Thereís been a focus on accumulating capital over the last few years and cutting the types of lending that arenít seen as a core business. —Kevin Cole, analyst at Standard & Poor
JPMorgan Chase‚Äôs announcement last week that it will stop making student loans leaves just one big bank still in the business: Wells Fargo.
The San Francisco bank has steadily increased its presence in the market as its peers have streamed for the exits since the financial crisis. Wells‚Äô private student loan portfolio has grown 6 percent in the past year, according to data the bank provides to investors.
Now, Wells Fargo is the nation‚Äôs second-largest private student lender behind only Sallie Mae ‚ÄĒ a company that focuses primarily on education loans. Together with Discover Financial, the three originate more than three-quarters of the nation‚Äôs private student loans, according to a report from ratings agency Standard & Poor‚Äôs.
Why does Wells still want to offer student loans?
‚ÄúI get that question asked fairly commonly,‚ÄĚ particularly when another bank jumps out, said John Rasmussen, Wells Fargo‚Äôs head of education finance. He said the business is part of the bank‚Äôs strategy of offering a customer as many different products as it can.
‚ÄúWe sort of hold ourselves out in the industry as America‚Äôs community bank,‚ÄĚ Rasmussen said. ‚ÄúWe look at this and say, ‚ÄėGeez, our communities need us; our customers need it.‚Äô ‚ÄĚ
From a bank‚Äôs perspective, student loans bring in an interest rate that compares favorably with auto loans and mortgages. They‚Äôre often co-signed by a family member with good credit, and borrowers can‚Äôt get out of them in bankruptcy.
But being in the market now means Wells Fargo will have to deal with heightened scrutiny from regulators, who have focused on the private student lending market in particular.
Banks have steadily left the private student loan market over the past three years as the federal government has taken on the most prominent role in education lending. More than 90 percent of student loans today come straight from Washington, according to Standard & Poor‚Äôs ‚ÄĒ making it harder for private lenders to expand in the market.
For Wells, the financial risk is likely small: Student loans make up only a small portion of the bank‚Äôs total loan portfolio. But scrutiny in an era of rising student loan defaults, analysts say, has given some banks pause about the ‚Äúheadline risk‚ÄĚ of being in the business. JPMorgan Chase‚Äôs exit now leaves Wells as the most prominent bank left to navigate potential new rules from Washington.
Wells Fargo is working with the Consumer Financial Protection Bureau to develop new programs to modify student loans that become delinquent, Rasmussen said. The bureau would not comment on negotiations with particular banks.
Under these newer workout options, a borrower‚Äôs interest rate could be brought down from, say, 7 percent to zero or 1 percent for a while, then gradually ratcheted back up.
Advocacy groups have pushed for legislators to go further and let borrowers get out of private student loans in bankruptcy. Wells Fargo has lobbied on Capitol Hill against such a measure, Senate disclosure records show.
The nation‚Äôs big banks played a significant role in student lending in the early part of the 2000s, when they were allowed to originate loans backed by the federal government, and when there was a robust market for securities backed by private loans.
By 2008, banks made more than $20 billion in private student loans. The financial crisis dried up the market for the securities backed by the loans.
In 2010, President Barack Obama signed a law taking banks out of the government-backed student loan business. They‚Äôre now made directly by the federal government.
Though student loan debt as a whole has hit record highs ‚ÄĒ above $1 trillion ‚ÄĒ private student loans now are a small piece of the pie. In the 2011-12 school year, private lenders made $6.4 billion in student loans.
Bank of America, Citigroup, U.S. Bank and ‚ÄĒ last week ‚ÄĒ JPMorgan Chase have all gotten out of the business. Scores of nonbank student lenders closed operations as well.
‚ÄúThere‚Äôs been a focus on accumulating capital over the last few years and cutting the types of lending that aren‚Äôt seen as a core business,‚ÄĚ said Kevin Cole, an analyst with Standard & Poor‚Äôs who tracks private student lending. He said banks also took note of the risk to a bank‚Äôs reputation that comes from all the attention being paid by regulators.
