by Zafreen J. Husain
On February 26, 2014, the Consumer Financial Protection Bureau (CFPB) filed a four-count complaint in the U.S. District Court for the Southern District of Indiana against for-profit college chain, ITT Educational Services, Inc. (ITT), alleging that ITT engaged in predatory student lending. The CFPB asserts that ITT exploited its students by encouraging them to take on high-cost private student loans that they knew were destined to end in default. As relief, the CFPB is seeking restitution for victims, a civil fine, and an injunction against ITT for its deceptive lending practices.
ITT is an Indiana-based provider of post-secondary technical education through online courses and in-person learning centers. Tens of thousands of students attend roughly 150 institutions across 40 states and online courses.
The CFPB alleges in its complaint that ITT devised a plan to convert low cost temporary loans into high cost long term loans and used high pressure tactics to boost its bottom line. ITT encouraged new students to enroll at ITT by providing them “Temporary Credit” to cover their first year tuition gap in the form of a zero-interest loan. The Temporary Credit had to be paid in full at the end of the student’s first academic year. However, the CFPB alleges that ITT knew at the outset that many students would be unable to repay this loan or fund their tuition gap for the following year. The CFPB alleges that between July 2011 and December 2011, ITT coerced students into paying their Temporary Credit and funding their subsequent tuition gap by taking out high cost private student loans through ITT’s private lending programs. Students would be unable to continue their studies without relying on these high-cost private loans. CFPB alleges that in addition to pressuring students into taking on predatory loans, ITT also denied transferability of credits earned at ITT, misled students about their job placement rates, and accreditation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the CFPB to take action against institutions engaging in unfair, deceptive, or abusive acts or practices. The CFPB’s complaint against ITT was the first public enforcement action against a company in this industry. The CFPB’s action serves as a warning to other for-profit colleges that it will continue to be vigilant in protecting students against predatory lending tactics. In its news bulletin announcing the lawsuit, the CFPB claimed that the for-profit college industry may be experiencing misaligned incentives, similar to the mortgage market just before the financial crisis. The CFPB’s investigation against for-profit colleges’ institutional lending programs fills a gap in federal enforcement of the for-profit educational industry.
Dozens of states, including Illinois, New Mexico, and Kentucky, are also independently probing, and in some instances suing, for-profit colleges who they contend are more interested in getting student loan dollars than in educating students.
Read more articles about the Consumer Financial Protection Bureau at Dykema’s CFPB Blog
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