Student loan rehabilitation is a process that has been limited to federal student loans. This allows the borrower a one-time opportunity to make a series of agreed-upon payments to bring a defaulted loan into good standing again.
It has been a good tool to use to prevent federal student loan debtors from falling entirely off the cliff into default. Like most policies in the student loan world, it’s not perfect, but it can be strategically helpful.
Historically private student loans have not been able to offer a similar solution.
The Office of the Comptroller of the Currency (OCC) has just announced a process by which private student loan lenders may offer a similar rehabilitation process.
This is not an instant process. Lenders will have to seek OCC approval before offering such rehabilitation solutions. Lenders are not required to offer them.
If lenders decide to pursue the option for private student loan rehabilitation I would not expect to see the first such programs roll out until end 1Q or 2Q in 2019.
Here is the current state of the new provision as it stands at the start of 2019.
Banks intending to establish a section 602 rehabilitation program should
- follow the OCC approval process explained in this bulletin, including making the request to the supervisory office at least 120 days before offering the program.
- administer section 602 rehabilitation programs consistent with safe and sound banking practices and risk management principles.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) gives a private education loan borrower the option to request the removal of a default from his or her consumer report under certain conditions, including the following:
- The bank offers a section 602 rehabilitation program that has been approved by the bank’s appropriate federal banking agency.
- The borrower successfully meets the bank’s program criteria, which include making consecutive, on-time monthly payments that demonstrate a renewed willingness and ability to repay the loan in accordance with the program.
- The borrower receives the benefit of removing a default only once per loan.
Note: Commensurate with the federal student loan rehabilitation program, the record of default would be removed from the borrower’s credit history. The delinquency leading up to the default would remain.
The EGRRCPA does not require banks to offer a section 602 rehabilitation program. Banks that choose to do so are entitled to section 602’s safe harbor from claims of inaccuracy for removing a reported default from a borrower’s consumer report.
The OCC supports banks’ efforts to work with borrowers experiencing financial difficulties. Prudent and properly structured rehabilitation programs are often in the best interest of the bank and the borrower. Workout programs offered to financially distressed private education loan borrowers should be administered in a safe and sound manner and adhere to generally accepted accounting principles.
Banks intending to establish a section 602 rehabilitation program must seek written approval from their supervisory office concerning the proposed loan rehabilitation program, as required by section 602 of EGRCCPA. The OCC supervisory office will review a bank’s program to assess whether it includes section 602’s requirements to make a minimum number of consecutive, on-time, monthly payments that demonstrate the borrower’s renewed ability and willingness to repay the loan and to notify the consumer reporting agencies of successful completion of any loan rehabilitation program.
In conjunction with its review of a bank’s proposed section 602 rehabilitation program, the supervisory office will assess whether the proposed program is consistent with applicable laws, regulations, and safe and sound banking principles.
The OCC will provide feedback or notify the bank of its decision in writing within 120 days of receipt of a request for approval. If the OCC declines to approve a request, the OCC will notify the bank in writing of the reason for the OCC’s decision. A bank may appeal the OCC’s decision under the OCC’s bank appeals process.