First, the big banks create debt. Then they get paid to collect it.
JPMorgan Chase may have cut back on its private student lending, but the megabank is still making plenty of money on student debt.
In addition to some $9 billion [PDF] in taxpayer-subsidized Federal Family Education Loans and untold millions in private student loans, JPMorgan, the country's biggest bank by assets, has a private equity arm, One Equity Partners. In turn, One Equity Partners owns NCO Group, a debt collector that makes millions of dollars a year from the federal government to collect on students who've defaulted on their loans. And that taxpayer money is paying for some pretty abusive practices.
In 2009, Jason Fagone at Philadelphia Magazine reported on one woman's experience with NCO as it tried to collect the $9,000 that her husband, at the time on active duty in Iraq, owed for school. At the time, Tara Burkholder told Fagone, she was working for free as a student teacher and had $92 in her checking account and a daughter to care for.
“The NCO lady told Tara it was time for her to give up on her dream of being a teacher, and get a paying job immediately: 'Honey, sometimes we have to do things that we need to do.' The lady also told Tara that NCO had contacted her husband’s commanding officer in Iraq, and that if she didn’t pay back the loan, her husband would be dishonorably discharged from the Army.”
Burkholder's story is hardly the only one. In the past three years, according to a report [PDF] from the National Consumer Law Center, there have been 1,116 complaints to the Better Business Bureau about abusive practices from NCO. Last February, the company settled with attorneys general from 19 states, paying $575,000 to quiet complaints about its collection practices and setting aside $50,000 per state to reimburse consumers who have wrongly paid NCO for debts they didn't actually owe. That's right, people were being pushed to pay and in some cases paid back money they didn't owe in the first place.
In 2004, before it became a JPMorgan subsidiary, NCO Group paid the largest settlement to date to settle charges from the Federal Trade Commission that it violated the Fair Credit Reporting Act (FCRA). It paid $1.5 million after the FTC accused them of using later-than-actual delinquency dates on debts it was collecting, which meant that people with debts were stuck with those debts on their credit report for longer than is legal.
Fagone noted that he found reports of deception, of allegations that NCO collectors lied, berated family members, disclosed private information, threatened to garnish wages. One blogger who sued NCO wrote that the collector told his wife that they'd sell her home. NCO denied using these illegal tactics.
But in Texas this summer, the burger chain Whataburger sued NCO because of its collection efforts toward one of its employees, saying that the calls to the employee's workplace “amount to a campaign of harassment” against Whataburger that is “unreasonable” and “reckless.” The company issued a cease-and-desist letter after repeated calls, more than 50 in all, started coming in to its toll-free number in search of an unnamed employee. The calls kept coming, in violation of the Fair Debt Collection Practices Act, and Whataburger wants $1,000 in damages per call.
A San Antonio lawyer who defends debt-collection cases told the Houston Chronicle that debt collectors regularly call debtors at work, attempting to make people fear for their jobs.
“Combining banks, private equity and debt collection creates a toxic beast designed to plunder taxpayer dollars and impoverish young people while draining billions out of higher education,” Stephen Lerner, who directed the Service Employees International Union's campaign against private equity, told AlterNet. “The worst players in the economy joined together to feed off of every possible level of student debt.”
Out of One Racket Into Another
In July, JPMorgan Chase stopped issuing private student loans to non-Chase customers—people without an existing student loan or credit card, loan or bank account. "We have decided to focus on providing private student loans only to current Chase customers as the private student loan market has continued to decline and government programs have expanded to help more students and their families," a Chase spokesperson told the Huffington Post.
It's nice to know that Chase is concerned with helping students and their families, but with variable interest rates running up to nearly 10 percent, as Mike Konczal of the Roosevelt Institute and Tamara Draut of Demos have noted, student debt is hardly “aid” these days. Instead, it's an immensely profitable business, and the actual issuance of loans is only one tiny part of it.
For instance, NCO Group, itself a subsidiary of JPMorgan's One Equity Partners, has a subsidiary in turn called University Accounting Services, LLC, which services 2.5 million loans according to its Web site. It services loans for universities ranging from Stanford to the University of New Orleans to the Christian University of Sioux Falls. And of course that servicing includes “default management.”
You have to search NCO Group's Web site a bit to find its debt collection services, under “Accounts Receivable Management.” What it plays up instead is its outsourcing -- bragging that they are really, really good at shipping American jobs overseas. The debt collections gig, despite the multi-million-dollar government contracts? Just a sideline, described in charming euphemisms: “NCO's third-party collection service imparts a sense of urgency upon seriously delinquent customers during these periods, reducing net write-offs and the cost of collecting after charge-off.”
It continues, “The best way to achieve this objective is NCO's method: concerted calling campaigns supplemented by automated skip tracing and third-party notices.” (“Skip tracing” is what they call tracking people down when their address has changed.)
And all of this, to the Department of Education, is worth quite a bit. The Federal Procurement Data System reports multiple contracts for NCO Financial Systems for “debt collection.” The most recent is for some $68 million; a previous contract was for $143.4 million. And they get commissions.
As John Hechinger at Bloomberg noted, some $67 billion of student loans are in default; because of the 2005 changes to bankruptcy law, even private student loans are non-dischargeable in bankruptcy, meaning you're stuck with them for life unless you can prove exceedingly dire hardship (and even then you still might find yourself chased by collectors).
Which brings us back to JPMorgan's decision to cut down on its lending. The financial blog Zero Hedge wonders if by doing so, JPMorgan may have popped the student loan bubble. “What JPM is implicitly saying, is that the party is over, and all private sector originators are hunkering down, in anticipation of the hammer falling.”
And if that's true, juicy debt collection contracts might be a better bet.
Where's Wall Street?
JPMorgan Chase is not alone in the creating-debt-and-getting-paid-to-collect it game—CitiGroup, as well as Sallie Mae and NelNet, also own collection agencies that have contracts with the Department of Education.
What this illustrates more than anything is how impossible it is to get the big banks and lenders out of the student lending business. During the first presidential debate this fall, Barack Obama touted his move to stop subsidizing private lenders to the tune of some $60 billion, with the FFEL program. And it's true, that was one of the few victories in the first four Obama years.
And combined with increased supervision by the Consumer Financial Protection Bureau, the brainchild of Elizabeth Warren (who said in 2005, “Student-loan debt collectors have power that would make a mobster envious”), there's more regulation of the lending end of the student debt machine. CFPB's moves to investigate and regulate private student lenders seem to be part of what's scaring JPMorgan and others (US Bank recently decided to quit student lending as well). "What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist," lawyer Kevin Petrasic told American Banker.
But the problem with the appearance of private lenders exiting the system is that they turn up in other places, that the banks' tentacles are laced throughout any process that includes lending and borrowing and collecting. And as tuition shows no sign of going down and the economy remains sluggish, with many of the new jobs created in recent years low-wage jobs that make it hard for grads to pay off their loans, more and more people will feel the pinch of the debt collectors—as of February, one in seven Americans was being chased by a collector. As Matt Stoller noted, it's a growth industry.
So what can be done about it? “The government has the power to shape collection activity through incentives in the collection contracts,” the National Consumer Law Center report stated. “Given the Department’s power to incentivize collection agency behavior, an emphasis on rewarding agencies with few complaints or penalizing those with high numbers of complaints could be a significant step to assisting borrowers.”
That would mean NCO, with one of the highest rates of complaints, might be in trouble. But the others are waiting to scoop up the contracts if one is driven out. To really get Wall Street out of the student debt game, it's going to require getting them out of every level of the process—not just making loans, but packaging and reselling them, and collecting on them when they default.