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NCHELP 2012 Spring Convention PowerPoint Presentation
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NCHELP 2012 Spring Convention

NCHELP 2012 Spring Convention

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NCHELP 2012 Spring Convention

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  1. NCHELP 2012 Spring Convention Private Student Loan Market May 2012

  2. PRIVATE STUDENT LOAN MARKET Private Credit Market Potential for Growth National Private Student Loan Originations* Volume by Year • CFPB March 2012 Report: • Outstanding student loan debt is $1TRN • Project on Student Debt: • Average student loan debt was $24,250 for Class of 2010 • College Board Trends in Student Aid 2011: • Private student loans only 7% of student lending in 2011 • From 2005-2008, private loans were 25% of student lending $Bn Source College Board Trends in Student Aid 2011 • Higher education costs outpace median household income • Increase in expected enrollment • Decrease in grants, aid, university endowment funds, home equity lines and credit cards • Budget Control Act of 2011 eliminates subsidies for graduate students and repayment incentives Notes * Based on estimates from the College Board from an annual survey of private lenders. For 2011, the College Board also relied on Student Lending Analytics to develop their estimates. Amounts are adjusted for inflation 2

  3. PRIVATE STUDENT LOAN MARKET Private Loans Can Help Fill $200Bn Funding Gap • Higher Ed funding gap traditionally filled by parental contributions • Also funded by other sources of consumer debt • Home equity loans • Credit cards • Private student loans can help fill the need 2011-2012 Estimated Sources of Funding for Higher Education Total Cost of Higher Education – $433Bn • U.S. annual cost of higher education approximately $433Bn in 2011-2012 AY • Federal Loans and Grants satisfy only half of funding at $224Bn • Private loans expected to account for approximately $9Bn • Annual funding gap of $200Bn Source College Board, Trends in College Pricing 2011; Department of Education Student Loans Overview FY 2013 Budget Request; National Center for Education Statistics 2012 3

  4. IndustryConsolidation • Rapid changes driving industry consolidation & acquisition • Portfolio sales & transfers • Outsourcing of administration & servicing • Sale of legacy administration & servicing IncreasedPrice Competition • For-profits offering low variable rate products • Access to low yielding bank depositor base • State agencies and not-for-profits in some cases unable to originate • Lack of variable rate financing options and low cost funding OriginationVolume Low &Funding Costs High • Private loan origination volume $8Bn in 2010-2011 • Down from $24Bn in 2007-2008 • Competing against Direct Lending and Pell Grants • Funding is costly in both tax-exempt and ABS markets • Initial parity levels up to 160% PRIVATE STUDENT LOAN MARKET Student Lending – Industry in Transition 4

  5. More ConservativeStructures,Collateral & Disclosure • Rating Agencies and investors more conservative • Better quality collateral • More overcollateralized conservative structures • Higher default assumptions • More disclosure Legislation Adds Uncertainty To Industry • Legislative developments impacting private loan originations: • Launch of Consumer Finance Protection Bureau (CFPB) • Know Before You Owe Act of 2012 • Durbin Bill and private student loan bankruptcy dischargeability • Dodd-Frank Act and other regulatory reforms PRIVATE STUDENT LOAN MARKET Student Lending – Industry in Transition (cont’d) 5

  6. Banks • Charter One • PNC • Suntrust • Wells Fargo • For-Profits • Sallie Mae • First Marblehead • Discover • Not-For-Profits • New Jersey HESAA • Massachusetts EFA • Iowa SLLC • Credit Unions PRIVATE STUDENT LOAN MARKET Private Student Loan Market Participants • New entrants have changed dynamics of private student loan market • Banks and for-profit entities with bank subsidiaries are key players in originating variable rate student loans • Not-for-profits transitioning away from historical FFELP platforms to originate fixed rate private student loans • Credit unions also entering private lending market to provide borrowers affordable products Originators 6

  7. PRIVATE STUDENT LOAN MARKET Consolidation of Student Loan Market Participants • Activity includes: • Whole Loan Portfolio Sales • Monetization of Servicing / Admin Fee Streams • Residual Interest Sales • Outsourcing of Servicing • Fundamental industry shift due to margin erosion & legislation • Consolidation and in some cases exit / suspension of private student lending • Chase and US Bank announced exits from private student lending • Chase to offer student loans only to existing clients • US Bank is exiting product entirely 7

  8. PRIVATE STUDENT LOAN MARKET Student Loan Products Highly Competitive • Products developed to meet borrower needs • But there are funding considerations Variable & Fixed RateProduct Pricing • For-profits offer variable rate loans priced as low as 1ML + 2.0% • State agency & non-profit offer fixed rate loans • Priced to compete against 7.9% Direct PLUS • Recently Sallie Mae introduced 5.75% fixed rate loan FundingConsiderations • Payment Structure – Full deferral, minimum $25, IO, or P&I • Current cashflowing products better suited to capital markets funding structures • Payment Term – 10, 15+ years repayment & grace / deferral options • Long payment terms lengthen maturity horizon of bonds & funding costs 8

