John Remondi, SLM, letter to US Senate by HuffPostBiz


John F. Remondl
                                                           Shahien Nasiripour, The Huffington Post

President and Chief Executive Officer

300 Continental Drive
Newark, DE 19713

August 1, 2013

The Honorable Sherrod Brown
United States Senate
Washington, D.C. 20510

Dear Senator Brown:

Thank you for your letter of July 2, 2013. I welcome the opportunity to provide you with
additional information about the innovative and successful programs that we have developed to
assist our customers with private education loans who may be experiencing financial hardship.

As I testified to your subcommittee last year, I am proud of the products we have designed to
help consumers make informed decisions about financing higher education, to encourage
repayment and reduce borrowing costs, and to avoid delinquencies and defaults. We do this
through sound underwriting as well as market-leading education, disclosures, and customer
contact. Our approach is working-our customers are realizing terrific success in loan
repayment as evidenced by steady declines in delinquencies and defaults. Our annualized default
rate declined to 2.7 percent last quarter, the lowest since unemployment rates began to increase
in 2008.

Despite increased success for many of our customers and lower delinquencies and defaults, we
recognize the economy continues to pose challenges to some borrowers as they leave school and
enter the workforce. That is why we have developed several programs to help borrowers through
periods of financial hardship. As I testified last year, "(O)ur success depends on our customers'
success, and therefore, we are committed to working with customers to help them navigate
difficult financial circumstances and preserve their good credit standing."

Two of our programs that have been particularly successful are our "3-pay program" which helps
borrowers who have fallen behind in their payments and our "rate reduction program" which
helps borrowers who are unable to make their current monthly payments. Currently, we have
$1.4 billion in loans enrolled in our rate reduction program, where we have lowered the interest
Senator Sherrod Brown
                                                            Shahien Nasiripour, The Huffington Post

August 1, 2013

rate to make the payments more affordable. (The attachment to this letter includes details on
these programs and other programs, such as our death and disability protections and our new
graduated repayment program).

As you may be aware, Sallie Mae announced in May our plan to pursue separation of the
company's existing businesses into two, separate, publicly traded entities- an education loan
management business and a consumer banking business. The education loan management
business will be comprised of the company's portfolios of federally guaranteed (FFELP) and
private education loans, as well as most related servicing and collection activities. The consumer
banking business will be comprised of our private education loan origination and servicing
businesses, including the Sallie Mae Bank and the private education loans that the Bank
currently holds. This entity will retain the Sallie Mae brand.

The new education loan management company will own over $31 billion of previously issued
private education loans and will continue to offer our market-leading loan modification programs
for borrowers experiencing financial distress. As we continue to prepare Sallie Mae Bank for its
transition to being not only an independent company but a "large bank" under the Dodd Frank
Act with the additional regulatory requirements that entails, we continue to closely review and
consider the implications existing prudential regulatory guidance will have on Sallie Mae Bank's
operations, including how regulation may affect the design of Sallie Mae Bank loan modification
programs. It is our view that the prudential regulatory requirements could pose significant
barriers to the implementation of these programs within a bank. Specifically, we view the time
to charge-off, limited use of forbearance and re-aging, and the lack of definitive guidance on the
amortization period for modified loans as preventing-or at a minimum, severely limiting-the
very programs that we have designed. The attachment to this letter includes a fuller discussion
of these limitations.

The banking regulations for private education loans has evolved over time and is currently based,
with very limited exceptions, on other consumer products such as open-ended credit cards or
closed-end/asset secured mortgages and auto loans. Private education loans are distinctly
different from those products and merit a separate treatment under the prudential guidelines. I
have provided our recommendations for changes in the guidelines in the attachment to this letter.
We are working diligently to make regulators and other interested parties aware of the barriers
that we see to implementing these programs in a bank and of our customers' success under these
programs. We have responded to all requests from regulators and others and will continue to
press for changes we believe are necessary. We are pleased at the interest in these highly
Senator Sherrod Brown
                                                                          Shahien Nasiripour, The Huffington Post

August 1, 2013

effective programs. We hope that our experience can shed light on the importance of improving
the guidance for private education loans.

We are proud of the work we do to find the right repayment plan for all of our federal student
loan borrowers as well. Our approach generates success-the default rate for our borrowers is
significantly below that for borrowers at the same school but with a different lender or servicer.

Among the programs available for federal loan borrowers is income-based repayment ("IBR"),
which you asked about in your letter. IBR is an important option in assisting those borrowers
with managing their monthly payments but, as you know, it posed some enrollment challenges
initially. However, in partnership with the U.S. Department of Education and other federal loan
servicers, we have greatly simplified and streamlined the process by which borrowers can apply
for IBR. As a result of this work, the number ofborrowers using IBR or other income-driven
repayment plans has significantly increased. Over the last 18 months, the number of our FFELP
customers using income-based repayment plans has increased by 75%, to more than 140,000
borrowers. At the end oflast quarter, three percent of our FFELP customers in repayment,
representing five percent of outstanding loan volume, were enrolled in IBR. I am pleased to note
that Sallie Mae has been highly successful in enrolling direct loan borrowers in income-based
repayment plans, as well. 1

I appreciate your interest in Sallie Mae's loan modification programs. There is a significant
opportunity for legislators and regulators to come together, work with all stakeholders, and
recognize private education loans as a distinct asset class with clearer rules that make sense for

Thank you for your interest.

President and Chief Executive Officer

    We are not authorized to release enrollment data on loans that Sallie Mae does not own.
                            Letter to the Honorable Sherrod Brown
                                                              Shahien Nasiripour, The Huffington Post
Sallie Mae's Programs for Private Education Loan Borrowers Experiencing Financial

Managing repayment of education loans is critical for students to achieve their educational goals,
recognize their full earning potential, and develop a strong credit profile. Our experience has
taught us that successful repayment starts at origination and that a one-size-fits-all approach does
not work. That is why we have developed a suite of tools and products designed to help students
and families build plans that are right for their situations and that will assist them whether
college is a long way off or right around the comer. Sallie Mae designs its tools and products
with incentives and programs to reward and encourage repayment and aid those who may be
struggling to meet their financial obligations.

Sallie Mae was the first private education lender to offer important protections for the family,
including tuition insurance, and death and disability loan forgiveness. Most recently, Sallie Mae
announced a new graduated repayment period that provides up to one year of interest-only
payments to assist recent graduates in good standing as they transition from college to full-time
employment. Designed based on customer feedback, this program provides assistance during the
transition, establishes important repayment habits, and avoids debt escalation that occurs when
payments are postponed.

Sallie Mae works one-on-one with borrowers who have fallen behind in their payments to
determine the right program to help them avoid default. For borrowers who have fallen behind
but have the ability to make their monthly payments, we have implemented the "3-pay program."
This program is ideal for the borrower who has had a temporary set-back and accumulated a past
due balance. Under this program, when the borrower makes three, consecutive, on-time
payments the account is brought current through the targeted use of forbearance.

For borrowers who have fallen behind and cannot meet their current monthly payments, we have
our "rate reduction program." For this program, we work collaboratively with the borrower to
assess their financial situation, and we may reduce the interest rate on their loan to as low as one
percent, so that their monthly payments can fit within their means. In some cases, we will
modify the term as well to reduce the payment even further. Once borrowers make three
payments at the modified payment and interest rate level, they are enrolled in the rate reduction
program for a 12-month period, and their account is brought current. After 12 months,
borrowers may extend at the modified level until their financial circumstances improve.

Currently, we have $1.4 billion of loans enrolled in the rate reduction program, with the average
customer receiving a 40-percent reduction to the monthly payment amount. This program has
great value for both Sallie Mae and the borrower. Most of those entering the rate reduction

                                        Attachment- Page 1
                              Letter to the Honorable Sherrod Brown
                                                                Shahien Nasiripour, The Huffington Post
program have been 90 days or more past due. The program allows the borrower to continue to
make payments and reduce principal. We are experiencing nearly an 80 percent success rate,
meaning most borrowers have successfully completed the 12-month program. The rate reduction
program is remarkably successful in helping these borrowers avoid default-after two years, the
default rate for borrowers who were severely delinquent before enrolling in the rate reduction
program is less than one-third of that for those who do not use the program.

Regulatory Impediments to Loan Modification Programs

The prudential regulatory framework for private education loans is currently based, with limited
exceptions, on the guidance that exists for other consumer loan products. Guidance specific to
private education loans, albeit limited, addresses policies where banks may match federal lending
practices, specifically in the area of deferments and forbearances. While this policy guidance
was necessary for safety and soundness at the time, it could be characterized as overly restrictive
in that it fails to recognize there can be effective programs to assist this unique set of borrowers
through temporary periods of financial hardship that are also safe and sound. Private education
loans, given the unique characteristics of these assets as compared to other closed end as well as
opened-end loans, warrant unique policies and policy guidance.

