Sallie Mae Settles FDIC, DOJ Probe - Analyst Blog

Student lender Sallie Mae SLM revealed that it has recently reached a settlement with regulators – the Federal Deposit Insurance Corporation (:FDIC) and the Department of Justice (:DOJ). The company is alleged to have adopted unjust and fraudulent methods associated with student loans that amounted to breach of Section 5 of the Federal Trade Commission Act and violated the Servicemembers Civil Relief Act (:SCRA). Notably, the settlement is subject to court approval.

The Complaint

The regulators alleged that Sallie Mae Bank and Navient Solutions, Inc. (formerly known as Sallie Mae, Inc.), subsidiaries of SLM Corporation and Navient Corporation, respectively, violated federal law with respect to student loans by making insufficient and improper disclosures relating to payment process and late fees.  

Further, Sallie Mae is alleged to have violated SCRA and Section 5 rules as members of the U.S. military was treated unfairly and denied the benefit of 6% interest rate and was instead overcharged. Notably the period dates back to 2005.

The Settlement

According to the FDIC orders, the firms would pay civil money penalties of $6.6 million, compensation of around $30 million to affected borrowers and a settlement fund of $60 million to the DOJ for compensating the servicemembers. Additionally, it requires the firms to take corrective measures to ensure proper disclosures and fair treatment to servicemembers under the SCRA.

Sallie Mae stated that as per the terms of the reorganization of SLM Corporation and the separation of Navient Corporation on April 30, 2014, Navient Corporation stands liable for payment of all the regulatory orders, except the penalty charges that are directly imposed on Sallie Mae Bank.

Notably, Sallie Mae Bank will have to shell out $3.3 million as compensation. Moreover, it will assure the reimbursement of up to $30 million associated with late fees on loans held or originated by Sallie Mae Bank since it started operating in Nov 2005.

Financial Impact

Owing to total estimated costs related to these regulatory issues, an additional amount of $103 million was charged to Navient Corporation and Sallie Mae Bank in first-quarter 2014. Consequently, it impacted SLM Corporation's first-quarter results which were reported prior to the spilt of the companies.

GAAP net income (after-tax) fell $65 million or 15 cents per share to $214 million or 49 cents per share. Notably, following the split, the record of SLM Corporation's financial statements, including its first-quarter 2014 results, are now considered part of Navient Corporation.

Sallie Mae currently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the finance sector worth considering include Simplicity Bancorp, Inc. (SMPL), Cash America International, Inc. CSH and Santander Consumer USA Holdings Inc. SC. While Simplicity Bancorp holds a Zacks Rank #1 (Strong Buy), both Cash America and Santander Consumer carry a Zacks Rank #2 (Buy).