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Cadwalader Attorneys Analyze Recent Developments in CFPB Student Loan Litigation

ellen.holloman@cwt.com's picture
Commentary by Ellen V. Holloman

Cadwalader attorneys described the implications to the structured finance industry of an enforcement action brought by the Consumer Financial Protection Bureau ("CFPB") against the National Collegiate Student Loan Trusts. In September 2017, the CFPB alleged that National Collegiate Student Loan Trusts violated consumer financial protection laws in connection with student loan debt collection practices.

As described more fully in the Cadwalader Memorandum, the CFPB's Proposed Consent Judgment contains terms that would effectively alter contracts affecting the underlying securitization trusts at issue. The attorneys state that by purporting to alter and thereby effectively rewrite these agreements, the CFPB's Proposed Consent Judgment upended well-established and long-standing market expectations. They concluded that the result threatens to undermine investor confidence, destabilize the student loan securitization market and, paradoxically, restrict student access to credit by making securitizations riskier.

Parties to the transaction agreements (which were non-parties to the litigation) sought to intervene in the proceedings. On October 19, 2018, the Honorable Maryellen Noreika issued a Memorandum Opinion that granted the Motions to Intervene, on the basis that the Proposed Consent Judgment and settlement approved by the equity holder might impermissibly alter the existing contractual obligations.

This memorandum was authored by Ellen Holloman, Cheryl Barnes, Scott Cammarn, Jason Halper, Neil Weidner, and Monica Martin.

Commentary

The District Court’s decision to allow intervention in these proceedings is important, because the parties to the securitization transactions, who are likely to be the most affected, are now "at the table" and able to defend their rights.  The intervening parties argued - and the Court agreed - that the Proposed Consent Judgment, if approved, would alter the carefully and highly negotiated agreements that market participants relied upon when they entered into the transactions and made their investment decisions.  Such an outcome would inject uncertainty into previously agreed upon investment terms, which, in turn, could destabilize securitization markets by causing investors to reassess their willingness to invest.  Further, this outcome would perhaps even have the unintended consequence of making access to credit more difficult and costly to students, as the threat that a government agency may set aside or rewrite contracts will change the risk calculus for investors in these products.  Finally, there is no reason to expect that this outcome would be limited to the student loan market, as robust securitization markets provide lower interest rates for mortgages, auto loans and credit cards. 

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