Written by Bernadette Clair, Senior Regulatory Compliance Counsel
Last week, the NCUA released its January 2014 report. Featured articles include:
- Office of Examination and Insurance Report: Supervision to be Forward-Looking, Targeted in 2014
- Chairman’s Corner: It’s Time to Flip the Calendar – from 1934
- Filing Your Call Reports Late Could be Costly
- Board Perspectives: Bursting Bubbles; ETA on EMV is Still TBA
- Board Actions: NCUA Board Approves New Charitable Accounts for Federal Credit Unions
- Understanding Loan Participation Waivers
- Region II Report: Private Student Lending – Looking Beyond Default Insurance
- Low-Income Credit Unions Can Apply for First Grant Round Starting Feb. 3
- Get Ready. Military and America Saves Week is Feb. 24 – March 1
Private Student Lending. Earlier this month, we blogged about NCUA Letter to Credit Unions 14-CU-02, which lays out NCUA’s supervisory focus for 2014. Private student lending is on the list and NCUA states in the letter that field staff “will evaluate each credit union’s student lending plans, policies, controls, and third-party due diligence.” In December 2013, NCUA also issued Letter to Credit Unions 13-CU-15, specifically on the topic of private student loans, and the enclosed Supervisory Letter No. 13-13 provides guidance to field staff on examining credit unions’ private student lending practices.
This month’s NCUA report also addresses private student lending in the Region II Report: Private Student Lending – Looking Beyond Default Insurance, highlighting issues examiners observed in 2013. These include reliance on default insurance, effective credit analysis of borrowers’ ability to repay their loans and effective due diligence of third party participants. Here’s an excerpt from the article that caught my eye related to default insurance:
“NCUA expects credit union management to establish appropriate policies and controls that are independent of default insurance protections. This includes concentration limits, exit strategies, liquidity impact and interest-rate risk management within the private student loan portfolio.
Many credit unions make use of default insurance to protect the credit union against loss if a private student loan is not repaid according to contract terms. The use of default insurance can be an effective way to mitigate credit risk, assuming the credit union:
- Performs proper due diligence of the default insurers;
- Understands the terms of the insurance contract;
- Is aware of the conditions required of the lender, servicer or both, to keep the insurance in force; and
- Properly assesses the financial capacity of the insurer.
Credit unions need to ensure the private student loan program they participate in fits their lending policies and underwriting requirements. Credit unions must perform adequate credit analysis consistent with their credit union’s individual risk tolerances. NCUA examiners will verify whether a credit union has the appropriate expertise and risk-mitigation controls for private student lending, regardless of default insurance.”