OLYMPIA, Wash. (5/31/11)--Washington State's credit union regulator has issued guidelines urging credit unions to use thorough due diligence when adopting student loan programs. The Division of Credit Unions (DCU) in the Washington State Department of Financial Institutions (DFI) is "giving closer attention to new loan programs. Recently, examiners found a few Washington credit unions have adopted student loan programs with very limited research and few controls," said the DCU in a bulletin dated May 17 and revised May 24. It outlined these conditions that examiners expect to find before a student loan program will be considered safe and sound:
* Perform due diligence by analyzing the conditions, costs, and benefits to the credit union of the program before implementing it. "One key objective of the credit union due diligence will be for management to understand the program and be prepared to make appropriate adjustments to protect the credit union as risk levels fluctuate," the bulletin said. * Have an analysis by the credit union's attorney to strengthen the contract in favor of the credit union. * Check reputation risk by analyzing all costs to the borrower of a private student loan program. "Critics have chastised some lenders for high cost debt to students as well as inflexible repayment options," said DCU. * Project the credit union's expected revenue, expenses and anticipated rate of return on the amount invested in student loans. * Adopt a policy for governing the loan program and managing the vendor before embarking in an indirect student loan program. If student loans are risk-priced, set reasonable limits on the loan amount in each risk category. "A credit union with an indirect student loan program should carefully analyze the third party's underwriting criteria," the bulletin urged. * Limit the concentration of private student loans on the books, as a new unsecured loan program, to growth of no more than 10% of the credit union's net worth per year, and keep the limit in place until the credit union has more than three years satisfactory experience with the program. * Provide adequate allowance for loans. Federal student loan programs may have controls and guarantees in place that the credit union is unable to duplicate to achieve a similar lower risk. Private loan programs may have a higher risk profile and require additional reserves, the regulator said. * Make sure insurance meets state requirements and the provider is licensed in the state. * Verify membership eligibility of each applicant before making the loan. * Continue monitoring the loans' service quality and the third-party vendor's financial health. * Include interest rate characteristics of the student loans when measuring interest rate risk before and after implementing the program.