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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I’m having a hard time imagining just how the Obama administration could get more odious. Perhaps if he ordered the FBI to randomly mug people on the street and give the “proceeds” to his bankster buddies? Kidnapping children and making the terrified parents pay their life savings to banks to get their kids back?
Hold it YF;
Your last sentence, if you add the word “lives” after kids, describes the post perfectly!
But he does. He is busy crafting policy to shut down dissent to carried out by a praetorian guard so his Wall Street friends can go about looting with impunity.
The Archdruid Report (linked in yesterday’s water cooler comments) had an excellent commentary regarding this.
I don’t think he’s some sort of diabolical mastermind with Caesar-like ability as a lot of commenters here seem to contend, he’s just a social climber who was well positioned to get a lot of powerful interests what they want even more effectively than Dubya by having the right disposition and skin color to sell people on the shit-sandwich they’re being served.
Here in Scandinavia most everyone seems to believe that he’s a well-intentioned guy who would pass all sorts of progressive reforms if it weren’t for those loony Republicans. What better president could there be for moneyed interests than one who can effectively sell this facade after 6 years?
Well with all the Integrity the Obama regime has displayed, now that you’ve made that accusation we all have to assume it’s true, until at least the regime comes out and denies it. At which point we’ll know it’s true.
As the years pass I think Obama will be seen as much a mediocrity as is W. Bush—it’s just the cultural style factors that differ between the two.
I’m proud to say I always thought Obama was an empty suit. I did believe Team Blue in Congress would be more aggressive without the specter of a Bush veto or risking the sure win in Nov. 08. I just thought he would be content to pursue a reiteration of his campaign strategy of agreeing with Hillary except to replace Hillary with Congress and play the celebrity President.
Moral hazard applies only to the 99%. The way Obama looks at it he is not going to lend a hand to ‘irresponsible’ borrowers no matter their station in life, young or old.
Obama has consistently sacrificed millions of people in a very deliberate way for a handful of Wall Street hotshots. He talks up a good game in front of captive crowds but once he steps off of the podium and choppers back to Washington in his 1000 manned, heavily armored flotilla, he gets back to his normal self and undermines them.
Why student loans. States and cities can run short of dollars, yet they pay for grades K-12. Why doesn’t the federal government, which never can run short of dollars, pay for college? See: http://goo.gl/5prqNU
We pay for grades K-12 with property taxes that are reaching five figures.
And we are not bloody amused.
Simple question, simple answer:
Solve that problem and everything else gets a whole lot easier.
Another decision that places ultimate priority on lenders, at all costs. Lenders are seen as too important to the economy to fail. And when leaders worry about moral hazard, they are deeply afraid of genuine debt relief for borrowers. The whole system might collapse if borrowers just up and decide that they simply will not pay back debts that cannot be paid.
Of course, Obama did that, but his slavering fan boys ‘n girls will find a way to blame it on Republicans.
Ba da boom, ba da bing.
Yes, we will, RUK, because they make it so easy for us. Elizabeth Warrren, another evil liberal, proposed a bill to allow students to refinance their loans. It got 56 votes on Wednesday, which wasn’t enough to overcome the Republican filibuster. Warren’s bill would have financed the loss of income from student loans–o worse and worse!–by forcing millionaires to play at least 30% of their income in taxes–horrible, horrible! That’s the part the Republicans objected to–or so they say. In fact, as that other horrible liberal Paul Krugman frequently points out, there is a spirit of downright meanness in Republicans that causes them to enjoy seeing the helpless suffer, whether by not having health insurance, or by being saddled with student debt, or not getting food stamps–really, any excuse will do.
No doubt that evil Obama would have vetoed the bill had it passed, ah-hahahahahahahahaha . . .
