I. INTRODUCTION
The Federal Reserve Board approved final amendments to Regulation Z (Truth in Lending) that revise disclosure requirements for private education loans (loans made for postsecondary educational expenses). The new rules implement Title X of the Higher Education Opportunity Act (HEOA). The rules became effective September 14, 2009. The rules apply to loans made expressly for postsecondary educational expenses but do not apply where educational expenses are funded by credit card advances, or real-estate-secured loans. In addition, the amendments do not apply to education loans made, insured, or guaranteed by the federal government, which are subject to disclosure rules issued by the Department of Education.
II. COVERED TRANSACTIONS
The HEOA adds disclosure requirements and prohibits certain practices for creditors making “private educational loans,” defined as loans made expressly for postsecondary educational expenses, but excluding open-end credit, real-estate-secured loans, and Federal loans under Title IV of the Higher Education Act of 1965. The Act also expressly covers private education loans even if the amount financed exceeds $25,000.
III. REQUIRED DISCLOSURES
The HEOA adds a number of new disclosures for private education loans, which must be given at different times in the loan origination process. Specifically, the HEOA’s amendments to TILA require the following disclosures for private education loans:
A. Disclosures With Applications (Or Solicitations That Require No Application)
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 Department of Education Web site.
B. 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.
C. Disclosures At Consummation
At consummation, the creditor must provide updated cost disclosures substantially similar to those provided at approval. The consumer’s three-day right to cancel the transaction must also be disclosed.
IV. SUBSTANTIVE RESTRICTIONS
The HEOA prohibits a creditor from using in its marketing materials a covered educational institution’s name, logo, mascot, or other words or symbols readily identified with the educational institution, to imply that the educational institution endorses the loans offered by the creditor. With respect to private education loans, the HEOA also amends TILA in the following ways:
V. SELF-CERTIFICATION FORM
Once a consumer applies for a private education loan, the consumer must complete a “self-certification form” with information about the cost of attendance at the school that the student will attend or is attending. The form includes information about the availability of Federal student loans, the student’s cost of attendance at that school, the amount of any financial aid, and the amount the consumer can borrow to cover any gap. The creditor must obtain the signed and completed form before consummating the private education loan. The Department of Education has primary responsibility for developing the self-certification form in consultation with the Board.
VI. CIVIL LIABILITIES
The HEOA amends TILA to provide a private right of action for several, but not all, of the disclosure requirements added by the HEOA. The HEOA also amends TILA’s statute of limitations for civil liabilities regarding private education loans. Currently, TILA Section 130(e) requires that an action be brought within one year of the date of the occurrence of the violation. Under the HEOA amendment, an action for a violation involving a private education loan must be brought within one year from the date on which the first regular payment of principal is due for the private education loan.
The HEOA provides a safe harbor for any creditor that elects to use a model form promulgated by the Board that accurately reflects the terms of the creditor’s loans. Model forms are included in the final rule as amendments to Regulation Z’s Appendix H. In addition, a creditor has no liability under TILA for failure to comply with the requirement that it receive the consumer’s self-certification form before consummating a private education loan.
VII. CONTENT OF DISCLOSURES
A. Application or Solicitation Disclosures
A creditor shall provide the required disclosures on or with a solicitation or an application for a private education loan.
(1) Interest Rates.
(i) The interest rate or range of interest rates applicable to the loan and actually offered by the creditor at the time of application or solicitation. If the rate will depend, in part, on a later determination of the consumer’s creditworthiness or other factors, a statement that the rate for which the consumer may qualify will depend on the consumer’s creditworthiness and other factors, if applicable.
(ii) Whether the interest rates applicable to the loan are fixed or variable.
(iii) If the interest rate may increase after consummation of the transaction, any limitations on the interest rate adjustments, or lack thereof; a statement that the consumer’s actual rate could be higher or lower than the rates disclosed under paragraph (A)(1)(i) of this section, if applicable; and, if the limitation is determined by applicable law, that fact.
(iv) Whether the applicable interest rates typically will be higher if the loan is not co-signed or guaranteed.
(2) Fees and default or late payment costs.
(i) An itemization of the fees or range of fees required to obtain the private education loan.
(ii) Any fees, changes to the interest rate, and adjustments to principal based on the consumer’s defaults or late payments.
(3) Repayment terms.
(i) The term of the loan, which is the period during which regularly scheduled payments of principal and interest will be due.
(ii) A description of any payment deferral options, or, if the consumer does not have the option to defer payments, that fact.
(iii) For each payment deferral option applicable while the student is enrolled at a covered educational institution:
(a) Whether interest will accrue during the deferral period; and
(b) If interest accrues, whether payment of interest may be deferred and added to the principal balance.
(iv) A statement that if the consumer files for bankruptcy, the consumer may still be required to pay back the loan.
(4) Cost estimates. An example of the total cost of the loan calculated as the total of payments over the term of the loan:
(i) Using the highest rate of interest disclosed under paragraph (A)(1) of this section and including all finance charges applicable to loans at that rate;
(ii) Using an amount financed of $10,000, or $5,000 if the creditor only offers loans of this type for less than $10,000; and
(iii) Calculated for each payment option.
