[Senate Report 110-327]
[From the U.S. Government Publishing Office]
Calendar No. 702
110th Congress Report
SENATE
2d Session 110-327
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PRIVATE STUDENT LOAN TRANSPARENCY AND IMPROVEMENT ACT OF 2008
_______
April 21, 2008.--Ordered to be printed
_______
Mr. Dodd, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 2894]
The Committee on Banking, Housing and Urban Affairs which
considered the original bill (S. 2894) to establish
requirements for private lenders to protect student borrowers
receiving private educational loans, and for other purposes,
reports favorably the ``Private Student Loan Transparency and
Improvement Act of 2008'' and recommends that the original bill
do pass.
INTRODUCTION
On August 1, 2007 the Committee considered a Committee
Print entitled the ``Private Student Loan Transparency and
Improvement Act.'' The Committee voted unanimously to report
the bill to the Senate for consideration.
HEARING RECORD AND WITNESSES
On June 6, 2007, The Honorable Andrew Cuomo, Attorney
General, State of New York; Mr. Barry W. Goulding, Senior Vice
President, Sallie Mae; Ms. Tracy Grooms, Senior Vice President,
Bank of America; Mr. Sevester Bell, Director of Student
Financial Aid, Howard University; Mr. Peter Tarr, General
Counsel, First Marblehead Corporation; Ms. Jennifer Pae,
President, United States Student Association; Mr. Luke
Swarthout, Higher Education Associate, U.S. PIRG,; and Mr.
Jonathan H. Avidan, consumer, Langhorne, Pennsylvania, appeared
before the Committee to testify on ``Paying for College: The
Role of Student Lending.''
PURPOSE AND SUMMARY OF THE LEGISLATION
The ``Private Student Loan Transparency and Improvement Act
of 2008'' was developed to implement needed reforms in the
private student lending market--the fastest-growing segment of
the $85 billion student loan industry--and to help ensure that
all students wishing to pursue a higher education are able to
obtain the most competitive and affordable student loans.
The legislation enhances the transparency and supervision
of the private student loan market and includes measures that
seek to make the attainment of a higher education more
affordable and accessible. Among important provisions in this
bill is a requirement that lenders provide more accurate and
timely information to their customers about the interest rates,
terms and conditions of their products, thereby helping
students better understand their financial options and
obligations.
The bill contains numerous provisions which promote college
affordability by providing student borrowers with a ``window''
to shop for the best, most competitive educational loan and
authorizes federal banking regulators to establish a system to
provide financial institutions with credit under the Community
Reinvestment Act for making ``low-cost'' private loans to low-
income student borrowers.
The bill also includes provisions prohibiting loan co-
branding and revenue sharing.
The legislation contains important new protections under
the Truth in Lending Act (TILA) by extending the Truth in
Lending Act statute of limitations for private student loan
borrowers for a period of one year from the date when their
first regular loan payment of principal is due. The legislation
also applies TILA provisions to all private student loans,
regardless of the amount a student borrows.
Additionally, the bill will promote students' understanding
of the private loan market by requiring that the effectiveness
of financial literacy programs be evaluated, and that effective
programs be promoted.
Lastly, the bill requires that the GAO conduct a study of
the impact of the use of nonindividual factors, such as a
school's graduation rate, cohort default rate, or
accreditation, as part of the underwriting criteria used to
determine the pricing of private educational loans to student
borrowers and the availability of loan products to institutions
of higher education.
BACKGROUND AND NEED FOR LEGISLATION
Private student loans are now the fastest growing segment
of the $85 billion student loan industry.\1\ Private loans fill
important gaps in students' ability to finance college,
particularly as federal financial aid has failed to keep pace
with soaring tuition costs, which have increased 52% at public
institutions and 34% at private institutions over the past
decade. As a result, private loans are increasingly becoming a
necessity for many families. If current student borrowing
trends persist, private loans will overtake federally-
guaranteed lending as the largest percentage of all student
lending sometime within the next decade.
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\1\According to the College Board, private education loans totaled
$1.3 billion during the 1995-1996 academic year and in academic year
2005-2006 totaled $17.3 billion--an increase of 1,200%. The proportion
of private education loans borrowed through banks and other lenders, as
opposed to the federal government loans, constituted 20% of all
education borrowing in 2005-2006, as compared to 12% five years
earlier, and 4% in 1995-96.