Deloss – Please refrain from referring to 1 percenter and effective tax rate of 5.2% Elizabeth Warren:
Harvard pays the adjuncts who teach many of its undergraduate classes an average of $11,037. In 2008, the earliest year for which Warren has released income tax returns, Warren and her husband Bruce Mann had a combined income of $831,208, which increased in 2009 to $981,670. Warren was paid an average of $350,000 per year by Harvard Law School during 2009-2010.
Warren’s net worth as of the end of 2011 was as high as $14.5 million.
http://www.scribd.com/doc/91532577/Elizabeth-Warren-Tax-Returns
Privet, “Friedman’s Ghost.” I myself worked for NYU as an adjunct for 24 years and worked my way up to a princely salary of 12K/year. Then I was fired and replaced by the dean’s “pet.”
I have a net worth of several millions–less than Warren’s–inherited, mostly–and am doing my best to preserve it for my son because we know from reading Piketty that the accumulation of wealth is essential for a liveable life, and we know from experience that acquiring wealth from scratch is next to impossible, if you exclude crime.
Ms. Warren’s efforts are in the right direction. I should say that her heart is in the right place, but the phrase is hackneyed.
What difference would it make to her if students are getting tortured for their loans or not? None, but she fights against it. So I admire her.
If you want to take your rancor out on somebody, well, to educate myself, I have gotten involved with a lot of Republican mailing lists, and if you reply here, I will be glad to provide you with several links. I don’t think you’re a naïf, but if you are, I shall be glad to enlighten you, if you’ll pardon my arrogance. Wait’ll you read a few emails from GUNS AND PATRIOTS.
I tried to post this before, and it got spat out, probably for rudeness.
Yes, we will (blame it on Republicans) RUK, because they make it so easy for us. Elizabeth Warrren, another evil liberal, proposed a bill to allow students to refinance their loans. It got 56 votes on Wednesday, which wasn’t enough to overcome the Republican filibuster. Warren’s bill would have financed the loss of income from student loans–o worse and worse!–by forcing millionaires to play at least 30% of their income in taxes–horrible, horrible! That’s the part the Republicans objected to–or so they say. In fact, as that other horrible liberal Paul Krugman frequently points out, there is a spirit of downright meanness in Republicans that causes them to enjoy seeing the helpless suffer, whether by not having health insurance, or by being saddled with student debt, or not getting food stamps–really, any excuse will do.
No doubt that evil Obama would have vetoed the bill had it passed, ah-hahahahahahahahaha, I’m sorry, I can’t help it–
Yes, we will, RUK (blame Republicans), because they make it so easy for us. Elizabeth Warrren, another evil liberal, proposed a bill to allow students to refinance their loans. It got 56 votes on Wednesday, which wasn’t enough to overcome the Republican filibuster. Warren’s bill would have financed the loss of income from student loans–o worse and worse!–by forcing millionaires to play at least 30% of their income in taxes–horrible, horrible! That’s the part the Republicans objected to–or so they say. In fact, as that other horrible liberal Paul Krugman frequently points out, there is a spirit of downright meanness in Republicans that causes them to enjoy seeing the helpless suffer, whether by not having health insurance, or by being saddled with student debt, or not getting food stamps–really, any excuse will do.
I gotta interject about the Filibustering.
http://www.nakedcapitalism.com/2012/07/the-obama-enablers-big-lie-we-never-had-the-votes.html
It’s Kabuki. The quicker you understand that Obama is a con man (and by the very nature of the system he wouldn’t be there if he wasn’t) the better.
random thought/question I had. Would much appreciate it if somebody insightful can reply
My thought is that if the ACA Employer mandate is ever actually implemented, in practice private employers (especially nonunionized, eg the employers of 90% of private USian employees) can avoid the ACA Employer mandate by threatening to fire the employees if they don’t obtain health insurance.
