Cordray's Corrupt Bargain Leaves Student Debtors Vulnerable

2018’s college graduates are hoping that their dreams will fly as high as their hats did at recent commencement exercises, but crushing student debt may keep those dreams on the ground.  

More than 44 million Americans have nearly $1.5 trillion in combined student loan debt, hindering their financial goals and undermining for many the entire purpose of going to college. This debt is not the product of some evil, right-wing conspiracy: The villains of the higher education industrial complex are the ones who run it. And thanks to some lingering Obama-era shenanigans, a couple more villains threaten to make the situation even worse.

Unless the Trump administration is allowed to help.  

Obama’s Consumer Financial Protection Bureau (CFPB) has long been criticized as unaccountable and unconstitutional — not just by conservative pundits but also by federal judges. One of CFPB’s most questionable overreaches is a corrupt bargain regarding student debt with National Collegiate Student Loan Trusts (NCSLT).

Before he left CFPB, Director Richard Cordray made a “consent agreement” with Vantage Capital Group’s Donald Uderitz to make him the de facto administrator of NCSLT’s massive student debt assets. In the name of stopping “unjust” collection practices, this consent agreement made Uderitz the judge, jury, and executioner. He now has the power to collect on loans as he sees fit.

Giving a guy like Uderitz this kind of blank check is basically handing him … a blank check.

The NCSLT holds 800,000 loans bundled together in a process is known as securitization. The loans are worth $12 billion, but about $5 billion of that is currently in default. Recovering defaulted money like that is typically done via litigation, since private loan lenders don’t have enforcement powers and can’t just garnish wages the way the federal government can. But litigation is long, uncertain, and costly, so any shortcut to getting that money is good for debt collectors. And the CFPB gave NCSLT the mother of all shortcuts to get at securitized student debt.

To justify the “need” for these extra-judicial measures, many have villainized securitization as a means of financing altogether because of its role in the financial crash. But securitization is not an evil plague inflicted upon mankind; it’s an efficient and traditional form of financing, the high-finance version of using a debt consolidator.

The term “extra-judicial” may sound nice and formal, but actually it just means, “We don’t have to follow any rules.” Uderitz now has the power to collect however he wants, for instance by saddling students with servicing and collection fees while reducing his fund’s own tax liability exposures. Uderitz and his VCG will make a ton of money on the backs of already indebted students.(Avoiding this kind of thing is precisely why some people use debt consolidation services.)

While some loans will get saddled with extra fees, the consent agreement also provides for some loans to disappear if they can’t pass an audit. That’s great for those whose debt might disappear, but terrible for those who comes afterward. Blankly forgiving debt will undermine the future student loan market — because it makes student loans that much riskier of an investment, spurring higher interest rates. Not paying back education lenders won’t just hurt consumer options and lending rates, it will also hurt the securities market more broadly.

Oh, and Cordray just happens to be buddies with Udertiz — an innocent coincidence, I’m sure!

Undermining lenders, graduates, and future students to the profit of one hedge fund manager is hardly the best we can do in America. Acting Director Mick Mulvaney has promised to reform the CFPB, making it more accountable to the Congress, the administration, and the American people. Fixing the corrupt bargain with NCSLT is just part of the “Cordray Cleanup” that needs to happen there — and nailing any crony capitalist to the wall will help satisfy the president’s promise to “drain the swamp.”

Obama promised the most “transparent administration in history.” He didn’t deliver that — not by a long shot — but the conflicts of interest in this deal are among that administration’s most transparent corruptions. Mulvaney should remove Uderitz from his position and dismiss the frivolous consent agreement. President Trump’s administration will have protected the current generation from higher student loan rates while they’re in college and punitive fees after they graduate.

They probably won’t thank him, but they’ll still have him to thank for it.

Jared Whitley has worked in the U.S. Senate and the White House. He recently completed his MBA from Hult International Business School in Dubai.