Regulatory Laws
Overview
Provided by: Lumen Learning. License: CC BY: Attribution
Outcome: Regulatory Laws
What you’ll learn to do: explain the laws that regulate marketing
While there are situations in which we expect individuals to act according to higher moral laws, at a basic level we always expect business professionals to follow the law. Most of the laws that impact marketers fall into a category called consumer protection. Consumer protection laws are created to ensure the rights of consumers and to create a fair marketplace for consumers.
The History of Consumer Protection
Historically, consumer protection laws in the United States have been specific formal legal responses to address public outrage over the disclosure of industry abuses and crises. For example, in 1905 a man named Upton Sinclair exposed the terrible worker conditions in the American meat-packing industry. His work sparked public outrage and, in turn, led to the creation of the Food & Drug Administration and the first comprehensive inspection and regulation of food safety in the United States.1
Similarly, in the 1960s consumer advocate Ralph Nadar took on automobile safety, highlighting the immense profits made by auto companies relative to their investment in customer safety. In 1966 Congress unanimously passed the National Traffic and Motor Vehicle Safety Act, and the National Highway Traffic Safety Administration gained consumer protection powers. The number of vehicular deaths in the U.S. reached a high of 50,000 in 1960 and have continued to fall despite a larger number of drivers on the road.
Government Consumer Protection and Enforcement Agencies
A number of governments agencies are charged with protecting consumers. The U.S. Federal Trade Commission (FTC) was created in 1914 and is charged with protecting America’s consumers and promoting competition. The commission includes individual divisions that oversee a range of activities that are of importance to marketers, including the following:
- Privacy and identity protection
- Advertising practices
- Marketing practices
- Financial practices
The FTC’s Bureau of Consumer Protection stops unfair, deceptive, and fraudulent business practices by collecting complaints and conducting investigations, suing companies and people who break the law, developing rules to maintain a fair marketplace, and educating consumers and businesses about their rights and responsibilities.
In addition to government-based agencies, consumer associations and other nonprofit entities also play an important role in protecting the consumer.
As a marketer, it is important to understand the current laws and consider where there are risks to consumers that might lead to new legislation.
The specific things you’ll learn in this section include:
- Explain product liability and its impact on marketing
- Explain privacy law and its impact on marketing
- Explain fraud in the marketing process and its impact
Learning Activities
The learning activities for this section include the following:
- Reading: Product Liability
- Reading: Privacy Laws
- Reading: Fraud in Marketing
- Spencer Weber Waller, Jillian G. Brady, and R.J. Acosta, "Consumer Protection in the United States: An Overview," http://www.luc.edu/media/lucedu/law/centers/antitrust/pdfs/publications/workingpapers/USConsumerProtectionFormatted.pdf.
Licenses and Attributions
CC licensed content, Original
- Outcome: Regulatory Laws. Provided by: Lumen Learning. License: CC BY: Attribution
- Image: Motor Vehicle Crash Deaths 1975u20132017. Provided by: Lumen Learning. License: CC BY: Attribution
Reading: Product Liability
Introduction
Product liability is the legal liability a manufacturer or trader incurs for producing or selling a faulty product.
There is not a single federal law or code that covers all product liability. Fourteen states have adopted the Uniform Commercial Code, which governs business transactions between states. Specifically, Article 2 of the code includes the requirements for contract formation and breach, which are important in many product liability cases. In general, product liability laws come about as a result of civil court cases being prosecuted at the state level.
The courts are increasingly holding sellers responsible for the safety of their products. The U.S. courts generally maintain that the producer of a product is liable for any product defect that causes injury in the course of normal use. Liability can even result if a court or a jury decides that a product’s design, construction, or operating instructions and safety warnings make the product unreasonably dangerous to use.
Types of Product Defects
There are three types of product defects that incur product liability: design defects, manufacturing defects, and defects in marketing.
Design Defects
Design defects exist before the product is manufactured. There is something in the design of the product that is inherently unsafe, regardless of how well it is manufactured. Since “product” is one of the primary elements of the marketing mix, the marketer bears responsibility for ensuring that the design results in a product that is safe and that the product will fulfill the promises of the other aspects of the marketing mix such as promotional commitments.
