[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Rules and Regulations]
[Pages 60478-60487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30359]



[[Page 60477]]

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Part VIII





Department of Education





_______________________________________________________________________



34 CFR Part 682



Postsecondary Education: Federal Family Loan Program; Due Diligence 
Requirements; Final Rule

  Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / 
Rules and Regulations  

[[Page 60478]]



DEPARTMENT OF EDUCATION

34 CFR Part 682

RIN 1840-AC35


Federal Family Education Loan Program; Due Diligence Requirements

AGENCY: Department of Education.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the regulations governing the Federal 
Family Education Loan (FFEL) Program. The FFEL regulations govern the 
Federal Stafford Loan Program, the Federal Supplemental Loans for 
Students (Federal SLS) Program, the Federal PLUS Program, and the 
Federal Consolidation Loan Program, collectively referred to as the 
Federal Family Education Loan Program and authorized by Title IV, Part 
B of the Higher Education Act of 1965, as amended (HEA). The Secretary 
is making changes to the due diligence requirements for lenders and 
guaranty agencies participating in the FFEL Program.

DATES: Effective date: Except for the revision of Sec. 682.404(f), 
these regulations take effect on July 1, 1997. The revision of 
Sec. 682.404(f) is effective January 1, 1998 and applicable for 
payments received on or after January 1, 1998. However, affected 
parties do not have to comply with the information collection 
requirement in Sec. 682.411 until the Department of Education publishes 
in the Federal Register the control number assigned by the Office of 
Management and Budget (OMB) to this information collection requirement. 
Publication of the control number notifies the public that OMB has 
approved this information collection requirement under the Paperwork 
Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Ron Streets, Program Specialist, Loans 
Branch, Policy Development Division, Policy, Training, and Analysis 
Service, U.S. Department of Education, 600 Independence Avenue, SW. 
(room 3053, ROB-3), Washington, DC 20202-5449. Telephone: (202) 708-
8242. Individuals who use a telecommunications device for the deaf 
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION:

Background

    The Secretary is amending 34 CFR Part 682 of the Department's 
regulations to improve the administration and the integrity of the FFEL 
Program. By improving program efficiency, these regulations will reduce 
burden for lenders and improve the collection of outstanding FFEL loans 
and potential liabilities owed to the Secretary.
    On September 6, 1996, the Secretary published a notice of proposed 
rulemaking (NPRM) for Part 682 in the Federal Register (61 FR 47398). 
The NPRM proposed changes needed to improve the due diligence 
provisions in the FFEL program. The NPRM included a discussion of the 
major issues surrounding the proposed changes, and the discussion will 
not be repeated here. The following list summarizes those issues:
     Guaranty agency retention of collection costs of a 
defaulted FFEL loan that are repaid by a consolidation loan;
     Requiring a guaranty agency to offer preclaims assistance 
to lenders no later than the 75th day of delinquency;
     Requiring a guaranty agency to provide counseling and 
written consumer information to the borrower by the 100th day of 
delinquency;
     Application of payments made by a borrower on a defaulted 
loan to a guaranty agency;
     Requiring a guaranty agency to assess a defaulted borrower 
the same amount of collection charges assessed by the Department;
     Initiating wage garnishment proceedings for borrowers with 
sufficient income;
     Expanding the length of time in which lenders must send 
the first written notice or collection letter to a delinquent borrower;
     Modifying the requirements for the two collection letters 
that must be sent to a borrower; and
     Expanding the possible remedial action available to the 
Secretary if a guaranty agency fails to meet the requirements of 
Sec. 682.410 to include mandatory assignment of FFEL loans to the 
Department at the Secretary's discretion.

Substantive Revisions to the Notice of Proposed Rulemaking

Section 682.404  Federal Reinsurance Agreement

    The Secretary amends this section of the regulations to require 
guaranty agencies to provide preclaims assistance to lenders no later 
than the 90th day of delinquency. The NPRM had proposed a deadline of 
the 75th day of delinquency.
    This section has also been amended to require that a guaranty 
agency provide counseling and consumer information to a borrower within 
10 days following the receipt of a preclaims assistance request from 
the lender or the servicer. The Secretary has further amended this 
section to allow guaranty agencies flexibility in using formats other 
than written ones when providing consumer information to the borrower 
as part of the guaranty agency's preclaims assistance.

Section 682.410  Fiscal, Administrative, and Enforcement Requirements

    The proposal to require a guaranty agency to charge a borrower 
collection costs equal to the amount the same borrower would be charged 
for the cost of collection if the loan was held by the Department has 
been removed. The Secretary has retained the current regulatory 
requirement which allows a guaranty agency to use the lesser of the 
amount derived from the formula in 34 CFR 30.60 or the amount charged 
by the Department.

Section 682.411  Due Diligence by Lenders in the Collection of Guaranty 
Agency Loans

    Section 682.411 is also amended to move the last sentence in 
paragraph (c) in the NPRM that deals with the contents of the first 
delinquency notice and insert it in paragraph (d), and to add a 
modified statement to paragraph (c).

Executive Order 12866

1. Assessment of Costs and Benefits

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary as necessary for administering this program effectively and 
efficiently. Potential costs and benefits are also discussed in 
conjunction with the public comments to which they relate.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these regulations, the Secretary has determined 
that the benefits of the regulations justify the costs.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 38 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes in the regulations since publication of the 
NPRM follows. An analysis of the comments received regarding the

[[Page 60479]]

regulatory flexibility certification can be found under the heading 
Regulatory Flexibility Act Certification.
    Major issues are grouped according to sections and subject. Other 
substantive issues are discussed under the section of the regulations 
to which they pertain. Technical and other minor changes--and suggested 
changes the Secretary is not legally authorized to make under the 
applicable statutory authority--are not addressed.

