The Death of a CUSO

The $1.5 trillion student loan crisis has claimed a new victim – the CUSO Student CU Connect.

After years of legal proceedings and a recent surprise settlement with the CFPB, the CUSO will close its business for good after agreeing in June to cancel and stop collecting $168 million in loan debt for thousands of students. These were high-interest, high-fee loans that students could not only not afford, but that they didn’t even want, didn’t understand and didn’t even know they had, according to the CFPB.

In a separate settlement agreement announced in May involving the Chapter 7 bankruptcy of ITT Technical Institute, Student CU Connect also agreed to pay $7.5 million out of a $8.8 million fund from which the balance, $1.3 million, will go to the CUSO.

While the CFPB settlement means the CUSO will pay no financial penalties, not even restitution for student victims, the bankruptcy case settlement freed Student CU Connect of potentially paying millions of dollars that a bankruptcy trustee lawyer originally sought in an adversary court proceeding. Now this settlement, titled as a “compromise,” will allow the CUSO to possibly collect an undetermined amount of its $127 million claim against ITT. It’s uncertain whether the CUSO will recover any funds after ITT’s assets are sold because there is a very long list of creditors also waiting in line to be paid.

Consumer finance lawyers had mixed reactions to the CFPB settlement, calling it soft and pointing out it failed to make student loan victims whole. But attorneys disagreed on whether this settlement may signal how the federal agency may prosecute consumer lawsuits going forward.

In a prepared statement, the CUSO said it acted properly and in good faith at all times in entering into and administering the student loan program.

“To the extent that ITT and its management engaged in any wrongful conduct, the CUSO was a victim of, not an accessory to, that misconduct,” the CUSO stated. “The CUSO has worked cooperatively with the CFPB and other government entities to reach a global resolution of issues related to the student loan program, and is gratified that these coordinated settlements are now becoming effective, and that they will be beneficial to ITT students.”

But the CFPB complaint filed against the CUSO last month painted a much different story. The federal agency said the CUSO provided substantial assistance to the unlawful conduct of ITT by its active involvement in the creation of the CUSO loan program, facilitating access to capital for the loans, overseeing the loan originations, and actively serving and managing the loan portfolio.

Nevertheless, just seven days after the CFPB filed its complaint against the CUSO in federal court, a settlement agreement was filed, which means the two organizations had been in private negotiations for weeks, months or even longer.

Donald E. Peterson, a consumer protection attorney based in Tampa, Fla., called the CFPB settlement “soft,” saying it had no teeth to it because the absence of a financial penalty will fail to send a strong deterrence message to other organizations from violating consumer protection laws.

Aki Estrella, a consumer protection and banking attorney in Chicago, Ill., also noted that the settlement did nothing to make the student victims whole, pointing out the prior CFPB leadership would have probably gone very aggressively in making these students whole.

However, she said this CFPB-CUSO case might signal how the federal agency will generally settle cases going forward.

“I think that this is really the first preview about where she’s [CFPB Director Kathy Kraninger] going,” Estrella said. “I think this is our first clue, but they [the CFPB] haven’t been going for restitution or federal money penalties pretty much since the [Obama-Trump] administrations changed.”

But James Kim, a consumer finance attorney for national law firm Ballard-Spahr LLP in New York, N.Y., and a former CFPB senior enforcement lawyer, didn’t agree with Estrella.

“I don’t necessarily think this is a great example about how the current administration and leadership is going to handle enforcement actions because of [this case’s] unusual moving parts and third-party involvement,” Kim said. “There are enough examples of consent orders under [former CFPB director Mick] Mulvaney and Kraninger to show pretty clearly that there are enforcement actions resulting in zero penalties or significantly smaller penalties.”

He pointed out that the settlement agreement that requires the discharge the $168 million in student loan debt will provide substantial relief for borrowers.

ITT filed for bankruptcy protection in September 2016 after the U.S. Department of Education curtailed its access to federal student aid, when it was revealed the organization was being investigated by several state and federal authorities for alleged fraud and deceptive marketing by allegedly steering students into predatory loans.

The business relationship began in February 2009 when Student CU Connect inked a controversial loan program agreement with ITT. The seven credit union members of Student CU Connect were the $1.6 billion Elements Financial Federal Credit Union (formerly Eli Lilly Federal Credit Union) in Indianapolis, Ind.; the $4.7 billion Bellco Credit Union in Greenwood Village, Colo.; the $2.8 billion CommunityAmerica Credit Union in Lenexa, Kan.; the $944 million Credit Union of America in Wichita, Kan.; the $880 million Directions Credit Union in Toledo, Ohio; the $4.2 billion Veridian Credit Union in Waterloo, Iowa and the $1.8 billion Workers Credit Union in Fitchburg, Mass.

In its complaint, the CFPB concluded the CUSO violated the Consumer Financial Protection Act by providing substantial assistance to ITT that engaged in unfair, deceptive and abusive acts and practices. In the settlement agreement, however, Student CU Connect neither admitted nor denied the CFPB’s claims.

According to the CFPB complaint, ITT offered student loans through a “temporary credit” program that covered the difference between the amount students obtained through federal government loans and grants and the cost of attending ITT. The temporary credit loan program was a noninterest loan, but it had to be paid in full nine months after students enrolled. Many students were unlikely to repay these short-term loans because they had poor credit, which ITT and the CUSO knew.

About $149 million, or 79% of the CUSO’s loan portfolio, included students who qualified for the temporary credit loan program.

ITT then used the CUSO loan program to offload these short-term loans, and Student CU Connect knew its loan program was to convert ITT’s temporary credit loan program into revenue for ITT, according to the CFPB complaint.

Projection models developed by ITT and the CUSO predicted that about 30% of the student debt was expected to default. What’s more, for the largest category of ITT students, those with poor credit scores below 600, the projected default rate was nearly 60%.

Moreover, almost half of these students were charged high interest rates on their loans that ranged from 13.75% to 16.25%, plus a 10% origination fee. Recent increases in the prime rate also hiked the interest rates of these CUSO loans, which deepened the debt burden even more for student borrowers, the CFPB noted in its complaint. About 8,600 students were affected by these high-interest, high-fee loans.

Despite the significant default rates, Student CU Connect continued to provide loans in part because of ITT’s risk share agreement, which kicked in when charge-offs exceeded certain loss thresholds. This required ITT to make a series of payments to the CUSO, which essentially incentivized it to continue to provide high-interest, high-fee loans.

Even when the CUSO became aware that the default rate would be much higher than anticipated, it kept making these high-interest, high-fee loans available.

But the CFPB complaint also revealed another troubled aspect of this case.

“During the period when the CUSO loan program was actively making loans, numerous students lodged complaints with the CUSO loan origination agent and the program’s servicers claiming that they did not realize they had taken out loans, were not aware of the terms of the loans, were not aware that the loans were not federal loans and that ITT Financial Aid employees had used high pressure tactics during their financial aid appointments,” the complaint read. “Despite knowledge of numerous consumer complaints, the CUSO continued funding, servicing and collecting CUSO loans in accordance with the loan program agreement with ITT.”