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



[[Page 12463]]

-----------------------------------------------------------------------

Part II





Federal Reserve System





-----------------------------------------------------------------------



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

[[Page 12464]]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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:
    <bullet> Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#c1b3a4a6b2efa2aeacaca4afb5b281a7a4a5a4b3a0adb3a4b2a4b3b7a4efa6aeb7"><span class="__cf_email__" data-cfemail="a8dacdcfdb86cbc7c5c5cdc6dcdbe8cecdcccddac9c4dacddbcddadecd86cfc7de">[email protected]</span></a>. Include the 
docket number in the subject line of the message.
    <bullet> Fax: (202) 452-3819 or (202) 452-3102.
    <bullet> 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 http://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

[[Page 12465]]

respect to private education loans, the HEOA also amends TILA in the 
following ways:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    <bullet> 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.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> Information required to be disclosed on or with 
applications or solicitations for private education loans (Application 
and Solicitation Disclosure);
    <bullet> Information required to be disclosed when a private 
education loan is approved (Approval Disclosure); and
    <bullet> 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

[[Page 12466]]

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: http://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

[[Page 12467]]

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,

[[Page 12468]]

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:
    <bullet> Finance charge
    <bullet> Payment schedule
    <bullet> 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. Because consumers who 
receive ``firm offers of credit'' have been preapproved to receive 
credit and may be turned down only under limited circumstances, the 
Board believes that these preapproved offers are of the type intended 
to be captured as a ``solicitation,'' even though consumers are 
typically asked to provide some additional information in connection 
with accepting the offer. The proposed definition of ``solicitation'' 
would be similar to that contained in Sec.  226.5a(a)(1) for credit and 
charge card application disclosures. Proposed comment 37(d)(1)-1 would 
provide additional guidance that invitations to apply for a private 
education loan would not be considered solicitations.
    Proposed Sec.  226.38(d)(1)()(ii) would deal with provision of 
disclosures in a telephone application, or solicitation, initiated by 
the creditor. The creditor would be allowed, but not required, to 
orally disclose the information in Sec.  226.38(a). Alternatively, if 
the creditor does not disclose orally the information in Sec.  
226.38(a), the creditor would be required to provide or place in the 
mail the disclosures no later than three business days after the 
consumer requests the credit. The Board believes that orally disclosing 
to consumers all of the information in Sec.  226.38(a), including rate 
and loan cost information, information about federal loan alternatives, 
and loan eligibility requirements, may make it difficult for consumers 
to comprehend and retain the information. However, the Board recognizes 
that creditors may sometimes be able to communicate approval of the 
consumer's application at the same time that the creditor would provide 
the application disclosures. Consumers may be confused by receiving 
both the application disclosures and the approval disclosures at the 
same time. Therefore, the Board would exercise its authority under TILA 
section 105(a) to create an exception from the requirement to provide 
the application disclosures under Sec.  226.38(a) if the creditor does 
not provide oral application disclosures and does provide or place in 
the mail the approval disclosures in Sec.  226.38(b) no later than 
three business days after the consumer requests the credit. As 
explained above, the Board believes that this exception is necessary 
and proper to assure a meaningful disclosure of credit terms for 
consumers.
    The Board would also exercise its authority under TILA section 
105(f) in proposing the exemption, described above, from the 
requirement to provide the application disclosures under Sec.  
226.38(a), as required by TILA section 128(e)(1). The Board believes 
that, as described above, the application disclosure requirements would 
not provide a meaningful benefit to consumers in the form of useful 
information or protection because they would also contemporaneously 
receive the approval disclosures which would provide the consumer with 
adequate information. Moreover, the Board thinks that receiving both 
the application and approval disclosures at the same time may 
complicate and hinder the credit process by causing consumer confusion. 
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 consumer. The Board also notes that private education loans are not 
secured by the consumer's residence and that HEOA provides the consumer 
with the right to cancel the loan. Finally, in considering the last 
factor under section 105(f), the Board does not believe that the goal 
of consumer protection would be undermined by such an exemption.
    As discussed above in the section-by-section analysis under Sec.  
226.37(b)(5), proposed Sec.  226.37(d)(2)(C) would create an exception 
to the application disclosure requirement for a loan, other than open-
end credit or any loan secured by real property or a dwelling, that the 
consumer may use for multiple purposes including, but not limited to, 
postsecondary educational expenses.
    The Board requests comment on alternatives to providing application 
disclosures in telephone applications or solicitations initiated by the 
creditor.
    Approval disclosures. Proposed Sec.  226.37(d)(2) would require 
that the disclosures specified in Sec.  226.38(b) be provided before 
consummation on or with any notice to the consumer that the

[[Page 12473]]

creditor has approved the consumer's application for a loan. If the 
creditor communicates notice of approval to the consumer by mail, the 
disclosures would have to be mailed at the same time as the notice of 
approval. If the creditor provides notice of approval by telephone, the 
creditor would be required to place the disclosures in the mail within 
three business days of the notice of approval. If the creditor provides 
notice of approval in electronic form, the creditor would be allowed to 
provide the disclosures in electronic form if the creditor has complied 
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. Sec.  7001 et seq.); otherwise, the creditor would be 
required place the disclosures in the mail within three business days. 
Comment 37(d)(2)-1 would clarify that for purposes of Sec.  226.37(d), 
the more precise definition of business day (meaning all calendar days 
except Sundays and specified federal holidays) applies.
    The HEOA requires that the disclosures be provided 
contemporaneously with loan approval. However, loan approval is an 
internal process of the creditor's and it often may not be feasible to 
provide the disclosures at the precise moment that the creditor 
approves the loan. The Board believes that by requiring the disclosures 
be provided at the time the creditor communicates approval to the 
consumer, the consumer will receive the information at the earliest 
opportunity contemporaneous with loan approval. In addition, the 
proposed rule provides creditors with certainty as to when the 
disclosure must be provided. The Board believes that creditors are 
likely to notify the consumer that the loan has been approved shortly 
after approval is granted because the creditor cannot consummate and 
disburse the loan until the consumer has received the required approval 
disclosures and accepted the loan.
    The Board requests comment on alternative approaches to the timing 
of the approval disclosure.
    Final disclosures. Proposed Sec.  226.37(d)(3) would require final 
disclosures to be provided to the consumer after the consumer accepts 
the loan and at least three business days prior to disbursing the 
private education loan funds. The proposed timing of the final 
disclosure would differ slightly from the language used in the HEOA. 
For the reasons discussed below, the Board believes that creditors may 
not always be able to comply with the literal text of the HEOA, and 
that the Board's proposed timing rule would implement the purpose of 
the HEOA's final disclosure.
    The HEOA requires a final disclosure contemporaneously with the 
consummation of a private education loan. HEOA, Title X, Subtitle B, 
Section 1021(a) (adding TILA Section 128(e)(4)). Regulation Z defines 
``consummation'' as the time that a consumer becomes contractually 
obligated on a credit transaction. 12 CFR 226.2(a)(13). The 
corresponding staff commentary provides that applicable state law 
governs in determining when a consumer becomes contractually 
obligated.\4\ The Board recognizes that states define when a consumer 
becomes contractually obligated in a variety of ways. The multiple 
state definitions could result in considerable confusion among 
creditors as to the required timing of the final disclosures. Under 
many current private education loan agreements, the consumer is not 
contractually obligated until funds are disbursed to the consumer. This 
would create a compliance problem for creditors making loans in these 
cases because, in addition to requiring delivery of the final 
disclosures contemporaneously with consummation, the HEOA forbids 
creditors from disbursing funds until three business days after the 
consumer receives the final disclosures. Thus, where the consumer is 
not contractually obligated until the funds are disbursed, creditors 
cannot comply with the literal language of the HEOA; a creditor cannot 
simultaneously provide a disclosure at the time of disbursement and not 
disburse funds until three business days after the disclosure is 
provided. The HEOA adds further complexity to determining when the 
consumer becomes contractually obligated because it requires creditors 
to provide an approval disclosure to the consumer and hold the terms 
open for 30 days for the consumer to accept. It is not clear how this 
process would effect various states' interpretations of when the 
consumer becomes contractually obligated. Thus, creditors may face 
considerable uncertainty as to when the required disclosures must be 
provided.
---------------------------------------------------------------------------

    \4\ The comment states that when a contractual obligation on the 
consumer's part is created is a matter to be determined under 
applicable law; Regulation Z does not make this determination. 
Comment 2(a)(13)-1.
---------------------------------------------------------------------------

    The Board proposes to interpret the phrase ``contemporaneously with 
consummation'' to mean the time after the consumer accepts the loan and 
at least three days before disbursement. The Board believes that the 
purpose of the final disclosure, and the consumer's three-business day 
right to cancel following receipt of that disclosure, is to ensure that 
consumers are given a final opportunity to evaluate their need for a 
private education loan after acceptance and before the funds are 
actually disbursed. The proposed rule would accomplish the statute's 
objectives while ensuring that creditors have reasonable certainty in 
complying with the rule's timing requirement.
    The Board solicits comment on alternative approaches to the timing 
of the final disclosure that achieve the statutory purpose while 
ensuring that compliance is possible in all cases.
37(e) Basis of Disclosures and Use of Estimates
    Proposed Sec.  226.37(e) would require that the disclosures be 
based on the terms of the legal obligation between the parties and is 
similar to current Sec.  226.17(e). If any information necessary for an 
accurate disclosure is unknown to creditor, the creditor would be 
required to make the disclosure based on the best information 
reasonably available at the time the disclosure is provided and to 
state clearly that the disclosure is an estimate. For example, the 
creditor may not know the exact date that repayment will begin at the 
time that credit is advanced to the consumer. The creditor would be 
permitted to estimate a repayment start date based on, for instance, an 
estimate of the consumer's graduation date.
37(f) Multiple Creditors; Multiple Consumers
    Proposed Sec.  226.37(f) would provide rules for disclosures where 
there are multiple creditors or consumers. If there are multiple 
creditors only one set of disclosures may be given and the creditors 
would be required to agree which creditor must comply. If there are 
multiple consumers, the creditor would be permitted to provide the 
disclosure to any consumer who is primarily liable on the obligation.
37(g) Effect of Subsequent Events
    Under proposed Sec.  226.37(g) and comment 37(g)-1, if an event 
that occurs after consummation renders the final disclosures under 
Sec.  226.38(c) inaccurate, the inaccuracy would not be a violation of 
Regulation Z. For example, if the consumer initially chooses to defer 
payment of principal and interest while enrolled in an educational 
institution, but later chooses to make payments while enrolled, such a 
change would not make the original disclosures inaccurate. Creditors 
would still be prohibited by proposed Sec.  226.39(c), discussed below,

[[Page 12474]]

from changing the rate or terms of the loan before disbursement, except 
for changes to the rate based on changes in the index used to determine 
the rate.

Section 226.38--Content of Disclosures

    Proposed Sec.  226.38 establishes the content that a creditor would 
be required to include in its disclosures to a consumer at three 
different stages in the private education loan origination process: (1) 
On or with an application or a solicitation that does not require the 
consumer to complete an application, (2) with any notice of approval of 
the private education loan, and (3) at least three business days prior 
to disbursement of the loan funds.

Preventing Duplication of Existing TILA Disclosure Requirements

    While adding a number of disclosure requirements for private 
education loans, the HEOA did not eliminate a creditor's obligation to 
provide consumers with the information required to be disclosed before 
consummation of any closed-end loan, in accordance with TILA sections 
128(a) through (d). The HEOA requires the Board to prevent, to the 
extent possible, duplicative disclosure requirements for creditors 
making private education loans under TILA. HEOA, Title X, Subtitle B, 
Section 1021(a) (adding TILA Section 128(e)(9)). Where the disclosure 
requirements of section 128(e) differ or conflict with other disclosure 
requirements under TILA that apply to creditors, the requirements of 
section 128(e) are controlling. Id.
    The new application and solicitation disclosures required under 
Sec.  226.38(a) do not duplicate disclosures previously required under 
TILA because TILA does not require disclosures at the time of 
application or solicitation for closed-end credit. Under TILA sections 
128(a) through (d), as implemented by Sec. Sec.  226.17 and 226.18, 
closed-end loan disclosures are required to be provided only once, 
before consummation. For private education loans, however, the Board 
proposes to require the closed-end loan disclosures be provided twice--
once when the loan is approved, and again with the final disclosures, 
in manner shown in the proposed model forms in Appendix H. 
Specifically, the Board proposes to require creditors to provide 
consumers the existing Sec.  226.18 disclosures along with the new 
Sec.  226.38(b) approval disclosures. The Board also proposes to 
require that the Sec.  226.18 disclosures be provided along with the 
final disclosures required under new TILA section 128(e)(4) 
(implemented by proposed Sec.  226.38(c), discussed below).
    Under TILA sections 128(e)(2)(P) and 128(e)(4)(B), the Board has 
authority to add such other information as necessary or appropriate for 
consumers to make informed borrowing decisions. With respect to the 
application disclosures, the Board believes that combining the existing 
closed-end credit TILA disclosures with the new private education loan 
disclosures puts at the consumer's disposal the most relevant 
transaction-specific information at a point where the consumer is most 
likely to make the decision as to whether a particular private 
education loan meets the consumer's needs. Once the creditor 
communicates approval to the consumer, the consumer has the right to 
accept the loan terms at any time within 30 calendar days of the date 
the consumer receives the approval disclosures required under Sec.  
226.38(b). During this time, with a few exceptions, the creditor may 
not change the rate and terms of the loan. As a result, if the consumer 
accepts the loan within that 30-day period, the rate and terms of the 
loan approved will generally be the rate and terms of the loan 
ultimately made to the consumer. To make an informed decision during 
this deliberation period, the consumer would be best served by having 
the information required under Sec. Sec.  226.17 and 226.18, as well as 
Sec.  226.38(b).
    In addition, consistent with the requirement in Sec.  226.17 that 
creditors must provide closed-end disclosures before consummation of 
the credit transaction, proposed Sec.  226.37(d)(2) would require that 
the approval disclosure be provided before consummation. Based on 
TILA's definition of ``consummation'' in Sec.  226.2(a)(13), this means 
that the closed-end credit disclosures must be provided before the 
consumer becomes contractually obligated on the loan. State laws may 
vary as to when consummation occurs (see comment 2(a)(13)-1), but the 
Board believes that the time of approval is likely to precede the time 
at which the consumer becomes contractually obligated on a loan.
    The Board believes that providing the Sec.  226.18 disclosures a 
second time along with the final disclosures under Sec.  226.38(c) 
would enhance consumer understanding by make it easier for consumers to 
compare the approval and final disclosures. By having two sets of 
disclosures that largely mirror each other, both in content and in 
form, consumers would be able to easily compare terms between the two 
sets of disclosures and likely would be better able to decide whether 
or not to exercise their right to cancel the loan. Moreover, relatively 
few disclosures could be removed from the final disclosure if the 
current TILA disclosures were not required, given the substantial 
overlap with the HEOA requirements. Thus, requiring uniformity would 
likely enhance consumer understanding by promoting uniformity without 
unduly burdening creditors. Indeed, it may be easier for creditors to 
provide two similar forms rather than two different forms, because a 
similar operational process could be used to produce and check both 
forms.
    In combining the Sec.  226.18 disclosures with the disclosures 
under Sec. Sec.  226.38(b) and (c) in a model form, the Board proposes 
to retain many of the basic elements of the closed-end loan model form 
in existing Regulation Z Appendix H (see Appendix H-2). The proposed 
model forms are discussed further in the section-by-section analysis 
under Appendix H.
    Graduated payment disclosure. TILA section 128(e)(2)(K) requires 
the creditor to disclose whether monthly payments are graduated. This 
disclosure would be implemented as part of the requirement that 
creditors provide the information under Sec.  226.18. Specifically, the 
payment schedule disclosure under Sec.  226.18(g) requires creditors to 
show whether the payments are graduated.
    Other instances in which the Board proposes to merge specific Sec.  
226.18 disclosures with the disclosures in Sec. Sec.  226.38(b) and (c) 
to avoid duplicative disclosures are discussed throughout this section-
by-section analysis below.

General Disclosure Requirements

    Proposed comment 38-1 would clarify that the disclosures required 
under Sec.  226.38 need be provided only as applicable, except where 
specifically provided otherwise. For example, under proposed Sec. Sec.  
226.38(b)(1) and (c)(1) creditors would specifically be required to 
disclose the lack of any limitations on adjustments to the loan's 
interest rate. However, for some loans, especially for loans made to 
consolidate a consumer's existing private education loans, a number of 
the required disclosures may not apply. For example, the required 
disclosures about the availability of federal student loans would 
generally not apply to a consolidation loan because federal loan 
programs do not allow a consumer to consolidate private education 
loans. For this reason, the Board proposes to allow disclosures for 
consolidation loans to omit the disclosures required in Sec. Sec.  
226.38(a)(6), and (b)(4).

[[Page 12475]]

38(a) Application or Solicitation Disclosures
    Proposed Sec.  226.38(a) specifies the information that a creditor 
must disclose to a consumer on or with any application for a private 
education loan or any solicitation for a private education loan that 
does not require an application. The disclosures may be included either 
on the same document as the application or solicitation or on a 
separate document, as long as the creditor provides the required 
disclosures to the consumer at the required time. Other guidance on 
delivery of the disclosures required under Sec.  226.38(a) is provided 
in proposed Sec.  226.37, corresponding commentary, and in this 
section-by-section analysis under Sec.  226.37. The Board requests 
comment on whether additional guidance on the appropriate delivery of 
the application and solicitation disclosures is needed.
38(a)(1) Interest Rates
    Proposed Sec.  226.38(a)(1) would require creditors to disclose 
information regarding the interest rates that apply to the private 
education loan being offered.
    Proposed Sec.  226.38(a)(1)(i) would require creditors to disclose 
the initial interest rate or range of rates that are being offered for 
the loan. TILA section 128(e)(1)(A) requires disclosure of the 
potential range of rates of interest applicable to the loan, but does 
not clarify how this requirement should be applied to loans with 
variable interest rates that might change between the time of 
application and approval of the loan. The Board proposes to require 
that the creditor disclose the minimum and maximum starting rates of 
interest available at the time that the creditor provides the 
application or solicitation to the consumer.
    The Board recognizes that these rates might vary based on the 
creditor's underwriting criteria for a particular loan product, 
including a consumer's credit history. Based on consumer testing, the 
Board believes that providing a general explanation of how an interest 
rate would be determined provides the context necessary for a consumer 
to understand why more than one rate is being offered and how a 
creditor would determine a consumer's interest rate if the consumer 
were to apply for the loan. For this reason, the Board proposes to add 
a disclosure requirement under its TILA section 128(e)(1)(R) authority. 
If the rate will depend, in part, on a later determination of the 
consumer's creditworthiness, the creditor would be required to state 
that the rate for which the consumer may qualify will depend on the 
consumer's creditworthiness and other factors, if applicable. Proposed 
comment 38(a)(1)(i)-2 would clarify that the disclosure does not 
require the creditor to list the factors that the creditor will use to 
determine the interest rate. If, for instance, the creditor will 
determine the interest rate based on the consumer's credit score and 
the type of school the consumer attends, the creditor may state, for 
example, ``Your interest rate will be based on your creditworthiness 
and other factors.''
    Proposed comment 38(a)(1)(i)-1 would clarify that the rates 
disclosed must be rates that are actually offered by the creditor. For 
variable rate loans, the comment would provide guidance on when a rate 
disclosure would be considered timely so that the disclosed rate would 
be deemed to be actually offered. For disclosures that are mailed, 
rates would be considered actually offered if the rates were in effect 
within 60 days before mailing; for disclosures in printed applications 
or solicitations made available to the general public, or for 
disclosures in electronic form, rates would be considered actually 
offered if the rates were in effect within 30 days before printing or 
within 30 days before the disclosures are sent to a consumer's e-mail 
address; for disclosures made on an Internet Web site, rates would be 
considered actually offered when viewed by the public; and for 
disclosures in telephone applications or solicitations, rates would be 
considered actually offered if the rates are currently applicable at 
the time the disclosures are provided. Proposed comment 38(a)(1)(i)-1 
is consistent with the rules for variable-rate accuracy in credit and 
charge card application disclosures under Sec. Sec.  226.5a(c), (d), 
and (e).
    Fixed or variable rate loans, rate limitations. Proposed Sec.  
226.38(a)(1)(ii) would require the creditor to disclose whether the 
interest rate applicable to the loan is fixed or may increase after 
consummation of the transaction. TILA section 128(e)(1)(A) requires 
disclosure of whether the interest rate applicable to the loan is fixed 
or variable. Proposed comment 38(a)(1)(ii)-1 would clarify that the 
proposed variable rate disclosures would not apply to interest rate 
increases based on delinquency (including late payment), default, 
assumption, or acceleration. If the loan's interest rate would 
fluctuate solely because of one or more of these actions, but in no 
other circumstances, the interest rate would be considered fixed.
    If the interest rate may increase after consummation, the creditor 
would be required to disclose any limitations on interest rate 
adjustments, or, if there are no limitations on interest rate 
adjustments, that fact. Under proposed comment 38(a)(1)(iii)-2, when 
disclosing any limitations on interest rate adjustments, the creditor 
must disclose both: (1) The maximum allowable increase during a single 
time period, or the lack of such a limit, and (2) the maximum allowable 
interest rate over the life of the loan, or the lack of a maximum rate. 
For example, a creditor may disclose that the maximum interest rate 
adjustment is two percent in a single month and that the maximum 
interest rate on the loan can never exceed twenty-five percent over the 
life of the loan. Consistent with the Board's proposal for disclosures 
based on the maximum rate in Sec. Sec.  226.38(b) and (c) discussed 
below, limitations would include legal limits in the nature of usury or 
rate ceilings under state or federal statutes or regulations. However, 
if a rate limitation in the form of a legal limit applies (rather than 
a numerical rate limitation in the legal obligation between the 
parties) the creditor would be required to disclose that the maximum 
rate is determined by law and may change. The creditor would also be 
required to disclose that the consumer's actual interest rate may be 
higher or lower than the range of rates disclosed under Sec.  
226.38(a)(1)(i), if applicable.
    Co-signer or Guarantor Disclosure. Proposed Sec.  226.38(a)(1)(iv) 
implements TILA section 128(e)(1)(D), which requires disclosure of 
requirements for a ``co-borrower,'' including any changes in the 
applicable interest rates that may apply to the loan if the loan does 
not have a ``co-borrower.'' HEOA, Title X, Subtitle B, Section 1021(a) 
(adding TILA Section 128(e)(1)(D)). The Board interprets the phrase 
``co-borrower,'' to mean a co-signer.
    Proposed Sec.  226.38(a)(1)(iv) would require the creditor to state 
whether a co-signer is required and whether the applicable interest 
rates typically will be higher if the loan is not co-signed or 
guaranteed by a third party. If the presence of a co-signer or 
guarantor would not affect the loan's interest rate, the creditor would 
be required to disclose that fact. The rule would require only a 
statement and the creditor would not be required to estimate any 
potential changes in the applicable interest rates numerically.
38(a)(2) Fees and Default or Late Payment Costs
    Proposed Sec.  226.38(a)(2) would require disclosure of the fees or 
range of fees applicable to the private education loan and other 
default or late payment costs, implementing the fee and penalty 
disclosures required in TILA sections

[[Page 12476]]

