A District Court judge in Delaware has dismissed a lawsuit filed by the Consumer Financial Protection Bureau that accused a student loan servicer and the debt collector it hired of engaging in deceptive collection practices, ruling that the regulator did not have the authority to file the lawsuits because it did so at a time when its leadership structure was unconstitutional. A subsequent ratification of the action by former Director Kathleen Kraninger was not enough to allow the CFPB to continue to the suit because the ratification’s statute of limitations had expired before it was done. This is believed to be the first case in which a judge has ruled that a ratification was not enough to save an enforcement action after the CFPB’s leadership structure was found to be unconstitutional by the Supreme Court in Seila Law v. CFPB.
A copy of the ruling in the case of CFPB v. The National Collegiate Master Student Loan Trust et al. can be accessed by clicking here.
The CFPB announced the enforcement action and a proposed judgment back in 2017, accusing the defendants of suing individuals to recover unpaid private student loans, even though the defendants allegedly could not prove the debts were owed or because the statutes of limitation had expired. The suit involved more than 800,000 student loans that were going to have to be audited and levied more than $20 million in fines.
Last year, the court denied a motion to approve the consent judgment, which meant the case would have to proceed. The defendants filed a motion to dismiss, arguing that the CFPB lacked subject-matter jurisdiction because the defendants should not have been under the regulatory purview of the CFPB, and that the ratification of the enforcement action came after the three-year statute of limitations to do so had expired.
Judge Maryellen Noreika dispensed with the argument that the CFPB lacked subject-matter jurisdiction, and then turned to the issue of ratification.
The CFPB acknowledged that the ratification came more than three years after the discovery of the violations, but tried to convince Judge Noreika that the statute of limitations could be ignored because the CFPB had filed its initial complaint in a timely manner and that statute of limitations had been equitably tolled.
But the CFPB was well aware that the constitutionality of its leadership structure was being challenged, Judge Noreika wrote. In fact, the CFPB itself came out and acknowledged that the structure was unconstitutional. But it did nothing to protect its rights while litigating this case.
“Despite its admitted ‘questioning’ of its own structure and the other red flags, however, the Bureau 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 (i.e., what actually happened),” Judge Noreika wrote.