U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

82–364 PDF 2014

S. HRG. 113–59

PRIVATE STUDENT LOANS: REGULATORY

PERSPECTIVES

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

FIRST SESSION

ON

EXAMINING THE SUPERVISION OF PRIVATE STUDENT LENDERS BY 

FEDERAL FINANCIAL REGULATORS AND WHAT ACTIONS LENDERS 

MAY TAKE TO WORK WITH BORROWERS TO AVOID DEFAULT DURING 

PERIODS OF HARDSHIP

JUNE 25, 2013

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

LAURA SWANSON, Deputy Staff Director 

JEANETTE QUICK, Counsel 

PHIL RUDD, Legislative Assistant

GREG DEAN, Republican Chief Counsel 

JELENA MCWILLIAMS, Republican Senior Counsel 

JARED SAWYER, Republican Counsel

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)

CONTENTS

TUESDAY, JUNE 25, 2013

Page

Opening statement of Chairman Johnson ............................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2

Senator Reed ..................................................................................................... 3

Senator Brown .................................................................................................. 4

Senator Heitkamp ............................................................................................ 5

WITNESSES 

Rohit Chopra, Assistant Director and Student Loan Ombudsman, Consumer 

Financial Protection Bureau ............................................................................... 6

Prepared statement .......................................................................................... 28

Response to written questions of: 

Chairman Johnson .................................................................................... 49

Senator Crapo ............................................................................................ 53

Senator Brown ........................................................................................... 55

Senator Manchin ....................................................................................... 60

John C. Lyons, Senior Deputy Comptroller, Bank Supervision Policy and 

Chief National Bank Examiner, Office of the Comptroller of the Currency ... 8

Prepared statement .......................................................................................... 35

Response to written questions of: 

Chairman Johnson .................................................................................... 62

Senator Crapo ............................................................................................ 66

Senator Brown ........................................................................................... 67

Senator Manchin ....................................................................................... 77

Todd Vermilyea, Senior Associate Director, Division of Banking Supervision 

and Regulation, Board of Governors of the Federal Reserve System .............. 9

Prepared statement .......................................................................................... 42

Response to written questions of: 

Chairman Johnson .................................................................................... 78

Senator Crapo ............................................................................................ 80

Senator Brown ........................................................................................... 81

Senator Manchin ....................................................................................... 88

Doreen R. Eberley, Director of Risk Management Supervision, Federal Deposit Insurance Corporation ................................................................................ 11

Prepared statement .......................................................................................... 44

Response to written questions of: 

Chairman Johnson .................................................................................... 89

Senator Crapo ............................................................................................ 92

Senator Brown ........................................................................................... 93

Senator Manchin ....................................................................................... 102

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by Consumer Bankers Association ........................................... 104

Letter submitted by The Financial Services Roundtable ..................................... 107

(III)

(1)

PRIVATE STUDENT LOANS: REGULATORY 

PERSPECTIVES 

TUESDAY, JUNE 25, 2013

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Good morning. I call this hearing to order. 

For many Americans, a college degree is an important goal that 

can mean a lifetime of better earnings and opportunities. However, 

this goal has come at a higher price: the cost of education has risen 

significantly while the job market has weakened, straining a generation of Americans seeking to establish themselves in the broader 

economy. Student loan debt now stands at over $1 trillion and is 

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

country. Student loan balances have almost tripled since 2004, and 

an alarming one-third of borrowers are delinquent on their loans. 

Last year, nearly eight out of ten students in my home State of 

South Dakota graduated with student loan debt. 

These rising debts reach beyond individuals and impact many 

sectors of the economy. High levels of student loans mean many 

put off buying a home or never become homeowners at all. Student 

loans make it harder to start small businesses. Student loan payments often take priority over retirement savings. And rising student loan balances in States like South Dakota make it harder for 

graduates to stay in rural communities. 

While most student loans are Federal, private loans make up $150 billion of the market. Private lenders allow many students to 

attend college who would not otherwise be able to afford it and may 

sometimes offer better terms than Federal loans. However, nearly 

1 million borrowers are in default on their private student loans. 

And while Federal loans offer flexible relief during periods of hardship, most private student lenders do not offer the same options for 

struggling graduates. 

Our witnesses today represent the Federal agencies responsible 

for ensuring that lenders balance sound lending principles with appropriate measures to avoid default. I look forward to hearing your 

testimony on guidance you provide to lenders and what limitations 

lenders may face in providing relief. The CFPB has been very active in private student loans, recently publishing a proposal to 

2

oversee large student loan servicers and a report on affordable private student loan repayment. I am interested to hear from the 

CFPB on both of these efforts. 

Next week, on July 1, millions of students face a doubling of the 

interest rates on some Federal loans. I urge the regulators to be 

vigilant in monitoring growth in the private student loan market 

that may result from changes to the Federal student loan market. 

It is critical that regulators respond quickly to marketplace 

changes and that consumer protections are safeguarded when demand rises. 

With that, I turn now to Ranking Member Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman, for holding this hearing today. 

Student loans play a vital role in the lives of many students and 

their families across this country. The loans help maintain a strong 

and educated workforce by ensuring that all Americans can have 

access to higher education regardless of their financial circumstances. 

Recently the New York Federal Reserve reported that student 

loan debt has risen to become the second largest household debt 

burden behind mortgages. The total outstanding student debt was 

$986 billion in the first quarter of 2013. Just 9 years ago, that 

number was $240 billion. 

Several factors have contributed to this student debt explosion of 

the last decade, including college tuition rates that have significantly outpaced inflation and a record number of students and employees opting for school in light of the very tight job prospects in 

the market. 

When discussing the student loan market, there is considerable 

confusion as to who is making the loans and how the loans are 

made. According to the CFPB, 85 percent of the total outstanding 

student debt is in Federal student loans, offered through the Department of Education. That is roughly $838 billion. 

Private student loans, the subject of this hearing, make up 15 

percent of the outstanding debt, and that market is expected to 

shrink even further. A recent Standard & Poor’s report noted that 

new originations for Federal loans occupy roughly 94 percent of the 

market while private lenders originate the remaining 6 percent. 

Much of the contraction in the private lending market is due to 

the restructuring of the Department of Education loan programs in 

2010 to virtually eliminate private lenders. Other important considerations include the fact that Federal loans default on average 

three times as often as private loans. Federal loans do not undergo 

an underwriting process, and there is almost limitless spending for 

borrowers who take out Federal loans for graduate school. 

With respect to private student loans, one concern I often hear 

is that banks do not offer enough borrower relief options. In the 

testimony submitted today, it appears that prudential banking regulators and the CFPB are offering conflicting guidance on borrower 

relief options. The CFPB is pressing for more borrower relief; however, the prudential banking regulators are concerned with how 

3

modified loans affect a bank’s safety and soundness as well as 

whether they violate accounting rules. 

Lenders have stepped up and expressed their willingness to help 

more troubled borrowers and cite that loan modifications may benefit both borrowers and lenders in certain circumstances. Today I 

hope we can get a better understanding of the obstacles that face 

us directly from the regulators. 

I also would like to hear about how the regulators are working 

together to resolve this conundrum of providing student loan relief 

while not endangering the safety and soundness of the system. 

Finally, since the vast majority of student loans are made by the 

Department of Education, we need to acknowledge that the Committee on Health, Education, Labor, and Pensions has a critical 

role in determining whether the Department of Education’s student 

loan programs are helping the situation or binding students and 

their families into too much debt. I know all of my Senate colleagues want to find a solution to ease the burden on our young 

people. 

Mr. Chairman, before we conclude, we received a letter from the 

Consumer Bankers Association and a letter from the Financial 

Services Roundtable regarding student loan issues, and I would request that both letters be entered into the record. 

Chairman JOHNSON. Without objection. 

Senator CRAPO. Thank you. 

Chairman JOHNSON. Thank you, Senator Crapo. 

Are there any other Members who wish to make a brief opening 

statement? 

Senator REED. Mr. Chairman? 

Chairman JOHNSON. Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you, Mr. Chairman. Thank you very much 

for holding this hearing, and we are reaching a tipping point with 

student loan debt, as you and Senator Crapo have illustrated, particularly as we approach July 1st with the potential doubling of 

loans on students who have the most need in our country. 

Student loan debt, as both my colleagues have indicated, is really 

the next big financial crisis, and it could have a lasting impact on 

our economic growth and the prospects for the coming generation. 

We have seen student loan debt rise throughout the recession even 

as other household debt has fallen. And student loan debt, as my 

colleagues have indicated, is now the second largest outstanding 

balance after mortgage debt with respect to households. And this 

is affecting the life trajectory of generations of Americans, the 

young people today and, if we do not do anything, even their children. 

Our students are caught between a rock and a hard place. The 

job market increasingly demands postsecondary education. At the 

same time, college is getting much more expensive. There has been 

a major cost shift in higher education. Costs have gone up. State 

support for public institutions has gone down, and as a result, tuitions are rising—in fact, exploding. 

In the Federal student aid program, 68 percent of Federal student aid is in the form of loans, and I have the privilege of holding 

4

the seat held by Claiborne Pell. When Senator Pell introduced the 

Pell grants back then, the mix was much different. In fact, I believe it was 80 percent grants and 20 percent loans, and we have 

flipped, turned the whole thing over on its head. In fact, many of 

my contemporaries were the beneficiaries of that wonderful 80 percent grant to 20 percent loan effort, and we are not keeping up 

with that at the Federal level. 

We have to keep these loans affordable. Low interest rates is 

part of the solution, and, again, it is distressing many of us that 

we are on the precipice of doubling the subsidized rate from 3.4 to 

6.8 percent in just a few days. 

Ironically, as we increase the rates—and my colleague from Massachusetts Senator Warren has pointed this out again and again—

the Federal Government is making about $50 billion this year on 

their loans and is expected to make $180 billion between now and 

2023. So there is a lot of money. It is just not getting to the young 

people that need it and their families. 

We have got to work on both sides, and we have to recognize that 

we have to be back where we were, I believe, in the 1950s, 1960s, 

and the 1970s when we were actually using Federal resources to 

help people get to college, not using students to pay down the debt. 

And many of my colleagues are suggesting that we do precisely the 

latter, not the former. 

So I look forward to today’s testimony and the broader issue of 

private loans, but we really have a crisis that is before us. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Is there anyone else? Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. I appreciate Senator 

Reed’s words. My wife is the daughter of a utility plant maintenance worker and a home care worker, and she graduated, first in 

her family to go to college, from Kent State 30—I will not say how 

many years ago—30-plus years ago with a student debt of about 

$1,200. I think that tells the story that he mentioned. 

Thank you to the witnesses and thanks, Mr. Chairman and Senator Crapo, for holding this hearing. 

In November 2009, I introduced legislation to create a private 

education loan ombudsman. These provisions were part of DoddFrank in 2010. Some 3–1/2 years later, it is gratifying to see the 

great work that CFPB’s first Student Loan Ombudsman Mr. 

Chopra is doing with this office—thank you for that—speaking out 

about issues, helping borrowers get real relief. 

About a year ago, my Subcommittee held a hearing on private 

student loans where Mr. Chopra and I discussed the discrepancy 

between the low rates at which banks borrow and the interest 

rates that they charge students, something that Senator Reed and 

Senator Warren both talked about. For example, the Nation’s largest student loan lender borrows at an average rate of 1.4 or 1.5 

percent, while the average private student loan borrower is paying 

more than 5 times that amount, some 7.9 percent. Mr. Chopra’s 

testimony then noted and now notes that the increase in private 

student loan lenders’ interest margins ‘‘may demonstrate a lack of 

5

competition, as well as an opportunity for more efficient private 

capital participation.’’

The president of the Nation’s largest student lender said in January the margins here are really a function of alternative financing 

opportunities. We are making loans to parents and students, family 

education loans. Their alternatives are fairly limited. 

Today I am proud to announce that my fellow Member of the 

Banking Committee Senator Heitkamp and I, along with Senators 

Durbin and Murray, are introducing legislation to create opportunities for borrowers to refinance their private student loans. The Refinancing Education Funding to Invest for the Future Act, or REFI 

for the Future, would authorize the Treasury Secretary, in consultation with the Education Secretary and the CFPB, to create a 

program to encourage competition and spur refinancing of private 

student loans. The most indebted student borrowers are the most 

likely to have private student loans. Of the $1 trillion that Senator 

Crapo mentioned in student loan debt, only about 15 percent, but 

that is still $150 billion, is in the private student loan market. It 

is something we can do something about. Senator Heitkamp’s and 

my legislation will help to do that. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Heitkamp. 

STATEMENT OF SENATOR HEIDI HEITKAMP 

Senator HEITKAMP. You know, a couple months ago, I hosted a 

housing tour across North Dakota. We have an acute shortage and 

affordability issues due to our economy as things grow. At the 

roundtables that I conducted, one issue came up over and over and 

over again, which is that young people cannot get entry into the 

market because they are not bankable. And they are not bankable 

because they are carrying thousands and thousands and thousands 

of dollars of student debt. And families talk to us every day and 

say, ‘‘How come at a time of record low interest rates we are paying 

8, 9, 10 percent on our student debt?’’

We cannot continue this. And we know from massive credit card 

interest that if we do not figure out a way, they will continue to 

pay the interest and never get out of the principal debt and never 

be bankable, never be able to get a loan to build a business, be entrepreneurial. 

This is crushing the future of our economy if we do not deal with 

it, and this is a small point, obviously not the big part of student 

loan issues. We are concerned about the rates. But we are also concerned about giving those people with private loans an opportunity 

to refinance, just like you would if you had a mortgage. 

And so I want to applaud Senator Brown for the work that he 

has done. I am proud to be on this, and I want to thank the Chairman and the Ranking Member for holding this hearing. This is an 

issue that will not go away. It is an issue that we will continue to 

work on until we know that we have secured a viable future for 

American families and they will not be buried under with student 

debt. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you all. 

6

I want to remind my colleagues that the record will be open for 

the next 7 days for opening statements and any other materials 

you would like to submit. 

Now I will introduce the members of the panel. 

Rohit Chopra—did I pronounce that correctly? 

Mr. CHOPRA. Close enough. 

[Laughter.] 

Chairman JOHNSON. He is the Student Loan Ombudsman at the 

Consumer Financial Protection Bureau. 

John Lyons is the Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner at the Office of 

the Comptroller of the Currency. 

Todd Vermilyea is Senior Associate Director for Banking Supervision and Regulation at the Board of Governors of the Federal Reserve System. 

Doreen Eberley is the Director of Risk Management Supervision 

at the Federal Deposit Insurance Corporation. 

I thank all of you again for being here today. I would like to ask 

the witnesses to please keep your remarks to 5 minutes. Your full 

written statements will be included in the hearing record. 

Mr. Chopra, you may proceed. 

STATEMENT OF ROHIT CHOPRA, ASSISTANT DIRECTOR AND 

STUDENT LOAN OMBUDSMAN, CONSUMER FINANCIAL PROTECTION BUREAU 

Mr. CHOPRA. Thank you, Mr. Chairman, Ranking Member Crapo, 

and Members of the Committee, for the opportunity to testify 

today. 

It is clear that many in Congress are keenly interested in finding 

solutions to some of the troubling trends in the student loan market. Understandably, many policymakers across the country are 

seeking to address some of the underlying drivers of growing student loan debt, including the rising cost of tuition. However, it will 

also be prudent to address the large pool of existing debt owed by 

millions of Americans. 

The Consumer Financial Protection Bureau estimates that outstanding student loan debt is approaching $1.2 trillion. While most 

of the market consists of Federal loans, 81 percent of our high-debt 

undergraduate borrowers used private student loans. And like a 

business, a consumer’s ability to manage cash-flow is absolutely 

critical to his or her financial health. 

Private student loan providers generally do not offer this cashflow management option, which is available to borrowers of Federal 

student loans. And for private loan borrowers who default early in 

their lives, the negative impact on their credit report can make it 

even more difficult to pass employment verification checks or ever 

reach their dream of buying a home. 

While risks in the student loan market do not appear to jeopardize the solvency of the financial system, the difficulties borrowers face when trying to manage cash-flow may have a broader 

impact on the economy and society. We recently published a report 

on what we heard from the public about these potential impacts. 

The National Association of Home Builders wrote to the Bureau 

about the relatively low share of first-time homebuyers in the marVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\82364.TXT SHERYL
7

ket compared to historical levels and that student debt can ‘‘impair 

the ability of recent college graduates to qualify for a loan.’’ And 

when young workers are putting large portions of their income toward student loan payments, they are less able to stash away cash 

for that first downpayment. 

In submissions by coalitions of small businesses, groups cited a 

number of factors about the threat of student debt. For many 

young entrepreneurs, it is critical to invest capital to develop ideas, 

market products, and create jobs. But high student debt burdens 

require these individuals to take more cash out of their business 

so that they can make monthly student loan payments. 

The American Medical Association wrote that high debt burdens 

can impact the career choice of new doctors, leading some to abandon caring for the elderly or children for more lucrative specialties. 

Student debt can also impact the availability of other professions 

critical to the livelihoods of rural communities. According to an annual survey, 89 percent of veterinary students are graduating with 

debt, averaging over $150,000 per borrower. Veterinarians encumbered with high debt burdens may be unable to make ends meet 

in a dairy medicine or livestock management practice in rural 

areas. 

Classroom teachers submitted letters detailing the impact of private student loan debt, which do not always offer the income-based 

repayment options or loan forgiveness programs. 

When there was concern about the domino effect of problems in 

the capital markets, policymakers took action. In 2008, distress in 

the credit markets led the Federal Government to enact policies to 

assist financial institutions to raise capital for student loan 

issuance. While programs like the ECASLA and TALF were primarily designed to assist financial institutions to originate more 

loans, understanding them might be useful for policymakers seeking to address some of the market failures faced in this market. 

In our recent report on student loan affordability, we discussed 

a number of ideas put forth by the public. I want to briefly note 

two that might increase private capital participation and market 

efficiency. 

The first is spurring loan restructuring opportunities. Most private student loans have few options available for alternative repayment plans. Policymakers might look to provide a path forward for 

borrowers in distress, creating a transparent step-by-step process 

that leads to affordable payment terms where monthly payments 

can match a reasonable debt-to-income ratio and repayment of the 

loans can be more affordable. This may be helpful to financial institutions as well who can recognize a higher net present value of 

loans in distress. 

The second is jump-starting a student loan refinance market. For 

borrowers who have dutifully managed their monthly payments on 

high interest rate loans, many raised the need for a way to refinance. This approach could give responsible borrowers the opportunity to swap their loan for one with a lower rate. When mortgage 

borrowers and others see rates plummet, they try to refinance. Responsible borrowers should have that option, too. 

Thank you for the opportunity to share insight on the state of 

the market, and I look forward to any questions you have. 

8

Chairman JOHNSON. Thank you, Mr. Chopra. 

Mr. Lyons, please proceed. 

STATEMENT OF JOHN C. LYONS, SENIOR DEPUTY COMPTROLLER, BANK SUPERVISION POLICY AND CHIEF NATIONAL BANK EXAMINER, OFFICE OF THE COMPTROLLER 

OF THE CURRENCY 

Mr. LYONS. Chairman Johnson, Ranking Member Crapo, and 

Members of the Committee, I appreciate this opportunity to discuss 

the OCC’s supervisory approach to private student lending conducted by national banks and Federal savings associations. Promoting fair and equitable access to credit, including education financing, is a core OCC mission and one of our highest priorities. 

Financial assistance is an important means of helping promote 

higher education in this country. National banks and Federal savings associations have a long history with Federal and private student lending programs, but they make up just 3 percent of the approximately $1 trillion in outstanding student loans in this country 

today. However, the private student loans offered by national 

banks and thrifts provide an important supplement for many students seeking to finance their educations. 

For most consumer loans, such as auto loans, the underwriting 

structure and management of the loans are straightforward. The 

funds serve a specific purpose, and the source of repayment is well 

defined and easily assessed at the loan’s origination. 

Student loans, however, pose unique challenges for lenders and 

borrowers. For example, student loans often require a several-year 

commitment that extends beyond when the student starts school 

until repayment begins after the education is complete. Private student loans are usually unsecured, and a significant time may pass 

between when the lender advances the funds and when that student reaches their anticipated earnings potential. 

In addition, because the Government does not guarantee private 

student loans as it does Federal student loans, many lenders require cosigners to help ensure repayment. 

Notwithstanding the challenges of private student lending, we 

expect national bank and thrift lenders to provide flexibility to borrowers when appropriate. For example, lenders typically defer payments while borrowers are in school and offer grace periods afterward to help borrowers transition to employment. Student loans 

are the only consumer product with such a transition period. This 

flexibility reflects the unique circumstances of the student borrower 

and that these loans truly are an investment in the borrower’s future. 

We also encourage lenders to work with borrowers who experience financial hardship. That assistance may come in the form of 

forbearance, modification programs that reduce interest rates or 

change other terms of the original loan, or extended grace periods 

that go beyond what is permitted in other consumer loans for up 

to 12 months. The OCC supports these efforts and issued guidance 

to our examiners in 2010 describing our expectations for managing 

forbearance, workout, and modification programs. 

While the OCC encourages national banks and thrifts to work 

with borrowers facing difficulties, this does not relieve these instiVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\DOCS\82364.TXT SHERYL
9

tutions of their responsibility to ensure that regulatory reports and 

financial statements are accurate and representative of the financial condition of the institution. Neither the public nor the banking 

industry should confuse the expectation for full and accurate reporting as a limit on available forbearance, workout, and modification programs. 

To be clear, our Student Lending Guidance allows flexibility for 

lenders to offer forbearance and modification programs, but requires banks to report the volume and nature of these transactions 

accurately. The flexibility to assist borrowers and the responsibility 

to report these actions accurately are not mutually exclusive. Together they promote a safe and sound banking system. 

My testimony concludes with a discussion of a number of policy 

recommendations to strengthen student lending. Overall, the OCC 

supports recommendations aimed at improving the transparency of 

student loans to help students and their families make better informed decisions. Likewise, we support loan documents and billing 

statements that are easy to read and understand. 

In closing, while private student lending is a small part of the 

available financial assistance in this country, it is an important 

part, and we encourage banks to work with troubled borrowers 

during periods of hardship. 

Thank you for the opportunity to testify, and I would be happy 

to answer your questions. 

Chairman JOHNSON. Thank you, Mr. Lyons. 

Mr. Vermilyea, please proceed. 

STATEMENT OF TODD VERMILYEA, SENIOR ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. VERMILYEA. Chairman Johnson, Ranking Member Crapo, 

and other Members of the Committee, thank you for the opportunity to testify at today’s hearing. First, I will discuss recent student loan market trends and the portfolio performance of both Government-guaranteed and private student loans. I will then address 

the Federal Reserve’s approach to supervising financial institutions 

engaged in student lending. 

The student loan market has increased significantly over the 

past several years, with outstanding student loan debt almost doubling since 2007 from about $550 billion to over $1 trillion today. 

Balances of student loan debt are now greater than any other consumer loan product with the exception of residential mortgages, 

and this is the only form of household debt that has continued to 

rise during the financial crisis. 

Since 2004, both the number of borrowers and the average balance per borrower has steadily increased. In 2004, the share of 25-

year-olds with student debt was just over 25 percent, and it stands 

at more than 40 percent today. At the end of 2012, the average balance per borrower was slightly less than $25,000 compared with an 

average balance of just over $15,000 in 2004. 

Of total student debt outstanding, approximately 85 percent is 

Government-guaranteed in some way while private loans represent 

15 percent of the market. While Federal student loan originations 

10

have continued to increase in each year, private loan originations 

peaked in 2008 at roughly $25 billion and have dropped sharply to 

just over $8 billion in 2012. 

In line with the rapid growth in student loans outstanding, the 

balance of student loans, private and guaranteed, that are currently delinquent has risen sharply, standing at 11.7 percent in 

2012, a large increase from 6.3 percent in 2004. However, some 44 

percent of balances are not yet in their repayment period, and if 

these loans are excluded from the data pool, the effective delinquency rate of loans in repayment roughly doubles to 21 percent. Of the $1 trillion in total outstanding student loan debt, about $150 billion consists of private student loans. In the private student loan market, roughly 5 percent, or $8 billion, is delinquent. 

There are likely a number of factors underlying the difference in 

performance of Government-guaranteed and private student loans. 

For instance, underwriting standards in the private student loan 

market have tightened considerably since the financial crisis, and 

today almost 90 percent of these loans have a guarantor or cosigner. 

The Federal Reserve has no direct role in setting the terms of 

student loan programs. The Federal Reserve does, however, have 

a window into the student loan market through our supervisory 

role over some of the banking organizations that participate in this 

market. 

Federal Reserve supervision of participants in the student loan 

market is similar to our supervision of other retail credit markets 

and products. For large institutions, the Federal Reserve regulates 

with significant student loan portfolios, our onsite examiners evaluate institutions’ credit risk management practices, including adherence to sound underwriting standards, timely recognition of loan 

deterioration, and appropriate loan loss provisioning. 

The Federal Reserve and other Federal banking agencies have 

jointly developed guidance outlining loan modification procedures 

that discusses how banks should engage in extension, deferrals, renewals, and rewrites of closed and retail credit loans, which include 

student loans. 

Any loan restructuring should be based on a renewed willingness 

and ability to repay and be consistent with an institution’s sound 

internal policies. The Federal Reserve encourages its regulated institutions to work constructively with borrowers who have a legitimate claim of hardship. Moreover, Federal Reserve examiners will 

not criticize institutions that engage in prudent loan modifications 

but, rather, view modifications as a positive action when they mitigate credit risk. 

As supervisors, our goal is to make sure that lenders work with 

borrowers having temporary difficulties in a way that does not contradict principles of sound bank risk management, including reflecting the true quality and delinquency status of student loan 

portfolios. 

Higher education plays an important role in improving the skill 

level of American workers. Due to increases in enrollment and the 

rising costs of higher education, student loans play an important 

role in financing higher education. The rapidly increasing burden 

of student loan debt underscores the importance of today’s hearing. 

11

This concludes my prepared remarks, and I would be happy to 

answer any questions you have. 

Chairman JOHNSON. Thank you, Mr. Vermilyea. 

Ms. Eberley, please proceed. 

STATEMENT OF DOREEN R. EBERLEY, DIRECTOR OF RISK 

MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. EBERLEY. Chairman Johnson, Ranking Member Crapo, and 

Members of the Committee, thank you for the opportunity to testify 

on behalf of the FDIC on the important topic of private student 

loans. 

In today’s fragile economic environment, with persistently high 

levels of unemployment and underemployment, many consumers 

are struggling with debt loads from student loans, both Federal 

and private. We understand the concerns of struggling private student loan borrowers and encourage the banks we supervise to work 

constructively with these borrowers. 

While it is difficult to be precise about the size of the private student loan market, it is estimated that, as of December 31, 2011, the 

market totaled about $150 billion, or 15 percent of all student loans 

outstanding. In the 2011–12 academic year, banks supervised by 

the FDIC held about $14 billion in outstanding private student 

loans and originated about $4 billion in new loans. 

The FDIC supervises private student loan lenders using the 

same framework of safety and soundness and consumer protection 

rules, policies, and guidance as for other loan categories. The interagency Uniform Retail Credit Classification and Account Management Policy, or Retail Credit Policy for short, applies to student 

loans as it does to other unsecured personal loans. This policy provides institutions with guidance on classifying retail credits for regulatory purposes and on establishing policies for working with borrowers experiencing problems. 

Private student loans held by FDIC-supervised institutions are 

generally performing satisfactorily. They have a past-due ratio of 

just under 3 percent and a charge-off rate of just over 1.5 percent 

per year. While the overall performance of these private student 

loans is satisfactory, we understand that many borrowers are currently having difficulty repaying their loans, and we encourage the 

banks we supervise to work with troubled borrowers using the 

guidance provided by the Retail Credit Policy. 

The Retail Credit Policy provides institutions flexibility in offering prudent loan modifications. Institutions are responsible for establishing their own modification standards within the principles 

set forth within the Retail Credit Policy. They must also monitor 

the performance of modified loans to ensure that their standards 

are reasonable. We make clear to our institutions that we will not 

criticize banks for engaging in alternate repayment plans or modifications that are consistent with safe and sound practices. In the 

end, prudent workout arrangements are in the long-term best interest of both the financial institution and the borrower. 

Under the policies they established, FDIC-supervised banks offer 

troubled borrowers forbearance for periods ranging from 3 to 9 

months beyond the initial 6-month grace period after leaving 

12

school. In addition, a number of workout plans are also available 

to borrowers of institutions we supervise, including interest rate reductions, extended loan terms, and in settlement situations, principal forgiveness. 

However, it is important that workout programs not leave the 

borrower worse off. For example, a workout that results in significant negative amortization can leave a borrower deeper in debt. 

Concerns have been raised that troubled debt restructuring accounting rules, or TDR rules, limit a bank’s ability to modify student loans. The TDR rules are established by generally accepted 

accounting principles, which banks are required by law to follow. 

However, the TDR rules do not prevent institutions from working 

with borrowers to restructure loans with reasonable terms. The 

FDIC will not criticize a restructured loan even if it is designated 

a TDR. 

We also appreciate the significant challenges borrowers face for 

refinancing higher-rate private student loans. One of the more important challenges is the lack of participants in the refinance market. 

The FDIC continues to seek solutions for challenges in the student lending arena. In the new few weeks, we intend to issue a financial institution letter to the banks we supervise clarifying and 

reinforcing that we support efforts by banks to work with student 

loan borrowers and that our current regulatory guidance permits 

this activity. The financial institution letter will make clear that 

banks should be transparent in their dealings with borrowers and 

make certain that borrowers are aware of the availability of workout programs and associated eligibility criteria. 

We have also formed an internal work group to engage private 

student loan lenders and consumer groups on these issues. We are 

discussing our current policies and the refinancing challenges with 

other regulators to determine whether additional clarifications or 

changes of current policies may be needed. 

Thank you again for inviting me to testify. I look forward to your 

questions. 

Chairman JOHNSON. Thank you, Ms. Eberley, and thank you all 

very much for your testimony. 

As we begin questions, I will ask the clerk to put 5 minutes on 

the clock for each Member. 

This question is for the whole panel. If Congress fails to act, interest rates will double on some Federal Stafford loans next week. 

If these rates double, what do you think the impact will be on the 

private student loan market? What steps are your agencies taking 

to closely monitor the situation and any related growth in the private student lending market? Mr. Chopra, let us begin with you. 

Mr. CHOPRA. Well, the data in the Federal student loan interest 

rates only impacts future borrowers, so it has absolutely no impact 

on private student loan borrowers who are currently trying to refinance to pay back those loans. 

Some industry observers would guess that the change in the interest rates might be a slight tail wind to private loan origination, 

but I do not expect it to be a huge one. 

Chairman JOHNSON. Mr. Lyons. 

13

Mr. LYONS. I think what you may see in the private loan market 

is risk-based pricing, which is what they should be doing today, 

and I think you should see that continuing forward. It all is predicated on the competition within the market and with the competitors of pricing as well. 

Chairman JOHNSON. Mr. Vermilyea. 

Mr. VERMILYEA. If pricing in the Government space were to increase, we would expect that the relative attractiveness of the price 

of products would increase, so we would expect growth in new 

originations. Our examiners would monitor this. They would monitor underwriting standards. As the importance of the asset class 

increased, their scrutiny of it would increase commensurately. 

Chairman JOHNSON. And, Ms. Eberley? 

Ms. EBERLEY. I think that there would definitely be an impact 

on borrowers in the Federal program going forward, as Mr. Chopra 

noted, with the increase in interest rates. But the impact on the 

private market I think is really unclear. As noted by Mr. Lyons, 

the private market does engage in risk-based pricing, and so the 

pricing of the Federal loan product is not really a factor in the private loan product. 

I would add that I would expect that students would continue to 

try to exhaust Federal loans first before moving to private loans 

just because of the available options under the Federal loan program for repayment and rehabilitation in particular that are not 

available under the private program. 

Chairman JOHNSON. Mr. Lyons, followed by Mr. Vermilyea and 

Ms. Eberley, the agencies do not have public guidance tailored to 

private student lending, instead relying on an interagency policy on 

retail credit that was last updated over 13 years ago. Some have 

suggested that this guidance prevent private lenders from granting 

appropriate relief to struggling borrowers. 

What flexibility do lenders have in working with borrowers to 

prevent default? And what additional steps will your agencies take 

to provide clear, up-to-date loan workout guidance for private student lenders? Mr. Lyons. 

Mr. LYONS. Senator, the interagency guidance, as you said, was 

prepared 13 years ago. The OCC in 2010 provided some additional 

guidance to our examiners addressing forbearance, workout programs, and so on, and it was really driven by the fact that banks 

were not properly recording transactions, workout transactions and 

forbearance transactions on their books. So we provided examiners 

with clarification and further guidance, and as I said, that was in 

2010. 

Having said that, we continue to encourage banks to work with 

customers. There is nothing in the guidance, either the uniform retail guidance or the OCC guidance, that prevents a bank from 

working with a customer. The bank, however, does have the responsibility of properly recording that transaction on their books. 

Chairman JOHNSON. Mr. Vermilyea, do you have anything to 

add? 

Mr. VERMILYEA. The retail loan guidance is very broad in nature 

and articulates timeless principles of risk management. It is not a 

prescriptive piece of guidance. It does not declare certain types of 

things out of bounds, but instead encourages banks to work with 

14

their borrowers when they can reaffirm the ability and willingness 

of the borrower to repay. 

Chairman JOHNSON. Ms. Eberley. 

Ms. EBERLEY. I believe that the Retail Credit Policy guidance 

does offer institutions the flexibility to work with borrowers, and, 

in fact, the institutions that the FDIC supervises have used that 

flexibility and offer a range of workout programs. The one that I 

highlighted earlier was a differing range of forbearance after the 

initial 6-month grace period. Forbearance periods range from 3 to 

9 months in the institutions we supervise. 

So we have not set forth anything concrete or prescriptive, but 

our institutions are using the flexibility and the guidance in the 

way that it was intended. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Mr. Chopra, last month, the Bureau published a report on the effects of student debt on young people’s economic futures, and in 

that report you make several policy recommendations, including 

spurring a more robust refinancing market, offering more relief options, and a possible credit report clean slate program. It is my understanding that some of these proposals may require legislative 

changes. 

Have you heard from the lenders and the regulators about the 

merits of these programs? And do you believe that the lenders currently have the tools and legal authority to participate in these programs? 

Mr. CHOPRA. Well, all of those suggestions that we put forth in 

the report were a summary of public comments that we received, 

and many of them, in fact, would not require legislation. 

In order to maximize the value of a troubled loan portfolio, banks 

and other financial institutions generally go through the process of 

identifying interventions that would increase the net present value 

of those loans. As the other panelists have mentioned, restructuring those loans is something where safety and soundness as well 

as helping borrowers seem to go hand in hand, and I share the concern of many investors, both equity and debt, who would like to see 

financial institutions maximize the value of these portfolios. It also 

ensures that those customers become lifelong loyal customers and 

can continue to bank with that institution by borrowing mortgages, 

auto loans, and other things that may provide higher net income 

to that institution. 

Senator CRAPO. Thank you. And for the other regulators, I have 

heard from many lenders that they are willing to offer more relief 

options. However, if the lender does modify a student loan, then 

they have to account properly for modifications on their books 

under the GAAP accounting standards. And a high number of 

modifications could signal to the prudential banking regulators 

that the lender’s loan portfolio is not safe or sound. 

