The cost of higher education is far outpacing what many students and their families can afford. To help fill the void, many credit unions offer private student lending programs, most through third-party partnerships.
The growth and success of these programs, with total outstanding loans now topping $2 billion, is attracting the interest of college-bound members nationwide. It has also gained the recent attention of the NCUA.
Manage your student-loan portfolio well, and your investments in education will pay off in terms of future prosperity for your members and for your credit union. — NCUA Chairman Debbie Matz, September 2014
In a September 2014 NCUA Report, Chairman Debbie Matz reiterated her support of private student lending in the aptly named article, “Credit Unions Help Students Go Back to School.” Matz correctly points out that student lending is not only a potentially promising opportunity for credit unions to establish long-term relationships with young adults at an early stage in their financial life, but also gives credit unions a chance to diversify loan portfolios.
As one would expect from the chief regulator, Matz also shares best practices, giving credit unions a helpful road map for how to manage their student lending program. These practices align closely with many of the items outlined in the NCUA letter that was issued to credit unions in December 2013 regarding supervisory guidance of private student lending. Check out the article below that originally ran on March 12, 2014, to apprise yourself of the key takeaways.
An NCUA supervisory letter to credit unions (LCU2013-15) notes the value of offering safe and sound student lending programs; namely, as related to member service and revenue potential. The NCUA’s letter makes three things crystal clear regarding student lending programs:
The credit union must be knowledgeable about the process.
The credit union must be in control.
The credit union must monitor the program.
The letter also provided guidance to credit unions offering these loans, including the need to distinguish them as direct or indirect lending programs — an important factor to consider, especially when third parties play a key role in the process.
In most cases, a direct-lending strategy may better address regulatory concerns. Fortunately, there are third-party providers that specialize in a “direct” approach. Credit unions don’t have to go it alone.
The Question Of Control
By initiating a direct-lending program through an outside provider, credit unions broaden their resources and knowledge base. The lending partner provides valuable guidance and operational support, but the credit union retains control over all key lending decisions. Alternatively, in the case of an indirect-lending program, the provider establishes the loan criteria and makes the credit decisions, which the credit union contractually agrees to accept.
From a regulatory standpoint, it’s important for credit unions to preserve a variety of key responsibilities and controls related to their student lending program. Through third-party due diligence and in accordance with NCUA guidelines, they should determine the extent of their roles and responsibilities in the following areas:
A program’s loan policy dictates the overall structure of the program; e.g., underwriting standards, loan terms, limits on loan types in the portfolio, and collection requirements. For instance, best practices suggest student lenders should establish policies that place limits on the amount and quantity of loans approved, certify the borrower’s school expenses through the school’s financial aid office, and issue loan funds directly to the respective college or university. The credit union must determine its level of participation and involvement in developing and administering the program’s lending policy.
Sound underwriting is critical because student lending involves certain risks — the ability to repay loans is greatly influenced by borrowers’ graduation rates, employment prospects, and future income potential. In addition, there are many consumer-lending regulations and various state laws and requirements that must be followed, as well as disclosures to be provided. It’s important that credit unions work with providers that are fully compliant and knowledgeable regarding all applicable laws. The credit union should have the ability to customize its underwriting guidelines to meet specific needs and markets, and have full access to the loan origination and servicing platforms of its third-party provider.
Different student-lending needs and situations will require different loan options and rates — some programs offer loans as lines of credit; others offer closed, fixed-rates loans. Repayment options vary as well: full-deferment, interest-only, or graduated payments. The credit union must work with third parties that offer consulting and training to help determine and monitor their appropriate loan limits. While outside providers can do much of the program’s heavy lifting — origination, processing, servicing — the credit union needs to retain internal controls for setting rates, determining funding limits and monitoring portfolio performance.
Credit unions’ marketing staffs know their members better than anyone. While many third-party providers offer valuable resources, such as marketing templates and messaging to help get the word out to members, they should provide the ability for customization to reflect a credit union’s unique voice, personality, and loan specifics. Marketing staff can work in partnership with third-party providers to maximize promotional efforts. By focusing on organic marketing approaches that yield borrowers from within their existing field of membership, credit unions are establishing the foundation for genuine long-term member relationships.
As college costs continue to rise, so does the need for fair-value funding options. Credit unions have an excellent opportunity to provide members with vital funding assistance. The NCUA recognizes the value of these efforts, including the important role of third-party providers. But understanding and retaining control of these vendor partnerships is critical to the program’s success.
This article originally ran on CreditUnions.com on March 12, 2014.