Cuomo Testifies On Deceptive Practices In Student Loan Industry Before U.s. Senate Banking Committee
NEW YORK, NY – (June 6, 2007) Attorney General Andrew M. Cuomo today testified before the United States Senate Banking Committee seeking new federal protections to safeguard students and families from deceptive practices in the student loan industry.
Cuomo’s testimony described the Department of Education’s failure to police rampant abuses in the college loan industry and questioned the failure of oversight agencies such as Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Federal Trade Commission (FTC) to take action.
“With the student loan issue, the federal government has hit students and their families with a real one-two punch,” said Cuomo. “First, federal student aid has not even come close to keeping pace with rising costs of attending college essentially forcing students and families to enter the costly private loan market. Second, the federal government fails to police that marketplace by ensuring these lenders are operating legally and not at the cost of unsuspecting borrowers.”
Cuomo also highlighted some of the worst practices identified by his office during his nationwide investigation into the student loan industry, launched in February 2007. The investigation uncovered among other things, illegal steering to preferred lenders by specific schools, revenue sharing agreements between schools and lenders, university financial aid call centers staffed by lender employees, gifts and trips from lenders to a school’s financial aid directors, and even stock in lender companies directly given to financial aid officers.
Cuomo also testified that the conflicts, deceptions and illegal practices identified by his office involved misleading student loan schemes. For example, the investigation found that one private lender marketed its student loans at interest rates of “as low as” 7.15 percent. Yet only 17 percent of this lender’s loans were at rates between 6 and 8 percent. Over 40% were found to be at rates of up to16% and more. Additionally, lenders advertising such “as low as” interest rates failed to disclose the actual rates until the student signed up.
Calling the private/alternative loan sector the “Wild West of the college loan business,” Cuomo urged the Senate Banking Committee to ask the private lenders to disclose their interest rates. Private lenders currently control 20% of the student loan marketplace and continue to grow exponentially.
Cuomo also questioned the inability of oversight agencies to take appropriate action and criticized the Department of Education’s failure to refer problems to federal banking and consumer regulators. “There has been much discussion about the Department of Education’s failure to police these rampant abuses,” said Cuomo. “If jurisdiction is the issue, where were the FTC and OCC and FDIC? It is a double debacle of government failure.”
Cuomo also criticized recent Department of Education action. Unlike the Student Lending Accountability, Transparency, and Enforcement (SLATE) Act of 2007, which is now law in New York, the Department of Education proposed regulations fail to ensure that preferred lenders are selected for reasons that are in the best interest of students.
“Students, and their parents, should not be forced to mortgage their futures, limit their future employment prospects, delay home ownership, or worse, never attend college when they are qualified and want to attend, because our government has failed them,” said Cuomo. “Federal grants and loans should cover a significantly greater percentage of student need than they currently cover, as was the case just ten years ago.”
Cuomo’s nationwide investigation into the student loan industry has resulted in agreements with the nation’s five largest student loan providers - Citibank, Sallie Mae, JP Morgan Chase, and Bank of America, and Wells Fargo - as well as with Education Finance Partners (EFP) and CIT. Additionally, a total of 25 schools have committed to Cuomo’s Code of Conduct, nine of which have agreed to reimburse students over $3 million for the cost of revenue sharing agreements. Sallie Mae, Citibank, EFP, and CIT have also agreed to contribute $9.5 million to a national fund established by Cuomo that will educate high school students and their families about the financial aid process. Columbia University has also agreed to pay $1.1 million into the education fund as part of a settlement with the Attorney General’s Office. 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. Governor Spitzer signed the SLATE Act into law on May 29, 2007.