03 Jul Federal Regulatory Update
On June 25, 2013, the Consumer Financial Protection Bureau (the “Bureau”) issued a guidance bulletin regarding responsible business conduct, self-policing, self-reporting, remediation, and cooperation during the Bureau’s investigations.
CFPB Bulletin 2013-06
The Bureau considers many factors in the exercise of its enforcement discretion, including:
· The nature, extent, and severity of the violations identified;
· The actual or potential harm from those violations;
· Whether there is a history of past violations; and
· A lender’s effectiveness in addressing violations.
The guidance is being provided to inform those subject to the Bureau’s enforcement authority that in addition to these and other factors, there are activities they can engage in both before and after the conduct in question has occurred that the Bureau may favorably consider in exercising its enforcement discretion. Specifically, a lender may proactively self-police for potential violations, promptly self-report to the Bureau when it identifies potential violations, quickly and completely remediate the harm resulting from violations, and affirmatively cooperate with any Bureau investigation above and beyond what is required. If a lender meaningfully engages in these activities, which the bulletin refers to collectively as “responsible conduct,” it may favorably affect the ultimate resolution of a Bureau enforcement investigation.
The purpose of the guidance is to encourage activity that has concrete and substantial benefits for borrowers and contributes significantly to the success of the Bureau’s mission. Depending on its form and substance, responsible conduct can improve the Bureau’s ability to promptly detect violations of the federal consumer protection laws, increase the effectiveness and efficiency of enforcement investigations, enable the Bureau to pursue a larger number of worthy investigations with its limited resources, provide important evidence in enforcement investigations and cases, and help more borrowers in more matters promptly receive financial and other meaningful remedies for any harm they experienced.
Depending on the nature and extent of a lender’s actions, the Bureau has a wide range of options available to properly account for responsible conduct in enforcement investigations. For example, the Bureau could resolve an investigation with no public enforcement action, treat the conduct as a less severe type of violation, reduce the number of violations pursued, or reduce the sanctions or penalties sought by the Bureau in an enforcement action. In order for the Bureau to consider awarding affirmative credit in the context of an enforcement investigation, a lender’s conduct must substantially exceed the standard of what is required by law in its interactions with the Bureau.
In the Bureau’s consideration of a lender’s conduct in these areas it must be stressed that what best protects borrowers is ultimately central to the Bureau’s exercise of its enforcement discretion. Self-policing, self-reporting, remediation, and cooperation with the Bureau’s investigation are important in promoting the best interests of borrowers, as well as consistent enforcement of the law and the application of appropriate sanctions where the law has been violated.
The guidance, and its description of activities that may warrant favorable consideration, is not adopting any rule or formula, or making a promise to any person about any specific case. The Bureau is not limiting its discretion and responsibility to evaluate each case individually on its own facts and circumstances. There is no consistent formula that can be applied to all enforcement actions to accomplish the goal of protecting borrowers. Similarly, there is no formula that can be applied to account for cooperation based on a lender’s actions related to the activities set forth above. There may be circumstances where the misconduct is so egregious, or the harm inflicted so great, that no amount of cooperation or other mitigating conduct could justify a decision not to bring an enforcement action, or even to forgo seeking the imposition of a civil money penalty. The fact that a lender may argue it has satisfied some or even all of the elements set forth in the guidance will not prevent the Bureau from bringing any enforcement action or seeking any remedy if it believes such a course is necessary and appropriate.
The Bureau principally considers four categories of conduct when evaluating whether some form of credit is warranted in an enforcement investigation: self-policing, self-reporting, remediation, and cooperation during the Bureau’s enforcement investigation. If a lender engages in another type of activity particular to its situation that is both substantial and meaningful, the Bureau may take that activity into consideration.
Listed below are some of the factors the Bureau will consider in determining whether and how much to take into account self-policing, self-reporting, remediation, and cooperation. This list is not exhaustive, and some of the factors identified may relate to more than one category of responsible conduct. The importance of each factor in a given case, and the way in which the Bureau evaluates each factor, will depend on the circumstances.
This concept, which can also be described as self-monitoring or self-auditing, reflects a proactive commitment by a lender to use resources for the prevention and early detection of potential violations of consumer financial laws. The Bureau recognizes that a strong compliance management system appropriate for the size and complexity of a lender’s business will not always prevent violations, but it will often enable early detection of potential violations, which can limit the size and scope of borrower harm. Questions the Bureau will consider in determining whether to provide favorable consideration for self-policing activity that detects violations or potential violations of federal consumer financial laws include:
· What is the nature of the violation or potential violation and how did it arise? Was the conduct pervasive or an isolated act? How long did it last? Was the conduct significant to the lender’s profitability or business model?
· How was the violation or potential violation detected and who uncovered it? What compliance procedures or self-policing mechanisms were in place to prevent, identify, or limit the conduct that occurred and to preserve relevant information? In what ways, if any, were the lender’s self-policing mechanisms particularly noteworthy and effective?
