LOAN PURCHASE PROGRAMS ELECTRONIC ANNOUNCEMENT #34

Date: October 31, 2008

To: FFEL Program Community

From: James Manning, Acting Chief Operating Officer

Federal Student Aid

Subject: Interpretative Guidance Regarding Loan Purchase Programs

Section 27 of the Master Loan Sale Agreement and Section 37 of the
Master Participation Agreement state that the respective Agreements and
any guidance interpreting the provisions of each Agreement published by,
and binding on, the Department prior to November 1, 2008, embody the
entire agreement and understanding of the parties to those Agreements.

The Department provides here, and includes by reference the Questions
and Answers previously posted to this Federal Student Aid website as
FAQ's regarding to two loan purchase programs, the guidance to which
these sections of the Agreements refer. These answers interpret the
provisions of the Agreements referenced in these questions and answers.
These statements are an integral part of the Agreements. By the terms of
the Agreements, the statements provided here bind the Department as any
other provision of the Agreements.

Attachment

Q1 The definition of "Redemption Payment" in the Section 3 of the Master
Participation Agreement (MPA) includes "the proceeds of the sale or
other transfer of such Purchased Eligible Loan, if any, including
proceeds received subsequent to the redemption date." Does this
provision require a sponsor to include any illiquid residual interest
held by the sponsor that redeems loans and subsequently securitizes
those loans?

A1 No, the amount of the Redemption Payment does not include the amount
of any illiquid residual interests held by the sponsor described here.

Q2 The MPA and Master Loan Sales Agreement (MLSA) require that a sponsor
or seller certify that it has complied with all "applicable codes of
conduct."[^1] What does this in fact require?

A2 Section 6.A(iii) of the MPA and Section 10(a)(v) of the MLSA require
the lender to certify that it is in compliance with "applicable codes of
conduct." These provisions require that the lender comply with voluntary
codes of conduct that actually, in fact, apply to that lender's
activities, and to which the lender has assented. This requirement
includes both those codes of conduct that effect student lending through
the FFEL Program and other codes of conduct to the extent that
non-compliance with either would adversely affect the rights of the
Department with regard to its interests in the loans that it purchases,
or in which it purchases participation interests, under these
agreements. If you have any questions, please contact the Department at
<ffel.agreementprocess@ed.gov>.

Q3 Under Section 10(b) of the MPA, a sponsor has an obligation to make
certain certifications to the Department as to the nature of the loans
in or to be placed in a custodial facility, and to make that
certification "as of each related Purchase Date and as of each date such
Loans are subject to a Class A Participation Interest." The only
mechanism for notifying the Department of changes in the character of
the loans -- for example, that a loan subject to the participation
interest was cancelled due to student-borrower activity -- appears to be
an amendment to the loan schedule, as provided in Section 5(d) of the
MPA. What procedures should a sponsor undertake to stay in compliance
with Section 10(b)?

A3 If a sponsor determines that a loan in which the Department has a
participation interest is not an eligible loan because it no longer
qualifies as an eligible loan under program requirements, or because the
loan was in fact not an eligible loan under those requirements when it
sold a participation interest in the loan to the Department, the sponsor
must redeem the loan from the facility. In general, the Department will
consider the loan schedule -- and amendments thereto -- that a sponsor
submits with its requests for purchase to provide sufficient notice to
the Department of changes in loan status that affect the eligibility of
the loan, such as cancellation of the loan. The sponsor must note its
redemption on an updated loan schedule. If, however, a sponsor does not
plan to sell more participation interests -- and thus would not have
reason to submit an updated loan schedule -- the sponsor has an
affirmative obligation to notify the Department and the custodian within
seven calendar days after it receives notice that it cannot continue to
honor the previously-made certification that the participated loan was
an eligible loan. Such notices of ineligibility must be sent to the
Department at the address listed in the MPA and may be sent by e-mail.
The custodian will include this information on the next monthly report
issued from that facility. . Because payments received on a loan and
remitted to the custodian will be reported monthly to the Department,
however, the Department will consider representations initially made by
the sponsor concerning the balance on a loan to remain acceptable if
that balance is reduced by payments remitted to and reported by the
custodian.

Q4 Section 11 of the MPA requires that all collections -- including
refunds and cancellations -- be deposited in the collections account of
the custodian within two business days of receipt by the sponsor or
servicer. Failure by the sponsor to remit to the custodian payments
received on loans is an event of default under Section 3 of the MPA. Is
there a grace period within which the collection may be remitted to the
custodian after two business days that would not result in a default?

A4 Although the Department expects that most payments will be remitted
to the custodian within the two-day period, it expects that even with
the exercise of due diligence by the sponsor, it may take longer than
two days to properly identify whether a payment pertains to a
participated loan. The Department may terminate the participation or
increase the spread if a sponsor event of default occurs. However, in
determining an appropriate response to untimely remittances, the
Department will consider the frequency with which these instances occur,
the explanation provided for the occurrence, and any prior notification
concerning such remittances.

Q5 When the Department determines that a loan purchased by the
Department, or in which it purchased a participation interest, was not
eligible for purchase under loan purchase program rules, will the
Department provide the lender an opportunity to cure the defect before
it requires the lender to redeem the interest in that loan or repurchase
the loan from the Department?

