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CIT Group Settles with New York Over Student Loan Unit

New York Attorney General Andrew Cuomo's office said it reached a settlement with CIT Groupand CIT's Student Loan Xpress unit arising from the state's investigation of abuses in the U.S. student-loan business.

The New York-based commercial and consumer lender agreed to pay $3 million into a fund that will educate students about financial aid, reform its business practices and assist the state in its investigation into lending officials.

"CIT's cooperation will add even more fuel to our ongoing investigation of certain lending officials who engaged in highly questionable practices," Cuomo said in a statement.

CIT officials declined immediate comment.

In April, CIT placed three student-loan executives on leave after Cuomo had alleged a week earlier that Student Loan Xpress gave valuable grants of stock to financial aid officers at three universities.

The allegations arose from Cuomo's probe of the U.S. student-loan business, an $85 billion a year industry in which conflicts of interest can result from undisclosed financial relationships between lenders and colleges.

Cuomo has argued that lenders used payments and perks to curry favor with schools and school officials in order to win the coveted "preferred lender" designation. Nine out of ten students choose a lender recommended by their school.

CIT is the seventh bank or student-loan company to reach an agreement with New York, with the highest fine to date.

In addition, 22 colleges and universities adopted Cuomo's code of conduct, which ban financial relations with lenders.

Education Lending Group, the former parent of Student Loan Xpress, granted shares to education and financial aid officials. These shares rose in value after Student Loan Xpress went public in a 2003 initial public offering.

CIT acquired Education Lending, and with it Student Loan Xpress, in 2005.

Cuomo's office said it found that Student Loan Xpress had provided meals, entertainment and gifts to school officials.

Student Loan Xpress sponsored advisory boards of financial aid officers and funded free trips to meetings.

New York investigators said Student Loan Xpress provided free staff to financial aid offices, free printing services and training seminars for aid officers and sponsored school events.

Some financial aid officers also received consulting fees from serving on Student Loan Xpress' advisory board.

Timothy Lehmann, a financial aid officer for Capella University, received $12,400, while Walter Cathie of Widener University received $80,000 from CIT, the state said. Ellen Frishberg, a former financial aid officer for Johns Hopkins University, received $43,000 and $22,000 toward her graduate school tuition at the University of Pennsylvania, it said.

The state, in its agreement, said a former Student Loan Xpress parent company in 2001 issued securities to Fabrizio Balestri, named CEO of the student lender in January 2002.

Balestri sold or transferred these securities to financial aid officers David Charlow of Columbia University, Catherine Thomas of the University of Southern California and Lawrence Burt of the University of Texas, New York said.

Balestri also sold or transferred securities to Matteo Fontana, who soon after became an employee at the Office of Federal Student Aid at the U.S. Education Department, Cuomo's office said.

Cuomo said the agreement with CIT does not prevent the state from pursuing action against Balestri, former Student Loan Xpress employees Michael Shaut or Robert deRose, and others involved with relationships with school officials.

U.S. Representative George Miller announced the state's agreement earlier Thursday during a hearing of the House Education and Labor Committee into the student loan business.