128(e)(1)(E) and (F). Under the proposal, the creditor would have to 
itemize all fees required to obtain the private education loan (Sec.  
226.38(a)(2)(i)) and any applicable charges or fees, changes to the 
interest rate, and adjustments to principal based on the consumer's 
default or late payment (Sec.  226.38(a)(2)(ii)).
    Proposed comment 38(a)(2)-1 would explain that the creditor must 
disclose the dollar amount of each fee required to obtain the loan, 
unless the fee is based on a percentage, in which case a percentage may 
be disclosed. If the exact amount of a fee is not known at the time of 
disclosure, the creditor may disclose the dollar amount or percentage 
for each fee as an estimated range and must clearly label the fee 
amount as an estimated range.
    Neither the HEOA nor its legislative history clarifies whether 
Congress intended the fees or range of fees disclosure to require an 
itemization of all fees, or rather to allow for disclosure of a single 
dollar or percentage amount for all fees combined. The Board proposes 
to require an itemization of fees, but to permit the creditor to 
provide an estimated range of the dollar or percentage amount of each 
fee if a single dollar or percentage amount is not known. Hearings 
preceding enactment of the HEOA expressly alerted Congress to concerns 
about excessively high origination fees and the charging of separate 
additional fees.\5\ In addition, the legislative history indicates that 
the HEOA is intended to require creditors of private education loans to 
provide full information to borrowers regarding their loans and to 
protect the interests of private education loan consumers by requiring 
creditors prominently to disclose all loan terms, conditions and 
incentives.\6\
---------------------------------------------------------------------------

    \5\ See National Consumer Law Center, ``Testimony before the 
U.S. Senate Committee on Health, Education, Labor, and Pensions 
regarding `Ensuring Access to College in a Turbulent Economy' '' 
(Mar. 17, 2008), p. 8.
    \6\ See U.S. House of Representatives, Committee on Education 
and Labor, ``Higher Education Opportunity Act of 2008; Protecting 
Borrowers of Federal and Private Student Loans,'' http://edlabor.house.gov/micro/coaa_protect.shtml (visited Oct. 31, 2008).
---------------------------------------------------------------------------

    Proposed comment 38(a)(2)-2 would clarify that the fees to be 
disclosed include finance charges under Sec.  226.4, such as loan 
origination fees and credit report fees, as well as fees not considered 
finance charges but required to obtain credit, such as an application 
fee charged whether or not credit is extended.
    Implementing TILA section 128(e)(1)(E), the creditor would also be 
required to disclose fees and costs based on defaults or late payments 
of the consumer, including adjustments to the interest rate, charges, 
late fees, and adjustments to principal. The HEOA requires a similar 
disclosure at approval and again in the final disclosure required after 
the consumer accepts the loan. HEOA, Title X, Subtitle B, Section 
1021(a) (adding TILA Sections 128(e)(2)(E) and (e)(4)(B)).
    One difference between the proposal and TILA section 128(e)(1)(E) 
is that the latter requires disclosure of ``finance charges'' based on 
defaults or late payments, whereas the Board's proposed regulation 
eliminates the word ``finance'' and requires disclosures of ``charges'' 
based on defaults or late payments. TILA section 106(a) defines the 
``finance charge'' as the sum of all charges, payable directly or 
indirectly by the person to whom the credit is extended, and imposed 
directly or indirectly by the creditor as an incident to the extension 
of credit. 15 U.S.C. 1605. The Board has interpreted the definition of 
``finance charge'' in Regulation Z to expressly exclude charges for 
late payment, delinquency, default, or a similar occurrence. 12 CFR 
226.4(c)(2). By contrast, the HEOA does not define the term ``finance 
charges,'' but simply states that ``finance charges'' based on the 
consumer's default or late payment must be disclosed. HEOA, Title X, 
Subtitle B, Section 1021(a) (adding TILA Section 128(e)(1)(E)). 
However, under current Regulation Z, there are no ``finance charges'' 
based on the consumer's default or late payment. To give effect to the 
requirements of HEOA, the Board proposes to use its authority under 
HEOA and impose additional disclosure requirements including charges 
based on defaults or late payments that are not covered by the 
definition of finance charge under Regulation Z. Therefore the word 
``charges,'' without the word ``finance,'' is used in Sec.  
226.38(a)(2)(ii) and in the corresponding provisions for other private 
education loan disclosures (Sec. Sec.  226.38(b)(2)(ii) and 
226.38(c)(2)).
    The Board is not proposing to require creditors to disclose fees 
that would apply if the consumer exercised an option after consummation 
under the agreement or promissory note for the private educational 
loan, such as fees for exercising deferment, forbearance, or loan 
modification options. Creditors would not be required to disclose 
third-party fees and costs for collection- or default-related expenses 
that might be passed on to the consumer, as these are not easily 
predicted and may never apply. The Board requests comment on whether 
creditors should be required to disclose these or other fees.
38(a)(3) Repayment Terms
    Proposed Sec.  226.38(a)(3) requires disclosure of information 
related to repayment.
    Loan term. Proposed Sec.  226.38(a)(3)(i) implements TILA section 
128(e)(1)(G), which requires disclosure of the term of the private 
education loan. Proposed comment 38(a)(3)(i)-1 would clarify that the 
term of the loan is the period of time during which regular principal 
and interest payments must be paid on the loan. For example, where 
repayment begins upon consummation of the private education loan, the 
disclosed loan term would be the same as the full term of the loan. By 
contrast, where repayment does not begin until, for instance, after the 
student is no longer enrolled, the disclosed loan term would be shorter 
than the full term of the loan. If more than one repayment term is 
possible, the creditor must disclose the longest possible repayment 
term.
    Payment deferral options. Proposed Sec.  226.38(a)(3)(ii) would 
require disclosure of information relating to the options offered by 
the creditor to the consumer to defer payments during the life of the 
loan, implementing TILA section 128(e)(1)(I). Under the Board's TILA 
section 105(e)(1)(R) authority, the proposal would also require that if 
the creditor does not offer any options to defer payments, the creditor 
would be required to state that fact. Proposed comment 38(a)(3)-2 would 
clarify that payment deferral options include both options to defer 
payment while the student is enrolled and options for payment deferral, 
forbearance or payment modification during the loan's repayment term. 
The disclosure would be required to include a description of the length 
of the deferment period, the types of payments that may be deferred, 
and a description of any payments that are required during the 
deferment period. The creditor would also be permitted to disclose any 
conditions applicable to the deferment option, such as that deferment 
is permitted only while the student is continuously enrolled.
    Under proposed Sec.  226.38(a)(3)(iii) and proposed comment 
38(a)(3)-3, if the creditor offers payment deferral options that apply 
while the student is enrolled in a covered educational institution, the 
creditor would be required to disclose the following additional 
information for each deferral option: (1) Whether interest will accrue 
while the student is enrolled in a covered educational institution; and 
(2) if interest accrues while the student is enrolled at a covered 
educational institution, whether payment of interest may be

[[Page 12477]]

deferred and added to the principal balance.
    Proposed comment 38(a)(3)-4 would explain that disclosure of 
payment deferral options may be combined with the disclosure of cost 
estimates required in Sec.  226.38(a)(4). For example, the creditor 
could describe each payment deferral option in the same chart or table 
that provides the cost estimates for each payment deferral option. This 
approach is used in the Board's model form contained in Appendix H-18.
38(a)(4) Cost Estimates
    Implementing TILA section 128(e)(1)(K), proposed Sec.  226.38(a)(4) 
would require a creditor to provide an example of the total cost to a 
consumer of a sample loan at the maximum rate of interest actually 
offered by the creditor, from the time of consummation until the loan 
is repaid. The HEOA does not define the term ``total cost,'' and the 
Board is interpreting ``total cost'' to mean the total of payments 
disclosed in accordance with the rules in Sec.  226.18(h). See proposed 
comment 38(a)(4)-1.
    Principal amount and fees. Under proposed Sec.  226.38(a)(4) and 
comment 38(a)(4)-2, creditors would be required to disclose an example 
of the total cost of the loan calculated using the maximum rate of 
interest applicable to the loan and the fees applicable to loans at the 
highest rate of interest that results in a $10,000 amount financed. For 
example, if the creditor offers a range of rates and fees that depend 
on the consumer's creditworthiness and particular fees will apply to 
loans with the highest interest rate, then the creditor must include 
those fees in the total cost example.
    In order to provide consumers with information about the effect 
that financing fees has on the total cost of the loan, proposed Sec.  
226.38(a)(4)(i) and comment 38(a)(4)-2 would require that the creditor 
base the total cost example on a $10,000 principal amount plus the 
finance charges applicable to loans at the maximum rate of interest. 
For example, if the creditor charges a 3% origination fee on loans with 
the highest interest rate, and finances the 3% fee, the creditor would 
calculate the total cost of the loan based on a $10,300 principal 
amount. However, while the creditor must base the calculation on the 
principal amount, the creditor must disclose that the example provides 
the total cost of a $10,000 amount financed, rather than disclosing the 
principal amount used in calculating the loan.
    The HEOA calls for an example based on the principal amount 
actually offered by the creditor. However, at the application stage, 
the creditor does not know the specific principal amount the consumer 
will request. Rather than permit each creditor to choose a principal 
amount upon which to base the disclosure, the Board believes that 
specifying uniform assumptions about the principal amount will allow 
consumers more easily to compare different loan products. The proposal 
would allow consumers to compare the cost of receiving a uniform 
$10,000 under different loans.
    The Board recognizes that finance charges could be added to the 
total cost of the loan in two different ways. The proposal would 
require creditors to assume that the consumer borrows more than $10,000 
if any finance charges are assessed. Alternatively, the total cost 
could be calculated assuming that the consumer only borrows $10,000 and 
pays finance charges separately by cash or check, or deducts them from 
the $10,000 loan amount. Under the alternative approach, the total cost 
would be calculated by adding any finance charges to the total of 
payments. For example, if a $10,000 has a 3% origination fee, the 
creditor would calculate the total of payments based on a $10,000 loan 
amount and add the $300 finance charge to the total of payments to 
calculate the total cost of the loan. By contrast, the proposal would 
require increasing the assumed principal amount to account for any 
finance charges, thereby allowing the consumer to compare not only the 
amount of the finance charges, but the effect on the loan's total cost 
of repaying those finance charges plus interest over time.
    The Board also proposes to provide creditors with flexibility if 
they do not make loans of the size that the Board specifies. If the 
creditor only offers a particular loan for less than $10,000, the 
creditor must use a $5,000 principal amount.
    The Board requests comment on alternative ways of ensuring that the 
total cost example reflects the cost of loan fees. Specifically, the 
Board requests comment on whether an assumed principal amount of 
$10,000 should be used without adding finance charges to the principal 
amount, but instead separately adding the finance charges to the total 
of payments. The Board requests comment on whether private education 
loan consumers have historically been more likely to add finance 
charges to the loan amount they request, or to deduct the finance 
charges from the principal amount requested (or pay them separately by 
cash or check). The Board also requests comment on practical 
limitations, if any, for creditors to determine the fees under Sec.  
226.38(a)(2)(i) that would be applicable to loans where the maximum 
rate of interest applies. The Board also requests comment on whether 
the total cost example should be based on a $10,000 amount financed, as 
proposed, or on a higher or lower amount. The Board also requests 
comment on whether the $5,000 amount financed is an appropriate 
alternative where creditors do not offer loans of $10,000 or more.
    Maximum rate. Proposed comment 38(a)(4)-3 would clarify that the 
maximum rate of interest used to calculate the example of the total 
cost of the loan must be the maximum initial rate of interest disclosed 
in the range of rates under Sec.  226.38(a)(1)(i). As discussed above 
in the section-by-section analysis under Sec.  226.38(a)(1)(i), this 
would mean the maximum interest rate that the creditor offers at the 
time that the application or solicitation is provided.
    Payment deferral options. Under the proposed rule, the creditor 
would have to disclose total loan cost examples for each payment 
deferral option disclosed in Sec.  226.38(a)(3)(iii). If a creditor 
offers a private education loan where payment options include, for 
example, (1) immediate repayment of both principal and interest upon 
consummation, (2) deferment of principal payments while the student is 
in school, or (3) deferment of both principal and interest payments 
while the student is in school, the disclosure must reflect a cost 
example for each option.
    Proposed comment 38(a)(4)-4 would clarify that when a creditor 
calculates an estimate of the total cost of the loan where interest 
capitalizes, the creditor must calculate the estimate using the same 
capitalization method that it would use for the loan itself. For 
example, if a creditor would capitalize interest on the loan on a 
quarterly basis, then each total cost estimate where interest is 
capitalized must assume interest capitalizes on a quarterly basis.
    Proposed comment 38(a)(4)-5 would provide guidance on the assumed 
deferral period on which to base the total cost example. For loan 
programs intended for educational expenses of undergraduate students, 
the creditor must assume that the consumer defers payments for four 
years plus the loan's maximum applicable grace period, if any. For all 
other loans the creditor must assume that the consumer defers for the 
lesser of two years plus the maximum applicable grace period, if any, 
or the maximum time the consumer may defer payments under the loan 
program. The Board believes that consumers will be better able to 
compare loan cost examples for loans

[[Page 12478]]

that allow the consumer to defer payments if those examples are based 
on uniform assumptions about how long the consumer will remain in 
school. The Board proposes to require creditors assume a four-year 
deferral period for consumers applying for undergraduate loans. Most 
undergraduate programs are four years long, and using a four year term 
would ensure that the disclosure is most meaningful to consumers who 
are at the beginning of their undergraduate education, and therefore 
likely are considering education loans for the first time. For all 
other types of loans, the proposal requires creditors assume a two year 
enrollment period or to use the maximum deferral period for the loan if 
the maximum period is less than two years. The Board believes that a 
two year enrollment period represents a term that would be applicable 
to most other postsecondary education programs and would meaningfully 
inform consumers of the effect of deferring payment on the total costs 
of the loan for more than a minimal period of time.
    The Board requests comment on the proposed deferral period 
assumptions for calculating the total cost examples under Sec.  
226.38(a)(4). Specifically, the Board requests comment on whether 
creditors should be allowed to modify the total cost disclosure if the 
creditor knows a consumer's specific situation. For example, if the 
creditor knows that a consumer is a college senior, whether the 
creditor should be allowed to provide a cost estimate based on a one 
year deferral period, rather than a four year deferral period. The 
Board also requests comment on whether two years is an appropriate term 
for non-undergraduate private education loans, or whether another term 
that would be a statistically more accurate representation of an 
average or median deferment period should be used. The Board also 
requests comments on whether lenders should be permitted to modify the 
disclosure for specific educational programs that are generally of a 
fixed length, such as three years for law school or four years for 
medical school.
38(a)(5) Eligibility
    Proposed Sec.  226.38(a)(5) would implement TILA section 
128(e)(1)(J) which requires disclosure of the general eligibility 
criteria for a private education loan. The proposal would specify the 
eligibility criteria that must be disclosed. The creditor would have to 
disclose any age or school enrollment eligibility requirements 
regarding the consumer or co-signer, if applicable. The Board requests 
comments on whether other types of eligibility requirements should be 
disclosed.
38(a)(6) Alternatives to Private Education Loans
    In Sec.  226.38(a)(6), the Board proposes to implement TILA 
sections 128(e)(1)(L), (M), (N), and (Q) by requiring statements 
regarding the following alternatives to private education loans: (1) 
Education loans offered or guaranteed by the federal government and (2) 
school-specific education loan benefits and terms potentially offered 
by a covered educational institution.
    Concerning federal education loans, a creditor would be required to 
disclose the following: (1) A statement that the consumer may qualify 
for Federal student financial assistance through a program under title 
IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), (2) 
the interest rates available under each program and whether the rates 
are fixed or variable, as prescribed in the Higher Education Act of 
1965 (20 U.S.C. 1077a), and (3) a statement that the consumer may 
obtain additional information concerning Federal student financial 
assistance from the relevant institution of higher education, or at the 
Web site of the Department of Education, including an appropriate Web 
site address. Proposed comment 38(a)(6)(ii)-1 would explain that the 
disclosure must list the address of an appropriate U.S. Department of 
Education Web site such as ``federalstudentaid.ed.gov.''
    To avoid overloading consumers with information and to ensure that 
consumers notice the most important information about federal student 
loans, the Board is proposing to exercise its authority under TILA 
section 105(a) to make exceptions to the statute by not requiring 
creditors to state that federal loans may be obtained in lieu of or in 
addition to private education loans. Instead the Board's proposed model 
forms would label the disclosure as ``Federal Loan Alternatives.'' See 
proposed App. H-18, H-19. For these reasons, and those explained 
further below, the Board believes that this exception is necessary and 
proper to effectuate meaningful disclosure of credit terms to 
consumers.
    The Board also proposes to exercise its authority under TILA 
section 105(f) to exempt private education loans from the specific 
disclosure requirement about federal loans, pursuant to the HOEA 
amendment to TILA sections 128(e)(1)(M) and 128(e)(2)(L). The Board 
believes that this specific requirement does not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
In testing, consumers' understanding that federal loans are available 
in lieu of or in addition to private education loans was enhanced by 
simply providing them a clear and prominent label indicating that the 
disclosures contained information about federal loan alternatives. The 
Board considered that the private education loan population includes 
students who may lack financial sophistication and that the size of the 
loan could be relatively significant and important to the borrower. 
However, as explained above, the Board believes that the borrower would 
receive meaningful information about federal loans through the other 
disclosures and the model form. The Board also recognizes that private 
education loans would not be secured by the principal residence of the 
consumer, which is a factor for consideration under section 105(f). 
Furthermore, the HEOA provides significant rights, such as the right to 
cancel the loan. The Board believes that consumer protection would not 
be undermined by this exemption.
    For each title IV program enumerated in the disclosure (e.g., 
Perkins, Stafford (both subsidized and unsubsidized), and PLUS loans), 
the creditor must disclose the interest rate corresponding to each loan 
program, as well as whether those rates are fixed or variable. The 
Board proposes to require disclosure of whether the federal loan rates 
are fixed or variable, under its TILA section 128(e)(1)(R) authority. 
The Board believes this additional disclosure is necessary in order to 
provide consumers with a more complete description of the nature of the 
federal loans' interest rates and to aid in comparison of federal loan 
programs to private education loans. During the Board's consumer 
testing, consumers have indicated that the disclosure that federal 
student loans have fixed rates is important information to them. 
Federal student loan interest rates are set by statute. Currently, 
federal student loan interest rates are fixed rates rather than 
variable rates, but this has not always been the case. For this reason, 
the proposal would require a disclosure of whether the rates are fixed 
or variable.
    The statute that sets the federal student loan interest rates 
currently contains a schedule with different fixed rates for loans 
originated at different times. See Higher Education Act of 1965 (20 
U.S.C. 1077a). For example, the fixed rates on subsidized Stafford 
loans are currently 6.0% for loans originated or applied for (depending 
on the loan) before July 1, 2009. For loans after July 1, 2009, the 
fixed interest rate will be

[[Page 12479]]

5.6%. Where the interest rate for a loan varies depending on the date 
of disbursement or receipt of application, the creditor must disclose 
only the current interest rate as of the time the disclosure is 
provided.
    To implement TILA section 128(e)(1)(L), the proposal would also 
require the creditor to disclose that a covered educational institution 
may have school-specific education loan benefits and terms not detailed 
on the disclosure form. School-specific education loan benefits and 
terms might include loans with special terms negotiated by the school 
with particular creditors, or loans extended by the covered educational 
institution itself to its students. The creditor would not be required 
to state what school-specific education loan benefits and terms might 
be available because these may vary widely, but rather would be 
required to alert the consumer to the possibility that school-specific 
education loan benefits and terms might be available to the consumer.
38(a)(7) Rights of the Consumer
    Proposed Sec.  226.38(a)(7) would implement TILA section 
128(e)(1)(O), by identifying for the consumer certain rights relating 
to the private education loan.
    Thirty day right of acceptance. Proposed Sec.  226.38(a)(7)(i) 
would require the creditor to alert the consumer that, should the 
consumer apply for the loan and the loan application be approved, the 
consumer would have the right to accept the terms of the loan at any 
time within 30 calendar days following notice of loan approval. TILA 
section 128(e)(1)(O)(i) requires a disclosure that the consumer has 30 
days to accept and consummate the loan. However, as discussed in the 
section-by-section analysis under Sec.  226.39(c)(1), because 
acceptance and consummation may not happen at the same time, the Board 
is proposing to provide the consumer the full 30-day period in which to 
accept the loan, even if consummation happens later.
    Prohibition on loan term changes. Under proposed Sec.  
226.38(a)(7)(ii), the creditor would have to state that, except for 
changes based on adjustments to the index used to determine the rate 
for the loan, the creditor may not change the rates and terms of the 
loan during the 30-day acceptance period described in Sec.  
226.38(a)(7)(i). The proposed rule allows the creditor to give 
consumers a period of time longer than 30 days in which to accept the 
loan and during which time the rates and terms offered could not change 
(except for changes based on adjustments to the applicable index). 
Creditors choosing to give consumers a period of time in which to 
accept the loan that is longer than 30 calendar days would be required 
to disclose this alternate time period.
    As discussed in the section-by-section analysis in Sec.  226.39(c), 
the Board is proposing to allow the creditor to make unequivocally 
beneficial changes, to make changes based on a request by the consumer, 
and is requesting comment on whether other changes should be allowed. 
The Board requests comment on whether the application disclosure should 
include more detail on possible changes to the rate or terms.
38(a)(8) Self-Certification Information
    Proposed Sec.  226.38(a)(8), which implements TILA section 
128(e)(1)(P), would require a statement, if applicable, that before the 
loan may be consummated, the consumer must obtain the self-
certification form required under Sec.  226.39(e), and sign and submit 
the completed form to the creditor.
    As discussed in the section-by-section analysis under Sec.  
226.39(e), the disclosure regarding the self-certification form is 
required only for expenses to be used by a student enrolled in an 
institution of higher education. It would not apply to consolidation 
loans and would not apply to loans to students attending covered 
educational institutions that do not meet the definition of institution 
of higher education.
226.38(b) Approval Disclosures
    Proposed Sec.  226.38(b) specifies the information that a creditor 
must disclose to a consumer on or with any notice of approval provided 
to the consumer. Guidance on delivery of the disclosures required under 
Sec.  226.38(b) is provided in proposed Sec.  226.37, corresponding 
commentary, and in the section-by-section analysis under Sec.  226.37.
    As discussed above in the section-by-section analysis under Sec.  
226.38(a), the creditor would be required to make the disclosures 
required under Sec. Sec.  226.17 and 226.18 as well as the disclosures 
required under Sec.  226.38(b).
38(b)(1) Interest Rate
    Implementing TILA section 128(e)(2)(A), proposed Sec.  
226.38(b)(1)(i) would require a creditor to disclose the interest rate 
that applies to the private education loan for which the consumer has 
been approved.
    Fixed or variable rate, rate limitations. Implementing TILA section 
128(e)(2)(A) and (B), proposed Sec. Sec.  226.38(b)(1)(ii) and (iii) 
would require the creditor to disclose whether the interest rate is 
fixed or variable and any limitations, or the absence of limitations, 
on changes to the variable interest rate.
    Proposed comment 38(b)(1)-1 would clarify that a private education 
loan would only be considered to have a variable rate if the terms of 
the legal obligation allow the creditor to increase the rate originally 
disclosed to the consumer. However, a rate is not considered variable 
if increases result only from delinquency, default, assumption or 
acceleration. The comment would also clarify that the creditor must 
make the other variable-rate disclosures required under Sec. Sec.  
226.18(f)(1)(i) and (iii)--the circumstances under which the rate may 
increase and the effect of an increase, respectively. The creditor 
would not be required to provide an example of the payment terms that 
would result from an increase under Sec.  226.18(f)(1)(iv). Current 
comment 18(f)(1)(iv)-2 provides that creditors need not provide the 
hypothetical example for interim student credit extensions. However, 
the Board believes that the requirement to disclose the maximum monthly 
payment based on the maximum possible rate in Sec.  226.38(b)(3)(viii) 
satisfies the requirement under Sec.  226.18(f)(1)(iv) of an example of 
the payment terms that would result from an increase in the rate. In 
order to avoid duplicative examples of the effect of a rate increase, 
proposed comment 38(b)(1)-1 would clarify that, although the creditor 
need not disclose a separate example under Sec.  226.18(f)(1)(iv), the 
creditor is nevertheless required to disclose the maximum monthly 
payment in Sec.  226.38(b)(2)(viii).
    As explained in the section-by-section analysis under Sec.  226.18 
(discussing the proposed changes to comment 18(f)(1)(ii)-1), proposed 
comment 38(b)(1)-2 would clarify that the rules regarding disclosure of 
limitations on interest rate increases for private education loans 
differ from the general rules in Sec.  226.18(f)(1)(ii) and comment 
18(f)(1)(ii)-1. Specifically, proposed Sec.  226.38(b)(1)(iii) would 
require that creditors explicitly disclose the lack of any limitations 
on interest rate adjustments. By contrast, existing comment 
18(f)(1)(ii)-1 does not require creditors to disclose the absence of 
limits on interest rate adjustments. In addition, under proposed Sec.  
226.38(b)(1)(iii), 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. However, if a rate limitation 
in the form of a legal limit applies

[[Page 12480]]

(rather than a numerical rate limitation in the legal obligation 
between the parties) the creditor must disclose that the maximum rate 
is determined by law and may change.
38(b)(2) Fees and Default or Late Payment Costs
    Implementing TILA sections 128(e)(2)(E) and (F), proposed Sec.  
226.38(b)(2) and proposed comment 38(b)(2)-1 would require the creditor 
to provide to the consumer the fee and penalty information required 
under proposed Sec.  226.38(a)(2), as explained in the section-by-
section analysis for proposed Sec.  226.38(a)(2). Under Sec.  226.18(l) 
creditors are required to disclose any dollar or percentage charge that 
may be imposed before maturity due to late payment, other than a 
deferral or extension charge. Creditors must disclose any charges that 
are required to be disclosed under Sec.  226.18(l) with the disclosures 
required under Sec.  226.38(b)(2). In addition, if the creditor 
includes the itemization of the amount financed under Sec.  226.18(c), 
any fees disclosed as part of the itemization need not be separately 
disclosed elsewhere.
38(b)(3) Repayment Terms
    Proposed Sec.  226.38(b)(3) requires disclosure of information 
related to repayment.
    Principal amount. Proposed Sec.  226.38(b)(3)(i) implements TILA 
section 128(e)(2)(D), which requires disclosure of the ``initial 
approved principal amount.'' Regulation Z currently uses the term 
``principal loan amount'' as part of its requirement to disclose the 
``amount financed.'' As explained below, however, the Board is not 
proposing to equate the terms ``principal loan amount'' and ``initial 
approved principal amount.''
    Under current Regulation Z, the amount financed must be calculated 
by doing the following:

    (1) Determining the principal loan amount * * * (subtracting any 
downpayment);
    (2) Adding any other amounts that are financed by the creditor 
and are not part of the finance charge; and
    (3) Subtracting any prepaid finance charge. 12 CFR 226.18(b).

