Purpose The agencies,
1 in conjunction
with the State Liaison Committee (SLC) of the Federal Financial Institutions
Examination Council, are issuing
2 this guidance to provide financial institutions with principles
applicable to private student loans that have graduated repayment
terms. Financial institutions that originate private student loans
may offer borrowers graduated repayment terms in addition to fixed
amortizing terms at the time of loan origination. Graduated repayment
terms are structured to provide for lower initial monthly payments
that gradually increase.
Although most student loan agreements include a grace
period
3 to help with the post-education transition, the agencies
and SLC recognize that students leaving higher education programs
may prefer more flexibility to transition into the labor market because
of a number of factors, such as competitive job markets, traditionally
low entry-level salaries, and higher student debt loads. Graduated
repayment terms may align borrowers’ income levels with loan repayment
requirements, provide flexibility to repay the debt sooner if borrowers’
incomes increase more quickly than projected, and may help long-term
probability of full repayment.
Graduated repayment terms are available under certain
federal student loan programs. The credit risk associated with federal
student loans, however, differs from that of private student loans,
which are not guaranteed or originated by the federal government.
Accordingly, some extended repayment features offered under the federal
student loan programs may not always be appropriate for private student
loans.
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.
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.
Principles for Private Student Loans with
Graduated Repayment Terms at Origination Financial institutions should consider the following principles in
their policies and procedures for underwriting private student loans
with graduated repayment terms at origination:
4
- 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.5 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.6 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.7 Private student loans with
graduated repayment terms must comply with all applicable consumer
protection laws. These include, but are not limited to, the Electronic
Fund Transfer Act, the Equal Credit Opportunity Act, federal and state
prohibitions against unfair, deceptive, or abusive acts or practices
(such as section 5 of the Federal Trade Commission Act and sections
1031 and 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act), the Truth in Lending Act, and the regulations issued pursuant
to those laws.
- 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 hierarchies8 and aid borrowers in responding effectively
to payment increases and other potential repayment challenges.
Issued by the Board, the Consumer Financial
Protection Bureau, the Federal Deposit Insurance Corporation, the
National Credit Union Administration, and the Office of the Comptroller
of the Currency, in conjunction with the State Liaison Committee of
the Federal Financial Institutions Examination Council January 29,
2015 (SR-15-2).
