Can banks fight CFPB?

The Consumer Financial Protection Bureau may be the newest kid on the regulatory block, but it has made up for its relative youth with an aggressive enforcement mentality.

In its first enforcement action back in 2011 the bureau revealed its “regulation by enforcement” approach with a $165 million consent order against a major bank and the issuance of a corresponding compliance bulletin on credit card add-on products. Since then, the bureau has brought numerous actions against lenders, debt collectors, debt buyers, mortgage servicers, lead generators, and many other providers of consumer financial services.

When faced with a CFPB investigation or threatened with litigation over alleged violations of consumer financial law, a company may feel overwhelmed by the potential of civil monetary penalties, restitution, and injunctive relief.

The company must carefully consider the tradeoffs between settling or litigating with the bureau. At times, however, it may seem that there are only two options—capitulating or litigating. This is particularly the case where the bureau’s enforcement action appears to be part of a larger policy objective.

You can negotiate

In fact, however, our experience before the CFPB, a review of the bureau's public enforcement actions brought to date, and the CFPB's internal guidance on the topic, suggest that there is often an opportunity to reach a negotiated settlement.

In this regard, CFPB’s Enforcement Policies and Procedures Manual establishes settlement principles to guide enforcement staff during investigations and settlement talks. To be sure, these settlement principles reflect the "regulation through enforcement" stance of CFPB and may not seem like much of a compromise in practice. But, understanding the bureau’s own internal guidance can go a long way to deciding if it's possible to reach a favorable settlement, or if there's room for the Bureau to close the investigation without any public enforcement action at all.

Bureau's broad investigatory and enforcement reach

CFPB is charged with implementing and enforcing federal consumer financial law, which includes 18 enumerated consumer laws enacted prior to the Dodd-Frank Act, including, for example, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and the Truth in Lending Act. In addition, CFPB has authority to bring an enforcement action for any unfair, deceptive, or abusive act or practice (UDAAP) involving consumer financial products or services.

To help set a consistent enforcement approach, CFPB’s manual also sets out policies for staff on initiating investigations; drafting civil investigative demands and taking testimony; closing investigations; and how to decide between seeking a settlement or filing a lawsuit in court or the administrative forum.

Of note, the bureau can investigate merely on suspicion that any person has violated any provision of federal consumer financial law. In other words, it is not necessary for CFPB to have evidence that a law has been violated before opening a investigation.

In fact, according to the manual, the bureau could conduct a compliance sweep to investigate whether industry participants are complying with a law or regulation.

Bureau's settlement priorities

The CFPB manual provides specific settlement principles to guide enforcement staff during investigations and settlement talks.

Although CFPB staffers are given leeway and discretion to adjust their negotiations in response to particular facts and circumstances, a review of a number of consent orders, as well as our own personal experience, reveals that enforcement staff typically closely follow these guidelines.

Nonetheless, there's no substitute for tough negotiation. This recognizes that every fact situation is different. And it also recognizes that the ultimate resolution of an enforcement matter, once alleged violations of law are made, depends on each party's perception and understanding of litigation risk and the larger policy picture.

CFPB’s settlement principles communicated to its “senior enforcement team” reveal:

• A preference for public settlements.

• A desire to control the timing of filings and the publicity of matters—and the language in a complaint or press release.

• A policy to treat similar conduct consistently.

In addition, CFPB’s internal guidance makes clear that it seeks settlements that “sufficiently impact the settling party and not be treated simply as the cost of doing business.” 

Similarly, according to the guidance, settlements should avoid being "hollow" or otherwise not enforceable. (For example, if the settling party has filed for bankruptcy and is unable to pay the assessed penalty.)

Finally, the guidance also prioritizes settlements that are accompanied by publication of compliance bulletins or other forms of consumer or industry guidance.

Applying knowledge of process

When considering settling a CFPB enforcement action—and when responding to an inquiry—companies need to understand the range of these issues and positions in order to develop an appropriate strategy and set realistic expectations. If found in CFPB’s crosshairs, a company should consider every opportunity to frame the issues and advocate its position.

Of course, if a settlement cannot be achieved or is unrealistic, especially because CFPB seems to have goals that go far beyond discrete enforcement of the law, then litigation may be inevitable.

Pending case worth watching

To this last point, PHH is currently challenging CFPB’s enforcement by regulation approach in an appeal to a CFPB administrative order in the D.C. Circuit. PHH Corp. v. Consumer Financial Protection Bureau (filed June 19, 2015).

If the challenge is successful—arguments have been heard and a decision is expected in the near future—it will be interesting to see if CFPB changes its enforcement approach or settlement principles in future investigations and enforcement actions. Until then, the CFPB’s own settlement principles come close to pre-ordaining regulation through enforcement.

About the authors

Jonathan L. Pompan, partner and co-chair of Venable's CFPB Task Force, Andrew E. Bigart, and Alexandra Megaris advise on consumer financial services matters and represent clients in investigations and enforcement. For more information, email  [email protected].