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August 23, 2000


The opinion of the court was delivered by: Huvelle, District Judge.


Before the Court are plaintiff's motion for summary judgment and defendant's cross-motion for summary judgment. The issue before the Court is whether to uphold the Secretary's decision that plaintiff has violated the anti-inducement provision of the Higher Education Act of 1965 ("HEA"), 20 U.S.C. § 1085 (d)(5)(A), which prohibits a lender from offering "directly or indirectly, points, premiums, payments, or other inducements, to any educational institution or individual in order to secure applicants for loans." Upon consideration of the pleadings and the entire record herein, and for the reasons stated below, the Court concludes that the Secretary's decision cannot be sustained and plaintiff's motion will be granted.


Plaintiff is a congressionally chartered, for-profit corporation financed by private sector capital. It was established by Congress in 1972 as a Government Sponsored Enterprise through the HEA to serve as a national secondary market for student loans. Plaintiff's activities include buying and financing student loans made under the Federal Family Education Loan Program ("FFEL Program"), formerly the Guaranteed Student Loan Program.

Under the FFEL Program, private lenders make loans to students attending eligible postsecondary schools. A postsecondary school may act as a lender under the FFEL Program, subject to certain conditions. 20 U.S.C. § 1085 (d)(2); 34 C.F.R. § 682.207 (b)(1). The repayment of the loans is guaranteed by state or private non-profit guaranty agencies that are reinsured by the Department of Education ("DOE"). See 20 U.S.C. § 1078 (c). As a lender, a postsecondary school, like all other holders of subsidized guaranteed student loans, is authorized to receive interest and special allowance payments from the DOE during the period when payments from the borrower are deferred to cover administrative costs. 34 C.F.R. § 682.302 (a).

Plaintiff provides various loan programs and services for FFEL Program borrowers whose loans it owns, including incentive programs that reduce the borrower's interest rates. Students can have access to these benefits if they borrow through institutions that have an operational support agreement with plaintiff. Plaintiff also offers secured loans and lines of credit, called "warehousing advances," to lenders to fund FFEL Program loans. These advances are collateralized at levels equal to at least 100 percent with insured education loans or other acceptable collateral. Most of plaintiff's loan purchases are accomplished using multi-year forward purchase commitments.

The Agreements

Dr. William M. Scholl College of Podiatric Medicine ("Scholl College") became an eligible lender under the FFEL Program in 1989. At that time, Scholl College entered into a number of contracts with plaintiff, including a Forward Financing Commitment Agreement, and two operational support agreements — an ExportSS Loan Origination and Loan Servicing Agreement and an ExportSS Comprehensive Commitment and Loan Sale Agreement. Plaintiff and Scholl College executed the ExportSS agreement at issue in April 1995.*fn1 Under the April 1995 ExportSS agreement, plaintiff processed student loan applications and performed loan origination activities on behalf of Scholl College, which was payee and legal owner of all of the loans. Plaintiff charged Scholl College origination and servicing fees at commercially acceptable rates. The agreement provided that Scholl College is to sell all loans originated under the agreement to plaintiff, generally before the 120th day prior to the time the borrower enters repayment.

For each loan portfolio it purchases, plaintiff pays Scholl College 100% of the principal balance and accrued interest plus an amount of up to 2.50% over par value (referred to by the parties as an "incentive fee"), depending upon the average borrower indebtedness ("ABI") of the loans in the portfolio and the number of serial loans in the portfolio.

Plaintiff and Scholl College were also parties to a Revolving Financing Agreement dated July 14, 1995. This agreement provided that plaintiff could make advances of up to twenty million dollars to Scholl College to finance Scholl College's lending activities through March 1998. Scholl College paid interest quarterly on any advances at the 13 week Treasury bill rate plus 1.25%. Plaintiff charged a higher interest rate to Scholl College than it charged to most other school lenders that are ExportSS clients.

Dear Colleague Letters

In February 1989 the DOE issued "Dear Colleague Letter" 89-L-129 ("1989 DCL"), to provide lenders and guarantee agencies with guidance in complying with the anti-inducement provisions of the HEA. (Administrative Record 1001-1004 ("R.")). The letter explained that:

Some financial incentives provided by lenders and guarantee agencies are expressly permitted by statute, and are therefore not subject to the statutory prohibitions quoted above. Other activities provide some financial benefit to prohibited recipients of inducements, but are nevertheless permissible because the financial value of the benefit is nominal, or the activity is not undertaken to directly secure applications from individual prospective borrowers, but rather as a form of generalized marketing or advertising. In addition, we do not believe these provisions were intended to prevent lenders and guarantee agencies from attempting to do a better job than their competitors in carrying out their established roles in the Part B programs, even if the improved service confers a financial benefit on schools or others.

(R. 1002-03). The DOE also provided examples of activities that are permissible under the anti-inducement provisions, including the following:

A lender purchases a loan made by another lender at a premium. This is not a transaction involving the securing of applicants, but rather the acquisition of loans already made. A purchasing lender may also act as the agent of a selling lender on a loan to be purchased for purposes of originating and disbursing the loan, and purchase the loan at a premium immediately following disbursement. The funds used to make the loan would ...

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