On June 14, 2019, the Consumer Financial Protection Bureau (CFPB) announced a settlement with Student CU Connect CUSO, LLC (CUSO), a company set up to manage student loans for ITT Educational Services, Inc., a subsidiary of ITT Technical Institute, which filed for bankruptcy and ceased operations in 2016.
The CFPB had alleged that ITT induced its students to take out the loans by a variety of shady means and that CUSO realized that many students did not understand the loans and could not pay them.
The settlement provides total loan forgiveness for approximately $168 million in student loans. In addition, CUSO must work with consumer reporting agencies to delete information relating to such loans from the records of the borrowers.
The CFPB originally filed suit against ITT in February 2014, alleging that ITT violated several laws, including the Truth in Lending Act, by unfairly pushed students into CUSO Loans in the guise of providing ‘financial aid’.
Unfortunately, these ‘financial aid’ packages obscured the lending aspect of these deals. Most of the borrowers were young, financially inexperienced and viewed the pushers of ‘financial aid’ as trustworthy authority figures.
According to the CFPB, about 89% of ITT’s cash receipts came from Title IV loans and grants (programs administered by the federal government) and around 7% came from private loans, such as the CUSO Loans.
Beginning in or about 2008, ITT began offering students ‘Temporary Credit’ loans to cover the difference between the amount they could obtain via Title IV and the total cost of tuition.
ITT’s Temporary Credit was a no-interest loan payable in a single lump sum payment, with a due date typically nine months after enrollment at the end of the academic year for which it was offered.
Temporary Credit was offered and provided by ITT during rushed financial aid appointments.
ITT provided its Financial Aid staff with software called “SmartForms,” which automatically populated and submitted financial aid applications for its students to the federal government or other lenders, requiring only e-signatures from students.
As a result, some students who had Temporary Credit loan obligations did not know they had received Temporary Credit that would have to be repaid.
Meanwhile, the ITT underwriting professionals knew that the vast majority of students would not have the resources to make the lump sum payments when they came due. In May 2011, ITT’s consultant for loan default analysis projected a gross default rate of 61.3% for the existing CUSO Loans.
To avoid large defaults on these Temporary Credit loans, ITT created a “Private Loan Program”, which was the CUSO program. Students who received Temporary Credit loans were pre-qualified to receive these CUSO loans. Eventually, approximately $149 million, or 79% of the entire CUSO Loan portfolio, went to students who were pre-qualified under the Temporary Credit Exception.
The financial aid appointments to get students to commit to these CUSO loans were called “repackaging” or “repack” appointments. ITT incentivized its Financial Aid staff to use aggressive tactics to close these repack agreements, including searching the students out in the bookstore or the library or the student lounge or pulling them from class.
In other instances, Financial Aid staff were able to gain unauthorized access to student SmartForms accounts and e-signed loan documents without the knowledge of the students.
Some students objected to the ITT Private Loans. However, if they refused to use them they either had to pay any outstanding Temporary Credit and the next year’s tuition gap—which most could not do—or leave the school in the middle of their program and forfeit the investment they had made while still being saddled with federal student loan debt.
The interest rate for the CUSO Loans, which carried a ten-year term, was based on a student’s credit score. Approximately 46% of the CUSO borrowers had credit scores under 600, and thus were subject to interest rates of 13.75% or 16.25% and origination fees of 10%.
ITT continued lending despite clear indications from its own underwriting professionals that the vast majority of students would be unable to pay. CUSO, for its part, proceeded with the loan program in part because ITT guaranteed the program’s performance above certain loss thresholds. When charge-offs exceeded those thresholds, ITT was required to make a series of payments to the CUSO to offset losses.
CUSO continued to make the loans available to consumers through the end of 2011, the duration of the loan program agreement with ITT.