Compliance Blog

Posted by Anthony Demangone

Why did the compliance officer cross the road?  Because Reg Z was not on the other side.

OK, that was a terrible joke.  But I think you understand the punchline, even if it makes you cry instead of laugh.

Regulation Z, specifically the open-end rule changes that we are swimming through, have captured our attention.  But do not overlook a recent final rule that amends to Regulation Z that addresses private student loans.

The final rule dropped on July 30th.  The effective date will be 180 days after the Federal Register publishes the final rule, which should be shortly.  So the effective date should be early in 2010.  Here's a link to the Fed's press release about the final rule, which includes a link to the actual document.

I mentioned this final rule last week, but after glancing through the 234 pages this afternoon, the final rule appears to be fairly tricky. 

Here's why.  If you ask credit unions whether they do student lending, many will think about the classic student loan - those formal, government guaranteed loans that you take out to pay for tuition and room and board.  The loans that I will personally be paying off until I'm 90 years old.   But this final rule covers "private student loans," a term that is defined to include a wide range of loans that you might not have considered.

Here's the definition:

(5) Private education loan means an extension of credit that:
(i) Is not made, insured, or guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) 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;
(iii) Does not include open-end credit, any loan that is secured by real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered educational institution is the creditor if:
    (A) the term of the extension of credit is 90 days or less; or
    (B) an interest rate will not be applied to the credit balance and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments.

So, if you make a closed-end personal loan, and the member indicates that it is being made for educational purposes, you are under the new reg's requirements.  Here's a snippet of the final rule:

2. Multiple-purpose loans.

    i. Definition. A private education loan may include an extension of credit not excluded under § 226.46(b)(5) that the consumer may use for multiple purposes including, but not limited to, postsecondary educational expenses. If the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses by indicating the loan’s purpose on an application, the loan is a private education loan.
    ii. Coverage. A creditor generally will not know before an application is received whether the consumer intends to use the loan for postsecondary educational expenses. For this reason, the creditor need not provide the disclosures required by § 226.47(a) on or with the application or solicitation for a loan that may be used for multiple purposes. See § 226.47(d)(1)(i). However, if the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses, the creditor must comply with §§ 226.47(b) and (c) and § 226.48. 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 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.

So, if the member notifies you that the purpose of the closed end loan is to help pay for postsecondary education, you apparently are under the reg's requirements.  And what are those?

On top of new disclosures, you're looking at the following requirements:

• Creditors must give the consumer 30 days after a private education loan application is approved to decide whether to accept the loan offered. During that time, the creditor may not change the rates or terms of the loan offered, except for rate changes based on changes in the index used for rate adjustments on the loan.
• The consumer has a right to cancel the loan for up to three business days after consummation. Creditors are prohibited from disbursing funds until the three day cancellation period has run.

Please keep in mind that I write this at 9 p.m. after a feverish read through this final regulation. Further clarifications may occur.  For now, it is enough to say this: if your credit union offers closed-end personal loans, and you allow the member to choose a purpose code on their application from a list that includes "educational expenses" or you allow the member to write in their purpose code, you very well could offer "private student loans." 

Stay tuned.