As a commercial litigator, you may not yet have considered how the Consumer Financial Protection Bureau (CFPB) will affect your practice. However, if your clients even touch the fringes of the financial services industry, now is the time to get up to speed on the CFPB. The CFPB likely will affect any entity that sells or services any type of consumer financial product, and the entities can include collection agencies, mortgage servicers, banks, credit unions, credit card companies, auto dealers, payday lenders and the like. Understanding the dramatic effect that the CFPB will have on your financial services clients will help you provide better and more informed representation, even if you practice outside the regulatory and compliance arena. In addition, due to the CFPB's enforcement actions, regulatory and compliance work has crept into territory once firmly held by traditional litigators, so understanding this aspect of your clients' businesses may be a smart business development move.
The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in the wake of the 2008 financial crisis, and Congress charged it with regulating and enforcing various consumer protection laws. Indeed, the CFPB touts itself as the "nation's first federal agency with the mission of focusing solely on consumer financial protection." Consumer Financial Protection Bureau, Report of CFPB Pursuant to Section 1017(e)(4) of the Dodd-Frank Act 5 (Dec. 31, 2013), available at http://files.consumerfinance.gov/f/201312_cfpb_report_section-1017e4-appropriations.pdf (last visited May 7, 2014). Because of the CFPB and its recent enforcement activities, financial services entities today face significantly more exposure to government investigations, customer complaints, and litigation than they did a few years ago. Therefore, for commercial litigators with financial services clients, understanding the CFPB and how it operates is critically important.
This article discusses some of the CFPB's enforcement mechanisms, recent litigation, and the type of relief typically obtained in these cases. Moreover, this article examines the CFPB consumer "complaint-handling" process and its potential effect on litigation trends in the financial services industry. Inshort, it remains unclear whether the consumer "complaint-handling" process will reduce private civil litigation or perhaps provide a "back door" for consumers to obtain relief when a private right of action may not exist. Commercial litigators should ensure that their financial services clients know about recent CFPB activities, including its consumer "complaint-handling" practices and enforcement actions, which will likely increase in the coming months and years.
The CFPB enforces a variety of consumer protection laws, including the Fair Debt Collection Practices Act (FDCPA), the Truth in Lending Act (TILA), and the Real Estate Settlement Procedures Act of 1974 (RESPA). The enforcement of these and other laws was previously dispersed among numerous other agencies, including the Office of Comptroller of the Currency, the Federal Deposit Insurance Company (FDIC), the Department of Housing and Urban Development, and the Federal Trade Commission.
Significantly, most CFPB enforcement actions also allege violations of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§5531, 5536, the CFPA. The CFPA is located in Title X of the Dodd-Frank Act. The CFPA authorizes the CFPB to bring actions for any "unfair, deceptive or abusive act or practice" involving consumer financial products or services. 12 U.S.C. §5531, 5536. Of course, this language is broad and provides the CFPB with wide latitude in regulating the financial services industry. The CFPB has the option of filing an action in federal court or in an administrative proceeding before an administrative law judge. Notably, the CFPB does not have its own administrative law judges. So it currently borrows Securities and Exchange Commission (SEC) administrative law judges to preside over CFPB administrative proceedings. The CFPB administrative proceedings are governed by a set of rules titled the "Rules of Practice for Adjudication Proceedings," which largely borrow the SEC and Federal Trade Commission (FTC) rules for the administrative proceedings. See 77 Fed. Reg. 39,058 (June 29,2012), available at https://www.federalregister.gov/articles/2012/06/29/2012-14061/rules-ofpractice-for-adjudication-proceedings (last visited May 7, 2014).
