| AwardYear: 1995-1996 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 7 SectionTitle: Due Diligence - Loan Collection PageNumbers: 77-86 COLLECTION PROCEDURES Collection procedures are the more intensive efforts a school must make when borrowers have not responded satisfactorily to billing procedures and are considered seriously in default. [[Report default to credit bureau]] The FIRST step a school must take in the collections process is to report a defaulted loan account to a national credit bureau organization (one with which ED has an agreement). (However, the debtor has the right to appeal the accuracy and validity of the information reported to the credit bureau.) [[Report changes in loan status to credit bureau]] The school must report any changes in the status of the borrower's loan account to the same national credit bureau to which the school originally reported the default. The school must use the reporting procedures required by that credit bureau. The school must also respond within one month to any inquiry received from that or any other credit bureau about the information reported on the loan amount. [[School or firm collects]] The SECOND step the school must take in the collections process is to use its own personnel to collect or hire a collection firm to collect the account. If the school's personnel or the collection firm cannot convert the account to regular repayment status by the end of 12 months (or if the borrower does not qualify for forbearance, deferment, postponement, or cancellation), the school has two options--the school must either litigate or make a second effort to collect. [[Procedures for second effort to collect]] A second effort to collect requires either of the following procedures: - If the school first attempted to collect by using its own personnel, it must refer the account to a collection firm unless state law prohibits it. - If the school first used a collection firm, it must attempt to collect by using its own personnel, use a different collection firm, or submit the account to ED for assignment. If a collection firm (retained by a school as part of its second effort to collect) cannot place an account into regular repayment status by the end of 12 months (or if the borrower does not qualify for forbearance, deferment, postponement, or cancellation), the firm must return the account to the school. [[Procedures if school is unable to collect]] If the school is unsuccessful in its effort to place the loan in repayment after following the procedures above, the school must continue to make annual attempts to collect from the borrower until-- - the loan is recovered through litigation; - the account is assigned to ED; or - the loan is written off. [[Write-offs of defaulted loans]] A school may write off a defaulted loan with a balance of LESS THAN $25.00, including outstanding principal, accrued interest, collection costs and late charges. If the school writes off the defaulted account, it may no longer include the amount of the account as an asset of the Federal Perkins Loan Fund. If a school receives a payment from a borrower after the loan has been written off, it must deposit that payment into the Fund. [[Assessing collection costs against borrower]] The school must determine the amount of collection costs to be charged to the borrower for address searches, collection, litigation, use of contractors for collection of the loan, and/or bankruptcy proceedings. The collection costs must be based on either actual costs incurred in collecting the borrower's loan or average costs incurred for similar actions taken to collect loans in similar stages of delinquency. The school must assess all reasonable collection costs against the borrower, without regard to any provisions of state law that would conflict with the above provisions. [[Limit on collection charges on older notes]] For loans made from 1981 through 1986, many borrowers have received loans under promissory notes that contain a limitation on the amount of costs that can be recovered from the borrower (25 percent of the outstanding principal and interest due on the loan). As this provision is no longer applicable, effective beginning with the 1987-88 award year, if these borrowers ask for new advances, ED strongly encourages schools to issue new promissory notes (which would delete this provision) and require the provisions of the new note to apply to repayment of previous advances. The borrower will then be liable for ALL collection costs on all Federal Perkins, Direct, or Defense loans. [[School determines reasonable collection costs]] The school determines what collection costs are "reasonable," as long as they are based either on actual costs the school incurs for the particular borrower, or on average costs incurred in collecting loans in similar stages of default. The school should explain to the borrower how it calculates collection costs, based on the cost analysis used to support charges of these costs to the Federal Perkins Loan Fund. The school must be able to document the basis for the costs assessed. ACTIONS A SCHOOL MAY TAKE TO AVOID LITIGATION [[May waive collection costs if loan is paid in full]] Before filing suit on a loan, a school may waive all collection costs on a loan if the borrower makes a lump-sum payment of the entire amount outstanding, including