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Payment Plans and Short Term
Financing Programs
Avoiding the Now Not so Hidden
Pitfalls of Federal and State Consumer
Credit Laws and Regulations
By: John L. Culhane, Jr.
Ballard Spahr LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Direct: 215.864.8535
Email: culhane@ballardspahr.com
Higher Education Opportunity Act of 2008 and
Private Education Loan Disclosures
• Title X of HEOA – the Private Student Loan Transparency and
Improvement Act of 2008 - added new application, approval and final
disclosure requirements for creditors making private education loans
• Federal Reserve Board (“Board”) engaged private companies to develop
sample disclosures
• After extensive testing, Board published proposed disclosure rules on March
24, 2009
• After reviewing comments and conducting further testing, Board published
final disclosure rules on August 14, 2009
• To complicate matters, Board specifically made disclosure rules applicable
to educational institutions and discussed the application of the disclosure
rules to tuition billing plans and short term loans
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Tuition Billing Plans
• Educational institutions requested clarification as to coverage
• Institutions argued that coverage would not make sense
- disclosures would not provide a meaningful benefit – no disbursement of funds
and no interest rate
- 30-day acceptance period and 3-day right to cancel are not really helpful
• Result – Board agreed and exempted tuition billing plans from the HEOA
disclosures provided
- plans are 1 year or less
- no interest is charged
- the plan is offered by the school, not an institution affiliated organization
• But Board cautions that tuition billing plans may nevertheless be extensions
of credit under Regulation Z
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Short Term Loans
• Educational institutions likewise requested clarification as to coverage
• Institutions argued that coverage would not make sense
- disclosures would not provide a meaningful benefit
- 30-day acceptance period and 3-day cancellation period could impose a burden
on students
• Result – Board agreed and excepted short-term loans from the HEOA
disclosures provided
- the term is 90-days or less (emergency not required)
- the loan is offered by the school, not an institution affiliated organization
• But Board cautioned that short term loans, on which interest is assessed, are
extensions of credit under Regulation Z
- if repayment is required on receipt of funds, disclosures must be based on an
estimate as to when that will happen
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Regulation Z
• When would Regulation Z apply to a tuition billing plan or short term loan?
• The plan or loan would have to be “credit” and “consumer credit”
- “credit” is the right to defer payment of debt or to incur debt and defer its
payment - pay as you go is not credit
- “consumer credit” is credit offered to a natural person primarily for personal,
family, or household purposes
• The plan or loan would also have to be one where either
- a finance charge is assessed or
- the obligation is payable by written agreement in more than four installments
• In which case, the person to whom the obligation is initially payable may be
required to provide Truth in Lending disclosures
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Finance Charge
• Any charge payable directly or indirectly by the consumer and imposed
directly or indirectly by the creditor as an incident to or a condition of the
extension of credit
• Fees paid to third party processors are finance charges if
- the creditor requires the use of the third party as a condition of participation in
the tuition billing plan or
- the creditor retains a portion of the fees (in which case the amounts retained are
finance charges)
• Application fees are not finance charges if charged to all applicants, even
ones who are turned down for participation in the tuition billing plan or short
term loan program
- to be excluded they must also be designed to recover the costs associated with
processing applications
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Finance Charge (cont’d)
• Late payment fees are not finance charges – but the late payment fee must
be charge for actual unanticipated late payment
- and if no effort is made to collect, the fee may be finance charge
• Participation fees are not finance charges but
- the fees must be charged for participating in the plan, that is, as a condition of
access to the plan itself
- a fee imposed separately on an individual transaction is not going to be
participation fee
- the fee must be charged on an monthly, annual or other periodic basis
- a one-time non-recurring fee imposed at the time an account is opened is not a
fee that is charged on a periodic basis
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Payable by Written Agreement
in More Than Four Installments
• Rule created by the Board – sort of assumes that with more than four
installments there may be a “hidden” finance charge – so cost disclosures are
required – but disclosures are required even without a hidden finance charge
• No disclosures required absent written agreement
- oral argument does not require disclosures
- letter that merely confirms oral agreement docs not require disclosures
• No disclosures required for repayment in
- 1 installment
- 2 installments (semesters)
- 3 installments (trimesters)
- 4 installments (quarters)
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Retail Installment Sales Act (RISA)
• Applies to installment sales of goods and services – few contain an
exclusion for educational services or for non-profit corporations
