Rep. Paul Kanjorski, D-Pa., has introduced legislation to allow the 12 Federal Home Loan Banks to assist student loan lenders after the Federal Reserve declined to use its emergency powers to grant "non-bank" lenders access to a $200 billion lending facility that the Fed launched last month to help resolve liquidity problems facing big Wall Street firms.

The legislation, introduced late Tuesday, comes after Fed chairman Ben Bernanke said in a letter to the congressman 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.

"The provision of discount window credit to non-depository institutions risks encouraging moral hazard - that is, it may induce those institutions to avoid the expense of making liquidity provisions that are likely to be adequate for stressed market circumstances as well as more routine situations," Bernanke wrote in the letter to Kanjorski, the chairman of the House Financial Services' capital markets subcommittee. The letter was dated March 31 but not released until late Tuesday.

"Moreover, the extension of such credit to one sector invites credit requests from others, and the Federal Reserve would find it very difficult to determine which sectors should be accommodated and which should not," Bernanke said.

Kanjorski's legislation essentially seeks to accomplish, through the Federal Home Loan Banks, what the Fed would not do. His bill would enable the banks temporarily to invest in student loan-related securities with their surplus funds, as well as to accept student loans and student-loan related securities as collateral. It also would permit the banks to provide "secured advances" to its members to originate student loans or finance student loan-related securities. The provisions would expire after two years.

"The addition of this temporary power is closely in line with the existing mission of the Federal Home Loan Banks to support community and economic development," Kanjorski said in a statement. "The student loan market currently faces severe liquidity problems and cannot access capital. The Federal Home Loan Banks can help provide such access."

John von Seggern, president and chief executive officer of the Council of Federal Home Loan Banks here said that the banks are still reviewing the legislation and cannot yet comment on it.

But sources said that the banks have been busy lobbying for passage of separate legislation, approved yesterday by the House Ways & Means committee, that would allow them to provide credit enhancement for small tax-exempt bond transactions, and that they were surprised by the Kanjorski proposal.

Some market participants said the bill would provide a needed boost of liquidity for a market in turmoil, mostly because state-level issuers of student loan-backed securities sold their paper as auction-rate securities, which typically was insured but is no longer liquid because of the rating downgrades of insurers with exposure to the subprime mortgage market.

"The availability of a potential, deep-pocketed federal investor to buy student loan securities and to make funds available for student lending, should go a long way to alleviating liquidity concerns," said Kenneth Roberts, a partner at Hawkins Delafield & Wood LLP in New York.

Bernanke's letter to Kanjorski comes after the lawmaker wrote to the Fed chairman in mid-March asking for both student lender access to the $200 billion lending facility and that the central bank allow dealers and issuers of student loans to use their holdings of triple-A-rated student loan asset-backed securities as collateral for any such loans, similar to the way Wall Street firms post their hard-to-sell mortgage-backed securities as collateral on loans from the facility.

"Either one or both of these actions would help to restore stability to the marketplace for financing student loans," Kanjorski told Bernanke. Kanjorski warned that a continuation of current market conditions could cause a "severe disruption of the student lending distribution system" for the approximately 6.7 million students and parents who in the coming weeks will apply for loans through the Federal Family Education Loan Program - one of two federally guaranteed student loan programs.

Under the FFEL program, which is favored by more than 80% of colleges and universities, state agencies and 501(c)(3) organizations may issue tax-exempt and taxable debt backed by the loans. Under the other system, the Ford Direct Student Loan Program, loans are financed with borrowing from the Treasury.

Kanjorski's letter, which was signed by 31 other federal lawmakers, received a belated boost from the American Securitization Forum and the Securities Industry and Financial Markets Association, which penned an April 2 letter to Bernanke urging the Fed to allow student loan lenders to pledge their student loan asset-backed securities.

"Given the very limited credit risk inherent in triple-A-rated government guaranteed and private [student loan asset-backed securities], we believe this proposal appropriately balances managing federal government risk exposure and meeting with urgent need for additional sources of liquidity to help fund student loan originations," the letter said.


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