Presentation on theme: "Truth in Lending Act (TILA) Requirements for Schools Thursday, February 18 th,2010 Presented by: David Stocker, General Counsel."— Presentation transcript:
Truth in Lending Act (TILA) Requirements for Schools Thursday, February 18 th,2010 Presented by: David Stocker, General Counsel
T he Higher Education Opportunity Act passed August, 2008 included new requirements for creditors who make education loans, including numerous disclosures involved in the credit transaction. These requirements must be implemented by February 14, 2009 (and they are not a sweetheart deal). The FTSC has information to assist in meeting these requirements, including a link to the Federal Register and model disclosure forms, at: http://www.federalreserve.gov/newsevents/press/bcreg/200907 30a.htm
It is important to know up front that the Truth In Lending Law (TILA) and the new education creditor requirements are geared toward the more traditional creditor transactions; not student aid by schools. As a result, some of the required actions are not a good fit for the way schools process aid. In addition, the model forms for the required disclosures by education creditors, do not match up well when the schools are administering the credit transactions. Schools have always made education loans and granted credit to students. However, they were exempt from TILA when making Federal Loans, and had minimum requirements when making private loans. Typically, they made some disclosures about the credit transaction only in the initial, upfront process.
Under the new rules, there are required disclosures for the loan application process which include alternative funding, interest rates, total cost of the credit and referral to the Dept. of Ed. web site, disclosures on the loan approval (which is valid for 30 days only) or denial which include transaction specific information on the maximum cost of the loan and monthly payment amount, disclosure before disbursement which update the terms and cost of the credit and a 3 day right of recession notice. Also part of the disclosure/disbursement process, is the required self certification by the student. As indicated above, these various disclosures are not necessarily in synch with the school processes. For example, not all schools have a credit application form or issue a formal loan approval or denial.
There are related issues to be addressed, such as the manner in which the school will adjust these disclosures when the students aid package and need changes; or how to manage the 3 day rescission rule or the 30 day approval period time lines. Typically, the aid will be utilized when approved or available. The new rules cover education institutions which regularly extend credit which is payable in 4 or more payments and used in whole or in part for education expenses at a covered institution. Some loans are exempt. For example, any loan which is repaid in no more than 90 days, a payment plan which is to be completed in less than I year even if there are more than 4 payments.
There are many other rules in the new law and definitions which will impact schools credit programs. For example, there are different rules for open ended and closed end credit. Another question is to what extent do these credit activities now trigger state licenses as lenders? What are the interactions with preferred lender lists when the school is a lender? It is important for the schools to seek good advice because the new law carries penalties for failure to comply.
Rules apply to creditors making private education loans. Schools that extended credit to students more than 25 times in preceding calendar year are creditors. Private education loans defined as loans extended to consumers expressly in whole or in part for post secondary educational expenses. Postsecondary educational expenses are expenses listed as part of cost of attendance at covered educational institutions. Rules Apply to direct-to-consumer private education loans.
Schools that qualify as creditors generally must comply with final rules when extending credit to students or graduates for postsecondary educational expenses. Examples of credit extensions by schools: Retail Installment Contracts Institutional Loans Payment Plans
Two exceptions based on comments received. Emergency Loans Loans provided for a short term while student waits for other funds to be disbursed. Must have a term less than 90 days. Exception applies even if interest is charged.
No Interest Short Term Payment Plans Billing plans with no interest. Term of one year or less. Rules do not apply to Open End Credit Can schools develop line of credit type programs for educational expenses that qualify as open end credit? Disclosure requirements for open end credit.
Model forms not adapt well for schools extending credit. Most schools charge fixed interest rate or no interest. Credit extensions by schools do not typically involve disbursement of money. Schools typically do not have students fill out application. Amount of credit extended by schools to students frequently changes after the fact re-disclosure issues. If an item included in Final Disclosure becomes inaccurate because of an event that occurs after delivery of Final Disclosure, the inaccuracy is not a violation of Regulation Z.
30 day period for consumer to approve credit offer vs. school policies that student has to have arrangements to pay before starting classes. Self-certification still required where school is creditor. School can pre-fill self certification form. When does school give student self certification form?
Is Application Disclosure required if school does not require student borrower to fill out application form? How do schools deliver Application/Solicitation Disclosure if no written application for credit extension? Exemption if application taken verbally and approval or rejection within 3 days.
Timing/Measuring 3-day period (mail vs. electronic). Interplay with preferred lender rules; is school that extends credit to its students a preferred lender. Where students borrow each semester, does student have to sign new prom notes or installment contract for each credit extension? Can school develop master prom note or installment contract?
Consider getting written acknowledgement from borrower that they did not exercise cancellation right at end of 3-day period. Consider electronic disclosures – Can deliver approval disclosure electronically if you have E-sign consent Can require cancellation via electronic means if final disclosure provided electronically based on E-sign consent. Consider specifying that student accepts credit offer when he or she signs prom note or installment contract – build that into your note or installment contract. Pay attention to state law compliance issues.
Civil Liability HEOA amends TILA to provide private right of action for some but not all of new disclosure requirements. No civil liability for failure to comply with self-certification requirement. Liability for failure to provide certain approval and final disclosures.
Safe harbor for reliance on model forms. What revisions are permissible to retain safe harbor? Inapplicable disclosures. Treatment of model forms vs. sample forms.
This information is being presented as an informational service only. It is not intended to be legal advice and you should consult with your counsel for specific legal guidance.
David Stocker General Counsel (800) 394-4228 ext. 392 DStocker@accountcontrol.com For more information please contact: