Friday, September 22, 2017

CFPB-induced National Collegiate Student Loan Litigation Moratorium: Expect confusion, inconsistent implementation, and need for follow-up

On Sep. 18, 2017 the CFPB issued an administrative CONSENT ORDER that requires Transworld Systems, Inc. (TSI), the “special servicer” of the National Collegiate Students Trusts for defaulted loans, to clean up its act. See the Bureau's press release here

TSI is the entity in charge of the Trust’s litigation machine (“attorney network”) and operates a high-volume litigation-exhibit and affidavit production center in Georgia (my characterization, not the Bureau’s). Unlike the proposed CONSENT JUDGMENT between the CFPB and the Trusts themselves, this order does not require court approval, and went into effective immediately.


TSI did not admit the CFPB's rather damning findings regarding improper affidavit production and other irregularities in the litigation process (such as filing of time-barred collection suits and having affiants sign affidavits professing personal knowledge they lacked). In fact, TSI disputes the charges by press release, at least with respect to its current business practices, which -- it protests -- are up to snuff.   
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.
But it consented to the imposition of a civil penalties of $2.5mil (which is very moderate, considering the size of the operation and the huge docket of cases) as well as the remedial measures, which include an audit of all cases to determine whether the available documentation justifies (or would justify) a lawsuit against the obligor(s).

How the remedial measures designed to undo the harm caused by the practices that attracted federal regulatory attention will play out at the ground level, however, is anything but clear. The CONSENT ORDER is not exactly the equivalent to an injunction that simply stops the litigation machine in its tracks. And the impact of the required compliance measure is bound to vary across jurisdictions.
Most likely, no new collection lawsuits will be filed for a while, but what about the ones that are well under way? What about the cases that already have default or agreed judgments which are now being collected? The consent order has very detailed provisions addressing such matters, and post-judgment collection is supposed to stop, but it leaves many questions nevertheless unanswered. 
An immediate question is how it will affect the pending cases, and the answer will likely not only depend on how TSI implements the CONSENT ORDER and what directions it issues to the law firms that handle litigation in different states. Much rather, the implementation and impact will necessarily differ from state to state because lawsuits cannot necessarily just be put on hold unilaterally.

The attorneys on these cases do not only have obligations to the client (i.e. the Trusts, via TSI), but also have obligations under the rules of the courts in which their cases are pending, including deadlines and such. In Texas, plaintiffs are allowed unilaterally withdraw a lawsuit by filing a notice of nonsuit (as long as the case is not already in the midst of a trial, and sometimes even then), but such a nonsuit will not terminate a counterclaim. So, the case would not actually terminate even if TSI and the Trust’s law firm want to dismiss it.

The court would have to be presented with a motion to stay or abate the case, or to continue the trial setting and/or discovery deadlines and other deadlines, or issue a new docket control order. That, of course, is most relevant in cases in which the Defendant has retained a lawyer. Most Defendants don’t.

Even if TSI instructs the two Texas law firms on its cases the “withdraw” pending collection suits, it will not dispose of all of them because they depend on what the opposing parties/attorneys and courts do in these cases. And the counterclaim may very well proceed to trial. It is not inconceivable that a clever attorney for a defendant will file for a default judgment against a Trust if the Trust law firms is placed in limbo.

On the other hand, TSI may claim that it is now producing compliant affidavits, and that lawsuits may thus proceed, if need be, with substituted or amended affidavits. But it is not clear how a problematic affidavit could be withdrawn if a judgment has already been entered, or when a case already on appeal, or eligible to be appealed because the deadline to do so has not yet expired. 
Nor is it clear what will happen with cases in which a settlement is pending or has already been signed, without the lawsuit having been terminated. Will the new regulatory development provide a basis for undoing a settlement agreement (which is a new contract on the old debt) or will it provide a basis for challenging an agreement judgment, if already entered? What if the court that signed the agreed judgment no longer has jurisdiction (plenary power, in Texas) to set it aside? Does the TSI CONSENT ORDER provide a basis for rescinding settlement agreements with payment plans, or is the defendant's remedy limited to no longer having to make payments on such an agreement? 

