CFPB Sues For-Profit College Chain ITT for Predatory Lending

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1 CFPB Sues For-Profit College Chain ITT for Predatory Lending May 20, 2014 Moderator Alan S. Kaplinsky Practice Leader Consumer Financial Services Panelists John L. Culhane, Jr. Consumer Financial Services Christopher J. Willis Consumer Financial Services Beth Moskow-Schnoll Consumer Financial Services White Collar Defense/ Internal Investigations Copyright 2014 Ballard Spahr LLP. All rights reserved.

Consumer Financial Services 215.864.8535 culhane@ballardspahr.com Christopher J. Willis Consumer Financial Services 678.420.

2 Resources CFPB Monitor Subscribe to our ABA award-winning blog at E-Alerts Subscribe at (click subscribe and indicate your areas of interest) Mortgage Banking Update Subscribe at (click subscribe and choose Mortgage Banking as your area of interest) Questions? 2

3 Upcoming Webinars Campus Banking Products: A Regulatory Action Update May 22 Lessons Learned from the CFPB s First 35 Enforcement Cases May 29 CFPB Debt Collection ANPR - Arbitration June 3 Cybersecurity Best Practices for Financial Institutions June 17 Elder Abuse Prevention June 18 Mortgage Servicing: Important Legal and Accounting Considerations A joint webinar by Ballard Spahr and BDO USA June 26 Register for upcoming webinars at or by ing questions@ballardspahr.com. Request materials from past webinars by ing questions@ballardspahr.com. 3

Mortgage Servicing: Important Legal and Accounting Considerations A joint webinar by Ballard Spahr and BDO USA June 26 Register for upcoming

4 Your Presenters Alan S. Kaplinsky John L. Culhane, Jr. Beth Moskow-Schnoll Christopher J. Willis 4

5 CFPB Enforcement Authority Section 1031(a) authorizes CFPB to use its enforcement authority to prevent UDAAPs Section 1036(a) declares that UDAAPs and actions violating Federal consumer financial law are unlawful Section 1054(a) authorizes CFPB to bring a civil suit against any person who violates a Federal consumer financial law, which includes Dodd Frank Section 1055 authorizes legal or equitable relief (broadly defined), recovery of costs by CFPB, and assessment of civil money penalties 5

CFPB to bring a civil suit against any person who violates a Federal consumer financial law, which includes Dodd Frank

6 CFPB Enforcement Authority (cont.) Complaint alleges numerous commissions of UDAAPs and also alleges violations of TILA Complaint further alleges four grounds for treating ITT as a covered person offering or providing consumer financial products or services 1. Lender 2. Broker 3. Provider of financial advisory services 4. Service provider to other lenders 6

Complaint further alleges four grounds for treating ITT as a covered person offering or

7 Marketing Practices at Issue (UDAAP) ITT allegedly misrepresented its ability to place students in desirable jobs with good salaries ITT allegedly misrepresenting its accreditation and the transferability of ITT credits ITT allegedly used aggressive and controlling tactics to recruit and enroll students and to convince them to borrow ITT allegedly rushed students through the complex process of enrollment and financial aid ITT coerced students to take out private student loans to repay it for the gap financing it provided 7

controlling tactics to recruit and enroll students and to convince them to borrow ITT allegedly rushed students through the complex

8 Financing Practices at Issue (TILA) Alleged practices involved a Temporary Credit provided as gap financing Temporary credit was a no-interest loan payable in a single lump sum payment at the end of the school year Students with outstanding balances at graduation were offered a 25% discount for payment in full Students who could not make the discounted payment were offered monthly installment plans (6-78 months) Forgone discount was alleged by CFPB to be a finance charge 8

outstanding balances at graduation were offered a 25% discount for payment in full Students who could not make the

9 Constitutional Arguments CFPB is unconstitutional - No Presidential oversight - No Congressional control of funding - Other defects Violation of due process - Lack of fair notice as to what conduct is prohibited - UDAAP definitions are ambiguous - No meaningful administrative guidance 9

Violation of due process - Lack of fair notice as to what conduct is

10 Jurisdictional Arguments ITT is not a covered person not a lender (did not sign contracts with students or receive fees or interest) and financial aid does not involve broker or financial advisory services ITT is not a service provider relevant activities in connection with third party loan programs occurred in 2008 and 2009 ITT is a seller of nonfinancial goods and services exempt from CFPB jurisdiction under Section 1027(a) note that this is a defense to UDAAP claims only 10

relevant activities in connection with third party loan programs occurred in 2008 and 2009 ITT is a seller of

11 Deficient Pleading Arguments Failure to plead adequate factual support for alleged unfair practices as required by U.S. Supreme Court decisions in Twombly and Iqbal In particular, no factual allegations showing: 1. Substantial injury by students 2. Causation 3. Injury not reasonably avoidable 4. Harm outweighed by any benefits 11

Supreme Court decisions in Twombly and Iqbal In particular, no factual allegations

12 Deficient Pleading (cont.) Failure to likewise plead adequate factual support for alleged abusive practices In particular, no factual allegations showing: 1. ITT took unreasonable advantage of students 2. Students were unable to protect their interests 3. ITT took unreasonable advantage of students reasonable reliance on ITT to act in their interests 12

particular, no factual allegations showing: 1.

