Audit Report

OIG-17-008

SAFETY AND SOUNDNESS: Financial Institutions’ Private 

Student Lending Activities

November 14, 2016

Office of

Inspector General

Department of the Treasury
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Contents

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page i 

Audit Report ................................................................................................ 1 

Background ............................................................................................... 2 

Audit Results .............................................................................................. 4 

 OCC Effectively Supervised Financial Institutions’ Private Student 

 Lending Activities............................................................................... 4 

Appendices

Appendix 1: Objective, Scope, and Methodology........................................ 8 

Appendix 2: Major Contributors to This Report .......................................... 10 

Appendix 3: Report Distribution ............................................................... 11 

Abbreviations

Bulletin 

2000-20 Bulletin 2000-20: Uniform Retail Credit Classification and 

Account Management Policy 

MRA matter requiring attention

OCC Office of the Comptroller of the Currency
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page ii

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OIG Audit

Report

The Department of the Treasury

Office of Inspector General

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 1 

November 14, 2016

Thomas J. Curry

Comptroller of the Currency

This report presents the results of our audit of the Office of the 

Comptroller of the Currency’s (OCC) supervision of financial 

institutions’ higher education student loan lending activities. 

Student loan debt stood at $1.36 trillion as of March 2016, and is 

second only to mortgage debt as the largest form of consumer debt

in the United States. The Federal Government backs approximately 

$1.26 trillion or 92.5 percent of outstanding student loans. The 

remaining 7.5 percent of the higher education student loan market

is made up of about $102 billion of private student loans1

. While 

private student loans have a small share of the total outstanding 

student debt, they are an important part of the market given their 

disproportionate use by high-debt borrowers. 

Our audit objective was to assess the adequacy and effectiveness 

of OCC’s supervision over financial institutions’ risk management 

controls and practices in place to mitigate losses in their private 

student loan portfolios. To accomplish our objective, we 

interviewed OCC personnel involved in supervising these activities 

and reviewed relevant OCC documentation. The scope of our audit 

ranged from January 1, 2007 through December 31, 2013. We 

conducted our fieldwork between August 2014 and July 2016. 

Appendix 1 contains a detailed description of our objective, scope, 

and methodology. 

In brief, we concluded that OCC effectively supervised financial 

institutions’ private student lending activities for the banks included 

in our audit sample. Specifically, we reviewed 3 out of 8 large 

banks and 3 out of 8 mid-size and community banks under OCC’s 

 

1 Private student loans are consumer loans offered to borrowers to fund undergraduate, graduate, and 

other forms of postsecondary education. 
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 2

supervision that had private student loan portfolios during the 2007 

through 2013 timeframe. For 4 out of the 6 banks sampled, OCC 

conducted specific procedures related to the banks’ private student 

loan portfolios. Based on our review, we found that OCC 

determined that the four banks complied with applicable guidance. 

In addition, OCC considered all matters requiring attention (MRA)

relating to the banks’ private student loan portfolios resolved by 

the banks’ corrective actions. For the remaining two banks

sampled, OCC assessed the retail credit portfolios as a whole and 

did not identify MRAs related to the banks’ private student loan 

portfolios. 

We are not making any recommendations to OCC as a result of our 

audit. We provided a draft of this report to OCC management for its 

review. OCC reviewed the report and had no comments.

Background

After 2008, the financial crisis, high unemployment, weaker loan 

performance, and reduced availability of funding all contributed to a 

lower market share in the private student loan market. Of the 

borrowers graduating around the time of the financial crisis with 

over $40,000 in student debt, 81 percent used private student 

loans. The unemployment rate for private student loan borrowers in 

2009 was 16 percent, causing default rates to spike significantly. 

Large, mid-size, and community banks have a long history of 

participation as lenders and servicers of Federal and private student 

lending programs. Large bank participation in the private student 

lending market is highly concentrated, with only eight 

OCC-supervised lenders holding portfolios of $500 million or more. 

Of the eight banks, four have ceased making new private student 

loans since 2008 due primarily to concerns about portfolio 

performance and liquidity. For mid-size and community banks, 

there are eight banks with outstanding private student loans in 

their portfolio, however, only two are still originating private 

student loans. 

Banks that offer student loans are encouraged by OCC to work 

with troubled borrowers, offering prudent forbearance, workout, 

and modification programs. Banks are also required to ensure the 
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 3

integrity of their books and records by reporting the volume and 

nature of transactions accurately. These options and 

responsibilities are not mutually exclusive, and together promote a 

safe and sound banking system. OCC’s Bulletin 2000-20: Uniform 

Retail Credit Classification and Account Management 

Policy (Bulletin 2000-20), issued June 12, 2000, provides 

examiners with general guidance regarding loan extensions, 

deferrals, renewals, and rewrites; however, this guidance does not 

specifically address private student loan workout and forbearance 

practices. To address those issues, OCC issued supplemental 

guidance2 that interprets Bulletin 2000-20 in the context of private 

student lending and describes OCC’s minimum expectations for 

managing forbearance, workout, and modification programs. 

