loan rehabilitation and related collection cost issues

2015 NCHER KNOWLEDGE SYMPOSIUM

November 4-6, 2015 San Antonio, TX

Loan Rehabilitation and Related

Collection Cost IssuesModerator: Lynn Heineman, ACT

Presenters: Tim Fitzgibbon, NCHERDoug St. Peters, Navient

Phillip Cervin, TGLen Hyde, ECMC

1



What We Will CoverTim Fitzgibbon – NCHER• BBA of 2013 – Cuts to GA rehab retention,

mandatory assignment if no rehab buyers• July 1, 2014 New Regulations – new R&A rules, $5

minimum monthly payment, AWG release• July 10, 2015 DCL regarding collection costs• Pending Litigation



What We Will CoverDoug St. Peters – Navient• Changes to the loan rehabilitation market• Ratings downgrade of FFELP Asset Backed

Securities has reduced value of rehab loans• Considerations to sell at discount or assign to ED



What We Will CoverPhillip Cervin – TG • Performance of post-7/1/14 rehabilitation loans,

by:• Step 1 (15%) or Step 2 (R&A)• Monthly payment amount• Age of account• Use of ACH• Loan Balance• If delinquency was cured



What We Will CoverLen Hyde – ECMC • Revisiting the impact of the 2014 rehabilitation

regulatory changes:• Changes in setup and retention rates• Impact on payment amounts• Step 1 (15%) vs. Step 2 (R&A) percentage

• Treatment of 60 day collection cost rule



Bipartisan Budget Act of 2013• To be used as a pay-for to reach a budget

agreement, the BBA of 2013 made severe cuts to revenues guaranty agencies receive for successfully rehabilitating a defaulted student loan.• GA retention reduced to zero from 18.5%.• Collection costs reduced to 16% from 18.5%• Provision requiring the assignment to ED for

rehabilitation loans that cannot be sold to a private lender.



July 1, 2014 New Regulations• Redefined the calculation for determining a

“reasonable and affordable” payment to be tied to income and allowed to be as low as $5 per month.• Step 1 caps payment at 15% of AGI, as defined in

regulations.• Step 2 allows borrower to complete a financial

disclosure form that can be used by the GA/PCA to calculate a potentially lower R&A amount.

• Requires the release of AWG after 5th qualifying payment.



July 10, 2015 Dear Colleague Letter• “In this letter we restate and clarify the rules that

bar a guaranty agency from charging collection costs…”• “A guaranty agency cannot charge collection costs

to a defaulted borrower who, within the 60-day period following the initial notice, enters into a repayment agreement, including a rehabilitation agreement, and who honors that agreement.”• “Few borrowers in the Department's portfolio

enter into repayment within that initial period.”



July 10, 2015 Dear Colleague Letter• In adopting the FFELP regulation in 1992, the

Department:• “expressly considered guaranty agencies' years of

experience under the Federal tax refund offset program;” • “required a guaranty agency to provide the borrower an

initial notice and opportunity to resolve the debt in all circumstances, not just for offset purposes:” and • “required the guarantor, for the first time, to charge

collection costs.”



July 10, 2015 Dear Colleague Letter• NCHER is gathering data from GA’s to show that ED

reviewers were very much aware of the “standard” application of this provision by GA’s over two decades and hundreds of GA reviews.• OMB Circular A-133 was changed in 2010 to state

that “A guaranty agency may choose not to charge collection costs to a borrower who enters into a voluntary repayment agreement with the guaranty agency during the 60-day period after notice from the guaranty agency…”



Litigation Tied to New DCLTwo related lawsuits, both involving USA Funds.• Bryana Bible v USA Funds: sent back to the District

Court for further discovery and a decision on class certification. • USA Funds v U.S. Department of Education, alleging

ED failed to follow proper administrative procedures in issuing new regulations: pending a motion to dismiss filed by ED.



