Blake Johnson was stunned when the Consumer Financial Protection Bureau demanded hundreds of detailed financial and operational records from his credit repair company, Prime Credit, at the start of 2015.
The CFPB offered little insight into why it wanted the information, but the California-based company that Johnson co-founded was confident it had not breached any rules and turned over 200 pages of documentation.
"I don't think they really understood what they were asking for," Johnson said in an interview. "So they asked for everything, and then some."
Prime Credit was facing a civil investigative demand, or CID — a powerful CFPB tool that lets the bureau's enforcement team dig into a company's documents to determine whether it is upholding federal consumer financial laws.
A CFPB spokesperson declined to say how many CIDs have been issued since the agency was formed in 2011, but the process could be poised for change. Acting bureau director and Trump-appointee Mick Mulvaney asked for recommendations on changing the CID process as part of a broad effort to shrink an agency that, during the Obama administration, held a reputation for strongly policing the financial services industry. On Jan. 24, the CFPB launched a request for information on CIDs, the first of 12 public comment requests asking industry stakeholders to provide evidence that the agency is following its mandate to protect consumers.
As public comments wrap up for all the requests for information, Mulvaney or his named successor, Kathy Kraninger, will have the opportunity to overhaul the way that CIDs are issued.
Separating examination and supervision
Consumer advocates see CIDs as a necessity in ensuring that companies are adhering to post-financial crisis rules.
"If the CFPB didn't have the CID authority, it would not be able to effectively conduct investigations," said Christopher Peterson, a former senior counsel for the CFPB's enforcement office who is now a law professor at the University of Utah.
Peterson criticized regulators such as the Federal Reserve for treating the financial services industry with "kid gloves" prior to the CFPB's creation.
But CID critics contend that the process is too difficult, costly and complex.
In public comments on CIDs, some industry groups pointed to general inefficiencies at the CFPB. For example, the American Bankers Association's member institutions commented that the bureau's enforcement teams often ask for materials that have already been provided in regular examinations.
Communication within the CFPB is another concern for some. Steve Henslee, who served in the CFPB's early years as an examiner before becoming chief of staff for supervision, said the examination and supervisory teams operate separately, potentially hampering the flow of information and leading to misunderstandings or even mistrust.
Henslee suggested requiring the enforcement team to communicate findings to the supervision team, which would then investigate those issues. The CID would be a last resort if the supervisory process did not adequately address enforcement's concerns.
But the separation of supervision and enforcement is by design, counters Joanna Pearl, who spent six years as chief of staff for the CFPB's enforcement office. Supervision relies on its own set of tools to assess the broad operations of a company while enforcement uses CIDs to "drill down" to specific activities, Pearl said.
Pearl, who now works for the policy startup Public Rights Project, said the enforcement office sometimes shares information with other offices on a "case-by-case basis," adding that there are rules barring the office from sharing confidential investigative information.
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Purpose and petitions
Industry groups frequently criticize the breadth of CID requests. By law, the CFPB cannot ask for too many documents or "tangible things" without explaining the conduct under investigation and the laws applicable to any possible violation.
The Federal Reserve's Office of Inspector General released a report in September 2017 noting that CIDs are issued fairly as required under Dodd-Frank, but that the agency's guidance is vague, leading the scope of some CIDs to be too broad. The CFPB says it has since tightened its statements of purpose to clarify the relevant case law.
Companies do have the opportunity to negotiate the terms and timing of a CID and can even petition the agency to modify or set aside the CID.
Christopher Willis, a Ballard Spahr partner who has represented financial services companies facing CIDs, said that in his experience, CFPB attorneys have been "generally courteous" and willing to compromise on the scope and timing of compliance.
"If you're working with the staff to negotiate a compromise, you don't file the petition because you'd rather resolve the issue amicably with the staff than litigate the issue," Willis said.
But since its creation, the bureau has never fully granted a petition. The CFPB partially granted one from Synchrony Financial, but only because the agency had previously withdrawn some portions of the CID.
The outcomes of the CFPB petition process are similar to those at another agency that issues CIDs, the Federal Trade Commission, which allows companies to file a "petition to quash." The FTC has not granted a single petition since 2012.
Former CFPB Director Richard Cordray has said companies can pursue due process through the legal system. "Like every other part of the federal government, no different for us, what we do can be challenged in the courts," Cordray told Congress in April 2017.
It remains unclear what stance the bureau's current leader takes on CIDs, though comments earlier this year suggest he is sympathetic to companies going through this process. A day before issuing the request for public comment in January, Mulvaney told CFPB staff in a memo that "[i]f a company closes its doors under the weight of a multiyear civil investigative demand, you and I will still have jobs at the CFPB." Mulvaney vowed to pull back on Cordray's legacy of actively pursuing wrongdoing in the financial services industry, which Mulvaney characterized as "regulation by enforcement."
At Prime Credit, Johnson and other executives settled for $1.5 million in June 2017, without admitting or denying the CFPB allegations of misleading advertising and illegal advance fees.
Johnson said the company tried to work with CFPB attorneys to argue the allegations, but was ultimately forced to settle. He said documents handed over to the CFPB show no wrongdoing, but he alleged that the bureau's attorneys were intent on fining the company.
"For me, it was incredibly expensive," Johnson said. "I spent well over $1 million on attorneys. For what purpose?"