B-216330, DEC 4, 1984

B-216330: Dec 4, 1984

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ACTION DIGEST: SINCE THE QUESTION OF THE AUTHORITY OF THE STUDENT LOAN MARKETING ASSOCIATION (SLMA) TO ACQUIRE AND OPERATE A SAVINGS AND LOAN ASSOCIATION (S&L) IS CURRENTLY THE SUBJECT OF ONGOING LITIGATION. OUR OFFICE IS NOT IN A POSITION TO RENDER A DEFINITIVE OPINION AS TO WHETHER SLMA'S ACQUISITION OF THE S&L EXCEEDED ITS AUTHORITY. THE PRIMARY ARGUMENT FAVORING SLMA'S AUTHORITY TO ACQUIRE THE S&L IS BASED ON THE BROAD STATUTORY LANGUAGE IN 20 U.S.C. SEC. 1087- 2(D)(1)(D) AUTHORIZING SLMA'S BOARD OF DIRECTORS TO UNDERTAKE "ANY OTHER ACTIVITY" THAT THE BOARD DETERMINES WILL FURTHER THE CREDIT NEEDS OF STUDENTS. THE MAIN ARGUMENTS SUPPORTING THE OPPOSITE CONCLUSION ARE BASED ON (1) THE PROPOSITION THAT CONGRESS NEVER INTENDED FOR SLMA TO ACQUIRE A PRIVATE LENDING INSTITUTION AND (2) THE STRONG POSSIBILITY THAT SOME OF THE ACTIVITIES THE S&L WILL BE ENGAGING IN ARE NOT WITHIN SLMA'S AUTHORITY TO PERFORM DIRECTLY.

B-216330, DEC 4, 1984

GENERAL ACCOUNTING OFFICE - DECISIONS - ABEYANCE - PENDING COURT, QUASI- JUDICIAL, APPELLATE BOARD, ETC. ACTION DIGEST: SINCE THE QUESTION OF THE AUTHORITY OF THE STUDENT LOAN MARKETING ASSOCIATION (SLMA) TO ACQUIRE AND OPERATE A SAVINGS AND LOAN ASSOCIATION (S&L) IS CURRENTLY THE SUBJECT OF ONGOING LITIGATION, AND SINCE SLMA DOES NOT RECEIVED FEDERAL APPROPRIATIONS, OUR OFFICE IS NOT IN A POSITION TO RENDER A DEFINITIVE OPINION AS TO WHETHER SLMA'S ACQUISITION OF THE S&L EXCEEDED ITS AUTHORITY, BUT HAS PREPARED A "PRO" AND "CON" ANALYSIS OF THE QUESTION. THE PRIMARY ARGUMENT FAVORING SLMA'S AUTHORITY TO ACQUIRE THE S&L IS BASED ON THE BROAD STATUTORY LANGUAGE IN 20 U.S.C. SEC. 1087- 2(D)(1)(D) AUTHORIZING SLMA'S BOARD OF DIRECTORS TO UNDERTAKE "ANY OTHER ACTIVITY" THAT THE BOARD DETERMINES WILL FURTHER THE CREDIT NEEDS OF STUDENTS. THE MAIN ARGUMENTS SUPPORTING THE OPPOSITE CONCLUSION ARE BASED ON (1) THE PROPOSITION THAT CONGRESS NEVER INTENDED FOR SLMA TO ACQUIRE A PRIVATE LENDING INSTITUTION AND (2) THE STRONG POSSIBILITY THAT SOME OF THE ACTIVITIES THE S&L WILL BE ENGAGING IN ARE NOT WITHIN SLMA'S AUTHORITY TO PERFORM DIRECTLY.

THE HONORABLE PAUL SIMON: CHAIRMAN, SUBCOMMITTEE ON POSTSECONDARY EDUCATION COMMITTEE ON EDUCATION AND LABOR HOUSE OF REPRESENTATIVES

DEAR MR. CHAIRMAN:

THIS IS IN RESPONSE TO YOUR REQUEST, DATED AUGUST 30, 1984, FOR OUR LEGAL OPINION CONCERNING THE AUTHORITY OF THE STUDENT LOAN MARKETING ASSOCIATION (SLMA) TO ACQUIRE AND OPERATE A SAVINGS AND LOAN ASSOCIATION.

IN YOUR LETTER, YOU STATED THAT OUR OPINION WAS NEEDED IN CONNECTION WITH OVERSIGHT HEARINGS THE SUBCOMMITTEE ON POSTSECONDARY EDUCATION WAS THEN PLANNING TO HOLD ON OR ABOUT SEPTEMBER 19, 1984. THE HEARING WAS PLANNED TO INVESTIGATE SLMA'S ACQUISITION OF THE SUN BELT SAVINGS AND LOAN ASSOCIATION, IN NORTH CAROLINA, NOW RENAMED THE FIRST CAPITAL CORPORATION (FIRST CAPITAL). THE HEARING WAS ALSO INTENDED TO EXAMINE THE RELATIONSHIP BETWEEN SLMA'S STATUTORY RESPONSIBILITIES AND ITS OPERATION OF THE STATE CHARTERED SAVINGS AND LOAN ASSOCIATION. SUBSEQUENTLY, YOUR OFFICE ADVISED US THAT WHILE THE SCHEDULED OVERSIGHT HEARINGS HAD BEEN POSTPONED, OUR OPINION WAS STILL NEEDED IN CONNECTION WITH A PLANNED STAFF INVESTIGATION OF SLMA'S ACQUISITION OF FIRST CAPITAL.

