```

[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]

 
                     EXAMINING UNETHICAL PRACTICES
                      IN THE STUDENT LOAN INDUSTRY

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, APRIL 25, 2007

                               __________

                           Serial No. 110-26

                               __________

      Printed for the use of the Committee on Education and Labor

                       Available on the Internet:
      http://www.gpoaccess.gov/congress/house/education/index.html

34-603 PDF                 WASHINGTON DC:  2007
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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Ranking Minority Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Ric Keller, Florida
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           John Kline, Minnesota
Danny K. Davis, Illinois             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            Dean Heller, Nevada
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                   Vic Klatt, Minority Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on April 25, 2007...................................     1

Statement of Members:
    Altmire, Hon. Jason, a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............    40
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     4
        Prepared statement of....................................     6
        Letter, dated April 10, 2007, from the office of the 
          Attorney General of South Carolina to the office of the 
          Attorney General of New York...........................    17
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     3
    Platts, Hon. Todd Russell, a Representative in Congress From 
      the State of Pennsylvania, submission for the record.......    41
        Statement of the Pennsylvania Higher Education Assistance 
          Agency (PHEAA) and American Education Services (AES)...    41

Statement of Witnesses:
    Hon. Andrew M. Cuomo, Attorney General, State of New York....     7
        Prepared statement of....................................    11

                     EXAMINING UNETHICAL PRACTICES
                      IN THE STUDENT LOAN INDUSTRY

                              ----------                              

                       Wednesday, April 25, 2007

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 10:33 a.m., in Room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Kildee, Payne, Andrews, 
Hinojosa, McCarthy, Tierney, Kucinich, Wu, Davis of California, 
Bishop of New York, Sestak, Loebsack, Hirono, Altmire, Yarmuth, 
Hare, Courtney, Shea-Porter, McKeon, Petri, Hoekstra, Castle, 
Ehlers, Platts, Keller, Kline, Kuhl, and Walberg.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jeff Appel, GAO Detailee; Adrienne Dunbar, 
Legislative Fellow, Education; Sarah Dyson, Administrative 
Assistant, Oversight; Gabriella Gomez, Senior Education Policy 
Advisor (Higher Education); Ryan Holden, Senior Investigator, 
Oversight; Lloyd Horwich, Policy Advisor for Subcommittee on 
Early Childhood, Elementary and Secretary Education; Lamont 
Ivey, Staff Assistant, Education; Thomas Kiley, Communications 
Director; Deborah Koolbeck, Policy Advisor for Subcommittee on 
Healthy Families; Ann-Frances Lambert, Administrative Assistant 
to Director of Education Policy; Danielle Lee, Press/Outreach 
Assistant; Ricardo Martinez, Policy Advisor for Subcommittee on 
Higher Education, Lifelong Learning and Competitiveness; Alex 
Nock, Deputy Staff Director; Joe Novotny, Chief Clerk; Lisette 
Partelow, Staff Assistant, Education; Rachel Racusen, Deputy 
Communications Director; Julie Radocchia, Education Policy 
Advisor; Michael Zola, Chief Investigative Counsel, Oversight; 
Mark Zuckerman, Staff Director; James Bergeron, Minority Deputy 
Director of Education and Human Services Policy; Robert Borden, 
Minority General Counsel; Kathryn Bruns, Minority Legislative 
Assistant; Taylor Hansen, Minority Legislative Assistant; 
Victor Klatt, Minority Staff Director; Susan Ross, Minority 
Director of Education and Human Resources Policy; and Linda 
Stevens, Minority Chief Clerk/Assistant to the General Counsel.
    Chairman Miller [presiding]. The Committee on Education and 
Labor will come to order for the purposes of holding a hearing 
on ``Examining Unethical Practices in the Student Loan 
Industry.'' And a quorum being present, we will begin.
    Good morning, and welcome to this morning's hearing on 
examining the unethical practices in the student loan industry.
    Today we have asked the honorable Andrew M. Cuomo to 
provide an overview of his investigation into the egregious 
practices in the student loan industry and to share his 
thoughts on how we may address these issues at the federal 
level. It is our hope to continue to build on the good work of 
the attorney general.
    This hearing comes at a time when it is getting harder and 
harder for our nation's students and families to afford 
college.
    One of the major focuses of this Congress is how to help 
students and their families finance a college education.
    We have already taken critical first steps to do just that 
by voting to cut interest rates in half on need-based federal 
student loans and by significantly raising the Pell grant 
scholarship funds available.
    We also have introduced legislation to boost financial aid 
for students at no new cost to the taxpayers by making the 
federal student loan programs more efficient.
    But as we work to make colleges more affordable, we also 
have the obligation to make sure that our nation's federal 
student loan programs are working as intended, to help students 
and families pay for college.
    It has become extremely clear that these programs have been 
hijacked by third parties who are more interested in boosting 
their bottom lines than serving the best interests of students 
and families.
    Between the conflicts of interest, the unethical practices 
revealed between lenders and schools, the improper use of the 
National Student Loan Database, to questionable stock holdings 
by public officials, we are talking about a system that is 
spinning out of control.
    The blame rests not just with the lenders and the 
individuals who have exploited these programs but also with 
this administration.
    Its failure to conduct proper oversight or to hold the 
industry accountable has harmed students and families, 
borrowers and taxpayers, all of whom ultimately pay the price 
for these corrupt practices.
    Here in Congress, we have launched our own investigation 
into the student loan industry and their practices and the 
environment that has allowed this corruption to flourish.
    We are closely examining the relationships and the 
conflicts of interest between the lenders, the financial aid 
officers, and public officials who are responsible for 
administering the student aid program.
    And given just how little has been done to protect the 
students and their families from the abuse in this program, 
last week I called on the secretary of education to immediately 
take the following actions to eliminate the corruption and 
cronyism within the student loan industry.
    I asked her to impose a moratorium on the use of preferred 
lender lists, to clearly define and end bribes paid by lenders, 
to require full disclosure by lenders and schools and their 
relationships, and to instruct schools and lenders to cease and 
desist all conflicts of interest and to conduct oversight of 
the Department of Education employees.
    I have called on the secretary to launch a public campaign 
to educate students and families about their rights and options 
when borrowing for college and to make public all records of 
loan industry meetings with political appointees so that the 
Congress and the American public can have a better 
understanding of who in the department has been lobbied by the 
industry.
    There is no question that congressional action is urgently 
needed to put these programs back into the hands of students 
and parents.
    Earlier this year, I introduced legislation called the 
Student Loan Sunshine Act that would clean up the relationship 
between lenders and schools.
    My counterpart on the committee, Mr. McKeon, has also 
introduced legislation to address this problem. And soon, the 
committee will address these proposals to clean up this 
program.
    I hope what we learn today helps us to build on these bills 
and to bring a sea change of reforms needed to this industry.
    Ensuring that students and their families can have full 
confidence in our nation's student aid program is a critical 
part of our goal of making college more affordable and 
accessible.
    Again, I want to thank our witness for joining us today and 
for the important work that he is doing on behalf of students 
and families in New York and across the country, for all of the 
contributions he has made to bring this problem to light and to 
encourage others to protect the students and families in their 
states to proceed in a manner in which he has to get these 
programs right side up and once again looking after the 
interests of students and their families.
    And with that, I would like to recognize Mr. McKeon, the 
senior Republican on the committee.
    [The prepared statement of Mr. Miller follows:]

   Prepared Statement of Hon. George Miller, Chairman, Committee on 
                          Education and Labor

    Good morning and welcome to this morning's hearing on examining 
unethical practices in the student loan industry.
    Today, we have asked the Honorable Andrew M. Cuomo to provide an 
overview of his investigation into the egregious practices in the 
student loan industry, and to share his thoughts for how we may address 
these issues at the federal level. It is our hope to continue to build 
upon the good work of the Attorney General.
    This hearing comes at a time when it's getting harder and harder 
for our nation's students and families to afford college.
    One of the major focuses of this Congress is how to help students 
and families finance a college education. We have already taken 
critical first steps to do just that by voting to cut interest rates in 
half on need-based federal student loans, and by significantly raising 
the Pell Grant scholarship. We have also introduced legislation to 
boost financial aid for students--at no new cost to taxpayers--by 
making the federal student loan programs more efficient.
    But as we work to make college more affordable, we also have an 
obligation to make sure that our nation's federal student loan programs 
are working as intended: to help students and families pay for college.
    It has become extremely clear that these programs have been 
hijacked by third parties who are more interested in boosting their 
bottom lines than serving the best interests of students and families.
    Between the conflicts of interest and unethical practices revealed 
between lenders and schools, the improper use of the National Student 
Loan Database, to questionable stock holdings by public officials, we 
are talking about a system that is spinning out of control.
    The blame rests not just with the lenders and individuals who have 
exploited these programs for profit, but also on this administration.
    Its failure to conduct proper oversight or hold the industry 
accountable has harmed student and family borrowers and taxpayers, all 
of whom ultimately pay the price for these corrupt practices.
    Here in Congress we have launched our own investigation into the 
student loan industry and into the practices and environment that have 
allowed this corruption to flourish. We are closely examining the 
relationships and conflicts of interest between these lenders, 
financial aid officers, and the public officials who are responsible 
for administering federal student aid.
    And given just how little has been done to protect student and 
families from the abuses in the program, last week I called on the 
Secretary of Education to immediately take the following actions to 
eliminate corruption and cronyism within the student loan industry:
     Impose a moratorium on ``preferred lender lists;''
     Clearly define and end bribes paid by lenders;
     Require full disclosure by lenders and schools of their 
relationships;
     Instruct schools and lenders to cease and desist all 
conflicts of interest; and
     Conduct oversight of Department of Education employees.
    I also called on the Secretary to launch a public campaign to 
educate students and families about their rights and options when 
borrowing for college, and make public all records of loan industry 
meetings with political appointees so that the Congress and the 
American public better understand who at the Department was being 
lobbied by the industry.
    There is no question that congressional action is urgently needed 
to put these programs back in the hands of students and parents. 
Earlier this year I introduced legislation, the Student Loan Sunshine 
Act, that would clean up the relationships between lenders and schools. 
I hope that what we learn today helps us build on this bill to bring 
the sea change of reforms needed to this industry.
    Ensuring that students and their families can have full confidence 
in our nation's student aid system is a critical part of our goal of 
making college more affordable and accessible.
    I again want to thank our witness for joining us today and for the 
important work he is doing on behalf of students and families in New 
York and across the country. We look forward to hearing his testimony.
    Thank you.
                                 ______
                                 
    Mr. McKeon. Thank you, Mr. Chairman, for convening today's 
hearing.
    And to Mr. Cuomo, I thank you for joining us and welcome to 
our committee.
    I don't believe anyone would argue with the fact that trust 
in our student aid system has been shaken. That is why we are 
here this morning, after all.
    So at the very outset of this hearing, I believe all of us 
can agree on a very basic yet vital goal for this hearing and 
the process that will follow it. And that should be to begin 
restoring that trust.
    The question that we will face during the coming weeks and 
months will be how to meet that goal. There are a variety of 
reform proposals on the table already, here in Washington, in 
Mr. Cuomo's state capital, and by organizations throughout the 
nation.
    And I believe that is extraordinarily healthy, because this 
effort will require all stakeholders in the system to step up.
    That means lenders, colleges, the Education Department, 
states and Congress all have a role to play. And where certain 
stakeholders don't step up, this committee may be forced to 
step in.
    Let me give you an example. Several years ago, when I 
served as chairman of the Higher Education Subcommittee, I 
urged financial aid administrators to work with other industry 
partners in adopting a series of recommended practices that 
would have helped deal with many aspects of the very situation 
we are presented with this morning, such as a lack of 
disclosure for students and a lack of clarity with regard to 
preferred lender lists.
    In short, they did not act quickly enough, and now it looks 
as if the committee is poised to do so.
    If we do step in, Mr. Chairman, it should be for a very 
straightforward reason: to ensure this system continues to 
serve the needs of the students who depend on it for a chance 
at a college education.
    This isn't about us versus the lenders or us versus the 
financial aid officers. This isn't about direct loans versus 
FFEL.
    And for the record, I continue to strongly support the 
private-sector-based program and healthy competition between 
the government-run direct loan program and the private sector 
FFEL-based program.
    No, this is about millions of young men and women who 
expect our student aid system to be there for them when they 
need it. By keeping our eyes fixed squarely on what best serves 
their need, we will be well on our way to restoring trust in 
the system.
    With this in mind, earlier this week Mr. Keller and I 
introduced comprehensive legislation to address many of the 
issues which will be discussed at today's hearing.
    The Financial Aid Accountability and Transparency Act 
builds on some of the recommendations you introduced earlier 
this year, Mr. Chairman.
    Like your bill, we do not explicitly outlaw the practice of 
preferred lender lists. Rather, we reform this practice to 
ensure that it continues to serve the interests of students.
    And like your bill, ours aims to protect against conflict 
of interest between lenders and financial aid officers.
    However, our bill goes even further than those introduced 
by congressional Democrats.
    For example, it asks colleges and universities to develop 
their own codes of conduct that must include restrictions on 
gifts, payments, stock and anything else that may give the 
appearance of a conflict of interest between financial aid 
officers and lenders.
    Rather than simply requiring the reporting of it, our bill 
also bans revenue-sharing between lenders of private loans and 
colleges or universities. This practice already is illegal with 
regard to federal loans, and it is my view that it should be 
for private loans as well.
    Instead of requiring even more lender and institutional 
reporting to the Department of Education, our bill requires 
extensive disclosure to students, particularly on matters 
relating to their financial aid rights, preferred lender lists 
and the like.
    And finally, and perhaps most importantly, our bill 
explicitly allows an institution to negotiate lower interest 
rates or fees on loan products for their students and parents.
