Preferred lender lists and lender inducements topped the agenda of the negotiated rulemaking sessions that began on December 12. After more than seven hours deliberating on protocols, additional negotiators, and a working agenda, the higher education negotiators and the Department of Education began to discuss these two highly charged student loan issues, as well as several others.
Preferred Lender Lists
The Department pointed out that for many years, schools participating in the FFEL program have used preferred lender lists to help students and families select a student loan provider. However, the Department and Congress noted growing concern that preferred lender lists prevent students and parents from exercising their right to use any approved lender, as specified in statute. The Department described complaints by some in the student loan industry that schools may "steer" applicants to preferred lenders or even pre-select lenders without student approval. Accusations were leveled by ED officials that some schools have purposefully delayed loan processing for borrowers who elect to use lenders not on a preferred lender list.
ED expressed their opinion that while regulations have never limited a school's ability to identify preferred lenders, the question was raised whether the time has come to explore regulatory guidance to ensure that borrowers' choices are being honored.
Phil Van Horn, from the Wyoming Student Loan Corporation, asked how widespread the problem really is, given that all of the evidence he has heard has been anecdotal, without numbers to quantify the issue. Since Congress has asked the Inspector General's Office to take a look at preferred lenders and any quid pro quo practices between lenders and schools, Van Horn wondered if time should be given for completion of the study before considering additional regulations.
Representatives from the Department acknowledged that an investigation commissioned by Congress is forthcoming, but said that given the growing number of phone calls they have been receiving, the problem seems to be on the rise.
Scott Giles, vice president of the Vermont Student Assistance Corporation, questioned whether additional regulations would solve the problem, since federal statute already states that borrowers have the ability to choose any lender. Giles pointed to better enforcement of existing regulation as the best way to handle any abuse of the preferred lender list.
Pam Fowler, director of financial aid at the University of Michigan, echoed Giles concerns, saying that schools did not need more regulations on this issue.
"I can tear up the list and the end result is the same," said Fowler, pointing out that borrowers will still come to the school asking which lender they should use whether a lender list exists or not.
Van Horn stated that those who seem to be continually "harping" on the issue are lenders who aren't competitive. "Having been on the side where we're not on the list," said Van Horn, "[those lenders] need to get competitive or quit whining."
Sarah Bauder, director of financial aid at the University of Maryland, expressed her view about the recent "mudslinging" that has been directed at financial aid administrators by lenders that she said have "less competitive products."
Bauder continued by addressing a growing myth in the student lending community that financial aid administrators don't take appropriate measures when constructing a preferred lender list. Using the University of Maryland as an example, Bauder explained that their preferred lender list consists of seven lenders. An evaluation of all lenders is conducted on an annual basis by a seven-member board that chooses lenders based on pricing, technology, and customer service, besides having to meet certain other criteria (e.g., longevity in the market, etc.). Bauder admitted that over 90 percent of UMD students use a lender from their preferred lender list, but said there didn't seem to be any problem with that, given all of the effort taken by the school to ensure the students were getting the best deal and services. She also said they process any loan from any lender expeditiously if that loan is the borrower's preference.
"We're being painted as stupid people who don't understand regulations," added Ellen Frishburg, Director of Student Financial Services, Johns Hopkins University.
Representing students, Luke Swarthout, from the State Public Interest Research Group on Higher Education, called for regulations to help correct some of the improprieties by schools. Swarthout advocated:
- Published material by the school describing how their preferred lender list was created
- More upfront disclosure by the school to let students know that while a preferred lender list exists, the borrower is free to choose any other participating lender
- Disclosure statements regarding any relationship between the lender and school
- Annual reports detailing loan volume by lender at each institution
Others, including the Department, noted that much of what is happening could be mitigated through increased awareness and training to help financial aid administrators to avoid giving borrowers the impression that they must choose a lender from their lender list.
Bauder responded that another myth about financial aid administrators is their apathy toward this issue. As proof that schools are interested in this issue, she cited over 40 requests from colleagues across the nation for the UMD's model for constructing a preferred lender list
One participant suggested that if followed by schools, the guidance in NASFAA's Monograph, Guide to Developing a Preferred Lender List, could negate the need for additional regulation.
Some suggestions for regulatory changes to address this issue included:
- A minimum number of lenders required on a preferred lender list
- A uniform way for all schools to develop a preferred lender list
- Disclosure on the true cost of a loan, based on the real number of students actually receiving the borrower benefit
- Better enforcement
Department representatives said they felt they had received good input from the recipients and could formulate proposed regulations in the coming months. Most of the comments from the negotiated rulemaking participants, both from the lending industry and, especially, from the negotiated rulemaking school representatives, indicated regulation in this matter is not necessary, rather sub-regulatory guidance from ED would be helpful.
Borrower Benefits Questioned As A Form Of Inducement
The Higher Education Act prohibits guaranty agencies and lenders in the FFEL program from offering premiums, payments, and any other inducements to an institution to secure a FFEL application. The Department asked if, given the increasingly large amount of time it spends fielding questions and complaints regarding possible improprieties between schools and lenders, the time had come to more narrowly define prohibited inducements.
Specifically, the Department pointed to "various borrower financial benefit and student loan marketing programs." Discussion quickly ensued as to whether borrower benefits were to be seen as a form of inducement, given that it benefits the borrower and not the school. Giles illustrated the complexity of the issue by asking--while obviously it would be wrong to give a student $200 cash for his or her loan business - would it likewise be wrong for a lender to give a student a $200 rebate on their loan principal in the spirit of lender competition?
"Different benefits given to different schools seem like an inducement," said Eileen O'Leary from Stonehill College. Fowler followed up by describing how larger schools with better default rates are many times given better borrower benefits than the students who really need them attending nearby community colleges.
With some guarantors paying default fees at some schools and not others, and some lenders offering different borrower benefits to different schools, many negotiators felt that lenders and guarantors should be required to offer the same benefits universally.
Overall most felt that regulating inducements would be difficult since it "can't be regulated by putting a box around it," said Bauder. Bauder cautioned against confusing services added as inducements (i.e., electronic servicing, etc.). The Department countered that there is some question that certain practices by lenders in the name of "services added" really are inducements. As an example, Department representatives asked whether it should be permissible for a lender to offer personnel to help process loans in the name of "services added."
With some negotiators advocating more disclosure and others calling for more enforcement and self-regulation, the Department ultimately decided that they had received enough input to formulate proposed regulations in the coming months.
Additional Items Discussed
Negotiators also discussed requiring entrance counseling for Graduate PLUS loans; standardized documents for an identity theft loan discharge; alternative documents for death discharge; and a narrower definition of a "school-affiliated" organization in hopes of completely eliminating the eligible lender trustee relationship in order to perpetuate the school-as-lender program.
Having discussed only six of the 21 final agenda items, the final day of the first round of loan negotiated rulemaking should prove interesting. NASFAA will continue to monitor and release information over the next few days regarding the discussions.
By Justin Draeger
NASFAA Assistant Director for Communications
Posted 12/14/06 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
