Regulation Z; Docket No. R-1353; Truth in Lending, 12464-12515 [E9-5561]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 55 (Tuesday, March 24, 2009)]
[Proposed Rules]
[Pages 12464-12515]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-5561]



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Part II





Federal Reserve System





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12 CFR Part 226



Regulation Z; Docket No. R-1353; Truth in Lending; Proposed Rule

Federal Register / Vol. 74, No. 55 / Tuesday, March 24, 2009 / 
Proposed Rules

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FEDERAL RESERVE SYSTEM

12 CFR Part 226


Regulation Z; Docket No. R-1353; Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA) following the passage of the Higher 
Education Opportunity Act (HEOA). Title X of the HEOA amends TILA by 
adding disclosure and timing requirements that apply to creditors 
making private education loans, which are defined as loans made 
expressly for postsecondary educational expenses, but excluding open-
end credit, real estate-secured loans, and loans made, insured, or 
guaranteed by the Federal government under title IV of the Higher 
Education Act of 1965. The HEOA also amends TILA by adding limitations 
on certain practices by creditors, including limitations on ``co-
branding'' their products with educational institutions in the 
marketing of private student loans. The proposal requires that 
creditors obtain a self-certification form signed by the consumer 
before consummating the loan. It also requires creditors with preferred 
lender arrangements with educational institutions to provide certain 
information to those institutions.

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: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://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, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Brent Lattin, Senior Attorney; Mandie 
Aubrey, or Lorna Neill, Attorneys; Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, Washington, 
DC 20551, at (202) 452-2412 or (202) 452-3667. For users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION: For the provisions of the HEOA that would be 
implemented by this proposal, the Board is required to issue final 
regulations under Regulation Z by August 14, 2009. The HEOA also 
requires the Board to issue model forms based on consumer testing and 
in consultation with the Department of Education.

I. Background

A. Current Regulation Z Student Loan Disclosure Requirements

    Congress enacted the Truth in Lending Act (TILA), 15 U.S.C. 1601 et 
seq., to regulate certain credit practices and promote the informed use 
of consumer credit by requiring uniform disclosures about its costs and 
terms. Under TILA section 128, creditors must provide TILA disclosures 
to consumers in writing before consummation of certain closed-end 
credit transactions. Extensions of consumer credit over $25,000 are 
exempt from TILA with the exceptions of credit secured by real 
property, and, following enactment of the HEOA, private education 
loans. Loans made, insured, or guaranteed pursuant to a program 
authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 
1070 et seq.) are also exempt from TILA.
    TILA mandates that the Board prescribe regulations to carry out the 
purposes of the statute. 15 U.S.C. 1604(a). Accordingly, the Board has 
promulgated Regulation Z, 12 CFR part 226. An Official Staff 
Commentary, 12 CFR 226 (Supp. I) interprets the requirements of the 
regulation and provides guidance to creditors in applying the rules to 
specific transactions.
    To implement TILA section 128, 15 U.S.C. 1638, Regulation Z 
requires disclosures for certain closed-end loans, including for 
education loans that are not exempt federal education loans. Sections 
226.17 and 226.18 require a creditor to provide the consumer with clear 
and conspicuous disclosures before consummation of the transaction. 
Section 226.17(i) contains special rules for student credit plans which 
are education loans where the repayment amount and schedule of payments 
are not known at the time that the credit is advanced. In such cases, 
creditors may make all the TILA cost disclosures at the time credit is 
extended based on the best information available at that time, and 
state clearly that the disclosures are estimates. Alternatively, 
creditors may provide partial disclosures at the time the credit is 
extended and later provide a complete set of disclosures when the 
repayment schedule for the loan is established.

B. The Higher Education Opportunity Act of 2008

    On August 14, 2008, the Higher Education Opportunity Act of 2008 
(HEOA) was enacted. Title X of the HEOA, entitled the ``Private Student 
Loan Transparency and Improvement Act of 2008,'' adds new subsection 
128(e) and section 140 to TILA. These TILA amendments add disclosure 
requirements and prohibit certain practices for creditors making 
``private education loans,'' defined as loans made expressly for 
postsecondary educational expenses, but excluding open-end credit, real 
estate-secured loans, and federal loans under title IV of the Higher 
Education Act of 1965. The HEOA also amends TILA section 104(3) to 
expressly cover private education loans over $25,000.
1. Overview of the HEOA's Amendments to TILA
    Substantive Restrictions. The HEOA prohibits a creditor from using 
in its marketing materials a covered educational institution's name, 
logo, mascot, or other words or symbols readily identified with the 
educational institution, to imply that the educational institution 
endorses the loans offered by the creditor.\1\ With

