**DRAFT Proposed Modifications to Existing Regulation**

**4/23/2015**

**Issue Paper 3:  Easing the Transition of Borrowers from Rehabilitation to Servicing**

**Session 3:**April 28 – April 30, 2015

**Statutory cites:**§428F of the Higher Education Act of 1965, as amended

**Regulatory cites:**§682.405

**Summary of Change:**This change would require a guaranty agency to engage in outreach to a Federal Family Education Loan (FFEL) Program borrower with whom it has entered into an agreement to rehabilitate a defaulted FFEL Program loan. The goal of the outreach during this period would be to counsel the borrower on repayment plans available to the borrower after rehabilitating the default loan, to help the borrower decide which repayment plan to choose after rehabilitation, and to explain to the borrower how to select that plan and provide any required documentation.

**Changes:**See regulatory text below.

**§ 682.405 Loan rehabilitation agreement.**

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(b) Terms of agreement. In the loan rehabilitation agreement, the guaranty agency agrees to ensure that its loan rehabilitation program meets the following requirements at all times:

(1) A borrower may request rehabilitation of the borrower’s defaulted loan held by the guaranty agency. In order to be eligible for rehabilitation of the loan, the borrower must voluntarily make at least 9 of the 10 payments required under a monthly repayment agreement.

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(vi) Within 15 business days of its determination of the borrower’s loan rehabilitation payment amount, the guaranty agency must provide the borrower with a written rehabilitation agreement which includes the borrower’s payment amount calculated under paragraph (b)(1)(iii), a prominent statement that the borrower may object orally or in writing to the payment amount, with the method and timeframe for raising such an objection, and an explanation of any other terms and conditions applicable to the required series of payments that must be made before the borrower’s account can be considered for repurchase by an eligible lender or assignment to the Secretary (i.e., rehabilitated). To accept the agreement, the borrower must sign and return the agreement or accept the agreement electronically under a process provided by the agency. The agency may not impose any conditions unrelated to the amount or timing of the rehabilitation payments in the rehabilitation agreement. The written rehabilitation agreement must inform the borrower—

(A) Of the effects of having the loans rehabilitated (e.g., removal of the record of default from the borrower’s credit history and return to normal repayment);

(B) Of the amount of any collection costs to be added to the unpaid principal of the loan when the loan is sold to an eligible lender or assigned to the Secretary, which may not exceed 16 percent of the unpaid principal and accrued interest on the loan at the time of the sale or assignment; and

(C) That the rehabilitation agreement is null and void if the borrower fails to provide the documentation required to confirm the monthly payment calculated under paragraph (b)(1)(iii) of this section.

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(xi) Except as provided in paragraph (c) of this section, during the rehabilitation period, the guaranty agency must limit contact with the borrower on the loan being rehabilitated to collection activities that are required by law or regulation and to communications that support the rehabilitation.

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(4) An eligible lender purchasing a rehabilitated loan must establish a repayment schedule that meets the same requirements that are applicable to other FFEL Program loans of the same loan type as the rehabilitated loan and must permit the borrower to choose any statutorily available repayment plan for that loan type. The lender must treat the first payment made under the nine payments as the first payment under the applicable maximum repayment term, as defined under § 682.209(a) or (e). For Consolidation loans, the maximum repayment term is based on the balance outstanding at the time of loan rehabilitation.

(c) A guaranty agency must make available to the borrower—

(1) During the rehabilitation period, information about repayment plans, including the income-based repayment plan, that may be available to the borrower upon rehabilitating the defaulted loan and how the borrower can select a repayment plan after the loan is purchased by an eligible lender; and

(2) After the successful completion of the rehabilitation period, financial and economic education materials, including debt management information.