(5) Eligibility. Any age or school enrollment eligibility requirements relating to the consumer or co-signer.
(6) Alternatives to private education loans.
(i) A statement that the consumer may qualify for Federal student financial assistance through a program under Title IV of the Higher Education Act of 1965.
(ii) The interest rates available under each program under Title IV of the Higher Education Act of 1965 and whether the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional information concerning Federal student financial assistance from the institution of higher education that the student attends, or at the Web site of the U.S. Department of Education, including an appropriate Web site
(iv) A statement that a covered educational institution may have school-specific education loan benefits and terms not detailed on the disclosure form.
(7) Rights of the consumer. A statement that if the loan is approved, the terms of the loan will be available and will not change for 30 days except as a result of adjustments to the interest rate and other changes permitted by law.
(8) Self-certification information. A statement that, before the loan may be consummated, the consumer must complete the self-certification form and that the form may be obtained from the institution of higher education that the student attends.
B. Approval Disclosures
On or with any notice of approval provided to the consumer, the creditor shall disclose the information required under Sec. 226.18 and the following information:
(1) Interest rate.
(i) The interest rate applicable to the loan.
(ii) Whether the interest rate is fixed or variable.
(iii) If the interest rate may increase after consummation of the transaction, any limitations on the rate adjustments, or lack thereof.
(i) The principal amount of the loan for which the consumer has been approved.
(ii) The term of the loan, which is the period during which regularly scheduled payments of principal and interest will be due.
(iii) A description of the payment deferral option chosen by the consumer, if applicable, and any other payment deferral options that the consumer may elect at a later time.
(iv) Any payments required while the student is enrolled at a covered educational institution, based on the deferral option chosen by the consumer.
(v) The amount of any unpaid interest that will accrue while the student is enrolled at a covered educational institution, based on the deferral option chosen by the consumer.
(vi) A statement that if the consumer files for bankruptcy, the consumer may still be required to pay back the loan.
(vii) An estimate of the total amount of payments calculated based on:
(a) The interest rate applicable to the loan. Compliance with Sec. 226.18(h) constitutes compliance with this requirement.
(b) The maximum possible rate of interest for the loan or, if a maximum rate cannot be determined, a rate of 25%.
(c) If a maximum rate cannot be determined, the estimate of the total amount for repayment must include a statement that there is no maximum rate and that the total amount for repayment disclosed under paragraph (B)(3)(vii)(b) is an estimate and will be higher if the applicable interest rate increases.
(viii) The maximum monthly payment based on the maximum rate of interest for the loan or, if a maximum rate cannot be determined, a rate of 25%. If a maximum cannot be determined, a statement that there is no maximum rate and that the monthly payment amount disclosed is an estimate and will be higher if the applicable interest rate increases.
(4) Alternatives to private education loans.
(ii) The interest rates available under each program under Title IV of the Higher Education Act of 1965, and whether the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional information concerning Federal student financial assistance from the institution of higher education that the student attends, or at the Web site of the U.S. Department of Education, including an appropriate Web site address.
(5) Rights of the consumer.
(i) A statement that the consumer may accept the terms of the loan until the acceptance period under Sec. 226.48(c)(1) has expired. The statement must include the specific date on which the acceptance period expires, based on the date upon which the consumer receives the disclosures required under this subsection for the loan. The disclosure must also specify the method or methods by which the consumer may communicate acceptance.
(ii) A statement that, except for changes to the interest rate and other changes permitted by law, the rates and terms of the loan may not be changed by the creditor during the period described in paragraph (B)(5)(i).
C. Final Disclosures
After the consumer has accepted the loan in accordance with Sec. 226.48(c)(1), the creditor shall disclose to the consumer the information required by Sec. 226.18 and the following information:
(1) Interest rate. Information required to be disclosed under Sec. 226.47(b)(1).
(2) Fees and default or late payment costs. Information required to be disclosed under Sec. 226.47(b)(2).
(3) Repayment terms. Information required to be disclosed under Sec. 226.47(b)(3).
(4) Cancellation right. A statement that:
(i) The consumer has the right to cancel the loan, without penalty, at any time before the cancellation period under Sec. 226.48(d) expires, and
(ii) The loan proceeds will not be disbursed until after the cancellation period under Sec. 226.48(d) expires. The statement must include the specific date on which the cancellation period expires and state that the consumer may cancel by that date. The statement must also specify the method or methods by which the consumer may cancel. If the creditor permits cancellation by mail, the statement must specify that the consumer’s mailed request will be deemed timely if placed in the mail not later than the cancellation date specified on the disclosure. The disclosures required by this paragraph must be made more conspicuous than any other disclosure required under this section, except for the finance charge, the interest rate, and the creditor’s identity, which must be disclosed in accordance with the requirements of Sec. 226.46(c)(2)(iii).