UPDATE: BANK BILL:Student Lenders Like Sallie Mae Avoid Setback

Companies that extend private loans to students will continue to be able to do so without needing schools' confirmation that the students have exhausted all other aid options, after the U.S. Senate shot down a House proposal that would tighten certification requirements.

The Senate decision could be considered a win for industry giant SLM Corp. (SLM), which originated $840 million in private loans in the first quarter. That company, commonly known as Sallie Mae, is expected to rely more on its private-loan business now that the government took federal loan originations in-house, eliminating a major revenue source from third-party lenders.

Other top private lenders include Citigroup Inc.'s (C) Student Loan Corp. (STU), Wells Fargo & Co. (WFC) and J.P. Morgan Chase & Co. (JPM).

Meanwhile, the bill also will affect for-profit educators that lend money to their students, such as Corinthian Colleges Inc. (COCO), Career Education Corp. (CECO) and ITT Educational Services Inc. (ESI). Those programs, along with more traditional private student lenders, will be overseen by a new consumer protection agency.

As for Sallie Mae, company spokeswoman Martha Holler said the lender has been a "longstanding and vocal supporter of school certification of private loans." She said the company advises students to complete the paperwork needed to qualify for federal aid before exploring private loans.

A Citigroup spokesman said the company can't speculate on pending legislation, but that "we expect to continue to offer a full suite of competitively priced private student loan products and excellent customer service."

Sen. Chris Dodd. (D., Conn.) said earlier this week that Congress wouldn't include as part of its financial-reform bill a measure requiring lenders to check that students maximized their federal, state and institutional loans before turning to private loans, which often have higher interest rates and less-flexible repayment terms. As the law currently stands, students must "self-certify" that they have tried to take out other loans.

According to the Institute for College Access and Success, nearly two-thirds of private-loan borrowers in 2007-2008 borrowed less than they could have in federal Stafford loans.

Mark Kantrowitz, publisher of financial-aid website FinAid.org, said the Senate's decision is a disappointment because the House's proposal would have eliminated direct-to-consumer private loans, "which tend to be excessive."

The financial-reform bill is still expected to change some private-lending operations, including oversight from a new watchdog agency.

"The Wall Street reform bill goes a long way to provide strong new consumer protections to student borrowers," Dodd said Tuesday in announcing that institutional certification wouldn't be included in the reconciliation.

While it is still unclear exactly what are the new rules to which private student lenders will have to adhere under the Consumer Financial Protection Bureau, a person close to the conference committee said the bureau will be allowed to set rules on underwriting, disclosures, advertising and creditworthiness but is barred from setting usury rates.

Also under the new agency are for-profit colleges that started lending directly to their own students after third-party lenders determined they were at too high a risk for default.

Corinthian Colleges spokesman Kent Jenkins said student lending is a "pretty small" part of the school's business; the company expects to lend about $150 million to students this fiscal year. Representatives from Career Education and ITT weren't immediately available for comment.

The new consumer protection bureau also will be able to enforce regulations for banks and credit unions with assets over $10 billion, including those with student-lending operations. But many private lenders' depositary units, including Sallie Mae's bank, don't meet that threshold and will continue to report to the Federal Deposit Insurance Corp.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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