Student Loan Risk Assessment

How are the changing economic, political and consumer environments affecting student loan asset backed securities?

Evolving sentiment toward the rising cost of higher education and growing student loan debt balance is resulting in new market opportunities and challenges. The charts provide instruction on how industry practices and other factors are impacting risks for lenders and investors.

Risk Level

As of Sept 2018

HIGH MED LOW 2012201320142015201620172018
The Student Loan Risk Assessment shows the risk of battles over loss allocation.

LOW RISK

HIGH RISK

Lending Practices and Factorsi

Private lending and refi’s have benefited from stringent underwriting, but competition could lead to looser underwriting; deferments and forbearances are skewing delinquency rates; latent risks exist, such as loans for unaccredited programs and for-profit schools.

LOW RISK

HIGH RISK

ABS Practices and Factorsi

Private and Refi deals continue to benefit from pools of higher quality loans; FFELP deals should continue to benefit from the government guarantee.

LOW RISK

HIGH RISK

Underlying Market Risksi

Education costs, the average student loan debt burden and the aggregate student loan balance all continue to climb, spurring debt-relief programs, proposed legislation and bankruptcy reform, and a growing body of borrower-friendly decisions.

current Status

Years ago, “show me the note” contagion took hold in the subprime mortgage market. Borrowers launched widespread attacks on foreclosure actions once tales of successful early challenges were reported in the media.  With the recent reports in The New York Times about National Collegiate Student Loan Trusts’ problems enforcing student loans due to incomplete documentation, the same contagion could again take hold in the nation’s courts.

In the aftermath of the 2008 financial crisis, courts were filled with cases in which borrowers made the technical argument that the securitization trustee trying to foreclose never actually received the relevant note and mortgage—and in some cases, that was correct. Many cases took years to work their way through the courts at great expense in time, money and reputation for the largest banks.

With regard to student loans, servicing problems had previously come to light in the CFPB’s lawsuit against student loan servicer, Navient. As we noted in American Banker, those problems indicated the potential for student loan servicing litigation to echo that involving subprime mortgage servicers.

Parallels between the two situations are already evident in missing documents and incomplete records. Now, they are being underscored by the aggressive collection practices of National Collegiate, which is a collection of trusts backed by bundled student loans which are then sold to investors.  Between 2013 and 2015, National Collegiate had filed thousands of lawsuits in various states.

According to The New York Times, judges are now wiping out student loan debt for borrowers where National Collegiate cannot show title to the student loans. However, reports of National Collegiate’s enforcement problems may be misleading borrowers and giving false hope.  After all, if we learned anything from the subprime mortgage foreclosure litigation, it’s that missing documentation is not a free get-out-of-debt card.

In the subprime mortgage litigation, “showing the note” often wasn’t possible due to the multiple layers of transfers before a loan landed in a securitization trust. Still, courts allowed foreclosing lenders and securitization trustees to foreclose based on “lost note” affidavits showing the chain of ownership and other best evidence available.  Ultimately, “show me the note” challenges normally meant delay, not dismissal.

Those cases, with mortgages on the line, had higher stakes than many student loan disputes. In the student loan context, National Collegiate may have made a calculation that upfront preparation to stave off challenges to standing is not worth the cost.  In other words, National Collegiate seems to be treating collection like a numbers game—bringing thousands of suits for relatively small amounts, without expensive preparation, expecting relatively few challenges.  In any event, the more it is reported in the press—accurately or not—that student loans can be wiped out, the more likely it becomes that borrowers will challenge collections, and the more likely there will be charge-offs. Before entering into any new deals, and to mitigate against enforcement challenges in current deals, now would be a good time for investors to ask ABS issuers the same question a court may someday ask:  Can you show me the note?

About Co-AuthorJames R. Serritella is a partner in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert and his practice focuses on complex litigation in the financial services sector, bankruptcy litigation and insurance recovery on behalf of policyholders.