What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2020-11-05 compared with 2020-08-06 · 44 added, 71 removed, 66 unchanged (64% of the section changed)

The following risk factors provide supplements and updates to the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 in response to Item 1A of Part I of such Form 10-K, and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 in response to Item 1A of Part II of such Form 10-Q:

The following risk factors provide supplements and updates to the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 in response to Item 1A of Part I of such Form 10-K, and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 in response to Item 1A of Part II of such Form 10-Q:

The COVID-19 pandemic has adversely impacted our results of operations, and could continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows.

The rapid outbreak of the respiratory disease caused by a novel strain of coronavirus, coronavirus 2019 or COVID-19 (“COVID-19”), was declared a global pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President on March 13, 2020.

Beginning on March 15, 2020, many businesses and schools closed or reduced hours throughout the U.S.

to combat the spread of COVID-19, and states and local jurisdictions implemented various containment efforts, including lockdowns on non-essential business, stay-at-home orders, and shelter-in-place orders.

Beginning in March 2020, the coronavirus 2019 or COVID-19 (“COVID-19”) pandemic resulted in many businesses and schools closing or reducing hours throughout the U.S.

to combat the spread of COVID-19, and states and local jurisdictions implementing various containment efforts, including lockdowns on non-essential business and other business restrictions, stay-at-home orders, and shelter-in-place orders.

The COVID-19 pandemic has caused significant disruption to the U.S.

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates and equity market valuations, and extreme volatility in

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates, and extreme volatility in the U.S.

and world markets.

These effects have adversely impacted our results of operations for the six months ended June 30, 2020, and if these effects continue for a prolonged period or result in sustained economic stress or recession, they could have a material adverse impact on us in a number of ways related to credit, interest rates, operations, and other risks as described in more detail below.

These effects have adversely impacted our results of operations for the nine months ended September 30, 2020, and if these effects continue for a prolonged period or result in sustained economic stress or recession, they could have a material adverse impact on us in a number of ways related to credit, interest rates, operations, and other risks as described in more detail below.

COVID-19 is having far reaching, negative impacts on individuals, businesses, and, consequently, the overall economy.

14 unchanged sentences

Fluctuations in interest rates have impacted and will continue to impact both the level of income and expense recorded on most of our assets and liabilities and the value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

For example, during the three and six months ended June 30, 2020, we experienced a decrease in variable loan spread due to a significant widening of the basis between the asset and debt indices in which we earn interest on our loans and fund such loans.

For example, during the first and second quarters of 2020, we experienced a compression in variable loan spread due to a significant widening of the basis between the asset and debt indices in which we earn interest on our loans and fund such loans.

This widening was the result of a significant decrease in interest rates beginning in March 2020 as a result of COVID-19.

7 unchanged sentences

Beginning in March 2020, schools largely moved to on-line classes for their students.

It is unclear at this time how many schools will be back to on-campus learning beginning with the 2020/2021 academic year and/or if schools decide to conduct on-campus learning, if they will have to move back to on-line classes during the academic term if the COVID-19 pandemic increases in severity.

Student loan application volumes have begun to decrease and our current expectation is that new student

loan volumes will decline in 2020 compared with 2019.

The magnitude of the expected decline depends upon many factors, including the economic impact caused by the pandemic coupled with uncertainty regarding on-line versus in person classes.

A decline in school enrollments has also reduced demand for our education technologies, services, and payment processing products and services, and continued declines over subsequent academic periods could have a similar impact.

Although many schools moved to on-campus learning beginning with the 2020/2021 academic year, it is uncertain if, and the extent to which, they will have to move back to on-line classes during the academic term if the COVID-19 pandemic increases in severity.

The COVID-19 pandemic has and may continue to impact demand for our education technologies, services, and payment processing products and services.

Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, federal student loan payments and interest accruals were suspended on all loans owned by the Department of Education (the “Department”) until September 30, 2020.

