Loan marketers scruntinized
New York State attorney general Andrew Cuomo shone the spotlight onto the direct marketing world last week, when he announced he was expanding his investigation into the student loan industry to include direct marketers.
A statement from Cuomo's office described misleading marketing practices through the direct mail, teleservices, television, radio, and online channels.
The examples he cited included some companies who are accused of mailing commercial offers designed to look like official letters from the US Department of Education that warn students to protect their rights by calling the lender. Subpoenas and requests inquiring into these practices were sent to Collegiate Funding Services/JP Morgan Chase, and Elite Financial Group, among others.
Other companies are accused of offering gift cards of up to $500 for loan applications. And, companies holding sweepstakes "to entice students to take out loans" included Wells Fargo and Academic Finance Corporation, among others.
LendingTree.com is being targeted because it promotes itself with the slogan "When banks compete, you win," but, according to Cuomo's office, "had an exclusive agreement with EduCap and essentially offered only its [own] student loans."
The Direct Marketing Association swiftly came out in favor of Cuomo's actions, saying that illegal marketing activities erode trust for the entire industry.
"If these actions violate the law, then they should be stopped," said Jerry Cerasale, SVP of government affairs for the DMA. "Legitimate marketers need to have trust in the marketplace, and violating the law undercuts that trust. This is not retail, where you can walk in and touch a product and buy it. With direct marketing, you don't hold the product until after you've bought it, so trust is essential."
More than 30 college-loan providers received subpoenas and document requests from Cuomo's office last week. The marketing practices being investigated may constitute a violation of New York State's consumer protection laws and the anti-inducement provisions of the federal Higher Education Act.
"Our ongoing investigation of the student loan industry has now shifted focus to the aggressive, misleading, and harmful tactics of many companies who market student loans directly to students and their parents," said Cuomo in a statement. "We are now concerned that as the bad practices surrounding the development of preferred lender lists are eliminated, we are seeing a spike in misleading and deceptive practices in the direct marketing segment of the student loan industry."
A Lendingtree spokeswoman, and representatives from many of the other lenders said to receive subpoenas, declined comment. Others did not return calls.
Publicity surrounding the actions of predatory lenders could negatively affect the public's willingness to do business with legitimate direct marketers, he warned, but added that vigilant enforcement by Cuomo and others could also help consumers feels safer.
"If you have enough of this, people will say, æI don't trust anything in the mail,' and we don't want that," Cerasale said. "But what the attorney general is doing, if indeed these people have violated the law, helps build trust. It says, æWe're going after the bad actors.'"
The investigation received widespread coverage late last week, including stories from Reuters, The New York Times and The Chronicle of Higher Education. Many articles cited the increasing frequency - and aggressiveness - with which college lenders are marketing directly to students, a practice that is generally frowned upon by consumer advocates.
"Over the past year lenders have increased their direct-to-consumer student loan marketing. These pieces are frequently misleading, encouraging students to take out high-interest, high-risk loans instead of pursuing more affordable student financing options," said Luke Swarthout, higher education advocate, US Public Interest Research Group.
The DMA's Cerasale compared the current situation to the sweepstakes scams that were prominent in the 1980s and 1990s. The sweepstakes scams cast a pall over legitimate direct marketers for years, he said, but were dealt with via new legislation and enforcement - something he hoped would happen again for deceptive college lenders.
"There have been laws passed trying to tell people that if you have to buy something, it's not a sweepstakes," he said. "You don't have to pay to play in a sweepstakes, and that kind of information has gone out through laws being passed. We've been somewhat successful on that. There are bad people out there in the world, and we all have to be vigilant against them."
The attorney general's office for now appears to be of similar thinking.
"Reforming the student loan industry requires investigation of all aspects of this market to ensure that one reform, like cleaning up preferred lender lists, is more than just a thumb in the dike causing the bad practices to shift to another area of the market," said Cuomo. "The practices we have found in the direct marketing of loans to students are surprisingly blatant and even involve some companies who portray themselves as arms of the federal government.
"The student loan industry is a very complex and confusing marketplace à and the last thing [students] need are sharks baiting them with glossy promotions and deceptive offers," he said. n