Tuesday, July 17, 2018

Mock v. National Collegiate Student Loan Trust: A peek into the shady world of the private student-loan market

In 2007, Casondra Mock, a Texas resident, borrowed about $20,000 from Union Federal Savings Bank, a Rhode Island institution, to finance her studies at the University of Houston at Clear Lake.  The interest rate was high--almost 14 percent.

Under the terms of the loan, Mock would begin paying  $339 a month beginning in December 2009 and would continue making monthly payments for 20 years.  Had she completed all the payments, she would have paid $81,000--4 times what she borrowed.

The Rhode Island bank packaged Mock's loan into a pool of loans, and sold the pool to National Collegiate Funding, which then sold the pool to a "purchaser trust."  Private student loans that are pooled and sold in this way are sometimes called SLABS--Student Loan Asset Backed Securities.

SLABS are very similar to the home mortgages that were pooled and sold to investors ten years ago. Those pooled mortgages were called ABS--Asset Backed Securities. If you watched the movie The Big Short, you know these ABS were sold to investors as AAA rated securities but in fact contained a lot of nonperforming home loans and were actually junk.  When the homes securing these mortgages began going into foreclosure, the ABS became almost worthless, and the real estate market collapsed.

Mock defaulted on her loan and National Collegiate Student Loan Trust (NCSL) sued her along with Kary Mock, who cosigned the loan. NCSL claimed the Mocks owed $37,086,54, together with accrued interest of $5,645.37 for a total debt of $42,731,91.

The Mocks fought the suit in court, acting as their own lawyers. They argued that the interest rate was usurious, the loan was predatory, and NCSL had not provided proper documentation to support its claim.

The trial court ruled for NCSL, entering a judgment of $37,086.54; and the Mocks appealed.

Justice Harvey Brown, writing for the Texas Court of Appeals (First Circuit) rejected the Mocks' usury argument and their argument that the loan was predatory on its face. But Judge Brown reduced the amount of the judgment to $24,408.72 on evidentiary grounds, ruling that NCSL had not produced documentary evidence to support a larger amount.

Why is this Texas court opinion significant? Three reasons:

1) The case shines a light on the shady private student-loan industry. As we see from the Mock case, banks and financial institutions are marketing private student loans all across the United States, charging high interest rates--far higher than students pay on their federal loans. These loans are then bundled into pools (sometimes called (SLABS) and sold to investors.

2) Private student loans are as difficult to discharge in bankruptcy as federal student loans, which makes them especially attractive to investors.  A lot of fat cats are happy to buy SLABS packed with student loans bearing high interest rates, secure in the knowledge that these loans are almost impossible to discharge in the bankruptcy courts.

3) People taking out private student loans are making bad decisions. We don't know Casondra Mock's circumstances, but surely she made a bad decision when she took out a 20-year loan at 14 percent interest to finance her studies at the University of Houston at Clear Lake. She could have taken out a federal student loan with an interest rate half the rate charged by that Rhode Island bank.

Perhaps Casondra had already maxed out her federal student loans and needed more money to pursue her studies. But even if that were the case, surely there was a better way to address her financial needs than taking out a 20-year loan at 14 percent interest.

Acting at the behest of the big banks, Congress put private student loans under the "undue hardship" standard in the 2005 Bankruptcy Reform Act. Some reform!  Congress should repeal the "undue hardship" provision for both federal and private student loans as numerous policy experts have urged. And I'm sure Congress will correct its mistake someday--someday when pigs fly and the lions lie down with the lambs.

Someday, Congress will repeal the "undue hardship" clause in the Bankruptcy Code.


References

Mock v. National Collegiate Student Loan Trust, No. 01-17-00216-CV (Tex. Ct. App. July 10, 2018).

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