On August 14, 2008, former President Bush signed into law the Higher Education Opportunity Act (HEOA), which completed reauthorization of the Higher Education Act of 1965, as amended (HEA). HEOA for the first time regulates private education loans, on which students increasingly depend. Recently published implementing regulations of the U.S. Department of Education (ED) and the Federal Reserve System’s Board of Governors (Federal Reserve Board) will require disclosures to borrowers by postsecondary education institutions and private education lenders and will regulate the relationships between postsecondary education institutions and private education lenders.
ED recently concluded negotiated rulemaking to implement various HEOA provisions and has published proposed rules reflecting consensus reached by two negotiated rulemaking teams. See 74 Fed. Reg. 36,556 (July 23, 2009); 74 Fed. Reg. 37,432 (July 28, 2009). The comment period for the proposed rules has closed, and final rules must be published by November 1, 2009 to become effective July 1, 2010. This Update addresses negotiated rulemaking and proposed rules related to HEOA provisions pertinent to private education loans. All provisions discussed in this Update apply to private education loans. Some provisions also apply to federal education loans. ED established five committees to negotiate regulations. See S. Gold, “Education Department Continues HEOA Rulemaking Process and Publishes HEOA Summary,” Education Investors Update (February 2009). Two negotiated rulemaking committees, Team I and Team II, addressed HEOA issues related to private education loans. Team I defined the terms “private education loan” and “lender.” Team II addressed college- and university-based issues, including disclosures by colleges and universities, “preferred lender arrangements,” and prohibited conduct. Both teams reached consensus on all issues. Selected provisions of the proposed rules developed by Teams I and II are summarized below.
In addition, as required by HEOA Title X, the Federal Reserve Board recently issued a final rule concerning new disclosure requirements by private education lenders as well as restrictions on cobranding. See 74 Fed. Reg. 41,194 (2009). The final rule becomes effective September 14, 2009, and compliance is mandatory by February 14, 2010.
One of the more contentious issues during the negotiated rulemaking process was the definition of a “private education loan.” ED representatives for Team I made clear during the rulemaking process that HEOA requires private education loan to be defined in accordance with the definition of private education loan in section 140 of the Truth in Lending Act (TILA). The proposed rules reflect this requirement:
Private Education Loan: As the term is defined in section 140 of the [TILA], a loan provided by a private educational lender that is not a title IV loan and that is issued expressly for postsecondary education expenses to a borrower, regardless of whether the loan is provided through the educational institution that the student attends or directly to the borrower from the private educational lender. A private education loan does not include an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction, or any other loan that is secured by real property or a dwelling.
74 Fed. Reg. 37,432, 37,470. The proposed rules define a “lender” for purposes of private education loans in accordance with the definition of a private education lender in section 140 of TILA. See id. TILA defines a “private educational lender” as “(A) a financial institution, as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) that solicits, makes, or extends private education loans; (B) a Federal credit union, as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752) that solicits, makes, or extends private education loans; and (C) any other person engaged in the business of soliciting, making, or extending private education loans.” HEOA Sec. 1011.
The definition of private education loan as negotiated by Team I thus covers institutional loans. Team II, however, resolved to exempt institutional loans from HEOA requirements pertaining to preferred lender arrangements. (See below.) In response to non-federal negotiators’ concerns that HEOA’s preferred lender provisions would prove unworkable as applied to institutional loans, the proposed rules provide that a “[preferred lender] arrangement or agreement does not exist if the private education loan provided or issued to a student attending a covered institution is made by the covered institution, and the private education loan is – (i) Funded by the covered institution’s own funds; (ii) Funded by donor-directed contributions; (iii) Made under title VII or title VIII of the Public Service Health Act; or (iv) Made under an institutional payment plan of the covered institution.” 74 Fed. Reg. 37,432, 37,470. In addition, as noted below, the Federal Reserve Board’s final rule exempts certain institutional loans from the definition of private education loan for purposes of TILA.
- Issues for colleges and universities
Disclosures by colleges and universities. HEOA and the proposed rules require institutions to make certain disclosures when they provide private education loan information to prospective borrowers. The institution must disclose the information that the private education lender is required to disclose in its applications or solicitations. (See below.) The institution must also advise the prospective borrower that he or she may qualify for federal student financial assistance, explain that the terms and conditions of federal student loans may be more favorable than those offered by private lenders, and present private education loan information in a way that distinguishes it from federal student aid information provided by the institution.