Section 682.401--Basic Program Agreement

    Comment: A number of guaranty agency representatives commented on 
the Secretary's proposal to modify the regulations to reflect his view 
that guaranty agencies may retain collection costs totaling up to 18.5% 
of the outstanding principal and accrued interest of a defaulted FFEL 
Program loan that is repaid by a consolidation loan if the collection 
costs are included in the payoff amount certified by the guaranty 
agency. These commenters argued that the HEA allows the guaranty 
agencies to retain 27 percent of payments received from borrowers on 
defaulted loans including payoffs provided through consolidation. They 
also argued that the agency needs to retain these funds to pay certain 
costs in connection with a consolidation loan. The agency 
representatives suggested that their view is consistent with 
Congressional intent as shown by budget ``scoring'' of a budget 
reconciliation bill in 1996 that included a provision that the agencies 
believe supports their position.
    Other commenters, including school organizations and borrower 
advocates, supported the proposed regulation limiting collection costs 
and the retention by guaranty agencies. These commenters noted that the 
addition of collection costs can be a disincentive for a borrower to 
consolidate a loan--thus eliminating an important tool to reduce 
defaults. These commenters also urged the Department to consider 
eliminating the authority for the guaranty agencies to add any 
collection costs to a defaulted loan that is consolidated.
    Discussion: The comments of the guaranty agency representatives are 
based on the view that a consolidation loan payoff amount is a 
``payment'' for purposes of section 428(c)(6) of the HEA. The 
Secretary, however, believes that the agencies' interpretation is 
contrary to the words and intent of the HEA. In defining the 
``Secretary's equitable share'' for purposes of the guaranty agency's 
retention of collections, the HEA specifically refers to ``the 
Secretary's equitable share of payments made by the borrower''. A 
consolidation loan payoff amount is not paid by the borrower but 
instead is paid by a third party (the consolidating lender) and does 
not reduce the borrower's obligation. Thus, a loan consolidation is not 
covered by section 428(c)(6).
    In addition, in interpreting the HEA, it is appropriate to look at 
both the specific statutory language and at the language and design of 
the entire statute. See Connecticut Student Loan Foundation v. Riley, 
Case No 3:93CV02570 (JBA) (D.Conn., Oct. 31, 1996). The guaranty 
agencies' interpretation is also inconsistent with other provisions of 
the HEA. Under the agencies' approach, a borrower who consolidated a 
defaulted loan would not be responsible for the collection costs on 
that loan. Instead, the taxpayer would pick up those costs by allowing 
the agency to retain a certain portion of the consolidation loan payoff 
amount. This is contrary to section 484A(b) of the HEA. At the same 
time, under this approach, the agencies would be allowed to retain an 
amount far in excess of their actual collection costs. Numerous audits 
of guaranty agencies show that the guaranty agencies' contracts with 
collection agencies frequently provided for payments to the collectors 
of far less than 27 percent when a defaulted loan is included in a 
consolidation loan. The agencies' comments on the NPRM did not address 
this issue or provide any supporting information for their claim that 
they need a greater retention to pay additional costs. Allowing the 
guaranty agencies to retain an amount far in excess of the amount they 
have established as the cost of collecting on the loan (in addition to 
the reinsurance payment the agency received) would provide an 
unnecessary and inappropriate windfall for the agencies. Finally, the 
Secretary notes that the agencies' claim that their view is consistent 
with Congressional intent based on the budget ``scoring'' of a 
provision in a bill that was ultimately vetoed is unpersuasive.
    The Secretary appreciates the concerns of the school and borrower 
advocates that the addition of collection costs reduces the value of 
the option of consolidation. The Secretary is continuing to evaluate 
how to address this issue while protecting the Federal fiscal interest.
    Changes: None

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

    Comment: The majority of commenters representing guaranty agencies, 
lenders, lender servicers, and secondary markets supported the 
Secretary's effort to promote standardization and simplification, but 
objected to the proposal that guaranty agencies be required to offer 
preclaims collection assistance to lenders on delinquent accounts no 
later than the 75th day of delinquency. These commenters recommended 
that the deadline be no later than the 90th day of delinquency. Two 
other guaranty agency commenters strongly objected to the Department 
establishing any deadline for beginning preclaims assistance on the 
grounds that many agencies have developed their own default prevention 
efforts based on portfolio characteristics and what has been shown to 
work best for their agencies. These commenters believe that agencies 
should be allowed to continue establishing the beginning date for 
preclaims assistance. One of these two commenters suggested that if, as 
the Secretary suggested in the preamble to the NPRM, some agencies have 
not provided preclaims assistance on a timely basis, the Department 
should address the problem with those guarantors. The commenters 
representing school and financial aid officer associations supported 
the Secretary's proposal, one stating that early intervention can 
prevent many defaults and the other that this change will ensure that 
delinquent borrowers are treated in a similar manner regardless of the 
guaranty agency performing the preclaims activities.
    Many commenters indicated that starting preclaims assistance 
earlier than the 90th day may confuse borrowers and cited studies 
conducted by several major guaranty agencies showing that about one-
third of borrower delinquencies are resolved between the 60th and 90th 
day. They also cited a similar study conducted by a major lender that 
showed a 41 percent default aversion rate by the lender during this 
period. These commenters believe that a ``no later than 90 days'' time 
frame will afford borrowers with the opportunity to fulfill their 
commitments to their loan holders and servicers without intervention by 
guarantors. They also believe such an approach will avoid unnecessary 
lender and guaranty agency costs.
    Discussion: The Secretary continues to believe that early preclaims 
intervention by a guaranty agency is

[[Page 60480]]

critical to default aversion, but agrees with the commenters that how 
early that intervention takes place may appropriately depend upon a 
number of factors, such as those mentioned by the commenters. The 
Secretary has decided that until further discussions with the loan 
industry and review of servicing data can take place, agencies should 
be given some flexibility in beginning their preclaims collection 
activities. However, the Secretary continues to believe that it is 
appropriate to establish an outer deadline for a guaranty agency to 
offer preclaims assistance to lenders. After consideration of the 
comments, the Secretary has decided to accept the suggestion that the 
90th day of delinquency is an appropriate deadline.
    Changes: The regulations have been amended to require guaranty 
agencies to offer preclaims assistance to lenders no later than the 
90th day of delinquency.

