Director of the Consumer Financial Protection Bureau and Trump appointee, Kathy Kraninger, has been leading the financial regulator for over a year and has done an impeccable job reversing Obama-era regulations that hindered innovation and increased the cost to obtain credit for consumers across the US. However, a consent decree entered into by the Bureau’s founding Director on his way out the door remains a hold-over headache that has punished student loan borrowers who rely on private loans and investors who purchased these securitized products as a tool to diversify their retirement portfolio. 

In September 2017, the CFPB under Obama-appointed Director, Richard Cordray, entered into a consent decree with the National Collegiate Student Loan Trusts and their loan servicer, Transworld Systems, Inc. as one of his last enforcement actions before leaving the Bureau. The 15 Trusts held $12 billion in private loans for 800,000 borrowers, of the which the loans were securitized and sold to investors. Typically, investors holding these securitized financial products include pension and retirement plans.

Concerningly, the Bureau appears to have intentionally defined or inappropriately misinterpreted the Trusts as debit collectors under the “covered persons” provision of Dodd-Frank. In Section 1024 of the Dodd-Frank Act, the Act refers to “covered persons” primarily as businesses dealing in real estate loan origination, offer and servicing and “a larger participant of a market for other consumer financial products and services.”

It would appear that former Director Cordray exceeded his authority by capturing Trust investors in the Bureau’s consent decree. The erroneous categorization of the Trusts as “covered persons” allowed the Bureau to deem Transworld Systems, acting as a servicer, as an “affiliate” within the statutory definition of Dodd-Frank. Subsequently, Trust investors have been apprehended in the Bureau’s ruling and have seen the gains forfeited because of Cordray’s actions.

Representatives Zeldin, Budd and Duffy raised these concerns in a letter to Director Kraninger how Cordray’s order  “penalize[s] innocent actors, including pensions plans, retirement plans, and by extension the consumers that have entrusted their savings to them, for a third party’s alleged misconduct.” As a result, the private student loan market can expect credit to constrict or become more expensive to access, and investors who utilize this product to diversify their retirement portfolio may see these investment opportunities vanish from the market. Creating certainty for investors and market participants is more important now to help stabilize the securitization market and should be consider with urgency. Director Kraninger should continue her pro-growth agenda by withdrawing the Obama-era consent decree.