Battle of the student loan lenders: CLC charges Sallie Mae with unfair business practices - Update

University Business, Oct, 2002 by Jean Marie Angelo

In September, the College Loan Corporation (www.collegeloancorp. com) filed suit in federal court against the mammoth Sallie Mae (www.salliemae.com), charging its competitor unfairly diverted business from CLC. The company has claimed $50 million in lost business, and is seeking at least that amount in damages. In an environment of plunging interest rates, the student loan consolidation market is more than busy, and certainly, both CLC and Sallie Mae want as much of the consolidation business as they can get their hands on. But, says James Trefil, litigation counsel for CLC, Sallie Mae has not played fair to get it. Among other charges, the three-year-old lender claims that Sallie Mae induced certain colleges and universities to steer consolidation business its way, although it has not disclosed to the media the names of the school involved.

According to the suit, Sallie Mae has also complicated the application process through one of its subsidiaries, USA Group. Several years earlier, before Sallie Mae acquired USA Group, CLC signed a contract designating USA Group as a serving entity. Once USA Group became a Sallie Mae company, loan applications from CLC suffered processing problems, Trefil claims. Sallie Mae's counsel, Robert Lavet, denies corporate wrongdoing, and adds that the CLC contract with USA Group has been terminated.

CLC is also complaining about Sallie Mae's use of the "single holder rule," which states that borrowers who hold a number of loans from the same lender must go to that lender first for a consolidation loan. Sallie Mae, which owns a number of other college loan companies including Nellie Mae, is saying these companies are covered by the single holder rule. This leaves many borrowers in the position of doing business only with Sallie Mae, claims Trefil.

Martha Holler, a spokesperson for Sallie Mae, says that while the company has doubled its loan consolidation activity this year, the company has processed all applications in accordance with regulations. "It is unfortunate but not surprising that CLC has decided to argue this in the media, especially since it is extremely unlikely any of CLC's arguments would prevail in court," she says. Lavet adds that Sallie Mae's interpretation of the rule is correct and also used by other large lenders.

Sallie Mae holds an estimated one-third of all U.S. student loans, for an estimated value of $76 billion. In contrast, CLC holds a "mere" $2 billion in student loans.