Sallie Mae called out once again

Jan Craig dreaded picking up her phone.

A computer mix-up mistakenly showed she owed a $1,040 credit card debt, and for nine months a collections company allegedly harassed the Florida homemaker with automated voice messages or rude telephone representatives who demanded she pay up. One threatened to call her at all hours of the night.

"It was such a shock to get these phone calls," says Craig. "It puts this pall over your life."

The calls, it turned out, came from a division of SLM Corp. -- better known as Sallie Mae, the student lending giant now under scrutiny over its dealings with college administrators and how it markets loans.

But documents also show Sallie Mae faces questions over what critics say are its heavy-handed tactics to collect debts for student loans and for broader consumer lending.

Sallie Mae says some of the complaints are old, that it has put new policies in place to prevent abuses, and that their numbers aren't significant compared with the millions of transactions it conducts smoothly. The aggressive collection comes from a little-known unit that generated $157 million in profit on $636 million in revenue in 2006, one reason a group of private-equity investors and banks agreed to purchase Sallie Mae for $25 billion last month.

However, the collections work has also made Sallie Mae the target of several inquiries from officials concerned its practices amount to bullying. In a letter to Sallie Mae's chief executive on April 26, for instance, Senator Edward M. Kennedy, Democrat of Massachusetts, wrote that he was concerned the company and other lenders "may be engaging in harsh and inappropriate tactics" against borrowers.

Kennedy spokeswoman Melissa Wagoner said the note was prompted by complaints from current and former students that collections agents used profane language, at tempted to collect debts that didn't exist, or harassed neighbors or co-workers.

Sallie Mae's practices have also drawn the attention of Illinois Attorney General Lisa Madigan, who filed a suit in January against Arrow Financial Services LLC of Illinois -- which is part of SLM's debt management operations unit.

In the suit, filed in Cook County Circuit Court, Madigan claims Arrow "engages in a variety of abusive practices in its contacts with consumers," citing 669 complaints filed with her office. In Massachusetts, a spokeswoman for Attorney General Martha Coakley said her office has received 32 complaints about Arrow.

Deborah Hagan, chief of Madigan's division of consumer protection, said her office is in settlement talks with Arrow and Sallie Mae.

Sallie Mae spokesman Tom Joyce said the talks have been "productive" and said the total number of complaints represents just a small part of the 23 million accounts the company oversees. Speaking of Arrow, Joyce said, "We hold our employees there and across SLM to a high standard of compliance. We are confident of the scope and depth of our programs."

And in an April 30 letter responding to Kennedy's staff on the issue of debt collection, Sallie Mae general counsel Robert S. Lavet wrote: "We are proud of the default prevention and collection work we have performed on behalf of former students and taxpayers." Default rates on student loans have fallen from 22 percent in 1990 to around 5 percent today, Joyce said.

Sallie Mae was set up in 1972 to promote loans for higher education and now owns or manages nearly 10 million student loans, more than any other lender . Under chief executive Thomas J. Fitzpatrick, Sallie Mae built up the company's debt management operations unit -- from one that focused on collecting money from student loan debtors to one that also collects consumer and mortgage debt. Since 2000, Sallie Mae has purchased a series of smaller collections and debt-management companies including a majority of Arrow in 2004.

Investors have cheered the strategy since the profitable area insulates Sallie Mae from risks like the chance Congress might cut back on the company's subsidies. "SLM knows how to collect on loans, and it reduces their exposure to regulatory risk," said Sameer Gokhale, analyst for Keefe, Bruyette & Woods Inc. in New York.

The Illinois suit describes the cases of seven consumers from around the country, including Craig, whom Arrow has pursued. Others allegedly faced overbearing loan officers who attempted to pressure them into paying debts they sometimes didn't owe. Craig's problems with Arrow ended only after she contacted credit bureaus who fixed an error in her records, the suit states.

In another case, a Washington state couple who had previously been victims of credit card fraud faced months of calls from Arrow up to six times a day, the suit states. Once, when they called to point out a police report they filed on the fraud, an Arrow representative allegedly swore repeatedly and threatened to put the wife in jail.

Lately, the Illinois attorney general's office has received several complaints about Arrow's efforts to collect on student loan payments as well, Hagan said. In one case, obtained under a public-records request, an unidentified person describes leaving school after being mobilized for military duty after the Sept. 11 attacks , then being harassed by Arrow two years later over a "false" school debt.

"They even went as far as to scream at me and curse and tell me that I was a bad person for not paying my bills," the complaint states.

Sallie Mae's Joyce said the company's privacy policies prevent it from discussing cases without the borrower's permission.

The question now is whether investigations could turn up wider problems at Arrow, which has received attention from other states, as well. Another investigation of Arrow resulted in the company paying $125,000 to the state of Minnesota in late 2005. (Joyce said the problems all predate Sallie's Mae involvement and that it didn't admit wrongdoing).

In Massachusetts, Coakley's office said last week it had begun investigating "deceptive practices in the college loan industry," though spokespeople declined to say whether the investigation included collections activities. Under a public-records request, her office provided two complaints it has received about Arrow including one from an unnamed person who said the company left automated message weekly for months to collect money from someone who did not live at the address.

Arrow's representative, the complaint states, spoke "nastily and told me that they could not stop calling and to write to the a ttorney g eneral."

Ross Kerber can be reached at kerber@globe.com.