of the principal amount
of the loan;
(3) Shall charge a borrower an origination fee on an SLS or a PLUS
loan of 5 percent of the principal amount of the loan;
(4) Shall deduct a pro rata portion of the fee from each
disbursement; and
(5) Shall refund by a credit against the borrower's loan balance
the portion of the fee previously deducted from the loan that is
attributable to any portion of the loan that is--
(i) Returned by the school to the lender;
(ii) Repaid within 120 days of disbursement; or
(iii) Not delivered within 120 days of disbursement.
(d) Insurance Premium. Except in the case of an unsubsidized
Stafford loan, a lender may charge the borrower the amount of the
insurance premium paid by the lender to the guarantor up to 3 percent
of the principal amount of the Stafford, SLS, or PLUS loan, if that
charge is provided for in the promissory note.
* * * * *
(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079,
1082, 1087-1, 1091a)
3. Section 682.208 is amended by adding new paragraphs (e)(4),
(e)(5), and (h) to read as follows:
Sec. 682.208 Due diligence in servicing a loan.
* * * * *
(e) * * *
(4) The assignor, or the assignee on behalf of the assignor, shall
notify the guaranty agency that guaranteed the loan within 45 days of
the date the assignee acquires a legally enforceable right to receive
payment from the borrower on the loan of--
(i) The assignment; and
(ii) The name and address of the assignee, and the telephone number
of the assignee that can be used to obtain information about the
repayment of the loan.
(5) The requirements of this paragraph, as to borrower
notification, apply if the borrower is in a grace period or has entered
the repayment period.
* * * * *
(h) Notifying the borrower about a servicing change. If an FFEL
Program loan has not been assigned, but there is a change in the
identity of the party to whom the borrower must send subsequent
payments or direct any communications concerning the loan, the holder
of the loan shall, no later than 45 days after the date of the change,
provide notice to the borrower of the name, telephone number, and
address of the party to whom subsequent payments or communications must
be sent. The requirements of this paragraph apply if the borrower is in
a grace period or has entered the repayment period.
(Authority: 20 U.S.C. 1077, 1078, 1078-1, 1078-2, 1078-3, 1079,
1080, 1082, 1085)
4. Section 682.402 is amended by revising the heading; by revising
paragraphs (a)(1) through (a)(3); by adding a new paragraph (a)(4); by
revising paragraphs (b) and (c)(1); by redesignating paragraphs (d),
(e), (e)(2)(ii), (f), (f)(2)(ii), (g), (h), (i), (i)(3), (j), and (k)
as paragraphs (f), (g), (g)(2)(iv), (h), (h)(2)(iii), (i), (j), (k),
(k)(5), (l), and (m), respectively; by adding new paragraphs (d), (e),
(g)(1)(vi), (g)(1)(vii), (h)(1)(iii), (k)(4), and (m)(5); by revising
redesignated paragraphs (f)(2) through (f)(3), (f)(4) introductory
text, (g)(1) introductory text, (g)(1)(i), (g)(2), (h) introductory
text, (h)(1)(iv), (h)(2)(ii), (h)(3)(i), (h)(3)(ii), (i)(2)
introductory text, (i)(2)(iv), (j) introductory text, (j)(1)
introductory text, (j)(2), (k)(2), (k)(5), (l), and (m) introductory
text; by reserving paragraph (k)(3); by removing the word ``and'' at
the end of paragraph (m)(3)(ii); and by removing the period at the end
of paragraph (m)(4), and adding in its place, a semicolon, to read as
follows:
Sec. 682.402 Death, disability, closed school, false certification,
and bankruptcy payments.
(a) General. (1) Rules governing the payment of claims based on
filing for relief in bankruptcy, and cancellation of loans due to
death, total and permanent disability, attendance at a school that
closes, and false certification by a school of a borrower's eligibility
for a loan, are set forth in this section.
(2) If a PLUS loan was obtained by two parents as co-makers, or a
Consolidation loan was obtained by a married couple, and only one of
the borrowers dies, becomes totally and permanently disabled, has
collection of his or her loan obligation stayed by a bankruptcy filing,
or has that obligation discharged in bankruptcy, the other borrower
remains obligated to repay the loan.
(3) A loan qualifies for payment under this section only to the
extent that the loan is legally enforceable under applicable law by the
holder of the loan.
(4) For purposes of this section--
(i) The legal enforceability of a loan is conclusively determined
on the basis of a ruling by a court or administrative tribunal of
competent jurisdiction with respect to that loan, or a ruling with
respect to another loan in a judgment that collaterally estops the
holder from contesting the enforceability of the loan;
(ii) A loan is conclusively determined to be legally unenforceable
to the extent that the guarantor determines, pursuant to an objection
presented in a proceeding prior to credit bureau reporting, tax refund
offset, wage garnishment, or other administrative proceeding, that the
loan is not legally enforceable; and
(iii) If an objection has been raised by the borrower or another
party about the legal enforceability of the loan and no determination
has been made under paragraph (a)(4) (i) or (ii) of this section, the
Secretary may authorize the payment of a claim under this section under
conditions the Secretary considers appropriate. If the Secretary
determines in that or any other case that a claim was paid under this
section with respect to a loan that was not a legally enforceable
obligation of the borrower, the recipient of that payment must refund
that amount of the payment to the Secretary.
(b) Death. (1) If an individual borrower dies, or the student for
whom a parent received a PLUS loan dies, the obligation of the borrower
and any endorser to make any further payments on the loan is canceled.
(2) In determining that a borrower (or student) has died, the
lender may rely on a death certificate or other proof of death that is
acceptable under applicable state law. If a death certificate or other
acceptable proof of death is not available, the borrower's obligation
on the loan can be canceled only if the guaranty agency determines that
other evidence establishes that the borrower (or student) has died.
