CUNA Comment Letter
Proposed Rule on Regulation Z Disclosures for Private Student Loans
May 26, 2009
Ms. Jennifer J. Johnson
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
|RE:||Docket No. R-1353 Proposed Rule on Regulation Z Disclosures for Private Student Loans|
Dear Ms. Johnson:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Federal Reserve Board’s (Board’s) proposed rule that will revise the Regulation Z disclosure requirements for private student loans. For these types of loans, the proposal will impose additional disclosure requirements, limit the co-branding of loan products with educational institutions in the marketing of private student loans, require creditors to obtain a self-certification form signed by the consumer before consummating the loan, and require creditors that have preferred lender arrangements with educational institutions to provide certain information to those institutions. By way of background, CUNA is the largest credit union advocacy organization in this country, representing approximately 90% of our nation’s 8,000 state and federal credit unions, which serve 92 million members.
Summary of CUNA’s Comments
- CUNA is concerned that this rule will cover loans that are only tangentially related to student lending and suggest the scope of the rule be restricted to only those that are considered traditional student loans. This would include loans that are used to pay for specific education-related expenses in which payments are not due until the student’s attendance is completed, or shortly thereafter.
- Under the proposal, the final disclosures are provided after the consumer accepts the loan and at least three business days prior to the disbursement of funds. We request that the Board provide more guidance as to what constitutes acceptance of the loan.
- The consumer’s right to cancel the loan should be no longer than three days and lenders should be able to set a reasonable time period on the third day, such as no earlier than 5 PM.
- CUNA strongly supports the provisions that exempt credit unions that use the name of an educational institution from the requirement to provide additional disclosures to indicate the institution does not endorse the credit union and that the credit union is not affiliated with the institution.
- Credit unions and other lenders should not be required to comply with this rule until at least one year after it is issued in final form in order to allow sufficient time to develop the disclosures, implement the necessary data processing changes, and provide staff training.
The Proposal is Overly Broad
CUNA is concerned with the extent that this proposal will impact credit union lending operations as it has the potential to affect a significant portion of the loans that credit unions make, including those that may only have a tangential relationship to student lending. We are specifically concerned about this in connection with the new, substantive disclosures that would now be required, in addition to the Regulation Z disclosures that are currently required for these types of loans. These include additional disclosures that would be required at the time of application, at the time the loan is approved, and when the loan is consummated, much of which are duplicative of each other. The consumer must also complete and sign a self-certification form, which includes information about the availability of federal student loans, the cost of attendance, the amount of financial aid, and the amount that may be borrowed to cover the remaining expenses.
As noted above, these new requirements have the potential to apply to a significant number of credit union loans. Under the proposal, a private education loan is a loan that is extended in whole or in part, for postsecondary educational expenses, although this definition excludes open-end loans or loans secured by real property or a home, as well as loans that are not made, insured, or guaranteed under the Higher Education Act of 1965. The term postsecondary educational expenses is also defined very broadly under the proposal to include nearly all costs associated with attending an educational institution, such as tuition, fees, books, supplies, room and board, as well as miscellaneous personal expenses.
CUNA is concerned that a significant portion of consumer loans will be covered under these very broad definitions of the terms private education loan and postsecondary educational expenses, with the result being that these loans will be subject to the substantial, additional disclosure requirements that are outlined in this proposal. For example, a consumer may apply for vehicle title loan and indicate that a portion of the proceeds may be used to purchase a computer that will be used for college and for other personal purposes.
In fact, we can envision a number of scenarios in which an individual may apply for a general consumer loan and indicate that a portion of the proceeds may be used for a personal expense that is in some manner related to his or her attendance at an educational institution. Although the official staff commentary indicates that these types of multi-purpose loans are excluded from the new application disclosure requirements, creditors will still be required to provide the new, required disclosures when the loan is approved and when the loan is consummated.
Not only will this proposal result in significant disclosure requirements for a wide variety of general consumer loans, we are also concerned that certain credit unions may not be aware that they may have to comply with this proposal. A vast majority of credit unions do not market themselves as providing private student loans. However, all credit unions make consumer loans and those that do not market themselves as providing private student loans may very well make general consumer loans that will in some way be used for college expenses.
