GAO issues report on CFPB civil penalty fund

by Ballard Spahr LLP
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The Government Accountability Office (GAO) has issued a report on the results of its review the CFPB’s Civil Penalty Fund (CPF). The review was requested by Representative Shelley Moore Capito, who chairs the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit.

Section 1017 of the Dodd-Frank Act established in the Federal Reserve a separate “Consumer Financial Protection Bureau Civil Penalty Fund.” When the CFPB collects civil penalties in an enforcement action, it is required to deposit them in the CPF. The funds are first to be used to compensate consumers who were harmed by the activities for which civil penalties were imposed. If funds remain after the CFPB has provided full compensation to all eligible victims or if payments to victims are impracticable because victims cannot be located or it is otherwise impracticable to pay victims, the CFPB can use the funds for consumer education and financial literacy programs.

The report indicates that as of May 30, 2014, the CFPB had collected more than $139 million in civil penalties and allocated over $31 million to compensate seven classes of harmed victims. It also made one allocation of $13.4 million for consumer education and financial literacy programs, with funds in such allocations designated for a program that provides financial coaching for transitioning veterans and economically vulnerable consumers. (Based on the numbers shown in the report, which include a set-aside of approximately $1.5 million for administrative expenses to administer payments to victims, the CPF had more than $93 million in unallocated funds as of May 30, 2014.)

The report describes the CFPB’s process for collecting and allocating CPF amounts to victims and consumer education and financial literacy program. It also describes the internal controls the CFPB has put in place for administering and monitoring the CPF. There is also a discussion of the similarities and differences that exist between the CPF and the civil penalty funds of the three other federal agencies with statutory authority to deposit the civil money penalties they collect into a fund. (Those agencies are the Commodity Futures Trading Commission, the Centers for Medicare and Medicaid Services, and the Securities and Exchange Commission.)

The GAO found that the CFPB failed to document the factors that the CFP administrator considered in deciding to allocate $13.4 million for consumer education and financial literacy programs. While the report indicates that the CFPB had revised its procedures for administering the CPF to include the factors the administrator will consider when determining such allocations, the GAO found that, at the time of its audit, the revised procedures did not include steps for the administrator to document the specific factors that were considered as part of an allocation. The GAO observes that “federal internal control standards state that it is important to promptly record transactions and events clearly and completely so that they maintain their relevance, value and usefulness to management in controlling operations and making decisions.” It concludes that documenting the specific factors the CFP administrator considered each time he or she makes an allocation “would make such decisions more transparent” and such information “could be used to help ensure that future allocation decisions are made in a consistent manner going forward.”

The report includes a letter from the CFPB concurring with the GAO’s recommendation that the CPF administrator document the specific factors considered in determining the amount of any allocations for consumer education and financial literacy. The report indicates that to implement the recommendation, the CFPB has developed a CPF allocation checklist to help ensure that such factors have been documented and appended the checklist to its revised procedures for administering the CPF.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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