Looking through the Regulatory Fog of the CFPBWhat’s Ahead for Consumer Financial Products

September 11, 2012

Continuing Education Information

We have applied for one hour of California, Minnesota, Texas and Virginia CLE and New York non-transitional CLE credit. Newly admitted New York attorneys may not receive non-transitional CLE credit. For attendees outside of these states, we will supply a certificate of attendance that can be used to apply for CLE credit in the applicable bar/other accrediting agency.Fulbright will supply a certificate of attendance to all participants that:1. Participate in the web seminar by phone and via the

web.2. Complete our online evaluation, which we will send

to later today or tomorrow.2

Administrative Information

Today’s program will be conducted in a listen-only mode. To ask an online question at any time throughout the program, simply click on the question mark icon located on the tool bar. We will try to answer your question during the session if time permits.

Everything we say today is opinion. We are not dispensing legal advice, and listening does not establish an attorney-client relationship. This discussion is off the record. Anything we say cannot be quoted without our prior express written permission.

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Bob PrattePartner, Minneapolis and Washington, D.C.Fulbright & Jaworski L.L.P.rpratte@fulbright.com+1 612 321 2244

More than 30 years of experience representing mortgage banking entities andfinancial institutionsExtensive background in all aspects of consumer credit related regulatory matters,including regulatory compliance investigations and audits and other governmentalinvestigations by state and federal regulatory authoritiesRepresented lenders in connection with truth-in-lending administrative restitutionactions, discrimination, CRA and fair lending actions brought by federal bankingsupervisory agenciesHeavily involved in defending class action litigation against the financial servicesindustry. Clients have included mortgage bankers, national banks, bank holdingcompanies, thrifts and insurance companies

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Brent LindahlPartner, Minneapolis Fulbright & Jaworski L.L.P.blindahl@fulbright.com+1 612 321 2244

Representation of lenders and insurers in investigations and enforcement actions brought by various state and federal regulators. Defense of lenders and other financial institutions in class actions in state and federal courts around the country. Substantial experience defending clients in matters challenging mortgage lending practices under various state and federal laws, including RESPA, TILA, ECOA, FDCPA, FCRA, and SCRA, as well as state consumer protection, deceptive practice, loan suitability and banking statutes.

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Erika Brown LeeSenior Counsel, Washington, D.C.Fulbright & Jaworski L.L.P.ebrownlee@fulbright.com+1 202 662 0398

Practice focuses on privacy, data security, consumer protection,antitrust, and consumer financial servicesCertified Information Privacy Professional (CIPP) by theInternational Association of Privacy ProfessionalsPrior to joining Fulbright, Erika was at the Federal TradeCommission where she served as Counsel to the Director ofBureau of Competition and with the Division of Privacy &Identity Protection in the Bureau of Consumer ProtectionChair of ABA Privacy & Information Security Committee

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John PrendergastVice President, Supervision Conference of State Bank SupervisorsWashington, D.C.JPrendergast@csbs.org

Over 24 years of regulatory and policy making experienceWorks to promote the development of initiatives for the statebanking and non-depository regulatory agencies to better fostercoordination and process improvement in both the mortgage anddepository banking areasProvides expertise and support to state banking Commissioners regarding state and federal policy matters, as well as supporting the professional development division in the creation and delivery of non-depository related schools and programsBachelors degree in business administration from Northeastern University

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Overview of the Consumer Financial Protection Bureau

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Overview of the Consumer Financial Protection Bureau

The CFPB was created in July 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection ActThe Act went into effect on July 21, 2011The Act combines authority from five bank regulators, the Federal Trade Commission, and the Department of Housing and Urban DevelopmentThe Act also gives the CFPB new powers, such as increased supervisory authority and increased authority over nondepository institutions

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Consumer Financial Protection Bureau: Budget and Current Status

EmployeesHired 663 employees by end of FY 2011Current staff is 889 employeesFY 2013 estimate - 1,359 FTEs

BudgetUsed $123 million of $171 million budget in FY 2011Spent $247 million of $356 million in FY 2012FY 2013 estimated at $448 million

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Consumer Financial Protection Bureau: Organizational Chart

http://files.consumerfinance.gov/f/201207_cfpb_report_annual-to-house-appropriations-committee.pdf