    Why is this language in the bill, some may ask? Simply put, 
it benefits students. Mr. Keller and I would not propose 
restrictions that in any way short-circuit a student's ability 
to get a better deal.
    With all of that said, Mr. Chairman, I believe that we can 
see a great deal of bipartisan cooperation on this issue during 
the coming weeks and months.
    Despite some of the sensationalized press reports that have 
followed these investigations, we must not lose sight of the 
fact that the federal financial aid system must work for 
students and colleges alike.
    We must be careful not to overreach as Congress does all 
too often. But we do need to restore trust in the system.
    Once again, thank you, Mr. Chairman.
    And, Mr. Cuomo, I look forward to your testimony.
    [The prepared statement of Mr. McKeon follows:]

Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican 
                Member, Committee on Education and Labor

    Thank you, Mr. Chairman, for convening today's hearing. And to Mr. 
Cuomo, I thank you for joining us and welcome you to our Committee.
    I don't believe anyone would argue with the fact that trust in our 
student aid system has been shaken. That's why we're here this morning, 
after all. So, at the outset of this hearing, I believe all of us can 
agree on a very basic, yet vital, goal for this hearing and the process 
that will follow it: to begin restoring that trust.
    The question that we will face during the coming weeks and months 
will be how to meet that goal. There are a variety of reform proposals 
on the table already--here in Washington, in Mr. Cuomo's state capital, 
and by organizations throughout the nation. And I believe that's 
extraordinarily healthy because this effort will require all 
stakeholders in the system to step up. That means lenders, colleges, 
the Education Department, states, and Congress all have a role to play. 
And, where certain stakeholders don't step up, this Committee may be 
forced to step in.
    Let me give you an example:
    Several years ago, when I served as Chairman of the higher 
education subcommittee, I urged financial aid administrators to work 
with other industry partners in adopting a series of recommended 
practices that would have helped deal with many aspects of the very 
situation we are presented with this morning, such as a lack of 
disclosure for students and a lack of clarity with regard to preferred 
lender lists. In short, they did not act quickly enough, and now, it 
looks as if this Committee is poised to do so.
    If we do step in, Mr. Chairman, it should be for a very 
straightforward reason: to ensure this system continues to serve the 
needs of the students who depend on it for a chance at a college 
education. This isn't about us versus the lenders or us versus the 
financial aid officers. This isn't about direct loans versus FFEL--and 
for the record, I continue to strongly support the private sector based 
program and healthy competition between the government-run Direct Loan 
program and the private sector-based FFEL program.
    No, this is about the millions of young men and women who expect 
our student aid system to be there for them when they need it. By 
keeping our eyes fixed squarely on what best serves their needs, we'll 
be well on our way to restoring trust in this system.
    With this in mind, earlier this week, Mr. Keller and I introduced 
comprehensive legislation to address many of the issues which will be 
discussed at today's hearing. The Financial Aid Accountability & 
Transparency Act builds on some of the recommendations you introduced 
earlier this year, Mr. Chairman. Like your bill, we do not explicitly 
outlaw the practice of preferred lender lists--rather we reform this 
practice to ensure that it continues to serve the interests of 
students. And like your bill, ours aims to protect against conflicts of 
interest between lenders and financial aid officers.
    However, our bill goes even further than those introduced by 
congressional Democrats. For example, it asks colleges and universities 
to develop their own unique codes of conduct that must include 
restrictions on gifts, payments, stock, and anything else that may give 
the appearance of a conflict of interest between financial aid officers 
and lenders. Rather than simply requiring the reporting of it, our bill 
also bans revenue sharing between lenders of private loans and colleges 
or universities. This practice already is illegal with regard to 
federal loans, and it is my view that it should be for private loans as 
well.
    Instead of requiring even more lender and institutional reporting 
to the Department of Education, our bill requires extensive disclosure 
to students, particularly on matters relating to their financial aid 
rights, preferred lender lists, and the like. And finally, and perhaps 
most importantly, our bill explicitly allows an institution to 
negotiate lower interest rates or fees on loan products for their 
students and parents. ``Why is this language in the bill?'' some may 
ask. Simply put, it benefits students. Mr. Keller and I would not 
propose restrictions that in any way short-circuit a student's ability 
to get a better deal.
    With all of that said, Mr. Chairman, I believe that we can see a 
great deal of bipartisan cooperation on this issue during the coming 
weeks and months. Despite some of the sensationalized press reports 
that have followed these investigations, we must not lose sight of the 
fact that the federal financial aid system must work for students and 
colleges alike. We must be careful not to overreach, as Congress does 
all too often, but we do need to restore trust in the system. Once 
again, thank you, Mr. Chairman. And Mr. Cuomo, I look forward to your 
testimony.
                                 ______
                                 
    Chairman Miller. I thank the gentleman.
    This morning in this hearing we have only one witness, and 
that is the honorable Andrew M. Cuomo.
    Mr. Cuomo was elected the 64th attorney general of New York 
state on November 7, 2006. As attorney general, he is the 
highest-ranking law enforcement officer in the state, 
responsible for representing New York and its residents in 
legal matters.
    The attorney general is no stranger to Washington, D.C., 
having served as secretary of housing and urban development 
under President Clinton. His work at HUD earned him the 
prestigious Innovation in American Government award from the 
Ford Foundation and the Kennedy School of Government at Harvard 
University on three separate occasions.
    He is also no stranger to the lending institutions in this 
country and to the government-sponsored organizations that work 
with them.
    In addition to his current work in the student loan 
industry, Mr. Cuomo is hard at work on protecting the people of 
the state of New York through investigations in nursing home 
abuses, drug trafficking and fraudulent practices.
    We thank you, Mr. Cuomo, for your leadership on this issue 
and for the contribution that you have made to our 
understanding of that issue. And we look forward to your 
testimony. Welcome to the committee.

 STATEMENT OF HON. ANDREW M. CUOMO, ATTORNEY GENERAL, STATE OF 
                            NEW YORK

    Mr. Cuomo. Thank you very much, Mr. Chairman. And I thank 
the entire committee for the opportunity to appear before you 
today. It is a pleasure to be back before the Congress, albeit 
in a different position than my past positions.
    I would also like the opportunity to introduce my deputy, 
Benjamin Lawsky, from the New York Attorney General's Office, 
who has been coordinating this case on college loans and is 
intimately familiar with our activity.
    It is a pleasure to speak about this topic, and I want to 
begin by commending the chairman and Ranking Member McKeon for 
the good work that this committee has done on this issue.
    I reviewed the legislative proposals. I think they go a 
long way toward remedying this problem, and it is a pleasure to 
be able to discuss it in detail today.
    As you know, the magnitude of the problem is daunting. Two-
thirds of all college students will leave school with a college 
loan. It is now an $85 billion per year industry.
    My office's investigation has found a wide range of 
improper and illegal activities occurring in a wide range of 
schools.
    Bad practices occur at small schools with enrollments of 
less than 2,000 students and at large state universities with 
more than 20,000 students.
    The problems exist across the country, from New York to 
California. There are a variety of troublesome activities that 
the schools and lenders have engaged in, many of which focus on 
the highly desirable preferred lender lists.
    There are usually separate preferred lender lists for 
specific loans--Stafford loans, PLUS loans, private loans, et 
cetera.
    In some instances, these preferred lender lists contain 
dozens of potential lenders. In other cases, the schools use 
the lists to recommend only a handful of lenders, sometimes a 
single lender.
    The economic benefits to the lenders included on these 
preferred lists are powerful. Remarkably, 90 percent of 
students take their loans from the preferred list.
    Why? Because the schools suggest these lenders to students, 
and students have trust in the schools.
    When schools place lenders on the preferred list based on 
benefits to the schools as opposed to the students, the school 
violates that relationship of trust. In our opinion, this 
violation of trust makes a bad situation worse.
    We have found a range of illegal activities, including 
direct payments to the schools as well as inducements to 
individual financial aid officers.
    Aid officers are given expensive meals, travel to 
attractive locations, tickets to entertainment events, 
honoraria to serve on lender advisory boards.
    In some instances, financial aid officers have even held 
stock in lending companies.
    Benefits to the schools include lender-funded printing of 
schools' financial aid materials, lenders who are running call 
centers for the schools where the person who answers the 
telephone is identified to the student as a representative of 
the school even though it is actually an employee of the 
lender.
    Another practice which we have found is ``co-branding'' 
between lenders and schools, using the school's colors, mascot 
and logos to convey at best the school's endorsement of the 
loan, and at worst a false impression that the loan is being 
offered by the school itself.
    There are also disturbing practices with respect to 
opportunity loans, where a lender gives the school essentially 
a line of credit, sometimes offered in exchange for placement 
on the preferred lender list or for specified loan volume on 
other types of loans.
    In my opinion, some tactics are a form of predatory 
lending. Allow me to quote from a lender's sales manual: ``We 
leverage the school name as much as possible, because the 
target is already predisposed to the brand.'' The ``target'' is 
the student.
    The most egregious practice that we have found is what is 
called revenue sharing. In revenue sharing arrangements, the 
lender pays the school a set percentage of the student loan 
volume.
    The revenue-sharing arrangements are essentially 
undisclosed loan brokerage schemes, in my opinion, no better 
than illegal kickback arrangements found in other industries.
    These practices hurt students in at least two ways. First, 
the practices stifle competition. Closed lists mean less 
competition. Lenders who could actually bring down interest 
rates for student loans are often eliminated from the process.
    Second, the lender payments and inducements increase the 
cost of the loan to the lender and are ultimately passed on to 
the students as the consumers.
    In the case of the University of Pennsylvania, revenue 
sharing resulted in a $500 added cost to each student taking 
the Citibank loans involved.
    The good news is that as my office has exposed the illegal 
practices described above, consumers and the industry have 
heard the problems and they are responding.
    Consumers are demanding reform and schools and lenders are 
willing to change course and set a new industry standard. To 
that end, we have entered into numerous settlement agreements 
with major lenders and schools in which they agree to adopt a 
new college code of conduct.
    We have settled with Citibank and Sallie Mae, two of the 
nation's largest lenders.
    Today we announced that we have reached agreement with Bank 
of America and J.P. Morgan Chase, the two main investors in the 
Sallie Mae private equity agreement.
    We are pleased that both J.P. Morgan and Bank of America 
have separately agreed to our code of conduct, and I wish to 
applaud them for their cooperation and responsibility.
    With these agreements, Mr. Chairman, the nation's top four 
student lenders have adopted our code of conduct. The code of 
conduct provides, in part, a total prohibition of revenue 
sharing.
    It prohibits lenders from providing goods or services to 
schools in exchange for placement on the school's preferred 
lender list.
    It prohibits lenders from making gifts or payments to 
school employees of more than nominal value.
    It requires that schools recommend lenders to students only 
on the best interest of the students.
    Finally, schools are prohibited from placing a lender on 
the preferred list for a particular type of loan in exchange 
for benefits provided to the school or the school's students in 
connection with different loans.
    In sum, the code of conduct rights the wrongs our 
investigation has revealed. Our code and the House and Senate 
proposals are all on the same theory and seek the same goal.
    I endorse Chairman Miller's Sunshine Act, which goes a long 
way toward ending the payments by lenders to school officials 
and requires important disclosures in connection with preferred 
lender lists.
    The bill also extends disclosure obligations to the private 
side of the equation, an area which has been, to date, the Wild 
West of the student loan industry.
    I would also point out that this issue resonates not only 
across the nation, Mr. Chairman, but also across the political 
aisle.
    In fact, the legislation which I have submitted in my home 
state of New York has been endorsed by Republicans and 
Democrats alike.
    In New York, every member of the state senate, a majority 
Republican body, has become a sponsor of the legislation. This 
is, indeed, a rare occurrence in New York's legislature. In 
fact, the state senate is poised to pass this legislation 
today.
    In terms of the federal government's responsibility in this 
arena, let me say that having run a federal agency myself, I am 
not quick to criticize. However, I believe in this case the 
Department of Education has been asleep at the switch in at 
least three regards.
    First, while there are Department of Education regulations 
governing conflicts of interest in the FFEL program, the 
safeguards were not extended to the private loan portfolio.
    Over the last 5 years, private student loans have grown at 
an astounding average annual rate of 27 percent and now 
comprise 20 percent of all education borrowing. The business is 
huge, with the potential for abuse as the rates are not capped. 
It should not have been ignored.
    Second, my investigation has shown that even where the 
Department of Education regulations did exist with respect to 
the FFEL program, there is significant evidence suggesting 
these regulations were flouted.
    For example, Marist College in New York had a preferred 
lender list of four FFEL lenders, without disclosing that one 
of the lenders had an agreement to purchase the loans placed by 
the other lenders on the list.
    The state university system of New York had a college which 
required students to pick a particular FFEL lender as their 
Stafford lender. This was a clear violation of federal law, 
under which a student is assured a choice of any lender.
    The New York Institute of Technology chose FFEL preferred 
lenders by considering how much each lender contributed to 
sponsor the school's programs or events.
    We have also found conflicted arrangements between Columbia 
University and FFEL lenders, where student financial aid 
officers obtained stock of one of the FFEL preferred lenders.
    Third, it has recently been reported that the Department of 
Education rulemaking process, which was supposed to resolve 
these issues, has broken down.
    To me, Mr. Chairman, that is like saying the fire truck has 
stalled on the way to the fire. It is simply unacceptable that 
the DOE can fail to right these wrongs in the midst of the 
disturbing revelations and at a time when students all across 
the nation are clamoring for guidance and help.
    Announcing a task force at this late date is, frankly, too 
little, too late. The department can and should issue 
regulations immediately to affect reform in the industry and 
protect our students.
    Today the marketplace is ahead of the regulators. Lenders 
and schools are reforming practices, and the Department of 
Education has still not acted.
