February 12, 2015

BOA readies student loan portfolio for sale

Bank of America recently moved a $2.7 billion student loan portfolio to hold-for-sale status, chief financial officer Bruce Thompson told analysts during a conference call in January. 

FFELP loan portfolio
An official working for the major lender, who wished to remain anonymous, told American Banker that BOA wants to sell the entire portfolio, which contains federally guaranteed debt that was originated under the Federal Family Education Loan Program. 

Currently, many expect Navient or one of the other large servicers of student loans to bid on the portfolio, American Banker reported. Navient currently holds $100 billion worth of FFELP assets, and snapped up $9.5 billion worth of these loans last quarter. 

Navient debt purchases
Navient bought $8.5 billion of these loans from Wells Fargo in November. This move coincided with Wells Fargo's desire to move away from federal student loans, which it has not granted since the program ended in June 2010, and instead focus on private student lending. 

"By selling these FFELP loans to Navient, Wells Fargo will be in a position to focus more on meeting the needs of our private student loan customers," John Rasmussen, head of Wells Fargo's Education Financial Services, said in a statement. 

While Navient has been aggressively purchasing assets, Nelnet could be another major contender for buying the BOA student loan portfolio, according to American Banker. The student loan servicer has a FFELP portfolio worth $27 billion, and bought CIT Group's student loan unit for $3.6 billion last year. 

Strategic loan sales
BOA's move to unload student loans reflects a broader industry trend, and Navient CEO Jack Remondi told American Banker that financial institutions are looking to sell these assets based on their expectation of how the lending market will behave as business conditions improve. As the economy expands, they want to redirect cash flows to lending types that will enjoy more robust demand. 

Another factor that is helping motivate these organizations to change their approach is the heavy compliance burden that comes along with this type of debt, according to American Banker. Financial institutions are facing pressure to supervise third-party vendors, and this development is combining with the existing regulations surrounding student loan debt to prompt banks to prioritize different lending types. 

As banks cope with these various headwinds, participating in loan sales in order to deploy capital more efficiently frequently makes sense. These assets are complex in nature and a seller requires a highly experienced advisor to follow best practices and achieve the best possible execution.