Session 9 Lender and School Relationships Pamela Moran Office of Postsecondary Education

Session 9

Lender and School RelationshipsPamela Moran

Office of Postsecondary Education

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Agenda

• Legislative Action and More– Federal and State Enacted and Pending– Private Education Loans

- Other Activities• 2006-2007 Negotiated Rulemaking• Developing Best Practices• Administrative - “Dear Colleague” Letters

– Compliance Issues

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Legislation

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Legislative ActionFederal Legislation

– HEA Reauthorization (S.1642) Passed Senate 7/24/07– Student Loan Sunshine Act (S. 486;

H.R. 890*)– Student Loan Accountability and

Disclosure Reform Act (S. 1262)

* passed House; awaiting Senate action

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Legislative Action

• Federal Legislation– Dodd/Shelby “Private Student Loan

Transparency and Improvement Act” - Draft passed by Senate Banking Committee

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Legislative Action

• Federal Legislation– “Student Financial Aid Data Privacy

Protection Act” (S.1401)

– Durbin Bill (S. 1561) permitting private education loan bankruptcy discharge after 5 years (S.1642)

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Student Loan Sunshine Act (HR 890)

• HR 890 passed House 413-3 in June 2007, added in different form to Senate HEA bill, S. 1642

• No gifts from lenders to schools worth more than nominal amount

• No payment of travel expenses for

service on advisory committees

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Student Loan Sunshine Act (HR 890)

• Lenders staffing during peak periods would be eliminated

• Requires Secretary to develop format for reporting loan terms and conditions

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Student Loan Sunshine Act

• FFELP Preferred lender lists must include minimum of 3 non-affiliated lenders

• List must clearly and fully disclose basis for school selection of lender

• Schools must advise students of right to choose any lender.

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Student Loan Sunshine Act

• “Arrangements” between schools and lenders must be disclosed

• Arrangements with school product branding prohibited

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Student Loan Sunshine Act• Direct-to-Consumer (DTC) private

lenders must: - prominently disclose

availability of lower cost federal student loans

- disclose interest rate calculation on private loans

- notify school of possible private loan

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S. 1642 Disclosures to Borrowers (Senate)

By school: extensive loan information including information on interest rates, repayment plans, terms and conditions of loans, availability of borrower benefits and take-up rates, collection practices and fees, and other information.”

Information based on report by lenders provided to Secretary.

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S.1642 Disclosures to Borrowers (Senate)

Lenders: repayment benefit information on automatic deduction, on-line, and other repayment methods. Must include details on conditions of receipt and loss of benefits and examples of the impact of interest rate reductions on borrower’s repayment amount and time in repayment.

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S.1262 Student Loan Accountability and Disclosure Reform Act (Senate) • School must ensure choice of lender - no assigning lender to first-time

borrower - no unnecessary processing delays• School may not designate preferred

lenders but may provide guidance on specific lenders to assist in selection

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S.1262 - SLADRA (Senate)

• School must provide prominent disclosure on lender choice and criteria for providing lender-specific guidance

• Lenders for which school provides guidance must disclose loan sale agreements

• Ban on gifts to school except of nominal value

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S.1262 - SLADRA (Senate)

• Ban on lender providing consulting services to schools, or paying someone to provide services except for exit counseling

• Ban on lender payments – prizes, stock, travel and entertainment, IT equipment at below market value, service on advisory board or lender-sponsored groups

• School-as-FFEL Lender terminated June 30, 2008

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Private Student Loan Transparency and Improvement Act (Senate)

• Dodd (D-CT)/Shelby (R-AL)Bill approved by Senate Banking Committee unanimously –Amends Truth-in-Lending Act

• Amendment planned but was not offered to Senate HEA bill

• House may include revised version in HEA bill

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• Definition covers institutional loans and other private education loans

–Anything that can be used for postsecondary educational costs

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• Main Feature: Disclosures, Disclosures, Disclosures

• Advice to borrowers to seek federal student aid first

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• Prohibitions on inducements like S. 1642 for FFELP – nothing permitted in exchange for preferential treatment or gifts but expense reimbursement for advisory board service OK

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• Civil liability for inadequate disclosures one year after repayment begins – could be years after disbursement

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• 30-day interest rate lock with right to cancel

• 3-day right to cancel after

consummation but before disbursement

• Prepayment fees prohibited

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• 16 forms of disclosure on terms and conditions at application or solicitation, approval and consummation

• Financial literacy programs encouraged

• Study of underwriting practices by GAO authorized with focus on “non-individual information”

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State Legislation - New York’s SLATE Act

• Effective November 2007 - First and only state law passed to date

• Providing a gift or service to a school or school employee is prohibited if offered in exchange for some advantage.