    Chairman Miller has written to the U.S. Education Secretary 
Margaret Spellings, calling on her to take emergency action to 
reform the nation's student loan programs, and I commend the 
chairman for his leadership on this issue.
    I also commend Senator Kennedy for his outstanding 
leadership on this issue.
    In conclusion, Mr. Chairman, I believe that real change is 
coming on this issue.
    As Malcolm Gladwell explains in his book, Tipping Point, 
the awareness caused by these investigations has reached a 
critical mass that will demand response. The outrage resonates 
on many levels across the country, and change is under way from 
many sources.
    Government is responding. Last week, over 40 attorney 
generals' offices participated in a conference call on this 
issue. State education offices are reforming practices. State 
legislatures are preparing legislative solutions.
    Editorial boards are advocating reform. Significantly, the 
market itself is demanding a response, as students, now 
informed, are asking the tough questions, and lenders must 
change their practices or risk losing business.
    Schools on their own initiative are changing their 
practices.
    I believe in the states as laboratories of democracy, and I 
believe in the free market system to correct itself when the 
consumer is informed.
    But I also believe that federal action is the swiftest, 
most comprehensive resolution to a nationwide injustice.
    Change can and will come on this issue, Mr. Chairman. The 
question is how and when. It is not a time for just task forces 
or study groups. We know the facts painfully well. It is a time 
for action.
    I look forward to federal leadership and cooperation, and I 
thank you and the committee for the honor of appearing before 
you today on this very important topic.
    [The statement of Mr. Cuomo follows:]

Prepared Statement of Hon. Andrew M. Cuomo, Attorney General, State of 
                                New York

    I thank Chairman Miller, Ranking Member McKeon, and the members of 
the Committee on Education and Labor for inviting me to speak this 
morning.
Background
    Over the last few months my office has conducted an investigation 
into the student loan industry. In just the short time that the 
investigation has been ongoing, we have uncovered several significant, 
deceptive and illegal practices. Unfortunately, these practices are 
widespread throughout the country and throughout the many segments of 
the industry. These practices have affected hundreds of thousands of 
student borrowers and their parents.
    It is easy to see why the results of this investigation have struck 
such a chord with the public. As the members of this Committee are well 
aware, the costs of higher education are soaring and have been for some 
time. Grant and scholarship funds have not kept pace with rising 
tuition. Accordingly, a significant and growing number of students and 
their parents turn to loans to cover what they otherwise could not 
afford. This is not just a problem in my state. Nationwide, two-thirds 
of all four year college graduates have loan debt. The student loan 
industry has swelled to become a greater than $85 billion per year 
industry.
    In spite of the large number of students and families that the 
student loan industry affects, the procedures of applying for and 
receiving loans are enormously complex and confusing. Students and 
their parents are faced with a dizzying array of loan possibilities and 
hundreds of potential lenders from which to choose.
    These parents and students, not surprisingly, often look to the 
educational institutions they are attending for advice. They trust that 
the institutions will give them unbiased guidance as to how to best 
finance their education. In response, many institutions of higher 
education have created lists of recommended lenders. In some instances, 
these ``preferred lender lists'' contain dozens of lenders that meet 
certain minimal requirements. In other cases, educational institutions 
use the lists to recommend a handful of lenders, or even a single 
lender, as ``preferred.'' The benefits to the lenders of being included 
on these lists are considerable. Lenders on preferred lender lists 
typically receive up to 90% of the loans borrowed by the institutions--
students and parents. With this loan volume come vast profits for 
included lenders.
    I am angered and saddened to say that our investigation has 
revealed an unholy alliance between lenders and many trusted 
institutions of higher education. The best interests of the lender and 
the institution, rather than the interests of the student, all too 
often have become paramount.
    I will take the next few minutes to elaborate on a few of the 
troubling, deceptive and often illegal practices that we have 
uncovered.
Problems Uncovered
            Revenue Sharing
    What I believe to be the most egregious practice that we have 
uncovered so far is a form of kick-back scheme often referred to as 
``revenue sharing.'' Revenue sharing is an arrangement under which a 
lender pays an institution of higher education a percentage of the 
principal of each loan taken out by a borrower at the institution. The 
practice of revenue sharing creates a potential conflict of interest on 
the part of the institutions of higher education. When and if the 
institutions direct students to lenders, the direction should be based 
solely on the best interests of the student and parents who may take 
out loans from the lenders. Because of these revenue sharing 
arrangements, however, the institutions have a financial interest in 
the student or parents selecting the revenue sharing lender, regardless 
of whether that lender offers the best rates and service for that 
borrower. The advice the students and parents sought from a trusted 
source may not be so impartial after all.
            Preferred Lender Lists
    As I mentioned before, many schools maintain preferred lender lists 
and encourage students to borrow from the lenders whose names appear on 
the lists. Despite the significant role that these lists play in 
determining the lenders from which students and parents borrow, many 
institutions have chosen not to inform their student and parent 
borrowers about the criteria used to formulate the lists of recommended 
or preferred lenders. In some instances, they have even gone so far as 
to actively conceal the methods by which their recommendations derive. 
Worse, some institutions fail to disclose the potential and all too 
often actual conflicts of interest on the part of their financial aid 
offices--the same offices which compile the preferred lender lists. 
These conflicts of interest may arise from the revenue sharing 
arrangements I just described or from other perks or consideration 
granted to schools and financial aid employees, some examples of which 
I will describe in greater detail.
            Improper Relationships Between Lenders and Financial Aid 
                    Offices and Administrators
    Our investigation has uncovered potential conflicts of interest 
created by financial aid administrators who have held stock in a 
lender, having been encouraged to purchase the stock by a lender 
executive. In other cases, financial aid administrators have received 
payment for consulting with a lender. In several of these cases, the 
implicated lenders succeeded in getting themselves placed on the 
implicated administrators' schools' preferred lender lists.
    Not all of the improper perks have been so egregious, but many have 
been exceptionally widespread. Many lenders have paid travel expenses 
and honoraria for financial aid officials to attend meetings and 
seminars in attractive locations often as part of an appointment of the 
institutions' financial aid officials to ``advisory boards'' or 
``committees'' sponsored by the lenders.
    We have also uncovered many examples of lenders paying hundreds of 
thousands of dollars for printing services at the request of financial 
aid officers. Some lenders have also sent their own staff to assist 
schools' financial aid staff on the schools' campus. The lenders did 
not offer these services out of the goodness of their hearts. Similar 
to the revenue sharing arrangements, lenders granted institutions of 
higher education these types of benefits in an effort to encourage the 
institutions to steer students to the lenders.
    In a related problem, lenders have agreed with institutions of 
higher education to staff ``call centers'' that answer students' 
telephoned or emailed questions regarding financial aid, loans and 
lenders. Often the call center employees have not only failed to 
identify themselves as employees of a lender, but have been instructed 
to answer the phone in the institutions' name. The student calling or 
emails their questions rightfully expected to receive disinterested 
advice and information regarding lenders. These lender call center 
employees, however, have an interest in advocating on behalf of the 
lender that pays them.
            Denial of Choice of Lender
    Our investigation has also brought to light a failure of some 
institutions of higher education to make clear that borrowers have a 
right to select the lender of their choice, irrespective of whether the 
lender appears on any preferred lender lists. In the most egregious 
cases, institutions have gone so far as to abrogate this right, by 
stating or strongly implying that the student and parents were limited 
to the lenders on the list, or even to a single lender. In this way the 
educational institutions steer borrowers to certain lenders, as with 
the other examples, not necessarily because that lender is best for the 
borrower.
            Undisclosed Sales of Loans to Another Lender
    Further, in many instances, institutions of higher education place 
several lenders on the institutions' lists of preferred lenders causing 
the potential borrower to think that the lender list represents a real 
choice of options. However, the choice is illusory when, as sometimes 
occurs, all or a number of the lenders on a lender list have arranged 
with each other to sell any loans to one of the lenders immediately 
after one of the other complicit lenders disburses a loan.
            Quid Pro Quo (Opportunity Loans)
    Deeply disturbing, too, was our discovery that lenders and colleges 
had, in many instances, entered into quid pro quo high risk, high 
interest loans that hurt students. Under these undisclosed agreements, 
often referred to as ``opportunity loans programs'' lenders agreed to 
make loans up to a specified aggregate amount to students with poor or 
no credit history, or international students, who the lender claimed 
would otherwise not be eligible for the lender's alternative loan 
program. In exchange for the lender's commitment to make such loans, 
however, the institution provided concessions or promises that 
prejudice other borrowers.
Solutions
            Code of Conduct
    Over the last few weeks, as my office exposed many of these 
practices to the light of day, I was pleased to see many lenders and 
schools that had engaged in some of the questionable and even illegal 
practices agree to change course and set a new standard for the 
industry. To that end, we have entered into numerous settlement 
agreements--with major lenders and schools alike--in which the schools 
and lenders agreed to adopt a new landmark Education Loan Code of 
Conduct, which will now govern those institutions' student loan 
practices going forward. The Code of Conduct offers institutions the 
guidelines many schools and lenders have actively sought and by which 
all schools and lenders should be willing to abide.
    The Code of Conduct remedies the troubling and illegal practices we 
have uncovered. Specifically, the Code of Conduct prohibits revenue 
sharing and kickbacks in other forms, including printing services. It 
prohibits lenders from funding gifts and trips for institutions' 
financial aid employees. The Code prohibits lender staffed call 
centers. Our Code also lays out strong but fair guidelines concerning, 
among other things, preferred lender lists, advisory board 
compensation, and loan resale.
    My office will continue to pursue lenders, schools, and other 
players in the student loan industry that fail to put students' 
interests first. In cases where the law has been broken, we will 
continue to demand that the responsible entity agree to cease the 
illegal practices, reimburse wronged borrowers or pay into our 
education fund as appropriate, and agree to abide by the Code or 
Conduct. If not, we will sue.
            State Legislation
    But, to most effectively reform the student loan industry--and to 
restore most fully the broken trust between universities and lenders on 
the one hand and students on the other--legislation is necessary so 
that these types of reforms come to all lenders and schools. I 
respectfully submit that it is crucial that Congress act promptly to 
end the conflicts, perks and revenue sharing that have been costing our 
students dearly. I ask you to move quickly to ensure that, as another 
group of high schools students look toward beginning their college 
educations in the fall, we have reform in place that will keep the 
students' interests paramount.
    That is why I was so pleased to stand on April 16 alongside my 
state's legislative leadership when we announced the introduction of 
state legislation that will codify and lend additional enforcement 
strength to the Code of Conduct. Our legislation addresses, on an 
industry-wide basis, the problems exposed as a result of my office's 
ongoing investigation into the widespread conflicts of interest 
throughout the student loan industry.
            National Action
    The settlements into which we have entered in New York will affect 
millions of students and thousands of schools around the country. 
Recently, my office has entered into settlements involving other 
states' attorneys general. Most notably because of the leadership of 
Illinois Attorney General Lisa Madigan and Missouri Attorney General 
Jay Nixon, we have been able to broaden the impact of our investigation 
by entering into settlements with multiple states simultaneously. The 
legislation we have proposed in New York will continue the reforms we 
began through our investigation and I hope other states will follow 
suit. We have certainly taken a major step in cleaning up a system 
laden with conflicts of interest.
            Congressional Action Needed
    Yet there is much more that needs to be done--and we must move 
without delay. That is where this Congress can play a significant role.
    Part of the reason the practices we have uncovered have been able 
to flourish nationwide over the past several years is because the U.S. 
Department of Education has been asleep at the switch. The practices we 
have uncovered were not undiscoverable until now. Rather, the entity 
charged with maintaining the integrity of the student loan market 
failed. The failure of the Department to pass adequate regulations is 
disappointing and irresponsible.
    Now is the time for Congress to act to affect change in this 
industry; an industry that until very recently has functioned without 
proper oversight. Congressman Miller and Senator Kennedy have both been 
extraordinary leaders on this issue for years. I believe that Chairman 
Miller's Student Loan Sunshine Act will go a long way toward bringing 
the much needed disinfectant of sunlight to this tainted industry. I 
would encourage the Committee to ensure that the bill is ultimately 
brought to the floor of the House soon.
Conclusion
    In closing, I urge Congress to enact the Student Loan Sunshine Act. 
Further, this Congress must ensure that the trust placed in educational 
institutions is warranted and that we end the pernicious effects of 
financial gain through the misleading of students and their families. 
The stakes are too high for too many Americans' futures for Congress 
not to act. I look forward to providing any assistance the Committee 
may require of my office to help achieve these goals.
                                 ______
                                 
    Chairman Miller. Thank you very much, General Cuomo. Again, 
we appreciate all that you have done and certainly taking the 
time to come here and to brief the committee on this.
    I think given your remarks and the remarks of Mr. McKeon 
and hopefully my own--we will be able to achieve that kind of 
bipartisan consensus on our legislation out of this committee 
that apparently you were able to achieve in the New York 
legislature, which is no easy trick, as we know.
    And we hope to be able to continue to work with you as we 
develop that legislation to make sure that we are, in fact, 
addressing it based upon the evidence that you have from your 
investigations.
    You mentioned the shared revenues, the preferred lender 
list, and maybe even the agreement--well, the preferred lender 
list and that it was sold originally as a convenience to 
students and their families, and it has been corrupted to be 
for the convenience of the universities and the lenders.
    But you also in your testimony and in your actions already 
have secured rebates to those students that starts to quantify 
the real cost of these corrupt practices on students and their 
families as they struggle with the cost of college.
    We have heard in this committee, and we have certainly 
heard in our districts, where students or families will talk 
about having to spend $100, $200, $250 for textbooks and that 
may be a make or break item for the question of whether or not 
they are going to go to college that semester or go to work and 
then go to college the next semester.