Thus, we have a situation in which the CFPB is advocating for 

certain relief options that may not be possible under current guidance and prudential banking regulations. 

First of all, is that correct? And how can lenders offer loan modifications without running afoul of the safety and soundness and acVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\DOCS\82364.TXT SHERYL
15

counting standards that they now must qualify under or must pursue? Mr. Lyons. 

Mr. LYONS. Senator, we encourage banks to work with customers 

when they have financial hardships. That would be reflected in the 

portfolio regardless of whether they did that or not. So whether it 

was a TDR or not, you would probably have a past due loan and 

a delinquent loan, so the risk would still be identified in the portfolio. We encourage banks to work with customers before they get 

to the point where it is severely delinquent. 

Banks do have the flexibility of offering a number of different 

programs, but as we did say, they are responsible for accurately reporting those transactions on their balance sheet. They have a fiduciary responsibility to their depositors, investors, and shareholders 

that they accurately report the risk profile of those portfolios. 

Senator CRAPO. Thank you. 

Mr. Vermilyea? 

Mr. VERMILYEA. So very similar, we expect our banks to work 

with borrowers in a way that benefits both the bank and the borrower. A restructured loan that is performing is far better for everyone than a severely delinquent loan or a charge-off. 

We also expect banks to follow basic principles of sound risk 

management. Typically, for a bank that has a large portfolio of restructured loans, we would expect them to segregate these loans 

from others on their balance sheet and then monitor the risk characteristics of this portfolio, understand the probability of default, 

understand the loss given default, and then hold appropriate reserves and capital. 

If a bank could demonstrate with their data that these loans performed in the same way as past credits, then that would be a perfectly appropriate outcome. But we always expect banks to follow 

accounting guidelines as well. 

Senator CRAPO. Thank you. 

Ms. Eberley? 

Ms. EBERLEY. I would agree with everything my fellow panelists 

have said, that, you know, when you have a troubled debt restructuring, you by definition have a troubled debt to begin with. So the 

actual accounting designation of a TDR really does not impact the 

examiner’s view of whether or not the debt was troubled to begin 

with. It does impact the examiner’s view about the bank’s ability 

to work with that borrower and turn a problem situation into a better situation. 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. 

It is important that our examiners do take a look on the back 

end, as Mr. Vermilyea noted, of an institution’s results with their 

troubled debt restructurings, with their modifications, to make sure 

that modification programs are reasonable and are ending up in a 

result that is good for both the consumer and the bank. 

Senator CRAPO. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

Mr. Chopra, you are responsible for coordinating with the Department of Education, and also you are responsible for reviewing 

16

the servicers—is that correct—the people who are servicing these 

loans? 

Mr. CHOPRA. Yes. The Bureau has a number of initiatives with 

the Department of Education and has supervisory authority over 

large financial institutions over $10 billion in assets for consumer 

financial laws with servicing operations. In addition, we have proposed supervision of certain large nonbank servicers. 

Senator REED. Well, let me ask you a question. To what extent 

are these loans held by servicers in sort of trust arrangements, as 

was common with mortgage securities, or held directly by financial 

institutions so that they can, in fact, negotiate with their customer 

directly? 

Mr. CHOPRA. As for private student loans, I would say roughly 

half are held in ABS trusts where there is a master servicer and 

appropriate guidelines, and governing those changes to the notes 

would apply. A key difference between subprime mortgage MBS or 

private student loan ABS is that it appears that the servicers, generally speaking, have more discretion relatively speaking in the 

mortgage world to conducting certain interventions that may maximize the value for those debt investors. 

Senator REED. Are they taking those advantages from your perspective now as you get ready to regulate them? 

Mr. CHOPRA. Well, our oversight solely relates to consumer financial laws. There is certainly activity to restructure certain loans 

with certain players that service asset-based securities whose underlying assets are 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. 

Senator REED. Troublingly low. Thank you. 

Mr. Lyons, do you supervise both the banks and the servicers 

that are part of the holding companies you supervise? How does 

that——

Mr. LYONS. Well, if it is connected in a national bank, we do supervise a national bank’s activities, whether it is on the bank’s 

books or if it is being serviced by the national bank. We will look 

at that activity as well. 

Senator REED. And is it common for banks to maintain a loan on 

their books as performing because they hope ultimately to collect 

something since these loans are not dischargeable in bankruptcy? 

Mr. LYONS. Student loans are not dischargeable in bankruptcy. 

That does not mean that the bank should not under certain circumstances show impairment or charge that loan off if it is not performing. 

Senator REED. But do they routinely show impairment or do they 

assume that, one, they will collect eventually? Under accounting 

rules can they——

Mr. LYONS. Under accounting rules that we enforce, we expect 

the bank to show impairments and to take charge-offs when they 

become past due, over 120 days, regardless of whether or not there 

is——

Senator REED. And what is the general record of impairment of 

student loans today in the institutions you supervise? High? Low? 

17

Mr. LYONS. There are eight national banks that conduct private 

student lending. Each one of those banks has engaged in some type 

of workout or forbearance. The number is not very large. The performance in those portfolios has been pretty good. As we said earlier, the past due rates are generally in the 3- to 4-percent range, 

and the loss rates are generally 4, 4.5 percent. So the performance 

has been relatively good. 

Senator REED. That is of this vintage loans——

Mr. LYONS. That is the entire portfolio, so that would cover all 

vintages. 

Senator REED. OK. And is there any difference between those 

loans held by the institution and those held by a servicer affiliate 

of the institution? 

Mr. LYONS. I am not sure what the servicer portfolios delinquency rates are. What I quoted you was what is on the book. 

Senator REED. Mr. Vermilyea, how about the servicer portfolio? 

Since the holding company—there would presumably be a holding 

company subsidiary. Are you noticing high levels of default or high 

levels of modification? 

Mr. VERMILYEA. Well, the data that we have is very similar to 

that cited by our colleague from the OCC. We do not have data 

that distinguishes the delinquency and default rate for loans where 

the servicer is separate. We can follow up on that. 

Senator REED. Please do so. But, again, I just want to confirm, 

Mr. Chopra, from your perspective, your point was that you are not 

seeing the kind of modifications numbers that would follow from 

the loan crisis that you are seeing in terms of delinquencies. Is that 

a fair statement? I do not want to——

Mr. CHOPRA. There are, of course, usages of forbearances, as the 

other panelists have mentioned, but I do not think there is a significant amount of concessions given by lenders, where they appropriately note them in their accounting statements and then modify 

the loan. It is a very low volume. 

Senator REED. Thank you. 

Chairman JOHNSON. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

As we have seen in recent studies and as some of our witnesses 

have testified today, private student loans carry high interest 

rates, they are difficult to restructure, and in many cases, they 

have created a barrier for people trying to buy their first homes. 

That is why I was surprised that a Federal Home Loan Bank has 

been making available an $8.5 billion line of credit to the Nation’s 

largest private student loan company, Sallie Mae. 

The Federal Home Loan Banks were established to expand 

homeownership, but now it seems that they are undermining that 

goal by helping finance more student loan debt. In addition, the 

Federal Home Loan Banks get extraordinarily cheap access to capital thanks to Government sponsorship, and that cheap capital was 

provided to Sallie Mae. And let us be specific on this. Sallie Mae 

has been getting this line of credit for one-third of 1 percent interest, and then turning around and lending money to students at a 

rate about 20 times higher than that. 

So yesterday I sent a letter to FHFA Acting Director Ed DeMarco 

because he regulates the Federal Home Loan Banks, but you are 

18

all experts, so I want to ask you about this, too. Does it make any 

sense for a Fortune 500 company that makes high-profit student 

loans to be able to borrow money for less than one-third of 1 percent from a program that has Federal backing for homeownership? 

Mr. Lyons, how about if we start with you? 

Mr. LYONS. Senator, the OCC does not regulate Sallie Mae 

so——

Senator WARREN. I understand that. I understand that. 

Mr. LYONS. I am not familiar with that program. 

Senator WARREN. But I am asking you the fundamental question. 

They are getting money at a third of 1 percent. 

Mr. LYONS. Right. 

Senator WARREN. And then turning around and lending it to students at many multiples of that. 

Mr. LYONS. Senator, can I please speak to national banks? The 

rates that the national banks are charging for private student 

loans today are comparable to what are being charged for Federal 

loans. So there is a spread there. National banks are offering rates 

LIBOR-plus, relatively the same as Federal loans. So they are offering in the neighborhood——

Senator WARREN. So you are telling me it is like Federal loans, which this year will make $51 billion in profits for the Federal 

Government. I am not sure I find that reassuring. 

Ms. Eberley, do you have any comment on the question about the 

Federal Home Loan Bank Board’s lending to Sallie Mae at a third 

of 1 percent? 

Ms. EBERLEY. So I think the issue you are raising is a public policy issue. The Federal Home Loan Bank is authorized to make 

loans that are secured by the former Federal loan program collateral, so loans that were issued by institutions with a Federal guarantee. So that is allowed under——

Senator WARREN. I am not asking the question whether or not 

they behaved illegally. I am really asking the question if they are 

there to promote homeownership. I think we have heard from our 

witnesses today that homeownership may be undermined, that 

there is data suggesting that homeownership is undermined by the 

growing amount of student loan debt. And so I see the Federal 

Home Loan Bank Board seems to be heading in opposite directions 

at the same time. 

Mr. Chopra, do you have any comment on this? 

Mr. CHOPRA. I have no idea as to why——

Senator WARREN. Hit your button. 

Mr. CHOPRA. Oh, I am sorry. I have no idea about the appropriateness of that arrangement. It is true, though, that data would 

suggest that student loan borrowers are now less likely to have a 

mortgage. 

Senator WARREN. All right. Well, that is a helpful point in it, but 

really worrisome about the policy that we are following here. 

Let me ask another question. I understand when we first started 

why we called student loans ‘‘subsidized.’’ But this year, the Government will profit $51 billion from the student loan program. The 

new loans will make a profit of $184 billion over the next 10 years. 

And it turns out that even the so-called subsidized loans make a 

profit of about 14 cents on the dollar. The student interest rate is 

19

scheduled to double July 1st, and so the question I have is: Why 

do we call these loans ‘‘subsidized’’? I do not get this. Why are they 

called ‘‘subsidized’’? Mr. Lyons? 

Mr. LYONS. Senator, you are referring to the Federal program 

that national banks do not lend into. They lend into the private 

market, so I would be happy to discuss the private market. 

Senator WARREN. I take that as a no. 

Mr. Chopra? 

Mr. CHOPRA. Well, the reason that it is called ‘‘subsidized’’ is because in the old bank-based program, where they gave Federal 

loans that were guaranteed, the Government paid subsidies to the 

financial institutions for interest accrued during periods such as 

being in school. 

Senator WARREN. Are we doing that anymore? 

Mr. CHOPRA. No. That program has ended. 

Senator WARREN. No. So we call these ‘‘subsidized’’ loans even 

though today the program has been completely changed and, in 

fact, is making a profit for the U.S. Government. 

I just want to say, you know, this just seems wrong to me, Mr. 

Chairman. The Government lends to banks at three-quarters of 1 

percent interest, then does a huge markup on student loans, and 

will make $51 billion in profits this year. Sallie Mae borrows at 

one-third of 1 percent in a program that is supported by the Federal Government and then does a markup on student loans. It is 

time for the Government to stop making a profit off our students. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Mr. Chopra, give me your thoughts on our REFI for the Future Act, in answering some of the questions and concerns on the $150 

billion outstanding, and for the future, what this means for private 

bank loans. 

Mr. CHOPRA. So without knowing specifics, I can say that it is 

absolutely important that we address the large population of existing borrowers and not just the new borrowers. Many of those existing borrowers were certainly victims of a financial crisis that they 

played no role in creating, and they wonder why they have been 

unable to take advantage of today’s historically low rates. And just 

as in 2008, there were market failures that provided for temporary 

authorities to ensure financial institutions could originate loans, 

but there are no authorities currently to jump-start that sort of 

market. So it seems that it is worthy of very careful consideration. 

Senator BROWN. Thank you. This is for all of you. Student loan 

debt, as a number of people have pointed out, Senator Crapo and 

the Chair and others, is the second largest form of consumer debt 

behind mortgages. And I see some similarities between these two 

issues, these two lending institutions in some sense, if you will. 

The biggest banks we hear repeatedly, finding out more information last week, are doing a generally poor job complying with the 

national settlement over their improper foreclosure practices. 

Homeowners have had some of the same problems that responsible 

student loan borrowers are having. They cannot refinance, they 

cannot negotiate a deal for an alternative repayment arrangement 

with the institution with whom they have their mortgage. But 

20

some large financial institutions are at least trying to pursue some 

mortgage modifications to stem their losses. But with the student 

loan market, it does not seem like that refinancing is happening, 

with very, very, very few exceptions. Despite the Federal Reserve’s 

testimony that student loan modifications are generally in the best 

interest of both the institution and the borrower, can lead to better 

loan performance, increased recoveries, reduce credit risks, and 

that they will view such modifications as a positive action when 

they mitigate credit risk. 

So even though the regulatory bodies are saying this makes sense for banks to begin to refinance some of this $150 billion in 

outstanding student debt, why—I understand this is a small portfolio for Citibank or for some of these large institutions—the student loan market is not very large, relatively, for them. But each 

of you answer, why are the banks not willing—when regulators are 

saying this makes sense, when common sense suggests that this 

makes sense to refinance, why are the large banks simply not coming to the table to refinance these student loans? I will start with 

you, Ms. Eberley. 

Ms. EBERLEY. Certainly. It is a good question why there is not 

an active refinance market for student debt. There is nothing in 

regulatory policy or practice that prohibits borrowers from refinancing their student debt. None of the institutions that 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. 

The underwriting criteria used by the institutions that FDIC supervises usually requires a guarantor, which means the debt is underwritten at a rate that reflects that you have already got an established borrower listed on the debt. So you may be starting out 

with a low rate to begin with based on that established credit history as opposed to a student on their own. So that does not address 

any legacy loans that are outstanding, that are at higher rates of 

interest, or that were not cosigned. You know, so it is unclear why 

there is not an active market to meet apparent demand. So I think 

the proposal is very interesting, and that is something we would 

be interested in working with you on. 

Senator BROWN. Mr. Vermilyea, this issue of too big to fail with 

these largest banks, it is coming back again. Is this sort of a too 

big to care sort of situation with these large banks with a relatively 

smaller portfolio, they are just sort of disdainful of doing anything 

with refinancing student loans? 

Mr. VERMILYEA. I do not think it is too big to care. I think they 

are interested in profit opportunities where they can find them. I 

would associate myself with the response from the FDIC. It is not 

clear why this is not happening more. Our regulatory policy would 

certainly permit it, indeed encourage appropriate workouts. So like 

the FDIC, we are interested in exploring this further. 

Senator BROWN. Mr. Lyons. 

Mr. LYONS. Senator, I would echo the comments of my fellow regulators. I think also it may reflect some market inefficiencies like 

competition as well. As Ms. Eberley said, many of the student 

21

loans, private student loans today, are priced off of a cosigner, so 

they are actually at a lower rate than would normally be the situation. So, that may also factor into why we are seeing low refinancing opportunities. 

Senator BROWN. Mr. Chopra. 

Mr. CHOPRA. Well, as you mentioned, net income from private 

student loans is a very small fraction for large financial institutions. As we note in our report, many of those financial institutions’ 

senior management are still addressing legacy issues of troubled 

portfolios, particularly in the residential mortgage space, that may 

be occupying significant management bandwidth, including issues 

with the flexibility and agility with their IT and accounting systems. 

Senator BROWN. All right. Mr. Chopra, your comments earlier 

about, you know, establishing—what puzzles me further about this 

that you mentioned earlier was that these institutions that are 

simply not—that seem indifferent to if not hostile to refinancing 

are the same institutions that I would think would want these 

young people to whom they lend this money to be lifelong customers and get a mortgage someday when they can pay off their 

student loans and start businesses and all the things—and use 

these banks with whom they have a relationship. But that does not 

seem to be the case. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and I am going to start 

by addressing something. As we were sitting here, the Supreme 

Court released a ruling eviscerating the Voting Rights Act, and I 

am deeply disturbed about that. The strategy of voter suppression 

has been used against blacks, Latinos, elderly, the poor, immigrants. We had a situation in our history where New York City 

politicians held registration days on Jewish holidays to keep Jewish individuals from voting. We have had all kinds of forms of efforts to not embrace the full ability of citizens to participate in our 

democracy. And today we have strategies that include voter ID 

laws, the reduction of early voting hours, the drawing of discriminatory districts, and so we are not in an era free of a strategy to 

block people’s ability to participate as full citizens, and I think it 

is deeply disturbing, the 5–4 decision that just came out is deeply 

disturbing. 

The topic we are addressing right now on the cost of student 

loans, it seems like we have a new form of debtor’s prison for our 

students because the loans, in combination with interest rates, 

mean individuals are having to delay living independently, delay 

marriage, cannot get a loan to buy a house, or if they do, their 

credit score, because of the debt that they carry, is lower so they 

have to pay a lot more in interest to buy a home. They cannot get 

a loan to start a business. They may be disadvantaged in employment interviews. All of these are factors that compromise one’s 

ability to thrive. 

And one of the pieces that is disturbing to me is these private 

loans vary their interest rates according to the credit background 

of the applicant even though the loans are guaranteed, which 

means that if you come from a background in which you have less 

22

wealth, you are going to pay a higher price over a very long period 

of time to get an education, thus locking in inequities from one generation to the next. 

Are any of you disturbed by that bias in the system? And if so, 

what do you think we should do? Doreen, or Ms. Eberley, perhaps 

we can start with you. 

Ms. EBERLEY. So I may have misunderstood the question, but the 

private student loans that we have supervisory responsibility for, 

the lenders that make those loans, those loans share a similarity 

with Federal student loans in that they are not dischargeable in 

bankruptcy, but they are not guaranteed by the Government. So 

that is a key distinction. So the institutions bear the risk of loss 

for a default on those loans. 

Institutions are offering—the institutions that we supervise are 

offering a choice of either a variable or a fixed rate of interest at 

the onset of the lending agreement. So the current variable rate of 

interest ranges between 3 and 9 percent, the fixed rate between 

about 5.5 and 11.5. 

Senator MERKLEY. Is it fair to say someone from a background 

where they have less wealth, less assets, is more likely to pay the 

9 percent than the 3 percent and, therefore, pay a much higher 

price for their education? 

Ms. EBERLEY. So it is true that an individual that had a less 

strong credit history would pay a higher rate of interest. 

Senator MERKLEY. So yes. The answer is yes? 

Ms. EBERLEY. It is risk-based, yes, based on the individual’s credit history——

Senator MERKLEY. I take your point on the national guarantee 

and thank you for pointing that out. 

Does this bother anyone else? 

Mr. CHOPRA. Well, Senator Merkley, the private student loans 

are often underwritten to the FICO score and income of a cosigner. 

So for borrowers whose parent, say, is not very creditworthy, they, 

in fact, would have a higher rate when they were freshmen. I think 

that many of them wonder, once they do graduate and land a very 

good job, they wonder that given their risk profile may have considerably shrunk, they have developed their own credit history, why 

they are unable to find a product in the market that is a lower 

risk-adjusted price. 

Senator MERKLEY. And they wonder about that because they are 

not able to refinance? 

Mr. CHOPRA. That is right. And I think many of them see the incredible savings that perhaps their parents, who may be homeowners and have been able to refinance given today’s historically 

low interest rates, have been able to take advantage of. 

Senator MERKLEY. Does the system in general, as we have described it here, create extra hurdles for those who come to the education marketplace with poor assets? 

Mr. CHOPRA. Well, there are certainly issues with market efficiency when price does not seem to match risk, which seems to be 

an issue. 

Senator MERKLEY. Mr. Lyons, is there kind of a bias that reinforces differences in background? 

23

Mr. LYONS. Senator, I do not know that answer. I would echo 

what Doreen Eberley indicated, that we expect banks to risk-price. 

They do risk-price. To the extent a student utilizes all of his Federal grants and loans and then has to move to a student loan, a 

private student loan, that loan would be risk-base priced. 

Senator MERKLEY. If you have a loan that is 9 percent versus one 

that is 3 percent, would it be fair to say that by and large the cost 

of the loan is going to be 3 times as high? 

Mr. LYONS. Not necessarily 3 times, but it will be more expensive, yes. 

Senator MERKLEY. The interest rate will be 3 times as high. 

Mr. LYONS. Yes, the interest rate is 3 times as high. 

Senator MERKLEY. And, thus, a low-income student, a student 

with parents who are cosigning who have a poor credit record 

might pay 3 times as much in interest over the course of the loan. 

Mr. LYONS. To the extent it is a higher risk, the bank would 

charge a higher rate of return, yes. 

Senator MERKLEY. Thank you. 

Thank you, Mr. Chair. 

Chairman JOHNSON. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

Just a couple of points, and I do not remember if it was Mr. 

Lyons or Mr. Vermilyea who gave us the side-by-side comparison, 

2004 to today. I think it was you. You might want to add another 

statistic to your record there. Fifty-five percent of all private loans 

in 2005 had a cosigner; today it is 90 percent. We are not only 

mortgaging our kids’ future; we are mortgaging their parents’ future, their grandparents’ future, and we are putting their homeownership and their retirement at risk. 

This is a big issue, the issue of cosigning, and so I just raise that 

because I think it is important to put that on the table. 

A couple issues—one on transparency and one on a recent visit 

that I had in North Dakota where I had a chance to sit in the car 

and actually listen to the radio, and this is for Mr. Chopra. Have 

you seen the 1–800 numbers or heard the 1–800 numbers, ‘‘Get 

yourself out of student debt trouble. We are here to help’’? They 

sound a lot like the predatory lending that we have experienced 

over the last how many years with home mortgages or consumer 

debt, credit card debt. And I see an entrance now or an opportunity 

to move into that market by people who are engaged in predatory 

lending practices, and I am wondering if you guys are monitoring 

that, paying attention, and if there is anything Congress should be 

doing right now, you to educate students but us to get out ahead 

of it on a regulatory basis. 

Mr. CHOPRA. Well, we are certainly familiar with the increase in 

debt collection and debt relief activities as the conditions in the 

student loan market for many have been quite challenging. For 

borrowers who have Federal student loans, there are marketed 

services to pay a fee to enroll in certain programs that may help 

then get out of default through the Department of Education, 

which may be at no cost. So, of course, we are looking to educate 

consumers and ensure that all financial services providers are complying with the law. 

24

Senator HEITKAMP. Just to follow up, one suggestion that I would 

have—and I know budgets are limited. But the ability to advertise 

on the same platform, to educate on the same platform, is critical, 

because what—they are not advertising to kids on, you know, 790 

talk radio; they are advertising to those parents who have cosigned 

those loans. And that is a big concern that I have. 

Mr. Lyons, you raised a very important point, I think, on transparency. Anyone recently has had a mortgage has sat down for almost an hour and a half and done all the due diligence, signed all 

of the, you know, awareness—‘‘Yes, we know we are mortgaging 

away our life.’’

You know, frequently what happens to a kid and their parents 

on student loans is that the paper gets slid across the desk and 

sign on the bottom line if you want a better future. And for especially a lot of first-generation college-goers, you know, there is not 

maybe a level of sophistication on what the alternatives are. 

And so I am wondering if anyone on the panel, but particularly 

you, Mr. Lyons, since you raised the issue, has some suggestions 

for what we can do to promote more transparency in the private 

marketplace and, you know, whether that should be mandated, encouraged, or otherwise, you know, talked about. 

Mr. LYONS. Thank you, Senator. I would agree with the recommendations that the CFPB put forth regarding disclosure and 

clear transparency. 

Senator HEITKAMP. But how do we get banks to do that? 

Mr. LYONS. I think that banks have taken steps over the last 

several years since the crisis to improve transparency, and so there 

are discussions before, during, and after that they provide the students and the students’ family; whereas, in the past that may not 

have been the case. 

Senator HEITKAMP. All right. One thing I would suggest—and my 

time is short, and that is why I am interrupting, and I will follow 

up with some additional questions. But this needs to be done in 

conjunction with institutions of higher learning. I have a student 

right now in North Dakota who has $100,000 of private debt; he 

is a first-generation student; he is a music major, and he is living 

in his parents’ basement. His parents, I am sure, are on the hook 

for that same level of debt. He will never retire that debt. He will 

never get out from underneath it. And we have guaranteed that by 

not discharging this debt in bankruptcy. 

And so with a little bit of education about, you know, what that 

education is worth compared to the earning power into the future, 

and what we need to do to educate kids not only as they pursue 

their dreams, but taking a look at what the earning power is of the 

choices they make in terms of education opportunities. And so I 

think you are only one part of the problem—I would not say ‘‘problem,’’ but you are only one part of the solution, which is here it is, 

financial literacy, but back it up with also education on what the 

earning potential is for these students, and maybe banks can be 

part of encouraging that as well. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Manchin. 

Senator MANCHIN. Thank you so much, Mr. Chairman. 

25

We were talking about public policy, and I would like to get your 

input, since you are part of the public. I think you are hearing from 

all of us that we believe that education being—and the facts are 

overwhelming that education adds to the value of not only the person, their well-being, their families, their communities, their State, 

and the Nation. We all, I believe, have that agreement. We are all 

products of it probably. 

With that being said, is it your opinion that we should not make 

a profit on education when it comes to loans? That is a public policy. We have got to make that. We need your input. So if I can just 

start with you, ma’am. 

Ms. EBERLEY. Well, I am not sure if you are talking about in the 

Federal sector or the private sector. 

Senator MANCHIN. I am talking about every—public policy, do 

you believe public policy should be that profits should not be made 

on education loans of any kind, so if we can just kind of pay itself 

and break even? Or do you put the same procedures and the same 

policies in place as you do any other type of loans? 

Ms. EBERLEY. I think it is an interesting question, and I think 

you would have to differentiate between the Federal sector and the 

private sector in answering that question. 

Senator MANCHIN. Not really. 

Ms. EBERLEY. Well, in the private sector——

Senator MANCHIN. If it is public policy, it is public policy. So 

maybe your cost is a little different. Maybe your whole policy is a 

little different. But there is still a spread. There is a spread taking 

a lot of things in consideration. Do you believe that spread should 

be zero or minimized to the point to where there is no—I am just 

asking a simple question. 

Ms. EBERLEY. Yes, I think it would be hard to calculate a zero 

spread on the private side just because the institutions bear the 

risk of loss, so that there is not the Government guarantee——

Senator MANCHIN. You do not have a public opinion then on——

Ms. EBERLEY. So I—you know, it is really not my area of expertise, and I——

Senator MANCHIN. You have an opinion. You are public. You 

have Representatives, Congress and the Senate. What would you 

say to your Congressman and Senator? 

Ms. EBERLEY. You know, I would have to think about it. I have 

not thought through this. 

Mr. VERMILYEA. In the private markets, we need to take many 

factors into consideration. One is credit availability. 

Senator MANCHIN. I think the simple—I am just asking a simple 

public policy. Do you believe—here we sit. Do you believe that we 

should not make a profit if we can keep from making a profit on 

trying to educate this great society of ours? 

Mr. VERMILYEA. My concern would be that if there were a mandated zero spread, for example, that there may not be credit availability in the public——

Senator MANCHIN. So you are saying that basically in the public—private sector that the almighty profit on every aspect of life 

is going to prevail? I am just—I am not—I am a private business 

person. I am just saying you have to put your priorities where your 

values are. If education is what has built this country, education 

26

has—this is the greatest country on Earth, how do we get there? 

And have we left that premise? And is everything the almighty dollar, the bottom line, to the point where we are trying to educate 

the masses? It is a public policy. You are talking—I am your Senator. What do you want me to do? 

Mr. VERMILYEA. Education policy is not in the realm of the Federal Reserve, and the Governors have not spoken on this issue, so 

this is a matter for Congress. 

Senator MANCHIN. OK. Now you know why we have a stalemate 

in Congress now, because we cannot even get the public to engage. 

That is—and I know you are looking, and you have to be careful 

what you are saying. I am just trying to get input. Sir? 

Mr. LYONS. Well, I am not going to expand the discussion must 

further, Senator. I do not think it is appropriate for a prudential 

regulator to take a public policy position. 

Having said that, I think I would echo what the two other regulators indicated, that it would be difficult to attract capital to a 

business that does not provide some profit to the investors. Just a 

consideration. 

Senator MANCHIN. And you think that basically the American 

public and the investors in American society would not invest in 

education knowing that it would be a zero return? 

Mr. LYONS. I think that is a possibility that has to be weighed. 

Senator MANCHIN. OK. Mr. Chopra? 

Mr. CHOPRA. Well, Senator, I agree with others that investors 

will not be able to earn a return on equity if they cannot earn any 

margin. But as it relates to your general question of profitability, 

the only thing I can add is there is data from a number of sources 

that does suggest there are positive externalities of a highly educated workforce in the sense of global competition, wage growth, 

and others, and certainly policymakers may consider that when developing policies to promote a highly educated workforce. 

Senator MANCHIN. I am talking—primary and secondary education were mandated by the Constitution and most every State to 

subsidize and pay for, which I agree wholeheartedly. And we all do 

that willingly. Higher education, there is not a word in the Constitution in West Virginia that we have to give a penny toward 

that. So our Founding Fathers a long time ago thought this was 

a high-value, good return, and we got involved. And we do. 

We are talking about a financial program that does not cost—we 

are not subsidizing. We are not asking someone to pay. It will pay 

for itself. Should we remove the profit where possible? And I think 

that is what Senator Warren and all of us—now, can we find that 

balance somewhere so that we can all be satisfied but you can still 

have enough money that we can keep the program alive, but we 

still have taken the amount of profit out that puts the burden on 

the backs of productivity? I think that is it in a nutshell, and that 

is where we are coming to, and we have got to—since we are not 

getting much help from the input from our constituents, we have 

got to be able to cipher through this one to find the balance between our colleagues on both sides of the aisle. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. I want to thank our witnesses for their testimony today and for their hard work on this important issue. 

27

This hearing is adjourned. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:]

28

1See, for example, the 2012 Annual Report of the Financial Stability Oversight Council, the 

March minutes of the Federal Reserve Board’s Federal Open Market Committee, and the 2012 

Annual Report of the Department of the Treasury’s Office of Financial Research. 2 Congress discontinued the Federal Family Educational Loan Program in 2010, though $437 

billion in balances remain according to the Department of Education’s latest Federal student 

loan portfolio data. Almost all new Federal student loans are originated by the Department of 

Education under the Direct Loan program. 

PREPARED STATEMENT OF ROHIT CHOPRA

ASSISTANT DIRECTOR AND STUDENT LOAN OMBUDSMAN

CONSUMER FINANCIAL PROTECTION BUREAU

JUNE 25, 2013

Chairman Johnson, Ranking Member Crapo, Members of the Committee, thank 

you for the opportunity to testify today about student debt. 

My name is Rohit Chopra, and I serve as an Assistant Director at the Consumer 

Financial Protection Bureau (Bureau). In October 2011, I was also designated by the 

Secretary of the Treasury as the Student Loan Ombudsman within the Consumer 

Financial Protection Bureau, a new role established by Congress in the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. 

By holding today’s hearing, it is clear that many of you are keenly interested in 

finding solutions for some of the troubling trends in the student loan market. Since 

the Bureau and others began raising concerns about these trends, several monitors 

of the financial system have expressed worry about how student debt could impact 

the housing market and other parts of the economy.1

The increasing level of student debt has certainly tested us. Most directly, it has 

tested Americans working to pay back nearly $1.2 trillion. It has tested our rural 

areas, many of whom are struggling to attract young, college-educated people to return and reinvest in their communities. It has tested aspiring entrepreneurs, who 

are looking to create jobs that will help our economy grow, but are often hampered 

by student debt. It has tested our doctors and health care professionals, many of 

whom cannot afford to pursue less lucrative jobs and serve the growing population 

of the elderly. It has tested our realtors and home builders, who are finding that 

many young Americans can’t pursue their dream of buying a home. And of course, 

it is a test for policymakers on whether or not we will heed the warning signs and 

avoid the potential negative impacts of growing student loan debt. 

In that vein, the Bureau has been continuously collaborating with financial institutions, consumers, investors, and other policymakers to help create a well-functioning market. Together, we can seek to ensure that borrowers can manage their 

student loan debt and climb the economic ladder. 

Understandably, many policymakers across the country are seeking to address 

some of the underlying drivers of growing student loan debt, including the rising 

cost of tuition, as well as interest rate structures on Federal student loans. However, it will also be prudent to address the large pool of existing debt owed by millions of Americans. 

I hope my testimony can shed additional light on the structure of the student loan 

market and its similarities to the mortgage market, issues in student loan servicing, 

potential economic impacts of high levels of student loan debt, past actions by policymakers to assist financial institutions, and opportunities to increase efficiency 

going forward. 

Parallels to the Mortgage Market 

Of the approximately $1.2 trillion in outstanding student loan debt, approximately 

$600 billion was funded using private capital. Nearly three-quarters of the privately 

funded debt met the criteria for a Government guarantee through the Federal Family Educational Loan Program (FFELP). Financial institutions holding these FFELP 

loans enjoy a range of subsidies, as well as a guaranteed return in excess of similar 

duration Treasuries.2

While the student loan and mortgage markets may seem completely different, 

there are some important similarities. In both the mortgage and student loan markets, origination of nontraditional products boomed in the years leading up to the 

financial crisis. Subprime private label mortgage-backed securities and private student loan asset-backed securities grew rapidly. Investor appetite for these assets led 

to less stringent underwriting standards, leading many subprime mortgage and private student loan originators to reduce documentation requirements and other 

checks that ensure high-quality loans. A notable portion of private student loans 

originated before the crisis did not go through the basic process of verification of 

29

3 Consumer Financial Protection Bureau and Department of Education, Report on Private Student Loans (2012). 4 Consumer Financial Protection Bureau and Department of Education, Report on Private Student Loans (2012). 5Many consumers borrowed both Federal and private student loans from the same financial 

institution, which also seems to contribute to confusion among some consumers. 6 National Center for Education Statistics: National Postsecondary Aid Study (2008). 

7 Bureau of Labor Statistics: Recent college graduates in the U.S. labor force: data from the 

Current Population Survey (2013). 8Governor Sarah Bloom Raskin. Speech to the Maryland State Bar Association Advanced Real 

Property Institute (2011). 

a student’s enrollment and utilization of other loans. These higher-risk loans also 

came with higher interest rates.3

Many borrowers with subprime mortgages actually qualified for a mortgage with 

a lower rate. Similarly, more than half of private student loan borrowers did not 

exhaust their Federal student loan options, which are generally less expensive and 

have several attractive benefits.4

In the mortgage market, many borrowers were unaware of some core features of 

their mortgage obligation, such as rate resets and other surprises. In a report by 

the Bureau and the Department of Education to Congress on private student loans, 

the agencies found that many student loan borrowers were also unaware of what 

type of loan they had and that their private student loans did not have many options for them in times of distress.5

While private student loans are a relatively small share of total outstanding student loan debt, they are disproportionately used by high-debt borrowers. For undergraduate student loan borrowers graduating around the time of the unraveling of 

the financial crisis with over $40,000 in debt, 81 percent used private student 

loans.6

In the years following the crisis, investors would no longer tolerate the risks associated with many of the practices used to originate subprime mortgages and private 

student loans. And like the mortgage market, underwriting standards for private 

student loans have markedly improved, but the existing obligations have not disappeared. 