Chief Operating Officer

Associate Director

Consumer Response

Operations & Facilities

Procurement

CTO

CIO

CFO

Human Capital

Inclusion

FOIA, Privacy & Records

Consumer Education & Engagement

Associate Director

Financial Education

Consumer Engagement

Older Americans

Service Members

Students

Financial Empowerment

Research, Markets & Regulations

Associate Director

Research

Regulations

Cards Markets

Mortgage Markets

Installment & Liquidity Lending Markets

Deposits, Collections, & Credit Information Markets

Supervision, Enforcement, Fair Lending & Equal Opportunity

Steve AntonakesAssociate Director

Enforcement Kent Markus Assistant Director

Fair Lending & Equal Opportunity Patrice FicklinAssistant Director

Large Bank Supervision Paul Sanford Assistant Director

Non-bank Supervision Peggy TwohigAssistant Director

General Counsel

Associate Director

Principal Deputy GC

Deputy GC

Deputy GC

ALJ Staff Director

External Affairs

Associate Director

Media Relations

Legislative Affairs

Small Business, Community Banks & Credit Unions

Intergovernmental Affairs

Consumer Advisory Boards

Community Affairs

Director – Richard Cordray

Raj DateDeputy Director

Administrative Law Judge

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Jurisdictional Reach of CFPB

Big banks – large depository institutions/credit unions with over $10 billion in assetsSmaller banks with under $10 billion – rulemaking only Non-banks offering consumer financial products/services or extension of credit including● Lenders including mortgage lenders, brokers, loan

servicers● Prepaid card issuers● Payday lenders● Auto dealers

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Regulatory Authority

CFPB has authority to promulgate rules necessary and appropriate to prevent any:● Unfair;● Deceptive; or ● Abusive act or practice

(UDAAP) in connection with a financial service or product.

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Unfairness● Likely to cause substantial consumer injury;● Cannot be reasonably avoided by consumers themselves; and● Not outweighed by benefits to consumers or competition

Deception● Claim (or omission) that is likely to mislead consumers;● Who are acting reasonably under the circumstances; and● It is material to the consumer’s decision to buy or use the

product

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Abusive?

According to the CFPB Supervision and Examination Manual, abusive includes:● material interference with the consumer’s ability to

understand a term or condition;● takes unreasonable advantage of a consumer’s lack of

understanding of material risks, costs or conditions.“It’s clear in the statute that for something to be abusive it needs to be a pretty outrageous practice…If you as a business stay away from pretty outrageous practices, you should be safe.”Richard Cordray, Testimony before Congress Jan. 24, 2012

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CFPB - FTCMemorandum of Understanding

Agencies signed in January 2012● Prior to opening an investigation, the agencies will run a

computer check; each agency will provide notice to the other prior to filing a complaint

● Consultations regarding rulemaking activity related to consumer financial products or laws

Information Sharing with State Attorneys General● CFPB and NAAG staff already coordinate through

working groups● Bureau has proposed MOUs with State AGs

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Enforcement

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CFPB Investigations

The formal investigation process begins with a Civil Investigative Demand (“CID”)The CID must describe the purpose and scope of the investigationWithin 10 calendar days, the recipient should meet and confer with the Bureau’s investigatorWithin 20 calendar days, the recipient may petition the CFPB to modify or set aside the CIDThe CFPB may conduct an investigational hearing in which representatives of the company must testify under oath

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Capital One

Enforcement action brought by CFPB in July 2012Theory of liability: ● Sections 1031 and 1036 of CFPA regarding unfair,

deceptive, abusive acts and practices

Civil penalty of $25 million and $150 million in customer refundsRestitution plan to reimburse consumers Independent auditor to assess compliance for 5 yearsFencing in relief – covered products

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CFPB v. Gordon Law Firm, et al.

Lawsuit filed on July 18, 2012 in Central District of CaliforniaAllegation that Defendants falsely promised loan modifications to reduce mortgage payments in return for a advanced fee in violation of UDAAPAlleged violations of Regulation O (MARS Rule) including failing to provided required disclosures Relief sought includes injunction, disgorgement, restitution

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MORTGAGE SUPERVISION CHANGED IN 2004

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IT CHANGED AGAIN IN 2008

CREATION OF THE MMC

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CORNERSTONE OFMULTI-STATE SUPERVISION

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Purpose

Basic framework

for the coordination

and supervision of MMEs.

