CUs Fear Banking Giants' Takeover Of Sallie Mae

RESTON, Va.–The pace of corporate takeovers in the credit union tech industry continued at a frenzied rate last week with the latest deal by two private equity funds and banking giants JP Morgan Chase and Bank of America to acquire Sallie Mae, the dominant player in the market, for a whopping $25 billion.The deal will not only give the two major competitors in the student loan market access to millions of young customers, but also defacto control over the secondary market for student loans, which Sallie Mae created and controlled, spreading fear among credit unions, many of whom have been squeezed out of the market by Sallie Mae.“It’s still kind of early to say how it may affect us because Sallie Mae has never really been a big competitor (in) Texas,” said James Nastars, SVP- lending at University of Texas FCU, one of the biggest student lenders among credit unions. “But BofA is; they’re No. 2 on the Texas campus. And Chase is up there among the leaders.”“That’s what we’re looking at,” said Nastars, whose credit union makes about $55 million a year in loans to UT students, about a fourth of all the loans made in the University system. “Sallie Mae is not much of a player in the Austin market. But BofA and JP Morgan are.”Other CUs relying on student loans had similar fears last week. When USC FCU sold its credit card portfolio to MBNA it chose the monoline bank because it didn’t want to be competing with the giant lender on other products, according to Gary Perez, president of the $300-million credit union. But then MBNA was sold to Bank of America, which competes with credit unions in almost every market.Under the deal, two private equity funds, J.C. Flowers, headed by ex-Goldman Sachs banker Christopher Flowers, and Friedman Fleischer & Lowe, will team to own 50.2% of the equity in Sallie Mae, while BofA and JP Morgan Chase will each own 24.9%. The group will pay $60 a share, a whopping 33% premium from the price the shares were trading before word of the giant takeover leaked out.As part of the deal, the two banking giants announced plans last week to provide a $30-billion line of credit to Sallie Mae to finance its securitizations, the key component of the secondary loan market. The deal comes as Congress is expected to cut federal subsidies and guarantees on student loans, squeezing even more small competitors like CUs and community banks. In addition, a probe of inducements paid by participants in the student loan market by the New York Attorney General continues to spread, with Sallie Mae among those that have agreed to settle charges by ending what were described as deceptive sales arrangements and pay $2 million into a fund to help students understand financial aid availability.To USC FCU’s Perez, the Sallie Mae takeover conjures up the whole MBNA deal. He worries that not only will the banking giant gain access to its members’ information, but also that key services provided by Sallie Mae, like servicing and securitization, will be affected.“The purpose of selling (the credit card portfolio) to a monoline was that we wouldn’t be selling to a competitor,” Perez said, likening it to ‘sleeping with the enemy.’ While Sallie Mae had grown from a credit union partner on student loans to a major competitor, its business was mostly restricted to student loans, said Perez. BofA and JP Morgan Chase compete with credit unions in every market, he noted.“One of the fears I’ve always had was being squeezed out of the market,” said Leo Ditchcreek, president of Notre Dame FCU, the dominant lender on the University of Notre Dame campus, with more than 80% of the market. But Sallie Mae is also one of the school’s six preferred lenders and also buys the CU’s loans and provides servicing.But the expansion of the role of BofA and JP Morgan Chase into the $85-billion student loan market is also a good sign for Notre Dame FCU’s Ditchcreek. “It appears to me that the student loan market is still a viable market for credit unions,” he said. “The fact that private firms like Chase and Bank of America are getting deeper involved gives me an indication that there’s still money to be had.” The demand for student loans is growing and will continue to grow in the near future, he added. “I hope with the Sallie’s Maes of the world and the Citibanks of the world that the competitiveness will maintain,” said Ditchcreek. “I hope they don’t squeeze out the other players.”