CIT Group has completed and executed a service agreement with the Pennsylvania Higher Education Assistance Agency (PHEAA) to service $7.4 billion of its portfolio of government-guaranteed student loans now serviced by CIT.
“Our decision to outsource the servicing of our student loans reflects our ongoing efforts to improve operating efficiencies,” said John Thain, CIT chairman and chief executive officer. “We expect that PHEAA will provide our customers with the same high-quality service that they currently receive.”
Under the agreement, CIT will be outsourcing all of its student loan servicing activities that are now being provided by its unit Xpress Loan Servicing (XLS).
The PHEAA conducts its commercial student loan servicing activities as American Education Services (AES), which now services around $1 billion of CIT’s student loan portfolio. Located in Harrisburg, PA, PHEAA now has over $120 billion in assets under management across the country.
The servicing of the added $7.4 billion portfolio should be transferred to AES between January and March. Because of the transfer, CIT will close its XLS offices in Cleveland and Cincinnati, Ohio.
Moody’s Investors Service, Fitch Ratings and DBRS have all confirmed their ratings on the related SLABS portfolio.
American Banker's, ASR's sister publication, reporter Sara Lepro said that Xpress Loan Servicing ran into some trouble a few years ago when then New York Attorney General Andrew Cuomo started an investigation of the unit for alleged illegal dealings with university and government officials.
CIT had to eventually pay $3 million to settle the allegations in May 2007. It stopped making all student loans in 2008.
Sameer Gokhale, a senior specialty finance analyst at KBW 's Keefe Bruyette & Woods, was quoted by Lepro as saying that the move makes sense since private lenders must wind down their government-guaranteed student loan portfolios.
In July, the government stopped its subsidies to private lenders for generating federal loans.
PHEAA was one of four organizations awarded a servicing contract with the U.S. Department of Education to service all government originations under the new federal direct loan program.
"PHEAA can probably service it for cheaper cost per account," Gokhale said. "I think it makes sense from an economic perspective, but it's not significant or meaningful to the company's consolidated earnings."
On the other hand, selling the portfolio would have been a less appealing option given that the firm would have probably had to sell it at less than par, Gokhale said.