The Battle Is Joined

N.Y. attorney general announces plan to sue his first college in loan inquiry, and his target, Drexel U., vows to fight back.
April 20, 2007

It was only a matter of time: New York's attorney general plans to sue a college for the first time in his expanding student loan investigation. And his target -- Drexel University -- accused the state official of unfair tactics and vowed to fight back.

Andrew M. Cuomo announced Thursday that his office would sue Drexel University over its revenue sharing agreement with Education Finance Partners, which has earned the university about $250,000 since 2005, according to the "notice of proposed litigation" that Cuomo released. Under the terms of Drexel's agreements with the lender, Cuomo charges, Education Finance agreed to pay Drexel between 0.75 and 1 percent of the net value of private (non-federal) loans originated by the company, and the Philadelphia university agreed to promote Education Finance to its students as a preferred loan provider.

The attorney general's legal notice claims that Drexel has broken state consumer law by engaging in "unlawful and deceptive acts and practices." Those practices, Cuomo alleges, include (1) failing to tell students about the lender's payments, creating "unlawful conflicts of interest on the part of Drexel and may have misled the student borrowers and their parents," and (2) "fostering the false impression to student borrowers and their parents that Drexel, which is in a position of trust with students and their parents, is a lender or lender partner" on Education Finance's loans, because the company used Drexel's name and logo in its promotional materials. (Education Finance itself agreed to settle with the attorney general this week in the face of a threatened lawsuit.)

Late Thursday night, Drexel's president, Constantine Papadakis, released a strongly worded statement that both defended the university's practices and accused Cuomo of underhanded tactics. University officials, Papadakis said, have "carefully reviewed our practices" and satisfied themselves that "there is no conflict of interest or untoward behavior on the part of Drexel University," adding: "Drexel will vigorously defend its position in this matter and will fully respond to any lawsuit in due course. We believe the allegations are without foundation in law or in fact."
Papadakis went on to say that Drexel had responded with "full disclosure" to the attorney general's initial inquiry in February (the university was among dozens of recipients of a Cuomo letter seeking information about student loan practices). "We received no communication from the Attorney General’s office until today when a letter regarding his intent to sue was sent to our undergraduate newspaper and then forwarded by our students to our legal counsel," Papadakis said.

"The timing and public release of the attorney general‘s notice of intent to sue raises troubling questions as to his motivations and to his tactics," the Drexel president added. "Indeed, his conduct violates fundamental principles of fair play to which Drexel and its students are entitled, and therefore we will move forcefully to protect our position in this matter."

Many legal observers have speculated in recent weeks that one college or another ultimately would stand up to the attorney general, testing his authority to bring legal action against colleges outside the state and to challenge practices (like revenue sharing agreements) that they have been deemed permissible under federal law. (Cuomo's news release about the legal action against Drexel asserts that he has such authority because "Drexel solicits and corresponds with students from New York, and New York students and their families rely on Drexel's representations about preferred lenders; the New York Attorney General therefore has jurisdiction over Drexel in this matter.")

Cuomo vowed to proceed. “This investigation is a two front battle: lenders and schools," he said. "We have proceeded against lenders and now we are proceeding against schools. There is no reason for a school not to adopt the Code of Conduct. This office has been clear to schools: settle or we will commence litigation. Either way we will get justice for students.”

Four other colleges did what Cuomo wanted: They settled. The attorney general said that Pace and Salve Regina Universities, Molloy College and New York Institute of Technology all had agreed to alter their practices and to sign the code of conduct that Cuomo's office is promulgating, both for individual colleges and lenders to sign and as legislation that would apply to all colleges in New York State.

Under their settlements:

  • Salve Regina agreed to reimburse $7,840 to students, covering the amount the Rhode Island university received through its revenue sharing agreement with Education Finance, which was one of its preferred lenders. In addition, according to Cuomo's office, several lenders provided services or paid printing costs for the university, or provided meals or lodging for its employees at loan workshops or advisory board meetings.
  • New York Institute of Technology accepted payments from lenders in the form of sposorships of university events and scholarships, according to Cuomo's office, and used a lender's contributions (or lack thereof) as a criterion in putting together its list of preferred lenders. Cuomo also said that lenders such as Sallie Mae, Citibank and College Loan Corp. had paid for meals and trips to student loan conferences for the university's financial aid officers.
  • Molloy College, on Long Island, agreed to return to Education Finance more than $1,600 it had received through a revenue sharing agreement with the lender, according to Cuomo, and asked that any future revenue due to it under the agreement go toward reducing student loan payments.
  • Pace University, in the Westchester County suburbs of New York City, was one of numerous colleges that contracted with Sallie Mae to staff a financial aid call center for students, and the Sallie Mae employees "wrongfully identified themselves as Pace University employees," the attorney general's office said. The Cuomo statement also said that a Pace administrator who oversaw student loans and "advised Pace to drop the federal direct lending program and enter into contracts with Sallie Mae subsequently went to work for Sallie Mae after leaving Pace." The attorney general's statement said that "[t]his administrator may have had an inappropriate relationship with Sallie Mae while employed by Pace."