Hoverboard
Let’s look at a current example of a product design going awry. One of the hottest holiday gift items in 2015 is the hoverboard self-balancing scooter. The premium models often cost more than $1,000, but several companies have created less expensive versions by using lower-cost board components. One expensive component that has been downgraded in the cheaper models is the rechargeable lithium-ion battery. Many less expensive boards use a lower-quality (and lower-priced) mass-produced battery cell. These cheaper batteries are more likely to have quality issues that might cause them to break and burst into flame when they are repeatedly bumped, which is a regular occurrence during the normal use of the scooter. After more than ten reported fires, the U.S. Consumer Product Safety Commission opened a case to investigate the hoverboard fires.
Manufacturing Defects
Manufacturing defects occur while a product is being constructed, produced, or assembled. Specifically, when a product departs from its intended design, even though all possible care was exercised in the preparation and marketing of the product1, it is a manufacturing defect. The manufacturer may be very careful with the design, the material selection, the development of the manufacturing process, and the quality-assurance guidelines. Nevertheless, if a poorly manufactured product leaves the manufacturers facility and causes injury when used for any of its intended purposes, then there is a defect in manufacturing.
It might seem that manufacturing defects occur only in product sales and not in the service industry, but there’s a very well-known case in this category: the McDonald’s coffee case.
On February 27, 1992, a seventy-nine-year-old woman named Stella Liebeck went to McDonald’s with her grandson, Chris. They got the coffee, and Chris pulled into a parking space so that Stella could add cream and sugar. Since the car had a curved dash and lacked cup holders, Stella put the cup between her knees and removed the lid. When she did, the cup fell backward, burning her groin, thighs, genitalia, and buttocks. Liebeck was taken to the hospital, where it was discovered that she had third-degree burns on 6 percent of her body and other burns on 16 percent of her body. She required multiple skin grafts and was in the hospital for eight days. Liebeck spent two years recovering from the injury, lost 20 percent of her bodyweight after the accident, and was left permanently scarred by the ordeal.
Liebeck wrote a letter to McDonald’s asking them to pay her medical bills, which totaled around $10,500 in 1992 (approximately $16,110 today). The company offered her $800. Liebeck and McDonald’s exchanged several more letters, but the company refused to increase their $800 offer, so Liebeck hired a law firm.
Liebeck’s lawyers conducted a study of coffee temperatures. They discovered that coffee brewed at home is usually served at 135–145°F and coffee served at most fast-food restaurants is in the 160–175°F range. McDonald’s, however, served its coffee at 190°F, which can cause third-degree burns on human skin after two to seven seconds of contact. No safety study of any kind was undertaken by either McDonald’s or the consultant who recommended the hotter temperature.
Moreover, Liebeck’s lawyers also discovered more than seven hundred other burn claims—many of them for third-degree burns—from McDonald’s customers between February 1983 and March 1992. In court, McDonald’s quality-control manager, Christopher Appleton, testified that McDonald’s served around 20 million cups of coffee a year and that seven hundred incidents during nine years was statistically insignificant. While this was factually accurate, the jury did not like to hear that McDonald’s considered seven hundred burned customer to be insignificant.
The jury found in Liebeck’s favor. They awarded her $200,000 in compensatory damages, but that amount was later reduced to $160,000 because they felt that the spill was 20 percent Liebeck’s fault. The jury made headlines when it came to the punitive damages, however, which they settled at $2.7 million. The jurors defended the amount, saying that it was to punish the company for its callous attitude toward Ms. Liebeck and the 700+ other McDonald’s customers who had suffered burns. Although it sounds like a lot, $2.7 million represented only two days’ worth of McDonald’s coffee sales, and the jurors felt that was fair.
The judge agreed, accusing McDonald’s of “willful, wanton, and reckless behavior” for ignoring all the customer complaints.
McDonald’s process for making coffee constituted a manufacturing defect, which resulted in many customer injuries and generated significant product liability for the company.
Marketing Defects
Marketing defects result from flaws in the way a product is marketed. Examples include improper labeling, poor or incomplete instructions, or inadequate safety warnings. Often marketing defects are referred to as a “failure to warn.” It is important for the marketer to think not only about the warnings that the user might need when using the product as intended but also about other, potentially dangerous uses for which the product was not intended.
