© 2012 Winston & Strawn LLP€¦ · © 2012 Winston & Strawn LLP . 10 “ Consumer Financial Product or Service” Offering or providing for use by consumers primarily for personal,

© 2012 Winston & Strawn LLP


The CFPB: Current Enforcement Priorities and Investigation Readiness

Brought to you by Winston & Strawn’s Financial Services practice group

© 2012 Winston & Strawn LLP 3

Today’s eLunch Presenters

Jerry LoeserLitigationChicago

[email protected]

Anthony DiRestaLitigation

Washington, D.C.

[email protected]

Chris CostelloLitigationNew York

[email protected]


What We Will Cover

Legal background of CFPB enforcement authority

Recent CFPB enforcement actions

CFPB Supervision and Examination Authority

CFPB formal investigations

Procedures and strategies involved in a CFPB investigation

Production expectations of CFPB: Submission standards


CFPB Enforcement Authority

Violations of any provision of Federal consumer financial law Not Federal Trade Commission Act

Title X of the Dodd-Frank Act Section 1031 – UDAAP

Enumerated consumer laws

Laws for which authority was transferred to the CFPB


18 Enumerated Laws

Alternative Mortgage Transaction Parity Act

Consumer Leasing Act

Electronic Fund Transfer Act

Equal Credit Opportunity Act

Fair Credit Billing Act

Fair Credit Reporting Act

Home Owners Protection Act

Fair Debt Collection Practices Act

Private deposit insurance disclosure


18 Enumerated Laws, continued

Privacy provisions of the Gramm-Leach-Bliley Act

Home Mortgage Disclosure Act

Home Ownership and Equity Protection Act

Real Estate Settlement and Procedures Act

S. A. F. E. Mortgage Licensing Act

Truth in Lending Act

Truth in Savings Act

Unfair and deceptive acts or practices regarding mortgage loans

Interstate Land Sales Full Disclosure Act


Additional Laws for Which Authority Was Transferred

Fair and Accurate Credit Transactions Act

Right to Financial Privacy Act

Telemarketing and Consumer Fraud and Abuse Prevention Act


UDAAP

Section 1031 of the Dodd-Frank Act gives the CFPB authority to use its enforcement powers to prevent a person offering a “consumer financial product or service” or a 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, or an offering of, a “consumer financial product or service.”


“Consumer Financial Product or Service”

Offering or providing for use by consumers primarily for personal, family, or household purposes

Credit (including extending, servicing, acquiring, selling, brokering)

Full payout leases

Real estate settlement, appraisals

Deposit-taking, transmitting or exchanging funds, acting as a custodian

Stored value, payment instruments

Check cashing, check collection, check guaranties

Payments or financial data processing

Financial advice (other than securities-regulated advice) (including credit counseling and debt management)

Collecting consumer report information

Collecting consumer debt


Statutory Definition of “Abusive”

An act or practice that Materially interferes with the ability of a consumer to

understand a term or condition of the product or

Takes unreasonable advantage of A lack of understanding, on the part of the consumer, of the

material risks, costs, or conditions of the product,

The inability of the consumer to protect his or her interests in selecting or using the product, or

The reasonable reliance of the consumer on a person offering the product to act in the interests of the consumer.


Enforcement Actions

Before the election, the CFPB had undertaken three major publicly announced consent settlements with three major credit card issuers over “add-on products”: Capital One Bank (U.S.A.) ($210 million in restitution and penalties

– 2 million customers – July 17, 2012) Discover Financial Services ($200 million restitution to 3.5 million

customers plus a $14 million fine – September 24, 2012) One CFPB assertion was that telemarketers downplayed mandatory

disclosures by speaking more rapidly when reading them. American Express Bank ($85 million to 250,000 customers plus a

$27.5 million fine – October 1, 2012) Each of these firms operated with large compliance

staffs and expert in-house counsel, including some of the leading practitioners.


Enforcement Actions, continued

In the American Express case, the CFPB press release suggested that AmEx had violated the law “at every stage of the consumer experience.”

Aggregate restitution and refunds of $425 million

Civil penalties of more than $100 million

CFPB Director Cordray: no intention to “ding” institutions on things in gray areas.


Joint Enforcement Actions

In these enforcement actions, the CFPB worked, and shared fine proceeds, with appropriate bank regulatory agencies.

Investigations leading to these enforcement actions began at the bank agencies before transfer of functions to the CFPB on July 21, 2011.

Capital One – OCC

Discover – FDIC

American Express – FDIC and Utah Department of Financial Institutions

Q: Will CFPB banking agency collaboration be ongoing? Q: Consumer finance law violations as unsafe and unsound banking practices?

That was a determination by the FDIC in both the Discover and American Express actions.