The Quiet Aftershock 

The unraveling of the mortgage market and the resulting financial crisis hit our 

economy like an earthquake. We are all familiar with the trillions of dollars lost in 

asset values, the millions of Americans who lost their jobs and homes, and the billions of aid deployed to assist financial institutions. 

But less discussed is how the crisis has impacted those who were in college. When 

those students graduated with more debt than they had anticipated, they would also 

be entering a very difficult job market. In 2007, jobs for college graduates were more 

plentiful. Unemployment among young Americans with college degrees was 7.7 percent. Less than 2 years later, unemployment for young college graduates had more 

than doubled, spiking to 15.5 percent.7 Many continue to be underemployed and are 

working in job fields that may not require a degree. 

A tough job market meant that many Americans needed to find options to honor 

their mortgage and student loan obligations. But both mortgage and student loan 

borrowers face two key problems with their servicers. 

First, when borrowers do have options, they can still be stymied. In the mortgage 

market, borrowers whose loans were owned by GSEs had options available to them 

to modify and refinance their mortgages. Even though some sort of modification may 

have been in the best interest of the investor and creditor, many mortgage servicers 

were unable to successfully work with troubled homeowners. A member of the Federal Reserve Board of Governors lamented the ‘‘agonizingly slow pace of mortgage 

modifications and repeated breakdowns in the foreclosure process.’’8

In the student loan market, many borrowers with Government-guaranteed student loans owned and serviced by financial institutions also report difficulty enrolling in Income-Based Repayment and other programs for borrowers facing hardship. 

Second, many borrowers have simply run out of options. For homeowners whose 

mortgages were owned by investors in private-label mortgage-backed securities, 

they did not always have access to options that would let them find an affordable 

payment. The same is true with private student loan borrowers who may be facing 

temporary hardship and looking for an alternative repayment option to get through 

tough times. Like a business, a consumer’s ability to manage cash-flow is absolutely 

critical to financial health. Private student loan providers generally do not offer this 

cash-flow management option, which is available to borrowers of Federal student 

loans. 

30

9Frame, W. Scott. ‘‘Estimating the Effect of Mortgage Foreclosures on Nearby Property Values: A Critical Review of the Literature.’’ Economic Review of the Federal Reserve Bank of Atlanta (2010). 10 Consumer Financial Protection Bureau and Department of Education: Report on Private 

Student Loans (2012). 11See, for example, http://portal.hud.gov/hudportal/HUD?src=/mortgageservicingsettlement/

investigations. 12 Consumer Financial Protection Bureau: Annual Report of the CFPB Student Loan Ombudsman (2012). 13 Consumer Financial Protection Bureau: The Next Front? Student Loan Servicing and the 

Cost to Our Men and Women in Uniform (2012). 14 In theory, investors could rely on the rating agencies, which were compensated to evaluate 

student loan asset-backed securities, serve to police quality issues, and align incentives of investors, issuers, and servicers. That alignment appears, in retrospect, to have been imprecise for 

certain ABS issuances prior to the crisis. 

For struggling homeowners and student loan borrowers, the consequences of being 

unable to find an affordable repayment option are severe. The impacts of foreclosures may not just be felt by the former homeowner, but potentially by the entire 

neighborhood.9 And for private student loan borrowers who default early in their 

lives, the negative impact on their credit report can make it more difficult to pass 

employment verification checks or ever reach their dream of buying a home. As of 

the end of 2011, more than $8 billion of private student loans were in default, representing 850,000 loans.10

Canary in the Coal Mine 

The importance of adequate servicing in a functioning mortgage or student loan 

market cannot be understated. The difficulties faced by mortgage borrowers were 

investigated by a wide range of Federal and State authorities.11 Many consumers 

reported lost paperwork, payment processing errors, and conflicting instructions. A 

particularly disconcerting occurrence involved the foreclosures faced by active-duty 

servicemembers, despite prohibitions under the Servicemembers Civil Relief Act 

(SCRA). 

Last October, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, we submitted a report on complaints faced by private student loan borrowers.12 Unfortunately, many of the problems reported by these student loan borrowers bear an uncanny resemblance to those faced by mortgage borrowers. Like in 

the mortgage market, the treatment of servicemembers by student loan servicers 

has been quite troubling.13

My colleague Holly Petraeus, who leads the Bureau’s Office of Servicemember Affairs, and I also published a report describing the obstacles military families face 

when attempting to use their student loan repayment benefits provided by applicable laws. For example, men and women in uniform are entitled to a 6 percent rate 

cap on their student loans incurred prior to entering active-duty status, as provided 

for by the SCRA. Unfortunately, some servicers have placed inappropriate requirements on servicemembers seeking the rate cap. 

One servicemember saw his request rejected multiple times because his military 

orders did not include an end date. This is neither a requirement of the SCRA, nor 

feasible for many military officers to obtain, as their orders usually do not delineate 

an end date. Another servicemember with multiple loans sought to reduce the rate 

on his highest-rate loans, but the servicer proceeded to raise the rate on the loans 

that were below 6 percent. While many of these problematic practices have subsided 

since brought to light by this report, we continue to receive these complaints by 

military families. 

In both the mortgage and student loan markets, improper and potentially unlawful servicing errors caused harm to servicemembers. Admittedly, military families 

are a small segment of the population. But if a servicer is unable to provide adequate service to those who have special protections under the law, it raises questions about whether it is agile enough to deal with the complexities of the larger 

population of borrowers facing hardship. 

I also share the concerns of prospective investors in this sector, whose questions 

about servicer agility will force them to conduct careful due diligence so that risks 

are fully understood.14

Oversight of Student Loan Servicers 

In the Dodd-Frank Wall Street Reform and Consumer Protection Act, the respon- sibility to supervise insured depository institutions with over $10 billion in assets 

for compliance with Federal consumer financial laws transferred from prudential 

regulators to the Bureau. While this includes many servicers owned by large banks 

with substantial portfolios of Government-guaranteed Federal student loans, as well 

31

15 In March, the Bureau proposed overseeing larger participants in the nonbank student loan 

servicing market, to ensure that both banks and nonbanks are on a level playing field. Comments closed on May 28. The Bureau is currently considering the public comments on the proposed rule before reaching any final decisions on the proposed rule. 16The Bureau’s student lending examination procedures are available to financial institutions 

and the public. See http://files.consumerfinance.gov/f/201212lcfpbleducationloanexam

procedures.pdf. 17For the full docket of submissions to this Request for Information, see http://

www.regulations.gov/#!docketDetail;D=CFPB-2013-0004. 18See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-1042. 19See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-6822. 20See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-7202. 21 U.S. Census Bureau: Income, Poverty and Health Insurance in the United States, P60—

239 (2011). 22See, for example, http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-7223. 23See, for example, http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-7223

and http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-7195. 24See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-6831.

as private student loans, most servicing activity takes place within the nonbank sector.15

In mortgage servicing, consumers struggled with servicers who were not prepared 

to handle loss mitigation and loan modification at scale when the financial crisis hit. 

In contrast, Federal loan guidelines have long offered flexibility to struggling borrowers, so student loan servicers should be able to administer repayment alternatives and other consumer protections efficiently and effectively. Our supervision 

program will look for that and respond if servicers fall short. Examinations will help 

determine whether entities have appropriate processes to ensure that borrowers can 

enroll in modified payment plans available to them, payments are appropriately 

credited to accounts, and transfers of servicing rights are orderly, among other 

areas.16

While compliance with existing Federal consumer financial laws is critical to protect honest businesses faced by unfair competition from those that cut corners, other 

structural impediments to repayment of almost $1.2 trillion in existing debt remain 

for many borrowers. 

Student Debt Domino Effect? 

While risks in the student loan market do not appear to jeopardize the solvency 

of the broader financial system, unmanageable student debt may have a broader impact on the economy and society. In February, we asked the public to provide input 

on potential policy options to tackle the problem of unmanageable student debt. We 

received more than 28,000 responses from experts and individuals impacted by student debt.17 Here were some of the potential impacts that participants noted: 

Homeownership and household formation: The National Association of Home 

Builders1A18 wrote to the Bureau about the relatively low share of first-time homebuyers in the market compared to historical levels and that student debt can ‘‘impair the ability of recent college graduates to qualify for a loan.’’ When monthly student loan payments are high relative to income, applicants may be deemed less 

qualified for a mortgage. The National Association of Realtors 19 wrote in its submission that first-time homebuyers typically rely heavily on savings to fund 

downpayments. When young workers are putting large portions of their income toward student loan payments, they are less able to stash away extra cash for that 

first downpayment. 

Other submissions cited research that showed that three-quarters of the overall 

shortfall in household formation can be attributed to reductions among younger 

adults ages 18 to 34.20 In 2011, two million more Americans in this age group lived 

with their parents, compared to 2007.21

Entrepreneurship and small business starts: In submissions by coalitions of small 

business and startups,22 groups cited a number of factors about the threat of student debt. For many young entrepreneurs, it is critical to invest capital to develop 

ideas, market products, and create jobs. High student debt burdens require these 

individuals to take more cash out of their business so they can make monthly student loan payments. Others note that unmanageable student debt limits their ability to access small business credit; some report being denied a small business loan 

because of their student loans.23

Retirement security: In its submission, AARP24 raised concerns about families 

headed by an American ages 50 to 64. The association wrote that ‘‘increasing debt 

threatens their ability to save for retirement or accumulate other assets, and may 

end up requiring them to delay retirement.’’ Student debt can delay participation 

32

25See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0878. 26See https://www.avma.org/news/journals/collections/pages/avma-collections-senior-surveys.aspx. 27See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0038. 28For example, in a 2007 letter, Sallie Mae CEO Tim Fitzpatrick discussed how just 10 percent of borrowers end up benefiting from advertised incentives. 29The Attorney General of New York entered settlements and code of conduct agreements to 

address this problem in 2007 with many schools and lenders, including the two largest lenders 

at the time: Sallie Mae and Citigroup. 30 It is worth noting that the absence of a developed student loan refinance market may be 

an impediment to monetary policy transmission. Savings from low borrowing costs for financial 

institutions are not necessarily being passed on to student loan borrowers with fixed-rate obligations. Given that student loan debt is the largest form of debt for a large portion of younger 

households, a robust student loan refinance market may be a prerequisite for monetary policymakers to ensure that younger households can accrue benefits from the low interest rate environment. 

in employer-sponsored retirement plans, leading to lost growth in the critical early 

years of a career. 

Health care, rural America, and education: The American Medical Association 25

wrote that high debt burdens can impact the career choice of new doctors, leading 

some to abandon caring for the elderly or children for more lucrative specialties. Aspiring primary care doctors with heavy debt burdens may be unable to secure a 

mortgage or a loan to start a new practice. This can have a particularly acute impact on rural America, where rental housing is limited and solo practitioners are 

a key part of the health care system. 

Student debt can also impact the availability of other professions critical to the 

livelihoods of farmers and ranchers in rural communities. According to an annual 

survey conducted by the American Veterinary Medical Association, 89 percent of 

veterinary students are graduating with debt, averaging $151,672 per borrower.26

Veterinarians encumbered with high debt burdens may be unable to make ends 

meet in a dairy medicine or livestock management practice in remote areas. 

Classroom teachers submitted letters detailing the impact of private student loan 

debt, which usually don’t offer forgiveness programs and income-based repayment 

options. One school district official wrote to the Bureau noting that programs to 

make student debt more manageable could lead to higher retention of quality teachers.27

Competitive Market? 

The student loan market has generally not exhibited signs of robust competition—

even when private market participants dominated. In the Federal Family Educational Loan Program, financial institutions could receive subsidies and guarantees 

if loans met certain criteria. Congress set statutory interest rate caps; in theory, the 

most efficient private actors would attract customers by providing the lowest possible price on a commodity product. 

Unfortunately, this was generally not the case. While lenders made limited use 

of incentives, such as waivers of some origination fees, those who charged the statutory maximum were not competed out of the market. Even when borrowers were 

offered various advertised incentives, most borrowers would never benefit from 

those incentives.28 Instead of offering competitive prices to student loan borrowers, 

many financial institutions drew scrutiny for business models that provided benefits 

to schools and financial aid officials, who are able to strongly influence student loan 

choices by students and families.29

Servicing of student loans and origination of private student loans remains fairly 

concentrated within a relatively limited number of players. Refinancing activity has 

been low, potentially due to this lack of robust competition. In addition, even when 

both the borrower and creditor may be better off with some sort of alternative repayment plan when a borrower is in distress, restructuring activity in the market 

is troublingly low. 

Like mortgage borrowers, many private student loan borrowers want to repay 

their obligations, but simply need an alternative payment plan to weather tough 

times in the labor market. In addition, borrowers with both Federal and private student loans have been frustrated with the inability to refinance fixed-rate loans to 

take advantage of today’s historically low interest rates and their improved credit 

profile.30 If these issues are not addressed, there may be a negative impact not just 

on consumers, but also on the broader economy. 

Assisting Financial Institutions in the Crisis 

In 2008, distress in the credit markets led the Federal Government to enact policies to assist financial institutions to raise capital for student loan issuance. While 

33

31For further information on the asset-backed commercial paper conduit facility established 

under the ECASLA authority, see http://ifap.ed.gov/ECASLA/ABCP.html. 32While financial institutions no longer originate Federal student loans, many lenders still 

have obligations through the Straight-A Funding, LLC, asset-backed commercial paper conduit 

facility. For example, one of the largest participants, Sallie Mae, had outstanding borrowings 

of over $16 billion at an average interest rate of 0.82 percent, as of the end of 2012. 33See, for example, SLM Corp., 10–K Annual Report for Fiscal Year 2009 (2010) and SLM 

Corp., 10–K Annual Report for Fiscal Year 2010 (2011). 34 It is worth noting that this authority was subsequently amended by Section 1101 of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. 35For further information and data on TALF loans and issuances, visit http://

www.federalreserve.gov/newsevents/reformltalf.htm.

these programs were primarily designed to help financial institutions originate more 

loans, understanding them might also be useful for policymakers seeking to find 

ways to increase efficiency and competition in the market for the benefit of borrowers. 

The ECASLA Authority 

In 2008, the Ensuring Continued Access to Student Loans Act (ECASLA) was enacted, providing the Secretary of Education the authority, with the consent of the 

Secretary of the Treasury and the Director of the Office of Management and Budget, 

to establish mechanisms to ensure that students and families had continued access 

to Federal student loans regardless of conditions in the credit markets. All programs 

administered under this authority were required to have no net cost to taxpayers. 

The Secretary of Education exercised this authority to intervene in the credit markets by creating a number of loan purchase programs, as well as a complex assetbacked commercial paper conduit that would pledge Federal support for financial institutions and other lenders seeking to access funding to finance Federal student 

loans. ECASLA permitted the Secretary of Education to purchase certain Federal 

student loans, provided that the owners of these Government-guaranteed loans use 

the proceeds to originate new Federal student loans for borrowers. 

Another program established by the Secretary (designed by Citigroup, Morgan 

Stanley, and a committee of lenders) provided financing to lenders through issuance 

of commercial paper. Under this program, the Government was obligated to buy this 

commercial paper if investors do not.31

Lenders were able to transfer Government-guaranteed existing loans into a special purpose vehicle, Straight-A Funding, LLC, which in turn would facilitate the 

issuance of commercial paper issued to investors. The Secretary of Education would 

purchase any commercial paper not sold to investors, while the Secretary of the 

Treasury (through the Federal Financing Bank) provided temporary financing. In 

total, the conduit advanced $41.5 billion in commercial paper to assist about two 

dozen lenders, who benefit from the Government’s lower cost of capital.32

The Secretary of Education’s actions under the ECASLA authority injected significant liquidity into the market. Financial institutions originated tens of billions of 

dollars in new loans in the subsequent academic year, potentially due to the favorable cost of capital as a result of Federal intervention. At the end of 2010, the Secretary of Education had purchased a total of $110 billion in Federal student loans 

from private sector lenders. While there was no budgetary cost to taxpayers, the 

asset purchase programs did lead to some cases of extraordinary gains when holders 

of Government-guaranteed student loans sold those loans to the Secretary of Education.33

The TALF Program 

In early 2008, the asset-backed securities (ABS) market came under intense 

strain, and by October 2008, the market was nearly frozen. Because ABS had historically funded consumer and small business credit, a complete halt in the ABS 

trading markets would have undoubtedly limited credit availability to households 

and small businesses. Citing ‘‘unusual and exigent circumstances’’, the Federal Reserve Board authorized the Term Asset-Backed Securities Loan Facility (TALF), 

under section 13(3) of the Federal Reserve Act.34

TALF did not provide loans directly to consumers. The program provided nonrecourse loans to purchasers of TALF-supported ABS, where the ABS was held as 

collateral. In other words, entities could borrow at attractive rates from the program 

to purchase qualifying ABS. Securities backed by Federal student loans and private 

student loans were eligible for TALF support. Two student lenders offered approximately $9 billion in TALF-supported ABS issuances in 2009 and 2010: Sallie Mae 

and Student Loan Corp (then a unit of Citigroup).35

34

36 Consumer Financial Protection Bureau: Student Loan Affordability (2013). This report specifically addresses issues policy options for borrowers in repayment. Pursuant to the Section 

1077 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bureau and the 

Department of Education also put forth recommendations to Congress in July 2012 addressing 

other aspects of the private student loan market. 37One unusual market trend is noteworthy here. Some private student lenders are enjoying 

increasing net interest margins, which is unlike the experience of lenders of other consumer financial products in today’s interest rate environment. This may demonstrate a lack of competition, as well an opportunity for more efficient private capital participation. 

TALF was successful in jumpstarting ABS issuance of private student loans. In 

2009, the majority of student loan ABS issuances were TALF-supported, totaling approximately $10 billion. No losses have been experienced by TALF thus far. All student loan ABS issued under TALF provided funding for private student loans. While 

Federal student loans were eligible, there were no Federal student loan ABS 

issuances under TALF. 

Path Forward 

Last month, the Bureau published a report on student loan affordability that discusses what we learned from the public about potential solutions for the market.36

During the crisis, policymakers employed a number of creative tools to revive the 

student lending market, as discussed above. Policymakers might now focus on the 

following objectives to increase private capital participation and market efficiency: 

Spurring loan restructuring opportunities: Some of those who submitted comments 

suggested options to help borrowers in distress, including those who have fallen behind on private loans. 

Most private student loans have few options available for alternative payment 

plans. Many of those who submitted to the Bureau’s request for information noted 

that if lenders had more incentive to work with borrowers trapped in debt, both 

could benefit. Policymakers might look to provide a path forward for those borrowers, creating a transparent step-by-step process that leads to affordable payment 

terms where monthly payments can match a reasonable debt-to-income ratio and repayment of the loans can be more affordable. 

Even if such a program required public funds, or a sharing of the cost between 

the public sector and the owners of the loans, the economic benefits of facilitating 

restructuring activity at scale might outweigh program costs. 

Jumpstarting a student loan refinance market: For borrowers who have dutifully 

managed their monthly payments on high-interest private student loans, many 

raised the need for a way to refinance. This approach could give responsible borrowers the opportunity to swap their existing loan for a new loan at market interest 

rates that reflect their current credit profile.37

Students generally apply for private student loans when they are young, have little to no credit history, and are not yet employed. Lenders have to consider the possibility that borrowers won’t graduate or find a job with a salary that allows them 

to meet their monthly payment. These risks are priced into new private student 

loans. 

Most borrowers do attain employment though, and have been honoring their 

promises to pay, but they simply can’t find a refinance option. When mortgage borrowers see rates plummet and see their incomes rise, they try to refinance. Responsible student loan borrowers should have this option, too. 

Conclusion 

Thank you for the opportunity to share insight on the state of the student loan 

market. We look forward to continued dialogue with industry, consumers, institutions of higher education, and policymakers to ensure that we confront the significant challenges faced by student loan borrowers. While there has recently been considerable discussion about interest rates on Federal student loans for borrowers 

next year, it will be important to address the potential impacts of the heavy burdens 

for the millions of Americans already in debt. 

If we are collectively successful, we can help a generation of new graduates serve 

as an economic engine—bettering themselves, the financial institutions that serve 

them, and the rest of society. 

35

* Statement Required by 12 U.S.C. § 250:

The views expressed herein are those of the Office of the Comptroller of the Currency and 

do not necessarily represent the views of the President. 

PREPARED STATEMENT OF JOHN C. LYONS

SENIOR DEPUTY COMPTROLLER

BANK SUPERVISION POLICY AND CHIEF NATIONAL BANK EXAMINER

OFFICE OF THE COMPTROLLER OF THE CURRENCY *

JUNE 25, 2013

Introduction 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, I 

appreciate this opportunity to discuss private student lending, and the OCC’s supervisory approach for national banks and Federal savings associations (hereafter, national banks and thrifts) engaged in this business. Promoting fair and equitable access to credit, including education financing, is a core OCC mission and one of our 

most important priorities. We work hard to ensure that national banks and thrifts 

offer and manage consumer credit portfolios in a safe and sound manner that promotes long-term access to credit across a spectrum of consumer products. National 

banks and thrifts have a long history of participation as lenders and servicers of 

Federal and private student lending programs; however, they are not dominant 

players in this market, and their current portfolio holdings of private student loans 

represent just 3 percent of the total $966 billion in student loans outstanding. 

We also have a longstanding policy of encouraging national banks and thrifts to 

work constructively with borrowers who may be facing hardship. As my testimony 

will describe, with respect to private student loans, we allow national banks and 

thrifts to offer additional flexibility when working with student borrowers in recognition of the unique challenges these borrowers face. This flexibility includes extended grace periods for loan repayments that go beyond what is permitted for other 

types of consumer credit. For long-term hardship cases, national banks and thrifts 

may also permanently reduce the interest rate or otherwise modify payments to assist the borrower. 

As requested by the Committee’s letter of invitation, my testimony provides an 

overview of trends in student lending and national bank and thrift participation in 

the private student loan market. I will describe applicable regulatory guidance as 

well as the OCC’s supervisory approach to private student loans. I will also address 

programs that national banks and thrifts may offer to assist borrowers who may be 

facing temporary hardship due to the current job market. My testimony concludes 

with a discussion of various recommendations that have been made to enhance the 

private student loan market and to help mitigate loan defaults, including a discussion of common workout programs for Federal student loans and their applicability 

to private student loans. 

Background 

I want to begin by describing some of the unique challenges student loans can 

pose for lenders and borrowers and how the OCC has responded to those challenges. 

For most consumer loans, such as automobile loans, the underwriting, loan structure, and account management are straightforward. The use of funds is for a specific 

purpose, and the source of repayment is well defined, structured, and can be readily 

assessed at origination. In contrast, private student loans are unique for three main 

reasons: first, funding a post-secondary education often requires a substantial, 

multi-year-term commitment that extends from the time the student starts school 

until repayment begins once he or she has finished his or her education; second, advances made under private student loans are usually uncollateralized; and third, a 

substantial time period exists between the date when the lender advances funds and 

when that student reaches his or her anticipated earnings potential. Private student 

loans also differ from Federal student loans in that the Government does not guarantee repayment. For this reason, many lenders require that private student loans 

have cosigners. 

Private student loans provide flexibility for deferment while borrowers are in 

school, and post-school grace periods to help borrowers transition from school to employment. Student loans are the only consumer product with such a transition period. This flexibility reflects both the unique circumstances of the student borrower 

and that these loans truly are an investment in the borrower’s future. As my testimony will describe, the OCC believes this flexibility, if properly applied, supports 

36

1 Uniform Retail Classification and Account Management Policy, 65 Fed. Reg. 113 (June 12, 

2000). 2 CNBE Policy Guidance 2010–02, ‘‘Policy Interpretation: OCC Bulletin 2000–20—Application 

to Private Student Lending.’’

student borrowers, and allows lenders to make private student loans and manage 

the resulting credit exposures in a safe and sound manner. 

When borrowers experience financial difficulties, the OCC encourages national 

banks and thrifts to work with the borrower by offering prudent forbearance and 

modification programs. We recognize that well-designed and consistently applied 

workout programs can help borrowers resume structured, orderly repayment and 

minimize losses. Such work out programs are fundamental to effective lending, and 

ultimately, benefit both the borrower and the financial institution. 

The interagency Uniform Retail Classification and Account Management Policy 

(Uniform Classification Policy) contains general guidance for consumer credit forbearance and modification programs.1 This policy acknowledges that extensions, deferrals, renewals, and rewrites of consumer loans can help borrowers overcome temporary financial difficulties such as unemployment, medical emergency, or other life 

events. It further notes that prudent use of these loan modification measures is acceptable when based on the borrower’s willingness and ability to repay the loan, and 

when the modification is structured in accordance with sound internal policies. 

While the Uniform Classification Policy provides general guidance regarding extensions, deferrals, renewals, and rewrites, it does not specifically address private 

student loan workout and forbearance practices, nor does it directly address the 

unique challenges that student lenders and borrowers may face. To address these 

issues, the OCC issued supplemental guidance to our examiners in 2010 that interprets the Uniform Classification Policy in the context of private student lending, 

and describes the OCC’s minimum expectations for managing forbearance, workout, 

and modification programs (The Student Lending Guidance or Guidance).2 The Student Lending Guidance explicitly permits national banks and thrifts to engage in 

the following actions to assist borrowers: 

• In-school deferments—allows a lender to postpone a borrower’s principal and interest payments as long as the borrower is enrolled in school at least as a halftime student.

• Grace periods—allows lenders to defer a borrower’s payments for 6 months immediately following the borrower’s departure from school, without conditions or 

hardship documentation.

• Extended Grace periods—allows lenders to defer a borrower’s payments for an 

additional 6 months immediately following the initial grace period. This option 

is for those borrowers who are experiencing a financial hardship and is available to student loan borrowers who are unemployed or under-employed.

• Short-term forbearance—allows lenders to offer two-to-three month loan extensions to a borrower to address short-term hardships.

• Loan Modifications—allows lenders to provide interest rate and payment reductions to borrowers who are experiencing long-term hardships.

The first three actions primarily help borrowers while they are in school and as 

they transition to full-time employment, and are unique to student loans. The extended grace period in particular is a direct response to the difficult employment 

conditions that many students are experiencing. Under our guidance, a national 

bank or thrift may allow a borrower facing difficulty in finding a job to not make 

any payment for up to 12 months after he or she leaves school. Upon completion 

of the extended grace period, the borrower is considered current and will remain in 

that status as long as scheduled payments are met. If the borrower is still experiencing hardship at the end of this extended grace period, we would expect the bank 

to work with the borrower and determine whether additional actions are warranted. 

Such actions may include the forbearance, workout, and modification programs allowed under the interagency Uniform Classification Policy. We also require banks 

to maintain appropriate loan loss allowances and regulatory capital levels, consistent with applicable accounting and regulatory requirements. Working constructively with troubled student borrowers, while adhering to prudent accounting principles, provides appropriate flexibility for both assisting troubled student borrowers 

and protecting the safety and soundness of the institution. 

37

3Trends in Student Aid 2012, The College Board, www.collegeboard.org. 4Quarterly Presentation on Household Debt and Credit, May 2013, Federal Reserve Bank of 

New York.

Trends in Private Student Lending 

In 2012, The College Board released its most recent ‘‘Trends in Student Aid Report’’3 that included preliminary data for the academic year 2011–2012. Student aid 

includes loans (Federal and private), grants, work-study, and education tax benefits. 

According to The College Board, total financial aid for academic year (AY) 2011–

2012 was approximately $245 billion. Federal loans represented $105.3 billion for 

AY 2011–2012, or 43 percent of total aid. By comparison, private student loans for 

AY 2011–2012 were $8.1 billion, or 3 percent of total aid. This was similar to AY 

2010–2011 and down substantially from the $25.6 billion in private student loans 

originated during the peak AY of 2007–2008. 

The student aid distribution in AY 2011–2012 continued recent trends, where 

Federal aid (loans and grants) are the principal source of student aid, while private 

student lending provides a supplement to help with shortfalls. Private student loan 

share peaked in AY 2007–2008 at just below 14 percent ($25.6 billion), but has been 

a much smaller share since then. After 2008, the financial crisis, high unemployment, weaker loan performance, and reduced securitization funding all contributed 

to lower market share in absolute and relative terms. We see little indication that 

private student lending volumes will increase or return to mid-2000 levels in the 

near term.

National Bank and Thrift Participation in the Private Student Loan Market 

Total outstanding private student loans are difficult to estimate since volumes are 

not collected as part of call report or public financial statement reporting. Industry 

estimates place year-end 2012 totals somewhere between $126 and $150 billion. For 

this discussion, we use the Federal Reserve Bank of New York’s estimates of $126 

billion for private student loans and $996 billion for total student loans, both as of 

December 2012.4


82364-1.eps 82364-2.eps
38

As the chart above shows, Federal loans dominate the student loan market, with 

87 percent, or approximately $849 billion of the total $966 billion that was outstanding at the end of 2012. Within the private segment of the student loan market, 

national banks and thrifts hold approximately $27 billion of the remaining $126 billion in student loans, or roughly 21 percent of the private market and 3 percent of 

the total $966 billion outstanding. The ‘‘Private—Other’’ segment in this chart includes other non-OCC supervised financial institutions. 

National bank and thrift participation in the private student lending market is 

highly concentrated, with only eight lenders holding portfolios of $500 million or 

more. Wells Fargo, JPMorgan Chase, Citibank, KeyBank, PNC, RBS Citizens, Bank 

of America, and U.S. Bank combined hold approximately $25.8 billion in private student loans, with Wells Fargo accounting for slightly more than 40 percent of the 

total. Of the eight banks, four have ceased making new private student loans since 

2008 due primarily to concerns about portfolio performance and liquidity. The second largest, JPMorgan Chase, only offers new private student loans to existing bank 

customers. 

Within these portfolios, a greater number of borrowers have concluded the inschool deferment phase, and have started repayment. For the eight largest banks, 

more than 70 percent of the outstanding loans are in repayment, and overall delinquencies are relatively low, generally between three to 4 percent; only one of the 

eight largest lenders has a delinquency level in excess of 4 percent. In addition, all 

eight of these banks offer forbearance and extended grace programs. At the end of 

2012, these banks had almost $750 million combined in active post-school 

deferment. Loss rates for loans in repayment are also relatively low, with the average for the eight largest private student lenders at 4.6 percent. These delinquency 

levels are manageable, and compare favorably to the overall student loan market 

and are considerably lower than the current delinquency rates for residential mortgages. The low levels associated with these private student loans reflect the quality 

of underwriting, including a greater prevalence of cosigners, and better risk selection than were evident after 2008. 

How the OCC Supervises Consumer Credit Portfolios 

Most lenders’ consumer credit portfolios, including student loan portfolios, consist 

of a significant number of loans, with standardized underwriting, loan structures, 

and repayment terms. Because of the volumes involved, such standardized processrelated decisions (credit score floors, credit line assignment, documentation of income, etc.) are critically important for consistent and timely credit decisions. Supervisory oversight generally focuses on the quality of the bank’s or thrift’s decisionmaking processes and on internal controls and audit. For safety and soundness purposes, the OCC focuses on whether management has established prudent risk tolerances, developed effective account management practices, and has a fundamental, 

disciplined understanding of portfolio quality. 

Prudent risk tolerances generally involve establishing well-defined underwriting 

and repayment structures. The OCC expects national banks and thrifts to employ 

underwriting standards that consider both a borrower’s willingness and capacity to 

repay any credit extended, based on reliable information prior to making the loan. 

Effective account management and collection practices include active monitoring 

of loan performance and timely actions when issues arise. This includes the use of 

forbearance and modification programs that are designed to benefit both the borrower and the bank by improving the likelihood of repayment. As with risk tolerances, we expect lenders to consider and articulate accepted and prudent use of 


82364-3.eps
39

5 Under the agencies’ regulatory classification guidelines, ‘‘substandard’’ assets are defined as 

assets that are inadequately protected by the current sound worth and paying capacity of the 

obligor or collateral pledged, if any. Assets so classified must have a well-defined weakness or 

weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct 

possibility that the institution will sustain some loss if the deficiencies are not corrected. 6 An asset classified ‘‘loss’’ is considered uncollectible, and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value; rather it is not practical or desirable to defer writing off 

an essentially worthless asset (or portion thereof), even though partial recovery may occur in 

the future. 7 Under Federal student loan program guidelines, Federal student loans that are 270 days 

past due are considered to be in default. 

modification programs in advance, and then manage these activities within defined 

parameters. 

Understanding portfolio quality generally involves robust, timely reporting that 

identifies loans or portfolio segments that are not performing as expected. A bank’s 

portfolio monitoring should include new and existing loans, as well as the range of 

loss mitigation and collection activities that it uses. A comprehensive and accurate 

view of a loan portfolio’s risk is critical for effective forbearance, workout, and modification programs. 

The interagency Uniform Classification Policy establishes standard guidelines for 

loan classification and charge-off. Under that policy, consumer loans 90 days past 

due are classified ‘‘substandard,’’5 and amortizing loans that become 120 days past 

due are classified ‘‘loss,’’6 and charged-off. This is one aspect where the regulatory 

treatment for Federal student loans and private student loans differs. While both 

types of loans are uncollateralized, generally banks are not required to charge-off 

loans that are federally guaranteed.7

Designating a loan as ‘‘loss’’ does not mean that a lender should stop the use of 

workout or modification programs, or that loss mitigation or collection efforts should 

cease. It simply means that for safety and soundness reasons and financial and investor transparency, the bank should follow appropriate accounting practices and 

reflect the increased credit risk in its financial statements. 

The Uniform Classification Policy does not prohibit or discourage a bank from 

working with troubled borrowers nor does it dictate when a bank can begin to work 

with a borrower who may be facing hardship. We believe that full, objective analysis 

and timely identification of problem loans encourage lenders to work with troubled 

borrowers at an early stage when programs generally have a higher probability of 

improving repayment and reducing losses. To be effective, however, forbearance and 

modification programs need to be based on accurate assessments of risk and reliable 

information. 

As previously noted, private student loans raise unique issues that are not explicitly addressed by the Uniform Classification Policy. In early 2010, OCC examiners 

noticed inconsistent practices regarding the use of grace and forbearance periods for 

borrowers who were transitioning from school to full-time employment. In response, 

the OCC issued the Student Lending Guidance to address the unique challenges associated with private student loan programs. As mentioned previously, that Guidance acknowledges the challenges that borrowers face shifting from school into the 

workforce, and recognizes the need to facilitate orderly transitions. To facilitate that 

transition, the Guidance allows a bank to defer a borrower’s payments for up to a 

year. 

The Guidance also specifically allows national banks and thrifts to offer loan 

modifications, but we expect such modifications will reflect three key concepts: i) eligibility and payment terms that are based on a credible analysis of the borrower’s 

hardship and reasonable ability to repay; ii) sustainable payment schedules that 

avoid unnecessary payment shock; and iii) revised loan structures that promote orderly repayment and do not include elements such as interest-only payments, balloon payments, and negative amortization. 

