CFPB Report: 2014-AE-C-001 January 16, 2014
On July 21, 2010, the Dodd-Frank Act established the CFPB to regulate the offering and provision of consumer products or services under federal consumer financial law. The CFPB is authorized under the act to enforce federal consumer financial law through judicial actions and administrative adjudication proceedings. In those actions or proceedings, a court or the CFPB may require a defendant who has violated the law to pay a civil penalty or make payments directly to those harmed by a violation.
The Dodd-Frank Act required the CFPB to establish the CPF. The CFPB must deposit any civil penalty it obtains against any person4 in any judicial or administrative action under federal consumer financial law into this separate fund, which is maintained in an account at the Federal Reserve Bank of New York. The CFPB will use the money collected in the CPF to compensate consumers who were harmed by activities for which civil penalties have been imposed. To the extent that victims cannot be located or payment is not practicable, the CFPB may use the funds for consumer education and financial literacy programs. Please see attachment A for a timeline of events related to the CPF.
To implement the statutory provisions relating to the CPF, the CFPB established the Civil Penalty Fund Governance Board and developed the CPF rule. In addition, the CFPB developed the following internal documents:
On July 17, 2012, the CFPB Director approved the original Governance Board Charter, which established the Governance Board as the executive advisory body responsible for ensuring that the CPF is administered in a manner consistent with the provisions of the Dodd-Frank Act. The charter, which was updated on August 8, 2013, states that the Governance Board should ensure that the disposition of CPF monies conforms to the Dodd-Frank Act; the CPF rule; and all other applicable laws, regulations, policies, and procedures. The charter also states that the Governance Board will meet on a quarterly basis, at a minimum, to review CPF activity with the Fund Administrator and will call meetings as necessary to advise or direct the Fund Administrator as indicated in the CPF rule. The Governance Board is responsible for the following:
The Governance Board is composed of the following five senior CFPB employees:
The CFPB issued the CPF rule pursuant to its authority under the Dodd-Frank Act, which authorizes the CFPB to prescribe rules as may be necessary to enable the agency to carry out the purposes and objectives of federal consumer financial law. Since the rule is in part interpretive and in part a rule relating to agency procedure and practice, the CFPB stated in the rule that the rule is not subject to the 30-day delayed effective date for substantive rules. The CFPB also stated in the rule that the agency had found good cause for the rule to take effect immediately, because the CPF rule does not impose any obligations or prohibitions on the public and immediate effectiveness allows the CFPB to begin the process of allocating funds to victims as soon as possible.
Thus, on May 7, 2013, the CPF rule was published in the Federal Register as an immediately effective final rule6. On the same day, the CFPB published a notice of proposed rulemaking in the Federal Register, which asked for comments on the CPF rule.7 The comment period closed on July 8, 2013, and six comments were submitted. The Governance Board and the Fund Administrator reviewed the comments and jointly determined that the comments were not sufficiently material to warrant any changes to the rule at that time.
In developing the CPF rule, the CFPB considered potential benefits, costs, and impacts, and the agency reached out to other federal agencies regarding consistency with prudential market or systemic objectives that those agencies administer. The rule, among other things,
The CPF rule establishes the position of Fund Administrator, which reports to the CFPB's Chief Financial Officer (CFO). The Fund Administrator takes direction from the CPF Governance Board and is required to follow any written directions that the Governance Board provides. The Fund Administrator establishes an allocation schedule; determines, based on information received from the Office of Enforcement, the amount of victims' compensable and uncompensated harm; determines practicability to pay victims based on the administrative costs required, among other things; and allocates funds to classes of victims with uncompensated harm. The Fund Administrator also approves the distribution plan submitted by the payment administrator.8 Lastly, the Fund Administrator decides how much to allocate for consumer education and financial literacy programs but does not have the authority to allocate funds to any particular consumer education or financial literacy program or to select particular programs for which funds will be used.9
The CPF rule states that a victim is eligible for payment from the CPF if a final order in a CFPB enforcement action imposed a civil penalty for the violations that harmed the victim. The CPF rule also states that CPF funds can be used to compensate only the victim's uncompensated harm. The rule defines uncompensated harm as the victim's compensable harm less any compensation the victim has received or is reasonably expected to receive for that harm.