And how will it be determined whether or not the criteria for relief under the CONSENT AGREEMENT were satisfied when the case was settled early, and the only evidence before the court was whatever was attached to the petition, which may not have included an affidavit? Most likely, the petition would have had the signature page of the loan agreement (page 1 of several) and the disclosure statement attached, but nothing else. Assignment proof would not be required at the pleading stage, and it could not be known by the defendant or the court whether the Plaintiff had evidence of assignment, and what kind, unless the parties had already engaged in discovery. 
One of the CFPB’s findings from its investigation and enforcement action concerns lawsuits brought on behalf of the Trusts that were filed past the “applicable” statute of limitations. It is not entirely clear how the Bureau arrived at the number. It the count is based on suits that were expressly dismissed as time-barred either pursuant to a motion invoking this defense or court orders stating the reason for dismissal (in Texas, a trial court is not required to state a reason when granting summary judgment), it would be straightforward. But matters are not as simple with pending cases, not to mention potential cases that have not even been filed yet (or assigned for litigation, for that matter). By definition, there is not yet a judicial determination that the Trust’s claim is time-barred.

The statutes of limitations are not same across jurisdictions in terms of length, and in many instances the choice-of-law state (which also varies, depending on the identity of the original creditor/program lender) does not govern the limitations issue if the courts of the state treat limitations as a procedural issue (or an issue regarding the availability of a legal remedy) as opposed to a substantive-law issue that would -- at least in theory -- be governed by the law of the jurisdiction specified in the standard terms of the loan contract. But in practice, the contractual choice of law is almost never invoked in any event, which means that limitations will be default be governed by the limitations law of the forum state.

To the extent limitations is deemed an affirmative defense, however, it must be properly invoked to avoid waiver, and sometimes there is an issue as to which statute of limitations applies (debt, contract, promissory note, negotiable instrument).  

In other words, whether a collection suit is time-barred is dependent both on the law of the jurisdiction in which the lawsuit is filed (based on Defendant’s current residence, as required by the FDCPA), and on the procedural posture of the case, most notably, whether the limitations issue is even raised.

And it is, of course, also dependent on defendant- and loan-specific facts, namely the date of default, which implicates the reliability and accuracy of loan payment history from PHEAA/AES, which is dubious, as was also revealed by the recent audit conducted in connection with the new owner’s legal squabble with the primary servicer. 

But even if there were no question as to reliability of payment histories extracted from the servicer’s account management system, different jurisdiction may have different rules regarding the accrual-of-claim date for limitations purposes (Does the breach/default occur when the first monthly installment payment is not made, or is it based on the last payment that was received and credited? What if the payment was only a partial payment?).

And there may be differences among jurisdictions as to whether or not, and under what conditions, a resumption of payments restarts the limitations clock. What if the payment history shows a "credit" that is merely in internal "accounting adjustment" rather than an actual payment made on the debt. Will it slow down the limitations clock? What if the servicer “granted” a deferment/forbearance that the borrower was not even aware of, and thereby also deferred the accrual of claim for SOL purposes through simple account gimmickry? Or claims that a deferment or forbearance was granted, but that the documentation is no longer available…and that there are only electronic event/status entries in the account history that is printed from the account system? Will those be deemed admissible in lieu of primary business records of these events, such as a copy of the borrower's request for a forbearance, or a notice letter to the borrower?).  

Sensibly, the consent order assigns the compliance burden to the retained law firms, which would be cognizant of  the law that applies in the jurisdiction in which their attorneys are licensed to practice, but that still leaves considerable uncertainty as to which lawsuits could be safely brought, and which not. Moreover, these collection attorneys would already be aware that they may incur FDCPA liability as third-party debt collectors for bringing a time-barred suit, so the practical effect of this component of the consent order may be limited because a deterrent is already in place in the form of private fair-debt collection actions against violators. 


The questions what is adequate in terms of proof of the underlying loan contract/note, and what was is adequate as proof of ownership by virtue of assignment not only varies by jurisdiction, but – even more importantly - is affected by rather tricky evidentiary issues, which are arguably even more complex than the limitations issue.

