Supreme Court Declines Review: What CFPB v. NCSLT Means for Securitization

Just last month, the U.S. Supreme Court declined to review the Third Circuit's surprising decision in?CFPB v. National Collegiate Student Loan Trusts?(NCSLT).? This decision effectively upheld the Third Circuit's ruling, making it the final word on the matter.

In March 2024, I authored an article exploring the Third Circuit's surprising decision in?CFPB v. National Collegiate Student Loan Trusts?(NCSLT), and later hosted a podcast to unpack its broader implications for structured finance and consumer lending. You can find that article here?and the podcast here.

In any case, this development renders the Third Circuit’s interpretation of “covered persons” under the Consumer Financial Protection Act final, setting a significant precedent for securitization trusts. The court held that trusts could be deemed covered persons if their servicers’ actions are deemed improper—a ruling that disrupts long-held assumptions about the legal isolation of securitization vehicles.

The Stakes for Securitization and Consumer Finance

Securitization depends on a robust legal framework to ensure the bankruptcy remoteness of trusts. By potentially holding trust assets liable for third-party servicer malfeasance, this decision raises new risks for structured finance transactions. The decision could lead to:

• Higher Costs:?Trustees and servicers may demand higher fees or preemptively escrow funds to defend against future litigation.? These changes could ripple through consumer borrowing, increasing costs for consumers at a time when access to affordable credit remains essential.
• Credit Assessments:?Rating agencies or other market participants may alter their evaluation of risks to underlying collateral and related cash flows, potentially leading to adjustments in credit ratings and pricing for affected transactions.
• Legal Uncertainty:?The decision’s broad reasoning could invite questions about whether trusts need to comply with state-level requirements, such as licensing or registration. While speculative, this interpretation would impose significant new operational and financial burdens on securitization vehicles.

Which Transactions Are Most at Risk?

The financial impact of this decision is likely to be most pronounced in transactions involving:

1. Riskier Collateral:?Deals backed by subprime or non-performing loans are more prone to servicing challenges. Such collateral often leads to more disputes and consumer complaints, increasing the likelihood of regulatory scrutiny or litigation.
2. Weaker Third-Party Servicers:?Transactions relying on servicers with limited financial or operational capacity may face higher risks. These entities are more likely to encounter performance issues, which could expose securitization trusts to liability under the court’s interpretation.

These characteristics tend to amplify the risks introduced by the decision, potentially discouraging participation in or raising the costs of securitization for such deals. This could, in turn, reduce credit availability in markets that already face challenges.

What Comes Next?

While the decision is limited to the Third Circuit's jurisdiction, its implications are being carefully analyzed across the industry. Solutions may include revising deal structures to mitigate risk or pursuing legislative clarity on whether securitization vehicles fall under CFPB jurisdiction.

As is often the case with new precedent, it may take months or even years for the full implications of this decision to manifest in the market.

I’ll continue covering this topic in future articles and podcasts, especially as the structured finance industry adapts to this precedent. As always, I welcome your thoughts on how this decision impacts your work or the broader market.