Can the government make a for-profit school tear up its private student loan promissory notes? We’re about to find out.
The Consumer Financial Protection Bureau filed suit this week against Corinthian Colleges for alleged misconduct relating to its private loan program, called Genesis. While lawsuits against Corinthian, which operates Heald, Wyotech and Everest, abound, something about this particular suit caught my eye.
The CFPB is asking the court to “order the rescission of all Genesis loans”. In plain English: the government is asking a federal court to cancel all of the notes on at least 170,000 private student loans, with a combined balance of $568.7 million. As in, tear them up. Poof. Make them gone, as though they had never existed.
Rescission of a contract is a pretty drastic remedy, and one that courts are not generally fond of. Plus, this one could get very complicated. Not only has Corinthian already sold the loans– for $19 million– they have also promised to close or sell all of the schools in a separate deal with the CFPB. On the other hand, Corinthian appears to have lied to students and staff about its financial interest in the Genesis loans. It used some outrageous debt collection practices, like hauling students out of class if they missed a loan payment. (It’s probably a bad thing if one of your financial aid officers is nicknamed “The Grim Reaper.”) If the CFPB succeeds in getting the order for rescission (which would be at the judge’s discretion) the unwinding of the Genesis loans might prove to be the dawn of a new strategy for the CFPB.
NOTE: Before anyone goes tearing up their student loan notes, I should emphasize that any future court order would only apply to the loans in this specific case. Also, the CFPB’s actions in general only apply to private loans, not the federal loans that make up the bulk of student debt. The Student Borrower Assistance Center has information about the very limited cancellation of federal loans in the case of serious wrongdoing by a school.