Another for-profit college
corporation has been sued.
Last week, the Consumer Financial Protection Bureau filed a lawsuit against ITT
Educational Services, accusing the large for-profit higher education company of
engaging in predatory lending and other abusive practices.
The suit comes just two weeks
after seven former employees filed a suit against Harris School of Business and
its parent company, Premier
Education Group, which owns more than two dozen trade schools and community
colleges operating under several names in 10 states. That suit contends that
while charging more than $10,000 for programs lasting less than a year, school
officials routinely misled students about their career prospects, and falsified
records to enroll them and keep them enrolled, so that government grant and
loan dollars would keep flowing.
The bureau’s lawsuit is
its first enforcement action against a for-profit college and is an indication,
some observers said, of how seriously and aggressively the new watchdog agency
plans to use its enforcement powers in this contentious, politically charged
sector of higher education.
The complaint accuses ITT of pressuring students into predatory loans and
misleading consumers about their colleges’ job placement rates, accreditation
and the transferability of credits. The CFPB alleges that the company developed
a private loan program that coerced borrowers into high-interest loans that ITT
knew were likely to fail and, by the company’s own projection, had default
rates as high as 64 percent.
“We believe ITT used high-pressure tactics to push many consumers into
expensive loans destined to default,” CFPB Director Richard Cordray said in
announcing the lawsuit. “Today’s action should serve as a warning to the
for-profit college industry that we will be vigilant about protecting students
against predatory lending tactics.”
The CFPB said the abuses at ITT took place between mid-July and December 2011
and violated the Dodd-Frank Act’s ban on unfair, deceptive or abusive practices
as well as the Truth in Lending Act. The suit seeks an unspecified amount in
civil penalties and restitution for victims as well as an injunction against
the company.
The bureau’s action Wednesday had been foreshadowed by disclosures in recent
months and years that
the CFPB was investigating for-profit colleges’ institutional loan programs.
Corinthian Colleges has
also said it is the subject of an investigation by the bureau.
Cordray declined to discuss those
other investigations but called the lawsuit "a first step for the consumer
bureau."
“An important message being sent today is there are numerous [enforcement]
pipelines now focused on this problem,” he said, referring to the CFPB and the
state attorneys general investigating the sector.
Officials at ITT, whose share
price fell more than 9 percent on Wednesday, declined to discuss the lawsuit in
detail.
“We don’t comment on pending litigation other than to say that we believe the
bureau’s claims are without merit and we intend to vigorously defend ourselves
against the charges,” said Nicole Elam, a company spokeswoman.
A Shift in Federal
Consumer Protection
Consumer advocates applauded the lawsuit, as did Senator Tom Harkin, the Iowa
Democrat, who has been an outspoken critic of the for-profit sector.
Harkin, who chairs the Senate education committee, said in a statement he
was “encouraged by the agency’s vigilance over lending practices that take
advantage of students seeking to further their education.”
Advocates have previously said that
the CFPB is needed to fill what they see as significant gaps in the federal
government’s ability to regulate for-profit colleges and non-federal student
loans.
Federal scrutiny of for-profit colleges, which has ramped up during the Obama
administration, has largely been focused on how the institutions use the tens
of billions of federal dollars they receive each year.
For instance, the Education Department has said its aim in pushing so-called “gainful
employment” regulations is to make sure that taxpayer money flows only to
vocational programs that produce graduates who can land jobs that pay well
enough to repay their student loans. Similarly, President Obama’s executive
order in 2012 was aimed at cracking down on how for-profit colleges
recruit and enroll students using veterans’ benefits and servicemember tuition
assistance.
The Federal Trade Commission, which has consumer protection powers that are
broader than protecting federal aid, last
fall published stricter guidelines on deceptive marketing practices
at for-profit colleges but has so far not played an aggressive enforcement
role in the sector.
