Friday, April 19, 2019

Community Banks Slowly Warm Up to Private Student Loans

Posted by OnCourse Staff July 25, 2013 3:58pm

Photo Credit: ppdigital

Source: American Banker

Looking to diversify, a number of smaller banks are considering making more student loans, even as bigger banks head for the exits.

The key is to stay disciplined, community bankers say.

"We're still looking to see if it is something we want to stay in, but so far we've gotten good feedback," says Todd DeFee, the retail and student loan officer at Peoples State Bank in Many, La., which began making student loans for the 2011-12 academic year.

Peoples began making loans after clients asked for help sending their children to nearby Northwestern State University. "It piqued the interest of the higher ups," DeFee says, adding that the $497 million-asset bank is talking to bigger schools such as Tulane University and Louisiana State University.

Potential bankruptcy changes could cause trouble down the line for loans made now, but otherwise it's a good time for small banks to enter the business, says Kevin Moehn, a Reston, Va., consultant who works with community banks on student loans.

The market appears ready for new lenders, just two years after the federal government eliminated subsidies and became a direct lender. U.S. Bancorp (USB) late last month pulled out of the market, and JPMorgan Chase (JPM) sharply reduced its lending in the area. Small banks such as First Financial Bankshares (FFIN) in Abilene, Texas, have also exited the business.

Students continue to enroll in college, apply for loans and amass debt. Total outstanding student debt in the United States topped $1 trillion this year, Rohit Chopra, the CFPB's student loan ombudsman, said in March.

Shakeout from the government's decision to become a direct lender means market boundaries are clearly set for banks, Moehn says. The size of the federal loan market is about $100 billion annually, and the private loan market is about $9 billion and growing, he adds.

That's a huge amount of business, providing plenty of growth opportunities for community banks, says Moehn, who is also associated with Student Loan Finance, an Aberdeen, S.D., company that administers student loans for smaller banks.

Some smaller banks exited student loans in recent years because of the difficulty in securitizing the loans. Since there is no market for securitizations, banks that make student loans should be prepared for the long haul. "Banks should be looking at putting these loans on their balance sheets and keeping them there," Moehn says.

Changes notwithstanding, First Financial is not looking to reenter the market, says Bruce Hildebrand, the $4.1 billion-asset company's chief financial officer. "The profitability of those loans for us was taken out of the system," he says. "We were losing money every time we made the loans, so we got out of the business."

Other community bankers are also taking a pass, with some saying that student loans are best left to the very large banks.

"The law changes almost made it so that borrowers were really better off going through" SLM Corp. (SLM), says Brad Tidwell, the president and CEO of Citizens National Bank, a unit of Henderson Citizens Bancshares in Henderson, Texas. "We refer our customers to Sallie Mae or a private student loan originator."

There are other possible deterrents. A proposal by Sen. Richard Durbin would let borrowers discharge private student loans in bankruptcy. It is also unclear how the Consumer Financial Protection Bureau will regulate private student lenders.

Durbin has said he believes there is an opening to allow private student loans to be discharged in bankruptcy because the interest rate on federal student loans is set to double in July, to 6.8%, and some in Congress want to prevent the rate hike.

Private student loans offered by small banks, which are usually have variable rates, are not tied to the federal rate, Moehn says. Banks getting into the business also seem to be taking a more conservative approach to lending.

Peoples State has set aside $1 million for student loans, DeFee says, or an amount equal to less than 1% of its total loans at Dec. 31. The average loan is $3,500. The bank avoids lending more than the cost of tuition, eliminating cases where students could use part of a loan like a credit line.

"We make sure we know who we're lending to, we check the credit scores, and we have a co-signer," DeFee says. "We're not just giving them the money."

The Obama administration has so far declined to endorse Durbin's plan. Treasury Secretary Timothy Geithner has been non-committal about the legislation, though he suggested in a March 28 congressional hearing that he is broadly sympathetic with Durbin's concerns about the private student loan market.

If it becomes law, the bankruptcy proposal "would make private loans more expensive and less easy to obtain," Moehn says. "By definition, many of these students are bankrupt. These loans are intended to be made to people who cannot otherwise get a loan."

As a requirement of the Dodd-Frank Act, the CFPB must issue a joint report to Congress by July 21 with the Department of Education on the student loan market. The CFPB has authority over all private student loan issuers, and has a designated office to serve as an ombudsman on such issues.