(3) After receiving information indicating that the borrower (or
student) has died, the lender, if it believes the information to be
reliable, shall suspend any collection activity against the borrower
and promptly request that the borrower's representative (or the
student's parent in the case of a PLUS loan) provide the documentation
described in paragraph (b)(2) of this section. During the suspension of
collection activity, which may not exceed 60 days, the lender shall
diligently attempt to obtain documentation verifying the borrower's (or
student's) death. If, despite diligent attempts, the lender is not able
to confirm the borrower's (or student's) death within 60 days, the
lender shall resume collection activity from the point that it had been
discontinued and is deemed to have exercised forbearance as to
repayment of the loan during the period when collection activity was
suspended.
(4) Once the lender has determined under paragraph (b)(2) of this
section that the borrower (or student) has died, the lender may not
attempt to collect on the loan from the borrower's estate or from any
endorser.
(5) The lender shall return to the sender any payments received
from the estate or paid on behalf of the borrower after the date of the
borrower's (or student's) death.
(c) Total and permanent disability. (1) If the lender determines
that an individual borrower is totally and permanently disabled, the
obligation of the borrower and any endorser to make any further
payments on the loan is canceled. A borrower is not considered totally
and permanently disabled on the basis of a condition that existed at
the time he or she applied for the loan, unless the borrower's
condition has substantially deteriorated later, so as to render the
borrower totally and permanently disabled. In the case of a
Consolidation loan, the borrower must certify that the condition did
not exist prior to the time the borrower applied for each of the
underlying loans, unless the condition has substantially deteriorated,
so as to render the borrower totally and permanently disabled. If the
condition existed prior to the date the Consolidation loan was made,
the borrower must provide the lender with the disbursement dates of the
underlying loans.
* * * * *
(d) Closed school. (1) General. (i) The Secretary reimburses the
holder of a loan received by a borrower on or after January 1, 1986,
and discharges the borrower's obligation with respect to the loan, if
the borrower (or the student for whom a parent received a PLUS loan)
could not complete the program of study for which the loan was intended
because the school at which the borrower (or student) was enrolled,
closed, or the borrower (or student) withdrew from the school not more
than 90 days prior to the date the school closed.
(ii) For purposes of the closed school discharge authorized by this
section--
(A) A school's closure date is the date that the school ceases to
provide educational instruction in all programs, as determined by the
Secretary or the designated agency in the state in which the school is
located;
(B) The term ``borrower'' includes all endorsers on a loan; and
(C) A ``school'' means a main campus or any location or branch of
the main campus.
(2) Relief available pursuant to discharge. (i) Discharge under
paragraph (d) of this section relieves the borrower of an existing
obligation to repay the loan and any charges imposed or costs incurred
by the holder with respect to the loan that the borrower is otherwise
obligated to pay.
(ii) A discharge of a loan under paragraph (d) of this section
qualifies the borrower for reimbursement of amounts paid voluntarily or
through enforced collection on a loan obligation discharged under
paragraph (d) of this section.
(iii) A borrower who has defaulted on a loan discharged under
paragraph (d) of this section is not regarded as in default on the loan
after discharge, and is eligible to receive assistance under the Title
IV, HEA programs.
(iv) A discharge of a loan under paragraph (d) of this section must
be reported by the loan holder to all credit reporting agencies to
which the holder previously reported the status of the loan, so as to
delete all adverse credit history assigned to the loan.
(3) Borrower eligibility for discharge. A borrower qualifies for
discharge of a loan under paragraph (d) of this section if the borrower
submits to the holder of the loan a written request and sworn statement
to the holder. The statement need not be notarized, but must be made by
the borrower under penalty of perjury, and, in the statement, the
borrower shall state--
(i) Whether the student has made a claim with respect to the
school's closing with any third party, such as the holder of a
performance bond or a tuition recovery program, and if so, the amount
of any payment received by the borrower (or student) or credited to the
borrower's loan obligation;
(ii) That the borrower (or the student for whom a parent received a
PLUS loan)--
(A) Received the proceeds of a loan on or after January 1, 1986 to
attend a school;
(B) Did not complete the educational program at that school because
the school closed while the student was enrolled or on an approved
leave of absence in accordance with Sec. 682.605(c), or the student
withdrew from the school not more than 90 days before the school
closed; and
(C) Did not complete the program of study through a teach-out at
another school or by transferring academic credits or hours earned at
the closed school to another school;
(iii) That the borrower agrees to provide, upon request by the
Secretary or the Secretary's designee, other documentation reasonably
available to the borrower that demonstrates, to the satisfaction of the
Secretary or the Secretary's designee, that the student meets the
qualifications in paragraph (d) of this section; and
(iv) That the borrower agrees to cooperate with the Secretary or
the Secretary's designee in enforcement actions in accordance with
paragraph (d)(4) of this section, and to transfer any right to recovery
against a third party pursuant to paragraph (d)(5) of this section.
(4) Cooperation by borrower in enforcement actions. (i) In any
judicial or administrative proceeding brought by the Secretary or the
Secretary's designee to recover for amounts discharged under paragraph
(d) of this section or to take other enforcement action with respect to
the conduct on which those claims were based, a borrower who requests
or receives a discharge under paragraph (d) of this section must
cooperate with the Secretary or the Secretary's designee. At the
request of the Secretary or the Secretary's designee, and upon the
Secretary's or the Secretary's designee's tendering to the borrower of
such fees and costs as are customarily provided in litigation to
reimburse witnesses, the borrower shall--
(A) Provide testimony regarding any representation made by the
borrower to support a request for discharge; and
(B) Produce any documentation available to the borrower with
respect to those representations and any sworn statement required by
the Secretary with respect to those representations and documents.
(ii) The Secretary revokes the discharge, or denies the request for
discharge, of a borrower who--
(A) Fails to provide testimony, sworn statements, or documentation
to support material representations made by the borrower to obtain the
discharge; or
(B) Provides testimony, a sworn statement, or documentation that
does not support the material representations made by the borrower to
obtain the discharge.
(5) Transfer to the Secretary of borrower's right of recovery
against third parties. (i) Upon discharge under paragraph (d) of this
section, the borrower is deemed to have assigned to and relinquish in
favor of the Secretary any right to a loan refund (up to the amount
discharged) that the borrower (or student) may have by contract or
applicable law with respect to the loan or the enrollment agreement for
the program for which the loan was received, against the school, its
principals, affiliates and their successors, its sureties, and any
private or public fund.
