On March 24, the Federal Reserve Board published in the Federal Register proposed amendments to Regulation Z necessitated by the amendments to the Truth in Lending Act that were part of the Higher Education Opportunity Act, enacted last summer. Because of these amendments, once finalized the rules will require creditors offering private education loans to provide disclosures significantly different from other Truth in Lending disclosures now required.

Comments on the proposed rules - which address the substantive limitations on such loans as well as implement new disclosure requirements - are due by May 26, 2009. Final rules must be issued no later than August 14, 2009, and must take effect no later than February 14, 2010.

Once final rules take effect, private education loans will be unique in that creditors offering those loans will be required to provide disclosures not only at the time of application or solicitation, but also at the time of loan approval and again at the time of consummation (or, if the amendments are adopted as proposed, no later than three business days before loan disbursement). In addition, once an approved loan has been accepted in general, the terms of that loan may not change.

As proposed, these disclosure requirements and corresponding substantive limitations apply to: (1) banks and others offering closed-end loans made expressly for post-secondary educational expenses; (2) banks and others offering mixed-use closed-end loans - even business loans - if they know that any part of the loan proceeds will be used for such expenses; and (3) accredited postsecondary schools, such as colleges and universities, and unaccredited postsecondary schools, such as flight schools, offering their own private education loans (or, apparently, any other financing) directly to their students.

Moreover, subject to certain limited exceptions involving lenders on school preferred-lender lists, co-branding, once virtually ubiquitous, will soon become a thing of the past, at least with respect to closed-end private education loans. Once final rules take effect,  creditors will be prohibited from using the names, emblems, mascots, or logos of schools, or other words, pictures, or symbols readily identified with those schools in their marketing materials in any way that implies that the schools endorse a creditor’s loans.

Ballard Spahr's Consumer Financial Services Group has significant experience in representing creditors offering financing for postsecondary educational expenses and in representing creditors commenting on regulations proposed by the Federal Reserve Board.  For further information about the proposed rules, please contact Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.   

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