United States: Third Circuit Holds Securitization Trusts Can Be Subject To CFPB Enforcement Authority

In a long-awaited decision, the Third Circuit handed the Consumer Financial Protection Bureau ("CFPB" or "Bureau") a victory in the National Collegiate Student Loan Trust litigation that could have wide-reaching implications for market participants in the consumer financial services industry. In its March 19, 2024 opinion, a three-judge panel held that: (1) the National Collegiate Student Loan Trust entities ("Trusts") are "covered persons" subject to the CFPB's enforcement authority under the Dodd-Frank Act because they "engage" in consumer financial products or services—i.e., student loan servicing and debt collection; and (2) the CFPB did not need to ratify the underlying action before the statute of limitations had run despite the constitutional deficiency within the Bureau when the action was initiated.¹

Background on NCSLT Litigation

By way of background, the Trusts are 15 special purpose Delaware statutory trusts. From 2001 to 2007, the Trusts acquired and provided financing for over 800,000 private student loans with a principal amount of more than $15 billion through the issuance of approximately $12 billion in investor notes. In 2017, the CFPB sued the Trusts in federal court alleging that the Trusts, through the actions of their servicers and sub-servicers, engaged in unfair and deceptive debt collection and litigation practices. Along with the complaint, the CFPB filed a purported consent judgment that the CFPB represented to the court had been executed by the defendants. After various Trust-related parties intervened, the district court denied the CFPB's motion to enter the consent judgment, finding that the attorneys who executed it on behalf of the defendant Trusts were not authorized to do so by the proper Trust parties.

Subsequently, after the Supreme Court held that the CFPB's structure was unconstitutional because it was headed by a single director removable by the President only for cause, the district court dismissed the CFPB's case without prejudice, holding that the CFPB did not have the power to bring the case when it did due to its constitutional structural defect. After the CFPB's case was dismissed, three important things happened. First, the agency filed an amended complaint. Second, the Supreme Court decided Collins v. Yellen, which addressed the validity of the Federal Housing Finance Agency's actions while that agency was headed by a single director removable only for cause. Third, the CFPB's case against the Trusts was re-assigned to a new judge.

In December 2021, that new judge denied renewed motions to dismiss the case, making two key rulings in the process. First, the court ruled that Collins changed the law and held that "an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed," unless it can be shown that "the agency action would not have been taken but for the President's inability to remove the agency head." Applying that standard, the district court found that the removal restriction did not impact the CFPB's decision to bring and continue litigating its case against the Trusts.

Second, the district court ruled that, at least at the motion to dismiss stage, the CFPB had properly asserted claims against the 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 Dodd-Frank Act. The Dodd-Frank Act provides that the CFPB can only seek to enforce prohibitions against unfair, deceptive and abusive acts and practices ("UDAAP") against "covered persons," a term defined as anyone who "engages in offering or providing a consumer financial product or service." The Dodd-Frank Act does not, however, authorize a private right of action against "covered persons."

The Trust parties argued that as special purpose 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). 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 subject to the CFPB's enforcement authority.

The Trust-related parties then moved to certify both these issues—the CFPB's authority to bring the action notwithstanding its constitutional defect and whether the Trusts are "covered persons" subject to the Dodd-Frank Act's UDAAP prohibitions—for interlocutory appeal. In February 2022, the district court certified both issues for interlocutory appeal and stayed the case pending the resolution of that appeal. In May 2023, the case was argued before a three-judge panel of the Third Circuit.

The Trusts Are "Covered Persons" Subject to CFPB Enforcement Authority

In its March 19, 2024 opinion, the court first analyzed the plain language of the statute and found that Congress clearly intended trusts to be included as "persons" under the Dodd-Frank Act. Similarly, the court found that consumer financial products and services include "extending credit and servicing loans" and that the Trusts themselves acknowledged that they were formed to acquire private student loans, issue securitized notes and provide for the servicing of the loans, among other activities. Thus, according to the court, the Trusts "unambiguously" fall within the statute. Therefore, the primary statutory question at issue was whether the Trusts "engage" in consumer financial products or services. According to the court, "[i]f they do 'engage,' they are covered persons under the [Dodd-Frank Act]; if they do not, they do not fall within the purview of the [Dodd-Frank Act]."²

Because the Dodd-Frank Act's legislative history does not define the term "engage," the court looked at how this term has been applied in earlier cases. The court cited to earlier Supreme Court precedent, holding that that word "engaged" means "occupied," "employed" or "involved" in something.³ It also noted that this interpretation is consistent with colloquial and legal dictionaries defining "engage" and that the definition has remained consistent over time. The court then looked to the trust agreements for each Trust, noting that the agreements themselves state the purpose of the Trust is to "engage in" activities that include entering into trust-related agreements for the "administration of the Trusts and servicing of the Student Loans." The court concluded:

The Trust Agreement's purpose indicates that the Trusts engage in both student loan servicing and debt collection. As such, the Trusts fall within the purview of the [Dodd-Frank Act] because they "engage" in a known "consumer financial product or service" and are necessarily subject to the CFPB's enforcement authority.⁴

CFPB Ratification Was Not Required

The court then turned to the constitutional question of whether Bureau ratification of the underlying action was required before the statute of limitations expired. The Trusts argued that the underlying suit needed to be ratified by the CFPB's Director before the statute of limitations expired because it was initiated while the agency's structure was unconstitutional and that this creates a "here-and-now injury."⁵ The CFPB argued that ratification was not necessary under the Collins decision because the Bureau's director was properly appointed, and the problematic statutory provision did not cause harm to the Trusts.

The court opined that "actions taken by an improperly insulated director are not 'void' and do not need to be 'ratified' unless a plaintiff can show that the removal provision harmed him."⁶ With respect to harm, the court declined to find a link between the removal provision and the Trusts' case. Instead, the court agreed with the district court and found that the underlying action likely would have been brought regardless of a president's authority to remove the CFPB's Director because the Bureau's litigation strategy has been consistent across five directors—four of whom were removable at will. The court was not persuaded that the Trusts suffered an actual "compensable and identifiable harm."⁷ Thus, the court concluded, "There is no indication that the unconstitutional limitation on the President's authority harmed the Trusts."⁸

Market participants should carefully examine trust and related documents to attempt to reduce the risk that they could be covered persons under the Dodd-Frank Act.

Footnotes

1 CFPB v. Nat'l Collegiate Master Student Loan Trust et al., No. 22-1864 (3rd Cir. March 19, 2024).

2 Id. at 25.

3 Id. at 27.

4 Id. at 32.

5 Id. at 32.

6 Id. at 33.

7 Id. at 37.

8 Id. at 38.

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