My most recent blog entries have been focused on the CFPB’s new mortgage servicing rules and the Flagstar Bank enforcement case. I’m going to switch gears for a moment and take a look at the Corinthian Colleges case.
A couple of quick points regarding student loans in general are in order: It is estimated by the CFPB that there is approximately $1.2 trillion in outstanding student loan debt, “with more than 7 million Americans in default on more than $100 billion in balances.”1
Student loans have surpassed “credit cards and auto loans to become the second biggest source of personal debt in the U.S., trailing only mortgages.”2 This $1.2 trillion in outstanding student loan debt hasn’t gradually accumulated over decades; it’s a number that has tripled in the last decade alone.
A lot of this increase in outstanding student loan debt has been driven by for-profit universities. For a Forbes.com article entitled “For-Profit Universities: The Yugos of Higher Education,” Steven Salzberg wrote, “For-profit universities have been spreading like wildfire the past few years, thanks to the growth in Internet access, aggressive marketing, and, as we’ve learned recently, government-subsidized student loans. Some of these “universities” are enormous, such as the University of Phoenix (part of Apollo Group), with over 400,000 students. The U.S. government has recently figured out that students at these universities are failing to repay their government-subsidized loans at alarming rates…”3 And Mr. Salzberg’s article is over four years old! Finally, it’s no secret that students at for-profit universities often come from economically disadvantaged backgrounds and don’t have the guidance and information enjoyed by students from more affluent backgrounds.
Now let’s look at the Corinthian Colleges case. Last month, on February 3rd, the CFPB posted an announcement on its Website about how the CFPB secured $480 million in debt relief for current and Corinthian students.4 Prior to that, on September 16, the CFPB posted an announcement that it had sued Corinthian Colleges for “its predatory lending scheme”…alleging “that Corinthian lured tens of thousands of students to take out private loans to cover expensive tuition costs by advertising bogus job prospects and career services. Corinthian then used illegal debt collection tactics to strong-arm students into paying back those loans while still in school.”5 In the CFPB’s 9/16/14 complaint against Corinthian, the CFPB stated (paraphrased) the following:
- Corinthian is one of the largest for-profit, post-secondary education companies in the United States. With more than 100 school campuses, Corinthian operates schools under the following names: Everest College, Everest Institute, Everest University Online, Everest University, Everest College Phoenix, Heald College, and WyoTech.
- Corinthian depends upon tuition and fees to generate revenue.
- Most students attending Corinthian’s schools are low-income, or the first in their families to seek an education beyond a high school diploma. Many Corinthian students struggle economically.
- Students attending Corinthian’s schools could very rarely pay for the school’s tuition out-of-pocket. Students relied on private loans and aid provided by the federal government under Title IV to pay Corinthian’s tuition and fees.
- Corinthian is a publicly-traded, for-profit school that marketed itself as a provider of career training. Corinthian’s business model is predicated on convincing consumers to obtain student financial aid to pay the high cost of tuition to enroll in its programs. Because most of its prospective students could not afford to pay tuition out-of-pocket, from July 2011 through March 2014, students took out nearly 130,000 private student loans to pay Corinthian’s tuition and fees. The total outstanding balance of these loans is in excess of $568.7 million.
- Corinthian falsely inflated its job placement statistics to induce students to enroll and to maintain its accreditation. Among other deceptive tactics, Corinthian defined a “placement” as any job that lasted one day, with the promise of a second day; paid employers to temporarily hire graduates from Corinthian schools; falsified placement information…
- Corinthian aggressively recruited these consumers, including through persistent telemarketing and subjecting consumers who visited its campuses to high-pressure sales efforts.
- Corinthian referred internally to its students as having “[m]inimal to non-existent understanding of basic financial concepts,” as well as poor or no credit history. Corinthian assisted these students in applying for federal financial aid…
- Rather than reduce tuition to eliminate this gap, Corinthian marketed and promoted private student loans, known as Genesis loans, to its students.
- Corinthian took aggressive action to collect in-school payments on the Genesis loans as soon as they become past due, and Corinthian’s campus staff members received bonuses based in part on their success in collecting such past-due payments from students. Corinthian’s efforts to collect such payments included pulling students out of class…
- Despite its aggressive collection efforts, to date, more than 60% of students with a Genesis loan have defaulted on that loan within three years.
- When Corinthian marketed, promoted, and facilitated these student loans, Corinthian expected that most student-borrowers would default.
