Student loan agency settles suit > Court to review MELMAC-attorney general agreement

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The state’s largest student loan agency and the Maine Attorney General reached a tentative agreement Friday that will keep the two from squaring off in court over the proposed conversion of the nonprofit lender to a charitable educational foundation.

The agreement is scheduled to be reviewed for approval by a Kennebec County Superior Court judge on Monday, according to Bob Way, special assistant to Attorney General Andrew Ketterer.

The agreement deals with the proposed conversion of the nonprofit Maine Educational Loan Marketing Corp. to a charitable foundation, and the sale of its $504 million portfolio of student loans for $30 million to a for-profit Nebraska-based student loan agency. The sale is a necessary first step in the conversion under federal law.

Way said he could not divulge details of the settlement until the judge endorses it, except that the two sides have agreed on the $30 million sale price.

Earlier this month, a financial consultant hired by the attorney general found that the $30 million purchase price for MELMAC’s $504 million portfolio is “reasonable.”

The major point of contention that negotiators hammered out on Friday concerns the structure of the charitable foundation and the makeup of its board of directors. In particular, the dispute focused on the board’s public membership and the seating of four new members appointed by Gov. Angus King in August under a law passed last spring.

The sale was announced in July, less than a month before the law took effect. It is supposed to be completed at the end of December.

The four gubernatorial appointees are scheduled to take their seats in January. However, MELMAC lawyers have questioned whether the new law would apply to the agency if it were no longer in the student loan business.

In other action Friday, a judge rejected a request by an individual with MELMAC student loans who had asked for more public participation in the negotiations over the sale.

MELMAC wants to get out of the college loan business. In July, after two years under a legislative spotlight and after the passage of the law affecting its board of directors, the agency announced it was selling its portfolio, which covers 60,000 borrowers, to the for-profit National Education Loan Network of Nebraska. The sale will not affect the terms of the already issued loans, according to MELMAC officials.

They said the agency would place the entire $30 million in the charitable foundation.

The attorney general stopped the sale when he asked a Superior Court judge to make sure the conversion complies with state law and that the $30 million is adequate value.

The private, nonprofit student loan agency was established in 1983 by Richard Pierce, a former Republican state lawmaker, at the behest of Gov. Joseph Brennan and the Democratically controlled Legislature.

Pierce came under fire two years ago for his Services, another private nonprofit that he established in 1993 to administer MELMAC. MES was also accused of making it difficult for borrowers to obtain the discounts it offered on loan repayments.

Lawyers for the Consumers Union, publisher of Consumer Reports, argue that the public ought to have more say in the sale and the foundation structure because MELMAC built up its business through its tax-exempt status and its ability to issue tax-exempt bonds.

Rebecca Goldberg, a Boston lawyer for Consumers Union, said she is disappointed with the finding by the attorney general’s expert financial consultant that the $30 million is a reasonable value.

“I don’t believe this expert has done a thorough enough job,” she said. “He has not looked beyond the four corners of what the defendant’s financial adviser gave him.”

She cited a court filing by the consultant, Mark Leicester of Arthur Andersen LLP in Boston, that his assessment was based on reviewing “extensive documentation provided by MELMAC and [Salomon Smith-Barney] and follow-up telephone conferences” as well as a telephone conference with MES employees in their capacity as MELMAC program administrators.

Goldberg thinks that Leicester should have also looked at Richard Pierce’s activities, including financial transactions between MELMAC and MES.

Critics accuse MES of turning profits derived from public assets – its tax-exempt status and MELMAC’s access to nontaxable bonds – and putting them to private purposes.

Goldberg also noted that MELMAC has spent $510,000 on financial advisers and $791,000 on lawyers because of the conversion. These expenditures lower the ultimate value of the foundation, she said.

Consumers Union has been involved with similar conversions in other states in an effort to ensure that public assets of the student loan agencies are being protected, that the valuations are accurate, and that the public controls the newborn foundations, she said.

MELMAC acts as a “secondary student loan market.” It buys college loans from banks, which allows the banks to use the capital to issue more student loans.

MELMAC controls roughly 60 percent of the student loan market in Maine. It gained this lion’s share, in part, because it received a portion of the tax-exempt bonds the federal government permits the state to issue each year. These nontaxable bonds allow MELMAC to raise capital more cheaply than other lenders and to offer deeper discounts on loan repayments.

While critics say MES makes it hard for students and families to get the repayment discounts it offers, MES officials counter that the discounts are the best in the nation and the repayment conditions are no tougher than those offered by private banks.

The governor’s appointees waiting to take their seats on the MELMAC board are Donald DeMatteis of Litchfield, Donna Watson of Pownal, Louis Kornreich of Bangor and Maurice Bisson of Brunswick.

Kornreich is a lawyer in the firm of Gross, Minsky & Mogul. Watson is vice president and district manager for Fleet Bank in southern Maine.

Bisson is a certified public accountant with Berry, Dunn, McNeil and Parker. DeMatteis is former banking superintendent in Maine.