    Regarding the first part of this calculation, determining the 
``principal loan amount,'' the commentary states that creditors have 
the option (when the charges are not add-on or discount charges) of 
either including or excluding the amount of the finance charges. As the 
commentary points out, this means that the ``principal loan amount'' 
for this calculation may, but need not, equal the face amount of the 
note. Comment 18(b)(3)-1. If the creditor opts to include finance 
charges in the principal loan amount, the creditor should deduct these 
charges from the principal loan amount as prepaid finance charges when 
calculating the amount financed. Id.
    Rather than equate Regulation Z's existing term ``principal loan 
amount'' with the HEOA's ``initial approved principal amount,'' the 
Board's view is that the most straightforward and easy-to-understand 
approach is to define ``initial approved principal amount'' as the face 
amount of the note if the transaction occurred on the terms approved. 
The ``initial approved principal amount'' under Sec.  226.38(b)(3)(i) 
should include all charges incorporated in the approved loan amount--in 
other words, the total amount borrowed. This amount should reflect what 
the face amount of the note would be if the loan were given based on 
the loan amount initially approved. For example, prepaid finance 
charges, as defined and discussed in comment 18(b)(3)-1, should not be 
included if they would not be included in the amount on the face of the 
note.
    The Board believes that defining ``initial approved principal 
amount'' in this way will not cause consumer confusion with Regulation 
Z's use of the term ``principal loan amount'' in Sec.  226.18(b), 
because ``principal loan amount'' is not currently a stand-alone 
disclosure in Regulation Z that consumers could confuse with the 
``initial approved principal amount.'' Defining the ``initial approved 
principal amount'' in Sec.  226.38(b)(3)(i) as distinct from the term 
``principal loan amount'' in Sec.  226.18(b) may also reduce creditor 
confusion about whether the definition of ``initial approved principal 
amount'' changes how the ``amount financed'' is calculated under Sec.  
226.18(b). As noted above, ``principal loan amount'' is a term used 
only as part of the calculation of the ``amount financed'' disclosure. 
Current comment 18(b)(3)-1 permits creditors to decide whether to 
include or exclude prepaid finance charges in the ``principal amount,'' 
but solely in the discrete context of calculating the ``amount 
financed.''
    In addition, in order to minimize potentially duplicative 
disclosures, proposed comment 38(b)(3)-1 would explain that creditors 
may disclose the initial approved principal amount as part of the 
itemization of the amount financed. The creditor would be permitted to 
disclose the initial approved principal amount as part of the 
itemization of the amount financed only if the creditor states the 
approved principal amount as part of the itemization. The proposed 
sample form in Appendix H-22 provides an example of this disclosure. 
Also, as discussed above, Sec.  226.17(a)(1) would be revised to allow 
the itemization of the amount financed to be included with the required 
disclosures, rather than disclosed separately.
    Loan term. Proposed Sec.  226.38(b)(3)(ii) and comment 38(b)(3)-2 
implement TILA section 128(e)(2)(G), which requires disclosure of the 
maximum term of the private education loan program. The term of the 
loan is the period of time during which regular principal and interest 
payments must be paid on the loan. For example, where repayment begins 
upon consummation of the private education loan, the disclosed loan 
term would be the same as the full term of the loan. By contrast, where 
repayment does not begin until, for instance, after the student is no 
longer enrolled, the disclosed loan term would be shorter than the full 
term of the loan. If more than one repayment term is possible, the 
creditor must disclose the longest possible repayment term.
    Payment deferral options. Proposed Sec.  226.38(b)(3)(iii) and 
proposed comment 38(b)(3)-3 would require the creditor to provide 
information about deferral options, implementing TILA section 
128(e)(2)(J). This disclosure is similar to the requirement under 
proposed Sec.  226.38(a)(3)(ii), as explained in the section-by-section 
analysis for that section. The difference between proposed Sec. Sec.  
226.38(a)(3)(ii) and 226.38(b)(3)(iii) is that the creditor must 
explain the deferral option chosen by the consumer, if the consumer has 
chosen a deferral option, and any deferral options that the consumer is 
permitted to choose in the future. The section-by-section analysis of 
the deferral options disclosure of Sec.  226.38(a)(3)(ii) describes the 
information that must also be included in the explanation of deferral 
options under Sec.  226.38(b)(3)(iii).
    Payments required during enrollment. Proposed Sec.  
226.38(b)(3)(iv) and comment 38(b)(3)-4 would require the creditor to 
disclose to the consumer whether any payments are required on the loan 
while the student is enrolled, implementing TILA section 128(e)(2)(I). 
The creditor also must describe the payments required during 
enrollment, such as principal and interest payments or interest-only 
payments. The payments required during enrollment may depend on the 
deferral option chosen by the consumer. The disclosure under Sec.  
226.38(b)(3)(iv) would be required to correspond to the deferral option 
chosen by the consumer.

[[Page 12481]]

    Estimate of interest accruing during enrollment. Also implementing 
TILA section 128(e)(2)(I), proposed Sec.  226.38(b)(3)(v) would apply 
only if interest will be charged on the private education loan while 
the student is enrolled, and the consumer will not be paying interest 
on the loan during this time. This disclosure would require the 
creditor to give the consumer an estimate of the interest that will 
accrue on the loan during enrollment.
    Bankruptcy limitations. Proposed Sec.  226.38(b)(3)(vi) would 
require disclosure of a statement of limitations on the discharge of a 
private education loan in bankruptcy. Proposed comment 38(b)(3)-5 would 
state that a creditor may comply with Sec.  226.38(b)(vi) by disclosing 
the following statement: ``If you file for bankruptcy you may still be 
required to pay back this loan.'' To avoid overloading the consumer 
with information, the Board proposes to require a general statement 
that student loans may not be dischargeable in bankruptcy rather than 
require a detailed disclosure of student loan bankruptcy rules and 
limitations.
    The disclosure of limitations of discharge of private educational 
loans in bankruptcy is mandated by TILA section 128(e)(2)(E) for the 
approval disclosures and TILA section 128(e)(4)(B) for the final 
disclosures. It is not statutorily required in the application and 
solicitation disclosures prescribed by TILA section 128(e)(1)(E). The 
Board requests comment on whether disclosure of education loan 
discharge limitations in bankruptcy should be included in the 
application and solicitation disclosures as implemented by Sec.  
226.38(a)(2).
    Total amount for repayment. TILA section 128(e)(2)(H) requires the 
creditor to disclose an estimate of the total amount for repayment 
calculated based on: (1) the interest rate in effect on the date of 
approval; and (2) the maximum possible rate of interest applicable to 
the loan or, if a maximum rate cannot be determined, a good faith 
estimate of the maximum rate.
    Proposed Sec.  226.38(b)(3)(vii) would define the total amount for 
repayment in the same manner as the current Regulation Z closed-end 
credit disclosure of the total of payments. 12 CFR 226.18(h). Neither 
the HEOA nor its legislative history provides guidance on the 
definition of ``total amount for repayment.'' Regulation Z defines 
``total of payments'' as the amount the consumer will have paid when 
the consumer has made all scheduled payments. 12 CFR 226.18(h). In some 
cases, the total of payments will not exactly match the total amount 
that the borrower must repay. For example, if the borrower pays prepaid 
finance charges separately in cash, the amount of these charges will 
not be reflected in the total of payments. However, the Board believes 
that requiring separate disclosures for the ``total amount for 
repayment'' and the ``total of payments'' would likely cause consumer 
confusion and that both terms are meant to capture the amount that the 
borrower will have paid after making all scheduled payments to repay 
the loan. Accordingly, in order to avoid duplication, proposed comment 
38(b)(3)-6.i would clarify that compliance with the total of payments 
disclosure under Sec.  226.18(h) constitutes compliance with the 
requirement to disclose the total amount for repayment at the interest 
rate in effect on the date of approval.
    Maximum rate. For the requirement that the creditor disclose an 
estimate of the total amount for repayment at the maximum possible rate 
of interest, proposed Sec.  226.38(b)(3)(vii) and comment 38(b)(3)-6.ii 
would require that either the maximum possible rate be used or, if a 
maximum rate cannot be determined, an assumed rate of 21%. For example, 
if the creditor were in a state without a usury limit on interest 
rates, and the legal agreement between the parties did not specify a 
maximum rate, the creditor would have to base the disclosure on a rate 
of 21%.
    Under proposed comment 38(b)(3)-6.ii, a maximum rate would include 
a legal limit in the nature of a usury or rate ceiling under state or 
federal statutes or regulations, and the creditor would be required to 
calculate the total amount for repayment based on that rate, and to 
disclose that the maximum rate is determined by law and may change.
    TILA section 128(e)(2)(H) requires that, if a maximum rate cannot 
be determined, the creditor must use a good faith estimate of the 
maximum rate. The Board would use its authority under the HEOA to add a 
requirement that where a maximum rate cannot be determined, the 
creditor use a rate of 21%. The Board believes that such a rule is 
necessary and appropriate for consumers to make informed borrowing 
decisions. A rule providing a uniform maximum rate assumption will give 
creditors more certainty in complying with the regulation. The Board 
believes that the proposed rate of 21% represents an appropriate 
midpoint in the range of usury rate ceilings that consumers in the 
private education loan market are likely to face. Thus, the Board 
believes that basing the disclosure on an assumed maximum rate of 21% 
will assist consumers in comparing different loans by providing 
consumers with an estimated total amount for repayment that will be 
similar between states with and without usury rate limitations.
    In addition, under the Board's TILA section 128(e)(2)(P) and 
128(e)(4)(B) authority, the proposal would add a requirement that, if 
the legal obligation between the parties does not specify a numeric 
maximum rate, the creditor must accompany the estimated total amount 
for repayment with a statement that: (1) No maximum interest rate 
applies to the private education loan; (2) the maximum interest rate 
used to calculate the total amount for repayment is an estimate; and 
(3) the total amount for repayment disclosed is an estimate and will be 
higher if the applicable interest rate increases. The Board believes 
that these additional disclosures are necessary to inform consumers 
that the examples in the disclosure statement are merely illustrative 
and that their loan in fact has no maximum rate.
    The HEOA allows the creditor to disclose the total amount for 
repayment under Sec.  226.38(b)(3)(vii) as an estimate. Proposed Sec.  
226.38(b)(3) would also require only an estimated total amount for 
repayment. The Board recognizes that permitting disclosure of an 
estimate of the total amount for repayment is necessary because the 
interest rates on most private education loans are variable and the 
repayment schedule is often not known at the time that the disclosures 
under Sec.  226.38(b) must be provided to the consumer. However, the 
creditor would not be permitted to disclose an estimate of the total 
amount for repayment if the applicable rates and repayment schedule are 
known at the time of disclosure, such as with a consolidation loan.
    The Board requests comment on whether a specific maximum rate 
assumption should be used for disclosures where a maximum rate cannot 
be determined, and, if so, whether 21% is the most appropriate rate or 
whether another rate should be used. The Board also requests comment on 
whether, if a maximum rate of interest is to be specified, the Board 
should publish the rate periodically, based on a median or a commonly 
used usury rate applicable to private education loans in various 
states. The Board also requests comment on alternative approaches by 
which creditors may make a good faith estimate of a maximum possible 
rate when a maximum rate cannot be determined.
    Maximum monthly payment. Proposed Sec.  226.38(b)(3)(viii) would

[[Page 12482]]

implement TILA section 128(e)(2)(O) by requiring the creditor to 
disclose the maximum monthly payment calculated based on the maximum 
rate of interest applicable to the loan or, if a maximum rate cannot be 
determined, for the reasons discussed above, an assumed rate of 21%. In 
addition, as discussed above, under the Board's TILA section 
128(e)(2)(P) and 128(e)(4)(B) authority, the proposal would add a 
requirement that the creditor state that: (1) No maximum interest rate 
applies to the loan; (2) the maximum interest rate used to calculate 
the maximum monthly payment amount is an estimate; and (3) the maximum 
monthly payment amount is an estimate and will be higher if the 
applicable interest rate increases.
    As with proposed Sec.  226.38(b)(3)(vii), the Board requests 
comment on other approaches by which creditors may calculate a maximum 
payment when a maximum rate cannot be determined.
38(b)(4) Alternatives to Private Education Loans
    Implementing TILA section 128(e)(2)(M), proposed Sec. Sec.  
226.38(b)(4)(i), (ii), and (iii) would require the creditor to provide 
the information about alternatives to private education loans for 
financing education that is also required under proposed Sec. Sec.  
226.38(a)(6)(i), (ii), and (iii) and explained in the section-by-
section analysis for those sections. The Board again proposes to use 
its authority under TILA sections 105(a) and 105(f) to make exceptions 
to the statute by not requiring creditors to state that federal loans 
may be obtained in lieu of or in addition to private education loans. 
As explained in the section-by-section analysis for Sec. Sec.  
226.38(a)(6)(i), (ii), and (iii), the Board believes that this 
exception is necessary and proper to effectuate meaningful disclosure 
of credit terms to consumers.
38(b)(5) Rights of the Consumer
    Implementing TILA section 128(e)(2)(L), proposed Sec.  226.38(b)(5) 
would require the creditor to disclose that the consumer has the right 
to accept the loan on the terms approved for up to 30 calendar days. 
The disclosure would also inform the consumer that the rate and terms 
of the loan will not change during this period, except for changes to 
the rate based on adjustments to the index used for the loan.
    Under the Board's TILA section 128(e)(2)(P) authority, the 
disclosure would be required to include the specific date on which the 
30-day period expires and indicate that the consumer may accept the 
terms of the loan until that date. For example, if the consumer 
received the disclosures on June 1, the disclosure would be required to 
state that the consumer could accept the loan until June 30. The Board 
believes that this disclosure is necessary to inform consumers of the 
precise date when the 30-day period expires because the date the 
consumer is deemed to receive the disclosure may differ slightly from 
the date the consumer actually receives the disclosure. The creditor 
would also be required to disclose the method or methods by which the 
consumer may communicate acceptance. The Board believes that this 
disclosure is necessary to ensure consumers understand the specific 
steps required to accept the loan. Proposed comment 39(c)-3, discussed 
below, would provide guidance to creditors on disclosing methods by 
which consumers may communicate acceptance.
    As discussed in the section-by-section analysis in Sec.  226.39(c), 
the Board is proposing to allow the creditor to make unequivocally 
beneficial changes, to make changes based on a request by the consumer, 
and is requesting comment on whether other changes should be allowed. 
The Board requests comment on whether the disclosure should include 
more detail on possible changes to the rate or terms.
38(c) Final Disclosures
    Proposed Sec.  226.38(c) requires the creditor to disclose to the 
consumer a third set of disclosures after the consumer accepts the loan 
and at least three business days before the loan funds are disbursed. 
Proposed Sec.  226.38(c) implements TILA section 128(e)(4), which 
requires the creditor to provide this final set of information 
contemporaneously with consummation. Regulation Z defines 
``consummation'' as the time that a consumer becomes contractually 
obligated on a credit transaction. See 12 CFR 226.2(a)(13). The 
corresponding commentary defers to state law to determine when 
consummation occurs. See comment 2(a)(13)-1. As discussed earlier in 
the section-by-section analysis under Sec.  226.37, to avoid confusion 
about when the final private education loan disclosures should be given 
due to differing state law definitions of consummation, and to ensure 
that consumers have a meaningful opportunity to exercise their 
cancellation right under TILA section 128(c)(8), the Board proposes to 
interpret ``contemporaneously with consummation'' to require creditors 
to provide these final disclosures after acceptance and at least three 
business days before loan funds are disbursed.
38(c)(1) Interest Rate
    Proposed Sec.  226.38(c)(1) would require creditors to disclose the 
interest rate that applies to the private education loan accepted by 
the consumer.
    Fixed or variable rate, rate limitations. Proposed Sec.  
226.38(c)(1) would also require the creditor to provide to the consumer 
the rate information required under proposed Sec. Sec.  
226.38(b)(1)(ii) and (iii), as explained in the section-by-section 
analysis for those sections.
38(c)(2) Fees and Default or Late Payment Costs
    Proposed Sec.  226.38(c)(2) would require the creditor to provide 
to the consumer the fee and default or late payment information 
required under proposed Sec.  226.38(b)(2), as explained in the 
section-by-section analysis for that section.
38(c)(3) Repayment Terms
    Proposed Sec.  226.38(c)(3) would require the creditor to provide 
to the consumer the repayment information required under proposed Sec.  
226.38(b)(3), as explained in the section-by-section analysis for that 
section.
38(c)(4) Cancellation Right
    Proposed Sec.  226.38 and comment 38(c)-1 would implement TILA 
section 128(e)(4)(C) by requiring the creditor to disclose to the 
consumer the following information:
    (i) The consumer has the right to cancel the loan, without being 
penalized, at any time before the cancellation period under Sec.  
226.39(d) expires; and
    (ii) Loan proceeds will not be disbursed until after the 
cancellation period expires. Under the Board's TILA section 
128(e)(4)(B) authority, the proposal would add a requirement that 
creditor disclose the specific date on which the cancellation period 
expires and include the methods or methods by which the consumer may 
cancel the loan.
    Proposed comment 38(c)-2 would clarify that the statement of the 
right to cancel must be more conspicuous than any other disclosure 
required under Sec.  226.38(c), except for the finance charge, the 
interest rate, and the creditor's identity. See proposed Sec.  
226.37(c)(2)(iii). Under proposed comment 38(c)-2, the Board would deem 
the right to cancel statement more conspicuous than other disclosures 
if the creditor segregated the statement from the other disclosures, 
placed the statement near the top of the disclosure document, and 
highlighted the statement in relation to other required

[[Page 12483]]

disclosures. Examples of appropriate highlighting given in comment 
38(c)-2 are that the statement may be outlined with a prominent, 
noticeable box; printed in contrasting color; printed in larger type, 
bold print or different type face; underlined; or set off with 
asterisks.
    Comments 39(d)-1, and 2, discussed below, would provide additional 
guidance about how the creditor should notify the consumer of the 
cancellation right and how the consumer may exercise this right.

Alternatives to Private Education Loans

    Based on the results of the Board's consumer testing, the Board is 
proposing to use its authority under TILA section 105(a) to create an 
exception from the requirement in TILA section 128(e)(4)(b) that the 
creditor provide to the consumer with information about federal 
alternatives to private education loans. Consumers have overwhelmingly 
indicated that this information would not be meaningful or useful to 
them at the time when they would receive the final disclosures. 
Consumers indicated that by the time they had applied for and accepted 
a private education loan, they already would have made a decision as to 
whether or not to seek other loan alternatives.
    The Board would also exercise its authority under TILA section 
105(f) to exempt private education loans from the specific requirement 
to disclose information about federal loan alternatives in the final 
disclosure form. The Board believes that this disclosure requirement 
does not provide a meaningful benefit to consumers in the form of 
useful information or protection. The Board considered that the private 
education loan consumer population may contain students who lack 
financial sophistication and that the size of the loan could be 
relatively significant and important to the borrower. However, as 
explained above, consumers tested indicated that this disclosure was 
not useful at this final stage in the loan process. Borrowers would 
receive the information about federal loans at application and 
approval. The Board also recognizes that private education loans would 
not be secured by the principal residence of the consumer, which is a 
factor for consideration under section 105(f). Furthermore, the HEOA 
provides significant rights, such as the right to cancel the loan. The 
Board believes that consumer protection would not be undermined by this 
exemption.
    The Board requests comment on whether it should adopt this proposed 
exception.

