TASFAA Conference 2012

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TASFAA Conference 2012

Private Loans 101

Melet Leafgreen

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Private Loans 101

Melet Leafgreen

Assistant Director of Loan Programs

Texas Christian University

[email protected]

Private Loans 101 - Agenda

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• Code of Conduct & PPA• What is a private loan, and what isn’t?• The three disclosures, and Self-Certification• Private Loans that aren’t really private• Preferred Lender Lists

– What is it, do I need it, and how do I get it?– What is required if I have one?

• Comparison: Private Loans, CAL, and PLUS– Terms, borrowers, and risks– APR

• Private Loan Consolidation• New News & Coming Up

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Code of Conduct

• Institution that participates in Title IV loan programs must develop, publish, administer, and enforce a code of conduct prohibiting:- Revenue Sharing programs- Opportunity Pool Loans- Conflicts of interest - FA office employees from receiving gifts from

lender, guarantor, servicer- Consulting/ contracting arrangements- School cannot request or accept assistance with

call center or staffing from a lender

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Code of Conduct

• COC must prohibit directing borrowers to particular lenders– For first-time borrowers, you cannot assign

(through packaging or other methods) the borrower’s loan to a particular lender

• Prohibit delaying loan certification– Cannot refuse to certify, or delay certification of,

any loan based on borrower’s lender selection

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Code of Conduct

• Must publish COC prominently on website• Must administer and enforce by annually

notifying covered institution’s agents of the code’s provisions

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Sample Code of Conduct

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Program Participation Agreement & Standards for Administrative Capability

Institution must:

-Have a code of conduct

- For any year you have a PLA, annually compile a list

- Provide the self-cert form and data to complete it to students

-Report annually to ED any reasonable reimbursements paid by lender to employee

- Include with any information about private loans the TILA disclosure info (regardless of PLA)

- Inform borrowers of Title IV eligibility and that Title IV terms & conditions MAY be more favorable than private

-Must present private loan info in a manner distinct from Title IV loan info


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What is a private loan?

• HEOA (2008): “A loan provided by a private educational lender that is not a Title IV loan and that is issued expressly for postsecondary education expenses to a borrower, regardless of whether the loan is provided through the institution that the student attends or directly to the borrower.

• TILA amendments: “a closed-end loan extended expressly, in whole or in part, for postsecondary educational expenses”

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What is NOT a private loan?

• Title IV loans• Emergency loans given by institutions

where term is 90 days or less (does not apply to affiliated organizations)

• Tuition payment plans IF no interest charge and term is 1 year or less (does not apply to affiliated organizations)

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Is it a private loan for TILA purposes?

• Sallie Mae Signature Loan• Grad PLUS Loan• Nursing Student Loan• Big Bear College Student Loan• Be-On-Time Loan• Discover Student Loan• Big Bear College Payment Plan• College Access Loan


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The 3 Disclosures from Lenders•App/Solicitation Disclosure

• on or with application

• Not required if approval disclosure sent within 3 business days of credit request

•Approval Disclosure• On or with notice of approval

• Must provide student with 30 days to accept the loan with no change in terms (begins day student receives disclosure)

• Final Disclosure• After consumer accepts the loan

• Requires lender to provide student with 3 days to cancel the loan following borrower receipt of the FD (funding not permitted until 3 day period has expired)

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Approval Disclosure (#2)

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Final Disclosure (#3)

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Self-Certification Form

• ED and Federal Reserve jointly designed the form; ED released form on 2/14/10

• Lender required (enforced by Federal Reserve) to obtain completed and signed self-certification form from the applicant

• All schools are required to, at the request of the applicant, provide the form as well as the information needed to complete the form (COA and EFA).

• Form also includes language about using Title IV aid or other lower cost aid first

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Self-Certification Form

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Private Loans that aren’t really Private

DCL GEN-10-01 Schools which make loans to students must comply with self-cert requirements applicable to lenders and institutions; specifically includes institutional loans and the Title VII and VIII loans (Federal Nursing Loan, Nurse Faculty Loan, etc.)

If the school is the lender, the loan is probably subject to the self-cert rules.

State loans not excluded.


