Will Sallie Mae Escape the Consumer Financial Protection Agency’s Oversight?

The U.S. Senate is expected to begin considering financial regulatory reform legislation this week that would create a new federal watchdog agency in charge of regulating all forms of consumer credit, including private student loans. The aim of the Consumer Financial Protection Bureau (which is called the Consumer Financial Protection Agency in the version of the legislation that the House of Representatives approved in December) is to protect consumers from the types of predatory lending practices that led to the near collapse of the financial markets in the not-so-distant past.

But at least in terms of strengthening regulation over the private loan market, the Senate bill’s authors seem to have committed a major oversight of their own: as written, the legislation appears to prevent the consumer protection bureau from having any oversight authority over Sallie Mae, which is by far the single largest private student loan provider in the country. According to Student Lending Analytics, the company made nearly $5 billion in private loans in 2008-09, over three times more than its closest competitor.

Under the bill, the Consumer Financial Protection Bureau would not have any supervision or enforcement authority over banks with less than $10 billion in assets. Instead, these banks would remain under the jurisdiction of the existing bank regulatory agencies, such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The legislation’s authors included this provision to try and limit the regulatory burden that the measure would place on smaller banks and credit unions.

So what does this have to do with Sallie Mae? According to some consumer advocates and lawmakers, the student loan giant appears to fall under this exemption because it is currently financing private student loans through a bank it owns in Utah (appropriately called the “Sallie Mae Bank”) whose total assets fall well below the threshold.

This would not be as much of a problem in the financial regulatory overhaul bill that the House of Representatives approved in December. While that measure included a similar exemption for banks with less than $10 billion in assets, the legislation gave the Consumer Financial Protection Agency “back-up authority” to intervene in cases where the primary regulators failed to take action against abusive lending practices.

At Higher Ed Watch, we think that it is absolutely vital for the bill’s authors to amend the legislation to make sure that Sallie Mae falls under the bureau’s jurisdiction. One option would be to adopt the House provision. Another would be to exempt private student loan providers from the exemption. A third option — which we understand some Democratic Senators are considering – would be to decrease the amount of assets a bank making private student loans needs to have for the Bureau to have full oversight.

By proposing to create a new Consumer Financial Protection Agency, the financial regulatory overhaul legislation aims to tame the “Wild West” of the private student loan market. If the bill is written and enacted correctly, private loans would for the first time be regulated by a single entity, rather than the patchwork of federal agencies that have done little to curb even the most predatory private lending practices.

Unfortunately, the Senate bill appears to fall well short of that goal. Unless the bill is changed to make sure that the bureau has the authority to oversee Sallie Mae, it could inadvertently perpetuate this broken system.