Darien Rowayton Bank has a obtained a higher credit rating (‘AA’ from DBRS) on its third securitization of private student consolidation loans, largely due to the fact that it has established a track record in lending to graduates capable of making payments.
But the $332.4 million DRB Prime Student Loan Trust 2015-D also has a new kind of risk: approximately 9.4% of the loans used as collateral are to medical school graduates who are serving their residency. Medical residency loans are risky because borrowers can extend repayment timelines, reducing cash flow in a securitization, according to DBRS.
Additionally, borrowers in medical residency can defer their loan payments during the entire term of their residency and any fellowship thereafter. Borrowers are required to make minimum payments of $100 per month during this period.
Possibly adding to this risk is the fact that DRB underwrites medical residency loans based on a borrower’s projected income and not current resident income. For the DRB 2015-D pool, the private student lender has projected the weighted average income of medical residents will be approximately $226,064.
On average, these borrowers had been in medical residency for 18 months when they obtained their consolidation loans and it takes a total 30 months to complete their residency.
To stress liquidity risk created by the inclusion of medical residency loans, DBRS assumes that 100% of them will remain in deferment for the maximum allowable time.
The overall characteristic of the broader pool of borrowers in the pool are strong. The weighted average FICO score is 772, comparable to DRB's previous securitization; and the weighted average borrower income is $198,659, the highest of DRB's deals to date.
On a weighted average basis, borrowers in the pool have made payments on the debt loans prior to refinancing for 3.6 years.
The majority of the loans (73.6%) were made to borrowers that attended business school (and received an MBA), law school, medical school, dental school or nursing school, fields that have higher than average incomes and lower cumulative default rates.
DBRS assigned preliminary 'AA' ratings to three tranches of class A notes to be issued by the securitization trust: class A-1 notes with a weighted average life of 4.22 years, class A-2 notes with a WAL of 4.44 years, and class A-3 notes with a WAL of 2.15 years.
In its presale report, the rating agency cited the fact that DRB has established a track record, providing more performance data on which to evaluate deals. Since its inception in 2006, DRB has originated over $1.3 billion of student loans to over 11,000 borrowers. Only 1 student loan has ever defaulted (due to borrower death) and one student loan has been more than 60 days delinquent.
Another positive for the transaction is the fact that servicing of the loans is being transferred from DRB to Missouri Higher Education Loan Authority, which DBRS considers to be a stronger servicer than either DRB or First Associates, the current backup servicer.