Consumer Financial Protection Bureau Issues Rules on Procedures for Investigations, Enforcement, Disclosure, and State Official Notifications

by the Consumer Financial Services Group

The Consumer Financial Protection Bureau (CFPB) published four interim final rules in the Federal Register on July 28, 2011, to establish its procedures for investigations, administrative enforcement actions, and disclosure of information to third parties, as well as procedures state officials must follow to notify the CFPB of enforcement actions they initiate.

Investigations. The rule governs investigations undertaken by the CFPB using its authority under Section 1052 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to determine whether a person has engaged in conduct that violates a provision of a federal consumer financial law. In its background discussion, the CFPB stated that the rules are largely based on Section 20 of the Federal Trade Commission Act and its corresponding regulations. Under the rule, the Assistant Director of the CFPB's Enforcement Division is authorized to issue civil investigative demands for documentary material, tangible things, written reports or answers to questions, and oral testimony. The demands may be enforced in federal district court by either the CFPB's General Counsel or the Assistant Director. The rule outlines the rights of witnesses and includes procedures for withholding requested material based on a claim of privilege and filing petitions to modify or set aside an investigative demand.

Administrative Enforcement. The rule governs administrative enforcement proceedings initiated by the CFPB using its authority under Section 1053 of Dodd-Frank to enforce compliance with Dodd-Frank provisions, CFPB rules, or any other federal law or regulation the CFPB is authorized to enforce. According to the CFPB, its rule is patterned on the administrative proceeding rules followed by the federal banking agencies, FTC, and Securities and Exchange Commission. It contemplates the assignment of a hearing officer who has 300 days from when a notice of charges is filed to issue a recommended decision, which then can be appealed to the CFPB Director by filing a notice with the CFPB's Executive Secretary within 10 days after service of the decision. A perfected appeal to the Director, which requires that an opening appeal brief be filed within 30 days of the recommended decision being served, is a prerequisite to seeking judicial review. Neither the rule nor the background discussion makes any reference to a pre-enforcement process that provides for advance notice of potential charges and an opportunity to respond (similar to the "Wells submission," permitted by the SEC.) The rule does not apply to temporary cease-and-desist orders the CFPB is authorized to issue under Section 1053(c) of Dodd-Frank, but the CFPB has asked for comments as to whether a special rule governing such orders is necessary and, if so, what it should provide.

Disclosure. The rule establishes the CFPB's procedures (1) for making disclosures under the Freedom of Information Act and the Privacy Act; (2) for accepting service of summonses and complaints, and of subpoenas, court orders, and other litigation-related demands for information or action, and for making disclosures of information or taking other action in response to such requests or demands; and (3) for making mandatory and discretionary disclosures of confidential information to third parties. Although the rule generally treats complaints received from consumers as "confidential information," it contains a special carve-out for such information that states that nothing in the rule limits "the discretion of the CFPB, to the extent permitted by law, to disclose confidential consumer complaint information as it deems necessary to investigate, resolve, or otherwise respond to consumer complaints or inquiries concerning financial institutions or consumer financial products and services."

State Officials. Before initiating a court, administrative, or regulatory proceeding to enforce any provision of Dodd-Frank or CFPB regulations, Dodd-Frank requires state attorneys general and state regulators to notify the CFPB pursuant to procedures established by the CFPB. In general, the rule requires state officials to provide electronic and written notice to the CFPB at least 10 days before initiating a proceeding. An exception for emergency proceedings allows notice to the CFPB to be delayed until up to 48 hours after the proceeding is initiated. The rule allows the CFPB to intervene in a proceeding and, upon intervening, remove a state court proceeding to federal court. It also describes what information must be included in the notice to the CFPB, generally requires the CFPB not to disclose the information in the notice to third parties, and provides that the notice requirements do not create a private right of action or defense.

The interim final rules became effective upon publication. In the background discussions, the CFPB indicated that it had bypassed advance notice-and-comment after concluding that such procedure was unnecessary for certain portions of its disclosure rule and otherwise inapplicable because the rules relate solely to agency organization, procedure, or practice. Although not stated as a reason for issuing the rules as interim final rules, the CFPB may have taken this tack because it wants to initiate enforcement proceedings against companies very soon and needs to have procedural rules in place before it can do so. Nevertheless, the CFPB has invited comments on the rules; comments must be submitted by September 26, 2011.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Mercedes K. Tunstall, 202.661.2221 or tunstallm@ballardspahr.com; Keith R. Fisher, 202.661.2284 or fisherk@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

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