(ii) The provisions of paragraph (d) of this section applies
notwithstanding any provision of State law that would otherwise
restrict transfer of such rights by the borrower (or student), limit or
prevent a transferee from exercising those rights, or establish
procedures or a scheme of distribution that would prejudice the
Secretary's ability to recover on those rights.
(iii) Nothing in this section shall be construed as limiting or
foreclosing the borrower's (or student's) right to pursue legal and
equitable relief regarding disputes arising from matters otherwise
unrelated to the loan discharged.
(6) Guaranty agency responsibilities. (i) Procedures applicable to
the period prior to the effective date of this regulation.
(A) If a loan subject to paragraph (d) of this section was received
for attendance at a school with a closure date after January 1, 1986
but prior to August 29, 1994, the loan may be discharged in accordance
with the procedures specified in paragraph (d)(6)(i) of this section.
(B) If a loan subject to paragraph (d) of this section was
discharged in part in accordance with the Secretary's ``Closed School
Policy'' as authorized by section IV of Bulletin 89-G-159, the guaranty
agency shall initiate the discharge of the remaining balance of the
loan not later than September 28, 1994.
(C) A guaranty agency shall review its records and identify all
schools that appear to have closed after January 1, 1986 and prior to
August 29, 1994, and shall identify all borrowers (or students) who
appear to have been enrolled on the school closure date or who withdrew
not more than 90 days prior to the closure date.
(D) If a guaranty agency determines (or is informed by the
Secretary) that a participating school has closed, it shall, within 30
days of making that determination or being informed by the Secretary,
notify all lenders participating in its program to suspend collection
efforts against individuals with respect to loans made for attendance
at the closed school, if the student to whom (or on whose behalf) a
loan was made, was enrolled at the school on the closing date, or
withdrew not more than 90 days prior to the date the school closed.
(E) If a loan identified under paragraph (d)(6)(i)(C) of this
section is held by the guaranty agency as a defaulted loan and the
borrower's current address is known, the guaranty agency shall, within
30 days after identifying a borrower under paragraph (d)(6)(i)(C) of
this section, mail a discharge application that meets the requirements
of paragraph (d)(6)(ii)(C) of this section to the borrower.
(F) If a loan identified under paragraph (d)(6)(i)(C) of this
section is held by the guaranty agency as a defaulted loan and the
borrower's current address is unknown, the agency shall, by August 29,
1995, further refine the list of borrowers whose loans are potentially
subject to discharge under paragraph (d) of this section by consulting
with representatives of the closed school, the school's licensing
agency, accrediting agency, and other appropriate parties. Upon
learning the borrower's new address, the guaranty agency shall, within
30 days, mail a discharge application to the borrower.
(ii) Procedures applicable to the period beginning on or after the
effective date of this regulation.
(A) A guaranty agency shall notify the Secretary immediately
whenever it becomes aware of reliable information indicating a
participating school may have closed. The designated agency in the
state in which the school is located shall promptly investigate whether
the school has closed, and whether a teach-out of the closed school's
program was made available to students, and report the results of its
investigation to the Secretary no later than 30 days after receiving
the information.
(B) If a guaranty agency determines (or is informed by the
Secretary) that a participating school has closed, it shall, within 30
days of making that determination or being informed by the Secretary,
notify all lenders participating in its program to suspend collection
efforts against individuals with respect to loans made for attendance
at the closed school, if the student to whom (or on whose behalf) a
loan was made was enrolled at the school on the closing date or
withdrew not more than 90 days prior to the date the school closed.
(C) Within 30 days after receiving notice from the Secretary that a
school has closed, a guaranty agency shall review its records of loans
that it holds and identify all borrowers (or students) who appear to
have been enrolled at the closed school on the closing date or who
withdrew not more than 90 days prior to the date the school closed. If
the guaranty agency knows the borrower's address, it shall, within 30
days after identifying a borrower under paragraph (d) of this section,
mail a discharge application and an explanation of the information that
must be included in the sworn statement (which may be combined) to the
borrower. The application shall inform the borrower of the procedures
and eligibility criteria for obtaining a discharge.
(D) If the guaranty agency determines that a borrower identified in
paragraph (d)(6)(ii)(C) of this section does not qualify for a
discharge, the agency shall notify the borrower in writing of that
determination and the reasons for it within 30 days after receiving the
borrower's completed application and sworn statement.
(E) A borrower's request for discharge may not be denied solely on
the basis of failing to meet any time limits set by the lender,
guaranty agency, or the Secretary.
(7) Lender responsibilities. (i) If the lender is notified by a
guaranty agency or the Secretary, or receives information it believes
to be reliable from another source indicating that the borrower may be
eligible for a loan cancellation under paragraph (d) of this section,
the lender shall immediately suspend any efforts to collect from the
borrower on any loan received for the program of study for which the
loan was made (but may continue to receive borrower payments), and,
within 30 days of receiving the information or notification, inform the
borrower of the procedures for requesting a discharge.
(ii) If the borrower fails to submit the written request and sworn
statement described in paragraph (d)(3) of this section within 60 days
of being notified of that option, the lender shall resume collection
and shall be deemed to have exercised forbearance of payment of
principal and interest from the date the lender suspended collection
activity. The lender may capitalize, in accordance with 682.202(b), any
interest accrued and not paid during that period.
(iii) The lender shall file a closed school claim with the guaranty
agency in accordance with Sec. 682.402(g) no later than 60 days after
the lender receives the borrower's written request and sworn statement
described in paragraph (d)(3) of this section. If a lender receives a
payment made by or on behalf of the borrower on the loan after the
lender files a claim on the loan with the guaranty agency, the lender
shall forward the payment to the guaranty agency within 30 days of its
receipt. The lender shall assist the guaranty agency and the borrower
in determining whether the borrower is eligible for discharge of the
loan.
(iv) Within 30 days after receiving reimbursement from the guaranty
agency for a closed school claim, the lender shall notify the borrower
that the loan obligation has been discharged, and request that all
credit bureaus to which it previously reported the status of the loan
delete all adverse credit history assigned to the loan.
