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Mr. Cuomo Comes to Washington

April 26, 2007

New York Attorney General Andrew M. Cuomo was in friendly territory at Wednesday's hearing of the House of Representatives Committee on Education and Labor, whose Democratic leaders, long critics of the student loan industry, are responding to Cuomo's high-profile investigation of lender-college relationships with their own push for federal legislation and tougher oversight by the Education Department. Since Cuomo was, after all, the sole witness at the hearing, all eyes were on him as he outlined his findings, faulted the federal government for lax scrutiny -- and hinted that criminal charges might be a possibility.

The controversial practices he has unearthed -- including colleges sharing revenue with lenders based on their volumes of student loans, conflicts of interest in determining which lenders wind up on lists of "preferred lenders," and a small number of financial aid officials holding stock in loan companies to which they refer students -- elicited from Cuomo and lawmakers some harsh words and phrases: "monopoly," "predatory lending," "illegal activity," "kickbacks" and "on the take," among others. The private loan industry, as Cuomo put it, is "an area that has been, to date, the Wild West" and, as the biggest growth area, the focus of his inquiry.

Moving beyond mere description into the realm of figurative language, members also wielded a metaphor or two. Rep. Rubén Hinojosa (D-Texas), who is also on the financial services committee, compared the effects of college lending practices to home foreclosures as a result of certain mortgages, and called for increased financial literacy for high-school students and their parents to navigate the complex web of financial aid options.

The proverbial bogeyman (or bogeywoman) was there in spirit, too, as Cuomo and the committee's members minced no words in expressing their disdain for what they saw as the Department of Education's failure to keep the relationship between colleges and lenders under scrutiny. "Part of the reason the practices we have uncovered have been able to flourish nationwide over the past several years is because the U.S. Department of Education has been asleep at the switch," Cuomo said. "The practices we have uncovered were not undiscoverable until now. Rather, the entity charged with maintaining the integrity of the student loan market failed." The implication, as expected, was that the current crisis came as a result of the Bush administration's supposedly lackluster oversight for the past several years.

Members of the committee took turns showering praise on Cuomo and questioning how to proceed. The attorney had clear ideas about that, too, and threw in his support for the Democrats' Student Loan Sunshine Act, sponsored among others by the committee's chair, Rep. George Miller of California. Miller said that his committee's own investigation, as well as Cuomo's testimony, would help him "build on this bill" and possibly expand it. Current provisions of the proposed legislation include requiring full disclosure for "special arrangements" between lenders and colleges, and banning most gifts to university officials.

As committee members questioned their witness, they also, as is often the case, used him as a sounding board for their own ideas. Doesn't it make more sense to stick solely to the federal direct loan program, in which students borrow directly from the government? What if we required colleges to publicize all lending institutions? Should we boost financial literacy?

Rep. Ric Keller (R-Fla.), for one, was concerned that his constituents might worry about Cuomo's efforts resulting in banishing private loans entirely. Cuomo didn't express a preference either way, but Keller wanted permission, he said, to tell them that Cuomo -- a former Clinton cabinet housing official -- wouldn't necessarily advocate for a shift such that all federal loans were distributed through the government's direct loan program, which competes with the guaranteed loan program that lenders dominate. "Can I say that?" Keller asked. "You can say that I'm a non-policy maker," Cuomo offered. "So we have a non-policy maker," Keller quipped.

But while he insisted on remaining neutral on that issue, Cuomo was outspoken about the Department of Education's role, as well as what he saw as the proper role of quick federal action to prevent further and future abuses, which Miller called for last week. The department, he said, should not only enhance its oversight of federally guaranteed loans, but should extend that oversight to private loans, which it currently lacks the power to do. He noted that industry was ahead of the government in this case -- already on the path to reforming itself and restoring "trust in the system," although those steps, like settling with the state, came as a result of the public pressure from Cuomo's investigation. But he maintained that federal action was necessary. "The schools and the lenders are ready to change their actions," he said, but the government needs to "just give them the guidance and the standards" to do so.

Cuomo also said that his office has issued subpoenas. Rep. Buck McKeon (R-Calif.), at one point, asked Cuomo to clarify whether he thought most financial aid administrators "are acting in interests that are not best for the students," something McKeon asserted not to be true. Cuomo agreed that the "vast majority of schools" are not involved. But later in the session, and in a news conference afterward, Cuomo seemed not to rule out that this was the tip of the iceberg. "The more work we do, the more work we find we need to do," he said. "It is a culture."

Meanwhile, the Republicans on the committee, led by McKeon, the panel's former chairman, presented their own solution, a bill called the Financial Aid Accountability and Transparency Act, which seeks some of the same measures as the Democratic version. One provision that might rankle Democrats on the committee, while seeking a compromise, is that colleges must "adopt a formal written policy about how it selects these lenders," including direct federal loans; the Democratic version encourages students to seek federal loans first. The Republican bill also would require colleges to create and commit to their own codes of conduct for lending practices, and ban revenue sharing for private loans. But over all, the Republicans were much less willing to adopt regulations of the private loan industry, even if members of both parties, and Cuomo, agreed that competition was key to making loans fair.

Secretary of Education Margaret Spellings, whose own testimony on the loan scandal before the House committee on May 10 was announced Wednesday, didn't wait until then to have her say. In a statement Wednesday, she challenged many of Cuomo's assertions, saying, "We have taken a number of steps to tighten our oversight responsibilities of federal student financial aid programs under existing regulations and within the authority the department has been given through the congressionally mandated process for issuing new regulations." Attempts to strengthen department regulations through negotiated rule making ended in an impasse last week, and Spellings has announced an internal panel to look into possible policy changes.

Cuomo interrupted the news conference he held with Miller after the hearing to announce that, as the session was occurring, the Republican-controlled New York Senate had passed a bill he had jointly developed with legislative leaders, which would put in place for all colleges in New York the "code of conduct" he has been negotiating one by one with colleges. Among other things, it would bar revenue sharing between colleges and lenders as well as prohibit gifts to campus officials.

In other developments and announcements related to the loan controversy Wednesday:

  • Bank of America and JPMorgan Chase have agreed to Cuomo's "Code of Conduct" for lenders -- meaning that with Citibank and Sallie Mae, which already adopted the code, the top four loan originators will now abide by the voluntary rules of conduct, many of which the House committee is seeking to codify into law.
  • Johns Hopkins University also agreed Wednesday to adopt the code of conduct, and said it would end all of its preferred lender lists, in response to its continuing investigation into monetary benefits its financial aid chief received from lenders.
  • Cuomo said his office was looking into credit card companies' practices with college students, and the relationship, if any, between educational institutions and those companies.

 

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