Wednesday, April 11, 2007

Their Oughta Be a Law Against That

New York Attorney General Andrew Cuomo is riding a wave of publicity over conflicts of interest in the student loan arena as more ties between lenders and university financial aid officers come to the surface.  An AP article (here) quotes Cuomo stating, "This is like peeling an onion . . . It seems to be getting worse the more we uncover. It's more widespread than we originally thought . . . More schools and more lenders at the top end."  The University of Pennsylvania said that it is modifying its student loan program and will reimburse student borrowers approximately $500 that it received from lenders for their applications (press release here).  CIT Group, whose subsidiary Student Loan Xpress is at the middle of the controversy, put three executives on leave while it investigates.

These close ties between lenders and financial aid officers raise the question whether any laws were broken, particularly federal laws because many loans come with federal guarantees and subsidies.  Based on a quick review of various federal criminal laws, the most likely basis for a prosecution would be under the mail and wire fraud statutes, either for a scheme to defraud of money or property, or more likely an honest services fraud claim.  For the financial aid officers, the government would have to show that their employers prohibited the receipt of undisclosed benefits from outside sources and that the recommendation of a lender was influenced by the payments.  The payment of referral fees to the institution might make it harder to establish that any benefits to an individual were improper.  Section 656, which covers embezzlement and theft from a financial institution, only covers banks and not loan companies or educational institutions.  There are no criminal provisions that specifically address student loan programs, at least from the lender and university side.

The Student Loan Sunshine Act (S. 486 and H.R. 890), which was introduced in Cogress in February, would provide that a "lender or guarantor of educational loans shall not offer any gift to an employee or agent of a covered institution," and would require any person working at an educational institution to report the offer of "any gratuity, favor, discount, entertainment, hospitality, loan, or other item having a monetary value of more than $10" from a lender or guarantor of student loans.  The penalty for violating the prohibition on gifts would be a $25,000 civil penalty imposed on the school and a ban on the lender from federal educational loan programs.  The bills are currently in committee. With the burgeoning scandal, look for someone in Congress to introduce legislation providing a criminal statute to directly address such payments and kickbacks at universities.  Maybe it will be called the Higher Education Loan Honesty and Fairness Act. (ph)

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