NCUA Offers CUs 5 Strategies to Help as Student Loan Payments Resume

In a letter to credit unions published Wednesday, NCUA Chairman Todd Harper offered credit union boards of directors and CEOs some strategic help, along with a warning about federal student loan payments, which restarted this month.

The warning: “With federal student loan payments now restarting, borrowers may have difficulty remaining current on their other loans while also making their renewed student loan payments,” Harper wrote.

The strategic help: Five different items to consider when it comes “to your credit union’s exposure to borrowers facing payment stress associated with their federal student loans, and the adequacy of your credit union’s related policies, procedures and practices.”

Since March 2020, payments and interest on federal student loans had been placed on pause as part of the U.S. Department of Education’s expanded COVID-19 emergency relief measures. Earlier this summer, Congress passed a law that halted any further extensions to the payment pause and federal student loan payments restarted on Oct. 1.

In the letter, published on the NCUA’s website, Harper stated that more than 43 million people held a combined federal student loan debt of more than $1.5 trillion – which averages to nearly $38,000 per borrower. Harper said, “With federal student loan payments now restarting, borrowers may have difficulty remaining current on their other loans while also making their renewed student loan payments. Additionally, the decrease in the personal savings accumulated during the early stages of the pandemic has reduced the financial buffer available to many borrowers to mitigate increased or unexpected expenses.”

Harper said these are worrying signs for credit unions and offered five strategic areas to consider as the federal student loan payments restart.

1. Risk Assessment: “Credit unions should assess aggregate exposure to borrowers with federal student loans. The materiality of a credit union’s exposure, specifically risk to net worth, from borrowers with federal student loans will determine what prudent steps should be taken to address the associated risks. Exposure greater than 100% of net worth should prompt enhanced performance monitoring. This exposure can be analyzed in a variety of ways, such as by identifying borrowers with large student loan balances relative to their income, reviewing borrowers’ credit bureau information, querying member transaction history from before the federal student loan repayment pause to identify members making their federal student loan payments out of their account at the credit union, or considering other indicators such as the number of members who have private student loans with the credit union,” the letter stated.

2. Borrower Outreach: “Credit unions should contact borrowers facing potentially large federal student loan repayments, as well as other high-risk federal student loan borrowers, to inform them about the credit union’s eligibility standards and processes for requesting loan modifications. Monitoring increases in credit card and line of credit usage after federal student loan payments restart may preemptively identify financial stress for borrowers using available credit to cover other expenses. Credit unions can encourage borrowers to prepare for payments to restart, research repayment plan options, and apply for loan forgiveness (if applicable).”

3. Underwriting and Modifications: “Credit unions should apply prudent underwriting and loss mitigation strategies for borrowers experiencing financial difficulty and struggling to make their loan payments. The use of well-structured and sustainable loan modifications is often in the best interest of both the member and the credit union. Loan modifications should be consistent with the nature and severity of the borrower’s financial hardship and should consider the amount of the borrower’s federal student loan payments. Modification terms should also be consistent with the type of loan being modified and should have sustainable repayment requirements based on the borrower’s financial condition and ability to repay under the restructured terms,” the letter stated.

4. Portfolio Monitoring: “Credit unions should identify and monitor higher-risk portfolio segments with student loan payment stress exposure. Higher-risk segments could include related loan types or sections of the portfolio with multiple layers of risk. Examples include, but are not limited to, borrowers with:

• Private student loans;
• Credit card balances or other debt obligations that materially increased while federal student loan payments were paused or that begin to increase following the resumption of federal student loan payments;
• Adjustable-rate loans that have similar payment reset timeframes — for example, adjustable-rate mortgages or home equity lines of credit; or
• Elevated debt-to-income ratios or low credit scores.

Credit unions should closely monitor the performance of borrowers with federal student loans, including how existing loan performance changes following the resumption of federal student loan payments and following the end of the U.S. Department of Education’s 12-month on-ramp. Management should periodically and in a timely manner update the credit union’s board on any relevant and material risk exposures,” the letter read.

5. Allowance for Credit Losses: “Credit unions need to consider whether the risk associated with the resumption of federal student loan payments is adequately captured within the ACL. Accounting Standards Codification Topic 326 requires expected losses to be evaluated on a collective, or pool, basis when financial assets share similar risk characteristics, but does not prescribe a process for segmenting financial assets for collective evaluation. Financial assets may be segmented based on one characteristic or a combination of characteristics, and management should exercise judgment when establishing appropriate segments or pools,” the letter read.