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Colleges Agree to Clean Up Student Lending Practices

Schools Agree to Reimburse $3.2 Million, Citibank Funds Education Effort

April 2, 2007

ews04#149; New York Lawmakers Toughen Student Loan Rules • Multi-State Agreements Reached in Student Loan Investigation • Colleges Agree to Clean Up Student Lending Practices • New York Sues Student Loan Lender • 529 Plans: A Tax-Free Way to Save for College • Why Does College Cost So Much? • Financial Aid Information --- • More about Education

Major universities in the Northeast have pledged to clean up their student-loan operations and reimburse to students the kickbacks the colleges received from lenders.

New York Attorney General Andrew M. Cuomo announced the settlements today, and said the universities have agreed to adopt a new College Code of Conduct.

The schools include the State University of New York's 29 four-year campuses (SUNY), Fordham University, Long Island University (LIU), New York University (NYU), St. Lawrence University, Syracuse University and the University of Pennsylvania.

At the same time, Citibank, the nation's largest bank with student-loan business at about 3,000 schools, agreed to voluntarily adopt practices in the Attorney General's College Code of Conduct, which will now govern Citibank's student loan business practices with all schools.

Citibank also agreed to commit $2 million to a newly created national fund administered by the state Office of the Attorney General to educate college-bound students and their parents about the student-loan industry.

Under the settlements, schools will make the following aggregate reimbursements to students:

• NYU -- $1,394,563.75 covering students who received loans issued over a five-year period.
• St. John's University -- $80,553.00 for loans issued over a one-year period.
• Syracuse University -- $164,084.74 for loans issued over a two-year period.
• Fordham University -- $13,840.00 for loans issued over a one-year period.
• University of Pennsylvania -- $1,617,580.00 for loans issued over a two-year period.
• Long Island University -- $2,435.41 for loans issued over a one-year period.

Cuomo applauded the cooperation received from Citibank and the schools that agreed to the settlements announced today.

"These schools and Citibank have made the responsible choice and are showing themselves to be industry leaders by being the first to take a major step in cleaning up a system laden with conflicts of interest," Cuomo said.

"We are beginning the process of restoring trust between universities and students and now is the time for other schools and lenders to step up and end the conflicts, perks and revenue sharing that have been costing students in New York and across the country dearly," Cuomo said. "These schools and Citibank are setting the example the entire industry should live by."

The Attorney General's College Code of Conduct, included in all of the settlements announced today, prohibits revenue sharing from lenders to schools, includes disclosure standards and restrictions on how lenders are chosen for school "preferred lender" lists, and bans gifts or trips to the university employees from lenders.

The Code of Conduct also prohibits lenders from staffing or paying for the staffing of any component of the university financial aid offices and outlines guidelines for other aspects of the lender-university relationship.

The Code of Conduct includes:

• Colleges are prohibited from receiving anything of value from any lending institution in exchange for any advantage sought by the lending institution. This severs any inappropriate financial arrangements between lenders and schools and specifically prohibits "revenue sharing" arrangements. Lenders can no longer pay to get on a school's preferred lender list.

• College employees are prohibited from taking anything of more than nominal value from any lending institution. This includes a prohibition on trips for financial aid officers and other college officials paid for by lenders.

• College employees are prohibited from receiving anything of value for serving on the advisory board of any lending institution.

• College preferred lender lists must be based solely on the best interests of the students or parents who may use the list without regard to financial interests of the College. This ensures that preferred lenders will be those the school has determined should be preferred by students as opposed to preferred by the school.

• On all preferred lender lists the College must clearly and fully disclose the criteria and process used to select preferred lenders. Students must also be told that they have the right and ability to select the lender of their choice regardless of the preferred lender list.

• No lender may appear on a preferred lender list if the lender has an agreement to sell its loans to another lender without disclosing this fact. In addition, no lender may bargain to be a preferred lender with respect to a certain type of loan by providing benefits to a College as to another type of loan.

• Colleges must ensure that employees of lenders never identify themselves to students as employees of the colleges. No employee of a lender may ever work in or provide staffing assistance a college financial aid office.

Consumers Union, publishers of Consumer Reports Magazine, applauded the settlement.

"Consumers Union commends Attorney General Cuomo for moving swiftly to stop unfair practices, secure compensation for students and their families and improve public oversight," said Chuck Bell, programs director for Consumers Union.

"With the skyrocketing costs of college tuition, students and parents need fair play and straight information from universities and lenders. This Code of Conduct will transform the lending process, result in more affordable loans for students and their families and should be viewed as a model for widespread adoption by schools and lenders across the nation."

"The College Code of Conduct spells out in black and white that no lender may pay a school for placement on a preferred lender list and no school may hide the reason it chose to recommend a particular lender," Cuomo said.

The settlements with New York University, Syracuse University and the University of Pennsylvania cover their relationship with Citibank by which the schools received payments from Citibank on the basis of loan volume. The SUNY, Fordham, LIU, St. Lawrence and St. John's settlements covered their relationships with San Francisco-based Education Finance Partners (EFP) and/or other lenders.

The money will be distributed back to the individual students on a pro rata basis, depending on how much each student borrowed and at what rate. For students who cannot be located, the money designated for their account will be placed in the fund to educate college-bound students about the student lending industry.

Today's announcement covered the first series of settlements in Cuomo's ongoing and expanding nationwide investigation into conflicts of interest in the student loan industry. It also represented a landmark reform to the $85 billion-per-year student lending industry.

On March 22, Cuomo announced that his office had begun legal action against EFP for its scheme of providing payoffs to more than 60 schools across the country that steered student-loan business to them. That case is still pending and talks are ongoing with a variety of other schools and lenders. Since then, the investigation has broadened to more than 100 schools and more than six lenders.

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