###### Attachment 2

FFEL PROGRAM

**(I) LOAN HOLDER PROCEDURES**

FFEL loan holders must use the following procedures in processing total
and permanent disability discharge requests. If the guaranty agency is
the loan holder, the disability discharge request is submitted by the
borrower directly to the guaranty agency. For these loans, the guaranty
agency is responsible for sending the notices described in Sections (I)
B.1 and (I) B.2 of this Attachment to the borrower.

**A. Review Process**

Under the total and permanent disability discharge procedures, an FFEL
loan holder is expected to conduct rigorous reviews of disability
discharge requests. If the physician's certification is not received or
the holder determines that the borrower is not totally and permanently
disabled, the loan holder must resume collection activities that were
suspended because it was evaluating the borrower's application or
awaiting the physician's certification. Otherwise collection activities
remain suspended by the loan holder and guaranty agency throughout the
loan holder claim payment process and the guaranty agency's assignment
of the loan to the Department \[34 C.F.R. §682.402(c)(4)\].

**B. Filing a Claim**

If the FFEL holder makes a preliminary determination that the borrower
meets the criteria for a total and permanent disability discharge based
on the certified discharge form and any supporting documentation, it
must file a claim with the guaranty agency within 60 days after making
that determination \[34 C.F.R. §682.402(c)(4)\]. If the guaranty agency
denies the claim, it must notify the loan holder of the reason for the
denial. Depending on the outcome of the guaranty agency's review, the
loan holder must take one of the following actions:

1\. If the claim is denied, the loan holder must promptly notify the
borrower and explain why the claim has been denied. The loan holder must
inform the borrower that it will resume collection activities and that
it may capitalize accrued interest that was not paid while collection
efforts were suspended \[34 C.F.R. §682.402(c)(5) and (c)(7)\].

2\. If the claim is paid, the loan holder must notify the borrower that
the guaranty agency has made a preliminary determination that the
borrower meets the eligibility criteria for a disability discharge. The
notification should inform the borrower that the loan will be assigned
to the Department of Education for a review of the request and an
initial determination of eligibility for the discharge \[34 C.F.R.
§682.402(c)(8)\]. If the Department determines that the borrower is not
eligible, the Department will notify the borrower and begin collection
activity on the loan \[34 C.F.R. §682.402(c)(12)\]. If the Department
makes an initial determination that the borrower meets the criteria for
a disability discharge, the Department will place the loan in a
conditional discharge status, for three years from the date the borrower
became totally and permanently disabled, as certified by a physician.
During the conditional discharge period, interest will not accrue on the
loan for which the discharge is sought and the borrower is not obligated
to make payments on the loan. If, throughout the conditional discharge
period, the borrower remains eligible for the discharge (does not take
out any additional Title IV loans and does not have annual earnings from
work in excess of the poverty level for a family of two) the Department
will grant the borrower a final discharge.

> The loan holder's notification to the borrower should explain these
> procedures for reviewing disability discharge, and inform the borrower
> that the Department will be requesting information on the borrower's
> income from employment during the conditional discharge period \[34
> C.F.R §§682.402(c)(13) -- (c)(15)\].

## C. Payments Received After A Claim Has Been Paid

If an FFEL holder receives any payment from or on behalf of the borrower
after the guaranty agency has paid the claim, the loan holder must
forward that payment to the guaranty agency. At the time the loan holder
forwards the payment to the guaranty agency, the loan holder must notify
the borrower or other party who sent the payment that there is no
obligation to make further payments, unless the Department directs the
borrower otherwise \[34 C.F.R. §682.402(c)(9)\].

\(II\) GUARANTY AGENCY PROCEDURES

Guaranty agencies may receive disability applications in claim packages
filed by loan holders, or directly from borrowers whose loans are
already held by the agency. In the latter case, the agency must suspend
any collection activities on the loan, such as administrative wage
garnishment or litigation, while it is evaluating the borrower's
application. The agency must also inactivate the loan from the Treasury
Offset Program on the weekly update tape.

**A. Review Process**

If a borrower who has filed an application for a disability discharge
also has previously filed a closed school or false certification
discharge request that is being reviewed by the guaranty agency, the
agency should conclude that review, to the extent that it covers the
same loans for which the disability discharge has been requested, before
it undertakes consideration of the disability discharge request. A
guaranty agency should continue its review of a borrower's discharge
request on any loan for which a judgment has been secured or on which a
bankruptcy filing has taken place and assign the loan to the Department,
as appropriate.

When the guaranty agency receives a borrower's application for a
disability discharge, it must review the application as it has done in
the past to ensure that the application is complete and that the
condition certified by the physician meets the standard for discharge,
and that no supporting documentation or other information of which the
agency is aware conflicts with the physician's certification. If the
guaranty agency questions the physician's certification for any reason,
the Department expects the guaranty agency to contact the physician to
obtain clarification and to resolve the apparent conflict \[34 C.F.R.
§682.402(c)(6)\].

If the guaranty agency makes a preliminary determination that the
borrower meets the criteria for a total and permanent disability
discharge, it assigns the loan to the Department by following the
assignment process outlined in Section (II) D of this Attachment \[34
C.F.R. §682.402(c)(11)\].

