Truth in Lending, 41194-41257 [E9-18548]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 156 (Friday, August 14, 2009)]
[Rules and Regulations]
[Pages 41194-41257]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18548]



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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Final Rule

Federal Register / Vol. 74, No. 156 / Friday, August 14, 2009 / Rules 
and Regulations

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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: Final rule; official staff commentary.

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SUMMARY: The Board is publishing final rules amending 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 for postsecondary educational expenses. 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 education loans. The HEOA 
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: Effective Date: September 14, 2009.
    Compliance Date: Compliance is optional until February 14, 2010.

FOR FURTHER INFORMATION CONTACT: Brent Lattin, Senior Attorney, or 
Mandie Aubrey, Attorney; 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: 

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 part 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. 
Current Sec.  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 even if the amount financed 
exceeds $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 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 issuing 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 cancellation 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 for those loans, and that additional information 
about Federal loans may be obtained from the school or the Department 
of Education Web site.

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     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 for 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 final rule 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 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, 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 sample 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 Solicitation Disclosure, 
Approval Disclosure, and Final Disclosure.
    Additional cognitive interviews on model disclosures. In April and 
May 2009, Rockbridge Associates worked closely with the Board to 
conduct two additional rounds of consumer testing. Each round of 
testing consisted of in-person cognitive interviews with 10 consumers. 
One round of testing was conducted within the Washington, DC 
metropolitan area and the second round of testing was conducted within 
the Philadelphia, PA metropolitan area. The consumer participants 
included college students, proprietary school students and parents of 
students, representing a range of ethnicities, ages, educational 
levels, and education loan experience. The format of the cognitive 
interviews was similar to the initial rounds and the Board worked with 
Rockbridge Associates and EightShapes to revise the model disclosures 
in response to findings from the each round of testing.
    Following the conclusion of the comment period on the proposed 
rule, Rockbridge Associates and EightShapes worked with the Board to 
further revise the disclosures in response to public comment. In June 
2009, Rockbridge Associates worked with the Board to conduct a final 
round of consumer testing comprised of in-person cognitive interviews 
with 10 consumers conducted in the Washington, DC metropolitan area. 
The format of the cognitive interviews was similar to the earlier 
rounds and the Board worked with Rockbridge Associates and EightShapes 
to revise the model disclosures in response to findings from the final 
round of testing.
    Results of testing. A report summarizing the results of the testing 
is