HEOA and the proposed rules also specify that if an institution participating in the Federal Direct Loan Program provides information regarding a private education loan to a prospective borrower, the institution must include certain information regarding Federal Direct Loans. The Direct Loan information required to be disclosed will be identified on a model disclosure form that ED will develop. It will include, at a minimum, the information that the Federal Reserve Board requires private educational lenders to provide in their applications and solicitations, adapted as necessary to apply to federal education loans. Institutions will be permitted to use a “comparable form designed by the institution” in lieu of ED’s model disclosure form in communicating required information.
Preferred lender arrangements. HEOA requires institutions that enter into preferred lender arrangements for private education loans (as well as for federal education loans) to comply with certain requirements. Each such institution must submit annual reports to ED to explain, among other matters, why the institution has a preferred lending arrangement. The institution must make certain disclosures – based on information provided annually by the lender to the institution – for each type of loan offered under a preferred lender arrangement. An institution that participates in federal student aid programs must make available a preferred lender list that includes specified information, such as a statement that students or their families are not required to borrow from a preferred lender, and must satisfy certain related requirements, such as prominently disclosing the institution’s method and criteria for selecting preferred lenders. The list must cover the institution’s preferred lender arrangements related to federal and private education loans.
The preamble to the proposed rules notes that negotiators discussed at length the meaning of the term preferred lender arrangement. The HEOA defines a preferred lender arrangement as an “agreement or arrangement” between a lender and a covered institution (a) under which the lender “provides or otherwise issues education loans to students attending such covered institution or the families of such students” and (b) that relates to such covered institution “recommending, promoting, or endorsing the education loan products of the lender.” HEOA Sec. 120. The proposed rules track this language. In the preamble, ED states that it declined to adopt a proposed definition that would have deemed a preferred lender arrangement to exist “only if there is a written or verbal agreement” between a lender and institution or if a “course of conduct” shows “intention by the parties to create” a preferred lender arrangement. 74 Fed. Reg. 37,432, 37,436.
The preamble also addresses the circumstances under which an institution is considered to have created a “preferred lender list.” It explains that a “neutral, comprehensive list of lenders that have provided loans to students at a covered institution is not a preferred lender list.” 74 Fed. Reg. 37,432, 37,439. It states that if an institution includes certain lenders and omits others, ED views the institution as “recommending, promoting, or endorsing the lenders on the list” and considers the institution to have established a preferred lender list. 74 Fed. Reg. 37,432, 37,437. The preamble notes that ED referred non-federal negotiators to its 2008 Dear Colleague letter (GEN-08-06) for guidance on what constitutes a preferred lender list.
With respect to the disclosures that institutions with preferred lenders must make as to each type of loan offered under a preferred lender arrangement, the proposed rules specify that the required disclosures must be provided annually. The preamble states that institutions may provide in their printed publications the URL of the website where disclosure information is posted, so long as such printed publications identify a point of contact at the institution where potential borrowers may obtain hard copies of disclosure information.
HEOA and the proposed rules require institutions to ensure that a private preferred lender’s name appears in all information and material pertaining to the lender’s private education loans. They also prohibit institutions from agreeing to a preferred private lender’s use of the institution’s name, emblem, or other symbol in marketing private education loans to the institution’s students. The preamble explains that if the institution’s name is “part of the name of a credit union,” the prohibition does not apply.
Prohibited Conduct. Under HEOA institutions that enter into preferred lender arrangements for private education loans (as well as federal education loans) must adopt a code of conduct. HEOA requires the institution to post the code “prominently on its Web site” and ensure that its officers, employees, and agents who have financial aid responsibilities are informed annually of the code’s provisions.
The proposed rules would implement HEOA code of conduct requirements by forbidding, with limited exceptions, gifts, consulting arrangements with lenders, and advisory board compensation other than reasonable expense reimbursement for financial aid office or other employees who have responsibility related to private (or federal) education loans. The proposed rules provide that expenses are “reasonable” if they “[m]eet the standards of and are paid in accordance with a State government reimbursement policy applicable to the entity” or, in the absence of a State policy that applies to the entity, “the applicable Federal cost principles for reimbursement.” 74 Fed. Reg. 37,432, 37,474-75.