  9. PRIVATE STUDENT LOAN MARKET Student Loan Issuance Volume Term Credit Facilities • Provide alternative long-term financing for variable rate loans • Direct placement • Requires one rating • Single-A level • Prepayable at any time • No prefunding and no recycling Private Student loan Issuance in 2011 – $3.4Bn • Tax-exempt market funded mostly fixed rate loans • Taxable LIBOR FRN market funded mostly variable rate loans 2011 Private Student Loan Issuance Total Private Student Loans – $3.4Bn Source: Morgan Stanley 9

  10. PRIVATE STUDENT LOAN MARKET Conservative Collateral and Structural Trends Collateral More Robust • More robust collateral for new originations and securitizations • Strong FICOs, more co-signers, fewer for-profit schools, fewer DTC loans, and shorter repayment terms Starting Parity Can Be High • Starting parity levels for tax-exempt structures starting at 105% to as high as 160% based on collateral, ratings, and nature of moral obligation, if applicable • Taxable LIBOR FRN structures can feature starting parities of 135% 10

  11. PRIVATE STUDENT LOAN MARKET Rating Agency Update • Overall effect includes: • Conservative default, recovery & prepay assumptions • Higher financing costs & equity contribution due to lower advance rates • More onerous and costly process for time allocation, staffing & resources • Requirements change from one transaction to next • Increasingly Conservative Stance • Negative outlook on sector • Unemployment rate greater than 8% • High borrower debt and declining income • Longer ratings process and timeline • Dodd-Frank increases liability • More data required and verification of data • 17(g)-5 requires all communications with Rating Agencies be available online • Not-for-profits and state agencies with non-SPV structures may be treated as exempt depending on Rating Agency • Strong historical data required • Otherwise, use more conservative industry-wide data • Negatively affects structure • Increased servicer disclosure and backup servicer requirements 11

  12. PRIVATE STUDENT LOAN MARKET Investor Update Continued Focus on Transparency & Continuing Disclosure • Investors require more information and disclosure • At time of issuance and ongoing • At issuance requests include • Intex modeling capabilities • Loan performance trends • Historical default rates, recoveries & prepayment rates • Historical volume trends & viability of future originations • Loan level data or repline data • Borrower benefit terms, if applicable • Ongoing requests include • Accessible & frequent remittance reports • Updated monthly rather than quarterly 12

  13. PRIVATE STUDENT LOAN MARKET Consumer Finance Protection Bureau (CFPB) • CFPB is the key legislative development in 2012 • Focus on consumer risk Description Impact Mandate: Provide ConsumersInformation onFinancialProducts • Created by Congress & launched in 2011 • Active federal oversight over nonbank consumer financial services providers • Authority over private student lenders and for-profit schools • Also has enforcement powers • Private loan industry subject to increased regulatory oversight StudentLendinga Key Focus Area • November 201 - Request for Information Regarding Private Education Loans and Private Education Lenders • March 2012 – Began taking complaints from private student loans borrowers • Under CFPB Review – For-profit schools and collection agencies • Congressional report due in July of 2012 • May lead to industry changes Know BeforeYou Owe Act and CFPB Initiative • Bill to Amend Truth in Lending Act & HEA– Require lenders to obtain certification from schools & increase disclosure of federal loan alternatives • Model Format – CFPB working with ED to publish model format for schools to communicate financial aid offers • More administrative requirements for lenders and schools • Longer timeline for loan acceptance & disbursement 13

  14. PRIVATE STUDENT LOAN MARKET Recent Legislative Developments Description Impact • Regulatory and legislative environment creates uncertainty in market • Higher loss and lower recovery assumptions • Increased financing costs for private student loans Dischargeabilityin Bankruptcy • Sen. Dick Durbin, D-Ill. advocating Fairness for Struggling Students Act • Allow borrowers to wipe out private student loan debt in bankruptcy proceedings • Adverse impact on securities liquidity • Impacts primary market pricing and secondary market trading Volcker Rule • Restricts banks & affiliates from proprietary trading • - Intended to exempt municipal securities • But does not include agencies or authorities of States or political subdivisions • Results in estimated 40% of municipal securities excluded from exemption • Tax uncertainty lowers market demand and raises borrowing costs Tax-Exemption • Proposals to reduce/eliminate tax exemption of muni bond interest • Especially limit value of muni securities interest for high-income earners • - 28% cap on deductions and exclusions AMT • Senate & House at odds on AMT provisions in transportation funding bill • Senate version temporarily exempts private-activity bonds from AMT • May boost market demand and lower yields 14