In our no-data privacy era, I would imagine there may be some “data service” company data service that would provide info of “insured vs not insured” list by Soc Security number the employer provides? There remains a vast Reserve Army of the Unemployed and PartTime Underemployed to replace anyone fired. And a nonunionized private employer, can “At-Will” typically fire anyone for no/any reason anytime. Even if they can’t fire “at will”, afaict in practice in the current US, an private employer could easily manufacture a fake reason, for instance “lay off for economic reasons” (iirc a newsstory that megacorps like IBM have done mass layoffs of USian workers citing “economic reasons” or “efficiency due to redundancy” even during a quarter of record profits without any legal problem from the fired employees nor any Government).
I also wonder if this will be a moot point, because 0 or the next Pres will “quietly” on a holiday ignored newsday permanently cancel the Employer Mandate anyways.
What do you think? Thanks again
The student loan defaults and their impact on generations of debt serfs plays out in the erosion of faith in political solutions to societal problems and the creation of a parallel underground economy. This will not bode well for the USA and its institutions. We are already seeing the consequences in small, subtitle ways. The only solution is to return statute of limitations and bankruptcy protections to these loans, unfortunately it wont happen because of the peculiar strain of Calvinism endemic to the new world capitalism. Historically this same debt peonage scenario played out in the end of the western Roman empire.
There was a student loan scandal involving NYU and I believe kick backs in the late 1980’s. I went looking for an article on the story and was lost in a sea of student loan scandal news articles.
Nothing has changed.
So when exactly are people responsible for their actions and inaction?
I can sympathize with someone having multiple student loans and loan servicers. Did you know there is a program for that? Its called LOAN CONSOLIDATION and the benefits and risks are spelled out here https://studentaid.ed.gov/repay-loans/consolidation. A paragraph on the site says, “Loan consolidation can greatly simplify loan repayment by centralizing your loans to one bill and can lower monthly payments by giving you up to 30 years to repay your loans.”
Apparently not enough student loan borrowers were taking advantage of it so President Obama made a speech on student loan relief in Denver during 2011 that was covered by all the MSM. The report on the speech by NBC News can be found here http://www.nbcnews.com/id/45039424/ns/politics-white_house/t/obama-announces-student-loan-relief/#.VCSgpvldUnF. In the speech he announced that, “He will also allow borrowers who have a loan from the Federal Family Education Loan Program and a direct loan from the government to consolidate them into one. The consolidated loan would carry an interest rate of up to a half percentage point less than before. This could affect 5.8 million borrowers.”
A discount to borrowers of up to 1/2% to do something to make their life easier! So is it the servicer, school or the borrower who is at fault?
Let me ask again, when exactly are people responsible for their actions and inaction?
I sure “hope” it works better than HAMP.
I suggest you read Shahien’s article. You clearly didn’t.
Borrowers who had split servicing weren’t offered loan consolidation.
Next?
I actually read the Shahien article and your post not once but twice. The first time I read them was in the morning and then again in the evening. I read them each twice because I found nothing in either in the way of hard facts to draw the drastic conclusions expressed. I don’t know enough to say that either is wrong at this point, but what I read is little more than opinion to me.
What I read in the Shahien article included quotes entirely from people with predisposed positions that lacked the facts to support the positions taken. For example there is a quote from Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. Ms. Loonin said, “Borrowers may be falling victim to incompetent loan servicing practices”. What the casual reader comes away with is that the servicers are incompetent and of course as the result none of the borrowers are to blame. There is a huge qualifier in her comment. Ms. Loonin uses the word MAY. What that tells me is she really has no idea of the circumstances and does not use any facts to support her speculation. Ms. Loonin has simply taken the opportunity to share her bias – and Mr. Nasiripour’s – with the reader.
As for Mr. Strether’s reference to HAMP in response to Consolidation Loans, I believe consolidation loans have been around for many years. Maybe he was unaware of that because they are relatively trouble free. I don’t know, so maybe that makes a good avenue for further inquiry. Consolidation Loans were not an Obama administration response to a problem. It was but one component of a response to the increasing burden of student debt which was aired nationally for all to hear and he put consolidation loans on sale to improve the take rate.