AS MENTIONED IN YOUR LETTER, SEVERAL SAVINGS AND LOAN AND COMMERCIAL BANKING ASSOCIATIONS LOCATED IN NORTH CAROLINA FILED SUIT AGAINST SLMA ON AUGUST 28, 1984, ALLEGING THAT SLMA'S ACQUISITION OF FIRST CAPITAL EXCEEDED ITS AUTHORITY UNDER FEDERAL, STATE, AND COMMON LAW. OUR OFFICE ORDINARILY DOES NOT COMMENT ON MATTERS THAT ARE THE SUBJECT OF ONGOING LITIGATION. ONCE AN ACTION HAS BEGUN, WE BELIEVE THAT THE APPROPRIATE FORUM FOR RESOLVING THE MATTER IS THE COURT WITH JURISDICTION OVER THE DISPUTE. THIS IS ESPECIALLY TRUE HERE, WHERE NO EXPENDITURE OF APPROPRIATED FUNDS IS INVOLVED. /1/ ACCORDINGLY, WE ARE NOT IN A POSITION TO RENDER A DEFINITIVE OPINION AS TO WHETHER SLMA EXCEEDED ITS AUTHORITY WHEN IT ACQUIRED FIRST CAPITAL. NEVERTHELESS, IN LIGHT OF YOUR INTEREST IN RECEIVING OUR VIEWS ON THE MATTER, WE HAVE EXAMINED THE ISSUES INVOLVED AND HAVE PREPARED A GENERAL ANALYSIS SETTING FORTH WHAT WE BELIEVE TO BE THE MAIN ARGUMENTS ON BOTH SIDES OF THE QUESTION.

WE CONTACTED REPRESENTATIVES OF SLMA TO INFORM THEM THAT WE WERE LOOKING INTO THIS MATTER AND TO GIVE THEM THE OPPORTUNITY TO SUBMIT A FORMAL REPORT TO US EXPLAINING THE LEGAL BASIS FOR THEIR ACQUISITION. SLMA DID NOT WISH TO SUBMIT A FORMAL WRITTEN REPORT GIVING ITS LEGAL POSITION FOR FEAR THAT BY DOING SO IT MIGHT PREJUDICE OR OTHERWISE ADVERSELY AFFECT ITS LITIGATIVE POSTURE. HOWEVER, SLMA'S REPRESENTATIVES DID STATE THEIR VIEW THAT SLMA'S ACQUISITION AND OPERATION OF FIRST CAPITAL WAS AUTHORIZED UNDER SECTION 439(D)(1)(D) OF THE HIGHER EDUCATION ACT OF 1965, AS AMENDED (ACT), 20 U.S.C. SEC. 1087-2(D)(1)(D), AND TO A LESSER EXTENT BY SECTION 439(I)(9) OF THE ACT, 20 U.S.C. SEC. 1087-2(I)(9).

IN ADDITION, SLMA'S REPRESENTATIVES FURNISHED US WITH A COPY OF A LETTER, DATED JUNE 18, 1984, TO SENATOR EDWARD KENNEDY FROM SLMA'S BOARD OF DIRECTORS THAT EXPLAINED WHAT WAS THEN THE BOARD'S PLAN TO FORM A NEW STATE CHARTERED BANK IN NORTH CAROLINA SPECIALIZING IN EDUCATION CREDIT. ALTHOUGH THE BOARD SUBSEQUENTLY DECIDED TO ACQUIRE A PRE-EXISTING LENDING INSTITUTION-- FIRST CAPITAL-- INSTEAD, SLMA'S REPRESENTATIVE ASSURED US THAT THE INTENDED ACTIVITIES OF THE "NEW" FINANCIAL INSTITUTION IT HAD PLANNED TO FORM, WERE ESSENTIALLY THE SAME AS THE ACTIVITIES THAT FIRST CAPITAL WILL NOW BE ENGAGING IN. AS EXPLAINED IN THE LETTER AND ENCLOSURE TO SENATOR KENNEDY, SLMA'S BASIC PURPOSE IN OPERATING A FINANCIAL INSTITUTION IS "TO PROVIDE ADDITIONAL POSTSECONDARY EDUCATION CREDIT TO NORTH CAROLINA RESIDENTS AND STUDENTS." THE ACTIVITIES IT WILL BE ENGAGING IN INCLUDE THE FOLLOWING: (1) THE EXTENSION OF NON-FEDERALLY INSURED EDUCATION LOANS, EITHER SECURED OR NONSECURED, TO PARENTS AND STUDENT; (2) PARTICIPATION ON A "WHOLESALE" INVESTOR BASIS IN FEDERALLY INSURED STUDENT LOAN PROGRAMS, AND (3) INVESTMENT, TO THE EXTENT ALLOWED UNDER THE INTERNAL REVENUE CODE, OF A PORTION OF ITS ASSETS IN TAX-EXEMPT STUDENT LOAN REVENUE BONDS. IN ADDITION, THE FINANCIAL INSTITUTION "WILL ENGAGE IN DEPOSIT AND LENDING PROGRAMS" THAT ARE CUSTOMARILY PERFORMED BY COMMERCIAL LENDING INSTITUTIONS. HOWEVER, IT IS SLMA'S STATED POSITION THAT THIS "FINANCIAL SUBSIDIARY WILL BE RESTRICTED IN ITS ACTIVITIES TO THOSE ALLOWED TO THE PARENT CORPORATION UNDER SECTION 439 OF THE HIGHER EDUCATION ACT OF 1965 AS AMENDED."

