PASFAA 2010 What Schools Need To Know About Private Education

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PASFAA 2010
What Schools Need to Know About
Private Education Loans
1
Overview
• On August 14, 2008 the Higher Education Opportunity Act
(HEOA) was enacted. Title X of the HEOA (“Private Student
Loan Transparency and Improvement Act of 2008”) amended
the Truth in Lending Act (TILA) to require new private
education loan disclosures.
• HEOA details may be found in Dear Colleague Letter GEN-08-12.
*Financial aid administrators are strongly encouraged to
discuss TILA and Regulation Z with their institutional legal
counsel to determine applicability and to ensure compliance.*
2
Federal Reserve System Final Rule
• Truth in Lending Final Rule was published on August 14, 2009
(Federal Register Volume 74, No. 156), with a mandatory
compliance date of February 14, 2010.
• Subpart F of Reg Z (“Special Rules for Private Education
Loans”) includes the detailed requirements for the new
private education loan disclosures.
• Highlights:
 3 separate disclosure requirements (application &
solicitation, approval, and final)
 A 30 calendar day approval/acceptance period
 A 3 business day right to cancel
 Self certification form
3
Private Loan Disclosures Enforcement Authority
• U.S. Department of Education regulates
institutions
• 34 CFR Part 601, effective 7/1/10. See October
28, 2009 Federal Register Volume 74, No. 207 for
Final Rule details on Part 601.
• Federal Reserve Board regulates lenders
• 12 CFR Part 226.
4
Notes regarding topics NOT to be covered today
• Preferred Lender List and Code of Conduct requirements were
covered during the Spring 2010 PASFAA Conference and the
requirements may be found at 34 CFR Part 601. A
presentation, which covered these two topics, among other
items, may be accessed at the following Web URL:
http://www.pasfaa.org/docs/training/2010/presentations.html
(Select “Title X Student Loan Transparency and Improvement Act of 2008”
on this Web page)
• The most recent 34 CFR Part 601 may be accessed at
http://gpoaccess.gov/ecfr/ and browsing for Title 34, and
finally by selecting Parts 600-699 (Office of Postsecondary
Education, Department of Education).
5
Definition - Private Education Loan
12 CFR 226.46(b)(5)
A private education loan means an extension of credit that:
• Is not made, insured, or guaranteed under Title IV of the Higher Education
Act of 1965;
• Is extended to a consumer expressly, in whole or in part, for
postsecondary educational expenses, regardless of whether the loan is
provided by the educational institution that the student attends;
• Does not include open-end credit or any loan that is secured by real
property or a dwelling; and
• Does not include an extension of credit in which the covered educational
institution is the creditor if:
• The term of the extension of credit is 90 days or less; or
• an interest rate will not be applied to the credit balance and the term
of the extension of credit is one year or less, even if the credit is
payable in more than four installments.
6
Self-Certification
• The HEOA created a new private education
loan self-certification requirement:
– Lender requirements
– Institutional requirements
7
Self Certification: Lender Requirement
Before a lender may consummate a private education
loan intended to be used for the postsecondary
educational expenses of a student while the student is
attending an institution of higher education, the lender
must obtain a completed and signed self certification
form from the applicant.
Note: if a consumer has private education loans with
two different lenders, two self certification forms must
be completed (one for each lender).
8
Self Certification: Lender Requirement (cont’d)
Reg Z provides flexibility as to how the selfcertification form may be provided to the lender:
1) Lender may receive the form directly from
consumer
2) Lender may receive the form from the consumer
through the higher education institution
3) Lender may provide the form with the
information the consumer must use to complete
the form, directly to the consumer to sign and
date and return (but creditors must obtain the
information from the institution)
9
Self Certification: Institutional Requirements
• Under section 487(a)(28) – added through the HEOA – an
institution participating in Title IV programs must
provide, at the request of an enrolled or admitted
applicant for a private education loan, the selfcertification form required under section 128(e)(3) of the
TILA. An institution must provide to the applicant:
– The form
– The information required to complete the form, to
the extent the institution possess such information
(see Dear Colleague Letter GEN-10-01)
10
Self Certification Form: Content
• Student’s Cost of Attendance (COA) for the
period of enrollment covered by the loan
• Any Estimated Financial Assistance (EFA)
for the period of enrollment covered by the
loan
• The difference between the COA and EFA
11
Self Certification: Other Institutional Disclosures
– Free or lower cost Title IV, state, or school financial
aid may be available
– A private education loan may reduce eligibility for
such aid
– The applicant is encouraged to pursue availability
of such aid with school’s financial aid office
– The applicant should verify any information that
lender supplied for the self-cert form
Note: Schools are NOT required to track the status of
the self-certification form after providing the form to
the applicant or to the private education lender.
