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What is the Difference Between FFELP and Private

Loan Programs?

and

Why Does It Matter?

Private education loans have much in common with FFELP loans

FFELP and private loans are both consumer credit

• We are all regularly engaged in the business of making loans.

• The debtor is a person other than an organization.

• The debt is incurred primarily for a personal, family or household purpose

FFELP and Private Loans are Both

Consumer Credit• The debt is payable in

installments and a finance charge is made.

• The amount financed does not exceed $25,000.

Both FFELP and Private Loans:

• Are closed-end loans• Offer interim periods• Offer extensions of varying

length and purpose

Commercial Lenders

Commercial lenders dispense Credit Cards, automobile loans, second mortgages, lines of credit, and other types of consumer credit

on a mass scale—and do the same

with FFELP loans.

Application Process

Some private loans go through the same application process as FFELP loans such as school certification

Servicers• Servicers of FFELP & private

loans face similar operations issues– Book the loan– Process payments– Send letters– Call forgetful borrowers– Report to credit bureaus– Report paid interest to the IRS

(our favorite topic!)

Whereas FFELP and private loan programs have much in common, it is the differences that cause us heartburn; especially if FFELP is all that we know

FISL OR FIZZLE!

In the 1970’s when government-insured student loans (and electronic servicing systems) were in their relative infancy, lenders making Federally Insured Student Loans (FISL, or FIZZLE as it was affectionately known in those days…) would tweak consumer credit servicing systems to manage FISLs.

Those were the days!

• A competent mortgage loan system worked well, assuming a few minor variations.

• Those were the days before buckets, fourteen different types of extensions, and two different up-front borrower fees.

Managing Both Programs

Many servicers that manage both FFELP and private loans now use servicing systems designed for FFELP to process and book private education loans.

? Two Important Questions?

• What are the differences between FFELP and private loan programs?

• What does it take to manage a private loan program?

PRESENTERS• Stephanie Foltz

– AES/PHEAA• Dino Tsibouris

– Mallory & Tsibouris Co. LPA• Jaye O’Connell

– VSAC• Walter Witthoff

– Iowa Student Loan

What is the difference between private loans and

FFELP

Mothership• FFELP

– HEA is the mothership of FFELP rules

• Private Loans– Private loans don’t have a

mothership

Rules• For the most part, if you

know HEA, you can manage FFELP loans

• Private student loans are regulated by multiple state and federal laws

Collections• In collecting the loan, the

consumer credit debt collector asks for the money

• FFELP collectors prefer the term “loan counselor” and tend to rely on loan extensions such as forbearances and deferments

Collections

It is exceedingly difficult to train a FFELP loan counselor to collect consumer credit debt

Loan Extensions and the Re-aging of Accounts

Loan extension and the accompanying re-aging of accounts are an entitlement under FFELP

Loan Extensions and the Re-aging of Accounts

Extensions and the re-aging of accounts, unless carefully monitored, violate bank safety and soundness guidelines

Rate of Interest• FFELP rates are determined by

federal statute

• Private loans are governed by state law– The rate of interest is determined

by state law in the same fashion as automobile loans, credit cards and mortgage loans

• Nationally chartered lender can export their home state rate which includes the rate and fees/charges within the definition of interest), but only using federal law to do so, and the interplay between state and federal law on fees and charges is particularly complicated

Truth-in-Lending (TIL) Act

• FFELP is specifically exempt from the federal TIL Act

• Private loans are not exempt from the federal TIL Act

TIL (con’t)

Reg Z is arguably the single most invasive federal law confronting the private education loan creditor.

Government Insurance

• FFELP loans are insured by guarantee agencies and re-insured by the U.S. Secretary of Education.

• Private loans may be insured by a private entity, uninsured, or the holder may create its own reserve fund against loss.

State Regulated Lender Laws

• The long time assumption has been that FFELP lenders do not need to have a state regulated lender license. This is not so clear now.

• There is no definitive answer to this question. HEA does not specifically provide a broad preemption of state laws.


• Lenders that are not state agencies, commercial banks, federal savings banks, or some other federal designated financial institution are probably not exempt from state laws.

• Such lenders should explore the possibility that they may need a state regulated lender license.


• A national bank or federal savings bank can generally get around having to comply with multiple state consumer credit laws.

• Both can export rates.


• All lenders, however, must have a state choice of law; thus, all private loan creditors will always be in a position to have to deal with one or more state laws.

