CFPB wants firms to sound off, but openness carries hidden risks

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Companies that have been investigated for wrongdoing by the Consumer Financial Protection Bureau are giving acting Director Mick Mulvaney an earful about how he should roll back enforcement practices.

The big question is: Are they seizing on a golden opportunity to reshape the regulatory landscape, or are they shooting themselves in the foot?

Mulvaney issued a "call for evidence" last month in which he asked companies regulated by the bureau to comment on a dozen topics, starting with how its enforcement office conducts investigations. Mortgage lenders, debt collectors and credit repair companies have responded with gusto.

But sounding off could draw unwanted new attention to a firm that already has been the target of a probe. And if a company sticks its neck out, it could prove to be a wasted effort, since Mulvaney will be in office until just September and a permanent CFPB director confirmed by Congress could go in a different direction.

"Given years of controversy surrounding CFPB enforcement and the keen interest of media, consumer and community advocates, and certain high-profile members of Congress, it may not be in the best interests of particular financial institutions to provide specific written comments ... at all," said Don Lampe, a partner at Morrison & Foerster, in a recent note to clients.

Mulvaney has asked companies regulated by the CFPB to comment on a dozen topics. For each subject, the agency issues a "request for information" on a staggered schedule, triggering a comment period for each one.

Companies accused of wrongdoing have the enviable position of helping the new agency leadership change the investigatory process.

In blistering comment letters, they described onerous demands for documents, investigations that went on for years without resolution, and a refusal by CFPB attorneys to explain precisely why a company was being investigated.

"Being treated like a second class citizen in what appeared to be a witch hunt was appalling," wrote Craig Parr, who submitted a comment letter about his experience testifying as part of the bureau's civil investigative demand process.

Most of the companies submitting comments on the CID process have cast themselves as innocent victims that caused no harm to consumers. They describe the CFPB as engaging in strong-arm tactics to extract civil money penalties from them.

Mulvaney is expected to use the feedback from companies that were accused of wrongdoing by his predecessor, Richard Cordray, to cut back the bureau's enforcement powers.

The CFPB so far has received 18 comments letters on civil investigative demands, known as CIDs, which are issued to companies that may be subject to an investigation or to third parties that may have relevant information. The CID process has long been a target of House Republicans who have sought to gut the agency. (The comment period for CIDs ends March 27.)

The agency, meanwhile, has already asked for comment on four more of the planned topics: adjudication proceedings, enforcement processes, supervision and external engagements.

Yet some experts said the information requests themselves are an obstacle to reform because few companies will want to publicize that they have been the subject of a CFPB investigation.

"It may not be advisable for specific targets of CIDs to set forth in comments detailed descriptions of their specific cases and experiences with the bureau," Lampe said in his client note.

While CIDs are private, the comments on the request for information are public.

"If the CFPB were really interested in having robust feedback, a better way to get that feedback would be through the confidential bank supervision process, where they can discreetly get examiners to get a response to questions and put together a report," said Jenny Lee, a partner at Dorsey & Whitney and a former CFPB enforcement attorney.

So far, no banks or major names in financial services have commented on the CID process. However, the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers of America all said they plan to comment on most, if not all, of Mulvaney's requests for information.

Meanwhile, firms must consider the ultimate value of commenting with Mulvaney's appointment only temporary. He may be able to move quickly on some targeted reforms, but with the length of his tenure limited by statute, it is unclear if he has enough time to make significant changes himself.

"There might be some low-hanging fruit that can be changed quickly by the director," said Sarah Auchterlonie, a compliance attorney at Brownstein Hyatt Farber Schreck and a former acting CFPB deputy director of enforcement.

Time is of the essence.

President Trump must nominate a permanent CFPB director who can be confirmed by the Senate before Mulvaney's term ends in September. But a permanent director is not bound by Mulvaney's requests and does not have to bring the RFI process to any conclusion.

"He is going to have to act relatively quickly," Lampe said in an interview. "This is a very ambitious agenda for an acting director, and the question is whether all of these efforts that industry is quietly applauding will ride out Mulvaney's tenure."

Mulvaney also could deliver a ready-made to-do list to his as-yet-unnamed successor.

"I suspect there is a longer-term strategy in place to lay the foundation for a permanent successor to use this information to create new policies and practices within the agency," said Todd J. Zywicki, a law professor at the Antonin Scalia Law School at George Mason University. "This is about collecting the factual foundation for that."

Yet there are signs that the agency may have tried to move too quickly out of the gate with the information-gathering process. The first three RFI topics were announced with 60-day comment periods, but the bureau later said the subsequent nine would have 90-day comment periods.

"There is a desire on the part of industry to have the process slow down to give responders more time," Lee said.

Some law firms have even provided instructions to companies on how they can aid Mulvaney by describing the burden of regulations, the need for a cost-benefit analysis and claims that the CFPB did not file due process.

The CFPB also has told companies to provide data on how long the CID process took and how much money a company spent defending itself.

Vincent Howard, a consumer attorney in Anaheim, Calif., and a former president of the Orange County Trial Lawyers Association, said the CFPB deprived his law firm of $25 million in accounts receivable and forced him to terminate over 60 employees and 50 attorneys.

"The CFPB weaponized the CIDs to intimidate and terrify support companies and banks to abandon me," Howard wrote, stating that the CFPB filed its complaint "without one single finding of wrongdoing and without the authority to regulate attorneys."

Howard said he spent $1 million in legal fees defending himself against charges in 2017 that he allegedly took over a debt-relief scam of a former client, the now-bankrupt Morgan Drexen. A federal court in 2016 ordered Morgan Drexen to pay roughly $133 million in restitution to customers and a $40 million fine for charging customers upfront fees before settling or amending a consumer's debt.

Though CFPB-targeted companies are lambasting the agency in comment letters, it is unclear whether the bureau has actually abused the CID process.

Last year, the Federal Reserve's Office of Inspector General found that the CFPB "generally complies," with requirements for issuing CIDs, but said it could improve on the guidance it gives companies and centralize its recordkeeping. (The consumer agency technically is a bureau of the Fed.)

The Dodd-Frank Act gave the CFPB the authority to take appropriate enforcement actions to address violations of federal consumer financial laws. But in his first month on the job, Mulvaney put a freeze on all enforcement actions and sided with companies that have long claimed Cordray engaged in "regulation by enforcement."

His request for information on CIDs could be used to drop investigations and roll back the bureau's enforcement tools.

Auchterlonie expects changes will be made to the CID process, including giving companies being investigated more time to respond to the CFPB's requests and narrowly tailoring CIDs generally.

The civil investigative demand process has long been contentious. Companies are given just 20 days to file a petition to modify or set aside the CID.

Moreover, a targeted company risks taking a reputational hit if they petition to have a CID set aside or modified because the CFPB can post the request on its web site, turning a private investigation public.

"You have to risk the whole world knowing you're under investigation by this government agency," Auchterlonie said.

The CFPB files an estimated 160 CIDs a year, or roughly 800 in the past five years. Cordray refused to modify or set aside any CIDs.

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Enforcement Regulatory relief Dodd-Frank Mick Mulvaney Richard Cordray CFPB