In a case involving the federal Consumer Financial Protection Bureau (CFPB) and a group of asset securitization trusts, the U.S. Court of Appeals for the Third Circuit recently held that the defendant trusts were "covered persons" under the federal Consumer Financial Protection Act (CFPA), and rejected the defendant trusts' arguments that the CFPB failed to ratify its action before the statute of limitations had run.
A copy of the opinion is available at: Link to Opinion
The CFPB initiated enforcement proceedings against the trusts for alleged violations related to servicing and collecting on student loans, which the trusts had contracted out to third parties. The Trusts had no employees, and the trustee was "empowered to 'act on behalf of the Trust[s]," including through "Administration Agreements" and "Servicing Agreements" with third parties. The third parties would "perform the duties of the trusts as well as the duties and obligations" of the trustee, as well as "provide and perform certain services such as borrower communications, procedures for delinquency and default, and disbursement", "conduct collections", and "oversee collection lawsuits against borrowers in the name of the Trusts."
The CFPB issued a civil investigative demand (CID) on each defendant trust "for information on collections lawsuits brought against borrowers for defaulted on student loans". The CFPB eventually initiated enforcement proceedings in 2017. The parties settled the allegations, but the trial court declined to enter the related consent decree, and the CFPB filed this action.
As you may recall, the Supreme Court of the United States in 2020 held that the CFPB's "for cause" removal provision "unconstitutionally insulated the Director of the CFPB from the president's removal authority". Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). The SCOTUS concluded that "[t]he provisions of the Dodd-Frank Act bearing on the CFPB's structure and duties remain fully operative without the offending tenure restriction," and that "if the CFPB Director did not effectively ratify the underlying suit, the petition had to be dismissed."
In addition, the Supreme Court of the United States in 2021 held that the similar "for cause" removal provision for the director of the Federal Housing Finance Authority (FHFA) was also unconstitutional. Collins v. Yellen, 594 U.S. __ (2021). However, the SCOTUS declined to declare all actions by the FHFA's director to be void ab initio, ruling instead that "[a]ll the officers who headed the FHFA during the time in question were properly appointed. Although the statute unconstitutionally limited the President's authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA as void." Id. The SCOTUS also rejected that argument that "agency actions are void unless ratified by an Acting Director who was removable at will by the President." Id.
The defendant trusts argued that they were not "covered persons" under the CFPA, and that the CFPB's action was untimely because it was initiated when the CFPB director was unconstitutionally insulated from presidential removal and ratified after the statute of limitations had expired.
The trial court ultimately rejected the timeliness argument, holding that "[t]his suit would have been filed even if the director had been under presidential control. It has been litigated by five directors of the CFPB, four of whom were removable at will by the President. And the CFPB did not change its litigation strategy once the removal protection was eliminated. This is strong evidence that this suit would have been brought regardless. Thus, the CFPB's initial decision to bring this suit was not ultra vires."
The trial court also held that the defendant trusts were "covered persons" under the CFPA. As you may recall, 12 U.S.C. § 5531 provides that the CFPB may bring enforcement actions to "prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice," and a "covered person" is defined as "any person that engages in offering or providing a consumer financial product or service." The trial court found that this definition was "broad enough to encompass actions taken on a person's behalf by another, at least where that action is central to his enterprise."
On appeal, the Third Circuit agreed with the lower court that the trusts were "covered persons" under the CFPA because they were engaged in offering or providing a consumer financial product or service.
First, the Court noted that trusts are explicitly included as "persons" under the CFPA. 12 U.S.C. § 5481(19). Similarly, under § 5481(15), a "financial product or service" includes "extending credit and servicing loans."
Second, the Third Circuit examined whether the defendant trusts were "engaged" in offering or providing consumer financial products or services. Parsing various case law and dictionary definitions of the word "engage", and applying these definitions to the stated purposes and activities of the defendant trusts in their trust agreements, the Appellate Court concluded that "[t]he 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 CFPA because they 'engage' in a known 'consumer financial product or service' and are necessarily subject to the CFPB's enforcement authority."
The Third Circuit also held that the CFPB was not required to ratify the action before the statute of limitations had run, following Collins v. Yellen as well as CFPB v. Law Offices of Crystal Moroney, P.C., 63 F.4th 174 (2d Cir. 2023), and Kaufmann v. Kijakazi, 6 32 F.4th 843 (9th Cir. 2022). The Third Circuit concluded that there was no indication that the unconstitutional limitation on the President's authority to remove the CFPB Director harmed the Trusts, and thus no need for ratification.
In sum, the Third Circuit held that (1) the defendant trusts "are covered persons subject to the CFPA's enforcement authority because they 'engage' in the requisite activities"; and (2) "the CFPB did not need to ratify this action before the statute of limitations had run."
Ralph T. Wutscher
Maurice Wutscher LLP
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Chicago, Illinois 60602
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Email: rwutscher@MauriceWutscher.com
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