SEC ANNOUNCES FRAUD CHARGES AGAINST ITT EDUCATIONAL SERVICES INC.

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

05/12/2015 10:20 AM EDT

The Securities and Exchange Commission today announced fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick.

The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT’s investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed.  ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance sheet loans for ITT’s students following the collapse of the private student loan market.  To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon.  Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT’s exposure to these programs was much more limited.  Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments that ITT would need to make on the guarantees, ITT’s stock price declined dramatically, falling by approximately two-thirds.

“Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations.”

The SEC’s complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT’s guarantee obligations for the PEAKS and CUSO programs.  For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.  ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact.  ITT further failed to consolidate the PEAKS program in ITT’s financial statements despite ITT’s control over the economic performance of the program.  ITT and the executives also misled and withheld significant information from ITT’s auditor.

The SEC’s investigation has been conducted by Zachary Carlyle, Jason Casey, and Anne Romero with assistance from Judy Bizu.  The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato of the Complex Financial Instruments Unit.  The litigation will be led by Nicholas Heinke, Polly Atkinson, and Mr. Carlyle.

REGULATORS RELEASE GUIDANCE ON CERTAIN PRIVATE STUDENT LOANS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
January 29, 2015 Regulators Release Guidance on Private Student Loans With Graduated Repayment Terms at Origination

Federal financial regulatory agencies, in partnership with the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council, today issued guidance for financial institutions on private student loans with graduated repayment terms at origination.

This guidance provides principles that financial institutions should consider in their policies and procedures for originating private student loans with graduated repayment terms.

The agencies—the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—and the SLC recognize that the competitive job market, traditionally low entry-level salaries, and higher student debt loads can contribute to some borrowers preferring greater flexibility with their payments as they transition into the labor market. Graduated repayment terms are structured to provide for lower initial monthly payments that gradually increase.

Financial institutions that originate private student loans with graduated repayment terms should prudently underwrite the loans in a manner consistent with safe and sound lending practices. Additionally, financial institutions should provide disclosures that clearly communicate the timing and the amount of payments to facilitate a borrower's understanding of the loan's terms and features.

FDIC, SALLIE MAE SETTLE DECEPTIVE PRACTICES ALLEGATIONS RELATED TO STUDENT LOANS

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION 

The Federal Deposit Insurance Corporation (FDIC) today announced a settlement with Sallie Mae Bank, Salt Lake City, Utah, and Navient Solutions, Inc. (formerly known as Sallie Mae, Inc.), subsidiaries of SLM Corporation and Navient Corporation, respectively, and herein collectively referred to as Sallie Mae, for unfair and deceptive practices related to student loans in violation of Section 5 of the Federal Trade Commission Act (Section 5) and for violations of the Servicemembers Civil Relief Act (SCRA).

This action results from an examination of Sallie Mae by the FDIC regarding Sallie Mae's compliance with federal consumer protection statutes, including Section 5 and SCRA, and a companion investigation by the Department of Justice (DOJ) related to the treatment of servicemembers. As part of the settlement, Sallie Mae stipulated to the issuance of Consent Orders, Orders for Restitution, and Orders to Pay Civil Money Penalty (collectively, FDIC orders). The FDIC orders require these entities to pay civil money penalties totaling $6.6 million, to pay restitution of approximately $30 million to harmed borrowers and to fund a $60 million settlement fund with the DOJ to provide remediation to servicemembers. The DOJ has also taken separate action against the entities with regard to violations of the SCRA.

The FDIC determined that Sallie Mae violated federal law prohibiting unfair and deceptive practices in regards to student loan borrowers through the following actions:

Inadequately disclosing its payment allocation methodologies to borrowers while allocating borrowers' payments across multiple loans in a manner that maximizes late fees; and Misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees. The FDIC determined that Sallie Mae violated federal laws regarding the treatment of servicemembers (SCRA and Section 5) through the following actions:

Unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the Act;
Improperly advising servicemembers that they must be deployed to receive benefits under the SCRA;
Failing to provide complete SCRA relief to servicemembers after having been put on notice of these borrowers' active duty status.

In addition to the payment of restitution to harmed borrowers and a civil money penalty, the FDIC orders require Sallie Mae to take affirmative steps to ensure that disclosures regarding payment allocation and late fee avoidance are clear and conspicuous, that servicemembers are properly treated under the SCRA, and that all residual violations be remedied to ensure compliance with applicable laws.

FDIC ENCOURAGES LENDERS TO WORK WITH STUDENT BORROWERS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
Agencies Encourage Lenders to Work with Student Loan Borrowers 

WASHINGTON — The federal bank regulatory agencies today issued a statement encouraging financial institutions to work constructively with private student loan borrowers experiencing financial difficulties. Prudent workout arrangements are consistent with safe and sound lending practices and are generally in the long-term best interest of both the financial institution and the borrower.

Student loan borrowers who are unemployed or underemployed may face hardship in making payments on their private student loan debts after separation from school or during periods of economic difficulty. Current interagency guidance permits prudent workout and modification programs for retail loans, including student loans, and provides that extensions, deferrals, renewals, and rewrites may be used to help borrowers overcome temporary financial difficulties. Institutions that have private student loan workout programs should provide borrowers with information that clearly explains the programs, including eligibility criteria and the process for requesting a modification.

