How to Successfully Resolve a CFPB Investigation: Strategies Derived from Recent Victories

How to Successfully Resolve a CFPB Investigation:

Strategies Derived from Recent Victories

Anthony E. DiResta

Partner, Washington, D.C.

(202) 282-5782

[email protected]

Brought to you by Winston & Strawn’s CFPB Response Team

March 5, 2014

© 2014 Winston & Strawn LLP 2

• Recent CFPB investigations with successful outcome (closure; no action)

– What was faced

• Almost two-year process

• CID and Warning Letter

• Review and production of hundreds of thousands of documents

• Complying with CFPB e-discovery production protocol

• Review of emails from employees, including senior company officials

• Responding to interrogatories

• Creating reports containing sensitive business information

• Depositions or “investigational hearings”

• Submissions of legal positions and a formal “white paper”

• Meetings and negotiations with CFPB staff

Overview


• Recent involvement in CFPB supervisory examinations (concluding

in solid ratings)

– What was faced

• Information Request (comprehensive and resource intensive)

• Meetings with CFPB lawyers and auditors

• On-site visits by CFPB, including interviews with senior

company officials

• Producing documents and information in an expedited fashion

• Providing legal submissions

• Meetings with CFPB staff concerning vulnerabilities

discovered and risks presented

Overview


• To determine what worked to obtain these successful

outcomes

• To discuss the lessons learned from successful CFPB

investigations, examinations, and audits

• To outline effective strategies and “best practices” in dealing

with CFPB inquiries

Goals for this presentation


• This presentation is intended to be practical, “in the trenches,”

“nuts and bolts.”

• Focus: Investigations

• But, consider supervisory examinations or audits by the CFPB

as “investigations.” The game is the same.

Goals for this presentation


• Anatomy of a CFPB investigation

• Anatomy of a CFPB supervisory examination

• Effectively negotiating with CFPB at the outset

• Appropriately and effectively producing documents and information to

the CFPB

• Strategically dealing with CFPB investigational hearings

• Effectively communicating with CFPB staff and authoring compelling

submissions after compliance with the CID or inquiry

• Effectively and appropriately communicating with CFPB staff during

NORA process

• Critical Points (or key takeaways)

– Advocacy before the CFPB

– Risk management

AGENDA

Anatomy of a CFPB investigation


CFPB has almost identical procedures

to those used by FTC:

CFPB “drew most heavily from the FTC’s nonadjudicative

procedures in constructing the” RULES RELATING TO

INVESTIGATIONS BY THE CFPB.

Note: Former FTC staff now in senior positions at CFPB, and

current relationship between FTC’s Division of Financial

Practices and CFPB Enforcement Division. E.g., Peggy Twohig,

Office of Supervision Policy, Assistant Director; Lucy Morris,

Deputy Enforcement Director.



• See generally 12 C.F.R. Part 1080

• Receive a Civil Investigative Demand (“CID”)

– Notification of Purpose (identifies laws/regulations at issue)

– Definitions (e.g., “Company;” ESI)

– Instructions

• Meet and confer

• Applicable period for responsive materials

– Requests

• Interrogatories

• Documents

– Certificate of Compliance

– Document Submission Standards

• Petition to modify or set aside the CID



• Negotiate CID and meet with CFPB staff

• Produce documents and information

• Submit “position papers” or “cover letters”

• Participate in “investigational hearings”

• Be aware of:

– Sharing of confidential information with federal or state

agencies (E.g., Memorandum of Understanding between

FTC and CFPB)

– Interviews with former employees: “Bureau investigators

may disclose the existence of an investigation to potential

witnesses or third parties to the extent necessary to

advance the investigation.”



• Seek to close the investigation

• If staff is considering an enforcement action, CFPB may submit

a Notice and Opportunity to Respond and Advise (“NORA”)

• Attempt to persuade and convince staff that no enforcement

action is necessary


Anatomy of a CFPB Supervisory Examination


• CFPB’s “goal is to maximize [its] coverage of consumer risk in

the market.”

• In contrast to investigations, which focus on a particular entity

or target, in an examination, the CFPB focuses on

product/service lines.

• Exams constitute a “risk base analysis.” “CFPB examinations

focus on risks of harm to consumers, including the risk a

supervised entity will not comply with Federal consumer

financial law.” CFPB SUPERVISION AND EXAMINATION MANUAL.

CFPB Supervisory Examination


Receive an Information Request, which may request information concerning:

• The company’s business model

• The Board of Directors and senior management oversight

• Compliance program

• Policies, practices, and procedures

• Industry practices

• Training of employees

• Monitoring and internal evaluations

• Consumer complaints and responses

• Third-party service providers and vendor management

• Recordkeeping

• Product development and business acquisitions



• Produce documents and information

• On-site visits

• Interviews with employees, including senior staff

• Preliminary conclusions are drawn

• Suggestions for corrective actions are made

• Conclusions and proposed actions are shared

• An examination report is drafted, finalized, and formally

approved

• A final report is delivered, containing a confidential rating



Structurally and strategically, examinations are

identical to investigations.



