The Consumer Financial Protection Bureau (CFPB) said Tuesday that it has sued for-profit college operator Corinthian Colleges, Inc. for creating a loan program that was so complicated in structure, it actually exposed Corinthian to liability under the FDCPA as a collection agency. The company is also accused of a host of other financial violations.
The CFPB is seeking more than $500 million in loan disgorgement, restitution, and penalties.
The embattled Corinthian disclosed last month that the CFPB had proposed a settlement that included FDCPA charges. Since Corinthian is ostensibly a creditor for student loans, the announcement was met by some confusion in the ARM industry since the FDCPA governs third party collection practices.
But the CFPB laid out how it arrived at FDCPA violations in its complaint and the details are very interesting.
In 2008, Corinthian initiated an institutional loan program called Genesis. Under the program, Corinthian marketed the loans and a partner bank acted as the originator for each Genesis loan, disbursing the funds to Corinthian after each student’s loan application was approved. Shortly after, an entirely separate company would purchase the loans from the bank and act as a servicer, a fairly typical arrangement. Corinthian would then turn around and purchase the loans from that company, which still served as the servicer.
One thing that was not typical about the student loans is that Corinthian and its servicer would force students make payments on the loans while they were enrolled at one of the company’s 107 campuses.
In 2011, the program was changed and a new intermediary was introduced. This company, called “Company B” in the CFPB’s complaint, purchased the loans from the bank, sent the loans to be serviced by the original servicer, and sold the loans to Corinthian. But unlike before, the only loans that Corinthian purchased were ones that were at least 90-days past due. Company B retained ownership of loans that were current.
Since Corinthian had a stake in ensuring that the loans didn’t reach 90-days past due, it employed debt collection tactics on students before it owned the loans. And since it was doing so on debts owned by another party, the CFPB said that Corinthian met the definition of “debt collector” and was governed by the FDCPA.
Specifically, the CFPB charges that Corinthian violated §1692d, which prohibits debt collectors from “engag[ing] in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” The collect the debts, Corinthian would pull students from class if they were behind on loans, block access to campus computer networks, prevent students from buying course materials, and deny delinquent debtors diplomas and other graduation ceremonies.
The CFPB said that Corinthian’s practices of communicating with students about a debt during class time also violated §1692c(a)(1) .
The FDCPA charges are just a part of the CFPB’s issues with Corinthian’s loan program. The Bureau said that the loan program was predatory in nature, targeting low-income borrowers with loans that carried interest rates that were more than double the industry average. The CFPB also alleges that the marketing of the loans contained blatant lies and misinformation.
It’s the latest problem for Corinthian which has been under investigation by a number of federal agencies. The Department of Education in June withheld the company’s access to federal aid funds, creating a liquidity crisis for Corinthian. The company then agreed to begin liquidating assets, including the sale or closure of its 107 campuses, to meet its lenders’ terms.
The state of California has also been tough on Corinthian, with the attorney general launching at least two enforcement actions against the firm in recent years. In August, California’s Department of Veterans Affairs moved to prevent Corinthian from receiving federal GI Bill benefits, a major source of tuition revenue for the college operator.
The CFPB became involved late last year when it began investigating the loans for-profit colleges were offering to students. Shortly thereafter, the CFPB sued a separate college operator – ITT Educational Services – over its loans. But Corinthian defended their financial services practices at the time noting that it “believes that its acts and practices relating to student loans are lawful and essential.”