CFPB deal with servicer raises red flags

Earlier this month, the Consumer Financial Protection Bureau reached a settlement with Vantage Capital Group that handed VCG administration rights to more than 800,000 private student loans that had been mismanaged by a trust called National Collegiate Student Loan Trusts.

Earlier this month, the Consumer Financial Protection Bureau reached a settlement with Vantage Capital Group that handed VCG administration rights to more than 800,000 private student loans that had been mismanaged by a trust called National Collegiate Student Loan Trusts. There are serious questions about the propriety of the CFPB settlement.

The borrowers involved all took out their loans from banks, who then sold the loans to a middleman, who then bundled them and sold them to NCSLT. Upon collecting debt payments from students, NCSLT pays out to investors. The loans originally enjoyed generous risk protection until the nonprofit providing the protection went bankrupt in 2008. NCSLT then hired American Education Services to collect on the debts.

Meanwhile, the owner of NCSLT, Donald Uderitz, convinced the CFPB to audit AES’ collections practices. As “beneficial owner” of the NCSLT, Uderlitz pockets any leftover funds from student loan payments after investors are paid. That audit covered only 400 loans, but concluded that AES, and therefore NCSLT, had failed to meet certain disclosure and procedural requirements mandated by the CFPB. The loans are currently serviced by U.S. Bank and a subsidiary.

Typically, when the CFPB gets involved in student loan servicing, they are the long arm of the law. In this case, however, Uderlitz himself approached the bureau, offering to pay some fines on behalf of NCSLT and AES in exchange for the CFPB transferring servicing powers to Uderlitz’s other business interest, VCG. The proposed deal calls for the trusts to pay $15.6 million to the federal government and $3.5 million to those borrowers who have already repaid the trusts after being hit with faulty lawsuits.

The outstanding face value of the loans in question is more than $8 billion dollars. U.S. Bank had asked the courts to settle the question of who ought to control the loans. The settlement between the CFPB and VCA rendered the legal proceedings moot.

Neither VCA nor Uderlitz has any experience servicing loans or collecting from defaulters. It appears that the CFPB has simply removed the question from the federal courts and selected a more compliant servicer. Uderlitz is likely to earn a substantial profit from administering the loans, and some of those profits could line the coffers of Richard Cordray, who resigned last week from the CFPB, reportedly to run for governor of Ohio. The Ohio GOP has filed a Freedom of Information Act request for more information on the deal.