A sweeping financial reform bill signed into law by President Barack Obama last month has created new protections for borrowers, but critics say it doesn’t focus enough on regulating student loans.
Although the new law is being hailed as the most comprehensive overhaul of financial regulations since the 1930s — creating a new Consumer Financial Protection Bureau to oversee lending institutions — some critics say still more should be done, especially with regard to protecting students from predatory lenders.
For instance, some large banks fall under a “community bank” exemption under the new law — including a subsidiary of Sallie Mae, the largest provider of student loans.
Although the Consumer Financial Protection Bureau will regulate Sallie Mae, its private student loans are not subject to the agency’s oversight because the company finances its loans through a subsidiary with less than $10 billion in assets.
“Community banks are not the ones that caused the problem in the first place,” said Harry Gural, a spokesman for Rep. Barney Frank (D-Mass.) who helped craft the bill. “That’s why there’s greater oversight on larger banks.”
But Lindsay McCluskey, vice president of the United States Student Association advocacy group, said the exemption is a loophole that is being exploited, because other agencies like the Federal Deposit Insurance Corporation have less authority than the new bureau.
“Sallie Mae is a far cry from a community bank,” McCluskey said, adding the lender doesn’t have a clean record: In 2007, the company was found bribing university financial aid officers at various schools with all-expense-paid trips, and in 2009, a U.S. Department of Education report found Sallie Mae had overbilled the government by $22.3 million for student loan subsidies between October 2003 and September 2006.
Elinda Kiss, a university finance professor, said one of the reasons the bureau wasn’t given greater oversight over student lenders like Sallie Mae is because “where the focus has been is mortgage lending.”
“Student loans haven’t been addressed in the same way because the bigger problem wasn’t student loan investments but mortgage investments,” Kiss said. “That’s a different bill.
“The bill passed with a slim majority — add Sallie Mae and you lose some Democrats and Republicans,” Kiss added.
The wide-reaching effects of the bill, largely assembled by Frank and Sen. Chris Dodd (D-Conn.) focus on granting government agencies the authority to regulate derivatives, or financial contracts linked to the future value of an asset, and large hedge funds, or portfolios of investments similar to mutual funds.
The reform effort also affects banks, lenders and borrowers, permanently increasing federal deposit insurance from $100,000 to $250,000; forcing banks to maintain more capital so they are less prone to fail; limiting the amount of risky activities banks can participate in and rooting out predatory lending practices, especially in the mortgage industry, such as hidden fees and penalties.
Although the bill is now law, many of its effects will remain unseen for several months as the proper government agencies detail how they will regulate and enforce its measures and the new Consumer Financial Protection Bureau is staffed and functioning.
“Law says it has to be up and running in 12 months, no later than 18,” House Financial Services Committee spokesman Steve Adamske said of the bureau.
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