CFPB Suffers Embarrassing Court Loss

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) suffered an embarrassing setback in federal district court earlier this week, when a federal district judge denied the Bureau’s motion for entry of a consent judgment on the grounds that the proper party had not consented to entry of the judgment on behalf of the defendants. Back in September 2017, shortly before former Director Richard Cordray left the agency, the Bureau filed a complaint along with a consent judgment against 15 student loan securitization trusts (the “Trusts”). The complaint alleged that the Trusts, through servicers and sub-servicers, engaged in unfair and deceptive practices in connection with servicing and collection of private student loans. The action was filed the same day that the Bureau entered into an administrative consent order with one of the Trusts’ successor sub-servicers, Transworld Systems, Inc.

Oddly, rather than also enter an administrative consent order against the Trusts, the Bureau instead filed a complaint and motion for approval of a consent judgment in federal district court. The Bureau’s motion for entry of the proposed consent judgment stated only that the Bureau moved for the Court to approve and enter the judgment, which was described as having been “executed by Plaintiff [the CFPB] and Defendants National Collegiate Student Loan Trusts [the Trusts]”. The proposed consent judgment was signed by two attorneys from the law firm McCarter & English, LLP (“M&E”), purportedly on behalf of the Trusts. The motion said nothing about any dispute regarding M&E’s authority to act on behalf of the Trusts.

Within days of the Bureau’s filings, a number of Trust-related parties intervened in the matter to argue against entry of the proposed consent judgment on various grounds. Among those grounds was that the Owner Trustee of the Trusts had not consented to entry of the proposed consent judgment (because it believed the terms of the judgment violated the terms of the Trust agreements), and that the Trusts could only act through the Owner Trustee. In addition, with respect to one of the Trusts, the Trust instruments provided that consent of the Note Insurer to the Trust was also required for the Trust to enter into such a settlement.

After a lengthy period of discovery and briefing, the district court ruled that under the governing Trust documents and governing Delaware law, the Owner Trustee was the only party with the authority to bind the Trusts. The court found that the beneficial owners of the Trusts had initially directed the Owner Trustee to execute the proposed consent judgment, but the Owner Trustee refused to do so on advice of counsel that the beneficial owners’ instruction was invalid under the Trust agreements. The beneficial owners then instructed M&E to execute the proposed consent judgment. But because the Owner Trustee had not acted for the Trusts, the court held that M&E did not have the authority to agree to the proposed consent judgment on behalf of the Trusts.

In addition, the court found that, with respect to one of the Trusts, consent from the Note Insurer to the Trust was also required in order to bind the Trusts. The court noted that “the CFPB admits as much” and goes on to quote from the CFPB’s brief noting that the Note Insurer’s “approval does not appear to have been given in this case.”

In light of these findings, the district court denied the Bureau’s motion to enter the proposed consent judgment.

It is rare for a court to reject a proposed settlement in an enforcement action that is allegedly consented to by the government and the defendant. Typically, the entry of such judgments is a rubber stamp. It is probably rarer still for a court to find that a government agency “settled” a matter with parties that lacked authority to do so. This embarrassing outcome for the Bureau leaves it with contested litigation on its hands in a matter that it sought to settle years ago. In addition to denying the Bureau’s motion for entry of the proposed consent judgment, the district court has ordered the CFPB to respond to a pending motion to dismiss on the grounds that the Trusts are not “covered persons” and therefore not subject to the prohibition on unfair, deceptive and abusive acts or practices (UDAAP) in the CFPB’s organic statute. The CFPB’s response to that motion is due June 19.