CFPB Leaders Discuss Bureau’s Approach To Enforcement
Why it matters
In recent weeks, both Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and Deputy Director Steven Antonakes have provided insight about the Bureau’s operations. Antonakes discussed the risk-based approach taken by the CFPB when evaluating whether to take a confidential supervisory or public enforcement action. In contrast to the other federal banking agencies, the Bureau focuses on risks to consumers rather than risks to institutions, he explained, and conducts examinations by product line instead of by institution. “We think our careful and reasoned approach to taking corrective action will result in consistency for industry and fairness for consumers,” Antonakes said. Adding to the conversation, Cordray discussed with the National Association of Attorneys General the “four D’s” that guide the Bureau’s enforcement activity: deceptive marketing, debt traps, dead ends, and discrimination. He also noted that the Bureau has recovered $5.3 billion in relief for consumers and more than $200 million in civil money penalties to date. As a relatively young agency with evolving policies, these statements from senior CFPB representatives are useful to persons subject to CFPB oversight and enforcement in determining what activities and practices the CFPB may view as problematic as well as areas that may raise future supervision issues.
Detailed discussion
In prepared remarks delivered at The Exchequer Club, Antonakes provided an explanation of the Bureau’s risk-based supervision program and the factors used when considering when—and what type of—enforcement action is necessary.
Antonakes emphasized the consumer-centric nature of the Bureau, noting that the CFPB’s “mission is to protect consumers by promoting a consumer financial services marketplace where consumers can understand the costs, benefits, and risks of the financial decisions that they make.”
To that end, as the leader of the Bureau’s Division of Supervision, Enforcement, and Fair Lending, he guides a risk-based and institutional product line-oriented approach to supervision. With an extremely broad scope of supervisory authority—from banks, thrifts, and credit unions to the larger participants of markets such as foreign money transmitters and debt collectors—it “was clear to us from the outset that the traditional approach to supervision wouldn’t work at the Bureau,” Antonakes explained.
Instead of visiting all the regulated institutions on a regular schedule—which would tax the limited resources of the Bureau—the CFPB elected to focus on consumer protection issues instead of institutions, which “drives our strong focus on consumer compliance management systems to ensure that regulated institutions adapt their controls to their business strategies and operational complexity,” he said.
By conducting examinations by product line rather than by institution, “we assess the likely risk to consumers in all product lines, at all stages of a product’s life cycle, and across wide swathes of the entire consumer financial marketplace,” Antonakes added.
Practically speaking, what this means is breaking down an institution into distinct product lines—such as auto lending, deposit accounts, mortgage origination, and credit cards at a large bank. These institutional product lines are then compared across institutions, charters, or licenses. Each product line is evaluated for issues such as the potential for consumer harm related to a particular market, the size of the product market, the supervised entity’s market share, and the risks inherent to the supervised entity’s operations.
Risks to consumers are examined on two levels, Antonakes told attendees: the market level and the institution level. This allows the Bureau to consider the relative risks to the consumer from each institution’s activity within any given market by considering market share as well as “field and market intelligence” with qualitative and quantitative factors such as the strength of compliance management systems, the existence of other regulatory actions, and the number and severity of consumer complaints, for example.
“Taken together, the information that we gather about each institutional product line at the market-level and at the institutional-level allows us to focus our resources where consumers have the greatest potential to be harmed,” Antonakes said. “Relatively higher risk institutional product lines within relatively higher risk markets are our highest priority.”
At the conclusion of a review, the CFPB provides a “roll-up examination report” that summarizes the Bureau’s examinations and includes the Federal Financial Institutions Examination Council compliance rating as well as a supervisory plan for smaller or less complex entities.
Where more significant violations are found, the Bureau forwards the matter to its action review committee. Based on a severity of examination findings, the committee will recommend whether confidential supervisory action or a public enforcement action should occur.
What factors are considered? Antonakes said they fall into three categories: violation-focused factors, institution-focused factors, and policy-focused factors. “For example, we are more likely to pursue public enforcement if we identify improper foreclosures than slightly miscalculated APRs,” he noted. “If we suspect a troubling practice is widespread, we may want to put the entire industry on notice through public enforcement actions.”
The behavior of an institution after the violation occurred is also an important consideration, Antonakes said, such as whether the entity cooperated with the Bureau, or self-identified or self-corrected the violation, which “may tilt the balance in favor of using the supervisory tool.”
Director Richard Cordray also provided insight into the workings of the Bureau in a recent speech to the National Association of Attorneys General (NAAG).
