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On September 24, the Bipartisan Policy Center (BPC) released a paper and held an event regarding the CFPB’s activities in its first three years, and potential changes to the agency and its policies going forward. The paper, generally critical of the CFPB’s use of guidance, expressed a preference for rulemakings to implement policy. The BPC argued that if the CFPB must issue substantive guidance, then it should employ a more open and transparent process, seeking input from a variety of parties, including consumer groups and regulated entities. In addition, the BPC identified several concerns with the CFPB’s supervisory and examination processes and recommended that the CFPB, among other things, (i) establish a specific policy setting timelines for closing out examinations, (ii) end its policy of including enforcement staff in the supervisory process, (iii) renew its effort to recruit and train high-quality supervisory and examination staff, and (iv) improve coordination with other agencies, particularly to integrate the CFPB’s product-based approach. The BPC also addressed, among other things, the CFPB’s requests for data from regulated entities, the use of its civil penalty fund, oversight of the Bureau, and the development and implementation of performance metrics.
On September 19, the CFPB and the OCC announced parallel enforcement actions against a national bank to resolve allegations that the bank engaged in the unfair and deceptive marketing, sale, and billing of “add-on products” across multiple consumer products, and the OCC announced a separate order that resolves claims related to the bank’s non-home loan debt collection litigation practices and compliance with the SCRA.
Under the CFPB’s consent order, the bank will pay a $20 million penalty to resolve allegations that over a seven year period ending in March 2012, the bank, through its vendor, enrolled customers in credit monitoring and identify theft products, and charged some customers for these products without or before having received written authorization to perform the monitoring services. The CFPB order also requires restitution to affected customers, and numerous requirements to enhance compliance, including with regard to vendor oversight. Under the OCC’s parallel action, the bank entered a consent order similar to the one entered with the CFPB, and consented to pay a $60 million penalty.
The CFPB order acknowledges the bank’s representations that it no longer offers the scrutinized products and that it already has credited or refunded affected customers. The bank’s press release also reaffirms its commitment to holding its vendors to high standards.
In a separate action announced by the OCC on the same day, the bank also entered a consent order to resolve allegations of unsafe or unsound practices with regard to its non-mortgage debt collection litigation practices and its non-mortgage SCRA compliance. As the bank pointed out in a press release, the consent order relates to only a slight percentage of credit card, student loan, auto loan, business banking and commercial banking customers who defaulted on their loan or contract and the resulting collections litigation that followed several years ago. The press release explains that the bank uncovered the issue in internal reviews that began in 2010 and took several steps in response, including: (i) halting new credit card collections litigation in 2011, (ii) dismissing the impacted lawsuits, and (iii) improving SCRA controls.
Like many government agencies before it, the CFPB has relied on the use of civil investigative demands (CIDs) in investigations. CIDs are one of the many tools in the CFPB’s toolbox to gather information from the subject of an investigation or third-parties who are in possession of information believed to be relevant to the investigation. While the CFPB drew from other government entities, including the FTC , in drafting its rules related to investigations, the CFPB’s execution of its investigatory procedures, particularly with respect to CIDs, is quite different than the approach taken by the FTC – creating a new playbook for enforcement lawyers and the institutions they represent.
The CFPB’s Final Rule Relating to Investigations sets forth the procedures that apply to CIDs, including certain meet and confer obligations and requirements regarding potential challenges to CIDs. Late last year, we reported on the Bureau’s first decision denying a petition to modify or set aside a CID. To date, the CFPB has issued three decisions, all denying such petitions.
From experience, we have discovered many practical takeaways in handling CFPB CIDs:
- Don’t wait to seek clarification on the CID.
- It is imperative to involve the company’s IT personnel early and often.
- You must move fast – the meet and confer must occur within 10 days and any petitions to modify a CID must be filed within 20 days.
- If you decide to file a petition to modify a CID, consider the practical consequences of doing so.
To learn more about the practical tips shared, please review some of our recent articles on the issue. BuckleySandler attorneys Jonice Gray Tucker and Amanda Raines provide additional details to the practical guidelines in their article, CFPB Investigations in Focus: Navigating CIDs. Earlier this year, Amanda analyze the reasoning behind the CFPB’s decisions denying petitions to modify or set aside CIDs.
