New York to sue Education Finance Partners

By Joseph A. Giannone

NEW YORK (Reuters) - New York Attorney General Andrew Cuomo said on Thursday he intends to file a lawsuit against student lender Education Finance Partners, the first legal action arising from the state's probe into the college loan industry.

But closely held Education Finance shot back by questioning whether it has broken the law.

Cuomo's notice of intent to sue alleges that Education Finance offered to pay colleges and universities for steering students to apply for EFP loans. These financial arrangements were not properly disclosed to students, the notice said.

EFP has five days to show why New York should not proceed with a formal lawsuit, Cuomo's notice said.

The notice said EFP required schools to promote EFP to its students as a "preferred" loan provider. In return, EFP would pay a percentage of the net value of the loans referred by each school. Universities get a higher portion of the revenue when they steer more business.

"EFP aggressively offered schools cash kickbacks in exchange for business," Cuomo said. "This lawsuit is just the beginning of an investigation that will show that lenders put market share above fair play."

EFP said in a statement it cooperated with Cuomo's investigation, but added: "(W)e question whether the Attorney General's office is seriously interested in learning all of the facts and whether there has been an actual violation of law."

Education Finance said its arrangements with universities never impact a student's borrowing costs, which are based on the student's risk profile.

MORE TO COME

Cuomo last month expanded an investigation launched last year by former AG Eliot Spitzer to see whether lenders were using perks and payments to curry favor with colleges and universities. About 90 percent of students choose the preferred lenders listed by their schools, Cuomo's office said.

Last week, Cuomo told reporters his investigation had discovered widespread examples of kickbacks and perks paid to schools of financial aid officials.

The investigation, which has reached out to 100 schools and at least six lenders, found EFP had revenue-sharing agreements with more than 60 schools across the United States, including Boston University, Duquesne University of Pittsburgh and Drexel University of Philadelphia.

Cuomo's legal action alleged that the relationship and financial arrangements between EFP and the schools constituted unlawful and deceptive business practices.

EFP said it discloses to all its borrowers that their school may have a revenue-sharing agreement with the lender. Many colleges and universities use revenue-sharing programs to fund student aid programs, EFP said.

EFP's agreement with Duquesne, for example, gave the school 0.6 percent of the net value of referred loans. Its agreement with Boston University offered payments of up to 0.75 percent over certain thresholds, while Drexel received more than $100,000 from EFP in one year.