Ruling that the Consumer Financial Protection Bureau (CFPB) is constitutional and has the authority to act against companies without first adopting specific rules defining whether any specific practice is unfair, deceptive or abusive, a Pennsylvania federal court judge denied a student loan servicer’s motion to dismiss an enforcement action.

What happened

In January 2017, the Consumer Financial Protection Bureau (CFPB) sued a major student loan servicer, alleging that the company created obstacles to repayment in a multitude of ways that amounted to unfair, abusive and deceptive practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Specifically, the Pennsylvania federal court complaint claimed that the servicer failed to follow the directions of borrowers with regard to repayments, repeatedly misapplied or misallocated payments, and continued to make the same errors again and again, even after borrowers complained.

In addition, the servicer allegedly guided borrowers into forbearance agreements in lieu of a new repayment plan to save itself time and paperwork, resulting in borrowers paying more than they needed to on their loans and the servicer earning $4 billion in interest on the loans of borrowers enrolled in multiple, consecutive forbearances.

The servicer also failed to adequately inform borrowers in income-driven repayment plans about their obligation to recertify their income and family size on an annual basis, causing borrowers to lose their lower monthly payments as a result, the CFPB said.

In response to the 11-count complaint, the servicer filed a motion to dismiss, contending that (i) the CFPB lacked the authority to bring suit without first engaging in rulemaking to declare specific acts or practices unfair, deceptive or abusive, the conduct alleged having never been the subject of such rulemaking; (ii) the structure of the CFPB is unconstitutional and therefore the director lacked authority to authorize the suit; and (iii) the various counts of the complaint failed to state a cause of action.

U.S. District Court Judge Robert D. Mariani, a 2011 appointee of President Obama, denied the defendant’s motion and rejected all of the defendant’s arguments.

The court first addressed the CFPB’s statutory authority to bring suit prior to engaging in rulemaking, looking to the statute itself, which states: “It shall be unlawful for … any covered person or service provider … to engage in any unfair, deceptive, or abusive act or practice.”

“Thus, there appears to be no reason why the CFPB cannot base an enforcement action on a violation of this provision of federal law,” the court said. The plain language of the statute “provides that the CFPB may, among other things, commence a civil action ‘to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law,’ and that one such violation of federal law occurs when a ‘covered person … engage[s] in any unfair, deceptive, or abusive act[s] or practice[s].’”

“The plain meaning of the statutory language provides that the CFPB has … the power to engage in rulemaking … and litigation … to address unfair, deceptive, or abusive acts or practices,” Judge Mariani wrote. “The most harmonious construction of these provisions is that the CFPB may proceed either via rulemaking or an enforcement action. This interpretation is supported not only by the plain language of the provisions at issue, but finds support in other places as well.”

In response to the defendant’s argument that this logic is circular, the court pointed to “other places” being (i) the vague definitions of “unfair, deceptive, or abusive” conduct contained in the law itself (12 U.S.C. 5531(c)-(d)) (and which read like they are meant to curtail the scope of rulemaking, not enforcement), and (ii) the common law surrounding these terms. The court also pointed to a decision considering analogous language found in the Federal Trade Commission Act from the U.S. Court of Appeals, Third Circuit permitting the FTC to regulate companies’ data security practices via enforcement rather than rulemaking.

“[The servicer’s] argument mistakes the nature of this lawsuit,” the court said. “[T]he relevant legal question is not whether [the servicer] had fair notice of what acts or practices the CFPB has interpreted as unlawful under the Act, but only whether [the servicer] had fair notice of what the Act requires.”

Judge Mariani next determined that the structure of the CFPB passed constitutional scrutiny, citing decisions from federal courts in California(Obama appointee) and Indiana (Reagan appointee) for support, noting that a contrary opinion from the U.S. Court of Appeals, D.C. Circuit (PHH Corp.) is currently under en banc review.

The servicer argued that the combination of a single director who wields executive power, a director removable only for cause, and agency funding from outside the normal budgetary process rendered the CFPB unconstitutional. But the court disagreed.

The court found persuasive that (i) the CFPB’s powers closely parallel the Federal Trade Commission’s powers that have passed review by the Supreme Court; (ii) several other agencies operate completely outside the normal annual appropriations process (including the Federal Deposit Insurance Corporation and the National Credit Union Administration); and (iii) at least three other executive agencies—such as the Social Security Administration—are headed by a single individual. The court found unpersuasive the defendant’s argument that it was the unprecedented combination of these factors that renders the CFPB’s structure unconstitutional. Agreeing with the PHH court, however, Judge Mariani held that the only permissible remedy would be to render the CFPB director removable without cause, and a finding of unconstitutionality of structure would not have rendered nugatory the CFPB’s enforcement action.

Finally, Judge Mariani found that the CFPB sufficiently stated claims for which relief could be granted, given that the case remained in the pleading stage and many facts were not yet before the court.

To read the opinion, click here.

Why it matters

The Pennsylvania federal court decision marks the fifth time a court has weighed in on the constitutionality of the Consumer Financial Protection Bureau and the fourth opinion upholding its structure. One interesting new point it contributes to the discussion is an observation that a director who cannot be removed except for cause is perhaps yet more accountable than officials on multidirector panels which have survived constitutional scrutiny. However, all eyes are trained on the U.S. Court of Appeals, D.C. Circuit, for its ideologically divided en banc opinion.