The Department instructed us and other student loan servicers to apply the benefits of the law retroactively to March 13, 2020, when the President declared a state of emergency related to COVID-19.

Although we will receive less servicing revenue per borrower through September 30, 2020 based on borrower status, we currently anticipate more borrowers being in a current status subsequent to September 30, 2020, at which time our revenue per borrower is expected to increase.

We do not currently anticipate an adverse impact from the CARES Act on the total amount of revenue to be earned during 2020 under our Department servicing contracts.

However, servicing revenue was negatively impacted in the second quarter of 2020, is expected to be lower in the third quarter of 2020, and is currently expected to be higher in the fourth quarter of 2020, than in corresponding prior periods.

The Department instructed us and other student loan servicers to apply the benefits of

the law retroactively to March 13, 2020, when the President declared a state of emergency related to COVID-19.

On August 8, 2020, the President issued a memorandum extending the CARES Act federal student loan borrower relief provisions until December 31, 2020.

We will receive less servicing revenue per borrower based on borrower status through the expiration of these provisions.

We currently anticipate revenue per borrower will return to pre-COVID-19 levels in the first quarter 2021.

While federal student loan payments are suspended, our operating expenses have been and will continue to be lower due to a significant reduction of borrower statement printing and postage costs.

In addition, during the second quarter of 2020, revenue from the Department for originating consolidation loans was adversely impacted as a result of borrowers receiving relief on their existing loans, thus not initiating a consolidation.

In addition, revenue from the Department for originating consolidation loans was adversely impacted as a result of borrowers receiving relief on their existing loans, thus not initiating a consolidation.

We currently anticipate this revenue will continue to be negatively impacted while student loan payments and interest accruals are suspended.

Beginning in the second quarter of 2020, FFELP, private education, and consumer loan servicing revenue was adversely impacted by the COVID-19 pandemic, due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing.

During the second and third quarters of 2020, FFELP, private education, and consumer loan servicing revenue was adversely impacted by the COVID-19 pandemic, due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing.

In addition, origination fee revenue was negatively impacted as borrowers are less likely to refinance their loans when they are receiving certain relief measures from their current lender.

We anticipate this trend will continue in future periods that are impacted by the COVID-19 pandemic, with the magnitude based on the extent to which existing or additional borrower relief policies and activities are implemented or extended by servicing customers.

If the student loan borrower relief provisions of the CARES Act were potentially extended past September 30, 2020 and/or new legislative or regulatory student loan borrower relief measures similar to such provisions of the CARES Act were to become effective, the levels and timing of future servicing revenues could continue to be impacted in a similar manner through the extended period of time that such provisions or measures are in effect.

We currently anticipate this trend will continue in future periods that are impacted by the COVID-19 pandemic, with the magnitude based on the extent to which existing or additional borrower relief policies and activities are implemented or extended by servicing customers.

If the student loan borrower relief provisions of the CARES Act were potentially extended past December 31, 2020 and/or new legislative or regulatory student loan borrower relief measures similar to such provisions of the CARES Act were to become effective, the levels and timing of future servicing revenues could continue to be impacted in a similar manner through the extended period of time that such provisions or measures are in effect.

Although the CARES Act does not apply to our FFELP loans, private education loans, or consumer loans, several states have announced various initiatives to suspend payment obligations for private education loan borrowers in those states, and we are proactively providing relief for our FFELP, private education, and consumer loan borrowers.

In addition, there currently are federal legislative proposals that would provide borrower relief with respect to privately-held FFELP loans, such as our FFELP loans.

In addition, there currently are federal legislative proposals that would provide borrower relief with respect to commercially-held FFELP loans, such as our FFELP loans.

For example, on October 1, 2020, the U.S.

House of Representatives passed an updated version of the previously passed Heroes Act (the “Amended Heroes Act”) which would amend the CARES Act to define “federal student loan” to include commercially-held FFELP loans such as our FFELP loans, and require the Department to pay the amount of interest due on the unpaid principal to the holders of commercially-held FFELP loans on a monthly basis.

