Special Rules for Private Education Loans

9/16/2010

By Fran Sponsler, CRCM, CCBCO

Since the beginning of 2010, we have seen significant and vast changes to regulatory rules and regulations. These changes have impacted virtually every department within a financial institution’s organization. As a result of the changes, financial institutions have been working hard to provide adequate and appropriate training, ensuring that systems and software programs have been updated to ensure compliance, and in some cases, providing notification to customers regarding specific changes to policies and periodic statements.

Financial institutions have implemented a series of checks and balances to help ensure each regulatory change is addressed and that appropriate measures are taken for maintaining compliance. Among all of the changes, one in particular seemed to garner little to no attention and, as a result, may have slipped through those checks and balances.

Regulation Z Subpart F – Special Rules for Private Education Loans

On February 14, 2010, the amendment to Federal Reserve Board Regulation Z went into effect that implemented the provisions of the Higher Education Opportunity Act. The amendments require financial institutions to provide specific disclosures throughout the loan process: at application, at approval, and at closing.

Private Education Loans

A Private Education Loan (PEL) is an extension of credit that:

1. Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965;
2. Is extended to a consumer expressly, in whole or in part, for post-secondary educational expenses, regardless of where the loan is provided by the educational institution that the student attends;
3. Does not include open-end credit or a loan that is secured by real property or a dwelling; and
4. Does not include an extension of credit in which the 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 term of the extension of credit is one year or less, even if the credit is payable in more than four installments.

Consequently, loans for which any portion of the proceeds will be used for the stated purpose of post-secondary educational expenses are PELs and subject to the rules set forth in Regulation Z.

Types of post-secondary educational expenses that would trigger compliance include, but are not limited to, tuition and fees, books, supplies, miscellaneous personal expenses, room and board, and an allowance for any loan fee, origination fee, or insurance premium charged to a student or parent for a loan incurred to cover the cost of the student’s attendance.

Content of Disclosures

• Section 226.47 provides the disclosure contents and timing requirements for each applicable disclosure.
• Section 226.47(a) requires application or solicitation disclosures that when provided, must include general information regarding rates, fees, repayment terms, costs, school eligibility, alternative loan programs, consumer rights, and self-certification information.
• Section 226.47(b) requires disclosures be provided on or with any notice of approval that includes specific information regarding rates, fees and late payment costs, repayment terms, alternative loan programs. In addition, the disclosure must include a statement that the applicant has a 30 day period to accept the loan and a specific date in which the offer expires.
• Section 226.47(c) requires disclosures to be provided after the consumer has accepted the loan. The disclosures will reflect the final fees and costs, repayment terms, and the consumer’s cancellation rights.

Summary

Creditors should determine, by general practice or otherwise, if they make or have made loans that meet the requirements of the new rules set forth under the act. Appropriate staff training and software updates may be required along with follow-up testing to ensure accurate disclosure content and timely notification. Model notices are provided within Appendix H (H18 – H23) of Regulation Z.

For more information, please see the following: http://www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm