Backlog Forces CFPB to Slow Down New Investigations

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WASHINGTON — The Consumer Financial Protection Bureau's enforcement attorneys have pulled back on new investigations in order to clear out a slew of pending cases, according to multiple current and former officials at the agency.

The officials say the agency essentially bit off more than it could chew when it began ramping up investigatory efforts three years ago, and has struggled to clear through the backlog of investigations as hundreds of referrals are also coming in. As a result, the agency is slowing the opening of new cases within enforcement while it works through its existing caseload.

In 2014, "they started slowing down in a sense that they're trying to bring down the cases to a more manageable level," said one former CFPB employee who, like others for this story, declined to speak on the record for fear of alienating the agency. "And it's good that they're trying to recalibrate that. They took on too much in the beginning and it became difficult to get through those investigations in a reasonable amount of time. They overestimated what the staff was capable of handling."

Sam Gilford, a spokesman for the agency, acknowledged that new investigations are slowing down, but attributed that to a natural shift because the agency inherited "a number of investigations" when it opened its doors in 2011.

"Because we have transitioned out of that initial start-up phase, we are necessarily opening new investigations at a slower pace than we did during our first couple of years," he said in response to questions from American Banker. "We are also resolving more matters — completing the early, inherited work allows for more strategic and impactful decisions about what cases to pursue."

Some cases are now more than two years old, the timeline the agency sets for itself to wrap up enforcement matters, which can be problematic both for the CFPB and the financial institutions involved.

For companies, an open investigation into a public firm can bring added scrutiny from shareholders and potentially interfere with possible mergers and acquisitions.

For the agency, there is a political dimension to prolonged delays. Unresolved cases must be reported to Congress under the Government Performance and Results Act. Some lawmakers are more likely to criticize the agency if it appears it cannot handle the cases it opens.

As a result, current and former employees said there has been added pressure for enforcement attorneys to quickly resolve outstanding investigations, effectively clearing the decks.

"There's definitely pressure from the top to move these cases along and resolve them faster," said one source familiar with the matter.

The push to resolve cases also puts the industry on high-alert because financial institutions scrutinize enforcement actions to ensure they aren't engaging in activities that the CFPB may target.

"For the industry, it means that there will be more consent orders and sources of guidance for them to follow," said Chris Willis, a partner at the Ballard Spahr office in Atlanta. "It seems like the CFPB is putting a high priority on bringing existing investigations to a close and pushing enforcement cases to a resolution. The pace of new investigations seems to have slowed."

The CFPB's Gilford said that in the agency's early days, the focus was "almost exclusively on opening new matters."

"That focus has now expanded and shifted to developing and resolving those matters already ongoing," he said. "That said, we are still regularly opening new investigations where we believe we can have the greatest impact in protecting consumers."

Though the CFPB does not disclose the total amounts of new investigations in its strategic report, it does report total figures for "supervisory activities," which are exams that can sometimes lead to investigations or other activities. The number of new supervision activities that were opened in fiscal year 2013 jumped 7% to 160, but fell 21% in fiscal year 2014 to 127.

Sources said the CFPB had more than 100 investigations still open, a figure that the CFPB's Gilford confirmed.

"Each enforcement investigation is different and merely counting the number of open investigations may not be an appropriate measure of the CFPB's ongoing enforcement work," Gilford said. "Matters can vary in size, scope and level of consumer harm."

The CFPB has made public more than 80 enforcement actions in the past three years, an aggressive pace for most financial regulators. In its latest strategic report, the CFPB said it had either settled or filed a case on 75% of the investigations it opened in the last two years. It expects to settle or file a case on 65% of its investigations within two years for the 2015 and 2016 fiscal years.

Sources gave several reasons why the agency is facing a backlog. For starters, the enforcement division immediately began launching investigative inquiries at a rapid pace when the agency first got itself up and running in 2011 and before it had fully established systems, according to multiple sources.

"The CFPB started out with guns blazing and they didn't wait around to create a lot of architecture before they began the functions of rulemaking, supervision and enforcement," said an outside source familiar with the matter. "They were aggressive from the start in sending out hundreds of CIDs [Civil Investigative Demand] that sometimes targeted whole industries."

