Tens of thousands of people who are struggling to pay back their private student debt could enjoy financial relief as a result of a settlement announced Monday between a government watchdog agency and a sprawling entity that bought billions of dollars of subprime student loans.
The Consumer Financial Protection Bureau said it had taken action against the National Collegiate Student Loan Trust, the country's largest holder of private student loan debt, for filing sloppy and at times illegal lawsuits in the hopes of clawing back hundreds of millions in loan money after borrowers went into default.
The Trust will pay at least $21 million, the CFPB said, and all 800,000 loans in its coffers will be independently audited — an action that could result in significantly more debt relief for individuals, because in many cases, the loans rest on flimsy grounds.
And the settlement will grind the steady march of shady lawsuits, which the Trust has been filing for years, to a halt.
“The National Collegiate Student Loan Trusts and their debt collector sued consumers for student loans they couldn’t prove were owed and filed false and misleading affidavits in courts across the country,” said Richard Cordray, director of the CFPB, in a statement. “We’re ordering them to pay at least $21.6 million, stopping them from filing illegal lawsuits, and requiring the trusts to thoroughly audit their loan portfolios to identify any other consumers who were harmed.”
The Trust bought up private student loans that were originally made by big banks like JPMorgan Chase and Bank of America — typically in the years leading up to the financial crisis — and put them into massive holding entities.
When people defaulted on those loans, the Trust began to sue indiscriminately, the CFPB said, filing suit against tens of thousands of consumers across the country. Some $5 billion of the loan portfolio is in default, according to the Trust's disclosures.
But in many cases, the Trust couldn't prove in court that it owned those loans the way the law requires, the CFPB's settlement said. As had happened in the wake of the mortgage crisis, important paperwork went missing, leaving yawning gaps in the ownership of many of the loans.
So the Trust had Transworld Systems, its debt collector, file misleading court documents saying that collectors had reviewed documents that didn't exist, the CFPB said. That practice, known as "robo-signing," was reminiscent of the bad practices of mortgage companies in the wake of the financial crisis — practices that resulted in billions in mortgage debt being wiped out.
The CFPB also settled with Transworld, which currently holds a lucrative contract with the Education Department to collect on federal loan debt. The department did not immediately respond to a request for comment from BuzzFeed.