Securitization trusts subject to CFPB oversight

The United States 3rd Circuit Court of Appeals late last month upheld a lower court’s ruling that securitization trusts are subject to the Consumer Financial Protection Bureau ’s oversight in a landmark decision that could have far-reaching implications for auto lenders' cost of funds and change the way deals are structured . The case marks the first time a court has ruled that securitization trusts — the pool of assets underlying a transaction structure — are subject to the enforcement authority of the CFPB, Structured Finance Association (SFA) General Counsel David Dwyer told Auto Finance News . “It may now be possible for the CFPB to seek compensation and damages from legal entities that have not participated in any alleged wrongdoing,” Dwyer said. Trusts are legal entities managed by a person or organization for the benefit of another. In asset-backed securities , auto loan or lease assets are placed in a trust and payments on those loans and leases are passed through the trust to investors. The ruling will likely make lending more expensive, SFA Chief Executive Michael Bright told AFN. [caption id="attachment_58330935" align="aligncenter" width="1024"] Photographer: Ting Shen/Bloomberg [/caption] “Reserves may need to be set aside to protect against future liability on the part of servicers,” Bright said. “Likely additional costs would be borne by the end investor, which is 401(k) and other money Americans save. That is why we think this ruling is not good for the system.” The ruling may also change how asset-backed securitization (ABS) deals are put together “to ensure that line of responsibility is defined,” Bright said, noting that “trustees are passive participants who simply execute the terms of the agreement.” No trust in trusts The case, CFPB v. National Collegiate Master Student Loan Trust et al., dates to 2017 when the CFPB sued National Collegiate Student Loan Trusts and their debt collector, Transworld Systems , for illegal debt collection practices, according to a March 22 note from law firm Mayer Brown . Simply put, the bureau alleged that the trusts, through the acts of their servicers and sub-servicers, engaged in deceptive debt collection and litigation practices, and that under the Dodd-Frank Act, trusts were considered “covered persons,” according to Mayer Brown. A covered person is “defined as any person engaged in offering or providing a ‘consumer financial product or service’ and any affiliate of that person that acts as a service provider to that person,” according to the firm. Risky borrowers and servicers could increase an ABS deal’s vulnerability to lawsuits, according to a February 2022 Moody’s Investor Services report issued when the case was first appealed. Registration is now available for the annual Auto Finance Summit East 2024 , May 1-3 in Nashville, Tenn., which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross section of industry players. Visit AutoFinance.Live to learn more.

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