The statement is being issued by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

SECRETARY OF HHS DUNCAN'S REMARKS ON STUDENT LOAN INTEREST RATE SPIKE

FROM: U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

Statement from Secretary Duncan on Preventing Student Loan Interest Rates from Doubling on July 1

Our priority is to ensure that Congress doesn't allow federal student loan interest rates to double on July 1. President Obama has put forward a comprehensive solution that will help middle-class students and their families afford college by lowering interest rates on July 1, without adding to the deficit, and Senator Harkin and Congressman Miller have also been leaders within Congress to prevent rates from doubling for students and families.

While we welcome action by the House on student loans, we have concerns about its current approach, which does not guarantee low rates for students on July 1, makes students bear the burden of deficit reduction, and fails to lock in interest rates when students take out a loan – so their rates could escalate in the future.

Now is not the time to double interest rates on student loans, and we remain committed to working with Congress on a bipartisan approach to a long-term, fiscally sustainable solution that will help students and families afford higher education now and in the future. Given the impending July 1 deadline, an extension that protects students against higher rates while Congress develops an alternative solution is another reasonable option.

Both the President and I firmly believe college should not be reserved only for the wealthy. All of us share responsibility for making college affordable and keeping the middle-class dream alive. There is no excuse if Congress fails to come to an agreement that prevents rates from rising suddenly in July, and we look forward to working with members of both parties to reach a solution.

CONSUMER FINANCIAL PROTECTION BUREAU TAKES COMPLAINTS ABOUT STUDENT LOANS

The following excerpt is from the Department of Education website:

"Washington, D.C. — The Consumer Financial Protection Bureau (CFPB) is now accepting complaints from borrowers having difficulties with their private student loans. The CFPB will assist all borrowers experiencing problems taking out a private student loan, repaying their private student loan, or managing a student loan that has gone into default and may have been referred to a debt collector.

"The ability to work hard and better yourself through education is part of what makes this country so great," said Richard Cordray, Director of the CFPB. "But getting a higher education can mean taking on significant debt—a big decision with a lot of consequences. The CFPB is now the one-stop federal agency where all private student loan borrowers can ask questions, get information, and file a complaint about this important market."

Student loans have now surpassed credit cards as the largest source of unsecured consumer debt. Millions of students turn to private loans to pay for college when scholarships and federal student loans do not cover the full costs. But unlike federal student loans, private student loans do not generally have the same borrower protections such as military deferments, discharges upon death, or income-based repayment plans.

Until recently, private student lenders have only been regulated by a patchwork of state and federal authorities. Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, there was no federal supervisory program over nonbanks that issued student loans. That authority has now been given to the CFPB. Among its reforms, the law created a private student loan ombudsman to assist borrowers and review complaints. The ombudsman, Rohit Chopra, is also responsible for examining the complaints in order to develop recommendations to Congress and other federal government agencies.

Consumers can get help from the CFPB on student loans in a variety of ways including by the Bureau website, telephone, mail, and fax. Consumers can file complaints about any kind of student loan. While the CFPB will alone manage the private student loan complaints, the CFPB will work closely with the Department of Education to route complaints that fall under their purview as the overseer of federal student loans. The agencies executed a memorandum of understanding to ensure close coordination. Examples of federal loans include Direct loans, Stafford loans, Perkins loans, and PLUS loans.

Among the complaints that the Bureau anticipates receiving:

• Difficulties making full payment;
• Confusing advertising or marketing terms;
• Billing disputes;
• Deferment and forbearance issues; and
• Debt collection and credit reporting problems.

Working with the Department of Education, the CFPB released a Know Before You Owe "Financial Aid Shopping Sheet," which is a draft of important financial aid information that colleges could provide to students and their families, including information about monthly debt payment levels after graduation. The CFPB also launched a Student Debt Repayment Assistant, an interactive tool which tens of thousands of Americans have already used to help navigate their repayment options on student loans.

In November, the Bureau published a Notice in the Federal Register to ask students, lenders, servicers, schools, and other members of the public to share their experiences with the private student loan market. The Bureau received thousands of comments from consumers, industry, and the higher education community, which will be analyzed as part of a report to Congress on the private student loan market, to be released later this year.

The CFPB has been taking complaints in categories of consumer financial products and services since launching on July 21, 2011. The Bureau started by taking credit card complaints. In December, the Bureau expanded and began taking complaints on mortgages and other home loans. And, on March 1, the Bureau began taking complaints on checking accounts.

The Bureau expects financial institutions to respond to complaints within 15 days with the steps they have or plan to take, and expects complaints to be closed in 60 days. Consumers are given a tracking number after submitting a complaint and can check the status of their complaint by logging on to the CFPB website. Each complaint will be processed individually and consumers will have the option to dispute the lender's resolution.

The Bureau sent a letter this week to more than 6,000 university officials across the country notifying them of the new complaint system, so they can direct students and alumni to get help with their student loans."