On June 4, 2015, Consumer Financial Protection Bureau Director Richard Cordray issued a decision in the first appeal of a CFPB administrative proceeding. The appeal to Director Cordray followed the CFPB's first administrative trial before an administrative law judge. The defendant, a mortgage lender, has vowed to appeal it further to the circuit court.¹ But despite the recent spotlight this matter has put on the CFPB's administrative process, the bureau has recently been filing more of its cases in federal court than ever before. This has important implications for the institutions under the CFPB’s jurisdiction, and it may limit the impact of Director Cordray’s decision on the statute of limitations in the recent appeal.

Settlement Is Typically Preferred By Both the Government and Company Under Investigation As with most government agencies, the vast majority of CFPB investigations end in either settlement (through a consent order) or closure. They rarely lead to active litigation because it is cheaper and faster for both the CFPB and the subject of the investigation to agree to a consent order.² Moreover, litigation generally draws far more attention than consent orders, and companies typically want to minimize the amount of media attention when they are the subject of CFPB investigations.

Since the CFPB’s enforcement authority took effect in July 2011, the bureau has had the authority to enforce federal consumer financial laws in its own administrative proceeding or in federal district court. The potential remedies in the two fora are the same, save for important differences in the statutes of limitations, which are discussed below.

In the past, when the CFPB has negotiated consent orders and has been the only plaintiff, it has typically filed the orders through its administrative proceeding. This process is faster because it only requires the approval of Director Cordray to enter the consent order, not the approval of a federal judge. It is also logistically simpler: the CFPB's attorneys do not need to research local court rules before filing the proposed consent.

In Situations Where It Used to Prefer an Administrative Proceeding, the CFPB Is Filing in Federal Court The CFPB’s complaint³ and proposed consent order against PayPal Inc. in the U.S. District Court for the District of Maryland was one of three recent proposed consent orders that the bureau chose to file in federal court instead of through administrative proceeding without any clear explanation. The others were in the District of New Jersey and the Northern District of California. Since April 28, the CFPB has filed only two administrative consent orders, and both were smaller in dollar terms than typical bureau enforcement actions: one did not require monetary relief and the other required an out-of-business mortgage company to pay a $228,000 civil money penalty.

In the Past, the CFPB’s Federal Court Cases Fell Into Three Categories Before May, the CFPB's federal court cases mostly fell into three buckets: (1) cases where another enforcement agency was joining the case (see, e.g., the complaint and proposed consent orders with the Maryland attorney general, or the complaint and proposed order with the Navajo Nation); (2) cases where the CFPB could not reach a settlement with the defendant⁴ (e.g., the complaint against ITT Educational Services Inc.); and (3) cases where the CFPB sought to immediately shut down an alleged scam (e.g., the complaint and continuing litigation against alleged collectors of “phantom debt”). Just because a case falls into one of these buckets does not mean the CFPB must file in federal court, but prior to May most of the CFPB’s federal cases fell into one of them.

The three recent federal consent orders do not fall into any of these three categories, and it is not clear why the CFPB chose to file them in court instead of an administrative proceeding. Perhaps the staff members who handle administrative filings were too busy working on Director Cordray’s decision in the recent appeal. It is also possible that somebody in Congress complained about the CFPB's preference for administrative proceedings.

Regardless of the reason behind the recent trend, filing in federal court has the potential to create additional hurdles for the CFPB. Most importantly, the court must approve the proposed settlement. Thus far, most courts have deferred to the CFPB's judgment on what is a fair settlement. But recently U.S. District Judge William H. Pauley III in the Southern District of New York said he would not approve one of the CFPB’s proposed consent orders until the parties “submit a motion explaining why this proposed settlement is fair, reasonable, and does not disserve the public interest.” This additional briefing will require significant resources from the CFPB's enforcement office, particularly as it is the first such motion for the bureau. Director Cordray will probably want to review the papers himself. More importantly, it could delay implementation of the settlement and prevent consumers from receiving restitution. Judge Pauley’s request, which is not unreasonable, could nudge the CFPB to pursue future consent orders administratively in order to save CFPB resources.

Lack of a Statute of Limitations May Make Administrative Proceedings More Attractive to the CFPB When It Anticipates Contested Litigation Instead of a Consent Order Interestingly, even as the CFPB has recently preferred federal court for its consent orders, an important development in the appeal decision may lead the bureau to file more matters that do not reach settlement administratively. In his June 4 decision, Director Cordray adopted the administrative law judge’s decision that the Real Estate Settlement Procedures Act statute of limitations does not apply to CFPB administrative proceedings (but does apply to CFPB actions in federal court). He reasoned that RESPA’s three-year statute of limitations only limits “actions,” and that an administrative proceeding is not an “action,” relying on BP America Production Co. v. Burton, 549 U.S. 84 (2006).

If Director Cordray’s decision that the RESPA statute of limitations does not apply to administrative proceedings is upheld by on appeal, it could impact the CFPB’s enforcement of other federal consumer financial laws as well. The CFPB will likely make the same argument that other statutes of limitations that refer to “actions” do not apply in administrative proceedings. Other limitations on “actions” appear in the Truth in Lending Act,⁵ Fair Credit Reporting Act and the Consumer Financial Protection Act (which contains the CFPB’s prohibition on unfair, deceptive, or abusive acts or practices). If the CFPB successfully argues that the statutes of limitations do not apply to its administrative proceedings, it would increase the bureau’s ability to reach back in time, which might create a strong incentive for the bureau to file contested litigation in an administrative proceeding.

However, that incentive is somewhat counterbalanced by the rules of the administrative proceeding, which create a “rocket docket,” requiring the CFPB to have most of its evidence ready before it files the notice of charges. When it needs to gather evidence post-filing through discovery, the CFPB may continue to prefer federal court, as it did in the Morgan Drexen and ITT matters.

1. Under the CFPB's rules, a party to a cease-and-desist proceeding may obtain a review “by filing in the court of appeals of the United States for the circuit in which the principal office of the covered person is located, or in the United States Court of Appeals for the District of Columbia Circuit.” 12 U.S.C. 5563(b)(4).
2. That said, since May 1, the CFPB has filed two complaints in federal court without consent orders, against Nationwide Biweekly and SNAAC. The CFPB seems more willing to litigate than ever before.
3. As I discussed in a prior article, the PayPal consent further develops the CFPB’s legal doctrine of “abusive” acts and practices. See http://www.reedsmith.com/CFPBs-Federal-Court-Action-Against-PayPal-Sheds-Further-Light-on-the-Meaning-of-Abusive-Acts-or-Practices-05-29-2015/.
4. Of course, the June 4 decision is the one contested case that the CFPB did not file in federal court. Since filing that matter in January 2014, the CFPB has filed no contested litigation through administrative proceeding.
5. As I discussed in an earlier client alert, the judge in CFPB v. ITT rejected the bureau’s argument that TILA’s statute of limitations does not apply in federal court, and she seemed to imply that the statute of limitations would not apply in an administrative proceeding. See http://www.reedsmith.com/CFPB-Updates-03-11-2015/.

Client Alert 2015-172