Asset-Backed Securities Face New Risks From a US Court Decision

A federal court decision has raised new legal risks for a corner of Wall Street that bundles consumer loans into asset-backed securities.

A US appeals court last week for the first time upheld the power of the Consumer Financial Protection Bureau to sue trusts that issue the securities if debt-collection companies or others they hire run afoul of the law. The trusts outsource the role of collecting on the loans that they package into bonds and sell off to investors.

The precedent could boost borrowing costs for firms that use securitizations by spurring investors to demand higher yields to compensate ...