For example, fabric used in children’s sleepwear must meet certain flammability requirements to prevent the risk of injury from fires. Certain comfortable children’s clothing that does not meet the flammability requirement can be confused with sleepwear. For this reason, such clothing will often contain a warning label that reads, “Not intended for sleepwear.”
Over time, product liability has shifted more to the side of the injured product user. Consumer advocates like Ralph Nader argue that, for too long, product liability favored producers at the expense of the product user. They assert that it’s the threat of lawsuits and huge settlements and restitutions that force companies to make safe products. While a discussion of all aspects of product liability is beyond the scope of this course, it is clear that liability has and will continue to have a tremendous impact on consumers and manufacturers alike. These two groups are not the only ones affected, either. Retailers, franchises, wholesalers, sellers of mass-produced homes, and building-site developers and engineers are all subject to liability legislation.
- Restatement of Torts, Third, Apportionment of Liability (2000)
Licenses and Attributions
CC licensed content, Shared previously
- Manufacturing Defects. Authored by: Jim Cofer. Located at: http://jimcofer.com/personal/2012/01/19/righting-the-wrongs-the-mcdonalds-coffee-case/. Project: Righting the Wrongs: The McDonald's Coffee Case. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
- Chapter 5: External Considerations in Marketing, from Introducing Marketing. Authored by: John Burnett. Project: Global Text. License: CC BY: Attribution
- Hoverboard. Provided by: Soar Boards. Located at: https://en.wikipedia.org/wiki/Self-balancing_two-wheeled_board#/media/File:Red_self-balancing_two-wheeled_board_with_a_person_standing_on_it.png. License: CC BY: Attribution
- Lawsuits Welcome. Authored by: Chris Tengi. Located at: https://www.flickr.com/photos/cjtengi/2022308688/. License: CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives
Reading: Privacy Laws
What does privacy mean in today’s world? Privacy is the ability of an individual or group to seclude themselves, or information about themselves, and thereby express themselves selectively. Most of us expect some level of privacy, but the boundaries around privacy can differ depending on the individual and the situation.
The right-to-privacy issue has gotten more complicated as our culture has come to rely so heavily on digital communication—for everything from social networking to education to conducting business. Marketers have been quick to capitalize on the potential of digital technology to yield creative, aggressive techniques for reaching their target buyers. Sometimes these aggressive tactics cause a public backlash that results in new laws. For example, intrusive telephone marketing activities led to the passage of the the Do-Not-Call Implementation Act of 2003, which permits individuals to register their phone number to prevent marketing calls from organizations with which they don’t have an existing relationship. The act was intended to protect consumers from a violation of privacy (incessant sales phone calls particularly during the evening hours), and it closed down many businesses that had used telephone solicitation as their primary sales channel.
What follows is an overview of important privacy laws that have a particular impact on marketers. These are areas in which marketers need to be thinking ahead of the law. While there are plenty of perfectly legal marketing tactics that utilize personal information, if they are a nuisance to prospective customers, they are probably not good marketing and may be affected by future legislation when the public decides it has had enough.
Email Spam
Have you received email messages without giving permission to the sender? The Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act, passed in 2003, establishes federal standards for commercial email. Consumers must be given the opportunity to opt out of receiving future solicitations, as in this opt-out notice provided by the clothing company Abercrombie & Fitch:
This is a product offering from Abercrombie & Fitch. You have received this email since you submitted your email address to our list of subscribers. To unsubscribe, please click here and submit your email address. Please see our Website Terms of Use, and to know how we use your personal data, please see our Privacy Policy.
Despite its name, the CAN-SPAM Act doesn’t apply just to bulk email. It covers all commercial messages, which the law defines as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service,” including email that promotes content on commercial Web sites. The law makes no exception for business-to-business email. That means that all email—even, for example, a message to former customers announcing a new product line—must comply with the law. Each separate email in violation of the CAN-SPAM Act is subject to penalties of up to $16,000, so non-compliance can be very costly. The good news is that following the law isn’t complicated.
