WASHINGTON - A proposal in Congress would exempt banks with small student loan portfolios from costly audits currently required by law.

Rep. Thomas Ewing, R-Ill., and Rep. Ron Lewis, R-Kan., introduced a bill this week that would drop the audit requirement for banks with student loan portfolios of $5 million or less.

Industry representatives are backing the bill but were pushing for a $10 million ceiling on the exemption. Of the 8,000 banks that make student loans, about 3,000 have less than $5 million of student loans outstanding.

The two lawmakers are planning to attach their measure to an appropriations bill expected to be voted on in the House today.

Under a 1992 law, banks must hire independent auditors by Sept. 30 to review compliance with the Department of Education's student lending rules. For example, the audits would make sure banks are paying required origination fees to the department.

Industry officials complain that the audits could cost as much as $20,000. Some bankers say that burden would be enough to make student lending unprofitable for those with small loan portfolios.

"This cost substantially eats into the yield from the student loan business - wiping out what may be very small earnings to begin with," said John E. Dean, special counsel for the Consumer Bankers Association. "If it is not repealed, a number of small institutions will not continue to participate in the student loan program."

Mr. Dean said the audit's cost would depend on the size and complexity of a bank's portfolio. But some banks with only $3 million of student loans would have to spend $15,000 to $20,000 to be audited, he said.

Stillwater National Bank, with $65 million of student loans, expects to pay $10,000 for its audit.

"If these audits continue to shrink our profit margin, we would have to consider not offering student loans," said Kimberly Sinclair, executive vice president at the Stillwater, Okla.-based bank. "We have to do something to make sure it's still profitable."

Industry sources also noted that student loan portfolios are already inspected by federal guarantee agencies and the Education Department. The mandatory audits, they contended, are redundant.

Education Department officials, who regulate student lenders, admit that the requirement is expensive, and they support limiting the audits to larger lenders.

"There is certainly a need on the part of the government to monitor student lenders," said Leo Kornfeld, the department's director of student lending. "But it seems the audit is an excessive burden for those banks which have only a few loans."

Mr. Lumetta writes for Medill News Service.

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