Sunday, September 17, 2017

Bank of America N.A.(BANA) finds way to cash in at the back-end of private student loan debt crisis - jointly raids bank account of student-borrower and splits the meager proceeds with NCSLT 2007-4

Here is how the National Collegiate Student Loan Trust's strategy of using collection litigation to shore up the poor quality of its portfolio of private student loans -- so dubiously originated in 2007 just before the financial crash -- is playing out at the retail level.

Along with its namesake statutory trusts, NCSLT 2007-4 obtains default judgments against student-borrowers who can't pay, then seizes the borrower's bank account balance through a writ of garnishment served on whatever financial institution the borrower has an account with. The going rate for a bank to respond to a writ of garnishment is $400-$500 in Texas. Bank of America, N.A. is now charging more than a $1,000 for filing the required answer to such a writ (verified by a corporate representative, see image below) and for whatever little effort it takes to see to it that it gets a cut of its own customer's account balance when the court enters a final judgment of garnishment for the Trust.

Bank of America was in the business of originating private student loans itself, including loans pooled into Trust 2007-4 (See BANA Pool Supplements EX-99.29 and EX-99.30 here). In fact, it was a major partner of the First Marblehead Corporation in the scheme, and an executive in its student lending division took expensive gifts from the high-finance guru who was then at the helm of the private-student loan asset-backed securitization enterprise (which led to the CEO's exit from the First Marblehead Corporation).... But all that happened more than a decade ago.

A high proportion of the subprime private student loans are now in default, and lawsuits are being used by the folks pulling the strings behind the statutory trusts (which are mere legal vehicles, rather than functioning business organizations) to collect accelerated loan balances and accrued interest to make up for the shortfall in the flow of installment payments caused by rising delinquencies and defaults. The servicer - AES - is under pressure too, for not doing a good-enough job squeezing cash from struggling debtors.

Bank of America has now figured out how to make money off these failed - often high-interest - loans too; -- once the time has come to squeeze blood from the wayward turnips who can't pay and already had default judgments entered against them that are no longer appealable. The Bank has found a way to "work with" the law firm that does the trust's collection work in Texas, and helps itself to a portion of the money customers unwittingly -- perhaps foolishly -- entrusted to it by opening or keeping a checking account.

In the case above (Harris County Civil Court at Law No. 2) the cosy arrangements between garnishor and garnishee came close to a fifty-fifty split because the former TSU student had only $2,148.49 on deposit.

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It was an AGREED JUDGMENT; -- agreed between the garnishor (the Trust) and garnishee (BANA), that is. The debtor did not have a say in the matter. He just had his account frozen and emptied. And the judge just signed off on it, as is typical with agreed judgments.

The received wisdom among the informed public is that Texas does not have wage garnishment. Far from it. The paycheck money is directly sucked out of the judgment debtor's bank account into which they employer just direct-deposited it. Unlike express wage garnishment as authorized in other jurisdiction, there is no percentage limit on what will be frozen, and then taken by judicial fiat. The theory in Texas is that the state constitutional protection against wage garnishment (except for child support) serves to allow Texas to meet their basic living expenses (and keep them off welfare). But thanks to appellate decisions, once the pay is deposited into a bank account, that protection dissipates. And how many people do not have their pay delivered electronically these days?

Default judgments followed by writs of garnishment thus allows the National Collegiate Student Loan Trusts to reach monies that would otherwise be exempt from seizure and protected as necessary to meet living expenses.

WRIT OF GARNISHMENT ISSUED BY HARRIS COUNTY CLERK ON BANK OF AMERICA
ON DEFAULT JUDGMENT FOR NCSLT 2007-4

THE UNDERLYING
-- COVERTLY --
HIGH-COST LOAN & AND ITS COLLEGIATE POOL BUDDIES

In the example above, court record reflects that the student signed the loan application on August 7, 2007, requesting $6,000 for his studies at Texas Southern University the Fall 2007 and Spring 2008 semesters from JPMorgan Chase Bank, N.A.

