[Updated 1:45 p.m. PST Feb. 26: This post has been updated to include a response from ITT Educational Services and to reflect the closing stock price.]
In its first action against a company in the for-profit college industry, the federal Consumer Financial Protection Bureau on Wednesday sued ITT Educational Services Inc., which operates 149 schools in 40 states, including 14 in California.
The consumer protection agency alleges that ITT used high-pressure tactics over a five-month period beginning in July 2011 to coerce students into high-interest private loans that were likely to end in default.
ITT, a publicly traded company, targeted low-income students and promised them better career prospects, CFPB Director Richard Cordray said at a news conference.
But in reality, Cordray said, the Carmel, Ind., company intended to have students apply for federal student loans that covered only part of its high tuition cost. A two-year degree, in which a majority of ITT students are enrolled, costs about $44,000 -- or $493 per credit hour, the CFPB said.
The remaining balance would be funded by a "temporary credit" ITT extended to students. Those who accepted the "credit" would have until the end of their first year to pay off the loan with no interest, but many students failed to do so and were pushed into a long-term, private, ITT-backed loan with interest rates as high as 16.25%.
Cordray, Ohio's former attorney general, said the company estimated that 64% of its loans would end in default. ITT seems "to care more about dollar signs than diplomas," he said.
A spokeswoman for ITT said the company normally doesn't comment on pending litigation. But, she added, "we believe that the bureau's claims are without merit and … we intend to vigorously defend ourselves against the charges."
The CFPB, in its complaint, also alleges that the for-profit chain, which operates schools under the names ITT Tech and Daniel Webster College, misled students with inflated job-placement rates.
Those rates, the agency alleges, were based on selective data and incomplete information. The company, for instance, did not include former students who did not graduate -- a common outcome, the agency said.
Only about 28% of students graduated from ITT schools in six years or fewer, the agency said, about half the rate of students enrolled in public institutions.
The agency said the school's financial aid staff rushed students through loan applications and used other high-pressure tactics, such as threatening expulsion, to push them into private loans to cover costs not paid for with government loans.
The complaint alleges that the main source of ITT's cash receipts are federal student loans, accounting for 80% of its revenue.
"The only way ITT can access these funds is by getting consumers in the door to apply for these forms of aid," the lawsuit said. "These students are ITT's sole source of revenue."
ITT shares fell $3.21, or 9%, to $32.40 on Wednesday.
Wednesday's legal action follows a string of other regulatory inquiries into the for-profit college industry. Earlier this month, Corinthian Colleges Inc., a Santa Ana company, disclosed that it was being investigated by the Education Department over its job-placement rates.
The company is already the subject of several state and federal inquiries. In October, California Atty. Gen. Kamala D. Harris sued Corinthian Colleges, accusing the company of false and predatory advertising, securities fraud and intentional misrepresentations to students.