NEW YORK--(BUSINESS WIRE)--Fitch Ratings is in the final phase of updating its criteria for U.S. FFELP student loan ABS (SLABS) and expects to publish the new criteria in less than 60 days.
The final phase of the criteria review includes transaction testing and model validation. The revisions reflect changing payment behavior and loan status trends in FFELP. The changes in behavior have been driven in part by the introduction of government-sponsored payment programs such as income based repayment (IBR). The slowdown in payment rates is placing some existing FFELP SLABS at risk of missing stated maturity dates.
In its December 2015 exposure draft, Fitch's proposals included:
--New assumptions and stresses for loans in deferment, forbearance and income based repayment statuses;
--New prepayment assumptions and stresses;
--New default timing scenarios; and
--A new surveillance application methodology for outstanding transactions including an 'Asf' cap for bonds that fail certain maturity stresses.
Fitch received numerous comments during the comment period which ended earlier this year, particularly from investors. In addition, Fitch has conducted additional analysis during the review period that has resulted in modest changes to the initial proposals.
Key changes to final criteria are expected to include:
--Using a constant default rate approach to replace the FFELP default model and default timing curves in the maturity scenarios;
--Modest changes to the previously proposed deferment assumptions, floor and stresses in the maturity scenarios;
--Modest changes to the previously proposed forbearance assumptions, floor and stresses in the maturity scenarios;
--Revised assumption to include loan forgiveness for outstanding loans in IBR starting in 2036 and over a set window of time;
--A revision from an 'Asf' cap to a 'AAsf' cap for bonds that fail certain maturity stresses.
In addition, Fitch is considering an approach to modelling cash flows post an event of default (EOD). Under the approach, Fitch would assume that no collateral liquidation will occur upon an EOD and all cash collections post EOD will be used to pay down senior notes interest and principal (pro rata) first before applying to subordinated notes.
Once the new criteria is finalized and published Fitch expects to complete the related rating changes over the subsequent three months. That said, Fitch's guidelines allow for rating changes to be implemented over a six month period.
Prior to the new criteria being finalized Fitch will continue to use the criteria described in the December 2015 exposure draft to rate new FFELP SLABS transactions and will use the existing criteria for surveillance ratings with sensitivity analysis performed using the exposure draft.
Fitch will continue to keep market participants apprised of any further significant developments in its FFELP Student Loan ABS criteria review process.
Additional information is available on www.fitchratings.com.
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