Many compliance officers in the financial services industry and beyond have worried that the scope of the Consumer Financial Protection Bureau's power is too broad and that its jurisdiction is not well undefined. A recent agreement the CFPB hammered out with the Department of Justice won't do much to allay those concerns.
Under a Memorandum of Understanding reached last month, the CFPB and the Justice Department have agreed to more closely coordinate their information-sharing abilities, conduct joint investigations, and pass referrals on to one another as they pertain to fair-lending enforcement efforts.
The agreement “sends a very broad signal to the financial services industry that there is going to be a very close working relationship between the CFPB and the Justice Department,” says Jake Lutz, a partner with law firm Troutman Sanders, who chairs the firm's Financial Institutions Practice Group.
The partnership could put more pressure on the compliance efforts of banks and credit unions with more than $10 billion in assets and a wide spectrum of non-banks—consumer financial services providers, mortgage companies, and other non-bank lenders. Although the CFPB is not the primary regulator of smaller lenders, the agreement will also help set policy “so that other bank regulatory agencies can conduct their examinations using policies that have been developed cooperatively with the CFPB,” says Lutz.
The CFPB is “very serious about bringing fair-lending enforcement actions,” says Christopher Willis, a partner with law firm Ballard Spahr. The general concern this raises for the consumer financial services industry is that the CFPB not only has a “great amount of power,” Willis says, but also “unlimited information-gathering capabilities” through its supervisory and enforcement authorities. The agreement with the Justice Department could enhance, not diminish, those powers.
As authorized under the Dodd-Frank Act, the agreement makes clear that the CFPB can initiate enforcement actions against any entity subject to its supervisory or enforcement authority that is found in violation of federal consumer financial laws, including the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act.
The CFPB may also engage in joint investigations with, and request information from, the Justice Department “where appropriate,” relating to fair-lending matters. If there is “reason to believe” that a creditor has engaged in a pattern or practice of lending discrimination, the CFPB may refer those matters to the Justice Department, including a recommendation that a criminal action be initiated.
The agreement between the two government entities could also give the Justice Department greater access to company information. That's because the CFPB in its capacity as a supervisory entity has the right to examine a company's documents and records as part of its normal course of doing business, whereas the Justice Department doesn't have that ability without issuing some type of subpoena or civil investigation.
“That means the Justice Department now has a conduit to information that it would not necessarily have but for this agreement to share information,” says Michael Mallow, a partner with law firm Loeb & Loeb, and chair of the firm's Consumer Protection Defense Department.
Typically, the Justice Department won't investigate a company unless it has received a complaint about a potential violation. Through this agreement, a financial firm—simply in the course of responding to a normal CFPB examination—could now produce information that ends up being referred to the Justice Department, potentially leading to an investigation or enforcement action, says Michael Thurman, also a partner with law firm Loeb & Loeb.
For financial institutions, the new information-sharing accord could potentially raise the profile of a low-level violation much higher than perhaps would have occurred in the past, explains Thurman.
The CFPB can also now refer to the Justice Department possible violations of other fair-lending laws that it doesn't have direct enforcement authority over, including the Fair Housing Act and the Servicemembers Civil Relief Act. Although the CFPB may only bring civil actions, the Justice Department, of course, has the authority to bring criminal actions, says Thurman.
The agreement “sends a very broad signal to the financial services industry that there is going to be a very close working relationship between the CFPB and the Justice Department.”
—Jake Lutz,
Partner,
Troutman Sanders
The agreement also states that the CFPB and Justice Department will meet quarterly to discuss whether to initiate an investigation or enforcement action and what entities to target. That's a “significant” inclusion in the agreement, considering that these types of referrals traditionally have been ad hoc, Mallow says.
Financial institutions have a right to be concerned about the CFPB's and Justice Department's coordination efforts, says Mallow, because now “you are dealing with a far larger beast in the two than you would be in the one.”
Avoiding Duplication
An unanswered question is whether the CFPB and the Justice Department are going to coordinate their efforts in a way that eases the burden of targeted entities, or whether those targeted entities will have to deal with “two potentially inconsistent approaches and investigatory issues,” says Melanie Brody, a partner with law firm K&L Gates. “We just don't know yet how that is going to shake out.”
