[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
EXAMINING UNETHICAL PRACTICES
IN THE STUDENT LOAN INDUSTRY
=======================================================================
HEARING
before the
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, APRIL 25, 2007
__________
Serial No. 110-26
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
http://www.gpoaccess.gov/congress/house/education/index.html
34-603 PDF WASHINGTON DC: 2007
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Ranking Minority Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Kenny Marchant, Texas
Timothy H. Bishop, New York Tom Price, Georgia
Linda T. Sanchez, California Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland Charles W. Boustany, Jr.,
Joe Sestak, Pennsylvania Louisiana
David Loebsack, Iowa Virginia Foxx, North Carolina
Mazie Hirono, Hawaii John R. ``Randy'' Kuhl, Jr., New
Jason Altmire, Pennsylvania York
John A. Yarmuth, Kentucky Rob Bishop, Utah
Phil Hare, Illinois David Davis, Tennessee
Yvette D. Clarke, New York Timothy Walberg, Michigan
Joe Courtney, Connecticut Dean Heller, Nevada
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on April 25, 2007................................... 1
Statement of Members:
Altmire, Hon. Jason, a Representative in Congress from the
State of Pennsylvania, prepared statement of............... 40
McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member,
Committee on Education and Labor........................... 4
Prepared statement of.................................... 6
Letter, dated April 10, 2007, from the office of the
Attorney General of South Carolina to the office of the
Attorney General of New York........................... 17
Miller, Hon. George, Chairman, Committee on Education and
Labor...................................................... 1
Prepared statement of.................................... 3
Platts, Hon. Todd Russell, a Representative in Congress From
the State of Pennsylvania, submission for the record....... 41
Statement of the Pennsylvania Higher Education Assistance
Agency (PHEAA) and American Education Services (AES)... 41
Statement of Witnesses:
Hon. Andrew M. Cuomo, Attorney General, State of New York.... 7
Prepared statement of.................................... 11
EXAMINING UNETHICAL PRACTICES
IN THE STUDENT LOAN INDUSTRY
----------
Wednesday, April 25, 2007
U.S. House of Representatives
Committee on Education and Labor
Washington, DC
----------
The committee met, pursuant to call, at 10:33 a.m., in Room
2175, Rayburn House Office Building, Hon. George Miller
[chairman of the committee] presiding.
Present: Representatives Miller, Kildee, Payne, Andrews,
Hinojosa, McCarthy, Tierney, Kucinich, Wu, Davis of California,
Bishop of New York, Sestak, Loebsack, Hirono, Altmire, Yarmuth,
Hare, Courtney, Shea-Porter, McKeon, Petri, Hoekstra, Castle,
Ehlers, Platts, Keller, Kline, Kuhl, and Walberg.
Staff present: Aaron Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Jeff Appel, GAO Detailee; Adrienne Dunbar,
Legislative Fellow, Education; Sarah Dyson, Administrative
Assistant, Oversight; Gabriella Gomez, Senior Education Policy
Advisor (Higher Education); Ryan Holden, Senior Investigator,
Oversight; Lloyd Horwich, Policy Advisor for Subcommittee on
Early Childhood, Elementary and Secretary Education; Lamont
Ivey, Staff Assistant, Education; Thomas Kiley, Communications
Director; Deborah Koolbeck, Policy Advisor for Subcommittee on
Healthy Families; Ann-Frances Lambert, Administrative Assistant
to Director of Education Policy; Danielle Lee, Press/Outreach
Assistant; Ricardo Martinez, Policy Advisor for Subcommittee on
Higher Education, Lifelong Learning and Competitiveness; Alex
Nock, Deputy Staff Director; Joe Novotny, Chief Clerk; Lisette
Partelow, Staff Assistant, Education; Rachel Racusen, Deputy
Communications Director; Julie Radocchia, Education Policy
Advisor; Michael Zola, Chief Investigative Counsel, Oversight;
Mark Zuckerman, Staff Director; James Bergeron, Minority Deputy
Director of Education and Human Services Policy; Robert Borden,
Minority General Counsel; Kathryn Bruns, Minority Legislative
Assistant; Taylor Hansen, Minority Legislative Assistant;
Victor Klatt, Minority Staff Director; Susan Ross, Minority
Director of Education and Human Resources Policy; and Linda
Stevens, Minority Chief Clerk/Assistant to the General Counsel.
Chairman Miller [presiding]. The Committee on Education and
Labor will come to order for the purposes of holding a hearing
on ``Examining Unethical Practices in the Student Loan
Industry.'' And a quorum being present, we will begin.
Good morning, and welcome to this morning's hearing on
examining the unethical practices in the student loan industry.
Today we have asked the honorable Andrew M. Cuomo to
provide an overview of his investigation into the egregious
practices in the student loan industry and to share his
thoughts on how we may address these issues at the federal
level. It is our hope to continue to build on the good work of
the attorney general.
This hearing comes at a time when it is getting harder and
harder for our nation's students and families to afford
college.
One of the major focuses of this Congress is how to help
students and their families finance a college education.
We have already taken critical first steps to do just that
by voting to cut interest rates in half on need-based federal
student loans and by significantly raising the Pell grant
scholarship funds available.
We also have introduced legislation to boost financial aid
for students at no new cost to the taxpayers by making the
federal student loan programs more efficient.
But as we work to make colleges more affordable, we also
have the obligation to make sure that our nation's federal
student loan programs are working as intended, to help students
and families pay for college.
It has become extremely clear that these programs have been
hijacked by third parties who are more interested in boosting
their bottom lines than serving the best interests of students
and families.
Between the conflicts of interest, the unethical practices
revealed between lenders and schools, the improper use of the
National Student Loan Database, to questionable stock holdings
by public officials, we are talking about a system that is
spinning out of control.
The blame rests not just with the lenders and the
individuals who have exploited these programs but also with
this administration.
Its failure to conduct proper oversight or to hold the
industry accountable has harmed students and families,
borrowers and taxpayers, all of whom ultimately pay the price
for these corrupt practices.
Here in Congress, we have launched our own investigation
into the student loan industry and their practices and the
environment that has allowed this corruption to flourish.
We are closely examining the relationships and the
conflicts of interest between the lenders, the financial aid
officers, and public officials who are responsible for
administering the student aid program.
And given just how little has been done to protect the
students and their families from the abuse in this program,
last week I called on the secretary of education to immediately
take the following actions to eliminate the corruption and
cronyism within the student loan industry.
I asked her to impose a moratorium on the use of preferred
lender lists, to clearly define and end bribes paid by lenders,
to require full disclosure by lenders and schools and their
relationships, and to instruct schools and lenders to cease and
desist all conflicts of interest and to conduct oversight of
the Department of Education employees.
I have called on the secretary to launch a public campaign
to educate students and families about their rights and options
when borrowing for college and to make public all records of
loan industry meetings with political appointees so that the
Congress and the American public can have a better
understanding of who in the department has been lobbied by the
industry.
There is no question that congressional action is urgently
needed to put these programs back into the hands of students
and parents.
Earlier this year, I introduced legislation called the
Student Loan Sunshine Act that would clean up the relationship
between lenders and schools.
My counterpart on the committee, Mr. McKeon, has also
introduced legislation to address this problem. And soon, the
committee will address these proposals to clean up this
program.
I hope what we learn today helps us to build on these bills
and to bring a sea change of reforms needed to this industry.
Ensuring that students and their families can have full
confidence in our nation's student aid program is a critical
part of our goal of making college more affordable and
accessible.
Again, I want to thank our witness for joining us today and
for the important work that he is doing on behalf of students
and families in New York and across the country, for all of the
contributions he has made to bring this problem to light and to
encourage others to protect the students and families in their
states to proceed in a manner in which he has to get these
programs right side up and once again looking after the
interests of students and their families.
And with that, I would like to recognize Mr. McKeon, the
senior Republican on the committee.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Hon. George Miller, Chairman, Committee on
Education and Labor
Good morning and welcome to this morning's hearing on examining
unethical practices in the student loan industry.
Today, we have asked the Honorable Andrew M. Cuomo to provide an
overview of his investigation into the egregious practices in the
student loan industry, and to share his thoughts for how we may address
these issues at the federal level. It is our hope to continue to build
upon the good work of the Attorney General.
This hearing comes at a time when it's getting harder and harder
for our nation's students and families to afford college.
One of the major focuses of this Congress is how to help students
and families finance a college education. We have already taken
critical first steps to do just that by voting to cut interest rates in
half on need-based federal student loans, and by significantly raising
the Pell Grant scholarship. We have also introduced legislation to
boost financial aid for students--at no new cost to taxpayers--by
making the federal student loan programs more efficient.
But as we work to make college more affordable, we also have an
obligation to make sure that our nation's federal student loan programs
are working as intended: to help students and families pay for college.
It has become extremely clear that these programs have been
hijacked by third parties who are more interested in boosting their
bottom lines than serving the best interests of students and families.
Between the conflicts of interest and unethical practices revealed
between lenders and schools, the improper use of the National Student
Loan Database, to questionable stock holdings by public officials, we
are talking about a system that is spinning out of control.
The blame rests not just with the lenders and individuals who have
exploited these programs for profit, but also on this administration.
Its failure to conduct proper oversight or hold the industry
accountable has harmed student and family borrowers and taxpayers, all
of whom ultimately pay the price for these corrupt practices.
Here in Congress we have launched our own investigation into the
student loan industry and into the practices and environment that have
allowed this corruption to flourish. We are closely examining the
relationships and conflicts of interest between these lenders,
financial aid officers, and the public officials who are responsible
for administering federal student aid.
And given just how little has been done to protect student and
families from the abuses in the program, last week I called on the
Secretary of Education to immediately take the following actions to
eliminate corruption and cronyism within the student loan industry:
Impose a moratorium on ``preferred lender lists;''
Clearly define and end bribes paid by lenders;
Require full disclosure by lenders and schools of their
relationships;
Instruct schools and lenders to cease and desist all
conflicts of interest; and
Conduct oversight of Department of Education employees.
I also called on the Secretary to launch a public campaign to
educate students and families about their rights and options when
borrowing for college, and make public all records of loan industry
meetings with political appointees so that the Congress and the
American public better understand who at the Department was being
lobbied by the industry.
There is no question that congressional action is urgently needed
to put these programs back in the hands of students and parents.
Earlier this year I introduced legislation, the Student Loan Sunshine
Act, that would clean up the relationships between lenders and schools.
I hope that what we learn today helps us build on this bill to bring
the sea change of reforms needed to this industry.
Ensuring that students and their families can have full confidence
in our nation's student aid system is a critical part of our goal of
making college more affordable and accessible.
I again want to thank our witness for joining us today and for the
important work he is doing on behalf of students and families in New
York and across the country. We look forward to hearing his testimony.
Thank you.
______
Mr. McKeon. Thank you, Mr. Chairman, for convening today's
hearing.
And to Mr. Cuomo, I thank you for joining us and welcome to
our committee.
I don't believe anyone would argue with the fact that trust
in our student aid system has been shaken. That is why we are
here this morning, after all.
So at the very outset of this hearing, I believe all of us
can agree on a very basic yet vital goal for this hearing and
the process that will follow it. And that should be to begin
restoring that trust.
The question that we will face during the coming weeks and
months will be how to meet that goal. There are a variety of
reform proposals on the table already, here in Washington, in
Mr. Cuomo's state capital, and by organizations throughout the
nation.
And I believe that is extraordinarily healthy, because this
effort will require all stakeholders in the system to step up.
That means lenders, colleges, the Education Department,
states and Congress all have a role to play. And where certain
stakeholders don't step up, this committee may be forced to
step in.
Let me give you an example. Several years ago, when I
served as chairman of the Higher Education Subcommittee, I
urged financial aid administrators to work with other industry
partners in adopting a series of recommended practices that
would have helped deal with many aspects of the very situation
we are presented with this morning, such as a lack of
disclosure for students and a lack of clarity with regard to
preferred lender lists.
In short, they did not act quickly enough, and now it looks
as if the committee is poised to do so.
If we do step in, Mr. Chairman, it should be for a very
straightforward reason: to ensure this system continues to
serve the needs of the students who depend on it for a chance
at a college education.
This isn't about us versus the lenders or us versus the
financial aid officers. This isn't about direct loans versus
FFEL.
And for the record, I continue to strongly support the
private-sector-based program and healthy competition between
the government-run direct loan program and the private sector
FFEL-based program.
No, this is about millions of young men and women who
expect our student aid system to be there for them when they
need it. By keeping our eyes fixed squarely on what best serves
their need, we will be well on our way to restoring trust in
the system.
With this in mind, earlier this week Mr. Keller and I
introduced comprehensive legislation to address many of the
issues which will be discussed at today's hearing.
The Financial Aid Accountability and Transparency Act
builds on some of the recommendations you introduced earlier
this year, Mr. Chairman.
Like your bill, we do not explicitly outlaw the practice of
preferred lender lists. Rather, we reform this practice to
ensure that it continues to serve the interests of students.
And like your bill, ours aims to protect against conflict
of interest between lenders and financial aid officers.