The Loan Request/Credit Agreement - Signature Page shows the interest rate as 7.25 and the Origination fee as 10.50. The interest rate is denominated as "Deferment Period Margin" and as "Repayment Period Margin." A standard fine-print contract document (which is not in the court's file) presumably explains that the "margin" is not actually the interest rate, but the percentage rate added to a market index, such as the U.S. Prime Rate or LIBOR.

The true (much higher) interest rate was then disclosed on the "NOTE DISCLOSURE STATEMENT," and it is 13.742%, rather than 7.25%; -- almost twice as high. Additionally, this DISCLOSURE reflects that an "Origination Fee" of $703.91 was immediately added to the loan balance to enlarge the "Principal Amount of the Note" to $6,703.91 from $6,000.00.

***

The LOAN REQUEST/CREDIT AGREEMENT - SIGNATURE PAGE was signed and faxed August 8, 2007. The DISCLOSURE STATEMENT, however, is dated August 10, 2007, three days later. It speaks of disbursement in the past tense ("Amount paid to ..."), so the disclosure of the true effective interest rate (and the cost of credit, including the origination fee) appears to have been made after the fact, if at all (the DISCLOSURE STATEMENT is denoted "File Copy" in the lower margin, which is no proof that it was ever conveyed to the borrower and/or co-signer).

Moreover, $703.91 is obviously more than 10.5% of the $5,000.00, the loan amount applied for and disbursed. Ten percent and half would by $525.00. Not only was the amount of the debt instantly enlarged by the addition of $703.91 for "origination" that was conducted by electronic means (internet and fax). In addition to this up-front surcharge, the borrower would then accrue interest on that additional portion of the "Total Amount Financed" from day one, along with interest applied to the $5,000.00 amount. So, the true cost of credit would be One-time Origination Fee + Interest accrued based on the APR (sum of LIBOR and Margin) on the disbursement amount + Interest on the $703.91 Origination Fee accrued based on the same APR. And in the case of a "Full Deferral" loan, the total cost of credit computed for the first year (for effective APR purposes, including the origination charge) would compound several times before repayment was even to commence. Enough time for the loan be sold, securitized, and pitched to investors as a highly profitable asset.

The First Marblehead Corporation would promptly sell this and the entire enormous agglomeration of pools of loans for total proceeds exceeding the nominal value of the loans, and would skim off 8.7% up front from those proceeds to reward itself for its ingenuity. See September 17, 2007 Press Release: First Marblehead Announces Preliminary Estimate of Up-front Fees in Upcoming Securitization.

At the closing of the NCSLT 2007-3 securitization, First Marblehead expects to receive up-front structural advisory fees of approximately $88.6 million, or 8.7% of the total private student loan balance securitized. At the closing of the NCSLT 2007-4 securitization, First Marblehead expects to receive up-front structural advisory fees of approximately $88.5 million, or 8.7% of the total private student loan balance securitized.

USE OF SECURITIZATION PROCEEDS AND ASSETS

The trust estimates that the net proceeds from the sale of the notes will be applied substantially as follows:

Collection Account(1)                                    $  903,349,048
Reserve Account                                          $  187,424,000
Deposit to TERI Pledge Fund                              $    7,400,867
Cost of Issuance                                         $    1,750,000
Underwriting Fee                                         $    3,339,375
                                                         --------------
     Total Uses                                          $1,103,263,290

⁽¹⁾	$813,643,182 used to purchase student loans and $89,705,866 paid to The First Marblehead Corporation as a structuring advisory fee.

The assets of the trust and those assets expected to be pledged to the trust at the closing date are estimated to be:

Trust Student Loans                                   $  769,947,314
Reserve Account                                       $  187,424,000
Collection Account                                    $      299,543
TERI Pledge Fund                                      $   47,736,733
                                                      --------------
     Total Assets                                     $1,005,407,590

CHARACTERISTICS OF THE STUDENT LOANS

Trust Student Loans

The trust student loans are all private student loans that are not reinsured by the United States Department of Education or any other government agency. The trust student loans are guaranteed by TERI. All trust student loans were originated from several different banks under different loan programs that were structured with the assistance of The First Marblehead Corporation.
The trust student loans will be purchased by the trust from the depositor with proceeds from the sale of the notes.