STATEMENT OF SLMA'S AUTHORITY

SLMA WAS CREATED IN 1972 BY SEC. 133 OF THE EDUCATION AMENDMENTS OF 1972, PUB.L. NO. 92-318, 86 STAT. 265, APPEARING, AS AMENDED, AT 20 U.S.C. SEC. 1087-2 (1982). IT WAS ESTABLISHED AS A GOVERNMENT SPONSORED, PRIVATE, FOR -PROFIT CORPORATION TO BE FINANCED BY PRIVATE CAPITAL FOR THE PURPOSE OF SERVING AS A SECONDARY MARKET AND WAREHOUSING FACILITY TO PROVIDE LIQUIDITY TO LENDERS MAKING INSURED STUDENT LOANS. TODAY, AFTER NUMEROUS AMENDMENTS TO ITS ENABLING LEGISLATION THAT HAVE SIGNIFICANTLY EXPANDED ITS ORIGINAL AUTHORITY, SLMA HAS THREE STATED STATUTORY PURPOSES:(1) TO SERVE AS A SECONDARY MARKET AND WAREHOUSING FACILITY FOR STUDENT LOANS TO PROVIDE LIQUIDITY FOR STUDENT INVESTMENTS, BOTH INSURED AND UNINSURED; (2) TO FACILITATE SECURED TRANSACTIONS INVOLVING STUDENT LOANS; AND (3) TO ASSURE NATIONWIDE THE ESTABLISHMENT OF ADEQUATE STUDENT LOAN INSURANCE PROGRAMS.

IN ORDER TO PURSUE THESE OBJECTIVES, 20 U.S.C. SEC. 1087-2(D)(1) AUTHORIZES SLMA TO UNDERTAKE A VARIETY OF ACTIVITIES, INCLUDING THE FOLLOWING.

"(A) *** TO MAKE ADVANCES ON THE SECURITY OF PURCHASE, OR REPURCHASE, SERVICE, SELL OR RESELL, OFFER PARTICIPATIONS, OR POOLED INTERESTS OR OTHERWISE DEAL IN THE *** STUDENT LOANS WHICH ARE INSURED BY THE SECRETARY OF EDUCATION UNDER THIS PART OR BY A STATE OR NONPROFIT PRIVATE INSTITUTION OR ORGANIZATION WITH WHICH THE SECRETARY HAS AN AGREEMENT

"(B) TO BUY, SELL, HOLD, UNDERWRITE, AND OTHERWISE DEAL IN OBLIGATIONS, IF SUCH OBLIGATIONS ARE ISSUED, FOR THE PURPOSE OF MAKING OR PURCHASING INSURED LOANS, BY A STATE OR NONPROFIT INSTITUTION OR ORGANIZATION WHICH HAS AN AGREEMENT WITH THE SECRETARY ***;

"(C) TO UNDERTAKE A PROGRAM OF LOAN INSURANCE PURSUANT TO AGREEMENTS WITH THE SECRETARY *** IF THE SECRETARY DETERMINES THAT (I) ELIGIBLE BORROWERS ARE SEEKING AND UNABLE TO OBTAIN LOANS UNDER THIS PART, AND (II) NO STATE OR NONPROFIT PRIVATE INSTITUTION OR ORGANIZATION HAVING AN AGREEMENT WITH THE SECRETARY FOR A PROGRAM OF LOAN INSURANCE UNDER THIS PART OF CAPABLE OF OR WILLING TO PROVIDE A PROGRAM OF LOAN INSURANCE FOR SUCH BORROWERS; AND

"(D) TO UNDERTAKE ANY OTHER ACTIVITY WHICH THE BOARD OF DIRECTORS OF THE ASSOCIATION DETERMINES TO BE IN FURTHERANCE OF THE PROGRAMS OF INSURED STUDENT LOANS AUTHORIZED UNDER THIS PART OR WILL OTHERWISE SUPPORT THE CREDIT NEEDS OF STUDENTS.

IN ADDITION TO THE ABOVE-MENTIONED ACTIVITIES, SLMA HAS LIMITED AUTHORITY UNDER 20 U.S.C. SEC. 1087-2(Q) TO MAKE INSURED STUDENT LOANS DIRECTLY WHENEVER THE SECRETARY OF EDUCATION DETERMINES THAT ELIGIBLE BORROWERS IN THE STATE ARE NOT ABLE TO OBTAIN INSURED STUDENT LOANS BECAUSE NO STATE GUARANTY AGENCY EXISTS OR BECAUSE INSURED LOANS ARE NOT OTHERWISE AVAILABLE FROM COMMERCIAL LENDERS. UNDER THAT PROVISION, SLMA'S AUTHORITY TO MAKE DIRECT INSURED LOANS TERMINATES WHEN THE SECRETARY OF EDUCATION DETERMINES THAT THE TRIGGERING CONDITIONS NO LONGER EXIST OR THAT DIRECT LENDING BY SLMA HAS FURTHER REDUCED LOAN AVAILABILITY FROM OTHER SOURCES OR HAS INHIBITED THE FORMATION OF A STATE GUARANTY AGENCY.

