Meeting of the Board of Regents | June 2007

THE STATE EDUCATION DEPARTMENT / THE UNIVERSITY OF THE STATE OF NEW YORK / ALBANY, NY 12234

 

TO:	Higher Education and Professional Practice Committee
FROM:	Johanna Duncan-Poitier
SUBJECT:	Student Lending Accountability, Transparency and Enforcement Act (SLATE)
DATE:	June 19, 2007
STRATEGIC GOAL:	Goals 2 and 3
AUTHORIZATION(S):

 

SUMMARY

 

Issue for Discussion

 

This report will give the Board of Regents an overview of the requirements under the new Student Lending Accountability, Transparency and Enforcement Act (SLATE),  the involvement of the New York State Education Department in its enforcement and the level of resources that are needed in order to effectively implement the requirements in this new law.

 

Reason(s) for Consideration

 

Required by State statute     

 

Proposed Handling

 

This item will come before the Higher Education and Professional Practice Committee at its June 2007 meeting for discussion.

 

Background Information

 

Since the beginning of his administration, the new Attorney General Andrew Cuomo has been investigating abuses in the student loan industry. The Attorney General has taken action against a number of institutions of higher education through fines and agreements by many institutions to enact a Loan Code of Conduct in administering student loan programs at their institutions.

 

As part of this national investigation, the Attorney General submitted a proposal during this legislative session to regulate the student loan industry in New York State and to also establish standards of conduct for colleges and school financial aid officers. The result of that legislation was the enactment of the Student Lending Accountability, Transparency and Enforcement Act (SLATE). SLATE was signed into law by Governor Spitzer on May 30, 2007 as Chapter 41 of the Laws of 2007. The new law provides for its implementation 180 days after it becomes law.   The State Education Department is given responsibility for enforcement of this new law and is authorized to establish regulations to implement the provisions in SLATE, however, there are no resources provided in the statute to make this possible. 

 

Based upon a staff analysis, it is determined that the New York State Education Department would need a budget of approximately $800,000 to effectively implement this new statute. The Department has notified the offices of the Governor and Attorney General, and the Assembly and Senate of the need for an appropriation to effectively implement the provisions of this new law.

 

Attached is a short description of SLATE and the requirements which the new law places upon the New York State Education Department to implement its provisions. Also attached is the complete text of the SLATE law.

 

 

Recommendation

 

N/A

 

Timetable for Implementation

 

SLATE goes into effect 180 days after it becomes law. The new statute, therefore, will take effect December 1, 2007.

 

 

The Student Lending, Accountability,

Transparency and Enforcement Act (SLATE)

 

 

Provisions of the New Law

 

The State Education Department supports all efforts that will reduce the cost of postsecondary education for all students and help ensure the integrity of the student loan industry which exceeds $5 billion per year in New York State.

 

This new law will directly impact 271 colleges in New York State, serving over 1.1 million students and thousands of college financial aid officers. In 2004-05, New York colleges reported the disbursement of $4.618 billion in federal loans and $1.054 billion in nonfederal loans for a total of $5.672 billion in student loans. Also, it is our understanding that law is intended to regulate loans to students attending non-degree granting vocational schools. This will include another 450 schools serving at least 80,000 students. There is no reliable data on the loan volume in these schools. In total,   over 700 educational institutions and their financial aid personnel will be subject to the provisions of this new law.  SLATE is an extremely comprehensive law designed to regulate a $5 billion industry which impacts hundreds of thousands of students each year.   The key provisions of the law:

 

• Prohibits lenders from making gifts – including the practice of revenue sharing – to colleges and universities or their employees in exchange for any advantage in loan activities.
• Bans colleges and universities from soliciting, accepting or receiving any gifts whatsoever – including those construed as part of a revenue sharing practice – from lenders in exchange for advantageous loan consideration.
• Bars college and university employees from receiving any advantage, reimbursement or benefit from serving as a member of a lender’s advisory board.
• Prohibits lender employees and agents from posing as college or university employees, including staffing the school’s financial aid offices with lender employees.
• Bans lenders and schools from agreeing to certain quid-pro-quo high-risk loans that prejudice other borrowers or potential borrowers.
• Prohibits schools from linking or directing potential borrowers to any electronic master promissory notes or other loan agreements that do not allow students to enter a lender code or name for any lender offering the relevant loan at that guarantee agency.