Purpose

Basic framework

for the coordination

and supervision of MMEs.

Purpose

Basic framework

for the coordination

and supervision of MMEs.

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AND STILL AGAIN IN 2011

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Jurisdiction

CFPBRule writing for 18 specific consumer protection lawsEnforcement authority for 18 federal laws + UDAAPFuture registration authorityExamination authorityComplaint processing and resolution

STATEState licensing and consumer protection lawsEnforcement authority for state and ALL federal lawCurrent licensing authorityExamination authorityComplaint processing and resolution

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CFPB’s 18 Specific CP LawsAlternative Mortgage Transaction Parity ActConsumer Leasing ActElectronic Fund Transfer Act (except for Section 920)Equal Credit Opportunity ActFair Credit Billing Act Fair Credit Reporting Act (except for Sections 615(e) and 628)Home Owners Protection ActFair Debt Collections Practices ActFederal Deposit Insurance Act (subsections (b) through (f) of section 43)Gramm-Leach-Bliley Act (sections 502 through 509)Home Mortgage Disclosure Act Home Ownership and Equity Protection ActReal Estate Settlement Procedures ActS.A.F.E. Mortgage Licensing ActTruth in Lending ActTruth in Savings ActSection 626 of the Omnibus Appropriations Act (FTC mortgage related rule-making for non-banks)Interstate Land Sales Full Disclosure Act

The Other Federal LawsCRABSA/AML, OFACFlood Disaster Protection Act (Flood Insurance)Fair Housing Act Expedited Funds Availability ActCheck Clearing for the 21st Century Act (Check 21) Right to Financial Privacy ActMilitary Service Member Protections, Servicemembers Civil Relief Act of 2003, and Talent AmendmentHousing and Urban Development Act of 1968 (homeownership counseling notification requirements of Section 106(c)(5)Children’s Online Privacy Protection Act of 1998Homeownership Counseling Procedures Telephone Consumer Protection ActE-SIGN ActControlling the Assault of Non-Solicited Pornography Marketing ActConsumer Protections in Sales of Insurance Protecting Tenants in Foreclosure ActAdvertising of FDIC MembershipNotice of Branch Closings

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18 Specific CP LawsAlternative Mortgage Transaction Parity ActConsumer Leasing ActElectronic Fund Transfer Act (except for Section 920)Equal Credit Opportunity ActFair Credit Billing Act Fair Credit Reporting Act (except for Sections 615(e) and 628)Home Owners Protection ActFair Debt Collections Practices ActFederal Deposit Insurance Act (subsections (b) through (f) of section 43)Gramm-Leach-Bliley Act (sections 502 through 509)Home Mortgage Disclosure Act Home Ownership and Equity Protection ActReal Estate Settlement Procedures ActS.A.F.E. Mortgage Licensing ActTruth in Lending ActTruth in Savings ActSection 626 of the Omnibus Appropriations Act (FTC mortgage related rule-making for non-banks)Interstate Land Sales Full Disclosure Act

The Other Federal LawsCRABSA/AML, OFACFlood Disaster Protection Act (Flood Insurance)Fair Housing Act Expedited Funds Availability ActCheck Clearing for the 21st Century Act (Check 21) Right to Financial Privacy ActMilitary Service Member Protections, Servicemembers Civil Relief Act of 2003, and Talent AmendmentHousing and Urban Development Act of 1968 (homeownership counseling notification requirements of Section 106(c)(5)Children’s Online Privacy Protection Act of 1998Homeownership Counseling Procedures Telephone Consumer Protection ActE-SIGN ActControlling the Assault of Non-Solicited Pornography Marketing ActConsumer Protections in Sales of Insurance Protecting Tenants in Foreclosure ActAdvertising of FDIC MembershipNotice of Branch Closings

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Preservation of State LawSection 1041

“. . . may not be construed as annulling, altering, or affecting, or exempting any person subject to the provisions of this title from complying with, the statutes, regulations, orders, or interpretations in effect in any State, except to the extent that any such provision of law is inconsistent with the provisions of this title, and then only to the extent of the inconsistency.”