ALSO, AMONG THE ENUMERATED POWERS OF THE ASSOCIATION IS THE POWER--

"*** TO DO ALL THINGS AS ARE NECESSARY OR INCIDENTAL TO THE MAJOR MANAGEMENT OF ITS AFFAIRS AND THE PROPER CONDUCT OF ITS BUSINESS." U.S.C. SEC. 1087-2(I)(9).

DISCUSSION AND ANALYSIS

AS A FEDERALLY-CREATED, ALBEIT PRIVATE, CORPORATE ENTITY ESTABLISHED BY CONGRESS TO PURSUE CONGRESSIONAL PURPOSES AND OBJECTIVES, SLMA'S AUTHORITY IS DERIVED FROM AND BASED ON ITS ENABLING LEGISLATION. ACCORDINGLY, SLMA CANNOT TAKE ANY ACTIONS OR UNDERTAKE ANY ACTIVITY THAT IS NOT AUTHORIZED, EXPLICITLY OR IMPLICITLY, BY THAT LEGISLATION. AS STATED ABOVE, SLMA MAINTAINS THAT THE PRIMARY LEGAL BASIS FOR ITS ACQUISITION AND OPERATION OF FIRST CAPITAL IS THE BROAD AUTHORITY PROVIDED IN 20 U.S.C. SEC. 1087- 2(D)(1)(D) FOR IT "TO UNDERTAKE ANY OTHER ACTIVITY WHICH THE BOARD OF DIRECTORS OF THE ASSOCIATION DETERMINES TO BE IN FURTHERANCE OF THE PROGRAMS OF INSURED STUDENT LOANS AUTHORIZED UNDER THE PART OR WILL OTHERWISE SUPPORT THE CREDIT NEED OF STUDENTS." THIS PROVISION WAS ONE OF NUMEROUS NEW PROVISIONS ADDED TO SLMA'S ENABLING LEGISLATION IN THE OMNIBUS BUDGET RECONCILIATION ACT OF 1981, PUB. L. NO. 97-35, SEC. 538, 95 STAT. 357, 458.

OBVIOUSLY THE PROVISION IN 20 U.S.C. SEC. 1087-2(D)(1)(D), AS WELL AS OTHER PROVISIONS ADDED TO THE STATUTE BY PUB. L. NO. 97-35, WERE INTENDED TO EXPAND SLMA'S AUTHORITY. UNFORTUNATELY, THE LEGISLATIVE HISTORY IF THE PROVISION IS NOT VERY HELPFUL IN DETERMINING THE EXTENT OF SLMA'S ADMITTEDLY BROADER AUTHORITY UNDER SUBSECTION (D), AND WHETHER THAT PROVISION CAN REASONABLY BE INTERPRETED AS GRANTING SLMA THE DISCRETION TO ACQUIRE A SAVINGS AND LOAN ASSOCIATION-- CLEARLY, AN "UNUSUAL" ACTION FOR A GOVERNMENT SPONSORED CORPORATION. THE CONFERENCE REPORT MERELY STATES THAT UNDER THE PROVISION-- "THE SALLIE MAE BOARD OF DIRECTORS IS AUTHORIZED TO PURSUE ACTIVITIES IT DEEMS NECESSARY ***." H.R. REP. NO. 97 -208, 97TH CONG., 1ST SESS. 742 (1981).

FOR A VARIETY OF REASON, BUT PRIMARILY BECAUSE OF THE ONGOING LITIGATION INVOLVING THIS MATTER AND SLMA'S STATUS AS A PRIVATE CORPORATION THAT DOES NOT RECEIVE APPROPRIATED FUNDS, OUR OFFICE IS NOT IN A POSITION, AS INDICATED ABOVE, TO REACH ANY DECISION AS TO WHETHER SLMA EXCEEDED ITS AUTHORITY WHEN ITS ACQUIRED FIRST CAPITAL. THE REMAINDER OF THIS OPINION SETS FORTH THE MAIN ARGUMENTS THAT MIGHT BE USED TO SUPPORT EITHER AN AFFIRMATIVE OR NEGATIVE ANSWER TO THAT QUESTION.

ARGUMENTS FAVORING SLMA'S AUTHORITY TO ACQUIRE AND OPERATE FIRST CAPITAL

THE PRIMARY ARGUMENT SUPPORTING SLMA'S POSITION THAT 20 U.S.C. SEC. 1087- 2(D)(1)(D) AUTHORIZES IT TO ACQUIRE AND OPERATE A SAVINGS AND LOAN ASSOCIATION IS THE STATUTORY LANGUAGE ITSELF, WHICH PROVIDES THE SLMA'S BOARD OF DIRECTORS MAY UNDERTAKE "ANY OTHER ACTIVITY" THAT THE BOARD DETERMINES WILL FURTHER THE INSURED LOAN PROGRAM OR WILL OTHERWISE SUPPORT THE CREDIT NEEDS OF STUDENTS. SINCE NEITHER THE STATUTE NOR ITS LEGISLATIVE HISTORY ATTEMPTS TO DEFINE THOSE ACTIVITIES THAT CAN BE AUTHORIZED BY THE BOARD UNDER THIS PROVISION AND THE ACTIVITIES ARE NOT SPECIFICALLY PROHIBITED, THIS LANGUAGE CAN BE INTERPRETED AS GRANTING SLMA'S BOARD OF DIRECTORS BROAD DISCRETION. THAT IS, AS LONG AS THE BOARD MAKES A REASONABLY SUPPORTABLE DETERMINATION THAT A PARTICULAR "ACTIVITY" WILL FURTHER THE INSURED LOAN PROGRAM OR OTHERWISE SUPPORT THE CREDITS NEEDS OF STUDENTS, THAT ACTIVITY WOULD BE AUTHORIZED UNDER THE STATUTE.

