When Did Education Become a Consumer Financial Service?
The mission of the Consumer Financial Protection Bureau (“CFPB”) is to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.” See 12 U.S.C. § 5491(a) (emphasis added). So why is the CFPB currently suing ITT Educational Services, Inc. (“ITT”), an educational services provider? After all, ITT is not a bank. ITT offers career-oriented bachelor and associates degree programs at physical campuses and online. One would think that, if any federal agency were to concern itself with the services offered by a college, it would be the U.S. Department of Education (“DOE”). Indeed, by means of federal education loans, the DOE provides the vast majority of ITT’s funding, yet the agency leading the charge against ITT is not the DOE, but the CFPB. Why? The answer to that question offers a window into the CFPB’s view regarding the long reach of its jurisdiction and of certain substantive provisions of law.
The CFPB commenced the action against ITT in February 2014, in the U.S. District Court for the Southern District of Indiana, the jurisdiction in which ITT is headquartered. See CFPB v. ITT Educ. Servs., Index. No. 1:14-cv-00292, 2015 WL 1013508 (S.D. Ind. Mar. 6, 2015). Earlier this year, the Court granted in part, and denied in part, a motion brought by ITT to dismiss the CFPB’s lawsuit, as discussed in detail below.
The Factual Allegations
As mentioned, the CFPB’s Complaint acknowledges that federal aid “comprises the overwhelming majority of ITT’s revenue.” See Compl. ¶ 4. Indeed, the CFPB’s Complaint notes that, “[i]n 2011, about 89% of ITT’s cash receipts came from the government, and around 7% came from private loans.” See id. ¶ 26. But the CFPB’s lawsuit does not assert any claims regarding the handling of federal aid. Instead, the CFPB focuses on the relatively smaller slice of ITT’s revenue that derives from private student loans. The CFPB concedes in its lawsuit that the reason students rely on such private student loans is that federal aid is often insufficient to cover the costs of tuition. See id. ¶¶ 5 6.
In its Complaint, the CFPB alleges that ITT lured students into enrolling at ITT, and ultimately into accepting private loans, by making certain misrepresentations regarding ITT’s post-graduation job placement success rates. See Compl. ¶ 33. The Complaint alleges that, once students were enrolled, ITT offered loans called “Temporary Credit,” consisting of zero-interest private loans that would supplement federal aid and were payable at the end of the academic year. Id. ¶ 6. The CFPB further claims that, at the end of any given academic year, many ITT students needed to take out additional private student loans in order to pay off their outstanding Temporary Credit balances, and that these private loan programs, known as “Student CU Connect” and “PEAKS,” trapped ITT students, following their graduation from ITT, in “high-interest, high-fee private loans.” Id. ¶¶ 8, 114.
The CFPB does not dispute that Student CU Connect and PEAKS were “ostensibly run by third parties,” not ITT. See Compl. ¶ 11. The CFPB also does not allege that, contractually, ITT was the “lender” in connection with these private loan programs. But the CFPB alleges that these programs were “in reality controlled by ITT and backed by an ITT guarantee that protected those third parties from loss.” Id. To describe the relationship between ITT and these programs, the Complaint uses terminology such as “brainchild” (id. ¶ 121), “actively involved” (id.), and “sole intermediary” (id. ¶ 122).
The CFPB further alleges that ITT “engaged in a variety of aggressive tactics, such as pulling students from class or withholding course materials or transcripts, to get those students to sign up for these private loans.” See Compl. ¶ 9. The CFPB cites projections to the effect that “more than 60% of the students who had received the private loans would default.” Id. ¶ 12. The CFPB also claims that, at the time of graduation from ITT, some students still had outstanding balances on the Temporary Credit accounts. Id. ¶ 143. ITT would offer such students a 25% discount for paying off their balances, or, in the alternative, students could enroll in a “Temporary Credit Installment Plan” which did not require payment in full but also did not come with the 25% discount. Id. ¶¶ 144, 146.
The CFPB does not cite any data regarding actual default rates, as opposed to projected default rates, regarding the private loan programs at ITT. The CFPB does not allege that such projected default rates were worse than default rates on federal student loans for ITT students, nor does the Complaint compare the penalties for defaulting on a Student CU Connect or PEAKS loan with the penalties for defaulting on a DOE loan.
