Iowa Student Loan says it has stopped pursuing controversial debt collection orders

A private student loan provider being sued for its debt collection practices says it already has ended its use of controversial court orders allowing it to garnish debtors' wages and bank accounts without any notice to them.

Iowa Student Loan Liquidity Corp., better known as Iowa Student Loan, is a nonprofit lender whose directors are appointed by the governor. For decades, it has pursued delinquent borrowers using what are called confessions of judgment.

Debtors, often without advice from an attorney, would sign the documents as part of a settlement when they fell behind on payments. What they often didn't understand was that the confession of judgment empowered the lender to obtain an immediate court judgment against them if they again fell behind on payments.

Now, after a Des Moines Register report on several lawsuits over the practice, Iowa Student Loan says it stopped obtaining new confessions of judgment more than three years ago, and that it will no longer file existing confessions to obtain orders from the courts.

Why are confessions of judgment controversial?

A debtor who signs a confession gives up any right to contest the judgment in court, or even to be notified when it is obtained, leading to situations where debtors have learned about judgments against them only when their bank accounts unexpectedly have been frozen.

Confessions of judgment are permitted under state law, but several borrowers represented by Iowa Legal Aid have sued Iowa Student Loan, arguing that they violate constitutional guarantees of due process. Many other states have banned confessions of judgment or limited their use to transactions between sophisticated business entities, and not in consumer contracts.

Iowa Student Loan said it feared its practices could be 'misconstrued'

In a March 27 statement to the Register, Iowa Student Loan CEO Steve McCullough defended the legality of the agency's debt collections. But following a Register editorial on the issue, board Chair Christine Hensley sent the Register an April 24 statement from McCullough that said Iowa Student Loan stopped asking borrowers to sign confessions in September 2020 and that it "recently" directed its attorneys to no longer file to enforce existing confessions with the court.

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"Now when a borrower re-defaults, our attorneys ignore the confessions of judgment and proceed as if it did not exist," McCullough said in the statement.

Hensley and McCullough also wrote in a Register opinion column, published April 28, that the group stopped including confessions of judgment in settlement agreements "some time ago to avoid the risk of bad publicity, should our practices be misconstrued."

Court records suggest Iowa Student Loan made policy change recently

Most of Iowa Student Loan's filings to enforce existing confessions of judgment involve confessions signed by borrowers well before September 2020. However, one filing, made in January in Madison County, involves a confession the borrower signed in November 2023. Citing pending litigation, Iowa Student Loan declined to comment on that case.

Iowa Student Loan also declined to say when exactly it made the decision to stop making filings to enforce existing confessions. Court records show the group has made filings to pursue collections in dozens of confession cases this year, well after Iowa Legal Aid filed its lawsuits.

The most recent recent filing to pursue collection from an existing confession of judgment that the Register is aware of was filed March 20 in Polk County, six days before the Register first reached out to Iowa Student Loan for comment on the lawsuits.

Iowa Legal Aid calls actions 'a step in the right direction'

Alex Kornya, litigation director and general counsel for Iowa Legal Aid, said the changes McCullough referenced are positive moves, but that the lender continues to actively pursue collections using confessions previously filed with the courts.

"Our clients support ISLLC moving away from what they believe to be unfair and unconstitutional collection methods," he said in an email. "However, public court records do not appear to show that ISLLC has fully abandoned use of confessions of judgment. While ISLLC’s changing position on the use of confessions is a step in the right direction, it is our clients’ hope that ISLLC will fully abandon not only obtaining new confessions but also filing and enforcing existing confessions, and give borrowers their day in court."

William Morris covers courts for the Des Moines Register. He can be contacted at wrmorris2@registermedia.com or 715-573-8166.

This article originally appeared on Des Moines Register: Iowa Student Loan says it has stopped filing controversial debt cases