Picking up where I left off with my earlier post on the new regulations on private loan disclosures:
Repayment Terms (Comment #7 on page 30): "Under proposed § 226.38(a)(3)(iii) and proposed comment 38(a)(3)-3, if the creditor offers payment deferral options that apply while the student is enrolled in a covered educational institution, the creditor would be required to disclose the following additional information for each deferral option: (1) whether interest will accrue while the student is enrolled in a covered educational institution; and (2) if interest accrues while the student is enrolled at a covered educational institution, whether payment of interest may be deferred and added to the principal balance.
- SLA Commentary: I would recommend that the Board require lenders to provide the timing and frequency of interest capitalization during deferment periods (e.g. monthly, quarterly, annually, only at repayment) as this has a large impact on overall loan cost.
Total loan cost example (Comment #8 on page 32): The Board requests comment on alternative ways of ensuring that the total cost example reflects the cost of loan fees. Specifically, the Board requests comment on whether an assumed principal amount of $10,000 should be used without adding finance charges to the principal amount, but instead separately adding the finance charges to the total of payments. The Board requests comment on whether private education loan consumers have historically been more likely to add finance charges to the loan amount they request, or to deduct the finance charges from the principal amount requested (or pay them separately by cash or check). The Board also requests comment on practical limitations, if any, for creditors to determine the fees under § 226.38(a)(2)(i) that would be applicable to loans where the maximum rate of interest applies. The Board also requests comment on whether the total cost example should be based on a $10,000 amount financed, as proposed, or on a higher or lower amount. The Board also requests comment on whether the $5,000 amount financed is an appropriate alternative where creditors do not offer loans of $10,000 or more.
- SLA Commentary: The Federal Reserve Board should use all efforts to increase transparency of loan fees which have become more prevalent in the last year. In order for borrowers to be aware of the magnitude of upfront fees, they should be spelled out in dollars and cents rather than just appearing as a bullet point in fees (e.g. origination fees of 6%). By adding it to principal rather than just burying it in total of payments, the borrower becomes immediately aware of this "hidden cost" and should be made aware of the option to pay it off to avoid financing it for the life of the loan. As for using $10,000 for the total cost example, that seems reasonable enought but more importantly I would strongly encourage conformity to allow consumers to compare alternatives.
- Having once applied for a loan from MRU, I have seen firsthand the dangers of this lack of transparency. For an account of the process I went through, visit this post "Clear and upfront information? You be the judge".
Federal loan alternatives (Comment #9 on page 35): To avoid overloading consumers with information and to ensure that consumers notice the most important information about federal student loans, the Board is proposing to exercise its authority under TILA section 105(a) to make exceptions to the statute by not requiring creditors to state that federal loans may be obtained in lieu of or in addition to private education loans.
- Federal Reserve rationale: The Board also proposes to exercise its authority under TILA section 105(f) to exempt private education loans from the specific disclosure requirement about federal loans, pursuant to the HOEA amendment to TILA sections 128(e)(1)(M) and 128(e)(2)(L). The Board believes that this specific requirement does not provide a meaningful benefit to consumers in the form of useful information or protection. In testing, consumers’ understanding that federal loans are available in lieu of or in addition to private education loans was enhanced by simply providing them a clear and prominent label indicating that the disclosures contained information about federal loan alternatives. 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. However, as explained above, the Board believes that the borrower would receive meaningful information about federal loans through the other disclosures and the model form. The Board also recognizes that private education loans would not be secured by the principal residence of the consumer, which is a factor for consideration under section 105(f). Furthermore, the HEOA provides significant rights, such as the right to cancel the loan. The Board believes that consumer protection would not be undermined by this exemption.
- SLA Commentary: I strongly recommend that the Board reconsider and use the language included in the statute. The statement "federal loans may be obtained in lieu or in addition to private education loans" is certainly more descriptive than just "Federal Loan Alternatives" which they have proposed. Without some verbiage around it, I fear that consumers will not seriously consider these alternatives. Relying on "consumer testing" which involved 20 interviews does not seem a sufficient rationale to discard this critical disclosure.
Education loan discharge limitations (comment #10 on page 41): The Board requests comment on whether disclosure of education loan discharge limitations in bankruptcy should be included in the application and solicitation disclosures as implemented by § 226.38(a)(2).
- SLA Commentary: Borrowers should be aware of this unique element to student loans PRIOR to applying for a student loan. It absolutely should be included in the application and solicitation disclosures to ensure that student borrowers are fully informed of all the potential consequences of this loan. Once their loan has been approved, this statement is much less likely to have any impact as most of the consideration of loan factors and features occurs in the application and solicitation process. It is often through repetition that comprehension follows.
Final disclosures regarding federal loan alternatives (comment #11 on page 45): Based on the results of the Board’s consumer testing, the Board is proposing to use its authority under TILA section 105(a) to create an exception from the requirement in TILA section 128(e)(4)(b) that the creditor provide to the consumer with information about federal alternatives to private education loans. Consumers have overwhelmingly indicated that this information would not be meaningful or useful to them at the time when they would receive the final disclosures. Consumers indicated that by the time they had applied for and accepted a private education loan, they already would have made a decision as to whether or not to seek other loan alternatives.
- SLA Commentary: So, why would it make sense to include information on federal loan alternatives with the final set of disclosures after the loan has already been consummated? Haven't you ever suffered from buyer's remorse? It might be a parent reading the final documents more closely or a student frightened by the reality that he/she is on the hook for $10,000. Or maybe it is the reality of a 16% interest rate that pushes the borrower to finally give in and work with their family to complete the FAFSA. It is at this critical juncture that knowing that federal loan alternatives exist would be helpful. The consumer testing component lacked this real world element and therefore the realities of buyer's remorse.
More to come...
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