Yes, the Consumer Financial Protection Board is Doing Things: For Profit Colllege Edition

The CFPB has filed suit against ITT Technical alleging that it behaves more like a payday lender than an institute of learning.

It's not just the CFPB, 32 state Attorneys General have filed suit as well, but the CFPB's involvement makes it far less likely that other federal agencies, most notably the Office of the Comptroller of the Currency, will attempt to preempt the investigation:

Honest, well-run for-profit colleges can be helpful to students who do not qualify for traditional schools. But the robber barons in the for-profit sector represent a menace that requires more federal oversight. They saddle students with crushing debt while furnishing them useless degrees – or no degrees at all. These schools have been known to push students who are eligible for low-cost, federal loans into ruinously priced private loans that have fewer consumer protections and that give borrowers who get in trouble little choice but to default. That in turn makes it difficult for them to find jobs, get credit or rent apartments. And because private student loans are difficult to escape through bankruptcy, the stricken borrower might never recover.

Attorneys general in 32 states are actively pursuing this problem . This week the federal Consumer Financial Protection Bureau finally got into the act. On Wednesday it filed suit against an Indiana-based for-profit chain, ITT Educational Services, Inc., which has tens of thousands of students enrolled online or at one of roughly 150 institutions in nearly 40 states. The bureau, which paints a damning portrait of the company’s policies, accuses the chain of practicing “predatory student lending.”

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The suit makes the company look very much like a storefront payday lender that ropes borrowers into loans that they cannot repay, then hammers them with fees and interest. In this case, the bureau asserts that the company rushed students through the application process without giving them a chance to understand what was happening. In some cases “ students did not even know they had a private student loan until they started getting collection calls.” Moreover, it says: “ITT knew that most of its students would ultimately default on their private student loans; it projected a default rate for its students of 64 percent.”

I really hope that this results in meaningful change.

The for profit college industry is full of parasites and predators who make their money off of federally guaranteed loans.

Full CFPB release after break:

CFPB Sues For-Profit College Chain ITT For Predatory Lending

ITT Pushed Consumers into High-Cost Student Loans Likely to Fail

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against ITT Educational Services, Inc., accusing the for-profit college chain of predatory student lending. The CFPB alleges that ITT exploited its students and pushed them into high-cost private student loans that were very likely to end in default. The CFPB is seeking restitution for victims, a civil fine, and an injunction against the company.

“ITT marketed itself as improving consumers’ lives but it was really just improving its bottom line,” said CFPB Director Richard Cordray. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”

Like the mortgage market in the lead-up to the financial crisis, the for-profit college industry may be experiencing misaligned incentives. These colleges benefit when students take out large amounts of loans, regardless of the students’ long-term success. The CFPB is concerned that some of these corporations may be employing practices to coax consumers into taking out more federal and private student loans. Today’s announcement is the Bureau’s first public enforcement action against a company in the for-profit college industry.

ITT Educational Services, Inc. is an Indiana-based for-profit provider of post-secondary technical education. Tens of thousands of students are enrolled online or at one of ITT’s roughly 150 institutions in nearly 40 states. ITT’s tuition costs are among the highest in the country in the for-profit industry. Earning an associate’s degree at ITT can cost more than $44,000. Bachelor’s degree programs can cost $88,000. That is significantly higher than the cost of similar degrees at a community college or a public four-year institution.

Most of ITT’s students borrow large sums to pay the high tuition costs and the majority of this money is borrowed from federal student loan programs. But private student loans also provide critical revenue for ITT. Because most ITT students’ federal aid does not cover the full cost of an ITT program, most students face a “tuition gap” requiring them to find other sources of funding.

The CFPB’s lawsuit alleges that ITT encouraged new students to enroll at ITT by providing them funding for this tuition gap with a zero-interest loan called “Temporary Credit.” This loan typically had to be paid in full at the end of the student’s first academic year. But ITT knew from the outset that many students would not be able to repay their Temporary Credit balances or fund their next year’s tuition gap.

The CFPB lawsuit alleges that between July 2011 and December 2011, ITT pushed its students into repaying their Temporary Credit and funding their second-year tuition gaps through high-cost private student loan programs. Students were left in the dark about the fact that taking out these high-cost loans would be required to continue their studies. However, ITT’s CEO revealed in investor calls that converting the temporary loans to long-term loans was the company’s “plan all along.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive, or abusive practices. Specifically, in today’s lawsuit, the Bureau alleges the following conduct by ITT:

• Pressured into predatory loans: ITT used its financial aid staff to rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved. In some cases, students did not even know they had a private student loan until they started getting collection calls. The loans were high-cost. For borrowers with credit scores under 600, for example, the costs of the private student loans included 10 percent origination fees and interest rates as high as 16.25 percent.

• Credits not transferable: ITT was accredited by a national organization that accredits many for-profit schools, but the credits that students earned typically did not transfer to local community colleges or other nonprofit schools such as public or private colleges. ITT used the prospect of expulsion and the loss of the money already spent during the student’s first year to coerce students into taking out the private loans.

• Misleading future job prospects: The Bureau believes that ITT’s representations led students to think that when they graduated they were likely to land good jobs and enough salary to repay their private student loans. In this way, ITT exploited student expectations while it knew that a majority of students would default.

• Loans likely to fail: ITT knew that most of its students would ultimately default on their private student loans; it projected a default rate for its students of 64 percent. Defaulting on private student loans can have grave consequences for consumers. It can make it difficult to get any kind of loan for years and even affect a borrower’s job prospects. And, because private student loans are difficult to discharge in bankruptcy, the debt can be very difficult to recover from.

The complaint against ITT can be found at: http://files.consumerfinance.gov/f/201402_cfpb_complaint_ITT.pdf

The Bureau’s complaint is not a finding or ruling that the defendant has actually violated the law.
To assist student loan borrowers who may be in delinquency or default, the CFPB recently launched an updated version of the Repay Student Debt interactive tool.

The CFPB also recently finalized a rule allowing it to supervise certain nonbank servicers of federal and private student loans. The rule takes effect on March 1.

CFPB takes complaints about student loans. To submit a complaint, consumers can:

• Go online at consumerfinance.gov/complaint
• Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372)
• Fax the CFPB at 1-855-237-2392
• Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244

### The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.