Information and Counseling Requirements

    Comment: Several commenters noted that the use of the phrase 
``consolidate the defaulted loan'' in the proposal to require 
guarantors to provide counseling and written consumer information to a 
delinquent borrower no later than the 100th day of delinquency was not 
correct within the context of preclaims assistance and recommended that 
the reference should be to ``delinquent'' rather than ``defaulted'' 
loan.
    Discussion: The Secretary agrees that the use of the word 
``defaulted'' is incorrect in the context of preclaims assistance 
contacts with delinquent borrowers.
    Changes: The word ``delinquent'' is substituted for ``defaulted'' 
in the provision.
    Comment: All of the guaranty agency, lender and loan servicer, and 
secondary market commenters agreed with the Secretary that there should 
be a consistent time period during the preclaims assistance process for 
the guaranty agency to provide specific information to the borrower on 
consolidation and other default prevention options. Because most of 
these same commenters recommended that guaranty agencies be given 
flexibility, up to the 90th day of delinquency, to begin the preclaims 
effort, they recommended that a consistent standard be achieved by 
requiring that the information be provided to the borrower no later 
than the 30th day following the agency's receipt of the preclaims 
assistance request from the lender rather than by the 100th day of 
delinquency as the Secretary proposed. These commenters indicated that 
they believed that this time frame will allow a guaranty agency the 
ability to perform preclaims activities in an orderly and logical 
sequence even if the lender's request is late. They also pointed out 
that under the Secretary's proposal, if a lender requests preclaims 
assistance as early as the 60th day of delinquency, the agency has up 
to 40 days to provide the required information, whereas if a lender 
requests preclaims assistance at the 90th day of delinquency, the 
agency would have only 10 days to provide the information.
    Discussion: The Secretary agrees that, in light of the change in 
the guaranty agency's deadline for offering preclaims assistance, the 
100th day of delinquency is no longer an appropriate deadline for 
requiring the guaranty agency to provide the required consumer 
information and counseling. The Secretary also agrees with commenters 
that there should be a consistent time period for agencies to provide 
this important consumer information. However, the Secretary believes 
that it is vital that this information be provided to the borrower 
through the preclaims assistance process as soon as possible after the 
lender requests preclaims assistance. The borrower should have every 
opportunity to take steps to remedy the delinquency before the agency 
undertakes more intensive supplemental preclaims efforts. Under the 
commenters' proposal that the information be provided to the borrower 
no later than the 30th day following the agency's receipt of the 
lender's request for preclaims collection assistance, this goal cannot 
be met. For example, if an agency offers preclaims assistance on the 
90th day of delinquency and the lender uses the full 10 days provided 
in 34 CFR 682.411(h) to request assistance, the borrower might not 
receive the information until the 130th day of delinquency, which is 
well within the supplemental preclaims period. The Secretary believes 
that this result does not serve the borrowers. To avoid this situation, 
the Secretary has decided to require the guaranty agency to provide the 
consumer information and counseling no later than 10 working days after 
it receives the lender's request for preclaims assistance.
    Changes: The regulations have been revised to require a guaranty 
agency to provide counseling and consumer information to the borrower 
no later than 10 working days after receiving a lender's request for 
preclaims assistance.
    Comment: The majority of commenters supported providing consumer 
information on default aversion options to delinquent borrowers as part 
of preclaims assistance activities. One borrower supported the proposal 
and noted that information on consolidation was not readily available 
to him when he encountered difficulties in being able to repay his loan 
and that he almost defaulted because his lender did not participate in 
the Consolidation program. However, an overwhelming number of 
commenters strongly objected to what they perceived as a proposal that 
the guaranty agency provide consumer information on only the 
consolidation loan option. The commenters indicated that they believe 
that loan consolidation is not always the best option for many 
borrowers because of the potential loss of benefits on the underlying 
loans being consolidated. They also pointed out that not all borrowers 
may be eligible for consolidation. All the commenters recommended that 
the consumer information provided to the borrower include all of the 
options available to resolve the delinquency, including deferment, 
forbearance, and the opportunity for an income-sensitive repayment 
schedule. One commenter recommended that the Department provide the 
guaranty agencies with a prepared information piece that outlines all 
the default aversion options and borrower profiles describing which 
borrowers might benefit from which option.
    Discussion: The Secretary agrees with the commenters that the 
information provided to the borrower should include all default 
aversion options available to the borrower, not just FFEL and Direct 
Loan Consolidation. The Secretary's proposal was intended to ensure 
that consolidation was included as an option in preclaims counseling 
and information, but it was not intended to suggest that information on 
other options should be withheld. The borrower's comment supports the 
Secretary's belief that information on consolidation has not been 
readily made available to delinquent borrowers. The Department agrees 
with the suggestion that a prepared information piece providing an 
overview of available options with borrower profiles would be useful.
    Changes: The regulations are amended to clarify that the 
information provided to the borrower must include all options available 
to avoid default, including FFEL and Direct Loan Consolidation.
    Comment: Many loan industry (guaranty agency, lender, and lender 
servicer) commenters recommended that the Secretary modify the 
regulations to allow agencies to provide

[[Page 60481]]

the required consumer information in formats other than written ones, 
such as video and e-mail. The commenters believe that the regulations 
should not preclude the use of more innovative mediums for providing 
this information. These same commenters questioned the advisability of 
requiring both written information and counseling, suggesting that 
providing both may cause borrower confusion. The commenters also 
requested clarification as to whether the written consumer information 
could be provided as part of the letter that is one of the three 
required preclaims activities and whether there are any situations, 
such as an invalid address or when the borrower has requested that the 
agency cease all collection activities, in which the agency would be 
relieved of the requirement to provide this information.
    Discussion: The Secretary agrees that the regulations should not 
prevent a guaranty agency from providing borrowers with required 
counseling and consumer information in formats other than written 
letters. The Department is primarily concerned with ensuring that the 
borrower receives the information in an appropriate manner. Thus, an 
agency may use different methods of providing the information to the 
borrower as long as the agency can show that the delinquent borrower 
received the information. The Secretary also agrees that this 
information may be provided as part of a preclaims letter, provided the 
default aversion options are clearly and prominently presented and not 
buried in the text of the letter. The Secretary does not agree that 
reinforcing the written consumer information with counseling will 
confuse borrowers. The Secretary believes that it is important for the 
agency to follow up with the borrower to determine that the borrower 
received and understood the information, to answer any questions the 
borrower may have about the available options, especially the loan 
consolidation programs, and to encourage the borrower to act on one of 
the options to halt the increasing delinquency. The Secretary expects 
an agency to provide this information to the extent that a valid 
address or telephone number is available for the borrower.
    Changes: The regulations have been modified to specify that an 
agency may provide written consumer information on default aversion 
options as part of the required preclaims letter and/or in other 
written materials or other formats as a separate information piece.
    Comment: Loan industry commenters expressed concern about the 
provision that specifies that an agency's failure to provide the 
required consumer information and counseling constitutes a violation of 
the guaranty agency's obligation to perform due diligence in collecting 
the loan. The commenters objected to what they viewed as the imposition 
of punitive sanctions on a loan-by-loan basis and requested that the 
Department withhold assessing penalties for noncompliance with this 
provision until the major due diligence reform effort previously 
announced by the Department is started. These commenters also requested 
clarification that a lender would not be harmed by an agency's failure 
to comply with this requirement and that any penalties would be paid 
out of an agency's reserve fund and not passed along to a lender or 
lender servicer.
    Discussion: The Secretary understands that the use of the phrase 
``servicing error'' in the preamble and the reference in the 
regulations to ``due diligence in collecting'' may have confused 
readers because common usage in the FFEL program has made a distinction 
between these terms. The Secretary did not intend to make such a 
distinction by use of these differing terms. The Secretary agrees with 
commenters that lenders should not be penalized for a guaranty agency's 
violations in this area. To clarify this, the Secretary has decided to 
relocate this provision.
    Changes: The statement citing violations of preclaims assistance 
requirements as a due diligence violation of the agency has been 
relocated to 34 CFR 682.406(a)(12) as a condition of reinsurance.