 

 

 

State Education Department Responsibilities and Capacity

 

The law gives the Department significant investigative, quasi-judicial and fiduciary responsibilities, including the following:

 

• All financial aid officers are required to report to the Department any offer of a “gift” by a lender institution.

 

• All financial aid officers have to submit a financial disclosure form to the Department as it relates to any financial interest with lender institutions.

 

• For any violation of the provisions in SLATE, a hearing must take place and fines could be levied.

 

• Any alleged violations must be investigated and appropriate evidence must be secured for use at a hearing for presentation to a hearing officer.

 

• Colleges must make full disclosure to all students requesting information on a loan. Along with full disclosure will come student complaints which must be investigated and may lead to hearings.

 

• The Department must collect all fines:

 

• Operate a grant program to award institutions funds (from collected fines) to initiative education programs to inform prospective borrowers; and/or

 

• Repay students who paid an inflated price for a loan because of a violation of a provision within this new law.

 

 Based on SED’s experience in investigating and conducting discipline hearings relating to proprietary schools and the licensed professions as well as investigating and conducting hearings on moral character issues involving certified teachers, SED would need an appropriation of $800,000 to cover additional professional personnel costs.  To carry out the duties imposed by SLATE, the department would need to hire additional Attorneys, Professional Conduct Investigators, Senior Professional Conduct Investigators, Auditors and support staff.  Additionally, funding is necessary to cover non-personnel services as well as the costs associated with administering the hearings required by the bill.  No funding is included in the statute for any of these purposes.  The State Education Department recommended approval of this bill based on our expectation that SED will be provided with adequate funding to effectively implement the law. 

 

   LAWS OF NEW YORK, 2007

 

                                  CHAPTER 41

 

   AN  ACT  to  amend the education law, in relation to protecting students

     and parents from being steered by lenders and institutions  of  higher

     learning  into  student loans laden with conflicts of interest; and to

     amend the state finance law, in relation to establishing  the  student

     lending education account

 

         Became a law May 29, 2007, with the approval of the Governor.

            Passed by a majority vote, three-fifths being present.

 

     The  Peopleof the State of New York, represented in Senate and Assem-

   bly, do enact as follows:

 

     Section 1. The education law is amended by adding a new  article  13-B

   to read as follows:

                                 ARTICLE 13-B

                        STUDENT LENDING ACCOUNTABILITY,

                       TRANSPARENCY AND ENFORCEMENT ACT

   Section 620.Definitions.

           621. Prohibition  of  gifts  made  by  lending  institutions  to

                  coveredinstitutions and their employees.

           622. Prohibition of receipt of gifts by covered institutions.

           623. Prohibition of receipt  of  gifts  by  covered  institution

                  employees.

           624. Covered  institution  employee  prohibitions  and reporting

                  requirements.

           625. Misleading identification of lending institutions'  employ-

                  ees.

           626. Loan  disclosure  and prohib ition of quid pro quo high risk

                  loans.

           627. Standards for preferred lender lists.

           628. Proper execution of master promissory notes.

           629. Disclosures at request of covered institutions.

           630. Penalties.

           631. Rules and regulations.

           632. Non-exclusivity of rights or remedies.

     § 620. Definitions. As used in this article, the following terms shall

   havethe following meanings unless otherwise specified:

     1. "Borrower" shall mean a student attending a covered institution  in

   this  state, or a parent or person in parental relation to such student,

   whoalso obtains an educational loan from a lending institution  to  pay

   foror finance higher education expenses.

