Comment on Private Loan Disclosures (Part 1)!

First, my apologies on my earlier post on the private loan disclosure samples put forward by the Federal Reserve.  My formatting of that post was horrible which probably made it difficult to read.  I am structuring this post to make it easy for readers to discern what areas the Federal Reserve is seeking comments on (see instructions below on where to send your comments; May 26th is the deadline).  This should save you the time of going through the 99 page document which provides the detailed play-by-play of the proposed regulation.  I may split this into several posts, given the length of the document.  All excerpts below taken verbatim from Federal Reserve document.  This is NOT intended to be a complete list of items the Federal Reserve is seeking comment on, but only those areas that I deemed to most worthy of commentary given their impact on consumers.  The "SLA Commentary" expresses the views of the author. 

Comment #1 (page 10):  The Board requests comment on whether the interest rate should be made more prominent and whether the APR should be made less prominent for private education loan disclosures. Specifically, the Board requests comment on the effect a less prominent APR may have on loan terms. For example, the Board requests comment on whether a less prominent APR may promote the use of low, introductory “teaser” interest rates on private education loans, the use of alternative interest calculation methods, or the imposition of higher fees. The Board also requests comment on alternatives ways to disclose both the APR and the interest rate for private education loans in a manner that is clear to consumers.

• Rationale:  Consumer testing of student loan disclosures has shown that consumers often do not understand the APR and incorrectly believe that the APR is the consumer’s interest rate. When the APR is presented prominently along with a less prominent disclosure of the interest rate, consumers experience added confusion. In consumer testing of the proposed model forms with a prominent APR and less prominent interest rate, some consumers believed that either the APR or the interest rate was a mistake and indicated a concern about trusting the accuracy of the disclosures.

• SLA Commentary:  The danger of not incorporating A.P.R. in the Rate and Terms disclosure is that it does not differentiate between low origination/repayment fee lenders and those with high fees.  While these fees would be captured in two places, the Fees section and the Repayment Options and Sample Costs section of the application disclosure, for those consumers just focused on interest rates (which dominate the disclosure), they would not be able to discern the impact of these fees on their overall costs.  One unintended consequence of making A.P.R. less prominent will be an increase in the proliferation and amount of loan fees. 

Comment #2 (page 15):  The Board requests comment on whether depository institutions and credit unions should be covered even if they do not meet the definition of “creditor.” The Board also requests comment on whether there are other persons engaged in the business of extending private education loans who would not be creditors under Regulation Z. 

• Rationale:  By applying the private education loan rules only to “creditors,” the Board is proposing to create an exception for depository institutions and federal credit unions that do not regularly extend consumer credit.
  • The term “creditor” applies to a person who regularly extends consumer credit, which is defined as credit extended more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year.

• SLA Commentary:  From a consumer's standpoint, it doesn't seem fair to exclude borrowers access to these disclosures if they take out loans with smaller institutions (less than 25 loans).  Shouldn't everyone have access to the same information?  My other concern is that start-up lenders, who have proven in the past an ability to grow quickly, would seem to be exempted in their first year, as they would not have extended any credit in the preceding calendar year. 

Comment #3 (page 20):  Proposed comment 37(c)(2)-1 would contain guidance on the manner in which disclosures could be provided in electronic form. Electronic disclosures would be deemed to be on or with an application or solicitation if they – (1) automatically appear on the screen when the application or solicitation reply form appears; (2) are located on the same Web “page” as the application or solicitation reply form and the application or reply form contains a clear and conspicuous reference to the location and content of the disclosures; or (3) are posted on a Web site and the application or solicitation reply form is linked to the disclosures in a manner that prevents the consumer from by-passing the disclosures before submitting the application or reply form. This approach is consistent with the rules for electronic disclosures for credit and
charge card applications under comment 5a(a)(2)-1.ii.

• SLA Commentary:  The Federal Reserve's document notes in several instances the lack of sophistication of student borrowers:  "The Board understands that the private education loan population contains students who may lack financial sophistication, and that the amount of the loan may be large and the loan itself may be important to the borrower."  Given this statement, it would seem that extra protections should be in place to ensure that students are actually reviewing the application and solicitation disclosures before they apply.  I would argue that these disclosures combined with an on-line entrance counseling process is necessary given the "lack of financial sophistication" noted by the Board.   If lenders are as committed as they say to "responsible borrowing" and minimizing defaults this would seem like like a "no-brainer."  Requiring these disclosures on the same Web "page" is a necessary but not sufficient condition. 

