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Copyright © 2012 by K&L Gates LLP. All rights reserved.
New Rules GoverningCFPB Enforcement Activities
July 12, 2012
Phillip L. Schulman 1601 K Street, N.W. Krista CooleyMichael J. Missal Washington, D.C. Stephanie C. RobinsonMelanie Brody 202.778.9000 Shanda N. Hastings
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Justice League
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A. Background
1. Centerpiece of Dodd-Frank Act
2. Uber-agency
3. Objectives
Timely, understandable information Eliminate deceptive practices Enforce consumer laws
I. Consumer Financial Protection Bureau
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B. Enormous Powers
1. Transfer of agency personnel
FDIC
NCUA
HUD
FRB
OCC
OTS
I. Consumer Financial Protection Bureau (cont.)
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B. Enormous Powers (cont’d)
2. Transfer responsibility for 18 existing consumer laws, including
HMDA TILA RESPA SAFE Act FDIC ILSA
EFTA ECOA FCRA GLB FDCPA HOEPA
I. Consumer Financial Protection Bureau (cont.)
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C. Penalties1. Nuclear arsenal of weaponry
2. Including:
Rescission Refunds Restitution Damages Unjust enrichment Public notification
I. Consumer Financial Protection Bureau (cont.)
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C. Penalties (cont’d)
3. Enforcement authority beyond original statutes
Can launch investigations (CID power)
Can bring litigation
Can conduct studies, collect information and make reports
I. Consumer Financial Protection Bureau (cont.)
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C. Penalties (cont’d)
4. Civil $ penalties
Up to $5,000 per day
$25,000 per day for reckless violation
Up to $1.0 million for knowing violation
I. Consumer Financial Protection Bureau (cont.)
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D. Authority to Supervise
1. Who’s Covered
financial advisors appraisers credit counselors
banks, lenders mortgage brokers mortgage servicers
2. Who’s Not Covered
persons regulated by state insurance regulators
auto dealers
insurance industry real estate industry Accountants attorneys
I. Consumer Financial Protection Bureau (cont.)
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D. Authority to Supervise (cont.)
3. Who’s Covered Who Thinks They’re Not
real estate brokers/agents
title companies
homebuilders
any person covered by RESPA
I. Consumer Financial Protection Bureau (cont.)
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June 6, 2012 Postings
II. CFPB Enforcement Activities
1. Final Rule on Investigative Processes
2. Final Rule on Adjudicative Procedures
3. Final Rule on State Official Notification
4. Interim Final Rule on Equal Access to Justice
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III. CFPB Investigations
1. Statutory authority – section 1052 of Dodd-Frank Act
2. Investigative procedure largely based on section 20 of FTC Act
A. Scope and Model for Procedure
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B. Initiating Investigations
III. CFPB Investigations
1. Comments to interim final rule criticized that staff-level employees had unchecked authority
2. Only the Assistant Director or Deputy Assistant Directors of the Office of Enforcement have the authority to initiate investigations
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C. Purpose of Investigation
III. CFPB Investigations
1. CFPB does not have to describe the purpose and scope of its investigation
2. Only the nature of the conduct constituting the alleged violation and the provisions of law applicable to the alleged violation
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D. Issuing Civil Investigative Demands
III. CFPB Investigations
1. Only the Director, Assistant Director of the Office of Enforcement or Deputy Assistant Directors of the Office of Enforcement can issue CIDs
2. CID may direct recipient to produce documentary material, submit tangible things, provide written reports, answer questions, appear to testify
3. Return date will provide a “reasonable period of time” within which to comply
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E. Negotiating CIDs
III. CFPB Investigations
1. AD and DADs of Enforcement have discretion to negotiate
2. Meet and confer: requires a conference within 10 calendar days to negotiate the CID Drop everything and plan for meet and confer right away
Include personnel with knowledge necessary to resolve issues relevant to compliance with the demand
Must ensure that person familiar with ESI participates in the meeting
3. Extensions: May extend the time for compliance “for good cause shown”
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F. Petitions to Set Aside or Modify CIDs
III. CFPB Investigations
1. Must first engage in meet and confer process and raise issues
2. 20 calendar days after service of CID to decide whether to comply with the CID (or prior to the return date, whichever is sooner)
Requests for extensions are disfavored
Timely filing of petition stays the time permitted for compliance with the portion challenged
3. Petition for an order modifying or setting aside a CID must be filed with the Executive Secretary of the CFPB with a copy to the AD of Enforcement
4. Petitions will be made public
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G. Responding to CIDs
III. CFPB Investigations
1. Under a sworn certificate
2. Form of production of electronically stored information must follow instructions
3. Withholding privileged material
Must assert claim before deadline for production
Submit a schedule of the items withheld
Person who submits the schedule and the attorney stating the grounds for a claim of privilege must sign the schedule
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H. Investigational Hearings
III. CFPB Investigations
1. Conducted by an investigator pursuant to CID
2. Under oath or affirmation
3. Stenographically reported
May be recorded
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H. Investigational Hearings
III. CFPB Investigations
4. Parties present at hearing
Witness
Counsel for witness
Officer before whom testimony is taken
Anybody engaged in joint investigation with CFPB
Transcriber/recorder
Others, at the CFPB’s discretion and with witness consent
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H. Investigational Hearings (cont.)
