Suit Against Student Loan Trusts Dismissed

Suit Against Student Loan Trusts Dismissed

On March 26, 2021, Judge Maryellen Noreika of the U.S. District Court for the District of Delaware dismissed a lawsuit introduced by the Consumer Financial Protection Bureau (“CFPB”) in Consumer Financial Protection Bureau v. The National Collegiate Master Student Loan Trusts,1 discovering, inter alia, that the CFPB’s swimsuit was constitutionally faulty because of the CFPB’s premature try and ratify the prosecution of the litigation within the wake of the Supreme Court’s resolution in Seila Law LLC v. Consumer Financial Protection Bureau.  This case has been intently watched by many members within the structured finance trade, as a result of the litigants had disputed over the query of whether or not the trusts at difficulty within the litigation are “covered persons” liable below the Consumer Financial Protection Act regardless of their standing as passive securitization belief entities—a query that has vital and wide-reaching implications for the structured finance markets.


The National Collegiate Student Loan Trusts (the “Trusts”) maintain greater than 800,000 personal student loans by 15 completely different Delaware statutory trusts created between 2001 and 2007, totaling roughly $12 billion.  The loans initially had been made to students by personal banks.  The Trusts offered financing for the student loans by promoting notes to buyers in securitization transactions.  The Trusts additionally offered for the servicing of and assortment on these student loans by participating third-party servicers.  However, the Trusts themselves are passive particular objective entities missing staff or inner administration; as an alternative, to function, the Trusts relied on numerous interlocking trust-related agreements with a number of third-party service suppliers to—amongst different issues—administer every of the Trusts, decide the relative precedence of financial pursuits within the Trusts, and repair the Trusts’ loans.

On September 4, 2014, the CPFB issued a civil investigative demand (“CID”) to every of the Trusts for info regarding 1000’s of allegedly unlawful student loan debt assortment lawsuits used to gather on defaulted loans held by the Trusts.  On May 9, 2016, the CFPB alerted the Trusts to the truth that the CFPB was contemplating initiating enforcement proceedings towards the Trusts primarily based on the gathering lawsuits by a Notice and Opportunity to Respond and Advice (“NORA”).  A couple of weeks later, the regulation agency McCarter & English, LLP (“McCarter”), purporting to symbolize the Trusts, submitted a NORA response to the CFPB.  McCarter and the CFPB then proceeded to barter a Proposed Consent Judgment to resolve the CFPB’s investigation of the Trusts. 

The Litigation

On September 18, 2017, the CFPB filed swimsuit towards the Trusts in Delaware federal courtroom (the “Court”), alleging that the Trusts had violated the Consumer Financial Protection Act of 2010 (the “CFPA”) by participating in unfair and misleading practices in reference to their servicing and assortment of student loans.  Although the CFPB acknowledged that the Trusts had no staff and that the alleged misconduct resulted from actions taken by the Trusts’ servicers and sub-servicers in the midst of their debt assortment actions—fairly than any actions taken by the Trusts themselves—the CFPB nonetheless named solely  the Trusts as defendants.  On the identical day, the CFPB additionally filed a movement to approve the Proposed Consent Judgment negotiated with McCarter. 

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However, inside days of the CFPB’s initiation of the lawsuit, a number of events related to the Trusts intervened within the litigation to argue towards the entry of the Proposed Consent Judgment.  The intervenors expressed concern that the entry of the Proposed Consent Judgment would impermissibly impair or rewrite their respective contractual obligations as set forth within the agreements underlying the Trusts.  After discovery, on May 31, 2020, the Court denied the CFPB’s movement to approve the Proposed Consent Judgement, holding that McCarter lacked authority to execute the Proposed Consent Judgment pursuant to phrases of the agreements governing the Trusts and Delaware regulation. 

