Punished for years of deception, the BloomTech story

Recent events have shed light on the dark underbelly of the educational sector, particularly concerning deceptive practices by institutions promising lucrative opportunities to students. Among these revelations, the case of BloomTech, formerly known as Lambda, a California based coding bootcamp, stands out as a cautionary tale of the dangers students face in pursuit of educational and career advancement. This article delves into the intricate web of deceit spun by BloomTech, the actions taken against them by regulatory authorities, and the lessons to be learned from this troubling saga.

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Punished for years of deception, the BloomTech story 

If opportunities for students planning to study abroad are endless, so are traps. Lured by the promise of lucrative placements and easy loans, several students lose a lot of money to unscrupulous agents or companies. Action has recently been taken in one such case but after years of fraud by the company, which, ironically, boasted of support from big names in Silicon Valley. 

On April 17, the Consumer Financial Protection Bureau, US entered a consent order against vocational school BloomTech and its CEO, Austen Allred. The company has been charged with deceptive marketing practices related to “income sharing agreements” (ISAs). 

It was found that BloomTech and its CEO deceived students about the nature and cost of the ISAs and made false claims about job placement rates for graduates. 

What are ISAs? 

BloomTech or Lambda as it was known previously, offers short term training programmes in various fields like web development, data science and backend engineering. The school offered ISAs as a financing option to students who were unable to pay upfront tuition. Under this, students financed their tuition by agreeing to pay a specific share of their future income, in case it exceeded the minimum threshold. 

Since 2017, BloomTech offered around 11,000 income share loans, with most students using this option to finance their tuition. Under the agreements, students who earned more than $50,000 were required to pay BloomTech 17% of their pre-tax income every month till they made 24 payments or made payments totaling $30,000. 

How were students deceived ?

According to the CFPB, BloomTech and Allred deceived students about the nature of the ISAs and the benefits students would receive. Students were told that the ISA was not a loan, did not lead to debt, was risk-free and carried no financial charge. However, the agreements did have a financial charge of $4,000 and a single missed payment triggered a default under which the $30,000 cap became due immediately. 

Students were lured with false promises of job placements as high as 86% in large companies. Company figures showed that the actual placement rate was around 50% and even 30% in some cases. 

The CFPB report said, “Allred tweeted that the school achieved a 100% job placement rate in one of BloomTech’s cohorts. In a private message, he later acknowledged that the sample size was just one student.” 

The report also said, “From 2019 onwards, BloomTech touted job placement rates of at least 71%. But BloomTech’s non-public reporting to investors, which relied on more accurate methodologies, has consistently shown placement rates closer to 50%.” 

BloomTech was also found to have violated the holder rule by failing to include a required provision under which the owner of the contract was subject to the legal claims and defences which students could assert against BloomTech. This meant that students were deprived of the rights they should have had when their ISAs were sold to an investor. 

The CFPB report said that BloomTech’s interests were often not aligned with those of its students. It often sold its ISAs to investors right after originating them. In these cases, BloomTech got paid regardless of whether students secured a job and were able to pay back the ISA. 

The report added that the respondents engaged in abusive acts or practices by taking unreasonable advantage of students’ reasonable reliance on BloomTech to act in their interest. 

The report also pointed out that BloomTech targeted students whose financial options were already limited. “BloomTech marketed its programme to prospective students with limited financial options. These students were unlikely to be able to spend $20,000 in tuition upfront. In order to get them to enroll, BloomTech made income share agreements available as a tuition financing option,” said the report. 

The consent order

Under the consent order brought about by CPFB, BloomTech and Allred have been permanently banned from all consumer lending activities and Allred has been banned from any student-lending activities for 10 years. They have been ordered to stop collecting payments on ISAs for graduates who did not have a qualifying job in the past year. They have also been ordered to eliminate finance charges for students who graduated the programme more than 18 months ago and obtained a qualifying job making $70,000 or less. They have been asked to allow current students the option of withdrawing without penalty and pay more than $164,000 in civil penalties, which will be deposited in the CFPB’s victims relief fund. 

Bloomtech has agreed to the order but none of this puts the company out of business. It can operate with third party loans. 

In 2020, Lambda students told The Verge that it was not just the financial terms of the loans they were apprehensive about but how the company did not seem to be hiring professional instructors to equip students with skills required to make them employable, despite promising world-class industry experts.

According to the CFPB report, “BloomTech’s curricula frequently changed and relied in part on teaching assistants paid $15 per hour with limited programming backgrounds. As a result, many students complained that they had to teach themselves the course content.” 

Navigating a minefield

What is particularly alarming about this case is that BloomTech or Lambda school had been engaging in such practices from the beginning. Three years ago, Class Central released a detailed report about such practices. However, instead of course correction, the company went on the offensive with the support of big names from Silicon Valley such as Y Combinator co-founder Paul Graham. BloomTech even started a fundraiser, in which it raised $122 million from high-profile investors. 

The case is another grim reminder of the situation faced by students who make the wrong choice. In this case, the company had carefully crafted its image to lure students, most of whom did not have much money to begin with. On the surface, everything seemed just right and by the time students would have realized that it was not, they would have been stranded. 

The safest bet is still a company that is forthright about what it has to offer and does not offer incoming students the moon.