Several NCSLT private student loan bonds have recovered some of the value they lost in the wake of the 18 September announcement of a USD 20m CFPB settlement over a range of improper servicing practices, according to Finra TRACE data.
The bond price recoveries have come as virtually every party to the bonds other than their equity holder has indicated that they are opposed to the settlement. In many cases, those parties — including bondholders, the servicer, the special servicer, the administrator, the trustee and a bond insurer — have questioned in federal court filings whether the securitization trusts’ equity holder, Vantage Capital Group, even had the right to agree to the Consumer Financial Protection Bureau settlement on behalf of the securitization trusts.
The federal district court overseeing the case has moved its filing deadlines back several times. Given the number of opposition filings, and their vehemence, the settlement may not be approved anytime soon — if it survives the legal challenges at all.
For instance, two USD 5m chunks of National Collegiate Student Loan Trust 2007-1 A4 traded on 20 October at prices of 82.625 and 82.50, according to TRACE. The bond had plummeted to a price of 78.50 for a USD 10m+ piece on 20 September, and a price of 80 for a USD 3m piece on 28 September. In August and early September, the bond traded as high as 87.
A USD 10m+ NCLST 2006-4 A4 traded at 86.875 on 17 October, well above a floor of 81.50 hit by a USD 2m piece on 22 September. In August, the bond traded several times with a 90 handle.
Subs have also been affected. A USD 2.67m NCSLT 2005-3 B traded twice on 6 October at prices of 56.50 and 56.75, up from the 51 price at which a USD 6.88m piece traded on 20 September. In July, the bond traded four times at prices of 62.50 and 62.75.
The whipsawing may have something to do with the uncertainty over the settlement. Even one party that the CFPB claims agreed to settle is now opposing the pact.
Debt collector Transworld Systems Inc., named by the CFPB as having agreed to the settlement, has since filed court papers claiming that it did not agree to the terms the CFPB claims that Transworld agreed to in the settlement agreement the CFPB filed in court. Transworld’s 22 September filing includes a three-and-a-half page section entitled “The Conflicting Orders” that details point-by-point how its negotiated consent order with the CFPB differs from the proposed settlement the CFPB filed in court on 18 September.
Judge Gregory Sleet of US District Court in Delaware has to date extended the deadline by which interested parties must file motions requesting the right to intervene in the case twice, and on Monday extended the deadline for replies to the intervention motions to 20 November. Meanwhile a separate case in Delaware state Chancery court is addressing the issue of whether Vantage is the true “owner” of the NCSLT trusts — a designation the CFPB relied on in allowing Vantage’s attorneys to agree to the settlement on behalf of the securitization trusts.
Some NCSLT bondholders, Transworld and special servicer US Bank allege that Vantage is improperly attempting to install an affiliate, Odyssey Education Resources, as special servicer of the trusts. “[Vantage Capital Group], the trusts’ equity owner, has sought to enrich itself personally by, among other things, appointing VCG affiliates to lucrative positions servicing the trusts, and restructuring the trusts’ servicing agreements to allow VCG’s affiliates to acquire the trusts’ loans at a discount,” alleged the bondholders in a 22 September filing.
The bondholders opposing the settlement include funds managed by Waterfall Asset Management, One William Street Capital, LibreMax and Angelo, Gordon. Also opposing the pact are bond insurer Ambac, trust administrator GSS Data Services, servicer the Pennsylvania Higher Education Assistance Agency (PHEAA), trustee Wilmington Trust Co. and special servicer US Bank.
A CFPB spokesperson declined to comment. Attorneys representing Vantage did not respond, nor did a Vantage executive.
The trusts sued by the CFPB are National Collegiate Student Loan Trust 2003-1, 2004-1 and -2, 2005-1, -2 and -3, 2006-1, -2, -3 and -4, and 2007-1, -2, -3 and -4. The bonds have a total outstanding balance of USD 6.13bn, according to Moody’s.
