April 25 (Bloomberg) -- New York Attorney General Andrew Cuomo forged agreements with Bank of America Corp. and JPMorgan Chase & Co. in his investigation of abuses in student lending and called for stronger federal oversight.

The U.S. Education Department has been negligent in regulating the $85 billion industry, Cuomo told the U.S. House Committee on Education and Labor in Washington today. The two lenders, along with Johns Hopkins University, are the latest institutions to agree with Cuomo that they'll abide by a new set of ethical standards.

Cuomo, who is coordinating his investigation with counterparts in more than 40 U.S. states, called for immediate regulations from the Education Department and stronger federal laws in the longer term. His inquiry has revealed undisclosed revenue-sharing between lenders and colleges as well as other payments to financial-aid officers whose schools recommended the loan providers to prospective borrowers.

``The U.S. Department of Education has been asleep at the switch,'' Cuomo said. ``The practices we have uncovered were not undiscoverable until now. Rather, the entity charged with maintaining the integrity of the student-loan market failed.''

Education Secretary Margaret Spellings disputed Cuomo's characterization, saying she called two years ago for greater clarity in the student-loan system. Spellings also said she appointed a committee last year to design tighter regulations on recommended-lender lists and inducements from loan companies.

Task Force

Spellings yesterday appointed an internal task force to recommend changes in federal regulations on student lending after an external negotiating panel failed to agree on solutions. She is scheduled to appear before the House committee on May 10.

``This secretary has defaulted on her obligations,'' said House education committee Chairman George Miller, a California Democrat. He and Senator Edward Kennedy, a Democrat from Massachusetts, are conducting their own investigations.

Kennedy today asked Spellings to provide financial- disclosure forms for 27 department employees. Matteo Fontana, a department general manager, revealed on his disclosures that he sold as much as $250,000 of stock in 2004 in Education Lending Group Inc. Fontana was responsible for department relations with providers such as Education Lending, which was acquired by CIT Group Inc. in 2005.

Stock Holdings

The department's policy restricts employees from handling matters involving companies in which they own more than $15,000 in stock. Fontana has been placed on leave while the department's inspector general investigates, and Spellings has ordered a review of her agency's ethics policy.

The Fontana case ``raises grave concerns about the effectiveness and impartiality of the ethics process at the department,'' Kennedy wrote. ``These facts demand hard scrutiny of the department's ability to police itself.''

Criminal charges are possible in some cases against college financial-aid officials who accepted compensation from lenders, Cuomo told the committee. He declined to be more specific after the hearing.

``It's illegal, it's wrong, it's offensive,'' Cuomo testified. ``We're going to enforce the law.''

Cuomo's probe has resulted in five loan companies and 16 schools agreeing to abide by new codes of conduct he devised. Some of the lenders and schools also paid a total of $9.9 million to reimburse borrowers or contribute to a public-information campaign. Attorneys general in Illinois, Missouri and Nebraska have reached similar accords.

Conduct Code

The federal government backs lending to students through a variety of programs, with about 80 percent of the money routed through banks and other agencies. Lenders also provide private loans that aren't federally guaranteed.

Colleges and universities often list recommended or ``preferred'' lenders on their Web sites and in brochures to help students and families sort through their options. Preferred institutions account for 90 percent of money borrowed.

Johns Hopkins in Baltimore said today that it would drop all preferred-lender lists until a national consensus develops on how they should be handled. The school also said it would adopt Cuomo's college code of conduct.

Johns Hopkins financial aid director Ellen Frishberg took $65,000 in tuition and consulting fees from CIT Group's Student Loan XPress, the school and Cuomo have said. Student Loan XPress had been on some of the university's preferred lists.

Consulting Links

In a meeting with Johns Hopkins attorneys last week, Frishberg said she had consulted for other companies, the school said in a statement. The university is investigating those relationships. Frishberg was placed on paid leave April 9.

The university ``has found no evidence of any lender payments to Johns Hopkins in return for placement on any lender list or as compensation for loans to Johns Hopkins students,'' according to the statement.

New York Mayor Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP, is an alumnus and benefactor of Johns Hopkins University, whose Bloomberg School of Public Health is named after him.

JPMorgan and Bank of America are the third- and fourth- largest student-loan originators. The top two, SLM Corp. and Citigroup Inc., previously signed agreements with Cuomo and paid $2 million apiece into a public-education campaign on student loans. Neither agreement announced today includes a monetary payment.

Private Loans

Bank of America said its existing policies already prohibit payments in exchange for being placed on preferred-lender lists.

``We hope that today's announcement will prompt widespread industry adoption of the code, and ensure a level playing field exists among lenders and benefits students and their families,'' said Tracy Grooms, a student-lending executive at Bank of America, in a statement today.

Federal laws should be extended to cover private student lending that isn't federally guaranteed, Cuomo said. Lenders ``prey'' on students who've exhausted their options under the federal programs, he said.

`Double Whammy'

``This is a double whammy for students,'' Cuomo said. ``The cost of a college education is skyrocketing. The student loans don't give students enough money to pay for their education, and the only alternative is to go to private loans at an exorbitant interest rate.''

The home-mortgage market has stronger protections against conflicts of interest than student loans, Cuomo said.

The terms of private loans also create a ``high potential for abuse,'' Cuomo said. ``The private loans are the Wild West of student lending.''

Miller said he is working with House Financial Services Committee Chairman Barney Frank to coordinate legislation for federal oversight of private, non-government-backed lending to students.

The House education committee's ranking Republican, Buck McKeon of California, said he has introduced a bill with Representative Ric Keller of Florida that would ask colleges to adopt their own codes of conduct, including restrictions on gifts from companies to aid officials. It also would ban revenue sharing for federally backed loans and private loans.

``We must be careful not to overreach, as Congress does all too often, but we do need to restore trust in the system,'' McKeon said at the hearing.

To contact the reporter on this story: James M. O'Neill in New York at joneill6@bloomberg.net; Matthew Keenan in Boston at mkeenan6@bloomberg.net.

Last Updated: April 25, 2007 18:55 EDT