In the September 2014 NCUA Report, Chairman Debbie Matz reiterated her support of private student lending in an aptly named article, “Credit Unions Help Students Go Back to School”. Matz correctly points out that student lending is not only a “potentially promising” opportunity for credit unions to establish long-term relationships with young adults at an early stage in their financial lives, but also gives credit unions a chance to diversify loan portfolios.
Manage your student-loan portfolio well, and your investments in education will pay off in terms of future prosperity for your members and for your credit union.
—Chairman Debbie Matz, September 2014 NCUA Report
As one would expect from the chief regulator, the chairman also shared best practices, giving credit unions a helpful road map for how to manage their student lending program. These practices align closely with many of the items outlined in the NCUA supervisory letter to credit unions (LCU2013-15) it released at the end of 2013 regarding private student lending. Check out the article below that originally ran on Feb. 10, 2014, to apprise yourself of the key takeaways:
What To Know
Considering the strong growth in credit union private student lending (PSL) over the past five years — the asset class now totals more than $2 billion — it should come as no surprise that PSL is receiving the regulatory attention that credit unions are accustomed to seeing with other well-established lending programs, such as credit cards and auto loans.
The supervisory letter is certainly required reading for credit unions who are interested in, or are currently offering a private student lending program, as well as any third parties that assist credit unions in the origination, processing, and/or servicing of these loans. In a nutshell, the letter provides an overview and background on PSLs, defines field staff responsibilities, outlines risk management expectations, and provides a questionnaire to assist field staff in conducting examinations.
Although additional regulatory requirements can bring about new challenges, the NCUA directive should provide comfort to credit unions for two important reasons:
Understanding: The supervisory letter did a thorough job of explaining the difference between private student loans and federal student loans; the risk mitigation tactics that credit unions need to understand and employ to build a successful program; and the key items credit unions must evaluate when working with a third party. Ultimately, the NCUA exhibited a strong grasp of the issues and reinforced the opportunity that exists for credit unions.
Clarity: The letter and corresponding ARIES questionnaire bring much-needed clarity to examiners and credit unions. As private student lending programs have grown over the past several years, exams could lead to challenging interactions as expectations were not clear. NCUA has now delivered a road map, giving both examiners and credit unions direction on what is expected of a credit union that offers private student lending.
Three Key Takeaways
As you’d expect, the letter and accompanying questionnaire put forth detailed guidance to help field staff examine PSL programs and analyze associated risks. Credit unions and third-party service providers should take special note of three key takeaways:
Know Your Program: A handful of credit unions manage their private student lending programs entirely on their own, but the majority of credit unions have partnered with a third party (a CUSO in many instances) to administer key aspects of their program — a smart move considering the intricacies of student lending. In these situations, it’s likely the third party performs much of the heavy lifting, including origination, processing, school certification, and servicing.
That said, it is imperative that credit unions exhibit to NCUA they have not ceded control of the program to an external party; that they fully understand the risks; and that they have a plan in place to manage the program moving forward. Key elements include:
Implementing a loan policy that is built on solid underwriting requirements, sets appropriate loan limits, and outlines potential exit strategies;
- Maintaining active internal control of the program by reviewing applications and funded loans to ensure adherence to underwriting guidelines and continually monitoring portfolio performance; and
- Complying with all applicable laws and regulations.
Know Your Portfolio: For obvious reasons, it’s imperative that loans not magically appear on credit union balance sheets and go unchecked. Credit unions should implement a comprehensive and ongoing portfolio analysis strategy to monitor performance and adjust program guidelines as needed. Analysis should come in multiple forms that capture important dynamics of private student lending, including:
- Vintage analysis — isolate a fixed group of loans.
- Multidimensional analysis — group loans by risk factors and cohorts, e.g., FICO.
- Cohort default rates — review schools for eligibility that carry high private student loan default rates specific to your portfolio.
For credit unions that are working with a third party to offer private student lending, it will be critical to work with that entity to procure the necessary reporting metrics.
Know Your Partners: Private student lending is a new asset class for most credit unions and has many distinct characteristics, such as school certification and in-school loan deferment. Like other complex lending programs — credit cards, for example — working with a third party to properly administer the program is a smart decision.
As NCUA points out in its supervisory letter, four CUSOs have been created within the past several years to help credit unions enter the private student lending market. Add in several non-CUSO organizations that are active in the space and it’s clear that most credit unions work with a third party in some capacity in order to offer a PSL program.
As is the case with any situation where a credit union works with a third party, it is imperative to perform ongoing due diligence to build a successful program and ensure third party capability. For example, does the third party:
- Have the necessary financial capacity?
- Meet legal and regulatory requirements?
- Have the ability to meet contractual obligations?
By growing private student loan balances to more than $2 billion in the past five years, credit unions have validated their ability to provide fair-value education financing solutions to students and families. Although additional regulatory scrutiny may bring new challenges, it also provides a clear road map for credit unions to move forward and play an even stronger role in an emerging market — a market that is in need of financial cooperatives that work with the best interest of the borrower in mind.
Jim Holt is the chief revenue officer and senior vice president of Credit Union Student Choice.
This article originally ran on CreditUnions.com on Feb.10, 2014.