Don’t approach a CFPB investigation

(or examination) as a litigator.

• A fundamentally different form of advocacy is involved.

• There’s a “touch” in dealing with the CFPB staff and

management.

• Consider the culture, psychology, and philosophy of the CFPB,

or the “institutional ego:” the CFPB staff see themselves as

law enforcers, not as regulators.

Critical Point No. 1


The staff is

the judge

and

the jury

and

the prosecutor.



• Governmental investigations and examinations are

“relationship-intensive.”

• Oral and written communications with the CFPB staff must be:

– effective,

– strategic, and

– respectful.


Effectively Negotiating with the CFPB


• Negotiate terms of the CID (specifications, definitions,

instructions)

• The “meet and confer”

– “If the [CID] seeks ESI, the recipient shall ensure that a

person familiar with its ESI systems and methods of

retrieval participates in the meeting.” (Emphasis added).

• Negotiate terms and production cycle (staged)

• Obtain extension of time

Effectively negotiating with the CFPB at the beginning of the process


During this initial stage, it is key to advocate.

• “Humanize” the company.

• Describe the company’s “culture of compliance” and “culture of

commitment.”

AND

Effectively communicate with the goal of developing a

meaningful working relationship with the staff.



• This requires that the company and its counsel

comprehensively analyze the CID (or inquiry) for compliance

obligations.

– Evaluate the implications of the burden, scope, and

breadth of the requests for both documents and

information.

• Scrutinize “all documents relating to” requests.

• Evaluate the time period involved.

• Evaluate how “document” is defined.

• Evaluate the requirements to create reports.



– Evaluate the costs and timing involved for locating,

reviewing, and producing hard copy and electronic

documents – as well as the task of responding to

interrogatories and other requests for information.

– Determine the custodians of documents and information.

– Identify the team which will locate and review documents

as well as who will draft responses and create reports.



During this initial phase, when communicating with the CFPB

staff:

• Determine why the requests were sent, and where the

inquiry/investigation is headed.

• Request assurance of confidentiality.

• Determine whether other federal agency (e.g., FTC) or state

attorneys general may become involved.



During this initial phase, determine your story (i.e., the

company’s “closing argument” at the outset.)



There’s much more to a CFPB investigation or

inquiry than just complying with its requests

for information and documents.

Be a strategic and effective advocate in responding to the

documents and information requested, while using the

appropriate communications “touch” with the staff.


Successfully – and Effectively – Producing

Documents and Information


Initial Observations

• The CFPB wants full, complete, and comprehensive compliance with

the CID or inquiry. It must “feel” that the company is being totally

transparent and responsive.

• The CFPB wants full cooperation and compliance with the DOCUMENT

SUBMISSION STANDARDS, or the ESI protocol.

• Be strategic: On the offense, not defense.

• Don’t engage in a “document dump.”

Successfully – and Effectively – Producing Documents and Information


For documents:

• Adopt procedures for evaluating what is responsive, privileged, and

highly sensitive.

• For electronic documents, develop a strategy for the collection and

review of ESI.

• Determine beneficial and useful documents for use in “cover letters.”



For information:

• Draft interrogatory responses and create reports accurately and fully

– but strategically. Be sure the responses are consistent with:

– the documents being produced,

– the legal theories and themes, and

– the risk management strategy.



For production and submission:

• Draft persuasive “cover letters” or memoranda for each stage of

production that include an appropriate narrative “spin” on the

contents being produced.

• Again, no “document or information dump.”

• Again, consider the ESI production requirements. DOCUMENT

SUBMISSION STANDARDS are integral to compliance.


Strategically Dealing with CFPB

“Investigational Hearings”


Process is very different from a deposition in litigation:

• Objections are limited.

– Must be grounded in a witness’s constitutional or other

legal right

– Neither the witness nor counsel shall otherwise object or

refuse to answer any question

• Hearing attendance is limited to witness and counsel

Successfully dealing with depositions or “investigational hearings”


Effective preparation

• Review sensitive documents, especially those showing compliance vulnerabilities.

• Review submissions (cover letters during production and memoranda)

• Focus on compliance policies, practices, and procedures:

– Three key issues:

• Whether a policy exists.

• Whether the policy was implemented.

• Whether the policy is effective.

– If the government believes that any one of these components are lacking, it will conclude that the policy/practice is not “reasonable.”



Process considerations

• Contrary to what is taught about depositions in litigation, be on

the offense, and not defense. If a question is asked where a

witness can volunteer positive or favorable information, go for

it.