13 State AG Actions and Section 1042 Numerous actions against for-profit schools, including actions by CT, KY, MA, NY, and others KY attorney general has been especially active and is apparently taking the lead with multistate actions IL attorney general has recently sought to invoke Section 1042 in its ongoing action against Alta Colleges Section 1042 authorizes states to sue in federal or state court to enforce Title 10 of Dodd Frank and regulations issued thereunder and to seek remedies under Dodd Frank or state law is abusive the attraction here or is it extraterritorial application or both? 13

ongoing action against Alta Colleges Section 1042 authorizes states to sue in federal or state court to enforce Title 10 of Dodd Frank and regulations

14 Implications The Student Loan Market Some implications for colleges and universities 1. CFPB jurisdiction 2. School marketing 3. Financial aid Some implications for originators of private student loans 1. School eligibility 2. Loss mitigation options Some implications for student loan servicers 14

Financial aid Some implications for originators of private student loans 1.

15 Implications All Markets ITT complaint tees up ongoing practices of the CFPB that many have found objectionable 1. Bald assertions that conduct is unfair, deceptive, or abusive without CFPB articulating the elements of such claims 2. Pushing the boundaries of the law through enforcement actions rather than through regulation or reasoned administrative guidance Fully litigated case may not completely derail such practices but could slow them down considerably 15

2. Pushing the boundaries of the law through enforcement actions rather than through regulation or reasoned

16 Thank you for joining us! Alan S. Kaplinsky Practice Leader Consumer Financial Services John L. Culhane, Jr. Consumer Financial Services Christopher J. Willis Consumer Financial Services Beth Moskow-Schnoll Consumer Financial Services White Collar Defense/ Internal Investigations

8535 culhane@ballardspahr.com Christopher J. Willis Consumer Financial Services 678.420.

17 Moderator Alan S. Kaplinsky Practice Leader of the Consumer Financial Services Group at Ballard Spahr Devotes his practice to counseling financial institutions with respect to bank regulatory and transactional matters and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters) First President of the American College of Consumer Financial Services Lawyers Former Chair of the American Bar Association Committee on Consumer Financial Services of the Business Law Section Co-Chair of the Practising Law Institute's Annual Consumer Financial Services Institute, now on its 18th year Has been named as a tier one banking and consumer financial services lawyer in the 2006 through 2013 editions of Chambers USA Has been named in The Best Lawyers in America under financial services regulation law and banking and finance litigation from 2007 to 2013 Named the 2012 Philadelphia Lawyer of the Year for Litigation-Banking & Finance 17

and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters) First President of the American College of Consumer Financial Services

18 Panelist John L. Culhane, Jr. Partner at Ballard Spahr and a member of the firm s Consumer Financial Services, Mortgage Banking, and Bank Regulation and Supervision Groups as well as the firm s Fair Lending Task Force Compliance practice emphasizes counseling clients on the development and implementation of innovative loan, leasing, and payment programs, and includes counseling on fair lending, servicing and collection issues Regulatory practice includes preparing clients for banking agency and CFPB targeted and full spectrum compliance examinations as well as assisting in the defense of consumer class actions, attorney general investigations, and agency enforcement actions Charter member of the American College of Consumer Financial Services Lawyers Former Chair of the Subcommittee on Fair Lending of the ABA Committee on Consumer Financial Services 18

practice emphasizes counseling clients on the development and implementation of innovative loan, leasing, and payment programs, and includes counseling on fair lending, servicing and collection

19 Panelist Beth Moskow-Schnoll Partner at Ballard Spahr and member of the firm s Consumer Financial Services, Mortgage Banking, and White Collar/Investigations Groups Represents major financial institutions in lawsuits asserting a wide variety of claims and advises clients on compliance programs and in responding to government investigative and enforcement actions Served for more than a decade as a federal prosecutor with the U.S. Attorney's Office for the District of Delaware, where she investigated and prosecuted financial crime cases involving bank fraud, money laundering, and mortgage fraud Has tried to verdict dozens of cases in federal district court Has convinced the government to decline prosecution of clients in matters involving allegations of financial and other fraud, and has conducted internal investigations for clients in numerous industries 19

decade as a federal prosecutor with the U.S.

20 Panelist Christopher J. Willis Partner at Ballard Spahr and a member of the firm s Consumer Financial Services and Mortgage Banking Groups Counsels financial institutions on regulatory matters, advises them on compliance with consumer financial services laws, and defends them in both individual and class action lawsuits, as well as governmental enforcement actions (including CFPB investigations) Chairs the firm s Fair Lending Task Force and Collection Documentation Task Force Named in The Best Lawyers in America for banking and finance litigation and commercial litigation for 2013 Member of the American College of Consumer Financial Services Lawyers Frequent author and speaker on issues relating to consumer financial services regulation and litigation 20

compliance with consumer financial services laws, and defends them in both individual and class action lawsuits, as well as governmental enforcement actions (including CFPB investigations)

Advertising Dos and Don'ts for Mortgage Lenders and Brokers

Advertising Dos and Don'ts for Mortgage Lenders and Brokers December 6, 2012 Alan S. Kaplinsky, Practice Leader Consumer Financial Services Group 215.864.8544 kaplinsky@ballardspahr.com November 5, 2012