ITT goes after new federal agency with guns blazing

April 25, 2015

Greg AndrewsThe legal team representing embattled ITT Educational Services Inc. is leaving no arrows in the quiver as it fights for dismissal of a federal Consumer Financial Protection Bureau lawsuit that accuses the company of predatory lending practices.

ITT is even going so far as to argue that the CFPB—launched in 2011 to crack down on lending abuses laid bare during the financial crisis—is itself unconstitutional.

Judge Sarah Evans Barker didn’t bite last month when she denied the motion to dismiss, save for one count relating to the Truth in Lending Act for which she concluded the statute of limitations had expired. But ITT has filed notice of appeal to the U.S. Court of Appeals in Chicago.

ITT has a lot riding on the outcome of the case—both reputationally and financially. The CFPB suit, filed in February 2014, charged, among other things, that ITT financial aid staff “coerced students into taking out loans they did not want, did not understand, or did not even realize they were getting.”

The company drew in new enrollees, the CFPB alleges, by offering no-interest “temporary credit” that plugged the gap between the cost of ITT’s tuition and the amounts the students collected in federal loans and grants.

While those no-interest loans might have sounded attractive, in fact they put students on an increasingly perilous financial path, the federal agency charged.

“If students were not able to pay off the temporary credit at the end of the academic year—something ITT knew few students would be able to do—ITT coerced them into paying off their temporary credit amounts with high-interest, high-fee private loans payable over 10 years. At the same time, to cover the tuition gaps for the upcoming year, students were coerced into taking out additional private student loans.”

In court papers aimed at getting the case dismissed without proceeding to trial, ITT attorneys at Ice Miller LLP denied the company had engaged in “unfair” or “abusive” lending tactics and asserted the CFPB was way overreaching in even bringing the case.

“This unprecedented and unfounded lawsuit should be dismissed,” the 35-page brief signed by Ice Miller partner Philip Whistler said. “The Consumer Financial Protection Bureau … has limited authority to regulate consumer finance, but wants to override the boundaries set by Congress and extend its power.”

In her 66-page ruling, Barker acknowledged that neither the U.S. Supreme Court nor Court of Appeals had conducted an “authoritative review” of the agency’s constitutionality, though one federal court had found it constitutional.

She came to the same conclusion as that court, writing that the company’s “generalized assault on the ‘unprecedented’ nature of the bureau proceeds from the mistaken premise that that which is not specifically approved by precedent is forbidden.”

She also cast aside other ITT arguments, including that it did not take “unreasonable advantage” of its students because its conduct was similar to that of other college financial aid offices across the country.

“The bureau has alleged conduct that—we hope—is not simply par for the course,” Barker wrote. “At any rate, the ‘everyone else is doing it’ defense does not support a motion to dismiss absent an argument that the allegations are legally invalid or factually implausible.”

HHGregg’s Smith stepping down

Longtime Indianapolis businessman Michael Smith is resigning as chairman of Indianapolis-based HHGregg Inc.—a move he said he’s making because he is “classically over-boarded.”

The 67-year-old, who formerly was CEO of the moving company Mayflower Group and chief financial officer of health insurer Anthem Inc., has been chairman three years and a board member for 10.

“I just got myself overextended, and I am at a good time in my life to slow that pace,” he said.

Smith’s idea of slowing things down certainly isn’t plodding. He remains on the board of two public companies—Evansville-based Vectren Corp. and Denver-based Envision Healthcare—as well as a string of private companies, including Indianapolis-based LDI Ltd. and Terre Haute-based Hulman & Co.

Smith, who will leave the HHGregg board after the company’s annual meeting this summer, said the retailer is headed in the right direction after adapting to an industry-wide drop in consumer electronics sales.

HHGregg responded by beefing up its already-substantial appliance business and launching new product lines, such as furniture.

“I’m very bullish about HHGregg’s future. Current management has done an excellent job pressure-testing their strategy and execution,” he said.

However, he added, “We all need to be patient. This is an industry going through a tremendous amount of change. It takes a while to put new strategies in place and execute them successfully.”•


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