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Preferred Lender Arrangement (PLA)

Definition: Any arrangement between a lender and a covered institution or an institution-affiliated organization of such covered institution (a) under which a lender provides or otherwise issues education loans to students attending such institution or the students’ families and (b) that relates to such covered institution or such institution-affiliated organization recommending, promoting, or endorsing the education loan products of the lender

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Exemptions• Institutional loans where loan is funded

from institution’s (or IAO’s) own funds• Made under Title VII or Title VIII of the

Public Health Services Act• Made under a state-funded financial

aid program, if loan includes public service loan forgiveness component

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When you have a LIST that is NOT a PLA-If you provide a neutral, comprehensive list of lenders that have made loans to students at your school within a specified period of time, such as 3-5 years, and that provides a clear statement that a borrower can select any lender.

[DCL GEN-08-06]

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So what if I have a PLA – the list:

• First, you must disclose that you have a PLA to your students and families before they borrow- at least annually: compile, maintain, and make available a list of the specific lenders you recommend, promote, or endorse

• On the Preferred Lender List, schools must provide:– the App/Solic. Disclosure for every loan listed– a description of the process, method, and criteria used to

determine who made the list; identify reasons for selecting each lender, particularly with respect to loan terms/ conditions favorable to borrower

– Not less than two unaffiliated lenders

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Sample Lender List online

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• On the Preferred Lender List, schools must provide:– Terms & conditions for every loan listed– identify reasons for selecting each lender, particularly with

respect to loan terms/ conditions favorable to borrower– Not less than two unaffiliated lenders– a description of the process, method, and criteria used to

determine who made the list

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Sample Lender List online

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• On the Preferred Lender List, schools must provide:– Terms & conditions for every loan listed– identify reasons for selecting each lender, particularly with

respect to loan terms/ conditions favorable to borrower– Not less than two unaffiliated lenders– a description of the process, method, and criteria used to

determine who made the list

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Sample Disclosure of lender selection process

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Sample of criteria used

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So what if I have a PLA

• You must compile the list without prejudice and for sole benefit of students and families

• Institution must not deny , impede or unnecessarily delay loan certification for borrowers who choose a lender not included on the list

• Cannot agree to use of school’s name, emblem, mascot, logo, colors, etc. by lenders which might imply loan is offered by school (co-branding)

• Must ensure lender name is displayed on all information and documentation related to the loan

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So what if I have a PLA - reporting

• Annual report to ED detailing method and criteria used to select: must include why terms and conditions of selected loans are beneficial to borrowers

• This report has to be made available to the public, and current and prospective students.

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Should you have a lender list?

What is scary cumbersome

irritating too much work risky about having a Preferred Lender

List?

If you don’t have one, why don’t you?

If you do have one, why do you?

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Student Loans online search

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Private Student Loans online search

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How do I make a lender list?

1. Figure out what is important to your population.2. Invite lenders to answer questions about it.3. Document their answers.4. Select lenders who are the best fit for your

students and families based on their answers.

Keep the documentation forever.

Guiding Questions:1. Do my borrowers benefit?2. Can I prove it? (Is it documentable?)

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1. Figure out what is important to your students and families. How do you do that???

- Survey students- Survey parents- Survey FA Staff (and other offices)- Ask other schools for best practices- Possible tools from guarantor, servicers, etc.- Associations (NASFAA, TASFAA, SWASFAA, etc.)

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2. Invite lenders to answer questions about it.3. Document their answers.

RFI, RFP , questionnaire, survey

• Evaluate lenders for their ability/ willingness to respond to needs of students & schools, so you can…

• Provide students & families with the options that will benefit them the most, and be able to…

• Document and disclose both the process and the outcome.

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4. Select lenders who are the best fit for your students and families based on their answers

Make sure you would be able to justify the choices you make by logic, scores, & comments

Always use the same basic criteria for all participants

The Goal is to make sure than anyone who wants to know (your VP, a student or parent, an attorney general) can tell easily from your documentation how you conducted the process and how your decisions were made.

A bonus: this makes it easier to explain to a non-listed lender why their shop didn’t make the cut.


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Which loan is right for me?

