Is Genesis just the beginning?

Banksy on the Thekla, photo credit Adrian Pingstone

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. Continue reading

Blowing the whistle on for-profit education

Blowing the whistle on for-profit education

It’s been a busy week in student loan litigation news.  In addition to the CFPB suit against ITT, the The New York Times reports that former employees have sued Harris (Premier Education Group), a for-profit trade school in New Jersey.

The complaint (filed in 2011 and unsealed in late 2013) reads like a catalog of the worst practices alleged by critics of the for-profit industry.  The whistleblowers contend that school officials violated the False Claims Act by taking in federal student aid after knowingly enrolling students who could not pass basic literacy exams, falsifying entrance exam grades, passing students out of courses that the students had failed, forging students’ signatures on loan documents, and misleading students about their career prospects and eligibility to sit for professional licensing exams.  If the plaintiffs are successful, the suit carries significant penalties, including treble damages.

This isn’t the first time Harris has been sued. The Press of Atlantic City reports that in March 2011, thirty-seven former Harris students brought suit against the school. Among the alleged violations? Misrepresentation of accreditation status, which meant that students were not eligible to sit for a required professional licensing exam, rendering their degrees worthless.

The CFPB bares its teeth

The CFPB bares its teeth

In a move applauded by consumer advocates, the Consumer Financial Protection Bureau filed suit against ITT Technical Institute.  The Huffington Post reports that this marks the first suit brought by the new consumer protection agency against a for-profit school.

The complaint alleges that ITT violated the Consumer Financial Protection Act and the Truth in Lending Act by enticing students through deceptive marketing and strong-arm recruiting tactics. ITT allegedly misrepresented its graduation and placement rates, and misled consumers about the school’s accreditation.

The complaint also alleges that ITT coerced students into taking out private loans for ITT’s own private gain. How? Well, tuition at ITT is much higher than students can afford, even after maxing out federal financial aid. To close the tuition gap, ITT offered students temporary credit from ITT. That credit came due within nine months–something many of the students were not told during a rushed financial aid discussion. When many of those students were unable to pay the hefty tuition price tag within the required nine months, ITT allegedly forced those students into private loans, due within 10 years, with a 16% interest rate. Defaults at ITT on those private loans topped 70%.

This isn’t ITT’s first legal rodeo.   Former students sued ITT for misrepresentation in 1995.  In 2005, ITT settled a lawsuit with the state of California for inflating grades in order to get more state aid. And ITT’s problems don’t end there; it revealed in an recent SEC filing that a long list of state Attorneys General have issued subpoenas or “civil investigative demands” under state consumer protection statutes.

Guest post: Kentucky AG takes on Spencerian College

SDEJ is proud to present a series of guest posts by our research fellow, Avie Zhao.  Avie is a 3L at American University Washington College of Law, where she is a member of the Business Law Review.  She is interested in business litigation, and is currently serving as a student attorney with DC Law Students in Court where she represents indigent clients in DC Superior Court.

For the next three weeks, she will highlight some of the actions state attorneys general are taking against for-profit colleges.  These actions situate higher education squarely within the realm of consumer law, a frame that raises fascinating questions about whether better information will lead to better outcomes for students.

Commonwealth of KY v. Sullivan d/b/a/ Spencerian College

Jack Conway, Attorney General of Kentucky and leader of a national bipartisan effort into examining abuses by for-profit colleges, is now investigating Spencerian College.  In January, 2013, Conway’s office brought a consumer-protection lawsuit against Sullivan University System, Inc., the parent company of Spencerian College.  The complaint alleges that Spencerian College knowingly provided false and misleading data regarding the percentage of students who were able to obtain employment.  Spencerian allegedly inflated the employment rates of graduates by as much as 40 % in its publications and on its website.  The complaint seeks injunctive relief, civil penalties, and recovery of investigative costs.

This lawsuit against Spencerian College marks the fourth lawsuit against for-profit colleges filed by Attorney General Conway’s office.  Previously, Attorney General Conway’s office has filed civil lawsuits against Daymar College, National College, and Education Management Corp. (parent company of Brown Mackie College).

Are you sure you want to put that question to a jury?

Did Globe University fire Dean Heidi Weber for poor performance or because she blew the whistle on its deceptive marketing practices?  Heidi Weber sued Globe, a for-profit institution (profiled here by Minnesota Public Radio) in 2011, claiming that Globe fired her in retaliation for raising questions about compliance with accreditation standards in its medical assistant program.  She alleged that they paid commissions to recruiters, inflated job statistics and failed to provide training opportunities promised to students.

This week, a Minnesota jury awarded the former dean of the medical assistant program almost $400,000 for lost wages and emotional distress.  Globe alleges that they fired her for performance, but jurors seemed swayed by evidence of malfeasance, such as the school’s failure to disclose that credits were not as transferable as they had represented and to tell students that promised externships were not available.  They also seemed disturbed by the fact that the school had knowingly enrolled students with felony records, even though those students would not be able to get jobs in a field that requires background checks.  Like the verdict last month against Vaderott, this verdict seems to tap into  deep public disgust with the for-profit industry, fueled at least in part by high default rates on student loans at these schools.