· If the lender’s self-policing functions have previously been the subject of supervisory examination by the Bureau or other regulators, what have been the results of such examination? How, if at all, has the lender changed its self-policing following such examination? If the lender’s self-policing functions have not previously been the subject of supervisory examination, how do those functions measure up to customary supervisory expectations?
· If the lender is a business entity, what was the “tone at the top” of the business about compliance? Was there a culture of compliance? How high up in the chain of command did people know of or participate in the conduct at issue? Did senior personnel participate in, or turn a blind eye toward, obvious indications of misconduct or deficiencies in compliance procedures?
Each category of responsible conduct is important to the Bureau and can significantly affect the Bureau’s decision about whether a lender should receive favorable consideration. Of the four categories, however, prompt and complete self-reporting to the Bureau of significant violations and potential violations is noteworthy. While no substitute for effective self-policing, self-reporting substantially advances the Bureau’s protection of borrowers and enhances its enforcement mission by reducing the resources it must use to identify potential or actual violations that are significant enough to warrant an enforcement investigation and making those resources available for other significant matters. Prompt self-reporting of serious violations also represents concrete evidence of a lender’s commitment to responsibly address the conduct at issue. The Bureau puts special emphasis on this category in its evaluation of a lender’s overall conduct.
Questions the Bureau will examine in determining whether to provide favorable consideration for self-reporting of violations or potential violations of federal consumer financial laws include:
· Did the lender completely and effectively disclose the existence of the conduct to the Bureau, to other regulators, and, if applicable, to self-regulators? Did affected borrowers receive appropriate information related to the violations or potential violations within a reasonable period of time?
· Did the lender report the conduct promptly to the Bureau? If it delayed, what justification, if any, existed for the delay? How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its investigation, or the interests of affected borrowers?
· Did the lender proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, borrower complaints or actions, or the conduct of a Bureau investigation?
When violations of federal consumer financial laws have occurred, the Bureau’s remedial priorities include obtaining full redress for those injured by the violations, ensuring that the lender who violated the law implements measures designed to prevent the violations from recurring, and, when appropriate, effectuating changes in the lender’s future conduct for the protection and/or benefit of borrowers. Remediation may be viewed positively even when the lender believes that it may have identified a potential rather than an actual violation.
Questions the Bureau will examine in determining whether to provide favorable consideration for remediation activity regarding violations of federal consumer financial laws include:
· What steps did the lender take upon learning of the misconduct? Did it immediately stop the misconduct? How long after the misconduct was uncovered did it take to implement an effective response?
· Were there any consequences imposed on the individuals responsible for the misconduct?
· Did the lender take prompt and effective steps to preserve information, identify the extent of the harm to borrowers, and appropriately reimburse those adversely affected? In situations where the harm caused by the violation goes beyond the amounts the victims may have paid to the lender, did the lender identify and implement additional ways to completely redress the harm?
· What assurances are there that the misconduct is unlikely to recur? By the time of the resolution of the Bureau matter, did the lender improve internal controls and procedures designed to prevent and detect a recurrence of such violations? Similarly, have the lender’s business practices, policies, and procedures changed to remove harmful incentives and encourage proper compliance?
Unlike self-policing and remediation, which may occur with or without Bureau involvement, cooperation relates to the quality of a lender’s interactions with the Bureau after the Bureau becomes aware of a potential violation of federal consumer financial laws, either through a lender’s self-reporting or the Bureau’s own discovery efforts. In order to receive credit for cooperation in this context, a lender must take substantial and material steps above and beyond what the law requires in its interactions with the Bureau. Simply meeting those obligations will not be rewarded by any special consideration.
Questions the Bureau will examine in determining whether to provide favorable consideration for cooperation in a Bureau investigation include:
· Did the lender cooperate promptly and completely with the Bureau and other appropriate regulatory and law enforcement bodies? Was that cooperation present throughout the course of the investigation? Did the actor identify any additional related misconduct likely to have occurred?
· Did the lender take proper steps to develop the truth quickly and completely and to fully share its findings with the Bureau? Did it undertake a thorough review of the nature, extent, origins, and consequences of the misconduct and related behavior? Who conducted the review and did they have a vested interest or bias in the outcome? Were scope limitations placed on the review? If so, why and what were they?
· Did the lender promptly make available to the Bureau the results of its review and provide sufficient documentation reflecting its response to the situation? Did it provide evidence with sufficient precision and completeness to enable, among other things, enforcement actions against others who violated the law? Did the lender produce a complete and thorough written report detailing the findings of its review? Did it voluntarily disclose material information not directly requested by the Bureau or that otherwise might not have been uncovered? Did the lender direct its employees to cooperate with the Bureau and make reasonable efforts to secure such cooperation?