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JUL 30 1993
TO: Schools, Lenders, and Holders participating in the Health Education Assistance Loan (HEAL) Program
SUBJECT: HEAL-to-HEAL Consolidation
Lender Policy Memorandum #93-14
School Policy Memorandum #39
Purpose
This memorandum addresses implementation of the HEAL loan consolidation statutory provision, as amended by the Health Professions Education Extension Amendments of 1992 (Public Law 102-408). The HEAL-to-HEAL loan consolidation authority enables borrowers and lenders, by mutual agreement, to consolidate all of the borrower's HEAL loans into a single instrument under the terms applicable to a HEAL loan made at the same time as the consolidation. The purpose of HEAL-to-HEAL consolidation is to assist the borrower in the repayment of these loans.
Borrowers may also consolidate HEAL loans with Title IV loans under section 428C of the Higher Education Act of 1965, as amended. If Title IV loans are involved, the HEAL loans will be paid off and all administration of the reissued loans will be the responsibility of the Department of Education (ED). Accordingly, questions regarding consolidation of HEAL loans with Title IV loans should be directed to ED.
Definitions
For purposes of this memorandum, "holder" refers to the entity that owns the loan prior to consolidation. "Consolidation Lender" refers to the entity that will hold the loan after consolidation.
Benefits of HEAL-to-HEAL Consolidation
HEAL-to-HEAL consolidation offers HEAL borrowers the following benefits:
1. The consolidated loan
is serviced by a single lender.
2. A single monthly payment can be made.
3. A consolidated HEAL loan is a new loan, containing the same statutory terms
that are applicable to a regular HEAL loan made at the same time. For example,
if a borrower previously had HEAL loans with different deferment provisions,
the consolidated loan will provide uniform terms based on current statutory
provisions. These terms and conditions become effective for the borrower as
of the date that the consolidation loan is made. Similarly, the lifetime of
the consolidated loan is based on the date the new loan is made, rather than
on the dates of the original HEAL loans.
Eligible Lenders
To offer HEAL-to-HEAL loan consolidation, an institution must be an approved HEAL lender or secondary market. An institution need not be a prior HEAL lender, but must meet all criteria and operating procedures to be a HEAL lender in order to be a HEAL consolidation lender. Any current HEAL lender or secondary market must notify the HEAL Branch in writing prior to initiating a HEAL loan consolidation program. Institutions eligible to initiate HEAL-to-HEAL consolidated loans include the following: (1) a current HEAL lender; (2) a financial or credit institution (including a bank, savings and loan association, credit union, or insurance company; (3) a pension fund approved by the Secretary; (4) a single state agency of a State or a single nonprofit private agency designated by a State and approved by the Secretary; (5) public entities in the business of purchasing student loans; and (6) the Student Loan Marketing Association.
A separate lender loan consolidation identification number (LID) will not be assigned to a current lender. However, any new institution approved as a HEAL consolidation lender will receive a lender identification number.
Eligible Borrowers
Any HEAL borrower with two or more HEAL loans is eligible to request loan consolidation, regardless of the total amount of the HEAL debt. This includes borrowers who have previously applied for and received Combined Payment Plans (CPP), as authorized by the Higher Education Act of 1965, as amended (even if as a result of the CPP option, the borrower has only one combined payment promissory note) . This also includes borrowers who are delinquent or in default on the repayment of one or more of their HEAL loans, provided that they can find a lender who is willing to consolidate the loans. However, in cases of delinquency or default, the borrower must pay to the current holder any late fees or collection costs that may be owed on the HEAL loan(s); these fees cannot be made a part of the consolidated loan.
Borrower Selection of Lender
A borrower may choose any authorized HEAL loan consolidation lender that agrees to consolidate his or her loans. The borrower does not have to consolidate HEAL loans with the lender that holds his/her Title IV loans, nor is the consolidation lender required to be currently holding any of the borrower's HEAL loans.
If one lender will not consolidate, then the borrower may go to another HEAL consolidation lender. However, a borrower may not apply to more than one lender at a time, and may only apply to a second lender if the application to the first lender has been denied or withdrawn.
The Department will periodically issue lists of authorized consolidation lenders to participating schools, lenders, and holders.
