WASHINGTON—The federal financial regulatory agencies, including NCUA, and the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council, have issued guidance for financial institutions on private student loans with graduated repayment terms at origination.
The guidance provides principles that financial institutions should consider in their policies and procedures for originating private student loans with graduated repayment terms, the agencies said.
The agencies—the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and NCUA—and the SLC said that they “recognize that the competitive job market, traditionally low entry-level salaries, and higher student debt loads can contribute to some borrowers preferring greater flexibility with their payments as they transition into the labor market. Graduated repayment terms are structured to provide for lower initial monthly payments that gradually increase.”
Financial institutions that originate private student loans with graduated repayment terms should prudently underwrite the loans in a manner consistent with safe and sound lending practices. Additionally, financial institutions should provide disclosures that clearly communicate the timing and the amount of payments to facilitate a borrower’s understanding of the loan’s terms and features.
The agencies recommended that financial institutions consider the following principles in their policies and procedures for underwriting private student loans with graduated repayment terms at origination:
- Ensure orderly repayment. Private student loans should have defined repayment periods and promote orderly repayment over the life of the loans. Graduated repayment terms should ensure timely loan repayment and be appropriately calibrated according to reasonable industry and market standards based on the amount of debt outstanding. Graduated repayment terms should avoid negative amortization or balloon payments.
- Avoid payment shock. Graduated repayment terms should result in monthly payments that a borrower can meet in a sustained manner over the life of the loan. Graduated increases in a borrower’s monthly payment should begin early in the repayment period and phase in the amortization of the principal balance to limit payment shock to the borrower.
- Align payment terms with a borrower’s income. Graduated repayment terms should be based on reasonable assumptions about the ability to repay of the borrower and cosigner, if any. Lender underwriting should include an assessment of a borrower’s (and, if applicable, a cosigner’s) ability to repay the highest amortizing payment over the term of the loan. Graduated repayment terms should not be structured in a way that could mask delinquencies or defer losses.
- Provide borrowers with clear disclosures. Financial institutions that offer private student loans with graduated repayment terms should provide borrowers with disclosures in compliance with all applicable laws and regulations. For example, the Truth in Lending Act, as implemented by Regulation Z, includes specific private student loan disclosure content requirements. Ensuring that disclosures clearly communicate the timing and the amount of payments facilitates borrowers’ understanding of their loans’ terms and features.
- Comply with all applicable federal and state consumer laws and regulations and reporting standards. Private student loans with graduated repayment terms must comply. In addition to offering graduated repayment terms at origination, financial institutions may also offer graduated repayment terms as well as other types of workout options to borrowers experiencing financial difficulties, as addressed in “Banking Agencies Encourage Financial Institutions to Work with Student Loan Borrowers Experiencing Financial Difficulties,” which was published July 25, 2013.
- Contact borrowers before reset dates. Before originating private students loans with graduated repayment terms, financial institutions should develop processes for contacting borrowers before the start of the repayment period and before each payment reset date. These contacts can help establish student debt as a priority in borrowers’ payment hierarchies and aid borrowers in responding effectively to payment increases and other potential repayment challenges.
Related
NCUA Concerned Over Risk In Student Loans