However, our bill goes even further than those introduced
by congressional Democrats.
For example, it asks colleges and universities to develop
their own codes of conduct that must include restrictions on
gifts, payments, stock and anything else that may give the
appearance of a conflict of interest between financial aid
officers and lenders.
Rather than simply requiring the reporting of it, our bill
also bans revenue-sharing between lenders of private loans and
colleges or universities. This practice already is illegal with
regard to federal loans, and it is my view that it should be
for private loans as well.
Instead of requiring even more lender and institutional
reporting to the Department of Education, our bill requires
extensive disclosure to students, particularly on matters
relating to their financial aid rights, preferred lender lists
and the like.
And finally, and perhaps most importantly, our bill
explicitly allows an institution to negotiate lower interest
rates or fees on loan products for their students and parents.
Why is this language in the bill, some may ask? Simply put,
it benefits students. Mr. Keller and I would not propose
restrictions that in any way short-circuit a student's ability
to get a better deal.
With all of that said, Mr. Chairman, I believe that we can
see a great deal of bipartisan cooperation on this issue during
the coming weeks and months.
Despite some of the sensationalized press reports that have
followed these investigations, we must not lose sight of the
fact that the federal financial aid system must work for
students and colleges alike.
We must be careful not to overreach as Congress does all
too often. But we do need to restore trust in the system.
Once again, thank you, Mr. Chairman.
And, Mr. Cuomo, I look forward to your testimony.
[The prepared statement of Mr. McKeon follows:]
Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican
Member, Committee on Education and Labor
Thank you, Mr. Chairman, for convening today's hearing. And to Mr.
Cuomo, I thank you for joining us and welcome you to our Committee.
I don't believe anyone would argue with the fact that trust in our
student aid system has been shaken. That's why we're here this morning,
after all. So, at the outset of this hearing, I believe all of us can
agree on a very basic, yet vital, goal for this hearing and the process
that will follow it: to begin restoring that trust.
The question that we will face during the coming weeks and months
will be how to meet that goal. There are a variety of reform proposals
on the table already--here in Washington, in Mr. Cuomo's state capital,
and by organizations throughout the nation. And I believe that's
extraordinarily healthy because this effort will require all
stakeholders in the system to step up. That means lenders, colleges,
the Education Department, states, and Congress all have a role to play.
And, where certain stakeholders don't step up, this Committee may be
forced to step in.
Let me give you an example:
Several years ago, when I served as Chairman of the higher
education subcommittee, I urged financial aid administrators to work
with other industry partners in adopting a series of recommended
practices that would have helped deal with many aspects of the very
situation we are presented with this morning, such as a lack of
disclosure for students and a lack of clarity with regard to preferred
lender lists. In short, they did not act quickly enough, and now, it
looks as if this Committee is poised to do so.
If we do step in, Mr. Chairman, it should be for a very
straightforward reason: to ensure this system continues to serve the
needs of the students who depend on it for a chance at a college
education. This isn't about us versus the lenders or us versus the
financial aid officers. This isn't about direct loans versus FFEL--and
for the record, I continue to strongly support the private sector based
program and healthy competition between the government-run Direct Loan
program and the private sector-based FFEL program.
No, this is about the millions of young men and women who expect
our student aid system to be there for them when they need it. By
keeping our eyes fixed squarely on what best serves their needs, we'll
be well on our way to restoring trust in this system.
With this in mind, earlier this week, Mr. Keller and I introduced
comprehensive legislation to address many of the issues which will be
discussed at today's hearing. The Financial Aid Accountability &
Transparency Act builds on some of the recommendations you introduced
earlier this year, Mr. Chairman. Like your bill, we do not explicitly
outlaw the practice of preferred lender lists--rather we reform this
practice to ensure that it continues to serve the interests of
students. And like your bill, ours aims to protect against conflicts of
interest between lenders and financial aid officers.
However, our bill goes even further than those introduced by
congressional Democrats. For example, it asks colleges and universities
to develop their own unique codes of conduct that must include
restrictions on gifts, payments, stock, and anything else that may give
the appearance of a conflict of interest between financial aid officers
and lenders. Rather than simply requiring the reporting of it, our bill
also bans revenue sharing between lenders of private loans and colleges
or universities. This practice already is illegal with regard to
federal loans, and it is my view that it should be for private loans as
well.
Instead of requiring even more lender and institutional reporting
to the Department of Education, our bill requires extensive disclosure
to students, particularly on matters relating to their financial aid
rights, preferred lender lists, and the like. And finally, and perhaps
most importantly, our bill explicitly allows an institution to
negotiate lower interest rates or fees on loan products for their
students and parents. ``Why is this language in the bill?'' some may
ask. Simply put, it benefits students. Mr. Keller and I would not
propose restrictions that in any way short-circuit a student's ability
to get a better deal.
With all of that said, Mr. Chairman, I believe that we can see a
great deal of bipartisan cooperation on this issue during the coming
weeks and months. Despite some of the sensationalized press reports
that have followed these investigations, we must not lose sight of the
fact that the federal financial aid system must work for students and
colleges alike. We must be careful not to overreach, as Congress does
all too often, but we do need to restore trust in the system. Once
again, thank you, Mr. Chairman. And Mr. Cuomo, I look forward to your
testimony.
______
Chairman Miller. I thank the gentleman.
This morning in this hearing we have only one witness, and
that is the honorable Andrew M. Cuomo.
Mr. Cuomo was elected the 64th attorney general of New York
state on November 7, 2006. As attorney general, he is the
highest-ranking law enforcement officer in the state,
responsible for representing New York and its residents in
legal matters.
The attorney general is no stranger to Washington, D.C.,
having served as secretary of housing and urban development
under President Clinton. His work at HUD earned him the
prestigious Innovation in American Government award from the
Ford Foundation and the Kennedy School of Government at Harvard
University on three separate occasions.
He is also no stranger to the lending institutions in this
country and to the government-sponsored organizations that work
with them.
In addition to his current work in the student loan
industry, Mr. Cuomo is hard at work on protecting the people of
the state of New York through investigations in nursing home
abuses, drug trafficking and fraudulent practices.
We thank you, Mr. Cuomo, for your leadership on this issue
and for the contribution that you have made to our
understanding of that issue. And we look forward to your
testimony. Welcome to the committee.
STATEMENT OF HON. ANDREW M. CUOMO, ATTORNEY GENERAL, STATE OF
NEW YORK
Mr. Cuomo. Thank you very much, Mr. Chairman. And I thank
the entire committee for the opportunity to appear before you
today. It is a pleasure to be back before the Congress, albeit
in a different position than my past positions.
I would also like the opportunity to introduce my deputy,
Benjamin Lawsky, from the New York Attorney General's Office,
who has been coordinating this case on college loans and is
intimately familiar with our activity.
It is a pleasure to speak about this topic, and I want to
begin by commending the chairman and Ranking Member McKeon for
the good work that this committee has done on this issue.
I reviewed the legislative proposals. I think they go a
long way toward remedying this problem, and it is a pleasure to
be able to discuss it in detail today.
As you know, the magnitude of the problem is daunting. Two-
thirds of all college students will leave school with a college
loan. It is now an $85 billion per year industry.
My office's investigation has found a wide range of
improper and illegal activities occurring in a wide range of
schools.
Bad practices occur at small schools with enrollments of
less than 2,000 students and at large state universities with
more than 20,000 students.
The problems exist across the country, from New York to
California. There are a variety of troublesome activities that
the schools and lenders have engaged in, many of which focus on
the highly desirable preferred lender lists.
There are usually separate preferred lender lists for
specific loans--Stafford loans, PLUS loans, private loans, et
cetera.
In some instances, these preferred lender lists contain
dozens of potential lenders. In other cases, the schools use
the lists to recommend only a handful of lenders, sometimes a
single lender.
The economic benefits to the lenders included on these
preferred lists are powerful. Remarkably, 90 percent of
students take their loans from the preferred list.
Why? Because the schools suggest these lenders to students,
and students have trust in the schools.
When schools place lenders on the preferred list based on
benefits to the schools as opposed to the students, the school
violates that relationship of trust. In our opinion, this
violation of trust makes a bad situation worse.
We have found a range of illegal activities, including
direct payments to the schools as well as inducements to
individual financial aid officers.
Aid officers are given expensive meals, travel to
attractive locations, tickets to entertainment events,
honoraria to serve on lender advisory boards.
In some instances, financial aid officers have even held
stock in lending companies.
Benefits to the schools include lender-funded printing of
schools' financial aid materials, lenders who are running call
centers for the schools where the person who answers the
telephone is identified to the student as a representative of
the school even though it is actually an employee of the
lender.
Another practice which we have found is ``co-branding''
between lenders and schools, using the school's colors, mascot
and logos to convey at best the school's endorsement of the
loan, and at worst a false impression that the loan is being
offered by the school itself.
There are also disturbing practices with respect to
opportunity loans, where a lender gives the school essentially
a line of credit, sometimes offered in exchange for placement
on the preferred lender list or for specified loan volume on
other types of loans.
In my opinion, some tactics are a form of predatory
lending. Allow me to quote from a lender's sales manual: ``We
leverage the school name as much as possible, because the
target is already predisposed to the brand.'' The ``target'' is
the student.
The most egregious practice that we have found is what is
called revenue sharing. In revenue sharing arrangements, the
lender pays the school a set percentage of the student loan
volume.
The revenue-sharing arrangements are essentially
undisclosed loan brokerage schemes, in my opinion, no better
than illegal kickback arrangements found in other industries.
These practices hurt students in at least two ways. First,
the practices stifle competition. Closed lists mean less
competition. Lenders who could actually bring down interest
rates for student loans are often eliminated from the process.
Second, the lender payments and inducements increase the
cost of the loan to the lender and are ultimately passed on to
the students as the consumers.
In the case of the University of Pennsylvania, revenue
sharing resulted in a $500 added cost to each student taking
the Citibank loans involved.
The good news is that as my office has exposed the illegal
practices described above, consumers and the industry have
heard the problems and they are responding.
Consumers are demanding reform and schools and lenders are
willing to change course and set a new industry standard. To
that end, we have entered into numerous settlement agreements
with major lenders and schools in which they agree to adopt a
new college code of conduct.
We have settled with Citibank and Sallie Mae, two of the
nation's largest lenders.
Today we announced that we have reached agreement with Bank
of America and J.P. Morgan Chase, the two main investors in the
Sallie Mae private equity agreement.
We are pleased that both J.P. Morgan and Bank of America
have separately agreed to our code of conduct, and I wish to
applaud them for their cooperation and responsibility.
With these agreements, Mr. Chairman, the nation's top four
student lenders have adopted our code of conduct. The code of
conduct provides, in part, a total prohibition of revenue
sharing.
It prohibits lenders from providing goods or services to
schools in exchange for placement on the school's preferred
lender list.
It prohibits lenders from making gifts or payments to
school employees of more than nominal value.
It requires that schools recommend lenders to students only
on the best interest of the students.
Finally, schools are prohibited from placing a lender on
the preferred list for a particular type of loan in exchange
for benefits provided to the school or the school's students in
connection with different loans.
In sum, the code of conduct rights the wrongs our
investigation has revealed. Our code and the House and Senate
proposals are all on the same theory and seek the same goal.
I endorse Chairman Miller's Sunshine Act, which goes a long
way toward ending the payments by lenders to school officials
and requires important disclosures in connection with preferred
lender lists.
The bill also extends disclosure obligations to the private
side of the equation, an area which has been, to date, the Wild
West of the student loan industry.
I would also point out that this issue resonates not only
across the nation, Mr. Chairman, but also across the political
aisle.
In fact, the legislation which I have submitted in my home
state of New York has been endorsed by Republicans and
Democrats alike.
In New York, every member of the state senate, a majority
Republican body, has become a sponsor of the legislation. This
is, indeed, a rare occurrence in New York's legislature. In
fact, the state senate is poised to pass this legislation
today.
In terms of the federal government's responsibility in this
arena, let me say that having run a federal agency myself, I am
not quick to criticize. However, I believe in this case the
Department of Education has been asleep at the switch in at
least three regards.
First, while there are Department of Education regulations
governing conflicts of interest in the FFEL program, the
safeguards were not extended to the private loan portfolio.
Over the last 5 years, private student loans have grown at
an astounding average annual rate of 27 percent and now
comprise 20 percent of all education borrowing. The business is
huge, with the potential for abuse as the rates are not capped.
It should not have been ignored.
Second, my investigation has shown that even where the
Department of Education regulations did exist with respect to
the FFEL program, there is significant evidence suggesting
these regulations were flouted.
For example, Marist College in New York had a preferred
lender list of four FFEL lenders, without disclosing that one
of the lenders had an agreement to purchase the loans placed by
the other lenders on the list.
The state university system of New York had a college which
required students to pick a particular FFEL lender as their
Stafford lender. This was a clear violation of federal law,
under which a student is assured a choice of any lender.
The New York Institute of Technology chose FFEL preferred
lenders by considering how much each lender contributed to
sponsor the school's programs or events.
