Iowa Student Loan settlement provision blocks borrowers' rights in court. Is that fair?

Imagine going to pay for groceries or rent, only to find that your bank account has been frozen. The reason: A debt collector has gotten a court judgment without any notice to you at all.

That's happened for decades to hundreds of Iowa student loan borrowers, hit with court orders to freeze bank accounts or garnish wages for unpaid debts without any opportunity to contest the claims in court.

That's because, as part of settlements with lenders when they fell into arrears on loan payments, they signed what's called a confession of judgment. It's a legal document essentially waiving all rights to participate in the case should their lender choose to initiate court proceedings against them.

The waiver includes their rights to be notified about the lawsuit, to offer evidence and to have the case heard by a judge or jury

Now a group of borrowers is arguing that these documents, which they say they signed without legal counsel or a full understanding of their rights, are an unconstitutional violation of their right to due process. Four plaintiffs, represented by Iowa Legal Aid, have filed lawsuits against the Iowa Student Loan Liquidity Corp., accusing the lender of strong-arming unsophisticated customers into giving up valid defenses against collection of old debts.

Iowa Student Loan CEO Steve McCullough, in a statement, said the nonprofit's debt collection practices are "expressly authorized by Iowa law" and that confessions of judgment lower collection costs for both the lender and borrowers.

"We used confessions of judgements so that we could offer more affordable settlement agreements to defaulted borrowers, lowering our court costs if they re-defaulted," said McCullough, who declined to comment on specific lawsuits. "As a nonprofit dedicated to providing low-cost loans, we were trying to be as generous as possible."

But Iowa Legal Aid's Alex Kornya said in a statement that the plaintiffs now suing Iowa Student Loan had no idea they were being subjected to court judgments until they found their bank accounts frozen or wages garnished.

"Our clients, who had no access to a lawyer, signed a document that waived every single right they had under the law," he said. "They received nothing in return."

Now they're asking the courts to throw out those judgments and rule that they have a right to more due process than they received.

A student loan nightmare: One week of school, 20 years of debt

Jantzen Mason attended Vatterott College for only one week in 2004, but he still walked away with unpaid student loan debts that, by 2012, totaled more than $6,700. That's the year, according to court filings, that Mason, as part of a settlement to avoid a collection judgment, signed a confession of judgment to allow Iowa Student Loan to unilaterally collect on his debt.

Mason, of Omaha, Nebraska, says in his complaint that he made some payments over the following years, but in 2016, Iowa Student Loan filed the confession with the Polk County clerk of court, claiming a remaining unpaid balance of more than $4,500. Court filings show the judgment was granted, allowing Iowa Student Loan to begin garnishing Mason's bank account. In 2018, without an attorney, Mason asked the court to end the garnishment, and was denied.

Mason doesn't remember signing the confession, according to his complaint, but does remember being contacted by Iowa Student Loan debt collectors who threatened to garnish his bank account unless he agreed to the settlement. He did not have an attorney and says he did not understand the legal consequences of the documents he signed.

In all four lawsuits, the plaintiffs say they signed confessions of judgment not as part of their initial loan paperwork, but years later, after they'd fallen behind on payments. McCullough, in his statement, portrays this as a win for both parties.

"(Confessions of judgment) are commonly used in collections when a creditor enters into a settlement agreement with a borrower who has already defaulted on their loan," he said. "The borrower avoids an immediate judgment being entered against them and the creditor avoids the time and expense of traditional litigation if the borrower re-defaults."

Iowa Student Loan borrowers believe debts may no longer be valid

Mason's loan was for an institution with a checkered background. Vatterott, a for-profit career training institute, shut down in 2018 amid lawsuits and scrutiny by the U.S. Department of Education. Another plaintiff, Liliana Zambrano of Johnson County, is on the hook for a nearly $22,000 judgment over loans she took out in 2007 to attend La' James International College, an Iowa chain of cosmetology schools that has faced numerous lawsuits as well as consumer fraud proceedings from the Iowa Attorney General's Office.

Like Mason and Zambrano, the other two plaintiffs are challenging loan debt from more than a decade ago. Linn County resident Amanda McDonald is subject to a $4,500 judgment dating to 2003, and Cassandra Gibson of Dubuque County was hit with a nearly $2,500 judgment for loans she took out in 2012.

In each case, according to the complaints, Iowa Legal Aid attorneys believe that the borrowers would have had legal defenses against the debt collection judgments, such as expired statutes of limitation or inadequate loan documentation, if they hadn't signed away their rights to contest the cases, and that Iowa Student Loan pushed borrowers to give up their rights over debts that were no longer valid.

It's not clear how many confessions of judgment Iowa Student Loan has filed, but there are more than 200 in Polk County alone, according to online court records, dating back at least as far as 2006.

What is a 'confession of judgment' under Iowa law?

Confessions of judgment aren't a new innovation. The legal device has existed in one form or another for centuries, and has been permitted in Iowa statute, without significant revisions or appellate review, since the state's first legal code was enacted in 1851, according to the complaints.