A credible analysis of the borrower’s difficulties and the use of payment terms 

that are sustainable ensure that a modified student loan is likely to be successful 

over the long term. Moreover, modification programs should address hardship and 

payment issues directly, with the objective of improving the borrower’s ability to 

repay. The Guidance discourages the use of payment terms such as interest-only 

and negative-amortization. Such payment structures delay problem recognition in 

the hope economic or other market conditions might quickly improve and resolve the 

issue, but often will leave the borrower exposed to uncertain market conditions, and 

ultimately, higher costs as a result of the payment deferrals or increases in principal balance. 

40

8See 12 U.S.C. 1831n. 

9The Glossary section of the Call Report Instructions provides regulatory guidance for the 

identification of TDRs and associated allowance methodologies under the topics Troubled Debt 

Restructures and Loan Impairment. 

Finally, while the OCC encourages national banks and thrifts to work with troubled borrowers, offering prudent forbearance, workout, and modification programs 

does not relieve these institutions of their fiduciary responsibility to ensure that regulatory reports and financial statements are accurate and fairly represent the financial condition of the institution. This tends to be a point of confusion, as some mistake the expectation of full and accurate reporting as limiting available forbearance, 

workout, and modification programs. To be clear, the Student Lending Guidance allows options and flexibility to lenders in offering forbearance and modification programs to private student loan borrowers, but requires banks to ensure the 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. 

Consistent with Section 121 of the FDIC Improvement Act of 1991, national banks 

and thrifts offering workout and modification programs are expected to follow generally accepted accounting principles (GAAP) to ensure transactions are accurately 

reflected in the institution’s regulatory reports and financial statements.8 In general, under GAAP a bank must recognize a loan modification for a financially troubled borrower that includes concessions as a troubled debt restructuring (TDR), with 

appropriate loan loss provisions if impairment exists.9 The designation of a loan as 

TDR does not prohibit or impede a bank’s ability to continue to work with the borrower. 

Potential Enhancements to the Private Student Loan Market and Mitigation Efforts 

A number of thoughtful studies have highlighted policy recommendations to 

strengthen student lending programs, including the Consumer Financial Protection 

Bureau’s July 2012 and March 2013 reports. Some of these recommendations are 

aimed at improving the transparency and clarity of student loan programs and loan 

terms to help ensure that students and their families can make informed decisions. 

The OCC supports proposals that would enhance borrowers’ ability to understand 

and compare various financial products and options that may be available. Likewise, 

we support loan documents and billing statements that allow a borrower to fully 

and readily comprehend his or her financial obligation. 

Other recommendations have focused on exploring permissible mitigation efforts 

for student borrowers who are facing difficulties and whether plans permitted under 

current Federal loan repayment programs can be used for private student loans. As 

previously discussed, the OCC believes its guidance provides national banks and 

thrifts with appropriate flexibility in providing loan modifications to troubled borrowers. This flexibility includes the ability to adapt features of repayment programs 

used for federally guaranteed student loans to private student loans, as described 

below. 

Graduated Repayment Plans—Most Federal student loans allow a lender to establish a payment schedule where the borrower’s payment obligation starts low and 

then increases over time. Initially, payments can be interest only, and no required 

payment plan can be more than three times any other payment. Loan terms are 

generally 10 years (excluding in-school, grace, deferment, or forbearance periods) or 

25 years for borrowers with an extended repayment term. 

Graduated payment terms that are part of the payment structure at origination 

are permissible and consistent with existing regulatory guidance. In the case of student loans, programs that include such payment terms recognize that borrowers are 

likely to have significantly lower income with entry-level jobs at the beginning of 

the payment period, and that their income may increase significantly over the next 

few years. Under GAAP and regulatory reporting guidelines, a bank offering a graduated payment plan as a workout concession to a financially distressed borrower 

generally would have to report the loan as a TDR and take an appropriate impairment charge to earnings. 

Income-Based Repayment Plans—These are payment plans for Federal student loans where monthly payments are based on a borrower’s expected total 

monthly gross income and family size. Such plans require the borrower to show a 

hardship, and payments are generally limited to 15 percent of eligible income. Any 

remaining loan balance is forgiven after 25 years. 

For private student loans, income-based loan modifications are consistent with 

regulatory expectations and typically form the basis for prudent modification proVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 S:\DOCS\82364.TXT SHERYL
41

grams. Given that payment and principal concessions are due to the borrower’s financial hardship, these modified loans likely would require TDR designation under 

GAAP, and would require appropriate recognition, carrying values, and impairment 

allowances. As a modification, we would expect that approved payment terms would 

not reflect interest-only or negative amortization provisions. In addition, any balances forgiven would likely require full loan loss allowance coverage, or be chargedoff. 

Consolidation Loans—Federal programs allow borrowers to combine multiple 

student loans into one consolidated loan, simplifying the repayment obligation. The 

consolidated loan’s repayment term is determined by the total loan balance, and can 

extend from 10 years to 30 years. Borrowers pay a fixed interest rate equal to the 

weighted average interest rate of the underlying loans. 

Consolidating loan balances is also permitted under existing regulatory policies. 

Since consolidated loans generally do not include concessions to troubled borrowers, 

extending their use to private student loans likely would not require TDR designation. As with any consumer loan, a lender should have reasonable underwriting criteria that considered a borrower’s reasonable willingness and ability to repay the 

full amount of the consolidated loan. 

Loan Rehabilitation Programs—A Federal student loan that has defaulted 

(i.e., more than 270 days delinquent) can be returned to performing status if the 

borrower makes at least nine on-time payments in a 10-month period. This rehabilitated loan must retain the same interest rate, repayment terms, and other benefits 

that were applicable when the loan was first disbursed, and collection costs and accrued interest are capitalized and built into the principal balance of the loan. After 

a Federal student loan has been rehabilitated, the loan’s default status is deleted 

from the borrower’s national credit bureau reports, and, pursuant to the loan’s original terms, any benefits that were available before the borrower defaulted (such as 

deferment, forbearance, or consolidation) are reinstated. 

Rehabilitation programs for Federal student loans are late-stage actions that 

occur well after normal collection activities for private student loans are exhausted. 

As previously noted, once a private student loan becomes 120 days past due, the 

Uniform Classification Policy indicates that the institution is expected to record the 

exposure as a loan loss and charge-off any remaining loan balance. Work out activities may continue post-charge-off, including payment plans for financially troubled 

borrowers, but any amounts received from the borrower are treated as recoveries. 

Charged-off loans are rarely re-booked as performing assets. This discipline is an 

important part of financial statement transparency, and ensures that lenders accurately report their balance sheets and capital. 

The OCC believes that full and accurate reporting to credit bureaus that includes 

updated default status for loans that subsequently perform as well as their prior 

history, is important for both lenders and borrowers. Much of the depth and breadth 

of the $11 trillion consumer credit market is tied directly to objective and accurate 

bureau transaction data that supports credit decisions and other account management practices. 

Conclusion 

We recognize that access to higher education remains an important public policy 

objective, and that cost-effective funding for an education can be a challenge for students and their families. Private student lending is a relatively small but important 

part of the student aid package, but still can contribute to the substantial debt burden that some students have once they leave school. 

The OCC encourages national banks and thrifts to work constructively with troubled borrowers, and expects banks and thrifts to make informed, objective decisions 

in workout situations. For troubled loans, most often this means active loss mitigation practices that include forbearance, workout, and loan modification programs. 

We believe that our guidelines provide lenders with the flexibility necessary to work 

with troubled private student loan borrowers, including permitting the lenders to 

take advantage of a number of the options currently used in connection with Federal student loans. In particular, we recognize the challenges that student borrowers 

can have finding employment during difficult economic conditions, and in response, 

we have allowed grace periods to extend up to a full year to help these borrowers 

as they transition into the work force. 

These and other forbearance and modification programs are consistent with safety 

and soundness principles and complement prudent underwriting practices. Both 

help borrowers handle debt responsibly, and avoid default during periods of hardship, and both are important for vibrant and sustainable loan markets. 

42

1 In July 2010, the Federal Government stopped guaranteeing student loans made through 

private lenders. 

PREPARED STATEMENT OF TODD VERMILYEA

SENIOR ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JUNE 25, 2013

Chairman Johnson, Ranking Member Crapo, and other Members of the Committee, thank you for the opportunity to testify at today’s hearing. First, I will discuss recent student loan market trends and the portfolio performance of both Government-guaranteed and private student loans. I will then address the Federal Reserve’s approach to supervising financial institutions engaged in student lending 

and close by briefly discussing the implications of rising student debt levels and default rates on other forms of lending. 

Background 

The Federal Reserve has supervisory and regulatory authority for bank holding 

companies, State-chartered banks that are members of the Federal Reserve System 

(State member banks), savings and loan holding companies, and certain other financial institutions and activities. We work with other Federal and State supervisory 

authorities to ensure the safety and soundness of the banking industry and foster 

the stability of the financial system. 

Student Loan Market 

The student loan market has increased significantly over the past several years, 

with outstanding student loan debt almost doubling since 2007, from about $550 billion to over $1 trillion today. Balances of student loan debt are now greater than 

any other consumer loan product with the exception of residential mortgages, and 

it is the only form of household debt that continued to rise during the financial crisis. Outstanding education loan debt is now greater than credit card debt, home equity lines of credit, or auto debt on consumers’ balance sheets. 

Since 2004, both the number of student loan borrowers, and the average balance 

per borrower, has steadily increased, according to data compiled by the Federal Reserve Bank of New York. In 2004, the share of 25-year-olds with student debt was 

just over 25 percent; today, that share has grown to more than 40 percent. At the 

end of 2012, the number of student loan borrowers totaled almost 40 million and 

the average balance per borrower was slightly less than $25,000. In 2004, the average balance was just over $15,000. In 2012, roughly 40 percent of all borrower had 

balances of less than $10,000; almost 30 percent had balances between $10,000 and 

$25,000; and fewer than 4 percent had balances greater than $100,000. 

This sharp increase in student loan borrowing likely reflects a number of factors. 

Demand for student loans has risen in line with the increasing cost of higher education; increasing enrollment in post-secondary education; a relative decline in 

household wealth brought about by the financial crisis and the ensuing recession; 

and more favorable terms on Government-guaranteed loans. 

The rising cost of higher education and the decline in wealth coincided with a difficult job market, which may have encouraged more people to enroll in higher education, or stay in school to pursue advanced degrees immediately after graduation. 

Notably, enrollment in degree-granting institutions increased at an annual rate of 

about 5 percent between 2007 and 2010, compared with a historical increase of 3 

percent since 1970. It is also important to note that underwriting standards and 

terms of Federal student loans have been favorable relative to other borrowing alternatives over the past few years. As a result, households likely substituted student loans for other sources of education financing, such as home equity loans, credit card debt, or savings. All of these factors have contributed to the rapid rise in 

student loan debt levels and seem likely to have been influenced by the financial 

crisis. 

The student loan market is bifurcated into Government-guaranteed loans and private student loans that are not guaranteed.1 Government-guaranteed loans represent approximately 85 percent of total student debt outstanding, and private loans 

represent just 15 percent. While Federal student loan originations have continued 

to increase each year, private loan originations peaked in 2008 at roughly $25 billion and have since dropped sharply to just over $8 billion. New Government-guaranteed student loan originations topped $105 billion in 2012, comprising 93 percent 

of all new loans. 

43

2Delinquency status is defined as more than 90 days past due. 

3Of the 19 banks participating in CCAR, seven submitted student loan data. Sallie Mae, the 

largest holder of private student loan debt (with $37 billion), is not included in the CCAR data 

set. 

Terms and conditions of Government-guaranteed loans are generally set by a Federal formula established by the Congress. Although a credit check is not required 

for most types of Government-guaranteed loans, borrowers may be turned down if 

they are delinquent on an existing student loan. Private loan standards are set by 

the lending institutions and generally require full underwriting, including a credit 

check. Private loans also increasingly require a guarantor. Most Government-guaranteed and private student loans provide the borrower with a 6-month grace period 

after leaving school before payments begin. 

Performance of Student Loan Portfolios 

In line with the rapid growth in student loans outstanding, the number of student 

loans—private and guaranteed—that are currently delinquent has risen sharply as 

well, standing at 11.7 percent of all outstanding student loans in 2012.2 However, 

some 44 percent of student loan balances are not yet in their repayment periods, 

and if these loans are excluded from the data pool, the effective delinquency rate 

of loans in repayment roughly doubles to 21 percent. By comparison, in 2004, only 

6.3 percent of student loans were in delinquency. 

According to the Consumer Financial Protection Bureau (CFPB), of the $1 trillion 

in total outstanding student loan debt, $150 billion consists of private student loans. 

It is important to note that the private student loan market includes loans made 

not only by banks, but also loans made by credit unions, State agencies, and schools 

themselves. The rate of delinquency among these loans is roughly 5 percent, according to the CFPB, less than half of the delinquency rate for all outstanding loans. 

There are likely a number of factors underlying the difference between the performance of the Government-guaranteed and private student loan portfolios. For instance, underwriting standards in the private student loan market have tightened 

considerably since the financial crisis. Almost 90 percent of these loans now require 

a guarantor or cosigner, usually a parent or legal guardian. 

Federal Reserve Supervision of Student Loan Market 

The Federal Reserve has no direct role in setting the terms of, or supervising, the 

student loan programs. The Department of Education is responsible for administering the various Federal student loan programs, which, as noted earlier, comprise about 85 percent of the student loan market. The Federal Reserve does, however, have a window into the student loan market through our supervisory role over 

some of the banking organizations that participate in the market. We share this role 

with the Office of the Comptroller of the Currency, the Federal Deposit Insurance 

Corporation, and the National Credit Union Administration. 

Federal Reserve supervision of participants in the student loan market is similar 

to our supervision of other retail credit markets and products. Institutions subject 

to Federal Reserve supervision—including those with significant student loan portfolios—are subject to onsite examinations that evaluate the institution’s risk-management practices, including the institution’s adherence to sound underwriting 

standards, timely recognition of loan deterioration, and appropriate loan loss provisioning, as well as (to a limited degree) compliance with consumer protection standards. 

In addition to our work at specific institutions, the Federal Reserve also takes a 

horizontal view of the student loan market across multiple firms during the Comprehensive Capital Analysis and Review (CCAR) exercise, an important supervisory 

tool that the Federal Reserve deploys, in part, to enhance financial stability by assessing all exposures on bank balance sheets. CCAR was established to ensure that 

each of the largest U.S. bank holding companies: (1) has rigorous, forward-looking 

capital planning processes that effectively account for the unique risks of the firm; 

and (2) maintains sufficient capital to continue operations throughout times of economic and financial stress. The CCAR exercise collects data on banks’ student loan 

portfolios, delineated by loan type (Federal or private), age, FICO Score, delinquency 

status, and loan purpose (graduate or undergraduate). 

The banks submitting student loan data for CCAR held just over $63 billion in 

both Government-guaranteed and private student loans at year-end 2012, of which 

$23.6 billion represented outstanding private student loans.3 At the end of 2012, 

CCAR banks reported that just over 4 percent of private student loan balances were 

in delinquency, but more than 21 percent of Government-guaranteed student loan 

balances were delinquent. Nevertheless, the delinquency rate for Government-guarVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 S:\DOCS\82364.TXT SHERYL
44

4For all private loans, the delinquency rate increased from 2005 to 2009, and started to decrease during 2010, according to data from Moody’s. 

anteed student loans has shown improvement over recent quarters, dropping from 

a high of more than 23 percent. Likewise, the delinquency rate for private loans at 

CCAR firms trended upward through mid-2009 but has since moved down, which 

is comparable to the performance of the overall private student loan market.4

The Federal Reserve and the other Federal banking agencies that are members 

of the Federal Financial Institutions Examination Council (FFIEC) have jointly developed guidance outlining loan modification procedures: the Uniform Retail Credit 

Classification and Account Management Policy (SR 00–08). This guidance discusses 

how banks should engage in extensions, deferrals, renewals, and rewrites of closedend retail loans, which include private student loans. According to that guidance, 

any loan restructuring should be based on renewed willingness and ability to repay, 

and be consistent with an institution’s sound internal policies. 

In keeping with this guidance, the Federal Reserve encourages its regulated institutions to work constructively with borrowers who have a legitimate claim of hardship. The aim of such work should be the development of sustainable repayment 

plans while also preserving the safety and soundness of the lending institutions and 

maintaining compliance with supervisory guidance and accounting regulations. 

When conducted in a prudent manner, modifications of problem loans, including student loans, are generally in the best interest of both the institution and the borrower, and can lead to better loan performance, increased recoveries, and reduced 

credit risk. Moreover, Federal Reserve examiners will not criticize institutions that 

engage in prudent loan modifications, but rather will view such modifications as a 

positive action when they mitigate credit risk. As supervisors, our goal is to make 

sure that lenders work with borrowers having temporary difficulties in a way that 

does not contradict principles of sound bank risk management, including reflecting 

the true credit quality and delinquency status of the loan portfolios. 

Implications for Other Forms of Lending 

The benefits of higher education are widely recognized and have been supported 

by public policy initiatives for some time through a variety of State and Federal programs. The fact that annual median earnings are significantly higher for those with 

higher levels of education is well documented. 

However, post-secondary education is becoming increasingly expensive. With continued increases in student debt, and high levels of unemployment, recent graduates 

are finding it more difficult to repay their obligations, resulting in elevated delinquency and charge-off rates. 

Younger borrowers with high student loan balances have reduced their other debt 

obligations, including credit card, auto, and mortgage debt. This reduction likely reflects in part a decline in demand due to the burden of servicing existing student 

loans as well as the possibility that access to credit might be curtailed due to high 

student debt. Borrowers who are delinquent on student debt may face difficulty obtaining other forms of credit. Further, student loan delinquency is also associated 

with higher delinquency rates on other types of debt. More than 15 percent of delinquent student loan borrowers also have delinquent auto loans, 35 percent have delinquent credit card debt, and just over 25 percent are delinquent on mortgages payments. 

Conclusion 

Higher education plays an important role in improving the skill level of American 

workers, especially in the face of rising gaps in income and employment across 

workers with varying education levels. Due to increasing enrollment and the rising 

cost of higher education, student loans play an important role in financing higher 

education. The rapidly increasing burden of student debt underscores the importance of the topic of today’s hearing. This concludes my prepared remarks, and I 

would be happy to answer any questions you may have. 

PREPARED STATEMENT OF DOREEN R. EBERLEY

DIRECTOR, DIVISION OF RISK MANAGEMENT SUPERVISION

FEDERAL DEPOSIT INSURANCE CORPORATION

JUNE 25, 2013

Chairman Johnson, Ranking Member Crapo and Members of the Committee, 

thank you for the opportunity to testify on behalf of the Federal Deposit Insurance 

45

1Donghoon Lee, Household Debt and Credit: Student Debt, February 28, 2013, The Federal 

Reserve Bank of New York Consumer Credit Panel and Equifax, http://www.newyorkfed.org/

newsevents/mediaadvisory/2013/Lee022813.pdf. 2 Ibid. 

3 CFPB, Private Student Loans, Report to the Senate Committee on Banking, Housing, and 

Urban Affairs, the Senate Committee on Health, Education, Labor, and Pensions, the House of 

Representatives Committee on Financial Services, and the House of Representatives Committee 

on Education and the Workforce. August 29, 2012. 4Donghoon Lee, 2013. 

5 College Board Advocacy & Policy Center, Trends in Student Aid 2012. 

Corporation (FDIC) regarding private student loans (PSLs). Higher education has 

long provided a pathway to prosperity, as individuals with college degrees historically have had higher incomes and lower rates of unemployment than those without. 

Students and their families have financed higher education through loans, both Federal and private, for many years. While this model works well when graduates are 

able to obtain employment and use their degrees to move into higher paying jobs, 

the severity of the recent financial crisis and a relatively slow recovery have resulted in persistently high rates of unemployment and underemployment, which 

have negatively impacted the newly graduated who are trying to enter or advance 

through the workforce. Today, many consumers are struggling with student debt 

loads in a still fragile economic environment. 

In my testimony, I will discuss data on the student loan market, including data 

on its size and performance. I also will discuss our approach to the supervision of 

private student loan lenders, including the regulations and guidance that apply to 

private student loans. In addition, I will describe the ability of insured depository 

institutions (IDIs) to work with consumers to manage their student loan obligations 

within the current supervisory environment. 

In particular, I will describe the FDIC’s efforts to communicate to the banks we 

supervise that, for borrowers experiencing difficulties, prudent workout arrangements are in the best long-term interest of both the bank and the borrower. 

Data Regarding Student Loans 

Data regarding the overall market for PSLs are difficult to discern because there 

is no standard source for collecting the data. These data are not broken out separately in the Consolidated Reports of Condition and Income, otherwise known as 

Call Reports, which banks file quarterly, as student lending is a fairly small portion 

of aggregate consumer lending and relatively few IDIs make these loans. Rather, 

data on PSLs, like unsecured installment loans, are contained within a broader category called ‘‘other loans to individuals.’’

Nonetheless, based on recent studies, there appear to be about 39 million borrowers with a student loan, with an average balance of about $25,000.1 As of yearend 2012, total student loans outstanding were about $966 billion.2 Of this total student loan debt, the Consumer Financial Protection Bureau (CFPB) has estimated 

the size of the PSL market to be about $150 billion as of year-end 2011, which represents about 15 percent of student loans outstanding, compared to 85 percent for 

the Federal student loan (FSL) market.3

Debt from FSLs and PSLs has risen significantly since 2007, and student loans 

(FSLs and PSLs combined) are now the largest category of consumer loans, not including first mortgages.4 With regard to originations, growth has been centered in 

FSL originations, which have climbed from about $70 billion in the 2006–2007 

school year to over $100 billion per year in the past three academic years.5 In contrast, the PSL market has shrunk considerably over the same time period, with 

originations peaking at about $23 billion in the 2007–2008 academic year before 

falling to about $8 billion per year in the past three academic years. In terms of 

new volumes, PSLs are currently only about 7 percent of overall originations. While 

the market for PSLs is relatively small, PSLs provide a secondary source of funds 

for students and families seeking to fill the gap between FSLs and other financial 

resources and the total cost of students’ higher education. 

IDIs supervised by the FDIC hold about $14 billion in outstanding PSLs and 

originated about $4 billion in the 2011–2012 academic year. Reported past due rates 

(30 days or more delinquent) are just under 3 percent of total student loan balances, 

and the upper end of the charge-off range is at just over 1.5 percent per year. In 

addition, IDIs that we supervise are currently requiring cosigners, usually parents, 

on about 90 percent of the loans they underwrite. 

The majority of loans are underwritten at a variable rate of interest, with average 

interest rates currently in the 6 to 7 percent range. Loan terms vary, usually between 5 and 15 years. 

46

6See http://www.fdic.gov/regulations/laws/rules/5000-1000.html#fdic5000uniformpf. 7See for example the interagency Policy Statement on Prudent Commercial Real Estate Loan 

Workouts, October 2009, http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf and 

the interagency Statement on Working with Mortgage Borrowers, April 2007, http://

www.fdic.gov/news/news/press/2007/pr07032a.html.

Supervision of PSL Lenders 

Of the approximately 4,400 institutions supervised by the FDIC, only a small 

number of FDIC-supervised institutions originate PSLs, but these include two of the 

largest PSL originators. Unlike most lending, student lending is complicated by the 

fact that students often have no established credit history to indicate their creditworthiness, and that repayment will initially be partial, or delayed, often for several 

years, while the student completes his or her education. Also, PSLs generally are 

not dischargeable in bankruptcy. While this provides borrowers with a strong incentive to repay, IDIs and other lenders in the PSL market absorb all losses on these 

loans for borrowers who do not repay, which is why many originators require cosigners. 

The FDIC supervises PSL lenders using the same framework of safety and soundness and consumer protection rules, policies, and guidance as for other loan categories. The interagency policy, Uniform Retail Credit Classification and Account 

Management Policy (Retail Credit Policy) applies to student loans as it does to other 

unsecured personal loans.6 This policy, which has been in place since 1980, with 

some subsequent revisions, provides IDIs with guidance on classifying retail credits 

for regulatory purposes and on establishing policies for working with borrowers experiencing problems. 

For safety and soundness purposes, the FDIC examines IDIs to ensure that they 

are following basic underwriting tenets when extending credit. For PSLs, like all 

loans, the ability and willingness to repay is necessarily the primary driver of safe 

and sound lending. Generally, the ability to repay is demonstrated by payments of 

principal and interest that reduce principal over a reasonable period of time. 

During an examination of a PSL lender, FDIC examiners review the appropriateness of the lender’s underwriting criteria; loan administration and servicing practices; compliance with applicable laws and regulatory reporting and accounting requirements; loan classification and allowance for loan and lease losses policies; audit 

and internal review practices; and modification, workout and collection policies and 

practices. Additionally, examiners review portfolio structure and performance, and 

related monitoring and controls to assess credit quality and management oversight. 

They also review individual loan files, on a sampling basis, to ensure consistency 

with supervisory guidelines, internal bank policies, and overall prudent lending 

standards. 

The FDIC also examines student loan lenders for compliance with applicable Federal consumer protection laws, including the Equal Credit Opportunity Act, the 

Truth in Lending Act and Regulation Z, the Fair Credit Reporting Act, the GrammLeach-Bliley Act rules on privacy of consumer financial information, the Electronic 

Signatures in Global and National Commerce Act (E-Sign Act), the Service Members 

Civil Relief Act, and the Community Reinvestment Act (CRA). In addition, Section 

5 of the Federal Trade Commission Act, which addresses unfair or deceptive acts 

or practices, is applicable to this type of lending. As part of these compliance examinations, examiners review policies, procedures, and practices; marketing materials 

and practices; disclosures provided to borrowers; and any related consumer complaints. 

Additionally, examiners review monitoring procedures implemented by the bank 

to ensure compliance with consumer protection regulations. 

Working with Student Loan Borrowers 

The FDIC appreciates concerns about repayment and workout options and encourages institutions to work constructively with borrowers who are experiencing difficulty. Examiners will not criticize banks for engaging in alternate repayment plans 

or modifications so long as such plans or modifications are consistent with safe and 

sound practices. With respect to workouts and modifications, the interagency Retail 

Credit Policy specifically states ‘‘extensions, deferrals, renewals, and rewrites of 

closed-end loans can be used to help borrowers overcome temporary financial difficulties.’’ The Retail Credit Policy provides significant flexibility for IDIs to offer 

prudent workout arrangements tailored to their PSL portfolios. In particular, the 

policy states that it is the IDI’s responsibility to establish its own policies for workouts suitable for their portfolio. 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.7

47

8Supra, Footnote 7. 

9Securities Industry and Financial Markets Association (SIFMA), U.S. ABS Issuance and 

Outstanding, http://www.sifma.org/research/statistics.aspx. This report shows that PSL 

securitizations outstanding total $37.3 billion. 

IDIs supervised by the FDIC offer borrowers experiencing financial difficulties forbearance (cessation of payments) for periods ranging from 3 to 9 months beyond the 

initial 6-month grace period after leaving school. A number of workout plans are 

also available to borrowers of FDIC-supervised IDIs, including rate reductions, extended loan terms, and in settlement situations, principal forgiveness. At the same 

time, it is important that modifications not leave the borrower in a worse position 

in the long term. For example, a modification that does not provide for payments 

to cover principal and interest or that allows a loan to remain in extended periods 

of forbearance can result in negative amortization, which leads to a growing loan 

balance that can dig a consumer deeper into debt. 

Concerns have been raised that troubled debt restructuring (TDR) accounting 

rules limit IDIs’ ability to modify PSLs. The treatment of loans as TDRs is established by generally accepted accounting principles (GAAP), and banks are required 

by law to adhere to GAAP. Under GAAP, modifications of loans, regardless of loan 

type, should be evaluated individually, considering all facts and circumstances, to 

determine if they represent TDRs. A TDR occurs when a lender, due to a borrower’s 

financial difficulties, grants a concession to the borrower that it would not otherwise 

consider. GAAP requires modified loans that are TDRs to be evaluated for impairment and written down, if necessary, with appropriate adjustments made to the allowance for loan and lease losses. 

Potential or actual treatment as a TDR should not prevent institutions from 

proactively working with borrowers to restructure loans with reasonable modified 

terms. As stated above, the FDIC encourages banks to work with troubled borrowers 

and will not criticize IDI management for engaging in prudent workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in a TDR designation.8

It also is important that borrowers who are facing repayment difficulties receive 

clear and accurate information on opportunities for loan modifications and workouts. 

There is often a great deal of confusion about differences between FSLs and PSLs. 

Prior to 2010, FSLs were made through private financial institutions under the 

Family Federal Education Loan Program, and those loans have more repayment 

and modifications options than PSLs. The FDIC encourages its institutions to make 

clear to borrowers the modification and workout options that exist, and the eligibility criteria for such programs. 

One complicating factor for modifications of PSLs is that about 25 percent of the 

estimated $150 billion PSLs outstanding are in securitization trusts.9 In those cases, 

payment restructuring and modification options may be limited by the terms of the 

securitization pooling and servicing agreement. In securitizations, the traditional 

borrower and lender relationship is replaced by governing documents administered 

by a trustee for the benefit of multiple parties, including investors. As a result, the 

servicer and trustee are responsible for ensuring that a securitized pool of loans is 

managed in the best interest of investors, which substantially limits the ability to 

change the terms of underlying pooled assets. For example, noteholders may have 

conflicting incentives based on their seniority in the securitization capital structure, 

and servicers may not have sufficient legal ability to make modifications without the 

consent of noteholders or trust administrators. When repayment difficulties arise, 

the borrower will generally be dealing with the servicer, not the original lender. 

Finally, PSL borrowers, especially those who are performing on their loans as 

agreed, face significant challenges for refinancing higher rate PSLs. Refinancing an 

unsecured PSL can be difficult given the lack of participants in the refinance market, and the potentially high costs of marketing and customer acquisition that may 

be keeping additional participants from entering the refinance market. Moreover, 

many PSLs have variable rates and, in the current low interest rate environment, 

it may be difficult for consumers to negotiate a lower fixed-rate without collateral. 

Additional FDIC Actions 

The FDIC continues to seek solutions to challenges in the student lending area. 

The FDIC is finalizing a statement to the banks it supervises to clarify both that 

we support efforts by banks to work with student loan borrowers and that our current regulatory guidance permits this activity. In addition, the statement will make 

clear that FDIC-supervised institutions should be transparent in their dealings with 

borrowers and make certain that borrowers are aware of the availability of workout 

48

programs and associated eligibility criteria. We expect to issue this statement in the 

near future. 

We also have formed an internal working group to engage various stakeholders, 

including PSL lenders and consumer groups, and we are discussing our current policies and refinancing challenges with other regulators, including the CFPB, to determine whether clarifications or changes may be needed. 

Conclusion 

The FDIC appreciates the opportunity to testify on this important issue. High levels of student debt can pose significant challenges for families, particularly during 

what has been a prolonged period of high unemployment. The FDIC remains committed to providing focused and effective oversight of institutions engaged in the 

PSL market to ensure that supervised institutions operate in a safe and sound manner and in compliance with applicable Federal consumer protection laws. 

(49)

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM ROHIT CHOPRA 

Q.1. School Certification—The CFPB has recommended mandatory 

school certification as a way to reduce student debt load and expand loan counseling. Does the Truth in Lending Act give the 

CFPB the regulatory authority to require school certification of private student loans?

A.1. The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) transferred the authority to prescribe regulations under the Truth in Lending Act from the Federal Reserve 

Board of Governors to the Consumer Financial Protection Bureau, 

including those provisions related to special disclosures for private 

student loans, which were required by the Higher Education Opportunity Act of 2008 (HEOA). 

HEOA required the Department of Education to develop a selfcertification form, which private student lenders must obtain before 

consummating the loan. The Federal Reserve Board of Governors 

prescribed regulations that detailed requirements for lenders related to the self-certification form. 

The self-certification form was intended to spur meaningful conversations between students and school financial aid officials. 

In our joint report with the Department of Education on Private 

Student Loans, the Bureau recommended that Congress require 

school certification. A number of concerns prompted this recommendation, including how some lenders may be accepting forms 

that are incomplete or inaccurate. Such incomplete paperwork 

shows that borrowers may not understand how various loan options have more favorable terms, or whether their loans exceed 

educational expenses. 

The agencies were troubled by the experience of consumers with 

‘‘direct-to-consumer’’ private student loans, i.e., loans that had not 

been ‘‘certified’’ for financial need by the school’s financial aid office, were more likely to borrow more than their tuition during the 

pre-recession boom years. Those loans were also much more likely 

to end up in default. 

Given the recent increase in securitization activity in the private 

student loan market, the Bureau is monitoring the market closely 

to determine whether the self-certification process is working as 

Congress intended. We will continue to consult with members of 

the public, schools, industry stakeholders, and the Department of 

Education to determine the appropriate steps to ensure the market 

is properly functioning.

Q.2. Rural and Economic Impact—Mr. Chopra, the success of rural 

communities is important to me. Rural areas are facing a serious 

shortage of qualified professionals in a number of professions, including teaching, medicine, and law. Can you describe the extent 

to which rising student loan debt could exacerbate existing workVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00053 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
50

1See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0878. 2See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0038. 3http://www.nap.edu/catalog.php?recordlid=11463. 4http://www.eric.ed.gov/ERICWebPortal/search/detailmini.jsp?lnfpb=true&l&

ERICExtSearchlSearchValuel0=EJ695458&ERICExtSearchlSearchTypel0=0 

=no&accno=EJ695458.

force challenges in rural communities? In your testimony, you also 

described a ‘‘domino’’ effect of student loans on the economy. Could 

you expand upon the impacts you found on the ability of borrowers 

to purchase homes, start businesses, form households, or any other 

impacts?

A.2. We have heard from consumers and industry professionals 

that growing levels of student debt may have spillover effects that 

present particular risks for rural communities. In addition to the 

fact that for many professions, graduates in rural communities 

earn less than their peers in more populated metropolitan areas, 

rural communities tend to have more severe shortages of teachers, 

certain healthcare providers, and other professionals. The financial 

strain of high student debt has the potential to exacerbate existing 

workforce shortages that exist due to these other factors present in 

rural communities. 

I recently had the chance to meet with representatives from the 

North American Meat Association, the American Veterinary Medical Association, the American Association of Bovine Practitioners, 

the U.S. Cattlemen’s Association, the Academy of Rural Veterinarians, and the National Farmers Union to discuss the potential impact of student debt on farmers, ranchers, and rural communities. 

Many of these representatives expressed significant concern. 

In February 2013, the CFPB published a notice in the Federal 

Register soliciting input on potential solutions to offer more affordable repayment options for borrowers with existing private student 

loans. According to a submission to the Bureau’s request for information from the American Medical Association, high debt burdens 

can impact the career choice of new doctors, leading some to abandon caring for the elderly or children for more lucrative specialties.1 Aspiring primary care doctors with heavy debt burdens may 

be unable to secure a mortgage or a loan to start a new practice. 

This can have a particularly acute impact on rural America, where 

rental housing is limited and solo practitioners are a key part of 

the health care system. 

Classroom teachers submitted letters to the Bureau detailing the 

impact of private student loans, which usually don’t offer forgiveness programs and income-based repayment options. One school 

district official wrote to the Bureau noting that programs to make 

student debt more manageable could lead to higher retention of 

quality teachers.2 In the past decade, we’ve faced a growing shortage of highly qualified math and science teachers.3 Rural and 

urban school districts face particularly severe shortages. And teachers in rural districts generally earn less than their peers—the 

starting salary for rural teachers is lower than the starting salary 

for non-rural teachers in 39 States.4

Student debt can also impact the availability of other professions 

critical to the livelihoods of farmers and ranchers in rural communities. According to an annual survey conducted by the American 

51

5See https://www.avma.org/news/journals/collections/pages/avma-collections-senior-surveys.aspx.

