One of America’s largest student loan creditors has reached a settlement with federal regulators regarding “false” lawsuits against debtors. According to the New York Times, the National Collegiate Student Loan Trusts, which holds $12 billion in student loan debt, will be required to pay a fine of $19 million in refunds and penalties and will potentially have to pay millions more in additional payments and forgiven loans. A debt collector retained by National Collegiate, Transworld Systems, will pay an additional $2.5 million.
The settlement comes after the Consumer Financial Protection Bureau (CFPB) accused National Collegiate, which holds loans originally issued by banks, of suing individuals for student loans that they couldn’t prove were actually owed, and filing false and misleading court affidavits across the nation.
As part of the settlement, National Collegiate agreed to set aside $3.5 million to make refunds to some 2,000 borrowers, who had made payments after being sued over loans that were legally uncollectable. On some loans, the statute of limitations had already expired; on others, National Collegiate allegedly lacked the documentation necessary to collect on those loans in court.
According to the WashingtonPost, the 15 trusts represented by National Collegiate purchased hundreds of thousands of private student loans in the lead-up to the 2008 financial crisis, mirroring the circumstances of the subprime mortgage crisis. According to the complaint, in many cases, the documentation on those loans was woefully-inadequate.
And as former students defaulted on those loans, National Collegiate hired Transworld to collect on them.
Between 2012 and 2016, Transworld filed almost 95,000 lawsuits over the loans. But according to CFPB investigators, they were able to identify over 2,000 lawsuits in which National Collegiate was unable to produce either proof of debt ownership or a promissory note; in those cases, the investigators say, Transworld employees nevertheless signed sworn affidavits claiming to have seen said evidence. In many cases, the investigators claimed, Transworld had instructed interns and mailroom clerks to execute sworn affidavits when they were dealing with a case backlog.
National Collegiate has also agreed, as part of the settlement, to retain an independent investigator to examine all 800,000 of the loans that they own; any debts that they are unable to prove ownership of will be written off. This could not only cost the company billions but is likely to ruin their relationship with insurance company Ambac, which sold insurance to National Collegiate’s investors. Last month, Ambac warned in a regulatory finding that they might need to set aside an additional $200 million to cover student loan losses through National Collegiate.
The proposed judgment requires approval by a District Court judge in Delaware but is expected to go through. Robyn Smith, a lawyer with the National Consumer Law Center, hopes that the judgment will be seen by the CFPB as a template for pursuing other student loan debt collectors who use similar tactics.
“This is a great precedent, but unfortunately National Collegiate are not the only ones engaging in this behavior.”
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