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DCLPublicationDate: 12/1/99 DCLID: 99-L-222 AwardYear: Summary: This letter provides our lender and guaranty agency partners with information pertaining to student loan delinquency, default aversion, claim processing and post-claim activities and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise during delinquent and defaulted loan activities. December 1999 99-L-222 Summary: This letter provides our lender and guaranty agency partners with information pertaining to student loan delinquency, default aversion, claim processing and post-claim activities and the Year 2000 (Y2K) and information about the Department's plans to alleviate any issues that may arise during delinquent and defaulted loan activities. Dear Partner: Secretary Riley has asked me to advise you about our Year 2000 Contingency Plan and describe the conditions under which a guaranty agency or lender may use the plan to carryout critical financial aid activities without incurring program liabilities. Representatives of the Department and organizations representing lenders, guaranty agencies and servicers participating in the Federal Family Education Loan Program (FFELP) have been meeting to review Year 2000 readiness along with contingency planning. Contingency planning includes those actions one would take in the event of a failure within a critical business function. Detailed information about the Department’s plan can be found at http://www.ed.gov/offices/OCIO/year/e3toc.html. In June of this year, a planning forum was held where FFELP representatives prepared model risk mitigation and contingency plans. Those plans were shared within the industry and provided to the Department. Included in those model plans were proposals that the Secretary exercise his authority under section 432(a) of the Higher Education Act of 1965, as amended, to waive any financial liability as a result of a lender’s or guaranty agency’s system failure due to Y2K related problems along with certain recommended actions to be taken by the Department. One such recommendation was for the Department to issue guidance on processing procedures and for the Department to exercise its authority to waive financial liabilities for regulatory violations that may occur due to Y2K related problems. Based on that recommendation, the Department is issuing a series of letters to lenders, guaranty agencies and institutions to provide recommendations and information to participants on special provisions relating to the Year 2000. This letter will focus on delinquent and defaulted student loan activities within the FFELP. Other letters will include information on loan origination and disbursement and servicing. In the event of a Y2K failure at a guaranty agency or lender, the Department of Education may waive liabilities that could relate to the enforcement of certain regulations for a limited period of time. For each Y2K failure and the related regulation, a time period to which a waiver will apply is specifically defined. For a guaranty agency or lender to take advantage of the waiver within the defined time period, the guaranty agency or lender must: 1. Notify Barry Morrow, General Manager, Financial Partners, immediately that it has a specific Y2K failure and cite the specific regulation; 2. Document the Y2K failure (a description of the failure, dates of the failure and completion of the repair, and the guaranty agency or lender efforts to repair the system); and 3. At the time the guaranty agency or lender has its annual audit covering the time period of the Y2K failure, · notify the auditor of the regulation non-compliance and · respond to the audit finding with a letter signed by the CEO that includes the following: (a) A statement that the guaranty agency or lender had a Y2K compliance plan. The plan should have included the following five phases and the dates the phases were completed: awareness, assessment, renovation, validation, and implementation. (b) A statement that the guaranty agency or lender had a Y2K failure and citing the specific failure and regulation not to be enforced. (c) The documentation from item 2. We appreciate the work and recommendations put forward by the forum participants. If your organization has any questions or additional suggestions, please contact me at (202) 401-2280. Sincerely, Barry Morrow General Manager, Financial Partners Office of Student Financial Assistance YEAR 2000 CONTINGENCY PLANNING ED WAIVERS AND RECOMMENDED ACTIONS Section A – Lender Due Diligence Summary Of Activity: Lenders are required to follow due diligence regulations while collecting student loans. See 34 CFR 682.411. A Y2K problem may result in the lender’s inability to perform due diligence. ED Commitments: ED will grant lenders the earlier of a 90-day administrative forbearance during a period of delinquency or until resumption of the system. This period is necessary to ensure the borrower’s delinquency does not progress during a period of due diligence lapse. Lenders wishing to utilize this administrative forbearance must notify the General Manager, Financial Partners, at the address provided at the end of this section (see the Contingency Option section below for details). The administrative forbearance will be considered approved upon notice to the Department, unless the Department notifies the lender otherwise, within 15 days. Interest accruing during a period of system failure may not be capitalized. ED is committed to working with any participant who may have unanticipated system problems arise which necessitates consideration of an extension of the administrative forbearance period. