The Debt Collection World Needs a Cleanup

Debt collection practices have been getting a lot of attention lately. They deserve it. Millions of Americans have experienced harassing phone calls, demands for payment of money not truly owed or illegal threats of dire consequences, up to and including imprisonment. These abuses are disturbingly common – in fact, they’re built into the way a great many debt collectors do business.

Fortunately, two federal agencies – the Consumer Financial Protection Bureau and the Federal Trade Commission – have the authority to address such problems. And both agencies have been gathering evidence on this market.

Debt collection, the bureau says, has quickly become its number one source of complaints. It ranks third at the FTC, where such complaints have increased more than 1,400 percent since 2000 — from 13,950 complants to last year’s total of 204,644.

Abusive debt collection practices can take a terrible toll, emotionally and practically. Beyond the fear, stress and embarrassment they cause, families can have their bank accounts frozen, making it impossible to pay for food, housing, utilities and other basic expenses. Debt collectors frequently place incorrect information on people’s credit reports, impairing their ability to secure credit, housing and even employment in some cases.

Almost all of the millions of collection suits filed against consumers each year are uncontested and result in default judgments against the consumer. And while the industry would say that’s because consumers really owe the money, studies point to an array of other factors, including illness, injury, inability to take time off from work, lack of notice, misunderstanding of the requirements for filing a legally proper response, and confusion stemming from the obscure and complicated language of summonses. In short, under current rules and procedures, the courts are not a fair playing field once a debt collector decides to go after you.

Consumer bureau complaint data, according to a report released this week, indicates that the most common grievances are mistaken information, which comes up more than half of the time, and what the bureau calls “aggressive communication tactics and threats” – the theme of nearly a quarter of its complaints.

Appalling anecdotes abound. In Missouri, an employed woman who had simply forgotten about a $425 loan was arrested and spent three nights in jail, until her mother finally borrowed $1,250 to pay her bond. In Illinois, an elderly woman was repeatedly called and harassed over a debt allegedly owed by her ex-husband, from whom she had been divorced for more than 30 years. In another Illinois case, a woman who was caring for four profoundly disabled foster children nearly had her bank account frozen (despite the fact that it contained nothing but public-benefit funds designated for the children’s care) as a result of a judgment that had been vacated years earlier. Another woman, suffering from early-onset dementia, was harassed over a loan that belonged to her ex-husband; the frequent calls contributed to her need to move into a nursing home.

While debt-collection problems have a long history, the recent combination of aggressive lending and widespread economic distress has made them considerably worse. Household debt nearly doubled in the half-decade before the financial crisis of 2008; the reckless lending and deceptive loans of those years contributed to a sharp rise in payment delinquency, which was accompanied by an explosion of new debt buyers and a deterioration of industry practices.

Having paid pennies on the dollar for the right to go after a portfolio of supposedly delinquent debtors, many debt buyers fail to ascertain the validity of the information passed along to them. Often, years have passed and misinformation about the debt or the debtor has become embedded into the collection process. Rather than sort through such issues, collectors often adopt a shotgun approach, hoping to frighten a few people into paying, whether they owe the money or not.

A third factor may also have been at work: Although Congress had passed a Fair Debt Collection Practices law in 1977, and the FTC has ramped up its enforcement efforts in the last few years, no agency had been given the power to issue specific rules for debt collectors until the enactment of the Dodd-Frank financial reform law of 2010.

Under Dodd-Frank, the Consumer Financial Protection Bureau has rule-making as well as enforcement power; it has the authority not only to impose new and substantively stronger obligations on debt collectors, but also to create incentives for all industry players to improve the accuracy of their collection efforts and steer clear of harassment and abuse. With those powers, the bureau is in a position to improve things significantly.

The National Consumer Law Center, the National Association of Consumer Advocates, Americans for Financial Reform and other consumer groups have called on the consumer bureau  to take a number of steps to improve the world of debt collection. Some of the major recommendations include: strengthening consumer remedies against ongoing abusive practices; requiring debt collectors to verify information before they act on it; curtailing telephone harassment by limiting calls to a more reasonable number; creating an effective mechanism to help consumers enforce their right to request that collectors stop communicating with them; and making sure the relevant rules cover payday lenders, credit card companies and other creditors as well third-party debt collectors.

— Rebecca Thiess and Ellen M. Taverna

Rebecca Thiess is a policy analyst at Americans for Financial Reform. Ellen M. Taverna is the Legislative Director at the National Association of Consumer Advocates. Originally published on USNews.com.

