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2 The Past, Present, and Future of CFPB Enforcement Actions November 5, 2014 Presented By: Brett M. Kitt Greenberg Traurig, LLP Association of Corporate Counsel 2

3 Overview of the CFPB Summary of Enforcement Powers Overview of Enforcement Tools Summary Snapshot of Enforcement Actions to Date Enforcement Hallmarks Who Are the Next Likely Targets? How Do You Avoid Becoming a Target? What Do You Do If You Are a Target? Questions and Contact Information 3

4 Overview of the CFPB It is an independent agency headed by a single Director and funded outside of the Congressional appropriations process It has broad and flexible jurisdiction over consumer financial products and services offered both by banks and non-banks Its mission is uniquely and solely focused on consumer protection Although enforcement gets the most attention, its other powers, including rulemaking, supervision, and consumer complaints, are of comparable significance 4

5 Summary of Enforcement Powers It has exclusive or shared authority to enforce existing federal consumer financial laws and regulations It has new authority under the Dodd-Frank Act to take enforcement action to prevent and address unfair, deceptive, and abusive acts and practices (UDAAPs) (State attorneys general also have authority to file suit for UDAAP violations, provided that they coordinate such suits with the CFPB before filing them) 5

6 Summary of Enforcement Powers It has authority to hold individual owners, shareholders, directors, officers, and employees liable for misconduct that occurs at their companies It asserts a right to obtain all relevant information notwithstanding claims of privilege It may seek a wide range of legal and equitable remedies in its enforcement actions, including: Damages set forth in the federal consumer financial laws Civil monetary penalties ranging from up to $5,000 per day per violation to $1,000,000 per day per knowing violation 6

7 Overview of Enforcement Tools The CFPB has independent litigating authority The Enforcement Division has a staff of more than 100 litigators and investigators from varying backgrounds It may pursue enforcement actions either before administrative law judges or in federal district courts It is authorized to and often does engage extensively in joint investigations with other federal and state law enforcement agencies It may and does conduct its investigate primarily by issuing civil investigative demands (CIDs) CIDs are often broadly worded and provide little if any specific information to recipients as to the CFPB s intentions or theories 7

8 Overview of Enforcement Tools The CFPB also has at its disposal a vast array of other intelligence gathering tools, including: Supervisory exams and data and exam reports HMDA data Commercial data purchases Mystery shoppers Information provided by other federal and state agencies Information provided by consumer advocacy groups It discourages motions to quash CIDs by making public petitions that it denies It may but it is not required to provide investigative targets with advance notice of or opportunities to respond to charges before filing them 8

9 Snapshot of Enforcement Actions to Date More than 40 CFPB enforcement actions have been announced since 2011, with the rate of activity increasing markedly each year as the CFPB ramps up its operations and expands its jurisdictional reach The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. * As of today 9

10 Snapshot of Enforcement Actions to Date The top three categories of CFPB enforcement actions account for roughly half of the total thus far: RESPA Section 8; UDAAPs credit card add-on product marketing; and debt settlement and relief programs 10

11 Enforcement Hallmarks A willingness to assert novel and bold legal theories CashCall alleged that action of payday lender seeking repayment of loans that the CFPB deemed to be illegal under state laws constituted a UDAAP Flagstar cited mortgage servicer for conduct that occurred prior to the promulgation of the CFPB s mortgage servicing rules on the grounds that such conduct constituted a UDAAP Ally Bank utilized the controversial disparate impact theory to allege that indirect auto lender s dealer compensation program violated fair lending laws Hanna alleged that litigation practices of debt collection law firm constituted UDAAPs notwithstanding the fact that the Dodd-Frank Act excludes the practice of law from the CFPB s jurisdiction Corinthian alleged that proprietary college committed UDAAP by marketing loans to students to pay for what the CFPB deemed to be poorquality educations that offered students meager employment prospects 11

