Student Loan Creditor, Fined for ‘False’ Lawsuits, Must Halt Collections

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One of the nation’s largest holders of private student-loan debt must refund millions of dollars to borrowers and temporarily stop many of its collection activities, under a settlement with federal regulators announced on Monday.

The creditor, the National Collegiate Student Loan Trusts, holds $12 billion in student loans that were originally made by banks. In Monday’s settlement with the Consumer Financial Protection Bureau, the trusts agreed to pay nearly $19 million in penalties and borrower refunds — and could be on the hook for millions in additional payments and forgiven loans. A debt collector that National Collegiate hired, Transworld Systems, will pay an additional $2.5 million.

The trusts “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, the consumer bureau’s director.

As part of the $19 million pact, National Collegiate agreed to set aside $3.5 million for refunds to 2,000 borrowers. Those borrowers had made payments after being sued over loans that were legally uncollectable, either because the statute of limitations had passed or because National Collegiate lacked the documentation needed to collect the debts in court.

But many more borrowers may eventually have their debts set aside. The consumer bureau ordered National Collegiate to hire an independent auditor to review all of its 800,000 loans. The trusts will be prohibited from collecting on any loan on which they cannot prove that the borrower legally owes them the debt.

If tens or hundreds of thousands of loans need to be written off, the cost of the settlement could grow far beyond the initial $21 million tally. The insurance company Ambac, which has hundreds of millions of dollars of exposure to National Collegiate’s securities through insurance it sold to investors, warned last month in a regulatory filing that it might need to set aside an additional $200 million to cover losses on its student loan portfolios.

Donald Uderitz, a financier whose private-equity firm is the beneficial owner of National Collegiate’s trusts, said he welcomed the government’s action.

“We’re pleased with the outcome,” Mr. Uderitz, the founder of Vantage Capital Group, in Delray Beach, Fla., said in an interview. “This is independent verification of problems we’ve been investigating ourselves for three years. The audit will allow us to figure out the scope, come up with a compliance plan and make the changes that need to be made.”

Mr. Uderitz has been locked in a legal dispute with other companies involved in operating the National Collegiate trusts.

The loans were made a decade or more ago by lenders like Bank of America and JPMorgan Chase. Those banks lent money to students, then sold those debts to investors. American borrowers owe $1.4 trillion on student loans, mostly on federal loans that are issued or guaranteed directly by the government. Private loans, which total $100 billion, come with far fewer consumer protections.

Around $5 billion of the debt owed to National Collegiate is in default. Mr. Uderitz, who bought his interest in the trusts in 2009, said he had been trying for years to end collection practices he considers abusive and illegal.

Among those that Mr. Uderitz has been feuding with are U.S. Bank, which is responsible for handling loans that are overdue. U.S. Bank hired Transworld to collect payments. Transworld has aggressively pursued delinquent borrowers in court, filing a deluge of cases — nearly 38,000 in one recent 18-month span — seeking payment.

Many of those cases had fatal legal flaws, according to the consumer bureau.

Transworld sued on loans that were too old to be collectible, failed to properly review chain-of-title documents proving ownership of the loans and submitted legal filings in which its employees “falsely claimed personal knowledge of the account records and the consumer’s debt,” the bureau wrote in a consent order against Transworld.

The consent order is effective immediately. The proposed judgment against the trusts requires approval by a judge in United States District Court in Delaware.

Transworld, in Fort Washington, Pa., said in a statement that it was “disappointed” by the Consumer Financial Protection Bureau’s action.

The company “disagrees with the C.F.P.B.’s characterizations, and with many of the alleged facts in the consent order,” it said. “TSI decided to settle with the C.F.P.B. in order to avoid costly and potentially protracted litigation with our primary regulator, and so that we may continue to focus all of our efforts on serving the needs of our customers.”

David Zwick, a spokesman for Transworld, or TSI, declined to comment on whether the company would halt its pending litigation against borrowers. Dana E. Ripley, a spokesman for U.S. Bank, declined to comment on the consumer bureau’s claims.

Sam Gilford, a spokesman for the consumer bureau, said the trusts “must suspend all further collection efforts until a compliance plan has been approved and implemented.”

Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofit advocacy group, said she hoped the consumer bureau would use the deal as a template and pursue other student loan debt collectors. Many use shoddy and inaccurate paperwork to pursue legally flawed cases, she wrote in a 2014 report about the practices.

“This is a great precedent, but unfortunately National Collegiate are not the only ones engaging in this behavior,” Ms. Smith said.

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