Thursday, May 1, 2014

Lawsuit Links CUs to Predatory Loan Practices at ITT Educational Services

A lawsuit by the Consumer Financial Protection Bureau (CFPB) against ITT Educational Services (ITT) links a student loan credit union service organization (CUSO), Student CU Connect, and indirectly credit unions to a predatory private student loan program.

Seven credit unions founded Student CU Connect (SCUC) -- Eli Lilly Federal Credit Union in Indianapolis, Ind.; Bellco Credit Union in Greenwood Village, Colo.; CommunityAmerica Credit Union in Lenexa, Kan.; Workers’ Credit Union in Fitchburg, Mass.; Directions Credit Union in Toledo, Ohio; Veridian Credit Union in Waterloo, Iowa; and Credit Union of America in Wichita, Kan. (check out the November 5, 2009 press release).

Eli Lilly Federal Credit Union was the originating entity of the student loan participations. (I will note that Eli Lilly FCU has ended this loan program with ITT). Participating credit unions made a three year commitment to fund a pre-specified amount of student loans each quarter.

The press release for SCUC makes it clear that this program was a good source of revenues for credit unions.

Paragraphs 120 through 128 of the CFPB complaint describe the SCUC private loan program (link to the complaint can be found at the end of this commentary).

The complaint notes that from March 2009 until December 2011 SCUC originated $189 million in student loans to ITT students. SCUC was only available to ITT students.

Paragraph 121 discusses the connection amongst ITT, SCUC, and the lead credit union, Eli Lilly FCU.

"SCUC was the brainchild of ITT or its paid consultants, and ITT was actively involved in the creation and support of SCUC by developing the underwriting criteria, providing a credit facility, and paying the credit union membership fees in the lead credit union on behalf of the students who took out SCUC loans. ITT was also actively involved in the servicing and collection activities of SCUC. In addition, ITT provided a stop-loss guarantee to the program participants: if defaults exceeded 35%, ITT would make the credit unions whole for any further defaults."

Paragraphs 123 and 124 of the complaint point out that the SCUC loans were targeted at subprime borrowers. According to the complaint, 46 percent of the borrowers had credit scores below 600 and "were subject to interest rates of 13.75% or 16.25% and origination fees of 10%."

The complaint states that a majority of these SCUC loans ended in default.

In paragraph 127, ITT's consultants projected a gross default rate of 63 percent on SCUC loans. In paragraph 154, ITT projected that the gross cumulative default rate for the SCUC pool of loans from 2009, which is the oldest and most seasoned pool of loans, would exceed 70 percent.

While the lawsuit targets ITT, credit unions that funded this private student loan program should not get a free pass.

Where are the credit union regulators and why haven't we seen any enforcement orders or civil fines against credit unions?

Read the CFPB complaint.

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