by Maura Dundon (Senior Policy Counsel, Center for Responsible Lending)
The sale of Corinthian Colleges (the for-profit college chain that operates Everest, WyoTech, and Heald) to the student loan debt collector ECMC is poised to close today. The deal has raised serious concerns about the fate of Corinthian students and whether the new entity represents a true reform for student borrowers. [Update: It's being reported that the closing has been postponed through February 2.]
Corinthian has been the subject of numerous accusations of abusive conduct and law enforcement investigations into consumer fraud allegations. With Corinthian suffering severe financial instability, the Department of Education is midwifing the sale to ECMC — which itself has a record of consumer abuse allegations against it—instead of allowing Corinthian to fail. Despite serious concerns raised by consumer, education, civil rights, and student groups, and by legislators, the Department of Education is set on seeing the deal through.
As part of the deal, which must be approved by the Department of Education and other regulators, Corinthian will be transformed from a for-profit into a non-profit, evading the bulk of regulations that apply to career college programs. This includes the “gainful employment” rule that the Obama administration has worked so hard to put into place.
Among the many troubling aspects of the deal, ECMC plans to perpetuate Corinthian’s use of forced arbitration agreements with students, suppressing their rights to bring their legitimate complaints to court and hindering important information that would otherwise reach regulators. Arbitration agreements are common at for-profit colleges, but they are essentially unheard of in private non-profit and public colleges. The deal would already limit ECMC’s successor liability for Corinthian’s conduct – so the arbitration agreements are clearly intended to reduce ECMC’s liability for its own conduct.
The Department of Education says that ECMC is “committed to giving students a new start and more opportunities for success,” but the insistence on arbitration suggests that ECMC expects to be the subject of a high volume of strong consumer and whistleblower complaints. The fact that ECMC still expects such a consumer litigation risk after it takes over belies ECMC and the Department’s claims that the deal represents a real sea change in conduct towards students.
The fate of Corinthian students’ $500 million dollars in private student loans remains a mystery. The CFPB filed suit against Corinthian this fall for predatory lending practices related to its Genesis private student loan product, but Corinthian sold the loans to a debt buyer for pennies on the dollar on the eve of the CFPB’s complaint filing. During that time period, Corinthian was also under close scrutiny and oversight by the Department of Education – but nobody seems to have taken action to stop the sale. This is a shame. Although borrowers may have some residual FTC Holder Rule claims and defenses against the debt buyer derived from Corinthian’s conduct, the best result would have been for the Department to require that Corinthian forgive the loans as part of the sale to ECMC, or forgiveness pursuant to the CFPB action. Those chances have been lost, since most of the loans are no longer held by Corinthian. Only a small fraction of the loans, those which are still held by Corinthian, will be forgiven under the deal.
By keeping Corinthian on life support, the Department of Education has also effectively blocked students from having their federal student loans discharged. The deal with ECMC would provide some relief for a subset of students, but if Corinthian closed, all current and recent students would have the option to have their loans discharged. But instead, Corinthian remains open and enrolling new students who are incurring new debts pending the sale. Some students certainly may prefer their school to remain open, but one can’t help but wish that this deal let all the indebted students have the option for a fresh start. ECMC is poised to enter this new endeavor free and clear of liability and with significant insulation against future claims. Why not the students, too?