| Commitments and Contingencies | 14. Commitments and
Contingencies
As part of our normal operations, one of our insurers issues surety
bonds for us that are required by various education authorities
that regulate us. We are obligated to reimburse our insurer for any
of those surety bonds that are paid by the insurer. As of
September 30, 2014, the total face amount of those surety
bonds was approximately $19,500. As of September 30, 2014, we
also had caused approximately $2,352 of letters of credit to be
issued to our workers’ compensation insurers and one of our
state regulatory agencies.
Our institutions’ failure to submit their 2013 audited
consolidated financial statements and the 2013 compliance audits of
their administration of the Title IV Programs in which they
participate (“Compliance Audits”) to the ED by the due
date resulted in sanctions imposed by the ED on our institutions
that included, among other things, our institutions having to
submit a letter of credit payable to the ED. We caused the ED
Letter of Credit in the amount of $79,708 to be issued on
October 31, 2014. The term of the ED Letter of Credit ends on
November 4, 2019. As of December 31, 2014, the total
amount of the outstanding letters of credit that we have caused to
be issued was $82,060.
The ED Letter of Credit provides that the ED may draw on the ED
Letter of Credit upon certification by the ED that the drafted
funds will be used for one or more of the following purposes:
• to pay refunds of institutional or
non-institutional charges owed to or on behalf of current or former
students of our institutions, whether our institutions remain open
or have closed;
• to provide for the
“teach-out” of students enrolled at the time of closure
of our institutions; and
• to pay any liabilities owing to the
ED arising from acts or omissions by our institutions, on or before
the expiration of the ED Letter of Credit, in violation of
requirements set forth in the HEA, including the violation of any
agreement entered into by our institutions with the ED regarding
the administration of Title IV Programs.
Claims and contingencies that we are subject to include those
related to litigation, government investigations, business
transactions, guarantee arrangements, tax matters and
employee-related matters, among others. We record a liability for
claims and contingencies, if it is probable that a loss will result
and the amount of the loss can be reasonably estimated. Although we
believe that our estimates related to any claims and contingencies
are reasonable, we cannot make any assurances with regard to the
accuracy of our estimates, and actual results could differ
materially.
The following table sets forth the components of our recorded
liability related to our claims and contingencies and where the
amounts were included on our Condensed Consolidated Balance Sheets
as of the dates indicated:
As of September 30, 2014 As of December 31, 2013 As of September 30, 2013
2009 RSA $ 0 $ 116,923 $ 36,535
Other 14,494 8,957 8,325
Total $ 14,494 $ 125,880 $ 44,860
Other current liabilities $ 14,494 $ 25,893 $ 44,472
Other liabilities 0 99,987 388
Total $ 14,494 $ 125,880 $ 44,860
Other current liabilities primarily represented our estimate of the
loss that we believed we would realize during the 12-month period
following the dates indicated. The amounts included in Other
liabilities primarily related to our estimated contingent liability
for the 2009 RSA as of December 31, 2013 and
September 30, 2013 (prior to the 2009 Entity Consolidation),
and represented our estimate of the loss that we believed we would
realize after the 12-month period following the dates indicated and
over a period that could exceed ten years. See below for a
discussion of the method by which we determined the amount of the
contingent liability that we recorded related to our guarantee
obligations under the 2009 RSA prior to the 2009 Entity
Consolidation.