III. CFPB Investigations
5. Rights of witnesses Objections allowed only if grounded in a constitutional
or other legal right or privilege
No arguments challenging CFPB’s authority to conduct the investigation or sufficiency or legality of CID may be made at the hearing
After testimony, counsel may ask permission for the witness to clarify any of his or her answers
Attorneys engaging in obstructionist, disorderly, etc. conduct can be barred from further practice before the Bureau
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I. Confidential Treatment of Demand Material and Non-Public Nature of Investigations
III. CFPB Investigations
1. Investigative materials are subject to 12 CFR Part 1070 procedures relating to disclosure of records and information
Discretion to disclose confidential investigatory information to a federal or state agency to the extent that disclosure is relevant to the exercise of the agency’s statutory or regulatory authority
2. Investigations generally are non-public
Investigators may disclose the existence of the investigation to potential witnesses or third parties to the extent necessary to advance the investigation
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J. Noncompliance with CIDs
III. CFPB Investigations
1. Failure to comply may result in action for enforcement
2. Director, Assistant Director of Office of Enforcement, and the General Counsel may institute enforcement proceeding
In district court
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K. Disposition
III. CFPB Investigations
1. When an investigation leads to an enforcement action, the Bureau may refer investigations to appropriate federal, state, or foreign governmental agencies
2. Or, it may institute further proceedings in
Federal court
State court
Through the Bureau’s administrative adjudicatory process
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IV. CFPB Adjudications
A. Scope and Model for Procedure
1. Statutory authority – Section 1053 of Dodd-Frank Act
2. Adjudication procedures are largely based on procedures for administrative hearings adopted by the SEC, the FTC, and the prudential regulators –Federal Reserve Board, FDIC, NCUA, and the OCC
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IV. CFPB Adjudications
B. Initiation of Adjudication1. Public notice of charges filed by the CFPB with a
hearing officer As announced in November 2011, the CFPB has adopted an
Early Warning Notice process similar to the SEC’s Wells Process
Will allow the subject of an investigation to respond to potential legal violations before the CFPB decides whether to initiate an enforcement proceeding
2. Notice of charges triggers typical pre-hearing events – answer, scheduling conference, motions, subpoenas, etc.
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IV. CFPB Adjudications
C. Administrative Hearing1. Parties appear before a hearing officer in a
presumptively public hearing2. Hearing will occur no earlier than 30 days nor later
than 60 days after service of the notice of charges3. Burden of proof lies with the CFPB4. Rules of evidence under the Administrative
Procedures Act and the Federal Rules of Evidence generally apply Some exceptions – including more lenient standards on
admissibility of hearsay
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IV. CFPB AdjudicationsD. Public Nature of the Adjudicative Proceedings
1. Documents and testimony introduced in a hearing or filed in connection with an adjudication proceeding are presumed to be public
2. Regulations contain a provision setting forth a process to seek a protective order to shield confidential information
3. Standard for granting a motion for a protective order is high: Public disclosure will likely result in a clearly defined,
serious injury to the party requesting confidential treatment;
The material constitutes sensitive personal information;
All parties agree to the protective order; or Public disclosure is prohibited by law
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IV. CFPB Adjudications
E. Hearing Officer Recommendation and CFPB Director’s Decision1. Hearing officer must issue a recommended decision within
300 days of the filing of the notice of charges – can request an extension from the CFPB Director
2. Director of the CFPB, or an authorized designee, ultimately issues the final decision Decision can affirm, adopt, reverse, modify, set aside, or remand the
hearing officer’s recommendation
3. If a party has perfected an appeal to the Director of the hearing officer’s decision, that party may seek judicial review of the final decision of the Director in federal appeals court
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IV. CFPB Adjudications
F. Observations on Final Regulation
1. Very few comments on the interim rule published last year – and few changes to the final regulation
2. Goal was to create a process to expeditiously resolve claims while ensuring a fair hearing for parties that appear before the CFPB Final rule contains very short deadlines Generally disfavors extensions of time to meet these
deadlines
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V. Comparing the CFPB Enforcement Procedures to Those of Other Regulators
A. Rules Relating to Investigations
B. Initiating Investigations
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V. Comparing the CFPB Enforcement Procedures to Those of Other Regulators
1. Compelling the production of documents and other information
2. Meet and confer
3. Knowledge of scope and purpose of investigation
4. Role of counsel in testimony
5. Transcripts
6. Privileges
C. Conducting Investigations
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V. Comparing the CFPB Enforcement Procedures to Those of Other Regulators
1. Persuading the staff not to initiate an enforcement proceeding
2. Appeal of staff’s decision
D. Decision-making Process