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available on the Board's Web site: https://www.federalreserve.gov.
    Application and Solicitation Disclosure. Regarding the Application 
and Solicitation Disclosure, consumers were confused in the initial 
rounds by seeing the required disclosure of a range of initial rates 
for which they could be approved. Consumers commonly mistook the 
highest rate in the range with the maximum possible rate for the life 
of the loan. Consequently, the model form was revised by providing 
information under two separate headings for the consumer's ``Starting 
interest rate upon approval'' and the consumer's ``Interest rate during 
the life of the loan.'' This revision improved consumers' ability to 
understand the range of initial interest rates and how the rate would 
vary over time.
    Once consumers understood that the rates disclosed were not 
necessarily the rates that actually would apply to them, they 
consistently wanted to know how their own rate would be determined. 
Thus, the model form places general information about how the 
consumer's rate will be determined under the heading about the 
consumer's starting interest rate upon approval. Consumers also wanted 
to understand how their rate would vary over the life of the loan, but 
many were confused by detailed information about how the interest rate 
varies based on the application of a margin to an index. A large number 
of consumers in the initial rounds were confused by the reference in 
the model forms to the London Interbank Offered Rate (LIBOR) as the 
index. However, in the final round of testing, the model form 
referenced the LIBOR being published in a major newspaper which worked 
to assure consumers that the LIBOR is a standard index used for 
determining variable interest rates on loans.
    Consumer testing also indicated that consumers want to see specific 
figures and dollar amounts for fees that may apply to their loan. Thus 
the model form 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 impact of a 
private education loan on their financial future. Consumers indicated 
that the sample total cost was most understandable when the loan 
amount, interest rate and loan term were included. In addition, 
consumers found showing the sample total cost of a loan based on each 
payment deferral option to be useful information.
    Finally, consumers found the presentation of Federal loan 
alternatives, ``Next Steps,'' and reference notes 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 
testing of the proposed model forms, consumers did not understand 
explanations of the difference between the interest rate and the APR. 
For this reason, the model forms published with the proposal were 
revised to disclose the interest rate more prominently than the APR so 
that consumers would focus on the rate they understood. In subsequent 
rounds of testing, the prominence of the interest rate disclosure and 
the additional context provided to explain the APR improved some 
consumers' understanding of the concepts, although a few consumers 
continued to have difficulty understanding the difference between the 
APR and the interest rate. However, in choosing between two loans, 
consumers in the tests were more likely to compare the payment 
schedules, total of payments, and finance charge rather than relying on 
the interest rate alone.
    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.
    Testing also indicated that consumers strongly prefer to have all 
fees disclosed with specific dollar amounts. In addition, the placement 
of the total loan amount in the box at the top of the form, along with 
the itemization of the amount financed, improved consumers' 
understanding of the concept presented by the amount financed--that the 
amount of credit actually available to the consumer would be less than 
the total loan amount if fees applied.
    Consumers considered the monthly payment schedule and amounts to be 
critical information in understanding the financial implications of 
obtaining a private education loan. Most consumers felt the disclosure 
of the maximum monthly payment amounts and total amount for repayment 
at the maximum rate was useful information. When shown disclosures 
where a sample maximum rate was used because no maximum rate applies, 
consumers indicated that they understood the disclosure was only an 
example.
    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 model Final Disclosure provides 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.
    Results from the initial rounds of testing indicated that consumers 
did 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. Consumers in 
the later rounds of testing were asked whether they felt the Federal 
loan alternatives should be included in the Final Disclosure and the 
majority did not feel such information would be useful at that stage. 
For these reasons, as discussed in the section-by-section analysis 
under Sec.  226.47(b)(3), the Board is exercising its exception 
authority under TILA sections 105(a) and 105(f) to omit information 
about Federal loan alternatives from the Final Disclosure form.

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.

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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 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 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 
exemptions were explained in the proposal and are explained below.

III. Overview of Comments Received

    On March 24, 2009, the Board published a proposed rule that would 
amend Regulation Z's rules by adding disclosure and timing requirements 
that apply to creditors making private education loans. 74 FR 12464. 
The Board received seventy-one public comment letters. Several 
financial institutions and financial services trade associations stated 
that they supported the Board's efforts to improve the disclosure of 
credit terms to consumers of private education loans and recognized 
that the Board's proposal was intended to conform Regulation Z to TILA, 
as amended by the HEOA. These commenters requested that the Board 
provide flexibility in the timing of the proposed approval disclosure 
to allow creditors to approve loans conditioned on verification of 
information provided by the consumer and the educational institution. 
These commenters also stated that the Board should not cover loans made 
``in whole or in part'' to finance postsecondary educational expenses, 
as proposed. They expressed concern that such coverage would increase 
the burden in complying with the rule and could cause some lenders to 
decline to provide consumers with credit if any part of the loan would 
be used for postsecondary educational expenses. Some of these 
commenters also did not support the proposal to make the disclosure of 
the annual percentage rate (APR) less prominent than the disclosure of 
the interest rate. A few financial institutions stated that the costs 
of the new disclosure and timing requirements under the HEOA outweigh 
the benefits and that consumers would object to delays in consummating 
a private education loan transaction.
    By contrast, consumer advocacy organizations generally supported 
the HEOA's goal of providing additional disclosure of private education 
loan terms to consumers and in providing for a 30-day period for the 
consumer to accept the loan and a three-day right to cancel the loan. 
Consumer advocates encouraged the Board to maintain coverage of loans 
used ``in whole or in part'' for postsecondary educational expenses. 
Most of these commenters did not support the proposal to make the 
disclosure of the APR less prominent than the disclosure of the 
interest rate.
    The Board also received comments from educational institutions and 
financial aid administrators and trade associations. These commenters 
also generally supported the HEOA's requirements to provide additional 
disclosure of private education loan credit terms to consumers. 
However, a majority of these commenters stated that educational 
institutions, or specific types of credit provided by education 
institutions, should be exempt from the proposed rules. Specifically, 
these creditors sought exemptions for credit in the form of tuition 
billing plans that permit the student to pay in installments and for 
short term ``emergency'' loans provided to students while they await 
disbursement of other funding sources. A number of financial aid 
officers commented that the proposed self-certification form would be 
burdensome and requested an exemption to the requirement to obtain a 
self-certification form in cases where the creditor certifies the 
student's financial need directly with the educational institution.
    Comments are discussed in detail below in part IV of the 
SUPPLEMENTARY INFORMATION.

