Marketing Code for Student Lenders

Resolving an investigation into whether they misled consumers, seven student loan companies have agreed to follow a code of conduct for their marketing, the New York attorney general’s office said on Tuesday.
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Statement from the Office of the Attorney General
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* GMAC Llc
* Nelnet, Inc

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The companies also agreed to put a total of $1.4 million into a fund to help educate students and their families about financial aid, Andrew M. Cuomo, the attorney general, said in a statement on Tuesday.

Those companies are Campus Door, EduCap, GMAC Bank, Graduate Loan Associates, Nelnet, NextStudent and Xanthus Financial Services.

An eighth lender, My Rich Uncle, has agreed to the marketing code voluntarily even though the attorney general’s office did not find fault with its marketing.

Some of the companies sent solicitations to students that looked as if they had come from the federal government, according to the attorney general’s office.

Others advertised interest rates not available to most borrowers. Some offered prizes and ran contests to lure student borrowers.

“These settlements are a major step forward in cleaning up an industry where false and misleading advertising practices have been all too rampant,” Mr. Cuomo said.

He added, “It is unconscionable for lenders to entice students into loans that are not best for them.”

Representatives of EduCap, Nelnet and GMAC Bank denied any wrongdoing but each said they welcomed the new code.

Raza Khan, president and co-founder of My Rich Uncle, said that the company was not part of the investigation but “wholeheartedly supported the code of conduct and voluntarily agreed to abide by it.”

Mr. Khan added, “This agreement did not require us to change how we market.”

The code of conduct, which Mr. Cuomo said he hoped other lenders would adopt, would ban using logos and return addresses that resemble those used by the federal government; sending false checks or rebate offers; offering free iPods or other gifts to lure borrowers; making misleading statements about loan terms and benefits, and providing examples of loan costs that are available to a small percentage of borrowers.

Democratic lawmakers in Washington have raised concerns about lenders’ marketing practices. In a statement on Tuesday, George Miller, the California Democrat who is chairman of the House education committee, said, “I am glad that attorney general Cuomo has continued to diligently pursue lenders involved with shady marketing schemes.”

In developing the code and persuading lenders to adopt it, Mr. Cuomo’s office is pursuing a similar strategy to one followed in addressing questionable ties between college financial aid offices and student loan companies uncovered in investigations last year. Benjamin Lawsky, special assistant to the attorney general, said the office’s investigation was continuing and expanding to include other potential conflicts of interest on college campuses.

“Numerous vendors do millions of dollars of business on college campuses, and we have found that they often pay to play,” Mr. Lawsky said. “The question then becomes, are students getting the best deals or, as we found in the student loan industry, are universities entering into financial arrangements that benefit them at the expense of students?”