Bar News - April 20, 2016
Opinion: In Spate of Private Student Loan Lawsuits, One Defense Stands Out
By: Richard Gaudreau
Private student loans are the worst debt in America, bar none. I didn’t come to this conclusion lightly, but only after comparing the legal options available to clients facing foreclosures, tax liens, etc., and speaking to borrowers, who tell me they have their federal loans under control, but have no solution to their private student loans.
Although IRS taxes can be discharged in bankruptcy in certain instances, private student loans will never be automatically discharged. The unwillingness of private student loan businesses to offer a borrower a plan to rehabilitate a private student loan, to escape default on a credit report, has led some observers to conclude that this is creating a real drag on the economy. With $1.2 trillion in student loans totaling more than this nation’s entire credit card debt, the private student loan problem is one begging for a solution. With the law presenting so few options, creative lawyering may help borrowers facing this type of lawsuit to help level the playing field.
In a Dec. 3, 2014, article in the Wall Street Journal, the ombudsman of the Consumer Financial Protection Bureau was quoted as accusing the private student loan industry of failing to do enough to help borrowers in financial distress. Although lawsuits are rare in the collection of federal student loans, they are much more common for private student loans. I’ve represented several clients facing lawsuits filed by National Collegiate Student Loan Trusts (NCT), the assignee of thousands of securitized private student loans.
The number of lawsuits filed by NCT has become a national phenomenon, with one Businessweek reporter, in an article on June 3, 2015, describing NCT as a “lawsuit machine,” filing more than one lawsuit per day in some states. A review of New Hampshire civil dockets indicates there have been at least 113 lawsuits filed by NCT in New Hampshire courts from 2014 to present. Most are filed in Superior Court, with a few in District Court. Most borrowers are unrepresented, despite the dire consequences of a default. Judgments are collectible for 20 years in New Hampshire. The usual scenario before litigation involves a demand for a payment far beyond the borrower’s means, and a refusal to negotiate something more affordable.
Unlike federal loans, private student loans are not mandated by law to offer borrowers affordable repayment plans. This impasse inexorably leads to a default and litigation, although few private student loan businesses are as litigious as NCT. With relatives often acting as co-signers, lawsuits often involve a parent as co-defendant, and the possibility of an attachment against a home with significant equity.
Lawyers defending borrowers from NCT lawsuits have found NCT susceptible to one defense in particular – that of standing. NCT never has a contractual relationship with a borrower, only acquiring a loan along with thousands of others after multiple assignments. The amount of SEC documentation necessary to assign securitized student loans multiple times is staggering, so it’s not surprising this “shell game” can create issues regarding who owns any particular loan.
One recent New Hampshire case illustrating the problem is that of NCSLT 2006-1, 2007-4 v. Glynn, 219-2015-CV-00209 in Strafford County Superior Court, where Judge Steven Houran dismissed two lawsuits filed by NCT. NCLST sued Glynn, who filed a motion to dismiss, alleging the court did not have subject matter jurisdiction to hear the dispute, because plaintiff did not own the debt, and, therefore, had no standing. The complaint attached a copy of the note indicating the lender was Bank of America, but no evidence of assignment. The court scheduled an evidentiary hearing requiring plaintiff to produce proof it owned the debt.
After considering a number of documents submitted by NCT, Houran at page 3 of that opinion, held: “The court determines that the evidence presented is insufficient to demonstrate that the plaintiff owns the debt. As noted above, the 2007 pool supplement assigned certain loans to NCF [i.e. National Collegiate Funding, LLC] – namely the loans listed on Schedule I. However, NCSLT has failed to provide the court with a copy of Schedule 1. Without Schedule 1, the court cannot determine which loans Bank of America assigned to NCF… Thus, the court determines that NCSLT has failed to establish it owns Glynn’s debt.”
Houran’s decision is far from unique, as a growing number of courts in other jurisdictions have arrived at similar conclusions, albeit flying under the radar as unreported cases.
Richard Gaudreau is a solo practitioner in Salem, NH, focusing on student loans and bankruptcy issues. His student loan practice includes debt defense, undue hardship complaints, and administrative alternatives to resolve federal loan defaults.