[Federal Register Volume 74, Number 55 (Tuesday, March 24, 2009)]
[Proposed Rules]
[Pages 12464-12515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-5561]
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Part II
Federal Reserve System
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12 CFR Part 226
Regulation Z; Docket No. R-1353; Truth in Lending; Proposed Rule
Federal Register / Vol. 74, No. 55 / Tuesday, March 24, 2009 /
Proposed Rules
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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: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend 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
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. 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 student loans. The proposal 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: Comments must be received on or before May 26, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1353, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Brent Lattin, Senior Attorney; Mandie
Aubrey, or Lorna Neill, Attorneys; 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: For the provisions of the HEOA that would be
implemented by this proposal, the Board is required to issue final
regulations under Regulation Z by August 14, 2009. The HEOA also
requires the Board to issue model forms based on consumer testing and
in consultation with the Department of Education.
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 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.
Section 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 over $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
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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 proposing to issue 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 rescission 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 on those loans, and that additional information
about federal loans may be obtained from the school or the Department
of Education Web site.
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 under 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 proposal 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 proposed 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 rounds, 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 model 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
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Solicitation Disclosure, Approval Disclosure, and Final Disclosure.
Results of testing. A report summarizing the results of the testing
is available on the Board's public Web site: http://www.federalreserve.gov.
Application and Solicitation Disclosure. Regarding the Application
and Solicitation Disclosure, consumers expected to see a single rate
that would apply to them and thus were initially confused by seeing the
required disclosure of a range of initial rates that might apply to
them. They also commonly mistook the rate disclosed as the high end of
the range of initial rates with the maximum possible rate for the loan.
For this reason, the proposed model form clarifies that the range of
initial rates and the maximum possible rate are separate concepts.
Once consumers understood that the rates disclosed were not
necessarily the actual rates that would apply to them, they
consistently wanted to know how their actual rate would be determined.
Thus, the model form places basic information about how the consumer's
actual rate will be determined immediately adjacent to the range of
initial rates.
Consumer testing also indicated that consumers want to see specific
figures and dollar amounts for fees that may apply to their loan. Thus
the proposal 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 effect of a
private education loan on their financial future. Improvements to the
initial sample form tested included clarifying the loan term and the
interest rates used in the sample cost estimates.
Finally, consumers found the presentation of federal loan
alternatives, ``Next Steps,'' and general eligibility requirements 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
drafts of the proposed model form, consumers did not understand
explanations of the difference between the interest rate and the annual
percentage rate (APR).
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.
Again, testing indicated that consumers strongly prefer to have all
fees disclosed with specific dollar amounts.
Consumers considered the monthly payment schedule and amounts to be
critical information in understanding the financial implications of
obtaining a private education loan. For this reason, the Board revised
initial drafts of the model disclosure to clarify the monthly payment
schedule and amounts under various payment deferral scenarios.
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 Board revised initial versions of the sample Final Disclosure to
disclose 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. The proposed form also reflects
revisions made to address consumer questions about the procedure for
exercising this right.
Results from both rounds of testing were that consumers do 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. For these reasons, as
discussed in the section-by-section analysis under Sec. 226.39(b)(3),
the Board is proposing to use its exception authority under TILA
section 105(a) to omit information about federal loan alternatives from
the proposed Final Disclosure form.
Additional testing during and after comment period. During the
comment period and after receiving comments from the public on the
proposal and model disclosure forms, the Board will work with
Rockbridge Associates and EightShapes to revise the model disclosures
and conduct additional rounds of cognitive interviews to test the
revised disclosures. Final model disclosures will be based on public
comments and results of the additional consumer testing.
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. 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 also 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
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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
proposed exemptions are explained below.
III. Section-by-Section Analysis
Introduction
The Board proposes to add the following new disclosure requirements
to Regulation Z for private education loans:
(i) Disclosures with applications (or solicitations that require no
application) in proposed Sec. 226.38(a);
(ii) Disclosures when notice of loan approval is provided in
proposed Sec. 226.38(b); and
(iii) Disclosures before loan disbursement in proposed Sec.
226.38(c).
General rules applicable to the new disclosure requirements are
detailed in proposed Sec. 226.37 and associated commentary. Model
forms for these disclosures are proposed to be added to Regulation Z's
Appendix H.
To implement TILA's new prohibition on co-branding, proposed Sec.
226.39 would amend Regulation Z to prohibit 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 proposal would make an exception to this prohibition under the
Board's TILA section 105(a) authority, for creditors in ``preferred
lender arrangements'' with covered educational institutions. Proposed
Sec. 226.39 would also: provide the consumer with 30 days following
receipt of the approval disclosures to accept the loan and prohibit
certain changes to a loan's rate or terms during that time; provide the
consumer a right to cancel the loan for three business days after
receipt of the final disclosures and prohibit disbursement during that
time; require creditors to obtain a completed self-certification form
signed by the consumer before consummating the transaction; and require
creditors with preferred lender arrangements to provide certain
information to educational institutions.
Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(b) describes the purposes of Regulation Z. The Board
proposes 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) would reference the proposed addition of a new Subpart
F containing rules relating to private education loans.
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), 226.23(a), and
226.31(c)(1) and (2). The Board also recently proposed adopting the
more precise definition for purposes of the presumption in proposed
Sec. 226.19(a)(2) that consumers receive corrected disclosures three
business days after they are mailed. (See 73 FR 74,989; Dec. 10, 2008).
As discussed more fully below in the section-by-section analysis under
Sec. Sec. 226.37, 226.38 and 226.39, the Board is proposing to use the
more precise definition of business day in providing presumptions of
when consumers receive mailed disclosures, and for measuring the period
during which consumers have a right to cancel a private education loan.
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
proposes to revise Sec. 226.3(b) to reflect this change. The Board is
not proposing changes to Sec. 226.3(f) because the HEOA does 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. Sec. 1603(7).
However, the Board is proposing 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.
Section 226.17--General Disclosure Requirements
Proposed Sec. Sec. 226.38(b) and (c) would require creditors to
provide the current Sec. 226.18 disclosures for private education
loans in addition to the new disclosures. Consequently, the Board is
proposing 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 is proposing
to remove the special rules for student credit plans.
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 is proposing 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.
226.38, the Board is proposing 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. Consumer
testing of student loan disclosures has shown that consumers often do
not understand the APR and incorrectly believe that the APR is the
consumer's interest rate. When the APR is presented prominently along
with a less prominent disclosure of the interest rate, consumers
experience added confusion. In consumer testing of the proposed model
forms with a prominent APR and less prominent interest rate, some
consumers believed that either the APR or the interest rate was a
mistake and indicated a concern about trusting the accuracy of the
disclosures. In addition,
[[Page 12468]]
TILA section 128(e)(1)(A) requires a disclosure of the range of
potential interest rates in the application and solicitation
disclosure. Some consumers expressed confusion as to why the APR on the
approval and final forms was inconsistent with the interest rate
disclosed on the application form. Consumers tested have indicated that
the interest rate is most relevant to them for private education loan
purposes.
The Board proposes to exercise its authority under TILA section
105(a) to except private education loans from the requirement that the
APR be more prominent than other disclosures. For the reasons discussed
above, the Board believes that such an exception is necessary and
proper to assure a meaningful disclosure of credit terms for consumers.
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 interest rate and APR disclosures differ from each other and the
difference impairs consumers' understanding of the rate that applies to
the private education loan. Thus, the Board is proposing to give
prominence to the interest rate disclosure that is required by the
HEOA.
The Board also proposes 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). The Board believes that in the context of private
education loan disclosures where both the APR and the interest rate
must be disclosed, consumers will be better able to avoid the uniformed
use of credit if the interest rate is made more prominent and the APR
made less prominent.
The Board requests comment on whether the interest rate should be
made more prominent and whether the APR should be made less prominent
for private education loan disclosures. Specifically, the Board
requests comment on the effect a less prominent APR may have on loan
terms. For example, the Board requests comment on whether a less
prominent APR may promote the use of low, introductory ``teaser''
interest rates on private education loans, the use of alternative
interest calculation methods, or the imposition of higher fees. The
Board also requests comment on alternatives ways to disclose both the
APR and the interest rate for private education loans in a manner that
is clear to consumers.
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. 226.37 and 226.38, creditors would be
required 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 proposes to revise Sec. 226.17(b) comment
17(b)-1 to clarify that more specific timing rules would apply for
private education loans.
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.''
For student credit plan loans, special disclosure rules apply when
interim credit is extended, at the time that the creditor and consumer
agree to a repayment schedule, and when a student credit plan loan is
consolidated. Specifically, the creditor need not make the following
closed-end loan disclosures at the time that interim credit is
extended:
Finance charge
Payment schedule
Total of payments
The TILA disclosures provided at the time of execution of the interim
note must show two APRs, one for the interim period and one for the
repayment period. See comment 17(i)-2. Creditors must make complete
closed-end TILA disclosures at the time the creditor and consumer agree
on a repayment schedule for the total obligation. At that time, a new
set of full TILA disclosures must be provided. Finally, new disclosures
must be given when interim student credit extensions are consolidated
through a renewal note with a set repayment schedule. See comment
17(i)-3.
The Board proposes 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 afforded by Sec. 226.17(i). Implementing new
TILA section 128(e)(2)(H), proposed Sec. 226.38(b)(3)(vii) requires
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) would require 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 new private education loan disclosure regime
applies to consolidation loans, rendering the commentary on
consolidation loan disclosures under comment 17(i)-3 unnecessary.
Finally, the Board believes that retaining two different disclosure
regimes from which creditors may choose, in addition to the significant
new disclosure requirements, is unnecessarily complex and may not be
useful to consumers and creditors.
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 HEOA does not
require, and the Board is not proposing to require, creditors to give a
new set of disclosures once the creditor and consumer agree upon a
repayment schedule. The proposed rules would 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. The Board will consider whether disclosures
should be required for subsequent events as part of its comprehensive
review of closed-end credit disclosures under Regulation Z.
Section 226.18--Content of Disclosures
As discussed more fully below, the Board is proposing to require
that creditors provide the disclosures required in Sec. 226.18 along
with the disclosures required with notice of approval in Sec.
226.38(b) and with the
[[Page 12469]]
final disclosures required in Sec. 226.38(c). The proposed 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. 226.38(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 proposing to revise 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 proposed Sec. Sec. 226.38(b) and (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. 226.38(b)(1)(ii), and
(c)(1)(i), 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. Proposed comment 38(b)(1)-2, discussed
below, would provide guidance on how creditors are to disclose
limitations on interest rate adjustments.
The Board is also proposing to revise 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
would be revised to replace the reference to interim student credit
extensions with a reference to private education loans. Proposed
Sec. Sec. 226.38(b)(3)(viii) and 226.38(c)(3) would 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. 226.38, 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. Proposed comment 38(b)(1)-1 would clarify 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 is also proposing 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 would remove the reference to
interim interest on a student loan as an example of what is not a
penalty. The Board does 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. The Board
believes that the description of what constitutes a penalty in the
remainder of revised comment 18(k)(1)-1 would provide sufficient
clarity that interim interest on a student loan would not be considered
a penalty.
Subpart F
The Board proposes to add a new Subpart F to contain the rules
relating to private education loans.
Section 226.37--Special Disclosure Requirements for Private Education
Loans
Proposed Sec. 226.37 contains general rules about the disclosure
and other requirements contained in Subpart F. Section 226.37(a) would
specify that Subpart F would apply only to private education loans.
Paragraph 37(a)(1) would clarify that, except where specifically
provided otherwise, the requirements and limitations of Subpart F would
be in addition to the requirements of the other subparts of Regulation
Z.
37(b) Definitions
The HEOA amends TILA by adding a number of defined terms in new
TILA sections 140 and 128(e). The Board proposes to add these
definitions to Regulation Z in proposed Sec. 226.37(b). However, for
one new defined term, ``private educational lender,'' the Board
proposes 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.\2\ The term also includes any other person engaged in the
business of soliciting, making, or extending private education loans.
The Board believes that the ``creditor'' definition would encompass
persons ``engaged in the business of'' extending private education
loans.\3\ 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 the preceding calendar year. 12 CFR 226.2(a)(17).
---------------------------------------------------------------------------
\2\ 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.
\3\ The HEOA also covers persons engaged in the business of
soliciting private education loans. Under proposed Sec.
226.37(d)(1) the term solicitation would be defined as an offer to
extend credit that does not require the consumer to complete an
application. The term ``solicit'' would 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 is proposing to create an exception for depository institutions
and federal credit unions that do not regularly extend consumer credit.
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. However, there may be a few instances where an
institution that does not regularly extend consumer credit nevertheless
makes an occasional private education loan. For such institutions, the
compliance burden would appear to be significant for the small number
of student loans that they may extend while still providing consumers
with credit disclosures in a manner consist with TILA and the Board's
interpretation thereof. The Board believes that this exception is
necessary and proper to facilitate compliance with TILA.
The Board also proposes to exercise its authority under TILA
section 105(f) by 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
[[Page 12470]]
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 requests comment on whether depository institutions and
credit unions should be covered even if they do not meet the definition
of ``creditor.'' The Board also requests comment on whether there are
other persons engaged in the business of extending private education
loans who would not be creditors under Regulation Z.