    You are talking about $500 rebates. Do you want to expand 
on what you might think the real cost here is?
    You know, this isn't just a matter of convenience and 
friends working with one another over the years. This money 
comes out of the subsidies that are provided by this government 
to the lenders.
    Mr. Cuomo. Well, Mr. Chairman, I totally agree, and you are 
very correct on the point. These are significant economic 
benefits. We are not talking about loose change here. At some 
schools, it is in excess of $1 million per year, the amount 
which is ``revenue sharing.''
    Revenue sharing is basically a commission that the school 
gets for referring business to a particular lender. 
Undisclosed, the school will come to an arrangement. The lender 
gets on the ``preferred list.''
    The lender wants as small a list as possible. From the 
lender's point of view, ideally, they would like to be the only 
preferred lender. The students trust the school's 
recommendation. Ninety percent of the students wind up taking 
the preferred lender.
    More business for the lender, and the schools get revenue 
sharing, basically a commission on the volume that goes to the 
lender.
    And it can be easily in excess of $1 million per year for 
the school. What does that mean to the student? What I 
mentioned in the testimony--in the case of the University of 
Pennsylvania, which is a case that we have handled and we have 
settled, so I am free to discuss it at this point--when the 
University of Pennsylvania, as part of the settlement, had to 
return that money to the students affected in that year, it is 
roughly $500 per student.
    And $500 per student is a lot of money, especially with the 
cost of college and all the financial pressures that are on 
these students.
    Chairman Miller. When you have the preferred lender 
program--and again, you know all of the iterations that are out 
there, and you have looked at them--do we know whether or not 
those preferred lenders--or in one case, you describe where 
they whittled it down to one lender with four other entities 
cooperating with the single lender.
    Do we know whether or not, in fact, those were the low-cost 
lender that was available at that time to the students?
    Mr. Cuomo. You don't know, Mr. Chairman, because often the 
decision on the preferred lender is the lender preferred by the 
school as opposed to the lender preferred because it is in the 
best interest of the student.
    Why would a school prefer a lender? Because they have a 
revenue-sharing agreement, or it was the most productive 
revenue-sharing agreement, or because the lender is providing 
employees, or because the lender is favored by the financial 
aid officer in the school who might own stock in that lender, 
or maybe went to a conference, or maybe he has gotten gifts.
    So the school prefers the lender, and that preferred lender 
is on the list. The students then trust the school's opinion 
and advice and take that lender.
    If you really had an open system, and you really had 
competition, and you were really competing for the rates, then 
we would know who the best lender was for the students. But all 
too often that is not the decision and it is not the criteria.
    Chairman Miller. My time is about to expire. What contact 
or what discussions have you or your staff had with the 
Department of Education as this investigation of yours has 
evolved?
    Mr. Cuomo. Mr. Lawsky can provide more specific 
information, but we have been in touch with the department. We 
have shared information with the department. And as cooperative 
or as helpful as we can be in sharing our findings, it would be 
our pleasure.
    Chairman Miller. So we can assume, therefore, that the 
Department is not just reading about this in the paper and 
moving along at that speed, that they----
    Mr. Cuomo. I believe there has been----
    Chairman Miller [continuing]. Have been informed of the 
investigation and some of the problems that you have 
encountered and some of the practices you have encountered.
    Mr. Cuomo. Yes, they have, Mr. Chairman.
    Chairman Miller. I share your concerns about the 
department. I don't understand their slowness to react to this 
situation, and I stated--and they haven't agreed to them, the 
five things that I thought they should do immediately to 
strengthen this program and end some of these practices.
    We are in contact with the secretary, and we are in the 
process of negotiating with her and her office for an 
appearance before this committee, hopefully within the next 2 
weeks.
    My time has expired. Again, thank you very much, General 
Cuomo.
    Mr. McKeon?
    Mr. McKeon. Thank you, Mr. Chairman.
    And thank you, Attorney General Cuomo, for your testimony 
and for the work that you are doing.
    One thing that I hope we leave this hearing with is the 
idea that not all federal aid administrators on the campus are 
picking preferred lenders or are acting in interests that are 
not the best for the students.
    We have over 6,000 schools participating in this program, 
and I think we don't want to paint with a broad brush the fact 
that all of these people are doing some of the things that have 
been mentioned. I think that that really is not a reasonable 
assumption.
    And we have about 3,500 lenders, and I don't think we want 
to leave the assumption that all of them are doing things that 
would violate the standards that we have been talking about.
    Mr. Cuomo, I understand that you have contacted Clemson 
University about an arrangement that they have with an 
alternative loan lender.
    I have a letter from the South Carolina Attorney General's 
Office that I would like to enter into the record, if I may, 
Mr. Chairman.
    Chairman Miller. If there is no objection--hearing none, so 
ordered.
    [The information follows:]

                    Office of the Attorney General,
                                   State of South Carolina,
                                      Columbia, SC, April 10, 2007.
Zachary Sturges, Esquire,
Assistant Attorney General, Investment Protection Bureau, Office of 
        Attorney General Andrew Cuomo, New York, NY.

Re: Proposed Agreement on Code of Conduct with Clemson University
    Dear Mr. Sturges: This letter is a follow-up to your discussions 
with Clemson University and this office concerning Clemson entering 
into a Code of Conduct Agreement with the New York Attorney General's 
Office as to the practices related to higher education loans offered to 
students and parents. Specifically, your interest was in the area of 
private ``alternative loans'' that may be promoted by a university, 
such as Clemson, with preferred lenders in which there is a revenue 
sharing agreement. As you are aware, Clemson has one such arrangement 
with Education Finance Partners, Inc. (EFP) which was entered into in 
April 2006 after EFP was selected pursuant to Clemson following the 
State Procurement procedures.
    Pursuant to your inquiry, this office, in conjunction with Clemson 
University, has reviewed Clemson's practices with regard to student 
financial aid, including the practices addressed in your Agreement. 
Based upon this review, we confirm herein what we orally advised you 
yesterday--that Clemson will not be entering into the Agreement. This 
decision was based upon our determination that as to student financial 
aid, generally, and preferred loans with revenue sharing agreements, 
specifically, no conflicts of interest existed and no untoward 
relationships are present.
    We appreciate your office's work and interest in the area of the 
relationships between colleges and lenders as to student financial aid. 
Based upon our discussions with you, Clemson, in conjunction with 
consulting with this office, will continue to monitor its student 
financial aid program, including whether or not to continue with its 
preferred lending-revenue sharing arrangement. Further, based upon 
discussions with your office, Clemson has added language to its loan 
program website which is already included in the ``Federal Truth in 
Lending Disclosure Statement'' that provides additional notice of the 
revenue sharing arrangement. Also, as you have been advised, Clemson 
will continue to use any revenue generated pursuant to this arrangement 
to fund a program for emergency funds for students. Clemson is proud of 
its reputation as being one of the finest public institutions in the 
country and its goal is to continue that recognition in the area of 
student loan programs.
    Once again, Clemson and this office thank you for your time and 
consideration in discussing the issues in this matter. We also 
appreciate the benefit of your expertise and your sharing with us the 
results of your investigation. Personally, I have enjoyed working with 
your office in the areas of antitrust and consumer protection and look 
forward to working with you and your office in mutual areas of concern 
in the future.
            Very truly yours,
                                      C. Havird Jones, Jr.,
                                 Senior Assistant Attorney General.
                                 ______
                                 
    Mr. McKeon. This letter says it has examined----
    Chairman Miller. General, do you have a copy of this?
    Mr. McKeon. Very expeditious. It says here that they have 
examined the situation between Clemson and the lender, and they 
don't see any impropriety with the relationship and will not be 
taking any immediate action.
    Will you be filing a lawsuit against Clemson?
    Mr. Cuomo. Congressman, the attorney general wears two 
hats, at least, in this regard--any attorney general. Number 
one, you protect the people of your state from a consumer 
protection point of view, and number two, you are also the 
counsel for state agencies, state universities.
    And in the case you point to, the attorney general is 
defending the university. In my state, we also serve as counsel 
to the university system. And the matter is ongoing. We are 
looking at it.
    And we will be looking at the facts on the case and 
speaking to the attorney general, speaking to the school. 
Wherever we can come to an amicable resolution, that is our 
preference.
    We have come to voluntary agreements with over 16 schools 
and four of the nation's top lenders, all on a voluntary basis. 
So to the extent we can resolve differences amicably, that is 
always my preference.
    Mr. McKeon. I would agree with that. And as you mentioned, 
as the attorney general for the state of New York, I assume 
that you are counsel for all state institutions, because that 
is the way most states function.
    I, like most people, assumed that colleges already had 
strong conflict of interest policies in place. As a counsel to 
state colleges or in discussions with other college counsels, 
do you know why they did not have strong conflict of interest 
policies in place in your particular state?
    Mr. Cuomo. Well, Congressman, I think your first point is 
correct. This is not to say that all colleges or all lenders 
have been engaging in this type of behavior. I agree with you.
    Mr. McKeon. Probably the vast majority, I think we would 
agree.
    Mr. Cuomo. That is exactly right. We are trying to restore 
the integrity and confidence and trust in the system.
    And to do that, I believe we need to put the reforms in 
place so we can say to every student on every campus, ``Don't 
worry, we have resolved this issue,'' because as your point is 
well taken, it is not every school, from a student's point of 
view, if it is only their school, that is enough of a problem. 
And that is why I think we need industry-wide reforms.
    Many schools do have conflict of interest resolutions and a 
code of conduct for their employees. Many state university 
systems do have an additional code of ethics on top of the 
normal college code of ethics.
    So many of the schools do. Some don't. Some cases we have 
come across, the employee was in violation not of just the law 
but also the code of ethics for that college. So there are a 
variety of situations.
    Mr. McKeon. Just having codes doesn't necessarily mean----
    Mr. Cuomo. That is exactly right. It is also the policing. 
It is also the oversight.
    Mr. McKeon. Thank you, Mr. Chairman. My time has expired.
    Chairman Miller. Thank you.
    Mr. Payne?
    Mr. Payne. Thank you very much.
    Let me commend you, Mr. Cuomo, for the outstanding job you 
have done at highlighting this and bringing attention to it.
    You know, my colleague just mentioned--of course, being a 
former--had mentioned that colleges tend to have strong codes 
of conduct.
    And you know, I am not so sure that we can simply make a 
blanket statement of that nature, when I look at the credit 
card situation that goes on in colleges.
    You talk about bad practices. And I hope you would take 
that on. So I am wondering where all this code of conduct is 
coming from administrators of colleges.
    Kids are sent credit cards. They are 18 years and 17 years 
and 19 years old, never had an opportunity to have any economic 
freedom, because they don't have--they haven't earned it.
    And that is why when these cards come through, encouraged 
by the colleges, booths set up at colleges, college employees 
calling students--I mean, what kind of code of conduct--where 
is the code of conduct?
    You know, in my district, they did a big investigation on, 
guess what, the Earned Income Tax Credit people. Now, anybody 
that breaks the law is wrong. Earned Income Tax Credit 
recipients mean people made between $13,000 and $28,000 a year.
    And they went through all of these audits to see whether 
these $13,000-to $28,000-a-year people were honest about what 
they were putting down. Did they get food stamps and didn't put 
it on?
    Here, you have got people--and you use nice words like 
revenue sharing and preferred lenders. If this was anywhere 
else, people--I haven't heard anybody talking about subpoenas, 
putting somebody's hand up to see whether they have broken a 
law or not.
    And you know, you are the messenger. I am just simply 
saying that when it comes to the white collar people, we tend 
to have fancy names. We tend to let students continually get 
the shaft. And people walk away willy-nilly on these issues.
    When it comes to the guy who is struggling and grunting and 
makes a mistake, they lay the book on him, you know?
    What is going to happen? What about the credit card 
business? What is going to happen to these people who are 
taking kickbacks? That is what they would say in my 
neighborhood. It is a kickback. Kickbacks are criminal. They go 
to jail. They pay fines.
    What is it going to be? Is this going to be some, ``Well, 
we have new reforms and that is good?'' What about what has 
happened already--students who have struggled to pay their way 
through, still have loans, and guys are buying bigger cars?
    Mr. Cuomo. Well, Mr. Congressman, I agree with the 
sentiment and the points you have raised. In my testimony, I 
said that I believe these are kickbacks. We have issued 
subpoenas.
    And I believe this is illegal activity, make no mistake 
about it. I believe it violates consumer protection laws. I 
believe it violates business law.
    And you are right, it is offensive. I believe it is 
especially offensive because schools are in a relationship of 
trust. This is not a normal marketplace relationship.
    This is not a relationship of caveat emptor, let the buyer 
beware. This is a student going to the school. Ninety percent 
of the students are following the school's recommendation 
because there is a relationship of trust.
    These are incoming students. They want to be part of the 
school. The school says, ``Go to this lender.'' They go to that 
lender.
    And then to find out that there was a different 
relationship or another relationship, or there was a 
``kickback'' that was undisclosed--I think it is illegal. It is 
wrong. It is offensive. It is unethical. It is improper. We are 
going to enforce the law.
    The question that I was trying to respond to in my 
testimony is, ``And what is the response of the federal 
government at this time? What is the response of the Department 
of Education?''
    We have laid out the facts. In my opinion, we don't need 
another task force or a study group. We know the facts 
painfully well. We have done the subpoenas.
    We have schools all across the country. We have states 
responding. We have attorney generals responding. Schools 
themselves are responding. Four of the top lenders in the 
country have responded.
    And now what is the federal government going to do? And 
what is the Department of Education going to go? That is the 
question that I am focused on today.
    But rest assured, Congressman, for the state of New York, 
we are working cooperatively with the attorney general from New 
Jersey. We will enforce the law, and we will do what we can as 
state officials.