Veterinary Medical Association, 89 percent of veterinary students 

are graduating with debt, averaging $151,672 per borrower.5 Veterinarians encumbered with high debt burdens may be unable to 

make ends meet in a dairy medicine or livestock management practice in remote areas. 

In effect, young graduates with student debt have less financial 

flexibility and, consequently, less ability to forgo a better paying job 

for one in a rural area. The impact of student debt on these communities seems worthy of closer study. 

More broadly, we are concerned that student debt may have a 

‘‘domino effect’’ on other sectors of the economy. The National Association of Home Builders wrote to the CFPB about the relatively 

low share of first-time home buyers in the market compared with 

historical levels, and that student debt can ‘‘impair the ability of 

recent college graduates to qualify for a loan.’’ According to NAHB, 

high student loan debt has an impact on consumers’ debt-to-income 

(DTI) ratio—an important metric for decisions about creditworthiness in mortgage origination. When monthly student loan payments take up a high portion of a borrower’s monthly income, applicants may be less qualified candidates for a mortgage. 

The National Association of Realtors noted that first-time home 

buyers typically rely heavily on savings to fund down payments. 

When young workers are putting big chunks of their income toward 

student loan payments, they’re less able to save for their first down 

payment. 

We have also heard from a number of young entrepreneurs and 

innovators working in the technology sector. We asked about the 

roadblocks they’ve experienced when trying to build new businesses. For many, student debt has made it much harder to take 

risks and for these young graduates to bet on themselves and on 

their ideas. In addition, we’ve heard that it is challenging to attract 

talented employees willing to take a risk because they’re worried 

about their debt. 

Unfortunately, many recent graduates tell us they’ve put off 

their goal of starting a business, and student debt may be playing 

a role. Since the recession, the share of young graduates’ outstanding credit consumed by student loans has jumped by 14 percent. Others have found that young student loan borrowers now 

have lower credit scores than their peers with no student debt. 

This may make it more difficult for borrowers to qualify for small 

business loans. 

Other research has demonstrated that three-quarters of the overall shortfall in household formation since the start of the recession 

can be attributed to reductions in household starts among younger 

adults ages 18 to 34. In 2011, nearly 2 million more Americans in 

this age group lived with their parents than in 2007. Moody’s Analytics estimates that each new household formed leads to $145,000 

of economic impact. 

If student debt is holding back just a third of those two million young Americans from living on their own, that adds up to a $100 

billion loss or delay in economic activity.

52

Q.3. Student Loan Servicers—Mr. Chopra, the CFPB recently proposed a rule that would enable it to examine and supervise large 

student loan servicers. Can you describe why the CFPB proposed 

this rule and how the agency plans to supervise these servicers?

A.3. In March of 2013, the Bureau issued a proposed rule defining 

the larger participants in the student loan servicing market. The 

proposed rule would establish the Bureau’s supervisory authority 

over certain nonbank covered persons participating in the market 

for student loan servicing. The comment period for the proposed 

rule closed on May 28, 2013 and the Bureau is considering the 

comments received before reaching any final decisions on the Proposed Rule. 

Student loan servicers play a critical role in the student loan 

market. Student loan servicers manage interactions with borrowers 

on behalf of loan holders of outstanding student loans. Servicers receive scheduled periodic payments from borrowers pursuant to the 

terms of their loans and apply the payments of principal and interest and other such payments as may be required pursuant to the 

terms of the loans or of the contracts governing the servicers’ work. 

Typically, student loan servicing also involves sending monthly 

payment statements, maintaining records of payments and balances, and answering borrowers’ questions. When appropriate, 

servicers may also make borrowers aware of alternative payment 

arrangements such as consolidation loans or deferments. 

Student loan servicers also play a role while students are still in 

school. A borrower may receive multiple disbursements of a loan 

over the course of one or more academic years. Repayment of the 

loan may be deferred until some future point, such as when the 

student finishes post-secondary education. A student loan servicer 

will maintain records of the amount lent to the borrower and of 

any interest that accrues; the servicer may also send statements of 

such amounts to the borrower. 

In addition, student loan servicers may collect payments and 

send statements after loans enter default. They may also report 

borrowers’ account activity to consumer reporting agencies. 

In short, most borrowers, once they have obtained their loans, 

conduct almost all transactions relating to their loans through student loan servicers. The proposed rule would enable the Bureau to 

supervise larger participants of an industry that has a tremendous 

impact on the lives of post-secondary education students and 

former students, as well as their families. 

Under 12 U.S.C. 5514, the Bureau has supervisory authority 

over all nonbank covered persons offering or providing three enumerated types of consumer financial products or services: (1) origination, brokerage, or servicing of consumer loans secured by real 

estate, and related mortgage loan modification or foreclosure relief 

services; (2) private education loans; and (3) payday loans. The Bureau also has supervisory authority over ‘‘larger participant[s] of a 

market for other consumer financial products or services,’’ as the 

Bureau defines by rule. This proposed rule, if adopted, would be 

the third in a series of rulemakings to define larger participants of 

markets for other consumer financial products or services for purposes of 12 U.S.C. 5514(a)(1)(B). The Bureau is proposing to estabVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00056 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
53

lish supervisory authority over certain nonbank covered persons 

participating in the market for student loan servicing. 

The Bureau is authorized to supervise nonbank covered persons 

subject to 12 U.S.C. 5514 of the Dodd-Frank Act for purposes of: 

(1) assessing compliance with Federal consumer financial law; (2) 

obtaining information about such persons’ activities and compliance 

systems or procedures; and (3) detecting and assessing risks to consumers and consumer financial markets. The Bureau conducts examinations, of various scopes, of supervised entities. In addition, 

the Bureau may, as appropriate, request information from supervised entities without conducting examinations. 

The Bureau prioritizes supervisory activity at nonbank covered 

persons on the basis of risk, taking into account, among other factors, the size of each entity, the volume of its transactions involving 

consumer financial products or services, the size and risk presented 

by the product market in which it is a participant, the extent of 

relevant State oversight, and any field and market information 

that the Bureau has on the entity. Such field and market information might include, for example, information from complaints and 

any other information the Bureau has about risks to consumers. 

The Bureau plans to supervise these servicers consistent with 

the general examination manual describing the Bureau’s supervisory approach and procedures. This manual is available on the 

Bureau’s Web site. As explained in the manual, examinations will 

be structured to address various factors related to a supervised entity’s compliance with Federal consumer financial law and other 

relevant considerations. On December 17, 2012, the Bureau released procedures specific to education lending and servicing for 

use in the Bureau’s examinations. If this proposed rule is adopted, 

the Bureau would use those examination procedures in supervising 

nonbank larger participants of the student loan servicing market. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM ROHIT CHOPRA 

Q.1.a. Many of the borrower relief options found in the CFPB’s 

May 2013 report appear beneficial to borrowers. However, one credit reporting agency has a section on its Web site outlining the impact of a loan modification on a borrower’s credit report and notes 

that a modification could negatively impact a credit score. 

Has the CFPB done any analysis to determine if there are negative collateral impacts to a borrower who gets a loan modification?

A.1.a. As a general matter, credit scores are based on proprietary 

models developed by private industry. Based on our discussions 

with servicers and consumer reporting agencies, there are specific 

codes in the Metro II reporting format that allow for indicators of 

alternative repayment plans. 

The impact on a credit score of a student loan default would certainly be a negative credit scoring event for an individual consumer. Alternative repayment options that allow a consumer to 

avoid delinquency and default would potentially lead to a better 

credit score. 

However, if a borrower is current on their obligations and pursues an alternative repayment schedule, a proprietary credit scorVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00057 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
54

ing model might determine that this is a sign of distress, which 

may impact a score. 

If financial institutions begin to offer more alternative repayment 

options to borrowers in distress, it will be important for servicers 

to clearly explain the factors that should be considered when choosing one of these options.

Q.1.b. How does the CFPB balance the need for a consumer to receive some immediate payment relief with the long term effects on 

other parts of a borrower’s financial profile?

A.1.b. In our consumer engagement efforts, we encourage consumers to think of both the short-term and the long-term. For 

younger consumers with student loan debt, it is particularly important for borrowers to protect their credit profile. Defaulting on a 

student loan can make it very difficult to obtain credit in the future, or even pass employment verification checks. We continue to 

educate consumers on ways to avoid default, such as accumulating 

emergency savings and pursuing alternative repayment options.

Q.2.a. The CFPB’s sole statutory mandate is to protect consumers. 

Lenders have noted regulatory confusion as the chief obstacle preventing them from offering more borrower relief options. This obstacle arises from a perceived conflict between the Bureau’s borrower relief policies and prudential banking regulators’ safety and 

soundness guidance. 

Has the Bureau taken steps to ensure that borrower relief options outlined in the May 2013 CFPB report on student loans don’t 

negatively impact the safety and soundness of the private student 

loan market?

A.2.a. As discussed in the hearing, prudential regulators clearly articulated that they would not criticize institutions for restructuring 

debt in a safe and sound manner. The Bureau has noted that alternative repayment options for private student loan borrowers might 

increase the net present value of troubled loans. This would be beneficial both to consumers, financial institution, and investors.

Q.2.b. Did the Bureau work with the prudential banking regulators 

to address potential regulatory obstacles before publishing the May 

2013 report?

A.2.b. The Bureau regularly consults prudential regulators on a 

wide range of matters, including the development of the May 2013 

report. As noted in testimony by the prudential regulators at the 

June 25th hearing, financial institutions are not barred from restructuring debt, as long as they accurately reflect the value of 

these loans in their accounting statements.

Q.3.a. As a result of prudential banking regulators offering varying 

levels of guidance for their supervised institutions with regards to 

private student loans, the financial institutions may in turn offer 

varying degrees of borrower relief options. 

How does the CFPB anticipate achieving consistent supervision 

of private student loans made by financial institutions that have 

different prudential banking regulators and therefore different 

guidance?

A.3.a. The Bureau does not supervise financial institutions for safety and soundness. The Bureau conducts examinations to assess 

55

compliance with Federal consumer financial law. The procedures 

used in these examinations are available to financial institutions 

and the public at: http://files.consumerfinance.gov/f/

201212lcfpbleducationloanexamprocedures.pdf.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM ROHIT CHOPRA 

Q.1. As a voting member agency of the Financial Stability Oversight Council, I am interested in your views on how you assess 

whether an entity would meet the criteria to be designated a systemically important financial institutions (SIFI). Specifically, given 

its extremely large footprint in servicing Direct, FFELP, and private student loans, what would be the broader impact on consumers and markets if SLM Corp. (Sallie Mae) were to fail?

A.1. According to its public filings, SLM Corp. (Sallie Mae) services 

student loans for over 13 million borrowers of Direct, FFELP, and 

private student loans. According to the surveys by the Student 

Loan Servicing Alliance, Sallie Mae is the largest servicer in the 

market, with a commanding lead over its competitors. 

Analysis of the impact of an unexpected failure of Sallie Mae 

would require assessing a number of factors, including whether 

there would be financial institutions with excess servicing capacity 

to bid on Sallie Mae’s servicing rights and portfolios given a set of 

capital market conditions, the ability for the Department of Education to reassign Direct Loan volume to other contracted servicers, 

and the impact of a potential disruption in payments to holders of 

FFELP asset-backed securities, among others. 

If Sallie Mae’s failure led to disruptions in servicing, there might 

also be an impact on the processing of payments and reporting to 

credit bureaus for individual customer accounts, if appropriate 

safeguards are not in place.

Q.2.a. In October 2012, the Consumer Financial Protection Bureau 

issued a report about problems servicemembers face when utilizing 

benefits guaranteed by Federal law, even on Government-guaranteed student loans. Your agency supervises institutions with 

FFELP portfolios. 

Have you focused on these portfolios in your examinations?

A.2.a. Prior to 2010, many insured depository institutions originated student loans guaranteed by the Federal Government. For 

insured depository institutions with assets over $10 billion and 

their affiliates, the authority to supervise such entities for compliance with Federal consumer financial law transferred from prudential regulators to the CFPB on the Dodd-Frank Act transfer date. 

The Department of Education oversees compliance with Title IV of 

the Higher Education Act. 

Our supervision program to date has covered a range of student 

lending issues, as well as other lending issues servicemembers are 

facing. The October 2012 report you reference detailed difficulties 

many servicemembers face in managing student loan debt, despite 

a number of Federal protections and benefits for servicemembers to 

help manage their student loan debt. 

56

Under the CFPB’s procedures for student lending examinations, 

examiners assess a variety of issues. The full procedures are available to the public at: http://files.consumerfinance.gov/f/

201212lcfpbleducationloanexamprocedures.pdf.

During the course of the examination, examiners may find evidence of violations of—or an absence of compliance policies and 

procedures with respect to—laws such as the Servicemembers Civil 

Relief Act. Additionally, examiners assess servicers’ policies and 

procedures for granting deferments consistent with FFELP requirements. The CFPB follows up on any examination findings as appropriate, depending on all of the facts.

Q.2.b. To what extent have you determined that servicemembers 

are victims of unfair or deceptive practices as it regards to student 

loan benefits?

A.2.b. An important function of the Bureau’s Office of 

Servicemember Affairs is to ‘‘monitor complaints by 

servicemembers and their families.’’ Over the course of reviewing 

these complaints, it became clear that servicemembers were experiencing difficulties obtaining and retaining their SCRA rights, as 

well as other benefits. The complaints submitted by 

servicemembers and their families regarding their experiences with 

financial institutions when navigating student loan repayment options were quite distressing. These complaints raise serious questions about the commitment of certain financial institutions to comply with laws that protect military families. 

The CFPB articulated these concerns as part of the October 2012 

report and will utilize the tools at its disposal to ensure that consumer protections relating to consumer financial products and services are vigorously enforced for servicemembers, veterans, and their 

families. Former Secretary of Defense Leon Panetta also shared his 

concern about misleading information given to servicemembers at 

an announcement discussing the findings of the report. 

Some financial institution investors have expressed surprise that 

senior management would be willing to bear significant reputation 

risk for a relatively minor level of additional profit on 

servicemember student loans.

Q.2.c. Are you confident that your supervised institutions are in 

compliance with the SCRA?

A.2.c. The October report laid out serious concerns over apparent 

compliance issues as they relate to student lending and the SCRA. 

The CFPB continues to remain concerned about active-duty 

servicemembers obtaining and retaining their rights under the 

SCRA.

Q.2.d. To what extent have you shared these results with the Department of Education and the Department of Justice?

A.2.d. The Dodd-Frank Act contemplates that the Office of 

Servicemember Affairs will coordinate with other Federal and 

State agencies ‘‘regarding consumer protection measures relating to 

consumer financial products and services offered to, or used by, 

servicemembers and their families.’’ The CFPB has worked closely 

with both the Department of Education and the Department of JusVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00060 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
57

tice as it relates to military student loan issues and the significant 

consumer protection risks documented within the October report.

Q.3.a. Much of the testimony focused heavily on forbearance as a 

method of relief for private student loan borrowers. But the volume 

and terms of private student loans issued in the years leading up 

to the financial crisis indicate that many of these loans may not be 

sustainable even after forbearance periods. Your July 2012 report 

documented a 400 percent increase in the volume of private student loan debt originated between 2001 and 2008—and 2008 originations surpassed $20 billion. The report also shows that from 

2005 to 2008 undergraduate and graduate borrowers of private student loans took on debt that exceeded their estimated tuition and 

fees, and in some years more than 30 percent of loans were made 

directly to students with no certification of enrollment from their 

academic institution. The heavy debt burden that was created in 

these few years is not just unsustainable by dollar volume, but also 

in the loans’ terms. Loans were often variable rate loans with initial interest rates ranging from 3 percent to more than 16 percent. 

Given that these unfavorable loan terms were made to a larger 

number of borrowers, presumably including more students from 

limited financial means, do loans originated between 2001 and 

2008 comply with your standards for safety and soundness?

A.3.a. Many private student loan borrowers wish to repay their 

loans but are seeking alternative repayment plans when they are 

unable to earn sufficient income to meet minimum required payments. The joint CFPB–ED Report to Congress on Private Student 

Loans found that, in 2008, 10 percent of private student loan borrowers devoted more than 25 percent of their income to meet student loan repayment obligations—a figure that may have risen as 

labor market conditions worsened. Many struggling borrowers end 

up in delinquency or default, see their credit profile damaged, and 

may be excluded from full economic participation once they attain 

adequate employment. 

However, the CFPB does not supervise institutions, including 

private student loan lenders, for safety and soundness standards. 

This responsibility remains with the prudential regulators, so the 

CFPB cannot speak to whether loans with poor underwriting met 

these standards.

Q.3.b. How would refinancing the highest-cost loans to reflect borrowers’ current characteristics affect the soundness of a regulated 

institution’s balance sheet in the short and long term?

A.3.b. The CFPB does not supervise institutions for safety and 

soundness regulations, so it would be difficult for the CFPB to determine this impact. As a general matter, when pricing is not commensurate with risk profile, this may be a sign of insufficient competition.

Q.4.a. It has often been noted that the lack of competition in the 

private student lender market has limited loan refinancing opportunities. 

Given the lack of competition in this space, how can we assure 

that low- and middle-income students have access to affordable 

58

loans and loan modification options that reflect the borrower’s 

characteristics and ability and willingness to repay?

A.4.a. Borrowers from low- and middle-income families might face 

high prices on private student loans due to their cosigners’ credit 

profile. Even when these borrowers graduate and find good jobs, 

many report to the Bureau that they are unable to refinance to 

lower rates that reflect their reduced credit risk. The current industry structure may not be delivering efficient pricing, and this 

may warrant further action from policymakers.

Q.4.b. Is there an existing public or private mechanism to encourage more sustainable loan terms and refinancing opportunities for 

student borrowers?

A.4.b. As discussed in the hearing, depository institutions are able 

to offer affordable payment plans to borrowers, as long as they accurately reflect the value of the loans. However, loan restructuring 

activity is troublingly low. 

Policymakers took a number of steps to jumpstart lending and 

capital markets activity as the financial crisis began to unravel. 

This might provide valuable lessons for how to ensure a well-functioning student loan market.

Q.4.c. Without intervention from Congress or regulators, is there 

reason to believe that private student lenders will actively work 

with borrowers to issue more sustainable loans and to modify the 

terms of loans issues prior to the financial crisis to more accurately 

reflect the risk profile of the borrower given the current lending environment and their financial status?

A.4.c. Lenders who are nimble and seek to maximize shareholder 

value would likely modify loan terms for distressed borrowers in 

order to avoid losses from default. However, many financial institutions face significant challenges with legacy accounting, IT, and 

servicing systems that are complex, inhibiting this activity.

Q.5. Pursuant to Section 1035 of the Dodd-Frank Act, you have 

regularly executed the mandate to provide ‘‘appropriate recommendations’’ to certain Congressional committees. Congress has 

been examining the long-term future of the GSE participants in the 

housing market. Given your expertise in the student loan market 

and your statutory mandate, would you find it appropriate to provide policymakers with your assessment of Sallie Mae’s transition 

from a GSE to its current corporate form to inform our approach 

on housing GSE policy? If so, what might be a feasible timeline?

A.5. As chartered, the mission of the Student Loan Marketing Association (Sallie Mae) was to provide liquidity for Governmentguaranteed student loans and serve as a national secondary market and warehousing facility. Next year will be the tenth anniversary of the termination of Sallie Mae’s Government charter. As 

part of the privatization, the Federal Government freed the company of many of its requirements as a GSE and permitted the company to maintain the Sallie Mae brand for a fee of $5 million. 

While Sallie Mae is now a private company (organized as SLM 

Corp), its business model is closely tied to Government programs. 

For example, Sallie Mae is a major Government contractor where 

it acts as a servicer and debt collector for Federal Direct Loans. 

59

The corporation is a large holder of FFELP loans, where it receives 

certain subsidies on interest accruals from the Federal Government. According to its filings, Sallie Mae has relied on Government-affiliated financing, including an asset-backed commercial 

paper facility arranged by the Department of Education and a line 

of credit with a Federal Home Loan Bank through its insurance 

subsidiary. The corporation also operates Sallie Mae Bank, whose 

deposits are insured by the FDIC. 

The Department of the Treasury’s Office of Sallie Mae Oversight 

served as the GSE’s primary regulator. The Bureau and the Department of Education now maintain significant compliance oversight responsibilities over many of Sallie Mae’s business activities 

(and in some cases, the Department of Education has contractual 

oversight). The Bureau is involved in frequent dialogue with the 

Departments of Education and Treasury about the activities of Sallie Mae, given its outsized role in the student loan market. 

In upcoming months, I will gather further information from appropriate agencies, as well as former OSMO staff, to provide information to your office and other interested parties about the privatization of the GSE and its impact on the marketplace.

Q.6.a. A key finding of the Senate HELP Committee report, ‘‘For 

Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success’’ is that some for-profit 

schools are engaged in tactics that appear designed to manipulate 

rates of students defaulting on loans. This includes schools paying 

staff based on the number of forbearances or deferments secured, 

and in at least one instance paying private investigators to get 

signed forbearance authorizations. 

Has the CFPB seen similar tactics in the private student loan 

market?

A.6.a. The Bureau is unable to comment on the status or existence 

of any investigation of for-profit colleges as it relates to tactics used 

to manipulate default rates. 

As a general matter, for-profit colleges do not face consequences 

under the Higher Education Act for defaults experienced by students on their private student loans. The Higher Education Act 

specifies that for-profit colleges may not exceed certain cohort default rates on Federal student loans without risking eligibility for 

accepting Title IV funds.

Q.6.b. Has the CFPB seen evidence that particular institutions 

with high levels of student defaults (upwards of 15 percent) are focused on enrolling servicemembers?

A.6.b. According to data from the Departments of Veterans Affairs 

and Education, of the 75 schools with the most recipients of GI Bill 

beneficiaries, more than half of those institutions have a default 

rate over 15 percent.

Q.6.c. Has the CFPB seen evidence that institutions that enroll a 

high number of servicemembers also have a large number of students that are taking out private student loans?

A.6.c. The Bureau is unable to comment on the status or existence 

of any investigation of for-profit colleges targeting servicemembers 

and steering them to private student loans. 

60

However, there is concern that the incentive structure created by 

the ‘‘90–10 rule’’ encourages for-profit colleges to aggressively market to servicemembers, due to the requirement that for-profit colleges get at least 10 percent of their revenue from sources other 

than Title IV Federal education funds administered by the Department of Education. GI Bill and Military Tuition Assistance benefits 

are not Title IV funds, so they fall into the 10 percent category that 

these colleges need to fill—and we have heard of some very aggressive tactics to quickly enroll GI Bill recipients, who also took out 

private student loans to pay for the amount of tuition and fees not 

covered by military benefits. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MANCHIN 

FROM ROHIT CHOPRA 

Q.1. In rural towns across the country, there is a chronic shortage 

of primary care health professionals. Not just doctors, but nurses 

and others. According to the American Medical Association, student 

debt may be a barrier to practicing in underserved communities. 

This problem extends beyond health professionals. I hear from 

West Virginians across my State that the best teachers are retiring 

and that poorer districts are having a tough time bringing in young 

people to take their places. So many rural families want their kids 

to go to college, but they worry about the impacts of high levels of 

student loan debt? In your opinion, how will rural areas survive 

without critical professions like doctors, nurses, and teachers? 

What are you doing to make sure that the burden of student debt 

isn’t disproportionately shouldered by rural areas?

A.1. As you have observed in West Virginia, we have heard from 

consumers and the agriculture industry that growing levels of student debt may have spillover effects that present particular risks 

for rural communities. If critical professions such as doctors, 

nurses, and teachers are unable to locate in rural areas, this could 

pose a serious threat to the standard of living for Americans in 

rural communities. 

I recently had the chance to meet with representatives from the 

North American Meat Association, the American Veterinary Medical Association, the American Association of Bovine Practitioners, 

the U.S. Cattlemen’s Association, the Academy of Rural Veterinarians, and the National Farmers Union to discuss the potential impact of student debt on farmers, ranchers, and rural communities. 

Many of these representatives expressed significant concern. 

In addition to the fact that for many professions, graduates in 

rural communities earn less than their peers in more populated 

metropolitan areas, rural communities tend to have more severe 

shortages of teachers, certain healthcare providers, and other professionals. The financial strain of high student debt has the potential to exacerbate existing workforce shortages that exist due to 

these other factors present in rural communities. 

In February 2013, the CFPB published a notice in the Federal 

Register soliciting input on potential solutions to offer more affordable repayment options for borrowers with existing private student 

loans. According to a submission to a Bureau request for information from the American Medical Association, high debt burdens can 

61

1See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0878. 2See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0004-0038. 3http://www.nap.edu/catalog.php?recordlid=11463. 4http://www.eric.ed.gov/ERICWebPortal/search/detailmini.jsp?lnfpb=true&l&

ERICExtSearchlSearchValuel0=EJ695458&ERICExtSearchlSearchTypel0=0 

=no&accno=EJ695458. 5See https://www.avma.org/news/journals/collections/pages/avma-collections-senior-surveys.aspx.

impact the career choice of new doctors, leading some to abandon 

caring for the elderly or children for more lucrative specialties.1 Aspiring primary care doctors with heavy debt burdens may be unable to secure a mortgage or a loan to start a new practice. This 

can have a particularly acute impact on rural America, where rental housing is limited and solo practitioners are a key part of the 

health care system. 

Classroom teachers submitted letters to the Bureau detailing the 

impact of private student loans, which usually don’t offer forgiveness programs and income-based repayment options. One school 

district official wrote to the Bureau noting that programs to make 

student debt more manageable could lead to higher retention of 

quality teachers.2 In the past decade, we’ve faced a growing shortage of highly qualified math and science teachers.3 Rural and 

urban school districts face particularly severe shortages. In effect, 

the communities with the most urgent need for great teachers tend 

to be the school districts with the fewest. And teachers in rural districts generally earn less than their peers—the starting salary for 

rural teachers is lower than the starting salary for nonrural teachers in 39 States.4

Student debt can also impact the availability of other professions 

critical to the livelihoods of farmers and ranchers in rural communities. According to an annual survey conducted by the American 

Veterinary Medical Association (AVMA), 89 percent of veterinary 

students are graduating with debt, averaging $151,672 per borrower.5 Veterinarians encumbered with high debt burdens may be 

unable to make ends meet in dairy medicine or livestock management practices in rural communities. 

In effect, young graduates with student debt have less financial 

flexibility and, consequently, less ability to forgo a better paying job 

for one in a rural area. The potential impact of student debt on 

these communities is one that policymakers should closely monitor.

Q.2. It does not make any sense that, under our current system, 

students are forced to pay high interest rates on Federal student 

loans when everyone else in the economy benefits from low borrowing costs on everything else. And if we don’t act by July 1st, 

every Federal loan will have an interest rate of at least 6.8 percent 

in 2013, while T-bill rates stay near historic lows. Not only would 

moving to a market-based rate allow students to benefit from 

cheaper borrowing when everyone else can, I expect that private 

student loan lenders would, in order to remain competitive, lower 

their rates as well. Under the current system, private lenders know 

that we have created artificial benchmarks for these rates, so private lenders can always keep their rates unnecessarily high. How 

do you believe that implementing a market-based rate for Federal 

loan programs would affect the private loan market? Wouldn’t allowing Federal rates to fall during times of cheap borrowing—such 

62

as today—force private borrowers to lower their interest rates to 

remain competitive?

A.2. As a general matter, the student loan market has not exhibited signs of robust competition—even when private market participants dominated. In the Federal Family Educational Loan Program, financial institutions could receive subsidies and guarantees 

if loans met certain criteria. Congress set statutory interest rate 

caps; in theory, the most efficient private actors would attract customers by providing the lowest possible price on a commodity product. 

Unfortunately, this was generally not the case. While lenders 

made limited use of incentives, such as waivers of some origination 

fees, those who charged the statutory maximum were not competed 

out of the market. Even when borrowers were offered various advertised incentives, many borrowers would never benefit from those 

incentives. Instead of offering competitive prices to student loan 

borrowers, many financial institutions drew scrutiny for business 

models that provided benefits to schools and financial aid officials, 

who are able to strongly influence student loan choices by students 

and families. 

The Department of Education and the Bureau authored a joint 

report to Congress on private student loans, which showed that 

most borrowers would be better off exhausting Federal student 

loan options before choosing private loans. Given that private student loans and Federal student loans are not economic substitutes, 

it would be difficult to determine how Federal student loan rates 

might impact private student loan pricing. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM JOHN C. LYONS 

Troubled Debt Restructuring 

Q.1.a.–d. Many lenders have noted that they cannot modify loans 

because they do not want the modification to be considered a troubled debt restructuring, or TDR, for accounting purposes. Mr. 

Lyons’ testimony stated that ‘‘under GAAP a bank must recognize 

a loan modification for a financially troubled borrower that includes concessions as a TDR, with appropriate loan loss provisions 

if impairment exists. The designation of a loan as TDR does not 

prohibit or impede a bank’s ability to continue to work with the 

borrower.’’ Ms. Eberley’s testimony noted that ‘‘[p]otential or actual 

treatment as a TDR should not prevent institutions from 

proactively working with borrowers to restructure loans with reasonable modified terms . . . [t]he FDIC encourages banks to work 

with troubled borrowers and will not criticize IDI management for 

engaging in prudent workout arrangements with borrowers who 

have encountered financial problems, even if the restructured loans 

result in a TDR designation.’’

Q.1.a. Can you describe when a loan modification is a TDR and 

what role your agency plays in interpreting the accounting standard?

A.1.a. A troubled debt restructure is a restructuring in which a 

bank, for economic or legal reasons related to a borrower’s financial 

63

difficulties, grants a concession to the borrower that it would not 

otherwise consider. Modification of the loan terms, such as a reduction of the stated interest rate or an extension of the maturity date 

at a stated interest rate lower than the current market rate for 

new debt with similar risk, typically qualifies as a restructuring 

under financial and regulatory reporting requirements. 

The standards for applying TDR accounting are set by the Financial Accounting Standards Board (FASB) and are part of generally 

accepted accounting principles (GAAP). A bank’s call report is 

statutorily required to be no less stringent than GAAP. As a result, 

the OCC ensures that modified or restructured loans are properly 

identified, risk-rated, accounted for, and reported to maintain the 

integrity of financial reporting. This includes the identification of 

troubled debt restructurings and a complete analysis of the allowance for loan and lease losses related to loan modification efforts. 

The OCC and other Federal banking agencies also provide input to 

the FASB on GAAP issues, including TDRs. For example, in an 

interagency comment letter to the FASB on the credit loss proposal 

dated May 31, 2013, the agencies encouraged the FASB to consider 

alternatives to the TDR designation requirements such as targeted 

or expanded disclosures.

Q.1.b. Can you describe how designation of loans as TDR factors 

into an institutions’ allowance for loan and lease losses (ALLL), 

and what role the ALLL plays in calculation of a financial institution’s minimum regulatory capital?

A.1.b. All loans whose terms have been modified in a troubled debt 

restructuring must be evaluated for impairment under Accounting 

Standards Codification (ASC) Topic 310, Receivables. In general, 

loans are impaired when, based on current information and events, 

it is probable that an institution will be unable to collect all 

amounts due (i.e., both principal and interest) according to the contractual terms of the original loan agreement. Impaired loans require appropriate financial statement recognition either through 

charge-off or ALLL reserve allocations. 

When measuring TDR impairment on an individual loan basis, 

a bank must choose one of the following methods:

• The present value of expected future cash-flows discounted at 

the loan’s effective interest rate (i.e., the contractual interest 

rate adjusted for any net deferred loan fees or costs, premium, 

or discount existing at the origination or acquisition of the 

loan);

• The loan’s observable market price; or

• The fair value of the collateral, if the loan is collateral dependent.

For most private student loans, the present value of expected future cash-flows is used to evaluate impairment. For practical reasons, pools of smaller-balance homogeneous TDRs could be reviewed on a pooled basis. If the impaired value is less than the current book value, the deficiency is typically recognized by adjusting 

the ALLL. When available information confirms that a specific restructured loan (or portion) is uncollectible, the uncollectible 

64

amount should be charged off against the allowance for loan and 

lease losses at the time of restructuring. 

For regulatory capital purposes, treatment of the allowance for 

loan and lease losses is different under the generally applicable 

rules and the advanced approaches rules. For the generally applicable rules, the allowance is included in tier 2 capital, up to a maximum of 1.25 percent of riskweighted assets. A bank may deduct 

from its risk-weighted assets the portion of its reserves for loan 

and lease losses that exceed the 1.25 percent maximum. For the 

advanced approaches rules, banks are required to compare eligible 

credit reserves to expected credit losses. If a shortfall exists, the 

bank must deduct the shortfall amount from capital (50 percent 

from tier 1 capital and 50 percent from tier 2). In contrast, if eligible credit reserves exceed the bank’s total expected credit losses, 

the bank may include the excess amount in tier 2 capital to the extent that the excess amount does not exceed 0.6 percent of the 

bank’s credit-related risk-weighted assets.

Q.1.c. How would the Basel III rules change the treatment of 

ALLL in the capital calculation, if at all?

A.1.c. The Basel III rules are similar to Basel II with respect to 

the treatment of the ALLL. There are two small changes. The first 

is that the base of calculating the amount of ALLL that would be 

included in tier 2 capital under the standardized approach, which 

will become the generally applicable rule in 2015, no longer includes market risk-weighted assets for banks subject to the market 

risk capital rule. The second change applies to the advanced approaches rules and specifies that any shortfall of reserves (when 

compared to expected losses) will be deducted entirely from common equity tier l. Previously, the shortfall was deducted 50 percent 

from tier 1 and 50 percent from total capital.

Q.1.d. Please describe any other impact designating a loan as TDR 

has on an institution’s balance sheet.

A.1.d. National banks and Federal thrifts should also evaluate consumer loan TDRs to determine whether accrual of interest remains 

appropriate. In accordance with call report instructions, upon restructure, a current, well-documented credit evaluation of the borrower’s financial condition and prospects for repayment must be 

performed to assess the likelihood that all principal and interest 

payments required under the modified terms will be collected in 

full. Nonaccrual reporting status for individual consumer loans is 

not specifically required, but the institution must take steps to ensure that net income is not materially overstated. 

Guidance 

Q.2.a.–c. Mr. Lyons stated in his testimony that the OCC issued 

supplemental guidance to its examiners in 2010 interpreting the 

Uniform Retail Classification and Account Management Policy (Retail Policy) in the context of private student lending. However, that 

guidance is not available to private student lenders, borrowers, or 

any other market participants.

Q.2.a. Does the OCC plan to make this guidance public or otherwise provide information to the institutions that it regulates on suVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00068 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
65

pervisory expectations for managing forbearance, workout, and 

modification programs?

A.2.a. The guidance was distributed to all examiners, and has been 

discussed internally with each bank during the normal examination cycle that included a review of private student lending activity. 

