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This file was generated by Descript 

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Samantha: Hello this is Samantha Shares.

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This podcast is educational
and is not legal advice.

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We are sponsored by Credit Union
Exam Solutions Incorporated, whose

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team has over two hundred and
Forty years of N C U A experience.

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They assist their clients with N
C U A so they save time and money.

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If you are worried about a recent,
upcoming or in process N C U A

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examination, reach out to learn how they
can assist at Mark Treichel DOT COM.

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Also check out our other podcast called
With Flying Colors where we provide tips

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on how to achieve success with N C U A.

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This episode covers NCU A's Letter
to Credit Unions on Resumption

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of Federal Student Loan Payments.

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The following is an audio
version of that letter.

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Dear Boards of Directors and
Chief Executive Officers:

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The U.S.

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Department of Education’s COVID-19 relief
for federal student loans ended . Federal

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student loan interest resumed on September
first,  and payments restart in October.

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As federal student loan payments
restart, some credit union members

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may have difficulty meeting
their repayment obligations.

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The resulting increase in total
repayment obligations may also

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negatively impact members’ ability
to repay other outstanding loans.

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The NCU A encourages credit unions
to work constructively with impacted

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borrowers and will not criticize a
credit union’s efforts to provide prudent

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relief to borrowers when such efforts
are conducted in a reasonable manner

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with proper controls and management
oversight and consistent with consumer

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financial protection requirements.

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Background

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In March of twenty twenty, the U S
Department of Education’s office of

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Federal Student Aid initiated temporary
relief for federal student loans owned

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by the U S  Department of Education
by suspending loan payments, stopping

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collections on defaulted loans, and
reducing interest rates to zero percent.

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Additionally in March
Twenty Twenty One, the U.S.

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Department of Education expanded COVID
nineteen emergency relief measures

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to defaulted federal student loans
that were made through the Federal

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Family Education Loan program.

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Federal student loan relief was
subsequently extended multiple times.

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However, in June twenty twenty
three,  Congress passed a law

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preventing further extensions of the
federal student loan payment pause

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The U S  Department of Education is
now providing a twelve-month on ramp

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to repayment, starting on October 1,
2023, and ending on September 30, 2024.

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Financially vulnerable borrowers who miss
monthly payments during the on-ramp will

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not be considered delinquent, reported
to credit bureaus, placed in default,

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or referred to debt collection agencies.

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Borrowers who can make payments were
advised to do so, but the on-ramp provides

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an adjustment period for borrowers
who cannot immediately make payments.

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Impact on Student Loan Borrowers

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As of June 2023, 43 point 6 million
individuals held a combined federal

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student loan debt of 1.64 trillion
dollars ; an average of approximately

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38,000 dollars per borrower.

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Inflation and elevated interest
rates have strained the budgets

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of many credit union members.

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For many borrowers, the resumption
of federal student loan payments

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represents an immediate, and in some
cases substantial, payment stress

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due to the increase in their total
monthly repayment requirements.

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Many borrowers have also increased
their overall debt during the

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federal student loan deferral period.

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With federal student loan payments
now restarting, borrowers may have

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difficulty remaining current on
their other loans while also making

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their renewed student loan payments.

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Additionally, the decrease in the
personal savings accumulated during

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the early stages of the pandemic
has reduced the financial buffer

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available to many borrowers to mitigate
increased or unexpected expenses.

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Risk Management Principles

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As communicated in the NCU A’s
2023 Examination Priorities, NCU A

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examiners will review the soundness
of existing lending programs at credit

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unions, adjustments to underwriting
standards, portfolio monitoring

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practices, and loan workout strategies.

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Additionally, examiners will review
policies and procedures related to

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the Allowance for Credit Losses (ACL),
documentation of the ACL reserve

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methodology, and adherence to generally
accepted accounting principles.

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The resumption of federal student loan
payments presents a payment stress

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that may affect borrowers’ ability to
repay their other outstanding debts.

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This change in payment requirements
will have a more pronounced impact

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on lenders that did not consider
federal student loan payments in

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debt-to-income or debt-service-coverage
ratios during underwriting.

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While the U.S.

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Department of Education’s 12-month
on-ramp provides some protection for

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borrowers, lenders may experience
an increase in delinquencies and a

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reduction in borrowers’ credit scores
during or after the end of the on-ramp.

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Borrowers with federal student loans
can also represent a concentration

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of credit risk, depending on how
many of the credit union’s borrowers

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have federal student loans.

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For the purposes of this letter, a
concentration of credit risk refers to

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a material exposure that shares common
characteristics or sensitivities that

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can result in correlated deterioration
in loan performance or elevated losses.

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In this case, federal student loans
represent a common characteristic

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among many credit union borrowers.

