OCC Tightens Forbearance Policies on Private Student Loans

As previously noted in this post from November 2009, the Office of the Comptroller of the Currency had been reviewing forbearance policies on private student loans.  The results of this inquiry appeared today in Student Loan Corporation's 8-K announcing their 4Q and full year results:

"The Company’s December 31, 2009 allowance for loan losses and related provision include $3.0 million related to the impact of adopting certain policy changes recommended by the Office of the Comptroller of the Currency in a January 8, 2010 supervisory letter.  These proposed changes include, among other things, more rigorous requirements for participation in private education loan forbearance and loss mitigation programs, shorter forbearance periods and the requirement for minimum periods of payment performance between forbearance grants.  These proposed changes are expected to materially increase the Company’s allowance for loan losses and related provision beginning in 2010."

It will be a good question to ask Sallie Mae on their 4Q conference call on Thursday (and other lenders) what the impact of this supervisory letter will be on their allowance for loan losses since SLM made some pretty dramatic changes to reduce borrower's usage of forbearance over the past year summed up by these recent comments by Jack Remondi, Vice-Chair and CFO at Sallie Mae: 

"I would describe the forbearance practice change, as being one of, more automatic eligibility for forbearance to match what went on in the FFELP program, so that borrowers and schools understood the consistency there, to one of more analytics.  Borrowers have to demonstrate to us that they can actually benefit from a forbearance before it is granted.  Putting someone into a forbearance mode and capitalizing the interest when they cannot afford the monthly payment because they either dropped out of school or borrowed too much, that doesn't make any sense.   Loan modification for that borrower is a far better tool to manage that.  If 10% of borrowers qualified for a forbearance that they could benefit from it, we wouldn't have a problem granting them a forbearance, it's just  don' t want to give it to people who can't benefit from it."

Comments

[Bill Weyandt]

A question for Sallie Mae:

While the amount of loans in Forbearance for the SLM 2007-A pool has been slowly trending down over recent quarters ($72MM as of 11/30/2009), loans in Deferment status continue to rise sharply ($191MM as of 11/30/2009 from a baseline of $49MM at pool inception). In-school Deferments should slowly trend down after pool inception.

The Sallie Mae website notes that Deferment can be authorized for economic hardship or unemployment, among other reasons. How is this sharp increase in the use of Deferments different than Forbearance?