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Friday, July 20, 2012 - 12:13

CFPB Study: Private Student Lending Experienced A Boom/Bust

WASHINGTON (MNI) - The U.S. Consumer Financial Protection Bureau said in a report Friday that private student loan volume experienced a boom and then a bust in the runnup to the crisis with many borrowers not clearly understanding the contracts they were signing.

"The financial institution PSL market grew rapidly over the last decade and just as rapidly receded," the report said, noting that lending by financial institutions grew from less than $5 billion in 2001 to over $20 billion in 2008 before receding back to $6 billion in 2011.

The CFPB said outstanding private student loan debt currently stands at about $150 billion.

The report said that from 2005 to 2007 "lenders increasingly marketed and disbursed loans directly to students, reducing the involvement of schools in the process," adding that the percentage of loans made to students without school involvement grew from 10% to over 70%.

"As a result, many students borrowed more than they needed to finance their education," the report said. In addition, lenders increased their lending activity to borrowers with lower credit scores.

The report also said that many borrowers didn't fully understand their options and many opted for private student loan products even though they were eligible for federal loans with better terms.

"Richard Cordray, the Director of the CFPB, asks that Congress enhance the role of schools in the private student loan origination process, examine the appropriateness of the bankruptcy discharge standard, and modernize the regulatory framework to ensure a competitive, level playing field where consumers fully understand their debt obligations and lenders have appropriate data to make underwriting decisions," the report said.

In a statement responding to the report, the American Securitization Forum noted that the report acknowledged that underwriting standards have improved since 2008 and that now 90% of student loans are co-signed.

The ASF also said that it worked with Congress to pass the Higher Education Opportunity Act in 2008 which improves disclosure standards, helping borrowers understand the terms of the loan and that private student loans should not replace federal lending but rather act as a bridge between federal money and higher school costs.

The study was done using data from a variety of sources, including lenders, the Department of Education and financial institutions and can be found on the CFPB website.

** MNI Washington Bureau: 202-371-2121 **

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