WASHINGTON -- New York Attorney General Andrew M. Cuomo, whose scrutiny of student loans has exposed ties between universities and lenders, said yesterday that he was broadening his investigation to examine the criteria lenders use when making loans and whether they violate civil rights statutes.
Testifying at a Senate Banking Committee hearing on private student loans, which do not carry federal guarantees, Cuomo said he was examining whether lenders were discriminating against students based on the institutions they attended or other factors not directly related to their credit history.
"What criteria are they using in the underwriting of these loans?" he asked. "Parental income? Student income? Student creditworthiness? How about the school you attend? How is that weighted?"
While lenders have the right to consider a borrower's credit record, he said, "there are also civil rights and legal ramifications to what criteria they use, and that's what we're looking at."
He suggested that students at historically black colleges and universities were sometimes charged higher interest rates and fees than other students.
Committee Chairman Christopher J. Dodd, a Connecticut Democrat who is running for president, likened the practice to redlining, in which banks rule out mortgage loans based not on the credit record of potential homeowners but by whether urban neighborhoods are predominantly black.
The market in private student loans has soared in recent years, tripling to $17.3 billion in the past five years. Such loans carry variable interest rates, unlike government-backed loans, which have fixed rates.
Cuomo, whose student-loan "code of conduct" banning secret gifts from lenders to universities became a model for legislation the House passed last month, called private student loans the "Wild West" of consumer lending. He says that they are largely unregulated and that the level of disclosure pales next to that required of the mortgage industry.
Regulations that the U.S. Education Department issued last week on student lending apply only to loans carrying federal guarantees. Cuomo urged Congress to clean up the private loan industry but said new legislation was probably not needed. Rather, he said, the federal agencies charged with oversight, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Trade Commission, have not used the authority the law gives them.
A number of lenders, including Sallie Mae, which holds more private loans than any other company, consider the institution a student is attending in determining the interest rate, fees and other terms of loans they extend to students, said Barry W. Goulding, a Sallie Mae senior vice president who testified.
But Goulding justified the practice, saying Sallie Mae considered "our experience with the borrowers attending that school" to only "a nominal extent," which could result in interest rates up to 1 percentage point higher. More important, he said, is the credit history of the borrower and the co-signer, usually the students' parents.