DBRS Unveils Federal Student Loan ABS Methodology

Dominion Bond Rating Service (DBRS) has published an updated rating methodology for federal student loan asset-backed securities (ABS). It is available at www.dbrs.com.

In the methodology, DBRS discusses the unique aspects of Federal Family Education Loan Program (FFELP) loans, how FFELP loans are financed in the capital markets, and the specialized approach for rating ABS backed by FFELP loans.

“Although FFELP loans are at least 97% guaranteed,” says DBRS Senior Vice President David Hartung, “the loans include terms that introduce a variety of risks to ABS transactions. These risks include liquidity risk, prepayment risk, interest rate and basis risk, as well as servicer risk. The loans are complex, unsecured, long-term instruments that often have large balances and are made most often to borrowers with little or no credit histories. Given the number of variables in FFELP loan ABS transactions, DBRS provides a comprehensive, logical and transparent approach to analyzing the credit quality of these bonds.”

Strategic highlights of the FFELP loan ABS methodology include issuer-specific default assumptions derived from standard deviations of the base case and issuer-specific deferment and forbearance assumptions. In addition, the methodology describes delinquency assumptions which are sensitive to borrower benefit programs, a concise and logical approach to interest rate and basis risk, and the integration of servicer evaluations into the ratings process.

“Updating the DBRS FFELP loan ABS criteria continues our commitment to the ABS market,” says DBRS Managing Director Michael Nelson. “In addition to superior analytics, investors can expect to receive timely and insightful commentary on the FFELP ABS asset class from DBRS so that they can make more informed decisions.”