Guilty Until Proven Innocent?

QUESTION 

I am the Chief Executive Officer of a lender and servicer. Last week, the CFPB hit us with a Civil Investigative Demand. Our in-house lawyer has put a team together from various departments to respond to it. And you kindly referred us to an attorney who specializes in this process. We are retaining the attorney you recommended. 

At this point, many people in the company are aware that we received the Civil Investigative Demand, and I am very concerned about reputation risk. We have built a fantastic company, yet rumors have already started that we did something to violate laws and regulations. I need a way to calm everyone down and not worry. 

Because of the rumors, some employees now think we are guilty of wrongdoing. We intend to fight any such charges! I need to issue a statement that explains the process in plain and simple language. I need your help in providing information that helps them to understand the process. 

What is the CFPB’s Civil Investigative Demand? 

Are we guilty until proven innocent? 

COMPLIANCE SOLUTION 

CMS Tune-up®  

RESPONSE 

Rumour doth double, like the voice and echo,

The numbers of the feared.

Henry IV, Part 2, Shakespeare 

Allow me to put the above lines into our modern idiom: An unconfirmed report expands like an echo growing louder and louder, magnifying the perceived size and threat. 

DO NOT IGNORE THE RUMORS! 

Perhaps you think that the truth will reduce the rumors. Sometimes, it does; sometimes, it does not. One of my favorite literary figures, Jonathan Swift, once said that “falsehood flies, and the truth comes limping after it.” He cautioned that by the time people become “undeceived,” the “jest” is over, and the “tale” has already had its effect.  

Reputation risk is real, and adverse issues can hobble a company financially, even when there’s nothing to the allegations of wrongdoing. Some rumors don’t have a scintilla of truth, but they thrive nonetheless. Like a garden of weeds, pull out one, and another takes its place. Your aim should be to control the message. However, do not ignore rumors! 

PEEKING BENEATH THE CFPB HOOD 

I am going to give you a peek into the CFPB’s Civil Investigative Demand process. The acronym is “CID,” and for brevity, I will use this acronym. If you’re wondering if the CFPB has coopted the authority to conduct CIDs, you might be interested in knowing that it certainly does have the authority pursuant to the Dodd-Frank Act.[i] A primary access point to the authority is Unfair, Deceptive, or Abusive Acts or Practices (UDAAP),[ii] which

 “…take any action . . . to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service…”[iii] 

Most CIDs are triggered by CFPB examination. However, the examination is not the only source of the CID. I’ll get back to examinations momentarily. 

NON-EXAMINATION SOURCES OF CIDs 

Other sources can trigger a CID, many of them being external to the company itself. For instance, the Office of Enforcement monitors the CFPB’s Consumer Complaint Database for potential violations.[iv]

The CFPB also sources allegations of violations from its Whistleblower and Tips portal. 

In addition, states and federal agencies may send referrals relating to possible breaches of regulations. 

News reports and even Better Business Bureau complaints can lead to activating a CID. 

Unfortunately, a company may have no idea that it has come to the attention of the CFPB’s enforcement investigation team until the CID is actually issued. Often, the company is surprised by the CID. Indeed, it may have no idea of the alleged violations. Put otherwise, the first a company learns of an investigation is usually when it gets the CID.[v] 

TRIPARTITE TEAM 

Such enforcement puts huge pressure on a company. One reason for the pressure is that there is an unyielding timeline for document production and appropriate responses.[vi] This is the reason why I referred you to an attorney who is steeped in handling the CID process. 

You must retain a lawyer who is capable of vetting relevant information, identifying witnesses and knowledgeable people in the company, and determining the legal violations implicated in the investigation. Importantly, the attorney must ensure compliance with the CID while also advising the company of any legal and factual risks. The appropriate legal counsel should be experienced in understanding UDAAP (for instance, the “unfair” and “deceptive” prongs), including, but not limited to, public consent orders, CFPB administrative adjudications, district court opinions, the CFPB examination manual, published guidance, and relevant CFPB policy statements. 

