Hundreds of thousands of Americans with private student loan debt may see their balances reduced, according to a report from Bloomberg. The feds have reached a preliminary agreement with the little-known firm, National Collegiate Student Loan Trusts, which owns $8 billion in private student loan debt.
The deal, if finalized, would conclude a lengthy investigation by the Consumer Financial Protection Bureau (CBPB). Lawyers for borrowers have complained that debt collectors for the 15 trusts owned by the firm have flooded courts with lawsuits against borrowers accused of defaulting.
National Collegiate is owned by VCG Securities LLC, a Florida-based company owned by Donald Uderitz. The CBPB has come to a preliminary settlement with VCG that would provide restitution to borrowers and civil penalties to the government.
Some reports indicate that the firm would pay $19.1 million to affected borrowers and $2.5 million in civil penalties. Specific details about the terms of the agreement have not been revealed. The CFPB has also ordered the firm to stop filing illegal lawsuits.
“The National Collegiate Student Loan Trusts and their debt collector 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, CFPB Director. “We’re ordering them to pay at least $21.6 million, stopping them from filing illegal lawsuits, and requiring the trusts to thoroughly audit their loan portfolios to identify any other consumers who were harmed.”
[pullquote]The 15 trusts hold more than 874,000 loans made to over 812,000 borrowers.[/pullquote] Most of those loans were used to fund higher education costs, according to the U.S. Securities and Exchange Commission.
Banks, primarily Bank of America and JPMorgan Chase, sold the loans to a third-party company that created the trusts. The trusts sold notes promising a certain return to investors. The loans were disbursed mainly to people with good credit, and 80% of those loans had a co-signer. Many of those loans fell into default after the financial crisis. Approximately 42% of the $12 million in loans were in default as of June.
The CFPB alleges that National Collegiate has violated the Consumer Financial Protection Act and Dodd-Frank Wall Street Reform by filing illegal collections lawsuits and filing false affidavits.
National Collegiate first made headlines when it was revealed that the firm was suing borrowers for the debt it could not prove it owned. The firm lacked the required documentation to prove that the debt was owed, making their lawsuits illegal.
According to the CFPB, more than 2,000 of the collections lawsuits violated consumer financial protection laws that protect consumers from having to pay debts they do not legally owe. The trusts lacked the paperwork to prove that either they owned or the consumer owed the debt.
In addition, many of the affidavits filed were improperly notarized or false. The CFPB also says that the firm filed at least 486 collections lawsuits after the statutes of limitations had expired on the debt. The proposed settlement has been filed with the U.S. District Court for the District of Delaware, and must still be finalized by the presiding judge.
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