“This case has uniformly raised serious concerns across the industry as the CFPB’s proposed consent order challenges certain sacrosanct contractual rights of transaction parties. We strongly support an appropriate and transparent servicing standard for consumers; however, we believe it’s inappropriate to shift the burden of remedying any alleged third party’s misconduct to another party in contradiction with the agreed contractual arrangement.” – Kristi Leo, Structured Finance Association
One of the many-cited contributors to the failure of the private-label RMBS market to rebound from its crisis-driven lows is contractual ambiguity, concern around the inviolability of the contract, and a general lack of trust that trust cash flows will be allocated as dictated by the transaction documents. The CFPB v NCSLT case has aggravated these concerns among market participants, and without intervention, the lack of confidence might extend to other asset classes such as credit cards, student loans, and auto loans.
While neither appropriate nor acceptable, the extra-legal re-ordering of legacy RMBS contracts, in retrospect, can at least be attributed to a crisis situation, the Great Financial Crisis. That is not the case in this NCSLT matter.
At the heart of our concerns is the rule of law as it applies to negotiated contracts – a bedrock tenet to the stability of financial markets. The CFPB’s proposed consent order effectively rewrites contractual provisions that parties agreed to and penalizes the underlying investors, who are not accused of any wrongdoing, for the alleged actions of the third-party services. Moreover, the CFPB’s proposed consent order was negotiated without the involvement of any of the transaction parties who have interest, rights and obligations that would be modified by that order.
The ramifications of this lawsuit will have a chilling effect on the broader securitization market if the proposed consent order moves forward. The securitization market provides essential credit to more students and consumers at a lower cost than would be available otherwise. For example, $171 billion of student loans, $223 billion of auto loans, and $206 billion of other consumer loans are currently funded through the securitization markets as of year-end 2018.
The Structured Finance Association took immediate action to submit an amicus brief. Additionally, the Association arranged an Investor D.C. Fly-In to relay the industry’s concerns to Capitol Hill and the CFPB. This multi-pronged approach of addressing the court, legislators, and the CFPB has already shown some impact. Various statements made in a recent court decision granting multiple parties’ motions to intervene where sympathetic to the positions argued by the Structured Finance Association. Likewise, letters sent by Members of Congress to the CFPB outlined the Association’s members’ concerns.