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Community banks that expanded student lending to improve earnings are discovering why their larger brethren have backed off from the business: servicing and compliance challenges abound.
May 3 -
Educational lenders, led by Sallie Mae, are feeling a bit of a tailwind from the economy. But the industry remains on fragile footing.
February 14
Private student lenders are pushing their regulators for permission to grant more slack to recent college graduates who are having trouble repaying their debts.
Lenders hope that banking regulators will allow them to avoid taking an accounting hit when they offer forbearance to recent graduates, many of whom are either out of work or underemployed.
"There could be some additional flexibility to help these borrowers that are just out of college," says Pace Bradshaw, vice president of congressional affairs at the Consumer Bankers Association, whose members include private student lenders. "There are a lot of folks who are a few years out of college who might have a job, but it might not be what they anticipated."
The lobbying comes as banks are grappling with the fallout from student loans they originated in 2006 and 2007, when underwriting standards in that market reached their lowest levels. Only around 60% of private loans from that time had co-signers, compared with around 90% more in recent years,
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The comptroller's office and the Fed declined to comment on the March 27 letter, saying that they are still working on responses.
The FDIC provided the text of a form letter that it has sent out recently regarding private student loans. The letter does not address the banks' specific requests, but it does state that "prudent workout arrangements consistent with safe-and-sound lending practices are generally in the long-term best interest of the financial institution and the borrower."
Key players in the private student loan market include Discover Financial Services (DFS), Citigroup (NYSE: C), JPMorgan Chase (JPM), KeyCorp (Key), PNC Financial Services (PNC), SLM Corp. (SLM), SunTrust Banks (STI), U.S. Bancorp (USB) and Wells Fargo (WFC).
For the lenders, the challenge will likely be in convincing regulators that their request should not raise concerns about their safety and soundness.
The Consumer Bankers Association, which represents numerous private student lenders, is arguing that regulators should treat such loans differently than other asset classes because they have unique characteristics.
"Statistics show that people with a college education have far more earnings potential than those without a college education," the Consumer Bankers Association's letter reads. "However, for student loan borrowers, it usually takes time before a career can be launched and financial independence can be established, a far more pronounced outcome in the current economic environment."
One of the trade association's suggestions is that banks should be allowed to accept interest-only payments for the first three to four years after the borrower's graduation, as long as no principal is forgiven.
Under current rules, if a bank offers that kind of loan workout to a borrower, it risks examiners classifying the loan as a troubled debt. That accounting designation can lead a bank to set aside bigger loss reserves, which reduces earnings.
"So it shifts the key metrics on a bank balance sheet the wrong way, if you're in management," explains Daniel Wheeler, a banking lawyer at Bryan Cave LLP.
The lobbying effort by banks comes at a time when both private students and their regulators are facing pressure from congressional Democrats who want to see more loan modifications. Just a few weeks before the Consumer Bankers Association sent its letter, five Democratic senators, including Sens. Richard Durbin of Illinois, Jack Reed of Rhode Island and Elizabeth Warren of Massachusetts,
There is more than $150 billion in private student debt outstanding in the United States, according to the CFPB's report last year. That's a small fraction of the $850 billion or so in federal student loans outstanding.
The private side of the industry is quick to distinguish itself from the federal loan system, emphasizing the rapid tightening in private loan underwriting standards in the wake of the financial crisis.
Still, unemployment remains particularly high for Americans in their 20s. Last year, the unemployment rate for people ages 20 to 24 was 13.3%, and it was 8.9% for 25 to 29 year-olds, compared with an 8.1% rate for the total adult population.
It will be hard for banks to collect unpaid debt from many of today's twentysomethings, particularly if they enrolled in college in 2007 or earlier. That's the period before private lenders made it harder to get a loan without a parent's co-signature.
The private student lenders say their proposal to regulators would be beneficial for both banks and borrowers.
But consumer advocates do not sound convinced, at least not yet. They are reluctant to speak on the record, saying that they're still educating themselves on the relevant issues. But a source at one consumer group expresses concern that banks will structure student loan workouts in a way that strings borrowers along, but does not lower their ultimate obligations.
"I think we are generally in favor of modifications of private student loans, but only if they're actually going to be help to borrowers," the source says.
One of the issues that consumer advocates say they're trying to sort through is the degree to which the current regulatory guidance is handcuffing banks from offering loan modifications.