We have also found conflicted arrangements between Columbia
University and FFEL lenders, where student financial aid
officers obtained stock of one of the FFEL preferred lenders.
Third, it has recently been reported that the Department of
Education rulemaking process, which was supposed to resolve
these issues, has broken down.
To me, Mr. Chairman, that is like saying the fire truck has
stalled on the way to the fire. It is simply unacceptable that
the DOE can fail to right these wrongs in the midst of the
disturbing revelations and at a time when students all across
the nation are clamoring for guidance and help.
Announcing a task force at this late date is, frankly, too
little, too late. The department can and should issue
regulations immediately to affect reform in the industry and
protect our students.
Today the marketplace is ahead of the regulators. Lenders
and schools are reforming practices, and the Department of
Education has still not acted.
Chairman Miller has written to the U.S. Education Secretary
Margaret Spellings, calling on her to take emergency action to
reform the nation's student loan programs, and I commend the
chairman for his leadership on this issue.
I also commend Senator Kennedy for his outstanding
leadership on this issue.
In conclusion, Mr. Chairman, I believe that real change is
coming on this issue.
As Malcolm Gladwell explains in his book, Tipping Point,
the awareness caused by these investigations has reached a
critical mass that will demand response. The outrage resonates
on many levels across the country, and change is under way from
many sources.
Government is responding. Last week, over 40 attorney
generals' offices participated in a conference call on this
issue. State education offices are reforming practices. State
legislatures are preparing legislative solutions.
Editorial boards are advocating reform. Significantly, the
market itself is demanding a response, as students, now
informed, are asking the tough questions, and lenders must
change their practices or risk losing business.
Schools on their own initiative are changing their
practices.
I believe in the states as laboratories of democracy, and I
believe in the free market system to correct itself when the
consumer is informed.
But I also believe that federal action is the swiftest,
most comprehensive resolution to a nationwide injustice.
Change can and will come on this issue, Mr. Chairman. The
question is how and when. It is not a time for just task forces
or study groups. We know the facts painfully well. It is a time
for action.
I look forward to federal leadership and cooperation, and I
thank you and the committee for the honor of appearing before
you today on this very important topic.
[The statement of Mr. Cuomo follows:]
Prepared Statement of Hon. Andrew M. Cuomo, Attorney General, State of
New York
I thank Chairman Miller, Ranking Member McKeon, and the members of
the Committee on Education and Labor for inviting me to speak this
morning.
Background
Over the last few months my office has conducted an investigation
into the student loan industry. In just the short time that the
investigation has been ongoing, we have uncovered several significant,
deceptive and illegal practices. Unfortunately, these practices are
widespread throughout the country and throughout the many segments of
the industry. These practices have affected hundreds of thousands of
student borrowers and their parents.
It is easy to see why the results of this investigation have struck
such a chord with the public. As the members of this Committee are well
aware, the costs of higher education are soaring and have been for some
time. Grant and scholarship funds have not kept pace with rising
tuition. Accordingly, a significant and growing number of students and
their parents turn to loans to cover what they otherwise could not
afford. This is not just a problem in my state. Nationwide, two-thirds
of all four year college graduates have loan debt. The student loan
industry has swelled to become a greater than $85 billion per year
industry.
In spite of the large number of students and families that the
student loan industry affects, the procedures of applying for and
receiving loans are enormously complex and confusing. Students and
their parents are faced with a dizzying array of loan possibilities and
hundreds of potential lenders from which to choose.
These parents and students, not surprisingly, often look to the
educational institutions they are attending for advice. They trust that
the institutions will give them unbiased guidance as to how to best
finance their education. In response, many institutions of higher
education have created lists of recommended lenders. In some instances,
these ``preferred lender lists'' contain dozens of lenders that meet
certain minimal requirements. In other cases, educational institutions
use the lists to recommend a handful of lenders, or even a single
lender, as ``preferred.'' The benefits to the lenders of being included
on these lists are considerable. Lenders on preferred lender lists
typically receive up to 90% of the loans borrowed by the institutions--
students and parents. With this loan volume come vast profits for
included lenders.
I am angered and saddened to say that our investigation has
revealed an unholy alliance between lenders and many trusted
institutions of higher education. The best interests of the lender and
the institution, rather than the interests of the student, all too
often have become paramount.
I will take the next few minutes to elaborate on a few of the
troubling, deceptive and often illegal practices that we have
uncovered.
Problems Uncovered
Revenue Sharing
What I believe to be the most egregious practice that we have
uncovered so far is a form of kick-back scheme often referred to as
``revenue sharing.'' Revenue sharing is an arrangement under which a
lender pays an institution of higher education a percentage of the
principal of each loan taken out by a borrower at the institution. 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, the direction should be based
solely on the best interests of the student and parents who may take
out loans from the lenders. Because of these revenue sharing
arrangements, however, the institutions have a financial interest in
the student or parents selecting the revenue sharing lender, regardless
of whether that lender offers the best rates and service for that
borrower. The advice the students and parents sought from a trusted
source may not be so impartial after all.
Preferred Lender Lists
As I mentioned before, many schools maintain preferred lender lists
and encourage students to borrow from the lenders whose names appear on
the lists. Despite the significant role that these lists play in
determining the lenders from which students and parents borrow, many
institutions have chosen not to inform their student and parent
borrowers about the criteria used to formulate the lists of recommended
or preferred lenders. In some instances, they have even gone so far as
to actively conceal the methods by which their recommendations derive.
Worse, some institutions fail to disclose the potential and all too
often actual conflicts of interest on the part of their financial aid
offices--the same offices which compile the preferred lender lists.
These conflicts of interest may arise from the revenue sharing
arrangements I just described or from other perks or consideration
granted to schools and financial aid employees, some examples of which
I will describe in greater detail.
Improper Relationships Between Lenders and Financial Aid
Offices and Administrators
Our investigation has uncovered potential conflicts of interest
created by financial aid administrators who have held stock in a
lender, having been encouraged to purchase the stock by a lender
executive. In other cases, financial aid administrators have received
payment for consulting with a lender. In several of these cases, the
implicated lenders succeeded in getting themselves placed on the
implicated administrators' schools' preferred lender lists.
Not all of the improper perks have been so egregious, but many have
been exceptionally widespread. Many lenders have paid travel expenses
and honoraria for financial aid officials to attend meetings and
seminars in attractive locations often as part of an appointment of the
institutions' financial aid officials to ``advisory boards'' or
``committees'' sponsored by the lenders.
We have also uncovered many examples of lenders paying hundreds of
thousands of dollars for printing services at the request of financial
aid officers. Some lenders have also sent their own staff to assist
schools' financial aid staff on the schools' campus. The lenders did
not offer these services out of the goodness of their hearts. Similar
to the revenue sharing arrangements, lenders granted institutions of
higher education these types of benefits in an effort to encourage the
institutions to steer students to the lenders.
In a related problem, lenders have agreed with institutions of
higher education to staff ``call centers'' that answer students'
telephoned or emailed questions regarding financial aid, loans and
lenders. Often the call center employees have not only failed to
identify themselves as employees of a lender, but have been instructed
to answer the phone in the institutions' name. The student calling or
emails their questions rightfully expected to receive disinterested
advice and information regarding lenders. These lender call center
employees, however, have an interest in advocating on behalf of the
lender that pays them.
Denial of Choice of Lender
Our investigation has also brought to light a failure of some
institutions of higher education to make clear that borrowers have a
right to select the 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. In this way the
educational institutions steer borrowers to certain lenders, as with
the other examples, not necessarily because that lender is best for the
borrower.
Undisclosed Sales of Loans to Another Lender
Further, 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. However, 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.
Quid Pro Quo (Opportunity Loans)
Deeply disturbing, too, was our discovery that lenders and colleges
had, in many instances, entered into quid pro quo high risk, high
interest loans that hurt students. Under these undisclosed agreements,
often referred to as ``opportunity loans programs'' lenders agreed to
make loans up to a specified aggregate amount to students with poor or
no credit history, or international students, who the lender claimed
would otherwise not be eligible for the lender's alternative loan
program. In exchange for the lender's commitment to make such loans,
however, the institution provided concessions or promises that
prejudice other borrowers.
Solutions
Code of Conduct
Over the last few weeks, as my office exposed many of these
practices to the light of day, I was pleased to see many lenders and
schools that had engaged in some of the questionable and even illegal
practices agree to change course and set a new standard for the
industry. To that end, we have entered into numerous settlement
agreements--with major lenders and schools alike--in which the schools
and lenders agreed to adopt a new landmark Education Loan Code of
Conduct, which will now govern those institutions' student loan
practices going forward. The Code of Conduct offers institutions the
guidelines many schools and lenders have actively sought and by which
all schools and lenders should be willing to abide.
The Code of Conduct remedies the troubling and illegal practices we
have uncovered. Specifically, the Code of Conduct prohibits revenue
sharing and kickbacks in other forms, including printing services. It
prohibits lenders from funding gifts and trips for institutions'
financial aid employees. The Code prohibits lender staffed call
centers. Our Code also lays out strong but fair guidelines concerning,
among other things, preferred lender lists, advisory board
compensation, and loan resale.
My office will continue to pursue lenders, schools, and other
players in the student loan industry that fail to put students'
interests first. In cases where the law has been broken, we will
continue to demand that the responsible entity agree to cease the
illegal practices, reimburse wronged borrowers or pay into our
education fund as appropriate, and agree to abide by the Code or
Conduct. If not, we will sue.
State Legislation
But, to most effectively reform the student loan industry--and to
restore most fully the broken trust between universities and lenders on
the one hand and students on the other--legislation is necessary so
that these types of reforms come to all lenders and schools. I
respectfully submit that it is crucial that Congress act promptly to
end the conflicts, perks and revenue sharing that have been costing our
students dearly. I ask you to move quickly to ensure that, as another
group of high schools students look toward beginning their college
educations in the fall, we have reform in place that will keep the
students' interests paramount.
That is why I was so pleased to stand on April 16 alongside my
state's legislative leadership when we announced the introduction of
state legislation that will codify and lend additional enforcement
strength to the Code of Conduct. Our legislation addresses, on an
industry-wide basis, the problems exposed as a result of my office's
ongoing investigation into the widespread conflicts of interest
throughout the student loan industry.
National Action
The settlements into which we have entered in New York will affect
millions of students and thousands of schools around the country.
Recently, my office has entered into settlements involving other
states' attorneys general. Most notably because of the leadership of
Illinois Attorney General Lisa Madigan and Missouri Attorney General
Jay Nixon, we have been able to broaden the impact of our investigation
by entering into settlements with multiple states simultaneously. The
legislation we have proposed in New York will continue the reforms we
began through our investigation and I hope other states will follow
suit. We have certainly taken a major step in cleaning up a system
laden with conflicts of interest.
Congressional Action Needed
Yet there is much more that needs to be done--and we must move
without delay. That is where this Congress can play a significant role.
Part of the reason the practices we have uncovered have been able
to flourish nationwide over the past several years is because the U.S.
Department of Education has been asleep at the switch. The practices we
have uncovered were not undiscoverable until now. Rather, the entity
charged with maintaining the integrity of the student loan market
failed. The failure of the Department to pass adequate regulations is
disappointing and irresponsible.
Now is the time for Congress to act to affect change in this
industry; an industry that until very recently has functioned without
proper oversight. Congressman Miller and Senator Kennedy have both been
extraordinary leaders on this issue for years. I believe that Chairman
Miller's Student Loan Sunshine Act will go a long way toward bringing
the much needed disinfectant of sunlight to this tainted industry. I
would encourage the Committee to ensure that the bill is ultimately
brought to the floor of the House soon.
Conclusion
In closing, I urge Congress to enact the Student Loan Sunshine Act.
Further, this Congress must ensure that the trust placed in educational
institutions is warranted and that we end the pernicious effects of
financial gain through the misleading of students and their families.
The stakes are too high for too many Americans' futures for Congress
not to act. I look forward to providing any assistance the Committee
may require of my office to help achieve these goals.
______
Chairman Miller. Thank you very much, General Cuomo. Again,
we appreciate all that you have done and certainly taking the
time to come here and to brief the committee on this.
I think given your remarks and the remarks of Mr. McKeon
and hopefully my own--we will be able to achieve that kind of
bipartisan consensus on our legislation out of this committee
that apparently you were able to achieve in the New York
legislature, which is no easy trick, as we know.
And we hope to be able to continue to work with you as we
develop that legislation to make sure that we are, in fact,
addressing it based upon the evidence that you have from your
investigations.
You mentioned the shared revenues, the preferred lender
list, and maybe even the agreement--well, the preferred lender
list and that it was sold originally as a convenience to
students and their families, and it has been corrupted to be
for the convenience of the universities and the lenders.
But you also in your testimony and in your actions already
have secured rebates to those students that starts to quantify
the real cost of these corrupt practices on students and their
families as they struggle with the cost of college.
We have heard in this committee, and we have certainly
heard in our districts, where students or families will talk
about having to spend $100, $200, $250 for textbooks and that
may be a make or break item for the question of whether or not
they are going to go to college that semester or go to work and
then go to college the next semester.
