Consumer Fraud

In order to achieve its mission, the agency was given broad authority to promulgate regulations, receive consumer complaints, provide financial education, and enforce laws that prohibit unfair treatment in consumer finance. Its enforcement authority involves seeking civil and administrative remedies, such as cease-and-desist orders, equitable relief, rescission and reformation of contracts, monetary relief, and civil penalties.

Initial Civil Enforcement Actions

Capital Bank: July 2012

In its first public enforcement action, the CFPB entered into a consent order with Capital One Bank (U.S.A.) in July 2012 to refund approximately $140 million to two million consumers and to pay an additional $25 million penalty to the CFPB's Civil Penalty Fund. The action derived from the CFPB's supervision process, during which examiners determined that Capital One's call-center vendors engaged in deceptive tactics in the sale of credit card “add-on products,” such as payment protection and credit monitoring, in violation of Dodd-Frank.

The CFPB's action was taken in coordination with the Office of the Comptroller of the Currency (OCC), which is authorized to regulate and supervise national banks. The OCC ordered restitution of approximately $150 million, which included the same $140 million refund ordered to be paid by the CFPB, as well as an additional amount to refund consumers harmed by unfair billing practices. In addition, the OCC assessed a $35 million civil penalty.

Discover Bank: September 2012

In its second enforcement action, the CFPB similarly alleged that Discover Bank used deceptive and misleading sales tactics in connection with its telemarketing practices used to sell its credit card add-on products, in violation of Dodd-Frank. The Discover Bank action was a joint action between the CFPB and the Federal Deposit Insurance Corporation (FDIC). In September 2012, Discover Bank was required to refund approximately $200 million to more than 3.5 million consumers and to pay a $14 million civil penalty.

The CFPB found, though Discover Bank neither admitted nor denied it, that Discover's telemarketing scripts contained misleading language likely to deceive consumers about whether they were actually purchasing the add-on products. The CFPB also found that the telemarketers downplayed key terms and spoke more rapidly during the mandatory disclosure portion of the sales call when prices and terms of the add-on products were disclosed.

According to the CFPB,' consumers were often misled or misinformed about the products, including about the cost of the products and whether they had actually purchased the products or whether they would have a chance to review printed materials prior to initiating the purchase. Again, according to the CFPB, some consumers were even enrolled without their consent. The telemarketers also allegedly withheld material information about the eligibility requirements for certain add-on products, such as exclusions for pre-existing medical conditions and certain limitations concerning employment.”

Pursuant to the consent order, Discover Bank agreed to take the following actions:

• Cease all allegedly deceptive marketing, make changes to its telemarketing of the add-on products, and submit a compliance plan to the FDIC and CFPB for approval to ensure that the alleged marketing tactics do not occur in the future;
• Pay approximately $200 million to about 3.5 million consumers who were charged for one or more of the add-on products between Dec. 1, 2007 and Aug. 31, 2011;
• Make payment to current Discover Bank consumers in the form of a credit to the consumers' credit card accounts, and send checks to consumers who no longer have a Discover Bank credit card account or have any outstanding balance reduced by the amount of the refund;
• Engage an independent auditor to assure compliance with the terms of the consent order; and
• Pay $14 million to the CFPB's Civil Penalty Fund.

Mortgage Insurance Companies: April 2012

More recently, in April 2013, the CFPB entered into proposed consent orders with four national mortgage insurance companies for them to pay more than $15 million in civil penalties. The insurers were found to be providing kickbacks to mortgage lenders by purchasing reinsurance from the lenders' subsidiaries in exchange for business referrals from the lenders, in violation of Dodd-Frank. The CFPB's concern for the consumers was that the cost of mortgage insurance was being inflated to cover the insurers' cost of the kickbacks.

Criminal Charges

The CFPB very recently took its enforcement responsibility to the next level when, for the first time, it referred a case to the Department of Justice (DOJ) for criminal prosecution. On May 1 of this year, Mission Settlement Agency, a debt-settlement services company, and four of its employees were indicted as a result of an investigation conducted by the CFPB that began in July 2012. In a prepared statement announcing this important development, Director Richard Cordray said, “During our investigation, we found evidence of criminal conduct and, accordingly, we referred this information to the United States Attorney for the Southern District of New York while we continued to pursue the civil law violations.”