The CPF rule requires the Fund Administrator to establish a schedule for allocating funds in the CPF. Allocating funds, for purposes of the CPF, means setting aside money from the CPF for payments to a class of victims or for use on consumer education and financial literacy programs. The allocation schedule is divided into six-month periods identifying the start and end dates of those periods. The Fund Administrator will allocate funds within 60 days after the end of a six-month period. Table 1 shows the allocation schedule developed by the Fund Administrator.
| Period | Start | End | Allocation date |
|---|---|---|---|
| 1 | 07/21/2011 | 03/31/2013 | 05/30/2013 |
| 2 | 04/01/2013 | 09/30/2013 | 11/29/2013 |
| 3 | 10/01/2013 | 03/31/2014 | 05/30/2014 |
| 4 | 04/01/2014 | 09/30/2014 | 11/29/2014 |
| 5 | 10/01/2014 | 03/31/2015 | 05/30/2015 |
Source: CFPB Civil Penalty Fund Allocation Schedule, http://www.consumerfinance.gov.
The CFPB must deposit into the CPF any civil penalty it obtains against any person in any judicial or administrative action under federal consumer financial law. Tables 2 and 3 show the CPF monies received for periods 1 and 2.
| Quarter | Defendant name | Amount |
|---|---|---|
| FY12 Q4 | Capital One Bank | $25,000,000 |
| FY12 Q4 | Discover | 7,000,000 |
| FY13 Q1 | American Express Centurion Bank | 3,900,000 |
| FY13 Q1 | American Express Bank, FSB | 1,200,000 |
| FY13 Q1 | American Express Travel | 9,000,000 |
| FY13 Q1 | Payday Loan Debt Solution, Inc. | 5,000 |
| FY13 Q2 | Abraham Pessar (Gordon, et al.) | 1 |
| Total Period 1 CPF collections | $46,105,001 | |
Source: CFPB's CFO update for the third quarter of fiscal year 2013, April 1-June 30, 2013, issued August 15, 2013, http://www.consumerfinance.gov.
Note: Only two of the seven cases that concluded as of March 31, 2013--Payday Loan Debt Solution, Inc., and Gordon, et al.--had classes of victims with uncompensated harm. In the other cases, defendants were ordered to pay redress to the victims.
| Quarter | Defendant name | Amount |
|---|---|---|
| FY12 Q3 | United Guaranty | $4,500,000 |
| FY12 Q3 | Genworth | 4,500,000 |
| FY13 Q3 | Radian Guaranty | 3,750,000 |
| FY13 Q3 | MGIC | 2,650,000 |
| FY13 Q4 | American Debt Settlement Solutions, Inc. | 15,000 |
| FY13 Q4 | National Legal Help Centera | 0 |
| FY13 Q4 | JPMorgan Chase | 20,000,000 |
| Total Period 2 CPF collections | $35,415,000 | |
Source: CFPB Fund Administrator, via e-mail.
Note: Two of the seven cases --American Debt Settlement Solutions, Inc., and National Legal Help Center--had classes of victims with uncompensated harm. The Fund Administrator determined that for one case--JPMorgan Chase--there were no victims with uncompensated harm because the defendant was ordered to pay redress to the victims. For the four remaining cases, the Fund Administrator does not have sufficient information to determine whether victims have compensable harm or uncompensated harm. The Fund Administrator will revisit whether to make an allocation to classes of victims for these cases in the period 3 allocation.
aFunds uncollectible.
Table 4 shows the civil penalty allocation summary for the period 1 schedule that started July 21, 2011, and ended March 31, 2013. Period 1 civil penalty funds were allocated on May 30, 2013, as established in the allocation schedule. Table 5 shows the civil penalty allocation summary for the period 2 schedule that started April 1, 2013, and ended September 30, 2013. Period 2 civil penalty funds were allocated on November 29, 2013, as established in the allocation schedule. The unallocated CPF balance is approximately $63.5 million as of November 29, 2013, after allocations for period 2.
| Victim compensation | $10,488,815 |
| Payday Loan Debt Solution, Inc., victim class allocation: $488,815 | |
| Gordon, et al., victim class allocation: $10,000,000 | |
| Consumer education and financial literacy programs | 13,380,000 |
| Total allocation | $23,868,815 |
Source: CFPB's CFO update for the third quarter of fiscal year 2013, April 1-June 30, 2013, issued August 15, 2013, http://www.consumerfinance.gov.
