New Rules Governing - K&L Gates · New Rules Governing CFPB Enforcement Activities July 12, 2012 Phillip L. Schulman 1601 K Street, N.W. Krista Cooley Michael J. Missal Washington,

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


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C. Penalties1. Nuclear arsenal of weaponry

2. Including:

Rescission Refunds Restitution Damages Unjust enrichment Public notification


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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


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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


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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


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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


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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


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


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


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


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


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


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


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


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.)


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


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


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


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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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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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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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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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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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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1. Persuading the staff not to initiate an enforcement proceeding

2. Appeal of staff’s decision

D. Decision-making Process