In an indictment that was unsealed on May 7, a federal grand jury empaneled in the Southern District of New York charged Mission Settlement Agency and four of its employees with conspiracy to commit mail and wire fraud, as well as one count of mail fraud and one count of wire fraud. As noted by Director Cordray in his statement, the indictment was derived from facts gathered by the CFPB during the course of its investigation of Mission ' a company that held itself out as being capable of lowering its customers' consumer debt by 45%, for a nominal fee, through negotiation with credit card companies and banks.

The CFPB's investigation disclosed that, from approximately mid-2009 through March 2013, Mission allegedly took for itself over $6.6 million in fees and paid only approximately $4.4 million to its consumers' creditors. And for over 1,200 of its consumers, the company allegedly took fees of nearly $2.2 million without having paid any money whatsoever to the consumers' creditors. The indictment's forfeiture allegations indicate that it is this nearly $2.2 million in fees that the DOJ contends constitutes the proceeds of the defendants' fraudulent scheme.

The allegations contend that Mission marketed its services to financially disadvantaged individuals who were known to be struggling with credit card debt. Sales representatives spoke with potential consumers on the telephone and allegedly misrepresented the amount of fees the consumers would pay for the company's services. For example, consumers were led to believe that they would pay a $49 “administration fee” each month and that there would only be an additional payment owed to Mission if the company was successful in reducing the consumer's debt by more than the promised 45%.

In actuality, the company collected the $49 monthly fees along with an upfront fee equal to 18% of the debt owed by the consumer. This upfront fee was collected by Mission through deductions of funds that consumers paid to a payment processor for the purpose of having funds held in escrow that could ultimately be used to pay the creditors.

In addition, Mission allegedly misrepresented the results it was capable of achieving for its consumers. The company purportedly knew that its promise to achieve a 45% reduction in debt was false because it did little work to negotiate a reduction in debt for many consumers. And when Mission did successfully negotiate a reduction, it generally fell short of a 45% reduction in total debt.

Mission also made alleged false statements indicating that it was affiliated with a federal government program, and, by using the Great Seal of the United States, the company gave consumers the false impression that it had a relationship with a federal agency. Moreover, sales representatives made alleged false statements indicating that Mission was working in conjunction with one of the three major credit bureaus.

Mission and its principals face parallel federal criminal and civil proceedings. In the civil lawsuit, which was also filed in the Southern District of New York, the CFPB alleges violations of the Federal Trade Commission's Telemarketing Sales Rule, as well as Dodd-Frank.

The Message of Mission

The Mission case presents a relatively common, albeit troubling, alleged fraudulent scheme by a company, through its principals, to prey on vulnerable individuals who reasonably relied upon the false statements and representations made to them. Yet Mission is an important case because it signals to United States Attorney's Offices throughout the country that the CFPB possesses sufficient credibility to be considered a worthy partner in the investigation and prosecution of financial fraud crimes. Federal prosecutors work with an alphabet soup of federal, state and local law enforcement agencies with varying degrees of success. The successful partnership seemingly forged between the CFPB and the well-respected United States Attorney's Office in the Southern District of New York lends great credibility to the CFPB's investigative capabilities.

In addition, Mission sends a message to the great number of financial services companies now regulated by the CFPB: This fledgling, consumer-protection agency will pursue allegations of deceptive and unfair business practices so aggressively that referrals for criminal prosecution, when warranted, should be expected.

If you thought that this agency would operate like the FTC or the federal banking regulators ' which arguably focus more on supervision than enforcement ' then you should think again. In Mission, the CFPB has raised the stakes and regulated entities ignore this agency, and its “mission,” at their peril.

Jonathan A. Vogel ([email protected]), a former federal prosecutor and counsel to an Assistant Attorney General, is a partner with McGuireWoods LLP. Jennifer L. King ([email protected]) is an associate with the firm.

On May 1, federal prosecutors brought the first criminal case based on a referral from the Consumer Financial Protection Bureau (CFPB) in United States v. Mission Settlement Agency. This development clearly signals that this new agency will not be confined to seeking civil and administrative remedies, and that the Justice Department is working cooperatively with the CFPB.