37(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 1002 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,
proposed Sec. 226.37(b)(1) would define ``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. 226.37(b)(2),
without regard to the institution's accreditation status. Proposed
comment 37(b)(1)-1 would clarify 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
would be a ``covered educational institution.'' It would also clarify
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. A
covered educational institution would 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 would clarify that an ``agent'' for the purposes of
defining a covered educational institution is an officer or employee of
an institution affiliated organization.
The Board requests comment on whether there are postsecondary
educational institutions not covered by the definition of institution
of higher education, other than unaccredited institutions, that should
be included in the definition of covered educational institution.
37(b)(2) Institution of Higher Education
The HEOA defines the term ``institution of higher education'' to
have the same meaning as in section 1002 of the Higher Education Act of
1965 (20 U.S.C. 1002). Proposed Sec. 226.37(b)(2) would define
``institution of higher education'' with reference to the Higher
Education Act of 1965 and to the implementing regulations promulgated
by the Department of Education. The definition would encompass, among
other institutions, colleges and universities, proprietary educational
institutions and vocational educational institutions.
37(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). Proposed Sec. 226.37(b)(3) would adopt this definition
and provide illustrative examples of postsecondary educational
expenses. Examples 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. Proposed comment 37(b)(3)-1 would clarify that
the examples in the rule are not exhaustive.
37(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). Proposed Sec. 226.37(b)(4) would adopt this definition
and proposed comment 37(b)(4)-1 would clarify 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 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.
37(b)(5) Private Education Loan
Proposed Sec. 226.37(b)(5) would implement the HEOA's definition
of a ``private education loan.'' A private education loan would be 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,
[[Page 12471]]
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 would exclude an open-end
credit plan. It would also exclude any closed-end loan secured by real
property or a dwelling.
Comment 37(b)(5)-1 would clarify that a loan made ``expressly for''
postsecondary educational expenses would include loans issued
explicitly for expenses incurred while a student is enrolled in a
covered educational institution. It would also cover loans issued to
consolidate a consumer's pre-existing private education loans.
Comment 37(b)(5)-2 would address 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.
Creditors extending such loans, may, at the creditor's option, provide
the disclosures under Sec. 226.38(a) on or with an application or
solicitation. However, under proposed Sec. 226.37(d)(2)(C), the Board
would exercise its authority under TILA section 105(a) and except
multi-purpose loans, from the application disclosure requirements of
Sec. 226.38(a). As explained below, the Board believes that this
exception is necessary and proper to effectuate the purposes of and
facilitate compliance with TILA.
The Board also proposes to exercise its authority under TILA
section 105(f) to exempt such loans from the Sec. 226.38(a) disclosure
requirements implementing TILA section 128(e)(1). The Board believes
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 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 be complicated and burdensome to creditors and
potentially infeasible to implement. Furthermore, the Board believes
that the borrower would receive meaningful information about the loan
through the subsequent approval and final disclosures required under
Sec. 226.38(b) and (c), respectively. The HEOA also provides borrowers
with significant rights, such as the right to cancel the loan. The
Board recognizes 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 believes that consumer
protection would not be undermined by this exemption.
Proposed comment 37(b)(5)-2 clarifies 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 Sec. Sec.
226.38(b) (approval disclosures) and (c) (final disclosures) and 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 would state that the creditor may rely on a check-
box or purpose line on a loan application.
Proposed comment 37(b)(5)-2 would also clarify 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 believes 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 would 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 believes that
this provision is necessary and appropriate to assure a meaningful
disclosure of credit terms for consumers.
The Board requests comment on whether the private educational loan
application disclosures should be required for loans that may be used
for multiple purposes, or, alternatively, whether such loans should be
excepted from any of the other disclosure requirements. The Board also
requests 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.
37(c) Form of Disclosures
Similar to the requirements imposed by Sec. 226.17 for the
disclosures required by Sec. 226.18, proposed Sec. 226.37(c)(1) would
require the disclosures for private student loans be made clearly and
conspicuously. Under proposed Sec. 226.37(c)(2), the approval and
final disclosures under Sec. Sec. 226.38(b) and (c) would be required
to be in writing in a form that the consumer may keep. The disclosures
would have to be grouped together, be segregated from everything else,
and not contain any information not directly related to the disclosures
required under Sec. Sec. 226.38(b) and (c), which include the
disclosures required under Sec. 226.18. However, the disclosures could
include an acknowledgement of receipt, the date of the transaction, and
the consumer's name, address, and account number. In addition, the
proposal would allow the following disclosures to 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).
The proposal would also require 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. 226.38(b)(1)(i) and (c)(1), to 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 would not be required to be more prominent than
other terms.
Proposed 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. The HEOA requires creditors to disclose the
principal amount of the loan. See proposed Sec. Sec. 226.38(b)(3)(i)
and 226.38(c)(3)(i). The Board proposes to allow creditors to provide
the disclosure of the loan's principal amount as part of the
itemization of the amount financed, if the creditor opts to provide an
itemization. Consumers may be confused about the difference between the
required disclosure of the amount financed (Sec. 226.18(b)) and the
principal amount in cases where those two disclosures are different,
and the Board
[[Page 12472]]
believes that providing an itemization may help clarify the distinction
between the two terms.
Proposed Sec. 226.37(c)(2) would permit 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. 226.38(a) could 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. In addition,
the self-certification form required under Sec. 226.39(e) could be
obtained in electronic form subject to the requirements in that
section. Proposed comment 37(c)(2)-1 would contain guidance on the
manner in which disclosures could be provided in electronic form.
Electronic disclosures would be 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.
37(d) Timing of Disclosures
Proposed Sec. 226.37(d) would contain the rules governing the
timing of the proposed disclosures. Comment 37(d)-1 would clarify that
disclosures are considered provided when received by the consumer. The
comment contains additional 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 Sec. Sec. 226.37, 226.38, and 226.39, the term ``business day''
would have 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). For example, if the creditor
were to place the disclosures in the mail on Thursday, June 4, the
disclosures would be considered received on Monday, June 8.
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)). Proposed
Sec. 226.37(d)(1) would implement this requirement. The Board proposes
that creditors may provide the disclosures on or with the application
or solicitation because the disclosures are likely to be longer than a
single page. The proposed regulation would also define 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 proposed definition of ``solicitation''
would be similar to that contained in Sec. 226.5a(a)(1) for credit and
charge card application disclosures. Proposed comment 37(d)(1)-1 would
provide additional guidance that invitations to apply for a private
education loan would not be considered solicitations.
Proposed Sec. 226.38(d)(1)()(ii) would deal with provision of
disclosures in a telephone application, or solicitation, initiated by
the creditor. The creditor would be allowed, but not required, to
orally disclose the information in Sec. 226.38(a). Alternatively, if
the creditor does not disclose orally the information in Sec.
226.38(a), the creditor would be required to provide or place in the
mail the disclosures no later than three business days after the
consumer requests the credit. The Board believes that orally disclosing
to consumers all of the information in 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. However, the Board recognizes
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 would exercise its authority under TILA
section 105(a) to create an exception from the requirement to provide
the application disclosures under Sec. 226.38(a) if the creditor does
not provide oral application disclosures and does provide or place in
the mail the approval disclosures in Sec. 226.38(b) no later than
three business days after the consumer requests the credit. As
explained above, the Board believes that this exception is necessary
and proper to assure a meaningful disclosure of credit terms for
consumers.
The Board would also exercise its authority under TILA section
105(f) in proposing the exemption, described above, from the
requirement to provide the application disclosures under Sec.
226.38(a), as required by TILA section 128(e)(1). The Board believes
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 thinks 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 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 consumer. The Board also notes 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 does not believe that the goal
of consumer protection would be undermined by such an exemption.
As discussed above in the section-by-section analysis under Sec.
226.37(b)(5), proposed Sec. 226.37(d)(2)(C) 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.
The Board requests comment on alternatives to providing application
disclosures in telephone applications or solicitations initiated by the
creditor.
Approval disclosures. Proposed Sec. 226.37(d)(2) would require
that the disclosures specified in Sec. 226.38(b) be provided before
consummation on or with any notice to the consumer that the
[[Page 12473]]
creditor has approved the consumer's application for a loan. If the
creditor communicates notice of approval to the consumer by mail, the
disclosures would have to be mailed at the same time as the notice of
approval. If the creditor provides notice of approval by telephone, the
creditor would be required to place the disclosures in the mail within
three business days of the notice of approval. If the creditor provides
notice of approval in electronic form, the creditor would be allowed to
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. Sec. 7001 et seq.); otherwise, the creditor would be
required place the disclosures in the mail within three business days.
Comment 37(d)(2)-1 would clarify that for purposes of Sec. 226.37(d),
the more precise definition of business day (meaning all calendar days
except Sundays and specified federal holidays) applies.
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
proposed 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 requests comment on alternative approaches to the timing
of the approval disclosure.
Final disclosures. Proposed Sec. 226.37(d)(3) would require final
disclosures 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. The proposed timing of the final
disclosure would differ 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 proposed timing rule would implement 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.\4\ 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 effect 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.
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\4\ 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 proposes to interpret the phrase ``contemporaneously with
consummation'' to mean the time after the consumer accepts the loan and
at least three days before disbursement. 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 proposed rule would accomplish the statute's
objectives while ensuring that creditors have reasonable certainty in
complying with the rule's timing requirement.
The Board solicits 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.
37(e) Basis of Disclosures and Use of Estimates
Proposed Sec. 226.37(e) would require 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 creditor, the creditor would be
required to make the disclosure based on the best information
reasonably available at the time the disclosure is provided and to
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 would be
permitted to estimate a repayment start date based on, for instance, an
estimate of the consumer's graduation date.
37(f) Multiple Creditors; Multiple Consumers
Proposed Sec. 226.37(f) would provide rules for disclosures where
there are multiple creditors or consumers. If there are multiple
creditors only one set of disclosures may be given and the creditors
would be required to agree which creditor must comply. If there are
multiple consumers, the creditor would be permitted to provide the
disclosure to any consumer who is primarily liable on the obligation.
37(g) Effect of Subsequent Events
Under proposed Sec. 226.37(g) and comment 37(g)-1, if an event
that occurs after consummation renders the final disclosures under
Sec. 226.38(c) inaccurate, the inaccuracy would not be a violation of
Regulation Z. For example, if the consumer initially chooses to defer
payment of principal and interest while enrolled in an educational
institution, but later chooses to make payments while enrolled, such a
change would not make the original disclosures inaccurate. Creditors
would still be prohibited by proposed Sec. 226.39(c), discussed below,
[[Page 12474]]
from changing the rate or terms of the loan before disbursement, except
for changes to the rate based on changes in the index used to determine
the rate.
Section 226.38--Content of Disclosures
Proposed Sec. 226.38 establishes the content that a creditor would
be 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) at least three business days prior
to disbursement of the loan funds.
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 required under
Sec. 226.38(a) do 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,
closed-end loan disclosures are required to be provided only once,
before consummation. For private education loans, however, the Board
proposes to require the closed-end loan disclosures be provided twice--
once when the loan is approved, and again with the final disclosures,
in manner shown in the proposed model forms in Appendix H.
Specifically, the Board proposes to require creditors to provide
consumers the existing Sec. 226.18 disclosures along with the new
Sec. 226.38(b) approval disclosures. The Board also proposes 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
application disclosures, the Board believes that combining the existing
closed-end credit TILA disclosures with the new private education loan
disclosures puts at the consumer's disposal the most relevant
transaction-specific information at a point where the consumer is most
likely to make the decision as to whether a particular private
education loan meets 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 required under Sec.
226.38(b). 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
loan approved 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 consumer would be best served by having
the information required under Sec. Sec. 226.17 and 226.18, as well as
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) would require that
the approval disclosure be provided before consummation. Based on
TILA's definition of ``consummation'' in Sec. 226.2(a)(13), this means
that the closed-end credit disclosures must be provided before the
consumer becomes 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 believes that providing the Sec. 226.18 disclosures a
second time along with the final disclosures under Sec. 226.38(c)
would enhance consumer understanding by make 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, requiring uniformity would
likely enhance consumer understanding by promoting uniformity without
unduly burdening creditors. Indeed, it may be easier for creditors to
provide two similar forms rather than two different forms, because a
similar operational process could be used to produce and check both
forms.
In combining the Sec. 226.18 disclosures with the disclosures
under Sec. Sec. 226.38(b) and (c) in a model form, the Board proposes
to retain many of the basic elements of the closed-end loan model form
in existing Regulation Z Appendix H (see Appendix H-2). The proposed
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. This
disclosure would be implemented 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 proposes to merge specific Sec.
226.18 disclosures with the disclosures in Sec. Sec. 226.38(b) and (c)
to avoid duplicative disclosures are discussed throughout this section-
by-section analysis below.
General Disclosure Requirements
Proposed comment 38-1 would clarify that the disclosures required
under 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. However, for some loans, especially for 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 proposes to allow disclosures for
consolidation loans to omit the disclosures required in Sec. Sec.
226.38(a)(6), and (b)(4).