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respect to private education loans, the HEOA also amends TILA in the 
following ways:
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    \1\ The HEOA adds a new section 140 to TILA that includes other 
restrictions regarding private education loans. The Board is only 
required to issue regulations to implement subsection (c) of TILA 
section 140, the prohibition on co-branding. The other subsections 
of section 140 became effective when the HEOA was enacted and the 
Board is not proposing to issue regulations to implement them at 
this time. The other subsections of TILA Section 140 prohibit 
creditors from giving gifts to educational institutions or their 
employees, and prohibit revenue sharing between creditors and 
educational institutions. In addition, they restrict creditor 
payments to financial aid officials who serve on creditors' advisory 
boards, and require disclosure of any payments made to financial aid 
officials for advisory board service expenses. Prepayment penalties 
or fees for early repayment are prohibited for private education 
loans.
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     Creditors must give the consumer 30 days after a private 
education loan application is approved to decide whether to accept the 
loan offered. During that time, the creditor may not change the rates 
or terms of the loan offered, except for rate changes based on changes 
in the index used for rate adjustments on the loan.
     The consumer has a right to cancel the loan for up to 
three business days after consummation. Creditors are prohibited from 
disbursing funds until the three-day rescission period has run.
    Disclosure Requirements. The HEOA adds a number of new disclosures 
for private education loans, which must be given at different times in 
the loan origination process. Specifically, the HEOA's amendments to 
TILA require the following disclosures for private education loans:
     Disclosures with applications (or solicitations that 
require no application). Creditors must provide general information 
about loan rates, fees, and terms, including an example of the total 
cost of a loan based on the maximum interest rate the creditor can 
charge. These disclosures must inform a prospective borrower of, among 
other things, the potential availability of federal student loans and 
the interest rates on those loans, and that additional information 
about federal loans may be obtained from the school or the Department 
of Education Web site.
     Disclosures when the loan is approved. When the creditor 
approves the consumer's application for a private education loan, the 
creditor must give the consumer a set of transaction-specific 
disclosures, including information about the rate, fees and other terms 
of the loan. The creditor must disclose, for example, estimates of the 
total repayment amount based on both the current interest rate and the 
maximum interest rate that may be charged. The creditor must also 
disclose the monthly payment at the maximum rate of interest.
     Disclosures at consummation. At consummation, the creditor 
must provide updated cost disclosures substantially similar to those 
provided at approval. The consumer's three-day right to cancel the 
transaction must also be disclosed.
    Finally, once a consumer applies for a private education loan, the 
consumer must complete a ``self-certification form'' with information 
about the cost of attendance at the school that the student will attend 
or is attending. The form includes information about the availability 
of federal student loans, the student's cost of attendance at that 
school, the amount of any financial aid, and the amount the consumer 
can borrow to cover any gap. The creditor must obtain the signed and 
completed form before consummating the private education loan. The 
Department of Education has primary responsibility for developing the 
self-certification form in consultation with the Board.
2. Civil Liability
    The HEOA amends TILA to provide a private right of action for 
several, but not all, of the disclosure requirements added by the HEOA. 
HEOA, Title X, Subtitle A, Section 1012 (amending TILA Section 130). 
The HEOA also amends TILA's statute of limitations for civil liability 
regarding private education loans. Currently TILA section 130(e) 
requires that an action be brought within one year of the date of the 
occurrence of the violation. Under the HEOA amendment, an action for a 
violation involving a private education loan must be brought within one 
year from the date on which the first regular payment of principal is 
due under the private education loan.
    The HEOA provides a safe harbor for any creditor that elects to use 
a model form promulgated by the Board that accurately reflects the 
terms of the creditor's loans. HEOA, Title X, Subtitle B, Section 
1021(a) (adding TILA Section 128(e)(5)(C)). Model forms are included in 
the proposal as amendments to Regulation Z's Appendix H. In addition, a 
creditor has no liability under TILA for failure to comply with the 
requirement that it receive the consumer's self-certification form 
before consummating a private education loan. HEOA, Title X, Subtitle 
B, Section 1021(a) (adding TILA Section 130(j)).

C. Consumer Testing

    In October 2008, the Board retained a research and consulting firm 
(Rockbridge Associates) and a design firm (EightShapes) to help the 
Board design the model forms required under the HEOA and to conduct 
consumer testing to determine the most effective presentation of the 
information required to be disclosed. Specifically, the Board used 
consumer testing to develop proposed model forms for the following:
     Information required to be disclosed on or with 
applications or solicitations for private education loans (Application 
and Solicitation Disclosure);
     Information required to be disclosed when a private 
education loan is approved (Approval Disclosure); and
     Information required to be disclosed after the consumer 
accepts a private education loan and at least three business days 
before loan funds are disbursed (Final Disclosure).
    Initial forms design. In November 2008, the Board worked with 
Rockbridge Associates and EightShapes to develop sample disclosures to 
be used in the testing rounds, taking into account the specific 
requirements of the HEOA, information learned through the Board's 
outreach efforts, and Rockbridge Associate's experience in financial 
disclosure testing.
    Cognitive interviews on model disclosures. In December 2008, 
Rockbridge Associates worked closely with the Board to conduct two 
rounds of consumer testing. Each round of testing comprised in-person 
cognitive interviews with 10 consumers. Both rounds of testing were 
conducted within the Washington, DC/Baltimore metropolitan area. The 
consumer participants included both college students and parents of 
college students, representing a range of ethnicities, ages, 
educational levels, and education loan experience.
    The cognitive interviews consisted of one-on-one discussions with 
consumers, during which consumers were asked to view the sample 
Application and Solicitation Disclosure, the Approval Disclosure, and 
the Final Disclosure developed by the Board. The goals of these 
interviews were as follows: (1) To learn more about what information 
consumers are concerned about and actually read when they receive 
private education loan disclosures; (2) to determine how easily 
consumers can find various critical pieces of information in the 
disclosures; (3) to assess consumers' understanding of the information 
that the HEOA and Sec.  226.18 require to be disclosed for private 
education loans, and of certain terminology related to private 
education loans; and (4) to determine the most clear and understandable 
way to disclose the required information to consumers.
    After the first round of cognitive testing, the Board worked with 
Rockbridge Associates and EightShapes to revise the initial drafts of 
the model disclosures in response to findings from the first round of 
testing. Later in December 2008, the Board and Rockbridge Associates 
conducted a second round of testing in which 10 consumers were asked to 
review the revised sample Application and

