) - also known as Sallie Mae - is being investigated by a
coalition of state prosecutors related to its student loan
practices. The probe is led by Illinois' Attorney General, who is
reportedly examining all of Sallie Mae's practices, including
servicing and collections related to whether the beleaguered
student lender used anti-borrower practices.
Notably, Sallie Mae is the major U.S. lender of student loans,
apart from the Department of Education. The student lender is
also the leading servicer of student debt. Therefore, Federal and
state governments are increasing the scrutiny of Sallie Mae as
they are concerned about the practices used by it when collecting
monthly student loan payments or pursuing bad debts.
The regulators investigating the company's adherence to federal
consumer protection laws include The Department of Justice (DOJ),
Federal Deposit Insurance Corp. (FDIC) and Consumer Financial
Protection Bureau (CFPB). Sallie Mae has set aside $70 million to
cover the expected settlements with FDIC and DOJ.
Under provisions of the Dodd-Frank Act, federal regulators are
tightening control to restrain malpractices of lenders and aid
borrowers so that they may decrease their debt. Therefore,
regulators are scrutinizing Sallie Mae's process of servicing
borrower loans and its dealing with borrowers, as they attempt to
According to the CFPB, common complaints against lenders include
erroneous payment processing and failure to modify loans.
Grievances against practices of lenders like
Discover Financial Services
Fargo & Company
JPMorgan Chase & Co.
) are also rampant.
According to Huffington Post, nearly 40 million Americans are
collectively having about $1.2 trillion in student loans. Thus,
there is rising concern among U.S. policymakers that excessively
indebted borrowers will be able to spend, save or invest much
less due to their student loan burden. This will result in
weakened economic growth for years to come.
Notably, in Nov 2013, the FDIC declared its plans to slap charges
on Sallie Mae for violating federal laws. The student lenders
process of disclosing and charging fines as well as allocating
borrowers' payments is questionable, according to the regulatory
body. Further, in Dec 2013, the CFPB initiated a similar probe.
We believe that increased scrutiny, in particular by state
authorities, could raise costs for the company. Further, action
by federal financial regulators could disrupt Sallie Mae's
strategic plans to split the company. In the wake of these
investigations, regulators may reject or otherwise hamper the
restructuring of the company.
Sallie Mae currently carries a Zacks Rank #3 (Hold).
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