Request for Information: Cornerstone of An Effective Lender … · 2009. 5. 2. · FFELP Loan Analysis: Subsidy cuts for FFEL loans having dramatic impact on lender yields • 60%

Slide 1© Student Lending Analytics, LLC

Request for Information: Cornerstone of An Effective Lender Selection Process

This presentation does not constitute formal policy or legal advice and should not be relied upon as such.


Agenda

Increasing usage of RFIs

Planning for an effective RFI

Categories and questions

Evaluating financial health of lenders


Use of RFIs Increasing In Popularity

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RFP None ofthe abov e

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Source: Student Lending Analytics Webinar, November 15, 2007Note: Sample size of 57 for 2008-09 question (#4), 49 for 2006-07 question (#3)Polling Question #3/4: Please indicate the method you used to select lenders for the 2007-08 (intend to use for 2008-09) processing year.


Popularity of RFIs

Department of Education regulations requiring disclosure of method and criteria

Creates an objective, more rigorous, competitive method to select lenders

Protect and enhance reputation of financial aid team and the educational institution

Opportunity to open up the process beyond existing lenders to test the marketplace

Provides financial aid office with method to set expectations/manage relationship beyond the RFI process

Opportunity to collect updated information on lenders to determine impact of credit crunch on their financial position

RFPs perceived as more binding on than RFI


Dept. of Education RegulationsImpact on Preferred Lender Lists

School may, at its option, make available a list of recommended or suggested lenders provided that the list:

– Not used to deny a borrower’s choice– Does not contain fewer than three lenders that are not affiliated with each other– Does not include lenders that have offered or have been solicited by the school to offer financial or

other benefits or any promise of a certain number of loan applications

School that provides such a list must:– Disclose the method and criteria used to select any lender– Provide comparative information about interest rates and other benefits offered by the

lenders– Include prominent statement that not required to use one of the lenders on the preferred list– For first-time borrowers, not assign borrower’s loan to a particular lender– Not cause unnecessary certification delays for borrowers who use lenders not on the list

Final regulations had two changes to earlier proposal– School must update its preferred lender list and the accompanying information at least

annually– Dropped clause requiring that benefits offered to borrowers by the lender had to be the same for all

borrowers at the school

Regulation and disclosure requirements of preferred lender lists will increase burden of schools by 141,625 hours (roughly 30 hours per FFEL school)


Polling Question #1

What information sources have you previously turned to for information regarding RFIs? (check all that apply)– Financial Aid peers– NASFAA site– Guarantors/Lenders– Department of Education– General Internet search


Agenda






Considerations Prior to RFI CreationStart with the End in Mind

The Team

Loan Programs– Should Alternative Loans be included in separate analysis?– Specific features of loans require different set of questions

Key Criteria

Value/Importance of Each Criterion

Questions should flow from key criteria identified

Format of RFI

Number of Lenders

Importance of Lender Evaluation


The Lender Selection Team

Include broad, diverse group that has either lender specific expertise or RFI process expertise

Typical group might include:– Financial Aid Director– Manager of Loan Programs– Loan Counselor– Business Office representative– General Counsel (if not on team, might review RFI and process)– Purchasing department– Other University Administration– Student Representatives?

Given recent events, this issue has clearly been elevated beyond Financial Aid


Preferred Lender List Disclosure

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ALL Stafford + Plus Stafford Only Other

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Source: SLA Analysis of 558 FFELP Schools that disclose preferred lender list information for their undergraduate Stafford, Plus or Alternative Loan Programs.


Most Important Criterion

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Automaticborrowerbenefits

Cus tomers erv ice

Loans erv icing

Repaymentbenefits

Web-bas eds erv ices

Source: Student Lending Analytics Webinar, November 15, 2007Note: Sample size of 51 respondentsPolling Question #2: For those with a preferred lender list, what is the SINGLE most important criterion in your selection process?


Lender Selection Criteria and Weightings

Most common criteria include:– Borrower Benefits– Customer Service

Considerations– Be sure to go beyond just borrower benefits to understand other loan terms

that may be advantageous to your students– How to measure customer service?