– Print jobs for schools prohibited

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-Meals, other than refreshments at bona fide training sessions prohibited

– Staffing of school’s financial aid office prohibited

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• Something of value in exchange for an advantage can be an explicit written or oral agreement or take the form of a "wink and a nod.“– Intent to gain advantage is

not necessary for a violation to occur

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Other Activities

• NY Attorney General reviews schools and lenders leading to:

- signed code of conduct agreements with some schools and several top FFEL lenders

- payment into an education fund to support borrower education

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Other Activities• Scrutiny expanding outside of

financial aid office• State AG examination of school

athletic department sponsorship arrangements with lenders

• Credit card marketing to students through schools or school-affiliated organizations (e.g., alumni association)

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2006-07 NegotiatedRulemaking

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2006-2007Negotiated Rulemaking

• Four negotiating committees were established:– Accreditation– General Provisions– Academic Competitiveness &

National SMART Grants– Loans

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2006-2007 Negotiated RulemakingLoans Committee

• Preferred Lender Lists• FFEL Loan Certification• Lender and GA

Prohibited Inducements• Use of Eligible Lender

Trustees by FFEL Schools

1st Meeting– December 2006

2nd Meeting– February 5-7, 2007

3rd Meeting– March 12-14, 2007

4th Meeting– April 18-20, 2007

Major Issues

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Loans RegulationCalendar

• NPRM: June 12, 2007• Comment Period Ended: August 13, 2007• 241 Comments Received• Final rules: November 1, 2007• Effective date: July 1, 2008 with

selected items for voluntary early implementation

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LOANS NPRM

• “No Consensus” on NPRM

• NPRM reflected what ED heard and deliberations of Secretary’s Loan Task Force

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Use of Eligible Lender Trustees (ELTs) by FFEL Schools

•Lender definition in §682.200 amended to prohibit new ELT relationships with schools on/after September 30, 2006

• §682.602:HERA FFEL school lender limits applied to school ELT arrangements 1/1/2007

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School FFEL Loan Certification • §682.603 (f) reorganized and

amended • FFEL schools May Not: - Refuse/Delay certification based on choice of lender or GA - Assign lender to first-time borrower in award packaging or through other methods

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School FFEL Loan Certification • Engage in a pattern or practice

of discrimination to deny FFEL access

• Refuse to certify or certify a reduced amount except on a case-by-case, documented basis with reason provided to borrower in writing

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School Preferred Lender List in FFELP

Background:• School’s Option• Allowed But Never Regulated• Evolution:

–Default prevention–Simplification E-transmission –Competition–Proliferation of borrower benefits

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Regulations require:• List must contain at least 3

unaffiliated lenders• “Unaffiliated” means:

–No common control or ownership

–No common directors, trustees, or general partners

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§682.212 requires a school to:• Disclose method/criteria for

lender inclusion on the list• Provide comparative information

on borrower benefits offered by listed lenders –Department to provide model format for school use

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• Include prominent statement advising borrowers that use of the school’s preferred lender not required

• Update at least annually

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School Preferred Lender List in

FFELP Under §682.212, a school MUST

NOT:• Include lenders that were

solicited and provided school or school- employee benefits, but may include lenders solicited for best borrower benefits

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School Preferred Lender List in

FFELP Under §682.212, a school MUST

NOT:• Assign lender to first-time

borrower • Cause any unnecessary delays

in certification for borrowers not using one of the school’s preferred lenders

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Preferred Lenders

• Publications, scripts and staff training should comply

• Violations could bring sanctions

• Does not apply to FFEL/Direct Loan choice

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Schools Not Using Preferred Lender Lists

• All FFEL loan certification rules apply

• School may identify lenders that have made loans to school’s students and parents in the past

• No statement endorsing or recommending a lender

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• Provide “neutral” presentation of factors to consider when selecting a lender

- good borrower benefits - good customer service - limits on sale of loans, if

important to customer

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- prior business dealings of family or friends on other consumer loans

- consumer complaints to State AG or BBB

- lender’s default rate as reflection of servicing

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• Encourage web-based searches

• Use the simple statement - “You must select your lender. The

aid office cannot do so for you.”

