April 13, 2007

Shaking Up Loan Industry

With the scandal over conflicts of interest in student loans continuing to grow, Education Secretary Margaret Spellings is pledging tougher enforcement of ethics rules, as the Education Department released more information about sale of stock in a lender by an official who works on student loan issues.

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And in a sign of just how volatile the loan industry is today (and how lucrative it remains), reports emerged Friday morning that Sallie Mae, the industry giant, is in talks to be bought out by private equity in a deal for more than $20 billion, according to The New York Times.

A statement released by the department late Thursday said that Spellings has asked Susan Winchell, the department’s chief ethics officer, to review “best practices” on its own financial disclosure forms to identify ways that the department might improve. Spellings also has directed that each financial disclosure form now be reviewed by at least two lawyers.

Last week, Spellings placed on leave Matteo Fontana, an Education Department official who works on student loan issues, after the New America Foundation reported that he had sold at least $100,000 in stock in the Education Lending Group, which owned Student Loan Xpress, a lender at the center of the current controversy.

It is unclear whether that sale (or the prior ownership) violated any laws or regulations, but the news about Fontana prompted calls from Democrats for tougher enforcement of loan rules by the department.

Financial disclosure reports for Fontana released by the department late Thursday in response to a Freedom of Information Act request by Inside Higher Ed offered conflicting evidence on the extent of his stock ownership and sale and of his disclosures to the department about those assets.

In his initial filing in mid-December 2002, soon after joining the department, he reported owning between $1,001 and $15,000 in stock in Direct III Marketing, as Student Loan Xpress was known at the time, and an equivalent amount of stock in Education Lending, Inc., then the parent company of Student Loan Xpress. (A note written on the form by the ethics officer at the time said “Filer [was] advised to contact Ethics Division if ELG stock exceeds $15K.") In May 2004, his first full financial disclosure, covering the 2003 calendar year, he reported having sold between $1,001 and $15,000 in stock in both companies later in mid- to late December 2002. That could be read to suggest that he had sold all of his stock in both companies.

But in May 2005, according to his disclosure form for the 2004 calendar year, Fontana reported having sold between $100,001 and $250,000 in stock in Education Lending common stock in July 2004. There is no explanation of where that stock came from. The fact that Fontana reported the sale is likely to add to Democratic Congressional criticism about the Education Department, as Fontana’s reporting raises the question of whether anyone at the department took action based on the apparent conflict.

Late Thursday, Sen. Edward Kennedy, chairman of the Senate committee with oversight of education programs, issued a statement saying: “The financial disclosure forms filed by Education Department official Matteo Fontana during his time at the department raise grave concerns about the effectiveness and impartiality of the ethics process at the department. The forms show that department officials were aware that Mr. Fontana held a significant financial interest in a company that he was charged with overseeing. Any American can tell you that this is dead wrong.”

The statement from the department Thursday noted that “like many federal government employees, Department of Education employees may own stock in any company, including companies the Department regulates or with whom the Department does business.” The statement went on to elaborate: “The conflict of interest statute prohibits employees from working on department matters that will affect the companies they own stock in unless the employee receives a waiver or an applicable regulatory exemption. For example, employees are generally permitted to work on any matter even if they do own stock as long as their interest in the matter does not exceed $15,000.”

The department also announced that Spellings has asked for the resignation of Ellen Frishberg from the department’s Negotiated Rulemaking Committee on Student Loans. Frishberg, director of student financial services at Johns Hopkins University, was placed on administrative leave by the university after it learned that she had received payments from Student Loan Xpress.

Frishberg is the second person Spellings has asked to leave a student aid post because of the scandal. Spellings earlier sought the resignation of Lawrence W. Burt from the Advisory Committee on Student Financial Assistance. Burt is director of financial aid at the University of Texas at Austin, although he too is on leave, following reports that he owned Student Loan Xpress stock.

The investigation of lender-college relationships has been led by Andrew M. Cuomo, attorney general of New York State, but it has prompted considerable interest among Congressional leaders as well. And there are no signs that the inquiries are winding down.

Reuters reported Thursday that the attorneys general of Connecticut and California are also starting probes of the topic, joining a previously announced review by the attorney general of Minnesota.

To date, most of the individuals implicated in the scandal — at least those working at colleges — have been financial aid officers. But on Thursday, a president joined the list of those being scrutinized.

Elnora Daniel, the president of Chicago State University, is a director and shareholder of a lender to which her university steers students, The Chicago Tribune reported. A Chicago State trustee is also chairman of the board of the lender, Seaway National Bank. Daniel told the Tribune that there was “no quid pro quo” in her relationship with the lender. Chicago’s other daily, The Sun-Times, reported, meanwhile, that Western Illinois University was abandoning an arrangement in which it received payment — called kickbacks by critics — from a lender it was recommending to students.

And Bloomberg reported Friday on a number of college officials — including the president of Morehouse College and the executive vice president of the University of Notre Dame — who collected pay or stocks from lenders at the time those lenders were being recommended to their students.

— Scott Jaschik

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