2007 nchelp debt management conference consumer credit law private loans vs. ffelp dino tsibouris...

2007 NCHELP DEBT MANAGEMENT CONFERENCE

Consumer Credit LawPrivate Loans vs. FFELP

Dino [email protected]

www.tsibouris.com


Licensing

• FFELP – must be an eligible lender• National banks and thrifts don’t need a

license from the state• Non-bank lenders and purchasers of

loans may need a license to make or enforce a loan


Licensing

• A common test: Are you in the “business of lending?”

– NJ includes companies that purchase loans from others

– OH includes the original lender only– MN excludes loans under other state

law


Licensing

• Physical location concerns

• Limits on assignment

• Specific rates of interest and permissible fees


Key Differences

• FFELP Loans: Agreement wording, format and pricing prescribed by a unique federal program

• Alternative Loans: Agreement wording, format and pricing regulated by differing state laws and federal consumer protection statutes


Interest Rate

FFELP Loans:• Interest rate set by federal law• Lender can charge same rate in any state


Loan Charges

FFELP Loans:• Origination fee permitted• Guaranty/Insurance fees permitted• Late charges of permitted• Attorney fees permitted


Interest Rates

Alternative Loans: • Interest rate capped by state law• Interest rate calculation regulated in some

states• Federally chartered institutions may

charge uniform interest rates to all customers


Loan Charges

Alternative Loans• Origination fees may be prohibited• Guaranty fees may be prohibited• Attorneys fees permitted in some states• Beware multistate loan agreements - some

impose civil liability for simply including them in the note


Loan Pricing• State licensed lender laws establish

permitted rates and fees– Interest rates– Late fees– Loan origination fees of 1-2%– Prepayment fees– Refund of unearned charges


Loan Pricing

• National Bank Act (12 USC 85)• A national bank located in a state may

charge interest at the maximum rate permitted to any state-chartered or licensed lending institution by the law of that state


Loan Pricing

• National Bank Act (12 USC 85) “Interest" includes any payment compensating a creditor for:– An extension of credit– Making available of a line of credit– Any default or breach by a borrower


Loan Pricing

• National Bank Act 12 USC 85• “Interest" includes, among other things:

– Numerical periodic rates– Late fees– Creditor-imposed NSF fees


Loan Pricing

• National Bank Act 12 USC 85• “Interest" does not ordinarily include:

– Premiums/commissions for insurance guaranteeing repayment of any extension of credit

– Document preparation– Fees incurred to obtain credit reports


Loan Pricing – Tied to State Law

• Ohio Revised Code 1109.20– Interest/finance charges not

exceeding APR of twenty-five per cent– Also may charge, as interest, other

fees and charges that are agreed upon by the bank and the borrower



• RC 1109.20 “Interest”– Charges for late payments– NSF fees– Application, processing, origination

fees– Guarantee fees– Prepayment fees



• RC 1109.20 “Interest”• Any fees and charges shall not be

included in the computation of the annual percentage rate or the rates of interest or finance charges for purposes of applying the twenty-five per cent limitation


Loan Pricing – Tied to State Law• 12 CFR 7.4001 The term “interest” as

used in 12 U.S.C. 85… includes, among other things,…

• RC 1109.20 A bank may charge… as interest, other fees and charges that are agreed upon … including, but not limited to,…

• Many possibilities; uncertain outcomes


Important Considerations

• Make sure rates and fees are properly structured

– Within legal limits– Business case for each fee

• Challenges to the relationship between lenders and those who buy their loans


Loan Documents

Initial Disclosure

FFELP Loans:• Initial Disclosures Prescribed by 34 CFR

682


Loan Documents

Alternative Loans: • Initial disclosures prescribed by the Truth-

in-Lending Act• Civil penalties for noncompliance• State law disclosures governing extension

of credit


Alternative Loan Disclosures

...More State Law Disclosures

• Credit grantor disclosures• Cosigner notices• Notices near the signature line • Font size and proximity requirements


Alternative Loan Disclosures

... And Even More State Law Disclosures

• Annual percentage rate disclosure requirements

• Administrative interpretations• Civil penalties for noncompliance


Loan Collection

FFELP Loans• Governed by federal regulations which

preempt state debt collection laws• Lender must send at least one

delinquency letter requesting repayment• Due diligence required by statute


Loan Collection

Alternative Loans• Governed by federal and state debt

collection law• If lender or servicer is a “debt collector”

communication must notify that purpose is to collect a debt

• Due diligence limited by law


Deferment

• FFELP: Borrower entitled to defer payments in certain instances, as long as the borrower is not in default

• Alternative Loans: Lender may (or may not) permit borrower to defer payments


Bankruptcy Discharge

• FFELP: Bankruptcy Code does not discharge a student loan unless the borrower can demonstrate the debt would create an undue hardship upon the debtor



• Alternative Loans: – Pilcher Case: An alternative loan may

also be nondischargeable if the promotion, marketing and servicing of the loan is provided by a non-profit entity who’s participation is “instrumental” to the availability of the loans.



– Hammarstrom Case: A loan is nondischargeable if non-profit entity plays a “meaningful part” in providing funding for the loans.


Contract Management

• FFELP servicer vendor audit guidelines• Bank regulatory vendor audit guidelines


Contract Management

• Compliance with law and regulations• Limits on use of data• Audit rights• Notice if breached• Indemnity for claims and losses• No limit on liability


Privacy – GLB Permitted Sharing

• Third party with notice and opt-out

• Permitted disclosure without consent

– Service providers (notice, contract)

– Joint marketing agreements (contract)

• Express consent from consumer


Privacy – Consent• GLB: “Clear and Conspicuous”

– Reasonably understandable and designed to call attention to the nature and significance of the information contained

– May combine with other clear and conspicuous notices

• FCRA: “Clear and Conspicuous”– Small type on back of mailer in a paragraph

of type about other matters inadequate (Use different type, color - Cole v. U.S. Capital)


Privacy – Scope of Consent I authorize the release of information pertinent to

my loans: (i) by the school, the lender, and the guarantor, or their agents, to the references on the applicable loans and to members of my immediate family unless I submit written directions otherwise; and, (ii) by and among my schools, lenders, guarantors, the Department of Education, and their agents.

Source: FFELP MPN


Privacy – Scope of Consent

• Agent:

A person authorized to act for and under the direction of another person when dealing with third parties. Can enter into binding agreements on the principal's behalf and may even create liability for the principal if the agent causes harm while carrying out his or her duties.

Source: www.nolo.com


SUMMARY

• FFELP and Alternative Loans serve similar purposes

• FFELP and Alternative Loans may be structured similarly

• Governed by very different laws

• DEVELOP A FEDERAL AND STATE CONSUMER COMPLIANCE PROGRAM


Questions????


Thank You!!

Please be sure to complete your conference evaluation forms after the

conference!

2007 nchelp debt management conference consumer credit law private loans vs. ffelp dino tsibouris...

Documents

state slide

loan slide

state law slide

rate ffelp loans

rates alternative loans

permitted rates

purchasers of loans

guarantyinsurance fees