Student Lending: New Law Expands the Inducement Prohibition

July 6, 2009

On July 1, 2009, the President signed into law H.R. 1777, making technical corrections to the Higher Education Act of 1965 (HEA). One revision to the HEA made by this law that is not so technical is an amendment to the prohibited inducement section that expands the reach of that prohibition to include lender payments to, literally, any individual or entity. By way of background, the prohibited inducement section excludes from the definition of “eligible lender” any lender that offers payments or other inducements in order to secure applicants for loans authorized under the Federal Family Education Loan (FFEL) program.

The legislative history of the HEA’s inducement prohibition indicates that it was intended to prevent FFEL lenders from paying off schools and financial aid administrators, as well as student and parent borrowers themselves, in order to obtain FFEL loans. In the past, the statutory text of the prohibition was consistent with that intention by only prohibiting certain lender payments made to colleges and individuals. Indeed, last year’s enactment of the Higher Education Opportunity Act (HEOA), which significantly amended the inducement prohibition, actually narrowed its scope to only prohibit payments made to colleges and to certain individuals — namely, college employees. Despite the HEA’s narrowed scope, for many years, the U.S. Department of Education has had a federal regulation on the books that prohibited lender payments to any individual or entity, regardless of whether the entity was a college and regardless of whether the individual was a college employee. That discrepancy raised the issue of whether the Department could legally enforce the regulation in a manner that went beyond the statutory prohibition.

However, with the addition of a mere five words within the new law (“or any individual or entity”), the scope of the HEA’s prohibition against lender inducements has been broadened to include lender payments to, well, any individual or entity, thus making the statute and regulation consistent. The types of lender payments that are now prohibited by section 435 of the HEA are payments made “to any institution of higher education, any employee of an institution of higher education, or any individual or entity in order to secure applicants for [FFEL] loans.” Importantly, the new law makes this amendment retroactive to the date of enactment of the HEOA, which was enacted on August 14, 2008.

At McGuireWoods, we advise banks, lenders, colleges, and third-party servicers in connection with preventative compliance measures and with audits and program reviews relating to the HEA and other laws affecting the higher education community.