[Federal Register Volume 74, Number 156 (Friday, August 14, 2009)]
[Rules and Regulations]
[Pages 41194-41257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-18548]
[[Page 41193]]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Final Rule
Federal Register / Vol. 74, No. 156 / Friday, August 14, 2009 / Rules
and Regulations
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1353]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff commentary.
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SUMMARY: The Board is publishing final rules amending Regulation Z,
which implements the Truth in Lending Act (TILA) following the passage
of the Higher Education Opportunity Act (HEOA). Title X of the HEOA
amends TILA by adding disclosure and timing requirements that apply to
creditors making private education loans, which are defined as loans
made for postsecondary educational expenses. The HEOA also amends TILA
by adding limitations on certain practices by creditors, including
limitations on ``co-branding'' their products with educational
institutions in the marketing of private education loans. The HEOA
requires that creditors obtain a self-certification form signed by the
consumer before consummating the loan. It also requires creditors with
preferred lender arrangements with educational institutions to provide
certain information to those institutions.
DATES: Effective Date: September 14, 2009.
Compliance Date: Compliance is optional until February 14, 2010.
FOR FURTHER INFORMATION CONTACT: Brent Lattin, Senior Attorney, or
Mandie Aubrey, Attorney; Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, Washington, DC 20551,
at (202) 452-2412 or (202) 452-3667. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
A. Current Regulation Z Student Loan Disclosure Requirements
Congress enacted the Truth in Lending Act (TILA), 15 U.S.C. 1601 et
seq., to regulate certain credit practices and promote the informed use
of consumer credit by requiring uniform disclosures about its costs and
terms. Under TILA section 128, creditors must provide TILA disclosures
to consumers in writing before consummation of certain closed-end
credit transactions. Extensions of consumer credit over $25,000 are
exempt from TILA with the exceptions of credit secured by real
property, and, following enactment of the HEOA, private education
loans. Loans made, insured, or guaranteed pursuant to a program
authorized by title IV of the Higher Education Act of 1965 (20 U.S.C.
1070 et seq.) are also exempt from TILA.
TILA mandates that the Board prescribe regulations to carry out the
purposes of the statute. 15 U.S.C. 1604(a). Accordingly, the Board has
promulgated Regulation Z, 12 CFR part 226. An Official Staff
Commentary, 12 CFR part 226 (Supp. I) interprets the requirements of
the regulation and provides guidance to creditors in applying the rules
to specific transactions.
To implement TILA section 128, 15 U.S.C. 1638, Regulation Z
requires disclosures for certain closed-end loans, including for
education loans that are not exempt Federal education loans. Sections
226.17 and 226.18 require a creditor to provide the consumer with clear
and conspicuous disclosures before consummation of the transaction.
Current Sec. 226.17(i) contains special rules for student credit plans
which are education loans where the repayment amount and schedule of
payments are not known at the time that the credit is advanced. In such
cases, creditors may make all the TILA cost disclosures at the time
credit is extended based on the best information available at that
time, and state clearly that the disclosures are estimates.
Alternatively, creditors may provide partial disclosures at the time
the credit is extended and later provide a complete set of disclosures
when the repayment schedule for the loan is established.
B. The Higher Education Opportunity Act of 2008
On August 14, 2008, the Higher Education Opportunity Act of 2008
(HEOA) was enacted. Title X of the HEOA, entitled the ``Private Student
Loan Transparency and Improvement Act of 2008,'' adds new subsection
128(e) and section 140 to TILA. These TILA amendments add disclosure
requirements and prohibit certain practices for creditors making
``private education 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 HEOA also amends TILA section 104(3) to
expressly cover private education loans even if the amount financed
exceeds $25,000.
1. Overview of the HEOA's Amendments to TILA
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.\1\ With respect to private
education loans, the HEOA also amends TILA in the following ways:
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\1\ The HEOA adds a new section 140 to TILA that includes other
restrictions regarding private education loans. The Board is only
required to issue regulations to implement subsection (c) of TILA
section 140, the prohibition on co-branding. The other subsections
of section 140 became effective when the HEOA was enacted and the
Board is not issuing regulations to implement them at this time. The
other subsections of TILA Section 140 prohibit creditors from giving
gifts to educational institutions or their employees, and prohibit
revenue sharing between creditors and educational institutions. In
addition, they restrict creditor payments to financial aid officials
who serve on creditors' advisory boards, and require disclosure of
any payments made to financial aid officials for advisory board
service expenses. Prepayment penalties or fees for early repayment
are prohibited for private education loans.
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Creditors must give the consumer 30 days after a private
education loan application is approved to decide whether to accept the
loan offered. During that time, the creditor may not change the rates
or terms of the loan offered, except for rate changes based on changes
in the index used for rate adjustments on the loan.
The consumer has a right to cancel the loan for up to
three business days after consummation. Creditors are prohibited from
disbursing funds until the three-day cancellation period has run.
Disclosure Requirements. 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:
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.
[[Page 41195]]
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.
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.
Finally, 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.
2. Civil Liability
The HEOA amends TILA to provide a private right of action for
several, but not all, of the disclosure requirements added by the HEOA.
HEOA, Title X, Subtitle A, Section 1012 (amending TILA Section 130).
The HEOA also amends TILA's statute of limitations for civil liability
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. HEOA, Title X, Subtitle B, Section
1021(a) (adding TILA Section 128(e)(5)(C)). 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. HEOA, Title X, Subtitle
B, Section 1021(a) (adding TILA Section 130(j)).
C. Consumer Testing
In October 2008, the Board retained a research and consulting firm
(Rockbridge Associates) and a design firm (EightShapes) to help the
Board design the model forms required under the HEOA and to conduct
consumer testing to determine the most effective presentation of the
information required to be disclosed. Specifically, the Board used
consumer testing to develop model forms for the following:
Information required to be disclosed on or with
applications or solicitations for private education loans (Application
and Solicitation Disclosure);
Information required to be disclosed when a private
education loan is approved (Approval Disclosure); and
Information required to be disclosed after the consumer
accepts a private education loan and at least three business days
before loan funds are disbursed (Final Disclosure).
Initial forms design. In November 2008, the Board worked with
Rockbridge Associates and EightShapes to develop sample disclosures to
be used in the testing, taking into account the specific requirements
of the HEOA, information learned through the Board's outreach efforts,
and Rockbridge Associate's experience in financial disclosure testing.
Cognitive interviews on model disclosures. In December 2008,
Rockbridge Associates worked closely with the Board to conduct two
rounds of consumer testing. Each round of testing comprised in-person
cognitive interviews with 10 consumers. Both rounds of testing were
conducted within the Washington, DC/Baltimore metropolitan area. The
consumer participants included both college students and parents of
college students, representing a range of ethnicities, ages,
educational levels, and education loan experience.
The cognitive interviews consisted of one-on-one discussions with
consumers, during which consumers were asked to view the sample
Application and Solicitation Disclosure, the Approval Disclosure, and
the Final Disclosure developed by the Board. The goals of these
interviews were as follows: (1) To learn more about what information
consumers are concerned about and actually read when they receive
private education loan disclosures; (2) to determine how easily
consumers can find various critical pieces of information in the
disclosures; (3) to assess consumers' understanding of the information
that the HEOA and Sec. 226.18 require to be disclosed for private
education loans, and of certain terminology related to private
education loans; and (4) to determine the most clear and understandable
way to disclose the required information to consumers.
After the first round of cognitive testing, the Board worked with
Rockbridge Associates and EightShapes to revise the initial drafts of
the sample disclosures in response to findings from the first round of
testing. Later in December 2008, the Board and Rockbridge Associates
conducted a second round of testing in which 10 consumers were asked to
review the revised sample Application and Solicitation Disclosure,
Approval Disclosure, and Final Disclosure.
Additional cognitive interviews on model disclosures. In April and
May 2009, Rockbridge Associates worked closely with the Board to
conduct two additional rounds of consumer testing. Each round of
testing consisted of in-person cognitive interviews with 10 consumers.
One round of testing was conducted within the Washington, DC
metropolitan area and the second round of testing was conducted within
the Philadelphia, PA metropolitan area. The consumer participants
included college students, proprietary school students and parents of
students, representing a range of ethnicities, ages, educational
levels, and education loan experience. The format of the cognitive
interviews was similar to the initial rounds and the Board worked with
Rockbridge Associates and EightShapes to revise the model disclosures
in response to findings from the each round of testing.
Following the conclusion of the comment period on the proposed
rule, Rockbridge Associates and EightShapes worked with the Board to
further revise the disclosures in response to public comment. In June
2009, Rockbridge Associates worked with the Board to conduct a final
round of consumer testing comprised of in-person cognitive interviews
with 10 consumers conducted in the Washington, DC metropolitan area.
The format of the cognitive interviews was similar to the earlier
rounds and the Board worked with Rockbridge Associates and EightShapes
to revise the model disclosures in response to findings from the final
round of testing.
Results of testing. A report summarizing the results of the testing
is
[[Page 41196]]
available on the Board's Web site: http://www.federalreserve.gov.
Application and Solicitation Disclosure. Regarding the Application
and Solicitation Disclosure, consumers were confused in the initial
rounds by seeing the required disclosure of a range of initial rates
for which they could be approved. Consumers commonly mistook the
highest rate in the range with the maximum possible rate for the life
of the loan. Consequently, the model form was revised by providing
information under two separate headings for the consumer's ``Starting
interest rate upon approval'' and the consumer's ``Interest rate during
the life of the loan.'' This revision improved consumers' ability to
understand the range of initial interest rates and how the rate would
vary over time.
Once consumers understood that the rates disclosed were not
necessarily the rates that actually would apply to them, they
consistently wanted to know how their own rate would be determined.
Thus, the model form places general information about how the
consumer's rate will be determined under the heading about the
consumer's starting interest rate upon approval. Consumers also wanted
to understand how their rate would vary over the life of the loan, but
many were confused by detailed information about how the interest rate
varies based on the application of a margin to an index. A large number
of consumers in the initial rounds were confused by the reference in
the model forms to the London Interbank Offered Rate (LIBOR) as the
index. However, in the final round of testing, the model form
referenced the LIBOR being published in a major newspaper which worked
to assure consumers that the LIBOR is a standard index used for
determining variable interest rates on loans.
Consumer testing also indicated that consumers want to see specific
figures and dollar amounts for fees that may apply to their loan. Thus
the model form requires dollar amounts to be disclosed for each fee
included on the form wherever possible.
In addition, testing showed that consumers found the sample total
cost information to be useful in assessing the potential impact of a
private education loan on their financial future. Consumers indicated
that the sample total cost was most understandable when the loan
amount, interest rate and loan term were included. In addition,
consumers found showing the sample total cost of a loan based on each
payment deferral option to be useful information.
Finally, consumers found the presentation of Federal loan
alternatives, ``Next Steps,'' and reference notes to be clear and
understandable, and the information in these sections to be useful.
Approval Disclosure. Regarding the Approval Disclosure, testing
indicated that consumers are most concerned about the rate and loan
costs, and that the traditional TILA box style of presenting the key
elements of a loan is effective even with novice consumers. In initial
testing of the proposed model forms, consumers did not understand
explanations of the difference between the interest rate and the APR.
For this reason, the model forms published with the proposal were
revised to disclose the interest rate more prominently than the APR so
that consumers would focus on the rate they understood. In subsequent
rounds of testing, the prominence of the interest rate disclosure and
the additional context provided to explain the APR improved some
consumers' understanding of the concepts, although a few consumers
continued to have difficulty understanding the difference between the
APR and the interest rate. However, in choosing between two loans,
consumers in the tests were more likely to compare the payment
schedules, total of payments, and finance charge rather than relying on
the interest rate alone.
Testing also showed that consumers generally do not understand
detailed explanations of how their variable rate changes based on a
publicly available index. For consumers, the most important information
regarding how the rate changes was simply that the creditor may not
change the rate at will, and instead generally can do so only based on
market factors out of the creditor's control.
Testing also indicated that consumers strongly prefer to have all
fees disclosed with specific dollar amounts. In addition, the placement
of the total loan amount in the box at the top of the form, along with
the itemization of the amount financed, improved consumers'
understanding of the concept presented by the amount financed--that the
amount of credit actually available to the consumer would be less than
the total loan amount if fees applied.
Consumers considered the monthly payment schedule and amounts to be
critical information in understanding the financial implications of
obtaining a private education loan. Most consumers felt the disclosure
of the maximum monthly payment amounts and total amount for repayment
at the maximum rate was useful information. When shown disclosures
where a sample maximum rate was used because no maximum rate applies,
consumers indicated that they understood the disclosure was only an
example.
As with the Application and Solicitation Disclosure, consumers
found the presentation of Federal loan alternatives and ``Next Steps''
to be clear and understandable, and the information in these sections
to be useful.
Final Disclosure. Regarding the Final Disclosure, the information
required to be disclosed under the HEOA is identical to that required
on the Approval Disclosure, except for the right to cancel notice.
Recognizing the importance of the right to cancel notice for consumers,
the model Final Disclosure provides the right to cancel information as
clearly and prominently as possible. Consumers tested immediately saw
and read the information in the proposed right to cancel notice.
Results from the initial rounds of testing indicated that consumers
did not find the information about Federal loan alternatives to be
useful at this stage in the private education loan origination process.
Consumers stated that this information is redundant; they have already
been told about these options two times (on the Application and
Solicitation Disclosure and the Approval Disclosure) and have already
decided at this point to obtain a private education loan. Consumers in
the later rounds of testing were asked whether they felt the Federal
loan alternatives should be included in the Final Disclosure and the
majority did not feel such information would be useful at that stage.
For these reasons, as discussed in the section-by-section analysis
under Sec. 226.47(b)(3), the Board is exercising its exception
authority under TILA sections 105(a) and 105(f) to omit information
about Federal loan alternatives from the Final Disclosure form.
II. The Board's Rulemaking Authority
The Board has authority under the HEOA to issue regulations to
implement paragraphs (1), (2), (3), (4), (6), (7), and (8) of new TILA
section 128(e), and to implement section 140(c) of new TILA section
140. HEOA, Title X, Section 1002. In addition to implementing the
specific disclosure requirements in TILA section 128(e), the Board has
authority under TILA sections 128(e)(1)(R), 128(e)(2)(P), and
128(e)(4)(B) to require disclosure of such other information as is
necessary or appropriate for consumers to make informed borrowing
decisions. 15 U.S.C.
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1638(e)(1)(R), 15 U.S.C. 1638(e)(2)(P), 15 U.S.C. 1638(e)(4)(B).
TILA section 128(e)(9) provides that, in issuing regulations to
implement the disclosure requirements under TILA section 128(e), the
Board is to prevent duplicative disclosure requirements for creditors
that are otherwise required to make disclosures under TILA. However, if
the disclosure requirements of section 128(e) differ or conflict with
the disclosure requirements elsewhere under TILA, the requirements of
section 128(e) are controlling. 15 U.S.C. 1638(e)(9).
TILA also mandates that the Board prescribe regulations to carry
out the purposes of the act. TILA specifically authorizes the Board,
among other things, to issue regulations that contain such
classifications, differentiations, or other provisions, or that provide
for such adjustments and exceptions for any class of transactions, that
in the Board's judgment are necessary or proper to effectuate the
purposes of TILA, facilitate compliance with the act, or prevent
circumvention or evasion. 15 U.S.C. 1604(a).
TILA also specifically authorizes the Board to exempt from all or
part of TILA any class of transactions if the Board determines that
TILA coverage does not provide a meaningful benefit to consumers in the
form of useful information or protection. The Board must consider
factors identified in the act and publish its rationale at the time it
proposes an exemption for comment. In proposing exemptions, the Board
considered (1) The amount of the loan and whether the disclosure
provides a benefit to consumers who are parties to the transaction
involving a loan of such amount; (2) the extent to which the
requirement complicates, hinders, or makes more expensive the credit
process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection. 15 U.S.C. 1604(f). The rationales for these
exemptions were explained in the proposal and are explained below.
III. Overview of Comments Received
On March 24, 2009, the Board published a proposed rule that would
amend Regulation Z's rules by adding disclosure and timing requirements
that apply to creditors making private education loans. 74 FR 12464.
The Board received seventy-one public comment letters. Several
financial institutions and financial services trade associations stated
that they supported the Board's efforts to improve the disclosure of
credit terms to consumers of private education loans and recognized
that the Board's proposal was intended to conform Regulation Z to TILA,
as amended by the HEOA. These commenters requested that the Board
provide flexibility in the timing of the proposed approval disclosure
to allow creditors to approve loans conditioned on verification of
information provided by the consumer and the educational institution.
These commenters also stated that the Board should not cover loans made
``in whole or in part'' to finance postsecondary educational expenses,
as proposed. They expressed concern that such coverage would increase
the burden in complying with the rule and could cause some lenders to
decline to provide consumers with credit if any part of the loan would
be used for postsecondary educational expenses. Some of these
commenters also did not support the proposal to make the disclosure of
the annual percentage rate (APR) less prominent than the disclosure of
the interest rate. A few financial institutions stated that the costs
of the new disclosure and timing requirements under the HEOA outweigh
the benefits and that consumers would object to delays in consummating
a private education loan transaction.
By contrast, consumer advocacy organizations generally supported
the HEOA's goal of providing additional disclosure of private education
loan terms to consumers and in providing for a 30-day period for the
consumer to accept the loan and a three-day right to cancel the loan.
Consumer advocates encouraged the Board to maintain coverage of loans
used ``in whole or in part'' for postsecondary educational expenses.
Most of these commenters did not support the proposal to make the
disclosure of the APR less prominent than the disclosure of the
interest rate.
The Board also received comments from educational institutions and
financial aid administrators and trade associations. These commenters
also generally supported the HEOA's requirements to provide additional
disclosure of private education loan credit terms to consumers.
However, a majority of these commenters stated that educational
institutions, or specific types of credit provided by education
institutions, should be exempt from the proposed rules. Specifically,
these creditors sought exemptions for credit in the form of tuition
billing plans that permit the student to pay in installments and for
short term ``emergency'' loans provided to students while they await
disbursement of other funding sources. A number of financial aid
officers commented that the proposed self-certification form would be
burdensome and requested an exemption to the requirement to obtain a
self-certification form in cases where the creditor certifies the
student's financial need directly with the educational institution.
Comments are discussed in detail below in part IV of the
SUPPLEMENTARY INFORMATION.
IV. Section-by-Section Analysis
Overview
The final rule adds the following new disclosure requirements to
Regulation Z for private education loans:
(i) Disclosures with applications (or solicitations that require no
application) in Sec. 226.47(a);
(ii) Disclosures when notice of loan approval is provided in Sec.
226.47(b); and
(iii) Disclosures before loan disbursement in Sec. 226.47(c).
General rules applicable to the new disclosure requirements were
detailed in Sec. 226.46 and associated commentary. Model forms for
these disclosures are added to Regulation Z's Appendix H.
To implement TILA's new prohibition on co-branding, Sec. 226.48
prohibits a creditor from using in its marketing a covered educational
institution's name, logo, mascot, or other words or symbols readily
identified with the institution, to imply that the institution endorses
the loans offered by the creditor. The final rule adopts an exception
to this prohibition under the Board's TILA section 105(a) authority,
for creditors who enter into an agreement where the covered educational
institution endorses the creditor's private education loans. Section
226.48 also: Provides the consumer with 30 days following receipt of
the approval disclosures to accept the loan and prohibits certain
changes to a loan's rate or terms during that time; provides the
consumer a right to cancel the loan for three business days after
receipt of the final disclosures and prohibits disbursement during that
time; requires creditors to obtain a completed self-certification form
signed by the consumer before consummating the transaction; and
requires creditors with preferred lender arrangements to provide
certain information to educational institutions.
[[Page 41198]]
The final rule largely adopts the provisions in the Board's March
24, 2009 proposed rule. 74 FR 12464. The Board has made certain
modifications to the proposal in response to public comment as
described throughout this Section-by-Section analysis. In addition, the
provisions in new Subpart F have been redesignated from proposed
Sec. Sec. 226.37, 38, and 39 to Sec. Sec. 226.46, 47, and 48.
Sections 226.37 through 226.45 have been reserved in order to
accommodate future rulemakings by the Board.
Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(b) describes the purposes of Regulation Z. The Board
proposed to amend Sec. 226.1(b) to refer to the new provisions for
private education loans. Section 226.1(d) provides an outline of
Regulation Z. Proposed paragraph (d)(6) referenced the addition of a
new Subpart F containing rules relating to private education loans.
No comments were received on these provisions and the Board is
adopting them as proposed with redesignated cross-references. In
addition, transition rules are added as comment 1(d)(6)-1.
Section 226.2--Definitions and Rules of Construction
Currently, Sec. 226.2(a)(6) contains two definitions of ``business
day.'' Under the general definition, a ``business day'' is a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions. However, for some purposes
a more precise definition applies; ``business day'' means all calendar
days except Sundays and specified Federal legal public holidays, for
purposes of Sec. Sec. 226.15(e), 226.19(a)(1)(ii), 226.19(a)(2),
226.23(a), and 226.31(c)(1) and (2). The Board proposed using the more
precise definition of business day for all purposes in proposed
Sec. Sec. 226.37, 38, and 39, including for measuring the period
during which consumers may cancel a private education loan. Industry
commenters requested that the Board adopt the general definition of
``business day,'' or exclude Saturdays from the more precise definition
of ``business day.'' These commenters noted that they did not operate
their systems for disbursing funds or providing disclosures on a
Saturday and expressed concern that including Saturday as a business
day could make it difficult to provide required disclosures to
consumers in a timely fashion.
Consistent with the Board's approach for certain transactions
secured by the consumer's dwelling in Sec. 226.19(a)(1)(i), the Board
is adopting the more precise definition of business day in providing
presumptions of when consumers receive mailed disclosures. The Board is
adopting the general definition of ``business day'' for all other
purposes in Sec. Sec. 226.46, 47, and 48, including for measuring the
period of time in which the consumer may cancel the loan. The Board
believes that allowing creditors to exclude Saturdays or other days on
which the creditor's offices are not open to the public for carrying on
substantially all of its business functions will result in consumers
being provided more time in which to cancel a private education loan.
As discussed in the section-by-section analysis to Sec. 226.48(d), the
final rule permits creditors to provide consumers with more time to
cancel the loan than the minimum three business days. Thus, whichever
definition of ``business day'' the Board were to select, creditors
would be free to exclude Saturdays or other days by providing the
consumer with more time in which to cancel. The final rule also
requires the creditor to disclose prominently the precise date upon
which the consumer's right to cancel expires and, based on the consumer
testing, the Board believes that consumers will be able to understand
precisely their deadline to cancel.
Section 226.3--Exempt Transactions
TILA section 104(3) (15 U.S.C. 1603(3)) exempts from coverage
credit transactions in which the total amount financed exceeds $25,000,
unless the loan is secured by real property or a consumer's principal
dwelling. The HEOA amends TILA section 104(3) to provide that private
education loans over $25,000 are not exempt from TILA. The Board
proposed to revise Sec. 226.3(b) to reflect this change. The Board did
not propose changes to Sec. 226.3(f) because the HEOA did not affect
TILA's exclusion of loans made, insured, or guaranteed under title IV
of the Higher Education Act of 1965. 15 U.S.C. 1603(7). However, the
Board proposed to revise comment 3(f)-1 to remove the list of Federal
education loans covered by the exemption because it is outdated, and to
clarify that private education loans are not exempt.
The Board is adopting the revisions to Sec. 226.3 as proposed with
redesignated cross-references. Under the final rules, as proposed,
private education loans are covered by TILA and Regulation Z regardless
of the loan's total amount financed.
Section 226.17--General Disclosure Requirements
Proposed Sec. Sec. 226.38(b) and (c) required creditors to provide
the current Sec. 226.18 disclosures for private education loans in
addition to the new disclosures. Consequently, the Board proposed to
revise Sec. 226.17 to clarify that the format and timing rules for
private education loans differ slightly from the rules for other types
of closed-end credit. In addition, the Board proposed to remove the
special rules for student credit plans.
The Board is adopting the proposed changes to Sec. 226.17 for the
format and timing rules for private education loans, with redesignated
cross-references. The Board is also eliminating the special rules for
student credit plans under Sec. 226.17(i) for credit extensions made
on or after the mandatory compliance date of Subpart F. However, as
discussed more fully below, the Board is revising rather than removing
Sec. 226.17(i) to clarify that student credit extensions made under
Sec. 226.17(i) prior to the mandatory compliance date of Subpart F
must still follow the requirements in Sec. 226.17(i).
Current Sec. 226.17(a)(1) requires that the closed-end credit
disclosures under Sec. 226.18 be grouped together, segregated from
everything else, and not contain any information not directly related
to the disclosures required under Sec. 226.18. It also requires that
the itemization of the amount financed under Sec. 226.18(c)(1) must be
separate from the other disclosures required under that section. The
Board proposed to revise Sec. 226.17(a)(1) and comment 17(a)(1)-4 to
clarify that the information required under Sec. 226.38 must be
provided together with the information required under Sec. 226.18. In
addition, as discussed in the section-by-section analysis under Sec.
226.47, the Board proposed to allow creditors to provide the
itemization of the amount financed together with the disclosures
required under Sec. 226.18 for private education loan disclosures.
Annual percentage rate disclosure. Current Sec. 226.17(a)(2),
implementing TILA section 122(a), requires the terms ``finance charge''
and ``annual percentage rate,'' together with a corresponding amount or
percentage rate, to be more conspicuous than any other disclosure,
except the creditor's identity under Sec. 226.18(a). For private
education loans, TILA sections 128(e)(2)(A) and 128(e)(4)(A) require a
disclosure of the interest rate in addition to the APR. The Board
proposed to exercise its authority under TILA section 105(a) to except
private
[[Page 41199]]
education loans from the requirement that the APR be more prominent
than other disclosures and proposed to give prominence to the interest
rate disclosure that is required by the HEOA. The Board also proposed
to exercise its authority under TILA section 122(a) to require that the
interest rate be disclosed as prominently as the finance charge. See
proposed Sec. 226.37(c)(2)(iii).
Some industry, consumer group, and other commenters objected to the
proposal to give the interest rate more prominence than the APR. Some
of the commenters believed the APR was a better tool for consumers to
use to compare the cost of a loan than the interest rate. They believed
that emphasizing the interest rate could mislead consumers who do not
consider other costs of loans. Other commenters believed that for
uniformity, the APR should not deviate from the prominent position in
the model forms for other types of closed-end loans. Further, consumer
group commenters argued that the data produced from consumer testing
was not definitive enough to justify making the exception, noting that
most consumers tested did not notice the difference between the APR and
interest rate and that the testing involved only 20 consumers. The
consumer groups also cited several studies to support retaining the
prominence of the APR, including a study that found that more than 70%
of the population reported using the APR to shop for closed-end
credit.\2\
---------------------------------------------------------------------------
\2\ Jinkook Lee and Jeanne M. Hogarth, ``The Price of Money:
Consumers' Understanding of APRs and Contract Interest Rates,'' 18
J. Pub. Pol'y and Marketing 66, 74 (1999).
---------------------------------------------------------------------------
TILA section 128(e)(1)(A) requires a disclosure of the range of
potential interest rates in the application and solicitation
disclosure. In consumer testing, some consumers expressed confusion as
to why the APR on the approval and final forms was inconsistent with
the interest rates disclosed on the application form. Consumers tested
indicated that the interest rate was most relevant to them for private
education loan purposes. In addition, TILA section 128(e)(9), as added
by the HEOA, directs the Board to implement the HEOA's requirements
even if those requirements differ from or conflict with requirements
under other parts of TILA. The HEOA also requires the Board to develop
model forms that may be used for the private education loan disclosures
based on consumer testing. HEOA, Title X, Subtitle B, Sec. 1021 (adding
TILA section 128(e)(5)(A)).
Consumer testing of private education loan disclosures that
continued during and after the comment period confirmed that most
consumers understand the interest rate and that it is one of the most
important terms to them. At the same time, most consumers do not
understand the APR and incorrectly believe that the APR is the interest
rate.\3\ In the initial rounds of testing the APR was presented more
prominently than the interest rate. Most consumers had difficulty
reconciling the two terms and some consumers believed that either the
APR or the interest rate was a mistake and expressed a concern about
the accuracy of the disclosures. Consumer confusion was compounded with
the private education loan disclosures. Under the HEOA, the application
disclosure that the consumer receives first in the series of forms
contains a range of interest rates and not APRs. Consumers expected to
see similar disclosures on subsequent forms.\4\
---------------------------------------------------------------------------
\3\ Rockbridge Associates, ``Consumer Research and Testing for
Private Education Loans: Final Report of Findings'' at 8.
\4\ Rockbridge Associates, ``Consumer Research and Testing for
Private Education Loans: Final Report of Findings'' at 39.
---------------------------------------------------------------------------
By contrast, in consumer testing of the model forms with a less
prominent APR, consumers were less likely to equate the APR with the
interest rate. Rather, the APR's less prominent location on the model
form encouraged consumers to view it in the context of the explanatory
text provided. This, in turn, helped consumers to better understand
that the APR was a distinct disclosure that reflected both the interest
rate and the fees.\5\
---------------------------------------------------------------------------
\5\ Rockbridge Associates, ``Consumer Research and Testing for
Private Education Loans: Final Report of Findings'' at 8, 43.
---------------------------------------------------------------------------
In addition, based on consumer testing, the Board does not believe
that making the APR less prominent is likely to cause consumers to
focus solely on the interest rate to the exclusion of other costs. When
consumers were asked in testing to determine which of two sample loans
was less expensive, they relied on information other than the interest
rate and APR to make their determination, such as the finance charge or
the total of payments. By using the other cost information all
consumers tested were able to select the loan that had a lower APR,
even when it had a higher interest rate.\6\
---------------------------------------------------------------------------
\6\ Rockbridge Associates, ``Consumer Research and Testing for
Private Education Loans: Final Report of Findings'' at 55.
---------------------------------------------------------------------------
The findings from the Board's consumer testing that consumers do
not understand the APR are supported in other research. For example,
the study that cited high awareness of the APR by mortgage borrowers
also found that at least 40% of those borrowers did not understand the
relationship between the interest rate and the APR which, the study
concluded, ``indicates a significant gap between awareness and
understanding.'' \7\ Lack of understanding of the APR on the part of
the consumer could result in an inaccurate comparison of loan terms.
For example, a consumer comparing two loans based on both the APR and
the fees might erroneously consider fees that were already included in
the APR.
---------------------------------------------------------------------------
\7\ Jinkook Lee and Jeanne M. Hogarth, ``The Price of Money:
Consumers' Understanding of APRs and Contract Interest Rates,'' 18
J. Pub. Pol'y and Marketing 66, 74 (1999).
---------------------------------------------------------------------------
Thus, the Board believes that an exception from the requirement
that the APR be disclosed more prominently than other terms is
necessary and proper to assure a meaningful disclosure of credit terms
for consumers, and it is retained in the final rule.
Timing of disclosures. Current Sec. 226.17(b) requires creditors
to make closed-end credit disclosures before consummation of the
transaction. As discussed more fully below in the section-by-section
analysis under Sec. Sec. 226.46 and 226.47, the Board is adopting as
proposed revisions to Sec. 226.17(b) to require creditors to make the
current closed-end disclosures two times for private education loans:
Once with any notice of approval of a private education loan, and again
before disbursement. Under current comment 17(b)-1, the disclosures
must be made before consummation, but need not be given by a particular
time, except in certain dwelling-secured transactions. The Board is
adopting as proposed revisions to comment 17(b)-1 to clarify that more
specific timing rules would apply for private education loans.
The proposed rule did not propose any changes to current Sec.
226.17(f), but the final rule revises that section. Current Sec.
226.17(f) requires redisclosure if disclosures are given before
consummation of a transaction under certain conditions. The Board is
excluding private education loans from the requirements of Sec.
226.17(f) because the Board believes that the disclosure and other
requirements for private education loans make redisclosures under Sec.
226.17(f) unnecessary. Creditors must provide approval disclosures for
private education loans and then, after the consumer accepts the loan
and before funds are disbursed, provide final disclosures. Thus,
consumers will always receive at least two disclosures in private
education loan transactions. In addition, with few exceptions,
creditors cannot change the loan's rate or terms after providing the
disclosures,
[[Page 41200]]
and Sec. 226.48(c) requires redisclosure if certain permitted changes
are made after the approval disclosure is provided. Creditors are
permitted, however, to make changes to the interest rate based on
adjustments to the index. As a result of interest rate fluctuations,
the loan's APR may vary outside of the tolerance in Sec. 226.17(f)(2).
The Board believes that requiring creditors to redisclose the approval
or final disclosures merely because of fluctuations in the interest
rate would be burdensome to creditors and could be confusing to
consumers who might not understand that the redisclosures reflected
only changes in the variable rate, rather than substantive changes in
the loan terms. Accordingly, Sec. 226.17(f) in the final rule does not
apply to private education loans.
In addition, the final rule revises Sec. 226.17(g) which
implements TILA section 128(c). Current Sec. 226.17(g) allows for
delayed delivery of disclosures if a creditor receives a purchase order
or a request for an extension of credit by mail, telephone, or
facsimile machine without face-to-face or direct telephone
solicitation. The creditor may delay disclosures until the due date of
the first payment if certain information is made available to the
consumer or the public before the actual purchase order request. The
final rule excludes private education loans from Sec. 226.17(g)
because the Board believes that the specific disclosure and timing
requirements that the HEOA added to TILA for private education loans
supersede TILA's general delayed disclosure provisions implemented in
Sec. 226.17(g).
Special rules for student credit extensions. Under current Sec.
226.17(i) and accompanying commentary, Regulation Z applies special
disclosure rules to closed-end student loans that are ``student credit
plans.'' The commentary to Regulation Z describes a ``student credit
plan'' as an extension of credit for educational purposes, where the
repayment amount and schedule are not known at the time credit is
advanced. The plans include loans made under any student credit plan
not otherwise exempt from TILA, whether government or private. Comment
17(i)-1. The credit extended before the repayment period begins under
these plans is referred to as the interim student credit extension. The
Board understands that most or all private education loans made today
are ``student credit plans.''
The Board proposed to eliminate the special rules for student
credit plans under Sec. 226.17(i) and accompanying commentary because
the new TILA section 128(e) disclosure rules effectively eliminate the
disclosure exemptions and special rules in Sec. 226.17(i).
Implementing new TILA section 128(e)(2)(H), proposed Sec.
226.38(b)(3)(vii) required the creditor to give the consumer an
estimate of the total amount for repayment at the time that the loan is
approved. As discussed further below, the Board views the total amount
for repayment disclosure as duplicative of TILA's existing total of
payments disclosure. Proposed Sec. 226.38(b)(3)(vii) required
creditors to disclose the total of payments before a definitive
repayment schedule is set. Thus, the HEOA revisions to TILA eliminate
the Sec. 226.17(i) exemption for disclosure of the total of payments.
This also has the effect of eliminating the other exemptions as well,
because an estimate of the total of payments requires the creditor to
estimate the finance charge and payment schedule. In addition, the
Board proposed to apply the new private education loan disclosure
regime to consolidation loans, rendering the commentary on
consolidation loan disclosures under comment 17(i)-3 unnecessary.
The Board believes that retaining two different disclosure regimes
from which creditors may choose is unnecessarily complex and may not be
useful to consumers and creditors. Thus, the final rule eliminates the
special rules for student credit plans under Sec. 226.17(i) for loans
for which an application is received on or after the mandatory
compliance date of Sec. Sec. 226.46, 47, and 48.
However, in response to public comment the Board is not eliminating
Sec. 226.17(i) in its entirety, as proposed. Under current comment
17(i)-1, creditors who choose not to make complete disclosures at the
time the credit is extended must make a new set of complete disclosures
at the time the creditor and consumer agree upon a repayment schedule
for the total obligation. The Board is retaining and revising Sec.
226.17(i) to clarify that the requirement to provide a complete
disclosures at the time the creditor and consumer agree upon a
repayment schedule for the total obligation remains in effect for
student credit extensions made before the mandatory compliance date of
Sec. Sec. 226.46, 47, and 48, and for which the creditor chose not to
make complete disclosures before consummation.
For loans subject to Sec. Sec. 226.46, 47, and 48 the Board did
not propose to require creditors to give a new set of disclosures once
the creditor and consumer agree upon a repayment schedule. Consumer
group commenters suggested that the Board require a new set of
disclosures upon repayment. However, TILA as amended by the HEOA, does
not require such disclosure for private education loans. The final
rules require a complete disclosure at the time the credit is extended.
In addition, new disclosures are required under Sec. 226.20(a) in the
case of a refinancing of a loan.
Section 226.18--Content of Disclosures
As discussed more fully below, the Board is adopting as proposed,
with redesignated cross-references, revisions to the commentary to
Sec. 226.18. The final rule requires that creditors provide the
disclosures required in Sec. 226.18 along with the disclosures
required with notice of approval in Sec. 226.47(b) and with the final
disclosures required in Sec. 226.47(c). As proposed, the model forms
in Appendix H-19 and H-20 show the disclosures required under Sec.
226.18 as well as the disclosures required under Sec. Sec. 226.47(b)
and (c). However, as explained below, the HEOA's disclosure about
limitations on interest rate adjustments differs slightly from that of
Sec. 226.18(f)(1)(ii), as interpreted in comment 18(f)(1)(ii)-1. Thus
the Board is revising comment 18(f)(1)(ii)-1 to clarify that parts of
the comment do not apply to private education loans.
