FP-04-04

Subject: Exceptional Performer

Summary: The attachment to this letter provides members of the FFEL
Community with information about the Exceptional Performer designation.

Dear Colleague:

Section 428I of the Higher Education Act of 1965, as amended (HEA) and
the implementing regulations at 34 C.F.R. 682.415 authorize the
Secretary to recognize qualified lenders and guaranty agencies and
servicers (as agents for eligible lenders and guaranty agencies) for an
exceptional level of performance in servicing Federal Family Education
Loan (FFEL) Program loans, if the lender, guaranty agency, or servicer
requests such status and meets all statutory and regulatory
requirements.

During the past few months, several organizations have applied for this
"exceptional performer" designation, and others are considering it.
These organizations have asked us questions concerning various aspects
of being designated an exceptional performer. So that all members of the
community are aware of the Department's guidance, we are publishing
those questions and our responses in an attached Question & Answer (Q&A)
format.

If you have questions that are not covered in the attachment, please
contact Mike Sutphin in the Department's Federal Student Aid office.
Mike can be contacted as follows:

Mike Sutphin

Financial Partners Services

Federal Student Aid

U.S. Department of Education

Room 111G5

830 First Street, NE, Washington, DC 20202

voice: 202-377-3624

fax: 202-275-0913

<mike.sutphin@ed.gov>

Sincerely,

Victoria L. Bateman, CPA, CGFM

FSA Chief Financial Officer and Acting General Manager, Financial
Partner Services

#### 

#### *General Program Requirements & Information*

Q1.10 The EP designation requires that default claims be paid at 100% of
unpaid principal and accrued interest. Is reinsurance paid to the
guaranty agency at 95% of the amount paid (100%), or at 95% of 98% (the
amount that would have been paid had the lender not been designated an
exceptional performer)? For example, the exceptional performer claim is
\$1,000 (total of unpaid principal and interest). Is reinsurance paid to
the guarantor at \$950 (95% of 100%), or is reinsurance paid at \$931
(98% of \$1,000 is \$980 x 95% = \$931)?

A1.10 Under Section 428(c)(1) of the HEA, \"the amount to be paid a
guaranty agency as reimbursement under this subsection shall be equal to
95 percent of the amount expended by it in discharge of its insurance
obligation . . . \". In this case, the amount expended by the agency is
100% of the claim amount so reinsurance should be 95% of the 100% claim
payment amount. In your example, the payment would be \$950 rather than
\$931. (NOTE: The rates included in this example assume that the agency
has not hit the trigger for lower reinsurance rates)

Q1.01 Does the EP designation apply to defaulted loans only or to other
types of claims as well?

**A1.01 As stated in the 34 C.F.R. § 682.415 (a)(1), the lender/lender
servicer receives 100 percent reimbursement on *[all]{.smallcaps}*
claims submitted for insurance.**

Q1.02 It seems that repurchases are not addressed in the law. If a claim
is paid and a problem is found at a later date, can the guarantor demand
repurchase?

**A1.02 The regulations at, 34 C.F.R. § 682.415 (b)(5)(ii), states that
"A guaranty agency or the Secretary may require the lender or lender
servicer to repurchase a loan if the agency determines the loan should
not have been submitted as a claim. A guaranty agency may not require
repurchase of a loan based solely on the lender's violation of the
requirement relating to repayment conversion, due diligence, or timely
filing."**

Q6.06 Please describe the multiple types of audit requirements as part
of the application process.

**A6.06 Two audits are required to obtain the EP designation:**

**1. An financial audit performed in accordance with the Audit Guide
developed by the Department or:**

**a. A lender may submit a copy of the annual audit required by 34
C.F.R.. §682.305(c) if the audit period ends no more than 90 days prior
to the date the lender submits its request for designation;**

**b. A servicer may submit a copy of the annual financial audit as
required by 34 C.F.R. §682.416(e) if the audit period ends no more than
90 days prior to the date the servicer submits its request for
designation.**

**2. A compliance audit of its loan portfolio performed in accordance
with the EP Lender Audit Guide.**

**See § 682.415(a)(2)(iii)(B)**

#### 

#### 

#### 

#### *EP Application, Designation & Implementation*

Q6.12 What form does the application for EP take?