Section 226.39--Limitations on Private Education Loans

    Section 226.39 contains rules and limitations on private 
educational loans. It includes a prohibition on co-branding in the 
marketing of private educational loans, rules governing the 30-day 
acceptance period and three-day cancellation period for private 
educational loans, the requirement that the creditor obtain a self-
certification form from the consumer before consummating a private 
education loan, and the requirement that creditors in preferred lender 
arrangements provide certain information to covered educational 
institutions.
39(a) Co-Branding Prohibited
    The HEOA prohibits creditors from using the name, emblem, mascot, 
or logo of a covered educational institution, or other words, pictures, 
or symbols readily identified with a covered educational institution in 
the marketing of private education loans in any way that implies that 
the covered educational institution endorses the creditor's loans.
    Proposed Sec.  226.39(a)(1) would implement this prohibition by 
prohibiting creditors from referencing a covered educational 
institution in a way that implies that the educational institution 
endorses the creditor's loans. At the same time, the Board recognizes 
that a creditor may at times have legitimate reasons for using the name 
of a covered educational institution. For instance, some educational 
institutions' financial aid websites might provide links to specific 
creditors' websites. Creditors might provide a welcome page to the 
student that references the name of the school that provided the link. 
Some creditors may have school-specific terms or benefits and may need 
to use the name of the school to provide accurate information to 
consumers about the nature and availability of its loan products.
    For these reasons, proposed Sec.  226.39(a)(2) would provide 
creditors with the following safe harbor for those cases where the 
creditor's marketing does make reference to an educational institution. 
Marketing that refers to an educational institution would not be deemed 
to imply endorsement if the marketing clearly and conspicuously 
discloses that the educational institution does not endorse the 
creditor's loans, and that the creditor is not affiliated with the 
educational institution. This safe harbor approach is consistent with 
the views expressed in the Conference Report to the HEOA, which states 
that the conferees intended that creditors could demonstrate that they 
are not implying endorsement by the covered educational institution by 
providing a clear and conspicuous disclaimer that the use of the name, 
emblem, mascot, or logo of a covered educational institution, or other 
words, pictures, or symbols readily identified with a covered 
educational institution, in no way implies endorsement by the covered 
educational institution of the creditor's private education loans and 
that the creditor is not affiliated with the covered educational 
institution. The Board believes that this safe harbor approach will 
inform consumers that a reference to a covered educational institution 
does not mean that the institution endorses the loan being marketed 
while also providing clarity about how to market private education 
loans without violating TILA and Regulation Z.
    Comment 39(a)-1 would clarify the term ``marketing'' as used in 
proposed Sec.  226.39. The term would include all ``advertisements'' as 
that term is defined in Regulation Z. 12 CFR 226.2(a)(2). The proposal 
explains that the term marketing is broader than advertisement, 
however, and includes documents that are part of the negotiation of the 
specific private education loan transaction. For example, applications 
or solicitations, promissory notes or contract documents would be 
considered marketing. The Board believes that a broader meaning of 
marketing is needed to cover documents, such as promissory notes, that 
are not considered advertisements, but that may use the name of the 
educational institution prominently in a potentially misleading way 
(such as naming the loan the ``University of ABC Loan,'' rather than 
``Creditor's Loan for ABC University Students'').
    Proposed comment 39(a)-2 clarifies that referencing a covered 
educational institution in a way that implies that the educational 
institution is offering or making the loan rather than the creditor is 
a form of implying that the educational institution endorses the loan 
and is therefore not permitted under Sec.  226.39(a)(1). However, the 
use of a creditor's own name, even if that name includes the name of a 
covered educational institution, would not imply endorsement. For 
example, a credit union whose name includes the name of a covered 
educational institution would not be prohibited from using its own 
name. In addition, a state's or an institution of higher education's 
use of a state seal, with

[[Page 12484]]

appropriate authorization, in the marketing of state education loan 
products does not imply endorsement.\7\
---------------------------------------------------------------------------

    \7\ See Joint Explanatory Statement of the Committee of 
Conference on H.R. 4137, Title X, Subtitle A, Sec.  1011. The 
Conference Report states that the prohibition is not intended to 
prohibit a credit union whose name includes the name of a covered 
educational institution from using its own name in marketing its 
private education loans. In addition, it is not intended to prohibit 
states or institutions of higher education from using state seals, 
with appropriate authorization, in the marketing of state education 
loan products.
---------------------------------------------------------------------------

    Proposed comment 39(a)-3.i provides a model clause that creditors 
may use in complying with the safe harbor in Sec.  226.39(a)(2). The 
creditor would be considered to have complied with Sec.  226.39(a)(2) 
if the creditor includes a clear and conspicuous statement, using the 
creditor's name and the covered educational institution's name, that 
``[Name of creditor]'s loans are not endorsed by [name of school] and 
[name of creditor] is not affiliated with [name of school].''
39(b) Preferred Lender Arrangements
    The Board recognizes that in certain instances the prohibition on 
creditors' implying endorsement from covered educational institutions 
would not be appropriate because it would not be factually correct. The 
HEOA specifically allows covered educational institutions to endorse 
the private education loans of creditors with which they have a 
``preferred lender arrangement.'' The HEOA defines a ``preferred lender 
arrangement'' as an arrangement or agreement between a creditor and a 
school under which the creditor provides loans to the school's students 
or their families, and the school recommends, promotes, or endorses the 
creditor's loans. HEOA, Title I, Sec.  120 (adding Section 152 to the 
Higher Education Act). Thus, where a creditor and a covered educational 
institution have a preferred lender arrangement, a creditor's statement 
that a school did not endorse its loans would be misleading.
    The Board proposes to exercise its authority under TILA section 
105(a) to provide an exception to the co-branding prohibition for 
creditors that have preferred lender arrangements. As explained above, 
the Board believes that this provision is necessary and proper to 
assure an accurate and meaningful disclosure to consumers of the 
relationship between the creditor and the educational institution. 
Proposed Sec.  226.39(b) would allow the creditor to refer to the 
covered educational institution, but would require that the creditor 
clearly and conspicuously disclose that the loan is not being offered 
or made by the educational institution, but rather by the creditor. The 
Board believes that a disclosure that the loan is provided by a 
creditor and not by the school would address consumer confusion about 
whether the loan was actually made by the school, or merely endorsed by 
the school.
    The proposed requirement that creditors with preferred lender 
arrangements make a disclosure when referring to a school follows a 
prohibition on co-branding for preferred lenders contained in section 
152 of the Higher Education Act, as added by the HEOA, which is similar 
to the newly added co-branding prohibition in TILA. Section 152 of the 
Higher Education Act prohibits a creditor in a preferred lender 
arrangement from making a reference to a covered educational 
institution in any way that implies that the loan is offered or made by 
such institution or organization instead of the creditor. HEOA, Title 
I, Section 120 (emphasis added) (adding Section 152(a)(2) to the Higher 
Education Act). Thus, proposed Sec.  226.39(b) would reconcile the two 
co-branding prohibitions contained in the HEOA.
    Proposed comment 39(a)-3.ii provides a model clause that creditors 
may use in complying with Sec.  226.39(b). The creditor would be 
considered to have complied with Sec.  226.39(b) if the creditor 
includes a clear and conspicuous statement, using the name of the 
creditor's loan or loan program, the creditor's name and the covered 
educational institution's name, that ``[Name of loan or loan program] 
is not being offered or made by [name of school], but by [name of 
creditor].''
    The Board requests comment on whether creditors should be offered a 
safe harbor from the prohibition on co-branding, and, if so, whether an 
alternative safe harbor should be considered. The Board also requests 
comment on how the co-branding prohibition should apply to creditors 
with preferred lender arrangements with covered educational 
institutions. The Board also requests comment on whether there are 
other examples of marketing that should be included in the co-branding 
prohibition.
39(c) Consumer's Right To Accept
    The HEOA provides consumers with a 30-day period following receipt 
of the approval disclosures in which to accept a private education 
loan. It also prohibits creditors from changing the rate or terms of 
the loan, except for changes based on adjustments to the index used for 
the loan, until the 30-day period has expired.
    Proposed Sec.  226.39(c) would implement the 30-day acceptance 
period for private educational loans. The 30-day period would begin 
following the consumer's receipt of the approval disclosures required 
in Sec.  226.38(b).
    Proposed comment 39(c)-1 would require creditors to provide at 
least 30 days from the date the consumer receives the disclosures 
required under Sec.  226.38(b) for the consumer to accept a private 
education loan. It would also allow creditors to provide a longer 
period of time at the creditor's option. It would clarify 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. The 
proposed comment would also clarify that the consumer may accept the 
loan at any time before the end of the 30 day period.
    The HEOA does not specify the method by which the consumer may 
accept the terms of the loan. Proposed comment 39(c)-2 would allow the 
creditor to specify a method or methods by which acceptance may occur. 
The creditor may specify that acceptance be made orally or in writing 
or may permit either form of acceptance. The creditor may also allow 
the consumer to accept electronically, but may not make electronic 
acceptance the sole form of acceptance. The Board believes that not all 
consumers have access to electronic forms of communication and that a 
form of acceptance in addition to electronic communication is 
appropriate.
    Proposed Sec.  226.39(c)(2) would prohibit creditors from changing 
the terms of the loan, with a few specified exceptions, before the loan 
disbursement, or the expiration of the 30-day acceptance period if the 
consumer has not accepted the loan during that time.
    The proposal differs slightly from the language used in the HEOA in 
order to provide creditors with certainty about the precise time period 
during which changes are prohibited. The HEOA prohibits the creditor 
from changing the terms of the loan prior to date of acceptance of the 
terms of the loan and consummation of the transaction. HEOA, Title X, 
Subtitle B, Section 1021(a) (adding TILA Section 128(e)(6)(B)). The 
literal language of the HEOA assumes that acceptance and consummation 
happen at the same time. As discussed in the section-by-section 
analysis under Sec.  226.37, this may not always be the case. To ensure 
that consumers receive the benefit of the entire 30-day period in which 
to accept the loan, the Board proposes to prohibit creditors from 
changing the rate and

[[Page 12485]]

terms of the loan until the date of disbursement, if the consumer 
accepts within the 30-day period.
    Proposed Sec.  226.39(c)(2) would prohibit only those changes that 
would affect the rate or terms required to be disclosed under 
Sec. Sec.  226.38(b) and (c). The Board interprets the prohibition on 
changes to the rate or terms of the loan to cover only the disclosed 
terms. The Board believes that changes to terms that are not required 
to be disclosed to the consumer are unlikely to affect the consumer's 
decision whether or not to accept a private education loan.
    Proposed Sec.  226.39(c)(2) would not prohibit changes based on 
adjustments to the index used for a loan, implementing TILA section 
128(e)(6)(B). In addition, the Board would exercise its authority under 
TILA section 105(a) to make exceptions to effectuate the purposes of 
the statute to allow the creditor to make changes that will 
unequivocally benefit the consumer, similar to the rule for home-equity 
plans in Sec.  226.5b(f)(3)(iv). For example, a creditor would be 
permitted to reduce the interest rate or lower the amount of a fee, so 
long as no other change that would not unequivocally benefit the 
consumer were made. The Board believes that allowing such changes would 
be in the interest of both the creditor and the consumer. The Board 
would also exercise its authority under TILA section 105(f) in 
permitting unequivocally beneficial changes by exempting creditors from 
HEOA's prohibition on making changes to the loan prior to the date of 
acceptance of the terms of the loan and consummation of the 
transaction. HEOA, Title X, Subtitle B, Section 1021(a) (adding TILA 
Section 128(e)(6)(B)). The Board believes that the prohibition in the 
HEOA may complicate the credit process and could unnecessarily increase 
costs for consumers and creditors who, for example, would otherwise 
have to repeat the application process in order to change the terms. 
The Board recognizes that financial sophistication among student 
consumers seeking private education loan may be lacking, and that the 
size and importance of the loan may be significant to the consumer. The 
Board believes, however, that consumer protection would not be 
undermined because the permissible change would have to ``unequivocally 
benefit the consumer.'' Consumers would not receive a meaningful 
benefit in the form of protection if the Board were to prevent 
creditors from altering the loan in a manner that unequivocally 
benefits the consumer. In addition, consumers would retain their right 
under HEOA to cancel the loan.
    The HEOA prohibits changes to the loan's rate or terms made by the 
creditor. The proposal would not prohibit changes made in connection 
with accommodating a request by the consumer. Proposed Sec.  
226.39(c)(3) and proposed comment 39(c)-3 would allow creditors to 
change a loan's rate or terms in response to a request from a consumer. 
For example, a consumer may learn that his or her financial assistance 
package has changed and may wish to request a higher or lower principal 
amount. The creditor would be allowed, at its option, to make changes 
to the rate and terms of the loan in response to this request. The rule 
would not limit the changes that could be made. For example, the 
creditor may provide for a shorter repayment term as a condition of 
granting the consumer's request to borrow a lesser principal amount.
    The Board believes that it is in the consumer's interest to be able 
to request changes to the rate or terms of the loan. The Board 
understands that it is common for students' financial assistance 
packages to change in a short time period for a variety of reasons, 
such as changes to the student's and family's financial situation or 
the availability of grants. Students whose financial assistance amount 
decreases after being approved for a private education loan face the 
problem of having insufficient funds for their education. Those whose 
financial assistance amount increases after their private education 
loan has been approved may end up borrowing, and paying interest and 
fees on, more than they require. Over-borrowing in the private 
education loan market can adversely affect a student's eligibility for 
federal student loans. With proposed Sec.  226.39(c)(3) and comment 
39(c)-3, the Board seeks to ensure that consumers retain the benefit of 
the 30-day acceptance period while also providing consumers with 
flexibility to move forward with a transaction with a creditor without 
having to cancel a loan, or loan offer, and expend time and money re-
applying.
    If the creditor chooses to modify the terms of the loan in response 
to a consumer's request, the creditor would need to provide a new set 
of approval disclosures under Sec.  226.38(b) and provide the consumer 
with a new 30-day acceptance period under Sec.  226.39(c). Because the 
consumer may accept at any time during the 30 day period, the Board 
does not believe that this will unduly inhibit consumers from 
proceeding with a loan modified in response a request. However, the 
Board requests comment on whether consumers should be allowed to accept 
loans before receiving the updated disclosures. The Board also requests 
comment on alternative means of ensuring that consumers retain the 
benefits of the 30-day acceptance period while providing them with 
flexibility in cases where the amount of private education loan funds a 
consumer needs changes.
    The HEOA provides that the consumer has 30 days in which to accept 
the terms of a private education loan and consummate the transaction, 
and that the creditor may not change the rate and terms of the loan 
during this time. The statute does not explicitly state under what 
conditions, if any, a creditor could withdraw the loan offer or change 
the loan's terms in response to a change in a material condition of the 
loan. The Board believes that there may be limited instances where it 
would appropriate for a creditor to withdraw a loan offer prior to 
disbursement, such as if the creditor learns that the consumer or a co-
signer has committed fraud in filling out the application. The Board 
also requests comment on whether there are other instances where a 
material condition of the loan offer is not met such that the creditor 
should be permitted to withdraw the offer or change the terms of the 
loan. For example, the creditor may approve the loan contingent upon 
the consumer maintaining full-time enrollment, but the consumer may 
ultimately only register as a part-time student. The Board also 
requests comment on whether it is operationally feasible to determine 
the existence of a change in a material circumstance by comparing the 
terms for which the consumer was actually approved with the terms for 
which the creditor would have approved the consumer (or whether the 
creditor would have denied the consumer's loan application), if the 
material circumstance was known to the creditor before the loan was 
approved.
39(d) Consumer's Right To Cancel
    Proposed Sec.  226.39(d) would provide the consumer with the right 
to cancel a private education loan without penalty until midnight of 
the third business day following receipt of the final disclosures 
required in Sec.  226.38(c). It would also prohibit the creditor from 
disbursing any funds until the expiration of the three-business day 
period. The consumer's right to cancel would apply regardless of 
whether or not the consumer was legally obligated on the loan at the 
time that the final disclosures were provided.

[[Page 12486]]

    Proposed comment 39(d)-1 would provide guidance on calculating the 
three-business day time period and on when a consumer's request to 
cancel would be considered timely. It would also clarify that the 
creditor would be allowed to provide a period of time longer than three 
business days in which the consumer may cancel, and that the creditor 
would be allowed to disburse funds after the minimum three-business day 
period so long as the creditor honored the consumer's later timely 
cancellation request. Proposed comment 39(d)-2 would provide guidance 
to creditors on specifying a method or methods by which the consumer 
may cancel the loan. The creditor would be permitted to require 
cancellation be communicated orally or in writing. The creditor would 
also be permitted to allow cancellation to be communicated 
electronically, but would not be permitted to require only electronic 
communication because the Board believes that not all consumers have 
access to electronic communication.
    Proposed comment 39(d)-3 would clarify the requirement that the 
creditor allow cancellation without penalty. The prohibition would 
extend only to fees charged specifically for canceling the loan. The 
creditor would not be required to refund fees, such as an application 
fee, charged to consumers for loans that are not cancelled.
    The Board requests comment on whether creditors should be required 
to accept cancellation requests until midnight, or whether they should 
be allowed to set a reasonable deadline for communicating cancellation 
on the third business day. The Board also requests comment on whether 
creditors should be allowed to provide for a longer period during which 
consumers may cancel the loan, and, if so, whether creditors should be 
allowed to disburse funds after the minimum three-business-day period.
39(e) Self-Certification Form
    The HEOA requires that, before a creditor may consummate a private 
education loan, it obtain from the consumer a self-certification form. 
Proposed Sec.  226.39(e) would implement this requirement. The HEOA 
requires that a creditor obtain the self-certification form only from 
consumers of private education loans intended for students attending an 
institution of higher education. HEOA, Title X, Subtitle B, Section 
1021(a) (adding TILA Section 128(e)(3)). Thus, a self-certification 
form will not be required with respect to every covered educational 
institution, but only those that meet the definition of an institution 
of higher education in proposed Sec.  226.37(b)(2). Moreover, proposed 
comment 39(e)-1 would clarify that the requirement applies even if the 
student is not currently attending an institution of higher education, 
but will use the loan proceeds for postsecondary educational expenses 
while attending such institution. For example, a creditor is required 
to obtain the form before consummating a private education loan 
provided to a high school senior for expenses to be incurred during the 
consumer's first year of college. At the same time, comment 39(e)-1 
would clarify that the self-certification requirement would not apply 
to loans where the self-certification information would not be 
applicable, such as loans intended to consolidate existing education 
loans. The self-certification form provides the consumer with 
information about the student's education costs to be incurred in the 
future (such as the cost of attendance and the amount of financial aid 
available). Even if the student were still enrolled, the information on 
the self-certification form would not apply to a consolidation loan, 
because the consolidation loan would cover expenses the student paid in 
the past.
    Section 155(a)(2) of the Higher Education Act of 1965, as added by 
the HEOA, provides that the form shall be made available to the 
consumer by the relevant institution of higher education. HEOA, Title 
X, Subtitle B, Sec. 1021(b). Although the HEOA requires that the 
creditor obtain the completed and signed self-certification form before 
consummating the loan, it does not specify that the creditor must 
obtain the form directly from the consumer. Proposed comment 39(e)-1 
would allow the creditor to obtain the self-certification form either 
directly from the consumer or through the institution of higher 
education. Compliance with the self-certification requirement may be 
simplified for all parties if the educational institution is permitted 
to obtain the completed form from the consumer and forward it to the 
creditor. The consumer may find it easier to return the form to the 
educational institution as part of the institution's overall financial 
aid process. The creditor and educational institution may also find it 
easier to include the self-certification form as part of a larger 
package of information communicated by the institution to the creditor 
about the student's eligibility and cost of attendance.
    Both Section 128(e)(3) of TILA and Section 155 of the Higher 
Education Act of 1965 provide that the self-certification form may be 
provided to the consumer in electronic form. Under Section 155 of the 
Higher Education Act of 1965, the Department of Education must develop 
the form and ensure that institutions of higher education make it 
available to consumers in written or electronic form. Because the form 
will be provided by educational institutions to consumers, the Board 
does not propose to impose consumer consent or other requirements on 
creditors in order to accept the form in electronic form. The self-
certification form may also be signed by the consumer in electronic 
form. Under Section 155(a)(5) of the Higher Education Act of 1965, the 
Department of Education must provide a place on the form for the 
applicant's written or electronic signature. Proposed comment 39(e)-2 
would provide that a consumer's electronic signature is considered 
valid if it meets the requirements promulgated by the Department of 
Education under Section 155(a)(5) of the Higher Education Act of 1965.
39(f) Provision of Information by Preferred Lenders
    The HEOA requires that a creditor that has a preferred lender 
arrangement with a covered educational institution provide the 
educational institution annually, by a date determined by the Board in 
consultation with the Secretary of Education, with the information 
required to be disclosed on the model form developed by the Board for 
each type of private education loan the creditor plans to offer for the 
next award year (meaning the period from July 1 to June 30 of the 
following year). HEOA, Title X, Subtitle B, Section 1021(a)(adding TILA 
Section 128(e)(11)). The HEOA does not specify which of the model forms 
that the creditor should use. However, the approval and consummation 
forms contain transaction-specific data that cannot be known for the 
next year. Thus, the Board proposes to require that the creditor 
provide the general loan information required on the application form 
in Sec.  226.38(a), rather than the transaction-specific information 
required in the approval and final disclosure forms.
    After consultation with the Department of Education, the Board 
proposes to require that creditors provide information by January 1 of 
each year. Proposed Sec.  226.39(f) would require that the creditor 
provide only the information about rates, terms and eligibility that 
are applicable to the creditor's specific loan products. The Board does 
not believe that educational institutions need the other information

[[Page 12487]]

required to be disclosed in Sec.  226.38(a), such as information about 
the availability of federal student loans. In addition, the Board 
believes that educational institutions can perform their own 
calculations of the total cost of the creditors' loans and do not need 
the cost estimate disclosure required under Sec.  226.38(a)(4). Comment 
39(f)-1 would provide creditors with the flexibility to comply with 
this requirement by providing educational institutions with copies of 
their application disclosure forms if they choose, or to provide only 
the required information.
    The Board requests comment on the appropriate date by which 
creditors must provide the required information and on what information 
should be required.
Appendix H--Closed-End Model Forms and Clauses
    Appendix H to part 226 contains model forms, model clauses and 
sample forms applicable to closed-end loans. Although use of the model 
forms and clauses is not required, creditors using them properly will 
be deemed to be in compliance with the regulation with regard to those 
disclosures. The Board proposes to add several model and sample forms 
to Appendix H to part 226. The Board also proposes to add commentary to 
the model and sample forms in Appendix H to part 226, as discussed 
below.
    Current model form H-2 contains boxes at the top of the form with 
disclosures in the following order: the annual percentage rate, the 
finance charge, the amount financed, and the total of payments. 
Proposed model forms H-19, and H-20 contain a similar box-style 
arrangement, but would reorder the disclosures as follows: the amount 
financed, the interest rate, the finance charge and the total of 
payments.\8\ The proposed order reflects a progression of the 
disclosures that consumer testing indicates may enhance understanding 
of these terms: the consumer borrows the amount financed, is charged 
interest which, along with fees, yields a finance charge and a total of 
payments. While the proposed order may enhance consumer understanding 
in the context of private education loans, the Board recognizes that 
consumers may be accustomed to the current order from other loan 
contexts. The Board requests comment on whether it should maintain a 
uniform order for the disclosures, or whether it should adopt the 
proposed order for private education loans.
---------------------------------------------------------------------------

    \8\ The proposed disclosure of the interest rate and annual 
percentage rate is discussed in the section-by-section analysis in 
Sec.  226.17.
---------------------------------------------------------------------------

    Permissible changes to the model and sample forms. The commentary 
to Appendices G and H to part 226 currently states that creditors may 
make certain changes in the format and content of the model forms and 
clauses and may delete any disclosures that are inapplicable to a 
transaction or a plan without losing the act's protection from 
liability. See comment app. G and H-1. However, the Board proposes to 
adopt format requirements with respect to the model forms for 
disclosures applicable to private education loans, such as requiring 
certain disclosures be grouped together under specific headings. 
Proposed comment app. H-25.i would provide a list of acceptable changes 
to the model forms. Proposed comment app. H-25.ii would provide 
guidance on the design of the model forms that would not be required 
but would be encouraged.
    The Board is also proposing sample forms H-21, H-22, and H-23 to 
illustrate various ways of adapting the model forms to the individual 
transactions described in the commentary to appendix H. The deletions 
and rearrangments shown relate only to the specific transactions 
described in proposed comments app. H-26, H-27, and H-28. As a result, 
the samples do not provide the general protection from civil liability 
provided by the model forms.