(e) False certification by a school of a student's eligibility to
borrow. (1) General. The Secretary reimburses the holder of a loan
received by a borrower on or after January 1, 1986, and discharges the
borrower's obligation with respect to the loan in accordance with the
provisions of paragraph (e) of this section, if the borrower's (or the
student for whom a parent received a PLUS loan) eligibility to receive
the loan was falsely certified by an eligible school. For purposes of a
false certification discharge, the term ``borrower'' includes all
endorsers on a loan.
(2) Relief available pursuant to discharge. (i) Discharge under
paragraph (e) of this section relieves the borrower of an existing
obligation to repay the loan and any charges imposed or costs incurred
by the holder with respect to the loan that the borrower is otherwise
obligated to pay.
(ii) A discharge of a loan under paragraph (e) of this section
qualifies the borrower for reimbursement of amounts paid voluntarily or
through enforced collection on a loan obligation discharged under
paragraph (e) of this section.
(iii) A borrower who has defaulted on a loan discharged under
paragraph (e) of this section is not regarded as in default on the loan
after discharge, and is eligible to receive assistance under the Title
IV, HEA programs.
(iv) A discharge of a loan under paragraph (e) of this section is
reported by the loan holder to all credit reporting agencies to which
the holder previously reported the status of the loan, so as to delete
all adverse credit history assigned to the loan.
(3) Borrower eligibility for discharge. A borrower qualifies for
discharge of a loan under paragraph (e) of this section if the borrower
submits to the holder of the loan a written request and a sworn
statement. The statement need not be notarized, but must be made by the
borrower under penalty of perjury, and, in the statement, the borrower
shall state--
(i) Whether the student has made a claim with respect to the
school's false certification with any third party, such as the holder
of a performance bond or a tuition recovery program, and if so, the
amount of any payment received by the borrower (or student) or credited
to the borrower's loan obligation;
(ii) That the borrower (or the student for whom a parent received a
PLUS loan)--
(A) Received the proceeds of a loan on or after January 1, 1986 to
attend a school;
(B) Was admitted to that school on the basis of ability to benefit
from its training and did not meet the applicable requirements for
admission on the basis of ability to benefit as described in paragraph
(e)(8) of this section;
(C) Was certified by the school on the application for the loan as
an eligible student; and
(D) Withdrew from the school and did not find employment in the
occupation for which the program was intended to provide training, or
completed the training program for which the loan was made and made a
reasonable attempt to obtain employment in the occupation for which the
program was intended to provide training, and--
(1) Was not able to find employment in that occupation; or
(2) Obtained employment in that occupation only after receiving
additional training that was not provided by the school that certified
the loan;
(iii) That the borrower agrees to provide upon request by the
Secretary or the Secretary's designee, other documentation reasonably
available to the borrower, that demonstrates, to the satisfaction of
the Secretary or the Secretary's designee, that the student meets the
qualifications in paragraph (e) of this section; and
(iv) That the borrower agrees to cooperate with the Secretary or
the Secretary's designee in enforcement actions in accordance with
paragraph (e)(4) of this section, and to transfer any right to recovery
against a third party in accordance with paragraph (e)(5) of this
section.
(4) Cooperation by borrower in enforcement actions. (i) In any
judicial or administrative proceeding brought by the Secretary or the
Secretary's designee to recover for amounts discharged under paragraph
(e) of this section or to take other enforcement action with respect to
the conduct on which those claims were based, a borrower who requests
or receives a discharge under paragraph (e) of this section must
cooperate with the Secretary or the Secretary's designee. At the
request of the Secretary or the Secretary's designee, and upon the
Secretary's or the Secretary's designee's tendering to the borrower the
fees and costs as are customarily provided in litigation to reimburse
witnesses, the borrower shall--
(A) Provide testimony regarding any representation made by the
borrower to support a request for discharge; and
(B) Produce any documentation reasonably available to the borrower
with respect to those representations and any sworn statement required
by the Secretary with respect to those representations and documents.
(ii) The Secretary revokes the discharge, or denies the request for
discharge, of a borrower who--
(A) Fails to provide testimony, sworn statements, or documentation
to support material representations made by the borrower to obtain the
discharge; or
(B) Provides testimony, a sworn statement, or documentation that
does not support the material representations made by the borrower to
obtain the discharge.
(5) Transfer to the Secretary of right of recovery against third
parties. (i) Upon discharge under paragraph (e) of this section, the
borrower is deemed to have assigned to and relinquish in favor of the
Secretary any right to a loan refund (up to the amount discharged) that
the borrower (or student) may have, by contract or applicable law with
respect to the loan or the enrollment agreement for the program for
which the loan was received, against the school, its principals,
affiliates and their successors, its sureties, and any private or
public fund.
(ii) The provisions of paragraph (e) of this section apply
notwithstanding any provision of State law that would otherwise
restrict transfer of those rights by the borrower (or student), limit
or prevent a transferee from exercising those rights, or establish
procedures or a scheme of distribution that would prejudice the
Secretary's ability to recover on those rights.
(iii) Nothing in this section shall be construed as limiting or
foreclosing the borrower's (or student's) right to pursue legal and
equitable relief regarding disputes arising from matters otherwise
unrelated to the loan discharged.
(6) Guaranty agency responsibilities. (i) Upon receipt of a false
certification discharge claim filed by a lender, or a request submitted
by a borrower with respect to a loan held by the guaranty agency, the
agency shall review the borrower's request and supporting sworn
statement in the light of information available from the records of the
agency and from other sources, including other guaranty agencies, state
authorities, and cognizant accrediting associations.
(ii) In the case of a claim filed by a lender--
(A) If the guaranty agency determines that the borrower satisfies
the requirements for discharge under paragraph (e) of this section, it
shall pay the claim in accordance with Sec. 682.402(h) not later than
90 days after the agency received the claim; or
(B) If, after examining the documentation in the claim file and
considering relevant information available from other sources, the
guaranty agency determines that the borrower does not qualify for a
discharge, the agency shall, not later than 90 days after the agency
received the claim, return the claim to the lender with an explanation
of the reasons for its determination.
