Student loans missing chain of title paperwork being wiped out by courts

The New York Times, and specifically reporters Jessica Silver-Greenberg and Stacy Cowley, recently writing about defaulting student loans reported the following…

“Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing.”

Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing.”

Now, where have I heard about this sort of thing happening before?  It sounds so familiar, but I just can’t seem to place it.  Oh wait… now I remember.

It sounds familiar because since 2009, millions of American homeowners have been threatened with foreclosure or even foreclosed upon by mortgage servicers that in courtrooms all over the country proved unable to produce the same sort of chain of title paperwork we’re talking about here… and yet, outside of a few notable cases, judges allowed it to happen and we lost countless homes to foreclosure as a result.

Now, however, judges are apparently taking a very different view of those that show up in court attempting to collect on a student loan in default without being able to prove they own the loan and therefore are owed the money they are seeking.

Before anyone rolls their eyes about this sort of thing happening, let’s understand why it’s happening. 

Let’s say that you fell behind on your student loan payments.  You took out the loan from ABC Company but XYZ Company is suing you in court.  They claim to represent a trust that owns your loan, but they offer no proof that they own your loan.

Shouldn’t they be required (and frankly, shouldn’t they be prepared) to produce documentation that proves they are the party to which you owe the money?  How could the answer to that question not be a resounding YES in all cases?

First of all, it’s important to understand that student loans are securitized, very much like we learned mortgages were over the last eight years, so chances are that the entity taking you to court is not the same entity from whom you originally obtained your loan. 

They might claim to service your loan or maybe that they represent a trust that owns your loan, but how do you really know, and more importantly, how does the court really know that they are entitled to collect on your debt if they can’t prove it on paper, as they say.  And assuming that they didn’t originate your loan, they need to show how they came to own it and that means showing documentation of your loan being assigned to them. 

They need to come to court with your original note, the assignment of your note to them, or if they can’t find the original note, they need to file a lost note affidavit, which must be signed by someone with knowledge of your loan… but the point is that they can’t just show up with nothing proving they have the right to collect.

If they can’t do that, they may find themselves out of luck as far as collecting on your loan is concerned, which is exactly how judges are increasingly ruling in courtrooms around the country.

Results of a Student Loan Servicer Audit…

In 2015, a firm by the name of Boston Portfolio Advisors, Inc. (“BPA”) was hired to conduct an audit of the student loans serviced by the Pennsylvania Higher Education Assistance Agency (“PHEAA”) and its student loan servicer American Educational Services (“AES”).

The loan portfolio involved consisted of roughly 800,000 loans held in 15 NCSLT (National Collegiate Student Loan Trusts) securitization trusts, initially valued at $12 billion.

BPA reviewed 379 accounts randomly selected from the servicing system to assess at the individual loan level, “adherence to servicing requirements, policies and procedures,” and what they found was… well, you could certainly call it a hot mess.

You can read BPA’s report by clicking here.  It’s very thorough and not terribly difficult to understand, so I won’t try to cover all of what it said.  Instead I’ll just provide a few of the most notable and telling statements contained in the report, such as…

  1. “100% of the accounts did not contain an Assignment. It is unknown whether Assignments were appropriately issued. Based on representations made by PHEAA, it is likely that the Assignments do not exist.”
  2. “336 or 88.7% of the PHEAA letters to borrowers did not have a statement that NCSLT was the owner of the loan.”
  3. “358 or 94.5% of the sample did not have terms and conditions affixed to the Note,” even though, per the note, “borrowers acknowledged receipt of the terms and conditions.”

Pretty shocking, right?  And that was only the beginning of the bad news to come.

Among other things, the BPA audit showed that “the servicing system does not provide a schedule of delinquencies that could be easily reconciled,” that “the servicing system does not demonstrate whether a borrower payment cured the prior delinquency in part or in full,” and also that “once a prior delinquency is fully cured, there is no clear record to track delinquency history.”

These are people charged with servicing 800,000 student loans valued at $12 billion, remember.  We’re not talking about a mom and pop shop keeping track of payments on a laptop running Microsoft Excel.  If the system can’t show whether a borrower’s payment cured a prior delinquency in part or full, how the heck can they ever know who is and isn’t current?

Overall, the audit showed almost nothing being handled correctly.  As stated on page 27, for example…

“PHEAA failed 26 of the 27 (servicing) standards that were tested,” and the report goes into detail as to how PHEAA failed in each case.

Based on those findings, I guess we shouldn’t be surprised that the NCSLT trusts have found it difficult or even impossible to prove that they own their student loans in court. 

