NEW YORK (CNN/Money) -
Sallie Mae was sued Monday on charges that the student-loan provider hoards loan-consolidation business by misleading customers.
San Diego-based College Loan Corp. (CLC) said it had a contract with a subsidiary of SLM Corp. (SLM: Research, Estimates), commonly known as Sallie Mae, to process loan consolidation applications, but the SLM unit diverted applicants to SLM affiliates in a variety of ways.
CLC said it was seeking at least $50 million in damages from Sallie Mae for failing to process at least 4,000 applications in violation of the U.S. Higher Education Act.
"We haven't seen the legal filing, but we know we comply with all regulations and policies governing the Higher Education Act," said Kathleen deLaski, spokeswoman for Sallie Mae.
Student-loan consolidation, in which two or more loans are combined into one at a fixed interest rate, has become especially popular in recent months as borrowers have tried to take advantage of extremely low rates.
Among the federal rules for consolidation is the "single holder" rule, which says that, if all of a borrower's loans are held by one lender, then the borrower must also consolidate with that lender.
CLC's lawsuit, filed in federal court in Alexandria, Va., accused Sallie Mae of refusing to process about 600 loan-consolidation applications submitted by CLC because, according to Sallie Mae, those loans belonged to Sallie Mae under the single-holder rule.
According to the suit, Sallie Mae, which holds about $76 billion in loans -- about one-third of all outstanding student loans -- claimed that any loan held by any of its affiliates, as well as any loans Sallie Mae has securitized and sold to other investors, fell under the single-holder rule and should only be consolidated by Sallie Mae.
CLC said this position was improper and in fact contradicted the position Sallie Mae took five years ago when trying to avoid federal fees on loans it held.
"Now that interest rates have fallen and consolidations are heating up and threatening to erode their loan base, SLM is flipping its stance and trying to prevent companies such as CLC from [competing]," said CLC attorney James K. Trefil.
Such activity also keeps borrowers from shopping for the best deal for their consolidated loan, CLC claimed. Rates for loan consolidations are set by federal formula, but lenders can offer incentives that lower the total cost of a loan, and CLC has claimed that it offers a better deal than Sallie Mae.
"We're a little perplexed that CLC would complain about our service to borrowers when we offer students a better financial deal," said Sallie Mae spokeswoman deLaski.
CLC's suit also claimed that Sallie Mae has improperly induced college finance offices to encourage students to borrow from SLM-affiliated lenders.
CLC also claimed that Sallie Mae has tried to encourage credit reporting agencies to obscure the nature of student loans on credit reports, making it harder for CLC and other lenders to market to them.
Sallie Mae would not comment on any of these specific allegations without first seeing a copy of the complaint against it.