12
Creditor Disclosure Requirements
1.
Disclosures with applications: Creditors must provide general information about loan rates,
fees, and terms, including an example of the total cost of a loan based on the maximum
interest rate the creditor can charge. These disclosures must inform a prospective borrower
of, among other things, the potential availability of federal student loans and the interest rates
for those loans, and that additional information about federal loans may be obtained from the
school or the U.S. Department of Education website. The Application & Solicitation Disclosure
(ASD) is meant to be a “shopping around” disclosure.
2.
Disclosures when the loan is approved: When the creditor approves the consumer’s
application for a private education loan, the creditor must give the consumer a set of
transaction-specific disclosures, including information about the rate, fees and other terms of
the loan. The creditor must disclose, for example, estimates of the total repayment amount
based on both the current interest rate and the maximum interest rate that may be charged.
The creditor must also disclose the monthly payment at the maximum rate of interest. The
Approval Disclosure (AD) must offer the consumer 30 days during which the applicant may
accept or decline the offered loan.
3.
Disclosures at consummation : At consummation, the creditor must provide updated
disclosures substantially similar to those provided at approval. The creditor must allow three
business days for the receipt of the Final Disclosure (FD). The consumer’s three-day right to
cancel the transaction must also be disclosed. A creditor may not disburse loan funds until
both the three business day delivery of the disclosure and the three day right to cancel have
passed.
13
Disclosures That May Be Applicable to Schools
There are 2 types of disclosure processes that may be
applicable to schools under TILA & Reg Z:
• The "regular" TILA disclosure -- the one you may have
seen in the past when you bought a vehicle or a
home (12 CFR 226.17 and 226.18); and
• The "Private Education Loan“ disclosures -- the new 3
disclosure scheme (CFR 226.46-48).
14
Truth-in-Lending Act: PEL Exemptions
• Certain exemptions to the private education loan
disclosures are available for credit extended directly
by educational institutions. Specifically:
1) Emergency loans – those with a term of 90 days
or less; AND
2) Tuition payment plans – where there is no
interest charge and the term is 1 year or less.
Note: These exemptions do not apply to credit
extended by institution-affiliated organizations.
15
Emergency Loans Provided By Schools
Some schools offer loans to student with terms of 90
days or less to assist the student in paying for
educational expenses, usually while the student waits
for other funds to be disbursed. Such loans are not
considered private education loans, even if interest is
charged on the credit balance.
Note: The school must be the creditor for this exception
to apply.
16
Billing Plans Provided By Schools
Some schools offer billing plans that permit a consumer
to make payments in installments. Such plans are not
considered private education loans if:
1) An interest rate will not be applied to the credit
balance; AND
2) The term of the credit extension is one year or
less, even if the plan is payable in more than 4
installments.
Note: The school must be the creditor in order for this
exception to apply.
17
Institutional Exclusions
• Exclusions applicable to credit extended by educational
institutions are exclusions only from the new private
education loan rules, not from all of Regulation Z.
• As a result, disclosures under TILA may still be required (e.g.,
disclosures required under 12 CFR 226.17 and 226.18).
*Financial aid administrators are strongly encouraged to
discuss TILA and Regulation Z with their institutional legal
counsel to determine applicability and to ensure compliance.*
18
Is Your School a Creditor?
Creditor – a person
• who regularly (more than 25 times during the
preceding calendar year, or more than 5 times
for transactions secured by a dwelling)
extends consumer credit that is subject to
finance charge or payable in more than 4
installments; AND
• to whom the obligation is initially payable
19
Truth-in-Lending Act:
Disclosure Analysis – Threshold Questions
1) Is the “loan” covered by TILA?