[[Page 12475]]
38(a) Application or Solicitation Disclosures
Proposed 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. 226.38(a) is provided
in proposed Sec. 226.37, corresponding commentary, and in this
section-by-section analysis under Sec. 226.37. The Board requests
comment on whether additional guidance on the appropriate delivery of
the application and solicitation disclosures is needed.
38(a)(1) Interest Rates
Proposed Sec. 226.38(a)(1) would require creditors to disclose
information regarding the interest rates that apply to the private
education loan being offered.
Proposed Sec. 226.38(a)(1)(i) would require 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 proposes 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 recognizes 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 offered 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 proposes 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, 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, if applicable. Proposed
comment 38(a)(1)(i)-2 would clarify that the disclosure does not
require the creditor to list the factors that the creditor will use to
determine the interest rate. If, for instance, the creditor will
determine the interest rate based on the consumer's credit score and
the type of school the consumer attends, the creditor may state, for
example, ``Your interest rate will be based on your creditworthiness
and other factors.''
Proposed comment 38(a)(1)(i)-1 would clarify that the rates
disclosed must be rates that are actually offered by the creditor. For
variable rate loans, the comment would provide 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 a consumer's e-mail
address; for disclosures made on an Internet Web site, rates would be
considered actually offered when viewed by the public; and for
disclosures in telephone applications or solicitations, rates 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
is consistent with the rules for variable-rate accuracy in credit and
charge card application disclosures under Sec. Sec. 226.5a(c), (d),
and (e).
Fixed or variable rate loans, rate limitations. Proposed Sec.
226.38(a)(1)(ii) would require 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. Proposed comment 38(a)(1)(ii)-1 would clarify that the
proposed variable rate disclosures would 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 would be considered fixed.
If the interest rate may increase after consummation, the creditor
would be required to disclose any limitations on interest rate
adjustments, or, if there are no limitations on interest rate
adjustments, that fact. Under proposed comment 38(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 may 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 Board's proposal for disclosures
based on the maximum rate in Sec. Sec. 226.38(b) and (c) discussed
below, limitations would include legal limits in the nature of usury or
rate ceilings under state or federal statutes or regulations. However,
if a rate limitation in the form of a legal limit applies (rather than
a numerical rate limitation in the legal obligation between the
parties) the creditor would be required to disclose that the maximum
rate is determined by law and may change. The creditor would also be
required to disclose that the consumer's actual interest rate may be
higher or lower than the range of rates disclosed under Sec.
226.38(a)(1)(i), if applicable.
Co-signer or Guarantor Disclosure. Proposed Sec. 226.38(a)(1)(iv)
implements 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) would require 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 would
be required to disclose that fact. The rule would require only a
statement and the creditor would not be required to estimate any
potential changes in the applicable interest rates numerically.
38(a)(2) Fees and Default or Late Payment Costs
Proposed Sec. 226.38(a)(2) would require 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
[[Page 12476]]
128(e)(1)(E) and (F). Under the proposal, the creditor would have to
itemize all fees required to obtain the private education loan (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 (Sec. 226.38(a)(2)(ii)).
Proposed comment 38(a)(2)-1 would explain 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 may 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 proposes
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.\5\ 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.\6\
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\5\ 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.
\6\ 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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Proposed comment 38(a)(2)-2 would clarify 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 creditor would also be
required 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
eliminates the word ``finance'' and requires 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 proposes 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,'' is used in Sec.
226.38(a)(2)(ii) and in the corresponding provisions for other private
education loan disclosures (Sec. Sec. 226.38(b)(2)(ii) and
226.38(c)(2)).
The Board is not proposing 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 educational
loan, such as fees for exercising deferment, forbearance, or loan
modification options. Creditors would not be 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 requests comment on whether
creditors should be required to disclose these or other fees.
38(a)(3) Repayment Terms
Proposed Sec. 226.38(a)(3) requires disclosure of information
related to repayment.
Loan term. Proposed Sec. 226.38(a)(3)(i) implements TILA section
128(e)(1)(G), which requires disclosure of the term of the private
education loan. Proposed comment 38(a)(3)(i)-1 would clarify that the
term of the loan is the period of time during which regular principal
and interest payments must be paid 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 longest possible repayment
term.
Payment deferral options. Proposed Sec. 226.38(a)(3)(ii) would
require 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 105(e)(1)(R) authority, the proposal would also require that if
the creditor does not offer any options to defer payments, the creditor
would be required to state that fact. Proposed comment 38(a)(3)-2 would
clarify 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 be 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 be 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 offers payment deferral options that apply
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
[[Page 12477]]
deferred and added to the principal balance.
Proposed comment 38(a)(3)-4 would explain 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 is used in the Board's model form contained in Appendix H-18.
38(a)(4) Cost Estimates
Implementing TILA section 128(e)(1)(K), proposed Sec. 226.38(a)(4)
would require a creditor to provide an example of the total cost to a
consumer of a sample loan at the maximum 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 the
Board is interpreting ``total cost'' to mean the total of payments
disclosed in accordance with the rules in Sec. 226.18(h). See proposed
comment 38(a)(4)-1.
Principal amount and fees. Under proposed Sec. 226.38(a)(4) and
comment 38(a)(4)-2, creditors would be required to disclose an example
of the total cost of the loan calculated using the maximum rate of
interest applicable to the loan and the fees applicable to loans at the
highest rate of interest that results in a $10,000 amount financed. 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 example.
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)(i) and comment 38(a)(4)-2 would require that the creditor
base the total cost example on a $10,000 principal amount plus the
finance charges applicable to loans at the maximum rate of interest.
For example, if the creditor charges a 3% origination fee on loans with
the highest interest rate, and finances the 3% fee, the creditor would
calculate the total cost of the loan based on a $10,300 principal
amount. However, while the creditor must base the calculation on the
principal amount, the creditor must disclose that the example provides
the total cost of a $10,000 amount financed, rather than disclosing the
principal amount used in calculating the loan.
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 principal amount the consumer
will request. Rather than permit each creditor to choose a principal
amount upon which to base the disclosure, the Board believes that
specifying uniform assumptions about the principal amount will allow
consumers more easily to compare different loan products. The proposal
would allow consumers to compare the cost of receiving a uniform
$10,000 under different loans.
The Board recognizes that finance charges could be added to the
total cost of the loan in two different ways. The proposal would
require creditors to assume that the consumer borrows more than $10,000
if any finance charges are assessed. Alternatively, the total cost
could be calculated assuming that the consumer only borrows $10,000 and
pays finance charges separately by cash or check, or deducts them from
the $10,000 loan amount. Under the alternative approach, the total cost
would be calculated by adding any finance charges to the total of
payments. For example, if a $10,000 has a 3% origination fee, the
creditor would calculate the total of payments based on a $10,000 loan
amount and add the $300 finance charge to the total of payments to
calculate the total cost of the loan. By contrast, the proposal would
require increasing the assumed principal amount to account for any
finance charges, thereby allowing the consumer to compare not only the
amount of the finance charges, but the effect on the loan's total cost
of repaying those finance charges plus interest over time.
The Board also proposes to provide creditors with flexibility if
they do not make loans of the size that the Board specifies. If the
creditor only offers a particular loan for less than $10,000, the
creditor must use a $5,000 principal amount.
The Board requests comment on alternative ways of ensuring that the
total cost example reflects the cost of loan fees. Specifically, the
Board requests comment on whether an assumed principal amount of
$10,000 should be used without adding finance charges to the principal
amount, but instead separately adding the finance charges to the total
of payments. The Board requests comment on whether private education
loan consumers have historically been more likely to add finance
charges to the loan amount they request, or to deduct the finance
charges from the principal amount requested (or pay them separately by
cash or check). The Board also requests comment on practical
limitations, if any, for creditors to determine the fees under Sec.
226.38(a)(2)(i) that would be applicable to loans where the maximum
rate of interest applies. The Board also requests comment on whether
the total cost example should be based on a $10,000 amount financed, as
proposed, or on a higher or lower amount. The Board also requests
comment on whether the $5,000 amount financed is an appropriate
alternative where creditors do not offer loans of $10,000 or more.
Maximum rate. Proposed comment 38(a)(4)-3 would clarify that the
maximum rate of interest used to calculate the example of the total
cost of the loan must be the maximum initial rate of interest disclosed
in the range of rates under Sec. 226.38(a)(1)(i). As discussed above
in the section-by-section analysis under Sec. 226.38(a)(1)(i), this
would mean the maximum interest rate that the creditor offers at the
time that the application or solicitation is provided.
Payment deferral options. Under the proposed rule, the creditor
would have to disclose total loan cost examples for each payment
deferral option disclosed in Sec. 226.38(a)(3)(iii). If a creditor
offers a private education loan where payment options include, for
example, (1) immediate repayment of both principal and interest upon
consummation, (2) deferment of principal payments while the student is
in school, or (3) deferment of both principal and interest payments
while the student is in school, the disclosure must reflect a cost
example for each option.
Proposed comment 38(a)(4)-4 would clarify that when a creditor
calculates an estimate of the total cost of the loan where interest
capitalizes, the creditor must calculate the estimate using the same
capitalization method that it would use for the loan itself. For
example, if a creditor would capitalize interest on the loan on a
quarterly basis, then each total cost estimate where interest is
capitalized must assume interest capitalizes on a quarterly basis.
Proposed comment 38(a)(4)-5 would provide 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 must 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 must assume that the consumer defers for the
lesser of two years plus the maximum applicable grace period, if any,
or the maximum time the consumer may defer payments under the loan
program. The Board believes that consumers will be better able to
compare loan cost examples for loans
[[Page 12478]]
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 proposes to require creditors assume a four-year
deferral period for consumers applying for undergraduate loans. Most
undergraduate programs are four years long, and 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 requires creditors assume a two year
enrollment period or to use the maximum deferral period for the loan if
the maximum period is less than two years. The Board believes that a
two year enrollment period represents a term that would be applicable
to most other postsecondary 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 requests comment on the proposed deferral period
assumptions for calculating the total cost examples under Sec.
226.38(a)(4). Specifically, the Board requests 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, 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 requests 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
requests comments 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.
38(a)(5) Eligibility
Proposed Sec. 226.38(a)(5) would implement TILA section
128(e)(1)(J) which requires disclosure of the general eligibility
criteria for a private education loan. The proposal would specify 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 requests
comments on whether other types of eligibility requirements should be
disclosed.
38(a)(6) Alternatives to Private Education Loans
In Sec. 226.38(a)(6), the Board proposes 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, a creditor would be 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. Proposed comment 38(a)(6)(ii)-1 would explain that the
disclosure must list the address of an appropriate U.S. Department of
Education Web site such as ``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 is proposing 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 would label the disclosure as ``Federal Loan Alternatives.'' See
proposed App. H-18, H-19. For these reasons, and those explained
further below, the Board believes that this exception is necessary and
proper to effectuate meaningful disclosure of credit terms to
consumers.
The Board also proposes 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
believes 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 believes that the borrower would
receive meaningful information about federal loans through the other
disclosures and the model form. The Board also recognizes 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 believes that consumer protection would not
be undermined by this exemption.
For each title IV program enumerated in the disclosure (e.g.,
Perkins, Stafford (both subsidized and unsubsidized), and PLUS loans),
the creditor must disclose the interest rate corresponding to each loan
program, as well as whether those rates are fixed or variable. The
Board proposes to require disclosure of whether the federal loan rates
are fixed or variable, under its TILA section 128(e)(1)(R) authority.
The Board believes this additional disclosure is 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 have 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 rates on subsidized Stafford
loans are currently 6.0% for loans originated or applied for (depending
on the loan) before July 1, 2009. For loans after July 1, 2009, the
fixed interest rate will be
[[Page 12479]]
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 would also
require 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 would not be required
to state what school-specific education loan benefits and terms might
be available because these may vary widely, but rather would be
required to alert the consumer to the possibility that school-specific
education loan benefits and terms might be available to the consumer.
38(a)(7) Rights of the Consumer
Proposed Sec. 226.38(a)(7) would implement 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)
would require the creditor to alert the consumer 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. However, as discussed in the
section-by-section analysis under Sec. 226.39(c)(1), because
acceptance and consummation may not happen at the same time, the Board
is proposing to provide the consumer the full 30-day period in which to
accept the loan, even if consummation happens later.
Prohibition on loan term changes. Under proposed Sec.
226.38(a)(7)(ii), the creditor would have 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 Sec.
226.38(a)(7)(i). The proposed rule allows the creditor to give
consumers a period of time longer than 30 days in which to accept the
loan and during which time the rates and terms offered could not change
(except for changes based on adjustments to the applicable index).
Creditors choosing to give consumers a period of time in which to
accept the loan that is longer than 30 calendar days would be required
to disclose this alternate time period.
As discussed in the section-by-section analysis in Sec. 226.39(c),
the Board is proposing to allow the creditor to make unequivocally
beneficial changes, to make changes based on a request by the consumer,
and is requesting comment on whether other changes should be allowed.
The Board requests comment on whether the application disclosure should
include more detail on possible changes to the rate or terms.
38(a)(8) Self-Certification Information
Proposed Sec. 226.38(a)(8), which implements TILA section
128(e)(1)(P), would require a statement, if applicable, that before the
loan may be consummated, the consumer must obtain the self-
certification form required under Sec. 226.39(e), and sign and submit
the completed form to the creditor.
