April 12, 2007

Cuomo Bags a Big One

Another day, another set of developments in the distinct but interrelated government investigations into practices in the student loan industry. All three of the major players in the unfolding inquiries acted Wednesday:

• New York Attorney General Andrew M. Cuomo announced that Sallie Mae, the nation’s biggest lender to students, had agreed to end some of its practices and put $2 million toward a borrower education fund to end the state’s review of the company. But Sallie Mae officials said that the settlement — which committed the company to abiding by the code of conduct that the attorney general is seeking to impose on colleges and lenders — pleased them and suggested that it showed the company had not engaged in any egregious practices.
• Sen. Edward M. Kennedy (D-Mass.) had a busy day: He asked the Securities and Exchange Commission to look into findings he said he had uncovered that three university financial aid administrators and a currrent U.S. Education Department official had bought shares in a loan company “at a significant discount” from the company’s president. And he asked the presidents of three universities (two of those involved in the stock sale, and one other) for all documents related to their aid officials’ relationships with the loan company, Student Loan Xpress.
• Rep. George Miller (D-Calif.), who heads the House of Representatives Education and Labor Committee, said his panel would hold a hearing on the investigative hearing into the “unethical practices and conflicts of interest that have recently been revealed within the student loan industry,” and that the star witness would be ... Cuomo.

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With the “assurance of discontinuance” its officials signed Wednesday, Sallie Mae became the second major lender (following Citibank, which settled with Cuomo last week) to agree to abide by the attorney general’s code of conduct. Under the accord, Sallie Mae did not formally admit to any wrongdoing (though it suggests that the lender did break New York law), but it agreed that it would:

• Stop paying travel and hotel expenses for the college officials on its advisory board to attend its occasional meetings. Tom Joyce, vice president for corporate communications at Sallie Mae, said the company several months ago had ended the $300 to $350 per-meeting honorariums that it had previously paid to its advisers, but that the lender would maintain the advisory boards themselves.
• Phase out the arrangements it has with financial aid offices at 19 colleges to have employees at its call centers answer inquiries from students about financial aid matters. Under the agreement, Sallie Mae will have up to 18 months to end its existing contracts, and it agreed not to create any more such arrangements. Sallie Mae declined to identify the colleges, although recent press reports have identified some of them.
• “Donate” $2 million to a fund the attorney general is creating to educate high school seniors and their parents about the financial aid process. The agreement says that the payment is “in recognition of the attorney general’s leadership in improving the circumstances under which education financing is made available to college students and consistent with Sallie Mae’s commitment to educating the public about the financial aid process.” Joyce disputed a reporter’s assertion that the $2 million payment appeared to be a fine. “We do not see it that way. We voluntarily entered into this agreement. We were asked to contribute, and it fits in very well with a number of efforts we’re funding around the country.”

A news release from the attorney general’s office said that Sallie Mae’s “adoption of this code of conduct will affect millions of students and thousands of schools around the country, and will help set a new industry standard that all lenders should adopt... With Sallie Mae’s $2 million contribution to an education fund, thousands of college bound students will now have more information on how to wisely choose the best student loan for them.”

The agreement is just as notable for what it seemingly will continue to allow Sallie Mae to do as for what it will stop the lender from doing. Although Cuomo had in some of his early statements about lender wrongdoing harshly criticized “opportunity loans” — which are made to students who might otherwise not qualify for them, sometimes in exchange for a college’s business or other concessions — the agreement with Sallie Mae appears to allow the lender to continue to offer them unless the opportunity loans are “offered in return for, or in exchange for, a specified loan volume from the institution of higher education or placement on the institution’s preferred lender list.”

Joyce of Sallie Mae said the lending giant was pleased with the resolution to the attorney general’s review, which began with a letter Sallie Mae received December 23.

“We have cooperated with the inquiry since it began, and we have been confident throughout that our policies would stand tall, and they have,” he said. “We were very pleased that the attorney general stood up today in front of reporters and others and said that Sallie Mae had not engaged in the egregious activities he’s found from other lenders. We credit him for shining a light on what we feel are egregious marekting activities going on.”

Joyce said that he did not believe that any of the changes the agreement will require of Sallie Mae will result in “material changes to the business.” But he suggested that some of them could ultimately hurt colleges; for instance, several of the customers of its “Campus Assist Program” call centers may well see increased costs if they have to hire more full-time staff members to answer questions from students at busy times of year.

Kennedy Steps Up His Review

In what has at times seemed like a competition (but clearly a cooperative one) between Cuomo and Congressional Democrats, Kennedy, particularly, kept pace on Wednesday.

In the wake of revelations last week that financial aid officers at Columbia University, the University of Southern California and the University of Texas at Austin and an Education Department official who oversees the loan industry all owned stock in Student Loan Xpress, Kennedy, who heads the Senate Committee on Health, Education, Labor and Pensions, said Wednesday that his own investigation had found that the company’s now-president, Fabrizio Balestri, had sold the stock to the officials in 2001 at a significant discount from its market value, and that the way he had sold the stock (after purchasing the stock himself in a transaction known as a “private placement") might have violated federal law. Kennedy said his review showed that the lender had gained an increasing share of the universities’ loan business after the stock transaction.

“The characteristics of this transaction, especially Mr. Balestri’s apparent effort to conceal his sale of shares to financial aid administrators and an Education Department official, raise significant concerns about its legality under securities laws,” Kennedy said in a news release. “It also raises the question of whether a quid pro quo existed between these financial aid officers and Student Loan Xpress.” Kennedy released the text of a letter that he said he had sent to the chairman of the Securities and Exchange Commission asking it to review the transactions.

Also Wednesday, Kennedy asked officials at Southern California and Texas for information about the universities’ relationships with Student Loan Xpress. He sent a similar letter to Johns Hopkins University, which on Monday suspended its financial aid director with pay amid allegations that she had received tens of thousands of dollars in consulting fees from Student Loan Xpress, which appeared on its preferred lender list.

Wednesday’s announcement by Miller that the House Education and Labor Committee would hold a hearing April 25, featuring Cuomo, more or less assured (as if there was any doubt) that the drumbeat of news flowing from the multiple student loan investigations will continue unabated.

— Doug Lederman

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