Funding• Some FFELP programs have

more borrower benefits, which means less revenue to support bonds.

• Issuing of debt requires projections of cash flows (interest rate assumptions, defaults, and other use of cash flow like payment of administrative expenses such as lender premiums and borrower benefits.

FundingThe biggest challenge in

funding private education loan programs is projecting default risk. Clearly, if a creditor maintains a FFELP loan guarantee, its exposure to default risk is less than that of the private education loan lender.

PrivacyThe authority and rationale for

disclosures of nonpublic personal information concerning FFELP borrowers is clearer than for private education loan lenders given the FFELP statutory and regulatory references

PrivacyThe federal Higher Education

Act of 1965 provides for the sharing of information of borrower NPI between schools, lenders and guarantee agencies that are not generally available to holders of private loans

PrivacyThere is no umbrella federal law

such as HEA that allows private education loan lenders to share borrower NPI with non-authorized third parties. Private education lenders must strictly follow the privacy provisions of Gramm-Leach-Bliley.

Contract Law

Whereas private loans must comply with state and federal laws, the creditor has more flexibility in crafting promissory note provisions

The Private Education Loan Program Policy

Function

PurposeThe purpose of the private

education loan program policy function is to provide sales, marketing, loan operations, and in certain circumstances accounting departments with the guidance they need to comply with state and federal consumer protection and credit, and privacy laws.

Program Policy vs. Compliance

• The program policy function is not a compliance function.

• The program policy folks, however, serve a critical function in educating and directing the compliance staff.

Knowledge• Private loan program policy

department staff must have knowledge of:– State consumer protection laws– The Truth in Lending Act– The Equal Credit Opportunity Act– The Fair Credit Reporting Act– The Gramm-Leach-Bliley Act– The Federal Trade Commission Act– The Fair Debt Collection Practices Act

Program Policy Function

The consumer credit program policy function is so broad in scope and detailed in execution it is difficult for one person to know and understand all of the laws that go into making private education loans.

Team ApproachThe most effective program

policy departments use a team approach. Only by combining the expertise of several individuals can a lender know that it is receiving competent guidance

Who Are these Specialists?

A department head is responsible for a coordinated approach to program policy to ensure that the team’s efforts create a cohesive and comprehensive whole

Legal Counsel• Legal counsel will draft documents,

interpret the law, and perform research when appropriate

• Competent legal counsel will not attempt to interpret laws outside of his or her expertise; finding counsel with the appropriate expertise is critical

The Ideal Private Education Loan Lawyer

• Background in– Crafting consumer credit

applications– Promissory notes– Workout agreements– Regulatory documents such as

adverse action, TIL disclosure, co-signer and privacy notices

Does a single lawyer have all this expertise?

• Generally no.• What the program policy

analyst is searching for is a team of two or more attorneys’, each with his or her own area of expertise in one or more areas of law.

• Together they create a comprehensive whole of program policy expertise.

Areas of Responsibility

• Each staff member should be assigned an area of responsibility, such as state consumer protection laws, TIL, privacy, collections, and so forth.

• These individuals will gain expertise in one or more subjects. – Creates value and competency in

the position

Relationship to Operations

• Program policy must work with operations staff to understand practical aspects of implementing policy

• Some of the best program policy people come from operations

Relationship to Operations

• Understanding the basics of loan operations and the accounting associated with a loan is useful

Accounting, Statistics and Others Who Are Numerate

• While not always the life of the party, these folks have value.

• If you don’t want to develop APR algorithms or dissect tax code to perform original issue discount computations, make friend with your neighborhood accountant and fiscal analyst.

Tools of the Trade• OCC/FDIC/Fed Reserve web

sites

• Kirchman Regulatory Service

• SLSA Private Education Loan Committee

The VSAC Experience• Centralized compliance and

program policy support for FFEL and Alternative loans within a small department

• Developed a network of external resources, contacts and systems that assist with the management of a critical function in the servicing of various loan programs

VSAC Staff Structure• Assistant Director• Manager School Policy & Compliance

(FFEL)• Federal Loan Compliance Officer (FFEL &

HEAL)• Alternative Loan Compliance Officer &

Compliance Specialist (research & documentation support for all loan programs)

• For FFEL support, work closely with the Guarantor division of VSAC

Accountability• Identify new requirements,

review & interpret law/regs (with legal support as necessary)

• Provide implementation support to operations (policy, process, training development & documentation)

Accountability• Support operations staff in

research & response to policy/compliance questions.