    But I think it is a tremendous opportunity for the federal 
government to come in and really resolve this injustice 
nationwide.
    Chairman Miller. The gentleman's time has expired.
    Mr. Keller?
    Mr. Keller. Thank you, Mr. Chairman.
    And thank you, Mr. Cuomo, for agreeing to be here today. I 
am especially troubled about hearing of the conflict of 
interest that exists where financial aid administrators receive 
consulting fees or stock from lenders. We have common ground in 
our belief that this is wrong and unacceptable.
    Now, your investigation, I believe, has focused primarily 
on the private alternative loan market and not the federal 
student loans such as the Stafford loans, which are guaranteed 
by the federal government under Title IV of the Higher 
Education Act. Am I correct?
    Mr. Cuomo. You are correct.
    Mr. Keller. Did your investigation reveal any specific 
problems with the federal student loan program that resulted in 
any students paying either a higher interest than the law 
allows or higher origination fees than the law allows?
    Mr. Cuomo. Well, Congressman, two points. First, we have 
focused on the private loans because that is the growing area 
of the market. There are no caps in that area of the market. 
And it is virtually unregulated, so we have been focusing on 
the private loans.
    We have also come across instances in the FFEL program 
where there are activities in violation of the regulations that 
cover the FFEL program.
    I spoke about Marist College, which in our opinion violated 
regulations of the FFEL program--Columbia University, New York 
Institute of Technology.
    Mr. Keller. And I don't want to cut you off, but I heard 
you testify, and I wrote your notes. I know you think there is 
some violations of FFEL. I am getting to did you ever see any 
instance where a student was hurt for paying like a higher 
interest rate.
    For example, the interest rate now is 6.8 percent as of 
July. Did you in your investigation see something where the 
student is paying 7.5 percent or something to that effect, 
where the student was actually financially hurt?
    Mr. Cuomo. Well, Congressman, as you know, the rate is 
capped under the FFEL program, but the concept that justifies 
the FFEL program, or the best case for the FFEL program, is, 
``Well, we are going to have competition among private 
lenders.''
    And the competition among the private lenders might bring 
the interest rate down, or there might be a discount on the 
back end.
    If you have a preferred lender list and preferences for the 
schools, you never get to competition, so you don't really know 
if you got the best loan for the students, since the lender was 
selected in the interest of the school rather than the interest 
of the student.
    Mr. Keller. I hear you. And you found an instance where 
they only got one choice under the FFEL program and you were 
concerned about that, correct?
    Mr. Cuomo. Yes.
    Mr. Keller. Okay. Now, the main federal student loan 
program is Stafford, and one out of five students get their 
Stafford loans direct from the federal government. Four out of 
five get their loans under the FFEL program from private 
lenders.
    Senator Kennedy, Chairman Miller, former President Clinton 
have all indicated their preference for the direct loan 
program. Do you prefer the direct lending program over the 
private FFEL program?
    Mr. Cuomo. I understand the arguments for both, and I 
understand the argument that in the FFEL program you could have 
a situation where competition brings down the cost of the loan.
    I don't believe that is what is occurring, but I understand 
the concept and the theory.
    The direct program, obviously, has benefits, that the 
federal government directly is making the loan, you don't have 
a private lender and you have reduced costs.
    So I understand the arguments for both. I am not here as a 
policy official today. At one time, I appeared before Congress 
as a Cabinet secretary where I made policy cases and defended 
policy.
    Now I am just a law enforcement official and speaking about 
the findings of our investigation.
    Mr. Keller. All right. Mr. Cuomo, the reason I asked you 
that--because when you leave here, and all the smoke is 
cleared, I am going to hear from some people on the other side 
of the aisle saying, ``Hey, we had the attorney general from 
New York here. He talked about a few bad apples in the private 
lending program. We have got to do away with private lending on 
the federal level and switch to direct student lending.''
    And so when I hear that argument, I just want to go back 
and say to them, ``We had Attorney General Cuomo right here, 
and he didn't express that opinion.'' Is that a fair thing for 
me to say?
    Mr. Cuomo. You can say he is not a policy maker; the 
attorney general was just here talking about the facts from his 
investigations.
    Mr. Keller. All right. As a non-policy maker, let me ask 
you this, Attorney General. You have testified that the U.S. 
Department of Education has been asleep at the switch, it is 
irresponsible, and it has failed to maintain integrity.
    If that is the case, why should we put the Department of 
Education in charge of all of the federal student loans?
    Mr. Cuomo. I believe the Department of Education in this 
situation--again, my focus here is narrow and specific to the 
situation at hand on college loans and the findings from my 
investigations, and my work with schools all across the country 
and attorneys general all across the country.
    I think the Department of Education should have--
retrospectively and prospectively should be doing a better job 
on oversight of the FFEL program.
    I believe that the Department of Education's oversight 
should be extended to the private loan program. That is an area 
that is growing. That is the area where we have evidence of 
abuse. That is the area where, by design, you have the 
proclivity for abuse. I believe that also.
    I also believe the Department of Education should be faster 
and more aggressive in issuing regulations on the activity that 
we have found.
    There is a tremendous amount of information available to 
this committee and to the department. We have numerous cases 
all across the country. The marketplace is responding. Schools 
are changing. Lenders are changing.
    The federal government is in the oversight capacity, and I 
believe the Department of Education should be more aggressive 
in promulgating regulations that address this issue today.
    Mr. Keller. Thank you, and my time has expired.
    Mr. Cuomo. Thank you, sir.
    Chairman Miller. I find it interesting that the direct loan 
program in the eyes of my colleagues, some of them on the other 
side of the aisle--that it can't compete, and yet the private 
lenders went in and paid the University of Indiana $3 million 
to drop the direct loan program, so apparently they thought it 
could compete if it was left to its own.
    Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman.
    Thank you, General, for your testimony here this morning.
    Mr. Chairman, I look forward to supporting your 
legislation. I think it is very timely. I wish it weren't 
necessary. I wish the Secretary of Education had been more 
proactive and aggressive in responding to your requests just a 
few days ago.
    General, you say you are not a policy maker. You may not 
have made policy, but you made a lot of sense and made a lot of 
progress already, and we thank you for that.
    Mr. Cuomo. Thank you.
    Mr. Andrews. You have certainly recovered substantial 
amounts of money for students. That is to be commended. You 
have induced responsible members of the lending community to 
take their own initiative and clear up this problem, for which 
we thank you. And you have opened up a very important debate.
    I wanted to ask you some questions about how we might build 
on your work and prevent this sort of thing from happening in 
the future.
    With respect to the cases that have already settled, so 
there is no litigation strategy you have to disclose, how did 
you derive the numbers of the settlements that you agreed to 
from the universities with which you settled?
    Mr. Cuomo. Thank you, Congressman, for the question. There 
are two basic scenarios.
    For schools that received payments from lenders that we 
believed should not have been received in the first place, and 
where the amount of money made it practicable, the school 
returned the money that it received from the lender to the 
students who took those loans from that lender in that year.
    Mr. Andrews. So these were the preferred payments. The 
revenue-sharing payments were returned.
    Mr. Cuomo. Yes. So if a school received payments from a 
lender, under our statements the school gave that amount of 
money to the students who took the loans, because my basic 
point was that was a cost of the loan.
    If the bank had to make a payment to the school, that was a 
cost of the loan. If the bank wasn't making that payment to the 
school, they could have reduced the cost to the student, so the 
school should give the money to the student.
    The case we discussed, University of Pennsylvania--that 
came out to about $500 per student.
    In situations where the students have already been 
compensated, or the amount of money just doesn't make sense 
from a practical point of view to distribute to the student 
body, we have also set up an education fund where we will run a 
program to educate high school students about loans and their 
parents about the available loans and the best way to get a 
loan.
    And some schools or lenders are contributing to that fund.
    Mr. Andrews. Do you think that the harms that you helped to 
remedy here would have been avoided if we had a statutory 
requirement that schools make available on a level playing 
field basis--the same Web site, the same booklet, whatever--
every private lender that is out there that might bid on the 
student's business?
    If we opened this up and said, ``Look, if you are going to 
refer information about one lender, private lender, you have 
got to refer information about all of them that wish to be in 
the marketplace,'' would that work?
    Mr. Cuomo. Yes, Congressman. I think the point of getting--
breaking the monopoly of the preferred lender list--you have to 
break that monopoly.
    And that list or those recommendations must be regulated to 
the point that the decisions are being made based on the best 
interest of the students without any conflict of interest and 
not in the best interest of the school.
    I am not against preferred lender lists. There are a lot of 
lenders out there, and it is very confusing.
    And if a school wants to provide a service of doing the due 
diligence, and doing the review, and coming up with one or two 
or three or four lenders they want to recommend to the 
students, because they honestly believe it is in the best 
interest of the students, and they have done their homework, 
and they say, ``They have the best rates, and they have done 
the best servicing, and we have a good relationship,'' fine.
    Mr. Andrews. So if we had some fair and open process based 
upon criteria of merit, where everyone who passed the merit 
could be listed on a Web site or put in a booklet, and then the 
student could choose among those competing lenders, do you 
think that would remedy the situation?
    Mr. Cuomo. Yes. And I think there are two sides to the 
equation. Number one, the school has to be making the 
determination in the best interest of the student. That should 
be the criteria, not what is good for the school, what is good 
for the student.
    Second, there can't be any other relationships that would 
pose a conflict of interest. You can't be a financial aid 
officer that is exercising discretion but you are also on the 
advisory board of the bank.
    Mr. Andrews. Right. Frankly, there is a pattern for this in 
other areas of our jurisdiction in labor law, where labor union 
officials are not permitted to take any kind of compensation 
from the employers from whom they are negotiating in order to 
preserve their objectivity. Something like that would probably 
work.
    Mr. Cuomo. That is exactly right. That is exactly right. It 
is done in many other areas.
    And I frankly think, Congressman, there is an opportunity 
for the federal government here, because as Congressman McKeon 
pointed out, we need to restore consumer confidence here. 
Students are nervous. Students are asking questions.
    The industry needs to restore consumer confidence. The 
lenders, the schools, the guarantors--they want to restore 
consumer confidence.
    Let the federal government lead the way, pass the 
regulations, improve the oversight and restore the confidence 
of the industry. That is in everyone's best interest.
    Mr. Andrews. Thank you very much.
    Chairman Miller. The gentleman's time has expired.
    Mr. Petri?
    Mr. Petri. Thank you, Mr. Chairman.
    Thank you, General, for your testimony today. Can you tell 
me if you found any examples of abuse or questionable behavior 
in the direct loan program, or are all the instances of these 
questionable transactions and so on in either the private 
market or FFEL program?
    Mr. Cuomo. Off the top of my head, Congressman, I don't 
know of any cases we brought in the direct loan arena. I 
mentioned the ones in the FFEL program, and we were primarily 
focused on the private loans.
    Mr. Petri. Now, some years ago, when the man you worked for 
over at the housing department was leading in this area, we had 
50 percent direct loan and 50 percent, about, of the guarantee 
program.
    Now it is about 80-20. President Bush and his Office of 
Management and Budget indicates that the direct loan program 
costs about one-third as much as the guarantee program to the 
taxpayers.
    Do you think the concerns of the taxpayers, if the terms 
are equal to students, should be a factor in schools combining 
preferred lender lists and this sort of thing?
    Mr. Cuomo. Congressman, I don't think we have to choose 
between the interests of the taxpayers and the interest of the 
students.
    Mr. Petri. No, but what about the interest of the schools? 
It is not a question of students and taxpayers.
    It is a question of direct and indirect, and the guarantee 
program, indirect program, costs the taxpayer three times as 
much, according to our Office of Management and Budget, as the 
direct program.
    And the direct program has none of these ethical problems 
that you have been mentioning, as best--according to your 
testimony, at least.
    So why wouldn't we ask that they put the direct program on 
any preferred lender list that they decide to do, since the 
terms are the same? At least the direct program certainly is 
not any higher than these guarantee programs.
    Mr. Cuomo. Well, no, Congressman, I agree. The direct 
program has significant benefits. And the rates are the same 
between the direct program and the so-called FFEL program, but 
there is no private lender involved, so there are just fewer 
transactions, fewer connections.
    And we have not come across any cases in the direct loan 
program, but again, our focus was on the private loan program. 
We found instances in the FFEL program. We didn't find 
instances in the direct loan program.
    Mr. Petri. Now, there are a lot of schools that have stayed 
with the direct loan program--my state, Marquette University, 
Harvard University, Michigan and Minnesota.
    And yet we have seen the guarantee program go, despite 
that, from maybe 50 percent of the loans up to 80 percent of 
the loans.
    Why would you think schools have chosen to engage in 
transactions with private lenders----
    Chairman Miller. Would the gentleman yield, Mr. Petri?
    Mr. Petri. Will there be another round?
    Chairman Miller. Okay.
    Mr. Cuomo. Quickly, first, lenders work very hard, 
obviously, to insert their product through the FFEL, the 
guarantee program, rather than the direct program. And the 
industry is effective. And there are significant incentives 
offered to schools to drop out of the direct program and take 
the guarantee program.
    Mr. Petri. So you don't think there is actually a fair 
competition between the direct and the guarantee program in the 
marketplace today, and that might account for this?
    Mr. Cuomo. I think that is correct.
    Mr. Petri. Thank you.
    Mr. McKeon. Again, you have just a second left. Just to 
clarify the record, as far as I know, the direct lending got up 
to about 39 percent. I would just like to have it clarified in 
the record whether it is 50 percent or 39 percent.
    I believe it is closer to 39 percent, just for the record.*
---------------------------------------------------------------------------
    *Loan volume in the direct loan program totaled 33 percent at its 
peak in award year 1997-1998.
---------------------------------------------------------------------------
    Chairman Miller. We will get that for the record.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Mr. Chairman.