‚ÄúIf you‚Äôre going to go through your entire portfolio and say, ‚ÄėWhere can I cut costs; where can I cut risks?‚Äô that‚Äôs going to kind of jump out for a lot of people.‚ÄĚ
Meanwhile, Wells Fargo has taken the opposite tack. Shortly after acquiring Charlotte, N.C.-based Wachovia, the bank announced it had increased student loan originations by 50 percent in the old Wachovia footprint. In addition to the portfolio growth, revenue in the Education Financial Services division grew 2 percent last year, according to the bank‚Äôs annual report.
Rasmussen, the head of Wells education finance, described the bank‚Äôs private loan originations as ‚Äústable,‚ÄĚ but said the bank plans to continue to grow in the area. In 2009, Wells owned 16 percent of the market. By the next year, it was 25 percent, according to data from College Board Statistics.
These days, these private student loans are going primarily to families with pristine credit scores. The average FICO score for a borrower is 746, with more than 80 percent of Wells Fargo‚Äôs loans having a parent or other family member co-sign.
Rasmussen points out that for some students, a Wells student loan could be a better deal than a federal loan. Since the interest rate is priced based on the creditworthiness of the borrower, a student from an affluent family could score a rate lower than unsubsidized federal loans.
Still, private student loans in general have contributed to the unprecedented student debt burden weighing down recent college graduates.
Kent Matzinger, 30, of Charlotte says he graduated from a small private college in southeast Michigan with more than $80,000 in private loans from Sallie Mae. He was originally slated to pay $1,000 a month, but said he was able to consolidate his loans and get the payment down to about $400 per month.
Since then, the debt has forced him to tighten his spending. When he purchased his home in Charlotte, he says he bought a low-cost foreclosed home and fixed it up.
He said he owes more on his student loan than on his mortgage.
‚ÄúIt was an easy way to get my hands on some money to go to school,‚ÄĚ Matzinger said. ‚ÄúEventually it‚Äôs caught back up with me.‚ÄĚ
The Consumer Financial Protection Bureau doesn‚Äôt make public the specifics of complaints against particular banks. But its reports on student loans provide a glimpse of the types of problems borrowers have encountered.
The largest source of complaints are former students being unable to modify the terms of their loan when they run into hardships ‚ÄĒ or when an improved financial picture means they could earn a better interest rate. Others reported getting incorrect or conflicting information from their loan servicers.
Wells Fargo faced the third-most complaints among private servicers, behind Sallie Mae and American Education Services. The 341 complaints against Wells since the bureau began collecting the complaints last March, however, represent a tiny fraction of the total loans owned and serviced by the banks.
Wells Fargo and the industry as a whole say the problems in private student loans are much less severe than in government-backed loans. While default rates have exceeded 10 percent on federal loans, roughly 2 percent of Wells private student loans are past due at any given time, according to data the bank shared with investors. The bank tends to charge off a little more than 1 percent each quarter.
Meanwhile, Wells Fargo says it has no intentions of joining its peers in scaling back on student loans.
‚ÄúWe have a long track history of lending to families and students,‚ÄĚ Rasmussen said. ‚ÄúWe look to grow.‚ÄĚ
GETTING OUT OF STUDENT LOANS:
Bank of America became one of the first of the big banks to back out of the business in April 2008. The Charlotte bank announced the move in a brief statement and did not elaborate on why it made the decision. At the time, the student loan market had been crumbling along with the subprime mortgage market.
Citigroup got out of the private student loan business in fall 2010, selling its portfolio to Discover Financial. The bank also sold most of its government-backed student loan portfolio to Sallie Mae. Citigroup took a $500 million loss on the two transactions.
U.S. Bank halted private student loan originations last year.
JPMorgan Chase, the nation‚Äôs largest bank, dramatically scaled back its business in 2012. Last week, the bank said it was getting out of the business completely. A spokeswoman told the Associated Press the bank planned to put resources where it saw growth potential.
‚ÄĒBy Andrew Dunn
¬©2013 The Charlotte Observer (Charlotte, N.C.)
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