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Solicitation Disclosure, Approval Disclosure, and Final Disclosure.
    Results of testing. A report summarizing the results of the testing 
is available on the Board's public Web site: https://www.federalreserve.gov.
    Application and Solicitation Disclosure. Regarding the Application 
and Solicitation Disclosure, consumers expected to see a single rate 
that would apply to them and thus were initially confused by seeing the 
required disclosure of a range of initial rates that might apply to 
them. They also commonly mistook the rate disclosed as the high end of 
the range of initial rates with the maximum possible rate for the loan. 
For this reason, the proposed model form clarifies that the range of 
initial rates and the maximum possible rate are separate concepts.
    Once consumers understood that the rates disclosed were not 
necessarily the actual rates that would apply to them, they 
consistently wanted to know how their actual rate would be determined. 
Thus, the model form places basic information about how the consumer's 
actual rate will be determined immediately adjacent to the range of 
initial rates.
    Consumer testing also indicated that consumers want to see specific 
figures and dollar amounts for fees that may apply to their loan. Thus 
the proposal requires dollar amounts to be disclosed for each fee 
included on the form wherever possible.
    In addition, testing showed that consumers found the sample total 
cost information to be useful in assessing the potential effect of a 
private education loan on their financial future. Improvements to the 
initial sample form tested included clarifying the loan term and the 
interest rates used in the sample cost estimates.
    Finally, consumers found the presentation of federal loan 
alternatives, ``Next Steps,'' and general eligibility requirements to 
be clear and understandable, and the information in these sections to 
be useful.
    Approval Disclosure. Regarding the Approval Disclosure, testing 
indicated that consumers are most concerned about the rate and loan 
costs, and that the traditional TILA box style of presenting the key 
elements of a loan is effective even with novice consumers. In initial 
drafts of the proposed model form, consumers did not understand 
explanations of the difference between the interest rate and the annual 
percentage rate (APR).
    Testing also showed that consumers generally do not understand 
detailed explanations of how their variable rate changes based on a 
publicly available index. For consumers, the most important information 
regarding how the rate changes was simply that the creditor may not 
change the rate at will, and instead generally can do so only based on 
market factors out of the creditor's control.
    Again, testing indicated that consumers strongly prefer to have all 
fees disclosed with specific dollar amounts.
    Consumers considered the monthly payment schedule and amounts to be 
critical information in understanding the financial implications of 
obtaining a private education loan. For this reason, the Board revised 
initial drafts of the model disclosure to clarify the monthly payment 
schedule and amounts under various payment deferral scenarios.
    As with the Application and Solicitation Disclosure, consumers 
found the presentation of federal loan alternatives and ``Next Steps'' 
to be clear and understandable, and the information in these sections 
to be useful.
    Final Disclosure. Regarding the Final Disclosure, the information 
required to be disclosed under the HEOA is identical to that required 
on the Approval Disclosure, except for the right to cancel notice. 
Recognizing the importance of the right to cancel notice for consumers, 
the Board revised initial versions of the sample Final Disclosure to 
disclose the right to cancel information as clearly and prominently as 
possible. Consumers tested immediately saw and read the information in 
the proposed right to cancel notice. The proposed form also reflects 
revisions made to address consumer questions about the procedure for 
exercising this right.
    Results from both rounds of testing were that consumers do not find 
the information about federal loan alternatives to be useful at this 
stage in the private education loan origination process. Consumers 
stated that this information is redundant; they have already been told 
about these options two times (on the Application and Solicitation 
Disclosure and the Approval Disclosure) and have already decided at 
this point to obtain a private education loan. For these reasons, as 
discussed in the section-by-section analysis under Sec.  226.39(b)(3), 
the Board is proposing to use its exception authority under TILA 
section 105(a) to omit information about federal loan alternatives from 
the proposed Final Disclosure form.
    Additional testing during and after comment period. During the 
comment period and after receiving comments from the public on the 
proposal and model disclosure forms, the Board will work with 
Rockbridge Associates and EightShapes to revise the model disclosures 
and conduct additional rounds of cognitive interviews to test the 
revised disclosures. Final model disclosures will be based on public 
comments and results of the additional consumer testing.

II. The Board's Rulemaking Authority

    The Board has authority under the HEOA to issue regulations to 
implement paragraphs (1), (2), (3), (4), (6), (7), and (8) of new TILA 
section 128(e), and to implement section 140(c) of new TILA section 
140. HEOA, Title X, Section 1002. In addition to implementing the 
specific disclosure requirements in TILA section 128(e), the Board has 
authority under TILA sections 128(e)(1)(R), 128(e)(2)(P), and 
128(e)(4)(B) to require disclosure of such other information as is 
necessary or appropriate for consumers to make informed borrowing 
decisions. 15 U.S.C. 1638(e)(1)(R), 15 U.S.C. 1638(e)(2)(P), 15 U.S.C. 
1638(e)(4)(B).
    TILA section 128(e)(9) provides that, in issuing regulations to 
implement the disclosure requirements under TILA section 128(e), the 
Board is to prevent duplicative disclosure requirements for creditors 
that are otherwise required to make disclosures under TILA. However, if 
the disclosure requirements of section 128(e) differ or conflict with 
the disclosure requirements elsewhere under TILA, the requirements of 
section 128(e) are controlling. 15 U.S.C. 1638(e)(9).
    TILA also mandates that the Board prescribe regulations to carry 
out the purposes of the act. TILA also specifically authorizes the 
Board, among other things, to issue regulations that contain such 
classifications, differentiations, or other provisions, or that provide 
for such adjustments and exceptions for any class of transactions, that 
in the Board's judgment are necessary or proper to effectuate the 
purposes of TILA, facilitate compliance with the act, or prevent 
circumvention or evasion. 15 U.S.C. 1604(a).
    TILA also specifically authorizes the Board to exempt from all or 
part of TILA any class of transactions if the Board determines that 
TILA coverage does not provide a meaningful benefit to consumers in the 
form of useful information or protection. The Board must consider 
factors identified in the act and publish its rationale at the time it 
proposes an exemption for comment. In proposing exemptions, the Board 
considered (1) the amount of the loan and whether the disclosure 
provides a benefit to consumers who are parties to

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the transaction involving a loan of such amount; (2) the extent to 
which the requirement complicates, hinders, or makes more expensive the 
credit process; (3) the status of the borrower, including any related 
financial arrangements of the borrower, the financial sophistication of 
the borrower relative to the type of transaction, and the importance to 
the borrower of the credit, related supporting property, and coverage 
under TILA; (4) whether the loan is secured by the principal residence 
of the borrower; and (5) whether the exemption would undermine the goal 
of consumer protection. 15 U.S.C. 1604(f). The rationales for these 
proposed exemptions are explained below.

III. Section-by-Section Analysis

Introduction

    The Board proposes to add the following new disclosure requirements 
to Regulation Z for private education loans:
    (i) Disclosures with applications (or solicitations that require no 
application) in proposed Sec.  226.38(a);
    (ii) Disclosures when notice of loan approval is provided in 
proposed Sec.  226.38(b); and
    (iii) Disclosures before loan disbursement in proposed Sec.  
226.38(c).

