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January 25, 2010 -- On August 14, 2009, the Federal Reserve Board issued Final Regulations that will affect schools that offer institutional loans (including some emergency loans) or have any students that utilize private education loans. The rules are effective September 30, 2009, but compliance with the rules is optional until February 14, 2010.
Title X, entitled the “Private Student Loan Transparency and Improvement Act of 2008, of the Higher Education Opportunity Act of 2008 (HEOA), enacted on August 14, 2008, amended the Truth in Lending Act (TILA), by adding disclosure and timing requirements that apply to creditors, including educational institutions that make private education loans. The HEOA also amends TILA by adding limitations on certain practices by creditors, including limitations on co-branding their products with educational institutions in the marketing of private education loans.
The HEOA requires that creditors obtain a self-certification form signed by the consumer before consummating the loan. The form is completed using information provided by the student's institution to the student or lender. The amended TILA also requires creditors with preferred lender arrangements with educational institutions to provide certain information to those institutions.
The final regulations apply to “creditors” that make “private education loans,” which are defined as extension of credits that are not made under Title IV of the HEA but are “extended to a consumer expressly, in whole or part, for postsecondary educational expenses,” but excluding open-end credit, real estate-secured loans, and Federal loans made under Title IV of the Higher Education Act of 1965. The Federal Reserve Board chose to use Regulation Z’s existing definition of “creditor” found in 12 C.F.R. 226.2(a)(17), which means a person or entity that regularly extends consumer credit. These terms apply to an educational institution that meets the definition of higher education without regard to the institution’s accreditation status. Therefore, the new requirements will apply to educational institutions, with two exceptions: (1) unless the term of the credit extension is 90 days or less or (2) no interest is charged and the term of the transaction is one year or less. If educational institutions use tuition payment plans that would fall under one of the exemptions, the tuition payment plans would still be subject to general consumer loan disclosure requirements if (1) the educational institution extended credit more than 25 times in the preceding year and charged interest or (2) does not charge interest, but the plan is payable in 4 or more installments.
The HEOA adds a number of new disclosures for private education loans, which must be given at different times in the loan origination process: (1) application or solicitation; (2) approval; and prior to disbursement. Specifically, the HEOA’s amendments to TILA require the following disclosures for private education loans:
A. Application or Solicitation Disclosures (12 C.F.R. 226.47(a))
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The interest rate or the range of rates that will actually be offered; whether the interest rate will depend on a later determination of the consumer’s credit worthiness or other factors; whether the interest rate is fixed or variable; whether the interest rate will be higher if it is not cosigned; and whether the interest rate will depend on co-signer credit or school type, etc.;
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The fees and default or late payment costs;
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Repayment terms, including the maximum period of time during which regularly scheduled payments of principal and interest will be due; options that may be available to defer payment, such as when the student is currently enrolled in a covered educational institution or whether there are no deferment options; and a statement must be provided saying that if the borrower files for bankruptcy that he may still be required to pay back the loan;
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An estimate of the total cost of the loan by determining all finance charges that would be applicable to all loans with the highest rate of interest;
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A description of alternatives to private education loans including the terms of federal student loans, such as the interest rates available under each program under Title IV of the HEA and whether the rates are fixed or variable.
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A statement that if the extension of credit is approved, the terms of the loan will not change for 30 calendar days; and
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A statement that before the credit can be extended the borrower must complete a self-certification form.
B. Approval Disclosures (12 C.F.R. 47(b))
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The applicable interest rate, and whether it is fixed or variable;
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Fees and default or late payment costs;
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Repayment terms, including the term of the loan, a description of any payment deferral options, the same disclosure on bankruptcy as in the initial disclosure, and an estimate of the total amount of payments based on the interest rate applicable to the loan;
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Alternatives to private education loans, including the same disclosures found in the initial disclosure; and
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A statement that the consumer has the right to accept the terms of the loan within 30 days after receipt of the approval disclosures and a statement that the rates and terms of the loan may not change with certain exceptions.
C. Final Disclosures
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The disclosures are the same as the approval disclosures, except that the statement about alternatives to private education loans is not required;
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The creditor is required to provide a statement that the applicant may cancel the loan, without penalty until midnight on the third business day (3 day right to cancel) following the date the applicant receives the final disclosures;
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A statement that includes the specific date the cancellation expires and specifies how the applicant can cancel the extension of credit;
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If the applicant cancels by mail, it is timely if placed in the mail no later than the cancellation date specified in the final disclosure;
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The cancellation right must be more conspicuous than any other disclosure except for the finance charge, the interest rate and the creditor’s identity; and
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The final disclosure must state that loan proceeds will not be disbursed until the cancellation period expires.
Other Provisions:
A. Borrower Self-Certification
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A model form is being developed by the Department of Education;
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The form must include: the availability of federal student loans; the applicant’s cost of attendance (COA), the applicant’s estimated financial assistance (EFA); and the difference between the COA and EFA; and the applicant’s signature.
B. Co-Branding: Use by a creditor of a covered institution’s name, logo, mascot, or other words or symbols readily identified with the institution endorses the loans offered by the creditor is prohibited.
C. Private Right of Action: The HEOA amended the TILA to provide a private right of action for several (not all) of the disclosure requirements added by the HEOA (HEOA, Section 1021(a))
The HEOA also amends TILA’s statute of limitations for civil liability regarding private education loans. Currently, TILA section 130(e) requires that an action be brought within one year of the date of the occurrence of the violation. Under the HEOA amendment, an action for a violation involving a private education loan must be brought within one year from the date on which the first regular payment of principal is due for the private education loan.
The HEOA provides a safe harbor for any creditor that uses a model form promulgated by the Federal Reserve Board that accurately reflects the terms of the creditor’s loans. (Section 1021(a) of the HEOA.) Model forms are included in the final rule as amendments to Regulation Z’s Appendix H.
http://www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm
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