• Is it a right to incur debt and defer its payment? AND
• Are you a creditor? Do you make more than 25 loans
per year that are either subject to finance charge or
payable in more than 4 installments?
If “NO” to either, the arrangement is not covered by
TILA and no disclosure is required.
If “YES” to both, it is covered by TILA and some
disclosure is required.
20
Truth-in-Lending Act:
Disclosure Analysis -Threshold Questions (cont’d)
2) Are the private education loan disclosures required?
• Is the term 90 days or less?
• Is the term 1 year or less with no interest charge?
If “YES” to either, the private education loan
disclosures are not required, but closed-end
disclosures may be required (12 CFR 226.17 and
226.18).
If “NO” to both, the private education loan disclosures
(the 3 disclosure regime) are required.
21
Can a school be a creditor and not make private
education loans?
• Yes. If a school makes more than 25 loans or
more than 5 loans secured by a dwelling, it may
be a creditor as defined by TILA.
• However, if the credit is not a “private education
loan” as defined, the new 3 disclosure process
would not be needed.
• However, such a school would need to provide
disclosures pursuant to Regulation Z closed-end
disclosure rules (12 CFR 226.17 and 226.18).
22
Example 1
During 2010, Example University makes 19 education loans to
students and 7 mortgage loans to faculty members.
Question: Is Example University a creditor subject to
Regulation Z?
1. Yes, Example University is a creditor under Regulation Z.
2. Example University meets the creditor test because (i) it
extended credit 26 times in total AND (ii) because it
extended consumer credit more than 5 times for
transactions secured by a dwelling.
Note: If the loans to students meet the definition of private
education loan, the University must comply with the 3 disclosure
scheme for the private education loans(ASD, AD & FD) as well as
collect the borrower self-certification).
23
Example 2
Example University makes 26 education loans
between January 1, 2009 and December 31,
2009.
Question: Will Example University be a creditor
for 2010?
Yes, if the requisite number is met in the
preceding year, then the person is a creditor for
all transactions in the current year.
24
Example 3
Question: Is a $500, 60-day, no interest single
payment loan to purchase books subject to the
new 3 disclosure regime? What if interest is
assessed?
No, because the term is less than 90 days. An
interest charge in this scenario would not
matter, as the term of the loan is controlling.
25
Example 4
Example University makes a $500, 60-day, no interest single payment loan
with an up-front fee of $25 to purchase books.
Questions:
Is this a credit extension subject to Regulation Z? Yes, the up-front fee is a
finance charge, so this is a Regulation Z transaction.
Is this a private education loan? No, this is not a private education loan
because the term is less than 90 days.
Does this loan count towards the “more than 25 times” extension of credit
rule to qualify Example University as a creditor under Regulation Z? Yes, this
transaction counts towards the more than 25 extensions of credit rule.
Is this loan subject to the private education loan 3 disclosure regime? No,
Example University is not required to follow the new private education loan 3
disclosure regime for this transaction because the term is 90 days or less.
However, if Example University is a creditor under Regulation Z it would be
required to issue disclosures under Regulation Z closed-end disclosure rules.
26
Example 5
Question: Tuition is due September 1st. If tuition is not paid by this date, a 2%
penalty will be charged on the outstanding balance each month that it
remains unpaid. Are any TILA disclosures required?
No, the arrangement does not fall under TILA:
• No right to defer payment
• A penalty is not interest or a finance charge
• This would not be an extension of credit and none of the TILA disclosures
would need to be given
• It is recommended that penalty/terms related to tuition payments be
clearly and prominently disclosed to the student
27
Example 6
Question: Is a single payment, interest-free loan of $600
loan for a term of less than one year made solely to cover
education expenses a private education loan subject to the
new 3 disclosure regime? What if this loan is payable in
more than 4 installments?
Answer: No, this loan is not subject to the 3 disclosure
regime (because it has no interest charged, and a term of
less than one year). However, it is a consumer credit
transaction subject to Regulation Z closed-end disclosure
rules.
