In CFPB v. National Collegiate Master Student Loan Trust et al., the district court rejected the Trusts’ arguments that they were not “covered persons” under the CFPA and 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 district court has now certified two questions to the Third Circuit for interlocutory appeal: whether the Trusts are “covered persons” and whether the filing of the enforcement action by an unconstitutionally structured CFPB made the filing invalid, thereby requiring the Bureau to ratify the lawsuit before the statute of limitations ran out.

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 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.”

The Trusts subsequently filed a motion asking Judge Bibas to certify the following two questions to the Third Circuit for interlocutory appeal:

  • Whether the Trusts are “covered persons” subject to the CFPB’s enforcement authority
  • Whether the Bureau needed to ratify the enforcement action before the statute of limitations ran out, having first filed the lawsuit while the CFPB’s director was improperly insulated from presidential removal.

In granting the Trusts’ motion, Judge Bibas indicated that both questions were novel and “the stakes are high—if I am wrong about either issue, this litigation must end now.”  With regard to the question whether the Trusts are “covered persons,” Judge Bibas stated that “there is room for reasonable disagreement” whether the Trusts “engage in” collecting debt or servicing loans for purposes of the definition of “covered person.”  He also stated that he was “the first judge to decide whether the Bureau may bring enforcement actions against creditors like the Trusts who contract out debt collection and loan servicing.”

With regard to the constitutional question, Judge Bibas indicated that Collins, on which he had relied for his constitutionality ruling, was “a very recent Supreme Court decision and lower courts have not yet hashed out its scope.”  While observing that Collins made clear that, under Seila Law, ratification is not always necessary when an agency director is insulated from presidential removal, he stated that “one can reasonably disagree about the scope of Collins.”  More specifically, according to the Trusts, Collins was distinguishable from the CFPB’s enforcement action because the action was marred by a constitutional defect from its inception while, in Collins, the challenged agency action was initiated by an acting director removable at will by the President and only later implemented by improperly insulated successors.  As a result, the Trusts argued that Seila Law should apply and require ratification.