NAICU Washington Update

When Cuomo Came to Washington

May 09, 2007

New York Attorney General Andrew Cuomo's investigation of college and student loan lender ties reached Capitol Hill on April 25 when he testified before the House Committee on Education and Labor, chaired by Rep. George Miller (D-Calif.). He was the sole witness.

Cuomo said that his office had "uncovered several significant, deceptive and illegal practices" that were widespread through the country and many segments of the loan industry. He identified revenue sharing, preferred lender lists, improper relationships between lenders and financial aid administrators, denying student their choice of lender, undisclosed sales of loans to another lender, and opportunity loans. These "unholy alliances," Cuomo stated, put the interests of the lender and the institution ahead of the students' interests. Preferred lender lists, for example, could steer students to borrow from lenders with the best "kickbacks" for schools, rather than the best loans for students. Cuomo claimed he was not against preferred lender lists, if they were developed correctly.

Although he accused the Department of Education of being "asleep at the switch," Cuomo, who became New York's attorney general in early 2007, has based his investigation on New York state consumer law. He said institutions have broken the law by not disclosing their relationships with lenders to students at their schools who take out loans. According to the law, there does not have to be any damage done to the students for these cases to be pursued. The attention that Cuomo has brought to particular practices at named schools have led many institutions to sign his prescribed code of conduct, and to "reimburse" students amounts based on the extent of the school's revenue-sharing. Lenders also have settled with Cuomo and made payments that he says will be used to fund a financial literacy campaign. Many facets of his investigations concern private student loans, not federally-insured loans.

Miller said that the system was spinning out of control and was replete with corrupt practices. He has introduced companion legislation to Sen. Kennedy's (D-Mass.) "Sunshine Act" to restrict existing practices and require institutions to provide more information on lenders they suggest. Similar draft regulations are expected to be issued by the Department in June. During the question and comment period, many committee members seemed supportive of the attorney general. However, a few saw the controversy differently, with some asking if overly restricting school and lender interaction might cause problems for students.

Ranking Minority Member Buck McKeon (R-Calif.) labeled the controversy as being between the Democrat-supported Federal Direct Lending Program (FDLP) and the "bank-based" Federal Family Education Lending Program (FFELP) which he supports. Rep. Rubén Hinojosa (D-Texas), chair of the Subcommittee on Higher Education, Lifelong Learning and Competitiveness, asked Cuomo if he thought it better that banks market loans directly to students. Both McKeon and Rep. John Kuhl (R-N.Y.) noted the Department had no control over private loans, while Cuomo and Miller both recommend such oversight.

The controversy continues to play out in the press with more schools and lenders, campus and Department individuals, guaranty agencies, and - most recently - alumni associations drawn into the fray. On May 7, the New York state legislature approved a code of conduct based on Cuomo's recommendations.

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