Direct Loan Servicer Smackdown: Vying for the Big Prize

First, my apologies for the WWF reference.  Just feeling like it was time to get a little animated.  As I was completing my earlier post about the six companies vying for the DL servicing contract, my mind started to wander as to the relative market shares of the firms.  Luckily, I came across this chart in the most recent Nelnet 10-K: 

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There is a relatively large number of lenders and servicing organizations who participate in the FFEL Program. The chart below lists the top 10 servicing organizations for FFELP loans as of December 31, 2007 (the latest date information was available from the Department).

Top FFELP Loan Servicers (a)
Rank		Name		$ billions
1		Sallie Mae		$	127.4
2		PHEAA			34.4
3		Nelnet			32.2
4		Great Lakes			32.1
5		ACS			31.0
6		Wells Fargo			11.7
7		JPMorgan Chase			11.4
8		Express Loan Servicing			8.7
9		Edfinancial			7.7
10		KHEAA (Kentucky)			5.5

Source: Student Loan Servicing Alliance

SLA Note:  ACS indicated in their 6/30/2008 10-K:  "At June 30, 2008, we serviced a FFEL portfolio of approximately 2.8 million loans with an outstanding principal balance of approximately $39.9 billion."

(a)		The above table does not include information from Citibank, The Student Loan Corporation, and CLC Servicing Corporation as these entities did not disclose volumes.

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That leaves three missing pieces of information:

• What is Citibank's/Student Loan Corp.'s servicing volume?
  • Nelnet reported in their 2007 10-K that as of December 31, 2006 Citibank had $19.5 billion in FFELP assets that they were servicing. 
• What is the servicing volume that ACS is managing through the DL program currently?
  • A recent ACS announcement indicated that "under this contract, ACS manages the business operations for more than $140 billion in student loans to more than 10 million borrowers."
  • When combined with their FFEL loan volumes, this would appear to make them the largest with $171 billion in assets that they are servicing, giving them more volume than SLM. 
• What loan volume does Wachovia, which was acquired by Wells Fargo, currently have and who did they use previously as their servicer?
  • Wachovia previously had a contract with ACS for servicing, according to this 2005 press release, which ran for 5 years.  The release indicated that the additional contract included $3.6 billion in assets in outstanding loans and was expected to generate $35 million in revenue to ACS, or $7 million/year.  ACS had an existing relationship with Wachovia for 10 years.  
  • As of FY2007, Wachovia was similar in loan holdings and originations to Wells Fargo, so it would seem a good assumption that Wells Fargo will double their servicing assets to $23-$24 billion once they are able to integrate Wachovia (I don't know if the contract with ACS continues through their change in control). 

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So, what are the insights here?

• ACS is clearly well positioned to garner additional volume given their advantage in terms of understanding the process and also having volume that is 5X greater than all the other servicers excluding Sallie Mae. 
  
  • As I discussed earlier, there are clearly economies of scale in loan servicing (larger servicers should be more efficient).
• Citibank/Student Loan Corporation was noticeably absent from the list of servicers continuing into phase II.  With their $20 billion in servicing volume in FY06, they would appear to be #6 on the list.  Wells Fargo, with 50% of Citibank's servicing volume (not taking into account Wachovia's volumes), appear to have leapfrogged them.  Citi may simply have decided that this was not a business that they wanted to invest in.  
• With $65 billion in loans to be serviced through this servicing contract, this is clearly a sizable chunk of volume for servicers to manage.