Cuomo, Back on the Scene

Nine months after he last weighed in on the student loan industry, New York Attorney General Andrew M. Cuomo on Tuesday announced a round of settlements with companies that he said had used misleading and potentially illegal tactics to market their loans directly to potential borrowers.

Cuomo's original scrutiny, which turned the student aid world upside down and helped spur increased federal regulation of the loan industry (see related article), had focused on the sometimes cozy relationships between loan providers and college financial aid offices, which he argued led colleges to recommend lenders that may not have provided the best deals to students. Late last year, he signaled that his next target would be lenders that marketed loans directly to prospective student borrowers. There was some irony in that fact, given that one of those "direct to consumer" lenders -- MyRichUncle, which was not targeted by Cuomo Tuesday -- had inspired and encouraged the New York official's original inquiry with its complaints about being shut out of many borrowers' decisions because it was on the outside looking in with many financial aid officers.

On Tuesday, following the pattern he established last year, Cuomo announced that he had reached settlements with seven lenders in which they agreed to abide by an updated code of conduct that his office has established specifically to govern marketing practices aimed directly at consumers. Cuomo said the lenders had also agreed to pay a total of $1.4 million to the fund he created last year to help educate consumers about their student loan options (more on that later).

Apart from identifying the affected lenders -- Nelnet, Campus Door, GMAC Bank, NextStudent, Xanthus Financial Services, EduCap, and Graduate Loan Associates -- Cuomo's news release provided few details about which lenders did what wrong and how much they had agreed to contribute. (Nelnet, one of the lenders named, said in a news release that it would make a $200,000 "contribution" to the Cuomo fund; officials in Cuomo's office did not respond to messages seeking amplification about whether that payment was typical.)

Broadly, Cuomo's statement said that the companies had "used phony mail solicitations designed to look like the federal government, pushed higher interest private loans on students, and employed unfair bait and switch techniques." Specifically, the attorney general said, the investigation found that lenders:

• used logos and return addresses that made it look like the lender's solicitation to consumers was from the federal government or the student's current lender.
• mailed fake checks or false rebate offers on current loans to entice students to take out loans.
• gave inducements to students, such as gift cards, iPods, and GPS devices, to "distract" students from terms of their loans.
• offered inducements to students to convince their friends to take out loans.
• made "false and misleading" representations favorably comparing private student loans to lower-cost federal loans.
• promoted low rates or good terms that were available only to a tiny fraction of borrowers without disclosing that fact.
• failed to guarantee that advertised borrower benefits, such as discounts on the interest rate of the loan during the repayment phase of the loan, traveled with the loan if it was later sold.

Cuomo said the new code of conduct would ban all such practices. “These settlements are a major step forward in cleaning up an industry where false and misleading advertising practices have been all too rampant," he said in a prepared statement. "Unsolicited and deceptive mailings that are sent to the homes of students are more than a nuisance, they can result in students being buried in mountains of debt for years to come.... I commend the eight lenders who have today signed the code thereby committing to help my office clean up this industry. It is unconscionable for lenders to entice students into loans that are not best for them.”

As was the case last time around, in which Cuomo threatened to pursue legal action against a small number of lenders and colleges and then used settlements with them to encourage others to voluntarily adopt the same standards, the attorney general said he hoped the same thing would happen now. “If other companies won’t adopt the new code, it should raise a red flag and students should be asking those companies, ‘why not?’" he said. "Students and their families should certainly think twice before taking a loan from any company who has not signed on to the code. This industry has a spotty track record when it comes to protecting consumers and it’s time for the companies to be held accountable.”

Cuomo's education fund has become a sore point with many lenders and college financial aid officials, who have repeatedly wondered what has been done with the more than $15 million that the attorney general's office has solicited through his student loan investigations. Cuomo's staff has ignored several requests from Inside Higher Ed in recent months to detail that spending.

While Cuomo is unpopular with many financial aid administrators and lender types, he would probably be more likely to get a dinner invitation from many of them than would Raza Khan and other officials at MyRichUncle. So there was probably some exulting in the student aid world when the Associated Press -- interpreting some unclear language in Cuomo's announcement Tuesday -- reported in the morning that MRU Holdings, the controversial lender's parent company, was among eight lenders that had signed the code of conduct because of improper practices.

MyRichUncle did sign the code of conduct -- but it did so voluntarily and was never a target of Cuomo's investigators, both the attorney general's office and the lender pointed out. Within an hour, the AP had corrected itself.