Section 682.404(f)--Application of Borrower Payments

    Comment: Many loan industry commenters agreed that only an 
appropriate amount from each borrower payment on a defaulted loan 
should be applied to collection costs, but objected to the proposed 
language that would prohibit the up-front assessment of collection 
costs after default claim payment and require that collection costs be 
assessed on each payment received. The commenters indicated that many 
guarantor systems are programmed currently to calculate up-front 
collection costs according to the limits established in 
Sec. 682.410(b)(2) and would require significant changes to make a per 
payment assessment. These commenters stated that, at the very least, 
retroactive recalculation of collection costs should not be required 
except on accounts on which the agency had not previously assessed 
fees. In the commenters' view, such reassessment on an account on which 
a borrower has been making payments may increase the percentage of 
collection costs assessed as well as increase the total amount paid.
    A few guaranty agency commenters strongly objected to any change to 
this provision of the regulations because they believe that the 
application of borrower payments as proposed is not in the best 
interest of the borrower and will require the borrower to pay more 
interest over the life of the loan because principal is reduced more 
slowly. These commenters believe that collection costs are a collection 
tool to be used by the agency and that the proposed regulation weakens 
this effective tool. One of these commenters also stated that he 
believes that this proposal would eliminate an agency's ability to 
compromise the debt. Some legal advocates who represent borrowers also 
strongly objected to the proposed change, stating that this approach 
will be counterproductive and will discourage defaulted borrowers from 
continuing to make payments because they will pay over long periods of 
time and not see their principal and interest diminish appreciably. The 
advocates recommended that the current regulations in this area be 
retained. A school association commenter also objected to the proposal 
and recommended that agencies be required to apply payments to 
principal and interest first, then collection and late charges. The 
commenter believes that the objective should be repaying the loan, not 
creating additional financial hardship for the borrower.
    Discussion: The Secretary understands that some commenters would 
prefer that defaulted borrowers not be discouraged from repaying on a 
defaulted loan by having to pay collection costs. However, section 484A 
of the Higher Education Act requires that these borrowers, rather than 
the taxpayers, bear reasonable costs of collection. The current 
regulations giving the guaranty agency the option of determining how 
payments are to be applied has led in some instances to the borrower 
paying few if any collection costs and the regulations do not comply 
with the Federal Claims Collection Standards. Therefore, the Secretary 
does not believe that retaining the current requirements, as suggested 
by many commenters, is an option. The Secretary does not agree that 
this change prevents an agency from compromising a portion of the 
collection costs if a borrower makes a lump sum payment to satisfy the 
debt.
    The loan industry commenters are correct that the proposed change 
precludes agencies from continuing to assess collection costs upfront 
at a time when the agency has not yet incurred

[[Page 60482]]

those costs. The Secretary notes that the borrower is not legally 
obligated to pay costs which have not been incurred. This regulatory 
change is intended to require the guaranty agencies to charge only 
those costs that have been incurred and to prohibit the upfront loading 
of collection costs on a borrower's account because it discourages 
repayment and does not reflect the agencies' actual collection 
expenses. In its own collection efforts, the Department calculates and 
displays in its billing statements the projected contingent fee charges 
that will be incurred and assessed against the borrower if the full 
amount of principal and interest owed is not immediately repaid. The 
Department incurs a contingent fee cost only as the borrower repays and 
then passes that cost on to the borrower as it is incurred on a 
payment-by-payment basis. The Department does not assess costs to the 
borrower it has not incurred and attempts to make this distinction 
clear in its notices to borrowers.
    The Secretary understands that some agencies may be required to 
make significant systems changes to inform borrowers clearly that they 
will be assessed collection costs on a per payment basis. Because of 
the time and complexity involved in making the necessary systems 
changes, the Secretary agrees that a delayed effective date for 
implementation of the regulations is appropriate as reflected in the 
effective date section of this document. The Secretary notes, however, 
that there has never been a legal basis for an agency to charge 
collection costs it has not incurred to a borrower and the delayed 
effective date is not intended to justify failure to conform to the 
law.
    Changes: No changes have been made to the regulations. However, the 
Secretary has provided a delayed effective date for implementation of 
this provision of the regulations.
    Comment: In response to the Secretary's solicitation on whether a 
guaranty agency should be allowed to apply borrower payments to 
incidental charges, after collection costs, rather that only after all 
principal and interest is satisfied, loan industry commenters 
overwhelmingly recommended that this decision be the option of the 
guarantor. They believe guarantors should be allowed to apply payments 
to incidental charges, such as late charges and court fees, when they 
are assessed, and as the agency deems appropriate. Some legal advocates 
for borrowers recommended that the current requirements, which provide 
that payments be applied to these costs only after the repayment of all 
principal and interest, be retained.
    Discussion: The Secretary has decided that, consistent with 4 CFR 
Chapter II, section 102.13(f) of the Federal Claims Collection 
standards, the borrower's payment must be applied to incidental charges 
(which the Secretary understands will be nominal amounts, such as late 
charges) after collection costs are paid and before the payment is 
applied to accrued interest and outstanding principal.
    Changes: The regulations have been revised to require that borrower 
payments on a defaulted loan be applied to any incidental charges after 
the appropriate amount of collection costs is paid and before the 
payment is applied to accrued interest and outstanding principal.
    Comment: Loan industry commenters proposed that the phrase 
``reinsured interest'' in the current regulations be changed to 
``accrued interest'' because the borrower owes all accrued interest 
whether or not the agency paid the lender insurance on the interest or 
the agency filed for reinsurance with the Secretary. The commenters 
pointed out that interest that accrues after the lender's claim is paid 
is not reinsured.
    Discussion: The Secretary agrees with the commenters that the 
regulations should reference accrued interest in this provision.
    Changes: The regulations have been revised to provide that borrower 
payments are applied to ``accrued'' interest rather than to 
``reinsured'' interest.
    Comment: One commenter pointed out that Sec. 682.404(f) fails to 
identify that the payments being described are being applied to a 
defaulted loan and recommends a change to reflect this.
    Discussion: The Secretary agrees with the commenter.
    Changes: The regulations have been modified to refer to a defaulted 
loan.

