Corinthian Colleges Inc. has preyed on unsophisticated and "isolated" students with expensive tuition and bogus job-placement promises, federal regulators say.
Corinthian, whose Everest and Heald career schools boast about 1,000 local students, intentionally set tuition so high that traditional federal student aid wouldn't cover the tab, forcing students into the company's expensive in-house loan program, according to regulators.
Corinthian has continued to push students into the loan program for six years, the feds say, even though it knows 60 percent of them will default.
In a confrontation that could change American higher education, federal regulators now maintain that one of the largest for-profit colleges in the country is a predatory lender, targeting the young, the poor and financially unsophisticated. The U.S. Consumer Financial Protection Bureau sued the company in September seeking to force the company to refund more than half-a-billion dollars worth of student loans.
Three months earlier, the U.S. Education Department crippled the company when it restricted its access to federal student aid money.
"If you're a bad actor, the government is taking a much harder line," said Michael Tarkan, a financial analyst who follows for-profit colleges. "And based on all the regulatory issues out there, Corinthian has demonstrated they are one of the bad actors."
Corinthian spokesman Kent Jenkins argues the for-profit serves its students well and its loan program was a sincere effort to provide students with alternative financing.
In response to the federal crackdown, Corinthian has launched an effort to sell all 100 locations by year's end, including its four campuses in the Portland area.
Two local companies, meanwhile, have found themselves near the center of the Corinthian controversy.
Genesis Financial Solutions, a Beaverton consumer finance company founded by prominent Portland philanthropist Irving Levin, has originated and serviced Corinthian's in-house student loans since 2008.
Genesis' Levin said his company played a relatively minor role and did nothing wrong. "We did the servicing and that was it," he said. "We didn't have anything to do with the underlying structure of the loan."
ASFG LLC, a subsidiary of Lake Oswego-based Aequitas Capital, agreed to buy Corinthian student loans, which enabled Corinthian to originate $444 million worth of loans. The deal provided a desperately needed source of liquidity. In return, ASFG reaped millions of dollars in fees.
ASFG declined to discuss its work with Corinthian.
Neither company has been charged with wrongdoing. But an examination of their relationship with Corinthian offers an inside look at the for-profit college business and the enormous sums of money at play in today's higher education industry.
RISE OF THE FOR-PROFITS
Corinthian is one of several national companies that thrived in the career-school niche during the last two decades, attracted by a river of federal student aid money.
These operations often get at least 80 percent of their total revenue from taxpayer-funded federal student loans and grants. In 2013, Corinthian's total revenue exceeded $1.6 billion, 84 percent of it from federal student aid.
The rapid growth of the for-profits has contributed to the tripling of U.S. student debt in the last 10 years to $1.3 trillion. Their students borrow more to cover the for-profits' relatively high tuition.
After bankrolling the industry for years, the federal government is now taking a more critical view. In recent federal filings, Corinthian divulged it is being investigated by the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Justice Department. Eleven attorneys general, including Oregon's, also have launched investigations.
The for-profit schools argue they serve poor, older and nontraditional students. Corinthian also defended its Genesis program.
"Corinthian wants every student to have the opportunity to succeed, so it arranges through a third party to make funds available without regard to the students' credit history," the company said in a statement. "A student who commits herself to a program is likely to succeed and pay back her student loans."
ONE STUDENT'S STORY
Sharnee Norwood has a starkly different view.
In 2008, the Stockbridge, Ga., resident signed up for a one-year medical assistant program at Corinthian's Everest College. She said that Corinthian officials told her she would be able to cover the $14,615 cost with government student loans and a $5,500 federal Pell grant.
But Norwood didn't get the grant. Only later, she says, when she got a copy of her file from Corinthian did she learn she owed $5,353 on a Genesis loan -- a loan she said she had not applied for. In her file was a master promissory note but she says the signature on it was not hers.
Norwood sued Corinthian and Genesis, its Beaverton-based partner, which originated the loan, sold it to Corinthian and continued to service the loan.
The companies tried to collect the debt, which had grown to more than $7,000. Genesis reported the loan in default in June 2013 to a credit-reporting agency.
Norwood's credit took a damaging hit because she didn't repay a loan she claims she never applied for.
Norwood accused Genesis of violating federal credit reporting and debt collection laws and of defaming her. She accused Corinthian of fraud, contending the company falsified her financial aid application.
Genesis CEO Bruce Weinstein dismissed Norwood's complaint as a "nuisance suit." Genesis settled with Norwood for what he said was a minimal amount of money.
