The Lawletter Vol 43 No 8
Student debt is the second-largest source of U.S. household debt, at nearly $1.4 trillion. Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit (accessed on Nov. 10, 2018). It is projected that nearly 40% of student loan borrowers will default by 2023. Judith Scott-Clayton, The Looming Student Loan Default Crisis is Worse than we Thought (accessed on Nov. 10, 2018). Many attorneys have seen increased requests for student loan advice.
Because students are often young and legally unsophisticated at the time they borrow, many understand little about their contracts, or have lost—or never obtained—copies of the essential documents. The first step in such circumstances is to have the client contact the servicer to request copies of the promissory note and related documents, payment history, name and address of the current lender, and documentation of any transfers. Some jurisdictions have enacted legislation requiring servicers to provide this information. See, e.g., District of Columbia Student Loan Borrower Bill of Rights, Sept. 8, 2017, issued pursuant to D.C. Code § 31-106.01; see also Cal. Fin. Code § 28130. Even in other jurisdictions, servicers generally cooperate with documentation requests.
Loans are rendered unenforceable, with surprising frequency, by various forms of sloppy paperwork by lenders. Lenders lose, or never acquire, essential documents. Where essential terms of the loan are contained not in the executed promissory note, but in a subsequent "disclosure" defining those terms, incorporated by reference in the note, the disclosures are often misplaced. Loans fail to comply with the Truth in Lending Act. The originating lender on the promissory note is acquired or dissolves without properly transferring the loan to another entity. Student loans are often resold by the originating lender and securitized in trusts, and transfer paperwork is fatally flawed or absent.
Many individual borrowers have obtained dismissal of collections suits due to lenders' failure to properly document loans. Additionally, in 2017, the Consumer Financial Protection Bureau brought an action against a student loan trust seeking injunctive relief and refunds for borrowers based on the trust's failure to maintain legally required records for thousands of loans. See Consumer Fin. Prot. Bur. v. Nat’l Collegiate Master Student Trust, C.A. No. 17-1323 (MN), 2018 WL 5095666, at *2 (D. Del. Oct. 19, 2018). A proposed consent judgment has been submitted but the litigation is still pending.
If a loan is unenforceable, the borrower may simply stop making payments. Of course, many borrowers default out of financial necessity, whether or not the loan is legally valid. In either case, if the lender continues with efforts to collect on the loan, the client should keep a "contact log" so the attorney can determine whether collections efforts violate state consumer protection acts, the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Fair Debt Collection Practices Act, and/or the Servicemembers' Civil Relief Act. These statutes can protect the client from harassment, and claims against lenders under them may also help a borrower who has defaulted on an otherwise enforceable loan negotiate a favorable settlement.