IV. Effective Date

    The HEOA's amendments to TILA have various effective dates. The 
TILA amendments for which the Board is not required to issue 
regulations became effective on the date of the HEOA's enactment, 
August 14, 2008. HEOA Section 1003.
    The Board is required to issue regulations for paragraphs (1), (2), 
(3), (4), (6), (7), and (8) of section 128(e) and section 140(c) of 
TILA. The Board's regulations are to have an effective date not later 
than six months after their issuance. HEOA Section 1002. However, the 
HEOA's amendments to TILA for which the Board must issue regulations 
take effect on the earlier of the date on which the Board's regulations 
become effective or 18 months after the date of the HEOA's enactment. 
HEOA Section 1003. Consequently, the latest date at which the 
provisions of the HEOA described above could become effective is 
February 14, 2010. The Board requests comment on whether six months 
would be an appropriate implementation period for the proposed rules or 
whether the Board should specify a shorter implementation period.
    In addition, TILA section 128(e)(5) requires the Board to develop 
model forms for the disclosures required under TILA section 128(e) 
within two years of the HEOA's date of enactment. The Board is 
proposing model forms along with this proposed rule. The Board is also 
proposing to issue a rule to implement TILA section 128(e)(11) which 
requires lenders to provide certain information to covered educational 
institutions with which they have preferred lender arrangements. The 
Board requests comment on whether the model forms and the rule 
implementing TILA section 128(e)(11) should be issued in final form at 
the same time as the other proposed rules.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The Federal Reserve also proposes to 
extend for three years the current recordkeeping and disclosure 
requirements in connection with Regulation Z. The collection of 
information that is required by this proposed rule is found in 12 CFR 
part 226. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless the information collection displays a currently valid OMB 
control number. The OMB control number is 7100-0199.
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Federal 
Reserve does not collect any information, no issue of confidentiality 
arises. The respondents/recordkeepers are creditors and other entities 
subject to Regulation Z, including for-profit financial institutions 
and small businesses.
    TILA and Regulation Z are intended to ensure effective disclosure 
of the costs and terms of credit to consumers. For open-end credit, 
creditors are required to, among other things, disclose information 
about the initial costs and terms and to provide periodic statements of 
account activity, notice of changes in terms, and statements of rights 
concerning billing error procedures. Regulation Z requires specific 
types of disclosures for credit and charge card accounts and home 
equity plans. For closed-end loans, such as mortgage and installment 
loans, cost disclosures are required to be provided

[[Page 12488]]

prior to consummation. Special disclosures are required in connection 
with certain products, such as reverse mortgages, certain variable-rate 
loans, and certain mortgages with rates and fees above specified 
thresholds. TILA and Regulation Z also contain rules concerning credit 
advertising. Creditors are required to retain evidence of compliance 
for twenty-four months (Sec.  226.25), but Regulation Z does not 
specify the types of records that must be retained.
    Under the PRA, the Federal Reserve accounts for the paperwork 
burden associated with Regulation Z for the state member banks and 
other creditors supervised by the Federal Reserve that engage in 
lending covered by Regulation Z and, therefore, are respondents under 
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: state member banks, branches and agencies of 
foreign banks (other than federal branches, federal agencies, and 
insured state branches of foreign banks), commercial lending companies 
owned or controlled by foreign banks, and organizations operating under 
section 25 or 25A of the Federal Reserve Act. Other federal agencies 
account for the paperwork burden imposed on the entities for which they 
have administrative enforcement authority. The current total annual 
burden to comply with the provisions of Regulation Z is estimated to be 
688,607 hours for the 1,138 Federal Reserve-regulated institutions \9\ 
that are deemed to be respondents for the purposes of the PRA. To ease 
the burden and cost of complying with Regulation Z (particularly for 
small entities), the Federal Reserve provides model forms, which are 
appended to the regulation.
---------------------------------------------------------------------------

    \9\ The number of Federal Reserve-supervised respondents was 
obtained from numbers published in the Board of Governors of the 
Federal Reserve System 94th Annual Report 2007: 878 State member 
banks, 258 Branches & agencies of foreign banks, and 2 Commercial 
lending companies.
---------------------------------------------------------------------------

    The total estimated burden increase, as well as the estimates of 
the burden increase associated with each major section of the proposed 
rule as set forth below, represents averages for all respondents 
regulated by the Federal Reserve. The Federal Reserve expects that the 
amount of time required to implement each of the proposed changes for a 
given institution may vary based on the size and complexity of the 
respondent. Furthermore, the burden estimate for this rulemaking does 
not include the burden addressing changes to implement provisions of 
the Mortgage Disclosure Improvement Act of 2008 (MDIA), as announced in 
a separate proposed rulemaking (Docket No. R-1340).
    As discussed in the preamble, the Federal Reserve proposes to add 
three new disclosures for private education loans, which must be given 
at different times in the loan origination process: (1) Application or 
Solicitation Disclosures (Section 226.38(a)) would require private 
educational lenders to provide on or with a solicitation or an 
application for a private education loan general information about the 
rate, fees, and loan terms, including an example of the total cost of 
the 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; (2) Approval Disclosures (Section 
226.38(b)) would require the private educational lender to provide on 
or with any notice of approval a set of transaction-specific 
disclosures containing information about the rate, fees and other terms 
of the loan. The consumer has at least 30 days in which to accept the 
terms of the loan offered, and the private educational lender may not 
change the rate or terms of the loan, except for changes to the rate 
based on an index, during that time; and (3) Final Disclosures (Section 
226.38(c)) would require the private educational lender to provide at 
least three business days prior to disbursing the loan funds an updated 
cost disclosure that is substantially similar to the form provided at 
approval. The consumer has three business days in which to cancel the 
loan and funds may not be disbursed until the three-day period has 
expired.
    The proposed rule would impose a one-time increase in the total 
annual burden under Regulation Z for all respondents regulated by the 
Federal Reserve by 45,440 hours, from 688,607 to 734,047 hours. In 
addition, the Federal Reserve estimates that, on a continuing basis, 
the proposed requirements would increase the total annual burden by 
231,474 hours from 688,607 to 920,081 hours.
    The Federal Reserve estimates that 1,136 respondents \10\ regulated 
by the Federal Reserve would take, on average, 40 hours (one business 
week) to update their systems to comply with the proposed disclosure 
requirements in Sections 226.38(a), 226.38(b), and 226.38(c). This one-
time revision would increase the burden by 45,440 hours. In addition, 
the Federal Reserve estimates that, on a continuing basis, these 
respondents would take on average 1 hour (monthly) to comply with each 
of the proposed disclosure requirements in Sections 226.38(a) and 8 
hours (monthly) to comply with the proposed disclosure requirements in 
Sections 226.38(b) and 226.38(c). The Federal Reserve estimates the 
annual burden to be 13,362 hours and 231,474, hours respectively.
---------------------------------------------------------------------------

    \10\ 878 State member banks and 258 Branches & agencies of 
foreign banks.
---------------------------------------------------------------------------

    To ease the burden and cost of complying with the proposed 
disclosures the Federal Reserve provided model forms for each of the 
three new disclosures: Appendix H-17 for the application or 
solicitation disclosures required in Sec.  226.38(a), Appendix H-18 for 
the approval disclosures required in Sec.  226.38(b), and Appendix H-19 
for the final disclosures required in Sec.  226.38(c).
    The other federal agencies are responsible for estimating and 
reporting to OMB the total paperwork burden for the institutions for 
which they have administrative enforcement authority.\11\ They may, but 
are not required to, use the Federal Reserve's burden estimation 
methodology. Using the Federal Reserve's method, the total current 
estimated annual burden for institutions regulated by the federal 
financial agencies, including Federal Reserve-supervised institutions, 
would be approximately 13,568,725 hours. The proposed rule would impose 
a one-time increase in the estimated annual burden for all institutions 
subject to Regulation Z by 688,000 hours to 14,256,725 hours. On a 
continuing basis the estimated total annual burden would increase by 
3,508,800 hours from 13,568,725 to 17,077,525 hours. The above 
estimates represent an average across all respondents and reflect 
variations between institutions based on their size, complexity, and 
practices. All covered institutions, of which there are approximately 
17,200, potentially are affected by this collection of information, and 
thus are respondents for purposes of the PRA.
---------------------------------------------------------------------------

    \11\ Appendix I to Part 226--Federal Enforcement Agencies of 
Regulation Z lists those federal agencies that enforce the 
regulation for particular classes of business. The federal financial 
agencies include: the Office of the Comptroller of the Currency, 
Federal Deposit Insurance Corporation, Office of Thrift Supervision, 
and National Credit Union Administration. The federal non-financial 
agencies include: Department of Transportation, Packers and 
Stockyards Administration, Farm Credit Administration, and Federal 
Trade Commission.
---------------------------------------------------------------------------

    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the Federal 
Reserve's functions; including whether the information has practical 
utility; (2) the accuracy of the Federal Reserve's estimate of the 
burden

[[Page 12489]]

of the proposed information collection, including the cost of 
compliance; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments on the collection of information should be sent to 
Michelle Shore, Federal Reserve Board Clearance Officer, Division of 
Research and Statistics, Mail Stop 151-A, Board of Governors of the 
Federal Reserve System, Washington, DC 20551, with copies of such 
comments sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0199), Washington, DC 20503.

VI. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
requires an agency either to provide an initial regulatory flexibility 
analysis with a proposed rule or certify that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. The proposed regulations cover certain banks, other 
depository institutions, and non-bank entities that extend private 
education loans to consumers. The Small Business Administration (SBA) 
establishes size standards that define which entities are small 
businesses for purposes of the RFA.\12\
---------------------------------------------------------------------------

    \12\ http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

    The size standard to be considered a small business is: $175 
million or less in assets for banks and other depository institutions; 
$25.5 million or less in annual revenues for flight training schools; 
and $7.0 million or less in annual revenues for all other non-bank 
entities that are likely to be subject to the proposed regulations. The 
Board requests public comment in the following areas.

A. Reasons for the Proposed Rule

    Section 1002 of the HEOA requires the Board to prescribe 
regulations prohibiting creditors from co-branding and requiring 
creditors to make certain disclosures and perform related requirements 
when making private education loans. More specifically, the regulations 
must address, but are not limited to, the following aspects of sections 
128 and 140 of the TILA: (i) prohibiting a creditor from marketing 
private education loans in any way that implies that the covered 
educational institution endorses the private education loans it offers; 
(ii) requiring a creditor to make certain disclosures to the consumer 
in an application (or solicitation without requiring an application), 
with the approval, and with the consummation of the private education 
loan; (iii) requiring the creditor to obtain from the consumer a self-
certification form prior to consummation; (iv) allowing at least 30 
days following receipt of the approval disclosure documents for the 
consumer to accept and consummate the loan, and prohibiting certain 
changes in rates and terms until either consummation or expiration of 
such period of time; and (v) requiring a three-day right to cancel 
following consummation and prohibiting disbursement of funds until the 
three-day period expires.
    Moreover, section 1021(a)(5) of the HEOA requires the Board, in 
consultation with the Secretary of Education, to develop and issue 
model disclosure forms that may be used to comply with the amended 
section 128 of the TILA.
    In addition, the regulations interpret certain definitions included 
in title X of the HEOA to clarify the meaning of terms used in section 
1011(a) of the HEOA, including the definitions of private education 
loan, and covered educational institution. The HEOA does not require 
the Board to issue regulations to implement these definitions, but the 
proposed definitions are intended to clarify the required regulations 
pursuant to the Board's authority under section 105(a) of the TILA.
    The Board is issuing the proposed regulations and model forms both 
to fulfill its statutory duty to implement the provisions of sections 
1002 and 1021(a)(5) of the HEOA and, in the case of the definition 
interpretations, to better clarify the requirements under the 
aforementioned sections.

B. Statement of Objectives and Legal Basis

    The SUPPLEMENTARY INFORMATION above contains this information. The 
legal basis for the proposed regulations is section 1002 of the HEOA 
and section 105(a) of the TILA.

C. Description of Small Entities to Which the Regulation Applies

    The proposed regulations would apply to any ``creditor'' as defined 
in Regulation Z (12 CFR 226.2(a)(17)) that extends a private education 
loan.
    The total number of small entities likely to be affected by the 
proposal is unknown because the Board does not have data on the number 
of small creditors that make private education loans. The rule has 
broad applicability, applying to any creditor that makes loans 
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. It could apply not only to depository 
institutions and finance companies, but also schools that meet the 
creditor definition and extend private education loans to their 
students.
    The Board can, however, identify through data from Call Reports\13\ 
approximate numbers of small depository institutions that could be 
subject to the proposed rules. Based on an average of data reported at 
quarter end between October 1, 2007 and September 30, 2008, 
approximately 4,481 banks, 401 thrifts, and 7,221 credit unions, 
totaling 12,103 institutions, would be considered small entities that 
are potentially subject to the proposed rule. The Board cannot identify 
the percentage of these small institutions that extend private 
education loans and thus would be subject to a rulemaking. However, 
because the proposed regulation would cover all private education loans 
regardless of their size or whether they are for multiple purposes, the 
Board believes a majority of the 12,103 institutions would be covered 
by this proposed rulemaking.
---------------------------------------------------------------------------

    \13\ Federal Financial Institutions Examination Council (FFIEC) 
Consolidated Reports of Condition and Income (Call Reports) (FFIEC 
031 & 041), Thrift Financial Report (1313), and NCUA Call Reports 
(NCUA 5300).
---------------------------------------------------------------------------

    The Board is not aware of data that provides information regarding 
finance companies' size in terms of annual revenues, and therefore 
cannot identify with certainty the number of small finance companies 
that extend private education loans that would be subject to the 
proposed rule. However, the size standard for these companies is $7.0 
million or less in annual revenues (rather than assets), and the Board 
believes the size standard for depository institutions--$175 million or 
less in asset size--is likely to provide a comparable estimate. A 2005 
compilation of surveys conducted by the Board indicates that 211 
finance companies have an asset size of $100 million or less, and an 
additional 36 finance companies have an asset size between $100 million 
and $1 billion. Thus, the Board estimates that there are no more than a 
total of 247 small finance companies. The Board is unable, however, to 
locate data demonstrating the number of these small finance

[[Page 12490]]

companies that extend private education loans.
    The proposed rule would also apply to covered educational 
institutions that extend private education loans to their students, 
including flight training schools. According to information on the 
Federal Aviation Administration Web site, there are approximately 588 
flight training schools nationwide. The Board is unaware of data that 
shows how many of those flight training schools would be deemed small 
institutions and, of those small flight schools, how many extend 
private education loans.
    The proposed rule would also apply to other types of postsecondary 
schools, including both accredited and unaccredited postsecondary 
schools. In order to calculate an estimate of small accredited 
postsecondary schools, the Board relied on data collected by the 
Department of Education through its Integrated Postsecondary Education 
Data System (IPEDS). The Board used IPEDS data showing the revenue of 
all schools that participate in the Department's financial aid programs 
for postsecondary students, all of which are accredited. According to 
this IPEDS data, the estimated number of small accredited postsecondary 
schools is 3,159.\14\
---------------------------------------------------------------------------

    \14\ Of these small accredited postsecondary schools, 396 are 
public institutions, 678 are private not-for-profit institutions, 
and 2,085 are private for-profit institutions.
---------------------------------------------------------------------------

    The Board is not aware of sources of data on either the number of 
non-accredited postsecondary schools nationwide or their revenues. 
However, based on estimates provided by several trade organizations 
representing for-profit postsecondary schools, the Board believes that 
the number of non-accredited for-profit schools is approximately three 
times the number of accredited for-profit schools. Based on the 
assumption that all non-accredited schools are for-profit institutions, 
and using the IPEDS data showing that there were approximately 2,600 
accredited for-profit postsecondary schools in 2005, the Board 
estimates there are 7,800 non-accredited postsecondary schools 
nationwide.
    In order to approximate how many of those 7,800 non-accredited 
postsecondary schools are small entities, the Board believes that 
available data on for-profit schools with programs less than two years 
is likely to provide the closest comparable data to that of non-
accredited postsecondary schools. According to this data, approximately 
95 percent of for-profit schools with programs less than two years--and 
therefore approximately 95 percent of non-accredited postsecondary 
schools--have $7 million or less in revenue.\15\ Thus, the Board 
estimates that 7,410 non-accredited postsecondary schools qualify as 
small entities.\16\
---------------------------------------------------------------------------

    \15\ This approximation is supported by similar estimates 
provided by representatives of several state associations of for-
profit schools, who estimated that 90 to 95 percent of their 
institutions would qualify as small businesses.
    \16\ While the numbers of accredited and unaccredited 
postsecondary schools includes flight training schools, the Board 
could not locate sources of data that would prevent this overlap.
---------------------------------------------------------------------------

    With respect to both accredited and unaccredited postsecondary 
schools, the Board is not aware of a source of data regarding the 
number of these small institutions that extend private education loans. 
Anecdotal information and informal survey results from representatives 
of several state associations of for-profit schools produced 
conflicting results regarding how many small schools extend private 
education loans.
    The Board invites comment regarding the number and type of small 
entities that would be affected by the proposed rule.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The compliance requirements of the proposed regulations are 
described in detail in the SUPPLEMENTARY INFORMATION above.
    The proposed regulations generally prohibit a creditor from 
marketing private education loans in a way that implies that the 
covered educational institution endorses the private education loans it 
offers. A creditor would need to analyze the regulations, determine 
whether it is engaging in marketing private education loans, and 
establish procedures to ensure the marketing does not imply such 
endorsement.
    The proposed regulations also generally require a creditor to make 
certain disclosures to the consumer on or with an application (or 
solicitation without requiring an application), with the approval, and 
with the consummation of the private education loan. The creditor is 
also required to obtain a self-certification form prior to 
consummation. The creditor must allow at least 30 days following the 
consumer's receipt of the approval disclosure documents for the 
consumer to accept the loan and must not change certain rates and terms 
until either consummation or expiration of such period of time. It also 
must provide a three-day right to cancel following consummation and is 
prohibited from disbursing funds until the three-day period expires. A 
creditor would need to analyze the regulations, determine when and to 
whom such notices must be given, and design, generate, and provide 
those notices in the appropriate circumstances. The creditor must also 
ensure the receipt of the self-certification form prior to consummation 
and that the applicable rates and terms do not change in the given 
period of time following the consumer's receipt of the approval 
disclosure documents.
    The Board seeks information and comment on any costs, compliance 
requirements, or changes in operating procedures arising from the 
application of the proposed rule to small institutions.

E. Identification of Duplicative, Overlapping, or Conflicting Federal 
Regulations

    The Board has not identified any federal statutes or regulations 
that would duplicate, overlap, or conflict with the proposed 
regulations. Pursuant to section 1021(a)(9) of the HEOA, the proposed 
disclosures given at the time of approval and before disbursement of 
the private education loan have been designed to prevent, to the extent 
possible, duplication with the existing disclosure requirements of the 
TILA. The Board seeks comment regarding any statutes or regulations, 
including state or local statutes or regulations that would duplicate, 
overlap, or conflict with the proposed regulations.

F. Discussion of Significant Alternatives

    The steps the Board has taken to minimize the economic impact and 
compliance burden on small entities, including the factual, policy, and 
legal reasons for selecting any alternatives adopted and why certain 
alternatives were not accepted, are described in the in SUPPLEMENTARY 
INFORMATION above. The Board believes that these changes minimize the 
significant economic impact on small entities while still meeting the 
requirements of the HEOA.
    The Board welcomes comments on any significant alternatives, 
consistent with section 1002 of the HEOA that would minimize the impact 
of the proposed regulations on small entities.

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, 
Mortgages, Reporting and recordkeeping requirements, Truth in lending.

[[Page 12491]]

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside bold arrows, and language that 
would be deleted is set off with bold brackets.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

Subpart A--General

    2. Section 226.1 is amended by revising paragraph (b), 
redesignating paragraph (d)(6) as paragraph (d)(7), and adding new 
paragraph (d)(6) to read as follows:


Sec.  226.1  Authority, purpose, coverage, organization, enforcement 
and liability.

* * * * *
    (b) Purpose. The purpose of this regulation is to promote the 
informed use of consumer credit by requiring disclosures about its 
terms and cost. The regulation also gives consumers the right to cancel 
certain credit transactions that involve a lien on a consumer's 
principal dwelling, regulates certain credit card practices, and 
provides a means for fair and timely resolution of credit billing 
disputes. The regulation does not govern charges for consumer credit. 
The regulation requires a maximum interest rate to be stated in 
variable-rate contracts secured by the consumer's dwelling. It also 
imposes limitations on home-equity plans that are subject to the 
requirements of Sec.  226.5b and mortgages that are subject to the 
requirements of Sec.  226.32. The regulation prohibits certain acts or 
practices in connection with credit secured by a consumer's principal 
dwelling. [rtrif]The regulation also regulates certain practices of 
creditors who extend private education loans as defined in Sec.  
226.37(b)(5).[ltrif]
    (d) * * *
    [rtrif](6) Subpart F relates to private education loans. It 
contains rules on disclosures, limitations on changes in terms after 
approval, the right to cancel the loan, and limitations on co-branding 
in the marketing of private education loans.
    [lsqbb](6)[rsqbb](7)[ltrif]
* * * * *
    2. Section 226.2 is amended by revising paragraph (a)(6) to read as 
follows:


Sec.  226.2  Definitions and rules of construction.

    (a) * * *
    (6) Business Day means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Sec. Sec.  226.15 
and 226.23, and for purposes of Sec.  226.19(a)(1)(ii)[rtrif], Sec.  
226.19(a)(2),[ltrif] [lsqbb]and[rsqbb] Sec.  226.31, [rtrif]and 
Sec. Sec.  226.37, 226.38, and 226.39,[ltrif] the term means all 
calendar days except Sundays and the legal public holidays specified in 
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther 
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor 
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
* * * * *
    3. Section 226.3 is amended by revising paragraph (b) to read as 
follows:


Sec.  226.3  Exempt transactions.

* * * * *
    (b) Credit over $25,000 [not secured by real property or a 
dwelling]. An extension of credit [lsqbb]not secured by real property, 
or by personal property used or expected to be used as the principal 
dwelling of the consumer,[rsqbb] in which the amount financed exceeds 
$25,000 or in which there is an express written commitment to extend 
credit in excess of $25,000[lsqbb].[rsqbb][rtrif], unless the extension 
of credit is:
    (1) Secured by real property, or by personal property used or 
expected to be used as the principal dwelling of the consumer; or
    (2) A private education loan as defined in Sec.  
226.37(b)(5).[ltrif]
* * * * *

Subpart C--Closed-End Credit

    4. Section 226.17 is amended by revising paragraphs (a), (b), and 
(e) and removing paragraph (i) to read as follows:


Sec.  226.17  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the 
disclosures required by this subpart clearly and conspicuously in 
writing, in a form that the consumer may keep. The disclosures required 
by this subpart may be provided to the consumer 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. Sec.  226.17(g), 226.19(b), and 226.24 may be provided to the 
consumer in electronic form without regard to the consumer consent or 
other provisions of the E-Sign Act in the circumstances set forth in 
those sections. The disclosures shall be grouped together, shall be 
segregated from everything else, and shall not contain any information 
not directly related \37\ to the disclosures required under Sec.  
226.18 [rtrif]or Sec.  226.38[ltrif].\38\ The itemization of the amount 
financed under Sec.  226.18(c)(1) must be separate from the other 
disclosures under that section [rtrif]except for private education loan 
disclosures under Sec.  226.38[ltrif].
---------------------------------------------------------------------------

    \37\ The disclosures may include an acknowledgment of receipt, 
the date of the transaction, and the consumer's name, address, and 
account number.
    \38\ The following disclosures may be made together with or 
separately from other required disclosures: The creditor's identity 
under Sec.  226.18(a), the variable rate example under Sec.  
226.18(f)(1)(iv), insurance or debt cancellation under Sec.  
226.18(n), and certain security interest charges under Sec.  
226.18(o).
---------------------------------------------------------------------------

    (2) [rtrif]Except for private education loans, 
t[ltrif][lsqbb]T[rsqbb]he terms ``finance charge'' and ``annual 
percentage rate,'' when required to be disclosed under Sec.  226.18(d) 
and (e) together with a corresponding amount or percentage rate, shall 
be more conspicuous than any other disclosure, except the creditor's 
identity under Sec.  226.18(a). [rtrif]For private education loans, the 
term ``annual percentage rate,'' and the corresponding percentage rate 
must be less conspicuous than the term ``finance charge'' and 
corresponding amount under Sec.  226.18(d), the interest rate under 
Sec. Sec.  226.38(b)(1)(i) and (c)(1), and the notice of the right to 
cancel under Sec.  226.38(c)(4).[ltrif]
    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain residential mortgage 
transactions, special timing requirements are set forth in Sec.  
226.19(a). In certain variable-rate transactions, special timing 
requirements for variable-rate disclosures are set forth in Sec.  
226.19(b) and Sec.  226.20(c). [rtrif]For private education loan 
transactions, special timing requirements are set forth in Sec.  
226.37(d).[ltrif] In certain transactions involving mail or telephone 
orders or a series of sales, the timing of disclosures may be delayed 
in accordance with paragraphs (g) and (h) of this section.
* * * * *
    (e) Effect of subsequent events. [rtrif]Except for the disclosures 
required in Sec.  226.38(b), i[ltrif][lsqbb]I[rsqbb]f a disclosure 
becomes inaccurate because of an event that occurs after the creditor 
delivers the

[[Page 12492]]

required disclosures, the inaccuracy is not a violation of this 
regulation, although new disclosures may be required under paragraph 
(f) of this section, Sec.  226.19, or Sec.  226.20.
* * * * *
    [lsqbb](i) Interim student credit extensions. For each transaction 
involving an interim credit extension under a student credit program, 
the creditor need not make the following disclosures: the finance 
charge under Sec.  226.18(d), the payment schedule under Sec.  
226.18(g), the total of payments under Sec.  226.18(h), or the total 
sale price under Sec.  226.18(j).[rsqbb]
* * * * *
    5. A new Subpart F consisting of Sec. Sec.  226.37, 226.38, and 
226.39 are added to read as follows:
Subpart F--Special Rules for Private Education Loans
Sec.
226.37 Special Disclosure Requirements for Private Education Loans.
226.38 Content of Disclosures.
226.39 Limitations on Private Educational Loans.

