As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania. In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans. On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds. While, on Friday, August 4, 2017, the district court declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over. We’ll focus here on two of them: fair notice, and the constitutionality of the CFPB’s structure.
Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law. The court used a technicality to decline to consider Navient’s fair notice argument at all. The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act. Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).” Thus, the court found that it need not consider the fair notice argument.
In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.” The court also ignored the obvious and clearly-implied corollary to Navient’s argument: The only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position. Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.
This is especially so given how well-founded the argument seems to have been. How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).” The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.
Constitutionality of CFPB Structure
The court also rejected the argument that the CFPB’s structure was unconstitutional. We’ve argued before why we believe that such a view is incorrect and even dangerous to our constitution. But a few of those arguments bear repeating in light of the Navient court’s ruling. The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case. In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission. Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one. Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive. Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.
Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?
Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director. The Director is not an inferior officer. More importantly, he has substantial policymaking authority. The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals. The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.
Finally, the court ignored the implications of its ruling. Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the Courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.
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As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.