New York To Sue Student Lender

This article was written by CBS News producer Phil Hirschkorn.

At a news conference in his Lower Manhattan office Thursday afternoon, Cuomo announced his intent to sue and seek restitution from EFP concerning its financial agreements with more than 60 universities around the country.

"EFP has repeatedly and persistently offered to make payments, and has in fact made payments, to colleges, universities, and vocational schools in exchange for these schools steering students to EFP loan products and placing EFP on the schools' 'preferred lender' lists," said a letter sent by Cuomo's office to Tamera Briones, EFP's founder and CEO.

"Such steering and placement on the preferred lenders lists occurred without disclosure to student borrowers and their parents," the letter added. Cuomo gave EFP five business days to furnish information that would dissuade him from filing the civil suit.

Briones said she was "surprised and dismayed" at his move.

"We understood that Mr. Cuomo's investigation was in its early stages, and we were cooperating fully with his office," Briones said in a written statement. "We 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."

Cuomo says universities that have agreements with EFP include: Baylor and Texas Christian, in Texas; Drexel and Duquesne, in Pennsylvania; Clemson, in South Carolina; Pepperdine's business school in California; the University of Mississippi; Washington University, in St. Louis; and Boston University. The New York state schools with such agreements include Fordham, St. John's, Union College, and Long Island University, Cuomo says.

"Fordham no longer participates in revenue-sharing opportunities with EFP or any other student loan firm," said spokesman Bob Howe. "It became apparent that the modest good it accomplished for a small number of students could be outweighed by the perception that it was an inappropriate practice."

In exchange for loan business, according to Cuomo, EFP pays schools a small percentage of the net value of the total loans referred in a given academic year, an arrangement the attorney general calls "kickbacks" that he says can inflate loan rates and cost borrowers more.

Briones rebutted that contention, saying, "The price to the borrower is based on the borrower's risk profile, not whether the student attends a school that participates in the program." She also said EFP does disclose its revenue-sharing deals.

According to Cuomo, Boston University receives .25 percent of the net value of loans referred to EFP totaling $1million to $5 million; .50 percent of the net value of loans totaling $5 million to 10 million; and .75 percent of loans exceeding $10 million.

"We never signed such an agreement," said Colin Riley, BU's Director of Public Relations. "In fact, EFP asked us to sign an agreement to actively promote them, and we refused."

According to Riley, during the past two years, EFP paid the school a $1,500 service fee for helping process $1.5 million in loans, a fraction of the $50 million BU students borrowed in that time, mostly from the federal government. Riley said BU had no preferred private lenders and gave EFP no preferential treatment.

Duquesne's agreement with EFP gives the school .60 percent of the net value of referred loans, confirmed spokeswoman Bridget Fare. After receiving its first query from Cuomo on Thursday, the school posted a "clarification" to its financial aid Web site acknowledging its "limited commission" from loans steered to EFP, PNC Bank, and Citizens Bank. Fare told CBS News, "We take access and affordability to higher education very seriously, which is why any monies collected form these agreements are put right back into need-based grants."

Drexel's agreement, signed last April, according to Cuomo, requires Drexel to designate EFP as its "sole preferred private loan provider" and returns the school .75 percent of the net value of loans up to $25 million a year. Drexel public affairs officials did not return phone messages seeking comment.

"Many colleges and universities use revenue share to fund student aid programs," Briones said of the alleged deals. "Education Finance Partners provides these funds directly to the schools because we believe schools are in the best position to know which students have the greatest unmet financial need."

Indeed, Clemson and Texas Christian told CBS News they did have revenue-sharing agreements with EFP, but said that the money earned went back into financial aid programs.

Marvin Carmichael, Clemson's financial aid director and a former president of the National Association of Student Financial Aid Administrators, said EFP was one of two preferred lenders recommended to students who had exhausted their federal and state government loans and grants.

"We consider that a loan of last resort," Carmichael said. "The revenue-sharing opportunity was secondary."

Carmichael acknowledged its EFP deal, giving Clemson .5 percent of the net value of loans up to $1 million, is not disclosed, but he said, "Without such programs there are students who would not be able to get a Clemson degree."

Mike Scott, TCU's financial aid director, said EFP is the school's only private preferred lender because it has the best combination of low interest rates, high approval rates, and borrower benefits. The school receives .25 percent back on the first $1 million referred, but the deal has amounted to only $12,000 this academic year.

"It's almost like a referral fee that we turn into financial aid," Scott said. "We don't keep that money for anything other than to give to kids."

Washington University told CBS News it provides students information on 90 lenders and did not label any "preferred."

"Do we have any revenue-sharing agreement with any lenders? Absolutely not," said Fred Volkmann, vice chancellor for public affairs. Volkmann said the school had a one-year deal with EFP because the lender offered a "unique benefit" — it would lend money to students without a co-signer. However, only three students borrowed from EFP a total of $25,000, and the university did not renew.

"The New York Attorney General has requested information and we're cooperating fully," Volkmann said.

Pepperdine's public relations director, Jerry Derloshon, said the school's loan policies were undergoing an internal review.

"With the best interests of our students always in mind, Pepperdine is committed to reviewing its practices relating to student loans and advised the New York State Attorney General's office that Pepperdine will work together with the Attorney General concerning these important issues," Derloshon said.

An official from Baylor would not comment. Mississippi did not immediately return phone calls.

The Senate Committee on Health, Education, Labor and Pensions, chaired by Sen. Edward Kennedy, D-Mass., is also moving forward with its own investigation.

This week the committee formally requested documents from 16 financial institutions, including two public companies also probed by the New York Attorney General — Sallie Mae and Nelnet — and one of the private ones, CIT.

The other banks and loan companies queried by the Senate are: Bank One, Bank of America, Citibank, Citizens Bank, JPMorgan Chase, PNC Bank, U.S. Bank, Wachovia, Wells Fargo, Access Group, College Loan Corp, EdAmerica, and Northstar Guarantee.

Sen. Kennedy says he is worried about tactics that lenders may use to secure student loan deals. "These include lenders who have offered school administrators 'educational conferences' at luxury hotels, free entertainment and tickets to sporting events, free staff and printing services, and e-mail services to students on behalf of the financial aid office," Kennedy said. "These practices are inappropriate, and they need to stop."

With reporting from Laura Strickler in Washington.