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CFPB Must: Share, Coordinate, Consult, Alert, Arrange, Agree with States

ComplaintsExam Schedules

Fair Lending EffortsSupervisory ActivitiesConsumer Protections

Risk Based SupervisionSenior and Military Issues

Reports to President and CongressTreatment of Products and Services

Registration Requirements and Systems

State Notification of Certain Enforcement Actions3030

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Multi-State Exam Approaches

Traditional Limited Scope Electronic

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Risk Profile & Exam Schedule

States Join –EIC Selected

Scope & Planning

Information Request & Production

Onsite/Offsite Exam Begins

File Review & Report Drafted

MMC Approval

Report to Institution

MMC Exam Process

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Limited Scope Electronic Exams

15 exams – 28 states – 83 examinersComplianceEase softwareBatch data uploadsHigh level Executive SummaryResolution:● Limited Scope Report of Exam● Expanded offsite exam● Full Scope onsite exam

8 – 10 more exams in 2012

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ExamManagement

RiskIdentification

CaseManagement

TransactionReview

ComplaintManagement

SharingPortal

ComplaintProcessing

MMC

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Licensing/Registration

Examination

Complaints Enforcement

Rules &Regulations

Mortgage Supervision

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Jurisdiction – Banks

Depository institutions:Larger depositories

$10 billion or more in assetsPrimary jurisdiction

Smaller depositoriesLess than $10 billion in assestsLimited regulatory and supervisory jurisdictionSecondary jurisdiction to other regulators

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Jurisdiction – Non-Banks Participants in specified consumer financial products or services markets:● Private student loans● Payday loans● Mortgage-related activities (originators, brokers, servicers)

“[L]arger participant of a market for other consumer financial products or services”● CFPB still defining “larger participant.”● Thus far defined differently depending on type of non-depositories.

debt collectors – annual receipts of over $10 million. consumer reporting agencies – annual receipts of over $7 million.

Other non-depositories “engaging … in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”● By order after reasonable cause notice and right to respond (12 C.F.R.

1091).● Meaning of “risk” to consumers is unclear. ● Complaints.

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Jurisdiction – Service Providers

Service providers to depositories and nondepositories are under the CFPB’s jurisdictionService providers are “subject to the authority of the Bureau . . . to the same extent as if such service provider were engaged in a service relationship with a bank, and the Bureau were an appropriate Federal banking agency under section 7(c) of the Bank Service Company Act ”These covered service providers are “subject to regulation and examination by such agency to the same extent as if such services were being performed by the depository institution itself.”

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CFPB’s Right to Obtain Privileged Information – Supervision

CFPB takes the position that its supervisory/examination authority includes the right to receive confidential information from supervised institutions, including privileged information.CFPB Bulletin 12-01 (January 4, 2012). ● Entitled “full and unfettered access to information” from supervised

institution in order to carry out broad supervisory responsibilities under Dodd Frank.

● This includes privileged information.● Threatened enforcement action if supervised institution refuses.● “[P]olicy is to request privileged information only when the [CFPB]

determines that such information is material to its supervisory objectives and that it cannot practicably obtain the same information from non-privileged sources.” (Emphasis added.)

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CFPB’s Right to Obtain Privileged Information – Supervision

CFPB Final Rule ● 77 Fed. Reg. at 39617-01; 12 C.F.R. § 1070, Part D. ● Applies to all entities under CFPB’s jurisdiction. ● Applies to information protected by attorney/client

privilege and attorney work product doctrine.Attorney/client privilege: generally protects from disclosure communications between lawyer and client that are for the purpose of providing or obtaining legal advice.Attorney work product doctrine: generally protects lawyer’s mental impressions, including notes and memoranda, prepared in anticipation of litigation, even if not communicated to the client.

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Not clear that CFPB has statutory authority under Dodd Frank to require production of privileged information.The American Bar Association (ABA) expressed disagreement with CFPB’s position in an April 12, 2012 letter commenting on CFPB’s proposed rule.