Current Sec. 226.18(f)(1)(ii) requires that if the annual
percentage rate in a closed-end credit transaction not secured by the
consumer's principal dwelling may increase after consummation, the
creditor must disclose, among other things, any limitations on the
increase. Current comment 18(f)(1)(ii)-1 states that when there are no
limitations, the creditor may, but need not, disclose that fact. By
contrast, the HEOA and Sec. Sec. 226.47(b) and 47(c) require creditors
to disclose any limitations on interest rate adjustments, or the lack
thereof. Thus, for private education loans, disclosure of the absence
of any limitations on interest rate adjustments is required, not
optional. In addition, under Sec. Sec. 226.47(b)(1)(iii), and (c)(1),
limitations on rate increases include, rather than exclude, legal
limits in the nature of usury or rate ceilings under state or Federal
statutes or regulations. Comment 47(b)(1)-2, proposed as comment
38(b)(1)-2, discussed below, provides guidance on how creditors are to
disclose limitations on interest rate adjustments.
The Board is also revising, as proposed, comment 18(f)(1)(iv)-2,
which currently clarifies that for interim student credit extensions
creditors need not provide a hypothetical example of the payment terms
that would result from an increase in the variable rate. The comment is
revised, with a
[[Page 41201]]
redesignated cross-reference, to replace the reference to interim
student credit extensions with a reference to private education loans.
Sections 226.47(b)(3)(viii) and 226.47(c)(3) require a disclosure of
the maximum monthly payment on a private education loan based on the
maximum possible rate of interest. As discussed more fully in the
section-by-section analysis in Sec. 226.47, the Board believes that
the required disclosure of the maximum monthly payment amount at the
maximum rate satisfies the requirement under Sec. 226.18(f)(1)(iv) to
disclose a hypothetical example of the payment terms resulting from an
increase in the rate. Comment 47(b)(1)-1, proposed as comment 38(b)(1)-
1, clarifies that while creditors must disclose the maximum payment at
the maximum possible rate, they need not also disclose a separate
example of the payment terms resulting from a rate increase under Sec.
226.18(f)(1)(iv).
The Board also proposed to revise comment 18(k)(1)-1 which
currently clarifies that interim interest on a student loan is not
considered a penalty for purposes of the requirement in Sec.
226.18(k)(1) to disclose whether or not a penalty may be imposed if a
loan is prepaid in full. The proposal removed the reference to interim
interest on a student loan as an example of what is not a penalty. The
Board did not intend to indicate that interim interest on a student
loan is considered a penalty. Rather, with the proposed removal of
Sec. 226.17(i) and associated commentary, the reference to interim
interest on a student loan would no longer be clear. Although the Board
is retaining and revising Sec. 226.17(i), to avoid confusion between
the terms ``student loan'' and ``private education loan,'' the Board is
adopting the proposed revision to comment 18(k)(1)-1. The Board
believes that the description of what constitutes a penalty in the
remainder of revised comment 18(k)(1)-1 provides sufficient clarity
that interim interest on a student loan would not be considered a
penalty.
Subpart F
The final rule, as proposed, adds a new Subpart F to contain the
rules relating to private education loans. In the final rule, proposed
Sec. Sec. 226.37, 38, and 39 have been redesignated to Sec. Sec.
226.46, 47, and 48. On July 23, 2009, the Board proposed new disclosure
requirements for closed-end loans secured by real property or a
dwelling. In order to make these proposed provisions contiguous with
the current Special Rules for Certain Mortgage Transactions in Subpart
E, the Board proposed to add the new disclosure requirements to
Sec. Sec. 226.37 and 226.38. In order to accommodate the potential for
future rulemakings the Board is reserving Sec. Sec. 226.39 through
226.45.
Section 226.46 Special Disclosure Requirements for Private Education
Loans
Section 226.46, proposed as Sec. 226.37, contains general rules
about the disclosure and other requirements contained in Subpart F.
Proposed Sec. 226.37(a) specified that Subpart F would apply only to
private education loans. Section 226.46(a) of the final rule applies
Subpart F to all extensions of credit that meet the definition of a
private education loan in Sec. 226.46(b)(5). The final rule also
permits, but does not require, creditors to comply with Subpart F for
certain extensions of credit subject to Sec. Sec. 226.17 and 18 that
are related to financing an education. Specifically, some commenters
requested clarification as to whether certain loans that do not meet
the definition of private education loan, but are extended to students
who have completed graduate school for expenses related to relocation,
medical internship or residency, or bar study would be covered. Under
Sec. 226.46(a) of the final rule, compliance with Subpart F is
optional for extensions of credit that are extended to a consumer for
expenses incurred after graduation from a law, medical, dental,
veterinary or other graduate school and related to relocation, study
for a bar or other examination, participation in an internship or
residency program, or similar purposes. New comment 46(a)-1 clarifies
that if the creditor opts to comply with Subpart F, it must comply with
all the applicable requirements of Subpart F. It also clarifies that if
the creditor opts not to comply with Subpart F it must comply with the
requirements in Sec. Sec. 226.17 and 18.
Loans made for bar study, residency, or internship expenses may not
meet the definition of ``private education loan'' in Sec. 226.46(b)(5)
if the extension of credit will not be used, in whole or in part, for
``postsecondary educational expenses'' as specified in Sec.
226.46(b)(3). Consequently, under the HEOA, compliance with Subpart F
would not be mandatory for such loans. However, the Board believes that
permitting creditors to comply with Subpart F benefits both creditors
and consumers. Creditor commenters requested the ability to comply with
Subpart F for these loans because the loans are often made along with
private education loans and share operational systems with those loans.
Optional compliance would allow creditors to avoid the expense of
maintaining separate compliance systems. The Board also believes that
permitting creditors to comply with Subpart F will benefit consumers
who will receive information about credit terms earlier in the lending
process and gain the benefits of a 30-day acceptance period and three-
day right to cancel.
Comment 46(a)-1, proposed as comment 37(a)-1 clarifies that if any
part of a loan used for post-graduate expenses is also used for
postsecondary educational expenses, then compliance with Subpart F is
mandatory not optional. It also clarifies that, except where
specifically provided otherwise, the requirements and limitations of
Subpart F are in addition to the requirements of the other subparts of
Regulation Z.
46(b) Definitions
The HEOA amends TILA by adding a number of defined terms in new
TILA sections 140 and 128(e). Section 226.46(b), proposed as Sec.
226.37(b), adds these definitions to Regulation Z.
The Board did not propose to add a definition to Regulation Z for
one new term defined in the HEOA, ``private educational lender.''
Instead, the Board proposed to use Regulation Z's existing definition
of ``creditor'' (12 CFR 226.2(a)(17)). The HEOA defines the term
``private educational lender'' as a financial institution, as defined
in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), or
a Federal credit union, as defined in section 101 of the Federal Credit
Union Act (12 U.S.C. 1752) that solicits, makes, or extends private
education loans.\8\ The term also includes any other person engaged in
the business of soliciting, making, or extending private education
loans. In the proposal, the Board stated its belief that the
``creditor'' definition would encompass persons ``engaged in the
business of'' extending private education loans.\9\ The term
``creditor'' applies to a person who regularly extends consumer credit,
which is defined as credit extended more than 25 times (or more than 5
times for transactions secured by a dwelling) in
[[Page 41202]]
the preceding calendar year. 12 CFR 226.2(a)(17).
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\8\ The term ``financial institution'' is not defined in section
3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), but the
Board interprets this term to refer to the defined term ``depository
institution,'' which is the most comprehensive definition in section
3 of the Federal Deposit Insurance Act.
\9\ The HEOA also covers persons engaged in the business of
soliciting private education loans. Under Sec. 226.46(d)(1),
proposed as Sec. 226.37(d)(1), the term solicitation is defined as
an offer to extend credit that does not require the consumer to
complete an application. The term ``solicit'' does not include
general advertising or invitations to apply for credit.
---------------------------------------------------------------------------
Under the HEOA, a depository institution or Federal credit union
would be covered for any private education loan it makes, regardless of
whether or not the institution regularly extended consumer credit. By
applying the private education loan rules only to ``creditors,'' the
Board proposed to create an exception for depository institutions and
Federal credit unions that do not regularly extend consumer credit. The
Board requested comment on whether there were instances where an
institution that does not regularly extend consumer credit nevertheless
makes an occasional private education loan and should be covered by the
rule. The few commenters who addressed this issue did not provide
specific examples of depository institutions or Federal credit unions
that make private education loans but do not meet the definition of
creditor.
Under TILA section 105(a), the Board may provide exceptions to TILA
for any class of transactions to facilitate compliance with TILA. The
Board believes that in most cases depository institutions and credit
unions that extend private education loans would also be creditors
under Regulation Z. The definition of creditor applies to institutions
that extended consumer credit of any type more than 25 times in the
preceding calendar year (or more than 5 times for transactions secured
by a dwelling). That is, an institution need not make more than 25
private education loans to be covered. If an institution makes 3
private education loans and 23 automobile loans, that institution is a
creditor. For institutions that do not meet the definition of creditor,
the compliance burden of the private education loans rules appears
significant for the small number of loans that they may extend.
Applying the private education loan rules to such institutions would
likely dissuade them from providing private education loans,
diminishing competition and consumer choice for those consumers who may
have access to such loans. Thus, the Board believes that this exception
is necessary and proper to facilitate compliance with TILA, and it is
adopted as proposed in the final rule.
The Board also proposed to exercise its authority under TILA
section 105(f) in applying the private education loan rules only to
``creditors,'' as defined in Regulation Z, thereby exempting from the
requirements of HEOA depository institutions and Federal credit unions
that do not regularly extend consumer credit. The Board understands
that the private education loan population contains students who may
lack financial sophistication, and that the amount of the loan may be
large and the loan itself may be important to the borrower. The Board
believes, however, that because the number of instances where a
consumer would receive a private education loan from an institution
that does not regularly extend consumer credit is very limited, the
burden and expenses of compliance that would be assumed by the
institution are not outweighed by the benefit to the consumer.
Furthermore, the Board believes that the goal of consumer protection
would not be undermined by this exemption and that, after considering
the 105(f) factors, coverage would not provide a meaningful benefit to
consumers in the form of useful protection.
The Board also requested comment on whether other persons not
covered by the definition of ``creditor'' should be covered by the
rule. A few commenters expressed concern that because the current
definition of ``creditor'' includes only persons who met the thresholds
for regularly extending consumer credit in the preceding calendar year,
it would not include new entrants into the private education loan
market in their first year. These commenters suggested that the
definition be extended to include those persons who intend to regularly
extend private education loans for the coming calendar year.
As proposed, the final rule applies to persons meeting the
definition of ``creditor'' under Sec. 226.2(a)(17). The current
definition provides persons with certainty as to whether or not they
are covered by Regulation Z. An alternative definition based on intent
to regularly extend credit would be subjective and persons could not
determine whether or not they must comply with Regulation Z until after
the fact.
46(b)(1) Covered Educational Institution
The HEOA defines the term ``covered educational institution'' to
mean any educational institution that offers a postsecondary
educational degree, certificate, or program of study (including any
institution of higher education) and includes an agent, officer, or
employee of the educational institution. Included in the definition of
covered educational institution are ``institutions of higher
education,'' as defined under section 102 of the Higher Education Act
of 1965 (20 U.S.C. 1002). The Higher Education Act of 1965 contains two
definitions of the term ``institution of higher education;'' a narrower
definition in section 101, and a broader definition in section 102. See
20 U.S.C. 1001, 1002. The HEOA explicitly uses the broader definition
in section 102 of the Higher Education Act of 1965. HEOA Title X,
Section 1001 (adding TILA Section 140(a)(3)). The more expansive
definition of institution of higher education, as interpreted by the
Department of Education's regulations (34 CFR 600), appears broad
enough to encompass most educational institutions that offer
postsecondary educational degrees, certificates, or programs of study.
The definition of institution of higher education under section 102 of
the Higher Education Act of 1965, however, would not include certain
unaccredited educational institutions that offer postsecondary
educational degrees, certificates, or programs of study. The HEOA's
definition of ``covered educational institution'' appears to be broader
than the definition of ``institution of higher education'' because the
former includes, but is not limited to, the latter. For this reason,
Sec. 226.46(b)(1), proposed as Sec. 226.37(b)(1), defines ``covered
educational institution'' as an educational institution (as well as an
agent, officer or employee of the institution) that would meet the
definition of an institution of higher education as defined in Sec.
226.46(b)(2), without regard to the institution's accreditation status.
Comment 46(b)(1)-1, proposed as comment 37(b)(1)-1, clarifies that
if an educational institution would not be considered an ``institution
of higher education'' solely on account of the institution's lack of
accreditation, the institution nonetheless would be a ``covered
educational institution.'' It also clarifies that a covered educational
institution may include, for example, a private university or a public
community college. It may also include an institution, whether
accredited or unaccredited, that offers instruction to prepare students
for gainful employment in a recognized profession such as flying,
culinary arts, or dental assistance. Under the definition, a covered
educational institution does not include elementary or secondary
schools.
Although the definition of ``covered educational institution''
under the Title X of the HEOA includes an agent, officer or employee of
a covered educational institution, the term ``agent'' is not explicitly
defined in that section of the HEOA. However, section 151 of the HEOA
defines an ``agent'' as an officer or employee of a covered institution
or an institution-affiliated organization and excluding any creditor
regarding any private education loan made by the creditor. Proposed
comment 37(b)(1)-2 clarified that an ``agent'' for the
[[Page 41203]]
purposes of defining a covered educational institution is an officer or
employee of an institution affiliated organization. Comment 46(b)(1)-2
in the final rule further clarifies that an ``agent'' of a covered
educational institution includes the institution-affiliated
organization itself, as well as an officer or employee of an
institution-affiliated organization.
46(b)(2) Institution of Higher Education
The HEOA added the term ``institution of higher education'' to TILA
Section 140(a)(3) and defined it to have the same meaning as in section
102 of the Higher Education Act of 1965 (20 U.S.C. 1002). The
definition encompasses, among other institutions, colleges and
universities, proprietary educational institutions and vocational
educational institutions. Proposed Sec. 226.37(b)(2) defined
``institution of higher education'' with reference to section 102 of
the Higher Education Act of 1965 and to the implementing regulations
promulgated by the Department of Education. However, on May 22, 2009,
after passage of the HEOA and publication of the Board's proposed rule,
the Credit Card Accountability Responsibility and Disclosure Act of
2009 (``Credit CARD Act'') amended TILA and added a definition of the
term ``institution of higher education'' to TILA section 127 that
differs slightly from the definition of ``institution of higher
education'' in TILA section 140. The Credit CARD Act amendment to TILA
defines ``institution of higher education'' to include both sections
101 and 102 of the Higher Education Act of 1965. Credit CARD Act, Title
III, Section 305 (adding TILA section 127(r)(1)(D)).
The definition of institution of higher education in TILA section
127 does not apply to private education loans. However, the Credit CARD
Act added substantive provisions that apply to ``institutions of higher
education'' to TILA section 127 and section 140, indicating that the
difference between the two definitions was inadvertent. Thus, the Board
believes that the two definitions of ``institution of higher
education'' should be reconciled. In order to ensure that the
definition of ``institution of higher education'' is consistent
throughout Regulation Z, the final rule adopts a definition of
``institution of higher education'' that includes both sections 101 and
102 of the Higher Education Act of 1965. The Board understands, after
consulting with the Department of Education, that intuitions covered
under section 101 of the Higher Education Act of 1965 would also be
covered under section 102 of the Higher Education Act. As a result, the
Board is not expanding the coverage of the final rule, but rather is
adopting a definition that is consistent with the most recent statutory
amendment to TILA. The Board is adopting comment 46(b)(2)-1, proposed
as comment 37(b)(2)-1, providing examples of institutions of higher
education.
46(b)(3) Postsecondary Educational Expenses
The HEOA defines ``postsecondary educational expenses'' as any of
the expenses that are listed as part of the cost of attendance of a
student under section 472 of the Higher Education Act of 1965 (20
U.S.C. 1087ll). Section 226.46(b)(3) adopts this definition as proposed
in Sec. 226.37(b)(3), and provides illustrative examples of
postsecondary educational expenses. Examples included 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. Comment 46(b)(3)-1, adopted as proposed in
comment 37(b)(3)-1, clarifies that the examples in the rule are not
exhaustive.
46(b)(4) Preferred Lender Arrangement
The HEOA defines ``preferred lender arrangement'' as having the
same meaning as in section 151 of the Higher Education Act of 1965 (20
U.S.C 1019). Section 226.46(b)(4), proposed as Sec. 226.37(b)(4),
adopts this definition. Comment 46(b)(4)-1, proposed as comment
37(b)(4)-1, clarifies that the term refers to an arrangement or
agreement between a creditor and a covered educational institution
under which a creditor provides education loans to consumers for
students attending the school and the school recommends, promotes, or
endorses the creditor's private education loans. It does not include
arrangements or agreements with respect to Federal Direct Stafford/Ford
loans, or Federal PLUS loans made under the Federal PLUS auction pilot
program.
46(b)(5) Private Education Loan
Proposed Sec. 226.37(b)(5) implemented the HEOA's definition of a
``private education loan.'' Under the proposal, a private education
loan was defined as a loan that is not made, insured, or guaranteed
under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et
seq.) and is extended expressly, in whole or in part, for postsecondary
educational expenses to a consumer, regardless of whether the loan is
provided through the educational institution that the student attends.
A private education loan excluded any credit otherwise made under an
open-end credit plan. It also excluded any closed-end loan secured by
real property or a dwelling.
Proposed comment 37(b)(5)-1 clarified that a loan made ``expressly
for'' postsecondary educational expenses included loans issued
explicitly for expenses incurred while a student is enrolled in a
covered educational institution. It also covered loans issued to
consolidate a consumer's pre-existing private education loans.
Under Sec. 226.46(b)(5) and related commentary, the Board is
adopting the definition of ``private education loan'' substantially as
proposed, but with exceptions for certain credit extensions provided by
covered educational institutions. Extensions of credit with a term of
90 days or less, and tuition billing plans where an interest rate will
not be applied to a balance and the term of the transaction is not
greater than one year, even if the credit is payable in more than four
installments, are exempt.
Loans used for multiple purposes. Proposed comment 37(b)(5)-2
addressed loans, other than open-end credit or any loan secured by real
property or a dwelling, that a consumer may use for multiple purposes,
including postsecondary education expenses. Under the proposal,
creditors extending such loans, could, at their option, provide the
disclosures under Sec. 226.38(a) on or with an application or
solicitation. However, under Sec. 226.37(d)(1)(iii), the Board
proposed to exercise its authority under TILA section 105(a) and except
multi-purpose loans from the application disclosure requirements of
proposed Sec. 226.38(a). As explained below, the Board stated its
belief that this exception is necessary and proper to effectuate the
purposes of, and facilitate compliance with, TILA.
The Board also proposed to exercise its authority under TILA
section 105(f) to exempt such loans from the proposed Sec. 226.38(a)
disclosure requirements implementing TILA section 128(e)(1). The Board
stated its view that these application and solicitation disclosure
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection for loans that may be used for
multiple purposes. The Board considered that the private education loan
population includes many students who may lack financial sophistication
and the size of the loan could be relatively significant and important
to the borrower. However, with respect to loans that may be used for
multiple purposes, the creditor may not know at application if
[[Page 41204]]
the consumer intends to use such loans for educational purposes. A
requirement to provide a consumer with the proposed Sec. 226.38(a)
disclosures would likely have been complicated and burdensome to
creditors and potentially infeasible to implement. Furthermore, the
Board believed that the borrower would receive meaningful information
about the loan through the subsequent approval and final disclosures
required under proposed Sec. Sec. 226.38(b) and 38(c), respectively.
The HEOA also provides borrowers with significant rights, such as the
right to cancel the loan. The Board recognized that such multi-purpose
loans would not be secured by the principal residence of the consumer,
which is a factor for consideration under section 105(f). The Board
stated its belief that consumer protection would not be undermined by
this exemption.
Proposed comment 37(b)(5)-2 clarified that if the consumer
expressly indicates on an application that the proceeds of the loan
will be used to pay for postsecondary educational expenses, the
creditor must comply with the disclosure requirements of proposed
Sec. Sec. 226.38(b) (approval disclosures) and 38(c) (final
disclosures) and proposed Sec. 226.39 (including the 30 day acceptance
period and three-business-day right to cancel). To determine the
purpose of the loan, proposed comment 37(b)(5)-2 stated that the
creditor may rely on a check-box or purpose line on a loan application.
Proposed comment 37(b)(5)-2 also clarified that the creditor must
base the disclosures on the entire amount of the loan, even if only a
part of the proceeds is intended for postsecondary educational
expenses. The Board's view was that this approach would be the least
administratively burdensome for creditors and would also be clearer to
consumers. Providing disclosures based on a partial loan amount might
cause a consumer to misinterpret the correct amount of his or her loan
obligation. Therefore, the Board proposed to exercise its authority
under TILA section 105(a) to require that the approval and final
disclosure requirements of HEOA be applied to the portion of the loan
that is not a private education loan. As explained above, the Board
stated its belief that this provision is necessary and appropriate to
assure a meaningful disclosure of credit terms for consumers.
The Board requested comment on whether the private education loan
application disclosures should be required for loans that may be used
for multiple purposes, or, alternatively, whether such loans should be
exempt from any of the other disclosure requirements. The Board also
requested comment on whether creditors who make loans that may be used
for multiple purposes should be required to comply with the requirement
to obtain a self-certification form under proposed Sec. 226.39(e) and,
if so, whether creditors should be required to obtain the self-
certification form only from consumers who are students, or from all
consumers, such as parents of a student.
The Board received numerous comments on the proposed application of
the private education loan rules to loans that may be used for multiple
purposes. Industry commenters, including both large and small
institutions and their representatives, stated that applying the
proposed rule to such loans would be burdensome. Small institutions
stated that the additional disclosures and timing requirements would
not be beneficial to their customers who expect to be able to apply for
and receive installment loans quickly based on an existing relationship
with the institution. Larger institutions noted that they often have
dedicated student lending operations and that applying the rules to
general installment loans would require them to update systems not only
for their student lending divisions, but also for other lending
divisions. Some commenters expressed concern that, rather than build
systems to comply with the private education loan rules, some
institutions would decline to make a loan if the consumer indicated
that the funds would be used for postsecondary educational expenses.
Commenters also expressed concern that basing the disclosures on the
entire loan amount, rather than the amount used for educational
expenses would cause confusion.
By contrast, consumer group commenters supported the proposed
inclusion of loans that may be used for multiple purposes, noting the
concern that exempting such loans could create an opportunity for
evasion of the proposed rules. They also supported basing the
disclosures on the entire loan amount, rather than the amount used for
educational expenses. These commenters suggested that creditors be
required to inquire whether a loan would be used for postsecondary
educational expenses.
The final rule would cover multipurpose loans largely as proposed.
The Board believes that coverage of loans that may be used for multiple
purposes is warranted by the statutory inclusion of loans made
``expressly,'' that is, explicitly, for postsecondary educational
expenses. The Board also believes that there is potential for evasion
of the rules if creditors could avoid compliance by lending the
consumer more than the amount needed for educational purposes. One of
the goals of the HEOA is to prevent students from borrowing more than
their financial need to finance their education. Comment 46(b)(5)-2
provides that the creditor may rely on a check-box or purpose line in
an application to determine the loan's purpose. In addition, the
creditor must base the disclosures on the entire amount of the loan,
even if only part of the loan is to be used for postsecondary
educational expenses. The Board believes that providing disclosures
based on a partial loan amount might cause a consumer to misinterpret
the correct amount of his or her loan obligation. The Board is also
adopting the exception to the requirement that the application
disclosures under Sec. 226.47(a) be provided for multiple-purpose
loans. The creditor may not know at application if the consumer intends
to use such loans for educational purposes. A requirement to provide a
consumer with the Sec. 226.47(a) disclosures would likely be
complicated and burdensome to creditors and potentially infeasible to
implement.
Credit provided by educational institutions. In addition to
comments about loans that may be used for multiple purposes, the Board
received a number of comments from educational institutions requesting
clarification as to whether tuition billing plans were covered by the
proposed rules. These commenters noted that such billing plans do not
involve a disbursement of funds to the consumer and do not involve the
application of an interest rate to a balance. Consequently, a major
part of the new disclosures required by the HEOA, such as disclosures
about interest rates and payment amounts at the maximum interest rate,
would not apply to such billing option plans. In addition, these
commenters suggested that neither the 30 day acceptance period nor the
three-day right to cancel would be meaningful to consumers in a context
where no funds are disbursed to the consumer. Most commenters who
addressed this issue noted that these billing plans usually have terms
of one year or less.
Under Sec. 226.46(b)(5)(iv)(B), the Board is revising the
definition of ``private education loan'' to exclude certain billing
plans provided by educational institutions. If payable in more than
four installments, these plans may be considered credit under
Regulation Z and would be subject to the requirements of Sec. Sec.
226.17 and 18.
[[Page 41205]]
However, the Board agrees with commenters that the additional
disclosure and timing rules for private education loans would not
provide meaningful disclosures to consumers and could potentially make
it more difficult for consumers to benefit from flexible payment
options. The Board believes that the disclosure requirements under
Sec. Sec. 226.17 and 18 provide consumers with adequate information
for these types of plans. In response to public comment, the Board is
exercising its authority under TILA section 105(a) to adopt a narrow
exception for billing plans that do not apply an interest rate to the
credit balance and have a term of one year or less, even if payable in
more than four installments. Based on public comment, the Board
believes that the limited exception for billing plans of one year or
less that do not charge interest will provide sufficient flexibility to
schools to accommodate students' payment needs while ensuring that
extensions of credit that are more likely to be a substitute for a
private education loan are covered. Comment 46(b)(5)-3 clarifies that
such plans may nevertheless be extensions of credit subject to
Sec. Sec. 226.17 and 18. As explained above, the Board believes that
this exception is necessary and proper to effectuate the purposes of,
and facilitate compliance with, TILA.
Educational institution commenters also requested an exemption for
``emergency'' loans provided to a student for a short term while the
student waits for other funds to be disbursed. Most commenters that
requested an exemption for these ``emergency'' loans stated that they
have a term of 90 days or less. Because these loans may charge
interest, they would not fall under the exemption for billing payment
plans. However, as with billing payment plans, the Board believes that
the additional disclosures required by the HEOA, such as the maximum
rate disclosures, would not provide a meaningful benefit to consumers
taking out short-term loans. Creditors would still be obligated to
provide the general disclosures required under Regulation Z. Moreover,
these commenters focused particularly on the burden that could be
imposed on students by the prohibition on disbursing funds during the
three-day cancellation period. For example, if delayed disbursement
caused the student to fail to meet a tuition payment deadline the
student may not be allowed to enroll in school, increasing the time
needed to graduate. The Board believes that short-term loans provided
by the school benefit consumers and that the HEOA's requirements,
especially the three-day cancellation period, could impair their
effectiveness by delaying disbursement of loan proceeds without
providing a meaningful benefit to students. Accordingly, the final rule
exempts loans provided by the school with a term of 90 days or less.
Comment 46(b)(5)-3 clarifies that such loans are not considered
private education loans, even if interest is charged on the credit
balance. Because these loans charge interest, they are not covered by
the exception under Sec. 226.46(b)(5)(iv)(B). However, these loans are
extensions of credit subject to the requirements of Sec. Sec. 226.17
and 18. The comment clarifies that if legal agreement provides that
repayment is required when the consumer or the educational institution
receives certain funds (such as by deposit into the consumer's or
educational institution's account), the disclosures should be based on
the creditor's estimate of the time the funds will be delivered.
The exceptions that apply when the covered educational institution
is the creditor apply only when the school itself is the creditors and
not when an institution-affiliated organization is the creditor. The
definition of covered educational institution in Sec. 226.46(b)(1)
includes an agent of the institution, meaning and institution-
affiliated organization. Comment 46(b)(1)-2 clarifies that institution-
affiliated organization does not include the creditor with respect to
any private education loan made by that creditor. Thus, if an
institution-affiliated organization is the creditor, it is not a
``covered educational institution'' and the institution-affiliated
organization's loans are not exempt.
Educational institution commenters also requested clarification as
to whether state ``service requirement'' programs would be considered
private education loans. Under these programs, money is disbursed to
students who agree as part of the legal obligation to complete a
service obligation, such as teaching or practicing medicine in an
underserved area. If the consumer completes the obligation, no
repayment of principal or interest is required. However, if the
consumer does not complete the service obligation, under the terms of
the legal obligation, the consumer is required to repay the funds with
interest.
The Board notes that the definition of ``credit'' under Sec.
226.2(a)(14) means the right to defer payment of debt or to incur debt
and defer its payment. Certain ``service requirement'' programs may not
be credit under Regulation Z if the terms of the legal obligation
contemplate that the consumer will not be required to repay principal
or interest on disbursed funds. If the consumer is required to repay
disbursed funds only in connection with an unanticipated breach of the
consumer's legal obligation to perform a service, the consumer may not
have a credit extension under Regulation Z.
46(c) Form of Disclosures
Similar to the requirements imposed by Sec. 226.17 for the
disclosures required by Sec. 226.18, the Board is adopting Sec.
226.46(c)(1), proposed as Sec. 226.37(c)(1), to require the
disclosures for private education loans be made clearly and
conspicuously. The Board is also adopting Sec. 226.46(c)(2), proposed
as Sec. 226.37(c)(2), to require that the approval and final
disclosures under Sec. Sec. 226.47(b) and 47(c) to be in writing in a
form that the consumer may keep. The disclosures must be grouped
together, be segregated from everything else, and not contain any
information not directly related to the disclosures required under
Sec. Sec. 226.47(b) and 47(c), which include the disclosures required
under Sec. 226.18. However, the disclosures may include an
acknowledgement of receipt, the date of the transaction, and the
consumer's name, address, and account number. In addition, as proposed,
the following disclosures may be made together with or separately from
other required disclosures as permitted under current Sec. 226.17: the
creditor's identity under Sec. 226.18(a), insurance or debt
cancellation under Sec. 226.18(n), and certain security interest
charges under Sec. 226.18(o).
As proposed, the term ``finance charge'' and corresponding amount,
when required to be disclosed under Sec. 226.18(d), and the interest
rate required to be disclosed under Sec. Sec. 226.47(b)(1)(i) and
47(c)(1), must be more conspicuous than any other disclosure, except
the creditor's identity under Sec. 228.18(a). As discussed in the
section-by-section analysis under Sec. 226.17, the annual percentage
rate is not required to be more prominent than other terms.
Comment 46(c)-1, proposed as comment 37(c)-1, clarifies that
creditors may follow the rules in Sec. 226.17 in complying with the
requirement to provide the information required under Sec. 226.18, as
well as the requirement that the disclosures be grouped together and
segregated from everything else. However, in contrast to Sec. 226.17,
the itemization of the amount financed under Sec. 226.18(c)(1) need
not be separate from the other disclosures.
[[Page 41206]]
TILA Section 128(b)(1) requires any computations or itemization to
be segregated from the disclosures required in TILA Section 128(a).
However, the HEOA requires creditors to disclose a number of terms that
are part of the itemization of the amount financed under Sec.
226.18(b), such as the principal amount of the loan and an itemization
of fees. See Sec. Sec. 226.47(b)(2), 47(b)(3)(i), 47(c)(2) and
47(c)(3)(i). Based on consumer testing, the Board believes that
consumers may be confused about the difference between the required
disclosure of the amount financed (Sec. 226.18(b)) and the loan's
total principal amount in cases where those two disclosures are
different. Providing an itemization can help clarify distinction
between the ``amount financed'' and the ``total loan amount'' by
showing the consumer how the amount financed is derived. It can also
provide a clear and understandable disclosure of certain fees. For
these reasons, the Board is exercising its authority under TILA section
105(a) to except private education loans from the requirement that the
itemization of the amount financed be segregated from the other
disclosures. The Board believes that this exception is necessary and
proper to effectuate the purposes of, and facilitate compliance with,
TILA.
The Board proposed to allow creditors to provide the disclosure of
the loan's total principal amount as part of the itemization of the
amount financed, if the creditor opts to provide an itemization.
However, because the final model disclosures provide the loan's total
principal amount, not the amount financed, prominently, the final rule
allows the creditor to disclose the amount financed as part of the
itemization if the creditor opts to provide an itemization.
Section 226.46(c)(2), proposed as Sec. 226.37(c)(2), permits
creditors to make disclosures to consumers in electronic form, subject
to compliance with the consumer consent and other applicable provisions
of the Electronic Signatures in Global and National Commerce Act (E-
Sign Act) (15 U.S.C. 7001 et seq.). The disclosures required by Sec.
226.47(a) may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act on
or with an application or solicitation provided in electronic form. The
self-certification form required under Sec. 226.48(e) may be obtained
in electronic form subject to the requirements in that section. In
addition, as discussed below in the section-by-section analysis under
Sec. Sec. 226.48(c) and (d), if creditors have provided the approval
or final disclosures electronically in accordance with the E-Sign Act,
creditors may accept electronic communication of loan acceptance or
cancellation, respectively.
Comment 46(c)(2)-1, proposed as comment 37(c)(2)-1, contains
guidance on the manner in which disclosures may be provided in
electronic form. Electronic disclosures are deemed to be on or with an
application or solicitation if they--(1) Automatically appear on the
screen when the application or solicitation reply form appears; (2) are
located on the same Web ``page'' as the application or solicitation
reply form and the application or reply form contains a clear and
conspicuous reference to the location and content of the disclosures;
or (3) are posted on a Web site and the application or solicitation
reply form is linked to the disclosures in a manner that prevents the
consumer from by-passing the disclosures before submitting the
application or reply form. This approach is consistent with the rules
for electronic disclosures for credit and charge card applications
under comment 5a(a)(2)-1.ii.
46(d) Timing of Disclosures
Section 226.46(d), proposed as Sec. 226.37(d), contains the rules
governing the timing of the proposed disclosures. Proposed comment
37(d)-1 contained guidance specifying that if the creditor places the
disclosures in the mail, the consumer is considered to have received
them three business days after they are mailed. For purposes of
proposed Sec. Sec. 226.37, 226.38, and 226.39, the term ``business
day'' was given the more precise definition used for rescission and
other purposes, meaning all calendar days except Sundays and the
Federal holidays referred to in Sec. 226.2(a)(6).
As discussed in the section-by-section analysis under Sec.
226.2(a)(6), in the final rule the more precise definition of
``business day'' applies only to measuring the time period in which
consumers are deemed to have received mailed disclosures. The final
rule includes a new Sec. 226.46(d)(4) providing that the consumer is
deemed to have received mailed disclosures within three business days
after they are mailed. Comment 46(d)-1 clarifies that the definition of
``business day'' used in Sec. 226.46(d)(4) means all calendar days
except Sundays and the Federal holidays referred to in Sec.
226.2(a)(6). For example, if the creditor places the disclosure in the
mail on Thursday, June 4, the disclosures are considered received on
Monday, June 8.
Proposed comment 37(d)-1 stated that the disclosures are considered
provided when received by the consumer. However, in order to clarify
the timing of different aspects of the final rule, this is not adopted
in comment 46(d)-1. Instead, as discussed in this section-by-section
analysis under Sec. 226.46, the final rule specifies when disclosures
must be provided and, as discussed in the section-by-section analysis
under Sec. 226.48, the final rule provides guidance on when
disclosures are deemed to be received by the consumer for purposes of
measuring the 30-day acceptance period and three-day cancellation
period.
Application disclosures. The HEOA requires creditors to provide
disclosures in an application or in a solicitation that does not
require the consumer to complete an application. HEOA, Title X,
Subtitle B, Section 1021(a) (adding TILA section 128(e)(1)). Under
Sec. 226.46(d)(1)(i), proposed as Sec. 226.37(d)(1), creditors are
allowed to provide the disclosures on or with the application or
solicitation because the disclosures are likely to be longer than a
single page. The final regulation, as proposed, defines the term
``solicitation'' to mean an offer of credit that does not require the
consumer to complete an application. A ``solicitation'' would also
include a ``firm offer of credit'' as defined in the Fair Credit
Reporting Act (FCRA). 15 U.S.C. 1681 et seq. Because consumers who
receive ``firm offers of credit'' have been preapproved to receive
credit and may be turned down only under limited circumstances, the
Board believes that these preapproved offers are of the type intended
to be captured as a ``solicitation,'' even though consumers are
typically asked to provide some additional information in connection
with accepting the offer. The definition of ``solicitation'' is similar
to that contained in Sec. 226.5a(a)(1) for credit and charge card
application disclosures. Comment 46(d)(1)-1, proposed as comment
37(d)(1)-1, provides additional guidance that invitations to apply for
a private education loan would not be considered solicitations.
Proposed Sec. 226.37(d)(1)(ii) dealt with provision of disclosures
in a telephone application or solicitation initiated by the creditor.
The creditor was allowed, but not required, to orally disclose the
information in proposed Sec. 226.38(a). Alternatively, if the creditor
did not disclose orally the information in Sec. 226.38(a), the
creditor was required to provide or place in the mail the disclosures
no later than three business days after the consumer applied for the
credit. The Board stated its belief that
[[Page 41207]]
orally disclosing to consumers all of the information in proposed Sec.