    General Cuomo, thank you very much for you and your 
assistant to come and visit with us here in our committee.
    My first question is on the basis of your investigation of 
the relationships between college employees and lenders and the 
instances you have uncovered of payments or other things of 
value being exchanged in return to steering borrowers to 
lenders. Are you considering criminal charges?
    Mr. Cuomo. That is a good question, Congressman. These 
facts present on two levels, if you will. It is the bank-school 
relationship and then, at times, the bank-financial aid officer 
relationship. And they are two different concepts.
    There is an institutional connection at times between the 
lender and the school, revenue sharing, printing, et cetera.
    And then we have also found cases where they are just--the 
individual financial aid officer at times unbeknownst to the 
school has a relationship with a lender and puts that lender as 
the ``preferred lender'' and then the phenomenon we discussed 
before, where the students trust the school, so they go to the 
preferred lender.
    Those are two very different situations for us. And there 
are a number of cases that my office is investigating where the 
individual financial aid officer may have been violating laws 
beyond just the consumer protection laws, and those are ongoing 
investigations in the office.
    And yes, there is a potential for criminal charges in those 
cases.
    Mr. Hinojosa. My next question is do you think that 
students and families would be better served if lenders and--if 
the lenders marketed directly to them?
    What is your obligation--what is our congressional 
obligation to assist students and families, many of whom have 
limited experience with credit, navigate higher education 
finance and student loans?
    Mr. Cuomo. I think, Congressman, first, the Department of 
Education should do its job. It should be doing the oversight 
on the FFEL program and the direct program. I believe the 
safeguards should be extended to the private loan program.
    And then I would urge action on the situation that has been 
uncovered on the preferred lenders and the revenue sharing and 
those relationships, and what I believe are distortions made to 
students and to parents in selecting the loans when they arrive 
at the school.
    And I believe this committee and the Department of 
Education can resolve that also. And as I said to Congressman 
Andrews, I believe the industry is crying out for your guidance 
and your intervention.
    There is a crisis. Consumers are worried. And the schools 
and the lenders are ready to change their ways. They are. You 
have seen that just from my actions as one state A.G. They want 
to restore the confidence.
    Just give them the guidance and the direction and say, 
``Here is the new protocol, here is the new behavior, here is 
the new regulation,'' and restore the confidence and we can 
then answer this question on every campus across the nation.
    Mr. Hinojosa. What do you think if we were to require that 
students and their parents be given counseling through 
financial literacy education programs that are available now, 
so that the student and the parent would make an intelligent 
decision?
    Mr. Cuomo. Congressman, I think the counseling is a good 
idea. I think that should be combined with--you know, as an 
affirmative counseling effort, but combine that with stopping 
the distortive material that they are getting, stopping the bad 
information and the bad guidance, and prime among that is the 
``preferred lender relationship,'' where they are following the 
school's advice, and the school may not be giving that advice 
in their best interest.
    Mr. Hinojosa. I believe that seeing what has happened in 
the home mortgage financing industry, where we have had tens of 
thousands of foreclosures, that we are considering requiring 
counseling before a mortgage loan is given, and there seems to 
be a lot of support in Congress for this.
    And so I am trying to see how we could also do the same 
thing for this type of a student loan because, in many cases, 
particularly in areas that I represent, were it not for a 
student loan, our students would not be able to access higher 
education.
    And I strongly believe that that is going to be a 
recommendation that I will be discussing with my colleagues.
    I yield back, Mr. Chairman.
    Chairman Miller. I thank the gentleman.
    Mr. Cuomo. Congressman, if I might--Mr. Chairman, just in 
response, I agree with the congressman's statements 
wholeheartedly.
    And what the housing market did--and I had the opportunity 
to work with you on some of those issues, Congressman, years 
back--we provided counseling, but we also fought predatory 
lending.
    To me, this is a fashion of predatory lending. It is not 
used normally in the college loan context, that term, but it 
could be, because the same types of tactics we saw that we 
referred to as predatory lending in mortgages--we are seeing 
the same tactics in the college loan, and they predatory, and 
there is predatory lending.
    So let's attack the predatory lending, and let's put the 
counseling in place to offer the affirmative guidance.
    Mr. Hinojosa. I thank you.
    Chairman Miller. Congressman Kuhl?
    Mr. Kuhl. Yes.
    Welcome back to Washington, Attorney General.
    Mr. Cuomo. Good to see you.
    Mr. Kuhl. Nice to see a fellow New Yorker here.
    Mr. Cuomo. Yes, sir.
    Mr. Kuhl. Nice to see you also leading the way in what is 
obviously a very deceptive practice going on today, and I 
certainly value your testimony.
    A couple of things I want to follow up on with what 
Congressman Hinojosa brought forward. And that is in your 
testimony, you talk about illegal practices.
    I guess it comes from my training as a lawyer as to knowing 
exactly what you term to be illegal. I have heard general 
references to violations of consumer protection laws and that 
sort of thing.
    I particularly was interested in the criminal aspects of 
this particular practice. And before we get there, we are--or I 
should say--and you are concentrating primarily on private 
loans, is that correct?
    Mr. Cuomo. That is correct, sir.
    Mr. Kuhl. Okay. And we recognize, I think, jointly that the 
Department of Education has no control over private loans at 
this point, is that correct?
    Mr. Cuomo. At this point, that is correct, sir.
    Mr. Kuhl. Okay. And you are advocating that they do involve 
themselves in what really is a free market practice right now 
between a school and--a student, I should say, and a creditor, 
a bank.
    Mr. Cuomo. Well, what I have said about the Department of 
Education first is they do regulate the FFEL program, as you 
know.
    Mr. Kuhl. Right.
    Mr. Cuomo. We pointed out a number of instances where the 
FFEL program--there were violations in the regulations 
concerning the FFEL program--many of the state schools in our 
home state of New York, where there are just violations within 
the FFEL program--current regulations, no additional 
jurisdiction.
    The suggestion is there should also be additional 
supervision on the private program which would require 
congressional action, is my guess.
    Mr. Kuhl. Right. And I think you used the statistic 90 
percent of the loans that are given are in that private arena, 
and that is where you found the violations primarily in your 
investigation?
    Mr. Cuomo. No, Congressman. Ninety percent is the 
percentage of students that take loans from preferred lenders, 
the lenders that are on the college preferred list. Ninety 
percent of the students follow the school's recommendation.
    The private loans are, give or take, about 20 percent of 
the entire loan portfolio nationwide, but it is the percentage 
of the market that is actually growing dramatically.
    Mr. Kuhl. Okay. And to follow up on your testimony relative 
to illegal practices, what illegal--under the statutes of New 
York that you are sworn to uphold, really occurred in those 
instances that your investigation revealed?
    Mr. Cuomo. There are two different situations, as we 
discussed. First, under the business laws of the state of New 
York and the consumer protection laws, it is illegal to have 
deceptive business practices.
    In our opinion, some of these business practices are 
deceptive, where you are getting a ``kickback,'' which is the 
term that we have been using this morning, for a loan that was 
undisclosed.
    You have deceptive business practices, and we protect the 
New York consumer. So the rationale for the jurisdiction in 
schools in other states--because if New Yorkers are there, and 
they are consumers, then we protect the consumers.
    Mr. Kuhl. Let me just interrupt for just a minute. On that 
specific point, has there been any kind of proactive attempts 
to be deceptive by any of the colleges that you have seen, from 
material that they have advance?
    Or is it an omission act on their part not to disclose 
their relationship that we are really kind of keying into, or 
that your investigation keyed into here?
    Mr. Cuomo. Both.
    Mr. Kuhl. Both.
    Mr. Cuomo. Both. First, non-disclosure is a problem, 
Congressman.
    Mr. Kuhl. I am not debating that it is or isn't. I am just 
curious from a factual standpoint what your investigation 
found. If there were schools that were saying----
    Mr. Cuomo. Well, almost all of this that we have been 
talking about this morning is a case of non-disclosure.
    Mr. Kuhl. Okay. By omission?
    Mr. Cuomo. Well, non-disclosure by omission.
    Mr. Kuhl. Okay.
    Mr. Cuomo. You had an economic incentive in the 
transaction, and you never disclosed your economic self-
interest to me.
    As a matter of fact, you represented the opposite. You 
said, ``This is good for you, Andrew. We think this is a good 
business transaction for you, Andrew.'' And you never told me 
that you were getting a commission on the business transaction. 
I consider that deceptive.
    On the situations with the individual, that is a different 
situation, because those are--they are not institutional.
    These are individuals who were involved in securities 
transactions with private companies that violated in some cases 
the college code, and possibly violated criminal laws.
    Mr. Kuhl. Okay.
    Chairman Miller. The gentleman's time has expired.
    Mr. Kuhl. My time has expired. Thank you.
    Chairman Miller. Ms. McCarthy?
    Mrs. McCarthy. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    And again, it is good to see you, Attorney General Cuomo. 
We have worked together in the past, and hopefully we will work 
together in the future.
    I have a little bit of a curiosity. I also sit on Financial 
Services, and with the banks that you have had statements with, 
were they breaking any regulations as far as through the 
banking industries? We have three different regulators of 
banks.
    Are those regulators looking into any of these practices 
that you have uncovered?
    And I guess the biggest thing is you just came into office 
in January. How long do you think these particular practices 
have been going on? And how did you pick it up and be able to 
do something in such a rapid time, when no one else seemed to 
know what was going on?
    Mr. Cuomo. Well, Congresswoman, thank you for the question. 
And it is a pleasure to be with you once again, and it is a 
pleasure to be able to work together on yet another important 
issue to New Yorkers and to Americans.
    As far as other banking regulators looking at these issues, 
I am not aware of that. I wouldn't be surprised, however, 
because this is basically a consumer lending transaction where 
the bank is offering a consumer loan, a student loan.
    The schools are almost de facto brokers, in my opinion, 
when they enter into these relationships where they are 
receiving a commission.
    It is almost like they went into the brokerage business, 
undisclosed brokers, and they are receiving a commission for 
their brokerage service.
    But I am not the banking regulator. It wasn't my 
jurisdiction, and we were doing this under consumer protection 
laws.
    In terms of where did this come from, it is interesting. It 
is an industry-wide practice, Congresswoman, that I believe has 
evolved over a period of years.
    And it is one of those industry practices where it starts 
small. It becomes more egregious as time goes on. More people 
are doing it. And then you get to a point where basically 
everyone is doing it.
    Every school seems like they are doing it. Everyone is 
going to the conferences. Everyone has a preferred list. 
Everyone has revenue sharing. It must be okay if everyone is 
doing it.
    We have seen these type of situations on Wall Street, where 
you have a practice that just grows and grows and grows, and it 
becomes very widespread, and people take comfort in the fact 
that everyone is doing it, but you scratch the surface and you 
really look at the underlying rationale, and it collapses.
    And I think that is what happened here. I don't believe the 
oversight was adequate. I don't believe the guidance was 
adequate. And it grew and it grew and it grew, and people took 
comfort that everyone was doing it.
    And now the expression we use in the office--it is like 
peeling an onion. One situation leads to another, leads to 
another, leads to another. And that is what we have been doing 
over the past several months.
    Again, the good news is the industry gets it. I really 
believe that. The schools get it. The lenders get it. Students 
understand this issue. And students are now asking the tough 
questions.
    And the industry really does want to reform the practice, 
because they need to. It is like the housing arena. Consumer 
confidence drives the market. And they need to restore consumer 
confidence.
    Otherwise, students are unwilling to take the loans, or 
they are asking a lot of tough questions when they take the 
loans, and that is actually an opportunity for government.
    You are not going to have to fight the market here. You can 
do it with the market, because the market needs to restore the 
consumer confidence as much as the consumers need the 
confidence restored.
    Mrs. McCarthy. I personally don't buy it that, you know, 
just because everybody was doing it that no one, whether in the 
lenders, the bankers or even the schools, had a thought that 
this could be wrong. I don't understand that.
    Obviously, you know, the banks, the lenders--they all have 
spreadsheets. Money is given. Transactions are done. It is like 
being on the take. I mean, I am lost on how they didn't think 
something was wrong, or not even to report it somewhere, that 
someone didn't do it.
    Is that what we are seeing? Is that what we are facing, 
that corporations today are saying, ``You know, oh, it must be 
okay?'' I mean, I am tired of those excuses, to be very honest 
with you.
    Mr. Cuomo. Well, Congresswoman, I am with you. But that was 
where this started. Now, it has unfolded rapidly, but a couple 
of months ago when we started this, that is where it started--
everyone does it, there is nothing wrong with it.
    Mrs. McCarthy. Thank you.
    Chairman Miller. The gentlewoman's time has expired.
    Mr. Hoekstra?
    Mr. Ehlers?
    Mr. Ehlers. Thank you, Mr. Chairman. I apologize for being 
late, but I had two other committee meetings I had to attend.
    Since I have not spent much time here, I am unprepared to 
ask questions, and I plan to yield time to Mr. Keller.
    But I just want to thank you for being here. Thank you for 
what you have uncovered. I am amazed that we didn't uncover it 
ourselves earlier. And I hope we can examine all the student 
loan programs and look at some of the programs.
    With that, I am pleased to yield the balance of my time to 
Mr. Keller.
    Mr. Keller. Well, thank you, Mr. Ehlers, for yielding.
    Mr. Attorney General, you said your investigation is like 
peeling an onion. I can assure you that your investigation, 
like an onion, has brought tears to many lenders' eyes here.
    You have recovered a substantial amount of money, $6.5 
million before today, and then you announced, presumably, a lot 
more today.
    Who controls that money that you have recovered for this 
national education fund?
    Mr. Cuomo. The financial payments happen in two areas. 
Number one, there are funds that are returned to students 
primarily from the schools. If we believe there was a payment 
that was questionable, those payments are turned over to the 
students.
