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With CFBP Ruling On Bridgepoint, It's Time To Revisit Credit Suisse's Advice

Bridgepoint Education For-Profit Colleges' >$24 Million Settlement Necessitates Another Look At ITT's 'Cautionary Tale'|Credit Suisse

The Consumer Financial Protection Bureau (CFBP) took action on Monday against Ashford University and the University of the Rockies, two for-profit colleges operated by Bridgepoint Education Inc BPI 1.7%.

The CFPB is forcing Bridgepoint to pay more than $24 million as part of a settlement involving students who took out education loans through the company's in-house program. The agency claimed Bridgepoint used deceptive marketing tactics, including telling students that the minimum monthly payment on loan accounts is just $25 a month.

"Bridgepoint deceived its students into taking out loans that cost more than advertised, and so we are ordering full relief of all loans made by the school," the Washington Post quoted CFPB Director Richard Cordray as saying in a statement.

The CFPB's action against Bridgepoint isn't the only recent headwind in the for education sector, as ITT Educational Services, Inc. NYSEESI announced its closure barely a week ago.

'A Cautionary Tale'

With that said, Trace Urdan of Credit Suisse issued a research note following ITT's closure titled "A Cautionary Tale — Lessons from ITT."

Here are the five main takeaways the analyst noted at the time, which seem even more relevant following CFBP's action against Bridgepoint:

    1. The "biggest" lesson from ITT's closure involves the "multiple missteps," including the "obvious" mistake management made of guaranteeing third-party student loans under the assumption that past performance would be duplicated in the future. Then there was the "less obvious but equally damaging" mistake of management buying back $2.1 billion worth of its own stock under the false assumption it would have continued access to the debt market.
    2. Investor pressure forced ITT's management to cut back on capital expenditure and repurchase stock. The lesson in this case is that investors aren't more knowledgeable than the board of directors.
    3. Simply put, for profit education companies shouldn't "fight city hall."
    4. ITT's decision to access third-party loans was an initiative to boost its margins. However, by doing so, it brought on regulatory pressure and no margin gains — which is worse than low margins.
    5. ITT may have failed to maintain a "finely-tuned and clear-eyed awareness of their current value proposition," especially when it comes to the prospective employment opportunities of its student base.

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DateFirmActionFromTo
May 2015BMO CapitalMaintainsOutperform
May 2015Deutsche BankMaintainsHold
Mar 2015PiperJaffrayMaintainsNeutral

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