You are talking about $500 rebates. Do you want to expand
on what you might think the real cost here is?
You know, this isn't just a matter of convenience and
friends working with one another over the years. This money
comes out of the subsidies that are provided by this government
to the lenders.
Mr. Cuomo. Well, Mr. Chairman, I totally agree, and you are
very correct on the point. These are significant economic
benefits. We are not talking about loose change here. At some
schools, it is in excess of $1 million per year, the amount
which is ``revenue sharing.''
Revenue sharing is basically a commission that the school
gets for referring business to a particular lender.
Undisclosed, the school will come to an arrangement. The lender
gets on the ``preferred list.''
The lender wants as small a list as possible. From the
lender's point of view, ideally, they would like to be the only
preferred lender. The students trust the school's
recommendation. Ninety percent of the students wind up taking
the preferred lender.
More business for the lender, and the schools get revenue
sharing, basically a commission on the volume that goes to the
lender.
And it can be easily in excess of $1 million per year for
the school. What does that mean to the student? What I
mentioned in the testimony--in the case of the University of
Pennsylvania, which is a case that we have handled and we have
settled, so I am free to discuss it at this point--when the
University of Pennsylvania, as part of the settlement, had to
return that money to the students affected in that year, it is
roughly $500 per student.
And $500 per student is a lot of money, especially with the
cost of college and all the financial pressures that are on
these students.
Chairman Miller. When you have the preferred lender
program--and again, you know all of the iterations that are out
there, and you have looked at them--do we know whether or not
those preferred lenders--or in one case, you describe where
they whittled it down to one lender with four other entities
cooperating with the single lender.
Do we know whether or not, in fact, those were the low-cost
lender that was available at that time to the students?
Mr. Cuomo. You don't know, Mr. Chairman, because often the
decision on the preferred lender is the lender preferred by the
school as opposed to the lender preferred because it is in the
best interest of the student.
Why would a school prefer a lender? Because they have a
revenue-sharing agreement, or it was the most productive
revenue-sharing agreement, or because the lender is providing
employees, or because the lender is favored by the financial
aid officer in the school who might own stock in that lender,
or maybe went to a conference, or maybe he has gotten gifts.
So the school prefers the lender, and that preferred lender
is on the list. The students then trust the school's opinion
and advice and take that lender.
If you really had an open system, and you really had
competition, and you were really competing for the rates, then
we would know who the best lender was for the students. But all
too often that is not the decision and it is not the criteria.
Chairman Miller. My time is about to expire. What contact
or what discussions have you or your staff had with the
Department of Education as this investigation of yours has
evolved?
Mr. Cuomo. Mr. Lawsky can provide more specific
information, but we have been in touch with the department. We
have shared information with the department. And as cooperative
or as helpful as we can be in sharing our findings, it would be
our pleasure.
Chairman Miller. So we can assume, therefore, that the
Department is not just reading about this in the paper and
moving along at that speed, that they----
Mr. Cuomo. I believe there has been----
Chairman Miller [continuing]. Have been informed of the
investigation and some of the problems that you have
encountered and some of the practices you have encountered.
Mr. Cuomo. Yes, they have, Mr. Chairman.
Chairman Miller. I share your concerns about the
department. I don't understand their slowness to react to this
situation, and I stated--and they haven't agreed to them, the
five things that I thought they should do immediately to
strengthen this program and end some of these practices.
We are in contact with the secretary, and we are in the
process of negotiating with her and her office for an
appearance before this committee, hopefully within the next 2
weeks.
My time has expired. Again, thank you very much, General
Cuomo.
Mr. McKeon?
Mr. McKeon. Thank you, Mr. Chairman.
And thank you, Attorney General Cuomo, for your testimony
and for the work that you are doing.
One thing that I hope we leave this hearing with is the
idea that not all federal aid administrators on the campus are
picking preferred lenders or are acting in interests that are
not the best for the students.
We have over 6,000 schools participating in this program,
and I think we don't want to paint with a broad brush the fact
that all of these people are doing some of the things that have
been mentioned. I think that that really is not a reasonable
assumption.
And we have about 3,500 lenders, and I don't think we want
to leave the assumption that all of them are doing things that
would violate the standards that we have been talking about.
Mr. Cuomo, I understand that you have contacted Clemson
University about an arrangement that they have with an
alternative loan lender.
I have a letter from the South Carolina Attorney General's
Office that I would like to enter into the record, if I may,
Mr. Chairman.
Chairman Miller. If there is no objection--hearing none, so
ordered.
[The information follows:]
Office of the Attorney General,
State of South Carolina,
Columbia, SC, April 10, 2007.
Zachary Sturges, Esquire,
Assistant Attorney General, Investment Protection Bureau, Office of
Attorney General Andrew Cuomo, New York, NY.
Re: Proposed Agreement on Code of Conduct with Clemson University
Dear Mr. Sturges: This letter is a follow-up to your discussions
with Clemson University and this office concerning Clemson entering
into a Code of Conduct Agreement with the New York Attorney General's
Office as to the practices related to higher education loans offered to
students and parents. Specifically, your interest was in the area of
private ``alternative loans'' that may be promoted by a university,
such as Clemson, with preferred lenders in which there is a revenue
sharing agreement. As you are aware, Clemson has one such arrangement
with Education Finance Partners, Inc. (EFP) which was entered into in
April 2006 after EFP was selected pursuant to Clemson following the
State Procurement procedures.
Pursuant to your inquiry, this office, in conjunction with Clemson
University, has reviewed Clemson's practices with regard to student
financial aid, including the practices addressed in your Agreement.
Based upon this review, we confirm herein what we orally advised you
yesterday--that Clemson will not be entering into the Agreement. This
decision was based upon our determination that as to student financial
aid, generally, and preferred loans with revenue sharing agreements,
specifically, no conflicts of interest existed and no untoward
relationships are present.
We appreciate your office's work and interest in the area of the
relationships between colleges and lenders as to student financial aid.
Based upon our discussions with you, Clemson, in conjunction with
consulting with this office, will continue to monitor its student
financial aid program, including whether or not to continue with its
preferred lending-revenue sharing arrangement. Further, based upon
discussions with your office, Clemson has added language to its loan
program website which is already included in the ``Federal Truth in
Lending Disclosure Statement'' that provides additional notice of the
revenue sharing arrangement. Also, as you have been advised, Clemson
will continue to use any revenue generated pursuant to this arrangement
to fund a program for emergency funds for students. Clemson is proud of
its reputation as being one of the finest public institutions in the
country and its goal is to continue that recognition in the area of
student loan programs.
Once again, Clemson and this office thank you for your time and
consideration in discussing the issues in this matter. We also
appreciate the benefit of your expertise and your sharing with us the
results of your investigation. Personally, I have enjoyed working with
your office in the areas of antitrust and consumer protection and look
forward to working with you and your office in mutual areas of concern
in the future.
Very truly yours,
C. Havird Jones, Jr.,
Senior Assistant Attorney General.
______
Mr. McKeon. This letter says it has examined----
Chairman Miller. General, do you have a copy of this?
Mr. McKeon. Very expeditious. It says here that they have
examined the situation between Clemson and the lender, and they
don't see any impropriety with the relationship and will not be
taking any immediate action.
Will you be filing a lawsuit against Clemson?
Mr. Cuomo. Congressman, the attorney general wears two
hats, at least, in this regard--any attorney general. Number
one, you protect the people of your state from a consumer
protection point of view, and number two, you are also the
counsel for state agencies, state universities.
And in the case you point to, the attorney general is
defending the university. In my state, we also serve as counsel
to the university system. And the matter is ongoing. We are
looking at it.
And we will be looking at the facts on the case and
speaking to the attorney general, speaking to the school.
Wherever we can come to an amicable resolution, that is our
preference.
We have come to voluntary agreements with over 16 schools
and four of the nation's top lenders, all on a voluntary basis.
So to the extent we can resolve differences amicably, that is
always my preference.
Mr. McKeon. I would agree with that. And as you mentioned,
as the attorney general for the state of New York, I assume
that you are counsel for all state institutions, because that
is the way most states function.
I, like most people, assumed that colleges already had
strong conflict of interest policies in place. As a counsel to
state colleges or in discussions with other college counsels,
do you know why they did not have strong conflict of interest
policies in place in your particular state?
Mr. Cuomo. Well, Congressman, I think your first point is
correct. This is not to say that all colleges or all lenders
have been engaging in this type of behavior. I agree with you.
Mr. McKeon. Probably the vast majority, I think we would
agree.
Mr. Cuomo. That is exactly right. We are trying to restore
the integrity and confidence and trust in the system.
And to do that, I believe we need to put the reforms in
place so we can say to every student on every campus, ``Don't
worry, we have resolved this issue,'' because as your point is
well taken, it is not every school, from a student's point of
view, if it is only their school, that is enough of a problem.
And that is why I think we need industry-wide reforms.
Many schools do have conflict of interest resolutions and a
code of conduct for their employees. Many state university
systems do have an additional code of ethics on top of the
normal college code of ethics.
So many of the schools do. Some don't. Some cases we have
come across, the employee was in violation not of just the law
but also the code of ethics for that college. So there are a
variety of situations.
Mr. McKeon. Just having codes doesn't necessarily mean----
Mr. Cuomo. That is exactly right. It is also the policing.
It is also the oversight.
Mr. McKeon. Thank you, Mr. Chairman. My time has expired.
Chairman Miller. Thank you.
Mr. Payne?
Mr. Payne. Thank you very much.
Let me commend you, Mr. Cuomo, for the outstanding job you
have done at highlighting this and bringing attention to it.
You know, my colleague just mentioned--of course, being a
former--had mentioned that colleges tend to have strong codes
of conduct.
And you know, I am not so sure that we can simply make a
blanket statement of that nature, when I look at the credit
card situation that goes on in colleges.
You talk about bad practices. And I hope you would take
that on. So I am wondering where all this code of conduct is
coming from administrators of colleges.
Kids are sent credit cards. They are 18 years and 17 years
and 19 years old, never had an opportunity to have any economic
freedom, because they don't have--they haven't earned it.
And that is why when these cards come through, encouraged
by the colleges, booths set up at colleges, college employees
calling students--I mean, what kind of code of conduct--where
is the code of conduct?
You know, in my district, they did a big investigation on,
guess what, the Earned Income Tax Credit people. Now, anybody
that breaks the law is wrong. Earned Income Tax Credit
recipients mean people made between $13,000 and $28,000 a year.
And they went through all of these audits to see whether
these $13,000-to $28,000-a-year people were honest about what
they were putting down. Did they get food stamps and didn't put
it on?
Here, you have got people--and you use nice words like
revenue sharing and preferred lenders. If this was anywhere
else, people--I haven't heard anybody talking about subpoenas,
putting somebody's hand up to see whether they have broken a
law or not.
And you know, you are the messenger. I am just simply
saying that when it comes to the white collar people, we tend
to have fancy names. We tend to let students continually get
the shaft. And people walk away willy-nilly on these issues.
When it comes to the guy who is struggling and grunting and
makes a mistake, they lay the book on him, you know?
What is going to happen? What about the credit card
business? What is going to happen to these people who are
taking kickbacks? That is what they would say in my
neighborhood. It is a kickback. Kickbacks are criminal. They go
to jail. They pay fines.
What is it going to be? Is this going to be some, ``Well,
we have new reforms and that is good?'' What about what has
happened already--students who have struggled to pay their way
through, still have loans, and guys are buying bigger cars?
Mr. Cuomo. Well, Mr. Congressman, I agree with the
sentiment and the points you have raised. In my testimony, I
said that I believe these are kickbacks. We have issued
subpoenas.
And I believe this is illegal activity, make no mistake
about it. I believe it violates consumer protection laws. I
believe it violates business law.
And you are right, it is offensive. I believe it is
especially offensive because schools are in a relationship of
trust. This is not a normal marketplace relationship.
This is not a relationship of caveat emptor, let the buyer
beware. This is a student going to the school. Ninety percent
of the students are following the school's recommendation
because there is a relationship of trust.
These are incoming students. They want to be part of the
school. The school says, ``Go to this lender.'' They go to that
lender.
And then to find out that there was a different
relationship or another relationship, or there was a
``kickback'' that was undisclosed--I think it is illegal. It is
wrong. It is offensive. It is unethical. It is improper. We are
going to enforce the law.
The question that I was trying to respond to in my
testimony is, ``And what is the response of the federal
government at this time? What is the response of the Department
of Education?''
We have laid out the facts. In my opinion, we don't need
another task force or a study group. We know the facts
painfully well. We have done the subpoenas.
We have schools all across the country. We have states
responding. We have attorney generals responding. Schools
themselves are responding. Four of the top lenders in the
country have responded.
And now what is the federal government going to do? And
what is the Department of Education going to go? That is the
question that I am focused on today.
But rest assured, Congressman, for the state of New York,
we are working cooperatively with the attorney general from New
Jersey. We will enforce the law, and we will do what we can as
state officials.
