June 2, 2007
U.S. Puts Limits on Lenders’ Ties to Universities
By JONATHAN D. GLATER
The Education Department, criticized for lax oversight of student loans, released proposed rules yesterday that would set new standards for universities and ban lenders’ marketing practices that have resulted, in some cases, in loan company payoffs to university officials.
The 225-page package represents a change in direction by the department, which for years had ignored calls by its inspector general, Democratic lawmakers and even some loan-industry officials for it to be more aggressive in policing the $85 billion student loan industry.
The rules would for the first time require universities to include at least three loan companies on any list of lenders they recommend to students and would ban many of the gifts and payments to financial aid officials that lenders have been offering to win student loan volume. The rules would bar everything from travel and entertainment expenses to providing staffing for college aid offices.
They would modify the existing framework, which applies only to federally guaranteed loans, “to strengthen and improve the administration of the loan programs,” the proposal states. The agency said the rules had been sent to the Federal Register for a 60-day comment period. If approved, they would take effect next summer.
Education Secretary Margaret Spellings created a task force in April to draw up the rules after an effort to win consensus on a similar package among representatives of students, lenders and academic institutions in a process known as “negotiated rule making” collapsed.
In the past few months, investigations in Congress and in the states, led by Attorney General Andrew M. Cuomo of New York, turned up an array of undisclosed relationships between universities and lenders, and conflicts of interest on the part of aid administrators. Some university officials who were promoting particular lenders had received stock on favorable terms, consulting payments or gifts from loan companies.
Just this week, the Education Department’s own inspector general reported to Congress that the department had made “minimal” progress in dealing with complaints about abuse in the nation’s government-backed student loan program.
Lenders by law have long been barred from offering inducements to gain loan applications. But what is an inducement is not entirely clear. In 2003, an assistant inspector general criticized the department for not giving any updated opinions about what kinds of incentives were barred since 1995, even though competition for loan business had escalated sharply since then.
Department officials have said in the past that they did not have the authority to oversee many of these practices because they involved private loans — those not guaranteed by the government. They had said they wanted aid administrators and the loan industry to police themselves.
The proposed regulations would still cover only federally guaranteed loans. They identify specific practices that would be barred, including “offering, directly or indirectly, any points, premiums, payments or other benefits to any school or other party to secure” student loan volume. Lenders who offer inducements run the risk of losing the federal guarantee on affected loans, under the proposal.
The rules would also ban a college’s “access to a lender’s other financial products, computer hardware, and payment of the cost of printing and distribution of college catalogs and other materials at less than market rate.” They also make clear that lenders cannot try to get around them by offering benefits to “school-affiliated” groups, like alumni organizations.
In addition, they would require that a university’s list of recommended or “preferred” lenders exclude any that provided incentives. Perhaps most importantly for students, universities would be required to explain how and why they recommend specific lenders and to ensure that all students, not just a few, receive the benefits offered by a lender on a preferred list.
In explaining the need for the regulations on inducements, the department stated that “this guidance, and the general requirements of the law, may no longer be generally known and understood by lenders and other participants” in the federally guaranteed loan program, because the last guidance was provided in 1995.
The rules appeared to be unlikely to meet much resistance. The Consumer Bankers Association indicated that it would seek minimal changes, particularly since Congress is already moving to enact even tougher restrictions.
John Dean, special counsel to the Consumer Bankers Association, said, “I think that you’ll have a series of largely technical comments.”
Lenders, he said, “have come to embrace the inevitability of reform and in many cases welcome it.”
And on Thursday the trade group representing college financial aid officers agreed to bar its members from accepting most gifts and to stop allowing lenders to sponsor its conferences.
Democratic lawmakers in both the House and the Senate who have championed legislation on the student loan industry offered cautious support but also criticized the Education Department for not acting more quickly. So did Mr. Cuomo.
“It has taken far too long for the Department of Education to act,” Mr. Cuomo said in a statement. He noted that the proposed rules would not require preferred lenders to be selected solely on the basis of the best interests of student borrowers. “This seems to be a gaping hole in the regulations,” Mr. Cuomo said.
Robert Shireman, a higher education policy adviser in the Clinton administration who is executive director of the Institute for College Access and Success, said that the rules could still allow philanthropic gifts by lenders to universities that might not be explicitly linked to loan volume.
“There can be the same kind of wink and a nod that occurs around campaign contributions,” Mr. Shireman said, adding that some of the proposals in Congress are stricter.
Separately, the Education Department announced Friday that Ms. Spellings had named Lawrence Warder as acting chief operating officer of the office of Federal Student Aid, previously overseen by Theresa S. Shaw, who stepped down.
Mr. Warder, who has been chief financial officer of the education agency since July 2006, previously worked for years as a management consultant at Deloitte Consulting.
Investigations of conduct in the student loan industry are not over. Yesterday, Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Banking Committee, announced plans for a hearing on Wednesday to explore ties between lenders and colleges and universities.
Copyright 2007 The New York Times Company
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