WASHINGTON - The Department of Education is planning to exempt banks and other financial institutions holding less than $5 million in student loans from costly audit requirements.

"Lenders with these small student loan portfolios can rest assured that the government will not impose this audit upon them," said Leo Kornfeld, senior adviser to Secretary of Education Richard W. Riley.

"It would make these banks go through too many hoops," he added.

Under a 1992 law, financial institutions must hire independent auditors to review compliance with the Department of Education's student lending rules. For institutions with only $3 million in student loans, the audits could cost as much as $15,000, said John E. Dean, special counsel to the Consumer Bankers Association.

Earlier this week, the administration extended the audit deadline for banks with small student loan portfolios to June 30, 1996, from Sept. 30, 1995. But Mr. Kornfeld said the administration has now agreed to abolish the requirement.

About 3,000 financial institutions - less than half of the 7,000 lenders that participate in the guaranteed loan program - have portfolios of less than $5 million.

Industry representatives applauded the decision.

"This is a major step towards regulatory relief for small student lenders," Mr. Dean said. "It shows that the Department of Education is listening to us."

The small-portfolio exemption is also folded into House and Senate appropriations legislation for the departments of labor, health and human services, and education.

The House approved its version Aug. 3, but President Clinton threatened to veto that measure because of cuts it would make to education funding. The Senate Appropriations Committee is expected to vote on its version of the bill today.

A congressional source said the President may look more favorably on the Senate version, since its education cuts are not as severe.

However, Mr. Dean noted that enactment of the legislation is still far from certain.

"The (Education) Department's decision will provide certain relief for lenders, whereas with the legislative approach, one just can't be sure about what is going to happen," he said.

Credit union industry representatives praised the decision as well. Monique Gaw, lobbyist for the National Association of Federal Credit Unions, said a number of members of the trade group decided to stop making student loans when faced with the costly audit requirement.

"This exemption is going to help about 85% of our members who make student loans," said Ms. Gaw. Over 330 of the 800 Nafcu members are in the student loan market.

Mr. Kornfeld said his agency will wait to see if the appropriations legislation is enacted. If it fails to become law, Mr. Kornfeld said the Department of Education will have to extend the audit deadline until June 30, 1997, which is the earliest date a regulation on the exemption can be finalized.

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