Third Circuit Says Student Loan Trusts Are "Covered Persons" Subject to the CFPA
In Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trust, et. al., a three-judge panel of the United States Circuit Court of Appeals for the Third Circuit (the "Court") considered two issues: (i) whether the fifteen appellant trusts (the "Trusts") were "covered persons" subject to the Consumer Financial Protection Act (the "CFPA") and (ii) whether the original lawsuit had to be ratified because the action was initiated while there was a constitutional deficiency within the CFPB, the agency established by the CFPA.
The Court found that (i) the Trusts were "covered persons" subject to the CFPA and (ii) the CFPB did not need to ratify the original lawsuit. The Court remanded the case to the District Court.
As to the first issue, the Court emphasized the importance of analyzing the plain language of the statute, focusing on 12 U.S.C. § 5531(a), which delineates the CFPB’s powers. The Court said that key terms such as "person," "covered person" and "consumer financial product[s] and service[s]" were carefully defined within the statutory framework. Under the statute, a "covered person" was broadly defined as any entity offering or providing consumer financial products or services. Trusts were explicitly mentioned in the statute. The Trusts’ at issue (i) categorized themselves as unincorporated associations under Delaware law and (ii) outlined their engagement in activities related to loan acquisition, administration, servicing and debt collection. The Court determined that the Trusts fell within the purview of the CFPB’s enforcement authority, finding that the Trusts "engaged in" activities in consumer financial products and services.
As to the second issue, the Court revisited the findings of the Supreme Court of the United States in Collins v. Yellen which established that actions taken by an improperly insulated director are not void unless they cause harm. (See related coverage.) The core issue the Court analyzed was whether the insulation provision caused harm. After surveying the approaches taken in the U.S. Courts of Appeals for the Second Circuit and the Ninth Circuit, the Court determined that the Trusts failed to provide sufficient evidence of a demonstrable, compensable harm that would show an injury exists. The Court found that there was no need to remand the ratification issue because there was no indication that the unconstitutional limitation that existed in the CFPB harmed the Trusts.
Commentary
The detailed analysis provided by the Court offers insights into the intricacies of regulatory compliance within the financial sector. Notably, this is the first appellate opinion to interpret the term “engage in” as used in the CFPA’s definition of “covered person” – which is the linchpin to much of the CFPB’s authority.
The Court’s determination that a securitization trust is a “covered person” under the CFPA is significant and carries substantial implications for any secondary market purchaser of a consumer loan, including passive securitization trusts, other whole loan buyers, hedge funds and institutional investors. The Court’s decision leaves open the possibility that all of these types of entities could be deemed “covered persons” and therefore be subject to the CFPB’s enforcement jurisdiction to the extent they acquire consumer loans either on a servicing retained basis or entering into a servicing agreement with a third-party servicer acting as an independent contractor. The CFPA authorizes the CFPB and state Attorneys General to bring lawsuits against covered persons for violating federal consumer financial law and to seek damages, restitution, injunctions and civil money penalties for each day a violation continues. This decision also will likely undermine the certainty of contract terms that is a foundational core of the structured finance industry, which has long operated on the premise that transaction parties are responsible for their own malfeasance and, barring special circumstances, will not be held accountable for the misconduct of other parties to the securitization transaction.
The decision may allow the CFPB to resume its litigation against the trusts in Delaware federal court. This decision is likely to be appealed by the trusts, which may open the door for the Supreme Court to weigh in on this relatively untested concept.
The Court’s decision did not address to what extent and under what legal theories the trusts may be liable for the unlawful acts of the servicer under the CFPA. Specifically, the decision does not address whether common-law principles of vicarious liability are available under the CFPA to attribute the acts of the servicer to a covered person.