The U.S. Consumer Financial Protection Bureau sued Corinthian Colleges Inc. on Tuesday, alleging that the ailing Orange County for-profit college operator deceived tens of thousands of students through an "illegal predatory lending scheme."
The lawsuit adds to a lengthy list of legal and regulatory woes for Corinthian, which announced in July that it would sell 85 of its campuses and close more than a dozen others amid a crackdown by the U.S. Education Department.
In a federal court filing Tuesday, the consumer protection bureau alleged that Corinthian engaged in a widespread pattern of deception. It said that the company advertised bogus job placement rates to prospective students, enrolled them in high-interest private loans and harassed them to repay debts while still in school.
The case seeks relief for students who have taken out more than $568 million in Corinthian's private loans since July 2011, in addition to civil penalties. Corinthian operates more than two dozen campuses across California under the Everest, WyoTech and Heald brands.
"Corinthian too often turned the American dream of higher education into an ongoing nightmare of financial despair," said Richard Cordray, the consumer protection bureau's director.
A Corinthian spokesman, Kent Jenkins, said in a statement that the company "strongly disputes the allegations" in the complaint, which he said "wrongly disparages the career services assistance that we offer our graduates."
He said the average interest rates for the private loans are "well below market rates" at 9%, and that fewer than 40% of students use the loan program.
Interest rates on the loans, however, have ranged as high as 18%.
Many of the allegations in the bureau's lawsuit mirror claims made by California Atty. Gen. Kamala D. Harris, who sued Corinthian in October 2013.
But the federal suit delves more deeply into Corinthian's private lending program, in which 60% of borrowers defaulted within three years, according to the suit.
Corinthian and other for-profit colleges get almost all of their revenue from federal student loans and grants (nearly 85% at Corinthian last year). But federal law requires that colleges get at least 10% of revenue from private sources.
The private lending program, according to the suit, was designed to give Corinthian cash tuition revenue that didn't come from the federal government, thereby enabling the school to meet the 10% threshold.
To come up with that money, the college hiked tuition above federal aid limits — prompting students to seek additional private loans from Corinthian.
The suit alleges that Corinthian required students to make payments on the loans while still enrolled, and had employees pull them out of classes if they got behind.
The practice was so common at an Everest College campus near Atlanta that students and employees referred to one financial aid staffer as the "Grim Reaper," according to the suit. The complaint also said financial aid officers told students that they would not be able to graduate if they remained behind on the loans.
Jenkins, Corinthian's spokesman, said the company asked students to pay loans while in school to "help them develop the discipline and practice of repaying their federal and other loan obligations."
Corinthian sold the high-interest private loans to students who were ill-equipped to repay them. More than 57% of Corinthian's students in 2011 had a household income of $19,000 or less, according to documents referred to in the lawsuit.
In conference calls with investors discussing the private loans, Corinthian executives have acknowledged that they expected default rates in excess of 50%.
Pauline Abernathy, vice president of the Institute for College Access & Success, a student advocacy group, said the egregious allegations in the consumer bureau's case could make it more likely that students would get restitution.
"The Corinthian executives said almost immediately after making these loans that a majority of them would not be repaid," she said. "It's such a clear-cut case."
The suit also alleges that Corinthian boosted job placement rates at one campus by creating fake employers, a tactic that enabled the company to claim placement rates as much as 37% higher than reality.
Jenkins referred to those allegations as "isolated incidents" that the company self-reported to regulators.
Corinthian is also facing investigations into its financial aid and marketing practices by more than a dozen state attorneys general. And the company disclosed last month that it is facing a potential criminal probe by the U.S. attorney's office in Los Angeles.
Corinthian is still under intense scrutiny from the U.S. Education Department, which temporarily halted student aid funding in June amid concerns about job placement fraud.
As part of a settlement with the department in July, Corinthian agreed to sell or close most of its U.S. campuses.
Robyn Smith, a former deputy attorney general in California, investigated Corinthian in the mid-2000s and helped orchestrate a $6.5-million settlement with the state in 2007.
She said Corinthian's dire financial situation could make full restitution difficult. But discharging at least parts of the loans could lead to significant relief for borrowers.
"When people get these loans they're really stuck," Smith said. "They can ruin your credit. There's no protection for people who become disabled or can't find a job, and they have a very difficult time discharging them in bankruptcy."