Overview
On March 19, 2024, the United States Court of Appeals for the Third Circuit delivered a precedential opinion with far-reaching implications in the case of the Consumer Financial Protection Bureau (CFPB) v. National Collegiate Master Student Loan Trust, et al. The decision, if upheld, would expand the CFPB's so-called "covered persons" enforcement authority under the Consumer Financial Protection Act (CFPA); it also confirms the CFPB did not have to ratify its enforcement action against the Trusts within the statute of limitations period following a Supreme Court ruling establishing the President’s inability to remove the CFPB director at will violated the separation of powers.
Background of the Case
The case involves a dispute between the CFPB and multiple National Collegiate Student Loan Trusts (the Trusts) entities involved in acquiring, pooling, and securitization of private student loan debts. The CFPB initiated enforcement actions against the Trusts, alleging violations related to collecting and servicing of student loans. Following litigation in district court, the Trusts appealed to the Third Circuit asking it to determine:
- Whether the Trusts qualify as "covered persons" under the CFPA, thereby subjecting them to the CFPB's enforcement authority; and
- Whether the CFPB was required to ratify within the statute of limitations period the enforcement action initiated against the Trusts given the Supreme Court’s ruling that the President's inability to remove the CFPB Director at will was unconstitutional.
The Court's Determination
Covered Persons Under the CFPA: The Third Circuit affirmatively ruled that the Trusts fall within the definition of "covered persons" regulated by the CFPB. The court highlighted that the Trusts' engagement with third-party services for debt collection and loan servicing positions them squarely within the ambit of entities offering or providing consumer financial products or services. This interpretation expands the industry’s long-held understanding that legal formalities were dispositive by focusing instead on the operational realities of parties’ contractual arrangements.
CFPB's Enforcement Authority and Constitutional Questions: The court found no requirement for the CFPB to ratify its enforcement action against the Trusts following the Supreme Court's resolution of the agency's structural constitutional issue. Relying on the Supreme Court's decisions in Collins v. Yellen and Seila Law LLC v. CFPB (finding that limiting the President only to “for cause” termination of the CFPB Director was unconstitutional), the court found the CFPB’s post-Selia law actions are not void due, absent a demonstration of “specific harm” caused by the identified constitutional defect that the Trusts had not shown.
Implications for Financial Institutions and Service Providers
This decision has significant implications for consumer financial services entities, service providers, and other firms broadly connected to the consumer finance industry.
It expands the CFPB's regulatory and enforcement powers to legal entities such as the Trusts, which solely engage in consumer financial services through contractual arrangements and operational partnerships. Financial institutions and service providers should consider closely reviewing their operational structures and contractual relationships to ensure compliance with the Third Circuit’s broad interpretation of "covered persons" under the CFPA.
Although this ruling applies only in the Third Circuit and remains subject to appeal en banc or a cert. petition to the Supreme Court, the decision expands “covered person” jurisdiction to securitization trusts squarely and could upend decades of practice for how the secondary market manages securitized consumer finance assets. The decision also could lay the foundation for the CFPB to claim jurisdiction over the actions of other entities that leverage arms-length, third-party servicing and debt collection arrangements, such as whole loan buyers that acquire consumer loans on a servicing-retained basis or enter into servicing agreements with third-party services acting as independent contractors.
Accordingly, until and unless this decision is reversed on appeal and especially if continuing to operate in the Third Circuit, we recommend clients that have been leveraging trust arrangements, buy whole loans or otherwise rely on similar legal formalities, in part, to insulate themselves from CFPB enforcement jurisdiction to consider the following:
- Enhance Compliance Management Systems. Ensure that the trust or other purchasing entities themselves have policies and procedures in place to interpret and apply existing consumer finance laws applicable to their servicing and/or debt collection activities, including, but not limited to, those identified in the underlying lawsuit brought by the CFPB in this case;
- Evaluate existing collections disputes. Consider re-examining any on-going collections lawsuits servicers have filed on their behalf to ensure they raise no issues similar to those the CFPB identified in the underlying case here;
- Consider Looking back. Consider a comparable look-back review of closed cases within the applicable statute of limitations period; and
- Review Licensing Strategies. Consider reviewing their licensing arrangements and/or entity structures, as this decision could highlight for state regulators the potential absence of such licenses.
Given the CFPB's recent enforcement hiring push and the above areas of possible vulnerability, implementing robust compliance strategies and proactive measures to mitigate risk now is the best way to safeguard against the risk of increased CFPB scrutiny following the Third Circuit’s ruling in its favor.