Time Frame for Loan Consolidation
Consolidation of HEAL loans shall only take place after graduation or other separation from a HEAL school. All of the borrower's HEAL loans must be consolidated at the same time into a single consolidation loan. Loan consolidation must be mutually agreed upon by the borrower and the lender.
Consolidation Loan Application
Borrowers must complete a loan consolidation application to receive a HEAL consolidated loan. Consolidation lenders may require borrowers to complete the standard HEAL application, or may develop their own consolidation application. If the lender uses the standard HEAL application, the lender must instruct the borrower to leave the school portion blank and indicate in item #17: (1) That the borrower is requesting HEAL-to-HEAL consolidation; and (2) the borrower's graduation date, date he/she became less than a full-time student, or date he/she terminated studies at a HEAL school. The lender may also omit the use of items #34 through #37 of the HEAL application. If a lender develops its own application, the application must at a minimum include the information requested on the HEAL application for the student and lender (excluding those items listed above) and include the Equal Credit Opportunity Act Notice, Privacy Act Notification Statement, Financial Privacy Act, Warning Statement, Fraud Statement, Borrower's rights and responsibilities, and Lender certification of compliance with all HEAL statutes, regulations and contracts. The new consolidation application must be submitted to the HEAL Branch for approval.
Lenders are to include with the loan application a "permission" certificate signed by the borrower that authorizes the consolidating lender to obtain loan information from the current holder(s) of the borrower's loans. The certificate will also include a certification by the borrower that no consolidation loan application is pending with another HEAL lender. A sample certificate is enclosed for your consideration.
Verification that all HEAL loans are included
Under HEAL-to-HEAL consolidation, the borrower is required to include in the consolidated loan all existing HEAL loans. To assure that the borrower does not inadvertently exclude any loans on the consolidation application, the consolidating lender must confirm with the HEAL Branch, before processing the consolidated loan, that the borrower has listed all his or her HEAL loans on the loan consolidation application. This confirmation must be done in writing (by mail or by fax) or by tape-to-tape transmission. Lenders are to provide the HEAL Branch with name and social security number (SSN) of the borrower; the HEAL Branch will then provide all loan data. The lender must certify to the HEAL Branch that they have the appropriate authority from the borrowers to acquire this information. The HEAL Branch will make every effort to respond to these requests within 10 days of receipt.
HEAL-to-HEAL Consolidated Loan Promissory Note
For HEAL-to-HEAL consolidated loans, the new loan must be documented by a single new HEAL consolidation loan promissory note, which (1) identifies the terms and provisions of the consolidation loan, (2) contains the borrower's name and social security number; and (3) lists all HEAL loans that are being consolidated into the note by name and address of holder, the original principal amount of each loan, and current loan amount. The current balance of the consolidated HEAL loan must be accurate, except for variations that may result from fluctuations in the HEAL interest rate. The final total amount of the consolidated loan reflected on the promissory note may not vary from the consolidated loan amount on the disclosure statement by more than $2,000 or 5 percent, whichever is lower. Should a variance occur over $2,000 or 5 percent, a new promissory note must be developed and signed by the borrower before the consolidation can be consummated.
A copy of the HEAL consolidation promissory note to be used for consolidated loans is provided with this policy memorandum. If a lender develops its own promissory note, the promissory note must at a minimum include all the documentation on the new HEAL consolidation loan promissory note, and must be submitted to the HEAL Branch for approval.
Consolidating lenders will not be required to obtain copies of the original promissory notes or HEAL applications of the old HEAL loans being consolidated. The holder prior to consolidation is required to retain information on the old HEAL loans a minimum of 5 years as required by Section 60.42(a)(3) of the HEAL regulations.
All consolidating lenders must use a disclosure statement in compliance with Regulation Z that indicates that the consolidating lender is paying to the holder(s), on the borrower's behalf, all outstanding principal and interest for HEAL loans held by the holder(s). A copy of this disclosure statement must be sent to the borrower.