But the practice has long been controversial, especially in transactions between consumers and commercial entities, according to Cathy Lesser Mansfield, a Case Western Reserve University law professor and expert on consumer law.

"It clearly, to me, flies in the face of what we would think of as due process, right to notice and hearing and all that stuff," Mansfield said. "It really turns on whether there's a knowing waiver of that right. And I certainly don't think consumers ever knowingly do anything with these standard terms."

Numerous states have banned confessions of judgment through legislation or court action, and others have legal safeguards, such as the right to go back and contest a judgment after issuance, which isn't present in Iowa's law. Iowa does impose some limits — confessions cannot be employed in residential rental agreements or after defaulting on consumer credit transactions.

The U.S. Supreme Court, in its only decisions addressing confessions of judgment, ruledin 1972 that they were permissible between sophisticated commercial actors. But the court strongly hinted, without definitively ruling, that it might find otherwise in cases where two parties had a "great disparity in bargaining power" and where debtors received nothing in exchange for signing away their rights.

Mansfield says she doesn't hear much about confessions of judgment in consumer contracts today, but the laws, such as Iowa's, may still be on the books.

"The market has changed so much since the late 1800s, where almost every contract was individually negotiated," she said. "In today's economy, you go out and get a credit card, a cell phone, a small loan, a car, whatever, you're handed a document, and either you signed the document or you don't deal with that merchant. And if it has a confession of judgment clause, to me, that's not a knowing waiver, because it's not something that consumer has any control over."

What is Iowa Student Loan? And what are its ties to state government?

Iowa Student Loan Liquidity Corp. is technically an independent nonprofit, but it is closely tied to the state government: It was created by a proclamation of Gov. Robert Ray in 1979, and its board of directors is appointed by the governor.

Sophie Laing, a consumer rights attorney who has lectured for a University of California, Irvine student loan law clinic, said many states have entities like Iowa Student Loan that were created in the 1980s to serve as middlemen to guarantee Federal Family Education Loans, a major component of federal student aid at the time.

More than four decades later, the education finance market has changed. The Federal Family Education Loans program was discontinued in 2010, eliminating the niche that state-based agencies had occupied. Even before then, many state agencies began diversifying into the private student loan market. Iowa Student Loan appears to have done so at least as early as 2003. All four of the plaintiffs now suing the agency say their loans were "partnership loans" issued directly by Iowa Student Loan and private lenders.

State agencies expanding into private lending often have been accused of misleading their borrowers, Laing said, based on complaints to the Consumer Finance Protection Bureau. While students may have perceived a nonprofit or state-backed loan provider as a safer option, the resulting loans in some cases combined the inflexible repayment terms of a private loan with the government's power to recoup those loans by, for example, garnishing tax returns.

"That's been some of the biggest complaints, about (borrowers) feeling misled about these loan products that they're getting, and then also being subjected to kind of the worst terms of private loans and the worst terms of federal loans in terms of the collection powers," Laing said.

Some of those complaints have come from Iowa. A 2008 investigation by the Iowa Attorney General's Office found that the organization falsely marketed its loans as the lowest-cost option, failed to direct eligible students toward less-expensive federal loans, and paid colleges for new loan applications in an apparent conflict of interest. The state passed a new law that year increasing oversight over Iowa Student Loan and seeking to reform those practices.

From 2015: Reader's Watchdog: Reader feels trapped by nonprofit student loan firm

Are confessions of judgment constitutional under Iowa and US law?

Iowa Legal Aid argues in its lawsuits that Iowa Student Loan Liquidity Corp.'s longstanding use of confessions of judgment is inconsistent with the Iowa and U.S. constitutions.

"As written, the antiquated language of (Iowa's confession of judgment statute) facially violates the guarantee of procedural due process," the complaints argue, pointing to the lack of notice to the defendant, lack of any hearing, inability to confront witnesses or vacate a wrongfully entered judgment, and the lack of judicial supervision over the process.

The suits seek injunctions blocking enforcement of the judgments, as well as damages for alleged violations of Iowa's Consumer Fraud Act and violations of their due process rights. They also ask the court to declare Iowa's law unconstitutional.

Iowa Student Loan, in court filings, has moved the cases to federal court and denied any constitutional issue with the judgments in question. The lawsuits have been set for a bench trial in August 2025. In the meantime, Iowa Student Loan continues to file new confessions of judgment with the court, with at least 20 new filings in Polk County so far in 2024.

Mansfield, the law professor, said depriving borrowers of their litigation rights — including the right to contest the validity of the underlying debt — is bad legal process, as well as bad policy.

"I don't think these (confessions of judgment) should be found to be constitutional, but even more importantly, I think that as a matter of public policy, Iowa should ban the use of these, which a lot of states have done," she said. "I just think by their nature, they are repugnant to our system of giving people a chance to air issues related to a consumer financial product."

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 borrowers sue over loss of rights to challenge debt