Federal Court Says Student Loan Trusts Are Subject to CFPB Enforcement Authority: What This Means for Consumer Securitizations and Other Whole Loan Buyers Cadwalader, Wickersham & Taft LLP


On December 13, 2021, Judge Stephanos Bibas, a visiting judge in the Delaware District Court of the United States Court of Appeals for the Third Circuit, dismissed a motion to dismiss a lawsuit brought by Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) in Consumer Financial Protection Bureau v. National Collegiate Master Student Loan Trusts, allowing the enforcement action to proceed directly against The National Collegiate Student Loan Trusts (the “Trusts”). In allowing the lawsuit, the court ruled that the trusts were “covered persons” under the Consumer Financial Protection Act (“CFPA”) despite the fact that they had no employees. and that they had contracted with special services and subcontractors to manage and collect student loans. As noted below, this participation has far-reaching implications for the secondary consumer loan market, including securitizations and other entire loan buyers.


The trusts hold more than 800,000 private student loans through 15 different Delaware statutory trusts created between 2001 and 2007, totaling approximately $ 12 billion. Originally, loans were granted to students by private banks. The trusts funded student loans by selling notes to investors in securitization transactions. The trusts also serviced and collected these student loans using third-party services. However, the trusts themselves are passive, purpose-built entities with no internal staff or management. Instead, to function, the trusts have relied on various nested trust agreements with several third-party service providers to, among other things, administer each of the trusts, determine the relative priority of economic interests in the trusts, and service the trusts. ready.

On September 18, 2017, the CFPB brought an action against the Trusts in Delaware federal court, alleging that the Trusts had violated the CFPA by engaging in unfair and deceptive practices in the administration and collection of student loans. Although the CFPB acknowledged that the alleged misconduct resulted from actions taken by the agents and deputy agents of the trusts in the course of their debt collection activities, rather than from any action taken by the trusts themselves, the However, CFPB only named the trusts as defendants.

The Court allows the CFPB to move forward

The CFPB action against the trusts has been pending in the Delaware federal court since 2017. After granting the initial motions to dismiss the case, the court allowed the CFPB to file an amended complaint. The Trusts and various interveners in the action requested that the amended complaint be dismissed, arguing that the trusts are not “covered persons” under the CFPA because they are “passive securitization vehicles that take no action. measure related to the servicing of student loans or the collection of debts ”and, therefore, are not subject to the executing authority of the CFPB.

Under the CFPA, the Bureau can take enforcement action “to prevent a covered person or the service provider to commit or engage in any unfair, deceptive or abusive act or practice. A “covered person” is defined by the CFPA as:

“(A) any person who offers or provides a financial product or service to consumers; and

(B) any company affiliated with a person described in subparagraph (A) if that affiliate is acting as a service provider for that person.

On December 13, 2021, the Court dismissed the motion to dismiss the amended complaint. The Court framed the legal question before it as follows: “Does a person ‘engage’ in an activity if he contracts with a third party to perform that activity on his behalf?” Turning first to the ordinary meaning of the word “engage”, the Court held that ““ engage ”means“ engage in an enterprise ”or“ engage or engage in an action. “The Court concluded that the” definition is broad enough to encompass actions taken on behalf of one person by another, at least when that action is at the heart of his business. For example, “if a dairy farmer contracts with a farm worker to milk his cows and never does this work himself, he is still employed in or in the cow milking business”. For example, trusts also “got into the business” of debt collection and loan servicing when they contracted with agents and subagents to collect their debts and service their loans. As such, the court ruled that the trusts themselves were “covered persons” under the CFPA and that the CFPB’s claims against them could be pursued.

Key points to remember

Noteworthy is the court’s ruling that a securitization trust is a “subject person” under the CFPA. Under the CFPA, a covered person cannot “offer or provide a consumer with a financial product or service that does not comply with the Federal Consumer Finance Act”, “violate[e] Federal Consumer Finance Act ”or“ engaging in an unjust, deceptive or abusive act or practice ”. The CFPA authorizes the CFPB and state attorneys general to sue covered persons for violating the federal consumer finance law and to seek damages, restitution, injunctions and civil fines up to up to $ 1,000,000 for each day of violation. The court ruling thus creates a potential new line of exposure for entities, such as securitization trusts and other whole loan buyers, who acquire consumer loans either on a retained service basis or enter into a contract. service with a third party provider acting as an independent contractor. .

However, it is also important to note the limitations of the Court’s judgment. The Court did not consider to what extent and under what legal theories trusts can be responsible for the unlawful acts of the duty officer under the CFPA. Specifically, the Court recognized that its decision did not decide whether the common law principles of vicarious liability are available under CEPA to attribute the acts of the maintenance worker to a covered person.

We will continue to monitor this and other action for significant legal developments under the CFPA affecting the secondary market.

1 n ° 17-1323, ECF n ° 380 (D. Del. 13 Dec. 2021).

2 For more on this story, see Ellen holloman et al., CFPB lawsuit against student loan trusts dismissed, Cadwalader, Wickersham & Taft LLP (April 1, 2021), https://www.cadwalader.com/resources/clients-friends-memos/cfpb-suit-against-student-loan-trusts-dismissed#_ftnref7; Ellen holloman et al., Forward Movement in Bureau of Consumer Financial Protection Student Loan Litigation: What It Means for Securitization, Cadwalader, Wickersham & Taft LLP (November 2, 2018), https://www.cadwalader.com/resources/clients-friends-memos/forward-movement-in-the-bureau-of-consumer-financial-protections-student-loan-litigation-what-this-means-for- securitization.

3 Nat’l Collegiate Master Student Loan Trust, n ° 17-1323, ECF n ° 380 (D. Del. 13 Dec. 2021) (“Ordinance”) at 8.

4 15 USC § 5531 (a) (emphasis added).

5 12 USC § 5481 (6).

6 Order at 8-10. Stakeholders also argued that the action was late. Identifier. to 5-6. They argued that the CFPB did not ratify the lawsuit before the statute of limitations expired, making the action time-barred. Username.

Addressing this argument, the Court concluded that ratification of the dispute was not necessary under the Supreme Court ruling of June 23, 2021 in Collins v. Yellen, who held that an unconstitutional restriction on travel does not invalidate an agency action and, therefore, does not require ratification. Username. to 5 (citing Collins v. Yellen, 141 S. Ct. 1761, 1788 (2021)). Since the CFPB’s lawsuit did not require ratification, the court ruled that this action was timely as it had been filed within three years of the date the CFPB discovered the alleged violations, such as the requires CFPA. Username. to 6; see also 12 USC § 5564 (g) (1).

7 Order at 8 (citing the Oxford English Dictionary (2nd ed. 2000)).

8 Username.

9 Identifier.

ten Identifier.

11 Username to 8-9.

12 Identifier. to 10.

13 12 USC § 5536.

14 Command at 10.


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