• Students/Graduates• Financial Aid staff

– For private loans, access to capital will become critical as credit crunch in subprime has spilled over into other consumer credit areas including student loans

– Be sure that questions will help you differentiate lenders for a given criteria


Case StudyUniversity of Connecticut

Issued Request for Proposal for Student Loan Services on July 3, 2007

Provided detailed criteria to evaluate Stafford Loan Proposals– Thirteen criteria listed including:

• Front-end fees and borrower benefits• Back-end borrower benefits• Telephone customer service• Technical support • Ease of loan processing for school• Customer service for school

– Assign maximum points available for each criterion from 5 to 25 points

Relative importance of criteria out of 215 points total– Back and front-end fees and borrower benefits 50 points– Loan Processing (school and borrower) 40 points– Customer service (school and borrower) 40 points


RFI DevelopmentFormat

Spreadsheet format more flexible in terms of creating comparison tables – Need to structure questions to allow for specific, standardized responses– Ensure that information not provided in PDF format that does not allow for

“cut and paste”– Devote time to Quality Control to ensure information was copied properly

Most seem to prefer electronic communication– Timeliness– Less taxing from administrative standpoint– Creates paper trail regarding communication

Often receive accompanying hard copies of supporting materials from lenders

Considerations– Boilerplate proposals that do not directly address your questions– Including lender presentations in overall ratings


Lender Invitations to RFI Process

Department of Education’s Pamela Moran speaking at recent Consumer Banking Conference

– Schools should “cast a wide net” with their RFI process– Cannot limit potential lenders based on guarantor or servicer relationships– None of the lenders on your preferred lending list can be affiliates

No single source available to determine appropriate lenders and contact information

– SLA has developed comprehensive database to put together thorough list• LenderInsight database with information on existing lender relationships at over

2,000 schools• Contact information on 100 largest lenders representing over 95% of FFEL

volume

Anecdotal evidence from lenders suggests two trends– Increased usage of RFIs– Receiving RFIs from schools that they do not have existing relationships with


Polling Question #2 and #3

Do you plan to invite lenders that are not currently originating loans/on the preferred list at your school?– Yes– No

How many lenders do you plan on inviting to respond to your RFI?– 3-5– 5-9– 10-24– 24-49– Over 50


Agenda






Categories in RFI

School Information

Loan Terms/Borrower Benefits– Specific to loan type

Customer Service– Financial Aid office– Student/Parent

Loan Processing Flow

Degree of Automation/Self-Service

Default Prevention

Lender Information and Reputation– Includes analysis of financial condition


Marketing Your School Loans to Lenders

School characteristics– Number of students (undergraduate vs. graduate)– International population– School reputation important

Volume by Loan Program– Growth rates over past few years (if applicable)– Provide information on all loan types included in RFI – Loan volume relative to other schools (if in upper quartile)

Default rate

Average salary of recent undergraduate/graduate student

Publicize your RFI through news release– Example: EMU Invites FFEL Lender Responses To RFI (posted

November 27, 2007 on NASFAA website)


Loan Terms/Borrower Benefits Questions

General– What types of borrower benefits do you provide students, what conditions must they

meet and when do they earn them?– What fees do you charge students? Please describe all fees.

Other considerations– Utilization rates for specific benefits

• Average and comparable schools• Try and get actual school data from current servicer

– Impact of certain events on benefits• Consolidation• Deferment• Forbearance• Sale of loan

– Grace period/Benefit restoration policies– Situations where benefits are paid back if certain conditions not met– Loan approval rates for credit-based loans (PLUS and Private Loans)


Borrower BenefitsIncreasing Use of Scenarios

Many create case study/scenario to get cost of loan information

Include information on:– Loan type– Principal amount– Timing of disbursement– Timing of repayment– With borrower benefits– Without borrower benefits– Assumes no consolidation


Customer Service Issues

Financial Aid office– Timing to process/disburse loans– Technical support– Processes to handle common issues (i.e. incomplete applications, guarantor rejects,

pending borrower suggestions)– Dedicated representative effective at problem solving– Other value-added customer service benefits

Students– Web-based services for various aspects of loan from origination through processing to

repayment– Quality/Operating measures for call centers

• Years of experience• Single point of contact for all loan information (“avoid the handoff”)• Average wait time


Customer Service RatingsBeyond the RFI

Financial Aid Customer Service Survey – Coming Soon!– As institutions consider new lenders, this survey will provide useful

information regarding lender service levels

Mystery calling to school/parent customer service lines

Survey students who recently completed borrowing process for first time

Survey recent graduates to collect information on quality of repayment experience


