Three Takeaways from Senate Panel's Private Student Loan Hearing

WASHINGTON — The Senate Banking Committee pressed regulators about growing concerns with the student debt market Tuesday, especially whether lenders are doing enough to modify or delay repayment of troubled student loans.

Lawmakers challenged several aspects of the market and regulators' oversight of it. They picked up where the Consumer Financial Protection Bureau had left off in a report last month that urged private lenders and the government to help lower loan payments.

Regulators have been under fire from multiple directions. Some lenders have been pushing them to provide more latitude with accounting practices when they offer forbearance to recent graduates who are unemployed or underemployed.

The hearing was held a day after Sen. Elizabeth Warren, D-Mass., raised concerns about financing that the Federal Home Loan Bank of Des Moines has provided to Sallie Mae, a major player in the private student loans market.

Below are three takeaways from Tuesday's hearing.

Regulators push back on lenders' bid for more flexibility.

Officials from the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. expressed little interest in providing lenders more leeway in their bookkeeping if they defer or otherwise modify existing student loans for unemployed borrowers.

"I've heard from many lenders that they are willing to offer more relief options," said Sen. Mike Crapo of Idaho, the panel's top Republican. "However, if the lender does modify a student loan then they have to account properly for modifications on their books under [generally accepted accounting principles] … and a high number of modifications could signal to the traditional banking regulators that the lender's loan portfolio is not safe or sound. How can lenders offer loan modifications without running afoul of the safety and soundness and accounting standards that they now must qualify under or must pursue?"

But regulators argued that they already encourage banks to work with borrowers who might be facing difficulty paying.

"Banks do have the flexibility for offering a number of programs, but as we did say, they are responsible for reporting those transactions on their balance sheet," said John Lyons, senior deputy comptroller for bank supervisions policy and chief national bank examiner at the OCC.

Doreen Eberley, director of risk management supervision at the FDIC, offered a similar view.

"When you have a troubled debt restructuring, you have a troubled debt to begin with," she said. "By definition, a troubled debt restructuring indicates that the bank is working with the borrower, taking a bad situation and trying to find a way out. But it is important that our examiners take a look on the back end … of an institution's results with their troubled debt restructurings, their modifications, to make sure their modification programs are reasonable and are ending up in a result that is good for the consumer and for the bank."

Rohit Chopra, student loan ombudsman at the CFPB, argued that banks and servicers of student debt asset-backed securities could be doing more to work with borrowers.

"There is certainly activity to restructure certain loans within certain players that service asset-backed securities whose underlying asset is private student loans. But I think in general the activity of modifying or restructuring debt that may be in the best interest of the debt investor and the borrower is troublingly low," he said.

Brown unveils student loan refi bill.

Sen. Sherrod Brown, D-Ohio, asked regulators about a new bill he introduced Tuesday with three other Democrats that would authorize the Treasury Department, in consultation with other agencies, to establish "creative solutions" to help make refinancing opportunities more available to those with student loan debt.

Brown pressed regulators for more information about why banks aren't already offering refinancing options on student debt, like many have started to do in the housing market. Regulators noted there are likely several factors involved, and they seemed open to the idea of introducing more refinance opportunities in the student loan market.

"There's nothing in regulatory policy or practice that prohibits borrowers from refinancing their student debt," Eberley said. "None of the institutions that the FDIC supervises uses prepayment penalties or anything that would prevent a borrower from actually engaging in a refinance. Part of it may be that the interest rates relative to other unsecured consumer debt available through banks is actually priced a little higher than student debt is, so that may be one factor."

She added: "The proposal is very interesting. It's something we'd be interesting in working with you on."

CFPB's Chopra added that banks may lack enough employees to deal with troubled student loans as they continue to work through the backlog of mortgage defaults.

"Senior management is still addressing legacy issues of troubled portfolios. … There [also] are issues with the flexibility and agility of their [informational technology] systems," said Chopra, adding that the proposal seemed "worthy of very careful consideration."

Warren continues her charge against Sallie Mae.

The Massachusetts Democrat again picked up on her investigation into why the Des Moines Federal Home Loan Bank opened an $8.5 billion line of credit of credit with Sallie Mae. Regulators largely demurred on discussing the matter, noting that it was out of their jurisdiction.

"The Federal Home Loan banks were established to expand homeownership, but now it seems they are undermining that goal by helping finance more student loan debt," Warren said, building on a letter she sent to the Federal Housing Finance Agency on Monday. "In addition, the [Home Loan banks] get extraordinarily cheap access to capital thanks to government sponsorship, and that cheap capital was provided to Sallie Mae."

Warren also followed up her letter yesterday with a second directly to Sallie Mae on Tuesday, asking for more details from Sallie Mae about its use of the line of credit.

Sallie Mae officials said Tuesday that the credit line is tied to its legacy portfolio of government-backed student loans, a business it exited in 2010. "Since the beginning of 2006, virtually all of our private education loans have been originated and funded by Sallie Mae Bank, a Utah industrial bank subsidiary … ," a Sallie Mae spokeswoman said. "Our utilization of the FHLB facility has and will continue to be to facilitate the efficient long-term capital markets funding for previously originated FFELP loans."

Sallie recently said it plans to split into two publicly traded companies: its $195 billion of private and federally backed student loans under management and Sallie Mae Bank.

The Des Moines Home Loan Bank said it began providing liquidity for federally guaranteed student loans of one of its members in 1999, and that a decade later — after the liquidity crunch hit — it expanded the use of such loans as collateral for advances to more member banks. Regulators authorized the effort, and other Home Loan banks accept such loans as collateral, it said.

"FHLB Des Moines does not accept private student loans as collateral," it said.