No more regulation by enforcement.

That was the loud and clear message sent to the Consumer Financial Protection Bureau (CFPB) from many of the 487 public comments who responded to a request for information (RFI) about the bureau’s enforcement processes.

The CFPB issued a Request for Information (RFI) Feb. 12 from interested parties to consider whether any changes to the processes would be appropriate. The comment period originally closed April 13, but was extended another 30 days at the request of two industry trade associations.

The cart before the horse?

Virginia O’Neill, senior vice president at the American Bankers Association’s (ABA) Center for Regulatory Compliance, said the bureau needs to rethink its relationship between enforcement, regulations and guidance.

“To date, the bureau has often had it backwards, using enforcement actions to provide guidance on how to comply with the law,” O’Neill wrote. “This has proven to be an inefficient and ‘cart-before-the-horse’ way to provide such direction. Going forward, the bureau should use regulations to establish legal requirements, and guidance to aid in the understanding of the regulations and how they are applied. Together, regulations and guidance provide a road map for compliance that financial providers can access and understand.”

O’Neill called the bureau’s tendency to provide guidance through consent orders misguided and overly adversarial.

“Consent orders do not actually provide ‘detailed guidance,’ but only a highly specific and highly negotiated account of how one party allegedly violated the law,” she said in her comment letter.

She added, “Consumers are better off when the bureau guides financial institutions towards compliant conduct in the first place, rather than waiting for harm to occur, conducting an investigation, and then suing a financial institution to obtain consumer refunds.”

To start with, O’Neill recommended reducing the bureau’s reliance on the prohibition on unfair, deceptive and abusive acts and practices (UDAAP) to bring enforcement actions, arguing that many UDAAP cases have stretched “unfair” and “deceptive” beyond their known meaning.

“Before bringing an enforcement action, the bureau should ask itself a simple question: ‘How could the defendant have known that the relevant conduct was illegal?’ ” O’Neill wrote. “This simple question would have prevented the debacle of the bureau’s enforcement case against PHH, in which a panel of the D.C. Circuit Court of Appeals found that the bureau’s interpretation of law was inconsistent with the statutory text, industry practice, prior interpretations by the federal government, and the statute’s purposes and legislative history.”

RESPRO President and Executive Director Ken Trepeta said enforcement must be based on clear-cut violations of the law as commonly interpreted.

“The bureau may be relatively new but RESPA is 44 years old and has much case law and decades of best practices to back it up,” Trepeta said in his letter. “Its meaning should not be altered by novel interpretations during enforcement efforts and, in particular, in consent orders.”

‘Prosecute, not persecute’

 “If the bureau wants to expand upon the interpretations or meaning of RESPA it should engage in a notice-and-comment process and provide written guidance,” Trepeta wrote. “If it is seeking to change the meaning of RESPA, it should bring the matter to Congress.”

Trepeta noted that many companies accused of wrongdoing feel forced to settle because the cost of litigation can exceed the money it would cost to end the proceedings.

“The bureau needs to use a scalpel and not a bludgeon in its enforcement,” Trepeta wrote. “It should prosecute genuine and clear-cut violations, period. It should not engage in wars of attrition with its regulated entities. It should not serve as a make work program for class-action attorneys. It should provide clear guidance consistent with long-held interpretations of RESPA. It should seek to correct behavior where there are minor or arguable infractions, especially when there is no demonstrable or quantifiable harm to consumers. It should prosecute and not persecute. Finally, it should seek to impose as little cost as possible, since those costs are born by the very consumers the bureau purports to protect.”

David Stevens, president and CEO of the Mortgage Bankers Association (MBA), said consent orders – and any accompanying news release – should be crafted more carefully to accurately and objectively reflect the terms of the settlement and nothing more.

The bureau’s ombudsman has received complaints alleging the CFPB tends to embellish details in press releases announcing the consent orders.

“Given that the bureau will not negotiate the terms of the press release that accompanies the consent order, and that the press release may be the only document quoted in news stories about a particular settlement, it is critical that the bureau’s press releases accurately reflect the content and meaning of consent orders,” Stevens wrote. “Press releases that deviate from the exact content set forth in the consent order sow confusion for those seeking to understand the consent order, and can unfairly sully the settling company’s reputation.”

Overhaul NORA?

Another consensus from writers was that the Notice and Opportunity to Respond and Advise (NORA) process is applied inconsistently, offers institutions few specific details about illegality and has numerous other problems.

“Institutions should not be forced into settlement discussions prior to receiving a full understanding regarding the nature of the alleged violations,” Stevens said in his letter.

Stevens suggested the bureau allow companies at least 30 to 45 days to respond to a NORA, rather than the current 14-day timeline. He also suggested doing away with the 40-page limit on responses.

In addition, MBA recommends the bureau always allow subjects of potential enforcement actions the right to make an in-person presentation before a decision is made to initiate legal action.

The Financial Services Roundtable, Consumer Bankers Association (CBA) and Consumer Mortgage Coalition jointly suggested the bureau require that the NORA call and NORA letter include the specific provisions of laws allegedly violated, citations to specific evidence relied upon and an application of the law to the specific evidence that demonstrates the alleged violation.

Those agencies were also among those suggesting the bureau implement a formal civil money penalties (CMP) and restitution matrix through the rulemaking process, and require enforcement provide companies with a written basis for any proposed CMPs.

“The goals of the bureau and the rights of the regulated would both be better served if the bureau was more rigorous and transparent about how it arrives at proposed CMPs,” O’Neill wrote. “The CMPs available to the bureau are governed by broad standards and a set of mitigating factors. However, the bureau has not adopted standards for applying those criteria to particular cases, nor explained its reasoning when it imposes CMPs in individual consent orders.”

Meanwhile, New York State Department of Financial Services Superintendent Maria Vullo urged the CFPB to keep enforcing federal consumer financial laws the same way.

“The bureau’s enforcement successes have gradually helped restore trust in financial services, which has remained relatively low since the financial crisis,” Vullo said in her comment letter. “The crisis left Americans angry and, along with the rest of the world, distrustful of the financial services industry. Polls year after year show that the bureau has ‘overwhelming and bipartisan support … for regulation and oversight of the financial services industry.’ The bureau’s work obtaining relief for consumers has been credited with contributing to rising American trust in the financial services industry.”