ALEXANDRIA, Va. (12/10/13)--The National Credit Union Administration Monday released a supervisory Letter to Credit Unions (13-CU-15) intended to clarify the regulators' expectations about direct and indirect private student loan (PSL) products.
The NCUA noted it has observed steady growth in the PSL market since the agency began collecting Call Report data on them in December 2011. "PSLs are unlike other consumer-based loan products, and it is critical that credit unions have sound processes and controls in place to address their unique characteristics and risks," the agency said in an introduction to the letter.
The guidance addresses unique issues with PSLs, such as:
The postponement of repayment;
The fact that borrowers often have little credit history;
That repayment is often dependent on future employment; and,
That PSLs are often structured as a line of credit that is converted to a closed-end line.
Credit Union National Association Deputy General Counsel Mary Dunn said Monday that the guidance is well done and should be helpful to examiners and credit unions that provide private student loans to their members.
For instance, she noted that Appendix A of the letter specifically addresses the differences between private and federal student loans. "This should be helpful because credit unions experiencing problems with their examiner's understanding of their private student loan programs often indicate the examiner failed to distinguish between PSLs and federally guaranteed SLs," Dunn said.
However, Dunn added that the guidance may nonetheless result in continued concerns that CUNA and the leagues will want to monitor with affected credit unions and the CUNA Lending Council.
For example, the guidance directs examiners to consider whether the credit union's methodology for funding its Allowance for Loan and Lease Losses (ALLL) has fully considered relevant PSL default rate trends. The way in which credit unions fund their ALLLs is an ongoing issue for many credit unions and whether the ALLL properly reflects PSL risks may remain an issue even after this guidance.
"Another issue is that examiners are directed to consider factors, such as concentrations of loans involving one school, that could have a broad impact on a PSL program. While such concerns may be fully appropriate in most circumstances, credit unions should have flexibility to extend loans that have a higher risk profile when the credit union can manage the risk," Dunn noted.
Nonetheless, she added, the guidance acknowledges that PSLs can be an important loan product for credit unions that can handle the risks, have a strong asset liability management program, develop and maintain appropriate loan policies, engage in sound underwriting, and implement effective collection practices.