• Serve as a liaison to internal and external legal counsel

• Promissory note development and maintenance

Accountability• Letter/marketing material

review• Web content review• And much, much more!

The Compliance Culture

• Created a collaborative model

• Staff encouraged to check their process and understanding with the Compliance Officers whenever questions arise

The Compliance Culture

• Not a “police state” – all development and revisions of processes are done in collaboration with operations staff to establish quality and compliance from the onset.

Industry Resources

• Industry Committee Participation– NCHELP Program

Regulations, Ops and Debt Management

– SLSA FFELP Committee– SLSA Private Loan

Committee

Industry Resources

• Active participation provides – access to the newest

information– the opportunity to develop

industry contacts– meet fine people like Walter!

Legal Resources

• Relative to FFEL and Alternative lending functions– Internal General Counsel– Two external attorneys

specializing in consumer credit and privacy and electronic commerce

Systems…

Databases have become a critical tool to manage our ever-expanding workload and to retain records of the work we complete

Systems…• Question Form

– Compliance intranet site – staff uses to send questions•Identifies appropriate recipient by

topic & generates e-mail•Includes utility to directly file

question and response into our archives

Systems…• Compliance Database

– Retains questions, research and response

– Internal and industry compliance and policy related discussions

– Attorney opinions•Related to loan programs,

privacy, and electronic commerce

And More Systems• Project Database

– Tool to manage many competing priorities and projects• Ability to track time and activities• Generate reports reflecting staff

contributions and how time is spent supporting compliance needs in operations, technology projects and new requirement implementation for FFEL and Alternative loans

Why Are You Here?• Review the critical elements

necessary to organize a successful private education loan servicing center

• Discuss private loan processing considerations

• Analyze the art of matching personnel with the appropriate functions and responsibilities

• Discuss legal and compliance issues

Private Loans – A Four Step Program

• Step One– The Common Manual doesn’t apply

• Step Two– Work on your creativity skills

• Step Three– Complexities exist

• Step Four– Develop a sense of humor and

remain neutral if you are a service provider

Selling Origination and Servicing

• Understand the lender’s vision of its private loan portfolio– What are the expectations and how

does this impact your systems and workload• Number of applications and volume• Number of variations of program• Boutique servicing – Web branding• School relationships – dedicated resources?

Selling Origination and Servicing

• Four C’s that lenders use to evaluate before making a loan– Credit – Has it been established yet?– Collateral – Did you own anything?– Co-Applicants – If you cannot obtain

independently, can someone assist?– Collectible – With some lenders self-

insuring – will the loan be repaid?

Determine the Lenders Needs

•Two basic needs–Originate

–Collect

Origination• What is the strategy

– Quality and Quantity• Schools will want quality & ease of

process. – Application completion

• Define what it is– Lender will have to satisfy risk

requirements

– Underwriting requirements• Fairly strict• Co-applicant if student doesn’t meet

criteria?

Origination• What is the strategy

– School communication•Is certification required

– Use of guarantor? •It helps – but not always

feasible•Usually self-insurer or limited

insurers

Collection• What is the strategy

– Relationship•Lenders using service providers

– Reactive•Due diligence schedules

– Proactive•High touch; high result

Collection• What is the strategy

– End result•Know the return on each

product and portfolio impact•Default define within each

note

– Not deal with it•Outsourcing to “experts”


• Develop guidelines for staff summarizing lender requirements– Maintain guidelines with

revision dates– Consider all potential

situations


• Promissory note terms and obligations of each loan program– How does note signed in 2003

compare with terms in 2004?– What if small differences?

• Systems and resource materials must support


• Repayment term, interest rate, borrower benefits, when do payments start

• School specific programs vs. non-school certification required

• Co-borrower, co-signer and co-maker defined

• Specific web products required


• Underwriting criteria• Guaranteed vs. non-guaranteed• Banking regulations associated

with the lender for origination and collection may help determine if there are other unique requirements to consider

Functions of an Origination & Servicing Center

• Document management– Imaging– Off-site storage– In/out bound mail

• Data management– Trading information with outside

entities requires analysis and security measures


• Policy and compliance management– Upper level management

• Charge offs• Unique situations – rehabilitation of

loans• Regulations B, Z • State collection and consumer

protection laws


• Application preparation– Inspecting for complete

information– Gathering of required documents– Data entry

• Underwriting– Credit & non-credit factors

• Age• School program requirements


• Quality Control– Sample of application to

ensure policies are in place, regulatory requirements are met and there is processing consistency

