Cuomo Announces Settlement With Student Loan Company
NEW YORK, NY (December 11, 2007) - New York Attorney General Andrew M. Cuomo today announced a settlement with a student loan consolidation company specializing in the direct marketing of student loans, the first such settlement in this growing segment of the student lending industry.
A four-month investigation found that Clearwater, Florida-based Student Financial Services Inc. (SFS), which also operates under the banner of University Financial Services (UFS), had agreed to pay some of the nation's top universities, school athletic departments, and sports marketing firms for generating loan applications, in a kickback scheme euphemistically known as revenue sharing. The company had contracts at 63 colleges nationwide, 57 of which are National Collegiate Athletic Association (NCAA) Division I schools.
Under these agreements, the company also paid for the rights to use school names, team names, colors, mascots, and logos to advertise their loans directly to students. This practice, known as "co-branding," was intended to imply that the company was the official lender of the school, or that it was actually a part of the school. Schools, athletic departments, and sports marketing firms made these agreements without evaluating the quality of the loans.
"When lenders use deceptive techniques to advertise their loans, they are playing a dangerous game with a student's future," said Cuomo. "Student loan companies incorporate school insignia and colors into advertisements because they know students are more likely to trust a lender if its loan appears to be approved by their college. We cannot allow lenders to exploit this trust with deceptive, co-branded marketing. A student loan is a very serious financial commitment, and choosing the wrong loan can lead to devastating consequences."
Under the settlement, which was joined by Florida Attorney General Bill McCollum, SFS has agreed to:
- End all lending-related agreements at a total of sixty-three schools including Georgetown University, Wake Forest University, University of Kansas, Central Michigan University, St. John's University, University of Washington, University of Oregon, University of Texas El Paso, Rutgers University, Georgia Tech, Florida State University, Florida Atlantic University, the University of Central Florida, and the University of Pittsburgh. SFS has until December 31, 2007 to comply;
- End all lending-related agreements with five sports marketing companies that, in some instances, were sold the right to market the school's insignia, colors, and mascot, and in turn signed an agreement with SFS. These companies are ESPN Regional Television, Inc., International Sports Properties, Inc., Host Communications, Nelligan Sports Marketing, Inc., and Learfield Communications, Inc. SFS has until December 31, 2007 to comply;
- Launch a print advertising campaign at 63 schools alerting students through their top-circulating newspapers that they must protect themselves when shopping for a loan;
- End the practice of cash-based inducements, including paying students up to $50 to refer their peers to the company and encouraging students to apply for SFS loans by creating contests where they could win up to $1,000.
Also under the settlement, SFS has agreed to adopt a new Code of Conduct (attached) developed by Attorney General Cuomo that prevents false and misleading direct loan marketing to students. The Code expressly prohibits lenders and marketers from buying rights to a college or university's name, team name, colors, logo, and mascot for loan marketing purposes. It also requires lenders and marketers to provide important disclosures to students in connection with loan transactions and prohibits a variety of misleading and deceptive practices identified by the Attorney General's investigation of the industry.
"Deceptive direct marketing schemes are illegal in New York, and will not be tolerated," said Cuomo. "That's why I have developed a new Code of Conduct to protect students from these predatory practices and ensure that any lending information they receive is honest, accurate, and consistent."
"College students and their parents deserve transparency and full disclosure when they are making important financial decisions about student loans and this settlement will extend that protection beyond the universities," said Florida Attorney General Bill McCollum. "The Florida Code of Conduct and the New York Code of Conduct are ground-breaking decisions to put the best interests of our students and parents first."
"Lenders inundate students with an overwhelming array of deceptive offers to finance or refinance their education. By banning some of the worst lending practices and providing consumer information for borrowers, Attorney General Cuomo has taken another valuable step towards reforming the student loan industry," said Luke Swarthout, Higher Education Advocate for the Public Interest Research Group. "The next step should come from passing private student loan reform introduced by Senator Dodd and Chairman Miller."
"By taking away all the distractions and requiring important disclosures, Attorney General Cuomo's new Code of Conduct is a tremendous advance. It will give students and parents relevant information to compare their loan approvals on an identical basis so that they can make informed borrowing decisions as they shop around for loans," stated Michael Wroblewski, Project Director of Consumer Education and Outreach for Consumers Union.
In August, Attorney General Cuomo served subpoenas and document requests to universities across the country, seeking information on deals their athletic departments had made with SFS. The investigation was sparked by a previous settlement Cuomo had reached with Dowling College, which revealed that Dowling's athletic department had entered into a revenue sharing agreement with SFS.
In October, Attorney General Cuomo served subpoenas and document requests to thirty-three companies and lenders as part of his investigation into the direct-to-student marketing of college loans. Loan companies are increasingly marketing loans directly to students employing a host of deceptive and misleading tactics to entice student borrowers. SFS does direct marking for federal consolidation loans under the Federal Family Education Loan (FFEL) Program, where the federal government guarantees the loans to the lenders.
Today's settlement is a significant milestone in Cuomo's nationwide investigation into the student loan industry, which has already resulted in agreements with twelve student loan companies, including the eight largest lenders in America - Citibank, Sallie Mae, Nelnet, JP Morgan Chase, Bank of America, Wells Fargo, Wachovia, and College Loan Corporation - as well as Education Finance Partners (EFP), CIT, National City Bank, and Regions Financial Corporation. Citibank, Sallie Mae, Nelnet, CLC, EFP, CIT, Johns Hopkins University, Columbia University, Mercy College, and Career Education Corporation have all agreed to contribute a total of $13.7 million to a National Education Fund established by Attorney General Cuomo. This fund is dedicated to educating the country's high school students and their families about the financial aid process.
In addition, the University of Pennsylvania, New York University, Syracuse University, Texas Christian University, St. John's University, Fordham University, Salve Regina, Long Island University, Drexel University, and DeVry University agreed to reimburse students a total of $3,368,443.
Cuomo's original Code of Conduct has become New York State law as the Student Lending Accountability, Transparency, and Enforcement (SLATE) Act of 2007. Proposed federal legislation regarding the student loan industry also incorporates Cuomo's original Code of Conduct; the Student Loan Sunshine Act has been passed by the U.S. House of Representatives and the U.S. Senate.
This investigation and settlement were handled by Assistant Attorney General Carolyn Fast of the Internet Bureau and Joy Feigenbaum, Bureau Chief of the Consumer Frauds and Protection Bureau.
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