IV. Section-by-Section Analysis

Overview

    The final rule adds the following new disclosure requirements to 
Regulation Z for private education loans:
    (i) Disclosures with applications (or solicitations that require no 
application) in Sec.  226.47(a);
    (ii) Disclosures when notice of loan approval is provided in Sec.  
226.47(b); and
    (iii) Disclosures before loan disbursement in Sec.  226.47(c). 
General rules applicable to the new disclosure requirements were 
detailed in Sec.  226.46 and associated commentary. Model forms for 
these disclosures are added to Regulation Z's Appendix H.
    To implement TILA's new prohibition on co-branding, Sec.  226.48 
prohibits 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 final rule adopts an exception 
to this prohibition under the Board's TILA section 105(a) authority, 
for creditors who enter into an agreement where the covered educational 
institution endorses the creditor's private education loans. Section 
226.48 also: Provides the consumer with 30 days following receipt of 
the approval disclosures to accept the loan and prohibits certain 
changes to a loan's rate or terms during that time; provides the 
consumer a right to cancel the loan for three business days after 
receipt of the final disclosures and prohibits disbursement during that 
time; requires creditors to obtain a completed self-certification form 
signed by the consumer before consummating the transaction; and 
requires creditors with preferred lender arrangements to provide 
certain information to educational institutions.

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    The final rule largely adopts the provisions in the Board's March 
24, 2009 proposed rule. 74 FR 12464. The Board has made certain 
modifications to the proposal in response to public comment as 
described throughout this Section-by-Section analysis. In addition, the 
provisions in new Subpart F have been redesignated from proposed 
Sec. Sec.  226.37, 38, and 39 to Sec. Sec.  226.46, 47, and 48. 
Sections 226.37 through 226.45 have been reserved in order to 
accommodate future rulemakings by the Board.

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

    Section 226.1(b) describes the purposes of Regulation Z. The Board 
proposed 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) referenced the addition of a 
new Subpart F containing rules relating to private education loans.
    No comments were received on these provisions and the Board is 
adopting them as proposed with redesignated cross-references. In 
addition, transition rules are added as comment 1(d)(6)-1.