Terms of HEAL-to-HEAL Consolidated Loans
All terms, conditions, and responsibilities associated with a new HEAL loan apply to a HEAL-to-HEAL consolidated loan. The consolidated loan should be treated like a new HEAL loan. The new terms and conditions of the promissory note will apply. A borrower's eligibility for forbearance and deferment will be renewed if the borrower meets applicable regulatory requirements. Interest will accrue at a rate that does not exceed the maximum allowed by law (currently the average of the bond equivalent rates reported for the 91-day Treasury bills auctioned for the preceding calendar quarter plus 3 percent, rounding that amount to the next higher one-eighth of 1 percent, and may be compounded no more frequently than allowed by law (currently annually).
Credit Worthiness
The HEAL regulatory requirements regarding the determination of credit worthiness are not applicable to consolidated HEAL loans, since these loans have already been insured and determination of credit worthiness was made when the original HEAL loans were insured.
Other Consolidated Lender Responsibilities
A HEAL-to-HEAL consolidated loan will be guaranteed under the HEAL program with no additional premium payment. A loan is consolidated by paying, on the borrower's behalf, the proceeds (outstanding principal and accrued interest), and issuing a new promissory note. The borrower may not be charged an insurance premium or fee on a consolidated loan. The multiple disbursement requirements do not apply to consolidated loans.
It is a consolidating lender's responsibility to provide information to the borrower concerning the advantages and disadvantages of loan consolidation. This information, at a minimum, must address forbearance and deferment issues, different graduated repayment plans offered by HEAL lenders (including income contingent repayment plans based on debt-to-income ratios), sample loan interest rates and compounding frequencies, and other new loan provisions versus prior HEAL loan provisions.
Each lender is to provide the HEAL Branch with copies of this "standardized" borrower information for approval prior to implementing the loan consolidation provisions.
Payoff Procedures
Once a holder is contacted by a HEAL consolidating lender, on the borrower's behalf as evidenced by proof of application or verification certificate (enclosed), concerning the payoff amount of the borrower's HEAL loans, the holder must provide the information within 10 days of receipt of the document requesting loan verification and payoff amounts. The payoff amounts should be given for whatever period of time (e.g., 45, 60, or 90 days hence) requested. The holder is to cease requesting regularly scheduled payments from the borrower after the date the payoff amount is received.
If the payoff amount represents an overpayment, the holder must refund the difference to the consolidation lender, who must credit it as a prepayment toward the consolidated HEAL loan. If the payoff amount represents an underpayment, the consolidating lender may either include this amount as part of the consolidation loan or request that the borrower pay this amount to the previous holder.
Records
The consolidating lender must maintain all records on consolidated loans as required by section 60.42 of the HEAL regulations, as if they were newly initiated HEAL loans. This will be the documentation necessary for filing a claim should the borrower default, go into bankruptcy, die or become totally or permanently disabled.
Reporting to the HEAL Branch
All reporting requirements of the HEAL program apply to HEAL consolidating loans, with the exception of reporting applications and disbursement data. These were reported on the original loans. HEAL consolidating lenders are required to notify the HEAL Branch via the HEAL Loan Transfer Statement (HRSA Form 507) within 30 days of the consolidation transaction. If the consolidating lender is the sole holder of all the borrower's HEAL loans, a loan transfer statement reflecting the loan consolidation transaction must be submitted to the HEAL Branch. Separate loan transfer statements, identified by pre-consolidation holder and borrower, must be completed if loans from multiple holders (including the consolidation lender) were consolidated.
Actual Implementation of HEAL-to-HEAL Loan Consolidation
Although this policy memorandum establishes guidance for implementing the HEAL-to-HEAL loan consolidation authority, it is expected that consolidation lenders will need additional time to develop the systems necessary to operate HEAL-to-HEAL consolidation. Accordingly, borrowers may find that this option will not be available to them until early in calendar year 1994. Schools are encouraged to check with the HEAL lenders they deal with to determine when HEAL-to-HEAL consolidation will actually be available.
Questions regarding operational aspects concerning HEAL consolidated loans should be directed to the HEAL Branch on (301) 443-1540.
Sincerely,
Michael Heningburg
Director
Division of Student Assistance
Promissory Note
Permission Certificate
Verification Certificate
ENCLOSURE I
NOTICE:
PROMISSORY NOTE-CONSOLIDATION LOAN (HRSA-500-3):
The attached form is in the process of being printed by the HEAL program. This form may be ordered by lenders around the end of September 1993. At that time you may order this form by contacting the HEAL Branch at (301) 443-443-1540.
