[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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.

                                  
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