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Unlike federal student loans, private loans are not
guaranteed by the federal government. In addition, while
guaranteed student loans carry a rate of no more than 6.8%,
there are no limits on the interest rates and fees private
lenders can charge.
As the private education loan market grows, so too does the
direct-to-customer marketing of loans to student borrowers.
Many students who receive direct marketing of private loans may
be unaware of the availability of federal loans at lower rates.
Student lending advocates have expressed concern that direct-
to-consumer student loan marketing may result in student
borrowers failing to take full advantage of these lower-cost
federal loans before obtaining private loans.
Testimony at the Banking Committee's hearing detailed
aggressive and questionable marketing practices and other
troubling industry practices, ranging from conflicts of
interest to kickback schemes to consumer fraud, that have been
unveiled by Congressional and State investigations into the
private student loan industry. The Act will help ensure that
the rapidly-growing private educational loan market is well
regulated and remains accessible and affordable as an
alternative source of higher education funding for students who
need these loans.
SECTION-BY-SECTION ANALYSIS
Section 1. Short title; table of contents
This section establishes the title of the bill, the
``Private Student Loan Transparency and Improvement Act of
2008'' and provides a table of contents.
Section 2. Definitions
This section defines ``Board,'' ``covered educational
institution,'' ``Federal banking agencies,'' ``appropriate
Federal banking agency,'' ``institution of higher education,''
``postsecondary educational expenses,'' ``private educational
lender,'' and ``private educational loan'' for purposes of the
bill.
For the purpose of achieving uniformity and clarity, the
Committee sought to cross reference preexisting definitions
from other sources in the United States Code.
Section 3. Regulations
This section requires the Board of the Federal Reserve to
issue final regulations to implement the Act and the amendments
made by the Act not later than 180 days after the enactment of
the Act.
Section 4. Effective dates
This section makes the Act and amendments made by the Act
effective 180 days after the date that final regulations are
issued.
TITLE I--PREVENTING UNFAIR AND DECEPTIVE PRIVATE EDUCATIONAL LENDING
PRACTICES AND ELIMINATING CONFLICTS OF INTEREST
Section 101. Amendment to the Truth in Lending Act
This section prohibits lenders from offering gifts to
schools or school employees in exchange for preferential
consideration of their private loan products or services.
Additionally, this section prohibits private educational
lenders from engaging in revenue-sharing and loan co-branding
arrangements that use the name or logo of an educational
institution. This section also prohibits advisory board members
from receiving anything of value from a private educational
lender other than reimbursement for reasonable expenses.
Prepayment penalties on private student loans are prohibited
under this section.
Section 102. Civil liability
This section extends the Truth in Lending Act statute of
limitations for private student loan borrowers for a period of
one year from the date when their first regular loan payment of
principal is due.
Section 103. Clerical amendment
This section updates TILA table of sections.
TITLE II--IMPROVED DISCLOSURES FOR PRIVATE EDUCATIONAL LOANS
Section 201. Private educational loan disclosures and limitations
This section requires private lenders to provide clear and
conspicuous disclosures about the terms and conditions of their
private educational loans to borrowers at: (1) loan application
and solicitation, (2) loan approval, and (3) loan consummation.
Among the required disclosures are: the range of APRs
applicable to the loan, whether the rate is fixed or variable,
any fees associated with the loan, the type of payment deferral
options available, and notification of the borrower's
eligibility for lower-cost federal loans through the federal
financial aid program.
This section provides student borrowers with a 30-day
shopping window during which they are able to lock in the terms
of a loan for which they have been approved while being able to
shop for lower rate products. This section also provides
borrowers with a 3-day ``cooling off'' period after the date of
consummation during which the borrower may cancel the loan
without any legal or financial obligation on the part of the
lender or the borrower.
Section 202. Application of Truth in Lending Act to all private student
loans
Applies TILA provisions to all private student loans,
regardless of amount.
TITLE III--COLLEGE AFFORDABILITY
Section 301. Community Reinvestment Act credit for low-cost loans
This section authorizes federal banking regulators to
establish a system to provide financial institutions with
credit under the requirements of the Community Reinvestment Act
for making ``low-cost'' private loans to low-income student
borrowers.
