FP-06-07 May 11, 2006

SUBJECT: GAFR Reporting Changes for Guaranty Agencies

SUMMARY: This letter provides guidance to guaranty agencies on reporting
changes to the Guaranty Agency Financial Report (GAFR), ED Form 2000, as
a result of the Higher Education Reconciliation Act of 2005.

Dear Colleague:

On February 8, 2006, President Bush signed the Higher Education
Reconciliation Act of 2005 (HERA), Pub. L. 109-171, which made changes
to the Higher Education Act of 1965, as amended (HEA), and reauthorized
the Federal Family Education Loan (FFEL) Program. We provided initial
guidance concerning the changes made by the HERA to the HEA student loan
programs in Dear Colleague Letter GEN-06-02 on March 14, 2006. Some of
those changes impact guaranty agency reporting to the Department of
Education (the Department) on the Guaranty Agency Financial Report
(GAFR). The purpose of this letter is to provide guidance to guaranty
agencies on reporting changes affecting the following four areas:

## Filing reinsurance claims 

1.  Lender insurance and guaranty agency reinsurance rates

2.  Collection costs on defaulted loans being consolidated

3.  Federal default fees

We are in the process of updating the GAFR Instruction Guide with all
HERA provisions that impact guaranty agency reporting. The updated guide
will be available before July 1, 2006 at:

<http://www.fp.ed.gov/PORTALSWebApp/fp/index.jsp>.

A summary of the HERA provisions that impact current GAFR reporting is
provided below.

## 1. Filing reinsurance claims 

Effective for reinsurance requests filed on or after July 1, 2006, the
time a guaranty agency is allowed under §428(c)(1) of the HEA for filing
a reinsurance claim to the Department has been reduced from 45 days to
30 days following the date the guaranty agency pays the lender's claim
on the loan. As a result of this change, the Department will provide
guaranty agencies with the option of reporting reinsurance claims twice
each month. A supplemental form will be available (web application only)
for reporting reinsurance claims one time between monthly reports.

The supplemental form process will be the same as the current GAFR
process, *i.e*., e-mail alerts, acceptance/rejection, payment terms at
net 21 days, and a Statement of Account (SOA). If a guaranty agency
submits a supplemental claim form, the next monthly GAFR report must
include the supplemental reinsurance request amounts. The monthly GAFR
claim amounts will be reduced by the supplemental claim amounts.

The supplemental claims form will be available by June 26, 2006 to allow
guaranty agencies to report lender claims paid in early June 2006.

In order to preserve GAFR/National Student Loan Data System (NSLDS)
reasonability reports, the guidelines below must be followed when
submitting supplemental claim requests

1.  NSLDS field 114 (Date Reinsurance Claim Requested) and field 116
    (Amount of Reinsurance Claim Requested) must correspond to monthly
    GAFR report date and amount. 

2.  NSLDS field 115 (Date Reinsurance Claim Paid) must continue to be
    reported as the actual date the guaranty agency receives the
    reinsurance claim payment from the Department (electronic funds
    transfer (EFT) date). This field is unlike most date fields
    associated with an event in NSLDS; it is treated as value or detail
    about the "Reinsurance Request Event" and does not impact
    reasonability.

For compliance audits, the guaranty agency must maintain the actual
reinsurance request date for the supplemental claim requests. A user
guide for reporting supplemental reinsurance claims is being developed
and will be posted on the Financial Partner Portal, prior to June 26,
2006 at:

<http://www.fp.ed.gov/PORTALSWebApp/fp/index.jsp>

# 2. Lender insurance and guaranty agency reinsurance rates 

Beginning with loans for which the first disbursement of principal is
made on or after July 1, 2006, a guaranty agency must insure 97 percent
(a decrease from the current 98 percent) of a defaulted loan.

The insurance percentage applicable to lenders or lender servicers
designated as exceptional performers under section 428I of the HEA
decreases from 100 percent to 99 percent for any default claim submitted
to a guaranty agency by the exceptional performer lender or lender
servicer on or after July 1, 2006, regardless of when the loan was made
or when it defaulted.

For loans for which the first disbursement of principal is made on or
after July 1, 2006, a guaranty agency will receive 100 percent
reinsurance from the Department for "exempt claims" that it pays under
section 428(c)(1)(G) of the HEA. The term "exempt claims" is defined in
the HEA as claims with respect to loans for which it is determined that
the borrower (or the student on whose behalf a parent has borrowed),
without the lender\'s or the institution\'s knowledge at the time the
loan was made, provided false or erroneous information or took actions
that caused the borrower or the student to be ineligible for all or a
portion of the loan or for interest benefits on the loan.

The following chart summarizes the primary insurance and reinsurance
rates, impacted by HERA, for default, exempt, and exceptional performer
claims.