I have often said that the best tactical response to a CID is to establish a Tripartite Team, as follows:

Consumer Complaint Database and Public Narratives

Lou Holtz, the renowned football coach, is reported to have quipped “Never tell your problems to anyone...20% don't care and the other 80% are glad you have them.” Leaving aside the pleasure of Schadenfreude when competitors get their comeuppance, lingering in the shadows is our own fear that we just might be the next recipient of some imputation of blame! Indeed, lest we fall into the downward drift of reputation risk, the general modus operandi has been to resolve controversial issues affecting consumer complaints as quickly as possible. So, we are usually able to avoid hanging out our dirty laundry to dry in the acidic air of public opinion. Until now!

Before I jump into the deep pool of consumer complaint machinations of the Consumer Financial Protection Bureau (“Bureau”), I would like to offer a definition of a word. That word is “allegation.” Here’s my definition of an “allegation”, liberated from its legalistic moorings: ‘An accusation that someone has done something illegal or wrong, which may be true or may be false, typically made without proof, or sufficient proof, and eventually may or may not lead to somebody being found innocent or guilty of doing something illegal or wrong.’ Please keep my definition in mind as we explore together the Bureau’s new Proposed Policy Statement regarding consumer complaints, issued on July 16, 2014.[i]

For some time we have known about the Bureau’s “Consumer Complaint Database” (“Database”). The Bureau’s new proposal would expand the “public-facing database” to include “unstructured consumer complaint narrative data” (“Narratives”). The Bureau promises that only those Narratives for which an opt-in consumer consent has been obtained and a “robust personal information scrubbing standard and methodology” applied would be subject to disclosure. The expansion, therefore, supplements and extends the Bureau’s existing Policy Statements that established the Database.[ii]

The Database actually had the Narratives feature associated with it from the start. The Bureau planned to include Narratives from as far back as the original announcement of the Database on December 8, 2011, when it notified the public about its plans to disclose certain data about the credit card complaints that consumers submitted to the Bureau.[iii] Its final policy statement was issued on June 22, 2012.[iv] At the time that this policy became official, it also announced its plans to disclose data from consumer complaints about financial products and services other than credit cards.[v] Finally, the Bureau rendered its final policy statement for these other financial products and services on March 25, 2013.[vi] In effect, the July 16, 2014 supplements the Bureau’s existing Policy Statements.

Here is the timeline:

·       Credit Card Complaints:

o   December 8, 2011: “December 2011 Proposed Policy Statement”

o   June 22, 2012: “June 2012 Policy Statement”

·       Financial products and services other than credit cards:

o   June 22, 2012: “June 2012 Proposed Policy Statement”

o   March 25, 2013: “March 2013 Policy Statement”

·       Supplement to credit card and financial products and services other than credit cards:

o   July 16, 2014: “July 2014 Proposed Policy Statement”[vii]

It should be noted that the June 2012 Proposed Policy Statement did not propose the inclusion of public Narratives in the Database. The volume of comments in response to including the such Narratives was “significant”: there were consumer, civil rights, and open government groups, supporting disclosure “on the grounds that disclosing narratives would provide consumers with more useful information on which to base financial decisions and would allow reviewers to assess the validity of the complaints; and privacy groups wanted an opt-in, because of concerns about the risk of publishing “non-identifiable” data; but trade and financial industry groups “nearly uniformly” opposed the disclosure of consumer complaint narratives.[viii] 

Responding to these comments, the Bureau noted in the March 2013 Policy Statement that it would not post public Narratives to the Consumer Complaint Database – at least not until it could assess whether there were “practical ways” to disclose narrative data submitted by consumers without undermining consumer privacy.[ix] The stage was now set to determine how and when to expand the policy to include these Narratives.

