WASHINGTON, D.C. – The Consumer Financial Protection Bureau said it has reached a settlement with Student CU Connect, a CUSO owned by seven credit unions, that requires loan forgiveness of nearly $170 million. The CUSO was created to hold and manage private loans for students of the now defunct ITT Technical Institute.
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 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 CUSO is seeking to have the relevant tradelines deleted. The total amount of loan forgiveness is currently estimated to be $168 million, according to the CFPB.
The CUSO was created by what is now Elements FCU, along with Bellco Credit Union, Credit Union of America, Directions Credit Union and Veridian Credit Union.
Forty-four states plus the District of Columbia have also settled with CUSO today on the same terms. The CUSO is not related to the Washington-based student lending CUSO Student Choice.
Allegations Made
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.
Forty-four states plus the District of Columbia have also settled with CUSO today on the same terms.
Pricing of Loans
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.”
ITT Files For Bankruptcy
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.
The CFPB complaint is available at: https://files.consumerfinance.gov/f/documents/cfpb_student-CU-connect-cuso-llc_complaint_2019-06.pdf
The CFPB proposed stipulated judgment is available at: https://files.consumerfinance.gov/f/documents/cfpb_student-CU-connect-cuso-llc_proposed-stipulated-judgment_2019-06.pdf