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Financial Services Law Insights and Observations

Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand

CFPB Nonbank Supervision Mortgage Servicing Mortgage Insurance Enforcement Investigations


On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID).  The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests.  CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days.  In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.

The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA).  In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.

In denying the petition, the Bureau began by explaining that CIDs play a “crucial role” in the Bureau’s ability to carry out its duty to enforce consumer financial laws.  It stated that the purpose of CIDs are to “close the [information] gap” between the Bureau and the subject company and/or individual in order for the Bureau to determine whether the investigation is worth pursuing, and if so, to what extent.

The CFPB then set forth the standard it will use to consider and resolve petitions to modify or set aside CIDs, adopting the deferential standard of review relied upon by Circuit Courts of Appeals in proceedings to enforce administrative subpoenas.  That standard provides that a CID will be enforced if it satisfies the following requirements:  (i) the investigation is for a lawfully authorized purpose; (ii) the information requested is relevant to the investigation; and (iii) procedural requirements are followed.  If the Bureau establishes these factors, the CID will be enforced unless the petitioner demonstrates the CID imposes an “undue burden” or constitutes an abuse of process.

With respect to the Company’s first issue, that the CID failed to state the nature of the conduct at issue, the Company argued that the CID’s description of the purpose of the investigation was so broad as to encompass every aspect of mortgage lending, and thus did not satisfy the notice requirement established by the Dodd-Frank Act.  The Bureau rejected this contention and found that “notice was provided from the outset and repeatedly thereafter” beginning as early as January 3 and through to May 22 in the CID’s “Notification of Purpose.”  In support of this finding, the CFPB cited cases standing for the proposition that the subject matter of investigations can be provided generally.

With respect to the Company’s assertion that the CID was an overly broad and unduly burdensome fishing expedition, the Bureau noted that the petition “offered little or no detail to make the kind of showing required to substantiate these claims.”  It explained that in order to meet its legal burden, the petitioner needed to show the specific nature and the magnitude of the hardship and state specifically how compliance will harm its business.  The Bureau further noted that it already had made substantial modifications to the CID through the meet-and-confer process, and the Bureau’s enforcement team had stated that it was willing to consider other potential limitations.

Finally, with respect to the Company’s objection that the CID sought documents, items, and information exceeding the applicable limitations period, the CFPB maintained that the relevant issue was not whether the information itself was actionable but rather whether that information was relevant to conduct that was actionable.  It cited other authority which allowed discovery beyond the statute of limitations and noted the importance of collecting relevant information in order to accurately and completely investigate a matter.

Petitioning a newly-founded government agency in unchartered territories always is a difficult exercise.  With the increasing number of CFPB investigations and enforcement actions, that exercise will become even more challenging.  In light of the Bureau’s first determination of a petition to modify or set aside a CID, potential CID recipients will be left to wonder:  how is the CFPB likely to respond to future petitions of this type?  Given its precedential value for potential petitioners, it is important to determine what, if anything, can be gleaned from the CFPB’s determination.

First, the Bureau makes clear that it is incumbent on petitioners to be specific in their objections to a CID.  Petitioners must specifically describe the burdens that supplying requested information imposes on the company and how the information sought is irrelevant to the investigation.  In fact, the Bureau criticized the petition’s use of “general objections” and summarily dismissed the arguments associated with those objections.

Second, given the deferential standard of review which will be applied to such petitions, the meet-and-confer sessions take on increased importance.  The meet-and-confer session is intended as an opportunity to narrow the scope of the requests and close the information gap between the CFPB and the subject of the investigation.  As a prerequisite to filing a petition, CID recipients are obligated to confer with the Bureau in a good-faith effort to resolve issues and concerns.   In fact, the CFPB’s Rules of Investigations provide that “[t]he Bureau will not consider petitions to set aside or modify civil investigative demands unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.”  12 C.F.R. part 1080.6(c)(3) (emphasis added).  While the CFPB did not decide whether the Company met this obligation, the Bureau did express its concern to future parties about the importance of approaching this obligation affirmatively and engaging in “a productive discussion that can resolve issues or concerns more effectively.”

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