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), 226.19(a)(2), 
226.23(a), and 226.31(c)(1) and (2). The Board proposed using the more 
precise definition of business day for all purposes in proposed 
Sec. Sec.  226.37, 38, and 39, including for measuring the period 
during which consumers may cancel a private education loan. Industry 
commenters requested that the Board adopt the general definition of 
``business day,'' or exclude Saturdays from the more precise definition 
of ``business day.'' These commenters noted that they did not operate 
their systems for disbursing funds or providing disclosures on a 
Saturday and expressed concern that including Saturday as a business 
day could make it difficult to provide required disclosures to 
consumers in a timely fashion.
    Consistent with the Board's approach for certain transactions 
secured by the consumer's dwelling in Sec.  226.19(a)(1)(i), the Board 
is adopting the more precise definition of business day in providing 
presumptions of when consumers receive mailed disclosures. The Board is 
adopting the general definition of ``business day'' for all other 
purposes in Sec. Sec.  226.46, 47, and 48, including for measuring the 
period of time in which the consumer may cancel the loan. The Board 
believes that allowing creditors to exclude Saturdays or other days on 
which the creditor's offices are not open to the public for carrying on 
substantially all of its business functions will result in consumers 
being provided more time in which to cancel a private education loan. 
As discussed in the section-by-section analysis to Sec.  226.48(d), the 
final rule permits creditors to provide consumers with more time to 
cancel the loan than the minimum three business days. Thus, whichever 
definition of ``business day'' the Board were to select, creditors 
would be free to exclude Saturdays or other days by providing the 
consumer with more time in which to cancel. The final rule also 
requires the creditor to disclose prominently the precise date upon 
which the consumer's right to cancel expires and, based on the consumer 
testing, the Board believes that consumers will be able to understand 
precisely their deadline to cancel.

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 
proposed to revise Sec.  226.3(b) to reflect this change. The Board did 
not propose changes to Sec.  226.3(f) because the HEOA did 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. 1603(7). However, the 
Board proposed 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.
    The Board is adopting the revisions to Sec.  226.3 as proposed with 
redesignated cross-references. Under the final rules, as proposed, 
private education loans are covered by TILA and Regulation Z regardless 
of the loan's total amount financed.

Section 226.17--General Disclosure Requirements

    Proposed Sec. Sec.  226.38(b) and (c) required creditors to provide 
the current Sec.  226.18 disclosures for private education loans in 
addition to the new disclosures. Consequently, the Board proposed 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 proposed to remove the 
special rules for student credit plans.
    The Board is adopting the proposed changes to Sec.  226.17 for the 
format and timing rules for private education loans, with redesignated 
cross-references. The Board is also eliminating the special rules for 
student credit plans under Sec.  226.17(i) for credit extensions made 
on or after the mandatory compliance date of Subpart F. However, as 
discussed more fully below, the Board is revising rather than removing 
Sec.  226.17(i) to clarify that student credit extensions made under 
Sec.  226.17(i) prior to the mandatory compliance date of Subpart F 
must still follow the requirements in Sec.  226.17(i).
    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 proposed 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.  
226.47, the Board proposed 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. The Board 
proposed to exercise its authority under TILA section 105(a) to except 
private

[[Page 41199]]

education loans from the requirement that the APR be more prominent 
than other disclosures and proposed to give prominence to the interest 
rate disclosure that is required by the HEOA. The Board also proposed 
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).
    Some industry, consumer group, and other commenters objected to the 
proposal to give the interest rate more prominence than the APR. Some 
of the commenters believed the APR was a better tool for consumers to 
use to compare the cost of a loan than the interest rate. They believed 
that emphasizing the interest rate could mislead consumers who do not 
consider other costs of loans. Other commenters believed that for 
uniformity, the APR should not deviate from the prominent position in 
the model forms for other types of closed-end loans. Further, consumer 
group commenters argued that the data produced from consumer testing 
was not definitive enough to justify making the exception, noting that 
most consumers tested did not notice the difference between the APR and 
interest rate and that the testing involved only 20 consumers. The 
consumer groups also cited several studies to support retaining the 
prominence of the APR, including a study that found that more than 70% 
of the population reported using the APR to shop for closed-end 
credit.\2\
---------------------------------------------------------------------------

    \2\ Jinkook Lee and Jeanne M. Hogarth, ``The Price of Money: 
Consumers' Understanding of APRs and Contract Interest Rates,'' 18 
J. Pub. Pol'y and Marketing 66, 74 (1999).
---------------------------------------------------------------------------

