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Federal Court Holds That Student Loan Trusts Are Subject to CFPB Enforcement Authority: What This Means for Consumer Securitizations and Other Whole Loan Buyers | Cadwalader, Wickersham & Taft LLP

Federal Court Holds That Student Loan Trusts Are Subject to CFPB Enforcement Authority: What This Means for Consumer Securitizations and Other Whole Loan Buyers | Cadwalader, Wickersham & Taft LLP
Written by Publishing Team

On December 13, 2021, Judge Stefanos Bibas, visiting judge in the US District Court for the Delaware District of the US Court of Appeals for the Third Circuit, denied a request to dismiss a lawsuit brought by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) in Consumer Financial Protection Bureau Against Collective National Student Loan Funds, allowing the enforcement action to proceed directly against the National Group Student Loan Trust Funds (“Trusts”). In allowing the action, the court ruled that the trusts were “covered persons” under the Consumer Financial Protection Act (“CFPA”) despite having no employees, contracting private butlers and service providers, and collecting student loans. As shown below, this acquisition has wide-ranging implications for the secondary market in consumer loans, including securitization and other entire loan buyers.

background

The trusts hold more than 800,000 private student loans through 15 different Delaware statutory funds that were set up between 2001 and 2007, totaling about $12 billion. The loans were originally given to students by private banks. The funds provided financing for student loans by selling banknotes to investors in securitization transactions. Trusts have also provided servicing and collection of these student loans by engaging third-party service providers. However, trusts themselves are passive, special purpose entities that lack staff or internal management. Instead, for the trusts to function, it relied on several interlocking trust-related agreements with several third-party service providers—among other things—to administer each of the trusts, determine the relative priority of economic interests in the trusts, and service the trusts. loans.

On September 18, 2017, the CFPB filed suit against Trusts in Delaware Federal Court, alleging that the Trusts had violated the CFPA by engaging in unfair and deceptive practices in connection with the servicing and collection of student loans. Although the CFPB acknowledged that the alleged misconduct resulted from actions taken by the Trusts’ servants and subsidiary service providers in the context of debt-collection activities – rather than from any actions taken by the trusts themselves – the CFPB only mentioned the Trusts as defendants.

Court allows CFPB case to begin

The CFPB’s action against the funds has been pending in federal court in Delaware since 2017. After initial petitions were approved to dismiss the case, the court allowed the CFPB to file an amended complaint. The trusts and various interveners in the procedure moved to dismiss the amended complaint, arguing that the trusts are not “covered persons” under the CFPA because they are “passive securitization instruments that take no action in connection with student loan servicing or debt collection” and, therefore, are not subject to to the CFPB enforcement authority.

Under the Fire Act, the Bureau may take enforcement action to “prevent a covered person or the Service Provider from committing or engaging in an unfair, deceptive or abusive act or practice.” A “Covered Person” is defined by the CFPA as:

“(a) any person involved in offering or providing a financial product or service to consumers; and

(b) any subsidiary of a person described in subparagraph (a) if such subsidiary acts as a service provider for that person.”

On December 13, 2021, the court denied the motion to dismiss the amended complaint. The court formulated the legal question before it as follows: “Would a person ‘engage’ in an activity if they contracted with a third party to do that activity on their behalf?” Turning first to the obvious meaning of the word “engage,” the court concluded that “participation” means “to engage in any business” or “to enter into or employ a person in a proceeding.” The Court concluded that “the definition is broad enough to include actions taken by another on behalf of a person, at least when such action is central to his enterprise.” For example, “If a dairy farmer contracts with a farm worker to milk his cows and does not perform that function himself, it is still in the milking business or in the business.” Thus, trusts also “got into the business” of debt collection and loan servicing when they contracted servants and servants to collect their debts and service their loans.” As such, the Court held that trusts itself were “persons covered” under the Anti-Corruption Act, and the CFPB’s lawsuits against them can proceed.

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The court’s ruling that a securitization fund is a “covered person” under the Anti-Corruption Act (CFPA) is noteworthy. Under the CFPA, a covered person may not “offer or provide a consumer with any financial product or service that is inconsistent with the Federal Consumer Financial Act,” a violation of[e] Consumer Federal Financial Act “or” participation in any unfair, deceptive or abusive act or practice. Canada Consumer Protection Act empowers the CFPB and state prosecutors to sue people covered by the federal consumer financial law for damages, damages, injunctions, and civil penalties of up to $1,000,000 for each day the violation continues. Thus, the court ruling creates A new line of potential exposure to entities, such as securitization funds and other full-fledged loan buyers, that obtain consumer loans either on the basis of retained service or entering into a service agreement with a third party acting as an independent contractor.

However, it is important to note the court’s judgment limits as well. The court did not address to what extent and under what legal theories the trusts may be responsible For wrongful acts of the servant under the Anti-Corruption Law. Specifically, the court held that its ruling did not determine whether common law principles of vicarious liability are available under the Financial Corruption Prevention Act (CFPA) to attribute the actions of a servant to a covered person.

We will continue to monitor this and other action for significant legal developments under the CFPA that affect the secondary market.

1 no. 17-1323, ECF No. 380 (d. December 13, 2021).

2 To read more about this history, We see Elaine Holloman et al.And CFPB’s claim against student loan credits dismissed, Cadwalader, Wickersham & Taft LLP (April 1, 2021), https://www.cadwalader.com/resources/clients-friends-memos/cfpb-suit-against-student-loan-trusts-dismissed#_ftnref7; Elaine Holloman et al.And Moving Forward in Consumer Financial Protection Bureau Student Loan Litigation: What This Means for Securitization, Cadwalader, Wickersham & Taft LLP (November 2, 2018), https://www.cadwalader.com/resources/clients-friends-memos/forward-movement-in-the-bureau-of-consumer-financial-protections-loan The student – litigation – what does this mean for securitization?

3 National Undergraduate Student Loan Trust, number. 17-1323, ECF No. 380 (d. December 13, 2021) (“request”) 8 o’clock.

4 15 USC § 5531(a) (emphasis added).

5 12 USC § 5481 (6).

6 Dial from 8-10. Intervenors also argued that the action came too late. Identification card. at 5-6. They argued that the CFPB failed to certify the lawsuit before the statute of limitations had expired, causing the procedure to run out of time. Identification card.

In addressing this argument, the Court concluded that the ratification of the litigation was not necessary under the Supreme Court’s ruling of June 23, 2021 in Collins vs. Yellen, which held that the unconstitutional removal restriction does not invalidate the agency’s action, and therefore does not require ratification. Identification card. at 5 (quoting from Collins vs. Yellen, 141 S. i. 1761, 1788 (2021)). Because the CFPB’s litigation procedure did not require certification, the Court held that this suit was timely because it was filed within three years from the date the CFPB discovered the alleged violations, as required by the CFPA. Identification card. in 6; see also 12 USC § 5564(g) (1).

7 Order at 8 (citing the Oxford English Dictionary (2d ed. 2000)).

8 Identification card.

9 Identification card.

10 Identification card.

11 Identification card in 8-9.

12 Identification card. in 10.

13 12 USC § 5536.

14 order for 10.

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