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The payment stress that federal student
loan borrowers may experience at the

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same time as their federal student
loan payments resume may result in

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a correlated deterioration in loan
performance or increased losses

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within credit union loan portfolios.

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To ensure your credit union operates in
a safe, sound, and fair manner, please

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consider the following strategies when
evaluating your credit union’s exposure to

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borrowers facing payment stress associated
with their federal student loans, and the

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adequacy of your credit union’s related
policies, procedures, and practices.

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Risk Assessment—Credit unions
should assess aggregate exposure to

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borrowers with federal student loans.

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The materiality of a credit union’s
exposure, specifically risk to net worth,

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from borrowers with federal student loans
will determine what prudent steps should

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be taken to address the associated risks.

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Exposure greater than 100 percent
of net worth should prompt

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enhanced performance monitoring.

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This exposure can be analyzed in a
variety of ways, such as by identifying

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borrowers with large student loan balances
relative to their income, reviewing

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borrowers’ credit bureau information,
querying member transaction history from

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before the federal student loan repayment
pause to identify members making their

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federal student loan payments out of
their account at the credit union, or

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considering other indicators such as
the number of members who have private

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student loans with the credit union.

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Borrower Outreach—Credit unions
should contact borrowers facing

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potentially large federal student loan
repayments, as well as other high-risk

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federal student loan borrowers, to
inform them about the credit union’s

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eligibility standards and processes
for requesting loan modifications.

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Monitoring increases in credit
card and line of credit usage after

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federal student loan payments restart
may preemptively identify financial

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stress for borrowers using available
credit to cover other expenses.

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Credit unions can encourage borrowers
to prepare for payments to restart,

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research repayment plan options, and
apply for loan forgiveness(if applicable).

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Additional information can be found on
the Federal Student Aid website at Student

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Aid dot gov, the NCU A’s consumer facing
website at My Credit Union  dot gov,

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and the Consumer Financial Protection
Bureau’s blog at Consumer Finance dot gov.

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Underwriting and Modifications—Credit
unions should apply prudent

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underwriting and loss mitigation
strategies for borrowers experiencing

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financial difficulty and struggling
to make their loan payments.

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The use of well-structured and
sustainable loan modifications is

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often in the best interest of both
the member and the credit union.

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Loan modifications should be consistent
with the nature and severity of the

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borrower’s financial hardship and
should consider the amount of the

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borrower’s federal student loan payments.

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Modification terms should also be
consistent with the type of loan being

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modified and should have sustainable
repayment requirements based on the

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borrower’s financial condition and ability
to repay under the restructured terms.

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Portfolio Monitoring—Credit
unions should identify and monitor

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higher-risk portfolio segments with
student loan payment stress exposure.

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Higher-risk segments could include
related loan types or sections of the

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portfolio with multiple layers of risk.

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Examples include, but are not
limited to, borrowers with:

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Private student loans;

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Credit card balances or other
debt obligations that materially

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increased while federal student loan
payments were paused or that begin

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to increase following the resumption
of federal student loan payments;

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Adjustable-rate loans that have
similar payment reset timeframes—for

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example, adjustable-rate mortgages
or home equity lines of credit; or

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Elevated debt-to-income
ratios or low credit scores.

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Credit unions should closely monitor the
performance of borrowers with federal

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student loans, including how existing
loan performance changes following

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the resumption of federal student loan
payments and following the end of the U.S.

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Department of Education’s
12-month on-ramp.

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Management should periodically
and in a timely manner update the

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credit union’s board on any relevant
and material risk exposures.

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Allowance for Credit Losses—Credit
unions need to consider whether the

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risk associated with the resumption
of federal student loan payments is

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adequately captured within the ACL.

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Accounting Standards Codification Topic
326 requires expected losses to be

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evaluated on a collective, or pool, basis
when financial assets share similar risk

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characteristics, but does not prescribe
a process for segmenting financial

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assets for collective evaluation.

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Financial assets may be segmented based
on one characteristic or a combination

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of characteristics, and management should
exercise judgment when establishing

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appropriate segments or pools.

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Conclusion

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This letter outlines prudent
risk management strategies for

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your credit union to consider
as borrowers resume making their

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federal student loan payments.

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The NCU A encourages credit unions
to work constructively with impacted

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borrowers and will not criticize a
credit union’s efforts to provide prudent

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relief to borrowers when such efforts
are conducted in a reasonable manner

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with proper controls and management
oversight and consistent with consumer

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financial protection requirements.

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Please contact your NCU A examiner or
regional office with any questions.

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This concludes the NCUA Letter to
credit unions on the resumption

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of Federal Student Loan payments.

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If your Credit union could use assistance
with your exam, reach out to Mark Treichel

00:10:33.094 --> 00:10:35.644
on LinkedIn, or at mark Treichel dot com.

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This is Samantha Shares and
we Thank you for listening.