Generally, the Department views lenders as affiliated when they have common ownership and control. There is no language in the final regulations that classifies lenders using a common loan servicer as affiliated simply because they share the same servicer. Similarly, there is no language that classifies lenders that sell to a common loan holder on the secondary market as affiliated simply because the lenders sell to the same loan holder.

U.S. Department of Education Final Regulations

In the preamble language accompanying the final regulations, the Secretary of Education states: "We [the Department] believe, therefore, that ensuring a borrower’s choice among lenders will be protected if 'affiliation' for purposes of a preferred lender list is limited to affiliates that are under common ownership and control. The Secretary also wishes to clarify that the Department does not interpret the lender affiliation provision to include entities that are involved in postdisbursement activities, which a school has no ability to monitor or control."

Below is the definition of “affiliated” that the Department expects institutions and lenders to use when creating preferred lender lists:

(3) For the purposes of paragraph (h) of this section, a lender is affiliated with another lender if--

(i) The lenders are under the ownership or control of the same entity or individuals;

(ii) The lenders are wholly or partly owned subsidiaries of the same parent company; or

(iii) The directors, trustees, or general partners (or individuals exercising similar functions) of one of the lenders constitute a majority of the persons holding similar positions with the other lender.

In summary, the term "affiliated lenders" is limited to lenders that are under common ownership and control.

In addition to Department regulations, legislation is both the House of Representatives and Senate address the definition of an affiliated lender:

Pending House Legislation — The College Opportunity and Affordability Act (H.R. 4137)

The Student Loan Sunshine Act (H.R. 890) was passed by the U.S. House of Representatives on May 9, 2007 and was recently incorporated into H.R. 4137, the College Opportunity and Affordability Act of 2007. The House language, still awaiting final approval, requires schools to have at least three lenders on the preferred lender list that are not affiliates of each other.

Below is the definition of “affiliate” listed in the House version of the Student Loan Sunshine Act and the College Opportunity and Affordability Act:

"(i) the term ‘affiliate’ means a person that controls, is controlled by, or is under common control with another person; and (ii) a person controls, is controlled by, or is under common control with another person if— (I) the person directly or indirectly, or acting through 1 or more others, owns, controls, or has the power to vote 5 percent or more of any class of voting securities of such other person; (II) the person controls, in any manner, the election of a majority of the directors or trustees of such other person; or (III) the Secretary determines (after notice and opportunity for a hearing) that the person directly or indirectly exercises a controlling interest over the management or policies of such other person. (C) The Secretary shall maintain and update a list of lender affiliates of all eligible lenders, and shall provide such list to the eligible institutions for use in carrying out subparagraph (A).’’

Pending Senate Legislation — The Higher Education Amendments of 2007 (S.1642)

The U.S. Senate has passed S. 1642, a bill reauthorizing the Higher Education Act of 1965 (HEA). As noted above, the U.S. House of Representatives has not voted on its version of the reauthorization bill and therefore compromise language must be struck between the House and Senate before the language becomes law.

Below is the definition of "affiliate" from the Senate version of HEA:

"(i) DEFINITION OF AFFILIATE.—For the purposes of subparagraph (A)(ii) the term ‘affiliate’ means a person that controls, is controlled by, or is under common control with, another person.

"(ii) CONTROL.—For purposes of sub paragraph (A)(ii), a person has control over another person if—

"(I) the person directly or indirectly, or acting through 1 or more others, owns, controls, or has the power to vote 5 percent or more of any class of voting securities of such other person;

"(II) the person controls, in any manner, the election of a majority of the directors or trustees of such other person; or

"(III) the Secretary determines(after notice and opportunity for a hearing) that the person directly or indirectly exercises a controlling interest over the management or policies of such other person.

3 "(C) LIST OF LENDER AFFILIATES.—The Secretary, in consultation with the Director of the Federal Deposit Insurance Corporation, shall maintain and update a list of lender affiliates of all eligible lenders, and shall provide such list to the eligible institutions for use in carrying out subparagraph (A).’’