Federal Watchdog’s Lawsuit Accuses Corinthian Colleges of Predatory Lending

September 16, 2014

Corinthian Colleges, the crippled for-profit higher-education company that is in the process of winding down its operations, is in trouble again, this time with the federal Consumer Financial Protection Bureau.

On Tuesday the bureau filed a lawsuit accusing Corinthian of predatory lending and illegal collection tactics. The lawsuit seeks an end to the alleged practices and debt relief for affected borrowers.

"We believe Corinthian lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school," Richard Cordray, the bureau’s director, told reporters on Tuesday.

In a written statement, Corinthian said it "strongly disputes" the lawsuit, which "mischaracterizes both the purposes and practices of the ‘Genesis’ lending program." It accused the bureau of ignoring "clear, easily obtainable evidence that thousands of Corinthian graduates are hired into permanent positions by large and small employers across the U.S. every year" in favor of "isolated incidents" that the company itself identified, reported, and corrected.

"It is deeply misleading to ignore the actions by Corinthian that brought these issues to light," the statement says.

The lawsuit comes seven months after the bureau, the nation’s top consumer watchdog, filed a suit accusing another for-profit college company—ITT Educational Services Inc.—of pushing its students into high-cost private loans that it knew were likely to end up in default. ITT has moved to dismiss the case.

For Corinthian, the lawsuit is the latest in a string of troubles dating to June, when the U.S. Department of Education began withholding financial-aid payments from the company. Those restrictions, coupled with the company’s existing cash-flow problems, pushed Corinthian to the brink of bankruptcy. Within days the company had entered into an agreement with the department to sell or close most of its campuses in exchange for continued access to federal aid.

In the agreement, the department said it had taken action "after the company failed to provide records concerning enrollment and job-placement data required by federal law, and failed to fully address concerns about its practices, including faulty job-placement data used in marketing claims to prospective students and allegations of altered grades and attendance."

Job-Placement Rates

The bureau’s complaint also centers on the company’s job-placement data, accusing Corinthian of inflating its rates by creating fictitious employers, counting jobs that lasted only one day, and paying employers to temporarily hire its graduates. The lawsuit asserts Corinthian used those inflated rates to convince students that their programs were worth the high cost—and the debt.

In 2013, Corinthian charged $33,000 to $43,000 for an associate degree, the complaint says. Tuition and fees for a bachelor’s degree ranged from $60,000 to $75,000.

In the complaint, the bureau says Corinthian deliberately set its tuition higher than federal loan limits in order to comply with the federal 90/10 rule, which requires for-profit colleges to receive at least 10 percent of their revenue from nonfederal sources. By creating such a "funding gap," Corinthian forced students to rely on its high-cost, private "Genesis loans."

When students inevitably struggled to make monthly payments, the lawsuit alleges, Corinthian would pull them out of class, block their access to classes and materials, and withhold their diplomas.

The bureau is seeking compensation for the tens of thousands of borrowers who took out Genesis loans from July 2011 to March 2014, including those who have already repaid their debts. The total outstanding balance of the loans exceeds $569-million.

Corinthian disclosed the bureau’s investigation to investors in August, saying it had been accused of violating the Dodd-Frank Act and the Fair Debt Collections Practices Act. At the time, the agency told the company it would be open to a settlement if Corinthian agreed to a list of conditions, including informing students nationwide of the potential sale of their campuses, as it has done in California.

Bureau officials declined to say whether the lawsuit meant that Corinthian had failed to meet its conditions.

"We can’t comment on discussions with Corinthian prior to filing of the complaint," said Ori Lev, deputy enforcement director for litigation, in the call with reporters.