On March 9, District Judge Sarah Evans Barker issued her long-anticipated order on the motion to dismiss in CFPB v. ITT Educational Services, Inc., No. 1:14-cv-00292 (S.D. Ind.). Judge Barker denied ITT’s motion to dismiss the Bureau’s unfairness and abusiveness claims but granted it on the Bureau’s TILA claim. At 67 pages, the order provides one of the longest and most thorough judicial opinions about the Bureau’s abusiveness authority to date.

CFPB complaint alleged that ITT coerced students into taking on private loans In its complaint, filed in February 2014, the CFPB alleged that ITT Tech, a for-profit college, pressured students into enrolling by using high-pressure sales tactics and offering no-interest loans, called “Temporary Credit,” which were good for the student’s first academic year. Students needed these loans to fill the “tuition gap” between what federal loans and grants covered and the cost of ITT’s tuition. The Bureau alleged that ITT knew from the outset that many students would not be able to repay their Temporary Credit balances at the end of the first year or fund their next year’s tuition gap. Instead, according to the Bureau, ITT’s financial aid staff rushed students through a process of refinancing the no-interest loans and paying for the gap with high-cost private loans that ITT had designed and helped manage. It alleged that ITT knew as early as May 2011 that more than 60 percent of the students who received the private loans would default.

Creating oppressive circumstances for consumers satisfies the “abusive” standard The order helps put some meat on the bones of the Bureau’s authority to prevent “abusive” acts and practices. The CFPB’s complaint alleged abusive practices under two of the four prongs of 12 U.S.C. § 5531(d), highlighted below:

(d) ABUSIVE.—The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

  1. materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  2. takes unreasonable advantage of
    • a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
    • the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
    • the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

First, CFPB alleged that ITT took unreasonable advantage of the inability of consumers to protect their interests in selecting or using a consumer financial product or service. The judge rejected ITT’s argument that it did not take “unreasonable” advantage because ITT’s conduct is similar to the conduct of college financial aid offices across the country. She wrote, “the Bureau has alleged conduct that—we hope—is not simply par for the course; at any rate, the ‘everyone else is doing it’ defense does not support a motion to dismiss absent an argument that the allegations are legally invalid or factually implausible.” On the meaning of “inability of the consumer to protect” her interests, the judge wrote, a “reasonable reading of the statutory language . . . is that it refers to oppressive circumstances,” which the Bureau sufficiently alleged. Interestingly, she cited a law review article that suggests that this prong of the abusive standard “is a statutory codification of the common-law doctrine of unconscionability.”

Second, the CFPB alleged that ITT took unreasonable advantage of the reasonable reliance of consumers to act in the consumers’ interests. Judge Barker wrote, “‘Reasonable reliance’ is a familiar concept in tort law, and it is a question of fact generally not appropriate for resolution on a motion to dismiss, or even summary judgment.” To the extent that future courts follow Judge Barker’s lead, this position could mean that the Bureau in the future will only need to sufficiently plead that the defendant took “unreasonable advantage” to withstand a motion to dismiss.

Abusiveness captures conduct that may not be unfair or deceptive In rejecting ITT’s argument that the CFP Act’s prohibition of abusive practices is unconstitutionally vague, the judge wrote that the legislative history “suggests that the term was added, in part, to enable the Bureau to reach forms of misconduct not embraced by the more rigid, cost-benefit standard that had grown up around the terms ‘unfair’ and ‘deceptive.’” She wrote that the statute itself provides “significant guidance” as to the term’s meaning.

The Bureau’s authority and structure are not unconstitutional Judge Barker rejected ITT’s arguments that the Bureau and its investigation of ITT and/or its authorities were unconstitutional, noting that two other district courts have also rejected arguments that the Bureau is unconstitutional.

The Bureau has jurisdiction over ITT as both a provider of financial advisory services and as a service provider to the private lenders ITT argued in its motion that the Bureau lacked jurisdiction over it because it was merely an educational institution, and that the financial aid counseling ITT provided did not fall within the CFP Act’s definition of “financial advisory services.” The judge disagreed, writing that, at a minimum, the Bureau had pleaded conduct that “would fall within the realm of ‘credit counseling’ and ‘assist[ing] a consumer with debt management,’” two of the activities in the Act’s definition of financial advisory services. The judge also held that the Bureau had alleged conduct that would qualify ITT as a service provider to the private lenders, citing ITT’s involvement in operating and maintaining the loan program, including its payment of credit union membership fees for students and the stop-loss guarantee it provided the private lenders.

The Bureau has sufficiently pleaded unfair practices The judge applied the three-part unfairness test to the CFPB’s complaint, holding that: (1) allegations that ITT coerced 8,600 students into private loans with interest rates as high as 16.25 percent and origination fees as high as 10 percent adequately described a substantial financial injury; (2) allegations that ITT threatened to withhold transcripts or expel students if they failed to make up their “tuition gap” described a situation that was not reasonably avoidable; and (3) whether the harm is outweighed by countervailing benefits is a factual question and that the Bureau’s detailed allegations of the harm were sufficient to state a claim.

The TILA statute of limitations for civil actions bars the CFPB’s TILA claim The only silver lining for ITT and its lawyers is that Judge Barker dismissed the Bureau’s TILA claim as time-barred. This ruling may make the Bureau reluctant to bring federal district court claims under TILA for conduct that is not continuing. However, the order does not limit the Bureau’s ability to bring such claims in an administrative proceeding.