ITT Educational Services, the defendant in the CFPB’s first enforcement action against a for-profit education company, has filed a motion seeking dismissal of the CFPB’s complaint. Filed this past February in an Indiana federal court, the CFPB’s complaint accused ITT of violating the Dodd-Frank ban on unfair, deceptive, or abusive practices (UDAAP) by misleading borrowers about job placement rates and salaries after graduation, misrepresenting information about accreditation and the transferability of credits, and strong-arming students into high-interest loans that the company knew students would be unable to repay.
The complaint also alleged that ITT violated the Truth in Lending Act by failing to accurately disclose finance charges. In particular, the complaint alleges that ITT offered graduating students the ability to repay their loan balance in a lump sum with a discount applied, or in installments without a discount. The CFPB alleges that the “foregone discount” associated with the installment plan constituted a finance charge that should have been disclosed to the borrowers. The CFPB is seeking an injunction against ITT’s allegedly improper acts, as well as unspecified civil penalties and restitution for all affected consumers.
In its brief in support of its motion to dismiss, ITT argues that the lawsuit violates the U.S. Constitution. First, ITT alleges that the CFPB is an unconstitutional entity because there is no meaningful Presidential control over the CFPB’s Director and no Congressional control over the CFPB’s funding which is not subject to the appropriations process. (Similar constitutional arguments were rejected earlier this year by a federal court in Washington, D.C.) Second, ITT alleges that the lawsuit violates due process because regulated parties do not have fair notice of what constitutes “unfair” or “abusive” acts or practices.
In its complaint, the CFPB alleged that ITT was subject to its enforcement authority in various ways, including in ITT’s capacity as (1) a broker (brokering loans offered by other lenders), (2) a financial advisory service (providing advice to students through ITT’s financial aid staff), and (3) a service provider to other lenders (based on its providing a “material service” to other lenders by participating in the design, operation, or maintenance of their loans).
In moving to dismiss the complaint, ITT argues that it is not a “covered person” under the Consumer Financial Protection Act (Dodd-Frank Title 10) subject to the CFPB’s UDAAP enforcement authority. According to ITT, the assistance it provided students in connection with obtaining loans did not constitute “brokering” under the CFPA but instead was assistance it was statutorily-required to provide students in securing financial aid. It asserts the CFPB’s jurisdiction over “financial advisory services” is limited to “services so closely related to
banking… as to be a proper incident thereto” and that any attempt by the CFPB to stretch financial advisory services “to cover the normal assistance that all college financial aid employees provide to students-[a service] clearly not [related to] banking-would be unlawful.”
ITT also argues that it is not a service provider to other lenders because (1) the third-party loan programs offered to its students were designed in 2008 and 2009 and the CFPB cannot exercise enforcement authority over ITT for designing a consumer financial product or service before July 21, 2011, the date on which the CFPB obtained its enforcement authority, and (2) providing financial aid assistance to students is not equivalent to providing a “material service” to other lenders in connection with operating or maintaining their loans.
With regard to the merits of the CFPB’s UDAAP claims, ITT argues that the complaint fails to allege adequately that ITT engaged in unfair or abusive acts or practices. It also argues that the CFPB’s TILA claim is substantially time-barred because only claims arising after February 16, 2013, one year before the complaint was filed, can be heard and the complaint says nothing specific about ITT’s conduct after that date. ITT further argues that the TILA claim is meritless because the installment plans offered to graduating students were a standard settlement of existing debt that is excluded from Regulation Z.
In its brief, ITT warns that the CFPB seeks to “create a class of prospective students who are too dangerous to service-and therefore cannot be educated” which is “contrary to the best interests of disadvantaged students, lacks any discernible limits, and should be rejected.”