     2.  "Covered  institution" shall mean any college, vocational institu-

   tion, or approved program as defined in section six hundred one of  this

   title.

     3.  "Covered  institution  employee"  shall  mean any employee, agent,

   contractor, director, officer or trustee of a covered institution.

     4. "Educational loan" shall mean any loan that is  made,  insured,  or

   guaranteed  underPart B of Title IV of the Federal Higher Education Act

   ofnineteen hundred sixty-five, as amended, any high risk  loan  or  any

 

   EXPLANATION--Matter in italics is new; matter in brackets [ ] is old law

                                to be omitted.

   CHAP. 41                           2

 

   private  loanissued by a lending institution for the purposes of paying

   foror financing higher education expenses.

     5.  "Gift" shall mean any discount, favor, gratuity, inducement, loan,

   stock, thing of value, or other item having more than nominal value.

     a. The term "gift" shall include, but is not lim ited to:

     (1) Any money, service, loan, entertainment,  honoraria,  hospitality,

   lodging  costs,  meals,  registration  fees,  travel expenses, discount,

   forbearanceor promise;

     (2) Gifts provided in kind,  by  purchase  of  a  ticket,  payment  in

   advance, or reimbursement after expenses have been incurred;

     (3)  Any  computer  hardware for which the recipient pays below-market

   prices;

     (4) Any printing costs or services.

     b. The term "gift" shall not include any of the following:

     (1) A lending institution's own brochure or promotional literature;

     (2) Food, refreshments, training, or informational material  furnished

   to  a  covered  institution  employee  as an integral part of a training

   session, if such training contributes to the professional development of

   thecovered institution employee.

     c. Nothing in this article shall be construed to  affect  the  private

   philanthropicactivities of banks or other lending institutions that are

   unrelatedto educational loans.

     6. "High risk loans" shall mean any agreement between a lending insti-

   tution  anda covered institution that provides for the lending institu-

   tionto provide loans to students with a poor or no credit history,  who

   wouldotherwise not be eligible for educational loans.

     7. "Higher education expenses" shall include the following:

     a. tuition and fees;

      b.  costs  incurred for books, supplies, transportation, and miscella-

   neouspersonal expenses; and

     c. room and board costs.

     8. "Lending institution" shall mean:

     a. any entity that itself or through an  affiliate  makes  educational

   loans  to  pay  for or finance higher education expenses or that securi-

   tizessuch loans;

     b. any entity, or association of entities, that guarantees educational

   loans; or

     c. any industry, trade or professional  association  or  other  entity

   that  receives  money,  related to educational loan activities, from any

   entitydescribed above in paragraphs a and b of this subdivision.

     9. "Preferred lender list" shall mean a list of  one  or  more  recom-

   mended  or  suggested  lending  institutions  that a covered institution

   makesavailable for use, in print  or  any  other  medium  or  form,  by

   borrowers, potential borrowers or others.

     10.  "Revenue  sharing"  shall  mean any arrangement whereby a lending

   institutionpays a covered institution or an affiliated entity or organ-

   izationof such covered institution a percentage  of  the  principal  of

   each  loan  directed  towards the lending institution from a borrower at

   thecovered institution.

     § 621. Prohibition of gifts made by lending  institutions  to  covered

   institutions  and  their  employees.  1.  A lending institution may not,

   directlyor indirectly, offer or provide any gift to a covered  institu-

   tionor a covered institution employee, in exchange for any advantage or

   considerationprovided to such lending institution related to its educa-

   tionalloan activities.

                                      3                            CHAP. 41

 

      2.  A  lending  institution  may  not engage in revenue sharing with a

   coveredinstitution.

     §  622.  Prohibition of receipt of gifts by covered institutions. 1. A

   coveredinstitution may not, directly or indirectly, solicit, accept  or

   receiveany gift from or on behalf of a lending institution, in exchange

   for  anyadvantage or consideration provided to such lending institution

   relatedto its educational loan activities.

