One of the nation’s largest private student loan holders is to repay millions of dollars to borrowers and temporarily halt many of its collection activities, under a deal with federal regulators announced Monday.
The creditor, the National Collegiate Student Loan Trusts, holds $ 12 billion in student loans originally made by the banks. In Monday’s settlement with the Consumer Financial Protection Bureau, the trusts agreed to pay nearly $ 19 million in penalties and repayments to borrowers – and could be forced to pay millions in additional payments and canceled loans. A debt collector that National Collegiate has hired, Transworld Systems, will pay an additional $ 2.5 million.
The trusts “have sued consumers for student loans they could not prove were due and filed false and misleading affidavits in courts across the country,” said Richard Cordray, director of the consumer office. .
As part of the $ 19 million pact, National Collegiate agreed to set aside $ 3.5 million to repay 2,000 borrowers. These borrowers had made payments after being sued for legally bad loans, either because the statute of limitations had expired or because the National Collegiate did not have the documents necessary to collect the debts in court.
But many other borrowers could eventually have their debts canceled. The Consumer Affairs Office ordered the National Collegiate to hire an independent auditor to review all of its 800,000 loans. Trusts will be prohibited from collecting any loan on which they cannot prove that the borrower legally owes them the debt.
A recent New York Times article revealed that various companies involved in the management of National Collegiate trusts are missing some of the documents needed to legally prove ownership of their loans.
If tens or hundreds of thousands of loans are to be written off, the cost of settlement could far exceed the original tally of $ 21 million. Insurance company Ambac, which has hundreds of millions of dollars in exposure to National Collegiate securities through insurance it has sold to investors, warned last month in a regulatory file that he may need to set aside an additional $ 200 million to cover losses on his student loan portfolios.
Donald Uderitz, a financier whose private equity firm is the beneficial owner of National Collegiate trusts, said he welcomed the government’s action.
“We are delighted with the result”, Mr. Uderitz, the founder of Vantage Capital Group, in Delray Beach, Florida, said in an interview. “This is an independent audit of the issues that we ourselves have been studying for the past three years. The audit will allow us to determine the scope, develop a compliance plan and make any changes that need to be made.
Mr. Uderitz has been locked in a legal dispute with other companies involved in operating the National Collegiate trusts.
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The loans were made a decade or more ago by lenders like Bank of America and JPMorgan Chase. These banks loaned money to students and then sold that debt to investors. US borrowers owe $ 1.4 trillion in student loans, mostly federal loans issued or guaranteed directly by the government. Private loans, which total $ 100 billion, come with much less protections for consumers.
About $ 5 billion in National Collegiate debt is in default. Mr Uderitz, who bought his stake in the trusts in 2009, said he has been trying for years to end collection practices he considers abusive and illegal.
Among those Mr. Uderitz has argued with is the US Bank, which is responsible for handling overdue loans. The US bank hired Transworld to collect the payments. Transworld has aggressively pursued delinquent borrowers in court, filing a deluge of cases – nearly 38,000 in a recent 18-month period – demanding payment.
Many of these cases had fatal legal flaws, according to the Office of Consumer Affairs.
Transworld sued over loans too old to be collectable, failed to properly review chain of title documents proving ownership of the loans, and submitted legal documents in which its employees “falsely claimed to know the statements personally. account and consumer debt ”. the office wrote in a consent order against Transmonde.
The consent order takes effect immediately. The proposed judgment against the trusts requires the approval of a judge of the United States District Court of Delaware.
Transworld, in Fort Washington, Pa., Said in a declaration that he was “disappointed” by the action of the Consumer Financial Protection Bureau.
The company “does not agree with the characterizations of the CFPB and with many facts alleged in the consent order,” he said. “TSI has decided to settle with the CFPB in order to avoid costly and potentially protracted litigation with our lead regulator, and so that we can continue to focus all of our efforts on meeting the needs of our customers.”
David Zwick, spokesperson for Transworld, or TSI, declined to say whether the company would end its ongoing litigation against the borrowers. US Bank spokesperson Dana E. Ripley declined to comment on the Consumer Bureau’s allegations.
Sam Gilford, spokesperson for the Office of Consumer Affairs, said the trusts “must suspend all further collection efforts until a compliance plan has been approved and implemented.”
Robyn Smith, a lawyer at the National Consumer Law Center, a non-profit advocacy group, said she hoped the consumer office would use the deal as a model and sue other student loan collectors. . Many use shoddy and inaccurate documents to pursue legally flawed cases, she wrote in a 2014 report on practices.
“This is a great precedent, but unfortunately National Collegiate is not the only one in this behavior,” said Ms. Smith.