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

    Comment: An overwhelming number of commenters objected to the 
proposal that would require a guaranty agency to assess a borrower in 
default the collection costs that the same borrower would be charged if 
the loan was held by the Department and recommended that the current 
regulatory standard be retained. Loan industry commenters, although 
appreciating the Secretary's goal of standardization, believe that the 
flat rate proposed in the NPRM is not reasonable if it bears no 
relation to the actual costs incurred in the collection process. These 
commenters believe a flat rate is inconsistent with section 
428(c)(6)(B)(i) of the HEA which states that collection costs are those 
costs incurred by a guaranty agency in relation to collecting on 
defaulted loans. Finally, loan industry commenters contended that fair 
treatment of borrowers is preferable to uniform treatment if the result 
would be that borrowers would be assessed more than they otherwise 
would be charged. They believe a flat rate assessment will also prevent 
an agency from continuing to compromise collection costs when it deems 
it appropriate.
    Some school associations supported the Secretary's proposal to 
mandate a maximum amount of collection costs that agencies would be 
authorized to assess, but strongly recommended that guaranty agencies 
have the flexibility to assess less than the flat rate when the actual 
cost is less.
    Borrower representatives strongly opposed the Secretary's proposal 
on the grounds that the imposition of uniform collection rates is not 
beneficial to borrowers if uniformity means higher collection fees. 
They recommended that reasonable collection costs be defined as the 
lesser of the percent limitation in the borrower's promissory note or 
other repayment agreement or the guarantor's actual costs of 
collection.
    Discussion: After further consideration, the Secretary agrees with 
the commenters that the assessment of a uniform rate may not be the 
fairest approach to assessing collection costs, and could prove 
counterproductive if it creates a disincentive to borrowers continuing 
to make payments on defaulted loans. In regard to the borrower 
representatives' recommendation to define reasonable collection costs 
by referencing the borrower's promissory note, the Secretary notes that 
the common promissory notes approved by the Secretary do not include 
any such limitation and may not be changed to provide for one.
    Changes: The Secretary has decided to retain current regulations 
governing the maximum collection costs that may be assessed a defaulted 
borrower, except specifically to note that such costs are subject to 
limitations in the borrower's promissory note, if any.

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

    Comment: Loan industry commenters recommended that the Secretary 
withdraw the proposed change to post-default collections that would 
require guaranty agencies to undertake ``administrative wage 
garnishment'' no later than the 225th day of a borrower's delinquency 
because it was unclear how that proposal related to the entire text of 
paragraph (vii) of the current rule that

[[Page 60483]]

addresses guaranty agency collection efforts. The commenters noted that 
the term administrative wage garnishment did not appear in the text of 
the regulations, but that they understood that the Department's intent 
was to require the agencies to use administrative wage garnishment 
exclusively. With that understanding, the commenters strongly objected 
to the loss of the guaranty agency's option to undertake judicial wage 
garnishment which they claimed was an efficient and cost-effective 
means to satisfy the debt in some states. They strongly recommended 
that agencies be allowed to continue to use judicial wage garnishment 
as a collection tool and to determine whether administrative wage 
garnishment or judicial wage garnishment is the most appropriate 
collection tool in particular cases. Borrower representatives indicated 
that they believe that the proposal to require administrative wage 
garnishment may be unworkable and contrary to the borrower's best 
interest. These commenters believe that difficulties in obtaining 
accurate employment data through state labor or unemployment insurance 
departments may result in a high volume of nonproductive and harassing 
wage garnishment attempts, leading to increased legal challenges to 
garnishment. They believe that litigation affords a borrower with more 
due process protection and recommend that the Secretary withdraw the 
proposal.
    Discussion: The Secretary believes that program experience has 
shown that administrative wage garnishment is a far more efficient and 
cost-effective collection tool than across-the-board litigation of all 
defaulted accounts. In regard to the loan industry comments about the 
alleged benefits features of judicial wage garnishment, the Secretary 
notes that the administrative wage garnishment authority was added to 
the HEA only after attempts to promote judicial wage garnishment by 
guaranty agencies proved ineffective. The guaranty agencies have 
presented no significant evidence of increased collections through the 
judicial wage garnishment process to justify the significant expense 
and complications created by that process. The Secretary also believes 
that the notice and opportunity for a hearing provisions in the 
regulations governing administrative wage garnishment afford a 
defaulted borrower adequate due process and an opportunity to contest 
the debt or enter into a repayment agreement on the loan with the 
guaranty agency and avoid the problems identified by the borrower 
commenters. The Secretary notes that this discussion is not intended to 
preclude a guaranty agency's use of a state administrative wage 
garnishment process that would provide similar benefits and protections 
to the government and the borrower as the HEA. The Secretary invites 
any agency that believes it has such authority to discuss the use of 
such authority with the Secretary. The Secretary also notes that this 
regulation is not intended to prohibit an agency from using state tax 
refund offset authority that may be available.
    The Secretary does agree with the commenters that conforming 
changes are necessary to Sec. 682.410(b)(6)(vii) and (b)(7) to clarify 
the use of wage garnishment within the greater context of the 181-545 
day due diligence period and has made appropriate changes to these 
regulations. The Secretary notes that he will review these changes 
further during the planned consideration of guaranty agency due 
diligence requirements next year.
    Changes: Conforming changes have been made to clarify this 
requirement within the context of the other provisions of the 181 to 
545-day period specified in the regulations. References to required 
collection activities at the 545th day of delinquency have been deleted 
from the regulations.
    Comment: Guaranty agency commenters overwhelmingly disagreed with 
the proposal that defaulted borrower accounts be assigned to the 
Department for litigation by the federal government if the borrower has 
no income that could be attached through wage garnishment, but has 
assets which could be attached through a court order. The commenters 
believe that the agencies should be permitted to choose to litigate or 
assign the account to the Department. They believe that agencies have 
the resources and procedures already in place to determine the most 
appropriate and cost-effective method of recovery and that assignment 
to the Department will not increase collections.
    Discussion: The Secretary disagrees with the commenters. It is the 
Secretary's experience that the guaranty agencies are frequently 
inconsistent in pursuing and enforcing judgments.
    Moreover, the process for transferring these judgments when a loan 
is assigned to the Secretary or transferred to another agency when the 
original agency closes can be complex and confusing for the agencies, 
the Secretary and the borrower. Thus the Secretary believes that 
centralized litigation by the federal government is the most cost-
effective means of collecting these accounts. The Secretary believes 
that the number of defaulted accounts where the borrower has no income 
to be garnished but assets which could be attached will not be an 
overwhelming number and is convinced that the federal government has 
sufficient resources to litigate these accounts efficiently.
    The Secretary does not intend that guaranty agencies immediately 
cease collection activity on judgments on which they are collecting. It 
is the Secretary's intention to eliminate the need for guaranty agency 
litigation on future defaults. However, the Secretary believes that 
guaranty agencies should continue to collect on current paying 
judgments. To avoid confusion, therefore, the Secretary has decided not 
to delete all references to litigation in the current regulation. The 
Secretary will make the necessary technical changes to the regulations 
at a later date.
    Changes: None.

