2007 NCHELP DEBT MANAGEMENT CONFERENCE
Consumer Credit Law
Private Loans vs. FFELP
Dino Tsibouris
dino@tsibouris.com
www.tsibouris.com
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Licensing
• FFELP – must be an eligible lender
• National banks and thrifts don’t need a
license from the state
• Non-bank lenders and purchasers of
loans may need a license to make or
enforce a loan
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Licensing
• A common test: Are you in the
“business of lending?”
– NJ includes companies that purchase
loans from others
– OH includes the original lender only
– MN excludes loans under other state
law
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Licensing
• Physical location concerns
• Limits on assignment
• Specific rates of interest and
permissible fees
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Key Differences
• FFELP Loans: Agreement wording, format
and pricing prescribed by a unique federal
program
• Alternative Loans: Agreement wording,
format and pricing regulated by differing
state laws and federal consumer
protection statutes
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Interest Rate
FFELP Loans:
• Interest rate set by federal law
• Lender can charge same rate in any state
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Charges
FFELP Loans:
• Origination fee permitted
• Guaranty/Insurance fees permitted
• Late charges of permitted
• Attorney fees permitted
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Interest Rates
Alternative Loans:
• Interest rate capped by state law
• Interest rate calculation regulated in some
states
• Federally chartered institutions may
charge uniform interest rates to all
customers
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Charges
Alternative Loans
• Origination fees may be prohibited
• Guaranty fees may be prohibited
• Attorneys fees permitted in some states
• Beware multistate loan agreements - some
impose civil liability for simply including
them in the note
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing
• State licensed lender laws establish
permitted rates and fees
– Interest rates
– Late fees
– Loan origination fees of 1-2%
– Prepayment fees
– Refund of unearned charges
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing
• National Bank Act (12 USC 85)
• A national bank located in a state may
charge interest at the maximum rate
permitted to any state-chartered or
licensed lending institution by the law of
that state
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing
• National Bank Act (12 USC 85) “Interest"
includes any payment compensating a
creditor for:
– An extension of credit
– Making available of a line of credit
– Any default or breach by a borrower
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing
• National Bank Act 12 USC 85
• “Interest" includes, among other things:
– Numerical periodic rates
– Late fees
– Creditor-imposed NSF fees
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing
• National Bank Act 12 USC 85
• “Interest" does not ordinarily include:
– Premiums/commissions for insurance
guaranteeing repayment of any
extension of credit
– Document preparation
– Fees incurred to obtain credit reports
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing – Tied to State Law
• Ohio Revised Code 1109.20
– Interest/finance charges not
exceeding APR of twenty-five per cent
– Also may charge, as interest, other
fees and charges that are agreed
upon by the bank and the borrower
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing – Tied to State Law
• RC 1109.20 “Interest”
– Charges for late payments
– NSF fees
– Application, processing, origination
fees
– Guarantee fees
– Prepayment fees
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing – Tied to State Law
• RC 1109.20 “Interest”
• Any fees and charges shall not be
included in the computation of the
annual percentage rate or the rates of
interest or finance charges for purposes
of applying the twenty-five per cent
limitation
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Pricing – Tied to State Law
• 12 CFR 7.4001 The term “interest” as
used in 12 U.S.C. 85… includes, among
other things,…
• RC 1109.20 A bank may charge… as
interest, other fees and charges that are
agreed upon … including, but not
limited to,…
• Many possibilities; uncertain outcomes
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Important Considerations
• Make sure rates and fees are properly
structured
– Within legal limits
– Business case for each fee
• Challenges to the relationship between
lenders and those who buy their loans
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Documents
Initial Disclosure
FFELP Loans:
• Initial Disclosures Prescribed by 34 CFR
682
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Documents
Alternative Loans:
• Initial disclosures prescribed by the Truthin-Lending Act
• Civil penalties for noncompliance
• State law disclosures governing extension
of credit
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Alternative Loan Disclosures
...More State Law Disclosures
•
•
•
•
Credit grantor disclosures
Cosigner notices
Notices near the signature line
Font size and proximity requirements
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Alternative Loan Disclosures
... And Even More State Law Disclosures
• Annual percentage rate disclosure
requirements
• Administrative interpretations
• Civil penalties for noncompliance
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Collection
FFELP Loans
• Governed by federal regulations which
preempt state debt collection laws
• Lender must send at least one
delinquency letter requesting repayment
• Due diligence required by statute
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Loan Collection
Alternative Loans
• Governed by federal and state debt
collection law
• If lender or servicer is a “debt collector”
communication must notify that purpose
is to collect a debt
• Due diligence limited by law
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Deferment
• FFELP: Borrower entitled to defer
payments in certain instances, as long as
the borrower is not in default
• Alternative Loans: Lender may (or may
not) permit borrower to defer payments
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Bankruptcy Discharge
• FFELP: Bankruptcy Code does not
discharge a student loan unless the
borrower can demonstrate the debt would
create an undue hardship upon the debtor
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Bankruptcy Discharge
• Alternative Loans:
– Pilcher Case: An alternative loan may
also be nondischargeable if the
promotion, marketing and servicing of
the loan is provided by a non-profit
entity who’s participation is
“instrumental” to the availability of the
loans.
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Bankruptcy Discharge
– Hammarstrom Case: A loan is
nondischargeable if non-profit entity
plays a “meaningful part” in providing
funding for the loans.
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Contract Management
• FFELP servicer vendor audit guidelines
• Bank regulatory vendor audit guidelines
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Contract Management
•
•
•
•
•
•
Compliance with law and regulations
Limits on use of data
Audit rights
Notice if breached
Indemnity for claims and losses
No limit on liability
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Privacy – GLB Permitted Sharing
• Third party with notice and opt-out
• Permitted disclosure without consent
– Service providers (notice, contract)
– Joint marketing agreements
(contract)
• Express consent from consumer
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Privacy – Consent
• GLB: “Clear and Conspicuous”
– Reasonably understandable and designed
to call attention to the nature and
significance of the information contained
– May combine with other clear and
conspicuous notices
• FCRA: “Clear and Conspicuous”
– Small type on back of mailer in a paragraph
of type about other matters inadequate (Use
different type, color - Cole v. U.S. Capital)
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Privacy – Scope of Consent
I authorize the release of information pertinent to
my loans: (i) by the school, the lender, and the
guarantor, or their agents, to the references on the
applicable loans and to members of my immediate
family unless I submit written directions otherwise;
and, (ii) by and among my schools, lenders,
guarantors, the Department of Education, and their
agents.
Source: FFELP MPN
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Privacy – Scope of Consent
• Agent:
A person authorized to act for and under the
direction of another person when dealing with third
parties. Can enter into binding agreements on the
principal's behalf and may even create liability for
the principal if the agent causes harm while
carrying out his or her duties.
Source: www.nolo.com
2007 NCHELP DEBT MANAGEMENT CONFERENCE
SUMMARY
• FFELP and Alternative Loans serve similar
purposes
• FFELP and Alternative Loans may be
structured similarly
• Governed by very different laws
• DEVELOP A FEDERAL AND STATE
CONSUMER COMPLIANCE PROGRAM
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Questions????
2007 NCHELP DEBT MANAGEMENT CONFERENCE
Thank You!!
Please be sure to complete your
conference evaluation forms after the
conference!