Integrated Portfolio Management for Guaranty Agencies

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Integrated Portfolio Management for Guaranty
Agencies

• Assuring The Public Interest Through
• Industry Best Practices
• Jon D. Shaver, Ed.D.
• EVP and Vice Chairman
• DCS, Inc.

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Guaranty Agency Role in the FFEL Program

• Section 1078(c)(2) of the HEA, as amended
• An agreement between the Secretary and a
  guaranty agency
• shall set forth such administrative and
  fiscal procedures as may be necessary
• to protect the United States from the risk of
  unreasonable loss thereunder,
• to ensure proper and efficient administration of
  the loan insurance program, and
• to assure that due diligence will be exercised in
  the collection of loans insured under the
  program

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What is Fiduciary Duty?

• A duty to act for someone elses benefit,
  while subordinating ones personal interests to
  that of the other person. It is the highest
  standard of duty implied by law (e.g. trustee,
  guardian).1
• 1Blacks Law Dictionary, Sixth Edition.

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What Does The Guarantor Do?
Everyone in the guaranty agency has a role in
creating and effectively managing federally
insured student loan assets.
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What Is Integrated Portfolio Management?

• def A structured systematic organizational
  strategy and plan to use best practices in
• default aversion and resolution
• to maximize performance of loans outstanding,
• to return defaulted loans to a performing status,
  and
• to minimize the trigger rate.

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Integrated Portfolio Management Illustrated
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This Is What The Industry Knows Best
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Key Best Practices in Default Aversion

• Structured partnering efforts with
  schools/lenders/servicers
• Early pre-postsecondary educational financial
  planning
• Pre-loan and exit counseling
• Continuous communication
• In-school, grace, and in-repayment debt
  management education
• Direct contact, information, and counseling in
  delinquency
• Multi-mode information delivery
• Print and other media, in-person, and web-based
• Portfolio scoring and multiple differentiated
  methods appropriate to various strata
• A B alternatives and analyses of
  effectiveness

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How Are We Doing In Default Aversion?
Overall, the industry is doing better but there
is still wide variability and room for
improvement.
2001 Cohort Default Rates by Guaranty Agency
National Cohort Default Rates
Source US Department of Education
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What About Cure Rates?
Overall, improving performance but variability of
results. Preliminary evidence indicates wide
variability between guarantors in the proportions
of cash, deferral, and forebearance cures.
2002 Selected GA Cure Rates1
1Source Guaranty Agency Interviews Agency Press
Releases Greentree Gazette Awaiting
the Storm, (5/02)
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Key Best Practices In Default Resolution

• Organization strategy and policy requires
• Clear asset management philosophy (top-down)
• Continuous tracking and assessment of public
  policy
• Alignment of organizational behavior and public
  policy
• Performance-based contracting to align policy and
  internal/external behavior
• Performance measurements and incentives must
  correlate fully with desired collection behavior
  and results produced
• Frequent and consistent communication of
  performance metrics
• Use of internal and external data to support
  decision-making
• Use of benchmarking and competition (internal and
  external) to drive desired results

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Key Best Practices In Default Resolution

• Portfolio strategy and management must blend
• Portfolio segmentation and appropriate tools and
  methodsBALANCED COLLECTIONS
• Forecasting claims trends
• Target recovery rate and mix
• Results management
• Borrower-centrism
• Risk management (trigger rate optimization)
• Revenue and cash flow modeling
• Fiduciary and mission consistency
• Repayment tools that minimize recidivism
• Acceleration of defaulted asset handling
• Avoid lost revenue due to Treasury Offset

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How Are GAs Doing At Default Resolution?
As with default aversion, there is significant
variability among guarantors with respect to
overall recovery of defaulted student loans.
Eight Large Guaranty Agency Recovery Rates
GA Weighted Average
Source US Department of Education Guaranty
Agency Recovery Totals Reports 20002004
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How Are GAs Doing Post-Default Resolution?
AWG and rehabilitation show significant growth
while consolidation has declined. Consolidation
still accounts for more than half of all
guarantors default resolutions.
Source US Department of Education Guaranty
Agency Recovery Totals Reports 20012004
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How Are You Doing Post-Default Resolution?
Reauthorization will drive change. The only
questions are how soon and how fast?
10 Largest Guarantor Default Portfolios
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Default Aversion/Default Collections Summary

• Increased focus on default aversion among
  guarantors--results are promising but there is
  significant room for improvement
• Best practices are known at the top line but
  application and results vary significantly
• Defaulted loan recovery rates vary widely as do
  recovery practices and resolution methods
• Some differences are explained by variable
  portfolio quality
• Some differences are explained by different
  recovery strategies and practices
• There is no current consensus on what constitutes
  post-default best practices

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What Are The Requirements To Implement?

• Organizational Policy and Strategic Commitment
• C level senior executive commitment to
  excellence and to deployment of best practices in
  the organization
• Commitment of one more essential C level
  executivethe Collection Manager
• Comprehensive view of portfolio management
• Internal systems for accountability

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Requirements To Implement?

• Process management and execution
• Understand best practices in default aversion and
  collection and commitment to implementation and
  training
• Understand pre- and post-default portfolio
  segmentation and asset differentiation
• Measurable performance objectives and plans to
  achieve results
• Use of internal and external data to inform
  decision-making
• Commitment to continuous improvement of business
  processes and support systems
• Periodic audits of processes and results

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Why Do Integrated Portfolio Management?

• Five BIG Reasons
• Fiduciary duty
• Organizational mission
• Optimize services to borrowers and business
  partners
• Minimize financial risk
• Maximize revenue

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Conclusion

• Integrated Portfolio Management can help
  guarantors
• Focus effortsfrom top to bottomand manage
  federally insured loan assets and the effects of
  new provisions in the HEA
• Achieve core mission excellence and execute
  fiduciary duty
• Achieve significant financial and programmatic
  benefits
• Deliver high-quality benefits to borrowers, to
  the government, and to business partners
• Manage and reduce financial risk

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Questions?

• For further information, contact
• Jon D. Shaver, Ed.D.
• [phone]
• jshaver_at_dcswins.com