The Higher Education Opportunity Act (“HEOA”), signed into law on August 14, 2008, regulates private education loans and the relationships between postsecondary education institutions and private education lenders. The Board of Governors of the Federal Reserve (the “Fed”) recently issued a Final Rule amending Regulation Z, which implements the disclosure requirements of HEOA and imposes a number of substantive restrictions on lenders. Compliance with these requirements becomes mandatory on February 14, 2010.
The Final Rule also sets forth a fairly regimented process for the application, approval and disbursement of private student loans. In connection with loan applications or solicitations, lenders must provide general information about loan rates, fees and terms, including an example of the total cost of the loan based on the highest interest rate permitted under the loan. The initial disclosures must also inform the student of the possibility of obtaining federal student aid.
Once the application has been submitted and the loan approved, the lender must provide a second set of disclosures, this time based on the specific terms of that consumer’s loan. Once the consumer has received the approval and disclosures, he or she will have 30 days during which to decide whether to accept the loan offer. Other than changes to the variable interest rate brought about by changes in the index to which it is tied, the lender may not change the terms of the loan during this period.
After the borrower accepts the loan and delivers to the lender a student self-certification, the lender must send out yet another set of disclosures, which should reflect the terms and conditions of the prior set of disclosures. After the loan has been accepted and all disclosures and certifications have been delivered, the student has another three business days during which he or she may terminate the loan transaction. Only after this three day period has expired may the lender finally disburse funds.
Because the disclosure requirements for private education loans differ from those for other loans, lenders that offer private education loans will have to implement specific procedures to ensure compliance.