As mentioned, rather than choosing to pursue an administrative proceeding, the CFPB can file an enforcement action in federal court. Venue for these federal actions is proper in any district where the defendant is located or does business. 12 U.S.C. §5564(f). As such, the CFPB has filed federal actions in district courts across the country. It remains unclear why the CFPB decides to file an action in federal court or in an administrative forum. In fact, the public enforcement actions filed to date are split nearly equally between court and administrative actions. There is no apparent correlation between the amount in controversy and the venue selected by the CFPB. Indeed, high-dollar and low-dollar cases have been filed in both forums. With that said, the perception is that the most serious cases are filed in federal court, rather than in an administrative proceeding. Despite the negative perception of defending a claim against the CFPB in court, defendants should prefer court because of its added protections. For example, in court, ordinarily a defendant has more procedural protections and more discovery rights.
To date, the CFPB has filed approximately 40 public enforcement actions. The first action was filed in July 2012, and the frequency of filings has increased over time. In 2013, the CFPB filed approximately 25 actions, steadily increasing through the year. In its busiest month, the CFPB filed six actions in December 2013. The cases have varied widely in the monetary relief sought, ranging from $2 billion in the largest case to $34,000 in the smallest case.
Moreover, to date, almost all administrative actions have been filed as "settled." Currently, there is only one administrative action being actively litigated. See In the Matter of: PHH Corp., et al., File No.2014-CFPB-0002 (complaint filed Jan. 29,2014). The enforcement actions filed in federal courts appear to be slightly more contested, although most civil cases are also filed as "settled."
While 40 may seem modest for the number of total enforcement cases, this number may only reflect the tip of the iceberg with respect to the extent of the CFPB's investigation activities. While cases may appear to be "settled" before they even begin, the public does not see the pre-lawsuit investigation process, which is private. When conducting pre-lawsuit investigations, the CFPB has broad power to obtain documents, information, and testimony by issuing civil investigative demands (CIDs), a form of administrative subpoena. 12 U.C.C. §5562(c) (providing pre-lawsuit discovery powers to CFPB). This entire discovery is kept confidential according to 12 U.S.C. §5562(d), so it is impossible to discern how extensive or contested the pre-lawsuit discovery process is in each case. Nonetheless, because the CFPB devotes a substantial portion of its total budget to the investigation division, it is safe to say that the extent of nonpublic, pre-lawsuit investigations is significant.
Areas of Enforcement
Almost all CFPB enforcement actions filed to date involve mortgages, credit cards, or debt collection practices. In addition to these largest categories, commercial litigators should take note that the CFPB has also filed actions related to automobile loans, student loans, and various other consumer financial products and services.
Regarding mortgages, the cases vary from alleged general mortgage servicing violations to racial discrimination allegations that a bank charged higher prices on mortgage loans to African-American and Hispanic borrowers compared to white borrowers with similar credit scores. Many of these cases involve alleged violations of RESPA. See In the Matter of: PHH Corp., et al., File No. 2014-CFPB-0002 (challenging mortgage insurance arrangement as violating RESPA prohibitions on kickbacks relating to settlement services).
As for credit cards, the most common allegation is that financial institutions misled credit card holders to purchase add-on products, but failed to disclose hidden costs and limitations of such add-on features. See In the Matter of: JPMorgan Chase Bank,N.A. and Chase Bank USA, N.A., File No.
2013-CFPB-0007 (consent order entered Sept. 18, 2013). Most recently, the CFPB announced a large settlement with Bank of America related to credit card add-on products, which required the bank to pay $727 million in restitution to customers and $45 million in civil penalties. In the Matter of: Bank of America, N.A., et al., File No. 2014- CFPB-0004 (consent order entered Apr. 9, 2014). In other instances, credit card companies have been accused of misrepresenting that cards were interest free when in fact they were not. With regard to credit reports and scoring, credit card companies have been accused of misleading customers into paying their delinquent balances under the guise that this would improve their credit scores when it would not.
