CFPB settles with owners of Wall Street’s worst student debt

As many as hundreds of thousands of borrowers accused of defaulting on their student loans may not have to pay a dime over the next several months, or perhaps ever, under an unusual settlement Monday between federal regulators and the owner of a series of trusts that form one of the nation's largest owners of private student debt.

The agreement with the Consumer Financial Protection Bureau, which was filed in Delaware federal court and still requires a judge’s approval, calls for an audit that consumer lawyers have called unprecedented.

Under it, the National Collegiate Student Loan Trusts must audit their book of more than $8 billion of loans, many of them in default, to prove they can document that they own each loan and that it's not too old to collect. Until it is complete, investors who own the bonds that contain those loans won’t receive any cash from borrowers, even those making steady payments. Instead, the money will go into an escrow account.

The settlement seeks to resolve allegations that the trusts illegally collected from tens of thousands of distressed borrowers using deceptive or unfair means, and that debt collectors and law firms for them flooded the nation’s courts with faulty lawsuits to collect.

According to the CFPB, those it examined were rife with irregularities: Some were filed well past the statute of limitations, others lacked paperwork establishing that the listed creditor actually had a right to collect, and many contained misleading statements. Debt collectors trying to process them, according to the bureau, were so inundated with paperwork that they had interns and mailroom clerks sign critical documents.The loans, which had been securitized and sold to investors, collectively have higher default rates than any student debt Wall Street has ever bundled. More than $5 billion, including interest, of the $12 billion in debt originally bundled into securities ended up in default.

Monday's settlement with the CFPB is almost certain to face opposition, especially since investors who were promised steady cash from the securitized debt won’t receive any money while the audit is pending.

It could be at least seven months before the audit is complete, legal filings show.But should a judge approve the settlement, borrowers who had been forced to repay with wage garnishments or levies against their bank accounts would now get a temporary reprieve. And debtors with loans the audit finds can’t be collected on would essentially be let off the hook, without having to pay income taxes if the loans were technically forgiven.

“This is one of the most thorough judgments I have ever seen from a government agency. It’s fantastic,” said Robyn Smith, a lawyer for the National Consumer Law Center and Legal Aid Foundation of Los Angeles who documented the trusts’ paperwork problems in a 2014 report (PDF).

The proposed deal calls for the trusts to pay $15.6 million to the federal government and $3.5 million to those borrowers who have already repaid the trusts after being hit with faulty lawsuits. That sum could climb if the audit reveals widespread wrongdoing.

With the settlement, the trusts neither admitted nor denied the CFPB’s allegations. Dana Ripley, a spokesman for U.S. Bancorp, which ultimately oversees debt collection on behalf of the trusts, declined to comment.

Donald Uderitz, whose firm Vantage Capital Group ultimately owns the trusts, said the settlement would help him recover losses he blamed on "systemic malfeasance, gross negligence and willful misconduct" by the trusts' debt collectors and other contractors. Uderitz has been trying to audit the trusts' loans for years.

Transworld Systems Inc., the primary debt collector for the trusts in recent years, agreed to pay a $2.5 million penalty to the CFPB. It neither admitted nor denied the allegations in settlement documents, but it said in a statement that it “disagrees with the CFPB's characterizations, and with many of the alleged facts." David Zwick, Transworld’s chief financial officer, declined further comment. The debt collector is owned by Platinum Equity LLC, a Los Angeles-based private equity firm. A spokesman, Dan Whelan, didn’t respond to a message seeking comment.The settlements with Transworld and the National Collegiate trusts follows a years-long investigation by the CFPB that it said found the trusts had filed more than 94,000 lawsuits, many of them flawed, against borrowers between November 2012 and April 2016.