The court’s decision may impact other pending CFPB enforcement actions where ratification occurred outside the statute-of-limitations period. Editor’s note: This article is published with permission Mayer Brown.
4/15/2021 9:00
By Ori Lev and Jim Williams
One of the great ironies of the U.S. Supreme Court’s decision in Seila Law v. CFPB, in which the Supreme Court held that the Consumer Financial Protection Bureau’s structure was unconstitutional, is that it effectively provided no relief to Seila Law, the party that took the case all the way to the Supreme Court.
On remand, the 9th Circuit held that the CFPB’s case against Seila Law could continue. Now, for the first time, a court has held that a pending CFPB enforcement action must be dismissed because of that constitutional infirmity.
On March 26, 2021, a federal district court dismissed the CFPB’s action against the National Collegiate Student Loan Trusts, a series of 15 special purpose Delaware statutory trusts that own $15 billion of private student loans (the NCSLTs or Trusts), finding that the agency lacked the authority to bring suit when it did; that its attempt to ratify its prior action came too late; and that based on its conduct, the CFPB could not benefit from equitable tolling.
In doing so, the court avoided ruling on a more substantial question with greater long-term implications for the CFPB and the securitization industry—whether statutory securitization trusts are proper defendants in a CFPB action.
After the district court declined to enter the proposed consent judgment, the intervenors moved to dismiss the complaint on various grounds. The intervenors argued that the trusts—which the complaint recognized were special purpose vehicles with no employees and that relied entirely on third-party service providers—were not “covered persons” subject to the CFPB’s enforcement authority for alleged unfair, deceptive, or abusive acts or practices (UDAAP). The intervenors argued that because the trusts lacked employees, they could not “engage” in the various activities that define a “covered person.” This argument had broad implications for the CFPB’s authority over similar securitization trusts.
The intervenors also argued that former Director Kathy Kraninger’s ratification of the decision to file the complaint—which came more than three years after the CFPB’s discovery of the purported violations—was untimely and therefore invalid, and that equitable tolling did not apply to save the CFPB’s case.
On March 26, the court agreed with the second argument. First, the court noted that “there is no question that the Bureau initiated this action against the Trusts at a time when its structure violated the Constitution’s separation of powers,” and that a valid ratification of the decision to file suit was therefore a necessary prerequisite for the suit to continue. Under 3rd Circuit precedent, for a ratification to be valid, the party doing the ratification must have the power to do the act ratified (here, filing a lawsuit against the trusts) at the time of ratification. Accordingly, “ratification is, in general, not effective when it takes place after the statute of limitations has expired.” The CFPB did not dispute that Kraninger’s ratification came outside the three-year statute of limitations period for UDAAP claims, but argued that the ratification was valid because equitable tolling should be applied to save its claims.
The court’s decision may impact other pending CFPB enforcement actions where ratification occurred outside the statute-of-limitations period. But the true impact to the CFPB—and to the securitization industry more broadly—would have come from a decision regarding the “covered person” issue, either affirming or rejecting the agency’s position that securitization trusts can be held liable under the CFPB’s UDAAP authority for actions taken in the trusts’ name by third parties.
Here, the district court chose not to address the issue. But the court did note that it “harbors some doubt that the Trusts are ‘covered persons’ under the plain language of the statute,” suggesting that the CFPB may face an uphill battle in asserting such authority in the future.
Lev is a partner in Mayer Brown’s Washington, D.C., office, and Williams is an associate in Mayer Brown’s Washington, D.C., office.
Editor’s note: This content is published with permission from Mayer Brown. This article is provided for informational purposes and is not intended nor should it be taken as legal advice. The views and opinions expressed in this article are those of the author in his individual capacity and do not reflect the official policy or position of their partners, entities, or clients they represent.