Joint Enforcement Actions, continued

The CFPB also has close working relationships with State Attorneys General.

A joint information-sharing agreement is in place between the CFPB and State Attorneys General.

Director Cordray is a former Ohio Attorney General.


Effect of the Election

The Director of the CFPB, had the election gone the other way, would likely have been replaced at the end of 2012.

Unless a court decision on the propriety of his “recess appointment” intervened earlier.

The Director may still leave at the end of the year to pursue elected office.

He had previously indicated he would run for Governor of Ohio in 2014.

Election of CFPB “inventor” Elizabeth Warren as U. S. Senator and her appointment to the Senate Banking Committee announced December 4.


Making Policy by Enforcement

Policy is normally made at an agency by rulemaking. However, rulemaking requires notice and opportunity

for public comment and is subject to appeal. A balancing of cost versus benefit is required to adopt a

rule. CFPB rules are subject to review and objection by other

agencies and, of course, courts. Making policy by enforcement is much simpler and

easier. CFPB Director Cordray: “How the law … applies in

particular situations is something that we’re going to measure on a facts and circumstances basis as we go.”


Enforcement Activity

Reportedly, the CFPB, in the last 14 months, has issued more than 100 subpoenas seeking millions of pages.

The CFPB’s Financial Report for 2012 indicates that 46.9% of its 970 employees work in its Division of Supervision, Enforcement, and Fair Lending.


Q: Impending Issue: Information Inaccuracy?

Affects servicing and collection

Long the focus of the Fair Credit Reporting Act

Q: The basis of mortgage servicing settlement concerns?

CFPB: Student loan servicing concerns

CFPB Director Cordray: Creditors have responsibility for inaccurate information in debt collection.

Q: The basis of new CFPB enforcement activity?


Scope of CFPB Supervision

The CFPB has authority to supervise: Banks

Savings associations

Credit unions

Residential mortgage loan originators, brokers, and servicers, and residential mortgage loan modification/foreclosure relief services

Large consumer installment lenders, large money transmitters, and large debt collectors

Private student lenders

Payday lenders


What is “Supervision”

Require reports

Conduct periodic examinations Essentially to assess compliance with law

CFPB Examination Manual suggests that CFPB examinations will be similar to bank examinations.


Bank Examinations

No longer surprises. Usually preceded by receipt of “30-day letter.”

Notifying of examination start date

Asking that certain documents be made available Some beforehand

Some at start of examination

Be prepared. Documentation is key.

Organization of materials is important.


Bank Examinations, continued

Establish a central point of contact So that someone knows the scope of

what is being asked by examiners and

what is being said to examiners

Cooperate with and respect examiners Never be rude or argumentative or disrespectful

Show everything Examiners have legal right to everything

Withholding arouses suspicion and distrust



What happens during an examination? On-premises visit.

Interviews and reviews of documents.

Preliminary conclusions are drawn.

Suggestions for corrective actions are drawn.

These conclusions and proposed actions are shared with the bank in an exit interview.

An examination report is then drafted, finalized, and approved back at the regulator’s offices.

That final report is delivered to the bank’s directors. That report is confidential.

It will contain a confidential rating of the bank.



Privilege Issue Consumer finance compliance often involves attorney input.

Some feel that providing examiners privileged information may constitute waiver of attorney-client privilege.

However, sharing information under compulsion of law normally does not constitute a waiver.

Nonetheless, in the banking area, the banks persuaded Congress to enact a statute that provides that disclosing privileged information to bank examiners does not waive any privilege.

Similar bill as to CFPB is stalled in Senate but may move in the “lame duck” session.

CFPB has adopted a regulation to that effect. Q: Its efficacy?

CFPB General Counsel Meredith Fuchs: We will work with you.


CFPB Examinations

Privilege Practices Anecdotal evidence is to the effect that some large banks are

declining to provide CFPB examiners privileged material. In one such actual case, the CFPB subsequently demanded a “privilege

log” listing Description of each document withheld

The basis for the privilege claim, and

The identities of those who have had access to the document.

Some believe that most firms provide the CFPB access to privileged information.

The CFPB appears to have a legal right to such information.


CFPB Examinations, continued

CFPB Examinations Manual: UDAAP exam objectives for financial institutions Assess the quality of compliance risk management systems

for avoiding UDAAP

Identify practices that materially increase the risk of consumers being treated in an unfair, deceptive, or abusive manner



CFPB examiners often are accompanied by enforcement attorneys. Ostensibly to educate them.

Cynics: the CFPB is using the examination process as a discovery mechanism.

Exam Manual: “Whether informal supervisory measures or formal enforcement action is necessary will depend on the type of problem(s) found and the severity of harm to consumers. Self-correction will be encouraged, but some circumstances may nevertheless be sufficiently serious to warrant a public enforcement action.”

