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1 U.S. Puts Limits on Lenders Ties to Universities - Ne... 1 of 2 6/4/2007 9:39 AM 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

2 U.S. Puts Limits on Lenders Ties to Universities - Ne... 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 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 Privacy Policy Search Corrections RSS First Look Help Contact Us Work for Us Site Map

3 1 of 3 6/4/2007 9:40 AM Monday, June 4, 2007 Education Dept. Proposes New Rules for Student-Loan Programs to Crack Down on Abuses By KELLY FIELD The U.S. Department of Education has issued a package of proposed changes in the student-loan programs, six weeks after negotiations over the changes ended in an impasse and a month after the attorney general of New York accused the department of exercising lax oversight of the programs. Washington The proposed regulations, a 225-page document that was posted on the department's Web site on Friday, represent the department's most significant response to date to the continuing controversy over conflicts of interest in the student-loan industry. Among other things, the proposals would establish strict new rules for the use of preferred-lender lists and clarify what constitutes a "prohibited inducement" under federal law. At the heart of the college-lender scandal have been accusations that some colleges and college officials have taken kickbacks and gifts from lenders in return for steering borrowers to them. Some two dozen colleges and half a dozen lenders have signed agreements pledging to observe a code of conduct drawn up by the attorney general of New York, Andrew M. Cuomo, who has led an investigation into the controversy. Top student-aid officials at four universities, and in the Education Department itself, have resigned, been fired, or been suspended as a result of the scandal. As the scandal has unfolded, the department has drawn sharp criticism -- from Mr. Cuomo and from Democrats in Congress, among others -- for doing little to stem abuses in the student-loan programs. Mr. Cuomo said the department was "asleep at the switch," and the department's own inspector general said in a report last week that it had made "minimal" progress in dealing with fraud and abuse in the programs. The department began working on the rule changes last winter, before the scandal erupted, when it convened a panel of negotiators from colleges, student groups, and loan companies to discuss its proposed revisions. The committee met over the course of four months but ultimately failed to reach consensus on several of the regulations offered by the department. The group's lack of agreement left Ms. Spellings free to make any changes in the programs that she wished. The proposals announced on Friday will go into effect, probably next summer, after a routine 60-day period of public comment. The regulations contain some changes that were unpopular with the negotiators, though they also contain some compromises and concessions. Restrictions on Preferred-Lender Lists Under the proposed rules, colleges would be required to include on their preferred-lender lists at least three lenders who are not affiliated with each other. Colleges would also be required to provide borrowers with comparative information on interest rates and benefits offered by the preferred lenders. If a college included a lender that offered interest-rate or fee reductions, it would have to ensure that the lender provided those benefits to all students at the college, not just to a subset, such as students deemed better credit risks.