In July 2013, the OCC issued a reminder to national banks and 

Federal thrifts of the importance of working constructively with 

troubled student borrowers to avoid unnecessary defaults. It reminded lenders that prudent workout arrangements are consistent 

with safe and sound lending practices and are generally in the 

long-term best interest of both the financial institution and the borrower. To promote consistency, this was a joint agency announcement by the OCC, Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC).

Q.2.b. Mr. Vermilyea stated in his testimony that the Retail Policy 

is ‘‘timeless.’’ The Retail Policy was revised in 2000, which superseded a 1999 revision, which in turn revised a policy from 1980. 

The private student loan market quadrupled from 2001 to 2008 

and just as rapidly declined through 2012. 

Given the marked changes in the student loan market since publication of the Retail Policy in 2000, what criteria do the agencies, 

either individually or through the Federal Financial Institutions 

Examination Council, use to determine when it is appropriate to 

revisit retail credit policy?

A.2.b. The agencies review the Uniform Retail Classification and 

Account Management Policy (Uniform Classification Policy) for updating or clarification when it becomes apparent that lending practices are changing and application is inconsistent or unclear. The 

main criteria would be if product terms change significantly 

enough that the delinquency-based foundation would no longer 

serve as a reasonable credit quality proxy. This would be most likely if regular, required monthly payments were no longer sufficient 

to signal a borrower has continued willingness and ability to repay 

the debt as structured. 

This becomes apparent to the agencies through examination 

work, policy-application questions from bankers or examiners, and 

general monitoring of lending practices and trends. Most consumer 

products continue to fit reasonably well under the Uniform Classification Policy parameters.

Q.2.c. When would it be appropriate to provide guidance to private 

student lenders regarding supervisory minimum expectations?

A.2.c. It becomes most important to provide guidance to lenders 

when product terms change significantly, application of existing 

policies is inconsistent, or the nature of specific products makes application of existing guidance unclear. For private student loans, 

the nature of the transition from school to full-time employment is 

unique to the product and warranted special consideration. Given 

the economic conditions in 2010, the OCC determined that establishing parameters for initial grace periods and the prudent use of 

forbearance programs would help lenders apply the Uniform Classification Policy more consistently. 

66

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOHN C. LYONS 

Q.1. In 2010, the OCC published additional guidance for financial 

institutions so they may properly record private student loan modifications on their books. The OCC currently allows financial institutions the ability to offer borrowers a 6-month grace period after 

graduation and a 6-month forbearance period. This guidance effectively grants the institution the ability to offer a 1-year window before a borrower has to make full payment. 

What factors did the OCC consider in publishing additional guidance on private student loans?

A.1. The primary factor the OCC considered concerned the difficulty borrowers were having in the transition from school to the 

job market once their education was complete. The job market in 

2010 was extremely difficult for students, and many had problems 

finding full-time employment in their specific field of study. Most 

student loan structures provide a 6-month grace period to help borrowers find suitable employment, but many borrowers found this 

an insufficient amount of time and were having difficulty beginning 

scheduled payments. 

In response, some lenders began granting excessive forbearance 

to distressed borrowers both in the transition to repayment and 

during the repayment term. The most common was the suspension 

of all payments for protracted periods without sufficient analysis or 

documentation of the borrower’s hardship or willingness and reasonably expected ability to repay. This was inconsistent with the 

fundamental principles of the Uniform Classification Policy that allows extensions, deferrals, renewals, and rewrites to help borrowers 

overcome temporary financial difficulties. Under the Uniform Classification Policy, prudent forbearance programs are allowed so long 

as the actions do not cloud the true performance and delinquency 

status of the portfolio, are based on renewed willingness and ability 

to repay the loan, and are structured and controlled in accordance 

with sound internal policies and procedures. In this case, the OCC 

determined that additional contextual guidance would improve consistency. The main purpose of the additional guidance was to describe practices that would generally be acceptable as part of a controlled and documented program, including grace and extended 

grace periods, loan modifications, and in-school deferments.

Q.2. What factors contributed to the OCC’s decision to cap the 

grace period and forbearance period at 6 months each?

A.2. The initial 6-month grace period is a common industry practice for most student loans, public and private. This initial period 

has traditionally been sufficient to allow borrowers time to find employment, and adjust to the costs of establishing households and 

other expenses of independent living. Extended grace periods were 

a direct response to the difficulties students had finding fulltime 

employment given the economic conditions at the time. 

The extended grace period was capped at an additional 6 months 

(12 months in total) to balance a reasonable job search timeframe 

with the need for institutions to maintain the integrity of their financial statements. The nature of the school-to-work change makes 

a transition period appropriate, but accurate reporting is also an 

67

important risk management practice that protects the integrity of 

the financial statements, and prompts direct and active loss mitigation actions when necessary. Both factors were considered in the 

allowable grace and forbearance timeframes.

Q.3. It is possible that a 2-year graduated repayment option actually results in better performance of the loan than a 1-year window 

of no repayment. Why is a 2-year graduated repayment option not 

allowed under current OCC guidance?

A.3. It is possible that a 2-year graduated repayment plan could result in better performance than a 1-year window of no repayment. 

Regular payments are an important characteristic of well-structured, successful consumer loan products, and the sooner a borrower with capacity begins making payments, the more likely they 

will manage their overall financial situation in a prudent and disciplined manner. Limited grace periods can help borrowers with 

the initial transition from school to full-time employment, but in 

general, the longer forbearance lasts, the more expensive the loan 

becomes and the more likely it is that borrowers may allocate 

available funds to other priorities. That is why many successful private student loan programs offer borrowers the option of making 

some payments each month even while in school. It lowers longterm costs (by reducing or eliminating deferred interest) and helps 

the borrower manage their budget and get used to making regular 

payments on the debt. Sometimes zero payment grace and deferral 

periods are necessary for borrowers without the capacity to repay, 

but we would not be surprised if accounts with immediate regular 

payments, even if initially lower than full, amortizing payments, 

outperformed loans with extended grace and forbearance periods. 

The OCC’s guidance does not prohibit appropriately structured 

graduated repayment plans as a type of loan modification. More 

specifically, our guidance does not specifically address graduated 

repayment options of any time period because if a borrower is not 

able to make the full payment the bank has the option to consider 

a modification or workout plan that best fits the individual consumer’s situation. This modification or workout plan could result in 

a period of full deferral or, depending on the consumer’s ability to 

pay, a period of lower payments until the borrower is able to resume full regular payments. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JOHN C. LYONS 

Q.1.a.–b. In the years leading up to the financial crisis, the Student Loan Asset Backed Securities (SLABS) market experienced 

unprecedented growth. SLABS issuance grew to more than $16 billion annually to feed investor demand for these securities. To increase volume, higher dollar value loans were made to a greater 

range of borrowers before being securitized. Multiple witnesses 

noted that the loans still held in securitized trusts may have fewer 

modification and refinance opportunities than those retained on a 

bank’s balance sheet, further limiting options for borrowers and 

raising the risk of default.

68

Q.1.a. Where applicable, what percentage of student loans originated by institutions regulated by your agency and still in repayment is held in securitized trusts? What percentage is held on 

banks’ balance sheets?

A.1.a. The largest OCC-regulated institutions with student lending 

portfolios have outstanding balances aggregating approximately 

$55 billion. Of that, approximately $4.9 billion or 9 percent is held 

in securitized trusts, with the remaining 91 percent on balance 

sheet.

Q.1.b. Is there a difference in the performance of loans that have 

been securitized and those that are held directly on a bank’s balance sheet?

A.1.b. Performance metrics for the securitized balances, in some 

cases, are better than those for loans that are not securitized. The 

primary reason for this is that in some of our institutions that have 

exited private student lending, securitized assets have seasoned, 

with all of the loans well into their repayment period. These loans 

are generally beyond the time in their life cycle when most delinquencies and losses are likely to occur.

Q.2.a.–c. In his testimony, Mr. Chopra stated that mortgage and 

student loan borrowers may have more difficulties working out a 

modification or forbearance when those loans have been 

securitized, but fewer barriers exist for student loan borrowers 

than existed in the mortgage market.

Q.2.a. What additional barriers to forbearance and modifications 

exist for private student loan borrowers whose loans were 

securitized?

A.2.a. The main limitation is generally aggregate forbearance and 

modification levels for the securitized pool as a whole. Frequent 

modification and forbearance actions can reduce portfolio yield and 

extend loan maturity enough to disrupt the timing and level of the 

securities’ cash-flows that investors are expecting. Rating agencies 

monitor and stress forbearance and modification actions to track 

whether volumes are higher than expected or could potentially impair cash-flows available for investors. Cash flow interruptions 

from unexpected forbearance or modification levels could result in 

a ratings downgrade. As volumes near thresholds, servicers may 

have contract or financial incentives to reduce the volume of modification and forbearance activity.

Q.2.b. How are contract conditions for SLABS different from conditions for mortgage-backed securities?

A.2.b. Contracts vary, but the general parameters for most assetbacked securities are similar. For example, most SLABS and mortgage-backed securities (MBS) require servicers to manage, service, 

administer and make collections on trust assets with reasonable 

care, using the degree of skill and attention that the servicer exercises with similar loans that it services on its own behalf. In other 

words, the contracts generally expect servicers to treat securitized 

accounts the same way they treat their own. 

Investors, trustees, and rating agencies prefer common servicing 

approaches because cash-flow estimates for the securitized pools 

are largely based on an issuer’s/servicer’s pattern of performance. 

69

Past performance is an important factor in setting pricing and 

credit enhancement levels, two factors that significantly affect 

price. Long, consistent history allows better analysis and cash-flow 

projections as long as borrower pools remain reasonably stable. 

Even so, both contract types also typically limit aggregate forbearance or modification activity to levels unlikely to alter projected 

cash-flows materially without explicit written trustee consent. 

Trustees want consistent performance, but also wish to retain some 

control over actions that could change cash-flows enough to affect 

a securities rating. 

In some cases, the existence of collateral and the lack of bankruptcy protection in a mortgage transaction may prompt MBS to 

give servicers more flexibility than student loan securities. 

Proactively managing collateral and secondary sources of repayment can materially affect trust cash-flows, so MBS pooling and 

servicing contracts may allow more frequent or timely forbearance 

or modification actions. For example, some contracts allow MBS 

servicers to modify loans when default is ‘‘imminent’’ rather than 

the more common post-default threshold. Since private student 

loans seldom have collateral but do have long-term protection from 

bankruptcy discharge, different loss mitigation approaches are common.

Q.2.c. What would be required to offer borrowers with securitized 

loans the same options that can be afforded to borrowers whose 

loans were not securitized?

A.2.c. Most contractual forbearance and modification limitations 

for securitized assets are designed to ensure adequate and timely 

cash-flows to repay investors. The most compelling argument for allowing greater activity would be to convince investors (and rating 

agencies) that the forbearance and modification actions used objectively improve the timing and amount of cash-flows received, and 

do not simply defer losses. Investors are particularly wary of speculative modification actions that only delay losses since security 

structures sometimes release credit protection over time, and delayed (rather than reduced) losses may then occur when credit protection is no longer available.

Q.3. As a voting member agency of the Financial Stability Oversight Council, I am interested in your views on how you assess 

whether an entity would meet the criteria to be designated a systemically important financial institutions (SIFI). Specifically, given 

its extremely large footprint in servicing Direct, FFELP, and private student loans, what would be the broader impact on consumers and markets if SLM Corp. (Sallie Mae) were to fail?

A.3. The Financial Stability Oversight Council (FSOC) has established a three-stage process and interpretative guidance that FSOC 

members use to assess and determine whether a nonbank financial 

company should be designated as systemically important and subject to enhanced prudential standards and supervision by the 

Board of Governors of the Federal Reserve System pursuant to section 113 of the Dodd-Frank Act. The FSOC’s assessment process 

considers the 10 statutory considerations set forth by Congress for 

making such determinations. FSOC’s interpretative guidance evaluates these factors in the context of how the material distress at 

70

a given nonbank financial company could be transmitted to other 

financial firms and markets and thereby pose a threat to U.S. financial stability through three transmission channels:

(1) the exposures of creditors, counterparties, investors, and 

other market participants to the nonbank financial company;

(2) the liquidation of assets by the nonbank financial company, 

which could trigger a fall in asset prices and thereby could 

disrupt trading or funding in key markets or cause significant losses or funding problems for other firms with similar 

holdings; and

(3) the inability or unwillingness of the nonbank financial company to provide a critical function or service relied upon by 

market participants and for which there are no ready substitutes.

Thus, consistent with the FSOC’s interpretative guidance, factors 

that one would consider when assessing the potential impact of a 

failure by any nonbank financial company, include substitutability 

(e.g., the extent to which there would be other sources for products 

or services offered by the nonbank financial company); interconnectedness between the nonbank financial company and other 

financial institutions; and the complexity and resolvability of the 

nonbank financial company’s operations.

Q.4.a. In October 2012, the Consumer Financial Protection Bureau 

issued a report about problems servicemembers face when utilizing 

benefits guaranteed by Federal law, even on Government-guaranteed student loans. Your agency supervises institutions with 

FFELP portfolios. 

Have you focused on these portfolios in your examinations?

A.4.a. Most large banks do not offer private student lending. However, when offered, the Servicemembers Civil Relief Act (SCRA) is 

an integral part of OCC’s compliance supervision. Supervisory activities include a review of internal audit processes and findings as 

well as bank policies, procedures and practices. OCC reviews customer complaints and performs transactional testing. Conclusions, 

including violations of law, Matters Requiring Attention, and other 

significant recommendations, are documented and communicated to 

the bank in a Supervisory Letter or Report of Examination.

Q.4.b. To what extent have you determined that servicemembers 

are victims of unfair or deceptive practices as it regards to student 

loan benefits?

A.4.b. Examinations conducted in large banks have not identified 

servicemembers that have been harmed by unfair or deceptive 

practices related to student loan benefits.

Q.4.c. Are you confident that your supervised institutions are in 

compliance with the SCRA?

A.4.c. OCC’s current supervisory guidance requires annual SCRA 

examinations. While OCC continues to see improved compliance 

with SCRA requirements, we will continue to hold banks accountable for compliance with the Act.

Q.4.d. To what extent have you shared these results with the Department of Education and the Department of Justice?

71

A.4.d. The OCC works closely with the Department of Justice 

(DOJ) on SCRA matters, including issues that arise in the course 

of the OCC’s examinations of national banks and Federal thrifts 

and other supervisory activities. As an example, last year the OCC 

and DOJ engaged in coordinated formal enforcement actions in 

connection with violations of SCRA by Capital One, N.A., and Capital One Bank (USA), N.A. Less formally, OCC staff also regularly 

consults with DOJ staff on SCRA questions that arise in connection 

with the OCC’s supervision of national banks and Federal thrifts. 

For example, the OCC is currently consulting with DOJ regarding 

the extent to which certain SCRA protections apply to an LLC that 

is majority owned by a servicemember and his spouse. The OCC 

believes that these consultations promote more consistent interpretation of SCRA across Government agencies. 

The OCC also works with the Department of Education (DOE) 

regarding student loan issues that have come to the OCC’s attention during the course of our supervisory activities. Our opportunities to work with DOE are less frequent than our collaborations 

with DOJ, in part because the Federal Government now makes 

Federal student loans directly to students, and national banks and 

Federal thrifts are not involved with new Federal student loans. 

Currently, the OCC is consulting with DOE concerning the appropriate way in which servicers of student loans may reconcile an apparent inconsistency between the minimum payment set forth in 

the Common Manual for servicing Federal student loans and the 

maximum interest rate provisions of SCRA. 

With regard to issues that may arise involving specific student 

loan transactions or files, the Right to Financial Privacy Act 

(RFPA), 12 U.S.C. §§ 3401–3422, places statutory limits on the 

OCC’s authority to transfer to other Government agencies the financial records of customers of the financial institutions that the 

OCC supervises. The OCC must certify that there is reason to believe that the financial records are relevant to a legitimate law enforcement inquiry within the jurisdiction of the Government agency 

to which it transfers the financial records. 12 U.S.C. § 3412(a). 

Under the RFPA, it is difficult for the OCC to provide detailed information to the DOE concerning violations of the SCRA, as the 

DOE has no apparent authority to enforce SCRA against national 

banks and Federal thrifts. 

The RFPA does not limit the transfer of customer financial 

records to DOJ if the OCC can certify that there is reason to believe that the records may be relevant to a violation of Federal 

criminal law, and that the OCC obtained the records in the exercise of its supervisory or regulatory functions. 12 U.S.C. §

3412(f)(l)(A) and (B). Thus, because SCRA attaches criminal penalties to the violation of certain provisions of SCRA, the OCC can 

more easily transfer records to DOJ for possible violations of SCRA.

Q.5.a.–c. The CFPB’s May 2013 report, Student Loan Affordability: 

Analysis of Public Input on Impact and Solutions, raised concerns 

about the effect of unsustainable levels of student debt. Heavy student loan burdens not only deplete available resources but can also 

limit the career opportunities of young graduates who must earn 

salaries that can repay tens or hundreds of thousands of dollars in 

debt. And, if borrowers fall behind the resulting damage to their 

72

credit can further limit access to financing for a home, car, or even 

daily purchases. Homebuilders and mortgage originators have already noted a decrease in the volume of home purchases by young 

people, and practitioners in careers that may offer less compensation, including public service and family medicine, have noted that 

young people are now gravitating toward more lucrative careers to 

pay back large volumes of debt.

Q.5.a. Has your agency observed differences in home loans, auto 

loans, and other extensions of credit to young borrowers?

A.5.a. Institutions we regulate do not monitor application or performance statistics based on a borrower’s age. While credit card 

issuers must adhere to specific Regulation Z underwriting requirements for applicants under 21 years of age, credit card portfolios 

are not typically segmented specifically by age. Some institutions 

offer ‘‘student’’ credit cards. Age is not a criterion that would determine whether an applicant would be included in the student portfolio and all borrowers classified as students are not necessarily 

under 21. However, it is likely that the vast majority of student 

cardholders would be considered ‘‘young’’ borrowers. In institutions 

where performance of this segment is monitored, performance 

metrics are not consistent. In some OCC-regulated institutions, 

younger credit cardholders show better performance metrics than 

the general population, and, in others, they do not perform as well.

Q.5.b. Given the risks associated with student loans, which are 

typically underwritten without an extensive borrower credit history, and the relatively more secure, collateralized loans made for 

homes, cars, and other consumer products, how do you project that 

the rising burden of student debt will impact the balance sheets of 

the institutions that you regulate in the long term?

A.5.b. Student lending is a minor segment of most national bank 

and Federal thrift balance sheets, so the volume of student loan 

balances is not expected to be a significant concern for the foreseeable future. 

Student loan debt service requirements however, may be an 

issue as debt levels rise. Monthly payments for existing student 

loans are part of the repayment capacity analyses for all new consumer loans, and rising levels are a claim on monthly cash-flows 

that may restrict the amount of other debt available to borrowers. 

Financing an education requires borrowers to manage debt levels 

and sometimes delay other spending until income levels can handle 

larger amounts of debt. This may affect growth levels for other 

products, and lenders will need to remain disciplined and consider 

total debt burden for all existing debt at each new credit request.

Q.5.c. In your experience, do the private student lenders you regulate extend, or offer to extend, other forms of credit to borrowers 

of private student loans? How do incentives for customer service 

and sound financial practices change for private student lenders 

that do not offer a full suite of financial products?

A.5.c. Most OCC-regulated private student lenders offer a full 

range of consumer products, including auto loans, credit cards, and 

mortgages. Many bank customers have student loans and other 

types of consumer credit. None of the OCC-regulated private stuVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00076 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
73

dent lenders are monoline companies that specialize only in student loans.

Q.6. Your testimony cited OCC guidance issued in 2010 as the 

standard that regulators use when determining the soundness of 

bank’s decision to work with a troubled borrower. The guidance 

states that once repayment has begun ‘‘private student loans 

should not be treated differently from other consumer loans except 

in cases where the borrower returns to school.’’ It further states the 

loan modifications should be considered for ‘‘long-term hardships’’ 

and may ‘‘temporarily or permanently’’ reduce interest rates to 

lower payments but should not include terms that ‘‘delay recognition of the problem credit.’’

How often does each of the private student lenders that you supervise engage in loan modifications for borrowers who are in longterm hardship situations? How often does each of the lenders grant 

additional forbearance beyond the 6-month introductory period?

A.6. The large OCC-regulated institutions have not generally offered modification programs for long-term hardship situations unless made available as a feature in guaranteed loan portfolios such 

as The Education Resources Institute, Inc. (TERI). Several institutions will make a modification available to military servicemembers 

in active duty status. These modifications are decisioned on a caseby-case basis and occur infrequently. 

Most large OCC-regulated institutions do grant an additional 6-

month forbearance period for borrowers experiencing financial 

hardship, with appropriate supporting documentation of their hardship.

Q.7. In your testimony, you described that institutions should constructively work with private student loan borrowers to conduct 

modifications in a safe and sound manner. Given that loan modifications might increase the net present value of certain troubled 

loans, how does your agency plan to increase the pace of loan modification activity among its supervised institutions?

A.7. The OCC expects lenders to work constructively with troubled 

borrowers, and to offer prudent loan modification programs when 

objective analysis indicates the ability to improve cash-flows and 

performance. As with all consumer products, OCC supervision of 

student lending loan modification activity generally focuses on the 

adequacy of information and the quality of decisionmaking. We expect both to be well controlled, structured, and robust, including 

the development and use of any net present value models used in 

modification decisions. Where credible net present value evaluations indicate modification and other workout or forbearance actions are prudent, the OCC will continue to encourage institutions 

to actively engage in the programs.

Q.8. Please provide any interpretive guidance (e.g., for use by examiners, supervised institutions) on the Uniform Retail Classification and Account Management Policy that is specific to private student loans. Describe how your interpretation differs from the guidance used by other prudential regulators.

A.8. In August 2010, the OCC issued CNBE Policy Guidance 2010–

02, ‘‘Policy Interpretation: OCC Bulletin 2000–20—Application to 

74

Private Student Lending’’ to examiners to help them interpret the 

Retail Uniform Classification Policy specifically for private student 

lending. The guidance explicitly permits national banks and Federal thrifts to engage in the following actions to assist borrowers:

• In-school deferments—allows lenders to postpone a borrower’s 

principal and interest payments as long as the person is enrolled in school at least as a half-time student.

• Grace periods—allows lenders to defer a borrower’s payments 

for 6 months immediately following their departure from 

school, without conditions or hardship documentation.

• Extended grace periods—allows lenders to defer a borrower’s 

payment for an additional 6 months immediately following the 

initial grace period for those borrowers who are experiencing 

a financial hardship. This benefit is available to student loan 

borrowers who are unemployed or under-employed.

• Short-term forbearance—allows lenders to offer two-to-three 

month loan extensions to a borrower to address short-term 

hardships.

• Loan modifications—allows lenders to provide interest rate and 

payment reductions to borrowers who are experiencing longterm hardships.

Although the OCC was the only prudential regulator to issue specific interpretive guidance for private student lending, in July 2013, 

the OCC, Federal Deposit Insurance Corporation and the Board of 

the Governors of the Federal Reserve System issued a joint statement that encourages financial institutions to work constructively 

with private student borrowers experiencing financial difficulties. 

The statement reaffirms that the Uniform Classification Policy permits prudent student workout and modifications of retail loans, including private student loans.

Q.9. What is your supervisory approach when conducting examinations of Federal and private student loan servicing activities? What 

are the risk factors that you look for? Do you have publicly available manuals and guidance that cover student loan servicing? Have 

you utilized complaints submitted to the CFPB and the Department of Education to scope your exams?

A.9. Many of our large institutions no longer offer private student 

loans to new borrowers, and are simply servicing existing portfolios. Risks in these portfolios and the focus of OCC supervisory 

activities are in servicing, collection and recovery activities. Supervision will include reviews of activities performed by the bank’s 

control functions such as internal audit, quality control and quality 

assurance, particularly when servicing is performed by a third 

party. Examiners may also include transaction testing to ensure institutions are appropriately offering grace periods, deferments and 

modifications. In institutions still active in private student loan 

originations, examiners will also review front-end activities, such 

as underwriting policies and strategies. 

The OCC has no examination manual dedicated specifically to 

student lending. However, the agency’s overall retail credit examination procedures and existing Federal Financial Institutions Examination Council (FFIEC) guidance for retail classification and acVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00078 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
75

count management are applicable to student lending. OCC emphasized this in CNBE Policy Guidance 2010–02 and examiners utilize 

this guidance for private student lending supervisory activities. 

Examiners have used complaints filed with the OCC to help 

guide the scope of examination activities. To date, the Consumer 

Financial Protection Bureau (CFPB) database or complaints filed 

with the DOE have not been widely used but all sources of consumer complaints are gaining wider usage during both consumer 

compliance and safety and soundness supervisory activities.

Q.10. Compared to Direct Loans, it is generally more cumbersome 

for Federal student loan borrowers to enroll in income-based repayment programs. Many institutions you supervise have significant 

FFELP holdings. How would you generally assess the ability of 

your supervised entities to make borrowers aware of and successfully enroll them in income-based repayment options?

A.10. We believe that the institutions we supervise have the ability 

to make borrowers aware of and successfully enroll in income-based 

repayment programs. Enrollment criteria and payment terms were 

established by the Federal Government, and servicers must comply 

with these terms in approval or payment decisions. Most national 

bank and thrift servicers provide contact information for troubled 

borrowers on their Web site and in monthly billing statements. Income-based repayment terms are also widely available on the internet, including on the DOE’s Web site.

Q.11.a.–c. In your testimony, you stated that lack of competition 

in the private student lender market has limited loan refinancing 

opportunities. But you also stated that pricing of private student 

loans is based on risk-based pricing and competition within the 

market.

Q.11.a. Given the lack of competition in this space, how can we assure that low- and middle-income students have access to both affordable loans and loan modification options that reflect the borrower’s characteristics and ability and willingness to repay?

A.11.a. Calibrating loan amounts and payment structures to a student borrower’s potential future income flows is inherently difficult 

and the main challenge for both Federal and private loan programs. Most Federal loans are tied more closely to the cost of education and living expenses rather than quantifiable potential future 

earnings that would limit loan amounts to affordable levels. Federal programs consider this an acceptable risk as they seem more 

willing to balance potential shortfalls with the general benefits of 

a broad, highly trained workforce. 

Private student lenders tend to have a narrower perspective and 

are far more concerned with quantifiable sources of repayment at 

origination. Loan underwriting typically considers affordability and 

credit performance at inception, and loan amounts and payment 

terms are set accordingly. Most private student lenders require coborrowers to meet affordability standards and mitigate the lack of 

a loan guarantee. Modification decisions also tend to be based on 

available resources from all borrowers, not only the student’s income. 

The most direct, practical way to assure greater access to affordable loans and primary obligor-based modifications would be to 

76

shift more lending for low- and moderate-income students to Federal programs. This would allow greater access to income-based repayment and principal forgiveness programs for low-to-moderateincome borrowers. Simply mandating primary-borrower incomebased repayment programs and loan modifications by private student lenders may have the unintended consequence of restricting 

credit by driving participants out of the market.

Q.11.b. Is there an existing public or private mechanism to encourage more sustainable loan terms and refinancing opportunities for 

student borrowers?

A.11.b. Most Federal student loan programs offer payment and 

consolidation options designed to help borrowers manage repayment and debt levels. These include graduated repayment plans, 

income-contingent repayment plans, extended repayment plans, income-based repayment plans, loan consolidation programs, and 

loan rehabilitation programs for delinquent borrowers. Most are 

tied directly to a primary borrower’s income and ability to repay 

and are designed to be sustainable and affordable. Several programs also allow principal forgiveness or administrative forbearance under certain conditions, largely tied to longer-term performance and a primary borrower’s income or occupation. 

These payment, consolidation, and rehabilitation programs tend 

to be more expensive than traditional amortizing loan structures 

used by private student lenders, and encouraging greater use 

would likely require subsidies or incentives to either adopt similar 

programs or shift existing loans to Federal programs.

Q.11.c. Without intervention from Congress or regulators, is there 

reason to believe that private student lenders will actively work 

with borrowers to issue more sustainable loans and to modify the 

terms of loans issues prior to the financial crisis to more accurately 

reflect the risk profile of the borrower given the current lending environment and their financial status?

A.11.c. Private student lenders have inherent financial incentives 

to work actively with troubled borrowers to maximize cash-flows 

and minimize losses for existing loans. Even with bankruptcy protection, collections and servicing costs for delinquent student borrowers are expensive, time consuming, and limit profitability. Most 

private student lenders attempt to control collections expenses by 

requiring financially responsible coborrowers to mitigate the risk. 

As a result, initial loan terms and subsequent loan modifications 

are typically based on available income and resources from all borrowers on the note, not only the primary student. 

When modifications and workout programs are used, national 

banks and Federal thrifts are expected to link decisions directly to 

the nature of the hardship and the willingness and ability of the 

borrower(s) to comply with sustainable modification terms. Current 

lending and economic environments are also a factor, and repayment and modification terms do adjust to consider these factors. 

For example, high unemployment levels associated with the last recession prompted lenders to offer extended grace periods beyond 

the initial 6-month period for students having difficulty finding employment. 

77

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MANCHIN 

FROM JOHN C. LYONS 

Q.1. In rural towns across the country, there is a chronic shortage 

of primary care health professionals. Not just doctors, but nurses 

and others. According to the American Medical Association, student 

debt may be a barrier to practicing in underserved communities. 

This problem extends beyond health professionals. I hear from 

West Virginians across my State that the best teachers are retiring 

and that poorer districts are having a tough time bringing in young 

people to take their places. 

So many rural families want their kids to go to college, but they 

worry about the impacts of high levels of student loan debt. 

In your opinion, how will rural areas survive without critical professions like doctors, nurses, and teachers? What are you doing to 

make sure that the burden of student debt isn’t disproportionately 

shouldered by rural areas?

A.1. While we do not regulate higher education costs, we recognize 

the issue and can understand and appreciate the challenges facing 

rural communities. Situations like this are one of the main reasons 

Federal student loan programs offer income-based and income-contingent repayment programs that sometimes include principal forgiveness for student loan borrowers who work in underserved 

areas. 

For private student loans, one issue we find extremely important 

is the need for lenders to tailor workout, forbearance, and modification programs directly to the nature of a borrower’s situation. Most 

often, this includes consideration of co-borrowers, but even so, we 

expect workout programs and modifications to be objective decisions that lenders offer when a credible analysis indicates that 

such actions will improve cash-flows. When offered, modification 

terms should be sustainable, capacity-based, and tied directly to a 

borrower’s current and prospective ability to repay. This will not 

solve the debt burden issue by itself, but should help ensure that 

actual income levels are an important consideration whenever 

modification or workout programs are used.

Q.2.a. It does not make any sense that, under our current system, 

students are forced to pay high interest rates on Federal student 

loans when everyone else in the economy benefits from low borrowing costs on everything else. And if we don’t act by July 15—

every Federal loan will have an interest rate of at least 6.8 percent 

in 2013, while T-bill rates stay near historic lows. 

Not only would moving to a market-based rate allow students to 

benefit from cheaper borrowing when everyone else can, I expect 

that private student loan lenders would, in order to remain competitive, lower their rates as well. Under the current system, private lenders know that we have created artificial benchmarks for 

these rates, so private lenders can always keep their rates unnecessarily high. 

How do you believe that implementing a market-based rate for 

Federal loan programs would affect the private loan market?

A.2.a. We would not expect significant change to the private loan 

market from implementation of a market-based rate for Federal 

loans. Private student lenders base pricing on operational costs, 

78

funding costs, and the risk in the transaction. Most often today, 

that includes the structure of the note, repayment capacity of the 

student, and the financial strength of any available co-borrowers. 

Other debt, including Federal student loans, is a consideration, but 

unless the rate change also affects the amount of Federal student 

loans available, we do not expect a market-based rate for Federal 

loans would have a substantial influence on lending decisions in 

the private student loan market.

Q.2.b. Wouldn’t allowing Federal rates to fall during times of cheap 

borrowing—such as today—force private borrowers to lower their 

interest rates to remain competitive?

A.2.b. Given available subsidies and flexible repayment options 

under Federal programs, most private student loans today are supplements to Federal programs rather than price-sensitive alternatives. As such, we expect that private student lenders would continue to base loan pricing on the characteristics of the transaction 

rather than the rate of Federal student programs. The risk in a 

private student loan today is generally a function of the strength 

of co-borrowers, a consideration not significantly impacted by Federal rates. We expect Federal program limits and the cost of education to continue to be the main driver of private student loan volumes. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM TODD VERMILYEA 

Troubled Debt Restructuring 

Q.1. Many lenders have noted that they cannot modify loans because they do not want the modification to be considered a troubled 

debt restructuring, or TDR, for accounting purposes. Can you describe when a loan modification is a TDR and what role your agency plays in interpreting the accounting standard? Mr. Lyons’ testimony stated that ‘‘under GAAP a bank must recognize a loan modification for a financially troubled borrower that includes concessions as a TDR, with appropriate loan loss provisions if impairment 

exists. The designation of a loan as TDR does not prohibit or impede a bank’s ability to continue to work with the borrower.’’ Ms. 

Eberley’s testimony noted that ‘‘[p]otential or actual treatment as 

a TDR should not prevent institutions from proactively working 

with borrowers to restructure loans with reasonable modified terms 

. . . [t]he FDIC encourages banks to work with troubled borrowers 

and will not criticize IDI management for engaging in prudent 

workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in a TDR 

designation.’’ Can you describe how designation of loans as TDR 

factors into an institutions’ allowance for loan and lease losses 

(ALLL), and what role the ALLL plays in calculation of a financial 

institution’s minimum regulatory capital? How would the Basel III 

rules change the treatment of ALLL in the capital calculation, if 

at all? Please also describe any other impact designating a loan as 

TDR has on an institution’s balance sheet.

A.1. Under U.S. generally accepted accounting principles (GAAP) 

and FFIEC Reports of Condition and Income (call reports), a reVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00082 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
79

structuring of a debt constitutes a troubled debt restructuring 

(TDR) if the creditor for economic or legal reasons related to the 

debtor’s financial difficulties grants a concession to the debtor that 

it would not otherwise consider. The determination of whether a restructured loan is a TDR requires judgment and consideration of 

all of the facts and circumstances surrounding the modification. Accordingly, examiners reviewing an institution’s accounting for 

modification must use judgment when assessing whether the criteria for a TDR have been met. 

Under U.S. GAAP, any loan modified in a TDR is an impaired 

loan. Financial Accounting Standards Board Accounting Standards 

Codification 310, Receivables, states that impaired loans should be 

measured for impairment using ( 1) the present value of expected 

future cash-flows discounted at the loan’s effective interest rate, (2) 

the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. An institution may 

choose the appropriate ASC 130 measurement method on a loanby-loan basis for an individually impaired loan to be measured 

using the fair value of collateral method. Generally, an allowance 

for loan losses is established for the amount of the impairment. 

There are several regulatory capital ratios. Regulatory capital ratios are generally calculated by dividing capital (calculated in a defined way) by assets (calculated in a defined way). GAAP capital 

is the basis for the numerator. When an allowance is established, 

earnings, and therefore GAAP capital, is reduced. For one of the 

capital ratios (Total Capital), the ALLL is added back to capital up 

to 1.25 percent of the bank’s gross risk-weighted assets. For each 

of the ratios, risk-weighted assets are reduced by the amount of 

ALLL in excess of 1.25 percent of the bank’s gross risk-weighted 

assets. 

