Throw-Back Thursday: Student Loans and Regulation Z
by Amy Kleinschmit
Chief Compliance Officer
8/8/2019

Back in 2010, credit unions were faced with the mandatory compliance deadline for new regulations issued by the Federal Reserve Board regarding private education loans (PEL) found under Regulation Z. The new regulations implemented “new consumer protections” aka lengthy disclosures, timing requirements, etc for private education loans. Some credit unions opted to embrace these new regulatory requirements and continue offering student loans even if it meant ordering new forms/disclosures while other credit unions looked at the regulatory cost and decided they would not offer the types of loans covered by this new regulation.

As we come to the end of another summer “back to school” is all around us. Just a friendly reminder of the Regulation Z requirements that might be triggered regarding clever back to school loan promotions and products. Back to school loans are great – just make sure that if your loan product triggers these additional regulatory requirements under Regulation Z, which implements the Truth In Lending Act, your credit union is doing these loans compliantly.

A “private education loan” and therefore a loan that triggers additional requirements under Regulation Z is defined as an extension of credit that:

  • Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq. );
  • 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.
  • Does not include open-end credit or any loan that is secured by real property or a dwelling.

“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.”

The commentary of the regulations expands on what a private education loan includes. For example, 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.

If the member “expressly indicates” that the proceeds of the loan will be used to pay for postsecondary educational expenses by indicating on the loan’s purpose on an application – the loan is a private education loan and subject to additional Regulation Z requirements. For purposes of the required disclosures, the creditor must calculate the disclosures based on the entire amount of the loan, even if only a part of the proceeds is intended for postsecondary educational expenses. The commentary provides, that the creditor may rely solely on a check-box, or a purpose line, on a loan application to determine whether or not the applicant intends to use loan proceeds for postsecondary educational expenses.

Remember – open-end loans and loans secured by real property are excluded. Also, as noted above, these additional requirements apply to post-secondary, so loans for elementary or secondary educational expenses are not covered.

If you are doing (or will be) student loans that fall into the definition of private education loan (PEL), as discussed above, you need to be doing them correctly. Conveniently, there is a model policy in your CU policy pro manual ready to get you started. Check out Model Policy 7240: Student Loans.

In addition to very specific ADDITIONAL disclosure requirements – this is Reg Z after all – there are also timing requirements. With regard to disclosures, the regulation includes model forms which can be found here. Check out H-18 to H-22. These are disclosures required at application/solicitation, then an “approval disclosure” and conclude with the “final disclosures” – additional disclosures, meaning in addition to other Regulation Z disclosures.

Consumers have the right to accept the terms of a private education loan (PEL) at any time within 30 calendar days following the date the consumer receives the “approval disclosure.”

In general, the rate and terms of a PEL that are required to be disclosed 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 if the consumer has not accepted the loan within that time. Exceptions – nothing prevents the creditor from: withdrawing an offer if the extension of credit would be prohibited by law; withdrawing an offer if the creditor has reason to believe the consumer committed fraud in connection with the loan application; changing the interest rate based on adjustments to the index used for a loan; changing the interest rate and terms if the change will unequivocally benefit the consumer; OR reducing the loan amount based upon a certification or other information received from the covered educational institution, or from the consumer, indicating that the student's cost of attendance has decreased or the consumer's other financial aid has increased. A creditor may make corresponding changes to the rate and other terms only to the extent that the consumer would have received the terms if the consumer had applied for the reduced loan amount. Also, nothing prevents the creditor, at its option, from changing the rate or terms of the loan to accommodate a specific request by the consumer.

The regulation provides that the consumer may cancel a PEL, without penalty, until midnight of the third business day following the date on which the consumer receives the final disclosures. No funds may be disbursed for a private education loan until the three-business day period has expired.

Finally, there is a requirement to obtain a self-certification form if the PEL is intended to be used for the postsecondary educational expenses of a student while the student is attending an institution of higher education. The creditor shall obtain from the consumer or the institution of higher education the form developed by the Secretary of Education under section 155 of the Higher Education Act of 1965, signed by the consumer, in written or electronic form, before consummating the private education loan.

CUAD members may contact Amy Kleinschmit with their compliance related questions.

 

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