As discussed in the section-by-section analysis under Sec.
226.39(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.
226.38(b) Approval Disclosures
Proposed Sec. 226.38(b) specifies the information that a creditor
must disclose to a consumer on or with any notice of approval provided
to the consumer. Guidance on delivery of the disclosures required under
Sec. 226.38(b) is provided in proposed Sec. 226.37, corresponding
commentary, and in the section-by-section analysis under Sec. 226.37.
As discussed above in the section-by-section analysis under Sec.
226.38(a), the creditor would be required to make the disclosures
required under Sec. Sec. 226.17 and 226.18 as well as the disclosures
required under Sec. 226.38(b).
38(b)(1) Interest Rate
Implementing TILA section 128(e)(2)(A), proposed Sec.
226.38(b)(1)(i) would require 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)
would require 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 would clarify 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 would also clarify 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 would clarify 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 would clarify 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) would
require 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 a rate limitation
in the form of a legal limit applies
[[Page 12480]]
(rather than a numerical rate limitation in the legal obligation
between the parties) the creditor must disclose that the maximum rate
is determined by law and may change.
38(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 would require 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 proposed Sec. 226.38(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. Creditors must disclose any charges that
are required to be disclosed under Sec. 226.18(l) with the disclosures
required under 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.
38(b)(3) Repayment Terms
Proposed Sec. 226.38(b)(3) requires disclosure of information
related to repayment.
Principal amount. Proposed Sec. 226.38(b)(3)(i) implements TILA
section 128(e)(2)(D), which requires disclosure of the ``initial
approved 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 is not
proposing to equate the terms ``principal loan amount'' and ``initial
approved principal amount.''
Under current Regulation Z, the amount financed must be calculated
by doing the following:
(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 creditors have
the option (when the charges are not add-on or discount charges) of
either including or excluding the amount of the finance charges. 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 HEOA's ``initial approved principal amount,'' the
Board's view is that the most straightforward and easy-to-understand
approach is to define ``initial approved principal amount'' as the face
amount of the note if the transaction occurred on the terms approved.
The ``initial approved principal amount'' under Sec. 226.38(b)(3)(i)
should 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 not be
included if they would not be included in the amount on the face of the
note.
The Board believes that defining ``initial approved principal
amount'' in this way will 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
``initial approved principal amount.'' Defining the ``initial approved
principal amount'' in 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 ``initial approved 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 amount,''
but solely in the discrete context of calculating the ``amount
financed.''
In addition, in order to minimize potentially duplicative
disclosures, proposed comment 38(b)(3)-1 would explain that creditors
may disclose the initial approved principal amount as part of the
itemization of the amount financed. The creditor would be permitted to
disclose the initial approved principal amount as part of the
itemization of the amount financed only if the creditor states the
approved principal amount as part of the itemization. The proposed
sample form in Appendix H-22 provides an example of this disclosure.
Also, as discussed above, Sec. 226.17(a)(1) would be revised to allow
the itemization of the amount financed to be included with the required
disclosures, rather than disclosed separately.
Loan term. Proposed Sec. 226.38(b)(3)(ii) and comment 38(b)(3)-2
implement TILA section 128(e)(2)(G), which requires disclosure of the
maximum term of the private education loan program. The term of the
loan is the period of time during which regular principal and interest
payments must be paid 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 longest possible repayment term.
Payment deferral options. Proposed Sec. 226.38(b)(3)(iii) and
proposed comment 38(b)(3)-3 would require the creditor to provide
information about deferral options, implementing TILA section
128(e)(2)(J). This disclosure is similar to the requirement under
proposed Sec. 226.38(a)(3)(ii), as explained in the section-by-section
analysis for that section. The difference between proposed Sec. Sec.
226.38(a)(3)(ii) and 226.38(b)(3)(iii) is that the creditor must
explain the deferral option chosen by the consumer, if the consumer has
chosen a deferral option, and any deferral options that the consumer is
permitted to choose in the future. The section-by-section analysis of
the deferral options disclosure of Sec. 226.38(a)(3)(ii) describes the
information that must also be included in the explanation of deferral
options under Sec. 226.38(b)(3)(iii).
Payments required during enrollment. Proposed Sec.
226.38(b)(3)(iv) and comment 38(b)(3)-4 would require the creditor to
disclose to the consumer whether any payments are required on the loan
while the student is enrolled, implementing TILA section 128(e)(2)(I).
The creditor also must 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 Sec.
226.38(b)(3)(iv) would be required to correspond to the deferral option
chosen by the consumer.
[[Page 12481]]
Estimate of interest accruing during enrollment. Also implementing
TILA section 128(e)(2)(I), proposed Sec. 226.38(b)(3)(v) would apply
only if interest will be 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.
Bankruptcy limitations. Proposed Sec. 226.38(b)(3)(vi) would
require disclosure of a statement of limitations on the discharge of a
private education loan in bankruptcy. Proposed comment 38(b)(3)-5 would
state that a creditor may comply with 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 proposes 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 disclosure of limitations of discharge of private educational
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 requests comment on whether disclosure of education loan
discharge limitations in bankruptcy should be included in the
application and solicitation disclosures as implemented by Sec.
226.38(a)(2).
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) would define 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 would clarify 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
would require 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 would include
a legal limit in the nature of a usury or rate ceiling under state or
federal statutes or regulations, and the creditor would be 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 would 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 believes that such a rule is
necessary and appropriate for consumers to make informed borrowing
decisions. A rule providing a uniform maximum rate assumption will give
creditors more certainty in complying with the regulation. The Board
believes that the proposed rate of 21% represents an appropriate
midpoint in the range of usury rate ceilings that consumers in the
private education loan market are likely to face. Thus, the Board
believes that basing the disclosure on an assumed maximum rate of 21%
will 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 would add a requirement that, if
the legal obligation between the parties does not specify a numeric
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 believes
that these additional disclosures are necessary to inform consumers
that the examples in the disclosure statement are merely illustrative
and that their loan in fact has no maximum rate.
The HEOA allows the creditor to disclose the total amount for
repayment under Sec. 226.38(b)(3)(vii) as an estimate. Proposed Sec.
226.38(b)(3) would also require only an estimated total amount for
repayment. The Board recognizes 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 disclosures
under Sec. 226.38(b) must be provided to the consumer. However, the
creditor would not be permitted to disclose an estimate of the total
amount for repayment if the applicable rates and repayment schedule are
known at the time of disclosure, such as with a consolidation loan.
The Board requests 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% is the most appropriate rate or
whether another rate should be used. The Board also requests comment on
whether, if a maximum rate of interest is 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 requests 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.
Maximum monthly payment. Proposed Sec. 226.38(b)(3)(viii) would
[[Page 12482]]
implement TILA section 128(e)(2)(O) by requiring the creditor to
disclose the maximum monthly payment calculated 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 would add 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 requests
comment on other approaches by which creditors may calculate a maximum
payment when a maximum rate cannot be determined.
38(b)(4) Alternatives to Private Education Loans
Implementing TILA section 128(e)(2)(M), proposed Sec. Sec.
226.38(b)(4)(i), (ii), and (iii) would require the creditor to provide
the information about alternatives to private education loans for
financing education that is also required under proposed Sec. Sec.
226.38(a)(6)(i), (ii), and (iii) and explained in the section-by-
section analysis for those sections. The Board again proposes 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.
226.38(a)(6)(i), (ii), and (iii), the Board believes that this
exception is necessary and proper to effectuate meaningful disclosure
of credit terms to consumers.
38(b)(5) Rights of the Consumer
Implementing TILA section 128(e)(2)(L), proposed Sec. 226.38(b)(5)
would require the creditor to disclose that the consumer has the right
to accept the loan on the terms approved for up to 30 calendar days.
The disclosure would also inform the consumer that the rate and terms
of the loan will 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
disclosure would be required to include the specific date on which the
30-day period expires and indicate that the consumer may accept the
terms of the loan until that date. For example, if the consumer
received the disclosures on June 1, the disclosure would be required to
state that the consumer could accept the loan until June 30. The Board
believes that this disclosure is necessary to inform consumers of the
precise date when the 30-day period expires because the date the
consumer is deemed to receive the disclosure may differ slightly from
the date the consumer actually receives the disclosure. The creditor
would also be required to disclose the method or methods by which the
consumer may communicate acceptance. The Board believes that this
disclosure is necessary to ensure consumers understand the specific
steps required to accept the loan. Proposed comment 39(c)-3, discussed
below, would provide guidance to creditors on disclosing methods by
which consumers may communicate acceptance.
As discussed in the section-by-section analysis in Sec. 226.39(c),
the Board is proposing to allow the creditor to make unequivocally
beneficial changes, to make changes based on a request by the consumer,
and is requesting comment on whether other changes should be allowed.
The Board requests comment on whether the disclosure should include
more detail on possible changes to the rate or terms.
38(c) Final Disclosures
Proposed Sec. 226.38(c) requires the creditor to disclose to the
consumer a third set of disclosures after the consumer accepts the loan
and at least three business days before the loan funds are disbursed.
Proposed Sec. 226.38(c) implements TILA section 128(e)(4), which
requires the creditor to provide this final set of information
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. 226.37, 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 proposes to
interpret ``contemporaneously with consummation'' to require creditors
to provide these final disclosures after acceptance and at least three
business days before loan funds are disbursed.
38(c)(1) Interest Rate
Proposed Sec. 226.38(c)(1) would require creditors to disclose the
interest rate that applies to the private education loan accepted by
the consumer.
Fixed or variable rate, rate limitations. Proposed Sec.
226.38(c)(1) would also require the creditor to provide to the consumer
the rate information required under proposed Sec. Sec.
226.38(b)(1)(ii) and (iii), as explained in the section-by-section
analysis for those sections.
38(c)(2) Fees and Default or Late Payment Costs
Proposed Sec. 226.38(c)(2) would require the creditor to provide
to the consumer the fee and default or late payment information
required under proposed Sec. 226.38(b)(2), as explained in the
section-by-section analysis for that section.
38(c)(3) Repayment Terms
Proposed Sec. 226.38(c)(3) would require the creditor to provide
to the consumer the repayment information required under proposed Sec.
226.38(b)(3), as explained in the section-by-section analysis for that
section.
38(c)(4) Cancellation Right
Proposed Sec. 226.38 and comment 38(c)-1 would 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.
226.39(d) expires; 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, the proposal would add 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.
Proposed comment 38(c)-2 would clarify that the statement of the
right to cancel must be more conspicuous than any other disclosure
required under Sec. 226.38(c), except for the finance charge, the
interest rate, and the creditor's identity. See proposed Sec.
226.37(c)(2)(iii). Under proposed comment 38(c)-2, the Board would deem
the right to cancel statement more conspicuous than other disclosures
if the creditor segregated the statement from the other disclosures,
placed the statement near the top of the disclosure document, and
highlighted the statement in relation to other required
[[Page 12483]]
disclosures. Examples of appropriate highlighting given in comment
38(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 39(d)-1, and 2, discussed below, would provide additional
guidance about how the creditor should 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 is
proposing 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 to the consumer with information about federal
alternatives to private education loans. Consumers have 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 already would have made a decision as to
whether or not to seek other loan alternatives.
The Board would also 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 believes 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 recognizes 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 believes that consumer protection would not be undermined by this
exemption.
The Board requests comment on whether it should adopt this proposed
exception.
Section 226.39--Limitations on Private Education Loans
Section 226.39 contains rules and limitations on private
educational loans. It includes a prohibition on co-branding in the
marketing of private educational loans, rules governing the 30-day
acceptance period and three-day cancellation period for private
educational 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.
39(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) would implement 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 recognizes
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 websites might provide links to specific
creditors' websites. 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) would provide
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 believes 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.
Comment 39(a)-1 would clarify the term ``marketing'' as used in
proposed Sec. 226.39. The term would include all ``advertisements'' as
that term is defined in Regulation Z. 12 CFR 226.2(a)(2). The proposal
explains 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 believes 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
(such as naming the loan the ``University of ABC Loan,'' rather than
``Creditor's Loan for ABC University Students'').
Proposed comment 39(a)-2 clarifies that referencing a covered
educational institution in a way that implies that the educational
institution is offering or making the loan rather than the creditor is
a form of implying that the educational institution endorses the loan
and is therefore not permitted under 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, a state's or an institution of higher education's
use of a state seal, with
[[Page 12484]]
appropriate authorization, in the marketing of state education loan
products does not imply endorsement.\7\
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\7\ 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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Proposed comment 39(a)-3.i provides a model clause that creditors
may use in complying with the safe harbor in Sec. 226.39(a)(2). The
creditor would be considered to have complied with 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].''
39(b) Preferred Lender Arrangements
The Board recognizes 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 proposes 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) would allow the creditor to refer to the
covered educational institution, but would require 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 (emphasis added) (adding Section 152(a)(2) to the Higher
Education Act). Thus, proposed Sec. 226.39(b) would reconcile the two
co-branding prohibitions contained in the HEOA.