(iii) In the case of a request submitted by a borrower with respect
to a loan held by the agency--
(A) If the guaranty agency determines that the borrower satisfies
the requirements for discharge under paragraph (e) of this section, it
shall notify the borrower not later than 90 days after the agency
received the borrower's request; or
(B) If, after examining the documentation provided by the borrower
and considering relevant information available from other sources, the
guaranty agency determines that the borrower does not qualify for a
discharge, the agency shall notify the borrower of the reasons for its
determination not later than 90 days after the agency received the
borrower's request.
(iv) If the guaranty agency receives information it believes to be
reliable indicating that the borrower may be eligible for a
cancellation of a loan under paragraph (e) of this section held by the
agency, the agency shall immediately suspend any efforts to collect
from the borrower on any loan received for the program of study for
which the loan was made (but may continue to receive borrower
payments), and inform the borrower of the procedures for requesting a
discharge.
(v) If the borrower fails to submit the written request and sworn
statement described in paragraph (e)(3) of this section within 60 days
of being notified of that option, the guaranty agency shall resume
collection and shall be deemed to have exercised forbearance of payment
of principal and interest from the date it suspended collection
activity. The agency may capitalize, in accordance with
Sec. 682.202(b), any interest accrued and not paid during that period.
(vi) A borrower's request for discharge and sworn statement may not
be denied solely on the basis of failing to meet any time limits set by
the lender or the guaranty agency.
(7) Lender Responsibilities. (i) If the lender receives information
it believes to be reliable indicating that the borrower may be eligible
for a loan cancellation under paragraph (e) of this section, the lender
shall immediately suspend any efforts to collect from the borrower on
any loan received for the program of study for which the loan was made
(but may continue to receive borrower payments), and inform the
borrower of the procedures for requesting a discharge.
(ii) If the borrower fails to submit the written request and sworn
statement described in paragraph (e)(3) of this section within 60 days
of being notified of that option, the lender shall resume collection
and shall be deemed to have exercised forbearance of payment of
principal and interest from the date the lender suspended collection
activity. The lender may capitalize, in accordance with
Sec. 682.202(b), any interest accrued and not paid during that period.
(iii) The lender shall file a false certification claim with the
guaranty agency in accordance with Sec. 682.402(g) no later than 60
days after the lender receives the borrower's written request and sworn
statement described in paragraph (e)(3) of this section. If a lender
receives a payment made by or on behalf of the borrower on the loan
after the lender files a claim on the loan with the guaranty agency,
the lender shall forward the payment to the guaranty agency within 30
days of its receipt. The lender shall assist the guaranty agency and
the borrower in determining whether the borrower is eligible for
discharge of the loan.
(iv) Within 30 days after receiving reimbursement from the guaranty
agency for a false certification claim, the lender shall notify the
borrower that the loan obligation has been discharged, and request that
all credit bureaus to which it previously reported the status of the
loan delete all adverse credit history assigned to the loan.
(v) Within 30 days after being notified by the guaranty agency that
the borrower's request for a false certification discharge has been
denied, the lender shall resume collection and notify the borrower of
the reasons for the denial. The lender shall be deemed to have
exercised forbearance of payment of principal and interest from the
date the lender suspended collection activity, and may capitalize, in
accordance with Sec. 682.202(b), any interest accrued and not paid
during that period.
(8) Requirements for admission on the basis of ability to benefit.
(i) For periods of enrollment beginning between July 1, 1987 and June
30, 1991, a student who had a general education diploma or received one
before the scheduled completion of the program of instruction is deemed
to have the ability to benefit from the training offered by the school.
(ii) A student not described in paragraph (e)(8)(i) of this section
is considered to have the ability to benefit from training offered by
the school if the student--
(A) Achieved a passing grade on a test--
(1) Approved by the Secretary, for periods of enrollment beginning
after July 1, 1991, or by the accrediting agency, for other periods;
and
(2) Administered in accordance with the requirements for use of the
test; or
(B) Successfully completed a program of developmental or remedial
education provided by the school.
(iii) Notwithstanding paragraphs (e)(8)(i) and (ii) of this
section, a student did not have the ability to benefit from training
offered by the school if the student had, at the time of enrollment, a
condition or status, including one based on a physical or mental
condition, age, or criminal record, that would have prevented the
student from satisfying the physical requirements or the legal
requirements of the State in which the student resided when the loan
was made for either acceptance into the educational program offered by
the school or performance of the occupation for which the program of
instruction was designed to prepare the student.
(f) * * *
(2) Suspension of collection activity. If the lender is notified
that a borrower has filed a petition for relief in bankruptcy, the
lender shall immediately suspend any collection efforts outside the
bankruptcy proceeding against the borrower and--
(i) Against any co-maker or endorser if the borrower has filed for
relief under Chapters 12 or 13; and
(ii) Against any co-maker or endorser who has filed for relief in
bankruptcy.
(3) Determination of filing. The lender shall determine that a
borrower has filed a petition for relief in bankruptcy on the basis of
receiving a notice of the first meeting of creditors or other
confirmation issued by the bankruptcy court.
(4) Proof of claim. Unless instructed otherwise by the guaranty
agency, the lender shall file a proof of claim with the bankruptcy
court within--
* * * * *
(g) Claim procedures for a loan held by a lender.
(1) Documentation. A lender shall provide the guaranty agency with
the following documentation when filing a death, disability, closed
school, false certification, or bankruptcy claim:
(i) The original promissory note, or, if the lender no longer has
the original promissory note, a copy of the note certified by the
lender as a true and accurate copy;
* * * * *
(vi) In the case of a closed school claim, the documentation
described in paragraph (d)(3) of this section, or any other
documentation as the Secretary may require;
(vii) In the case of a false certification claim, the documentation
described in paragraph (e)(3) of this section.
(2) Filing deadlines. A lender shall file a death, disability,
closed school, false certification, or bankruptcy claim within the
following periods:
(i) Within 60 days of the date on which the lender determines that
a borrower (or the student on whose behalf a parent obtained a PLUS
loan) has died, or the lender determines that the borrower is totally
and permanently disabled.
