Ohio Democratic gubernatorial candidate Richard Cordray’s track record of overreaching his authority as the former director of the Consumer Financial Protection Bureau (CFPB) needs to be re-examined.
Cordray’s actions at the CFPB still threaten the future of the securitization market and private student loans, all due to a September 2017 deal involving the National Collegiate Student Loan Trusts (NCSLT).
There are fifteen NCSLT Trusts holding around 800,000 student loans totaling about $12 billion collectively. It is the nation’s largest owners of private student loans. From 2001 to 2007, the trusts purchased and securitized loans taken out over a decade ago. Then the trusts sold notes secured by the loans to investors.
Thousands of students ultimately defaulted on their loans and NCSLT filed lawsuits to force them to pay, as litigation was the only effective way for the Trusts to collect payment.
Under Cordray’s direction, the agency accused servicers and debt collectors of misconduct for attempting to collect on the past-due student loan balances.
“The National Collegiate Student Loan Trusts and their debt collector sued consumers for student loans they couldn’t prove were owed and filed false and misleading affidavits in courts across the country,” Cordray said in a September 2017 CFPB news release. “We’re ordering them to pay at least $21.6 million, stopping them from filing illegal lawsuits, and requiring the trusts to thoroughly audit their loan portfolios to identify any other consumers who were harmed.”
In an unprecedented move, the CFPB brought action against the Trusts by negotiating a proposed consent judgment imposing significant penalties and onerous terms on the Trusts.
This move could make private student loans more difficult and more expensive to obtain, while also destabilizing the securitization market. The proposed consent judgment would require an independent audit of every single student loan in NCSLT’s portfolio. In addition, NCSLT would have to pay at least $19.1 million in initial redress to harmed consumers, relinquished funds to the Treasury, and a civil money penalty.
Cordray targeted the wrong party for the misconduct. Debt collectors, not securitization trusts and investors, should have been the subject of the lawsuits.
The Structured Industry Finance Group, the trade association for the securitization industry, filed an amicus brief in the CFPB’s litigation against the NCSLTs. SIFG argued that the CFPB’s actions “disrupt the secondary loan market for many types of consumer and business loans, including student loans, and also will create uncertainty and unwarranted potential liability for market participants.”
To make matters worse, or at least more complicated, Donald Uderitz, the founder of a hedge fund called Vantage Capital Group, was allowed to bar all other parties to the Trusts and take control over them.
The consent judgment allows Uderitz, an Obama donor, to obtain access to and control student loan debt servicing, and gives him the chance to recoup some of the lost value from investments into the trusts before any senior investors in the Trusts. Innocent investors would have to pay up for Uldertiz’s bottom line.
While Cordray will likely paint himself as a staunch defender of students against predatory lenders and wealthy investors, the reality is Cordray launched an unjustified attack against the securitization market that threatens investor confidence.
Acting CFPB Director Mick Mulvaney could withdraw the claims without prejudice to prevent student loan interest rates from rising and avoid a reduction in fewer borrowing options for students. It would be the right move for the sake of future students pursuing private loans at an affordable rate.
Lindsay Marchello is an associate editor with the Carolina Journal. Follow her on Twitter.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.