Consumer Financial Protection Bureau Sues ITT as Predatory Lender

February 27, 2014

The nation’s top consumer watchdog sued ITT Educational Services Inc. on Wednesday, 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, alleges that ITT offered its students zero-interest loans to cover the cost of their first year, knowing that they were 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 their balance and finance their second year of education.

The CFPB is seeking restitution for the victims, a civil fine, and an injunction against the company.

In a conference call with reporters, 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, "the investors and shareholders got richer."

Also on the call were four state attorneys general who are part of a multistate group that is conducting investigations of ITT and three other publicly traded for-profit higher-education companies: Corinthian Colleges, the Education Management Corporation, and the Career Education Corporation. One of the attorneys general, New Mexico’s Gary King, announced that his office was suing ITT over alleged misrepresentations made to nursing students.

Nicole Elam, vice president for government affairs and external relations at ITT, said the company could not comment on pending litigation. But she added that the company regards the bureau's claims as "without merit" and will "vigorously defend ourselves against the charges."

‘Just the First Step’

The bureau’s enforcement action comes almost exactly a year after the Securities and Exchange Commission issued a subpoena to ITT over a defunct private-loan program that involved risk-sharing agreements with lenders. Last January, ITT announced that it would pay $46-million to Sallie Mae to settle a lawsuit that accused it of failing to pay money due under a similar agreement.

According to the latest 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." The company projected that up to 64 percent of the loans would default, according to the lawsuit. The suit also alleges that ITT failed to tell students that many of their credits were not transferable to other colleges, and misled students about their job prospects.

In Wednesday’s conference call, 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 allege the company violated the Consumer Financial Protection Act of 2010, and that the agency "may seek injunctive and monetary relief."

ITT Educational Services and Corinthian Colleges have both been under investigation by the CFPB for more than a year, since shortly after the consumer-protection agency was established, in July 2011.

In recent months, ITT has been cutting costs by closing campuses. In 2013 it suspended enrollment at two campuses and merged five others into existing campuses.

Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, praised the lawsuit and attorney-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.