**A6.12 Currently, the "form" is a written letter from the applicant,
along with all required documentation.**

Q6.01 The regulations state that the lender or servicer must submit a
written request for the EP designation. Can this be electronic? Will
electronic signatures be accepted for the certification statements?

**A6.01 The regulations at 32 C.F.R. § 682.415(a)(2)(i) require that
applicant to submit a "written request". An electronic application and
signature process is not currently available for applying for the EP
designation. FSA will monitor this process and determine if an
electronic process would be beneficial.**

Q6.02 The audit period end date requirement for the EP designation ties
to the date the lender submits the request for designation. Please
clarify the "date the lender submits the request" -- is this the date of
the written request? What if the application is subsequently found to be
incomplete? Does the "submittal date" change to the date that a complete
application is received?

**A6.02 The "date the lender submits the request" would be the date that
the lender submits to FSA their letter for consideration of the
designation along with all other required documentation. The submittal
date, therefore, is the date that a complete application is received by
FSA.**

Q6.13 If audit work papers are incomplete at the time of submission, how
does that relate to the processing procedures of that application?

**A6.13 The application would be considered incomplete. Until an
application is complete, it will not be considered for the EP
designation. (See also Q6-02)**

Q1.20 The current audit guide states that the audit requirements are for
quarterly audits, yet maintains the designation is based on monthly
calculations, not quarterly ones. Please clarify and provide specific
guidance on how the calculations should be made and reported.

**A1.20 The lender/lender servicer that receives the EP designation must
develop a sampling plan that ensures that adequate sampling occurs for
each month of the quarter being audited. A lender/ lender servicer may
perform the audit on a monthly basis to meet this requirement. See the
OIG Audit Guide.**

Q6.04 What lead-time for implementation will be provided with each new
designee?

**A6.04 The regulations state that the effective date for the
implementation of the designation is the date of notification. As
applications for the designation are approved, FSA will work with those
organizations that are approved to determine the effective date for
their guarantors to implement. See § 682.415(a)(1)**

Q1.09 How will FSA track loans paid to the lender at 100% under the EP
designation?

**A1.09 It has been determined that NSLDS will be used to track the EP
volume. A Technical Update will be issued by NSLDS to re-state the
importance of accurate and timely submission of the following data:
servicer transfers, amount of claim paid to lender, and the proper use
of the servicer ID. This information will be critical to the tracking of
the EP volume. Alternate solutions, such as adding a new value for Claim
Paid Type, or adding an additional value of Claim Submittal Date to
NSLDS will be discussed as part of the NSLDS re-engineering efforts. In
the interim, NSLDS will develop a query formula to be used to identify
the EP volume. It has been noted that NSLDS does not capture the claim
submittal date, but only the claim paid date and this factor will be
considered in the reporting of EP volume.**

Q3.01 Review the potential changes required to the Form 2000 to track EP
claims paid.

A3.01 No changes to Form 2000 are anticipated to track EP claims paid.

Q6.10 Please quantify, in the definition of a servicer, what is meant by
"an entity with substantial experience in servicing and collecting
consumer or student loans."

**A6.10 "Substantial Experience" is a term that comes from the HEA and
is applied on a case-by-case basis.**

Q6.07 Can a lender receive the EP designation if they are not also
servicing the portfolio?

**A6.07 No. An organization must service the loan to receive the
designation. See 34 C.F.R. § 682.415(a)(5)**

Q6.11 The EP Lender Audit Guide indicates that a lender may receive the
EP designation based on loans that it services itself and that the
lender does not have to service its entire portfolio. Please elaborate
on this discussion as it relates to comments made about lenders with
multiple servicers.

