Federal Court Orders Loan Servicer to Comply with CFPB’s CID Investigating Potential UDAAP and FCRA Violations

On February 28, 2018, the U.S. District Court for the Western District of Pennsylvania granted a petition by the Consumer Financial Protection Bureau (“CFPB”) to enforce a civil investigative demand (“CID”) against a student loan servicer to investigate potential Unfair, Deceptive or Abusive Acts or Practices (“UDAAP”) or violations of the Fair Credit Reporting Act (“FCRA”). See Consumer Fin. Prot. Bureau v. Heartland Campus Solutions, ECSI, No. 17-cv-1502, 2018 U.S. Dist. LEXIS 31952 (W.D. Pa. Feb. 28, 2018).

The CID contained the following Notification of Purpose:

The purpose of this investigation is to determine whether a [sic] student-loan servicers or other persons, in connection with servicing of student loans, including processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting, have engaged in unfair, deceptive or abusive acts or practices in violation of §§ 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536; or have engaged in conduct that violates the Fair Credit Reporting Act, 15 U.SC. §§ 1681, et seq., and its implementing Regulation V, 12 C.F.R. Part 1022. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest.

The servicer argued that the above-referenced Notification of Purpose was unreasonably vague and that the CID therefore was unenforceable. In support of that argument, the servicer relied heavily on the recent decision of the U.S. Court of Appeals for the District of Columbia in Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools, 854 F.3d 683 (D.C. Cir. 2017) (“ACICS”).

In ACICS, the CFPB issued a CID to a non-profit organization that accredits for-profit colleges. The Notification of Purpose in ACICS stated that the CFPB was investigating “unlawful acts and practices in connection with accrediting for-profit colleges.” The D.C. district court deemed the CID unenforceable. The D.C. Circuit affirmed that decision, holding that:

  • “[T]he deference courts afford agencies does not ‘eviscerate the independent role which the federal courts play in subpoena enforcement proceedings.’” ACICS, 854 F.3d at 689.
  • “The statutory power to enforce CIDs in the district courts . . . entrusts courts with the authority and duty not to rubber-stamp the Bureau’s CIDs, but to adjudge their legitimacy.” Id.
  • Agencies are “not afforded ‘unfettered authority to cast about for potential wrongdoing.’” Id.
  • “Accordingly, courts will not enforce a CID when the investigation’s subject matter is outside the agency’s jurisdiction. . . . Nor will they enforce a demand ‘where there is too much indefiniteness or breadth’ in the items requested.” Id.
  • “Because the validity of a CID is measured by the purposes stated in the notification of purpose . . . the adequacy of the notification of purpose is an important statutory requirement.” Id. at 690.

Applying these standards, the D.C. Circuit concluded that “the Notification of Purpose fails to state adequately the unlawful conduct under investigation or the applicable law.” ACICS, 854 F.3d at 690. In particular, the CID failed to explain “what the broad and non-specific term ‘unlawful acts and practices’ means in this investigation.” Id. The D.C. Circuit also noted that “[t]he CFPB’s recognition that it lacks statutory authority over the accreditation process of for-profit colleges further illustrates the CID’s inadequacy.” Id. at 691.

In sum, the ACICS court held: “[W]ere we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.” ACICS, 854 F.3d at 692.

Heartland Campus Solutions (“Heartland”) argued that the CID issued to it by the CFPB was just as vague as the ACICS CID because it “merely categorize[s] all aspects of a student loan servicing operation.” Heartland, 2018 U.S. Dist. LEXIS 31952, at *5. The Heartland court agreed that ACICS sets forth the correct legal test for analyzing the enforceability of a CID. Id. at *10.

However, the Heartland court found there were certain distinctions – two of which were particularly important – between the CID issued to Heartland and the CID that the D.C. Circuit examined in ACICS. First, unlike in ACICS – where the CFPB’s authority to investigate college accreditation was called into question – “the CFPB has broad statutory authority to investigate student lending practices.” Heartland, 2018 U.S. Dist. LEXIS 31952, at *13. Second, unlike the ACICS CID, the Heartland CID did not have a “catch-all” provision for “any other” consumer financial law violations.

In the alternative, Heartland argued that the CID was improper because it covered all the operations of a student loan servicer’s business. The court deemed this argument a “red herring.” Heartland, 2018 U.S. Dist. LEXIS 31952, at *11. The court concluded that even the company had acknowledged at the show cause hearing that the Bureau has broad authority to investigate violations of consumer financial law. Id. In reaching its conclusion, the court hewed closely to the statutory language of the Dodd-Frank Act. The court concluded that, so long as each operation is itself within the Bureau’s authority to investigate financial products and services, a CID potentially can cover all of a company’s operations. The court noted that Heartland had cited “to no authority – and the Court finds none – holding that the CFPB is barred from investigating the totality of a company’s business operations, rather than a mere subset of its operations, when it has a legitimate reason to believe that violations have occurred.” Id.

In short, the court adopted and applied the legal test set forth in ACICS. But that test led to a different result because, the court held, the modified CID in Heartland was drafted by Bureau staff differently than the CID at issue in ACICS. Thus, the court enforced the Heartland CID in furtherance of the CFPB’s investigation of possible UDAAP and FCRA violations related to student loan servicing.

Moving forward, this case signals a future protocol for how the CFPB, now under the leadership of Mick Mulvaney, is likely to operate. Unlike the ACICS CID that was issued under the previous Bureau director, the Heartland CID was notable in that the text used in the Notification of Purpose box was tighter and more tailored to the enabling statute. The modified CID in Heartland, however, was also issued under the tenure of Director Cordray on June 9, 2017 (five months before Director Cordray stepped down). Therefore, Heartland demonstrates that the Mulvaney-led Bureau is moving forward in investigations and enforcement activity in the student financing space. It also serves as an example of the Bureau’s ongoing intention to continue pursuing enforcement investigations and to sue to enforce CIDs in district court in appropriate circumstances, including in circumstances where the product line falls squarely within the Bureau’s jurisdiction.

J.H. Jennifer Lee

J.H. Jennifer Lee

Jenny represents large and regional banks, card issuers, mortgage bankers or mortgage insurance companies, online lenders, Fin Tech firms, private equity firms with consumer-facing specialty finance strategies, or any “covered person” delineated in the Bureau’s statute, title X of the Dodd-Frank Act. As a lawyer who worked inside the Consumer Financial Protection Bureau (Bureau) Office of Enforcement for several years beginning with the Bureau’s founding, Jenny possesses unique experience that she draws upon to provide clients with defense strategies for enforcement by or litigation with the Bureau....

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