Last Friday, the CFPB simultaneously issued a final rule to govern the administration of the Bureau’s Civil Penalty Fund (CPF) and proposed revisions to that rule. The final rule is effective immediately upon publication in the Federal Register, with the CFPB taking the position that the rule was exempt from the notice-and-comment requirements of the Administrative Procedure Act because it is “interpretative and procedural and relates to benefits.” However, because “[n]onetheless the Bureau believes public input on the Final Rule would be valuable,” the CFPB is also seeking comment on “the choices reflected in the Final Rule and on possible revisions, adjustments, refinements, or other changes to the rule.” Comments on the proposal will be due no later than 60 days after its publication in the Federal Register.
Section 1017 of the Dodd-Frank Act established in the Federal Reserve a separate “Consumer Financial Protection Bureau Civil Penalty Fund.” When the CFPB collects civil penalties in an enforcement action, it is required to deposit them in the CPF. The funds are to be used for payments to the “victims of activities for which civil penalties have been imposed” and if “such victims cannot be located or such payments are not otherwise practicable,” the CFPB can use the funds for consumer education and financial literacy programs.
Dodd-Frank does not permit the CFPB to use funds from the CPF for its general operating expenses. Under Section 1017, those expenses must be paid from the funds transferred by the Fed or any additional appropriation requested by the CFPB Director. However, to the extent the CFPB is able to use funds from the CPF for consumer education and financial literacy programs (and perhaps for overhead and salaries of its Offices of Financial Education and Financial Empowerment allocated to those programs), the CFPB would presumably have more funds available to use for other purposes (such as enforcement activities).
Highlights of the final rule and proposal include the following:
• A victim is eligible for payment from the CPF under the final rule if a final order in a CFPB enforcement action imposed a civil penalty for the violation or violations that harmed the victim. A victim can only receive a payment up to the amount of the harm suffered but is not limited to receiving some portion of the particular civil penalty actually paid for the violation that harmed the victim. Instead, funds are pooled so that a victim can receive payment from any funds in the CPF. In the proposal, the CFPB is considering whether a broader category of victims should be eligible for payment, specifically victims of any type of activities for which civil penalties have been imposed even if no enforcement action imposed a civil penalty for the particular activities that harmed the victim. It is also considering alternate approaches to basing payments on the amount of a victim’s uncompensated harm, such as basing payments solely on the amount of the civil penalty actually collected for the violation that harmed the victim instead of pooling penalties from multiple cases.
• The final rule generally provides that a victim’s uncompensated harm is the amount of the victim’s compensable harm minus any compensation that the victim has received or is reasonably expected to receive from other sources. To the extent possible, the amount of a victim’s compensable harm will be based on the terms of the final order. Accordingly, if the final order provides for redress for a class of victims, each victim’s compensable harm is equal to the victim’s share of the total redress. However, if the final order denies redress requested by the CFPB for a class of victims, the victims in the class have no compensable harm. If a victim’s compensable harm cannot be determined from the order, it will be deemed equal to his or her out-of-pocket losses. The proposal seeks comment on when the CFPB should deem compensation to be “reasonably expected” and whether instead of looking to out-of pocket losses, compensable harm should be whatever amount of harm the CPF Administrator (a CFPB employee charged with administering the CPF) determines is practicable on a case-by-case basis.
• The final rule provides that the CPF Administrator will allocate funds to classes of victims, and as appropriate, to consumer education and financial literacy programs, every six months. It also sets forth procedures for allocating funds depending on whether or not there are enough funds available to fully compensate victims. The proposal seeks comment on whether the frequency of allocations and allocation procedures should be modified, and suggests alternatives to the method prescribed by the final rule for prioritizing allocations among classes of victims when funds are insufficient.
According to the CFPB’s Frequently Asked Questions on the CPF, as of April 19, 2013, the CPF had nearly $58 million collected from 8 cases. It appears that except for the consent orders in the four cases involving mortgage insurance, the consent orders in the other five cases provided for at least (and in the cases against the credit card issuers probably much more than) full restitution to the “victims.” As a result, the “victims” in the mortgage insurance cases (purchasers of mortgage insurance) appear to be the only consumers with potentially uncompensated harm who would currently be eligible to receive payments from the CPF.
The final rule requires the CFPB to post a schedule for making allocations on its website. In its press release on the final rule, the CFPB stated that it plans to make the first allocation of funds by May 30, 2013 and thereafter begin distributing funds to victims. The final rule also requires the CFPB to issue regular reports on the CPF and the CFPB has stated that it plans to include information on the CPF in its Semi-Annual Reports to Congress and quarterly budget reports.