National Collegiate Funding (NCF) is an umbrella name for 15 trusts that collectively hold 800,000 private student loans, totaling some $12 billion in outstanding obligations. The only problem is that roughly $5 billion worth of those loans, or over 40%, are currently in default (and you thought auto delinquencies were bad).
Now, ordinarily when a student defaults on their loan, NCF simply files a lawsuit in local or state court as a means for negotiating a settlement or payment plan with the borrower. Often times, NCF wins these cases automatically as the borrowers don't even bother to show up for their court date. In cases like that, NCF can use their court victory to garnish wages and/or federal benefits from entitlement programs like Social Security which can haunt borrowers for decades (we actually wrote about it here: Baby Boomers Increasingly Having Social Security Checks Garnished To Cover Student Loan Payments).
That said, NCF is increasingly finding that, much like the subprime mortgage debacle from 10 years ago, student lending institutions apparently had a really hard time keeping tracking of paperwork over the years and/or processed deeply flawed contracts with incomplete ownership records and mass-produced documentation (who can forget that whole robo-signing catastrophe).
As the New York Times points out today, student loans, much like mortgages, are often originated at large commercial banks before being sold to numerous other financial institutions and ultimately ending up in a securitization owned by some unsuspecting European pension funds. And while pooling these student loans in such a complicated way into securitizations apparently magically eradicates all default risk associated with the underlying loans (just ask any 22 year old on the JPM securitization desk and he/she will confirm the same), it also makes it extremely difficult to prove ownership.
Of course, courts generally shy away from awarding judgements to folks who can't adequately prove they actually own something. And, as a result, 1,000s of students are finding they can easily get their student loans expunged on a technicality.
Take the case of Samantha Watson, a 33-year-old graduate of Lehman College in New York who fell behind on her student loans primarily because she "didn’t really understand about things like interest rates." Luckily, she doesn't need to invest the time to learn how to multiply by fractions because, when NCF failed to provide adequate ownership records, some $31,000 worth of her student debt was magically erased.
Last year, National Collegiate unleashed a fusillade of litigation against Samantha Watson, a 33-year-old mother of three who graduated from Lehman College in the Bronx in 2013 with a degree in psychology.
Ms. Watson, the first in her family to go to college, took out private loans to finance her studies. But she said she had trouble following the fine print. “I didn’t really understand about things like interest rates,” she said. “Everybody tells you to go to college, get an education, and everything will be O.K. So that’s what I did.”
Ms. Watson made some payments on her loans but fell behind when her daughter got sick and she had to quit her job as an executive assistant. She now works as a nurse’s aide, with more flexible hours but a smaller paycheck that barely covers her family’s expenses.
When National Collegiate sued her, the paperwork it submitted was a mess, according to her lawyer, Kevin Thomas of the New York Legal Assistance Group. At one point, National Collegiate presented documents saying that Ms. Watson had enrolled at a school she never attended, Mr. Thomas said.
“I tried to be honest,” Ms. Watson said of her court appearance. “I said, ‘Some of these loans I took out, and I’ll be responsible for them, but some I didn’t take.’”
In her defense, Ms. Watson’s lawyer seized upon what he saw as the flaws in National Collegiate’s paperwork. Judge Eddie McShan of New York City’s Civil Court in the Bronx agreed and dismissed four lawsuits against Ms. Watson. The trusts “failed to establish the chain of title” on Ms. Watson’s loans, he wrote in one ruling.
When the judge’s rulings wiped out $31,000 in debt, “it was such a relief,” Ms. Watson said. “You just feel this whole weight lifted. My mom started to cry.”
But Watson's experience is hardly unique. One defense attorney in Iowa told the New York Times that she represented some 30 borrowers in cases against NCF and only lost 1 of them.
Jason Mason, 35, was sued over $11,243 in student loans he took out to finance his freshman year at California State University, Dominguez Hills. His lawyer, Joe Villaseñor of the Legal Aid Society of San Diego, got the case dismissed in 2013, after the trust’s representative did not show up for a court-ordered deposition. It is unclear if the trusts had the paperwork they would have needed to prove their case, Mr. Villaseñor said.
“It was a scary time,” Mr. Mason said of being taken to court. “I didn’t know how they would come after me, or seize whatever I had, to get the money.”
Nancy Thompson, a lawyer in Des Moines, represented students in at least 30 cases brought by National Collegiate in the past few years. All were dismissed before trial except three. Of those, Ms. Thompson won two and lost one, according to her records. In every case, the paperwork Transworld submitted to the court had critical omissions or flaws, she said.
It almost makes you want to sign up for a masters degree, load up on some student loans and head off to Cancun for spring break...it all seems to be working out really well for millennials (see "31% Of College Students Spend Their Loans On Spring Break").