The CFPB strives to combat the “four D’s,” he said: deceptive marketing, debt traps, dead ends, and discrimination.
“It is obvious that consumers cannot make sound financial choices if they are given inaccurate or false information,” he said. “But when key information is deliberately withheld, or when the information provided is misleading, consumers similarly have a hard time making sound choices.” Cordray highlighted many efforts by the CFPB against deceptive marketing, highlighting a recent action in the for-profit college industry.
Discussing debt traps, Cordray pinpointed payday loans as a major focus for the Bureau, the first federal agency to supervise payday lenders for compliance with federal consumer financial laws. Currently in “the latter stages” of formulating new rules for the market, Cordray promised that state AGs—who have “extensive and varied experience” in the area—will have the opportunity to review and evaluate the forthcoming proposals.
Dead ends—or when “consumers have limited clout because they cannot choose the business they are dealing with”—led Cordray to reference the CFPB’s work in the realms of credit reporting and debt collection, another area where the Bureau is in the process of crafting regulations.
Finally, Cordray noted that discrimination remains a priority, with the Bureau keeping “a watchful eye” on the auto industry and leveraging technology to help identify patterns in mortgage origination that may be discriminatory. “[W]e are working to secure the right to equal treatment in the financial marketplace based on individual merit and responsibility,” he said.
The Director—who referenced his own past life as Attorney General of the state of Ohio—concluded by noting that in the last three and one-half years, the publicly announced enforcement actions of the Bureau have resulted in $5.3 billion in relief to 15 million consumers and more than $200 million in civil money penalties.
To read Deputy Director Antonakes’ prepared remarks, click here.
To read Director Cordray’s prepared remarks, click here.
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DOJ Reaches Deal In Auto Lending Discrimination Case
Why it matters
In what the government calls its first ever discrimination settlement involving “buy here, pay here” auto financing, the Department of Justice (DOJ) and North Carolina Attorney General reached a deal with two used auto dealerships. The federal government alleged that the two dealerships violated the Equal Credit Opportunity Act (ECOA) by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases,” while the state AG added claims based on North Carolina’s Unfair and Deceptive Trade Practices Act. Pursuant to the settlement agreement, the two dealerships must, among other things, revise the terms of their loans as well as their repossession practices. Specifically, the dealerships must omit hidden fees from the required down payment, are prohibited from repossessing a vehicle until the borrower has missed at least two consecutive payments, need to provide “better quality” disclosure notices at the time of the sale, and establish a $225,000 fund “to compensate victims of their past discriminatory and predatory lending.” Auto lending—already squarely on the radar of the Consumer Financial Protection Bureau—is an area of focus for the DOJ and state AGs as well. “Combating discrimination in all segments of the auto lending market is, and will remain, a top priority for the Civil Rights Division,” Acting Assistant Attorney General Vanita Gupta of the DOJ’s Civil Rights Division said in a statement, adding that she hopes “that other buy here, pay here dealerships will evaluate their practices in light of this settlement.”
Detailed discussion
In January 2014, the DOJ and the State of North Carolina brought suit against two used car dealerships: Auto Fare Inc. and Southeastern Auto Corp. The “buy here, pay here” dealerships allegedly engaged in “reverse redlining,” intentionally targeting African-American customers for unfair and predatory credit practices in violation of the ECOA and North Carolina’s Unfair and Deceptive Trade Practices Act.
Specifically, the authorities said that from 2006 to 2011, the sales prices, down payments, and interest rates offered by the two dealerships were disproportionately high as compared to other subprime used car dealers. Auto Fare and Southeastern failed to meaningfully assess the creditworthiness or ability to repay of customers, resulting in disproportionately high rates of default and repossession. The dealerships also engaged in repossessions when customers were not in default, the DOJ and state AG claimed.
In addition, the owner of both dealerships, Zuhdi A. Saadeh, allegedly made derogatory and racist comments about potential borrowers, suggesting that he “was interested in African American customers because he perceived them to be of inferior intellect and have fewer options for credit,” according to the complaint.
A federal court judge in North Carolina denied the defendants’ motion to dismiss the suit last June. The parties then reached a deal.
Pursuant to the settlement agreement (which still requires court approval), the dealerships are enjoined from engaging in any act, policy or practice that discriminates on the basis of race or color in any aspect of credit transactions, and must implement several new written policies and procedures to halt their allegedly predatory behavior. Required changes range from limiting projected monthly payments to no more than 25 percent of a borrower’s income to prohibiting hidden fees on top of the required down payment to prohibiting repossessions until at least two consecutive payments have been missed.