The proposed rules also would ban “opportunity pool loans” that lenders offer in exchange for promises by the institution to provide the lender a specified number or volume of private (or federal) loans or a preferred lender arrangement for such loans. The preamble to the proposed rules notes that non-federal negotiators raised the question whether this provision would prohibit recourse loans, which are private education loans for which an institution agrees to guarantee repayment. The preamble explains that this provision would not prohibit recourse loans, so long as there is no quid pro quo regarding loan number, volume, or preferred lender arrangement.
- Issues for lenders (including colleges and universities making institutional loans)
Definition of “Private Education Loan.” The Federal Reserve Board’s final rule amending Regulation Z, the implementing regulation of TILA, excepts certain credit extensions provided by covered educational institutions from the definition of “private education loan” (see part I. Definitions above) and resulting TILA compliance requirements. Such exceptions include (1) billing plans that do not apply an interest rate to the credit balance and have a term of one year or less, irrespective of the number installment payments, (2) loans provided by a covered educational institution with a term of 90 days or less, and possibly (3) state “service requirement” programs. Those exemptions, however, do not apply to loans made by an institution-affiliated organization. Creditors may, but are not required to comply with the final rule for loans to cover expenses incurred after graduation from graduate or professional school and related to relocation, study for a bar or other examination, participation in an internship or residency program, or similar purposes.
Disclosures. The Federal Reserve Board’s final rule sets forth certain disclosures that creditors extending private education loans, including colleges and universities making institutional loans, must provide about loan terms and features on or with the loan application. These disclosures must include information about federal student loan programs that may offer less costly alternatives. Additional disclosures must be provided when the loan is approved and when the loan is consummated. Along with the final rule, the Federal Reserve Board has provided model disclosure forms that creditors may use to comply with the new disclosure requirements. A creditor that has a preferred lender arrangement with a college or university must provide the institution annually with certain information required to be disclosed on the model form.
Self-Certification. HEOA requires ED and the Federal Reserve Board to create a certification form, which borrowers will need to sign and submit to the lender before consummating a private education loan. Although ED and the Federal Reserve Board have not yet published a selfcertification form, the form will, for example, encourage the applicant to discuss federal, state and institutional financial aid options with financial aid personnel at the applicant’s institution and explain that private education loans could affect the applicant’s eligibility for free or low-cost financial aid.
Team II addressed the institution’s obligation to provide the self-certification form to the private education loan applicant. The proposed rules would require that institutions, upon request of an enrolled or admitted student applicant, provide in written or electronic form a private education loan self-certification form and the information needed to complete the form, to the extent that the institution possesses such information. The preamble states that institutions may post selfcertification forms on their website for download by private loan applicants or may provide the forms directly to applicants through a designated office such as the financial aid office. The proposed rules also would require that institutions, upon request of the applicant, “discuss with the applicant the availability of Federal, State, and institutional student financial aid.” 74 Fed. Reg. 37,474, 37,432.
Prohibited Interactions by Private Lenders with Colleges and Universities. HEOA amended TILA to forbid private education lenders to engage in certain activities with educational institutions, such as co-branding, revenue-sharing, provision of gifts, and provision of compensation, other than reasonable expense reimbursement, for lender advisory board service.
The Federal Reserve Board’s final rule implements HEOA's restrictions on a creditor’s use of the name, emblem, or mascot of an educational institution in certain circumstances in a way that implies that the institution endorses the creditor's loans. The final rule clarifies, among other points, that:
- the co-branding prohibition does not apply if the institution is the creditor;
- use of a creditor’s full name, even if that name includes the name of a covered educational institution (such as XYZ University Federal Credit Union), does not imply endorsement;
- a creditor may avoid any implication of endorsement of its loans by a covered educational institution if the creditor’s marketing includes a clear and conspicuous disclosure that is equally prominent and closely proximate to the reference to the covered educational institution that the covered educational institution does not endorse the creditor’s loans and that the creditor is not affiliated with the covered educational institution;
- the co-branding prohibition does not apply to lawful preferred lender arrangements for private education loans, provided that the marketing includes a clear and conspicuous disclosure that is equally prominent and closely proximate to the reference to the covered education institution that the creditor’s loans are not offered or made by the covered educational institution, but are made by the creditor.
The final rule does not include provisions implementing the other HEOA restrictions on relationships between lenders and colleges and universities and college and university officials, which became effective when HEOA was enacted.