CFPB’s Right To Obtain Privileged Information – Supervision

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CFPB’s Right to Obtain Privileged Information – Investigations

Unlike the rules applicable to examinations, the CFPB’s rules for investigations do allow entities to withhold privileged information. ● During the investigation process, an entity may withhold privileged

material if it provides a detailed privilege log. 12 C.F.R. 1080.8(a).● The CFPB rules provide a limited “claw-back” procedure for

inadvertent disclosures. 12 C.F.R. 1080.8(c)(1).

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CFPB’s Sharing of Privileged Information With Other Agencies

CFPB examinations and investigations are treated as confidential.● Exempt from disclosure under FOIA.● However, petitions to modify investigative demands are

public records.But CFPB can share confidential information—including privileged information—with other federal and state agencies and with Congress.

Dodd Frank’s broad mandate for inter-agency coordination.

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Mandatory disclosure ● Draft and final examination reports to federal and state

agencies with overlapping jurisdiction over supervised institution.

● “provided that the CFPB receives from the agency reasonable assurances as to the confidentiality of the information disclosed.”

12 C.F.R. § 1070.43(a)(1) (emphasis added)

CFPB’s Sharing of Privileged Information With Other Agencies

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Discretionary disclosure● CFPB has “sole discretion” to disclose “confidential

information” to other federal or state agencies (presumably including a state attorney general) if:

“relevant to the exercise of the agency’s statutory or regulatory authority;” andthe agency makes a “written request” explaining, among other things, its “legal authority for requesting the information” and the “purpose for which the information will be used.”

12 C.F.R. § 1070.43(b)(1), (2) (emphasis added).

CFPB’s Sharing of Privileged Information With Other Agencies

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CFPB also “may disclose confidential investigative information and other confidential information” to Congress, as well as to “law enforcement and other government agencies in accordance with this subpart.” 12 C.F.R. §1070.45(a)(1)(5). But CFPB has some authority to “negotiate” and presumably impose conditions on the disclosure of information to other federal and state government agencies. 12 C.F.R. §1070.43(d).

CFPB’s Sharing of Privileged Information With Other Agencies

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Privilege Waiver Issues

Traditionally, disclosure of privileged information to a third party, including the government, would generally constitute a waiver of the privilege as to the world.

In 2006, Congress enacted 12 U.S.C. §§ 1821(t) , 1828(x) providing that disclosure of privileged information to certain federal banking agencies did not waive the privilege as to third parties.

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Privilege Waiver Issues

CFPB takes the position that disclosure of privileged information to CFPB does not waive privilege. See77 Fed. Reg. 39617-01; 12 C.F.R. § 1070, Part D; CFPB Bulletin 12-01 (January 4, 2012). Unclear if CFPB has this authority. ABA’s April 12, 2012 letter questioned the authority in part based on the lack of authority to compel production of privileged information in first instance.

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Privilege Waiver Issues

CFPB is not one of the covered federal banking agencies under 12 U.S.C. §§ 1821(t), 1828(x). Amendment currently in Congress to add CFPB to definition of covered federal banking agencies. In an attempt to ease concerns of supervised institutions, CFPB has stated that it will assist a financial institution in opposing a claim of waiver. See CFPB Bulletin 12-01; 12 C.F.R. § 1070.47(a)(3)(iii). CFPB also has indicated that it will share confidential information (and, thus, privileged informaiton) with a non-supervisory law enforcement agency, such as a state attorney general, “only in very limited circumstances” where justified by the “significance of the law enforcement interest at stake.” CFPB Bulletin 12-01.

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Remaining Issues Even If No Waiver

CFPB presumably will use the privileged information against the supervised institution● Enforcement action or lawsuit

Risk that other federal and state agencies also use the information against the supervised institution● But CFPB rules provide that CFPB disclosure to

third party is not a waiver. 12 C.F.R. 1070.47(c).● Terms of MOU?

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Remaining Issues Even If No Waiver

State Attorneys’ General ● CFPB presumably will use its discretionary authority and

share information with state attorneys’ general. ● CFPB already may be sharing information with state attorneys

general? ● Terms of forthcoming memorandum of understanding?● Sometimes aligned with plaintiff’s lawyers?

Risk of leaks to media and plaintiff’s lawyers ● After disclosure the CFPB is less able to control what happens

to the information

No real remedy for the supervised institution

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Questions?

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