CFPB Sees Student Loans as Housing Crisis Redux

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Byline: Joe Adler

WASHINGTON a Patterns in the private student-lending industry are dangerously similar to those seen in the housing market prior to its collapse, according to a study expected to be released Friday by the Consumer Financial Protection Bureau.

The study, completed with the Department of Education under a mandate in the Dodd-Frank Act, said the private student loan market a fueled by eased underwriting and investors interested in asset-backed securities a grew 185% between 2001 and 2008 to $20 billion. Yet that market then deflated over the next three years, falling below $7 billion in 2011. Outstanding private student loans now total about $150 billion, compared with $864 billion in federal student loan debt.

"Many students have taken out loans from private banks which we know have been issued in a way very similar" to loans "in the subprime lending crisis," Education Secretary Arne Duncan said in a conference call with reporters in advance of the study's release.

The two agencies said private loans have proven riskier for students than federal ones, and borrowers struggling to repay their debt find few workout options. They suggest a potential remedy a a recommendation sure to raise eyebrows in Congress a is to consider allowing student loan borrowers more ways to restructure credit while in bankruptcy.

"Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis," CFPB Director Richard Cordray said during the call. "Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They're now overwhelmed by debt and regret the decisions they made."

The study included data collected from nine lenders covering more than 5 million loans that were originated between 2005 and 2011. Additionally, five nonprofit lenders also submitted data. The participants included RBS Citizens N.A., Discover Financial Services, The First Marblehead Corp., JPMorgan Chase, PNC Bank, Sallie Mae Inc., SunTrust Banks Inc., U.S. Bank National Association and Wells Fargo Bank, N.A.

The study makes some key recommendations, including that Congress strengthen the role schools play in the origination of private loans, consider making it easier for borrowers to restructure student-loan debt in the bankruptcy process and modernize regulation to "ensure a competitive, fair market where consumers fully understand their debt obligations and lenders have appropriate data to make underwriting decisions."

As loans grew during the boom, the study said, lenders began increasing their direct marketing of loans to students without using schools as an intermediary. Between 2005 and 2007, loans to undergraduate students bypassing school involvement and any verification of students' credit needs increased from 40% to over 70%.

"As a result, many students borrowed more than they needed to finance their education," the study said. "Additionally, during this period, lenders were more likely to originate loans to borrowers with lower credit scores than they had previously been. These trends made private student loans riskier for consumers."

But the report said following the financial crisis, when investor interest declined, underwriting standards appeared to improve. Loans that were co-signed increased from 67% in 2008 to 85% in 2009. …