    That is the $500 per student, University of Pennsylvania, 
and that has been the majority of the arrangements with the 
schools.
    Mr. Keller. Let me just stop you on that. First, if it goes 
to the school with directions, do you use it for need-based 
financial aid, or for anything they want, or how does that 
work?
    Mr. Cuomo. No, the schools will return--I use the 
expression return the money to the students, because my 
position is that the students subsidized that payment to the 
school.
    So the school will return the money to the students who 
took loans that year and proportionate to their loan amount. So 
if you took a larger loan than I took, you get more money back 
than----
    Mr. Keller. And that is most of the--say most of the $6.5 
million you recovered so far will go back to the schools, at 
those particular schools?
    Mr. Cuomo. Well, that is one aspect of funding. Another 
aspect of funding is primarily from the lenders, where it is 
not a question of returning money to students.
    My office is going to run an educational program to educate 
high school students and parents about the loan programs, the 
benefit of programs, but it will be obviously an objective 
source of information for high school students and their 
parents.
    Congressman Hinojosa's point, I think, was very well taken. 
The counseling aspect of this is also important.
    Understanding the FFEL versus direct versus Stafford versus 
Perkins versus private versus PLUS--it gets confusing, 
especially for a high school student who hasn't had a lot of 
experience in this area, so we will offer an educational 
program in that regard.
    Mr. Keller. All right. And your office will decide with 
respect to those funds from the lenders where that money will 
be spent?
    Mr. Cuomo. Yes, sir.
    Mr. Keller. And so it is a national education fund, so will 
it be distributed equally among the states like Florida, or is 
New York going to be on the preferred list of receiving those 
funds?
    Mr. Cuomo. Well, we have a lot of New York students in 
Florida schools. We have a lot of New Yorkers who move to 
Florida. So it is going to be a prime market for us.
    Mr. Keller. We will look closely at that list and make sure 
it is not preferred there.
    Let me ask you something about this preferred list issue, 
anyway. Clear it up for me. It would seem to some of us that 
maybe you want to do away with preferred list altogether, but 
then on the other hand you have wholeheartedly endorsed 
Congressman Miller's Sunshine Act, which doesn't do away with 
the preferred list. It just says you have to have a minimum of 
three.
    Where do you stand on this issue about whether we should do 
away with the preferred list or keep them?
    Mr. Cuomo. You can either fix it, reform it, or do away 
with it. You can't leave it the way it is. I don't believe that 
is an option.
    If you want to regulate it and reform it, you can keep it. 
If you don't believe you have the capacity to do the oversight 
or the appetite to do the reform, then do away with it.
    I am not against preferred lender lists per se, because--
just the way I am running an educational program to inform high 
school students, because this is complicated.
    If you have a college that says, ``I will undertake 
voluntarily the task of vetting all these lenders, and I will 
bring them in, and I will do the interviews, and I will go 
through the loan rates, and I will go through the service 
records, and I am going to recommend three or four or five 
lenders to my student population, only on their best 
interest,'' the school says, ``I have no conflict of interest. 
My financial aid officer has nothing to do with the 
universities. This is just a gratuitous opinion to help my 
students,'' that could be a good thing.
    But then it has to be regulated. First of all, there have 
to be regulations. Then those regulations have to be enforced. 
Then there has to be oversight. And you could do that. And that 
is a position I endorse.
    Or do away with the list. If we don't believe we have that 
capacity, then say the schools should not be making 
recommendations, should not be steering, because they may be 
self-interested, and that could actually be hurting the 
consumer interest of the student.
    Mr. Keller. Thank you. My time has expired.
    Chairman Miller. Thank you.
    Mr. Bishop?
    Mr. Bishop of New York. Thank you, Mr. Chairman. Thank you 
very much for holding this hearing.
    Mr. Attorney General, welcome, and we New Yorkers have been 
proud to call you one of our own for a long, long time, but we 
are particularly proud right now. So thank you very much for 
the work that you have done.
    Mr. Cuomo. Thank you.
    Mr. Bishop of New York. Let me start with an observation. 
It is not remotely surprising, in my view, that the private 
loans have grown so dramatically in recent years. And in part, 
they have grown because of federal policy or federal actions.
    You know, college costs are increasing. Only very recently 
did we increase the Pell grant maximum for individual students. 
We have kept campus-based federal funding constant, I think, 
since 2000 or 2001.
    The president's budget request to Congress suggested that 
we eliminate SEOG, eliminate Perkins loans. So we are leaving 
needy students with precious few options if they are going to 
attend the colleges of their choice.
    What I want to focus on--you have testified and you have 
said that you think the lenders get it. You think the schools 
get it. You think that they want to reform themselves. You have 
entered into 16 or 17 agreements with schools and agreements 
with four lenders.
    Does your office have the staff to monitor compliance with 
these agreements on an ongoing basis, or is that monitoring of 
compliance better left to the federal government?
    Mr. Cuomo. Congressman, first, thank you very much for your 
kind words. We can monitor the agreements that we have signed. 
We can monitor the 16 schools. We can monitor the four lenders. 
Our agreements were done in such a way that they are relatively 
simple to monitor.
    Can we replicate the task that the Department of Education 
should be doing? Of course not. Could even all the attorneys 
general combined be replicating the task of the Department of 
Education? I don't believe so.
    And that is why there is a federal government. There are 
state attorney generals.
    But I think the best course is, as a believer in the 
federal government, as a former Cabinet secretary who truly has 
the highest respect for federal service, I believe through this 
committee and the Department of Education federal policy should 
be set.
    Regulations should be promulgated now for effect. This is 
not a question where we need task forces and study groups 
before we act. Pass the regulations. Do the oversight.
    Mr. Bishop of New York. On the issue of preferred lender 
list, I know we have talked about this throughout the morning, 
but our legislation basically deals with the issue of preferred 
lender list in terms of greater transparency and having schools 
provide clear information as to how and why a school came--
pardon me, a lender came to be on a preferred lender list.
    Do you believe that is sufficient, or do you think we 
should have more extensive monitoring, if you will, or more 
extensive efforts to control how preferred lender lists are 
developed?
    Mr. Cuomo. Congressman, I think you answered both ends of 
the equation--the how and why did you pick the lender, and it 
can only be with the interest of the students in mind. And 
number two, there are no conflicts for the school or the 
financial aid officer.
    If those two conditions exist, then I think the preferred 
lender list can be an asset.
    Mr. Bishop of New York. Thank you. And thank you very much 
for----
    Mr. Cuomo. Thank you. Pleasure being with you.
    Chairman Miller. Congresswoman Shea-Porter?
    Ms. Shea-Porter. Thank you, Mr. Chairman.
    And thank you very much for being here and for your 
testimony. I am very concerned about, first of all, the culture 
that we have been discussing. It feels like a corrupt culture, 
and I have to agree with the congresswoman who said it feels 
like on the take.
    And I don't understand it. And I am concerned, and I wanted 
to read a couple of things that I had seen in an A.P. article, 
when they are talking about a senior department student aid 
official placed on leave pending an investigation of $100,000 
in stock in Education Lending Group, the former parent company 
of Student Loan Express.
    Do we have a problem inside the Department of Education 
here?
    Mr. Cuomo. I don't know if we have a problem inside the 
department, Congresswoman, just because I haven't done that 
work, and it is not my role.
    But I agree with the congresswoman and Congresswoman 
McCarthy and Congressman Hinojosa on the point that there are 
instances of just plain, blunt corruption here.
    We have found those instances primarily around the 
financial aid officer situations, where individuals in the 
financial aid office basically undertook self-dealing, I 
believe in violation of the law.
    So there are instances of corruption, there is no doubt.
    Ms. Shea-Porter. Okay. Also, in the A.P. article it talked 
about lenders also would not be allowed to pay college 
employees to serve on advisory boards.
    That would seem like a no-brainer right away, that you 
wouldn't have a college employee on an advisory board of a 
lender. Is that very common?
    Mr. Cuomo. We have found it. But, Congresswoman, your basic 
point I agree with, which is we have to change the culture 
here. It is not just a question of a specific fact pattern. 
There is a culture.
    There are relationships here which have to be changed and 
broken, and relationships between the financial aid officers 
and lenders, relationships between the schools and lenders. And 
there has to be a new code of conduct, we call it, a new 
culture defining those relationships.
    Ms. Shea-Porter. Perhaps an old code, because I think back 
when I was in college, and I don't think we needed all these 
laws. People understood, instead of us having to constantly 
address it.
    And I wanted to disagree with something a colleague across 
the aisle said when he was talking about the Department of 
Education and wondering if, you know, it should have a role.
    It is not the Department of Education. It is the political 
people inside the Department of Education that appear to be 
falling down on this job.
    And so my next question to you is why can't we just have 
the federal government--when we look at the problems that we 
are having with these preferred providers and others, are they 
absolutely a necessary component?
    I know when I got my student loans we just had a couple of 
choices. Life was easy. Paying back wasn't, but, you know, we 
understood what the responsibility was. And we didn't have to 
maneuver through all of this.
    I look at my own daughter who is in college, and every 
single day--and she is not even living at home--I receive for 
her an application for a credit card company and for this and 
for that.
    Is there a way--is there some harm in simplifying this and 
saying, ``If you go to college, you are going to get your loan, 
these are the federal loans that are available, and we are not 
going to put out a menu with 10,000 different companies?'' Is 
there something inherently wrong with that?
    Mr. Cuomo. Congresswoman, it is a good question. I don't 
know the area well enough, frankly, to say whether or not there 
could be a consolidation of these different programs.
    I ran the Department of Housing and Urban Development as 
secretary for 4 years and then assistant secretary for 4 years, 
and the constant question was, ``Why do we have to have so many 
housing programs? Can't we consolidate these? It is so 
confusing.''
    There is old language at HUD and housing and different 
programs and different acronyms. I don't know student lending 
well enough to say whether or not there could be a 
consolidation of programs.
    And also, competition is a good thing. I believe that. And 
putting lenders in competition, who can get the rates down for 
students, and who can offer the best package--that is a good 
thing.
    That is just not what we have now. We have almost the 
opposite. We have a virtual monopoly for lenders where 90 
percent of the students are going to a selected group of 
lenders. The monopoly, if you will, is done through the 
preferred lender list.
    And the preferred lender list can be a very good thing and 
can help guide the students through the maze that you are 
discussing. But then it has to be done on the student's 
interest, and there can't be conflicts.
    Ms. Shea-Porter. Okay, thank you. My time has expired. 
Thank you.
    Chairman Miller. Thank you.
    Mr. McKeon just wanted to make a clarification. Then Mr. 
Courtney is next.
    Mr. McKeon. Thank you, Mr. Chairman.
    Just in clarification, most of the dealings that you had 
with these different schools really involved private lending, 
is that correct?
    Mr. Cuomo. Private lending and FFEL programs.
    Mr. McKeon. But most of it--the majority was private 
lending.
    Mr. Cuomo. We have had activity in both. I would have to 
look at how many cases we have done in each to answer your 
question.
    Mr. McKeon. What we have seen so far that you reported--
most of it was private lending, which we have no--and the 
department has no jurisdiction over. It comes under another 
committee, the Financial Services.
    And also, in the refunding or--what do we call that?--the 
revenue sharing--that is already against the law with regard to 
the FFEL program. We have already done that. So it is the 
private lending, which we have no jurisdiction over now.
    If we could go to Mr. Franks and ask him to give up that 
jurisdiction, that would be great, and we could get it all here 
where we could get our hands on it.
    Chairman Miller. He doesn't even have to give it up. He 
would just agree with us. We are talking to the committee. 
Obviously, there is a number of issues here that stray off in 
different directions and different jurisdiction.
    Once again, we would like jurisdiction not to become the 
issue here. We would like the results of Mr. Cuomo's 
investigation and our own legislation and others to be the 
results of that, not a jurisdictional fight.
    Mr. Cuomo. But just to clarify----
    Chairman Miller. Mr. Courtney?
    Mr. Cuomo. Excuse me, I am sorry. Just to clarify on the 
congressman's point, the Marist College case that we 
discussed--that is the FFEL program. New York Institute of 
Technology--that is the FFEL program.
    Columbia University--that is the FFEL program. SUNY, state 
university system of New York, had a college that was engaged 
in a FFEL program violation.
    So we are talking about FFEL program violations as well as, 
as the congressman points out, private loans.
    Mr. McKeon. And those are the areas that our bills that we 
have introduced we would have----
    Mr. Cuomo. Yes.
    Mr. McKeon [continuing]. We would have a chance to address.
    Chairman Miller. We will come back. Mr. Courtney can see 
his time evaporating.
    Mr. Courtney is recognized for 5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman.
    And I want to congratulate the attorney general on the fine 
work you are doing. Mr. Blumenthal, your neighbor next door, I 
know is working hard to get Connecticut covered as well.
    Mr. Cuomo. Oh, he is the dean. He is a great, great man.
    Mr. Courtney. I will tell him you said so. When 
Congresswoman Shea-Porter talked about how it is hard to almost 
understand how much change has gone on for families dealing 
with this issue, I mean, one reason I think the change is 
happening is that going to college now is like buying a house 
in terms of the size of the cost.
    And that really has just raised the stakes for everybody in 
terms of what--as consumers, but certainly in terms of lenders 
as well, in terms of what type of money people can make out of 
this process.
    And you know, using the house analogy, I mean, it strikes 
me that the preferred lender list is almost like saying to 
people buying a home, ``You know, we are going to let the home 
builder select the top two or three banks that you can buy your 
house through.''
    And there almost seems to be something almost inherently--a 
conflict with having the entity that you are paying be involved 
at all in the decision-making.
