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SCI Start the Week - 19 April

Category: Capital Relief Trades CLOs CMBS

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A review of securitisation activity over the past seven days

Last week's stories
Income opportunities

Angel Oak Capital Advisors, answers SCI's questions
Leverage boost
Dual-tranche SRT prepped
Robust sentiment
Positive outlook for Dutch RMBS market
Servicing hitch
Italian NPL ABS collections drop
Shifting trends
Differing ESG impacts on credit quality considered
Trailing Texas
Banks with large warehouse loan books set to follow TCBI
Consumer warriors
Setback for CFPB, but warning shots at securitisation market fired
The March 26 dismissal of a lawsuit brought by the Consumer Financial Protection Bureau (CFPB) against a student loan trust is good news for the securitisation market, but may be only the first skirmish between it and a more bellicose CFPB.

In fact, the manner in which CFPB appears to interpret elements of the 2010 Dodd-Frank Act now means that the structured finance industry stands squarely in its cross hairs. While the Delaware district court rejected the arguments made by the CFPB in its suit against the National Collegiate Master Student Loan Trusts, which hold more than 800,000 student loans, the alarm bell has sounded.

The suit was brought due to the actions of the debt servicers, who, among other failings, had pursued student debtors and their families in an often hostile manner. The CFPB claimed that the trust is responsible for this behaviour, and, further, that trusts qualify as "covered persons" as defined by the Dodd-Frank Act and so are subject to the CFPB. If an entity is not deemed a covered person, then the CFPB has no jurisdiction over it.

Crucially, in its rejection of the suit against National Collegiate, the Delaware court did not make ruling on the question of whether a trust used in a securitisation can be legitimately deemed a covered person. Neither is it thought that a district court would be able to make a final judgement on this topic anyway. It remains hanging in the air, unanswered.

"Who is a covered person is one of the most important and least explored aspects of Dodd-Frank, and the CFPB has chosen to be aggressive in its interpretation. They can take the position that purchasers of consumer receivables are covered persons. We haven't seen the end of this. The comments made by the judge were favourable but the issue is not resolved," says Rachel Rodman, a partner and member of the white collar defence and investigations practice at Cadwalader, Wickersham and Taft, in New York.

Last September, the CFPB won a case against PEAKS Trust 2009-1 for what it deemed unfair and coercive lending practices. The trust incorporated loans made by the ITT Educational Services. In this case, the trust did not put up a fight but accepted the verdict.

Cases like these suggest that any structured finance vehicle which incorporates consumer debt, like ones used for credit card deals, auto loans or student loans, could be on the hook for the actions of the debt originators and servicers. The trust is, of course, not an active entity, but rather an operational device.

"To the extent that securitisations will be now held liable for the conduct of third parties, then this will have an impact. This becomes a risk that any consumer credit product seeking financing in the ABS markets will have to acknowledge," says Neil Weidner, a partner in the capital markets group at Cadwalader.

The Delaware court rejected the suit against National Collegiate on a constitutional technicality. In Seila Law LLC versus Consumer Financial Protection Bureau in June 2020, the Supreme Court ruled that the structure of the CFPB was unconstitutional in that the director of the bureau could only be removed "for cause" rather than by presidential edict, and this represented was deemed a violation of separation of powers.

Following that landmark decision, the director can now be removed on the orders of the executive. Previous actions initiated by the CFPB - when it was, in fact, an unconstitutional body - were allowed to proceed under an order of ratification. However, in the verdict delivered on March 26, the Delaware judge ruled that in the case under consideration ratification had occurred after the statute of limitations had passed and thus the suit was invalid.

The chances of an increasingly interventionist CFPB have increased with a new regime in Washington DC and the likelihood that President Biden's nominee Rohit Chopra will be confirmed as the new director. Chopra, currently a commissioner at the Federal Trade Commission, is a darling of the leftist wing of the Democrats. "The CFPB was designed to be the cop on the beat policing the financial system for consumer abuses. If confirmed, Chopra will take aggressive action," Aaron Klein, senior fellow of economic studies at the Brookings Institution, said recently.

"We're seeing a return to form in terms of the CFPB being much more aggressive and asserting the full panoply of its authority - at least as the CFPB thinks were granted to it under Dodd-Frank," affirms Rodman.

She was previously a senior legal counsel at the CFPB when Richard Corday was the body's first director. Corday, who was the Democratic nominee for the governorship of Ohio in 2018, was a notoriously combative director, and Rodman believes those days are here again.

A trust is more likely to defeat a suit if it is able to hire expensive lawyers who are experts not only in securitisation but also in the minutiae of litigation. This could be beyond the means of most trusts, which have a priority of payments and those are often capped.

