Allowing Felons in FFEL

At Higher Ed Watch, we have written much about the U.S. Department of Education's lax oversight over the lenders and guarantee agencies that participate in the Federal Family Education Loan (FFEL) program. But until we read a recent investigative report in the St. Petersburg Times, we didn't fully grasp just how lax that oversight has been.

As that report revealed, the Education Department does not conduct criminal background checks on individuals who are seeking to become eligible FFEL lenders. The agency leaves it to student-loan guarantee agencies to verify eligibility for participation. But apparently most guarantors often don't even bother to ask about past criminal records of those who apply to become federal student loan providers.

As a result, the St. Pete Times reports, some convicted felons and others with criminal records have gained entry into the guaranteed-loan program and taken advantage of the rich rewards the government bestows on lenders that participate in the FFEL program.

The newspaper's report focuses on two individuals with criminal records who managed to set up and run student loan consolidation companies based in Tampa Bay that dealt in over $300 million worth of federal loans.

According to the articles, Roger Wayne Morgan, a native of North Carolina, "earned felony convictions for safecracking, breaking and entering, and larceny following his first arrest in 1992, when he broke into a North Carolina movie theater and made off with $400 in rolled quarters." In a separate incident, he was arrested and charged with "armed kidnapping in connection with a botched ecstasy deal." Prosecutors, however, ultimately dropped the charges, "citing trouble with witnesses." Morgan also "pleaded guilty to stealing from a cash register and no contest to writing an $18,000 bad check."

Meanwhile, Joseph Pursley of Michigan had a police record that included resisting arrest and public drunkenness. He also carried enormous debt, owing at one point "$2.8-million in unpaid bills" as the result of a failed real estate venture. In 1999, the state of Michigan rejected his application to practice law after the state bar's committee on character and fitness "cited his foul temper and a 'frivolous, cavalier approach to other people's money.'"

Despite their backgrounds, neither man ran into much difficulty starting his own federal student loan consolidation businesses. These companies -- Morgan's Academic Financial Services and Pursley''s Student Funding Services -- grew to be among the top 100 companies refinancing loans in the FFEL program. "It's a great business to be in," Pursley boasted to the St. Pete Times in 2006. "There's essentially no risk for anybody buying these loans."

The good times, however, were short-lived. According to the newspaper, both companies "have collapsed amid lawsuits and a federal raid, leaving creditors, employees, and aggrieved borrowers in the lurch." In March, Morgan was arrested on 24 charges of writing bad checks. Meanwhile, Pursley's company went under in May 2007, after federal agents raided its headquarters, carting away boxes of loan documents. The agents were apparently acting on a tip they had received from a whistleblower that company officials had been forging students' signatures on loan applications.

The St. Pete Times report has justifiably raised alarms on Capitol Hill. On Tuesday, Rep. Kathy Castor (D-FL) announced that she and Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and Labor, plan to introduce legislation requiring background checks be conducted on all individuals wishing to become FFEL lenders.

While all the details of the legislation have not been worked out yet, this appears to be a common-sense solution -- so common-sense, in fact, that it is unbelievable that such a requirement doesn't already exist.

At Higher Ed Watch, we urge policymakers to move quickly to address this problem, so that we can restore integrity to the FFEL program and protect students from such shady operators.