A5 Yes, the Department will allow up to 30 days for a seller or sponsor
to cure any loan level defects, so as to avoid redemption or rescission.

Q6 The definition of Eligible Loan in the MPA and MLSA includes the
element that the loan has not been modified except as
"[required]{.underline}" by the Higher Education Act. Shouldn't this
read "[permitted]{.underline}" by the Act, to allow for selection of
repayment plans, etc. that the HEA permits but doesn't require?

A6 No. Selection of a repayment plan is not a "modification" of the
loan; agreeing to a repayment term that extends beyond that authorized
is an "extension" of the loan beyond that required by the HEA. Required
modifications of the loan agreement might include, for example, the new
provision that limits the interest rate for active duty service members.

Q7 Will the Department accept as "Eligible Loans" under either loan
purchase program loans for which the lender has offered borrower
benefits or incentives that are not "Eligible Borrower Benefits" under
the agreements but that are not binding upon a transferee?

A7 No. The Department will not accept as Eligible Loans those loans for
which benefits other than Eligible Borrower Benefits have been offered
by the lender under terms that bind only the lender, because the
Department does not intend to incur the added expense of responding to
borrowers who expect that the promised benefits remained in force.

Q8 Is there an inconsistency between the inclusion of Section 3(xvi) of
the MPA, in the definition of "Eligible Loan," (which appears to require
participation in the loan sale program) and Section 35 of the MPA, which
states that participation is not required?

A8        No.  In order to qualify as an Eligible Loan under Section 3
of the MPA, the loan must simply meet the definition of "eligible loan"
under Section 3(I) of the MLSA, at the latest, when it has been fully
disbursed.  The MPA does not require every sponsor to participate as
well in the PUT program.  Section 35 of the MPA acknowledges that in
some instances, such as those described in Sections 1 and 15 of the MPA,
a sponsor must also participate in the PUT program.  A sponsor that
wishes to redeem a loan by putting the loan to the Department must enter
into a MLSA.   A sponsor that wishes to sell a participation interest in
a loan to the Department after August 1, 2009, must enter into a MLSA
and put the participated loan to the Department.

Q9 After a sponsor redeems the participation interest in a loan, when
must redemption payments be remitted to the custodian for deposit into
the Collection Account, and how long do those funds remain in the
Collection Account?

A9 Redemption payments by or on behalf of the sponsor must be made to
the custodian and deposited by the custodian promptly into the
Collection Account. If redemption is made by put of the loan to the
Department, the Department will remit to the custodian for deposit in
the Collection Account the net of the purchase price less the redemption
amount. The custodian must distribute amounts on deposit in the
Collection Account at least monthly, and, at the option of the sponsor,
may do so as frequently as weekly. Amounts derived from the sale of a
loan redeemed from the participation must be deposited into the
Collection Account and remain there until the next distribution by the
custodian.

Q10 Section 4(b) of the MPA states that the sponsor transfers its right,
title and interest in the loan to the custodian [prior]{.underline}
[to]{.underline} the Purchase Date, and that the custodian will hold the
same in trust for the sponsor until the Purchase Date. This appears to
be inconsistent with Section 4(c) of the MPA, which states that on the
date of delivery, the sponsor sells and assigns its interest in the loan
in exchange for the Participation Interests - which are not created
until the Purchase Date - and with Section 4(g) of the MPA, which states
that a common law trust is created [on]{.underline} the Purchase Date,
and that the Loans are transferred into the trust on that date?

A10 Sections 4(b), 4(c), and 4(g) of the MPA are not inconsistent,
because they describe different stages of the purchase transaction.
Section 4(b) describes, in the first sentence, the initial step in the
purchase transaction, in which the custodian accepts title to the loan
from the sponsor, and holds title to the loan in escrow on behalf of the
sponsor. Section 4(c) describes the closing of the participation
purchase transaction: upon receipt by the custodian of the Federal
payment (the "Purchase Date"), the custodian issues the Participation
Certificates to the Department and to the sponsor. On the Purchase Date,
the role of the custodian changes from escrow agent/trustee for the
benefit of the sponsor to trustee of a common law trust of which the
Department is the senior beneficial owner and the sponsor, the
subordinate or junior beneficial owner. Section 4(g) and the second half
of Section 4(b) describe the trustee role in which the custodian
performs these functions as of the Purchase Date and thereafter holds
title to the loans so long as the participation interest exists.

Q11 Of the sponsor and an ELT, which one must make the representations
contained in Section 6 of the MLSA and Section 10 of the MPA?

A11 The seller must make all representations in Sections 6(a) and (b) of
the MLSA, the sponsor, all those in Sections 10(a) and (b) of the MPA.
Those representations in either Section that explicitly refer to the
Eligible Lender Trustee (ELT) must also be made by the ELT.

Q12 Section 10(b) of the MPA requires the sponsor to warrant that no
"right of rescission" has been "asserted or threatened" with respect to
the loan. Does this representation refer to or include the right of the
borrower to cancel all or part of a loan pursuant to the terms of the
promissory note, including the right to cancel a loan within 120 days as
provided in the Borrower Rights and Responsibilities that are part of
the terms of the loan agreement?