Already, NCSLT has lost numerous cases as a result of not being able to produce the proper paperwork to court.  In one representative case, described in the New York Times’ article, a judge in New York City’s Civil Court in the Bronx dismissed four NCSLT lawsuits against a borrower saying that the trusts “failed to establish the chain of title.”

Click here to link to the judges ruling.

P.H.E.E.A. also stated in the audit’s report that “student loan originators are more interested in loans being serviced than whether or not the notes exist.”  As a result, they didn’t think they had to be concerned about showing that a note or other documents exist when attempting to collect the debt associated with defaulting loans.

They didn’t think they had to show much of anything, apparently.

The report also made clear that the process was consistently lacking. “P.H.E.E.A. did not consistently receive all of the documents for each loan,” and also that, “the contract did not require that they receive every single document.”

“P.H.E.E.A. indicated that it does not have all promissory notes because it was never required to obtain them…”

Remember, after reviewing 379 accounts, not one Assignment was found.  And keep in mind, there were supposed to be (and should have been) 379 out of 379… but instead there were none.

I mean, there may never been an audit that failed quite so spectacularly as 379 and 0.  That’s not just misplacing paperwork, is it?  Please don’t tell me that anyone needs further proof that something is seriously wrong here? 

The article in the Times went on to say…

“Judges throughout the country, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate (“NCSLT”), ruling that it did not prove it owned the debt on which it was trying to collect.”

In many instances, borrowers lose such suits because they simply don’t show up to fight them, however, the article also quoted an attorney who has represented borrowers in cases brought by NCSLT, Robyn Smith of the nonprofit National Consumer Law Center, who explained that companies often drop lawsuits when borrowers put up a fight.

The Times also quoted a lawyer from New Hampshire who has represented several clients sued by NCSLT, Richard Gaudreau, who similarly said…

“It’s a numbers game. My experience is they try to bully you at first, and then if you’re not susceptible to that, they back off, because they don’t really want to litigate these cases.”

And another lawyer from Des Moines, Nancy Thompson, who has represented at least 30 borrowers in student loan suits brought by NCSLT and according to the article…

“… 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 submitted to the court had critical omissions or flaws, she said.”

Again, according to the Times article, hundreds of these suits have already been dismissed and…

“A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.”

Perhaps most telling is what NCSLT lawyers warned in a recent legal filing…

“As news of the servicing issues and the trusts’ inability to produce the documents needed to foreclose on loans spreads, the likelihood of more defaults rises.”

Well, I certainly hope that proves to be true, because as you keep reading, you’ll see that it couldn’t happen to nicer people.

Student Loans vs. Mortgages…

I’ll never be able to count how many homeowners, foreclosure defense lawyers, politicians, judges and other experts I spoke with about the foreclosure crisis that started in 2008, and specifically about the topic of, let’s call it, “paperwork-lite” foreclosures.

In many instances the discussions were around the question of being able to determine if the party foreclosing was the party with the right to foreclose.  I mean, you can’t just show up in court to foreclose on a home without proper documentation, can you?  And you certainly would never show up in court with forged paperwork, right? 

You wouldn’t think so, but you actually can and as homeowners who went through it know all too well, it happened all the time.  In fact, in non-judicial foreclosure states like California, where you don’t need a judge’s ruling to foreclose, you simply don’t need to prove you own the loan in order to foreclose on someone’s home.

Literally millions of homes were lost either without proper documentation or based on forged paperwork signed by “robo-signers,” people with no knowledge of what they were signing because they were signing thousands of fraudulent documents each day.

At a minimum, hundreds of thousands of homeowners in this country lost homes to foreclosure that they shouldn’t have lost… and many would tell you that the number is in the millions.  Think about that.  

In this country, that should never happen. It should be impossible to lose a house to foreclosure in this country when you’re not supposed to lose one.

President Obama’s plan to mitigate the damage caused by foreclosures was called HAMP, and it was by far the worst government program I could ever have imagined.  To refer to it as total chaos doesn’t come close to describing it.  If you went through it, then you know what I’m talking about… and you’ll never forget it.

What’s Different About Student Loans…

So, a company you’ve never heard of is suing you for money you borrowed to pay for your education, plus legal fees and court costs, of course.  You’ve never heard of the company before so how do you know you owe them the money?  They come to court and produce nothing that proves that they have the right to collect the debt. 

What should happen next?  Shouldn’t the case be dismissed?  If you don’t bring the ticket, you don’t get to pick up the laundry… isn’t that how it’s supposed to work?

When homeowners tried to use this and related arguments in court to fight against foreclosure, many judges said that homeowners lacked standing, meaning that they had no right to demand that the entity trying to foreclose produce proof of their right to foreclose. 

