E-Alerts

Truth In Lending Act Obligations May Apply To Independent Schools

[August 22, 2012]  Many independent schools are covered by the Truth in Lending Act (“TILA”).  Because we have seen an uptick in TILA compliance issues, we have prepared this white paper to outline TILA issues for independent schools.  In sum, we recommend that all independent schools review their tuition payment plans (and other transactions in which schools extend credit to families or employees) to determine whether the transactions are covered by TILA, and if so, comply with the disclosure requirements under TILA.

TILA Applicability

TILA applies to a person or a business that offers or extends credit when the following four conditions are met:

1. The credit is offered or extended to consumers;
2. The offering or extension of credit is done regularly;
3. The credit is subject to a finance charge or is payable by a written agreement in more than four installments; and
4. The credit is primarily for personal, family, or household purposes.

It should be noted that TILA applies even if the finance charge includes fees and amounts charged by someone other than the creditor (e.g., Tuition Management System) if the individual or the business: (1) requires the use of a third party as a condition of or  incident to the extension of credit, even if the consumer can choose the third party; or (2) retains a portion of the third-party charge, to the extent of the portion retained.

Determine If TILA Applies To Your School

The following steps should be followed to determine if your school is subject to disclosure requirements under TILA:

•    Step 1: Does the school offer a deferred payment plan?

o    YES: Continue on to Step 2.
o    NO: The school is not covered because it does not offer “credit.”

•    Step 2: Does the school extend the right to defer payment more than 25 times in the preceding or current calendar year?

o    YES: Continue on to Step 3.
o    NO: The school is not covered because it does not offer credit “regularly.”

•    Step 3: Does the school allow for more than four installment payments?

o    YES: The school is covered regardless of whether it imposes a finance charge or not.
o    NO: Continue on to Step 4.

•    Step 4: Does the school impose a finance charge?

o    YES: The school is covered.
o    NO: The school is not covered.

TILA Requirements

When an independent school is subject to TILA, it must comply with the disclosure requirements imposed by TILA.  TILA imposes various types of requirements depending on whether the covered entities extend closed-end credit or open-end credit.  Schools generally fall into the closed-end credit category, and the compliance requirements for the closed-end credit category are set forth below.

To comply with TILA requirements, the school is required to provide Parents with clear and conspicuous written disclosures of the cost of credit in a form that the individuals may keep.  Such disclosures must be made before extending the right to defer tuition payment.  The disclosures must contain the following information, as applicable:

•    Creditor: If the school is offering the deferred tuition payment plan in its name, it must identify the school as the person making the disclosure.

•    Amount Financed: The school is required to disclose the amount financed with the following descriptive sentence: “the amount of credit provided to you or on your behalf.”

•    Itemization of Amount Financed: The school is required to either provide a separate written itemization of the amount financed or provide a statement that the Parents have the right to receive a written itemization of the amount financed, together with a space for the Parents to indicate whether it is desired, and whether the Parents do not request it.

•    Finance Charge: The school is required to disclose the cost of credit, using the term “finance charge” and a brief description such as “the dollar amount the credit will cost you.”  The term “finance charge” must be more conspicuous than any other disclosures (e.g., highlight this disclosure in bold).

•    Annual Percentage Rate: The school is required to disclose the cost of credit as a percentage, using the term “annual percentage rate,” and a brief description such as “the cost of your credit as a yearly rate.”  The term “annual percentage rate” must be more conspicuous than any other disclosures (e.g., highlight this disclosure in bold).

•    Payment Schedule: The school is required to disclose the number, amounts, and timing of payment schedule to repay the obligation.

•    Total of Payments: The school is required to disclose the total of payments, using the term “total of payments” and a descriptive explanation such as “the amount you will have paid when you have made all scheduled payments.”

•    Demand Feature: The school is required to disclose whether the obligation has a demand feature (meaning that the school can require repayment prior to the expiration of the term of the tuition payment plan).

•    Total Sale Price: The school is required to disclose the total cost of the tuition including any tuition deposit, using the term “total sale price” and a descriptive explanation such as “the total price of your purchase on credit, including your tuition deposit of $_____.”  The total sale price is the sum of the cash price, any other amounts that are financed by the school and are not part of the finance charge, and the finance charge.

•    Pre-payment: The school is required to disclose (1) a statement, explaining whether there is a penalty fee for pre-payment of the tuition in full if an obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance; or (2) a statement indicating whether the Parent is entitled to a rebate of any unaccrued finance charge if the tuition is paid in full prior to maturity if an obligation includes a finance charge other than those described in (1).

•    Late Payment: The school is required to disclose if the tuition payment plan imposes a fee upon a Parent’s late payment.

Penalties For Non-compliance

Liability for failure to comply with the requirements of TILA is governed by the Consumer Protection Act, Sections 112, 113, 130, 131 and 134, and administrative enforcement is governed by Section 108.  Penalties that may be imposed on schools include:

•    Criminal liability: A school may be liable for willfully and knowingly: (1) giving false or inaccurate information or failing to provide the required information; (2) using any authorized chart or table in such manner as to consistently understate the annual percentage rate; or (3) otherwise failing to comply with any requirement under the regulation. Penalty is a fine of not more than $5,000 or imprisonment of not more than one year, or both.

•    Civil liability: Parents may bring an action against a school for failure to comply with the TILA requirements. Schools may be liable for any actual damage plus attorneys’ fees and court costs. In the case of individual actions, schools may be liable for statutory damages in the amount of double the amount of any finance charge, but not less than $100 nor more than $1,000. In the case of class actions, a school may be liable for up to $500,000 or 1% of the school’s net worth, except that as to each member of the class, no minimum recovery shall be applicable.

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We recommend that all independent schools carefully assess, with assistance of counsel, whether the school is subject to the disclosure requirements imposed by TILA. If you have any questions about TILA or need assistance, please do not hesitate to contact us.

Note:  An annotated white paper version of this E-Alert is available upon request.