NY AG Testifies Before House Committee On Student Loan Industry

Attorney General Andrew M. Cuomo today testified before the United States House of Representatives Committee on Education and Labor about his nationwide investigation into the student loan industry. Cuomo criticized the Department of Education (DOE) on three fronts and said the Department had been “asleep at the switch,” regarding its regulation of the student loan industry. Cuomo called on the Department to immediately issue regulations, for effect, governing the student loan industry that would ban revenue sharing agreements, gifts, trips and other inducements from lenders to school officials, mandate full disclosures, and remove other conflicts of interest in the student lending industry.

Cuomo also announced that two of the nation’s largest banks, JP Morgan Chase and Bank of America have now agreed to Cuomo’s Student Loan Code of Conduct in their student lending practices. JP Morgan Chase and Bank of America are the nations’ third and fourth largest loan originators. Citibank and Sallie Mae, the two largest lenders, have already adopted the Code of Conduct.

“With JP Morgan Chase and Bank of America agreeing to the Code of Conduct, the top four lenders are agreeing to significantly raise the bar in the student loan industry. For those working hard to bring the highest ethical standards and best practices to the student loan industry, the wind is at our backs.” Cuomo said. “In this case, the private marketplace is running ahead of the market regulators. The Department of Education has been remarkably weak in its oversight of the industry. The Department of Education ought to immediately issue regulations, for effect, prohibiting revenue sharing, gifts, trips and other inducements from lenders to schools.”

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Cuomo criticized the Department of Education on multiple fronts and called for immediate regulations. Below is an excerpt from his testimony before the Committee:

“In terms of the Federal government’s responsibility in this arena, let me say that having run a federal agency myself for eight years, I am not quick to criticize. I believe in this case, however, the Department of Education has been asleep at the switch.

My investigation has shown that even where the DOE regulations did exist with respect to the FFEL program, there is significant evidence suggesting these regulations were flouted. For example, one school my office investigated had a preferred lender list of four FFELP lenders, without disclosing that one of the lenders had an agreement to purchase the loans placed by the other lenders on the list. The State University of New York had a college which required students to pick a particular FFELP lender as their Stafford lender. That was a clear violation of federal law under which a student is assured a choice of any lender. Another school chose FFELP “preferred lenders" by considering how much each lender contributed to sponsor the school’s programs or events. We have also found conflicted arrangements between Columbia University and FFEL lenders where student financial aid officers obtained stock of one of the FFELP preferred lenders.

It has recently been reported that the DOE rule making process, which was supposed to resolve these issues, has broken down. To me, that is like saying the fire truck has stalled on the way to the fire. It is simply unacceptable that the DOE can fail to right these wrongs in the midst of these disturbing revelations and at a time when students all across the nation are clamoring for guidance and help. Announcing a task force at this late date is, frankly, too little too late. The Department can and should issue regulations immediately, for effect, to reform the industry and protect our students.”

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The Student Loan Code of Conduct adopted by JP Morgan Chase and Bank of America includes the following provisions:

1. Ban on Financial Ties. Lenders are prohibited from giving anything of value to any college in exchange for any advantage sought by the lender. This severs any inappropriate financial arrangements between lenders and schools and specifically prohibits "revenue sharing" arrangements.
2. Ban on Payments for Preferred Lender Status. Lenders may not pay or give colleges any financial benefits whatsoever to get on a college’s preferred lender list.
3. Gift and Trip Prohibition. Lenders are prohibited from giving college employees anything of more than nominal value. This includes a prohibition on trips for financial aid officers and other college officials paid for by lenders.
4. Advisory Board Rules. Lenders are prohibited from paying college employees anything of value for serving on the advisory boards of the lenders.
5. Call-Center and Staffing Prohibition. Lenders must ensure that employees of lenders never identify themselves to students as employees of the colleges. No employee of a lender may ever work in or providing staffing assistance a college financial aid office.
6. Disclosure of Range of Rates and Defaults. Lenders must disclose to any requesting school the range of rates they charge to students at the school, the number of borrowers at each rate at the school, and the lender’s historic default rate at the school. This will ensure that schools will have the information they need to select preferred lenders who are best for students and parents.
7. Loan Resale Disclosure. Lenders shall fully and prominently disclose to students and their parents any agreements they have to sell loans to any other lender.