The following table sets forth the activity with respect to our
recorded liability related to our claims and contingencies in the
periods indicated:
Three Months Ended Nine Months Ended
2014 2013 2014 2013
Balance at beginning of period $ 126,074 $ 38,725 $ 125,880 $ 126,978
Increases (decreases) from:
Additional accruals:
2009 RSA 2,019 4,826 2,019 8,629
Other 11,603 5,484 27,816 12,415
Payments, other, net of recoveries owed of $0, $186, $475, and
$413 (1) (8,532 ) (3,717 ) (21,804 ) (8,924 )
Payments under the 2009 RSA, net of recoveries of $0, $0, $0 and
$103 (2) (1,809 ) (458 ) (4,556 ) (738 )
Payments under PEAKS Guarantee, net of estimated recoveries of $0,
$80, $0 and $803 (52,517 ) (58 ) (94,318 ) (574 )
Payments on Behalf of Borrowers 0 (2,502 ) (1,832 ) (7,647 )
Settlement payment – 2007 RSA 0 0 0 (46,000 )
Elimination of PEAKS Trust intercompany transactions (3) 52,517 2,560 96,150 6,835
Elimination of PEAKS Guarantee accrual (4) 0 0 0 (46,114 )
Elimination of 2009 RSA accrual (5) (114,861 ) 0 (114,861 ) 0
Balance at end of period $ 14,494 $ 44,860 $ 14,494 $ 44,860
(1) Consists of payments for legal and
other contingencies, net of recoveries from charged-off loans made
under the 2009 Loan Program that were owed, but had not been
remitted, to us.
(2) Consists of payments made under the
2009 RSA, net of recoveries from charged-off 2009 Entity Student
Loans that we received.
(3) We consolidated the PEAKS Trust in
our consolidated financial statements as of February 28, 2013
and, as a result, we eliminated from our consolidated financial
statements the amount of payments under the PEAKS Guarantee and
Payments on Behalf of Borrowers that we made following the PEAKS
Consolidation. See Note 9 – Variable Interest Entities, for a
further discussion of the PEAKS Consolidation.
(4) As a result of the PEAKS
Consolidation, in the nine months ended September 30, 2013, we
eliminated from our consolidated financial statements the
contingent liability related to the PEAKS Guarantee that we had
previously recorded.
(5) As a result of the 2009 Entity
Consolidation, in the three and nine months ended
September 30, 2014, we eliminated from our consolidated
financial statements the contingent liability related to the 2009
RSA that we had previously recorded.
We had guaranteed the repayment of private education loans made by
a lender to our students in 2007 and early 2008 (the “2007
RSA”) that the lender charged off above a certain percentage
of the total dollar volume of private education loans made under
the 2007 RSA. In January 2013, we paid $46,000 in a settlement to
absolve us from any further obligations with respect to our
guarantee obligations under the 2007 RSA, which amount is included
in the Settlement payment – 2007 RSA line item in the nine
months ended September 30, 2013 in the table above.
Prior to the 2009 Entity Consolidation, in order to determine the
amount of the contingent liability to record related to our
guarantee obligations under the 2009 RSA, we utilized estimates of,
among other things, the projected repayment performance of the
private education loans made under the 2009 Loan Program, which
projections involved numerous assumptions. We consulted with
third-party consumer credit consulting firms in developing certain
repayment assumptions. Based on those projections and other
factors, we estimated the amount of payments that we expected to
make and the amounts that we expected to be repaid to us.
In connection with determining the amount of the contingent
liability to record related to our guarantee obligations under the
2009 RSA, prior to the 2009 Entity Consolidation, we also
considered the payment options available to us under the 2009 Loan
Program, including our ability to make Discharge Payments under the
2009 RSA. To the extent that we projected that we would have
sufficient funds available to make Discharge Payments under the
2009 RSA, we incorporated an assumption that we would make
Discharge Payments into our estimate of the amount of payments that
we expected to make when determining the contingent liability. If
we did not believe that we would have sufficient funds available to
make Discharge Payments, we assumed that we would make Regular
Payments to satisfy our obligations under the 2009 RSA. We
discounted the amount of those expected future monthly Regular
Payments at a risk-free rate of interest. Making Discharge Payments
results in us paying a lesser amount than we otherwise would have
been required to pay under our guarantee obligations in future
periods under the 2009 RSA and, therefore, results in an estimated
contingent liability amount that is less than if we had assumed
that we would make Regular Payments in future periods.
