On May 5, 2011, the Eight Circuit Court of Appeals in United States ex rel. Vigil v. Nelnet, Inc., et al., 2011 WL 1675418 (8th Cir. 2011), affirmed the dismissal of federal False Claims Act claims by a relator against private institutional lenders participating in the Federal Family Education Loan Program (FFELP) for failing to state a claim and to plead fraud with particularity. The relator was a former loan advisor for Nelnet, a loan service company specializing in student loans, and the primary defendant was Nelnet, with two major banks joined as alleged participants in a conspiracy to submit false claims. The government did not intervene.
FFELP provides financial assistance to private lenders of qualified student loans in the form of interest rate subsidies, defaulted loan reimbursements and special allowance payments. The relator alleged that Nelnet continuously violated FFELP regulations by offering improper inducements to its loan advisors and engaging in fraudulent advertising in order to attract student borrowers. According to the relator, Nelnet’s continuous violations of the FFELP made it ineligible to receive payments and subsidies under the program, and thus Nelnet’s application for financial assistance during this time constituted violations of the FCA under a theory of false certification.
The court ruled that there was no false certification because violations of the FFELP did not automatically result in loss of eligibility. Rather, a previously qualified lender loses its FFELP status only after the government elects to terminate the lender’s participation after a formal administrative proceeding. The court also found it significant that FFELP regulations already set forth available remedies against noncompliant lenders, including recovery of previously paid claims, imposition of civil fines, revocation of eligibility status, suspension and termination. As the court stated, when a “statute creates a complex monitoring and remedial scheme that ends FFELP payments only as a last resort,” the FCA should not be applied to “undermine the government’s own regulatory procedures.”
Moreover, the court noted that the FFELP regulations concerning prohibited inducements and advertisements were merely conditions of participation, and not conditions of payment that are material to the government’s decision to pay. For example, the court observed that the government would still have provided insurance benefits and guarantees on behalf of defaulting borrowers irrespective of the alleged violations by the lender.
The relator also alleged that two major banks entered into loan servicing agreements with Nelnet and had used the latter as a conduit to make false claims on FFELP loans. The court went on to dismiss the conspiracy claims against the banks because it found no violation of the FCA by Nelnet.
The complaint in this case was filed in July 2007. However, in March 2007, the New York Attorney General Office announced its investigation of the student loan industry for deceptive practices and specifically the provision of kickbacks and improper inducements to schools and financial aid officers in exchange for preferred-lender deals. The New York Attorney General Office named six lenders in its investigation, including Sallie Mae and Nelnet. Earlier this year, the Eastern District Court of Virginia in United States ex rel. Jones v. Collegiate Funding Services, Inc., et al., 2011 WL 129842 (E.D. Va. Jan. 12, 2011), also dismissed FCA claims against FFELP participating lenders because the relators’ knowledge originated from, among other things, news articles detailing the New York Attorney General’s investigation into the student loan industry.