On April 26, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a final rule, effective immediately, that sets forth procedures for the administration of the Consumer Financial Civil Penalty Fund (Civil Penalty Fund or Fund). Under Dodd-Frank, all civil penalties obtained by the CFPB are deposited into the Civil Penalty Fund, which may be used to compensate victims and, to the extent any funds remain, to fund consumer education and financial literacy programs. The final rule identifies categories of victims who may receive payments from the Civil Penalty Fund and articulates the Bureau's interpretation of the types of payments that may be appropriate for these victims. It also establishes procedures for allocating funds for such payments to victims and for consumer education and financial literacy programs. The CFPB simultaneously issued a proposed rule, seeking comment on possible revisions to the final rule. The CFPB is accepting comments on the proposed rule through July 8, 2013.
Pursuant to the final rule, victims are eligible for compensation from the Fund if a final order in a Bureau enforcement action imposed a civil penalty for the particular violation that harmed the victim. A final order is defined as a consent order or settlement issued by a court or by the Bureau, or an appealable order issued by a court or by the Bureau as to which the time for filing an appeal has expired and no appeals are pending. The Bureau's proposed rule, however, states that it is considering whether it should revise the final rule to allow payments to victims of any "type" of activity for which civil penalties have been imposed, even if no enforcement action has imposed penalties for the "particular" activity that harmed the victims.
Under the final rule, victims will be compensated from the Fund to the extent of their uncompensated harm. Uncompensated harm is defined as the victim's compensable harm minus any compensation for that harm that the victim has received or is reasonably expected to receive. The final rule describes three categories of compensation that a victim has received or may be reasonably expected to receive: (i) a previous allocation from the Civil Penalty Fund to the victim's class; (ii) any redress that a final order in a Bureau enforcement action orders paid to the victim that has not been suspended, waived, or determined by the Chief Financial Officer to be uncollectible; and (iii) other redress that the Bureau knows has been paid to the victim. In determining whether a victim's harm is compensable, the final rules states that the CFPB will look to the objective terms of the order imposing the civil penalty, or if the order does not set forth such objective terms, the victim's out-of-pocket loss that resulted from the violation. The Bureau's proposed rule, however, seeks comment on (i) what should qualify as compensable harm. (ii) whether, when the amount of harm cannot be determined based on the terms of a final order, the Fund Administrator should determine what amount of harm is "practicable," as opposed to using the victim's out-of-pocket loss, and (iii) whether, instead of paying victims for their uncompensated harm, the Bureau instead should pay victims a share of the civil penalties collected for the particular violations that harmed them.
The CFPB has stated that it will only make payments to victims to the extent practicable. In the final rule's interpretative commentary, the CFPB explained that it believes that for payments to be "practicable," it must be feasible to carry out all of the steps involved in making the payments, and to do so efficiently and without excessive administrative cost. The final rule identifies scenarios where distribution may be impracticable, including when the amount of the payment is so small the victim is unlikely to redeem it, the cost of distribution is not justified, the victim cannot be located with reasonable effort, the victim does not timely submit information required by the distribution plan, or the victim does not redeem the payment within a reasonable time.
With respect to fund allocation procedures, the final rule establishes a Civil Penalty Fund Administrator who will manage the Fund and report to the CFPB's Chief Financial Officer. The Fund Administrator also must follow written direction provided by the Civil Penalty Fund Governance Board, which will be established by the Director of the CFPB. The Administrator will designate a payment administrator-who may be a CFPB employee or a contractor-who will propose a plan for distributing the allocated funds to individual victims. The plan must be approved by the Administrator.
Under the final rule, funds will be allocated based on six-month periods, which will be published on the CFPB's website by July 8, 2013. The start date for the first period has been established as July 21, 2011. The first two periods, however, need not be exactly six months in order to allow the Bureau to establish a schedule that will be administratively efficient. When there are sufficient funds available to fully compensate all the victims in the six-month period class, the Fund Administrator will allocate to each victim the amount necessary to fully compensate those victims for their uncompensated harm. If there are insufficient funds to fully compensate victims in any six-month period, victims from the most recently concluded six-month period will receive an equal percentage of their uncompensated harm. In the event of a surplusage within a given six-month period, the Fund Administrator next will allocate any remaining funds to classes of victims from preceding six-month periods until no funds remain or the victims are fully compensated. The proposed rule seeks comments regarding (i) how funds should be allocated to classes of victims, particularly when there are insufficient funds in a particular period to fully compensate all victims and (ii) whether funds should be allocated more or less frequently, or whether a different method of timing allocations should be used.
Under the final rule, any funds that remain after distribution can be allocated to consumer education or financial literacy programs, based on criteria separately adopted by the CFPB. The Fund Administrator, however, does not have the authority to select or allocate funds to particular programs. The proposed rule also seeks comment regarding whether there should be a limit to the amount of funds that may be allocated to such programs.
The CFPB will issue annual reports that describe how the funds will be allocated, the basis for those allocations, and how the funds have been distributed. The reports will be available on the CFPB's web site.