INDIANAPOLIS — Eli Lilly FCU will take a $26 million loss on default-prone loans to students enrolled at ITT Technical Institute, owned by ITT Educational Services, a for-profit college chain sued in February by the Consumer Financial Protection Bureau for alleged predatory lending practices.
The college notified more than 49,000 credit union members in a Web site posting.
The credit union told its members it is trying to work with ITT to collect on the loan losses. Joe Hasto, the credit union's chief financial officer, said he's confident the credit union eventually will recover all of the $26 million from ITT Tech, The Indianapolis Star reported.
The CFPB's lawsuit, filed in federal court in Indianapolis, was its first public enforcement action against a company in the for-profit college industry.
The lawsuit claims many students did not know they had private student loans until they began receiving collection calls. For borrowers with credit scores under 600, the costs of the private student loans included 10% origination fees and interest rates as high as 16.25%, the lawsuit alleges. In contrast, conventional federal Stafford loans had interest rates of 3.4% or 6.8% and no origination fee.
The credit union declared its write-off after ITT stopped covering the loan losses last year. After six months of non-payment, ITT resumed coverage of the losses in December.
Despite the financial hit, Hasto said the credit union is not in financial danger from write-off because its assets of $1 billion are enough to guard it against a $26 million loss.
ITT in 2012 reported a profit of $140 million on revenue of $1.29 billion. Student enrollment at its 149 campuses in 39 states fell to 61,000 in 2012 from 73,255 the previous year.
ITT Educational Services filed a court motion last week to dismiss the lawsuit. It believes the CFPB overstepped its authority and that the regulatory agency's case largely attacks private student loans issued by third parties during a five-month period in late 2011.
The CFPB's case claims ITT exploited its students and pushed them into high-cost private student loans that were likely to end in default. It charged ITT with violations of the Consumer Financial Protection Act and the Trust in Lending Act and seeks restitution for victims, a civil fine and an injunction.
Eli Lilly FCU is not mentioned in the CFPB's lawsuit.
Late last year, Credit Union Journal reported that the bureau top official in charge of student lending warned financial institutions that the trillion-dollar student loan market is missing key data and regulations necessary to head off another financial crisis.
Rick Thornburg, SVP of lending at Indianapolis-based Eli Lilly FCU, said at the time that the situation may not be quite as bad as forecasted, "but there is a potential" for an eventual crisis, especially if the economy turns south again.
Eli Lilly has been in the private student lending market since 2007 and currently has a portfolio of about $40 million in student loans.
The $1 billion-asset CU has three full-time employees working on student lending, and in many cases requires co-signers on student loans, along with a rigorous process to make sure borrowers and co-signers understand the debt.
The CU now only works with non-for-profit, accredited four-year universities, according to a spokeswoman.
--Ray Birch contributed to this article.
