My colleagues, Chris Willis and Barbara Mishkin, have previously blogged here and here about the CFPB’s recent guidance advising banks and non-banks subject to its jurisdiction to investigate and self-report to the Bureau violations of federal consumer financial services laws and UDAAP discovered by them. The Bureau has told them that if they do so, it may be more lenient on them in assessing penalties in an enforcement action than would otherwise be the case. While on its face this policy seems to make sense, Chris pointed out the practical difficulty in applying it to real-world situations.
At a program sponsored by the Committee on Consumer Financial Services of the Business Law Section which took place at the American Bar Association Annual Meeting on August 9 in San Francisco entitled “Developing a Robust Compliance Management System – Assessing Your Risk and Resources”, I asked Peggy Twohig of the CFPB whether it expects self-reporting to happen in situations where the violations of law are unclear. After all, it is one thing if a bank discovers a clear violation of TILA or some other federal statute or regulation. That’s the easy case. But what about the very common situation that falls into a gray area. We and other industry lawyers have explained how difficult it is to define UDAAP violations. What may be considered unfair, deceptive or abusive to one person may not be viewed in the same fashion by someone else. The definitions of such terms in Dodd-Frank and similar guidance provided by the Bureau don’t help a great deal in providing a litmus test for banks and non-banks to use.
Peggy was very emphatic in saying that all possible violations need to be reported along with the clear cut violations. The Bureau can then decide whether the company crossed the line and, if so, initiate an enforcement action.
If a company follows that advice, it might be red flagging for the Bureau certain things which the Bureau’s examiners would never discover on their own. And if a consent order ensues in which the Bureau lives up to its promise of being lenient with respect to penalties, that won’t have any impact on plaintiffs’ attorneys who may decide to initiate class actions against the companies. Notwithstanding the Bureau’s view expressed by Peggy, I don’t think decisions to self-report are that clear. They often require consultation with counsel who can assist the company in weighing the pros and cons.