ELFCU Stung with ITT Student Loan Loss
Eli Lilly Federal Credit Union, also known as ELFCU, may have planned for some level of loan loss when it became part of Student CU Connect. The CUSO was created specifically to provide private student loans to enrollees at the for-profit ITT Technical Institute.
However, the $1.1 billion Indianapolis credit union may have felt a sharper sting than expected.
ELFCU recorded a $26 million loan loss at the end of 2012 when it reserved 70% of total loan balances for a specific private student loan program, according to an article in the April 26 Indianapolis Business Journal.
The charge, a credit union official said, was related to ITT loans.
Several calls to ELFCU requesting comment were not returned.
ELFCU was one of six credit unions caught up in a Feb. 26 complaint filed by the CFPB against the Carmel, Ind.-based ITT Educational Services, parent company for ITT Technical Institute. The credit unions, all CUSO members, were not charged in the CFPB complaint, which accused ITT of targeting largely low-income students and then entrapping them in a series of high interest temporary and private student loans that few had little hope of repaying.
According to the complaint, new ITT students were offered school-funded temporary loans until they secured private student loans to cover the average $22,000-per-year cost of the school.
Once accepted, loan obligations forced students to follow through with their education, or immediately repay the loan in full. Historically, few ITT students had access to the funds or income required to repay the debt.
“ELFCU is committed to students at all financial levels and life stages who attend hundreds of colleges and universities. We’ve been doing this for the past 25 years in the student lending business,” said Joseph Hasto Jr., ELFCU’s CFO, to the Business Journal.
News of ELFCU’s 2012 loan loss was not reported to members until recently, and then as a footnote in the credit union’s 2013 annual report. The loss likely contributed to an overall $13.9 million net loss to ELFCU in 2012.
Despite the loss, ELFCU remained well capitalized at 8.24% in 2012, down from 9.82% in 2011, according to financial performance reports posted on the NCUA’s website.
The credit union fulfilled its three-year CUSO obligation and no longer participates in the program, according to the Business Journal.
The CFPB complaint also alleged that ITT had a personal hand in developing two networks to provide private student loans, one of which was SCUC. The CUSO is managed by San Diego-based First Associates Loan Servicing LLC, which also managed PEAKS, another private student lending group named in the complaint.
SCUC was the brainchild of ITT, or its paid consultants, according to the complaint. ITT was instrumental in setting the lending standards and ITT students were automatically eligible for the high-interest loans providing they hadn’t declared bankruptcy in the previous 24 month, CFPB said.
Interest rates for SCUC loans, which carried a 10-year term, were based on a student’s credit score. For borrowers with credit scores less than 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 less than 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 less than 600. For borrowers taking out loans after April 2011 with credit scores less than 600, the SCUC interest rate has been 16.25%.
Approximately 46% of SCUC borrowers had credit scores less than 600, and were subject to interest rates of 13.75% or 16.25%, and origination fees of 10%.
In addition to ELFCU, the other institutions participating in the CUSO were the $2.6billion Bellco Credit Union of Denver; the $1.9 billion Community America Credit Union of Kansas City, Mo.; the $535.4 million Credit Union of America in Wichita, Kans.; the $560 million Directions Credit Union in Sylvania, Ohio; and, the $2.4 billion Veridian Credit Union in Waterloo, Iowa.
According to a 2009 CU Times article, the $620 million Workers Credit Union in Fitchburg, Mass., was also one of the CUSO’s founding credit unions.
Despite its experience with ITT, ELFCU continues to offer private student loans, one of only a few Indiana credit unions to do so. As of March 31, the credit union had $69 million in private student loans on its books, according to its call report.