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OK. This is subject to rehearing, reconsideration and appeal. But in Delaware where the financial industry is coddled to the point of absurdity (statutory trusts are not trusts), this ruling is highly significant. Allow me to say “I told you so.”

Here is the decision: REMIC Trust MTD-AC-decision-2021.12.13

Here is an article about the decision written by Ori Lev on December 16, 2021. Ori Lev is an attorney who works for and writes for the law firm of Mayer Brown. which represents the largest players in the financial industry. The article is sent out as a warning to all investment banks doing business under the name of some name claimed to be a REMIC trust.

CFPB Wins Reversal of Dismissal – And Key Ruling on Securitization Trusts

Key quotes from the article are as follows:

• • the district court ruled that, at least at the motion to dismiss stage, the CFPB had properly asserted claims against the Trusts. It is this aspect of the court’s ruling that may have broad ramifications for securitization trusts. Various Trust parties that moved to dismiss the case had argued that the CFPB could not properly assert claims against pass-through securitization trusts because such trusts are not “covered persons” under the CFPB’s authorizing statute. That statute provides that the CFPB can only seek to enforce prohibitions against unfair, deceptive and abusive acts and practices against “covered persons,” a term defined as anyone who “engages in offering or providing a consumer financial product or service” (emphasis added).
  • The Trust parties argued that as pass-through entities with no employees the Trusts could not “engage” in providing a consumer financial product or service and the only proper defendants are the entities that do so directly (in this case, the servicers and sub-servicers). [Editor’s note: As with all schemes based upon plausible deniability, lawsuits against U.S. Bank, Deutsch Bank National Trust Company, Bank of New York Mellon, various Willmington entities and others have completely failed because the “trust” (frequently nonexistent and always empty), acting through lawyers who claimed to be representing the trustee basically convinced every judge that the trust could not possibly have done anything wrong because all duties and obligations of the trust and the trustee were delegated to companies that were claimed to be “servicers” and “subservicers.” Consumers, homeowners, attorneys, judges and regulators all got confused by this labyrinth, but this case takes a large piece out of that argument.]
  • Relying on dictionary definitions of the term “engage,” the district court held that by contracting with others to service and collect student loans, which the court described as “core aspects of the Trusts’ business model,” the Trusts had “engaged” in those acts and were thus covered persons. Whether this holding withstands the scrutiny of further litigation, and whether other courts adopt its reasoning, will have important implications for both the CFPB and for the securitization industry more generally.

  Significant quotes from the case decision:

  • Since the Trusts have no employees, they collect debt and service the loans through third parties. First Am. Compl. ¶ 29.
  • in 2009 the Trusts contracted with a special servicer to collect “pastdue and defaulted student loans” and to do “collections litigation.” D.I. 54, at 5. The special servicer, in turn, entered into agreements with “subservicers,” who would “conduct[] collections” and “oversee[] various law firms that [would] file collection lawsuits against borrowers in the name of the Trusts.” Id.; see First Am. Compl. ¶¶ 38–44.
  • But the subservicers soon attracted the attention of the CFPB. After a lengthy investigation, it found that the subservicers had “executed and notarized deceptive affidavits” and “filed … collections lawsuits lacking” key evidence. First Am. Compl. ¶¶ 49–50. The CFPB concluded that they engaged in unfair and deceptive debt-collection practices. D.I. 54, at 1–2. (e.s.)
  • The Trusts do not deny that their subservicers collected debt or serviced loans. Instead, they contend that the CFPB cannot hold them liable for those actions. D.I. 367, at 13. The Trusts characterize themselves as “passive securitization vehicles … [that] take no action related to the servicing of student loans or collecting debt.” Id. at 12.
  • the CFPB alleges that the unfair and deceptive debt-collection practices happened in lawsuits brought on behalf of the Trusts, with the “relevant Trust … named [as the] plaintiff in the action.” First Am. Compl. ¶ 37. Those suits could have proceeded only with the Trusts’ involvement: with narrow exceptions, “a party … must assert his own legal rights and interests.” Kowalski v. Tesmer, 543 U.S. 125, 129 (2004) (internal quotation marks omitted). The subservicers could not have collected any debt without the Trusts’ say-so. (e.s.)
  • The Trusts cannot claim that they were not “engaged in” a key part of their business just because they contracted it out. Cf. Barbato v. Greystone All., LLC, 916 F.3d 260, 266−68 (3d Cir. 2019) (finding that a “passive debt owner” counted as a “debt collector” under the Fair Debt Collection Practices Act when it contracted with a third party to collect debt on its behalf).
  • if Congress wanted to allow enforcement against only those who directly engage in offering or providing consumer financial services, it could have said so. See, e.g., 12 U.S.C. § 5481(15)(A)(vii)(I) (exempting some merchants from “covered person” status where they deal in “nonfinancial good[s] or service[s] sold directly … to the consumer”).
  • because the Trusts themselves count as covered persons, I need not decide whether a non-covered-person principal can ever be held vicariously liable for the acts of his covered-person agent. (e.s.)

  Bottom Line: This case is NOT an authoritative precedent that is binding on other judges even within the same district. But it is very persuasive authority supporting lawsuits that name the “trust”, the “trustee” and quite probably the investment bank that used the name of the trust to do business and borrow money from investors under the guise of selling them “mortgage-backed securities.”

  In plain language, this opens the door to suing the trustees and the trusts in addition to the companies that are claimed to be servicers and sub-servicers.

  I would add that either vicarious liability or liability established through piercing the veil of the empty REMIC trust could now be attached to the investment banks that initiated each securitization scheme and especially all those who participated in the foreclosure game in which a remedy is sought for a trust that will never see the remedy (foreclosure) applied to any entity bearing the name of the trust, the trustee or any investor. If I am right, this decision could be the start of the end of securitization as now practiced.

  Just ask them — U.S. Bank, Deutsch Bank National Trust Company, Bank of New York Mellon, various Willmington entities — have you ever been paid one cent from the sale of a foreclosed home on behalf of a REMIC Trust?

Filed under: foreclosure |