In the May issue of Basis Points, we reported on the Federal Reserve Board’s proposed rules on private student loan disclosures. The Board has now issued the final rules in largely the form proposed, which means that lenders making private student loans will have some work to do to comply with the new requirements. To recap, the student loan rules implement the Higher Education Opportunity Act (“HEOA”) enacted in 2008. The HEOA amended the Truth in Lending Act to give new substantive rights to student borrowers and to require new disclosures at application or solicitation (if no application will be required), at loan approval and at consummation of a private student loan. The final rules include the substance of those disclosures, model forms for the new disclosures, and commentary to help lenders comply with the new requirements.
The new transaction disclosures for private student loans will only barely resemble the closed-end credit disclosures that lenders use for other types of credit. Foremost among the differences for those experienced in preparing and checking closed-end disclosures is the requirement to make the periodic interest rate that applies to the unpaid balance of the loan more prominent than the APR. Although the APR is still a required disclosure, the Board’s consumer research conducted in the development of the rules and model disclosures revealed that most consumers do not understand the APR and find the interest rate to be the more meaningful disclosure. That failure to understand the APR could cause inaccurate comparisons of loan terms, so the Board requires the more prominent disclosure of the interest rate, which is the term consumers appear to understand more completely. There is also an expanded scope of required segregated disclosures that will now include itemized fees and costs, and can include the Itemization of Amount Financed at the creditor’s option. The disclosure rules and model forms warrant close review by anyone intending to make private student loans after the effective date of the rules, which is on or just before February 14, 2010.
The Board clarified some issues in the final rules and addressed some potential areas of confusion for lenders to make compliance with the new rules easier. For example, the Board made it clear that a bar study loan incurred after graduation from law school, and other similar loans taken after graduation can be considered “private student loans” subject to the new rules at the creditor’s option, and that the creditor will not be required to make certain disclosures that are not applicable to such loans. In one departure from the proposed rule, the final rule requires student lenders to provide the final disclosures after the consumer accepts the loan, as opposed to “at consummation.” The reason for the change, according to the Supplementary Information, is that under many student loan programs the student is not contractually obligated on the loan until the lender disburses funds. Under the new rules, the lender may not disburse funds until after the expiration of a three-day right to rescind the loan, so lenders whose loan agreements do not obligate the student to repay advances until disbursement would, if not for this change, have been unable to comply with the rules. To avoid any uncertainty as to when the lender should provide the final disclosures, the Board chose to time delivery based on the consumer’s acceptance of the loan as opposed to consummation.
Under the new rules, lenders may only advertise interest rates they actually offer. The commentary to the rules offers guidance about what constitutes a rate “actually offer[ed],” and the Board clarified that guidance in the final rule. Specifically, the Board explained that advertising disclosures on the lender’s website must reflect rates the lender has actually offered that were in effect within 30 days before the public is able to view that rate information – not the rate in effect as of the time the consumer viewed the information, which was apparently a possible interpretation of the rule as originally proposed. The new rules also require the lender to disclose the potential limitations on bankruptcy discharge for student loans not only in the approval and final disclosures, but also in the application and solicitation disclosures, for the sake of conformity and consistency. There were other clarifications in the final rules and some other minor deviations from the proposed rules, but generally speaking the Board adopted the proposed rules largely as proposed.
On the whole, lenders who make private student loans have substantial work ahead of them to comply with the new disclosures and substantive requirements. The HEOA went into effect a year ago. Six months from now, students will see the results in their private student loan documentation.
Chuck Dodge is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Chuck at (410) 865-5427 or by email at cdodge@hudco.com.