AREAS OF INTEREST

The Bureau believes that there are three areas of interest that need to be considered in order to implement its plan to include the Narratives: (1) the direct and indirect benefits to consumers, (2) the benefit to the Bureau, and (3) the advancement of open government principles. Permit me to provide a synopsis of each of these vectors.

Direct Benefits to Consumers: Consumers may share their experience with other consumers.

Complainants would be able to provide information they deem useful to others who may be considering doing business with a particular financial institution. Or, the Narrative would be a means of letting others know about a company, offering and experiencing similar situations, thereby letting them “know that they are not alone.”[x] The Bureau contends that the public is not served if it only discloses the non-narrative portions of the complaint. It seems to me that the Bureau is crossing into the realm of the Confidence Fairy[xi] when it opines that “some consumers may choose to submit a complaint only if they will have the opportunity to share their story and other consumers may overcome their reticence to submit a complaint by reading the experiences of others.”[xii] The Bureau believes that this direct benefit may expand the number of complaints submitted to the Bureau, thereby improving the value of the Database.

Indirect Benefits to Consumers: The marketplace will be more responsive to consumers, because the effect of the Narratives will be to influence consumer purchasing decisions. The Bureau claims that research shows that “consumer word of mouth (which includes consumer reviews and complaints) is a reliable signal of product quality that consumers consult and act upon when making purchasing decisions.”[xiii] While the Bureau does not provide such research, it is a rudimentary premise of economic theory that, through their purchases, consumers signal competitive information to market participants. However, the device of a Database with Narratives is not itself the market. As the eminent semanticist, Alfred Korzybski, said, "the map is not the territory."[xiv] Or, as mathematician Eric Temple Bell said, "the map is not the thing mapped."[xv] The signal is not coming from within the market itself but mysteriously from a contrived database. This is what I would call the “Angie’s List Fallacy,” the notion that a list of pros and cons about vendors can substantially move the overall pricing and enhance customer service across a huge market. The theory seems wonderful; the practice does not deliver. Yet, the Bureau believe that the Narratives will be “responsive to the effect word of mouth can have on sales, adjust prices to match product quality and improve customer service in order to remain competitive.”[xvi] The Confidence Fairy reappears, when the Bureau asserts the indirect benefits of the “powerful first person voice of the consumer talking about their (sic) experience,” and the “ability for local stakeholders to highlight consumer experiences in their community,” and empowerment provided “by encouraging similarly situated consumers to speak up and be heard.”[xvii]

Given the direct and indirect benefits to the consumer, the Bureau seems to have arrived at the following algorithm: the aforementioned increase in benefits and utility leads to an increase in consumer contacts, which leads to a positive effect on Bureau operations, which leads to a “critical mass” of complaint data being achieved and exceeded, which leads to the representativeness of Bureau complaint data increasing. The July 2014 Proposed Policy Statement provides no information in support of effectiveness of this process nor does it offer how the “critical mass” will be sliced and diced, except to claim that the “complaint data” will be used by the Bureau’s Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking.

Benefits to the Bureau: The Bureau sees itself as a vehicle to open and transparent government. As such, it takes the position that the expansion of the Database is needed in order to “further establishing itself as a leader in the realm of open government and open data.”[xviii] In support of this mission, it mentions the “Open Government Directive,” issued on December 8, 2009 by the Office of Management and Budget (“OMB”), which requires agencies to “take prompt steps to expand access to information by making it available online.”[xix] The Bureau indulges in a bit of spin when it asserts that “agencies have historically withheld data from the public due to privacy and cost controls, (but) with new technology comes new opportunities for openness without significant increases to privacy risk and costs.”[xx] I think it is fair to observe that agencies have withheld data from the public for numerous reasons, though the least of which seem to have been due to “privacy and cost controls.”

