A recent decision from the Eastern District of Michigan in CFPB v. Harbour Portfolio Advisors, LLC; National Asset Advisors, LLC; and National Asset Mortgage, LLC serves as a reminder that the CFPB’s authority to issue a Civil Investigative Demand (“CID”) is very broad, particularly when compared to discovery in federal litigation. For example, federal courts will often limit discovery to conduct that occurred within the relevant statute of limitations. In Harbour Portfolio Advisors, however, the court allowed the CFPB to seek information dating back seven years, even though the pertinent statute of limitations was at most three years. In declining to limit the CID to the statute of limitations, the court reasoned that “information dating back to that period will help the Bureau develop a complete understanding of Respondents’ practices and operations.” Plaintiffs in civil litigation will often argue that they need pre-statute material to tell the full story of a defendant’s alleged misconduct, but federal courts rarely permit it in discovery disputes.
In addition to approving the seven year response period, other features of the opinion highlight the broad nature of the CFPB’s investigatory power compared to traditional discovery. The first relates to the subject matter of the CID and the CFPB’s authority over it. The CFPB sought information with respect to a product the respondents offered known as an agreement for deed. An agreement for deed is similar to a rent-to-own product, only for real property instead of personal property. In the transaction, a consumer agrees to make periodic payments to the owner of real property until a certain “purchase price” is reached. Once the consumer makes payments that total the purchase price, the owner of the property transfers the deed to the consumer.
The respondents, issuers and servicers of agreements for deeds, argued that the CFPB does not have jurisdiction over agreements for deeds because they are not credit products, much in the way that rent-to-own agreements are not credit products. The court held that it did not need to decide whether an agreement for deed is a credit product, however, because that argument is relevant to an enforcement action, not a CID. Instead, the court held that the inquiry was limited to whether the CFPB’s jurisdiction was “plainly lacking.” If the CFPB has a “plausible basis” for jurisdiction over the activity, the court reasoned, it must enforce the CID. The court then held that because there was at least a plausible basis for believing an agreement for deed is a credit product, the CFPB had jurisdiction to issue the CID. In reaching this decision, the court distinguished the CFPB’s attempt to enforce a CID against a college accrediting agency, in which case another federal district court ruled that the CFPB’s jurisdiction was plainly lacking.
The “plainly lacking” standard could end up being the most significant aspect of the case. The CFPB’s authority to enforce a CID against the supplier of a product that is arguably not a consumer financial product or service is currently at issue in the Eastern District of Pennsylvania, involving a CID directed to an issuer of settlement annuities. The target of the CID, and the Chamber of Commerce of the United States as amicus, argued that the settlement annuities are not a consumer financial product or service, and, therefore, the CFPB does not have jurisdiction to regulate them. On the same day the Harbour Portfolio decision was issued, the CFPB submitted it as supplemental authority. We will monitor that case closely to determine whether the Eastern District of Pennsylvania finds Harbour Portfolio persuasive.
The Harbour Portfolio court similarly drew a distinction between an enforcement action and a CID with respect to the respondents’ “fair notice” argument. The respondents argued that they did not have fair notice that an agreement for deed was a financial product subject to CFPB jurisdiction. The court held that fair notice only comes into play if the CFPB proceeds beyond the investigative stage and into the enforcement stage. Because a CID is part of the investigative stage, the court did not rule on the merits of the argument, and deferred consideration of it to a future enforcement action, should one occur.
Finally, the court rejected the respondents’ undue burden argument because, in the court’s view, the respondents did not put forth sufficient evidence of the burden of production. This holding is a useful reminder to entities facing CIDs from the CFPB and other agencies that, when making a burden argument, the better strategy is to come forward with very specific evidence of the cost, time, and resources necessary to comply with information requests. This evidence should be presented to the CFPB in the first instance, as enforcement attorneys will often work with targets of an investigation to reach modifications to the requests. In our experience, such requests are more likely to be granted when supported by specific evidence of the exact nature of the burden involved. If an agreement with the CFPB is not possible, evidence of the burden will almost certainly be required from a court. Thus, it is invariably worth the effort to establish the burden by specific evidence as early as possible.
Almost as interesting as the opinion itself is the fact that the New York Times covered it. It is rare for a major newspaper to run a lengthy article on what essentially amounts to a discovery dispute. But the article is best understood as not being about a single dispute over a CID, but the broader debate over the future of the CFPB itself. With bills being introduced in Congress that would eliminate or substantially reshape the CID, all of its actions will likely receive heightened attention in the press, as all sides of the debate seek to shape the public narrative around the future of the agency.