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This episode covers NCU A's Letter to Credit Unions on Resumption
of Federal Student Loan Payments.
The following is an audio version of that letter.
Dear Boards of Directors and Chief Executive Officers:
The U.S.
Department of Education’s COVID-19 relief for federal student loans ended . Federal
student loan interest resumed on September first, and payments restart in October.
As federal student loan payments restart, some credit union members
may have difficulty meeting their repayment obligations.
The resulting increase in total repayment obligations may also
negatively impact members’ ability to repay other outstanding loans.
The NCU A encourages credit unions to work constructively with impacted
borrowers and will not criticize a credit union’s efforts to provide prudent
relief to borrowers when such efforts are conducted in a reasonable manner
with proper controls and management oversight and consistent with consumer
financial protection requirements.
Background
In March of twenty twenty, the U S Department of Education’s office of
Federal Student Aid initiated temporary relief for federal student loans owned
by the U S Department of Education by suspending loan payments, stopping
collections on defaulted loans, and reducing interest rates to zero percent.
Additionally in March Twenty Twenty One, the U.S.
Department of Education expanded COVID nineteen emergency relief measures
to defaulted federal student loans that were made through the Federal
Family Education Loan program.
Federal student loan relief was subsequently extended multiple times.
However, in June twenty twenty three, Congress passed a law
preventing further extensions of the federal student loan payment pause
The U S Department of Education is now providing a twelve-month on ramp
to repayment, starting on October 1, 2023, and ending on September 30, 2024.
Financially vulnerable borrowers who miss monthly payments during the on-ramp will
not be considered delinquent, reported to credit bureaus, placed in default,
or referred to debt collection agencies.
Borrowers who can make payments were advised to do so, but the on-ramp provides
an adjustment period for borrowers who cannot immediately make payments.
Impact on Student Loan Borrowers
As of June 2023, 43 point 6 million individuals held a combined federal
student loan debt of 1.64 trillion dollars ; an average of approximately
38,000 dollars per borrower.
Inflation and elevated interest rates have strained the budgets
of many credit union members.
For many borrowers, the resumption of federal student loan payments
represents an immediate, and in some cases substantial, payment stress
due to the increase in their total monthly repayment requirements.
Many borrowers have also increased their overall debt during the
federal student loan deferral period.
With federal student loan payments now restarting, borrowers may have
difficulty remaining current on their other loans while also making
their renewed student loan payments.
Additionally, the decrease in the personal savings accumulated during
the early stages of the pandemic has reduced the financial buffer
available to many borrowers to mitigate increased or unexpected expenses.
Risk Management Principles
As communicated in the NCU A’s 2023 Examination Priorities, NCU A
examiners will review the soundness of existing lending programs at credit
unions, adjustments to underwriting standards, portfolio monitoring
practices, and loan workout strategies.
Additionally, examiners will review policies and procedures related to
the Allowance for Credit Losses (ACL), documentation of the ACL reserve
methodology, and adherence to generally accepted accounting principles.
The resumption of federal student loan payments presents a payment stress
that may affect borrowers’ ability to repay their other outstanding debts.
This change in payment requirements will have a more pronounced impact
on lenders that did not consider federal student loan payments in
debt-to-income or debt-service-coverage ratios during underwriting.
While the U.S.
Department of Education’s 12-month on-ramp provides some protection for
borrowers, lenders may experience an increase in delinquencies and a
reduction in borrowers’ credit scores during or after the end of the on-ramp.
Borrowers with federal student loans can also represent a concentration
of credit risk, depending on how many of the credit union’s borrowers
have federal student loans.
For the purposes of this letter, a concentration of credit risk refers to
a material exposure that shares common characteristics or sensitivities that
can result in correlated deterioration in loan performance or elevated losses.
In this case, federal student loans represent a common characteristic
among many credit union borrowers.
The payment stress that federal student loan borrowers may experience at the
same time as their federal student loan payments resume may result in
a correlated deterioration in loan performance or increased losses
within credit union loan portfolios.
