The Consumer Financial Protection Bureau filed a complaint and proposed settlement on Thursday in the U.S. District Court in Oregon against Aequitas Capital Management Inc. and related entities for aiding the Corinthian Colleges’ predatory lending scheme.

The CFPB alleges that Aequitas enabled the now defunct Corinthian to make high-cost private loans to Corinthian students to make it appear that the school was pulling in enough outside revenue to meet the requirements for receiving federal student aid money.

(Related: U.S. Is Collecting Student Loans It Promised to Forgive)

The risky loans, CFPB maintains, saddled students with high-priced debt that both Aequitas and Corinthian knew students could not afford.

The CFPB’s settlement asks the court to allow close to 41,000 Corinthian students to be eligible for approximately $183.3 million in loan forgiveness and reduction.

In collaboration with the CFPB, several state attorneys general have also reached proposed settlements with Aequitas.

“Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare,” said CFPB Director Richard Cordray, in a statement. “Today’s action marks another step by the Bureau to bring justice and relief to the borrowers still saddled with expensive student loan debt. We will continue to address the illegal lending practices of for-profit colleges and those who enable them.”

Aequitas Capital Management, which is currently in receivership, and its related entities, based in Lake Oswego, Oregon, did work as a private equity firm that purchased or funded about $230 million in Corinthian Colleges’ private loans, branded by the school as “Genesis loans.”

On March 10, 2016, the Securities and Exchange Commission took action against Aequitas, alleging the firm and its top executives had defrauded more than 1,500 investors. A receiver was appointed to wind down Aequitas and distribute its remaining assets.

The CFPB alleges that Aequitas violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibitions against abusive acts and practices by funding and supporting Corinthian’s predatory Genesis loan program.

CFPB alleges that Aequitas and Corinthian engaged in their charade to satisfy Corinthian’s obligations under the 90/10 rule, a federal law requiring for-profit schools seeking federal money to obtain at least 10% of their revenue from sources other than federal student aid.

“Knowing that its students could not generally afford the additional 10% charge, Corinthian created the Genesis loan program to cover it,” CFPB said.

If approved by the U.S. District Court in Oregon, Aequitas and related entities would be required to:  

  • Forgive Genesis loans in connection with certain closed schools: Aequitas would forgive all outstanding balances on Genesis loans for borrowers who meet certain eligibility requirements. Eligible borrowers are those who did not complete their coursework or graduate and were enrolled at schools Corinthian announced in April 2015 would be closed; those who withdrew from those schools on or after June 1, 2014; and those who did not complete their coursework or graduate and were enrolled at the schools Corinthian sold to Zenith Education Group that subsequently closed. 
  • Forgive Genesis loans in default: Aequitas would forgive all outstanding balances for any Genesis loans it owns that were 270 days or more past due as of March 31.
  • Reduce all other Genesis loans by more than half: On all other Genesis loans it owns, Aequitas would reduce the principal amount owed as of March 31 by 55%, and would forgive any accrued and unpaid interest, fees and charges that were 30 or more days past due as of that date. Borrowers could opt to have their monthly payments lowered after the remaining loan balance is reduced by 55%. Borrowers would receive a notice of this option, along with an explanation of the costs and benefits of this option versus maintaining their previous monthly payment amount.

If CFPB’s proposed settlement is approved by the court, eligible borrowers will be notified within 90 days after approval. 

— Check out Student Loan Delinquencies Climb Despite Economic Recovery on ThinkAdvisor.