You cannot regulate it if you can't regulate it.
The four financial regulator agencies accepted comments up to Thursday afternoon on a proposed rulemaking to apply the Community Reinvestment Act to the private student loan industry. The proposed rule asked commenters for suggestions about how CRA credit could be designed to encourage the supply of low-cost student loans to low-income students.
We made the following comments (pdf) 11 pages.
We suggest that these four principles should govern the integration of private student lending into the umbrella of CRA regulation:
The low-income standard is good: expand the qualifying student population to middle-income students. It is an unusual situation. Low-income students can qualify for Pell Grants and Perkins Loans, and high-income students can choose without concerns for cost. The families in the middle are stuck. Low-cost loans should be no more than 300 basis points above 10-year Treasuries.
Don't give credit for private loans at schools that don't work. Twenty-seven colleges and universities in the US graduated zero (none, nada, zilch, 0) students in 2007. Another 150 or so graduated less than 15 percent of their students. This is a low standard to meet - you only have to graduate them in six years - and yet many schools can't do it. We aren't do that well with this in general - only about 58 percent of students who enter school will graduate in six years. Still, CRA credit should extol performance to a higher standard. Most of the lowest-performing schools are for-profit four-year schools. It is a dis-service to encourage students to take debt to go to a school where they probably won't graduate.
Pay attention to loan-quality. One of the regulatory gaps with CRA is that examiners are not allowed to be sensitive to loan quality. Subprime loans count the same as solid fixed-rate loans. That should change, and this rulemaking is a good place to start. Examiners should only give CRA credit for private loans with no prepayment penalties, with fixed rates, and with loan forgiveness to students who spend 10 years in public service. The public service criteria could include teaching, legal aide, or being a nurse.
Put data in the hands of the public. Sunshine is the best disinfectant. CRA has been well-served by HMDA data for mortgage loans. The same thing would work for student loans. Establish regulatory criteria for private student loans, and then make those metrics part of a loan-level database.
Private student lending is soaring as the costs of attending college continue to increase. Yes, grant aid is available. The Obama administration is increasing the sizes of Pell Grants. But that doesn'td meet the gap between the cost of school and the sum of good federal loans and grant aid.
That gets to the larger problem with this rule making. It seems that since the CRA applies its regulation only to financial institutions with deposits (banks and thrifts, not independent mortgage companies, industrial loan corporations, wholesale banks, et al), that most of the student loan lenders won't be compelled to cooperate.
Moreover, among the banks that do provide private loans (BA, STI, JPM, WFC, RF), most keep their deposits in the bank holding company and outside of the student loan subsidiary. For those institutions, it is voluntary. They can ask the examiner to consider their student loan portfolio (if this new rule follows the traditional enforcement of CRA) or they can choose to decline.
Some of the lenders do have deposits. Sallie Mae, First Marblehead, Discover, and NelNet all own banks or thrifts. Nonetheless, most of these only have their deposits in one or two offices. That would mean that Sallie Mae, for example, would only have CRA duty in the Murray, Utah MSA. Discover would be compelled to follow CRA in Greenwood, Delaware. Nelnet would have all of Nebraska to worry about. For First Marblehead, the assessment area would be Providence, RI.
Do you get the picture? There's not going to be much reach to CRA for private student loans - unless the CRA is changed.