Cuomo’s Code of Conduct: Troubled Times for the Student Loan Industry

In November of 2006, the office of the New York State Attorney General initiated an investigation into the financial agreements between New York universities and student loan providers as part of an effort to eliminate practices that created conflicts of interests in the lucrative $85 billion student loan industry. [1]  However, this investigation did not receive a high degree of publicity or momentum until February of 2007 when the newly appointed New York Attorney General Andrew M. Cuomo expanded the investigation to include more than 60 universities nationwide and major student loan providers and banks. [2]  Attorney General Cuomo's investigation revealed questionable practices within the student loan industry whereby universities were receiving illegal kickbacks for including certain lenders in their "preferred lender" list.  [3] This discovery has led to a nationwide reaction and the student loan industry has been under significant probing from several lawmakers as well as the U.S. Education Department. [4]

Financial agreements between universities and student loan providers can create conflicts of interest that are potentially detrimental to more than 90 percent of U.S. university students who take out educational loans in reliance on the 'preferred lenders' list provided by their schools. [5]  Student loan providers are able to secure a spot on a university's "preferred lender" list by providing payments (in form of revenue-sharing or kickbacks) and/or a variety of other benefits (e.g., paid trips) to the university officials. [6]  Although most of university officials involved in such questionable practices are financial aid officials, a Chicago Tribune investigation revealed that Chicago State University has been directing its students to obtain loans from a bank "in which the University President, Elnora Daniel, is a director and shareholder." [7] These conflicts of interests are not disclosed to the students and in some situations, the "preferred lender" list may not include providers of the best possible loans that the student could have otherwise obtained. [8]  According to Attorney General Cuomo, these financial arrangements represent "an unholy alliance between banks and institutions of higher education that may often not be in the student's best interest." [9]

As part of Attorney General Cuomo's investigation, information requests and subpoenas were sent to 10 major banks including: Bank of America, Citizens Financial Group, JPMorgan Chase and Wells Fargo. [10]  Student loan providers such as Access Group, College Loan Corporation, Education Financial Services and Sallie Mae were also investigated. [11] The investigation revealed several problematic practices in particular, including the creation of "preferred lender" lists without disclosing, to students, the criteria for such selection or the specific benefits associated with these preferred lenders, e.g., lenders providing fully funded trips for financial aid officers and their spouses to exotic locations and/or offering credit lines for schools in exchange for a spot on the school's preferred lender list. [12]

In addressing these problematic practices, Attorney General Cuomo's office drafted a Code of Conduct ("Cuomo's Code of Conduct") which is geared towards providing more transparency in student lending and conflict-of-interest-free financial aid services for all students. Cuomo's Code of Conduct prohibits student loan providers from engaging in revenue-sharing or making gifts to or funding trips for universities or university officials. [13]  In addition to other restrictions, the Code also requires full disclosure on the criteria and process used to select preferred lenders and prohibits any employee of a lender from staffing a college financial aid office. [14]  Cuomo's Code of Conduct is included in the settlement agreements entered by several universities and major student loan providers as a result of Attorney General Cuomo's investigation.

The settlement agreement offered by Attorney General Cuomo allows universities and student loan providers who are engaging in such problematic practices to avoid legal actions without admitting guilt. These agreements primarily require the payment of a certain amount into a fund which will be used to educate students and parents about student loans, and the termination of any existing problematic or questionable financial arrangement. [15]  Both Sallie Mae and CitiGroup have entered similar settlement agreements and will each pay $2 million into the settlement fund. [16]  Education Finance Partners, another major student loan provider attributed with revenue-sharing deals with more than 60 universities, recently entered a settlement agreement with Attorney General Cuomo whereby the San Francisco-based lender will pay $2.5 million into the settlement fund. [17]  In addition, several N.Y. universities such as Fordham University, St. John's University, and Long Island University have entered into similar settlement agreements involving the cessation of their respective revenue-sharing agreements with lenders and the "reimburse[ment of] students on a pro rata basis for the money received through those agreements." [18]

Although it is clear that the current financial arrangements between universities and student loan providers are problematic and may not be in the best interest of the students, the settlement agreements implemented by Attorney General Cuomo may not be an effective means of ensuring that such deceptive practices do not arise in the future. The so-called settlement fund causes one to be wary as it is unclear as to what sort of financial aid education would be provided to the students or how such education would benefit the students. Based on the settlement agreements with Sallie Mae, Citigroup and Education Finance Partners, there is approximately $6.5 million in the settlement fund. When and in what manner will this fund be used to educate the students and parents?  Moreover, requiring major lenders like Sallie Mae to pay merely $2 million as settlement agreement could be viewed more as a slap on the wrist than a deterrence. 