The CFPB spends significant resources regulating debt collection practices under the FDCPA as well. The CFPB often works in in partnership with the FTC, which also has the authority to enforce the FDCPA. Interestingly, the CFPB did not begin accepting debt collection complaints from consumers until July 2013, two years after it started its consumer complaint program. Consumer Financial Protection Bureau Fair Debt Collection Practices Act CFPB Annual Report 2014 2 (Mar. 20, 2014) available at http://files.consumerfinance.gov/f/201403_cfpb_fair-debtcollection-practices-act.pdf (last visited May 7, 2014). Today, the volume of consumer debt collection complaints is now the largest source of complaints each month compared to any other area. Id. at 2. While the FTC has historically operated as the enforcer of the FDCPA and continues to do so, it appears that the CFPB may begin to take a more aggressive role in this area. Indeed, in late 2013, the CFPB filed two large enforcement actions related to debt collection. See CFPB v. CashCall, Inc. et al., (D. Mass. 1:13-cv-13167) (complaint filed Dec. 16, 2013) (alleging unlawful debt collection of high-cost loans); In the Matter of: Cash America Int'l, Inc., File No. 2013-CFPB-0008 (consent order entered Nov. 20, 2013) (alleging debt collection violations against national payday lender, including robosigning and overcharging military service members).
The CFPB has also filed actions for a broad range of alleged unlawful conduct, including pressuring students to incur "predatory" student loans, discrimination in auto loan interest rates, misrepresentations regarding loan modifications, and charging unlawful upfront fees for debt-relief services. See CFPB v. ITT Educ. Servs., Inc., (S.D. Ind. 1:14-cv-00292-SEB-TAB) (complaint filed Feb. 26, 2014) (predatory student loans); CFPB v. Morgan Drexen, Inc., et al. (C.D. Cal. SACV13-01267 JLS) (complaint filed Aug. 20, 2013) (upfront fees for debt relief).
Type of Relief Sought
The relief sought by the CFPB in enforcement actions is wide ranging but usually consists of cease-and-desist orders, restitution, and civil penalties. The type of relief typically sought by the CFPB can be gleaned from the settlement stipulations and consent orders in these cases. Indeed, a majority of CFPB cases are actually filed as "settled" actions, and therefore, they are not actively litigated. In many of these settlements, the financial institution neither admits nor denies the alleged misconduct. Moreover, most cases that are settled involve a varied combination of different types of relief.
Most enforcement actions result in some form of nonmonetary relief, including cease-and-desist orders, injunctions, and the assumption of compliance and governance procedures. In cease-and-desist and injunction scenarios, the financial institutions agree to refrain from committing certain conduct, with the caveat that if they fail to comply, the penalties will be severe. In addition, financial institutions may agree to undertake affirmative steps to change their compliance programs, hire third-party consultants to assist with compliance, participate in an independent audit programs, or require board oversight and responsibility of compliance risk management. These requirements are typically memorialized in a compliance plan, which further requires a financial institution to submit periodic progress reports to the CFPB. See In the Matter of: JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., File No. 2013-CFPB-0007 (consent order entered Sept. 18, 2013) (requiring credit card company to conduct an annual review of add-on products and report back to the CFPB). The CFPB has placed a strong emphasis on self-policing and self-reporting in hopes of preventing future violations. These compliance requirements can be quite onerous and arguably more costly than civil penalties.
Regarding monetary relief, the restitution and civil penalty damages sought by the CFPB can be enormous. The CFPB relies largely on the CFPA, which allows federal courts and administrative law judges to award "restitution," "disgorgement of compensation for unjust enrichment," "refund
of moneys or return of real property," and "payment of damages or other monetary relief." 12 U.S.C. §5565. Most CFPB settlements have required the payments of restitution to consumers.
In addition to restitution, the CFPA authorizes courts and administrative law judges to impose civil penalties. For negligent violations, a penalty may not exceed $5,000 "for each day during which such violation continues." For reckless violations, civil penalties may not exceed $25,000 for each day during which a violation continues. Most significantly, for knowing violations, the civil penalty skyrockets to the cap of $1 million for each day during which a violation continues. In determining the size of the penalty, the CFPA requires the CFPB to weigh a variety of factors similar to a determination of whether to award punitive damages in civil cases. For example, such factors include a financial institution's resources, the severity of violation, the degree of harm to the consumer, the history of previous violations, and "such other matters as justice may require."