Proposed comment 39(a)-3.ii provides a model clause that creditors
may use in complying with Sec. 226.39(b). The creditor would be
considered to have complied with Sec. 226.39(b) if the creditor
includes 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 requests comment on whether creditors should be offered a
safe harbor from the prohibition on co-branding, and, if so, whether an
alternative safe harbor should be considered. The Board also requests
comment on how the co-branding prohibition should apply to creditors
with preferred lender arrangements with covered educational
institutions. The Board also requests comment on whether there are
other examples of marketing that should be included in the co-branding
prohibition.
39(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.
Proposed Sec. 226.39(c) would implement the 30-day acceptance
period for private educational loans. The 30-day period would begin
following the consumer's receipt of the approval disclosures required
in Sec. 226.38(b).
Proposed comment 39(c)-1 would require creditors to provide at
least 30 days from the date the consumer receives the disclosures
required under Sec. 226.38(b) for the consumer to accept a private
education loan. It would also allow creditors to provide a longer
period of time at the creditor's option. It would clarify 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. The
proposed comment would also clarify that the consumer may accept the
loan at any time before the end of the 30 day period.
The HEOA does not specify the method by which the consumer may
accept the terms of the loan. Proposed comment 39(c)-2 would allow the
creditor to specify a method or methods by which acceptance may occur.
The creditor may specify that acceptance be made orally or in writing
or may permit either form of acceptance. The creditor may also allow
the consumer to accept electronically, but may not make electronic
acceptance the sole form of acceptance. The Board believes that not all
consumers have access to electronic forms of communication and that a
form of acceptance in addition to electronic communication is
appropriate.
Proposed Sec. 226.39(c)(2) would prohibit 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 has not accepted the loan during that time.
The proposal differs slightly from the language used in the HEOA in
order to provide creditors with certainty about the precise time period
during which changes are prohibited. The HEOA prohibits the creditor
from changing the terms of the loan prior to 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
literal language of the HEOA assumes that acceptance and consummation
happen at the same time. As discussed in the section-by-section
analysis under Sec. 226.37, this may not always be the case. To ensure
that consumers receive the benefit of the entire 30-day period in which
to accept the loan, the Board proposes to prohibit creditors from
changing the rate and
[[Page 12485]]
terms of the loan until the date of disbursement, if the consumer
accepts within the 30-day period.
Proposed Sec. 226.39(c)(2) would prohibit only those changes that
would affect the rate or terms required to be disclosed under
Sec. Sec. 226.38(b) and (c). The Board interprets the prohibition on
changes to the rate or terms of the loan to cover only the disclosed
terms. The Board believes that changes to terms that are not required
to be disclosed to the consumer are unlikely to affect the consumer's
decision whether or not to accept a private education loan.
Proposed Sec. 226.39(c)(2) would not prohibit changes based on
adjustments to the index used for a loan, implementing TILA section
128(e)(6)(B). In addition, the Board would exercise 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 will
unequivocally benefit the consumer, similar to the rule for home-equity
plans in Sec. 226.5b(f)(3)(iv). For example, a creditor would be
permitted to reduce the interest rate or lower the amount of a fee, so
long as no other change that would not unequivocally benefit the
consumer were made. The Board believes that allowing such changes would
be in the interest of both the creditor and the consumer. The Board
would also 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 Board believes that the prohibition in the
HEOA may complicate the credit process and could unnecessarily increase
costs for consumers and creditors who, for example, would otherwise
have to repeat the application process in order to change the terms.
The Board recognizes that financial sophistication among student
consumers seeking private education loan may be lacking, and that the
size and importance of the loan may be significant to the consumer. The
Board believes, however, that consumer protection would not be
undermined because the permissible change would have to ``unequivocally
benefit the consumer.'' Consumers would not receive a meaningful
benefit in the form of protection if the Board were to prevent
creditors from altering the loan in a manner that unequivocally
benefits the consumer. In addition, consumers would retain their right
under HEOA to cancel the loan.
The HEOA prohibits changes to the loan's rate or terms made by the
creditor. The proposal would 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 would allow creditors to
change a loan's rate or terms in response to a request from a consumer.
For example, a consumer may learn that his or her financial assistance
package has changed and may wish to request a higher or lower principal
amount. The creditor would be allowed, at its option, to make changes
to the rate and terms of the loan in response to this request. The rule
would not limit the changes that could be made. For example, the
creditor may provide for a shorter repayment term as a condition of
granting the consumer's request to borrow a lesser principal amount.
The Board believes that it is in the consumer's interest to be able
to request changes to the rate or terms of the loan. The Board
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. Students whose financial assistance amount
decreases after being approved for a private education loan face the
problem of having insufficient funds for their education. Those whose
financial assistance amount increases after their private education
loan has been approved may end up borrowing, and paying interest and
fees on, more than they require. Over-borrowing in the private
education loan market can adversely affect a student's eligibility for
federal student loans. With proposed Sec. 226.39(c)(3) and comment
39(c)-3, 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.
If the creditor chooses to modify the terms of the loan in response
to a consumer's request, the creditor would need to provide a new set
of approval disclosures under Sec. 226.38(b) and provide the consumer
with a new 30-day acceptance period under Sec. 226.39(c). Because the
consumer may accept at any time during the 30 day period, the Board
does not believe that this will unduly inhibit consumers from
proceeding with a loan modified in response a request. However, the
Board requests comment on whether consumers should be allowed to accept
loans before receiving the updated disclosures. The Board also requests
comment on alternative means of ensuring that consumers retain the
benefits of the 30-day acceptance period while providing them with
flexibility in cases where the amount of private education loan funds a
consumer needs changes.
The HEOA provides that the 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 believes that there may be limited instances where it
would appropriate for a creditor to withdraw a loan offer prior to
disbursement, such as if the creditor learns that the consumer or a co-
signer has committed fraud in filling out the application. The Board
also requests comment on whether there are other instances where a
material condition of the loan offer is not met such that the creditor
should be permitted to withdraw the offer or change the terms of the
loan. For example, the creditor may approve the loan contingent upon
the consumer maintaining full-time enrollment, but the consumer may
ultimately only register as a part-time student. The Board also
requests comment on whether it is operationally feasible to determine
the existence of a change in a material circumstance by comparing the
terms for which the consumer was actually approved with the terms for
which the creditor would have approved the consumer (or whether the
creditor would have denied the consumer's loan application), if the
material circumstance was known to the creditor before the loan was
approved.
39(d) Consumer's Right To Cancel
Proposed Sec. 226.39(d) would provide 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. 226.38(c). It would also prohibit the creditor from
disbursing any funds until the expiration of the three-business day
period. The consumer's right to cancel would apply regardless of
whether or not the consumer was legally obligated on the loan at the
time that the final disclosures were provided.
[[Page 12486]]
Proposed comment 39(d)-1 would provide guidance on calculating the
three-business day time period and on when a consumer's request to
cancel would be considered timely. It would also clarify that the
creditor would be allowed to provide a period of time longer than three
business days in which the consumer may cancel, and that the creditor
would be allowed to disburse funds after the minimum three-business day
period so long as the creditor honored the consumer's later timely
cancellation request. Proposed comment 39(d)-2 would provide guidance
to creditors on specifying a method or methods by which the consumer
may cancel the loan. The creditor would be permitted to require
cancellation be communicated orally or in writing. The creditor would
also be permitted to allow cancellation to be communicated
electronically, but would not be permitted to require only electronic
communication because the Board believes that not all consumers have
access to electronic communication.
Proposed comment 39(d)-3 would clarify the requirement that the
creditor allow cancellation without penalty. The prohibition would
extend only to fees charged specifically for canceling the loan. The
creditor would not be required to refund fees, such as an application
fee, charged to consumers for loans that are not cancelled.
The Board requests 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 requests 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.
39(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) would implement 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, a self-certification
form will not be required with respect to every covered educational
institution, but only those that meet the definition of an institution
of higher education in proposed Sec. 226.37(b)(2). Moreover, proposed
comment 39(e)-1 would clarify that 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. At the same time, comment 39(e)-1
would clarify 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 paid 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
would allow 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
available to consumers in written or electronic form. Because the form
will be provided by educational institutions to consumers, the Board
does 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
would provide 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.
39(f) Provision of Information by Preferred Lenders
The HEOA requires that a creditor that has a preferred lender
arrangement with a covered educational institution 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 to June 30 of the
following year). HEOA, Title X, Subtitle B, Section 1021(a)(adding TILA
Section 128(e)(11)). The HEOA does not specify which of the model forms
that the creditor should use. However, the approval and consummation
forms contain transaction-specific data that cannot be known for the
next year. Thus, the Board proposes to require that the creditor
provide the general loan information required on the application form
in Sec. 226.38(a), rather than the transaction-specific information
required in the approval and final disclosure forms.
After consultation with the Department of Education, the Board
proposes to require that creditors provide information by January 1 of
each year. Proposed Sec. 226.39(f) would require that the creditor
provide only the information about rates, terms and eligibility that
are applicable to the creditor's specific loan products. The Board does
not believe that educational institutions need the other information
[[Page 12487]]
required to be disclosed in Sec. 226.38(a), such as information about
the availability of federal student loans. In addition, the Board
believes that educational institutions can perform their own
calculations of the total cost of the creditors' loans and do not need
the cost estimate disclosure required under Sec. 226.38(a)(4). Comment
39(f)-1 would provide creditors with the flexibility to comply with
this requirement by providing educational institutions with copies of
their application disclosure forms if they choose, or to provide only
the required information.
The Board requests comment on the appropriate date by which
creditors must provide the required information and on what information
should be required.
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 proposes to add several model and sample forms
to Appendix H to part 226. The Board also proposes 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 would reorder the disclosures as follows: the amount
financed, the interest rate, the finance charge and the total of
payments.\8\ The proposed order reflects a 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 proposed order may enhance consumer understanding
in the context of private education loans, the Board recognizes that
consumers may be accustomed to the current order from other loan
contexts. The Board requests 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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\8\ The proposed 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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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 proposes 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 would provide a list of acceptable changes
to the model forms. Proposed comment app. H-25.ii would provide
guidance on the design of the model forms that would not be required
but would be encouraged.
The Board is also proposing 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 rearrangments 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.
IV. 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 requests 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.
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
proposing model forms along with this proposed rule. The Board is also
proposing to issue 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. The
Board requests comment on whether the model forms and the rule
implementing TILA section 128(e)(11) should be issued in final form at
the same time as the other proposed rules.
V. 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
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The Federal Reserve also proposes to
extend for three years the current recordkeeping and disclosure
requirements in connection with Regulation Z. The collection of
information that is required by this proposed rule is found in 12 CFR
part 226. The Federal Reserve 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 Federal
Reserve 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
[[Page 12488]]
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 Federal Reserve accounts for the paperwork
burden associated with Regulation Z for the state member banks and
other creditors supervised by the Federal Reserve that engage in
lending covered by Regulation Z and, therefore, are respondents under
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
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. The current total annual
burden to comply with the provisions of Regulation Z is estimated to be
688,607 hours for the 1,138 Federal Reserve-regulated institutions \9\
that are deemed to be respondents for the purposes of the PRA. To ease
the burden and cost of complying with Regulation Z (particularly for
small entities), the Federal Reserve provides model forms, which are
appended to the regulation.
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\9\ The number of Federal Reserve-supervised respondents was
obtained from numbers published in the Board of Governors of the
Federal Reserve System 94th Annual Report 2007: 878 State member
banks, 258 Branches & agencies of foreign banks, and 2 Commercial
lending companies.
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The total estimated burden increase, as well as the estimates of
the burden increase associated with each major section of the proposed
rule as set forth below, represents averages for all respondents
regulated by the Federal Reserve. The Federal Reserve expects that the
amount of time required to implement each of the proposed changes for a
given institution may vary based on the size and complexity of the
respondent. Furthermore, the burden estimate for this rulemaking does
not include the burden addressing changes to implement provisions of
the Mortgage Disclosure Improvement Act of 2008 (MDIA), as announced in
a separate proposed rulemaking (Docket No. R-1340).
As discussed in the preamble, the Federal Reserve proposes to add
three new disclosures for private education loans, which must be given
at different times in the loan origination process: (1) Application or
Solicitation Disclosures (Section 226.38(a)) would require private
educational lenders to provide on or with a solicitation or an
application for a private education loan general information about the
rate, fees, and loan terms, including an example of the total cost of
the 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 on those loans; (2) Approval Disclosures (Section
226.38(b)) would require the private educational lender to provide on
or with any notice of approval a set of transaction-specific
disclosures containing information about the rate, fees and other terms
of the loan. The consumer has at least 30 days in which to accept the
terms of the loan offered, and the private educational lender may not
change the rate or terms of the loan, except for changes to the rate
based on an index, during that time; and (3) Final Disclosures (Section
226.38(c)) would require the private educational lender to provide at
least three business days prior to disbursing the loan funds an updated
cost disclosure that is substantially similar to the form provided at
approval. The consumer has three business days in which to cancel the
loan and funds may not be disbursed until the three-day period has
expired.
The proposed rule would impose a one-time increase in the total
annual burden under Regulation Z for all respondents regulated by the
Federal Reserve by 45,440 hours, from 688,607 to 734,047 hours. In
addition, the Federal Reserve estimates that, on a continuing basis,
the proposed requirements would increase the total annual burden by
231,474 hours from 688,607 to 920,081 hours.
