Missing paperwork may ease student loan debts
Tens of thousands who took out private loans may be lucky.
Tens of thousands of peo- ple 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 center 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 dismissed dozens of lawsuits against former students, essentially wiping out their debt, because docu- ments 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-pro- duced documentation.
Some of the problems playing out in the $108 billion private student loan mar- ket are reminiscent of those that arose from the subprime mortgage crisis a decade ago, when billions of dollars in subprime mortgage loans were ruled uncollectable by courts because of miss- ing or fake documentation. And like those troubled mort- gages, private student loans — which come with higher interest rates and fewer con- sumer protections than federal loans — are often targeted at the most vulnerable bor- rowers, like those attending for-profit schools.
At the center of the storm is one of the nation’s largest owners of private student loans, the National Colle- giate 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 It is struggling to prove in court that it has the legal paperwork showing ownership of its loans, which were originally made by banks and then sold to investors.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, totaling $12 bil- lion. More than $5 billion of that debt is in default, according to court filings. The trusts aggressively pursue borrow- ers 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 this year — and tens of thousands of lawsuits in the past five years.
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.
The trusts win many of the lawsuits they file automatically, because borrow- ers often do not show up to fight. Those court victories, which can be used to garnish paychecks and federal benefits like Social Security, can haunt borrowers for decades.
The loans that National Collegiate holds were made to college students more than a decade ago by dozens of different banks, then bun- dled together by a financing company and sold to investors through a process known as securitization. These private loans were not guaran- teed by the federal government, which is the nation’s largest student loan lender.
But as the debt passed through many hands before landing in National Colle- giate’s trusts, critical paper- work documenting the loans’ ownership disappeared, according to documents that have surfaced in a little-no- ticed legal battle involving the trusts in state and federal courts in Delaware and Pennsylvania.
National Collegiate’s legal problems have hinged on its inability to prove it owns the student loans, not on any falsification of documents.
Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofit advocacy group, has seen shoddy and inaccurate paperwork in dozens of cases involving private student loans from a variety of lenders and debt buyers, which she detailed in a 2014 report.
But National Collegiate’s problems are especially acute, she said. Over and over, she said, the company drops lawsuits — often on the eve of a trial or depo- sition — when borrowers contest them. “I question whether they actually pos- sess the documents necessary to show that they own loans,” Smith said.
In an unusual situation, one of the financiers behind National Collegiate’s trusts agrees with some of the criticism. He is Donald Uderitz, the founder of Vantage Capital Group, a private equity firm in Delray Beach, Florida, that is the beneficial owner of National Collegiate’s trusts. (Uderitz’s firm keeps whatever money is left after the trusts’ noteholders are paid off.)
He said he was appalled by National Collegiate’s collection lawsuits and wanted them to stop, but an internal struggle between Vantage Capital and others involved in operating the trusts has prevented him from ordering a halt, he said.
“We don’t like what’s going on,” Uderitz said in a recent interview.
“We don’t want National Collegiate to be the poster boy of bad practices in student loan collections, but we have no ability to affect it except through this litigation,” he said, referring to a lawsuit he initiated last year against the trusts’ loan servicer in Delaware’s Chancery Court, a popular battleground for corporate legal fights.