Deal Agent Role in Consumer Structured Finance May Lower Risk of Enforcement Actions

Recent court rulings upholding enforcement actions brought by the Consumer Financial Protection Bureau (CFPB) against securitization trusts for violating consumer protection laws underscore the critical need for deal agents in these transactions. The 3rd U.S. Circuit Court of Appeals decision highlights that weaknesses in the governance and administration of trusts could expose consumer loan-backed structured finance deals to material losses. While Oakleaf believes that some of the issues noted in the CFPB’s actions could be addressed with improvements to deal documents, installing a deal agent as a preventative measure could help catch potential violations early and reduce the risk of repeated violations, as was the case with the National Collegiate Student Loan Trust (NCSLT).

On March 19, 2024, the US Court of Appeals for the Third Circuit upheld the DE District Court’s December 2021 ruling that held that the 15 National Collegiate Student Loan Trusts (NCSLT) are covered persons subject to the Consumer Financial Protection Act ‘s (CFPA) enforcement authority, and the Consumer Finance Protection Bureau (CFPB) did not need to ratify its action before the statute of limitations had run. The petition for a rehearing was denied by the Third Circuit on May 21, 2024.

On May 6, 2024, the CFPB filed a second enforcement action against the NCSLTs and Pennsylvania Higher Education Assistance Agency (PHEAA) for multi-year servicing failures. The action was filed in the US District Court for the Middle District of Pennsylvania. The CFPB’s complaint alleges that from 2015 until 2021, the defendants failed to properly respond to borrower requests, including during the COVID-19 pandemic, and that thousands of borrower requests seeking forbearance during the pandemic for loans held by the NCSLTs were mishandled.

Oakleaf believes that the risk of loss arising from CFPB actions is much lower for post-crisis transactions compared to those issued before 2008 for several reasons. First, post-crisis residential mortgage-backed securities (RMBS) and consumer asset-backed securities (ABS) have incorporated many of the lessons learned from the 2007-2008 crisis into the governing agreements. Second, the creation of the CFPB and regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act have led to improvements and accountability in the administration of consumer assets. Lastly, operational risks, particularly in RMBS, are addressed by loan-level due diligence reviews, originator and servicer quality ratings and assessments, and growing use of digital documentation such as eMortgages.

However, weaknesses in the administration and governance of RMBS and ABS may still be present and unknown until too late, potentially exposing the trusts to large monetary (non-credit) losses if not caught early. Oakleaf has noted two key findings in the CFPB’s complaints that have the potential to result in enforcement actions, fines, penalties, and ratings downgrades if not accounted for in the loss protection levels, particularly if performance begins to deteriorate.

One of the key findings noted in the CFPB’s September 2017 debt collection practices complaint was that the trusts and debt collector sued consumers for debts without the necessary documentation required to sue. The CFPB noted that over 2,000 collections lawsuits were filed on behalf of the trusts in violation of consumer financial protection laws that prevent consumers from having to pay debts they do not legally owe.

In these lawsuits, the CFPB asserts that the trusts did not have or could not find the documentation necessary to prove either that they own the loans or that the consumer owed the debt.  The CFPB also noted that the trusts and debt collector filed false and misleading affidavits, and in numerous instances, affiants claimed personal knowledge of the student loan debt they did not have.

The other key finding was set forth in the CFPB’s May 2024 servicing failure complaint against the same NCSLT trusts and PHEAA as servicer. Here, the CFPB found that the trusts and PHEAA failed to accommodate borrower requests for payment relief because the servicing guidelines governing how PHEAA services loans on the trusts’ behalf do not provide it with the authority to decide certain borrower requests.  The CFPB noted in its complaint a “general breakdown in the Trusts’ management and governance and rendered the process for deciding exception requests non-functional”. The CFPB also noted that PHEAA represented to those borrowers that it would seek permission from the NCSLTs for forbearance extensions due to the ongoing impact of the pandemic, but PHEAA did not inform borrowers that the NCSLTs were not responding to these requests.

The enforcement actions appear to have resulted from a pervasive and widespread pattern of consumer law violations. While improvements in deal documents to address weaknesses in the administration of the trust could fix some of the findings noted in the CFPB’s actions, such as the lack of permissions regarding consumers’ requests, a deal agent could catch potential violations early and help prevent recurrence on a large scale as was the case with the NCSLT trusts.

Another important finding that could be addressed by the deal agent role is the oversight of the document delivery requirements, particularly in RMBS, but nonetheless important for all consumer ABS. The 2017 enforcement action noted that the trust sued consumers for debts the trust could not prove it owned or that the borrower owed.

Private-label RMBS have detailed conveyance procedures in the pooling and servicing agreements and instructions on confirming the presence of key mortgage documents, such as the promissory note and security interest (mortgage), reporting of exceptions, and cure enforcement. A deal agent could confirm that the files have been reviewed and follow up on cure and repurchase requests to prevent widespread delays and potential enforcement actions arising from incomplete files for lien enforcement.

Deal agents also oversee representation and warranty reviews, cash reconciliation, and servicing oversight and can help with the decision-making process to accommodate borrower requests and communicate to transaction parties if certain permissions are needed.

Oakleaf believes that the CFPB recognizes the importance of securitization in consumer finance and capital markets and will likely pursue violations against consumer structured finance transactions judiciously. However, the presence of a deal agent to help oversee the administration of the trust may be a low-cost solution to a low probability-high severity risk of millions of dollars in fines and penalties.

The Consumer Financial Protection Bureau (CFPB) has filed two significant cases against the National Collegiate Student Loan Trusts (NCSLT):

1. Debt Collection Practices Case (2017): In September 2017, the CFPB filed a lawsuit against 15 NCSLTs and their debt collector, Transworld Systems, Inc. The CFPB alleged that the NCSLT engaged in illegal debt collection practices by suing borrowers for student loan debts that they could not prove were owed or were too old to sue over. The lawsuit claimed that false or misleading affidavits were used in these collections cases. The consent order required NCSLT to pay at least $21.6 million, conduct an independent audit of all 800,000 loans in its portfolio, and stop collections on any loans that could not be verified as valid​ (Case No. 17-1323 (MN) for amended complaint).

2. Servicing Failures Case (2024): In May 2024, the CFPB took action against the NCSLT and the Pennsylvania Higher Education Assistance Agency (PHEAA) for failing to properly respond to borrower requests for relief from student loan payments. This included failures during the COVID-19 pandemic when many borrowers sought forbearance or other relief. The proposed stipulated final judgments required the NCSLT and PHEAA to pay a total of more than $5 million in penalties and restitution. This action addressed multi-year servicing failures that harmed thousands of borrowers by ignoring their requests for assistance and providing inaccurate information​​ (Case 1:24-cv-00756-JPW).

To learn more about our findings, please reach out to Suzanne Mistretta.