Small banks welcome any calls from the CFPB for more disclosure of student loan terms, Moehn says. "We want to make sure students understand the deal they're getting."

"The way we're doing this, I can sleep well at night, and I don't feel like I'm the bad guy," DeFee adds.


Add a comment

  • Required fields are marked with *.

If you have trouble reading the code, click on the code itself to generate a new random code.


OnCourse Staff

The OnCourse writing staff work to keep you informed about the most pertinent financial industry news of the moment

OnCourse Staff's Posts Subscribe to RSS Feed

Training – An Investment and Risk Management Tool
Are You Gambling with Your BSA Program?
Does your 401(k) Plan need an Audit?
Same Day ACH Credits – Phase One
Is the IRS Status of your Defined Benefit plan in Jeopardy?
Is your Institution Monitoring Working Capital Lines of Credit?
Financial Reporting and Regulatory Update on the Horizon
Planning in a Consolidating Banking Industry
To opt-out or not to opt-out, that is the question – A reminder on March 31, 2015 Call Report, Schedule RC-R, item 3.a
Cybercriminals Broaden their Attacks in Social Networks
The Importance of Segregating a Bank’s Credit Function from its Lending Function
Requesting Current Financial Information
Countdown to Windows XP End of Life and Support: Are you still at Risk?
314(b) Distinct Advantages for Financial Institutions
Where is the Document?
Do You Know The Security Features of the New $100 Bill?
Segregation of Duties for Wire Transfer Processing
Community Banks Slowly Warm Up to Private Student Loans
Has your Bank updated the Adverse Action Notice?
How Does Your Bank Handle Customer Requested Maintenance Changes?
OCC Releases Booklet on "Common Sense" Community Banking
New SAR Filing Updates
The Importance of BSA Training
FFIEC Proposed Risk Management Guidance on Social Media: Beware and Prepare
Pandemic Preparedness: Are you testing your Pandemic Plan?
FFIEC issues revised “Supervision of Technology Service Providers” booklet
Is Your Institution's Marketing UDAAP Compliant?
Electronic Work Papers - Why P&G Made the Switch
Community Lenders Seize Market Share From Big Banks by Using Advanced Online Lending Technology
New FinCEN Guidance for CTR Aggregation for Businesses with Common Ownership (FIN – 2012 –G001)
Curry: Operational Risk Now OCC’s Top Concern
JOBS Act Client Alert - Rules 506 of Regulation D
Wall Street Receives Volcker Rule Clarity
De-stressing with stress testing
Banks Participate in Information Sharing to Battle Online Theft
IT security: Is your program still effective?
Mobile banking: How do we get there?
UBS further struggles with $2 Billion loss by Rogue Trader
Capital One Becomes Dodd-Frank Test as Nation’s Fifth Largest Bank
Community Banks to receive US Funding for Small Businesses
FDIC fields questions about overdraft guidance
Negligent Hiring – A mistake can cost more than just money!
From Embezzlement to Imprisonment: Former Citigroup employee faces charges with $19.2 million in bank fraud
Finding the Right Hire
Model behavior: Is your ALM model capturing your bank’s risks?
ALLL best practices: Pay attention to qualitative factors
Abandoned Property Law, and its new New York State of Mind
FDIC releases Provisions on Dodd-Frank to help Community Banks
Social Media in the Employment Arena – It Gets Funky!
Banks and Businesses get "swiped" over Fees
A little bit of this, and a little bit of that: Fed Unveils list of Banks Helped during Financial Crisis of 2008
To Test or Not to Test; That is the Question
2011 Failed Bank List Hits 25
Committee on Financial Services to Hold Hearing on the Effects of Dodd-Frank on Small Biz and Banks Today
2011 Failed Bank List up to 18
The Test Drive: Leasing or Buying a HR IT Platform
Double Digits: Bank Closings up to 11 in 2011
FCIC Releases Report on the Causes of the Financial Crisis
Another One Bites the Dust: Regulators Close 4 Banks
On Notice: FDIC Issues Rule for Temp Unlimited Deposit Insurance
2011 Failed Bank List Up to 3
Stick 'Em Up!
Time for a Tune-Up: The Necessity of a HR Audit
Visa Instituting Two-Tiered Debit Card Interchange Structure
The First Failed Banks of 2011
The Law on Your Side: Understanding HR Regulations in 2011
No Respite from RESPA