Consolidation loan shenanigans

We've been getting quite a few emails from borrowers in the middle of consolidating their loans and why it takes so long. Since the annual "season" for consolidation is coming up, we thought this would be a timely post.

We've done some research, made some calls, snooped around, and mystery shopped some lenders. Here's what we found out. Once you submit a FFELP consolidation loan application to the lender of your choice, the lender promptly begins processing the loan. The first thing they do is make sure the required information is submitted. Although the application asks for a lot of information, all they're looking for is: name, address, city, state, zip, social security number, date of birth, reference information, and the underlying loan information. Let's look at a few of these application requirements. First reference information. The Department of Education requires two references and their address info. The references must be at a different address than yours, and the two references must not be at the same address. Why? We surmise this is left over from collections practices from the 70's. Our guess is that the Department of Education is completely ignorant about the advancements and innovations that have occured in the collections industry which would make the reference requirement completely obsolete. The second piece of info we'd like to address is the underlying loans. According to our mystery shopping experience, most lenders will look this info up right on the phone. If a lender has your permission, they can pull your NSLDS record to verify this information. Whoops, the Department has taken NSLDS away from all lenders. So, you as a consolidation applicant must get this information to your lenders yourself. What a pain in the ass. We found a few lenders that are pulling credit bureau reports to get the underlying loan info. Frankly, we're lazy, we'd rather have the lender go through the exercise of gathering all that information.

Another aspect to why it takes so long to get a consolidation loan consummated is the process of obtaining the payoff verifications of all the underlying loans. You see, the Department has some very beurocratic rules that govern this process. Unfortunately, it seems that they do absolutely nothing to enforce those rules (according to a few calls lobbed into some lenders). Here's what happens. Say you have 4 underlying loans. The lender sends a LVC (Loan Verification Certificate) to the holder(s) of those 4 loans. The holder(s) have 10 days to provide the payoff details back to the consolidating lender. Given the technology base of servicers and lenders, they can get these requests out in about 24 hours. But what do they do in reality? Nothing. Those loan holder(s) want to keep their asset. So what happens when they ignore these LVC's ? Nothing. The Department of Education is lame. Who loses in this whole process? You, the borrower. How come mortgate refinancing doesn't have this LVC nonsense? Because it's pointless and the borrower would file a complaint with their states AG regarding the underlying loan holder if they witheld payoff information.

Aaarrgghh.....we're gonna do a little more research on this topic, it sounds fishy.