OPINION:
Approximately 44 million Americans have student loan debt, and during former President Obama’s historically weak economic recovery, many borrowers defaulted on their loans, contributing to an economic crisis.
When lenders are not paid, it has significant consequences for the future of student loan funding, both in the short-term for consumer options and lending rates, but also for the securities market and the broader American economy. An estimated $108 billion worth of loans are held by investor groups.
The recent questionable dealings between former Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and the National Collegiate Student Loan Trusts (NCSLT), controlled by hedge fund manager and Cordray friend Donald Uderitz, have shown not only massive overreach in authority by the bureau, but the kind of problematic insider political dealings that President Trump can and should end.
NCSLT is the nation’s largest owner of private student loans — a group of 15 trusts that hold 800,000 loans worth about $12 billion, with $5 billion of that total currently in default. In a process is known as securitization, the loans — made to students over a decade ago by dozens of different banks — were bundled together by a financing company and sold to investors.
The NCSLT trusts were established between 2002 and 2007 to acquire and securitize private student loans originated by various banks pursuant to lending programs established by First Marblehead Corporation (FMC), which provided private student loans to borrowers who required funds beyond what could be obtained through federally-backed programs at the time.
Private lenders do not have the same enforcement mechanisms as the federal government. The most effective way they can collect payments is via litigation.
But in July 2017, the system hit a snag when it was suggested that the NCSLT either may not have had proper title to the loans or that the ownership records were incomplete, meaning that aggressive pursuit of recoveries through litigation may not work.
When Mr. Uderitz, the beneficial owner of the NCSLT, needed a more efficient way to collect these overdue loans, he called up his old friend Mr. Cordray.
In a first-of-its-kind judgment, Mr. Cordray’s CFPB intervened in the matter, giving Mr. Uderitz a major win by forcing a settlement in September 2017 that made him the de-facto administrator of the NCSLT, able to collect loans as he sees fit. Mr. Uderitz had been negotiating with the CFPB to become a “special servicer” (essentially taking control of the trust) in order to do the recoveries his preferred way, and he won.
This agreement in September 2017 meant that trusts cannot collect on any loan for which they cannot prove the borrower legally owes them the debt, forcing an audit on literally all 800,000 troubled loans. The deal also included $19 million in penalties and borrower refunds from the NCSLT, with the possibility of having to pay millions of dollars more.
In short, the NCSLT would pay for both the audit and settlement in the deal negotiated by Mr. Cordray and Mr. Uderitz, but one which investors never approved. So, why is the CFPB in bed with a hedge fund manager to help him win a battle that would be better decided in the courtroom?
Mr. Uderitz thinks he can do a better job of collecting on the debts, even though he and his hedge fund have no past experience in servicing debt. The CFPB made a deal with Mr. Uderitz to transfer servicing powers on the loans in return for fines on some trustees and servicing companies — allowing Mr. Uderitz to profit handsomely servicing and administering of this debt.
And he stands to do very well because a November 2017 ruling confirmed “entities associated with Vantage Capital Group founder Donald Uderitz were declared squarely in control of National Collegiate Master Student Loan Trust.”
A takeover of the funds damages the current structure for recovering on defaulted student loans, to the benefit of Mr. Uderitz’s bottom line and at the expense of the secured bond investors in these trusts. In addition, these actions endanger future funding access for private student loan securitizations.
Fortunately, Mick Mulvaney can do something about this sketchy deal.
In November 2017, President Trump named his Office of Management and Budget chief to also serve as the CFPB’s acting director. Mr. Mulvaney has already signaled welcome and appropriate changes at the CFPB. As the former South Carolina congressman has said, “The days of aggressively ’pushing the envelope’ of the law in the name of ’the mission’ are over.”
That means changing the structure of the CFPB, if not eliminating it altogether. Under Mr. Cordray, neither the director nor the board was directly accountable to either the White House or Congress, allowing Mr. Cordray, now running for governor of Ohio as a Democrat, to exceed his agency’s authority and jurisdictional limits, with the private student loan servicing issue a prime case in point.
Mr. Mulvaney should remove Mr. Uderitz from his position, based on the glaring conflicts of interest and dismiss the CFPB’s frivolous consent agreement which will drive up student loan interest rates and lead to fewer borrowing options for students.
• Matt Mackowiak is the president of Austin, Texas, and Washington, D.C.-based Potomac Strategy Group, a Republican consultant, a Bush administration and Bush-Cheney re-election campaign veteran and former press secretary to two U.S. senators. His national politics podcast, “Mack on Politics,” may be found on iTunes, Google Play, Stitcher and on the web at MackOnPolitics.com.
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