Loan Rehabilitation and Related Collection Cost Issues Moderator: Lynn Heineman, ACT Presenters: Tim Fitzgibbon, NCHER Doug St. Peters, Navient Phillip Cervin, TG Len Hyde, ECMC

What We Will Cover Tim Fitzgibbon – NCHER BBA of 2013 – Cuts to GA rehab retention, mandatory assignment if no rehab buyers July 1, 2014 New Regulations – new R&A rules, $5 minimum monthly payment, AWG release July 10, 2015 DCL regarding collection costs Pending Litigation

What We Will Cover Doug St. Peters – Navient Changes to the loan rehabilitation market Ratings downgrade of FFELP Asset Backed Securities has reduced value of rehab loans Considerations to sell at discount or assign to ED

What We Will Cover Phillip Cervin – TG Performance of post-7/1/14 rehabilitation loans, by: Step 1 (15%) or Step 2 (R&A) Monthly payment amount Age of account Use of ACH Loan Balance If delinquency was cured

What We Will Cover Len Hyde – ECMC Revisiting the impact of the 2014 rehabilitation regulatory changes: Changes in setup and retention rates Impact on payment amounts Step 1 (15%) vs. Step 2 (R&A) percentage Treatment of 60 day collection cost rule

Bipartisan Budget Act of 2013 To be used as a pay-for to reach a budget agreement, the BBA of 2013 made severe cuts to revenues guaranty agencies receive for successfully rehabilitating a defaulted student loan. GA retention reduced to zero from 18.5%. Collection costs reduced to 16% from 18.5% Provision requiring the assignment to ED for rehabilitation loans that cannot be sold to a private lender.

July 1, 2014 New Regulations Redefined the calculation for determining a “reasonable and affordable” payment to be tied to income and allowed to be as low as $5 per month. Step 1 caps payment at 15% of AGI, as defined in regulations. Step 2 allows borrower to complete a financial disclosure form that can be used by the GA/PCA to calculate a potentially lower R&A amount. Requires the release of AWG after 5th qualifying payment.

July 10, 2015 Dear Colleague Letter “In this letter we restate and clarify the rules that bar a guaranty agency from charging collection costs…” “A guaranty agency cannot charge collection costs to a defaulted borrower who, within the 60-day period following the initial notice, enters into a repayment agreement, including a rehabilitation agreement, and who honors that agreement.” “Few borrowers in the Department's portfolio enter into repayment within that initial period.”

July 10, 2015 Dear Colleague Letter In adopting the FFELP regulation in 1992, the Department: “expressly considered guaranty agencies' years of experience under the Federal tax refund offset program;” “required a guaranty agency to provide the borrower an initial notice and opportunity to resolve the debt in all circumstances, not just for offset purposes:” and “required the guarantor, for the first time, to charge collection costs.”

July 10, 2015 Dear Colleague Letter NCHER is gathering data from GA’s to show that ED reviewers were very much aware of the “standard” application of this provision by GA’s over two decades and hundreds of GA reviews. OMB Circular A-133 was changed in 2010 to state that “A guaranty agency may choose not to charge collection costs to a borrower who enters into a voluntary repayment agreement with the guaranty agency during the 60-day period after notice from the guaranty agency…”

Litigation Tied to New DCL Two related lawsuits, both involving USA Funds. Bryana Bible v USA Funds: sent back to the District Court for further discovery and a decision on class certification. USA Funds v U.S. Department of Education, alleging ED failed to follow proper administrative procedures in issuing new regulations: pending a motion to dismiss filed by ED.

Assignment of Rehabs to ED

Litigation Tied to New DCL

Rehabilitation Funding market Quick review 4th qtr 2008 Financial liquidity crisis - rehab funding market stopped 1st qtr 2009 Limited funding, but with steep discounts 4th qtr 2009 Market buyers increased, discounts decreased 2nd qtr 2010 Even more buyers lead to rehab purchase premiums 2010-2015 Funding is “normal” 7/1/2014 Department of Education new regs., including ability to assign rehabilitations if no buyer (from the 2013 Bipartisan Budget Act). 3rd qtr 2015 Bond rating agencies downgrade rehab securitization funds, funding becomes more challenging.

