Forward Movement In The Bureau Of Consumer Financial Protection's Student Loan Litigation: What This Means For Securitization

Introduction

In September 2017, the Bureau of Consumer Financial Protection (the "Bureau") brought an enforcement action against the National Collegiate Student Loan Trusts for alleged violations of consumer financial protection laws in connection with student loan debt collection practices. The action, titled Consumer Financial Protection Bureau v. The National Collegiate Student Loan Master Trust,1 was brought in the United States District Court for the District of Delaware.

This litigation has important implications for the structured finance industry as a whole, as the Proposed Consent Judgment filed by the Bureau contains terms that would effectively alter the contracts affecting the underlying securitization trusts at issue. The Proposed Consent Judgment also was submitted to the District Court by the Bureau without first seeking or obtaining consent from all of the affected contractual counterparties. Securitization transactions are built upon transaction agreements that define the obligations and responsibilities of each party to the transaction. By purporting to alter and thereby effectively rewrite these agreements, the Bureau's Proposed Consent Judgment upended well-established and long-standing market expectations and thereby threatens to undermine investor confidence, destabilize the student loan securitization market, and paradoxically, restrict student access to credit by making securitizations more risky.

The parties to the transaction agreements, which were non-parties to the litigation, quickly sought to intervene in the proceedings, and Cadwalader client the Structured Finance Industry Group ("SFIG") submitted an amicus curiae brief highlighting the negative impact this litigation could have on the industry as a whole. On October 19, 2018, the Honorable Maryellen Noreika issued a Memorandum Opinion that granted the motions to intervene, on the basis that that the Proposed Consent Judgment and settlement approved by the equity holder might impermissibly alter the existing contractual obligations.

Background

The National Collegiate Student Loan Trusts (the "Trusts") are a group of 15 Delaware statutory trusts that hold more than 800,000 student loans totaling $12 billion. The loans originally were made to students by private banks and were subsequently securitized. On September 18, 2017, the Bureau brought an enforcement action against the Trusts for illegal student loan debt collection lawsuits, together with a motion for...