Members of Congress Speak Out To Protect Derivatives Reforms

Four years ago, with the passage of the Dodd-Frank financial reform law, Congress established basic standards of safety and transparency for the massive and previously unregulated derivatives markets that played a central role in crashing the world economy. Now nineteen current and former legislators involved in drafting that legislation, led by former Representative Barney Frank, are speaking out to oppose Wall Street’s efforts to do an end-run around the law.

 The question at issue is whether U.S. derivatives rules will govern transactions conducted through nominally overseas entities, like foreign subsidiaries of U.S. banks, or foreign banks who are key players in the U.S. derivatives markets. This is a critical question because the largest global banks can shift derivatives risks and funding between thousands of international subsidiaries at the touch of a computer keyboard. Nominally, a transaction may be booked in a foreign subsidiary, incorporated in the Cayman Islands or Hong Kong, but the risk and economic impact remain with the U.S. economy. It’s impossible to effectively regulate derivatives markets without applying rules to transactions conducted through foreign subsidiaries.

In fact, if you’ve read about a major scandal involving derivatives, chances are foreign subsidiary transactions were at the center of the affair. In the 1990s, Long Term Capital Management almost brought down Wall Street with trillions in derivatives traded through Cayman Islands subsidiaries, and in Britain the 230 year-old Barings Bank failed thanks to the actions of a single rogue derivatives trader. During the financial crisis, AIG’s London subsidiary, AIG Financial Products, experienced massive derivatives losses that resulted in a U.S. taxpayer bailout. And even more recently, the London Whale created billions of dollars in losses for JP Morgan through London derivatives trades.

No one understands all this better than the major Wall Street banks, who routinely conduct over half of their derivatives transactions through foreign subsidiaries. That’s why as the Commodity Futures Trading Commission (CFTC) finally begins to implement Dodd-Frank derivatives rules, the major Wall Street derivatives dealers are trying a last minute end run around derivatives enforcement. Their vehicle is a major lawsuit that seeks to stop the derivatives regulation in its tracks by banning any cross-border enforcement of any Dodd-Frank derivatives oversight. Arguing that the CFTC has failed to comply with technical procedural requirements for economic analysis, a few global mega-banks are asking the court to forbid the agency from enforcing any of the Dodd-Frank derivatives and commodity market reforms at foreign subsidiaries of U.S. banks, or foreign banks operating in the U.S. If they get everything they’re asking for, dozens of rules that took years to complete will be rendered almost impossible to enforce, until elaborate new rulemaking procedures are completed for each and every rule. That would add fresh years of delay to the three and a half years we’ve already waited for real derivatives oversight.

But there’s at least one major problem with their argument: Congress also understood the danger of cross-border evasion of derivatives rules, and ensured that the CFTC has clear jurisdiction to address it. Specifically, Section 722(d) of the Dodd-Frank Act states clearly and unambiguously that any CFTC derivatives rule governs not just transactions conducted on U.S. soil, but also any nominally foreign transaction that has a ‘direct and significant’ connection with U.S. commerce. 

Now Congress is speaking up against Wall Street’s attempt to use procedural technicalities to dodge this clear statutory rule. Today, nineteen current and former Representatives and Senators, led by former representative Barney Frank, a lead drafter of the Dodd-Frank Act, filed an amicus brief opposing the big banks’ case. Their brief makes a conclusive case for Congress’ intent to properly regulate all derivatives that impact the U.S. economy – even those that take an end run through a foreign country. Let’s hope that this strong statement by Congress leads the court to push back the bank’s attempt to get out of the rules.

Wall Street Needs to Pay Its Fair Share in Taxes. Here's How.

There are many inequities in our tax system, but here’s one that should really command the attention of a country still reeling from the aftershocks of the financial crisis and bank bailouts: the “financial services industry,” as it has come to be known, is badly undertaxed compared to other industries. While banks and financial companies reap more than 30 percent of the nation’s corporate profits, they pay only about 18 percent of corporate taxes and contribute less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

As part of its broader budget plan, the Congressional Progressive Caucus is advancing a set of good ideas for leveling the playing field. In its “Better-Off Budget” blueprint, released today, the Progressive Caucus proposes:

  • A Wall Street speculation tax, also known as a financial transaction tax — a very small levy on the trading of stocks, derivatives and complex financial instruments;
  • A big-bank excise tax applied to the ten or so banks with assets of $500 billion of more; and
  • The sharp reduction of a subsidy arrangement in which banks receive so-called “dividends” (totaling more than $1.6 billion last year) from the Federal Reserve.