On June 29, 2020, in one other lawsuit involving the CFPB, the United States Supreme Court held in Seila Law LLC v. Consumer Financial Protection Bureau that the CFPB’s construction violated the Constitution’s separation of powers.2  Specifically, the Supreme Court held that “an independent agency led by a single Director and vested with significant executive power” has “no basis in history and no place in our constitutional structure,”3 and that the statutory restriction on the President’s authority to take away the CFPB’s Director just for “inefficiency, neglect, or malfeasance” violated the separation of powers.4  The Supreme Court then concluded that the correct treatment was to sever the removing restriction, and finally allowed the CFPB to face.  The Supreme Court additionally famous that an enforcement motion that the CFPB had filed to implement a CID whereas its construction was unconstitutional could nonetheless be enforceable if it was later efficiently ratified by an performing director of the CFPB who was detachable at will by the President.  If not so ratified, nevertheless, the enforcement motion should be dismissed.

Around the time the Supreme Court issued its resolution in Seila Law, numerous intervenors had been briefing a number of motions to dismiss the CFPB’s criticism towards the Trusts.  One subset of intervenors—Ambac Assurance Corporation, the Pennsylvania Higher Education Assistance Agency, and the Wilmington Trust Company5 (collectively, “Ambac”)—argued, inter alia, that: (i) the Supreme Court’s resolution in Seila Law required dismissal of the CFPB’s criticism as a result of the CFPB’s ratification of the litigation towards the Trusts was premature, and (ii) the Court lacked subject material jurisdiction over its asserted claims as a result of the Trusts will not be “covered persons” as required below the CFPA.  Another intervenor, Transworld Systems, Inc.6 (“TSI”) additionally argued that the CFPB’s criticism merited dismissal for lack of subject material jurisdiction as effectively. 

The Court’s Holding

Subject Matter Jurisdiction

The Court held that it possessed the requisite subject material jurisdiction to determine the CFPB’s claims, and rejected the rivalry {that a} displaying of whether or not the Trusts are “covered persons” is a jurisdictional requirement below the CFPA.  To decide whether or not a restriction—such because the time period “covered persons”—is jurisdictional, the Court appeared to “whether Congress has clearly stated that the rule is jurisdictional.”7  “[A]bsent such a clear statement,” courts “should treat the restriction as nonjurisdictional.”8 

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The Court then examined the CFPA, observing that there isn’t any clear assertion within the CFPA’s jurisdictional grant that “covered persons” is required.  The Court famous that just one part of the CFPA addresses the problem of subject material jurisdiction, and that part granted jurisdiction over “an action or adjudication proceeding brought under Federal consumer law” with no point out of “covered persons” in anyway.9 

While the Court agreed that the time period “covered persons” appeared a number of occasions all through the CFPA, it identified that not one of the sections the place “covered persons” appeared talked about jurisdiction.

Enforcement Authority

In mild of the Supreme Court’s holding in Seila Law, the Court granted Ambac’s movement to dismiss the CFPB’s criticism because of the CFPB’s lack of enforcement authority on account of its premature ratification of the litigation. 

As an preliminary matter, the Court noticed that there was no query that the CFPB initiated the enforcement motion towards the Trusts at a time when its construction violated the constitutional separation of powers.  The job dealing with the Court, then, could be to find out (i) whether or not that constitutional defect has been cured by ratification, or (ii) whether or not dismissal of the swimsuit is required.  Under the relevant Third Circuit precedent, there are three basic necessities for ratification of previously-unauthorized motion by an company: (1) “the ratifier must, at the time of ratification, still have the authority to take the action to be ratified”; (2) “the ratifier must have full knowledge of the decision to be ratified”; and (3) “the ratifier must make a detached and considered affirmation of the earlier decision.”10  Here, the events’ dispute centered across the first requirement.

