Preferred lender arrangements are essentially agreements or understandings between lenders and post-secondary educational institutions in which the lender provides FFELP or Private Loans to students attending the school and the school recommends, promotes or endorses the lender’s student loan products. Schools and lenders must provide students, families and borrowers with of various disclosures (or information) when they maintain such relationships.
For example, a school having a preferred lender arrangement with a lender must disclose, among other things, on its website and in its student loan brochures and materials:
- The maximum amount of Federal grant and loan aid under the FFEL Program available to students in an easy-to understand format; and
- A statement that the student is able to choose any lender for a FFELP loan (as long as the lender participates in the FFEL Program) and the school is required to process the loan documents using that lender.
Any lender who has a preferred lender arrangement with a school must annually provide to each such school (as well as the Secretary of Education) a detailed disclosure that describes the types of FFELP loans the lender plans to offer in the coming school year. Schools having such relationships must make this information available to students, prospective students and their families. The Secretary of Education in consultation with the Federal Reserve Board will develop a model form on which these disclosures are to be made. The information likely required to be disclosed for each type of FFELP loan subject to a preferred lender arrangement may include information regarding (i) interest accrual, (ii) deferral options, (iii) information on charges such as origination and Federal default fees payable in connection with the FFELP loan, (iv) the annual and maximum amounts which may be borrowed and (v) the average amounts borrowed from the lender in the previous year by program type (e.g., undergraduate, graduate, certificate-only, etc.)
The Department of Education must prepare and disclose annually to each school participating in the Direct Loan Program similar model form loan disclosures and each such school must likewise make that information available to students, prospective students and their families (regardless of whether the school also maintains a preferred lender arrangement).
In addition, each school that has a preferred lender arrangement must comply with a federally-mandated "Code of Conduct." Essentially the Code of Conduct must prohibit the school from engaging in certain activities which could give rise to a conflict of interest for the school and/or its officers, employees or agents. The school is required to regularly train its employees, officers and agents on compliance with the Code of Conduct. The Code of Conduct must be published on the schools website.
Preferred Lender List
Any school having a preferred lender arrangement is required to compile, maintain and make available to the public, students and their families a list of the specific FFELP (and, if applicable, Private Loan) lenders the school recommends, promotes and/or endorses. The list must also contain, among other things, the following:
- a detailed explanation as to why the school entered into the preferred lender arrangement with the lender and why the terms, conditions and provisions of each type of FFELP loan (and Private Loans, if applicable) provided pursuant to the preferred lender arrangement are beneficial to students and/or their families;
- a statement that students and families need not borrow from a lender on the preferred lender list;
- certain model form loan program disclosures; and
- the method and criteria used by the school to select the lenders on the list.
In addition, the preferred lender list must be substantiated and updated annually with the results of that substantiation. There must be at least three (3) unaffiliated FFELP lenders on the list (and, if the school recommends Private Loans, at least two (2) unaffiliated Private Loan lenders). All affiliates must be identified as such.