In CFPB-filed actions, the civil penalties imposed have ranged from $1 to $27.5 million. Generally, the size of the civil penalties correlate with the amount of restitution awarded. Moreover, the civil penalties appear to be smaller than the restitution awarded. For example, in a case involving credit card add-on products, the restitution award was $140 million and the civil penalty was $25 million. The CFPB does not explain why it awards varying level of civil penalties in its enforcement cases. Instead, the CFPB simply includes in its settlements boilerplate language that the above-referenced factors were generally considered. Without any guidance on civil penalties, the scope of potential exposure in this area will remain uncertain for financial institutions. Defense counsel will be left arguing to the CFPB and to courts that similar cases should be treated similarly. Unfortunately, this will be challenging because defense counsel do not have access to the underlying facts in other cases, such as private, pre-lawsuit cooperation with the CFPB, which is a penalty mitigating factor. Nonetheless, arguing for consistent treatment will be the best argument if you litigate in this area.
With that said, the CFPB has issued a set of guidelines that financial services entities may use to avoid or to mitigate the severity of civil penalties in enforcement actions. See CFPB Bulletin 2013-06, Responsible Business Conduct: Self-Policing,Self-Reporting, Remediation and Cooperation (June 25, 2013). The day after these guidelines were published, the CFPB issued consent orders in two cases that did not include civil penalties because the defendants "proactively alter[ed] problematic aspects" of the alleged wrongful practices and were "readily working with the bureau to provide refunds" to affected consumers. See In the Matter of: U.S. Bank Nat'l Ass'n, File No. 2013-CFPB-0003 (consent order entered June 26, 2013); In the Matter of: Dealers' Fin. Servs., Inc., File No. 2013- CFPB-0004 (consent order entered June 25,
2013). Accordingly, counsel representing financial services entities should familiarize themselves with the CFPB "Responsible Business Conduct" bulletin and counsel their clients on these issues because this may be one of the best ways to avoid the harsh scrutiny of the CFPB.
"Complaint Handling" Process
In addition to its enforcement actions, the CFPB devotes a significant part of its resources and budget to a consumer "complaint handling" process. Consumer Financial Protection Bureau, Consumer Response Annual Report (January 1–December 31, 2013) 5 (Mar. 31, 2014), available at http://files.consumerfinance.gov/f/201403_cfpb_consumer-response-annual-report-complaints.pdf (last visited May 7, 2014). In essence, the CFPB collects complaints from consumers regarding a wide range of alleged wrongdoing in the financial services industry. After a complaint is submitted, the CFPB
will screen it to determine if it "falls within the CFPB's primary enforcement authority" before it determines whether to pass it along to the financial services entities. Id. at 10. The CFPB then allows the financial services providers to respond to the complaint. The financial services provider will send its response to the CFPB and the consumer, and then the CFPB will allow the consumer to review the response and provide feedback. This process is largely handled electronically through a secure "web portal." Id.
The CFPB started these consumer response operations in July 2011. Id. at 2. As of March 2014, the CFPB has handled approximately 310,000 consumer complaints. Id. at 6. The volume of complaints has steadily increased over time, from 91,000 in 2012 to 163,700 in 2013. Id. The CFPB has a separate division, the Office of Consumer Response, which specifically has the task of handling these complaints.
Similar to the focus of enforcement actions, the large majority of consumer complaints involve mortgages, debt collection, credit card products and services, and credit-reporting activities. Id. at 12. A smaller percentage of the complaints involve student loans, payday loans, auto loans, and bank accounts and services. Id.
Of the 300,000-plus complaints submitted, the CFPB sent approximately 69 percent (113,200) to financial services entities for review and response. Id. at 32. The remaining complaints were either referred to other regulatory agencies (18 percent) or summarily dismissed by the CFPB. Id. A financial services entity's response typically includes descriptions of steps taken or that will be taken and any follow-up actions or planned follow-up actions. Companies sometimes respond by offering monetary relief, nonmonetary relief, or simply an "explanation."