General rules applicable to the new disclosure requirements are 
detailed in proposed Sec.  226.37 and associated commentary. Model 
forms for these disclosures are proposed to be added to Regulation Z's 
Appendix H.
    To implement TILA's new prohibition on co-branding, proposed Sec.  
226.39 would amend Regulation Z to prohibit a creditor from using in 
its marketing a covered educational institution's name, logo, mascot, 
or other words or symbols readily identified with the institution, to 
imply that the institution endorses the loans offered by the creditor. 
The proposal would make an exception to this prohibition under the 
Board's TILA section 105(a) authority, for creditors in ``preferred 
lender arrangements'' with covered educational institutions. Proposed 
Sec.  226.39 would also: provide the consumer with 30 days following 
receipt of the approval disclosures to accept the loan and prohibit 
certain changes to a loan's rate or terms during that time; provide the 
consumer a right to cancel the loan for three business days after 
receipt of the final disclosures and prohibit disbursement during that 
time; require creditors to obtain a completed self-certification form 
signed by the consumer before consummating the transaction; and require 
creditors with preferred lender arrangements to provide certain 
information to educational institutions.

Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability

    Section 226.1(b) describes the purposes of Regulation Z. The Board 
proposes to amend Sec.  226.1(b) to refer to the new provisions for 
private education loans.
    Section 226.1(d) provides an outline of Regulation Z. Proposed 
paragraph (d)(6) would reference the proposed addition of a new Subpart 
F containing rules relating to private education loans.

Section 226.2--Definitions and Rules of Construction

    Currently, Sec.  226.2(a)(6) contains two definitions of ``business 
day.'' Under the general definition, a ``business day'' is a day on 
which the creditor's offices are open to the public for carrying on 
substantially all of its business functions. However, for some purposes 
a more precise definition applies; ``business day'' means all calendar 
days except Sundays and specified federal legal public holidays, for 
purposes of Sec. Sec.  226.15(e), 226.19(a)(1)(ii), 226.23(a), and 
226.31(c)(1) and (2). The Board also recently proposed adopting the 
more precise definition for purposes of the presumption in proposed 
Sec.  226.19(a)(2) that consumers receive corrected disclosures three 
business days after they are mailed. (See 73 FR 74,989; Dec. 10, 2008). 
As discussed more fully below in the section-by-section analysis under 
Sec. Sec.  226.37, 226.38 and 226.39, the Board is proposing to use the 
more precise definition of business day in providing presumptions of 
when consumers receive mailed disclosures, and for measuring the period 
during which consumers have a right to cancel a private education loan.

Section 226.3--Exempt Transactions

    TILA section 104(3) (15 U.S.C. 1603(3)) exempts from coverage 
credit transactions in which the total amount financed exceeds $25,000, 
unless the loan is secured by real property or a consumer's principal 
dwelling. The HEOA amends TILA section 104(3) to provide that private 
education loans over $25,000 are not exempt from TILA. The Board 
proposes to revise Sec.  226.3(b) to reflect this change. The Board is 
not proposing changes to Sec.  226.3(f) because the HEOA does not 
affect TILA's exclusion of loans made, insured, or guaranteed under 
title IV of the Higher Education Act of 1965. 15 U.S.C. Sec.  1603(7). 
However, the Board is proposing to revise comment 3(f)-1 to remove the 
list of federal education loans covered by the exemption because it is 
outdated, and to clarify that private education loans are not exempt.

Section 226.17--General Disclosure Requirements

    Proposed Sec. Sec.  226.38(b) and (c) would require creditors to 
provide the current Sec.  226.18 disclosures for private education 
loans in addition to the new disclosures. Consequently, the Board is 
proposing to revise Sec.  226.17 to clarify that the format and timing 
rules for private education loans differ slightly from the rules for 
other types of closed-end credit. In addition, the Board is proposing 
to remove the special rules for student credit plans.
    Current Sec.  226.17(a)(1) requires that the closed-end credit 
disclosures under Sec.  226.18 be grouped together, segregated from 
everything else, and not contain any information not directly related 
to the disclosures required under Sec.  226.18. It also requires that 
the itemization of the amount financed under Sec.  226.18(c)(1) must be 
separate from the other disclosures required under that section. The 
Board is proposing to revise Sec.  226.17(a)(1) and comment 17(a)(1)-4 
to clarify that the information required under Sec.  226.38 must be 
provided together with the information required under Sec.  226.18. In 
addition, as discussed in the section-by-section analysis under Sec.  
226.38, the Board is proposing to allow creditors to provide the 
itemization of the amount financed together with the disclosures 
required under Sec.  226.18 for private education loan disclosures.
    Annual percentage rate disclosure. Current Sec.  226.17(a)(2), 
implementing TILA section 122(a), requires the terms ``finance charge'' 
and ``annual percentage rate,'' together with a corresponding amount or 
percentage rate, to be more conspicuous than any other disclosure, 
except the creditor's identity under Sec.  226.18(a). For private 
education loans, TILA sections 128(e)(2)(A) and 128(e)(4)(A) require a 
disclosure of the interest rate in addition to the APR. 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. In addition,

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TILA section 128(e)(1)(A) requires a disclosure of the range of 
potential interest rates in the application and solicitation 
disclosure. Some consumers expressed confusion as to why the APR on the 
approval and final forms was inconsistent with the interest rate 
disclosed on the application form. Consumers tested have indicated that 
the interest rate is most relevant to them for private education loan 
purposes.
    The Board proposes to exercise its authority under TILA section 
105(a) to except private education loans from the requirement that the 
APR be more prominent than other disclosures. For the reasons discussed 
above, the Board believes that such an exception is necessary and 
proper to assure a meaningful disclosure of credit terms for consumers. 
In addition, TILA section 128(e)(9), as added by the HEOA, directs the 
Board to implement the HEOA's requirements even if those requirements 
differ from or conflict with requirements under other parts of TILA. 
The interest rate and APR disclosures differ from each other and the 
difference impairs consumers' understanding of the rate that applies to 
the private education loan. Thus, the Board is proposing to give 
prominence to the interest rate disclosure that is required by the 
HEOA.
    The Board also proposes to exercise its authority under TILA 
section 122(a) to require that the interest rate be disclosed as 
prominently as the finance charge. See proposed Sec.  
226.37(c)(2)(iii). The Board believes that in the context of private 
education loan disclosures where both the APR and the interest rate 
must be disclosed, consumers will be better able to avoid the uniformed 
use of credit if the interest rate is made more prominent and the APR 
made less prominent.
    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.
    Timing of disclosures. Current Sec.  226.17(b) requires creditors 
to make closed-end credit disclosures before consummation of the 
transaction. As discussed more fully below in the section-by-section 
analysis under Sec. Sec.  226.37 and 226.38, creditors would be 
required to make the current closed-end disclosures two times for 
private education loans: once with any notice of approval of a private 
education loan, and again before disbursement. Under current comment 
17(b)-1, the disclosures must be made before consummation, but need not 
be given by a particular time, except in certain dwelling-secured 
transactions. The Board proposes to revise Sec.  226.17(b) comment 
17(b)-1 to clarify that more specific timing rules would apply for 
private education loans.
    Under current Sec.  226.17(i) and accompanying commentary, 
Regulation Z applies special disclosure rules to closed-end student 
loans that are ``student credit plans.'' The commentary to Regulation Z 
describes a ``student credit plan'' as an extension of credit for 
educational purposes, where the repayment amount and schedule are not 
known at the time credit is advanced. The plans include loans made 
under any student credit plan not otherwise exempt from TILA, whether 
government or private. Comment 17(i)-1. The credit extended before the 
repayment period begins under these plans is referred to as the interim 
student credit extension. The Board understands that most or all 
private education loans made today are ``student credit plans.''
    For student credit plan loans, special disclosure rules apply when 
interim credit is extended, at the time that the creditor and consumer 
agree to a repayment schedule, and when a student credit plan loan is 
consolidated. Specifically, the creditor need not make the following 
closed-end loan disclosures at the time that interim credit is 
extended:
     Finance charge
     Payment schedule
     Total of payments

