To most RESPA attorneys and compliance officers, Section 1052(c)(1) of the Dodd-Frank Act is probably as scary a read as any Stephen King novel. That statutory language, which governors the Consumer Financial Protection Bureau’s authority to issue Civil Investigative Demands (CIDs), states the following:
“Whenever the bureau has reason to believe that any person may be in possession, custody or control of any documentary material or tangible things, or may have any information, relevant to a violation, the bureau may, before the institution of any proceedings under the federal consumer financial law, issue in writing, and cause to be served upon such person a civil investigative demand.” (Emphasis added.)
Through the CIDs, the CFPB can require the receiver to produce documents for inspection, copying or reproduction; submit tangible items; file written reports or answers to questions; give oral testimony; or furnish any combination of such material, answers or testimony.
Although the Dodd-Frank Act requires that each CID “shall state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation,” those who receive CIDs are not given very many details to determine exactly what the CFPB is seeking.
“When you get a CID, the first thing you need to do is look at what information the bureau is requesting, look at the timeframe of when document production is due, and quickly analyze internally whether you are actually the target or not,” Marx Sterbcow of Sterbcow Law Group told RESPA News. “More often than not, when you get the CID you really don’t know if you are the target [of the CFPB’s investigation] or if someone else is the target. The way that the bureau words the CID is, ‘We’re investigating an issue of UDAAP and RESPA or some other federal consumer law.’ And that’s it.”
Given the expansive breadth of coverage that UDAAP allows through its broad standards, it is wise to address the CID as soon as it arrives in the mail.
Even though the CFPB is required under the Dodd-Frank Act to prescribe a “reasonable period of time” for recipients, Sterbcow stated that it is a very fast process in the beginning. For instance, the recipient is required to call the investigator and notify them they received the CID and to schedule the “Meet and Confer” in person or telephone meeting within 10 days.
If you are a company, as soon as you receive the CID, contact a reputable attorney who knows the process, and then have that attorney contact the CFPB enforcement officer, informing him or her that the CID has been received. Once you start providing the CFPB with the requested materials, if you are lucky, you may try to see whether the CFPB will limit the volume of information they are requesting or will allow you to produce the documents on a rolling basis. The CFPB does not have do either one, so the recipients’ initial interactions with the CFPB are extremely important in how willing they are to work with you.
Part of the CID is the CFPB’s request for the recipient to respond to the CFPB’s interrogatories, a request for the written reports, and request for the recipient to produce documents. The CFPB also attaches a Civil Investigative Demand Document Submission Standards Manual to help the recipient comply with the technical requirements needed for producing the electronic documents.
Once the CFPB has been informed that the CID has been received, you may want to consider hiring one or two more law firms to assist you and your first attorney with the response process.
Although hiring multiple attorneys may seem like much, do not underestimate the amount of work it takes to respond to a CID.
“It’s critical that you hire one if not two, if not sometimes three, different law firms or lawyers to help you in the process, depending on how significant the CID is,” Sterbcow said. “Those are the situations that have been the most effective because you are going to need somebody to produce all of your documentation in a very specific ESI [electronically stored information] format, and it has to be bates stamped and delivered to the bureau only in a specialized format they will accept. So that means that every document that you have has to have a bates stamp on it and delivered electronically so the CFPB can sort through it.”
Sterbcow added that partnering with law firms or attorneys that specializes in ESI production has been extremely helpful. The volume of data and information the CFPB requests can be massive, time consuming, and often times the data they are requesting can encompass every transaction file and email for the last 10, 12, or even 15-plus years.
Having the additional counsel is necessary because some of the firms that specialize in the document processing part may not specialize in the particulars of RESPA, UDAAP or the other federal consumer laws. If you decide to select a third firm, Sterbcow recommends finding a white-collar defense attorney because the CFPB also may be targeting principals with the company, as well as the company.
“Those are typically the most successful and best structured ‘Legal Teams’ that I have seen organized thus far,” Sterbcow said, emphasizing that you and your client want to demonstrate that you are trying to facilitate – rather than impede – the CFPB’s investigation.
