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Bureau of Consumer Financial Protection.
The Bureau of Consumer Financial Protection (Bureau) is issuing this advisory opinion to clarify that loan products that refinance or consolidate a consumer's pre-existing Federal, or Federal and private, education loans meet the definition of “private education loan” in the Truth in Lending Act and Regulation Z and are subject to the disclosure and consumer protection requirements in subpart F of Regulation Z. This advisory opinion is an interpretive rule under the Administrative Procedure Act.
This Advisory Opinion is effective on December 10, 2020.
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FOR FURTHER INFORMATION CONTACT:
Shelley Thompson, Counsel, Office of Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an alternative electronic format, please contact CFPB_Accessibility@cfpb.gov.
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The Bureau is issuing this advisory opinion through the procedures for its Advisory Opinions Policy.
Refer to those procedures for more information.
I. Advisory Opinion
1. Growth of the Postsecondary Education Loan Market
The postsecondary education loan market has swelled in the past decade and education debt has become an increasingly large share of total household debt, from 5 percent in 2008 to 11 percent in 2020.
Education loans issued or guaranteed by the Federal government, through title IV of the Higher Education Act of 1965,
which are administered by the U.S. Department of Education,
currently comprise over 92 percent of the education loan market.
Between 2006 and 2012, the share of non-Federal education loans issued by private lenders ranged from 9 percent to 13 percent, and since then, the share of total outstanding education loans held by private lenders has been about 8 percent.
Prior to 2010, education loans were primarily issued through the Federal Family Education Loan Program (FFELP).
Under the FFELP, banks and other private creditors issued education loans that were subsidized and guaranteed by the Federal government.
The Health Care and Education Reconciliation Act of 2010 prohibited the origination of new FFELP loans after June 30, 2010, at which point Direct Loans issued under the William D. Ford Direct Loan Program became the predominant type of Federal education loan.
Direct Loans are issued and owned by the U.S. Department of Education.
FFELP loans, Direct Loans, and other title IV loans are administered by the Department of Education and include borrower protections such as postponement options, income-driven repayment options, in-school deferrals, no prepayment penalties, and loan forgiveness.
Most FFELP and Direct loans have fixed interest rates that are determined by Federal statute.
Between 2006 and Start Printed Page 794012013, these statutes set fixed interest rates for most loans issued to undergraduate students at 6.8 percent; Federal PLUS loan 
rates were set at 8.5 percent for FFELP loans and 7.9 percent for Direct Loans at 7.9 percent.
In contrast, by late 2011, private education creditors were offering interest rates of 2.98 percent to 3.55 percent for borrowers with prime or super prime credit scores.
This interest rate differential created incentives for prime and super prime borrowers with high fixed-rate Federal education loans to consolidate or refinance their loans into a lower rate education loan product.
2. Consolidation of Education Loans
The market for consolidation or refinance of Federal education loans by private lenders largely did not exist prior to 2006, because there was little to no demand for such a private product. Between 2001 and 2006, nearly all consolidations of Federal education loans were through the Federal government's loan consolidation program.
The interest rate on Federal consolidation loans is generally the weighted average of interest rates on the loans consolidated.
Because most Federal loans issued prior to July 1, 2006 charged variable rates, Federal consolidation loans allowed borrowers to take advantage of a downturn in interest rates to lock in fixed interest rates as low as 2.875 percent.
Federal consolidation loans also generally offer the same deferment, forbearance, and discharge benefits available on the underlying Federal loans and a wide range of repayment options, including income-driven repayment.
The few private creditors who offered education consolidation and refinance loans during this period typically offered variable-rate loans and did not offer the wide range of Federal loan repayment, deferment, forbearance, and discharge options.
In addition, education consolidation and refinance loans offered by private creditors typically did not allow borrowers to consolidate or refinance any Federal loans.
However, in 2006, legislative changes took effect which changed interest rates for Federal loans from variable rates to fixed rates, initially ranging from 6.8 percent to 8.5 percent, depending on the type of loan and whether the loan was issued under the Direct or FFELP program.
Thus, for loans originated after June 2006, a borrower no longer had the ability to take advantage of a drop in market interest rates to lock in a low interest rate through a Federal loan consolidation.
This change from variable to fixed rates on Federal loans led to an opening in the market for private lenders to offer a product that would allow borrowers with high fixed interest rate Federal loans to consolidate or refinance those loans and obtain a lower interest rate. In 2012, a few private creditors began offering private loan consolidation and refinance products that allowed borrowers who had graduated and were in repayment to consolidate or refinance their Federal education loans to reduce their interest rate.
These products are marketed to consumers with both high interest rate Federal education loans (which were generally issued or extended beginning in 2006) and prime Start Printed Page 79402or super prime 
The market for private consolidation and refinancing of Federal education loans has continued to expand in recent years.