On August 22, C. Hunter Wiggins, the CFPB’s Deputy Enforcement Director for Policy and Strategy, spoke to the D.C. Bar Antitrust and Consumer Law Section at a session titled “The Consumer Financial Protection Bureau’s Enforcement Priorities.” A summary of his remarks and responses to certain questions follows.
Mr. Wiggins began his presentation by noting that the Bureau did not want to be a “reactive” agency that devotes its limited resources to “cleaning up” after past crises. Instead, his team, which reports to the CFPB’s Director of Enforcement, Kent Markus, is responsible for evaluating and setting strategic priorities that will allow the Bureau to be a proactive organization.
The Bureau has 150 employees in its Office of Enforcement, seven of whom are on the Policy and Strategy Team. In addition, the Enforcement Office has several “Issue Teams,” which include members of the Policy and Strategy team and other Enforcement staff. Each of the “Issue Teams” is focused on one particular market, such as mortgage servicing or credit cards, and is responsible for identifying problems in those markets that should be prioritized for enforcement action. The criteria used include: (1) the number of consumers potentially impacted by a practice; (2) the period of time that practice has been in place (including whether the practice is ongoing); (3) the amount of harm to consumers; (4) whether the practice targets a vulnerable population; (5) whether consumers have the ability to avoid the practice through shopping; (6) whether the practice results in market distortions (such as a “race to the bottom” or competitive harm to legitimate businesses that do not engage in the practice); and (7) barriers to other solutions (such as the lack of a private right of action).
The Bureau allocates its enforcement resources as follows:
- Core Work (50%): This consists of the priority areas in which the Bureau carries out what were described as its “cop on the beat” responsibilities. Each area generally receives a pro rata amount of resources, but this can vary over time. The areas include: (1) auto finance; (2) consumer loans; (3) credit cards; (4) credit reporting; (5) debt collection; (6) debt relief; (7) deposit accounts; (8) fair lending; (9) money services / prepaid cards; (10) mortgage origination; (11) mortgage servicing; (12) payday loans; and (13) student lending.
- Emphasized Priorities (25-35%): Two to four specific, systemic market problems are chosen. As an example, Mr. Wiggins pointed to the Bureau’s actions regarding credit card add-on products over the past year, which he said were prioritized due to the scope of their impact.
- Emerging and Cross-Cutting Priorities (15%): These are new products, services, or markets, or in some cases new aspects of older products and services that may have an impact on a particular population. As an example, Mr. Wiggins referred to the Bureau’s recent action regarding the use of military allotments to collect payments on auto loans made to servicemembers.
- Tactical Priorities (0-10%): These are activities that are useful to the Bureau’s own long-term institutional development. For example, Mr. Wiggins noted areas where the Bureau has sought out partnerships with other agencies to establish or strengthen enforcement relationships with other regulators or law enforcement agencies. Other possible tactical priorities mentioned included pursuing enforcement matters with a regional focus and increasing the Bureau’s ability to use temporary restraining orders as an enforcement tool.
Question and Answer Session
Mr. Wiggins noted that his responses to questions, which are discussed below, represented his own views and not those of the Bureau.
- RESPA enforcement: Mr. Wiggins was asked if the Bureau was looking at title agents for RESPA compliance. He responded that, in setting priorities, the Bureau focuses on identifying problems, not industries.
- Add-on products: Mr. Wiggins was asked why the Bureau identified credit card add-on products as an “Emphasized Priority” when those products were already receiving significant attention from other regulators. Mr. Wiggins acknowledged the actions of other regulators but said that the Bureau’s review led them to view this as an area where they needed to step in.
- Regulating attorneys: A concern was raised regarding the extent to which the Bureau could regulate the activities of attorneys. Mr. Wiggins responded that, as general matter, the Bureau has no interest in intervening in circumstances where attorneys are merely providing legal advice to clients. However, he noted two Bureau enforcement actions involving potentially problematic attorney conduct: first, a 2012 action against a California law firm allegedly engaged in unfair and deceptive practices related to loan modifications; and second, this week’s suit against a debt-settlement firm that allegedly partnered with attorneys to collect prohibited upfront fees for debt relief services.