Assignment of Rehabs to ED



Litigation Tied to New DCL



Rehabilitation Funding marketQuick review

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• 4th qtr 2008 Financial liquidity crisis - rehab funding market stopped• 1st qtr 2009 Limited funding, but with steep discounts• 4th qtr 2009 Market buyers increased, discounts decreased• 2nd qtr 2010 Even more buyers lead to rehab purchase premiums• 2010-2015 Funding is “normal”• 7/1/2014 Department of Education new regs., including ability to assign

rehabilitations if no buyer (from the 2013 Bipartisan Budget Act).

• 3rd qtr 2015 Bond rating agencies downgrade rehab securitization funds, funding becomes more challenging.



Rehabilitation Loan to Maturity

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The various income-based repayment plans extend life of loan to 25 years

Securitized asset @ 20 years to maturity

20 years in months opt of IBR

Borrower 1 240 240Borrower 2 240 240Borrower 3 240 240Borrower 4 240 240Borrower 5 240 300Borrower 6 240 240Borrower 7 240 240Borrower 8 240 300Borrower 9 240 240Borrower 10 240 240average 240 252

years 20.00 21.00



Rehabilitation funding market today

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• Previous market participants are stopping further purchases• Lenders still purchasing are only doing so at a discount• Typical discount at 3%• How do lenders look at loans (segments) (90.8%-101%)

Stafford/PLUS/SLS pre 10/1/07 Stafford/PLUS post 9/30/07 Consolidation pre 4/1/06 between 4% and 5% Consolidation pre 4/1/06 between 5% and 6.5% (best)Consolidation pre 4/1/06 6.5% and greater Consolidation pre 4/1/06 below 4% Consolidation between 4/1/06 and 10/1/07 Consolidation post 9/30/07 (worst)



Rehabilitation selling options

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1. Selling to open market at a discount2. Sell to Dept. of Ed (if no buyer)

Open Market Dept of Ed "break even"Principal 10,000$ 10,000$ 10,000$ Interest 600$ 600$ 600$ Collecton cost (16%) 1,696$ 1,696$ 1,696$ TOTAL 12,296$ 12,296$ 12,296$

retention 2,296$ 1,696$ 2,296$ Less: 3% discount (369)$ (600)$ -4.88%net retention 1,927$ 1,696$ 1,696$