BASED ON THE INFORMATION CONTAINED IN THE LETTER DATED JUNE 18,, 1984, TO SENATOR KENNEDY, AND OTHER INFORMATION OBTAINED INFORMALLY FROM SLMA, WE UNDERSTAND THAT MOST OF THE ACTIVITIES ENGAGED IN BY FIRST CAPITAL WILL BE DIRECTLY RELATED TO, AND IN SUPPORT OF, SLMA'S MISSION OF ASSURING THAT ADEQUATE CREDIT IS AVAILABLE TO MEET STUDENT'S NEEDS. SLMA'S BASIC JUSTIFICATION FOR ACQUIRING FIRST CAPITAL IS TO "PROVIDE CREDIT FOR POSTSECONDARY EDUCATION." THESE CIRCUMSTANCES APPEAR TO SUPPORT THE BOARD'S DETERMINATION THAT THE ACQUISITION OF FIRST CAPITAL WILL FURTHER SLMA'S CAPACITY TO MEET THE CREDIT NEEDS OF THE STUDENTS.

AS A COMMERCIAL LENDING INSTITUTION, WE UNDERSTAND THAT FIRST CAPITAL WILL BE ENGAGING IN SOME ACTIVITIES SUCH AS THE ACCEPTANCE OF DEPOSITS AND THE EXTENSION OF MORTGAGE AND OTHER CONSUMER TYPE LOANS THAT ARE NOT DIRECTLY RELATED TO THE PURPOSE OF PROVIDING CREDIT TO STUDENTS. SLMA'S REPRESENTATIVES HAVE INFORMALLY ADVISED US THAT SLMA'S AUTHORITY TO ENGAGE IN THIS TYPE OF ACTIVITY IS BASED ON 20 U.S.C. SEC. 1087-2(D)(1)(D), DISCUSSED ABOVE, AS SUPPLEMENTED BY THE AUTHORITY GRANTED SLMA IN 20 U.S.C. SEC. 1087-2(I)(9)--

"*** TO DO ALL THINGS AS ARE NECESSARY OR INCIDENTAL TO THE PROPER MANAGEMENT OF ITS AFFAIRS AND THE PROPER CONDUCT OF ITS BUSINESS." THUS, IT IS SLMA'S POSITION THAT SINCE THE BOARD OF DIRECTORS DETERMINED THAT THE ACQUISITION OF FIRST CAPITAL WAS A NECESSARY AND PROPER MEANS OF FURTHERING SLMA'S STATUTORY MANDATE TO MEET THE CREDIT NEEDS OF STUDENTS, FIRST CAPITAL'S PARTICIPATION IN OTHER NON-STUDENT LOAN RELATED ACTIVITIES THAT ARE CUSTOMARILY PERFORMED BY A COMMERCIAL SAVINGS AND LOAN ASSOCIATION ARE INCIDENTAL TO THE PERFORMANCE OF SLMA'S AUTHORIZED ACTIVITIES. THESE NORMAL SAVINGS AND LOAN ACTIVITIES EVEN THOUGH UNRELATED TO SLMA'S PURPOSES, ARE REQUIRED UNDER THE STATE CHARTER OF THE SAVINGS AND LOAN ASSOCIATION.

IN ADDITION, IT CAN BE ARGUED THAT AS THE ENTITY RESPONSIBLE FOR ADMINISTERING THIS LEGISLATION, SLMA'S INTERPRETATION OF THE STATUTE AND THE EXTENT OF ITS OWN AUTHORITY THEREUNDER SHOULD BE FOLLOWED UNLESS THERE ARE STRONG INDICATIONS FROM THE LEGISLATIVE HISTORY OR OTHERWISE THAT ITS INTERPRETATION IS ARBITRARY OR INCONSISTENT WITH THE STATUTORY PURPOSE. SEE 58 COMP.GEN. 635, 638 (1979). FINALLY, SINCE CONGRESS HAS CONSISTENTLY EXTENDED AND EXPANDED SLMA'S AUTHORITY THROUGH THE ENACTMENT OF NEW LEGISLATION, THUS DEMONSTRATING ITS INTENT TO ENLARGE SLMA'S AUTHORITY, ANY QUESTION AS TO THE PROPER INTERPRETATION OF A PARTICULAR STATUTORY PROVISION RELATING TO SLMA'S AUTHORITY SHOULD BE RESOLVED BY GIVING THE PROVISION THE BROADEST POSSIBLE CONSTRUCTION SO AS TO BEST EFFECTUATE THE INTENT OF CONGRESS. ARGUMENT AGAINST SLMA'S AUTHORITY TO ACQUIRE AND OPERATE FIRST CAPITAL

