Auditors Accuse Bank of Illegally Getting Student Loans

A recently completed audit of Fifth Third Bank — the 20th largest lender of federal student loans in the country according to college financial aid site FinAid — found that the bank violated federal law by illegally paying three companies for loan applications (“Audit Slams Fifth Third Student Loans,” The Enquirer, Jan. 9, 2009).

According to the law, lenders may not provide inducements in the form of “points, premiums or payments” in exchange for loan volume, reports The Chronicle of Higher Education (“Fifth Third Bank Offered Inducements for Loan Volume, Audit Finds,” Jan. 7, 2009).

The bank had agreements with Law School Financial, MSA Solution Inc., and Pacific Loan Processing Inc. to solicit loan applications that allowed these third-party companies to participate in the federal student loan program through Fifth Third, which acted as a trustee on their behalf. These arrangements allowed the third-party companies to make or purchase federal student loans.

As a result of the audit’s findings, the Department of Education’s Inspector General recommended terminating the bank’s participation in the Federal Family Education Loan Program. The audit also recommended imposing penalties that range from a fine to removing government subsidies on more than $3 billion of improperly obtained loans, which would require more than $300 million in reimbursements.

Fifth Third said that the audit’s findings represented a new, stricter interpretation of the law which authorizes a bank to buy and sell loans, but doesn’t allow lenders to pay another company to market loans or solicit applications. “The payments at issue were for the sale of actual loans, and not for the marketing of loan applications,” the bank said in response to the Inspector General’s audit.

Although the dispute won’t affect current Fifth Third borrowers who already have loans with the company, it could affect the way student loan companies do business and make it much more difficult for students to obtain loans in the future.

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