principal and interest; a written repayment agreement is not a precondition. The amount waived may be charged to the Federal Perkins Loan Fund. [[May waive a portion of collection costs]] Another alternative is for the school to waive a PORTION of the collection costs on a loan if doing so will give the school greater flexibility in negotiating repayment. The school may waive a percentage of the collection costs, applicable to the amount then due on the loan, equal to the percentage of the past-due balance the borrower repays within 30 days of entering into a written repayment agreement with the school. For example, if the borrower repays one- half the outstanding balance on a loan within 30 days of the agreement, the school may waive one-half of the collection costs incurred through the date of that payment. The amount waived may be charged to the Federal Perkins Loan Fund. [[May write off a balance under $25]] As stated earlier, a school may write off a defaulted loan with a balance of LESS THAN $25.00, including outstanding principal, accrued interest, collection costs and late charges (but may no longer include the amount of the account written off as an asset of the Federal Perkins Loan Fund). [[Compromise if 90% is paid]] As provided in Section 674.33(e) of the November 30, 1994 Final Rule, a school may compromise on the repayment of a defaulted loan if the school has fully complied with all due diligence requirements, and the student borrower pays in a single lump-sum payment-- - at least 90% of the outstanding principal balance on the loan; - all interest due; and - any collection fees due. The Federal share of the compromise repayment must bear the same relation to the school's share of the compromise repayment as the Federal capital contribution to the school's loan Fund under this part bears to the school's capital contribution to the Fund. [[Possible Consolidation Loan]] The Federal Family Education Loan (FFEL) regulations allow a borrower to receive a Consolidation Loan that could include a defaulted Federal Perkins Loan on which the borrower has made satisfactory repayment arrangements if the defaulted loan will reenter repayment through consolidation. (Consolidation Loans are discussed in Chapter 10). The amount eligible for consolidation is the sum of the unpaid principal, accrued unpaid interest, and late charges including outstanding collection costs. A defaulted loan that is being repaid under a COURT ORDER would remain in default status until paid and is not eligible for consolidation. LITIGATION [[Must sue under certain conditions]] If the collection procedures described above do not result in the repayment of a loan, the school must determine at least once a year whether all the conditions listed below are met. If so, the school must litigate. The conditions are-- - the total amount owed (including outstanding principal, interest, collection costs, and late charges) on all the borrower's Federal Perkins Loans and NDSLs at the school is more than $200; - the borrower can be located and served with process; - the borrower either has enough assets attachable under state law to cover a major portion of the debt, or enough income that can be garnished under state law to satisfy a major portion of the debt over a reasonable period of time (defining "reasonable" is left to the school); - the borrower does not have a defense that will bar judgment for the school (if the school determines that the borrower has a partial defense, it must weigh the costs of litigation against the costs of recovery, based on the amount of the enforceable portion of the debt); and - the expected cost of litigation (including attorneys' fees) does not exceed the amount that can be recovered from the borrower. [[May sue at any time]] Even if all the above conditions are NOT met, the school may sue if it chooses. Section 484A(a) of the Higher Education Amendments of 1992 (P.L. 102-325) permanently eliminated any federal or state statute of limitations that would have applied formerly to enforcement actions to collect Federal Perkins Loans or NDSLs. [[Recovery of costs]] The school must attempt to recover from the borrower all litigation costs, including attorneys' fees, court costs, and other related costs, to the extent permitted by applicable state law. The school is also required to try and recover all costs previously incurred in the collection of overdue payments, if these collection costs have not been paid by the borrower; a percentage of these unrecovered costs may be charged to the Fund (see below). [[Assignment of amount of $25 or more]] If the school cannot collect a payment after following all collection procedures (including litigation, if required), it may, with the Secretary's approval, assign the account to ED for collection. A school may assign a loan to ED for collection if the amount outstanding is $25 OR MORE, including principal, interest, collection costs, and late charges. If the school has a cohort default rate of more than 20 percent as of June 30 two years before the school submits an assignment request, the school must provide documentation to ED that it has complied with all of the due diligence requirements discussed in this chapter. DEPOSIT OF FUNDS COLLECTED [[Deposit into interest-bearing bank account]] A school must deposit any funds collected into