[Senate Hearing 113-59]
[From the U.S. Government Publishing Office]


                                                         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

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       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)



                            C O N T E N T S

                              ----------                              

                         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)


             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 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 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 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 
Dodd-Frank 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 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.
    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 
cash-flow 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 market 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.
    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 
institutions 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 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.
    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 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.
    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 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 accounting 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 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?
    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 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 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 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 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 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?
    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.
    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.
    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 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.
    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:]
                   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\
---------------------------------------------------------------------------
    \1\ See, 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 a student's enrollment and 
utilization of other loans. These higher-risk loans also came with 
higher interest rates.\3\
---------------------------------------------------------------------------
    \3\ Consumer Financial Protection Bureau and Department of 
Education, Report on Private Student Loans (2012).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \4\ Consumer Financial Protection Bureau and Department of 
Education, Report on Private Student Loans (2012).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \5\ Many consumers borrowed both Federal and private student loans 
from the same financial institution, which also seems to contribute to 
confusion among some consumers.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \6\ National Center for Education Statistics: National 
Postsecondary Aid Study (2008).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \7\ Bureau of Labor Statistics: Recent college graduates in the 
U.S. labor force: data from the Current Population Survey (2013).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \8\ Governor Sarah Bloom Raskin. Speech to the Maryland State Bar 
Association Advanced Real Property Institute (2011).
---------------------------------------------------------------------------
    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.
    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\
---------------------------------------------------------------------------
    \9\ Frame, 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).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
    \11\ See, for example, http://portal.hud.gov/hudportal/HUD?src=/
mortgageservicingsettlement/investigations.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
Oversight of Student Loan Servicers
    In the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
the responsibility 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 as private student loans, most servicing activity takes place 
within the nonbank sector.\15\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \16\ The Bureau's student lending examination procedures are 
available to financial institutions and the public. See http://
files.consumerfinance.gov/f/201212_cfpb_educationloanexam
procedures.pdf.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \17\ For the full docket of submissions to this Request for 
Information, see http://www.regulations.gov/#!docketDetail;D=CFPB-2013-
0004.

    Homeownership and household formation: The National Association of 
Home Builders1A\18\ 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.
---------------------------------------------------------------------------
    \18\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-1042.
    \19\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-6822.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \20\ See 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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \22\ See, for example, http://www.regulations.gov/
#!documentDetail;D=CFPB-2013-0004-7223.
    \23\ See, for example, http://www.regulations.gov/
#!documentDetail;D=CFPB-2013-0004-7223 and http://www.regulations.gov/
#!documentDetail;D=CFPB-2013-0004-7195.
---------------------------------------------------------------------------
    Retirement security: In its submission, AARP \24\ 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 in employer-
sponsored retirement plans, leading to lost growth in the critical 
early years of a career.
---------------------------------------------------------------------------
    \24\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-6831.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \25\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0878.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \26\ See https://www.avma.org/news/journals/collections/pages/avma-
collections-senior-surveys.aspx.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \27\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0038.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \28\ For example, in a 2007 letter, Sallie Mae CEO Tim Fitzpatrick 
discussed how just 10 percent of borrowers end up benefiting from 
advertised incentives.
    \29\ The 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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 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 asset-backed 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\
---------------------------------------------------------------------------
    \31\ For further information on the asset-backed commercial paper 
conduit facility established under the ECASLA authority, see http://
ifap.ed.gov/ECASLA/ABCP.html.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \32\ While 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \33\ See, 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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \35\ For further information and data on TALF loans and issuances, 
visit http://www.federalreserve.gov/newsevents/reform_talf.htm.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \37\ One 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.
---------------------------------------------------------------------------
    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.
                                 ______
                                 
                  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.
---------------------------------------------------------------------------
    * 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.
---------------------------------------------------------------------------
    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 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.
---------------------------------------------------------------------------
    \1\ Uniform Retail Classification and Account Management Policy, 65 
Fed. Reg. 113 (June 12, 2000).
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \2\ CNBE Policy Guidance 2010-02, ``Policy Interpretation: OCC 
Bulletin 2000-20--Application to Private Student Lending.''

    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 half-time 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.
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.
---------------------------------------------------------------------------
    \3\ Trends in Student Aid 2012, The College Board, 
www.collegeboard.org.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    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.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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\
---------------------------------------------------------------------------
    \4\ Quarterly Presentation on Household Debt and Credit, May 2013, 
Federal Reserve Bank of New York.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    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 in-school 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 process-related 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 
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\
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    \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.
---------------------------------------------------------------------------
    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.
    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.
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    \8\ See 12 U.S.C. 1831n.
    \9\ The 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.
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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 programs. 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 charged-off.
    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.
                                 ______
                                 
