Rehabilitation of Defaulted FFELP Student Loans: Progress and Prospective

1
Rehabilitation of Defaulted FFELP Student
LoansProgress and Prospective

• Dick George, President and CEO
• Great Lakes Higher Education Corporation and
  Affiliates
• Amy Kerwin, Chief Guaranty Officer
• Great Lakes Higher Education Corporation and
  Affiliates
• Jon Shaver, COODiversified Collection Services,
  Inc.
• Hal Leach, President
• Diversified Collection Services, Inc.

2
Current Default Resolution Methods

• Voluntary Methods
• Payment in full
• Compromise
• Consolidation (FFEL or WD Ford)
• Rehabilitation
• Involuntary Method
• Administrative Wage Garnishment

3
Which Method Is Best?

• Best for whom?
• Borrower
• Guarantor
• Government
• Lender/Servicer
• Using borrower-centric criteria, rehabilitation
  is best
• Reestablishes regular repayment behavior
• Results in expungement of derogatory credit by
  Guarantor
• May result in waiver of collection costs
• Reestablishes eligibility for Title IV
  participation

4
How Does Rehabilitation Work?

• Standard Rehabilitation
• Requires defaulted borrower to make 12
  consecutive timely payments and complete an
  agreement to rehabilitate
• After qualifying period, loan is purchased by a
  lender
• Qualifying payments are calculated as an
  amortizing payment (typically 1.2 of outstanding
  PI)
• Ensures that the loan will fully amortize during
  the 108 month period following qualifying period
• Previously consolidated loans will fully amortize
  during the remaining applicable term

5
What Are The Results With Standard Rehabilitation?

• In reviewing actual defaulted loan standard
  rehabilitations completed by various guaranty
  agencies and ED
• Average loan balances are in the 6,000 to 7,000
  range
• Average qualifying payments are 72 to 84 per
  month
• Thousands of loans are rehabilitated annually
  resulting in return to serviceability and
  reducing losses to the government

6
When Standard Rehabilitation Doesnt Fit The
Borrower

• Income Sensitive Rehabilitation
• Offered by only a few Guarantors
• Requires 12 consecutive timely payments and a
  signed agreement to rehabilitate
• After qualifying period, loan is purchased by a
  lender
• Qualifying payments are less than 1.2 of
  outstanding PI but usually more than negative
  amortization
• Monthly payment will increase (perhaps
  significantly) following qualifying period
• Payment after rehab must be sufficient to ensure
  that the loan will fully amortize during the 108
  month period following qualifying period or on
  the term of the consolidation loan
• Average balances of 20,000-25,000

7
Shortcomings of Standard and Income Sensitive
Methods

• Standard
• Not as feasible for high balances
• above 10,000
• Income Sensitive
• Borrower is betting on a material change of
  financial circumstances in order to make higher
  post-rehabilitation monthly paymentsnot
  necessarily a good bet
• Does not result in liquidation of that portion of
  default portfolios containing high balance loans

8
Why Not Consolidate Higher Balance Loans?

• Offers reduced monthly payments over an extended
  period of time
• Greater affordability
• Applicable to higher balances
• Both graduated and extended payment terms
  available
• Reestablishes Title IV eligibility
• Does not offer deletion of derogatory credit
  entry
• Does not offer waiver of collection costs
• Does nothing to address the underlying reason for
  borrowers default behavior
• Provides no real service to borrower to assist
  with future default avoidance

9
Relative Sample of Portfolios
10
Great Lakes Challenge

• April 2001, Great Lakes instructed its PCAs that
  its collection focus would be rehabilitation
• Rehabilitation incentivized
• Collection costs waived after qualifying period
• Consolidation disincentivized

11
Impact of Change in PCA Incentivization
12
Impact of Change in PCA IncentivizationCollection
Program Type as a Percentage of Total
RecoveriesGuarantors with the 10 Highest Total
Recoveries
13
Rehabilitation Results to Date
14
High Balance Accounts Not Resolvable via Standard
Rehabilitation Methods
15
High Balance Accounts Not Resolvable via Standard
Rehabilitation Methods
16
Balance Sensitive Rehabilitation

• Balances gt10,000 at time of rehabilitation
  agreement
• Combines payment terms and schedule of a
  graduated or extended consolidation loan and
  requires 12 consecutive on-time payments at that
  level during a rehabilitation qualifying period
• During the 30 days following the purchase of the
  rehabilitated loan, the borrower consolidates
  with the same lender in order to establish a
  payment level for the term appropriate to the
  outstanding balance

17
Benefits of Balance Sensitive Rehabilitation

• Borrowers derogatory credit entry is expunged
• Borrower has established an affordable, workable
  repayment level that can be tested under
  supervision during the qualifying period
• Collection costs may be waived or reduced
• Large dollar volumes can be liquidated from
  default portfolios
• Costs to the government are reduced
• Lenders and servicers are provided with quality
  long-term assets to manage

18
A Comparison of Alternatives
19
BSR Summary

• Offers the most affordable repayment option to
  defaulted borrowers
• Permits borrowers to establish repayment behavior
  pattern during qualifying period that is not
  altered upon rehabilitation
• Liquidates large balances in portfolios that have
  been only possible to resolve to date with
  consolidation

20
Who Is Doing Balance Sensitive Rehabilitation?

• Great Lakes
• ED
• Others are in process

21
Further Information

• Dick George, President and CEO
• Great Lakes Higher Education Corporation and
  Affiliates
• [phone]
• rgeorge_at_glhec.org
• Amy Kerwin, Chief Guaranty Officer
• Great Lakes Higher Education Corporation and
  Affiliates
• [phone]
• akerwin_at_glhec.org
• Jon Shaver, COO
• DCS, Inc.
• [phone]
• jshaver_at_dcswins.com
• Hal Leach, President
• DCS, Inc.
• [phone]
• hleach_at_dcswins.com

22
THANK YOU!

• Dick George, President and CEO
• Great Lakes Higher Education Corporation and
  Affiliates
• Amy Kerwin, Chief Guaranty Officer
• Great Lakes Higher Education Corporation and
  Affiliates
• Jon Shaver, COODCS, Inc.
• Hal Leach, President
• DCS, Inc.