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

    Comment: Many loan industry commenters strongly supported the 
Secretary's effort to change the timing of the first delinquency notice 
required in Sec. 682.411(c) of the regulations and the resulting change 
in the timing of the subsequent due diligence period in 
Sec. 682.411(d), but recommended that the 1- to 15-day period be 
extended to a 1-20-day period. The commenters indicated that they 
believe that borrowers assume that a 15-day grace period, similar to 
that available on many consumer loans, is available on their student 
loans. They believe that the additional five days they are requesting 
would allow borrowers to mail payments within 15 days of the due date 
without adverse consequences. The commenters believe that the use of 
the 20-day standard will eliminate unnecessary collection letters from 
being generated. Another commenter recommended that either a 15-day 
period or a 20-day period be used, depending upon the lender's policy 
for reporting delinquencies to credit bureaus. The majority of loan 
industry commenters urged the Secretary to allow lenders to implement 
the change in the time period for delinquent notices or collection 
letters ``no later than July 1, 1997.''
    Discussion: The Secretary believes that because a student loan may 
be a borrower's first consumer loan experience, lenders must exercise 
greater diligence than they might on other consumer loans in order to 
monitor borrower delinquency and take proactive steps to ensure that a 
borrower establishes a successful repayment

[[Page 60484]]

pattern. The Secretary believes that adopting the 15-day period for the 
first notice of delinquency will eliminate the possibility of 
unnecessary collection notices. In response to the request for early 
implementation of this change, the Secretary notes that, under section 
482(c) of the HEA, this change cannot be effective until July 1, 1997.
    Changes: A conforming change to reference the 15-day standard for 
generating the first delinquency notice has been made in 
Sec. 682.202(f)(2) of the regulations.
    Comment: Many loan industry commenters disagreed with the proposal 
that the first notice of delinquency required by Sec. 682.411(c) 
provide the borrower with information on loan consolidation, 
forbearance, and other available options to avoid default. The 
commenters point out that the borrower's initial delinquency is not 
necessarily a sign of either financial difficulty in making scheduled 
payments or of impending default. They believe that the initial notice 
should simply remind the borrower of the delinquency and that he or she 
should call the lender or lender servicer if he or she is having 
difficulty making scheduled payments. They also point out that a first 
notice of delinquency is generally issued in a billing statement format 
that is not intended to alienate or intimidate the borrower and that 
space for providing extensive information is limited.
    Many of these same commenters also objected to adding the 
additional notice to subsequent collection letters required under 
Sec. 682.411(d). The commenters argued that lenders and lender 
servicers should be allowed to insert a notice of their own design that 
they believe will elicit the best response from the borrower and 
further recommended that the specific references in the notice to wage 
garnishment, tax offset, and litigation be replaced with a more generic 
reference to the lender taking ``other actions as authorized by law.'' 
The commenters believe that many borrowers do not understand what these 
terms mean and that the lender should be allowed to explain these legal 
actions in simple language that borrowers will understand. They also 
indicated that a listing of specific consequences may suggest to the 
borrower that this list supersedes any right the guarantor or the 
Secretary has to pursue collection as provided for in the borrower's 
promissory note.
    Discussion: The Secretary disagrees with commenters that informing 
the borrower that there are various options available to assist the 
borrower if he or she is having difficulty making scheduled payments is 
inappropriate in the first notice of delinquency. Given the current due 
diligence requirements for issuing second and subsequent collection 
letters, there will be a significant delay before the next collection 
letter is issued in which this information could be provided. The 
Secretary notes that he did not intend to require that the first notice 
of delinquency contain detailed information on loan consolidation, 
forbearance, deferments, and other default aversion options. This 
sentence was placed in paragraph (c) in error and was intended instead 
to be included in the 16-180 day delinquency collection timeframe. The 
Secretary recognizes that not all borrowers may be experiencing 
difficulties at this stage and that the billing format generally used 
to issue the first notice has limited space. Therefore, the Secretary 
has decided that it is sufficient to include on the first notice a 
prominent statement, which includes the name and a telephone number of 
a contact person, and that informs the borrower that other options are 
available if he or she is experiencing difficulties making scheduled 
payments.
    In regard to the later collection letters, however, the Secretary 
believes that providing information on default aversion options and the 
proceedings that may be instituted against the borrower are even more 
critical. The Secretary believes that borrowers are capable of 
understanding the required notice related to tax offset, wage 
garnishment, and litigation by the federal government and notes that 
nothing prevents a lender from explaining these terms in simpler 
language after providing the notice if the lender believes it is 
necessary.
    Changes: Section 682.411(c) has been modified to require the lender 
to include a prominent message in the first delinquency notice briefly 
mentioning that various forms of assistance are available to borrowers 
experiencing repayment difficulties and providing a telephone contact 
number for further information. Section 682.411(d) has been modified to 
incorporate the more complete information disclosure originally 
proposed in Sec. 682.411(c).

Section 682.413--Remedial Actions

    Comment: The majority of guaranty agency commenters stated that the 
Secretary should only exercise the remedial action of loan assignment 
in circumstances involving repetitive violations and consistent 
patterns of noncompliance, not isolated or occasional violations that 
do not materially impact the collectability of the loan. The commenters 
also stated that the regulations should define the circumstances under 
which the assignment option will be used rather than the loss of 
reinsurance option and provide that it is the guarantor's choice as to 
which option will be used. These same commenters recommended that 
guaranty agencies be provided with a ``curing'' process for due 
diligence violations comparable to that provided for lenders and an 
appeal process related to any actions taken by the Secretary under this 
section.
    Discussion: The option of assignment is intended as additional 
discretionary authority that will allow the Secretary to address 
guaranty agency violations of any of the fiscal, administrative and 
enforcement requirements of Sec. 682.410 in a manner that best serves 
the interests of the FFEL program. The Secretary has the responsibility 
to determine the appropriate sanction and he does not agree that the 
guaranty agency should be able to choose how its violation should be 
addressed. The Secretary will determine the appropriate action on a 
case-by-case basis. Therefore, he also declines to incorporate into the 
regulations a list of circumstances under which he would decide to use 
the option of mandatory assignment. The Secretary further notes that 34 
CFR 682.413(d) already addresses the procedures the Secretary will 
follow in imposing a fine or penalties under this section of the 
regulations and provides guarantors with appropriate due process. The 
Secretary believes any discussions related to guaranty agency due 
diligence and proposed cures should be left to the due diligence reform 
effort that the Department will undertake in 1997.
    Changes: None.
    Comment: A number of commenters proposed various technical changes 
to the regulations included in the NPRM.
    Discussion: The Secretary appreciates the commenters' suggestions 
for technical changes and agrees with many of the suggestions. However, 
in some cases, those suggestions go beyond the scope of this rule. 
Accordingly, the Secretary will incorporate those changes in a separate 
publication that will be issued shortly.
    Changes: None.
    Comment: One commenter asked the Secretary to address the issue of 
whether the Federal Fair Debt Collection Practices Act (FDCPA) applies 
to guaranty agency collection activities on defaulted loans.
    Discussion: It has been the longstanding view of the Secretary and 
the Federal Trade Commission that the FDCPA does not apply to guaranty