[rtrif]Subpart F--Special Rules for Private Education Loans


Sec.  226.37  Special Disclosure Requirements for Private Education 
Loans

    (a) Coverage. The requirements of this subpart apply to private 
education loans as defined in Sec.  226.37(b)(5).
    (1) Relation to other subparts in this part. Except as otherwise 
specifically provided, the requirements and limitations of this subpart 
are in addition to and not in lieu of those contained in other subparts 
of this Part.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) Covered educational institution means:
    (i) An educational institution that meets the definition of an 
institution of higher education, as defined in paragraph (b)(2) of this 
section, without regard to the institution's accreditation status; and
    (ii) Includes an agent, officer, or employee of the institution of 
higher education.
    (2) Institution of higher education has the same meaning as in 
section 102 of the Higher Education Act of 1965 (20 U.S.C. 1002) and 
the implementing regulations published by the Department of Education.
    (3) Postsecondary educational expenses means any of the expenses 
that are listed as part of the cost of attendance, as defined under 
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of 
a student at a covered educational institution. These expenses 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.
    (4) Preferred lender arrangement has the same meaning as in section 
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
    (5) Private education loan means a loan that:
    (i) Is not made, insured, or guaranteed under title IV of the 
Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
    (ii) Is extended to a consumer expressly, in whole or in part, for 
postsecondary educational expenses, regardless of whether the loan is 
provided by the educational institution that the student attends; and
    (iii) Does not include open-end credit or any loan that is secured 
by real property or a dwelling.
    (c) Form of disclosures--(1) Clear and conspicuous. The disclosures 
required by this subpart shall be made clearly and conspicuously.
    (2) Transaction disclosures. (i) The disclosures required under 
Sec. Sec.  226.38(b) and (c) shall be made in writing, in a form that 
the consumer may keep. The disclosures shall be grouped together, shall 
be segregated from everything else, and shall 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.
    (ii) The disclosures may include an acknowledgement of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number. The following disclosures may 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).
    (iii) 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), 
shall be more conspicuous than any other disclosure, except the 
creditor's identity under Sec.  228.18(a).
    (3) Electronic disclosures. The disclosures required under 
Sec. Sec.  226.38(b) and (c) may be provided to the consumer 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. Sec.  7001 et seq.). The 
disclosures required by Sec.  226.38(a) may be provided to the consumer 
in electronic form on or with an application or solicitation provided 
in electronic form without regard to the consumer consent or other 
provisions of the E-Sign Act. The form required to be received under 
Sec.  226.39(e) may be accepted by the creditor in electronic form as 
provided for in that section.
    (d) Timing of disclosures--(1) Application or solicitation 
disclosures.
    (i) The disclosures required by Sec.  226.38(a) shall be provided 
on or with any application or solicitation. For purposes of this 
subpart, the term solicitation means an offer of credit that does not 
require the consumer to complete an application. A ``firm offer of 
credit'' as defined in section 603(l) of the Fair Credit Reporting Act 
(15 U.S.C. 1681a(l)) is a solicitation for purposes of this section.
    (ii) The creditor may, at its option, disclose orally the 
information in Sec.  226.38(a) in a telephone application, or 
solicitation, initiated by the creditor. Alternatively, if the creditor 
does not disclose orally the information in Sec.  226.38(a), the 
creditor must provide the disclosures or place them in the mail no 
later than three business days after the consumer requests the credit, 
except that, if the creditor provides or places in the mail the 
disclosures in Sec.  226.38(b) no later than three business days after 
the consumer requests the credit, the creditor need not also provide 
the Sec.  226.38(a) disclosures.
    (iii) For a loan, other than open-end credit or any loan secured by 
real property or a dwelling, that the consumer may use for multiple 
purposes including, but not limited to, postsecondary educational 
expenses, the creditor need not also provide Sec.  226.38(a) 
disclosures.
    (2) Approval disclosures. The creditor shall provide the 
disclosures required by Sec.  226.38(b) before consummation on or with 
any notice of approval provided to the consumer. If the creditor mails 
notice of approval, the disclosures must be mailed with the notice. If 
the creditor communicates notice of approval by telephone, the creditor 
must mail the disclosures within three business days of providing the 
notice of approval. If the creditor communicates notice of approval 
electronically, the creditor may provide the disclosures in electronic 
form; otherwise the creditor must mail the disclosures within three 
business days of communicating the notice of approval.
    (3) Final disclosures. The disclosures required by Sec.  226.38(c) 
shall be provided after the consumer accepts the loan and at least 
three business days

[[Page 12493]]

prior to disbursing the private education loan funds.
    (e) Basis of disclosures and use of estimates--(1) Legal 
obligation. Disclosures shall reflect the terms of the legal obligation 
between the parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available at the 
time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (f) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor 
must comply with the requirements that this part imposes on any or all 
of them. If there is more than one consumer, the disclosures may be 
made to any consumer who is primarily liable on the obligation.
    (g) Effect of subsequent events. If a disclosure under Sec.  
226.38(c) becomes inaccurate because of an event that occurs after the 
creditor delivers the required disclosures, the inaccuracy is not a 
violation of Regulation Z (12 CFR part 226).


Sec.  226.38  Content of disclosures.

    (a) Application or solicitation disclosures. A creditor shall 
provide the disclosures required under paragraph (a) of this section on 
or with a solicitation or an application for a private education loan.
    (1) Interest Rates. (i) The interest rate or range of interest 
rates applicable to the loan and actually offered by the creditor at 
the time of application or solicitation. If the rate will depend, in 
part, on a later determination of the consumer's creditworthiness, a 
statement that the rate for which the consumer may qualify will depend 
on the consumer's creditworthiness and other factors, if applicable.
    (ii) Whether the interest rates applicable to the loan are fixed or 
variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the interest rate adjustments, or lack 
thereof, and a statement that the consumer's actual rate could be 
higher or lower than the rates disclosed under paragraph (a)(1)(i) of 
this section, if applicable.
    (iv) Whether a co-signer or guarantor is required and whether the 
applicable interest rates typically will be higher if the loan is not 
co-signed or guaranteed.
    (2) Fees and Default or Late Payment Costs. (i) An itemization of 
the fees or range of fees required to obtain the private education 
loan; and
    (ii) Any applicable charges or fees, changes to the interest rate, 
and adjustments to principal based on the consumer's defaults or late 
payments.
    (3) Repayment Terms. (i) The term of the loan.
    (ii) Any payment deferral options, or, if the consumer does not 
have the option to defer payments, that fact.
    (iii) For each payment deferral option applicable while the student 
is enrolled at a covered educational institution:
    (A) whether interest will accrue during the deferral period; and
    (B) if interest accrues, whether payment of interest may be 
deferred and added to the principal balance.
    (4) Cost estimates. An example of the total cost of the loan over 
the life of the loan, calculated as the total of payments:
    (i) using the maximum rate of interest and a principal amount of 
$10,000, or $5000 if the creditor only offers the loan for less than 
$10,000, plus the finance charges applicable to loans at the maximum 
rate of interest; and
    (ii) calculated both for any option that allows for deferral of 
interest payments and for any option that does not allow for deferral 
of interest payments.
    (5) Eligibility. Any age or school enrollment eligibility 
requirements relating to the consumer or co-signer, if applicable.
    (6) Alternatives to Private Education Loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under title IV of the Higher Education Act of 1965 
(20 U.S.C. 1070 et seq.);
    (ii) The interest rates available under each program under title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and 
whether the rates are fixed or variable;
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the student attends, or at the 
website of the U.S. Department of Education, including an appropriate 
website address; and
    (iv) A statement that a covered educational institution may have 
school-specific education loan benefits and terms not detailed on the 
disclosure form.
    (7) Rights of the Consumer. (i) A statement that if the loan is 
approved, the consumer will have the right to accept the terms of the 
loan at any time within 30 calendar days following receipt of the 
approval disclosures in Sec.  226.38(b).
    (ii) A statement that except for changes based on adjustments to 
the index used to determine the rate for the loan, the rates and terms 
of the loan may not be changed by the creditor during the 30-day period 
described in paragraph (a)(7)(i) of this section.
    (8) Self-certification information. A statement that, before the 
loan may be consummated, the consumer must obtain from the relevant 
institution of higher education the self-certification form required 
under Sec.  226.39(e), and complete, sign and submit the form to the 
creditor, if applicable.
    (b) Approval disclosures. On or with any notice of approval 
provided to the consumer, the creditor shall disclose to the consumer 
the information required under Sec.  226.18 and the following 
information:
    (1) Interest Rate. (i) The interest rate applicable to the loan.
    (ii) Whether the interest rate is fixed or variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the rate adjustments, or lack thereof.
    (2) Fees and default or late payment costs.
    (i) An itemization of the fees or range of fees required to obtain 
the private education loan; and
    (ii) Any applicable charges or fees, changes to the interest rate, 
and adjustments to principal based on the consumer's defaults or late 
payments.
    (3) Repayment terms.
    (i) The principal amount of the loan for which the consumer has 
been approved.
    (ii) The term of the loan.
    (iii) A description of the payment deferral option chosen by the 
consumer, if applicable, and any other payment deferral options that 
the consumer may elect at a later time.
    (iv) Any payments required while the student is enrolled at a 
covered educational institution, based on the deferral option chosen by 
the consumer.
    (v) The amount of any unpaid interest that will accrue while the 
student is enrolled at a covered educational institution, based on the 
deferral option chosen by the consumer.
    (vi) A statement that if the consumer files for bankruptcy, the 
consumer may still be required to pay back the loan.
    (vii) An estimate of the total amount of payments calculated based 
on:
    (A) The interest rate applicable to the loan. Compliance with Sec.  
226.18(h) constitutes compliance with this requirement.
    (B) The maximum possible rate of interest for the loan or, if a 
maximum rate cannot be determined, a rate of 21%.
    (C) If a maximum rate cannot be determined, the estimate of the 
total

[[Page 12494]]

amount for repayment must include a statement that there is no maximum 
rate and that the total amount for repayment disclosed under Sec.  
226.38(b)(3)(vii)(A) is an estimate and will be higher if the 
applicable interest rate increases.
    (viii) The maximum monthly payment based on the maximum rate of 
interest for the loan or, if a maximum rate cannot be determined, a 
rate of 21%. If a maximum cannot be determined, a statement of that 
there is no maximum rate and that the monthly payment amount disclosed 
is an estimate and will be higher if the applicable interest rate 
increases.
    (4) Alternatives to private education loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under title IV of the Higher Education Act of 1965 
(20 U.S.C. 1070 et seq.);
    (ii) The interest rates available under each program under title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), and 
whether the rates are fixed or variable; and
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the subject student attends, or at 
the website of the U.S. Department of Education, including an 
appropriate website address.
    (5) Rights of the consumer. (i) A statement that the consumer has 
the right to accept the terms of the loan at any time within 30 
calendar days following notice of loan approval. The disclosure must 
include the specific date on which the 30-day period expires, based on 
the date upon which the consumer receives the disclosures required 
under this subsection for the loan, and indicate that the consumer may 
accept the terms of the loan until that date. The disclosure must also 
specify the method or methods by which the consumer may communicate 
acceptance.
    (ii) A statement that, except for changes based on adjustments to 
the index used for a loan, the rates and terms of the loan may not be 
changed by the creditor during the period described in paragraph 
(b)(5)(i).
    (c) Final disclosures. At least three business days prior to 
disbursing the loan funds, the creditor shall disclose to the consumer 
the information required by Sec.  226.18 and the following information:
    (1) Interest rate. Information required to be disclosed under 
Sec. Sec.  226.38(b)(1).
    (2) Fees and default or late payment costs. Information required to 
be disclosed under Sec.  226.38(b)(2).
    (3) Repayment terms. Information required to be disclosed under 
Sec.  226.38(b)(3).
    (4) Cancellation right. A statement that:
    (i) the consumer has the right to cancel the loan, without penalty, 
at any time before the cancellation period under Sec.  226.39(d) 
expires, and
    (ii) loan proceeds will not be disbursed until after the 
cancellation period under Sec.  226.39(d) expires. The statement must 
include the specific date on which the cancellation period expires and 
state that the consumer may cancel by that date. The statement must 
also specify the method or methods by which the consumer may cancel. 
The disclosures required by this paragraph (c)(4) must be made more 
conspicuous than any other disclosure required under this section, 
except for the finance charge, the interest rate, and the creditor's 
identity, which must be disclosed in accordance with the requirements 
of Sec.  226.37(c)(2)(iii).


Sec.  226.39  Limitations on private educational loans.

    (a) Co-branding prohibited. (1) Except as provided in paragraph (b) 
of this section, a creditor shall not use the name, emblem, mascot, or 
logo of a covered educational institution, or other words, pictures, or 
symbols identified with a covered educational institution, in the 
marketing of private education loans in a way that implies that the 
covered education institution endorses the creditor's loans.
    (2) A creditor's marketing of private education loans does not 
imply that the covered education institution endorses the creditor's 
loans if the marketing includes a clear and conspicuous disclosure that 
the covered educational institution does not endorse the creditor's 
loans and that the creditor is not affiliated with the covered 
educational institution.
    (b) Preferred lender arrangements. If a creditor and a covered 
educational institution have entered into a preferred lender 
arrangement, as defined by Sec.  226.37(b)(4), paragraph (a)(1) of this 
section does not apply if the private education loan marketing includes 
a clear and conspicuous disclosure that the creditor's loans are not 
offered or made by the covered educational institution, but are made by 
the creditor.
    (c) Consumer's right to accept. (1) The consumer has the right to 
accept the terms of a private education loan at any time within 30 
calendar days following the date on which the consumer receives the 
disclosures required under Sec.  226.38(b).
    (2) Except for changes based on adjustments to the index used for a 
loan, or changes that will unequivocally benefit the consumer, the rate 
and terms of the private education loan that are required to be 
disclosed under Sec. Sec.  226.38(b) and (c) may not be changed by the 
creditor prior to the earlier of:
    (i) the date of disbursement of the loan; or
    (ii) the expiration of the 30 calendar day period described in 
paragraph (c)(1) of this section if the consumer has not accepted the 
loan within that time.
    (3) Notwithstanding paragraph (c)(2) of this section, nothing in 
this section prevents the creditor from changing the rate or terms of 
the loan, at the creditor's option, in connection with accommodating a 
specific request by the consumer. For example, if the consumer requests 
a higher or lower principal amount of the loan following a change in 
the amount of the consumer's other available financial assistance, the 
creditor may, but need not, provide the requested principal amount and 
make any other changes to the rate or terms. If the consumer requests a 
change to the terms of the loan, the creditor shall provide the 
disclosures required under Sec.  228.38(b)(2) for the new loan terms 
and shall provide the consumer with an additional 30 days to accept the 
new rates and terms of the loan, and shall not make changes to the 
rates and terms except as specified in paragraphs (c)(2) and (3) of 
this section.
    (d) Consumer's right to cancel. The consumer may cancel a private 
education loan, without penalty, until midnight of the third business 
day following the date on which the consumer receives the disclosures 
required by Sec.  226.38(c). No funds may be disbursed with respect to 
a private education loan until after the expiration of the three-
business day period.
    (e) Self-certification form. For a private education loan intended 
to be used for the postsecondary educational expenses of a student 
while the student is attending an institution of higher education, a 
creditor shall obtain from the consumer or the institution of higher 
education the form developed by the Secretary of Education under 
section 155 of the Higher Education Act of 1965, signed by the 
consumer, in written or electronic form, before consummating the 
private education loan.
    (f) Provision of information by preferred lenders. A creditor that 
has a preferred lender arrangement with a covered educational 
institution shall provide to the covered educational institution 
annually by the 1st day of January, the information required under

[[Page 12495]]

Sec. Sec.  226.38(a)(1), (2), (3) and (5), for each type of private 
education loan that the lender plans to offer to consumers for students 
attending the covered educational institution for the period beginning 
July 1 and ending June 30 of the following year.[ltrif]
    6. In Part 226, Appendix H is amended by adding new entries H-18 
through H-23 to the table of contents at the beginning of the appendix, 
and adding new Forms H-18, H-19, H-20, H-21, H-22, and H-23.

Appendix H to Part 226--Closed-End Model Forms and Clauses

* * * * *
[rtrif]H-18 Private Education Loan Application and Solicitation 
Model Form
H-19 Private Education Loan Approval Model Form
H-20 Private Education Loan Final Model Form
H-21 Private Education Loan Application and Solicitation Sample
H-22 Private Education Loan Approval Sample
H-23 Private Education Loan Final Sample[ltrif]
* * * * *

[rtrif]H-18 Private Education Loan Application and Solicitation Model 
Form

BILLING CODE 6210-01-P

[[Page 12496]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.000


[[Page 12497]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.001

H-19 Private Education Loan Approval Model Form

[[Page 12498]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.002


[[Page 12499]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.003

H-20 Private Education Loan Final Model Form

[[Page 12500]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.004


[[Page 12501]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.005

H-21 Private Education Loan Application and Solicitation Sample

[[Page 12502]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.006


[[Page 12503]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.007

H-22 Private Education Loan Approval Sample

[[Page 12504]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.008


[[Page 12505]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.009

H-23 Private Education Loan Final Sample

[[Page 12506]]

[GRAPHIC] [TIFF OMITTED] TP24MR09.010


[[Page 12507]]


[GRAPHIC] [TIFF OMITTED] TP24MR09.011

BILLING CODE 6210-01-C


[[Page 12508]]


    7. In Supplement I to Part 226:
    a. Under Section 226.2--Definitions and Rules of Construction, 
2(a) Definitions, 2(a)(6) Business day, paragraph 2(a)(6)-2 is 
revised.
    b. Under Section 226.3--Exempt Transactions, the heading to 3(b) 
Credit Over $25,000 Not Secured by Real Property or a Dwelling, and 
3(f) Student Loan Programs, are revised.
    c. Under Section 226.17--General Disclosure Requirements, under 
17(a) Form of Disclosures, paragraphs (17)(a)(1)-4, (17)(a)(1)-6, 
(a)(2) and 17(b) Time of Disclosures, are revised, and 17(i) Interim 
Student Credit Extensions, is removed.
    d. Under Section 226.18--Content of Disclosures, Paragraph 
18(f)(1)(ii), Paragraph 18(f)(1)(iv)-2, and Paragraph 18(k)(1) are 
revised.
    e. A new Subpart F--Special Rules for Private Student Loans is 
added, and new Section 226.37--Requirements for Private Student 
Loans, Section 226.38--Content of Disclosures, and Section 226.39--
Limitations on Private Educational Loans are added.
    f. Under the heading, Appendixes G and H--Open-End and Closed-
End Model Forms and Clauses, paragraph 1. is revised.
    g. Under Appendix H--Closed-End Model Forms and Clauses, 
paragraphs 21 through 24 are revised, and paragraphs 25 through 28 
are revised.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

2(a) Definitions

* * * * *
    2(a)(6) Business day.
* * * * *
    2. [Rescission rule][rtrif] Rule for rescission, disclosures for 
certain mortgage transactions, and private education loans[ltrif]. A 
more precise rule for what is a business day (all calendar days 
except Sundays and the federal legal holidays specified in 5 U.S.C. 
6103(a)) applies when the right of rescission [or][rtrif],[ltrif] 
the receipt of disclosures for certain [rtrif]dwelling-
secured[ltrif] mortgage transactions under Sec. Sec.  
226.19(a)(1)(ii), [rtrif]226.19(a)(2),[ltrif] [or mortgages subject 
to Sec.  226.32 are] 226.31(c) [rtrif], or the receipt of 
disclosures and the right to cancel private education loans under 
Sec. Sec.  226.37, 226.38, and 226.39 is[ltrif] involved. [(See also 
comment 31(c)(1)-1.)] Four federal legal holidays are identified in 
5 U.S.C. 6103(a) by a specific date: New Year's Day, January 1; 
Independence Day, July 4; Veterans Day, November 11; and Christmas 
Day, December 25. When one of these holidays (July 4, for example) 
falls on a Saturday, federal offices and other entities might 
observe the holiday on the preceding Friday (July 3). [The][rtrif]In 
cases where the more precise rule applies, the[ltrif] observed 
holiday (in the example, July 3) is a business day [for purposes of 
rescission or the delivery of disclosures for certain high-cost 
mortgages covered by Sec.  226.32].
* * * * *

Section 226.3--Exempt Transactions

* * * * *

3(b) Credit Over $25,000 [Not Secured by Real Property or a 
Dwelling]

* * * * *

3(f) Student Loan Programs

    1. Coverage. This exemption applies to [the Guaranteed Student 
Loan program (administered by the Federal government, State, and 
private non-profit agencies), the Auxiliary Loans to Assist Students 
(also known as PLUS) program, and the National Direct Student Loan 
program.] [rtrif]loans made, insured, or guaranteed under title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.). This 
exemption does not apply to private education loans as defined by 
Sec.  226.37(b)(5).[ltrif]
* * * * *

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements

* * * * *

17(a) Form of Disclosures

Paragraph 17(a)(1)

* * * * *
    4. Content of segregated disclosures. Footnotes 37 and 38 
contain exceptions to the requirement that the disclosures under 
Sec.  226.18 be segregated from material that is not directly 
related to those disclosures. Footnote 37 lists the items that may 
be added to the segregated disclosures, even though not directly 
related to those disclosures. Footnote 38 lists the items required 
under Sec.  226.18 that may be deleted from the segregated 
disclosures and appear elsewhere. Any one or more of these additions 
or deletions may be combined and appear either together with or 
separate from the segregated disclosures. The itemization of the 
amount financed under Sec.  226.18(c), however, must be separate 
from the other segregated disclosures under Sec.  226.18[rtrif], 
except for private education loan disclosures under Sec.  
226.38[ltrif]. If a creditor chooses to include the security 
interest charges required to be itemized under Sec.  226.4(e) and 
Sec.  226.18(o) in the amount financed itemization, it need not list 
these charges elsewhere.
* * * * *
    6. Multiple-purpose forms. The creditor may design a disclosure 
statement that can be used for more than one type of transaction, so 
long as the required disclosures for individual transactions are 
clear and conspicuous. (See the Commentary to appendices G and H for 
a discussion of the treatment of disclosures that do not apply to 
specific transactions.) Any disclosure listed in Sec.  226.18 
(except the itemization of the amount financed under Sec.  226.18(c) 
[rtrif]for transactions other than private education loans[ltrif]) 
may be included on a standard disclosure statement even though not 
all of the creditor's transactions include those features. For 
example, the statement may include:
    <bullet> The variable rate disclosure under Sec.  226.18(f).
    <bullet> The demand feature disclosure under Sec.  226.18(i).
    <bullet> A reference to the possibility of a security interest 
arising from a spreader clause, under Sec.  226.18(m).
    <bullet> The assumption policy disclosure under Sec.  226.18(q).
    <bullet> The required deposit disclosure under Sec.  226.18(r).
* * * * *

Paragraph 17(a)(2)

    1. When disclosures must be more conspicuous. The following 
rules apply to the requirement that the terms ``annual percentage 
rate'' [rtrif](except for private education loans)[ltrif] and 
``finance charge'' be shown more conspicuously:
    <bullet> The terms must be more conspicuous only in relation to 
the other required disclosures under Sec.  226.18. For example, when 
the disclosures are included on the contract document, those two 
terms need not be more conspicuous as compared to the heading on the 
contract document or information required by state law.
    <bullet> The terms need not be more conspicuous except as part 
of the finance charge and annual percentage rate disclosures under 
Sec.  226.18(d) and (e), although they may, at the creditor's 
option, be highlighted wherever used in the required disclosures. 
For example, the terms may, but need not, be highlighted when used 
in disclosing a prepayment penalty under Sec.  226.18(k) or a 
required deposit under Sec.  226.18(r).
    <bullet> The creditor's identity under Sec.  226.18(a) may, but 
need not, be more prominently displayed than the finance charge and 
annual percentage rate.
    <bullet> The terms need not be more conspicuous than figures 
(including, for example, numbers, percentages, and dollar signs)
    2. Making disclosures more conspicuous. The terms ``finance 
charge'' and [rtrif](except for private education loans)[ltrif] 
``annual percentage rate'' may be made more conspicuous in any way 
that highlights them in relation to the other required disclosures. 
For example, they may be:
    <bullet> Capitalized when other disclosures are printed in 
capital and lower case.
    <bullet> Printed in larger type, bold print or different type 
face.
    <bullet> Printed in a contrasting color.
    <bullet> Underlined.
    <bullet> Set off with asterisks.

