[July 28, 2014]

Fitch: US Student Loan Sales May Raise ABS Servicer Risk

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 these assets.

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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