Opinion

Judge Throws out CFPB’s Shady Student Loan Deal

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Posted: Jun 30, 2020 12:01 AM
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Judge Throws out CFPB’s Shady Student Loan Deal

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For college students, the fall semester is unpredictable. Some schools are shifting completely online, while others are planning for a hybrid model of both in-class and online participation. As the question of how fall classes may be taught remains fluid, students are still faced with a murkier market when it comes to securing tuition assistance to fund their education goals. 

Students received a crucial win from a lawsuit challenging the CFPB’s enforcement authority in Consumer Financial Protection Bureau v. The National Collegiate Master Student Trust. Shareholders that purchase securitized products tied to tuition assistance also get to share in the court’s decision. Had the court sided with the Bureau, students could have fewer options in the private loan market to pursue higher education. 

In his final days as an Obama-era holdover in President Trump’s administration, CFPB Director Richard Cordray entered into a consent agreement against the National Collegiate Student Loan Trusts. The agreement would have had widespread negative repercussions throughout the loan securitization industry, which pools multiple loans into a single group for investors. 

NCSLT holds approximately $12 billion worth of private student loans that have been securitized and spread evenly among 15 separate trusts. The Bureau brought legal action against NCSLT because of allegations that third-party company contracted with NCSLT engaged in unfair business practices.

If the Bureau won in Court, Cordray’s enforcement action would have made Donald Uderitz – Cordray’s friend and founder of Vantage Capital Group – the de facto administrator of the trust’s assets. Uderitz would have limited oversight to collect fees from shareholders who own the trusts in their investment portfolios. 

The Judge’s memorandum opinion filed in the District Court of Delaware on May 31 denied the Bureau’s motion to approve the Cordray consent agreement. 

The Court determined that attorneys at McCarter & English – representing the Trusts – lacked authority to sign the agreement with Cordray’s CFPB. McCarter & English acted unilaterally as the “owner trustee” without the required written consent from all other trustees before agreeing to the Bureau’s consent decree. 

Since the consent agreement was initiated in September 2017 it was met with pushback from several members of Congress. Representatives Ted Budd (R-N.C.), Sean Duffy (R-Wis.), and Lee Zeldin (R-N.Y.) sent a letter to current CFPB Director Kathy Kraninger urging her to reconsider Cordray’s judgment and not “penalize innocent actors, including pensions plans, retirement plans, and by extension the consumers that have entrusted their savings to them, for a third party’s alleged misconduct.”

On its face, the consent decree appears to be based on an erroneous categorization of the trusts as “covered persons” under Section 1024 of the Dodd-Frank Act. The Bureau’s supervisory and enforcement authority is limited to covered persons violating federal law. The trusts were mistakenly brought within the Bureau’s scope, and innocent investors nearly penalized for the alleged wrongdoing of a third party. For investors holding these trusts, or any future securitized product, the CFPB’s action may have left them with a loss and without a willing buyer to purchase these investments. 

When risk arises from contractual uncertainty or ambiguity, shareholders and lenders will stop investing in these products. The precedent set by Cordray’s decree threatened to destabilize the market for student loan-backed trusts, further decreasing the availability of funds, increasing the cost of credit or both.

Investors frequently rely on asset-backed securities such as loan trusts to diversify their portfolios and hedge against risk. The consent order would directly impact middle-class investors as the trusts should have represented a low risk form of diversification. Alternatively, students would have struggled searching for other forms of affordable assistance to fund their education.

The Court’s decision not to approve the consent decree was a major win for student debtors and investors by denying the Bureau’s ability to enforce terms wrongly agreed to. However, the CFPB’s original complaint against the trusts is still pending, and litigation is expected to continue as the Bureau seeks various relief. The Bureau should instead withdraw its Complaint and help preserve the longevity and stability of the markets.

Christina Mitsopoulos is a financial services advisor at Americans for Tax Reform, a nonprofit organization dedicated to lower taxes and limited government