42 U.S.C. § 292f — Default of borrower

Page 995 TITLE 42—THE PUBLIC HEALTH AND WELFARE § 292f (July 1, 1944, ch. 373, title VII, § 706, as added Pub. L. 102–408, title I, § 102, Oct. 13, 1992, 106 Stat. 2000; amended Pub. L. 105–392, title I, § 145, Nov. 13, 1998, 112 Stat. 3581.) Editorial Notes PRIOR PROVISIONS A prior section 292e, act July 1, 1944, ch. 373, title VII, § 705, as added Oct. 12, 1976, Pub. L. 94–484, title II, § 204, 90 Stat. 2248; amended Nov. 9, 1978, Pub. L. 95–623, § 11(f), 92 Stat. 3456; Aug. 13, 1981, Pub. L. 97–35, title XXVII, § 2718, 95 Stat. 914, related to establishment and mainte- nance of records and annual financial reports and au- dits, prior to the general revision of this subchapter by Pub. L. 102–408. Another prior section 292e, act July 1, 1944, ch. 373, title VII, § 706, as added July 30, 1956, 779, § 2, 70 Stat. 719; amended Oct. 5, 1961, Pub. L. 87–395, § 8(c), (d), 75 Stat. 827; Sept. 24, 1963, Pub. L. 88–129, § 2(a), 77 Stat. 164; Aug. 16, 1968, Pub. L. 90–490, title IV, § 402, 82 Stat. 789; Nov. 18, 1971, Pub. L. 92–157, title I, § 102(k)(2)(A), (B), 85 Stat. 437, limited amount of grant available for construction of health research facilities, including provisions relating to its maximum, reservation of amount, manner of payment, and exclusion of amounts granted by certain other funds, prior to repeal by Pub. L. 94–484, title II, § 201(a), Oct. 12, 1976, 90 Stat. 2246. A prior section 706 of act July 1, 1944, was classified to section 292f of this title prior to the general revision of this subchapter by Pub. L. 102–408. Another prior section 706 of act July 1, 1944, was clas- sified to section 230 of this title prior to repeal by act Apr. 27, 1956, ch. 211, § 5(e), 70 Stat. 117. AMENDMENTS 1998—Subsec. (d). Pub. L. 105–392, § 145(1), in heading, substituted ‘‘refinancing or consolidation’’ for ‘‘con- solidation’’ and, in first sentence, substituted ‘‘indebt- edness or the refinancing of a single loan’’ for ‘‘indebt- edness’’. Subsec. (e). Pub. L. 105–392, § 145(2), in heading, sub- stituted ‘‘debts and refinancing’’ for ‘‘debts’’, in first sentence, substituted ‘‘all of the borrower’s loans in- sured under this subpart into a single instrument (or, if the borrower obtained only 1 loan insured under this subpart, refinancing the loan 1 time)’’ for ‘‘all of the borrower’s debts into a single instrument’’, and in sec- ond sentence, substituted ‘‘consolidation or refi- nancing’’ for ‘‘consolidation’’. § 292f. Default of borrower (a) Conditions for payment to beneficiary (1) In general Upon default by the borrower on any loan covered by Federal loan insurance pursuant to this subpart, and after a substantial collection effort (including, subject to subsection (h), commencement and prosecution of an action) as determined under regulations of the Sec- retary, the insurance beneficiary shall promptly notify the Secretary and the Sec- retary shall, if requested (at that time or after further collection efforts) by the beneficiary, or may on his own motion, if the insurance is still in effect, pay to the beneficiary the amount of the loss sustained by the insured upon that loan as soon as that amount has been determined, except that, if the insurance beneficiary including any servicer of the loan is not designated for ‘‘exceptional perform- ance’’, as set forth in paragraph (2), the Sec- retary shall pay to the beneficiary a sum equal to 98 percent of the amount of the loss sustained by the insured upon that loan. (2) Exceptional performance (A) Authority Where the Secretary determines that an eligible lender, holder, or servicer has a com- pliance performance rating that equals or exceeds 97 percent, the Secretary shall des- ignate that eligible lender, holder, or servicer, as the case may be, for exceptional performance. (B) Compliance performance rating For purposes of subparagraph (A), a com- pliance performance rating is determined with respect to compliance with due dili- gence in the disbursement, servicing, and collection of loans under this subpart for each year for which the determination is made. Such rating shall be equal to the per- centage of all due diligence requirements ap- plicable to each loan, on average, as estab- lished by the Secretary, with respect to loans serviced during the period by the eligi- ble lender, holder, or servicer. (C) Annual audits for lenders, holders, and servicers Each eligible lender, holder, or servicer de- siring a designation under subparagraph (A) shall have an annual financial and compli- ance audit conducted with respect to the loan portfolio of such eligible lender, holder, or servicer, by a qualified independent orga- nization from a list of