Credit underwriting and default management in today s private student loan environment
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Credit Underwriting and Default Management in Today’s Private Student Loan Environment. Contact Info: Michial Thompson Managing Director, Credit Risk Management First Marblehead 617-638-2135 [email protected] How to Avoid Student Loan Defaults.

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Credit Underwriting and Default Management in Today’s Private Student Loan Environment

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Credit underwriting and default management in today s private student loan environment

Credit Underwriting and Default Management in Today’s Private Student Loan Environment

Contact Info:

Michial Thompson

Managing Director, Credit Risk Management

First Marblehead

617-638-2135

[email protected]


Credit underwriting and default management in today s private student loan environment

How to Avoid Student Loan Defaults

To determine how to prevent defaults, let’s look at what the main drivers of default are:

  • Credit Policy: Lenders make loans they expect to be paid back

  • Collection Agency Management: Ensure maximum performance when DQ loans are placed for collections

  • Data & Analytics: Performance projections, reporting and collections placement streams driven by data analytics

  • Student Loan Idiosyncrasies: Deferment, youth, cosigners

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Credit underwriting and default management in today s private student loan environment

PSL Credit, Data and Analytics

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Credit policy

Credit Policy


Credit underwriting and default management in today s private student loan environment

Credit Policy

  • Appropriate Assessment of Risk at Time of Application

  • Beyond just FICO

  • More granular credit bureau attributes

  • Evaluate both student and cosigner

  • Over-borrowing/loan amounts

  • School types/programs

  • Ability to repay

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Credit underwriting and default management in today s private student loan environment

Credit Policy: Skeletons in the Closet

  • All of these are cosigned loans with cosigner FICO > 750. The bars show what happens to defaults when we further segment these by student FICO.

  • The student (skeleton in the closet) weighs heavily on the performance of the loan.

  • Overall cosigned loans with cosigner FICO > 750 default at a higher rate than non-cosigned loans with student FICO > 750.

Cosigner vs. CWS

Student FICO on Cosigned (>750) Loans

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Credit underwriting and default management in today s private student loan environment

Credit Policy: Lend to Quality Schools

  • Dropouts are twice as likely to default as graduates

  • School, school type, and program of study are strong predictors of graduation rates

  • Clearly graduates are more likely to get a higher paying job that will allow them to pay back the loan

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Credit underwriting and default management in today s private student loan environment

Credit Policy: Lend to Quality Schools

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Credit underwriting and default management in today s private student loan environment

Credit Policy: Control Over-Borrowing

  • School certification greatly reduces over-borrowing compared to DTC

  • Loan amount requested should be considered in credit decision

  • Capacity metrics (such as DTI) further assess ability to repay and prevent excessive loan amounts

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Credit underwriting and default management in today s private student loan environment

FMC Private Student Loan Scorecard: Updated Score Further Separates Risk

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Agency management

Agency Management


Credit underwriting and default management in today s private student loan environment

Aggressive Agency Management Approach

Define Strategy

  • Define the agency type (experience, client base, management, etc)

  • Performance drives future volume placements

  • Incentive plan must be meaningful to agency to align performance

Develop Network

  • Optimizing number of agencies per segment to foster competition

  • Continuous refresh of agencies based on results

  • Robust bullpen for quick change-out for performance or client need

  • Goals and volume forecasts clearly communicated

  • Monitoring in place for outcomes; activity monitoring progressing

  • Mutual transparency into operations

  • Deep dives on root causes of performance gaps

  • Volume shift algorithms for Recovery agencies

  • Agencies now know they are being watched

Manage

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Data analytics

Data & Analytics


Credit underwriting and default management in today s private student loan environment

Data and Analytics

NOT one-size-fits-all

  • Collectability scorecard

    • Origination, monthly performance, refreshed credit bureau data

    • Probability of a delinquent loan curing

  • Strategies driven by data

    • When to place a file vs. leaving it with servicer

    • Which collection agency to place with

    • How long to leave loan at a given collection agency

    • Which strategies (FB, MGRS, etc) available per customer

    • Test-and-learn approach

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Credit underwriting and default management in today s private student loan environment

Data and Analytics

  • Agency level

    • Daily, weekly, monthly

    • Performance by batch, by risk segment, by placement stream/strategy

    • Transparent view of competition

  • Agent level

    • Daily, weekly, monthly

    • Keep track of what happens to top performers

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Credit underwriting and default management in today s private student loan environment

Data and Analytics

  • Data

  • Dialer data

    • Daily details of every call

  • Skip-tracing

    • Refreshed credit bureau data

    • Phone, cell phone data

    • USPS (and others) data to track relocations

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Credit underwriting and default management in today s private student loan environment

Data and Analytics: Example Agent level reporting

  • Prevent best performer migration

  • Plans for lower performers

  • Resulted in 3 better supervisors transferred in

  • They know we are watching

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Credit underwriting and default management in today s private student loan environment

Data and Analytics: Example Test-and-Learn

  • Mailing Strategy Test

  • Timing of communications strategy

  • Borrower vs. Cosigner

  • Delivery / Channel options

  • Agency integration / talking points

No Cosigner

With Cosigner

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Student loan idiosyncrasies

Student Loan Idiosyncrasies


Credit underwriting and default management in today s private student loan environment

Student Loan Idiosyncrasies

Deferment does not build a habit of making payments

  • Credit policy should encourage cash-flowing loans

  • Early Awareness Program

    • Reach out to both student and cosigner before repayment

    • Email, phone, mail package

  • Most loans need a cosigner—utilize this early and often

  • Contact cosigner at any sign of trouble

  • Include cosigner in all communications

  • Require cosigner participation in FB or similar decisions

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Credit underwriting and default management in today s private student loan environment

Student Loan Idiosyncrasies: Example Deferment

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Results a case study

Results: A Case Study


Credit underwriting and default management in today s private student loan environment

Case Study: FMD reduced delinquencies and defaults for one major bank’s PSL portfolio by 50%

  • After taking over, delinquencies immediately improved. Within 6 months, annualized monthly charge-off rates were cut in half.

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