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U.S. Bank, Chase Pull Back from Student Lending

U.S. Bancorp (USB) is pulling out of the private student loans market and JPMorgan Chase (JPM) is sharply reducing its lending, as banking regulators step up their scrutiny of the products.

Minneapolis-based U.S. Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29, a spokesman told American Banker on Friday.

"We are in fact exiting the private student lending business," U.S. Bank spokesman Thomas Joyce said, adding that the bank's business was too small to be worthwhile.

"The reasoning is we're a very small player, less than 1.5% of market share," Joyce adds. "It's a very small business for the bank, and we've decided to make a strategic shift and move resources."

Meanwhile, JPMorgan Chase will limit student lending to existing customers starting in July, a bank spokesman told American Banker on Friday. The bank laid off 24 employees who make sales calls to colleges as part of its decision.

"The private student loan market is continuing to decline, so we decided to focus on Chase customers," spokesman Thomas Kelly says.

Banks and other private student lenders have already seen their role in the market diminish, after the federal government in 2010 stopped guaranteeing loans they originated. Now more lenders could follow U.S. Bank out the door, as the Consumer Financial Protection Bureau and other policymakers turn their attention to the student loan market.

"What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist," says Kevin Petrasic, a partner with law firm Paul Hastings.

"Historically there's been a patchwork of regulation towards private student lenders," he adds. "The CFPB allows for a more uniform and consistent approach and identification of the issues. It also provides a network, effectively a data-gathering base that is going to enable the agency to get all the stories that are out there."

The CFPB recently began accepting student loan complaints on its website.

"I think there's going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing," Petrasic says, warning that "the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product."

Outstanding student debt, including private and federal loans, has topped $1 trillion, surpassing previous estimates, the CFPB reported earlier this month.

But despite mounting regulatory concerns, some lenders including Discover Financial Services (DFS) are ramping up their participation in the market. Discover has snatched up several large student loan portfolios over the past year and is growing originations.

The student lending blog Cheapscholar.org first reported about U.S. Bank's letter to colleges and universities and the dismissal of some Chase employees.


(7) Comments



Comments (7)
@aberw: Keep this in mind when discussing government intervention in financial markets: over-regulation didn't lead to the financial crisis, under-regulation did (e.g., credit default swaps and other complicated financial products and related practices). No reasonable person would ever think the government incapable of mistakes, but, quite frankly, most consumers are ignorant about financial products and services and many could use a measure of protection. All the CFPB is discussing is a way to make private student loans easier to understand for borrowers who have little financial acumen. I am aware of no other proposal or discussion, especially one that alters the private loan product itself, save for an unrelated push to grant bankruptcy protection to private student loans, a protection already provided to borrowers of all other types of consumer loans. If a bank or other financial institution feels forced to leave the private student loan space -- or any other space -- because it might be required to provide full, transparent, easy-to-understand disclosures to its customers, then that says a lot about the character of the company. Subprime lending practices in the housing sector are being repeated in the private student loan space and that's not good for anyone -- borrowers, lenders, servicers, or shareholders. Meanwhile, changes to bank overdrafts, namely the opt-in requirement, are an entirely different matter, contrary to your claim, and fall in line with business regulations in other industries that generally require consumers to opt-in to services. And banks aren't leaving the banking space because of overdraft protection regulations. Ultimately, banks and other lenders are perfectly capable of being profitable while being held to reasonable, common-sense ethical standards such as a requirement to provide easy-to-understand information to customers. Asserting otherwise is the height of cynicism.
Posted by srasberry | Monday, April 09 2012 at 10:56PM ET
Shannon R: your response amply demonstrates my case. In the name of "protecting" consumers the government that makes no mistakes will drive providers right out of the business. Take out "student loans" from your explanation and insert just about any other consumer financial product and you will likely be previewing government regulatory action yet to come on a host of other popular financial services. We are already seeing that with bank overdraft programs.
Posted by WayneAbernathy | Thursday, April 05 2012 at 4:49PM ET
@WAYNE A: That's not at all accurate. The federal government is not "driving lenders out of the student loan business." As a cost-savings move that saves billions of taxpayer dollars, the federal government stopped providing subsidies to private banks for the purpose of issuing federal student loans and began issuing all federal student loans directly through the existing William D. Ford Federal Direct Loan Program. In this way, private banks are simply no longer able to issue zero-risk, federally-guaranteed loans at a tremendous cost to taxpayers. Some private lenders, who make private, non-federal student loans, are exiting the business (USB) or cutting back on their lending (JPM), while other private lenders are taking the business these other lenders are leaving on the table and using it to expand their own private lending operations (DFS). Private student loans have a rocky history in terms of fairness to lenders and some private lenders do their fair share of taking advantage of young borrowers and ill-informed co-signers with purposefully complicated terms and a lack of transparent disclosures. The CFPB should help even this playing field, which is why some lenders feel pressured to exit or curtail private student lending.

@Neil W: While it's true that government subsidies do little to prevent cost inflation -- and often encourage it -- higher education and healthcare, which you have singled out for suffering "from chronic cost increases" are somewhat more complicated than you acknowledge and are only two examples of public policy that suffer from tremendous cost overruns due to federal funding. Cost increases in higher education have as much to do with increases in the availability of lending as they do with decreases in federal and state appropriations to education budgets due to ideological differences and a lack of taxpayer revenue. And without heath insurance -- not just Medicare and Medicaid -- there's no telling how expensive healthcare would be; in such a case, medical costs may be forced down but individuals would be required to foot 100 percent of the bill. Perhaps private banks could get in the business of making medical emergency loans for expensive procedures such as heart bypass surgery that come with high variable interest rates and a lack of bankruptcy protection, as private student loans do. And what about other industries which receive generous taxpayer subsidies and funding, such as oil and the military? Surely you're not suggesting there's no subsidy-encouraged cost inflation at the gas pump or dubious cost overruns when $500 hammers are used to install $1,000 toilets at the Pentagon?

@David B: A point of clarification: if Congress takes no action and lets the College Cost Reduction and Access Act of 2007 expire as scheduled this summer, the fixed interest rate on federal Stafford loans for undergraduate students will revert to 6.8 percent, where it was in 2007, from 3.4 percent. As expected, Congress is divided down party lines on whether to take action and extend the Act (Democrats support the extension, Republican oppose it).
Posted by srasberry | Wednesday, April 04 2012 at 8:34AM ET
Great point by Neil Weinberg. I'd add housing to the list where government support resulted in rapid inflation before the collapse.
Posted by stfleming | Friday, March 30 2012 at 7:36PM ET
Now Congress wants to increase the Federal Student loan rate in July to 6.5 % a huge increase- Why ? Prime is still at 3.25 % why not set the rate at prime- this is being debated in Washington - let's hope they have change of mind- contact your Rep. in Washington-
Posted by David B | Friday, March 30 2012 at 4:16PM ET
It's probably no coincidence that the two markets where the government opens the spigot and pours in the public funds--higher education and health care--are the same one's that suffer from chronic cost increases well in excess of the averages. Neil Weinberg, Editor in Chief, American Banker.
Posted by Neil Weinberg | Friday, March 30 2012 at 3:47PM ET
In the name of helping students the Federal Government is driving lenders out of the student loan business. Could this be what the future looks like for other financial products after a few years of protection by the Consumer Bureau?
Posted by WayneAbernathy | Friday, March 30 2012 at 2:51PM ET
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