12 Enforcement Hallmarks Fondness for holding companies accountable for the actions of their third party service providers as a means of prodding those companies to self-police ACE Cash Express - ACE controlled its third-party debt collectors according to the terms of its third- party vendor contracts. ACE s compliance monitoring, vendor management, and quality assurance did not prevent, identify, or correct instances of misconduct by some thirdparty debt collectors. Result - $ 5 million in relief to consumers; $ 5 million in civil penalties. Bank of America - The Bank s compliance monitoring, Service Provider management, and quality assurance yielded ineffective oversight and did not, in certain instances, prevent, identify, or correct improper sales practices in marketing the Credit Protection Covered Products. Result - $727 million in relief to consumers; $20 million in civil penalties 12

13 Enforcement Hallmarks Willingness to hold individuals liable for alleged misconduct when they personally direct or participate in perpetrating a fraud or scheme or when the individuals are the alter egos of their companies [T]here are legitimate occasions where it is appropriate to pursue not only the company that was a party to the consumer s transaction, but also individuals who were decision-makers or actors relevant to that transaction Richard Cordray, May 9, 2014 Examples: Hydra Group charged online payday lender and its four principals with depositing fraudulent payday loans into and then extracting repayments from consumers bank accounts Global Client Solutions charged payment processor and its two principals for helping debt settlement firms process illegal up-front debt settlement fees Fidelity Mortgage Corp. charged mortgage lender and its former owner and president with violating RESPA Section 8 by paying real estate referral fees to a bank that were disguised as inflated office lease payments 13

14 Enforcement Hallmarks Desire to cover the playing field by pursuing both large and small companies for both large and small violations There are an abundance of big ticket recoveries that have translated into eye-popping press releases and favorable media coverage Ocwen - $2 billion in relief and $125 million in refunds for mortgage servicing failures JPMorgan Chase - $309 million in refunds and $20 million in penalties due to violations relating to the marketing of add-on credit card products However, the CFPB also does not shy away from making examples of small companies that engage in egregious misconduct, even when the recoveries are small Stonebridge Title Services - $30,000 in civil monetary penalties for RESPA Section 8 violation Payday Loan Debt Solutions - $100,000 in consumer refunds and $5,000 in civil monetary penalties for charging consumers illegal upfront debt settlement fees 14

15 Enforcement Hallmarks Other notable aspects of CFPB enforcement actions to date: Frequent and broad partnerships with federal and state law enforcement agencies Regulation through enforcement action rather than rulemaking Uniform denials of motions to quash Issuance of CIDs for exploratory purposes Broad information sharing with other agencies Limited enforcement credit for self-reporting violations Ensuring that targets feel the pain from enforcement actions by prohibiting them from seeking indemnification or insurance 15

16 Who Are the Next Likely Targets? Mortgage Servicers Student loan servicers Lead generators for online and payday loans Service providers Indirect auto lenders Low-hanging fruits of all varieties 16

17 How Do You Avoid Becoming a Target? INVEST IN EFFECTIVE COMPLIANCE MANAGEMENT! Have a compliance management program that is more than just a binder of policies collecting dust on a shelf have it be effective at preventing, detecting, and remediating problems Be discriminating in selecting service providers and actively and continuously monitor their conduct Respond in a timely fashion to consumer complaints and analyze them for patterns or evidence of systemic problems 17

18 How Do You Avoid Becoming a Target? Don t make the mistake of thinking you are too small to be noticed Don t make the mistake of believing that there is safety in numbers Don t make the mistake of thinking that dealing with the CFPB will be like dealing with every other state or federal regulator you ve dealt with before Don t wait to fix problems until after you receive a CID 18

19 What Do You Do If You Are a Target? Don t panic or assume the worst Issue a document preservation order immediately and, in fact, preserve documents Contact experienced counsel to prepare for a meet-and-confer with the CFPB Quickly evaluate whether to file a motion to quash Organize your documents and information for production 19

20 Questions and Contact Information Brett Kitt Greenberg Traurig, LLP 2101 L Street, NW, Ste Washington, DC (202) kittb@gtlaw.com 20

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