The Amended Heroes Act would also amend the CARES Act to extend suspension of principal payments, no interest accrual, and other benefits for FFELP student loan borrowers through September 30, 2021.

There can be no assurance as to whether the Amended Heroes Act or any similar legislative proposal will become law or, if any become law, the nature of any changes to their current provisions or as to the timing of their enactment or implementation.

Due to uncertainties regarding, among other things, the duration of the COVID-19 pandemic and any new legislation, regulations, guidance, or widely accepted practices with respect to relief to loan borrowers, we are not able to estimate the ultimate impact that debt relief measures will have on our results of operations.

1 unchanged sentence

Such changes involve additional regulatory and other complexities, uncertainties, and matters of interpretation.

Currently, we are defending a putative class action brought by student loan borrowers alleging that Great Lakes furnishing of certain information to credit reporting agencies was inaccurate under the CARES Act.

We deny any wrongdoing.

In addition, such COVID-19 regulatory measures and associated operational changes increase the risk that noncompliance with applicable laws, regulations, and Consumer Financial Protection Bureau guidance could result in penalties, litigation, reputation damage, and a loss of customers.

3 unchanged sentences

However, if circumstances surrounding COVID-19 continue to change in significantly adverse ways and/or if the pandemic continues for an extended period of time, our liquidity and capital resources position could be materially and adversely affected, which could adversely impact our businesses, cash flows (including forecasted cash flows from our asset-backed securitizations), and overall financial condition, and could also result in a reduction, suspension, or discontinuation of quarterly dividend payments on our Class A and Class B common stock.

We have historically funded student loans by completing asset-backed securitizations.

Fitch Ratings, Standard & Poor's, and Moody’s Investors Service have recently downgraded and placed numerous tranches of FFELP securitizations by various issuers, including certain tranches of prior FFELP securitizations issued by us, on review for potential downgrade due to principal payments and prepayments on the underlying student loans coming in slower than initial expectations, and the resulting risk that certain principal maturities on those FFELP securitizations may not be met by the final maturity dates, which could result in an event of default under the underlying securitization agreements.

The decrease in principal payments and prepayments is due to significant increases in forbearances resulting from a contraction in economic activity and an increase in unemployment due to the COVID-19 pandemic.

Such rating actions have caused the spreads on FFELP securitizations in general to widen and have reduced the liquidity in the secondary market for FFELP securitizations.

Such actions could adversely affect our ability to access the asset-backed securities market, or make new securitization transactions more expensive by requiring us to pay a higher spread over LIBOR when pricing new bonds.

The extent to which the COVID-19 pandemic impacts our businesses, results of operations, financial condition, and/or cash flows will depend on future developments, which are highly uncertain and largely beyond our control, including, among others:

the scope, severity, and duration of the pandemic;

the number of our employees, borrowers, customers, and vendors adversely affected by the pandemic;

the number of our employees, borrowers, customers, and vendors adversely

affected by the pandemic;

the impact of the pandemic on schools, student enrollment, and the need for student and consumer loans;

8 unchanged sentences

Our largest fee-based customer, the Department of Education, represented 30 percent of our revenue in 2019.

Failure to extend the Department contracts or obtain new Department contracts in the Department's NextGen procurement process, our inability to consistently surpass competitor performance metrics, or unfavorable contract modifications or interpretations, could significantly lower servicing revenue and hinder future service opportunities.

Failure to extend the Department contracts or obtain new Department contracts in the Department's NextGen or ISS procurement processes, our inability to consistently surpass competitor performance metrics, or unfavorable contract modifications or interpretations, could significantly lower servicing revenue and hinder future service opportunities.

Our subsidiaries Nelnet Servicing, LLC (“Nelnet Servicing”) and Great Lakes Educational Loan Services, Inc.

(“Great Lakes”) are two of four large private sector companies (referred to as Title IV Additional Servicers, or “TIVAS”) that have student loan servicing contracts awarded by the Department in June 2009 to provide additional servicing capacity for loans owned by the Department.

