Attorney General Cuomo Announces Agreements With Two Universities

NEW YORK, NY (May 15, 2007) – Attorney General Andrew M. Cuomo today announced agreements with two more universities in his ongoing investigation into the student loan industry: Drexel University and Capella University.

According to the agreement with Pennsylvania-based Drexel, the university will refund student borrowers approximately $250,000 that it received in revenue sharing fees. As part of the second agreement announced today, Minnesota-based Capella University has disclosed information about the business relationships of the university’s director of financial aid. Both schools have also agreed to accept Cuomo’s Code of Conduct and to alter their practices regarding student loans accordingly. Cuomo had previously begun legal proceedings against Drexel when he filed a Notice of Intent to sue the university on April 19, 2007.

Attorney General Cuomo said, “By shining a light on the corrupt practices of the student loan industry and their partners, we have begun to protect students across America. These agreements signal that as our investigation goes forward, the tide of this industry continues to turn, with more schools and lenders adopting new practices and returning money to students.”

Drexel University: Attorney General Cuomo’s investigation revealed that Drexel University entered into a revenue sharing agreement with Education Finance Partners (EFP) in April 2005. In exchange for putting EFP on its preferred lender list, Drexel received .75% of the value of every EFP alternative loan taken out by a Drexel student. Approximately one year later, Drexel agreed to make EFP its “exclusive” preferred lender for private alternative loans in exchange for 1% of the value of every EFP private alternative loan taken out by a Drexel student, once Drexel students had taken out $25 million of such loans from EFP. Soon after, Drexel and EFP amended that agreement to include EFP’s private alternative consolidation loans in the calculation of Drexel’s revenue sharing amount. Drexel did not disclose this information to its students or their families.

As a result of their revenue sharing agreement with EFP, Drexel received $124,021.73. The university also accrued – but has not yet been paid – an additional amount estimated to be at least $126,031.61. Furthermore, Drexel allowed EFP to use the university’s name, logo, colors, and mascot in EFP’s promotional materials to foster the false impression to student borrowers and their families that Drexel was the lender, or the lender partner, on EFP’s private alternative loans. Drexel also included a link from its website to EFP’s website, where EFP used the logo, colors, and mascot associated with the university.

In addition, Drexel had an agreement with another one of its preferred lenders, EdAmerica, Inc., for EdAmerica to operate a call center for the university’s financial aid office. Students and their families who contacted the call center for financial aid advice were unaware that they were speaking to the employees of a private loan company. EdAmerica had a clear interest to encourage callers to take loans from EdAmerica; during 2005, 35% of Drexel’s students and their parents who took education loans from Drexel’s preferred lenders took loans from EdAmerica.

As part of their agreement with the Attorney General’s office, Drexel University has accepted the Attorney General’s Code of Conduct for education loan practices. Drexel will also distribute the approximately $250,000 it received from its revenue sharing agreements with EFP on a pro rata basis to students who took loans from EFP between 2005 and 2007. If Drexel is unable to pay any qualified borrower despite its best efforts, the university will provide the undistributed funds to the Attorney General’s office, which will use the funds to create appropriate programs for those seeking educational loans.

Capella University: According to Attorney General Cuomo’s investigation, Capella’s director of financial aid, Timothy Lehmann, was engaged in several business relationships that presented conflicts of interest based on his position at the university. Between 2005 and 2006, Lehmann was paid $12,400 for consulting services performed for Student Loan Xpress, one of Capella’s preferred lenders at the time. This arrangement was not approved by the University and it was in violation of Capella’s Code of Business Conduct. It was not made known to university management until April 2007.

Between 2003 and 2007, Lehmann served on the advisory boards of several banks and lenders for varying periods of time, including Wells Fargo, Nelnet, Chase, Student Loan Xpress, Citibank, T.H.E. Northstar, Wachovia, College Loan Corporation, EdFinancial, and TERI/First Marblehead. In addition to travel, lodging, meals, and gifts, the loan companies treated Lehmann to approximately one or two rounds of golf at most advisory board meetings. Furthermore, Lehmann received travel, lodging, meals, entertainment, and gifts – such as wine, golf accessories, and clothing – as part of the sales and marketing initiatives of those lenders. Lehmann also received thousands of dollars in honoraria from some of the lenders.

Other than Lehmann, several individuals in Capella’s financial aid department received travel, lodging, meals, and nominal gifts and entertainment from lenders. In addition, during 2006 and 2007, Capella received temporary help from employees of five of their lenders.

As part of their agreement with the Attorney General’s office, Capella University has accepted the Attorney General’s Code of Conduct for education loan practices and will alter its practices with respect to student loans. The agreement between the Attorney General and Capella University does not prevent the Attorney General from pursuing action against Lehmann.

Other than Capella University and Drexel University, 22 schools have committed to Cuomo’s Code of Conduct, 8 of which have agreed to reimburse students over $3 million for the cost of revenue sharing agreements. Cuomo’s investigation has resulted in agreements with the nation’s four largest student loan providers - Citibank, Sallie Mae, JP Morgan Chase, and Bank of America - as well as Education Finance Partners (EFP) and CIT. Sallie Mae, Citibank, EFP, and CIT have also agreed to contribute $9.5 million to the national fund for educating high school students and their families about the financial aid process. On May 7, 2007, the New York State Legislature passed the Student Lending Accountability, Transparency, and Enforcement (SLATE) Act of 2007, which was sponsored at the request of Cuomo and is the first piece of legislation in the country aimed at ending the widespread conflicts of interest the student loan industry.