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Truth in Lending (Regulation Z); Private Education Loans

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Bureau of Consumer Financial Protection.

Advisory opinion.

The Bureau of Consumer Financial Protection (Bureau) is issuing this advisory opinion to make clear that loan merchandise that refinance or consolidate a shopper’s pre-existing Federal, or Federal and personal, training loans meet the definition of “private education loan” within the Truth in Lending Act and Regulation Z and are topic to the disclosure and shopper safety necessities in subpart F of Regulation Z. This advisory opinion is an interpretive rule beneath the Administrative Procedure Act.

This Advisory Opinion is efficient on December 10, 2020.

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Shelley Thompson, Counsel, Office of Regulations, at 202-435-7700 or​. If you require this doc in another digital format, please contact [email protected]

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The Bureau is issuing this advisory opinion via the procedures for its Advisory Opinions Policy.[]
Refer to these procedures for extra data.

I. Advisory Opinion

A. Background

1. Growth of the Postsecondary Education Loan Market

The postsecondary training loan market has swelled prior to now decade and training debt has develop into an more and more massive share of complete family debt, from 5 p.c in 2008 to 11 p.c in 2020.[]
Education loans issued or assured by the Federal authorities, via title IV of the Higher Education Act of 1965,[]
that are administered by the U.S. Department of Education,[]
presently comprise over 92 p.c of the training loan market.[]
Between 2006 and 2012, the share of non-Federal training loans issued by personal lenders ranged from 9 p.c to 13 p.c, and since then, the share of complete excellent training loans held by personal lenders has been about 8 p.c.[]

Prior to 2010, training loans have been primarily issued via the Federal Family Education Loan Program (FFELP).[]
Under the FFELP, banks and different personal collectors issued training loans that have been backed and assured by the Federal authorities.[]
The Health Care and Education Reconciliation Act of 2010 prohibited the origination of latest FFELP loans after June 30, 2010, at which level Direct Loans issued beneath the William D. Ford Direct Loan Program grew to become the predominant kind of Federal training loan.[]
Direct Loans are issued and owned by the U.S. Department of Education.[]
FFELP loans, Direct Loans, and different title IV loans are administered by the Department of Education and embody borrower protections similar to postponement choices, income-driven reimbursement choices, in-school deferrals, no prepayment penalties, and loan forgiveness.[]

Most FFELP and Direct loans have fastened rates of interest which might be decided by Federal statute.[]
Between 2006 and Start Printed Page 794012013, these statutes set fastened rates of interest for many loans issued to undergraduate students at 6.8 p.c; Federal PLUS loan []
charges have been set at 8.5 p.c for FFELP loans and seven.9 p.c for Direct Loans at 7.9 p.c.[]
In distinction, by late 2011, personal training collectors have been providing rates of interest of two.98 p.c to three.55 p.c for debtors with prime or tremendous prime credit scores.[]
This rate of interest differential created incentives for prime and tremendous prime debtors with excessive fixed-rate Federal training loans to consolidate or refinance their loans right into a decrease charge training loan product.

2. Consolidation of Education Loans

The marketplace for consolidation or refinance of Federal training loans by personal lenders largely didn’t exist previous to 2006, as a result of there was little to no demand for such a personal product. Between 2001 and 2006, almost all consolidations of Federal training loans have been via the Federal authorities’s loan consolidation program.[]
The rate of interest on Federal consolidation loans is mostly the weighted common of rates of interest on the loans consolidated.[]
Because most Federal loans issued previous to July 1, 2006 charged variable charges, Federal consolidation loans allowed debtors to make the most of a downturn in rates of interest to lock in fastened rates of interest as little as 2.875 p.c.[]
Federal consolidation loans additionally typically provide the identical deferment, forbearance, and discharge advantages accessible on the underlying Federal loans and a variety of reimbursement choices, together with income-driven reimbursement.[]
The few personal collectors who provided training consolidation and refinance loans throughout this era usually provided variable-rate loans and didn’t provide the big selection of Federal loan reimbursement, deferment, forbearance, and discharge choices.[]
In addition, training consolidation and refinance loans provided by personal collectors usually didn’t enable debtors to consolidate or refinance any Federal loans.[]
However, in 2006, legislative adjustments took impact which modified rates of interest for Federal loans from variable charges to fastened charges, initially starting from 6.8 p.c to eight.5 p.c, relying on the kind of loan and whether or not the loan was issued beneath the Direct or FFELP program.[]
Thus, for loans originated after June 2006, a borrower now not had the power to make the most of a drop in market rates of interest to lock in a low rate of interest via a Federal loan consolidation.[]

