Sallie Mae under investigation for illegal practices

April 27, 2007

Sallie Mae under investigation for illegal practices

The largest student loan company in America is now under fire for potentially illegal and aggressive tactics. You can read the entire article at the Washington Post.
Probe Launched on Sallie Mae Collection Tactics

By Amit R. Paley

Sallie Mae, the nation’s largest student loan company, may have violated federal laws by repeatedly using aggressive tactics to collect loans from student borrowers, Senate investigators said yesterday.

Aides to Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate education committee, said they believed the Reston lending giant tried to collect debts that were not owed, fired employees who attempted to help borrowers and intentionally sent payment notices to an incorrect address to force a borrower into default.

“I am concerned that several student loan lenders may be engaging in harsh and inappropriate tactics” that “are prohibited by federal law and regulations,” Kennedy wrote in letters sent yesterday to Sallie Mae and Nelnet, a Nebraska student lender, that requested documents about their collection practices.

Both companies defended their policies and said they would cooperate with the inquiry. “We are proud of our record of helping more than 20 million Americans pay for college,” Tom Joyce, a Sallie Mae spokesman, wrote in an e-mail.

Kennedy’s probe of improper loan collection practices comes in the midst of a nationwide investigation into the $85 billion-dollar-a-year student loan industry. The unfolding scandal has revealed kickbacks and conflicts of interest among lenders, universities and government officials, prompting pledges from lawmakers of both parties to reform the system.

One of the stories highlighted by Kennedy centered on Britt Napoli, 48, a former special education teacher whom Sallie Mae put into default after he lost his home in a 1994 California earthquake. Investigators said the company violated Education Department policy.

Napoli said in an interview that he did not receive letters from Sallie Mae telling him he was going into default because he was living in a tent city without access to mail and surviving on help from the Red Cross. He said the company refused to negotiate with him and insisted that he immediately pay the $26,000 balance of his loan. Napoli said that over the past decade Sallie Mae has improperly taken $32,000 by garnishing his wages and seizing his tax refunds. The company has added interest and fees and says he still owes $72,000, Napoli said. His payments do not reduce the principal of the loan, he said.

“This is a nightmare,” said Napoli, now a college professor in Sacramento. “The people at Sallie Mae won’t compromise or listen. And at this rate, I’ll be paying them the rest of my life.”

Asked to respond, Sallie Mae provided a letter from the Education Department’s Office of Federal Student Aid, which indicated that the company had the right to put Napoli in default.

Napoli and Kennedy aides disagreed with the letter’s conclusions.

In its investigation of loan collection practices, Kennedy’s office interviewed about a dozen borrowers and former Sallie Mae employees, an aide said. Investigators said that Sallie Mae threatened a borrower would be sent to jail if he did not pay his loan. It also harassed the neighbors, family and co-workers of borrowers, the investigators said.

Joyce, the Sallie Mae spokesman, said the company followed the law and had “an excellent compliance record in performing post default collection activity.” He also attacked Kennedy’s office for publicizing the inquiry. “It raises the question as to whether the facts are important in this inquiry, and whether the matter has been pre-judged,” Joyce said in the e-mail.

In his letter to Nelnet, Kennedy said the company may have refused to provide loan and payment history information to defaulted borrowers and inappropriately consolidated loans with the borrower’s consent.

Ben Kiser, a Nelnet spokesman, said the company has “extensive systems, policies and procedures in place to stay in compliance with the law.”

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