Written by
Robert Park
The Importance of Compliance for Skill-Based Schools
In the realm of skill-based post-secondary educational programs such as welding schools or coding bootcamps, the primary focus is on equipping students with practical skills that can translate into immediate employment opportunities. However, many of these institutions overlook a critical aspect of their operation—how they manage and offer payment plans for their courses.
The Truth in Lending Act (TILA) and its implementation of Regulation Z are designed to protect consumers by requiring clear disclosure of the terms and costs of credit. While these regulations are well-known in traditional lending circles, many educational institutions are unaware that their in-house payment plans might fall under the same regulatory scrutiny.
Why Schools Should Avoid Originating Lending Products
Skill-based schools are experts in education and training, not in managing financial products. When these schools offer in-house payment plans or enter into originate-to-purchase agreements with external payment plan providers, they might inadvertently become lenders under TILA. This role brings significant regulatory obligations and risks with it, which many institutions are ill-equipped to handle.
Regulatory Compliance: TILA requires that any credit transaction involving more than four installments or including a finance charge must adhere to specific disclosure and compliance requirements. These requirements are complex and time-consuming, often necessitating a dedicated compliance team.
Consumer Protection: The Consumer Financial Protection Bureau (CFPB) enforces these regulations and can impose severe penalties for non-compliance. Schools offering payment plans must ensure they provide all necessary disclosures, handle consumer inquiries properly, and manage the loan according to TILA guidelines.
Reputation Risk: Non-compliance not only attracts regulatory penalties but can also damage the institution's reputation. Negative publicity from consumer complaints or CFPB actions can deter prospective students and harm the school's long-term viability.
Operational Burden: Managing a portfolio of loans requires robust systems for tracking payments, handling defaults, and maintaining accurate records. Most educational institutions lack the infrastructure and expertise to manage these tasks effectively.
The Test: Are You the Originator?
Many schools enter into agreements with external payment plan providers without realizing they may still be considered the originator of the loan. Here's a simple test to help schools determine their role:
1. Who Has Decision-Making Authority on Terms? If your institution has the final say on the terms of the payment plan (interest rate, payment schedule, etc.), you are likely the originator.
2. Who Sets the Credit Policy? If your school decides who gets approved or declined for the payment plan, then it is your credit policy, and you are the originator.
3. Who is Selling the Asset? If in a purchase agreement, the school is the selling party, then it is likely the originator since it owns the asset being sold.
Case Study: The Pitfalls of In-House Payment Plans
Consider the example of a coding bootcamp that decides to offer an in-house payment plan to attract more students. They set up a plan where students can pay in six monthly installments. Because this plan includes more than four installments, it falls under TILA's requirements.
The school fails to provide proper disclosures and does not handle payment processing in a compliant manner. A few months in, several students default on their payments, leading to financial strain on the institution. The CFPB receives complaints from students about unclear loan terms and excessive fees, resulting in an investigation and subsequent penalties for the school.
Conclusion
Skill-based educational programs must recognize the regulatory implications of offering in-house payment plans. Compliance with TILA is not optional, and the risks of non-compliance are significant. By partnering with a specialized service like Fortify, schools can offer safe, compliant financing options, allowing them to focus on their core mission—providing quality education and training.
Managing Director at Fortify