Unlike the filing of time-barred suits, FDCPA actions based on suits where the creditor failed to meet its burden to proof on the merits, or its standing to sue, are much more problematic and less likely to be successful. In this respect, then, the consent order may have a more significant impact, but many questions remain under the big question: What is adequate proof of the chain of title when the "note" at issue is not a negotiable instrument; and what constitutes "possession" of such proof so that the chain-of-title requirement for bringing a compliant collection suit under the consent order is satisfied?     
The audit of a small sample of PHEAA/AES loan files commissioned by the current residuals owner of the Trusts has revealed that proof of assignment is missing from 100% of the loan files. 

Audit report via NYT here 

The Trusts' new owners apparently make much of this in the lawsuit they filed against PHEAA/AES in Delaware Chancery Court. The public version of the filings are heavily redacted, but the available information is sufficient to conclude that the goal of the legal action is to oust the servicer and replace it with a new one, presumably one that is cheaper and better at squeezing money from the legions of subprime borrowers struggling to make ends meet, not to mention making payments on high-interest loans. 

But the lack (or shoddy nature) of chain-of-title proof is a problem that is inherent in the business model that drove the creation of the trust as vehicles for the securitization scheme in the first instance. It is a systemic or structural problem. 

The absence of documentary proof of assignment at the loan level (not really a loan file in the traditional sense of the term, which makes the hype about “missing paperwork” somewhat ironic) is anything but surprising because the “notes” were transferred by pool-transaction instruments called "Pool Supplements” with incorporation by reference of a data file denominated “Schedule”).

Pool Supplement is a meaningful label in this context. The term 'supplement' is descriptive because this contract document supplemented the pre-existing loan/note purchase agreements between originating bank and The First Marblehead Corporation, the sponsor of the securitization through its subsidiary National Collegiate Funding, LLC. The “pool” refers to the aggregate of the loans subject to the transaction on the particular occasion. 

See examples of: Bank of America Pool Supplement and DASA for NCSLT 2007-2 

The second chain-of-title document pertaining to transfers of "pools" to a trust is a Deposit and Sale Agreement for the specific trust (to be) formed for the purpose of aggregating and securitizing multiple pools of loans from different program lenders.

The data-file was used because that was much more efficient than physical transfer of files, or even individual electronic transfer of files at the loan-level.  
Student Loan Purchase Agreement and Deposit and Sale Agreement
explained (from NCSLT 2007-3 Prospectus)
The problems the Trusts have encountered in collection cases in which borrowers/defendants hired a savvy defense attorney is the problem of proving that the particular loan at issue was included in the pool-transaction evidenced by the “Pool Supplement” and the “Deposit and Sale Agreement”. Those two documents are easy to come by because they are on file with the Securities and Exchange Commission for the whole world to view on the web and to puzzle over. While the data file is referenced in the Pool Supplement, e.g. "Schedule 1 [Transferred Bank of America Loans]", its content is not posted on the SEC's public-facing website. 

The challenge for the TSI and the Trust’s attorney’s was to link the loan-origination documents (Signed signature page, additional pages of fine print, and TIL disclosure statement, -- more on those below) to the these documents evidencing transactions involving huge numbers of loans, and – in the case of the Deposit and Sale Agreement – multiple pools from different lenders. Apparently, they did not have access to the loan file, which was supposedly on file with the Indenture Trustee. Even assuming that TSI now has access to this file, that does not entirely solve the problem because they must still integrate the loan detail (data excerpt) with the pool-level transaction evidence, and that requires a properly qualified witness that can lay a proper predicate for the data file / Schedule or authenticate an data extracted from it pertaining to a particular loan. 
As the CFPB observed, TSI would simply print the two document from the SEC website. These print-outs would then be attached to affidavits, if proof of assignment was needed in a particular jurisdiction, or a in a contested case. And a data-sheet with loan-level pieces of data would be inserted between the Pool Supplement and the Deposit & Sale Agreement as supposed "proof" that the particular loan at issue in the collection suit was indeed part of the deal. One appellate court in Texas called that addition the "orphan page". See Gillespie v National Collegiate Student Loan Trust 2005-3, A Delaware Statutory Trust. No. 02-16-00124-CV (Tex.App. - Forth Worth, June 29, 2017, no pet.) 