On December 3, the CFPB Ombudsman reported that it had recently recommended “review” of “implementation of [this] policy” and, until that review is complete, establishment of “ways to clarify the role of the enforcement attorney in practice at the supervisory examination.” It also reported that the CFPB is considering those recent recommendations.



Q: Coordination with bank regulators? A routine bank examination by the FDIC and Utah Department of Financial

Services reportedly led to the American Express enforcement actions.

Consumer Bankers Association General Counsel: “a serious coordination issue;” “the regulatory Olympics.”



The CFPB uses the examination process to initiate restitution to wronged consumers.

If a CFPB examiner obtains evidence that a firm or a customer has violated Federal criminal law, it is required to refer the finding to the Department of Justice (the “DoJ”).

The CFPB is also required to refer information identifying tax law non-compliance to the Internal Revenue Service.

The CFPB is also required to refer to the DoJ evidence of unlawful discrimination in granting credit.



October 31, 2012 Supervisory Highlights: Fall 2012 1.4 million consumers have experienced remedial relief from

CFPB examinations.

Most frequent violations: CARD Act

Credit reporting

RESPA

Truth in Lending


CFPB Supervision

Distinguish bank supervision Led by former Massachusetts Bank Commissioner

Using long-established banking agency templates

Regularly scheduled examinations

From non-bank supervision Led by former senior Federal Trade Commission official

No established template

Examinations scheduled based on a Risk Analytics and Monitoring Team’s determination as to which industries and firms pose the greatest risk to consumers.

Q: Role of the CFPB consumer complaint database?


CFPB Supervisory Highlights

The CFPB has commenced publication of issues it has discovered in its examinations.

The first issue cites: Comprehensive deficiencies in compliance management

systems Q: Great policies, but not followed?

Compliance deficiencies at service providers Q: Vicarious liability?

Fair lending Q: Perform internal regression analyses?


CFPB Supervisory Highlights, continued

Issues cited, continued Fair Credit Reporting Act

Failure to communicate accurate information to credit reporting agencies

Failure to indicate that consumer disputes the information

Failure to retain information on resolution of the dispute

Mortgage Lending Inaccurate disclosures

Significant error rates in Home Mortgage Disclosure Act data


Investigations by the CFPB

Enforcement vs. examination

Governmental partners of the CFPB and joint activity

CFPB procedures

Civil investigative demands

Strategies involved in navigating through a CFPB investigation

Preparation


A Perspective on the CFPB Framework:Enforcement vs. Examination

It’s not comparing apples with oranges,It’s comparing apples with broccoli!

“Fear and Trembling:” The unknown

Enforcement Division (fundamentally different from supervision/examination; regulation vs. enforcement)

Personnel: Organizational chart — Kent Marcus, head of Enforcement Division

“Personality” of CFPB Enforcement Division: “FTC on steroids,” but staff is “young”


Partners of the CFPB

Sharing of information between law enforcement officials

Relationship between CFPB and the states (attorneys general)

Relationship between CFPB and FTC

Complaints to the CFPB


Investigatory Procedures (Final Rule issued on June 29, 2012)

Background

Initiating and conducting investigations

Notification of purpose

Civil investigative demands

Investigational hearings

Rights of witnesses in investigations

Noncompliance

Confidential treatment of materials and non-public nature of investigations


Civil Investigative Demands

Contents

Similarities with and differences from an FTC CID

CFPB and Waiver of Protected Communications


Navigating an Investigation and Strategies:Five Key Considerations

Analyze CID (or inquiry) for compliance obligations Create document hold immediately

Communicate with CFPB staff to obtain background information and negotiate terms of production process — with an eye toward developing a meaningful working relationship

The “right touch” is critical.

Create a comprehensive legal strategy

Create a comprehensive strategic plan of analyzing documents and information

CFPB Submission Standards and electronically stored information (ediscovery implications)

Use of memoranda to put appropriate “spin” on contents being produced

Advocacy and use of “position papers”


Investigation Preparation

What can you be doing now to be prepared for any investigation?


CFPB Discovery & Document Submission

CFPB has detailed Discovery & Document Submission Standards.

CFPB designed its Submission Standards based on rules from other government agencies (FTC and SEC specifically mentioned).

While based on other agencies, they are more complex and have combined them in a unique way. Example: Multiple production formats required (image and

native).


Meet and Confer

Though the Discovery & Documents Submission Standards are specific, the CFPB is open to Meet and Confer.

Be prepared with specifics on Discovery collection and processing details for agreement. Example: Global duplicate removal protocol

Be prepared with specific reasons for Documents Submission changes. Burden reasons. Example: Excel produced in Native only.


Questions?


Thank You.