AGGREGATE POOL PROFILE FOR NCSLT 2007-4 TRUST LOANS

AS PRESENTED IN PROSPECTUS PRECEDING THE BOND ISSUES

Composition of the Trust Student Loans (as of August 31, 2007)

Outstanding Principal Balance		$997,962,250

Total Accrued Interest		$18,095,723

Total Outstanding Principal and Accrued Interest		$1,016,057,973

Number of Borrowers		69,606

Average Outstanding Principal Balance Per Borrower		$14,337

Number of Loans		71,943

Average Outstanding Principal Balance Per Loan		$13,872

Weighted Average Annual Interest Rate		LIBOR + 5.15%

Weighted Average Annual Interest Rate in Repayment		LIBOR + 5.21%

Weighted Average Remaining Term to Maturity		269

Weighted Average FICO Score for Cosigned Loans		712

Weighted Average FICO Score for Non-Cosigned Loans		707

Weighted Average FICO Score for All Loans		711

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Distribution of the Trust Student Loans by Interest Rate
(Current Interest Rate)
(as of August 31, 2007)

Current Interest Rate*	Number of Loans	Outstanding Principal Balance		Percentage of Trust Student Loans by Outstanding Principal Balance
LIBOR + at least 0.50% but less than 3.00%	8,876	$	103,918,306	10.4	%
LIBOR + at least 3.00% but less than 3.25%	746	$	9,086,629	0.9	%
LIBOR + at least 3.25% but less than 3.50%	1,331	$	13,119,618	1.3	%
LIBOR + at least 3.50% but less than 3.75%	4,041	$	56,200,254	5.6	%
LIBOR + at least 3.75% but less than 4.00%	948	$	10,632,664	1.1	%
LIBOR + at least 4.00% but less than 4.25%	4,249	$	61,753,668	6.2	%
LIBOR + at least 4.25% but less than 4.50%	2,277	$	23,002,856	2.3	%
LIBOR + at least 4.50% but less than 4.75%	11,877	$	170,920,586	17.1	%
LIBOR + at least 4.75% but less than 5.00%	437	$	5,949,517	0.6	%
LIBOR + at least 5.00% but less than 7.00%	26,198	$	383,144,890	38.4	%
LIBOR + at least 7.00%	10,963	$	160,233,262	16.1	%
Total	71,943	$	997,962,250	100.0	%

* Base LIBOR index for the month of August 2007 set at 5.32% for all monthly reset loans; base LIBOR index for third quarter 2007 set at 5.32% for all quarterly LIBOR resets.

Distribution of the Trust Student Loans by Interest Rate
(Repayment Interest Rate)
(as of August 31, 2007)

Repayment Interest Rate*	Number of Loans	Outstanding Principal Balance		Percentage of Trust Student Loans by Outstanding Principal Balance
LIBOR + at least 1.00% but less than 3.00%	3,786	$	39,256,707	3.9	%
LIBOR + at least 3.00% but less than 3.25%	1,068	$	16,153,730	1.6	%
LIBOR + at least 3.25% but less than 3.50%	1,730	$	20,623,388	2.1	%
LIBOR + at least 3.50% but less than 3.75%	8,303	$	104,958,273	10.5	%
LIBOR + at least 3.75% but less than 4.00%	1,052	$	11,938,583	1.2	%
LIBOR + at least 4.00% but less than 4.25%	4,240	$	61,698,613	6.2	%
LIBOR + at least 4.25% but less than 4.50%	2,288	$	23,045,424	2.3	%
LIBOR + at least 4.50% but less than 4.75%	11,872	$	170,849,438	17.1	%
LIBOR + at least 4.75% but less than 5.00%	442	$	6,049,452	0.6	%
LIBOR + at least 5.00% but less than 7.00%	26,199	$	383,155,378	38.4	%
LIBOR + at least 7.00%	10,963	$	160,233,262	16.1	%
Total	71,943	$	997,962,250	100.0	%

* Base LIBOR index for the month of August 2007 set at 5.32% for all monthly reset loans; base LIBOR index for third quarter 2007 set at 5.32% for all quarterly LIBOR resets.

S-42

SOME DEFENDANTS TELL THEIR TALES OF WOE

-- WILL ANYONE LISTEN?