June 6, 2007 / 2:19 PM / 12 years ago

Student loan scandal spreads to underwriting

WASHINGTON (Reuters) - A scandal in the $85-billion U.S. student loan industry expanded on Wednesday as officials raised questions about possible discriminatory practices by lenders to students based on where they attend school.

New York Attorney General Andrew Cuomo in a file photo. Cuomo urged Congress on Wednesday to legislate a clean-up of the student loan industry, including the fast-growing private loan market. REUTERS/File

New York Attorney General Andrew Cuomo told a U.S. Senate committee that he is widening an investigation of student lenders to target loan underwriting standards and any “civil rights ramifications” that may result.

Cuomo and congressional investigators have already accused major student lenders of paying kickbacks to college aid officers to curry favor and drum up business among students. Many lenders and colleges have reached legal settlements with Cuomo and promised to adhere to a new code of conduct.

The U.S. House approved a bill to crack down on such practices last month and the Senate is considering action at a time of sweeping change for major lenders such as Sallie Mae, Bank of America and Citigroup. Those lenders have all settled with Cuomo.

Senate Banking Committee Chairman Chris Dodd, following Cuomo’s testimony before the committee at a hearing, questioned industry officials on the so-called “red-lining aspects of all of this.”

Red-lining refers to a home mortgage market practice in which lenders bar potential borrowers from getting loans based on the neighborhoods they live in.

Dodd, a Democratic presidential candidate, asked officials: “Why would you brand someone” based on the college they attend? He asked if “historically black colleges, for example,” might be hurt.

The Connecticut senator said any practices that would prevent the most needy students from getting loans would be “doing the direct opposite of what we’re trying to do.”

MORE BORROWING

With college costs soaring in the United States, students increasingly must borrow money to pay tuition and fees. About 80 percent of student loans today come with federal government involvement, either directly from the Education Department, or indirectly from private lenders with federal guarantees.

Students also rely on federal grants, which need not be repaid. But grant funding has been outpaced by tuition inflation, forcing students to seek a third source of funds — private loans.

Now accounting for 20 percent of student lending, the aggressive private loan sector charges higher interest rates. Cuomo called it “the Wild West of the college loan business.”

He said the worst misconduct alleged by his investigations — a lender-to-college kickback scheme known as revenue sharing — has been found only in the private loan sector.

“The worst practices we have seen ... came out of this sector of the student loan business,” Cuomo said.

The attorney general urged Congress to legislate a crackdown on student loans, including the private loan market.

The House bill passed last month would require colleges and lenders to abide by new codes of conduct: it bans gifts from lenders to aid officers; requires disclosure of college-lender links; and protects students from aggressive marketing.

Massachusetts Democrat Edward Kennedy, chairman of the Senate education committee, is managing Senate Democrats’ overall response to the student loan scandal, chiefly through a spending measure that is still being negotiated.

Dodd said the banking committee is taking the lead on private loan market issues and is working closely with Kennedy.

In related news, the House education committee on Wednesday scheduled a vote for June 13 on an education budget measure.

President George W. Bush in February proposed slashing subsidies to college lenders as part of a broad overhaul of college student aid programs in his fiscal 2008 budget.

For more news stories about the student loan probes, see.

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