The CFPB also does not dispute that the private loan programs available at ITT were the best, or only, option for individuals who, after exhausting federal aid, could not afford the cost of an ITT education out of pocket. In addition, the CFPB’s Complaint does not cite any specific examples of actual ITT students who were harmed because of the terms or conditions of such private student loans, or who, in the end, were worse off than they otherwise would have been had they not enrolled at ITT and had not taken such private loans.
The Legal Theory
While describing the Student CU Connect and PEAKS programs as “high-interest, high-fee private loans” (see Compl. ¶ 8), the CFPB does not allege that these rates or fees violated any quantitative limits on rates or fees under federal or state law. Instead, the CFPB has proceeded under certain other legal theories.
Counts One through Three of the CFPB’s case rest on 12 U.S.C. § 5536(a)(1)(B), a product of Title X of the Dodd-Frank Act of 2010, which created the CFPB. This statutory provision prohibits any “covered person or service provider” from engaging in “any unfair, deceptive, or abusive act or practice.” See 12 U.S.C. § 5536(a)(1)(B). Title X defines “covered person” as a person “offering or providing a consumer financial product or service,” and defines a “service provider” as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” See 12 U.S.C. § 5481(6)(A), (26)(A). The CFPB characterizes ITT as both a covered person and a service provider in light of ITT’s alleged relationship with the private loan programs at issue. See Compl. ¶ 21.
Count One of the CFPB’s Complaint charges that ITT’s conduct was “unfair.” See Compl. ¶¶ 151-65. The term “unfair” is defined in Title X as conduct that “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers,” and that is “not outweighed by countervailing benefits.” See 12 U.S.C. § 5531(c)(1).
Counts Two and Three of the CFPB’s Complaint allege that ITT’s conduct was “abusive.” See Comp. ¶¶ 166-82. Count Two invokes one definition of “abusive” contained in Title X, namely to take “unreasonable advantage” of “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” See 12 U.S.C. § 5531(d)(2)(B). Count Three invokes an alternative definition of “abusive” contained in Title X, which refers to taking “unreasonable advantage” of “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” See 12 U.S.C. § 5531(d)(2)(C). Here, the CFPB alleges that “ITT instructed its Financial Aid staff to gain students’ trust and appear to work in students’ interests.” See Compl. ¶ 88.
Count Four of the CFPB’s Complaint alleges a violation of the Truth in Lending Act (“TILA”). This aspect of the CFPB’s case focuses on ITT’s policy of offering a discount for clearing unpaid Temporary Credit balances at graduation. The essence of the CFPB’s theory is that, rather than a discount for paying in full, this policy really was an additional “finance charge” for failing to pay in full, disguised as a discount. According to the CFPB, ITT did not formally disclose this policy as a “finance charge,” thus violating the duty to formally disclose “finance charges” under TILA. See Compl. ¶ 148.
Notably, federal law contains a number of specific provisions that govern the private student loan industry. See 15 U.S.C. § 1650 (“Preventing unfair and deceptive private educational lending practices and eliminating conflicts of interest.”); 15 U.S.C. § 1638(e) (“Terms and disclosures with respect to private education loans.”); 20 U.S.C. § 1019d (“Self-certification form for private education loans.”) The CFPB’s lawsuit against ITT does not allege any violations of any of these provisions, except to the extent that such rules incorporate the general duty under TILA to formally disclose finance charges to borrowers. Furthermore, with the exception of the above-mentioned question regarding the formal disclosure of finance charges, the CFPB’s Complaint does not allege that any misrepresentations were made to students regarding the terms or conditions of any private loans.
The Motion to Dismiss
ITT moved to dismiss the CFPB’s case, and, in a decision issued on March 6, 2015, the District Court held that the CFPB’s Title X claims were legally cognizable, but dismissed the CFPB’s TILA claim as time-barred. See ITT, 2015 WL 1013508 (the “Decision”). First, ITT challenged the CFPB’s case on constitutional grounds, arguing, among other things, that the prohibition on “unfair” or “abusive” practices is unconstitutionally vague. The Court did not concur with this aspect of ITT’s motion to dismiss, holding: “The Bureau is not required to plead here that the private loans crossed any sort of discrete ‘affordability’ threshold, nor does the ultimate success of the claim hinge on whether the rates charged in the loans are per se unreasonable or usurious.” See id. at *26.
