Last month, the Consumer Financial Protection Bureau (CFPB) filed a complaint and proposed consent judgment against one of the nation’s largest owners of private student loan debt. The CFPB alleged that the National Collegiate Student Loan Trusts (NCLTs) and their collection agencies had initiated lawsuits against borrowers without sufficient proof that they owned the debt in question, over debt that was often time-barred by the statute of limitations, and using false or misleading statements in affidavits. The NCLTs and their collectors settled for a total of $21.5 million, plus an additional audit of 800,000 loans, which could lead to the discharge of millions more loans.
The text of the CFPB’s allegations describes what appears on the surface to be a pattern of carelessness and corner-cutting. The NCLTs acquired debts that were often missing the requisite paperwork to make them legally enforceable. Some of them were too old to be collected. They submitted affidavits from debt servicers who claimed to have “personal knowledge” of the loan records, when they had no such knowledge. Someone reading the complaint without context may assume the NCLTs were guilty of no more than shoddy lawyering and careless record-keeping.
But context suggests much more insidious conduct. The allegations fit into a well-documented trend of unscrupulous practices on the part of debt collectors. According to the CFPB complaint, the NCLTs are employee-less statutory trusts that exist for the sole purpose of acquiring private student loan debt, and hiring debt servicing companies to collect on those loans. Debt buyers like the NCLTs have in recent years been in the business of securitizing consumer debt. Banks and other lenders sell credit card debt, car loans, mortgages, and private student loan debt for fractions on the dollar to collectors—without the knowledge of the borrowers—who then either build a business out of collecting on the debt, or else sell it further downstream.
In collecting on the consumer debt, debt buyers run something of a mass litigation shop. They overwhelm state civil courts and small claims courts with debt collection lawsuits. According to the FTC, often the majority of cases on state civil dockets consists of debt collection suits.[1] And in these suits, the loan portfolios—like those of the NCLTs—are often missing required documentation, are time-barred, and have “robo-signed” affidavits (i.e., signed pro forma without any knowledge of accuracy).[2] The FTC has estimated that as little as 6% of loans purchased by debt buyers have full documentation at the time of sale.[3]
But the debt buyers are not concerned with putting on an airtight case. They rely on their low-income defendants to not have counsel to raise these defenses, or even more common, to not show up to court and receive a default judgment. Insufficient service of process to let the borrower know she is actually being sued, inability to take time off work, or simply a lack of understanding can all very easily lead to a no-show default.[4] Without the borrower present to raise a defense, the court will rarely question the collector’s case.[5] Once the collector has won a default judgment, it can garnish the borrower’s wages, seize her bank accounts, and put liens on her property. And if a borrower does somehow successfully challenge a collection, the collector’s loss is merely tacked onto the cost of business.
Students in HLS’s Predatory Lending and Consumer Protection Clinic—of which I am a member—often witness this phenomenon first-hand. Lawyers for debt collectors camp out in small claims court all day, filing one after another boilerplate collection lawsuits. Borrower-defendants rarely show up to challenge them, and so the judge rubber stamps default judgments, often in a matter of seconds. When a defendant is present and a clinical student or other pro bono counsel is available to defend a claim, the collector’s lawyer doesn’t put up much of a fight. They know their documents are incomplete or lack foundation. Regardless, they are not really there to litigate. It is more efficient just to let it go and move on to the next case.
When viewed in this context, the NCLTs’ conduct starts to look less like negligent lawyering and more like willful exploitation. It is an extreme example of a repeat player abusing a one-shot defendant. To make matters worse, a racial element underlies all of this. A 2015 investigation by ProPublica found that even controlling for income, debt collection judgments were more than twice as likely to be filed in black neighborhoods as in white neighborhoods. The investigation revealed how through collection suits, debt buyers have stripped $34 million away from families in black neighborhoods of St. Louis. Maybe debt collectors are outright racist, or maybe structural inequities beyond income make black families more susceptible to debt collection. Regardless, the impact is clearly disparate. The consumer debt crisis is a civil rights crisis.[6]
The NCLTs are arguably even more pernicious than the run-of-mill debt collectors that the FTC, ProPublica, and others describe because of the particular kind of debt they work with. Private student loans can be extraordinarily risky: they usually have high variable interest rates, do not have the same deferment and income-based repayment protections as federal student loans do, and are very difficult to discharge in bankruptcy. They are also often unnecessary. According to the Institute for College Access & Success, 47% of private student loan borrowers did not reach their maximum eligible amount of federal loans. Why would students borrow riskier private loans instead of federal loans? One reason is that private loans are disproportionately used by for-profit colleges. By regulation, for-profit colleges must derive at least 10% of their revenue from private sources, giving these schools a strong incentive to push borrowers towards private loans.
Which brings us to the source of much of this debt. For-profit colleges are notorious for using aggressive marketing—and blatant misrepresentations—to lure low-income, minority students. As compared to any other higher education cohort, for-profit college students are the most likely to be female and minority, to have the lowest levels of parental education, to be single parents, and to have dependents. Having been targeted and deceived into borrowing to pay high tuition costs for a low-quality education with bleak graduation and employment prospects, these students are also the most likely to end up in default. Perhaps worst of all, creditors are well aware that students will likely default. Sallie Mae, one of the nation’s largest student loan servicers, saddled for-profit college students with subprime loans with sky-high variable interest rates that were “designed to fail,” according to the Illinois Attorney General. Of course, borrowers had no idea that even their bank had no faith in their ability to repay.[7]
Unpacking the CFPB’s lawsuit reveals a nauseating story of abuse and exploitation. Low-income people from marginalized, vulnerable communities are deceived into over-borrowing risky private loans for a worthless education. Unbeknownst to them, their loans are sold by their creditors—without bothering to include the actual contract—to a litigation mill that mass produces collection suits. Meanwhile, unable to find meaningful employment and facing soaring interest rates, the borrowers can’t afford to make payments. They find themselves getting served with a lawsuit from a company whom they did not borrow from, whom they likely have never heard of, and who does not even have the original contract that they signed. The borrowers have a valid defense, but tragically, because of fundamental inequities in the civil justice system, they default. Their wages are garnished, their credit ruined, and poverty and inequality are exacerbated.
Are the NCLTs guilty of all of this? Maybe not. But this story rings true for thousands of consumers. It is interesting how one regulatory enforcement action, alleging relatively simple and straightforward violations, can embody so much that is wrong in both our financial system and our courts.
[1] Federal Trade Commission, Collecting Consumer Debts: The Challenges of Change 55 (2009).
[2] Lisa Stifler & Leslie Parrish, The State of Lending in America and its Impact on U.S. Households 10–13 (Center for Responsible Lending 2014).
[3] Federal Trade Commission, The Structure and Practices of the Debt Buying Industry 35 (2013).
[4] Stifler & Parrish, supra note 2, 13.
[5] Id.
[6] Regulators and consumers have consistently brought claims against creditors alleging racially discriminatory lending practices under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act, including using a disparate impact theory of liability. Much less common are discrimination claims against collectors. But see Sharp v. Chartwell Financial Services Ltd., 2000 WL 283095 at *4 (holding that the ECOA applies to collection practices).
[7] Why would creditors give out loans they knew would fail? The Illinois Attorney General alleged that Sallie Mae colluded with for-profit schools to supply subprime loans as a loss leader, boosting enrollment by allowing students to attend who otherwise could not afford to do so, in exchange for the schools steering all their student loan business to Sallie Mae.