+---------------+--------+----------+----------+----------+----------+
| **            | Sample | Reimb    | Reimb    | Maximum  | Reimb    |
| Description** | Loan / | ursement | ursement |          | ursement |
|               | Claim  | Rate (GA | Amount   | Reimb    | Amount   |
|               | Amount | to       | to       | ursement | to GA    |
|               |        | Lender)  | Lender   | Rate (ED |          |
|               |        |          |          | to GA)   |          |
+---------------+--------+----------+----------+----------+----------+
| Lender        | \$1,   | 98%      | \$980    | 98%      | \$960.40 |
| Insurance     | 000.00 |          |          |          |          |
| (Loan 1^st^   |        |          |          |          |          |
| Disbursed on  |        |          |          |          |          |
| or after      |        |          |          |          |          |
| 10/1/93 and   |        |          |          |          |          |
| before        |        |          |          |          |          |
| 10/1/98)      |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Lender        | \$1,   | 98%      | \$980.00 | 95%      | \$931.00 |
| Insurance     | 000.00 |          |          |          |          |
| (Loan 1^st^   |        |          |          |          |          |
| Disbursed     |        |          |          |          |          |
| On/After      |        |          |          |          |          |
| 10/1/98 and   |        |          |          |          |          |
| Before        |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Lender        | \$1,   | 97%      | \$970.00 | 95%      | \$921.50 |
| Insurance     | 000.00 |          |          |          |          |
| **(**Loan     |        |          |          |          |          |
| 1^st^         |        |          |          |          |          |
| Disbursed     |        |          |          |          |          |
| On/After      |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Lender        | \$1,   | 98%      | \$980.00 | 95%      | \$931.00 |
| Insurance for | 000.00 |          |          |          |          |
| Exempt Claims |        |          |          |          |          |
| (Loan 1^st^   |        |          |          |          |          |
| Disbursed     |        |          |          |          |          |
| Before        |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Lender        | \$1,   | 100%     | \$       | 100%     | \$       |
| Insurance for | 000.00 |          | 1,000.00 |          | 1,000.00 |
| Exempt Claims |        |          |          |          |          |
| **(**Loan     |        |          |          |          |          |
| 1^st^         |        |          |          |          |          |
| Disbursed     |        |          |          |          |          |
| On/After      |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Exceptional   | \$1,   | 100%     | \$       | 95%      | \$950.00 |
| Performer     | 000.00 |          | 1,000.00 |          |          |
| (Claim        |        |          |          |          |          |
| Submitted     |        |          |          |          |          |
| Before        |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+
| Exceptional   | \$1,   | 99%      | \$990.00 | 95%      | \$940.50 |
| Performer     | 000.00 |          |          |          |          |
| **(**Claim    |        |          |          |          |          |
| Submitted     |        |          |          |          |          |
| On/After      |        |          |          |          |          |
| 7/1/06)       |        |          |          |          |          |
+---------------+--------+----------+----------+----------+----------+

## 3. Collection costs on defaulted loans being consolidated 

The HERA amends section 428(c) of the HEA by limiting the amount of
collection costs a guaranty agency may charge a borrower consolidating a
defaulted loan to no more than 18.5 percent of the outstanding principal
and accrued interest of the defaulted loan. For defaulted loans
consolidated on or after October 1, 2006, the HERA requires a guaranty
agency to remit to the Secretary a portion of the collection charge
equal to the lesser of the amount charged the borrower or 8.5 percent of
the outstanding principal and interest of the loan.

Effective October 1, 2006, GAFR, line item MR-11, FFEL Consolidation
Refund, for both the web application and FTP file format, will be
modified to accept data in line item MR-11, Other Amounts. This field
will be used to report the Secretary's share of the collection costs
charged on defaulted loans being consolidated.

When paying off a defaulted FFEL loan being consolidated into the Direct
Loan Program, the Department will continue to use the current process
and include in the payoff to the guaranty agency collection costs
charged by the guaranty agency (which cannot exceed an amount equal to
18.5 percent of the outstanding principal and interest). Effective
October 2006, line item MR-15 (Late Reporting Interest) of the GAFR will
be renamed "Default FFEL Consolidated By DL Fee" to allow reporting in
the MR-15, Amount Due To (From) Guarantor column. This field is being
enabled to collect the Secretary's share of the collection costs charged
on defaulted loans being consolidated.

On and after October 1, 2009, a guaranty agency must remit the entire
amount of the collection costs charged the borrower applicable to a
defaulted loan that is paid off with excess consolidation proceeds. The
term "excess consolidation proceeds" is defined in the HEA, as, with
respect to any guaranty agency for any Federal fiscal year beginning on
or after October 1, 2009, the proceeds of consolidation loans received
to pay defaulted Title IV loans for that agency that exceed 45 percent
of the agency\'s total collections on defaulted loans in such Federal
fiscal year.

**4. Federal default fees**

Effective for loans for which the date of guarantee of principal is on
or after July 1, 2006, the HERA eliminates the insurance premium fee
that guaranty agencies could charge a borrower and replaces it in
section 428(b)(1)(H) of the HEA with a required Federal Default Fee of
1 percent of the principal amount of each loan that a guaranty agency
must deposit into its Federal Fund. The Default Fee will be reported on
the Annual GAFR in line item AR-19, Insurance Premiums.

The Default Fee can either be charged to the borrower by a deduction
from the proceeds of the loan or paid from other non-federal sources. If
the borrower is charged the fee, it must be deducted proportionally from
the loan proceeds. The Default Fee must be deposited into the guaranty
agency's Federal Fund immediately upon receipt, but no later than 45
days after the loan proceeds have been disbursed by the lender, even if
payment will be made from a source other than borrower proceeds.

If you have any questions regarding the reporting changes described in
this letter, please contact Sandra Simmons at 202-377-3332 or Nettie
Harding at 202-377-3307, or via e-mail to <FSA_GAR@ed.gov>.

Sincerely,

Matteo Fontana

General Manager, Financial Partner Services

Federal Student Aid