United States: District Court Rebuffs Student Loan Servicer's Attempt To Quash CFPB's Investigative Demand

On June 9, 2017, under the leadership of its former director, the Consumer Financial Protection Bureau issued a modified civil investigative demand, or "CID," containing 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 recipient of this CID was Heartland Campus Solutions ECSI, a division of Heartland Campus Solutions and a large servicer of student loans. Within twenty-one days, Heartland filed a petition to set aside or modify this request in the United States District Court for the Western District of Pennsylvania. The District Court rejected the petition. 

Background 

Statutory Framework  

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")—the Consumer Financial Protection Act ("CFPA")—established the CFPB to "regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws" and "to implement and . . . enforce Federal consumer financial law." One of the CFPB's "primary functions" is to "supervis[e] covered persons for compliance with Federal consumer financial law, and tak[e] appropriate enforcement action to address violations of Federal consumer financial law[.]" For years, the CFPB has investigated for-profit colleges for allegedly deceptive practices in connection with their student-lending activities. 

Pursuant to its investigative authority, the CFPB may issue CIDs so as to investigate and collect information "before the institution of any proceeding." These demands may require the production of documents and oral testimony from "any person" that it believes may be in possession of "any documentary material or tangible things, or may have any information, relevant to a violation" of the sundry laws over which it enjoys jurisdiction. Statutorily, each CID must "state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation." As CIDs are not self-enforcing, a recipient's refusal compels the CFPB to file a petition in federal court to secure compliance.  

D.C. Circuit's Test 

In Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools, 854 F.3d 683 (D.C. Cir. 2017) ("ACICS"), the D.C. Circuit formulated the test now used for analyzing the enforceability of a CID. In that case, the CID's Notification of Purpose declared:  

The purpose of this investigation is to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536, or any other Federal consumer financial protection law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest. 

Affirming the district court's decision that this CID was unenforceable – "other than noting that an agency may define the scope of its investigation in general terms, the Bureau wholly fails to address the perfunctory nature of its Notification of Purpose" – the D.C. Circuit summarized its guiding principles. "[R]eal limits on any agency's subpoena power" exist, it warned, and "the deference courts afford agencies does not 'eviscerate the independent role which the federal courts play in subpoena enforcement proceeding.'" Instead, "[t]he statutory power to enforce CIDs in the district courts . . . [implicitly] entrusts courts with the authority and duty not to rubber-stamp the . . . [CFPB's] CIDs, but to adjudge their legitimacy." Simply put, "[a]gencies are also not afforded 'unfettered authority to cast about for potential wrongdoing.'" Therefore, "[b]ecause the validity of a CID is measured by the purposes stated in the notification of purpose," courts must carefully assess "the adequacy of the notification of purpose," a critically "important statutory requirement." In general, no court should "enforce a CID when the investigation's subject matter is outside the agency's jurisdiction" or honor a demand "where there is too much indefiniteness or breadth in the items requested." 

Guided by these precepts, ACICS gave content to CIDs' minimal "adequacy" requirement. "A notification of purpose may use broad terms to articulate an investigation's purpose." However, to satisfy the statute, that notice must still provide a recipient "with sufficient notice as to the nature of the conduct and the alleged violation under investigation." 

The D.C. Circuit applied this standard—and found the CFPB's CID to be inadequate. While the Notification of Purpose defined "the relevant conduct as 'unlawful acts and practices in connection with accrediting for-profit colleges,'" it "never explain[ed] what the broad and non-specific term 'unlawful acts and practices' means in this investigation." Reasonably read, the CFPB's explanation of its investigative purpose provided "no description whatsoever of the conduct the CFPB is interested in investigating" or "sa[id] nothing" at all about any potential link between the relevant conduct and the alleged violation. The D.C. Circuit concluded, "[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." 

Case at Hand

Application of ACICS' Standard 

Heartland "relie[d] almost exclusively" upon the test fashioned and utilized in ACICS. Although the District Court agreed that ACICS sets forth the correct legal test for analyzing the enforceability of a CID, it rejected Heartland's central argument: that the CID issued to it by the CFPB was just as vague because it "merely categorize[s] all aspects of a student loan servicing operation." 

Instead, the District Court saw two pivotal distinctions between the two notices. First, "the CFPB has broad statutory authority to investigate student lending practices," unlike the its questionable prerogative to investigate college accreditation in ACICS. Second, the CID issued to Heartland lacked any "catch-all" provision for "any other" consumer financial law violations, again distinguishing it from the capacious and virtually unlimited CID in ACICS. Indeed, the CID in Heartland referred to two violations—engaging in Unfair, Deceptive or Abusive Acts or Practices ("UDAAP") and violation of the Fair Credit Reporting Act ("FCRA")—that the CFBP is statutorily obliged to enforce. 

As to Heartland's alternative argument—that the CID was improper because it covered all the operations of a student loan servicer's business—the District Court deemed it a "red herring." Heartland itself, it noted, had acknowledged the CFPB's broad authority to investigate violations of consumer financial laws. Per Dodd-Frank, as long as oversight of each operation lies within the CFPB's purview, a CID may reasonably cover a company's every endeavor. As the District Court observed, Heartland had cited "no authority . . . 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." For its part, the District Court could find not a shred of legal support for this assertion. 

Accordingly, as Heartland had "not argue[d] that the information requested in . . .  [the] CID is unreasonably broad or burdensome, only that the Notification of Purpose is inadequate," the District Court deemed "the Notification of Purpose set out in the June 9 CID . . . [to be] sufficient to provide Respondent with fair notice of the CFPB's investigation" under the ACICS standard. 

Two Take-Aways: Two Ways to Defeat CIDs and CFPB's Unchanged Character   

Heartland holds several lessons for lenders, servicers, and their counsel. First, these opinions, if only because of the scarcity of any others, will likely set the rules for the cases to follow. Under ACICS and Heartland, firms and individuals receiving CIDs can object to them on two bases: (1) that the CID is beyond the scope of the CFPB's authority to investigate, and (2) that the CID is not specific enough to put the recipient on notice of the alleged illegal conduct. Whether or not the CFPB responds with more thorough descriptions, both ACICS and Heartland point to two promising avenues for beating back an unduly capacious CID. 

Second, the Heartland case suggests a nuanced approach to the CFPB, even under its more pro-business director. Apparently, the CFPB is still willing to continue with its investigations and enforcement activity in the student–financing field. In addition, it appears prepared to pursue ongoing enforcement investigations and to sue to enforce CIDs where the activities implicated fall readily within its jurisdiction. 

How other courts make use of ACICS and Heartland in the years ahead is a story worth following.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Stephen Piepgrass
Timothy St. George
Alan D. Wingfield
 
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