In addition to these ideas, which explicitly relate to the financial sector, the Progressive Caucus budget includes broader provisions that would have significant effects on Wall Street. Two that stand out are an end to the preferential tax treatment of capital gains and an enforceable $1 million-a-year limit on the tax deductibility of corporate executives’ paychecks.

The net effect would be to make the tax system fairer overall and make sure that Wall Street does more to help the country recover from an economic calamity that was largely its doing. Several of the Progressive Caucus’ proposals would also set better incentives for the financial sector itself.

A tax on the very largest banks could, along with other policies, help address the “too big to fail” problem and the unhealthy trend of increased concentration – and reduced competition – in the banking industry. A small transaction tax could help nudge the industry away from high-frequency trading and ultra-short-term speculation toward a longer-term investment outlook and practices with a clearer value to the society at large. (A new report released today by Public Citizen refutes one of the key arguments used by the financial industry to keep that idea off the table: the claim that ordinary investors would be hurt.)

These ideas, of course, comprise just a small part of the Progressive Caucus budget, which contains many proposals to improve tax fairness, address income inequality and spur investment in infrastructure and clean energy. But their inclusion is one sign of growing, and widening, support for the basic concept of getting Wall Street to assume more of the tax burden. The big bank tax, for example, is similar to one advocated by the Obama administration, and not so different from one embraced by House Ways and Means chairman Dave Camp, R-Mich. Camp’s tax-reform plan also includes a more limited version of the proposal to cap the deductibility of corporate pay. (On this count, Camp and the Progressive Caucus are both, in a sense, just trying to put teeth into a law that supposedly established a $1 million cap – 20 years ago!)

Several of the Progressive Caucus’ ideas are also the subject of stand-alone bills in the House, the Senate or both. Those bills include two different transaction tax bills – one co-authored by Rep. Peter DeFazio, D-Ore., and Sen. Tom Harkin, D-Iowa, and the other introduced by Rep. Keith Ellison, D-Minn. – and companion bills on the deductibility of executive pay introduced by Sens Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., and Rep. Lloyd Doggett, D-Texas. Meanwhile, 11 European countries are moving ahead with their version of a financial transaction tax.

The Progressive Caucus has done the country a service by putting these worthy proposals on the table. They should be taken seriously.

– Jim Lardner

Originally published on USNews.com,

What to Do About Credit-Card Data Breaches (by Ed Mierzwinski, USPIRG)

This morning, I testify in the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee in the latest hearing on the Target data breach. The committee should post all the testimony and have a live video feed here at 10am.

As I did in a Senate hearing last month, I will try to shift the debate from the supposed need for a “uniform national data breach notification standard” to much more important issues, such as improving consumer rights when they use unsafe debit cards to ensuring that standards for payment card and card network security are set in an open, fair way that holds banks and card networks accountable for forcing merchants and consumers to rely on inherently unsafe, obsolete magnetic stripe cards.

This is a somewhat long-ish blog where I lay out my main recommendations to Congress:

1) Congress should improve debit/ATM card consumer rights and make all plastic equal:

Credit cards are safe, by law. Debit cards have “zero liability” only by promise. The shared risk fraud standard for debit cards under law – where consumers could be liable for up to $500 or more in losses — appears to be vestigial, or left over from the days when debit cards could only be used with a PIN. Since banks encourage consumers to use debit cards, placing their bank accounts at risk, on the unsafe signature debit platform, this fraud standard should be changed. Compare some of the Truth In Lending Act’s robust credit card protections by law to the Electronic Funds Transfer Act’s weak debit card consumer rights at this FDIC website.

As a first step, Congress should institute the same fraud cap, $50, on debit/ATM cards as exists on credit cards. Congress should also provide debit and prepaid card customers with the stronger billing dispute rights and rights to dispute payment for products that do not arrive or do not work as promised that credit card users enjoy (through the Fair Credit Billing Act, a part of the Truth In Lending Act). For a detailed discussion of these problems and recommended solutions, see “Before the Grand Rethinking: Five Things to Do Today with Payments Law and Ten Principles to Guide New Payments Products and New Payments Law,” by Gail Hillebrand (then with Consumers Union, now at the CFPB).

Debit/ATM card customers already face cash flow and bounced check problems while banks investigate fraud under the Electronic Funds Transfer Act. Reducing their possible liability by law, not simply by promise, won’t solve this particular problem, but it will force banks to work harder to avoid fraud. If they face greater liability to their customers and accountholders, they will be more likely to develop better security.