226.38(a), including rate and loan cost information, information about
Federal loan alternatives, and loan eligibility requirements, may make
it difficult for consumers to comprehend and retain the information.
The Board requested comment on alternatives to providing
application disclosures in telephone applications or solicitations
initiated by the creditor. In response to comment, the final rule
revises the proposal in two ways. First, under Sec. 226.47(d)(1)(ii),
the oral disclosure provisions for telephone applications or
solicitations apply regardless of whether the creditor or the consumer
initiates the communication. Both industry and consumer group
commenters stated that consumers of private education loans often
initiate telephone applications and suggested that both consumers and
creditors would benefit if the same rules applied regardless of which
party initiates the communication.
Second, the Board recognized in the proposal that creditors may
sometimes be able to communicate approval of the consumer's application
at the same time that the creditor would provide the application
disclosures. Consumers may be confused by receiving both the
application disclosures and the approval disclosures at the same time.
Therefore, the Board proposed to exercise its authority under TILA
section 105(a) to create an exception from the requirement to provide
the application disclosures under proposed Sec. 226.38(a) if the
creditor did not provide oral application disclosures but did provide
or place in the mail the approval disclosures in proposed Sec.
226.38(b) no later than three business days after the consumer
requested the credit. As explained above, the Board stated its belief
that this exception is necessary and proper to assure a meaningful
disclosure of credit terms for consumers.
The Board also proposed to exercise its authority under TILA
section 105(f) in proposing the exemption, described above, from the
requirement to provide the application disclosures under proposed Sec.
226.38(a), as required by TILA section 128(e)(1). The Board believed
that, as described above, the application disclosure requirements would
not provide a meaningful benefit to consumers in the form of useful
information or protection because they would also contemporaneously
receive the approval disclosures which would provide the consumer with
adequate information. Moreover, the Board stated its view that
receiving both the application and approval disclosures at the same
time may complicate and hinder the credit process by causing consumer
confusion. The Board recognized that the private education loan
population contains students who may lack financial sophistication, and
that the amount of the loan may be large and the loan itself may be
important to the consumer. The Board also noted that private education
loans are not secured by the consumer's residence and that HEOA
provides the consumer with the right to cancel the loan. Finally, in
considering the last factor under section 105(f), the Board did not
believe that the goal of consumer protection would be undermined by
such an exemption.
Commenters supported this aspect of the proposal, but industry
commenters also suggested that if creditor denies the consumer's
application within three business days of the telephone communication,
the creditor should not be required to provide the application
disclosures. The Board agrees that it would be confusing for the
consumer to receive an adverse action notice simultaneously with or
shortly after receiving the application disclosures. Under Sec.
226.47(d)(1)(ii) of the final rule, if the creditor does not provide
the application disclosures orally and the creditor denies the
consumer's application within three business days, the creditor need
not send the application disclosures.
As discussed above in the section-by-section analysis under Sec.
226.46(b)(5), Sec. 226.46(d)(1)(iii) would create an exception to the
application disclosure requirement for a loan, other than open-end
credit or any loan secured by real property or a dwelling, that the
consumer may use for multiple purposes including, but not limited to,
postsecondary educational expenses.
Approval disclosures. Section 226.46(d)(2), proposed as Sec.
226.37(d)(2), requires that the disclosures specified in Sec.
226.47(b) be provided before consummation on or with any notice to the
consumer that the creditor has approved the consumer's application for
a loan. If the creditor provides approval to the consumer by mail, the
disclosures have to be mailed at the same time as the approval. If the
creditor provides approval by telephone, the creditor must place the
disclosures in the mail within three business days of the approval. The
creditor may provide the disclosures solely in electronic form if the
creditor has complied with the consumer consent and other applicable
provisions of the Electronic Signatures in Global and National Commerce
Act (E-Sign Act) (15 U.S.C. Sec. 7001 et seq.); otherwise, the
creditor must place the disclosures in the mail within three business
days.
The HEOA requires that the disclosures be provided
contemporaneously with loan approval. However, loan approval is an
internal process of the creditor's and it often may not be feasible to
provide the disclosures at the precise moment that the creditor
approves the loan. The Board believes that by requiring the disclosures
be provided at the time the creditor communicates approval to the
consumer, the consumer will receive the information at the earliest
opportunity contemporaneous with loan approval. In addition, the rule
provides creditors with certainty as to when the disclosure must be
provided. The Board believes that creditors are likely to notify the
consumer that the loan has been approved shortly after approval is
granted because the creditor cannot consummate and disburse the loan
until the consumer has received the required approval disclosures and
accepted the loan.
The Board requested comment on alternative approaches to the timing
of the approval disclosure. As discussed more fully in the section-by-
section analysis under Sec. 226.48(c), industry commenters requested
clarification as to when ``approval'' occurs. They noted that they
currently provide conditional notices of approval to consumers but that
final approval does not occur until information provided by the
consumer and the educational institution are verified. These commenters
noted that under the prohibition on changing terms during the
consumer's 30-day acceptance period in proposed Sec. 226.39(b), they
could no longer provide conditional approvals and expressed concern
that final approvals would come too late in the process for the 30-day
acceptance period to be meaningful to consumers.
The final rule requires creditors to provide the approval
disclosures on or with any notice of approval, as proposed. However, to
ensure that the approval disclosure comes as early as reasonably
possible consistent with the HEOA's prohibition on the creditor
changing the terms of the loan, Sec. 226.48(c) allows creditors to
make certain, limited changes to loan terms after loan approval without
providing another 30-day acceptance period. In addition, comment
46(d)(2)-1 explicitly permits the creditor to communicate that
additional information is required from the consumer before approval
may be granted, without triggering the disclosure requirements of Sec.
226.47(b).
Final disclosures. Proposed Sec. 226.37(d)(3) required final
disclosures
[[Page 41208]]
to be provided to the consumer after the consumer accepts the loan and
at least three business days prior to disbursing the private education
loan funds.
In the final rule Sec. 226.46(d)(3), requires the final
disclosures to be provided to the consumer after the consumer accepts
the loan, but does not base the timing on when the private education
loan funds are disbursed. Section 226.48(d) prohibits the creditor from
disbursing funds until at least three business days after the consumer
receives the final disclosures. The reference in proposed Sec.
226.37(d)(3) to the disbursement of funds was potentially confusing and
did not add a meaningful restriction on the timing of providing the
disclosures.
In both the proposed and final rule, the timing of the final
disclosure differs slightly from the language used in the HEOA. For the
reasons discussed below, the Board believes that creditors may not
always be able to comply with the literal text of the HEOA, and that
the Board's timing rule implements the purpose of the HEOA's final
disclosure.
The HEOA requires a final disclosure contemporaneously with the
consummation of a private education loan. HEOA, Title X, Subtitle B,
Section 1021(a) (adding TILA Section 128(e)(4)). Regulation Z defines
``consummation'' as the time that a consumer becomes contractually
obligated on a credit transaction. 12 CFR 226.2(a)(13). The
corresponding staff commentary provides that applicable state law
governs in determining when a consumer becomes contractually
obligated.\10\ The Board recognizes that states define when a consumer
becomes contractually obligated in a variety of ways. The multiple
state definitions could result in considerable confusion among
creditors as to the required timing of the final disclosures. Under
many current private education loan agreements, the consumer is not
contractually obligated until funds are disbursed to the consumer. This
would create a compliance problem for creditors making loans in these
cases because, in addition to requiring delivery of the final
disclosures contemporaneously with consummation, the HEOA forbids
creditors from disbursing funds until three business days after the
consumer receives the final disclosures. Thus, where the consumer is
not contractually obligated until the funds are disbursed, creditors
cannot comply with the literal language of the HEOA; a creditor cannot
simultaneously provide a disclosure at the time of disbursement and not
disburse funds until three business days after the disclosure is
provided. The HEOA adds further complexity to determining when the
consumer becomes contractually obligated because it requires creditors
to provide an approval disclosure to the consumer and hold the terms
open for 30 days for the consumer to accept. It is not clear how this
process would affect various states' interpretations of when the
consumer becomes contractually obligated. Thus, creditors may face
considerable uncertainty as to when the required disclosures must be
provided.
---------------------------------------------------------------------------
\10\ The comment states that when a contractual obligation on
the consumer's part is created is a matter to be determined under
applicable law; Regulation Z does not make this determination.
Comment 2(a)(13)-1.
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The Board interprets the phrase ``contemporaneously with
consummation'' to mean a time after the consumer accepts the loan that
is at least three days before disbursement. Accordingly, the Board is
adopting Sec. 226.46(d)(3) to require that the final disclosures be
provided after the consumer accepts the loan and, as discussed in the
section-by-section analysis below, Sec. 226.48(d) to prohibit
disbursement until three days after the consumer receives the final
disclosures. The Board solicited comment on alternative approaches to
the timing of the final disclosure that achieve the statutory purpose
while ensuring that compliance is possible in all cases and commenters
generally supported the Board's approach. The Board believes that the
purpose of the final disclosure, and the consumer's three-business day
right to cancel following receipt of that disclosure, is to ensure that
consumers are given a final opportunity to evaluate their need for a
private education loan after acceptance and before the funds are
actually disbursed. The Board believes that rule will accomplish the
statute's objectives while ensuring that creditors have reasonable
certainty in complying with the rule's timing requirement.
46(e) Basis of Disclosures and Use of Estimates
Section 226.46(e), adopted as proposed in Sec. 226.37(e), requires
that the disclosures be based on the terms of the legal obligation
between the parties and is similar to current Sec. 226.17(e). If any
information necessary for an accurate disclosure is unknown to the
creditor, the creditor must make the disclosure based on the best
information reasonably available at the time the disclosure is provided
and state clearly that the disclosure is an estimate. For example, the
creditor may not know the exact date that repayment will begin at the
time that credit is advanced to the consumer. The creditor is permitted
to estimate a repayment start date based on, for instance, an estimate
of the consumer's graduation date.
46(f) Multiple Creditors; Multiple Consumers
Proposed Sec. 226.37(f), provided rules for disclosures where
there are multiple creditors or consumers. If there are multiple
creditors only one set of disclosures could be given and the creditors
were required to agree which creditor must comply. If there are
multiple consumers, the creditor was permitted to provide the
disclosure to any consumer who is primarily liable on the obligation.
Consumer group commenters urged the Board to require that the
disclosures be provided to all consumers primarily liable on the
obligation. However, proposed Sec. 226.37(f) was consistent with the
treatment of other disclosures under Regulation Z and the Board is
adopting it as proposed in Sec. 226.46(f).
46(g) Effect of Subsequent Events
Under proposed Sec. 226.37(g) and comment 37(g)-1, if an event
that occurred after consummation rendered the final disclosures under
proposed Sec. 226.38(c) inaccurate, the inaccuracy would not be a
violation of Regulation Z. For example, if the consumer initially chose
to defer payment of principal and interest while enrolled in an
educational institution, but later chose to make payments while
enrolled, such a change would not make the original disclosures
inaccurate.
Proposed Sec. 226.37(g) was modeled after current Sec. 226.17(e).
However, because only one set of disclosures are required under Sec.
226.17, while two sets are required for private education loans,
commenters requested clarification of the effect of subsequent events
on the approval disclosures required under proposed Sec. 226.38(b).
Specifically, commenters noted that because the proposed rule had
excepted private education loans from Sec. 226.17(e), but provided an
analogous rule in proposed Sec. 226.37(g) only for final disclosures,
the proposal did not address the effect of subsequent events on
approval disclosures.
In the final rule, Sec. 226.46(g) is broken out into separate
rules for the approval disclosures under Sec. 226.47(b) and the final
disclosures under Sec. 226.47(c). For approval disclosures, the rule
clarifies that if a disclosure under Sec. 226.47(b) becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of Regulation Z
(12 CFR part 226), although new disclosures may
[[Page 41209]]
be required under Sec. 226.48(c). Comment 46(g)-1 clarifies that
although inaccuracies in the disclosures required under Sec. 226.47(b)
are not violations if attributable to events occurring after
disclosures are made, creditors are restricted under Sec. 226.48(c)(2)
from making certain changes to the loan's rate or terms after the
creditor provides an approval disclosure to a consumer. Creditors are
also required to make subsequent disclosures in the form of the final
disclosures required under Sec. 226.47(c) and therefore, except as
specified under Sec. 226.48(c)(4), need not make new approval
disclosures in response to an event that occurs after the creditor
delivers the required approval disclosures. For example, at the time
the approval disclosures are provided, the creditor may not know the
precise disbursement date of the loan funds and must provide estimated
disclosures based on the best information reasonably available. If,
after the approval disclosures are provided, the creditor learns from
the educational institution the precise disbursement date, new approval
disclosures would not be required, unless specifically required under
Sec. 226.48(c)(4) if other changes are made at the same time.
Similarly, the creditor may not know the precise amounts of each loan
to be consolidated in a consolidation loan transaction and information
about the precise amounts would not require new approval disclosures,
unless specifically required under Sec. 226.48(c)(4) if other changes
are made.
For final disclosures required under Sec. 226.47(c), Sec.
226.46(g)(2) rule clarifies that if a disclosure under Sec. 226.47(c)
becomes inaccurate because of an event that occurs after the creditor
delivers the required disclosures, the inaccuracy is not a violation of
Regulation Z (12 CFR part 226. For example, if the consumer initially
chooses to defer payment of principal and interest while enrolled in a
covered educational institution, but later chooses to make payments
while enrolled, such a change does not make the original disclosures
inaccurate.
Section 226.47 Content of Disclosures
Section 226.47, proposed as Sec. 226.38, establishes the content
that a creditor is required to include in its disclosures to a consumer
at three different stages in the private education loan origination
process: (1) On or with an application or a solicitation that does not
require the consumer to complete an application, (2) with any notice of
approval of the private education loan, and (3) after the consumer
accepts the loan.
Preventing Duplication of Existing TILA Disclosure Requirements
While adding a number of disclosure requirements for private
education loans, the HEOA did not eliminate a creditor's obligation to
provide consumers with the information required to be disclosed before
consummation of any closed-end loan, in accordance with TILA sections
128(a) through (d). The HEOA requires the Board to prevent, to the
extent possible, duplicative disclosure requirements for creditors
making private education loans under TILA. HEOA, Title X, Subtitle B,
Section 1021(a) (adding TILA Section 128(e)(9)). Where the disclosure
requirements of section 128(e) differ or conflict with other disclosure
requirements under TILA that apply to creditors, the requirements of
section 128(e) are controlling. Id.
The new application and solicitation disclosures proposed under
Sec. 226.38(a) did not duplicate disclosures previously required under
TILA because TILA does not require disclosures at the time of
application or solicitation for closed-end credit. Under TILA sections
128(a) through (d), as implemented by Sec. Sec. 226.17 and 226.18, the
closed-end loan disclosures applicable to private education loans are
required to be provided only once, before consummation. However, the
Board proposed to require the Sec. 226.18 closed-end loan disclosures
be provided twice for private education loans--once when the loan is
approved, and again with the final disclosures, in a manner shown in
the proposed model forms in Appendix H. Specifically, the Board
proposed to require creditors to provide consumers the existing Sec.
226.18 disclosures along with the proposed Sec. 226.38(b) approval
disclosures. The Board also proposed to require that the Sec. 226.18
disclosures be provided along with the final disclosures required under
new TILA section 128(e)(4) (implemented by proposed Sec. 226.38(c),
discussed below).
Under TILA sections 128(e)(2)(P) and 128(e)(4)(B), the Board has
authority to add such other information as necessary or appropriate for
consumers to make informed borrowing decisions. With respect to the
approval disclosures, the Board stated in its proposal its belief that
combining the existing closed-end credit TILA disclosures with the new
private education loan disclosures provided to consumers the most
relevant transaction-specific information at a point where the consumer
was most likely to make the decision as to whether a particular private
education loan met the consumer's needs. Once the creditor communicates
approval to the consumer, the consumer has the right to accept the loan
terms at any time within 30 calendar days of the date the consumer
receives the approval disclosures. During this time, with a few
exceptions, the creditor may not change the rate and terms of the loan.
As a result, if the consumer accepts the loan within that 30-day
period, the rate and terms of the approved loan will generally be the
rate and terms of the loan ultimately made to the consumer. To make an
informed decision during this deliberation period, the Board stated
that consumer would be best served by having the information required
under Sec. Sec. 226.17 and 226.18, as well as under proposed Sec.
226.38(b).
In addition, consistent with the requirement in Sec. 226.17 that
creditors must provide closed-end disclosures before consummation of
the credit transaction, proposed Sec. 226.37(d)(2) required that the
approval disclosure be provided before consummation. Based on TILA's
definition of ``consummation'' in Sec. 226.2(a)(13), this meant that
the closed-end credit disclosures must be provided before the consumer
was contractually obligated on the loan. State laws may vary as to when
consummation occurs (see comment 2(a)(13)-1), but the Board believes
that the time of approval is likely to precede the time at which the
consumer becomes contractually obligated on a loan.
The Board believed that providing the Sec. 226.18 disclosures a
second time along with the final disclosures under proposed Sec.
226.38(c) would enhance consumer understanding by making it easier for
consumers to compare the approval and final disclosures. By having two
sets of disclosures that largely mirror each other, both in content and
in form, consumers would be able to easily compare terms between the
two sets of disclosures and likely would be better able to decide
whether or not to exercise their right to cancel the loan. Moreover,
relatively few disclosures could be removed from the final disclosure
if the current TILA disclosures were not required, given the
substantial overlap with the HEOA requirements. Thus, the Board stated
that requiring uniformity would likely enhance consumer understanding
without unduly burdening creditors.
Commenters generally supported the inclusion of the information
required in Sec. 226.18 along with the approval and final disclosures
in proposed Sec. Sec. 226.38(b) and 38(c) and the final rule adopts
these requirements in Sec. Sec. 226.47(b) and 47(c). In combining the
Sec. 226.18 disclosures with the
[[Page 41210]]
disclosures under Sec. Sec. 226.47(b) and 47(c) in a model form, the
Board, as proposed, retains many of the basic elements of the closed-
end loan model form in existing Regulation Z Appendix H (see Appendix
H-2). The model forms are discussed further in the section-by-section
analysis under Appendix H.
Graduated payment disclosure. TILA section 128(e)(2)(K) requires
the creditor to disclose whether monthly payments are graduated. As
proposed, the Board is implementing this requirement as part of the
requirement that creditors provide the information under Sec. 226.18.
Specifically, the payment schedule disclosure under Sec. 226.18(g)
requires creditors to show whether the payments are graduated.
Other instances in which the Board is merging specific Sec. 226.18
disclosures with the disclosures in Sec. Sec. 226.47(b) and (c) to
avoid duplicative disclosures are discussed throughout this section-by-
section analysis below.
General Disclosure Requirements
Proposed comment 38-1 clarified that the disclosures required under
proposed Sec. 226.38 need be provided only as applicable, except where
specifically provided otherwise. For example, under proposed Sec. Sec.
226.38(b)(1) and (c)(1) creditors would specifically be required to
disclose the lack of any limitations on adjustments to the loan's
interest rate, rather than omit the disclosure as inapplicable.
However, for some loans, especially loans made to consolidate a
consumer's existing private education loans, a number of the required
disclosures may not apply. For example, the required disclosures about
the availability of Federal student loans would generally not apply to
a consolidation loan because Federal loan programs do not allow a
consumer to consolidate private education loans. For this reason, the
Board proposed to allow disclosures for consolidation loans to omit the
disclosures required in proposed Sec. Sec. 226.38(a)(6), and (b)(4).
Industry commenters sought further clarification that disclosure of
Federal loan alternatives would not apply to other types of loans for
which Federal funding is not available. In response to these comments,
comment 47-1 of the final rule also lists the transactions for which
compliance under Subpart F is optional, such as medical residency or
bar study loans, as loans for which Sec. Sec. 226.47(a)(6) and (b)(4)
are not applicable.
47(a) Application or Solicitation Disclosures
Section 226.47(a), proposed as Sec. 226.38(a), specifies the
information that a creditor must disclose to a consumer on or with any
application for a private education loan or any solicitation for a
private education loan that does not require an application. The
disclosures may be included either on the same document as the
application or solicitation or on a separate document, as long as the
creditor provides the required disclosures to the consumer at the
required time. Other guidance on delivery of the disclosures required
under Sec. 226.47(a) is provided in Sec. 226.46, corresponding
commentary, and in this section-by-section analysis under Sec. 226.46.
Revisions to the final rule regarding the provision of application and
solicitation disclosures in telephone applications are discussed in the
section-by-section analysis under Sec. 226.46(d)(1).
47(a)(1) Interest Rates
Section 226.47(a)(1), proposed as Sec. 226.38(a)(1), requires
creditors to disclose information regarding the interest rates that
apply to the private education loan being offered.
Proposed Sec. 226.38(a)(1)(i) required creditors to disclose the
initial interest rate or range of rates that are being offered for the
loan. TILA section 128(e)(1)(A) requires disclosure of the potential
range of rates of interest applicable to the loan, but does not clarify
how this requirement should be applied to loans with variable interest
rates that might change between the time of application and approval of
the loan. The Board proposed to require that the creditor disclose the
minimum and maximum starting rates of interest available at the time
that the creditor provides the application or solicitation to the
consumer.
The Board recognized that these rates might vary based on the
creditor's underwriting criteria for a particular loan product,
including a consumer's credit history. Based on consumer testing, the
Board believes that providing a general explanation of how an interest
rate would be determined provides the context necessary for a consumer
to understand why more than one rate is being disclosed and how a
creditor would determine a consumer's interest rate if the consumer
were to apply for the loan. For this reason, the Board proposed to add
a disclosure requirement under its TILA section 128(e)(1)(R) authority.
If the rate will depend, in part, on a later determination of the
consumer's creditworthiness or other factors, the creditor would be
required to state that the rate for which the consumer may qualify will
depend on the consumer's creditworthiness and other factors. Proposed
comment 38(a)(1)(i)-2 clarified that the disclosure does not require
the creditor to list the factors that the creditor will use to
determine the interest rate.
Section 226.47(a)(1) adopts proposed Sec. 226.38(a)(1)(i) largely
as proposed. Comment 47(a)(1)(i)-2 clarifies that the creditor may, at
its option, specify any factors other than the consumer's credit
history that it will use to determine the interest rate. For example,
if the creditor will determine the interest rate based on information
in the consumer's or co-signer's credit report and the type of school
the consumer attends, the creditor may state, ``Your interest rate will
be based on your credit history and other factors (co-signer credit and
school type).''
Proposed comment 38(a)(1)(i)-1 clarified that the rates disclosed
must be rates that are actually offered by the creditor. For variable
rate loans, the comment provided guidance on when a rate disclosure
would be considered timely so that the disclosed rate would be deemed
to be actually offered. For disclosures that are mailed, rates would be
considered actually offered if the rates were in effect within 60 days
before mailing. For disclosures in printed applications or
solicitations made available to the general public, or for disclosures
in electronic form, rates would be considered actually offered if the
rates were in effect within 30 days before printing or within 30 days
before the disclosures are sent to consumers electronically or, for
disclosures made on an Internet Web site, within 30 days before being
viewed by the public. For disclosures in telephone applications or
solicitations, rates provided orally would be considered actually
offered if the rates are currently applicable at the time the
disclosures are provided. Proposed comment 38(a)(1)(i)-1 was consistent
with the rules for variable-rate accuracy in credit and charge card
application disclosures under Sec. Sec. 226.5a(c), (d), and (e).
Industry commenters expressed concern that proposed comment
38(a)(1)(i)-1 required interest rate information on an Internet Web
site to be in effect as of the time the consumer viewed the
information. However, the Board's intent was to provide that such
information is deemed actually offered if in effect within 30 days
before being viewed by the public. Final comment 47(a)(1)(i)-1 has been
revised to clarify this.
Industry, consumer group, and educational institution commenters
all expressed concern that for variable-rate loans the interest rates
disclosed under Sec. 226.47(a)(1) not be allowed to reflect
[[Page 41211]]
an interest rate other than the rate based on the index and margin used
to make rate adjustments. For example, commenters pointed to certain
``borrower benefits,'' such as a reduction in the interest rate for a
series of on-time payments that creditors may offer. According to
commenters, few consumers achieve these benefits and often the benefits
are not contained in the legal obligation between the parties.
Under Sec. 226.46(e)(1), the disclosures must reflect the terms of
the legal obligation between the parties. Section 226.47(a)(1) requires
a disclosure of the rate or rates applicable to the loan. Comment
47(a)(1)(i)-3 clarifies that the disclosure of the interest rate or
range of rates must reflect the rate or rates calculated based on the
index and margin that will be used to make interest rate adjustments
under the loan. The comment also permits the creditor to disclose a
brief description of the index and margin, or range of margins, used to
make rate adjustments. Consumer testing conducted for the Board
indicated that consumers' understanding of how a variable-rate loan
works is enhanced by such information.
Fixed or variable rate loans, rate limitations. The Board is
adopting proposed Sec. Sec. 226.38(a)(1)(ii) and 38(a)(1)(iii) as
Sec. Sec. 226.47(a)(1)(ii) and 47(a)(1)(iii). Section 226.47(a)(1)(ii)
requires the creditor to disclose whether the interest rate applicable
to the loan is fixed or may increase after consummation of the
transaction. TILA section 128(e)(1)(A) requires disclosure of whether
the interest rate applicable to the loan is fixed or variable. Comment
47(a)(1)(iii)-1, proposed as comment 38(a)(1)(iii)-1 clarifies that the
variable rate disclosures do not apply to interest rate increases based
on delinquency (including late payment), default, assumption, or
acceleration. If the loan's interest rate would fluctuate solely
because of one or more of these actions, but in no other circumstances,
the interest rate is considered fixed.
As proposed, if the interest rate may increase after consummation,
Sec. 226.47(a)(1)(iii) requires the creditor to disclose any
limitations on interest rate adjustments, or, if there are no
limitations on interest rate adjustments, that fact. Under comment
47(a)(1)(iii)-2, when disclosing any limitations on interest rate
adjustments, the creditor must disclose both: (1) The maximum allowable
increase during a single time period, or the lack of such a limit, and
(2) the maximum allowable interest rate over the life of the loan, or
the lack of a maximum rate. For example, a creditor could disclose that
the maximum interest rate adjustment is two percent in a single month
and that the maximum interest rate on the loan can never exceed twenty-
five percent over the life of the loan. Consistent with the disclosures
based on the maximum rate in Sec. Sec. 226.47(b) and 47(c) discussed
below, limitations include legal limits in the nature of usury or rate
ceilings under state or Federal statutes or regulations. However, if
the applicable rate limitation is in form of a legal limit, such as a
state's usury cap (rather than a maximum rate specified in the legal
obligation between the parties), the creditor must disclose that the
maximum rate is determined by applicable law. The creditor is also
required to disclose that the consumer's actual interest rate may be
higher or lower than the range of rates disclosed under Sec.
226.47(a)(1)(i), if applicable.
Co-signer or Guarantor Disclosure. Proposed Sec. 226.38(a)(1)(iv)
implemented TILA section 128(e)(1)(D), which requires disclosure of
requirements for a ``co-borrower,'' including any changes in the
applicable interest rates that may apply to the loan if the loan does
not have a ``co-borrower.'' HEOA, Title X, Subtitle B, Section 1021(a)
(adding TILA Section 128(e)(1)(D)). The Board interprets the phrase
``co-borrower,'' to mean a co-signer.
Proposed Sec. 226.38(a)(1)(iv) required the creditor to state
whether a co-signer is required and whether the applicable interest
rates typically will be higher if the loan is not co-signed or
guaranteed by a third party. If the presence of a co-signer or
guarantor would not affect the loan's interest rate, the creditor was
required to disclose that fact. The rule required only a statement and
the creditor was not required to estimate any potential changes in the
applicable interest rates numerically.
One industry commenter noted that the Board's Regulation B, which
implements the Equal Credit Opportunity Act, prohibits creditors from
requiring co-signers unless certain conditions are met. 12 CFR 202.7.
This commenter expressed concern that the requirement to disclose
whether a co-signer is required could cause confusion with the
requirements of Regulation B. The HEOA does not alter the prohibitions
in Regulation B. Accordingly, Sec. 226.47(a)(1)(iv) of the final rule
does not adopt the requirement to state whether a co-signer is
required. Rather, the final rule, as proposed, requires disclosure of
whether interest rates typically will be higher without a co-signer. In
addition, Sec. 226.47(a)(5) requires disclosure of certain eligibility
criteria for co-signers. These provisions implement the HEOA's
requirement to disclose the requirements for a co-borrower.
47(a)(2) Fees and Default or Late Payment Costs
Proposed Sec. 226.38(a)(2) required disclosure of the fees or
range of fees applicable to the private education loan and other
default or late payment costs, implementing the fee and penalty
disclosures required in TILA sections 128(e)(1)(E) and (F). Under the
proposal, the creditor was required to itemize all fees required to
obtain the private education loan (proposed Sec. 226.38(a)(2)(i)) and
any applicable charges or fees, changes to the interest rate, and
adjustments to principal based on the consumer's default or late
payment (proposed Sec. 226.38(a)(2)(ii)).
Proposed comment 38(a)(2)-1 explained that the creditor must
disclose the dollar amount of each fee required to obtain the loan,
unless the fee is based on a percentage, in which case a percentage may
be disclosed. If the exact amount of a fee is not known at the time of
disclosure, the creditor could disclose the dollar amount or percentage
for each fee as an estimated range and must clearly label the fee
amount as an estimated range.
Neither the HEOA nor its legislative history clarifies whether
Congress intended the fees or range of fees disclosure to require an
itemization of all fees, or rather to allow for disclosure of a single
dollar or percentage amount for all fees combined. The Board proposed
to require an itemization of fees, but to permit the creditor to
provide an estimated range of the dollar or percentage amount of each
fee if a single dollar or percentage amount is not known. Hearings
preceding enactment of the HEOA expressly alerted Congress to concerns
about excessively high origination fees and the charging of separate
additional fees.\11\ In addition, the legislative history indicates
that the HEOA is intended to require creditors of private education
loans to provide full information to borrowers regarding their loans
and to protect the interests of private education loan consumers by
requiring creditors prominently to disclose all loan terms, conditions
and incentives.\12\
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\11\ See National Consumer Law Center, ``Testimony before the
U.S. Senate Committee on Health, Education, Labor, and Pensions
regarding `Ensuring Access to College in a Turbulent Economy' ''
(Mar. 17, 2008), p. 8.
\12\ See U.S. House of Representatives, Committee on Education
and Labor, ``Higher Education Opportunity Act of 2008: Protecting
Borrowers of Federal and Private Student Loans,'' <http://edlabor.house.gov/micro/coaa_protect.shtml> (visited Oct. 31,
2008).
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[[Page 41212]]
Proposed comment 38(a)(2)-2 clarified that the fees to be disclosed
include finance charges under Sec. 226.4, such as loan origination
fees and credit report fees, as well as fees not considered finance
charges but required to obtain credit, such as an application fee
charged whether or not credit is extended.
Implementing TILA section 128(e)(1)(E), the proposal also required
the creditor to disclose fees and costs based on defaults or late
payments of the consumer, including adjustments to the interest rate,
charges, late fees, and adjustments to principal. The HEOA requires a
similar disclosure at approval and again in the final disclosure
required after the consumer accepts the loan. HEOA, Title X, Subtitle
B, Section 1021(a) (adding TILA Sections 128(e)(2)(E) and (e)(4)(B)).
One difference between the proposal and TILA section 128(e)(1)(E)
is that the latter requires disclosure of ``finance charges'' based on
defaults or late payments, whereas the Board's proposed regulation
eliminated the word ``finance'' and required disclosures of ``charges''
based on defaults or late payments. TILA section 106(a) defines the
``finance charge'' as the sum of all charges, payable directly or
indirectly by the person to whom the credit is extended, and imposed
directly or indirectly by the creditor as an incident to the extension
of credit. 15 U.S.C. 1605. The Board has interpreted the definition of
``finance charge'' in Regulation Z to expressly exclude charges for
late payment, delinquency, default, or a similar occurrence. 12 CFR
226.4(c)(2). By contrast, the HEOA does not define the term ``finance
charges,'' but simply states that ``finance charges'' based on the
consumer's default or late payment must be disclosed. HEOA, Title X,
Subtitle B, Section 1021(a) (adding TILA Section 128(e)(1)(E)).
However, under current Regulation Z, there are no ``finance charges''
based on the consumer's default or late payment. To give effect to the
requirements of HEOA, the Board proposed to use its authority under
HEOA and impose additional disclosure requirements including charges
based on defaults or late payments that are not covered by the
definition of finance charge under Regulation Z. Therefore the word
``charges,'' without the word ``finance,'' was used in proposed Sec.
226.38(a)(2)(ii) and in the corresponding provisions for other private
education loan disclosures (proposed Sec. Sec. 226.38(b)(2)(ii) and
38(c)(2)).
The Board did not propose to require creditors to disclose fees
that would apply if the consumer exercised an option after consummation
under the agreement or promissory note for the private education loan,
such as fees for exercising deferment, forbearance, or loan
modification options. Creditors were not required to disclose third-
party fees and costs for collection- or default-related expenses that
might be passed on to the consumer, as these are not easily predicted
and may never apply.
The Board requested comment on whether creditors should be required
to disclose these or other fees. Some consumer group commenters
suggested that fees for exercising deferment, forbearance or loan
modification options may be important to some consumers. However, the
final rule does not require the disclosure of such fees. Based on
consumer testing, the Board believes that consumers are unlikely to
shop and compare loans based on such fees. Given the amount of
information required to be disclosed, the Board believes that
disclosure of these fees could produce information overload and
distract consumers from more relevant information.
A few commenters also requested clarification as to whether fees
charged when the consumer enters repayment of a loan for which payments
were deferred during an interim period were fees to ``obtain'' the
loan.
The Board is adopting proposed Sec. 226.38(a)(2) as Sec.
226.47(a)(2). In addition, the Board is clarifying in comment 47(a)(2)-
2 that because repayment fees are considered finance charges, they must
be disclosed as fees required to obtain the loan under Sec.
226.47(a)(2).
47(a)(3) Repayment Terms
Section 226.47(a)(3), proposed as Sec. 226.38(a)(3), requires
disclosure of information related to repayment.
Loan term. Proposed Sec. 226.38(a)(3)(i) implemented TILA section
128(e)(1)(G), which requires disclosure of the term of the private
education loan. Proposed comment 38(a)(3)(i)-1 clarified that the term
of the loan is the period of time during which regular principal and
interest payments must be made on the loan. For example, where
repayment begins upon consummation of the private education loan, the
disclosed loan term would be the same as the full term of the loan. By
contrast, where repayment does not begin until, for instance, after the
student is no longer enrolled, the disclosed loan term would be shorter
than the full term of the loan. If more than one repayment term is
possible, the creditor must disclose the loan term as the longest
possible repayment term. Proposed Sec. 226.38(a)(3)(i) is adopted as
Sec. 226.47(a)(3)(i).
Payment deferral options. Proposed Sec. 226.38(a)(3)(ii) required
disclosure of information relating to the options offered by the
creditor to the consumer to defer payments during the life of the loan,
implementing TILA section 128(e)(1)(I). Under the Board's TILA section
128(e)(1)(R) authority, the proposal also required that if the creditor
does not offer any options to defer payments, the creditor must state
that fact. Proposed comment 38(a)(3)-2 clarified that payment deferral
options include both options to defer payment while the student is
enrolled and options for payment deferral, forbearance or payment
modification during the loan's repayment term. The disclosure would
have been required to include a description of the length of the
deferment period, the types of payments that may be deferred, and a
description of any payments that are required during the deferment
period. The creditor would also have been permitted to disclose any
conditions applicable to the deferment option, such as that deferment
is permitted only while the student is continuously enrolled.
Under proposed Sec. 226.38(a)(3)(iii) and proposed comment
38(a)(3)-3, if the creditor offered payment deferral options that
applied while the student is enrolled in a covered educational
institution, the creditor would be required to disclose the following
additional information for each deferral option: (1) Whether interest
will accrue while the student is enrolled in a covered educational
institution; and (2) if interest accrues while the student is enrolled
at a covered educational institution, whether payment of interest may
be deferred and added to the principal balance.
Proposed comment 38(a)(3)-4 explained that disclosure of payment
deferral options may be combined with the disclosure of cost estimates
required in Sec. 226.38(a)(4). For example, the creditor could
describe each payment deferral option in the same chart or table that
provides the cost estimates for each payment deferral option. This
approach was used in the Board's proposed sample form contained in
Appendix H-21.
A number of industry commenters requested clarification on the
requirements of proposed Sec. 226.38(a)(3)(ii). That section required
creditors to disclose options the consumer may have to defer payment
after the loan's repayment period begins, such as options for
forbearance or deferral upon re-enrolling in an
[[Page 41213]]
educational program. Comment 38(a)(3)(ii)-2 required a description of
the length of the deferment period, the types of payments that may be
deferred, and a description of any payments that are required during
the deferment period for all payment deferral options, both in-school
and after repayment begins. However, the Board's proposed model and
samples form did not indicate where such information was to be
provided. Commenters stated that descriptions of deferral options
during the repayment period would be lengthy and could detract from the
other information provided on the model forms.