Finally, regarding the impact of Basel III, there should be no impact since Basel III did not include specific changes to the treatment of ALLL. Designation of a loan as TDR has no other impact 

on an institution’s balance sheet. 

Guidance 

Q.2. Mr. Lyons stated in his testimony that the OCC issued supplemental guidance to its examiners in 2010 interpreting the Uniform 

Retail Classification and Account Management Policy (Retail Policy) in the context of private student lending. However, that guidance is not available to private student lenders, borrowers, or any 

other market participants. Does the OCC plan to make this guidance public or otherwise provide information to the institutions 

that it regulates on supervisory expectations for managing forbearance, workout, and modification programs? Mr. Vermilyea stated in 

his testimony that the Retail Policy is ‘‘timeless.’’ The Retail Policy 

was revised in 2000, which superseded a 1999 revision, which in 

turn revised a policy from 1980. The private student loan market 

quadrupled from 2001 to 2008 and just as rapidly declined through 

2012. Given the marked changes in the student loan market since 

publication of the Retail Policy in 2000, what criteria do the agencies, either individually or through the Federal Financial Institutions Examination Council, use to determine when it is appropriate 

to revisit retail credit policy? When would it be appropriate to proVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00083 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
80

1 http://www.Federalreserve.gov/newsevents/press/bcreg/20130725a.htm. 1http://www. Federalreserve.gov/newsevents/press/bcreg/20130725a.htm.

vide guidance to private student lenders regarding supervisory 

minimum expectations?

A.2. The Retail Policy is quite broad and it covers not just student 

loans, but most other types of closed-end and open-end retail credit 

extensions. As such, it applies generally to retail portfolios and embodies sound risk management principles that are timeless and 

still very much applicable. While the student loan market has indeed grown in size in the mid-2000s, the underlying risk management principles applicable to it have remained the same. 

To remind both examiners and banks of the important risk management principles in the Retail Policy, and of the appropriateness 

of prudent loan modifications, on July 25, the three banking regulatory agencies issued a joint statement, which encourages regulated institutions to work with student loan borrowers based on the 

prudent principles of the Retail Policy.1

The Federal Reserve has no set timetable or policy to determine 

when it is appropriate to revisit policies. Every policy is a separate 

case and whether or not it needs to be updated or refreshed is evaluated on its own merits. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM TODD VERMILYEA 

Q.1. The OCC published updated retail credit classification guidance on private student loans in 2010. The FDIC testified at the 

hearing that it would release updated guidance in the near future. 

Does the Federal Reserve have any plans to publish updated retail credit classification guidance specific to private student loans?

A.1. The Retail Credit Classification Policy embodies sound risk 

management principles that are timeless and remain very much 

applicable to today’s market conditions; no plan exists currently to 

update it. However, to remind both examiners and banks of those 

important risk management principles and of the appropriateness 

of prudent loan modifications, on July 25, the three banking regulatory agencies issued a joint statement, which encourages regulated institutions to work with student loan borrowers based on the 

prudent principles of the Retail Policy.1

Q.2. Does the Federal Reserve view private student loans as a 

unique type of retail consumer credit?

A.2. The student loan market is unique in that it is comprised of 

long-term unsecured debt where, the source of expected repayment 

is contingent on the future productivity of the borrower. The Federal Reserve is cognizant of the important social implications of private student loans. Student loan borrowers who are unemployed or 

underemployed may not have sufficient financial capacity to service 

their private student loan debts shortly after separation from 

school or during periods of economic difficulty. 

As with other consumer lending activities, the Federal Reserve 

encourages financial institutions to consider prudent workout arrangements that increase the potential for financially stressed borVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00084 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
81

rowers to repay private student loans whenever workout arrangements are economically feasible and appropriate. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM TODD VERMILYEA 

Q.1.a.–b. In the years leading up to the financial crisis, the Student Loan Asset Backed Securities (SLABS) market experienced 

unprecedented growth. SLABS issuance grew to more than $16 billion annually to feed investor demand for these securities. To increase volume, higher dollar value loans were made to a greater 

range of borrowers before being securitized. Multiple witnesses 

noted that the loans still held in securitized trusts may have fewer 

modification and refinance opportunities than those retained on a 

bank’s balance sheet, further limiting options for borrowers and 

raising the risk of default.

Q.1.a. Where applicable, what percentage of student loans originated by institutions regulated by your agency and still in repayment is held in securitized trusts? What percentage is held on 

banks’ balance sheets?

A.1.a. The Federal Reserve is the primary supervisory authority of 

one institution that originates student loans: SunTrust Bank, a 

State member bank SunTrust issued one student loan asset-backed 

security in 2006, which was for $765 million worth of Federal Family Education Loans (FFELP), or Government-guaranteed, loans as 

opposed to private student loans, which was the focus of the hearing. Using the current securitized balance of $360 million, and total 

student loan balance of $5.942 billion, the percentage of SunTrust’s 

loans held in securitized trusts is 6.06 percent, and the remainder, 

93.94 percent, is held on the balance sheet.

Q.1.b. Is there a difference in the performance of loans that have 

been securitized and those that are held directly on a bank’s balance sheet?

A.1.b. According to data from the Consumer Financial Protection 

Bureau (CFPB) and ratings agency DBRS, industry cumulative default rates for private student loan vintages reveal that the performance of loans that have been securitized is poorer than the 

overall student loan market.

Vintage Overall Student Loan Market Securitized Private Student Loan Market 

2005 ..................................................................................... 10.5% 17.9%

2006 ..................................................................................... 9.0% 15.5%

2007 ..................................................................................... 7.0% 17.9%

In his testimony, Mr. Chopra stated that mortgage and student 

loan borrowers may have more difficulties working out a modification or forbearance when those loans have been securitized, but 

fewer barriers exist for student loan borrowers than existed in the 

mortgage market.

82

1See http://www.Federalreserve.gov/newsevents/press/bcreg/20130725a.htm.

Q.1.c. What additional barriers to forbearance and modifications 

exist for private student loan borrowers whose loans were 

securitized?

A.1.c. When it comes to working with a troubled borrower, it does 

not matter whether the loan has been securitized or not. Private 

student loans, as a credit risk for the bank, may face different forbearance or modification options than Government-guaranteed student loans. On July 25, the three banking regulatory agencies 

issued a joint statement encouraging regulated institutions to work 

with student loan borrowers based on the prudent principles of the 

Retail Policy.1

Q.1.d. How are contract conditions for SLABS different from conditions for mortgage-backed securities?

A.1.d. The differences between student loan asset-backed securities 

and mortgage-backed securities has more to do with the origination 

and nature of the loan. 

At mortgage origination, the securitizing institution typically requires extensive financial data before making the loan. This information is required if the institution chooses to sell the loan to a 

Government-sponsored entity (GSE) such as Fannie Mae or 

Freddie Mac. For mortgages, the banks self-police to verify that 

they have followed the associated agency’s guidelines. Issues with 

the self-policing allowed the GSEs to retroactively find fault in the 

loan documentation and force the originating bank to repurchase 

the mortgage. 

For Government-guaranteed student loans, typically a private institution issues the loan on behalf of a State agency that has the 

backing of the Federal Government. For these loans, the State 

agency that guarantees the loan reviews the application before 

making the guarantee and before the bank disperses the funds to 

the school. The independence of the FFELP guarantor from the 

holder in due course lender is a critical distinction when compared 

to the mortgage origination process. As FFELP loans are certified 

and guaranteed during the origination process, the guarantor cannot later find fault and dishonor its own guarantee. As such, the 

FFELP student loan market will avoid the repurchase risk that the 

mortgage market experienced.

Q.1.e. What would be required to offer borrowers with securitized 

loans the same options that can be afforded to borrowers whose 

loans were not securitized?

A.1.e. When it comes to forbearing or modifying a private student 

loan, it does not matter whether the loan has been securitized or 

not, and therefore nothing would be required to offer borrowers 

with securitized loans the same options that can be afforded to borrowers whose loans were not securitized. Regardless of whether a 

student loan has been securitized or not, if it is an FFELP loan, 

modification and forbearance guidelines as provided by the Department of Education must be followed.

Q.2. As a voting member agency of the Financial Stability Oversight Council, I am interested in your views on how you assess 

83

whether an entity would meet the criteria to be designated a systemically important financial institutions (SIFI). Specifically, given 

its extremely large footprint in servicing Direct, FFELP, and private student loans, what would be the broader impact on consumers and markets if SLM Corp. (Sallie Mae) were to fail?

A.2. The designation of systemically important financial institutions (SIFI) is a matter that only the Financial Stability Oversight 

Council (FSOC) can determine. To date, FSOC has designated two 

nonbank financial companies as SIFIs, AIG, Inc. and GE Capital 

Corporation, in addition to eight financial market utility firms. The 

Federal Reserve does not have regulatory authority over the SLM 

Corp. and has not conducted an assessment of the firm.

Q.3.a.–d. In October 2012, the Consumer Financial Protection Bureau issued a report about problems servicemembers face when utilizing benefits guaranteed by Federal law, even on Governmentguaranteed student loans. Your agency supervises institutions with 

FFELP portfolios.

Q.3.a. Have you focused on these portfolios in your examinations?

A.3.a. Please see response to question 3, part d.

Q.3.b. To what extent have you determined that servicemembers 

are victims of unfair or deceptive practices as it regards to student 

loan benefits?

A.3.b. Please see response to question 3, part d.

Q.3.c. Are you confident that your supervised institutions are in 

compliance with the SCRA?

A.3.c. Please see response to question 3, part d.

Q.3.d. To what extent have you shared these results with the Department of Education and the Department of Justice?

A.3.d. The Federal Reserve supports the CFPB’s efforts to highlight options that may be available to servicemembers pursuant to 

student loan programs. Although we do not supervise the administration of student loan programs, as a bank supervisor, we do encourage supervised banks to work with student borrowers. On July 

25, the Federal Reserve Board joined other Federal bank regulatory agencies in issuing a statement encouraging financial institutions to work constructively with private student loan borrowers 

experiencing financial difficulties. Prudent workout arrangements 

are consistent with safe and sound lending practices and are generally in the long-term best interest of both the financial institution 

and the consumer. 

The Federal Reserve also supports the objectives of the 

Servicemembers Civil Relief Act (SCRA). Through our supervisory 

role, we evaluate whether the financial institutions we supervise 

are complying with the SCRA and the unfair and deceptive acts 

and practices provisions of the Federal Trade Commission Act (FTC 

Act). Examinations are conducted on a regular schedule by specially trained consumer compliance examiners. As a standard practice, SCRA compliance is evaluated as part of these scheduled consumer compliance examinations using detailed SCRA examination 

procedures. 

84

As part of their review of an institution’s SCRA policies, procedures, and practices, examiners evaluate any consumer complaints 

received by the Federal Reserve through the consumer complaint 

program, or by the institution itself, regarding SCRA to better 

scope their examinations, and identify risks and potential problem 

areas. Any instances of noncompliance with the consumer protection laws and regulations, including SCRA and the FTC Act—regardless of whether the product is a mortgage or student loan—are 

reported to the management of the financial institution and corrective action is required. At this time, we have not identified any violations of the FTC Act’s unfair and deceptive provisions or any violations of the SCRA in connection with servicemember student 

loans. 

Finally, we engage in periodic discussions with other agencies 

and engage in industry outreach. In the fall of 2013, we sponsored 

a free Outlook Live Webinar on Servicemember Financial Protection that included SCRA. Several agencies, including the CFPB and 

the Department of Justice, participated; the Webinar attracted over 

4,000 registrants.

Q.4.a.–c. The CFPB’s May 2013 report, Student Loan Affordability: 

Analysis of Public Input on Impact and Solutions, raised concerns 

about the effect of unsustainable levels of student debt. Heavy student loan burdens not only deplete available resources but can also 

limit the career opportunities of young graduates who must earn 

salaries that can repay tens or hundreds of thousands of dollars in 

debt. And, if borrowers fall behind the resulting damage to their 

credit can further limit access to financing for a home, car, or even 

daily purchases. Homebuilders and mortgage originators have already noted a decrease in the volume of home purchases by young 

people, and practitioners in careers that may offer less compensation, including public service and family medicine, have noted that 

young people are now gravitating toward more lucrative careers to 

pay back large volumes of debt.

Q.4.a. Has your agency observed differences in home loans, auto 

loans, and other extensions of credit to young borrowers?

A.4.a. Please see response to question 4, part c.

Q.4.b. Given the risks associated with student loans, which are 

typically underwritten without an extensive borrower credit history, and the relatively more secure, collateralized loans made for 

homes, cars, and other consumer products, how do you project that 

the rising burden of student debt will impact the balance sheets of 

the institutions that you regulate in the long term?

A.4.b. Please see response to question 4, part c.

Q.4.c. In your experience, do the private student lenders you regulate extend, or offer to extend, other forms of credit to borrowers 

of private student loans? How do incentives for customer service 

and sound financial practices change for private student lenders 

that do not offer a full suite of financial products?

A.4.c. Following the financial crisis, most institutions have tightened underwriting standards for all loans. To date, the Federal Reserve has not observed a defined pattern where student-loan indebtedness has limited demand for other consumer loan products. 

85

However, we are monitoring student loan debt levels because we 

have concerns. First, a larger student loan balance increases debt 

payment burdens and reduces disposable income, which in turn reduces a consumer’s demand for other consumer debt. Second, high 

student loan payments and potential delinquencies on such loans 

may make it harder for borrowers to obtain additional consumer 

loans. 

However, it is important to note that the incomes of young 

households with education debt tend to be higher than the incomes 

of those without education debt due to the positive returns to college education. Consequently, to the extent that higher income can 

be associated with greater demand for other consumer loan products, there is likely little impact on the extension of other forms of 

consumer credit. 

According to the CFPB, of the $1 trillion in total outstanding student debt, $150 billion consists of private student loans, and includes loans made not only by banks but by credit unions, State 

agencies, and schools themselves. While Federal student loan originations have continued to increase each year, private loan originations peaked in 2008 at roughly $25 billion and have since dropped 

sharply to just over $8 billion. To date, the delinquency among private student loans is roughly 5 percent, according to the CFPB, 

less than half of the delinquency rate for all outstanding student 

loans. There are likely a number of factors underlying the difference between the performance of the Government-guaranteed 

and private student loan portfolios. For instance, underwriting 

standards in the private student loan market have tightened considerably since the financial crisis. Almost 90 percent of these loans 

now require a guarantor or cosigner. 

In the case of SunTrust, the only private student loan lender 

where the Federal Reserve acts as the primary regulatory authority, that institution offers a full range of consumer products in addition to private student loans.

Q.5. Your testimony cited OCC guidance issued in 2010 as the 

standard that regulators use when determining the soundness of 

bank’s decision to work with a troubled borrower. The guidance 

states that once repayment has begun ‘‘private student loans 

should not be treated differently from other consumer loans except 

in cases where the borrower returns to school.’’ It further states the 

loan modifications should be considered for ‘‘long-term hardships’’ 

and may ‘‘temporarily or permanently’’ reduce interest rates to 

lower payments but should not include terms that ‘‘delay recognition of the problem credit.’’

How often does each of the private student lenders that you supervise engage in loan modifications for borrowers who are in longterm hardship situations? How often does each of the lenders grant 

additional forbearance beyond the 6-month introductory period?

A.5. The Federal Reserve does not have comprehensive data on the 

frequency in which regulated institutions engage in loan modifications. However, the Federal Reserve encourages its regulated institutions to work constructively with borrowers who have a legitimate hardship. The aim of such work should be the development 

of sustainable repayment plans while also preserving the safety 

86

and soundness of the lending institution and maintaining compliance with supervisory guidance and accounting regulations.

Q.6. In your testimony, you described that institutions should constructively work with private student loan borrowers to conduct 

modifications in a safe and sound manner. Given that loan modifications might increase the net present value of certain troubled 

loans, how does your agency plan to increase the pace of loan modification activity among its supervised institutions?

A.6. On July 25, the Federal Reserve Board joined other Federal 

bank regulatory agencies in issuing a statement encouraging financial institutions to work constructively with private student loan 

borrowers experiencing financial difficulties. Prudent workout arrangements are consistent with safe and sound lending practices 

and are generally in the long-term best interest of both the financial institution and the consumer. Moreover, Federal Reserve examiners will not criticize institutions that engage in prudent loan 

modifications, but rather will view such modifications as a positive 

action when they mitigate credit risk.

Q.7. Please provide any interpretive guidance (e.g., for use my examiners, supervised institutions) on the Uniform Retail Classification and Account Management Policy that is specific to private student loans. Describe how your interpretation differs from the guidance used by other prudential regulators.

A.7. No interpretative guidance is applicable to the Uniform Retail 

Classification and Account Management Policy, as this policy is 

fairly detailed, clear, and self-explanatory. Nevertheless, to remind 

both examiners and banks of the important risk management principles contained in the policy and of the appropriateness of prudent 

loan modifications, on July 25, the three banking regulatory agencies issued a joint statement, which encourages borrowers to work 

with student loan borrowers based on the prudent principles of the 

Retail Policy.

Q.8. What is your supervisory approach when conducting examinations of Federal and private student loan servicing activities? What 

are the risk factors that you look for? Do you have publicly available manuals and guidance that cover student loan servicing? Have 

you utilized complaints submitted to the CFPB and the Department of Education to scope your exams?

A.8. The Federal Reserve’s supervision of institutions engaged in 

the student loan market is similar to our supervision of other retail 

credit markets and products. For the largest institutions that the 

Federal Reserve regulates with significant student loan portfolios, 

we have onsite examination staff that evaluate the institution’s 

risk-management practices, including adherence to sound underwriting standards, timely recognition of loan deterioration, and appropriate loan provisioning. 

The regulations that the Federal Reserve utilizes to examine institutions are published on our Web site. The Department of Education has a common servicing standards manual for all student 

loan servicers. 

As part of any examination of an institution, Federal Reserve examiners would look at any consumer complaints received by the 

87

Federal Reserve through our consumer complaint program, or by 

the institution itself, to better scope the examination and identify 

potential risks.

Q.9. Compared to Direct Loans, it is generally more cumbersome 

for Federal student loan borrowers to enroll in income-based repayment programs. Many institutions you supervise have significant 

FFELP holdings. How would you generally assess the ability of 

your supervised entities to make borrowers aware of and successfully enroll them in income-based repayment options?

A.9. As referenced above, in July 2013, the Federal Reserve joined 

other Federal bank regulatory agencies in issuing a statement encouraging financial institutions to work constructively with private 

student loan borrowers experiencing financial difficulties. In part, 

this guidance directs supervised institutions ‘‘that have student 

loan modification programs, or other options for those struggling 

with repayment, should provide borrowers with practical information that explains the basic options available, general eligibility criteria, and the process for requesting a modification.’’

Federal Reserve examiners will monitor effective implementation 

of this guidance at the one State member bank that offers FFLEP 

loans.

Q.10.a.–b. Your testimony focused heavily on forbearance as a 

method of relief for private student loan borrowers. But the volume 

and terms of private student loans issued in the years leading up 

to the financial crisis indicate that many of these loans may not be 

sustainable even after forbearance periods. The Consumer Financial Protection Bureau’s July 2012 report documented a 400 percent increase in the volume of private student loan debt originated 

between 2001 and 2008, and 2008 originations surpassed $20 billion. The report also shows that, from 2005 to 2008, undergraduate 

and graduate borrowers of private student loans took on debt that 

exceeded their estimated tuition and fees, and in some years more 

than 30 percent of loans were made directly to students with no 

certification of enrollment from their academic institution. The 

heavy debt burden that was created in these few years is not just 

unsustainable by dollar volume, but also in loan terms. Loans were 

often variable rate loans with initial interest rates ranging from 3 

percent to more than 16 percent.

Q.10.a. Given these extremely unfavorable loan terms that were 

made to a larger number of borrowers, presumably including more 

students from limited financial means, do loans originated between 

2001 and 2008 comply with your standards for safety and soundness?

A.10.a. Please see response for question 10, part b.

Q.10.b. How would refinancing the highest-cost loans to reflect borrowers’ current characteristics affect the soundness of a regulated 

institution’s balance sheet in the short and long term?

A.10.b. The Federal Reserve takes a horizontal view of the student 

loan market across multiple firms during the Comprehensive Capital Analysis and Review (CCAR) exercise, an important supervisory tool that the Federal Reserve deploys, in part, to enhance financial stability by assessing all exposures on bank balance sheets. 

88

CCAR was established to ensure that each of the largest U.S. bank 

holding companies: (1) has rigorous, forward-looking capital planning processes that effectively account for the unique risks of the 

firm; and (2) maintains sufficient capital to continue operations 

throughout times of economic and financial stress. The CCAR exercise collects data on banks’ student loan portfolios, delineated by 

loan type (Federal or private), age, FICO Score, delinquency status, 

and loan purpose (graduate or undergraduate). 

The banks submitting student loan data for CCAR held just over $63 billion in both Government-guaranteed and private student 

loans at year-end 2012, of which $23.6 billion represented outstanding private student loans. At the end of 2012, CCAR banks 

reported that just over 4 percent of private student loan balances 

were in delinquency, but more than 21 percent of Governmentguaranteed student loan balances were delinquent. Nevertheless, 

the delinquency rate for Government-guaranteed student loans has 

shown improvement over recent quarters, dropping from a high of 

more than 23 percent. Likewise, the delinquency rate for private 

loans at CCAR firms trended upward through mid-2009 but has 

since moved down, which is comparable to the performance of the 

overall private student loan market. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MANCHIN 

FROM TODD VERMILYEA 

Q.1. In rural towns across the country, there is a chronic shortage 

of primary care health professionals. Not just doctors, but nurses 

and others. According to the American Medical Association, student 

debt may be a barrier to practicing in underserved communities. 

This problem extends beyond health professionals. I hear from 

West Virginians across my State that the best teachers are retiring 

and that poorer districts are having a tough time bringing in young 

people to take their places. 

So many rural families want their kids to go to college, but they 

worry about the impacts of high levels of student loan debt? 

In your opinion, how will rural areas survive without critical professions like doctors, nurses, and teachers? What are you doing to 

make sure that the burden of student debt isn’t disproportionately 

shouldered by rural areas?

A.1. Education is one of the impost important drivers of social mobility. On average, attending college appears to be beneficial from 

a financial standpoint if a degree is obtained and employment is 

found. Numerous studies, including several undertaken recently, 

have found that the average wage premiums earned by college 

graduates remain substantial, and, in this particular sense, attending college appears to be a very good investment. In addition, unemployment rates for college graduates are lower than for high 

school graduates. A recent research paper prepared by the Federal 

Reserve Bank of Kansas City noted that the ‘‘preponderance of research suggests’’ that the value of a college education outweighs 

the costs. https://www.kansascityfed.org/publicat/reswkpap/pdf/

rwp%2012-05.pdf.

That is again why, on July 25, the Federal Reserve Board joined 

other Federal bank regulatory agencies in issuing a statement enVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00092 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
89

couraging financial institutions to work constructively with private 

student loan borrowers experiencing financial difficulties. Prudent 

workout arrangements are consistent with safe and sound lending 

practices and are generally in the long-term best interest of both 

the financial institution and the consumer.

Q.2. It does not make any sense that, under our current system, 

students are forced to pay high interest rates on Federal student 

loans when everyone else in the economy benefits from low borrowing costs on everything else. And if we don’t act by July 1st, 

every Federal loan will have an interest rate of at least 6.8 percent 

in 2013, while T-bill rates stay near historic lows. 

Not only would moving to a market-based rate allow students to 

benefit from cheaper borrowing when everyone else can, I expect 

that private student loan lenders would, in order to remain competitive, lower their rates as well. Under the current system, private lenders know that we have created artificial benchmarks for 

these rates, so private lenders can always keep their rates unnecessarily high. 

How do you believe that implementing a market-based rate for 

Federal loan programs would affect the private loan market? 

Wouldn’t allowing Federal rates to fall during times of cheap borrowing—such as today—force private borrowers to lower their interest rates to remain competitive?

A.2. The Federal Reserve does not have statutory supervisory 

power or a policymaking mandate over Federal student loan programs. The Department of Education is responsible for administering the various Federal student loan programs. The Federal 

Reserve would ensure that the institutions we regulate remain in 

compliance with all statutory requirements associated with student 

loan programs. 

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON 

FROM DOREEN R. EBERLEY 

Troubled Debt Restructuring 

Q.1. Many lenders have noted that they cannot modify loans because they do not want the modification to be considered a troubled 

debt restructuring, or TDR, for accounting purposes. Can you describe when a loan modification is a TDR and what role your agency plays in interpreting the accounting standard? Mr. Lyons’ testimony stated that ‘‘under GAAP a bank must recognize a loan modification for a financially troubled borrower that includes concessions as a TDR, with appropriate loan loss provisions if impairment 

exists. The designation of a loan as TDR does not prohibit or impede a bank’s ability to continue to work with the borrower.’’ Ms. 

Eberley’s testimony noted that ‘‘[p]otential or actual treatment as 

a TDR should not prevent institutions from proactively working 

with borrowers to restructure loans with reasonable modified terms 

. . . [t]he FDIC encourages banks to work with troubled borrowers 

and will not criticize IDI management for engaging in prudent 

workout arrangements with borrowers who have encountered financial problems, even if the restructured loans result in a TDR 

designation.’’ Can you describe how designation of loans as TDR 

90

1See Accounting Standards Codification Subtopic 310–40, Receivables—Troubled Debt 

Restructurings by Creditors. 2 Ibid. 

3 ASC Subtopic 310–10, Receivables—Overall. 

factors into an institutions’ allowance for loan and lease losses 

(ALLL), and what role the ALLL plays in calculation of a financial 

institution’s minimum regulatory capital? How would the Basel III 

rules change the treatment of ALLL in the capital calculation, if 

at all? Please also describe any other impact designating a loan as 

TDR has on an institution’s balance sheet.

A.1. U.S. generally accepted accounting principles (GAAP) state 

that a restructuring or modification of a debt constitutes a troubled 

debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that the creditor would not otherwise consider 

were it not for the debtor’s financial difficulties.1 When the terms 

of a loan are modified, an institution must apply judgment and consider all relevant facts and circumstances when determining (1) 

whether the debtor is experiencing financial difficulties and (2) 

whether the institution has granted a concession. The relevant accounting principles also include guidance on making these determinations.2

With regard to the FDIC’s role in interpreting accounting standards, pursuant to Section 37 of the Federal Deposit Insurance Act, 

the accounting principles applicable to the regulatory reports insured banks and savings associations file with the Federal banking 

agencies—the Consolidated Reports of Condition and Income (Call 

Report)—must be ‘‘uniform and consistent with’’ GAAP. The Call 

Report instructions issued by the Federal Financial Institutions 

Examination Council (FFIEC), of which the FDIC is a member, 

summarize GAAP for TDRs. These instructions and other supervisory and reporting materials issued by the FDIC, including 

through the FFIEC, also provide additional interpretational and 

application guidance on accounting and reporting for TDRs that is 

intended to be consistent with GAAP. Examples include the interagency Policy Statement on Prudent Commercial Real Estate Loan 

Workouts and the FDIC’s Supervisory Insights article Accounting 

for Troubled Debt Restructurings. These and other additional guidance have been developed in response to questions from bankers 

and examiners and are intended to promote consistency in the accounting and reporting of TDRs. 

Under GAAP, a loan restructured as a TDR is an impaired loan. 

All impaired loans, including TDRs, must be measured for impairment in accordance with accounting principles.3 The principles sets 

forth measurement methods for estimating the portion of an institution’s overall ALLL attributable to impaired loans, including 

those that are TDRs and those that are not. Many loans whose 

terms are modified in TDRs will already have been identified as 

impaired loans before they are restructured. In these situations, because the allowances for these individually impaired loans would 

be measured under accounting principles both before and after they 

have been modified, their allowances likely would not materially 

change as a result of the restructurings. The remainder of an institution’s overall ALLL would be determined in accordance with adVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00094 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
91

4 ASC Subtopic 450–20, Contingencies—Loss Contingencies, and ASC Subtopic 310–30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality. 5 ASC Subtopic 310–10. 

ditional accounting principles as appropriate.4 For regulatory reporting purposes, an institution also would be expected to follow 

the relevant Call Report instructions and supervisory guidance 

when determining the appropriate level for its overall ALLL. In addition, according to accounting principles,5 a credit loss on a loan, 

including a TDR, which maybe for all or part of the loan, should 

be deducted from the ALLL and the related loan balance should be 

charged off in the period when the loan is deemed uncollectible. 

For regulatory capital purposes, an institution’s ALLL generally 

is included in tier 2 capital up to a maximum of 1.25 percent of 

gross risk-weighted assets. Gross risk-weighted assets are reduced 

by the amount of any excess over the 1.25 percent limit when determining total risk-weighted assets. However, for an advanced approaches institution under the Basel II capital rules (in general, an 

institution with $250 billion or more in consolidated total assets or 

$10 billion or more in consolidated total on balance sheet foreign 

exposure as well as a subsidiary of such an institution) after its 

parallel run period, the treatment of the ALLL for purposes of 

measuring regulatory capital depends on its level in relation to expected credit losses, as defined in the rule. If the ALLL and other 

‘‘eligible credit reserves’’ are less than an institution’s total expected credit losses, in general, 50 percent of the shortfall is deducted from tier 1 capital and 50 percent of the shortfall is deducted from tier 2 capital. If the ALLL and other ‘‘eligible credit 

reserves’’ are greater than an institution’s total expected credit 

losses, the institution may include the excess amount in tier 2 capital up to a maximum of 0.6 percent of risk-weighted assets. 

The Basel III rules do not change the percentage limit on the 

amount of an institution’s ALLL that can be included in tier 2 capital. However, the measurement of risk-weighted assets was revised under Basel III. As a result, the application of the 1.25 percent of total risk-weighted assets limit on the amount of an institution’s ALLL eligible for inclusion in tier 2 capital would cause the 

institution’s eligible ALLL under Basel III to be different than 

under the current regulatory capital risk-weighting rules. For an 

advanced approaches institution that has completed the parallel 

run process and has been approved to apply these approaches, the 

Basel III rules require the entire amount by which the ALLL and 

other ‘‘eligible credit reserves’’ are less than an institution’s total 

expected credit losses to be deducted from common equity tier 1 

capital. 

Guidance 

Q.2. Mr. Lyons stated in his testimony that the OCC issued supplemental guidance to its examiners in 2010 interpreting the Uniform 

Retail Classification and Account Management Policy (Retail Policy) in the context of private student lending. However, that guidance is not available to private student lenders, borrowers, or any 

other market participants. Does the OCC plan to make this guidance public or otherwise provide information to the institutions 

that it regulates on supervisory expectations for managing forbearVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00095 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
92

ance, workout, and modification programs? Mr. Vermilyea stated in 

his testimony that the Retail Policy is ‘‘timeless.’’ The Retail Policy 

was revised in 2000, which superseded a 1999 revision, which in 

turn revised a policy from 1980. The private student loan market 

quadrupled from 2001 to 2008 and just as rapidly declined through 

2012. Given the marked changes in the student loan market since 

publication of the Retail Policy in 2000, what criteria do the agencies, either individually or through the Federal Financial Institutions Examination Council, use to determine when it is appropriate 

to revisit retail credit policy? When would it be appropriate to provide guidance to private student lenders regarding supervisory 

minimum expectations?

A.2. The FDIC supervises private student loan (PSL) lenders using 

the same framework of safety and soundness and consumer protection rules, policies, and guidance as for other consumer loans. The 

interagency Uniform Retail Credit Classification and Account Management Policy (Retail Credit Policy) applies to student loans as it 

does to other unsecured personal loans. The Retail Credit Policy 

provides principles-based guidance to insured depository institutions on classifying retail credits for regulatory purposes and establishing policies for working with borrowers experiencing financial 

problems. 

Some confusion has recently been expressed in the industry regarding regulatory policies for providing flexibility for institutions 

to modify or restructure PSLs. In response, the FDIC, jointly with 

the FRB and OCC, issued a statement on July 25, 2013, to their 

respective supervised institutions to clarify and reiterate that the 

interagency Retail Credit Policy applies to PSLs, allows broad flexibilities to institutions specifically related to working with PSL borrowers experiencing financial difficulties, and permits workouts, 

deferrals, and renewals to help borrowers overcome temporary financial difficulties. The statement emphasizes that our supervised 

institutions should be transparent and make sure that borrowers 

are aware of the availability of workout programs. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM DOREEN R. EBERLEY 

Q.1. The FDIC testified that it would provide guidance on private 

student loans in the near future.

• What factors contributed to the FDIC’s decision to publish new 

guidance specific to private student loans?

• Did the FDIC consult any other prudential banking regulator 

or the CFPB in developing the expected guidance?

A.1. The FDIC considered information, including recent Consumer 

Financial Protection Bureau (CFPB) reports regarding student 

loans, and consulted with other Federal banking agencies about the 

Retail Credit Policy. The FDIC, jointly with other Federal bank 

regulators (FRB and OCC), recently issued a statement applicable 

to the banks each agency supervises to reiterate and specifically 

clarify that the current regulatory guidance provides institutions 

with broad flexibilities to help student loan borrowers overcome 

temporary financial difficulties, including through prudent extenVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00096 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
93

sions, deferrals, and rewrites. We also informed the CFPB that we 

would be issuing such a statement. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DOREEN R. EBERLEY 

Q.1.a.–b. In the years leading up to the financial crisis, the Student Loan Asset Backed Securities (SLABS) market experienced 

unprecedented growth. SLABS issuance grew to more than $16 billion annually to feed investor demand for these securities. To increase volume, higher dollar value loans were made to a greater 

range of borrowers before being securitized. Multiple witnesses 

noted that the loans still held in securitized trusts may have fewer 

modification and other refinance opportunities than those retained 

on a bank’s balance sheet, further limiting options for borrowers 

and raising the risk of default.

Q.1.a. Where applicable, what percentage of student loans originated by institutions regulated by your agency and still in repayment is held in securitized trusts? What percentage is held on 

banks’ balance sheets?

A.1.a. About 25 percent of the estimated $150 billion in private 

student loans (PSLs) outstanding are in securitization trusts; most 

of the remainder are on banks’ balance sheets, although some 

State-sponsored agencies and other organizations securitize or hold 

small amounts of PSLs.

Q.1.b. Is there a difference in the performance of loans that have 

been securitized and those that are held directly on a bank’s balance sheet?

A.1.b. As noted in Ms. Eberley’s testimony, specific data on PSLs 

are not reported separately on the Call Reports, which banks file 

quarterly. Student loans are a fairly small portion of aggregate consumer lending and relatively few banks make these types of loans. 

Data on PSLs, like other unsecured installment loans, are reported 

under the broader loan category ‘‘other loans to individuals.’’ The 

PSL lenders supervised by the FDIC reported past due rates (30 

or more days delinquent) just under 3 percent of total student loan 

balances and annual charge-offs just over 1.5 percent at the upper 

end of the range. 

In June of this year, Moody’s Investors Service reported that the 

average default rate for securitized private loans (equivalent to the 

regulatory charge-off rate) fell from 5.0 percent during first quarter 

2012 to 4.0 percent during first quarter 2013. Despite this improvement, the default rate is still about 50 percent higher than it was 

prior to the recession. Moody’s also reported that the 90-day and 

over delinquency rate dropped slightly from 2.5 percent in first 

quarter 2012 to 2.4 percent during first quarter 2013.

