CFPB Student Debt Collection Enforcement Upheld by Appeals Court

Federal oversight applies to a student loan investment trust that contracted out debt collection to a third party, a federal appeals court ruled Tuesday in a test of how far the CFPB could go to protect student loan borrowers.

The trust is subject to the Consumer Financial Protection Act’s enforcement because it’s own agreements indicate it engages in both student loan servicing and debt collection, said Judge Jane Roth, writing for a three-judge panel of the US Court of Appeals for the Third Circuit.

As such, it falls “within the purview of the CFPA because they ‘engage’ in a known ‘consumer financial product or service’ and are necessarily subject to the CFPB’s enforcement authority,” she said.

The National Collegiate Master Student Loan Trust and other similar trusts had argued in May 2023 it was exempt from the category of “covered persons” subject to Consumer Financial Protection Board enforcement.

The CFPB sued the trust in 2017, alleging its deals with debt servicers to collect on hundreds of thousands of student loans led to activities that violated debt collection rules.

The trust bought student loans and used them for securities on notes, with the debt collection performed by outside contractors. The CFPB argued that gave it oversight over the trust, while the trust said only the third-party debt collection fell under the regulator’s purview.

“When suits are brought against borrowers for the Trusts to collect on student loans, third parties are acting for the benefit of the Trusts. As such, the Trusts cannot claim that they did not ‘take part in’ collecting debts,” Roth said.

A district court ruled in December 2021 that the CFPB had the power to sue securitization trusts, finding they were “covered persons” subject to enforcement of unfair, deceptive, and abusive acts and practices because they engaged in servicing and collections activities through third-party providers.

A bipartisan coalition of 22 state attorneys general filed a brief urging the Third Circuit to uphold the district court’s ruling in the CFPB’s favor. The brief argued the 2010 Dodd-Frank Act included passive trusts as covered persons that could be held responsible for consumer financial law violations.

The US Chamber of Commerce and the Securities Industry and Financial Markets Association filed a brief supporting the trust.

Judges L. Felipe Restrepo and Theodore McKee joined Roth on the appeals court panel.

The trust was represented by McGuireWoods LLP and Pinckney, Weidinger, Urban & Joyce LLC.

The case is Consumer Fin. Prot. Bureau v. Nat’l Collegiate Master Student Loan Trust, 3d Cir., No. 22-01864.