SUPPORT FOR THE CONCLUSION THAT SLMA'S ACQUISITION OF FIRST CAPITAL EXCEEDED ITS AUTHORITY RESTS ON THE PROPOSITION THAT CONGRESS NEVER INTENDED THROUGH ITS ENACTMENT OF 20 U.S.C. SEC. 1087-2(D)(1)(D) OR ANY OTHER PROVISIONS OF THE ACT, TO ALLOW SLMA TO ACQUIRE AND OPERATE A COMMERCIAL SAVINGS AND LOAN ASSOCIATION. ALTHOUGH CONGRESS NEVER EXPRESSLY STATED ITS INTENTION IN THIS REGARD, THERE ARE VARIOUS INDICATIONS THAT SUPPORT THIS CONCLUSION. FROM THE CREATION OF SLMA IN 1971, UNDER PUB. L. NO. 92-318, THROUGH THE OMNIBUS BUDGET RECONCILIATION ACT OF 1981, PUB. L. NO. 97-35, THAT ADDED 20 U.S.C. SEC. 1087-2(D)(1)(D), AND THEREAFTER, IN SUBSEQUENT AMENDMENTS TO SLMA'S ENABLING LEGISLATION, THE PREDOMINANT PURPOSE OF CONGRESS HAS BEEN THE ESTABLISHMENT AND STRENGTHENING OF A SECONDARY MARKET MECHANISM THAT WOULD PROVIDE LIQUIDITY AND SUPPORT TO PRIVATE LENDERS TO ASSIST AND ENCOURAGE THEM IN FULFILLING THE CREDIT NEEDS OF STUDENTS.

APPROXIMATELY, 1 YEAR AFTER 20 U.S.C. SEC. 1087-2(D)(1)(D) WAS ENACTED, CONGRESS EXPRESSED SOME CONCERN AS TO WHETHER SLMA WAS BEGINNING TO MOVE AWAY FROM ITS PRIMARY PURPOSE OF PROVIDING LIQUIDITY TO LENDERS MAKING STUDENTS LOANS. IN A CONFERENCE REPORT ON PUB. L. NO. 97-301, APPROVED OCTOBER 13, 1982, WHICH MADE SOME MINOR AMENDMENTS TO SLMA'S ENABLING LEGISLATION, THE CONFEREES REQUESTED THE GENERAL ACCOUNTING OFFICE TO CONDUCT AN EXTENSIVE REVIEW FOCUSING ON THE EVOLUTION OF SLMA'S AUTHORITY FROM ITS ESTABLISHMENT IN 1972 THROUGH ITS MOST RECENT AMENDMENT IN 1981. THE CONFEREES STATED THAT THEY WERE "PARTICULARLY INTERESTED IN AN ANALYSIS OF WHETHER SALLIE MAE'S ORIGINAL PURPOSE, TO PROVIDE ADDITIONAL CAPITAL FOR STUDENT LOANS FROM THE PRIVATE SECTOR, HAS, THROUGH LEGISLATIVE CHANGES OR POLICY REDIRECTION, BEEN SIGNIFICANTLY ERODED OR ALTERED, AND WHETHER OR NOT SALLIE MAE LESSENED ITS COMMITMENT TO ACT AS A SECONDARY MARKET IN FAVOR OF ITS ABILITY TO SERVE AS A DIRECT LENDER OR GUARANTOR." H.CONF. REP. NO. 97-887, 97TH CONG., 2D SESSION. 14 (1982).

SINCE ITS INCEPTION, SLMA'S PRIMARY PURPOSE HAS BEEN TO SUPPLEMENT AND SUPPORT THE ABILITY OF PRIVATE LENDING INSTITUTIONS TO PROVIDE CREDIT TO STUDENTS RATHER THAN TO COMPETE DIRECTLY WITH THE PRIVATE SECTOR AS SLMA APPEARS TO BE DOING HERE WHEN IT ACQUIRES AND OPERATES A COMMERCIAL SAVINGS AND LOAN ASSOCIATION. EVEN SLMA'S AUTHORITY UNDER 20 U.S.C. SEC. 1087-2(Q) TO ACT AS A DIRECT LENDER IS LIMITED TO AREAS IN WHICH ELIGIBLE STUDENT BORROWERS ARE UNABLE TO OBTAIN CREDIT FROM PRIVATE LENDERS.

IN THE COMPLAINT FILED IN THE UNITED STATES DISTRICT COURT IN NORTH CAROLINA ON AUGUST 28, 1984, ON BEHALF OF SAVINGS AND LOAN ASSOCIATIONS AND COMMERCIAL BANKS LOCATED IN NORTH CAROLINA, THE COMPLAINANTS ASSERT THAT SLMA'S ACQUISITION OF FIRST CAPITAL PLACES SLMA IN DIRECT COMPETITION WITH THEM. IN THIS RESPECT, PARAGRAPH 15 OF THE COMPLAINT MAKES THE FOLLOWING ALLEGATION:

"THROUGH ITS OWNERSHIP AND CONTROL OF A NORTH CAROLINA SAVINGS AND LOAN ASSOCIATION, SLMA WILL COMPETE DIRECTLY WITH NORTH CAROLINA BANKS AND SAVINGS AND LOAN ASSOCIATIONS-- BOTH BY PROVIDING TRADITIONAL SAVINGS AND LOAN SERVICES AND BY PURSUING SLMA'S ADDITIONAL GOALS AND OBJECTIVES." OUR VIEW, A STRONG ARGUMENT COULD BE MADE THAT CONGRESS NEVER INTENDED TO ALLOW SLMA TO COMPETE DIRECTLY WITH PRIVATE LENDERS AS THE COMPLAINT ALLEGES SLMA IS DOING IN THIS CASE.

