WASHINGTON - A California-based chain of for-profit colleges is being accused by the Consumer Financial Protection Bureau of making predatory student loans and engaging in illegal debt collection tactics.

The CFPB lawsuit announced Tuesday against Corinthian Colleges is the second time the bureau has publicly taken action against a for-profit school rather than a student lender. The CFPB filed a lawsuit in May against ITT Educational Services Inc., accusing it of predatory lending. That case is still pending.

The suit filed Tuesday alleges Corinthian made false claims in advertising about job prospects for graduates to lure students into taking out private loans, and offered them interest rates roughly double those of a federal loan.

The bureau claims Corinthian's aggressive debt collection practices included having campus staff pull students out of class or block them from registering for new classes.

"Getting students to repay these loans while they were still in school was important to Corinthian's business model," said CFPB Director Richard Cordray during a conference call with reporters. "Our investigation found that Corinthian paid bonuses based in part on how well its staff got students to pay up. … At one Georgia campus, a financial aid staff member was called the 'Grim Reaper' for removing so many students from class."

The CFPB also alleges Corinthian advertised "sham job placement rates" for students, and promised career counseling services "that were not delivered."

The bureau estimates that "tens of thousands of students" took out more than $560 million in private loans - called Genesis loans - through the alleged scheme. The agency is seeking relief for those students regardless of whether they still owe money on their loan. The CFPB also said Corinthian inflated tuition costs to more than five times the cost of similar education programs at public colleges. Since most of the students at a Corinthian school come from low-income families, the CFPB said, they were more likely to fall behind on their loan payments.

"Tuition at a Corinthian school was much higher than the federal loan limit, which left most students no choice but to take out private student loans to make up the difference," Cordray said. "In fact, our investigation found that three out of five students were likely to fall behind on their Genesis loan payments within three years. Corinthian did not share these dire prospects with students. On the contrary, it sold the loans to students knowing they had no idea they were being set up to fail."

In a statement, Corinthian signaled its intent to fight the lawsuit, claiming the bureau "ignores clear, easily obtainable evidence" of the schools' career services benefiting students and graduates getting hired. The company argued its ratio of career services staff to students exceeds the average for community colleges.

"Corinthian Colleges strongly disputes the allegations in today's complaint filed by the" CFPB "wrongly disparages the career services assistance that we offer our graduates and mischaracterizes both the purpose and practices of the "Genesis" lending program," the company said. "Further, contrary to CFPB's normal process, Corinthian has not had the opportunity to respond to many of the allegations in this complaint."

Though the CFPB is authorized to target colleges' lending and debt collection practices, industry proponents have questioned the scope of that authority since the bureau does not regulate schools. In the CFPB's May lawsuit against ITT Educational Services, a case that is still pending, ITT sought dismissal of the case on the grounds the CFPB does not have jurisdiction.

But officials on the conference call said both suits focus on the companies' lending practices.

In both cases, our claims relate to private student loan programs that were essentially established by these schools and sold to their students, and relate to these schools’ conduct in relation to those loan programs,” said Ori Lev, the CFPB's deputy enforcement director.

The CFPB's case is among a string of state and federal cases against Corinthian, which operates more than 100 school campuses nationwide under the names Everest, Heald, and WyoTech. In June, the Department of Education put a hold on Corinthian's access to federal student aid and Corinthian has since agreed to scale back its operation, including closing about a dozen schools. There were about 74,000 students enrolled at Corinthian campuses as of last March, the CFPB said.

However, the CFPB claims that Corinthian continues to enroll new students. The CFPB lawsuit covers an investigation from July 21, 2011 to the present. From July 2011 through this past March, the CFPB estimates 130,000 private student loans were taken out. While some of those loans have been paid off or paid down, the agency estimates the total outstanding balance is more than $569 million.

"Despite the federal and state actions already pending against it, Corinthian is continuing to enroll students," Cordray said. "We are seeking help for the tens of thousands of consumers who have been victimized by Corinthian and for the new students who are currently in harm's way."

As Corinthian has closed schools in response to the DOE agreement, CFPB officials said they were sensitive to students' concerns about being displaced and the servicing of their loans. The agency released a notice for current and former students giving them options for dealing with loan-related issues in case their school closes.

"We very much understand that for students who are enrolled at Corinthian-owned schools this can be a great time of uncertainty as to what will happen with their academic program," said the CFPB's student loan ombudsman, Rohit Chopra. "We're seeking relief for the private student loans but there's a lot more that students need to be thinking about."


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