qualified organiza- tions identified by the Secretary and in ac- cordance with standards established by the Secretary. The standards shall measure the lender’s, holder’s, or servicer’s compliance with due diligence standards and shall in- clude a defined statistical sampling tech- nique designed to measure the performance rating of the eligible lender, holder, or servicer for the purpose of this section. Each eligible lender, holder, or servicer shall sub- mit the audit required by this section to the Secretary. (D) Secretary’s determinations The Secretary shall make the determina- tion under subparagraph (A) based upon the audits submitted under this paragraph and any information in the possession of the Secretary or submitted by any other agency or office of the Federal Government. (E) Quarterly compliance audit To maintain its status as an exceptional performer, the lender, holder, or servicer shall undergo a quarterly compliance audit at the end of each quarter (other than the quarter in which status as an exceptional performer is established through a financial and compliance audit, as described in sub- paragraph (C)), and submit the results of such audit to the Secretary. The compliance audit shall review compliance with due dili- gence requirements for the period beginning on the day after the ending date of the pre- vious audit, in accordance with standards determined by the Secretary. (F) Revocation authority The Secretary shall revoke the designa- tion of a lender, holder, or servicer under Page 996 TITLE 42—THE PUBLIC HEALTH AND WELFARE § 292f subparagraph (A) if any quarterly audit re- quired under subparagraph (E) is not re- ceived by the Secretary by the date estab- lished by the Secretary or if the audit indi- cates the lender, holder, or servicer has failed to meet the standards for designation as an exceptional performer under subpara- graph (A). A lender, holder, or servicer re- ceiving a compliance audit not meeting the standard for designation as an exceptional performer may reapply for designation under subparagraph (A) at any time. (G) Documentation Nothing in this section shall restrict or limit the authority of the Secretary to re- quire the submission of claims documenta- tion evidencing servicing performed on loans, except that the Secretary may not re- quire exceptional performers to submit greater documentation than that required for lenders, holders, and servicers not des- ignated under subparagraph (A). (H) Cost of audits Each eligible lender, holder, or servicer shall pay for all the costs associated with the audits required under this section. (I) Additional revocation authority Notwithstanding any other provision of this section, a designation under subpara- graph (A) may be revoked at any time by the Secretary if the Secretary determines that the eligible lender, holder, or servicer has failed to maintain an overall level of compli- ance consistent with the audit submitted by the eligible lender, holder, or servicer under this paragraph or if the Secretary asserts that the lender, holder, or servicer may have engaged in fraud in securing designation under subparagraph (A) or is failing to serv- ice loans in accordance with program re- quirements. (J) Noncompliance A lender, holder, or servicer designated under subparagraph (A) that fails to service loans or otherwise comply with applicable program regulations shall be considered in violation of the Federal False Claims Act. (b) Subrogation Upon payment by the Secretary of the amount of the loss pursuant to subsection (a), the United States shall be subrogated for all of the rights of the holder of the obligation upon the insured loan and shall be entitled to an assignment of the note or other evidence of the insured loan by the insurance beneficiary. If the net recovery made by the Secretary on a loan after deduction of the cost of that recovery (including reason- able administrative costs) exceeds the amount of the loss, the excess shall be paid over to the insured. The Secretary may sell without re- course to eligible lenders (or other entities that the Secretary determines are capable of dealing in such loans) notes or other evidence of loans received through assignment under the first sen- tence. (c) Forbearance Nothing in this section or in this subpart shall be construed to preclude any forbearance for the benefit of the borrower which may be agreed upon by the parties to the insured loan and ap- proved by the Secretary or to preclude forbear- ance by the Secretary in the enforcement of the insured obligation after payment on that insur- ance. (d) Reasonable care and diligence regarding loans Nothing in this section or in this subpart shall be