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SLM Corporation (SLM - Analyst Report) – also known as Sallie Mae – is being investigated by a coalition of state prosecutors related to its student loan practices. The probe is led by Illinois’ Attorney General, who is reportedly examining all of Sallie Mae’s practices, including servicing and collections related to whether the beleaguered student lender used anti-borrower practices.

Notably, Sallie Mae is the major U.S. lender of student loans, apart from the Department of Education. The student lender is also the leading servicer of student debt. Therefore, Federal and state governments are increasing the scrutiny of Sallie Mae as they are concerned about the practices used by it when collecting monthly student loan payments or pursuing bad debts.

The regulators investigating the company’s adherence to federal consumer protection laws include The Department of Justice (DOJ), Federal Deposit Insurance Corp. (FDIC) and Consumer Financial Protection Bureau (CFPB). Sallie Mae has set aside $70 million to cover the expected settlements with FDIC and DOJ.

Under provisions of the Dodd-Frank Act, federal regulators are tightening control to restrain malpractices of lenders and aid borrowers so that they may decrease their debt. Therefore, regulators are scrutinizing Sallie Mae’s process of servicing borrower loans and its dealing with borrowers, as they attempt to repay loans.

According to the CFPB, common complaints against lenders include erroneous payment processing and failure to modify loans. Grievances against practices of lenders like Discover Financial Services (DFS - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) are also rampant.

According to Huffington Post, nearly 40 million Americans are collectively having about $1.2 trillion in student loans. Thus, there is rising concern among U.S. policymakers that excessively indebted borrowers will be able to spend, save or invest much less due to their student loan burden. This will result in weakened economic growth for years to come.

Notably, in Nov 2013, the FDIC declared its plans to slap charges on Sallie Mae for violating federal laws. The student lenders process of disclosing and charging fines as well as allocating borrowers’ payments is questionable, according to the regulatory body. Further, in Dec 2013, the CFPB initiated a similar probe.

We believe that increased scrutiny, in particular by state authorities, could raise costs for the company. Further, action by federal financial regulators could disrupt Sallie Mae’s strategic plans to split the company. In the wake of these investigations, regulators may reject or otherwise hamper the restructuring of the company.

Sallie Mae currently carries a Zacks Rank #3 (Hold).

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