Currently, banking institutions that make private education loans follow the guidance issued by
the Office of Comptroller of the Currency ("OCC") in 2010. 2 This guidance directs lenders to
follow the Uniform Retail Credit Classification and Account Management Policy (OCC Bulletin
2000-20) for closed end-loans and requires that private education loans, with limited exceptions,
should not be treated differently than other consumer products once repayment has begun. These
limited exceptions are:

      •   6-month grace period after leaving school
      •   Additiona16-month grace, if needed, immediately after first grace (OCC-regulated
          institutions must classify the second grace as forbearance and count it against the life-of-
          loan limitation of 12 months).
      •   Deferments for in-school and returning to school.

It is clear that private education loans are now a significant asset class that has distinctly different
attributes from closed-end loans such as auto loans or mortgages, which are backed by assets, or
from open-end loans such as credit cards. New prudential regulatory guidance for private
education loans should look at three areas to provide clarity and greater ability to work with
education loan borrowers to make sure they can manage the transition from school to repayment,

    CNBE Policy Guidance 2010-02

                                          Attachment-Page 2
                                   Letter to the Honorable Sherrod Brown
                                                                           Shahien Nasiripour, The Huffington Post
and their income potential from their education catches up to their actual earnings. These areas

•     Time to charge-off:
         o Banks must charge-off at 120 days based on rules for closed-end loans, such as
             mortgages and auto loans.
         o Private education loans are different than other closed-end loans which typically are
             secured by an underlying asset (such as an auto or home). In contrast, repayment of
             private education loans is based on the future earnings potential of the borrower.
         o Another attribute that distinguishes private education loans from other asset classes is
             the prevalence of co-borrowers, most often a parent. Most often, resolving
             delinquencies requires involving other parties, not just the borrowers.
         o More time to charge-off allows lenders to work with the school to make sure that
             there are no enrollment issues and to coordinate with the borrower and the co-signer
             and avoid the serious borrower impact.
         o The charge-off is a precipitating event, with the severe derogatory reflecting on the
             borrower's credit profile. Once a loan is charged-off, the willingness of the borrower
             to work on a repayment plan drops significantly.
         o Open-end consumer credit products, such as credit cards, have a longer period to
             charge-off 3
         o A longer charge-off period, 180 to 210 days, would be more appropriate for private
             education loans.

•     Loan modifications:
         o The OCC guidance "allows" for loan modifications such as interest rate reductions
            but is silent on a reasonable amortization period for such loan modifications.
            However, the guidance specifically discourages any extension of term.
         o In the absence of specific guidance for private education loans, banks rely on OCC
            guidance on account management and loss allowance guidance for credit cards, the
            written guidance on loan modifications (OCC 2003-1).
         o Under such guidance, a repayment period for a modified loan is 60 months,
            considerably shorter than the term for most education loans.
         o New guidance should make clear that lenders do not have to accelerate the term if
            they make an interest rate reduction or other loan modification. In fact, the guidance
            should allow extension of the term if that would allow borrowers to maintain
            amortizing payments.

    Credit card balances are required to be charged off after 180 days of delinquency.

                                                 Attaclunent-Page 3
                           Letter to the Honorable Sherrod Brown
                                                            Shahien Nasiripour, The Huffington Post
•   Forbearance and reaging:
       o Prudential regulations restrict the use of forbearance to 12 months over the life of a
           loan and require 12 months to elapse between periods of forbearance use. A loan
           may only be reaged once (meaning brought to a current status) in a loan modification
       o Targeted use of forbearance and reaging in loan modification programs should be
           allowed in addition to the limited use under prudential regulations. Loan
          modification programs, like Sallie Mae's 3-pay or rate reduction programs, rely on
           the use of forbearance and reaging to bring an account current after a borrower
           demonstrates willingness and ability to pay by making three consecutive payments.
       o The second, extended grace period should not count against the 12 month life of loan
           limit on the use of forbearance.

Note that if a loan is restructured through a loan modification program in response to a borrower
experiencing financial difficulty, it would most likely need to be classified as a ''troubled debt
restructure" or "TDR." For example, all loans modified through Sallie Mae's rate reduction
program are classified as a TDR. This classification results in the need to provision for life of
loan losses, a higher level than performing loans. These accounting standards apply to bank and
non-bank lenders and assure that probable losses are reflected in the financial statements. This
safety and soundness requirement should assure regulators that some flexibility in implementing
loan modification programs could not be used to inaccurately reflect the soundness of
institutions' finances. In fact, the accounting rules require that once a loan is classified as a
TDR, the life-of-loan provisioning approach would continue for the remainder of the loan term
even if the borrower emerges from their temporary financial hardship and demonstrates
consistent ability to meet their payment obligations. This requirement results in reserve levels
that would generally be in excess of the reserve levels required under the accounting guidance
for non-TDR loans.

                                       Attachment-Page 4

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