Court Upholds CFPB Authority Over Student Loan Trusts in Landmark Ruling
The Third Circuit Court of Appeals has ruled that the Consumer Financial Protection Bureau (CFPB) did not need to ratify its action against certain student loan trusts before the statute of limitations expired, despite a constitutional deficiency within the Bureau at the time the action was initiated. The CFPB had sued the trusts in 2017 for unfair and deceptive debt collection practices, but the case was dismissed due to the CFPB's structural defect.
The trusts in question, known as National Collegiate Student Loan Trust entities, are 15 special purpose Delaware statutory trusts. They acquired and provided financing for over 800,000 private student loans, totaling more than $15 billion, between 2001 and 2007. The Third Circuit ruled that these trusts are 'covered persons' under the Dodd-Frank Act, subject to the CFPB's enforcement authority. This is because they 'engage' in consumer financial products or services, specifically student loan servicing and debt collection, despite having no employees and only contracting with others for these services.
The court's decision was completed on November 15, 2011, in the NCSLT litigation. The trusts had argued that they could not be considered 'covered persons' as they did not directly engage in these activities, but the court ruled that by contracting others to perform these services, they were indeed engaged in them and thus fell under the CFPB's jurisdiction.
Market participants are advised to carefully examine trust and related documents to reduce the risk of being considered 'covered persons' under the Dodd-Frank Act. The Third Circuit's ruling has clarified the CFPB's enforcement authority over entities that engage in consumer financial services, even if they do not directly employ staff to carry out these activities.
