The Student Debt Collection Lawsuit Business

Lenders are suing without proof they own the loans

In 2003, Bank One, now owned by JPMorgan Chase, lent $30,000 to Adam Beverly for tuition at Ohio State University, from which he never graduated. The National Collegiate Student Loan Trust claimed, in a lawsuit three years later, that Mr. Beverly owed more than $45,000 including interest and penalties. A two year long court battle saw Mr. Beverly succeed in proving that the collector had no evidence of owning the debt and in September a panel of Ohio judges vacated the judgement.

After 2007, the federal student loan balance has increased from $516 billion to approximately $1.2 trillion, almost doubling in size. In fact, student loans have become such a burden on former students that they have actually risen above credit cards to become the second largest source of outstanding debt in the U.S. after mortgages. According to the Consumer Financial Protection Bureau, students, former students, and their parents owe an additional $150 billion in loans from banks and other private lenders.

As defaults in these loans continue to climb, more and more lenders are turning to the courts to collect. However, many of their suits are clouded by missing documents and procedural errors, say consumer advocates and lawyers defending debtors. An e-mail from Massachusetts Attorney General Maura Healey said, “Our office is seeing an uptick in abusive loan debt collection tactics that leave no room for relief.”

Student loans, like mortgages, were bundled into packages and sold to investors. Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofit advocacy group said, “This is robosigning 2.0 with student loans,” as the paperwork problems are eerily similar to the “robosigning scandals that followed the housing bust.  “You have securitized loans in these large pools; you have the sloppy record keeping,” as in the mortgage crisis.

The National Collegiate Student Loan Trusts are investment vehicles created by First Marbehead in Boston which concentrates on education lending. Between 1996 and 2007, the Company bought student loans from lenders such as Bank of America, JPMorgan, and a bank now owned by Citizens Bank. In so doing, First Marblehead transferred over two dozen batches of loans to trusts it created. These trusts are responsible for collecting loan payments from borrowers and paying out interest to bondholders. Bond rater, Moody’s Investors Services, said in 2013 that it expected losses to reach as high as 50% in 15 National Collegiate trusts it examined.

As a result, National Collegiate trusts have been among the most active in bring lawsuits to borrowers, say consumer advocates. Since 2011, National Collegiate has filed over 1,900 civil cases in Missouri, an average of over one lawsuit a day. In the States of Connecticut, Indiana, Arizona, and Oklahoma, according to state legal databases, the Company has filed a total of more than 2,100 suits. First Marblehead CFO, Alan Breitman said in response to repeated requests for comment, “We don’t comment on the trusts.” No other representatives for National Collegiate responded either.

Some student debtors are fighting back and winning. In Ohio, Florida and Kentucky, judges have found that the trusts have not proved that National Collegiate’s trusts own the debt and are not legally able to collect. In California, 13 people are seeking class-action status for a suit against National Collegiate for suing them without identifying the original lender. This is a violation of California debt-collection law. National Collegiate has denied the allegations in court filings.

According to Adam Beverly’s lawyer, Greg Reichenbach, Beverly’s monthly payments jumped from $120, to $600. When he tried to discuss the payments, he was bounced back and forth between First Marblehead and National Collegiate, continued Reichenbach. In 2009 he stopped making payments and in 2012, National Collegiate filed two lawsuits against Beverly in Ohio state court demanding repayment of the loans. Beverly initially turned to a credit repair service for help with the lawsuit and was told it would be taken care of. Unfortunately when Beverly didn’t respond to contest the suits, National Collegiate won default judgements.

“The cases that get filed in court for debt collection, a lot of times they are not for huge amounts, and so consumers may not show up to defend them.”

However, the suits did not assert that National Collegiate owned the loans and after Beverly appealed, the Company was unable to produce any documents indicating it did in fact own them. “The whole basis for the lawsuit is that they are entitled to enforce this alleged debt, and they don’t even claim that they were assigned the debt, let alone prove it,” says Reichenbach, who handled Beverly’s appeal. The same missing or incomplete records of loan transfers sank National Collegiate suits in Kentucky and Florida and has forced the Company to rethink lawsuits in New Hampshire, California and Pennsylvania according to lawyers in these States.

According to assistant director at the Federal Trade Commission’s Bureau of Consumer Protection, Christopher Koegel, lenders and their representatives are overwhelming the courts with thin and sometimes inaccurate lawsuits like Beverly’s case. In fact, much like Beverly’s case, there often is no trial. “The cases that get filed in court for debt collection, a lot of times they are not for huge amounts, and so consumers may not show up to defend them,” Koegel says. This leads to automatic judgements in favor of the creditor. And once the lender gets a judgement, it can begin garnishing a debtor’s wages and seizing his personal property. “It may be burdening consumers with judgements over their head for years and years,” Koegel says.

Pablo Ramirez learned the benefits of fighting back. After taking out a $30,000 loan to pay for his bachelor’s degree from Westwood College in 2006, the payments were more than he could afford. In November 2014, he received a court notice that a judge had issued a judgement against him. He then owed $50,000 to National Collegiate. “I was in shock,” Ramirez said, because he didn’t even know he was being sued. When he contested the ruling, National Collegiate tried to say it gave Ramirez Notice of the lawsuit, but to no avail. A Texas county court judge set aside the judgement. “They didn’t have the facts right,” Ramirez says. “It seemed like they were trying to throw anything against the wall to see if it stuck.”

The bottom line: National Collegiate trusts have filed more than 4,000 lawsuits in five states seeking to collect on student loans.