WASHINGTON -- Federal regulators on Tuesday sued Corinthian Colleges, accusing the embattled for-profit education company of setting up a predatory student loan scheme and then illegally harassing borrowers in an attempt to collect that debt.
The lawsuit, by the Consumer Financial Protection Bureau (CFPB), alleges that Corinthian deceived students by convincing them to take out private student loans based on misleading and false information about their job prospects upon completing a program. The bureau is seeking, among other things, to force Corinthian to compensate tens of thousands of students who took out the loans, including the $569 million of outstanding debt.
Richard Cordray, the bureau’s director, told reporters that the company’s Everest, Heald and WyoTech campuses -- which enroll tens of thousands of students -- had “a pervasive culture of employees who routinely deceived and harassed students.”
“We believe the schools lured in prospective students by lies and bogus advertising, which promised solid and well-paying careers upon graduation,” he said. “But the job placement rates advertised were a sham.”
The bureau accused Corinthian of inflating its job placement rates, in some cases, by creating fictitious employers, paying employers to temporarily hire its graduates, or classifying graduates as “unemployable” without verifying their circumstances.
The company promised prospective students that they would get lifetime career assistance, the CFPB said, but it didn’t provide students with meaningful help in finding a job.
“Corinthian’s limited career services included distributing job postings from Craigslist,” the lawsuit says.
In addition to problems with its loans and job placement rates, the CFPB’s complaint also alleges that Corinthian violated federal law in how it went about collecting loans from students. The bureau said that the company’s strong-arm tactics in seeking to recover its private student loans included routinely interrupting classes to pull out students who had not paid their loans.
Corinthian said in a statement that it “strongly disputes the allegations in today’s complaint filed by the Consumer Financial Protection Bureau, which wrongly disparages the career services assistance that we offer our graduates and mischaracterizes both the purpose and practices of” its private lending program.
The company also suggested that the lawsuit would complicate its plan to either slowly close or sell off all of its campuses under the agreement it reached with the U.S. Department of Education in July.
“Precipitous, unwarranted actions by state and federal regulators make this transition more difficult for existing students, graduates seeking employment and Corinthian employees,” the company said.
The CFPB lawsuit is the latest blow to the troubled company, which is strapped for cash and facing numerous other regulatory and legal issues, including a federal criminal investigation. The Education Department, Securities and Exchange Commission, and state attorneys general are conducting separate inquiries. And regulators in several states have already suspended the company’s ability to enroll students using veterans’ benefits.
“We share the Consumer Protection Financial Bureau’s concerns about Corinthian’s past practices and our independent regulatory investigations of Corinthian continue,” Denise Horn, an Education Department spokeswoman, said Tuesday. “Meanwhile, our independent monitor will continue to ensure the company is in full compliance with our operating agreement and students are informed of their options throughout this wind-down process.”
Combined with already-declining enrollment, the company’s regulatory and legal woes have hurt its bottom line. Corinthian again told investors Tuesday that it needs to find additional sources of liquidity to continue operating. It also said it wouldn’t be able to file its annual financial report on time because of the resources involved in responding to Education Department requests and the sale and closure of its campuses.
The lawsuit was filed Tuesday after Corinthian disclosed last month that the CFPB had sought to engage the company in negotiations to settle the allegations as long as the company would agree in principle to certain conditions, including providing prospective students with warnings that their campus might be sold or closed. Corinthian students in California are receiving such notifications as part of the company’s agreement with that state’s attorney general. (The company previously rebuffed an effort by California to require all of its websites to prominently display a warning, arguing that it would scare off prospective buyers of its campuses).
Kent Jenkins, the company’s spokesman, on Tuesday declined to say whether Corinthian had reached such a preliminary agreement to negotiate with the CFPB.
“We had not raised an objection to any of the four stipulations they laid down,” he said. “We had not hit any type of an impasse. We were in what we considered to be ongoing negotiations.”
CFPB officials declined to comment on their discussions with Corinthian.
A Troubled Loan Program and the 90/10 Rule
In making its case that Corinthian’s private lending program, known as Genesis, was predatory, the CFPB outlines one of the company’s strategies for complying with the federal law that caps for-profit colleges’ receipt of Department of Education student loans and grants at 90 percent of their revenue.
In 2011, the company raised its tuition in order to make sure that students would max out their federal student aid and have to pay using some private money. This artificial ‘funding gap,’ the lawsuit says, gave Corinthian a “strong financial incentive to induce its students into taking out Genesis loans, even given students borrowers’ high default rates.”
“Regardless of whether students were able to repay the private student loans, Corinthian would profit from the increased availability of [federal student aid],” the lawsuit said, noting that every dollar the company received from a Genesis loan would, in effect, allow it to receive as many as nine additional dollars in federal student aid.
The bureau also alleges that Corinthian officials knew that the students to whom it was lending were likely to default on their loans. The lawsuit says that the three-year default rate for students with Genesis loans was more than 60 percent.
Growing Role of CFPB in For-Profit Space
The lawsuit marks the second time that the three-year-old bureau is taking an enforcement action against a for-profit education company. Earlier this year, the bureau sued ITT Educational Services, alleging similar consumer protection violations relating to that company’s private student lending products.
CFPB officials would not say whether they are eyeing other for-profit colleges for predatory practices, but Cordray, the bureau’s director, said they would “continue to look closely at how they treat consumers.”
Rohit Chopra, the bureau’s student loans ombudsman, noted that the CFPB had previously questioned whether some of the financial incentives are properly aligned in the industry.
"There is no question that we receive a substantial amount of complaints from students who attend these schools,” he added.
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