Advancement of Open Government Principles: In developing its thesis, the Bureau provides a list of agencies that are seeking to be more open and transparent, such as the Department of Health and Human Services, the Federal Trade Commission, and projects like HealthData.gov and Regulations.gov. These efforts are rooted in the OMB’s call for a “presumption of openness” standard.[xxi]

The Bureau’s Pursuit of Fair Lending

By now it is a known fact that one of the most important features of an examination conducted by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is a rigorous review of fair lending compliance. So, given its importance, it behooves us to learn about what the CFPB has found out about fair lending and what actions are needed to ensure its compliance. In this article, I provide an analysis of the CFPB’s most recent findings in the mortgage space as well as practical actions to be taken that help to build a vibrant fair lending initiative, gleaned from both the Bureau’s own issuances and actions, as well as my firm’s experience in assisting institutions with their CFPB fair lending examinations.

On April 30, 2014, the Bureau issued an Annual Report, entitled “Fair lending Report of the Consumer Financial Protection Bureau” (“Report”).[i] Richard Cordray, Director of the CFPB, stated in the Report’s preamble:

“Far too many consumers still must navigate a financial marketplace laden with deceptive marketing, debt traps, dead ends, and discrimination. At the Consumer Bureau, we are fierce advocates for a consumer financial marketplace that allows all Americans to pursue a path to greater opportunity. To that end, we are working to remove the unnecessary obstacles too many Americans face in the consumer financial marketplace. This includes ferreting out discrimination in credit markets, including the markets for home mortgages and auto lending.”[ii]

The Report generally covers the period from July 21, 2012 through December 31, 2013. In addition, there is Interagency Reporting on ECOA and HMDA contained therein, which conveys information on the Bureau’s and other administrative agencies’ functions under ECOA and HMDA, as required by those statutes, for the period of January 1, 2012 to December 31, 2013.

Patrice Alexander Ficklin, the Bureau’s Director of Fair Lending and Equal Opportunity, offered this overview of the Report:

“In this report we describe our steady focus on ensuring that consumers have fair, equitable, and nondiscriminatory access to credit by using all of the tools at our disposal – including research, supervision, enforcement, consumer education and outreach, rulemaking, and interagency engagement.”[iii]

The Bureau issued the Report to Congress “in fulfillment of its statutory obligation and continued commitment to accountability and transparency.”[iv] In this regard, the Bureau is relying on its claimed efforts to fulfill its fair lending monitoring mandate, and provides additional reporting required by the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA).[v]

Dodd-Frank established the Office of Fair Lending and Equal Opportunity (the “Office of Fair Lending”) within the CFPB, and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the Bureau,” including ECOA and HMDA.[vi] The Office of Fair Lending is required to coordinate “fair lending efforts of the Bureau with other Federal agencies and State regulators, as appropriate, to promote consistent, efficient, and effective enforcement of federal fair lending laws,” and works “with private industry, fair lending, civil rights, consumer and community advocates on the promotion of fair lending compliance and education.”[vii]

Since the Bureau’s last report to Congress in December 2012, the Bureau has built fair lending tools and materials and engaged in public dialogue in order to educate, inform, and learn from consumers, advocates, and industry. It introduced a Home Mortgage Disclosure Act Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. Additionally, the Bureau has published a bulletin on lending discrimination to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets.[viii] 

REPORT’S CONCLUSIONS 

We can derive certain salient observations about the Report’s findings.

In the first place, the Bureau has noted increasing efficiencies in fair lending activity. Thus, they have “created, refined, and implemented a risk-based fair lending prioritization process” to ensure that their supervisory procedures focus on the “areas presenting the greatest fair lending risk to consumers.” The approach, dubbed “risk-based prioritization” by the Bureau, uses the collection of both quantitative and qualitative data to assess fair lending risk to consumers as well as assessments of risk in order to prioritize enforcement actions.[ix]

Importantly, with respect to providing guidance on its examinations, the Bureau publicly released information about the three methods its examiners use in fair lending supervisory reviews: (1) ECOA Baseline Reviews, (2) ECOA Targeted Reviews, and (3) HMDA Data Integrity Reviews. In the period subject to the Report, the CFPB has completed dozens of examinations on ECOA and HMDA compliance.[x] Through these examinations the Bureau detected some violations of ECOA and HMDA. However, it also found that many lenders have instituted and maintained strong fair lending Compliance Management Systems (“CMS”) and had no violations of ECOA or HMDA. With respect to self-assessments, the Bureau has issued guidance describing how to conduct them, so as to be in compliance with ECOA and HMDA. Guidance has been provided through the Bureau’s Supervisory Highlights and Bulletins discussing fair lending topics.