Of course, many will argue that it trusts have to pay closer attention to loan origination and the actions of debt servicers, then that is no bad thing. But, as is the case with a great many high-minded undertakings, a law of unintended consequences may apply.

"If you're hurting consumer securitisation, you're hurting the flow of money into consumer lending, and you wouldn't want to do that in a recovery," says Weidner.

Simon Boughey

Other deal-related news

  • Fitch has affirmed and removed its rating watch negative placement on the outstanding ratings of the rental car ABS issued by Hertz Vehicle Financing II, reflecting Hertz's ongoing management of its business and fleet through Chapter 11 bankruptcy (SCI 12 April).
  • Fitch Solutions has released enhanced infrastructure key projects data together with a project risk metric that enables users to quantify and gauge infrastructure project completion risk (SCI 12 April).
  • ESMA has published interim STS notification templates for synthetic securitisations following amendments to the Securitisation Regulation (SCI 12 April).
  • CO2 emissions data reporting by auto loan lenders is likely to be crucial to classifying auto loan securitisations as 'sustainable' or 'green', in order to tap demand from ESG-oriented investors, Fitch says (SCI 13 April).
  • Scope has affirmed the class A notes and upgraded by a notch classes B to D issued by Santander's York 2019-1 CLO, in light of positive portfolio performance(SCI 15 April).
  • Fannie Mae and Freddie Mac have announced that any loans purchased after 1 July must meet the standards set out in the most recent amendments to the Preferred Stock Purchase Agreements, which stipulate that the GSEs will only purchase qualified mortgage loans that meet the new general ATR/QM Rule (SCI 16 April).
  • Uniform standards - including a clear green asset definition and a minimum percentage of green assets in a pool for securitisations to be classified as green - would lead to broader investor confidence and participation in the market, Fitch says (SCI 16 April).

Company and people moves

  • Citi and Bank of America have announced they are working together on building a new data and execution platform, initially focused on CLOs and syndicated loans (SCI 12 April).
  • SoFi has launched auto loan refinancing services in partnership with auto fintech start-up MotoRefi through its network of trusted lenders (SCI 12 April).
  • Mission Peak Capital has made a significant financial investment in the US operations of Mount Street Group (SCI 12 April).
  • Avant has acquired Zero Financial and Level, the company's neobank and banking app assets (SCI 12 April).
  • Privatam is adding to its investment solutions team with the hire of Jason Rodrigues as sales director for the Southern African market, based in the firm's Zurich office (SCI 12 April).
  • DBRS Morningstar has launched a new dedicated esoteric finance team (SCI 12 April).
  • Horseshoe has appointed Kathleen Faries as its new ceo, effective on 15 April (SCI 12 April).
  • Connection Capital has raised a £3m commitment to allocate to SCIO Capital's European Secured Credit Fund III (SCI 13 April).
  • Bellwether Asset Management has hired Cara Leonard-Munn as svp, debt asset management (SCI 13 April).
  • Lafayette Square has appointed Seren Tahiroglu as cfo of its credit strategy, overseeing the platform's accounting and financial reporting functions (SCI 13 April).
  • International Investment Group managing partner and coo Martin Silver has pled guilty before US District Judge Alvin Hellerstein to investment adviser fraud, securities fraud and wire fraud offenses (SCI 14 April).
  • Andy Phelps has joined Lafayette Square as md, head of capital markets (SCI 14 April).
  • Search and surveillance platform Pre-Rec has appointed securitisation industry veteran Saul Sanders to its board of strategic advisors (SCI 14 April).
  • Trade finance boutique CFE Finance has strengthened its UK team with two new recruits (SCI 14 April).
  • Two US courts have heard actions that are of significance to marketplace lenders and their funding sources so far this month, Chapman and Cutler reports (SCI 15 April).
  • Avant Capital Partners has formed a programmatic commercial real estate joint venture with an undisclosed Connecticut-based investment management platform with assets under management in excess of US$10bn (SCI 16 April).
  • Fairwater Capital has hired Eric de Sangues as head of structured credit, responsible for the strategic development of credit strategies alongside his role as fund manager, reporting to cio and founding partner Orlando Gemes (SCI 16 April).
  • Allianz Global Corporate & Specialty (AGCS) has promoted David Brown, currently the firm's head of insurance-linked markets, to head of its capital solutions unit effective from 1 July (SCI 16 April).
  • Monroe Capital has recruited Jayro Yoo as director, serve on its marketing and investor relations team based in Texas (SCI 16 April).


Recent research to download
The Collins Amendment - March 2021
CRT 2021 Outlook - March 2021
Synthetic RMBS - March 2021
CLO Case Study - Spring 2021

Upcoming events
SCI's 5th Annual Risk Transfer & Synthetics Seminar
21-22 April 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
26 May 2021, Virtual Event
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event