CFPB Settlement With Student Loan Trust Raises Red Flags
A settlement between the Consumer Financial Protection Bureau (CFPB) and Donald Uderitz, owner of Vantage Capital Group (VCG), has major implications for students with loan debt. Based on media coverage of the settlement, most casual readers might believe that hundreds of thousands of former students may see their student debt wiped away—all thanks to administrative errors by the trust holding the debt, National Collegiate Student Loan Trusts (NCSLT). Unfortunately, this narrative oversimplifies what appears to be an attempt by the CFPB to provide Uderitz with lucrative responsibilities using extrajudicial means.
NCSLT maintains a collection of over 800,000 private student loans that students entered into with banks. These banks sell the loans to a middleman, and the loans are eventually bundled into the NCSLT. Upon collecting debt payments from students, NCSLT pays out to investors such as the Bill & Melinda Gates Foundation. As Bloomberg notes, the loans were made to students with good credit scores and originally enjoyed generous risk protection until the nonprofit providing the protection went bankrupt in 2008. NCSLT hired American Education Services (in concert with Pennsylvania Higher Education Assistance Agency, referred to from here on as AES/PHEAA) to collect on the debt.
Partially as a result of the financial crisis, many students owing money to NCSLT have defaulted on the debt. Consequently, servicing responsibilities for this delinquent debt have passed on to U.S. Bank.
Meanwhile, amid reports that AES/PHEAA was lacking necessary paperwork, Uderitz, the “beneficial owner” of NCSLT, launched an audit of AES/PHEAA’s collections practices. (The beneficial owner keeps any leftover funds from student loan payments after investors are paid.) An ensuing report on the results of the audit, conducted on a small sample of 400 loans, uncovered some sloppy paperwork on the part of AES/PHEAA.
As a result, CFPB stepped in and made a deal with Uderitz to transfer servicing powers to Uderitz’s firm, VCG, in return for fines on some trustees and other servicing companies. The upshot for Uderitz and VCG is that Uderitz will make a killing off servicing and administering the debt. Uderitz claims that he has wanted to effect changes in debt collection practices for years, but has been “stonewalled” and needed the CFPB to step in. Yet, the “stonewalling” that Uderitz refers to is the normal legal process to determine who should administer the debt.
VCG had attempted to wrestle control of the process of administering debt owed to the trusts away and submit a bill for services rendered to the trustees of NCSLT, but some trustees questioned whether the process was legal. These trustees asked the courts to determine whether they truly owed VCG the fees VCG was claiming, a legal process which was ongoing until CFPB intervention. In effect, the CFPB has stepped in and bypassed the courts to tell Uderitz what he wants to hear.
But why is CFPB helping hedge fund manager’s power grab? VCG and Uderitz have no past experience servicing debt, and it seems odd that the CFPB would empower them to start now. The Ohio GOP has submitted a Freedom of Information Act request for correspondence between Uderitz and the CFPB to provide more clarity on the behind-the-scenes maneuvering that led to this arrangement. For now, it certainly appears that the CFPB handpicked a more compliant servicer of the debt––legal process be damned.
This is hardly the first case where the CFPB has pushed the limits of its vast and often unbridled powers. Conservatives and progressives alike have questioned the wisdom of an organization with loosely-defined powers headed by an unaccountable director. Besides, CFPB’s aggressive action to punish what they see as a “predatory collector” takes place as rumors swirl of the head of the CFPB, Richard Cordray, mulling a gubernatorial run.
There is little justification for the CFPB’s action to empower VCG with lucrative powers it has no legal right to. Even less justifiable is the CFPB’s indifference towards established judicial processes. Bureaucrats need to be accountable to judges, not the other way around. And enriching a hedge fund manager is possibly the worst reason to abandon this principle.
Andrew Wilford is a Young Voices Advocate. Follow him on Twitter @PolicyWilford.