Sallie Mae

Sallie Mae's Lame Defense

October 14, 2010

Earlier this week, we wrote about a class action shareholder lawsuit that accuses Sallie Mae executives of having engaged in an elaborate scheme to hide the rapidly deteriorating state of the company's private student loan portfolio at a time when they were trying to complete a buy-out deal that would have brought them great riches.

At Higher Ed Watch, we find these allegations compelling. It was, after all, only a week after Sallie Mae's deal with J.C. Flowers & Co. collapsed that the company began to come clean about the huge amount of losses it was about to incur on the extremely risky private loans it had made to sub-prime borrowers at some of the largest chains of for-profit college companies in the country.

Unsurprisingly, Sallie Mae's lawyers tell a different story. Far from being conspirators, the student loan giant's leaders, they say, were "unsuspecting victims" of the financial turmoil that overtook the country during that period of time. "Although not recognized at the time, the second half of 2007 marked the start of what became the largest credit crisis since the Great Depression, described by former Federal Reserve Chairman, Alan Greenspan (who did not predict it), as a "once-in-a-century credit tsunami," the company's counsel wrote in their unsuccessful motion to get the case dismissed. "During this period SLM Corporation experienced unprecedented defaults by its student borrowers and its stock price declined substantially, on virtually the same downward trajectory as other consumer credit providers."

They concluded the motion by saying, "In sum, plaintiffs offer no contemporaneous, reliable evidence sufficient to support any inference other than that defendants were unsuspecting victims of a consumer credit tsunami that cause unprecedented numbers of its student borrowers to default."

This explanation could be convincing -- but only if you ignore the numerous statements that Sallie Mae officials have made since that time acknowledging the part they played in creating the mess in which they find themselves. At Higher Ed Watch, we thought we'd provide the following chronology to remind our readers of what Sallie Mae executives had to say as the true condition of  the company's private loan portfolio became known:

Class Action Lawsuit Against Sallie Mae Gets New Life

October 12, 2010

On December 12, 2007, Sallie Mae announced that the extremely lucrative buy-out deal that it had reached earlier in the year with an investor group led by the private equity firm J.C. Flowers & Co. had gone up in smoke. A week later, Sallie Mae executives began to acknowledge the rapidly deteriorating state of the company's private loan portfolio, particularly among those high-risk loans it had made to sub-prime borrowers at some of the largest chains of for-profit colleges in the country.

Was the timing a coincidence? Or had the student loan giant's leaders engaged in a deliberate scheme to mask the company’s true financial condition to make sure the deal -- which promised to bring great riches to its board members, including chairman Al Lord, who was set to rake in $225 million -- was consummated?

Those questions are at the center of a class action shareholder lawsuit (click here for part 1 of the complaint and here for part 2) that a federal judge in Manhattan has allowed to proceed against Sallie Mae [SLM]. Late last month, William Pauley of the Federal District Court in Southern New York rejected a motion by Sallie Mae to dismiss the lawsuit, saying that the investors suing the company had provided sufficient evidence of possible wrongdoing to allow the litigation to move forward.

The case dates back to the fall of 2006 when Sallie Mae put itself up for sale. In the immediate years preceding, the loan company had forged sweetheart deals with some of the largest chains of for-profit colleges in the country, including Career Education Corporation, Corinthian Colleges, and ITT Educational Services, as Higher Ed Watch has previously reported. Under these arrangements, Sallie Mae agreed to provide funds for private student loans, with interest rates and fees totaling more than 20 percent per year, to low-income and working class students at these schools who normally wouldn’t qualify for them because of their poor credit records. Sallie Mae apparently viewed these loans as “loss leaders,” meaning that the company was willing to make these loans, many of which were likely to go into default, in exchange for becoming the exclusive provider of federal loans to the hundreds of thousands of students these huge chains collectively serve.

