ITT Wants Its Day In Court, Opponents Want It to Bag the Arbitration Clause in Enrollment Contracts

NEW YORK (MainStreet) — Some higher education observers believe that ITT Tech (ESI) could be the next big domino to fall in the for-profit college space following the demise of Corinthian Colleges (COCO). Federal legislators are focusing on the arbitration clause contained in ITT enrollment documents students sign that prevents them from suing the company, either as individuals or part of a class action law suit.

Arb clauses are typically found in consumer loan or product agreements that prevent customers from suing the company. In this case, ITT calls all the shots in resolving disputes students bring against the school.

Students are forced into arbitration proceedings that deny them the precedents and protections of court proceedings,” said Senator Dick Durbin (D-Ill.) in a letter to Eugene Feichtner, chief operating officer of ITT Tech, also known as ITT Educational Services. “With these enrollment terms, ITT Tech is shielding itself from liability and accountability. Given your firm position that ITT Tech deserves its ‘day in court,’ surely you believe your students deserve the same." Durbin wants ITT to stop enforcing the arb clauses in its contracts.

Concerning any day in court, the Carmel, Ind.-based ITT might best be careful in what it wishes for. There are already a lot of sharks in the water—including investigations of the kind of student loan scams that helped bring down Corinthian Colleges.

New Mexico Attorney General Hector Balderas found that ITT Tech made misrepresentations to students about accreditation and engaged in unfair, deceptive and unconscionable practices -- including that ITT Tech placed students into loans without their knowledge, falsely stated the number of credits a student had to take in order to push them into taking on more debt and failed to issue refunds of tuition and fees in compliance with federal law.

The Consumer Financial Protection Bureau found ITT Tech’s private lending practices were predatory and that students were misled into believing they would be able to repay ITT-originated private loans, some with rates as high as 16.25%.

The Securities and Exchange Commission also found that ITT Tech’s CEO Kevin Modany and CFO Daniel Fitzpatrick engaged in a scheme to conceal the poor performance of its proprietary student loans. Two ITT private loan programs, called “CUSO” and “PEAKS” were designed to provide off balance sheet loans to ITT students. The SEC alleges that when they began to tank, ITT started secretly paying PEAKS loans off to avoid a default trigger that would force ITT to make guaranteed payments to the tune of tens of millions of dollars. At least 18 other state Attorneys General are investigating similar practices by ITT in their states.

ITT attorney Frederic Firestone and CFO Fitzpatrick also ran with the day-in-court mantra when he said last month, "We do not believe that he (Fitzpatrick) did anything wrong and look forward to our day in court.”

After trading at a 52-week high of $18.83, ESI lost 24 cents of its value, or 5.85%, when it closed at $3.81 on Friday.

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