USA Funds Offers Guidance on Identity-Theft-Discharge Claims

Members of the Federal Family Education Loan Program community and the U.S. Department of Education are developing a common form for borrowers to complete and lenders to use in documenting and filing a claim for the new identity-theft loan-discharge claim. While that form is in development, USA Funds^® provides guidance regarding how to file this type of claim, as well as affidavits that lenders may use to obtain the necessary borrower certifications.

To qualify for an identity-theft loan discharge, the borrower must provide evidence of a judicial verdict naming the perpetrator and stating that the FFELP loan was obtained as a result of identity theft. If the judicial verdict does not expressly state that the FFELP loan was obtained as a result of identity theft, the alleged victim also must provide specimens of signatures and statements of the facts that demonstrate that eligibility for the loan was falsely certified as a result of identity theft.

After receiving the required documentation and signed affidavit from the borrower, the lender may file an identity-theft claim with USA Funds. Because the common Claim Form does not yet include a unique identifier for an identity theft claim, the lender may file the claim as a false-certification claim type. (You will need Adobe Acrobat Reader to access the Claim Form on the USA Funds Web site.)

Legal determination required
Federal regulations provide for payment of an identify-theft claim only when a court has made a legal determination on the case. If the borrower does not provide documentation of a court verdict or judgment, the borrower’s loans cannot be discharged on the basis of identity theft. If the borrower continues to challenge the validity of the debt, the lender must be able to prove the enforceability of the loan. In a case in which the lender cannot obtain documentation that the borrower named on the loan was aware of the debt or had use of the loan funds, then the loans on which the borrower is asserting identity theft are not considered enforceable against the borrower named on the note.

USA Funds will work with lenders to attempt to verify whether a borrower ratified the note or had use of the loan funds.

Note regarding unenforceable loans
Loans that are not legally enforceable are not reinsured by the Department of Education and are not insured by USA Funds. Unreinsured loans are not eligible for interest benefits or special-allowance payments, and the lender must refund any such payments received on a loan that is found to be unenforceable. Lenders should consult their own counsel regarding the collection of loans that have lost their insurance due to the unenforceable status of the note based on an assertion of identity theft.

USA Funds reminds lenders that if a loan was made as a result of a crime of identity theft perpetrated by an employee of the lender, or if an employee or agent of the lender knew of the identity theft, the loan is not insured, and the lender is required by regulation to refund to the Department all interest subsidies and special-allowance payments made on that loan.

The Higher Education Reconciliation Act of 2005 provides for this new type of loan discharge for borrowers whose identity was used without their knowledge or consent to obtain loans under the FFELP. The U.S. Department of Education’s Aug. 9, 2006, interim final regulations regarding the HERA provide further guidance regarding this new type of loan discharge.