Under the 2009 RSA, we are entitled to all amounts that the 2009
Entity recovers from loans in a particular loan pool made under the
2009 Loan Program that have been charged off, until all payments
that we made under the 2009 RSA with respect to that loan pool have
been repaid to us by the 2009 Entity. We discounted the amounts of
recoveries that we expected would be repaid to us under the 2009
RSA at a risk-free rate of interest. The difference between the
amount of the discounted guarantee payments that we expected to
make and the discounted amount that we expected would be repaid to
us under the 2009 RSA is recorded as the amount of our estimated
contingent liability related to our guarantee obligations under the
2009 RSA, prior to the 2009 Entity Consolidation.
In connection with estimating our recorded liability for claims and
contingencies as of September 30, 2014, December 31,
2013 and September 30, 2013, we considered whether additional
losses for claims and contingencies were reasonably possible, could
be estimated and might be material to our financial condition,
results of operations or cash flows. As with any estimate, as facts
and circumstances change, the recorded liability and estimated
range of reasonably possible losses could change significantly.
With respect to legal proceedings, we determined that we cannot
provide an estimate of the possible losses, or the range of
possible losses, in excess of the amount, if any, accrued, for
various reasons, including but not limited to some or all of the
following:
• there are significant factual issues
to be resolved;
• there are novel or unsettled legal
issues presented;
• the proceedings are in the early
stages;
• there is uncertainty as to the
likelihood of a class being certified or decertified or the
ultimate size and scope of the class;
• there is uncertainty as to the
outcome of pending appeals or motions; and
• in many cases, the plaintiffs have
not specified damages in their complaint or in court filings.
We may resolve certain federal and state income tax matters
presently under examination within the 12 months immediately
following the date of this filing. As of September 30, 2014,
we estimated that it was reasonably possible that unrecognized tax
benefits, excluding interest and penalties, could decrease in an
amount ranging from $0 to $7,100 in the 12 months immediately
following the date of this filing due to the resolution of those
matters.
We have presented legal and professional fees related to certain
lawsuits, investigations and accounting matters as a separate line
item in our Condensed Consolidated Statements of Income. The
amounts included in this line item represent expenses for various
lawsuits, investigations and accounting matters that we believe are
not representative of those normally incurred in the ordinary
course of business. Certain of those lawsuits and investigations
are described in detail, below. The expenses for the accounting
matters included in this line item relate primarily to services
identified as relating to accounting for, and the audit work
performed in connection with, the consolidation of the PEAKS Trust
and the restatement of our 2013 quarterly consolidated financial
statements.
Guarantees.
PEAKS Guarantee and Purchase Obligations
We concluded that we were required to consolidate the PEAKS Trust
in our consolidated financial statements beginning on
February 28, 2013. See Note 9 – Variable Interest
Entities, for a further discussion of the PEAKS Consolidation. As a
result, the assets and liabilities of the PEAKS Trust have been
included on, and all intercompany transactions have been eliminated
from, our Condensed Consolidated Balance Sheets as of
September 30, 2014, December 31, 2013 and
September 30, 2013. While we no longer record a contingent
liability for the PEAKS Guarantee on our Condensed Consolidated
Balance Sheet beginning on February 28, 2013, our obligations
under the PEAKS Guarantee remain in effect.
PEAKS Program Payments in 2014
• the $40,000 payment we made in March
2014 pursuant to the PEAKS Letter Agreement, which is considered to
be a payment under the PEAKS Guarantee;
• the payments totaling approximately
$51,700 that we made from July 2014 through September 2014 to
satisfy our obligation under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in prior
periods;
• payments totaling approximately
$64,900 that we made from October 2014 through December 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in current and
prior periods;
• payments totaling approximately
$2,700 that we made from March 2014 through September 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
interest owed on the PEAKS Senior Debt and administrative fees and
expenses of the PEAKS Trust; and
• Payments on Behalf of Borrowers of
approximately $1,800 that we made in January 2014.