In 2019, annual originations of private consolidation and refinance education loan products reached an estimated $16 billion,
which was larger than that year's originations for private education loans by currently enrolled students.
As the market for private consolidations and refinancings of Federal student loans has grown, some industry participants have expressed uncertainty about the application of Regulation Z, which implements the Truth in Lending Act (TILA), to these loan products. Questions have arisen regarding whether consolidation and refinance products that satisfy and replace a consumer's existing Federal loans (or existing Federal and private loans) are considered “private education loans” such that the disclosures and other protections under subpart F of Regulation Z 
are required. Specifically, creditors need to know whether they are required to provide disclosures under TILA and Regulation Z, and if so, which disclosures they are required to provide. If the loan is not considered a private education loan and is over $50,000, then the loan is not covered under TILA and Regulation Z, and a creditor is not required to provide any disclosures to the consumer.
For loans under $50,000, whether a loan is a “private education loan” determines whether creditors must comply with either the private education loan disclosure requirements or installment loan disclosure requirements, because it is impossible to comply with both sets of requirements simultaneously.
This advisory opinion generally covers private loan consolidation products that satisfy and replace multiple Federal, or Federal and private, loans, as well as private loan refinance products that satisfy and replace a single Federal or private loan. This advisory opinion does not cover loans that are made, insured, or guaranteed by the Federal government under title IV of the Higher Education Act of 1965. For purposes of this advisory opinion, the terms “private creditor” or “private education creditor” broadly refer to creditors (other than the U.S. Department of Education) who offer refinance or consolidation products for education loans, regardless of whether the creditors themselves are private persons or institutions and whether they offer products other than education loans.
C. Legal Analysis
The Higher Education Opportunity Act of 2008 (HEOA) amended TILA by adding new requirements that apply to creditors making “private education loans.” 
For example, HEOA's amendments to TILA require creditors making “private education loans” to provide special disclosures; 
prohibits creditors from co-branding with schools; 
requires creditors to provide a 30-day rumination period; 
and mandates that borrowers have a right to cancel within three days of fund disbursement.
HEOA amended TILA such that private education loans over a certain threshold—$25,000 at the time of HEOA was passed, and $50,000 after the passage of the Dodd-Frank Act 
—were no longer excluded from coverage.
In relevant part, HOEA defined a “private education loan” under TILA as a loan that is (1) not “made, insured, or guaranteed under title IV of the Higher Education Act of 1965,” and (2) “issued expressly for postsecondary educational expenses to a borrower, regardless of whether the loan is provided through the educational institution that the subject student attends or directly to the borrower from the private educational lender.” 
On August 14, 2009, the Board issued final amendments to TILA's implementing regulation, Regulation Z. The Board also issued commentary to those amendments, including subpart F, which interpreted the term “private education loan” to include “loans extended to consolidate a consumer's pre-existing private education loans.” 
Questions have arisen regarding whether the refinance and consolidation loans covered by this advisory opinion are “private education loans” under the two conditions set forth in HEOA. The first condition is met because these loans are originated by private education creditors and are not originated or insured by the Federal government or otherwise under title IV of the Higher Education Act of 1965. Thus, this advisory opinion focuses on whether such loans meet the second condition—that is, are they issued or extended by creditors “expressly for postsecondary educational Start Printed Page 79403expenses” ? 
TILA is silent on the question, and the courts have not considered it. The commentary to Regulation Z states that the phrase “extended expressly [ ] for postsecondary educational expenses” includes “loans extended to consolidate a consumer's pre-existing private education loans,” 
but it does not address loans that consolidate existing Federal education loans, nor does it refer to loans that refinance a single existing loan, whether private or Federal.
With respect to consolidation loans, the Bureau believes that TILA and Regulation Z are ambiguous as to whether a loan that consolidates existing Federal education loans is issued or extended “expressly for postsecondary educational expenses to a borrower.” In other words, it is ambiguous whether the educational purpose of the underlying loans is transferred to the consolidation loan, or if instead the express purpose of the consolidation loan is to manage existing debt, benefit from more favorable interest rates, or some other purpose. The commentary to Regulation Z resolves this ambiguity only for loans consolidating existing private education loans.
The Bureau believes that the best reading of TILA and Regulation Z is that a loan that consolidates Federal loans or a loan that refinances a Federal loan incurred expressly for postsecondary educational expenses is, itself, “expressly for postsecondary educational expenses.” Borrowers apply for these loans explicitly to consolidate loans that were originated expressly for postsecondary educational expenses, and a creditor issues them pursuant to an explicit understanding that they will be used to satisfy debt incurred expressly for postsecondary educational expenses. Thus, these loans, from the perspective of both the borrower and the creditor, are “expressly for” postsecondary education expenses.