[[Page 60485]]

agencies collecting defaulted FFEL Program loans in their own names and 
protecting the financial interests of their guarantee programs. The 
FDCPA does not apply to an entity collecting a debt it is owed. 
Moreover, application of the FDCPA to the guaranty agencies would 
potentially penalize them for compliance with the requirements in 34 
CFR 682.410 and, thus, is inconsistent with the Secretary's goal of 
ensuring a minimum standard of collection action. The Secretary notes, 
however, that the FDCPA clearly applies to a collection contractor 
acting for the guaranty agency. Such contractors are collecting a debt 
owed to another and are clearly subject to the FDCPA.
    Change: None.

Regulatory Flexibility Act Certification

    Comment: Many commenters stated that Sec. 682.404, requiring the 
guaranty agency to offer preclaims assistance no later than the 75th 
day of delinquency, could have a significant impact on lenders, 
particularly small lenders. The commenters also stated that many loans 
that become 60 to 90 days delinquent are ``self-cured'' through the 
borrower or other party providing documentation for deferment or 
forbearance. In addition, the commenters noted that requiring 
assistance from the guaranty agency earlier in the process could result 
in unnecessary requests for preclaims assistance and the unnecessary 
loading and processing of the preclaims assistance request by the 
guarantor.
    Discussion: The Secretary agrees with the commenters and believes 
that it would be more advantageous for collection assistance to be made 
available to the lender by the guaranty agency no later than the 90th 
day of delinquency.
    Change: The regulations have been revised to provide that preclaims 
assistance be made available no later than the 90th day of delinquency.
    Comment: Many commenters stated that the Sec. 682.411 provision 
establishing a minimum of information to be included in the letters 
sent by lenders to delinquent borrowers during the 1-15 days of 
delinquency provides too much information and reduces the clarity of 
the letters making the letters less effective. The commenters expressed 
concern that requiring additional information in the notice sent during 
this period could create a significant burden on lenders, since the 
first notice is generally a billing statement.
    Discussion: The Secretary notes that it was not the Department's 
intent to require that the notice or collection letter sent during the 
1-15 days of delinquency contain detailed information for the borrower 
regarding loan consolidation, forbearance and other available options 
to avoid default. This sentence was placed in paragraph (c) in error. 
This requirement should have been included in the collection timeframe 
of 16-180 days of delinquency. However, the Secretary does want a 
statement in the collection letter relating to the 1-15 day delinquency 
that indicates that other options are available if a borrower is having 
difficulty making payments. The name and telephone number of a contact 
person should also be included in this letter.
    Change: The regulations have been amended to remove this 
requirement from paragraph (c) and insert it in paragraph (d). A 
modified statement has been added to paragraph (c).

Paperwork Reduction Act of 1995

    Section 682.411 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995, the U.S. Department of 
Education has submitted a copy of this section to the Office of 
Management and Budget (OMB) for its review. (44 U.S.C 3504(h)). In 
response to the Secretary's invitation in the NPRM to comment on any 
potential paperwork burden associated with this regulation, the 
following comments were received.
    Comment: Many commenters suggested that the Secretary amend 
Sec. 682.411(c) to expand the length of the current timeframe that 
lenders will have to send the first written collection notice or 
collection letter to a delinquent borrower from 1-10 days (1-15 in 
NPRM) to 1-20 days. The commenters stated that consumer loans often 
offer a 15-day grace period on payment due dates. They suggested that 
many borrowers believe that the student loan has a similar payment 
grace period and may delay mailing their payment. The commenters 
believe that many unnecessary collection letters will be eliminated by 
expanding the timeframe to 20 days.
    Discussion: The Secretary declines to extend the timeframe 
specified in the NPRM (1-15 days) to 1-20 days. The Secretary believes 
that the expanded timeframe in the NPRM is sufficient to eliminate the 
majority of unnecessary collection notices that have been generated 
under the current 10-day period.
    Change: None.
    Comment: Many commenters stated that the Sec. 682.411 provision 
establishing a minimum of information to be included in the letters 
sent by lenders to delinquent borrowers during the 1-15 days of 
delinquency provides too much information and reduces the clarity of 
the letters making the letters less effective. The commenters expressed 
concern that requiring that additional information be added to the 
notice sent during this period could create a significant burden on 
lenders, since the first notice is generally a billing statement.
    Discussion: The Secretary notes that it was not the Department's 
intent to require that the notice or collection letter sent during the 
1-15 days of delinquency contain detailed information for the borrower 
regarding loan consolidation, forbearance and other available options 
to avoid default. This sentence was placed in paragraph (c) in error. 
This requirement should have been included in the collection timeframe 
for the 16-180 days of delinquency. However, the Secretary does intend 
that a statement in the collection letter relating to the day 1-15 
delinquency indicate that other options are available if a borrower is 
having difficulty making payments. The name and telephone number of a 
contact person should also be included in this letter.
    Change: The regulations have been amended to remove the statement 
in the NPRM from paragraph (c) and insert it in paragraph (d). A 
modified statement has been inserted in paragraph (c).

Assessment of Educational Impact

    In the NPRM, the Secretary requested comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.
    Based on the response to the proposed regulations and on its own 
review, the Department has determined that the regulations in this 
document do not require transmission of information that is being 
gathered by or is available from any other agency or authority of the 
United States.

