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California Association of Private Postsecondary Schools

Sallie Mae to Be Accused of Overcharging Military Personnel on Loans

08/12/2013

The New York Times.  August 9, 2013.  By Richard Perez-Pena.  Federal regulators plan to accuse Sallie Mae, the giant student lending corporation, of charging military personnel excessive interest on student loans, and the government is looking into similar allegations against other lenders.

Sallie Mae revealed the pending action against it this week in its quarterlyearnings report, stating that theFederal Deposit Insurance Corporation warned in July that it planned to take “new formal enforcement action” against the lender. Both corporations declined to describe the allegations, but Sallie Mae said they would deal in part with the Servicemembers Civil Relief Act.

That law caps interest on loans to military personnel at 6 percent, along with providing protections against default judgments and garnishments, and a person briefed on the matter said compliance with the 6 percent limit would be a key part of the F.D.I.C. action. Under the law, if a person borrows money at a higher rate and then enters the military and requests a lower rate, the lender must reduce the rate to 6 percent, and forgive any interest above that level.

“We’ve invested a lot in our compliance efforts, but we understand some concerns persist, and we realize that the bar is getting higher,” said Martha Holler, a Sallie Mae spokeswoman, adding that the corporation is “open to our regulator’s recommendations for improvement.” In recent months, Sallie Mae has created a Web site specifically for military personnel, and has taken other steps to notify them of their legal rights regarding student loans.

In enforcing the 6 percent rule and other credit protections for service members, the government has focused primarily on mortgage borrowing. In the last three years, the Justice Department and the states have reached several settlements with banks, directing billions of dollars in payments to service members, some of whom had lost their homes, and subjecting new foreclosure actions to more scrutiny.

In October, the government’s new Consumer Financial Protection Bureau identified improper student lending as “the next front” in protecting service members financially.

And in a July 31 hearing of the Senate Committee on Veterans Affairs, when asked about predatory student lending, a Justice Department official said that the department was looking into some of the same kinds of violations as the F.D.I.C.

“We are concerned with loans that are taken out while not on active duty, and then when someone becomes activated, whether they get the full benefits of the 6 percent reduction when they request it,” said Eric Halperin, special counsel for fair lending in the Civil Rights Division.

“And we do have active investigations in that area, looking into a failure to provide servicemembers the full benefits,” Mr. Halperin added.

Sallie Mae said that in addition to the law protecting service members, the F.D.I.C. action would deal with the Equal Credit Opportunity Act, which prohibits discriminatory lending. But that law addresses many bases for discrimination, like race and whether a borrower is on public assistance, and neither Sallie Mae nor the F.D.I.C. would say what kind of discrimination would be alleged.

Sallie Mae began four decades ago as a government-sponsored enterprise, like the mortgage lenders Fannie Mae and Freddie Mac, but has been independent since the end of 2004. It lists as its primary assets $145.6 billion in student loans. The company also acts as a servicer and collector for loans made by banks and the federal government.

The F.D.I.C. primarily oversees local and regional banks, not major national institutions, but Sallie Mae comes under its jurisdiction because of the role of its Utah-based arm, Sallie Mae Bank, which provides banking services directly to consumers and is an F.D.I.C. member.