NEW YORK (MainStreet) — The Consumer Financial Protection Bureau filed its first lawsuit against a for-profit college when it sued ITT Educational Services Inc. yesterday. The civil case was filed in federal court in Indianapolis as state attorneys general in Iowa, Kentucky and New Mexico joined the suit.
The CFPB's court papers charge that between 2009 and 2011 ITT pressured students to take out predatory loans based on misleading information on future job prospects and salaries. The suit seeks restitution, a civil fine, and injunctive relief to be determined by the court. The filing cited Truth-in-Lending Act violations.
"ITT marketed itself as improving consumers' lives but it was really just improving its bottom line," CFPB Director Richard Corday said in a news conference Wednesday. "We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. 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's lawsuit alleges that ITT provided students with a product called "Temporary Credit," a zero-interest loan intended to make up the difference between a student's federal aid and the school's high tuition.
Temporary Credit had to be paid in full at the end of the student's first academic year. This, however, is where some observers say that a scam was engaged. When students were unable to repay their first year Temporary Credit, ITT allegedly pushed high-cost private student loan programs to cover the repayment and second-year tuition. The CFPB alleges that ITT financial aid staff were compensated based on the number of students they enrolled in Temporary Credit.
Those high-cost private students loans were Student CU Connect and the PEAKS Loan, originated by ITT. Although the CFPB's court papers described them as being structured differently, they could only be used to pay off a Temporary Credit loan.
The suit also alleges that ITT's CEO Kevin Modany revealed in conference calls with investors that converting the temporary loans to long-term loans was the company's "plan all along." A spokesperson for ITT could not be reached for comment.
The Indiana-based technical education school, which has tens of thousands of student online and on its 150 campuses, charges tuition that is among the highest in the for-profit tech school vertical. An associate's degree can cost over $44,000, while a Bachelor's degree can run $88,000.
The CFPB claims that ITT led students to believe they would land jobs with enough salary to repay their private student loans.
"This is truly an American tragedy," Cordray said. "Students may think they are climbing a ladder to success when instead they are getting knocked down, crushed by student debt that does not help them gain a better job or a better life."
"Some of these colleges are thriving on selling a dream to someone [but] once the ink is dried on the financial aid paperwork the nightmare begins," Kentucky Attorney General Jack Conway said during the press conference. "We will be working tirelessly to be certain that the industry as a whole understand their business is education and not just flattering the bottom line."
Last March, ITT was sued by shareholders in a class action lawsuit, alleging that the school issued materially false and misleading statements regarding the company's business and financial results in press releases, analyst conference calls and filings with the SEC to inflate its stock. ITT reached a high of $112.69 per share on April 22, 2010, and closed at $43.75 on February 26, 2014. The class period ran between 2010 and 2013. Lead attorney Darren Robbins of San Diego-based Darren, Robbins, Rudman & Dowd could not be reached for comment.
--Written by John Sandman for MainStreet