Why Kraninger's CFPB is mandating fewer consumer refunds

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The Consumer Financial Protection Bureau appears to have shifted away from requiring financial institutions to refund customers in response to enforcement actions.

Of the six settlements signed so far this year by Director Kathy Kraninger, only one — against a bank — resulted in restitution paid to consumers. Meanwhile, none of the five other settlements with nonbanks, including three online payday lenders, a retail jewelry chain and a broker, required any relief be paid to consumers.

In a surprising twist, at least two of the companies that settled accusations of wrongdoing this year — the payday lender Cash Tyme and Enova International, a large online payday and installment lender — actually paid refunds to consumers, even though it was not mandated. Yet the CFPB did not mention the refunds in press releases, leaving the impression that consumers had not been made whole.

“The CFPB may not be requiring remediation, but from a reputational standpoint, companies may already have refunded consumers because it was the right thing to do," said Joe Lynyak, a partner at Dorsey & Whitney.

A little-understood aspect of the agency's enforcement actions is that in many cases companies self-identify problems and remediate when an issue is a supervisory matter. So refunds may have been handed out to consumers years before the CFPB files an enforcement action, lawyers said.

Generally, a regulator will seek restitution for harmed consumers if it has pursued a company for violating the law. But the CFPB’s ability to obtain restitution may be impacted by a host of issues including statute of limitations, the complexity of calculating relief or the cost of administrating a program.

"Each case has its own twists and turns, and if a company had to perform an audit, they have to pay and consumers might get redress; it's just not stated how," said Tony Alexis, a partner at Goodwin and former assistant CFPB director and head of the Office of Enforcement.

The trend away from refunding consumers may reflect a turnabout at the agency under Republican leadership — total enforcement actions, for instance, are down 70% in the past year. Under former Director Richard Cordray, the CFPB returned $12 billion to consumers over six years, some of which came in the form of canceled consumer debts.

“It’s very natural for there to be a pullback" in relief because under Cordray "a lot of the theories were very aggressive in the past and this is a normalization,” said Jeff Naimon, a partner at the law firm Buckley, formerly Buckley Sandler.

But Democratic lawmakers are beginning to ask questions about the CFPB's recent settlements. House Financial Services Committee Chairwoman Reps. Maxine Waters, D-Calif., and Rep. Al Green, D-La., who chairs the House subcommittee on oversight and investigations, sent a letter earlier this month to Kraninger raising questions about the lack of redress to consumers. Waters and Green requested all communications, including draft consent orders, between the bureau and three companies in recent settlements: Sterling Jewelers, the large jewelry retail chain; the online payday lender Enova International; and NDG Financial, a Canadian online payday lender.

A CFPB spokeswoman did not respond to a request for comment.

Some lawyers said the lawmakers' request is risky because Congress is not subject to confidentiality. Publicly disclosing draft consent orders and meeting minutes could have a chilling effect on what companies disclose to the bureau in the future.

“The idea that confidential company information could be released to Congress sets a bad precedent and will make it harder for the CFPB to bring enforcement actions,” Naimon said. “This will make communicating more difficult because it is more fraught if your audience isn’t the enforcement staff at the CFPB but is the public.”

In some circumstances, restitution may not be appropriate — or even possible.

"If a CFPB staff member determined the harm came to 15 cents per consumer" it "would be impracticable," Alexis said.

In the case of NDG Financial, jurisdictional issues may have been at play. The CFPB settled the case by banning the Canadian company, three executives and its affiliates from lending in the U.S. after alleging it operated a cross-border payday loan scheme to skirt state usury laws. A judgment against the firms in the U.S. would not have been enforceable in Canada, lawyers said.

Still others suggest that the CFPB may have sought restitution early on only to have Kraninger change course.

It's also possible that the agency's leadership may view restitution differently after the bureau lost a major case last year against the nonbank lender CashCall. In that case, a federal judge tossed out the CFPB’s request for $280 million in restitution and penalties and instead imposed a $10 million fine and zero in relief to consumers. Lawyers said the CashCall case was a rebuke and that the current CFPB leadership has decided not attempt to get relief for consumers if the need for restitution could not be proved in court.

In some cases, the CFPB may have had difficulty identifying which specific consumers were harmed, which also could explain why no relief was provided.

For example, Sterling Jewelers agreed to pay a $10 million penalty to the CFPB and $1 million to the state of New York for enrolling consumers in store credit cards and payment-protection insurance without their consent. The CFPB did not seek restitution in the case even though the bureau stated that Sterling generated $60 million a year from its payment-protection plans. It is unclear if the company could identify which consumers, if any, had been signed up for the plans and were charged without their consent, lawyers said.

But Allen Denson, a partner at Hudson Cook, said he was surprised that the CFPB did not seek consumer redress in the case.

“At the end of the day, that’s the bureau’s role and primary goal,” said Denson, a former OCC enforcement attorney who represented Cash Tyme in a settlement this month. “I hope that it's not that they fundamentally don't believe in restitution. Maybe it will shake out differently as there are more actions."

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