New York State's Department of Financial Services, an agency founded in late 2011 that has made its name in aggressive investigations of payday lenders and large settlements with foreign banks, issued subpoenas to 13 companies Wednesday that offer debt relief and consolidation for student loans. The subpoenas are the first action of the Student Protection Unit, a new group within the regulator charged with both education and enforcement on student finance issues.
"The idea behind the unit is not only to root out companies and firms who are ripping off students but also to educate and promote smart financial habits among students," Benjamin Lawsky, the head of DFS, told BuzzFeed.
The 13 companies that DFS subpoenaed all offer student debt relief or consolidation. The industry has come under fire from consumer activist groups for what they allege are violations of consumer protections laws and misleading student borrowers about the services they provide. The DFS subpoenas covered the companies' advertising materials, fee schedules, and contracts. "They're all doing business in the state of New York. Some have offices here, some don't," Lawsky said. "They all have impacts here in New York state."
Lawsky's office has shown a willingness to go after consumer finance companies that don't have a presence in the state if they do business with New Yorkers, like when it went after payday lenders that were based in out-of-state Indian reservations but offered loans with interest rates above New York's statutory caps.
One group, the National Consumer Law Center, wrote a report last year criticizing the industry for what it described as deceptive marketing practices and charging high fees for "programs that are available for free," specifically the federal government's own programs for reducing and consolidating federal student loans. "Socking students with high fees for a service that is already available for free through the federal government is an immediate red flag," Lawsky said in a statement.
DFS cited the NCLC's work in its release announcing the subpoena. Deanne Loonin, the author of the report, said that she had spoken generally with the New York attorney general's office about the for-profit student debt relief industry but "not all with DFS," she told BuzzFeed. "We reviewed the report during the course of conducting our own investigation. Typically, we reach out to outside groups as needed as our investigations progress," Matthew Anderson, a DFS spokesperson said. "We've had no conversations with DFS about student loan issues," said Attorney General Eric Schneiderman's press secretary Matt Mittenthal.
Although the unit has a staff of only six, Lawsky envisions expanding past enforcement and investigations and into consumer education. "The idea behind the unit is not only to root out companies and firms who are ripping off students but also to educate and promote smart financial habits among students as well," Lawsky said. "We are really going to take a holistic view of his areas, less firm by firm and more focused on the students." Lawsky also said the group would look into health insurance for students.
DFS isn't the only newish, energetic regulator throwing itself at student finance issues. The Consumer Financial Protection Bureau, the two-and-a-half-year-old consumer protection agency, has started regulating the companies that service student loans and is investigating Sallie Mae, the largest student lender and servicer for violating consumer protection. "We have worked quite closely with the CFPB, Richard Cordray is a bright shining light of the Obama administration," Lawsky said.
The focus on student finance issues marks a return to form for Governor Cuomo and Lawsky. One of Cuomo's highest-profile investigations during his time as New York state attorney general was of the marketing practices of student lenders and the relationships between lenders and colleges, including gifts and benefits for employees in exchange for being placed on "preferred lender" lists.
Cuomo eventually got many banks to sign on to a code of conduct that banned payments and gifts from lenders to college employees. Lawsky, who was special assistant and deputy counselor to Cuomo, led the investigation. Lawsky's current investigation in student debt relief "could result in enforcement action, could result in reforms, could result in regulation, could result in legislation," he said.
"What struck me is that it's not limited to violations of law — there will probably be some outreach efforts out of DFS to encourage conduct they'd like to see that's a little bit different than the attorney general's office," said John Culhane, who works on consumer financial services at the law firm Ballhard Spahr.
According to the Federal Reserve Bank of New York, there is just over $1 trillion in outstanding student debt and the average student borrower in New York state has $27,310 in debt. "The rising tide of student loan debt has made it more important than ever that we put in place strong consumer protections for New York's students," Governor Cuomo said in a statement. "Any company trying to sell students a raw deal using misleading or deceptive practices should know that we'll continue to work vigilantly to root out consumer abuse."