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.

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