Change of Heart on Lender Oversight

Education Department proposes toughened enforcement of colleges' relationships with loan providers.
March 13, 2007

Despite vociferous opposition from lenders and several college financial aid officers, U.S. Education Department officials showed no signs of backing away from the department's intention to more aggressively regulate the relationships between colleges and loan providers.

The sharp disagreement unfolded as a federal committee contemplating changes in U.S. rules governing student loan programs reconvened for its third round of face to face negotiations in a Virginia hotel ballroom. At a meeting last month, department officials had signaled that they planned to toughen their policies regarding when and how colleges can select certain "preferred" lenders for their students to use, and to clarify the sorts of "inducements" that lenders are prohibited from offering colleges and potential borrowers.

The relationships between lenders and colleges have drawn increasingly intense scrutiny from the newly installed Democratic Congress and from some state officials amid some highly publicized examples of questionable payments, and even some student aid experts who support the heightened scrutiny say they are surprised that the department -- which has been perceived as taking a hands-off approach to lender oversight thus far in the Bush administration -- seems to have found religion.

Department officials have characterized their push as driven by a desire to ensure that student borrowers have a real choice in who they borrow from, but some critics in the student loan industry have accused the department of trying to make up for years of lax enforcement as Democrats on Capitol Hill begin to ramp up their oversight of the industry.

Among other things, the proposals the department released at last month's negotiating session would require colleges to have at least three lenders on any list of "preferred" providers, to publicize the process and criteria they used to craft that list, and sharply restrict the benefits and gifts that they can bestow on colleges and borrowers.

At the February session, the lenders and many of the college officials on the federal panel balked at the proposed changes, and a group of negotiators drafted an alternative proposal that sought to eliminate the required minimum of three lenders on a "preferred" list and to drop a provision that would have barred from any such list lenders that have offered "financial or other benefits to the school or its borrowers in exchange for inclusion on the list" -- part of a perceived "quid pro quo."

Late last week, though, department officials delivered a new batch of "proposed regulatory language" as a starting point for this week's deliberations -- and it largely rejected the suggestions made by the group of negotiators.

"We may not have all the words right, but we think the concepts here about preserving student choice, a minimum number of lenders, various disclosures -- those kinds of things are very important to us," said Daniel Madzelan, the Education Department official who is overseeing the loan negotiations.

That stance virtually ensured that Monday's session would be contentious, and it was. Lenders and college lobbyists and financial aid officials raised an array of objections to the department's proposed approach, which they said would limit colleges' ability to help their students find and get the best deals on loans.

College aid officers also complained that the department's stance -- particularly in suggesting that lenders have offered and colleges accepted gifts or payments in exchange for spots on preferred lender lists -- assumes that financial aid officers are on the take. "It's a slap in my face, saying I'm unethical," said Sarah Bauder, director of the office of financial aid at the University of Maryland at College Park. "I'm not," she added angrily.

In one particularly sharp exchange, Scott Giles, of the Vermont Student Assistance Corp., a state guarantee agency, asked Madzelan and a lawyer for the department, Brian Siegel, for proof of the problem, suggesting that the department had done little to enforce its existing rules and laws governing illegal inducements, and that perhaps stepped-up enforcement might be wiser than new regulations.

"How many inducement proceedings have you all initiated?" Giles asked.

"We've taken one formal action related to inducements, but there have been a number of circumstances in which we have learned of arrangements and told the school or lender to stop or we would take action," Siegel replied. "To the best of our knowledge, those arrangements have ended."

"So we're talking less than a dozen?" Giles pressed.

"Over all, in situations we've addressed? No, much more," Siegel said.

"Twenty-four?" Giles asked.

"I don't know," Siegel said.

"A small number, from amid 6,000 schools" in the federal loan programs? Giles forged on. That last drew a nod of yes from Siegel.

William A. (Buddy) Blakey, a lawyer and lobbyist for historically black colleges and for the Perkins Loan Program, summed up the views of several other negotiators with his usual sweeping eloquence. "This is intrusion with little documentable fact to support it," Blakey said. "This is intrusion without, to my mind, proper statutory premise. And we have doubt being raised about the professional behavior of a group of people who have served well beyond even the suggesting of that level of inappropriate, not to say illegal, behavior."

Amid the onslaught from lenders and most of the college officials alike, it was left to advocates for students and consumers on the negotiating panel to largely back up the administration's approach.

Luke Swarthout, director of the State PIRGs Higher Education Project, cited several recent instances of apparent "conflicts of interest" in which college aid officials could be seen as acting "counter to the appropriate intermediary role for the institution."

Deanne Loonin, a lawyer for the National Consumer Law Center, said that even "sincere and well-intentioned" advice from financial aid officers can, when provided in a referral or advisory role, amount to "steering" to certain lenders. "Steering is okay if it's good, it's bad if it's tied to some kind of improper relationship," she said.

Madzelan and Siegel said that department officials would "listen" to the complaints from the negotiators and take them seriously. "We're listening and we're hearing you," Siegel said. "We may just end up agreeing to disagree."

Officials of the loan industry said they did not expect department officials to change their minds, given the political pressure they're facing. "This is an attempt to ward off criticism should there be oversight hearings" in Congress, said Brett Lief, president of the National Council of Higher Education Loan Programs, which represents guarantee agencies, secondary markets and other lending organizations. "This is all preemptive damage control."


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