The Delaware federal district court, in CFPB v. National Collegiate Master Student Loan Trust et al., has rejected the Trusts’ argument that because the enforcement action was filed by an unconstitutionally structured CFPB, it was void when filed and could not stop the statute of limitations from running.

The CFPB first filed the enforcement action in 2017, alleging that the Trusts engaged in unlawful debt collection practices.  The enforcement action was among the CFPB lawsuits ratified by former Director Kraninger following the U.S. Supreme Court’s decision in Seila Law that held that the CFPB’s Director was unconstitutionally insulated from removal by the President.  The district court ruled that because CFPB enforcement actions must be filed within three years of the CFPB’s discovery of a violation and the CFPB admitted that the ratification occurred more than three years after it filed the lawsuit against the Trusts, the ratification was ineffective to save the lawsuit.  However, the court dismissed the CFPB’s lawsuit without prejudice, thereby allowing the CFPB an opportunity to refile.  The CFPB subsequently amended its complaint and the Trusts moved to dismiss, arguing that the amended complaint was untimely for the same reason as the original complaint.  They also argued that the enforcement action was invalid because they were not “covered persons” under the CFPA.

Sitting by designation in the district court,  Third Circuit Judge Stephanos Bibas denied the motion to dismiss and ruled that, based on the amended complaint, the lawsuit was not time-barred.  According to Judge Bibas, the U.S. Supreme Court’s decision in Collins v Yellen undercut the argument that the lawsuit was void because the ratification occurred too late to save it.  In Collins, the Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed.  Judge Bibas interpreted this to mean that actions taken under a properly appointed agency head are not void and do not need to be ratified unless the plaintiff can show that the action would not have been taken but for the President’s inability to remove the agency head.

Judge Bibas found this was not the case before him because the CFPB would have filed the lawsuit even if the CFPB’s Director had been under presidential control.  He observed that the case “has been litigated by five directors of the CFPB, four of whom were removable at will by the President.  And the CFPB did not change its litigation strategy once the removal provision was eliminated.”  In his view, this was “strong evidence that the suit would have been brought regardless.”  Accordingly, he found that the CFPB’s initial decision to bring the suit was not ultra vires.  He did, however, leave open the possibility that on summary judgment, the Trusts could show that the CFPB filed the lawsuit more than three years after it discovered the alleged unlawful conduct.

Judge Bibas also rejected the Trusts’ argument that they were not “covered persons” under the CFPA  because they were “passive securitization vehicles” that could not be held liable for the actions of their subservicers.  The CFPB argued that the Trusts “engaged in offering or providing a consumer financial product or service” within the meaning of the CFPA’s definition of “covered person.”

Judge Bibas concluded that the Trusts engaged in servicing loans because “[the] definition [of ‘engage’] is broad enough to encompass actions taken on a person’s behalf by another, at least where that action is central to his enterprise.”  According to Judge Bibas, it was not dispositive that the subservicers were independent contractors rather than Trust employees because debt collection and loan servicing were “core aspects of the Trusts’ business model” and if the Trusts “did not enforce debtors’ obligations, their pool of loans would be less valuable, as would the notes they sell to investors.”  Thus, in his view, the Trusts “cannot claim that they were not ‘engaged in’ a key part of their business just because they contracted it out.”  He also noted that if Congress had wanted to allow enforcement only against those who directly engage in offering or providing consumer financial products or services, it could have said so.