The final rule adopts Sec. Sec. 226.38(a)(3)(ii) and 38(a)(3)(iii)
as Sec. Sec. 226.47(a)(3)(ii) and 47(a)(3)(iii), largely as proposed.
However, to conform to the final model and sample forms, the Board is
clarifying in comment 47(a)(3)-2 that the creditor may disclose the
length of the maximum initial in-school deferment period. In addition,
comment 47(a)(3)-2 clarifies that if the creditor offers payment
deferral options that may apply during the repayment period, the
creditor need only disclose a statement referring the consumer to the
legal obligation for more information. Comment 47(a)(3)-4 also
clarifies that the creditor may combine all of the disclosures required
under Sec. 226.47(a)(3), including the loan term, with the cost
estimate disclosure required in Sec. 226.47(a)(4).
In addition, the final rule includes new Sec. 226.47(a)(3)(iv)
requiring a disclosure of private education loan discharge limitations
in bankruptcy. The disclosure of limitations of discharge of private
education loans in bankruptcy is mandated by TILA section 128(e)(2)(E)
for the approval disclosures and TILA section 128(e)(4)(B) for the
final disclosures. It is not statutorily required in the application
and solicitation disclosures prescribed by TILA section 128(e)(1)(E).
The Board requested comment on whether disclosure of education loan
discharge limitations in bankruptcy should be included in the
application and solicitation disclosures as implemented by proposed
Sec. 226.38(a). Consumer group commenters supported including the
bankruptcy disclosures and other commenters who addressed the issue did
not oppose it. The Board believes that the bankruptcy disclosures will
be useful to consumers earlier in the lending process, when consumers
are most likely to be considering a wide range of education financing
options. The Board also believes adding bankruptcy disclosures to the
application and solicitation disclosures provides for uniformity across
the disclosure forms. Thus, the Board is exercising its authority under
TILA section 128(e)(1)(R) by adding a disclosure similar to the
disclosures required under Sec. Sec. 226.47(b)(3)(vi) and 47(c)(3).
47(a)(4) Cost Estimates
Implementing TILA section 128(e)(1)(K), Sec. 226.47(a)(4),
proposed as Sec. 226.38(a)(4), requires creditors to provide an
example of the total cost to a consumer of a sample loan at the highest
initial rate of interest actually offered by the creditor, from the
time of consummation until the loan is repaid. The HEOA does not define
the term ``total cost,'' and, as proposed, the Board interprets ``total
cost'' to mean the total of payments disclosed in accordance with the
rules in Sec. 226.18(h). See comment 47(a)(4)-1.
Basis for estimates. Under proposed Sec. 226.38(a)(4) and comment
38(a)(4)-2, creditors were required to disclose an example of the total
cost of the loan calculated using the highest initial rate of interest
applicable to the loan and the fees applicable to loans at the highest
initial rate of interest. For example, if the creditor offers a range
of rates and fees that depend on the consumer's creditworthiness and
particular fees will apply to loans with the highest interest rate,
then the creditor must include those fees in the total cost estimate.
In order to provide consumers with information about the effect
that financing fees has on the total cost of the loan, proposed Sec.
226.38(a)(4) and comment 38(a)(4)-2 required that the creditor base the
total cost estimate on a loan amount of $10,000 plus the finance
charges applicable to loans at the highest initial rate of interest.
For example, if the creditor charges a 3% origination fee on loans with
the highest initial interest rate, and finances the 3% fee, under the
proposal the creditor would calculate the total cost of the loan based
on a $10,300 total loan amount. However, while the creditor would have
been required to base the calculation on the total loan amount, the
creditor would have to disclose that the example provides the total
cost of a $10,000 amount financed, rather than disclosing the total
loan amount used in calculating the loan cost estimate.
The HEOA calls for an example based on the principal amount
actually offered by the creditor. However, at the application stage,
the creditor does not know the specific loan amount the consumer will
request. Rather than permit each creditor to choose a loan amount upon
which to base the disclosure, the Board believed that specifying
uniform assumptions about the loan amount would allow consumers more
easily to compare different loan products. The proposal allowed
consumers to compare the cost of receiving a uniform $10,000
disbursement under different loans.
The Board also proposed to provide creditors with flexibility if
they do not make loans of the size that the Board specified. If the
creditor only offers a particular type of loan for less than $10,000,
the creditor would be required to use a $5,000 principal amount.
The Board requested comment on alternative ways of ensuring that
the total cost example reflects the cost of loan fees. Specifically,
the Board requested comment on whether an assumed loan amount of
$10,000 should be used without adding fees to the loan amount, but
instead separately adding the fees to the total of payments. The Board
requested comment on whether private education loan consumers have
historically been more likely to add fees to the loan amount they
request, or to deduct the fees from the loan amount requested (or pay
them separately by cash or check). The Board also requested comment on
the practical limitations, if any, for creditors to determine the fees
that would be applicable to loans where the highest initial rate of
interest applies. In addition, the Board requested comment on whether
the total cost example should be based on an assumed amount financed of
$10,000, as proposed, or on a higher or lower amount. The Board also
requested comment on whether the assumption of a $5,000 amount financed
when creditors do not offer loans of $10,000 or more was an appropriate
alternative.
Commenters generally supported the Board's proposed approach to
ensuring that the total loan cost example provided a consistent basis
for calculating the total cost so that consumers could accurately
compare loans. Specifically, most commenters supported a calculation
method that assumed that prepaid finance charges are included in the
total loan amount so that the total cost will reflect the effect of the
consumer paying interest on the finance charges. Commenters supported
requiring creditors to use a $10,000 amount financed or, if the
creditor does not offer loans of $10,000 or more, a $5,000 amount
financed. Commenters did not state that there were practical
limitations on determining the amount of fees that would apply to loans
at the highest rate.
Two industry group commenters noted that creditors are not uniform
in the way they calculate prepaid finance
[[Page 41214]]
charges that are based on a percentage of the loan amount. According to
these commenters, the majority deduct prepaid finance charges from the
total loan amount, rather than adding them to the loan amount. These
commenters requested that the Board allow creditors to choose the
method the creditor normally uses for assessing prepaid finance
charges. In the alternative, the commenters suggested that if the Board
imposed a uniform calculation method that it be based on the more
common practice of deducting prepaid finance charges from the total
loan amount.
In the final rule, Sec. 226.47(a)(4) is adopted largely as
proposed in Sec. 226.38(a)(4), but with a change in the total cost
calculation method. Comment 47(a)(4)-2.i, as proposed in comment
38(a)(4)-2, requires creditors to calculate the total cost estimate by
determining all finance charges that would be applicable to loans with
the highest initial rate of interest. For example, if a creditor
charges a range of origination fees from 0% to 3%, but the 3%
origination fee would apply to loans with the highest initial interest
rate, the lender must assume the 3% origination fee is charged. Comment
47(a)(4)-2.i also requires the creditor to base the total cost example
on a principal amount that results in a $10,000 amount financed when
all prepaid finance charges are financed. The creditor must disclose
the example as reflecting the $10,000 disbursement, rather than the
full loan amount. If the creditor only offers a particular private
education loan for less than $10,000, the creditor may assume a total
loan amount that results in a $5,000 amount financed for that loan.
The Board recognizes that prepaid finance charges can be assessed
and paid in different ways depending on the creditor's practices and
the consumer's needs. However, the Board believes that in order for
consumers to be able to easily compare the costs of different loan
products using the total cost example on the application and
solicitation disclosures, creditors must use uniform assumptions about
the way prepaid finance charges are assessed and paid.
Comment 47(a)(4)-2.i, as proposed, requires creditors to assume
that all prepaid finance charges are financed by the consumer rather
than paid separately by cash or check. However, fees based on a
percentage of the loan amount can be assessed in two different ways,
even when they are financed. Under the proposal, creditors were
required to assume that the fee was assessed as a percentage of a
hypothetical $10,000 amount financed. Thus, a 3% fee resulted in a $300
charge. This charge, in turn, was added to the $10,000 amount financed
resulting in a total principal loan amount of $10,300. Accordingly, the
consumer would borrow $10,300 in order to obtain a $10,000
disbursement.
The assumption that fees are assessed as a percentage of the
$10,000 amount financed and then added to the total loan amount
reflects the practices of some, but not all creditors. Another practice
assesses fees as a percentage of the total loan amount and then deducts
the fees from the loan amount. For example, in this case a total loan
amount of $10,309.28, times a 3% origination fee results in a finance
charge of $309.28. The creditor does not, however, add an extra $309.28
to the loan balance. Instead, the creditor deducts the $309.28 from the
loan amount and disburses $10,000 to the consumer. The resulting amount
financed (the $10,309.28 principal loan amount less the $309.28 prepaid
finance charge) is $10,000.
Under comment 47(a)(4)-2.ii in the final rule, if a prepaid finance
charge is based on a percentage of the amount financed, for purposes of
the example, the creditor must assume that the fee is assessed on the
total loan amount, even if this is not the creditor's usual practice.
In order to ensure that consumers may accurately compare total cost
examples from different creditors, the Board is not allowing creditors
to choose whether to add or subtract prepaid finance charges. Rather,
based on comments received, the final rule requires creditors to use
the method that appears to be more common.
Highest initial rate. Proposed Sec. 226.38(a)(4)(i) required
creditors to calculate the total cost example at the maximum rate of
interest, and proposed comment 38(a)(4)-3 clarified that the
``maximum'' rate of interest meant the highest initial rate of interest
disclosed in the range of rates under proposed Sec. 226.38(a)(1)(i).
Some industry commenters requested clarification in the regulation that
the phrase ``maximum rate of interest'' used in proposed Sec.
226.38(a)(4)(i) was the highest initial interest rate rather than the
maximum possible interest rate. Section 226.47(a)(4)(i) is revised to
clarify that the total cost example should be based on the highest rate
required to be disclosed under Sec. 226.47(a)(1). As a result,
proposed comment 38(a)(4)-3 is unnecessary and therefore is not
adopted.
Payment deferral options. Under comment 47(a)(4)-3, proposed as
comment 38(a)(4)-4, the loan cost example must include an estimate of
the total cost of the loan for each in-school deferral option disclosed
in Sec. 226.47(a)(3)(iii). For example, if the creditor provides the
consumer with the option to begin making principal and interest
payments immediately, to defer principal payments but begin making
interest-only payments immediately, or to defer all principal and
interest payments while in school, the creditor is required to disclose
three estimates of the total cost of the loan, one for each deferral
option.
Comment 47(a)(4)-3 also clarifies that if the creditor adds accrued
interest to the loan balance (i.e., interest is capitalized), the
estimate of the total loan cost should be based on the capitalization
method that the creditor actually uses for the loan. For instance, for
each deferred payment option where the creditor would capitalize
interest on a quarterly basis, the total loan cost must be calculated
assuming interest capitalizes on a quarterly basis.
Proposed comment 38(a)(4)-5 provided guidance on the assumed
deferral period on which to base the total cost example. For loan
programs intended for educational expenses of undergraduate students,
the creditor would have been required to assume that the consumer
defers payments for four years plus the loan's maximum applicable grace
period, if any. For all other loans the creditor would have been
required to assume that the consumer defers for two years plus the
maximum applicable grace period, if any, or the maximum time the
consumer may defer payments under the loan program, whichever time is
less. The Board believed that consumers would be better able to compare
loan cost examples for loans that allow the consumer to defer payments
if those examples are based on uniform assumptions about how long the
consumer will remain in school. The Board proposed to require creditors
assume a four-year deferral period for consumers applying for
undergraduate loans since most undergraduate programs are four years
long. The Board believed that using a four-year term would ensure that
the disclosure is most meaningful to consumers who are at the beginning
of their undergraduate education, and therefore likely are considering
education loans for the first time. For all other types of loans, the
proposal required creditors assume a two-year enrollment period (or to
use the maximum deferral period for the loan, if less than two-years).
The Board believed that a two-year enrollment period represented a term
that would be applicable to most other postsecondary
[[Page 41215]]
education programs and would meaningfully inform consumers of the
effect of deferring payment on the total costs of the loan for more
than a minimal period of time.
The Board requested comment on the proposed deferral period
assumptions for calculating the total cost examples under proposed
Sec. 226.38(a)(4). Specifically, the Board requested comment on
whether creditors should be allowed to modify the total cost disclosure
if the creditor knows a consumer's specific situation. For example, if
the creditor knows that a consumer is a college senior, the Board asked
whether the creditor should be allowed to provide a cost estimate based
on a one-year deferral period, rather than a four-year deferral period.
The Board also requested comment on whether two years is an appropriate
term for non-undergraduate private education loans, or whether another
term that would be a statistically more accurate representation of an
average or median deferment period should be used. The Board also
requested comment on whether lenders should be permitted to modify the
disclosure for specific educational programs that are generally of a
fixed length, such as three years for law school or four years for
medical school.
Commenters generally supported the proposal to use uniform
assumptions for determining the consumer's deferral period in cases
where the consumer's actual situation was not known. However, most
commenters supported allowing creditors to use more accurate
assumptions where more information was known. Commenters supported
allowing creditors to use the specific duration of an educational
program of a known length, such as three years for law school. In
addition, commenters noted that the term ``undergraduate'' may include
students in two-year programs and that the four-year term assumption
would not be appropriate for these students. Commenters also supported
allowing creditors to tailor the deferral period assumption to the
specific consumer's situation if known. Where the length of the
educational program was not known, commenters did not oppose using a
two-year term.
Comment 47(a)(4)-4, proposed as comment 38(a)(4)-5, has been
revised to allow the creditor to use either of two methods for
estimating the duration of deferral periods. Similar to the proposed
rule, for loan programs intended for educational expenses of
undergraduate students, the creditor may assume that the consumer
defers payments for a four-year matriculation period, plus the loan's
maximum applicable grace period, if any. For all other loans the
creditor may assume that the consumer defers for a two-year
matriculation period, plus the maximum applicable grace period, if any,
or the maximum time the consumer may defer payments under the loan
program, whichever is shorter.
Alternatively, if the creditor knows that the student will be
enrolled in a program with a standard duration, the creditor may assume
that the consumer defers payments for the full duration of the program
(plus any grace period). For example, if a creditor makes loans
intended for students enrolled in a four-year medical school degree
program, the creditor may assume that the consumer defers payments for
four years plus the loan's maximum applicable grace period, if any.
However, the creditor may not modify the disclosure to correspond to a
particular student's situation. For example, even if the creditor knows
that a student will be a second-year medical school student, the
creditor must assume a four-year deferral period.
The Board believes that the use of standardized assumptions will
assist consumers when shopping for a private education loan. Providing
consistent deferral periods is necessary in order for a consumer to
compare the overall costs of different loans for particular educational
programs. Consumers enrolled in an educational program may have
difficulty comparing the total cost of two loans if one disclosure uses
the consumer's actual deferral period and the other uses an assumed
deferral period. The total cost may appear lower on the disclosure
using the actual, shorter, deferral period, but the consumer may not be
able to determine if the loan is actually less costly. Therefore, the
Board is not permitting disclosures to be tailored to individual
consumers.
47(a)(5) Eligibility
Proposed Sec. 226.38(a)(5) implemented TILA section 128(e)(1)(J)
which requires disclosure of the general eligibility criteria for a
private education loan. The proposal specified the eligibility criteria
that must be disclosed. The creditor would have to disclose any age or
school enrollment eligibility requirements regarding the consumer or
co-signer, if applicable. The Board requested comments on whether other
types of eligibility requirements should be disclosed.
A few commenters suggested that the Board require more information
about eligibility requirements. However, in the consumer testing
conducted for the Board, few consumers suggested that more such
information would be helpful. Because the disclosure of all eligibility
criteria could be detailed and lengthy, the Board believes that
requiring additional eligibility information would not be meaningful to
consumers. Therefore, the final rule provides that the creditor provide
any age or school enrollment eligibility requirements relating to the
consumer or co-signer.
47(a)(6) Alternatives to Private Education Loans
The Board proposed Sec. 226.38(a)(6), to implement TILA sections
128(e)(1)(L), (M), (N), and (Q) by requiring statements regarding the
following alternatives to private education loans: (1) education loans
offered or guaranteed by the Federal government and (2) school-specific
education loan benefits and terms potentially offered by a covered
educational institution.
Concerning Federal education loans, under the proposal, a creditor
was required to disclose the following: (1) 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 (20 U.S.C.
1070 et seq.), (2) the interest rates available under each program and
whether the rates are fixed or variable, as prescribed in the Higher
Education Act of 1965 (20 U.S.C. 1077a), and (3) a statement that the
consumer may obtain additional information concerning Federal student
financial assistance from the relevant institution of higher education,
or at the Web site of the Department of Education, including an
appropriate Web site address. After consulting with the Department of
Education, the Board proposed comment 38(a)(6)(ii)-1, which explained
that the disclosure must list the address of an appropriate U.S.
Department of Education Web site such as ``http://federalstudentaid.ed.gov.''
To avoid overloading consumers with information and to ensure that
consumers notice the most important information about Federal student
loans, the Board proposed to exercise its authority under TILA section
105(a) to make exceptions to the statute by not requiring creditors to
state that Federal loans may be obtained in lieu of or in addition to
private education loans. Instead the Board's proposed model forms
labelled the disclosure as ``Federal Loan Alternatives.'' See proposed
App. H-18, H-19. The Board stated its belief that this exception was
necessary and proper to effectuate meaningful disclosure of credit
terms to consumers.
[[Page 41216]]
The Board also proposed to exercise its authority under TILA
section 105(f) to exempt private education loans from the specific
disclosure requirement about Federal loans, pursuant to the HOEA
amendment to TILA sections 128(e)(1)(M) and 128(e)(2)(L). The Board
believed that this specific requirement does not provide a meaningful
benefit to consumers in the form of useful information or protection.
In testing, consumers' understanding that Federal loans are available
in lieu of or in addition to private education loans was enhanced by
simply providing them a clear and prominent label indicating that the
disclosures contained information about Federal loan alternatives. The
Board considered that the private education loan population includes
students who may lack financial sophistication and that the size of the
loan could be relatively significant and important to the borrower.
However, as explained above, the Board believed that the borrower would
receive meaningful information about Federal loans through the other
disclosures and the model form. The Board also recognized that private
education loans would not be secured by the principal residence of the
consumer, which is a factor for consideration under section 105(f).
Furthermore, the HEOA provides significant rights, such as the right to
cancel the loan. The Board believed that consumer protection would not
be undermined by this exemption.
A few consumer group commenters urged the Board to retain the
phrase that Federal loans are available ``in addition to or in lieu
of'' private education loans. However, the Board's consumer testing
during and after the comment period continued to indicate that
consumers understood the disclosure about Federal student loans and
that Federal loans are available in addition to or in lieu of private
education loans. The Board believes that requiring additional verbiage
to communicate something that consumers already understand could
contribute to information overload, cause consumers to skip over the
existing textual information about Federal student loans, and
potentially cause consumers to miss more important information in the
disclosures. Consumers tested found the information about Federal
student loans to be clear and understandable. The Board is adopting
proposed Sec. 226.38(a)(6), as Sec. 226.47(a)(6).
Under the proposal, for each title IV program enumerated in the
disclosure (e.g., Perkins, Stafford (both subsidized and unsubsidized),
and PLUS loans), the creditor would be required to disclose the
interest rate corresponding to each loan program, as well as whether
those rates are fixed or variable. The Board proposed to require
disclosure of whether the Federal loan rates are fixed or variable,
under its TILA section 128(e)(1)(R) authority. The Board believed this
additional disclosure to be necessary in order to provide consumers
with a more complete description of the nature of the Federal loans'
interest rates and to aid in comparison of Federal loan programs to
private education loans. During the Board's consumer testing, consumers
indicated that the disclosure that Federal student loans have fixed
rates is important information to them. Federal student loan interest
rates are set by statute. Currently, Federal student loan interest
rates are fixed rates rather than variable rates, but this has not
always been the case. For this reason, the proposal would require a
disclosure of whether the rates are fixed or variable.
The statute that sets the Federal student loan interest rates
currently contains a schedule with different fixed rates for loans
originated at different times. See Higher Education Act of 1965 (20
U.S.C. 1077a). For example, the fixed rate on subsidized Stafford loans
was 6.0% for loans originated or applied for (depending on the loan)
before July 1, 2009. For loans after July 1, 2009, the current fixed
interest rate is 5.6%. Where the interest rate for a loan varies
depending on the date of disbursement or receipt of application, the
creditor must disclose only the current interest rate as of the time
the disclosure is provided.
To implement TILA section 128(e)(1)(L), the proposal also required
the creditor to disclose that a covered educational institution may
have school-specific education loan benefits and terms not detailed on
the disclosure form. School-specific education loan benefits and terms
might include loans with special terms negotiated by the school with
particular creditors, or loans extended by the covered educational
institution itself to its students. The creditor was not required to
state what school-specific education loan benefits and terms might be
available because these may vary widely, but rather was required to
alert the consumer to the possibility that school-specific education
loan benefits and terms might be available to the consumer.
47(a)(7) Rights of the Consumer
Proposed Sec. 226.38(a)(7) implemented TILA section 128(e)(1)(O),
by identifying for the consumer certain rights relating to the private
education loan.
Thirty day right of acceptance. Proposed Sec. 226.38(a)(7)(i)
required the creditor to disclose that, should the consumer apply for
the loan and the loan application be approved, the consumer would have
the right to accept the terms of the loan at any time within 30
calendar days following notice of loan approval. TILA section
128(e)(1)(O)(i) requires a disclosure that the consumer has 30 days to
accept and consummate the loan.
Prohibition on loan term changes. Under proposed Sec.
226.38(a)(7)(ii), the creditor was required to state that, except for
changes based on adjustments to the index used to determine the rate
for the loan, the creditor may not change the rates and terms of the
loan during the 30-day acceptance period described in proposed Sec.
226.38(a)(7)(i). Proposed comment 39(c)-1 allowed the creditor to give
consumers a period of time longer than 30 days in which to accept the
loan. In the preamble to the proposed rule, the Board stated that
creditors choosing to give consumers a period of time in which to
accept the loan that is longer than 30 calendar days were required to
disclose this alternate time period.
The Board proposed in Sec. 226.39(c) to allow creditors to make
changes to the rate and terms of the loan not only in response to
adjustments to a variable rate, but also in cases where the change was
requested by, or unequivocally beneficial to, the consumer. The Board
did not propose, however, to require the application disclosure to
state each possible condition under which the rate or terms might
change. The Board requested comment on the appropriate amount of detail
in the application disclosure.
The Board received one comment about the appropriate amount of
detail in the statement on the application disclosure regarding the
permissible changes to the rate or terms of the loan after the loan is
approved. The industry commenter suggested that the Board should not
require creditors to list every possible reason that rates and terms
may change because of the limited amount of space on the two-page
disclosure. The commenter suggested that it would be appropriate to
disclose the most common reason or reasons that the rates and terms may
change after approval.
The Board agrees that it is not necessary or useful to list each
reason that rates and terms of a loan may change after approval and
that a more general statement is sufficient to alert the consumer to
the restrictions on changing the loan terms. The Board also
[[Page 41217]]
believes a less detailed statement is appropriate in light of the
changes made to Sec. 226.48(c) (proposed as Sec. 226.39(c)), which
includes additional exceptions to the prohibition on changing the terms
of the loan. Thus, in the final rule, Sec. 226.47(a)(7) requires the
creditor to state that if the loan for which the consumer is applying
is approved, the terms of the loan will be available for 30 days. It
also requires the creditor to state that the terms of the loan will not
change during this period except as a result of adjustments to the
interest rate and due to other changes permitted by law. The
requirement in the final rules more closely resembles the language that
was used on the application and solicitation disclosures in consumer
testing which consumers found clear and understandable.
47(a)(8) Self-Certification Information
The Board proposed Sec. 226.38(a)(8) to implement TILA section
128(e)(1)(P). It required a statement that before the loan may be
consummated, the consumer must obtain the self-certification form
required under proposed Sec. 226.39(e), and sign and submit the
completed form to the creditor.
The model forms used in consumer testing contained a basic
statement that the consumer must complete the self-certification form
as part of the application process and that the form may be obtained
from the relevant institution of higher education. Consumers found the
language in the model form to be clear and understandable and the Board
believes that the self-certification form itself will provide consumers
with sufficient instruction as to the steps the consumer must take to
complete the form. Accordingly, Sec. 226.47(a)(8) of the final rule
conforms the required disclosure to the text used in the proposed model
form.
As discussed in the section-by-section analysis under Sec.
226.48(e), the disclosure regarding the self-certification form is
required only for expenses to be used by a student enrolled in an
institution of higher education. It would not apply to consolidation
loans and would not apply to loans to students attending covered
educational institutions that do not meet the definition of institution
of higher education.
47(b) Approval Disclosures
Section 226.47(b), proposed as Sec. 226.38(b), specifies the
information that a creditor must disclose on or with any notice of
approval provided to the consumer. Guidance on delivery of the
disclosures required under Sec. 226.47(b) is provided in Sec. 226.46,
corresponding commentary, and in the section-by-section analysis under
Sec. 226.46.
As discussed above in the section-by-section analysis under Sec.
226.46(a), the creditor must make the closed-end credit disclosures
required under Sec. Sec. 226.17 and 226.18 as well as the private
education loan disclosures required under Sec. 226.47(b).
47(b)(1) Interest Rate
Implementing TILA section 128(e)(2)(A), Sec. 226.47(b)(1)(i),
proposed as Sec. 226.38(b)(1)(i), requires a creditor to disclose the
interest rate that applies to the private education loan for which the
consumer has been approved.
Fixed or variable rate, rate limitations. Implementing TILA section
128(e)(2)(A) and (B), proposed Sec. Sec. 226.38(b)(1)(ii) and (iii)
required the creditor to disclose whether the interest rate is fixed or
variable and any limitations, or the absence of limitations, on changes
to the variable interest rate.
Proposed comment 38(b)(1)-1 clarified that a private education loan
would only be considered to have a variable rate if the terms of the
legal obligation allow the creditor to increase the rate originally
disclosed to the consumer. However, a rate is not considered variable
if increases result only from delinquency, default, assumption or
acceleration. The comment also clarified that the creditor must make
the other variable-rate disclosures required under Sec. Sec.
226.18(f)(1)(i) and (iii)--the circumstances under which the rate may
increase and the effect of an increase, respectively. The creditor
would not be required to provide an example of the payment terms that
would result from an increase under Sec. 226.18(f)(1)(iv). Current
comment 18(f)(1)(iv)-2 provides that creditors need not provide the
hypothetical example for interim student credit extensions. However,
the Board believes that the requirement to disclose the maximum monthly
payment based on the maximum possible rate in Sec. 226.38(b)(3)(viii)
satisfies the requirement under Sec. 226.18(f)(1)(iv) of an example of
the payment terms that would result from an increase in the rate. In
order to avoid duplicative examples of the effect of a rate increase,
proposed comment 38(b)(1)-1 clarified that, although the creditor need
not disclose a separate example under Sec. 226.18(f)(1)(iv), the
creditor is nevertheless required to disclose the maximum monthly
payment in Sec. 226.38(b)(2)(viii).
As explained in the section-by-section analysis under Sec. 226.18
(discussing the proposed changes to comment 18(f)(1)(ii)-1), proposed
comment 38(b)(1)-2 clarified that the rules regarding disclosure of
limitations on interest rate increases for private education loans
differ from the general rules in Sec. 226.18(f)(1)(ii) and comment
18(f)(1)(ii)-1. Specifically, proposed Sec. 226.38(b)(1)(iii) required
that creditors explicitly disclose the lack of any limitations on
interest rate adjustments. By contrast, existing comment 18(f)(1)(ii)-1
does not require creditors to disclose the absence of limits on
interest rate adjustments. In addition, under proposed Sec.
226.38(b)(1)(iii), limitations on rate increases include, rather than
exclude, legal limits in the nature of usury or rate ceilings under
state or Federal statutes or regulations. However, if the applicable
rate limitation is in the form of a legal limit, such as a state's
usury cap (rather than a maximum rate specified in the legal obligation
between the parties), the creditor must disclose that the maximum rate
is determined by law and may change.
As discussed in the section-by-section analysis under Sec.
226.47(a)(1) above, commenters urged the Board allow disclosure of a
variable interest rate only as calculated based on the index and margin
used to make interest rate adjustments. The Board is adopting proposed
Sec. 226.38(b)(1) as Sec. 226.47(b)(1) and adding new comment
47(b)(1)-3 to clarify that the disclosure of the interest rate must
reflect the rate calculated based on the index and margin that will be
used to make interest rate adjustments for the loan.
47(b)(2) Fees and Default or Late Payment Costs
Implementing TILA sections 128(e)(2)(E) and (F), proposed Sec.
226.38(b)(2) and proposed comment 38(b)(2)-1 required the creditor to
provide to the consumer the fee and penalty information required under
proposed Sec. 226.38(a)(2), as explained in the section-by-section
analysis for Sec. 226.47(a)(2). Under Sec. 226.18(l) creditors are
required to disclose any dollar or percentage charge that may be
imposed before maturity due to late payment, other than a deferral or
extension charge. Under the proposal, creditors were required to
disclose any charges that must be disclosed under Sec. 226.18(l) with
the disclosures required under proposed Sec. 226.38(b)(2). In
addition, if the creditor includes the itemization of the amount
financed under Sec. 226.18(c), any fees disclosed as part of the
itemization need not be separately disclosed elsewhere. The
[[Page 41218]]
Board is adopting proposed Sec. 226.38(b)(2) as Sec. 226.47(b)(2).
47(b)(3) Repayment Terms
Section 226.47(b)(3), proposed as Sec. 226.38(b)(3), requires
disclosure of information related to repayment.
Principal amount. Proposed Sec. 226.38(b)(3)(i) implemented TILA
section 128(e)(2)(D), which requires disclosure of the ``initial
approved principal amount,'' by requiring disclosure of the loan's
``principal amount.''
Regulation Z currently uses the term ``principal loan amount'' as
part of its requirement to disclose the ``amount financed.'' As
explained below, however, the Board did not propose to equate the terms
``principal loan amount'' used in comment 18(b)(3)-1 with the
``principal amount'' disclosed under Sec. 226.38(b)(3)(i).
Under current Regulation Z, the amount financed must be calculated
in the following manner:
(1) Determining the principal loan amount * * * (subtracting any
downpayment);
(2) Adding any other amounts that are financed by the creditor
and are not part of the finance charge; and
(3) Subtracting any prepaid finance charge. 12 CFR 226.18(b).
Regarding the first part of this calculation, determining the
``principal loan amount,'' the commentary states that when loan fees
are financed by the creditor, the creditor has the option (when the
charges are not add-on or discount charges) of either including or
excluding the amount of the finance charges in the principal loan
amount. As the commentary points out, this means that the ``principal
loan amount'' for this calculation may, but need not, equal the face
amount of the note. Comment 18(b)(3)-1. If the creditor opts to include
finance charges in the principal loan amount, the creditor should
deduct these charges from the principal loan amount as prepaid finance
charges when calculating the amount financed. Id.
Rather than equate Regulation Z's existing term ``principal loan
amount'' with the ``principal amount'' required to be disclosed in
proposed Sec. 226.38(b)(3)(i), the Board's view was that the most
straightforward and easy-to-understand approach was to define
``principal amount'' as the face amount of the note if the transaction
occurred on the terms approved. The ``principal amount'' under proposed
Sec. 226.38(b)(3)(i) was to include all charges incorporated in the
approved loan amount--in other words, the total amount borrowed. This
amount should reflect what the face amount of the note would be if the
loan were given based on the loan amount initially approved. For
example, prepaid finance charges, as defined and discussed in comment
18(b)(3)-1, should be included if they would be included in the face
amount of the note.
The Board believed that defining ``principal amount'' in this way
would not cause consumer confusion with Regulation Z's use of the term
``principal loan amount'' in Sec. 226.18(b), because ``principal loan
amount'' is not currently a stand-alone disclosure in Regulation Z that
consumers could confuse with the ``principal amount.'' Defining the
``principal amount'' in proposed Sec. 226.38(b)(3)(i) as distinct from
the term ``principal loan amount'' in Sec. 226.18(b) may also reduce
creditor confusion about whether the definition of ``principal amount''
changes how the ``amount financed'' is calculated under Sec.
226.18(b). As noted above, ``principal loan amount'' is a term used
only as part of the calculation of the ``amount financed'' disclosure.
Current comment 18(b)(3)-1 permits creditors to decide whether to
include or exclude prepaid finance charges in the ``principal loan
amount,'' but solely for purposes of calculating the ``amount
financed.''
In addition, in order to minimize potentially duplicative
disclosures, proposed comment 38(b)(3)-1 explained that creditors may
disclose the principal amount as part of the itemization of the amount
financed. The creditor would be permitted to disclose the principal
amount as part of the itemization of the amount financed only if the
creditor states the principal amount as part of the itemization. The
proposed sample form in Appendix H-22 provided an example of this
disclosure. Also, as discussed above, the proposal revised Sec.
226.17(a)(1) to allow the itemization of the amount financed to be
included with the required disclosures, rather than disclosed
separately.
Some commenters expressed confusion as to the distinction among the
concepts of the ``principal amount'' required to be disclosed in
proposed Sec. 226.38(b)(3)(i), the ``principal loan amount'' used to
calculate the amount financed, and the ``amount financed'' required to
be disclosed in Sec. 226.18(b), because the Board's sample forms did
not include non-interest finance charges. Commenters were unclear as to
where and how the principal amount was required to be disclosed on the
model and sample forms.
Proposed Sec. 226.38(b)(3)(i) is adopted as Sec. 226.47(b)(3)(i).
Comment 47(b)(3)-1 has been revised to clarify that the principal
amount required to be disclosed under Sec. 226.47(b)(3)(i) should be
labelled the ``Total Loan Amount'' and that this amount may be
different from the ``principal loan amount'' used to calculate the
amount financed under comment 18(b)(3)-1. In addition, the Board's
sample forms in Appendix H-22 and H-23 provide examples that include
non-interest finance charges and better reflect the distinction between
the principal amount and the amount financed.
The Board is also revising the model and sample disclosures in
Appendix H to make the principal amount, labelled the ``Total Loan
Amount,'' more prominent by placing it in a box labelled ``Total Loan
Amount'' at the top left of the disclosure, where the disclosure of the
amount financed was in the proposal. The Board's consumer testing
indicated that consumers interpret the ``Amount Financed'' and the
accompanying phrase ``the amount of credit provided to you or on your
behalf'' to mean the loan's total principal amount. They do not readily
understand that the amount financed may not include certain finance
charges and thus may be less than the face amount of the note. Consumer
testing indicated that consumers better understand the amount financed
if it is disclosed as part of the itemization of the amount financed
because consumers can see how the amount financed is arrived at based
on the total principal amount.
The Board proposed to allow creditors to make the disclosure of the
principal amount in Sec. 226.47(b)(3)(i) as part of the itemization of
the amount financed, if the creditor chose to include the itemization.
However, because the final model forms disclose the principal amount
more prominently, comment 47(b)(3)-1 has been revised to permit the
creditor to make the disclosure of the amount financed under Sec.
226.18(b)(3) as part of the itemization of the amount financed, if the
creditor elects to include the itemization on the disclosures under
Sec. 228.18(c)(1).
Loan term. Proposed Sec. 226.38(b)(3)(ii) and comment 38(b)(3)-2
implemented TILA section 128(e)(2)(G), which requires disclosure of the
maximum term of the private education loan program. Under the proposal,
the term of the loan was the period of time during which regular
principal and interest payments must be made on the loan. For example,
where repayment begins upon consummation of the private education loan,
the disclosed loan term would be the same as the full term of the loan.
By contrast, where repayment does not begin until, for instance, after
the student is no longer enrolled, the disclosed loan term would
[[Page 41219]]
be shorter than the full term of the loan. If more than one repayment
term is possible, the creditor must disclose the loan term as the
longest possible repayment term. Proposed Sec. 226.38(b)(3)(ii) is
adopted as Sec. 226.47(b)(3)(ii).
Payment deferral options. Proposed Sec. 226.38(b)(3)(iii) and
proposed comment 38(b)(3)-3 required the creditor to provide
information about deferral options, implementing TILA section
128(e)(2)(J). This disclosure was similar to the requirement under
proposed Sec. 226.38(a)(3)(ii), as explained in the section-by-section
analysis for section Sec. 226.47(a)(3)(ii). However, by the time the
consumer receives the approval disclosure, the consumer may have chosen
a deferral option already. The difference between proposed Sec. Sec.
226.38(a)(3)(ii) and 226.38(b)(3)(iii) is that the creditor was
required to explain the deferral option chosen by the consumer, if the
consumer has chosen a deferral option, as well as any other deferral
options that the consumer is permitted to choose in the future. The
Board is adopting Sec. 226.38(b)(3)(ii) as Sec. 226.47(b)(3)(ii). The
section-by-section analysis of the deferral options disclosure of Sec.
226.47(a)(3)(ii) describes the information that must also be included
in the explanation of deferral options under Sec. 226.47(b)(3)(iii).
Payments required during enrollment. Proposed Sec.
