Responding to Investigations and Enforcement Actions by the New Consumer Financial Protection Bureau

The new Consumer Financial Protection Bureau ("CFPB") was created by the Consumer Financial Protection Act of 2010 ("Act").¹ The Act transferred to the CFPB authority for enforcement of, and rulemaking under, fourteen federal consumer financial laws that previously had been spread among seven other agencies: 

1. Consumer Leasing Act,
2. Electronic Fund Transfer Act (except Section 920)
3. Equal Credit Opportunity Act,
4. Fair Credit Reporting Act (except Sections 615(e) and 628),
5. Fair Debt Collection Practices Act,
6. Federal Deposit Insurance Act, Section 43, Subsections (b) through (f),
7. Gramm-Leach-Bliley Act Sections 502 through 509 (except for Section 505 as it applies to Section 501(b)),
8. Home Mortgage Disclosure Act,
9. Real Estate Settlement Procedures Act,
10. S.A.F.E. Mortgage Licensing Act,
11. Truth in Lending Act,
12. Truth in Savings Act,
13. Section 626 of the Omnibus Appropriations Act, 2009, and
14. Interstate Land Sales Full Disclosure Act.

The CFPB is authorized to investigate potential violations of "any provision of Federal consumer financial law" and to enforce the provisions of the Act, any CFPB rules or orders, and the fourteen transferred laws and regulations issued under those laws. The CFPB has ramped up its enforcement staff to approximately 100 attorneys.

The CFPB's expansive enforcement powers include the ability to bring actions both in federal court and in administrative proceedings within the CFPB, itself. There is no difference in the relief the CFPB can seek in court as opposed to an administrative proceeding. The CFPB's enforcement authority includes the power to impose civil money penalties, ranging from $5,000 per day for garden-variety violations of federal consumer financial laws to $25,000 per day for reckless violations and $one million per day for knowing violations. In July 2011 the CFPB issued rules governing how it will conduct investigations ("Investigation Rules")² and how enforcement proceedings will be adjudicated at the CFPB ("Adjudication Rules").³  

The Investigation Rules

The Investigation Rules allow the Assistant Director of the CFPB's Division of Enforcement to issue civil investigative demands ("CIDs") requiring production of documentary material or tangible things, a written report or answers to questions, and oral testimony. The CID must provide "a reasonable period of time" to assemble and produce the material. The Assistant Director is authorized to negotiate and approve the terms of satisfactory compliance with a CID and to extend the time for compliance. If a person receiving a CID wants to challenge it formally, he or she must petition the Executive Secretary of the CFPB (with a copy to the Assistant Director) within 20 days or less, if the return date on the CID is less than 20 days after service. Requests for extension of time to file such a petition are ruled upon by the Assistant Director and are disfavored. If a recipient fails or refuses to comply with a CID, the CFPB may seek to enforce it in federal district court. If the recipient violates a court order enforcing the CID, the CFPB may seek a contempt citation or other relief.

Persons compelled to produce documents or testimony pursuant to a CID shall be advised of the conduct being investigated and the applicable provisions of law. A person may withhold documents based on a claim of privilege but (if the CID so provides) will have to submit a detailed privilege log describing the materials withheld and the grounds for claiming privilege. A person may assert a Fifth Amendment privilege to refuse to answer questions. The CFPB can seek a grant of immunity from the Justice Department in order to overcome the claim of privilege.

Any witness compelled to appear in person may be represented by counsel. After testifying, a witness and his/her attorney have an opportunity to review the transcript and make changes. Any such changes are entered on the transcript along with a statement of the reasons given by the witness for making the changes. A person may request a copy of the transcript but the CFPB may deny such requests for good cause. 

The Adjudication Rules

The Adjudication Rules establish a time limit of 300 days from the time an action is commenced until the hearing officer must issue a recommended decision, which is subject to review only by the Director of the CFPB. This 300-day limit will be extended only in "rare circumstances." Accordingly, all stages of the proceedings are on an accelerated schedule.