As they started to shop the company around, Sallie Mae executives, the lawsuit says, decided to double down on this risky strategy. "Defendents sought to increase short-term profits in an effort to negotiate a sale to the Flowers group (or another buyer) at an attractive premium and convince investors that an acquisition on favorable terms was likely,” the complaint states. “The scheme consisted of writing billions of dollars in private loans to high-risk borrowers, recording increased income from these loans (as a result of increased loan volume and higher rates of interest SLM was entitled to receive on the loans" as compared to federal loans), and "underreporting expected losses.” From June 2006 to December 2007, Sallie Mae’s private loan portfolio “more than doubled,” from $7 billion to $15.8 billion.

To make the strategy work, Sallie Mae officials needed to find a way to mask the amount of risk the company was taking on. Their aim was to keep delinquency and default rates on these high-cost loans artificially low while the buy-out deal was pending, the lawsuit says. Otherwise, they would have had to significantly raise the amount of money they held in reserve to cover possible losses on these loans -- which would have “reduced reported income and earnings” and ultimately the company’s value. 

According to the lawsuit, Sallie Mae officials found an easy solution: pretend that the problems with the portfolio didn't exist by pushing delinquent borrowers into forbearance. By manipulating the company's forbearance, they could ensure that delinquent borrowers would not default on their loans until after the buy-out deal was completed and ownership had changed hands.

Public Purpose Finance

  • By
  • Michael Lind,
  • New America Foundation
September 9, 2010

Executive Summary

Rebuilding the American economy in the aftermath of the most severe global economic crisis since the Great Depression can be achieved in part with the aid of public economic development banks that can leverage private capital for public purposes that include investment in infrastructure, energy, R&D, manufacturing and skills development. 

With End in Sight, Whistleblower Lawsuit Reveals Truths about the 9.5 Scandal

August 13, 2010

One way or another, the whistle-blower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against six student loan companies that participated in the scheme should be resolved shortly.

The parties are currently in the third-day of court-ordered settlement talks to resolve the lawsuit, which seeks the return of approximately $1 billion to the government in overpayments these lenders improperly received. If the negotiations break down, the case is scheduled to go to a jury trial in the U.S. District Court for the Eastern District of Virginia on Tuesday.

The defendant with the most to lose in the case is Nelnet, the Nebraska-based loan company that was the most aggressive participant in the scheme, reaping about $300 million in excess federal subsidy payments from the government. The other defendants are: Brazos Higher Education Services Corporation (Texas), Education Loans Inc. (South Dakota), Panhandle Plains Higher Education Authority (Texas), Sallie Mae, and Southwest Student Services Corporation (Arizona). Brazos and Oberg have tentatively reached a settlement, the terms of which are now under review by the Justice Department.

As we have repeatedly said, this case should finally resolve many of the unanswered questions surrounding the scandal -- a goal we have been pursuing at Higher Ed Watch over the last couple of years. After doing a careful review of court documents publicly available on PACER (Public Access to Court Electronic Records), here are some of the truths that we believe have been revealed:

A Missed Opportunity to Make Private Loans Safer?

May 11, 2010

Senate Democratic leaders are coming dangerously close to allowing a golden opportunity to rein in predatory private student loan practices pass them by.

The Senate is expected to complete work over the next week on its version of a financial regulatory overhaul bill 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 would be to protect consumers from the types of unscrupulous lending practices that led to the near collapse of the financial markets not so long ago.

The legislation holds out the promise that 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 worst private lending abuses in the past.

Unfortunately, the Senate bill, as currently written, falls far short of that goal. As our colleagues at the Project on Student Debt have pointed out, the measure includes “worrisome gaps” that would hamper the bureau’s ability to provide meaningful oversight over the private loan market and to ensure that students are not being led to take on high-cost private loans unnecessarily.

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

April 27, 2010

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.

The End of FFEL

March 26, 2010

A little more than 15 years ago, the Federal Family Education Loan (FFEL) program was on the verge of extinction. A Democratic president pushed Congress to phase out the FFEL and replace it with a program in which the U.S. Department of Education would provide federal loans directly to students through their colleges. The transition, however, came to a grinding halt on election night 1994. Republicans gained control of Congress and gave the FFEL program a new lease on life.