The Bureau has used the collection of data to analyze its supervision and enforcement priorities and determine two key priorities: mortgage lending and auto finance. With respect to mortgage lending, the CFPB conducted fair lending supervisory reviews of a number of mortgage lenders, finding that many lenders have strong fair lending compliance management systems and no violations of ECOA or HMDA. However, the Bureau did allege some instances of fair lending non-compliance. Consequently, it took enforcement action against two mortgage lenders for violating HMDA, which resulted in assessments of civil monetary penalties and other relief. It is important to note that, in addition to jointly investigating certain matters with the United States Department of Justice (DOJ), the CFPB also made several referrals to the Department of Justice for violations of ECOA, one of which actually resulted in a recent enforcement action.

The interagency coordination and collaboration is a critical feature of the Bureau’s pursuit of violations. The CFPB continues to coordinate with the Federal Financial Institutions Examination Council (FFIEC) agencies, as well as the DOJ, the Federal Trade Commission (FTC), and the Department of Housing and Urban Development (HUD), in enforcing fair lending statutes. In fact, in 2012, the CFPB formalized its fair lending enforcement relationship with the DOJ via a Memorandum of Understanding (MOU).[xi] 

Complaints and Whistleblowers and Priorities

The CFPB uses input from a variety of external and internal stakeholders to inform its fair lending prioritization process. Thus, it considers fair lending complaints received by its Office of Consumer Response or brought to the Office of Fair Lending’s attention by advocacy groups, whistleblowers, and other government agencies (at the local, state, and federal levels). As part of the prioritization process, the Office of Fair Lending also considers public and private litigation.

Steering Consumers to Expensive Mortgage Loans

The CFPB announced that it had filed a complaint yesterday in a federal district court against Utah-based Castle & Cooke Mortgage, LLC (“C & C”) and two of its officers for illegally giving bonuses to loan officers who steered consumers into mortgages with higher interest rates.

C & C is not some mom and pop mortgage company: in 2012 it originated in the range of $1.3 billion, and it does business in at least 22 states, and maintains approximately 45 branches across the country.

At the core of the complaint is the allegation that C & C violated the Loan Originator Compensation Rule (“LOC Rule”) which bans compensation based on loan terms, such as the interest rate of the loan. Specifically, the CFPB alleges that C & C violated the LOC Rule by establishing a quarterly bonus program, which paid certain C & C loan officers greater bonus compensation when they persuaded consumers to take on more expensive loans. The average quarterly bonus ranged from $6,100 to $8,700.

The CFPB further alleges, that, by contrast, those loan officers who did not charge consumers higher interest rates did not receive quarterly bonuses. (The CFPB also alleges that C & C did not record what portion of each loan officer’s quarterly bonus was attributable to a particular loan and did not reference its quarterly bonus program in each loan originator’s compensation agreement, in violation of federal consumer financial law.)

The idiomatic expression for this is called "selling up" or "upselling the consumer" or "up-charging the borrower." So, briefly put, the CFPB alleges that more than 1,100 illegal quarterly bonuses were paid - where the loan officers had been given the forgoing incentive - and that tens of thousands of customers may have been upsold by C & C since April 6, 2011, the compliance effective date of the LOC Rule.