All may not be lost as increased publicity concerning the Student loan industry has led to efforts by NY lawmakers to enact a bill that would make Cuomo's Code of Conduct the law in New York State. On April 16, 2007, N.Y.'s top legislators introduced the Student Lending, Accountability, Transparency and Enforcement Act ("SLATE") which would prohibit illegal kickbacks and would "require all New York colleges to adopt Cuomo's Code of Conduct for student loans or face fines." [19]  Under this bill, "lenders and colleges could be fined up to $50,000 for a violation and individuals at colleges or lending institutions could face fines up to $7,500." [20] Joseph Bruno, the Republican leader of the state senate, noted that this SLATE bill will "protect parents and students from financial exploitation, provide more transparency and accountability in the student loan industry, and give our families piece of mind." [21]  Furthermore, if the SLATE bill is passed into law, it would be a more effective deterrence to lenders and universities than Attorney General Cuomo's settlement agreements.

Sources

[1] OFFICE OF THE NEW YORK STATE ATTORNEY GENERAL ANDREW M. CUOMO, Press Release: Attorney General Andrew Cuomo Launches Broad Expansion of Investigation into Potential Conflicts of Interest in the Student Loan Industry, Feb. 01, 2007, available at http://www.oag.state.ny.us/press/2007/feb/feb01a_07.html.

[2] Id.

[3] Id.

[4]  Scott Jaschik, Shaking Up Loan Industry, INSIDE HIGHER ED, Apr. 13 2007, http://www.insiderhighered.com/news/2007/04/13/ed.

[5]  Brooke Masters, NY State Introduces Student Loans Bill, FINANCIAL TIMES, Apr. 16, 2007, available at http://www.msnbc.msn.com/id/18140435/.

[6] Joseph Giannone, NY Adds 13 More Lenders to Student Loan Probe, REUTERS (New York), Apr. 16, 2007, http://www.reuters.com/article/domesticNews/idUSN1625185520070416?feedType=RSS.

[7] Jodi S. Cohen, College’s Links to Lender Revealed 2 on Bank’s Board from Chicago State, CHI. TRIB., Apr. 12, 2007, available at http://www.chicagotribune.com/business/chi-0704111007apr12,0,6226782.story.

[8] Giannone, supra note 6.

[9]  OFFICE OF THE NEW YORK STATE ATTORNEY GENERAL ANDREW M. CUOMO, Press Release: Attorney General Andrew Cuomo Reveals Deceptive Practices in the College Loan Industry; Sends Letters to More Than 400 Colleges and Universities Cautioning them of  Potential Conflicts of Interest; Advises College-bound Students to Protect Themselves,  Mar. 15, 2007, available at http://www.oag.state.ny.us/press/2007/mar/mar15a_07.html.

[10] Giannone, supra note 6.

[11] Id.

[12] Supra note 9.

[13] Giannone, supra note 6. 

[14] Id.

[15] Masters, supra note 5.

[16] Id.

[17] Lender Pays $2.5 Million In Student Loan Probe, ASSOCIATED PRESS, Apr. 16, 2007, available at http://abclocal.go.com/kgo/story?section=business&id=5214343.

[18] OFFICE OF THE NEW YORK STATE ATTORNEY GENERAL ANDREW M. CUOMO, Press Release: Cuomo Announces First legal Action Against A School in Student Loan Investigation, Apr. 19, 2007, available at http://www.oag.state.ny.us/press/2007/apr/apr19b_07.html.

[19] Giannone, supra note 6.

[20] Biggest Provider of Student loans Settles Inquiry, LOS ANGELES TIMES, Apr. 12, 2007, available at http://www.latimes.com/business/la-fi-student12apr12,1,2266197.story?track=rss&ctrack=1&cset=true.

[21] Masters, supra note 5.