ITT Educational Services filed a court motion this week to dismiss a Consumer Financial Protection Bureau lawsuit that accuses the Indiana-based for-profit college chain of predatory student lending.
ITT's motion claims the CFPB overstepped its statutory authority and that the enforcement approach lacks due process. The CFPB's case primarily attacks private student loans issued by third parties during a five-month period in late 2011, according to ITT.
"Defendant ITT Educational Services does not provide consumer financial products and its conduct as described in the Bureaus complaint falls outside the Bureaus jurisdiction," ITT's filing stated.
The CFPB's lawsuit, filed in February, 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.
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. The CFPB seeks restitution for victims, a civil fine and an injunction.
??ITT countered in its motion that the CFPB makes misleading use of "mystery shopper" reports that are used to ensure its activities conform to its policies and are compliant with state and federal regulations: "The [CFPB lawsuit] provides only out-of-context, edited quotations from select mystery shopper reports. The full quotations reveal a starkly different picture."
On pages 5-6 of the response, ITT cites the CFPB's use of a mystery report that was truncated to create a misleading impression:
For example, the complaint quotes one mystery shopper as describing [ITT's] insistence on following up with the prospective student as invasive, yet omitted the remainder of the shopper's report stating that she "was pleasantly overwhelmed at how willing and excited [the school] was to help me in finding a career," and "had never encountered a career service office as nice and helpful as this one."
The shopper also praised [school] staff because "they truly seem to make it their goal to help their students succeed at making the leap from education to career, which is great!!"
The ITT response notes: "The Bureau does not claim that [ITT] engaged in fraudulent or deceptive conduct. Nearly every allegation in the complaint, including the misleading and out-of-context mystery shopper allegations - is window-dressing that has nothing to do with the third-party loans or the causes of action the Bureau has chosen to plead."
ITT provides post-secondary technical education. Tens of thousands of students are enrolled online or at one of ITTs roughly 150 institutions in 40 states. ITTs tuition costs are among the highest in the country in the for-profit industry. Earning an associates degree at ITT can cost more than $44,000. Bachelors degree programs can cost $88,000.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive or abusive practices. Specifically, the lawsuit alleges the following conduct by ITT:
Pressured into predatory loans: ITT used its financial aid staff to rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved. In some cases, students did not even know they had a private student loan until they started getting collection calls. The loans were high-cost. For borrowers with credit scores under 600, for example, the costs of the private student loans included 10 percent origination fees and interest rates as high as 16.25 percent.
Credits not transferable: ITT was accredited by a national organization that accredits many for-profit schools, but the credits that students earned typically did not transfer to local community colleges or other nonprofit schools such as public or private colleges. ITT used the prospect of expulsion and the loss of the money already spent during the students first year to coerce students into taking out the private loans.
Misleading future job prospects: The Bureau believes that ITTs representations led students to think that when they graduated they were likely to land good jobs and enough salary to repay their private student loans. In this way, ITT exploited student expectations while it knew that a majority of students would default.
Loans likely to fail: ITT knew that most of its students would ultimately default on their private student loans; it projected a default rate for its students of 64 percent. Defaulting on private student loans can have grave consequences for consumers. It can make it difficult to get any kind of loan for years and even affect a borrowers job prospects. And, because private student loans are difficult to discharge in bankruptcy, the debt can be very difficult to recover from.