Managing Customer Data
Sometimes companies and organization possess personal data about their customers that is collected during the course of doing business. The most obvious examples are medical organizations that keep confidential patient records, financial institutions that capture your financial data, and educational institutions that record student test scores and grades. Other companies might know your contact information, your purchase patterns, and your Internet-shopping or search history. These organization all have important legal responsibilities to protect your data.
The Federal Trade Commission (FTC) gives access to an important source of information about the necessity of securing sensitive data: the lessons contained in the more than fifty law enforcement actions taken by the FTC so far. These are settlements—no findings have been made by a court—and the details of the orders apply just to the companies involved, but learning about alleged lapses that have led to law enforcement actions can help your company improve its practices. Most of these alleged practices involve basic, fundamental security missteps or oversights. Without getting into the details of those cases, below are ten practical tips that we can learn from them. Distilling the facts of those cases down to their essence, here are ten lessons to learn that touch on vulnerabilities that could affect your company, along with practical guidance on how to reduce the risks they pose.
- Start with security: only collect customer data when necessary; be transparent; and treat the data with extreme care.
- Control and restrict access to sensitive data.
- Require strong, secure passwords and authentication; protect access to sensitive data
- Store sensitive personal information securely and protect it during transmission: use best-in-class security technology.
- Segment your network and monitor who’s trying to get in and out
- Secure remote access to your network: put sensible access limits in place.
- Apply sound security practices when developing new products; train engineers in security and test for common vulnerabilities.
- Make sure your service providers implement reasonable security measures: write security into contracts and verify compliance.
- Establish procedures to keep your security current and address vulnerabilities that may arise; heed credible security warnings.
- Secure paper, physical media, and devices—not all data are stored digitally.
These may seem like overly technical considerations that aren’t important to someone working in a marketing organization, but in the same way that it is important for a marketer to protect its company from product liability suits, it is important to protect customers from security breaches related to the company’s products, services, and marketing activities.
Protecting Privacy Online
The Internet provides unprecedented opportunities for the collection and sharing of information from and about consumers. But studies show that consumers have very strong concerns about the security and confidentiality of their personal information in the online marketplace. Many consumers also report reluctance to engage in online commerce, partly because they fear that their personal information can be misused. These consumer concerns present an opportunity for marketers to build consumer trust by implementing sound practices for protecting consumers’ information privacy.
The FTC recommends four Fair Information Practice Principles. These are guidelines that represent widely accepted concepts concerning fair information practice in an electronic marketplace.
Notice
Consumers should be given notice of an entity’s information practices before any personal information is collected from them, including, at a minimum, identification of the entity collecting the data, the uses to which the data will be put, and any potential recipients of the data.
Choice
Choice and consent in an online information-gathering sense means giving consumers options to control how their data is used. Specifically, choice relates to secondary uses of information beyond the immediate needs of the information collector to complete the consumer’s transaction. The two typical types of choice models are “opt-in” or “opt-out.” The opt-in method requires that consumers give permission for their information to be used for other purposes. Without the consumer taking these affirmative steps in an opt-in system, the information gatherer assumes that it cannot use the information for any other purpose. The opt-out method requires consumers to affirmatively decline permission for other uses. Without the consumer taking these affirmative steps in an opt-out system, the information gatherer assumes that it can use the consumer’s information for other purposes.
Access
Access, as defined in the Fair Information Practice Principles, includes not only a consumer’s ability to view the data collected but also to verify and contest its accuracy. This access must be inexpensive and timely in order to be useful to the consumer.
Security
Information collectors should ensure that the data they collect is accurate and secure. They can improve the integrity of data by cross-referencing it with only reputable databases and by providing access for the consumer to verify it. Information collectors can keep their data secure by protecting against both internal and external security threats. They can limit access within their company to only necessary employees to protect against internal threats, and they can use encryption and other computer-based security systems to stop outside threats.