Neither Norwood nor her attorneys would comment, citing a nondisclosure clause in the settlement agreement. Norwood's lawsuit against Corinthian is still pending.
CORINTHIAN FINDS GENESIS
Six years ago, the big for-profit colleges seemed on a roll.
Corinthian's annual revenue had just topped $1 billion. The company earned $21.2 million in 2008, and enrollment had jumped nearly 12 percent to more than 69,000.
There were clouds on the horizon, though. The financial crisis was devastating credit markets. Corinthian's preferred lender, Sallie Mae, pulled out of the market.
Genesis is a 250-employee consumer finance company based in Beaverton. Jeff Manning
Corinthian needed to find an alternative, and it found Genesis.
Genesis is a quietly successful consumer finance operation based in Beaverton. Its primary business is private-label financing -- it runs internal finance operations for retailers such as Best Buy and Zale's.
Levin has amassed a considerable fortune over the years -- he sold one of his companies for $300 million. He's used the money to fund a host of charitable causes, including higher education. He and his wife, former Oregon journalist and broadcaster Stephanie Fowler, fund college scholarships for low-income students.
Levin minimized Genesis' role, saying Corinthian was always obligated to buy all the Genesis loans originated by his company. And Corinthian set the terms, he said. "We were strictly a contractor," Levin said. "We got paid a few bucks for every loan we originated and serviced."
Levin declined to divulge how much Corinthian paid Genesis for its services.
In 2012, Corinthian found another partner that was willing to hold its loans, cutting a deal with ASFG, the Aequitas subsidiary. ASFG purchased hundreds of millions of dollars worth of Corinthian loans, according to Corinthian SEC filings.
Why would any company willingly buy into a loan portfolio with a 60 percent loan default rate? Corinthian's federal filings reveal that ASFG insisted on terms that minimized its credit risk. Their deal required Corinthian to buy back any loan that went delinquent after 90 days.
There was also this: Corinthian paid ASFG more than $18 million in fees over two years. Aequitas officials declined to comment.
GENESIS AND THE 90-10 RULE
Under the scenario laid out by the Consumer Financial Protection Bureau, Genesis and Aequitas were little more than well-paid participants in a Corinthian scheme to leverage more money out of the federal government.
Corinthian was willing to continue to operate a loan program with a 60 percent default rate because it was a necessary step, the bureau alleges, to gain greater access to the real mother lode -- federal student aid.
Taxpayer-funded loans and grants dispensed by the U.S. Education Department are known as Title IV funds. The department enforces a strict 90-10 rule that prohibits schools from deriving more than 90 percent of revenue from Title IV student aid.
Corinthian and other for-profits routinely flirt with the 90 percent limit.
Genesis provided Corinthian the crucial internally generated revenue that constituted its 10 percent contribution. "Genesis was a loss leader," said Maura Dundon, a lawyer with the Center for Responsible Lending. "It was the vital source of non-Title IV money."
Corinthian admitted to stock analysts in February 2011 that it increased tuition 11 percent in part to comply with the 90-10 rule. Students would have to turn to Genesis to cover the cost. "We've expanded our Genesis loan limits to accommodate the increase in tuition," Ken Ord, Corinthian chief financial officer told the analysts.
Corinthian was thrown into crisis in June when the feds restricted access to student aid money. The Education Department put a 21-day delay on new releases, citing evidence Corinthian was falsifying job placement data for its students.
That pushed Corinthian into a severe cash-flow problem.
"ENABLING SOMETHING..."
Genesis and ASFG cut ties with Corinthian in 2014. Dundon, the consumer lending expert, said the frequency with which Corinthian students fell behind on loans should have set off alarm bells at Genesis and ASFG long before.
"Certainly anyone in the consumer finance industry knows that targeting subprime borrowers with a program that has a 60 percent default rate is a problem," she said. "The phrase is 'debt trap.'"
Levin insists his company did no wrong. But he's also clearly pained.
"It's a very fine line," he said. "When you're making the loan, you're definitely enabling something. ... Ultimately, the question is, did the loan support an unsavory product? Whether or not Corinthian's product was good or bad is certainly open to debate."
There is little debate in the market about the value of the Genesis portfolio. Over the summer, Corinthian quietly sold off all of its approximately 170,000 Genesis loans. On a portfolio with a face value of $505 million, the unidentified buyer was willing to pay just $19 million.
-- Jeff Manning