A12 Yes, the sponsor must represent that the sponsor has not been
notified that the borrower or loan applicant has communicated to the
lender his or her intention to cancel a proposed disbursement or a
disbursement already credited the individual's account at the school

Q13 Does the sponsor own the loan after it has been transferred to the
custodian?

A13 After the sponsor transfers the loan to the custodian, the custodian
owns the loan. The custodian then issues participation certificates that
convey beneficial ownership of that loan. The Department purchases a
Class A participation interest in the loan and acquires a senior
beneficial ownership of the loan. The sponsor receives a Class B
participation interest and with it, a junior beneficial ownership
interest in the loan.

Q14 Does the representation in section 10(b)(xv) of the MPA that
promissory notes are free of notations of transfer to any party other
than Department include notations of transfer of the loans to the
custodian as well, so as to be consistent with Section 4?

A14 Yes, this exception includes notations regarding transfer to the
custodian.

Q15 Section 10(b)(xvii) of the MPA (relating to prior security
interests) requires the sponsor and ELT to warrant that neither has
authorized the filing of a financing statement against either than
includes the loans in which participation interests are sold, or is
aware of such a filing, other than for a security interest that has been
terminated or will be terminated upon the Department's purchase of a
participation interest in the loans. Warehouse lenders will at that time
still have security interests in other assets covered by the same
financing statement that covered the participated loans. Does this
representation mean that the sponsor must ensure that such a financing
statement is terminated when the Department purchases a participation
interest in those loans? 

A15 Section 10(b)(xvii) of the MPA provides that the sponsor and ELT
represent that neither has granted a security interest in the
participated loans other than one that will be released upon purchase of
the participation interest, and that neither has filed or is aware of a
financing statement against either with respect to a security interest
in the participated loans other than a security interest that has been
or will be terminated upon purchase of the participation interest. The
provision requires a representation that a security interest has been or
will be released. Whether that requires termination or amendment of a
financing statement depends of whether the statement covers other
assets. The representation does not suggest or require that financing
statements for security interests in other collateral must be
terminated. The secured party would modify the financing statement
already filed for the loans in which the sponsor sells a participation
interest to the Department by filing an amendment that indicates that
the collateral now excludes those includes 2008-2009 loans in which the
sponsor sold participation interests to the Department, which loans are
identified in the loan schedules for the participation certificates.

Q16 The Security Release Certification prescribed for the MPA (Exhibit
G) includes a statement that the security interest is released upon the
warehouse lender's receipt of stated amount "for such Participation
Interests in such Loans."[^2] The warehouse lender will be receiving
these funds not for sale of the participation interests, but for
repayment of the advances made by warehouse lender to the sponsor.
Should this statement not be changed to refer instead to amounts
received "in repayment of debt secured by such Loans"?

A16 The Security Release Certification, Ex. G to the MPA, as revised,
simply recites the basis of the payment from the Department (its
purchase of participation interests), and does not state that this is
the basis on which the payment is remitted to the warehouse lender. No
change is needed.

Q17 If a lender sells to the Department loans or participation interests
in loans subject to a security interest that the secured party perfected
by possession of the promissory notes, pursuant to HEA § 432(m)(1)(iv)
rather than by filing a financing statement, is that lender required to
obtain a certification that the secured party will file UCC termination
statements for that interest?

A17 The lender must provide a Security Release Certification in which
the secured party certifies that upon receipt of payment, it will
promptly file all "appropriate" UCC terminations statements evidencing
release of its lien on the loans in question. A secured party that
perfected its security interest by possession and did not file a
financing statement covering those loans has no financing statement to
modify or terminate, and therefore need not file any UCC termination
statement to reflect release of its interest.

Q18 Section 15(e) of the MPA provides that all loans that have not been
redeemed on the Termination Date become the property of the Department
without further action, thereby extinguishing the Sponsor's Class B
Participation Interests  Shouldn't the Department obtain the full
ownership rights to the loans only upon paying for (1) any payments that
have previously been made in reduction of the Class A Participation
Interests, (2) any capitalized interest that it has not previously paid
for, and (3) any accrued borrower interest?

A18 The Department does not intend to change this resolution in the MPA
for loans not redeemed by the sponsor. A sponsor that does not choose to
redeem loans by the termination date agrees to relinquish any claim it
might have had to recover some additional return by putting the loan to
the Department.

Q19 The MPA defines "Business Day" less restrictively than does the
MLSA. The MPA defines the term to include bank holidays, the MLSA does
not. Shouldn't both agreements include bank holidays?

A19 Under the MPA, the sponsor and servicer have regular ongoing
relationships, for the duration of a facility, with the custodian - a
bank. The MPA recognizes that bank holidays may affect how quickly the
transaction could be accomplished, and therefore excludes bank holidays.
The MLSA, on the other hand, requires a seller to perform only one task
within a relatively short performance period measured in "business days"
-- transmission to the Department of payments and correspondence
received on loans already sold to the Department. The Department would
consider these actions timely performed by a seller if completed within
the MPA-defined time period. We note that failure by a seller to meet
that deadline does not constitute an event of default or comparable
adverse event under the MLSA, and would not expose the seller to any
specific adverse consequence.

Q20 What records are included in the definition of "Loan Documents" in
the MLSA?

