WASHINGTON — Since 2010, the federal government has been the nation's primary student lender. But the incoming chairman of the Consumer Bankers Association says the government's record as a credit provider leaves much to be desired.
“We believe we have the expertise” to underwrite student loans “better,” said Brad Conner, vice chairman of consumer banking at the $150 billion-asset Citizens Bank in Providence, R.I., who will become CBA chairman next year.
Conner said continued problems with student lending under the government's watch may open the door for private lenders to get back into the space. He said the CBA plans to raise awareness about exploding student loan debt in 2018.
"What is happening is the overwhelming majority … of student lending being done in this country is being done by the federal government and it typically is underwritten without assessing the students' ability to repay,” Conner said.
In an extended interview, Conner also expressed hope for banks to expand small-dollar lending if the Consumer Financial Protection Bureau cracks down on more expensive products offered by payday lenders and other nonbanks. He also reiterated the industry's support for establishing a commission to oversee the CFPB, as opposed to a single director, and said bankers will continue to fight to repeal the so-called Durbin amendment's cap on debit interchange fees.
The federal government took on a greater role as a direct student lender following 2010 legislation that ended subsidies to private student lenders. Critics of the subsidies charged that private lenders had profited off of government support without sufficiently lowering costs for students.
But Conner indicated that he and other bankers believe the government has done no better. Outstanding student loan debt has doubled since 2007, from $600 billion to $1.3 trillion, and many students struggle to pay back their loans; over 16% of student loans are currently in default.
“This is very poor quality lending,” Conner said. “It has very high delinquency rates.”
Private lenders are not interested in restoring the subsidies, according to the CBA.
But Conner said the government's current approach to disclosures for student loan borrowers is inappropriate, whereas private student lenders use stronger disclosures and assess students' ability to repay. He said the 5-to-7% of student loans that are underwritten by private lenders are of "very high quality."
Conner said he hopes 2018 will be the year that banks can get back into another business: small-dollar loans.
“We definitely think there is a role for small-dollar lending for the banks,” he said. “We believe the banks are in the best position to provide these products to consumers and so far the regulation has prevented our ability to build the right products for consumers.”
The CFPB is finalizing a rule regulating small-dollar loans, but the expectation is the rule will likely focus on loans with terms of 45 days or less and will be targeted at more expensive products than banks offer.
While Conner said he could not say for sure whether the CFPB rule will open up an opportunity for banks, he did say banks are well positioned to fulfill that credit need if policymakers allow it.
“We think the banks are in the best position to” offer small-dollar loans “in the most transparent way and the most economical way,” he said. He added that credit alternatives such as online lenders and payday lenders tend to be less regulated and more expensive, and called for lawmakers to consider steps to encourage more bank small-dollar lending.
“We are really pushing for legislation that opens an opportunity for banks” to offer small-dollar loans, Conner said.
One good sign for banks is that Joseph Otting, the nominee to become comptroller of the currency, appears to agree.
“We have pushed” small-dollar loans “out of the banking sector,” Otting said during his July nomination hearing. “I think they should be put back in the banking sector.”
Conner commended the nomination of Otting, who has been an executive at several banks. “The fact that Otting comes from the world of banking and has been in a position to understand the real-world challenges of banking and serving customers is a good indication,” Conner said.
“We will advocate for balanced regulation and balanced leadership” at the federal financial agencies, he added. “We would like to see leadership in those agencies that has a consumer-facing background and experience.”
The CBA has been one of the most outspoken groups in advocating for the CFPB to be restructured as a bipartisan commission. Conner said that won't change in 2018.
“We do really believe that the industry and consumers are better served by a commission overseeing the CFPB. We just believe a single directorship is not the right direction and there would be better balance with a commission,” he said. “We believe the stability and the certainty of a commission is a much better solution for the industry and consumers."
There is widespread speculation that CFPB Director Richard Cordray may step down before his term expires in July 2018, but Conner said the CBA’s position on a commission is unrelated to how the current agency chief has operated.
“This has nothing to do with Director Cordray," he said.
Conner said bankers will continue plug away at seeking to reverse the Durbin amendment, even if a repeal is still an uphill climb.
“It is a very bad regulation for the industry and consumer alike,” Conner said of the Federal Reserve rule implementing the provision of the Dodd-Frank Act and named for Sen. Richard Durbin, D-Ill.
“The theory on that regulation is that retailers would benefit and would pass that through consumers, and we just don’t believe that … has happened,” Conner said. “It has forced the banking industry to do away with things like rewards programs and free checking."