CFPB Sues For-Profit College Chain ITT for Predatory Lending

May 20, 2014

Copyright 2014 Ballard Spahr LLP. All rights reserved.

Moderator

Alan S. Kaplinsky Practice Leader Consumer Financial Services 215.864.8544 kaplinsky@ballardspahr.com

Panelists

John L. Culhane, Jr. Consumer Financial Services 215.864.8535 culhane@ballardspahr.com

Beth Moskow-Schnoll Consumer Financial Services White Collar Defense/ Internal Investigations 302.252.4447 moskowb@ballardspahr.com

Christopher J. Willis Consumer Financial Services 678.420.9436 willisc@ballardspahr.com

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Your Presenters

John L. Culhane, Jr. Alan S. Kaplinsky

Christopher J. Willis Beth Moskow-Schnoll

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CFPB Enforcement Authority

• Section 1031(a) – authorizes CFPB to use its enforcement authority to prevent UDAAPs

• Section 1036(a) – declares that UDAAPs and actions violating Federal consumer financial law are unlawful

• Section 1054(a) – authorizes CFPB to bring a civil suit against any person who violates a Federal consumer financial law, which includes Dodd Frank

• Section 1055 – authorizes legal or equitable relief (broadly defined), recovery of costs by CFPB, and assessment of civil money penalties

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CFPB Enforcement Authority (cont.)

• Complaint alleges numerous commissions of UDAAPs and also alleges violations of TILA

• Complaint further alleges four grounds for treating ITT as a “covered person” offering or providing “consumer financial products or services”

1. Lender

2. Broker

3. Provider of financial advisory services

4. Service provider to other lenders

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Marketing Practices at Issue (UDAAP)

• ITT allegedly misrepresented its ability to place students in desirable jobs with good salaries

• ITT allegedly misrepresenting its accreditation and the transferability of ITT credits

• ITT allegedly used aggressive and controlling tactics to recruit and enroll students and to convince them to borrow

• ITT allegedly rushed students through the complex process of enrollment and financial aid

• ITT coerced students to take out private student loans to repay it for the gap financing it provided

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Financing Practices at Issue (TILA)

• Alleged practices involved a “Temporary Credit” provided as gap financing

• Temporary credit was a no-interest loan payable in a single lump sum payment at the end of the school year

• Students with outstanding balances at graduation were offered a 25% discount for payment in full

• Students who could not make the discounted payment were offered monthly installment plans (6-78 months)

• Forgone discount was alleged by CFPB to be a finance charge

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Constitutional Arguments

• CFPB is unconstitutional

- No Presidential oversight

- No Congressional control of funding

- Other defects

• Violation of due process

- Lack of fair notice as to what conduct is prohibited

- UDAAP definitions are ambiguous

- No meaningful administrative guidance

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Jurisdictional Arguments

• ITT is not a “covered person” – not a lender (did not sign contracts with students or receive fees or interest) and financial aid does not involve broker or financial advisory services

• ITT is not a “service provider” – relevant activities in connection with third party loan programs occurred in 2008 and 2009

• ITT is a seller of nonfinancial goods and services exempt from CFPB jurisdiction under Section 1027(a) – note that this is a defense to UDAAP claims only

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Deficient Pleading Arguments

• Failure to plead adequate factual support for alleged unfair practices as required by U.S. Supreme Court decisions in Twombly and Iqbal

• In particular, no factual allegations showing:

1. Substantial injury by students

2. Causation

3. Injury “not reasonably avoidable”

4. Harm outweighed by any benefits

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Deficient Pleading (cont.)

• Failure to likewise plead adequate factual support for alleged abusive practices

• In particular, no factual allegations showing:

1. ITT took unreasonable advantage of students

2. Students were unable to protect their interests

3. ITT took unreasonable advantage of students’ reasonable reliance on ITT to act in their interests

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State AG Actions and Section 1042

• Numerous actions against for-profit schools, including actions by CT, KY, MA, NY, and others

• KY attorney general has been especially active and is apparently taking the lead with multistate actions

• IL attorney general has recently sought to invoke Section 1042 in its ongoing action against Alta Colleges

• Section 1042 authorizes states to sue in federal or state court to enforce Title 10 of Dodd Frank and regulations issued thereunder and to seek remedies under Dodd Frank or state law – is “abusive” the attraction here or is it “extraterritorial” application or both?