Consumer Financial Protection Bureau

The CFPB, which was established by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), is authorized to regulate and supervise certain consumer financial services companies and large depository institutions. Its stated purpose is “to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”

In order to achieve its mission, the agency was given broad authority to promulgate regulations, receive consumer complaints, provide financial education, and enforce laws that prohibit unfair treatment in consumer finance. Its enforcement authority involves seeking civil and administrative remedies, such as cease-and-desist orders, equitable relief, rescission and reformation of contracts, monetary relief, and civil penalties.

Initial Civil Enforcement Actions

Capital Bank: July 2012

In its first public enforcement action, the CFPB entered into a consent order with Capital One Bank (U.S.A.) in July 2012 to refund approximately $140 million to two million consumers and to pay an additional $25 million penalty to the CFPB's Civil Penalty Fund. The action derived from the CFPB's supervision process, during which examiners determined that Capital One's call-center vendors engaged in deceptive tactics in the sale of credit card “add-on products,” such as payment protection and credit monitoring, in violation of Dodd-Frank.

The CFPB's action was taken in coordination with the Office of the Comptroller of the Currency (OCC), which is authorized to regulate and supervise national banks. The OCC ordered restitution of approximately $150 million, which included the same $140 million refund ordered to be paid by the CFPB, as well as an additional amount to refund consumers harmed by unfair billing practices. In addition, the OCC assessed a $35 million civil penalty.

Discover Bank: September 2012

In its second enforcement action, the CFPB similarly alleged that Discover Bank used deceptive and misleading sales tactics in connection with its telemarketing practices used to sell its credit card add-on products, in violation of Dodd-Frank. The Discover Bank action was a joint action between the CFPB and the Federal Deposit Insurance Corporation (FDIC). In September 2012, Discover Bank was required to refund approximately $200 million to more than 3.5 million consumers and to pay a $14 million civil penalty.

The CFPB found, though Discover Bank neither admitted nor denied it, that Discover's telemarketing scripts contained misleading language likely to deceive consumers about whether they were actually purchasing the add-on products. The CFPB also found that the telemarketers downplayed key terms and spoke more rapidly during the mandatory disclosure portion of the sales call when prices and terms of the add-on products were disclosed.

According to the CFPB,' consumers were often misled or misinformed about the products, including about the cost of the products and whether they had actually purchased the products or whether they would have a chance to review printed materials prior to initiating the purchase. Again, according to the CFPB, some consumers were even enrolled without their consent. The telemarketers also allegedly withheld material information about the eligibility requirements for certain add-on products, such as exclusions for pre-existing medical conditions and certain limitations concerning employment.”

Pursuant to the consent order, Discover Bank agreed to take the following actions:

• Cease all allegedly deceptive marketing, make changes to its telemarketing of the add-on products, and submit a compliance plan to the FDIC and CFPB for approval to ensure that the alleged marketing tactics do not occur in the future;
• Pay approximately $200 million to about 3.5 million consumers who were charged for one or more of the add-on products between Dec. 1, 2007 and Aug. 31, 2011;
• Make payment to current Discover Bank consumers in the form of a credit to the consumers' credit card accounts, and send checks to consumers who no longer have a Discover Bank credit card account or have any outstanding balance reduced by the amount of the refund;
• Engage an independent auditor to assure compliance with the terms of the consent order; and
• Pay $14 million to the CFPB's Civil Penalty Fund.

Mortgage Insurance Companies: April 2012

More recently, in April 2013, the CFPB entered into proposed consent orders with four national mortgage insurance companies for them to pay more than $15 million in civil penalties. The insurers were found to be providing kickbacks to mortgage lenders by purchasing reinsurance from the lenders' subsidiaries in exchange for business referrals from the lenders, in violation of Dodd-Frank. The CFPB's concern for the consumers was that the cost of mortgage insurance was being inflated to cover the insurers' cost of the kickbacks.

