- Consumer Financial Protection Bureau Issues Guidance for Opposing and Modifying Civil Investigative Demands
- October 5, 2012
- Law Firm: Greenberg Traurig LLP - Miami Office
Director Cordray demands comprehensive ‘meet and confer’ and specific objections to burden and scope arguments
The Consumer Financial Protection Bureau’s (CFPB) recent decision denying a PHH Corporation’s Petition to Modify or Set Aside Civil Investigative Demand (CID) provided some needed clarity as to how much a company can push back on the CFPB’s requests for documents and responses. In his first written opinion on the issue, Director Richard Cordray sought to “provide more specific guidance for parties assessing their course of conduct” in challenging the CFPB’s request. Through his September 20, 2012, published opinion, Director Cordray instructed recipients and their counsel to essentially hit the ground running upon receipt of a CID, requiring that within 20 calendar days of service, the respondent must (1) evaluate and analyze the CID, (2) evaluate the universe of potential information responsive to the CID, (3) evaluate the burden and relevancy of such information, (4) meet and confer with the CFPB regarding the same, and (5) determine if filing a Petition to modify or set aside the CID is the appropriate course of conduct. The opinion provided guidance on what factors to consider and bring to the CFPB’s attention during that time period to allow for consideration of modifications or extensions to the requests.
Like other federal agencies, the CFPB is authorized by statute to “conduct investigations to ascertain whether any person is or has been engaged in conduct that, if proved, would constitute a violation of any provision of Federal consumer financial law.” 77 Fed. Reg. 39101 (June 29, 2012). In order to implement its investigative functions, the CFPB may issue CIDs for documentary material, tangible things, written reports, answers to questions, and oral testimony. See 12 C.F.R. § 1080.6. A recipient of a CID is permitted to file a Petition to Modify or Set Aside the CID, including asserting all factual and legal objections, within 20 calendar days after service of the CID. See 12 C.F.R. § 1080.6(e). Other than certain pre-conditions that must be satisfied in order for the CFPB to consider a Petition, the regulations provide no guidance regarding the standard that must be satisfied to have the CID modified or set aside. Cordray’s opinion in the PHH Corporation matter attempted to do so.
In the PHH Corporation investigation into possible mortgage lending violations, the CFPB issued a CID on May 22, 2012, consisting of 21 interrogatories (with multiple subparts) and 33 document requests. The CID requested information dating back to at least January 1, 2001, and in many cases, as far back as 1995.
As required in the regulations, PHH’s first step in responding to the CID was to have a “meet and confer” with the CFPB that was held on May 29, 2012. PHH elected to have a telephonic meet and confer, during which, PHH’s counsel objected to the applicable time periods and substantive aspects of the requests. The next day, the CFPB sent PHH a letter indicating a willingness to take a flexible approach to the CID in order to accommodate any identifiable undue burdens and, accordingly, offered to recommend four specific modifications to the CID in light of PHH’s concerns. On June 4, 2012, PHH responded by providing a letter detailing its various concerns and objections — primarily that the requests were irrelevant and unduly burdensome — and setting forth a proposed resolution. Three days later, on June 7, 2012, the CFPB sent responses to PHH accepting certain proposed resolutions but denying others, and providing some justifications for its denial. After receipt of the letter, PHH wished to engage in further discussions regarding the scope and breadth of the CID and therefore sought an extension of the deadline to file a Petition to Modify or Set Aside. The CFPB, however, refused to grant such an extension, thereby further cementing the adversarial posture of the parties and causing PHH to file its Petition instead of waiving its objections to the CID.
In issuing its ruling, the CFPB equated its role to that of a grand jury that “can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.” (citing United States v. Morton Salt Co., 338 U.S. 632, 642-43 (1950)). The CFPB further adopted the “deferential standard of review” used by the Supreme Court and Courts of Appeals when evaluating the appropriateness of its own CIDs. Specifically, the CFPB cited that administrative subpoenas have generally been enforced if they satisfy the following requirements: (1) the investigation is for a lawfully authorized purpose, (2) the information requested is relevant to the investigation, and (3) procedural requirements are followed. The CFPB further notes that “[i]f the agency establishes these factors, the CID will be enforced unless the subject demonstrates the CID imposes an ‘undue burden’ or constitutes an abuse of the court’s process.” (internal citations omitted). In denying PHH’s Petition, the CFPB held that the CID issued to PHH had satisfied these three factors and that “PHH has not met its burden of showing that the CID seeks information that is irrelevant to the investigation or imposed an undue burden on it.”