The TILA disclosures provided at the time of execution of the interim 
note must show two APRs, one for the interim period and one for the 
repayment period. See comment 17(i)-2. Creditors must make complete 
closed-end TILA disclosures at the time the creditor and consumer agree 
on a repayment schedule for the total obligation. At that time, a new 
set of full TILA disclosures must be provided. Finally, new disclosures 
must be given when interim student credit extensions are consolidated 
through a renewal note with a set repayment schedule. See comment 
17(i)-3.
    The Board proposes to eliminate the special rules for student 
credit plans under Sec.  226.17(i) and accompanying commentary because 
the new TILA section 128(e) disclosure rules effectively eliminate the 
disclosure exemptions afforded by Sec.  226.17(i). Implementing new 
TILA section 128(e)(2)(H), proposed Sec.  226.38(b)(3)(vii) requires 
the creditor to give the consumer an estimate of the total amount for 
repayment at the time that the loan is approved. As discussed further 
below, the Board views the total amount for repayment disclosure as 
duplicative of TILA's existing total of payments disclosure. Proposed 
Sec.  226.38(b)(3)(vii) would require creditors to disclose the total 
of payments before a definitive repayment schedule is set. Thus, the 
HEOA revisions to TILA eliminate the Sec.  226.17(i) exemption for 
disclosure of the total of payments. This also has the effect of 
eliminating the other exemptions as well, because an estimate of the 
total of payments requires the creditor to estimate the finance charge 
and payment schedule.
    In addition, the new private education loan disclosure regime 
applies to consolidation loans, rendering the commentary on 
consolidation loan disclosures under comment 17(i)-3 unnecessary. 
Finally, the Board believes that retaining two different disclosure 
regimes from which creditors may choose, in addition to the significant 
new disclosure requirements, is unnecessarily complex and may not be 
useful to consumers and creditors.
    Under current comment 17(i)-1, creditors who choose not to make 
complete disclosures at the time the credit is extended must make a new 
set of complete disclosures at the time the creditor and consumer agree 
upon a repayment schedule for the total obligation. The HEOA does not 
require, and the Board is not proposing to require, creditors to give a 
new set of disclosures once the creditor and consumer agree upon a 
repayment schedule. The proposed rules would require a complete 
disclosure at the time the credit is extended. In addition, new 
disclosures are required under Sec.  226.20(a) in the case of a 
refinancing of a loan. The Board will consider whether disclosures 
should be required for subsequent events as part of its comprehensive 
review of closed-end credit disclosures under Regulation Z.

Section 226.18--Content of Disclosures

    As discussed more fully below, the Board is proposing to require 
that creditors provide the disclosures required in Sec.  226.18 along 
with the disclosures required with notice of approval in Sec.  
226.38(b) and with the

[[Page 12469]]

final disclosures required in Sec.  226.38(c). The proposed model forms 
in Appendix H-19 and H-20 show the disclosures required under Sec.  
226.18 as well as the disclosures required under Sec. Sec.  226.38(b) 
and (c). However, as explained below, the HEOA's disclosure about 
limitations on interest rate adjustments differs slightly from that of 
Sec.  226.18(f)(1)(ii), as interpreted in comment 18(f)(1)(ii)-1. Thus 
the Board is proposing to revise comment 18(f)(1)(ii)-1 to clarify that 
parts of the comment do not apply to private education loans.
    Current Sec.  226.18(f)(1)(ii) requires that if the annual 
percentage rate in a closed-end credit transaction not secured by the 
consumer's principal dwelling may increase after consummation, the 
creditor must disclose, among other things, any limitations on the 
increase. Current comment 18(f)(1)(ii)-1 states that when there are no 
limitations, the creditor may, but need not, disclose that fact. By 
contrast, the HEOA and proposed Sec. Sec.  226.38(b) and (c) require 
creditors to disclose any limitations on interest rate adjustments, or 
the lack thereof. Thus, for private education loans, disclosure of the 
absence of any limitations on interest rate adjustments is required, 
not optional. In addition, under Sec. Sec.  226.38(b)(1)(ii), and 
(c)(1)(i), limitations on rate increases include, rather than exclude, 
legal limits in the nature of usury or rate ceilings under state or 
federal statutes or regulations. Proposed comment 38(b)(1)-2, discussed 
below, would provide guidance on how creditors are to disclose 
limitations on interest rate adjustments.
    The Board is also proposing to revise comment 18(f)(1)(iv)-2, which 
currently clarifies that for interim student credit extensions 
creditors need not provide a hypothetical example of the payment terms 
that would result from an increase in the variable rate. The comment 
would be revised to replace the reference to interim student credit 
extensions with a reference to private education loans. Proposed 
Sec. Sec.  226.38(b)(3)(viii) and 226.38(c)(3) would require a 
disclosure of the maximum monthly payment on a private education loan 
based on the maximum possible rate of interest. As discussed more fully 
in the section-by-section analysis in Sec.  226.38, the Board believes 
that the required disclosure of the maximum monthly payment amount at 
the maximum rate satisfies the requirement under Sec.  226.18(f)(1)(iv) 
to disclose a hypothetical example of the payment terms resulting from 
an increase in the rate. Proposed comment 38(b)(1)-1 would clarify that 
while creditors must disclose the maximum payment at the maximum 
possible rate, they need not also disclose a separate example of the 
payment terms resulting from a rate increase under Sec.  
226.18(f)(1)(iv).
    The Board is also proposing to revise comment 18(k)(1)-1 which 
currently clarifies that interim interest on a student loan is not 
considered a penalty for purposes of the requirement in Sec.  
226.18(k)(1) to disclose whether or not a penalty may be imposed if a 
loan is prepaid in full. The proposal would remove the reference to 
interim interest on a student loan as an example of what is not a 
penalty. The Board does not intend to indicate that interim interest on 
a student loan is considered a penalty. Rather, with the proposed 
removal of Sec.  226.17(i) and associated commentary, the reference to 
interim interest on a student loan would no longer be clear. The Board 
believes that the description of what constitutes a penalty in the 
remainder of revised comment 18(k)(1)-1 would provide sufficient 
clarity that interim interest on a student loan would not be considered 
a penalty.