Under the primary requirement, the Court famous that “it is essential that the party ratifying should be able not merely to do the act ratified at the time the act was done, but also at the time the ratification was made.”11  On July 9, 2020, the CFPB’s then-Director, Kathy Kraninger, had ratified the choice to provoke the CFPB’s litigation towards the Trusts a number of weeks after the Supreme Court’s resolution in Seila Law.  The Court held that Director Kraninger’s ratification was ineffective, as a result of (i) an enforcement motion arising from alleged CFPA violations should be introduced no later than three years after the date of discovery of the violation to which the motion relates,12 (ii) ratification is ineffective when it takes place after the related statute of limitations has expired, and (iii) the CFPB clearly had discovery of the Trusts’ alleged CFPA violations greater than three years earlier than the ratification date, i.e., earlier than July 9, 2017.  Thus, Director Kraninger’s ratification of the CFPB’s resolution to file swimsuit towards the Trusts didn’t treatment the constitutional defects raised by Seila Law, and the CFPB’s criticism—initially filed by a CFPB director unconstitutionally insulated from removing—couldn’t be enforced.

In so holding, the Court rejected the CFPB’s argument that the timeliness necessities for ratification had been glad as a result of the CFPB had introduced the unique swimsuit throughout the relevant limitations interval.  The Court likewise rejected the CFPB’s request to equitably toll the statute of limitations for ratification, as a result of the CFPB “could not identify a single act that it took to preserve its rights in this case in anticipation of the constitutional challenges that could have reasonably ended with an unfavorable ruling from the Supreme Court.”13

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Key Takeaways

The securitization trade has operated for many years on the premise that agreements governing securitization transactions present that transaction events are liable for their very own malfeasance and, barring particular circumstances, is not going to be held accountable for the misconduct of different events to the transaction.  A choice holding that passive securitization entities just like the Trusts are “covered persons” below the CFPA—and thus doubtlessly liable for the actions of their third-party service suppliers—would undermine the understanding of contract phrases that undergirds the success of the structured finance trade, with grave implications for the heathy functioning of the trade.  While the substantive query of whether or not passive securitization entities just like the Trusts might certainly be “covered persons” and held accountable for the actions of their third-party service suppliers stays to be answered for an additional day, the Court did observe that it “harbor[ed] some doubt” that the plain language of the CFPA prolonged to passive statutory trusts,14 and expressed skepticism as as to if the CFPB might efficiently replead in a fashion that might efficiently treatment the deficiencies in its unique criticism. 

1   2021 WL 1169029, at *3 (D. Del. Mar. 26, 2021). 

2   140 S.Ct. 2183, 2197 (June 29, 2020).  For an in depth dialogue on Seila Law, please see our July 2, 2020 Clients & Friends Memo, “Seila Law LLC v. Consumer Financial Protection Bureau: Has the Supreme Court Tamed or Empowered the CFPB?”, out there at

3   Id. at 2201.

4   Id. at 2197. 

5   Ambac Assurance Corporation offered monetary assure insurance with respect to securities in over half of the Trusts.  The Pennsylvania Higher Education Assistance Agency is the Primary Servicer for the Trusts, whereas the Wilmington Trust Company is the Trusts’ Owner Trustee.

6   TSI is a sub-servicer liable for the gathering of the Trusts’ delinquent loans.

7   Nat’l Collegiate Master Student Loan Tr. at *3 (citing Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013)). 

8   Id. 

9   See 12 U.S.C. § 5565(a)(1).

10  Nat’l Collegiate Master Student Loan Tr. at *4 (quoting Advanced Disposal Serv. E., Inc. v. Nat’l Labor Relations Bd., 820 F.3d 592, 602 (3d Cir. 2016)).

11  Id. (quoting Advanced Disposal, 820 F.3d at 603) (emphasis in unique). 

12  12 U.S.C. § 5564(g)(1).

13  Nat’l Collegiate Master Student Loan Tr. at 7. 

14  Id. at 3. 

© Copyright 2021 Cadwalader, Wickersham & Taft LLP
National Law Review, Volume XI, Number 91

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