(ii) In the case of a closed school claim, the lender shall file a
claim with the guaranty agency no later than 60 days after the borrower
submits to the lender the written request and sworn statement described
in paragraph (d)(3) of this section or after the lender is notified by
the Secretary or the Secretary's designee or by the guaranty agency to
do so.
(iii) In the case of a false certification claim, the lender shall
file a claim with the guaranty agency no later than 60 days after the
borrower submits to the lender the written request and sworn statement
described in paragraph (e)(3) of this section or after the lender is
notified by the Secretary or the Secretary's designee or by the
guaranty agency to do so.
* * * * *
(h) Payment of death, disability, closed school, false
certification, and bankruptcy claims by the guaranty agency.
(1) * * *
(iii) In the case of a closed school claim, the guaranty agency
shall document its determination that the student was unable to
complete the educational program as a result of the school's closure.
On the same date that it pays a closed school claim to the lender, the
agency shall pay the borrower an amount equal to the amount paid on the
loan by or on behalf of the borrower, less any school tuition refunds
or payments received by the holder or the borrower from a tuition
recovery fund, performance bond, or other third-party source.
(iv) In the case of a false certification claim, the guaranty
agency shall document its determination that the borrower is eligible
for cancellation under paragraph (e) of this section. On the same date
that it pays a false certification claim to the lender, the agency
shall pay the borrower an amount equal to the amount paid on the loan
by or on behalf of the borrower, less any school tuition refunds or
payments received by the holder or the borrower from a tuition recovery
fund, performance bond, or other third-party source.
(2) * * *
(ii) The amount of loss payable on a closed school claim or on a
false certification claim is equal to the sum of the remaining
principal balance and interest accrued on the loan, collection costs
incurred by the lender and applied to the borrower's account within 30
days of the date those costs were actually incurred, and unpaid
interest determined in accordance with paragraph (h)(3) of this
section.
(3) * * *
(i) During the period before the claim is filed, not to exceed the
period provided for in paragraph (g)(2) of this section for filing the
claim.
(ii) During a period not to exceed 30 days following the receipt
date by the lender of a claim returned by the guaranty agency for
additional documentation necessary for the claim to be approved by the
guaranty agency.
* * * * *
(i) * * *
(2) Response by a guaranty agency to plans proposed under Chapters
11, 12, and 13. The guaranty agency shall take the following actions
when a petition for relief in bankruptcy under Chapters 11, 12, or 13
is filed:
* * * * *
(iv) The agency shall monitor the debtor's performance under a
confirmed plan. If the debtor fails to make payments required under the
plan or seeks but does not demonstrate entitlement to discharge under
11 U.S.C. 1328(b), the agency shall oppose any requested discharge or
move to dismiss the case if the costs of litigation together with the
costs incurred for objections to the plan are not reasonably expected
to exceed one-third of the amount of the loan to be discharged under
the plan.
* * * * *
(j) Mandatory purchase by a lender of a loan subject to a
bankruptcy claim. (1) The lender shall repurchase from the guaranty
agency a loan held by the agency pursuant to a bankruptcy claim paid to
that lender, unless the guaranty agency sells the loan to another
lender, promptly after the earliest of the following events:
* * * * *
(2) The lender may capitalize all outstanding interest accrued on a
loan purchased under paragraph (j) of this section to cover any periods
of delinquency prior to the bankruptcy action through the date the
lender purchases the loan and receives the supporting loan
documentation from the guaranty agency.
(k) Claims for reimbursement from the Secretary on loans held by
guaranty agencies.
* * * * *
(2) The Secretary pays a death, disability, bankruptcy, closed
school, or false certification claim in an amount determined under
Sec. 682.402(k)(5) on a loan held by a guaranty agency after the agency
has paid a default claim to the lender thereon and received payment
under its reinsurance agreement. The Secretary reimburses the guaranty
agency only if--
(i) The guaranty agency determines that the borrower (or the
student for whom a parent obtained a PLUS loan or each of the co-makers
of a PLUS loan) has died, or the borrower (or each of the co-makers of
a PLUS loan) has become totally and permanently disabled since applying
for the loan, or has filed for relief in bankruptcy, in accordance with
the procedures in paragraphs (b) through (f) of this section, or the
student was unable to complete an educational program because the
school closed, or the borrower's eligibility to borrow (or the
student's eligibility in the case of a PLUS loan) was falsely certified
by an eligible school. For purposes of this paragraph, references to
the ``lender'' and ``guaranty agency'' in paragraphs (b) through (f) of
this section mean the guaranty agency and the Secretary respectively;
(ii) In the case of a Stafford, SLS, or PLUS loan, the guaranty
agency determines that the borrower (or the student for whom a parent
obtained a PLUS loan, or each of the co-makers of a PLUS loan) has
died, or the borrower (or each of the co-makers of a PLUS loan) has
become totally and permanently disabled since applying for the loan, or
has filed the petition for relief in bankruptcy within 10 years of the
date the borrower entered repayment, exclusive of periods of deferment
or periods of forbearance granted by the lender that extended the 10-
year maximum repayment period, or the borrower was unable to complete
an educational program because the school closed, or the borrower's
eligibility to borrow (or the student's eligibility in the case of a
PLUS loan) was falsely certified by an eligible school.
(iii) In the case of a Consolidation loan, the guaranty agency
determines that the borrower (or each of the co-makers) has died,
become totally and permanently disabled since applying for the
Consolidation loan, or has filed the petition for relief in bankruptcy
within the maximum repayment period described in Sec. 682.209(h)(2),
exclusive of periods of deferment or periods of forbearance granted by
the lender that extended the maximum repayment period.
(iv) The guaranty agency has not written off the loan in accordance
with the procedures established by the agency under
Sec. 682.410(b)(6)(x), except for closed school and false certification
discharges; and
(v) The guaranty agency has exercised due diligence in the
collection of the loan in accordance with the procedures established by
the agency under Sec. 682.410(b)(6)(x), until the borrower (or the
student for whom a parent obtained a PLUS loan, or each of the co-
makers of a PLUS loan) has died, or the borrower (or each of the co-
makers of a PLUS loan) has become totally and permanently disabled or
filed a Chapter 12 or Chapter 13 petition, or had the loan discharged
in bankruptcy, or for closed school and false certification claims, the
guaranty agency receives a request for discharge from the borrower or
another party.
