IBA Compliance Connection

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A customer came to us with an outstanding federal student loan. Our loan department refinanced his student loan, but structured it as a commercial loan product (with the terms and conditions of a commercial loan). The refinancing was made to him and his wife as co-borrowers, and the proceeds were used to pay off his original federal student loan. Were the Higher Education Opportunity Act (HEOA) disclosures required? What if we had made the refinancing to the customer’s business, with him and his wife as individual guarantors? Would that transaction have been subject to HEOA disclosures?

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We do not believe that the Higher Education Opportunity Act (HEOA) disclosures were required in this case, because the loan did not fit the definition of a “private education loan.”

The HEOA disclosures are required only for “private education loans,” which are loans made to a consumer for post-secondary educational expenses (in addition to having other characteristics, such as being a closed-end loan with terms longer than 90 days). A loan that refinances a private education loan also fits this definition; the Regulation Z Official Interpretations clarify that private education loans include “loans extended to consolidate a consumer’s pre-existing private education loans.” However, loans made, insured, or guaranteed by the federal government are excluded from the definition of “private education loans.” Consequently, we believe that a refinancing of such a loan also would be exempt from Regulation Z and the HEOA disclosure requirements.

We also note that Regulation Z does not apply to business loans, including business loans guaranteed by individuals. In other words, if you had made the refinancing to the customer’s business, the fact that he and his wife would serve as individual guarantors would not affect the loan’s exempt status.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.46(b)(5) (“Private education loan means an extension of credit that (i) Is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.); (ii) Is extended to a consumer expressly, in whole or in part, for postsecondary educational expenses, regardless of whether the loan is provided by the educational institution that the student attends; (iii) Does not include open-end credit or any loan that is secured by real property or a dwelling; and (iv) Does not include an extension of credit in which the covered educational institution is the creditor if: (A) The term of the extension of credit is 90 days or less; or (B) an interest rate will not be applied to the credit balance and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments.”)
  • Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 46(b)(5), Comment 1 (“A private education loan is one that is extended expressly for postsecondary educational expenses. The term includes loans extended for postsecondary educational expenses incurred while a student is enrolled in a covered educational institution as well as loans extended to consolidate a consumer’s pre-existing private education loans.”)
  • Regulation Z, 12 CFR 1026.3(a)(2) (“The following transactions are not subject to this part or, if the exemption is limited to specified provisions of this part, are not subject to those provisions: . . . . (2) An extension of credit to other than a natural person . . . .”)
  • Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 3(a), Comment 9 (“The exemption for transactions in which the borrower is not a natural person applies, for example, to loans to corporations, partnerships, associations, churches, unions, and fraternal organizations. The exemption applies regardless of the purpose of the credit extension and regardless of the fact that a natural person may guarantee or provide security for the credit. . . .”)