• Customer Service– Manage borrower, school and

lender relationships


• Collections– Keep the obligation in front

of the borrower– Skip trace– Collection of money

•Note choice of words rather than “Servicing”

Staffing Needs• Determine hiring strategy

– What skills can be learned– What is inherently present or not

present– How will you find your candidates– Outsourcing versus in-house

processing– How do you build in-house

expertise

Hiring Strategy – Aptitudes

• Aptitudes– Data entry – fast with few errors– Underwriting – understands basic

risk analysis & mathematics– Quality control – understanding of

compliance, consistency, and able to install preventative measures

Hiring Strategy – Aptitudes

• Aptitudes– Customer Service

• Excellent listening, verbal & written skills

• Problem solving ability

– Collections• Successful in ‘selling’ importance of

debt repayment without ruining reputation

Hiring Strategy – Attitudes

• Attitudes– Flexible

•Ability to adjust to changes in programs

– Pride•Sense of ownership in work

habits

Hiring Strategy - Attitudes

• Attitudes– Fit

• Shares similar values present in company’s culture

– Continual learner• Inquisitive and applies learned

knowledge

Hiring Strategy• Where will you find your

candidates?– Within your organization– Newspaper advertising– Referrals from employees– Networking

Hiring Strategy• Assessing Candidates

– Panel Interviews•Develop binary matrix to compare

the candidates more subjectively

– Require testing•Assess data entry, customer

service, listening, and mathematics

Hiring Strategy• Assessing Candidates

– Measure the ‘un-measurable’•Myers Briggs Analysis

Hiring Strategy• Outsourcing vs. In-house

– Four differences in FFELP & Private Loans• Lack of common regulatory entity to

provide guidance and processing rules

• Underwriting usually required for Private

• Collection mentality not due diligence• Two main programs with minor

variations vs. unlimited programs and unlimited variations

Hiring Strategy• Group discussion

– Other considerations?– Who is doing this now? Who is

not?– Success stories? Failures?– How do our borrowers view

FFELP and Private?• Do they realize differences? • Do they care?

Similarities Between FFELP/Private Loans

• Application processing requirements

• Billing cycles and loan terms

• Collection requirements• Regulatory bodies

Organizational Design

• How many people are needed?– Determine volume of

applications, in- and out-bound phone calls

– Hours of operation (east coast vs. west coast)

– Number of loan types & variations

Organizational Design

• How many people are needed?– Percentage of FFELP

borrowers with Private Loans– What is the loan program

knowledge base capacity of one person

Developing Organizational Standards

• Benchmarking – Likely not the best option due to

multiple private loan program variables

• Consider managing FTE levels based on: – Calls taken– Applications processed– Loan programs– Servicing related tasks processed

AES Example – Staff Training

• Training program length typically 6 weeks

• 130 Private Loan programs• Goal to have ‘one-stop’

shop for borrowers with both Private and FFELP loans


• Trained to understand the differences between Federal Regulations and Private Loan guidelines– Some Private loan servicing

requirements are modeled after federal regulations

– Some differ such as forbearance, deferment and repayment options


• Federal loan regulations are outlined first during training

• Private loan types and guidelines follow the federal training since much more detail is required


• Program Directory – electronic format– Program profile outlines each

loan by type– Access each loan program

individually in an effort to respond to customer concerns regarding terms of each loan program


• Program Directory – electronic format– Keep staff up to date on the terms

of private programs – Instant resource at staff fingertips

to respond to customer inquiries– Maintained on Agency intranet site


• All staff is initially trained to receive customer calls and respond to telephone inquiries


• Staff is later cross trained on other operational functions such as certification processing and loan consolidation options– Enables staff to gain a complete

understanding of all facets with managing alternative loans

– Increases staff knowledge base and aids them in thorough responsiveness to the customers


• Staff is fully cross trained on all functions based on adaptability to managing customer calls and all other facets evaluated for performance appraisals purposes– Staff that performs at a satisfactory

level or able is eligible to receive additional cross training


– Verbal & written communications are key factors that are emphasized when dealing with Private loan customers because of;• Unique terms of their loans as

outlined in the promissory note• Unique “servicing guidelines: based

on the guarantor/insurer of the loan program

• Graduate Market Professionals

AES Example – Organizational Design

• A group of staff whose primary function is to respond to customer calls– Separate groups within

