Sen. Dodd Warns of Looming Lending Crisis, Urges Action

Senate Banking Committee chairman Christopher Dodd yesterday warned there is a looming student-loan lending crisis, but said Congress could help prevent it by urging federal officials to quickly provide lenders with some relief.

The Connecticut Democrat issued the warning yesterday at a committee hearing on how the turmoil in the credit markets is affecting the cost and availability of student loans.

Last year, student lenders sold about $60 billion of student loan-related securities, of which roughly 20% were tax-exempt and issued by state-level agencies and nonprofits, according to the American Securitization Forum. But since the beginning of the year, issuance has dropped dramatically as more than 50 lenders of federally guaranteed loans and about 20 private student loan issuers have suspended their lending activities, raising questions about the availability of educational loans for students enrolling in school this fall, Dodd said

"While I am unaware of an instance to date when a student has been unable to secure a loan, the withdrawal of these lenders, the ongoing turmoil in U.S. credit markets, and the illiquidity in the student loan market have fueled concerns that a potential student loan credit crunch may be looming - one which could leave millions of students in a last-minute dash to secure the financial assistance they need to attend college this academic year," he said.

Dodd told those at the hearing that he plans to ask Treasury Secretary Henry Paulson, in a letter, to consider using the Federal Financing Bank, an entity overseen by the Treasury Department that lends money to government agencies, to "help prime the pump of liquidity" by purchasing packages of student loans from lenders.

He said he also plans to ask Federal Reserve chairman Ben Bernanke to allow Wall Street banks and other firms to buy student loan asset-backed securities and then use them as collateral to borrow from a $200 billion lending facility that the Fed launched last month to help resolve liquidity problems facing big Wall Street firms.

Market participants who spoke at the hearing welcomed both actions as the best hope for providing liquidity to the largest federally-administered student loan program, the Federal Family Education Loan program, which is favored by more than 80% of colleges and universities. Under the FFEL program, state agencies and 501(c)(3) organizations may issue tax-exempt and taxable debt backed by loans.

"We think a combination of those two recommendations would go a long way in stabilizing some of the concerns of FHEL program loans," said Tom Deutsch, deputy executive director of the American Securitization Forum, who spoke on behalf of both the forum and the Securities Industry and Financial Markets Association and encouraged both ideas in prepared testimony.

Deutsch said appealing to the Fed and the Treasury is more expedient than legislation introduced last week that would revolve around the 12 Federal Home Loan Banks. That bill - introduced by Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services capital markets subcommittee, and cosponsored by four lawmakers - would allow the banks to temporarily invest in student loan-related securities with their surplus funds, as well as to accept student loans and student-loan related securities as collateral, among other things. An identical version of that bill was introduced in the Senate by John Kerry, D-Mass., but it has no cosponsors.

Kanjorski introduced his legislation after the Fed declined to use its emergency powers to grant "non-bank" lenders access the $200 billion Fed facility.

In a letter, Bernanke told Kanjorski that "lending to non-depositories" such as student loan lenders would "raise serious public policy issues" because they, unlike the Wall Street firms, are not in situations that pose a significant risk of systemic financial crisis."

 

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