There is a lot of discussion right now about the apparent drop in credit scores.  It is not a dramatic change in score quality, but it is dramatic for its widespread impact.  Nationally, the average credit score (TransUnion) dropped by six points, to 651. In some states, the impact is especially poor – places like California and Arizona have seen average credit scores in their states drop by more than 10 points.

Here is a recent story documenting the scope of the changes in credit scores. This story attributes most of the change to unemployment and other macroeconomic forces.

What could be the root of this problem?  Yes, unemployment is probably part of the explanation for the drop in credit scores.

Still, a part of it could be driven by the cutting back of credit to consumers on the part of banks. When a bank reduces a credit limit, it increases the percentage of debt owed by a consumer on their account. Credit card utilization rates soar, without any change in borrower behavior.  That’s a strong factor in credit scoring.

There are other things that a bank can do, particularly with credit cards, to deflate credit scores.  If an account is closed, that is also a negative, because it takes away accounts with longer durations.

The US Department of Education awarded servicing contracts to four companies today.  Each of the four will have the opportunity to manage payments of federal student loans.

The four companies chosen were NelNet Servicing, Great Lakes Educational Loan Services, Sallie Mae, and the Pennsylvania Higher Education Assistance Authority.

It is a 5-year contract.

Wells Fargo was a finalist, but it turned down the chance to submit a bid during the final round.  ACS, the current provider for the Direct Loan program, did not get a contract.

It is a lot of business.  Although Sallie Mae acknowledges in its press release that margins are lower than the normal industry agreement, there is still a lot of money here.  The Departments educational loan portfolio is worth $550 billion.  It has as many as 50 million customers.

The Department added an interesting caveat to the contracts.  The allotment of business divided among the four firms will be determined by loan performance.  Firms that generate better loan payments will subsequently receive a higher share of future work.

I like the sound of this: on page 63 of today’s proposal for the Consumer Financial Protections Agency, it says that consumers often suffer when contracts require them to utilize binding-arbritration court to settle disputes.

Its hard to believe that this would have to be said, but it is true.  What is wrong with using the courts?  Why is this so hard?

The proposal is not too specific. It just says that if an appointed committee decides that widespread use of binding arbitration is a problem, then that committee should look into ways for reforming the situation.

A few commenters have argued that this bill will be problematic for financial institutions.  Sure, that’s probably true.  But arbitration is really a problem.  If one side gets to pick the arbitrator (and is required to pay that arbitrator, too) is stands to reason that the system is not going to produce a legitimate hearing.

President Obama is proposing a new regulatory agency that will be designed to speak for consumers first.

This is great news.  After months of responding to the financial crisis by relieving the banks, this is a systematic step towards changing the system to meet the needs of people.  That’s a change!

The new agency would be called the Consumer Financial Safety Agency.  The idea is encapsulated in a bill proposed by Illinois Senator Chuck Durbin.  Its an idea created by Elizabeth Warren, a Harvard professor who has been working for Congress to monitor TARP.  Her panel, the Congressional Oversight Panel, has quietly examined a number of the problems that made it possible to have a financial meltdown.  It is an interesting panel, incidentally, because it is blessed with a wide set of opinion makers.  There are academics from the right-leaning American Enterprise Institute to the progressive Warren as well as free market advocate Jeb Hensarling.  There is even an ex-Senator, John Sununu.

Well, things are looking up. It has been too long that regulators have been paid to do nothing.  I heard in a conference that there were reports that more than half of all first time homebuyers were getting mortgages with cash-out terms as recently as 2004.  Seems like someone ought to have said something about that, eh?

I see that one of the ideas is to require lenders to hold on to at least 5 percent of the loans that they originate.  That seems like a good idea, but it also seems like something that could have some unintended consequences.

The student loan asset backed securities market is finally functioning, although it is certainly not as robust as it was as recently as in 2007.

Whereas a National Collegiate Student Loan Trust (NCSLT 2007-2) from 2007 offered tranches with a weighted average interest rate of LIBOR plus 5.13 percent, today’s are much higher.

Student Lending Analytics is showing that recent offerings are as much as LIBOR plus 11 percent.  Its a factor of the lack of liquidity, and or the lack of investor confidence in markets. It is also a product of the increased costs that lenders are paying on the funds that they borrow.

That does not bode well for students who go to private student loans. Granted, LIBOR has dropped some.  Nonetheless, these are very high prices for debt. For a student with $25,000 in private loans upon graduation, monthly payments on a 15-year loan would be as much as $350.  With a LIBOr plus interest rate of 15 percent, a student would spend $62,000 over the life of that loan to pay back their debt.