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From Banking and Finance Law Daily, September 16, 2014

For-profit educator’s lending, collection practices fail its students, CFPB claims

By Richard A. Roth, J.D.

Corinthian Colleges, Inc., used fraudulent statistics and false promises to enroll students, induced students to take out predatory loans to pay inflated tuition, and then used illegal tactics to collect the loans, the Consumer Financial Protection Bureau is charging. Tens of thousands of students took more than 130,000 loans from the company between July 2011 and March 2014, and more than $568 million remain outstanding, the bureau claims.

The CFPB complaint alleges that Corinthian Colleges is one of the largest for-profit, post-secondary education companies in the United States. It operates more than 100 campuses under names such as Everest, Heald, and WyoTech. As of March 2014, the company had about 74,000 enrolled students, most of who came from economically disadvantaged backgrounds or were seen by the company as vulnerable for other reasons.

Misrepresentations. According to the CFPB, Corinthian College’s students were “lured into loans by lies” about their employment prospects and the company’s job placement assistance. The bureau alleges that the company advertised exaggerated placement rates by tactics such as creating fictitious employers; secretly paid employers to hire graduates for jobs that were only temporary; counted jobs that lasted only one day, with a promise of a second day, as a “career”; and failed to provide meaningful placement assistance—sometimes doing little more than distributing Craigslist job postings.

Tuition, fees, and predatory loans. Corinthian’s tuition and fees were as much as five times the cost for similar courses at public colleges, the CFPB alleges. The bureau claims that the company deliberately charged more than the federal loan limits in order to push students into taking out private loans, including the company’s own “Genesis loans.”

In 2013, Genesis loans carried an interest rate of approximately 15 percent, and students also paid a 6-percent origination fee. Federal student loans had interest rates of between 3 percent and 7 percent and charged low or no origination fees, the bureau says. Corinthian also deceptively told students that it had no interest in the Genesis loans.

Moreover, Corinthian expected most borrowers to default, according to the CFPB, and more than 60 percent did default within three years.

Collection tactics. Students with Genesis loans generally were required to make payments while attending school, while most student loan programs defer payments until after graduation. This gave the company the ability to use “aggressive debt collection tactics,” the CFPB says; in fact, the company paid staff members bonuses that were based in part on their ability to collect loan payments from students.

The CFPB described collection tactics that include:

  • shaming students by removing them from classes;

  • blocking students’ computer access, keeping them out of classes, and denying them necessary books or other materials until they made loan payments; and

  • withholding certificates or diplomas until students were current on their loan payments.

Requested relief. The bureau’s complaint seeks an injunction against the continued use of these practices, as well as damages and restitution for the students who were harmed. This includes a request that all Genesis loans extended during the covered period be rescinded.

The bureau also has published a statement giving students and former students information on the situation. The information covers students’ payment obligations, their rights if their school is closing, and legal versus illegal debt collection tactics.

The CFPB complaint notes that Corinthian already has entered into an agreement with the Department of Education that requires the company to sell most of its campuses. The rest will be closed. This agreement also requires the creation of a $30 million fund to pay student refunds. The bureau says that this fund has yet to be created; however, Corinthian has sold nearly all of its outstanding Genesis loan notes to a third party for $19 million.

In a statement about the action, CFPB Director Richard Cordray said that Corinthian continues to recruit and enroll students, despite pending state and federal enforcement actions. The bureau’s complaint also claims that the company plans to reintroduce the temporarily-suspended Genesis loan program.

Companies: Corinthian Colleges, Inc.; Everest College; Everest College Online; Everest College Phoenix; Everest Institute; Everest University; Everest University Online; Heald College; WyoTech

MainStory: TopStory CFPB DebtCollection EnforcementActions Loans UDAAP

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