Audit: Fifth Third Violated Federal Loan Laws

Cincinnati-based Fifth Third Bank is under fire for violating federal laws prohibiting the use of financial incentives to market and secure federal student loans, according to a report that comes as the result of an audit conducted by the U.S. Education Department’s Inspector General.

Representatives for Fifth Third deny any laws were violated and instead insist the transactions in question, which involve student loan originators MSA Solution, Pacific Loan Processing and Law School Financial, were for the transfer of loans, not the marketing or solicitation of loans. According to Fifth Third, the buying and selling of existing loans is a common practice.

The Education Department is recommending disciplinary action against Fifth Third. Such action could include fines, removal of federal guarantees for the loans or removal of Fifth Third from the federal loan program.

Connie Williams, the University of Cincinnati’s director of enrollment management and student financial aid, said UC has about $58 million in federal student loans with Fifth Third, out of a total of approximately $130 million. Williams estimates 20,000 UC students have federal loans through Fifth Third.

Overall, Fifth Third is the 20th-largest student loan lender in the country, with more than $3 billion in outstanding loans, according to financial aid Web site finaid.org.

Williams said she doesn’t expect the situation to significantly impact UC students.
“Worst-case scenario, students would have to find another lender,” she said.

Should that possibility become a reality, OneStop is prepared to help students find new lending sources. Existing loans would be secure through the end of this school year.

And even though Williams said she doesn’t “think it’s likely that [Fifth Third will] be suspended,” such action against them could lead to a tightening of loan markets.

Federal loans will likely continue to be readily available to students, Williams said, but private and alternative loans might become harder to secure or may come at a premium.

In a response to the Inspector General, written by Fifth Third’s Brian Gardner, vice president for asset securitization, the Education Department is cautioned against termination of federal guarantees.

“Just as the credit markets are attempting to recover from significant, widespread disruptions triggered initially by subprime mortgages [demands for repayment] would inject a major new source of risk and uncertainty for current and potential investors …
as well as for student and parent borrowers,” according to the report.

Fifth Third also indicates such action could threaten the entire multi-billion dollar student loan industry.

Several institutions have already exited the student loan market over the last year because of declining consumer credit and the overall instability of the U.S. economy.