See also “— PEAKS Program and 2009 RSA Payments in
Certain Periods
Projected PEAKS Guarantee Payments
The estimated amount and timing of future payments and recoveries
with respect to the PEAKS Guarantee discussed above and elsewhere
in this report are only estimates, are based on numerous
assumptions and are subject to change. As with any estimate, as
facts and circumstances change, the estimated amounts and timing
could change. We made a number of assumptions in preparing the
estimates, which assumptions may not be correct. The assumptions
included, among other things, the following:
• the repayment performance of the
PEAKS Trust Student Loans, the proceeds from which will be used to
repay the PEAKS Senior Debt and to pay the fees and expenses of the
PEAKS Trust, and the performance of which also affects the
Asset/Liability Ratio;
• the fact that those loans will
consist of a large number of loans of individually immaterial
amounts;
• the fact that the interest rate on
the PEAKS Senior Debt is a variable rate based on the LIBOR plus a
margin; and
• the amount of fees and expenses of
the PEAKS Trust, much of which is based on the principal balance of
the PEAKS Trust Student Loans.
2009 RSA
Pursuant to the 2009 RSA, we are required to maintain collateral to
secure our guarantee obligation in an amount equal to a percentage
of the outstanding balance of the private education loans disbursed
to our students under the 2009 Loan Program. As of
September 30, 2014, December 31, 2013 and
September 30, 2013, the total collateral maintained in a
restricted bank account was approximately $8,600. This amount was
included in Other assets on our Condensed Consolidated Balance
Sheets as of each of those dates. The 2009 RSA also requires that
we comply with certain covenants, including that we maintain
certain financial ratios which are measured on a quarterly basis
and that we deliver compliance certificates on a quarterly basis
setting forth the status of our compliance with those financial
ratios. If we are not in compliance with those covenants at the end
of each fiscal quarter, we are required to increase the amount of
collateral maintained in the restricted bank account to a
predetermined amount, until the end of a succeeding quarter at
which we are in compliance with those covenants. The predetermined
amount is based on the percentage of the aggregate principal
balance of the private education loans made under the 2009 Loan
Program that exceeds a certain percentage as of the end of each
fiscal quarter.
Under the 2009 RSA, we have the right to elect to make Discharge
Payments with respect to private education loans made under the
2009 Loan Program that have been charged off. The effect of a
making a Discharge Payment related to a private education loan is
to reduce the aggregate amount that we may have to pay under our
guarantee obligations with respect to that loan. We have claimed as
an offset against amounts owed to us under the Revolving Note
amounts that would have the effect of discharging our obligations
with respect to certain charged off loans under the 2009 RSA. In
addition, in the three months ended December 31, 2013, we made
Discharge Payments to the 2009 Entity. Making Discharge Payments
results in us paying amounts to the 2009 Entity in advance of when
a guarantee payment would be due, which would negatively impact our
liquidity in a particular period, but may result in us paying a
lesser amount than we otherwise would have been required to pay
under our guarantee obligation in future periods under the 2009
RSA. See Note 9 – Variable Interest Entities, for a further
discussion of Discharge Payments.
We concluded that we were required to consolidate the 2009 Entity
in our consolidated financial statements beginning on
September 30, 2014. See Note 9 – Variable Interest
Entities, for a further discussion of the 2009 Entity
Consolidation. As a result, the assets and liabilities of the 2009
Entity have been included on, and all intercompany transactions
have been eliminated from, our Condensed Consolidated Balance Sheet
as of September 30, 2014. While we no longer record a
contingent liability for the 2009 RSA on our Condensed Consolidated
Balance Sheet beginning September 30, 2014, our obligations
under the 2009 RSA remain in effect.
2009 RSA Payments in 2014.
• Regular Payments of $7,028;
• a Discharge Payment of $2,577 that we
made pursuant to the Fourth Amendment to 2009 RSA (as defined
below); and
• $466 in recoveries from charged-off
loans that were owed to us from the 2009 Entity and that we applied
to reduce the amount payable by us to the 2009 Entity pursuant to
our offset right.