When it comes to student loan debts, however, apparently it’s very different.

I’m not a lawyer, but the lawyers I asked about this said that when talking about a student loan, the consumer absolutely has standing to demand that the so-called creditor prove they have the right to collect the debt, and it seems that judges are agreeing in many instances. 

In addition, when it comes to student loans there is no such thing as a non-judicial collection action.  Creditors have no choice but to sue in court, which means the borrower has standing to ask that they prove they own the debt.  And that’s where things are falling apart.

Another attorney pointed out that creditors can’t move the case to federal court, because most student loan suits involve lesser amounts than the $75,000 threshold required by federal courts.

For years, the thinking was that there was very little that could be done to avoid repaying student loan debt, because in most cases, student loans can’t even be discharged in bankruptcy.

National Consumer Law Center’s Smith authored a paper in 2014, designed to help borrowers who are being harassed by creditors over student loans.  On the topic of the need to produce the note, she says…

“In order to recover on a promissory note such as a student loan, a plaintiff/loan holder must prove that (1) the defendant signed the note; (2) the plaintiff is the present owner or holder of the note; and (3) the note is in default.  The plaintiff must therefore produce the note as well as the documents that show an unbroken chain of assignment from the original creditor to the plaintiff.”

Just as we learned from the foreclosure crisis, securitized debt generally involves numerous transfers from the entity that originated the loan to any number of intermediaries and eventually to a trust. 

Even when the loan wasn’t securitized, it still may have been transferred multiple times and anytime that’s the case, it’s likely that plaintiffs were “careless about maintaining documentation and may not be able to produce the note or document the chain of assignment.”

In her paper, Smith makes clear that…

“One element of the plaintiff’s burden is producing the promissory note. In order to recover on a breach of contract claim, the plaintiff must prove not only that the borrower has assented to a contract but the actual terms of that contract.  This means that the collector must produce the actual contract or note that the borrower has agreed to, with some evidence that the borrower has, in fact, agreed to it.”

Smith also says that to obtain a judgment, “the plaintiff must also show that it owns the note.”  She says plaintiffs must establish that they are the “real party in interest,” or that “it has the authority to collect on behalf of a loan holder that is the real party in interest.” 

She approaches each case by creating a flow chart that shows the parties involved in securitizing the loan, then she looks for “defects or breaks in the chain of assignment.”  She says that borrowers should “start with the original creditor on the promissory note, and then try to fill in everything in between that original creditor to the plaintiff bringing the complaint.
The idea, in legal speak, is to “craft discovery requests and identify possible issues to raise with the court, either through evidentiary or substantive motions.”

That sounds like you’ll need a lawyer to me, but before you do anything you can certainly learn a lot by reading Smith’s paper, which you can do by clicking here: “How to Help Borrowers and Stop the Abuses in Private Student Loan Collection Cases.”

Last words, for the moment anyway…

Not surprisingly, I suppose, the always pro-business CNBC, seeking to marginalize the entire subject, ran an article in July of this year under the headline…

“This epic clerical error could wipe out $5 billion in student loan debt.”

An “epic clerical error?”  That’s the same sort of dismissive attitude we saw describing the robo-signing scandal and paperwork-life foreclosures that were contested by thousands of homeowners in the courts.  Last time, they unfortunately turned out to be more right than wrong.  Hopefully, this time things will be different.

Student loans and the skyrocketing cost of higher education are both huge problems in this country today.  Student loan debt has reportedly increased by 250 percent over the last 10 years, as college tuition has continued steadily rising as well.

Reports show that “roughly 70 percent of grads leave college with student debt, and over 44 million Americans hold a total of $1.4 trillion in student loan debt,” as of last year.  And today, 60 percent of those that take out student loans to pay for college don’t expect to be able to pay off their loans until they’re in their 40s.

A study from the OneWisconsin Institute supports that timeline for repaying student loan debt,  finding that “it takes graduates of Wisconsin universities 19.7 years to pay off a bachelor’s degree and 23 years to pay off a graduate degree.”

And if that doesn’t at least give you pause, consider that the Federal Reserve reports that “there are that there are 6.8 million student loan borrowers between the ages of 40 and 49 and that together, these graduates hold a collective $229.6 billion in debt.

That means that these forty-something Americans with student loan debt have an average balance of $33,765 each. 

Think about that.  The only thing Americans owe more on than that are their homes and many are predicting that student debt in this country will impact our housing market in the years to come, as well as how we view and finance retirement.