    TILA section 128(e)(1)(A) requires a disclosure of the range of 
potential interest rates in the application and solicitation 
disclosure. In consumer testing, some consumers expressed confusion as 
to why the APR on the approval and final forms was inconsistent with 
the interest rates disclosed on the application form. Consumers tested 
indicated that the interest rate was most relevant to them for private 
education loan purposes. 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 HEOA also requires the Board to develop 
model forms that may be used for the private education loan disclosures 
based on consumer testing. HEOA, Title X, Subtitle B, Sec. 1021 (adding 
TILA section 128(e)(5)(A)).
    Consumer testing of private education loan disclosures that 
continued during and after the comment period confirmed that most 
consumers understand the interest rate and that it is one of the most 
important terms to them. At the same time, most consumers do not 
understand the APR and incorrectly believe that the APR is the interest 
rate.\3\ In the initial rounds of testing the APR was presented more 
prominently than the interest rate. Most consumers had difficulty 
reconciling the two terms and some consumers believed that either the 
APR or the interest rate was a mistake and expressed a concern about 
the accuracy of the disclosures. Consumer confusion was compounded with 
the private education loan disclosures. Under the HEOA, the application 
disclosure that the consumer receives first in the series of forms 
contains a range of interest rates and not APRs. Consumers expected to 
see similar disclosures on subsequent forms.\4\
---------------------------------------------------------------------------

    \3\ Rockbridge Associates, ``Consumer Research and Testing for 
Private Education Loans: Final Report of Findings'' at 8.
    \4\ Rockbridge Associates, ``Consumer Research and Testing for 
Private Education Loans: Final Report of Findings'' at 39.
---------------------------------------------------------------------------

    By contrast, in consumer testing of the model forms with a less 
prominent APR, consumers were less likely to equate the APR with the 
interest rate. Rather, the APR's less prominent location on the model 
form encouraged consumers to view it in the context of the explanatory 
text provided. This, in turn, helped consumers to better understand 
that the APR was a distinct disclosure that reflected both the interest 
rate and the fees.\5\
---------------------------------------------------------------------------

    \5\ Rockbridge Associates, ``Consumer Research and Testing for 
Private Education Loans: Final Report of Findings'' at 8, 43.
---------------------------------------------------------------------------

    In addition, based on consumer testing, the Board does not believe 
that making the APR less prominent is likely to cause consumers to 
focus solely on the interest rate to the exclusion of other costs. When 
consumers were asked in testing to determine which of two sample loans 
was less expensive, they relied on information other than the interest 
rate and APR to make their determination, such as the finance charge or 
the total of payments. By using the other cost information all 
consumers tested were able to select the loan that had a lower APR, 
even when it had a higher interest rate.\6\
---------------------------------------------------------------------------

    \6\ Rockbridge Associates, ``Consumer Research and Testing for 
Private Education Loans: Final Report of Findings'' at 55.
---------------------------------------------------------------------------

    The findings from the Board's consumer testing that consumers do 
not understand the APR are supported in other research. For example, 
the study that cited high awareness of the APR by mortgage borrowers 
also found that at least 40% of those borrowers did not understand the 
relationship between the interest rate and the APR which, the study 
concluded, ``indicates a significant gap between awareness and 
understanding.'' \7\ Lack of understanding of the APR on the part of 
the consumer could result in an inaccurate comparison of loan terms. 
For example, a consumer comparing two loans based on both the APR and 
the fees might erroneously consider fees that were already included in 
the APR.
---------------------------------------------------------------------------

    \7\ Jinkook Lee and Jeanne M. Hogarth, ``The Price of Money: 
Consumers' Understanding of APRs and Contract Interest Rates,'' 18 
J. Pub. Pol'y and Marketing 66, 74 (1999).
---------------------------------------------------------------------------

