MyRichUncle: student lender leverages loan scandal

NEW YORK (Reuters) - At least one company is benefiting from government investigations into the U.S. student loan industry.

MRU Holdings Inc.'s UNCL.O MyRichUncle hopes to cash in on the scandal with marketing that aims to differentiate its alternative loan products from heavyweight competitors such as Sallie Mae (SLM.N).

The company bills itself as a bargain lender untainted by the investigations, which have put a variety of lenders, including Sallie Mae, Bank of America Corp. (BAC.N), Citigroup Inc. (C.N), Education Finance Partners and JPMorgan Chase & Co. (JPM.N), under the government's microscope.

For instance, one of MyRichUncle's loan products uses a student's academic achievement as a basis to extend credit, even in the absence of credit history or a guarantor.

Congressional and state investigators are probing methods used by the $85-billion-a-year student loan industry to entice college loan officers to place them on so-called preferred lender lists.

An ad MyRichUncle ran in The New York Times last July urged students to ask aid officers if they participate in "revenue sharing" that gives schools part of each loan, or if they accept gifts from lenders -- practices that later came under scrutiny.

In January, New York State Attorney General Andrew Cuomo began the investigation into the industry when announced he was questioning Sallie Mae about its lending practices.

Journalists began writing about MyRichUncle as a conflict-free alternative, which boosted the stock, said Sanders Morris Harris analyst William Hamilton, who rates the company's shares a "buy."

MyRichUncle stock has risen over 20 percent, to about $6.70 a share, since this time last year. Its loan applications have also roughly doubled in that time period, spokeswoman Karin Pellman said.

But its ad campaign offended aid officers throughout the country, said Cathy Simoneaux, aid director for Loyola University in New Orleans.

She said she won't recommend MyRichUncle because the company's Web site impugns the integrity of all student loan officers.

BACKLASH

MyRichUncle co-founders Raza Khan and Vishal Garg, both 29, said the backlash from university officials doesn't bother them. They're wooing students in part by turning them against schools' traditional student loan departments.

"These guys seem to pursue a kind of high-risk, high-reward strategy," said Keefe Bruyette & Woods analyst Sameer Gokhale.

Khan and Garg said they can dispense with aid officers because lenders will soon compete solely on price, marketing directly to students.

MyRichUncle's first product, launched in 2001, had students sign over a percentage of future earnings to investors -- hence the company's name, which evoked a benefactor who didn't demand a guarantee of full return.

In 2004, the company went public, and in 2005 and 2006 it introduced a series of cheaper loans. Its Stafford government loans, for example, knock points off the interest rate.

Rival loans may include origination fees, but MyRichUncle's product is cheaper because its discount applies over most of a loan's life, said Mark Kantrowitz, publisher of a Web-based financial aid guide.

"They are the low-cost leader," Kantrowitz said.

Aid officials thought MyRichUncle's original product was a bit too "radical" and are generally wary of new companies, said Buffalo State College financial aid director Kent McGowan.

"With the advent of the Internet you just never know who's legitimate and who's not," McGowan said.

But Khan and Garg argue their products were rejected by schools because they refused to pay aid officers to serve as honorary advisers and to participate in revenue sharing.

GOVERNMENT REFORM

The government is now pushing to enact reforms in the student loan industry.

The U.S. House of Representatives passed a bill that would require disclosure of relationships between colleges and lenders, and more tightly regulate preferred lender lists.

Senate lawmakers have said they are considering similar reforms for a broader bill.

The less important preferred lender lists become, the bigger MyRichUncle could grow, said Richard Colvin, who contributed to the book "Footing the Tuition Bill."

"Right now they're a niche player," he said. "Whether they become a full-service lender depends on what happens with preferred lender lists" in Congress, he said.

MRU Holdings has yet to turn a net profit. In its most recent quarter, its net loss widened to $8.3 million, or 44 cents per share, from a loss of $3.4 million, or 23 cents, a year earlier.

And its public relations strategy could be limiting, Gokhale said, because aid officers can still dissuade a student from pursuing an outside lender.

"Those financial aid officers still have control," Keefe Bruyette & Woods' Gokhale said. "They are not totally cut out of the loop."