Comment #4 (page 22):  The Board requests comment on alternatives to providing application disclosures in telephone applications or solicitations initiated by the creditor.

• Rationale:  Proposed § 226.38(d)(1)(B) would deal with provision of disclosures in a telephone application, or solicitation, initiated by the creditor...Therefore, the Board would exercise its authority under TILA section 105(a) to create an exception from the requirement to provide the application disclosures under § 226.38(a) if the creditor does not provide oral application disclosures and does provide or place in the mail the approval disclosures in § 226.38(b) no later than three business days after the consumer requests the credit.

• SLA Commentary:  If I understand this properly, this would seem to allow lenders to provide loan approvals over the phone WITHOUT providing the necessary oral application disclosures.  The Federal Reserve seems to believe that the loan approval disclosures mailed out no more than 3 days later would suffice.  SLA's research has found that students make heavy use of lender call centers when making decisions about student loans.  This loophole will create an incentive for lenders to staff their call centers with "closers" who can push students to apply now (rather than provide useful information to minimize the disclosures required.  Lenders should be required to provide a comparable amount of disclosure for applications completed over the phone.  We do not need any "Boiler Room" operations in student lending. 

Comment #5 (page 27):  Proposed comment 38(a)(1)(i)-2 would clarify that the disclosure does not require the creditor to list the factors that the creditor will use to determine the interest rate. If, for instance, the creditor will determine the interest rate based on the consumer’s credit score and the type of school the consumer attends, the creditor may state, for example, “Your interest rate will be based on your creditworthiness and other factors.”

• Rationale:  The Board recognizes that these rates might vary based on the creditor’s underwriting criteria for a particular loan product, including a consumer’s credit history.  Based on consumer testing, the Board believes that providing a general explanation of how an interest rate would be determined provides the context necessary for a consumer to understand why more than one rate is being offered and how a creditor would determine a consumer’s interest rate if the consumer were to apply for the loan. For this reason, the Board proposes to add a disclosure requirement under its TILA section 128(e)(1)(R) authority. If the rate will depend, in part, on a later determination of the consumer’s creditworthiness, the creditor would be required to state that the rate for which the consumer may qualify will depend on the consumer’s creditworthiness and other factors, if applicable.

• SLA Commentary:  Consumers need more information not less about what factors the creditor will use to determine interest rates.  Given that each time a student/parent applies for a student loan they face the possibility of a reduction in their credit scores, disclosures should help them determine which lenders they should apply to.  The Federal Reserve should be encouraging more transparency in this area not less.  By allowing lenders to use "other factors" they continue to allow the obfuscation that exists in the marketplace. 

Comment #6 (page 30):  The Board is not proposing to require creditors to disclose fees that would apply if the consumer exercised an option after consummation under the agreement or promissory note for the private educational loan, such as fees for exercising deferment, forbearance, or loan modification options. Creditors would not be required to disclose third-party fees and costs for collection- or default-related expenses that might be passed on to the consumer, as these are not easily predicted and may never apply. The Board requests comment on whether creditors should be required to disclose these or other fees.

• SLA Commentary:  A significant (and growing) number of borrowers will find themselves requiring forbearance, loan modification or unfortunately may find themselves in default.  Check out student loan message boards if you want to know how consumers feel about loan fees.  By not requiring disclosure of these fees and indicating that they "are not easily predicted," the Federal Reserve is missing an opportunity to shine a light on fees that are currently not well understood and the subject of much consumer ire.  

Here are instructions on how to post your comments:

DATES: Comments must be received on or before May 26, 2009. 

ADDRESSES: You may submit comments, identified by Docket No. R-1353, by any of the following methods:

• Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
• E-mail: regs.comments@federalreserve.gov. Include the docket number in the subject line of the message.
• Fax: (202) 452-3819 or (202) 452-3102.
• Mail: Address to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.

Comments

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