Fitch Ratings said today that a cap on the allocations of borrower accounts to existing not for profit servicers of the Federal Direct Loan Program (FDLP) could affect the performance of Federal Family Education Loan Program (FFELP) -backed securities.

The cap results from an obscure aspect of the Budget Control Act of 2011 which limits these servicers to initial statutory 100,000 accounts per eligible not for profit entity and no new not for profit servicers will be able to receive any direct loans through fiscal year 2013.

This could result in a workforce reduction and reduced servicing quality for some smaller not for profit servicers. “We expect this pressure to be limited to small not for profit servicers for now, as those with sizable FFELP portfolios should be able to withstand the loss in revenues in the near term,” said Fitch analysts in the report.

Fitch said that there are no plans to provide current not for profit servicers with additional allocation of accounts and approximately five not for profit servicers that were set to be allocated accounts will no longer receive any accounts.  

“The Health Care and Education Reconciliation Act of 2010 offered not for profit issuers an opportunity to service at least 100,000 accounts for the FDLP,” said Fitch, “However, the sequester provision has put that program in jeopardy.”

Fitch noted in the report that all FFELP-backed student loan ABS transactions post 2010 have back-up servicers appointed for the not for profit servicers; this would protect bondholders from the risk of loss resulting from the new cap.



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