    Thus, the Board believes that an exception from the requirement 
that the APR be disclosed more prominently than other terms is 
necessary and proper to assure a meaningful disclosure of credit terms 
for consumers, and it is retained in the final rule.
    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.  226.46 and 226.47, the Board is adopting as 
proposed revisions to Sec.  226.17(b) to require creditors 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 is 
adopting as proposed revisions to comment 17(b)-1 to clarify that more 
specific timing rules would apply for private education loans.
    The proposed rule did not propose any changes to current Sec.  
226.17(f), but the final rule revises that section. Current Sec.  
226.17(f) requires redisclosure if disclosures are given before 
consummation of a transaction under certain conditions. The Board is 
excluding private education loans from the requirements of Sec.  
226.17(f) because the Board believes that the disclosure and other 
requirements for private education loans make redisclosures under Sec.  
226.17(f) unnecessary. Creditors must provide approval disclosures for 
private education loans and then, after the consumer accepts the loan 
and before funds are disbursed, provide final disclosures. Thus, 
consumers will always receive at least two disclosures in private 
education loan transactions. In addition, with few exceptions, 
creditors cannot change the loan's rate or terms after providing the 
disclosures,

[[Page 41200]]

and Sec.  226.48(c) requires redisclosure if certain permitted changes 
are made after the approval disclosure is provided. Creditors are 
permitted, however, to make changes to the interest rate based on 
adjustments to the index. As a result of interest rate fluctuations, 
the loan's APR may vary outside of the tolerance in Sec.  226.17(f)(2). 
The Board believes that requiring creditors to redisclose the approval 
or final disclosures merely because of fluctuations in the interest 
rate would be burdensome to creditors and could be confusing to 
consumers who might not understand that the redisclosures reflected 
only changes in the variable rate, rather than substantive changes in 
the loan terms. Accordingly, Sec.  226.17(f) in the final rule does not 
apply to private education loans.
    In addition, the final rule revises Sec.  226.17(g) which 
implements TILA section 128(c). Current Sec.  226.17(g) allows for 
delayed delivery of disclosures if a creditor receives a purchase order 
or a request for an extension of credit by mail, telephone, or 
facsimile machine without face-to-face or direct telephone 
solicitation. The creditor may delay disclosures until the due date of 
the first payment if certain information is made available to the 
consumer or the public before the actual purchase order request. The 
final rule excludes private education loans from Sec.  226.17(g) 
because the Board believes that the specific disclosure and timing 
requirements that the HEOA added to TILA for private education loans 
supersede TILA's general delayed disclosure provisions implemented in 
Sec.  226.17(g).
    Special rules for student credit extensions. 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.''
    The Board proposed 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 and special rules in Sec.  226.17(i). 
Implementing new TILA section 128(e)(2)(H), proposed Sec.  
226.38(b)(3)(vii) required 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) required 
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 
Board proposed to apply the new private education loan disclosure 
regime to consolidation loans, rendering the commentary on 
consolidation loan disclosures under comment 17(i)-3 unnecessary.
    The Board believes that retaining two different disclosure regimes 
from which creditors may choose is unnecessarily complex and may not be 
useful to consumers and creditors. Thus, the final rule eliminates the 
special rules for student credit plans under Sec.  226.17(i) for loans 
for which an application is received on or after the mandatory 
compliance date of Sec. Sec.  226.46, 47, and 48.
    However, in response to public comment the Board is not eliminating 
Sec.  226.17(i) in its entirety, as proposed. 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 Board is retaining and revising Sec.  
226.17(i) to clarify that the requirement to provide a complete 
disclosures at the time the creditor and consumer agree upon a 
repayment schedule for the total obligation remains in effect for 
student credit extensions made before the mandatory compliance date of 
Sec. Sec.  226.46, 47, and 48, and for which the creditor chose not to 
make complete disclosures before consummation.
    For loans subject to Sec. Sec.  226.46, 47, and 48 the Board did 
not propose to require creditors to give a new set of disclosures once 
the creditor and consumer agree upon a repayment schedule. Consumer 
group commenters suggested that the Board require a new set of 
disclosures upon repayment. However, TILA as amended by the HEOA, does 
not require such disclosure for private education loans. The final 
rules 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.