“It's hard enough when you're dealing with an investigation by one government agency but then when you have multiple agencies investigating you for the same or overlapping issues, it becomes very difficult to manage and be responsive,” says Brody.
In theory, greater coordination and collaboration between the two agencies will mean that consumer financial institutions won't have to jump through hoops at both agencies over the same matter, says Mallow. “If you're dealing with an enforcement action, it's likely going to be an enforcement action with either the CFPB or the Justice Department.”
As stated in the agreement, the agencies will coordinate their efforts “to avoid unnecessarily duplicative action.” Within 60 days of receiving a referral, the Justice Department must make a reasonable effort to determine whether to proceed with its own investigation, during which time the CFPB may not commence an action related to the referred violations.
The agreement emphasizes, however, that each agency still retains “independent authority” to carry on its investigations however it deems necessary. Joint investigations may take place “when appropriate” to “leverage resources and expertise.”
Proactive Measures
JOINT INVESTIGATION AND COORDINATION
The following excerpt from the Memorandum of Understanding between the CFPB and the Justice Department explains how they will work together on investigations:
(1)Section 1052 of the Act authorizes the CFPB, where appropriate, to engage in joint investigations with, and requests for information from, the DoJ in matters relating to fair lending.
(2)When appropriate, the DoJ and the CFPB will seek to collaborate on investigations and conduct joint investigations of entities allowing the Agencies to leverage resources and expertise.
(3)The Agencies will meet no less than quarterly to discuss current fair-lending investigations of entities within the jurisdiction of both Agencies and how they can coordinate and cooperate effectively in those activities.
(4)When the DoJ and the CFPB conduct a joint investigation, the Agencies will work closely together to coordinate their investigations in a manner that is consistent and complementary, including but not limited to coordinating the planning and conduct of the investigation. The DoJ and the CFPB will strive to avoid unnecessarily duplicative actions. At the time that either Agency is prepared to make a determination as to how to proceed following a joint investigation, the Agencies will consult to determine whether multiple or joint actions are necessary or appropriate. However, nothing in this MOU will affect either Agency's independent authority to proceed in the manner that it determines is appropriate.
(5)For any enforcement action that results from a joint investigation, the Agencies will comply with Section IV of this MOU.
Source: Memorandum of Understanding.
The good news for companies is that the CFPB continues to take “a very transparent and open approach” when it comes to its expectations, says Thurman. In October 2012, for example, the CFPB published its Supervision and Examination Manual, which describes how the CFPB supervises and examines companies that provide consumer financial products and services. “So compliance officers have some guidance in terms of what the CFPB is going to be looking at when they review a firm,” says Thurman.
Mallow says the flipside to the CFPB making its playbook available, however, is that companies have “really very little excuse for not being in compliance with the examination procedures.” The stakes have been raised significantly for entities that are not prepared, “since the CFPB has made its expectations quite clear,” he says.
Compliance officers can help mitigate liability when it comes to violations of consumer financial protection laws by making sure that their companies are taking steps to comply with provisions in the examination manuals, and are able to demonstrate that compliance. “That should certainly reduce the exposure to enforcement activity,” says Thurman.
What compliance officers need to do is enhance their compliance efforts to ensure compliance with consumer financial protection laws, including conducting internal reviews and audits, says Lutz.
Financial firms should also ensure that they have in place a “robust fair-lending compliance policy,” Brody advises. That means structuring policies in a way that protects any privileged documents that you don't want disclosed to third parties. While such materials must be disclosed to the CFPB, “certainly you can make a privileged claim with regard to the Justice Department,” she says.
While the agreement states that the CFPB can provide the Justice Department with all non-public information "sufficient to support” a referral, it also stresses that any information shared between the agencies will remain confidential. To further strengthen the confidentiality protections, President Barack Obama on Dec. 20, 2012, signed into law a bill clarifying that privileged materials produced to the CFPB retain their privileged character as to third parties.
When it comes to their supervisory and enforcement authorities, the CFPB is only just warming up. Armed with a staff of more than 1,000 attorneys and investigators, “our expectation is that this year should be very busy in terms of enforcement,” says Thurman. Expect more cases to come through the pipeline beginning around March or April, and intensify from there.
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