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as issues that are discovered after the fact. Should a lender need an extension beyond the initial 90 day period described above, the Secretary’s review and permission is required (see the Contingency Option section below for details). Risk Mitigation: Default Aversion Requests- Lenders are encouraged to file Default Aversion Requests with Guarantors as soon after the 60th day of delinquency as possible. Data Back-ups- Lenders are encouraged to create data file backups with critical borrower information that might be needed to support manual due diligence processes. Contingency Options: Lenders should establish plans and procedures to manually perform due diligence activities. To benefit from this waiver, a lender or guaranty agency is required to notify the Department of the Y2K system failure and the expected timeframe for resolution. The lender’s or guaranty agency’s notice should be sent to: Barry Morrow General Manager, Financial Partners U.S. Department of Education ROB 3, Room 4616 7th and D Streets, SW Washington, DC 20202 Section B – Lender Claim Filing Summary of Activity: Lenders are required to file default claims by the 360th day of delinquency and other claim types by certain deadlines. See 34 CFR 682.406(a)(5) and 682.402(g)(2). Additionally, to avoid interest penalties, lenders must re-submit claims returned by guarantors within 60 days of receipt of the returned claim. See 34 CFR 682.406(a)(6). A Y2K problem may result in the lender’s inability to file or re-submit claims timely. ED Commitments: ED will grant guaranty agencies the earlier of a timely filing extension for lender claims not to exceed 60 days beyond the filing and re-filing timeframe requirements, if necessary to correct system failures and/or to accommodate manual claim filing or until resumption of the system. Lenders wishing to utilize this extension must notify the General Manager, Financial Partners, at the address at the end of Section A (see the Contingency Option section below for details). The extension will be considered approved upon notice to the Department, unless the Department notifies the lender otherwise, within 15 days. .ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of the timely filing period. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Should a lender need an extension beyond the initial 60-day period, the Secretary’s review and permission is required (see the Contingency Option section below for details). Contingency Options: Lenders should file claims manually to the extent practicable. A lender wishing to utilize this waiver must have its senior official notify the General Manager, Financial Partners, at the address provided at the end of Section A and must include a detailed explanation of the problem, a review of the lender’s efforts to plan for Y2K and an estimate of when the problem will be corrected. Should a lender need an extension beyond the initial 60-day period, the Secretary’s review and permission is required. Lenders requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the address indicated. Interest accrued through any extension period would not be billed to ED through the 799 and 1189 reports. Section C –Three year cure deadline and Performance of ICA Summary of Activity: Lenders are required to complete cure activities with 3 years of certain prescribed servicing deficiencies. In addition, when performing Intensive Collection Activities (ICA) cures, lenders are required to complete activities within certain timeframes. A Y2K problem may result in a lender’s inability to comply with the 3-year cure deadline or timely completion of ICA. ED Commitments: ED will consider granting lenders the earlier of a 60-day extension applicable to the three year cure deadline, or the timeframe occurring between Intensive Collection or until resumption of the system. Any such extension must be reviewed and approved by the Secretary on a case by case basis (see the Contingency Option section below for details). Risk Mitigation: Lenders are encouraged to work loans for which the 3-year cure deadline expires on or before 6/30/00 as a priority. Contingency Options: Lenders should complete cures and ICA manually. Lenders should prioritize loans according to the applicable 3-year deadline. Should a lender need a 60-day extension, the Secretary’s review and permission is required. Lenders requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address provided at the end of Section A. Additional interest accrues during any extension period may not be billed to the Department through the 1189. Section D – Processing Rehabilitation Loans Summary of Activity: Defaulted borrowers who make 12 consecutive, monthly, on-time payments are eligible for Loan Rehabilitation which restores their credit and eligibility for future Title IV aid. Lenders repurchase these loans from