• Although the role of counsel is substantially limited and

different from traditional depositions in litigation, the witness

can still be proactive, and have the opportunity to say to the

questioner, for example, “I don’t understand the question,” or

“You mischaracterized what I said previously.”

• Don’t guess about the contents of a document. If a question is

asked that refers to a document, have the witness ask to see

the document first. This is particularly important in government

investigations.



Effective advocacy before the CFPB requires

knowledge of the culture, psychology, and

philosophy of the Bureau.

The goal is to persuade and convince the staff. Consider what

will – and will not – resonate.

The staff must believe and “feel” that the company is credible

and is committed to a “culture of compliance.”


Effective Communications and Submissions

after Compliance with CID


Submit a “White Paper” containing:

1. Legal arguments showing that (a) the company has complied

with the laws and regulations at issue; and (b) the policies,

practices, and procedures of the company (i) exist, (ii) have been

implemented, and (iii) are effective; and

2. Mitigating circumstances showing that the facts and equities

should prevent the CFPB from exercising its prosecutorial

discretion to present an enforcement action against the

company.

Effective communications and submissions after compliance with CID


• Seek a meeting with the staff to discuss the contents of the

White Paper.

• Have company executives at the meeting – and have non-

lawyers attend. Consider having the Director of Compliance

attend the meeting.

• Be prepared to discuss options other than closing of the

investigation, if the staff appears reluctant to recommend

closing. Consider narrowing of allegations, limiting of potential

injunctive relief, and limitations to monetary remedies.



Key considerations

• The messages and themes in the White Paper and meeting

with the staff must be consistent with previous submissions.

– Remember that you should have outlined the “closing

argument” before submitting a single document to the

CFPB.

• Dispositive argument: The company has, and is committed to

having, a “culture of compliance.”


NORA Process and Effective Advocacy Strategy


See generally CFPB Bulletin 2011-04 (Enforcement)

“Before the Office of Enforcement recommends that the Bureau

commence enforcement proceedings, the Office of Enforcement

may give the subject of such recommendation notice of the

nature of the subject’s potential violations and may offer the

subject the opportunity to submit a written statement in

response. The decision whether to give such notice is

discretionary. . . . The objective of the notice is to ensure that

potential subjects of enforcement actions have the opportunity to

present their positions to the Bureau before an enforcement

action is recommended or commenced.”

Notice and Opportunity to Respond and Advise (NORA Letter)


• NORA letter sent to company.

• Company responds to NORA letter.

• Meeting can take place between company and staff concerning allegations presented in NORA letter or verbally by staff.

• Staff makes determination whether to move forward with enforcement action, and sends memo to managers with their recommendation.

• If investigation is not closed, staff sends counsel proposed complaint and consent decree for negotiation.

• During negotiations, an “appellate” process occurs. If impasse results in negotiating with staff, Enforcement Director may be brought in.

• If matter is not settled, staff will recommend litigation administratively or in federal district court.

Process involved if NORA letter is submitted to company


• The tone and style (“touch”) is critical. The staff is attempting

to determine whether to recommend an enforcement action.

• Don’t tell the staff what the CFPB can’t do or how the Bureau is

limited. Avoid “legal” arguments.

• Rather, stress facts and equities. Articulate reasons why the

CFPB shouldn’t exercise its prosecutorial discretion.

See CFPB Bulletin 2013-06, dated June 25, 2013: Responsible

Business Conduct

Effectively communicating with CFPB staff during the NORA process


Focus on the following arguments:

1. The company has policies, practices, and procedures that

have been implemented and that are effective.

• Training

• Disciplining

• Monitoring

2. The company engages in effective compliance self-policing,

and therefore does not need to be under the governmental

microscope.

3. The company is pro-consumer, and committed to appropriate

remediation when problems occur.



4. The company has “heard” the concerns expressed by the

staff during the investigation, and is responsive to what the

CFPB has said.

5. The company does not deserve to be punished. It is not an

appropriate poster child.

6. The company has been cooperative during the entire

investigation.



Create effective risk management strategies – which you

can commence immediately – to provide the most

compelling story to the CFPB during an investigation or

examination.

• Establish policies, practices, and procedures to demonstrate a

committed “culture of compliance.”

• Have a Compliance Management System in writing with key

personnel responsible for reviewing, implementing, and

monitoring the infrastructure.

• Create a compliance team that includes members from

different departments.



• Have the C-suite executives involved in the compliance

aspects. The “tone” of the company needs to be set from the

top.

• Document the compliance activities – create a paper trail.


Questions?

Anthony E. DiResta

Partner, Washington, D.C.

(202) 282-5782

[email protected]

Thank You.

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How to Successfully Resolve a CFPB Investigation: Strategies Derived from Recent Victories

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