The Federal Reserve estimates that 1,136 respondents \10\ regulated
by the Federal Reserve would take, on average, 40 hours (one business
week) to update their systems to comply with the proposed disclosure
requirements in Sections 226.38(a), 226.38(b), and 226.38(c). This one-
time revision would increase the burden by 45,440 hours. In addition,
the Federal Reserve estimates that, on a continuing basis, these
respondents would take on average 1 hour (monthly) to comply with each
of the proposed disclosure requirements in Sections 226.38(a) and 8
hours (monthly) to comply with the proposed disclosure requirements in
Sections 226.38(b) and 226.38(c). The Federal Reserve estimates the
annual burden to be 13,362 hours and 231,474, hours respectively.
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\10\ 878 State member banks and 258 Branches & agencies of
foreign banks.
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To ease the burden and cost of complying with the proposed
disclosures the Federal Reserve provided model forms for each of the
three new disclosures: Appendix H-17 for the application or
solicitation disclosures required in Sec. 226.38(a), Appendix H-18 for
the approval disclosures required in Sec. 226.38(b), and Appendix H-19
for the final disclosures required in Sec. 226.38(c).
The other federal agencies are responsible for estimating and
reporting to OMB the total paperwork burden for the institutions for
which they have administrative enforcement authority.\11\ They may, but
are not required to, use the Federal Reserve's burden estimation
methodology. Using the Federal Reserve's method, the total current
estimated annual burden for institutions regulated by the federal
financial agencies, including Federal Reserve-supervised institutions,
would be approximately 13,568,725 hours. The proposed rule would impose
a one-time increase in the estimated annual burden for all institutions
subject to Regulation Z by 688,000 hours to 14,256,725 hours. On a
continuing basis the estimated total annual burden would increase by
3,508,800 hours from 13,568,725 to 17,077,525 hours. The above
estimates represent an average across all respondents and reflect
variations between institutions based on their size, complexity, and
practices. All covered institutions, of which there are approximately
17,200, potentially are affected by this collection of information, and
thus are respondents for purposes of the PRA.
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\11\ Appendix I to Part 226--Federal Enforcement Agencies of
Regulation Z lists those federal agencies that enforce the
regulation for particular classes of business. The federal financial
agencies include: the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, Office of Thrift Supervision,
and National Credit Union Administration. The federal non-financial
agencies include: Department of Transportation, Packers and
Stockyards Administration, Farm Credit Administration, and Federal
Trade Commission.
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Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; (2) the accuracy of the Federal Reserve's estimate of the
burden
[[Page 12489]]
of the proposed information collection, including the cost of
compliance; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collection of information should be sent to
Michelle Shore, Federal Reserve Board Clearance Officer, Division of
Research and Statistics, Mail Stop 151-A, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0199), Washington, DC 20503.
VI. Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
requires an agency either to provide an initial regulatory flexibility
analysis with a proposed rule or certify that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. The proposed regulations cover certain banks, other
depository institutions, and non-bank entities that extend private
education loans to consumers. The Small Business Administration (SBA)
establishes size standards that define which entities are small
businesses for purposes of the RFA.\12\
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\12\ http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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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 proposed regulations. The
Board requests public comment in the following areas.
A. Reasons for the Proposed 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
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 disclosure documents 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
proposed 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 proposed 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.
B. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION above contains this information. The
legal basis for the proposed regulations is section 1002 of the HEOA
and section 105(a) of the TILA.
C. Description of Small Entities to Which the Regulation Applies
The proposed regulations would 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
proposal 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 can, however, identify through data from Call Reports\13\
approximate numbers of small depository institutions that could be
subject to the proposed rules. Based on an average of data reported at
quarter end between October 1, 2007 and September 30, 2008,
approximately 4,481 banks, 401 thrifts, and 7,221 credit unions,
totaling 12,103 institutions, would be considered small entities that
are potentially subject to the proposed rule. The Board cannot identify
the percentage of these small institutions that extend private
education loans and thus would be subject to a rulemaking. However,
because the proposed regulation would cover all private education loans
regardless of their size or whether they are for multiple purposes, the
Board believes a majority of the 12,103 institutions would be covered
by this proposed rulemaking.
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\13\ 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).
---------------------------------------------------------------------------
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
proposed 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
[[Page 12490]]
companies that extend private education loans.
The proposed rule would also apply to covered educational
institutions that extend private education loans to their students,
including flight training schools. According 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 proposed 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.\14\
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\14\ 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-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.\15\ Thus, the Board
estimates that 7,410 non-accredited postsecondary schools qualify as
small entities.\16\
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\15\ 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.
\16\ While the numbers of accredited and unaccredited
postsecondary schools includes 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.
The Board invites comment regarding the number and type of small
entities that would be affected by the proposed rule.
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The compliance requirements of the proposed regulations are
described in detail in the SUPPLEMENTARY INFORMATION above.
The proposed 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 would 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 proposed regulations also generally require a creditor 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. It also
must provide a three-day right to cancel following consummation and is
prohibited from disbursing funds until the three-day period expires. A
creditor would 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 given
period of time following the consumer's receipt of the approval
disclosure documents.
The Board seeks information and comment on any costs, compliance
requirements, or changes in operating procedures arising from the
application of the proposed rule to small institutions.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that would duplicate, overlap, or conflict with the proposed
regulations. Pursuant to section 1021(a)(9) of the HEOA, the proposed
disclosures given at the time of approval and before disbursement of
the private education loan have been designed to prevent, to the extent
possible, duplication with the existing disclosure requirements of the
TILA. The Board seeks comment regarding any statutes or regulations,
including state or local statutes or regulations that would duplicate,
overlap, or conflict with the proposed regulations.
F. Discussion of Significant Alternatives
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 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.
The Board welcomes comments on any significant alternatives,
consistent with section 1002 of the HEOA that would minimize the impact
of the proposed regulations on small entities.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in lending.
[[Page 12491]]
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside bold arrows, and language that
would be deleted is set off with bold brackets.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
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
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. [rtrif]The regulation also regulates certain practices of
creditors who extend private education loans as defined in Sec.
226.37(b)(5).[ltrif]
(d) * * *
[rtrif](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.
[lsqbb](6)[rsqbb](7)[ltrif]
* * * * *
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)[rtrif], Sec.
226.19(a)(2),[ltrif] [lsqbb]and[rsqbb] Sec. 226.31, [rtrif]and
Sec. Sec. 226.37, 226.38, and 226.39,[ltrif] 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.
* * * * *
3. Section 226.3 is amended by revising paragraph (b) to read as
follows:
Sec. 226.3 Exempt transactions.
* * * * *
(b) Credit over $25,000 [not secured by real property or a
dwelling]. An extension of credit [lsqbb]not secured by real property,
or by personal property used or expected to be used as the principal
dwelling of the consumer,[rsqbb] 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[lsqbb].[rsqbb][rtrif], 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.
226.37(b)(5).[ltrif]
* * * * *
Subpart C--Closed-End Credit
4. Section 226.17 is amended by revising paragraphs (a), (b), and
(e) and removing paragraph (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 [rtrif]or Sec. 226.38[ltrif].\38\ The itemization of the amount
financed under Sec. 226.18(c)(1) must be separate from the other
disclosures under that section [rtrif]except for private education loan
disclosures under Sec. 226.38[ltrif].
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
(2) [rtrif]Except for private education loans,
t[ltrif][lsqbb]T[rsqbb]he 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). [rtrif]For private education loans, 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. 226.38(b)(1)(i) and (c)(1), and the notice of the right to
cancel under Sec. 226.38(c)(4).[ltrif]
(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). [rtrif]For private education loan
transactions, special timing requirements are set forth in Sec.
226.37(d).[ltrif] 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. [rtrif]Except for the disclosures
required in Sec. 226.38(b), i[ltrif][lsqbb]I[rsqbb]f a disclosure
becomes inaccurate because of an event that occurs after the creditor
delivers the
[[Page 12492]]
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, or Sec. 226.20.
* * * * *
[lsqbb](i) Interim student credit extensions. For each transaction
involving an interim credit extension under a student credit program,
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).[rsqbb]
* * * * *
5. A new Subpart F consisting of Sec. Sec. 226.37, 226.38, and
226.39 are added to read as follows:
Subpart F--Special Rules for Private Education Loans
Sec.
226.37 Special Disclosure Requirements for Private Education Loans.
226.38 Content of Disclosures.
226.39 Limitations on Private Educational Loans.
[rtrif]Subpart F--Special Rules for Private Education Loans
Sec. 226.37 Special Disclosure Requirements for Private Education
Loans
(a) Coverage. The requirements of this subpart apply to private
education loans as defined in Sec. 226.37(b)(5).
(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.
(2) Institution of higher education has the same meaning as in
section 102 of the Higher Education Act of 1965 (20 U.S.C. 1002) and
the implementing regulations published by the 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 a loan 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; and
(iii) Does not include open-end credit or any loan that is secured
by real property or a dwelling.
(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. 226.38(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. 226.38(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. 226.38(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. 226.38(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. Sec. 7001 et seq.). The
disclosures required by Sec. 226.38(a) may be provided to the consumer
in electronic form on or with an application or solicitation provided
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. 226.39(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. 226.38(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. 226.38(a) in a telephone application, or
solicitation, initiated by the creditor. Alternatively, if the creditor
does not disclose orally the information in Sec. 226.38(a), the
creditor must provide the disclosures or place them in the mail no
later than three business days after the consumer requests the credit,
except that, if the creditor provides or places in the mail the
disclosures in Sec. 226.38(b) no later than three business days after
the consumer requests the credit, the creditor need not also provide
the Sec. 226.38(a) disclosures.
(iii) 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, the creditor need not also provide Sec. 226.38(a)
disclosures.
(2) Approval disclosures. The creditor shall provide the
disclosures required by Sec. 226.38(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; otherwise the creditor must mail the disclosures within three
business days of communicating the notice of approval.
(3) Final disclosures. The disclosures required by Sec. 226.38(c)
shall be provided after the consumer accepts the loan and at least
three business days
[[Page 12493]]
prior to disbursing the private education loan funds.
(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
must 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. If a disclosure under Sec.
226.38(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. 226.38 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, 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, and 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.
(iv) Whether a co-signer or guarantor is required and 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; and
(ii) Any applicable charges or 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.
(ii) 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.
(4) Cost estimates. An example of the total cost of the loan over
the life of the loan, calculated as the total of payments:
(i) using the maximum rate of interest and a principal amount of
$10,000, or $5000 if the creditor only offers the loan for less than
$10,000, plus the finance charges applicable to loans at the maximum
rate of interest; and
(ii) calculated both for any option that allows for deferral of
interest payments and for any option that does not allow for deferral
of interest payments.
(5) Eligibility. Any age or school enrollment eligibility
requirements relating to the consumer or co-signer, if applicable.
(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
website of the U.S. Department of Education, including an appropriate
website address; and
(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. (i) A statement that if the loan is
approved, the consumer will have the right to accept the terms of the
loan at any time within 30 calendar days following receipt of the
approval disclosures in Sec. 226.38(b).
(ii) A statement that except for changes based on adjustments to
the index used to determine the rate for the loan, the rates and terms
of the loan may not be changed by the creditor during the 30-day period
described in paragraph (a)(7)(i) of this section.
(8) Self-certification information. A statement that, before the
loan may be consummated, the consumer must obtain from the relevant
institution of higher education the self-certification form required
under Sec. 226.39(e), and complete, sign and submit the form to the
creditor, if applicable.
(b) Approval disclosures. On or with any notice of approval
provided to the consumer, the creditor shall disclose to the consumer
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; and
(ii) Any applicable charges or 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.
(iii) A description of the payment deferral option chosen by the
consumer, if applicable, and any other payment deferral options that
the consumer may elect at a later time.
(iv) Any payments required while the student is enrolled at a
covered educational institution, based on the deferral option chosen by
the consumer.
(v) The amount of any unpaid interest that will accrue while the
student is enrolled at a covered educational institution, based on the
deferral option chosen by the consumer.
(vi) A statement that if the consumer files for bankruptcy, the
consumer may still be required to pay back the loan.
(vii) An estimate of the total amount of payments calculated based
on:
(A) The interest rate applicable to the loan. Compliance with Sec.
226.18(h) constitutes compliance with this requirement.
(B) The maximum possible rate of interest for the loan or, if a
maximum rate cannot be determined, a rate of 21%.
(C) If a maximum rate cannot be determined, the estimate of the
total
[[Page 12494]]
amount for repayment must include a statement that there is no maximum
rate and that the total amount for repayment disclosed under Sec.
226.38(b)(3)(vii)(A) 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 21%. If a maximum cannot be determined, a statement of 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; and
(iii) A statement that the consumer may obtain additional
information concerning Federal student financial assistance from the
institution of higher education that the subject student attends, or at
the website of the U.S. Department of Education, including an
appropriate website address.
(5) Rights of the consumer. (i) A statement that the consumer has
the right to accept the terms of the loan at any time within 30
calendar days following notice of loan approval. The disclosure must
include the specific date on which the 30-day period expires, based on
the date upon which the consumer receives the disclosures required
under this subsection for the loan, and indicate that the consumer may
accept the terms of the loan until that date. The disclosure must also
specify the method or methods by which the consumer may communicate
acceptance.