List of Subjects in 34 CFR Part 682

    Administrative practice and procedure, Colleges and universities, 
Education, Loan programs-education, Reporting and recordkeeping 
requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.032, Federal 
Family Education Loan Program)

    Dated: November 21, 1996.
Richard W. Riley,
Secretary of Education.
    The Secretary amends part 682 of title 34 of the Code of Federal 
Regulations as follows:

[[Page 60486]]

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

    1. The authority citation for part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

    2. Section 682.202 is amended by removing the number ``10'' from 
paragraph (f)(2) and adding in its place the number ``15''.
    3. Section 682.401 is amended by revising paragraph (b)(27) to read 
as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (27) Collection Charges and Late Fees on Defaulted FFEL loans being 
Consolidated. (i) A guaranty agency may add collection costs in an 
amount not to exceed 18.5 percent of the outstanding principal and 
interest to a defaulted FFEL Program loan that is included in a Federal 
Consolidation loan.
    (ii) When returning the proceeds from the consolidation of a 
defaulted loan to the Secretary, a guaranty agency may only retain the 
amount added to the borrower's balance pursuant to paragraph (b)(27)(i) 
of this section.
* * * * *
    4. Section 682.404 is amended by revising paragraph (a)(2)(ii) and 
paragraph (f) to read as follows:


Sec. 682.404  Federal reinsurance agreement.

* * * * *
    (a) * * *
    (2) * * *
    (ii) Preclaims assistance means collection assistance made 
available to the lender by the guaranty agency no later than the 90th 
day of delinquency. This assistance must include collection activities 
that are at least as forceful as the level of preclaims assistance 
performed by the guaranty agency as of October 16, 1990, and involves 
the initiation by the guaranty agency of at least 3 collection 
activities, one of which is a letter designed to encourage the borrower 
to begin or resume repayment. As part of their preclaims assistance, 
guaranty agencies must provide counseling and consumer information (in 
written or other format) to the borrower by the 10th working day after 
the agency receives the lender's request for preclaims assistance 
informing the borrower of all of the borrower's options to avoid 
default, including the availability of consolidating delinquent loans 
under the FFEL Program or the Federal Direct Consolidation Loan 
Program.
* * * * *
    (f) Application of borrower payments. A payment made to a guaranty 
agency by a borrower on a defaulted loan must be applied first to the 
collection costs incurred to collect that amount and then to other 
incidental charges, such as late charges, then to accrued interest and 
then to principal.
* * * * *
    5. Section 682.406 is amended by revising paragraph (a)(12) to read 
as follows:


Sec. 682.406  Conditions of reinsurance coverage.

* * * * *
    (a) * * *
    (12) The agency and lender complied with all other Federal 
requirements with respect to the loan including the payment of 
origination fees and compliance with all preclaims assistance 
requirements in Sec. 682.404(a)(2)(ii);
* * * * *
    6. Section 682.410 is amended by revising paragraphs (b)(2) 
and(b)(6)(vii)(A) to read as follows:


Sec. 682.410  Fiscal, administrative, and enforcement requirements.

* * * * *
    (b) * * *
    (2) Collection charges. Whether or not provided for in the 
borrower's promissory note and subject to any limitation on the amount 
of those costs in that note, the guaranty agency shall charge a 
borrower an amount equal to reasonable costs incurred by the agency in 
collecting a loan on which the agency has paid a default or bankruptcy 
claim. These costs may include, but are not limited to, all attorney's 
fees, collection agency charges, and court costs. Except as provided in 
Secs. 682.401(b)(27) and 682.405(b)(1)(iv), the amount charged a 
borrower must equal the lesser of--
    (i) The amount the same borrower would be charged for the cost of 
collection under the formula in 34 CFR 30.60; or
    (ii) The amount the same borrower would be charged for the cost of 
collection if the loan was held by the U.S. Department of Education.
* * * * *
    (6) * * *
    (vii) After 181 days:
    (A) Except as provided in paragraph (b)(6)(vii)(B) of this section, 
during this period but not sooner than 30 days after sending the notice 
described in paragraph (b)(5)(vi) of this section, the agency shall 
initiate proceedings to offset the borrower's state and federal income 
tax refunds and other payments made by the federal government to a 
borrower, and shall initiate administrative wage garnishment 
proceedings against the borrower by the 225th day. If the agency 
determines that the borrower has insufficient income to satisfy the 
debt through wage garnishment, but has assets from which the debt can 
be satisfied, the agency shall assign the loan to the Department. The 
agency must not file suit to collect a loan from a borrower unless 
directed to do so by the Secretary.
* * * * *
    7. Section 682.411 is amended by revising paragraphs (c), (d) 
introductory text, (d)(1), and (d)(2) to read as follows:


Sec. 682.411  Due diligence by lenders in the collection of guaranty 
agency loans.

* * * * *
    (c) 1-15 days delinquent: Except in the case where a loan is 
brought into this period by a payment on the loan, expiration of an 
authorized deferment or forbearance period, or the lender's receipt 
from the drawee of a dishonored check submitted as a payment on the 
loan, the lender during this period shall send at least one written 
notice or collection letter to the borrower informing the borrower of 
the delinquency and urging the borrower to make payments sufficient to 
eliminate the delinquency. The notice or collection letter sent during 
this period must include, at a minimum, a lender/servicer contact and 
telephone number, and a prominent statement informing the borrower that 
assistance may be available if he or she is experiencing difficulty in 
making a scheduled repayment.
    (d) 16-180 days delinquent (16-240 days delinquent for a loan 
repayable in installments less frequent than monthly): (1) Unless 
exempted under paragraph (d)(4) of this section, during this period the 
lender shall engage in at least four diligent efforts to contact the 
borrower by telephone and send at least four collection letters urging 
the borrower to make the required payments on the loan. At least one of 
the diligent efforts to contact the borrower by phone must occur 
before, and another one must occur after, the 90th day of delinquency. 
The notice or collection letter sent during this period must include, 
at a minimum, information for the borrower regarding deferment, 
forbearance, income-sensitive repayment and loan consolidation and 
other available options to avoid default.
    (2) At least two of the collection letters required under paragraph 
(d)(1) of this section must warn the borrower that if the loan is not 
paid, the lender will assign the loan to the guaranty agency that, in 
turn, will report the default to all national credit bureaus,

[[Page 60487]]

and that the agency may institute proceedings to offset the borrower's 
state and federal income tax refunds and other payments made by the 
federal government to a borrower or to garnish the borrower's wages, or 
assign the loan to the federal government for litigation against the 
borrower.
* * * * *
    8. Section 682.413 is amended by redesignating paragraph (b) as 
paragraph (b)(1) and adding a new paragraph (b)(2) to read as follows:


Sec. 682.413  Remedial actions.

* * * * *
    (b)(1) The Secretary requires a guaranty agency to repay 
reinsurance payments received on a loan if the lender, third-party 
servicer, if applicable, or the agency fails to meet the requirements 
of Sec. 682.406(a).
    (2) The Secretary may require a guaranty agency to repay 
reinsurance payments received on a loan or to assign FFEL loans to the 
Department if the agency fails to meet the requirements of 
Sec. 682.410.
* * * * *
[FR Doc. 96-30359 Filed 11-26-96; 8:45 am]
BILLING CODE 4000-01-P