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For years many industry participants wondered if allowing their real estate agents or loan officers to engage in co-marketing on Zillow Group applications and websites posed a risk to their companies under RESPA.  The industry may soon know the answer, as Zillow Group advised in recent prepared remarks on first quarter earnings that “Over the past two years, the Consumer Financial Protection Bureau, or CFPB, has been reviewing our program for compliance with the Real Estate Settlement Procedures Act, or RESPA, which is a regulation designed to protect consumers.”

To say that the CFPB is not a fan of marketing arrangements between settlement service providers is an understatement.  We previously reported on an October 2015 bulletin in which the CFPB addressed its experiences with such marketing arrangements.  The CFPB stated “In sum, the Bureau’s experience in this area gives rise to grave concerns about the use of [marketing services agreements] in ways that evade the requirements of RESPA.”  The recent announcement by Zillow may cause industry members to assess co-marketing arrangements.

While the Zillow announcement indicates that the CFPB investigation has occurred over the past two years, the apparent reason for the announcement is the disclosure that “Recently, the CFPB requested additional information and documents from us as part of their evaluation, which we are working with them on.”  Zillow also notes that it considers its co-marketing program to be compliant, and that it has continually encouraged consumers to shop around while looking for a mortgage.

 

 

The Office of Inspector General for the Fed and CFPB recently issued an audit report entitled “The CFPB Can Strengthen Contract Award Controls and Administrative Processes.”  The objective of the OIG’s audit was to assess the CFPB’s compliance with applicable laws, regulations and CFPB policies and procedures related to contract solicitation, selection and award processes, as well as the effectiveness of the CFPB’s associated internal controls.

While finding the CFPB to be generally compliant, the OIG found occasions on which reviews and approvals were overlooked or not documented as required by regulation or CFPB policy.  Among its other findings was that the CFPB could improve the documentation used to support price reasonableness determinations for sole-source contracts (i.e. contracts where there is other than a full and open competition).

The OIG’s work plan updated as of April 1, 2017 includes the following initiated projects in which the OIG will evaluate:

  • the CFPB Enforcement Office’s processes for protecting confidential information obtained through the use of the CFPB’s enforcement powers, such as information received in response to a CID (completion expected second quarter 2017)
  • the CFPB’s compliance with the requirements for issuing CIDs including those in the Dodd-Frank Act (completion expected third quarter 2017)  (Last week, the D.C. Circuit affirmed the district court’s denial of the CFPB’s petition to enforce a CID because the CFPB had not complied with the Dodd-Frank requirements.)
  • the effectiveness of the CFPB’s management of examiner commissioning and training (completion expected third quarter 2017)

Planned projects described in the work plan include (1) an evaluation of the effectiveness of the Division of Supervision, Enforcement, and Fair Lending in monitoring and ensuring that supervised entities take timely action to correct deficiencies identified in examinations, (2) an evaluation of the risk assessment framework used by the CFPB to prioritize examinations, and (3) a review of the extent to which the CFPB has assessed the risks associated with the collection, maintenance, storage, and disposal of privacy data and personally identifiable information and applied appropriate information security controls and protection over the data to mitigate those risks.

 

 

The D. C. Circuit has affirmed the D.C. federal district court’s April 2016 denial of the CFPB’s petition to enforce a CID issued to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

After denying ACICS’s petition to modify or set aside the CID in October 2015, the CFPB filed a petition in D.C. federal district court to enforce the CID.  The CFPA allows the CFPB to issue a CID to “any person” that the CFPB believes may be possession of “any documentary material or tangible things, or may have any information, relevant to a violation” of laws enforced by the CFPB.  The CID’s Notification of Purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it had authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools.  The district court denied the CFPB’s petition, holding that the CFPB lacked statutory authority to investigate the accreditation process.

In affirming the denial of the CFPB’s petition to enforce the CID, the D.C. Circuit declined to reach the broad question of whether the CFPB had statutory authority “to investigate the area of accreditation at all” and instead stated that it would “confine our analysis to the invalidity of this particular CID.”  More specifically, the D.C. Circuit considered only whether the CID satisfied the CFPB requirement that “[e]ach [CID] shall state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”

The D.C. Circuit concluded that “as written, the Notification of Purpose [in the ACICS CID] fails to state adequately the unlawful conduct under investigation or the applicable law.”  In reaching that conclusion, the D.C. Circuit relied on case law holding that to determine whether to enforce a CID, a court should consider only whether the inquiry is within the agency’s statutory authority, whether the request is not too indefinite, and whether the information sought is reasonably relevant.

