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From Banking and Finance Law Daily, August 7, 2017

CFPB enforcement action survives multiple attacks by student loan servicer

By Richard A. Roth, J.D.

A Consumer Financial Protection Bureau suit claiming that Navient Corporation and its subsidiaries violated federal fair debt collection laws and the Dodd-Frank Act will not be dismissed based on challenges to the Bureau’s authority. According to a U.S. District Judge for the Middle District of Pennsylvania, the Bureau could act against the companies without first adopting rules that defined the specific practices as unfair, deceptive, or abusive, and the organization of the Bureau as an independent agency with a director who could be removed only for cause did not violate the Constitution (CFPB v. Navient Corp., Aug. 4, 2017, Mariani, R.).

The Bureau describes Navient and its subsidiaries as specializing in the management and servicing of student loans and the collection of delinquent loans. It works for both the Department of Education and private lenders. Navient Solutions is the organization’s servicing arm, while Pioneer Credit Recovery handles collections.

Alleged illegal activities. Both of the subsidiaries engage in practices that violate federal laws when dealing with borrowers, the CFPB claims. The Bureau says that Navient Solutions steered troubled borrowers into loan forbearance rather than more favorable income-based repayment plans. Income-based repayment plans usually are a better option for borrowers, according to the Bureau, but they take more time and effort for company employees and thus are disfavored by Navient Solutions. The company also did not give borrowers in these plans adequate notice of what was required to certify their continuing eligibility each year, which caused many of the borrowers to fall out of compliance at significant financial cost.

Navient Solutions also misallocated the payments of borrowers who had more than one outstanding loan, resulting in improper fees being charged and negative entries on the borrowers’ credit reports being made. The company’s practices made it difficult for borrowers to correct the misallocations, resulting in "the same processing errors month after month."

Pioneer Credit Recovery had the ability to enroll troubled borrowers in federal loan rehabilitation plans. However, the company’s customer service representatives routinely exaggerated the benefits of these plans, the CFPB alleges.

Bureau authority. Navient argued that the CFPB did not have the statutory authority to act against the servicing processes because it had never adopted a regulation defining what practices would be considered to be unfair, deceptive, or abusive. The judge rejected that argument.

According to the judge, the Dodd-Frank Act provision allowing the Bureau to take action against practices that had been identified as unfair, deceptive, or abusive does not require the practices in question to have been declared as violations by law or regulation. There was no reason the Bureau could not use litigation to declare what practices are prohibited if it chose.

The Dodd-Frank Act language was permissive, the judge pointed out. It spoke of what the Bureau "may" do, not what it was required to do.

Neither was Navient being treated unfairly because it did not have notice of what the CFPB said was required, the judge said. In litigation, the court would decide whether Navient’s practices violated the UDAAP ban. Navient might have argued that the Dodd-Frank Act had not given fair notice, but it had not done so.

Constitutionality. The judge began his analysis of the attack on the CFPB’s structure by closely analyzing precedents, including cases that considered general principles and those that applied those principles to the Bureau. He concluded that the CFPB’s organization neither violated the Constitution’s separation of powers principles nor interfered with the President’s ability to ensure that the laws "be faithfully executed."

Navient argued that the Bureau was unconstitutional because of a combination of three factors:

  1. The Bureau is headed by a single director who holds "executive power."
  2. The director is removable only for cause.
  3. The Bureau is funded by drawing on the Federal Reserve Board’s assessments, not through appropriations.

Navient conceded that none of the three factors alone would be enough to make the CFPB’s structure impermissible; rather, the company claimed that the three in combination violated the Constitution.

From a presidential powers perspective, the judge first noted that the Dodd-Frank Act removal for cause restriction was essentially the same as the provision that protects members of the Federal Trade Commission, and that provision was expressly permitted by the Supreme Court in Humphrey’s Executor v. U.S., 295 U.S. 602, 55 S. Ct. 869 (1935). The FTC and CFPB have comparable functions and comparable authority, he continued.

The Bureau’s funding method and single director structure also have parallels in other federal agencies, the judge pointed out. Congress has the ability to allow agencies to fund themselves and has the ability to change its mind if it chooses. In any event, the funding argument method might impinge on congressional authority, but it did not affect presidential authority.

It was reasonable to believe that the single director structure actually increased the President’s ability to exert control over the CFPB, according to the judge. The President retained the power to remove the Bureau’s director for cause, and the CFPB could be remade by replacing a single individual. To affect the FTC, it might be necessary to replace several of the five commissioners.

Navient’s separation of powers arguments failed as well, the judge decided. Neither the legislative nor judicial branches of the government had usurped the powers of the President, and the Bureau’s structure simply did not interfere with the President’s authority under the Constitution.

The case is No. 3:17-CV-101.

Attorneys: Andrea J. Matthews for the Consumer Financial Protection Bureau. Daniel P. Kearney (Wilmer Cutler Pickering Hale and Dorr LLP) for Navient Corp., Navient Solutions, Inc., and Pioneer Credit Recovery, Inc.

Companies: Navient Corporation; Navient Solutions, Inc.; Pioneer Credit Recovery, Inc.

MainStory: TopStory CFPB DebtCollection DoddFrankAct EnforcementActions PennsylvaniaNews UDAAP

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