Money Grab

Representatives of the same student loan providers who ripped-off taxpayers more than $1 billion a year through use and abuse of the so-called “9.5 percent loan” legislative loophole are at it once again. This time, this special group of lenders is quietly lobbying for a lucrative carve out (also ready to be exploited) in pending student loan credit crunch legislation.

Inside Higher Ed reported the money grab story yesterday, but we’ve got more details on the proposal that the Education Finance Council is peddling on Capitol Hill. See their legislative language below.

We’ve bolded some of the most notable elements like entitling the lender to a government purchase of their product, setting a price in statute, mandating no servicer change on the relevant loans, etc, etc… And of course the proposal gives taxpayers nothing in return in the way of business practice reform, like say, banning the mingling of private and federal student loan assets, a cash reserve requirement to avoid this problem in the future, or perish the thought, restrictions on executive compensation.

Just to be clear on the lobbyists’ business model. The taxpayers:

(1) guarantee the product against risk,
(2) guarantee the product has a specified rate or return,
(3) guarantee a source of low cost capital to make the product, and
(4) just to grease the rapid flow of profit, guarantee the product has a buyer at a set price — thereby creating an option that the lenders can leverage for even more low source capital.

Where’s George Will when we need him?

“Sec. 440B. SECONDARY MARKET OF LAST RESORT AND STANDBY LOAN PURCHASER

Insert after proposed subsection 440B (a) the following new subsection 440B (b), and renumber subsections “(b) and (c)” as “(c) and (d)”:

“(b) STANDBY LOAN PURCHASE AGREEMENTS. – Notwithstanding any other provision of this Act and subject to subsections (c) and (d), upon the request of an eligible lender, the Secretary shall enter into one or more standby loan purchase agreements with such eligible lender that shall –

“(1) provide an option to the eligible lender to sell to the Secretary loans originated or expected to be originated under section 428, 428B, 428C, or 428H;

“(2) permit the eligible lender to sell to the Secretary from time to time any or all of such loans originated or purchased by the eligible lender, at a price equal to the sum of the total of the outstanding principal amount of, plus any accrued and unpaid interest, interest subsidy payments, and special allowance on, the loans that are sold;

“(3) permit the eligible lender to exercise its option to sell any or all of such loans to the Secretary at least monthly, upon seven days notice to the Secretary, at any time prior to the earlier of the final repayment of such loans or a date established by the Secretary, which date shall be not less than five years following the date of execution of the standby loan purchase agreement;

“(4) permit the eligible lender to repurchase any of the loans sold to the Secretary during the first 12 months following the sale of the loan to the Secretary and during any longer period in which the loan continues to be serviced by the prior servicer pursuant to section 440B(b), upon the same terms and conditions that the Secretary purchased such loan from the eligible lender;

“(5) upon the request of the eligible lender, not require a change in the servicer of a sold loan during the first 12 months following the sale of such loan, and permit, upon the agreement of the Secretary, the Secretary’s continued use of that servicer after such initial period;

“(6) not require any alteration in the terms and conditions of a promissory note of a loan under section 428, 428B, 428C, or 428H, or the execution of a new promissory note; and

“(7) have such terms and provisions as shall be necessary to allow the debt of the eligible lender that is financing such loans to meet the standards of publicly offered money market securities with the highest short term credit rating from at least two nationally recognized credit rating agencies;

Amend renumbered subsection (c) by inserting the following at the end thereof on line 21 of page 8 before the period:

“; provided, however, that in the case of a sale pursuant to a standby loan purchase agreement under subsection (b), the loans offered for sale shall be representative (including representative with respect to risk of default) of the eligible lender’s portfolio of loans under such sections that are then eligible for sale pursuant to the standby loan purchase agreement.”

Amend renumbered subsection (d):

a) by inserting the following at the end of (d)(1) before the period:

“, and the authority provided to the Secretary under subsection (b) to enter into standby loan purchase agreements shall expire on July 1, 2009, provided that the expiration of such authority shall not affect the authority of the Secretary to purchase any loan on or after July 1, 2009 pursuant to a standby loan purchase agreement entered into prior to July 1, 2009.”

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