Criminal Charges

The CFPB very recently took its enforcement responsibility to the next level when, for the first time, it referred a case to the Department of Justice (DOJ) for criminal prosecution. On May 1 of this year, Mission Settlement Agency, a debt-settlement services company, and four of its employees were indicted as a result of an investigation conducted by the CFPB that began in July 2012. In a prepared statement announcing this important development, Director Richard Cordray said, “During our investigation, we found evidence of criminal conduct and, accordingly, we referred this information to the United States Attorney for the Southern District of New York while we continued to pursue the civil law violations.”

In an indictment that was unsealed on May 7, a federal grand jury empaneled in the Southern District of New York charged Mission Settlement Agency and four of its employees with conspiracy to commit mail and wire fraud, as well as one count of mail fraud and one count of wire fraud. As noted by Director Cordray in his statement, the indictment was derived from facts gathered by the CFPB during the course of its investigation of Mission ' a company that held itself out as being capable of lowering its customers' consumer debt by 45%, for a nominal fee, through negotiation with credit card companies and banks.

The CFPB's investigation disclosed that, from approximately mid-2009 through March 2013, Mission allegedly took for itself over $6.6 million in fees and paid only approximately $4.4 million to its consumers' creditors. And for over 1,200 of its consumers, the company allegedly took fees of nearly $2.2 million without having paid any money whatsoever to the consumers' creditors. The indictment's forfeiture allegations indicate that it is this nearly $2.2 million in fees that the DOJ contends constitutes the proceeds of the defendants' fraudulent scheme.

The allegations contend that Mission marketed its services to financially disadvantaged individuals who were known to be struggling with credit card debt. Sales representatives spoke with potential consumers on the telephone and allegedly misrepresented the amount of fees the consumers would pay for the company's services. For example, consumers were led to believe that they would pay a $49 “administration fee” each month and that there would only be an additional payment owed to Mission if the company was successful in reducing the consumer's debt by more than the promised 45%.

In actuality, the company collected the $49 monthly fees along with an upfront fee equal to 18% of the debt owed by the consumer. This upfront fee was collected by Mission through deductions of funds that consumers paid to a payment processor for the purpose of having funds held in escrow that could ultimately be used to pay the creditors.

In addition, Mission allegedly misrepresented the results it was capable of achieving for its consumers. The company purportedly knew that its promise to achieve a 45% reduction in debt was false because it did little work to negotiate a reduction in debt for many consumers. And when Mission did successfully negotiate a reduction, it generally fell short of a 45% reduction in total debt.

Mission also made alleged false statements indicating that it was affiliated with a federal government program, and, by using the Great Seal of the United States, the company gave consumers the false impression that it had a relationship with a federal agency. Moreover, sales representatives made alleged false statements indicating that Mission was working in conjunction with one of the three major credit bureaus.

Mission and its principals face parallel federal criminal and civil proceedings. In the civil lawsuit, which was also filed in the Southern District of New York, the CFPB alleges violations of the Federal Trade Commission's Telemarketing Sales Rule, as well as Dodd-Frank.

The Message of Mission

The Mission case presents a relatively common, albeit troubling, alleged fraudulent scheme by a company, through its principals, to prey on vulnerable individuals who reasonably relied upon the false statements and representations made to them. Yet Mission is an important case because it signals to United States Attorney's Offices throughout the country that the CFPB possesses sufficient credibility to be considered a worthy partner in the investigation and prosecution of financial fraud crimes. Federal prosecutors work with an alphabet soup of federal, state and local law enforcement agencies with varying degrees of success. The successful partnership seemingly forged between the CFPB and the well-respected United States Attorney's Office in the Southern District of New York lends great credibility to the CFPB's investigative capabilities.

In addition, Mission sends a message to the great number of financial services companies now regulated by the CFPB: This fledgling, consumer-protection agency will pursue allegations of deceptive and unfair business practices so aggressively that referrals for criminal prosecution, when warranted, should be expected.

If you thought that this agency would operate like the FTC or the federal banking regulators ' which arguably focus more on supervision than enforcement ' then you should think again. In Mission, the CFPB has raised the stakes and regulated entities ignore this agency, and its “mission,” at their peril.

Jonathan A. Vogel ([email protected]), a former federal prosecutor and counsel to an Assistant Attorney General, is a partner with McGuireWoods LLP. Jennifer L. King ([email protected]) is an associate with the firm.