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Business and Policy Areas
Business and Policy Areas

ED Clarifies Rules on Preferred Lender Lists

May 14, 2008

Acknowledging that "the student loan marketplace has changed significantly" since new rules governing the Federal Family Education Loan (FFEL) program were issued last fall, the Department of Education issued a Dear Colleague letter on May 9 providing further guidance to institutions on preferred lender lists.

The ED letter notes that preferred lender lists can be an effective tool for borrowers, and seems to encourage institutions to provide such a list.

The November 1 rules (which are scheduled to take effect on July 1) require institutions to meet several standards if they provide a "preferred lender list." The primary requirement is that the list include at least three unaffiliated lenders. In the current loan climate, institutions have raised concerns that they may not be able to find three lenders that meet their institutional criteria for inclusion on their preferred lender list, or that lenders will decide to quit offering FFEL loans after the institution has published their list. Questions have also arisen about whether all lenders on an institution list must be unaffiliated or just that at least three must be unaffiliated.

The ED letter provides institutions with some flexibility. If an institution cannot find three lenders that warrant inclusion on a preferred lender list, it can provide the names of lenders indicating a willingness to lend to the institution’s students, while making it clear that the institution is not endorsing the lenders and that students have the right to pick any participating lender. Institutions may also offer a list of lenders that their students have used in the past, but should not provide additional information such as the percentage of loans made by the lender.

ED also clarifies that a preferred lender list that includes at least three lenders which are unaffiliated is acceptable, even if some lenders with ties to others are included. ED suggests that it would be helpful to identify any affiliations between lenders on the list.

Finally, ED assures institutions that it will not hold circumstances over which the institution has no control, such as a preferred lender’s withdrawal, against the institution in determining its compliance with regulations.

NACUBO Contact:  Anne Gross, vice president, regulatory affairs, 202.861.2544