**A6.11 A lender may receive the designation for loans that it services
itself. A lender is not required to service its entire portfolio, but
can only receive the benefits of the EP designation for those that it
does service. If a lender has multiple servicers for various portions of
its portfolio, only those servicers that receive the EP designation will
qualify for 100% reinsurance. See 34 C.F.R. § 682.415(a)(5)**

Q1.15 How would a servicer or lender who simultaneous to their servicing
of a loan has a 3rd party perform some collection or skip tracing
activities on the same loan be evaluated? Servicing is not totally being
done in-house, but not totally by a 3rd party either. Would both
entities have to apply and qualify for EP status?

A1.15 An entity can only be designated as an exceptional performer based
on activities it performs itself. A lender or servicer must perform all
of the required activities itself to get the EP designation. Therefore,
if a loan servicer is not performing all due diligence activities (but
subcontracts some activities out to another service provider) the loan
servicer cannot get the EP designation. See 34 C.F.R. § 682.415(a)(5).

Q6.14 Please explain the role of the application coordinator.

A6.14 Financial Partner Services will identify a single resource in the
Washington, D.C. office to serve as the EP coordinator for all
applications for the EP designation. Additionally, an application
coordinator will also be assigned to each application to assist in the
evaluation, guarantor feedback collection, etc. The point of contact for
new applicants will be the Washington D.C. EP coordinator.

Q6.15 Will ED grant any extensions to the 90-day audit reporting
requirement, perhaps to 120 days, because of the initial start up period
and additional guidance discussions?

**A6.15 It is not anticipated that any extensions will be granted.**

Q6.16 Please clarify 34 C.F.R. § 682.415(b)(7)(ii) which states that "a
lender or lender servicer designated under this section that fails to
service loans or otherwise comply with the applicable program
regulations is considered in violation of 31 U.S.C. 3729."

**A6.16 The language of the regulation reflects § 428I(g) of the HES.
The Statute referenced, 31 USC 3729 is the Federal False Claims Act and
provides for treble damages against violators. If a lender or lender
servicer that has received the EP designation is found to be out of
compliance with any program regulation, not just timely conversion to
repayment, timely filing of claims and compliance with due diligence
standards, in the servicing of loans, they may be subject to triple
damage penalties. Organizations should consult with their legal counsel
about the possible implications**

Q6.17 Several references have been made to the fact that the FSA
procedures for determining eligibility for the EP designation are a
"work in progress." Please provide clarification.

**A6.17 FSA, particularly Financial Partner Services, is in the process
of finalizing the procedures from an internal personnel perspective, not
from a review and determination perspective. The criteria used to
evaluate the first organization to receive the designation, are the same
criteria that will be used in the review of future applicants. The work
in progress is merely referring to the internal FSA procedures for
tracking, coordinating and implementing new applications.**

Q6.03 One of the factors considered in the determination of eligibility
for the EP designation was explained to include the following NSLDS
multi function queries: 6, 9, 10, 13, 35, and 36. Please provide a
description of what information is contained in these queries and how it
is used in the determination process.

**A6.03 Query #6 identifies open loans that have not been updated with a
current Outstanding Principal Balance (OPB). Query #9 Identifies loans
that have been in repayment for more than twelve years with OPB not
updated in the past year. Query #10 identifies loans that have been open
longer than the normal repayment period. Query #13 identifies loans with
outstanding principal balances in excess of the loan amount plus
capitalized interest. Query \# 35 identifies loans with moving OPB dates
but static OPB amounts. Query \# 36 identifies loans in repayment for
more than twelve years with OPB not updated in the past 4 1/2 years.**

Q6.05 If a lender has volume on multiple servicing systems under the
same LID, and only one of those servicers has the EP designation, how
will guarantors know how to pay claims that come in for that particular
lender?

