In recent posts, this blog discussed how the Consumer Financial Protection Bureau (CFPB) has tightened control over financial institutions, including an overhaul of the regulatory landscape for debt collection and banks. The CFPB has once against exerted its authority—this time in the context of student loans.

Case Background

Last Wednesday, two days before Trump’s inauguration, the CFBP filed a 66-page lawsuit [i] in federal court in Pennsylvania against Navient Corporation—formerly part of Sallie Mae and currently the largest student loan servicer in the U.S.—and its subsidiaries (Navient). The CFPB alleged a variety of “servicing failures” including:

• not telling borrowers who sought financial assistance about the availability of income-based repayment plans and thereby “steering” them into other alternatives such as forbearance;
• not sending notifications to borrowers who consented to receive electronic communications;
• not advising borrowers that if borrowers provided incorrect information on applications to renew income-driven repayment plans, this inaccuracy might result in (i) higher monthly payments, (ii) the addition of unpaid interest to the principal balance of the loan, and (iii) the partial loss of the federal government’s interest subsidy for eligible loans, and creating a “false impression” to consumers that the only consequence of submitting incomplete information “would be a processing delay and nothing more”;
• not clarifying for the borrowers that in order to qualify for cosigner release, they need to make consecutive payments, including on months in which no payment is due;
• misallocating and misapplying payments made on loans;
• misrepresenting to borrowers that completing a rehabilitation program would absolve them of (i) all adverse information regarding the student loan on the borrower’s credit report and (ii) fees assessed on missed payments, when in fact it would not because the credit report would still contain the original trade line reflecting late payments and delinquencies prior to the default; and
• not implementing reasonable written policies and procedures for ensuring “the accuracy and integrity of the information relating to consumers that it furnishes to a consumer reporting agency.”

The CFPB’s case alleged that the above practices were in violation of the federal prohibition of “unfair [ii], deceptive, and abusive [iii] acts or practices” (UDAAP) under Title X of the Dodd-Frank Act.

Four Things You Need to Know

First, the Navient lawsuit is another data point displaying a clear CFPB trend: to depart from the guidance issued or practices accepted by other federal government agencies that regulate the same industry. According to Navient’s view, the CFPB’s case “improperly seeks to impose penalties . . . based on new servicing standards applied retroactively and applied only against one servicer” and that the new servicing standards are inconsistent with the Department of Education’s regulations. The CFPB doesn’t hesitate to stray from the position of other regulators, as we have seen before.

As many of our readers know, a couple years ago, the CFPB sued PHH Corporation (PHH) —a home mortgage servicing company— for purportedly receiving kickbacks from mortgage insurance companies to whom it referred borrowers, in alleged violation of Section 8(a) and 8(b) of the Real Estate Settlement Procedures Act (RESPA).[iv] Contrary to the plain language and the U.S. Department of Housing and Urban Development’s (HUD) interpretation of RESPA, the CFPB found that PHH’s receipt of payments from the insurance company did not fall within the statutory carve-out for practices otherwise prohibited by RESPA. [v] Richard Cordray, the CFPB director, demanded that PHH return all reinsurance premiums it received during the relevant time period—$103 million more than what the administrative law judge granted. On appeal of Mr. Cordray’s ruling, the Court of Appeals for the District of Columbia Circuit reversed, finding that the bureau misinterpreted Section 8(c) of RESPA and violated “due process principles by retroactively applying its new interpretation of the statute against PHH.” When compared against the PHH case, the Navient matter similarly exemplifies a desire by CFPB to impose new regulatory expectations that were not previously articulated by the functional regulator for this industry, in this case, the Department of Education.

Second, in the Navient matter, the CFPB makes pronouncements about how UDAAP applies to a given set of facts—for the first time—through an enforcement action rather than through agency guidance or rulemaking. This is also not a new phenomenon. Since its inception six years ago, the CFPB has brought several enforcement actions against financial institutions based on the UDAAP prohibition without specifying what precise conduct would meet the elements of a UDAAP violation of that prohibition (other than pointing to the general elements of UDAAP listed in the Dodd-Frank Act). The Navient matter shows that the CFPB remains committed to its approach of regulation by enforcement, which we have spoken about before.

Third, the Navient matter also illustrates how at least one component of the Republicans’ efforts to reform the CFPB’s workings is likely to be ineffectual. In an effort to curb the CFPB’s authority, Congressman Jeb Hensarling (R-TX) has proposed legislation to delete the CFPB’s power to prohibit “abusive” practices [vi] in the Dodd-Frank Act. Hensarling’s approach is understandable and may be responsive to widespread critique of the “abusive” authority of the CFPB. For example, one commentator at the George Mason University observed, “[a] shifting standard of this sort opens the door to abuse of authority by the CFPB.”

However, despite the controversy surrounding the CFPB’s “abusive” power, any attempt to eliminate this authority will have no impact on curbing the CFPB as a practical matter. This is because anytime that the CFPB has sought to allege violations of the “abusive” prohibition, the CFPB has also chosen to plead a companion claim in practice—asserting that the same fact pattern underlying the “abusive” count also independently constitutes an illegal, “unfair” act. For instance, in the Navient matter, the CFPB targeted alleged “steering” conduct by which Navient was accused of advising borrowers to seek forbearance of student loan obligations rather than income-based repayment plans that “would have been financially beneficial to those borrowers.” The CFPB crafted both an Abusive count (Count I) and an Unfairness count (Count II) based on this same conduct, which illustrate how stripping the CFPB of its power to bring an abusive claim does nothing to restrain the CFPB’s ability to pursue an enforcement action overall. Because the CFPB’s power to assert an unfairness claim would remain intact, the proposed amendment to remove “abusive” in Hensarling’s legislation may not have a practical effect.

Fourth, the case shows the CFPB in active partnership with state law enforcement agencies to sue financial firms jointly or in parallel proceedings. Navient was sued by the Illinois Attorney General and the Washington Attorney General at the same time the CFPB suit arose. As commentators observe the continuing political and existential crises facing the CFPB in coming weeks, one point to remember is that the consumer protection laws found in the Dodd-Frank Act have state analogs under state unfair business practices statutes. In addition, the Dodd-Frank Act itself permits, in some situations, state attorneys general or state banking authorities to enforce the Dodd-Frank Act, thereby stepping into the CFPB’s shoes, in a sense. Accordingly, the Navient case represents a potential harbinger of what may come as states increasingly focus their effort on consumer financial cases.

With the case initiated on the eve of a new administration, the outcome of this strategic enforcement action will have a lasting impact on the state of play in the student loan servicing industry. We will continue to monitor and provide updates on the development of the CFPB’s activities.

-Notes-

[i] Consumer Financial Protection Bureau v. Navient Corporation, et. al., 3:17-cv-00101-RDM (Dkt. 1, January 18, 2017).

[ii] The CFPB defines an “unfair act” as one causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers, and such substantial injury is not outweighed by countervailing benefits to consumers or to competition. See 12 U.S.C. § 5531(c).

[iii] An abusive act, according to the CFPB, means one that “takes unreasonable advantage of the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” See also, 12 U.S.C. § 5531(d).

[iv] The relevant sections under RESPA prohibiting acceptance of kickbacks are enumerated under Sections 8(a) and 8(b).  Section 8(a) provides that “no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” Section 8(b) provides that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

[v] Section 8(c)(2) provides in relevant part that “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

[vi] This includes Sections 1013(g), 1021(b)(2), 1031, 1036(a)(1)(B) and 1076(b)(2)(A) of the Consumer Financial Protection Act of 2010.