Woodstock Institute and the National Community Reinvestment Coalition, along with 13 partner organizations, submitted a comment letter to the Federal Deposit Insurance Corporation (FDIC) today raising concerns about Sallie Mae Bank’s banking and lending practices. Sallie Mae Bank is falling short on its Community Reinvestment Act (CRA) obligations. This is largely due problems with its “non-traditional” private student loans, which are loans to college students with low credit scores, particularly those who attend for-profit colleges. In 2008, Sallie Mae Bank announced that it would discontinue making these type of loans, but they owned and serviced non-traditional loans during its CRA examination period.
For-profit colleges are under fire because students often graduate with large amounts of debt and few job opportunities, and because for-profit colleges misrepresent the quality of their programs. Recent Woodstock Institute research shows that for-profit college students often struggle with higher amounts of loans compared to their non-profit and public student counterparts with similar demographic and financial characteristics. Unaffordable debt, combined with poor job prospects, result in disproportionately high default rates for for-profit student loan borrowers. The default rates for non-traditional loans are higher than the rates for traditional loans. In 2013, 17 percent of non-traditional loans were in forbearance or were over 90 days delinquent compared to seven percent of traditional loans.
Sallie Mae Bank encouraged students to use its prepaid debit cards to receive federal student aid disbursements. These cards came with a variety of fees that drained students’ federal financial aid.
Under the CRA, banks are encouraged to meet the credit needs of low- and moderate-income people. Over 500 complaints about Sallie Mae Bank have been submitted to the Consumer Financial Protection Bureau (CFPB) and state and federal law enforcement have investigated Sallie Mae Bank repeatedly. Sallie Mae Bank has already received a “Needs to Improve” rating on three CRA examinations, but it appears that the bank has no incentive to improve. Sallie Mae Bank’s CRA activity is currently assessed entirely on its performance in and around Salt Lake City, Utah, despite having a national lending and deposit footprint. Woodstock Institute urges the FDIC to hold Sallie Mae Bank accountable for adequately serving the credit needs of student loan borrowers in low- and moderate-income communities and to use its safety and soundness authority to require changes in bank management and limits on its ability to continue growing and offering securities backed by predatory student loans.