But I think it is a tremendous opportunity for the federal
government to come in and really resolve this injustice
nationwide.
Chairman Miller. The gentleman's time has expired.
Mr. Keller?
Mr. Keller. Thank you, Mr. Chairman.
And thank you, Mr. Cuomo, for agreeing to be here today. I
am especially troubled about hearing of the conflict of
interest that exists where financial aid administrators receive
consulting fees or stock from lenders. We have common ground in
our belief that this is wrong and unacceptable.
Now, your investigation, I believe, has focused primarily
on the private alternative loan market and not the federal
student loans such as the Stafford loans, which are guaranteed
by the federal government under Title IV of the Higher
Education Act. Am I correct?
Mr. Cuomo. You are correct.
Mr. Keller. Did your investigation reveal any specific
problems with the federal student loan program that resulted in
any students paying either a higher interest than the law
allows or higher origination fees than the law allows?
Mr. Cuomo. Well, Congressman, two points. First, we have
focused on the private loans because that is the growing area
of the market. There are no caps in that area of the market.
And it is virtually unregulated, so we have been focusing on
the private loans.
We have also come across instances in the FFEL program
where there are activities in violation of the regulations that
cover the FFEL program.
I spoke about Marist College, which in our opinion violated
regulations of the FFEL program--Columbia University, New York
Institute of Technology.
Mr. Keller. And I don't want to cut you off, but I heard
you testify, and I wrote your notes. I know you think there is
some violations of FFEL. I am getting to did you ever see any
instance where a student was hurt for paying like a higher
interest rate.
For example, the interest rate now is 6.8 percent as of
July. Did you in your investigation see something where the
student is paying 7.5 percent or something to that effect,
where the student was actually financially hurt?
Mr. Cuomo. Well, Congressman, as you know, the rate is
capped under the FFEL program, but the concept that justifies
the FFEL program, or the best case for the FFEL program, is,
``Well, we are going to have competition among private
lenders.''
And the competition among the private lenders might bring
the interest rate down, or there might be a discount on the
back end.
If you have a preferred lender list and preferences for the
schools, you never get to competition, so you don't really know
if you got the best loan for the students, since the lender was
selected in the interest of the school rather than the interest
of the student.
Mr. Keller. I hear you. And you found an instance where
they only got one choice under the FFEL program and you were
concerned about that, correct?
Mr. Cuomo. Yes.
Mr. Keller. Okay. Now, the main federal student loan
program is Stafford, and one out of five students get their
Stafford loans direct from the federal government. Four out of
five get their loans under the FFEL program from private
lenders.
Senator Kennedy, Chairman Miller, former President Clinton
have all indicated their preference for the direct loan
program. Do you prefer the direct lending program over the
private FFEL program?
Mr. Cuomo. I understand the arguments for both, and I
understand the argument that in the FFEL program you could have
a situation where competition brings down the cost of the loan.
I don't believe that is what is occurring, but I understand
the concept and the theory.
The direct program, obviously, has benefits, that the
federal government directly is making the loan, you don't have
a private lender and you have reduced costs.
So I understand the arguments for both. I am not here as a
policy official today. At one time, I appeared before Congress
as a Cabinet secretary where I made policy cases and defended
policy.
Now I am just a law enforcement official and speaking about
the findings of our investigation.
Mr. Keller. All right. Mr. Cuomo, the reason I asked you
that--because when you leave here, and all the smoke is
cleared, I am going to hear from some people on the other side
of the aisle saying, ``Hey, we had the attorney general from
New York here. He talked about a few bad apples in the private
lending program. We have got to do away with private lending on
the federal level and switch to direct student lending.''
And so when I hear that argument, I just want to go back
and say to them, ``We had Attorney General Cuomo right here,
and he didn't express that opinion.'' Is that a fair thing for
me to say?
Mr. Cuomo. You can say he is not a policy maker; the
attorney general was just here talking about the facts from his
investigations.
Mr. Keller. All right. As a non-policy maker, let me ask
you this, Attorney General. You have testified that the U.S.
Department of Education has been asleep at the switch, it is
irresponsible, and it has failed to maintain integrity.
If that is the case, why should we put the Department of
Education in charge of all of the federal student loans?
Mr. Cuomo. I believe the Department of Education in this
situation--again, my focus here is narrow and specific to the
situation at hand on college loans and the findings from my
investigations, and my work with schools all across the country
and attorneys general all across the country.
I think the Department of Education should have--
retrospectively and prospectively should be doing a better job
on oversight of the FFEL program.
I believe that the Department of Education's oversight
should be extended to the private loan program. That is an area
that is growing. That is the area where we have evidence of
abuse. That is the area where, by design, you have the
proclivity for abuse. I believe that also.
I also believe the Department of Education should be faster
and more aggressive in issuing regulations on the activity that
we have found.
There is a tremendous amount of information available to
this committee and to the department. We have numerous cases
all across the country. The marketplace is responding. Schools
are changing. Lenders are changing.
The federal government is in the oversight capacity, and I
believe the Department of Education should be more aggressive
in promulgating regulations that address this issue today.
Mr. Keller. Thank you, and my time has expired.
Mr. Cuomo. Thank you, sir.
Chairman Miller. I find it interesting that the direct loan
program in the eyes of my colleagues, some of them on the other
side of the aisle--that it can't compete, and yet the private
lenders went in and paid the University of Indiana $3 million
to drop the direct loan program, so apparently they thought it
could compete if it was left to its own.
Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman.
Thank you, General, for your testimony here this morning.
Mr. Chairman, I look forward to supporting your
legislation. I think it is very timely. I wish it weren't
necessary. I wish the Secretary of Education had been more
proactive and aggressive in responding to your requests just a
few days ago.
General, you say you are not a policy maker. You may not
have made policy, but you made a lot of sense and made a lot of
progress already, and we thank you for that.
Mr. Cuomo. Thank you.
Mr. Andrews. You have certainly recovered substantial
amounts of money for students. That is to be commended. You
have induced responsible members of the lending community to
take their own initiative and clear up this problem, for which
we thank you. And you have opened up a very important debate.
I wanted to ask you some questions about how we might build
on your work and prevent this sort of thing from happening in
the future.
With respect to the cases that have already settled, so
there is no litigation strategy you have to disclose, how did
you derive the numbers of the settlements that you agreed to
from the universities with which you settled?
Mr. Cuomo. Thank you, Congressman, for the question. There
are two basic scenarios.
For schools that received payments from lenders that we
believed should not have been received in the first place, and
where the amount of money made it practicable, the school
returned the money that it received from the lender to the
students who took those loans from that lender in that year.
Mr. Andrews. So these were the preferred payments. The
revenue-sharing payments were returned.
Mr. Cuomo. Yes. So if a school received payments from a
lender, under our statements the school gave that amount of
money to the students who took the loans, because my basic
point was that was a cost of the loan.
If the bank had to make a payment to the school, that was a
cost of the loan. If the bank wasn't making that payment to the
school, they could have reduced the cost to the student, so the
school should give the money to the student.
The case we discussed, University of Pennsylvania--that
came out to about $500 per student.
In situations where the students have already been
compensated, or the amount of money just doesn't make sense
from a practical point of view to distribute to the student
body, we have also set up an education fund where we will run a
program to educate high school students about loans and their
parents about the available loans and the best way to get a
loan.
And some schools or lenders are contributing to that fund.
Mr. Andrews. Do you think that the harms that you helped to
remedy here would have been avoided if we had a statutory
requirement that schools make available on a level playing
field basis--the same Web site, the same booklet, whatever--
every private lender that is out there that might bid on the
student's business?
If we opened this up and said, ``Look, if you are going to
refer information about one lender, private lender, you have
got to refer information about all of them that wish to be in
the marketplace,'' would that work?
Mr. Cuomo. Yes, Congressman. I think the point of getting--
breaking the monopoly of the preferred lender list--you have to
break that monopoly.
And that list or those recommendations must be regulated to
the point that the decisions are being made based on the best
interest of the students without any conflict of interest and
not in the best interest of the school.
I am not against preferred lender lists. There are a lot of
lenders out there, and it is very confusing.
And if a school wants to provide a service of doing the due
diligence, and doing the review, and coming up with one or two
or three or four lenders they want to recommend to the
students, because they honestly believe it is in the best
interest of the students, and they have done their homework,
and they say, ``They have the best rates, and they have done
the best servicing, and we have a good relationship,'' fine.
Mr. Andrews. So if we had some fair and open process based
upon criteria of merit, where everyone who passed the merit
could be listed on a Web site or put in a booklet, and then the
student could choose among those competing lenders, do you
think that would remedy the situation?
Mr. Cuomo. Yes. And I think there are two sides to the
equation. Number one, the school has to be making the
determination in the best interest of the student. That should
be the criteria, not what is good for the school, what is good
for the student.
Second, there can't be any other relationships that would
pose a conflict of interest. You can't be a financial aid
officer that is exercising discretion but you are also on the
advisory board of the bank.
Mr. Andrews. Right. Frankly, there is a pattern for this in
other areas of our jurisdiction in labor law, where labor union
officials are not permitted to take any kind of compensation
from the employers from whom they are negotiating in order to
preserve their objectivity. Something like that would probably
work.
Mr. Cuomo. That is exactly right. That is exactly right. It
is done in many other areas.
And I frankly think, Congressman, there is an opportunity
for the federal government here, because as Congressman McKeon
pointed out, we need to restore consumer confidence here.
Students are nervous. Students are asking questions.
The industry needs to restore consumer confidence. The
lenders, the schools, the guarantors--they want to restore
consumer confidence.
Let the federal government lead the way, pass the
regulations, improve the oversight and restore the confidence
of the industry. That is in everyone's best interest.
Mr. Andrews. Thank you very much.
Chairman Miller. The gentleman's time has expired.
Mr. Petri?
Mr. Petri. Thank you, Mr. Chairman.
Thank you, General, for your testimony today. Can you tell
me if you found any examples of abuse or questionable behavior
in the direct loan program, or are all the instances of these
questionable transactions and so on in either the private
market or FFEL program?
Mr. Cuomo. Off the top of my head, Congressman, I don't
know of any cases we brought in the direct loan arena. I
mentioned the ones in the FFEL program, and we were primarily
focused on the private loans.
Mr. Petri. Now, some years ago, when the man you worked for
over at the housing department was leading in this area, we had
50 percent direct loan and 50 percent, about, of the guarantee
program.
Now it is about 80-20. President Bush and his Office of
Management and Budget indicates that the direct loan program
costs about one-third as much as the guarantee program to the
taxpayers.
Do you think the concerns of the taxpayers, if the terms
are equal to students, should be a factor in schools combining
preferred lender lists and this sort of thing?
Mr. Cuomo. Congressman, I don't think we have to choose
between the interests of the taxpayers and the interest of the
students.
Mr. Petri. No, but what about the interest of the schools?
It is not a question of students and taxpayers.
It is a question of direct and indirect, and the guarantee
program, indirect program, costs the taxpayer three times as
much, according to our Office of Management and Budget, as the
direct program.
And the direct program has none of these ethical problems
that you have been mentioning, as best--according to your
testimony, at least.
So why wouldn't we ask that they put the direct program on
any preferred lender list that they decide to do, since the
terms are the same? At least the direct program certainly is
not any higher than these guarantee programs.
Mr. Cuomo. Well, no, Congressman, I agree. The direct
program has significant benefits. And the rates are the same
between the direct program and the so-called FFEL program, but
there is no private lender involved, so there are just fewer
transactions, fewer connections.
And we have not come across any cases in the direct loan
program, but again, our focus was on the private loan program.
We found instances in the FFEL program. We didn't find
instances in the direct loan program.
Mr. Petri. Now, there are a lot of schools that have stayed
with the direct loan program--my state, Marquette University,
Harvard University, Michigan and Minnesota.
And yet we have seen the guarantee program go, despite
that, from maybe 50 percent of the loans up to 80 percent of
the loans.
Why would you think schools have chosen to engage in
transactions with private lenders----
Chairman Miller. Would the gentleman yield, Mr. Petri?
Mr. Petri. Will there be another round?
Chairman Miller. Okay.
Mr. Cuomo. Quickly, first, lenders work very hard,
obviously, to insert their product through the FFEL, the
guarantee program, rather than the direct program. And the
industry is effective. And there are significant incentives
offered to schools to drop out of the direct program and take
the guarantee program.
Mr. Petri. So you don't think there is actually a fair
competition between the direct and the guarantee program in the
marketplace today, and that might account for this?
Mr. Cuomo. I think that is correct.
Mr. Petri. Thank you.
Mr. McKeon. Again, you have just a second left. Just to
clarify the record, as far as I know, the direct lending got up
to about 39 percent. I would just like to have it clarified in
the record whether it is 50 percent or 39 percent.
I believe it is closer to 39 percent, just for the record.*
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*Loan volume in the direct loan program totaled 33 percent at its
peak in award year 1997-1998.
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Chairman Miller. We will get that for the record.
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Mr. Chairman.
General Cuomo, thank you very much for you and your
assistant to come and visit with us here in our committee.