Pace issued its own statement Thursday in which it acknowledged the attorney general's findings in broad outline, but challenged some of his assumptions and conclusions, revealing some of the underlying tension within higher education over the questioning that Cuomo and Congressional lawmakers have done of some of the practices they are challenging.

For instance, Pace's statement said that "we do not believe (and we have not admitted) that it is illegal or a conflict of interest for us to outsource various functions, including call centers," as it did in one case with Sallie Mae. "We have not found any basis to believe, nor has any evidence been presented to us, that Sallie Mae call center personnel engaged in any steering of Pace students or their parents to Sallie Mae products or that Pace’s students or their parents were harmed in any way by our agreement to outsource the call center."

Similarly, the Pace statement said, while university officials were "unaware of a possible conflict by our former enrollment management director at the time of our negotiation of the 2004 agreements with Sallie Mae ... we have found no evidence, and none has been presented to us, that the agreements were illegal or, equally important, that any of our students or their parents were harmed as a consequence of our entering into those agreements." The former official, Pace said, "was not the decision maker regarding our contracts with Sallie Mae. Other university officers, in consultation with university counsel, conducted independent analyses and reached independent decisions on the basis of their assessment of what was in the best interest of our students, their parents and the university."

Negotiated Rule Making

As Cuomo made his announcement about the latest of his campaign to rein in perceived excesses in the student loan industry -- a campaign in which Democratic Congressional leaders are also increasingly active participants -- a group of lenders, financial aid administrators, and Education Department officials were holed up in a Washington office building in their last of four meetings to negotiate possible changes in federal rules governing the loan industry.

As recently as a month ago, when the negotiating panel last met, the department's proposed approach to strengthening its oversight of lenders and financial aid officials was seen by lenders and college officials as aggressive (too aggressive, for some of their tastes). Among other things, the department's proposals 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 lenders can bestow on colleges and borrowers. Some student loan officials grumbled that the department, in getting tough now, was trying to cover the fact that the Bush administration has been perceived as taking a lax approach to regulating the loan industry in recent years -- the latter view shared by advocates for students and other critics of the loan industry.

But given what has unfolded in the five weeks since then -- Cuomo initiated his campaign three days after the negotiators last met, and his office and Congressional leaders (along with enterprising reporters) have unleashed a virtually nonstop barrage of damaging findings and accusations that have put lending companies and some college aid officers alike on their heels. In addition, the lawmakers have put forward recommendations for much more radical restrictions on the practices of lenders and colleges (and the interrelationship between the two) than the department had proposed.

Those facts have made the proceedings of the federal negotiating panel, which continue today, seem rather tame, if not downright irrelevant. At a time when Cuomo's code of conduct and proposals from members of Congress would bar college employees from receiving "anything of value for serving on the advisory board of any lending institution," under any circumstances, for example, the rule making negotiators were fighting over a department proposal that would prohibit such payments only if they could be proven to be given in exchange for a lender's receiving access to a college's loan portfolio. 

"Our legal authority here is tied to inducements," Brian Siegel, a lawyer for the Education Department, explained at Thursday's session. "While there's been a lot of public discusion about advisory committees and the benefits or perks that may be provided to people who serve on these committees ... it only becomes an enforcement issue for us if there's a tie to [a college's loan] volume or loan applications." He added: "We do not have authority under this structure to ban [lender advisory committees] or to say how they're structured in terms of compensation or benefits."

But Congress does, and encouraged and stimulated by Cuomo, Congressional leaders (including, surprisingly, some top Republicans) seem to have a growing appetite to consider wholesale reforms in the loan industry, which gave Thursday's proceedings of the federal rule making committee a rather empty feel.


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