Responsibilities of OCC

OCC performs safety and soundness examinations of banks on an 

ongoing basis. For supervisory purposes, OCC designates each 

bank as a large, mid-size, or community bank. Large and mid-size 

banks are supervised through OCC’s headquarters office, which 

follows a supervisory process detailed in its Large Bank Supervision 

booklet.

3 Examinations are performed on a 12-month supervisory 

cycle. Community banks are supervised under the oversight of 

district deputy comptrollers, who follow a supervisory process 

detailed in the Community Bank Supervision booklet.

4 In smaller 

National bank affiliates, community banks, and Federal branches 

and agencies of foreign banks, there is flexibility in both when and 

how examination activities are performed during the 12 or 

18-month supervisory cycle. 

 

2 Chief National Bank Examiner Policy Guidance 2010-02: Policy Interpretation: OCC 

Bulletin 2000-20 - Application to Private Student Lending issued Aug. 4, 2010. 3 Comptroller’s Handbook: Large Bank Supervision (Jan. 2010). 4 Comptroller’s Handbook: Community Bank Supervision (Jan. 2010).
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 4

Audit Results 

OCC Effectively Supervised Financial Institutions’ Private 

Student Lending Activities 

OCC employs a risk-based supervisory philosophy focused on 

evaluating risk, identifying problems, and ensuring banks take 

appropriate corrective action. As part of this approach, examiners 

can tailor examination activities to the level of risk within any given 

examination area. OCC determined that the overall risk of private 

student lending activities is low, primarily because of the size and 

performance of the portfolios. However, according to OCC officials, 

when concerns arise relating to these activities at a specific bank, 

OCC expands its procedures as part of its safety and soundness 

examinations. Based on our review of OCC’s risk assessment and 

documentation, we concluded that OCC performed effective

ongoing supervision of financial institutions’ private student lending 

activities.

We sampled 3 out of the 8 large banks and 3 out of the 8 mid-size 

and community banks OCC supervises that had private student loan 

portfolios during the 2007 through 2013 timeframe. We selected 

banks that were still originating private student loans and banks 

that were no longer originating these types of loans. Our sample 

also included banks with smaller and larger private student loan 

portfolios. We found that OCC performed effective ongoing 

supervision procedures for the six banks in our sample. Because we 

used a non-statistical sampling technique to select the banks, we 

did not project the results of our testing to the total universe of 

banks that had private student loan portfolios.

More specifically, for 4 out of the 6 banks, OCC conducted specific 

procedures relating to the banks’ private student loan portfolios

during full scope examinations, targeted examinations, and ongoing 

supervision. For example, OCC reviewed the banks’ management 

information systems and independent assessments and determined

that the banks complied with Bulletin 2000-20, which provides

examiners with general guidance regarding extensions, deferrals, 

renewals, and rewrites of banks’ retail loans. As mentioned above, 

OCC issued supplemental guidance that interprets Bulletin 2000-20 
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 5

in the context of private student lending and describes OCC’s 

minimum expectations for managing forbearance, workout, and 

modification programs. The supplemental guidance provides some 

examples of practices and policies that generally would be 

acceptable as part of a controlled and documented program. These 

examples included grace and extended grace periods, loan 

modifications, and in-school deferments. 

Other areas for these four banks’ private student loan portfolios

that OCC assessed during examinations included credit risk 

management, underwriting, loan collection, loss mitigation, and loan 

forbearance. For 3 out of the 4 banks, OCC identified MRAs relating

to the banks’ private student loan portfolios. The MRAs addressed 

issues such as liberal forbearance practices, administration of 

forbearance policies and practices, noncompliance with guidance, 

and insufficient board and management reports. However, based on 

our review of subsequent reports of examinations, compliance with 

supervisory letters, and examiner workpapers, we found that OCC 

considered the corrective actions taken by the banks to have 

resolved the MRAs.

For the remaining two banks in our sample, during its examinations 

OCC assessed retail credit portfolios, which includes private student 

loans, as a whole. An OCC official stated that the student loan 

portfolios for these banks were considered low risk because of the 

asset size; and therefore, there were no specific procedures 

performed relating to the private student loan portfolios. According 

to OCC’s Handbook for Bank Supervision Process,

5 the type, depth, 

and frequency of activities undertaken should correspond to the 

level of risk in each bank and statutory requirements. However, the

handbook further states that examiners should employ some 

periodic baseline transaction testing to validate key control 

functions and systems, even if those areas are considered low risk.

An OCC official told us that periodic baseline testing includes 

conducting sufficient review of the activity in order to confirm the 

level of risk the area represents. The official further stated that the 

frequency of reviews of a particular activity is determined as part of 

the supervisory strategy based on the risk profile. In addition, 

certain activities can be insignificant and not specifically addressed 

 

5 Comptroller’s Handbook: Bank Supervision Process (Sept. 2007).
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 6

in the risk profile or strategy. In these circumstances, OCC relies on 

internal exception reports and audit reports to monitor activity in 

these areas. That said, review of the banks’ internal documents 

could prompt OCC examiners to review the student loan portfolio if 

concerns arise.

