For-Profit Colleges and Federal Investigations
NEW YORK ( MainStreet) ITT Educational Services (ESI) quietly revealed in a December SEC filing that it was the target of an enforcement action by the Consumer Financial Protection Bureau.
The CFBP, through its Office of Enforcement, is expected to recommend, in the words of ITT's 8-K filing, "remedies and penalties to the fullest extent of the law" for violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Truth in Lending Act and Regulation Z.
Investors have been indifferent so far. Shares of ITT Educational Services dropped about 3% during the week that word on an enforcement action surfaced while they gained about 95% in 2013.
Timo Connor, an equity research analyst with William Blair & Co. told Barron's that investors saw this coming. What's more, any fine is not expected to be damaging and the probably buck stops when ITT writes a check.
"We view as unlikely a severely punitive settlement against ITT Education from the Consumer Financial Protection Bureau (CFPB) related to its continuing investigation of marketing practices on third-party student lending programs," said Connor, "and we believe the risk is a manageable one for ITT."
Connor's optimism also stems from previous penalties assessed by the CFPB. The median fine has been $3.9 million, or just 0.4% of ITT Educational Services market cap, he says.
Connor didn't address the impact of reputational risk at a time when for-profit colleges are under regulatory scrutiny while competing for students. ITT peer Corinthian Colleges (COCO) disclosed in an SEC filing last June that the SEC requested documents tied to compliance with the U.S. Department of Education's financial requirements, involving "corporate, operational, financial and accounting matters."
SEC spokesperson Judith Burns declined to comment. An SEC source who spoke on background noted that the SEC doesn't comment on active investigations which are often reported by the companies themselves in filings to the SEClike the ones in filed by ITT and Corinthian. Corinthian's stock dropped 23% the week after the investigation was announced and was down about 27% for 2013. One of its peers soared -- Apollo Education (APOL) was up about 30% by the time the time the New Year was being rung in while another, DeVry Education (DV) gained about 50% in 2013.
But both Apollo and DeVry have also been targets of investigations. The Apollo Group, which owns the University of Phoenix, a pin cushion for critics of for-profit schools, disclosed in a 2012 SEC filing that the Department of Education was scrutinizing the university for misreporting verification status codes on FAFSA applications that determine student aid.
A January 8 version of this story incorrectly linked DeVry to the 2010 General Accountability Office report that identified it as encouraging students to falsify information on loan applications. The story didn't mention that the school has been investigated elsewhere and has been subpoenaed by state attorneys general in Illinois and Massachusetts. Illinois AG Lisa Madigan opened an investigation on DeVry last year for non-compliance with a federal law banning incentives to employees for achieving enrollment targets, while Massachusetts is looking into violations of the federal Higher Education Act.