CFPB Issues Advisory Opinion on Consolidation of Pre-Existing Federal Education Loans

The CFPB recently issued an advisory opinion clarifying 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” under the Truth in Lending Act (TILA) and Regulation Z and are therefore subject to the disclosure and consumer protection requirements in subpart F of Regulation Z.  This advisory opinion was issued concurrently with the CFPB’s finalization of its Advisory Opinion Policy, previously covered by WBK.

The Higher Education Opportunity Act (HEOA) defines 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 education expenses to a borrower, regardless of whether the loan is provided through the educational lender.  Further, commentary to Regulation Z states that the term “private education loan” includes “loans extended to consolidate a consumer’s pre-existing private education loans.”  Loans not considered “private education loans” over $50,000 are not covered under TILA or Regulation Z and a creditor is not required to provide any disclosures to the consumer.

The CFPB’s advisory opinion states 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” 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.  Nonetheless, the CFPB interprets these types of loans to fall within the definition of “private education loans”.  First, the CFPB finds that 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.  Second, the CFPB finds that these loans are expressly for postsecondary education expenses because “[b]orrowers 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.