(3) [Reserved]
(4) Within 30 days of receiving reimbursement for a closed school
or false certification claim, the guaranty agency shall pay the
borrower an amount equal to the amount paid on the loan by or on behalf
of the borrower, less any school tuition refunds or payments received
by the holder, guaranty agency, or the borrower from a tuition recovery
fund, performance bond, or other third-party source.
(5) The Secretary pays the guaranty agency a percentage of the
outstanding principal and interest that is equal to the complement of
the reinsurance percentage paid on the loan. This interest includes
interest that accrues during--
(i) For death, disability, or bankruptcy claims, the shorter of 60
days or the period from the date the guaranty agency determines that
the borrower (or the student for whom a parent obtained a PLUS loan, or
each of the co-makers of a PLUS loan) died, became totally and
permanently disabled, or filed a petition for relief in bankruptcy
until the Secretary authorizes payment; or
(ii) For closed school or false certification claims, the period
from the date on which the guaranty agency received payment from the
Secretary on a default claim to the date on which the Secretary
authorizes payment of the closed school or false certification claim.
(l) Payments received after the Secretary's payment of a death,
disability, closed school, false certification, or bankruptcy claim.
(1) If the guaranty agency receives any payments from or on behalf of
the borrower on or attributable to a loan on which the Secretary
previously paid a bankruptcy claim, the guaranty agency shall remit 100
percent of these payments to the Secretary.
(2) The guaranty agency shall remit to the Secretary all payments
received from a tuition recovery fund, performance bond, or other
third-party with respect to a loan on which the Secretary previously
paid a closed school or false certification claim. The guaranty agency
shall promptly return to the borrower or the borrower's representative,
any payment on a discharged loan made by the borrower (or
representative) and received after the Secretary pays a closed school
or false certification claim. At the same time that the agency returns
the payment, it shall notify the borrower (or representative) that
there is no obligation to repay a loan discharged by virtue of death,
disability, false certification, or closing of the school.
(3) If the guaranty agency has returned a payment to the borrower,
or the borrower's representative, with the notice described in
paragraph (l)(2) of this section, and the borrower (or representative)
continues to send payments to the guaranty agency, the agency shall
remit all of those payments to the Secretary.
(m) Applicable suspension of the repayment period. For purposes of
this section and 11 U.S.C. 523(a)(8)(A) with respect to loans
guaranteed under the FFEL Program, an applicable suspension of the
repayment period--
* * * * *
(5) Includes the period between the filing of the petition for
relief and the date on which the proceeding is completed or dismissed,
unless payments have been made during that period in amounts sufficient
to meet the amount owed under the repayment schedule in effect when the
petition was filed.
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082, 1087)
5. Section 682.410 is amended by revising paragraphs (b)(6)(i),
(iii) introductory text, (iii)(A), (iv) introductory text, (iv)(B),
(vii) (A) through (C), and (xii); and by adding a new paragraph (b)(10)
to read as follows:
682.410 Fiscal, administrative, and enforcement requirements.
* * * * *
(b) * * *
(6) Collection efforts on defaulted loans. (i) Unless it initiates
procedures to garnish the borrower's wages in accordance with paragraph
(b)(10) of this section, a guaranty agency shall attempt annual IRS
offset on all eligible loans and engage in at least the collection
activities described in paragraphs (b)(6) (iii) through (xii) of this
section on a loan on which it pays a default claim filed by a lender,
except that the agency may engage in the collection activities
described in paragraph (b)(7) of this section in lieu of the activities
described in paragraphs (b)(6) (iii) through (vi) of this section. If,
after initiating wage garnishment procedures, the agency terminates
those procedures for a particular borrower, the agency shall, within 30
days, commence collection efforts at least as forceful as those
described in paragraphs (b)(6) (iii) through (xii) of this section. The
agency's collection efforts shall begin with the same collection
activities as those that immediately preceded the initiation of
garnishment procedures, or, if no collection activities had been
performed, the agency shall begin with the activities described in
paragraph (b)(6)(iii) of this section, except that the agency may
engage in the collection activities described in paragraph (b)(7) of
this section in lieu of the activities described in paragraphs (b)(6)
(iii) through (vi) of this section.
* * * * *
(iii) One-45 days: During this period, the agency shall--
(A) Send to the borrower the written notice described in paragraph
(b)(5)(ii) of this section, or a written notice stating that the agency
may garnish the borrower's wages to collect the amount that the
borrower owes plus related collection costs; and
* * * * *
(iv) 46-180 days: During this period the agency shall--
* * * * *
(B) Send at least three written notices to the borrower forcefully
demanding that the borrower immediately commence repayment of the loan,
and informing the borrower that the default has been reported to all
national credit bureaus (if that is the case) and that the borrower's
credit rating may thereby have been damaged. The final notice also must
indicate that it is the final notice the borrower will receive before
the agency will take more forceful action, including the initiation of
procedures to garnish the borrower's wages or instituting a civil suit
to compel repayment of the amount that the borrower owes plus related
collection costs.
* * * * *
(vii) 181-545 days:
(A) Except as provided in paragraphs (b)(6)(vii) (B), (C), and (D)
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 garnish the borrower's wages or institute a civil suit
against the borrower for repayment of the loan.
(B) Except as provided in paragraph (b)(6)(vii)(C) of this section,
in the case of a loan that was assigned to the Secretary prior to the
545th day and returned to the agency less than 180 days prior to the
545th day, the agency has 180 days from the date it receives the
returned loan to garnish the borrower's wages or institute a civil
suit.