In June 1998, the FTC issued a report to Congress noting that while more than 85 percent of all Web sites collected personal information from consumers, only 14 percent of the sites in the FTC’s random sample of commercial Web sites provided any notice to consumers of the personal information they collect or how they use it. In May 2000, the FTC issued a follow-up report that showed significant improvement in the percent of Web sites that post at least some privacy disclosures; still, only 20 percent of the random sample sites were found to have implemented all four fair information practices: notice, choice, access, and security. Even when the survey looked at the percentage of sites implementing the two critical practices of notice and choice, only 41 percent of the random sample provided such privacy disclosures.
In the evolving field of privacy law there is an opportunity for marketers build trust with target customers by setting standards that are higher than the legal requirements and by respecting customers’ desire for privacy.
Licenses and Attributions
CC licensed content, Original
- Revision and adaptation. Provided by: Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
CC licensed content, Shared previously
- Fair Information Practice Principles. Provided by: Wikipedia. Located at: https://en.wikipedia.org/wiki/FTC_Fair_Information_Practice. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
- Privacy. Authored by: g4ll4is. Located at: https://www.flickr.com/photos/g4ll4is/8521624548/. License: CC BY-SA: Attribution-ShareAlike
- Tech Privacy. Authored by: Bernard Goldbach. Located at: https://www.flickr.com/photos/topgold/5534004979/. License: CC BY: Attribution
Public domain content
- Email Spam. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/bus61-can-spam-act-compliance-guide-business.pdf. Project: The CAN-SPAM Act: A Compliance Guide for Business. License: Public Domain: No Known Copyright
- Managing Customer Data. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/pdf0205-startwithsecurity.pdf. Project: Start with Security: A Guide for Business. License: Public Domain: No Known Copyright
- Protecting Privacy Online. Provided by: Federal Trade Commission. Located at: https://www.ftc.gov/system/files/documents/plain-language/bus28-advertising-and-marketing-internet-rules-road.pdf. Project: Advertising and Marketing on the Internet. License: Public Domain: No Known Copyright
Reading: Fraud in Marketing
Fraud is the deliberate deception of someone else with the intent of causing damage. The damage need not be physical damage—in fact, it is often financial.1
The Federal Trade Commission has determined that a representation, omission, or practice is deceptive if it is likely to:
- mislead consumers and
- affect consumers’ behavior or decisions about the product or service.
When it comes to marketing fraud, the two key words are deliberate deception. In a legal setting, a judge asked to rule on a marketing fraud case would need to evaluate the extent of the deception and the impact of the deception on the consumer. For our purposes, though, it is more useful to begin outside the courtroom with the basic starting point of marketing: the goal of marketing is not to deceive the customer; it is, in fact, to build trust.
When we consider the elements of the marketing mix—product, price, promotion, and distribution—there are opportunities for deception in each area.
Product: Is the product designed and manufactured as the customer would expect, given the other elements of the marketing mix? Is the customer warned about the product’s limitations or uses that are not recommended?
Price: Is the total price of the product fairly presented to the customer? Is the price charged for the product the same as the price posted or advertised? Has something been marketed as “free” and, if so, does it meet FTC guidelines for the definition of free? Does the company disclose information about finance charges?
Promotion: Can claims made to consumers be substantiated? Are disclaimers clear and conspicuous? For products marketed to children, is extra care taken to accurately represent the product?
Place (Distribution): Does the distribution channel deliver the product at the price and quality promised? Do other companies in the distribution channel (wholesalers, retailers) perform as promised and deliver on expectations set for product, price, and promotions?
Marketing Fraud in Education
Sadly, it is easy enough to find a case of pervasive marketing fraud that any student can understand: Corinthian Colleges.
As you review the following press release from the Consumer Financial Protection Bureau, consider the following questions:
- Where was the Corinthian Colleges chain deliberately deceptive in presenting its offering to students?
- Where was Corinthian deliberately deceptive in the way it represented pricing?
- Where was the company’s promotion of its offering deceptive?
CFPB Sues For-Profit Corinthian Colleges for Predatory Lending Scheme2
Bureau Seeks More than $500 Million In Relief For Borrowers of Corinthian’s Private Student Loans
WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) sued for-profit college chain Corinthian Colleges, Inc. for its illegal predatory lending scheme. The Bureau alleges that Corinthian lured tens of thousands of students to take out private loans to cover expensive tuition costs by advertising bogus job prospects and career services. Corinthian then used illegal debt collection tactics to strong-arm students into paying back those loans while still in school. To protect current and past students of the Corinthian schools, the Bureau is seeking to halt these practices and is requesting the court to grant relief to the students who collectively have taken out more than $500 million in private student loans.