(ii) A statement that, except for changes based on adjustments to
the index used for a loan, the rates and terms of the loan may not be
changed by the creditor during the period described in paragraph
(b)(5)(i).
(c) Final disclosures. At least three business days prior to
disbursing the loan funds, 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. 226.38(b)(1).
(2) Fees and default or late payment costs. Information required to
be disclosed under Sec. 226.38(b)(2).
(3) Repayment terms. Information required to be disclosed under
Sec. 226.38(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. 226.39(d)
expires, and
(ii) loan proceeds will not be disbursed until after the
cancellation period under Sec. 226.39(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.
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. 226.37(c)(2)(iii).
Sec. 226.39 Limitations on private educational loans.
(a) Co-branding prohibited. (1) Except as provided in paragraph (b)
of this section, a creditor 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
the covered educational institution does not endorse the creditor's
loans and that the creditor is not affiliated with the covered
educational institution.
(b) Preferred lender arrangements. If a creditor and a covered
educational institution have entered into a preferred lender
arrangement, as defined by Sec. 226.37(b)(4), paragraph (a)(1) of this
section does not apply if the private education loan marketing includes
a clear and conspicuous disclosure 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. 226.38(b).
(2) Except for changes based on adjustments to the index used for a
loan, or changes that will unequivocally benefit the consumer, the rate
and terms of the private education loan that are required to be
disclosed under Sec. Sec. 226.38(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) Notwithstanding paragraph (c)(2) of this section, nothing in
this section prevents the creditor from changing the rate or terms of
the loan, at the creditor's option, in connection with accommodating a
specific request by the consumer. For example, if the consumer requests
a higher or lower principal amount of the loan following a change in
the amount of the consumer's other available financial assistance, the
creditor may, but need not, provide the requested principal amount and
make any other changes to the rate or terms. If the consumer requests a
change to the terms of the loan, the creditor shall provide the
disclosures required under Sec. 228.38(b)(2) for the new loan terms
and shall provide the consumer with an additional 30 days to accept the
new rates and terms of the loan, and shall not make changes to the
rates and terms except as specified in paragraphs (c)(2) and (3) of
this section.
(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. 226.38(c). No funds may be disbursed with respect to
a private education loan until after the expiration of the three-
business day period.
(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, a
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
annually by the 1st day of January, the information required under
[[Page 12495]]
Sec. Sec. 226.38(a)(1), (2), (3) and (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 and ending June 30 of the following year.[ltrif]
6. 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
* * * * *
[rtrif]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[ltrif]
* * * * *
[rtrif]H-18 Private Education Loan Application and Solicitation Model
Form
BILLING CODE 6210-01-P
[[Page 12496]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.000
[[Page 12497]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.001
H-19 Private Education Loan Approval Model Form
[[Page 12498]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.002
[[Page 12499]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.003
H-20 Private Education Loan Final Model Form
[[Page 12500]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.004
[[Page 12501]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.005
H-21 Private Education Loan Application and Solicitation Sample
[[Page 12502]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.006
[[Page 12503]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.007
H-22 Private Education Loan Approval Sample
[[Page 12504]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.008
[[Page 12505]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.009
H-23 Private Education Loan Final Sample
[[Page 12506]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.010
[[Page 12507]]
[GRAPHIC] [TIFF OMITTED] TP24MR09.011
BILLING CODE 6210-01-C
[[Page 12508]]
7. In Supplement I to Part 226:
a. Under Section 226.2--Definitions and Rules of Construction,
2(a) Definitions, 2(a)(6) Business day, paragraph 2(a)(6)-2 is
revised.
b. Under Section 226.3--Exempt Transactions, the heading to 3(b)
Credit Over $25,000 Not Secured by Real Property or a Dwelling, and
3(f) Student Loan Programs, are revised.
c. Under Section 226.17--General Disclosure Requirements, under
17(a) Form of Disclosures, paragraphs (17)(a)(1)-4, (17)(a)(1)-6,
(a)(2) and 17(b) Time of Disclosures, are revised, and 17(i) Interim
Student Credit Extensions, is removed.
d. Under Section 226.18--Content of Disclosures, Paragraph
18(f)(1)(ii), Paragraph 18(f)(1)(iv)-2, and Paragraph 18(k)(1) are
revised.
e. A new Subpart F--Special Rules for Private Student Loans is
added, and new Section 226.37--Requirements for Private Student
Loans, Section 226.38--Content of Disclosures, and Section 226.39--
Limitations on Private Educational Loans are added.
f. Under the heading, Appendixes G and H--Open-End and Closed-
End Model Forms and Clauses, paragraph 1. is revised.
g. Under Appendix H--Closed-End Model Forms and Clauses,
paragraphs 21 through 24 are revised, and paragraphs 25 through 28
are revised.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
* * * * *
2(a)(6) Business day.
* * * * *
2. [Rescission rule][rtrif] Rule for rescission, disclosures for
certain mortgage transactions, and private education loans[ltrif]. 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 [or][rtrif],[ltrif]
the receipt of disclosures for certain [rtrif]dwelling-
secured[ltrif] mortgage transactions under Sec. Sec.
226.19(a)(1)(ii), [rtrif]226.19(a)(2),[ltrif] [or mortgages subject
to Sec. 226.32 are] 226.31(c) [rtrif], or the receipt of
disclosures and the right to cancel private education loans under
Sec. Sec. 226.37, 226.38, and 226.39 is[ltrif] involved. [(See also
comment 31(c)(1)-1.)] 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). [The][rtrif]In
cases where the more precise rule applies, the[ltrif] observed
holiday (in the example, July 3) is a business day [for purposes of
rescission or the delivery of disclosures for certain high-cost
mortgages covered by Sec. 226.32].
* * * * *
Section 226.3--Exempt Transactions
* * * * *
3(b) Credit Over $25,000 [Not Secured by Real Property or a
Dwelling]
* * * * *
3(f) Student Loan Programs
1. Coverage. This exemption applies to [the Guaranteed Student
Loan program (administered by the Federal government, State, and
private non-profit agencies), the Auxiliary Loans to Assist Students
(also known as PLUS) program, and the National Direct Student Loan
program.] [rtrif]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. 226.37(b)(5).[ltrif]
* * * * *
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[rtrif],
except for private education loan disclosures under Sec.
226.38[ltrif]. 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)
[rtrif]for transactions other than private education loans[ltrif])
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'' [rtrif](except for private education loans)[ltrif] 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 [rtrif](except for private education loans)[ltrif]
``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[rtrif], and in private education loan
transactions under Sec. Sec. 226.37 and 226.38[ltrif]. (See the
commentary to
[[Page 12509]]
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).) Creditors in interim student
credit extensions need not disclose the terms set forth in this
paragraph at the time the credit is actually extended but 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.
2. Basis of disclosures. The disclosures given at the time of
execution of the interim note should reflect two annual percentage
rates, one for the interim period and one for the repayment period.
The use of Sec. 226.17(i) in making disclosures does not, by
itself, make those disclosures estimates. Any portion of the finance
charge, such as statutory interest, that is attributable to the
interim period and is paid by the student (either as a prepaid
finance charge, periodically during the interim period, in one
payment at the end of the interim period, or capitalized at the
beginning of the repayment period) must be reflected in the interim
annual percentage rate. Interest subsidies, such as payments made by
either a state or the Federal government on an interim loan, must be
excluded in computing the annual percentage rate on the interim
obligation, when the consumer has no contingent liability for
payment of those amounts. Any finance charges that are paid
separately by the student at the outset or withheld from the
proceeds of the loan are prepaid finance charges. An example of this
type of charge is the loan guarantee fee. The sum of the prepaid
finance charges is deducted from the loan proceeds to determine the
amount financed and included in the calculation of the finance
charge.
3. Consolidation. Consolidation of the interim student credit
extensions through a renewal note with a set repayment schedule is
treated as a new transaction with disclosures made as they would be
for a refinancing. Any unearned portion of the finance charge must
be reflected in the new finance charge and annual percentage rate,
and is not added to the new amount financed. In itemizing the amount
financed under Sec. 226.18(c), the creditor may combine the
principal balances remaining on the interim extensions at the time
of consolidation and categorize them as the amount paid on the
consumer's account.
4. Approved student credit forms. See the commentary to appendix
H regarding disclosure forms approved for use in certain student
credit programs.]
* * * * *
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. [rtrif]Except
for private education loans disclosures,
[ltrif][W][rtrif]w[ltrif]hen there are no limitations, the creditor
may, but need not, disclose that fact[. L][rtrif], and
l[ltrif]imitations 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.)
[rtrif]For limitations with respect to private education loan
disclosures, see comment 38(b)(1)-2.[ltrif]
* * * * *
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.
[Interim student credit extensions][rtrif]Private
education loans as defined in Sec. 226.37(b)(5)[ltrif].
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 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[:
L][rtrif], l[ltrif]oan guarantee fees[rtrif].[ltrif]
[ Interim interest on a student loan]
* * * * *
Subpart F--Special Rules for Private Education Loans
Section 226.37--Special Disclosure Requirements for Private
Education Loans
37(b) Definitions
37(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. 226.37(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. 226.37(b)(1), the term agent
means an officer or employee of an institution-affiliated
organization as defined by section 151 of the Higher Education Act
of 1965 (20 U.S.C 1019). 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.
37(b)(2) Institution of higher education.
1. General. An institution of higher education includes any
institution that meets the definitions contained in section 102 of
the Higher Education Act of 1965 (20 U.S.C. 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.
37(b)(3) Postsecondary educational expenses.
1. General. The examples listed in Sec. 226.37(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).
37(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.
[[Page 12510]]
37(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. 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, the creditor need not
provide the disclosures required by Sec. 226.38(a) on or with the
application or solicitation. See Sec. 226.38(d)(1)(i). However, 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 creditor must comply with
Sec. Sec. 226.38(b) and (c) and Sec. 226.39. The creditor may rely
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. For purposes of the required
disclosures, 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.
37(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. 226.37(c)(1). To comply with the requirement under
Sec. Sec. 226.38(b) and (c) that private education lenders disclose
the information required under Sec. 226.18, as well as the
requirement that the disclosures be grouped together and segregated
from everything else, creditors may follow the rules in Sec.
226.17, except where specifically provided otherwise. Although Sec.
226.17(b) requires creditors to provide only one set of disclosures
before consummation of the transaction, Sec. Sec. 226.38(b) and (c)
require that the creditor provide the disclosures under Sec. 226.18
both upon approval and prior to disbursing the loan.
Paragraph 37(c)(3)
1. Application and solicitation disclosures--electronic
disclosures. If the disclosures required under Sec. 226.38(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.
37(d) Timing of Disclosures
1. Providing disclosures. Disclosures are considered provided
when received by the consumer. 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. Sec. 226.37, 226.38, and 226.39, ``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 37(d)(1)
1. Invitations to apply. A creditor may contact a consumer who
has not been preapproved for a private educational 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 initiated by the
creditor; or
iii. An application in an in-person contact initiated by the
creditor.
Paragraph 37(d)(2)
1. Timing. The creditor must provide the disclosures required by
Sec. 226.38(b) at the time the creditor provides to the consumer
any notice that the loan has been approved. 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 notice of approval. 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. Sec. 7001 et seq.); otherwise,
the creditor must place the disclosures in the mail within three
business days of the communication. For purposes of Sec. 226.37(d),
the more precise definition of business day (meaning all calendar
days except Sundays and specified federal holidays) applies. See
comment 2(a)(6)-2.
37(g) Effect of Subsequent Events
1. Inaccuracies in the disclosures required under Sec.
226.38(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 226.38--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, the creditor need not
disclose the information under Sec. Sec. 226.38(a)(6), and (b)(4),
and any other information otherwise required to be disclosed under
this subpart that is not applicable to the loan consolidation
transaction.
38(a) Application or Solicitation Disclosures
Paragraph 38(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's e-mail address, or for
disclosures made on an Internet Web site, when 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 applicable 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, 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, if applicable.
The creditor is not required to list the 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
credit report and the type of school the consumer attends, the
creditor may state, ``Your interest rate will be based on your
creditworthiness and other factors.''
Paragraph 38(a)(1)(iii)
1. Coverage. The requirements of section 226.38(a)(1)(iii) apply
to all transactions in which 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.
[[Page 12511]]
2. Limitations. The creditor must disclose 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. When
there are no limitations, the creditor must disclose that fact.
Limitations include legal limits in the nature of usury or rate
ceilings under state or federal statutes or regulations. However, if
a rate limitation in the form of a legal limit applies (rather than
a numerical rate limitation in the legal obligation between the
parties) the creditor must disclose that the maximum rate is
determined by applicable law and may change. The creditor must also
disclose that the consumer's actual rate may be higher or lower than
the initial rates disclosed under Sec. 226.38(a)(1)(i), if
applicable.
Paragraph 38(a)(1)(iv)
1. Co-signer or guarantor--changes in applicable interest rate.
The creditor must disclose whether a co-signer or guarantor is
required to obtain the loan. The creditor must also 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 only 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.''