In the year ended December 31, 2014, the 2009 Entity did not
remit to us $475 of recoveries from charged-off loans that were
owed to us. See also “— PEAKS Program and 2009 RSA
Payments in Certain Periods
2009 RSA Amendments.
On March 17, 2015, we entered into a Fifth Amendment to the
2009 RSA with the 2009 Entity (the “Fifth Amendment to 2009
RSA”). The Fifth Amendment to 2009 RSA provides that we are
not required to comply with certain financial ratio covenants under
the 2009 RSA that we otherwise would not have been in compliance
with from June 30, 2013 through: (i) March 31, 2015
related to our debt service ratio, and (ii) December 31,
2015 related to our current ratio. Additionally, the Fifth
Amendment to 2009 RSA provides that for any fiscal quarter end in
which the 2009 Entity (or its owned or managed assets) are
consolidated into our financial statements that the financial
covenant and persistence percentage provisions and the
corresponding compliance certificate requirements will be based on
our relevant quarterly and annual reports that we file with the
SEC, but excluding the effects of any such consolidation. Further,
any financial statements for periods ending prior to March 17,
2015 that we are required to deliver to the 2009 Entity, but have
not been delivered as of that date, must be delivered to the 2009
Entity on or before May 31, 2015. In lieu of an increase in
the required collateral under the 2009 RSA, we made a payment of
$2,709 to the 2009 Entity on March 19, 2015 pursuant to the
Fifth Amendment to 2009 RSA, which payment was considered a
Discharge Payment under the 2009 RSA.
Projected 2009 RSA Payments
Year Estimated Regular Payments Estimated Estimated Estimated
2015 $ 13,400 $ 2,709 (1) $ 16,109 $ (1,240 )
2016 15,835 0 15,835 (1,240 )
2017 16,631 0 16,631 (1,240 )
2018 and later 0 72,509 72,509 (380 )
Total $ 45,866 $ 75,218 $ 121,084 $ (4,100 )
(1) Represents the Discharge Payment of
$2,709 that we made on March 19, 2015 pursuant to the terms of
the Fifth Amendment to 2009 RSA.
We believe that the vast majority of the $72,509 of estimated
payments projected to be paid after 2017 will be made by us in
2018. The estimated future payment amounts and timing related to
the 2009 RSA assume, among other factors, that we do not make any
Discharge Payments in 2015, 2016 or 2017 (other than the Discharge
Payment made in March 2015 pursuant to the terms of the Fifth
Amendment to 2009 RSA) and do make Discharge Payments to the
fullest extent possible in 2018 and later years. If we do not make
the Discharge Payments as assumed in 2018 and later years, we
estimate that we would make approximately $100,100 of Regular
Payments in 2018 through 2027. Of this amount, approximately
$16,500 to $17,000 would be paid annually in each of 2018 through
2022, and approximately $16,300, in the aggregate, would be paid in
2023 through 2027.
The estimated amount and timing of future payments and recoveries
with respect to the 2009 RSA discussed above are only estimates,
are based on numerous assumptions and are subject to change. As
with any estimate, as facts and circumstances change, the estimated
amounts and timing could change. We made a number of assumptions in
preparing the estimates, which assumptions may not be correct. The
assumptions included, among other things, the following:
• the repayment performance of the
private education loans made under the 2009 Loan Program;
• the timing and rate at which those
private education loans will be paid;
• the changes in the variable interest
rates applicable to those private education;
• the amounts and timing of collections
in the future on those private education loans that have been
charged off; and
• our ability to utilize the available
options for payment of our obligations under the 2009 RSA.
PEAKS Program and 2009 RSA Payments in Certain
Periods
Three Months Ended September 30, Nine Months Ended September 30,
Type of Payment (Receipt) 2014 2013 2014 2013
Guarantee:
PEAKS Program $ 52,517 $ 138 $ 94,318 $ 1,377 (1)
2009 RSA Regular Payments 1,809 (2) 458 4,556 (2) 841
2009 RSA Discharge Payments 0 0 0 0
Payments on Behalf of Borrowers 0 2,502 1,832 7,647 (3)
2009 RSA-Recoveries from Charged-Off Loans 0 0 0 (103 )
Total $ 54,326 $ 3,098 $ 100,706 $ 9,762
(1) Of this amount, $854 was paid prior
to the PEAKS Consolidation.
(2) This amount is net of $156 of
recoveries from charged-off loans owed to us that we offset against
the amount we owed under the 2009 RSA.
(3) Of this amount, $532 was paid prior
to the PEAKS Consolidation.
