Regulator Asks Private Student Loan Insurer to Be Declared Insolvent
ReliaMax of South Dakota serves about 475 U.S. lenders, including credit unions.
ReliaMax Surety Co. of Sioux Falls, S.D., manages and insures private student loans for about 475 lenders across the country, including credit unions. Its loans under management grew from about $40 million in 2015 to $275 million in April 2017.
On June 12, the South Dakota Division of Insurance petitioned the Hughes County Circuit Court to place ReliaMax Surety into liquidation. The petition says it has negative equity because it must write off the value of loans to its financially troubled parent, Reliamax Holdings Co., which are unlikely to be repaid.
In April and May the agency received financial reports showing that Reliamax Holdings was in trouble. It had recently tried and failed to raise capital or find a purchaser.
Reliamax Surety had a surplus on its books of $19.1 million, but its assets were boosted by the value of $21.8 million in loans to the parent. The agency’s analysis found that the company’s condition and statutory accounting standards require the Holding Company Loans on ReliaMax’s Surety’s books to be valued at zero. “As a result of the application of this rule, ReliaMax Surety is insolvent.”
The shortfall is even greater because a targeted study of Reliamax-insured loans by the agency revealed higher projected losses than those projected by ReliaMax Surety.
The agency’s petition asks the judge to appoint agency director Larry Deiter as liquidator.
Deiter says the order would allow the division to provide protection to affected policy holders by preserving company assets for claims payment. A liquidation order would direct the liquidator to take possession of and safeguard the property of the insurer, conduct the insurer’s business in the interim and take the steps needed to bring the affairs of the business of the insurer to an end.
“If the petition is granted, the next steps include notifying policy holders, claimants and other interested parties of the liquidation status and providing established procedures to file claims,” Dieter said.
ReliaMax’s board voted June 7 to agree to the petition. It also appointed Mark Payne as its president/CEO to replace Michael VanErdewyk, who had resigned. Payne joined ReliaMax in 2011 and had served as its president/COO.
The company began as Hemar Insurance Corp., which began insuring private student loans in the mid-1980s. VanErdewyk bought Hemar from Sallie Mae in 2006.
Among all U.S. lenders, student loans represented 53% of all non-revolving loans, including $1.1 trillion in federal student loans. Total student loans, including private loans, were $1.5 trillion in December, up 5.9% from a year earlier, according to the Federal Reserve’s Consumer Credit Report.
Private student loans at credit unions have more than doubled since 2012. At the end of last year, 715 federally insured credit unions held nearly $4.4 billion, up 15% from 2016. As of March 31, student loans were held by 714 of the nation’s 5,646 credit unions. The first-quarter balance was $4.6 billion, up 14.1%.
Some credit unions insure their private student loans through Reliamax, while others choose to provide loan loss allowances, the standard practice for most loans. About $2 billion of credit union private student loans are managed by CU Student Choice, a CUSO based in Washington, D.C. Some of them are insured through Reliamax.
Scott Patterson, CU Student Choice President/CEO, said the CUSO is communicating with the portion of its clients who are also Reliamax clients.
“The action taken against ReliaMax is in no way a reflection of the quality of this loan portfolio,” Patterson said. “Thorough, independent analysis and 10 years of repayment history indicate future performance of these loans will remain strong.”
The exposure of credit unions to the action is unclear.
Meta Financial Group, Inc., a Sioux Falls, S.D., company with $189.1 million in purchased student loans insured by Reliamax, told shareholders that it is increasing its loan loss allowance, which it said would result in a $2.8 million to $3.2 million pre-tax charge to its loan loss provision and a reduction in consolidated pre-tax net income in the quarter.
“Depending on the level of estate liquidation recoveries and authorized distributions, recoveries from a state insurance guarantee fund and other recovery sources, the company anticipates realized pre-tax yields, net of on-going provision for credit losses and direct servicing costs, for the portfolios to range between 7.50% and 5.50%,” a company news release said.
“The Company expects to receive substantial recoveries of unearned premiums from the estate of ReliaMax and also anticipates additional recoveries from a state guarantee fund, to which the Company believes it is entitled based upon the structure of the purchases of the student loan portfolios.”