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The Consumer Financial Protection Bureau (“CFPB”) recently announced its latest round of multi-hundred million dollar settlements of enforcement actions, all against major credit card issuers. Since July, three enforcement actions led by the CFPB have resulted in restitution payments and penalties in excess of $536 million payable to more than five and a half million customers, the CFPB, and other coordinating federal agencies. On September 24, 2012, the CFPB and the Federal Deposit Insurance Corporation (“FDIC”) agreed to a joint settlement with Discover Bank (“Discover”) to resolve enforcement actions. Pursuant to the Consent Order, Discover agreed to refund $200 million to three and a half million customers who purchased its credit card “add-on” products and to pay a $14 million fine, half payable to the CFPB’s Civil Penalty Fund and half going to the FDIC.1 One week later, on October 1, 2012, the CFPB and several other federal and state agencies reached a settlement with another major credit card issuer and certain affiliates, ordering the companies to refund $85 million to approximately 250,000 customers and to pay penalties of $27.5 million for alleged illegal credit card marketing and debt collection practices.2 These settlements come hard on the heels of the CFPB’s inaugural settlement with Capital One Bank (USA), N.A. (“Capital One”) on July 17, 2012, under which the credit card issuer paid a total of $210 million in reimbursements and penalties to two million customers, the CFPB, and the Office of the Comptroller of the Currency (the “OCC”).
The Discover enforcement action concerned allegations similar to those made by the CFPB in the settlement with Capital One. The CFPB and the FDIC alleged that Discover violated the consumer financial protection laws through deceptive marketing and sales practices perpetrated by its representatives relating to credit card add-on products, including debt cancellation, identity-theft protection and credit score monitoring services.4
As is typical in the resolution of enforcement actions, Discover stipulated to the Consent Order without admitting or denying the allegations brought by the CFPB and the FDIC.5
The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)7 to implement and enforce federal consumer financial laws and to promote fair, transparent, competitive and accessible markets for consumer financial services and products.8 The CFPB consolidates the consumer financial protection responsibilities (including with respect to rulemaking, supervision and enforcement) that previously had been the province of seven federal agencies.9 In exercising its enforcement powers, the CFPB has the discretion to craft any appropriate legal or equitable remedy to address violations of the consumer financial protection laws, including temporary and permanent cease-and-desist orders, rescission, reformation of contracts, refunds, disgorgements, damages and civil money penalties.10 In addition, the CFPB has wide and exclusive authority – except where it shares rulemaking power with the FTC – to promulgate rules “as may be necessary or appropriate to enable the Bureau to administer . . . enforce and otherwise implement the provisions of Federal consumer financial law.”11
The CFPB has extensive enforcement powers and operates with unique and controversial independence from Congressional or Executive oversight. Its budget is statutorily tied as a fixed ratio to the Federal Reserve’s operating expenses. CFPB final rules can be overturned only by a determination by two-thirds of the members of the Financial Stability Oversight Council (the “FSOC”) that the rule threatens the “safety and soundness of the United States banking system or the stability of the financial system.”12 Courts must defer to the CFPB’s determinations regarding the meaning or interpretation of federal consumer financial law.13 While a cease-and-desist order issued by the CFPB may be appealed within 30 days of service to the D.C. circuit or to the federal circuit court in which the principal office of the defendant resides, such appeal does not operate as a stay of the CFPB’s order.14 Finally, the CFPB is headed by a single Director, appointed by the President with the consent of the Senate to a five-year term and is removable only for cause by the President for “inefficiency, neglect of duty or malfeasance of office.”15
The result is a powerful regulatory agency that has sweeping oversight authority, including exclusive jurisdiction to oversee compliance with consumer protection laws for banks with assets exceeding $10 billion, limited powers to monitor smaller banks and depository institutions, as well as supervisory authority over credit unions, residential mortgage companies (including originators, brokers and servicers, and providers of loan modification or foreclosure relief services), payday lenders and private education lenders.16 The CFPB also has the authority to supervise nonbank “larger participants,” including credit reporting companies and certain other consumer reporting companies.