226.38(b)(3)(iv) and comment 38(b)(3)-4 required the creditor to
disclose whether any payments are required on the loan while the
student is enrolled, implementing TILA section 128(e)(2)(I). The
creditor also was required to describe the payments required during
enrollment, such as principal and interest payments or interest-only
payments. The payments required during enrollment may depend on the
deferral option chosen by the consumer. The disclosure under proposed
Sec. 226.38(b)(3)(iv) was required to correspond to the deferral
option chosen by the consumer. The Board is adopting Sec.
226.38(b)(3)(iv) as Sec. 226.47(b)(3)(iv).
Estimate of interest accruing during enrollment. Also implementing
TILA section 128(e)(2)(I), proposed Sec. 226.38(b)(3)(v) applied only
if interest is charged on the private education loan while the student
is enrolled, and the consumer will not be paying interest on the loan
during this time. This disclosure would require the creditor to give
the consumer an estimate of the interest that will accrue on the loan
during enrollment. The Board is adopting proposed Sec. 226.38(b)(3)(v)
as Sec. 226.47(b)(3)(v).
Bankruptcy limitations. Proposed Sec. 226.38(b)(3)(vi) required
disclosure of a statement of limitations on the discharge of a private
education loan in bankruptcy. Proposed comment 38(b)(3)-5 stated that a
creditor may comply with proposed Sec. 226.38(b)(vi) by disclosing the
following statement: ``If you file for bankruptcy you may still be
required to pay back this loan.'' To avoid overloading the consumer
with information, the Board proposed to require a general statement
that student loans may not be dischargeable in bankruptcy rather than
require a detailed disclosure of student loan bankruptcy rules and
limitations. The Board is adopting proposed Sec. 226.38(b)(3)(vi) as
Sec. 226.47(b)(3)(vi).
Total amount for repayment. TILA section 128(e)(2)(H) requires the
creditor to disclose an estimate of the total amount for repayment
calculated based on: (1) the interest rate in effect on the date of
approval; and (2) the maximum possible rate of interest applicable to
the loan or, if a maximum rate cannot be determined, a good faith
estimate of the maximum rate.
Proposed Sec. 226.38(b)(3)(vii) defined the total amount for
repayment in the same manner as the current Regulation Z closed-end
credit disclosure of the total of payments. 12 CFR 226.18(h). Neither
the HEOA nor its legislative history provides guidance on the
definition of ``total amount for repayment.'' Regulation Z defines
``total of payments'' as the amount the consumer will have paid when
the consumer has made all scheduled payments. 12 CFR 226.18(h). In some
cases, the total of payments will not exactly match the total amount
that the borrower must repay. For example, if the borrower pays prepaid
finance charges separately in cash, the amount of these charges will
not be reflected in the total of payments. However, the Board believes
that requiring separate disclosures for the ``total amount for
repayment'' and the ``total of payments'' would likely cause consumer
confusion and that both terms are meant to capture the amount that the
borrower will have paid after making all scheduled payments to repay
the loan. Accordingly, in order to avoid duplication, proposed comment
38(b)(3)-6.i clarified that compliance with the total of payments
disclosure under Sec. 226.18(h) constitutes compliance with the
requirement to disclose the total amount for repayment at the interest
rate in effect on the date of approval.
Maximum rate. For the requirement that the creditor disclose an
estimate of the total amount for repayment at the maximum possible rate
of interest, proposed Sec. 226.38(b)(3)(vii) and comment 38(b)(3)-6.ii
required that either the maximum possible rate be used or, if a maximum
rate cannot be determined, an assumed rate of 21%. For example, if the
creditor were in a state without a usury limit on interest rates, and
the legal agreement between the parties did not specify a maximum rate,
the creditor would have to base the disclosure on a rate of 21%.
Under proposed comment 38(b)(3)-6.ii, a maximum rate included a
legal limit in the nature of a usury or rate ceiling under state or
Federal statutes or regulations, and the creditor was required to
calculate the total amount for repayment based on that rate, and to
disclose that the maximum rate is determined by law and may change.
TILA section 128(e)(2)(H) requires that, if a maximum rate cannot
be determined, the creditor must use a good faith estimate of the
maximum rate. The Board proposed to use its authority under the HEOA to
add a requirement that where a maximum rate cannot be determined, the
creditor use a rate of 21%. The Board stated its belief that such a
rule is necessary and appropriate for consumers to make informed
borrowing decisions. A rule providing a uniform maximum rate assumption
also gives creditors more certainty in complying with the regulation.
The Board proposed a rate of 21% because the Board believed that 21%
was the most common rate within the range of usury rate ceilings that
consumers in the private education loan market are likely to face.
Thus, the Board believed that basing the disclosure on an assumed
maximum rate of 21% would assist consumers in comparing different loans
by providing consumers with an estimated total amount for repayment
that will be similar between states with and without usury rate
limitations.
In addition, under the Board's TILA section 128(e)(2)(P) and
128(e)(4)(B) authority, the proposal added a requirement that, if the
legal obligation between the parties does not specify a maximum rate,
the creditor must accompany the estimated total amount for repayment
with a statement that: (1) No maximum interest rate applies to the
private education loan; (2) the maximum interest rate used to calculate
the total amount for repayment is an estimate; and (3) the total amount
for repayment disclosed is an estimate and will be higher if the
applicable interest rate increases. The Board believed that these
additional disclosures were necessary to inform consumers that the
examples in the disclosure statement are
[[Page 41220]]
merely illustrative and that their loan in fact has no maximum rate.
The HEOA allows the creditor to disclose the total amount for
repayment as an estimate. Proposed Sec. 226.38(b)(3) also required
only an estimated total amount for repayment. The Board recognized that
permitting disclosure of an estimate of the total amount for repayment
is necessary because the interest rates on most private education loans
are variable and the repayment schedule is often not known at the time
that the approval disclosures must be provided to the consumer.
The Board requested comment on whether a specific maximum rate
assumption should be used for disclosures where a maximum rate cannot
be determined, and, if so, whether 21% was the most appropriate rate or
whether another rate should be used. The Board also requested comment
on whether, if a maximum rate of interest was to be specified, the
Board should publish the rate periodically, based on a median or a
commonly used usury rate applicable to private education loans in
various states. The Board also requested comment on alternative
approaches by which creditors may make a good faith estimate of a
maximum possible rate when a maximum rate cannot be determined.
The Board received a number of comments on the proposal to require
disclosure of the total amount for repayment at an assumed rate of 21%
if a maximum interest rate could not be determined. Commenters
generally supported the approach used in the proposed rule although a
few commenters suggested specific higher or lower rates to be used as a
maximum rate assumption, or to require a creditor to use its actual
interest rate history. For example, consumer group commenters suggested
that a rate of 36% represented an average of state law usury ceilings,
but cited in support a study of payday lending laws. By contrast, some
industry commenters suggested that historically a rate of 21% was
higher than had actually been charged to consumers for private
education loans. One government agency supported using the greater of
21% or the highest rate actually charged by the creditor during a
recent period of time. One industry commenter stated that it was
subject to a state usury ceiling of 25% and expressed concern that
allowing other lenders with no rate cap to base the disclosure example
on a maximum rate of 21% was unfair to creditors in states with higher
usury ceilings. The commenter expressed concern that some consumers
would incorrectly conclude that it was preferable to take a loan from a
creditor in a state with no usury ceiling than from a creditor in a
state with a ceiling greater than 21%. Some commenters also suggested
that the Board should publish from time to time an assumed rate to be
used in calculating the total for repayment where a maximum rate cannot
be determined.
The Board is adopting proposed Sec. 226.38(b)(3)(vii) as Sec.
226.47(b)(3)(vii) largely as proposed, but the final rule requires a
disclosure based on an assumed rate of 25% where a maximum rate cannot
be determined, rather than 21%. The Board proposed using a rate of 21%
based on the most common rate in the range of usury rate ceilings that
consumers in the private education loan market are likely to face.
However, the Board believes that basing the example on the most common
state usury rate could disadvantage creditors in states with higher
usury ceilings. The highest state law usury rate actually applicable to
student loans mentioned by commenters was 25%. In addition, consumers
shown a disclosure where no maximum rate applied understood in testing
that the example used only an assumed rate of 21%. However, a few
consumers stated that they usually expect an assumption to be a ``round
number'' such as 20% or 25%, not a number like 21%. Based on consumer
testing results, the Board also believes that using an assumed rate of
25% will help indicate to consumers that the disclosure is based on an
example. The Board is not publishing a rate because commenters did not
suggest a methodology by which the Board could choose a more
appropriate rate. In addition, the Board believes that requiring all
creditors to use the same assumption, rather than historic rates, will
better assist consumers in comparing loans because a creditor's past
interest rates may not be predictive of future interest rates.
In response to one state education loan provider's comment, the
Board is adding comment 47(b)(3)-6.iii to clarify that if terms of the
legal obligation provide a limitation on the amount that the interest
rate may increase at any one time, the creditor may reflect the effect
of the interest rate limitation in calculating the total cost example.
For example, if the legal obligation provides that the interest rate
may not increase by more than three percentage points each year, the
creditor may, at its option, assume that the rate increases by three
percentage points each year until it reaches that maximum possible
rate, or if a maximum rate cannot be determined, an interest rate of
25%.
Maximum monthly payment. Proposed Sec. 226.38(b)(3)(viii)
implemented TILA section 128(e)(2)(O) by requiring the creditor to
disclose the maximum monthly payment based on the maximum rate of
interest applicable to the loan or, if a maximum rate cannot be
determined, for the reasons discussed above, an assumed rate of 21%. In
addition, as discussed above, under the Board's TILA section
128(e)(2)(P) and 128(e)(4)(B) authority, the proposal added a
requirement that the creditor state that: (1) No maximum interest rate
applies to the loan; (2) the maximum interest rate used to calculate
the maximum monthly payment amount is an estimate; and (3) the maximum
monthly payment amount is an estimate and will be higher if the
applicable interest rate increases.
As with proposed Sec. 226.38(b)(3)(vii), the Board requested
comment on other approaches by which creditors may calculate a maximum
payment when a maximum rate cannot be determined. Commenters combined
their comments on proposed Sec. 226.38(b)(3)(viii) with their comments
on proposed Sec. 226.38(b)(3)(vii).
For the reasons discussed above, the Board is adopting proposed
Sec. 226.38(b)(3)(viii) as Sec. 226. 47(b)(3)(viii) largely as
proposed except that if a maximum rate cannot be determined, an assumed
rate of 25% must be used.
47(b)(4) Alternatives to Private Education Loans
Implementing TILA section 128(e)(2)(M), the Board proposed
Sec. Sec. 226.38(b)(4) to require the creditor to provide the
information about alternatives to private education loans for financing
education that were also required under proposed Sec. Sec.
226.38(a)(6)(i)-(iii) and explained in the section-by-section analysis
for Sec. Sec. 226.47(a)(6). The Board proposed to use its authority
under TILA sections 105(a) and 105(f) to make exceptions to the statute
by not requiring creditors to state that Federal loans may be obtained
in lieu of or in addition to private education loans. As explained in
the section-by-section analysis for Sec. Sec. 226.47(a)(6), the Board
believes that this exception is necessary and proper to effectuate
meaningful disclosure of credit terms to consumers. The Board is
adopting Sec. Sec. 226.38(a)(6) as Sec. Sec. 226.47(a)(6).
47(b)(5) Rights of the Consumer
In implementing TILA section 128(e)(2)(L), proposed Sec.
226.38(b)(5) required a creditor to disclose that the consumer had the
right to accept the loan on the terms approved for up to 30
[[Page 41221]]
calendar days. The proposed disclosure also informed the consumer that
the rate and terms of the loan would not change during this period,
except for changes to the rate based on adjustments to the index used
for the loan.
Under the Board's TILA section 128(e)(2)(P) authority, the proposed
disclosure required a creditor to include the specific date on which
the 30-day period expired and to indicate that the consumer may accept
the terms of the loan until that date. For example, under the proposal,
if the consumer received the disclosures on June 1, the disclosure was
required to state that the consumer could accept the loan until July 1.
The Board believed that this disclosure was necessary to inform
consumers of the precise date when the 30-day period expired because
the date the consumer was deemed to receive the disclosure may have
differed slightly from the date the consumer actually received the
disclosure. The creditor was also required to disclose the method or
methods by which the consumer could communicate acceptance. The Board
believed that this disclosure was necessary to ensure consumers
understood the specific steps required to accept the loan. Proposed
comment 39(c)-3, discussed below, provided guidance to creditors on
disclosing methods by which consumers may communicate acceptance.
Section 226.47(b)(5) of the final rule requires a statement that
the consumer may accept the terms of the loan until the acceptance
period under Sec. 226.48(c)(1) has expired. As discussed in the
section-by-section analysis in Sec. 226.47(a)(7), the disclosure also
requires a statement similar to the statement in the application
disclosure that, except for changes as a result of adjustments 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 acceptance
period. As in the application disclosure, the requirements of this
provision more closely resemble the language used on the approval
disclosures in consumer testing, which consumers found to be clear and
understandable.
Section 226.47(b)(5) also requires the creditor to include the
specific date on which the acceptance period expires, based upon the
date on which the consumer receives the disclosures. It further
requires the disclosure to specify the method or methods by which the
consumer may accept the loan, such as by telephone or by mailing a
signed acceptance.
47(c) Final Disclosures
Section 226.47(c), proposed as Sec. 226.38(c), requires the
creditor to disclose to the consumer a third set of disclosures after
the consumer accepts the loan in accordance with Sec. 226.48(c)(1).
Section 226.47(c) implements TILA section 128(e)(4), which requires the
creditor to provide this final set of disclosures contemporaneously
with consummation. Regulation Z defines ``consummation'' as the time
that a consumer becomes contractually obligated on a credit
transaction. See 12 CFR 226.2(a)(13). The corresponding commentary
defers to state law to determine when consummation occurs. See comment
2(a)(13)-1. As discussed earlier in the section-by-section analysis
under Sec. 226.46, to avoid confusion about when the final private
education loan disclosures should be given due to differing state law
definitions of consummation, and to ensure that consumers have a
meaningful opportunity to exercise their cancellation right under TILA
section 128(c)(8), the Board interprets ``contemporaneously with
consummation'' to require creditors to provide these final disclosures
after acceptance and, under Sec. 226.48(d), at least three days before
disbursement.
47(c)(1) Interest Rate
Section 226.47(c)(1), proposed as Sec. 226.38(c)(1), requires
creditors to disclose the interest rate that applies to the private
education loan accepted by the consumer.
Fixed or variable rate, rate limitations. As proposed in Sec.
226.38(c)(1), Sec. 226.47(c)(1) requires the creditor to provide to
the consumer the rate information required under Sec. Sec.
226.47(b)(1)(ii) and (iii), as explained in the section-by-section
analysis for those sections.
47(c)(2) Fees and Default or Late Payment Costs
As proposed in Sec. 226.38(c)(2), Sec. 226.47(c)(2) requires the
creditor to provide to the consumer the fee and default or late payment
information required under Sec. 226.47(b)(2), as explained in the
section-by-section analysis for that section.
47(c)(3) Repayment Terms
As proposed in Sec. 226.38(c)(3), Sec. 226.47(c)(3) requires the
creditor to provide to the consumer the repayment information required
under Sec. 226.47(b)(3), as explained in the section-by-section
analysis for that section.
47(c)(4) Cancellation Right
Section 226.47(c)(4) is adopted as proposed in Sec. 226.38(c)(4).
Section 226.47(c)(4) and comment 47(c)-1 implement TILA section
128(e)(4)(C) by requiring the creditor to disclose to the consumer the
following information:
(i) The consumer has the right to cancel the loan, without being
penalized, at any time before the cancellation period under Sec.
226.48(d) has expired; and
(ii) Loan proceeds will not be disbursed until after the
cancellation period expires.
Under the Board's TILA section 128(e)(4)(B) authority, Sec.
226.47(c)(4) adds a requirement that creditor disclose the specific
date on which the cancellation period expires and include the methods
or methods by which the consumer may cancel the loan.
Comment 47(c)-2, proposed as comment 38(c)-2, clarifies that the
statement of the right to cancel must be more conspicuous than any
other disclosure required under Sec. 226.47(c), except for the finance
charge, the interest rate, and the creditor's identity. See Sec.
226.46(c)(2)(iii). Under comment 47(c)-2, the right to cancel statement
is deemed more conspicuous than other disclosures if the creditor
segregates the statement from other the disclosures, places the
statement at or near the top of the disclosure document, and highlights
the statement in relation to other required disclosures. Examples of
appropriate highlighting given in comment 47(c)-2 are that the
statement may be outlined with a prominent, noticeable box; printed in
contrasting color; printed in larger type, bold print or different type
face; underlined; or set off with asterisks. Comments 48(d)-1, and 2,
discussed below in the section-by-section analysis under Sec.
226.48(d), provide additional guidance about how the creditor must
notify the consumer of the cancellation right and how the consumer may
exercise this right.
Alternatives to Private Education Loans
Based on the results of the Board's consumer testing, the Board
proposed to use its authority under TILA section 105(a) to create an
exception from the requirement in TILA section 128(e)(4)(b) that the
creditor provide the consumer with information about Federal
alternatives to private education loans. Consumers overwhelmingly
indicated that this information would not be meaningful or useful to
them at the time when they would receive the final disclosures.
Consumers indicated that by the time they had applied for and accepted
a private education loan, they
[[Page 41222]]
already would have made a decision as to whether or not to seek other
loan alternatives.
The Board also proposed to exercise its authority under TILA
section 105(f) to exempt private education loans from the specific
requirement to disclose information about Federal loan alternatives in
the final disclosure form. The Board believed that this disclosure
requirement does not provide a meaningful benefit to consumers in the
form of useful information or protection. The Board considered that the
private education loan consumer population may contain students who
lack financial sophistication and that the size of the loan could be
relatively significant and important to the borrower. However, as
explained above, consumers tested indicated that this disclosure was
not useful at this final stage in the loan process. Borrowers would
receive the information about Federal loans at application and
approval. The Board also recognized that private education loans would
not be secured by the principal residence of the consumer, which is a
factor for consideration under section 105(f). Furthermore, the HEOA
provides significant rights, such as the right to cancel the loan. The
Board believed that consumer protection would not be undermined by this
exemption.
The Board requested comment on whether it should adopt this
proposed exception. Some consumer group commenters urged the Board to
retain the disclosures about Federal loan alternatives stating a
concern that consumers in a testing context received the various
private education loan disclosure forms close together in time, but
that consumers in the marketplace would receive them at different times
and may not recall the information about Federal loan alternatives.
For the reasons stated in the proposal, the Board is not requiring
disclosure of Federal loan alternatives on the final disclosure form.
The Board's consumer testing conducted after the proposed rule was
issued confirmed that consumers would not find this information
beneficial at the stage in the lending process where they receive the
final disclosure form.
Section 226.48 Limitations on Private Education Loans
Section 226.48, proposed as Sec. 226.39, contains rules and
limitations on private education loans. It includes a prohibition on
co-branding in the marketing of private education loans, rules
governing the 30-day acceptance period and three-day cancellation
period for private education loans, the requirement that the creditor
obtain a self-certification form from the consumer before consummating
a private education loan, and the requirement that creditors in
preferred lender arrangements provide certain information to covered
educational institutions.
48(a) Co-Branding Prohibited
The HEOA prohibits creditors from using the name, emblem, mascot,
or logo of a covered educational institution, or other words, pictures,
or symbols readily identified with a covered educational institution in
the marketing of private education loans in any way that implies that
the covered educational institution endorses the creditor's loans.
Proposed Sec. 226.39(a)(1) implemented this prohibition by
prohibiting creditors from referencing a covered educational
institution in a way that implies that the educational institution
endorses the creditor's loans. At the same time, the Board recognized
that a creditor may at times have legitimate reasons for using the name
of a covered educational institution. For instance, some educational
institutions' financial aid Web sites might provide links to specific
creditors' Web sites. Creditors might provide a welcome page to the
student that references the name of the school that provided the link.
Some creditors may have school-specific terms or benefits and may need
to use the name of the school to provide accurate information to
consumers about the nature and availability of its loan products.
For these reasons, proposed Sec. 226.39(a)(2) provided creditors
with the following safe harbor for those cases where the creditor's
marketing does make reference to an educational institution. Marketing
that refers to an educational institution would not be deemed to imply
endorsement if the marketing clearly and conspicuously discloses that
the educational institution does not endorse the creditor's loans, and
that the creditor is not affiliated with the educational institution.
This safe harbor approach is consistent with the views expressed in the
Conference Report to the HEOA, which states that the conferees intended
that creditors could demonstrate that they are not implying endorsement
by the covered educational institution by providing a clear and
conspicuous disclaimer that the use of the name, emblem, mascot, or
logo of a covered educational institution, or other words, pictures, or
symbols readily identified with a covered educational institution, in
no way implies endorsement by the covered educational institution of
the creditor's private education loans and that the creditor is not
affiliated with the covered educational institution. The Board stated
its belief that this safe harbor approach will inform consumers that a
reference to a covered educational institution does not mean that the
institution endorses the loan being marketed while also providing
clarity about how to market private education loans without violating
TILA and Regulation Z.
Proposed comment 39(a)-1 clarified the term ``marketing'' as used
in proposed Sec. 226.39. The term included all ``advertisements'' as
that term is defined in Regulation Z. 12 CFR 226.2(a)(2). The proposal
explained that the term marketing is broader than advertisement,
however, and includes documents that are part of the negotiation of the
specific private education loan transaction. For example, applications
or solicitations, promissory notes or contract documents would be
considered marketing. The Board believed that a broader meaning of
marketing is needed to cover documents, such as promissory notes, that
are not considered advertisements, but that may use the name of the
educational institution prominently in a potentially misleading way.
For example, naming the loan the ``University of ABC Loan'' could
mislead consumers into believing that the loan was offered by the
educational institution.
Proposed comment 39(a)-2 clarified that referencing a covered
educational institution in a way that implies that the educational
institution, rather than the creditor, is offering or making the loan
is a form of implying that the educational institution endorses the
loan and was therefore not permitted under proposed Sec. 226.39(a)(1).
However, the use of a creditor's own name, even if that name includes
the name of a covered educational institution, would not imply
endorsement. For example, a credit union whose name includes the name
of a covered educational institution would not be prohibited from using
its own name. In addition, authorized use of a state seal by a state or
an institution of higher education in the marketing of state education
loan products would not imply endorsement.\13\
---------------------------------------------------------------------------
\13\ See Joint Explanatory Statement of the Committee of
Conference on H.R. 4137, Title X, Subtitle A, Sec. 1011. The
Conference Report states that the prohibition is not intended to
prohibit a credit union whose name includes the name of a covered
educational institution from using its own name in marketing its
private education loans. In addition, it is not intended to prohibit
states or institutions of higher education from using state seals,
with appropriate authorization, in the marketing of state education
loan products.
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[[Page 41223]]
Proposed comment 39(a)-3.i provided a model clause that creditors
may use in complying with the safe harbor proposed in Sec.
226.39(a)(2). The creditor would be considered to have complied with
proposed Sec. 226.39(a)(2) if the creditor includes a clear and
conspicuous statement, using the creditor's name and the covered
educational institution's name, that ``[Name of creditor]'s loans are
not endorsed by [name of school] and [name of creditor] is not
affiliated with [name of school].''
The Board received comments from educational institutions arguing
that the prohibition on co-branding should not apply if the educational
institution is itself the creditor. The Board also received comments
from creditors suggesting that use of the educational institution's
name on the promissory note, if no more conspicuous than the text of
the promissory note does not imply endorsement and should not be
prohibited. By contrast, consumer groups suggested that the Board
engage in consumer testing to ensure that the proposed disclosures were
effective in indicating that a private education loan was not endorsed
by the educational institution.
Proposed Sec. Sec. 226.39(a)(1) and 39(a)(2) are adopted as
Sec. Sec. 226.48(a)(1) and 48(a)(2) largely as proposed. However,
consistent with comment 47-2, which permits a creditor to use its own
name, Sec. 226.48(a)(1) has been clarified to not apply to a covered
educational institution if the institution is the creditor. In
addition, comments 47(d)-3.i and 47(d)-3.ii of the final rule require
the safe harbor model clauses be provided with equal prominence and in
close proximity to the reference to the school. Consistent with the
Board's interpretation of the equal prominence and close proximity
standards in the advertising rules in Sec. Sec. 226.16 and 24, the
statement would be deemed equally prominent and closely proximate if it
is the same type size and is located immediately next to or directly
above or below the reference to the school, without any intervening
text or graphical displays. The Board believes that requiring equal
prominence and close proximity for the use of the safe harbor
statements will ensure that marketing material clearly communicates to
consumers the identity of the creditor making the loan and, if
applicable, that the school does not endorse the creditor's loans.
The final rule does not exclude use of the school's name in the
promissory note from the general rule, even if the school's name is no
more prominent than other text. The Board does not believe that the
relative prominence of the school's name within the promissory note, by
itself, determines whether or not the use of the school's name is
misleading.
48(b) Preferred Lender Arrangements
In the proposal, the Board recognized that in certain instances the
prohibition on creditors' implying endorsement from covered educational
institutions would not be appropriate because it would not be factually
correct. The HEOA specifically allows covered educational institutions
to endorse the private education loans of creditors with which they
have a ``preferred lender arrangement.'' The HEOA defines a ``preferred
lender arrangement'' as an arrangement or agreement between a creditor
and a school under which the creditor provides loans to the school's
students or their families, and the school recommends, promotes, or
endorses the creditor's loans. HEOA, Title I, Sec. 120 (adding Section
152 to the Higher Education Act). Thus, where a creditor and a covered
educational institution have a preferred lender arrangement, a
creditor's statement that a school did not endorse its loans would be
misleading.
The Board proposed to exercise its authority under TILA section
105(a) to provide an exception to the co-branding prohibition for
creditors that have preferred lender arrangements. As explained above,
the Board believes that this provision is necessary and proper to
assure an accurate and meaningful disclosure to consumers of the
relationship between the creditor and the educational institution.
Proposed Sec. 226.39(b) allowed the creditor to refer to the covered
educational institution, but required that the creditor clearly and
conspicuously disclose that the loan is not being offered or made by
the educational institution, but rather by the creditor. The Board
believes that a disclosure that the loan is provided by a creditor and
not by the school would address consumer confusion about whether the
loan was actually made by the school, or merely endorsed by the school.
The proposed requirement that creditors with preferred lender
arrangements make a disclosure when referring to a school follows a
prohibition on co-branding for preferred lenders contained in section
152 of the Higher Education Act, as added by the HEOA, which is similar
to the newly added co-branding prohibition in TILA. Section 152 of the
Higher Education Act prohibits a creditor in a preferred lender
arrangement from making a reference to a covered educational
institution in any way that implies that the loan is offered or made by
such institution or organization instead of the creditor. HEOA, Title
I, Section 120 (adding Section 152(a)(2) to the Higher Education Act).
Thus, proposed Sec. 226.39(b) reconciled the two co-branding
prohibitions contained in the HEOA.
Proposed comment 39(a)-3.ii provided a model clause that creditors
could use in complying with proposed Sec. 226.39(b). The creditor
would be considered to have complied with proposed Sec. 226.39(b) if
the creditor included a clear and conspicuous statement, using the name
of the creditor's loan or loan program, the creditor's name and the
covered educational institution's name, that ``[Name of loan or loan
program] is not being offered or made by [name of school], but by [name
of creditor].''
The Board requested comment on whether creditors should be offered
a safe harbor from the prohibition on co-branding, and, if so, whether
other types of safe harbors should be considered. The Board also
requested comment on how the co-branding prohibition should apply to
creditors with preferred lender arrangements with covered educational
institutions. The Board also requested comment on whether there are
other examples of marketing that should be included in the co-branding
prohibition.
The Board received comments from educational institutions and some
lenders indicating that the proposed exception to the co-branding
prohibition might conflict the Department of Education's, or other
state law code-of-conduct provisions. Some educational institutions
expressed concern that the proposed rule would permit the creditor to
claim endorsement without the educational institution's consent if the
educational institution merely placed a creditor on a suggested list of
lenders provided to students.
The Board is adopting Sec. 226.48(b) largely as proposed in Sec.
226.39(b). However, the final rule clarifies that it does not authorize
creditors to claim endorsement by an educational institution without
the institution's having actually endorsed the creditor's loan program.
After consulting with the Department of Education, the Board still
believes that such endorsements may be permissible. The final rule has
also been clarified to apply only when an endorsement of the creditor's
loans by the educational institution is not
[[Page 41224]]
prohibited by other applicable law or regulation. In addition, the
statement that must accompany the reference to the educational
institution must be equally prominent and closely proximate as
discussed in the section-by-section analysis under Sec. 226.48(a)
above.
48(c) Consumer's Right To Accept
The HEOA provides consumers with a 30-day period following receipt
of the approval disclosures in which to accept a private education
loan. It also prohibits creditors from changing the rate or terms of
the loan, except for changes based on adjustments to the index used for
the loan, until the 30-day period has expired. Section 226.48(c),
proposed as Sec. 226.39(c), implements the 30-day acceptance period
for private education loans.
Under the proposal, the 30-day period began following the
consumer's receipt of the approval disclosures required in proposed
Sec. 226.38(b). Proposed comment 39(c)-1 required creditors to provide
at least 30 days from the date the consumer received the disclosures
required under proposed Sec. 226.38(b) for the consumer to accept a
private education loan. It also allowed creditors to provide a longer
period of time at the creditor's option. It clarified that if the
creditor placed the disclosures in the mail, the consumer was
considered to have received them three business days after they were
mailed. The proposed comment also clarified that the consumer could
accept the loan at any time before the end of the 30 day period.
Commenters agreed with the proposal requiring a minimum 30-day
acceptance period and the provision that a consumer could accept the
loan at any time within the 30-day period. Therefore, proposed Sec.
226.39(c) and comment 39(c)-1 are adopted as Sec. 226.48(c) and
comment 48(c)-1, respectively.
The HEOA does not specify the method by which the consumer may
accept the terms of the loan. Proposed comment 39(c)-2 allowed the
creditor to specify a method or methods by which acceptance could
occur. Under the proposal, the creditor could specify that acceptance
be made orally or in writing or could permit either form of acceptance.
The creditor could also allow the consumer to accept electronically,
but could not make electronic acceptance the sole form of acceptance.
Commenters generally agreed with the proposed comment on
permissible methods of acceptance. However, some commenters suggested
that creditors should be permitted to require electronic communication
to be the only means of acceptance if the creditor provided the
approval disclosure to the consumer electronically. The Board believes
that requiring a form of acceptance in addition to electronic
communication is generally appropriate because not all consumers have
access to electronic forms of communication. However, the Board agrees
with commenters that electronic communication could be permissible as
the only means of acceptance when the consumer has already indicated a
willingness to communicate electronically by consenting to and
receiving a disclosure electronically, pursuant to the E-Sign Act.
Comment 48(c)-2, proposed as comment 39(c)-2, is adopted and revised to
permit electronic communication as the only means of acceptance if the
creditor has provided the approval disclosure electronically in
compliance with the consumer consent and other applicable provisions of
the E-Sign Act.
Proposed Sec. 226.39(c)(2) prohibited creditors from changing the
terms of the loan, with a few specified exceptions, before the loan
disbursement, or the expiration of the 30-day acceptance period if the
consumer did not accept the loan during that time. To ensure that
consumers receive the benefit of the entire 30-day period in which to
accept the loan, the Board proposed to prohibit creditors from changing
the rate and terms of the loan until the date of disbursement, if the
consumer accepted within the 30-day period.
Proposed Sec. 226.39(c)(2) prohibited only those changes that
would affect the rate or terms required to be disclosed under proposed
Sec. Sec. 226.38(b) and (c), the approval and final disclosures,
respectively. The Board interpreted the prohibition on changes to the
rate or terms of the loan to cover only the disclosed terms.
In the proposal, the Board provided three exceptions to the
provision that the rate and terms of private education loans required
to be disclosed could not be changed. Proposed Sec. 226.39(c)(2) did
not prohibit changes based on adjustments to the index used for a loan,
implementing TILA section 128(e)(6)(B). In addition, in the proposal,
the Board exercised its authority under TILA section 105(a) to make
exceptions to effectuate the purposes of the statute to allow the
creditor to make changes that would unequivocally benefit the consumer,
similar to the rule for home-equity plans in Sec. 226.5b(f)(3)(iv).
The Board also proposed to exercise its authority under TILA section
105(f) in permitting unequivocally beneficial changes by exempting
creditors from HEOA's prohibition on making changes to the loan prior
to the date of acceptance of the terms of the loan and consummation of
the transaction. HEOA, Title X, Subtitle B, Section 1021(a) (adding
TILA Section 128(e)(6)(B)).
The proposal also did not prohibit changes made in connection with
accommodating a request by the consumer. Proposed Sec. 226.39(c)(3)
and proposed comment 39(c)-3 allowed creditors to change a loan's rate
or terms in response to a request from a consumer. The proposed rule
did not limit the changes that could be made. For example, the creditor
was permitted to provide for a shorter repayment term as a condition of
granting the consumer's request to borrow a lesser loan amount.
However, under the proposal if the creditor chose to modify the terms
of the loan in response to a consumer's request, the creditor needed to
provide a new set of approval disclosures and provide the consumer with
a new 30-day acceptance period.
The HEOA provides that a consumer has 30 days in which to accept
the terms of a private education loan and consummate the transaction,
and that the creditor may not change the rate and terms of the loan
during this time. The statute does not explicitly state under what
conditions, if any, a creditor could withdraw the loan offer or change
the loan's terms in response to a change in a material condition of the
loan. The Board requested comment on whether there were instances where
a material condition of the loan offer was not met such that the
creditor should be permitted to withdraw the offer or change the terms
of the loan.
Commenters generally agreed with the permissible exceptions to the
restrictions on changes to the loan's rate and terms. Industry
commenters, however, suggested that creditors should be permitted to
give approval disclosures at a conditional approval stage, and be
allowed to change the terms of the loan based upon information received
later, such as verification of income, verification of citizenship,
validation of co-borrower information, and validation that the loan
transaction is in compliance with applicable laws. Industry commenters
also argued for an exception to enable creditors to change the terms of
a loan based on revised information regarding a consumer's educational
expenses and financial need provided in a school certification or other
communication from a school. They argued that if creditors were not
permitted to give approval disclosures at a conditional approval stage,
loan approvals and
[[Page 41225]]
approval disclosures would be delayed while verifications, compliance
checks, and school certifications were completed.
The Board agrees that it is important to inform consumers of a loan
approval and the applicable rates and terms early in the loan process,
so that consumers have as much time as possible to shop for a private
education loan with the most favorable terms. However, the HEOA
provides that the rates and terms of the private education loan may not
be changed by a creditor during the 30-day period in which the consumer
has the right to accept the loan terms and consummate the transaction,
except for changes based on adjustments to the index used for a
loan.\14\ Thus, permitting conditions contemplated by the commenters
would require the Board to make multiple exceptions, which could
undermine the statutory provision. This would also prevent the consumer
from being able to adequately shop for the best loan terms because the
consumer would not know the final terms of the offer until the final
disclosure was provided. Moreover, the Board believes that while
private education loan approvals may be delayed in order for creditors
to verify certain information, creditors will still have an incentive
to approve the loans expeditiously in order to respond to the needs of
their customers.
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\14\ Title X, Subtitle A, Sec. 1021(a) (amending TILA Section
128(e)).
---------------------------------------------------------------------------
However, the Board does believe that two of the exceptions
suggested by the industry commenters are appropriate, in addition to
those exceptions provided in the proposed rules and, for the reasons
stated below, is adopting them pursuant to its TILA Section 105(a)
authority in order to effectuate the purposes of and facilitate
compliance with TILA. In response to concerns that the provision would
require creditors to consummate a loan that is legally impermissible,
in Sec. 226.48(c)(3) and comment 48(c)-4 in the final rules, the Board
makes clear that a creditor may withdraw an offer prior to consummation
if the extension of credit would be prohibited by law. The creditor
also may withdraw an offer prior to consummation if the creditor has
reason to believe that the consumer has committed fraud in connection
with the application.
The Board also understands that it is common for students'
financial assistance packages to change in a short time period for a
variety of reasons, such as changes to the student's and family's
financial situation or the availability of grants. The Board shares
commenters' concerns that those whose financial assistance amount
increases after their private education loan has been approved could
end up over-borrowing, which, among other things, could adversely
affect a student's eligibility for Federal student loans. Thus, section
226.48(c)(3) and comment 48(c)-4 permit the creditor to reduce the loan
amount based upon a certification or other information received from a
covered educational institution or from the consumer that indicates the
student's cost of attendance has decreased or that other financial aid
has increased. A creditor may make corresponding changes to the rate
and other terms, but only to the extent that the consumer would have
received the changed terms if the consumer had applied for the reduced
loan amount. For example, assume a consumer applies for, and is
approved for, a $10,000 loan at a 7% interest rate. However, the
consumer's school certifies that the consumer's financial need is only
$8,000. The creditor may reduce the loan amount for which the consumer
is approved to $8,000. The creditor may also, for example, increase the
interest rate on the loan to 7.125%, but only if the consumer would
have received a rate of 7.125% if the consumer had originally applied
for a $8,000 loan.
The Board is also adopting the exceptions to the restrictions on
changing the rates and terms of the loan that were set forth in the
proposed rules. The Board continues to believe a permissible change
that would unequivocally benefit the consumer is appropriate.