Should you try to fight a CID?
It may be tempting to try to argue your client’s way out of responding to the CID altogether, given recent pushback the CFPB has faced.
For example, in CFPB v. Accrediting Council for Independent Colleges and Schools (Case No. 15-cv-1838-RJL), the CFPB faced opposition to its authority when the U.S. District Court for the D.C. Circuit held that the information sought by the bureau was not “reasonably relevant” and for a “lawfully authorized purpose.”
In that case the CFPB argued that because it was investigating for-profit schools’ lending practices, it had authority to investigate whether any entity had engaged in any lawful action relating to the accreditation of those schools. The court, however, determined that the school accreditor played no part in the for-profit schools’ student lending programs.
There have been other companies that have tried challenging the CIDs they received.
The CFPB is embattled with J.G. Wentworth in the U.S. District Court for the Eastern District of Pennsylvania over whether the structured settlement purchaser is a covered person under the Dodd-Frank Act. Wentworth specifically argued that its purchase of settlements and annuities was not a consumer financial product or extension of credit.
The CFPB recently denied the motion to set aside the CFPB’s CID of Zero Parallel LLC, a short-term loan lead affiliate network.
Zero Parallel argued that the CID had been issued “for the sole purpose of punishing” founder Davit Gasparyan “for not acquiescing to the bureau’s unreasonable demands during settlement negotiations” in its case against T3Leads case, which also was owned by Gasparyan, and because Zero Parallel was not engaged “in offering or providing a consumer financial product or service” and therefore not a “covered person or service provider.”
In its denial of Zero Parallel’s motion, however, the CFPB reiterated that it is authorized to issue CIDs to “any person” — not only to covered persons or service providers — who may have information “relevant to a violation.”
So why did the Accrediting Council prevail in its challenge, while Zero Parallel has not thus far? Because the true extent of the CFPB’s authority has not been fully mapped out yet, and so sometimes it really just depends on who you ask.
In the Accrediting Council case, U.S. District Judge Richard J. Leon did not buy the CFPB’s argument that because it had the authority to investigate the for-profit schools’ lending practices that it also had the authority to investigate whether laws were violated in the accreditation process of those schools.
“Put simply, this post-hoc justification is a bridge too far,” he wrote. “As [Accrediting Council] has repeatedly and accurately explained, the accreditation process simply has no connection to a school’s private student lending practices.”
Although the outcomes for Zero Parallel and J.G. Wentworth remain to be seen, Sterbcow said that chances are, if you are in the settlement services business or accountable to RESPA, there is no question that you are going to be reachable under the CFPB’s CID authority.
“My strongest advice is if you get a CID, you need to be prepared to help the bureau and not hinder the bureau – just my personal stance,” Sterbcow said. “Because I do believe that if you try to hinder the bureau in the enforcement or their investigation, that can be used against you down the stream. If you want to fight the CFPB, the key question the recipient needs to ask is can I afford to fight them and if I can what are my chances at success? And always remember the government prints money!”
You have your legal team prepared, so what’s next?
Once you and your legal team have come together, it is important to communicate with the CFPB. If the lawyer(s) and/or firms have a good reputation with the bureau, then the CFPB may provide your clients with leniency in terms of allowing you and the client to respond to producing documentation on a rolling basis. The ESI aspect of the process – when you are supplying the requested documents to the CFPB – is extremely expensive; that it why having somebody who knows every aspect of the ESI technology also is critical.
Typically, within a few days or weeks, the first hearing known as the “Meet and Confer” Hearing (the first effective, official deposition) will take place. During these early stages, it is important to try to figure out the true scope of the CFPB’s investigation, and whether you are the direct target of the inquiry. If the recipient is unable to figure out why they are being investigated the Meet and Confer Hearing if the first chance to gain insight as to what the CFPB may be looking at.
“The more that you can help narrow down and try to figure out what exactly the investigation is, the better it is for the client and the CFPB,” Sterbcow said.
“It’s a 24-hour process when you first get that CID,” Sterbcow warned. “It is not a process that you can ask for additional time because they are not going to grant it unless you are cooperative with them.”