    And it seems to me that using another sort of example where 
the government had to come in and sort of straighten out a 
marketplace that was out of control was the situation with 
Medicare supplemental insurance about 10 years or so ago, 
where, again, consumers were being overwhelmed and confused 
with insurance companies that were selling Medicare 
supplemental insurance policies and ending up with products 
that weren't what they were purported to be.
    And the government had to step in and basically structure 
the marketplace with the A through J different types of plans, 
and then allow the insurance companies to compete on price, 
which has worked actually pretty well in terms of making sure 
that at least from a consumer protection standpoint insurance 
policies did cover a basic set of coverages.
    But it still allowed a marketplace to give people a choice 
in terms of price. And I know you have tried to sort of balance 
your testimony in terms of not castigating the notion of 
preferred providers list as a--you know, as an option as we 
move forward.
    But it just seems to me that at some point, you know, it is 
a situation in which given, again, the amount of money that 
people are having to use in terms of student loans that maybe 
colleges and universities really should just be sort of taken 
out of this process and allow the government to set up a 
separate mechanism for protecting the consumer.
    Mr. Cuomo. Well, Congressman, let me respond, and let me be 
more direct. Sometimes as a New Yorker I am a little too 
reserved and indirect, I have found.
    Mr. Courtney. We haven't noticed that at Fenway Park.
    Mr. Cuomo. And Congressman Bishop made this point earlier. 
This is a double whammy for students and the reason I have a 
disagreement with the point that Congressman McKeon raised.
    What is really happening is this. The cost of a college 
education has skyrocketed. The student loans don't give the 
student enough money to pay for the education. The student's 
only alternative is to go to the private loans ``alternative.''
    The joke is because they have no alternative. That is why 
they are taking a private loan, at an exorbitant interest rate, 
because federal programs don't provide enough money to pay the 
tuition, period.
    So if you want to go to college, you take the federal 
loans, then you have to take a private loan. Otherwise you 
can't afford it.
    When you go to the private loans, they are a function of 
the private marketplace. There are no caps. There is a high 
potential for abuse. They are very expensive.
    When you compare this market, this industry, to the housing 
mortgage market, in my opinion there is no comparison. The 
housing mortgage market is much safer than this market.
    These issues of disclosure, these conflicts of interest are 
much better protected in the mortgage arena than they are in 
the student loan arena.
    The ``predatory lending'' that we have talked about in the 
housing market arena is a modified version of what we are 
looking at in the student lending arena.
    So I agree that many students take the private loans as a 
last resort because they can't afford the school. They are 
unregulated. There is a high potential for abuse. The abuse has 
happened.
    It is not as well regulated as the housing market, not that 
that is perfectly regulated either, and not that there is not 
abuse there, but there are many more regulations than you have 
in the lending area.
    And it is a situation that is only getting worse. And I 
would like to see a more aggressive federal response than we 
have seen thus far.
    Mr. Courtney. Thank you, Mr. Chairman.
    Chairman Miller. Mr. Hare?
    Mr. Hare. Thank you, Mr. Chairman. Thank you for holding 
the hearing this morning.
    And, Attorney General Cuomo, thank you very much for coming 
and for all the hard work you have done.
    And I am happy that on Monday the attorney general of my 
state, Lisa Madigan, worked with you, and because of those 
efforts two for-profit college systems with headquarters in 
Illinois, DeVry University and Career Education Corporation, 
agreed to make changes in their student loan practices and to 
adopt the code of conduct that you have been talking about for 
lenders and colleges alike.
    You know, I don't know how many times today I have heard 
the term kickback, but it would seem to me--and I agree with 
Mr. Payne.
    You know, for those students, you know, the $500 per 
person, I wonder if for those people who were basically allowed 
to be used, if you will--and hopefully the $500 will help 
them--if you went into a convenience store in my state, I 
believe it is--and you lifted $500 worth of merchandise, I 
think that would be a felony.
    And it just seems to me that this kind of conduct is just 
absolutely insane. And it is wrong. And I just want to, you 
know, commend you for the work you have done.
    I just want to ask you, on the basis of your investigations 
and the relationship between these employees and the lenders, 
are you considering filing criminal charges against any of the 
folks that have been found to have practiced and engaged in 
this?
    Mr. Cuomo. There is a possibility of criminal charges 
against the--in some of the cases that we are investigating, 
yes, Congressman.
    And I also agree with you. The expression I used is the 
private loans are the Wild West of student lending. And I 
believe the federal government does have a responsibility.
    And we know there are abuses. We know that it is the area 
that is growing. We know that it is highly unregulated now.
    And we know that you are dealing--you are preying on a 
population of students who are not in the position to protect 
themselves and don't really have any alternatives or options.
    And why shouldn't the federal government give them the 
protection? And I believe this committee can do it, or the 
committee could do it working in conjunction with another 
committee if there is a jurisdictional debate.
    But I think what the consumers across the country are 
saying is, ``Please help.'' And I am sure this committee 
intends to respond.
    Mr. Hare. One other question I wanted to ask you was about 
the chairman's bill that I am a co-sponsor of, and I know you 
support the Student Loan Sunshine Act.
    And from your perspective, if you could tell me or maybe 
the committee why you feel that the act is so important and, 
you know, why we need it.
    I mean, I think I know that, but I am just wondering from 
your perspective.
    Mr. Cuomo. Well, I think, Congressman, on a number of 
levels. Number one, students need help. Parents need help.
    Number two, the industry itself needs confidence restored. 
And again, we have four of the top lenders in the country--the 
four top lenders in the country--just in the past month entered 
into settlements with us.
    Sixteen schools all across the country, just in the past 
month--this is an industry that is crying out for reform and 
crying out for a new standard. There is no one better, nobody 
better, at providing a national uniform reform standard than 
the federal government.
    And change comes in a number of ways. And we have done 
change through the states, through attorneys general, when the 
federal government has failed to act. We did it on Wall Street 
when the SEC failed, in my opinion. We have done it in the 
environment when EPA has failed.
    Arguably, we are doing it now where the Department of 
Education has failed. But it is not the best way to do it. I 
believe the best way to do it is with deliberate federal 
action, not federal inaction where the states fill the void.
    Mr. Hare. Attorney General, if you wouldn't mind, I would 
like to--with the remainder of my time, Congresswoman Shea-
Porter, I think, has a very important question. I think I will 
let her ask it.
    But again, I just want to thank you for all your hard work 
and continued success in this field. Thank you very much.
    Mr. Cuomo. Thank you. It is a pleasure to work with Lisa 
Madigan. She is a real pro.
    Ms. Shea-Porter. Thank you very much, Congressman.
    I wanted to ask a question about a federal database and if 
these lenders have had any access to it. I read that recently 
they have been banned from accessing a federal database. Was 
there any abuse there?
    Mr. Cuomo. I only know what I have read in the papers on 
that issue, Congresswoman. I don't have any independent 
knowledge. But I think the stopping of the access to the 
database was a good idea.
    Ms. Shea-Porter. Okay. Thank you.
    And I yield back. Thank you.
    Chairman Miller. Thank you.
    Attorney General, you have been very generous with your 
time, and I told you I would get you out of here at a 
reasonable time. I think I am a few minutes beyond what we 
agreed to, but thank you.
    Mr. Cuomo. Still reasonable, Mr. Chairman.
    Chairman Miller. It is unusual to have one witness have to 
field all of the questions. Usually you get to share them with 
a panel.
    But this has been, I think, very helpful to us, hopefully 
helpful to the public in terms of understanding what has taken 
place here and what you have uncovered along with the other 
attorney generals.
    I appreciate your remarks and your support of my 
legislation, Mr. McKeon's legislation, and we are going to try 
to respond to this in a timely fashion.
    But again, thank you so much for your leadership and your 
actions that you have taken to date on this matter, and it is 
great to have you here in this capacity as the attorney general 
of the state of New York.
    Thank you very, very much.
    Mr. Cuomo. It is good to be back, Mr. Chairman. Thank you.
    Chairman Miller. The committee record will remain open for 
members for the next 14 days if members have submissions that 
they want to make.
    I think some members may have additional questions, Mr. 
Attorney General, that they may want to submit to you in 
writing. If that is all right with you, we would like to be 
able to do that.
    Mr. Cuomo. It is my pleasure.
    Chairman Miller. And with that, the committee will stand 
adjourned.
    [The prepared statement of Mr. Altmire follows:]

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 
                     From the State of Pennsylvania

    Mr. Chairman, thank you for holding this important hearing on 
unethical practices that have been discovered in the student loan 
industry.
    I would also like to thank Attorney General Cuomo for taking the 
time to be here today. I appreciate your leadership on this issue and 
look forward to hearing your testimony.
    Ensuring that higher education is affordable and accessible to all 
students is an issue of great importance to me. The state of 
Pennsylvania has the fifth most expensive public institutions of higher 
education and the tenth most expensive private institutions of higher 
education. As a result, loans are an essential part of financing 
education for most students in Pennsylvania and getting the best 
possible interest rates is crucial to making higher education 
affordable and accessible to them.
    This Congress has already taken a great first step in making 
college more affordable for students by passing the College Student 
Relief Act (H.R. 5), which reduces the interest rate on subsidized 
student loans from 6.8% to 3.4% over the next five years. Eliminating 
the unethical practices that have been found in the student loan 
industry, and therefore, helping students and their families receive 
the best possible deal is the necessary next step.
    I am aware that most lenders and institutions of higher education 
are not bad actors, and that many lenders have begun dealing with the 
issues that have come to light. Today, I am interested in learning how 
Congress can best help make sure that all lenders and institutions of 
higher education are held to the same high ethical standards.
    Thank you again, Mr. Chairman, for holding this hearing. I yield 
back the balance of my time.
                                 ______
                                 
    [Additional submission from Mr. Platts follows:]

                 Additional Submission From Mr. Platts

    Thank you, Chairman Miller. In response to a request from the 
Pennsylvania Higher Education Assistance Agency (PHEAA), which has an 
office in my Congressional District, I am submitting for the record the 
Education Lending Code of Ethics which PHEAA and the American Education 
Services (AES) recently adopted.
                                 ______
                                 
    [Statement of the PHEAA and AES follows:]

  Prepared Statement of the Pennsylvania Higher Education Assistance 
          Agency (PHEAA) and American Education Services (AES)

Education Lending Code of Ethics
    As America's leading non-profit student aid organization, the 
management of the Pennsylvania Higher Education Assistance Agency 
(PHEAA) and American Education Services (AES) have adopted the 
following Education Lending Code of Ethics as part of an effort to help 
ensure integrity in all aspects of the federal student loan program.
    This Code of Ethics formalizes long-standing business practices. 
This Code of Ethics reflects PHEAA & AES' unique role as a federal 
student loan guarantor, servicer and lender, and as Pennsylvania's 
legislatively-created agency responsible for administering the 
Pennsylvania State Grant and other state-funded programs. This Code of 
Ethics supports PHEAA & AES' mission to provide affordable access to 
higher education.
No Revenue Sharing Between PHEAA and the School
    PHEAA & AES will continue its practice of not providing 
postsecondary schools with any financial benefits in exchange for a 
competitive advantage or preferential treatment. PHEAA & AES will 
continue the policy of not providing monetary incentives to secure a 
position as a school's recommended lender.
Gift and Trip Prohibitions
    In its role as a student loan lender, PHEAA & AES will not provide 
postsecondary school employees with anything exceeding a nominal value. 
This includes a strict prohibition on trips for financial aid 
administrators and other college officials paid for by PHEAA & AES.
Student Loan Advisory Boards
    In its role as a student loan lender, PHEAA & AES will not provide 
postsecondary school employees with anything of value in exchange for 
their service on an advisory board or compensate them for their service 
on an advisory board. PHEAA & AES value the views of the financial aid 
community and will continue to seek their input on programs and 
services.
Preferred Lender Guidelines
    PHEAA & AES believe that the practice of schools recommending 
lenders for federal and private loans should be based on the cost of 
the loan, the ease and speed of application and funds disbursement and 
superior customer service; all of which focus on the best interests and 
needs of students with no direct regard for any financial benefit to 
the school.
Preferred Lender List Disclosure
    PHEAA & AES support transparency in the way lenders are recommended 
including the criteria used in recommending lenders. Students and 
families must be informed that they may select the lender of their 
choice. In all such events, and to safeguard against predatory lenders, 
the school should provide information to the student on the best 
possible loan options, with the most favorable terms, customer service, 
and lender integrity.
Student Loan Resale Disclosure & Borrower Protections
    PHEAA & AES pledge to honor all borrower benefits that are promised 
to and earned by borrowers, regardless of which lender originated the 
student loan. PHEAA & AES believe that all lenders should make the same 
pledge to help safeguard the borrower's long-term financial interests. 
Lenders should also disclose to borrowers at the time a loan is 
originated if they intend to sell their loans to another entity.
Customer Service Integrity
    PHEAA & AES' customer service representatives have not and will not 
identify themselves to students, families or borrowers as employees of 
any school. Nor will PHEAA & AES employees physically work in or 
provide staffing to a school's financial aid office. Furthermore, PHEAA 
& AES pledge to continue to locate its industry-leading customer 
service call centers in the United States, using highly trained 
employees to best serve the individual needs of students and their 
families.
About PHEAA, Powered by AES
    PHEAA is the nation's leading nonprofit student aid organization. 
We devote our energy, resources and imagination to developing 
innovative ways to ease the financial burden of higher education for 
students, families and taxpayers.
    Our public service mission is powered by American Education 
Services (AES), our commercial business enterprise. The earnings 
generated by AES through loan guaranty, loan servicing and student aid 
processing systems fund our $72.5 million supplement to the State Grant 
Program, millions of dollars in free scholarships and loan forgiveness, 
award-winning online planning tools and the nation's lowest-cost 
student loans--all at no cost to taxpayers.
                                 ______
                                 
    [Whereupon, at 12:16 p.m., the committee was adjourned.]

                                 
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