Yesterday, the Federal Reserve Board approved final rules on Regulation Z (Truth in Lending) that revise the disclosure requirements for private education loans. These final rules have yet to be published in the Federal Register, but the Reserve Board has released the text and model disclosures (see links below) that have been approved for publication. These final rules would become effective six months after publication in the Federal Register or Feb. 14, 2010, whichever is earlier.

On March 24, the Federal Reserve released proposed rules on the Truth in Lending Act (TILA) regulations that were being updated in accordance with changes from the Higher Education Opportunity Act (HEOA). Title X of the HEOA amends TILA by adding disclosure and timing requirements that apply to creditors - including institutions - making private education loans. The HEOA also amends TILA by adding limitations on certain practices by creditors, including limitations on co-branding. 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.

Four other higher education associations joined with NASFAA in submitting comments to the Federal Reserve on proposed TILA regulations in May. A quick read through the final rules shows that there are some positives and some negatives for NASFAA members. NASFAA has provided the following summary on some of the issues that will most affect institutions. A more thorough analysis will be conducted by NASFAA once the regulations have been published in the Federal Register.

• Definition of Private Education Lender: The Federal Reserve Board will use the existing definition of creditor to define a private education lender. The term creditor applies to an entity that extends consumer credit more than 25 times in a calendar year as requires more than four payment installments. In the final rules, the Reserve Board has taken the suggestion offered by NASFAA and several other organizations to exclude institutions that only make extensions of credit with a term of 90 days or less (emergency loans) from the definition of private education lender. Schools that offer interest free tuition billing plans where the term of the transaction is not greater than one year - even if the credit is payable in more than four installments - are also excluded from the definition of private education lender.

• Definition of Private Education Loan: The Federal Reserve Board has chosen to exclude from compliance with Subpart F (which deals with new private student loan disclosures) extensions of credit that are extended to students for expenses incurred after graduation from law, medical, dental, veterinary or other graduate school and related to relocation, study for a bar or other examination, participating in an internship or residency program, or similar purpose, according to the final rules explanatory text. Creditors that offer these types of loans would still be required to comply with general TILA disclosure requirements in Sections 226.17 and 226.18.

• Co-Branding: The Federal Reserve Board has taken the suggestion offered by NASFAA and several other organization to exclude co-branding requirements for schools offering their own institutional loans. In the final rules, the co-branding requirements also contain a safe harbor for creditors. 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.

  The HEOA specifically allows covered educational institutions to endorse the private education loans of creditors with which they have a "preferred lender arrangement." The Board will provide an exception to the co-branding prohibition for creditors that have preferred lender arrangements.

• Self-Certification Form: Contrary to suggestions from NASFAA and multiple other schools and associations, the Federal Reserve Board had declined to provide an exception from the self-certification requirement for private loans that are already certified by schools.

  "The HEOA requires creditors to obtain the self-certification form in all cases," according to the Board’s explanatory statement. "The Board believes that self-certification form is intended not only to ensure that the educational institution and creditor are aware of the cost of attendance at the educational institution and about the consumer’s other financial aid and need, but also to provide the consumer with this information. Thus, even where the school and the creditor share this information directly, the self-certification form seeks to ensure consumers are aware of their own educational expenses, the financial aid for which they qualify, and their remaining financial need."

  However, the final rules do permit creditors to provide the self-certification form directly to the consumer with the information the consumer requires in order to complete the form. So, it appears that a school could certify a loan directly to a lender and the lender could give the student the form with which to self-certify.

NASFAA will be conducting a more thorough analysis of these regulations in the coming days and weeks. NASFAA will publish the final rules in Today’s News once they have been officially released through the Federal Register.

Online Resources

Federal Register notice (2 MB PDF)

Consumer Research and Testing for Private Education Loans: Final Report of Findings (4.1 MB PDF)

Model forms and samples:

1. H-18 (63.3 KB PDF) Private Education Loan Application and Solicitation Model Form
2. H-19 (65.2 KB PDF) Private Education Loan Approval Model Form
3. H-20 (62 KB PDF) Private Education Loan Final Model Form
4. H-21 (184 KB PDF) Private Education Loan Application and Solicitation Sample
5. H-22 (80.3 KB PDF) Private Education Loan Approval Sample
6. H-23 (74.2 KB PDF) Provate Education Loan Final Sample

By Justin Draeger
Vice President of Public Policy, Advocacy, and Research

Posted 07/31/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.