Disallowing such a change could complicate the credit process and
unnecessarily increase costs for consumers and creditors who, for
example, would otherwise have to repeat the application process in
order to change the terms. In addition, consumers retain their right
under HEOA to cancel the loan. Therefore, the Board is adopting the
exception proposed in Sec. 226.39(c)(2) and comment 39(c)-3 that
permits a creditor to make changes if they will unequivocally benefit
the consumer in the final rules as Sec. 226.48(c)(3) and comment
48(c)-4. The final rules clarify that the permissible changes may be
made to both the interest rate and the terms of the loan. For example,
a creditor is permitted to reduce the interest rate or lower the amount
of a fee.
The Board is also adopting proposed Sec. 226.39(c)(2) as Sec.
226.48(c)(3) in the final rules, permitting changes based on
adjustments to the index used for a loan, as mandated in the HEOA. The
final rules clarify that while changes to the interest rate are
permissible under this exception, changes to other loan terms based on
adjustments to the index used for a loan are not permissible.
The Board has clarified in Sec. 226.48(c)(3)(ii) and comment
48(c)-4 that if the creditor changes the rate or terms of the loan
under Sec. 226.48(c)(3), the creditor need not provide the approval
disclosures required under Sec. 226.47(b) for the changed loan terms,
nor must the creditor provide an additional 30 days to accept the new
terms of the loan. However, the creditor must provide the final
disclosures required under Sec. 226.47(c).
In addition to the changes to the rates and terms of the loan
permitted in Sec. 226.48(c)(3), the Board also continues to believe
that it is in the consumer's interest to be able to request changes to
specific terms of the loan, even if this results in changes to the rate
or other terms. The Board understands that it is common for a
consumer's private education loan needs to change even until
immediately prior to consummation of the loan. For example, a consumer
may seek to defer repayment during enrollment in school after the
consumer has already applied for the loan. The Board seeks to ensure
that consumers retain the benefit of the 30-day acceptance period while
also providing consumers with flexibility to move forward with a
transaction with a creditor without having to cancel a loan, or loan
offer, and expend time and money re-applying. Thus, the Board is also
adopting proposed Sec. 226.39(c)(3) and comment 39(c)-4 as Sec.
226.48(c)(4) and comment 48(c)-5 to permit a creditor, at its option,
to change the rate or terms of a loan in order to accommodate a request
from a consumer. The final rule also clarifies that, except for the
permissible changes to the rates and terms in Sec. 226.48(c)(3)
discussed above, a creditor may not withdraw or change the rate or
terms of the original loan for which the consumer was approved unless
the consumer accepts the terms of the loan offered in response to the
consumer's request. For example, assume a consumer applies for a
$10,000 loan and is approved for the $10,000 amount at an interest rate
of 6%. After the creditor has provided the approval disclosures, the
consumer's financial need increases, and the consumer requests to a
loan amount of $15,000. In this situation, the creditor is permitted to
offer a $15,000 loan, and to make any other changes such as raising the
interest rate to 7%, in response to the consumer's request. However,
because the consumer may choose not to accept the offer for the $15,000
loan at the higher interest rate, the creditor may not withdraw or
[[Page 41226]]
change the rate or terms of the offer for the $10,000 loan, except as
permitted under Sec. 226.48(c)(3), unless the consumer accepts the
$15,000 loan.
The Board believes that consumers could be discouraged from
requesting changes to loan terms unless the original offer for which
the consumer was approved is held open until the consumer accepts the
counter-offer. For similar reasons, the Board has clarified in Sec.
226.48(c)(4)(ii) that if the creditor offers to make changes based on a
request from the consumer, the creditor must provide the disclosures
required under Sec. 226.47(b) for the new loan terms. The creditor
must also provide the consumer with an additional 30 days to accept the
new terms of the loan and must not change the new loan's rate and terms
except as specified in Sec. Sec. 226.48(c)(3) and 226.48(c)(4).
48(d) Consumer's Right To Cancel
Section 226.48(d), adopted substantially as proposed in Sec.
226.39(d), provides the consumer with the right to cancel a private
education loan without penalty until midnight of the third business day
following receipt of the final disclosures required in Sec. 226.47(c).
It also prohibits the creditor from disbursing any funds until the
expiration of the three-business day period. As proposed, the
consumer's right to cancel applies regardless of whether or not the
consumer is legally obligated on the loan at the time that the final
disclosures were provided.
Comment 48(d)-1, proposed as comment 39(d)-1, provides guidance on
calculating the three-business day time period and when a consumer's
request to cancel would be considered timely. It also clarifies that
the creditor may provide a period of time longer than three business
days in which the consumer may cancel, and that the creditor may
disburse funds after the minimum three-business day period so long as
the creditor honors the consumer's later timely cancellation request.
Comment 48(d)-2, proposed as comment 39(d)-2, provides guidance to
creditors on specifying a method or methods by which the consumer may
cancel the loan. The creditor is permitted to require cancellation be
communicated orally or in writing. Under the proposal, the creditor was
also permitted to allow cancellation to be communicated electronically,
but was not permitted to require only electronic communication because
the Board believed that not all consumers have access to electronic
communication. In the final rule, comment 48(d)-2 clarifies that if the
creditor has provided the final disclosure electronically in accordance
with the E-Sign Act, the creditor may allow electronic communication as
the only means of acceptance.
Comment 48(d)-3, proposed as comment 39(d)-3 clarifies the
requirement that the creditor allow cancellation without penalty. The
prohibition extended only to fees charged specifically for canceling
the loan. The creditor is not required to refund fees, such as an
application fee, when charged to all consumers whether loans are
cancelled or not.
The Board requested comment on whether creditors should be required
to accept cancellation requests until midnight, or whether they should
be allowed to set a reasonable deadline for communicating cancellation
on the third business day. The Board also requested comment on whether
creditors should be allowed to provide for a longer period during which
consumers may cancel the loan, and, if so, whether creditors should be
allowed to disburse funds after the minimum three-business-day period.
Commenters generally supported permitting creditors to provide a
period longer than three days in which to cancel the loan and allowing
loan funds to be disbursed after the third day if the creditor provides
additional time in which to cancel. A few industry commenters suggested
that creditors be allowed to set a reasonable cut-off time for
cancellation requests on the third business day, such as 5 p.m.
However, because the final rule allows creditors to provide the
consumer with more than three days in which to cancel, the final rule
adopts the midnight cutoff time on the third day.
48(e) Self-Certification Form
The HEOA requires that, before a creditor may consummate a private
education loan, it obtain from the consumer a self-certification form.
Proposed Sec. 226.39(e) implemented this requirement. The HEOA
requires that a creditor obtain the self-certification form only from
consumers of private education loans intended for students attending an
institution of higher education. HEOA, Title X, Subtitle B, Section
1021(a) (adding TILA Section 128(e)(3)). Thus, the proposal did not
require a self-certification form with respect to every covered
educational institution, but only those that met the definition of an
institution of higher education in proposed Sec. 226.37(b)(2).
Moreover, proposed comment 39(e)-1 clarified that the requirement
applied even if the student was not currently attending an institution
of higher education, but would use the loan proceeds for postsecondary
educational expenses while attending such institution. For example, a
creditor would have been required to obtain the form before
consummating a private education loan provided to a high school senior
for expenses to be incurred during the consumer's first year of
college. At the same time, proposed comment 39(e)-1 clarified that the
self-certification requirement would not apply to loans where the self-
certification information would not be applicable, such as loans
intended to consolidate existing education loans. The self-
certification form provides the consumer with information about the
student's education costs to be incurred in the future (such as the
cost of attendance and the amount of financial aid available). Even if
the student were still enrolled, the information on the self-
certification form would not apply to a consolidation loan, because the
consolidation loan would cover expenses the student incurred in the
past.
Section 155(a)(2) of the Higher Education Act of 1965, as added by
the HEOA, provides that the form shall be made available to the
consumer by the relevant institution of higher education. HEOA, Title
X, Subtitle B, Sec. 1021(b). Although the HEOA requires that the
creditor obtain the completed and signed self-certification form before
consummating the loan, it does not specify that the creditor must
obtain the form directly from the consumer. Proposed comment 39(e)-1
allowed the creditor to obtain the self-certification form either
directly from the consumer or through the institution of higher
education. Compliance with the self-certification requirement may be
simplified for all parties if the educational institution is permitted
to obtain the completed form from the consumer and forward it to the
creditor. The consumer may find it easier to return the form to the
educational institution as part of the institution's overall financial
aid process. The creditor and educational institution may also find it
easier to include the self-certification form as part of a larger
package of information communicated by the institution to the creditor
about the student's eligibility and cost of attendance.
Both Section 128(e)(3) of TILA and Section 155 of the Higher
Education Act of 1965 provide that the self-certification form may be
provided to the consumer in electronic form. Under Section 155 of the
Higher Education Act of 1965, the Department of Education must develop
the form and ensure that institutions of higher education make it
[[Page 41227]]
available to consumers in written or electronic form. Because the form
will be provided by educational institutions to consumers, the Board
did not propose to impose consumer consent or other requirements on
creditors in order to accept the form in electronic form. The self-
certification form may also be signed by the consumer in electronic
form. Under Section 155(a)(5) of the Higher Education Act of 1965, the
Department of Education must provide a place on the form for the
applicant's written or electronic signature. Proposed comment 39(e)-2
provided that a consumer's electronic signature is considered valid if
it meets the requirements promulgated by the Department of Education
under Section 155(a)(5) of the Higher Education Act of 1965.
The Board received numerous comments from industry, educational
institutions, and individual financial aid officers and their
representatives about the self-certification requirement. These
comments requested that the Board exempt from the self-certification
requirement any private education loan for which the creditor certifies
the borrower's cost of attendance, other financial aid, and financial
need information with the school. Commenters expressed concern that the
self-certification requirement would be duplicative of the current
school certification process when that process is used. In particular,
individual financial aid officers expressed concern that the self-
certification process would greatly increase the burden on financial
aid offices with few staff. Educational institutions also suggested
that the self-certification process was likely to be less meaningful
when the educational institution is the creditor because the
educational institution provides the form as well as the information
the consumer must use to complete the form, but must also receive the
form back from the consumer.
Section 226.48(e) of the final rule does not provide an exception
from the self-certification requirement for school-certified loans. The
HEOA requires creditors to obtain the self-certification form in all
cases. The Board believes that self-certification form is intended not
only to ensure that the educational institution and creditor are aware
of the cost of attendance at the educational institution and about the
consumer's other financial aid and need, but also to provide the
consumer with this information. Thus, even where the school and the
creditor share this information directly, the self-certification form
seeks to ensure consumers are aware of their own educational expenses,
the financial aid for which they qualify, and their remaining financial
need.
The final rule does, however, permit creditors to provide the self-
certification form directly to the consumer with the information the
consumer requires in order to complete the form. Nothing in the HEOA
prohibits creditors or anyone else from providing the form to the
consumer and the Board notes that the form necessarily will be provided
by the creditor when the creditor is the educational institution. The
HEOA requires a statement on the self-certification form that the
consumer is encouraged to communicate with the financial aid office
about the availability of other financial aid. The Board believes that
allowing the creditor to provide the form will ensure that creditors
have the ability to consummate private education loans and disburse
loan funds in a timely manner and that this will benefit consumers,
especially if financial aid offices are unable to process self-
certification requests.
48(f) Provision of Information by Preferred Lenders
The HEOA requires a creditor that has a preferred lender
arrangement with a covered educational institution to provide the
educational institution annually, by a date determined by the Board in
consultation with the Secretary of Education, with the information
required to be disclosed on ``the model form'' developed by the Board
for each type of private education loan the creditor plans to offer for
the next award year (meaning the period from July 1 of the current
calendar year to June 30 of the next year). HEOA, Title X, Subtitle B,
Section 1021(a) (adding TILA Section 128(e)(11)). TILA Section
128(e)(11) refers to the information on ``the model form'' but the HEOA
requires the Board to develop three model forms and Section 128(e)(11)
does not specify which of the model forms the creditor should use.
However, the approval and consummation forms contain transaction-
specific data that cannot be known for the next year. Thus, the final
rule requires, as proposed, that the creditor provide the general loan
information required on the application form in Sec. 226.47(a), rather
than the transaction-specific information required in the approval and
final disclosure forms.
After consultation with the Department of Education, the Board
proposed to require that creditors provide information by January 1 of
each year. Proposed Sec. 226.39(f) required that the creditor provide
only the information about rates, terms and eligibility that are
applicable to the creditor's specific loan products. The Board did not
believe that educational institutions needed the other information
required to be disclosed in Sec. 226.38(a), such as information about
the availability of Federal student loans. In addition, the Board
believed that educational institutions could perform their own
calculations of the total cost of the creditors' loans and did not need
the cost estimate disclosure required under Sec. 226.38(a)(4). Comment
39(f)-1 provided creditors with the flexibility to comply with this
requirement by providing educational institutions with copies of their
application disclosure forms if they chose, or to provide only the
required information.
The Board requested comment on the appropriate date by which
creditors must provide the required information and on what information
should be required. Industry and educational institution commenters
suggested that April 1 of each year would be a more appropriate date.
Commenters stated that creditors often do not settle on credit terms
for the upcoming school year and schools do not compile preferred
lender lists until closer to April 1. In addition, commenters noted
that under the Department of Education's negotiated rulemaking, the
definition of preferred lender arrangement was likely to be very broad
and that creditors may not know by April 1, or at all, that they are on
a school's preferred lender list and thus party to a preferred lender
arrangement. These commenters requested that they be required to
provide the information by April 1 or within 30 days of learning that
they were party to a preferred lender arrangement. Educational
institution commenters also requested that the Board require disclosure
of the total cost examples contained in the application forms, stating
they may not always have the information or resources necessary to
reproduce the calculations.
Under Sec. 226.48(e), the final rule requires creditors to provide
the required information by April 1 of each calendar year or within 30
days of entering into, or learning that the creditor is a party to, a
preferred lender arrangement. The information must cover private
education loans that the creditor plans to offer students for the
period from July 1 of the current calendar year to June 30 of the next
calendar year (that is, the next award year). In addition, the creditor
is required to provide the information required in Sec. Sec.
226.47(a)(1)-(5), which includes the total cost examples.
[[Page 41228]]
Comment 48(e)-1 clarifies that a creditor is not required to comply if
the creditor is not aware that it is a party to a preferred lender
arrangement. For example, if a creditor is placed on a covered
educational institution's preferred lender list without the creditor's
knowledge, the creditor is not required to comply with Sec. 226.48(f).
Appendix H--Closed-End Model Forms and Clauses
Appendix H to part 226 contains model forms, model clauses and
sample forms applicable to closed-end loans. Although use of the model
forms and clauses is not required, creditors using them properly will
be deemed to be in compliance with the regulation with regard to those
disclosures. The Board proposed to add several model and sample forms
to Appendix H to part 226. The Board also proposed to add commentary to
the model and sample forms in Appendix H to part 226, as discussed
below.
Current model form H-2 contains boxes at the top of the form with
disclosures in the following order: the annual percentage rate, the
finance charge, the amount financed, and the total of payments.
Proposed model forms H-19, and H-20 contain a similar box-style
arrangement, but reordered the disclosures as follows: The amount
financed, the interest rate, the finance charge and the total of
payments.\15\ The proposed order reflected a mathematical progression
of the disclosures that consumer testing indicates may enhance
understanding of these terms: the consumer borrows the amount financed,
is charged interest which, along with fees, yields a finance charge and
a total of payments. While the Board believed that proposed order may
enhance consumer understanding in the context of private education
loans, the Board also recognized that consumers may be accustomed to
the current order from other loan contexts. The Board requested comment
on whether it should maintain a uniform order for the disclosures, or
whether it should adopt the proposed order for private education loans.
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\15\ The disclosure of the interest rate and annual percentage
rate is discussed in the section-by-section analysis in Sec.
226.17.
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A few industry and consumer group commenters suggested that the
Board maintain the boxes in the order provided in model form H-1.
However, the final model forms H-19 and H-20 contain further changes to
the boxes displayed at the top of the forms. In the final model forms,
the amount financed is disclosed as part of the itemization of the
amount financed and the total loan amount is in the top left box where
the amount financed was in the proposed forms. Consumer testing
indicated that disclosing the total loan amount, interest rate, finance
charge and total of payments in this manner enhanced consumer
understanding. Consumers were able to follow the mathematical
progression of the terms and understand the finance charge and total of
payments based on the total loan amount, interest rate and itemization
of the amount financed. For these reasons the Board is maintaining the
order of the boxes as proposed.\16\
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\16\ In addition, the Board notes that current comment app. H-1
specifically permits creditors to rearrange the order of the finance
charge and amount financed boxes in model forms H-1 and H-2.
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Permissible changes to the model and sample forms. The commentary
to Appendices G and H to part 226 currently states that creditors may
make certain changes in the format and content of the model forms and
clauses and may delete any disclosures that are inapplicable to a
transaction or a plan without losing the act's protection from
liability. See comment app. G and H-1. However, the Board proposed to
adopt format requirements with respect to the model forms for
disclosures applicable to private education loans, such as requiring
certain disclosures be grouped together under specific headings.
Proposed comment app. H-25.i provided a list of acceptable changes to
the model forms. Proposed comment app. H-25.ii provided guidance on the
design of the model forms that would not be required but would be
encouraged.
The Board also proposed sample forms H-21, H-22, and H-23 to
illustrate various ways of adapting the model forms to the individual
transactions described in the commentary to appendix H. The deletions
and rearrangements shown relate only to the specific transactions
described in proposed comments app. H-26, H-27, and H-28. As a result,
the samples do not provide the general protection from civil liability
provided by the model forms.
The Board conducted consumer testing on the proposed forms and on
later revisions of the proposed forms. The Board also received comments
on the proposed forms requesting clarification as to whether certain
changes could be made. For example, commenters requested the ability to
move the notice of the right to cancel to accommodate a form that could
be used with windowed envelopes.
The Board is adopting final model forms H-18, H-19, and H-20, and
final sample forms H-21, H-22, and H-23, that have been revised to
reflect the consumer testing conducted for the Board and public
comment. The Board is also adopting comment H-25 to provide a list of
acceptable changes to the model forms and guidance on the design of the
forms. For example, in response to public comment, the Board tested a
version of the sample final form with the notice of the right to cancel
in the top right instead of the top left and consumers did not find the
notice less conspicuous. The final rule allows creditors to place the
notice of the right to cancel in the top right of the form to
accommodate windowed envelopes.
V. Effective Date
The HEOA's amendments to TILA have various effective dates. The
TILA amendments for which the Board is not required to issue
regulations became effective on the date of the HEOA's enactment,
August 14, 2008. HEOA Section 1003.
The Board is required to issue regulations for paragraphs (1), (2),
(3), (4), (6), (7), and (8) of section 128(e) and section 140(c) of
TILA. The Board's regulations are to have an effective date not later
than six months after their issuance. HEOA Section 1002. However, the
HEOA's amendments to TILA for which the Board must issue regulations
take effect on the earlier of the date on which the Board's regulations
become effective or 18 months after the date of the HEOA's enactment.
HEOA Section 1003. Consequently, the latest date at which the
provisions of the HEOA described above could become effective is
February 14, 2010.
The Board requested comment on whether six months would be an
appropriate implementation period for the proposed rules or whether the
Board should specify a shorter implementation period. Commenters stated
that compliance with the proposed rule would require significant
updates to disclosure systems, processes, and training, and requested
that the Board provide no less than a six-month implementation period.
The final rule provides creditors until February 14, 2010 to comply.
Compliance with the final rules is mandatory for private education
loans for which the creditor receives an application on or after
February 14, 2010. Transition rules are provided for private education
loans for which applications were received before the mandatory
compliance date in comment 1(d)(6)-2.
[[Page 41229]]
In addition, TILA section 128(e)(5) requires the Board to develop
model forms for the disclosures required under TILA section 128(e)
within two years of the HEOA's date of enactment. The Board is adopting
model forms along with this final rule. The Board is also adopting a
rule to implement TILA section 128(e)(11) which requires lenders to
provide certain information to covered educational institutions with
which they have preferred lender arrangements.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the
final rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). In addition, the Board, under OMB
delegated authority, will extend for three years the current
recordkeeping and disclosure requirements in connection with Regulation
Z. The collection of information that is required by this final rule is
found in 12 CFR part 226. The Board may not conduct or sponsor, and an
organization is not required to respond to, this information collection
unless the information collection displays a currently valid OMB
control number. The OMB control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are creditors and other entities subject
to Regulation Z, including for-profit financial institutions and small
businesses.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notice of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with
certain products, such as reverse mortgages, certain variable-rate
loans, and certain mortgages with rates and fees above specified
thresholds. TILA and Regulation Z also contain rules concerning credit
advertising. Creditors are required to retain evidence of compliance
for twenty-four months (Sec. 226.25), but Regulation Z does not
specify the types of records that must be retained.
Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Board that engage in lending covered by
Regulation Z and, therefore, are respondents under the PRA. Appendix I
of Regulation Z defines the Board-regulated institutions as: state
member banks, branches and agencies of foreign banks (other than
Federal branches, Federal agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A of
the Federal Reserve Act. Other Federal agencies account for the
paperwork burden imposed on the entities for which they have
administrative enforcement authority. To ease the burden and cost of
complying with Regulation Z (particularly for small entities), the
Board provides model forms, which are appended to the regulation.
As discussed above, on March 24, 2009, the Board published in the
Federal Register a notice of proposed rulemaking to implement the HEOA
(74 FR 12,464). The comment period for this notice expired May 26,
2009. No comments that specifically addressed current or proposed
paperwork burden estimates were received. The final rule will impose a
one-time increase in the total annual burden under Regulation Z by
45,440 hours from 734,127 to 779,567 hours. In addition, the Board
estimates that, on a continuing basis, the requirements will increase
the annual burden by 231,744 hours \17\ from 734,127 to 965,871 hours.
The total annual burden will increase by 277,184 hours, from 734,127 to
1,011,311 hours.\18\ This burden increase will affect all Board-
regulated institutions that are deemed to be respondents for the
purposes of the PRA.
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\17\ The increase of 270 hours corrects a transposition of
231,474 hours published in the proposed rules.
\18\ The burden estimate for this rulemaking includes the burden
addressing changes to implement provisions of the Mortgage
Disclosure Improvement Act of 2008, as announced in a separate final
rulemaking. See 74 FR 23,289 (May 19, 2009).
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The Board has a continuing interest in the public's opinions of its
collections of information. At any time, comments regarding the burden
estimate or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551; and to the Office of Management and
Budget, Paperwork Reduction Project (7100-0199), Washington, DC 20503.
VII. Regulatory Flexibility Analysis
In accordance with Section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 601-612) (RFA), the Board is publishing a final regulatory
flexibility analysis for the proposed amendments to Regulation Z. The
RFA requires an agency either to provide a final regulatory flexibility
analysis with a final rule or certify that the final rule will not have
a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) establishes size
standards that define which entities are small businesses for purposes
of the RFA.\19\ The size standard to be considered a small business is:
$175 million or less in assets for banks and other depository
institutions; $25.5 million or less in annual revenues for flight
training schools; and $7.0 million or less in annual revenues for all
other non-bank entities that are likely to be subject to the final
regulations.
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\19\ http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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The Board believes that this final rule will not have a significant
economic impact on a substantial number of small entities. The final
amendments to Regulation Z are narrowly designed to implement the
revisions to TILA made by the HEOA. Creditors must comply with the
HEOA's requirements by February 14, 2010, whether or not the Board
amends Regulation Z to conform the regulation to the statute. The
Board's final rule is intended to facilitate compliance by eliminating
duplication between Regulation Z's existing requirements and the
statutory requirements imposed by the HEOA and to provide guidance on
compliance with the HEOA's requirements.
A. Statement of the Need for, and Objectives of, the Final Rule
Section 1002 of the HEOA requires the Board to prescribe
regulations prohibiting creditors from co-branding and requiring
creditors to make certain disclosures and perform related requirements
when making private education loans. More specifically, the regulations
must address, but are not limited to, the following aspects of sections
128 and 140 of the TILA: (i) Prohibiting a creditor from marketing
[[Page 41230]]
private education loans in any way that implies that the covered
educational institution endorses the private education loans it offers;
(ii) requiring a creditor to make certain disclosures to the consumer
in an application (or solicitation without requiring an application),
with the approval, and with the consummation of the private education
loan; (iii) requiring the creditor to obtain from the consumer a self-
certification form prior to consummation; (iv) allowing at least 30
days following receipt of the approval disclosures for the consumer to
accept and consummate the loan, and prohibiting certain changes in
rates and terms until either consummation or expiration of such period
of time; and (v) requiring a three-day right to cancel following
consummation and prohibiting disbursement of funds until the three-day
period expires.
Moreover, section 1021(a)(5) of the HEOA requires the Board, in
consultation with the Secretary of Education, to develop and issue
model disclosure forms that may be used to comply with the amended
section 128 of the TILA.
In addition, the regulations interpret certain definitions included
in title X of the HEOA to clarify the meaning of terms used in section
1011(a) of the HEOA, including the definitions of private education
loan, and covered educational institution. The HEOA does not require
the Board to issue regulations to implement these definitions, but the
definitions are intended to clarify the required regulations pursuant
to the Board's authority under section 105(a) of the TILA.
The Board is issuing the final regulations and model forms both to
fulfill its statutory duty to implement the provisions of sections 1002
and 1021(a)(5) of the HEOA and, in the case of the definition
interpretations, to better clarify the requirements under the
aforementioned sections. Parts I and IV of the SUPPLEMENTARY
INFORMATION describe in detail the reasons, objectives, and legal basis
for each component of the final rule.
B. Summary of Issues Raised by Comments in Response to the Initial
Regulatory Flexibility Analysis
In connection with the proposed rule to implement the HEOA, the
Board sought information and comment on any costs, compliance
requirements, or changes in operating procedures arising from the
application of the rule to small institutions. The Board received
several comments from small banks, credit unions, and educational
institutions and trade associations that represent them. The commenters
asserted that compliance with a final rule to implement the HEOA would
increase costs and delay consummation of private education loans.
However, these comments did not contain specific information about
costs that will be incurred or changes in operating procedures that
will be required to comply with the final rule. In general, the
comments discussed the impact of statutory requirements rather than any
impact that the Board's proposed rule itself would generate.
C. Description and Estimate of Small Entities to Which the Regulation
Applies
The final regulations apply to any ``creditor'' as defined in
Regulation Z (12 CFR 226.2(a)(17)) that extends a private education
loan.
The total number of small entities likely to be affected by the
final rule is unknown because the Board does not have data on the
number of small creditors that make private education loans. The rule
has broad applicability, applying to any creditor that makes loans
expressly for postsecondary educational expenses, but excluding open-
end credit, real estate-secured loans, and loans made, insured, or
guaranteed by the Federal government under title IV of the Higher
Education Act of 1965. It could apply not only to depository
institutions and finance companies, but also schools that meet the
creditor definition and extend private education loans to their
students. The Board requested but did not receive specific comment
regarding the number and type of small entities that would be affected
by the proposed rule.
Based on the best information available, the Board makes the
following estimate of small entities that would be affected by this
final rule: Based on an average of data reported in Call Reports \20\
at quarter end between April 1, 2008 and March 31, 2009, approximately
4,362 banks, 393 thrifts, and 7,038 credit unions, totaling 11,793
institutions, would be considered small entities that are subject to
the final rules. The Board cannot identify the percentage of these
small institutions that extend private education loans and thus are
subject to the rulemaking. However, because the final rules cover all
private education loans regardless of their size or whether they are
for multiple purposes, the Board believes a majority of the 11,793
institutions would be covered by the final rules.
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\20\ Federal Financial Institutions Examination Council (FFIEC)
Consolidated Reports of Condition and Income (Call Reports) (FFIEC
031 & 041), Thrift Financial Report (1313), and NCUA Call Reports
(NCUA 5300).
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The Board is not aware of data that provides information regarding
finance companies' size in terms of annual revenues, and therefore
cannot identify with certainty the number of small finance companies
that extend private education loans that would be subject to the final
rule. However, the size standard for these companies is $7.0 million or
less in annual revenues (rather than assets), and the Board believes
the size standard for depository institutions--$175 million or less in
asset size--is likely to provide a comparable estimate. A 2005
compilation of surveys conducted by the Board indicates that 211
finance companies have an asset size of $100 million or less, and an
additional 36 finance companies have an asset size between $100 million
and $1 billion. Thus, the Board estimates that there are no more than a
total of 247 small finance companies. The Board is unable, however, to
locate data demonstrating the number of these small finance companies
that extend private education loans.
The final rule would also apply to covered educational institutions
that extend private education loans to their students, including flight
training schools. Accordingly to information on the Federal Aviation
Administration Web site, there are approximately 588 flight training
schools nationwide. The Board is unaware of data that shows how many of
those flight training schools would be deemed small institutions and,
of those small flight schools, how many extend private education loans.
The final rule would also apply to other types of postsecondary
schools, including both accredited and unaccredited postsecondary
schools. In order to calculate an estimate of small accredited
postsecondary schools, the Board relied on data collected by the
Department of Education through its Integrated Postsecondary Education
Data System (IPEDS). The Board used IPEDS data showing the revenue of
all schools that participate in the Department's financial aid programs
for postsecondary students, all of which are accredited. According to
this IPEDS data, the estimated number of small accredited postsecondary
schools is 3,159.\21\
---------------------------------------------------------------------------
\21\ Of these small accredited postsecondary schools, 396 are
public institutions, 678 are private not-for-profit institutions,
and 2,085 are private for-profit institutions.
---------------------------------------------------------------------------
The Board is not aware of sources of data on either the number of
non-
[[Page 41231]]
accredited postsecondary schools nationwide or their revenues. However,
based on estimates provided by several trade organizations representing
for-profit postsecondary schools, the Board believes that the number of
non-accredited for-profit schools is approximately three times the
number of accredited for-profit schools. Based on the assumption that
all non-accredited schools are for-profit institutions, and using the
IPEDS data showing that there were approximately 2,600 accredited for-
profit postsecondary schools in 2005, the Board estimates there are
7,800 non-accredited postsecondary schools nationwide.
In order to approximate how many of those 7,800 non-accredited
postsecondary schools are small entities, the Board believes that
available data on for-profit schools with programs less than two years
is likely to provide the closest comparable data to that of non-
accredited postsecondary schools. According to this data, approximately
95 percent of for-profit schools with programs less than two years--and
therefore approximately 95 percent of non-accredited postsecondary
schools--have $7 million or less in revenue.\22\ Thus, the Board
estimates that 7,410 non-accredited postsecondary schools qualify as
small entities.\23\
---------------------------------------------------------------------------
\22\ This approximation is supported by similar estimates
provided by representatives of several state associations of for-
profit schools, who estimated that 90 to 95 percent of their
institutions would qualify as small businesses.
\23\ While the numbers of accredited and unaccredited
postsecondary schools include flight training schools, the Board
could not locate sources of data that would prevent this overlap.
---------------------------------------------------------------------------
With respect to both accredited and unaccredited postsecondary
schools, the Board is not aware of a source of data regarding the
number of these small institutions that extend private education loans.
Anecdotal information and informal survey results from representatives
of several state associations of for-profit schools produced
conflicting results regarding how many small schools extend private
education loans.
D. Reporting, Recordkeeping and Other Compliance Requirements
The compliance requirements of the final regulations are described
in detail in parts I and IV of the SUPPLEMENTARY INFORMATION above.
The final regulations generally prohibit a creditor from marketing
private education loans in a way that implies that the covered
educational institution endorses the private education loans it offers.
A creditor will need to analyze the regulations, determine whether it
is engaging in marketing private education loans, and establish
procedures to ensure the marketing does not imply such endorsement.
The final regulations also require creditors to make certain
disclosures to the consumer on or with an application (or solicitation
without requiring an application), with the approval, and with the
consummation of the private education loan. The creditor is also
required to obtain a self-certification form prior to consummation. The
creditor must allow at least 30 days following the consumer's receipt
of the approval disclosure documents for the consumer to accept the
loan and must not change certain rates and terms until either
consummation or expiration of such period of time. A creditor also must
provide a three-day right to cancel following consummation and is
generally prohibited from disbursing funds until the three-day period
expires. A creditor will need to analyze the regulations, determine
when and to whom such notices must be given, and design, generate, and
provide those notices in the appropriate circumstances. The creditor
must also ensure the receipt of the self-certification form prior to
consummation and that the applicable rates and terms do not change in
the period of time following the consumer's receipt of the approval
disclosure documents.
The Board requested but did not receive specific information and
comment on any costs, compliance requirements, or changes in operating
procedures arising from the application of the proposed rule to small
institutions. The precise costs to small entities of updating their
systems and disclosures are difficult to predict. These costs will
depend on a number of unknown factors, including, among other things,
the specifications of the current systems used by such entities to
prepare and provide disclosures.
E. Steps Taken To Minimize the Economic Impact on Small Entities
The steps the Board has taken to minimize the economic impact and
compliance burden on small entities, including the factual, policy, and
legal reasons for selecting any alternatives adopted and why certain
alternatives were not accepted, are described in the in parts I and IV
of the SUPPLEMENTARY INFORMATION above. The Board believes that these
changes minimize the significant economic impact on small entities
while still meeting the requirements of the HEOA.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in lending.
Authority and Issuance
0
For the reasons set forth in the preamble, the Board amends Regulation
Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 226 continues to read as follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
Subpart A--General
0
2. Section 226.1 is amended by revising paragraph (b), redesignating
paragraph (d)(6) as paragraph (d)(7), and adding new paragraph (d)(6)
to read as follows:
Sec. 226.1 Authority, purpose, coverage, organization, enforcement
and liability.
* * * * *
(b) Purpose. The purpose of this regulation is to promote the
informed use of consumer credit by requiring disclosures about its
terms and cost. The regulation also gives consumers the right to cancel
certain credit transactions that involve a lien on a consumer's
principal dwelling, regulates certain credit card practices, and
provides a means for fair and timely resolution of credit billing
disputes. The regulation does not govern charges for consumer credit.
The regulation requires a maximum interest rate to be stated in
variable-rate contracts secured by the consumer's dwelling. It also
imposes limitations on home-equity plans that are subject to the
requirements of Sec. 226.5b and mortgages that are subject to the
requirements of Sec. 226.32. The regulation prohibits certain acts or
practices in connection with credit secured by a consumer's principal
dwelling. The regulation also regulates certain practices of creditors
who extend private education loans as defined in Sec. 226.46(b)(5).
* * * * *
(d) * * *
(6) Subpart F relates to private education loans. It contains rules
on disclosures, limitations on changes in terms after approval, the
right to cancel the loan, and limitations on co-branding in the
marketing of private education loans.
* * * * *
[[Page 41232]]
0
2. Section 226.2 is amended by revising paragraph (a)(6) to read as
follows:
Sec. 226.2 Definitions and rules of construction.
(a) * * *
(6) Business Day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of Sec. 226.19(a)(1)(ii), Sec.
226.19(a)(2), Sec. 226.31, and Sec. 226.46(d)(4), the term means all
calendar days except Sundays and the legal public holidays specified in
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
* * * * *
0
3. Section 226.3 is amended by revising paragraph (b) to read as
follows:
Sec. 226.3 Exempt transactions.
* * * * *
(b) Credit over $25,000. An extension of credit in which the amount
financed exceeds $25,000 or in which there is an express written
commitment to extend credit in excess of $25,000, unless the extension
of credit is:
(1) Secured by real property, or by personal property used or
expected to be used as the principal dwelling of the consumer; or
(2) A private education loan as defined in Sec. 226.46(b)(5).
* * * * *
Subpart C--Closed-End Credit
0
4. Section 226.17 is amended by revising paragraphs (a), (b), (e), (f),
(g) and (i) to read as follows:
Sec. 226.17 General disclosure requirements.
(a) Form of disclosures. (1) The creditor shall make the
disclosures required by this subpart clearly and conspicuously in
writing, in a form that the consumer may keep. The disclosures required
by this subpart may be provided to the consumer in electronic form,
subject to compliance with the consumer consent and other applicable
provisions of the Electronic Signatures in Global and National Commerce
Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The disclosures required by
Sec. Sec. 226.17(g), 226.19(b), and 226.24 may be provided to the
consumer in electronic form without regard to the consumer consent or
other provisions of the E-Sign Act in the circumstances set forth in
those sections. The disclosures shall be grouped together, shall be
segregated from everything else, and shall not contain any information
not directly related \37\ to the disclosures required under Sec.
226.18 or Sec. 226.47.\38\ The itemization of the amount financed
under Sec. 226.18(c)(1) must be separate from the other disclosures
under Sec. 226.18, except for private education loan disclosures made
in compliance with Sec. 226.47.
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\37\ The disclosures may include an acknowledgment of receipt,
the date of the transaction, and the consumer's name, address, and
account number.
\38\ The following disclosures may be made together with or
separately from other required disclosures: the creditor's identity
under Sec. 226.18(a), the variable rate example under Sec.
226.18(f)(1)(iv), insurance or debt cancellation under Sec.
226.18(n), and certain security interest charges under Sec.
226.18(o).
