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The Cuomo Effect Spreads

April 24, 2007

The next convention of state attorneys general should be an interesting one, thanks to Andrew M. Cuomo's path-breaking efforts to regulate the student loan industry at the state level.

In recent days, the top legal officers in states like South Carolina, Mississippi and, to a lesser extent, Nebraska, have put themselves at odds with the New York attorney general's aggressive and increasingly expansive campaign to "change the behavior of the industry" on behalf, he says, of student borrowers and their families.

On Monday, though, the attorneys general in Illinois and Missouri explicitly locked arms with Cuomo. They signed settlement agreements with colleges and universities in their states at which Cuomo had taken aim and vowed that they were just beginning their own efforts to help "the students and parents of our states" by reforming "an industry that as we have learned over recent months needs reforming," as Lisa Madigan, the attorney general of Illinois, said during a telephone news conference with Cuomo and Jay Nixon, her counterpart in Missouri. (Madigan and Nixon are both Democrats, and the officials in South Carolina, Mississippi and Nebraska all are Republicans.)

Madigan and Nixon both said that they were in the early stages of broad reviews of the student loan practices in their states, and Cuomo promised that there would be much more to come as other states get into the act. "I'm very proud that attorneys general across the country are stepping up to the plate," praising Madigan and Nixon for being "at the head of that parade."

In the multistate arrangements announced Monday, two for-profit college systems with headquarters in Illinois, DeVry University,Inc. and Career Education Corp., agreed to make changes in their student loan practices and to adopt the code of conduct that Cuomo has promulgated for lenders and colleges alike.

In its agreement, DeVry said it would distribute to student loan borrowers $88,122 that it had received in payments through a now-disbanded revenue sharing agreement with Citibank in exchange for listing the company on its preferred lender list for private loans. In addition, the agreement also says that DeVry's financial aid officers had accepted business meals and training seminars at no cost from its preferred lenders and that, as part of the code of conduct, they no longer would.

Under the agreement Career Education signed with Madigan, the company acknowledged that it had received $21,000 in contributions to its scholarship fund from two lenders on its preferred lender list, Wachovia and Sallie Mae, and that it would donate a similar amount to a national fund Cuomo has created to educate prospective student borrowers and families about their loan options.

Nixon, meanwhile, said he had signed an agreement early Monday with Washington University in St. Louis in which the university also agreed to adopt the Cuomo code of conduct. Washington University acknowledged that it had had a revenue sharing agreement with Education Finance Partners from April 1, 2005 to March 31, 2006, but said that it had not received any funds through that contract because so few students used the company's loans.

The broadening of Cuomo's campaign to other states comes at a time when some college and state officials are beginning to challenge his efforts. Drexel University, a private nonprofit institution in Philadelphia, said last week that it would defend its student loan practices against a lawsuit the New York attorney general said he would file, and the attorney general in South Carolina gave a clean bill of health to a revenue sharing agreement between Clemson University and a lender whose legality Cuomo had challenged. Officials at the University of Mississippi, too, have defended their practices with, they say, the support of the state's attorney general.

And in reaching a settlement agreement Friday with the National Education Loan Network, a Nebraska lender that Cuomo has also investigated, Nebraska's attorney general, Jon Bruning, put some distance between himself and Cuomo by embracing a code of conduct that Nelnet itself produced, which would allow some practices that Cuomo's code would ban.

Some college and university legal experts have questioned whether Cuomo has a legal leg to stand on in trying to apply New York's consumer protection laws to institutions outside the state. Cuomo argues that the state has a legal interest (and claim) against any college or university where New York State residents are enrolled and might be hurt by the institution's student loan practices; a lawyer at one university whose practices Cuomo has questioned called the idea "laughable."

In that context, the fact that Cuomo appears to be lining up attorneys general in other states has to be seen as bolstering his efforts. Madigan, as the top legal official in Illinois, said she believed the Illinois Consumer Fraud Act gave her the latitude to bring litigation against colleges for "failure to disclose conflicts of interest," among other possible acts. She and Nixon, of Missouri, both said they would be working their way through the student loan practices of the institutions in their states and identifying potential problems. She said that some of the "270" colleges and universities in Illinois had already been identified in news reports as having questionable practices, citing Western Illinois and Chicago State Universities. The problems, she said, are "very broad," "very widespread."

For his part, Cuomo characterized the formal expansion of the inquiry to other states as a sign that "the tide is turning" on what he called a "nationwide effort." "There are a number of ways to affect a nationwide industry, and I think this is one of them," he said in response to a question about whether the campaigns in New York and other states are meant to "substitute for federal action."

As more states turn up the heat and more colleges, feeling that heat, sign the code of conduct as part of settlements, "the question is now going to be, 'Why haven't the other schools signed onto this code of conduct?" he said. "I think the informed consumer would be well advised to say, 'Why not? Why has that school not adopted" the code? "What provision of the code gives you a problem, and what are you doing that stops you from signing that code?" The "force of the market place," he said, "is one of the most powerful tools we have."

Congressional Republicans Weigh In

As the House of Representatives Committee on Education and Labor prepares for a hearing tomorrow on the student loan issues at which Cuomo will be (as of this writing) the only witness, the panel's top Republican, Rep. Howard P. (Buck) McKeon (R-Calif.) released details about legislation he plans to introduce to confront perceived student loan abuses at the federal level.

McKeon's "Financial Aid Accountability & Transparency Act" would put in place at the national level some of the changes that Cuomo's code of conduct aims to institute state by state and institution by institution. It would, for example, bar colleges and lenders from striking agreements in which lenders give colleges a cut of their loan volume, and require institutions to adopt a code of conduct that bars financial aid officers from receiving "gifts, payments or other financial benefits" from lenders and from receiving "any fees, payments or financial benefits" as compensation for serving on lenders' advisory councils.

The McKeon legislation would also require colleges to disclose how they have selected the student loan providers that appear on their lists of preferred lenders, and insist that all such lists contain "at least three non-affiliated lenders," which is what the U.S. Education Department had recommended in proposed regulatory language that its officials offered as part of a negotiated rule making process that collapsed Friday, among other reasons, amid opposition from colleges to that provision. (In a move likely to stoke partisan antagonism on the House committee, the McKeon legislation would also require colleges that participate in the government's direct lending program (which competes with the guaranteed loan program under scrutiny from Cuomo and Congressional Democrats) to disclose to students why they are in that program.

“Our nation’s financial aid system exists for a single purpose: to serve students,” said McKeon. “Congress has an obligation to make sure that in our move to reform this system, we never take our eyes off the students who depend on us to protect their interests. By instituting better disclosure practices, more accountability, and clear codes of conduct within this industry, we will be well on our way to restoring students’ trust in this vital program.”

 

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