A20 Section 5.B(iii)(3) of the MLSA requires the seller to deliver to
the Department "the Loan Documents for each Loan listed on the Loan
Schedule" submitted with the Bill of Sale. The MLSA defines Loan
Documents as including all documents pertaining to a Loan. The
Department is explaining through electronic announcements the particular
records that the Department considers sufficient to satisfy this
delivery requirement.

Q21 How is the purchase price paid for loans put to the Department
through the MLSA?

A21 The Department pays the purchase price by ACH, with the purchase
price computed through the date of purchase. Those funds are available
to the seller on the following business day.

Q22 At what time does Section 4.E of the MLSA terminate the seller's
right to receive Interest and Special Allowance Payments (ISAP) on a
loan put to the Department?

A22 Section 4.E of the MLSA provides that the seller is entitled to
claim and receive from the Department that ISAP which accrues up to, but
not including, the Purchase Date. The "Purchase Date" is the date on
which the title to the loans is conveyed to the Department. Section 3.Z;
see MLSA, Ex. B.[^3] Similarly, the Department pays the seller the
Purchase Price on the loan. As pertinent here, the Purchase Price is an
amount equal to the outstanding principal balance and accrued and unpaid
interest owed by the borrower "as of the related Purchase Date." Section
3.AA. (Subsidized interest is not considered to be "accrued" interest
for this purpose.) The words "as of" the Purchase Date mean up to, but
not including, the Purchase Date. Similarly, a sponsor's right to claim
ISAP on a loan transferred to the custodian under the MPA terminates on
the date immediately preceding the date on which the sponsor conveys
title to the loan to the custodian.

Q23 Do Sections 5.B(iv) and 5.C of the MLSA require the seller to
endorse or provide a power of attorney to enforce any loan that has not
been sold to the Department under the MLSA?

A23 No. The MLSA requires the seller to endorse and provide a power of
attorney to enforce only loans sold to the Department.

Q24 Is a Security Release Certification required for security interests
that are not in place at the time of sale (e.g., those provided to prior
bridge lenders or other secured parties that no longer have such a
security interest when the Loan is sold)?

A24 No. Section 5.B(vi) of the MLSA requires the seller to provide a
Security Release Certification in the form specified in Exhibit E to the
MLSA. That release must be provided only by the party with a security
interest in effect at the time of sale. The seller certifies, in part II
of this Security Release Certification, that no security interest in the
loans exists other than the interest held by that party. In addition,
Section 6.B(xvii) of the MLSA requires the seller and ELT to warrant
that no security interests have been granted in loans being sold to the
Department, and no financing statements filed with respect to interests
in those loans, other than interests that will be released upon sale to
the Department.

Q25 Does a seller that has possession of the original promissory note
executed by the borrower for a loan sold to the Department satisfy its
obligation under Section 5.C(iii) of the MLSA by providing to the
Department a true and correct copy of that promissory note?

A25 No. Section 5.C(iii) authorizes the Department to obtain on demand
the original promissory note evidencing a loan sold under the MLSA if
the Department considers it necessary to enforce the loan. In each such
instance, the seller will have already provided to the Department, as it
warranted under Section 6.B(xv) of the MLSA, at least a true and correct
copy of the promissory note for the loan. Section 5.C(iii) of the MLSA
therefore does not simply authorize the Department to demand another
copy of the original note. The Department may need the original note to
enforce the loan if the obligor challenges the authenticity of the copy
of the note transferred by the seller or disputes signing the note, or
if the Department considers presentation of the original necessary to
enforce the loan in litigation, whether or not the obligor has
challenged its authenticity. A seller that acquired a loan made under an
MPN by another lender may well have acquired only a copy of the MPN
actually signed by the borrower. In such a situation, the Department may
need, and the seller must provide, a statement explaining that the
particular loan was made on the basis of that copy of the MPN. If the
seller that provides an original MPN requests its return to support
other loans not sold to the Department, the Department will promptly
return the original as soon as practicable.

Q26 Section 6.B(i) of the MLSA refers to "encumbrances" -- what does
this term include?

A26 The term "encumbrance" in Section 6.B(i) of the MLSA is a general
term that includes any lien, security interest, or other charge that
might impair transfer of title to the loans free and clear of the claim
of any kind of any party. The provision explicitly refers to "liens or
security interests" in order to reassure those financing parties that
would be expected to have a lien or security interest to be released
upon sale that such an interest is not a bar to sale, but the same
requirement applies in the same manner to any other encumbrance that
exists as of the Purchase Date.

Q27 Other than Loans for which there is a payment schedule at the time
of sale, to what do the representations in Section 6.B(vii) of the MLSA
apply?

A27 Section 6.B(vii) of the MLSA requires the seller to represent that
the Loan provides, "or when the payment schedule with respect thereto is
determined, will provide" for full amortization within the requisite
time period. The representation is expected to be relevant in instances
in which a payment schedule has been adopted, but also precludes any
agreement made by the seller or its servicer that a borrower could
obtain in the future a schedule that would not meet the amortization
requirement.

Q28 Section 6.B(xv) requires that promissory notes for loans sold to the
Department contain no notations of transfer other than those reflecting
transfer to the Department. Does this "carve-out" apply exclusively to
those notations?

