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Companies that extend private loans to students will continue to be able to do so without needing schools' confirmation that the students have exhausted all other aid options, after the U.S. Senate shot down a House proposal that would tighten certification requirements.
The Senate decision could be considered a win for industry giant SLM Corp. (SLM), which originated $840 million in private loans in the first quarter. That company, commonly known as Sallie Mae, is expected to rely more on its private-loan business now that the government took federal loan originations in-house, eliminating a major revenue source from third-party lenders.
A representative from Sallie Mae wasn't immediately available for comment. Other top private lenders include Citigroup Inc.'s (C) Student Loan Corp. (STU), Wells Fargo & Co. (WFC) and J.P. Morgan Chase & Co. (JPM).
Sen. Chris Dodd. (D., Conn.) said earlier this week that Congress wouldn't include as part of its financial-reform bill a measure requiring lenders to check that students maximized their federal, state and institutional loans before turning to private loans, which often have higher interest rates and less-flexible repayment terms. As the law currently stands, students must "self-certify" that they have tried to take out other loans.
According to the Institute for College Access and Success, nearly two-thirds of private-loan borrowers in 2007-2008 borrowed less than they could have in federal Stafford loans.
Mark Kantrowitz, publisher of financial-aid website FinAid.org, said the Senate's decision is a disappointment because the House's proposal would have eliminated direct-to-consumer private loans, "which tend to be excessive."
Still, the financial-reform bill is expected to change some private-lending operations.
"The Wall Street reform bill goes a long way to provide strong new consumer protections to student borrowers," Dodd said Tuesday in announcing that institutional certification wouldn't be included in the reconciliation.
While it is still unclear exactly what are the new rules to which private student lenders will have to adhere under the Consumer Financial Protection Bureau, a person close to the conference committee said the bureau will be allowed to set rules on underwriting, disclosures, advertising and creditworthiness but is barred from setting usury rates.
The watchdog will have the authority to enforce regulations for banks and credit unions with assets over $10 billion, including those with student-lending operations. But many private lenders' depositary units, including Sallie Mae's bank, don't meet that threshold and will continue to report to the Federal Deposit Insurance Corp.
-By Melissa Korn, Dow Jones Newswires; 212-416-2271; email@example.com