But these finer points of proof typically only become issues where the defendants fight the lawsuit, and do so with competent legal representation. 
The so-called private student loan “notes” that were bundled and pooled and ultimately became trust assets are not instruments comparable to closing documents in a mortgage loan transaction.

The “promissory notes” consist of a signed signature page that does double-duty as an application and as an agreement to repay (on terms not yet certain because the loan has not yet been approved when the page is signed) and a few more pages of fine print that might be called "Terms and Conditions" or "Standard Terms" although some standard terms and conditions are printed on the signature page also. 

Example of faxed Signature Page (above)
from Bank One student loan originated in 2004 (NCSLT 2005-1)

The applicant would fax back the signature page only (to the agent of the program lender) and contractually agree that the fax is as good as the original (retained by the applicant), while the remainder of the pages (the fine print) is incorporated by reference. But those additional pages did not necessarily make it into the loan origination file, and in many instances lawsuits would be filed that included only the signature page (page 1 of 4) and the Note Disclosure Statement as evidence of the “note” or “loan contract”. Also see PHEAA audit, which showed that very few loans in the sample had the "Terms and Conditions" affixed to the signed notes.

Does the absence of the terms and conditions pages mean that the contract was not proven, or not fully proven? Arguably so, but it would not matter in the default judgment context. At least not in Texas. This is because the rules governing no-answer defaults provide that a defendant who does not answer automatically admits the allegations in the complaint (called Original Petition in Texas) as to liability. And the damages are proven by affidavit. Either one filed with the pleadings, or one attached to a motion for default judgment. That’s where TSI comes in, because it furnished these affidavits the fill in the gaps in the documentation with "testimony." See ---> prior post on this blawg on NCO / TSI robo-affidavits

CFPB Findings re chain-of-title fibbing (under oath)    
Can the default judgment procured with such an affidavit now be undone? That is not so clear. If the time for a post-judgment motion or an appeal has passed, the only potentially viable route would be appear to be action in equity called a bill of review suit, which must be brought within four years. The Texas rules of procedure, unlike the federal rules, do not know a motion for relief of a judgment, and the trial court generally loses jurisdiction to set aside a judgment after 30 days if no post-judgment motion is filed.

Would the TSI CONSENT ORDER and the CONSENT JUDGMENT as the TRUSTS provide a proper basis to re-open a case by bill of review when the normal requisites for bill of review are not satisfied? -- Not so clear. There would be no precedent directly on point, but a bill of review petition attacking a default judgment based on an affidavit of the kind found faulty by the CFPB (if not perjurious) might provide an opportunity for cutting-edge or ground-breaking lawyering. Or an occasion to present "an issue of first impression" to the judiciary.  

Pick your metaphor or proper legal lingo. 


Another approach may be for the CFPB to persuade or require TSI, and the attorneys whose actions it directs, to not oppose bill-of-review filings by defendants-in-judgment in Texas who seek vacature of final judgments obtained with dubious documents or questionable representations, or to require the Trusts to execute a release of judgment. The latter approach would solve the problem of eliminating judgments that cannot otherwise be undone for lack of proper procedural mechanisms in a jurisdiction such as Texas.

Non-enforcement or a stop to post-judgment collection will no doubt provide substantial relief to affected individuals (particularly in light of the fact that the National Collegiate Trusts used writs of garnishments to empty out borrower's bank accounts), but it is not the same as vacature of a judgment that should not have been entered, but was. Once final and unappealable, the judgment is res judicata. 

No doubt, many unanswered questions remain, and time will tell how the implementation of the NCSLT CONSENT JUDGMENT and the TSI CONSENT ODER play out. 

After the audit of the full population of student loans is completed, a certain percentage of them will no doubt pass muster under the newly-instituted documentation criteria, and the revamped collection lawsuit machine will roar again. 


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