CFPB suffers its first defeat after Seila law

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One of the great ironies of the Supreme Court decision in Seila Law v. CFPB, in which the Supreme Court ruled that the structure of the Consumer Financial Protection Bureau (CFPB) was unconstitutional, is that it did not effectively provide any relief to Seila Law, the party who brought the case to court. supreme. In pre-trial detention, the Ninth Circuit ruled that the CFPB case against Seila Law could continue. Now, for the first time, a court has ruled that an ongoing CFPB enforcement action must be dismissed due to this constitutional infirmity. On March 26, 2021, a federal district court dismissed the CFPB’s action against the National Collegiate Student Loan Trusts, a series of fifteen Delaware special purpose statutory trusts that hold $ 15 billion in private student loans (NCSLTs or Trusts), considering that the agency did not have the power to bring an action when it did so; that his attempt to ratify his prior action came too late; and that because of its behavior, the CFPB could not benefit from fair pricing. In doing so, the court avoided ruling on a more substantive issue with greater long-term implications for the CFPB and the securitization industry, namely whether statutory securitization trusts are appropriate defendants in a CFPB action. .

In Seila Law, the Supreme Court ruled that Congress’ decision to establish the CFPB as an agency headed by a single director who can be dismissed by the president only for cause violated the principles of the separation of powers. But it also ruled that because “the protection against the dismissal of the director of the CFPB is dissociable from the other statutory provisions relating to the authority of the CFPB[,] [t]The agency can therefore continue to operate. . . . “In the future, therefore, the CFPB retains all its powers and authorities, but the president can dismiss the director at any time and for any reason. But what about pending cases, including the CFPB action against Seila law? Supreme Court has referred Seila Law lower courts to decide whether the CFPB validly ratified the decision of Seila action. The CFPB, in turn, filed formal ratifications in all of its other pending enforcement actions, indicating that then director Kathleen Kraninger had ratified the decision to prosecute. The Ninth Circuit finally upheld the CFPB’s lawsuit against Seila Law, and other courts had, until Friday, similarly upheld CFPB’s ongoing enforcement measures.

Which brings us to Friday’s ruling in the CFPB v NCLT case. The case was filed against the trusts in 2017, when the CFPB was headed by then-director Richard Cordray. The complaint sought to hold the trusts accountable for the various collection practices of loan managers managing loans held by the trusts. Along with the complaint, the CFPB filed a draft consent judgment, to which the defendant Trusts allegedly consented. Shortly after the case was filed, however, various parties related to the trust sought to intervene and objected to the entry of the proposed consent judgment, arguing that the lawyers who had executed it on behalf of the trusts did not have the power to do so. After the discovery, the district court dismissed the motion to register the proposed consent judgment, finding that the attorneys who executed it were not authorized by the appropriate parties to the trust (and that, as regards the minus some of the trusts, the CFPB knew that the appropriate parties had not consented). The CFPB therefore found itself pleading a case that it believed to be settled.

After the district court refused to render the proposed consent judgment, the interveners decided to dismiss the complaint on various grounds. Stakeholders argued that the trusts – which the complaint recognized as special purpose vehicles without employees and which relied entirely on third-party service providers – were not “covered persons” subject to the enforcement authority of the CFPB for allegedly unfair, deceptive or abusive acts. or practices (UDAAP). Stakeholders argued that because trusts lacked employees, they could not “engage” in the various activities that define a “covered person”. This argument had broad implications for the authority of the CFPB over similar securitization trusts. Stakeholders also argued that Director Kraninger’s ratification of the decision to file the complaint – which came more than three years after the CFPB discovered the alleged violations – was untimely and therefore invalid, and that the fair toll does not did not apply to save the cause of the CFPB.

Last Friday, the court accepted the second argument. First, the tribunal noted that “there is no doubt that the Bureau initiated this action against the Trusts at a time when its structure violated the separation of powers provided for in the Constitution” and that a valid ratification of the decision of filing a complaint was therefore a necessary prerequisite. for the costume to continue. Under the Third Circuit precedent, for a ratification to be valid, the party carrying out the ratification must have the power to make the act ratified (here, take legal action against the trusts) at the time of ratification. Thus, “ratification is not, in general, effective when it occurs after the expiration of the limitation period”. The CFPB did not dispute that Director Kraninger’s ratification was outside the three-year statute of limitations for UDAAP claims, but argued that the ratification was valid because a fair toll should be applied to save his claims. .

The district court disagreed, finding that the CFPB had not diligently exercised its rights in the case. The district court focused on the fact that the CFPB “could not identify a single act that it has taken to preserve its rights in this case in anticipation of the constitutional challenges” that have taken place. The court also noted that there was a dispute over whether the lawsuit itself had been filed within the statute of limitations, further suggesting that the CFPB had not diligently exercised its rights. And finally, the court noted that the CFPB had not identified any facts to suggest that it had diligently pursued the litigation against the trusts once the case was filed. Although the court made no reference to the rejected proposed consent judgment, it seems likely that the history of the case had an impact on the court’s assessment of the CFPB’s right to equitable relief.

The court’s decision may have an impact on other CFPB enforcement actions pending where the ratification took place outside the statute of limitations. But the real impact on the CFPB – and on the securitization industry more broadly – would have come from a decision on the “covered person” issue, affirming or rejecting the agency’s position that securitization may be held liable under the UDAAP authority of the CFPB for actions taken on behalf of the trusts by third parties. Here, the district court chose not to address the issue. But the court noted that it “harbors doubt that trusts are ‘covered persons’ under the plain language of the law,” suggesting the CFPB could face an uphill battle to assert such authority. in the future.

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