Attorney General Announces Landmark Student Loan Agreements - Schools To Adopt New College Code Of Conduct And Repay Students
NEW YORK, NY (April 2, 2007) - Attorney General Andrew M. Cuomo today announced that his office has signed settlements with major universities concerning student-loan arrangements between the schools and lenders. The settlements require schools to reimburse students money that the colleges were paid by lenders for loan business and to adopt a new landmark College Code of Conduct.
The schools include the State University of New York's 29 four-year campuses (SUNY), Fordham University, Long Island University (LIU), New York University (NYU), St. Lawrence University, Syracuse University and the University of Pennsylvania.
At the same time, Citibank, the nation's largest bank with student-loan business at about 3,000 schools, agreed to voluntarily adopt practices in the Attorney General's College Code of Conduct, which will now govern Citibank's student loan business practices with all schools.
Citibank also agreed to commit $2 million to a newly created national fund administered by the state Office of the Attorney General to educate college-bound students and their parents about the student-loan industry.
Under the settlements, schools will make the following aggregate reimbursements to students:
- NYU - $1,394,563.75 covering students who received loans issued over a five-year period.
- St. John's University - $80,553.00 for loans issued over a one-year period.
- Syracuse University - $164,084.74 for loans issued over a two-year period.
- Fordham University - $13,840.00 for loans issued over a one-year period.
- University of Pennsylvania - $1,617,580.00 for loans issued over a two-year period.
- Long Island University - $2,435.41 for loans issued over a one-year period.
Cuomo applauded the cooperation received from Citibank and the schools that agreed to the settlements announced today.
"These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders by being the first to take a major step in cleaning up a system laden with conflicts of interest," Cuomo said. "We are beginning the process of restoring trust between universities and students and now is the time for other schools and lenders to step up and end the conflicts, perks and revenue sharing that have been costing students in New York and across the country dearly. These schools and Citibank are setting the example the entire industry should live by."
The Attorney General's College Code of Conduct, included in all of the settlements announced today, prohibits revenue sharing from lenders to schools, includes disclosure standards and restrictions on how lenders are chosen for school "preferred lender" lists, and bans gifts or trips to the university employees from lenders. The Code of Conduct also prohibits lenders from staffing or paying for the staffing of any component of the university financial aid offices and outlines guidelines for other aspects of the lender-university relationship.
The Code of Conduct includes:
- Colleges are prohibited from receiving anything of value from any lending institution in exchange for any advantage sought by the lending institution. This severs any inappropriate financial arrangements between lenders and schools and specifically prohibits "revenue sharing" arrangements. Lenders can no longer pay to get on a school's preferred lender list.
- College employees are prohibited from taking anything of more than nominal value from any lending institution. This includes a prohibition on trips for financial aid officers and other college officials paid for by lenders.
- College employees are prohibited from receiving anything of value for serving on the advisory board of any lending institution.
- College preferred lender lists must be based solely on the best interests of the students or parents who may use the list without regard to financial interests of the College. This ensures that preferred lenders will be those the school has determined should be preferred by students as opposed to preferred by the school.
- On all preferred lender lists the College must clearly and fully disclose the criteria and process used to select preferred lenders. Students must also be told that they have the right and ability to select the lender of their choice regardless of the preferred lender list.
- No lender may appear on a preferred lender list if the lender has an agreement to sell its loans to another lender without disclosing this fact. In addition, no lender may bargain to be a preferred lender with respect to a certain type of loan by providing benefits to a College as to another type of loan.
- Colleges 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 provide staffing assistance a college financial aid office.
"Consumers Union commends Attorney General Cuomo for moving swiftly to stop unfair practices, secure compensation for students and their families and improve public oversight," said Chuck Bell, programs director for Consumers Union, publishers of Consumer Reports Magazine. "With the skyrocketing costs of college tuition, students and parents need fair play and straight information from universities and lenders. This Code of Conduct will transform the lending process, result in more affordable loans for students and their families and should be viewed as a model for widespread adoption by schools and lenders across the nation."
Cuomo said, "The College Code of Conduct spells out in black and white that no lender may pay a school for placement on a preferred lender list and no school may hide the reason it chose to recommend a particular lender."
The settlements with New York University, Syracuse University and the University of Pennsylvania cover their relationship with Citibank by which the schools received payments from Citibank on the basis of loan volume. The SUNY, Fordham, LIU, St. Lawrence and St. John's settlements covered their relationships with San Francisco-based Education Finance Partners (EFP) and/or other lenders.