17(b) Time of Disclosures

    1. Consummation. As a general rule, disclosures must be made 
before ``consummation'' of the transaction. The disclosures need not 
be given by any particular time before consummation, except in 
certain mortgage transactions and variable-rate transactions secured 
by the consumer's principal dwelling with a term greater than one 
year under Sec.  226.19[rtrif], and in private education loan 
transactions under Sec. Sec.  226.37 and 226.38[ltrif]. (See the 
commentary to

[[Page 12509]]

Sec.  226.2(a)(13) regarding the definition of consummation.)
* * * * *

17(i) Interim Student Credit Extensions

    1. Definition. Student credit plans involve extensions of credit 
for education purposes where the repayment amount and schedule are 
not known at the time credit is advanced. These plans include loans 
made under any student credit plan, whether government or private, 
where the repayment period does not begin immediately. (Certain 
student credit plans that meet this definition are exempt from 
Regulation Z. See Sec.  226.3(f).) Creditors in interim student 
credit extensions need not disclose the terms set forth in this 
paragraph at the time the credit is actually extended but must make 
complete disclosures at the time the creditor and consumer agree 
upon the repayment schedule for the total obligation. At that time, 
a new set of disclosures must be made of all applicable items under 
Sec.  226.18.
    2. Basis of disclosures. The disclosures given at the time of 
execution of the interim note should reflect two annual percentage 
rates, one for the interim period and one for the repayment period. 
The use of Sec.  226.17(i) in making disclosures does not, by 
itself, make those disclosures estimates. Any portion of the finance 
charge, such as statutory interest, that is attributable to the 
interim period and is paid by the student (either as a prepaid 
finance charge, periodically during the interim period, in one 
payment at the end of the interim period, or capitalized at the 
beginning of the repayment period) must be reflected in the interim 
annual percentage rate. Interest subsidies, such as payments made by 
either a state or the Federal government on an interim loan, must be 
excluded in computing the annual percentage rate on the interim 
obligation, when the consumer has no contingent liability for 
payment of those amounts. Any finance charges that are paid 
separately by the student at the outset or withheld from the 
proceeds of the loan are prepaid finance charges. An example of this 
type of charge is the loan guarantee fee. The sum of the prepaid 
finance charges is deducted from the loan proceeds to determine the 
amount financed and included in the calculation of the finance 
charge.
    3. Consolidation. Consolidation of the interim student credit 
extensions through a renewal note with a set repayment schedule is 
treated as a new transaction with disclosures made as they would be 
for a refinancing. Any unearned portion of the finance charge must 
be reflected in the new finance charge and annual percentage rate, 
and is not added to the new amount financed. In itemizing the amount 
financed under Sec.  226.18(c), the creditor may combine the 
principal balances remaining on the interim extensions at the time 
of consolidation and categorize them as the amount paid on the 
consumer's account.
    4. Approved student credit forms. See the commentary to appendix 
H regarding disclosure forms approved for use in certain student 
credit programs.]
* * * * *

Section 226.18--Content of Disclosures

* * * * *

Paragraph 18(f)(1)(ii)

    1. Limitations. This includes any maximum imposed on the amount 
of an increase in the rate at any time, as well as any maximum on 
the total increase over the life of the transaction. [rtrif]Except 
for private education loans disclosures, 
[ltrif][W][rtrif]w[ltrif]hen there are no limitations, the creditor 
may, but need not, disclose that fact[. L][rtrif], and 
l[ltrif]imitations do not include legal limits in the nature of 
usury or rate ceilings under state or federal statutes or 
regulations. (See Sec.  226.30 for the rule requiring that a maximum 
interest rate be included in certain variable-rate transactions.) 
[rtrif]For limitations with respect to private education loan 
disclosures, see comment 38(b)(1)-2.[ltrif]
* * * * *

Paragraph 18(f)(1)(iv)

* * * * *
    2. Hypothetical example not required. The creditor need not 
provide a hypothetical example in the following transactions with a 
variable-rate feature:
    <bullet> Demand obligations with no alternate maturity date.
    <bullet> [Interim student credit extensions][rtrif]Private 
education loans as defined in Sec.  226.37(b)(5)[ltrif].
    <bullet> Multiple-advance construction loans disclosed pursuant 
to appendix D, Part I.
* * * * *

Paragraph 18(k)(1)

    1. Penalty. This applies only to those transactions in which the 
interest calculation takes account of all scheduled reductions in 
principal, as well as transactions in which interest calculations 
are made daily. The term penalty as used here encompasses only those 
charges that are assessed strictly because of the prepayment in full 
of a simple-interest obligation, as an addition to all other 
amounts. Items which are penalties include, for example:
    <bullet> Interest charges for any period after prepayment in 
full is made. (See the commentary to Sec.  226.17(a)(1) regarding 
disclosure of interest charges assessed for periods after prepayment 
in full as directly related information.)
    <bullet> A minimum finance charge in a simple-interest 
transaction. (See the commentary to Sec.  226.17(a)(1) regarding the 
disclosure of a minimum finance charge as directly related 
information.) Items which are not penalties include, for example[:
    <bullet> L][rtrif], l[ltrif]oan guarantee fees[rtrif].[ltrif]
    [<bullet> Interim interest on a student loan]
* * * * *

Subpart F--Special Rules for Private Education Loans

Section 226.37--Special Disclosure Requirements for Private 
Education Loans

37(b) Definitions

    37(b)(1) Covered educational institution.
    1. General. A covered educational institution includes any 
educational institution that meets the definition of an institution 
of higher education in Sec.  226.37(b)(2). An institution is also a 
covered educational institution if it otherwise meets the definition 
of an institution of higher education, except for its lack of 
accreditation. Such an institution may include, for example, a 
university or community college. It may also include an institution, 
whether accredited or unaccredited, offering instruction to prepare 
students for gainful employment in a recognized profession, such as 
flying, culinary arts, or dental assistance. A covered educational 
institution does not include elementary or secondary schools.
    2. Agent. For purposes of Sec.  226.37(b)(1), the term agent 
means an officer or employee of an institution-affiliated 
organization as defined by section 151 of the Higher Education Act 
of 1965 (20 U.S.C 1019). Under section 151 of the Higher Education 
Act, an institution-affiliated organization means any organization 
that is directly or indirectly related to a covered institution and 
is engaged in the practice of recommending, promoting, or endorsing 
education loans for students attending the covered institution or 
the families of such students. An institution-affiliated 
organization may include an alumni organization, athletic 
organization, foundation, or social, academic, or professional 
organization, of a covered institution, but does not include any 
creditor with respect to any private education loan made by that 
creditor.
    37(b)(2) Institution of higher education.
    1. General. An institution of higher education includes any 
institution that meets the definitions contained in section 102 of 
the Higher Education Act of 1965 (20 U.S.C. 1002) and implementing 
Department of Education regulations (34 CFR 600). Such an 
institution may include, for example, a university or community 
college. It may also include an institution offering instruction to 
prepare students for gainful employment in a recognized profession, 
such as flying, culinary arts, or dental assistance. An institution 
of higher education does not include elementary or secondary 
schools.
    37(b)(3) Postsecondary educational expenses.
    1. General. The examples listed in Sec.  226.37(b)(3) are 
illustrative only. The full list of postsecondary educational 
expenses is contained in section 472 of the Higher Education Act of 
1965 (20 U.S.C. 1087ll).
    37(b)(4) Preferred lender arrangement.
    1. General. The term ``preferred lender arrangement'' is defined 
in section 151 of the Higher Education Act of 1965 (20 U.S.C 1019). 
The term refers to an arrangement or agreement between a creditor 
and a covered educational institution (or an institution-affiliated 
organization as defined by section 151 of the Higher Education Act 
of 1965 (20 U.S.C 1019)) under which a creditor provides private 
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.

[[Page 12510]]

    37(b)(5) Private education loan.
    1. Extended expressly for postsecondary educational expenses. A 
private education loan is one that is extended expressly for 
postsecondary educational expenses. The term includes loans extended 
for postsecondary educational expenses incurred while a student is 
enrolled in a covered educational institution as well as loans 
extended to consolidate a consumer's pre-existing private education 
loans.
    2. Multiple-purpose loans. For a loan, other than open-end 
credit or any loan secured by real property or a dwelling, that the 
consumer may use for multiple purposes including, but not limited 
to, postsecondary educational expenses, the creditor need not 
provide the disclosures required by Sec.  226.38(a) on or with the 
application or solicitation. See Sec.  226.38(d)(1)(i). However, if 
the consumer expressly indicates that the proceeds of the loan will 
be used to pay for postsecondary educational expenses by indicating 
the loan's purpose on an application, the creditor must comply with 
Sec. Sec.  226.38(b) and (c) and Sec.  226.39. The creditor may rely 
on a check-box, or a purpose line, on a loan application to 
determine whether or not the applicant intends to use loan proceeds 
for postsecondary educational expenses. For purposes of the required 
disclosures, 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.

37(c) Form of Disclosures

    1. Form of disclosures--relation to other sections. Creditors 
must make the disclosures required under this subpart in accordance 
with Sec.  226.37(c)(1). To comply with the requirement under 
Sec. Sec.  226.38(b) and (c) that private education lenders disclose 
the information required under Sec.  226.18, as well as the 
requirement that the disclosures be grouped together and segregated 
from everything else, creditors may follow the rules in Sec.  
226.17, except where specifically provided otherwise. Although Sec.  
226.17(b) requires creditors to provide only one set of disclosures 
before consummation of the transaction, Sec. Sec.  226.38(b) and (c) 
require that the creditor provide the disclosures under Sec.  226.18 
both upon approval and prior to disbursing the loan.

Paragraph 37(c)(3)

    1. Application and solicitation disclosures--electronic 
disclosures. If the disclosures required under Sec.  226.38(a) are 
provided electronically, they must be provided on or with the 
application or solicitation reply form. Electronic disclosures are 
deemed to be on or with an application or solicitation if they meet 
one of the following conditions:
    i. They automatically appear on the screen when the application 
or solicitation reply form appears;
    ii. They are located on the same Web ``page'' as the application 
or solicitation reply form without necessarily appearing on the 
initial screen, if the application or reply form contains a clear 
and conspicuous reference to the location of the disclosures and 
indicates that the disclosures contain rate, fee, and other cost 
information, as applicable; or
    iii. They 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.

37(d) Timing of Disclosures

    1. Providing disclosures. Disclosures are considered provided 
when received by the consumer. 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, ``business day'' means all 
calendar days except Sundays and the legal public holidays referred 
to in Sec.  226.2(a)(6). See comment 2(a)(6)-2. For example, if the 
creditor places the disclosures in the mail on Thursday, June 4, the 
disclosures are considered received on Monday, June 8.

Paragraph 37(d)(1)

    1. Invitations to apply. A creditor may contact a consumer who 
has not been preapproved for a private educational loan about taking 
out a loan (whether by direct mail, telephone, or other means) and 
invite the consumer to complete an application. Such a contact does 
not meet the definition of solicitation, nor is it covered by this 
subpart, unless the contact itself includes the following:
    i. An application form in a direct mailing, electronic 
communication or a single application form as a ``take-one'' (in 
racks in public locations, for example);
    ii. An oral application in a telephone contact initiated by the 
creditor; or
    iii. An application in an in-person contact initiated by the 
creditor.

Paragraph 37(d)(2)

    1. Timing. The creditor must provide the disclosures required by 
Sec.  226.38(b) at the time the creditor provides to the consumer 
any notice that the loan has been approved. If the creditor 
communicates notice of approval to the consumer by mail, the 
disclosures must be mailed at the same time as the notice of 
approval. If the creditor communicates notice of approval by 
telephone, the creditor must place the disclosures in the mail 
within three business days of the notice of approval. If the 
creditor communicates notice of approval in electronic form, the 
creditor may provide the disclosures in electronic form if the 
creditor has complied 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. Sec.  7001 et seq.); otherwise, 
the creditor must place the disclosures in the mail within three 
business days of the communication. For purposes of Sec.  226.37(d), 
the more precise definition of business day (meaning all calendar 
days except Sundays and specified federal holidays) applies. See 
comment 2(a)(6)-2.

37(g) Effect of Subsequent Events

    1. Inaccuracies in the disclosures required under Sec.  
226.38(c) are not violations if attributable to events occurring 
after disclosures are made. For example, if the consumer initially 
chooses to defer payment of principal and interest while enrolled in 
a covered educational institution, but later chooses to make 
payments while enrolled, such a change does not make the original 
disclosures inaccurate.

Section 226.38--Content of Disclosures

    1. As applicable. The disclosures required by this subpart need 
be made only as applicable, unless specifically required otherwise. 
The creditor need not provide any disclosure that is not applicable 
to a particular transaction. For example, in a transaction 
consolidating private education loans, the creditor need not 
disclose the information under Sec. Sec.  226.38(a)(6), and (b)(4), 
and any other information otherwise required to be disclosed under 
this subpart that is not applicable to the loan consolidation 
transaction.

38(a) Application or Solicitation Disclosures

Paragraph 38(a)(1)(i)

    1. Rates actually offered. The disclosure may state only those 
rates that the creditor is actually prepared to offer. For example, 
a creditor may not disclose a very low interest rate that will not 
in fact be offered at any time. For a loan with variable interest 
rates, the ranges of rates will be considered actually offered if:
    i. For disclosures in applications or solicitations sent by 
direct mail, the rates were in effect within 60 days before mailing;
    ii. For disclosures in applications or solicitations in 
electronic form, the rates were in effect within 30 days before the 
disclosures are sent to a consumer's e-mail address, or for 
disclosures made on an Internet Web site, when viewed by the public;
    iii. For disclosures in printed applications or solicitations 
made available to the general public, the rates were in effect 
within 30 days before printing; or
    iv. For disclosures provided orally in telephone applications or 
solicitations, the rates are currently applicable at the time the 
disclosures are provided.
    2. Creditworthiness and other factors. If the rate will depend, 
at least in part, on a later determination of the consumer's 
creditworthiness, the disclosure must include a statement that the 
rate for which the consumer may qualify at approval will depend on 
the consumer's creditworthiness and other factors, if applicable. 
The creditor is not required to list the factors that it will use to 
determine the interest rate. For example, if the creditor will 
determine the interest rate based on information in the consumer's 
credit report and the type of school the consumer attends, the 
creditor may state, ``Your interest rate will be based on your 
creditworthiness and other factors.''

Paragraph 38(a)(1)(iii)

    1. Coverage. The requirements of section 226.38(a)(1)(iii) apply 
to all transactions in which the terms of the legal obligation allow 
the creditor to increase the interest rate originally disclosed to 
the consumer. The provisions do not apply to increases resulting 
from delinquency (including late payment), default, assumption, or 
acceleration.

[[Page 12511]]

    2. Limitations. The creditor must disclose any maximum imposed 
on the amount of an increase in the rate at any time, as well as any 
maximum on the total increase over the life of the transaction. When 
there are no limitations, the creditor must disclose that fact. 
Limitations include legal limits in the nature of usury or rate 
ceilings under state or federal statutes or regulations. However, if 
a rate limitation in the form of a legal limit applies (rather than 
a numerical rate limitation in the legal obligation between the 
parties) the creditor must disclose that the maximum rate is 
determined by applicable law and may change. The creditor must also 
disclose that the consumer's actual rate may be higher or lower than 
the initial rates disclosed under Sec.  226.38(a)(1)(i), if 
applicable.

Paragraph 38(a)(1)(iv)

    1. Co-signer or guarantor--changes in applicable interest rate. 
The creditor must disclose whether a co-signer or guarantor is 
required to obtain the loan. The creditor must also state whether 
the interest rate typically will be higher if the loan is not co-
signed or guaranteed by a third party. The creditor is required to 
provide only a statement of the effect on the interest rate and is 
not required to provide a numerical estimate of the effect on the 
interest rate. For example, a creditor may state: ``Rates are 
typically higher without a co-signer.''
    38(a)(2) Fees and Default or Late Payment Costs.
    1. Fees or range of fees. The creditor must itemize fees 
required to obtain the private education loan. The creditor must 
give a single dollar amount for each fee, unless the fee is based on 
a percentage, in which case the percentage must be stated. If the 
exact amount of the fee is not known at the time of disclosure, the 
creditor may disclose the dollar amount or percentage for each fee 
as an estimated range.
    2. Fees required to obtain the private education loan. The 
creditor must itemize the fees that the consumer must pay to obtain 
the private education loan. Fees disclosed include finance charges 
under Sec.  226.4, such as loan origination fees and credit report 
fees, as well as fees not considered finance charges but required to 
obtain credit, such as application fees that are charged whether or 
not credit is extended. Fees disclosed include those paid by the 
consumer directly to the creditor and fees paid to third parties by 
the creditor on the consumer's behalf. Fees disclosed do not include 
those that apply if the consumer exercises an option after 
consummation under the agreement or promissory note for the private 
educational loan, such as fees for exercising deferment, 
forbearance, or loan modification options.
    38(a)(3) Repayment Terms.
    1. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest 
will be due on the loan.
    2. Payment deferral options--general. The creditor must describe 
the options that the consumer has under the private education loan 
agreement to defer payment on the loan. When there is no deferment 
option provided for the loan, the creditor must disclose that fact. 
Payment deferral options required to be disclosed include options 
for immediate deferral of payments, such as when the student is 
currently enrolled at a covered educational institution. Payment 
deferral options also include any options that may apply during the 
repayment period, such as an option to defer payments if the student 
returns to school to pursue an additional degree. The disclosure 
must include a description of the length of the deferment period, 
the types of payments that may be deferred, and a description of any 
payments that are required during the deferment period. The creditor 
may, but need not, disclose any conditions applicable to the 
deferment option, such as that deferment is permitted only while the 
student is continuously enrolled in school. If payment deferral is 
not an option, the creditor must disclose that the consumer must 
begin repayment upon consummating the loan and may not defer 
repayment at any time.
    3. Payment deferral options--in school deferment. For each 
payment deferral option applicable while the student is enrolled at 
a covered educational institution the creditor must disclose 
additional information. The creditor must disclose whether interest 
will accrue while the student is enrolled at a covered educational 
institution and, if interest does accrue, whether payment of 
interest may be deferred and added to the principal balance.
    4. Combination with cost estimate disclosure. The disclosure of 
payment deferral options applicable while the student is enrolled at 
a covered educational institution under Sec. Sec.  226.38(a)(3)(ii) 
and (iii) may be combined with the disclosure of cost estimates 
required in Sec.  226.38(a)(4). For example, the creditor may 
describe each payment deferral option in the same chart or table 
that provides the cost estimates for each payment deferral option. 
See Appendix H-18.
    38(a)(4) Cost Estimates.
    1. Total cost of the loan. For purposes of Sec.  226.38(a)(4), 
the creditor must calculate the example of the total cost of the 
loan in accordance with the rules under Sec.  226.18(h) for 
calculating the loan's total of payments.
    2. Principal amount and fees. The creditor must calculate the 
principal amount by starting with a $10,000 amount and adding all 
finance charges that would be applicable to loans with that maximum 
rate of interest. For example, if a creditor charges a range of 
origination fees from 0% to 3%, but the 3% origination fee would 
apply to loans with the highest interest rate, the lender must add 
the 3% origination fee to the starting $10,000 principal amount, 
resulting in a $10,300 principal amount. Although the creditor must 
calculate the example using the principal amount described above, 
the creditor must disclose that the example provides the total cost 
of a $10,000 amount financed, rather than disclosing the principal 
amount used in calculating the loan. If the creditor only offers a 
particular private education loan for less than $10,000, the 
creditor may assume a principal amount that results in a $5,000 
amount financed for that loan.
    3. Maximum interest rate. For purposes of Sec.  226.38(a)(4), 
the maximum rate of interest used to calculate the example of the 
total cost of the loan must be the maximum initial rate of interest 
disclosed in the range of rates under Sec.  226.38(a)(1)(i).
    4. Calculated for each option to defer interest payments. The 
creditor must provide an example of the total cost of the loan for 
each in-school deferral option disclosed in Sec.  226.38(a)(3)(iii). 
For example, if the creditor provides the consumer with the option 
to begin making principal and interest payments immediately, to 
defer principal payments but begin making interest-only payments 
immediately, or to defer all principal and interest payments, the 
creditor is required to disclose three estimates of the total cost 
of the loan, one for each deferral option. In calculating each 
estimate of the total cost of the loan where interest capitalizes, 
the creditor must calculate the estimate using the same 
capitalization method that it would use if that loan were to be 
made. For instance, if a creditor would capitalize interest on the 
loan being offered on a quarterly basis, each estimate of the total 
cost of the loan where interest capitalizes must be calculated 
assuming interest capitalizes on a quarterly basis.
    5. Deferment period assumptions. For loan programs intended for 
educational expenses of undergraduate students, the creditor must 
assume that the consumer defers payments for four years plus the 
loan's maximum applicable grace period, if any. For all other loans 
the creditor must assume that the consumer defers for the lesser of 
two years plus the maximum applicable grace period, if any, or the 
maximum time the consumer may defer payments under the loan program.
    38(a)(6)(ii).
    1. Terms of federal student loans. The creditor must disclose 
the interest rates available under each program under title IV of 
the Higher Education Act of 1965 and whether the rates are fixed or 
variable, as prescribed in the Higher Education Act of 1965 (20 
U.S.C. 1077a). Where the fixed interest rate for a loan varies by 
statute depending on the date of disbursement or receipt of 
application, the creditor must disclose only the interest rate as of 
the time the disclosure is provided.
    38(a)(6)(iii).
    1. Web site address. The creditor must include with this 
disclosure an appropriate U.S. Department of Education Web site 
address such as ``federalstudentaid.ed.gov.''

