Proposed Student Loan Regulation May Spill Over and Impact Other Lending
A new regulation, part of a proposal of Truth in Lending amendments, would require greater disclosure for private education loans. The proposed Regulation Z amendment would also require any lenders to adhere to these disclosures as well, if the customer indicates that a loan will be used to pay for college expenses. For example, even if a credit union has no private student lending program, if a member comes in for a home equity line of credit and says he or she will be using the loan to pay for college, the credit union is then required to complete the new disclosure requirements for that loan.
The proposed amendments require disclosure at three points of the lending process: at application, when the loan is approved and then not less than three business days before the loan is disbursed. The member would also have three days to cancel the loan, starting after all the disclosures are completed.
"This will be a huge change for lenders to get up to speed with regulations," said Pat Torkildson, chief privacy officer, CIPP and deputy general counsel for Great Lakes Educational Loan Services.
For lenders that don't have student lending programs in place, Torkildson said that the new requirements could mean turning members down if they say that the loan will be used to pay for education and the credit union is not prepared to make the new required disclosures for that loan.
"I hope that there will be enough comments on these proposals to get the Fed to change their minds," Torkildson said.
Michelle Pezzulli, vice president of operations at private student lending CUSO Credit Union Student Choice, said that her concern is for the unwary lender that is not aware of what is happening and advertises that a loan can be used to pay for education.
"Credit unions need to go through and look at their marketing material and see what they are advertising a loan can be used for."
The disclosures, Pezzulli said, would just mean more manual process and paperwork and prolong the length of time between the loan application and date funds can be issued.
Comments are due on the proposals on May 26, and the final rules are expected to be announced over the summer.
Right now, Pezzulli said lenders should be reviewing the proposals and offering suggestions and reviewing their own programs.
"There's still more information we're waiting for but you should start reviewing now and looking over your marketing and make sure you are equipped to make these disclosures if you are required to."
If the proposals go through, Mike Weber, vice president of marketing at CU Student Choice, said the credit unions offering home equity loans might have to be very careful about the language they use when promoting those loans.
Another proposal in the pipeline that would impact credit unions offering federal loans is the elimination of the Federal Family Education Loan Program, included in President Obama's 2010 budget proposal.
San Antonio Federal Credit Union ended it's participation in FFELP in July of last year and started its own private student loan program in its place.
Chuck Smith, senior vice president and director of lending at SACU, said that interest rates and regulatory changes to the FFELP program changed the credit union's ability to put loans on their portfolio. The credit union, Smith said, started to see the gap between loan revenue and expenses meet.
In 2007, SACU was one of the original investors of CU Student Choice. SACU's new program is now serviced through CU Student Choice.
With the first semester of the new loan program up and running, Smith said he's putting pressure on Vice President and Director of Student Lending Juan Antonio Ruiz to get the volume of the new program up to the $15 million a year in loans the CU is doing through FFELP.
"It's quite a challenge, but the gap between the cost of education and loans available is turning into a chasm," Smith said.
Even though SACU has left the FFELP program, the 2010 budget proposal to eliminate the program would still impact the credit union's portfolio.
"If the program is eliminated, students graduating will do direct loan consolidation and that will cause run offs and a loss of loans on our portfolio," Ruiz explained.
Smith said that he thinks SACU's program will continue to be seen as a student lending solution over the next year.
"I don't see an end to the freefall of student lending and the loans being offered by Sallie Mae are much more expensive than what we have to offer," Smith said.
Credit unions in Illinois recently announced that they will invest nearly $100 million in securities issued by the Illinois Student Assistance Commission to finance loans through FFELP.
The program called the ISAC-Credit Union Pact has 12 credit unions committed to it so far.
Regarding the 2010 budget proposal, the Illinois Credit Union League said in a statement that ISAC intends to remain an active and vital player in the student loan industry in Illinois, whether it be through FFELP, direct lending, a combination of the two, or some as yet undetermined new variation.
Historically, credit unions have not been huge players in FFELP, according Weber.
"Anyone involved in the industry should keep an eye on the constantly shifting landscape. Whatever happens there will continue to be a need for private loans. I'm curious though what will happen with lenders big in the federal program. Will they drop out completely? Or will they make their programs completely private?"
One thing Weber said that he is sure of is that the student lending market right now has opportunities for credit unions to take advantage of. Digital Federal Credit Union in Philadelphia recently developed a loan program for international MBA students at the Wharton School of the University of Pennsylvania. The program is similar to a loan program developed by MIT Federal Credit Union for international students at the MIT Sloan School of Management.
The loan covers tuition and living expenses and is also available for current first year international students for their second year of study.