In the ongoing Integrity Advance enforcement action by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), the Office of Enforcement this month filed a brief arguing that its claims for alleged unfair, deceptive, or abusive acts or practices (“UDAAP”) in a payday lending case are not subject to the three-year statute of limitations (“SoL”) set forth in the Consumer Financial Protection Act (“CFPA”), because the Bureau is proceeding administratively rather than in federal court. Enforcement relies on a ruling issued by CFPB Director Richard Cordray last year in his controversial PHH decision, which is currently on appeal before a U.S. Court of Appeals.

This view–that the Bureau is subject to a maximum time limit in which to bring an enforcement action in court, but virtually no time limit in which to bring the same action administratively—has major ramifications for the consumer financial services industry and future CFPB Enforcement actions. Enforcement has complete discretion when deciding whether to pursue claimed violations in an administrative forum or as a complaint in federal court, and it has access to the same remedies, including civil money penalties, in either forum. But under the Bureau’s approach, an administrative action would give the Bureau a longer look-back period and increase a defendant’s exposure to penalties for claimed violations.

PHH

PHH arose as an enforcement action alleging that PHH Corp. and other defendants, in connection with certain mortgage reinsurance practices, violated the Real Estate Settlement Procedures Act (“RESPA”), which prohibits kickbacks for referrals in the real estate market. In PHH, rather than file suit in court (as it had in nearly all of its other contested actions to date), Bureau Enforcement instead chose to pursue its claims administratively. A trial was conducted before an administrative law judge (“ALJ”). PHH invoked a number of defenses, including a defense under the three-year SoL on “actions” to enforce RESPA. 

On July 21, 2011, the CFPB assumed authority for RESPA from the U.S. Department of Housing and Urban Development (“HUD”), as part of the Dodd-Frank Act. RESPA provides for a three-year SoL on government actions to enforce RESPA. Before Dodd-Frank, HUD was essentially limited to seeking injunctive relief in court, and thus was entirely bound by this three-year SoL under RESPA.

Dodd-Frank changed the game. The CFPA (Title X of Dodd-Frank), which created the CFPB to oversee most federal consumer financial laws, empowers the CFPB to enforce those laws through court litigation or administrative proceedings and to seek new money penalties and other relief. It enables the CFPB to recover costs in connection with prosecuting an “action” and to bring any enforcement “action” to enforce a new UDAAP prohibition. The CFPA also provides for a three-year SoL applicable to “actions brought by the Bureau.”

The CFPB maintains that the term “action” means court litigation only, and points to the fact that the three-year SoL appears in the section authorizing litigation, not the section authorizing administrative proceedings.

PHH argued that since the challenged conduct ended in 2009, it was largely time-barred. However, the ALJ ruled that the SoL did not apply to CFPB’s administrative enforcement of RESPA, construing the term “actions” to mean court actions, not administrative proceedings. The ALJ subsequently issued a recommended decision that was largely adverse to PHH.

Both parties appealed different aspects of the ALJ’s decision to the Director. On June 4, 2015, Director Cordray issued a decision siding almost uniformly with his Office of Enforcement. As to the SoL issue, the Director ruled that the CFPB can pursue RESPA claims which accrued within the three-year SoL applicable to HUD, and that no SoL applies to administrative enforcement of claims accruing after the CFPB assumed its RESPA authority. Under this ruling, Enforcement can pursue any RESPA claims that have accrued since July 21, 2008, and seek substantial penalties for any such violations that occurred after July 21, 2011, when new penalty provisions became effective. The Director went further in interpreting other RESPA issues, resulting in a massive increase in the initial penalty award, from $6.4 million to $109 million. The Director’s PHH ruling has been controversial, and currently is on appeal before the U.S. Court of Appeals for the D.C. Circuit, the Bureau’s first review by a federal appeals court.

Integrity Advance

Now, in the contested Integrity Advance matter, Enforcement is taking a similar position in the UDAAP context. In that case, Enforcement contends that the defendants, a now-defunct payday lender and its former CEO, violated the CFPA’s UDAAP prohibition and other laws in connection with originating and servicing its loans. The lender stopped offering loans to consumers in late 2012, and had the Bureau pursued its UDAAP claim in court, the three-year SoL clearly would apply. However, the Bureau took the administrative route, filing a notice of charges nearly three years after the cessation of lending activity. The defendants moved to dismiss, arguing, among other things, that the claims are time-barred. In its opposition filed on January 15, 2016, Enforcement contends that the CFPA’s limitations period only applies to court action, citing the Director’s PHHdecision as precedent. In reply, the defendants point out that under the Bureau’s “action” argument, the CFPA’s provisions allowing the Bureau to bring an “action” to enforce the UDAAP prohibition, and to recover the costs of prosecuting an “action,” would not apply to the administrative forum at all. They argue that the Bureau cannot have its cake and eat it, too: the term “action” must be interpreted to include both a court action and an administrative action.

The Upshot

Even under a short SoL, the penalties and other remedies available to the CFPB give Enforcement enormous leverage. Given the potential exposure, most companies have chosen to settle, even in instances where there was a strong basis to challenge the allegations. In considering the SoL issue in PHH, the D.C. Circuit could disagree with the Director’s statutory analysis, and/or distinguish the cases he relies upon. If not, however, the CFPB will continue to avail itself of a broader look-back period to pursue claimed RESPA, UDAAP, and other violations simply by selecting the administrative route. This would raise the stakes yet higher for businesses, imposing new challenges on their ability to assess risk, to innovate, and to navigate an investigation or enforcement action.

The D.C. Circuit is set to hear oral argument in the PHH matter in April.