The removal of FFELP is a going concern for certain student loan issuers/servicers that have predominantly existed for the purpose of purchasing,originating,and servicing loans under the program, a Fitch Ratings report said.
The program's end means that many state- based, quasi-governmental, and not-for-profit issuers are changing their business models as they are no longer able to purchase or originate new loans, leaving them with a portfolio that will run-off overtime.
Fitch believes these developments pose additional risks to transactions serviced by such entities and could have a negative impact on future rating performance without any mitigating factors.
In many cases, the issuer's new business model consists of becoming a servicer for the new Federal Direct Loan Program (DLP). Not-for-profit issuers' business models have traditionally focused on the FFELP.
The new business models for these issuers often consist of servicing the DLP and, to a lesser extent, beginning a private student loan program.
"If an issuer that is changing its business model and has a potential going concern issue, due to an unproven business model, is also the servicer or administrator, the ABS transactions under management can be exposed to significant additional operational risks," Fitch analysts said. "If the servicer/administrator is unable to perform its duties or unable to perform its duties appropriately due to financial stress, several issues arise within student loan ABS."
Fitch believes the presence of a backup service provider can lessen the risks associated with the transition of business models. "A properly contracted backup service provider can mitigate these risks and protect student loan ABS from increased stress and further losses and potential rating actions," Fitch analysts said.