Wednesday’s CFPB lawsuit, meanwhile, signals new federal enforcement of
consumer protection laws against for-profit colleges. The complaint focuses on
how ITT allegedly pushed students into private loans and misled students about
the overall product they were offering with deceptive job placement rates and
representations about the transferability of credits.
“The consumer bureau will subject the financial products and services offered
by for-profit colleges and their partners to the same standards as any other
consumer financial product or service,” Cordray noted Wednesday.
Deanne Loonin, a staff lawyer at the National Consumer Law Center, who
represents low-income student loan borrowers, said the CFPB lawsuit “represents
a shift” in federal enforcement of for-profit colleges. “It’s exactly the
kind of consumer protection focused actions that the CFPB was created to do,”
she said.
“The Department of Education has done some important work in the last few years
in trying to investigate for-profit schools, but they are, understandably,
focused on federal aid. A lot of these problems are in the private student
lending area, so there’s definitely been a huge gap in federal enforcement.”
Loonin also said she would be watching carefully to see how the CFPB uses its
discretion, in concert with other federal agencies, to push for relief for
individual borrowers.
She said that a “huge problem” in federal action against for-profit colleges
has been in cases where fraud or abuses have been proven to take place.
Navigating court settlements and avenues for relief through the Education
Department, she said, are often administratively difficult and very belated for
those who've been wronged.
Another consumer advocacy group, the New York Legal Aid Group, for instance,
filed a class-action
lawsuit on Wednesday against Education Secretary Arne Duncan, insisting
that the department forgive the federally-backed loan debt of borrowers who
attended a for-profit college that went out of business in the early 1990s. The
group says that the department’s inspector general long ago concluded that
Wilfred American Education Corporation fraudulently pushed students into loans,
and that, as a result, its clients are entitled to debt forgiveness.
Growing State Involvement
In announcing the action against ITT, CFPB Director Cordray was flanked by the
attorneys general from four states, who are among the dozens of state officials
who have been also probing, and in some cases suing, for-profit colleges.
New Mexico Attorney General Gary K. King announced Wednesday that he was also
suing ITT for similar violations under New Mexico law. His lawsuit alleges,
among other things, that ITT’s nursing program in the state misled students
about its accreditation status. The company, King’s complaint says, told
students and prospective students that its nursing program would allow them to
sit for the licensing exam for nursing when, in fact, the program’s lack of
appropriate accreditation precluded that.
The attorneys general, which included Lisa Madigan of Illinois and Tom Miller
of Iowa, noted the importance of federal and state cooperation in investigating
for-profit colleges. Earlier in the day, Cordray told an
annual conference of attorneys general that combating unfair and deceptive
practices was an important area of “mutual engagement.”
Kentucky Attorney General Jack Conway also noted that his efforts on for-profit
colleges have not proceeded without opposition.
"There is a lobbying front that has been put forward by this particular
industry that is very formidable," he said adding that his coalition of
attorneys general and CFPB "are going to try to overcome that lobbying
front, and we're going to try to have federal-state partnerships that really
make some substantial changes in this particular business model, amongst the
worst actors."
Joseph D’Angelo, a partner at Carl Marks Advisory Group LLC, which advises
for-profit colleges on a wide range of practices, said that the CFPB lawsuit
against ITT was likely to be unsurprising to those in the industry, and that he
believes that much of the regulatory risk has already been factored into the
stock prices of publicly traded higher education companies, driving them down.
Still, he said, that the probes by the state attorneys general could pose
significant risk to the sector.
Given all of the previous
scrutiny that for-profit colleges have faced from a range of sources -- the
Education Department, False Claims Act lawsuits, accrediting agencies, and
state regulators -- he said that the increasing interest from state attorneys
general could be viewed as worrisome for the industry.
“In the past, settlements have been pretty nominal, and it’s been part of the
cost of doing business,” he said. “Now that they’re coming through to look at
for-profit colleges a second time, it makes me wonder whether there is
something more significant that has been discovered.”
“If they have discovered and have hard evidence of something more serious in
the industry, the monetary damages for these schools could put some of them out
of business,” he said.