“For too many students, Corinthian has turned the American dream of higher education into an ongoing nightmare of debt and despair,” said CFPB Director Richard Corday. “We believe Corinthian lured consumers into predatory loans by lying about their future job prospects, and then used illegal debt collection tactics to strong-arm students at school. We want to put an end to these predatory practices and get relief for the students who are bearing the weight of more than half a billion dollars in Corinthian’s private student loans.”
Corinthian Colleges, Inc. is one of the largest for-profit, post-secondary education companies in the United States. The publicly traded company has more than 100 school campuses across the country. The company operates schools under the names Everest, Heald, and WyoTech. As of last March, the company had approximately 74,000 students.
In June, the U.S. Department of Education delayed Corinthian’s access to federal student aid dollars because of reports of malfeasance. Since then, Corinthian has been scaling down its operations as part of an agreement with the Department of Education. However, Corinthian continues to enroll new students.
Today’s CFPB lawsuit alleges a pervasive culture across the Everest, Heald, and WyoTech schools that allowed employees to routinely deceive and illegally harass private student loan borrowers. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive, or abusive practices. Based on its investigation, the CFPB alleges that the schools made deceptive representations about career opportunities that induced prospective students to take out private student loans, and then used illegal tactics to collect on those loans. Today’s lawsuit covers the period from July 21, 2011 to the present.
Lured into Loans by Lies
Most students who attend Everest, Heald, and WyoTech schools come from economically disadvantaged backgrounds and many are the first in their families to seek an education beyond a high school diploma. According to internal Corinthian documents, most students lived in households with very low income. Today’s lawsuit alleges that the schools owned by Corinthian Colleges, Inc. advertised their education as a gateway to good jobs and better careers. It alleges that throughout the Corinthian schools, consumers were lured into loans by lies, including:
Sham job placement rates: The CFPB alleges that Corinthian’s school representatives led students to think that when they graduated they were likely to land good jobs and sufficient salaries to repay their private student loans. But the CFPB believes that Corinthian inflated the job placement rates at its schools. Based on its investigation, the CFPB alleges that this included creating fictitious employers and reporting students as being placed at those fake employers.
One-day long “career”: According to the CFPB’s investigation, Corinthian schools told students they would have promising career options with an Everest, Heald, or WyoTech degree. But Corinthian counted a “career” as a job that merely lasted one day, with the promise of a second day.
Pay for placement: The CFPB also alleges that the Corinthian schools further inflated advertised job placement rates by paying employers to temporarily hire graduates. The schools did not inform students about these payments or that these jobs were temporary.
Craigslist career counseling: According to the CFPB’s investigation, the Corinthian schools promised students extensive and lasting career services that were not delivered. Students often had trouble contacting anyone in the career services office or getting any meaningful support. The limited career services included distributing generally available job postings from websites like Craigslist.
Predatory Loans
Tuition and fees for some Corinthian programs were more than five times the cost of similar programs at public colleges. In 2013, the Corinthian tuition and fees for an associate’s degree was $33,000 to $43,000. The tuition and fees for a bachelor’s degree at Corinthian cost $60,000 to $75,000.
The CFPB believes the Corinthian colleges deliberately inflated tuition prices to be higher than federal loan limits so that most students were forced to rely on additional sources of funding. The Corinthian schools then relied on deceptive statements regarding its education program to induce students into taking out its high-cost private student loans, known as “Genesis loans.” Today’s lawsuit alleges that under the Genesis loan program:
Interest rates were more than twice as expensive: Corinthian sold its students predatory loans that typically had substantially higher interest rates than federal loans. In July 2011, the Genesis loan interest rate was about 15 percent with an origination fee of 6 percent. Meanwhile, the interest rate for federal student loans during that time was about 3 percent to 7 percent, with low or no origination fees.