The 2009 Entity did not remit to us, and we did not offset payments
under the 2009 RSA for, the following amounts of recoveries from
charged-off loans that were owed to us:
• $0 in the three months ended
September 30, 2014;
• $186 in the three months ended
September 30, 2013;
• $475 in the nine months ended
September 30, 2014; and
• $413 in the nine months ended
September 30, 2013.
We recorded the amount of recoveries from charged-off loans that
were owed to us, but not paid or offset, as of September 30,
2013, in Prepaid expenses and other current assets on our Condensed
Consolidated Balance Sheet. The amounts of recoveries from
charged-off loans that were owed to us by the 2009 Entity, but not
paid or offset, as of September 30, 2014 were not recorded on
our consolidated financial statements, since those amounts were
intercompany transactions that were eliminated from our financial
statements as a result of the 2009 Entity Consolidation
We also offset the following amounts owed by us under the 2009 RSA
against amounts owed to us by the 2009 Entity under the Revolving
Note, instead of making additional payments in those amounts:
• $0 in the three months ended
September 30, 2014;
• $357 in the three months ended
September 30, 2013;
• $0 in the nine months ended
September 30, 2014; and
• $8,471 in the nine months ended
September 30, 2013.
We recorded all of the amounts that we claimed as offsets against
amounts owed to us under the Revolving Note in Other current
liabilities on our Condensed Consolidated Balance Sheet as of
September 30, 2013. The amounts that we claimed as offsets
under the Revolving Note as of September 30, 2014, were not
recorded on our consolidated financial statements, since those
amounts were intercompany transactions that were eliminated from
our financial statements as a result of the 2009 Entity
Consolidation.
In the first quarter of 2013, we notified the 2009 Entity that:
• we had determined that the 2009
Entity was in default of its obligations to us under the loan and
security agreement pursuant to which the Revolving Note was issued
(the “2009 Loan Agreement”);
• as a result of that default, all
amounts under the Revolving Note were immediately due and payable;
and
• we would not make payments under the
2009 RSA, until we received credit for the full amount due us under
the Revolving Note, based on the provisions of the 2009 Loan
Agreement and the 2009 RSA that allow us to set off amounts owed by
us under the 2009 RSA against amounts owed to us by the 2009 Entity
under the Revolving Note.
At that time, the outstanding amount of the Revolving Note due to
us was approximately $8,200, representing principal and accrued
interest. In response to our notification, the 2009 Entity:
• denied that it had defaulted under
the 2009 Loan Agreement and, therefore, our ability to accelerate
the payment of the Revolving Note; and
• refused our demand to immediately pay
the Revolving Note in full.
As a consequence, over the period from February 2013 through August
2013, we offset our then current payment obligations under the 2009
RSA and the amount of Discharge Payments we elected to make during
that period against all of the 2009 Entity’s obligations owed
to us under the Revolving Note (the “Offset”).
We understand that the 2009 Entity’s position is that the
Offset was improper, because:
• it has not defaulted under the 2009
Loan Agreement; and
• even if it had defaulted under the
2009 Loan Agreement, the assets of the 2009 Entity against which we
could offset or exercise our other remedies, were limited.
We further understand the 2009 Entity’s position to be that,
because the Offset was improper, we are in default under the 2009
RSA. In April 2013, the 2009 Entity notified us that it had taken
control of the restricted account containing the cash collateral
that we deposited to secure our obligations under the 2009 RSA (the
“Collateral”). At that time, the amount of funds in
that account was approximately $8,600. To our knowledge, the 2009
Entity has taken no further action related to the Collateral. We
believe that our good faith exercise of our right of offset
provided for in the 2009 Loan Agreement and the 2009 RSA does not
constitute an event of default under the 2009 RSA, and that the
2009 Entity’s seizure of control of the restricted account
containing the Collateral constitutes an additional default by the
2009 Entity. We cannot assure you, however, that the Offset will
ultimately be determined to have been proper. In the event of a
default by us under the 2009 RSA related to the Offset, we may be
required to pay to the 2009 Entity approximately $8,600,
representing the amount of the Offset, net of approximately $1,049
of recoveries from charged-off loans that are owed, but have not
been paid, to us. If, instead, the 2009 Entity was to withdraw
Collateral in that amount from the restricted bank account, we
would be required to deposit that amount of cash in the account to
maintain the required level of Collateral.
