Fiduciary Duty and Financial Aid
posted by Dave Hoffman
The financial aid scandal, sparked by NY Attorney General Andrew Cuomo’s investigation (and possibly a shut-out competitor) has already led to some settlements with lenders and universities. The basic thrust of Cuomo’s investigation is that if lenders pay administrators referral fees (whether direct or indirect) to steer students to take certain loans, that conduct is a deceptive trade practice, “in violation of New York Executive Law ‘ 63(12) and General Business Law 349 and 350 and other relevant state law.”
Universities are falling over themselves to settle with NY, as is the lending industry, in light of some bad facts: the companies have sought to influence financial aid administrators with stock, Broadway tickets, and other goodies. So this question is, literally, academic: is the alleged conduct by the university employees a violation of a fiduciary duty (loyalty) owed to students?
I’m going to assume that such agency questions are not preempted by federal law. The first, and probably dispositive question, is whether financial aid administrators are agents of students for the purposes of filling in loan applications. It is at first glance a hard fit. But in my corporation’s casebook, I teach agency through Basile v. H&R Block, 761 A.2d. 1115 (Pa. 2000). In Basile, a tax preparation firm took a kickback from Mellon Bank for arranging that customers seeking an advancement on their tax refunds use the bank. The question in the case (after federal TILA claims fell away) was whether H&R Block was the agent of Basile. If it was, then (obvious) Block violated its duty of loyalty by not disclosing the referral and profit-sharing relationship.
The Court found (contrary to others on similar facts) that there was no agency relationship:
“[T]here is no showing that appellees intended Block to act on their behalf in securing the [refund loan]. To the contrary, Block offered appellees the opportunity to file their tax returns electronically with three options [electronic filing for a fee, electronic filing for a fee with direct deposit of the refund; electronic filing for a fee with a loan], only one of which involved a [loan.] It was appellees alone who decided to take advantage of [the loan . . . Block simply facilitated the loan process . . . Simply introducing appellees to a lender willing to provide a loan is not sufficient to create an agency relationship . . . If Block’s method of doing business is worthy of the condemnation that appellees suggest, presumably the marketplace will react to correct it. IT is not our place to imbue the relationship between Block and appellees with heightened legal qualities that the parties did not agree upon.”
Block is wrongly decided. The proper inquiry is the principal’s control over the agent with respect to the activity in question, and the agent’s consent to the relationship. Block sold itself as trustworthy, and filled out the tax forms for customers under their supervision, giving rise to an expectation that it would act in the customer’s interest.
The financial aid fact pattern is clearly distinguishable. As I understand it, at most schools students fill out and submit forms themselves (albeit with counseling). Schools provide a list of recommended lenders, but that list is not exclusive, and students are not penalized by the school for going “off-list.” On the other hand, like Block, students probably have reasonable expectations that colleges are acting in their interests, and like Block, are in a position of vulnerability, and are badly positioned to evaluate the free market options available to them. The issue might turn on whether the colleges complete and submit forms for the students under the student’s supervision – we certainly need some kind of manifestation of assent by the purported agent to be bound to the relationship.
To the extent that universites are students’ agents, which I think unlikely, nondisclosed referral fees and gifts would almost certainly be disloyal. What would be the remedy? As against the agents, disgorgement certainly. But could students sue universities for the difference between what they expected (the best loan available) and what the got (the loan on the list)? This seems to me to create some pretty difficult proof issues – loans are desirable for reasons other than interest rates – and would likely make it hard to certify a borrower class.
In the end, I don’t know how this kind of claim would work out. What do you think?
April 12, 2007 at 10:01 am
Posted in: Behavioral Law and Economics, Consumer Protection Law, Contract Law & Beyond, Corporate Law, Current Events, Economic Analysis of Law, Education, Law School
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Responses (6)
John Armstrong - April 12, 2007 at 11:01 am
Even in the worst case possible the financial aid officers are undisclosed paid endorsers, which is a deceptive practice. If such an officer says, “I recommend this company’s services,” without the disclaimer, “they gave me a ton of stock,” the student is misled into thinking the assessment is based on an honest appraisal of the quality of the company’s services.
Christine Hurt - April 12, 2007 at 2:08 pm
Dave, I also teach the H.&R. Block case, which as you know was decidedly differently in different states. I’m not sure I’m convinced that Block was the agent, but I see the argument. Also, mortgage lenders are not agents of the borrowers under almost all state laws, which seems to be relevant here. I don’t see a court saying that the university’s financial aid office is the agent of the student either.
The fact patterns are almost too close to an attorney receiving expensive entertainment tickets, dinners, and (at our firm) custom-made shirts by court reporter firms vying for business. Of course, attorneys (who are agents) hire these firms for the benefit of our clients, who pay their bills.
dave - April 12, 2007 at 3:29 pm
If the attorneys were inhouse, I assume that the tickets, dinners, and shirts would all be corporate opportunities subject to disgorgement upon request. Presumably, the only reason that the same is not true for the private attorney is a practical/standing problem: how could you determine which of the many principals the opportunity “belonged” to?
hdhouse - April 22, 2007 at 7:17 am
H&R Block is your primary mistake. Student loans are not in the same category as a public, for profit company.
First, there are several offering institution types. I can think of three main ones:
1. publically funded institions that operate with major financing from the State…e.g. UofM, Mich. State, etc.
2. private colleges that enjoy a certain status from the IRS
3. for profit institutions that, by in large, offer vocational credits or courses (cosmotology, surgical assistant, etc.)
Block and #3 appear to be something of the same. Groups #1 and #2 are what Spitzer is going after here in New York. #1 group, SUNY schools are his prime target and that kind of sweetheart deal that guides a student through a state sponsored institution populated by state employees who are, in no uncertain terms, taking kickbacks from the private sector for guiding students to lenders is just reprehensible….and that is the problem here.
Students have an expectation that the state is operating in their interest and their interest alone and that no one is taking an undisclosed profit in the transaction. No one would mind if Chase donated a million bucks to higher education in consideration. Everyone gets crazy when Mr. Smith in financial aide takes $50k in a cash “thank you” for steering kids to Chase.
MICHAEL OGIERIAKHI - June 4, 2007 at 1:18 pm
Sir, I am very grateful to you for the admission you granted me at Novus Law School, but I am likely to experience some constraints in transferring funds to you. I humbly request that you kindly assist me for financial aid ( including student loan package) application materials to enable me fully become a member of the Novus Law School Family. I am in great love with Novus’Law.
Rarelyignited - April 5, 2011 at 10:25 pm
I just have to ask after reading this, if anyone can direct me to a lawyer who would handle such a case that involves the breach of a fiduciary relationship assumed between a student and financial aid adviser. There are other misc. offenses such as violation of privacy, and breach of contract on behalf of the institution. If anyone can help me, please respond. Thank you kindly.
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