Tens of thousands of borrowers may find that their private student loan debt could be “wiped” away due to false or missing critical paperwork. Borrowers who have fallen behind on their payments may also be included in this debt wipe out because of clerical errors. The private student loan debt, which estimates to a total of at least $5 BILLION dollars, is part of a legal dispute between student loan borrowers and a group of creditors. These lenders have been aggressively pursuing borrowers who have specifically fallen behind on their payments.
Judges have dismissed numerous lawsuits filed against borrowers, effectively wiping out their debt. The reasons for many of the case dismissals are due to many creditors failing to produce documents that prove debt ownership. The New York Times reviewed several lawsuits filed by creditors that were deeply flawed and did not have documents to prove borrowers owed these debts. Also, many creditors mass-produce a majority of their documents that are filed in court, failing to give proper attention to the cases they filed in court.
The problems that are being discovered in these cases echo the same dilemma that arose from the subprime mortgage loan crisis. Billions of dollars in subprime mortgage loans have been declared uncollectible by the courts because of fake or missing documents. The private student loan industry is worth $108 billion, and like past subprime mortgages, these student loans come with higher interest rates and with fewer consumer protections than federal student loans. These private loans are targeted to the most vulnerable of consumers, many who are attending for-profit schools.
Biggest Owner of Private Student Loans Fails To Prove Debt Ownership
The nation’s largest owner of private student loans, National Collegiate Student Loan Trust, is currently being scrutinized by the courts for its lawsuit filed against borrowers. National Collegiate struggles to prove its legal ownership of thousands of its loans, which were originated from banks but subsequently sold to investors. Lawyers of National Collegiate warned in a recent legal filing: “as news of the servicing issues and trusts’ inability to produce the documents needed to foreclosure on loans spread, the likelihood of more default rises.”
National Collegiate Trust (NTC), is an umbrella name for 15 trusts that contain 800,000 private student loans totaling $12 billion. Of the $12 billion, $5 billion of those loans are in default, revealed in documents filed by the NTC. The company aggressively pursue delinquent borrowers, so much so, that across the nation, the company presents four new collection suits every day. That brings about 800 cases alone this year and over thousands of lawsuits in the past five years.
One of the cases filed by National Collegiate was against Samantha Watson. Watson is a 33-year-old mother of three and a graduate of Lehman College in 2013 with a degree in psychology. She is the first in her family to go to college and to fund her education with private loans. In the beginning, she had trouble following the fine print of her loans. As she explained, “I didn’t really understand about things like interest rates. Everybody tells you to go to college, get an education and everything will be O.K., So that’s what I did.” Watson made her payments, but when her daughter fell sick, she had to quit her job as an executive assistant. She is now employed as a nurse’s aide that provides her with flexible hours but brings much less money to her household.
When National Collegiate sued Watson, the paperwork submitted by the trust were described as a mess, according to her lawyer, Levin Thomas of the New York Legal Assistance Group. At one point of the suit, National Collegiate presented documents to the courts that insisted that Watson was enrolled in a school that she never attended.
At her court appearance, Watson said to the courts, “I tried to be honest…some of these loans I took out, and I’ll be responsible for them but some I didn’t take.”
Watson’s lawyers pointed out the flaws in National Collegiate paperwork, presenting them to the court during the trial. The judge, Eddie McShan of New York City Civil Court, agreed with Watson’s attorneys and dismissed four lawsuits filed against Watson. Judge McShan cited in one of his rulings that the Company “failed to establish the chain of title.” The dismissal wiped out $31,000 in debt for Watson.
Joel Leiferman, a lawyer from Forster and Garbus that represents National Collegiate in its litigation against Watson, declined to comment on the lawsuits.
Repeated Missing Paperwork
Throughout the nation, judges have tossed out lawsuits by National Collegiate because it failed to prove that it owned debt it was trying to collect. However, the trusts win so many of their suits because they file them automatically. Moreover, many borrowers do not show up in the courts to fight. These court victorious are used by the Trusts to garnish wages and even federal benefits like social security that haunts borrowers for years.
The loans in National Collegiate possession have been made to college students for more than a decade ago from dozens of banks that are bundled together by a single finance company, then sold to different investors through a process called securitization. The federal government does not guarantee the private loans. As different hands and organizations pass the debt around before it reaches National Collegiate, critical paperwork goes missing or disappeared, according to documents filed in a low-key legal battle that involves the Trust and the state and federal courts in Delaware and Pennsylvania.
National Collegiate Trust’s biggest trouble is proving that it owns any of the debt it has filed in court, but it has not been accused of falsifying any documents. National Consumer Law Center is a nonprofit advocacy group. One of its lawyers, Robyn Smith, filed a report in 2014 that detailed shoddy and inaccurate paperwork and practices in numerous cases that involved private student loans from many different lenders and debt buyers.
National Collegiate is a little different because it consistently cannot prove legal ownership of its private student debt. Repeatedly, the company has dropped lawsuits, many times on the eve of trial or deposition when borrowers appear in the case and contest the suit. “I question whether they actually possess the documents necessary to show that they own the loans,” Ms. Smith said.