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Reports Say Sallie Mae Fiscally Secure, But Warn of Poor Regulatory Oversight

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Washington--The Treasury Department and the Congressional Budget Office last week issued separate reports confirming the financial stability of the Student Loan Marketing Association, but warned that a lack of supervision could lead the organization to take financial risks.

Such instability would cause the federal government to become involved in the firm's financial matters at a significant cost to taxpayers, the reports said.

The association, known as Sallie Mae, is a federally chartered intermediary that purchases student loans from lenders and provides money to lenders that work directly with students.

Both reports offered suggestions on how the government could further supervise Sallie Mae's operations.

The reports, mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Omnibus Budget Reconciliation Act of 1990, attempted to outline for the Congress potential financial risks for five financial enterprises established and backed by the government to serve specific public purposes.

The other enterprises are the Farm Credit System, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank System.

Lawmakers demanded the reports, along with one to follow from the General Accounting Office, after several government-backed saving and loan institutions failed in the late 1980's. They feared that a lack of regulatory supervision might lead to risky practices on the part of the five enterprises.

In the case of Sallie Mae, however, the reports indicated that despite little supervision, it is operating prudently.

"The firm--without a safety and soundness regulator--has conducted its business in such a way as to have limited the federal exposure to risk to an insignificant level," the cbo report found.

The Treasury report noted that Standard & Poor's, a bond-rating company, gave Sallie Mae its highest financial rating, aaa, in response to the department's requests for an assessment.

Nevertheless, the agency said in its report that it would like a regulator to monitor Sallie Mae to further guard against financial risks.

The cbo report outlined several options the government could take to regulate Sallie Mae. It could privatize the enterprise, increase federal supervision of it, require Sallie Mae to subject itself to private risk assessment, or subject it to the supervision of a centralized supervisor of all government-sponsored enterprises.--mp

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