While the Consumer Financial Protection Bureau hasn’t specified the focus of its investigations of two for-profit-college companies, many people following the cases believe the bureau is looking into institutional private-loan practices.
Recently the bureau sent letters to both companies—ITT Educational Services and Corinthian Colleges—saying it was potentially pursuing legal action against them.
Trace Urdan, a senior analyst at Wells Fargo Securities, wrote in a report that the CFPB was most likely pursuing its investigation of ITT Educational Services because of the company’s admission that it expected that 50 percent or more of the private loans it had arranged for students would fail, perhaps suggesting “bad faith” by the company toward the borrowers.
Private student loans are also believed to be at the root of a CFPB investigation into Corinthian Colleges.
“We expect the CFPB could allege that these loans were made irresponsibly to students that represented a poor credit risk, solely for the purpose of gaining access to federal Title IV loan and grant dollars, which do not bear any requirements for assessing borrower risk,” Mr. Urdan wrote. (Title IV is the section of the Higher Education Act that governs most federal student-aid programs.)
Robyn Smith, counsel at the National Consumer Law Center, agreed that the CFPB’s investigations were most likely focused on private student loans, which she said were often predatory loans and were difficult for students to pay back.
“They are certainly the first federal regulator that we know of that is actually looking at the private student-loan products that are being offered by these schools, and then looking at them closely to see if they comply with both the Truth in Lending Act and the laws they have the jurisdiction to enforce,” Ms. Smith said.
Corinthian said on Monday in a corporate filing with the U.S. Securities and Exchange Commission that it had received a letter stating that the CFPB’s enforcement office expects to allege the company violated the Consumer Financial Protection Act of 2010, and that the agency “may seek injunctive and monetary relief” if it takes action against the company.
Similarly, ITT said in a filing in December that it had received a letter stating that the CFPB expects to allege the company violated the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act.
“We don’t know what they’re alleging—and I’m not trying to be cute here—we don’t know if they are going to allege anything,” said Kent Jenkins, a spokesman for Corinthian. “And if they do, we don’t know what it is going to be.”
Nicole Elam, ITT’s vice president for government affairs and external relations, declined to comment beyond what the company had stated in its filing with the Securities and Exchange Commission.
Michelle Muth Person, a spokeswoman for the Consumer Financial Protection Bureau, also declined to comment, adding that the agency neither confirms nor denies investigations.
Institutions as Lenders
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.
Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities, said the for-profit sector had been underregulated and was riddled with institutions that charge high tuition and offer low-quality programs.
Many for-profit institutions, including Corinthian, began offering their own private loans during the recession, after Sallie Mae and other lenders announced new restrictions on the private student loans they would offer.
Pessimistic about that system, Mr. Nassirian said some for-profit educational companies were using “the bundling of predatory financing so that the sector is not just picking the pockets of student-aid recipients of their federal-aid eligibility, but further victimizing them with absolutely unbelievable private-label credit.”
Regulators may allege Corinthian and ITT participated in unlawful acts or practices relating to the advertising, marketing, or origination of private student loans, according to the companies’ filings with the Securities and Exchange Commission. The companies have called for the bureau to end its investigations, arguing that they have done nothing illegal.
According to a letter Corinthian sent to the CFPB in September 2013, the bureau’s demand for documents and information from the company was “an industry-wide sweep,” failing to identify any specific violations by Corinthian.
Mr. Jenkins, the company’s spokesman, said that after Sallie Mae and other lenders stopped offering private loans to students at for-profit colleges, Corinthian founded a loan program of its own, called Genesis, through which students could borrow the 10 percent of their education costs not covered by federal student loans.
Without the loan program, Mr. Jenkins said, a majority of Corinthian’s students would be unable to receive a higher education.
Mr. Urdan wrote in two separate reports that he does not believe that Corinthian’s or ITT’s loan programs are substantially different from those at nonprofit and public institutions, and that he believes that the for-profit colleges’ private-loan programs exist to avoid violating a federal rule dictating that the institutions receive no more than 90 percent of their revenue from federal student-aid sources.
He added that a variety of colleges offer proprietary loan programs and that the for-profit companies “will likely have to be judged within this broad context.” The bureau will have to show that its decision to investigate “was warranted by objective evidence and not the result of prosecutorial bias toward for-profit schools,” he said.