Loans were likely to fail: Corinthian expected that most of its students would ultimately default on their Genesis loans. In fact, more than 60 percent of Corinthian school students defaulted on their loans within three years. The Everest, Heald, and WyoTech schools did not tell students about these high default rates. Defaulting on private student loans can have grave consequences for consumers, including affecting a borrower’s job prospects and making it difficult to get any kind of loan for years.
Strong-Armed by Illegal Debt Collection Tactics
Under the Genesis loan program, nearly all student borrowers were required to make monthly loan payments while attending school. This is unusual; federal loans and almost all other sources of private student loans do not require repayment until after graduation. This put pressure on Everest, Heald, and WyoTech students to come up with funding while attending school. Today’s lawsuit alleges that Corinthian took advantage of this position of power to engage in aggressive debt collection tactics. The CFPB alleges that Corinthian’s campus staff members received bonuses based in part on their success in collecting payments from students. The debt collection tactics included:
Pulling students out of class: The CFPB’s investigation revealed that Corinthian’s efforts to collect payments included shaming students by pulling them out of class. Financial aid officers would inform instructors and other staff that students were past due on their Genesis loans. Corinthian schools also required students to meet with campus presidents to discuss the seriousness of the overdue loans. At one Corinthian campus, students and employees referred to one financial aid staff member as the “Grim Reaper” because the staff member so frequently pulled students out of class to collect debts.
Putting education in jeopardy: According to the CFPB’s investigation, the Corinthian colleges jeopardized students’ academic experience by denying them education until they paid up. They blocked students’ access to school computer terminals and other academic resources. The Corinthian schools also prevented students from attending and registering for class, and from receiving their books for their next classes.
Withholding diplomas: According to the CFPB investigation, Corinthian schools informed students that they could not participate in the graduation ceremony or would have their certificate withheld if they were not current on their Genesis loan in-school payments. In many cases, financial aid staff threatened that if students did not become current on their loans, they could not graduate or start their externships. Some former students stated that Corinthian schools continue to withhold their certificates because they are unable to make payments on their Genesis loans.
Halting Illegal Conduct and Obtaining Relief for Private Student Loan Borrowers
Today’s lawsuit seeks, among other things, compensation for the tens of thousands of students who took out Genesis loans. The CFPB estimates that from July 2011 through March 2014, students took out approximately 130,000 private student loans to pay tuition and fees at Everest, Heald, or WyoTech colleges. Some of these loans have been paid back in part or in full; the total outstanding balance of these loans is in excess of $569 million.
The CFPB is seeking redress for all the private student loans made since July 21, 2011, including those that have been paid off. In its lawsuit, the CFPB is also seeking to keep Corinthian from continuing the illegal conduct described above, and to prevent new students from being harmed.
Today the CFPB is also publishing a special notice for current and former Corinthian students to help them navigate their options in this time of uncertainty, including information on loan discharge options.
The Close of the Corinthian College Story
In May 2015, Corinthian Colleges declared bankruptcy.3
In October 2015, the CFPB won its case against Corinthian Colleges in federal court.
As a fellow student you will be pleased to hear that the federal government is providing loan relief for students who were victims of financial fraud.4
From a marketer’s point of view, the story demonstrates a number of different types of fraud, which had devastating consequences for both shareholders and stakeholders. Deliberate deception was part of the company’s strategy, and it played a dominant role in all aspects of marketing.
- https://www.law.cornell.edu/wex/fraud
- http://www.consumerfinance.gov/newsroom/cfpb-sues-for-profit-corinthian-colleges-for-predatory-lending-scheme/
- http://www.bloomberg.com/news/articles/2015-05-07/for-profit-college-implosion-intensifies-as-campuses-shut-down?cmpid=the_street
- https://studentaid.ed.gov/sa/about/announcements/corinthian
Licenses and Attributions
CC licensed content, Original
- Fraud in Marketing. Provided by: Lumen Learning. License: CC BY: Attribution
Public domain content
- Press Release: CFPB Sues For-Profit Corinthian Colleges for Predatory Lending Scheme. Provided by: Consumer Financial Protection Bureau. Located at: http://www.consumerfinance.gov/newsroom/cfpb-sues-for-profit-corinthian-colleges-for-predatory-lending-scheme/. License: Public Domain: No Known Copyright