1. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Consumer Credit Law Private Loans vs. FFELP Dino Tsibouris dino@tsibouris.com www.tsibouris.com

2. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Licensing FFELP – must be an eligible lender National banks and thrifts don’t need a license from the state Non-bank lenders and purchasers of loans may need a license to make or enforce a loan

3. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Licensing A common test: Are you in the “business of lending?” –NJ includes companies that purchase loans from others –OH includes the original lender only –MN excludes loans under other state law

4. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Licensing Physical location concerns Limits on assignment Specific rates of interest and permissible fees

5. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Key Differences FFELP Loans: Agreement wording, format and pricing prescribed by a unique federal program Alternative Loans: Agreement wording, format and pricing regulated by differing state laws and federal consumer protection statutes

6. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Interest Rate FFELP Loans: Interest rate set by federal law Lender can charge same rate in any state

7. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Charges FFELP Loans: Origination fee permitted Guaranty/Insurance fees permitted Late charges of permitted Attorney fees permitted

8. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Interest Rates Alternative Loans: Interest rate capped by state law Interest rate calculation regulated in some states Federally chartered institutions may charge uniform interest rates to all customers

9. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Charges Alternative Loans Origination fees may be prohibited Guaranty fees may be prohibited Attorneys fees permitted in some states Beware multistate loan agreements - some impose civil liability for simply including them in the note

10. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing State licensed lender laws establish permitted rates and fees –Interest rates –Late fees –Loan origination fees of 1-2% –Prepayment fees –Refund of unearned charges

11. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing National Bank Act (12 USC 85) A national bank located in a state may charge interest at the maximum rate permitted to any state-chartered or licensed lending institution by the law of that state

12. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing National Bank Act (12 USC 85) “Interest" includes any payment compensating a creditor for: –An extension of credit –Making available of a line of credit –Any default or breach by a borrower

13. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing National Bank Act 12 USC 85 “Interest" includes, among other things: –Numerical periodic rates –Late fees –Creditor-imposed NSF fees

14. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing National Bank Act 12 USC 85 “Interest" does not ordinarily include: –Premiums/commissions for insurance guaranteeing repayment of any extension of credit –Document preparation –Fees incurred to obtain credit reports

15. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing – Tied to State Law Ohio Revised Code 1109.20 –Interest/finance charges not exceeding APR of twenty-five per cent –Also may charge, as interest, other fees and charges that are agreed upon by the bank and the borrower

16. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing – Tied to State Law RC 1109.20 “Interest” –Charges for late payments –NSF fees –Application, processing, origination fees –Guarantee fees –Prepayment fees

17. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing – Tied to State Law RC 1109.20 “Interest” Any fees and charges shall not be included in the computation of the annual percentage rate or the rates of interest or finance charges for purposes of applying the twenty-five per cent limitation

18. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Pricing – Tied to State Law 12 CFR 7.4001 The term “interest” as used in 12 U.S.C. 85… includes, among other things,… RC 1109.20 A bank may charge… as interest, other fees and charges that are agreed upon … including, but not limited to,… Many possibilities; uncertain outcomes

19. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Important Considerations Make sure rates and fees are properly structured –Within legal limits –Business case for each fee Challenges to the relationship between lenders and those who buy their loans

20. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Documents Initial Disclosure FFELP Loans: Initial Disclosures Prescribed by 34 CFR 682

21. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Documents Alternative Loans: Initial disclosures prescribed by the Truth- in-Lending Act Civil penalties for noncompliance State law disclosures governing extension of credit

22. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Alternative Loan Disclosures...More State Law Disclosures Credit grantor disclosures Cosigner notices Notices near the signature line Font size and proximity requirements

23. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Alternative Loan Disclosures... And Even More State Law Disclosures Annual percentage rate disclosure requirements Administrative interpretations Civil penalties for noncompliance

24. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Collection FFELP Loans Governed by federal regulations which preempt state debt collection laws Lender must send at least one delinquency letter requesting repayment Due diligence required by statute

25. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Loan Collection Alternative Loans Governed by federal and state debt collection law If lender or servicer is a “debt collector” communication must notify that purpose is to collect a debt Due diligence limited by law

26. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Deferment FFELP: Borrower entitled to defer payments in certain instances, as long as the borrower is not in default Alternative Loans: Lender may (or may not) permit borrower to defer payments

27. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Bankruptcy Discharge FFELP: Bankruptcy Code does not discharge a student loan unless the borrower can demonstrate the debt would create an undue hardship upon the debtor

28. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Bankruptcy Discharge Alternative Loans: –Pilcher Case: An alternative loan may also be nondischargeable if the promotion, marketing and servicing of the loan is provided by a non-profit entity who’s participation is “instrumental” to the availability of the loans.

29. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Bankruptcy Discharge –Hammarstrom Case: A loan is nondischargeable if non-profit entity plays a “meaningful part” in providing funding for the loans.

30. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Contract Management FFELP servicer vendor audit guidelines Bank regulatory vendor audit guidelines

31. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Contract Management Compliance with law and regulations Limits on use of data Audit rights Notice if breached Indemnity for claims and losses No limit on liability

32. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Privacy – GLB Permitted Sharing Third party with notice and opt-out Permitted disclosure without consent –Service providers (notice, contract) –Joint marketing agreements (contract) Express consent from consumer

33. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Privacy – Consent GLB: “Clear and Conspicuous” –Reasonably understandable and designed to call attention to the nature and significance of the information contained –May combine with other clear and conspicuous notices FCRA: “Clear and Conspicuous” –Small type on back of mailer in a paragraph of type about other matters inadequate (Use different type, color - Cole v. U.S. Capital)

34. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Privacy – Scope of Consent I authorize the release of information pertinent to my loans: (i) by the school, the lender, and the guarantor, or their agents, to the references on the applicable loans and to members of my immediate family unless I submit written directions otherwise; and, (ii) by and among my schools, lenders, guarantors, the Department of Education, and their agents. Source: FFELP MPN

35. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Privacy – Scope of Consent Agent: A person authorized to act for and under the direction of another person when dealing with third parties. Can enter into binding agreements on the principal's behalf and may even create liability for the principal if the agent causes harm while carrying out his or her duties. Source: www.nolo.com

36. 2007 NCHELP DEBT MANAGEMENT CONFERENCE SUMMARY FFELP and Alternative Loans serve similar purposes FFELP and Alternative Loans may be structured similarly Governed by very different laws DEVELOP A FEDERAL AND STATE CONSUMER COMPLIANCE PROGRAM

37. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Questions????

38. 2007 NCHELP DEBT MANAGEMENT CONFERENCE Thank You!! Please be sure to complete your conference evaluation forms after the conference!