PHH had raised four primary objections in its Petition: (i) the CID failed to provide sufficient notice of the purpose of the investigation, (ii) the CID was overbroad and imposes an undue burden, (iii) the CID sought information beyond the applicable three year statute of limitations, and (iv) PHH asserted a number of general objections to the CID. The CFPB rejected each of these objections.
With regard to the first objection, the CFPB relied upon the fact that even before the CID was issued, the CFPB had sent a letter to PHH approximately five months earlier that explained what the CFPB would be investigating and identified the underlying conduct at issue. Relying upon FTC v. O’Connell Associates, Inc., 828 F.Supp. 165, 171 (E.D.N.Y. 1993), the CFPB noted that the scope of investigation may be drawn “quite generally,” and stated that its previous letter to PHH as well as the CID itself “taken singly or together, easily meet the notice requirement established by law.”
Concerning breadth and burden, PHH argued in its Petition that the CID was a “fishing expedition” and that it was no different than an “open-records search” of PHH’s business. PHH further argued that the broad requests would cause undue hardship and potential financial damage as a result of having to compile such extensive responses. The CFPB responded in its decision that although PHH had repeatedly asserted that the CID was overbroad and unduly burdensome, PHH only provided “little or no detail” that amounted to nothing more than “generalized assertions” and “suggestions devoid of any tangible detail” regarding this burden. The CFPB noted that “mere suggestion of possible damage to . . . business activities is not sufficient to block authorized inquiry into relevant matters.” (internal quotations omitted).
Moreover, the CFPB noted that because PHH failed to include their information technology staff in the meet and confer discussions as had been requested, the CFPB could not fairly assess the burden of providing responsive material. The CFPB stated that in order to receive fair consideration of modifications, PHH needed to identify “specific issues of unavailability, inaccessibility, or excessive volumes of data.” Further, it said that it would have considered PHH proposals regarding limiting searches to certain custodians or using specific search terms.
In closing, Director Cordray wrote that the CFPB enforcement attorneys would continue to work with PHH and any other recipient of a CID to modify a CID or extend the period of response if the recipient could sufficiently and in a detailed manner establish objections based upon breadth and burden. Director Cordray instructed “future parties” to make “good faith efforts to engage in a productive discussion that can resolve issues or concerns more effectively.”
The CFPB’s decision in the PHH Corporation matter provides guidance and points out the difficulties in responding to a CID. Director Cordray expects companies to gather materials, respond quickly, and engage in productive conversations within a few days of receipt. Consumer financial services companies, as well as their service providers, will need to prepare a game plan in order to accomplish these tasks quickly to preserve objections, prepare defenses and provide the necessary materials in a timely fashion.
- A company and its counsel must be ready within days of receipt of the CID to make decisions as to how and whether to challenge the scope and breadth of the CID. The meet and confer is required within seven days, and must include information technology representatives who can provide the basis for arguing the undue burden of responding to the requests. That very small window of responding is made smaller by the time it takes client to enlist outside counsel and get them up to speed.
- Since the Petition must be filed within twenty (20) days, the client must make the relatively quick strategic (and financial) cost/benefit analysis of challenging the CID by way of Petition. While a Petition may preserve objections and slow down the process so that a company can adequately review its internal materials, the regulations provide that a Petition may be disclosed to the public, thus revealing the existence of what up until that point is a non-public investigation. Companies are left with the very difficult balancing of preserving their right to object against the public disclosure of an investigation.
- The short turnaround time requires counsel to engage in meaningful discussions with enforcement attorneys at the CFPB. Cordray has indicated that the only respondents who will receive consideration for modification of the CID will be those who engage in productive discussions with the staff, and that the CFPB will take a hardline approach towards anyone adopting a “scorched earth policy of delay and obfuscation.” Thus, outside counsel will be tasked with trying to convince company personnel to “play nice” with those who are requesting such large amounts of information in a short period of time.