Default & Debt Collections Spur Controversy in Private Student Loan Securitization Industry
National Collegiate Student Loan Trusts (NCSLT), the largest owner of private student loan debt, has made its way into the news, and this time, it is not great for the investment vehicle group. However, this recent development could be some much-needed good news for struggling private student loan borrowers who took out loans before the financial crisis.
Debt collectors, who were working for National Collegiate Student Loan Trusts to collect on private student loans originated about a decade ago, were accused of utilizing deceptive, yet legal, documents to get private loan borrowers to pay up. These findings spurred an investigation by the Consumer Financial Protection Bureau.
In response, NCSLT-owner Vantage Capital Group LLC reacted to the CFPB investigation by agreeing to work on a settlement. The settlement involves an independent third-party audit, covering 800,000 plus private student loans.
The audit is meant to zero in on which outstanding loans have a chance of being repaid. Additionally, a stipulation in the settlement would charge a $19 million fine to be paid back to borrowers who were affected by any allegedly scheming debt collection methods.
Plus, if the audit does find evidence of wrongdoing, all parties involved in the debt collection process would pay this fine according to the settlement.
These developments are new and unheard of in a way, potentially affecting student loan securitizations and in a negative way. Here’s why.
For past borrowers with private student loans, this could be seen as good news, especially if they were victimized in any way by debt collectors. This settlement could potentially result in loan discharge for defaulted borrowers who have no hope of paying back their student loans. This is good new right?
For an individual who could be free of debt, sure, it is good news. However, anyone who is looking to take out a private student loan in the future could stand to lose in a way.
This development could set a bad precedent for government regulation and loan securitizations. If a large group of borrowers can default on securitized debt, spurring federal action to relieve these group of borrowers of their debt obligations. Furthermore, a fine being levied on the collecting parties would make things worse.
With this in mind, it would appear that any investor who owns a loan, in this case a private student loan, is assuming more risk in this sort of regulatory environment. Typically, if there is more risk for the lender or loan owner, then harsher conditions for missing payments would be implemented.
Looking at the private student loan industry under this potential precedent, student loan borrowers could be faced with higher interest rates, costing them more money in the end and raising the cost of education down the road.
However, keep in mind that this is just a scenario for now, and it’s a good argument against the lawsuit and settlement in play right now. Look back to the root reason for all of these developments – alleged malpractice in debt collection.
Presumably, if debt collection methods didn’t fall under such suspicion, then this wouldn’t be such an issue. However, on the flip side, if large groups of borrowers weren’t defaulting on their student loans, then there wouldn’t be the need for any sort of debt collection method, good or bad.