The Department also has contracts with 31 not-for-profit (“NFP”) entities to service student loans, although currently five NFP servicers service the volume allocated to these 31 entities.

As of June 30, 2020, Nelnet Servicing was servicing $185.3 billion of student loans for 5.5 million borrowers under its contract, and Great Lakes was servicing $243.6 billion of student loans for 7.3 million borrowers under its contract.

For the year ended December 31, 2019, we recognized a total of $343.6 million in revenue from the Department under these contracts, which represented 30 percent of our revenue.

For the three and six months ended June 30, 2020, we recognized a total of $82.6 million and $167.7 million in revenue from the Department under these contracts, respectively.

The Department also has contracts with approximately 30 not-for-profit (“NFP”) entities to service student loans, although currently four NFP servicers service the volume allocated to these entities.

As of September 30, 2020, Nelnet Servicing was servicing $189.9 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $249.7 billion of student loans for 7.5 million borrowers under its contract.

These contracts represented 30 percent of our revenue in 2019, and for the three and nine months ended September 30, 2020, we recognized a total of $81.6 million and $249.3 million in revenue from the Department under these contracts, respectively.

The current servicing contracts with the Department expire on December 14, 2020 and provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021.

On October 13, 2020, Nelnet Servicing and Great Lakes received correspondence from the Department indicating the Department's intent to exercise the first additional six-month extension of the current servicing contracts, from December 14, 2020 to approximately June 15, 2021.

The correspondence served only as a non-binding notice of intent that does not commit the Department to extend the contracts, and any formal extension of the contracts will occur only upon a unilateral modification by the Department to the contracts.

The Department is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department.

On January 15, 2019, the Department issued solicitations for three NextGen components:

• NextGen Enhanced Processing Solution ("EPS")

• NextGen Business Process Operations ("BPO")

• NextGen Optimal Processing Solution ("OPS")

On April 1, 2019 and October 4, 2019, we responded to the EPS solicitation component.

On January 16, 2020, the Department released an amendment to the EPS solicitation component and we responded on February 3, 2020.

In addition, on August 1, 2019, we responded to the BPO solicitation component.

On January 10, 2020, the Department released an amendment to the BPO solicitation component and we responded on January 30, 2020.

The EPS solicitation component was for a transitional

technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future.

However, on April 3, 2020, the Department cancelled the OPS solicitation component.

The BPO solicitation component is for the back office and call center operational functions for servicing the Department's student loan customers.

On March 30, 2020, we received a letter from the Department notifying us that our proposal in response to the EPS component had been determined to be outside of the competitive range and would receive no further consideration for an award.

On April 13, 2020, we filed a protest with the Government Accountability Office ("GAO") challenging the Department's decision to cancel the OPS solicitation component without amending the EPS solicitation component.

On April 27, 2020, we filed a supplemental protest challenging a number of bases for the Department's competitive range exclusion of our proposal from the EPS solicitation component.

On July 10, 2020, the Department cancelled the solicitation for the EPS component.

In its cancellation description, the Department indicated that it continues to be committed to the goals and vision of NextGen, and that it will be introducing a new solicitation to continue the NextGen strategy in the future.

Based on the Department's cancellation of the EPS procurement, on July 14, 2020, the GAO dismissed our protests as moot.

We fully intend to compete for the servicing system solution as the Department proceeds with their NextGen strategy.

On June 18, 2020, we received a letter from the Department notifying us that our proposal in response to the BPO solicitation component was determined to be ineligible for award, claiming our response did not meet certain requirements related to small business participation.

We immediately requested a debriefing regarding the Department's basis for this decision.

Prior to providing us a debriefing, on June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO solicitation.

On July 13, 2020, we filed a protest with the GAO challenging on a number of bases the Department's determination that our BPO response did not meet small business participation requirements.