Private loan department serve as a backup to the call center staff should all call reps be on a call

AES Example – Organizational Design– These separate groups are

teams that manage specific functions such as correspondence, deferment, forbearance, school certification, and quality assurance•This approach is in place to ensure

quality in processing and adhering to appropriate program guidelines


• Technical assistance is provided by a team of Business Analysts (BA) that interface with IT in an effort to develop and support new programs, run query’s, and update system tables.– Ensure the system is programmed to

automate as much of the function that is possible

– BA’s trouble shoot system issues or discrepancies in reviewing loan data


• Legal and compliance requirements for Private loans must be reviewed differently– Originating & servicing loans in

accordance with the promissory note & servicing guidelines language is critical

• OP staff work with Legal & Compliance as needed

Legal Considerations

• Lender loan licenses & national & state affiliation require different regulatory bodies

• Customers who believe that they are victims of unfair discrimination in a credit transaction should contact the appropriate regulatory agency.

Regulatory Agencies

• http://www.usdoj.gov/crt/housing/shousing.ecoa.htm

• Office of Thrift Supervision (OTS): Savings associations & federally chartered savings banks (the word “Federal” or the initials “F.S.B.” appear in the federal institution’ name

http://www.usdoj.gov/crt/housing/shousing.ecoa.htm

http://www.usdoj.gov/crt/housing/shousing.ecoa.htm

Regulatory Agencies

• Comptroller of Currency (OCC): National banks & federal branches/agencies of foreign banks (the word “National” or the initials “N.A.” appear in or after the bank’s name)

Regulatory Agencies

• Federal Reserve Board (FRB): Financial institutions that are members of the Federal Reserve system, except national banks and federal branches/agencies of foreign banks

Regulatory Agencies

• Federal Deposit Insurance Corporation (FDIC): State chartered banks that are not members of the Federal Reserve System

Regulatory Agencies

• National Credit Union Association (NCUA): Federal credit unions (the words “Federal Credit Union” appear in the institution’s name).

Regulatory Agencies

• Federal Trade Commission (FTC): Retailers, finance companies, creditors (including most mortgage companies) that are not assigned to another agency. This includes student loan secondary markets that originate loans in their own names.

Regulatory Agencies

• Check with your legal counsel to determine the ultimate impact to your shop. Considerations include but not limited to – ECOA references vary based on

regulatory body– GLB notices may have unique affiliates– Audit requirements for each entity

vary– Collection rules within each state may

vary

Legal Consideration

• Private education loan customers have a perception that the same rules & processes that apply to FFELP apply to their private loan

• Typically private loan customers have more questions before a loan is consummated


• Consumer and customer interactions are different

• Gramm-Leach-Bliley privacy notices– Consumer vs. Customer

• What is an application?– Phone, paper, electronic e-

signature


• Denying a consumer a loan requires interaction from the originator and servicer– Equal Credit Opportunity

Act (ECOA)•How it works•When must it be sent


• When approving a loan for a customer there are certain permissible charges that must be followed– Annual percentage rate (APR)

not to exceed usury rate

Speculation• Increase bankruptcy

– Bankruptcy law changes

• More programs with unique terms• Industry standards – ABI, default %,

average length of time for payoff• Consolidation Private loans• Line of credit• School cohort default rates linked

more tightly to terms of Private loans

What Can an Origination & Servicing

Shop Do?• Keep active in consumer

credit law changes• Actively design systems to

be flexible• Know your portfolio

characteristics


Shop Do?• Anticipate loan program

needs– Think creatively– Know your competition

•PLUS loans•Credit cards•Home equity•Personal loans•Use of savings


Shop Do?• Understand school

concerns– Cohort default rates for

Private loan portfolios are likely to be different than their FFELP portfolio

The End is Near

• What did you learn?– Cookie cutters belong to

bakers•The is no ‘standard’ program

– Lender involvement required•Design an effective Origination

& Servicing shop

The End is Near– The old cliché is true

•Great people equate to great results

– Hire staff wisely

– Get creative•Evolving marketplace

The End is Near

Questions?

THANK YOU!Please be sure to

complete your conference evaluation forms after the

conference!

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