It’s a pretty safe bet that the Consumer Financial Protection Bureau won’t see much of the half-billion-plus dollars it demanded from Corinthian Colleges Inc., in a lawsuit the bureau filed on Tuesday that accused the company of predatory lending and illegal collection tactics.
Since June the for-profit college company has been selling off or closing its 100-plus campuses, after a crackdown by the U.S. Department of Education.
At first glance the suit might even seem at cross-purposes with the goals of that deal. A $500-million lawsuit doesn’t exactly make for a strong selling point. In a prepared statement on Tuesday, Corinthian said as much: “Precipitous unwarranted actions by state and federal regulators make this transition more difficult for existing students, graduates seeking employment, and Corinthian employees.”
Some observers have questioned the federal agency’s actions, noting that if its suit pushed the company into bankruptcy, the government could be left with little choice but to forgive student loans for thousands of Corinthian’s current students at a cost of hundreds of millions of dollars to taxpayers.
But if the department was worried, it wasn’t showing it. “We share the Consumer Financial Protection Bureau’s concerns about Corinthian’s past practices, and our independent regulatory investigations of Corinthian continue,” the assistant press secretary, Denise Horn, said in a written statement. “Meanwhile, our independent monitor will continue to ensure the company is in full compliance with our operating agreement and students are informed of their options throughout this wind-down process.”
At the same time, the lawsuit could be the key to some new developments that reach far beyond Corinthian. Here’s a look at some of those issues.
Establishing Authority
Depending on how it is resolved, the lawsuit could help establish the agency’s authority to oversee lending activities of for-profit colleges.
The Consumer Financial Protection Bureau had previously filed suit against another for-profit college company, ITT Educational Services. In response, ITT has argued that the federal agency doesn’t have authority over “sellers of nonfinancial goods or services” such as colleges. (ITT also contends that the entire agency is unconstitutional because it violates the principle of checks and balances.)
A few weeks ago Corinthian disclosed that it had been in discussions with the consumer agency over an informal settlement of the bureau’s allegations against it. Had that settlement gone through, it might have lent some political weight to the agency’s efforts to regulate the kinds of loans ITT had been making. But it would have been just that—an informal settlement.
But now that the bureau has mounted a legal case against Corinthian, any settlement is likely to be resolved under the authority of the courts, which could add more weight to the federal agency’s authority. And unlike ITT, Corinthian may be more likely to settle, because it doesn’t have ITT’s cash reserves or its resolve to fight the bureau. (As one observer put it on Tuesday, ITT “would rather pay the lawyers” than pay the consumer bureau.)
Also, under the agreement it reached with the Department of Education, Corinthian is forbidden to use students’ tuition payments for legal fees or settlements.
On the other hand, it’s entirely possible that Corinthian will all but disappear before it gets a chance to settle anything. Under its deal with the Education Department, Corinthian is expected to sell or close all of its colleges by the end of the year. What the company will look like after that is hard to predict.
Considering that outcome, perhaps even an informal settlement would have been the more precedent-setting event, at least as far as public perceptions go. As one lawyer who is following the situation privately noted, in cases like this, the significance is not so much in the terms of the settlement or the actual legal precedents: “It’s the noise.”
Scrutinizing Loans
The lawsuit could also mean that the Consumer Financial Protection Bureau plans to assert more authority over the kinds of loans that many for-profit colleges, and even some nonprofit colleges, now help make available to their students. The lawsuit is directed at Corinthian’s conduct under an arrangement in which the college company had agreed to buy back loans from a third-party lender if they were delinquent for more than 90 days.
The lawsuit contends that Corinthian used abusive debt-collection practices to keep students from becoming delinquent and failed to inform borrowers of its financial interest in the loans. While those allegations have yet to be proved—and Corinthian disputes them—it is hardly the only college company that works with private lenders to make loans available, and sometimes those deals involve separate financial arrangements between the lenders and the colleges.
Those arrangements are more prevalent in the for-profit sector, according to a lawyer familiar with the practices. And even in the nonprofit sector, colleges sometimes work with private lenders to make loans available and then sell the loan portfolio. The lawsuit raises the notion that the consumer agency could extend its reach over all such deals involving colleges.
But as the lawyer also noted, there is probably little cause for “too much alarm.” Unless those colleges are engaging in practices that could be seen as abusive or overly aggressive, the likelihood of a lawsuit by the agency is probably pretty small.
Defining ‘Predatory Lending’
The lawsuit raises provocative questions—or at least presents an interesting thought lesson—concerning the standard for what constitutes “predatory lending.”
In its suit, the federal agency faults Corinthian for making loans to students who it knew would be likely to default. Many of the private loans that other for-profit and nonprofit colleges make are issued with the understanding that not all students will pay them back. And of course the federal government issues billions of dollars in student loans every year, even though about 15 percent of borrowers default within three years, according to the most recent data. (The U.S. Department of Education is expected to release the latest default-rate figures for federal student loans next week.)
Here the issue may boil down to the question of degree. The consumer agency alleges that Corinthian continued to make loans to students whose default rates were “consistently extremely high"—greater than 60 percent for loans more than three years old. Student advocates like Pamela Banks, senior policy counsel at Consumers Union, cited that allegation on Tuesday as a sign that the company “was banking on a student’s failure, literally, because it expected most students to default on their loans.”
The suit does not specify a more acceptable default rate under which such loans might be offered. Still, it’s probably another safe bet to assume that the Consumer Financial Protection Bureau doesn’t intend to take on the Education Department any time soon.