A6.05 Part of the confirmation process with regard to a lender/lender
servicer receiving the EP designation is written notification to each
guaranty agency. Lender and servicer ID's associated with the
designation will be shared -- to the best degree possible -- with each
guarantor. Additionally, ED understands that the community has been
implementing the Common Claim Initiative which provides a mechanism for
a lender/lender servicer to notify the guarantor on each claim submitted
whether it is an EP claim (both in the processing of paper and
electronic claims). We note that the lender or servicer will have to
take steps to ensure that it is only submitting proper claims for EP
status. Otherwise, it may be subject to liability under the Federal
False Claims Act as discussed in Answer 6.16 above.

Q1.16 If a loan servicer received the EP designation and subsequently
begins servicing loans for new lender clients, are the loans from the
new lenders portfolio eligible for the EP benefits? Are there any
special notification requirements to ED if new lender volume is added to
the servicer's loan portfolio?

**A1.16 There are no restrictions or conditions other than those
specifically referenced in the regulation. A loan servicer that receives
the EP designation would receive that benefit for any lender that it
services -- not just those lenders that it services at the time it
receives the designation. A loan servicer that receives the designation
is not required to reapply for the designation each time a new lender
enters into a servicing agreement with the servicing organization. See
34 CFE 682.415(a)(1). However, the servicer is only entitled to EP
treatment on loans it services for the period required for the EP
status.**

Q6.08 If a servicer is submitting an application for the EP designation,
do they need to identify all of the lender id's that they are servicing?

**A6.08 Although this is not a requirement for an application for the EP
designation, FSA will work with each applicant to collect this
information at the time the application is submitted. Additionally, FSA
will request that subsequent changes to the list of lender id's serviced
are submitted in conjunction with the quarterly audits.**

Q6.09 A lender/lender servicer's cure rate was indicated as a criteria
used in the determination of their application for the EP designation.
Please clarify if it would be the cure rate with regard to default
aversion requests or reinstatement of guarantee requirements.

**A6.09 The rate that will be looked at is the cure rate with regard to
curing denied claims.**

#### *Claim Review*

Q1.17 Does a guaranty agency need to review the entire claim package
when the lender has an EP designation?

A1.17 Both the HEA and the regulations state that the EP designation
applies to \"all claims\". Thus, the guarantors are not required to
review collection activities on all loans. However, under 34 C.F.R. §
682.402 it is the guarantor and not the lender who determines if the
borrower qualifies for a discharge based on death, closed school, false
certification or an unpaid refund and the guarantor does its own review
of the borrower\'s eligibility for a disability discharge before the
Secretary makes the ultimate determination. The guarantor still has to
do that review and determine the borrower\'s eligibility for these
discharges and can deny payment to the lender if the borrower is not
eligible for the discharge.

For these \"specialty claims\" such as death/disability, closed school,
etc. the guarantor needs to review the documentation to ensure that the
claim is appropriate but is not required to look at due diligence.

**For defaults, the guarantor should be looking to make sure the
necessary documentation is in the claim package. Even if the specific
due diligence steps are not reviewed, documentation of those steps
should be present in the package as well as all other claims
documentation required. See 34 C.F.R. § 682.414**

Q1.13 Are supplemental claims paid at the same insurance rate as the
original claim payment?

**A1.13 A supplemental claim would be paid at the same insurance rate as
the original claim. The reasoning is that it is an increase to an
existing claim, which, if the amount of the supplemental claim had been
included in the original claim, would have been paid at the rate in
effect prior to the EP designation.**

Q1.24 If a loan has previously been deemed irrevocably out of guarantee
and is subsequently submitted by the EP lender/servicer for reinsurance,
does the guarantor assume any liability for paying that claim (as it
would not be reviewed per the EP rules)?

