We service student loans made by trusts for which our trust department serves as trustee. If the student borrowers meet certain conditions, such as finding employment in their field of study, then the loan is forgiven (it becomes a “scholarship”). If not, the student must pay back the loan to the trust. The loan terms are longer than a year, and they are unsecured. Is our bank considered a servicing agent for these loans? If so, what regulations apply? What disclosures are required?

Do any of the trusts make more than twenty-five unsecured loans in a calendar year? If not, all of their student loans likely are exempt from Regulation Z. Regulation Z exempts creditors that make fewer than twenty-five unsecured loans annually, and its Official Interpretations treat these trusts as “separate entities” when counting their loans. But if one of more of your trusts makes more than twenty-five student loans in a calendar year, their loans would be subject to Regulation Z’s requirements, including its special disclosures and other requirements for private education loans.

It is less clear to us whether these loans would be covered by Regulation B; that depends on the nature and extent of the purposes and activities of the trusts. Regulation B applies to “creditors,” and it defines a “creditor” as a person who “in the ordinary course of business, regularly participates in a credit decision.” We think the trusts almost certainly are making credit decisions with respect to their student loans, but we don’t have enough facts to comment on whether they should be considered to be making these loans in the ordinary course of their respective businesses.

It is likely that these loans are governed by other federal and state consumer laws and regulations. Unlike Regulations B and Z, for example, the federal Servicemember Civil Relief Act (SCRA) does not define “creditor” or exempt low-volume lenders. We think the SCRA applies here, and you should ensure that these student loans comply with its requirements, such as its limits on interest rates for qualified borrowers.

As to whether your bank is a “service agent” in this arrangement, we think it is more to the point that your bank is the trustee for these trusts. As the trustee, you are acting on behalf of the trusts and are engaging in direct lending activities. Needless to say, as the trustee, your bank is responsible for ensuring that the trusts’ loans are in compliance with all applicable laws and regulations. To that end, you may wish to consult with your bank counsel for a more thorough review of this program from the bank’s point of view.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.2(a)(17) (“Creditor means (i) A person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable . . . . (v) A person regularly extends consumer credit only if it extended credit . . . more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 2(a)(17)(i), Comment 7 (“Trusts. In the case of credit extended by trusts, each individual trust is considered a separate entity for purposes of applying the criteria.”)

Regulation Z, 12 CFR 1026.46–12 CFR 1026.48 (Provisions covering Private Education Loans)

Regulation B, 12 CFR 1002.2(l) (“Creditor means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit.”)

Servicemember Civil Relief Act, 50 USC App. 527(a) (“An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent. . . .”)