CFPB Suffers First Loss After Seila Law

One of the great ironies of the Supreme Court’s decision in Seila Law v. CFPB, in which the Supreme Court held that the Consumer Financial Protection Bureau’s (CFPB) structure was unconstitutional, is that it effectively provided no relief to Seila Law, the party that took the case all the way to the Supreme Court. On remand, the Ninth Circuit held that the CFPB’s case against Seila Law could continue. Now, for the first time, a court has held that a pending CFPB enforcement action must be dismissed because of that 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 special purpose Delaware statutory trusts that own $15 billion of private student loans (the NCSLTs or Trusts), finding that the agency lacked the authority to bring suit when it did; that its attempt to ratify its prior action came too late; and that based on its conduct, the CFPB could not benefit from equitable tolling. In doing so, the court avoided ruling on a more substantial question with greater long-term implications for the CFPB and the securitization industry—whether statutory securitization trusts are proper defendants in a CFPB action.

In Seila Law, the Supreme Court held that Congress’s decision to establish the CFPB as an agency headed by a single director removable by the President only for cause violated separation-of-powers principles. But it also held that because “the CFPB Director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority[,] [t]he agency may therefore continue to operate . . . .” Going forward, therefore, the CFPB retains all of its powers and authorities, but the President can remove the Director at any time and for any reason. But what about pending cases, including the CFPB’s action against Seila Law? The Supreme Court remanded Seila Law for the lower courts to decide whether the CFPB had validly ratified the decision to bring the 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 bring the lawsuits. The Ninth Circuit ultimately upheld the CFPB’s suit against Seila Law, and other courts had—until Friday—similarly upheld the CFPB’s pending enforcement actions.

Which brings us to Friday’s decision in the CFPB’s case against the NCLTs. 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 responsible for various collection practices of the loan servicers servicing the loans owned by the Trusts. Along with the complaint, the CFPB filed a proposed consent judgment, which the defendant Trusts purportedly consented to. Shortly after the case was filed, however, various trust-related parties moved to intervene and opposed entry of the proposed consent judgment, arguing that the attorneys who executed it on behalf of the Trusts lacked the authority to do so. After discovery, the district court denied the motion to enter the proposed consent judgment, finding that the attorneys who executed it were not authorized 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.

After the district court declined to enter the proposed consent judgment, the intervenors moved to dismiss the complaint on various grounds. The intervenors argued that the Trusts—which the complaint recognized were special purpose vehicles with no employees and that relied entirely on third-party service providers—were not “covered persons” subject to the CFPB’s enforcement authority for alleged unfair, deceptive, or abusive acts or practices (UDAAP). The intervenors argued that because the Trusts lacked employees, they could not “engage” in the various activities that define a “covered person.” This argument had broad implications for the CFPB’s authority over similar securitization trusts. The intervenors also argued that Director Kraninger’s ratification of the decision to file the complaint—which came more than three years after the CFPB’s discovery of the purported violations—was untimely and therefore invalid, and that equitable tolling did not apply to save the CFPB’s case.

Last Friday, the court agreed with the second argument. First, the court noted that “there is no question that the Bureau initiated this action against the Trusts at a time when its structure violated the Constitution’s separation of powers,” and that a valid ratification of the decision to file suit was therefore a necessary prerequisite for the suit to continue. Under Third Circuit precedent, for a ratification to be valid, the party doing the ratification must have the power to do the act ratified (here, filing a lawsuit against the Trusts) at the time of ratification. Accordingly, “ratification is, in general, not effective when it takes place after the statute of limitations has expired.” The CFPB did not dispute that Director Kraninger’s ratification came outside the three-year statute of limitations period for UDAAP claims, but argued that the ratification was valid because equitable tolling should be applied to save its claims.

The district court disagreed, finding that the CFPB did not diligently pursue its rights in the case. The district court focused on the fact that the CFPB “could not identify a single act that it took to preserve its rights in this case in anticipation of the constitutional challenges” that came to pass. The court also noted that there was a dispute as to whether the lawsuit itself had been filed within the statute-of-limitations period, further suggesting that the CFPB did not diligently pursue its rights. And finally, the court noted that the CFPB had not identified any facts suggesting it had pursued the litigation against the Trusts diligently 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 impacted the court’s assessment of the CFPB’s entitlement to equitable relief.

The court’s decision may impact other pending CFPB enforcement actions where ratification occurred outside the statute-of-limitations period. But the true impact to the CFPB—and to the securitization industry more broadly—would have come from a decision regarding the “covered person” issue, either affirming or rejecting the agency’s position that securitization trusts can be held liable under the CFPB’s UDAAP authority for actions taken in the trusts’ name by third parties. Here, the district court chose not to address the issue. But the court did note that it “harbors some doubt that the Trusts are ‘covered persons’ under the plain language of the statute,” suggesting that the CFPB may face an uphill battle in asserting such authority in the future.