an interest-bearing bank account. A collection agency, collection attorney, or loan servicer is required to deposit funds collected into an interest- bearing account only if the agency, attorney or servicer holds such amounts for more than 45 days. The account must be insured by an agency of the federal government, secured by collateral of reasonably equivalent value, or invested in low-risk income- producing securities, such as obligations issued or guaranteed by the United States. The school may deduct from the interest earned any bank charges incurred as a result of maintaining the Fund assets in an interest- bearing account, such as service charges, and deposit only the net earnings into the Fund. COSTS CHARGEABLE TO THE FEDERAL PERKINS LOAN FUND [[Routine billing costs are not chargeable]] The costs of actions a school takes in regard to past-due payments on a loan must be CHARGED TO THE BORROWER as follows billing costs associated with past-due payments (NOT routine billing costs) and costs of address searches, collection, litigation, the use of contractors, and bankruptcy litigation. [[Billing costs for past-due payments sometimes chargeable]] The only BILLING COSTS a school may charge the Fund are the costs of telephone calls made to demand payment of overdue amounts not paid by the borrower; if the amount recovered from the borrower does not suffice to pay the amount of the past-due payments and the penalty or late charges, the school may charge the Fund for only the unpaid portion of the actual cost of the calls. [[List of collection costs chargeable to the Fund]] Only the collection costs discussed below that are WAIVED OR NOT PAID BY THE BORROWER may be charged to the Federal Perkins Loan Fund: - Collection costs waived As stated earlier, a school may waive all collection costs on a loan if the borrower makes a lump-sum payment of the entire amount outstanding or may waive a percentage of the collection costs equal to the percentage the borrower pays on the amount outstanding on the loan within 30 days of entering into a new repayment agreement. The amount waived may be charged to the Fund. - Cost of a successful address search A reasonable amount for the cost of a successful address search, if not paid by the borrower, may be charged to the Fund-- provided the school either used a commercial skip-trace service or its own personnel, employing methods comparable to commercial skip-tracing practices. Defining a "reasonable" amount is left to the school. - Cost of reporting defaulted loans to credit bureaus The following costs not paid by the borrower may be charged to the Fund: the cost of reporting a defaulted loan to a credit bureau, reporting any change in the status of a defaulted account to the bureau to which the school had previously reported the account, and responding to any inquiry from a credit bureau about the status of a loan. - Collection costs Collection costs not paid by the borrower may be charged to the Fund if they do not exceed--for FIRST COLLECTION EFFORTS--30 PERCENT of the total principal, interest, and late charges COLLECTED and--for SECOND COLLECTION EFFORTS--40 PERCENT of the principal, interest, and late charges collected. The school must reimburse the Fund for collection costs initially charged the Fund but subsequently paid by the borrower. - Collection costs resulting from litigation, including attorney's fees Collection costs resulting from litigation, including attorney's fees, may be charged to the Fund if not paid by the borrower, but must not exceed the sum of-- -- court costs specified in 28 U.S.C. 1920; -- other costs incurred in bankruptcy proceedings in taking actions required or authorized under Section 674.49 of the regulations; -- costs of other actions in bankruptcy proceedings to the extent that those costs, together with other costs incurred in bankruptcy proceedings, do not exceed 40 PERCENT of the total amount of judgment obtained on the loan; and -- 40 PERCENT of the total amount recovered from the borrower in any other proceeding. - Costs of firm performing both collection and litigation services If a collection firm agrees to perform or obtain the performance of both collection and litigation services on a loan, the amount for both functions that may be charged to the Fund may not exceed the sum of 40 PERCENT of the amount of principal, interest, and late charges collected on the loan, plus court costs specified in 28 U.S.C. 1920. [[Documenting charges to Fund]] For audit purposes, a school must support costs charged to the Fund with appropriate documentation, including telephone bills and receipts from collection firms. Due diligence activities involving FIXED costs (telephone contacts, credit bureau reporting, and bankruptcy procedures) may be charged to the Fund whether or not the actions are successful. Other activities are typically performed on a CONTINGENT-FEE basis--address search, collection, and litigation (other than bankruptcy); the school may charge the costs of these activities to the Fund under the conditions stated previously and only if they are successful, as the school incurs no costs if they are not. [[Write-off of account of less than $25]] [[Write-offs not included as a Fund asset]] As stated earlier, a school may write off a student's defaulted loan if the total amount owed on the account