                  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.
---------------------------------------------------------------------------
    \1\ In July 2010, the Federal Government stopped guaranteeing 
student loans made through private lenders.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ Delinquency status is defined as more than 90 days past due.
---------------------------------------------------------------------------
    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-
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.\4\
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    \3\ Of 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.
    \4\ For all private loans, the delinquency rate increased from 2005 
to 2009, and started to decrease during 2010, according to data from 
Moody's.
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    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 closed-end 
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 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 year-end 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\
---------------------------------------------------------------------------
    \1\ Donghoon 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\ Donghoon Lee, 2013.
    \5\ College Board Advocacy & Policy Center, Trends in Student Aid 
2012.
---------------------------------------------------------------------------
    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.
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.
---------------------------------------------------------------------------
    \6\ See http://www.fdic.gov/regulations/laws/rules/5000-
1000.html#fdic5000uniformpf.
---------------------------------------------------------------------------
    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 Gramm-Leach-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\
---------------------------------------------------------------------------
    \7\ See 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \8\ Supra, Footnote 7.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ Securities 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.
---------------------------------------------------------------------------
    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 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.

 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 
self-certification 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 workforce 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.
---------------------------------------------------------------------------
    \1\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0878.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0038.
    \3\ http://www.nap.edu/catalog.php?record_id=11463.
    \4\ http://www.eric.ed.gov/ERICWebPortal/search/
detailmini.jsp?_nfpb=true&_&
ERICExtSearch_SearchValue_0=EJ695458&ERICExtSearch_SearchType_0=0 
=no&accno=EJ695458.
---------------------------------------------------------------------------
    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.\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.
---------------------------------------------------------------------------
    \5\ See https://www.avma.org/news/journals/collections/pages/avma-
collections-senior-surveys.aspx.
---------------------------------------------------------------------------
    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.

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 
establish 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 
scoring 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 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/
201212_cfpb_educationloanexamprocedures.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.
    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/
201212_cfpb_educationloanexamprocedures.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 Justice 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 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 
Government-guaranteed 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. 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.
    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 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.
---------------------------------------------------------------------------
    \1\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0878.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ See http://www.regulations.gov/#!documentDetail;D=CFPB-2013-
0004-0038.
    \3\ http://www.nap.edu/catalog.php?record_id=11463.
    \4\ http://www.eric.ed.gov/ERICWebPortal/search/
detailmini.jsp?_nfpb=true&_&
ERICExtSearch_SearchValue_0=EJ695458&ERICExtSearch_SearchType_0=0 
=no&accno=EJ695458.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ See https://www.avma.org/news/journals/collections/pages/avma-
collections-senior-surveys.aspx.
---------------------------------------------------------------------------
    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 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 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:

   LThe 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);

   LThe loan's observable market price; or

   LThe 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 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 supervisory 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.
                                ------                                


  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 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 long-term 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.

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 
asset-backed 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. 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 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) Lthe exposures of creditors, counterparties, investors, 
        and other market participants to the nonbank financial 
        company;

  (2) Lthe 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) Lthe 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?

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 
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 
student 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 
long-term 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 case-by-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 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:

   LIn-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.

   LGrace periods--allows lenders to defer a borrower's 
        payments for 6 months immediately following their 
        departure from school, without conditions or hardship 
        documentation.

   LExtended 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.

   LShort-term forbearance--allows lenders to offer 
        two-to-three month loan extensions to a borrower to 
        address short-term hardships.

   LLoan modifications--allows lenders to provide 
        interest rate and payment reductions to borrowers who 
        are experiencing long-term 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 account 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 co-borrowers 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 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-
moderate-income borrowers. Simply mandating primary-borrower 
income-based 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.
                                ------                                


 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, 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 
restructuring 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 loan-by-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 provide 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\
---------------------------------------------------------------------------
    \1\ http://www.Federalreserve.gov/newsevents/press/bcreg/
20130725a.htm.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ http://www. Federalreserve.gov/newsevents/press/bcreg/
20130725a.htm.

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 borrowers 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.


----------------------------------------------------------------------------------------------------------------
                                                                                     Securitized Private Student
                       Vintage                         Overall Student Loan Market           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.

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\
---------------------------------------------------------------------------
    \1\ See http://www.Federalreserve.gov/newsevents/press/bcreg/
20130725a.htm.

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 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 
Government-guaranteed 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.
    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. 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 
long-term 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 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 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. 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 Government-guaranteed 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 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.

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 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\
---------------------------------------------------------------------------
    \1\ See Accounting Standards Codification Subtopic 310-40, 
Receivables--Troubled Debt Restructurings by Creditors.
    \2\ Ibid.
---------------------------------------------------------------------------
    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 additional 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.
---------------------------------------------------------------------------
    \3\ ASC Subtopic 310-10, Receivables--Overall.
    \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.
---------------------------------------------------------------------------
    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 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 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.

   LWhat factors contributed to the FDIC's decision to 
        publish new guidance specific to private student loans?

   LDid 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 extensions, 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.

   LWhat additional barriers to forbearance and 
        modifications exist for private student loan borrowers 
        whose loans were securitized?

   LHow 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 present-
value 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 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 Dodd-Frank 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 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 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 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 
long-term 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 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 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 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?

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 
borrowing--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.

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