RFI DevelopmentRisk Management Issues

Detail any and all current and ongoing investigations

Comply with existing Codes of Conduct (e.g. NASFAA) and Dept of Education regulations (inducements) and state law (if applicable)

Commitment to borrower benefits for life of the loan

Lender information– Experience– Subsidiaries– Financial condition – Access to capital

Privacy/information security practices

Direct-to-consumer marketing

Business continuity/disaster recovery


Agenda






Student LendersInsights from CBA Conference/Recent Headlines

FFELP Loan Analysis: Subsidy cuts for FFEL loans having dramatic impact on lender yields

• 60% reduction in loan value for For-Profit Stafford lender• 62.9% reduction in loan value for For-Profit Consolidation lenders

Source: Citibank presentation at CBA conference and excludes lender acquisition and origination costs and prior to August 2007 credit market disruption.

Potential result: Borrower benefits will see dramatic drop for 2008-09 school year

Private Loan Analysis: Private student loan portfolios have seen increasing default rates recently leading to review by ratings agencies

• “Student debt latest asset type to go south: Liquidity scarce for securities without federal backing (Financial Week, December 10, 2007)”

• “Student-Loan Problems Add to Debt Worry (Wall Street Journal, December 8, 2007)”• First Marblehead “elected not to execute a securitization transaction this fiscal quarter…Steps

have been taken to tighten underwriting criteria related to lower credit tiers.” (Company press release, December 7, 2007)

Potential result: Unless current credit trends improve dramatically, the reduced appetite for student loan asset backed securities and increased defaults will impact privatestudent loan pricing and availability.


Rising Defaults of Student Loans

FFEL Loans– USAF: 22% increase in default claims for 2007– American Student Assistance Corp: 14% increase in its annual default rate

in 2007 from .98% to 1.12%

Private Loans– First Marblehead securitized loans defaulting at nearly twice the rate

• 2005 package: 2.0% defaulted after 17 months• 2006 package: 3.98% defaulted after 17 months

– Sallie Mae• 3rd quarter 2007: charge-offs were $110 million, nearly double the

amount a year before.

Source: “Student-Loan Problems Add to Debt Worry (WSJ, December 8, 2007)”“First Marblehead Shares Battered By Possible Student-Loan Defaults (WSJ, December 6, 2007)”


Polling Question #4

Are you currently planning to schedule lender meetings at any point of the RFI process?– Yes– No


Lender EvaluationFinancial Condition

Key point: Ask for current and trend information

Volume of loans processed (by type, last three years)

Loan approval rates (for credit based loans) by loan tier

Default rates/Chargeoffs over time (quarterly ideally)

Hold/sell loans

Strategy in dealing with credit crunch– Availability of credit for lower credit tiers– Ability/appetite to originate new loans

Underwriting standards


RFI DevelopmentAnticipating Hot Button Issues

Access to capital (particularly for private loans)– With securitization door closed, how will they fund their loan program?– Monitoring loan approval rates and volumes will be critical

• Past approval ratings not effective guide in new environment

Default aversion and education efforts– Defaults rising quickly; Moody reviewing student loan securitizations

Customer service– Reduction in borrower benefits will narrow differences between lenders– Without objective criteria in place for customer service leads to questions

regarding process

Private Loan decision must stand apart from FFEL loans– State that decision on private loans made independently of FFEL loans– Ensure lenders comply with upcoming HERA regulations around private

loan transparency


Student Lending AnalyticsService Model

Develop RFI

Provide Lender

List

Analyze Proposals

Evaluate Customer Service

Compare to Other Schools

Design Disclosure


RFInsight Description

With increased time constraints, financial aid professionals need a way to simplify the RFI process

RFInsight saves you time by putting all the information you need at your fingertips. RFInsight represents the collective wisdom that we have gained by analyzing dozens of proposals.

RFInsight allows you to: – Select from comprehensive list of questions categorized by topical area– Identify the most commonly used questions – Review additional detailed questions to address more specialized concerns– Customize the proposal by inserting your own questions – Create the RFI document that you can send to lenders


RFInsight Sample Screen Shot

Documents

Request for Information: Cornerstone of An Effective Lender … · 2009. 5. 2. · FFELP Loan Analysis: Subsidy cuts for FFEL loans having dramatic impact on lender yields • 60%