Assessment of Guarantee Contingent Liability
In order to estimate the amount of the contingent liability, we
made certain assumptions with respect to the performance of the
2009 Entity Student Loans over the life of those loans. The life of
a 2009 Entity Student Loan may be in excess of ten years from the
date of disbursement. Therefore, our estimates were based on
assumptions for periods in excess of ten years, and those
assumptions included, among other things, the following:
• the repayment performance of the 2009
Entity Student Loans, which includes both payments on non-defaulted
loans and recoveries from defaulted, or charged-off, loans;
• the timing and rate at which the 2009
Entity Student Loans will be paid;
• the changes in the variable interest
rates applicable to the 2009 Entity Student Loans;
• the amounts and timing of collections
that will be collected in the future on 2009 Entity Student Loans
that have defaulted; and
• our ability to utilize the available
options for payment of our obligations under the 2009 RSA.
Because the amount of the contingent liability takes into
consideration the projected repayment performance of the 2009
Entity Student Loans that could extend for ten or more years, and
the repayment performance data develops over a period that is
several years from the date the loans were originated, we
continually refined our assumptions based on new data and
information. We consulted with third-party consumer credit
consulting firms in determining certain repayment performance
assumptions.
The projected future payments that we expected to make under the
2009 RSA were based on a methodology to forecast future default
rates and amounts, which methodology utilized the historical amount
of 2009 Entity Student Loans that had defaulted. The historical
default experience by itself, however, may not be indicative of the
future default performance of the 2009 Entity Student Loans.
Therefore, we made certain assumptions regarding the expected
future default performance of the loans. In estimating the
projected future amounts that we expected to be repaid to us by the
2009 Entity from recoveries from charged-off loans, we considered
the actual collections on defaulted loans made under the 2009 Loan
Program, as well as other factors. As the 2009 Entity Student Loans
matured, additional data related to the repayment performance of
the loans and other information regarding the loans became
available to us that we utilized to estimate the related contingent
liability. The assumptions used for our projections of future
payments and recoveries have changed significantly over time as
actual repayment performance became known, which resulted in
changes to the estimated contingent liability.
We also considered our ability to utilize Discharge Payments for
payment of our obligations under the 2009 RSA in our estimates of
the contingent liability. Making Discharge Payments results in an
estimated contingent liability amount that is less than if we had
assumed we would make Regular Payments in future periods. As
circumstances and our future cash flow projections changed over
time, we adjusted our assumptions related to our ability to make
Discharge Payments, which resulted in an increase in our estimated
contingent liability amount in certain periods.
In addition, in certain prior reporting periods, there were
disruptions in the servicing of a portion of the 2009 Entity
Student Loans, as well as indications that servicing activities
were not being performed as required by the applicable servicing
agreement, which we believe had a negative impact on the repayment
performance of those loans. We cannot predict with any certainty
whether other servicing disruptions or other servicing issues will
occur in the future.
Litigation .
On December 22, 2008, we were served with a qui tam action
that was filed on July 3, 2007 in the United States District
Court for the Southern District of Indiana by a former employee
(“relator”) on behalf of herself and the federal
government under the following caption: United States of America
ex rel. Debra Leveski v. ITT Educational Services, Inc. et seq
• treble the amount of unspecified
funds paid to us for federal student grants;
• treble the amount of unspecified
default payments, special allowance payments and interest received
by lenders with respect to federal student loans received by our
students;
• all civil penalties allowed by law;
and
• attorney’s fees and costs.
A qui tam action is a civil lawsuit brought by one or more
individuals (a qui tam “relator”) on behalf of the
federal or state government for an alleged submission to the
government of a false claim for payment. A qui tam action is always
filed under seal and remains under seal, until the government
decides whether to intervene in the liti |
