Third Circuit: The CFPB may use a CID to obtain information about all aspects of a company’s business.

By Stephen J Shapiro

In order to pursue its Congressional mandate to enforce Federal consumer financial laws, the Consumer Financial Protection Bureau (CFPB) may compel the production of documents or testimony by issuing a civil investigative demand (CID) to anyone the CFPB believes has information relevant to a violation of those laws.  A CID must identify “(1) the nature of the conduct constituting the alleged violation [of the law] and (2) the provision of law applicable to such violation.”  The Third Circuit recently held that the CFPB may use a CID to request information relating to the entirety of a company’s operations, and need not limit its request to information relating to any specific aspect of those operations.

In Consumer Financial Protection Bureau v. Heartland Campus Solutions, ECSI, the CFPB issued a CID to Heartland, a student loan servicer.  The CID explained that the CFPB was investigating “whether student-loan servicers . . . have engaged in unfair, deceptive, or abusive acts or practices . . . or have engaged in conduct that violates the Fair Credit Reporting Act . . . .”  The CID identified the following categories of conduct among those on which the CFPB was focusing:  “processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting.”

Heartland conferred with the CFPB to address its concerns about the scope of the CID, but ultimately refused to comply with the CID.  The CFPB, following the procedure in the statute governing CIDs, filed in the United States District Court for the Western District of Pennsylvania a petition seeking enforcement of the CID.  The district court granted the petition.

On appeal, Heartland conceded that, had the CFPB requested information relating to any single one of the categories of conduct identified in the CID – “processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting” – the CID would have been valid.  However, Heartland argued, because the CID requested information about “‘all component functions of any student loan servicing business, [the CID provided] no notice of what conduct’” the CFPB was investigating and, therefore, was unreasonably broad.  The Third Circuit, in a non-precedential opinion, rejected Heartland’s argument:  “[Heartland’s argument] rests on the flawed assumption that the CFPB could not investigate all of [Heartland’s] conduct.  Nothing prohibits the CFPB from investigating the totality of [a company’s] business activities . . . .”  Therefore, the Third Circuit affirmed the district court’s grant of the CFPB’s petition to enforce the CID.

The Heartland decision suggests that, when negotiating with the CFPB over the scope of a CID, focusing on the particularized burden that responding to the CID would impose may be a more effective strategy than objecting generally to the broad scope of the request.



CFPB releases preliminary results of arbitration study

By Christopher Reese

On December 12, 2013, the Consumer Financial Protection Bureau (CFPB) released the preliminary results of its investigation into the use of arbitration agreements in connection with consumer financial products or services. Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the CFPB to conduct such an investigation and provide a report to Congress summarizing the results.  The CFPB noted that its analysis is preliminary and is subject to change as more results are received.

The preliminary report is likely just the first step toward the issuance of regulations by the CFPB prohibiting or regulating the use of arbitration clauses in agreements concerning consumer financial products and services.  Section 1028(b) of the Dodd-Frank Act permits the CFPB to impose such regulations, if it finds that they are in the public interest and for the protection of consumers based on the results of its study.

The CFPB focused its initial investigation on the use of arbitration agreements in connection with three consumer financial products and services: credit cards, checking accounts, and general purpose reloadable prepaid cards.  The CFPB noted that its investigation going forward may look at additional consumer financial products, such as student loans.  For this preliminary report, the CFPB looked only at what it called the “front-end” of disputes involving consumers – “who files these disputes, in what numbers, against whom, and about what.”  The report states that the CFPB intends to address the “back-end” in the future – “what happens, in how long, and at what cost.”  Additionally, the CFPB notes that it intends to look more deeply at consumer cases filed in federal and state courts other than small claims courts, along with additional investigation into consumer class actions.

The CFPB found that larger bank issuers of credit cards are more likely to include arbitration clauses in their credit card agreements than smaller bank issuers and credit unions.  This means that even though most issuers of credit cards do not include arbitration clauses in their credit card agreements, a majority of outstanding credit card loans are subject to arbitration agreements because issuers of large numbers of credits cards use such agreements.  The CFPB also found that larger banks tend to include arbitration clauses in their consumer checking contracts more often than do smaller banks and credit unions.  The result, again, is that even though most banks and credit unions do not include arbitration clauses in their checking account agreements, a significant percentage of insured deposits in checking accounts are subject to arbitration agreements.  As for prepaid cards, arbitration clauses are included in most agreements.

Ninety percent of the arbitration agreements reviewed by the CFPB include provisions prohibiting class arbitration, and the American Arbitration Association is the arbitration administrator most frequently selected.  Most of the arbitration agreements also contain small claims court carve-outs, which allow either party to file an action in small claims court, and thus avoid arbitration, where the disputed amount falls within the jurisdiction of the relevant small claims court.  Approximately one quarter of the arbitration agreements give consumers the option to opt out of them, and most require the consumer to opt out within either 30 or 60 days.  Very few of the arbitration agreements place time limits on the filing of claims in arbitration, while most provide disclosure to consumers of certain important differences between arbitration and litigation, such as the lack of a jury trial, limited discovery, and limited rights to appeal.

We will continue to closely monitor the CFPB’s activity in this area and will be prepared to provide analysis of any regulations the CFPB may issue based on its findings.

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