Student Loans Involving For-Profit Colleges Made Through Credit Unions Escape Regulation

NEW YORK (MainStreet) — Credit Unions have been at the margins of the student loan crisis, yet they make student loans. The Center for American Progress, the United States Student Organization, Veterans for Educational Success and five other groups protested the role of credit union service organizations (CUSO) in partnering with for-profit colleges, particularly ITT Tech, in a July 30 letter to the National Credit Union Administration (NCUA), the federal credit union regulator.

The letter noted that ITT Tech has spent more on marketing and executive compensation than on classroom instruction. Overall, 20% of students who left ITT Tech end up defaulting on their student loans. In May, the Securities and Exchange Commission (SEC) filed fraud charges against ITT Educational Services, its CEO Kevin Modany and its CEO Daniel Fitzpatrick.

"We are deeply disturbed about the role of credit unions and credit union service organizations (CUSO) that partnered with for-profit colleges to offer predatory student loans," the letter stated. "In particular, ITT Educational Services, the controversial for-profit college chain allegedly developed a scheme to issue high-cost private student loans to its students through a CUSO." CUSOs are corporate entities in which federally chartered credit unions own a minority stake.

The letter also alleged that Eli Lilly Federal Credit Union along with six state-chartered credit unions partnered with ITT to offer these loans to ITT students. The Rochdale Group, a credit union consulting firm, recruited credit unions to partner with ITT through the CUSO Student CU Connect.

"Credit Unions should help students chart a bright future, lot load them unmanageable student debt,” said Maggie Thompson, campaign manager for Higher Ed, Not Debt in a statement. “Banks and credit unions should steer clear of for-profit colleges that mislead students, veterans, and taxpayers.”

The coalition demanded that that the NCUA determine whether ITT's credit union partners adhered to the NCUA's requirements and if not, consider enforcement actions.

But the buck stopped there.

NCUA chairman Debbie Matz was quick to reply in a statement. "Please understand that the National Credit Union Administration has no enforcement authority over credit union service organizations or other third parties," Matz said, "including those that initiated this allegedly predatory student lending program: ITT Educational Services, the Rochdale Group and Student CU Connect."

NCUA spokes person John Fairbanks added, "The ITT loans were made through a third party, over which NCUA has no authority, and the credit unions involved, at NCUA's instigation, ceased purchasing those loans after their contract expired."

Perhaps this right-church, wrong-pew SNAFU was preventable if someone in one of the eight petitioning organizations had known that NCUA would stand down. But this regulatory space seems to come in at least 50 shades of gray. Industry sources say that the Consumer Financial Protection Bureau (CFPB) could have been the relevant agency as its role in regulating credit unions evolves. A spokesperson for the CFPB could not be reached for comment.

Since its creation in 2010, the CFPB has taken on some of the regulation of credit bureaus. About Resources, an Austin, Texas-based consulting firm focused on the community banking industry, states on its website that although the CFPB had an initial focus on credit union with over $10 billion in assets, "the direction of the Bureau will impact all credit unions as they set the tone for member compliance examination." The Bureau is starting to examine the larger credit unions and issued examination manuals in October 2011. About Resources said the Bureau has taken over some credit union regulation from the Federal Reserve.

Many of loans that concern the eight student organizations were likely made to borrowers with poor credit scores, making them look like subprime--if not predatory--loans. Loan terms were likely influenced by risk-based pricing metrics.

Mark Kantrowitz, senior vice president and publisher of Edvisors.com, noted that in a risk-based pricing model, loans to borrowers who are at higher risk of default are usually charged higher interest rates and fees.

"For example, a ten-year loan with a 6% interest rate involves total payments equal to 133% of the amount originally borrowed," Kantrowitz said. "If a lender makes this loan with the same terms to borrowers who have a 20% risk of default, on average the lender will receive total payments equal to 106% of the amount originally borrowed. The lender will lose money making a loan with these terms to borrowers with a 30% or higher risk of default."

So the riskier the borrower, the more expensive the loan. "To have the same total payments, on average, the lender would need to charge 11.2% to borrowers with a 20% risk of default," Kantrowitz said. "For borrowers with a 30% risk of default, the interest rate would have to be 14.5%. For borrowers with a 40% risk of default, the interest rate would have to be 18.6%. For borrowers with a 50% risk of default, the interest rate would have to be 24.2%."

"Risk-based pricing charges the highest interest rates to the borrowers who need the most help," Kantrowtiz noted. "Generally, subprime borrowers with FICO scores under 650 have a greater than 10% risk of default and the risk of default climbs rapidly for subprime credit scores."

By most accounts, ITT has been an bad actor in an industry of bad actors. As Higher Ed, Not Debt points out, more than 50% of ITT Tech students withdraw before completing their programs. ITT Tech typically charges over $40,000 for an Associate's Degree and its courses are usually impossible to transfer to other schools.

The CFPB sued ITT last year for predatory lending practices. It's suit alleged that ITT pressured students to take the loans by lying about their job prospects. The loans had interest rates of up to 16.5%--and origination fees of up to 10%.

High pressure sales pitches to people who are ill-equipped to succeed in college have been a key to ITT's success. A 2014 report on for-profit colleges produced by the Senate Health, Education, Labor and Pension committee, then chaired by former Iowa Democrat Tom Harkin, found that ITT recruiters targeted vulnerable people who for whom for-profit colleges were their only option.

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