**A1.24 Yes, the GA would be liable for paying that claim. It is still
the GA's responsibility to validate that the loan for which a claim is
being submitted is a valid loan prior to the claim payment actually
being made. As a reminder, please note the following basic reinsurance
rules from 34 C.F.R. § 682.406(a):**

> **(a) A guaranty agency may make a claim payment from the Federal Fund
> and receive a reinsurance payment on a loan only if \--**
>
> **(7) The lender satisfied all conditions of guarantee coverage set by
> the agency\...**

**(12) The agency and lender, if applicable, complied with all other
Federal requirements with respect to the loan\...**

Q1.12 If a claim is filed and rejected prior to the effective date of an
EP designation, and then the claim is resubmitted after the EP
designation effective date, are the claim review and payment processes
dictated by the original submittal date, or the resubmittal date?

**A1.12 The claim review and payment processes would be dictated by the
original submittal date. Therefore, claims that are rejected prior to
the EP designation and resubmitted after the EP designation, are not
eligible for the 100% reinsurance. See 34 C.F.R. § 682.406 (a)(6) and
(8)**

Q1.26 If a claim was rejected for timely filing, due diligence or
conversion to repayment violations prior to a lender/servicer receiving
the EP designation and was not cured prior to the effective date of the
designation, may the lender refile/appeal the loss of guarantee once the
designation is effective?

**A1.26 No. The lender/lender servicer should only refile the claim upon
successful cure. See 34 C.F.R. § Part 682, Appendix D**

Q1.27 When a cure has been performed, is the EP lender/servicer still
subject to denial of interest for the cure period or does the guaranty
agency pay all outstanding interest including the interest during the
uninsured period?

**A1.27 The claim would still be subject to a denial of interest for the
uninsured period. See 34 C.F.R. § Part 682, Appendix D.**

Q1.28 If the guaranty agency shows that a borrower has been continuously
enrolled at least half time and the lender has placed the borrower in
repayment, should the guaranty agency contact the lender regarding the
discrepancy prior to the claim payment? Paying the claim would have a
very negative impact on the borrower and the school.

**A1.28 Enrollment verification is not part of the due diligence in
collecting a loan and therefore should still be reviewed as part of the
claims process for lenders/servicers with the EP designation.**

Q1.29 What happens if a guarantor's system reflects a different lender
than the EP lender submitting the claim for payment, because the
guarantor was not notified of the loan transfer? Should the guarantor
reject the claim, or pay the claim and rely on the lenders self
certification?

**A1.29 If a guarantor receives a claim from a different lender of
record than what their records reflect, the claim should be returned and
the details of the loan transfer resolved before payment is made. See 34
C.F.R. § 682.208 (e)(4).**

#### 

#### *Program Reviews & Guarantor Audits*

Q1.14 It is possible that there may be confusion and/or conflicts
between program review requirements and the claims processing
requirements outlined in the EP regulations. Normally required
corrective actions in a guarantor\'s program review of a lender or
servicer may in some cases conflict with the special provisions of EP.
Is there any impact to guarantor program reviews of lenders and
servicers?

**A1.14 There are no changes to a guarantor's program review of a
lender/lender servicer who has received an EP designation. Although the
claim processing is streamlined, the program review procedures are not
changed. See 34 C.F.R. § 682.410(c)(1).**

Q1.22 What assurance does a guarantor have that ED and or/OIG will not
assess a finding/penalty on a claim that contained an error but was paid
by the guarantor as the lender/lender servicer had the EP designation?

**A1.22 Any guarantor that reviews a claim for an organization with the
EP designation may not reject that claim for repayment conversion,
timely filing, or due diligence errors. However, if the guarantor
determines that the claim is incomplete or otherwise ineligible, it must
reject the claim. See 34 C.F.R. § 682.460(s). The guarantor still has
the responsibility to ensure that all normally required
documentation/requirements are met prior to payment of the claim. If the
guarantor has reviewed and paid a claim submitted by an exceptional
performer in accordance with the regulations and guidance issued by the
Department in regard to the review and payment of such claims, there
will not be a basis for liability. See 34 C.F.R. § 682.414**