STUDENT LOAN TRUSTS
CFPB v. National Collegiate Master Student Loan Trust
Date: March 19, 2024
Issue: Whether student loan trusts are subject to the Consumer Financial Protection Bureau’s enforcement authority.
Case Summary: In a 3-0 decision, a Third Circuit panel concluded student loan trusts are subject to Consumer Financial Protection Bureau (CFPB) enforcement under the Consumer Financial Protection Act (CFPA).
Between 2003 and 2007, there was a massive uptick in securitized assets, partly due to the privatization of student loans. During this period, fifteen trusts (the trusts) were formed “for the narrow purpose of acquiring and servicing a sizable portfolio of student loans.” Since formation, the trusts have amassed over 800,000 private loans. In 2014, CFPB issued a civil investigative demand (CID) to each trust for information on collections lawsuits brought against borrowers for defaulted student loans. In 2017, CFPB initiated enforcement proceedings against the trusts. The parties reached a settlement and asked the court to enter a consent decree. However, the court declined to do so.
In 2017, CFPB sued the trusts alleging its deals with debt servicers to collect on student loans led to activities that violated debt collection rules. CFPB alleged that the trusts sued consumers for debts the Trusts could not prove were owed, and the Trusts filed false and misleading affidavits. In 2020, the lawsuit was initially dismissed following the U.S. Supreme Court’s decision in Seila Law v. CFPB. In Seila Law, the Supreme Court held that CFPB’s removal provision unconstitutionally insulated the director of the CFPB from the president’s removal authority. The CFPB’s removal authority required that the director of the CFPB be removeable by the president only for inefficiency, neglect of duty or malfeasance. Following Seila Law, the district court ruled this case needed to be ratified because CFPB initiated the action with a constitutional deficiency.
CFPB filed its amended complaint emphasizing the trusts are “covered persons” who engaged in debt collection and are thus subject to the CFPA. The trusts and several intervenors moved to dismiss, arguing they are not covered persons under the statute and the suit was untimely. In December 2021, the district court ruled the CFPB has authority to sue securitization trusts. Under the CFPA, the bureau may prevent a covered person or service provider from engaging in Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) in any transaction where a consumer financial product or service is offered. The court found that the trusts were “covered persons” subject to UDAAP enforcement because they engaged in servicing and collections activities through third-party providers.
On appeal, the Third Circuit affirmed, concluding the trusts were “covered persons” under the CFPA. According to the panel, a “covered person” in the CFPA is any person that engages in offering or providing a consumer financial product or service. The panel reasoned that the CFPA lists trusts as an example of a covered person, and servicing loans are listed as an example of a financial product or service. Further, the trusts’ agreements explicitly state they engage in student loan servicing and debt collection. For these reasons, the panel concluded the trusts are within CFPB’s enforcement purview because they engage in a known consumer financial product or service.
Turning to the statute of limitations, the panel concluded the CFPB did not need to ratify this action before the statute of limitations had run. The trusts argued the CFPB director ratified this lawsuit after the statute of limitations had run, and thus the lawsuit was untimely. In reaching its decision, the panel relied on the U.S. Supreme Court’s decision in Collins v. Yellen. In Collins, the Court ruled actions taken by an improperly insulated director are not void and do not need to be ratified, unless a plaintiff can show the removal provision harmed him. While the trusts claimed an unconstitutional provision violating the separation of powers caused them harm, the panel determined a mere allegation that harm occurred is not enough. The panel declared: “there is no indication that the unconstitutional limitation on the president’s authority harmed the trusts.”
Bottom Line: CFPB has not yet indicated whether it will seek en banc review.
Documents: Motion
