Statutory Trusts Subject To Consumer Financial Protection Bureau Jurisdiction

Cadwalader reports on a Third Circuit decision involving the Consumer Financial Protection Bureau and the National Collegiate Master Student Loan Trust. The Court found that statutory trusts used to handle securitizations are considered “covered persons” under the Consumer Financial Protection Act and are subject to CFPB jurisdiction.

The parties had been litigating for years and almost settled in 2017. The U.S. District Court for the District of Delaware refused to accept their proposed consent judgment due to concerns about the constitutionality of the CFPB. The Third Circuit found that even if the CFPB Director’s position was unconstitutional, that did not mean actions taken by the Director were void. 

The other issue was whether the statutory trusts were “engaged” in consumer financial services under the Consumer Financial Protection Act. The purpose of the trusts is to facilitate the transfer of ownership of the loans into securitization pools. The trusts have no employees. The limited set of activities they “engage” in all occur as a result of automatic processes established by the agreements used to set up a securitization of loans.

The Third Circuit ignored this aspect of the trusts. It commented in a footnote that it doesn’t need to address the Administrator’s role. It only needs to determine whether the trusts engaged in such agreements. 

The ruling was that based on legislative history, plain language, and the language of the administration agreements used in the transactions, the statutory trusts are considered “covered persons” under the CFPA. As such they are not only subject to CFPB jurisdiction but also have primary responsibility for full compliance with consumer financial services laws and regulations.

According to Cadwalader, the decision will potentially undermine the non-operating nature of the trusts used in consumer asset securitizations. Trusts could be treated as accountable to the Consumer Financial Protection Bureau, and possibly be liable to private litigants, as well as the states. That means “trusts could need direct management, operations (perhaps including risk and compliance), and capital to manage the assets and business.”