is less than $25. "Total amount owed" means outstanding principal, accrued interest, collection costs, and late charges. Another alternative would be for the school to elect to use its own funds to satisfy the debt. If the school writes off an account, it no longer includes it as an asset of the Fund. If the school receives a repayment from the borrower after the loan has been written off, the school must deposit it into the Fund. USING BILLING AND COLLECTION FIRMS [[School ultimately responsible]] The school may use a contractor for billing or collection, but the school is still responsible for complying with the Subpart C regulations about those activities. For example, the school, not the billing or collection firm, is responsible for deciding whether to sue a borrower in default. The school is also responsible for decisions about cancelling, postponing, or deferring repayment, granting forbearance, extending the repayment period, and safeguarding the funds collected. [[Billing service and collection firm must be separate]] A school using a billing service may not use a collection firm that owns or controls the billing service, or is owned or controlled by the billing service. In addition, a school may not use a collection firm if both the collection firm and billing service are owned or controlled by the same corporation, partnership, association, or individual. [[Quarterly activities statement]] A school using either a billing service or a collection firm must ensure that the service or firm issues, at least quarterly, a statement showing the activities for each borrower, such as amounts collected or changes in the borrower's name, address, telephone number, or Social Security number, if known. The service or firm must also give the school, at least quarterly, a list of charges for skip-tracing activities and telephone calls. [[Handling of repayments by billing service or collection firm]] The school must also ensure that the billing service or collection firm instructs the borrower either to mail repayment checks to the school directly or to a bank where a lock-box is maintained for the school. Alternatively, the service or firm may deposit the funds into an interest-bearing institutional trust account. If a billing service or a collection firm is depositing funds received directly from the borrower into an institutional trust account, this institutional trust account must be an interest-bearing account if those funds will be held for longer than 45 days. A billing service is not permitted to deduct its fees before depositing the amount it receives from borrowers. A collection firm may deduct its fees before depositing the funds it receives from borrowers if the school authorizes it to do so. The firm may commingle in its accounts the funds collected as long as it can identify the interest earnings and the amount collected by the institution. If a COLLECTION firm chooses this last procedure, it may, IF THE SCHOOL AUTHORIZES IT, deduct its fees before depositing the amount collected. A BILLING service may NOT deduct its fees from the amount it receives from borrowers. [[Fidelity bond or comparable insurance]] Just as schools are required to keep adequate fidelity bond coverage to protect the government's interest in the SFA funds they receive, it is appropriate to ensure the same sort of protection from third parties who handle Federal Perkins Loan Program funds for the school. Accordingly, a school must ensure that its billing service and collection firm maintain a fidelity bond or comparable insurance to protect the accounts they service. Billing services (and COLLECTION FIRMS NOT AUTHORIZED TO DEDUCT THEIR FEES from borrowers' payments) must be bonded or insured in an amount not less than the amount of funds the school expects to be repaid in a two-month period on the accounts it refers. [[Larger bond for collection firm that deducts fees]] Collection firms authorized to deduct their fees from borrowers' payments must be bonded or insured as follows: 1. If the amount the school expects to be repaid in a two-month period is LESS THAN $100,000, the collection firm must be bonded or insured in one of the following amounts, whichever is LESS: - ten times the amount the school expects to be repaid on accounts it refers to the firm during a two-month period OR - the amount the firm expects to collect in a two-month period on ALL accounts it has in its portfolio (not just the school's). 2. If the amount the school expects to be repaid in a two-month period is $100,000 OR MORE, the collection firm must be bonded or insured in an amount not less than the amount of funds the school can reasonably expect to be repaid during that two-month period. THE BOND OR INSURANCE MUST NAME THE SCHOOL AS BENEFICIARY. (This is not a requirement when the repayments expected in a two-month period are less than $100,000.) The school must review annually the amount of repayments it expects to receive from billing or collection firms to ensure adequate bond or insurance coverage. [[Law firm as collection firm]] A school using a law firm to collect must review the firm's bond or its insurance policy to determine whether the firm is protected against employee misappropriation. If the firm's malpractice insurance also covers misappropriation of funds, that policy is considered to provide coverage. |