THE OTHER MAJOR ARGUMENT AGAINST SLMA'S AUTHORITY TO ACQUIRE AND OPERATE FIRST CAPITAL FOCUSES ON THE PROPOSED ACTIVITIES THAT FIRST CAPITAL WILL BE ENGAGING IN. AS NOTED ABOVE, SOME OF THESE ACTIVITIES, SUCH AS ACCEPTING DEPOSITS AND MAKING CONSUMER LOANS, ARE UNRELATED TO THE PERFORMANCE OF SLMA'S STATUTORY MANDATE TO PROVIDE CREDIT FOR POSTSECONDARY EDUCATION. SLMA ARGUES THAT THESE NON-STUDENT LOAN ACTIVITIES BY FIRST CAPITAL ARE INCIDENTAL TO THE PERFORMANCE OF ACTIVITIES THAT ARE EXPRESSLY AUTHORIZED TO BE CONDUCTED BY SLMA AND THEREFORE ARE PERMISSIBLE. HOWEVER, SLMA WOULD PROBABLY NOT HAVE THE AUTHORITY TO ENGAGE IN THESE TYPES OF COMMERCIAL BANKING ACTIVITIES ITSELF. ACCORDINGLY, WE BELIEVE THAT SLMA'S AUTHORITY TO ENGAGE IN SUCH NON-STUDENT LOAN ACTIVITIES "INDIRECTLY" THROUGH ITS WHOLLY-OWNED SUBSIDIARY IS SUBJECT TO THE SAME DOUBTS. SEE B-194153, SEPTEMBER 6, 1979, AS MODIFIED AND EXPLAINED BY 60 COMP.GEN. 404, 405 (1981).

SLMA APPEARED TO BE CONCERNED ABOUT THIS ISSUE AS WELL WHEN IT ADVISED SENATOR KENNEDY IN ITS LETTER OF JUNE 18, 1984, AS FOLLOWS:

"THIS FINANCIAL SUBSIDIARY WILL BE RESTRICTED IN ITS ACTIVITIES TO THOSE ALLOWED TOO THE PARENT CORPORATION UNDER SECTION 439 OF THE HIGHER EDUCATION ACT OF 1965 AS AMENDED (20 U.S.C. SEC. 1087-2)."

THIS STATEMENT WAS MADE IN CONNECTION WITH WHAT WAS THEN SLMA'S PLAN TO FILE DE NOVO CHARTER APPLICATION TO ESTABLISH A NEW COMMERCIAL BANK IN NORTH CAROLINA. IN FACT, ONE OF THE REASONS SLMA WAS ORIGINALLY GOING TO ESTABLISH A NEW LENDING INSTITUTION RATHER THAT ACQUIRE AN EXISTING ONE WAS TO MINIMIZE THE PROBLEM OF HAVING TO PERFORM NON STUDENT LOAN RELATED BANKING ACTIVITIES. ITS LETTER TO SENATOR KENNEDY EXPLAINED THAT FILING A DE NOVO APPLICATION FOR A NEW INSTITUTION WOULD ENSURE, "THAT ITS PURPOSE WILL BE EDUCATION CREDIT FROM THE BEGINNING WITHOUT THE NECESSITY TO BE CONCERNED ABOUT EXISTING BANK ASSETS WHICH DO NOT FURTHER THOSE GOALS." AS THIS STATEMENT SUGGESTS, SLMA'S SUBSEQUENT DECISION TO ACQUIRE A PRE- EXISTING SAVINGS AND LOAN ASSOCIATION PRESUMABLY HEIGHTENED THIS PROBLEM BY INCREASING THE LEVEL OF NON-STUDENT LOAN ACTIVITY THE SUBSIDIARY LENDING INSTITUTION WOULD NECESSARILY BE CONDUCTING.

A QUESTION CAN ALSO BE RAISED ABOUT ANOTHER OF THE PROPOSED ACTIVITIES THAT FIRST CAPITAL WILL BE PERFORMING. ACCORDING TO SLMA, ONE OF FIRST CAPITALS'S MAJOR ACTIVITIES WILL INVOLVE THE EXTENSION OF NON-FEDERALLY INSURED LOANS TO STUDENTS. TO THE EXTENT THAT SLMA AND THEREFORE FIRST CAPITAL DO NOT POSSESS AUTHORITY TO MAKE SUCH UNINSURED STUDENT LOANS, THE LEGAL JUSTIFICATION FOR SLMA'S ACQUISITION OF FIRST CAPITAL WOULD BE WEAKENED IN OUR VIEW. SLMA HAS INFORMALLY ADVISED US THAT ITS AUTHORITY TO MAKE NON-INSURED LOANS IS DERIVED FROM THE FOLLOWING PROVISION:

"THE ASSOCIATION IS FURTHER AUTHORIZED TO UNDERTAKE ANY ACTIVITY WITH REGARD TO STUDENT LOANS WHICH ARE NOT INSURED OR GUARANTEED AS PROVIDED FOR IN THIS SUBSECTION AS IT MAY UNDERTAKE WITH REGARD TO INSURED OR GUARANTEED STUDENT LOANS." 20 U.S.C. SEC. 1087-2(D)(1).