In addition, on July 20, 2020, we filed a supplemental protest challenging the Department's decision to proceed with awards of contracts for the BPO component, when it cancelled the EPS component and a new EPS solicitation is expected to be released.

On July 24, 2020, the Department provided us a debriefing regarding the Department's June 18, 2020 decision to eliminate us from the BPO competition.

On July 28, 2020, we filed a second supplemental protest challenging the Department's BPO decision.

Under applicable law, contract awards to other parties for the BPO component are subject to a stay of performance until the protests are resolved.

A decision by the GAO is due on or before October 22, 2020.

On January 15, 2019, the Department issued solicitations for various components of NextGen.

For the currently existing component of NextGen, we received an unfavorable determination by the Department with respect to our proposal, and contracts were awarded to other parties in June 2020.

On October 28, 2020, the Department issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS").

ISS is a follow-on to the existing Title IV Additional Servicing and NFP Servicing contracts, which would award a full system and servicing solution to two providers.

Responses for the ISS solicitation are due December 9, 2020.

We fully intend to respond to the ISS solicitation.

In the event that our servicing contracts are not extended beyond the current expiration date or we are not chosen as a subsequent servicer, loan servicing revenue would decrease significantly.

There are significant risks to us and uncertainties regarding the current Department contracts and potential future Department contracts, including the pending and uncertain nature of the Department's awards of new contracts to other service providers and its current NextGen contract procurement process and the impact of the cancellation by the Department of the EPS component, which could be subject to potential delays, further cancellations, or material changes to the structure of the contract procurement process;

the uncertain timing and nature of the outcome of our protests related to the BPO component and a protest by another interested party regarding the BPO solicitation;

the possibility that new contract awards and other evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented within the currently anticipated time frame or at all;

There are significant risks to us and uncertainties regarding the current Department contracts and potential future Department contracts, including the uncertain nature of the Department's awards of new NextGen contracts to other service providers and the pending and uncertain nature of other components of the NextGen contract procurement process and the ISS contract procurement process, which could be subject to potential delays, cancellations, or material changes to the structure of the contract procurement process;

the possibility that new contract awards and evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented within the currently anticipated time frame or at all;

risks that we may not be successful in obtaining any new contracts with the Department;

and risks and uncertainties as to the terms and requirements under a potential new contract or contracts with the Department.

We cannot predict the outcome of the current protests regarding the BPO component, or the timing, nature, or ultimate outcome of the Department's NextGen contract procurement process.

New loan volume is currently allocated among the four TIVAS and five NFP servicers based on certain performance metrics established by the Department and compared among all loan servicers in this group.

The amount of future allocations of new loan volume could be negatively impacted if we are unable to consistently surpass comparable competitor and/or other performance metrics.

In the event the current Department servicing contracts become subject to unfavorable modifications or interpretations by the Department, loan servicing revenue could decrease significantly and/or operating costs to serve the contracts could increase significantly.

We cannot predict the timing, nature, or ultimate outcome of the Department's NextGen contract procurement process or the ISS solicitation.

New loan volume is currently allocated among the four TIVAS and four NFP servicers based on certain performance metrics established by the Department and compared among all loan servicers in this group.

The amount of future allocations of new

loan volume could be negatively impacted if we are unable to consistently surpass comparable competitor and/or other performance metrics.

For example, as of January 2020, a change instituted by the Department required enrollment in the Ongoing Security Authorization (OSA) program that requires quarterly control assessments.

4 unchanged sentences

The size and importance of these contracts provide us the scale and infrastructure needed to profitably expand into new business opportunities.

Failure to extend the Department contracts

beyond the current expiration date, or obtain new Department contracts, could significantly hinder future opportunities, as well as result in potential restructuring charges that may be necessary to re-align our cost structure with our servicing operations.

Failure to extend the Department contracts beyond the current expiration date, or obtain new Department contracts, could significantly hinder future opportunities, as well as result in potential restructuring charges that may be necessary to re-align our cost structure with our servicing operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors