April 10, 2007

NY Times reports 3 Loan Execs suspended over student loan probe

Posted in Student Loan News at 12:20 PM by Joe From Boston


From the front page of the New York Times!  Read the whole article online.

Student Lender Planned to Woo Officials

The founders of Student Loan Xpress had an explicit plan for corralling a bigger share of the lucrative student loan business: “market to the financial aid offices of schools.”

That was how Robert deRose, Michael H. Shaut and Fabrizio Balestri set out, according to a 2002 regulatory filing by the company, a strategy to use university financial aid offices as the gateway to coveted placements on the lists of lenders recommended to students.

Five years later the company says it is the eighth-largest player in student lending — and it found many ways to court university financial aid directors. It put them on a company advisory board, paid at least two as consultants and sold stock in the venture to others, investigators and university officials say.

Yesterday aides to Attorney General Andrew M. Cuomo of New York provided new details, saying financial aid officers at Johns Hopkins University in Baltimore and Capella University, an online for-profit institution, had served as paid consultants to the lending company.

The company also paid for part of the graduate school tuition for Ellen Frishberg, the Johns Hopkins official, Mr. Cuomo’s office said.

At another university, Widener in Pennsylvania, the lending company sent executives to conferences held by a firm run by the dean of financial aid. It paid the firm $80,000, Mr. Cuomo’s aides said.

These were just the latest in a series of revelations that have already shown that financial aid directors at three universities — Columbia, the University of Texas at Austin and the University of Southern California — held stock in the company, as did an Education Department official who helps oversee student lenders.

Yesterday, the three executives were put on leave by the parent company of Student Loan Xpress. It is not clear whether the company or university officials have done anything illegal.

Mr. Cuomo’s aides say they are looking into deceptive business practices, a civil matter. Mr. Cuomo has said the relationships between lenders and the officials whom students rely on for unbiased financial advice pose a conflict of interest.

Some tactics like using financial aid officers as advisers and consultants are used by other companies. And universities that recommended Student Loan Xpress to students say its loan rates are competitive.

Still, the three men were all put on leave yesterday by the CIT Group, which bought Student Loan Xpress in 2005. That company and the broader student loan industry are now under scrutiny by Congress, the Department of Education’s inspector general in Washington as well as by several state attorneys general.

“As a company that holds itself to the highest standards of business ethics and integrity, we take the allegations raised by Attorney General Cuomo very seriously,” said Jeffrey M. Peek, chairman and chief executive of CIT. Mr. deRose, Mr. Shaut and Mr. Balestri have not returned repeated calls seeking comment.

The quick rise of Student Loan Xpress is a window into an industry in which profits have soared along with tuition and student debt.

“All the companies are out there scrapping,” said Richard Lee Colvin, director of the Hechinger Institute at Teachers College at Columbia University. “This may be an outlier, but every single company is out there trying to increase its market share.”

All three executives worked in the student loan industry during the 1990s. Mr. deRose ran the student loan business for American Express from his base in San Diego, where Mr. Balestri, who had been a longtime executive at Sallie Mae, the nation’s largest student loan company, joined him to direct sales operations. In the 1990s Mr. Shaut had worked at companies involved in the student loan market, too.

By 2002, they were all working together in a new company, Education Lending Group, which had Student Loan Xpress as a student loan marketing subsidiary. Mr. Balestri was the president of Student Loan Xpress. Mr. Balestri knew hundreds of loan officials all over the country, and he had built a reputation in the industry as a natural salesman.

“He was very good at sales, always upbeat, talking about how great everything was,” said Dan Davenport, director of admissions and financial aid at the University of Idaho.

Otto Reyer, director of financial aid at Western University of Health Sciences in California, worked with Mr. deRose and Mr. Balestri at American Express and remembers Mr. Balestri in the same way.

“He has a great smile,” Mr. Reyer said. “He’s somebody you can sit down and talk with, easily. He could sell anything.”

In his work to build Student Loan Xpress, Mr. Balestri used some novel marketing tactics. In one initiative, he arranged for the company to help sponsor a coast-to-coast “Scholarships for Everyone” tour by Ben Kaplan, a 25-year-old Harvard graduate and author of a book outlining tactics for obtaining scholarships.

Mr. Kaplan said he met Mr. Balestri, whom he knew by his nickname, Breeze, at conventions of college lending officers, and that on the tour he would occasionally mention Student Loan Xpress as a helpful financial resource for students.

Mr. Balestri was also wooing university officials. People with experience in the student loan industry said that some of the company’s tactics were common. Many student loan companies establish advisory boards composed of university financial aid officers, as did Student Loan Xpress.

Dana Kelly, director of financial planning at High Point University in North Carolina, said she accepted the company’s invitation to sit on its advisory board because she was providing advice about how students might react to various loans. The company was already on the university’s “frequently used lenders” list, she said, and she received payment only for transportation and lodging at meetings.

But in at least one case, Mr. Balestri encouraged a university loan official to buy stock in the company, a practice that several university loan officials say they had never heard of.

Lawrence Burt, director of the financial aid office at the University of Texas at Austin, said that Mr. Balestri encouraged him to buy shares in Education Lending Group and that he bought 1,500 shares for $1,000 in late 2001.

Mr. Balestri, Mr. Burt said, told him “this is kind of a risky venture. We think it will end up turning a profit but we don’t really know for sure.” Mr. Burt said his purchase was not a conflict of interest because the company at the time was focused more on loan consolidation and only later began expanding its business of originating loans. Mr. Burt said he sold in 2003 when the company was raising more money through the sale of additional shares. The shares of Education Lending Group were worth roughly $10 each. That translates into a profit of about $14,000 for him.

Others who put stock up for sale at that time, according to S.E.C. filings, included the financial aid director for Columbia’s undergraduate college and its engineering school, David Charlow; Catherine Thomas, director of financial aid at the University of Southern California, and Matteo Fontana, who is general manager in a unit of the Office of Federal Student Aid at the Department of Education, and, according to a person who knows him, a longtime friend of Mr. Balestri’s. Mr. Fontana planned to sell about $100,000 in stock up for sale in 2003. In the last few days, these officials have been put on paid leave pending investigations.

Last week, Ms. Frishberg of Johns Hopkins said she had been encouraged to acquire stock in 2002, at a dinner she and other members of the company’s advisory board attended. She turned it down, she said.

“I told them it was not allowed in my position,” Ms. Frishberg said.

Johns Hopkins put her on leave after learning that she had received payments from the company. Mr. Cuomo’s office wrote that she received $43,000 for consulting and $22,000 in tuition reimbursement for a doctoral program she was enrolled in. Student Loan Xpress is a preferred lender at Johns Hopkins for some loan programs.

Tim Lehman, director of financial aid at Capella University, also served as a consultant to the company, earning more than $12,000, Mr. Cuomo’s office said. And Walter Cathie, dean of student financial aid at Widener University, runs a firm that holds conferences on student aid, which representatives of Student Loan Xpress attended at a cost of $80,000, Mr. Cuomo’s office said.

A spokesman for Widener yesterday said the university was looking into the matter. Irene Silber, director of public relations at Capella, said yesterday that the university had known of Mr. Lehman’s consulting arrangement and was reviewing it. She said he did not put Student Loan Xpress on Capella’s list of preferred lenders; the company was there when he arrived.

Profits at Student Loan Xpress did not materialize overnight. The company lost $28.3 million in 2002. But by 2003 its loan portfolio had tripled in size to about $3 billion and in the first nine months of 2004, it had profits of about $10 million. The real payback came in 2005, when the CIT Group bought the company for $318 million.

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