2) Congress should not endorse a specific technology. If Congress takes steps to encourage use of higher standards, its actions should be technology-neutral and apply equally to all players.

“Chip and PIN” and “Chip and signature” are variants of the EMV technology standard commonly in use in Europe. The current pending U.S. rollout of chip cards will allow use of the less-secure Chip and Signature cards rather than the more-secure Chip and PIN cards. Why not go to the higher Chip and PIN authentication standard immediately and skip past Chip and Signature? Further, Congress should not embrace a specific technology. Instead, it should take steps to encourage all users to use the highest possible existing standard. Current standards are developed in a closed system run by the banks and card networks. New standards should be developed in an open system that encourages innovation and applies equally to banks as well as merchants and others.

Further, as most observers are aware, chip technology will only prevent the use of cloned cards in card-present (Point-of-Sale) transactions. It is an improvement over obsolete magnetic stripe technology in that regard, yet it will have no impact on online transactions, where fraud volume is much greater already than in point-of-sale transactions.

Experiments, such as with “virtual card numbers” for one-time use, are being carried out online. It would be worthwhile for the committee to inquire of the industry and the regulators how well those experiments are proceeding and whether requiring the use of virtual card numbers in all online debit and credit transactions should be considered a best practice.

3) Investigate Card Security Standards Bodies and Ask the Prudential Regulators for Their Views:

To ensure that improvements continue to be made, the committee should also inquire into the governance and oversight of the development of card network security standards. Do regulators sit on or have oversight over the PCI card security standards board? As I understand it, merchants do not; they are only allowed to sit on what may be a meaningless “advisory” board.

4) Congress should not enact any new legislation sought by the banks to impose their costs of replacement cards on the merchants:

Target should pay its share but this breach was not entirely Target’s fault. Disputes over costs of replacement cards should be handled by contracts and agreements between the players. How could you possibly draft a bill to address all the possible shared liabilities?

5) Congress should not enact any federal breach law that preempts state breach laws or, especially, preempts other state data security rights:

In 2003, the Fair and Accurate Credit Transactions Act did not do enough to prevent identity theft. But it did not preempt new state privacy laws. Since 2003, fully 46 states enacted tough security freeze laws (based on a U.S. PIRG/Consumers Union model law) and 49 others enacted breach notification laws. State “laboratories of democracy” flourished.

But industry lobbyists (and this isn’t only the banks, but includes the chemical industry, car makers, airlines, the drug companies and pretty much everyone else) prefer to enact weak federal laws accompanied by strong limits on the states. That is the wrong way to go. Broad preemption will prevent states from acting as first responders to emerging privacy threats. Congress should not preempt the states. In fact, Congress should think twice about whether a federal breach law that is weaker than the best state laws is needed at all.

6) Congress Should Allow For Private Enforcement and Broad State and Local Enforcement of Any Law It Passes:

The marketplace only works when we have strong federal laws and strong enforcement of those laws, buttressed by state and local and private enforcement.

7) Any federal breach law should not include any “harm trigger” before notice is required:

The better state breach laws, starting with California’s, require breach notification if information is presumed to have been “acquired.” The weaker laws allow the company that failed to protect the consumer’s information in the first place to decide whether to tell them, based on its estimate of the likelihood of identity theft or other harm. Only an acquisition standard will serve to force data collectors to protect the financial information of their trusted customers, accountholders or, as Target calls them, “guests,” well enough to avoid the costs, including to reputation, of a breach.

8) Congress should further investigate marketing of overpriced credit monitoring and identity theft subscription products:

In 2005 and then again in 2007 the FTC imposed fines on the credit bureau Experian for deceptive marketing of its various credit monitoring products, which are often sold as add-ons to credit cards and bank accounts. Prices range up to $19.99/month. While it is likely that recent CFPB enforcement orders against several large credit card companies for deceptive sale of the add-on products – resulting in recovery of approximately $800 million to aggrieved consumers — may cause banks to think twice about continuing these relationships with third-party firms, the committee should also consider its own examination of the sale of these credit card add-on products. See my recent post.