My first question is on the basis of your investigation of
the relationships between college employees and lenders and the
instances you have uncovered of payments or other things of
value being exchanged in return to steering borrowers to
lenders. Are you considering criminal charges?
Mr. Cuomo. That is a good question, Congressman. These
facts present on two levels, if you will. It is the bank-school
relationship and then, at times, the bank-financial aid officer
relationship. And they are two different concepts.
There is an institutional connection at times between the
lender and the school, revenue sharing, printing, et cetera.
And then we have also found cases where they are just--the
individual financial aid officer at times unbeknownst to the
school has a relationship with a lender and puts that lender as
the ``preferred lender'' and then the phenomenon we discussed
before, where the students trust the school, so they go to the
preferred lender.
Those are two very different situations for us. And there
are a number of cases that my office is investigating where the
individual financial aid officer may have been violating laws
beyond just the consumer protection laws, and those are ongoing
investigations in the office.
And yes, there is a potential for criminal charges in those
cases.
Mr. Hinojosa. My next question is do you think that
students and families would be better served if lenders and--if
the lenders marketed directly to them?
What is your obligation--what is our congressional
obligation to assist students and families, many of whom have
limited experience with credit, navigate higher education
finance and student loans?
Mr. Cuomo. I think, Congressman, first, the Department of
Education should do its job. It should be doing the oversight
on the FFEL program and the direct program. I believe the
safeguards should be extended to the private loan program.
And then I would urge action on the situation that has been
uncovered on the preferred lenders and the revenue sharing and
those relationships, and what I believe are distortions made to
students and to parents in selecting the loans when they arrive
at the school.
And I believe this committee and the Department of
Education can resolve that also. And as I said to Congressman
Andrews, I believe the industry is crying out for your guidance
and your intervention.
There is a crisis. Consumers are worried. And the schools
and the lenders are ready to change their ways. They are. You
have seen that just from my actions as one state A.G. They want
to restore the confidence.
Just give them the guidance and the direction and say,
``Here is the new protocol, here is the new behavior, here is
the new regulation,'' and restore the confidence and we can
then answer this question on every campus across the nation.
Mr. Hinojosa. What do you think if we were to require that
students and their parents be given counseling through
financial literacy education programs that are available now,
so that the student and the parent would make an intelligent
decision?
Mr. Cuomo. Congressman, I think the counseling is a good
idea. I think that should be combined with--you know, as an
affirmative counseling effort, but combine that with stopping
the distortive material that they are getting, stopping the bad
information and the bad guidance, and prime among that is the
``preferred lender relationship,'' where they are following the
school's advice, and the school may not be giving that advice
in their best interest.
Mr. Hinojosa. I believe that seeing what has happened in
the home mortgage financing industry, where we have had tens of
thousands of foreclosures, that we are considering requiring
counseling before a mortgage loan is given, and there seems to
be a lot of support in Congress for this.
And so I am trying to see how we could also do the same
thing for this type of a student loan because, in many cases,
particularly in areas that I represent, were it not for a
student loan, our students would not be able to access higher
education.
And I strongly believe that that is going to be a
recommendation that I will be discussing with my colleagues.
I yield back, Mr. Chairman.
Chairman Miller. I thank the gentleman.
Mr. Cuomo. Congressman, if I might--Mr. Chairman, just in
response, I agree with the congressman's statements
wholeheartedly.
And what the housing market did--and I had the opportunity
to work with you on some of those issues, Congressman, years
back--we provided counseling, but we also fought predatory
lending.
To me, this is a fashion of predatory lending. It is not
used normally in the college loan context, that term, but it
could be, because the same types of tactics we saw that we
referred to as predatory lending in mortgages--we are seeing
the same tactics in the college loan, and they predatory, and
there is predatory lending.
So let's attack the predatory lending, and let's put the
counseling in place to offer the affirmative guidance.
Mr. Hinojosa. I thank you.
Chairman Miller. Congressman Kuhl?
Mr. Kuhl. Yes.
Welcome back to Washington, Attorney General.
Mr. Cuomo. Good to see you.
Mr. Kuhl. Nice to see a fellow New Yorker here.
Mr. Cuomo. Yes, sir.
Mr. Kuhl. Nice to see you also leading the way in what is
obviously a very deceptive practice going on today, and I
certainly value your testimony.
A couple of things I want to follow up on with what
Congressman Hinojosa brought forward. And that is in your
testimony, you talk about illegal practices.
I guess it comes from my training as a lawyer as to knowing
exactly what you term to be illegal. I have heard general
references to violations of consumer protection laws and that
sort of thing.
I particularly was interested in the criminal aspects of
this particular practice. And before we get there, we are--or I
should say--and you are concentrating primarily on private
loans, is that correct?
Mr. Cuomo. That is correct, sir.
Mr. Kuhl. Okay. And we recognize, I think, jointly that the
Department of Education has no control over private loans at
this point, is that correct?
Mr. Cuomo. At this point, that is correct, sir.
Mr. Kuhl. Okay. And you are advocating that they do involve
themselves in what really is a free market practice right now
between a school and--a student, I should say, and a creditor,
a bank.
Mr. Cuomo. Well, what I have said about the Department of
Education first is they do regulate the FFEL program, as you
know.
Mr. Kuhl. Right.
Mr. Cuomo. We pointed out a number of instances where the
FFEL program--there were violations in the regulations
concerning the FFEL program--many of the state schools in our
home state of New York, where there are just violations within
the FFEL program--current regulations, no additional
jurisdiction.
The suggestion is there should also be additional
supervision on the private program which would require
congressional action, is my guess.
Mr. Kuhl. Right. And I think you used the statistic 90
percent of the loans that are given are in that private arena,
and that is where you found the violations primarily in your
investigation?
Mr. Cuomo. No, Congressman. Ninety percent is the
percentage of students that take loans from preferred lenders,
the lenders that are on the college preferred list. Ninety
percent of the students follow the school's recommendation.
The private loans are, give or take, about 20 percent of
the entire loan portfolio nationwide, but it is the percentage
of the market that is actually growing dramatically.
Mr. Kuhl. Okay. And to follow up on your testimony relative
to illegal practices, what illegal--under the statutes of New
York that you are sworn to uphold, really occurred in those
instances that your investigation revealed?
Mr. Cuomo. There are two different situations, as we
discussed. First, under the business laws of the state of New
York and the consumer protection laws, it is illegal to have
deceptive business practices.
In our opinion, some of these business practices are
deceptive, where you are getting a ``kickback,'' which is the
term that we have been using this morning, for a loan that was
undisclosed.
You have deceptive business practices, and we protect the
New York consumer. So the rationale for the jurisdiction in
schools in other states--because if New Yorkers are there, and
they are consumers, then we protect the consumers.
Mr. Kuhl. Let me just interrupt for just a minute. On that
specific point, has there been any kind of proactive attempts
to be deceptive by any of the colleges that you have seen, from
material that they have advance?
Or is it an omission act on their part not to disclose
their relationship that we are really kind of keying into, or
that your investigation keyed into here?
Mr. Cuomo. Both.
Mr. Kuhl. Both.
Mr. Cuomo. Both. First, non-disclosure is a problem,
Congressman.
Mr. Kuhl. I am not debating that it is or isn't. I am just
curious from a factual standpoint what your investigation
found. If there were schools that were saying----
Mr. Cuomo. Well, almost all of this that we have been
talking about this morning is a case of non-disclosure.
Mr. Kuhl. Okay. By omission?
Mr. Cuomo. Well, non-disclosure by omission.
Mr. Kuhl. Okay.
Mr. Cuomo. You had an economic incentive in the
transaction, and you never disclosed your economic self-
interest to me.
As a matter of fact, you represented the opposite. You
said, ``This is good for you, Andrew. We think this is a good
business transaction for you, Andrew.'' And you never told me
that you were getting a commission on the business transaction.
I consider that deceptive.
On the situations with the individual, that is a different
situation, because those are--they are not institutional.
These are individuals who were involved in securities
transactions with private companies that violated in some cases
the college code, and possibly violated criminal laws.
Mr. Kuhl. Okay.
Chairman Miller. The gentleman's time has expired.
Mr. Kuhl. My time has expired. Thank you.
Chairman Miller. Ms. McCarthy?
Mrs. McCarthy. Thank you, Mr. Chairman, and thank you for
holding this hearing.
And again, it is good to see you, Attorney General Cuomo.
We have worked together in the past, and hopefully we will work
together in the future.
I have a little bit of a curiosity. I also sit on Financial
Services, and with the banks that you have had statements with,
were they breaking any regulations as far as through the
banking industries? We have three different regulators of
banks.
Are those regulators looking into any of these practices
that you have uncovered?
And I guess the biggest thing is you just came into office
in January. How long do you think these particular practices
have been going on? And how did you pick it up and be able to
do something in such a rapid time, when no one else seemed to
know what was going on?
Mr. Cuomo. Well, Congresswoman, thank you for the question.
And it is a pleasure to be with you once again, and it is a
pleasure to be able to work together on yet another important
issue to New Yorkers and to Americans.
As far as other banking regulators looking at these issues,
I am not aware of that. I wouldn't be surprised, however,
because this is basically a consumer lending transaction where
the bank is offering a consumer loan, a student loan.
The schools are almost de facto brokers, in my opinion,
when they enter into these relationships where they are
receiving a commission.
It is almost like they went into the brokerage business,
undisclosed brokers, and they are receiving a commission for
their brokerage service.
But I am not the banking regulator. It wasn't my
jurisdiction, and we were doing this under consumer protection
laws.
In terms of where did this come from, it is interesting. It
is an industry-wide practice, Congresswoman, that I believe has
evolved over a period of years.
And it is one of those industry practices where it starts
small. It becomes more egregious as time goes on. More people
are doing it. And then you get to a point where basically
everyone is doing it.
Every school seems like they are doing it. Everyone is
going to the conferences. Everyone has a preferred list.
Everyone has revenue sharing. It must be okay if everyone is
doing it.
We have seen these type of situations on Wall Street, where
you have a practice that just grows and grows and grows, and it
becomes very widespread, and people take comfort in the fact
that everyone is doing it, but you scratch the surface and you
really look at the underlying rationale, and it collapses.
And I think that is what happened here. I don't believe the
oversight was adequate. I don't believe the guidance was
adequate. And it grew and it grew and it grew, and people took
comfort that everyone was doing it.
And now the expression we use in the office--it is like
peeling an onion. One situation leads to another, leads to
another, leads to another. And that is what we have been doing
over the past several months.
Again, the good news is the industry gets it. I really
believe that. The schools get it. The lenders get it. Students
understand this issue. And students are now asking the tough
questions.
And the industry really does want to reform the practice,
because they need to. It is like the housing arena. Consumer
confidence drives the market. And they need to restore consumer
confidence.
Otherwise, students are unwilling to take the loans, or
they are asking a lot of tough questions when they take the
loans, and that is actually an opportunity for government.
You are not going to have to fight the market here. You can
do it with the market, because the market needs to restore the
consumer confidence as much as the consumers need the
confidence restored.
Mrs. McCarthy. I personally don't buy it that, you know,
just because everybody was doing it that no one, whether in the
lenders, the bankers or even the schools, had a thought that
this could be wrong. I don't understand that.
Obviously, you know, the banks, the lenders--they all have
spreadsheets. Money is given. Transactions are done. It is like
being on the take. I mean, I am lost on how they didn't think
something was wrong, or not even to report it somewhere, that
someone didn't do it.
Is that what we are seeing? Is that what we are facing,
that corporations today are saying, ``You know, oh, it must be
okay?'' I mean, I am tired of those excuses, to be very honest
with you.
Mr. Cuomo. Well, Congresswoman, I am with you. But that was
where this started. Now, it has unfolded rapidly, but a couple
of months ago when we started this, that is where it started--
everyone does it, there is nothing wrong with it.
Mrs. McCarthy. Thank you.
Chairman Miller. The gentlewoman's time has expired.
Mr. Hoekstra?
Mr. Ehlers?
Mr. Ehlers. Thank you, Mr. Chairman. I apologize for being
late, but I had two other committee meetings I had to attend.
Since I have not spent much time here, I am unprepared to
ask questions, and I plan to yield time to Mr. Keller.
But I just want to thank you for being here. Thank you for
what you have uncovered. I am amazed that we didn't uncover it
ourselves earlier. And I hope we can examine all the student
loan programs and look at some of the programs.
With that, I am pleased to yield the balance of my time to
Mr. Keller.
Mr. Keller. Well, thank you, Mr. Ehlers, for yielding.
Mr. Attorney General, you said your investigation is like
peeling an onion. I can assure you that your investigation,
like an onion, has brought tears to many lenders' eyes here.
You have recovered a substantial amount of money, $6.5
million before today, and then you announced, presumably, a lot
more today.
Who controls that money that you have recovered for this
national education fund?
Mr. Cuomo. The financial payments happen in two areas.
Number one, there are funds that are returned to students
primarily from the schools. If we believe there was a payment
that was questionable, those payments are turned over to the
students.