construed to excuse the eligible lender or holder of a federally insured loan from exer- cising reasonable care and diligence in the mak- ing of loans under the provisions of this subpart and from exercising a substantial effort in the collection of loans under the provisions of this subpart. If the Secretary, after reasonable no- tice and opportunity for hearing to an eligible lender, finds that the lender has failed to exer- cise such care and diligence, to exercise such substantial efforts, to make the reports and statements required under section 292e(a)(3) of this title, or to pay the required Federal loan in- surance premiums, he shall disqualify that lend- er from obtaining further Federal insurance on loans granted pursuant to this subpart until he is satisfied that its failure has ceased and finds that there is reasonable assurance that the lend- er will in the future exercise necessary care and diligence, exercise substantial effort, or comply with such requirements, as the case may be. (e) Definitions For purposes of this section: (1) The term ‘‘insurance beneficiary’’ means the insured or its authorized assignee in ac- cordance with section 292e(c) of this title. (2) The term ‘‘amount of the loss’’ means, with respect to a loan, unpaid balance of the principal amount and interest on such loan, less the amount of any judgment collected pursuant to default proceedings commenced by the eligible lender or holder involved. (3) The term ‘‘default’’ includes only such defaults as have existed for 120 days. (4) The term ‘‘servicer’’ means any agency acting on behalf of the insurance beneficiary. (f) Reductions in Federal reimbursements or payments for defaulting borrowers The Secretary shall, after notice and oppor- tunity for a hearing, cause to be reduced Federal reimbursements or payments for health services under any Federal law to borrowers who are practicing their professions and have defaulted on their loans insured under this subpart in amounts up to the remaining balance of such loans. Procedures for reduction of payments under the medicare program are provided under section 1395ccc of this title. Notwithstanding such section 1395ccc of this title, any funds re- covered under this subsection shall be deposited in the insurance fund established under section 292i of this title. (g) Conditions for discharge of debt in bank- ruptcy Notwithstanding any other provision of Fed- eral or State law, a debt that is a loan insured under the authority of this subpart may be re- leased by a discharge in bankruptcy under any chapter of title 11, only if such discharge is granted— Page 997 TITLE 42—THE PUBLIC HEALTH AND WELFARE § 292f (1) after the expiration of the seven-year pe- riod beginning on the first date when repay- ment of such loan is required, exclusive of any period after such date in which the obligation to pay installments on the loan is suspended; (2) upon a finding by the Bankruptcy Court that the nondischarge of such debt would be unconscionable; and (3) upon the condition that the Secretary shall not have waived the Secretary’s rights to apply subsection (f) to the borrower and the discharged debt. (h) Requirement regarding actions for default (1) In general With respect to the default by a borrower on any loan covered by Federal loan insurance under this subpart, the Secretary shall, under subsection (a), require an eligible lender or holder to commence and prosecute an action for such default unless— (A) in the determination of the Sec- retary— (i) the eligible lender or holder has made reasonable efforts to serve process on the borrower involved and has been unsuccess- ful with respect to such efforts, or (ii) prosecution of such an action would be fruitless because of the financial or other circumstances of the borrower; (B) for such loans made before November 4, 1988, the loan involved was made in an amount of less than $5,000; or (C) for such loans made after November 4, 1988, the loan involved was made in an amount of less than $2,500. (2) Relationship to claim for payment With respect to an eligible lender or holder that has commenced an action pursuant to subsection (a), the Secretary shall make the payment required in such subsection, or deny the claim for such payment, not later than 60 days after the date on which the Secretary de- termines that the lender or holder has made reasonable efforts to secure a judgment and collect on the judgment entered into pursuant to this subsection. (3) State court judgments With respect to any State court judgment that is obtained by a lender or holder against a borrower for default on a loan insured under this subpart and that is subrogated to the United States under