A28 The "carve-out" in Section 6.B(xv) of the MLSA includes notations
reflecting any interest that will be released on sale to the Department.
(A similar carve-out appears in Section 10(b)(xv) of the MPA, and these
considerations apply to that provision.) The Department does not expect
that promissory notes will typically bear any markings that reflect
prior ownership or security interests. However, the Department
recognizes that notes for loans acquired by a secondary market seller
and sold to the Department could bear the originating lender's
endorsement to the seller, and could possibly bear notations of prior
pledges by either that originating lender or the secondary market
seller. Section 5.B(vii) requires the seller to produce other documents
requested by the Department. If promissory notes for loans sold to the
Department include notations indicating an interest that the seller
represents was satisfied prior to the sale, the Department may demand
that the seller produce proof that such interest has already been
satisfied and released prior to the sale.

Q29 Warehouse lenders typically have security interests in other assets
covered by the same financing statement. What effect does Section
6.B(xvii) of the MLSA (relating to prior security interests) have on
those interests?

A29 Any security interest in loans sold to the Department must be
terminated as to the loans sold. If those loans are included with other
collateral subject to a single financing statement, the financing
statement must be amended to give notice that the security interest is
terminated as to the loans sold to the Department. This is effected by
filing an amendment to the financing statement to change the collateral
subject to the security interest.

Q30 How will reinstatement of the loan guarantee be handled if a loan is
repurchased from the custodial facility or, later, from the Department
through a rescission of sale, for a reason that would not otherwise have
created an incurable loss of guarantee?

A30 Because the seller will have already paid the guarantor the required
fees to obtain its guaranty for each loan at issue, the Department sees
no basis for a guarantor to view its guaranty commitment as having
lapsed on a loan that the seller repurchases from the Department. While
the loan is held by the Department, the guarantor has no responsibility
for claims on the loan. The guarantor does not earn and is not paid an
account maintenance fee for that period. If the loan is repurchased, the
guarantor resumes claim responsibility and regains the right to the
account maintenance fee.

Q31 Does Section 13 of the MLSA require a seller to accept liability for
any fees and expenses for loans purchased by the Department that are
incurred by the Department or the Department's designated servicer?

A31 Section 13 of the MLSA requires the seller to bear any expenses
included in transferring loans -- including transferring the ownership
of loans -- to the Department. Section 13 does not require the seller to
bear servicing expenses incurred by the Department or its agents after
the sale. Section 7 of the MLSA does require the seller to bear any
expenses the Department incurs that arise from a claim or defense based
on an event that occurred prior to the sale, or from a breach of a
warranty by the seller. In addition, Section 8 of the MLSA requires the
seller to remit payments and communications on a purchased loan that the
seller receives after the sale, and the seller also bears the expense of
those actions.

Q32 Under the MLSA, when must loan- and lender-level representations and
warranties be provided?

A32 Section 6.A of the MLSA requires representations by the seller and
ELT that bear on the authority of each to enter into the MLSA, which
must be true and correct both on the date of the Adoption Agreement and
on the date of any sale under the MLSA. If a representation made with
the Adoption Agreement is no longer true as the date of a sale under the
MLSA, the seller or ELT must promptly notify the Department of the
change regarding that representation and must obtain a determination
from the Department whether the change affects the party's ability to
continue participation under the MLSA. Section 6.B of the MLSA requires
representations regarding individual loans sold under the MLSA, which
must be true as of the date of sale of those loans under the MLSA.

Q33 The Security Release Certification to be used for loan sales under
the MLSA, Exhibit E to the MLSA in clause (ii), requires the financial
institution that holds a security interest in loans sold to the
Department to certify that upon receipt of the proceeds of the sale of
those loans, it will promptly file appropriate notices that its security
interest in those loans has been released. Is this required, and if so,
why?

A33 Yes, the secured party must make this certification because the
secured party is in the best position to give assurances to the
Department that its security interests will be promptly released. The
Security Release Certification (Exhibit E to the MLSA) requires the
secured lender to certify, in part I, clause (ii), that upon its receipt
of payment, all appropriate UCC termination statements will have been
filed.[^4] Because that representation is contingent on its receipt of
payment, the secured party can readily execute this Certification before
it files these termination statements, and execution of the
Certification need not delay closing on the sale.

Q34 Can parties that acquire loans made by others use the loan purchase
programs? If so, what conditions apply to their ability to do so?

A34 Lenders that purchase eligible loans can use the loan purchase
programs. After the publication of the amended Notice of Intent (NOI),
it became apparent that some lenders perceived an ambiguity between the
terms of the Notice of Intent and the terms of the annexed MLSA and MPA
that controlled the rights of those parties that held loans they had not
originated to participate in the loan purchase programs. The Department
interprets the NOI to permit a lender that holds a loan acquired from
another lender to participate in the loan purchase programs with regard
to that loan if (1) it filed a NOI on or before the date it acquired
that loan and (2) the originating lender filed a timely NOI with regard
to that loan. For example, if an originating lender filed a NOI on
August 5, 2008 and then originated a loan on that same day, that loan
would be eligible for sale under either of the loan programs. By filing
its NOI, the originating lender not only acquired its own right to sell
the Department the loan or a participation interest in the loan, but it
also endowed the loan with a right to be sold, or to have a
participation interest in it sold, by a party that acquired the loan.
Thus, if that loan is later sold to a lender that had filed its own NOI
on or before the date it acquired the loan (thus acquiring for itself
the right to use the programs), that lender could fully use the loan
programs for that loan.

