Banking and Finance Law Daily CFPB sues lending conduit for aiding Corinthian Colleges' predatory lending
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Friday, August 18, 2017

CFPB sues lending conduit for aiding Corinthian Colleges' predatory lending

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau filed a complaint and proposed settlement in an Oregon federal court, against Aequitas Capital Management, Inc. and related entities, for aiding the Corinthian Colleges’ predatory lending scheme.

Aequitas Capital Management, Inc. was a private equity firm that purchased or funded about $230 million in Corinthian Colleges’ private loans, branded by the school as "Genesis loans." On March 10, 2016, the Securities and Exchange Commission took action against Aequitas, alleging Aequitas, and related entities, had defrauded more than 1,500 investors. A receiver was appointed to wind down Aequitas and distribute its remaining assets (see Securities Regulation DailyMarch 11, 2016).

Abusive acts and practices. The Bureau’s complaint alleged that Aequitas violated the Dodd-Frank Act’s prohibitions against abusive acts and practices by funding and supporting Corinthian’s predatory Genesis loan program. Specifically, the CFPB claimed that Aequitas and Corinthian plotted to make it seem as if the school was getting outside revenue in the form of the Genesis loans, when in reality Corinthian was paying Aequitas to support the loan program. Corinthian and Aequitas engaged in this arrangement to satisfy Corinthian’s obligations under the 90/10 rule, a federal law requiring for-profit schools to obtain at least 10 percent of their revenue from other sources in order to get federal loan dollars.

Loan forgiveness and reduction. Under a settlement agreement, that the federal court approved, Aequitas and related entities would be required to:

  • forgive Genesis loans in connection with certain closed schools;
  • forgive Genesis loans in default; and
  • reduce all other Genesis loans by more than half.

By the settlement’s terms, about 41,000 Corinthian students could be eligible for approximately $183.3 million in loan forgiveness and reduction.

Another step. Commenting on the Bureau’s action, CFPB Director Richard Cordray said, "Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare." He added, "Today’s action marks another step by the Bureau to bring justice and relief to the borrowers still saddled with expensive student loan debt. We will continue to address the illegal lending practices of for-profit colleges and those who enable them."

In September 2014, the CFPB filed a lawsuit against Corinthian Colleges, Inc., alleging that it used fraudulent statistics and false promises to enroll students, induced students to take out predatory loans to pay inflated tuition, and then used illegal tactics to collect the loans (see Banking and Finance Law Daily, Sept. 16, 2014).

Following the Corinthian Colleges lawsuit, Zenith Education Group and its parent, ECMC Group, Inc., reached a settlement with the Bureau and Department of Education that released the two companies from any possible liability for the actions of Corinthian Colleges, Inc., a for-profit education company from which they purchased a number of schools. As part of the settlement, Zenith and ECMC were to provide more than $480 million in loan forgiveness to Corinthian’s borrowers (see Banking and Finance Law Daily, Feb. 3, 2015).

Companies: Aequitas Capital Management, Inc.; Corinthian Colleges, Inc.; ECMC Group, Inc.; Zenith Education Group

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