But during the intervening years, the student loan industry ran amok. When it came to power, the Bush administration put loan industry officials and lobbyists in charge of the Education Department. Meanwhile, lenders such as Sallie Mae and Nelnet showered Congressional leaders with hundreds of thousands of dollars in contributions each election cycle. The result: a virtually unregulated industry exploiting a federal program to enrich itself at the expense of students and taxpayers alike.

These were the years in which, among other things:

  • A group of lenders systematically overcharged the federal government more than $1 billion in improper 9.5 percent loan subsidy payments.
  • Student loan providers routinely violated a federal law forbidding lenders from providing "illegal inducements" to colleges and financial aid administrators in exchange for getting the schools to steer borrowers their way.
  • Loan companies used relationships they had forged with colleges and trade schools through the FFEL program to push dangerously high levels of expensive private loan debt on low-income and working-class students who had little hope of paying it back.

All the while, the direct student loan program was delivering the same federal loans to students at lower costs for taxpayers and without all the scandals.

Yesterday, Congress finally said enough is enough. We salute those policymakers in the White House and on Capitol Hill who courageously decided to put the interests of students and taxpayers first.

Jason Delisle vs. Sallie Mae on PBS NewsHour

March 24, 2010

On Friday, Jason Delisle, director of New America’s Federal Education Budget Project, went head to head with Renee Mang, a senior vice president at Sallie Mae, on PBS NewsHour over the student loan reform legislation that is currently being considered by the Senate. The discussion focused on the benefits of the bill, as well as the impact the measure would have on loan industry jobs and whether the legislation represented “a government takeover” of the federal student loan program. The most bizarre moment in the segment came when Mang complained that there are “thousands of students who have applied for loans at Sallie Mae that are being denied the right today to take those loans because the schools are being forced to go to the direct lending program.” Perhaps we missed something, but we haven’t heard any reports of students taking to the streets over being denied the “right” to borrow from Sallie Mae….

To view this video, click play. If you’d like a transcript of the interview, click here.

Covering the Battle Over Student Loan Reform

March 23, 2010

As our readers know, Higher Ed Watch has followed the debate over President Obama’s proposal to eliminate the Federal Family Education Loan (FFEL) program and shift to 100 percent direct lending quite closely. In fact, we have written 60 blog items on that topic over the last year. Now that Congress is on the cusp of completing work on legislation enacting the president’s plan, we thought it would be a good time to highlight the best of our coverage. We have chosen a dozen posts that we hope brought clarity to a complex debate and kept our readers informed of the back-room deals and political maneuvering going on behind the scenes:

Shameful

March 11, 2010

According to news reports today, Senate Democratic leaders are considering allowing a landmark student loan reform bill die. The would-be killers: a handful of Senate Democrats who apparently care more about protecting the subsidies of powerful student loan companies than about helping low-income and working class families afford to send their children to college.

Make no mistake, if this bill dies, the victims will be those students who do not have the financial wherewithal to afford to go to college without the substantial boost in Pell Grants that the legislation promises. Given the mammoth budget deficits this country faces, this just may be the last chance in a long time for Congress to make a significant investment in the program. In fact, if the bill collapses, many Pell Grant recipients may actually see reductions in their grants. Without the mandatory funding that the student loan reform bill provides, it will be extremely difficult for Congress to keep the fiscal year 2010 maximum award of $5,550 in place in the coming years.

Correct us if we are wrong, but aren’t there millions of financially needy students in Arkansas, Delaware, Nebraska, North Dakota, and Virginiathe states the bill’s detractors hail from – who could sorely use the additional Pell Grant funds to make their college dreams come true? Unfortunately, these students and their families can’t afford to hire powerhouse Democratic lobbyists like Tony Podesta and former Deputy Attorney General Jamie Gorelick to press their case on Capitol Hill, as student loan giant Sallie Mae has done. Nor are they able to shower lawmakers with hefty campaign contributions or make sizeable contributions to Members’ personal charities or pet causes.

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