NAICU Washington Update

Cuomo Gives Senate Banking Committee a Tour of the "Wild West"

June 12, 2007

New York State Attorney General Andrew Cuomo was the star witness before Sen. Christopher Dodd's (D-Conn.) Banking Committee on June 6. While examination of student loan improprieties has largely centered in the education committees, Dodd's committee has jurisdiction over private student loans. Dodd and Ranking Minority Member Richard Shelby (R-Ala.), agreed that the growing importance of private student loans is a key aspect of the current controversy.

In his testimony, Cuomo reiterated student loan practices he's condemned in the past, including illegal activities such as revenue-sharing and receipt of personal gifts. He characterized the present student loan situation as the "Wild West" where "financial aid administrators were taking undisclosed commissions at the expense of students." He stressed the need to "stop the scams" given that students trust the advice provided by colleges to such a degree that 90 percent choose a lender on their college's preferred lender list.

Cuomo criticized federal banking regulatory agencies such as the FTC and FDIC for not acting, and the Department of Education for not referring private loan cases to those agencies. Sen. Bob Casey (D-Pa.) suggested that the agencies might be brought before the Banking Committee. Dodd noted he was willing to give the agencies any needed additional authority over private student loans, and would co-ordinate any necessary action with the Health, Education, Labor, and Pensions Committee. In response to a request from Shelby, Cuomo agreed to provide, for the record, examples of where lenders had broken federal banking law.

Cuomo said he is now beginning to look at "red-lining" in the underwriting of private student loans and believes that could be civil rights issues involved.

The growth of private loans – and arrangements between lenders and colleges regarding them – stems from the increased cost of college and the inadequacy of federal student loans to meet needed borrowing levels. Dodd acknowledged the importance of private loans in providing access to college, but feared they would soon exceed the borrowing in the federal programs. Shelby noted the explosive growth of private loans since the mid-1990s, reaching $17 billion in 2005; and a projected $30-50 billion by 2009.

The hearing's second panel, composed of several lenders and student advocate groups, offered sharply different perspectives on the student loan issue. The lenders asserted they counseled students to check their eligibility for Title IV aid programs before applying for private loans, and that they offered loan comparison tools on their Web sites. The consumer advocates focused on increasing debt burden, and the need for comparative loan information and low interest rates, with one suggesting that the lenders were engaged in predatory lending.

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