HOWEVER, SLMA'S AUTHORITY TO MAKE ITS OWN INSURED LOANS IS SEVERELY RESTRICTED. UNDER 20 U.S.C. SEC. 1087-2(Q), SLMA CAN ONLY MAKE DIRECT LOANS /2/ WHEN THE SECRETARY OF EDUCATION DETERMINES THAT ELIGIBLE BORROWERS IN A STATE ARE SEEKING AND ARE UNABLE TO OBTAIN INSURED LOANS FROM PRIVATE LENDERS. IF CONGRESS MEANT TO IMPOSE THE SAME RESTRICTIONS ON SLMA'S AUTHORITY TO MAKE NON-INSURED LOANS AS EXISTS WITH RESPECT TO SLMA'S AUTHORITY TO MAKE INSURED LOANS-- ONE REASONABLE INTERPRETATION OF THE STATUTORY LANGUAGE-- SLMA COULD ONLY MAKE NON INSURED LOANS WHEN THE SECRETARY OF EDUCATION DETERMINES THAT STUDENTS ARE UNABLE TO OBTAIN SUCH LOANS FROM PRIVATE LENDERS IN THE PARTICULAR AREA INVOLVED. ACCORDINGLY, IF SLMA ONLY HAS LIMITED AUTHORITY TO MAKE UNINSURED LOANS ITSELF, IT FOLLOWS THAT SLMA WOULD ONLY HAVE LIMITED AUTHORITY TO MAKE UNINSURED LOANS INDIRECTLY THROUGH ITS SUBSIDIARY-- FIRST CAPITAL.

FURTHERMORE, WE THINK IT IS AT LEAST ARGUABLE THAT WHEN CONGRESS AUTHORIZED SLMA TO UNDERTAKE THE SAME ACTIVITIES REGARDING UNINSURED LOANS THAT IT COULD UNDERTAKE REGARDING INSURED LOANS, IT WAS NOT CONCERNED WITH SLMA'S RELATIVELY MINOR ROLE AS A DIRECT LENDER, BUT WAS INSTEAD FOCUSING ON SLMA'S PRIMARY ROLE AS A SECONDARY MARKET. THUS, CONGRESS MAY ONLY HAVE INTENDED TO SERVE AS A SECONDARY MARKET FOR INSURED LOANS. IN THIS RESPECT, THE ONLY REFERENCING THE CONFERENCE REPORT ON PUB. L. NO. 97-35 TO ANY NEW AUTHORITY FOR SLMA TO DEAL WITH NON-INSURED LOANS, SUPPORTS THIS VIEW AS FOLLOWS:

"SALLIE MAE IS AUTHORIZED TO DEAL WITH NON-INSURED STUDENT LOANS IN TERMS OF WAREHOUSING AND SECONDARY MARKETS." SEE H.CONF. REPT. NO. 97 208, 97TH CONG. 2D SESS. 742(1981). ALSO, SEE STATEMENT PREPARED BY SLMA FOR OVERSIGHT CURRENT STATUS AND ADMINISTRATION OF FEDERAL STUDENT ASSISTANT PROGRAMS: HEARINGS BEFORE THE SUBCOMMITTEE ON BUDGET AND LABOR, 97TH CONG., 2D SESS. 268, 224 (1982).

SLMA HAS INFORMALLY ADVISED US THAT IT BELIEVES THE CITED PROVISION DOES GIVE IT THE AUTHORITY TO MAKE NON-FEDERALLY INSURED STUDENT LOANS DIRECTLY OR THROUGH A SUBSIDIARY SUCH AS FIRST CAPITAL. FURTHERMORE, SLMA BELIEVES THAT ITS AUTHORITY TO DO SO IS NOT SUBJECT TO THE SAME LIMITATIONS AND RESTRICTIONS THAT APPLY TO ITS AUTHORITY TO MAKE INSURED STUDENT LOANS.

SUMMARY

IN SUMMARY, ARGUMENTS CAN BE USED TO SUPPORT EITHER A POSITIVE OR NEGATIVE ANSWER TO THE QUESTION OF SLMA'S AUTHORITY TO ACQUIRE AND OPERATE FIRST CAPITAL. A LEGISLATIVE OR JUDICIAL SOLUTION WOULD APPEAR TO BE THE MOST APPROPRIATE MEANS OF RESOLVING THIS MATTER UNLESS SLMA VOLUNTARILY DIVESTS ITSELF OF OWNERSHIP OF THE SAVINGS AND LOAN ASSOCIATION.

WE TRUST THAT THE FOREGOING INFORMATION HAS BEEN HELPFUL TO YOU. UNLESS RELEASED EARLIER BY YOUR OFFICE, THIS OPINION WILL BE RELEASED IN 30 DAYS.

/1/ SLMA DOES NOT RECEIVED FEDERAL APPROPRIATIONS. IT OBTAINS FUNDS FOR ITS OPERATIONS PRIMARILY FROM THE SALE OF ITS DEBT OBLIGATIONS. FORMERLY, IT SOLD DEBT OBLIGATIONS, GUARANTEED BY THE SECRETARY OF EDUCATION, TO THE FEDERAL FINANCING BANK. SINCE 1982, SLMA HAS BEEN BORROWING FUNDS FOR ITS OPERATIONS IN THE PRIVATE CAPITAL MARKETS WITHOUT A FEDERAL GUARANTEE. SEE GENERAL ACCOUNTING OFFICE AUDIT REPORT ENTITLED SECONDARY MARKET ACTIVITIES OF THE STUDENT LOAN MARKETING ASSOCIATION, HRD-84-51, MAY 18, 1984, P.2.

/2/ AT THE TIME PUB. L. NO. 97-35 WAS ENACTED SLMA COULD ALSO MAKE INSURE "CONSOLIDATION" LOANS UNDER 20 U.S.C. SEC. 1087-2(O). HOWEVER, ITS AUTHORITY TO MAKE CONSOLIDATION LOANS TERMINATED ON NOVEMBER 1, 1983.