The purpose of this letter is to provide Title IV, Federal student loan program participants with information concerning the existing false signature/identity theft discharge process used by the U.S. Department of Education (Department) and to explain the Department’s new process for addressing claims made by individuals that loans allegedly taken out by them are unenforceable due to forgery of their signatures. We are also providing Title IV participants with a copy of the new form that the Department will use to implement this process and we encourage Title IV loan holders to create a similar discharge process for loans that they hold if they have not already done so.
The Department’s Current Process Evaluates All Forgery Claims Using Forms Adapted for Evaluation of Claims That the School Falsified the Claimant’s Signature or the Claimant Was the Victim of a Judicially-Proven Crime of Identity Theft.
During the collection process the Department regularly receives claims from individuals who contend that they did not sign the promissory note or otherwise request the Federal loan on which the Department is trying to collect. Claimants who raise forgery defenses often do not know the identity of the forger. For the Federal Family Education Loan (FFEL) Program, Direct Loan (Direct) Program, and Federal Perkins Loan Program (Perkins) loans it holds, the forms the Department currently uses to process claims that an applicant did not execute the promissory note on which the Department is trying to collect are those adapted for the statutory discharges for “false certification of eligibility to borrow,” or “identity theft.” [Higher Education Act (HEA) §437(c); 20 U.S.C. §1087(c).] HEA regulations provide loan discharges for unauthorized signature by the school of the loan application, promissory note, loan check, electronic funds transfer, master check, or for identity theft claims. [34 C.F.R. §682.402(e) and 34 C.F.R. §685.215 for FFEL and Direct loans respectively.] Unauthorized signature discharge is specifically authorized by statute only for actions committed “by a school.” [HEA §437(c); 20 U.S.C. §1087(c); 34 C.F.R. §685.215(a)(1); 34 C.F.R. §682.402(e).] Identity theft claims under Direct Loan and FFEL Program regulations are limited to those instances in which the applicant shows that a court has determined that the “individual named as the borrower of the loan was the victim of identity theft.” [34 C.F.R. §685.215(c)(4); 34 CFR §682.402(e).] Neither provision addresses or is designed to provide relief to applicants who believe themselves to be victims of a forgery either committed by someone other than a school and/or committed without a court determination of identity theft (as of the date the discharge request is submitted). Furthermore, the drastic increase in the student loan volume and the expected potential increase in the number of individuals asserting this defense in court call for the implementation of a process that would enhance individuals’ ability to resolve their claims at the lowest possible cost to the taxpayer.
Common Law Requires the Department to Consider Forgery Claims
Under common law, a creditor has the burden of proving that an individual in fact obtained a loan that the creditor seeks to enforce. An individual is generally not liable on an instrument that the individual did not sign. Thus, common law provides a well-established doctrine that an individual may defend a claim for repayment by disputing the authenticity of his or her signature on the loan agreement and adducing sufficient evidence to shift the burden on the creditor of proving that the individual in fact signed the loan agreement (or that the individual in fact received the benefits of the loan either directly or “in kind”). The doctrine that the Department, like any other creditor, must prove the authenticity of the signature arises under common law independently of, and in addition to, any statutory authority that may address other loan discharges or defenses.
We refer to the defense here as a “forgery” claim because consumers commonly describe the end result as a “forgery” of their signature. In fact, forgery is a crime requiring proof that the forger signed with the intent to do so falsely or fraudulently. Individuals asserting that they did not sign the note would make allegations akin to those that would make out the crime of common law forgery. Unlike proving the crime of forgery, however, the individual who claims that he or she did not sign the note need not prove the identity or state of mind of the individual who actually forged his or her signature. He or she merely needs to show that the Department lacks evidence to prove that the signature1 is authentic.2
Creating a Forgery Discharge Process Is in the Best Interest of Both Applicants and the Department
Individuals who believe themselves to be victims of forgery have the right to present evidence in support of their assertion as a defense against the holder of the loan in court or in any administrative proceeding in which the debt is sought to be enforced, such as the process used to implement administrative wage garnishment (AWG) or the Treasury offset program (TOP). Creating an administrative discharge process for forgery claims will provide applicants the same consideration as a court of law, but at a much lower cost to the taxpayers and the applicant. Creating an administrative discharge process for forgery claims will also serve the best interest of the individual applicants, who would be able to obtain relief in a far more timely and cost-efficient manner. In addition, creating such a process will allow the Department to guide applicants through the application process, informing them of and providing them the opportunity to submit the documents they would need to prove their claims, and, if appropriate, directing them towards a loan discharge that would be more applicable to their specific fact situation.
The New Forgery Discharge Process Will Be Limited to Loans Held by the Department and Will Not Involve Additional Payments to Guarantors and Lenders
Creation of the new forgery discharge process will impact only student loans held by the Department. We are not proposing to change the FFEL or Perkins program regulations at this time, and this change does not cover forgery claims asserted with respect to FFEL loans held by lenders or guarantors or Perkins loans held by schools. Neither the HEA nor the regulations permit FFEL loan holders or guaranty agencies to claim insurance or reinsurance payments for loans that are legally unenforceable, including those subject to unresolved signature authenticity disputes and those discharged on the basis of forgery. Such loans are uninsurable and constitute a breach of guarantor’s obligation to use Federal fund assets, and to claim reinsurance, only on legally enforceable loans, 34 C.F.R. §682.406(a)(10), a breach of the lender’s obligation to obtain a legally-enforceable promissory note, 34 C.F.R. §682.206(d)(1), and, if sold to the Department, a breach of warranty by the lender to the Department . Thus, the adoption by guarantors and FFEL lenders of a forgery discharge process would not result in additional payments to guarantors or FFEL lenders who grant this type of discharge with respect to loans they hold.
Nonetheless, FFEL guarantors and lenders, and schools participating in the Perkins Loan program, could be subject to legal challenges by individuals who are in this situation and we are encouraging you, if you have not already done so, to create a similar discharge process for forgery circumstances as a good business practice.
The New Loan Discharge Application for Forgery Claims Can Be Used to Discharge Department-Held Loans Only
The attached Loan Discharge Application: Forgery was developed by the Department to be used solely for Department-held loans. It is designed to guide a claimant through the steps of establishing the elements of the claim, ascertaining the type of discharge most applicable to the applicant, gathering the pertinent facts, and submitting the relevant evidence. It is also designed to redirect claimants towards a different discharge process if the claimant’s answers indicate that such process is more likely to result in a discharge.
If a claimant’s application, on its face, supports the possibility that a forgery could have occurred, the application and any supporting evidence submitted will be considered in its entirety to determine whether the applicant has shown that his or her signature was not genuine. If such demonstration is made, and if the applicant is determined not to have obtained any benefit, such as credit against tuition debt, “in kind,” the Department will discharge the loan. If the Department determines that the totality of the evidence does not support the claim of forgery, the applicant will be provided a detailed explanation of the reasons for the denial and given the opportunity to submit additional evidence. If an applicant’s submission, on its face, fails to show that forgery could have occurred, but the evidence provided appears to support potential eligibility for a different type of discharge, the applicant will be redirected towards a different discharge process.
1 As used in this announcement, “signature” means either a wet or an electronic signature.
2 A loan that is ratified by the applicant by accepting its proceeds or otherwise acknowledging its validity would not be subject to discharge on grounds of forgery.