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The CFPB’s Adjudication Rules

July 24, 2012

The CFPB adjudication procedures provide a quick resolution process with limited discovery practice.

The Issue: On June 29, 2012, the Consumer Financial Protection Bureau (CFPB) published the final rules establishing the procedures by which it would conduct adjudicatory proceedings.[1] The CFPB modeled its procedures after similar procedures used by the prudential banking regulators, the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC) and the Administrative Conference of the United States. Some of the highlights are presented below:

Applicability: The CFPB must follow these procedures before issuing orders finding a violation of consumer financial law. The relief sought by the CFPB can include, inter alia, cease and desist orders, rescission or civil money penalties – but not punitive damages.[2] These procedures also do not apply to temporary orders to cease and desist, or to CFPB investigations, rulemaking or other proceedings.[3] In lieu of this manner of administrative adjudication, the CFPB can pursue an enforcement action in Federal or State court.

Advanced warning and settlement: The CFPB announced in November 2011 that it will provide advance warning of a possible enforcement action, similar to the “Wells” process used by the SEC.[4] If the parties reach a settlement before a notice of charges is filed, the CFPB may commence a proceeding by filing a stipulation and a consent order concluding the proceeding.[5] Settlements must be presented to the CFPB’s Director for approval.[6]

Concurrent investigations or examinations of the defendant: The CFPB clarified that it is entitled to conduct investigations and examinations of the defendant while the adjudication process unfolds.[7]

Notice of charges, answer and scheduling conference: The formal adjudication process starts with a Notice of Charges issued by the CFPB’s Office of Enforcement. The respondent must file an answer within 14 days of service of the Notice of Charges—a relatively short period when compared the SEC’s and other prudential banking regulators’ procedures.[8] A scheduling conference is required within 20 days of service of the Notice of Charges. Within five days after the scheduling conference, a scheduling order will declare a hearing date, to occur between 30 and 60 days after service of the Notice of Charges.[9]

Filings: Filings must be signed and must contain a good faith certification.[10] A violation of this requirement is ground for sanctions.[11] Sensitive personal information must be redacted from the filings when such information is not relevant or necessary.[12] The parties can also request a protective order to prevent the disclosure of confidential information. If confidential information obtained from a third party is to be disclosed, that third party must be given ten days notice to request a protective order.[13] Protective orders will be granted only upon a finding that “public disclosure will likely result in a clearly defined, serious injury” or if the information is “sensitive personal information.”[14] In the interest of transparency, the CFPB follows the FTC’s substantive standards for issuing protective orders rather than the SEC’s more lax standards.[15] Parties can also stipulate to a protective order.

Discovery: Within seven days after service of the Notice of Charges, the CFPB’s Office of Enforcement will make certain documents obtained in connection with the investigation leading to the Notice of Charges available to the respondent for copying or in electronic form.[16] These documents will not include those obtained from persons employed by the CFPB. The CFPB may also withhold documents on the basis of privilege, work product, or relevance, as well as to protect the identity of confidential sources not intended to be called as witnesses.[17] If material exculpatory evidence is contained in documents that could otherwise be withheld, the Office of Enforcement will disclose such documents.[18] The Office of Enforcement does not, however, have an obligation to search the entire CFPB for exculpatory evidence.[19] The Office of Enforcement must supplement its original affirmative disclosures if it acquires additional information it intends to rely on at a hearing.[20] Respondents may also seek additional information by subpoena which will be granted if not “unreasonable, oppressive, excessive in scope or unduly burdensome.”[21] The respondent must ask the CFPB to enforce all subpoenas.[22] Interrogatories are not allowed, nor are depositions of third parties who are available to testify at the hearing.[23] If a witness is unavailable for a hearing, a deposition may be requested with 14 days notice.[24] Respondents can request copies of witness statements if the CFPB intends to call that witness during the hearing, with some exceptions. The CFPB will not provide such witness statements if the respondent does not request them.[25]

Expert testimony: Each party is limited to five expert witnesses, each of whom must generally provide a report before testifying at a deposition or hearing.[26]

Motions: Non-dispositive motions will be ruled on within 14 days of filing of all motion papers.[27] Dispositive motions arguing that dismissal is required as a matter of law even if all of the CFPB’s facts are accepted, will be ruled on within 30 days of filing of all moving and responding papers.[28] Third parties can apply to file amicus submissions.[29]

Interlocutory review: Parties can request an interlocutory review, by the Director of the CFPB, of any decision made by the hearing officer during the adjudication within 5 days of service of the ruling. The request is made by filing a request with the hearing officer. Such requests will be granted by the hearing officer if they seek additional production of evidence, or if there is substantial ground for difference of opinion and immediate review is appropriate.[30] If the hearing officer denies a request for interlocutory review, such request can be made directly to the CFPB Director.[31]