Q.1.c. In his testimony, Mr. Chopra stated that mortgage and student loan borrowers may have more difficulties working out a 

modification or forbearance when those loans have been 

securitized, but fewer barriers exist for student loan borrowers 

than existed in the mortgage market.

94

• What additional barriers to forbearance and modifications exist 

for private student loan borrowers whose loans were 

securitized?

• How are contract conditions for SLABS different from conditions for mortgage-backed securities?

A.1.c. As discussed in Ms. Eberley’s testimony, for securitized loan 

pools, payment restructuring and modification options maybe limited by the terms of the securitization governing documents. As a 

result, when repayment difficulties arise, the borrower will be dealing with the servicer, not the original lender. Although student 

loan borrowers whose loans were securitized may face barriers to 

forbearance and modification, the barriers could be less onerous 

and less explicit than those that existed with the private-label 

mortgage-backed securities originated in the period leading up to 

the financial crisis. 

The type of loan and nature of the servicing arrangement appear 

to more directly impact modification and forbearance options for 

distressed student loan borrowers. Federal student loan (FSL) servicing standards are uniform and modifications are statutorily based 

and, therefore, available regardless of whether they are securitized. 

The standards for PSL servicing vary by servicer, as do options for 

modification. FSLs typically offer more forbearance and modification options than PSLs. 

Generally, the governing securitization documents for PSLs do 

not explicitly limit modifications to loans underlying 

securitizations, but the structure of the securitization may influence how servicers apply forbearance and modification. For example, the interest payments that are received from the underlying 

loans that are over and above the interest payments to bondholders 

are considered ‘‘excess spread,’’ which is a form of 

overcollateralization for the securitization that provides protections 

to bondholders. Servicers maybe less willing to provide modifications if doing so would extract more cash-flow from the underlying 

loans to maintain excess spread. Another common structural feature that the PSL asset-backed securities and private-label mortgage-backed securities share is a senior/subordinate structure, 

where cash-flows are diverted to senior bondholders when certain 

performance triggers are breached, such as cumulative default 

rates. The senior/subordinate structure can influence modification 

and forbearance activities, as discussed in the testimony. 

In contrast, the contractual obligations for private-label mortgage-backed securities issued during the financial crisis created 

more explicit barriers to modification. For example, certain governing securitization documents contained restrictions on the 

amount of underlying mortgage loans that could be modified (frequently limited to 5 percent of the outstanding pool). Other governing documents, namely the Pooling and Servicing Agreements, 

often required the servicer to take actions that would be in the best 

interest of the investors and required servicers to determine whether a modification would benefit the securitization on a presentvalue basis. Additionally, mortgage-backed securities had certain 

restrictions under the real estate investment trust (REIT) structure. These are just some of the barriers to modification faced by 

95

mortgage borrowers whose loans were securitized in private label 

mortgage-backed securities.

Q.1.d. What would be required to offer borrowers with securitized 

loans the same options that can be afforded to borrowers whose 

loans were not securitized?

A.1.d. The FDIC continues to seek solutions to challenges in the 

student lending area. The FDIC, jointly with the FRB and OCC, 

recently issued a statement to the institutions we supervise to clarify that we support efforts by banks to work with student loan borrowers and our current regulatory guidance permits this activity. 

In addition, the statement makes clear FDIC-supervised institutions should be transparent in their dealings with borrowers and 

make certain that borrowers are aware of the availability of workout programs and associated eligibility criteria. Additionally, the 

FDIC has formed a working group to engage various stakeholders, 

including private student loan lenders and consumer groups to determine whether other enhancements are needed.

Q.2. As a voting member agency of the Financial Stability Oversight Council, I am interested in your views on how you assess 

whether an entity would meet the criteria to be designated a systemically important financial institutions (SIFI). Specifically, given 

its extremely large footprint in servicing Direct, FFELP, and private student loans, what would be the broader impact on consumers and markets if SLM Corp. (Sallie Mae) were to fail?

A.2. Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) authorizes the Financial 

Stability Oversight Council (FSOC) to determine that a nonbank financial company shall be supervised by the FRB and shall be subject to prudential standards, in accordance with Title I of the DoddFrank Act, if the FSOC determines that material financial distress 

at the nonbank financial company, or the nature, scope, size, scale, 

concentration, interconnectedness, or mix of the activities of the 

nonbank financial company, could pose a threat to the financial 

stability of the United States. The final rule and the interpretive 

guidance describe the manner in which the FSOC intends to apply 

the statutory standards and considerations, and the processes and 

procedures that the FSOC intends to follow, in making determinations under section 113 of the Dodd-Frank Act. While the FDIC 

does not comment on open and operating institutions, the impact 

of any major consumer loan servicer would depend on market conditions at the time and the company’s ability to sell or transfer its 

balance sheet components and servicing platforms.

Q.3.a. In October 2012, the Consumer Financial Protection Bureau 

issued a report about problems servicemembers face when utilizing 

benefits guaranteed by Federal law, even on Government-guaranteed student loans. Your agency supervises institutions with 

FFELP portfolios. 

Have you focused on these portfolios in your examinations?

A.3.a. The FDIC’s compliance examination process is risk-focused, 

including its review of student loans and related practices. As part 

of that review, examiners assess compliance with Federal laws designed to protect servicemembers. Examples of Federal laws that 

96

provide special protections to servicemembers are the 

Servicemembers Civil Relief Act (SCRA) and the Military Lending 

Act (MLA). These laws could involve student loans as well as other 

types of loans. SCRA and MLA compliance is an important examination priority for the FDIC given the potential for consumer 

harm. SCRA is included in the scope of all compliance examinations conducted by the FDIC. Through the risk-based examination 

process, examiners communicate this emphasis to our supervised 

banks during the review of the bank’s compliance management system and transaction testing. 

Additionally, the FDIC’s examination process also includes a review of consumer protection laws and regulations under its authority to the extent those rules are applicable to PSL and Family Federal Education Loan Program (FFELP) portfolios. However, the 

Truth-in-Lending Act exempts loans made, insured, or guaranteed 

under title IV of the Higher Education Act of 1965, which includes 

FFELP portfolios. In general, the regulatory review of an institution’s policies and practices with regard to student lending encompasses the bank’s origination and servicing aspects for PSLs and focuses on servicing with regard to the federally guaranteed student 

loans.

Q.3.b. To what extent have you determined that servicemembers 

are victims of unfair or deceptive practices as it regards to student 

loan benefits?

A.3.b. The FDIC takes enforcement actions to address violations of 

the SCRA, MLA, section 5 of the Federal Trade Commission Act 

(Section 5) regarding unfair and deceptive acts and practices, and 

other applicable laws and regulations, including those that involve 

an institution’s policies and practices affecting student loans. Since 

January 2012, the FDIC has addressed SCRA violations (generally) 

in 55 examinations and FDIC-supervised institutions have reimbursed, pursuant to enforcement actions, a total of approximately 

$154,000 to 358 servicemembers for violations of SCRA.

Q.3.c. Are you confident that your supervised institutions are in 

compliance with the SCRA?

A.3.c. Based on our compliance examination procedures and processes, which include SCRA compliance reviews, we believe that 

most of the institutions we supervise comply with the SCRA. 

Where we find violations, we take appropriate corrective action. 

The primary responsibility for compliance with the SCRA rests 

with an institution’s board and management. The FDIC’s compliance examination process assesses how well a financial institution 

manages compliance with Federal consumer protection laws and 

regulations starting with a top-down, comprehensive evaluation of 

the compliance management system (CMS) used by the financial 

institution to identify, monitor, and manage its compliance responsibilities and risks, including those associated with the SCRA. The 

goal of a risk-focused, process-oriented examination is to direct resources toward areas with higher degrees of risk. 

The FDIC specifically examines its institutions for compliance 

with the SCRA, using transaction sampling and other techniques. 

Through our policies, guidance, and examination procedures, the 

FDIC communicates to our supervised institutions the importance 

97

of SCRA compliance. The FDIC may initiate informal or formal corrective action when an insured depository institution is found to be 

in an unsatisfactory condition, based on unfair or deceptive acts or 

practices. Violations of consumer protection laws and regulations 

and/or a bank’s failure to maintain a satisfactory CMS may also result in these types of corrective action.

Q.3.d. To what extent have you shared these results with the Department of Education and the Department of Justice?

A.3.d. Subject to the limitations of the Right to Financial Privacy 

Act (RFPA) and FDIC regulations regarding the sharing of confidential supervisory information, 12 C.F.R. Part 309 (Part 309), 

the FDIC shares examination information with other Federal financial institution regulators and with the Department of Justice 

(DOJ). DOJ has exclusive enforcement authority over criminal violations and has concurrent authority over violations of Federal fair 

lending laws and the SCRA. If the FDIC uncovers evidence that 

parties over which DOJ has exclusive or concurrent authority may 

have violated these laws, the FDIC shares with the DOJ relevant 

information related to these potential violations to the extent permitted by the RFPA, Part 309, and interagency memoranda of understanding. Because the Department of Education (DOE) does not 

have enforcement jurisdiction over financial institutions, such examination information is not typically shared with DOE. 

For compliance examinations, the review of loan servicing by an 

institution focuses on ensuring that the agreement is consistent 

with governing laws and is implemented as agreed to avoid any 

SCRA or Section 5 violations.

Q.4.a. The CFPB’s May 2013 report, Student Loan Affordability: 

Analysis of Public Input on Impact and Solutions, raised concerns 

about the effect of unsustainable levels of student debt. Heavy student loan burdens not only deplete available resources but can also 

limit the career opportunities of young graduates who must earn 

salaries that can repay tens or hundreds of thousands of dollars in 

debt. And, if borrowers fall behind the resulting damage to their 

credit can further limit access to financing for a home, car, or even 

daily purchases. Homebuilders and mortgage originators have already noted a decrease in the volume of home purchases by young 

people, and practitioners in careers that may offer less compensation, including public service and family medicine, have noted that 

young people are now gravitating toward more lucrative careers to 

pay back large volumes of debt. 

Has your agency observed differences in home loans, auto loans, 

and other extensions of credit to young borrowers?

A.4.a. Insured depository institutions report information on their 

financial condition and operations in their quarterly Call Report filings. All data, including information on loans, are reported in aggregate and do not contain any demographic or other identifying 

characteristics.

Q.4.b. Given the risks associated with student loans, which are 

typically underwritten without an extensive borrower credit history, and the relatively more secure, collateralized loans made for 

homes, cars, and other consumer products, how do you project that 

98

the rising burden of student debt will impact the balance sheets of 

the institutions that you regulate in the long term?

A.4.b. Institutions supervised by the FDIC hold about $14 billion in PSLs, representing less than 10 percent of the estimated $150 

billion in PSLs outstanding. This amount represents a very small 

portion of the $14.4 trillion in total industry assets and $7.7 trillion 

in total loans outstanding. PSL originations are currently about $8 

billion per year. 

The FDIC supervises PSL lenders using the same framework of 

safety and soundness, and consumer protection rules, policies, and 

guidance, as for other loan categories. We expect insured institutions to prudently underwrite PSLs and comply with outstanding 

rules and guidance. PSLs typically are required by originators to 

have a cosigner. In 2011, over 90 percent of these loans were cosigned. According to TransUnion, the 90-day and over delinquency 

rate for PSLs was 5.33 percent as of March 2012.

Q.4.c. In your experience, do the private student lenders you regulate extend, or offer to extend, other forms of credit to borrowers 

of private student loans? How do incentives for customer service 

and sound financial practices change for Private student lenders 

that do not offer a full suite of financial products?

A.4.c. One of the larger lenders that the FDIC supervises offers a 

variety of credit products, including credit cards, personal loans, 

and home loans. Specific data quantifying the number of accounts 

and balances of private student loans holding multiple products by 

this institution are not publicly available. 

Another large lender which originates PSLs does not offer other 

forms of credit to PSL borrowers. 

As a general matter, financial institutions’ approaches to customer service and financial practices are motivated by a desire to 

grow and maintain a strong and well-regarded business. Moreover, 

as mentioned under our response to question 8, we examine the institutions we supervise for safety and soundness and for compliance with all applicable laws, rules, and guidance.

Q.5. Your testimony cited OCC guidance issued in 2010 as the 

standard that regulators use when determining the soundness of 

bank’s decision to work with a troubled borrower. The guidance 

states that once repayment has begun ‘‘private student loans 

should not be treated differently from other consumer loans except 

in cases where the borrower returns to school.’’ It further states the 

loan modifications should be considered for ‘‘long-term hardships’’ 

and may ‘‘temporarily or permanently’’ reduce interest rates to 

lower payments but should not include terms that ‘‘delay recognition of the problem credit.’’

How often does each of the private student lenders that you supervise engage in loan modifications for borrowers who are in longterm hardship situations? How often does each of the lenders grant 

additional forbearance beyond the 6-month introductory period?

A.5. The FDIC’s testimony cited the interagency Retail Credit Policy, which provides significant flexibility for institutions to offer 

prudent workout arrangements tailored to their PSL portfolios and 

borrower circumstances. In particular, the Retail Credit Policy 

states that it is the institution’s responsibility to establish its own 

99

policies for workouts suitable for their portfolio. There is nothing 

barring FDIC-supervised institutions from engaging in workouts, 

and many institutions offer various types of workout options. Repayment options are disclosed in application or solicitation materials as well as in the promissory note. Each institution has its own 

policies that establish how the bank will work with borrowers who 

are facing financial challenges. 

The institutions we supervise do not usually publicly disclose the 

full scope of modification and restructuring options available. 

Nonetheless, the two largest FDIC-supervised institutions that 

offer PSLs described their features and borrower benefits in their 

respective letters to the CFPB, both dated April 8, 2013, responding to the Request for Information Regarding an Initiative to Promote Student Loan Affordability (Docket No. CFPB–2013–0004).

Q.6. In your testimony, you described that institutions should constructively work with private student loan borrowers to conduct 

modifications in a safe and sound manner. Given that loan modifications might increase the net present value of certain troubled 

loans, how does your agency plan to increase the pace of loan modification activity among its supervised institutions?

A.6. The FDIC encourages the institutions we supervise to work 

with borrowers who are unable to meet the contractual payments 

on their loans. We have communicated to banks during onsite examinations, through written guidance, and at outreach events that 

prudent workout arrangements are generally in the best long-term 

interest of both the bank and the borrower, and that examiners 

will not criticize banks for engaging in prudent workout arrangements, even if it results in adverse asset classifications or TDR accounting treatment. 

We believe the Retail Credit Policy provides institutions with the 

flexibility needed to help borrowers overcome temporary financial 

difficulties through extensions, deferrals, renewals, and re-writes of 

closed-end loans, which include student loans. To emphasize this 

point, the FDIC, along with the FRB and OCC, recently issued a 

statement to the banks we supervise to clarify that we support efforts by banks to work with student loan borrowers and that our 

current regulatory guidance permits this activity.

Q.7. Please provide any interpretive guidance (e.g., for use by examiners, supervised institutions) on the Uniform Retail Classification and Account Management Policy that is specific to private student loans. Describe how your interpretation differs from the guidance used by other prudential regulators.

A.7. The Federal financial institution regulatory agencies strive to 

consistently apply the Retail Credit Policy. On July 25, 2013, the 

FDIC, jointly with the FRB and the OCC, issued a statement encouraging banks to work prudently with student loan borrowers 

who are experiencing financial difficulties.

Q.8. What is your supervisory approach when conducting examinations of Federal and private student loan servicing activities? What 

are the risk factors that you look for? Do you have publicly available manuals and guidance that cover student loan servicing? Have 

100

you utilized complaints submitted to the CFPB and the Department of Education to scope your exams?

A.8. The FDIC supervises PSL lenders using the same framework 

of safety and soundness and consumer protection rules, policies, 

and guidance as for other loan categories. In addition to the examination scope and procedures described in Ms. Eberley’s testimony, 

the FDIC reviews loan servicing activities, in particular, for safety 

and soundness and consumer compliance issues. Safety and soundness concerns include those related to the bank’s valuation of its 

servicing rights (assets) and adherence to governing loan servicing 

documents. In general, financial institutions engaged in servicing 

activities, including student loan servicing, should have policies 

and procedures, operational support, and appropriate audit and 

other quality controls to ensure performance under servicing agreements. 

The FDIC’s compliance examination process assesses how well 

each financial institution manages compliance with Federal consumer protection laws and regulations. In general, our examinations for compliance with the Fair Debt Collection Practices Act, 

Equal Credit Opportunity Act, and Section 5 of the Federal Trade 

Commission (FTC) Act, include review of distressed loans, including student loans, to ensure equal treatment, adherence to debt collection requirements, and that no unfair or deceptive acts or practices are involved in attempting to collect debts from distressed 

borrowers. 

The FDIC’s regulatory assessment of the supervised institution’s 

compliance with the various consumer protection laws and regulations typically includes review of consumer complaints, pending 

litigation, the oversight and use of third-party servicers, due diligence on the schools the institutions work with to provide student 

loans (e.g., reputation, accreditations, for-profit/not-for-profit), marketing practices, and the institution’s policies and procedures. 

These procedures apply to student loans as well as other consumer 

loans. 

Consumer complaints play a key role in the detection of consumer protection risks, including those involving student loan 

issues. Examiners review various sources of complaint information, 

such as the CFPB, FDIC, FTC, institutional, and various media 

sources. The FDIC’s Consumer Affairs Branch continues to monitor 

and identify potential areas of concern through the complaint investigation process. In analyzing and collecting information about 

how these products may impact consumers, we are able to see the 

impact these new products may have on consumers.

Q.9. Compared to Direct Loans, it is generally more cumbersome 

for Federal student loan borrowers to enroll in income-based repayment programs. Many institutions you supervise have significant 

FFELP holdings. How would you generally assess the ability of 

your supervised entities to make borrowers aware of and successfully enroll them in income-based repayment options?

A.9. Not all FDIC-supervised banks have FFELP holdings, choosing instead to sell their existing FFELP portfolios. One of the 

major FDIC-supervised student lenders relies on affiliates to service its FFELP loan portfolio. This institution communicates to its 

101

customers, making them aware of repayment options through an 

interactive Web site that offers information regarding student loan 

applications, loan repayment advice, and forbearance options, 

among other things.

Q.10.a. Your testimony focused heavily on forbearance as a method 

of relief for private student loan borrowers. But the volume and 

terms of private student loans issued in the years leading up to the 

financial crisis indicate that many of these loans may not be sustainable even after forbearance periods. The Consumer Financial 

Protection Bureau’s July 2012 report documented a 400 percent increase in the volume of private student loan debt originated between 2001 and 2008, and 2008 originations surpassed $20 billion. 

The report also shows that, from 2005 to 2008, undergraduate and 

graduate borrowers of private student loans took on debt that exceeded their estimated tuition and fees, and in some years more 

than 30 percent of loans were made directly to students with no 

certification of enrollment from their academic institution. The 

heavy debt burden that was created in these few years is not just 

unsustainable by dollar volume, but also in loan terms. Loans were 

often variable rate loans with initial interest rates ranging from 3 

percent to more than 16 percent. 

Given these extremely unfavorable loan terms that were made to 

a larger number of borrowers, presumably including more students 

from limited financial means, do loans originated between 2001 

and 2008 comply with your standards for safety and soundness?

A.10.a. Many borrowers who have student loan debt have FSLs 

and PSLs, as the rising cost of education often required additional 

borrowing to supplement college savings, scholarships, and grants 

used to pay for higher education. However, some mechanisms, such 

as extending loans only for accredited educational programs and directly transmitting the funds to the school, that were in place to 

prevent overlending to an individual were circumvented during the 

years leading up to the recent financial crisis. As mentioned in our 

response to question 8, the FDIC examines banks for safety and 

soundness and consumer compliance concerns, and would be critical if objectionable conditions or practices are found.

Q.10.b. How would refinancing the highest-cost loans to reflect borrowers’ current characteristics affect the soundness of a regulated 

institution’s balance sheet in the short and long term?

A.10.b. FDIC supervised institutions routinely offer new or renewed loans and, for variable rate loans, periodically adjust the 

loan rate, based on current market rates. In general, financial institutions actively manage the asset and liability mix of their balance sheet. Based on market-based pricing and other balance sheet 

management strategies used by financial institutions, as well as 

the small overall volume of PSLs held by banks, we do not expect 

refinancing of PSL loans to have a material impact on the balance 

sheet condition of the banks that we supervise.

Q.11. Recently, SLM Corp. announced that it would make significant changes to its corporate structure. As the prudential regulator 

of Sallie Mae Bank, what is your view on these changes?

102

A.11. The FDIC does not comment publicly on open banks it supervises. Published reports indicate that SLM Corporation plans to divide its existing businesses into two, separate, publicly traded entities that would each initially be owned by its existing shareholders. 

It is expected the separation, if completed, would be effected via a 

tax-free distribution of the holding company’s common stock to Sallie Mae’s shareholders. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MANCHIN 

FROM DOREEN R. EBERLEY 

Q.1. In rural towns across the country, there is a chronic shortage 

of primary care health professionals. Not just doctors, but nurses 

and others. According to the American Medical Association, student 

debt may be a barrier to practicing in underserved communities. 

This problem extends beyond health professionals. I hear from 

West Virginians across my State that the best teachers are retiring 

and that poorer districts are having a tough time bringing in young 

people to take their places. So many rural families want their kids 

to go to college, but they worry about the impacts of high levels of 

student loan debt? 

In your opinion, how will rural areas survive without critical professions like doctors, nurses, and teachers? What are you doing to 

make sure that the burden of student debt isn’t disproportionately 

shouldered by rural areas?

A.1. PSLs issued by financial institutions help individuals, who 

might not otherwise have the resources, to obtain a college education and the subsequent benefits associated with a college degree, 

both financial and nonfinancial. At the time a student loan is 

made, it is without regard to where future employment opportunities may be located. 

As the primary regulator of small community banks, the FDIC 

understands the unique financial challenges in rural areas. Rural 

areas in particular struggle to attract and retain young professionals. The FDIC, jointly with the FRB and OCC, recently issued 

a statement encouraging banks to work constructively with student 

loan borrowers experiencing financial difficulties, and clarifying 

that our current regulatory guidance permits this activity.

Q.2. It does not make any sense that, under our current system, 

students are forced to pay high interest rates on Federal student 

loans when everyone else in the economy benefits from low borrowing costs on everything else. And if we don’t act by July lst, 

every Federal loan will have an interest rate of at least 6.8 percent 

in 2013, while T-bill rates stay near historic lows. 

Not only would moving to a market-based rate allow students to 

benefit from cheaper borrowing when everyone else can, I expect 

that PSL lenders would, in order to remain competitive, lower their 

rates as well. Under the current system, private lenders know that 

we have created artificial benchmarks for these rates, so private 

lenders can always keep their rates unnecessarily high. 

How do you believe that implementing a market-based rate for 

Federal loan programs would affect the private loan market? 

Wouldn’t allowing Federal rates to fall during times of cheap borVerDate 0ct 09 2002 16:16 Jan 31, 2014 Jkt 000000 PO 00000 Frm 00106 Fmt 6604 Sfmt 6604 S:\DOCS\82364.TXT SHERYL
103

rowing—such as today—force private borrowers to lower their interest rates to remain competitive?

A.2. In general, students exhaust other financial options, such as 

grants and FSLs, before applying for PSLs, which are issued by financial institutions. Rates for the two types of student loans—FSLs 

and PSLs—are determined through different processes. PSLs have 

a market-driven rate, which reflects the supply and demand for 

funds, whereas FSLs have rates currently set by statute. The rates 

charged on loans are set by individual institutions to cover funding 

and overhead expenses and reflect a risk premium on the loans 

granted based on the risk profile of the student borrower and cosigner, if any. PSLs are unsecured (no collateral protection) and expose the institution to risk of loss for the entire outstanding loan 

balance in default. Loan rates for PSLs are set to reflect this risk 

and are already at market rates. Therefore, it is unlikely that a 

change in a market-based rate for Federal loans to substantially affect PSLs.

104

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD


82364-4.eps

CONSUMER 

BANKERS 

ASSOCIATION 

The Voice of the Retail Banking Industry 

The Honorable Tim Johnson 

Chairman 

U.S. Senate Committee on Banking, 

Housing, and Urban Affairs 

534 Dirksen Senate Office Building 

Washington, DC 20510 

June 24, 2013 

The Honorable Mike Crapo 

Ranking Member 

U.S. Senate Committee on Banking, 

Housing, and Urban Affairs 

534 Dirksen Senate Office Building 

Washington, DC 20510 

Dear Chairman Johnson and Ranking Member Crapo: 

The Consumer Bankers Association (CBA) is Washington's public policy leader for private 

student lenders and appreciates the opportunity to share some of our views with the Senate 

Banking Committee for its hearing entitled "Private Student Loans: A Regulatory Perspective." 

CBA's Education Funding Committee represents all the major bank participants in the private 

student loan business and is focused on promoting a private student loan market that is ethical, 

fair and reli able. 

CBA and its member institutions recognize the value of higher education. During all economic 

periods, those with a college degree will have a better opportunity at securing ajob and will have 

higher earnings than those without a college degree. A 2009 report by the U.S. Bureau of Labor 

Statistics (BLS) highlights lower unemployment for those with bachelor's degrees. i It points out 

higher earnings - "this amount is 1.8 times the average amount earned by those with only a high 

school diploma.,,2 

Unfortunately, college tuition has risen 1,120 percent since 1978 3 This leaves many students and 

families with the difficult question of how to finance higher education. Families and students are 

covering the cost of higher education through grants, financial aid, scholarships, college savings 

plans and income. When these options do not cover the fu ll cost of attendance, families and 

students then turn to loans. 

The federal government is now originating 93 percent of to day's loans, but private lenders playa 

critical role in bridging the financing gap when aid, scholarships and Stafford loans do not meet 

a student's needs. In fact, the 2012 Consumer Financial Protection Bureau (CFPB)/Department 

of Education joint report, "Private Student Loans" called these products "useful tools in the 

education finance toolkit,,4 

We have seen an evolution in the private market. Today, most if not all, of the top private lenders 

offer fixed-rate products that are competitively priced and broadly avai lable. Variable-rate 

products are also available at historically rates for those consumers who choose to take 

advantage of the benefits that variable rates can provide. 
105


82364-6.eps

Innovation and more competition in the marketplace have directly benefited consumers seeking 

private loans tailored to their needs. The CFPB acknowledged that lenders are now offering 

products, which, in some cases, are "an appropriate substitute for an unsubsidized Stafford 

10an.'.6 

CBA strongly believes consumers should have access to the necessary information to shop and 

compare loan products best suited for their needs. For example, private loan prices and terms 

work better than PLUS loans for some students. PLUS Loans have a 7.9 percent fixed interest 

rate with a 4 percent origination fee. Most of today' s private loans do not have origination fees, 

and a number of lenders offer fixed-rate products with lower rates for qualified borrowers. 

CBA's members are in the business of helping students and families meet their higher education 

financing needs, and they are doing it in a responsible and effective manner. This can be 

observed through the performance of these loans. According to the CFPB, private student loans 

have a default rate of 5.3 percent. 5 In September 2012, the D~artment of Education announced a 

13.5 percent three-year default rate for Federal student loans. 

Private student loans contain the most important consumer protection because they undergo 

rigorous underwriting and a full ability-to-repay assessment before the loan is even made. 

As the former Deputy Director of the CFPB Raj Date puts it, "People who are going to lend 

money should care about getting paid back. And if you care about getting paid back, you should 

inquire about, and evaluate, a borrower's ability to pay you back. This should not be 

controversial. ,,8 

Underwriting of private student loans helps ensure customers do not over-borrow. While this has 

led to lower default rates, private lenders also have tools to help borrowers. Private lenders 

continually do outreach to and educate borrowers while in school and increase contact before 

graduation to help them with the transition from school to the workforce. 

In addition, borrowers are allowed a six-month grace period before having to begin payments 

and can also receive another six months of extended grace (hardship forbearance). Private 

lenders can also grant subsequent forbearances as permitted by regulatory guidance. We believe 

more discussion on ways to assist troubled borrowers is important. CBA recently sent a letter to 

the prudential banking regulators asking them to review several suggested ways to help 

borrowers who are "experiencing financial difficulty who are recent graduates, or early in their 

careers, when it is more difficult to enter the labor force and establish financial independence and 

stability.,,8 

Conclusion 

Higher education is critical for the future competitiveness of our country. Data clearly shows a 

degree opens the doors for future employment and higher earnings potential. Private lenders, 

while a small portion of the market, are leading the way in responsible lending. Through 

competition and innovation, we continue to see more loan options for students. 
106


82364-5.eps

CBA urges policymakers to focus their efforts on ways to make college more affordable and 

accessible for all. During discussions on this topic, it is important that all stakeholders 

recognize the valuable role banks are playing in helping students and families meet their higher 

education financing needs. 

CBA looks forward to continuing to work with Congress, students and all stakeholders on these 

important issues. 

Sincerely, 

Richard Hunt 

President and CEO 

Consumer Bankers Association 

Percent change since January 1978 

• College tuition and fees • Medical care • Sholtor • Consume Prico Index • Food 

1980 1990 2000 

Source' RIoomberg I abof Oepam-et1t 

1. httpJ/www,bls.gov/spotl ightl2010/Coll cgc/pdf/collcgc.pdf (pg. 3) Sec chan in appendix 

2. http://www.hls.gov/spotlightl20 IO/collcgcJpdf/collcgc.pdf (pg. 4) Sec chart in appendix 

3. hup:llwww.dcc isionsoncvidcncc ("0",/20 12/08/coSI-of·col1c!!c-dct!rcc-soars-1 2-fold-sincc- 1 978/ 

4. "Private Student Loans" report by the CFPB and the Department of Education (page II) 

hltp:l/fil cs.conslImcrfi nancc.gov/fi'20 [207_ cfpb _Reports _Privatc-Sludcnl-Loans.pdf 

5. Private Student Loans" report by the CFrS and the Department of Education (page 16) 

hnp:llfi lcs.consulllcrlinancc.gov/fI20 1207_ cfpb _Reports _ Privatc-Studcnt-LOillls.pdf 

6. hllo:llwww.cd.gov/ncws/prc5s-rclcascs/lir5t-official-thrcc-vcar-sludcnt-Ioan-default-ratcs-published 

201 0 

7. Testimony ofCFPB Deputy Director Raj Dale. July 19.20 12. http·lIfinancialserviccs.house e.ov/UploadedFilcs/HHRG-1 12-BA 15-WSwtcROatc-20 1207 19 pdf 

8. CBA Letterto OCC, FDIC & Fed Requesting Flexibility on Student Loan Repayment Options (March 27, 2013) 

http://www.cbanel.orgldocumcntsl20 13%20Commenl%20Lc\tcrsI032713 _ CBA-LCltcr-to-OCC-FDIC-&-Fed-Requesting-Flcxibility-on-StudctHLoan-RepaYlllent-Options.pdf 
107


82364-7.eps

THE FINANCIAL SERVICES ROUNDTABLE 1001 PE..'i;.,iSYLVA:\!I .. \ AvE., NW 

SUITE 500 SOlJI1 [ 

WASHI NGTON, DC 20004 

Financ TEL 202-289-4322 ing America's Economy 

June 25, 2013 

The Honorable Tim Johnson (D-SD) 

Chainnan 

Senate Banking Committee 

U.S. Senate 

Washington, D.C. 20510 

Re: Private Student Loans 

FAX 202-628-2507 

~ 

E·Mail info@fsround.org 

The Honorable Michael Crapo (R-ID) 

Ranking Member 

Senate Banking Commitee 

U.S. Senate 

Washington, D.C. 20510 

Dear Chairman Johnson and Ranking Member Crapo: 

The Financial Services Roundtable supports the public policy goal of ensuring that college or 'an 

advanced education is available to every American and believes it is crucial to the future 

competitiveness of our nation. Education loans, along with college savings plans and federal 

assistance, such as tax credits and Pell grants help to make college affordable and accessible for 

many Americans. 

Private lenders provide loans and services to help cover the cost of tuition and educational 

expenses and create access for millions of American families each year. Private student loans 

being originated today typically provide borrowers with the choice of a fixed rate or variable 

rate option, which allows the consumer to select the option that best works for them, and they 

are largely 100% school certified, ensuring borrowing levels do not exceed the cost of 

education. There is competition in the private student loan marketplace, which benefits students 

and their families. Those same benefits of competition should be available to all students no 

matter whether they use private or federal student loaris. Private sector competition has 

supported technological innovations and the improvement of services and products to the benefit 

of students. 

There is no question that the ever increasing cost of education is making it harder for students to 

afford college. Between 1986 and 2011, inflation increased by 115% but college tuition 

increased by over 498% - outpacing inflation by more than 4 times the rate. Although federal 

Pell Grant assistance has increased significantly during this period, reliance on student loans-in 

particular federal student loans-has increased dramatically. The Department of Education 

("DOE") projects that over 25 million Federal Direct Student Loans will be made this year 

totaling over $124 billion. In addition to these Direct Loans to students and parents, private 

sector lenders will make approximately $8 billion in loans - or about 6 percent of the overall 

total. 

A 2013 student loan study conducted by TransUnion found that federal loans made up 92% of 

all student loan accounts and 86% of overall balances. Between 2007 and 2012, federal loan 
108


82364-8.eps

balances jumped 97% while private loan balances only rose 4%. From 2007 to 2012, federal 

student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2% 

in that same timeframe. The 90-day delinquency rate for federal loans was 12.31 % as of March 

2012, compared to 5.33% for private loans. Since March 2012, the federal loan delinquency 

rate has increased and the private loan delinquency rate has continued to decline. Accordingly, 

this year the federal government will lend 20 times more than private lenders to students and 

parents without any test of ability to pay, and the government fully knows that nearly one in five 

of them will not be able to pay the taxpayer back. 

In sharp contrast, the loans made by the private sector default at less than one third of that rate 

continuing the sustained trend towards lower private loan delinquencies/defaults driven by 

private loan underwriting and delinquency management. If one defines risk as a question of 

one's ability to payoff the loan, then on average federal student loans appear statistically far 

riskier to far more borrowers than private loans. The dramatically lower private education loan 

default rate is a result of the fact that the private sector's interest are aligned with students, since 

the only way lenders can earn any return and protect their investment is if the student gets value 

for their education resulting in their ability to repay that investment in their education. 

A side-by-side comparison of the private and federal student loan markets reveals that private 

sector lenders have multiple regulators, publicly disclose extensive loan performance data, and 

have been scrutinized for years by their regulators, Congress, and the media. In contrast the 

U.S. Department of Education operates with very little transparency. More importantly, little is 

known about the hundreds of billions in loans that the DOE makes to students and parents. The 

year to year costs to the American taxpayers are never reconciled and are later masked in the 

Federal Budget. 

In closing, private student loans are a viable alternative and/or supplement to federal student 

loans, the Roundtable believes that private student loan industry plays an important role in 

helping students reach their education aspirations. It is important to recognize that lenders must 

receive a fair return on student loans, since that fair return creates the programs, value, and 

competition which improves responsible access to credit and higher education. We look 

forward to continuing this important conversation with students, schools and universities, and 

Congress. 

Best Regards, 

Scott Talbott 

Senior Vice President, Public Policy