Consumers who want credit monitoring can monitor their credit themselves. No one should pay for it. You have the right under federal law to look at each of your 3 credit reports (Equifax, Experian and TransUnion) once a year for free at the federally-mandated central site annualcreditreport.com. Don’t like websites? You can also access your federal free report rights by phone or email. You can stagger these requests – 1 every 4 months — for a type of do-it-yourself no-cost monitoring. And, if you suspect you are a victim of identity theft, you can call each bureau directly for an additional free credit report. If you live in Colorado, Georgia, Massachusetts, Maryland, Maine, New Jersey, Puerto Rico or Vermont, you are eligible for yet another free report annually under state law by calling each of the Big 3 credit bureaus.

And kudos to Discover Card for leading the way in disclosing credit scores on account statements. Director Rich Cordray and the Consumer Financial Protection Bureau have recently launched a campaign to encourage this voluntary practice. It should help end the sale of over-priced credit monitoring. Eventually, we hope credit scores will also be made part of credit reports, so anyone, not just credit card holders, can see them.

9) Review Title V of the Gramm-Leach-Bliley Act and its Data Security Requirements:

The 1999 Gramm-Leach-Bliley Act imposed certain data security responsibilities on regulated financial institutions, including banks. The requirements include breach notification in certain circumstances. The committee should ask the regulators for information on their enforcement of its requirements and should determine whether additional legislation is needed.

10) Congress should investigate the over-collection of consumer information for marketing purposes. More information means more information at risk of identity theft. It also means there is a greater potential for unfair secondary marketing uses of information:

In the Big Data world, companies are collecting vast troves of information about consumers. Every day, the collection and use of consumer information in a virtually unregulated marketplace is exploding. New technologies allow a web of interconnected businesses – many of which the consumer has never heard of – to assimilate and share consumer data in real-time for a variety of purposes that the consumer may be unaware of and may cause consumer harm. Increasingly, the information is being collected in the mobile marketplace and includes a new level of localized information.

Although the Fair Credit Reporting Act limits the use of financial information for marketing purposes and gives consumers the right to opt-out of the limited credit marketing uses allowed, these new Big Data uses of information may not be fully regulated by the FCRA. The development of the Internet marketing ecosystem, populated by a variety of data brokers and advertisers buying and selling consumer information without their knowledge and consent, is worthy of Congressional inquiry. See the FTC’s March 2012 report, “Protecting Consumer Privacy in an Era of Rapid Change: Recommendations For Businesses and Policymakers.” Also see my paper with Jeff Chester of the Center for Digital Demcoracy, at the Suffolk University Law Review, “Selling Consumers Not Lists: The New World of Digital Decision-Making and the Role of the Fair Credit Reporting Act.”

– Ed Mierzwinski

Cross-posted from US PIRG.

The Hidden Cost of Car Loans (by Christopher Kukla, CRL)

When a car buyer finances a car through a car dealer, he or she signs a contract with the dealer for the car purchase and loan. In the vast majority of cases, the dealer will quickly get funding for the loan by selling that contract to a third party, such as a bank or finance company. The potential funders also receive the consumer’s financial information to help them determine pricing on the loan. The dealer then collects bids from interested financial institutions, which outline the terms and conditions the funder will accept, including the interest rate.

What most car buyers don’t know is that the bank funding the loan allows the dealer to increase the interest rate for compensation. For example, a bank may be willing to buy the contract as long as the interest rate is at least 4 percent, but will permit the dealer to charge the consumer up to 6.5 percent interest. The dealer is paid some or all the difference, which is the “markup.”

The Center for Responsible Lending estimates that for dealer-financed cars bought in 2009, over the life of their loans buyers will pay $25.8 billion in interest solely attributable to this markup. In 2009, the average markup was nearly 2.5 percent, hiking costs for each loan by hundreds of dollars. While we believe dealers should be compensated for the work they do in financing cars, they shouldn’t have arbitrary discretion to take more in compensation from some buyers than others.

Unfortunately, a long trail of cases shows that the dealer system is patently unfair. Most recently, the Consumer Financial Protection Bureau and the Department of Justice announced a settlement with Ally Financial based on discriminatory markup practices. They found that the average African-American car buyer who received an Ally loan paid more than $300 in additional interest over the course of the loan than white borrowers with similar qualifications. While agreeing to pay $98 million to settle these claims, Ally has also said that it plans to continue granting dealers the discretion to manipulate interest rates for compensation.

The dealers’ stubborn clinging to the markup system persists in spite of a history of legal violations dating back to the late 1990s. Again and again, lawsuits and investigations have found pricing discrimination. Not only do car buyers of color receive interest rate markups more frequently, they also consistently get higher markups than similar white borrowers.