15.67% 13.79% 13.79%

97.0% 95.1%



TG Stats on 15% and R & A Rehabs

Month of Rehab Sale Type of Rehab # Sold

% Delinquent After 60 Days

in Repayment

MAR15

REHAB 15% 728 30.9

REHAB R & A 82 18.3

APR15

REHAB 15% 1,324 32.9

REHAB R & A 161 36.0

MAY15

REHAB 15% 1,408 35.3

REHAB R & A 169 32.5

JUN15

REHAB 15% 1,509 31.7

REHAB R & A 236 28.4




Month of Rehab Sale Monthly Rehab Payment # Sold % Delinquent After 60

Days in Repayment

MAR15

$5.00 554 33.0$6 to $25 52 25.0$26 to $50 199 24.6$51 to $100 193 25.4

$101 to $150 105 21.9$151 to $200 67 20.9

More Than $200 144 18.1

APR15

$5.00 1,027 37.5$6 to $25 61 29.5$26 to $50 111 26.1$51 to $100 131 27.5

$101 to $150 92 19.6$151 to $200 66 15.2

More Than $200 141 16.3

MAY15

$5.00 1,042 40.1$6 to $25 68 32.4$26 to $50 93 24.7$51 to $100 146 28.8

$101 to $150 101 21.8$151 to $200 75 17.3

More Than $200 176 19.3

JUN15

$5.00 1,195 34.4$6 to $25 96 28.1$26 to $50 107 29.9$51 to $100 148 23.6

$101 to $150 86 24.4$151 to $200 67 28.4

More Than $200 156 16.7




Month of Rehab Sale Age of Account # Sold % Delinquent After 60

Days in Repayment

MAR15

1 Year or Less 288 29.21 to 2 Years 476 31.52 to 3 Years 250 24.03 to 4 Years 155 23.2

More Than 4 Years 145 18.6

APR15



MAY15



JUN15






Month of Rehab Sale Rehabilitated with ACH? # Sold % Delinquent After 60

Days in Repayment

MAR15No 492 19.9

Yes 845 30.9

APR15No 528 25.2

Yes 1,116 34.9

MAY15No 528 24.8

Yes 1,178 37.6

JUN15No 496 24.8

Yes 1,373 32.8




Month of Rehab Sale Rehab Balance # Sold % Delinquent After 60

Days in Repayment

MAR15

$5,000 or less 130 30.8$5,001 to $10,000 153 28.1

$10,001 to $20,000 214 33.2$20,001 to $30,000 99 28.3$30,001 to $49,999 117 24.8$50,000 to $74,999 61 24.6$75,000 to $99,999 16 25.0$100,000 or more 20 50.0

APR15

$5,000 or less 248 28.6$5,001 to $10,000 327 30.3




TG Stats on 15% and R & A Rehabs (continued)

Month of Rehab Sale Rehab Balance # Sold % Delinquent After 60

Days in Repayment

MAY15

$5,000 or less 251 31.1$5,001 to $10,000 342 36.8


JUN15

$5,000 or less 313 29.4$5,001 to $10,000 342 32.7





# DelinqCured? Cured by Forb?

No Yes No Yes% % % %

Delinq Begin Monthly Payment

MAY15

$5.00 205 61.5 38.5 68.8 31.2$6 to $25 18 72.2 27.8 83.3 16.7

$26 to $50 14 50.0 50.0 71.4 28.6$51 to $100 19 57.9 42.1 73.7 26.3

$101 to $150 6 66.7 33.3 66.7 33.3$151 to $200 7 57.1 42.9 57.1 42.9

More Than $200 12 50.0 50.0 50.0 50.0

JUN15

$5.00 739 72.1 27.9 76.5 23.5$6 to $25 34 88.2 11.8 88.2 11.8

$26 to $50 29 69.0 31.0 79.3 20.7$51 to $100 58 67.2 32.8 75.9 24.1

$101 to $150 30 66.7 33.3 70.0 30.0$151 to $200 22 86.4 13.6 86.4 13.6

More Than $200 46 69.6 30.4 84.8 15.2

JUL15

$5.00 381 82.9 17.1 86.9 13.1$6 to $25 21 90.5 9.5 100.0

$26 to $50 20 90.0 10.0 90.0 10.0$51 to $100 34 94.1 5.9 97.1 2.9

$101 to $150 16 100.0 100.0 $151 to $200 13 61.5 38.5 69.2 30.8

More Than $200 34 85.3 14.7 91.2 8.8



Impact of Income Based RepaymentPre 7/1/2014 Post 7/1/2014

Inco

me

Inco

me

Balance Balance



Rehabilitation Payment Trends

Pre 7/1/2014 Post 7/1/20140%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

27%

4%

37%

6%

24%

4%10%3%

79%

4%

> $200$100 - $200$50 - $100$25 - $50$5 - $25$5

% o

f N

ew R

ehab

Arr

ange

men

ts

$109 average $27 average



Rehabilitation Completion Rate Trends

Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Oct-150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

22%32% 38% 41% 47% 51% (est)

39%34%

33% 32%32% (est)

32% (est)9%7%

5% 5% 5% (est)

5% (est)

3% 4% 3%

Month 5 (150 Days)Month 4 (120 Days)Month 3 (90 Days)Month 2 (60 Days)Month 1 (30 Days)

% o

f Se

tups

Com

plet

ed

76%79% 80% 81%

88% 90%

Pipeline Retention Rates

Pay Count 0 to 2 (est)

Pay Count 2 to 3

Pay Count 3 to 4

Pay Count 4 to 5

Pay Count 5 to 6

Pay Count 6 to 7

Pay Count 7 to 8

Pay Count 8 to 9

30%

40%

50%

60%

70%

80%

90%

100%

75%72%

68%65% 63% 62% 60% 59%

90% 88%85% 84% 83% 81% 81% 80%

Pre Reg ChangePost Reg Change

% o

f Re

habs

Rem

aini

ng in

Pip

elin

e



Question & Answer Session

loan rehabilitation and related collection cost issues

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