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Implications – The Student Loan Market

• Some implications for colleges and universities

1. CFPB jurisdiction

2. School marketing

3. Financial aid

• Some implications for originators of private student loans

1. School eligibility

2. Loss mitigation options

• Some implications for student loan servicers

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Implications – All Markets

• ITT complaint tees up ongoing practices of the CFPB that many have found objectionable

1. Bald assertions that conduct is unfair, deceptive, or abusive without CFPB articulating the elements of such claims

2. Pushing the boundaries of the law through enforcement actions rather than through regulation or reasoned administrative guidance

• Fully litigated case may not completely derail such practices but could slow them down considerably

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Thank you for joining us!

Alan S. Kaplinsky Practice Leader Consumer Financial Services 215.864.8544 kaplinsky@ballardspahr.com

John L. Culhane, Jr. Consumer Financial Services 215.864.8535 culhane@ballardspahr.com

Beth Moskow-Schnoll Consumer Financial Services White Collar Defense/ Internal Investigations 302.252.4447 moskowb@ballardspahr.com

Christopher J. Willis Consumer Financial Services 678.420.9436 willisc@ballardspahr.com

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Moderator – Alan S. Kaplinsky

• Practice Leader of the Consumer Financial Services Group at Ballard Spahr

• Devotes his practice to counseling financial institutions with respect to bank regulatory and transactional matters and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters)

• First President of the American College of Consumer Financial Services Lawyers

• Former Chair of the American Bar Association Committee on Consumer Financial Services of the Business Law Section

• Co-Chair of the Practising Law Institute's Annual Consumer Financial Services Institute, now on its 18th year

• Has been named as a tier one banking and consumer financial services lawyer in the 2006 through 2013 editions of Chambers USA

• Has been named in The Best Lawyers in America under financial services regulation law and banking and finance litigation from 2007 to 2013

• Named the 2012 Philadelphia Lawyer of the Year for Litigation-Banking & Finance

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Panelist – John L. Culhane, Jr.

• Partner at Ballard Spahr and a member of the firm’s Consumer Financial Services, Mortgage Banking, and Bank Regulation and Supervision Groups as well as the firm’s Fair Lending Task Force

• Compliance practice emphasizes counseling clients on the development and implementation of innovative loan, leasing, and payment programs, and includes counseling on fair lending, servicing and collection issues

• Regulatory practice includes preparing clients for banking agency and CFPB targeted and full spectrum compliance examinations as well as assisting in the defense of consumer class actions, attorney general investigations, and agency enforcement actions

• Charter member of the American College of Consumer Financial Services Lawyers

• Former Chair of the Subcommittee on Fair Lending of the ABA Committee on Consumer Financial Services

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Panelist – Beth Moskow-Schnoll

• Partner at Ballard Spahr and member of the firm’s Consumer Financial Services, Mortgage Banking, and White Collar/Investigations Groups

• Represents major financial institutions in lawsuits asserting a wide variety of claims and advises clients on compliance programs and in responding to government investigative and enforcement actions

• Served for more than a decade as a federal prosecutor with the U.S. Attorney's Office for the District of Delaware, where she investigated and prosecuted financial crime cases involving bank fraud, money laundering, and mortgage fraud

• Has tried to verdict dozens of cases in federal district court

• Has convinced the government to decline prosecution of clients in matters involving allegations of financial and other fraud, and has conducted internal investigations for clients in numerous industries

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Panelist – Christopher J. Willis

• Partner at Ballard Spahr and a member of the firm’s Consumer Financial Services and Mortgage Banking Groups

• Counsels financial institutions on regulatory matters, advises them on compliance with consumer financial services laws, and defends them in both individual and class action lawsuits, as well as governmental enforcement actions (including CFPB investigations)

• Chairs the firm’s Fair Lending Task Force and Collection Documentation Task Force

• Named in The Best Lawyers in America for banking and finance litigation and commercial litigation for 2013

• Member of the American College of Consumer Financial Services Lawyers

• Frequent author and speaker on issues relating to consumer financial services regulation and litigation