New York AG on Student Loan Industry

July 25, 2007

Over the past six months, New York's Attorney General, Andrew M. Cuomo, has conducted a nationwide investigation of colleges' and lenders' practices regarding private student loans. Cuomo has not yet brought formal charges against any institution, but has asserted that many colleges and lenders have acted in ways that have created conflicts of interest and have engaged in various practices that he believes are "significant, deceptive, and illegal," including forms of "revenue sharing." In testimony before the Senate Committee on Banking, Housing, and Urban Affairs on June 6, 2007, Cuomo stated that many of the schools and lenders had agreed to adopt a code of Education Loan Code of Conduct as a condition to "numerous settlement agreements." More recently, Cuomo has expanded the investigation beyond alleged kickbacks and conflicts of interest to review the lenders' criteria for underwriting private student loans.

In his Senate testimony, Cuomo noted that the practices that his office has alleged include payments by lenders to be placed on "preferred lender" lists, revenue sharing agreements in which a lender pays a college "a percentage of the principal of each loan taken out by a borrower," and the payment of "travel expenses and honoraria for financial aid officials to attend meetings and seminars in attractive locations often as part of an appointment of the institutions' financial aid officials to 'advisory boards' or 'committees' sponsored by the lenders."

Cuomo's office announced last month that it had reached agreements "with the nation's six largest student loan providers - Citibank, Sallie Mae, JP Morgan Chase, and Bank of America, Wachovia Education Finance, Inc. and Wells Fargo - as well as with Education Finance Partners (EFP), CIT and National City Bank, and Regions Financial Corporation." The office also announced that a total of 26 schools have accepted a code of conduct drafted by Cuomo's office. The majority of the schools are in New York, but there are notable exceptions, including Lewis and Clark College and Texas Christian University.

Cuomo has recently expanded his office's investigation beyond alleged kickbacks and conflicts of interest to review the criteria that lenders use when underwriting criteria for private student loans. In early June Cuomo wrote a letter with Senator Dodd asking 20 lenders to provide such criteria, "including but not limited to whether [the lender] considers . . . college, college location, graduation rate, historic default rate, race, gender, age, parental income, [and] credit history." A few weeks later Cuomo wrote another letter, this one not with Senator Dodd but to him and Representative Miller, suggesting that a lender's decision to set a borrower's interest rate based, in part, on the default rate for graduates of the school that the borrower attends was "analogous to 'redlining' in the home mortgage industry." (Redlining is the practice of charging higher interest rates for a mortgage based on a prospective homeowner's neighborhood.)

Cuomo's letter illustrated his allegations by focusing on disparities in the interest rates charged to graduates of Duke University and the University of Phoenix. Describing what he said were the practices of an unnamed "large lender," Cuomo claimed that the lender would loan to a Duke student with excellent credit at 8% interest, but would loan to a Phoenix student with the same credit rating at 11 % interest. John Dean, special counsel to the Consumer Bankers Association, has defended the lending industry by observing that students at more prestigious colleges may in fact be lower credit risks than students at less prestigious universities because the former can be expected to earn more in the future.

Other state Attorneys General have questioned whether Cuomo's investigation is within his lawful jurisdiction, contending that his actions should have been confined to universities and companies within the boundaries of his own state. Cuomo has argued that, because students from New York take out loans from schools in other states, his investigation did not cross any jurisdictional lines. Attorneys General in other states, however, have dealt with the loan issue by reaching settlements with loan companies in their respective states. In April, Nebraska Attorney General Jon Bruning signed an agreement with the National Education Loan Network (Nelnet), which has its headquarters in Lincoln, Nebraska. Nelnet, one of the companies under investigation by Cuomo, initiated the settlement with Bruning, in which the company agreed to abide by a code of conduct and to commit $1 million for a national program that will educate students on how to pay for college. Though Bruning said he hoped the settlement would resolve the issues respecting this company and thereby obviate the need for further investigation by Cuomo, the New York Attorney General has announced that his investigation of Nelnet will continue.