A Closer Look at CFPB Action v. National Collegiate Student Loan Trusts and Transworld Systems

On Monday, September 18, 2017 the Consumer Financial Protection Bureau (CFPB) announced that it had reached a settlement in an enforcement proceeding against National Collegiate Student Loan Trusts (NCSLT) and Transworld Systems, Inc. (TSI) for alleged illegal student loan debt collection lawsuits.

Per the CFPB press release:

“Consumers were sued for private student loan debt that the companies couldn’t prove was owed or was too old to sue over. These lawsuits relied on the filing of false or misleading legal documents. The proposed judgment requires an independent audit of all 800,000 student loans in the National Collegiate Student Loan Trusts’ portfolio. It prohibits the National Collegiate Student Loan Trusts, and any company they hire, from attempting to collect, reporting negative credit information, or filing lawsuits on any loan the audit shows is unverified or invalid. In addition, it requires the National Collegiate Student Loan Trusts to pay at least $19.1 million, which includes initial redress to harmed consumers, relinquished funds to the Treasury, and a civil money penalty. Under a separate consent order, Transworld Systems, Inc. is ordered to pay a $2.5 million civil money penalty. “

CFPB Director Richard Cordray commented:

“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. 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.”

Background

The NCSLT are 15 Delaware statutory trusts that own more than 800,000 private student loans. Between 2001 and 2007, the trusts purchased and securitized the loans, and then sold notes secured by the loans to investors. The trusts have no employees but instead use service providers to interact with consumers about their loans. TSI is a nationwide debt collector incorporated in California, with a principal place of business in Ft. Washington, Pennsylvania. TSI assumed control of this business on November 1, 2014. The CFPB inquiry for the trusts predates TSI's assumption of control. TSI employees complete, sign, and notarize sworn legal documents for collections lawsuits brought on behalf of the trusts. TSI then utilizes a national network of law firms to file and prosecute collections lawsuits on behalf of the trusts in courts across the country.

The complaint and consent order against the NCSLT and the consent order with TSI include allegations and findings that the NCSLT and TSI violated the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act by filing false affidavits and for pursuing collections lawsuits they could not have won, if contested.

Specifically, the CFPB alleged:

NCSLT and TSI sued consumers for debts the trusts could not prove were owed;
NCSLT and TSI filed false and misleading affidavits;
NCSLT caused to have at least 486 collections lawsuits filed after the applicable statute of limitations on the debt collection had expired; and
In numerous instances, many of the affidavits filed were improperly notarized because they were not sworn or signed in the presence of the notary.

Under the terms of the proposed final judgment and consent order, the CFPB is requiring:

NCSLT must conduct a thorough audit of the 800,000 student loans in its portfolio
NCSLT pay at least $3.5 million in restitution
Stop filing collections lawsuits on debt that can no longer legally be sued over
Stop attempting to collect, reporting negative credit information, and suing consumers for debt without proper documentation
NCSLT must stop filing false or improperly notarized legal documents
NCSLT must pay $7.8 million in disgorgement
NCSLT must pay a $7.8 million civil money penalty
TSI must pay a $2.5 million civil money penalty

TSI issued a press release in connection with this matter. Per the release:

“TSI is disappointed that the CFPB decided to bring an enforcement action related to one portfolio for a single client of the Attorney Network business unit, which utilizes outside law firms to collect on defaulted private student loans. At times, this business unit executes affidavits at the request of law firms in connection with collections lawsuits.

TSI disagrees with the CFPB's characterizations, and with many of the alleged facts in the Consent Order. Since assuming control of the Attorney Network in November 2014, Company management has worked diligently to enhance the compliance management system for the Attorney Network business unit to reflect TSI's company-wide culture of compliance. TSI's current practices in the Attorney Network business unit adhere to all federal and state consumer protection laws, and embody best practices in the industry, including having well-trained affiants, proper documentation for any legal claims, and diligent local law firms that review these cases in their entirety prior to taking any action in court.

TSI decided to settle with the CFPB in order to avoid costly and potentially protracted litigation with our primary regulator, and so that we may continue to focus all of our efforts on serving the needs of our customers.”

insideARM Perspective

A common complaint about the CFPB is that they “regulate through enforcement proceedings” rather than through a formal rulemaking process. Director Cordray has suggested that the industries governed by the CFPB should study enforcement proceedings for guidance on policies and procedures. In this instance, insideARM suggests that this case be given close attention.

The press release provides a general overview of the CFPB agreement with the parties. insideARM suggests that compliance professionals go beyond the press release and study the specific terms of the consent orders in this case. A review will show that two themes emerge:

1) Documentation of the debt and, 2) policies/procedures regarding legal action on accounts.

In the consent order, there are very specific directives for both NCSLT and TSI. For instance, in the NCSLT order in the section requiring NCSLT to “conduct a thorough Compliance Audit of over 800,000 accounts” there are the following requirements:

“The purposes of the Compliance Audit must be to determine, at a minimum:

a. For each and every student loan, whether Defendants, or their agents (including Defendants’ Servicers), have or ever had in their possession sufficient loan documentation, including signed promissory notes and documentation reflecting the complete chain of assignment since the loan’s origination, to support the claim that a Debt is currently owed to a Trust, including but not limited to, assignments from the Debt’s originator to the Trust claiming ownership and any subsequent assignments by the Trust to a student loan guarantor.

Within thirty (30) days of receiving the final Compliance Audit Report………Defendants must submit to the Enforcement Director for review and non-objection an amendment to the Compliance Plan…….to:

a. ensure the withdrawal and dismissal without prejudice of any pending Collections Lawsuits identified in Paragraph 19(c);

b. ensure that Defendants and their agents, including but not limited to any of Defendants’ Servicers, will not take any steps to initiate collections or furnish negative reports to consumer reporting agencies, on loans identified in Paragraph 19(a), or accept payments on any defaulted Debts, unless and until Defendants first verify the existence of the documentation referenced in that subparagraph in order to prove the existence of the Debt and the identity of the current owner.”

In pages 20 and 21 of the TSI consent order the CFPB lays down specific guidelines for TSI’s use and management of their attorney network. These requirements are an extension of elements in the prior CFPB consent orders against Frederick J. Hanna and Associates P.C. and Pressler & Pressler LLP.

The TSI order also discusses the role of TSI’s Board in this matter. They specifically require the TSI Board to “review all submissions, (including plans, reports, programs, policies, and procedures) required by the order prior to submission to the CFPB. insideARM suggests that compliance managers everywhere should review and share that section of the TSI order (page 22) with senior management, owners and member of any Board of Directors.