> **Extended time period for reviewing loan holder claims:** Under
> current regulations, a guaranty agency has 45 days to pay or return a
> disability claim submitted by a loan holder. As of the date of this
> letter, a proposal to increase this time period to 90 days is being
> considered. The Department will publish a Notice of Proposed
> Rulemaking proposing this change later this year. Because we believe
> it is important to allow guaranty agencies more time to rigorously
> scrutinize disability claims, we will not hold a guaranty agency
> liable for not meeting the current 45 day requirement if it pays or
> returns a disability claim filed by a loan holder within 90 days.

**B. Denying or Approving a Claim**

Depending on the outcome of its review of a claim submitted by an FFEL
holder, the guaranty agency will take one of the following actions:

1\. If the claim is denied, the agency must return the claim package to
the loan holder and explain why it has denied the claim \[34 C.F.R.
§682.402(c)(7)\].

2\. If the agency makes a preliminary determination that the borrower
meets the criteria for a disability discharge, it must pay the FFEL
holder's claim and assign the loan to the Department \[34 C.F.R.
§682.402(c)(6) and (c)(11)\].

**C. Requesting Reimbursement**

The new disability rules have no effect on the way that guaranty
agencies request reimbursement for disability claims paid to loan
holders. Guaranty agencies should continue to follow the normal
procedures for requesting reimbursement from the Department.

## D. Assignment

After paying a loan holder's disability claim and receiving the
reimbursement payment the guaranty agency assigns the loan to the
Department. When assigning a loan, the agency must:

1\. Use the current electronic and hard copy file formats and provide
all data normally associated with loan subrogation.

2\. Include the appropriate assignment letter and tape transmittal form,
identifying the assignment as a "disability assignment."

3\. Fill in Tape Positions 427-434 ("Date of Default") with spaces, if
the loan is not in default

4\. Attach the disability discharge application and any other supporting
medical documentation provided by the borrower or obtained by the loan
holder or guaranty agency during the review process.

5\. Attach the promissory note and any judgment, bankruptcy, or
indemnification agreement, as applicable.

6\. Include a listing of any payments (amounts and payment date)
received on or after the date the borrower became totally and
permanently disabled, as certified by the physician in Section 3 of the
Total and Permanent Disability Discharge Form. The listing should
include payments received from any source, including those made by
Treasury Offset.

## E. Mailing Address

Total and permanent disability assignment submissions should be sent to
the Department at the following address:

> Conditional Total and Permanent Disability Assignments
>
> U.S. Department of Education
>
> c/o AFSA Data Corporation
>
> 501 Bleecker Street
>
> Utica, New York 13501

**F. Credit Bureau Reporting**

After assignment to the Department, a guaranty agency should use the
Standard Metro formats for reporting these loans to credit bureau
organizations, using an "88" code to indicate that a claim has been
filed with the Department. Upon notification by the Department that the
assignment has been accepted, the agency should delete the loan record
using the "DA" reporting code.

After the loan has been assigned, the Department will be responsible for
further credit bureau reporting on the loan (see Attachment 3, Section
(III) A.).

## G. NSLDS Reporting

After receipt of a disability reimbursement payment and after verifying
that the loan had previously been reported to NSLDS, the guaranty agency
should continue the current practice of reporting the loan to NSLDS as
"DI" or "DS" with a \$0 balance. The date of discharge reported by the
guaranty agency as part of the NSLDS reporting transaction will
determine how the Department reports these accounts to NSLDS following
assignment. If the date of discharge is after July 1, 2002, the
Department will replace the \$0 balance with the outstanding loan
amount.

As under the current assignment process, when a guaranty agency assigns
a loan to the Department, the guaranty agency reports to NSLDS a code
number for the entity that will receive the loan. These loans will be
assigned to a newly established Disability Discharge Operating Unit. An
entity code for this unit has not yet been designated. We will advise
guaranty agencies of the new entity code as soon as it is available.

After the loan has been assigned, the Department will be responsible for
further NSLDS reporting on the loan (see Attachment 3, Section (III)
B.).

## H. Payments Received After Assignment

If the guaranty agency receives any payment from or on behalf of the
borrower after the loan has been assigned it must forward that payment
to the Department at the address provided in Section (II) E of this
Attachment. The submission should be accompanied by a listing with the
borrower's name, social security number, source of payment if known
(i.e. borrower, parent, etc), payment amount, payment date and date of
assignment to the Department for total and permanent disability
discharge purposes. The Department will credit the payment to the
borrower's account.

At the time the agency forwards the payment to the Department, the
agency must notify the borrower or the sender of the payment that there
is no obligation to make further payments while the loan is held by the
Department in a conditional discharge status, unless the Department
directs the borrower otherwise. If the Department makes a final
determination to discharge the loan, it will return to the borrower any
payments received on the loan on or after the date the borrower became
totally and permanently disabled \[34 C.F.R. §§682.402(r)(2) --
(r)(3)\].

## 

## I. Financial Reporting

As stated in Section (II) C of this Attachment, the new disability rules
have no effect on the way guaranty agencies request or are paid
reimbursement on disability claims paid to loan holders. A certain
number of loans assigned to the Department as disability claims,
however, may either not be approved by the Department, or may become
ineligible for final discharge during the conditional discharge period.
Although these loans will not be returned to the guaranty agency

nor will the reimbursement amount change, the Department believes that
it may be necessary to adjust guaranty agency financial reports in some
manner to reflect the change in status of these claims to ensure
consistency between NSLDS and financial reporting records. The
Department plans to work with the guaranty agencies in the near future
to determine the best way to reflect the changed status of these loans
in guaranty agencies financial reports.