Additionally, Congress included the term “borrower” (and the Board included the term “consumer”) in its definition of “private education loan,” instead of referring solely to a “student,” as in other sections of TILA.
This choice suggests that the statute can best be implemented by construing “private education loan” to include loans originated to consumers other than those currently in school, such as former students.
This reading also best implements one of the general purposes of TILA, which Congress amended in HEOA, “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” 
Prior to HEOA, borrowers seeking credit relating to postsecondary educational expenses would receive comprehensive disclosures if they were seeking Federal loans originated pursuant to title IV of the Higher Education Act of 1965,
but they would not receive even ordinary TILA disclosures for education loans over $25,000.
As a result, pre-HEOA borrowers were less able to compare their options. But with the TILA amendments in HEOA, Congress made more robust comparisons possible for all “private education loans,” regardless of their size.
Additionally, this reading is most consistent with the statement in the Regulation Z commentary that “loans extended to consolidate a consumer's pre-existing private education loans” are themselves private education loans originated “expressly [ ] for postsecondary educational purposes.” Nothing in the text of TILA or Regulation Z supports concluding that private education loans retain their purpose as “expressly for postsecondary educational expenses” when they are consolidated but that Federal education loans originated for the same expenses do not.
The Bureau also does not believe that the Comment's specific mention of “pre-existing private education loans” precludes the interpretation that consolidated pre-existing Federal loans are covered. The Board issued the commentary to Regulation Z, which interpreted the term “private education loan,” in 2009.
As discussed in the Background section, while there was a small market for consolidating private education loans in 2009, the private market for consolidation of Federal loans did not emerge until 2012. The Board did not receive any comments on its proposed rule that indicated the existence of such a market and no commenters sought clarity on the application of the proposed rule to Federal education loan consolidations.
Additionally, the relevant Comment to Regulation Z indicates that it is intended to be illustrative rather than exhaustive because it states that “[t]he term includes” loans consolidating private loans as well as loans extended for expenses incurred while the student is enrolled.
The above analysis addressing the consolidation of multiple Federal education loans also applies to loans that refinance a single pre-existing loan that was originated expressly for Start Printed Page 79404postsecondary education expenses, regardless of whether the pre-existing loan was a private or Federal loan. While the commentary refers only to consolidation of multiple pre-existing loans, the commentary is not intended to be exhaustive,
and the Bureau does not believe there is any principled reason to conclude that the postsecondary education purpose of multiple loans may transfer to a new loan, while the postsecondary purpose of a single loan transferred to a new loan may not.
Accordingly, the Bureau interprets the commentary's reference to loans that “consolidate a consumer's pre-existing private education loans” as simply referencing the type of consolidation loan that existed at the time the commentary was issued by the Board. Thus, for the reasons discussed in this advisory opinion, the Bureau interprets the phrase “expressly for postsecondary educational expenses” to include loans that either consolidate Federal education loans that were themselves originated expressly for postsecondary education expenses or to refinance a single private or Federal education loan that was originated for such purpose.
As a result, these consolidation or refinance loans are covered under the term “private education loan” in TILA and Regulation Z and are therefore subject to TILA and Regulation Z's requirements in subpart F (including Regulation Z's disclosures, prohibition on co-branding, 30-day rumination period, and a right to cancel).
II. Regulatory Matters
This advisory opinion is an interpretive rule issued under the Bureau's authority to interpret TILA and Regulation Z, including under section 1022(b)(1) of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act,
which authorizes guidance as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of Federal consumer financial laws.
By operation of TILA section 130(f), no provision of TILA sections 130, 108(b), 108(c), 108(e), or 112 imposing any liability applies to any act done or omitted in good faith in conformity with this interpretive rule, notwithstanding that after such act or omission has occurred, the interpretive rule is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.
As an interpretive rule, this advisory opinion is exempt from the notice-and-comment rulemaking requirements of the Administrative Procedure Act.
Because no notice of proposed rulemaking is required, the Regulatory Flexibility Act does not require an initial or final regulatory flexibility analysis.
The Bureau has also determined that this advisory opinion does not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring approval by the Office of Management and Budget under the Paperwork Reduction Act.
Pursuant to the Congressional Review Act,
the Bureau will submit a report containing this interpretive rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the United States prior to the rule's published effective date. The Office of Information and Regulatory Affairs has designated this interpretive rule as not a “major rule” as defined by 5 U.S.C. 804(2).
III. Signing Authority
The Director of the Bureau, Kathleen L. Kraninger, having reviewed and approved this document, is delegating the authority to electronically sign this document to Grace Feola, a Bureau Federal Register Liaison, for purposes of publication in the Federal Register.
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Dated: November 30, 2020.
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-26662 Filed 12-9-20; 8:45 am]
BILLING CODE 4810-AM-P