As for the idea that these borrowers were not “offered” consolidation loans, I never read that in either article. A search of both articles shows that the word consolidation appears twice in your post, with one occurrence being my comment and the other being your reply. The Shahien article has no reference to consolidation. Consolidation loans are widely on offer through the website from the link in my comment. I would think that a borrower who is struggling to make payments because of multiple servicers and the related confusion might conduct a search of the World Wide Web and within seconds find out that such an offering exists. Maybe Mr. Nasiripour’s article could have performed a service to student loan borrowers by letting them know about consolidation loans. Possibly Ms. Loonin’s organization, whose mission is to assist student loan borrowers, has some information on consolidation loans they could share with borrowers experiencing difficulty. It clearly did not fit with either of their agendas.
Are there bad servicers – yes. Are there bad borrowers – yes. When you put the two together it is rarely an improvement. But there is nothing in the Shahien article that leads me to know which we are talking about.
About 10 years ago the Exchequer in the UK did a survey of bank customers. One of the survey results was that about 30% of bank account holders actively went out of their way to avoid knowing the balance in their account. These respondents actually worked not to know their balance because among other things it might show them to be overdrawn or that their balance would be less than they imagined it to be. When I read articles such as Shahien’s it is hard not to think there may be some of this behavior going on. Especially understanding that these are young people who may have moved their residence multiple times (but not their email address), the dog may have eaten their loan paperwork and the servicer may suck.
So from the article what I expect the student loan borrower at issue here is someone who has multiple student loans being serviced by multiple loan servicers. The student loan borrower is current on one or more student loans, while they have never made a payment on one or more student loans that are now in default. It is very plausible to me that this is a small number such as 1,000 borrowers among 20 schools. If the borrower never received notice of the debt, whether through servicer incompetence or not, yes let’s reset the clock and cure the borrower default. If there are incompetent servicers out there lets force them to improve or get out of the business. In fact for the past 5 years the Direct Loan Program through its five service metrics has focused 60% of its attention on borrower default and borrower satisfaction. The US Government has clearly told servicers where the focus should be as can be read here http://ifap.ed.gov/eannouncements/attachments/LSIExplanAllocationAndCustServMethod091114.pdf
By the way, how would the loan servicer know a borrower has other student loans at other loan servicer(s) as a basis to make an “offer” of loan consolidation?
By the way, how would a loan servicer know that a student loan borrower has other student loan(s) at other student loan servicer(s) as the basis for an offer to consolidate loans?
By the way, how would a loan servicer know that a student loan borrower has other student loans at other student loan servicer(s) as the basis to make an “offer” of loan consolidation?
Not a new development. Split servicing was done to my loans back in 1991 and *surprise* even though I was still in school I defaulted when Sallie Mae “sold” my 3 loans from Omaha to Salt Lake City. Go figure, the 2 small ones were just fine but the big one was suddenly in default with incorrect contact information. Took almost a decade to pay them off, because correcting the “mistake” was impossible – “since it’s in default, it’s out of our control”.
Yves: Shahien does better than average reporting on this topic (which sadly is a pretty low bar post crisis), but he has deliberately ignored research findings that we did years ago and have sent to him multiple times…these are findings that inform and change the debate to such an extent that most previous discussion on the topic turn out to be silly and worthless!! Yet, Shahien and his colleague (like most other higher ed reporters, sadly) ceased communicating with me abruptly after I had sent them this stuff, and to this day won’t even acknowledge unrelated emails I might send them.
I’ve seen reporters be turned against me and our groups claims more than a few times (I suspect you’ve seen this upclose as well), so when I say something is not right with Shahien, I’m almost certainly correct.
Anyhow, here is the claim should you be interested. I urge you to give it a hard look. I would be glad to be hit with the most skeptical questions that you might ask, and happy to answer them as a skunk would.
http://studentloanjustice.org/defaults-making-money.html
This is strongly linked to the “fair value accounting” fight currently going on for student loans btw…