The National Automobile Dealers Association recently proposed a voluntary plan for its dealers. Under this plan, rather than increase the interest rate on a case-by-case basis, dealers would mark up every interest rate. But here’s the catch: Dealers would still be free to lower rates if they so choose. This means that certain groups of consumers could still find themselves paying unjustifiably higher interest rates.

Dealers also try to justify markups by saying that their customers can negotiate the interest rate on their loan just like on the price of the car. The problem is this: Negotiation on interest rate doesn’t result in better pricing.

The Center for Responsible Lending recently released data showing that even though borrowers of color reported negotiating their interest rates at the same rate or more than white borrowers, they still paid higher interest rates. The data also showed that borrowers of color were more likely to be told information leading them to believe that further negotiation would be fruitless. When the dealer tells a consumer that the interest rate is the best that dealer can find, even though that may not be true, the consumer stops negotiating.

Ultimately, the banks that fund these loans have the power to stop abusive markups, but, as with the dealers, they don’t seem to be rushing to change. Recently, Wells Fargo announced that it will continue to allow dealers to mark up interest rates for compensation.

The Center for Responsible Lending and other groups believe that this particular form of compensation, which has a long history of unfairness, should be eliminated. Dealers already get compensated in forms other than marking up the interest rate. For instance, dealers receive a flat fee for every loan made under 0 percent and other low-interest rate promotions that manufacturers may offer. Dealers will still get compensated for their work, but with less incentive to sell consumers on the highest interest rate possible.

We applaud the Consumer Protection Bureau and Justice Department for their vigilance and action on the abuses that dealer interest rate markups cause. We think their recent actions are a step in the right direction, but we know that the only way to effectively eliminate abuse is to end this practice.

— Christopher Kukla

Originally published on USNews.com.

Consumer Agency Files Lawsuit Against ITT for Predatory Lending Practices

The Consumer Financial Protection Bureau has taken its first public enforcement action against a company in the for-profit college industry, filing a lawsuit against ITT Educational Services, Inc. The company, based in Indiana, is a for-profit provider of post-secondary technical education, with tens of thousands of students enrolled online or in the school’s 150 institutions. The agency is accusing the for-profit college chain of engaging in predatory student lending by pushing students into high-cost private student loans that, in Director Rich Cordray words, “were destined to default.” In fact, the company itself projected a default rate of 64 percent, predicting that well over half of students who borrowed would be unable to repay. The CFPB is seeking refunds for victims, a civil penalty, and an injunction against the company, among other forms of relief.

The CFPB asserts that ITT coerced students into taking on high-cost loans with interest rates of more than 16 percent. These loans additionally had opaque terms, with some students not even aware they had a private student loan until they received a collection call. The CFPB alleges that the company knew students would have no way to pay the temporary loans they were encouraged to take out to fund tuition gaps (the amount of tuition owed after federal financial aid resources were exhausted). ITT’s programs cost significantly more than similar programs at public colleges, and because the tuition is higher than the maximum federal student aid limit, many students had to fill that gap with outside financing. To fill this hole ITT offered students no-interest loans that looked appealing, but were due in full at the end of a student’s first academic year. When the end of the year came and students couldn’t repay, the company pushed them into new high-cost private student loans to repay both their temporary loans and their second year of tuition. ITT’s CEO even told investors that the plan all along was for students to end up converting the temporary loans to long-term loans.  In addition to misleading students on loans, the company also misled them on future job prospects, leading students to believe they would earn enough money upon graduation to repay their loans even though past experience showed otherwise.

Four state attorneys general, from Illinois, Iowa, Kentucky, and New Mexico, joined the CFPB in announcing legal actions. New Mexico Attorney General Gary King—who filed a separate suit in New Mexico—explained: “A significant percentage of the New Mexico students that entered the ITT nursing program were unable to complete the program; cannot get a job in their chosen field; because their ITT credits will not transfer, they must start over at another institution; and, these students continue to suffer under their heavy student loan debt.” Kentucky Attorney General Jack Conway, who is heading a group of 32 attorneys general investigating for-profit colleges, added that “some of these schools are more interested in getting their hands on federal and state dollars than educating students.”

The CFPB is using its authority under the Dodd-Frank Act to take action against institutions engaging in “unfair, deceptive, or abusive practices” in this case. Relatedly, the CFPB also recently finalized a rule, which takes effect on March 1, allowing the agency to supervise certain nonbank servicers of private and federal student loans.

— Rebecca Thiess