Wall Street Halts Massive Student-Loan Relief Deal in Court

(Bloomberg) -- A federal judge sided with a coalition of financial firms, rejecting an agreement between U.S. regulators and a money manager that could have brought student-debt relief to hundreds of thousands of borrowers.

U.S. District Judge Maryellen Noreika in Wilmington, Delaware, denied on Sunday the Consumer Financial Protection Bureau's proposed 2017 settlement with a group of 15 investment vehicles known as the National Collegiate Student Loan Trusts. Noreika determined that lawyers hired to act on the trusts' behalf lacked authority to deal with the consumer bureau, according to an opinion unsealed Wednesday. The trustee, Wilmington Trust, had the authority but it declined to agree to the proposed settlement.

The agreement promised to audit some 800,000 student loans to resolve allegations that collection agencies illegally flooded the nation's courts with faulty paperwork to force distressed borrowers to pay up. Some borrowers defeated collection attempts by convincing judges that the trusts couldn't prove the debts were valid, prompting expectations that the audit meant debt forgiveness for many was around the corner.

Banks, insurers, debt collectors and hedge funds involved in the trusts' operations tried to block the accord. They argued that Florida-based VCG Securities, which holds equity slices of the National Collegiate trusts, had no right to hammer out the agreement with the federal consumer bureau. Donald Uderitz, who runs VCG, didn't respond to an email, text message and voicemail seeking comment. Marisol Garibay, a spokesperson for the consumer bureau, declined to comment.

Hundreds of thousands of borrowers collectively owe billions of dollar to the trusts, which are among the nation's largest owners of private student debt. The loans, made more than a decade ago, have ranked among the worst-performing student loans ever packaged into securities. Of the original $12 billion in loan principal bundled into the trusts, nearly half was in default at the time of the 2017 settlement.

Uderitz has tried for years to change how the trusts collect from borrowers. One idea involved purchasing loans, taking a cut, and then striking deals with borrowers who'd pay less than what they owed. Uderitz has been unable to convince other investors in the trusts that he's acting in their best interests.

Money managers Angelo Gordon & Co., Waterfall Asset Management, One William Street and Libremax Capital -- which collectively hold more than $1.8 billion in notes issued by the National Collegiate trusts -- have fought Uderitz in federal and state courts. Their lawyer, Michael Hanin, a partner at Kasowitz Benson Torres LLP, said the consumer bureau's deal with the trusts would have trampled their rights.