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June 24 (The following statement was released by the rating agency)
Servicers of U.S. FFELP student loan ABS have done an admirable job of keeping net claim reject rates in check, though whether they can continue that trend remains in question, according to Fitch Ratings.
Since the termination of the Federal Family Education Loan Program in 2010, FFELP loan servicers have had to endure a constantly changing environment. Among their numerous challenges has been keeping net claim reject rates under control in order to preventing sizeable ABS losses. Though they have met this challenge with success thus far, future sustainability is still uncertain.
Servicer loss, exemplified by net claims rejects, is a key rating driver that could contribute 20%-30% of stressed losses for 'AAA' rated FFELP ABS. The higher the amount of rejected claims, the more vulnerable FFELP ABS would be to higher losses. A declining FFELP portfolio coupled with ongoing sequestration and pending changes to direct loan servicing performance measurements and future allocations presents ongoing challenges to the industry, particularly small not-for-profit servicers, who due to size, may not fare as well as their larger counterparts..
'A student loan servicer's net claims reject rate represents their capability to service a loan as required and represents the true loss to an ABS trust, so the lower they can keep the number of rejected claims, the better,' said Managing Director Michael Dean. The good news is that student loan servicers are keeping rejected claims low thus far.
Factors that could lead to a spike in rejected claims would likely be one-time events like a servicing transfer or workforce reduction that create a backlog in claims filing. Fitch has already baked the potential for these disruptions into its analysis, with current data supporting Fitch's assumptions and stress levels for servicer loss. 'Even in the event of an outlier SLABS transaction where the net claims reject rate exceeds our base case threshold, it would still remain within Fitch's stress range,' said Dean.
'FFELP Servicers Get a Passing Grade' is available at 'www.fitchratings.com' or by clicking on the below link.
Link to Fitch Ratings' Report: FFELP Servicers Get a Passing Grade