Credit Unions Part of CFPB’s ITT Loan Complaint
The Consumer Financial Protection Bureau’s formal complaint filed earlier this year against ITT Educational Services Inc. has unexpectedly caught a credit union CUSO in its wake.
Now, six CUSO member institutions may be coming under closer scrutiny for what the complaint says are the for-profit financial institution’s deceptive and abusive actions and corresponding violations of both the Truth in Savings Act and Part 1026 of Regulation Z.
Filed Feb. 26, the complaint at the United States District Court for the Southern District of Indiana in Indianapolis alleged that the Carmel, Ind.-based for-profit ITT targets largely low-income students and then entraps them in a series of high interest rate temporary and private student loans most students have little hope of repaying.
New ITT students are offered school-funded temporary loans until they can secure private student loans to cover the average $22,000-per-year cost of the school, according to the complaint. Once accepted, the loan obligations forces students to follow through with their education, or immediately repay the loan in full. Historically, few ITT students have access to the capital necessary to repay that debt.
On April 30, ITT moved for dismissal of the complaint, saying the CFPB’s allegations are legally flawed and violate the U.S. Constitution.
The complaint also alleged that ITT had a personal hand in developing two networks to provide private student loans, one of which was Student CU Connect, a CUSO managed by San Diego-based First Associates Loan Servicing LLC. First Associates also managed PEAKS, another private student lending group named in the complaint.
SCUC was the brainchild of ITT, or its paid consultants, the complaint read. ITT was instrumental in setting the lending standards and the school’s students were automatically eligible for the high-interest loans providing they hadn’t declared bankruptcy in the previous 24 month, the CFPB said.
Calls to Larry Chiavero, executive vice president of First Associates Loan Serving, with requests to respond to CFPB’s allegations and verify credit unions participating in the CUSO, were not returned by press time.
However, a Feb. 26 article on Bank Talk, an online service concerned with issues facing the unbanked and underbanked, identified six credit unions that were members of the CUSO during the 2009 to 2011 time period referenced in the complaint.
Those institutions are the $2.6 billion Bellco Credit Union, Denver; $1.9 billion Community America Credit Union, Kansas City, Mo.; $535.4 million Credit Union of America, Wichita, Kan.; $560 million Directions Credit Union, Sylvania, Ohio; $1 billion Eli Lilly Federal Credit Union, Indianapolis; and the $2.4 billion Veridian Credit Union, Waterloo, Iowa.
According to a 2009 CU Times article, $620 million Workers’ Credit Union in Fitchburg, Mass., was also one of the CUSO’s founding credit unions.
The four counts listed in CFPB’s complaint and demands for relief that include civil money penalties, restitution for affected consumers and other court-issued awards, are against ITT only. No similar complaints have been filed against First Associates, SCUC or any of the credit unions involved in the alleged inappropriate actions.
None of the credit unions involved responded to CU Times’ requests for more information.
Specific language in the complaints alleged that ITT developed both SCUC and PEAKS for the specific purpose of reducing the amount of temporary credit outstanding. The temporary loans, which ITT sought to remove from its books, served to prequalify students for private student loans regardless of their financial condition. The students were then coerced to take out private student loans to repay the temporary loans without knowing the full weight of their financial commitment.
Further, ITT served as the sole intermediary between the student and SCUC, according to the complaint. Funds borrowed from the credit unions, repayable directly to ITT, could be used only to satisfy school debt and for no other student purpose. A stop-loss program guaranteed that the school would make participating credit unions whole for program defaults in excess of 35%.
Interest rates for SCUC loans, which carried a 10-year term, were based on a student’s credit score. For borrowers with credit scores below 600, the interest rate initially went as high as the prime rate plus 10.5%, with an origination fee as high as 10%. Starting in or around April 2011, borrowers with credit scores below 600 were charged an interest rate of prime plus 13%, plus the 10% origination fee.
The prime rate, since 2009, has been 3.25%; thus the effective interest rate for SCUC loans has been 13.75% for some borrowers with credit scores under 600. For borrowers taking out loans after April 2011 with credit scores under 600, the SCUC interest rate has been 16.25%. Approximately 46% of the SCUC borrowers had credit scores under 600, and thus were subject to interest rates of 13.75% or 16.25% and origination fees of 10%.
By comparison, federal Stafford student loans for the same period offered all borrowers interest rates of 3.4% for subsidized loans and 6.8% for unsubsidized loans without origination fees, according to the complaint.
The SCUC loan program, available only to ITT students, originated approximately $189 million in student loans from March 2009 until December 2011, and in particular, approximately $60 million from July 21, 2011 through December 2011.
Approximately $149 million, or 79%, of the entire SCUC program went to students who had temporary loans and who were pushed into SCUC loans to pay then off and to finance their tuition gaps for later years at ITT.
As early as May 2011, ITT’s consultant for loan default analysis projected a gross default rate of 61.3% for the existing SCUC loans, the complaint noted.
The specific counts for which CPFB is seeking redress from ITT include unfairly subjecting consumers to undue influence and coercion in taking out private student loans in violation of the Consumer Financial Protection Act; taking unreasonable advantage of students’ inability to protect their financial interest in violation of CFPA’s prohibition against abusive practices; and ITT’s failure to disclose finance charges in violation of the federal Truth In Lending Act.