The Federal Reserve Board of Washington, D.C. published a study in 2016 titled: “On the Effect of Student Loans on Access to Homeownership.” 

That study found that student loan have contributed to a decrease in home ownership, and a study from NerdWallet predicts that “students who graduated from college in 2015 will have to delay retirement until the age of 75, in part because of the increasing burden of student debt.”

It’s bad enough when federally insured student loans are used to finance legitimate educational goals, like bachelors and masters degrees from accredited colleges and universities.  But, there many examples of loans being used to pay for highly questionable programs offered by for-profit companies.

People desperate for a better life try to improve their prospects and end up saddled with insane amounts of debt, what should be considered usurious interest rates… and a degree barely  worth the paper on which it’s printed.

It’s all just a giant predatory lending scam thinly disguised as an all-important education no one should live without.  Take out a loan that’s designed to fail or at least be a significant burden for 20+ years of your life… but is marketed and sold as the right thing to do for your future financial security.

Jessica Silver-Greenberg and Stacy Cowley, writing for the New York Times, did excellent work exposing what’s been happening in the courts related to student loan collection cases, but they’re also responsible for writing, “Loans ‘Designed to Fail’: States Say Navient Preyed on Students,” which shines a light on student loan scams that saddle aspiring students with “high-risk loans in pursuit of low paying careers.”

The article begins…

“Ashley Hardin dreamed of being a professional photographer — glamorous shoots, perhaps some exotic travel. So in 2006, she enrolled in the Brooks Institute of Photography and borrowed more than $150,000 to pay for what the school described as a pathway into an industry clamoring for its graduates.”

“Brooks was advertised as the most prestigious photography school on the West Coast,” Ms. Hardin said. “I wanted to learn from the best of the best.

Ms. Hardin did not realize that she had taken out high-risk private loans in pursuit of a low-paying career. But her lender, SLM Corporation, better known as Sallie Mae, knew all of that, government lawyers say — and made the loans anyway.”

The article goes on to explain that student loan industry giant Navient, has recently been accused of “aggressive and sloppy loan collection practices,”  and that last January, the federal government filed lawsuits against the company.  Navient was created in 2014, when it was spun-off from Sallie Mae.

Their article also says that attorneys general in Illinois and Washington, after a three-year investigation into student loans, have filed lawsuits alleging that Sallie Mae…

“… engaged in predatory lending, extending billions of dollars in private loans to students like Ms. Hardin that never should have been made in the first place.”

We can all see what this is really about, right?

This is nothing more than one more in a long line of predatory lending scams, this time driven by easy qualifying loans guaranteed by the federal government and made without any consideration for the borrower’s ability to repay. 

The outcomes of this shameful but institutionalized financing scam are a generation stuck servicing debt instead of buying homes and saving for their futures… and a cost for higher education across the board that’s rising at an alarming rate. 

It’s a lot like what fueled the housing bubble.  Easy to get loans make prices rise, didn’t we learn that lesson the last time around?

Remember Ashley Hardin, the woman who wanted to become a professional photographer but ended up $150,000 in debt?

Well, she now makes a monthly payment of just under $1400, which is more than she pays in rent each month, and after making those payments for eight years, her loan balance is only $1,000 below the amount she originally borrowed.

A Navient spokeswoman, Patricia Nash Christel, told the New York Times…

“We have a proven track record of helping millions of Americans access and achieve the benefits of higher education.”

So, I guess Patricia thinks we should be saying thank you for the help Navient and Sallie Mae provided over the years, help that created loans with default rates of 50-92% every year from 2000 – 2007, according to the Times.  

Even knowing of the rates at which these toxic loans were defaulting, Sallie Mae kept right on making them.  The Times article claims that the number of such loans increased by some 26,000 percent… from 165 to 43,000… between 2000 and 2006. 

I can’t think of anything that increases by 26,000 percent over six years, but I’m dead certain that an increase like that never happens accidentally.  That sort of growth can only result from a well designed and carefully executed plan.

Well, I don’t know about you, but I’ve learned enough… more than enough to conclude that this is more of the same kind of egregious crap that in 2008, caused the worst financial crisis since the 1930s. 

It’s yet another example of unbridled greed operating under lax regulations, making loans that can’t be repaid as they feign benevolence, describing their mission as helping people achieve their dreams by becoming the best they can be. 

Well, isn’t that a pile of hot steaming horse pucky!

I’ve reached out to several of the lawyers quoted in the New York Times articles on this subject, along with other consumer attorneys that I’ve known for years.  I’m hoping to be able to offer some tangible help to people struggling to repay a predatory student loan… so stay tuned for that.


Mandelman out.

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