subsection (b), any United States attorney may register such judgment with the Federal courts for enforcement. (i) Inapplicability of Federal and State statute of limitations on actions for loan collection Notwithstanding any other provision of Fed- eral or State law, there shall be no limitation on the period within which suit may be filed, a judgment may be enforced, or an offset, garnish- ment, or other action may be initiated or taken by the Secretary, the Attorney General, or other administrative head of another Federal agency, as the case may be, for the repayment of the amount due from a borrower on a loan made under this subpart that has been assigned to the Secretary under subsection (b). (j) School collection assistance An institution or postgraduate training pro- gram attended by a borrower may assist in the collection of any loan of that borrower made under this subpart which becomes delinquent, including providing information concerning the borrower to the Secretary and to past and present lenders and holders of the borrower’s loans, contacting the borrower in order to en- courage repayment, and withholding services in accordance with regulations issued by the Sec- retary under section 292n(a)(7) of this title. The institution or postgraduate training program shall not be subject to section 1692g of title 15 for purposes of carrying out activities author- ized by this section. (July 1, 1944, ch. 373, title VII, § 707, as added Pub. L. 102–408, title I, § 102, Oct. 13, 1992, 106 Stat. 2002; amended Pub. L. 103–43, title XX, § 2014(a)(2), June 10, 1993, 107 Stat. 215; Pub. L. 105–392, title I, §§ 142(a), (b), 144(a), Nov. 13, 1998, 112 Stat. 3579, 3581.) Editorial Notes REFERENCES IN TEXT The Federal False Claims Act, referred to in subsec. (a)(2)(J), probably means the False Claims Act which was the popular name for sections 231, 232, 233, and 235 of former Title 31, Money and Finance. Sections 231, 232, 233, and 235 were repealed by Pub. L. 97–258, § 5(b), Sept. 13, 1982, 96 Stat. 1084, and reenacted by the first section thereof as sections 3729 to 3731 of Title 31, Money and Finance. PRIOR PROVISIONS A prior section 292f, act July 1, 1944, ch. 373, title VII, § 706, as added Oct. 12, 1976, Pub. L. 94–484, title II, § 204, 90 Stat. 2249, authorized contracts under this sub- chapter without regard to certain provisions, prior to the general revision of this subchapter by Pub. L. 102–408. Another prior section 292f, act July 1, 1944, ch. 373, title VII, § 707, as added July 30, 1956, ch. 779, § 2, 70 Stat. 720; amended Oct. 5, 1961, Pub. L. 87–395, § 8(d), 75 Stat. 827; Sept. 24, 1963, Pub. L. 88–129, § 2(a), 77 Stat. 164; Nov. 18, 1971, Pub. L. 92–157, title I, § 102(k)(2)(A), 85 Stat. 437, provided for recapture of payments relating to grants for construction of health research facilities, prior to repeal by Pub. L. 94–484, title II, § 201(a), Oct. 12, 1976, 90 Stat. 2246. A prior section 707 of act July 1, 1944, was classified to section 292g of this title prior to the general revision of this subchapter by Pub. L. 102–408. AMENDMENTS 1998—Subsec. (a). Pub. L. 105–392, § 142(a), designated existing provisions as par. (1), inserted heading, sub- stituted ‘‘determined, except that, if the insurance ben- eficiary including any servicer of the loan is not des- ignated for ‘exceptional performance’, as set forth in paragraph (2), the Secretary shall pay to the bene- ficiary a sum equal to 98 percent of the amount of the loss sustained by the insured upon that loan.’’ for ‘‘de- termined.’’, struck out at end ‘‘Not later than one year after October 13, 1992, the Secretary shall establish per- formance standards for lenders and holders of loans under this subpart, including fees to be imposed for failing to meet such standards.’’, and added par. (2). Subsec. (e)(4). Pub. L. 105–392, § 142(b), added par. (4). Subsec. (g). Pub. L. 105–392, § 144(a), substituted ‘‘Not- withstanding any other provision of Federal or State law, a debt that is a loan insured’’ for ‘‘A debt which is a loan insured’’ in introductory provisions. 1993—Subsec. (g)(1). Pub. L. 103–43, § 2014(a)(2)(A), amended par. (1) generally. Prior to amendment, par. Page 998 TITLE 42—THE PUBLIC HEALTH AND WELFARE § 292g (1) read as follows: ‘‘after the expiration of the five- year period beginning on the first date, as specified in subparagraphs (B) and (C) of section 292d(a)(2) of this title, when repayment of such loan is required;’’. Subsec. (j). Pub. L. 103–43, § 2014(a)(2)(B), added sub- sec. (j). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1998 AMENDMENT Pub. L. 105–392, title I, § 142(c), Nov. 13, 1998, 112 Stat. 3581, provided that: ‘‘The amendments made by sub- sections (a) and (b) [amending this section] shall apply with respect to loans submitted to the Secretary for payment on or after the first day of the sixth month that begins after the date of enactment of this Act [Nov. 13, 1998].’’ Pub. L. 105–392, title I, § 144(b), Nov. 13, 1998, 112 Stat. 3581, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to any loan insured under the authority of subpart I of part A of title VII of the Public Health Service Act (42 U.S.C. 292 et seq.) that is listed or scheduled by the debtor in a case under title XI, United States Code [Title 11, Bankruptcy], filed— ‘‘(1) on or after the date of enactment of this Act [Nov. 13, 1998]; or ‘‘(2) prior to such date of enactment in which a dis- charge has not been granted.’’ § 292g. Risk-based premiums (a) Authority With respect to a loan made under this sub- part on or after January 1, 1993, the Secretary, in accordance with subsection (b), shall assess a risk-based premium on an eligible borrower and, if required under this section, an eligible insti- tution that is based on the default rate of the el- igible institution involved (as defined in section 292o of this title). (b) Assessment of premium Except as provided in subsection (d)(2), the risk-based premium to be assessed under sub- section (a) shall be as follows: (1) Low-risk rate With respect to an eligible borrower seeking to obtain a loan for attendance at an eligible institution that has a default rate of not to ex- ceed five percent, such borrower shall be as- sessed a risk-based premium in an amount equal to 6 percent of the principal amount of the loan. (2) Medium-risk rate (A) In general With respect to an eligible borrower seek- ing to obtain a loan for attendance at an eli- gible institution that has a default rate of in excess of five percent but not to exceed 10 percent— (i) such borrower shall be assessed a risk- based premium in an amount equal to 8 percent of the principal amount of the loan; and (ii) such institution shall be assessed a risk-based premium in an amount equal to 5 percent of the principal amount of the loan. (B) Default management plan An institution of the type described in sub- paragraph (A) shall prepare and submit to the Secretary for approval, an annual de- fault management plan, that shall specify the detailed short-term and long-term proce- dures that such institution will have in place to minimize defaults on loans to bor- rowers under this subpart. Under such plan the institution shall, among other measures, provide an exit interview to all borrowers that includes information concerning repay- ment schedules, loan deferments, forbear- ance, and the consequences of default. (3) High-risk rate (A) In general With respect to an eligible borrower seek- ing to obtain a loan for attendance at an eli- gible institution that has a default rate of in excess of 10 percent but not to exceed 20 per- cent— (i) such borrower shall be assessed a risk- based premium in an amount equal to 8 percent of the principal amount of the loan; and (ii) such institution shall be assessed a risk-based premium in an amount equal to 10 percent of the principal amount of the loan. (B) Default management plan An institution of the type described in sub- paragraph (A) shall prepare and submit to the Secretary for approval a plan that meets the requirements of paragraph (2)(B). (4) Ineligibility An individual shall not be eligible to obtain a loan under this subpart for attendance at an institution that has a default rate in excess of 20 percent. (c) Reduction of risk-based premium Lenders shall reduce by 50 percent the risk- based premium to eligible borrowers if a credit worthy parent or other responsible party co- signs the loan note. (d) Administrative waivers (1) Hearing The Secretary shall afford an institution not less than one hearing, and may consider miti- gating circumstances, prior to making such institution ineligible for participation in the program under this subpart. (2) Exceptions In carrying out this section with respect to an institution, the Secretary may grant an in- stitution a waiver of requirements of para- graphs (2) through (4) of subsection (b) if the Secretary determines that the default rate for such institution is not an accurate indicator because the volume of the loans under this subpart made by such institution has been in- sufficient. (3) Transition for certain institutions During the 3-year period beginning on Octo- ber 13, 1992— (A) subsection (b)(4) shall not apply with respect to any eligible institution that is a Historically Black College or University; and (B) any such institution that has a default rate in excess of 20 percent, and any eligible