It was also easier for enforcement attorneys to launch new investigations at the very beginning since they were not yet getting referrals from CFPB examiners. But it gradually became more difficult to close those cases — which were sometimes complex and new terrain for the CFPB — as more referrals started coming in the last two years.

"The cases that are referred from supervision are also farther developed and closer to settlement or suit so it's more efficient for the enforcement attorneys to take on those matters," said a second former employee.

Staffing has also contributed to the problem as the agency is still building out its supervision, enforcement and fair lending groups while simultaneously facing turnover. The CFPB added more than 100 people in fiscal year 2014 within those three groups, reaching 633 full-time employees. But that's down from the agency's original 742 target figure for that time period. The agency is now hoping to reach 691 employees within those groups by the end of fiscal year 2015, according to its strategic review.

The CFPB said it has 130 employees in the office of enforcement, which some current and former officials characterized as a low number considering the hundreds of referrals and investigative inquiries that have gone out in recent years. Each attorney can only take on about 3 to 5 cases at one time since a case can easily take at least a year to be resolved, they said.

Adding to that, the CFPB has faced turnover as its employees, particularly those involved in supervision and enforcement, are valuable hires for private sector firms. That often means cases have to be reassigned to another attorney which can prolong the investigation process.

"It just takes time to recruit and train skilled attorneys when someone leaves so that can add to the time it takes to finish investigations," said one current employee.

The CFPB's Gilford said the agency moved quickly in 2011 to ensure it had sufficient enforcement staff.

"We hired both attorneys and non-attorneys quite rapidly so that we would have staff on board to carry out the core work of our office: enforcing federal consumer financial laws," he said.

The CFPB has recently named several top officials in its enforcement department. It chose Tony Alexis as its permanent director of enforcement in January, after he had served as interim director for roughly a year, sources said. Also in January, the CFPB selected a new chief human capital officer, a deputy chief operating officer and a northeast regional director of supervision enforcement. The permanent placements should bring some more certainty and speed up the case resolutions, according to sources.

To some degree, some of the backlog now is due to difficulties in establishing formal processes in its early years, sources said. The agency had an enforcement process in place early on, but its internal reporting systems for supervision and enforcement were still being finalized last year. For example, the CFPB said that in the fourth quarter 2014 that it issued a new policy for supervision to accurately enter data "on a timely basis" as well as new fields into the system, according to its latest strategy plan.

Beyond that, several sources described the enforcement division as having a "micromanaging" process that required attorneys to get approval from senior officials in multiple departments, like supervision, before they could proceed with a settlement or make changes to the settlement. In contrast, some other agencies require the top official to sign off after discussions when a settlement is about to be closed.

The CFPB's push to settle or sue investigatory targets on a dual-track process also meant that the attorneys had to first get approval from CFPB Director Richard Cordray before they could proceed in either direction, even if a company was already willing to settle, which inevitably prolonged the process.

"The managers did not allow the enforcement attorneys to have any authority and that's terrible for morale. They really neutered the line attorneys," said a third former employee. "Because of the approval process, some cases were dragging on for years and every step of back and forth could take a month or two. The approval process did create a bottleneck."

The CFPB's Gilford said that the agency endeavored to create a process that was "both efficient and effective" and "minimize disruption to ongoing work when attorneys leave the office."

"We have internal approval processes in place to ensure consistency of approach internally within the Office of Enforcement and also within the bureau as a whole," Gilford said. "There are certain decisions that require approvals by the assistant director of enforcement or the Bureau Director — decisions to open investigations, to authorize entering into settlement agreements, or to file lawsuits, for example. This is entirely consistent with the approach of other federal financial regulators and law enforcement agencies."

The CFPB also did not set a target baseline for resolving investigations until 2014 because it said the agency was not old enough to determine a timeline until then. But many observers said the CFPB is moving too slowly.

"They have so many of these CIDs outstanding right now that it's difficult to tell whether they will close them in any reasonable amount of time," said the second source familiar with the matter. "I've seen companies that have cooperated and sent the CFPB everything on time, under the bureau's very strict timeframes, and then the bureau has responded quite slowly."

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