After a complaint is filed, the respondent must answer within 14 days. Failure to do so is deemed a waiver of the right to appear and consent to the entry of an order granting the relief sought by the CFPB. Unless the respondent is already aware that an enforcement action is brewing and has been developing a defense, this 14-day time limit provides little time to review the notice of charges, investigate the allegations, determine the appropriate response and draft an answer. 

After the enforcement action is commenced, the CFPB must disclose to the respondent all documents the Division of Enforcement obtained from persons not employed by the CFPB, unless they are privileged or otherwise protected from disclosure (e.g. the identity of confidential sources). This disclosure requirement applies only to documents in the possession of the Division of Enforcement; no other division of the CFPB is required to produce anything. Beyond this mandatory disclosure, discovery is quite limited. Respondents can request production of witness statements, but the time for delivery is determined by the hearing officer. There are no discovery depositions or interrogatories. Subpoenas for witnesses and documents can be issued, but only by the hearing officer, and they can be enforced only by the CFPB. Expert discovery is permitted and depositions can be taken of witnesses unavailable for the hearing.

Hearings before the CFPB are presumptively public. Evidence that is relevant, material, reliable, and not unduly repetitive shall be admissible and evidence shall not be excluded solely on the basis of its being hearsay if it is otherwise admissible and bears satisfactory indicia of reliability. Prior sworn statements by a non-party witness can be admitted if the witness is unavailable to testify or if the party offering the sworn statement is unable to procure the attendance of the witness by subpoena.

The hearing officer will file a recommended decision in each case no later than 90 days after the deadline for filing final post-hearing briefs and in no event later than 300 days after service of the notice of charges. The recommended decision normally will be adopted by the Director as the final decision unless a party files a notice of appeal to the Director within 10 days of issuance of the recommended decision and perfects that appeal by filing an opening brief within 30 days of the recommended decision. An appeal to the Director is a prerequisite to seeking judicial review of the final decision.

Early Warning Notice For Potential Enforcement Targets

In November 2011, the Division of Enforcement announced that, before it recommends that the CFPB commence enforcement proceedings, it may give the subject notice of the potential violations and offer an opportunity to submit a written statement in response.⁴ The objective of this Early Warning Notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions before an enforcement action is recommended or commenced.

Any statement provided in response to an Early Warning Notice must be received by the CFPB within 14 days. It must be no longer than 40 pages, double-spaced, and should focus on legal and policy matters relevant to the potential enforcement proceedings. Any factual assertions relied upon or presented in the statement must be made under oath by someone with personal knowledge of such facts. These same procedures should be followed by persons involved in a CFPB investigation who wish to submit a written statement on their own initiative at any point during an investigation.

A person or company considering whether to respond to an Early Warning Notice must take into consideration that the response likely will not be privileged, and could potentially be used against the respondent in any future enforcement proceeding. The response may also be discoverable in later civil litigation by private parties.

Settlements

Any person who is facing a pending or a prospective enforcement proceeding may make a written offer of settlement at any time. The offer must be submitted to the CFPB attorney handling the matter, who will review it and decide whether to recommend it. If the attorney's recommendation is favorable, the settlement offer and the recommendation will be presented to the Director for approval. If the attorney's recommendation is unfavorable, the offer shall not be presented to the Director unless the person making the offer so requests. If the Director rejects the offer of settlement, the offer is deemed withdrawn and it will not constitute a part of the record in any proceeding against the person making the offer.

¹ The Act is Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203 (July 21, 2010), Title X, 12 U.S.C. § 5481 et seq.

² 76 Fed. Reg. 45168 (July 28, 2011), to be published as 12 C.F.R. Part 1080.

³ 76 Fed. Reg. 45338 (July 28, 2011), to be published as 12 C.F.R. Part 1081.

⁴ CFPB Bulletin 2011-4.