READ:   (PDF) The adverse results of student loans on household web price is jeopardizing the long-term monetary well being of US households

This change from variable to fastened charges on Federal loans led to a gap available in the market for personal lenders to supply a product that might enable debtors with excessive fastened rate of interest Federal loans to consolidate or refinance these loans and acquire a decrease rate of interest. In 2012, a number of personal collectors started providing personal loan consolidation and refinance merchandise that allowed debtors who had graduated and have been in reimbursement to consolidate or refinance their Federal training loans to cut back their rate of interest.[]

These merchandise are marketed to shoppers with each excessive rate of interest Federal training loans (which have been typically issued or prolonged starting in 2006) and prime Start Printed Page 79402or tremendous prime []
credit scores.[]
The marketplace for personal consolidation and refinancing of Federal training loans has continued to increase lately.[]
In 2019, annual originations of personal consolidation and refinance training loan merchandise reached an estimated $16 billion,[]
which was bigger than that yr’s originations for personal training loans by presently enrolled students.[]

As the marketplace for personal consolidations and refinancings of Federal student loans has grown, some trade contributors have expressed uncertainty concerning the software of Regulation Z, which implements the Truth in Lending Act (TILA), to those loan merchandise. Questions have arisen relating to whether or not consolidation and refinance merchandise that fulfill and change a shopper’s present Federal loans (or present Federal and personal loans) are thought of “private education loans” such that the disclosures and different protections beneath subpart F of Regulation Z []
are required. Specifically, collectors have to know whether or not they’re required to offer disclosures beneath TILA and Regulation Z, and in that case, which disclosures they’re required to offer. If the loan will not be thought of a personal training loan and is over $50,000, then the loan will not be lined beneath TILA and Regulation Z, and a creditor will not be required to offer any disclosures to the patron.[]
For loans beneath $50,000, whether or not a loan is a “private education loan” determines whether or not collectors should adjust to both the personal training loan disclosure necessities or installment loan disclosure necessities, as a result of it’s inconceivable to adjust to each units of necessities concurrently.[]

B. Coverage

This advisory opinion typically covers personal loan consolidation merchandise that fulfill and change a number of Federal, or Federal and personal, loans, in addition to personal loan refinance merchandise that fulfill and change a single Federal or personal loan. This advisory opinion doesn’t cowl loans which might be made, insured, or assured by the Federal authorities beneath title IV of the Higher Education Act of 1965. For functions of this advisory opinion, the phrases “private creditor” or “private education creditor” broadly consult with collectors (apart from the U.S. Department of Education) who provide refinance or consolidation merchandise for training loans, no matter whether or not the collectors themselves are personal individuals or establishments and whether or not they provide merchandise apart from training loans.

C. Legal Analysis

The Higher Education Opportunity Act of 2008 (HEOA) amended TILA by including new necessities that apply to collectors making “private education loans.” []
For instance, HEOA’s amendments to TILA require collectors making “private education loans” to offer particular disclosures; []
prohibits collectors from co-branding with faculties; []
requires collectors to offer a 30-day rumination interval; []
and mandates that debtors have a proper to cancel inside three days of fund disbursement.[]

HEOA amended TILA such that personal training loans over a sure threshold—$25,000 on the time of HEOA was handed, and $50,000 after the passage of the Dodd-Frank Act []
—have been now not excluded from protection.[]
In related half, HOEA outlined a “private education loan” beneath TILA as a loan that’s (1) not “made, insured, or guaranteed under title IV of the Higher Education Act of 1965,” and (2) “issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational institution that the subject student attends or directly to the borrower from the private educational lender.” []
On August 14, 2009, the Board issued ultimate amendments to TILA’s implementing regulation, Regulation Z. The Board additionally issued commentary to these amendments, together with subpart F, which interpreted the time period “private education loan” to incorporate “loans extended to consolidate a consumer’s pre-existing private education loans.” []

