October 6, 2010

Private Student Loan Servicing Guidance Issued

The Office of the Comptroller of the Currency (OCC) issued guidance in August about servicing private student loans, using extensions, deferrals, renewals and rewrites for closed-end loans and granting forbearance and deferments. OCC Bulletin 2000-20 PDF requires banks to charge off closed-end loans when they are 120 days past due and establish explicit standards that control the use of extensions, deferrals, renewals and rewrites.

The new guidance, specifically for private student lending by banks, recognizes that borrowers leaving school for the job market may not have enough funds to immediately begin repayment. It states that practices that defer the start of repayment must be well-controlled, supported and documented. Generally, this means it is acceptable to:

• Allow a borrower an unconditional six-month grace period immediately following separation from school, although the bank is expected to contact and counsel the borrower during this time.
• Extend the grace period for up to six additional months for borrowers who experience documented financial hardship.
• Grant in-school deferments for borrowers who re-enroll at least half-time.

Otherwise, the guidance states that once repayment begins, private student loans should not be treated any differently from other consumer loans. A bank may temporarily or permanently reduce the interest rate for long-term hardships but delays in recognizing problem credit are generally not appropriate for long-term hardships. These delays include the following:

• Extensions of loan terms.
• Allowing non-amortizing payments.
• Balloon payment at maturity.

The guidance also states that the range of practices for working with distressed borrowers of federally-guaranteed loans (FFELP, DL Stafford and PLUS loans) is not appropriate for consumer loans.

Additional information on this guidance is available from the OCC letter PDF.