DOE Takes Steps to Aid Lenders

WASHINGTON - Department of Education officials said yesterday that they will take several steps toward easing lender access to emergency liquidity, a move that received applause from nonprofit members of the student loan industry who are still grappling with how to originate loans for the new academic year that began July 1.

The steps, which include disclosing the terms of agreements and extending deadlines for the letters of intent lenders must file to borrow funds from the department, were detailed at the Education Finance Council's mid-year conference in Alexandria, Va.

Despite DOE promises to ensure that no student is unable to obtain a loan in the current academic year, lenders at yesterday's conference expressed anxiety over the future of the FFEL program, warning that it could disappear without strong leadership from the federal government.

"Our fear is that if this program is left to whither on the vine and to wait for the miracle of the capital markets to revive, the infrastructure is going to be lost in terms of people, lost in terms of assistance, and lost in terms of the financial folks who make this engine run," said Scott Miller, director of federal relations for the Pennsylvania Higher Education Assistance Agency.

Meanwhile, Rep. Christopher Shays, R-Conn., who also addressed the council, called on leaders of the House Financial Services Committee to consider holding hearings on two bills that would allow the Federal Home Loan Banks and a financing arm of the Treasury Department to provide liquidity for the student loan lenders.

The lenders, who participate in the Federal Family Education Loan, or FFEL, program, have been squeezed by federal cuts in the interest they can earn on their loans combined with the ongoing credit crunch that has dramatically increased their borrowing costs.

Shays said the bills would "inject the liquidity needed for FFEL lenders to maintain their loan commitments," in letters sent yesterday to House Financial Services Committee chairman Barney Frank, D-Mass., and Alabama Rep. Spencer Bachus, the ranking Republican on the committee.

The bills, both of which were introduced by Rep. Paul Kanjorski, D-Pa., would allow the FHLBs and the Federal Financing Bank, an entity overseen by the Treasury Department that lends money to government agencies, to purchase student loan-related securities.

Kanjorski, who also spoke at the council's conference, told The Bond Buyer that legislation passed by Congress in May should be sufficient to ensure that non-bank lenders are able to finance new loans by allowing the Department of Education to loan FFEL lenders money or to purchase loans from the lenders through September 2009 if they remain unable to issue debt backed by the loans.

Still, he characterized his FHLB and FFB bills at backstops in case FFEL lenders' liquidity needs remain unmet, and said the department should do everything within its legal authority to ensure that students have access to loans this summer.

"Now is the time to take a little risk, to assume you have the authority, and to interpret laws as broadly as you can," Kanjorski said.

Kanjorski's comments come as some lenders have complained that some of the provisions of the department's plans have been unduly cumbersome. For instance, department officials have said that they will agree to loan lenders money but only if they have already secured access to short-term "bridge loans" elsewhere, which lenders say may be prohibitively expensive in light of the credit crunch.

FFEL lenders had hoped that the DOE would essentially advance them funds through Treasury borrowing, but the department has told lenders in recent weeks that it does not believe the May legislation, which was rushed into law, gives them the authority to provide money to lenders that haven't already originated loans.

Sara Martinez Tucker, the department's undersecretary of education who also spoke at the council's conference yesterday, said the department will take three immediate steps that she hopes will ensure FFEL lenders remain in the program.

Tucker said the department planned to publish long-awaited finalized terms of agreement for its so-called participation and loan purchasing programs on its Web site last night. The agreements were originally promised in June, and lenders have said it would be hard to know if they could commit to borrowing funds from the DOE without reading them.

In addition, Martinez Tucker said that the department will extend to July 31 from July 16 a deadline for lenders to file letters of intent with the DOE that include the estimated amounts they plan to borrow from the department. FFEL lenders, who must file such letters even if they do not yet know whether they will actually borrow from the department, said that the extension is logical in light of the delay in receiving the agreements.

Tucker also left the door open to allowing lenders who borrow funds from the DOE to defer so-called negative special allowance payments or SAP until they sell loans back to the department, to mitigate the cash-flow concerns lenders have for unsubsidized loans - for which the lender does not receive any payment until the student finishes school.

Negative SAP refers to the quarterly payments lenders must make to the DOE on the difference between the interest rate a student receives on a loan and the rate a lender is allowed to receive under federal law. Students may receive a 6.8% rate on their loans, but federal law currently limits what lenders can earn to a rate that is much lower and based on variable commercial paper rates. By law, lenders must rebate the difference back to the DOE, but many would like to defer such payments until they sell the loans to the department, when the SAP payments could be netted out of the price the lenders receive for their loans.

"Let me take that back to the office and look at that," Martinez Tucker said when asked about delayed negative SAP payments by a student loan lender.

Peter Warren, executive vice president of the council, which represents state-level nonprofits that issue tax-exempt bonds backed by student loans, said negative SAP is a significant issue for a number of lenders considering the DOE programs.

"We really hope that the department does consider revisiting this because it seems like an unnecessary added burden," Warren said.

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