2009 SLA Private Loan Series: What's the Interest Rate, Chase? (Part Deux)

If you read my earlier post, it takes a minimum of navigating your way through four links on the Chase student loan website to find  the range of interest rates available to private loan borrowers (in case you were curious the range is 3-month LIBOR + 4.75% to 3-month LIBOR +12.25%).  Of course, many borrowers may have stopped on the page titled "Interest Rates" which had the following description:

School Certified Private Loans

Chase Select is a school certified loan product. This means your school must offer this loan product for you to be eligible to receive it and it also requires school certification.

Interest Rate Index For Chase Select	Month	LIBOR Rate*
LIBOR Rate	April 4, 2009 - June 30, 2009	1.32%

It was with much trepidation, therefore, that I applied as a co-signer for a $5,000 loan for a Chase Select loan.   Would Chase "hide the ball" when it came to interest rates for approved loans too?  I was about to find out.  Having completed the co-signer application (after the borrower application had been completed), I hit the Enter key and got the following message:

Your loan has been conditionally approved. 

We still need to verify your application information, so we need more details to complete your application.

Hmm.The old good news/bad news scenario.  The good news is that I have been approved for a loan but the bad news is that I don't know the rates.  OK, take a deep breath, relax, Chase just needs some additional information on me before they can get me those rates.  So, I dutifully completed the remainder of the application.  Upon completion, the message on the final screen of the application process highlighted these next steps:

Select a delivery option.  The final step in the application process is to decide how you would like to sign your loan application and Master Promissory Note and have it delivered to you.

I also received this most excellent reassurance in the Application Summary:

          You have successfully applied for the following loan

Only one problem: I still didn't know what the interest rate on the loan was.  Oh, I get it, the interest rate must be in the promissory note, since Chase certainly seems to be encouraging me to sign it:

Sign your application electronically - This will expedite the processing of your loan.  We will begin processing your application right away. 

I also got an email the morning after I applied (seems they really want me to sign this note!):

Dear Chase Applicant,

"URGENT, REPLY NEEDED"
On the day you applied, we advised you that unless we receive these important documents from you:

Promissory Note
Proof of ID

Your conditional approval will expire 90 days from the day you applied and we will be unable to give further consideration to your application.  You should act quickly so you can receive your funds as soon as possible!

So, I dutifully printed out the promissory note and began to quickly scan through it.  Eight pages into it, I came across what I was looking for (hooray!), the margin on the variable rate loan:

    (a) Margin.  The Margin will be disclosed on or with the Disclosure Statement. 

Now, regarding that Disclosure Statement, that was on page seven:

If we approve this request and agree to make a loan to you, we will notify you by e-mail or in writing and we will provide you with  a Disclosure Statement prior to the time that the loan is consummated.  The Disclosure Statement will set forth the Actual Loan Amount that we have approved (the Amount financed), the amount of any applicable loan origination fee, the Annual Percentage Rate and other important information. 

Hmm...OK, I think I got the drill now.  Sign the promissory note, thereby committing myself to a Promise To Pay (that's #1 in the Promissory Note) and then the curtain will rise, the Grand Underwriter will suddenly appear, and I will find out what the margin on my private student loan is. 

Before I get to that, I know some of you are thinking:

Would you just sign the darn promissory note?  You can always cancel the loan if you don't like the terms.  Move on to another blog topic, please!

Of course, you would be correct.  I can cancel the loan, but there are a few hoops to jump through first (not as simple as one phone call unfortunately), according to the promissory note: 

To cancel your loan, you must send a written cancellation notice within 30 days of the first disbursement of the Actual Loan Amount to you or your School.  Your cancellation request must include a copy of the Disclosure Statement and your unused disbursement check. If you have already endorsed or deposited the disbursement check, or allowed the loan proceeds to be used on your behalf without objection, you must instead include a certified check for the full amount of the loan proceeds.

So I implore you, Chase, please spare me the trouble and tell me the margin on my approved loan!  There is a great body of consumer research described as "incremental decisions and escalating commitment" which suggests that once a consumer takes an hour or more to complete the application process, find a co-signer, have their application approved and then complete more paperwork to keep the process moving...well you get the picture.  As the Federal Reserve notes in several instances in their Regulation Z proposals, student loan borrowers are not all that sophisticated: 

"The Board considered that the private education loan population includes students who may lack financial sophistication and that the size of the loan could be relatively significant and important to the borrower.

Hmm..so what better way to take advantage of unsophisticated borrowers than to ask them to sign a promissory note before telling them what their loan costs are?  How amazing is this lack of transparency in this day and age!  Sorry, I am hyperventilating.  Have we learned nothing from recent history?

Still with me?  Not exactly a Robert Ludlum thriller here, but you have made it this far.  Suddenly, I peer across my desk and there it is, the telephone. I dial the number and get through quickly to a pleasant customer service representative.  I explain my conundrum and wonder if I am the hundredth caller today seeking to uncover the secrets of the Grand Underwriter or just the first.  So I ask: 

I have been approved for a loan but I do now know what it will cost me.  Would you be kind enough to let me know the margin on my loan before I sign a document promising to repay you?

Her response, to paraphrase (drum roll, please):

I can only give you an estimate, which is subject to change.  The rate cannot be confirmed until we provide a final approval based on our review of the documents you will be providing to us with your completed application. 

OK, enough with the caveats.  What's the number?  Here it is the answer you have been on the edge of your seats waiting for: 

The interest rate on your loan will be 11.57%, which is LIBOR + 10.25% margin, but             remember this is only an estimate and I cannot provide you with anything in writing [Note:  three days later I received a written notice with the interest rate listed here.]

I leave you with one statement and one question:

• The Federal Reserve's Regulation Z to improve the transparency of private loans cannot be implemented soon enough (for my comments on the proposals, go here and here and here)

• Why would a lender go to such lengths to prevent a borrower from knowing the true cost of their loan? 

Update:  I heard from a Chase representative today that the lender would be updating their disclosures by the end of May so that a borrower would receive the interest rate information simultaneous with their loan approval.