After New York’s attorney general, Andrew M. Cuomo, began criticizing relationships between colleges and student-loan companies, some in the industry warned that their responses would leave students even more vulnerable to deceptive corporate marketing practices.
Mr. Cuomo announced on Thursday a new round of subpoenas that industry leaders are citing as confirmation of those warnings, as well as an unfair attempt to prolong their public embarrassment.
The attorney general issued the subpoenas to 33 companies he suspects of using misleading marketing practices, such as offering false gift cards and rebate offers, and creating solicitation letters designed to look like official government notices.
“Reforming the student-loan industry,” Mr. Cuomo said in a written statement, “requires investigation of all aspects of this market to ensure that one reform, like cleaning up preferred-lender lists, is more than just a thumb in the dike causing the bad practices to shift to another area of the market.”
Fairness Questioned
Mr. Cuomo’s latest round of subpoenas prompted some in the student-loan industry to question whether the attorney general’s campaign was fueling some of the very practices he decries, or being fair toward companies that already have agreed to clean up their practices.
Recipients of the subpoenas include several companies—such as Sallie Mae, Nelnet, JPMorgan Chase & Company, Bank of America, Wells Fargo, and Student Loan Xpress Inc.—that have already reached negotiated settlements with Mr. Cuomo’s office over their student-loan practices.
As part of those settlements, the companies accepted Mr. Cuomo’s proposed “code of conduct,” setting out guidelines for their future conduct in the student-loan business.
Lenders are expected to cooperate with the new subpoenas, though they have a right to be puzzled by them, said John Dean, special counsel to the Consumer Bankers Association, which represents the student-loan industry’s largest members.
“The subpoenas took the lenders by surprise,” Mr. Dean said, “because many of them had fully cooperated in the first phase of the investigation, have implemented the code of conduct, have been living under it, and had assumed that their practices were OK going forward.”
Both the Bush administration and the Democrat-controlled Congress also have opened investigations into some of the issues raised by Mr. Cuomo with his subpoenas.
The House of Representatives education committee asked the Federal Trade Commission in May to investigate possible unfair and deceptive practices that lenders use to market themselves to students. The education secretary, Margaret Spellings, told the committee later that month that her department shared its concern and was helping with the investigation.
At the same time, Ms. Spellings told the committee that Mr. Cuomo appeared to be “ill-informed on the department’s actions and on federal law,” citing his suggestion that lender violations of state laws concerning fraud or deceptive trade practices might mean a violation of federal law governing student loans.
“The department is investigating, under its authority, whether, in fact, there have been violations of the anti-inducement provisions” of federal student-loan law, Ms. Spellings told the Congressional hearing.
Mr. Cuomo, in his statement on Thursday, cited a series of instances in which he believes lenders are using direct-marketing companies “to entice young borrowers seeking college loans.”
Allegations of Deception
As examples, he alleged that JPMorgan Chase and other lenders were “mailing phony offers designed to look like official letters issued by the federal government and operating deceptive Web sites designed to look like the federal government.” He also alleged that Nelnet and Student Loan Xpress were “mailing fake checks or false rebate offers on current loans,” and that Wells Fargo was “holding sweepstakes to entice students to take out loans with the company.”
The attorney general began outlining complaints against the student-loan industry earlier this year, focusing initially on his belief that college aid administrators were making lender recommendations to their students on the basis of their colleges’ financial relations with the lenders.
Dozens of colleges and loan companies agreed to halt such practices, and the National Association of Student Financial Aid Administrators agreed to implement stricter ethics guidelines on itself and its members.
At the same time, a higher-education lawyer representing the association, Sheldon E. Steinbach, warned that Mr. Cuomo’s actions could harm students in the long run by making them less willing to trust college administrators and more likely to make their own judgments about various loan offers.
That, in turn, has left students more vulnerable to the types of marketing practices now being condemned by Mr. Cuomo, said Mr. Steinbach, who is with the Washington firm Dow Lohnes PLLC.
“If you curtail the ability of colleges to provide neutral advice,” he said, “you then open up the floodgates to private lenders and others who will fill any vacuum because there is money to be made.”
Spokesmen for several lenders cited by Mr. Cuomo either declined to comment or did not respond to requests for comment.
A spokesman for Mr. Cuomo, Jeffrey Lerner, declined to comment on Mr. Steinbach’s criticisms, saying only that the attorney general’s investigation was continuing.