Wall Street is fighting a CFPB deal over billions in defaulted student loans

Shahien Nasiripour, Bloomberg News on

Published in Business News

Donald Uderitz, who owns Vantage, has stated that the settlement would help his company recover losses he blames on "systemic malfeasance, gross negligence and willful misconduct." Vantage lawyers have gone a step further, claiming in court last week that the trusts' contractors were responsible for triggering the federal investigation -- an allegation the CFPB denied. Uderitz has been trying to audit the trusts' loans for years. Transworld Chief Financial Officer David Zwick and CFPB spokesman David Mayorga both declined to comment. A spokesman for Ambac didn't return a request for comment.

At the time they were created, the trusts cumulatively held more than 874,000 student loans made to more than 812,000 people, according to securities filings. They were bundled into $16 billion of securities for sale to investors, backed by borrowers' monthly payments. Of the original $12 billion in loan principal bundled into the trusts, about 42 percent -- $5 billion, including interest -- was in default as of June 30, according to disclosures by the trusts' administrator.

This makes them the worst-performing student loan investment vehicles ever created by Wall Street, according to Jon Riber, a DBRS Inc. analyst who specializes in consumer debt that's been bundled into securities.

Initially, investors who bought the loan-backed notes had generous protection against the risk that borrowers would default en masse -- but the 2008 bankruptcy of the nonprofit that guaranteed their loans ended that arrangement. Collection efforts in the form of mass lawsuits filed by debt-collection law firms followed. Vantage gained control of the trusts in the ensuing years by purchasing more than 99 percent of the equity notes issued by the trusts, according to court filings.

Uderitz said he became alarmed by mounting losses and the trusts' inability to collect. Tens of thousands of collections lawsuits filed against debtors in state courts across the country yielded little in the way of recoveries. The CFPB alleged it found that in at least 2,500 cases, contractors working for the trusts sued borrowers even though the statute of limitations had expired or they didn't have the right paperwork. Under the proposed settlement, a third party would inspect the trusts' records to ensure that paperwork is in order and the trusts have a legal right to demand payment. In doing so, the bureau would give Vantage authority to temporarily halt payments to investors pending completion of the audit. Ambac has estimated the audit could cost as much as $80 million.

Should the judge approve the settlement, borrowers who had been forced to repay with wage garnishments or levies against their bank accounts would get a temporary reprieve. Debtors with loans the audit finds can't be collected would essentially be let off the hook.

The opponents posit three main reasons for being against the deal. First, they argue their substantial financial interests (which cumulatively total about $2 billion) weren't taken into account. Second, the roughly $19 million in immediate payments would come out of their pockets (and they'd be further harmed while the trusts halt collection on their loans pending the audit). Third, the settlement is part of a long-running effort by Vantage to enrich itself at everyone else's expense, various objectors to the deal alleged in court filings. (Michael Hanin, a lawyer for the hedge funds, declined to comment.)

Uderitz rejects these claims. As defaults have climbed and the trusts' assets have dwindled, Uderitz contends he's been trying to convince other investors and companies with an interest in the trusts that they could make more money if they included a Vantage affiliate called Odyssey Education Resources LLC as one of the trusts' debt collectors, according to records in other court cases. One way everyone could increase their earnings, Uderitz said in an interview, would be to allow Odyssey to purchase loans out of the trusts that are no longer collectible because the statute of limitations has passed. Odyssey would then try to persuade borrowers to pay up without threatening litigation. Uderitz said borrowers often would be able to pay substantially less than what's owed.

The objectors alleged that Uderitz would be buying the loans at a discount while reaping "lucrative" fees. Uderitz has said he's trying to maximize loan recoveries for all investors while staying on the right side of the law. Odyssey has proposed keeping 10 percent of the sale price of the loans it purchases out of the trusts as its compensation.

In court papers, the CFPB said that those opposing its settlement with Vantage appeared to be arguing they shouldn't be held liable for what the bureau calls unlawful collections -- even though they directly profited from it. The judge in the case could rule as early as next month.

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