Subpart F

    The Board proposes to add a new Subpart F to contain the rules 
relating to private education loans.

Section 226.37--Special Disclosure Requirements for Private Education 
Loans

    Proposed Sec.  226.37 contains general rules about the disclosure 
and other requirements contained in Subpart F. Section 226.37(a) would 
specify that Subpart F would apply only to private education loans. 
Paragraph 37(a)(1) would clarify that, except where specifically 
provided otherwise, the requirements and limitations of Subpart F would 
be in addition to the requirements of the other subparts of Regulation 
Z.
37(b) Definitions
    The HEOA amends TILA by adding a number of defined terms in new 
TILA sections 140 and 128(e). The Board proposes to add these 
definitions to Regulation Z in proposed Sec.  226.37(b). However, for 
one new defined term, ``private educational lender,'' the Board 
proposes to use Regulation Z's existing definition of ``creditor'' (12 
CFR 226.2(a)(17)). The HEOA defines the term ``private educational 
lender'' as a financial institution, as defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813), or 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.\2\ The term also includes any other person engaged in the 
business of soliciting, making, or extending private education loans. 
The Board believes that the ``creditor'' definition would encompass 
persons ``engaged in the business of'' extending private education 
loans.\3\ 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. 12 CFR 226.2(a)(17).
---------------------------------------------------------------------------

    \2\ The term ``financial institution'' is not defined in section 
3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), but the 
Board interprets this term to refer to the defined term ``depository 
institution,'' which is the most comprehensive definition in section 
3 of the Federal Deposit Insurance Act.
    \3\ The HEOA also covers persons engaged in the business of 
soliciting private education loans. Under proposed Sec.  
226.37(d)(1) the term solicitation would be defined as an offer to 
extend credit that does not require the consumer to complete an 
application. The term ``solicit'' would not include general 
advertising or invitations to apply for credit.
---------------------------------------------------------------------------

    Under the HEOA, a depository institution or federal credit union 
would be covered for any private education loan it makes, regardless of 
whether or not the institution regularly extended consumer credit. 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. 
Under TILA section 105(a), the Board may provide exceptions to TILA for 
any class of transactions to facilitate compliance with TILA. The Board 
believes that in most cases depository institutions and credit unions 
that extend private education loans would also be creditors under 
Regulation Z. However, there may be a few instances where an 
institution that does not regularly extend consumer credit nevertheless 
makes an occasional private education loan. For such institutions, the 
compliance burden would appear to be significant for the small number 
of student loans that they may extend while still providing consumers 
with credit disclosures in a manner consist with TILA and the Board's 
interpretation thereof. The Board believes that this exception is 
necessary and proper to facilitate compliance with TILA.
    The Board also proposes to exercise its authority under TILA 
section 105(f) by applying the private education loan rules only to 
``creditors,'' as defined in Regulation Z, thereby exempting from the 
requirements of HEOA depository institutions and federal credit unions 
that do not regularly extend consumer

[[Page 12470]]

