ITT Educational Services (ESI) Received ED Letter from U.S. Dept. of Education; Says Sanctions, Requirements Imposed

August 26, 2016 8:43 AM EDT

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ITT Educational Services (NYSE: ESI) disclosed the following on Friday:

Item 8.01. Other Events.

On August 25, 2016, ITT Educational Services, Inc. (the “Company”) received a letter (the “ED Letter”) from the U.S. Department of Education (the “ED”) citing the August 17, 2016 letter (the “ACICS Letter”) from the Accrediting Council for Independent Colleges and Schools (“ACICS”) to the Company, which continued ACICS’ show-cause directive against the Company. The ED Letter summarizes the ACICS standards that ACICS has indicated the Company has not yet demonstrated full compliance with, and related concerns of ACICS. The ED Letter states that the Company has failed to meet the requirements established by ACICS, as required by the Company’s Program Participation Agreement with the ED. The ED Letter provides that as a result of those facts and other information, including as detailed in previous communications from the ED to the Company, the ED is imposing the following conditions on the Company’s continued participation in funding under the federal student financial aid programs under Title IV (the “Title IV Program”).

  • the surety provided by the Company to the ED must be increased from the current $94.4 million to $247.3 million, which amount represents 40% of the Title IV Program funds received by the ITT Technical Institutes during the most recently completed fiscal year;
  • the additional amount of $152.9 million (the “Additional Surety”) must be provided to the ED within 30 days from the date of the ED Letter;
  • effective immediately, all ITT Technical Institutes are required to make all Title IV Program fund disbursements under the Heightened Cash Monitoring 2 payment method, which requires the Company to make disbursements to students from its own institutional funds, and then submit a request for reimbursement of those funds to the ED;
  • the ITT Technical Institutes are restricted from enrolling or beginning classes for any new students who may receive Title IV Program funds;
  • the ITT Technical Institutes must provide all students with a notice disclosing the ACICS show-cause directives, including the fact that ACICS accreditation standards state that the “Council determines that [the] institution is not in compliance with the Accreditation Criteria, and is unlikely to become in compliance”;
  • the ITT Technical Institutes must provide to the ED within 30 days of the ED Letter teach out agreements for all ITT Technical Institutes;
  • the Company may not pay, or agree to pay, any bonuses, severance payments, raises or retention payments to any of its management or directors, nor may it pay special dividends or make any expenditures out of the ordinary course of business and consistent with prior practices, without approval from the ED; and
  • the Company remains required to provide information to the ED as previously required by the ED, and previously disclosed by the Company, regarding various events and regarding the Company’s operations, finances and future plans.

The ED Letter also provides that if the Company fails to meet any of these requirements, it will demonstrate to the ED that the Company is incapable of meeting the fiduciary and financial responsibility standards established by the Higher Education Act and the ED’s regulations. The ED Letter states that, accordingly, the failure to meet these standards will result in the referral of this matter to the ED’s Administrative Actions and Appeals Service Group for administrative action, including the potential revocation of the Program Participation Agreements for the ITT Technical Institutes, in which case the ITT Technical Institutes would no longer be eligible to participate in Title IV Programs.

The Company is evaluating these additional sanctions and requirements, as well as all options available to it.

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