WASHINGTON — The Consumer Financial Protection Bureau said Monday it plans to give banks a heads up when they face possible enforcement actions.
The early warning notice would give the subject of any investigation — including individuals and institutions — an opportunity to respond to allegations before the bureau decides whether to take legal action.
"The early warning notice announced today strikes a balance between the goal of fairness to those being investigated and our mission to protect consumers," Raj Date, the bureau's interim leader, said in a press release. "This process will help us fulfill our commitment to transparency in enforcing the law."
Industry observers said the process is similar to the Securities and Exchange Commission's "Wells process," by which firms receive advance written notice of any investigation, and have the opportunity to review the evidence and respond to the charges. The banking agencies also typically notify banks that are under investigation, but in a less formal manner.
Under its own early warning process, the CFPB will notify firms or individuals that evidence gathered in an investigation indicates that they have violated consumer financial laws. They then have 14 days to respond in writing, including any relevant legal or policy arguments or facts, according to the press release.
The bureau said the decision to give notice is discretionary, however, and would depend on factors such as whether prompt action is needed. The notice is not required by law, but the agency said in a press release that it believes the notice will "promote even-handed enforcement" of consumer laws.
Bank lawyers welcomed the news on Monday, and were eager to hear more details. Sources also viewed the move as a positive step by Richard Cordray, the bureau's enforcement chief and the nominee to be its first director.
Reginald Brown, a partner with WilmerHale in Washington, said the announcement "shows the CFPB is taking industry concerns about due process seriously. While it isn't everything many would want, it does show a willingness to listen and consider feedback."
L. Richard Fischer, a partner with the law firm Morrison & Foerster, said the Wells process allows parties and their lawyers to come in and view the evidence that the SEC has against them. It's unclear whether the CFPB plans to follow a similar procedure, he said.
"If that is what the bureau's contemplating, I think it's a very good idea," Fischer said. "I'd much rather know that than just have the agency come in and blow the door down."
Kevin Petrasic, a partner with the law firm Paul, Hastings, Janofsky & Walker, agreed it is better for banks to know about an investigation. But he said it could be a double-edged sword if publicly traded entities are required to disclose the notice to shareholders if it is considered "material" information under securities laws.
"There is a downside in terms of disclosure, but better to know what's going on and at least have an opportunity to head something off before it gets ugly," he said.