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CFPB Ordered by a New York Federal Court to "Show Me the Money"

April 12, 2017

Since the birth of the Consumer Financial Protection Bureau ("CFPB" or "Bureau") well over 150 Consent Orders have been entered against every sector of the financial services industry. Many of these Consent Orders came with a great deal of fanfare with exuberant press releases and exorbitant penalties. But what happens when all monies owing to affected consumers are paid and a surplus of funds remains? Under the Miscellaneous Receipts Act the money is to go to the U.S. Treasury. However, a recent federal court decision uncovered an attempt by three State Attorneys General to divert the money elsewhere, apparently possibly with the CFPB's blessing.

In 2014, the CFPB brought an action against Sprint in the United States District Court for the Southern District of New York for improper and unauthorized charges to its customers' wireless telephone bills. In 2015, the parties settled the case and the CFPB sought judicial approval of the settlement, which initially was rejected by the Court because the CFPB failed to appropriately explain why the settlement was fair, reasonable and consistent with the public interest. After amending its application, the Court approved the settlement for $50 million, which would pay the claims of affected consumers. Consistent with the terms of prior CFPB Consent Orders, if any balance remained after the payment of all claims, the money would be returned to the CFPB to determine other equitable relief that reasonably would be related to the allegations against Sprint. To the extent any remaining funds existed thereafter, the monies were to go to the U.S. Treasury.

Sprint also settled with the Federal Communications Commission ("FCC") for similar allegations as well as entered into agreements with all 50 state Attorneys General and the Attorney General for the District of Columbia.

Complete redress was made to Sprint customers sometime in 2016; however a balance of $15.14 million remained. After consultation with the FCC and the Attorneys General, the CFPB could not identify any equitable relief to which the remaining settlement funds could be applied. Rather than comply with the terms of the Consent Order and return the balance to the U.S. Treasury, the CFPB held onto the money. Shortly thereafter, three Attorneys General from Vermont, Kansas and Indiana petitioned the District Court to intervene and modify the Consent Order to redirect the undistributed settlement monies to develop a research and training institution for consumer protection, in affiliation with the National Association of Attorneys General ("NAAG"). Sprint filed an opposition to that motion but ultimately consented to the Attorneys General request. In their joint submission to the court, Sprint and the Attorneys General reported that the CFPB took no position on the matter.

The District Court rejected the petition and the joint submission for three reasons: (1) the proposal would fundamentally alter the Consent Order and redirect funds earmarked for the U.S. Treasury, possibly violating the Miscellaneous Receipts Act; (2) the modification of the Consent Order was not reasonably related to the allegations set forth in the complaint against Sprint, and the NAAG project would not provide any assistance to consumers affected by Sprint's billing practices; and (3) both the CFPB and Sprint "unmistakably knew" by the plain terms of the Consent Order that undistributed settlement funds were to go to the U.S. Treasury. The Court ordered the CFPB and the Department of Justice to respond separately to the intervention motion. Specifically, the Court ordered the CFPB to advise where the unexpended funds have been deposited during the pendency of the motion to intervene. 

Providing monetary and equitable relief to consumers is an important role of the Bureau, however it has taken it on the chin lately with the Administration and Republicans building a "for cause" case to remove Director Cordray. This matter only adds potential traction to the claims that the CFPB is a "rogue agency." The worst thing the CFPB can do is attempt to ignore statutory requirements in crafting enforcement actions.  By doing so, the Bureau loses credibility, potential respectability and risks additional adverse findings by the courts. Ignoring the law as well as its own settlement agreement in the name of consumer protection simply cannot be reconciled. Now more than ever the CFPB should work to strengthen its reputation and ability to continue its mission in a well-measured and reasonable way. 

Clark Hill's Consumer Financial Services Regulatory & Compliance Practice Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in – and an in-depth understanding of – the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.

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