In addition, Auto Fare and Southeastern must keep interest rates at least five percentage points below the state’s rate cap and use a lower interest rate for borrowers who have specified evidence of lower credit risk, provide down payment refunds to borrowers who quickly go into default, allow borrowers to obtain an independent inspection of the car before completing the purchase, and improve the notices provided to borrowers before repossession.
Competitive sales prices and better disclosures at the time of sale—including information about the presence of any GPS or automatic shutoff device in the vehicle—as well as strict compliance with state repossession law, are also included in the deal.
Auto Fare and Southeastern must pay $225,000 for a settlement fund intended to compensate “victims of their past discriminatory and predatory lending,” the DOJ and AG said.
To read the consent decree in U.S. v. Auto Fare, Inc., click here.
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IRS Will Adopt “Common Sense” Approach To Structured Activity In Bank Accounts
Why it matters
In response to recent criticism, the Commissioner of the Internal Revenue Service (IRS) John A. Koskinen announced that the agency will adopt a “common sense” approach in how it handles funds that have been structured to avoid the reporting threshold for cash transactions in excess of $10,000. Many criminals manipulate cash transactions to fall below the reporting threshold, the Commissioner noted, and the IRS adopted a policy of seizure and forfeiture of the assets in accounts related to such potential Bank Secrecy Act (BSA) violations. Controversy arose over the policy when assets were seized by law enforcement where they were structured but not derived from or associated with any other illegal activity. At a hearing of the House Committee on Ways and Means Subcommittee on Oversight, Commissioner Koskinen pledged that the IRS will no longer seize the bank accounts from otherwise law-abiding business owners simply because they structured transactions to avoid the federal reporting requirements. Instead, the IRS will focus on accounts where evidence indicates that the structured funds were derived from illegal sources, the Commissioner said. This revised approach should minimize the impact on financial institutions whose customer accounts are seized without any underlying evidence of illegal activity.
Detailed discussion
The BSA mandates that financial institutions report cash transactions conducted by the same person that, individually or in the aggregate, exceed $10,000 on any single day. Known as Currency Transaction Reports (CTRs), the reports are used in conjunction with other data sets such as Suspicious Activity Reports (SARs) to highlight potential red flags for regulators and law enforcement organizations.
Speaking before the House Committee on Ways and Means Subcommittee on Oversight, Internal Revenue Service (IRS) Commissioner John A. Koskinen explained that criminals often manipulate cash transactions in order to fall below the $10,000 threshold to avoid CTR reporting requirements.
“This intentional manipulation of the CTR filing threshold is referred to as structuring,” the Commissioner explained. “The Money Laundering Control Act of 1986 criminalized structuring for the purpose of evading the reporting requirements and made a person who willfully violated the law subject to possible fines and imprisonment. Ignorance of the law is not a defense to criminal structuring.”
A pattern of cash deposits or other transactions may trigger closer scrutiny and provide circumstantial evidence that a bank account holder acted with this illegal purpose, Koskinen said, and an investigation can result in prosecution.
“A critical tool to combat criminal activity is the seizure and forfeiture of assets related to those criminal activities,” he added, and the IRS adopted a policy of seizure and forfeiture of assets found in accounts with structured activity.
The agency faced criticism in recent months claiming that its efforts were overinclusive and that law enforcement organizations were seizing funds that while structured, were neither derived from nor associated with any other illegal activity.
Due to these concerns—and after a review of structuring cases over the last year—Commissioner Koskinen told lawmakers the IRS would change course. Going forward, the agency will no longer seize bank accounts based solely on the fact that transactions were structured to avoid federal reporting requirements.
“Specifically, the IRS will no longer pursue the seizure and forfeiture of funds associated solely with ‘legal source’ structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved by a senior headquarters executive within [the IRS],” Commissioner Koskinen said. “While the act of structuring to evade BSA requirements—whether the funds are from a legal or illegal source—s against the law, [IRS] special agents will view this act as an indicator that other, more serious crimes may be occurring.”
Seizure and forfeiture in “illegal source” structuring cases will continue, he added.
“To be clear, structuring is a felony no matter the source of the funds, and federal law allows for seizures as a permissible tool,” Commissioner Koskinen told the Committee. But the new policy “will help ensure consistency” in how structuring investigations and related seizures are conducted. “[T]he IRS concluded that it will focus its resources on cases where evidence indicates that the structured funds are derived from illegal sources. We have tried to take a common sense approach to how we operate in this area,” he concluded.
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