(C) Except as provided in paragraph (b)(6)(vii)(D) of this section,
in the case of a loan not assigned to the Secretary, during this
period, but not sooner than 30 days after sending the final notice
described in paragraph (b)(6)(iv) of this section, the agency shall
garnish the borrower's wages or institute a civil suit against the
borrower by the 225th day unless that loan is subsequently assigned to
the Secretary by the deadline for the next available opportunity to
collect by Internal Revenue Service (IRS) tax refund offset, or a
payment is received from the borrower fewer than 120 days before the
deadline for the next available opportunity to collect by IRS tax
refund offset.
* * * * *
(xii) Not later than 10 days after its receipt of information
indicating that it does not know the current address of a borrower on a
loan on which the agency has neither declined to sue under paragraph
(b)(6)(vii)(D) of this section nor discontinued semi-annual inquiries
under paragraph (b)(6)(x) of this section, or the 60th day after its
payment of a default claim on the loan, whichever is later, the agency
shall attempt diligently to locate the borrower through the use of all
available skip-tracing techniques, including, but not limited to, any
skip-tracing assistance available from the IRS, credit bureaus, and
state motor vehicle departments. A guaranty agency shall use any
information provided by a school about a borrower's location in
conducting skip-tracing activities.
* * * * *
(10) Administrative Garnishment. (i) If a guaranty agency decides
to garnish the disposable pay of a borrower who is not making payments
on a loan held by the agency, on which the Secretary has paid a
reinsurance claim, it shall do so in accordance with the following
procedures:
(A) The employer shall deduct and pay to the agency from a
borrower's wages an amount that does not exceed 10 percent of the
borrower's disposable pay for each pay period, or the amount permitted
by 15 U.S.C. 1673, unless the borrower provides the agency with written
consent to deduct a greater amount. For this purpose, the term
``disposable pay'' means that part of the borrower's compensation from
an employer remaining after the deduction of any amounts required by
law to be withheld.
(B) At least 30 days before the initiation of garnishment
proceedings, the guaranty agency shall mail to the borrower's last
known address, a written notice of the nature and amount of the debt,
the intention of the agency to initiate proceedings to collect the debt
through deductions from pay, and an explanation of the borrower's
rights.
(C) The guaranty agency shall offer the borrower an opportunity to
inspect and copy agency records related to the debt.
(D) The guaranty agency shall offer the borrower an opportunity to
enter into a written repayment agreement with the agency under terms
agreeable to the agency.
(E) The guaranty agency shall offer the borrower an opportunity for
a hearing in accordance with paragraph (b)(10)(i)(J) of this section
concerning the existence or the amount of the debt and, in the case of
a borrower whose repayment schedule is established other than by a
written agreement under paragraph (b)(10)(i)(D) of this section, the
terms of the repayment schedule.
(F) The guaranty agency shall sue any employer (including a
borrower who is self-employed) for any amount that the employer, after
receipt of the garnishment notice provided by the agency under
paragraph (b)(10)(i)(H) of this section, fails to withhold from wages
owed and payable to an employee under the employer's normal pay and
disbursement cycle.
(G) The guaranty agency may not garnish the wages of a borrower
whom it knows has been involuntarily separated from employment until
the borrower has been reemployed continuously for at least 12 months.
(H) Unless the guaranty agency receives information that the agency
believes justifies a delay or cancellation of the withholding order, it
shall send a withholding order to the employer within 20 days after the
borrower fails to make a timely request for a hearing, or, if a timely
request for a hearing is made by the borrower, within 20 days after a
final decision is made by the agency to proceed with garnishment.
(I) The notice given to the employer under paragraph (b)(10)(i)(H)
of this section must contain only the information as may be necessary
for the employer to comply with the withholding order.
(J) The guaranty agency shall provide a hearing, which, at the
borrower's option, may be oral or written, if the borrower submits a
written request for a hearing on the existence or amount of the debt or
the terms of the repayment schedule. An oral hearing may, at the
borrower's option, be conducted either in-person or by telephone
conference. All telephonic charges must be the responsibility of the
guaranty agency.
(K) If the borrower's written request is received by the guaranty
agency on or before the 15th day following the borrower's receipt of
the notice described in paragraph (b)(10)(i)(B) of this section, the
guaranty agency may not issue a withholding order until the borrower
has been provided the requested hearing. The guaranty agency shall
provide a hearing to the borrower in sufficient time to permit a
decision, in accordance with the procedures that the agency may
prescribe, to be rendered within 60 days.
(L) If the borrower's written request is received by the guaranty
agency after the 15th day following the borrower's receipt of the
notice described in paragraph (b)(10)(i)(B) of this section, the
guaranty agency shall provide a hearing to the borrower in sufficient
time that a decision, in accordance with the procedures that the agency
may prescribe, may be rendered within 60 days, but may not delay
issuance of a withholding order unless the agency determines that the
delay in filing the request was caused by factors over which the
borrower had no control.
(M) A hearing may not be conducted by an individual under the
supervision or control of the head of the guaranty agency, except that
an agency may appoint an administrative law judge to conduct the
hearing.
(N) The hearing official shall issue a final written decision at
the earliest practicable date, but not later than 60 days after the
guaranty agency's receipt of the borrower's hearing request.
(O) As specified in section 488A(a)(8) of the HEA, the borrower may
seek judicial relief, including punitive damages, if the employer
discharges, refuses to employ, or takes disciplinary action against the
borrower due to the issuance of a withholding order.
(ii) References to ``the borrower'' in this paragraph include all
endorsers on a loan.
* * * * *
6. Section 682.411 is amended by revising paragraph (d)(2) to read
as follows:
Sec. 682.411 Due diligence by lenders in the collection of guaranty
agency loans.
* * * * *
(d) 11-180 days delinquent (11-240 days delinquent for a loan
repayable in installments less frequent than monthly).
* * * * *
(2) At least two of the collection letters required under paragraph
(d)(1) of this section must warn the borrower that if the loan is not
paid, the lender will assign the loan to the guaranty agency that, in
turn, will report the default to all national credit bureaus, and that
the agency may institute a proceeding to garnish the borrower's wages
and bring suit against the borrower to compel repayment of the loan.
* * * * *
[FR Doc. 94-1008 Filed 1-13-94; 8:45 am]
BILLING CODE 4000-01-P