4 2 of 3 6/4/2007 9:40 AM In addition, the regulations would require colleges to disclose to borrowers the "method and criteria" they had used to pick the lenders and to notify borrowers that they may choose a lender that is not on the list. Colleges could not recommend lenders that had offered payments or other inducements in exchange for placement on the list. The regulations would also clarify what lenders could and could not offer colleges to secure loan applications or a spot on a preferred-lender list. Among other things, the rules would bar lenders and guarantee agencies from offering: additional financial aid or prizes; computer hardware; payment of conference or training registration, transportation, and lodging costs; entertainment expenses; and staffing services on more than a short-term, nonrecurring emergency basis. The rules would allow lenders to continue to offer reduced interest rates and fees; items of "nominal value"; and meals, refreshments, and receptions at conference events, as long as the events were open to all attendees. Guarantee agencies would be allowed to pay travel and lodging costs for college employees who attended training programs or meetings of the agencies' governing or advisory boards. In cases where the department took action against a lender or guarantee agency for an alleged violation of the ban on inducements, the lender or guarantee agency would be required to prove that it had not offered a payment or other benefit as a "quid pro quo" for loan applications or loan volume. In addition, borrowers at nonprofit institutions would be allowed to take legal action against a lender for violating the inducements ban. Only borrowers at for-profit institutions now have that right. New Rules on Perkins Loans The rules would also make changes in several areas unrelated to preferred-lender lists and inducements. Among other things, the plan would raise the proposed cap on the fees that colleges could collect on students' unpaid Perkins loans and would give the education secretary the authority, in certain circumstances, to strip colleges of the right to collect such loans. Under the proposed regulations, colleges would be allowed to charge borrowers 30 percent of the total of principal, interest, and late charges on first efforts at collection, 40 percent on second collection efforts, and 40 percent, plus litigation costs, in cases where colleges go to court to collect the loans. The secretary could require a college to hand over a loan to the federal government for collection if the amount of the loan was more than $100, the loan had been due for at least seven years, or the borrower had not made a payment in a year. The regulations would also: Allow lenders to provide a 90-day forbearance to individuals who had begun the process of obtaining a loan discharge because of identity theft. Permit lenders to accept photocopies of death certificates as proof that a loan is eligible for discharge. Under current law, lenders can accept only the original or a certified copy as proof. Require colleges to notify graduate students seeking PLUS loans of their eligibility for Stafford loans and provide the borrowers with a comparison of the terms offered by the two types of loans. Establish separate entrance-counseling requirements for graduate PLUS borrowers with prior Stafford loans and graduate PLUS borrowers without prior Stafford loans. Let institutions certify a single loan for borrowers in nonterm or nonstandard-term programs in excess of 12 months. Limit when lenders can capitalize interest on consolidation loans that are in deferment or forbearance. The regulations would allow capitalization only when a borrower changed status at the end of a period of deferment or forbearance.

5 3 of 3 6/4/2007 9:40 AM Allow lenders, the department, and colleges participating in the Perkins loan program to provide a deferment to a borrower if another lender or the department had issued a deferment for the same reason and for the same time period. That provision would apply to loans issued on or after July 1, Make permanent a regulation that allows family members to request military deferments on behalf of borrowers who are on active duty. Carry out a law that eliminated the ability of lenders to enter into new eligible-lender-trustee relationships with colleges or "school-affiliated organizations" as of September 30, Under such arrangements, colleges or affiliated organizations would hire banks that participated in the guaranteed-student-loan program to serve as trustees for the loans they made. The banks would hold the legal title to the loans, and would ultimately be held responsible by the government if the lenders violated statutory or regulatory requirements or could not meet their financial obligations. Define a "school-affiliated organization" to include alumni associations, foundations, athletics organizations, and social, academic, and professional organizations. Require colleges, lenders, and guarantee agencies to report enrollment and loan-status information to the National Student Loan Data System by the deadline date established by the education secretary. Require colleges to retain loan-disbursement records and electronic authentication and signature records for each loan made to a borrower on a master-promissory note until the loan was canceled, repaid, or otherwise satisfied. Specify that to qualify for a child- or family-service cancellation on a Perkins loan, a borrower must be a full-time employee of a child- or family-service agency providing services "directly and exclusively" to high-risk children from low-income communities. Immediate reaction to the regulations was mixed. Sen. Edward M. Kennedy, the Massachusetts Democrat who leads the Senate's education committee, called the proposals a "positive development." But he hinted that bipartisan legislation pending in his committee would take a stronger stand on ethics in the student-loan industry. Lenders seemed largely satisfied with the regulations, seeing them perhaps as a way to insulate themselves from the smoldering scandal. John Dean, special counsel to the Consumer Bankers Association, told The New York Times that lenders had accepted "the inevitability of reform." Mr. Cuomo was not satisfied, saying in a written statement that "a gaping hole" in the regulations would still allow colleges to pick preferred lenders for reasons other than the best interests of the student borrowers. Copyright 2007 by The Chronicle of Higher Education Subscribe About The Chronicle Contact us Terms of use Privacy policy Help