Section 226.18--Content of Disclosures

    As discussed more fully below, the Board is adopting as proposed, 
with redesignated cross-references, revisions to the commentary to 
Sec.  226.18. The final rule requires that creditors provide the 
disclosures required in Sec.  226.18 along with the disclosures 
required with notice of approval in Sec.  226.47(b) and with the final 
disclosures required in Sec.  226.47(c). As proposed, the 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.  226.47(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 revising 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 Sec. Sec.  226.47(b) and 47(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.  226.47(b)(1)(iii), and (c)(1), 
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. Comment 47(b)(1)-2, proposed as comment 
38(b)(1)-2, discussed below, provides guidance on how creditors are to 
disclose limitations on interest rate adjustments.
    The Board is also revising, as proposed, 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 is 
revised, with a

[[Page 41201]]

redesignated cross-reference, to replace the reference to interim 
student credit extensions with a reference to private education loans. 
Sections 226.47(b)(3)(viii) and 226.47(c)(3) 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.  226.47, 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. Comment 47(b)(1)-1, proposed as comment 38(b)(1)-
1, clarifies 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 also proposed 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 removed the reference to interim 
interest on a student loan as an example of what is not a penalty. The 
Board did 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. Although the Board 
is retaining and revising Sec.  226.17(i), to avoid confusion between 
the terms ``student loan'' and ``private education loan,'' the Board is 
adopting the proposed revision to comment 18(k)(1)-1. The Board 
believes that the description of what constitutes a penalty in the 
remainder of revised comment 18(k)(1)-1 provides sufficient clarity 
that interim interest on a student loan would not be considered a 
penalty.

Subpart F

    The final rule, as proposed, adds a new Subpart F to contain the 
rules relating to private education loans. In the final rule, proposed 
Sec. Sec.  226.37, 38, and 39 have been redesignated to Sec. Sec.  
226.46, 47, and 48. On July 23, 2009, the Board proposed new disclosure 
requirements for closed-end loans secured by real property or a 
dwelling. In order to make these proposed provisions contiguous with 
the current Special Rules for Certain Mortgage Transactions in Subpart 
E, the Board proposed to add the new disclosure requirements to 
Sec. Sec.  226.37 and 226.38. In order to accommodate the potential for 
future rulemakings the Board is reserving Sec. Sec.  226.39 through 
226.45.

