Structured Finance Department AssetBacked Securities ABS Group Operational Risk Group Rating Private

1
Structured Finance DepartmentAsset-Backed
Securities (ABS) GroupOperational Risk
GroupRating Private Student Loan Transactions
since the Early 1990s
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Debt Ratings and Investors

• An opinion regarding the ability of an entity or
  of a securities issue to meet financial
  commitments
• Recognized Terms
• Investment Grade AAA, AA, AA, AA-, A, A, A-,
  BBB, BBB, BBB-
• Speculative Grade BB, BB, BB-, B, B, B-, CCC,
  CCC, CCC-, CC, C
• Investors use ratings because
• Independent appraisal of risk
• Well-understood and accepted facilitate
  liquidity
• Satisfy regulatory requirements or investment
  guidelines
• Efficient use of their own resources
• A very reliable predictor of bond defaults

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Fitch Average Annual Default Rates
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Fitchs Credit Rating Process

• Perform Credit Analysis and Assess Transaction
  Risks
• On-site Reviews of Transaction Parties
• Review of Legal Structure Issuer Type, Trust
  Formation, Legal Opinions
• Evaluate Collateral Quality and Servicer(s)
• Evaluate Transaction Financial Structure
• Cash Flow Analysis Sizing of Credit Enhancement
  Levels
• Access to Information the Market Does Not Have
  (Remains Confidential)
• Quantitative Financial Research Group
• Credit Policy Group - Committee process and well
  established policies
• Legal Department - On-site assistance with legal
  issues

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On-Site Reviews of Transaction Parties -
Servicing Private Student Loans - Why Does Fitch
Rate Servicers?

• Issuer On-site Review Gain an understanding of
  the issuers business model
• Seller/Servicer Rating
• Organizes and standardizes the analysis of
  servicers
• Transparency
• The ratings provide investors and other industry
  participants with a clear indication of Fitchs
  opinion regarding either additional risk or the
  mitigation of risk attributed to the transaction
  due to the performance of the servicer.
• Surveillance or Monitoring of the Rating
• The on-going monitoring of the servicer, using
  annual renewals, augments the deal performance
  analytics and remedies for problem situations.

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Evaluating Collateral Quality

• Underwriting Criteria and Changes Over Time
• Credit Worthy vs. Credit Ready
• School Eligibility Criteria
• Loan Structure
• Interest Rate (fixed vs. floating)
• Deferment / Forbearance Options
• Amortization Terms
• Self-Insured (Excess Spread, Reserve Funds,
  Premium Proceeds Disbursement) vs. Third-Party
  Insured (Insurer Financial Strength Rating)
• Performance Defaults, Recoveries, Default
  Timing, Prepayments
• Origination and Servicing Procedures

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Private Student Loan Underwriting

• FICO Minimums and Sourcing
• Credit History Two to Four Years vs. No History
• Income Verification 1 or 2 Year W2s or Pay Stub
  with YTD
• Employment Verification
• Debt-to-Income Requirements
• Judgmental Criteria
• No Prior Student Loan Defaults
• No Bankruptcies or Charge-Offs within 5 to 10
  years
• Co-Signed vs. Non Co-Signed
• Eligibility Requirements for Co-Signer Release
• Residency Requirements

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Private Student Loan Gross Default Rates

• Product Type Gross Default Rate Range
• Undergraduate - Cosigned 5 -
  10
• Undergraduate - No Cosigner 15 -
  20
• Law - Cosigned 3 - 6
• Law - No Cosigner 15 - 20
• MBA - Cosigned 3 - 6
• MBA - No Cosigner 7 - 10
• Medical Loans 7 - 10
• Historical Recoveries Range from 30 to 70

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Private Credit Student Loan Trust CPRs
Source Sallie Mae
10
Stafford Loan Trust CPRs
Source Sallie Mae
11
FFELP Consolidation Loan Trust CPRs
Source Sallie Mae
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Private Credit Student Loans Structural
Considerations

• Performance drives Credit Enhancement. Losses
  covered by
• Excess Spread
• Reserve Funds
• Overcollateralization
• Subordination
• Excess Spread limited by Prepayments and Asset to
  Liability Matching
• Deferment and Forbearance affect Liquidity
  Capitalized Interest Accounts

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Fitchs Seller/Servicer Rating Scale
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