Docstoc

Enter Session Title Here

Document Sample
Enter Session Title Here Powered By Docstoc
					Rehabilitation of Defaulted
   FFELP Student Loans:
 Progress 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, COO
 Diversified Collection Services, Inc.
 Hal Leach, President
 Diversified Collection Services, Inc.

         2003 Debt Management Conference
           Current Default
         Resolution Methods
   Voluntary Methods
     Payment in full
     Compromise

     Consolidation (FFEL or WD Ford)

     Rehabilitation

   Involuntary Method
       Administrative Wage Garnishment


                       2003 Debt Management Conference
        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

                                 2003 Debt Management Conference
            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
        P&I)
         • 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

                               2003 Debt Management Conference
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

                           2003 Debt Management Conference
When Standard Rehabilitation
 Doesn’t 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
        P&I 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

                                 2003 Debt Management Conference
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 payments—
        not necessarily a good bet
   Does not result in liquidation of that
    portion of default portfolios containing
    high balance loans
                           2003 Debt Management Conference
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



                                2003 Debt Management Conference
Relative Sample of Portfolios
                Relative Sample of Guarantee Agencies and Dept. of Education (ED) Portfolios

               Guaranty Agency 1             Guaranty Agency 2            Dept. of Education

                                                                                 0%
                      1%                            1%                           1%             5%
  100%                               12%
                      2%                            2%            14%            5%             4%
                      8%                            7%
   90%
                                     9%             13%                          19%            15%

                      18%                                         9%
   80%
                                                    8%                                                60000 and above
                                     23%                                         10%
   70%                10%
                                                                  22%                                 40000-59999.99

                                                                                                32%
   60%                                                                                                20000-39999.99

                                                                                                      10000-19999.99
   50%                                                            22%
                                     26%
                                                                                                      7501-9999.99
                      61%                           69%                          65%            11%
   40%
                                                                                                      7500 and below
                                                                  9%
   30%                               9%


   20%                                                                                          34%

                                     21%                          25%
   10%


   0%
         % of Total     % of Total    % of Total     % of Total    % of Total      % of Total
         Number of      Dollars of    Number of      Dollars of    Number of       Dollars of
         Accounts       Accounts      Accounts       Accounts      Accounts        Accounts


                                                           2003 Debt Management Conference
        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




                           2003 Debt Management Conference
          Impact of Change in PCA
              Incentivization
                          April 1, 2000 through March 31, 2001                       April 1, 2001 through March 31, 2002

                        Number of                                           Number of
                        Borrowers      Commission                           Borrowers
Collection Program     Rehabilitated      Rate         Recoveries*         Rehabilitated      Commission Rate           Recoveries*
                                                                                              18.5% (standard)
Rehabilitations            4,359           15.0%       $ 21,899,121            5,397                                    $ 37,873,333
                                                                                           9.0% (income-sensitive)
Regular and AWG               -            13.0%       $ 40,490,477              -                   9.5%               $ 33,507,332
FFEL Consolidation            -            9.0%        $ 10,651,929              -                   $100               $    876,280
FDLP Consolidation            -            9.0%        $ 43,790,896              -                   $100               $ 31,703,139


* represents the amount of principal and accrued interest outstanding at the time of rehabilitation. Effective 4/1/01, Great Lakes
stopped assessing the 18.5% collection fee allowed under 34 CFR 682.405(b)(1)(iv) at the time the rehabilitation loan is sold to a
lender. In accordance with 34 CFR 682.410(b)(2), Great Lakes continues to assess collection fees on the qualifying payments
made during the 12-month rehabilitation period.




                                                                 2003 Debt Management Conference
            Impact of Change in PCA Incentivization
 Collection Program Type as a Percentage of Total Recoveries
       Guarantors with the 10 Highest Total Recoveries

                                                         Treasury         FFEL             Direct
Agency           Rehabilitations   Regular     AWG        Offsets     Consolidations   Consolidations

Great Lakes             43.60%      16.76%      6.55%      11.98%             0.11%            21.00%
ASA (Mass)              22.49%      35.74%      3.47%      21.57%             8.95%             7.79%
Pennsylvania            12.56%      18.75%     16.41%       8.87%             2.20%            41.20%
California               7.53%      10.33%      5.17%       9.23%             4.25%            63.50%
Florida                  5.86%      17.81%      2.96%      11.04%            15.52%            46.80%
New York                 5.44%      32.11%      8.25%      12.79%             1.20%            40.21%
Texas                    5.40%      18.59%     12.30%       8.49%            25.57%            29.65%
USAF                     5.21%       8.50%      4.81%       5.88%             1.80%            73.79%
Illinois                 3.14%      22.83%      8.84%      11.09%             0.96%            53.14%
ECMC II (VA)             1.42%       5.85%      3.95%       6.64%             1.71%            80.44%

Top 10 Average           8.27%      14.86%      6.94%       8.78%             5.01%            56.15%

All GA Average           8.65%      15.69%      7.20%       9.68%             4.80%            53.97%