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(2) Except for private education loan disclosures made in
compliance with Sec. 226.47, the terms ``finance charge'' and ``annual
percentage rate,'' when required to be disclosed under Sec. 226.18 (d)
and (e) together with a corresponding amount or percentage rate, shall
be more conspicuous than any other disclosure, except the creditor's
identity under Sec. 226.18(a). For private education loan disclosures
made in compliance with Sec. 226.47, the term ``annual percentage
rate,'' and the corresponding percentage rate must be less conspicuous
than the term ``finance charge'' and corresponding amount under Sec.
226.18(d), the interest rate under Sec. Sec. 226.47(b)(1)(i) and
(c)(1), and the notice of the right to cancel under Sec. 226.47(c)(4).
(b) Time of disclosures. The creditor shall make disclosures before
consummation of the transaction. In certain residential mortgage
transactions, special timing requirements are set forth in Sec.
226.19(a). In certain variable-rate transactions, special timing
requirements for variable-rate disclosures are set forth in Sec.
226.19(b) and Sec. 226.20(c). For private education loan disclosures
made in compliance with Sec. 226.47, special timing requirements are
set forth in Sec. 226.46(d). In certain transactions involving mail or
telephone orders or a series of sales, the timing of disclosures may be
delayed in accordance with paragraphs (g) and (h) of this section.
* * * * *
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of this
regulation, although new disclosures may be required under paragraph
(f) of this section, Sec. 226.19, Sec. 226.20, or Sec. 226.48(c)(4).
(f) Early disclosures. Except for private education loan
disclosures made in compliance with Sec. 226.47, if disclosures
required by this subpart are given before the date of consummation of a
transaction and a subsequent event makes them inaccurate, the creditor
shall disclose before consummation (subject to the provisions of Sec.
226.19(a)(2) and Sec. 226.19(a)(5)(iii)): \39\
---------------------------------------------------------------------------
\39\ [Reserved.]
---------------------------------------------------------------------------
(1) * * *
(2) * * *
(g) Mail or telephone orders--delay in disclosures. Except for
private education loan disclosures made in compliance with Sec.
226.47, if a creditor receives a purchase order or a request for an
extension of credit by mail, telephone, or facsimile machine without
face-to-face or direct telephone solicitation, the creditor may delay
the disclosures until the due date of the first payment, if the
following information for representative amounts or ranges of credit is
made available in written form or in electronic form to the consumer or
to the public before the actual purchase order or request:
(1) * * *
(2) * * *
* * * * *
(i) Interim student credit extensions. For transactions involving
an interim credit extension under a student credit program for which an
application is received prior to the mandatory compliance date of
Sec. Sec. 226.46, 47, and 48, the creditor need not make the following
disclosures: the finance charge under Sec. 226.18(d), the payment
schedule under Sec. 226.18(g), the total of payments under Sec.
226.18(h), or the total sale price under Sec. 226.18(j) at the time
the credit is actually extended. The creditor must make complete
disclosures at the time the creditor and consumer agree upon the
repayment schedule for the total obligation. At that time, a new set of
disclosures must be made of all applicable items under Sec. 226.18.
* * * * *
Sec. Sec. 226.37-226.45 [Reserved.]
0
5. Sections 226.37 through 226.45 are reserved.
0
6. A new Subpart F consisting of Sec. Sec. 226.46, 226.47, and 226.48
are added to read as follows:
Subpart F--Special Rules for Private Education Loans
Sec.
226.46 Special disclosure requirements for private education loans.
226.47 Content of disclosures.
226.48 Limitations on private education loans.
[[Page 41233]]
Subpart F--Special Rules for Private Education Loans
Sec. 226.46 Special disclosure requirements for private education
loans.
(a) Coverage. The requirements of this subpart apply to private
education loans as defined in Sec. 226.46(b)(5). A creditor may, at
its option, comply with the requirements of this subpart for an
extension of credit subject to Sec. Sec. 226.17 and 226.18 that is
extended to a consumer for expenses incurred after graduation from a
law, medical, dental, veterinary, or other graduate school and related
to relocation, study for a bar or other examination, participation in
an internship or residency program, or similar purposes.
(1) Relation to other subparts in this part. Except as otherwise
specifically provided, the requirements and limitations of this subpart
are in addition to and not in lieu of those contained in other subparts
of this Part.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Covered educational institution means:
(i) An educational institution that meets the definition of an
institution of higher education, as defined in paragraph (b)(2) of this
section, without regard to the institution's accreditation status; and
(ii) Includes an agent, officer, or employee of the institution of
higher education. An agent means an institution-affiliated organization
as defined by section 151 of the Higher Education Act of 1965 (20
U.S.C. 1019) or an officer or employee of an institution-affiliated
organization.
(2) Institution of higher education has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C.
1001-1002) and the implementing regulations published by the U.S.
Department of Education.
(3) Postsecondary educational expenses means any of the expenses
that are listed as part of the cost of attendance, as defined under
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of
a student at a covered educational institution. These expenses include
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.
(4) Preferred lender arrangement has the same meaning as in section
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
(5) Private education loan means an extension of credit that:
(i) Is not made, insured, or guaranteed under title IV of the
Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) 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;
(iii) Does not include open-end credit any loan that is secured by
real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered
educational institution is the creditor if:
(A) The term of the extension of credit is 90 days or less; or
(B) 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.
(c) Form of disclosures--(1) Clear and conspicuous. The disclosures
required by this subpart shall be made clearly and conspicuously.
(2) Transaction disclosures. (i) The disclosures required under
Sec. Sec. 226.47(b) and (c) shall be made in writing, in a form that
the consumer may keep. The disclosures shall be grouped together, shall
be segregated from everything else, and shall not contain any
information not directly related to the disclosures required under
Sec. Sec. 226.47(b) and (c), which include the disclosures required
under Sec. 226.18.
(ii) The disclosures may include an acknowledgement of receipt, the
date of the transaction, and the consumer's name, address, and account
number. The following disclosures may be made together with or
separately from other required disclosures: the creditor's identity
under Sec. 226.18(a), insurance or debt cancellation under Sec.
226.18(n), and certain security interest charges under Sec. 226.18(o).
(iii) The term ``finance charge'' and corresponding amount, when
required to be disclosed under Sec. 226.18(d), and the interest rate
required to be disclosed under Sec. Sec. 226.47(b)(1)(i) and (c)(1),
shall be more conspicuous than any other disclosure, except the
creditor's identity under Sec. 228.18(a).
(3) Electronic disclosures. The disclosures required under
Sec. Sec. 226.47(b) and (c) may be provided to the consumer in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The
disclosures required by Sec. 226.47(a) may be provided to the consumer
in electronic form on or with an application or solicitation that is
accessed by the consumer in electronic form without regard to the
consumer consent or other provisions of the E-Sign Act. The form
required to be received under Sec. 226.48(e) may be accepted by the
creditor in electronic form as provided for in that section.
(d) Timing of disclosures--(1) Application or solicitation
disclosures.
(i) The disclosures required by Sec. 226.47(a) shall be provided
on or with any application or solicitation. For purposes of this
subpart, the term solicitation means an offer of credit that does not
require the consumer to complete an application. A ``firm offer of
credit'' as defined in section 603(l) of the Fair Credit Reporting Act
(15 U.S.C. 1681a(l)) is a solicitation for purposes of this section.
(ii) The creditor may, at its option, disclose orally the
information in Sec. 226.47(a) in a telephone application or
solicitation. Alternatively, if the creditor does not disclose orally
the information in Sec. 226.47(a), the creditor must provide the
disclosures or place them in the mail no later than three business days
after the consumer has applied for the credit, except that, if the
creditor either denies the consumer's application or provides or places
in the mail the disclosures in Sec. 226.47(b) no later than three
business days after the consumer requests the credit, the creditor need
not also provide the Sec. 226.47(a) disclosures.
(iii) Notwithstanding paragraph (d)(1)(i), for a loan that the
consumer may use for multiple purposes including, but not limited to,
postsecondary educational expenses, the creditor need not provide the
disclosures required by Sec. 226.47(a).
(2) Approval disclosures. The creditor shall provide the
disclosures required by Sec. 226.47(b) before consummation on or with
any notice of approval provided to the consumer. If the creditor mails
notice of approval, the disclosures must be mailed with the notice. If
the creditor communicates notice of approval by telephone, the creditor
must mail the disclosures within three business days of providing the
notice of approval. If the creditor communicates notice of approval
electronically, the creditor may provide the disclosures in electronic
form in accordance with Sec. 226.46(d)(3); otherwise the creditor must
mail the disclosures within three business days of communicating the
notice of approval. If the creditor communicates approval in person,
the creditor must provide the disclosures to the consumer at that time.
(3) Final disclosures. The disclosures required by Sec. 226.47(c)
shall be
[[Page 41234]]
provided after the consumer accepts the loan in accordance with Sec.
226.48(c)(1).
(4) Receipt of mailed disclosures. If the disclosures under
paragraphs (d)(1), (d)(2) or (d)(3), are mailed to the consumer, the
consumer is considered to have received them three business days after
they are mailed.
(e) Basis of disclosures and use of estimates--(1) Legal
obligation. Disclosures shall reflect the terms of the legal obligation
between the parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(f) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
will comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures may be
made to any consumer who is primarily liable on the obligation.
(g) Effect of subsequent events--(1) Approval disclosures. If a
disclosure under Sec. 226.47(b) becomes inaccurate because of an event
that occurs after the creditor delivers the required disclosures, the
inaccuracy is not a violation of Regulation Z (12 CFR part 226),
although new disclosures may be required under Sec. 226.48(c).
(2) Final disclosures. If a disclosure under Sec. 226.47(c)
becomes inaccurate because of an event that occurs after the creditor
delivers the required disclosures, the inaccuracy is not a violation of
Regulation Z (12 CFR part 226).
Sec. 226.47 Content of disclosures.
(a) Application or solicitation disclosures. A creditor shall
provide the disclosures required under paragraph (a) of this section 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 $5000 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 (20 U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) 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.
(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.
(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 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.
[[Page 41235]]
(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) of this section 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.
(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 (20 U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), 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) of this section.
(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. 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) 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 (c)(4) 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).
Sec. 226.48 Limitations on private education loans.
(a) Co-branding prohibited. (1) Except as provided in paragraph (b)
of this section, a creditor, other than the covered educational
institution itself, shall not use the name, emblem, mascot, or logo of
a covered educational institution, or other words, pictures, or symbols
identified with a covered educational institution, in the marketing of
private education loans in a way that implies that the covered
education institution endorses the creditor's loans.
(2) A creditor's marketing of private education loans does not
imply that the covered education institution endorses the creditor's
loans if the marketing includes a clear and conspicuous disclosure that
is equally prominent and closely proximate to the reference to the
covered educational institution that the covered educational
institution does not endorse the creditor's loans and that the creditor
is not affiliated with the covered educational institution.
(b) Endorsed lender arrangements. If a creditor and a covered
educational institution have entered into an arrangement where the
covered educational institution agrees to endorse the creditor's
private education loans, and such arrangement is not prohibited by
other applicable law or regulation, paragraph (a)(1) of this section
does not apply if the private education loan marketing includes a clear
and conspicuous disclosure that is equally prominent and closely
proximate to the reference to the covered educational institution that
the creditor's loans are not offered or made by the covered educational
institution, but are made by the creditor.
(c) Consumer's right to accept. (1) The consumer has the right to
accept the terms of a private education loan at any time within 30
calendar days following the date on which the consumer receives the
disclosures required under Sec. 226.47(b).
(2) Except for changes permitted under paragraphs (c)(3) and
(c)(4), the rate and terms of the private education loan that are
required to be disclosed under Sec. Sec. 226.47(b) and (c) may not be
changed by the creditor prior to the earlier of:
(i) The date of disbursement of the loan; or
(ii) The expiration of the 30 calendar day period described in
paragraph (c)(1) of this section if the consumer has not accepted the
loan within that time.
(3) Exceptions not requiring re-disclosure. (i) Notwithstanding
paragraph (c)(2) of this section, nothing in this section prevents the
creditor from:
(A) Withdrawing an offer before consummation of the transaction if
the extension of credit would be prohibited by law or if the creditor
has reason to believe that the consumer has committed fraud in
connection with the loan application;
(B) Changing the interest rate based on adjustments to the index
used for a loan;
(C) Changing the interest rate and terms if the change will
unequivocally benefit the consumer; or
(D) Reducing the loan amount based upon a certification or other
information received from the covered educational
[[Page 41236]]
institution, or from the consumer, indicating that the student's cost
of attendance has decreased or the consumer's other financial aid has
increased. A creditor may make corresponding changes to the rate and
other terms only to the extent that the consumer would have received
the terms if the consumer had applied for the reduced loan amount.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(3), the creditor need not provide the disclosures
required under Sec. 228.47(b) for the new loan terms, nor need the
creditor provide an additional 30-day period to the consumer to accept
the new terms of the loan under paragraph (c)(1) of this section.
(4) Exceptions requiring re-disclosure. (i) Notwithstanding
paragraphs (c)(2) or (c)(3) of this section, nothing in this section
prevents the creditor, at its option, from changing the rate or terms
of the loan to accommodate a specific request by the consumer. For
example, if the consumer requests a different repayment option, the
creditor may, but need not, offer to provide the requested repayment
option and make any other changes to the rate and terms.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(4), the creditor shall provide the disclosures
required under Sec. 228.47(b) and shall provide the consumer the 30-
day period to accept the loan under paragraph (c)(1) of this section.
The creditor shall not make further changes to the rates and terms of
the loan, except as specified in paragraphs (c)(3) and (4) of this
section. Except as permitted under Sec. 226.48(c)(3), unless the
consumer accepts the loan offered by the creditor in response to the
consumer's request, the creditor may not withdraw or change the rates
or terms of the loan for which the consumer was approved prior to the
consumer's request for a change in loan terms.
(d) Consumer's right to cancel. The consumer may cancel a private
education loan, without penalty, until midnight of the third business
day following the date on which the consumer receives the disclosures
required by Sec. 226.47(c). No funds may be disbursed for a private
education loan until the three-business day period has expired.
(e) Self-certification form. For 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
creditor shall obtain from the consumer or the institution of higher
education the form developed by the Secretary of Education under
section 155 of the Higher Education Act of 1965, signed by the
consumer, in written or electronic form, before consummating the
private education loan.
(f) Provision of information by preferred lenders. A creditor that
has a preferred lender arrangement with a covered educational
institution shall provide to the covered educational institution the
information required under Sec. Sec. 226.47(a)(1) through (5), for
each type of private education loan that the lender plans to offer to
consumers for students attending the covered educational institution
for the period beginning July 1 of the current year and ending June 30
of the following year. The creditor shall provide the information
annually by the later of the 1st day of April, or within 30 days after
entering into, or learning the creditor is a party to, a preferred
lender arrangement.
0
7. In Part 226, Appendix H is amended by adding new entries H-18
through H-23 to the table of contents at the beginning of the appendix,
and adding new Forms H-18, H-19, H-20, H-21, H-22, and H-23.
Appendix H to Part 226--Closed-End Model Forms and Clauses
* * * * *
H-18 Private Education Loan Application and Solicitation Model Form
H-19 Private Education Loan Approval Model Form
H-20 Private Education Loan Final Model Form
H-21 Private Education Loan Application and Solicitation Sample
H-22 Private Education Loan Approval Sample
H-23 Private Education Loan Final Sample
* * * * *
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8. In Supplement I to Part 226:
0
a. Under Section 226.1 paragraph 1(d)(6) is revised and new paragraph
(1)(d)(7) is added.
0
b. Under Section 226.2, paragraph 2(a) Definitions, 2(a)(6) Business
day, paragraph 2(a)(6)-2 is revised.
0
c. Under Section 226.3, the heading to 3(b) Credit Over $25,000 Not
Secured by Real Property or a Dwelling, and heading to 3(f) Student
Loan Programs, are revised.
0
d. Under Section 226.17:
0
(i) In paragraph 17(a) Form of Disclosures, paragraphs 17(a)(1)-4,
17(a)(1)-6, 17(a)(2) are revised;
0
(ii) In paragraph 17(b) Time of Disclosures, paragraph 17(b)-1 is
revised;
0
(iii) In paragraph 17(i) Interim Student Credit Extensions, paragraph
17(i)-1 is revised and new paragraph 17(i)-2 is added;
0
(iv) Paragraphs 17(i)-2, 17(i)-3, and 17(i)-4 are redesignated as
paragraphs 17(i)-3, 17(i)-4, and 17(i)-5, respectively.
0
e. Under Section 226.18, paragraph 18(f)(1)(ii), paragraph
18(f)(1)(iv)-2, and paragraph 18(k)(1) are revised.
0
f. The following new paragraphs are added:
0
(i) Subpart F--Special Rules for Private Education Loans is added,
0
(ii) Section 226.46--Requirements for Private Education Loans, is added
0
(iii) Section 226.47--Content of Disclosures, is added; and
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(iv) Section 226.48--Limitations on Private Education Loans is added.
0
g. Under the heading, Appendixes G and H--Open-End and Closed-End Model
Forms and Clauses, paragraph 1 is revised.
0
h. Under Appendix H--Closed-End Model Forms and Clauses, paragraphs 21
through 24 are revised, and paragraphs 25 through 28 are added.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability
* * * * *
Paragraph 1(d)(6)
1. Mandatory compliance dates. Compliance with the Board's
revisions to Regulation Z published on August 14, 2009 is mandatory
for private education loans for which the creditor receives an
application on or after February 14, 2010. Compliance with the final
rules on co-branding in Sec. Sec. 226.48(a) and (b) is mandatory
for marketing occurring on or after February 14, 2010. Compliance
with the final rules is optional for private education loan
transactions for which an application was received prior to February
14, 2010, even if consummated after the mandatory compliance date.
2. Optional compliance. A creditor may, at its option, provide
the approval and final disclosures required under Sec. Sec.
226.47(b) or (c) for private education loans where an application
was received prior to the mandatory compliance date. If the creditor
opts to provide the disclosures, the creditor must also comply with
the applicable timing and other rules in Sec. Sec. 226.46 and
226.48 (including providing the consumer with the 30-day acceptance
period under Sec. 226.48(c), and the right to cancel under Sec.
226.48(d)). For example if the creditor receives an application on
January 25, 2010 and approves the consumer's application on or after
February 14, 2010, the creditor may, at its option, provide the
approval disclosures under Sec. 226.47(b), the final disclosures
under Sec. 226.47(c) and comply with the applicable requirements
Sec. Sec. 226.46 and 226.48. The creditor must also obtain the
self-certification form as required in Sec. 226.48(e), if
applicable. Or, for example, if the creditor receives an application
on January 25, 2010 and approves the consumer's application before
February 14, 2010, the creditor may, at its option, provide the
final disclosure under Sec. 226.47(c) and comply with the
applicable timing and other requirements of Sec. Sec. 226.46 and
226.48, including providing the consumer with the right to cancel
under Sec. 226.48(d). The creditor must also obtain the self-
certification form as required in Sec. 226.48(e), if applicable.
Paragraph 1(d)(7)
1. [Reserved.]
Section 226.2--Definitions and Rules of Construction
2(a) Definitions.
* * * * *
2(a)(6) Business day.
* * * * *
2. Rule for rescission, disclosures for certain mortgage
transactions, and private education loans. A more precise rule for
what is a business day (all calendar days except Sundays and the
Federal legal holidays specified in 5 U.S.C. 6103(a)) applies when
the right of rescission, the receipt of disclosures for certain
dwelling-secured mortgage transactions under Sec. Sec.
226.19(a)(1)(ii), 226.19(a)(2), 226.31(c), or the receipt of
disclosures for private education loans under Sec. 226.46(d)(4) is
involved. Four Federal legal holidays are identified in 5 U.S.C.
6103(a) by a specific date: New Year's Day, January 1; Independence
Day, July 4; Veterans Day, November 11; and Christmas Day, December
25. When one of these holidays (July 4, for example) falls on a
Saturday, Federal offices and other entities might observe the
holiday on the preceding Friday (July 3). In cases where the more
precise rule applies, the observed holiday (in the example, July 3)
is a business day.
* * * * *
Section 226.3--Exempt Transactions
* * * * *
3(b) Credit over $25,000.
* * * * *
[[Page 41249]]
3(f) Student Loan Programs
1. Coverage. This exemption applies to loans made, insured, or
guaranteed under title IV of the Higher Education Act of 1965 (20
U.S.C. 1070 et seq.). This exemption does not apply to private
education loans as defined by Sec. 226.46(b)(5).
* * * * *
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
* * * * *
17(a) Form of Disclosures
Paragraph 17(a)(1)
* * * * *
4. Content of segregated disclosures. Footnotes 37 and 38
contain exceptions to the requirement that the disclosures under
Sec. 226.18 be segregated from material that is not directly
related to those disclosures. Footnote 37 lists the items that may
be added to the segregated disclosures, even though not directly
related to those disclosures. Footnote 38 lists the items required
under Sec. 226.18 that may be deleted from the segregated
disclosures and appear elsewhere. Any one or more of these additions
or deletions may be combined and appear either together with or
separate from the segregated disclosures. The itemization of the
amount financed under Sec. 226.18(c), however, must be separate
from the other segregated disclosures under Sec. 226.18, except for
private education loan disclosures made in compliance with Sec.
226.47. If a creditor chooses to include the security interest
charges required to be itemized under Sec. 226.4(e) and Sec.
226.18(o) in the amount financed itemization, it need not list these
charges elsewhere.
* * * * *
6. Multiple-purpose forms. The creditor may design a disclosure
statement that can be used for more than one type of transaction, so
long as the required disclosures for individual transactions are
clear and conspicuous. (See the Commentary to appendices G and H for
a discussion of the treatment of disclosures that do not apply to
specific transactions.) Any disclosure listed in Sec. 226.18
(except the itemization of the amount financed under Sec. 226.18(c)
for transactions other than private education loans) may be included
on a standard disclosure statement even though not all of the
creditor's transactions include those features. For example, the
statement may include:
The variable rate disclosure under Sec. 226.18(f).
The demand feature disclosure under Sec. 226.18(i).
A reference to the possibility of a security interest
arising from a spreader clause, under Sec. 226.18(m).
The assumption policy disclosure under Sec. 226.18(q).
The required deposit disclosure under Sec. 226.18(r).
* * * * *
Paragraph 17(a)(2)
1. When disclosures must be more conspicuous. The following
rules apply to the requirement that the terms ``annual percentage
rate'' (except for private education loan disclosures made in
compliance with Sec. 226.47) and ``finance charge'' be shown more
conspicuously:
The terms must be more conspicuous only in relation to
the other required disclosures under Sec. 226.18. For example, when
the disclosures are included on the contract document, those two
terms need not be more conspicuous as compared to the heading on the
contract document or information required by state law.
The terms need not be more conspicuous except as part
of the finance charge and annual percentage rate disclosures under
Sec. 226.18 (d) and (e), although they may, at the creditor's
option, be highlighted wherever used in the required disclosures.
For example, the terms may, but need not, be highlighted when used
in disclosing a prepayment penalty under Sec. 226.18(k) or a
required deposit under Sec. 226.18(r).
The creditor's identity under Sec. 226.18(a) may, but
need not, be more prominently displayed than the finance charge and
annual percentage rate.
The terms need not be more conspicuous than figures
(including, for example, numbers, percentages, and dollar signs).
2. Making disclosures more conspicuous. The terms ``finance
charge'' and (except for private education loan disclosures made in
compliance with Sec. 226.47) ``annual percentage rate'' may be made
more conspicuous in any way that highlights them in relation to the
other required disclosures. For example, they may be:
Capitalized when other disclosures are printed in
capital and lower case.
Printed in larger type, bold print or different type
face.
Printed in a contrasting color.
Underlined.
Set off with asterisks.
17(b) Time of Disclosures
1. Consummation. As a general rule, disclosures must be made
before ``consummation'' of the transaction. The disclosures need not
be given by any particular time before consummation, except in
certain mortgage transactions and variable-rate transactions secured
by the consumer's principal dwelling with a term greater than one
year under Sec. 226.19, and in private education loan transactions
disclosed in compliance with Sec. Sec. 226.46 and 226.47. (See the
commentary to Sec. 226.2(a)(13) regarding the definition of
consummation.)
* * * * *
17(i) Interim Student Credit Extensions
1. Definition. Student credit plans involve extensions of credit
for education purposes where the repayment amount and schedule are
not known at the time credit is advanced. These plans include loans
made under any student credit plan, whether government or private,
where the repayment period does not begin immediately. (Certain
student credit plans that meet this definition are exempt from
Regulation Z. See Sec. 226.3(f).)
2. Relation to other sections. For disclosures made before the
mandatory compliance date of the disclosures required under
Sec. Sec. 226.46, 47, and 48, paragraph 17(i) permitted creditors
to omit from the disclosures the terms set forth in that paragraph
at the time the credit was actually extended. However, creditors
were required to make complete disclosures at the time the creditor
and consumer agreed upon the repayment schedule for the total
obligation. At that time, a new set of disclosures of all applicable
items under Sec. 226.18 was required. Most student credit plans are
subject to the requirements in Sec. Sec. 226.46, 47, and 48.
Consequently, for applications for student credit plans received on
or after the mandatory compliance date of Sec. Sec. 226.46, 47, and
48, the creditor may not omit from the disclosures the terms set
forth in paragraph 17(i). Instead, the creditor must comply with
Sec. Sec. 226.46, 47, and 48, if applicable, or with Sec. Sec.
226.17 and 226.18.
3. Basis of disclosures. * * *
4. Consolidation. * * *
5. Approved student credit forms. See the commentary to appendix
H regarding disclosure forms approved for use in certain student
credit programs for which applications were received prior to the
mandatory compliance date of Sec. Sec. 226.46, 47, and 48.
* * * * *
Section 226.18--Content of Disclosures
* * * * *
Paragraph 18(f)(1)(ii)
1. Limitations. This includes any maximum imposed on the amount
of an increase in the rate at any time, as well as any maximum on
the total increase over the life of the transaction. Except for
private education loans disclosures, when there are no limitations,
the creditor may, but need not, disclose that fact, and limitations
do not include legal limits in the nature of usury or rate ceilings
under State or Federal statutes or regulations. (See Sec. 226.30
for the rule requiring that a maximum interest rate be included in
certain variable-rate transactions.) For disclosures with respect to
private education loan disclosures, see comment 47(b)(1)-2.
* * * * *
Paragraph 18(f)(1)(iv)
* * * * *
2. Hypothetical example not required. The creditor need not
provide a hypothetical example in the following transactions with a
variable-rate feature:
Demand obligations with no alternate maturity date.
Private education loans as defined in Sec.
226.46(b)(5).
Multiple-advance construction loans disclosed pursuant
to appendix D, Part I.
* * * * *
Paragraph 18(k)(1)
1. Penalty. This applies only to those transactions in which the
interest calculation takes account of all scheduled reductions in
principal, as well as transactions in which interest calculations
are made daily. The
[[Page 41250]]
term penalty as used here encompasses only those charges that are
assessed strictly because of the prepayment in full of a simple-
interest obligation, as an addition to all other amounts. Items
which are penalties include, for example:
Interest charges for any period after prepayment in
full is made. (See the commentary to Sec. 226.17(a)(1) regarding
disclosure of interest charges assessed for periods after prepayment
in full as directly related information.)
A minimum finance charge in a simple-interest
transaction. (See the commentary to Sec. 226.17(a)(1) regarding the
disclosure of a minimum finance charge as directly related
information.) Items which are not penalties include, for example,
loan guarantee fees.
* * * * *
Subpart F--Special Rules for Private Education Loans
Section 226.46--Special Disclosure Requirements for Private Education
Loans
46(a) Coverage
1. Coverage. This subpart applies to all private education loans
as defined in Sec. 226.46(b)(5). Coverage under this subpart is
optional for certain extensions of credit that do not meet the
definition of ``private education loan'' because the credit is not
extended, in whole or in part, for ``postsecondary educational
expenses'' defined in Sec. 226.46(b)(3). If a transaction is not
covered and a creditor opts to comply with any section of this
subpart, the creditor must comply with all applicable sections of
this subpart. If a transaction is not covered and a creditor opts
not to comply with this subpart, the creditor must comply with all
applicable requirements under Sec. Sec. 226.17 and 226.18.
Compliance with this subpart is optional for an extension of credit
for expenses incurred after graduation from a law, medical, dental,
veterinary, or other graduate school and related to relocation,
study for a bar or other examination, participation in an internship
or residency program, or similar purposes. However, if any part of
such loan is used for postsecondary educational expenses as defined
in Sec. 226.46(b)(3), then compliance with Subpart F is mandatory
not optional.
46(b) Definitions
46(b)(1) Covered Educational Institution
1. General. A covered educational institution includes any
educational institution that meets the definition of an institution
of higher education in Sec. 226.46(b)(2). An institution is also a
covered educational institution if it otherwise meets the definition
of an institution of higher education, except for its lack of
accreditation. Such an institution may include, for example, a
university or community college. It may also include an institution,
whether accredited or unaccredited, offering instruction to prepare
students for gainful employment in a recognized profession, such as
flying, culinary arts, or dental assistance. A covered educational
institution does not include elementary or secondary schools.
2. Agent. For purposes of Sec. 226.46(b)(1), the term agent
means an institution-affiliated organization as defined by section
151 of the Higher Education Act of 1965 (20 U.S.C 1019) or an
officer or employee of an institution-affiliated organization. Under
section 151 of the Higher Education Act, an institution-affiliated
organization means any organization that is directly or indirectly
related to a covered institution and is engaged in the practice of
recommending, promoting, or endorsing education loans for students
attending the covered institution or the families of such students.
An institution-affiliated organization may include an alumni
organization, athletic organization, foundation, or social,
academic, or professional organization, of a covered institution,
but does not include any creditor with respect to any private
education loan made by that creditor.
46(b)(2) Institution of higher education.
1. General. An institution of higher education includes any
institution that meets the definitions contained in sections 101 and
102 of the Higher Education Act of 1965 (20 U.S.C. 1001-1002) and
implementing Department of Education regulations (34 CFR 600). Such
an institution may include, for example, a university or community
college. It may also include an institution offering instruction to
prepare students for gainful employment in a recognized profession,
such as flying, culinary arts, or dental assistance. An institution
of higher education does not include elementary or secondary
schools.
46(b)(3) Postsecondary educational expenses.
1. General. The examples listed in Sec. 226.46(b)(3) are
illustrative only. The full list of postsecondary educational
expenses is contained in section 472 of the Higher Education Act of
1965 (20 U.S.C. 1087ll).
46(b)(4) Preferred lender arrangement.
1. General. The term ``preferred lender arrangement'' is defined
in section 151 of the Higher Education Act of 1965 (20 U.S.C 1019).
The term refers to an arrangement or agreement between a creditor
and a covered educational institution (or an institution-affiliated
organization as defined by section 151 of the Higher Education Act
of 1965 (20 U.S.C 1019)) under which a creditor provides private
education loans to consumers for students attending the covered
educational institution and the covered educational institution
recommends, promotes, or endorses the private education loan
products of the creditor. It does not include arrangements or
agreements with respect to Federal Direct Stafford/Ford loans, or
Federal PLUS loans made under the Federal PLUS auction pilot
program.
46(b)(5) Private education loan.
1. Extended expressly for postsecondary educational expenses. A
private education loan is one that is extended expressly for
postsecondary educational expenses. The term includes loans extended
for postsecondary educational expenses incurred while a student is
enrolled in a covered educational institution as well as loans
extended to consolidate a consumer's pre-existing private education
loans.
2. Multiple-purpose loans. i. Definition. A private education
loan may include an extension of credit not excluded under Sec.
226.46(b)(5) that the consumer may use for multiple purposes
including, but not limited to, postsecondary educational expenses.
If the consumer expressly indicates that the proceeds of the loan
will be used to pay for postsecondary educational expenses by
indicating the loan's purpose on an application, the loan is a
private education loan.
ii. Coverage. A creditor generally will not know before an
application is received whether the consumer intends to use the loan
for postsecondary educational expenses. For this reason, the
creditor need not provide the disclosures required by Sec.
226.47(a) on or with the application or solicitation for a loan that
may be used for multiple purposes. See Sec. 226.47(d)(1)(i).
However, if the consumer expressly indicates that the proceeds of
the loan will be used to pay for postsecondary educational expenses,
the creditor must comply with Sec. Sec. 226.47(b) and (c) and Sec.
226.48. For purposes of the required disclosures, the creditor must
calculate the disclosures based on the entire amount of the loan,
even if only a part of the proceeds is intended for postsecondary
educational expenses. The creditor may rely solely on a check-box,
or a purpose line, on a loan application to determine whether or not
the applicant intends to use loan proceeds for postsecondary
educational expenses.
iii. Examples. The creditor must comply only if the extension of
credit also meets the other parts of the definition of private
education loan. For example, if the creditor uses a single
application form for both open-end and closed-end credit, and the
consumer applies for open-end credit to be used for postsecondary
educational expenses, the extension of credit is not covered.
Similarly, if the consumer indicates the extension of credit will be
used for educational expenses that are not postsecondary educational
expenses, such as elementary or secondary educational expenses, the
extension of credit is not covered. These examples are only
illustrative, not exhaustive.
3. Short-term loans. Some covered educational institutions offer
loans to students 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. Under Sec.
226.46(b)(5)(iv)(A) such loans are not considered private education
loans, even if interest is charged on the credit balance. (Because
these loans charge interest, they are not covered by the exception
under Sec. 226.46(b)(5)(iv)(B).) However, these loans are
extensions of credit subject to the requirements of Sec. Sec.
226.17 and 18. The legal agreement may provide that repayment is
required when the consumer or the educational institution receives
certain funds. If, under the terms of the legal obligation,
repayment of the loan is required when the certain funds are
received by the consumer or the educational institution (such as by
deposit into the consumer's or educational institution's account),
the disclosures should be based on the creditor's estimate of the
time the funds will be delivered.
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4. Billing plans. Some covered educational institutions 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 extension of credit is one year or less, even if the
plan is payable in more than four installments. However, such plans
may be extensions of credit subject to the requirements of
Sec. Sec. 226.17 and 18.
46(c) Form of Disclosures
1. Form of disclosures--relation to other sections. Creditors
must make the disclosures required under this subpart in accordance
with Sec. 226.46(c). Section 226.46(c)(2) requires that the
disclosures be grouped together and segregated from everything else.
In complying with this requirement, creditors may follow the rules
in Sec. 226.17, except where specifically provided otherwise. For
example, although Sec. 226.17(b) requires creditors to provide only
one set of disclosures before consummation of the transaction,
Sec. Sec. 226.47(b) and (c) require that the creditor provide the
disclosures under Sec. 226.18 both upon approval and after the
consumer accepts the loan.
Paragraph 46(c)(3)
1. Application and solicitation disclosures--electronic
disclosures. If the disclosures required under Sec. 226.47(a) are
provided electronically, they must be provided on or with the
application or solicitation reply form. Electronic disclosures are
deemed to be on or with an application or solicitation if they meet
one of the following conditions:
i. They automatically appear on the screen when the application
or solicitation reply form appears;
ii. They are located on the same Web ``page'' as the application
or solicitation reply form without necessarily appearing on the
initial screen, if the application or reply form contains a clear
and conspicuous reference to the location of the disclosures and
indicates that the disclosures contain rate, fee, and other cost
information, as applicable; or
iii. They are posted on a Web site and the application or
solicitation reply form is linked to the disclosures in a manner
that prevents the consumer from by passing the disclosures before
submitting the application or reply form.
46(d) Timing of Disclosures
1. Receipt of disclosures. Under Sec. 226.46(d)(4), if the
creditor places the disclosures in the mail, the consumer is
considered to have received them three business days after they are
mailed. For purposes of Sec. 226.46(d)(4), ``business day'' means
all calendar days except Sundays and the legal public holidays
referred to in Sec. 226.2(a)(6). See comment 2(a)(6)-2. For
example, if the creditor places the disclosures in the mail on
Thursday, June 4, the disclosures are considered received on Monday,
June 8.
Paragraph 46(d)(1)
1. Invitations to apply. A creditor may contact a consumer who
has not been pre-selected for a private education loan about taking
out a loan (whether by direct mail, telephone, or other means) and
invite the consumer to complete an application. Such a contact does
not meet the definition of solicitation, nor is it covered by this
subpart, unless the contact itself includes the following:
i. An application form in a direct mailing, electronic
communication or a single application form as a ``take-one'' (in
racks in public locations, for example);
ii. An oral application in a telephone contact; or
iii. An application in an in-person contact.
Paragraph 46(d)(2)
1. Timing. The creditor must provide the disclosures required by
Sec. 226.47(b) at the time the creditor provides to the consumer
any notice that the loan has been approved. However, nothing in this
section prevents the creditor from communicating to the consumer
that additional information is required from the consumer before
approval may be granted. In such a case, a creditor is not required
to provide the disclosures at that time. If the creditor
communicates notice of approval to the consumer by mail, the
disclosures must be mailed at the same time as the notice of
approval. If the creditor communicates notice of approval by
telephone, the creditor must place the disclosures in the mail
within three business days of the telephone call. If the creditor
communicates notice of approval in electronic form, the creditor may
provide the disclosures in electronic form. If the creditor has
complied with the consumer consent and other applicable provisions
of the Electronic Signatures in Global and National Commerce Act (E-
Sign Act) (15 U.S.C. 7001 et seq.) the creditor may provide the
disclosures solely in electronic form; otherwise, the creditor must
place the disclosures in the mail within three business days of the
communication.
