The nation’s top consumer watchdog sued ITT Educational Services Inc. last week, accusing the for-profit college chain of pushing its students into high-cost private loans that it knew were likely to end up in default.
The lawsuit, the first filed by the Consumer Financial Protection Bureau against a for-profit college company, says that ITT offered its students zero-interest loans to cover the cost of their first year, knowing that they would be unlikely to repay at the end of the year. When borrowers failed to do so, the company pressured them into taking out private loans to pay off the balance.
The consumer-protection agency is seeking restitution for the victims, a civil fine, and an injunction against the company, which operates 140 institutions in 35 states, enrolling some 57,000 students.
The crackdown by the CFPB is the latest in an expanding array of audits, investigations, and inquiries into the for-profit-college sector. Dozens of state attorneys general, as well as the Securities and Exchange Commission, the Justice Department, and the Education Department’s inspector general are investigating the colleges. The scrutiny is wide-ranging, looking at everything from aggressive recruitment to the misrepresentation of graduation and job-placement rates.
Richard Cordray, the bureau’s director, said that while ITT “marketed itself as improving consumers’ lives, it was really just improving its bottom line.”
“The result was that while many of the students got poorer,” he said in a call with reporters, “the investors and shareholders got richer.”
In a statement, ITT denied that it had coerced its students into taking out unfair loans or rushed them through the financial-aid process, as the suit alleges. The company pointed out that it did not profit off the debt. It called the complaint an “aggressive attempt by the bureau … to extend its jurisdiction into matters well beyond consumer finance.”
‘Just the First Step’
ITT is among the most expensive for-profit colleges, with associate degrees costing roughly $44,000 and bachelor’s programs double that amount, according to the lawsuit. While federal grants and loans typically cover a portion of the cost, many students rely on private loans to fill the gap.
According to the bureau’s complaint, ITT pressured students to take out private loans that carried origination fees as high as 10 percent and interest rates as high as 16.25 percent to repay their zero-interest “temporary credit” and help finance their second year of education. The company projected that up to 70 percent of the loans would default, the lawsuit says.
The complaint alleges that financial-aid officers, who were compensated in part on the basis of how many loans they certified, would pull students from class or withhold transcripts to get students to agree to the loans.
Jennifer K. Cody, a former financial-aid coordinator who provided documents and sources to the consumer-protection agency, said the pressure went both ways. She said aid administrators were “hounded, threatened, strongly urged, and humiliated in campuswide staff meetings” to get students to sign applications for private loans.
“If we did not physically drag the student out of classes to have them apply, the campus director often did it and brought them to our desks,” she said. Ms. Cody was laid off from her job at the Bessemer, Ala., campus in 2011, after almost four years at ITT. She said financial-aid employees, who earned a point for each certified loan, would often apply for, and electronically sign, loans to meet their quotas.
“We were under enormous pressure to complete files,” she said. “It was a race between campuses, between employees, between districts to be No. 1 in points by a deadline.”
The lawsuit also claims that ITT failed to tell students that many of their credits were not transferable to other colleges, and that the company had misled students about their job prospects.
Much of the complaint relies on a “mystery shopper” program that the company created to monitor employee behavior. In its statement, ITT said the bureau had taken the program’s findings out of context, “giving isolated anecdotes that are examples of the conduct the program is designed to root out and eliminate.”
Mr. Cordray hinted that more lawsuits may follow, calling the case against ITT “just the first step the consumer bureau is taking to address consumer issues in the for-profit-college market.” The bureau recently notified Corinthian Colleges that it expects to take action against the company for violating the Consumer Financial Protection Act of 2010, and that the agency “may seek injunctive and monetary relief.”
SEC Investigation
The bureau’s enforcement action comes almost a year after the Securities and Exchange Commission issued a subpoena to ITT over a convoluted private-loan program that was structured to keep the risky debt off the company’s balance sheets.
Under the program, known as Peaks, a bank would originate private student loans, then sell the loan portfolio to an unaffiliated trust that issued debt to investors. ITT guaranteed the debt and was on the hook to investors when loan repayments fell short of projections.
If the SEC decides that the Peaks debt should be counted on the company’s books, that could make it harder for ITT to comply with the federal 90/10 rule, which requires colleges to receive at least 90 percent of their revenue from sources other than federal student aid.
If the company failed that test two years in a row, it would become ineligible to award federal student aid, a likely death sentence for its colleges.
Both ITT Educational Services and Corinthian Colleges have been under investigation by the consumer-protection agency for more than a year, since shortly after it was established, in July 2011.
Both colleges are also under investigation by a group of more than a dozen state attorneys general. That coalition, a subset of a “working group” of 32 state prosecutors that has scrutinized the sector since 2011, is also investigating the Education Management Corporation and the Career Education Corporation.
Last week one of the attorneys general, New Mexico’s Gary K. King, announced that his office was suing ITT over alleged misrepresentations made to nursing students.
Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, praised the lawsuit and the attorneys-general investigations, calling them “a signal to the for-profit-school industry that business as usual will no longer be tolerated.” She encouraged the bureau and the attorneys general to “prioritize relief for student borrowers” as they pursue their actions.
Goldie Blumenstyk contributed to this report
Correction (4/4/2014, 5:30 p.m.): This chart originally reported incorrectly that the Wisconsin attorney general was investigating ITT Educational Services. The chart has been updated to reflect this correction.