Loan Origination

  • What date should the school or lender report as the “signature date” for a Master Promissory Note? Is the date different if it is an e-signed note versus a paper copy, or “wet” signature?
    The lender or school must record and report the actual date on which the borrower signed (endorsed) the note, regardless of the format the borrower used to sign the note. This date is critical for determining the validity of an MPN. If a loan disbursement is not made on a loan related to that MPN within 12 months of the signature date, for example, then the MPN becomes invalid.
    Lenders and schools must do the following to ensure that the proper signature date is reported:
    • Record the actual date that the note is signed.
    • Report this date when requested in data-reporting protocols.
    • Compare the disbursement date of the first disbursement made on the MPN to the signature date to ensure that the note is valid for the loan being made.
  • Will the change from variable to fixed interest rates for Stafford and PLUS loans affect only new loans? Could borrowers potentially have both variable- and fixed-interest-rate loans?
    Public Law 107-139 mandates fixed interest rates only for those Stafford and PLUS loans first disbursed on or after July 1, 2006. Federal Stafford and Federal PLUS loans that are first disbursed prior to July 1, 2006, will continue to accrue interest at a variable rate. 

    As a result, borrowers with loans first disbursed prior to July 1, 2006, as well as loans that are first disbursed on or after July 1, 2006, will have loans that accrue interest at different rates — some calculated at variable rates, and some calculated at the fixed rates.

    Public Law 107-139 set a fixed interest rate of 6.8 percent for Stafford loans first disbursed on or after July 1, 2006. The federal Deficit Reduction Act of 2005 set a fixed rate of 8.5 percent for PLUS loans first disbursed on or after that date.

  • The Common Manual states that if a lender intends to pay origination fees on behalf of some borrowers, the lender may not pay those fees or reduce the fees for individual borrowers or even for borrowers at selected schools. The Common Manual outlines exceptions in subsection 3.5.A, for individual Stafford borrowers who demonstrate financial need. Otherwise, lenders are required to reduce the fee or pay the fee for all borrowers who reside in a particular state or who attend school in that state.

    Are there similar requirements relating to the federal default fee if the lender wants to reduce or pay in full the fee on behalf of the borrower? 
    Common Manual provisions relate solely to requirements for lenders charging origination fees and are drawn directly from FFELP regulations [34 CFR 682.202(c)(4)]. There are no equivalent federal or common-policy provisions related to a lender's choice to pay the federal default fee on behalf of Federal Stafford-loan and Federal PLUS-loan borrowers. Education lenders may establish their own parameters and policies for paying the federal default fee for borrowers based on criteria specific to their loan portfolios.

    USA Funds' policy department cautions that there may be other, non-FFELP rules that can affect this practice. Lenders should consult their legal counsel to ensure that they follow all applicable rules and regulations.

  • A two-year community college processed a loan for a student with a loan period of August 2002 to May 2003. The borrower then transferred to a four-year college. Can the Stafford Master Promissory Note on record at the two-year community college (and with the same lender) be used to disburse the loans at the four-year school as serial loans? We know that since March 2003, community colleges can use the serial, or multi-year, feature of the MPN, but we are not certain whether our school's policies related to the MPN have any effect on what a subsequent school might be required to do.
    The lender and the new school may use the existing MPN as a serial or multi-year note, regardless of the policies of the school from which the MPN originated. The new school decides whether to support the new loan using the same MPN or to require the borrower to complete a new MPN.

  • If a loan is processed after the half-way point of a semester, can the funds be sent in one disbursement as opposed to two?
    If the loan is processed on or after the date on which a subsequent disbursement could be made, then both the initial and subsequent disbursement made be made together. See Common Manual subsection 6.4.B.

  • A student is registered for fall semester. He takes out a full-year loan, then takes a leave of absence on December 1, after receiving the fall-semester disbursement. On December 1, the student already has pre-registered for the spring semester and wants to keep the loan. Since the student already is pre-registered for the following semester, does the second disbursement need to be cancelled, or can the loan be left as is? 
    The loan can be left as is. If, however, the leave of absence exceeds the length of the loan period certified on the application, then the leave of absence should not be granted.

  • Does USA Funds require the cancellation of the multi-year function of a Master Promissory Note if the borrower files bankruptcy?
    USA Funds' current policy regarding the filing of bankruptcy between the disbursements of a loan has not changed. USA Funds continues to require lenders to cancel future disbursements if the lender receives notification that the borrower has filed a claim-eligible bankruptcy prior to all disbursements of a loan being made. The guidance is provided in Appendix C of the Common Manual.

    USA Funds believes that it is in the best interests of the Federal Family Education Loan Program to establish a clear separation between loans included in the bankruptcy action and loans obtained after the bankruptcy action. This separation is best achieved by canceling any future disbursements and requiring borrowers to obtain new loans with school certification after borrowers have filed a claim-eligible bankruptcy.

    USA Funds does not require the lender to invalidate the multi-year function of an MPN merely because the borrower filed a claim-eligible bankruptcy. The lender may use the MPN for serial loans, ensuring all requirements for future loans are met. </ul