New federal regulations that cover government-backed student lending are forcing more financial institutions to look at outsourcing the systems that run the business.

Dozens of changes in the rules on student loan processing and reporting took effect this year, and many institutions - particularly low-volume lenders - are having trouble adapting their computer systems accordingly, bankers and lawyers said.

"With the introduction of variable-rate loans [on Oct. 1], there have been dozens of new loan categories created, each of which will have subtly different servicing requirements," said William Banks, a vice president at Chemical Banking Corp.'s student lending area. "In time, this will affect every part of a bank's servicing system."

Regular Review

The rule changes to which Mr. Banks refers are the result of the Department of Education's policy of revisiting student loan regulation every five years and making changes where necessary.

Among other things, this year's "reauthorization" plan will remove many of the borrowing limits traditionally placed on parents.

From a lender's perspective, this portion of the reauthorization is good news. Increasing loan dollar volumes almost always translate into improvements in lending profits.

Refunds Sometimes Due

However, the reauthorization presents a number of new challenges as well. For instance, effective Thursday, "Stafford" loans, which are the most numerous of the government-guaranteed products, will switch from fixed rates to a variable rate based on a 91 -day Treasury bill.

The tracking and reporting challenges created by the fluctuating interest rates are complicated by a requirement that banks make refunds to a student when the yield earned by the financial institution exceeds a preset cap.

Not surprisingly, these changes have created a number of operational problems.

"The largest processors will probably be able to adjust to technical complexities that the reauthorization introduces, but servicing is increasingly becoming a mission impossible for the smaller-volume organizations," said John E. Dean, special counsel to the Consumer Bankers Association and a partner at Clohan & Dean in Washington.

Fear of Penalties

Mr. Dean said an increasing number of banks, fearful that a mistake in updating their systems will result in penalties or jeopardize the government's guarantee to pay the loans, have turned to outsourcing as a way around the problem.

A number of financial institutions, such as Fleet Financial Group Inc. and Wachovia Corp., operate subsidiaries that specialize in handling student loan servicing for institutions the operations themselves.

As with the third-party service providers that handle data processing, check processing, and trust services for bankers, student loan processors believe they can offer banks with small loan portfolios the operational advantages of a large, highly specialized loan shop.

Cost of Upgrades

For example, Fleet's AFSA Data Corp., a student loan processing concern in Long Beach, Calif., estimates that the software upgrades required by the new rules will cost banks $100,000 to $800,000. AFSA officials said they can complete the same changes for a fraction of the cost to the bank.

But experts warn that it is important for institutions contracting for such services to understand clearly which party is financially, liable for a compliance lapse.

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