The CFPB’s Notification of Purpose defined the relevant conduct constituting the violation under investigation as “unlawful acts and practices in connection with accrediting for-profit colleges.”  According to the D.C. Circuit, because the Notification of Purpose gave “no description whatsoever” of the “unlawful acts and practices” the CFPB sought to investigate, the court “need not and probably cannot accurately determine whether the inquiry is within the authority of the agency and whether the information sought is reasonably relevant.”  The D.C. Circuit noted that the CFPB had argued that, even if it did not have statutory authority over the accreditation process, it had an interest in the possible connection between the lending practices of ACICS-accredited schools and the accreditation process.  However, the court observed that “[e]ven if the CFPB is correct, that interest does not appear on the face of the Notification of Purpose,” and the agency had failed to adequately inform ACICS of the link between the relevant conduct and the alleged violation.

The CID had identified “sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law” as the laws applicable to the alleged violation under investigation  The D.C. Circuit determined that the this language was “similarly inadequate” because, coupled with the CID’s failure to adequately state the unlawful conduct under investigation, the statutory references “tell ACICS nothing about the statutory basis for the Bureau’s investigation.”  The court noted that although the CFPA provides detailed definitions of “Federal consumer financial law” and “consumer financial product or service,” the CID “contains no mention of these definitions or how they relate to its investigation.”  It also commented that the inclusion of the “uninformative catch-all phrase ‘any other Federal consumer financial protection law’ does nothing to cure the CID’s defect.”  According to the court, “were we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.”

Because the D.C. Circuit did not reach the broader question of the CFPB’s authority to investigate the accreditation process and “express[ed] no opinion on whether a revised CID that complies with [the CFPA CID requirements] should be enforced,” the CFPB will get another bite at the apple should it decide to reissue the CID.   While the decision will likely result in more detailed Notifications of Purpose in future CFPB CIDs, because it does not substantively change the scope of the CFPB’s broad power to issue CIDs, the decision’s overall impact will likely be minimal.  In addition, there continues to be a fairly low standard for what constitutes relevant information in discovery and litigation.

 

 

 

 

 

 

Last week, the D. C. Circuit held oral argument in the CFPB’s appeal from the D.C. federal district court’s April 2016 ruling that the CFPB exceeded its statutory authority when it issued a CID to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

After denying ACICS’s petition to modify or set aside the CID in October 2015, the CFPB filed a petition in D.C. federal district court to enforce the CID.  The CID’s statement of purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it also has authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools. 

The district court observed that ACICS had “repeatedly and accurately explained [that] the accreditation process simply has no connection to a school’s private student lending practices” and that ACICS was not involved in financial aid decisions, meaning that it played “no part in deciding whether to make or fund a student loan.”  While noting that the CFPB might be “entitled to learn whether ACICS is connected to potential violations of the consumer financial laws by schools its accredits,” the court stated that the CID’s “statement of purpose and the CFPB’s actual requests belie any notion that its inquiry is limited in this way.  Indeed, the statement of purpose says nothing about an investigation into the lending or financial-advisory practices of for-profit schools.” 

At the oral argument in the D.C. Circuit, the CFPB’s attorney sparred with Judge David Sentelle as to whether the CFPB had satisfied the CFPA requirements that a CID must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”  In particular, Judge Sentelle questioned whether the CID’s use of the phrase “unlawful acts or practices” and reference to the CFPA and “any other Federal consumer financial protection law” was sufficiently specific to provide notice of how the conduct under investigation related to financial activity regulated by the CFPB.  The CFPB’s attorney argued that the CFPB was not required to describe the nature of the potentially unlawful conduct under investigation with greater specificity in a CID.

The CFPB’s attorney stressed the CFPB’s authority under the CFPA to issue a CID to anyone who might have information relevant to violations of laws enforced by the CFPB even if the CFPB could not enforce such laws directly against the CID recipient.  To explain why ACICS might have relevant information, he pointed to the CFPB’s enforcement actions against for-profit colleges accredited by ACICS that made loans to their students and allegedly made misrepresentations to their students about the schools’ accreditation status.  The CFPB’s attorney also resisted Judge Karen Henderson’s suggestion that for purposes of whether the CID constituted “fair notice” to ACICS, given the CFPB’s obligation under the CFPA to identify “the provision of law” applicable to the alleged violation under investigation, it would have been “an easy enough matter” for the CFPB to have added the CFPA’s definitions of “federal consumer financial law” and “financial product or service” to put ACICS on notice “of what you were looking at.”

