A federal district court has ruled that a lawsuit by the Consumer Financial Protection Bureau (CFPB) against more than a dozen student loan ABS trusts can go forward, saying the trusts are ” persons covered” and subject to the application of the agency.
The district court’s decision, released Dec. 13, was certified for an interlocutory appeal (an appeal in the middle of a case) this month, in which it acknowledged there could be disagreement over what constitute “covered persons”.
At issue, the CFPB alleges that the National Collegiate Student Loan Trust (NCSLT) engaged in deceptive student loan debt collection practices and unfair legal practices when servicing and collecting student loans that served as guarantee on transactions, thereby violating the Consumer Financial Protection Act of 2010. The CFPB sued 15 trusts in the NCSLT program on these grounds four and a half years ago, affecting approximately $12 billion in assets ABS of student loans.
What are “covered persons”? »
NCSLT “entered into debt collection and loan servicing when it contracted with managers and sub-departments to collect its debt and service its loans,” according to the decision.
The CFPB defines “Covered Persons” as “any person who undertakes to offer or provide a consumer financial product or service” or as any Affiliate of such person if the Affiliate acts as a service provider to person.
The CFPB said the misconduct resulted from actions taken by NCSLT contractors and repairers when collecting debts – not any action taken by the trusts themselves. Despite the distinction, the CFPB named the NCSLTs as defendants in the lawsuit.
In its ruling, the court said “the definition is broad enough to encompass actions taken on behalf of one person by another, at least where that action is at the core of their business.”
“This is a case we’ve been following for some time and it’s certainly the latest twist in the saga,” said Kristi Leo, president of the Structured Finance Association, the ABS trade body. “(With the potential for) widespread market implications.”
It starts with student loans
The effect of the CFPB lawsuit and court ruling has rippled through the industry.
“There is no reason to think that the CFPB will limit its view on this issue to student loans, and it could apply to other consumer financial products,” said Steven Kaplan, partner at Mayer Brown. , an international law firm, in an earlier conference call. this month dealing with the implications of the case.
NCSLT has over 800,000 private student loans worth $12 billion through 15 different Delaware statutory trusts established between 2001 and 2007.
ABS industry professionals are unsure how the court can consider NCSLT programs as “covered persons” because the trusts have no employees, no internal management and they are the managers and sub-departments who receive student loans. They rely on agreements with several third-party service providers to administer each trust.
“If there is someone who has broken the law, you sue that party,” said the SFA’s Leo. “You’re not going after the ‘Trust’.”
Judge Stephanos Bibas wrote this in his memorandum of opinion:
“If a dairy farmer contracts with a farmhand to milk his cows and never does that work himself, he is still employed in or in the business of milking cows,” he wrote in his post. decision.
Ten days after the Dec. 13 ruling, NCSLT and other interested parties requested an interlocutory appeal of the court order. NCSLT representatives argued that the platform does not act as one of the “covered persons” because trusts are “passive securitization vehicles that take no action related to servicing student loans or collecting debts”.
On February 11, the district court granted NCSLT’s request, finding that there may be disagreement over the interpretation of “covered persons.” On February 22, the Trusts asked the Court of Appeal to hear the appeal. The CFPB should respond before the court decides whether or not to hear the appeal.
Will other ABS get involved?
The NCSLT argues that the CFPB has no authority to bring an action under the CFPA.
As a precaution during this time, parties should ensure that they do not engage in activity or include language that triggers potential risks under applicable law, Kaplan said. They shouldn’t appoint a repairman as their agent, Kaplan said. They should not engage in any activity that directly gives rise to liability under applicable financial consumer protection law, Kaplan said.
Additionally, state licensing requirements can be triggered due to holding legal title to the underlying asset, Kaplan said.
Fitch Ratings maintains a less than desirable cap of “BBBsf” for NCSLT transactions and Rating Watch Negative (RNW) on all tranches rated “B-sf” or higher.
“Fitch will resolve the RWN as soon as further clarity becomes available on the outcome of the ongoing litigation involving the issuers and parties to the transaction,” said Pasquale Giordano, senior director at Fitch Ratings.
Fitch said that in its view, unexpected financial losses on its rated securities could materially affect the performance of the transaction and increase rating volatility, primarily because such losses and legal costs to defend related claims do not are not predictable.
“Could the cash flows actually be taken out of the trust? is clearly one of those things that people assess and that’s if trusts are found liable in the first place,” Leo said.
The situation raises other important questions, according to the NCSLT. Does the CFPB have the authority to prosecute NCSLTs under the CFPA? Even if it had the right to sue, the CFPB improperly filed its lawsuit because at the time of filing it was constitutionally unstable, the NCSLT argues.