The money will be distributed back to the individual students on a pro rata basis, depending on how much each student borrowed and at what rate. For students who cannot be located, the money designated for their account will be placed in the fund to educate college-bound students about the student lending industry.
Today's announcement covered the first series of settlements in Cuomo's ongoing and expanding nationwide investigation into conflicts of interest in the student loan industry. It also represented a landmark reform to the $85 billion-per-year student lending industry.
Michael Reardon, Chairman, President, and CEO of the Citibank Student Loan Corporation, stated, "Citibank Student Loan Corporation is proud to have provided access to higher education to millions of college students nationwide for nearly 50 years. We are pleased to work with the NY Attorney General and we thank him for his acknowledgment that the Citibank Student Loan Corporation has been and continues to be a leader in raising the standards of good practices and integrity in the higher education financing field. By taking the voluntary steps announced today, we are continuing this tradition."
On March 22, Cuomo announced that his office had begun legal action against EFP for its scheme of providing payoffs to more than 60 schools across the country that steered student-loan business to them. That case is still pending and talks are ongoing with a variety of other schools and lenders. Since then, the investigation has broadened to more than 100 schools and more than six lenders.
The settlement agreements signed today set forth the Attorney General's nationwide findings about conflict of interest in the student-loan industry. They include:
i. "Preferred Lender" Lists
The lenders listed on an institution of higher education's list of preferred lenders typically receive up to 90% of the loans taken out by the institution's students and their parents. Despite the significant role that these lists play in determining the lenders from which students and parents borrow, many institutions did not inform their student and parent borrowers about the process and criteria used to formulate the lists of recommended or preferred lenders. Nor did they disclose the potential conflicts of interest on the part of their financial aid offices, which typically compile the preferred lender lists. These conflicts of interest may arise from: lender-funded travel expenses for institutions' financial aid officials to attend meetings and seminars in attractive locations; the appointment of the institutions' financial aid officials to "Boards" or "Committees" sponsored by the lenders; the lenders' provision of staff and services to the institutions; the lenders' provision of "Opportunity Loans;" and revenue sharing. These practices are described below.
ii. Revenue Sharing
In the context of the education loan business, revenue sharing refers to an arrangement whereby a lender pays an institution of higher education a percentage of the principal of each loan directed toward the lender from a borrower at the institution, often, but not always, in exchange for the institution of higher education placing the given lender on the institution of higher education's preferred lender lists. This type of arrangement is prohibited by federal regulation in the context of Stafford Loans, PLUS Loans and other federal loan programs; it occurs only in the alternative loan segment of the industry.
The practice of revenue sharing creates a potential conflict of interest on the part of the institutions of higher education. When and if the institutions direct students to lenders, they should do so based solely on the best interests of the student and parents who may take out loans from the lenders; yet, the institutions have a financial interest in the selection of the lenders by the student and parents.
iii. Denial of Choice of Lender
Some institutions of higher education have neglected to make clear that borrowers have a right to select the Stafford Loan and PLUS Loan lender of their choice, irrespective of whether the lender appears on any preferred lender lists. In the most egregious cases, institutions have gone so far as to abrogate this right, by stating or strongly implying that the student and parents were limited to the lenders on the list, or even to a single lender.
iv. Exclusive Consolidation Loan Marketing Agreements
Former students may wish to combine their various education loans into a single package, called a "consolidation loan." Some institutions of higher education have entered into agreements with the providers of such consolidation loans pursuant to which the institution agrees to encourage its former students to consolidate the former students' loans with a particular lender and no other. In exchange, the institution secures revenue sharing or other benefits that inure directly or indirectly to the institution rather than the borrower. Once again, the institution is in a conflicted position because its advice and encouragement may be influenced by its financial self-interest.
v. Undisclosed Sales of Loans to Another Lender
In many instances, institutions of higher education place several lenders on the institutions' lists of preferred lenders causing the potential borrower to think that the lender list represents a real choice of options. But, the choice is illusory when, as sometimes occurs, all or a number of the lenders on a lender list have arranged with each other to sell any loans to one of the lenders immediately after one of the other complicit lenders disburses a loan.
vi. Opportunity Loans
Lenders have entered into undisclosed agreements with institutions of higher education to provide what are referred to as "Opportunity Loans." These agreements provide that the lender will make loans up to a specified aggregate amount to students with poor or no credit history, or international students, who the lender claims would otherwise not be eligible for the lender's alternative loan program. In exchange for the lender's commitment to make such loans, the institution may provide concessions or promises to the lender that may prejudice other borrowers.
Settlement agreements with NYU and the University of Pennsylvania are attached to this release.