     2. A covered institution may not engage  in  revenue  sharing  with  a

   lendinginstitution.

     §  623. Prohibition of receipt of gifts by covered institution employ-

   ees.  1. A covered institution shall require that no covered institution

   employeeon his or her own behalf or on behalf of another,  directly  or

   indirectly,  solicits, accepts or receives any gift from or on behalf of

   alending institution. Nothing in this section  shall  be  construed  as

   prohibitinga covered institution employee from conducting business with

   a  lending  institution, provided that such business is unrelated in any

   mannerwhatsoever to a covered institution.

     2. A covered institution employee, on his or  her  own  behalf  or  on

   behalf  of  another, shall not directly or indirectly solicit, accept or

   receiveany gift from or on behalf of a lending institution. Nothing  in

   this  section  shall  be  construed as prohibiting a covered institution

   employeefrom conducting business with any lending institution, provided

   thatsuch business is  unrelated  in  any  manner  whatsoever  with  the

   coveredinstitution.

     3.  Covered  institution  employees shall report to the department any

   instanceof a lending institution attempting to  give  a  gift  to  such

   coveredinstitution employees.

     §   624.  Covered  institution  employee  prohibitions  and  reporting

   requirements.  1. A lending institution shall require  that  no  covered

   institution  employee  receives any remuneration for serving as a member

   orparticipant of an advisory board of a lending institution or receives

   anyreimbursement of expenses for so serving.

     2. A covered institution shall require  that  no  covered  institution

   employeeof such covered institution receives any remuneration for serv-

   ing  asa member or participant of an advisory board of a lending insti-

   tutionor receives any reimbursement of expenses for so serving.

     3. Nothing in this section shall be construed as prohibiting:

     a. a covered institution employee's participation on an advisory board

   ofa lending institution that is unrelated in any manner  whatsoever  to

   educationalloans; or

     b. a covered institution employee, who does not have a direct interest

   in  or  does not benefit from the functions of the covered institution's

   financialaid office, from serving on a board of directors of a publicly

   tradedor privately held company.

     4. Covered institution employees who are  directly  involved  with  or

   benefit  from  the  functions of the covered institution's financial aid

   officeshall be required to report to the  department,  in  a  form  and

   manner  prescribed  by  the  department,  all participation or financial

   interestsrelated to any lending institution.

     § 625. Misleading identification of lending  institutions'  employees.

   1.    A  lending  institution shall require that no employee or agent of

   suchlending institution is identified to borrowers or potential borrow-

   ersof a covered institution as an employee, representative or agent  of

   suchcovered institution.

     2.  A covered institution shall require that no employee or agent of a

   lendinginstitution is identified to borrowers or potential borrowers of

   CHAP. 41                           4

 

   suchcovered institution as an employee, representative or agent of such

   coveredinstitution.

     3.  No  employee, representative or agent of a lending institution may

   staffa covered institution's financial aid offices.

     § 626. Loan disclosure and prohibition  of  quid  pro  quo  high  risk

   loans.    1.   Should a borrower or potential borrower consult a covered

   institution'sfinancial aid  office  in  connection  with  obtaining  an

   educational  loan  to  pay for or finance higher education expenses, the

   coveredinstitution shall inform the borrower or potential  borrower  of

   all  available  financing  options  under Title IV of the Federal Higher

   Education Act of nineteen  hundred  sixty-five,  as   amended,  including

   information  on  any  terms and conditions of available loans under such

   titlethat are more favorable to the borrower, before a lending institu-

   tionmay provide a private educational loan to a  borrower  attending  a

   coveredinstitution.

     2.  A  lending institution shall not enter into an agreement or other-

   wiseprovide any high risk loans, in exchange for the  covered  institu-

   tion  providing  concessions or promises to the lending institution that

   mayprejudice other borrowers or potential borrowers.

