In this episode of the Consumer Credit Matters podcast, I sat down with Steve Macy to dissect the Supreme Court's recent decision to deny certiorari in the CFPB vs. National Collegiate Student Loan Trust (NCSLT) case. For those in the structured finance world, this decision strikes at a cornerstone of securitization: the legal isolation of underlying assets.

The Third Circuit's ruling, now left standing, finds that securitization trusts can be considered "covered persons" under the Consumer Financial Protection Act (CFPA). This redefines the risk landscape for securitization entities, shaking long-held assumptions about the bankruptcy remoteness of trusts. The potential for direct liability introduces new complexities and costs across the securitization lifecycle.

In the episode, we explore the broad implications of this precedent. Here are some highlights:

• Redefining Risk: Legal isolation, a bedrock principle, now faces erosion. Trusts could become entangled in lawsuits previously aimed only at servicers or other operating entities.

• Practical Impacts: Increased risks may translate into higher costs for securitizations, affecting trustees, servicers, and ultimately, the cost of consumer credit.

• Industry Response: Legal and structural adjustments, including tighter indemnification clauses and nuanced boilerplate language, will be critical. However, as Steve points out, these solutions may not fully insulate stakeholders from the decision’s ripple effects.

This case underscores a paradox: while aimed at protecting consumers, these changes might inadvertently increase financing costs, affecting affordability.