ACICS’s attorney asserted that the CID did not conform to the authority of the CFPB because conduct “in connection with accrediting for-profit colleges” did not implicate any consumer financial  laws enforced by the CFPB.  In response to Judge Robert Wilkins’ suggestion that ACICS was asking the court to take a “strict construction” of the CID’s wording and ignore other information about the nature of the CFPB’s investigation, ACICS’s attorney argued that even under a broad view, the phrase “in connection with” could not be used to expand the CFPB’s jurisdiction beyond information that could be relevant to a violation of a consumer financial protection law.

Judge Wilkins reacted to that argument by commenting that ACICS was aware of the nature of the potential violations being investigated and that an accrediting organization could have relevant information.  ACICS’s attorney asserted, in response, that the stated purpose of the investigation was for the CFPB to look at “conduct in connection with accrediting” for-profit schools rather than to look at for-profit schools and that nothing in “accrediting non-profit colleges” touched on laws that the CFPB has authority to enforce.  She also argued that the CID’s deficiency was not one of “semantics,” as Judge Wilkins suggested, but rather that the CID did not fulfill its purpose of providing notice of alleged unlawful conduct “that touches anything the CFPB has the authority to enforce.”

An affirmance by the D.C. Circuit is likely to lead other courts to more closely scrutinize CFPB CIDs for whether they adequately put the recipient on notice of the nature of the investigation and whether the investigation is within the CFPB’s jurisdiction.

The D.C. federal district court has ruled that the CFPB exceeded its statutory authority when it issued a CID to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

ACICS’s petition to modify or set aside the CID was denied by the CFPB on October 8, 2015, and the CFPB thereafter filed a petition in D.C. federal district court to enforce the CID.  The CID’s statement of purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it also has authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools.

According to the court, the CFPB’s justification was “a bridge too far.”  The court observed that ACICS had “repeatedly and accurately explained [that] the accreditation process simply has no connection to a school’s private student lending practices” and that ACICS was not involved in financial aid decisions, meaning that it played “no part in deciding whether to make or fund a student loan.”

In response to the CFPB’s claim that it was not obligated “to accept at face value” ACICS’s description of its interaction with the schools it accredits and had the right to independently determine the truth of that description, the court stated simply “Please.”   While noting the CFPB might be “entitled to learn whether ACICS is connected to potential violations of the consumer financial laws by schools its accredits,” the CID’s “statement of purpose and the CFPB’s actual requests belie any notion that its inquiry is limited in this way.  Indeed, the statement of purpose says nothing about an investigation into the lending or financial-advisory practices of for-profit schools.”

The court also observed that the information requested by the CFPB included a list of all schools accredited by ACICS and a list of individuals involved in the accreditation of certain schools.  The court stated that such requests “clearly reveal [the CFPB’s] investigation targets the accreditation process generally.  This the CFPB was never empowered to do.”

In a footnote, the court commented that even if the CFPB had provided an investigatory purpose within its authority, such as the lending practices of for-profit schools, information regarding the accreditation process could still “be beyond [the CFPB’s] reach as not reasonably relevant  to that purpose.”  The court pointed to ACICS’s explanation that the accreditation process did not touch a school’s lending or financial-advisory services.”

The court concluded its opinion denying the CFPB’s petition to enforce the CID with the following admonition: “Although it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow head long into fields not clearly ceded to them by Congress.”

We have previously commented on the CFPB’s aggressive approach to asserting its jurisdiction.  Last summer, Ballard Spahr attorneys conducted a webinar: “Pushing the Envelope: Are There Limits to the CFPB’s Jurisdiction?” in which we discussed the CFPB’s continuing “jurisdiction creep” and explored the limits of the CFPB’s jurisdiction.

 

Director Cordray is reported to have defended the CFPB’s authority to investigate a college accrediting organization at a recent Politico event.

On October 8, 2015, the CFPB issued a decision and order denying the petition of the Accrediting Council for Independent Colleges and Schools (ACICS) to modify or set aside the CID issued by the CFPB.  Among the objections to the CID raised by ACICS were that the Department of Education is its sole regulator and that it was not subject to the CFPB’s enforcement jurisdiction as a  “covered person,” “service provider,” or “person who knowingly or recklessly provides substantial assistance to a covered person or service provider.”

