Shoddy Paperwork Haunts Private Student Loan Lenders

In a not-so-surprising development, the shoddy transfer paperwork that has consistently dogged lenders in the mortgage foreclosure space is now rearing its head in the debt collection arena — largely in the area of private student loan debt. At Oppenheim Law, during the foreclosure crisis, we consistently saw mortgage lenders unable to prove the single most important element of suing on a debt – standing. In the debt collection arena, student loan servicers and lenders face an even harder time doing so based on poor documentation. Their debt instruments are typically non-negotiable instruments, requiring proof of transfer by assignment under Article 9 of the Uniform Commercial Code instead of the typical transfer by negotiability under Article 3 of the Uniform Commercial Code.

While transfer by negotiability under Article 3 requires only a minimal endorsement on the debt instrument in blank, or to bearer that pre-dates the filing of a Complaint, transfer by assignment under Article 9 is far more complex. In addition, given how difficult many lenders seemed to find the simple task of pre-suit endorsement when dealing with negotiable promissory notes, watching them try to prove transfer by assignment may prove to be an entertaining past-time as they scrounge for documentation to prove they are entitled to collect on these debts. Even worse for these lenders, they cannot fall back on the “holder in due course” argument that was so prevalent in mortgage foreclosure actions, increasing the number and nature of affirmative defenses available to borrowers in defending such suits.

Plagued by Loss After Loss in Court, Default Rates Expected to Rise as News Gets Out

In an article published by the New York Times on July 17, 2017, the Times focused on one particular lender dealing in private (non-government backed) student loan debt, National Collegiate Student Loan Trusts. Amidst in-fighting between the trusts, servicers, and financiers of the trusts playing the blame-game as to who is responsible for poor documentation, National Collegiate has suffered loss after loss in their aggressive lawsuits to pursue private student loan debts from borrowers amidst poor ownership records. Overall, National Collegiate Loan Trusts asserts ownership of approximately $12 billion in student loan debt, of which $5 billion is currently in default status. To date, National Collegiate has lost dozens of suits filed against borrowers in state courts for collection on these debts, projecting difficulty in collection on future actions.  Additionally, the Times noted that National Collegiate’s lawyers have voiced in ongoing legal proceedings concerns that “[a]s 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.”

The Numbers Game, and How Borrowers Can Combat It

In filing thousands of lawsuits and aggressively pursuing debt collection from these borrowers with their poor documentation, National Collegiate is playing a numbers game, banking on the fact that most borrowers in default will not defend these suits and will end up with judgments against them.  However, those borrowers who have defended their rights have largely walked away from tens of thousands of dollars of debt, providing significant incentives to borrowers to respond to and defend suits being filed by National Collegiate.

If you are a borrower with a student loan in default, we encourage you to do your research and defend your rights in court. Who knows, you soon may be the proud owner of a $0.00 student loan debt balance. Call us if you want us to evaluate your circumstances.

From the trenches,

Roy Oppenheim