Publication Date: April 14, 2008
DCL ID: FP-08-03/GEN-08-03
Subject: Lender-of-Last-Resort Services in the Federal Family Education Loan Program
Summary: This letter provides updated assistance for the implementation of a Lender-of-Last- Resort (LLR) program by a guaranty agency in the FFEL Program. Guaranty agencies are instructed to submit updated LLR rules and operating procedures to the Department for review and approval
Posted on 04-14-2008
Dear Guaranty Agency Director:
During the last several weeks, the Department of Education (the Department) has been closely monitoring events in the financial markets, as well as announcements made by some participating Federal Family Education Loan (FFEL) lenders about their future participation in the FFEL Program. The Secretary is committed to timely access to FFEL loans for all eligible borrowers. The purpose of this letter is to ensure that all guaranty agencies are in compliance with section 428(j) of the Higher Education Act (HEA) and the implementing regulations at 34 CFR 682.401(c), and have in place approved, updated rules and operating procedures to provide FFEL LLR loans should they be needed. While the regulations specify that a guaranty agency’s LLR program must serve all eligible students at any eligible school in the state in which the agency serves as the designated guarantor, such a program may be provided to students attending schools in states other than the one in which the agency serves as the designated guaranty agency.
Section 428(j) of the HEA requires the guaranty agency, or a lender or lenders under an agreement with the guaranty agency, to serve as a lender of last resort for an eligible borrower who is otherwise unable to obtain a FFEL loan. A guaranty agency is required to consider any request from an eligible FFEL lender that wishes to serve in an LLR capacity.
The HEA specifies that a guaranty agency must establish rules and operating procedures for its LLR program. These rules and operating procedures must include -
Guaranty Agency Submission of Updated LLR Program Policies and Procedures
The Department has a responsibility to ensure guaranty agencies have up to date, compliant LLR plans to meet their statutory obligations in the unlikely event they are needed. As a result, we are requesting that each guaranty agency provide the Department an updated and complete statement of its policies and procedures governing its LLR program, within 30 days of the date of this letter.
The agency’s LLR rules and operating procedures must, at a minimum, address the following:
Any agreement between a guaranty agency and a lender for LLR loan purposes must clearly state the scope and time frame of the lender’s LLR commitment. Additionally, it must require the lender to notify the guaranty agency of its intent to terminate the LLR agreement at least 60 days prior to the effective date of the termination, and to fully disburse any loan first disbursed prior to that effective date.
If a guaranty agency identifies one or more lenders to make LLR loans in its program, it must explain the standards it used to select the LLR lenders and outline the steps it will take to ensure that the lender is prepared to continue making LLR loans under the agency’s program. As part of its review process, the guaranty agency must examine the lender’s financial and administrative capability to serve as an LLR lender.
2. LLR Scope of Coverage
A guaranty agency’s updated LLR rules and operating procedures must identify the types of loans that will be made available to eligible borrowers either by the guaranty agency or by the LLR lender(s). The plan must explicitly state whether, in addition to Stafford Loans made to students eligible for interest subsidy, other unsubsidized Federal Stafford and Federal PLUS loans will be made under the guaranty agency’s LLR program.
As part of its updated LLR rules and operating procedures, a guaranty agency must provide, and keep the Department updated, with:
Reporting of LLR Program Implementation
Prior to the issuance of LLR loans by either the guaranty agency or an LLR lender, the agency must inform the Department of the following:
Note this information is in addition to regular reporting by a guaranty agency to the Department, including its reporting of loans to the Department’s National Student Loan Data System (NSLDS).
As noted above, within 30 days of the date of this letter, each guaranty agency must submit to the Department, a copy of its complete, updated policies and procedures governing the agency’s LLR program accompanied by a transmittal letter signed by the CEO of the guaranty agency.
These materials should be sent to the Department either as a PDF attachment emailed to Rosemary.Beavers@ed.gov or mailed or delivered to the address below:
Federal Student Aid
830 First Street, NE, Room 111I4
Washington, DC 20202 (if using USPS) or 20002 (if using a commercial carrier)
Within 30 days of receipt of the policies and procedures, the Department will notify each guaranty agency of approval or whether modifications are needed. The Department also intends to closely monitor guaranty agency implementation of these policies and procedures.
Federal Advances for Guaranty-Agency Originated LLR Loans
Within the context of the LLR program, questions have been raised regarding the Secretary’s authority to advance capital funding. The Department is currently reviewing the specific criteria set forth in the statute and is examining the circumstances under which Federal advances could be provided to a guaranty agency. Should the need arise additional information and guidance will be issued by the Department. However, the use of any advance funding is separate from the statutory requirement that a guaranty agency have updated LLR rules and operating procedures in place. The Department’s main focus at this time is to ensure program consistency.
We are, of course, committed to an open dialogue with the guaranty agency community on the issues related to the lender of last resort provisions. I wish to thank FFEL lenders, guaranty agencies, and schools for their efforts to ensure that eligible borrowers have access to Federal student loans to pursue their educational goals.
If you have any questions on the information provided in this letter, you may contact Jeff Baker of my staff at Jeff.Baker@ed.gov.
Lawrence A. Warder
Acting Chief Operating Officer
Federal Student Aid
Publication Date: 4/14/2008