CFPB secures dismissal of layoff – and key decision on securitization trusts – Finance and Banking

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United States: CFPB secures dismissal overturned – and key decision on securitization trusts

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Earlier this week, the Consumer Financial Protection Bureau (“CFPB”) won a major court decision in a long-standing case against student loan securitization trusts. The case has a long (and for the CFPB, somewhat despicable) history. The CFPB first initiated legal action against 15 Delaware student loan securitization statutory trusts (the “Trusts”) in September 2017. The complaint alleged that the trusts, through the actions of their agents and deputy agents, had engaged in unfair and deceptive lawsuits and litigation. practices. Along with the complaint, the CFPB filed an alleged consent judgment which the CFPB represented in court had been enforced by the defendants. As discussed earlier, in an embarrassing setback, the district court dismissed the CFPB’s request to enter the judgment by consent, ruling that the attorneys who had executed it on behalf of the defending trusts were not allowed. to do so by the appropriate parties to the trust (and that, with respect to at least some of the trusts, the CFPB knew that the parties involved had not consented). The CFPB therefore found itself pleading a case that it believed to be settled. Subsequently, after the Supreme Court ruled that the structure of the CFPB was unconstitutional because it was headed by a single administrator who could be dismissed by the president for a single reason, the district court dismissed the CFPB case without prejudice, considering that the CFPB did not have the power to seize the case where it did so because of its structural defect. We have discussed this decision here.

After the rejection of the CFPB case, three important events occurred. First, the agency filed an amended complaint. Second, the Supreme Court ruled Collins v. Yellen, which dealt with the validity of the actions of the Federal Housing Finance Agency when this agency was headed by a single director who can only be dismissed for just cause. Third, the CFPB vs. Trusts case has been handed over to a new judge. This new judge recently dismissed the new motions to dismiss the case, rendering two key decisions in the process.

First, the court ruled that Collins amended the law and held that “an unconstitutional restriction on dismissal does not invalidate the agency’s action as long as the head of the agency has been properly appointed”, unless it can be demonstrated that “The agency’s action would not have been taken without the president’s inability to remove the agency head.” Applying this standard, the district court found that the deletion restriction had no impact on the CFPB’s decision to initiate and continue its action against the trusts.

Second, the district court ruled that, at least at the dismissal motion stage, the CFPB had properly asserted claims against the trusts. It is this aspect of the court decision that can have broad ramifications for securitization trusts. Various parties to the trust who decided to dismiss the case had argued that the CFPB could not properly assert claims against the intermediary securitization trusts because these trusts are not “covered persons” under the law. authorization from the CFPB. This law provides that the CFPB can only seek to enforce the prohibitions against unfair, deceptive and abusive acts and practices against “targeted persons”, a term defined as any person who “”engages in offering or providing a financial product or service to consumers ”(emphasis added). The parties to the trust argued that as flow-through entities without employees, trusts could not “engage” in the provision of a financial product or service to consumers and that the only suitable defendants are the entities. who do it directly (in this case, agents and sub-agents). When the district court first dismissed the CFPB’s claims for the constitutional reasons discussed above, the court noted that “there is doubt that trusts are ‘covered persons’.’ under the clear language of the law. ” This comment, of course, was dicta, since the court had decided to dismiss the case on other grounds. But with a new judge assigned to the case, the district court came to a different conclusion Relying on dictionary definitions of the term “engage”, the district court held that by entering into contracts with others to manage and collect student loans, which the court described as “essential aspects of the business mod of el trusts,” the Trusts had “engaged” in these acts and therefore were covered persons. The fact that this This decision withstands the scrutiny of other litigation and that other courts adopt its reasoning will have important implications both for the CFPB and for the securitization industry in general. We will continue to monitor this action and report developments. notable.

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This article by Mayer Brown provides information and commentary on legal issues and developments of interest. The foregoing does not constitute a complete treatment of the matter at hand and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action on the matters discussed in this document.

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