The Consumer Financial Protection Bureau grabbed headlines yesterday with the news that Discover Financial Services agreed to pay $214 million to settle charges that it deceptively marketed credit card add-on services.
But that settlement - which resembles a $210 million penalty paid by Capital One Bank in July for similar allegations - is not the hottest topic in the consumer finance bar.
Rather, lawyers who follow the agency closely have zeroed in on a little-noticed petition by mortgage lender PHH Corp., which filed the first-ever challenge to a CFPB civil investigative demand, calling the agency's request for information "overly broad and unduly burdensome."
Last week, CFPB Director Richard Cordray in a nine-page decision denied the petition and ordered the company to produce all relevant documents within 21 days.
"The denial provides a window into the bureau's view of its aggressive ability to investigate," said Jonathan Pompan, of counsel at Venable, who was not involved in the case. "Investigative demands like the ones the bureau has been issuing can get very expensive and be disruptive to even the most well-heeled companies. The bureau's supporters will likely view this as its appropriate role and critics will say that this is validation of their concerns about its power."
The dispute arose from an investigation to determine whether mortgage lenders and private mortgage insurance providers engaged in "unlawful acts or practices in connection with residential mortgage loans," as the CFPB put it in its "Notification of Purpose" that agency lawyers served on PHH on May 22.
In its petition, PHH complained that the CFPB failed to state the nature of the conduct at issue, as required by Dodd-Frank, and that the description "covers every aspect of mortgage lending….It is hard to image a less specific statement," PHH counsel Mitchel Kider and David Souders of Weiner Brodsky Sidman Kider wrote. "The failure of the CFPB to properly apprise PHH of the nature of its investigation prejudices PHH's ability to formulate appropriate objections."
Cordray responded that an initial civil investigative demand may be "crafted broadly because the enforcement team needs to be thorough and comprehensive about its inquiries into possible violations of law that harm consumers."
Further, he noted, the CFPB's first letter to PHH, dated Jan. 3, was more specific, and stated that the agency was looking into whether "premium ceding practices by PHH involving captive reinsurers and private mortgage insurance carriers" comply with the Real Estate Settlement Procedures Act. "Notice was provided from the outset and repeatedly thereafter," he wrote.
PHH also complained that the civil investigative demand was too broad, with 21 interrogatories and 33 document requests "most of which start with the term 'all,'" wrote PHH lawyers Kider and Souders, who declined comment because the matter is pending.
Again, Cordray was not swayed, writing that PHH "has offered little or no detail to make the kind of showing required to substantiate these claims."
PHH also said the CFPB was seeking documents that fell outside the three year statute of limitations. "The CFPB's demand for documents created more than eleven years ago (and eight years prior to the statute of limitations cut-off) is wholly irrelevant to any legitimate inquiry and creates a burden that is undue as a matter of law," wrote Kider and Souders.
Cordray responded, "The issue here is not whether all such information is actionable; rather, the issue is whether such information is relevant to conduct for which liability can be lawfully imposed."
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