PHIL KERPEN: Mulvaney should lift cloud from student loan trusts | Opinion

September 15, 2018 Off By administrator

On his way out the door, former Bureau of Consumer Financial Protection chief Richard Cordray signed off on a shockingly corrupt settlement agreement that could have widespread negative consequences for student loan borrowers (and more broadly for consumer finance) across the economy.

It was an enforcement action against the National Collegiate Student Loan Trusts, a group of 15 Delaware trusts that hold about 800,000 student loans totaling $12 billion, of which $5 billion is presently in default.These are loans that were made by dozens of private banks and then aggregated by institutional investors and repackaged as securities.

Because these are private loans, enforcement actions against borrowers in default require individual lawsuits to be filed — and the trusts used an array of debt collection entities to bring thousands of such lawsuits.Many of these lawsuits filed by third party debt collection entities were bogus, taking action without proper documentation or in some cases taking action against people who did not actually owe anything.Some of the debt collectors have already been fined for their violations.

But under Cordray the BCFP went further, declaring the trusts themselves “covered persons” under the Consumer Financial Protection Act and brought an enforcement action against the trusts, even though they are passive entities that did not engage in any of the improper activities.

If that action stands, the well-established, low-risk mechanism of securitizing loans through trusts would become a legally fraught process.And that would cause a massively negative ripple effect.

“For future students and their parents, this Byzantine fight over securitized loans may prove costly,” Bloomberg reporter Shahien Nasiripour explained. “The threat of a government agency setting aside securities contracts based on student loan payments could lead hedge funds to devalue their holdings, and cause them to demand higher interest rates on future loans to compensate for the risk of unilateral government action.”

Worse, the fallout would not be contained to the student loan market.A robust securitization market helps keep interest rates down for mortgages, auto loans, and credit cards.

Unfortunately, the trusts themselves eagerly agreed to Cordray’s power grab — because the hedge fund titan, Donald Uderitz, who bought up control of the trusts stood to benefit.

As Andrew Wilford explained, the BCFP “stepped in and made a deal with Uderitz to transfer servicing powers to Uderitz’s firm, VCG, in return for fines on some trustees and other servicing companies. The upshot for Uderitz and VCG is that Uderitz will make a killing off servicing and administering the debt.”

In effect, Uderitz “settled” with Cordray to use trust assets for his own company’s benefit.Moreover, the use of trust assets to settle claims against debt collectors, who…

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