I came across this article in the Economist this evening which raised this question: "Will the Obama administration's reforms of the financial system hurt retailers and manufacturers with lending arms?" The article goes on to describe how the financial reforms may impact industrial loan companies. As described by the Economist, ILCs are "state-regulated outfits, based mainly in Utah, which can take in federally insured deposits from savers, make loans and issue credit cards, but are subject to less onerous regulation than banks." The recently unveiled financial system reforms include plans to "put an end to a category of financial firm they have all set up called an “industrial loan company” (ILC)."
This is not a new story as the Wall Street Journal reported last week on the Obama Administration's plans:
"President Barack Obama wants companies with ILC charters to register as bank-holding companies with the Federal Reserve. That would put them in the same regulatory category as Bank of America Corp. and J.P. Morgan Chase & Co., subjecting the non-banks to much greater government oversight."
The Journal goes on to report that if this regulation were to occur, most of the ILCs would be shut down:
"If that happens, most companies with ILC charters likely would close them down, potentially shutting off another source of credit for consumers, industry experts predict. That's because the companies might not be able to satisfy the Fed's capital and other requirements, and thus would be ineligible to become bank-holding companies, or they would balk at heavier regulation."
Of course, this won't happen without a fight on Capitol Hill:
"Some lawmakers and banking groups are vowing to fight the ILC provision, which they see as an overzealous attempt to create a level regulatory playing field at the expense of companies that didn't play major roles in the financial crisis."
Why is this important to Sallie Mae? The Sallie Mae Bank, an ILC, plays a critical role in private loan originations as these recent company pronouncements make clear:
- 8-K filing from August 2008: "Sallie Mae Bank supports the Company’s private credit lending operations through both loan originations and funding. We expect Sallie Mae Bank to play a growing role in the financing of Sallie Mae's private credit loans."
- From 4Q 2008 Earnings Report: "From the period October 1, 2008 to December 31, 2008, Sallie Mae Bank raised $1.6 billion of term bank deposits with a weighted average life of 2.2 years and a weighted average cost of approximately three-month LIBOR plus 0.97 percent. As of December 31, 2008, total term bank deposits were $2.3 billion. We expect Sallie Mae Bank to raise deposits to fund Private Education Loan originations for the foreseeable future. We ultimately expect to raise long-term financing, through Private Education Loan securitizations or otherwise, to fund these loans."
- From 1Q 2009 Earnings Report: ""In the first quarter of 2009, Sallie Mae Bank raised $1.2 billion of term bank deposits with a weighted average life of 3.2 years and a weighted average fixed cost of approximately 3.24 percent. As of March 31, 2009, total term bank deposits were $3.3 billion. We expect Sallie Mae Bank to fund newly originated Private Education Loans by continuing to raise term bank deposits. We ultimately expect to raise long-term financing, through Private Education Loan securitizations or otherwise, to fund these loans."
So, now the focus turns again to Capitol Hill. With major bills to transform healthcare, finance, energy, and I almost forgot, education, it is sure to be a busy summer and fall. Meanwhile, the recent SLM private loan securitizations, while pricey, do show some demand for the collateral. Stay tuned...
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