Student Lenders Cited For Violating Federal Inducement Rules

Two student lenders offered inappropriate inducements in order to secure contracts and generate business for their federal lending operations, according to an audit report by the U.S. Department of Education's Office of Inspector General.

According to the report, the agreements between Corinthian Colleges Inc. (COCO) and lenders SLM Corp. (SLM) and CIT Group Inc.'s (CIT) Student Loan Xpress Inc. violated federal rules that govern the Federal Family Education Loan Program. As of July 1, private lenders stopped originating those loans on behalf of the federal government.

News of the audit findings was first reported by the Chronicle of Higher Education, a trade publication, earlier Wednesday.

A government investigation found that SLM, commonly known as Sallie Mae, offered parents of Corinthian students a $500 break on closing costs associated with a Sallie Mae home loan if they used the lender for Parent PLUS loans.

Sallie Mae, which was told of the initial findings in November, had said in a December response that the payment wasn't an inducement because it wasn't marketed to prospective parent borrowers, and parents of Corinthian students could obtain the loans regardless of whether they applied for or received Sallie Mae home loans.

The inspector general concluded, though, that Sallie Mae's offer was indeed an inducement and asked the Education Department to take "appropriate action." The report doesn't cite Corinthian for any wrongdoing.

Representatives for Sallie Mae and Corinthian weren't immediately available for comment.

An Education Department representative wasn't available for comment and it wasn't immediately clear what action the Department could take. Sallie Mae is the nation's largest student lender, originating $7.7 billion in federal loans and $840 million in private loans in the first quarter.

Meanwhile, the inspector general said that Student Loan Xpress and Corinthian created a risk-sharing agreement, encouraging the school to keep its default rate below 15% and to ensure private loans didn't exceed 15% of the loans the company extended to certain campuses' students. Another agreement between the two allowed for Student Loan Xpress to provide Corinthian with website development, which helped establish a link directly to the lender's page.

Student Loan Xpress, which said in a letter to the inspector general that it didn't believe its agreement included unfair inducements, settled some of the claims in March 2009 as part of another settlement with Fifth Third Bank and CIT Group. Student Loan Xpress no longer originates federal or private loans.

A CIT representative wasn't immediately available for comment.

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

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