     3. A covered institution shall not enter into an agreement  or  other-

   wise  provide  any high risk loans, in exchange for the covered institu-

   tionproviding concessions or promises to the lending  i nstitution  that

   mayprejudice other borrowers or potential borrowers.

     §  627.  Standards  for preferred lender lists.  A covered institution

   thatprovides or makes available a preferred  lender  list  must  comply

   withthe following standards:

     1.  A  preferred  lender  list  must disclose the process by which the

   coveredinstitution selected lending  institutions  for  such  preferred

   lenderlist, including, but not limited to, the method and criteria used

   to  choosethe lending institutions and the relative importance of those

   criteria;

     2. A preferred lender list must state in the same font size  and  same

   manner  as  the predominant text on the document that borrowers have the

   rightand ability to select the education loan provider of their choice,

   arenot required to use any of the  lenders  on  such  preferred  lender

   list,  and  will  suffer no penalty for choosing a lender that is not on

   suchpreferred lender list;

     3. The covered institution's decision to include a lending institution

   onany preferred lender list and the covered institution's  decision  as

   to  where  on  the  preferred lender list the lending institution's name

   appearsshall be determined solely by consideration of the  best  inter-

   ests  of  the  borrowers  who may use such preferred lender list without

   regardto the pecuniary interests of the covered institution;

     4. The contents of any preferred lender list  shall  be  reviewed  and

   updatedno less than annually;

     5.  No  lending institution shall be placed on a preferred lender list

   unlesssuch lending institution provides assurance to the covered insti-

   tutionand to borrowers who take out loans from such lending institution

   thatthe advertised benefits upon repayment will continue  to  inure  to

   thebenefit of borrowers regardless of whether the lending institution's

   loansare sold;

     6. No lending institution that, to the covered institution's knowledge

   after  reasonableinquiry, has an agreement to sell its loans to another

   unaffiliatedlending institution shall be included on a preferred lender

   listunless such agreement is disclosed therein in the  same  font  size

                                      5                            CHAP. 41

 

   and  same  manner  as  the predominant text on the document in which the

   preferredlender list appears;

     7.  No  lending institution shall be placed on a covered institution's

   preferredlender lists or in  favored  placement  on  a  covered  insti-

   tution's  preferred  lender  lists  for  a  particular  type of loan, in

   exchangefor benefits provided to the  covered  institution  or  to  the

   covered  institution's  students  in connection with a different type of

   loan.

     § 628. Proper execution of master promissory notes.  A covered  insti-

   tution  shallnot direct in any manner whatsoever potential borrowers to

   anyelectronic master promissory notes or other loan agreements that  do

   not  providea reasonable and convenient alternative for the borrower to

   completea master promissory note with any  federally  approved  lending

   institutionoffering the relevant loan in this state.

     §  629.  Disclosures  at  request of covered institutions.  Except for

   educationalloans made, insured, or guaranteed by  the  federal  govern-

   ment, upon the request of any covered institution, a lending institution

   shall  disclose  to  such  covered institution, in reasonable detail and

   form, the historic default rates of  the  borrowers  from  such  covered

   institution,  and  the  rates of interest charged to borrowers from such

   coveredinstitution in the year preceding the disclosures and the number

   ofborrowers obtaining each rate of interest.

     § 630. Penalties.  1. If after providing notice and an opportunity for

   ahearing the department determines that a covered institution or  lend-

   ing  institution  has  violated any terms or provisions of this article,

   thenthe covered institution or lending institution may be liable for  a

   civil  penalty.    Regardless  of  the department's determination that a

   coveredinstitution or  lending  institution  is  liable  for  a  single

   violation  or  a  series  of  violations under this article, the maximum

   penaltyshall not  exceed  fifty  thousand  dollars.  In  taking  action

   against  a  covered  institution  or  lending institution, consideration

   shallbe given to the nature and severity of violations of this article.

