The public is financing a mass debt-forgiveness scheme largely in secret for distressed private student loan borrowers who attended schools once owned by Corinthian Colleges Inc. A top Democrat in Congress is calling for more information.
The Consumer Financial Protection Bureau and the Obama administration announced the $7.5 million plan this month in a package of reforms designed to placate opposition to the government-orchestrated sale of more than 50 failing for-profit schools to debt collector ECMC Group.
The money was originally intended for the Department of Education. But the department, desperate for the deal to be finalized to avoid school closures, directed the cash to investors, who own as much as $505 million in unpaid private student loans once owned by Corinthian. The department passed along the funds in order to gain assurances from the consumer bureau that it wouldn’t hold ECMC responsible for alleged wrongdoing committed at campuses it bought from Corinthian.
ECMC, better known as the owner of Educational Credit Management Corp., and the federal government say the move would immediately reduce borrowers’ loan balances by 40 percent. Eventually, over an unspecified number of years, some $480 million in debt would be forgiven, according to the scheme. But few details have been made public.
Rep. Maxine Waters (D-Calif.), the ranking member on the House Financial Services Committee, on Wednesday asked federal regulators and ECMC to publicly identify the loan servicers responsible for working with borrowers, according to copies of her letters. Waters said borrowers could then verify whether they’ve had their loan balances cut and report any issues they encounter.
Neither Jenni LeCompte, a Glover Park Group executive who helped shepherd the deal, nor Jenny Anderson, an ECMC spokeswoman, responded to requests for comment. Neither did CFPB spokeswoman Moira Vahey.
The loan-forgiveness plan has been shrouded in secrecy since it was announced Feb. 3. ECMC, the consumer bureau and the Education Department have all refused to detail how they arrived at the $480 million figure, how many borrowers will benefit, which investors ultimately will reap the rewards of the publicly financed plan, or the duration of the forgiveness scheme.
In addition, the CFPB has given borrowers saddled with the debt conflicting messages, according to a Feb. 3 bulletin from the bureau. The consumer bureau has told borrowers that negative information related to the loans will be removed from their credit reports, but it also advises them to make payments on the loans to avoid future negative marks on their credit reports.
Corporate filings from Corinthian strongly suggest that most of the loans, taken out by students to attend Corinthian schools such as Everest, Wyotech and Heald, were in default and judged to be largely uncollectible. But a 2005 law made it difficult for borrowers to discharge private student loans in bankruptcy, which is why borrowers continue to be hounded long after they've defaulted.
For example, in one of its two main loan programs, named Genesis, Corinthian charged off more than half of its more than $450 million in notes, an event the company said occurred only after a borrower missed nine months of payments, according to the company’s filings with the Securities and Exchange Commission. In its other loan program, Corinthian only acquired the loans after the borrower failed to make payments for three straight months.
Corinthian’s student lending program generated losses for the company during the three most recent years for which the company produced annual financial reports. Student advocates say Corinthian created the program to enable the company to comply with federal regulations that prohibit for-profit colleges from generating more than 90 percent of their revenues from federal student aid.
Corinthian sold nearly all of the student loans it held in August for $19 million, according to the CFPB, and told investors it suffered as much as $59 million in losses on the transaction. The accounting suggests that Corinthian valued the loans at around 15 cents on the dollar.
Turnstile Capital Management, a debt buyer that purchases private student loans deemed uncollectible by other lenders, bought the Corinthian notes, according to people familiar with the deal. Ken Ruggiero, chief executive of education finance company Goal Structured Solutions, which owns Turnstile, declined to comment through his assistant.
At some point after the sale, the loans were transferred to a Delaware entity named Balboa Student Loan Trust. It is that trust that will be getting $7.5 million originally meant for the Education Department, according to securities filings.
Officials at the Education Department and CFPB have declined requests to explain why the public is financing debt reductions on private student loans for borrowers who have largely defaulted on them.
The Education Department directed the loan forgiveness plan as part of an effort to get the federal consumer bureau to assure ECMC that it won’t hold the company responsible for any alleged wrongdoing committed at the campuses it purchased from Corinthian, according to securities filings and people familiar with the transaction.
ECMC had sought the assurances due to a pending CFPB lawsuit against Corinthian and fear that the consumer watchdog would seek to hold it responsible as the successor entity to Corinthian. The CFPB alleges that Corinthian systematically misled students into taking out unaffordable private student loans by falsely advertising bogus job prospects to lure them to its schools. Corinthian has disputed the allegations.
Some of the campuses cited in the CFPB’s complaint as having engaged in dodgy behavior were purchased by ECMC. Since ECMC now owns the schools, the legal theory goes, the company could have been on the hook for liabilities such as future enforcement actions by government regulators.
Instead, the federal consumer watchdog let ECMC off the hook. The consumer bureau says its lawsuit against Corinthian is ongoing. Among the CFPB’s demands are to have the company’s private student loans rescinded, which would effectively cancel the loans and make it a crime for anyone to collect on them.
In effect, ECMC bought amnesty from the federal consumer bureau using government money.
Student advocates cheered the debt forgiveness plan, but some questioned whether federal authorities could have achieved the same results without sacrificing public dollars.
For example, while the CFPB was preparing its lawsuit against Corinthian, and during a period in which an Education Department monitor was overseeing virtually all business dealings at Corinthian, the department allowed the company to sell the $505 million pool of loans to Turnstile on Aug. 20. The next day, according to Corinthian, the consumer bureau met with the company and demanded it stop selling its private student loans to other parties, one of many conditions that could have helped the company avoid a lawsuit.
The consumer bureau was said to have been surprised by the debt sale to Turnstile, according to people familiar with the transaction. The CFPB, after all, was seeking to have the loans canceled -- an effort that would’ve been easier had Corinthian held onto the notes. Its lawsuit was filed Sept. 16.
“The outrageous thing to me is that the Education Department let the sale happen,” said Maura Dundon, senior policy counsel at the Center for Responsible Lending.