The common practice of marketing and selling student loans could mean trouble for Fifth Third Bank, one of Ohio's largest banks.
An audit from the U.S. Department of Education's Inspector General said the Cincinnati bank violated federal law by paying three other companies to solicit more applications.
The audit recommends suspending the bank's participation in the Federal Family Education Loan Program under those contracts, which would force some students to find another lender for federal loans.
Fifth Third said the audit reflects a new interpretation of the law, which allows a bank to buy or sell completed loans but prohibits paying someone to market a loan or solicit applications.
At issue was the sale of actual loans, not the marketing of loan applications, the bank said.
The dispute shouldn't affect students who already have loans from Fifth Third.
"The department is taking important steps to alleviate the anxiety in student lending, and this recommendation could severely undermine those efforts," wrote Brian Gardner, the banking firm's vice president, in a letter to the Education Department.
Sales of student loans by one lender to another give the original lender money to make more loans, while the buyer continues to collect management fees.
The federal agency will decide on penalties, which could range from a fine to pulling the federal guarantee on more than $3 billion in loans and triggering more than $300 million in reimbursements.
"To me, it looks like what a lot of lenders have already done," said Jeff Wallace, director of marketing and operations at Student Lending Works, Ohio's designated nonprofit student lender, which is not involved in the loan sales.