That is the $500 per student, University of Pennsylvania,
and that has been the majority of the arrangements with the
schools.
Mr. Keller. Let me just stop you on that. First, if it goes
to the school with directions, do you use it for need-based
financial aid, or for anything they want, or how does that
work?
Mr. Cuomo. No, the schools will return--I use the
expression return the money to the students, because my
position is that the students subsidized that payment to the
school.
So the school will return the money to the students who
took loans that year and proportionate to their loan amount. So
if you took a larger loan than I took, you get more money back
than----
Mr. Keller. And that is most of the--say most of the $6.5
million you recovered so far will go back to the schools, at
those particular schools?
Mr. Cuomo. Well, that is one aspect of funding. Another
aspect of funding is primarily from the lenders, where it is
not a question of returning money to students.
My office is going to run an educational program to educate
high school students and parents about the loan programs, the
benefit of programs, but it will be obviously an objective
source of information for high school students and their
parents.
Congressman Hinojosa's point, I think, was very well taken.
The counseling aspect of this is also important.
Understanding the FFEL versus direct versus Stafford versus
Perkins versus private versus PLUS--it gets confusing,
especially for a high school student who hasn't had a lot of
experience in this area, so we will offer an educational
program in that regard.
Mr. Keller. All right. And your office will decide with
respect to those funds from the lenders where that money will
be spent?
Mr. Cuomo. Yes, sir.
Mr. Keller. And so it is a national education fund, so will
it be distributed equally among the states like Florida, or is
New York going to be on the preferred list of receiving those
funds?
Mr. Cuomo. Well, we have a lot of New York students in
Florida schools. We have a lot of New Yorkers who move to
Florida. So it is going to be a prime market for us.
Mr. Keller. We will look closely at that list and make sure
it is not preferred there.
Let me ask you something about this preferred list issue,
anyway. Clear it up for me. It would seem to some of us that
maybe you want to do away with preferred list altogether, but
then on the other hand you have wholeheartedly endorsed
Congressman Miller's Sunshine Act, which doesn't do away with
the preferred list. It just says you have to have a minimum of
three.
Where do you stand on this issue about whether we should do
away with the preferred list or keep them?
Mr. Cuomo. You can either fix it, reform it, or do away
with it. You can't leave it the way it is. I don't believe that
is an option.
If you want to regulate it and reform it, you can keep it.
If you don't believe you have the capacity to do the oversight
or the appetite to do the reform, then do away with it.
I am not against preferred lender lists per se, because--
just the way I am running an educational program to inform high
school students, because this is complicated.
If you have a college that says, ``I will undertake
voluntarily the task of vetting all these lenders, and I will
bring them in, and I will do the interviews, and I will go
through the loan rates, and I will go through the service
records, and I am going to recommend three or four or five
lenders to my student population, only on their best
interest,'' the school says, ``I have no conflict of interest.
My financial aid officer has nothing to do with the
universities. This is just a gratuitous opinion to help my
students,'' that could be a good thing.
But then it has to be regulated. First of all, there have
to be regulations. Then those regulations have to be enforced.
Then there has to be oversight. And you could do that. And that
is a position I endorse.
Or do away with the list. If we don't believe we have that
capacity, then say the schools should not be making
recommendations, should not be steering, because they may be
self-interested, and that could actually be hurting the
consumer interest of the student.
Mr. Keller. Thank you. My time has expired.
Chairman Miller. Thank you.
Mr. Bishop?
Mr. Bishop of New York. Thank you, Mr. Chairman. Thank you
very much for holding this hearing.
Mr. Attorney General, welcome, and we New Yorkers have been
proud to call you one of our own for a long, long time, but we
are particularly proud right now. So thank you very much for
the work that you have done.
Mr. Cuomo. Thank you.
Mr. Bishop of New York. Let me start with an observation.
It is not remotely surprising, in my view, that the private
loans have grown so dramatically in recent years. And in part,
they have grown because of federal policy or federal actions.
You know, college costs are increasing. Only very recently
did we increase the Pell grant maximum for individual students.
We have kept campus-based federal funding constant, I think,
since 2000 or 2001.
The president's budget request to Congress suggested that
we eliminate SEOG, eliminate Perkins loans. So we are leaving
needy students with precious few options if they are going to
attend the colleges of their choice.
What I want to focus on--you have testified and you have
said that you think the lenders get it. You think the schools
get it. You think that they want to reform themselves. You have
entered into 16 or 17 agreements with schools and agreements
with four lenders.
Does your office have the staff to monitor compliance with
these agreements on an ongoing basis, or is that monitoring of
compliance better left to the federal government?
Mr. Cuomo. Congressman, first, thank you very much for your
kind words. We can monitor the agreements that we have signed.
We can monitor the 16 schools. We can monitor the four lenders.
Our agreements were done in such a way that they are relatively
simple to monitor.
Can we replicate the task that the Department of Education
should be doing? Of course not. Could even all the attorneys
general combined be replicating the task of the Department of
Education? I don't believe so.
And that is why there is a federal government. There are
state attorney generals.
But I think the best course is, as a believer in the
federal government, as a former Cabinet secretary who truly has
the highest respect for federal service, I believe through this
committee and the Department of Education federal policy should
be set.
Regulations should be promulgated now for effect. This is
not a question where we need task forces and study groups
before we act. Pass the regulations. Do the oversight.
Mr. Bishop of New York. On the issue of preferred lender
list, I know we have talked about this throughout the morning,
but our legislation basically deals with the issue of preferred
lender list in terms of greater transparency and having schools
provide clear information as to how and why a school came--
pardon me, a lender came to be on a preferred lender list.
Do you believe that is sufficient, or do you think we
should have more extensive monitoring, if you will, or more
extensive efforts to control how preferred lender lists are
developed?
Mr. Cuomo. Congressman, I think you answered both ends of
the equation--the how and why did you pick the lender, and it
can only be with the interest of the students in mind. And
number two, there are no conflicts for the school or the
financial aid officer.
If those two conditions exist, then I think the preferred
lender list can be an asset.
Mr. Bishop of New York. Thank you. And thank you very much
for----
Mr. Cuomo. Thank you. Pleasure being with you.
Chairman Miller. Congresswoman Shea-Porter?
Ms. Shea-Porter. Thank you, Mr. Chairman.
And thank you very much for being here and for your
testimony. I am very concerned about, first of all, the culture
that we have been discussing. It feels like a corrupt culture,
and I have to agree with the congresswoman who said it feels
like on the take.
And I don't understand it. And I am concerned, and I wanted
to read a couple of things that I had seen in an A.P. article,
when they are talking about a senior department student aid
official placed on leave pending an investigation of $100,000
in stock in Education Lending Group, the former parent company
of Student Loan Express.
Do we have a problem inside the Department of Education
here?
Mr. Cuomo. I don't know if we have a problem inside the
department, Congresswoman, just because I haven't done that
work, and it is not my role.
But I agree with the congresswoman and Congresswoman
McCarthy and Congressman Hinojosa on the point that there are
instances of just plain, blunt corruption here.
We have found those instances primarily around the
financial aid officer situations, where individuals in the
financial aid office basically undertook self-dealing, I
believe in violation of the law.
So there are instances of corruption, there is no doubt.
Ms. Shea-Porter. Okay. Also, in the A.P. article it talked
about lenders also would not be allowed to pay college
employees to serve on advisory boards.
That would seem like a no-brainer right away, that you
wouldn't have a college employee on an advisory board of a
lender. Is that very common?
Mr. Cuomo. We have found it. But, Congresswoman, your basic
point I agree with, which is we have to change the culture
here. It is not just a question of a specific fact pattern.
There is a culture.
There are relationships here which have to be changed and
broken, and relationships between the financial aid officers
and lenders, relationships between the schools and lenders. And
there has to be a new code of conduct, we call it, a new
culture defining those relationships.
Ms. Shea-Porter. Perhaps an old code, because I think back
when I was in college, and I don't think we needed all these
laws. People understood, instead of us having to constantly
address it.
And I wanted to disagree with something a colleague across
the aisle said when he was talking about the Department of
Education and wondering if, you know, it should have a role.
It is not the Department of Education. It is the political
people inside the Department of Education that appear to be
falling down on this job.
And so my next question to you is why can't we just have
the federal government--when we look at the problems that we
are having with these preferred providers and others, are they
absolutely a necessary component?
I know when I got my student loans we just had a couple of
choices. Life was easy. Paying back wasn't, but, you know, we
understood what the responsibility was. And we didn't have to
maneuver through all of this.
I look at my own daughter who is in college, and every
single day--and she is not even living at home--I receive for
her an application for a credit card company and for this and
for that.
Is there a way--is there some harm in simplifying this and
saying, ``If you go to college, you are going to get your loan,
these are the federal loans that are available, and we are not
going to put out a menu with 10,000 different companies?'' Is
there something inherently wrong with that?
Mr. Cuomo. Congresswoman, it is a good question. I don't
know the area well enough, frankly, to say whether or not there
could be a consolidation of these different programs.
I ran the Department of Housing and Urban Development as
secretary for 4 years and then assistant secretary for 4 years,
and the constant question was, ``Why do we have to have so many
housing programs? Can't we consolidate these? It is so
confusing.''
There is old language at HUD and housing and different
programs and different acronyms. I don't know student lending
well enough to say whether or not there could be a
consolidation of programs.
And also, competition is a good thing. I believe that. And
putting lenders in competition, who can get the rates down for
students, and who can offer the best package--that is a good
thing.
That is just not what we have now. We have almost the
opposite. We have a virtual monopoly for lenders where 90
percent of the students are going to a selected group of
lenders. The monopoly, if you will, is done through the
preferred lender list.
And the preferred lender list can be a very good thing and
can help guide the students through the maze that you are
discussing. But then it has to be done on the student's
interest, and there can't be conflicts.
Ms. Shea-Porter. Okay, thank you. My time has expired.
Thank you.
Chairman Miller. Thank you.
Mr. McKeon just wanted to make a clarification. Then Mr.
Courtney is next.
Mr. McKeon. Thank you, Mr. Chairman.
Just in clarification, most of the dealings that you had
with these different schools really involved private lending,
is that correct?
Mr. Cuomo. Private lending and FFEL programs.
Mr. McKeon. But most of it--the majority was private
lending.
Mr. Cuomo. We have had activity in both. I would have to
look at how many cases we have done in each to answer your
question.
Mr. McKeon. What we have seen so far that you reported--
most of it was private lending, which we have no--and the
department has no jurisdiction over. It comes under another
committee, the Financial Services.
And also, in the refunding or--what do we call that?--the
revenue sharing--that is already against the law with regard to
the FFEL program. We have already done that. So it is the
private lending, which we have no jurisdiction over now.
If we could go to Mr. Franks and ask him to give up that
jurisdiction, that would be great, and we could get it all here
where we could get our hands on it.
Chairman Miller. He doesn't even have to give it up. He
would just agree with us. We are talking to the committee.
Obviously, there is a number of issues here that stray off in
different directions and different jurisdiction.
Once again, we would like jurisdiction not to become the
issue here. We would like the results of Mr. Cuomo's
investigation and our own legislation and others to be the
results of that, not a jurisdictional fight.
Mr. Cuomo. But just to clarify----
Chairman Miller. Mr. Courtney?
Mr. Cuomo. Excuse me, I am sorry. Just to clarify on the
congressman's point, the Marist College case that we
discussed--that is the FFEL program. New York Institute of
Technology--that is the FFEL program.
Columbia University--that is the FFEL program. SUNY, state
university system of New York, had a college that was engaged
in a FFEL program violation.
So we are talking about FFEL program violations as well as,
as the congressman points out, private loans.
Mr. McKeon. And those are the areas that our bills that we
have introduced we would have----
Mr. Cuomo. Yes.
Mr. McKeon [continuing]. We would have a chance to address.
Chairman Miller. We will come back. Mr. Courtney can see
his time evaporating.
Mr. Courtney is recognized for 5 minutes.
Mr. Courtney. Thank you, Mr. Chairman.
And I want to congratulate the attorney general on the fine
work you are doing. Mr. Blumenthal, your neighbor next door, I
know is working hard to get Connecticut covered as well.
Mr. Cuomo. Oh, he is the dean. He is a great, great man.
Mr. Courtney. I will tell him you said so. When
Congresswoman Shea-Porter talked about how it is hard to almost
understand how much change has gone on for families dealing
with this issue, I mean, one reason I think the change is
happening is that going to college now is like buying a house
in terms of the size of the cost.
And that really has just raised the stakes for everybody in
terms of what--as consumers, but certainly in terms of lenders
as well, in terms of what type of money people can make out of
this process.
And you know, using the house analogy, I mean, it strikes
me that the preferred lender list is almost like saying to
people buying a home, ``You know, we are going to let the home
builder select the top two or three banks that you can buy your
house through.''
And there almost seems to be something almost inherently--a
conflict with having the entity that you are paying be involved
at all in the decision-making.