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FFEL Program Lender and GA Prohibited Inducements

Background:• Enacted as part of 1986

Amendments to HEA• 1998 Amendments to HEA

allowed lenders and GAs to provide assistance to schools comparable to what Secretary provides to Direct Loan schools

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FFEL Program Lender and GA Prohibited Inducements

• Affects lender eligibility and participation and GA participation

• Current regulations primarily reflect statutory provisions

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• Offer, directly or indirectly, points, premiums, payments or other inducements to any school to secure FFEL applications, loan volume or placement on a preferred lender list

• Pay referral or processing fees to another lender or other party

• Pay conference or training registration, transportation and lodging costs for school or school-affiliated organization employees

• Pay entertainment expenses related to lender-sponsored activities for employees of school or school-affiliated organization

• Undertake philanthropic activities in exchange for FFEL applications, volume or placement on lender list

• Provide staffing services to a school except on a short-term, emergency basis

Loans Regulations FFEL IssuesProhibited Inducements -- Eligible Lenders CANNOT:

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• Assistance comparable to that provided to a DL school by the Secretary

• Student aid/financial literacy outreach- no in-person counseling

• Meals, refreshments and receptions, reasonable in cost, in conjunction with meetings, training or conferences if provided to all participants

• Toll-free numbers for FFEL info/e-transmission

• Reduced origination fees

• Reduced interest rates• Payment of Federal

default fees• Borrower benefits-

repayment incentive• Items of nominal value

Loans Regulations FFEL Issues

Prohibited Inducements -- Eligible Lenders MAY:

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FFEL Program Prohibited Inducements – GAs

• Same as lenders, except GAs permitted to pay:

-- travel and lodging expenses related to school employee service on GA advisory or governing board

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FFEL Program Prohibited Inducements – GAs

-- reasonable costs of meals and

refreshments for GA-sponsored training, workshops, and forums permitted

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Best Practices

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Best Practices – Things to Consider

• Examine what’s out there and whether voluntary or required:

- school ethics rules or codes of conduct – look at your contract

- school private agreement with State attorney general

- State ethics rules for public employees

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• Examine what’s out there and whether voluntary or required:

- State laws governing school practices –all schools

- Professional Association/ Accrediting Agency best practices or recommended codes of conduct

- Federal title IV regulations

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• When applying legal requirements in the same area from multiple sources:

- Default to the strictest requirement and build your practices around that

• Assume gift or service is NOT permitted when in doubt until confirmed otherwise

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• Review school web-sites and other published materials for “neutrality” in loan and lender information unless information supports preferred lender list

• Examine your existing practices with lenders, guaranty agencies, and other vendors for possible conflicts of interest

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• Avoid appearance as well as reality of conflicts of interest

• Document your decisions

• Talk to your colleagues at other schools – what are they implementing and why?

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• Assure adequate staff training down to work-study level and provide clear reference materials for their use

• Open a dialogue with your student body and their parents

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Recent Letters & Announcements

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Dear Colleague Letters & Electronic Announcements Dear Colleague Letters

GEN-06-21- Third Higher ED Extension Act – ELT Relationships with Schools (12/1/06)

GEN-07-01- Borrower Choice of FFEL Lender (3/30/07)

GEN-07-05-Releasing Student Information (9/7/07)

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Dear Colleague Letters & Electronic Announcements

Electronic AnnouncementFFEL Prohibited Inducement Guidance (9/14/2007)Secretary Spellings wrote to all institutions and lenders urging them to assure students and parents that we have their best interests at heart in providing competitive student loans

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Compliance Update

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Oversight Activities • ED inducement reviews of

selected schools and lenders• Updating of current Office of

Inspector General (OIG) audit guides for schools and lenders to include inducements and borrower choice of lender as required review areas

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Oversight Activities • ED recommendation to GAs to

incorporate inducements as area of GA review of schools and lenders

• Introduction of ED inducements workgroup to investigate and follow-up on inducement-related complaints

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Oversight Activities • Ongoing ED analysis of

institutional loan volume by lender as possible indicator for follow-up with schools and lenders

• Ongoing analysis of Ombudsman Office complaints for trends to inform oversight activities

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NSLDS Access Web access to the

National Student Loan Data System (NSLDS) was suspended for some Title IV student aid program participants on April 17.

To ensure privacy is protected and that access to NSLDS is used only for authorized purposes.

Web search now requires SSN, Name, and DOB.

Ability for schools to add new users reinstated.

Guaranty agency web access reinstated.

Some lender web access reinstated.

State grant agency access reinstated.

Lender ELT access still on hold.

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Contact Information

We appreciate your feedback and comments. We can be reached at:

• Phone: (202) 502-7732• Email: [email protected]• Fax: (202) 502-7873

Documents

Session 9 Lender and School Relationships Pamela Moran Office of Postsecondary Education