CFPB’s unexpected showdown with Citizens

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Just as banks were starting to see clarity about the Consumer Financial Protection Bureau's enforcement strategy, the recent CFPB order against Citizens Bank is challenging assumptions about the bureau's approach.

Financial services watchers, GOP lawmakers and others are still scratching their heads about the recent CFPB lawsuit filed against Citizens Bank — which the bank says it will fight — over how the $165.7 billion-asset institution handled credit card fraud claims.

Many observers questioned why the agency sued the Providence, R.I., bank five years after Citizens says it self-reported the issues in 2015. But the case is also drawing attention in part because the tough stance by the Trump-appointed CFPB Director Kathy Kraninger is the opposite of what the industry expected.

“This is definitely a case to watch,” said Nanci Weissgold, a partner at Alston & Bird. “Why did the CFPB file this? This is a case [showing that] where there are allegations of consumer harm and to the extent that there is harm, Kraninger is going to enforce the laws.”

The case also deviates from other norms. It is relatively rare, in general, for the CFPB to penalize a bank (versus a nonbank) and for the bank to challenge the agency's findings in court. Of the 25 CFPB enforcement actions issued since Kraninger came aboard, the Citizens lawsuit is the first action involving a bank.

The CFPB alleges Citizens mishandled claims of credit card billing errors attributed to fraud in violation of the Truth in Lending Act. But Citizens claims it fully self-reported the incidents to the CFPB while refunding 25,000 credit card customers shortly thereafter. The bank says no more remediation is necessary, and the lawsuit exceeds a one-year statute of limitations.

Early on in her tenure, Kraninger urged financial institutions to self-report violations and compensate consumers on their own — a message that appeared to signal a preference against enforcement actions and big fines. Indeed, CFPB enforcement actions are down compared to her Obama-era predecessor, Richard Cordray.

But Kraninger is getting plenty of push-back for the Citizens lawsuit from those hoping the agency was headed in a different direction on enforcement.

At a House hearing Thursday, Rep. Roger Williams, R-Texas, asked Kraninger if she had personally signed off on the lawsuit.

"When I see things like this still happening, it doesn’t inspire confidence that meaningful reforms have been made to get this agency under control," Williams said.

Kraninger made it clear that she signs off on every enforcement action. She also declined to comment on specific cases such as the Citizens lawsuit.

"The filings will speak for themselves, so I encourage people to read them," she told Williams. "We are focused on prevention of harm, we absolutely want entities seeking to join us in being compliant with the law, but no one should mistake fairness and reasonableness for weakness.”

Lawyers speculating on why the CFPB waited five years to file the suit cautioned that not all the facts have been disclosed. For example, it is unknown if Citizens has a so-called tolling agreement in place that would have put a halt to the statute of limitations while the bank was under investigation.

“I do think the statute of limitations issue could be a significant issue in the case,” Weissgold said.

The lawsuit raises a number of other legal issues that financial institutions wrestle with when facing off against regulators, including how much credit should be awarded to companies that self-report violations.

Chris Peterson, who was a special adviser to Cordray at the CFPB, said Citizens and the agency may disagree about the requirements of the Fair Credit Billing Act, which amended TILA and set out the framework for banks to investigate fraud and billing errors by consumers.

“The bank is to be commended for coming forward and attempting to remediate the consumer harm, but self-reporting is not the same thing as a get-out-of-jail-free card,” said Peterson, a professor at the University of Utah’s S.J. Quinney College of Law and a senior fellow at the Consumer Federation of America.

Consumer harm

The core of the CFPB’s lawsuit is the allegation that consumers were harmed by Citizens' requirement that customers with fraud claims return a notarized affidavit to the bank. If a customer failed to so, the bank numerous times denied the claim in violation of Regulation Z, the CFPB said.

“In numerous instances when consumers filed either billing error notices or claims of unauthorized use, Citizens automatically denied the consumers’ claims because the consumer failed to comply with requests to provide Fraud Affidavits, including signing the affidavits under penalty of perjury and with a provision agreeing to testify as witnesses,” the lawsuit states.

Making consumers jump through hoops to get an investigation or a refund was not the intent of the law, several lawyers said. Others said banks want to conduct some due diligence to ensure that consumers’ claims of errors or fraud in various contexts are legitimate, such as by requiring signed affidavits or a police report.

“The question becomes, what level of diligence are you permitted to do before rejecting a claim like this,” said Scott Pearson, a partner at Manatt, Phelps & Phillips, LLP. “There is a disagreement here about whether a bank can reject a claim because the consumer did not submit something the bank wanted to verify that the claim is legitimate.”


In a statement Jan. 30 following the announcement of the lawsuit, Citizens Bank General Counsel Stephen Gannon said that the CFPB's action “ignores the swift, corrective actions that Citizens took” to address issues in how it handle fraud claims.

The bank cited a 2013 bulletin in which the bureau described what it considers “responsible conduct” that can favorably affect the ultimate resolution of an enforcement investigation. Credit typically involves going “above and beyond what is required,” including proactively identifying and self-reporting violations, refunding consumers in full and cooperating with an investigation.

Richard Hunt, the CEO of the Consumer Bankers Association, also weighed in on the issue in a statement, saying that Kraninger has encouraged financial institutions “to ‘self-report, self-examine and provide restitution where appropriate.’ ”

“The CFPB’s action is inconsistent with that belief and counterproductive to furthering a well-regulated, consumer-focused banking system,” Hunt said.

Some suggest that the scope of the restitution could be at issue. The bank may think it went beyond what was required while the CFPB has a different opinion.

"There are certainly circumstances that when you self-report something you do get some leniency but not always, but this is not just an issue with the CFPB, this comes up with other regulators too," Weissgold said. "It’s entirely probable that both sides believe they are doing the right thing and there is a difference in opinion over what was the right measure of restitution."

Despite the Citizens lawsuit, Kraninger has been criticized by congressional Democrats and consumer groups for dramatically reducing both fines and restitution to consumers.

But on the other side, some industry representatives say Citizens’ intent to challenge the agency in court is a positive.

“There is something deeply wrong with an enforcement regime where fear of retaliation or reputational damage has for years forced banks to settle every case,” said Greg Baer, president and CEO of the Bank Policy Institute. “So, it is encouraging that Citizens has decided to assert its rights and stick to its guns.”

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CFPB Credit cards Enforcement actions TILA Litigation Consumer lending Kathy Kraninger Citizens Bank