The time frame is important. It is alleged that from July 8, 2011 through April 27, 2012 the company paid to its loan officers more than 500 quarterly bonuses, in amounts that varied based on loan terms or conditions, totaling more than $4 million. And is it further alleged that since May 2012, C & C had actually continued paying quarterly bonuses to loan officers in amounts that varied based on loan terms or conditions, and, thus by doing so from the compliance effective date, according to the CFPB, the company “recklessly or knowingly paid quarterly bonuses based on loan terms or conditions, in violation of the Compensation Rule.” The “recklessly and knowingly” allegation is made in order to set the bar for civil monetary penalties at the highest levels.

Bottom Line: The CFPB's position is that, by tying bonuses to the interest rate of the loans in this manner, C & C was in direct violation of the LOC Rule.

Another interesting facet of this complaint is that the case was referred to the CFPB by investigators with the Utah Department of Commerce, Division of Real Estate (jointly, “CFPB”). This should further reinforce the fact and make exceedingly clear that states and the CFPB are more and more working together seamlessly to enforce the applicable regulations. The complaint was filed in the United States District Court for the District of Utah, where the company is located and where the individual defendants reside.

Both the state regulator and the CFPB are claiming that C & C violated the LOC Rule by paying its loan officers quarterly bonuses in amounts based on terms or conditions of the loans they closed, thus "incentivizing loan officers to steer consumers into mortgages with less favorable terms," which, of course, is the very practice the LOC Rule seeks to prevent.

The remedies being sought would require C & C to desist from providing an incentive to loan officers to up-charge consumers by distributing quarterly bonuses based on the interest rates of loans sold. In addition to the restitution to consumers, the CFPB seeks civil monetary penalties, which is three tiered: up to $5,000 for any violation; up to $25,000 for reckless violations; and up to $1,000,000 for knowing violations.

I have read the full complaint. Permit me to outline the "before and after" process that the CFPB alleges C & C used, which forms the basis of the CFPB's complaint:

Before the LOC Rule compliance effective date, it is alleged:

1) Each branch of C & C employed loan officers who interacted directly with borrowers. C & C paid its loan officers to assist borrowers with obtaining credit to be secured by a dwelling.

2) A loan officer took an initial loan application, assessed the borrower’s creditworthiness, and determined the interest rates available to the borrower for a given loan product.

3) Borrowers did not directly compensate C & C's loan officers for the loan origination services they provided.

4) C & C paid its loan officers commissions based on the interest rates of the loans they offered to consumers, that is, the higher the interest rates, the higher the loan officers’ commissions.

The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.

It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]

For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.

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IN THIS ARTICLE

Hearings and Adjudications

Scope of Legal Remedies

Blowing the Whistle on Violations

Policy Statement and Whistleblower Protection

Locking Horns with the Department of Labor

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Hearings and Adjudications

On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]

Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]

Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:

• Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and
• “… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.”

Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.

Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.

Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]

Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.

When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.

Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

CFPB's Company Portal for Consumer Complaints

Last year, we notified you about the Company Portal Manual (Manual) issued by Consumer Financial Protection Bureau (CFPB). The Manual gave instructions on the use of the special access portal, known as the Company Portal (Portal). The Portal allows financial institutions to view and respond to complaints in the CFPB consumer complaint database. At that time, the Portal was enabled to take consumer complaints about credit cards and provider resources for distressed homeowners.

Since the inception of the Portal, we have responded to numerous requests from clients to help them navigate its rather labyrinthine pathways. Thus, we have obtained considerable experience in guiding our clients from point of contact with the CFPB to point of resolution. In most instances, resolution of the complaint was achieved. While the CFPB continues to acquire statistics about the nature of the complaints, we also have become familiar with how best to respond to the complaints and have kept our own database.

When I cite statistics in this article, the time frame that I am writing about is July 21, 2011 to June 1, 2012. More recent statistics have not yet been officially announced by the CFPB. However, it is known that this database is updated on a daily basis. Retroactive data is expected shortly.

I would like you to become more familiar with the Portal and learn how to set up your access to it. Of course, in an article I can only offer a generic, rather than a detailed, description. I encourage you to explore the Portal, download the most recent Manual, and, most importantly, draft and implement complaint management procedures for using it. Regulators will surely expect as much!