Transfer of a loan does not cause a loan to lose eligibility under
either purchase program. Eligibility depends on two considerations:
first, whether that loan is eligible under the terms of the particular
purchase program, and second, whether the holder is eligible. Loan
eligibility rules differ between the programs: neither the lender that
sells and then redeems a participation interest in a loan, nor any
subsequent holder of that loan, can sell a new participation interest in
that loan, because the loan is not then eligible under the participation
program. The loan would remain eligible, however, under the put program.
Lender eligibility to use the programs depends on the actions of the
originating lender and the current holder. Thus, if an originating
lender timely files a NOI, makes a loan and transfers the loan to a
party that has not timely filed a NOI (Holder 2), which in turn sells
that loan to another lender (Holder 3) that has filed a timely NOI and
executed the MPA or MLSA, Holder 3 may sell that loan, or a
participation interest in that loan, to the Department.

Q35 Does the MLSA require sellers that put loans made on E-signed notes
to deliver to the Department session data and audit trail records for
each loan?

A35 The MLSA in Section 5.B(iii) requires the seller to deliver to the
Department by the Purchase Date all loan documents on loans being sold.
These records include documentation of any master promissory note
confirmation process and a statement that identifies the entity that has
possession of the original electronically-signed note and is able to
provide the affidavit and supporting materials required under 34 C.F.R.
§ 682.414(a)(6)(i). Session data and audit trail records may be
reasonably considered as integral to the very electronic signature
itself, as opposed to records that provide the context for that
signature and assurance that the record has been maintained in a secure
fashion. Some have raised concerns that this kind of record was not
retained in readily-retrievable fashion in their origination systems,
and urged that the Department rely instead on the procedures adopted in
34 C.F.R. § 682.414(a)(6)(i) with respect to assignments to the
Department of loans on which various claims have been filed.

To resolve this concern in a way that provides the Department a
reasonable basis for concluding that the seller can provide all records
as needed, the Department will instead require that a seller provide
what may be described as an "exemplary affidavit" and full supporting
material that makes clear the procedures it used to make and hold that
loan and its capability to meet future needs of the Department for
records supporting the loans it sells to the Department. A seller that
makes and holds loans using a single process and record procedure must
submit this affidavit and support only once, unless and until the
Department may require this in the future as specific needs arise for
particular loans.

Therefore, no later than November 30, 2009, a lender that sells loans to
the Department must submit to the Department an affidavit regarding the
creation and maintenance of the electronic records of the E-signed notes
for loans that have been sold to the Department under the MLSA. A single
affidavit is sufficient to cover multiple loan sales if the process
described in the affidavit, and the supporting records provided with it,
are reliably associated by that lender with the specific cohorts of
loans that the lender sells to the Department. The affidavit must
include all of the following:

1.  The name and location of the entity in possession of any original
    electronic promissory notes.

2.  A description of the steps followed by a borrower to execute the
    promissory note (such as a flow chart).

3.  A copy of each screen as it would have appeared to the borrower when
    the borrower signed the note electronically.

4.  A description of the field edits and other security measures used to
    ensure integrity of the data submitted to the originator
    electronically.

5.  A description of how the executed promissory note has been preserved
    to ensure that cannot be altered after it was executed.

6.  Documentation supporting the lender\'s authentication and electronic
    signature process.

The lender must provide this exemplary affidavit and the material
described here regarding at least one loan that the lender actually
sells to the Department. A lender that sells loans made or retained
under different procedures must submit a separate affidavit to describe
a loan made and retained under each separate procedure. A lender that
changes procedures after it submits this exemplary affidavit and sells
loans made under the changed procedures must submit an exemplary
affidavit for a loan made or retained under the changed procedures and
sold to the Department. A lender that sells only loans that were made
and retained under the procedures described in the exemplary affidavit
it submits to the Department need not submit another affidavit unless
and until the Department may submit a request for an affidavit and
related material when needed to enforce a specific loan assigned to the
Department.

Q36 Does the Higher Education Act of 1965, as amended, 20 U.S.C. § 1001
et seq. (HEA), or the Ensuring Continued Access to Student Loans Act of
2008, Pub. L. 110-227 (ECASLA), provide the Department of Education
power to displace or supersede the rights of a secured creditor under a
security interest in Federal Family Education Loan Program loans (FFELs)
and amounts payable under the Program on those loans?

A36 No. Neither the HEA nor ECASLA provides the Department of Education
power to displace or supersede the rights of a secured creditor under a
security interest in FFELs and amounts payable under the FFEL Program on
those loans.

Q37 If a lender sells FFELs or participation interests in FFELs to the
Department and the Department acquires a claim arising from that sale
against that lender, does applicable law permit the Department to
enforce that claim by offset against claims presented by that lender for
ISAP on FFELs without regard to whether those FFELs and claims arising
from those FFELs are subject to a prior security interest?