On October 23, Senator Lamar Alexander and Representative John Kline sent a letter to Director Cordray requesting that he “immediately rescind the issuance of a civil investigative demand to [ACICS] and halt any other planned investigatory actions regarding accreditors or the accreditation of institutions of higher education.”  (Mssrs. Alexander and Kline are, respectively, the Chairs of the Senate Committee on Health, Education, Labor and Pensions and the House Committee on Education and the Workforce.)  In their letter, the lawmakers asserted that the CFPB’s issuance of the CID to ACICS represents an “unprecedented overreach” by the CFPB that “raises serious concerns regarding jurisdiction.”

In defending the CID, Director Cordray is reported to have said that the CFPB’s “authority is over those who provide financial products or services, or provide material, substantial assistance to those who do” and that “if an accrediting agency is facilitating for-profit colleges’ misleading consumers, treating them unfairly and deceptively, then that’s something that we should look at.”

We have previously commented on the CFPB’s aggressive approach to asserting its jurisdiction.  In August 2015, Ballard Spahr attorneys conducted a webinar: “Pushing the Envelope: Are There Limits to the CFPB’s Jurisdiction?” in which we discussed the CFPB’s continuing “jurisdiction creep” and explored the limits of the CFPB’s jurisdiction.

 

The CFPB has denied the petition of a lead generation company and its employee to modify or set aside a civil investigative demand (CID).  As we reported, among the petitioners’ arguments for why the CID should be set aside was that the company is neither a “service provider” nor “covered person.”  They argued that the company is not a “covered person” because it does not offer or provide a “financial product or service” as defined in Dodd-Frank.  They also argued that the company is not a “service provider” as defined in Dodd-Frank.

In its decision denying the petition, the CFPB stated that, as an initial matter, the petitioners waived these arguments by not raising them with the CFPB’s enforcement counsel during the meet-and-confer process.  The CFPB ruled that the objection also failed on its merits because it is “essentially a substantive defense to claims the Bureau has yet to assert.”  The CFPB stated that “such fact-based arguments about whether an entity is subject to or complied with a law’s substantive provisions are not defenses to the enforcement of a CID.” According to the CFPB, its position is supported by case law involving the FTC and Equal Employment Opportunity Commission indicating that an agency’s rejection of such defenses is appropriate because “the responses to a CID may be highly relevant to determining the merits of the agency’s potential claims and the parties’ defenses.”  (The CFPB also cites to its own previous decision rejecting a similar objection to a CID.)

Among the petitioners’ other arguments rejected by the CFPB was their argument that the CID’s notification of purpose was insufficiently specific and thus failed to comply with the requirement that a CID state “the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”  The CID indicated that the CFPB was investigating “whether lead generators or other unnamed person have engaged or are engaging in unlawful acts and practices in connection with the marketing, selling, or collection of payday loans” and identified various statutes, including Sections 1031 and 1036 of Dodd-Frank, the ECOA, FCRA and GLBA.  According to the CFPB, this information “adequately informed Petitioners of the conduct of interest to the Bureau and the potentially applicable provisions of law.”

A lead generation company and its employee recently filed a petition with the CFPB to modify or set aside a civil investigative demand (CID).

Among the arguments made in the petition for why the CID should be set aside is that the company is neither a “service provider” nor “covered person.”  The company argues that it is not a “covered person” because it does not offer or provide a “financial product or service” as defined in Dodd-Frank.

The company also asserts that it is not a “service provider” as defined in Dodd-Frank.  Under Dodd-Frank, a “service provider” is a person who provides a “material service” to a covered person in connection with the offering of a financial product or service, including a person that “participates in designing, operating or maintaining the consumer financial product or service” or “processes transactions relating to the consumer financial product or service [other than unknowingly or incidentally transmitting or processing undifferentiated financial data].”  The definition includes an exception for providers of a “support service of a type provided to businesses generally or a similar ministerial service.”

The company argues that it does not provide any “material service” to covered persons nor does it provide services that fall within the specific examples contained in the statutory “service provider” definition.  It asserts that lead generation services instead fall within the exception for services “provided to businesses generally.”  According to the petition, lead generation services “are no different than advertising agency services, public relations services, marketing consultants and strategists and any other of the numerous support services which are now inextricably woven into the fabric of the American business model.  They have nothing to do with core financial services functions.”