READ:   Annual Notice of Interest Rates for Variable-Rate Federal Student Loans Made Under the Federal Family Education Loan Program Prior to July 1, 2010

Questions have arisen relating to whether or not the refinance and consolidation loans lined by this advisory opinion are “private education loans” beneath the 2 situations set forth in HEOA. The first situation is met as a result of these loans are originated by personal training collectors and aren’t originated or insured by the Federal authorities or in any other case beneath title IV of the Higher Education Act of 1965. Thus, this advisory opinion focuses on whether or not such loans meet the second situation—that’s, are they issued or prolonged by collectors “expressly for postsecondary educational Start Printed Page 79403expenses” ? []

TILA is silent on the query, and the courts haven’t thought of it. The commentary to Regulation Z states that the phrase “extended expressly [ ] for postsecondary educational expenses” contains “loans extended to consolidate a consumer’s pre-existing private education loans,” []

nevertheless it doesn’t tackle loans that consolidate present Federal training loans, nor does it consult with loans that refinance a single present loan, whether or not personal or Federal.

With respect to consolidation loans, the Bureau believes that TILA and Regulation Z are ambiguous as as to if a loan that consolidates present Federal training loans is issued or prolonged “expressly for postsecondary educational expenses to a borrower.” In different phrases, it’s ambiguous whether or not the academic goal of the underlying loans is transferred to the consolidation loan, or if as an alternative the specific goal of the consolidation loan is to handle present debt, profit from extra favorable rates of interest, or another goal. The commentary to Regulation Z resolves this ambiguity just for loans consolidating present personal training loans.

The Bureau believes that the most effective studying of TILA and Regulation Z is {that a} loan that consolidates Federal loans or a loan that refinances a Federal loan incurred expressly for postsecondary instructional bills is, itself, “expressly for postsecondary educational expenses.” Borrowers apply for these loans explicitly to consolidate loans that have been originated expressly for postsecondary instructional bills, and a creditor points them pursuant to an express understanding that they are going to be used to fulfill debt incurred expressly for postsecondary instructional bills. Thus, these loans, from the attitude of each the borrower and the creditor, are “expressly for” postsecondary training bills.[]
Additionally, Congress included the time period “borrower” (and the Board included the time period “consumer”) in its definition of “private education loan,” as an alternative of referring solely to a “student,” as in different sections of TILA.[]
This alternative means that the statute can finest be carried out by construing “private education loan” to incorporate loans originated to shoppers apart from these presently in class, similar to former students.[]

This studying additionally finest implements one of many normal functions of TILA, which Congress amended in HEOA, “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” []
Prior to HEOA, debtors in search of credit referring to postsecondary instructional bills would obtain complete disclosures in the event that they have been in search of Federal loans originated pursuant to title IV of the Higher Education Act of 1965,[]
however they’d not obtain even abnormal TILA disclosures for training loans over $25,000.[]
As a consequence, pre-HEOA debtors have been much less in a position to examine their choices. But with the TILA amendments in HEOA, Congress made extra sturdy comparisons doable for all “private education loans,” no matter their dimension.

Additionally, this studying is most according to the assertion within the Regulation Z commentary that “loans extended to consolidate a consumer’s pre-existing private education loans” are themselves personal training loans originated “expressly [ ] for postsecondary educational purposes.” Nothing within the textual content of TILA or Regulation Z helps concluding that personal training loans retain their goal as “expressly for postsecondary educational expenses” when they’re consolidated however that Federal training loans originated for a similar bills don’t.[]

