Former students at ITT Technical Institute, a for-profit college that went bankrupt in 2016, will be forgiven of $330 million in private student loans that trusts set up by Deutsche Bank made, under a settlement with U.S. authorities.
The settlement, which was revealed Tuesday, resolves allegations from the U.S. Consumer Financial Protection Bureau, along with 47 states and the District of Columbia, that agents of loans issued through ITT’s PEAKS loan program knew that many students did not understand the terms of the loans, could not repay them and, in some cases, were not even aware of them.
The PEAKS Trust 2009-1 loan fund was created by ITT Educational Services, which ran the collapsed college, and three Deutsche Bank trust companies served as trustees for the PEAKS loans, the CFPB said in filings with the U.S. District Court for the Southern District of Indiana.
The CFPB alleged that the owners and managers of the PEAKS loans provided “substantial assistance” to ITT Educational Services in “engaging in unfair acts and practices." The defendants knew or were “reckless” in not knowing the issues with the loan program, CFPB asserted.
Some students did not realize they took out the ITT private loans because of the “rushed and automated manner” of the ITT financial aid staff processing their paperwork, while for others, it was due to the “flaws in the loan origination process and the SmartForms system” that gave the financial aid staff “unauthorized access to student loan applications and promissory notes,” according to the regulator.
“Despite these red flags, PEAKS continued the PEAKS loan program, servicing and collecting on the loans, ensuring that ITT students faced the harmful consequences of the high cost debt,” CFPB said.
A representative for Deutsche Bank declined to comment.
The settlement will provide relief for more than 43,000 borrowers and require PEAKS to be shut down. The PEAKS loans balance is around $330 million, which includes the principal, outstanding interest and outstanding fees.
“Using a private lending scheme, ITT Tech saddled students with massive debt, exorbitant interest rates, and a worthless diploma,” California Attorney General Xavier Becerra, who participated in the settlement, said on Tuesday. “Today's settlement removes the financial handcuffs gripping thousands of California students defrauded by ITT Tech.”
According to the CFPB, the interest rate for the PEAKS loans was based on a student’s credit score. Around 47% of the PEAKS borrowers had credit scores under 600, and were subject to higher interest rates and origination fees. In addition, the PEAKS Loans required a “high monthly payment, with higher interest rates, more rigid conditions, and fewer options to reduce monthly payments than federal student loans offer.” The monthly payment and the other loan obligations were “unaffordable” to most of the student borrowers.
“As a consequence, these former ITT students have had their defaults, delinquencies, and negative payment histories reported to consumer reporting agencies,” the CFPB said.
This settlement is the latest win for the CFPB on ITT’s private student loan programs.
The for-profit school had set up two different private loan programs for ITT students, the PEAKS and the Student CU Connect CUSO programs. Default rates reached 80% on the PEAKS loans and 94% on the CUSO loans, the regulator said.
Last June, the agency inked a deal with CUSO, which managed the other program, in which CUSO was required to discharge around $168 million in loans. And in August 2019, ITT Educational Services agreed to a $60 million settlement and an injunction prohibiting it from offering or providing student loans.