The U.S. House of Representatives' approval of tighter restrictions on the preferred lender relationships between student loan providers and universities is not expected to adversely affect the securitization industry. However, market professionals are already awaiting further Congressional actions that could significantly impact the SLABS sector.
By a 414-3 vote last Wednesday, the House passed the Student Loan Sunshine Act. The legislation aims to bring more accountability and openness to the relationship between universities and the preferred lenders that receive business from them.
Market participants do not think that the House bill will have an adverse effect on student loan ABS collateral, mainly because the provisions do not address the special allowance payment rate or the FFELP government guarantee level, Barclays Capital analysts said in a report. The House, however, is working on a more comprehensive bill that is widely expected to call for cuts in special allowance payments (SAP) to lenders. The College Student Loan Relief Act would make several changes, including a reduction in borrower interest rates, decreasing the lender SAP rate by 10 basis points for loans granted after July 1, 2007 and increasing consolidation loan rebate fees. On the latter, the 1.05% consolidation loan rebate would be increased to 1.3%, but only for institutions whose holdings are made up of consolidation loans amounting to 90% or more. In his 2008 budget plan, President George W. Bush called for a 50 basis point cut in the SAP rate.
"Our concern is that they [Congress] go even further," said Joseph Astorina, a Barclays Capital analyst.
As for the Student Loan Sunshine Act, it bans gifts from student loan providers to college officials, discontinues long-standing revenue-sharing agreements between schools and lenders, and bans college officials from participating on lenders' advisory boards. Although schools can continue to use preferred lender lists, they must provide at least three names for that select group and explain how those lenders were chosen. Furthermore, a preferred lender cannot make a private education loan until the school has informed the student or parent of their options for borrowing under Title IV. Preferred lenders are also prohibited from using the school's logo in their marketing. On the schools' part, whenever providing information on private education loans, they must inform students of their Title IV eligibility and describe private loan terms that are less favorable than Title IV loans, according to the National Council of Higher Education Loan Programs.
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