guarantors, reinstating them in a non-default status. A Y2K problem may result in the guarantor’s and/or lender’s inability to process the eligible loans. ED Commitments: ED will grant lenders and guarantors the option to utilize data as of the date of the system failure to determine eligibility for rehabilitation. Risk Mitigation: Guarantors are encouraged to identify alternative lenders that are Y2K ready to complete the Rehabilitation repurchase of eligible loans. Contingency Options: Lenders and guarantors should process Rehabilitation loans manually. Guarantors are encouraged to identify lenders capable of processing Rehabilitation loans. If no lender is available, rehabilitation of eligible loans may be delayed until systems corrections are made or a lender can be identified. Section E – Guarantor Default Aversion Counseling Summary of Activity: Guarantors are required to perform borrower counseling within 10 days of receipt of a Default Aversion Request. See 34 CFR 682.404 (a)(2)(ii). A Y2K problem may result in the guarantor’s inability to provide this counseling. ED Commitments: ED will grant guarantors the earlier of a 60-day extension of the regulatory timeframe for providing the counseling or until resumption of the system. Guarantors wishing to utilize this extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A (see the Contingency Option section below for details). The extension will be considered approved upon notice to the Department, unless the Department notifies the guarantor otherwise, within 15 days. ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of the counseling period. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Risk Mitigation: Guarantors are encouraged to prepare form letters to support manual performance of this requirement to the extent practicable. Contingency Options: Guarantors will attempt to counsel borrowers utilizing manual processes and form letters. Guarantors should consider a third party arrangement to perform this activity during any system outages. Guarantors wishing to utilize the 60-day extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A and must include a detailed explanation of the problem, a review of the guarantor’s efforts to plan for Y2K and an estimate of when the problem will be corrected. Should a guarantor need an extension beyond the initial 60-day period, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address provided at the end of Section A. Section F – Default Aversion Fee (DAF) Summary of Activity: The new guarantor funding model includes a provision that allows guarantors to transfer the default aversion fee from the Federal Reserve Fund to the Operating Fund under the rules established by the Department. A Y2K system related problem may result in the guaranty agency's inability to calculate the appropriate amount of DAF to be transferred to the operating Fund. See section 428(l)(2)(B) of the HEA. ED Commitments: ED will consider granting guarantors the option to transfer funds based on historical data during periods when the system is unavailable due to Y2K problems. Reconciliation and any necessary adjustments must be made within 60 days following system restoration. Requests for use of historical data must be reviewed and approved by the Secretary on a case by case basis (see the Contingency Option section below for details). Contingency Options: Guarantors should calculate the fees manually. Should a guarantor need to transfer funds based on historical data, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution historical data (basis for the amount requested for transfer) and request for an extension to the General Manager, Financial Partners, at the address provided at the end of Section A. In addition, guarantor must submit adjustment data to the Department within 60 days following system restoration. Section G – Guarantor Claims Processing Summary of Activity: In order to obtain reinsurance on loans submitted for claim purchase, guarantors are required to process claims within certain timeframes See 34 CFR 682.402(h)(1)(i) and 682.406(a)(8). A Y2K problem may result in a guarantor’s inability to timely pay or return claims. ED Commitment: ED will grant guarantors the earlier of a 60-day extension for processing claim purchases, recalls and returns or until resumption of the system. Guarantors wishing to utilize this extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A (see the Contingency Option section below for details). The extension will be considered approved upon notice to the Department, unless the Department notifies the lender otherwise, within 15 days. ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of the claim processing period. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Contingency Options: Guarantors should process claims manually. Guarantors wishing to utilize this extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A and must include a detailed explanation of the problem, a review of the guarantor’s efforts to plan for Y2K and an estimate of when the problem will be corrected. Should a guarantor need an extension beyond the initial 60-day period, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address indicated. Additional interest accrued during any extension period would may not be billed to ED through the 1189. Section H– Default Placement and Due Diligence Summary of Activity: In order to retain reinsurance on defaulted student loans, guarantors are required to perform certain due diligence collection activities. See 34 CFR 682.410. Guarantors routinely assign these defaulted loans to external collection agencies for third party servicing. A Y2K problem may result in the guarantor’s inability to place loans and/or perform required due diligence. ED Commitment: ED will grant guarantors the earlier of a 60 day extension of the regulatory timeframes for performing required due diligence and/or assigning loans to external collection agencies or until resumption of the system. Guarantors wishing to utilize this extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A (see the Contingency Option section below for details). The extension will be considered approved upon notice to the Department, unless the Department notifies the lender otherwise, within 15 days. ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of due diligence and/or placement of defaulted loans. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Should a guarantor need an extension beyond the initial 60-day period, the Secretary’s review and permission is required (see the Contingency Option section below for details). . Should a guarantor need an extension beyond the initial 60 day period, the Secretary’s review and permission is required (see the Contingency Option section below for details). Risk Mitigation: Guarantors are encouraged to verify third party collection agencies are Y2K compliant and are capable of accepting increased volume should the guarantor experience Y2K failures that prevent collecting on defaulted student loans. Guarantors are encouraged to evaluate their defaulted student loan portfolio to determine the possibility of creating a third party placement tape of critical loans to ensure continuity of collections. Contingency Options: Guarantors should perform manual due diligence. Guarantors wishing to utilize this extension must notify the General Manager, Financial Partners, at the address provided at the end of Section A and must include a detailed explanation of the problem, a review of the guarantor’s efforts to plan for Y2K and an estimate of when the problem will be corrected. Should a guarantor need an extension beyond the initial 60 day period, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address indicated. Section I- Processing Borrower Discharges on Defaulted Loans Summary of Activity: During the post-default servicing of loans, borrowers may qualify for a discharge of debt (e.g., death, disability, closed school or false certification). A Y2K problem may result in the guarantor’s inability to timely process such discharges. ED Commitment: ED will grant guarantors the earlier of a 60-day extension of the regulatory timeframes for processing closed school and false certification discharges or until resumption of the system. See 34 CFR 682.402(e) and (f). ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of the discharge timeframes for closed school and false certification. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Should a guarantor need an extension beyond the initial 60 day period, the Secretary’s review and permission is required (see the Contingency Option section below for details). Contingency Options: Guarantors should manually process borrower discharge applications. Once systems are restored, guarantors must ensure that any outstanding discharge application are processed. Should a guarantor need an extension beyond the initial 60 day period, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address provided at the end of Section A. Section J- Administrative Wage Garnishment (AWG) Processing Summary of Activity: During the course of default collections, guarantors may administratively garnish wages from borrowers with defaulted loans. A Y2K problem may result in a guarantor’s inability to administer its AWG program. Additionally, employers experiencing Y2K related failures may not be able to offset their employee’s wages. See 34 CFR 682.410(b)(6), (b)(7), and (b)(10). ED Commitment: ED will grant guarantors the earlier of a 60-day extension or until resumption of the system to: · mail to the borrower a notice of intent to initiate proceedings to collect the debt through deductions from pay; and · send the withholding order to the borrower's employer. ED is committed to working with any participant who may have unanticipated problems arise which necessitates consideration of an extension of the AWG timeframes. This commitment applies to problems that arise upon conversion to January 1, 2000, as well as problems that are discovered after the fact. Should a guarantor need an extension beyond the initial 60-day period, the Secretary’s review and permission is required. Guarantors requesting this regulatory waiver must send a letter describing their system issue(s), expected plan(s) for resolution and request for an extension to the General Manager, Financial Partners, at the address provided at the end of Section A. Contingency Options: Guarantors should manually process AWG accounts. Attachment A Attachment B

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