- Despite the high default rate, Corinthian marketed, promoted, and facilitated the Genesis loan program because it could not rely solely on federal funding for 100% of its revenue. Federal law requires that no more than 90% of its revenue may come from federal financial aid provided under Title IV of the Higher Education Act of 1965, 20 U.S.C. §§ 1070 et seq. (Title IV aid). Every Genesis loan dollar that Corinthian induced its students to borrow, in effect, allowed Corinthian to receive up to an additional nine dollars in Title IV aid. As a result, Corinthian had strong financial incentives to induce its students into taking out Genesis loans, even given students borrowers’ high default rates.
- On July 3, 2014, Corinthian and its wholly- and partially-owned subsidiaries entered into an Operating Agreement with the U.S. Department of Education (“Department”).
- Corinthian entered into the Operating Agreement after the Department’s Federal Student Aid office placed Corinthian on Heightened Cash Monitoring on June 12, 2014.
- Per the terms of the Operating Agreement, Corinthian has put a majority of its campuses up for sale and will close the remaining campuses. Corinthian further disclosed that for any school designated for sale, Corinthian “will seek to reach definitive sale agreements… within six months.”
- On August 20, 2014, Corinthian sold virtually all of the Genesis loan notes that it owned, totaling approximately 170,000 loans with a face value of $505 million, to a third-party company for $19 million.6
Writing about Everest University, one of the colleges operated by Corinthian, Molly Hensley-Clancy, a BuzzFeed News Reporter, wrote the following: “At every step of the way, people fell prey to Everest precisely because of tactics designed to capitalize on their poverty and their trust in an accredited university. Its advertisements targeted poor and minority students, capitalizing on their desperation for jobs to get them on the phone with admissions representatives. Those salespeople used classic high-pressure tactics to sign them up for programs that were up to five times the price of similar offerings at a community college, and twice as much as a state university. One former employee called the tactics she had been taught ‘beyond deceptive and immoral.’”7
In the CFPB’s February 3rd announcement, the CFPB and the U.S. Department of Education “announced more than $480 million in forgiveness for borrowers who took out Corinthian College’s high-cost private student loans. ECMC Group, the new owner of a number of Corinthian schools, will not operate a private student loan program for seven years and agreed to a series of new consumer protections.” The announcement goes on to state, in part:
Because ECMC has never operated an institution of higher education, the CFPB also sought to ensure that they operate the schools in a fair and transparent manner, given the harm caused by Corinthian. The CFPB granted a release, based on ECMC’s agreement to the following:
- Provide more than $480 million in debt relief to Corinthian victims: Although Corinthian Colleges will no longer operate the schools, tens of thousands of students remain saddled with debt incurred under Corinthian’s alleged predatory and illegal lending scheme. ECMC worked with the CFPB and U.S. Department of Education to secure $480 million in debt relief for borrowers who took out Corinthian’s high-cost private student loans…
- Not offer private student loan programs: The CFPB sued Corinthian Colleges for alleged predatory practices related to its high-cost Genesis loan program. ECMC will not offer its own private student loans to current and future students for a period of seven years.
- Halt lawsuits threats and improper debt collection practices: The CFPB’s lawsuit alleges that Corinthian engaged in strong-arm tactics to collect private student loan debt. ECMC has taken steps to ensure that borrowers who have outstanding Corinthian loans will not be sued or threatened with legal action. In addition, borrowers will not be harassed or have their debts disclosed to third parties.
- Remove negative information from student borrowers’ credit reports: Many borrowers lured in by Corinthian’s efforts to induce them into high-cost loans have seen their credit report damaged. Credit reporting agencies will receive instructions to delete any existing negative credit reporting information from borrowers’ credit reports.
- Implement strong, new consumer protections: The CFPB’s lawsuit alleges that Corinthian made a range of misrepresentations to prospective students. As part of today’s announcement, ECMC is obligated to adhere to an agreement with the U.S. Department of Education that provides for flexible withdrawal policies, clear information on job prospects, and other protections.8
The terms of the agreement, set forth in a February 2, 2015 letter from signed by the CEO of ECMC with the CFPB’s attached release (and additional terms), can be accessed at the below link.9 A quick note on ECMC: ECMC is a student loan manager. ECMC created Zenith Education Group, Inc. to take over the campuses purchased from Corinthian. Had ECMC not made the deal with Corinthian to purchase these campuses, the schools likely would have been shut down.10
On a final note, here’s an interesting--but not surprising--point about the release in the CFPB’s arrangement with ECMC: it does not release Corinthian. I’m not sure what’s left of Corinthian given that it sold its Genesis loan notes, totaling approximately 170,000 loans with a face value of $505 million, for only $19 million. But we’ll be hearing more about the CFPB’s case against Corinthian – the CFPB’s arrangement with ECMC does not let Corinthian off the hook for the sordid mess Corinthian created. Also, I wouldn’t be surprised if we see more enforcement cases brought by the CFPB against other for-profit colleges like Corinthian.