Sallie Mae Watch – January 30, 2012

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It seems that Sallie Mae could well have been copying the tactics of the subprime lenders, way back from 2006 onwards.  That is, making risky loans, hiding the risk from investors, and making money in the process.  (Is this new to anyone though?  I guess it is, because people still borrow from Sallie Mae, and people still attend for-profit colleges.)

This story, which is getting shamefully little coverage, provides a brief overview of a class action lawsuit against Sallie Mae which has been certified.  Here’s the gist of the story:

A federal judge has certified a securities fraud class action against Sallie Mae, the top student loan provider in the United States.

Lead plaintiff SLM Ventures accused SLM Corp., Sallie Mae’s corporate name, of telling investors it used strict underwriting standards for its loans, while weakening those standards by approving risky loans to students at for-profit schools.

U.S. District Judge William H. Pauley III laid out the allegations in a 19-page ruling.

“In 2006, Sallie Mae’s management decided to expand the company’s PEL [Private Education Loan] business. Between June 2006 and December 2007, Sallie Mae’s PEL portfolio more than doubled, growing from $7 billion to $15.8 billion. At the time, Sallie Mae publicly stated that it had applied strict underwriting standards to all PEL borrowers. However, SLM Ventures alleges that Sallie Mae actually relaxed its underwriting standards and loaned billions of dollars to borrowers with low credit scores and other high risk borrowers who attended part-time, correspondence, or for-profit schools.” (Citations omitted.)

Sallie Mae then moved as many problem loans as possible into forbearance to hide the true number of private loans that were delinquent or in default, in violation of Generally Accepted Accounting Principles and Securities and Exchange Commission regulations, the investors said.

They accuse Sallie Mae’s chairman of fudging the numbers to profit on a merger.

“In April 2007, Sallie Mae and its then-Chairman of the Board, Albert L. Lord (‘Lord’), negotiated to sell the company to a group of private equity investors (the ‘Flowers Transaction’). The strike price was set at $60 per share, and was contingent on Sallie Mae’s financial performance and outlook. If the proposed merger closed, Lord would receive a cash payment totaling $225 million representing the value of his stock options.

(Underlining added by me.)

The details of the SM lawsuit, including today’s class certification, can be found here, at the web site of Girard Gibbs LLP, lead counsel.

I’m not particularly surprised to hear that Sallie Mae was allegedly involved in this kind of behavior (and I’m almost certain that there is no need for the use of the word “allegedly”, based on SM’s past performance).  I’m not surprised, either, that for-profit schools are involved too, and that for-profit schools are once again revealed as nothing more than a vehicle for siphoning money from the government and individuals, straight into the coffers of Sallie Mae’s investors.

Updates to follow as information arrives…

This entry was posted in For-Profit, General education, Higher Education Bubble, Sallie Mae, Student debt. Bookmark the permalink.

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