CFPB's First For-Profit Salvo

The Consumer Financial Protection Bureau is investigating Corinthian Colleges Inc., the company said last week, with a broad inquiry that may revolve around Corinthian’s institutional student loan program.

Details about the investigation are skimpy. The CFPB isn’t talking. And Corinthian, a for-profit-college holding company, is in the early stages of responding to the bureau’s questions. But the company released some information about the inquiry last week in a corporate filing and a call with investors.

The CFPB is seeking to “determine whether for-profit postsecondary companies, student loan origination and servicing providers, or other unnamed persons, have engaged or are engaging in unlawful acts or practices relating to the advertising, marketing or origination of private student loans,” according to the Corinthian filing, which apparently quotes from the CFPB’s civil investigative demand.

It was not clear if the bureau is investigating other for-profits. Corinthian has caught flak for its lending program, in part because company officials have been open about the high risk of default on those loans.

The CFPB’s interest in Corinthian is likely to draw plenty of attention, mostly because of expectations by consumer advocates (and fears of for-profit officials) that the agency would pursue the sector. Both camps are also uncertain about how the bureau could pursue the industry, and how aggressive it might be. As the Beltway’s new regulator, the CFPB’s powers have yet to be tested. And its every move is being watched closely.

Congress created the bureau in the recession’s wake, with the strong support of the Obama administration. Officially launched last year, the CFPB’s mandate is to “make markets for consumer financial products and services work for Americans.”

It seeks to pursue that goal partially through the release of better consumer information. But the bureau also has enforcement powers and compares itself to a “neighborhood cop on the beat.” Consumer advocates hope it will be able to stay above the sway of vested interests, which some say have hobbled traditional regulators like the Securities and Exchange Commission.

The CFPB has authority over most non-federal student loans, an oversight power that some for-profits resisted. Student lending has been an overt focus for the bureau, which launched a complaint system on private lending in March, and has been studying student borrowing patterns. The CFPB has also made rumblings about for-profit colleges' recruitment of veterans, and hired Holly Petraeus as its assistant director for servicemember affairs. Her husband, David Petraeus, is director of the Central Intelligence Agency and a retired four-star general in the U.S. Army.

Richard Cordray, the bureau’s director, has repeatedly criticized institutional student loans, with language that appears to reference a 2009 Corinthian disclosure.

“We’re seeing some of the schools anticipating as much as a 50 percent default rate on their students, yet they’re making those loans anyway,” Cordray told The New York Times in January.

Wider Investigation?

Corinthian enrolls 93,000 students at its Everest, WyoTech and Heald College campuses. The company created its alternative lending program in 2008, as the financial crisis was peaking and “after private lenders stopped making loans to our students,” said Kent Jenkins, a company spokesman, in an email.

Non-federal loans also help keep Corinthian and other for-profits from running afoul of the so-called “90/10 Rule,” a government requirement that the colleges do not receive more than 90 percent of their total revenue from federal financial aid sources, like Pell Grants or Stafford loans.

Jenkins said Corinthian’s institutional loans are generally small, about $3,600 on average, and help students handle expenses not covered by federal aid.

“This program has enabled tens of thousands of students to attend or remain in school and get the training and skills they need to be more employable,” Jenkins said.

But those loans come with a high risk of default, in part because Corinthian enrolls large numbers of lower-income students. In a February 2009 call with investors, company officials said they expected an institutional loan default rate of about 50 percent. The National Consumer Law Center cited that disclosure in a critical report on for-profit student lending, noting that Corinthian’s estimated loan default rate later went up.

The 50 percent default rate was subsequently criticized by other consumer advocates and Cordray.

A CFPB spokeswoman, however, cautioned against drawing a link between Cordray’s statements on for-profit loan default rates and the investigation.

“Director Cordray's previous remarks should not be interpreted as comment or confirmation” related to the inquiry, the spokeswoman said in an e-mail.

Deanne Loonin, a lawyer with the consumer law center and director of its Student Loan Borrower Assistance Project, said there are several areas the CFPB could pursue with for-profit institutional lending. The agency might scrutinize for-profits’ underwriting of loans, their potentially inadequate evaluation of borrowers' ability to repay and disclosures about loans. The investigation might also be a broad, fact-finding effort, Loonin said, with an eye toward enforcement and work with state regulatory agencies.

Not all for-profits make institutional loans. Loonin said the University of Phoenix does not, for example. Corinthian and ITT Educational Services, Inc., which has received similar scrutiny for its lending, have some of the largest loan programs, she said.

As for the small average size of Corinthian’s loans, Loonin said: “I don’t see that in any way being a shield from oversight.”

Corinthian officials have hinted that they may push back at the investigation’s scope, which they called “very broad” last week in a call with investors. It includes extensive document requests relating to the company's student lending and other business practices, officials said.

“We are responding to the Consumer Financial Protection Bureau while maintaining our right to object to the inquiry,” said Jenkins, echoing an earlier statement by Jack D. Massimino, Corinthian’s CEO. “We believe that our acts and practices relating to student loans are lawful and essential to preserving our students’ access to post-secondary education.”