Source: FY 2002 Guaranty Agency Recovery Rates published by ED on 1/3/03




                                                    2003 Debt Management Conference
Rehabilitation Results to Date
                                      Number of                  Total Principal
                                      Borrowers                   and Interest
  Federal Fiscal Year                Rehabilitated                Rehabilitated

          2000                           4,080                  $    20,139,872
          2001                           4,162                  $    24,669,913
          2002                           7,818                  $    57,344,835

    2003 (Oct - Jan)                     3,195                  $    24,697,684



  As of January 13, 2003, 10,186 borrowers are actively participating in a
  rehabilitation agreement. The average outstanding principal and accrued
  interest balance at the time of rehabilitation for loans rehabilitated during
  federal fiscal year 2002 was $7,335.




                                                     2003 Debt Management Conference
High Balance Accounts Not Resolvable
 via Standard Rehabilitation Methods
Analysis of Outstanding Balance for Borrowers Eligible for Rehabilitation:

                         Number of       % of Total   Defaulted Dollars    % of Total
                         Defaulted       Number of      Outstanding         Dollars
Outstanding Balance      Borrowers       Borrowers      as of 1/29/03     Outstanding
$1 to $7,500                  45,765       67%        $    137,340,544       24%
$7,501 to $10,000               5,739       9%        $      49,447,627       8%
> $10,000                     16,497       24%        $    397,277,655       68%
Totals                        68,001                  $    584,065,826


Analysis of Completed Rehabilitations by Amount Rehabilitated:

                         Number of       % of Total      Total Dollars     % of Total
                        Rehabilitated    Number of      Rehabilitated       Dollars
Balance Rehabilitated    Borrowers       Borrowers     Through 1/29/03    Rehabilitated
$1 to $7,500                   25,537      75%        $      81,583,162      35%
$7,501 to $10,000                2,587      7%        $      22,255,518       9%
> $10,000                        6,007     18%        $     129,927,188      56%
Totals                         34,131                 $     233,765,868



                                               2003 Debt Management Conference
                         Rehabilitated    Number of     Rehabilitated       Dollars
 Balance Rehabilitated    Borrowers       Borrowers    Through 1/29/03    Rehabilitated

High Balance Accounts Not Resolvable
 $1 to $7,500                   25,537      75%       $      81,583,162      35%
 $7,501 to $10,000                2,587      7%       $      22,255,518       9%

 via Standard Rehabilitation Methods
 > $10,000                        6,007     18%       $     129,927,188      56%
 Totals                         34,131                $     233,765,868




 Analysis of Borrowers that Default on Rehabilitated Loan(s):

                              % of
                         Borrowers that
 Balance Rehabilitated     Redefault
 $1 to $7,500                 12%
 $7,501 to $10,000            14%
 > $10,000                    75%




                                          2003 Debt Management Conference
          Balance Sensitive
           Rehabilitation
   Balances >=$10,000 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

                         2003 Debt Management Conference
       Benefits of Balance
     Sensitive Rehabilitation
   Borrower’s 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


                         2003 Debt Management Conference
A Comparison of Alternatives
                                                 Table 1.
             Effects of Alternative Default Resolution Methods For a Hypothetical Borrower

                    Standard                Income Sensitive                  FFEL/FDSL                 Balance Sensitive
                 Rehabilitation               Rehabilitation                 Consolidation                Rehabilitation
Loan        Qualifying        Term       Qualifying        Term      Qualifying          Term        Qualifying       Term
Amount       Payment       Payments      Payment1        Payments     Payment2         Payments3      Payment      Payments4
$35,000                                                             No collection    No collection
  P&I         420.00        420.00         245.00        324.07      costs added      costs added     252.00        252.00
$41,475
P,I&CC        497.70        497.70         290.33        384.03        414.75           323.00        298.62        298.62
1
 Qualifying payment = .7% of outstanding balance
2
 Qualifying payment = 1.0% of outstanding balance
3
 Extended payment plan for 25 years
4
 Graduated payment plan for 30 years




                                                             2003 Debt Management Conference
           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


                       2003 Debt Management Conference
     Who Is Doing Balance
    Sensitive Rehabilitation?
 Great Lakes
 ED
 Others are in process




                  2003 Debt Management Conference
Further Information
Dick George, President and CEO
Great Lakes Higher Education Corporation and Affiliates
(608) 246-1408
rgeorge@glhec.org

Amy Kerwin, Chief Guaranty Officer
Great Lakes Higher Education Corporation and Affiliates
(608) 246-1785
akerwin@glhec.org

Jon Shaver, COO
DCS, Inc.
(510) 338-2377
jshaver@dcswins.com

Hal Leach, President
DCS, Inc.
(510) 338-2228
hleach@dcswins.com


                                2003 Debt Management Conference
              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, COO
DCS, Inc.
Hal Leach, President
DCS, Inc.

        2003 Debt Management Conference

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:16
posted:3/7/2010
language:English
pages:22