Note: The CFPB set aside $1.6 million for administrative costs during period 1 allocation.
| Victim compensation | $2,557,230.96 |
| American Debt Settlement Solutions, Inc: $499,247.96 | |
| National Legal Help Center: $2,057,983.00 | |
| Consumer education and financial literacy programs | 0 |
| Total allocation | $2,557,230.96 |
Source: CFPB allocation memorandum.
The bullets below provide a narrative of the process for the allocation of funds.
After the Fund Administrator allocates funds to a class of victims, those funds will be distributed to the individual victims in that class. For cases involving distribution of funds to harmed victims, a distribution plan is to be developed and monitored under the direction of the Fund Administrator. Pursuant to the Federal Acquisition Regulation, the Fund Administrator will contract with payment administrators who will be responsible for distributing payments to the victims. The Fund Administrator must approve the distribution plan developed by the payment administrator prior to making any distributions of CPF monies. The plan may require the following elements:
Once the Fund Administrator approves the distribution plan, the payment administrator will make payments to victims in accordance with the plan, subject to the Fund Administrator's supervision.
See attachment B for a flowchart of the allocation and distribution process.
In the preamble to the CPF rule, the CFPB states that for payments to be practicable, it must be feasible to carry out all the steps involved in making the payments efficiently and without excessive administrative costs. Although the statute does not specify any mechanism for making payments, the CFPB interprets section 1017(d)(2) of the Dodd-Frank Act as referring to payments that may be made through ordinary administrative mechanisms.10 Practicable, therefore, according to the CFPB's CPF rule, means capable of being carried out through such mechanisms. The text of the CPF rule provides the following six instances in which making a payment to an individual victim will be deemed impracticable:
The CPF rule also provides that payment to a class of victims will be deemed impracticable if the expected aggregate actual payment to the class is too small to justify the costs of locating the victims and making payments to them.
The Fund Administrator must issue regular reports, on at least an annual basis, that describe how funds in the CPF have been allocated, the basis for those allocations, and how funds have been distributed to victims. The Fund Administrator must make these reports available on the CFPB's public website, located at www.consumerfinance.gov. Currently, CPF information is found by accessing the CFPB homepage, hovering over "Inside the CFPB" on the navigation bar, and selecting "Budget and performance."
The Procedures for Civil Penalty Fund Administration was developed to operationalize the procedures and guidelines set forth in the CPF rule. The procedures identify guidelines for data collection, civil monetary penalty collection, allocation process, funds distribution, and distribution tracking.
The CFPB is authorized by the Dodd-Frank Act to use monies from the CPF to fund consumer education and financial literacy programs when victims cannot be located or when payments are otherwise not practicable. This provision aims to increase the effectiveness of financial education by helping and motivating consumers to make sound financial decisions that serve individual financial goals.
On August 8, 2013, the CFPB Director approved the Policy for Selecting Civil Penalty Fund Consumer Education and Financial Literacy Programs. This internal policy includes procedures for the CPF Consumer Education and Financial Literacy Officer (CEFL Officer) to develop focus areas for potential education programs in consultation with other consumer education initiatives within the CFPB, to prepare program concepts, and to brief the Governance Board as well as the CFPB Director.
All proposals must be presented to the Investment Review Board for approval, and upon approval, the CEFL Officer may issue a request for proposal through the federal procurement process to procure vendors to implement the approved proposals. The CEFL Officer is responsible for monitoring programs and providing quarterly updates to the OCFO or the Fund Administrator.
The CFPB also established the Criteria for Use of Civil Penalty Fund Monies for Consumer Education and Financial Literacy Programs in June 2012 to identify criteria that will help the CFPB award contracts for consumer education and financial literacy programs. This document lists contractor requirements, such as a proven track record of direct service in consumer education or financial literacy, a demonstrated understanding of products and services available in the financial services marketplace, and expertise in providing technical services that can support consumer education or financial literacy programs. Further, the document sets forth specific program requirements, including promoting and enhancing economic security of consumers, improving financial literacy, presenting opportunities for savings, and facilitating the removal or dismantling of economic barriers for consumers to access financial products and services.
On November 19, 2012, the CFPB Director approved two consumer education and financial literacy program concepts to be funded with CPF monies, if sufficient funds are allocated:
On August 28, 2013, the CFPB held a pre-solicitation conference with vendors for the Financial Coaching for Transitioning Veterans and Economically Vulnerable Consumers program and on November 22, 2013, a request for proposals was issued by the CFPB. To date, a contractor has not yet been selected for this program.
