Federal Court Holds That Student Loan Trusts Are Subject To CFPB Enforcement Authority: What This Means For Consumer Securitizations And Other Whole Loan Buyers

• Published date: 21 December 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Securitization & Structured Finance, Trials & Appeals & Compensation, Trusts
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Ms Ellen V. Holloman, Rachel Rodman, Scott A. Cammarn, Sophie K. Cuthbertson, Cheryl Barnes, Chris Gavin, Stuart N. Goldstein and Victor Celis

On December 13, 2021, Judge Stephanos Bibas, visiting judge in the U.S. District Court for the District Delaware from the U.S. Court of Appeals for the Third Circuit, denied a motion to dismiss a lawsuit brought by the Consumer Financial Protection Bureau ("CFPB" or the "Bureau") in Consumer Financial Protection Bureau v. The National Collegiate Master Student Loan Trusts,¹ allowing the enforcement action to proceed directly against The National Collegiate Student Loan Trusts (the "Trusts"). In allowing the action to proceed, the Court ruled that the Trusts were "covered persons" under the Consumer Financial Protection Act ("CFPA") despite having no employees and contracting with special servicers and subservicers to service and collect on the student loans. As discussed below, this holding has wide-reaching implications for the secondary market in consumer loans, including securitizations and other whole loan buyers.

Background

The Trusts hold more than 800,000 private student loans through 15 different Delaware statutory trusts created between 2001 and 2007, totaling approximately $12 billion. The loans originally were made to students by private banks. The Trusts provided financing for the student loans by selling notes to investors in securitization transactions. The Trusts also provided for the servicing of and collection on those student loans by engaging third-party servicers. However, the Trusts themselves are passive special-purpose entities lacking employees or internal management. Instead, to operate, the Trusts relied on various interlocking trust-related agreements with multiple third-party service providers to'among other things'administer each of the Trusts, determine the relative priority of economic interests in the Trusts, and service the Trusts' loans.

On September 18, 2017, the CFPB filed suit against the Trusts in Delaware federal court, alleging that the Trusts had violated the CFPA by engaging in unfair and deceptive practices in connection with the servicing and collection of student loans. Although the CFPB acknowledged that the alleged misconduct resulted from actions taken by the Trusts' servicers and sub-servicers in the course of their debt collection activities'rather than any actions taken by the Trusts themselves'the CFPB nonetheless named only the Trusts as defendants.

The Court Allows the CFPB's Case to Proceed

The CFPB's action against the Trusts has been pending in federal court in Delaware since 2017.² After granting...