To ensure your credit union operates in a safe, sound, and fair manner, please
consider the following strategies when evaluating your credit union’s exposure to
borrowers facing payment stress associated with their federal student loans, and the
adequacy of your credit union’s related policies, procedures, and practices.
Risk Assessment—Credit unions should assess aggregate exposure to
borrowers with federal student loans.
The materiality of a credit union’s exposure, specifically risk to net worth,
from borrowers with federal student loans will determine what prudent steps should
be taken to address the associated risks.
Exposure greater than 100 percent of net worth should prompt
enhanced performance monitoring.
This exposure can be analyzed in a variety of ways, such as by identifying
borrowers with large student loan balances relative to their income, reviewing
borrowers’ credit bureau information, querying member transaction history from
before the federal student loan repayment pause to identify members making their
federal student loan payments out of their account at the credit union, or
considering other indicators such as the number of members who have private
student loans with the credit union.
Borrower Outreach—Credit unions should contact borrowers facing
potentially large federal student loan repayments, as well as other high-risk
federal student loan borrowers, to inform them about the credit union’s
eligibility standards and processes for requesting loan modifications.
Monitoring increases in credit card and line of credit usage after
federal student loan payments restart may preemptively identify financial
stress for borrowers using available credit to cover other expenses.
Credit unions can encourage borrowers to prepare for payments to restart,
research repayment plan options, and apply for loan forgiveness(if applicable).
Additional information can be found on the Federal Student Aid website at Student
Aid dot gov, the NCU A’s consumer facing website at My Credit Union dot gov,
and the Consumer Financial Protection Bureau’s blog at Consumer Finance dot gov.
Underwriting and Modifications—Credit unions should apply prudent
underwriting and loss mitigation strategies for borrowers experiencing
financial difficulty and struggling to make their loan payments.
The use of well-structured and sustainable loan modifications is
often in the best interest of both the member and the credit union.
Loan modifications should be consistent with the nature and severity of the
borrower’s financial hardship and should consider the amount of the
borrower’s federal student loan payments.
Modification terms should also be consistent with the type of loan being
modified and should have sustainable repayment requirements based on the
borrower’s financial condition and ability to repay under the restructured terms.
Portfolio Monitoring—Credit unions should identify and monitor
higher-risk portfolio segments with student loan payment stress exposure.
Higher-risk segments could include related loan types or sections of the
portfolio with multiple layers of risk.
Examples include, but are not limited to, borrowers with:
Private student loans;
Credit card balances or other debt obligations that materially
increased while federal student loan payments were paused or that begin
to increase following the resumption of federal student loan payments;
Adjustable-rate loans that have similar payment reset timeframes—for
example, adjustable-rate mortgages or home equity lines of credit; or
Elevated debt-to-income ratios or low credit scores.
Credit unions should closely monitor the performance of borrowers with federal
student loans, including how existing loan performance changes following
the resumption of federal student loan payments and following the end of the U.S.
Department of Education’s 12-month on-ramp.
Management should periodically and in a timely manner update the
credit union’s board on any relevant and material risk exposures.
Allowance for Credit Losses—Credit unions need to consider whether the
risk associated with the resumption of federal student loan payments is
adequately captured within the ACL.
Accounting Standards Codification Topic 326 requires expected losses to be
evaluated on a collective, or pool, basis when financial assets share similar risk
characteristics, but does not prescribe a process for segmenting financial
assets for collective evaluation.
Financial assets may be segmented based on one characteristic or a combination
of characteristics, and management should exercise judgment when establishing
appropriate segments or pools.
Conclusion
This letter outlines prudent risk management strategies for
your credit union to consider as borrowers resume making their
federal student loan payments.
The NCU A encourages credit unions to work constructively with impacted
borrowers and will not criticize a credit union’s efforts to provide prudent
relief to borrowers when such efforts are conducted in a reasonable manner
with proper controls and management oversight and consistent with consumer
financial protection requirements.
Please contact your NCU A examiner or regional office with any questions.
This concludes the NCUA Letter to credit unions on the resumption
of Federal Student Loan payments.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.