Back to School! S.2155 Amendments to Private Student Loans
By: Reginald Watson, Regulatory Compliance Counsel, NAFCU
Greetings Compliance Friends! School is back in full swing up here in the nation’s capital, and unfortunately so is morning rush hour.
While the NAFCU compliance team can’t do much to help with your morning commute, we can offer some things to keep in mind when it comes to new private student loans.
The Economic Growth, Regulatory Relief, and Consumer Protection Act, (S.2155) was signed into law in May 22, 2018 and brought several amendments to the Truth in Lending Act (TILA), including some new protections for members and cosigners with private student loans. Section 601 of S.2155 added provisions to TILA which will prohibit the credit union’s ability to declare a default or accelerate the debt of a member’s private student loan in the event of a member’s death or bankruptcy. If a member dies with a remaining private student loan balance, the new provision also requires the credit union to release any cosigners from the obligation. Here’s a brief excerpt of the relevant language:
“(g) ADDITIONAL PROTECTIONS RELATING TO BORROWER OR COSIGNER OF A PRIVATE EDUCATION LOAN.—
(1) PROHIBITION ON AUTOMATIC DEFAULT IN CASE OF DEATH OR BANKRUPTCY OF NON-STUDENT OBLIGOR.—With respect to a private education loan involving a student obligor and 1 or more cosigners, the creditor shall not declare a default or accelerate the debt against the student obligor on the sole basis of a bankruptcy or death of a cosigner.
(2) COSIGNER RELEASE IN CASE OF DEATH OF BORROWER.—
(A) RELEASE OF COSIGNER.—The holder of a private education loan, when notified of the death of a student obligor, shall release within a reasonable timeframe any cosigner from the obligations of the cosigner under the private education loan.
(B) NOTIFICATION OF RELEASE.—A holder or servicer of a private education loan, as applicable, shall within a reasonable time-frame notify any cosigners for the private education loan if a cosigner is released from the obligations of the cosigner for the private education loan under this paragraph.
(C) DESIGNATION OF INDIVIDUAL TO ACT ON BEHALF OF THE BORROWER.—Any lender that extends a private education loan shall provide the student obligor an option to designate an individual to have the legal authority to act on behalf of the student obligor with respect to the private education loan in the event of the death of the student obligor.”
While the aforementioned amendment seems fairly straight-forward, the final paragraph regarding a “designated individual” has caused confusion for some credit unions. Some have asked if this means the designated individual is obligated to repay the debt if the member-borrower dies. Others have asked what purpose this would serve in light of state probate law that may lead to an executor handling the borrower’s estate. Other questions involve how to comply since there is no implementing regulation or model form at this time. To help clear the confusion, NAFCU's legislative affairs team raised this issue in recent conversations with Congress and we were informed that the idea was to simply allow an individual to assign a "designee" to specifically handle their student loan payments separate from the executor of the estate. It seems that Congress intended to provide this option in case a member wanted to separate responsibilities for handling the disposition of debt in their will. For instance, in the case of the estate going to the spouse, someone could designate a different person or family member to take on the responsibility of handling the decedent’s debt.
The protections from section 601 will apply to new private student loans made more than 180 days after enactment (after November 18, 2018, for those non-mathematicians out there). Section 602 of S.2155 also encourages credit unions to create loan rehabilitation programs that delay or exclude the reporting of private student loan defaults to consumer reporting agencies. The loan rehabilitation process is required to specify a number of consecutive on-time payments that demonstrate “a renewed ability and willingness to repay the loan.” If your credit union offers private student loans, these provisions are worth reviewing and may require consulting with counsel.
