Fitch Ratings is in talks with a large student-loan servicer in preparation for issuing its first servicer rating by the middle of 2005, although Fitch analyst David Hartung declined to name the servicer, saying only that it is one of the largest in the business.

After that rating is announced, Hartung said, Fitch will move on to rate the other major student loan servicers on a rolling basis. "There are five or six we feel are necessary targets," he said. Hartung pointed to Sallie Mae, Nelnet, PHEAA, CFS-SunTech, ACS and Great Lakes as the servicers Fitch was likely to target first. In addition to those, Hartung said there are six to eight other servicers that Fitch would look to rate.

The inaugural rating will mark the formalization of Fitch's existing servicer ratings process. "Fitch's student-loan ABS ratings have always included seller/servicer evaluations and the introduction of formal ratings formalizes and standardizes this information," wrote Fitch analyst David Laterza in a report issued last week. "The seller and servicer ratings will be used to supplement Fitch's student loan collateral analysis and cashflow modeling when determining credit enhancement, serving to formalize, as an added component, any risk or benefit associated with the transaction," continued Laterza.

Fitch's ratings criteria will focus generally on corporate performance, originations and servicing, with finer subcategories under each. Corporate performance analysis focuses on the quality of the company's management, its financial strength and its ability to manage operational risks at a corporate level. Evaluation of originating activities covers the origination, sourcing procedures and underwriting integrity, as well as loan disbursement, quality control and operational risk management in the loan-origination function. The servicing review focuses on account maintenance, customer service, investor reporting and remittance, cash management, default and claims management, and operational risk management of various servicing functions, according to Fitch.

Servicers will be ranked on five levels: S1 through S5, with S1 being the superior rating, and S5 representing non-approval as a servicer. "Having a servicer rating will not only smooth the [ratings] process, but will offer the chance for more credit to be given on the servicer," said Hartung.

Hartung said Fitch formalized it evaluation criteria into a ratings process to keep up with the increasing sophistication of asset-backed deals and investors, as well as with developing trends in ratings, which, in other asset classes, are trending towards formal servicer ratings. "A broader and more sophisticated investor base is driving the need for a more critical look at servicing," added Hartung.

Moody's Investors Service is the only other rating agency to offer student loan servicer ratings, but has rated only rated one, CFS-SunTech, in the past year.

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