Hearing: No later than ten days prior to the hearing, a prehearing statement providing a list of witnesses, evidence and stipulations is to be filed. The hearings are generally public.[33] Objections to the admission of evidence during a hearing must be made in a timely manner.[34] Within 30 days after the filing of the hearing transcript, the parties can propose findings of fact and conclusions of law.[35]

Decision and appeals process: The hearing officer shall make a recommended decision by the earlier of (a) 90 days after the deadline for filing post-hearing briefs or (b) 300 days after the service of Notice of Charges.[36] The recommended decision may be appealed to the CFPB Director within 10 days.[37] If the recommended decision is not appealed, the CFPB Director will either accept or deny the recommended decision.[38] If the recommended decision is appealed, then the appealing party must file its brief within 30 days of the recommended decision.[39] An appeal is necessary if the party intends to seek judicial review of the Director’s final decision; in other words, parties must “exhaust” their administrative remedies within the agency. Once appeals briefs have been filed, the Director may request an oral argument and will issue a final decision within 90 days.[40] A motion for reconsideration is allowed within 14 days of the service of the Director’s decision.[41]

Judicial Review: Per 5 U.S.C. §703 judicial review can be sought in a “court of competent jurisdiction” which will generally be the District Court unless a cease-and-desist order is being contested, in which case it will be a United States Court of Appeals, per 12 U.S.C. §5563(b)(4). Judicial review will be governed by the Administrative Procedures Act, 5 U.S.C. §706(2) which allows the decision to be set aside if it was made, for example, “without observance of procedure required by law,” or if it is “unsupported by substantial evidence[.]” In lieu or in addition to challenging the CFPB’s adjudication, the appeal can challenge the CFPB’s regulation under the same statute, generally as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” If the respondent seeks judicial review of the Director’s decision, it can also ask the Director to stay his or her final order pending that review.[42]

Implication: The CFPB’s adjudication procedure consists of many dozens of precise and consequential rules that require careful planning and decision making at each stage of the administrative process. If respondents choose to proceed with litigation, they will face a discovery mechanism that is far more limited than would be available in a traditional court setting. The CFPB can also use its investigation and examination powers in parallel with its pursuit of litigation.

As was seen in the recent action against Capital One Bank,[43] the CFPB can also refer matters to other regulators and coordinate its actions with them. In that case the CFPB alleged that deceptive marketing of credit card products violated Dodd Frank §1036(a)(1)(B)’s prohibition against deceptive acts. Although the CFPB has exclusive jurisdiction over most consumer finance laws - the Office of the Comptroller of the Currency (OCC) was able to allege that the same deceptive acts also violated Federal Trade Commission Act §5 and OCC regulation 12 C.F.R. §37.8. Providers may wish to plan for such teamwork by government regulators when evaluating their litigation strategy.

Brian Boyle - (202) 383-5327  bboyle@omm.com
Vivi Lee  - (650) 473-2655  vlee@omm.com

[1] 77 FR 39057 (June 29, 2012), available here.
[2] Id.at 39060; 15 USC §5565.
[3] Id.at 39060.
[4] Id.at 39060, 39068.
[5] Id.at 39068.
[6] Id.at 39067.
[7] Id.at 39066.
[8] Id.at 39068.
[9] Id.at 39069.
[10] Id.at 39063.
[11] Id.at 39063.
[12] Id.at 39064.
[13] Id.at 39066.
[14] Id.at 39066.
[15] Id.at 39066.
[16] Id.at 39070-39075.
[17] Id.at 39071, 39074.
[18] Id.at 39071.
[19] Id.at 39074.
[20] Id.at 39072.
[21] Id.at 39073, 39075.
[22] Id.at 39075.
[23] Id.at 39073.
[24] Id.at 39076.
[25] Id.at 39075.
[26] Id.at 39076-39077.
[27] Id.at 39070.
[28] Id.at 39078.
[29] Id.at 39079.
[30] Id.at 39077.
[31] Id.at 39077.
[32] Id.at 39078.
[33] Id.at 39079.
[34] Id.at 39080.
[35] Id.at 39080.
[36] Id.at 39080.
[37] Id.at 39080.
[38] Id.at 39081.
[39] Id.at 39081.
[40] Id.at 39081.
[41] Id.at 39082.
[42] Id.at 39082.
[43] Press Release, CFPB probe into Capital One credit card marketing results in $140 million consumer refund (July 18, 2012), at http://www.consumerfinance.gov/pressreleases/cfpb-capital-one-probe/