According to the CFPB and FDIC, between December 1, 2007 and August 31, 2011, Discover violated the consumer financial protection laws by marketing and enrolling approximately 4.7 million customers into its credit card add-on products.17 Discover’s add-on products included “Payment Protection,” which allowed consumers to suspend payments for up to two years in the event of “life events” such as unemployment or hospitalization; “Identify Theft Protection,” allowing daily credit monitoring; “Wallet Protection,” marketed as a service that helped customers cancel credit cards in the event of theft; and “Credit Score Tracker,” allowing a customer unlimited access to credit reports and credit scores.18 Discover’s representatives allegedly promoted the add-on products during both inbound and outbound calls, where telemarketing vendors disguised sales calls as “courtesy calls.”19 On these calls, Discover’s representatives allegedly “spoke more rapidly during the mandatory disclosure portion of the sales call” and “downplayed” the importance of the terms and conditions of the add-on products.20
The CFPB and FDIC alleged that Discover engaged in the following deceptive practices:
In the Discover Consent Order, the CFPB and the FDIC alleged that Discover violated Sections 1031 and 1036 of the CFPA and Section 5 of the Federal Trade Commission Act in connection with its practices relating to the marketing, sales and operation of its credit card add-on products. The settlement with Discover provides the following:
The CFPB has sent a loud and clear message to financial services firms that large settlements in the hundreds of millions of dollars may become the norm for companies that are deemed by the CFPB to have violated the consumer protection laws. CFPB Director Richard Cordray warned that “we are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.”31 In less than three months, the CFPB has led the resolution of investigations coordinated with multiple federal and state agencies to extract $435 million in reimbursements to customers, more than $46 million in civil monetary penalties payable to the Civil Penalty Fund, and fines in excess of $55 million payable to other federal agencies.
In light of the aggressive posture adopted by the CFPB, and repeated warnings that these settlements are a harbinger of things to come, companies should strongly consider retaining outside legal counsel to review their marketing and sales practices for compliance with consumer financial protection laws and CFPB expectations,32 including ensuring that:
In addition to meeting CFPB expectations, we recommend the following:
Diligent and ongoing review of marketing and sales practices is crucial to ensuring compliance under this new regulatory regime.
1 Press Release, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing (Sept. 24, 2012) (“CFPB Discover Press Release”), available at http://www.consumerfinance.gov/pressreleases/discover-consent-order/.
2 Press Release, Consumer Financial Protection Bureau, CFPB Orders American Express to Pay $85 Million Refund to Consumers Harmed by Illegal Credit Card Practices (Oct. 1, 2012) (“CFPB American Express Press Release”), available at http://www.consumerfinance.gov/pressreleases/cfpb-orders-american-express-to-pay-85-million-refund-to-consumers-harmed-by-illegal-credit-card-practices/.
4 CFPB Discover Press Release.
5 In re Discover Bank, Admin. Proc. No. 2012-CFPB-0005, Joint Consent Order, Order for Restitution, and Order to Pay Civil Monetary Penalty (Sept. 24, 2012) (“Discover Consent Order”), available at http://files.consumerfinance.gov/f/201209_cfpb_consent_order_0005.pdf.
6 For a detailed discussion of the CFPB and its enforcement powers, please see The Consumer Financial Protection Bureau: The New, Powerful Regulator of Financial Products and Services (Mar. 6, 2012), available at http://www.cadwalader.com/assets/client_friend/030612ConsumerFinancialProtectionBureau.pdf.
7 Pub. L. No. 111-203 (2010).
8 Dodd-Frank § 1021.
9 The seven agencies are the Board of Governors of the Federal Reserve System, Department of Housing and Urban Development (“HUD”), the FDIC, Federal Trade Commission (“FTC”), National Credit Union Administration, the OCC, and Office of Thrift Supervision. Dodd-Frank § 1061(b)(1)-(7).
10 Dodd-Frank § 1055(a)(2). Until the timely filing of an appeal, the CFPB may, at any time, modify, terminate, or set aside any order that it has issued.
11 Dodd-Frank §§ 1022(a)-(b), 1061(b)(5)(B).
12 Dodd-Frank § 1023. Notably, by statute, the CFPB Director is one of the twelve members of the FSOC. Id. § 111(b)(1)(D).
13 Dodd-Frank § 1022(b)(4)(A)-(B).
14 Dodd-Frank § 1053(b)(4).
15 Dodd-Frank § 1011(c)(3). The combination of the CFPB’s broad powers and unique lack of accountability to other branches of government has raised constitutional concerns.
16 Dodd-Frank § 1025.
17 Discover Consent Order at 2-6.
18 CFPB Discover Press Release.
19 Discover Consent Order at 3.
20 Id. at 4.
21 Id. at 3-4.
23 Id. at 5.
24 Id. at 4.
25 Id. at 23-25.
26 Id. at 28.
27 Id. at 28.
28 Id. at 13.
29 Id. at 17.
30 Id. at 27.
31 Prepared Remarks by Richard Cordray on the Press Call on FDIC and CFPB Joint Enforcement Action (Sept. 24, 2012), available at www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-on-the-press-call-on-fdic-and-cfpb-joint-enforcement-action/.
32 CFPB Bulletin 2012-06, Marketing of Credit Card Add-on Products (July 18, 2012), available at http://files.consumerfinance.gov/f/201207_cfpb_marketing_of_credit_card_addon_products.pdf.
33 See, e.g., Third Party Relationships, OCC Bulletin 2001-47 (Nov. 1, 2001).