Rehabilitation Loan to Maturity The various income-based repayment plans extend life of loan to 25 years       

Rehabilitation funding market today Previous market participants are stopping further purchases Lenders still purchasing are only doing so at a discount Typical discount at 3% How do lenders look at loans (segments) (90.8%-101%) Stafford/PLUS/SLS pre 10/1/07                               Stafford/PLUS post 9/30/07                                      Consolidation pre 4/1/06 between 4% and 5%      Consolidation pre 4/1/06 between 5% and 6.5% (best) Consolidation pre 4/1/06 6.5% and greater           Consolidation pre 4/1/06 below 4%                      Consolidation between 4/1/06 and 10/1/07          Consolidation post 9/30/07 (worst)                    

Rehabilitation selling options Selling to open market at a discount Sell to Dept. of Ed (if no buyer)

TG Stats on 15% and R & A Rehabs Month of Rehab Sale Type of Rehab # Sold % Delinquent After 60 Days in Repayment MAR15   REHAB 15% 728 30.9 REHAB R & A 82 18.3 APR15 1,324 32.9 161 36.0 MAY15 1,408 35.3 169 32.5 JUN15 1,509 31.7 236 28.4

TG Stats on 15% and R & A Rehabs Month of Rehab Sale Monthly Rehab Payment # Sold % Delinquent After 60 Days in Repayment MAR15 $5.00 554 33.0 $6 to $25 52 25.0 $26 to $50 199 24.6 $51 to $100 193 25.4 $101 to $150 105 21.9 $151 to $200 67 20.9 More Than $200 144 18.1 APR15 1,027 37.5 61 29.5 111 26.1 131 27.5 92 19.6 66 15.2 141 16.3 MAY15 1,042 40.1 68 32.4 93 24.7 146 28.8 101 21.8 75 17.3 176 19.3 JUN15 1,195 34.4 96 28.1 107 29.9 148 23.6 86 24.4 28.4 156 16.7

TG Stats on 15% and R & A Rehabs Month of Rehab Sale Age of Account # Sold % Delinquent After 60 Days in Repayment MAR15 1 Year or Less 288 29.2 1 to 2 Years 476 31.5 2 to 3 Years 250 24.0 3 to 4 Years 155 23.2 More Than 4 Years 145 18.6 APR15 325 33.5 600 33.2 342 36.3 197 27.9 165 19.4 MAY15 223 35.9 652 36.7 421 34.2 242 28.9 163 25.2 JUN15 27.8 629 477 32.9 308 218 20.2

TG Stats on 15% and R & A Rehabs Month of Rehab Sale Rehabilitated with ACH? # Sold % Delinquent After 60 Days in Repayment MAR15 No 492 19.9 Yes 845 30.9 APR15 528 25.2 1,116 34.9 MAY15 24.8 1,178 37.6 JUN15 496 1,373 32.8

TG Stats on 15% and R & A Rehabs Month of Rehab Sale Rehab Balance # Sold % Delinquent After 60 Days in Repayment MAR15 $5,000 or less 130 30.8 $5,001 to $10,000 153 28.1 $10,001 to $20,000 214 33.2 $20,001 to $30,000 99 28.3 $30,001 to $49,999 117 24.8 $50,000 to $74,999 61 24.6 $75,000 to $99,999 16 25.0 $100,000 or more 20 50.0 APR15 248 28.6 327 30.3 380 35.3 180 33.3 197 37.1 91 36.3 23 39.1 39 38.5

TG Stats on 15% and R & A Rehabs (continued) Month of Rehab Sale Rehab Balance # Sold % Delinquent After 60 Days in Repayment MAY15 $5,000 or less 251 31.1 $5,001 to $10,000 342 36.8 $10,001 to $20,000 389 33.7 $20,001 to $30,000 191 36.6 $30,001 to $49,999 215 34.9 $50,000 to $74,999 102 37.3 $75,000 to $99,999 40 37.5 $100,000 or more 47 40.4 JUN15 313 29.4 32.7 447 29.5 230 33.9 216 31.9 125 28.0 32

TG Stats on 15% and R & A Rehabs   # Delinq Cured? Cured by Forb? No Yes % Delinq Begin Monthly Payment MAY15 $5.00 205 61.5 38.5 68.8 31.2 $6 to $25 18 72.2 27.8 83.3 16.7 $26 to $50 14 50.0 71.4 28.6 $51 to $100 19 57.9 42.1 73.7 26.3 $101 to $150 6 66.7 33.3 $151 to $200 7 57.1 42.9 More Than $200 12 JUN15 739 72.1 27.9 76.5 23.5 34 88.2 11.8 29 69.0 31.0 79.3 20.7 58 67.2 32.8 75.9 24.1 30 70.0 30.0 22 86.4 13.6 46 69.6 30.4 84.8 15.2 JUL15 381 82.9 17.1 86.9 13.1 21 90.5 9.5 100.0 20 90.0 10.0 94.1 5.9 97.1 2.9 16 13 69.2 30.8 85.3 14.7 91.2 8.8

Impact of Income Based Repayment PIF / Repayment Rehabilitation PIF/Repayment Consolidation Rehabilitation or Consolidation Consolidation Rehabilitation Rehabilitation

Rehabilitation Payment Trends

Rehabilitation Completion Rate Trends

Pipeline Retention Rates

Question & Answer Session