Credit unions that do not view themselves as private student lenders may not be aware that they may have to comply with these new rules. When they realize they do have to comply, they may then reject future consumer loan applications whenever a member indicates that some portion may be used for educational expenses, at least until these credit unions have developed or obtained the necessary disclosure forms and provided the necessary staff training, all of which will take a significant amount of time. Curtailing lending for this period of time will be unfortunate for both credit unions and their members, especially in the current economic environment in which credit has been severely constricted, including student loans. Credit unions have been relatively successful in continuing to lend in the current environment, but we are concerned that the proposal has the potential to impede this type of lending and may adversely affect those who may need to make certain education-related purchases.
To alleviate these potential problems, we suggest the term private education loan be restricted so it only applies to those loans that have the common characteristics of a traditional student loan. In our view, this would only include loans in which the entire amount is used for expenses such as tuition, fees, room and board, and books that are structured so that payments are not due until the student’s attendance is completed, or shortly thereafter. This rule should not apply to any other type of consumer loan in which regular payments are due each month shortly after the loan is made, regardless of whether any portion of the loan is used for education-related expenses.
As mentioned above, we do not believe restricting the rule in this manner will adversely impact consumers. For loans that would not be covered under this rule, consumers will still receive the significant Regulation Z disclosures that are currently required for consumer loans. We believe the current disclosures provide more than adequate information about the cost and terms of these loans. In addition, targeting this rule to traditional student loans will also alleviate our concern that the current proposal may impact credit unions and other financial institutions that do not market or view themselves as private student lenders, but instead make general consumer loans in which a portion may be used for education-related expenses.
We recognize that the proposal does attempt to alleviate the compliance burdens by exempting lenders that do not meet the Regulation Z definition of creditor. Under this exemption, those that extend credit 25 or fewer times over the course of a year would not be covered under this rule. Although we appreciate the effort to alleviate burdens, this exemption will affect few, if any, credit unions since making loans is an integral part of their operations.
Under the proposal, the final disclosures are provided after the consumer accepts the loan and at least three business days prior to the disbursement of funds. We request that the Board provide more guidance as to what constitutes acceptance of the loan.
Right to Cancel the Loan
The proposal will require that the final disclosures be provided to the consumer after he or she accepts the loan and at least three business days prior to the disbursement of the funds. This provides borrowers with a three-day right to cancel the loan.
We believe this right to cancel the loan should be no longer than three days, and we also request that the Board allow lenders to set a reasonable time limit on the third business day in which the consumer must cancel, such as a time no earlier than 5 PM. This will allow lenders a reasonable opportunity to update their records so as not to disburse the funds, as opposed to a later midnight deadline, and this should not disadvantage consumers to any great extent.
The proposal will prohibit a creditor from using in its marketing materials an educational institution’s name, logo, mascot, or other words or symbols readily identified with the educational institution to imply that the institution endorses the loans offered by the creditor. Marketing that refers to an educational institution would not be deemed to imply endorsement if the marketing clearly and conspicuously discloses that the institution does not endorse the creditor’s loans and that the creditor is not affiliated with the institution.
However, under the proposal, simply using the name of the institution would not imply an endorsement, which includes those credit unions that use the name of an educational institution. These credit unions would, therefore, not be required to provide the additional disclosure that the institution does not endorse the credit union and that the credit union is not affiliated with the institution.
CUNA strongly supports this clarification to these marketing restrictions. We also appreciate that the Board has included specific recognition in the proposal that a number of credit unions incorporate the names of colleges and universities as a means to indicate that they serve students, faculty, and others who are connected with these institutions and that they should not be covered under the new marketing restrictions.
The Board indicates that the final rule will be effective no later than February 14, 2010, as required under the Higher Education Opportunity Act that was enacted last year. We request that compliance with this rule not be mandatory until at least one year after the final rule is effective, even though this will be after February 14, 2010. The Board has on numerous occasions set a mandatory compliance date that is at least one year after the final rule is issued, and we believe this is warranted for this rule as well. This extended time period will be necessary in order to allow credit unions and others sufficient time to prepare the appropriate disclosures, provide appropriate staff training, and implement the necessary data processing changes.
Thank you for the opportunity to comment on the proposal with regard to the Regulation Z disclosure requirements for private student loans. If you have questions about our comments, please contact Senior Vice President and Deputy General Counsel Mary Dunn or me at (202) 638-5777.
Jeffrey P. Bloch
Senior Assistant General Counsel