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'Deceptive Practices' in Loan Industry

'Deceptive Practices' in Loan Industry
March 16, 2007

New York State's attorney general said Thursday that his review of banks and other providers of student loans has uncovered "deceptive practices" -- and warned that it could result in charges of illegal activity under New York law.

"There is an unholy alliance between banks and institutions of higher education that may often not be in the students' best interest," Andrew Cuomo said in a news release. "The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law."

Cuomo -- who is following in the footsteps of his predecessor as New York's attorney general, now-Gov. Eliot Spitzer, in making high-profile headlines in pursuit of perceived wrongdoers -- has gradually expanded his review of the student loan industry. In February, he announced a broad inquiry into possible conflicts of interest in the student loan industry. He sent letters ( like this one) to 60 colleges and universities, in New York and 16 other states, seeking information about their financial arrangements with lenders, how they make up lists of "preferred lenders," and other matters. The attorney general's office had asked a group of lenders for similar information the previous November.

On Thursday, he said that because now is when current college students and their parents are working out their financial aid packages with colleges and lenders for next academic year, it was an appropriate time to share "some preliminary findings" of his investigation -- and to warn college and university officials not to engage in the troubling practices he has uncovered. As part of his review, Cuomo sent a letter to the president of every college in New York State and to selected others -- 400 in total -- urging them to review their practices and to inform students about their arrangements with lenders.

"I do not want another college-bound class to be taken advantage of by schools or by lenders," Cuomo said in his news release. "Students and their families need to know about the practices in the industry so they can better protect themselves when being steered toward a lender by a college or university."

The "problematic practices" that Cuomo said his review had uncovered so far include:

  • Lenders paying financial kickbacks to colleges based on a percentage of the loans that are directed to the lenders, and especially if the colleges make the lender their “exclusive” preferred lender.
  • Lenders paying for all-expense-paid trips for financial aid officers (and their spouses), or providing other benefits like computer systems. A high-profile case last fall drew attention to this issue.
  • Lenders setting up funds and credit lines for colleges to use in exchange for putting the lenders on their preferred lender lists.
  • Lenders offering large payments to institutions to drop out of the federal direct loan program so the lenders get more business.
  • Colleges putting multiple lenders on their preferred lender lists, but those providers all selling their loans to a single lender so there is "no real choice for the student."

The letter that Cuomo sent to college presidents contains gentler language than the news release -- no mention of the "unholy alliance," for instance. And in possible deference to complaints from financial aid officials that Cuomo's effort and other critiques of the loan industry by members of Congress and the lender MyRichUncle have tarred college officials with a broad brush, Cuomo's letter says: "We are not suggesting that there are untoward relationships with lenders at every college or university, or that disclosures at all colleges and universities are insufficient."

But it adds: "Nevertheless, we believe it will assist students, as they begin the process of accumulating significant student loan debt, for you to share this information so that students and their parents can make informed choices as they select lenders and negotiate loan terms. Moreover, as noted above, we have found that the overall financial relationship between some lenders and universities is highly problematic."

Cuomo's letter suggests that college officials take many of the steps suggested by Sen. Edward M. Kennedy (D-Mass.) in "sunshine" legislation that he is promoting, and by the U.S. Education Department in regulatory language that it is contemplating promulgating, including telling students how they build their "preferred lender" lists and ensuring that all students are not bound by the lenders on a college's preferred list. The attorney general's announcement drew a promise from Rep. George Miller, chairman of the U.S. House Education and Labor Committee, to thoroughly investigate "dishonorable practices within the college loan industry" as part of the panel's review of the Higher Education Act

In a response to Cuomo's latest missives, the National Association of Student Financial Aid Administrators sought to emphasize the positive. "We are pleased the Attorney General’s letter is measured in its tone, using phrases such as '…potential conflicts of interest and illegal conduct…,' ”  the group said in a statement. "A financial aid administrator’s primary concern is to provide as much student aid as is available from all sources of federal and state assistance, private scholarships offered chiefly by colleges and civic groups, and student loans so that all students are able to finance their education and that their student loan debt burden is kept as low as possible. Part of their responsibilities is to find lenders with loan programs that have the most favorable borrower terms and conditions, such as no loan fees, lower interest rates, and loan repayment benefits for their students."

It added: "NASFAA and Mr. Cuomo agree that more disclosure is necessary and the few abuses that have occurred must end. Financial aid administrators are the first to condemn colleagues who cross the line into unethical behavior. And so we invite Mr. Cuomo to visit financial aid administrators in New York and around the country and to talk to them about their practices. He will find committed professionals with the highest ethical standards whose only concern is for their financial aid recipients and not padding their or their school’s pockets."

 

 

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