According to complaints filed by the Federal Trade Commission and 19 state attorneys general, NCO Financial resorted to a practice that the student loan debt collection industry has employed for centuries – instilling fear. Credit: Mdustinmoore/Wikimedia Commons

Some of the companies profiting from the student loan industry have names you’ve never heard of – unless you’ve fallen behind on your loan.

NCO Financial Systems was once a family-owned business founded in 1926 in suburban Philadelphia to collect all sorts of bad debts. Like many other small-time collections agencies, NCO moved into the student loan collection business in a big way in 1996, when it landed its first contract with the U.S. Department of Education. That was the same year Congress privatized Sallie Mae.

NCO went public that year and grew rapidly by acquiring other debt collectors, becoming what one admiring Merrill Lynch analyst called the “Wal-Mart of debt collection.” In 2004, the private equity arm of JPMorgan Chase, One Equity Partners, took NCO private.

The company was viewed favorably by Wall Street for its technological savvy in tracking debtors. But according to complaints filed by the Federal Trade Commission and 19 state attorneys general, NCO also resorted to a practice that debt collectors have employed for centuries – instilling fear.

If they fell behind on a student loan or other debt, borrowers heard from NCO – over and over, often on the same day, sometimes at home, sometimes at work, the FTC charged in 2013.

You might have been hassled by NCO even if you never got your student loan. In 2007, Jesse Kennedy of Lawrenceville, Georgia, briefly considered borrowing money to pay for auto repair school and filled out loan documents co-signed by his father. But he says he never completed the loan application and didn’t get any money.

Six years later, Kennedy was contacted by an NCO subsidiary and told he owed $58,000 on a student loan. He disputed the debt, but the $58,000 loan showed up on his credit report, wrecking his credit score and making it impossible for him to secure a mortgage to buy a house.

Then he and his father were hit by a lawsuit filed by an entity they’d never heard of – National Collegiate Student Loan Trust – that claimed it owned his unpaid loan. In court, the trust contended that Kennedy and his father had deposited $30,000 in loan proceeds in a Birmingham, Alabama, bank.

But as the Kennedys showed in court, neither Jesse nor his father had such an account, and after they filed documents charging fraud, the trust dropped the lawsuit.  The Kennedys are countersuing the trust for violating the federal Fair Credit Reporting Act.

The case highlights another maddening aspect of student loans for many borrowers. As Kennedy’s dispute unfolded, it was unclear who actually owned the supposed loan that was at issue.

This is a common problem for many borrowers because of the Byzantine complexity of the industry.

Loan documents might carry the name of a bank, but the loan might be insured by the federal government, with the bank merely acting as the issuer. Or the loan might indeed be owned by that bank with no connection to the federal government. In other cases, the loan might carry a bank’s name but be owned by a third party to which the bank conveyed the loan. If that sounds like the kind of financial instrument that helped fuel the home mortgage meltdown, that’s because it is.

Like the financial industry, which bundled home mortgages and sold them like bonds, so, too, have banks and other financial interests packaged private student loans and peddled them to investors. It’s been a lucrative subset of the industry for the companies that do the bundling, one of which created the trust that sued Jesse Kennedy.

Practices such as those encountered by Kennedy have gotten NCO into trouble with both federal and state authorities.

Since 2004, NCO and its affiliates have paid about $6.9 million in penalties and settlements after being accused of improper debt-collection practices, records show.  In 2013, the company – by then known as Expert Global Solutions – paid the biggest fine ever levied by the FTC in a debt-collection case: $3.2 million.

The FTC complaint charged that the company repeatedly employed “false, deceptive, or misleading” tactics to try to collect on loans, including phoning loan holders multiple times a day, calling them at their jobs and calling their bosses.

In a statement after the fine was levied, the company said it had cooperated with the FTC probe and had “already implemented systems and procedures to help address their areas of concern.”

The company continues to interest investors. Its owner, One Equity Partners, sold a half interest in the company to two other private equity companies in 2014. Later that year, its entire collections business, including student loans, was sold to yet another private equity company in Beverly Hills, California. Earlier this month, Expert Global Solutions was purchased by Alorica, a customer service company based in Irvine, California.

Lance Williams is a senior reporter for Reveal, focusing on money and politics. He has twice won journalism’s George Polk Award – for medical reporting while at The Center for Investigative Reporting, and for coverage of the BALCO sports steroid scandal while at the San Francisco Chronicle. With partner Mark Fainaru-Wada, Williams wrote the national bestseller “Game of Shadows: Barry Bonds, BALCO, and the Steroids Scandal that Rocked Professional Sports.” In 2006, the reporting duo was held in contempt of court and threatened with 18 months in federal prison for refusing to testify about their confidential sources on the BALCO investigation. The subpoenas were later withdrawn. Williams’ reporting also has been honored with the White House Correspondents’ Association’s Edgar A. Poe Award; the Gerald Loeb Award for financial reporting; and the Scripps Howard Foundation’s Award for Distinguished Service to the First Amendment. He graduated from Brown University and UC Berkeley. He also worked at the San Francisco Examiner, the Oakland Tribune and the Daily Review in Hayward, California. Williams is based in Reveal's Emeryville, California, office.