Fiduciary Duty and Financial Aid
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?