Student loan firms hit by probes, reform calls

By Joseph A. Giannone

NEW YORK (Reuters) - The largest U.S. student loan company reached a settlement with New York's attorney general on Wednesday, and federal lawmakers called for further investigation of the widening scandal in the $85 billion-a-year industry.

SLM Corp., known as Sallie Mae, agreed to pay $2 million and to end some of its practices, which Attorney General Andrew Cuomo said were deceptive and unlawful. SLM will pay the $2 million into a fund that will educate students about financial aid.

Meanwhile in Washington, Sen. Edward Kennedy asked the U.S. Securities and Exchange Commission to investigate stock dealings of a CIT Group subsidiary, school financial aid officers who did business with the company and an official of the U.S. Education Department.

These developments came as investor James Chanos, a well-known short-seller, told Reuters that many more student loan companies face serious legal issues. Chanos, who profits by betting stock prices will decline, expects lenders' shares to drop.

Investigators will uncover "many tens of billions of dollars in fraud" at loan companies, Chanos said at the Reuters Hedge Funds and Private Equity Summit. Chanos, who anticipated the Enron scandal months before the company collapsed, declined to name exactly which companies he is betting against.

His firm, Kynikos Associates, has been shorting companies in the sector for three years, he said.

"The real fraud they will find is the herding of middle- and lower-income kids into all kinds of degree schools, and they come out with $40,000 to $50,000 in loans," said Chanos. "We've only just scratched the surface."

ONGOING PROBE

Cuomo told reporters his investigation continues into other schools and lenders, including CIT Group's Student Loan Xpress. SLM, the first to reach a settlement with New York, has agreed to cooperate with the ongoing probe.

"To the schools and lenders, you now have a choice: you can either settle with us or the investigation will continue," Cuomo said at a Manhattan press conference.

New York, which began probing financial arrangements between loan companies and schools late last year, said several student lenders paid kickbacks and offered perks to financial aid officers. In exchange, lenders wanted to be included on

schools' lists of preferred lenders.

Cuomo said these practices were not disclosed to students, who as a result might not get the best terms possible.

The lists are an important source of business for lenders, with 90 percent of students using a preferred lender, the attorney general said.

In the settlement, SLM denied having broken the law.