Fed Action on Student loans, Auto Loans, Consumer Loans and small business loans

As we have repeatedly said publicly and privately, the securitization process extended throughout the credit world. Hardly anything was not packaged in some securitized zone. Thus most assumptions about the liability on such debt are wrong as to whether there is any outstanding balance, who owns the loan, etc.

Of particular interest is the student loan debt. We have researched this. It appears that the government guarantee does not necessarily run with the note. In fact, quite the contrary, once the lender is paid in full (as they always are in securitized loans) there is no guarantee. This is important because it is the presence of the government guarantee that is the basis for student loans being non dischargeable in bankruptcy. It appears to us that auto and student loans can be both unsecured and fully dischargeable in bankruptcy. The same might hold true for small business loans.

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November 25, 2008
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Treasury Provides TARP Funds to Federal Reserve
Consumer ABS Lending Facility

Washington– The U.S. Treasury Department today announced it will allocate $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York.

The asset backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards. While ABS issuances in these categories were roughly $240 billion in 2007, issuance of consumer ABS declined precipitously in the third quarter of 2008 before essentially coming to a halt in October. Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally.

This facility, the Term Asset Backed Securities Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. The underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.

Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department will provide a $20 billion of credit protection to the Federal Reserve in connection with the facility, using its authorities in the Emergency Economic Stabilization Act of 2008. The attached term sheet describes the basic terms and operational details of the facility.

One Response

  1. The concept of loan dischargability in a bankruptcy, should also be explored from a ‘Standing’ point of view, in the same manner as all ‘Creditors’ must ‘prove up’ that they own the debt by producing the original signed and inked promissory note, showing physical possession, and proper endorsement/ assignment. Constitutionally, the Student Loan law being slanted toward no BK, is unconstitutional (ei. 4th and 14th Ammendment, Due Process violations, illegal seizures). A record should then be created in court, showing that party has ‘no interest’ and ‘no standing’ when they can not produce the note. Should the fact they have ‘no note’ ‘no debt’ be overlooked, because they are the Department of Education ? It would be unconstitutional on its face, to require a party to pay a debt which another party (ei. government) can not show proof of. This concept could be useful in discharge of older loans from the 80’s and 90’s were actual promissory notes were signed. Todays, E-Signing methods used for student loans pose more problems for debtors, in challenging legal standing, since there was no real signed piece of paper to begin with. (Though perhaps over time, and with the diligence of others, they will find a kink in the chain of armor, of Student Loan EnSlavement/ EnDebtedness.

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