46(g) Effect of subsequent events
1. Approval disclosures. Inaccuracies in the disclosures
required under Sec. 226.47(b) are not violations if attributable to
events occurring after disclosures are made, although creditors are
restricted under Sec. 226.48(c)(2) from making certain changes to
the loan's rate or terms after the creditor provides an approval
disclosure to a consumer. Since creditors are required provide the
final disclosures under Sec. 226.47(c), they need not make new
approval disclosures in response to an event that occurs after the
creditor delivers the required approval disclosures, except as
specified under Sec. 226.48(c)(4). For example, at the time the
approval disclosures are provided, the creditor may not know the
precise disbursement date of the loan funds and must provide
estimated disclosures based on the best information reasonably
available and labelled as an estimate. If, after the approval
disclosures are provided, the creditor learns from the educational
institution the precise disbursement date, new approval disclosures
would not be required, unless specifically required under Sec.
226.48(c)(4) if other changes are made. Similarly, the creditor may
not know the precise amounts of each loan to be consolidated in a
consolidation loan transaction and information about the precise
amounts would not require new approval disclosures, unless
specifically required under Sec. 226.48(c)(4) if other changes are
made.
2. Final disclosures. Inaccuracies in the disclosures required
under Sec. 226.47(c) are not violations if attributable to events
occurring after disclosures are made. For example, if the consumer
initially chooses to defer payment of principal and interest while
enrolled in a covered educational institution, but later chooses to
make payments while enrolled, such a change does not make the
original disclosures inaccurate.
Section 226.47--Content of Disclosures
1. As applicable. The disclosures required by this subpart need
be made only as applicable, unless specifically required otherwise.
The creditor need not provide any disclosure that is not applicable
to a particular transaction. For example, in a transaction
consolidating private education loans, or in transactions under
Sec. 226.46(a) for which compliance with this subpart is optional,
the creditor need not disclose the information under Sec. Sec.
226.47(a)(6), and (b)(4), and any other information otherwise
required to be disclosed under this subpart that is not applicable
to the transaction. Similarly, creditors making loans to consumers
where the student is not attending an institution of higher
education, as defined in Sec. 226.46(b)(2), need not provide the
disclosures regarding the self-certification form in Sec.
226.47(a)(8).
47(a) Application or Solicitation Disclosures
Paragraph 47(a)(1)(i)
1. Rates actually offered. The disclosure may state only those
rates that the creditor is actually prepared to offer. For example,
a creditor may not disclose a very low interest rate that will not
in fact be offered at any time. For a loan with variable interest
rates, the ranges of rates will be considered actually offered if:
i. For disclosures in applications or solicitations sent by
direct mail, the rates were in effect within 60 days before mailing;
ii. For disclosures in applications or solicitations in
electronic form, the rates were in effect within 30 days before the
disclosures are sent to a consumer, or for disclosures made on an
Internet Web site, within 30 days before being viewed by the public;
iii. For disclosures in printed applications or solicitations
made available to the general public, the rates were in effect
within 30 days before printing; or
iv. For disclosures provided orally in telephone applications or
solicitations, the rates are currently available at the time the
disclosures are provided.
2. Creditworthiness and other factors. If the rate will depend,
at least in part, on a later determination of the consumer's
creditworthiness or other factors, the disclosure must include a
statement that the rate for which the consumer may qualify at
approval will depend on the consumer's creditworthiness and other
factors. The creditor may, but is not required to, specify
[[Page 41252]]
any additional factors that it will use to determine the interest
rate. For example, if the creditor will determine the interest rate
based on information in the consumer's or co-signer's credit report
and the type of school the consumer attends, the creditor may state,
``Your interest rate will be based on your credit history and other
factors (co-signer credit and school type).''
3. Rates applicable to the loan. For a variable-rate private
education loan, the disclosure of the interest rate or range of
rates must reflect the rate or rates calculated based on the index
and margin that will be used to make interest rate adjustments for
the loan. The creditor may provide a description of the index and
margin or range of margins used to make interest rate adjustments,
including a reference to a source, such as a newspaper, where the
consumer may look up the index.
Paragraph 47(a)(1)(iii)
1. Coverage. The interest rate is considered variable if the
terms of the legal obligation allow the creditor to increase the
interest rate originally disclosed to the consumer and the
requirements of section 226.47(a)(1)(iii) apply to all such
transactions. The provisions do not apply to increases resulting
from delinquency (including late payment), default, assumption, or
acceleration.
2. Limitations. The creditor must disclose how often the rate
may change and any limit on the amount that the rate may increase at
any one time. The creditor must also disclose any maximum rate over
the life of the transaction. If the legal obligation between the
parties does specify a maximum rate, the creditor must disclose any
legal limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations. However, if the applicable maximum
rate is in the form of a legal limit, such as a state's usury cap
(rather than a maximum rate specified in the legal obligation
between the parties), the creditor must disclose that the maximum
rate is determined by applicable law. The creditor must also
disclose that the consumer's actual rate may be higher or lower than
the initial rates disclosed under Sec. 226.47(a)(1)(i), if
applicable.
Paragraph 47(a)(1)(iv)
1. Co-signer or guarantor--changes in applicable interest rate.
The creditor must state whether the interest rate typically will be
higher if the loan is not co-signed or guaranteed by a third party.
The creditor is required to provide a statement of the effect on the
interest rate and is not required to provide a numerical estimate of
the effect on the interest rate. For example, a creditor may state:
``Rates are typically higher without a co-signer.''
47(a)(2) Fees and Default or Late Payment Costs
1. Fees or range of fees. The creditor must itemize fees
required to obtain the private education loan. The creditor must
give a single dollar amount for each fee, unless the fee is based on
a percentage, in which case a percentage must be stated. If the
exact amount of the fee is not known at the time of disclosure, the
creditor may disclose the dollar amount or percentage for each fee
as an estimated range.
2. Fees required to obtain the private education loan. The
creditor must itemize the fees that the consumer must pay to obtain
the private education loan. Fees disclosed include all finance
charges under Sec. 226.4, such as loan origination fees, credit
report fees, and fees charged upon entering repayment, as well as
fees not considered finance charges but required to obtain credit,
such as application fees that are charged whether or not credit is
extended. Fees disclosed include those paid by the consumer directly
to the creditor and fees paid to third parties by the creditor on
the consumer's behalf. Creditors are not required to disclose fees
that apply if the consumer exercises an option under the loan
agreement after consummation, such as fees for deferment,
forbearance, or loan modification.
47(a)(3) Repayment Terms
1. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest
will be due on the loan.
2. Payment deferral options--general. The creditor must describe
the options that the consumer has under the loan agreement to defer
payment on the loan. When there is no deferment option provided for
the loan, the creditor must disclose that fact. Payment deferral
options required to be disclosed include options for immediate
deferral of payments, such as when the student is currently enrolled
at a covered educational institution. The description may include of
the length of the maximum initial in-school deferment period, the
types of payments that may be deferred, and a description of any
payments that are required during the deferment period. The creditor
may, but need not, disclose any conditions applicable to the
deferment option, such as that deferment is permitted only while the
student is continuously enrolled in school. If payment deferral is
not an option while the student is enrolled in school, the creditor
may disclose that the consumer must begin repayment upon
disbursement of the loan and that the consumer may not defer
repayment while enrolled in school. If the creditor offers payment
deferral options that may apply during the repayment period, such as
an option to defer payments if the student returns to school to
pursue an additional degree, the creditor must include a statement
referring the consumer to the contract document or promissory note
for more information.
3. Payment deferral options--in school deferment. For each
payment deferral option applicable while the student is enrolled at
a covered educational institution the creditor must disclose whether
interest will accrue while the student is enrolled at a covered
educational institution and, if interest does accrue, whether
payment of interest may be deferred and added to the principal
balance.
4. Combination with cost estimate disclosure. The disclosures of
the loan term under Sec. 226.47(a)(3)(i) and of the payment
deferral options applicable while the student is enrolled at a
covered educational institution under Sec. Sec. 226.47(a)(3)(ii)
and (iii) may be combined with the disclosure of cost estimates
required in Sec. 226.47(a)(4). For example, the creditor may
describe each payment deferral option in the same chart or table
that provides the cost estimates for each payment deferral option.
See Appendix H-21.
5. Bankruptcy limitations. The creditor may comply with Sec.
226.47(a)(3)(iv) by disclosing the following statement: ``If you
file for bankruptcy you may still be required to pay back this
loan.''
47(a)(4) Cost Estimates
1. Total cost of the loan. For purposes of Sec. 226.47(a)(4),
the creditor must calculate the example of the total cost of the
loan in accordance with the rules in Sec. 226.18(h) for calculating
the loan's total of payments.
2. Basis for estimates. i. The creditor must calculate the total
cost estimate by determining all finance charges that would be
applicable to loans with the highest rate of interest required to be
disclosed under Sec. 226.47(a)(1)(i). For example, if a creditor
charges a range of origination fees from 0% to 3%, but the 3%
origination fee would apply to loans with the highest initial rate,
the lender must assume the 3% origination fee is charged. The
creditor must base the total cost estimate on a total loan amount
that includes all prepaid finance charges and results in a $10,000
amount financed. For example, if the prepaid finance charges are
$600, the creditor must base the estimate on a $10,600 total loan
amount and an amount financed of $10,000. The example must reflect
an amount provided of $10,000. If the creditor only offers a
particular private education loan for less than $10,000, the
creditor may assume a loan amount that results in a $5,000 amount
financed for that loan.
ii. If a prepaid finance charge is determined as a percentage of
the amount financed, for purposes of the example, the creditor
should assume that the fee is determined as a percentage of the
total loan amount, even if this is not the creditor's usual
practice. For example, suppose the consumer requires a disbursement
of $10,000 and the creditor charges a 3% origination fee. In order
to calculate the total cost example, the creditor must determine the
loan amount that will result in a $10,000 amount financed after the
3% fee is assessed. In this example, the resulting loan amount would
be $10,309.28. Assessing the 3% origination fee on the loan amount
of $10,309.28 results in an origination fee of $309.28, which is
withheld from the loan funds disbursed to the consumer. The
principal loan amount of $10,309.28 minus the prepaid finance charge
of $309.28 results in an amount financed of $10,000.
3. Calculated for each option to defer interest payments. The
example must include an estimate of the total cost of the loan for
each in-school deferral option disclosed in Sec. 226.47(a)(3)(iii).
For example, if the creditor provides the consumer with the option
to begin making principal and interest payments immediately, to
defer principal payments but begin making interest-only payments
immediately, or to defer all principal and interest payments while
in school, the creditor is required to disclose three estimates of
the total cost of the loan,
[[Page 41253]]
one for each deferral option. If the creditor adds accrued interest
to the loan balance (i.e., interest is capitalized), the estimate of
the total loan cost should be based on the capitalization method
that the creditor actually uses for the loan. For instance, for each
deferred payment option where the creditor would capitalize interest
on a quarterly basis, the total loan cost must be calculated
assuming interest capitalizes on a quarterly basis.
4. Deferment period assumptions. Creditors may use either of the
following two methods for estimating the duration of in-school
deferment periods:
i. For loan programs intended for educational expenses of
undergraduate students, the creditor may assume that the consumer
defers payments for a four-year matriculation period, plus the
loan's maximum applicable grace period, if any. For all other loans,
the creditor may assume that the consumer defers for a two-year
matriculation period, plus the maximum applicable grace period, if
any, or the maximum time the consumer may defer payments under the
loan program, whichever is shorter.
ii. Alternatively, if the creditor knows that the student will
be enrolled in a program with a standard duration, the creditor may
assume that the consumer defers payments for the full duration of
the program (plus any grace period). For example, if a creditor
makes loans intended for students enrolled in a four-year medical
school degree program, the creditor may assume that the consumer
defers payments for four years plus the loan's maximum applicable
grace period, if any. However, the creditor may not modify the
disclosure to correspond to a particular student's situation. For
example, even if the creditor knows that a student will be a second-
year medical school student, the creditor must assume a four-year
deferral period.
47(a)(6)(ii)
1. Terms of Federal student loans. The creditor must disclose
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, as prescribed in the Higher Education Act of 1965 (20
U.S.C. 1077a). Where the fixed interest rate for a loan varies by
statute depending on the date of disbursement or receipt of
application, the creditor must disclose only the interest rate as of
the time the disclosure is provided.
47(a)(6)(iii)
1. Web site address. The creditor must include with this
disclosure an appropriate U.S. Department of Education Web site
address such as ``Federalstudentaid.ed.gov.''
47(b) Approval Disclosures
47(b)(1) Interest Rate
1. Variable rate disclosures. The interest rate is considered
variable if the terms of the legal obligation allow the creditor to
increase the interest rate originally disclosed to the consumer. The
provisions do not apply to increases resulting from delinquency
(including late payment), default, assumption, or acceleration. In
addition to disclosing the information required under Sec. Sec.
226.47(b)(ii) and (iii), the creditor must disclose the information
required under Sec. Sec. 226.18(f)(1)(i) and (iii)--the
circumstances under which the rate may increase and the effect of an
increase, respectively. The creditor is required to disclose the
maximum monthly payment based on the maximum possible rate in Sec.
226.47(b)(3)(viii), and the creditor need not disclose a separate
example of the payment terms that would result from an increase
under Sec. 226.18(f)(1)(iv).
2. Limitations on rate adjustments. The creditor must disclose
how often the rate may change and any limit on the amount that the
rate may increase at any one time. The creditor must also disclose
any maximum rate over the life of the transaction. If the legal
obligation between the parties does provide a maximum rate, the
creditor must disclose any legal limits in the nature of usury or
rate ceilings under state or Federal statutes or regulations.
However, if the applicable maximum rate is in the form of a legal
limit, such as a State's usury cap (rather than a maximum rate
specified in the legal obligation between the parties), the creditor
must disclose that the maximum rate is determined by applicable law.
Compliance with Sec. 226.18(f)(1)(ii) (requiring disclosure of any
limitations on the increase of the interest rate) does not
necessarily constitute compliance with this section. Specifically,
this section requires that if there are no limitations on interest
rate increases, the creditor must disclose that fact. By contrast,
comment 18(f)(1)(ii)-1 states that if there are no limitations the
creditor need not disclose that fact. In addition, under this
section, limitations on rate increases include, rather than exclude,
legal limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations.
3. Rates applicable to the loan. For a variable-rate loan, the
disclosure of the interest rate must reflect the index and margin
that will be used to make interest rate adjustments for the loan.
The creditor may provide a description of the index and margin or
range of margins used to make interest rate adjustments, including a
reference to a source, such as a newspaper, where the consumer may
look up the index.
Paragraph 47(b)(2)
1. Fees and default or late payment costs. Creditors may follow
the commentary for Sec. 226.47(a)(2) in complying with Sec.
226.47(b)(2). Creditors must disclose the late payment fees required
to be disclosed under Sec. 226.18(l) as part of the disclosure
required under Sec. 226.47(b)(2)(ii). If the creditor includes the
itemization of the amount financed under Sec. 226.18(c)(1), any
fees disclosed as part of the itemization need not be separately
disclosed elsewhere.
47(b)(3) Repayment Terms
1. Principal amount. The principal amount must equal what the
face amount of the note would be as of the time of approval, and it
must be labeled ``Total Loan Amount.'' See Appendix H-18. This
amount may be different from the ``principal loan amount'' used to
calculate the amount financed under comment 18(b)(3)-1, because the
creditor has the option under that comment of using a ``principal
loan amount'' that is different from the face amount of the note. If
the creditor elects to provide an itemization of the amount financed
under Sec. 226.18(c)(1) the creditor need not disclose the amount
financed elsewhere.
2. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest
are due on the loan.
3. Payment deferral options applicable to the consumer.
Creditors may follow the commentary for Sec. 226.47(a)(3)(ii) in
complying with Sec. 226.47(b)(3)(iii).
4. Payments required during enrollment. Required payments that
must be disclosed include payments of interest and principal,
interest only, or other payments that the consumer must make during
the time that the student is enrolled. Compliance with Sec.
226.18(g) constitutes compliance with Sec. 226.47(b)(3)(iv).
5. Bankruptcy limitations. The creditor may comply with Sec.
226.47(b)(3)(vi) by disclosing the following statement: ``If you
file for bankruptcy you may still be required to pay back this
loan.''
6. An estimate of the total amount for repayment. The creditor
must disclose an estimate of the total amount for repayment at two
interest rates:
i. The interest rate in effect on the date of approval.
Compliance with the total of payments disclosure requirement of
Sec. 226.18(h) constitutes compliance with this requirement.
ii. The maximum possible rate of interest applicable to the loan
or, if the maximum rate cannot be determined, a rate of 25%. If the
legal obligation between the parties specifies a maximum rate of
interest, the creditor must calculate the total amount for repayment
based on that rate. If the legal obligation does not specify a
maximum rate but a usury or rate ceiling under State or Federal
statutes or regulations applies, the creditor must use that rate. If
a there is no maximum rate in the legal obligation or under a usury
or rate ceiling, the creditor must base the disclosure on a rate of
25% and must disclose that there is no maximum rate and that the
total amount for repayment disclosed under Sec.
226.47(b)(3)(vii)(B) is an estimate and will be higher if the
applicable interest rate increases.
iii. If terms of the legal obligation provide a limitation on
the amount that the interest rate may increase at any one time, the
creditor may reflect the effect of the interest rate limitation in
calculating the total cost example. For example, if the legal
obligation provides that the interest rate may not increase by more
than three percentage points each year, the creditor may assume that
the rate increases by three percentage points each year until it
reaches that maximum possible rate, or if a maximum rate cannot be
determined, an interest rate of 25%.
7. The maximum monthly payment. The creditor must disclose the
maximum payment that the consumer could be required to make under
the loan agreement, calculated using the maximum rate of interest
[[Page 41254]]
applicable to the loan, or if the maximum rate cannot be determined,
a rate of 25%. The creditor must determine and disclose the maximum
rate of interest in accordance with comments 47(b)(3)-6.ii and
47(b)(3)-6.iii. In addition, if a maximum rate cannot be determined,
the creditor must state that there is no maximum rate and that the
monthly payment amounts disclosed under Sec. 226.47(b)(3)(viii) are
estimates and will be higher if the applicable interest rate
increases.
47(b)(4) Alternatives to Private Education Loans
1. General. Creditors may use the guidance provided in the
commentary for Sec. 226.47(a)(6) in complying with Sec.
226.47(b)(4).
47(b)(5) Rights of the Consumer
1. Notice of acceptance period. The disclosure that the consumer
may accept the terms of the loan until the acceptance period under
Sec. 226.48(c)(1) has expired must include the specific date on
which the acceptance period expires and state that the consumer may
accept the terms of the loan until that date. Under Sec.
226.48(c)(1), the date on which the acceptance period expires is
based on when the consumer receives the disclosures. If the creditor
mails the disclosures, the consumer is considered to have received
them three business days after the creditor places the disclosures
in the mail See Sec. 226.46(d)(4). If the creditor provides an
acceptance period longer than the minimum 30 calendar days, the
disclosure must reflect the later date. The disclosure must also
specify the method or methods by which the consumer may communicate
acceptance.
47(c) Final Disclosures
1. Notice of right to cancel. The disclosure of the right to
cancel must include the specific date on which the three-day
cancellation period expires and state that the consumer has a right
to cancel by that date. See comments 48(d)-1 and 2. For example, if
the disclosures were mailed to the consumer on Friday, June 1, and
the consumer is deemed to receive them on Tuesday, June 5, the
creditor could state: ``You have a right to cancel this transaction,
without penalty, by midnight on June 8, 2009. No funds will be
disbursed to you or to your school until after this time. You may
cancel by calling us at 800-XXX-XXXX.'' 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
disclosure must also specify the method or methods by which the
consumer may cancel.
2. More conspicuous. The statement of the right to cancel must
be more conspicuous than any other disclosure required under this
section except for the finance charge, the interest rate, and the
creditor's identity. See Sec. 226.46(c)(2)(iii). The statement will
be deemed to be made more conspicuous if it is segregated from other
disclosures, placed near or at the top of the disclosure document,
and highlighted in relation to other required disclosures. For
example, the statement may be outlined with a prominent, noticeable
box; printed in contrasting color; printed in larger type, bold
print, or different type face; underlined; or set off with
asterisks.
Section 226.48--Limitations on Private Education Loans
1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec. 226.48(a) and (b) applies to the marketing of
private education loans. The term marketing includes any
advertisement under Sec. 226.2(a)(2). In addition, the term
marketing includes any document provided by the creditor to the
consumer related to a specific transaction, such as an application
or solicitation, a promissory note or a contract provided to the
consumer. For example, prominently displaying the name of the
educational institution at the top of the application form or
promissory note without mentioning the name of the creditor, such as
by naming the loan product the ``University of ABC Loan,'' would be
prohibited.
2. Implied endorsement. A suggestion that a private education
loan is offered or made by the covered educational institution
instead of by the creditor is included in the prohibition on
implying that the covered educational institution endorses the
private education loan under Sec. 226.48(a)(1). For example, naming
the loan the ``University of ABC Loan,'' suggests that the loan is
offered by the educational institution. However, the use of a
creditor's full name, even if that name includes the name of a
covered educational institution, does not imply endorsement. For
example, a credit union whose name includes the name of a covered
educational institution is not prohibited from using its own name.
In addition, the authorized use of a state seal by a state or an
institution of higher education in the marketing of state education
loan products does not imply endorsement.
3. Disclosure. i. A creditor is considered to have complied with
Sec. 226.48(a)(2) if the creditor's marketing contains a clear and
conspicuous statement, equally prominent and closely proximate to
the reference to the covered educational institution, using the name
of the creditor and the name of the covered educational institution
that the covered educational institution does not endorse the
creditor's loans and that the creditor is not affiliated with the
covered educational institution. For example, ``[Name of creditor]'s
loans are not endorsed by [name of school] and [name of creditor] is
not affiliated with [name of school].'' The statement is considered
to be equally prominent and closely proximate if it is the same type
size and is located immediately next to or directly above or below
the reference to the educational institution, without any
intervening text or graphical displays.
ii. A creditor is considered to have complied with Sec.
226.48(b) if the creditor's marketing contains a clear and
conspicuous statement, equally prominent and closely proximate to
the reference to the covered educational institution, using the name
of the creditor's loan or loan program, the name of the covered
educational institution, and the name of the creditor, that the
creditor's loans are not offered or made by the covered educational
institution, but are made by the creditor. For example, ``[Name of
loan or loan program] is not being offered or made by [name of
school], but by [name of creditor].'' The statement is considered to
be equally prominent and closely proximate if it is the same type
size and is located immediately next to or directly above or below
the reference to the educational institution, without any
intervening text or graphical displays.
Paragraph 48(c)
1. 30 day acceptance period. The creditor must provide the
consumer with at least 30 calendar days from the date the consumer
receives the disclosures required under Sec. 226.47(b) to accept
the terms of the loan. The creditor may provide the consumer with a
longer period of time. If the creditor places the disclosures in the
mail, the consumer is considered to have received them three
business days after they are mailed under Sec. 226.46(d)(4). For
purposes of determining when a consumer receives mailed disclosures,
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 226.2(a)(6). See comment
46(d)-1. The consumer may accept the loan at any time before the end
of the 30 day period.
2. Method of acceptance. The creditor must specify a method or
methods by which the consumer can accept the loan at any time within
the 30-day acceptance period. The creditor may require the consumer
to communicate acceptance orally or in writing. Acceptance may also
be communicated electronically, but electronic communication must
not be the only means provided for the consumer to communicate
acceptance unless the creditor has provided the approval disclosure
electronically in compliance with the consumer consent and other
applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. Sec. 7001 et seq.).
If acceptance by mail is allowed, the consumer's communication of
acceptance is considered timely if placed in the mail within the 30-
day period.
3. Prohibition on changes to rates and terms. The prohibition on
changes to the rates and terms of the loan applies to changes that
affect those terms that are required to be disclosed under
Sec. Sec. 226.47(b) and (c). The creditor is permitted to make
changes that do not affect any of the terms disclosed to the
consumer under those sections.
4. Permissible changes to rates and terms--re-disclosure not
required. Creditors are not required to consummate a loan where the
extension of credit would be prohibited by law or where the creditor
has reason to believe that the consumer has committed fraud. A
creditor may make changes to the rate based on adjustments to the
index used for the loan and changes that will unequivocally benefit
the consumer. For example, a creditor is permitted to reduce the
interest rate or lower the amount of a fee. A creditor may also
reduce the loan amount based on a certification or other information
received from a covered educational institution or from the consumer
indicating
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that the student's cost of attendance has decreased or the amount of
other financial aid has increased. A creditor may also withdraw the
loan approval based on a certification or other information received
from a covered educational institution or from the consumer
indicating that the student is not enrolled in the institution. For
these changes permitted by Sec. 226.48(c)(3), the creditor is not
required to provide a new set of approval disclosures required under
Sec. 226.47(b) or provide the consumer with a new 30-day acceptance
period under Sec. 226.48(c)(1). The creditor must provide the final
disclosures under Sec. 226.47(c).
5. Permissible changes to rates and terms--school certification.
If the creditor reduces the loan amount based on information that
the student's cost of attendance has decreased or the amount of
other financial aid has increased, the creditor may make certain
corresponding changes to the rate and terms. The creditor may change
the rate or terms to those that the consumer would have received if
the consumer had applied for the reduced loan amount. For example,
assume a consumer applies for, and is approved for, a $10,000 loan
at a 7% interest rate. However, after the consumer receives the
approval disclosures, the consumer's school certifies that the
consumer's financial need is only $8,000. The creditor may reduce
the loan amount for which the consumer is approved to $8,000. The
creditor may also, for example, increase the interest rate on the
loan to 7.125%, but only if the consumer would have received a rate
of 7.125% if the consumer had originally applied for an $8,000 loan.
5. Permissible changes to rates and terms--re-disclosure
required. A creditor may make changes to the interest rate or terms
to accommodate a request from a consumer. For example, assume a
consumer applies for a $10,000 loan and is approved for the $10,000
amount at an interest rate of 6%. After the creditor has provided
the approval disclosures, the consumer's financial need increases,
and the consumer requests to a loan amount of $15,000. In this
situation, the creditor is permitted to offer a $15,000 loan, and to
make any other changes such as raising the interest rate to 7%, in
response to the consumer's request. The creditor must provide a new
set of disclosures under Sec. 226.47(b) and provide the consumer
with 30 days to accept the offer under Sec. 226.48(c) for the
$15,000 loan offered in response to the consumer's request. However,
because the consumer may choose not to accept the offer for the
$15,000 loan at the higher interest rate, the creditor may not
withdraw or change the rate or terms of the offer for the $10,000
loan, except as permitted under Sec. 226.48(c)(3), unless the
consumer accepts the $15,000 loan.
Paragraph 48(d)
1. Right to cancel. If the creditor mails the disclosures, the
disclosures are considered received by the consumer three business
days after the disclosures were mailed. For purposes of determining
when the consumer receives the disclosures, the term ``business
day'' is defined as all calendar days except Sunday and the legal
public holidays referred to in Sec. 226.2(a)(6). See Sec.
226.46(d)(4). The consumer has three business days from the date on
which the disclosures are deemed received to cancel the loan. For
example, if the creditor places the disclosures in the mail on
Thursday, June 4, the disclosures are considered received on Monday,
June 8. The consumer may cancel any time before midnight Thursday,
June 11. The creditor may provide the consumer with more time to
cancel the loan than the minimum three business days required under
this section. If the creditor provides the consumer with a longer
period of time in which to cancel the loan, the creditor may
disburse the funds three business days after the consumer has
received the disclosures required under this section, but the
creditor must honor the consumer's later timely cancellation
request.
2. Method of cancellation. The creditor must specify a method or
methods by which the consumer may cancel. For example, the creditor
may require the consumer to communicate cancellation orally or in
writing. Cancellation may also be communicated electronically, but
electronic communication must not be the only means by which the
consumer may cancel unless the creditor provided the final
disclosure electronically in compliance with the consumer consent
and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et
seq.). If the creditor allows cancellation by mail, the creditor
must specify an address or the name and address of an agent of the
creditor to receive notice of cancellation. The creditor must wait
to disburse funds until it is reasonably satisfied that the consumer
has not canceled. For example, the creditor may satisfy itself by
waiting a reasonable time after expiration of the cancellation
period to allow for delivery of a mailed notice. The creditor may
also satisfy itself by obtaining a written statement from the
consumer, which must be provided to and signed by the consumer only
at the end of the three-day period, that the right has not been
exercised.
3. Cancellation without penalty. The creditor may not charge the
consumer a fee for exercising the right to cancel under Sec.
226.48(d). The prohibition extends only to fees charged specifically
for canceling the loan. The creditor is not required to refund fees,
such as an application fee, that are charged to all consumers
whether or not the consumer cancels the loan.
Paragraph 48(e)
1. General. Section 226.48(e) requires that the creditor obtain
the self-certification form, signed by the consumer, before
consummating the private education loan. The rule applies only to
private education loans that will be used for the postsecondary
educational expenses of a student while that student is attending an
institution of higher education as defined in Sec. 226.46(b)(2). It
does not apply to all covered educational institutions. The
requirement applies even if the student is not currently attending
an institution of higher education, but will use the loan proceeds
for postsecondary educational expenses while attending such
institution. For example, a creditor is required to obtain the form
before consummating a private education loan provided to a high
school senior for expenses to be incurred during the consumer's
first year of college. This provision does not require that the
creditor obtain the self-certification form in instances where the
loan is not intended for a student attending an institution of
higher education, such as when the consumer is consolidating loans
after graduation. Section 155(a)(2) of the Higher Education Act of
1965 provides that the form shall be made available to the consumer
by the relevant institution of higher education. However, Sec.
226.48(e) provides flexibility to institutions of higher education
and creditors as to how the completed self-certification form is
provided to the lender. The creditor may receive the form directly
from the consumer, or the creditor may receive the form from the
consumer through the institution of higher education. In addition,
the creditor may provide the form, and the information the consumer
will require to complete the form, directly to the consumer.
2. Electronic signature. Under Section 155(a)(2) of the Higher
Education Act of 1965, the institution of higher education may
provide the self-certification form to the consumer in written or
electronic form. Under Section 155(a)(5) of the Higher Education Act
of 1965, the form may be signed electronically by the consumer. A
creditor may accept the self-certification form from the consumer in
electronic form. A consumer's electronic signature is considered
valid if it meets the requirements issued by the Department of
Education under Section 155(a)(5) of the Higher Education Act of
1965.
Paragraph 48(f)
1. General. Section 226.48(f) does not specify the format in
which creditors must provide the required information to the covered
educational institution. Creditors may choose to provide only the
required information or may provide copies of the form or forms the
lender uses to comply with Sec. 226.47(a). A creditor is only
required to provide the required information if the creditor is
aware that it is a party to a preferred lender arrangement. For
example, if a creditor is placed on a covered educational
institution's preferred lender list without the creditor's
knowledge, the creditor is not required to comply with Sec.
226.48(f).
* * * * *
Appendixes G and H--Open-End and Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the act's
protection from liability, except formatting changes may not be made
to model forms and samples in H-18, H-19, H-20, H-21, H-22, H-23, G-
2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as
permitted pursuant to Sec. 226.7(b)(2)), G-18(B)-(C), G-19,
[[Page 41256]]
G-20, and G-21. The rearrangement of the model forms and clauses may
not be so extensive as to affect the substance, clarity, or
meaningful sequence of the forms and clauses. Creditors making
revisions with that effect will lose their protection from civil
liability. Except as otherwise specifically required, acceptable
changes include, for example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms.)
vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.
Appendix H--Closed-End Model Forms and Clauses
21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all Health Education Assistance Loans (HEAL) with a
variable interest rate that were considered interim student credit
extensions as defined in Regulation Z.
22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all HEAL loans with a fixed interest rate that were
considered interim student credit extensions as defined in
Regulation Z.
23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-502-1 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all HEAL loans with a variable interest rate in which
the borrower has reached repayment status and is making payments of
both interest and principal.
24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all HEAL loans with a fixed interest rate in which the
borrower has reached repayment status and is making payments of both
interest and principal.
25. Models H-18, H-19, H-20.
i. These model forms illustrate disclosures required under Sec.
226.47 on or with an application or solicitation, at approval, and
after acceptance of a private education loan. Although use of the
model forms is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to
private education loan disclosures. Creditors may make certain types
of changes to private education loan model forms H-18 (application
and solicitation), H-19 (approval), and H-20 (final) and still be
deemed to be in compliance with the regulation, provided that the
required disclosures are made clearly and conspicuously. The model
forms aggregate disclosures into groups under specific headings.
Changes may not include rearranging the sequence of disclosures, for
instance, by rearranging which disclosures are provided under each
heading or by rearranging the sequence of the headings and grouping
of disclosures. Changes to the model forms may not be so extensive
as to affect the substance or clarity of the forms. Creditors making
revisions with that effect will lose their protection from civil
liability.
The creditor may delete inapplicable disclosures, such as:
The Federal student financial assistance alternatives
disclosures
The self-certification disclosure
Other permissible changes include, for example:
Adding the creditor's address, telephone number, or Web
site
Adding loan identification information, such as a loan
identification number
Adding the date on which the form was printed or
produced
Placing the notice of the right to cancel in the top
left or top right of the disclosure to accommodate a window envelope
Combining required terms where several numerical
disclosures are the same. For instance, if the itemization of the
amount financed is provided, the amount financed need not be
separately disclosed
Combining the disclosure of loan term and payment
deferral options required in Sec. 226.47(a)(3) with the disclosure
of cost estimates required in Sec. 226.47(a)(4) in the same chart
or table (See comment 47(a)(3)-4.)
Using the first person, instead of the second person,
in referring to the borrower
Using ``borrower'' and ``creditor'' instead of pronouns
Incorporating certain state ``plain English''
requirements
Deleting inapplicable disclosures by whiting out,
blocking out, filling in ``N/A'' (not applicable) or ``0,'' crossing
out, leaving blanks, checking a box for applicable items, or
circling applicable items
ii. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 226.47(a), (b) and (c)
disclosures, samples H-21, H-22, and H-23 are designed to be printed
on two 8\1/2\ x 11 inch sheets of paper. A creditor may use a larger
sheet of paper, such as 8\1/2\ x 14 inch sheets of paper, or may use
multiple pages. If the disclosures are provided on two sides of a
single sheet of paper, the creditor must include a reference or
references, such as ``SEE BACK OF PAGE'' at the bottom of each page
indicating that the disclosures continue onto the back of the page.
If the disclosures are on two or more pages, a creditor may not
include any intervening information between portions of the
disclosure. In addition, the following formatting techniques were
used in presenting the information in the sample tables to ensure
that the information is readable:
A. A readable font style and font size (10-point Helvetica font
style for body text).
B. Sufficient spacing between lines of the text.
C. Standard spacing between words and characters. In other
words, the body text was not compressed to appear smaller than the
10-point type size.
D. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
iii. While the Board is not requiring issuers to use the above
formatting techniques in presenting information in the disclosure,
the Board encourages issuers to consider these techniques when
deciding how to disclose information in the disclosure to ensure
that the information is presented in a readable format.
iv. Creditors are allowed to use color, shading and similar
graphic techniques in the disclosures, so long as the disclosures
remain substantially similar to the model and sample forms in
appendix H.
26. Sample H-21. This sample illustrates a disclosure required
under Sec. 226.47(a). The sample assumes a range of interest rates
between 7.375% and 17.375%. The sample assumes a variable interest
rate that will never exceed 25% over the life of the loan. The term
of the sample loan is 20 years for an amount up to $20,000 and 30
years for an amount more than $20,000. The repayment options and
sample costs have been combined into a single table, as permitted in
the commentary to Sec. 226.47(a)(3). It demonstrates the loan
amount, interest rate, and total paid when a consumer makes loan
payments while in school, pays only interest while in school, and
defers all payments while in school.
27. Sample H-22. This sample illustrates a disclosure required
under Sec. 226.47(b). The sample assumes the consumer financed
$10,000 at an 8.23% annual percentage rate. The sample assumes a
variable interest rate that will never exceed 25% over the life of
the loan. The payment schedule and terms assumes a 20-year loan term
and that the consumer elected to defer payments while enrolled in
school. This includes a sample disclosure of a total loan amount of
$10,600 and prepaid finance charges totaling $600, for a total
amount financed of $10,000.
28. Sample H-22. This sample illustrates a disclosure required
under Sec. 226.47(c). The sample assumes the consumer financed
$10,000 at an 8.23% annual percentage rate. The sample assumes a
variable annual percentage rate in an instance where there is no
maximum interest rate. The sample
[[Page 41257]]
demonstrates disclosure of an assumed maximum rate, and the
statement that the consumer's actual maximum rate and payment amount
could be higher. The payment schedule and terms assumes a 20-year
loan term, the assumed maximum interest rate, and that the consumer
elected to defer payments while enrolled in school. This includes a
sample disclosure of a total loan amount of $10,600 and prepaid
finance charges totaling $600, for a total amount financed of
$10,000.
By order of the Board of Governors of the Federal Reserve
System.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-18548 Filed 8-13-09; 8:45 am]
BILLING CODE 6210-01-P