- Criminal activity: In response to a question, Mr. Wiggins stated that the Bureau was legally obligated to turn over information regarding suspected criminal activity uncovered during its examinations and investigations to the Department of Justice (DOJ) and that the Bureau has a memorandum of understanding with DOJ for that purpose. However, he emphasized that the CFPB’s examiners and investigators do not look for criminal conduct, such as tax evasion, in the regular course of their duties.
- Employee incentive programs: Mr. Wiggins was asked about the use of employee incentive programs in the area of debt collection. He responded that incentive programs can be problematic to the extent they encourage employees to engage in improper conduct and that the Bureau takes this into account.
On August 20, the CFPB announced an enforcement action against a debt settlement company for violations of the Telemarketing Sales Rule and the Dodd-Frank Act. The complaint alleges that the company disguised illegal upfront fees charged for debt-relief services as bankruptcy-related charges and deceived consumers into believing they would become debt free when only “a tiny fraction” of its customers actually do. The enforcement action follows a lawsuit filed against the CFPB on July 22, in which the same debt settlement company and an attorney jointly accused the CFPB of “grossly overreaching its authority” in the investigation on which the enforcement action is based.
On August 6, the DOJ and the SEC announced parallel civil fraud actions filed in the U.S. District Court for the Western District of North Carolina. The DOJ alleged that a national bank and related entities misled investors about the residential jumbo prime mortgage loans backing an $850 million RMBS the bank offered for sale, made false statements after failing to perform proper due diligence, and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers. The DOJ action represents the enforcement agency’s latest effort to employ the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to seek civil penalties. The SEC is seeking an order requiring disgorgement and civil penalties under the Securities Act. The complaints were announced as part of the Financial Fraud Enforcement Task Force’s RMBS Working Group, and Task Force participants Attorney General Eric Holder, Associate Attorney General Tony West, and New York Attorney General Eric Schneiderman all promised additional investigations and actions, using every tool and resource available to the group.
On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.
The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.
On July 31, the DOJ announced the departure of Financial Fraud Enforcement Task Force (FFETF) Executive Director Michael Bresnick, effective August 1, 2013. The DOJ describes the FFETF, which was created in 2009, as the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat financial fraud. Mr. Bresnick has led the FFETF since October 2011, and departed to join a private law practice. On the same day, the Senate voted to confirm Stuart Delery as Assistant Attorney General for DOJ’s Civil Division. Mr. Delery had been filling that position on an acting basis, prior to which time he held several other positions within the department. He joined the DOJ in January 2009 as Chief of Staff and Counselor to the Deputy Attorney General and later served as Associate Deputy Attorney General and Senior Counselor to the Attorney General.
On July 26, the Federal Reserve Board released an amended consent order with one of the several financial institutions that entered into a consent order in April 2011 to resolve allegations that the institutions engaged in improper mortgage servicing and foreclosure processing practices. The agreement follows numerous others released earlier this year. Under this latest agreement the institution will pay roughly $230 million, including $32 million to satisfy its obligation to provide loss-mitigation assistance since it no longer owns a significant residential mortgaging portfolio. Together, all the amended consent orders will provide approximately 4.4 million borrowers a total of more than $3.8 billion in cash compensation while an additional $5.8 billion will be provided by the servicers in commitments for loss-mitigation assistance, such as loan modifications and forgiveness of deficiency judgments. For the participating servicers, the amendments also replace the requirements related to the Independent Foreclosure Review process set out under the original consent orders.
On July 18, Virginia Attorney General Ken Cuccinelli (AG) announced a lawsuit against an online lender for allegedly making illegal payday loans in the state. The AG explained that the Virginia State Corporation Commission requires every payday loan lender to obtain a license before conducting business in Virginia. The AG asserts that the lender did not obtain the required license. State law limits unlicensed lenders to charging no more 12% in annual interest on a loan. The AG alleges that the rates on the online lender’s loans range from 438% annually for a 25-day loan to 1,369% annually for an eight-day loan. The AG stated that the company instructs customers to apply for loans through its website, and after the loan applications are approved, the company wires funds directly to the consumers' bank accounts in exchange for authorizing the company to directly debit loan payments from the customers’ bank accounts. The suit seeks to enjoin the company from collecting interest over the 12% state limit, and seeks consumer reimbursement of certain interest paid and civil penalties in the amount of $2,500 for each violation.