One of the hallmarks of the CFPB’s enforcement actions has been its use of those actions to announce new legal standards. Navient attacks this enforcement strategy in its motion to dismiss a recent case brought against it by the CFPB. On January 18, 2017, the CFPB sued Navient, alleging a number of violations. The chief allegation is that Navient unlawfully “steered” consumers into resolving student loans defaults using forbearance instead of income-driven repayment plans (“IDB”), even in situations where IDB would have been allegedly better for consumers. The motion to dismiss briefing closed on May 15, 2017.
Navient’s main argument is that the CFPB cannot seek penalties against it for the alleged steering because no one had fair notice that steering, if it occurred, violated UDAAP before the enforcement action began. This is especially so when, as Navient points out, it was governed by the comprehensive rules, regulations, and contractual obligations that never even mention the conduct that the CFPB is suing over.
In addition, Navient argues that the CFPB is required to engage in rulemaking before imposing penalties on industry actors for alleged UDAAP violations. The CFPB is authorized under 12 U.S.C. § 5531(a) to seek fines and penalties against any entity that that engages in “an unfair, deceptive, or abusive act or practice under Federal Law.” Navient argues that “under Federal Law” means the CFPB must declare that conduct violates UDAAP through rulemaking before seeking fines and penalties for alleged violations. This, Navient argues, is supported by § 5531(a)’s placement in the statute immediately before § 5531(b), which allows the CFPB to “prescribe rules . . . identifying as unlawful unfair, deceptive, or abusive acts or practices.” The CFPB disagrees, arguing that “under Federal Law” is a reference to the general prohibition on UDAAPs in § 5536, and that no rulemaking is required prior to a UDAAP enforcement action. No court that we know of has yet addressed this specific issue under Dodd-Frank. How the court resolves this argument could have a substantial impact on how the CFPB does business going forward.
Navient also attacked the premise of the CFPB’s steering claims. For steering to be a violation, Navient argues, the CFPB has to first establish that Navient had some legal duty to counsel consumers on whether IDB or forbearance is better for their individualized situations. In an attempt to manufacture that duty, the CFPB points to general statements on Navient’s website inviting consumers to let Navient help them resolve their student loan defaults. In response, Navient emphasizes that such generalized statements do not create a fiduciary relationship as a matter of law and rightly reminds the court that lenders are not fiduciaries of borrowers.
We will continue to follow this case and keep you posted. Oral argument on the motion has been scheduled for June 27.