Second, ITT contended that the Title X provisions at issue were categorically inapplicable to ITT “[s]ince it is primarily an educational institution and only tangentially, if at all, involved in consumer financial products and services.” See Decision at *21. The Court disagreed, holding that an entity could qualify as a “covered person,” or “service provider,” “so long as it involved itself in any of the statutorily-governed conduct, regardless of whether doing so was its primary business focus.” Id. at *22.
Third, and more specifically, the Court concluded that ITT could be characterized as a “covered person” because the definition of “covered person” under Title X is not limited to “the direct extension of a loan to a consumer.” See Decision at *20. In particular, the Court held that ITT potentially was a covered person in the sense that it allegedly provided “financial advisory services” to students. See id. at **22 24. Title X provides that a person who provides “financial advisory services” to consumers on “individual financial matters” – including “credit counseling” and “debt management” – is a “covered person” (see 12 U.S.C. § 5481(15)(A)(viii)), and ITT’s Financial Aid staff allegedly provided such services to ITT students in connection with private student loan options. See Decision at **22 24. Alternatively, the Court determined, ITT could be deemed a “service provider” to the extent that “ITT was heavily involved in operating and maintaining the loan program.” See id. at *24.
Fourth, the Court found that the CFPB had adequately alleged that the programs were “unfair” or “abusive.” The Court held that “the absence of overt misrepresentations in the forms the students signed” was not dispositive. See Decision at *31 n.37. In addition, “[w]hether or not ITT caused the students later to default – or derived some sort of benefit from that default – is irrelevant.” See id. at *30 n. 34. The Court agreed with ITT “that students never lost the theoretical power to defend their interests, in the sense that they could have walked away from ITT entirely and refused to take out new debt.” See id. at *30. However, the Court found, “[a] reasonable reading of the statutory language. . . is that it refers to oppressive circumstances – when a consumer is unable to protect herself not in absolute terms, but relative to the excessively stronger position of the defendant.” See id.
Fifth, without reaching the substantive merit of the CFPB’s TILA claim, the Court dismissed the claim on statute-of-limitations grounds. See Decision. at *32 33. The Court noted that TILA claims ordinarily are subject to a one-year statute of limitation (see 15 U.S.C. § 1640(e)), and that the instant lawsuit was commenced more than one year after certain alleged events at issue, and thus was time-barred. Id. The CFPB contended that this one-year limitations period applied only to civil claims brought by private litigants, rather than lawsuits brought by the CFPB, but the Court disagreed with this reading, holding, “we see no persuasive evidence that 15 U.S.C. § 1640 governs only private civil actions.” See Decision at *33.
Examined as a whole, the CFPB’s lawsuit against ITT suggests that the CFPB is taking an expansive view of its enforcement authority. First, the CFPB has asserted jurisdiction over an entity, ITT, that is not a lender but rather an educational services provider, essentially because the services provided were, in small part, financed with third-party credit that the entity allegedly was involved in marketing to its customers.
Second, in light of the dismissal of the TILA claim, the CFPB’s surviving case is based entirely on an arguably subjective view that the loan programs at issue were “unfair” or “abusive.” The CFPB has no claim that these loan programs saw worse outcomes than federal education loans or any other type of credit available to ITT students, that any particular misrepresentation was made to students regarding the terms or conditions of these loans, or that any of the specific federal statutory provisions or regulations governing private student loans were violated by ITT. Furthermore, the CFPB’s Complaint does not cite any actual examples of concrete harm to students. The lawsuit raises the question of whether, in the CFPB’s view, there is any type of entity, or any type of dealing between a business and consumer, that would be definitively outside the CFPB’s jurisdiction.
At the same time, the Court’s decision on ITT’s motion to dismiss can serve as a helpful precedent for a defendant if the CFPB has commenced a lawsuit after the expiration of the applicable statute of limitations. At least under TILA, the Court’s decision stands for the proposition that the CFPB is subject to the same time bar as private litigants with respect to the commencement of lawsuits. It may be possible to extrapolate the Court’s reasoning to the limitations periods applicable to other consumer protection statutes under the CFPB’s purview.
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