Earlier this week, the Consumer Financial Protection Bureau (“CFPB”) won an important court ruling in a long-running case against student loan securitization trusts. The case has a long (and for the CFPB, somewhat ignoble) history. The CFPB first filed suit against 15 Delaware statutory student loan securitization trusts (the “Trusts”) in September 2017. The complaint alleged 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. As we’ve previously discussed, in an embarrassing setback, 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 (and that, with respect to at least some of the Trusts, the CFPB knew that the proper parties had not consented). The CFPB was therefore left to litigate a case that it thought it had settled. 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 structural defect. We discussed that ruling here.
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. That new judge recently denied the renewed motions to dismiss in 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. It is this aspect of the court’s ruling that may have broad ramifications for securitization 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 CFPB’s authorizing statute. That statute provides that the CFPB can only seek to enforce prohibitions against unfair, deceptive and abusive acts and practices against “covered persons,” a term defined as anyone who “engages in offering or providing a consumer financial product or service” (emphasis added). The Trust parties argued that as pass-through 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). When the district court first dismissed the CFPB’s claims for the constitutional reasons discussed above, the court noted that “it harbors some doubt that the Trusts are ‘covered persons’ under the plain language of the statute.” That comment, of course, was dicta, since the court had decided to dismiss the case on other grounds. But with a new judge assigned to the case, the district court came to a different conclusion. 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. Whether this holding withstands the scrutiny of further litigation, and whether other courts adopt its reasoning, will have important implications for both the CFPB and for the securitization industry more generally. We will continue to monitor this action and report noteworthy developments.