Loan creditor fined $19M for suing students with 'false' legal documents

Roger Yu | USA TODAY

The Consumer Financial Protection Bureau on Monday fined a student loan creditor, the National Collegiate Student Loan Trusts, and its debt collector nearly $22 million, charging them for aggressively suing students for debts that they allegedly couldn’t prove were legitimate.

National Collegiate and its debt collector, Transworld Systems, sued thousands of students by relying on "false or misleading legal documents" and couldn't prove that those being sued were the actual owners of the loans in dispute, the federal consumer watchdog agency said.

Many of the loans were also too old to sue over, it said.

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The bureau also ordered National Collegiate, which is a group of 15 trusts, to conduct an audit of all 800,000 private student loans in its portfolio. National Collegiate and other companies it hires are barred from attempting to collect, reporting negative credit information, or filing lawsuits on any loan that they can’t verify though an audit.

National Collegiate also has been ordered to pay "at least $19.1 million," including initial redress to harmed consumers and a civil penalty. Transworld Systems has been fined $2.5 million.

Transworld said in a statement that it "disagrees with the CFPB's characterizations, and with many of the alleged facts" in the bureau's order. The company's "management has worked diligently to enhance the compliance management system" for the unit that works with National Collegiate, it said.

But Vantage Capital, which is the beneficial owner of National Collegiate's trusts, welcomed the bureau's actions, saying it has tried to end the alleged collection tactics since it bought the trusts in 2009. Vantage Capital's efforts to clean up were stymied by the trusts' collectors and other partners, said Donald Uderitz, founder of Vantage Capital.

“We frankly welcomed the intervention of the CFPB to help us to put an end to these appalling practices,” Uderitz said. “VCG has been investigating these issues for the last three years but have been consistently stonewalled from taking the necessary corrective action until now.”

From 2001 and 2007, National Collegiate bought and securitized student loans. These securitized notes were then sold to debt investors. National Collegiate then hired Transworld to pursue debtors for collecting what they considered to be outstanding debts.

Federal laws mandate collectors to possess the documents that prove debts they want to collect are indeed owned by the people they're pursuing. "Over 2,000 collections lawsuits" that were filed on behalf of the trusts were in violation of the laws, the financial bureau said.

"In these lawsuits, the trusts do not have or cannot find the documentation necessary to prove either that they own the loans or that the consumer owed the debt," it said.

Valid affidavits must be signed by a witness with personal knowledge of the consumers’ account records. But such affidavits didn't exist in many of the lawsuits, the bureau said. Transworld employees completed and notarized sworn legal documents for lawsuits brought on behalf of the trusts, it said.

National Collegiate also filed "at least 486 collections lawsuits" after the statute of limitations had expired, the bureau said.

The bureau has been investigating the trusts for about three years. In July, New York Attorney General Eric Schneiderman got involved by issuing subpoenas after The New York Times ran a scathing story highlighting National Collegiate's allegedly shoddy paperwork.

National Collegiate’s Uderitz told USA TODAY in July he's "glad" the New York attorney general was getting involved.

Uderitz has maintained that the trusts already were working with their loan servicer and collector before he bought the equity interest. And he has been not been successful in trying “to replace and remedy” some of their alleged collection issues because they won't take his directions to change their practices.

National Collegiate also works with the Pennsylvania Higher Education Assistance Agency — also known as PHEAA or American Education Services —- as the trusts' main loan servicer.

The trusts filed a lawsuit against PHEAA in March of 2016 "to enforce many of the same reforms contained in the CFPB" order, Uderitz said.

"We are delighted with the outcome but this effort has just started and we look forward to working as a team with the CFPB on an ongoing basis to finish the job,” Uderitz said. "We intend to seek to recover from the wrongdoers a significant amount of the monies the trusts have to pay under this order and believe the CFPB’s findings will assist us in those efforts."

PHEAA couldn't immediately be reached for comment.

Up to $5B in student loans could be erased due to missing paperwork National Collegiate Student Loan Trusts, one of the country's largest holders of student debt, has lost several lawsuits because of missing documents. Video provided by Newsy