INDIANAPOLIS—As one of a number of credit unions that just reached a settlement with the CFPB to forgive nearly $170 million in student loan debt, Elements Financial says it did not intend to harm borrowers as a result of its relationship with the CUSO it helped create, Student CU Connect.
Elements, during the time it was still known as Eli Lilly FCU, was a key player in establishing the CUSO, along with a half-dozen other CUs, all of which are also part of the agreement with the CFPB. As CUToday.info reported, the CFPB said it has reached a settlement with Student CU Connect that requires loan forgiveness of $168 million. The CUSO was created to hold and manage private loans for students of the now defunct ITT Technical Institute.
The CUSO was created by what is now Elements Financial, along with Bellco Credit Union, Credit Union of America, Directions Credit Union and Veridian Credit Union.
Settlement Terms
Under the terms of the proposed stipulated judgment, Student CU Connect must stop collecting on all outstanding loans, discharge all outstanding loans, and ask all consumer reporting agencies to which the CUSO furnished information to delete tradelines relating to its loans. The order also requires the CUSO to provide notice to all consumers with outstanding loans that their debt has been discharged and is no longer owed, and that the CUSO is seeking to have the relevant tradelines deleted.
Forty-four states plus the District of Columbia have also settled with the CUSO on the same terms. The CUSO is not related to the Washington-based student lending CUSO Student Choice.
In its action against Student CU Connect, the CFPB alleged many borrowers were pressured into high-rate loans they were unable to repay.
In an e-mailed statement from New York-based Foley & Lardner LLP, which is representing Elements, the credit union stated, “The CUSO, Elements, and the other related CUSO parties at all times acted properly and in good faith in entering into and administering the student loan program. To the extent that ITT and its management engaged in any wrongful conduct, the CUSO and these other parties were victims of, not accessories to, that misconduct,” stated Foley & Lardner’s Susan J. Schwartz in the email. “The CUSO has worked cooperatively with the CFPB and other government entities to reach a global resolution of issues related to the student loan program, and is gratified that these coordinated settlements are now becoming effective, and that they will be beneficial to ITT students.”
Write-Off Accounted For
Foley & Lardner added that Elements has already accounted for the write-off, not disclosing the amount.
“In accordance with Generally Accepted Accounting Principles, Elements Financial already has written down its investment in the CUSO and, in anticipation of this settlement, has fully reserved for it. Therefore, the settlement will have no negative impact on earnings in 2019,” Schwartz said.
NCUA declined to comment when asked if it was concerned over the size of the write-down.
A review of Element Financial's latest 5300 Call Report reveals sound financials. The CU’s assets have grown steadily over the last five years, from $1.2 billion in 2015 to $1.7 billion at the close of March 2019.
The CU made $10.7 million last year and $3.1 million through the first quarter of this year. Net worth, which had held steady over the last four years at 8.8%, however, dropped to 8.17% at the close of Q1 2019.
The Bureau filed a complaint and a proposed stipulated judgment in federal district court for the Southern District of Indiana alleging that Student CU Connect provided substantial assistance to ITT Educational Services, Inc. (ITT) in engaging in unfair acts and practices. ITT operated ITT Technical Institute until it filed for bankruptcy and ceased operations in 2016. The Bureau’s complaint alleges Student CU Connect was actively involved in the creation and the implementation of the CUSO loan program. The complaint further alleges that ITT induced its students to take out the loans by a variety of means, and that CU Student Connect knew or was reckless in not knowing that many student borrowers did not understand the terms and conditions of the loans and could not afford them.
According to the CFPB complaint, the interest rate for Student CU Connect loans, which carried a 10-year term, was based on a student’s credit score.
“For borrowers with credit scores under 600, the interest rate initially went as high as the prime rate plus 10.5%, with an origination fee as high as 10%. Starting in or around April 2011, borrowers with credit scores under 600 were charged an interest rate of prime plus 13%, in addition to the 10% origination fee,” the complaint reads. “For most of the period since the loans were made, the prime rate has been 3.25%; thus the effective interest rate for borrowers with credit scores under 600 has been 13.75% or 16.25%. Approximately 46% of the CUSO borrowers had credit scores under 600, and thus were subject to interest rates of 13.75% or 16.25% and origination fees of 10%. Recent increases in the prime rate have increased the interest rates of the CUSO loans, further impacting borrowers.”
Bankruptcy Filing
In September 2016, ITT filed for bankruptcy protection and ceased all operations. In a filing in bankruptcy court in January 2017, Student CU Connect projected a gross cumulative default rate of 94% for the loans it made, according to the CFPB, which alleges the CUSO proceeded to make loans even though it was aware they would go into default.
As CUToday.info earlier reported here, the credit union owners of the CUSO also recently settled another complaint.