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From Banking and Finance Law Daily, May 2, 2014

Target of CFPB enforcement action seeks dismissal of UDAAP charges

By Katalina M. Bianco, J.D.

ITT Educational Services, a for-profit education company targeted by the Consumer Financial Protection Bureau for unfair, deceptive, or abusive practices (UDAAP), has filed a motion to dismiss the bureau’s complaint. ITT is the defendant in the CFPB’s first enforcement action against a for-profit education company.

History. ITT is an Indiana-based for-profit provider of post-secondary technical education, the CFPB said. Tens of thousands of students are enrolled online or at one of ITT’s approximately 150 institutions in close to 40 states. The bureau said that ITT’s tuition costs are among the highest in the country in the for-profit industry. ITT students pay more than $44,000 for an associate’s degree and $88,000 for a bachelor’s degree, figures that are significantly higher than the cost of similar degrees at a community college or a public four-year institution.

The bureau said that most ITT’s students borrow large sums to pay the high tuition costs, and the majority of the money is borrowed from federal student loan programs. ITT students generally have low credit profiles and low earnings, according to the CFPB. Private student loans also provide critical revenue for ITT. Because most ITT students’ federal aid does not cover the full cost of an ITT program, most students face a “tuition gap” requiring them to find other sources of funding, the bureau said.

CFPB complaint. In February2014, the bureau filed a complaint against ITT for predatory lending practices. In its complaint, the CFPB alleged that ITT misled borrowers about job placement rates and salaries after graduation, misrepresented information about accreditation and transferability of credits, and pressured students into high-interest loans that the company knew students would be unable to repay. The complaint not only alleged violations of Section 1036(a)(1) of the Consumer Financial Protection Act’s UDAAP prohibitions but asserted violations of the Truth in Lending Act and Regulation Z for failure to disclose finance charges on the loans. The bureau charged that ITT offered graduating students the ability to repay their loan balance in a lump sum with a discount applied or in installments without a discount. According to the CFPB, the “foregone discount” associated with the installment plan constituted a finance charge that should have been disclosed to borrowers.

The bureau is seeking an injunction against ITT’s allegedly improper acts and unspecified civil penalties, and restitution for affected consumers.

Lawsuit violates the Constitution. In its motion to dismiss the bureau’s complaint, ITT contends that the lawsuit violates the U.S. Constitution. ITT argues that the CFPB is an unconstitutional entity because there is no “meaningful” presidential control over the bureau’s director and no congressional control over the CFPB’s funding which is not subject to the appropriations process. ITT also alleges that the bureau’s suit violates due process because regulated parties do not have fair notice of what constitutes unfair or abusive practices.

Failure of allegations. ITT contends that the complaint fails to adequately allege that the company engaged in unfair or abusive practices. As for the claim of TILA violations, ITT argues that the claim is time-barred because only claims arising after Feb. 16, 2013, one year before the filing of the complaint, can be heard and the complaint does not specify violations after that date. In addition, according to ITT, the TILA claim is meritless because the installment plans offered to graduating students were a standard settlement of existing debt that is excluded from Regulation Z.

Covered person argument. ITT argues that ITT is not a “covered person” under the CFPA. In the bureaus’ complaint, the CFPB alleged that ITT was subject to its enforcement authority in ITT’s capacity: as a broker; financial advisory service providing students with advice by financial aid staff; and service provider to other lenders.

According to ITT, the assistance provided to students about loans does not constitute brokering under the CFPA but was instead statutorily-required assistance to students seeking financial aid. ITT disputed the CFPB’s claim to jurisdiction over financial advisory services because that jurisdiction is limited to “services so closely related to banking…as to be a proper incident thereto.” The education company asserts that for the CFPB to stretch the definition of financial advisory services to cover “the normal assistance that all college financial employees provide to students” that is “clearly” unrelated to banking is unlawful. Finally, ITT argues that it is not a service provider under the CFPA because the third-party loan programs offered to students were created in 2008 and 2009, before the CFPB obtained its enforcement authority in 2011. In addition, ITT provides financial aid assistance to students, which does not constitute a “material service” provided to other lenders.

Companies: ITT Educational Services.

MainStory: TopStory CFPB EnforcementActions IndianaNews Loans TruthInLending UDAAP

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