TITLE IV--FINANCIAL LITERACY
Section 401. Coordinated education efforts
This section requires the Secretary of the Treasury, in
coordination with the Secretary of Education, Agriculture, and
other appropriate agencies that are members of the Financial
Literacy and Education Commission, to develop initiatives to
improve student awareness of the cost, obligations, and rights
associated with educational loans and other college debts. The
Treasury Secretary is required under this section to identify
programs and develop initiatives to encourage institutions of
higher education to implement financial education programs for
their students. This section also requires the Financial
Literacy and Education Commission to report to Congress on the
state of financial education among students at institutions of
higher education.
TITLE V--STUDY AND REPORT ON NONINDIVIDUAL INFORMATION
Section 501. Study and report on nonindividual information
This section requires the GAO to study the impact of the
use of nonindividual factors, such as a school's graduation
rate, cohort default rate, or accreditation, as part of the
underwriting criteria used to determine the pricing of private
educational loans to student borrowers and the availability of
loan products to institutions of higher education.
REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
The ``Private Student Loan Transparency and Improvement Act
of 2008'' modifies the Truth in Lending Act to prohibit certain
practices by private educational lenders, and to require that
they provide additional disclosures to borrowers. The bill
requires the Federal Reserve Board to issue regulations to
implement the Act. By providing a 30-day shopping window, this
legislation should have significant positive impact on
students' ability to procure student loans on favorable terms.
The bill has no discernable impact on personal privacy. The
bill is not expected to result in substantial additional
paperwork.
COST OF THE LEGISLATION
U.S. Congress,
Congressional Budget Office,
Washington, DC, October 4, 2007.
Hon. Christopher J. Dodd,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Private Student
Loan Transparency and Improvement Act of 2007.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Justin
Humphrey.
Sincerely,
Peter R. Orszag.
Enclosure.
Private Student Loan Transparency and Improvement Act of 2007
Summary: The Private Student Loan Transparency and
Improvement Act would require firms to follow certain terms and
procedures when soliciting or making private loans for post-
secondary education expenses. It would direct the Board of
Governors of the Federal Reserve and other financial regulatory
agencies to issue regulations implementing the new standards.
It also would require the Department of the Treasury and the
Government Accountability Office (GAO) to prepare reports on
issues related to such financial arrangements.
CBO estimates that preparing the reports required by this
bill would cost about $2 million over fiscal years 2008 and
2009, assuming the availability of appropriated funds.
Provisions in the legislation affecting the workload of the
Federal Reserve and financial regulatory agencies would affect
revenues and direct spending, respectively, but CBO estimates
that any such impacts would not be significant.
This bill contains two intergovernmental mandates as
defined in the Unfunded Mandates Reform Act (UMRA). First, it
would prohibit public institutions of higher education from
participating in certain lending practices and financial
arrangements with private lenders. It also would increase the
disclosure requirements for lenders of certain educational
loans, including public entities. CBO estimates that the
aggregate costs to state, local, and tribal governments to
comply with those mandates would be small and would not exceed
the threshold established in UMRA ($66 million in 2007,
adjusted annually for inflation).
The bill would impose a number of mandates on the private
sector as defined in UMRA, including increasing the disclosure
requirements on lenders that make nonfederal education loans
and prohibiting certain exchanges between lenders and
institutions of higher education and their employees. CBO
estimates that the aggregate cost of complying with those
mandates would not exceed the threshold established by UMRA for
private-sector mandates ($131 million in 2007, adjusted
annually for inflation).
Estimated cost to the Federal Government: For this
estimate, CBO assumes that this legislation will be enacted
near the beginning of fiscal year 2008 and that outlays will
follow historical trends for similar activities. Assuming the
availability of appropriated funds, CBO estimates that
implementing this bill would cost about $2 million over the
2008-2009 period. Enacting the legislation also would affect
direct spending and revenues, but CBO estimates that those
effects would not be significant.
Spending subject to appropriation
This bill would direct two federal agencies to prepare
reports on issues related to private-sector financing of post-
secondary education. The legislation would require the
Department of the Treasury to identify and evaluate programs at
institutions of higher education that enhance the financial
literacy of college students, and subsequently encourage the
implementation of those programs that the department found to
be most effective. The bill also would require the GAO to
prepare a report on the impact of nonindividual factors, such
as cohort default rate and graduation rates, on the pricing of
private education loans among institutions of higher education.