And it seems to me that using another sort of example where
the government had to come in and sort of straighten out a
marketplace that was out of control was the situation with
Medicare supplemental insurance about 10 years or so ago,
where, again, consumers were being overwhelmed and confused
with insurance companies that were selling Medicare
supplemental insurance policies and ending up with products
that weren't what they were purported to be.
And the government had to step in and basically structure
the marketplace with the A through J different types of plans,
and then allow the insurance companies to compete on price,
which has worked actually pretty well in terms of making sure
that at least from a consumer protection standpoint insurance
policies did cover a basic set of coverages.
But it still allowed a marketplace to give people a choice
in terms of price. And I know you have tried to sort of balance
your testimony in terms of not castigating the notion of
preferred providers list as a--you know, as an option as we
move forward.
But it just seems to me that at some point, you know, it is
a situation in which given, again, the amount of money that
people are having to use in terms of student loans that maybe
colleges and universities really should just be sort of taken
out of this process and allow the government to set up a
separate mechanism for protecting the consumer.
Mr. Cuomo. Well, Congressman, let me respond, and let me be
more direct. Sometimes as a New Yorker I am a little too
reserved and indirect, I have found.
Mr. Courtney. We haven't noticed that at Fenway Park.
Mr. Cuomo. And Congressman Bishop made this point earlier.
This is a double whammy for students and the reason I have a
disagreement with the point that Congressman McKeon raised.
What is really happening is this. The cost of a college
education has skyrocketed. The student loans don't give the
student enough money to pay for the education. The student's
only alternative is to go to the private loans ``alternative.''
The joke is because they have no alternative. That is why
they are taking a private loan, at an exorbitant interest rate,
because federal programs don't provide enough money to pay the
tuition, period.
So if you want to go to college, you take the federal
loans, then you have to take a private loan. Otherwise you
can't afford it.
When you go to the private loans, they are a function of
the private marketplace. There are no caps. There is a high
potential for abuse. They are very expensive.
When you compare this market, this industry, to the housing
mortgage market, in my opinion there is no comparison. The
housing mortgage market is much safer than this market.
These issues of disclosure, these conflicts of interest are
much better protected in the mortgage arena than they are in
the student loan arena.
The ``predatory lending'' that we have talked about in the
housing market arena is a modified version of what we are
looking at in the student lending arena.
So I agree that many students take the private loans as a
last resort because they can't afford the school. They are
unregulated. There is a high potential for abuse. The abuse has
happened.
It is not as well regulated as the housing market, not that
that is perfectly regulated either, and not that there is not
abuse there, but there are many more regulations than you have
in the lending area.
And it is a situation that is only getting worse. And I
would like to see a more aggressive federal response than we
have seen thus far.
Mr. Courtney. Thank you, Mr. Chairman.
Chairman Miller. Mr. Hare?
Mr. Hare. Thank you, Mr. Chairman. Thank you for holding
the hearing this morning.
And, Attorney General Cuomo, thank you very much for coming
and for all the hard work you have done.
And I am happy that on Monday the attorney general of my
state, Lisa Madigan, worked with you, and because of those
efforts two for-profit college systems with headquarters in
Illinois, DeVry University and Career Education Corporation,
agreed to make changes in their student loan practices and to
adopt the code of conduct that you have been talking about for
lenders and colleges alike.
You know, I don't know how many times today I have heard
the term kickback, but it would seem to me--and I agree with
Mr. Payne.
You know, for those students, you know, the $500 per
person, I wonder if for those people who were basically allowed
to be used, if you will--and hopefully the $500 will help
them--if you went into a convenience store in my state, I
believe it is--and you lifted $500 worth of merchandise, I
think that would be a felony.
And it just seems to me that this kind of conduct is just
absolutely insane. And it is wrong. And I just want to, you
know, commend you for the work you have done.
I just want to ask you, on the basis of your investigations
and the relationship between these employees and the lenders,
are you considering filing criminal charges against any of the
folks that have been found to have practiced and engaged in
this?
Mr. Cuomo. There is a possibility of criminal charges
against the--in some of the cases that we are investigating,
yes, Congressman.
And I also agree with you. The expression I used is the
private loans are the Wild West of student lending. And I
believe the federal government does have a responsibility.
And we know there are abuses. We know that it is the area
that is growing. We know that it is highly unregulated now.
And we know that you are dealing--you are preying on a
population of students who are not in the position to protect
themselves and don't really have any alternatives or options.
And why shouldn't the federal government give them the
protection? And I believe this committee can do it, or the
committee could do it working in conjunction with another
committee if there is a jurisdictional debate.
But I think what the consumers across the country are
saying is, ``Please help.'' And I am sure this committee
intends to respond.
Mr. Hare. One other question I wanted to ask you was about
the chairman's bill that I am a co-sponsor of, and I know you
support the Student Loan Sunshine Act.
And from your perspective, if you could tell me or maybe
the committee why you feel that the act is so important and,
you know, why we need it.
I mean, I think I know that, but I am just wondering from
your perspective.
Mr. Cuomo. Well, I think, Congressman, on a number of
levels. Number one, students need help. Parents need help.
Number two, the industry itself needs confidence restored.
And again, we have four of the top lenders in the country--the
four top lenders in the country--just in the past month entered
into settlements with us.
Sixteen schools all across the country, just in the past
month--this is an industry that is crying out for reform and
crying out for a new standard. There is no one better, nobody
better, at providing a national uniform reform standard than
the federal government.
And change comes in a number of ways. And we have done
change through the states, through attorneys general, when the
federal government has failed to act. We did it on Wall Street
when the SEC failed, in my opinion. We have done it in the
environment when EPA has failed.
Arguably, we are doing it now where the Department of
Education has failed. But it is not the best way to do it. I
believe the best way to do it is with deliberate federal
action, not federal inaction where the states fill the void.
Mr. Hare. Attorney General, if you wouldn't mind, I would
like to--with the remainder of my time, Congresswoman Shea-
Porter, I think, has a very important question. I think I will
let her ask it.
But again, I just want to thank you for all your hard work
and continued success in this field. Thank you very much.
Mr. Cuomo. Thank you. It is a pleasure to work with Lisa
Madigan. She is a real pro.
Ms. Shea-Porter. Thank you very much, Congressman.
I wanted to ask a question about a federal database and if
these lenders have had any access to it. I read that recently
they have been banned from accessing a federal database. Was
there any abuse there?
Mr. Cuomo. I only know what I have read in the papers on
that issue, Congresswoman. I don't have any independent
knowledge. But I think the stopping of the access to the
database was a good idea.
Ms. Shea-Porter. Okay. Thank you.
And I yield back. Thank you.
Chairman Miller. Thank you.
Attorney General, you have been very generous with your
time, and I told you I would get you out of here at a
reasonable time. I think I am a few minutes beyond what we
agreed to, but thank you.
Mr. Cuomo. Still reasonable, Mr. Chairman.
Chairman Miller. It is unusual to have one witness have to
field all of the questions. Usually you get to share them with
a panel.
But this has been, I think, very helpful to us, hopefully
helpful to the public in terms of understanding what has taken
place here and what you have uncovered along with the other
attorney generals.
I appreciate your remarks and your support of my
legislation, Mr. McKeon's legislation, and we are going to try
to respond to this in a timely fashion.
But again, thank you so much for your leadership and your
actions that you have taken to date on this matter, and it is
great to have you here in this capacity as the attorney general
of the state of New York.
Thank you very, very much.
Mr. Cuomo. It is good to be back, Mr. Chairman. Thank you.
Chairman Miller. The committee record will remain open for
members for the next 14 days if members have submissions that
they want to make.
I think some members may have additional questions, Mr.
Attorney General, that they may want to submit to you in
writing. If that is all right with you, we would like to be
able to do that.
Mr. Cuomo. It is my pleasure.
Chairman Miller. And with that, the committee will stand
adjourned.
[The prepared statement of Mr. Altmire follows:]
Prepared Statement of Hon. Jason Altmire, a Representative in Congress
From the State of Pennsylvania
Mr. Chairman, thank you for holding this important hearing on
unethical practices that have been discovered in the student loan
industry.
I would also like to thank Attorney General Cuomo for taking the
time to be here today. I appreciate your leadership on this issue and
look forward to hearing your testimony.
Ensuring that higher education is affordable and accessible to all
students is an issue of great importance to me. The state of
Pennsylvania has the fifth most expensive public institutions of higher
education and the tenth most expensive private institutions of higher
education. As a result, loans are an essential part of financing
education for most students in Pennsylvania and getting the best
possible interest rates is crucial to making higher education
affordable and accessible to them.
This Congress has already taken a great first step in making
college more affordable for students by passing the College Student
Relief Act (H.R. 5), which reduces the interest rate on subsidized
student loans from 6.8% to 3.4% over the next five years. Eliminating
the unethical practices that have been found in the student loan
industry, and therefore, helping students and their families receive
the best possible deal is the necessary next step.
I am aware that most lenders and institutions of higher education
are not bad actors, and that many lenders have begun dealing with the
issues that have come to light. Today, I am interested in learning how
Congress can best help make sure that all lenders and institutions of
higher education are held to the same high ethical standards.
Thank you again, Mr. Chairman, for holding this hearing. I yield
back the balance of my time.
______
[Additional submission from Mr. Platts follows:]
Additional Submission From Mr. Platts
Thank you, Chairman Miller. In response to a request from the
Pennsylvania Higher Education Assistance Agency (PHEAA), which has an
office in my Congressional District, I am submitting for the record the
Education Lending Code of Ethics which PHEAA and the American Education
Services (AES) recently adopted.
______
[Statement of the PHEAA and AES follows:]
Prepared Statement of the Pennsylvania Higher Education Assistance
Agency (PHEAA) and American Education Services (AES)
Education Lending Code of Ethics
As America's leading non-profit student aid organization, the
management of the Pennsylvania Higher Education Assistance Agency
(PHEAA) and American Education Services (AES) have adopted the
following Education Lending Code of Ethics as part of an effort to help
ensure integrity in all aspects of the federal student loan program.
This Code of Ethics formalizes long-standing business practices.
This Code of Ethics reflects PHEAA & AES' unique role as a federal
student loan guarantor, servicer and lender, and as Pennsylvania's
legislatively-created agency responsible for administering the
Pennsylvania State Grant and other state-funded programs. This Code of
Ethics supports PHEAA & AES' mission to provide affordable access to
higher education.
No Revenue Sharing Between PHEAA and the School
PHEAA & AES will continue its practice of not providing
postsecondary schools with any financial benefits in exchange for a
competitive advantage or preferential treatment. PHEAA & AES will
continue the policy of not providing monetary incentives to secure a
position as a school's recommended lender.
Gift and Trip Prohibitions
In its role as a student loan lender, PHEAA & AES will not provide
postsecondary school employees with anything exceeding a nominal value.
This includes a strict prohibition on trips for financial aid
administrators and other college officials paid for by PHEAA & AES.
Student Loan Advisory Boards
In its role as a student loan lender, PHEAA & AES will not provide
postsecondary school employees with anything of value in exchange for
their service on an advisory board or compensate them for their service
on an advisory board. PHEAA & AES value the views of the financial aid
community and will continue to seek their input on programs and
services.
Preferred Lender Guidelines
PHEAA & AES believe that the practice of schools recommending
lenders for federal and private loans should be based on the cost of
the loan, the ease and speed of application and funds disbursement and
superior customer service; all of which focus on the best interests and
needs of students with no direct regard for any financial benefit to
the school.
Preferred Lender List Disclosure
PHEAA & AES support transparency in the way lenders are recommended
including the criteria used in recommending lenders. Students and
families must be informed that they may select the lender of their
choice. In all such events, and to safeguard against predatory lenders,
the school should provide information to the student on the best
possible loan options, with the most favorable terms, customer service,
and lender integrity.
Student Loan Resale Disclosure & Borrower Protections
PHEAA & AES pledge to honor all borrower benefits that are promised
to and earned by borrowers, regardless of which lender originated the
student loan. PHEAA & AES believe that all lenders should make the same
pledge to help safeguard the borrower's long-term financial interests.
Lenders should also disclose to borrowers at the time a loan is
originated if they intend to sell their loans to another entity.
Customer Service Integrity
PHEAA & AES' customer service representatives have not and will not
identify themselves to students, families or borrowers as employees of
any school. Nor will PHEAA & AES employees physically work in or
provide staffing to a school's financial aid office. Furthermore, PHEAA
& AES pledge to continue to locate its industry-leading customer
service call centers in the United States, using highly trained
employees to best serve the individual needs of students and their
families.
About PHEAA, Powered by AES
PHEAA is the nation's leading nonprofit student aid organization.
We devote our energy, resources and imagination to developing
innovative ways to ease the financial burden of higher education for
students, families and taxpayers.
Our public service mission is powered by American Education
Services (AES), our commercial business enterprise. The earnings
generated by AES through loan guaranty, loan servicing and student aid
processing systems fund our $72.5 million supplement to the State Grant
Program, millions of dollars in free scholarships and loan forgiveness,
award-winning online planning tools and the nation's lowest-cost
student loans--all at no cost to taxpayers.
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[Whereupon, at 12:16 p.m., the committee was adjourned.]