In a significant legal development, a U.S. appeals court in Philadelphia decreed that several investment trusts holding student loans are subject to federal consumer protection laws. This pivotal ruling, delivered on Tuesday, marks a triumph for the Consumer Financial Protection Bureau (CFPB) in its endeavor to ensure fair treatment for borrowers.
The trusts under scrutiny were established to acquire a staggering 800,000 private student loans from original lenders and oversee their collection on behalf of investors. However, allegations surfaced regarding the employment of deceptive and unfair tactics in debt collection, prompting the CFPB to initiate legal action against these entities in 2017.
Central to the CFPB’s case were accusations that the trusts, in their pursuit of debt collection, resorted to dubious practices such as initiating lawsuits based on false or insufficient documentation, or exceeding deadlines for debt collection. Such actions, the agency argued, contravened the Consumer Financial Protection Act (CFPA), designed to safeguard consumers from deceptive financial practices.
Despite the trusts’ efforts to dismiss the lawsuit, a federal judge in Wilmington, Delaware, stood firm in 2021, paving the way for the case to proceed to the appellate level. In their defense, the trusts contended that they should not fall under the purview of the CFPA, asserting their role as passive investment vehicles with no direct control over the loan servicers responsible for initiating lawsuits.
However, the appeals court’s ruling emphasizes a broader interpretation of “covered persons” under the CFPA, rejecting the trusts’ argument and affirming the application of consumer finance law in their operations. CFPB attorney Kevin Friedl underscored the importance of holding companies accountable, cautioning against loopholes that could enable evasion of consumer protection statutes.
The case attracted attention from various industry stakeholders, with conflicting perspectives on the potential implications. While industry groups voiced concerns about upsetting investor expectations and constraining consumer credit, consumer advocacy groups and 22 states rallied behind the CFPB, highlighting the propensity of investment trusts to resort to unlawful tactics, especially in dealing with old or undocumented debts.
As the legal battle unfolds, this ruling not only sets a precedent for the regulation of student loan trusts but also underscores the ongoing efforts to ensure fairness and transparency in the realm of consumer finance.