Overall, seven percent of consumer complaints are closed with the financial services entities providing some measure of monetary relief. Id. at 33. Eleven percent of complaints are closed with nonmonetary relief. Id. A common example of nonmonetary relief is correcting a consumer's credit report or account information. Most complaints (68 percent) are closed with an "explanation" that is tailored to answer substantively the concerns in the consumer's complaint to his or her satisfaction or explains why no further action will be taken. Id. For the remaining complaints, they were either closed without relief or explanation, the company is still reviewing them, or the company did not provide a timely response. For complaints resolved with monetary relief, the average amount of relief is $154, however, the amounts vary by product. Id. at 35–36. For example, the average credit reporting complaint is resolved for $33, whereas the average mortgage complaint is resolved for $460. Id. at 35.
More often than not, 66 percent of the time based on statistics available through 2013, a consumer does not dispute a company's response. Id. at 37. In fact, only 21 percent of consumers disputed a company's response. Id. The remaining complaints filed are currently pending. Id. Based on the available data, it appears that the CFPB "complaint-handling" process generally works to resolve consumer complaints without controversy efficiently. As such, this process may actually reduce the volume of civil litigation in this area. In particular, consumers may receive remedies to their satisfaction through the CFPB complaint-handling process when they might otherwise file a lawsuit in state or federal court.
With that said, it is unclear whether all these consumer complaints are based on alleged violations of statutory schemes for which a private right of action exists. Indeed, not all financial consumer protection laws provide rights for private causes of action against financial services entities. See RESPA, Sections 4 and 5, 12 U.S.C. §§2603, 2604 (no private right of action available for violation of disclosure requirements). In certain circumstances, consumers may receive or have received relief through the CFPB complaint-handling program that would otherwise be unavailable without the right to institute a private lawsuit. In effect, this program may provide a "back door" through which consumers may receive relief when a private right of action may not exist.
It appears that many financial services entities have chosen to settle consumer complaints or enforcement actions even when the terms were onerous. Indeed, almost all the largest enforcement cases filed to date were filed as "settled" actions. The CFPB enforcement actions have been widely publicized, and the big-dollar cases have received national attention. This has arguably created a perception that the CFPB is an aggressive enforcer and seeks hefty monetary relief. This perception may be causing financial services entities to resolve consumer complaints expeditiously in hopes of avoiding attention from the CFPB, specifically the purview of the CFPB enforcement division. And rightly so because the CFPB acknowledges that these complaints provide the pipeline for enforcement actions. Indeed, the CFPB "prioritizes" complaints for further investigation, and in at least "some cases" it will refer the complaint to the Division of Supervision, Enforcement, and Fair Lending & Equal Opportunity. Consumer Financial Protection Bureau, Consumer Response Annual Report, supra, at 38.
The Future of the CFPB and What Litigators Need to Know
CFPB and state attorney general enforcement actions are expected to increase in the coming years. The CFPB is well funded, staffed, and poised to ramp up its enforcement activities. Its budget has increased significantly over time, to $570 million in 2014 compared to $541 million in 2013 and $300 million in 2012. The budget estimate for 2015 is an even higher $583 million. The largest line item in the CFPB budget is
the enforcement division line item, which predicts future trends. The number of fulltime employees in the enforcement division has increased 72 percent in just two years.
Commercial litigators serving clients in the consumer financial services industry need to take notice of the CFPB watchdog perched on their clients' doorsteps. Litigators must understand that CFPB related complaints, investigations, and enforcement actions will rise and that the consequences of failing to respond to CFPB-related inquiries could be severe, perhaps business ending. In short, considering the breadth of the CFPB investigative and enforcement powers, litigators serving clients in the consumer financial services industry ignore this watchdog at their own peril.
Copyright 2014, DRI For The Defense. Reprint permission granted.