The Bureau additionally doesn’t consider that the Comment’s particular point out of “pre-existing private education loans” precludes the interpretation that consolidated pre-existing Federal loans are lined. The Board issued the commentary to Regulation Z, which interpreted the time period “private education loan,” in 2009.[]
As mentioned within the Background part, whereas there was a small marketplace for consolidating personal training loans in 2009, the personal marketplace for consolidation of Federal loans didn’t emerge till 2012. The Board didn’t obtain any feedback on its proposed rule that indicated the existence of such a market and no commenters sought readability on the applying of the proposed rule to Federal training loan consolidations.[]

READ:   Continued Student Loan Payment Relief During the COVID-19 Pandemic

Additionally, the related Comment to Regulation Z signifies that it’s meant to be illustrative slightly than exhaustive as a result of it states that “[t]he term includes” loans consolidating personal loans in addition to loans prolonged for bills incurred whereas the student is enrolled.[]

The above evaluation addressing the consolidation of a number of Federal training loans additionally applies to loans that refinance a single pre-existing loan that was originated expressly for Start Printed Page 79404postsecondary training bills, no matter whether or not the pre-existing loan was a personal or Federal loan. While the commentary refers solely to consolidation of a number of pre-existing loans, the commentary will not be meant to be exhaustive,[]
and the Bureau doesn’t consider there may be any principled purpose to conclude that the postsecondary training goal of a number of loans might switch to a brand new loan, whereas the postsecondary goal of a single loan transferred to a brand new loan might not.[]

Accordingly, the Bureau interprets the commentary’s reference to loans that “consolidate a consumer’s pre-existing private education loans” as merely referencing the kind of consolidation loan that existed on the time the commentary was issued by the Board. Thus, for the explanations mentioned on this advisory opinion, the Bureau interprets the phrase “expressly for postsecondary educational expenses” to incorporate loans that both consolidate Federal training loans that have been themselves originated expressly for postsecondary training bills or to refinance a single personal or Federal training loan that was originated for such goal.

As a consequence, these consolidation or refinance loans are lined beneath the time period “private education loan” in TILA and Regulation Z and are due to this fact topic to TILA and Regulation Z’s necessities in subpart F (together with Regulation Z’s disclosures, prohibition on co-branding, 30-day rumination interval, and a proper to cancel).

II. Regulatory Matters

This advisory opinion is an interpretive rule issued beneath the Bureau’s authority to interpret TILA and Regulation Z, together with beneath part 1022(b)(1) of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act,[]
which authorizes steerage as could also be vital or acceptable to allow the Bureau to manage and perform the needs and targets of Federal shopper monetary legal guidelines.[]

By operation of TILA part 130(f), no provision of TILA sections 130, 108(b), 108(c), 108(e), or 112 imposing any legal responsibility applies to any act executed or omitted in good religion in conformity with this interpretive rule, however that after such act or omission has occurred, the interpretive rule is amended, rescinded, or decided by judicial or different authority to be invalid for any purpose.[]

As an interpretive rule, this advisory opinion is exempt from the notice-and-comment rulemaking necessities of the Administrative Procedure Act.[]
Because no discover of proposed rulemaking is required, the Regulatory Flexibility Act doesn’t require an preliminary or ultimate regulatory flexibility evaluation.[]
The Bureau has additionally decided that this advisory opinion doesn’t impose any new or revise any present recordkeeping, reporting, or disclosure necessities on lined entities or members of the general public that might be collections of data requiring approval by the Office of Management and Budget beneath the Paperwork Reduction Act.[]

Pursuant to the Congressional Review Act,[]
the Bureau will submit a report containing this interpretive rule and different required data to the United States Senate, the United States House of Representatives, and the Comptroller General of the United States previous to the rule’s printed efficient date. The Office of Information and Regulatory Affairs has designated this interpretive rule as not a “major rule” as outlined by 5 U.S.C. 804(2).

III. Signing Authority

The Director of the Bureau, Kathleen L. Kraninger, having reviewed and accepted this doc, is delegating the authority to electronically signal this doc to Grace Feola, a Bureau Federal Register Liaison, for functions of publication within the Federal Register.

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Dated: November 30, 2020.

Grace Feola,

Federal Register Liaison, Bureau of Consumer Financial Protection.

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[FR Doc. 2020-26662 Filed 12-9-20; 8:45 am]