New York Attorney General Andrew Cuomo reached settlements with seven student-loan firms requiring them to abandon alleged inducements and deceptive marketing, and jointly pay $1.4 million into a special fund.An eighth lender agreed to adopt a related code of conduct voluntarily and will not pay into the fund, which will be used to educate students and parents about the loan process.
Mr. Cuomo, whose office began investigating the student-loan industry last year, called the settlements “a major step toward cleaning up an industry where false and misleading advertising practices have been all too rampant.”
The settlements are the result of a probe that began last October, when Mr. Cuomo issued subpoenas and document requests to 33 companies involved in making so-called direct-to-student loans. A fast-growing part of the student-loan industry, such private student loans are heavily advertised on television and the Internet, with some lenders advertising that students can quickly borrow $40,000 and more. Direct-to-student loans are often made without the knowledge of college officials and typically involve higher interest rates than federal student loans.
Mr. Cuomo said the investigation uncovered widespread use of deceptive practices that are banned under the new code of conduct. They allegedly included: using logos and return addresses designed to make loan solicitations look like they were from the federal government; offering students inducements such as iPods and gift cards; and making false rebate offers on existing loans to persuade students to borrow more money. “They are preying on young people,” Mr. Cuomo said in an interview. In their settlement agreements, the lenders didn’t admit or deny using such tactics.
Terry Hartle, senior vice president of the American Council on Education, a college trade group, said many educators and policy makers have been concerned about the marketing described by New York.
The lenders that agreed to the settlements are: Inc., Campus Door Inc., GMAC Bank, NextStudent Inc., Xanthus Financial Services Inc., EduCap Inc. and Graduate Loan Associates LLC.
Nelnet spokesman said his company “continues to be in the forefront of increasing transparency and disclosure” in the industry. EduCap said it welcomes the opportunity to “embrace” the new code of conduct. A spokeswoman for GMAC Bank said it denies any violation of the law. Other lenders involved either didn’t respond to requests to comment or couldn’t be reached.
MRU Holdings Inc., doing business as My Rich Uncle, is adopting the code voluntarily and wasn’t involved in a settlement.
A senior staffer in the attorney general’s office said other lenders remain under investigation for their direct marketing.
The latest settlements mirror those hammered out with 26 schools and 13 lenders since last year amid Mr. Cuomo’s probe into colleges and their ties to lenders.
By: Robert Tomsho
Wall Street Journal; September 10, 2008
