Bruce Horovitz

USA TODAY

Lawsuit says ITT pushed students into costly student loans likely to fail

Bureau%27s first action against for-profit college industry company

ITT claims charges are %27without merit%27

The Consumer Financial Protection Bureau on Wednesday sued ITT Educational Services, accusing the national college chain of predatory lending and laying down a stern warning to other for-profit colleges.

"ITT marketed itself as improving consumers' lives but it was really just improving its bottom line," said Richard Cordray, director of the U.S. agency.

"We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. Today's action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics," he said in a CFPB statement.

The lawsuit marks the CFPB's first public enforcement action against a company in the for-profit college industry.

ITT's comments were very limited on Wednesday. "We don't comment on pending litigation, other than to say that we believe that the bureau's claims are without merit and that we intend to vigorously defend ourselves against the charges," said Nicole Elam, vice president of government relations, in a statement.

The company's stock fell on the news of the lawsuit, closing down 9% to $32.40 a share Wednesday.

ITT owns and operates more than 135 ITT Technical Institutes and Daniel Webster College. ITT/ESI serves more than 55,000 students at its campuses in 39 states and online.

ITT's tuition costs rank among the highest in the country in the for-profit industry, says CFPB. Earning an associate's degree at ITT can cost more than $44,000 and bachelor's degree programs can cost up to $88,000, the bureau says. That is significantly higher than the cost of similar degrees at a community college or a public four-year institution, says CFPB.

The bureau's complaint alleges that ITT encouraged new students to enroll at ITT by providing them so-called "tuition gap" funding with a zero-interest loan called "Temporary Credit." This loan typically had to be paid in full at the end of the student's first academic year. But, the suit claims, ITT knew from the outset that many students would not be able to repay their balances or fund their next year's tuition gap.

The CFPB alleges that between July and December 2011, ITT pushed students into repaying their temporary credit and funding their second-year tuition by taking out high-cost private student loans. Students were rushed through the loan-application process without getting a fair chance to understand the obligations they were taking on.

Borrowers with credit scores under 600, typical for many ITT students, paid 10% origination fees and interest rates as high as 16.25%, according to the CFPB's complaint.

ITT knew many loans would not be repaid, projecting a 64% default rate on its students' private loans, the complaint says.