Questions to ask:- Who is the borrower?- Who is the lender? Do I have a choice?- Is there a yearly/ aggregate loan limit?- Do I need a cosigner or endorser?- Can this cosigner/ endorser be released?- What’s the interest rate and fee?- When is interest capitalized?

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Which loan is right for me?

Questions to ask (more):- How long does the application process take?- What are the credit requirements?- Can I consolidate this loan?- What type of repayment plans are available?- Could I postpone my payments if I need to?- Is there any way to have this loan forgiven?

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Comparing costs

• Calculate a simple APR – different than interest rate because it helps you take into account any up-front fees

• Example: $10,000 loan, 120 mo. repayment

5.25% fixed rate 8% fixed rate5% fee 0% feeAPR = 6.38% APR = 8%

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Comparing costs

APR calculatorhttp://banking.about.com/library/calculators/bl_APR_calculator_load.htm

Note: Most simple online APR

calculators are made for use with a fixed

rate loan.

http://banking.about.com/library/calculators/bl_APR_calculator_load.htm

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Comparing costs

Another comparison:$10,000 loan, 120 month repayment term

7.9% fixed rate4% feeAPR = 8.88%

5.25% fixed rate5% feeAPR = 6.38%

8% fixed rate0% feeAPR = 8%

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Credit Criteria – CAL vs. PLUS

College Access Loan (CAL)• Have an Experian VantageScore of 700 or higher;• Not have public records such as tax liens or bankruptcy proceedings;• Have a minimum of 5 credit trade lines, excluding student loans or authorized

user accounts.• Not have defaulted on any federal or private education loans.

Parent PLUS Loan- “adverse credit history” includes:• Bankruptcy (Chapters 7,11, or 12), Voluntary surrender, Repossession,

Foreclosure, wage garnishment , County/State/Federal tax lien within the past 5 years

• Foreclosure proceedings started, or deed in lieu of foreclosure.• Accounts currently 90 days or more delinquent (unpaid collection accounts,

charge offs/ write offs)• Defaulted loan that has been claim paid.• Lease or contract terminated by default.

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Besides APR/ interest rate…

- Who is the Borrower?- What are the available repayment options?- What about if something terrible happens?- Which has cosigner release?- When is interest capitalized?- What are the lender’s credit criteria? (And do I

get a better rate if my credit is awesome?)- What are consolidation options?

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Discussion – Comparing Loans

Discussion question:

Are there some types of education loans that are ALWAYS better than others?

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Does it make more sense for the education loans to be in a parent’s name or in the student’s name?

Why?

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Is it more important to get the lowest interest rate possible even if it’s variable, or to get a rate that is fixed (will not change)?

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What else is different about private (or state) loans versus Federal loans?

- Consolidation- Repayment Options- Postponement of payments- Loan forgiveness/ discharge/ cancellation

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Private Loan Consolidation

A private loan consolidation is just a refinancing of education loans.

Main benefit would be for someone with multiple lenders to simplify repayment, or someone who has much better credit now than when they initially took out private debt

Possibly could reduce monthly payment when term is reset (a “new” 10 years, for example) – of course this makes the loan more expensive over time

Credit or cosigner is required. New loan has new terms and conditions.

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Private Loan Consolidation

Many of the same questions apply:- Interest rate (fixed or variable), fees,

prepayment penalties- Cosigner release?- Credit requirements- Maximum/ minimum limits- Repayment options- Forbearance/ payment postponements

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Recent News & Coming Up…???

• Consumer Financial Protection Bureau (CFPB) established by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)– Operates with Federal Reserve system– Established student loan ombudsman position to address

private loan complaints– Submitted report to Congress in late August on private student

loans recommending: • Changes to the bankruptcy law to allow private student loans to be

dischargeable in bankruptcy like other consumer debt• Excluding DHHS loans from TILA requirements• Requirement for all private education loans to be certified by a school• Setting up a database – similar to NSLDS – for private student loan

borrowers to help them track and repay

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Private Loans 101

Melet Leafgreen

Assistant Director of Loan Programs

Texas Christian University

[email protected]

mailto:[email protected]

Documents

TASFAA Conference 2012