NAICU Washington Update

Senate Banking Committee Writes Private Loan Regulations

August 07, 2007

The Senate Banking Committee has marked up the "Private Student Loan Transparency and Improvement Act," which would impose new federal regulations on the private student loan industry. With a brief introduction of the bill by Chairman Chris Dodd (D-Conn.), the committee reviewed the manager's amendment, including three amendments, and passed the bill unanimously on August 1, all in a matter of about five minutes.

The bill is intended to protect student borrowers and sever special relationships between lenders and institutions of higher education. Specifically, the bill would amend the Truth in Lending Act to:

  • prohibit lenders from offering gifts to schools or employees in exchange for preferential consideration of their loans or services;
  • prohibit revenue-sharing and co-branding arrangements with institutions of higher education;
  • prohibit advisory boar members from receiving anything of value from private lenders other than reasonable expense reimbursement; and
  • prohibit prepayment penalties.

The bill also requires lenders to provide very clear disclosures about the terms and conditions of their loans to borrowers at three different points during the loan application and approval process. The required disclosures include rates, fees, deferral options, and notification of the borrower's eligibility for cheaper federal student loans.

Another borrower benefit is a new 30-day "shopping window." During this period, students can lock in the rate of the loan they've been approved for, while continuing to explore other loan options to ensure that they've gotten the lowest rate possible. An amendment to this section by Sen. Mike Enzi (R-Wyo.) ensures that loan disbursements do not have to be withheld during this period, if the borrower so wishes. NAICU worked to ensure that this improvement was integrated into the underlying bill.

Another provision of the bill allows borrowers a three-day "cooling off" period after having accepted the loan, during which the borrower may cancel the loan without any legal or financial penalty.

The bill provides credit to private educational lenders making low-cost lost loans to low-income borrowers, with the credits to be used in meeting those lenders' community contribution obligations under the Community Reinvestment Act of 1977. It also requires the Financial Literacy and Education Commission to develop and evaluate initiatives to improve student awareness programs regarding student financial aid - particularly the cost, obligations, and rights associated with educational loans. An initial requirement for lenders to provide reports on their private educational loans by individual and institutional characteristics has been replaced by a study of the effect of these factors on the price of the loans.

When the student loan scandal broke earlier this year, Chairman Dodd began working on this legislation. As a member of the Health, Education, Labor and Pensions Committee, he originally planned to offer the bill as an amendment to the Higher Education Act reauthorization (S. 1642) during floor consideration. While that did not materialize, it could still be added when the House and Senate conference their bills this fall. There is no similar legislation in the House.