• Applies to agreements that provide for repayment in installments (plural)
and in which either a time price differential (or service charge) is assessed or
the cost of the goods and services would be less if the buyer (student) paid
cash
• Generally requires more (and) different disclosures than Regulation Z
(although some disclosures may be preempted)
• Often requires the agreement to be identified as a Retail Installment Contract
and to include all terms (single document rule), a description of the
educational services, a Notice to Buyer, and a state holder notice (even if the
FTC Holder Notice would not be required)
• Often places substantive limitations on the price differential (interest), late
fees and other charges (including collection costs and attorneys’ fees)
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Structuring a Tuition Billing Plan to Avoid
Tuition Lending Disclosures
No credit
- payment in advance for set period of time
– but consumer cannot be contractually obligated to continue making
payments
- progress payments for training as completed
– but consumer cannot be contractually obligated to continue making
payments
No finance charge
- assess application fee to everyone who requests the plan, even those who end up
being turned down
- Assess a late payment fee only - must be a charge for actual unanticipated late
payment (and may have to service a liquidated damages analysis under law)
- Make plan available for expected period of enrollment and then assess a
participation fee by quarter, semester, or school year (must be done very
carefully)
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Structuring a Tuition Billing Plan to Avoid
Tuition Lending Disclosures
No written agreement – oral agreement with confirming letter only
Provide for repayment in no more than four installments
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Structuring a Short Term Loan Program to Avoid
Truth in Lending Disclosures
• Probably impossible to avoid having an extension of credit
No finance charge
- assess an application fee to everyone who requests a loan, even those who end
up being turned down
- assess a late fee only – must be a charge for actual unanticipated late payment
(and may have to survive a liquidated damages analysis under state law)
- make short term loans available for expected period of enrollment and assess a
participation fee
No written agreement
- oral agreement with confirming letter only
Provide for repayment in no more than four installments
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Structuring a Tuition Billing Plans or Short Term
Loan to Avoid RISA Disclosures
• Examine definition of RISA carefully
• Tuition billing plan may be exempt if there is no price increase and no time
price differential or service charge
- application fee may be permitted if charged to all applicants
- late fee may be excluded from definition of time price differential or service
charge
- participation fee may be excluded from definition of time price differential or
service charge (be careful to distinguish between retail installment contracts and
retail installments accounts)
• Short term loan may be exempt if contract does not provide for repayment in
installments or does not provide for a time price differential or service
charge – again, application fee, late fee, or participation fee may be excluded
from definition of time price differential or service charge
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What if Disclosures Are Required?
• For federal Truth in Lending disclosures, school will have the option to
treat the transaction as a loan or as a credit sale
- Loan – 4 box disclosure
ANNUAL FINANCE Amount Total of Payments
PERCENTAGE CHARGE Financed The amount you will
RATE The dollar amount the The amount of credit have paid after you
The cost of your credit will cost you. provided to you or on have made all
credit as a yearly rate. your behalf. payments as
scheduled.
$
% $ $
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What if Disclosures Are Required? (cont’d)
- Credit Sale – 5 box disclosure
ANNUAL FINANCE Amount Total of Payments Total Sale Price
PERCENTAGE CHARGE Financed The amount you will The total cost of your
RATE The dollar amount the The amount of credit have paid after you purchase on credit,
The cost of your credit will cost you. provided to you or on have made all including your down
credit as a yearly rate. your behalf. payments as payment of
scheduled.
$_________________
$
% $ $
$
• But for state disclosures, the tuition billing plans and short term loans
financing will probably be subject to the RISA which will require
credit sale disclosures
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Other Federal Laws
• ECOA and Regulation B – in particular, the requirements to make a decision
on a completed application within 30-days and the requirement to provide an
adverse action notice if the application is declined
• Fair Credit Reporting Act – in particular, the requirement to provide an
adverse action notice if an application is declined based on information in a
consumer report, information obtained from a person other than a consumer
reporting agency, or information furnished by a company related by
common ownership or affiliated by common corporate control
• FTC Credit Practices Rule – in particular, the requirement to provide a
cosigner notice to a parent or family member or any other person who
assumes liability without receiving the educational services
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Other State Laws
• Application and related notice requirements
• State credit reporting notices
• State cosigner notices
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