38(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 the 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 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 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. Fees disclosed do not include
those that apply if the consumer exercises an option after
consummation under the agreement or promissory note for the private
educational loan, such as fees for exercising deferment,
forbearance, or loan modification options.
38(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 private education 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. Payment
deferral options also include any 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 disclosure
must 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
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, the creditor must disclose that the consumer must
begin repayment upon consummating the loan and may not defer
repayment at any time.
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
additional information. 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 disclosure of
payment deferral options applicable while the student is enrolled at
a covered educational institution under Sec. Sec. 226.38(a)(3)(ii)
and (iii) may be combined with the disclosure of cost estimates
required in Sec. 226.38(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-18.
38(a)(4) Cost Estimates.
1. Total cost of the loan. For purposes of Sec. 226.38(a)(4),
the creditor must calculate the example of the total cost of the
loan in accordance with the rules under Sec. 226.18(h) for
calculating the loan's total of payments.
2. Principal amount and fees. The creditor must calculate the
principal amount by starting with a $10,000 amount and adding all
finance charges that would be applicable to loans with that maximum
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 interest rate, the lender must add
the 3% origination fee to the starting $10,000 principal amount,
resulting in a $10,300 principal amount. Although the creditor must
calculate the example using the principal amount described above,
the creditor must disclose that the example provides the total cost
of a $10,000 amount financed, rather than disclosing the principal
amount used in calculating the loan. If the creditor only offers a
particular private education loan for less than $10,000, the
creditor may assume a principal amount that results in a $5,000
amount financed for that loan.
3. Maximum interest rate. For purposes of Sec. 226.38(a)(4),
the maximum rate of interest used to calculate the example of the
total cost of the loan must be the maximum initial rate of interest
disclosed in the range of rates under Sec. 226.38(a)(1)(i).
4. Calculated for each option to defer interest payments. The
creditor must provide an example of the total cost of the loan for
each in-school deferral option disclosed in Sec. 226.38(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, the
creditor is required to disclose three estimates of the total cost
of the loan, one for each deferral option. In calculating each
estimate of the total cost of the loan where interest capitalizes,
the creditor must calculate the estimate using the same
capitalization method that it would use if that loan were to be
made. For instance, if a creditor would capitalize interest on the
loan being offered on a quarterly basis, each estimate of the total
cost of the loan where interest capitalizes must be calculated
assuming interest capitalizes on a quarterly basis.
5. Deferment period assumptions. For loan programs intended for
educational expenses of undergraduate students, the creditor must
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 must assume that the consumer defers for the lesser of
two years plus the maximum applicable grace period, if any, or the
maximum time the consumer may defer payments under the loan program.
38(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.
38(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.''
38(b) Approval Disclosures.
38(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.
226.38(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
[[Page 12512]]
possible rate in Sec. 226.38(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. 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 Sec. 226.38(b)(1)(iii) (requiring disclosure of any
limitations on the interest rate adjustments, or lack thereof),
because the rules under Sec. 226.38(b)(1)(iii) differ from the
rules under Sec. 226.18(f)(1)(ii) as described in comment
18(f)(1)(ii)-1. Specifically, Sec. 226.38(b)(1)(iii), but not Sec.
226.18(f)(1)(ii), requires that if there are no limitations on
interest rate increases, the creditor must disclose that fact. In
addition, under Sec. 226.38(b)(1)(iii), but not under Sec.
226.18(f)(1)(ii), 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. Under Sec.
226.38(b)(1)(iii), if a rate limitation in the form of a legal limit
applies (rather than a numerical rate limitation in the legal
obligation between the parties) the creditor must disclose that the
maximum rate is determined by law and may change.
Paragraph 38(b)(2)
1. Fees and default or late payment costs. Creditors may follow
the commentary for Sec. 226.38(a)(2) in complying with Sec.
226.38(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. 226.38(b)(2)(ii). 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.
38(b)(3) Repayment Terms.
1. Approved principal amount. The principal amount for which the
consumer has been approved should include all charges incorporated
in the approved loan amount. 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. Prepaid finance charges should not
be included in the initial approved principal amount disclosed if
they would not be included in the amount on the face of the note.
See comment 18(b)(3)-1. If the creditor elects to provide an
itemization of the amount financed under Sec. 226.18(c)(1), and the
itemization states the approved principal amount, the creditor need
not list the approved principal amount 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. If the payment schedule disclosed in accordance
with Sec. 226.18(g) reflects the maximum repayment term, then
compliance with Sec. 226.18(g) constitutes compliance with Sec.
38(b)(3)(ii).
3. Payment deferral options applicable to the consumer.
Creditors may follow the commentary for Sec. 226.38(a)(3)(ii) in
complying with Sec. 226.38(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 pay during
the time that the student is enrolled. If the payment schedule
disclosed in accordance with Sec. 226.18(g) reflects payments
required while the student is enrolled, then compliance with Sec.
226.18(g) constitutes compliance with Sec. 38(b)(3)(iv).
5. Bankruptcy limitations. The creditor may comply with Sec.
226.38(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
private education loan or, if the maximum rate cannot be determined,
a rate of 21%. If the legal obligation between the parties specifies
a numeric maximum rate of interest beyond which the interest rate on
the loan may not increase, the creditor must calculate the total
amount for repayment based on that rate. If the legal obligation
does not specify a numeric maximum rate, but a limitation on
interest rate increases exists in the form of a legal limit in the
nature of a usury or rate ceiling under state or federal statutes or
regulations, the creditor must calculate the total amount for
repayment based on that rate, and the creditor must disclose that
the maximum rate is determined by law and may change. If a maximum
rate cannot be determined, the creditor must base the disclosure on
a rate of 21% and must disclose that there is no maximum rate and
that the total amount for repayment disclosed under Sec.
226.38(b)(3)(vii)(A) is an estimate and will be higher if the
applicable interest rate increases.
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
applicable to the private education loan, or if the maximum rate
cannot be determined, a rate of 21%. The creditor should follow
comment 38(b)(3)-6.ii in determining and disclosing the maximum rate
of interest. 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. 226.38(b)(3)(viii) are
estimates and will be higher if the applicable interest rate
increases.
38(b)(4) Alternatives to Private Education Loans.
1. General. Creditors may follow the commentary for Sec.
226.38(a)(6) in complying with Sec. 226.38(b)(4).
38(b)(5) Rights of the Consumer.
1. Notice of 30 day acceptance period. The disclosure must
include the specific date on which the 30 day acceptance period
expires and state that the consumer may accept the terms of the loan
until that date. The disclosure must also specify the method or
methods by which the consumer may cancel.
38(c) Final Disclosures
1. Notice of right to cancel. The disclosure must include the
specific date on which the three-business day cancellation period
expires and state that the consumer has a right to cancel by that
date. See comments 39(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 requires 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. 226.37(c)(2)(iii). The statement will
be deemed to be made more conspicuous if it is segregated from other
disclosures, placed near 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 226.39--Limitations on Private Educational Loans
1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec. 226.39(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 to the consumer related to
a specific transaction. For example, the term marketing includes an
application or solicitation, a promissory note or a contract
provided to the consumer.
2. Implied endorsement. An implication that a private student
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 educational loan under 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, 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, a state's or an institution of higher education's use
of a state seal, with appropriate authorization, in the marketing of
state education loan products does not imply endorsement.
3. Disclosure.
i. A creditor is considered to have complied with Sec.
226.39(a)(2) if the creditor's marketing contains a clear and
conspicuous statement using the name of the creditor and
[[Page 12513]]
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].''
ii. A creditor is considered to have complied with Sec.
226.39(b) if the creditor's marketing contains a clear and
conspicuous statement, 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].''
Paragraph 39(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. 226.38(b) to accept
the terms of the loan. The creditor may provide the consumer with a
period of time longer than 30 days after the consumer receives the
disclosures for the consumer to accept the transaction. 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. 226.37(c), ``business day'' means all
calendar days except Sundays and the legal public holidays referred
to in Sec. 226.2(a)(6). See comment 37(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. If acceptance by mail is allowed, the consumer's
communication of acceptance is considered timely if placed in the
mail not later than 30 calendar days following the date the consumer
received the disclosure required under Sec. 226.39(b).
3. Prohibition on changes to rates and terms. Except as
specified in Sec. 226.39(c)(2), the creditor may not change the
rates and terms of the loan that are required to be disclosed under
Sec. 226.38(b) until the 30-day acceptance period has expired with
the consumer having accepted the loan, or until loan funds are
disbursed. The creditor is permitted to make changes that do not
affect any of the terms disclosed to the consumer under Sec.
226.38(b). Changes to the rate based on adjustments to the index
used for the loan and changes that will unequivocally benefit the
consumer are not prohibited. For example, a creditor is permitted to
reduce the interest rate or lower the amount of a fee.
4. Changes to rates and terms based on request by consumer. The
prohibition on changes to the rate and terms of the loan in Sec.
226.39(c)(2) applies only to changes made in the absence of a
request from the consumer. The creditor may make changes to the rate
and terms of the private education loan in connection with
accommodating a request from the consumer. For example, the consumer
may request a lower principal amount upon receiving additional
financial assistance from another source after the consumer applied
for the private educational loan. In this situation, the creditor is
permitted to provide a lower principal amount, and to make any other
changes such as a different repayment term, in response to the
consumer's request. However, the creditor would need to provide a
new set of approval disclosures under Sec. 226.38(b) and provide
the consumer with a new 30-day acceptance period under Sec.
226.39(c).
Paragraph 39(d)
1. Right to cancel. If the creditor mails the disclosures
including the statement of the right to cancel, the disclosures are
considered received by the consumer within three business days from
the date on which the creditor mailed the statement. See comment 37-
2. The consumer has three business days from the date on which the
disclosures are 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 and the
consumer may cancel any time before midnight Wednesday, June 10. 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. If the creditor allows cancellation by mail,
the creditor must specify the address of the creditor's place of
business or the name and address of an agent of the creditor to
receive notice of cancellation. The creditor must also specify that
the consumer's mailed request will be deemed timely if placed in the
mail before the expiration of the cancellation period. 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 either waiting a reasonable time after expiration of the
cancellation period to allow for delivery of a mailed notice or by
obtaining a written statement from the consumer 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.
226.39(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, charged to consumers for loans that are
not cancelled.
Paragraph 39(e)
1. General. Section 226.39(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 educational 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. 226.37(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.
226.39(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.
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 39(f)
1. General. Section 226.39(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. 226.38(a).[ltrif]
* * * * *
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
[[Page 12514]]
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 [rtrif]H-18, H-19, H-20,[ltrif] 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, 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[.] [rtrif]for use for loans made prior to the effective
date of the disclosures required under Subpart F[ltrif]. The form
[may be used] [rtrif]was approved [ltrif] for all Health Education
Assistance Loans (HEAL) with a variable interest rate that
[are][rtrif]were considered[ltrif] 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[.] [rtrif]for use for loans made prior to the effective
date of the disclosures required under Subpart F[ltrif]. The form
[may be used] [rtrif]was approved[ltrif] for all HEAL loans with a
fixed interest rate that [are][rtrif]were considered[ltrif]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[.] [rtrif]for use for loans made prior to the effective
date of the disclosures required under Subpart F[ltrif]. The form
[may be used] [rtrif]was approved[ltrif] 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[.] [rtrif]for use for loans made prior to the effective
date of the disclosures required under Subpart F[ltrif]. The form
[may be used] [rtrif]was approved[ltrif] 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.
[rtrif]25. Models H-18, H-19, H-20.
i. These model forms illustrate disclosures required under Sec.
226.38 on or with an application or solicitation, at approval, and
before disbursement 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
Combining required terms where several numerical
disclosures are the same, for instance, if the initial approved
principal amount is included in an itemization of the amount
financed
Combining the disclosure of payment deferral options
required in Sec. 226.38(a)(3) with the disclosure of cost estimates
required in Sec. 226.38(a)(4) in the same chart or table (See
comment 38(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. 226.38(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. 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.
B. Sufficient spacing between lines of the text.
C. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 8-point
type.
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. 226.38(a). The sample assumes a range of interest rates
between 7.375 and 17.375 percent. The sample assumes a variable
interest rate that will never exceed 25 percent 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. 226.38(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. 226.38(b). The sample assumes the consumer financed
$10,000 at a 7.059 annual percentage rate. The sample assumes a
variable interest rate that will never exceed 25 percent 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 the
student is enrolled in school. This includes a sample disclosure of
a loan amount of $10,000 and an origination fee of $0, for a total
amount financed of $10,000.
28. Sample H-22. This sample illustrates a disclosure required
under Sec. 226.38(c). The sample assumes the consumer financed
$10,000 at a 7.059 annual percentage rate. The sample assumes a
variable annual percentage rate in an instance where there is no
maximum interest rate. The sample 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
[[Page 12515]]
year loan term, the assumed maximum interest rate, and that the
consumer elected to defer payments while the student relates is
enrolled in school. This includes a sample disclosure of a loan
amount of $10,000 and an origination fee of $0, for a total amount
financed of $10,000.[ltrif]
By order of the Board of Governors of the Federal Reserve
System.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-5561 Filed 3-23-09; 8:45 am]
BILLING CODE 6210-01-P