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House Moves to Further Regulate Private Loans

October 23, 2009

by Scholarships.com Staff

Private student loans may soon come under increased federal regulation as Congress takes up legislation that would create a consumer financial protection agency. The bill moved out of the House Financial Services Committee yesterday and will soon go to a floor vote.

Lenders fought the legislation, but the proposed amendment to exempt student loans from the agency's oversight was defeated in committee. A brief but heated debate also arose over whether the agency should also regulate "gap loans" made by private for-profit colleges directly to students to help cover tuition and other expenses. Ultimately, the panel sided with the schools who argued that new Truth in Lending restrictions already offered students sufficient protection in regards to borrowing from schools.

Student loans are only one of several aspects of lending that would be regulated by the new agency. They'd be accompanied by mortgages, credit cards, and other bank-based loans. This comes in addition to legislation that's already been passed that will limit lenders' ability to market credit cards to college students. However, auto financing plans offered by car dealers were exempted and the agency's role in regulating smaller banks and lending institutions was also limited by amendments.

Backers of the proposed regulatory agency hope that its creation will offer greater protection to consumers, including college students, who find themselves overwhelmed by risky debt or deceptive lending practices. They hope that they will be able to limit the extremely high interest rates and confusing terms that accompany some private loans.  Student lenders have previously come under fire for questionable lending practices and have paid out large settlements and agreed to new codes of conduct governing their practices of marketing loans to students and offering incentives to colleges to promote their services on "preferred lender" lists. Private loans have also seen increased regulation this year, with previous student aid legislation requiring them to disclose terms up front, among other steps taken to make their lending practices more transparent.

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