Nine months after winning a bitter contest for control of Sallie Mae Inc., Albert L. Lord remains in fighting trim.

"The player with the most ability and dedication is going to be the winner and that's going to be us," he said.

The 52-year-old is sure to face plenty of brawls as he transforms the company from solely a secondary market provider into an originator of student loans.

To succeed he must beat some of the country's biggest banks and even a Clinton administration plan to trim the margin lenders earn on guaranteed student loans by 25%. Though he faces formidable competition, Mr. Lord has already triumphed against some tough rivals.

Last August he won a two-year shareholder fight for control of the company's future. Mr. Lord took over as chief executive officer and forced two bankers off the company's board by branding them as competitors to Sallie Mae.

Though his plans to enter direct lending have rankled some of the banking industry's heaviest hitters-Citibank, Bank of America, and Norwest Bank to name a few-Mr. Lord insists most banks should still consider Sallie Mae an ally.

"We are trying to develop as many warm and fuzzy and economically viable relationships with banks as we can," Mr. Lord said in his first interview since taking the helm of Sallie Mae. "There are close to 1,000 banks with which we do business. I have to view them as customers."

Warm and fuzzy, however, only goes so far.

Mr. Lord said Sallie Mae is gunning to steal market share from the top 20 banks in the student lending business. That group accounts for roughly a quarter of the $40 billion in loans issued annually as part of the government's guaranteed student lending program.

"There are many other banks, Citibank for example, that do a lot of loans and don't use our services in any way, shape, or form," Mr. Lord noted. "I certainly view Citibank as a competitor."

Many bankers complain Mr. Lord's strategy will hurt their institutions- large and small alike-because Sallie Mae can raise funds at lower rates and can cherry pick which schools it wants to serve.

"We have Community Reinvestment Act obligations; Sallie Mae does not," said Greg Stringer, vice president of education finance at National City Bank in Cleveland. "My guess is they won't focus real hard on riskier markets that we cannot ignore, such as trade schools and some community colleges with high default rates."

National City chairman David A. Daberko was one of the bankers kicked off the Sallie Mae board last year. The other was David J. Vitale, vice chairman First Chicago NBD Corp. Neither Mr. Daberko nor Mr. Vitale would comment for this story.

Mr. Lord said his goal is to get the Sallie Mae name on as many college campuses as possible-either by establishing servicing relationships with local banks or by offering loans directly.

The move to originate loans is critical because Sallie Mae must end its government ties by 2008. Without the preferential borrowing rates allowed by the government's implicit guarantee of Sallie Mae debt, Mr. Lord said the company must find other ways to boost its margins. By lending directly, Sallie Mae will have to share less of its profits with banks.

He insisted, however, that banks selling loans to Sallie Mae have nothing to fear. "We are not going to originate loans where we have a customer making loans," he said. "But if our service is not on a campus, we are going to put it there one way or another."

Bankers say Mr. Lord's plan is to boost Sallie Mae's profits at their expense. "Almost every campus in this country is being courted by a dozen or more lenders, one or more of which has a relationship with Sallie Mae," Mr. Stringer said. "I've got to wonder what really is Sallie Mae's reason to be in originations."

Currently, Sallie Mae, which marks its 25th anniversary this month pays banks approximately 2% of the value of a loan. Mr. Lord vowed to chop that fee in half within five years.

"If a bank is providing the loan only in name and we're providing 100% of operational services, I think the economics should be divided differently," Mr. Lord said. "We have originations where, in fact, a bank may never touch the asset. It may appear on the bank's ledger, but Sallie Mae does all the servicing from the back-room processing to the university campus to the student's bank account."

Mr. Lord not only seeks a bigger cut of the profits. He wants banks to turn over more of the servicing duties to Sallie Mae as well.

"Ultimately the success of our business depends on the satisfaction level of schools and students," he said. "What's principally missing is front-end services-the delivery of funds with less muss and fuss. We have to create more distance between ourselves and competitors. I don't think we and our partners are doing very well on that."

Although he may be on shaky ground with many in the industry, Mr. Lord gets high marks from Wall Street. Several investment firms, including Salomon Smith Barney and Sanford C. Bernstein, have issued "buy" recommendations on the company's stock, even though legislation pending in Congress would cut the rate lenders could charge for government-guaranteed student loans and, consequently, lower the company's profits.

As of May 21, Sallie Mae's stock traded at $41.25, up only 3.5% for the year.

Salomon Smith Barney analyst Thomas O'Donnell blames the uncertainty surrounding the interest rate formula for the lackluster return. "I think they've turned in an outstanding performance under difficult conditions," he said.

He noted that the new management already has delivered on its promise to cut costs by closing three loan processing operations and eliminating roughly 200 jobs. Sallie Mae also has eliminated a unprofitable program that allowed borrowers to consolidate guaranteed loans from private lenders and direct loans from the federal government.

"Assuming no damage is done to the private-sector lending by the interest rate legislation, I think the best is yet to come for Sallie Mae."

"They have definitely improved the operating efficiency of the company. Management has done a good job," added Leslie A. Nelkin, an analyst at Furman Selz.

Mr. O'Donnell predicted Sallie Mae shares will reach $50 by yearend.

In the first quarter, earnings per share were 80 cents, up from 62 cents a year earlier. Mr. O'Donnell estimated that yearend income will reach $3.25, up 17% from the $2.78 earned in 1997.

But Mr. Lord said his team has just begun to grapple with the company's finances. Though operating expenses were pared 10% during the first quarter, the real mission, he said, is to increase the amount of student loans under management. During 1997, managed student loans increased 9%, to $43.6 billion. That's tepid growth, Mr. Lord said.

"I am not at all satisfied. We have to do some repair work here," he said.

Mr. Lord said the distraction of the legislative battle over interest rates on government-guaranteed student loans has put efforts to build the company's student loan portfolio four months behind schedule.

He's eager to shake off the dispute, but he steadfastly refuses to give into the administration's demand that lenders absorb an 80-basis-point reduction in rates. On this issue, at least, he has found solidarity with bankers.

Sallie Mae and the industry reluctantly back compromise legislation in Congress that would partially compensate lenders for the cut, which is scheduled to go into effect this July. (See story on page 2.)

Mr. Lord complained that the Clinton administration, which wants the industry to bear the full cost of the interest rate cut, is playing politics by painting the student loan program as a cash cow for banks.

"High returns typically draw competition, but this business is not drawing competition. No one has excessive returns," he said. "Capital is leaving the student loan business." Since 1980, he said, the number of lenders making student loans has dwindled to roughly 5,000 from a high of 11,000.

He also is trying to shoot down the notion that the interest rate cut will help students, who pay nothing on the loans while they are in school.

"The administration is engaging in hyperbole by saying they will be saving students money," he said. "Never in the history of the program has a student paid a loan. Former students pay loans-after they leave the classroom and the beer parties behind and join us in the working world."

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