credit. 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. The Board believes, however, that because 
the number of instances where a consumer would receive a private 
education loan from an institution that does not regularly extend 
consumer credit is very limited, the burden and expenses of compliance 
that would be assumed by the institution are not outweighed by the 
benefit to the consumer. Furthermore, the Board believes that the goal 
of consumer protection would not be undermined by this exemption and 
that, after considering the 105(f) factors, coverage would not provide 
a meaningful benefit to consumers in the form of useful protection.
    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.
37(b)(1) Covered Educational Institution
    The HEOA defines the term ``covered educational institution'' to 
mean any educational institution that offers a postsecondary 
educational degree, certificate, or program of study (including any 
institution of higher education) and includes an agent, officer, or 
employee of the educational institution. Included in the definition of 
covered educational institution are ``institutions of higher 
education,'' as defined under section 102 of the Higher Education Act 
of 1965 (20 U.S.C. 1002). The Higher Education Act of 1965 contains two 
definitions of the term ``institution of higher education;'' a narrower 
definition in section 101, and a broader definition in section 102. See 
20 U.S.C. 1001, 1002. The HEOA explicitly uses the broader definition 
in section 102 of the Higher Education Act of 1965. HEOA Title X, 
Section 1001 (adding TILA Section 140(a)(3)). The more expansive 
definition of institution of higher education, as interpreted by the 
Department of Education's regulations (34 CFR 600), appears broad 
enough to encompass most educational institutions that offer 
postsecondary educational degrees, certificates, or programs of study. 
The definition of institution of higher education under section 1002 of 
the Higher Education Act of 1965, however, would not include certain 
unaccredited educational institutions that offer postsecondary 
educational degrees, certificates, or programs of study. The HEOA's 
definition of ``covered educational institution'' appears to be broader 
than the definition of ``institution of higher education'' because the 
former includes, but is not limited to, the latter. For this reason, 
proposed Sec.  226.37(b)(1) would define ``covered educational 
institution'' as an educational institution (as well as an agent, 
officer or employee of the institution) that would meet the definition 
of an institution of higher education as defined in Sec.  226.37(b)(2), 
without regard to the institution's accreditation status. Proposed 
comment 37(b)(1)-1 would clarify that if an educational institution 
would not be considered an ``institution of higher education'' solely 
on account of the institution's lack of accreditation, the institution 
would be a ``covered educational institution.'' It would also clarify 
that a covered educational institution may include, for example, a 
private university or a public community college. It may also include 
an institution, whether accredited or unaccredited, that offers 
instruction to prepare students for gainful employment in a recognized 
profession such as flying, culinary arts, or dental assistance. A 
covered educational institution would not include elementary or 
secondary schools.
    Although the definition of ``covered educational institution'' 
under the Title X of the HEOA includes an agent, officer or employee of 
a covered educational institution, the term ``agent'' is not explicitly 
defined in that section of the HEOA. However, section 151 of the HEOA 
defines an ``agent'' as an officer or employee of a covered institution 
or an institution-affiliated organization and excluding any creditor 
regarding any private education loan made by the creditor. Proposed 
comment 37(b)(1)-2 would clarify that an ``agent'' for the purposes of 
defining a covered educational institution is an officer or employee of 
an institution affiliated organization.
    The Board requests comment on whether there are postsecondary 
educational institutions not covered by the definition of institution 
of higher education, other than unaccredited institutions, that should 
be included in the definition of covered educational institution.
37(b)(2) Institution of Higher Education
    The HEOA defines the term ``institution of higher education'' to 
have the same meaning as in section 1002 of the Higher Education Act of 
1965 (20 U.S.C. 1002). Proposed Sec.  226.37(b)(2) would define 
``institution of higher education'' with reference to the Higher 
Education Act of 1965 and to the implementing regulations promulgated 
by the Department of Education. The definition would encompass, among 
other institutions, colleges and universities, proprietary educational 
institutions and vocational educational institutions.
37(b)(3) Postsecondary Educational Expenses
    The HEOA defines ``postsecondary educational expenses'' as any of 
the expenses that are listed as part of the cost of attendance of a 
student under section 472 of the Higher Education Act of 1965 (20 
U.S.C. 1087ll). Proposed Sec.  226.37(b)(3) would adopt this definition 
and provide illustrative examples of postsecondary educational 
expenses. Examples include tuition and fees, books, supplies, 
miscellaneous personal expenses, room and board, and an allowance for 
any loan fee, origination fee, or insurance premium charged to a 
student or parent for a loan incurred to cover the cost of the 
student's attendance. Proposed comment 37(b)(3)-1 would clarify that 
the examples in the rule are not exhaustive.
37(b)(4) Preferred Lender Arrangement
    The HEOA defines ``preferred lender arrangement'' as having the 
same meaning as in section 151 of the Higher Education Act of 1965 (20 
U.S.C 1019). Proposed Sec.  226.37(b)(4) would adopt this definition 
and proposed comment 37(b)(4)-1 would clarify that the term refers to 
an arrangement or agreement between a creditor and a covered 
educational institution under which a creditor provides education loans 
to consumers for students attending the covered educational institution 
and the covered educational institution recommends, promotes, or 
endorses the private education loan products of the creditor. It does 
not include arrangements or agreements with respect to Federal Direct 
Stafford/Ford loans, or Federal PLUS loans made under the Federal PLUS 
auction pilot program.
37(b)(5) Private Education Loan
    Proposed Sec.  226.37(b)(5) would implement the HEOA's definition 
of a ``private education loan.'' A private education loan would be a 
loan that is not made, insured, or guaranteed under title IV of the 
Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and is extended 
expressly, in whole or in part,

[[Page 12471]]