Specifically, for the two banks in our sample, OCC reviewed 

internal bank documents, including internal audit reports, 

management information systems, enterprise risk management 

systems, credit review reports, and board meeting minutes. In 

addition, OCC did not identify any MRAs related to the banks’

private student loan portfolios during its examinations. As a result 

of its review of these internal documents and systems and its 

examinations, OCC did not expand its procedures relating to the 

banks’ student loan portfolios, nor did it assess compliance with 

Bulletin 2000-20 or the supplemental guidance. According to an 

OCC official, there is no statutory or explicit policy requirement for 

examiners to test compliance with the bulletin and the supplemental 

guidance unless there is more than a nominal volume of retail 

lending.

During the 2007 through 2013 timeframe, OCC examiners followed 

the Retail Lending Examination Procedures Handbook,

6

Bulletin 2000-20, and the Bulletin 2000-20 supplemental guidance, 

which all relate to retail lending as a whole. We noted that there 

was limited specific guidance relating to student lending. However, 

subsequent to the timeframe covered by the scope of our audit, 

OCC issued a Student Lending Handbook7 for OCC examiners to 

use in connection with their examination and supervision of National 

banks and Federal savings associations engaged in private student 

lending. The handbook provides (1) guidance to examiners on 

assessing the quantity of risk associated with private student 

lending and the quality of student lending risk management and 

(2) information on unique aspects of student loans and industry 

practices. Additionally, it highlights the differences between Federal 

student loans and private student loans. 

 

6 Comptroller’s Handbook: Retail Lending Examination Procedures (Dec. 2004). 7 Comptroller’s Handbook: Student Lending (May 2016).
Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 7

We provided a draft of this report to OCC management. OCC 

reviewed the report and had no comments.

* * * * *

We appreciate the courtesies and cooperation provided to our staff 

during the audit. If you wish to discuss the report, you may 

contact me at (202) 927-8783 or Alicia Weber, Audit Manager, at 

(202) 927-5811. Major contributors to this report are listed in 

Appendix 2.

Katherine E. Johnson

Audit Director
Appendix 1 

Objective, Scope, and Methodology 

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 8 

Appendix 1: Objectives, Scope, and Methodology

The objective of this audit was to assess the adequacy and 

effectiveness of the Office of the Comptroller of the 

Currency’s (OCC) supervision over financial institutions’ risk 

management controls and practices in place to mitigate losses in 

their private student loan portfolios. The scope of our audit ranged

from January 1, 2007 through December 31, 2013. We conducted

our fieldwork in Washington, D.C. between August 2014 and July

2016. 

To accomplish our objective, we performed the following 

procedures.

• We reviewed OCC’s internal supervisory guidance for 

examiners as it relates to National bank and Federal savings 

association private student lending activities. 

• We reviewed OCC’s Comptroller’s Handbook. 

• We selected a sample of 3 out of 8 large banks, and 3 out of 

8 mid-size and community banks that had a private student 

loan portfolio during the scope of our audit. We selected 

banks that were still originating private student loans and 

banks that were no longer originating these types of loans, 

as well as banks with smaller and larger portfolios. The 

sample selected was non-statistical because the universe 

was determined to be low risk. Non-statistical sample results

were not projected to the total universe. 

• We reviewed relevant supervisory files and records from 

2007 through 2013, for our sample of large, mid-size, and 

community banks, including reports of examination, 

supervisory strategies, core assessments, supervisory 

letters, conclusion memos, formal and informal enforcement 

actions and other documents supporting OCC’s supervision 

and monitoring of private student loan portfolios. 

• We interviewed OCC officials and examiners.

We conducted this performance audit in accordance with generally 

accepted government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and 
Appendix 1

Objective, Scope, and Methodology 

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 9

conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objective. 
Appendix 2 

Major Contributors to This Report

______________________________________________________________________________________________

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 10 

Appendix 3: Major Contributors to This Report

Alicia Weber, Audit Manager

Khuyen Tran, Auditor-in-Charge

Daniel Gerges, Auditor

Kajuana Britt, Program Analyst 

April Ellison, Referencer

Dionne Smith, Referencer
Appendix 3 

Report Distribution

_____________________________________________________________________________________________

Financial Institutions’ Private Student Lending Activities (OIG-17-008) Page 11 

Appendix 4: Report Distribution

Department of the Treasury

Deputy Secretary

Office of Strategic Planning and Performance Improvement

Office of the Deputy Chief Financial Officer, Risk and Control

Group 

Office of the Comptroller of the Currency 

Comptroller of the Currency

Liaison Officer 

Office of Management and Budget

OIG Budget Examiner
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