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IN THIS ARTICLE

Statistics

Common Complaints

Screening Process

Flow Chart

Step-by-Step Procedures

CFPB Response

Company Response

Monetary Relief

Specifying Relief and Status

Government Portal

Requesting Access

Login

Viewing Complaints

Technical Assistance

Library

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Statistics

By this point, the CFPB has staffed a Consumer Response team. The Consumer Response team, or “Consumer Response” as it has become known, began taking consumer complaints about credit cards on July 21, 2011; it began handling mortgage complaints on December 1, 2011; and it began accepting complaints about bank products and services, private student loans, and other consumer loans on March 1, 2012. Over the next year, the CFPB expects to handle consumer complaints on all products and services under its authority.

According to the CFPB, between July 21, 2011, and June 1, 2012, the CFPB received approximately 45,630 consumer complaints, including approximately:

• 16,840 credit card complaints,
• 19,250 mortgage complaints,
• 6,490 bank products and services complaints, and
• 1,270 private student loan complaints.

Approximately 44 percent of all complaints were submitted through the CFPB’s website and 11 percent via telephone calls. In the same period, referrals from other regulators and agencies accounted for 39 percent of all complaints received. (The rest were submitted by mail, email, and fax.)

Furthermore, the CFPB has notified the public that more than 37,120 complaints (81 percent) of complaints received as of June 1, 2012, have been sent by Consumer Response to companies for review and response. The remaining complaints have been referred to other regulatory agencies (9 percent), found to be incomplete (4 percent), or are pending with the consumer or the CFPB (6 percent).

Companies have already responded to approximately 33,000 complaints or 89 percent of the complaints sent to them for response.

CFPB Issues “Early Warning Notice” Procedures

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.

This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.

The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.

OVERVIEW

The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.

The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.

Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.

In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.

The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.

EARLY WARNING NOTICE LETTER - SAMPLE

Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.

The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.

The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.

RESPONDING TO THE “EARLY WARNING NOTICE” LETTER

The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.

Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.

Submissions may be discoverable by third parties in accordance with applicable law.

GUIDELINES FOR LETTER'S FORMAT

The written statement must:

-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.

The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.

If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.

Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.

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Consumer Financial Protection Bureau

Early Warning Notice
Bulletin 2011-04
November 7, 2011

Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011

Coordinating Consumer Complaints

On August 12, 2011, the Consumer Financial Protection Bureau (CFPB) announced that it had entered into an agreement with the Federal Trade Commission (FTC), allowing the CFPB to access consumer complaints within the FTC's Consumer Sentinel system.

This agreement implements a Dodd-Frank Act provision that requires the CFPB to share consumer complaint information with the FTC and other state and federal agencies. In addition, the CFPB will share complaint information that it receives from consumers with the Sentinel database, subject to appropriate privacy protections and access restrictions. 

According to the CFPB, the "goal is to make sure agencies coordinate their enforcement of consumer financial protection laws."

Consumer Sentinel

The FTC's Consumer Sentinel is used by law enforcement to track and respond to consumer complaints. It is an online database of consumer complaints maintained by the FTC. The complaints in the database touch on many financial matters, from advance-fee loans to credit scams, from debt collection to credit reports, and more. The database is accessible only to law enforcement.

Among the government entities that are using Consumer Sentinel are several state Attorneys General (including Idaho, Michigan, Mississippi, North Carolina, Ohio, Oregon, Tennessee, and Washington State), the U.S. Postal Inspection Service, and the FBI's Internet Crime Complaint Center.

Non-governmental organizations include the Lawyers' Committee for Civil Rights, MoneyGram International, the National Consumers League, Publishers Clearing House, Xerox Corporation, and the Better Business Bureaus.

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Consumer Financial Protection Bureau
Coordinating Consumer Complaints
Kent Markus
Deputy Director/Enforcement
August 12, 2011