A corrosive development is the ease with which lenders steal extract income which is not properly theirs from borrowers through what is at best incompetence and in far too many cases is fraud. This pattern has repeats itself again and again: in mortgage servicing, with debt collection, and more and more with student loan servicing.
A big part of why servicers, who are less supposedly disreputable than kneecapping debt collectors, keep getting away with misconduct is that most borrowers are too broke to fight bogus charges and the cascading damage that results, often from interest rates ratcheting into default levels. And even when borrowers go to court, judges are often unwilling to side with consumers against large, legitimate-looking loan servicers.
But even worse is that the Obama Administration has repeatedly thrown its weight behind predatory servicers. The so-called National Mortgage Settlement of early 2012, which was a Federal/49 state attorney general pact, amounted to a second bailout of major banks. Many of the loans originated after the 2002 refi boom that were securitized hadn't been transferred to the securitization trusts as stipulated by clear cutoff dates. The contracts were designed to be rigid, so legal after-the-fact fixes weren't possible. Yet these trusts needed to have clear title to properties in order to foreclose.
No one in the officialdom wanted to expose that investors might be holding an empty bag, or what Adam Levitin called securitization fail, since the liability to banks was enormous. So mortgage servicers routinely submitted incomplete or incorrect documents, since judges (until some wised up) assumed homeowners were deadbeats, and later took to various forms of fabrication in order to be able to foreclose.
One might argue that the Administration had few good choices, given the systemic risk, but the one it chose, of yet again covering up for bad conduct and giving the banks a "get out of liability almost free" card was among the worst.
As a new story by Shahien Nasiripour in the Huffington Post tells us, the Administration is now giving student loan servicers the "too big to fail" kid gloves treatment. The apparent justification is that correcting the records of borrowers who may have gone into default through not fault of their own would lead schools with bad servicers to lose access to Federal student aid, which could prove to be crippling to them.
So understand what that means: the law was set up to inflict draconian punishments on schools that used servicers that screw up and/or cheat on a regular basis, presumably because the consequences to borrowers were so serious. But rather than enforce the law, which would have such dire consequences for bad actors as to serve as a wake-up call for everyone else, the Administration has thrown its weight fully behind the education-extraction complex.
The key parts of Shahien's story:
The U.S. Department of Education is turning its back on at least 1,000 borrowers in favor of shielding their former colleges from potentially crippling sanctions that would have resulted from high rates of default on federal student loans…
"Borrowers aren't getting any relief or similar consideration from the Education Department," said Debbie Cochrane, research director at the California-based Institute for College Access & Success, which advocates affordable education. "If the school isn't held accountable for the default, then the borrower shouldn't either."
As many as 20 schools won't lose access to critical federal student aid programs, an Education Department official said Wednesday. Losing access to taxpayer-provided student aid would be the equivalent of a death sentence for most colleges. The institutions that were let off the hook include for-profit schools, private and public colleges, and historically black colleges and universities, the official said on a conference call organized for news media.
"As many as 20 schools" being given a waiver they clearly don't deserve suggests that the number of borrowers being thrown under the bus is considerably larger than 1000. Huffington Post identified 13, of which seven are for-profits and four started out as black colleges. And mind you, the schools have to be abjectly bad at making and servicing loans to be subject to the loss of Federal aid:
Schools whose former students subsequently default on their federal student loans at unacceptably high rates can cost their current and future students access to federal grant and loan programs. Penalties kick in once a school's default rate exceeds 30 percent over three straight years.
The "get out of jail for free" card applies to servicers that screwed up by billing students for only some of their loans, and later declared the students to be in default on loans they didn't know about. While that may sound nuts, recall that students typically sign loan agreements and the proceeds go to the educational institution. Moreover, payments are usually deferred while the student is still in school. So it isn't hard to see that a student, having signed loan documents over the years, might not realize that they were to different lenders and hence they'd down the road be facing multiple bills. Shahien explains:
The reason has to do with so-called split-servicing, or a situation in which the Education Department has assigned a borrower's loans to multiple specialists that collect monthly payments. In November 2011, Cynthia Battle, an Education Department official, told college financial aid administrators that some 500,000 borrowers with federal student loans were being forced to make multiple monthly payments to different loan companies….
Borrowers are forced to deal with multiple servicers for a variety of reasons. In some instances, they took out Education Department-guaranteed loans from banks under the Federal Family Education Loan program, or FFEL — before Congress ended the program in 2010 — then returned to school in recent years and took out new loans under the Direct Loan program.
Another example includes undergraduate student borrowers who entered school in the fall of 2008. These borrowers may have taken out FFEL loans from banks for the first two years of college, then got loans directly from the Education Department for their junior and senior years.
Mind you, that 500,000 figure is now nearly three years stale, and the Department of Education has refused to update it. That might be because the DoE was evidently trying to reduce the number of students who dealt with multiple servicers. One can guess it hasn't tried hard enough. For instance, outreach efforts have excluded student borrowers subject to split servicing:
Last year, in a move celebrated by the White House, the Obama administration directly emailed millions of borrowers, urging them to consider repayment plans that would cap their monthly payments based on earnings. Borrower advocates said they were unaware of any similar efforts directed at borrowers who were behind on one set of their federal student debt, but current on their other Education Department loans.
Let us be clear on what happened: the Administration could have chosen to give the servicers on their screw-up, while also requiring them to take student loans out of default if the student hadn't been billed for them and gotten delinquency notices prior to being told they were in default. If the side that has made the error that put the problem in motion is forgiven, why isn't the party suffering harm also given a break? That is not how this is going down:
[Jeff] Baker [a senior official at the Education Department's Federal Student Aid office] dryly noted in his memo that even though schools were let off the hook, "the borrowers' defaulted loan remains in its current status for collection and other purposes."
So these students are getting a painful lesson at a tender age: financial predators have a strong and sympathetic constituency in government.
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