INDIANAPOLIS–The bankruptcy trustee here responsible for unwinding the assets of the defunct ITT Educational Services has filed suit against five credit unions over a joint loan program.
Trustee Deborah J. Caruso is alleging that the loan program boosted the pay of management at the credit unions while contributing negatively to the school’s finances, according to the Wall Street Journal.
Named as defendants are Eli Lilly Federal Credit Union, Bellco Credit Union, Credit Union of America, Directions Credit Union, and Veridian Credit Union, which had formed a CUSO called Student CU Connect to make the loans. The Rochdale Group has also been named in the suit, which seeks to recover all damages sustained by ITT under a private student-loan program begun in 2009.
According to the Wall Street Journal, the lawsuit is seeking to wipe away $157 million that the credit unions say is owed by ITT, and to further to claw back $42.6 million in payments the CUs received from ITT between 2011 and 2016, as well as to avoid or recover at least another $25 million.
“ITT’s profits and revenues were nearly completely derived from student loans backed by the U.S. government,” the Wall Street Journal reported. “However, a regulation called the 90/10 rule required that at least 10% of ITT’s revenue come from some other source. The majority of ITT’s students couldn’t pay out of pocket the additional 10%, so ITT had looked to private lenders to make up the difference.”
According to the lawsuit, when private student lending dried up during the recession, ITT’s senior managers aggressively pursued students and other types of loans including creating a temporary credit program that would keep ITT in compliance with the 90/10 rule. That credit program gave ITT-backed loans to students with very low credit scores who were living at or near the poverty line, according to the lawsuit.
The suit further alleges that because the loans had a low likelihood of collection, ITT needed to move them off its balance sheet or executive compensation would suffer, the lawsuit alleges. To achieve that goal, the lawsuit alleges that the company hired Rochdale in 2009 to create the Student CU Connect loan program.
“Additionally, fees on the refinance arrangement grew so high that it made ITT insolvent: In one example, ITT received a $189 million infusion that refinanced the loans off its own books but became indebted to the Student CU program by more than $215 million, according to the lawsuit,” the Journal reported.
The lawsuit additionally alleges that ITT’s senior management and the credit unions knew the true impact of the program and purposefully didn’t disclose it to investors and creditors, including the U.S. Department of Education, and that the credit unions “aided and abetted management in breaching their fiduciary duties and committing fraud.”
Richard Bernard of Foley & Lardner LLP, who is representing all the parties named in the lawsuit, told the Wall Street Journal that the trustee’s allegations have no merit.