A37 Yes. Applicable law permits the Department to enforce a claim that
arises from its purchase of FFELs or participation interests in FFELs
from a lender by offset against ISAP claims later presented by that
lender without regard to whether the FFELs on which the ISAP claims
rest, and the right to ISAP from those FFELs, are subject to a prior
security interest.[^5]

Q38 Assume that a lender sells FFELs or participation interests in FFELs
to the Department, that the Department acquires a claim against that
lender arising from that sale, that this lender assigns its rights to
receive ISAP on other FFELs to a party that lent it funds to acquire
those FFELs, and that the lender and the financing party notified the
Department of this assignment. Does applicable law permit the Department
to enforce its claim by offset against ISAP claims on those FFELs
presented by this financing party?

A38 Whether the Department can offset under these facts depends on when
the Department receives notice that the lender has assigned its claims.
If the Department receives notice before its own claim accrues,
applicable law bars the Department from enforcing its claim by offset
against those claims made by the assignee. If the Department received
notice after its own claim accrued, it can collect its claim by offset
against claims by the assignee.

The Department's right to collect by offset rests on Federal statutory
law and common law. Federal law allows a party to assign its right to
payment from the government of an approved claim. If two conditions are
met, a party can assign its right to payment in advance of agency
approval of its claim. First, the assignment must be made to a financing
institution that provided the party financial assistance that
facilitated performance of the contract on which the claim is based.
Second, the assignee must provide written notice to the government
agency that the claim has been assigned. The agency can enforce a claim
based on another contract with the assignor by offset against payments
owed to the assignee only if the agency's claim accrued before it
received that notice of assignment. The agency cannot enforce a claim
based on another contract by offset against payments owed to the
assignee if the agency's claim accrued after it received that notice of
assignment. This conclusion rests on the generally-applicable principle
stated in UCC 9-404(a). When the agency's claim accrues is determined by
the legal principles that apply to that particular transaction.

Q39 What is the claim that a lender transfers when it assigns the right
to ISAP on a FFEL?

A39 A lender that assigns the right to ISAP on a FFEL transfers its
claim for ISAP payable over the life of that FFEL. Federal law permits a
party to assign its claim to a financing institution only if the party
assigns the right to all payments due or to become due under its
contract with the Federal agency. The lender's right to ISAP does not
arise from a formal written contractual agreement between the lender and
the Department. Rather, the HEA itself gives the lender a contractual
right against the Department to receive interest that accrues on a
qualifying loan during periods in which the borrower is in school or in
a grace or deferment period on that loan. The HEA also gives the lender
a contractual right to receive special allowance payments on a
qualifying loan over the life of that loan. In both cases, the lender
has a contractual right to payment of those subsidies with respect to a
loan over the life of that loan. If the lender intends to assign its
rights to a financing party, it must assign to that party all its rights
to ISAP that is due or will become due on a FFEL. If the Department
receives the requisite notice that the lender has assigned its rights to
those payments on a FFEL before the Department's claim with respect to a
loan purchase accrues, the Department may not collect its claim by
offset against the assignee's claim for payment of ISAP on that FFEL. If
the Department receives notice after its claim has accrued, the
Department may collect its claim by offset against any claim then made
by the assignee for ISAP on that loan.

Q40 Section 7 of the MLSA provides that upon conditions listed in that
section, the seller must repurchase a loan sold to the Department, and
repay the amount of the purchase price, accrued and unpaid interest,
applicable special allowance payments, and other amounts owed to the
Department with respect to the loan. What special allowance payments are
required, and what charges are included in the term "other amounts owed
to the Department"?

A40 Section 7 of the MLSA requires the lender that must repurchase a
loan to repay an amount equal to the sum of the purchase price paid by
the Department less credit for any payments received by the Department
on that loan, any "negative special allowance payments" that would have
been payable if the loan had been held continuously by the lender, and
any amounts for costs and damages incurred by the Department
attributable to occurrences described in Section 7(A) -- (C) with
respect to that particular loan.

Q41 Is the Department obligated to honor a put made by a warehouse
lender that provided interim financing to a lender that entered into a
MPA and MLSA with the Department?

A41 A warehouse lender that provided interim financing to a lender that
entered into a MLSA or MPA with the Department may put to the Department
loans that it financed, under the terms stated in Section 4.B of the
MLSA and Section 15(c)(iv) of the MPA. A warehouse lender may put
financed loans to the Department even if the sponsor itself did not
enter into a MLSA with the Department. The Department is obligated to
purchase those loans from a warehouse lender that satisfies the
conditions stated in those sections.

Q42 What is meant by the phrase "all regulations and other requirements
provided by the applicable Guarantor .... relating to the validity and
enforceability of such Promissory Note" in Section 6.B(xvi) of the MLSA?

A42 Section 6.B(xvi) of the MLSA requires a seller that sells an
electronically-executed note to warrant that the seller, and the
originator or servicer of the loan, if other than the seller, complied
with requirements adopted by the guarantor and the Department that
relate to the validity of the note and to its enforceability -- whether
by the seller or by any assignee, including the Department.

Q43 In Section 6.A(xv) of the MLSA, the seller represents that it has an
internal quality control program that verifies, on a regular basis, the
existence and accuracy of its legal documents, credit documents and
underwriting decisions. Does the term "legal documents" include legal
documents associated with non-FFELP products?

