Lender of Last Resort Explained

With some lenders having announced temporary suspension or permanent termination of loan originations under the Federal Family Education Loan Program, concerns about potential loan access problems have brought attention to a rarely used authority in the Higher Education Act dealing with lender of last resort. The following questions and answers explain lender of last resort.

What is the authority for lender of last resort and what is its purpose?
Lender of last resort is authorized under section 428(j) of the Higher Education Act of 1965, as amended. The lender of last resort provision is designed to ensure the availability of FFELP loan funds to otherwise eligible students enrolled in an eligible postsecondary institution, when the student is unable to find a lender willing to make a FFELP loan to the student.

How would lender of last resort work?
Under the provisions of the HEA, either the guarantor designated by the U.S. secretary of education for a state or a specified lender would act as lender of last resort, if students in the state are unable to access FFELP funds. The HEA also permits the secretary to specify a guarantor, other than the designated guarantor for a state, to serve as a lender of last resort. 

How would lender of last resort loans be funded?
There are two basic scenarios: In the more likely event of isolated loan access problems involving a small number of students in a state, the specified lenders or guarantor could fund the loans. In the unlikely event of widespread loan access problems, the guarantor would tap funds advanced from the federal Treasury.

How would lender of last resort loans be processed and disbursed?
The loans would be processed and disbursed like any other FFELP loan. The only difference is that lender of last resort loans would have to be “flagged” because they carry 100 percent insurance against default.

Have lender of last resort loans been issued in the past?
Due to the participation of thousands of lenders in the FFELP, there has been little need to use lender of last resort loans. USA Funds^® has guaranteed a small number of these loans in the past.

During the late 1990s an impending change in the interest rate formula prompted concerns about lender participation in the FFELP. As a result, the U.S. Department of Education asked three guarantors, including USA Funds, to be prepared to administer lender of last resort loans using federal funds, based on an agreement developed by the guarantors and the Department. This authority never was used because Congress took action to resolve the interest rate formula issue and ensure continued access to FFELP loans.

Are guarantors ready to process lender of last resort loans?
USA Funds and other guarantors have been working through the National Council of Higher Education Loan Programs on updated lender of last resort processes that more accurately reflect current loan processing scenarios, including Master Promissory Notes and electronic signatures.

For its part, USA Funds has been in discussions with lenders in the states where it serves as the designated guarantor to assess their willingness to participate as lenders of last resort. USA Funds also has identified system changes necessary to originate and guarantee lender of last resort loans and is preparing to make those system changes.

Guarantors are awaiting guidance from the Department of Education before they can finalize their implementation plans for lender of last resort. The Department’s guidance is necessary on critical issues such as the process for guarantors to draw down funds advanced from the Treasury. To ensure a streamlined process, guarantors have urged the Education Department to allow lender of last resort eligibility to be determined by the school rather than by each individual borrower. In addition, they have asked the Department to consider lender of last resort policies that reflect today’s electronic loan processing environment.

The Department of Education is expected to issue guidance to guarantors regarding lender of last resort shortly.