38(b) Approval Disclosures.

    38(b)(1) Interest Rate.
    1. Variable rate disclosures. The interest rate is considered 
variable if the terms of the legal obligation allow the creditor to 
increase the interest rate originally disclosed to the consumer. The 
provisions do not apply to increases resulting from delinquency 
(including late payment), default, assumption, or acceleration. In 
addition to disclosing the information required under Sec. Sec.  
226.38(b)(ii) and (iii), the creditor must disclose the information 
required under Sec. Sec.  226.18(f)(1)(i) and (iii)--the 
circumstances under which the rate may increase and the effect of an 
increase, respectively. The creditor is required to disclose the 
maximum monthly payment based on the maximum

[[Page 12512]]

possible rate in Sec.  226.38(b)(3)(viii), and the creditor need not 
disclose a separate example of the payment terms that would result 
from an increase under Sec.  226.18(f)(1)(iv).
    2. Limitations on rate adjustments. Compliance with Sec.  
226.18(f)(1)(ii) (requiring disclosure of any limitations on the 
increase of the interest rate) does not necessarily constitute 
compliance with Sec.  226.38(b)(1)(iii) (requiring disclosure of any 
limitations on the interest rate adjustments, or lack thereof), 
because the rules under Sec.  226.38(b)(1)(iii) differ from the 
rules under Sec.  226.18(f)(1)(ii) as described in comment 
18(f)(1)(ii)-1. Specifically, Sec.  226.38(b)(1)(iii), but not Sec.  
226.18(f)(1)(ii), requires that if there are no limitations on 
interest rate increases, the creditor must disclose that fact. In 
addition, under Sec.  226.38(b)(1)(iii), but not under Sec.  
226.18(f)(1)(ii), 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. Under Sec.  
226.38(b)(1)(iii), if a rate limitation in the form of a legal limit 
applies (rather than a numerical rate limitation in the legal 
obligation between the parties) the creditor must disclose that the 
maximum rate is determined by law and may change.

Paragraph 38(b)(2)

    1. Fees and default or late payment costs. Creditors may follow 
the commentary for Sec.  226.38(a)(2) in complying with Sec.  
226.38(b)(2). Creditors must disclose the late payment fees required 
to be disclosed under Sec.  226.18(l) as part of the disclosure 
required under Sec.  226.38(b)(2)(ii). If the creditor includes the 
itemization of the amount financed under Sec.  226.18(c), any fees 
disclosed as part of the itemization need not be separately 
disclosed elsewhere.
    38(b)(3) Repayment Terms.
    1. Approved principal amount. The principal amount for which the 
consumer has been approved should include all charges incorporated 
in the approved loan amount. This amount should reflect what the 
face amount of the note would be if the loan were given based on the 
loan amount initially approved. Prepaid finance charges should not 
be included in the initial approved principal amount disclosed if 
they would not be included in the amount on the face of the note. 
See comment 18(b)(3)-1. If the creditor elects to provide an 
itemization of the amount financed under Sec.  226.18(c)(1), and the 
itemization states the approved principal amount, the creditor need 
not list the approved principal amount elsewhere.
    2. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest 
are due on the loan. If the payment schedule disclosed in accordance 
with Sec.  226.18(g) reflects the maximum repayment term, then 
compliance with Sec.  226.18(g) constitutes compliance with Sec.  
38(b)(3)(ii).
    3. Payment deferral options applicable to the consumer. 
Creditors may follow the commentary for Sec.  226.38(a)(3)(ii) in 
complying with Sec.  226.38(b)(3)(iii).
    4. Payments required during enrollment. Required payments that 
must be disclosed include payments of interest and principal, 
interest only, or other payments that the consumer must pay during 
the time that the student is enrolled. If the payment schedule 
disclosed in accordance with Sec.  226.18(g) reflects payments 
required while the student is enrolled, then compliance with Sec.  
226.18(g) constitutes compliance with Sec.  38(b)(3)(iv).
    5. Bankruptcy limitations. The creditor may comply with Sec.  
226.38(b)(3)(vi) by disclosing the following statement: ``If you 
file for bankruptcy you may still be required to pay back this 
loan.''
    6. An estimate of the total amount for repayment. The creditor 
must disclose an estimate of the total amount for repayment at two 
interest rates:
    i. The interest rate in effect on the date of approval. 
Compliance with the total of payments disclosure requirement of 
Sec.  226.18(h) constitutes compliance with this requirement.
    ii. The maximum possible rate of interest applicable to the 
private education loan or, if the maximum rate cannot be determined, 
a rate of 21%. If the legal obligation between the parties specifies 
a numeric maximum rate of interest beyond which the interest rate on 
the loan may not increase, the creditor must calculate the total 
amount for repayment based on that rate. If the legal obligation 
does not specify a numeric maximum rate, but a limitation on 
interest rate increases exists in the form of a legal limit in the 
nature of a usury or rate ceiling under state or federal statutes or 
regulations, the creditor must calculate the total amount for 
repayment based on that rate, and the creditor must disclose that 
the maximum rate is determined by law and may change. If a maximum 
rate cannot be determined, the creditor must base the disclosure on 
a rate of 21% and must disclose that there is no maximum rate and 
that the total amount for repayment disclosed under Sec.  
226.38(b)(3)(vii)(A) is an estimate and will be higher if the 
applicable interest rate increases.
    7. The maximum monthly payment. The creditor must disclose the 
maximum payment that the consumer could be required to make under 
the loan agreement, calculated using the maximum rate of interest 
applicable to the private education loan, or if the maximum rate 
cannot be determined, a rate of 21%. The creditor should follow 
comment 38(b)(3)-6.ii in determining and disclosing the maximum rate 
of interest. In addition, if a maximum rate cannot be determined, 
the creditor must state that there is no maximum rate and that the 
monthly payment amounts disclosed under Sec.  226.38(b)(3)(viii) are 
estimates and will be higher if the applicable interest rate 
increases.
    38(b)(4) Alternatives to Private Education Loans.
    1. General. Creditors may follow the commentary for Sec.  
226.38(a)(6) in complying with Sec.  226.38(b)(4).
    38(b)(5) Rights of the Consumer.
    1. Notice of 30 day acceptance period. The disclosure must 
include the specific date on which the 30 day acceptance period 
expires and state that the consumer may accept the terms of the loan 
until that date. The disclosure must also specify the method or 
methods by which the consumer may cancel.

38(c) Final Disclosures

    1. Notice of right to cancel. The disclosure must include the 
specific date on which the three-business day cancellation period 
expires and state that the consumer has a right to cancel by that 
date. See comments 39(d)-1 and 2. For example, if the disclosures 
were mailed to the consumer on Friday, June 1, and the consumer is 
deemed to receive them on Tuesday, June 5, the creditor could state: 
``You have a right to cancel this transaction, without penalty, by 
midnight on June 8, 2009. No funds will be disbursed to you or to 
your school until after this time. You may cancel by calling us at 
800-XXX-XXXX.'' If the creditor requires cancellation by mail, the 
statement must specify that the consumer's mailed request will be 
deemed timely if placed in the mail not later than the cancellation 
date specified on the disclosure. The disclosure must also specify 
the method or methods by which the consumer may cancel.
    2. More conspicuous. The statement of the right to cancel must 
be more conspicuous than any other disclosure required under this 
section except for the finance charge, the interest rate, and the 
creditor's identity. See Sec.  226.37(c)(2)(iii). The statement will 
be deemed to be made more conspicuous if it is segregated from other 
disclosures, placed near the top of the disclosure document, and 
highlighted in relation to other required disclosures. For example, 
the statement may be outlined with a prominent, noticeable box; 
printed in contrasting color; printed in larger type, bold print or 
different type face; underlined; or set off with asterisks.

Section 226.39--Limitations on Private Educational Loans

    1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec.  226.39(a) and (b) applies to the marketing of 
private education loans. The term marketing includes any 
advertisement under Sec.  226.2(a)(2). In addition, the term 
marketing includes any document provided to the consumer related to 
a specific transaction. For example, the term marketing includes an 
application or solicitation, a promissory note or a contract 
provided to the consumer.
    2. Implied endorsement. An implication that a private student 
loan is offered or made by the covered educational institution 
instead of by the creditor is included in the prohibition on 
implying that the covered educational institution endorses the 
private educational loan under Sec.  226.39(a)(1). However, the use 
of a creditor's own name, even if that name includes the name of a 
covered educational institution, does not imply endorsement. For 
example, a credit union whose name includes the name of a covered 
educational institution is not prohibited from using its own name. 
In addition, a state's or an institution of higher education's use 
of a state seal, with appropriate authorization, in the marketing of 
state education loan products does not imply endorsement.
    3. Disclosure.
    i. A creditor is considered to have complied with Sec.  
226.39(a)(2) if the creditor's marketing contains a clear and 
conspicuous statement using the name of the creditor and

[[Page 12513]]

the name of the covered educational institution that the covered 
educational institution does not endorse the creditor's loans and 
that the creditor is not affiliated with the covered educational 
institution. For example, ``[Name of creditor]'s loans are not 
endorsed by [name of school] and [name of creditor] is not 
affiliated with [name of school].''
    ii. A creditor is considered to have complied with Sec.  
226.39(b) if the creditor's marketing contains a clear and 
conspicuous statement, using the name of the creditor's loan or loan 
program, the name of the covered educational institution, and the 
name of the creditor, that the creditor's loans are not offered or 
made by the covered educational institution, but are made by the 
creditor. For example, ``[Name of loan or loan program] is not being 
offered or made by [name of school], but by [name of creditor].''

Paragraph 39(c)

    1. 30 day acceptance period. The creditor must provide the 
consumer with at least 30 calendar days from the date the consumer 
receives the disclosures required under Sec.  226.38(b) to accept 
the terms of the loan. The creditor may provide the consumer with a 
period of time longer than 30 days after the consumer receives the 
disclosures for the consumer to accept the transaction. 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.  226.37(c), ``business day'' means all 
calendar days except Sundays and the legal public holidays referred 
to in Sec.  226.2(a)(6). See comment 37(d)-1. The consumer may 
accept the loan at any time before the end of the 30 day period.
    2. Method of acceptance. The creditor must specify a method or 
methods by which the consumer can accept the loan at any time within 
the 30-day acceptance period. The creditor may require the consumer 
to communicate acceptance orally or in writing. Acceptance may also 
be communicated electronically, but electronic communication must 
not be the only means provided for the consumer to communicate 
acceptance. If acceptance by mail is allowed, the consumer's 
communication of acceptance is considered timely if placed in the 
mail not later than 30 calendar days following the date the consumer 
received the disclosure required under Sec.  226.39(b).
    3. Prohibition on changes to rates and terms. Except as 
specified in Sec.  226.39(c)(2), the creditor may not change the 
rates and terms of the loan that are required to be disclosed under 
Sec.  226.38(b) until the 30-day acceptance period has expired with 
the consumer having accepted the loan, or until loan funds are 
disbursed. The creditor is permitted to make changes that do not 
affect any of the terms disclosed to the consumer under Sec.  
226.38(b). Changes to the rate based on adjustments to the index 
used for the loan and changes that will unequivocally benefit the 
consumer are not prohibited. For example, a creditor is permitted to 
reduce the interest rate or lower the amount of a fee.
    4. Changes to rates and terms based on request by consumer. The 
prohibition on changes to the rate and terms of the loan in Sec.  
226.39(c)(2) applies only to changes made in the absence of a 
request from the consumer. The creditor may make changes to the rate 
and terms of the private education loan in connection with 
accommodating a request from the consumer. For example, the consumer 
may request a lower principal amount upon receiving additional 
financial assistance from another source after the consumer applied 
for the private educational loan. In this situation, the creditor is 
permitted to provide a lower principal amount, and to make any other 
changes such as a different repayment term, in response to the 
consumer's request. However, the creditor would need to provide a 
new set of approval disclosures under Sec.  226.38(b) and provide 
the consumer with a new 30-day acceptance period under Sec.  
226.39(c).

Paragraph 39(d)

    1. Right to cancel. If the creditor mails the disclosures 
including the statement of the right to cancel, the disclosures are 
considered received by the consumer within three business days from 
the date on which the creditor mailed the statement. See comment 37-
2. The consumer has three business days from the date on which the 
disclosures are received to cancel the loan. For example, if the 
creditor places the disclosures in the mail on Thursday, June 4, the 
disclosures are considered received on Monday, June 8 and the 
consumer may cancel any time before midnight Wednesday, June 10. The 
creditor may provide the consumer with more time to cancel the loan 
than the minimum three business days required under this section. If 
the creditor provides the consumer with a longer period of time in 
which to cancel the loan, the creditor may disburse the funds three 
business days after the consumer has received the disclosures 
required under this section, but the creditor must honor the 
consumer's later timely cancellation request.
    2. Method of cancellation. The creditor must specify a method or 
methods by which the consumer may cancel. For example, the creditor 
may require the consumer to communicate cancellation orally or in 
writing. Cancellation may also be communicated electronically, but 
electronic communication must not be the only means by which the 
consumer may cancel. If the creditor allows cancellation by mail, 
the creditor must specify the address of the creditor's place of 
business or the name and address of an agent of the creditor to 
receive notice of cancellation. The creditor must also specify that 
the consumer's mailed request will be deemed timely if placed in the 
mail before the expiration of the cancellation period. The creditor 
must wait to disburse funds until it is reasonably satisfied that 
the consumer has not canceled. For example, the creditor may satisfy 
itself by either waiting a reasonable time after expiration of the 
cancellation period to allow for delivery of a mailed notice or by 
obtaining a written statement from the consumer that the right has 
not been exercised.
    3. Cancellation without penalty. The creditor may not charge the 
consumer a fee for exercising the right to cancel under Sec.  
226.39(d). The prohibition extends only to fees charged specifically 
for canceling the loan. The creditor is not required to refund fees, 
such as an application fee, charged to consumers for loans that are 
not cancelled.

Paragraph 39(e)

    1. General. Section 226.39(e) requires that the creditor obtain 
the self-certification form, signed by the consumer, before 
consummating the private education loan. The rule applies only to 
private educational loans that will be used for the postsecondary 
educational expenses of a student while that student is attending an 
institution of higher education as defined in Sec.  226.37(b)(2). It 
does not apply to all covered educational institutions. The 
requirement applies even if the student is not currently attending 
an institution of higher education, but will use the loan proceeds 
for postsecondary educational expenses while attending such 
institution. For example, a creditor is required to obtain the form 
before consummating a private education loan provided to a high 
school senior for expenses to be incurred during the consumer's 
first year of college. This provision does not require that the 
creditor obtain the self-certification form in instances where the 
loan is not intended for a student attending an institution of 
higher education, such as when the consumer is consolidating loans 
after graduation. Section 155(a)(2) of the Higher Education Act of 
1965 provides that the form shall be made available to the consumer 
by the relevant institution of higher education. However, Sec.  
226.39(e) provides flexibility to institutions of higher education 
and creditors as to how the completed self-certification form is 
provided to the lender. The creditor may receive the form directly 
from the consumer, or the creditor may receive the form from the 
consumer through the institution of higher education.
    2. Electronic signature. Under Section 155(a)(2) of the Higher 
Education Act of 1965, the institution of higher education may 
provide the self-certification form to the consumer in written or 
electronic form. Under Section 155(a)(5) of the Higher Education Act 
of 1965, the form may be signed electronically by the consumer. A 
creditor may accept the self-certification form from the consumer in 
electronic form. A consumer's electronic signature is considered 
valid if it meets the requirements issued by the Department of 
Education under Section 155(a)(5) of the Higher Education Act of 
1965.

Paragraph 39(f)

    1. General. Section 226.39(f) does not specify the format in 
which creditors must provide the required information to the covered 
educational institution. Creditors may choose to provide only the 
required information, or may provide copies of the form or forms the 
lender uses to comply with Sec.  226.38(a).[ltrif]
* * * * *

Appendixes G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and 
clauses is not required, creditors using them properly will be 
deemed

[[Page 12514]]

to be in compliance with the regulation with regard to those 
disclosures. Creditors may make certain changes in the format or 
content of the forms and clauses and may delete any disclosures that 
are inapplicable to a transaction or a plan without losing the act's 
protection from liability, except formatting changes may not be made 
to model forms and samples in [rtrif]H-18, H-19, H-20,[ltrif] G-
2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as 
permitted pursuant to Sec.  226.7(b)(2)), G-18(B)-(C), G-19, G-20, 
and G-21. The rearrangement of the model forms and clauses may not 
be so extensive as to affect the substance, clarity, or meaningful 
sequence of the forms and clauses. Creditors making revisions with 
that effect will lose their protection from civil liability. Except 
as otherwise specifically required, acceptable changes include, for 
example:
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain state ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking 
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out, 
leaving blanks, checking a box for applicable items, or circling 
applicable items. (This should permit use of multipurpose standard 
forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
* * * * *

Appendix H--Closed-End Model Forms and Clauses

* * * * *
    21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved[.] [rtrif]for use for loans made prior to the effective 
date of the disclosures required under Subpart F[ltrif]. The form 
[may be used] [rtrif]was approved [ltrif] for all Health Education 
Assistance Loans (HEAL) with a variable interest rate that 
[are][rtrif]were considered[ltrif] interim student credit extensions 
as defined in Regulation Z.
    22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved[.] [rtrif]for use for loans made prior to the effective 
date of the disclosures required under Subpart F[ltrif]. The form 
[may be used] [rtrif]was approved[ltrif] for all HEAL loans with a 
fixed interest rate that [are][rtrif]were considered[ltrif]interim 
student credit extensions as defined in Regulation Z.
    23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved[.] [rtrif]for use for loans made prior to the effective 
date of the disclosures required under Subpart F[ltrif]. The form 
[may be used] [rtrif]was approved[ltrif] for all HEAL loans with a 
variable interest rate in which the borrower has reached repayment 
status and is making payments of both interest and principal.
    24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved[.] [rtrif]for use for loans made prior to the effective 
date of the disclosures required under Subpart F[ltrif]. The form 
[may be used] [rtrif]was approved[ltrif] for all HEAL loans with a 
fixed interest rate in which the borrower has reached repayment 
status and is making payments of both interest and principal.
    [rtrif]25. Models H-18, H-19, H-20.
    i. These model forms illustrate disclosures required under Sec.  
226.38 on or with an application or solicitation, at approval, and 
before disbursement of a private education loan. Although use of the 
model forms is not required, creditors using them properly will be 
deemed to be in compliance with the regulation with regard to 
private education loan disclosures. Creditors may make certain types 
of changes to private education loan model forms H-18 (application 
and solicitation), H-19 (approval), and H-20 (final) and still be 
deemed to be in compliance with the regulation, provided that the 
required disclosures are made clearly and conspicuously. The model 
forms aggregate disclosures into groups under specific headings. 
Changes may not include rearranging the sequence of disclosures, for 
instance, by rearranging which disclosures are provided under each 
heading or by rearranging the sequence of the headings and grouping 
of disclosures. Changes to the model forms may not be so extensive 
as to affect the substance or clarity of the forms. Creditors making 
revisions with that effect will lose their protection from civil 
liability.
    The creditor may delete inapplicable disclosures, such as:
    <bullet> The Federal student financial assistance alternatives 
disclosures
    <bullet> The self-certification disclosure
    Other permissible changes include, for example:
    <bullet> Adding the creditor's address, telephone number, or Web 
site
    <bullet> Combining required terms where several numerical 
disclosures are the same, for instance, if the initial approved 
principal amount is included in an itemization of the amount 
financed
    <bullet> Combining the disclosure of payment deferral options 
required in Sec.  226.38(a)(3) with the disclosure of cost estimates 
required in Sec.  226.38(a)(4) in the same chart or table (See 
comment 38(a)(3)-4.)
    <bullet> Using the first person, instead of the second person, 
in referring to the borrower
    <bullet> Using ``borrower'' and ``creditor'' instead of pronouns
    <bullet> Incorporating certain state ``plain English'' 
requirements
    <bullet> Deleting inapplicable disclosures by whiting out, 
blocking out, filling in ``N/A'' (not applicable) or ``0,'' crossing 
out, leaving blanks, checking a box for applicable items, or 

circling applicable items
    ii. Although creditors are not required to use a certain paper 
size in disclosing the Sec. Sec.  226.38(a), (b) and (c) 
disclosures, samples H-21, H-22, and H-23 are designed to be printed 
on two 8\1/2\ x 11 inch sheets of paper. In addition, the following 
formatting techniques were used in presenting the information in the 
sample tables to ensure that the information is readable:
    A. A readable font style and font size.
    B. Sufficient spacing between lines of the text.
    C. Standard spacing between words and characters. In other 
words, the text was not compressed to appear smaller than 8-point 
type.
    D. Sufficient white space around the text of the information in 
each row, by providing sufficient margins above, below and to the 
sides of the text.
    E. Sufficient contrast between the text and the background. 
Generally, black text was used on white paper.
    iii. While the Board is not requiring issuers to use the above 
formatting techniques in presenting information in the disclosure, 
the Board encourages issuers to consider these techniques when 
deciding how to disclose information in the disclosure, to ensure 
that the information is presented in a readable format.
    iv. Creditors are allowed to use color, shading and similar 
graphic techniques in the disclosures, so long as the disclosures 
remain substantially similar to the model and sample forms in 
appendix H.
    26. Sample H-21. This sample illustrates a disclosure required 
under Sec.  226.38(a). The sample assumes a range of interest rates 
between 7.375 and 17.375 percent. The sample assumes a variable 
interest rate that will never exceed 25 percent over the life of the 
loan. The term of the sample loan is 20 years for an amount up to 
$20,000 and 30 years for an amount more than $20,000. The repayment 
options and sample costs have been combined into a single table, as 
permitted in the commentary to Sec.  226.38(a)(3). It demonstrates 
the loan amount, interest rate, and total paid when a consumer makes 
loan payments while in school, pays only interest while in school, 
and defers all payments while in school.
    27. Sample H-22. This sample illustrates a disclosure required 
under Sec.  226.38(b). The sample assumes the consumer financed 
$10,000 at a 7.059 annual percentage rate. The sample assumes a 
variable interest rate that will never exceed 25 percent over the 
life of the loan. The payment schedule and terms assumes a 20 year 
loan term and that the consumer elected to defer payments while the 
student is enrolled in school. This includes a sample disclosure of 
a loan amount of $10,000 and an origination fee of $0, for a total 
amount financed of $10,000.
    28. Sample H-22. This sample illustrates a disclosure required 
under Sec.  226.38(c). The sample assumes the consumer financed 
$10,000 at a 7.059 annual percentage rate. The sample assumes a 
variable annual percentage rate in an instance where there is no 
maximum interest rate. The sample demonstrates disclosure of an 
assumed maximum rate, and the statement that the consumer's actual 
maximum rate and payment amount could be higher. The payment 
schedule and terms assumes a 20

[[Page 12515]]

year loan term, the assumed maximum interest rate, and that the 
consumer elected to defer payments while the student relates is 
enrolled in school. This includes a sample disclosure of a loan 
amount of $10,000 and an origination fee of $0, for a total amount 
financed of $10,000.[ltrif]

    By order of the Board of Governors of the Federal Reserve 
System.
Jennifer J. Johnson,
Secretary of the Board.

[FR Doc. E9-5561 Filed 3-23-09; 8:45 am]
BILLING CODE 6210-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>