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PASFAA 2010

PASFAA 2010. What Schools Need to Know About Private Education Loans. Overview.

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PASFAA 2010

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  1. PASFAA 2010 What Schools Need to Know About Private Education Loans

  2. 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.*

  3. 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

  4. 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.

  5. 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).

  6. 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.

  7. Self-Certification • The HEOA created a new private education loan self-certification requirement: – Lender requirements – Institutional requirements

  8. 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).

  9. Self Certification: Lender Requirement (cont’d) Reg Z provides flexibility as to how the self-certification 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)

  10. 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 self-certification 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)

  11. 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

  12. 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.

  13. Creditor Disclosure Requirements • 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. • 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. • 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.

  14. 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).

  15. 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.

  16. 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.

  17. 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: • An interest rate will not be applied to the credit balance; AND • 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.

  18. 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.*

  19. 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

  20. 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.

  21. 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.

  22. 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).

  23. 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? • Yes, Example University is a creditor under Regulation Z. • 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).

  24. 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.

  25. 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.

  26. 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.

  27. 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

  28. 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.

  29. 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.

  30. 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.

  31. 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.

  32. 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.

  33. 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.

  34. 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".

  35. 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.

  36. 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.

  37. Private Education Loan Inquiries • Questions regarding private education loans may be submitted to:  cmpolicy@aessuccess.org • Please list “private education loan” in the subject line of the email.

  38. 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.

  39. Thank you!! For additional information regarding the information presented today, please contact John Middendorf, AES/PHEAA Compliance Services at: • 717.720.2171 • jmiddend@aesSuccess.org

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