|[July 28, 2014]
Fitch: US Student Loan Sales May Raise ABS Servicer Risk
NEW YORK --(Business Wire)--
Bank sales of Federal Family Education Loan Program (FFELP) loan
portfolios could increase ABS (News - Alert) issuance and intensify risks for small,
not-for-profit (NFP) servicers and bondholders, Fitch Ratings says.
Wells Fargo & Company transferred its entire $9.7 billion FFELP loan
portfolio to held-for-sale during the second quarter. And CIT Group sold
its $3.6 billion portfolio to Nelnet in April.
In our view, most future securitizations are likely to be concentrated
with large non-bank servicers, who are also the traditional FFELP
buyers. Of the 13 Fitch-rated FFELP deals that closed in first-half
2014, 10 were issued by Navient Corporation, Nelnet Inc. and the
Pennsylvania Higher Education Assistance Agency (PHEAA).
As some portfolio acquisitions include servicing transfers, we believe
some small NFPs could experience lower account volume and profitability.
These servicers are already facing sustainability issues, as some may
not have the scale to weather the pressures brought by the Budget
Control Act of 2011 and the termination of FFELP. They may also be
pressured in the near term by rules proposed by Congress that would
establish a common set of performance metrics, incentive pricing for
servicers and allocate accounts to NFPs that meet the requirements.
Shortfalls in account volume and account profitability may force smaller
servicers to pursue expense reductionstrategies, including headcount
reduction, which could put pressure on servicing quality. This presents
risk to bondholders if the servicing quality doesn't meet certain
standards and leads to reduced claim reimbursement for defaults. While
Fitch expects further consolidation in the servicer industry to
continue, consolidation could also partly mitigate this risk, as larger
servicers tend to be better positioned to weather these challenges.
In our view, FFELP portfolio acquisition is likely to increase new ABS
issuance. Fitch believes banks have historically opted to fund these
assets with deposits rather than ABS. As these portfolios change hands,
we expect the non-bank entities will look to the ABS market to fund
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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