The CFPB complaint, also filed on 18 September, alleges that Transworld employees initiated thousands of collections lawsuits against borrowers whose loans back the NCSLT trusts in which they “falsely claimed personal knowledge of the account records and the consumer’s debt and, in many cases, personal knowledge of the chain of assignments establishing ownership of the loans.” The suit alleges that Transworld filed at least 2,000 collections lawsuits without the necessary documentation to prove that the trusts owned the loans, or filed cases after statues of limitations had expired. Notaries for the loans’ servicers notarized more than 25,000 affidavits without witnessing signatures, the complaint alleges.
The settlement calls for the trusts to pay at least USD 19.1m, “which includes initial redress to harmed customers, relinquished funds to the Treasury, and a civil money penalty,” according to a CFPB statement. Transworld was ordered to pay USD 2.5m under a separate consent order.
According to a 10 October US Bank filing, the NCSLT deals were sponsored by First Marblehead, who employed PHEAA as primary servicer. They were initially guaranteed by The Educational Resources Institution (TERI), but TERI went bankrupt in 2008. There was initially no special servicing agreement, but the parties added one with First Marblehead in 2009. US Bank was named backup special servicer, and NCO was named collection firm. First Marblehead, the deals’ equity owner, later resigned as special servicer and sold its equity interests to VCG. NCO eventually transferred its collections business line to Transworld, a subsidiary, which it later sold to Platinum Equity. Since November 2014, Transworld has handled all past-due and default servicing for the trusts.
Changing the rules
In their 22 September objection, the bondholders argue that the settlement would jeopardize payments of bond principal and interest by requiring that the special servicer and collection company stop attempting to collect on defaulted underlying loans; by establishing an escrow account to hold all money received by the trusts; and by “replacing the priority of payments under the indenture with a compliance regime that permits a self-interested “Board” acting (purportedly) on behalf of the trusts to determine what amounts, if any, are paid to noteholders.”
The noteholders also argue that neither the CFPB nor the trusts represent their interests, and questioned whether any signatory to the settlement does. “It is not entirely clear at this point what person or entity is acting on behalf of the trusts [and] whether the person or entity acting for the trusts actually has the authority to do so,” the bondholders state in their filing. “If the entity purporting to act on behalf of the trusts with respect to the proposed order is VCG Securities, LLC and/or its affiliates …, VCG lacks the authority to do so.”
Other objections follow similar lines of reasoning, and are perhaps best summed up by this excerpt from Ambac’s 20 September filing:
“The proposed order provides that the power to decide how to use the funds will be given to an entity whose purported interests in these trusts is being actively litigated, and that has been alleged to have acted contrary to the interests of the trusts, Ambac, or investors. Accordingly, the proposed order asserts control over millions of dollars of payments for an unknown period of time, and places seemingly complete discretion over such monies in the hands of a self-interested entity, all contrary to the terms of documentation agreed to over a decade ago and observed by the parties thereto, including the Indenture trustee, the owner trustee, the trust administrator, the servicers, Ambac, and the investors. This complete disregard of the governing documentation threatens not only this transaction but also calls into question the fundamental assumptions that capital markets have long accepted in structuring analogous transactions.”
Ambac elsewhere terms the settlement agreement “unauthorized and invalid.”
Administrator GSS also alleges a VCG power-grab in its 26 September filing: Under the agreement, “[VCG] would obtain the right — which they do not have under the trust related agreements — to manage the multi-billion dollar trusts (and to control [their] cash).”
Special servicer US Bank’s objection is based on similar grounds, and argues that following the settlement terms would open it up to liability from other parties to the NCSLT trusts.
Wilmington Trust itself attempted to resign as trustee on 20 July, in part because of its unwillingness to follow VCG’s directions due to the lack of certainty over whether VCG is entitled to act as owner of the trusts, according to a 22 September filing in Delaware Chancery Court. Wilmington Trust has declined to follow VCG’s instructions until the court resolves what the filing refers to as “The ‘Ownership Dispute.’” However, Wilmington Trust will not be relieved of its trustee duties until another trustee is appointed, and that has not yet happened, according to court filings.
Parties seeking to intervene in the case must file papers requesting that right by 1 November. At the moment, the deadline for answering arguments is 20 November.
by John Wilen