Missing paperwork to wipe away $5-billion student loans

Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing.

The troubled loans, which total at least $5 billion, are at the centre of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments.

Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York

Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.

Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago, when billions of dollars in subprime mortgage loans were ruled uncollectible by courts because of missing or fake documentation. And like those troubled mortgages, private student loans — which come with higher interest rates and fewer consumer protections than federal loans — are often targeted at the most vulnerable borrowers, like those attending for-profit schools.

At the centre of the storm is one of the nation’s largest owners of private student loans, the National Collegiate Student Loan Trusts. It is struggling to prove in court that it has the legal paperwork showing ownership of its loans, which were originally made by banks and then sold to investors. National Collegiate’s lawyers warned in a recent legal filing, “As news of the servicing issues and the trusts’ inability to produce the documents needed to foreclose on loans spreads, the likelihood of more defaults rises.”

National Collegiate is an umbrella name for 15 trusts that hold 800,000 private student loans, totalling $12 billion. More than $5 billion of that debt is in default, according to court filings. The trusts aggressively pursue borrowers who fall behind on their bills. Across the country, they have brought at least four new collection cases each day, on average — more than 800 so far this year — and tens of thousands of lawsuits in the past five years.

Last year, National Collegiate unleashed a fusillade of litigation against Samantha Watson, a 33-year-old mother of three who graduated from Lehman College in the Bronx in 2013 with a degree in psychology.

Watson, the first in her family to go to college, took out private loans to finance her studies. But she said she had trouble following the fine print. “I didn’t really understand about things like interest rates,” she said. “Everybody tells you to go to college, get an education, and everything will be OK. So that’s what I did.”

Watson made some payments on her loans but fell behind when her daughter got sick and she had to quit her job as an executive assistant. She now works as a nurse’s aide, with more flexible hours but a smaller paycheck that barely covers her family’s expenses.

When National Collegiate sued her, the paperwork it submitted was a mess, according to her lawyer, Kevin Thomas of the New York Legal Assistance Group. At one point, National Collegiate presented documents saying that Watson had enrolled at a school she never attended, Thomas said.

“I tried to be honest,” Watson said of her court appearance. “I said, ‘Some of these loans I took out, and I’ll be responsible for them, but some I didn’t take.’”

In her defence, Watson’s lawyer seized upon what he saw as the flaws in National Collegiate’s paperwork. Judge Eddie McShan of New York City’s Civil Court in the Bronx agreed and dismissed four lawsuits against Watson. The trusts “failed to establish the chain of title” on Watson’s loans, he wrote in one ruling.

When the judge’s rulings wiped out $31,000 in debt, “it was such a relief,” Watson said. “You just feel this whole weight lifted. My mom started to cry.”

Donald Uderitz, the founder of Vantage Capital, a private equity firm that is the beneficial owner of National Collegiate’s trusts. “We don’t want National Collegiate to be the poster-boy of bad practices in student loan collections,” he said.

Joel Leiderman, a lawyer at Forster and Garbus, the law firm that represented National Collegiate in its litigation against Watson, declined to comment on the lawsuits.

Judges throughout the country, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it did not prove it owned the debt on which it was trying to collect.