Paperwork issues could wipe out private debt

Sloppy and missing paperwork could wipe out $5 billion or more in private student loans held by consumers struggling to make their payments.

Lawsuits are being dismissed or withdrawn when they are challenged by consumers because the group of creditors that has aggressively pursued them is unable to prove that it owns the delinquent loans.

“Some have some paperwork. Others have no paperwork. Some attach a copy of the loan application,” said Emily White, a Columbus attorney who has represented consumers in lawsuits filed against them by National Collegiate Student Loan Trusts.

Regardless, the cases are always missing the one important thing, she said.

“Even if they have paperwork that looks impressive, it doesn’t have the critical information to show ownership,” White said.

The same sort of problem occurred during the housing crisis several years ago, when many banks had trouble foreclosing on homes because they couldn’t document that they owned the loan on the home or relied on missing or fake documentation.

Erica Corbett, formerly of Ashtabula County in northeast Ohio, and her grandfather, who co-signed her student loans, were sued this year after she purposely decided to stop paying her privately funded student debt. The case filed against her for nonpayment was withdrawn after she hired an attorney who demanded loan documents that couldn’t be produced.

Corbett borrowed money from a bank beginning in 2002 to finance her teaching degree from Edinboro College in northwest Pennsylvania. She borrowed about $100,000 and said she struggled to make payments of several hundred dollars a month for several years, sums that weren’t even enough to cover the interest on the loan.

When she sought help, the company servicing the debt for the trust, which bought her bank loans, couldn’t provide her with basic information on her debt: how much she owed, how long it would take to pay it off and whether the debt could be reworked to lower the payments.

“I could not get a straight answer. The debt was sold, and the balance would change. ‘Where are you guys coming up with this?’,” she

said she would ask. “‘Where is the documentation for the promissory notes?’ “

Matthew Davey, 35, of North Olmstead, near Cleveland, was sued by the trust after he got behind on his student loans after he had repaid all but $3,000 to $4,000 of it.

“I didn’t want to hide from it. I wanted to figure out a way to make things right. I borrowed this money. ... They were trying to collect all this interest, more than what I originally had borrowed. I would never get out from under this,” he said.

As was the case with Corbett, the trust withdrew its case against Davey after it couldn’t produce documents showing ownership of the loan, he said.

“It was a weight off me,” he said.

The attorney for both, Blake Brewer of Cleveland, says these cases can be won by consumers, but they need help.

“That’s the message,” he said. “These lawsuits can be defended with overwhelming success, really, if the consumer is willing to search out an attorney who understands collections, who understand the issues.”

Brewer estimated that more than half the time, borrowers don’t even bother try to defend themselves.

The result can be devastating with judgments filed against consumers and wage garnishment.

“Borrowers are so ashamed. They’re frustrated. They’re at their wits’ end. ‘I owe them money’,” he said they’ll say.

Private debt burden

Private student debt totals about $165 billion, according to website LendEDU. That’s a small portion of the total student debt, which stands at $1.4 trillion.

Banks make loans to students for college or other

kinds of schooling and then sell those loans. The loans are ultimately packaged and sold to investors.

National Collegiate is actually made up of 15 trusts that hold 800,000 student loans totaling $12 billion, according to The New York Times, which first reported on the troubled loans in July.

The trusts have been aggressively suing consumers who are behind on their loan payments, averaging four new collection cases a day and more than 10,000 cases over the past five years, the Times reported.

Private student debt is treated much differently than the debt financed by the federal government.

Government loans come with flexible payment plans and loan forgiveness in return for public service.

Private debt, on the other hand, usually comes with higher interest rates and fewer consumer protections. It is often targeted at students who attend forprofit schools.

Unlike other kinds of debt, student loans can’t be discharged in bankruptcy.

Regulators watching

The trust’s problems figure to get worse.

“As news of the servicing issues on the trusts’ inability to produce the documents needed to foreclose on loans spread, the likelihood of more defaults arises,” the trust said in a legal filing.

The trust and one of its loan servicers also have caught the attention of federal regulators.

In September, the trust agreed to pay $21.6 million in damages and take other measures after Consumer Financial Protection Bureau accused the trust of filing illegal lawsuits against consumers.

“The National Collegiate

Student Loan Trusts and their debt collector sued consumers for students they couldn’t prove were owed and filed false and misleading affidavits in courts across the country,” said Richard Cordray, the bureau’s director, in a statement.

“We’re ordering them to pay at least $21.6 million, stopping them from filing illegal lawsuits, and requiring the trusts to thoroughly audit their loan portfolios to identify any other consumers who were harmed.”

That debt collector, Transworld Systems, said it was disappointed in the bureau’s decision to take action against the company and said it disagrees with the bureau’s characterization of its work.

The company said the unit involved in the work adheres “to all federal and state consumer protection laws, and (embodies) best practices in the industry, including having ... proper documentation for any legal claims, and diligent local law firms that review these cases in their entirety prior to taking any action in court.”

How much the bureau’s action will help consumers is hard to say, says White, the Columbus attorney who has help consumers in these cases.

“Borrowers and courts can’t rely on the (bureau) to ensure that judgments are fairly and properly obtained in future private student loan collections actions,” she said. “In these cases, borrowers and courts should still insist on complete and admissible evidence that a loan was issued, that it was effectively transferred to the plaintiff, that the statute of limitations had not expired, and that the amount owed is correct.”

One story

Erica Corbett, the

former northeast Ohio woman, decided in 2014 to stop making payments on her student loan debt. It was a tough decision that she knew would cause trouble for her and her family, especially her grandfather, who had cosigned the loans.

Collection agencies began to hound her and her grandfather.

“He was getting phone calls. I was getting phone calls. He was getting letters. I was getting letters. He was basically getting harassed by these collection agencies,” she said.

She knew she and her grandfather would end up being sued. The trust sued both of them in Ashtabula County in northeast Ohio in January, a case that the trust later withdrew.

While she is relieved the case has been dismissed, she also knows it hasn’t put an end to the problems.

The trust could sue again if it can more prove ownership of the loans. And her credit score — and that of her grandfather — has been damaged.

She and her husband bought a home in Arizona where they recently moved.

“I’m not on the loan because I couldn’t be (because of her problematic credit score). My husband owns the house, and my husband owns the car,” she said.

Still, she has no regrets about what she’s done.

“How many thousands of dollars I wasted,” she said of the loan payments. “What I could have done with it. It hurt my credit scores and hurt my grandfather’s credit score. There were a lot of times where it caused a lot of tension and grief. I was bound and determined not to spend the rest of my life in this cycle.”