That report also would examine the extent to which those
factors affect the availability of private loans to certain
borrowers or certain schools. Based on information from the
affected agencies, CBO estimates that preparing these reports
would cost approximately $2 million over the 2008-2009 period,
assuming the availability of appropriated funds.
Direct spending and revenues
Under this legislation, the Board of Governors of the
Federal Reserve and other financial regulatory agencies would
be required to issue regulations and supervise compliance with
the new lending standards and procedures in the bill. According
to officials at the Federal Reserve and other agencies, those
regulatory activities would have no significant effect on their
workload or budgets. The budgetary effects on the Federal
Reserve are recorded as changes in revenues (governmental
receipts). Costs incurred by the other financial regulatory
agencies affect direct spending, but most of those expenses are
offset by fees or income from insurance premiums. Thus, CBO
estimates that enacting this bill would reduce revenues by less
than $500,000 in any year and over the 2008-2017 period and
would have a negligible net effect on direct spending.
Estimated impact on state, local, and tribal governments:
This bill contains intergovernmental mandates as defined in
UMRA; however, CBO estimates that the aggregate costs to state,
local, and tribal governments to comply with those mandates
would be small and would not exceed the threshold established
in UMRA ($66 million in 2007, adjusted annually for inflation).
This bill would prohibit public institutions of higher
education from receiving gifts from private lenders in exchange
for any advantage or consideration provided to those lenders.
Those schools also would be prohibited from engaging in
revenue-sharing agreements with private lenders. Complying with
those requirements could result in lost revenue for those
entities. Many schools, however, have stopped such practices
voluntarily or as a result of state requirements. CBO therefore
estimates that the additional cost to public institutions of
complying with the federal mandate would be minimal.
The bill also would increase the disclosure requirements
for lenders of certain private educational loans. According to
state representatives and industry experts, there are very few
public entities that offer such loans and the cost for those
entities to comply with the new requirements would be small.
Estimated impact on the private sector: The bill would
impose a number of private-sector mandates, as defined in UMRA,
on private lenders that make education loans, on private
postsecondary educational institutions, and on financial aid
administrators and other employees at postsecondary educational
institutions. CBO estimates that the direct cost of these
mandates would be less than the threshold established by UMRA
for private-sector mandates ($131 million in 2007, adjusted
annually for inflation).
The bill would prohibit postsecondary education
institutions, their officers, and their employees from
receiving any gift from a private lender in exchange for any
advantage for the lender in its loan activities. Conversely,
the bill would prohibit lenders from sharing the profits from
their loan activities with higher education institutions in
exchange for some advantage for the lender in its loan
activities, including offering or providing gifts to
postsecondary educational institutions or their employees. The
bill would prohibit lenders from co-branding their loans with
the institution's mascot or logo. It would also prohibit
lenders from charging prepayment or early payment fees on their
loans. CBO estimates that the direct cost of these prohibitions
would be minimal, because the prohibited practices are not
widespread.
The bill would require lenders to make additional
disclosures to borrowers at three stages of the loan
application process: (1) with advertising or solicitation of
loans, (2) with approval of loan applications, and (3) with
consummation of loans. The bill would require lenders to give
the applicant up to 30 days following the approval of a loan to
accept it with no changes in terms other than via an index to
determine the interest rate and to give a borrower up to three
days to change their minds once they consummate a loan with a
lender. The direct cost of initially complying with these
mandates, which would be higher than the continuing cost, would
include the cost of the development and legal review of
disclosures to be supplied with advertizing materials and the
modification and review of other existing disclosure forms.
According to industry sources, the major ongoing cost would be
the cost of fielding questions from prospective borrowers about
the similar but different disclosure forms at each stage of the
process.
Estimate prepared by: Federal costs: Justin Humphrey, and
Kathleen Gramp and Matthew Pickford; Revenue provisions--
Barbara Edwards; Impact on state, local, and tribal
governments: Melissa Merrell; Impact on the private sector:
Nabeel Alsalam.
Estimate approved by: Keith Fontenot, Deputy Assistant
Director for Health and Human Resources, Budget Analysis
Division.
CHANGES IN EXISTING LAW (CORDON RULE)
On August 1, 2007 the Committee unanimously approved a
motion by Senator Dodd to waive the Cordon rule. Thus, in the
opinion of the Committee, it is necessary to dispense with the
requirement of section 12 of rule XXVI of the Standing Rules of
the Senate in order to expedite the business of the Senate.