CUNA Regulatory Comment Call
April 1, 2009
Proposed Regulation Z Disclosures for Private Student Loans
- The Federal Reserve Board (Fed) has issued a proposed rule to amend Regulation Z, the Truth in Lending Act, to incorporate provisions of the Higher Education Opportunity Act (HEOA) that were enacted last year. Provisions of the HEOA amend Regulation Z by including disclosure and other requirements for lenders offering private student loans that are made expressly for post-secondary educational expenses. This will exclude open-end credit; real estate-secured loans; and loans made, insured, or guaranteed by the federal government under the Higher Education Act of 1965.
- This proposal also implements provisions of the HEOA that limit certain practices by creditors. This includes limitations on co-branding loan products with educational institutions in the marketing of private student loans. However, this will not impact credit unions that share their name with colleges or universities.
- The proposal will also require creditors to obtain a self-certification form signed by the consumer before consummating the loan and requires creditors with preferred lender arrangements with educational institutions to provide certain information to those institutions.
- The Fed will provide model forms for the required disclosures.
- Comments in response to this proposal are due by May 26, 2009. The Fed will then review the comments and finalize the rule, which will become effective no later than February 14, 2010.
Please submit your comments to CUNA by May 15, 2009. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org or to Senior Assistant General Counsel Jeff Bloch at email@example.com or mail them to Mary or Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. If commenting directly to the Fed, you must refer to Docket No. R-1353. You may also contact us if you would like a copy of the proposal or you may access it here.
TILA is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires lenders to disclose the cost of credit as a dollar amount, and as an APR in a uniform manner. This uniformity is intended to assist consumers in comparison-shopping for credit. Regulation Z implements TILA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions.
The HEOA was enacted in 2008 and includes provisions that amend TILA. These provisions add disclosure requirements and prohibit certain practices with regard to private student loans, which are loans made expressly for postsecondary educational purposes, but exclude open-end credit, real estate-secured loans, and federal student loans under the Higher Education Act of 1965.
Consumer loans in excess of $25,000 are generally excluded from the TILA requirements, with the exception of real-estate secured loans. The HEOA amends TILA to also include private student loans even if they exceed the $25,000 threshold.
DESCRIPTION OF THE PROPOSED RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY
The proposed rule imposes the following substantive restrictions and disclosure requirements with regard to private student loans:
The HEOA prohibits a creditor from using in its marketing materials an educational institutions 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 creditors loans and that the creditor is not affiliated with the institution. The proposal includes model language that may be used in making this disclosure.
However, simply using the name of the institution would not imply an endorsement, such as those credit unions that use the name of the 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.
There will also be exceptions for preferred lender arrangements with educational institutions in which the institution promotes the student loans offered by a creditor. However, the creditor must disclose that the loan is being made by the creditor, not the educational institution, and the rule includes model language for making this disclosure. Creditors under these arrangements will also be required to provide loan information to the institution on an annual basis, and the Fed will provide a model form that may be used to satisfy these reporting requirements.
Creditors must give consumers 30 days after a private education loan application is approved to decide whether to accept the loan. The 30-day period begins three business days after the approval is mailed by the creditor or after the consumer receives the approval if it is not mailed. The only terms that may change during this time are the rate, if it is based on an index, and terms that are beneficial and requested by the consumer. For changes requested by the consumers, new disclosures and a new 30-day acceptance period would have to be provided. Information about this process and how to accept the loan must be provided in the new disclosures, as described below. Acceptance may be made electronically, but that cannot be the only choice offered by the creditor.
The HEOA requires the following new disclosures for private student loans, which are in addition to the current required disclosures, and the Fed will provide model forms that may be used to satisfy these requirements:
Disclosures at the time of application/solicitation These must provide the interest rate, which includes whether it is variable and how it is determined, along with the minimum and maximum starting rate and that this will depend on creditworthiness but that there may be legal limits. Other information in the disclosure includes certain fees and other terms, including an example of the total cost of the loan based on the maximum interest rate the creditor can charge. The proposal provides requirements and guidance on how to disclose this example.
In addition, the disclosure would have to state whether a co-signer is required and whether the rate will be higher if there is no co-signer. Information about the option to defer payments must also be disclosed, including the extent that interest would still accrue and, if so, whether it can be added to the principal.
Information must also be provided about the availability of federal student loans, and the rates on these loans, and must indicate that more information may be obtained from the school or the Department of Education (DOE) website. This information about federal loans does not have to be provided for consolidation loans. The creditor would also need to state that the educational institution may have other loan alternatives.
The required disclosures may be provided electronically with the electronic application and solicitation without having to obtain the consumers consent, which would otherwise be required under the Electronic Signatures in Global and National Commerce Act (E-Sign Act). However, the disclosures would have to either automatically appear when the application or solicitation reply form appears; located on the same web page as the reply form, as long as there is a clear reference to those disclosures; or posted on the website with the reply form being linked to the disclosures, which cannot be bypassed.
For telephone applications or solicitations, the required disclosures would need to be provided orally or mailed to the consumer within three business days. If mailed, the creditor may provide the approval disclosures, instead of the application disclosures, if the loan is approved at that time.
Disclosures when the loan is approved When the application is approved, the creditor must give the consumer new disclosures that outline the amount of the loan, the interest rate, the term of the loan, deferral options, fees, penalties, and other payment terms, similar to the application/solicitation disclosures. This must include an estimate of the total repayment and interest, based on both the current and maximum interest rate. The monthly payment that would apply at the maximum rate would also be disclosed. An estimate may be used if there is no specific maximum interest rate.
In addition, there must be a disclosure that student loans are not dischargeable in bankruptcy. The disclosures regarding loan alternatives that are provided in the application/solicitation disclosures would also be included in these approval disclosures.
In general, the approval disclosures need to be mailed to the consumer. If approval is communicated by telephone, the disclosure would need to be mailed within three business days. The disclosures may be provided electronically if the consumer consents to receiving them in this form, as outlined under the E-Sign Act.
Final disclosures when the loan is consummated These will be substantially similar to the loan approval disclosures and must be provided at least three business days before funds are disbursed, during which time the consumer can rescind the loan. This three-day right to cancel before the loan is disbursed must also be disclosed, along with the method in which consumers may cancel the loan. Although an electronic means to cancel may be provided, it cannot be the only alternative. Information about student loan alternatives does not have to be included in these final disclosures.
Other disclosure requirements - As part of this overall disclosure process, the consumer must 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 can be borrowed to cover the difference. This requirement will not apply to consolidation loans. The institution will make this form available to the consumer, and the creditor may obtain the completed and signed form from either the consumer or the institution. The form may be received in an electronic format. DOE and the Fed will develop this new form.
In general, if there are multiple creditors, only one needs to provide the disclosures. If there are multiple borrowers, the disclosures only need to be provided to one of the borrowers.
QUESTIONS TO CONSIDER REGARDING THE REGULATION Z PROPOSAL ON PRIVATE STUDENT LOANS
(The Fed has specifically requested comment on the issues
raised in these questions.)
- Do you have any suggested changes to the model forms (click here
and scroll towards the end to view them), especially with how prominent the interest rate and APR are displayed?
Should more detailed information be included?
- Should these disclosure requirements apply to loans that may be used for multiple purposes, in addition to student
expenses? Should the self-certification requirement apply to these multiple purpose loans? Should the self certification
be obtained from parents, in addition to students?
- Do you have any suggestions regarding the timing and delivery requirements for these new disclosures, including
telephone applications, mailing requirements, and electronic notifications?
- Will six months after the final rule is issued be an adequate period of time to comply with these new requirements?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com