for postsecondary educational expenses to a consumer, regardless of 
whether the loan is provided through the educational institution that 
the student attends. A private education loan would exclude an open-end 
credit plan. It would also exclude any closed-end loan secured by real 
property or a dwelling.
    Comment 37(b)(5)-1 would clarify that a loan made ``expressly for'' 
postsecondary educational expenses would include loans issued 
explicitly for expenses incurred while a student is enrolled in a 
covered educational institution. It would also cover loans issued to 
consolidate a consumer's pre-existing private education loans.
    Comment 37(b)(5)-2 would address loans, other than open-end credit 
or any loan secured by real property or a dwelling, that a consumer may 
use for multiple purposes, including postsecondary education expenses. 
Creditors extending such loans, may, at the creditor's option, provide 
the disclosures under Sec.  226.38(a) on or with an application or 
solicitation. However, under proposed Sec.  226.37(d)(2)(C), the Board 
would exercise its authority under TILA section 105(a) and except 
multi-purpose loans, from the application disclosure requirements of 
Sec.  226.38(a). As explained below, the Board believes that this 
exception is necessary and proper to effectuate the purposes of and 
facilitate compliance with TILA.
    The Board also proposes to exercise its authority under TILA 
section 105(f) to exempt such loans from the Sec.  226.38(a) disclosure 
requirements implementing TILA section 128(e)(1). The Board believes 
that these application and solicitation disclosure requirements do not 
provide a meaningful benefit to consumers in the form of useful 
information or protection for loans that may be used for multiple 
purposes. The Board considered that the private education loan 
population includes many students who may lack financial sophistication 
and the size of the loan could be relatively significant and important 
to the borrower. However, with respect to loans that may be used for 
multiple purposes, the creditor may not know at application if the 
consumer intends to use such loans for educational purposes. A 
requirement to provide a consumer with the proposed Sec.  226.38(a) 
disclosures would likely be complicated and burdensome to creditors and 
potentially infeasible to implement. Furthermore, the Board believes 
that the borrower would receive meaningful information about the loan 
through the subsequent approval and final disclosures required under 
Sec.  226.38(b) and (c), respectively. The HEOA also provides borrowers 
with significant rights, such as the right to cancel the loan. The 
Board recognizes that such multi-purpose loans would not be secured by 
the principal residence of the consumer, which is a factor for 
consideration under section 105(f). The Board believes that consumer 
protection would not be undermined by this exemption.
    Proposed comment 37(b)(5)-2 clarifies that if the consumer 
expressly indicates on an application that the proceeds of the loan 
will be used to pay for postsecondary educational expenses, the 
creditor must comply with the disclosure requirements of Sec. Sec.  
226.38(b) (approval disclosures) and (c) (final disclosures) and Sec.  
226.39 (including the 30 day acceptance period and three-business-day 
right to cancel). To determine the purpose of the loan, proposed 
comment 37(b)(5)-2 would state that the creditor may rely on a check-
box or purpose line on a loan application.
    Proposed comment 37(b)(5)-2 would also clarify that the creditor 
must base the disclosures on the entire amount of the loan, even if 
only a part of the proceeds is intended for postsecondary educational 
expenses. The Board believes that this approach would be the least 
administratively burdensome for creditors and would also be clearer to 
consumers. Providing disclosures based on a partial loan amount might 
cause a consumer to misinterpret the correct amount of his or her loan 
obligation. Therefore, the Board would exercise its authority under 
TILA section 105(a) to require that the approval and final disclosure 
requirements of HEOA be applied to the portion of the loan that is not 
a private education loan. As explained above, the Board believes that 
this provision is necessary and appropriate to assure a meaningful 
disclosure of credit terms for consumers.
    The Board requests comment on whether the private educational loan 
application disclosures should be required for loans that may be used 
for multiple purposes, or, alternatively, whether such loans should be 
excepted from any of the other disclosure requirements. The Board also 
requests comment on whether creditors who make loans that may be used 
for multiple purposes should be required to comply with the requirement 
to obtain a self-certification form under proposed Sec.  226.39(e) and, 
if so, whether creditors should be required to obtain the self-
certification form only from consumers who are students, or from all 
consumers, such as parents of a student.
37(c) Form of Disclosures
    Similar to the requirements imposed by Sec.  226.17 for the 
disclosures required by Sec.  226.18, proposed Sec.  226.37(c)(1) would 
require the disclosures for private student loans be made clearly and 
conspicuously. Under proposed Sec.  226.37(c)(2), the approval and 
final disclosures under Sec. Sec.  226.38(b) and (c) would be required 
to be in writing in a form that the consumer may keep. The disclosures 
would have to be grouped together, be segregated from everything else, 
and not contain any information not directly related to the disclosures 
required under Sec. Sec.  226.38(b) and (c), which include the 
disclosures required under Sec.  226.18. However, the disclosures could 
include an acknowledgement of receipt, the date of the transaction, and 
the consumer's name, address, and account number. In addition, the 
proposal would allow the following disclosures to be made together with 
or separately from other required disclosures: the creditor's identity 
under Sec.  226.18(a), insurance or debt cancellation under Sec.  
226.18(n), and certain security interest charges under Sec.  226.18(o).
    The proposal would also require the term ``finance charge'' and 
corresponding amount, when required to be disclosed under Sec.  
226.18(d), and the interest rate required to be disclosed under 
Sec. Sec.  226.38(b)(1)(i) and (c)(1), to be more conspicuous than any 
other disclosure, except the creditor's identity under Sec.  228.18(a). 
As discussed in the section-by-section analysis under Sec.  226.17, the 
annual percentage rate would not be required to be more prominent than 
other terms.
    Proposed comment 37(c)-1 clarifies that creditors may follow the 
rules in Sec.  226.17 in complying with the requirement to provide the 
information required under Sec.  226.18, as well as the requirement 
that the disclosures be grouped together and segregated from everything 
else. However, in contrast to Sec.  226.17, the itemization of the 
amount financed under Sec.  226.18(c)(1) need not be separate from the 
other disclosures. The HEOA requires creditors to disclose the 
principal amount of the loan. See proposed Sec. Sec.  226.38(b)(3)(i) 
and 226.38(c)(3)(i). The Board proposes to allow creditors to provide 
the disclosure of the loan's principal amount as part of the 
itemization of the amount financed, if the creditor opts to provide an 
itemization. Consumers may be confused about the difference between the 
required disclosure of the amount financed (Sec.  226.18(b)) and the 
principal amount in cases where those two disclosures are different, 
and the Board

[[Page 12472]]

believes that providing an itemization may help clarify the distinction 
between the two terms.
    Proposed Sec.  226.37(c)(2) would permit creditors to make 
disclosures to consumers in electronic form, subject to compliance with 
the consumer consent and other applicable provisions of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 
7001 et seq.). The disclosures required by Sec.  226.38(a) could be 
provided to the consumer in electronic form without regard to the 
consumer consent or other provisions of the E-Sign Act on or with an 
application or solicitation provided in electronic form. In addition, 
the self-certification form required under Sec.  226.39(e) could be 
obtained in electronic form subject to the requirements in that 
section. 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.
37(d) Timing of Disclosures
    Proposed Sec.  226.37(d) would contain the rules governing the 
timing of the proposed disclosures. Comment 37(d)-1 would clarify that 
disclosures are considered provided when received by the consumer. The 
comment contains additional guidance specifying that if the creditor 
places the disclosures in the mail, the consumer is considered to have 
received them three business days after they are mailed. For purposes 
of Sec. Sec.  226.37, 226.38, and 226.39, the term ``business day'' 
would have the more precise definition used for rescission and other 
purposes, meaning all calendar days except Sundays and the federal 
holidays referred to in Sec.  226.2(a)(6). For example, if the creditor 
were to place the disclosures in the mail on Thursday, June 4, the 
disclosures would be considered received on Monday, June 8.
    Application disclosures. The HEOA requires creditors to provide 
disclosures in an application or in a solicitation that does not 
require the consumer to complete an application. HEOA, Title X, 
Subtitle B, Section 1021(a) (adding TILA section 128(e)(1)). Proposed 
Sec.  226.37(d)(1) would implement this requirement. The Board proposes 
that creditors may provide the disclosures on or with the application 
or solicitation because the disclosures are likely to be longer than a 
single page. The proposed regulation would also define the term 
``solicitation'' to mean an offer of credit that does not require the 
consumer to complete an application. A ``solicitation'' would also 
include a ``firm offer of credit'' as defined in the Fair Credit 
Reporting Act (FCRA). 15 U.S.C. 1681 et seq. Becau