A43 Section 6.A(xv) of the MLSA requires a review of those "legal
documents" that would affect the validity of the representations and
warranties of the seller listed in Section 6.A of the MSLA

Q44 Section 6.A(xv) of the MLSA requires the seller to have an internal
quality control program that "guard\[s\] against" dishonest, fraudulent
and negligent acts, and errors and omissions by its officials, employees
or agents. What does this provision require?

A44 This provision in Section 6.A(xv) of the MLSA requires the seller to
have an internal quality control program that uses
commercially-reasonable processes and procedures to prevent or detect
the types of acts, errors and omissions described in that provision. At
a minimum, these processes must include maintenance of an errors and
omissions insurance policy, to the extent that the seller adopts this
practice for its other credit transactions, or is required to do so
under financing arrangements of the seller. To the extent that the
seller uses, or is required to use, periodic independent auditor reviews
of its transactions, these processes must include those reviews for
transactions that include the activities under the MLSA.

Q45 How soon after a seller pays the repurchase price under Section 7 of
the MLSA will the Department return loan documents to the seller or the
seller's designated agent, and will the Department make loan-level
representations to the seller for the period of time during which the
Department held the loan?

A45 Promptly after receiving the amount the Department determines is
required under Section 7, the Department will deliver to seller or
seller's designated agent the related loan documents endorsed to the
order of seller or its designee, and all documentation relating to the
administration of the loan by the Department, including, a payment
history and a collection history. The Department will represent and
warrant to the seller or its designee, with respect to a loan
repurchased under Section 7, that the Department \--

\(i\) Is the sole owner of such loan, and has full authority to convey
all its right, title and interest in the loan to the seller;

\(ii\) Calculated the repurchase price for such loan in compliance with
the MLSA;

\(iii\) Transfers such loan free and clear of any liens, security
interests, encumbrances, or charges that resulting from Department's
conduct with respect to the loan, and

\(iv\) Has not modified the loan terms or the note in any material
respect, except as consistent with applicable laws; and

\(v\) Has not cancelled or discharged the loan or released the obligor
from liability on the loan, nor executed any instrument of release,
cancellation or satisfaction with respect to the loan.

Q46 Does the representation in Section 6A(i)(3) of the MLSA, by which
the seller warrants that it is in compliance with the laws of the state
of its formation to the extent necessary to ensure the enforceability of
each loan, impose laws on the seller that are not otherwise applicable
to the seller?

A46 The lender must warrant, under this provision in Section 6A(i)(3) of
the MLSA, that it is in compliance with any law of the state of its
formation that may affect the enforceability of the loan that it sells
to the Department. To the extent that a state law may affect
enforceability of the loan by the seller or by the Department, the
seller must warrant that it is in compliance with that law.

Q47 Section 3.I(vii) of the MLSA defines Eligible Loan, and, for a loan
that is not yet in repayment status and is not eligible for payment of
Interest Subsidy Payments, provides that interest has been billed
quarterly or capitalized to the extent permitted by the guarantor. If
the seller by the Purchase Date, has neither billed the borrower for
interest nor capitalized accrued interest on a loan as permitted by
guarantor rules, does that prevent the loan from qualifying as an
Eligible Loan?

A47 A loan that is not a subsidized Stafford Loan may qualify as an
Eligible Loan even if by the Purchase Date, the seller has neither
capitalized accrued interest nor billed the borrower quarterly for
accrued interest on that loan, if the seller would not by that date have
otherwise billed the borrower quarterly for accrued interest. However,
the seller can capitalize accrued interest on such a loan on or prior to
the Purchase Date only to the extent permitted by the applicable
Guarantor.

Q48 The Officer's Certification required under both agreements provides
in Section 7 that the seller or sponsor has satisfied all material
conditions that must be met prior to the Purchase Date of loans under
the agreement. There conditions include the loan-level representations
and warranties for loans sold under the agreements. The lender may not
have made or acquired those loans at the time the Certification is
provided. Does the Certification refer here to those conditions that
pertain to the seller or sponsor, rather than to the individual loans?

A48 The Officer's Certification in Section 7 requires a certification
that those material conditions regarding the constitution,
qualifications, and operations of the seller, sponsor and ELT contained
in the Section 10(a) of the MPA and Section 6.A of the MLSA have been
satisfied. The parties must make those Loan Level Representations at the
time of the Purchase Date under either agreement.

[^1]: Questions from lenders and financing institutions regarding the
    Department's loan participation purchase program are addressed here
    first, then those about its loan purchase commitment program. The
    Master Participation Agreement (MPA) and the Master Loan Sales
    Agreement (MLSA) include many of the same elements in their
    definitions of eligible loans, and require many of the same
    representations and warranties from the parties. Responses to
    questions about provisions of the MPA on these matters apply to the
    identical provisions of the MLSA.

[^2]: *See* Security Release Certification as revised, Loan Purchase
    Programs Electronic Announcement #16, August 15, 2008.

[^3]: *See* Bill of Sale as revised, Loan Purchase Programs Electronic
    Announcement #26, September 9, 2008.

[^4]: *See* Security Release Certification as revised, Loan Purchase
    Program Electronic Announcement #26, September 9, 2008.

[^5]: This and the following responses address the treatment of ISAP
    claims based on FFELs other than those FFELs involved in the loan
    purchase programs from which the Department's claim arose.