28
Example 7
Example: University makes a $7500 loan for tuition with an APR of 6.5%, an
up-front fee of 5%, which is repayable in monthly installments (after
graduation) for a term of 60 months (5 years).
Questions: Is this a credit extension subject to regulation under Regulation Z?
Is this a private education loan? Does this loan count towards the “more than
25 times” rule? Is this loan subject to the new 3 disclosure regime?
Yes, this is a Regulation Z extension of credit. This is indeed a private
education loan subject to the 3 disclosure regime, as well as a loan that
counts towards the “more than 25 times” qualification for Example University
to be a creditor under Regulation Z.
29
Example 8
Question: Is a $1000 loan at a annual rate of
interest of 6.75%, made for a term of one year
payable in 12 installments, and made solely to
cover education expenses a private education
loan?
Yes, because interest is assessed.
30
Questions for Schools to Keep in Mind
Is the school a creditor? Is the transaction a
private education loan?
As a general rule, if the school is a creditor and the
loan is not excluded or exempt from being a
private education loan, the school must provide the
3 new disclosures and collect the self certification
form for that loan.
31
Additional Notes
• The elimination of private education loan prepayment
penalties became effective on 8/14/08 with the passage of
the HEOA.
• The Dodd-Frank Wall Street Reform & Consumer Protection
Act of 2010, signed into law on 7/21/10, creates a Private
Loan Ombudsman and the Consumer Financial Protection
Bureau (CFPB) that will help borrowers resolve problems with
private education loans. The Secretary of Treasury will
disseminate information about the availability and functions
of the Ombudsman to borrowers and potential borrowers, as
well as institutions of higher education, lenders, guaranty
agencies, loan servicers, and other participants in private
education student loan programs.
32
Additional Notes, Continued
• Some schools may have institutional
scholarships that convert to loans in certain
cases (e.g., GPA not met). These types of loans
are NOT extensions of credit. Therefore, these
types of scholarships would not require any
Reg Z disclosures if the funds do in fact
convert to a loan.
• Title IV loans remain exempt from Regulation
Z disclosures.
33
Additional Notes, Continued
• AES Loan Notes, published on a regular basis, has covered some
topics with regards to private education loans (see
November/December 2009 and March/April 2010 editions)
• To locate the Loan Notes documents, you may navigate to our
web site manually by typing www.aesSuccess.org into your web
browser's address window and following the steps below:
• From the AES home page (www.aesSuccess.org), along the left
hand side click on "Financial Aid Products and Support for
Schools";
• Next, select “Additional School Services”;
• Next, under Additional School Services, select “Materials &
Publications";
• Finally, at the top of the screen click "Loan Notes".
34
Equal Credit Opportunity Act (Reg B)
Adverse Action
• If a creditor refuses to extend credit to an
applicant who has applied for credit, an
adverse action notice is required that provides
information regarding the reasons for the
denial of the application.
• Creditors who deny applicants should seek
competent legal counsel for information on
how to comply with ECOA Reg B.
35
Risk-Based Pricing Notices
• The Fair Credit Reporting Act (FCRA) has a new section –
Section 615(h) – that requires that a risk-based pricing notice
must be provided to consumers when the creditor grants
credit on less favorable terms than the majority of applicants,
based in whole or in part on a consumer credit report.
• Rule is effective January 1, 2011.
• Final Rules on risk-based pricing notices may be reviewed in
Federal Register Vol. 75, No. 10, dated Friday, January 15,
2010.
• Creditors who grant credit based on the results of consumer
credit reports should seek competent legal counsel for
information on how to comply with risk-based pricing notice
rules.
36
Private Education Loan Inquiries
• Questions regarding private education loans
may be submitted to:
 [email protected]
• Please list “private education loan” in the
subject line of the email.
37
Disclaimer
The information provided in this presentation
may not be applicable to all situations due to
its generality and should not be acted upon
without specific advice from legal counsel.
38
Thank you!!
For additional information regarding the
information presented today, please contact
John Middendorf, AES/PHEAA Compliance
Services at:
• 717.720.2171
• [email protected]
39
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