     2. If after providing notice and an  opportunity  for  a  hearing  the

   department  determines  that a covered institution employee has violated

   anyterms or provisions of this article, then  the  covered  institution

   employee  may  be liable for a civil penalty.  Regardless of the depart-

   ment'sdetermination that a covered institution employee is liable for a

   singleviolation or a series of violations under this article, the maxi-

   mumpenalty shall not exceed seven thousand  five  hundred  dollars.  In

   taking  action  against  a  covered  institution empl oyee, consideration

   shallbe given to the nature and severity of violations of this article.

     3. If after providing notice and an  opportunity  for  a  hearing  the

   department  determinesthat a lending institution has violated a term or

   provisionof this article, such lending institution shall not be  placed

   or  remain  on  any  covered  institution's preferred lender list unless

   noticeof such violation is provided to all potential borrowers  of  the

   coveredinstitution.

     4. Nothing in this section shall prohibit the department from reaching

   a  settlement  agreement with a covered institution, covered institution

   employeeor lending institution in order to effectuate the  purposes  of

   this  section.    Provided,  however,  if  such  settlement agreement is

   reachedwith a covered institution or lending institution,  the  depart-

   mentshall provide notice of such action to all potential borrowers in a

   formand manner prescribed by the department.

     5.  The department shall deposit the funds generated from this section

   intothe student lending education account, created by  section  ninety-

   CHAP. 41                           6

 

   seven-hhhh  of  the  state  finance  law.  Such  funds shall be given to

   coveredinstitutions upon application to the department for the purposes

   of:

     a. Educating borrowers and potential borrowers on the educational loan

   process,  including,  but  not  limited  to,  available educational loan

   options, understanding rates and terms of student loans, managing  costs

   and  credit  responsibilities,  student  loan repayment and loan consol-

   idation; and

     b. Reimbursing borrowers from inflated educational loan prices  caused

   by  revenue  sharing  agreements  between such covered institution and a

   lendinginstitution.

     § 631. Rules and regulations.   The commissioner  and  the  department

   shall  promulgaterules and regulations necessary for the implementation

   ofthis article.

     § 632. Non-exclusivity of rights or remedies. Nothing in this  article

   shall  be  construed  to  limit,  in  any manner, any rights or remedies

   otherwiseavailable under law to any person or  entity,  including,  but

   notlimited to, the attorney general of the state of New York.

     §  2. The state finance law is amended by adding a new section 97-hhhh

   to read as follows:

     § 97-hhhh. The student lending education account.  1. There is  hereby

   established  in  the  joint  custody  of  the  state comptroller and the

   commissionerof taxation and finance an  account  to  be  known  as  the

   studentlending education account.

     2.  Such  account  shall consist of all revenues generated pursuant to

   sectionsix hundred thirty of the education law  and  all  other  moneys

   credited  or  transferred thereto from any other fund or source pursuant

   tolaw.

     3. Moneys of the account, following appropriation by  the  legislature

   shall  be  made  available  to  the  state  education department for the

   purposesof: (a) supporting programs that  educate  students,  potential

   students,  and parents of such students on the educational loan process,

   including, but not  limited  to,  available  educational  loan  options,

   understandingrates and terms of student loans, managing costs and cred-

   it  responsibilities, student loan repayment and loan consolidation; and

   (b) reimbursing students from inflated educational loan prices caused by

   revenuesharing agreements between such covered institution and a  lend-

   ing  institution.    Money shall be paid out of the account on the audit

   andwarrant of the state comptroller on vouchers certified  or  approved

   bythe state education department.

     § 3. This act shall take effect on the one hundred eightieth day after

   it shall have become a law.

 

   The Legislature of the STATE OF NEW YORK ss:

     Pursuant  to  the authority vested in us by section 70-b of the Public

   Officers Law, we hereby jointly certify that  this  slip  copy  of  this

   session law was printed under our direction and, in accordance with such

   section, is entitled to be read into evidence.

 

      JOSEPH L. BRUNO                                     SHELDON SILVER

   TemporaryPresidentoftheSenate                SpeakeroftheAssembly