Section 226.46 Special Disclosure Requirements for Private Education 
Loans

    Section 226.46, proposed as Sec.  226.37, contains general rules 
about the disclosure and other requirements contained in Subpart F. 
Proposed Sec.  226.37(a) specified that Subpart F would apply only to 
private education loans. Section 226.46(a) of the final rule applies 
Subpart F to all extensions of credit that meet the definition of a 
private education loan in Sec.  226.46(b)(5). The final rule also 
permits, but does not require, creditors to comply with Subpart F for 
certain extensions of credit subject to Sec. Sec.  226.17 and 18 that 
are related to financing an education. Specifically, some commenters 
requested clarification as to whether certain loans that do not meet 
the definition of private education loan, but are extended to students 
who have completed graduate school for expenses related to relocation, 
medical internship or residency, or bar study would be covered. Under 
Sec.  226.46(a) of the final rule, compliance with Subpart F is 
optional for extensions of credit that are extended to a consumer for 
expenses incurred after graduation from a law, medical, dental, 
veterinary or other graduate school and related to relocation, study 
for a bar or other examination, participation in an internship or 
residency program, or similar purposes. New comment 46(a)-1 clarifies 
that if the creditor opts to comply with Subpart F, it must comply with 
all the applicable requirements of Subpart F. It also clarifies that if 
the creditor opts not to comply with Subpart F it must comply with the 
requirements in Sec. Sec.  226.17 and 18.
    Loans made for bar study, residency, or internship expenses may not 
meet the definition of ``private education loan'' in Sec.  226.46(b)(5) 
if the extension of credit will not be used, in whole or in part, for 
``postsecondary educational expenses'' as specified in Sec.  
226.46(b)(3). Consequently, under the HEOA, compliance with Subpart F 
would not be mandatory for such loans. However, the Board believes that 
permitting creditors to comply with Subpart F benefits both creditors 
and consumers. Creditor commenters requested the ability to comply with 
Subpart F for these loans because the loans are often made along with 
private education loans and share operational systems with those loans. 
Optional compliance would allow creditors to avoid the expense of 
maintaining separate compliance systems. The Board also believes that 
permitting creditors to comply with Subpart F will benefit consumers 
who will receive information about credit terms earlier in the lending 
process and gain the benefits of a 30-day acceptance period and three-
day right to cancel.
    Comment 46(a)-1, proposed as comment 37(a)-1 clarifies that if any 
part of a loan used for post-graduate expenses is also used for 
postsecondary educational expenses, then compliance with Subpart F is 
mandatory not optional. It also clarifies that, except where 
specifically provided otherwise, the requirements and limitations of 
Subpart F are in addition to the requirements of the other subparts of 
Regulation Z.
46(b) Definitions
    The HEOA amends TILA by adding a number of defined terms in new 
TILA sections 140 and 128(e). Section 226.46(b), proposed as Sec.  
226.37(b), adds these definitions to Regulation Z.
    The Board did not propose to add a definition to Regulation Z for 
one new term defined in the HEOA, ``private educational lender.'' 
Instead, the Board proposed 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.\8\ The term also includes any other person engaged in 
the business of soliciting, making, or extending private education 
loans. In the proposal, the Board stated its belief that the 
``creditor'' definition would encompass persons ``engaged in the 
business of'' extending private education loans.\9\ 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

[[Page 41202]]

the preceding calendar year. 12 CFR 226.2(a)(17).
---------------------------------------------------------------------------

    \8\ 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.
    \9\ The HEOA also covers persons engaged in the business of 
soliciting private education loans. Under Sec.  226.46(d)(1), 
proposed as Sec.  226.37(d)(1), the term solicitation is defined as 
an offer to extend credit that does not require the consumer to 
complete an application. The term ``solicit'' does 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 proposed to create an exception for depository institutions and 
Federal credit unions that do not regularly extend consumer credit. The 
Board requested comment on whether there were instances where an 
institution that does not regularly extend consumer credit nevertheless 
makes an occasional private education loan and should be covered by the 
rule. The few commenters who addressed this issue did not provide 
specific examples of depository institutions or Federal credit unions 
that make private education loans but do not meet the definition of 
creditor.
    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. The definition of creditor applies to institutions 
that extended consumer credit of any type more than 25 times in the 
preceding calendar year (or more than 5 times for transactions secured 
by a dwelling). That is, an institution need not make more than 25 
private education loans to be covered. If an institution makes 3 
private education loans and 23 automobile loans, that institution is a 
creditor. For institutions that do not meet the definition of creditor, 
the compliance burden of the private education loans rules appears 
significant for the small number of loans that they may extend. 
Applying the private education loan rules to such institutions would 
likely dissuade them from providing private education loans, 
diminishing competition and consumer choice for those consumers who may 
have access to such loans. Thus, the Board believes that this exception 
is necessary and proper to facilitate compliance with TILA, and it is 
adopted as proposed in the final rule.
    The Board also proposed to exercise its authority under TILA 
section 105(f) in applying the private education loan rules only to 
``creditors,'' as defined in Regulation Z, thereby exempting from the 
requir