The Dodd-Frank Wall Street Reform and Consumer Protection Act grants to the U.S. Bureau of Consumer Financial Protection (the “CFPB”) the power to bring actions against “related persons” of non-depository institutions. A related person is defined to mean:
- Any director, officer or employee of a non-depository institution charged with managerial responsibility for, or controlling shareholder of, or agent for, the non-depository institution;
- Any shareholder, consultant, joint venture partner, or other person, as determined by the CFPB (by rule or on a case-by-case basis) who materially participates in the conduct of the affairs of the non-depository institution; and
- Any independent contractor (including any attorney, appraiser or accountant) who knowingly or recklessly participates in any violation of any provision of law or regulation, or breach of a fiduciary duty.
- Does the CFPB intend to pursue related persons on a non-depository institution for claims of damages? CFPB Director Richard Cordray addressed the issue of individual accountability in a recent speech at the Federal Reserve Bank of Chicago. Mr. Cordray stated that:
“[W]e have also reflected in various settings that a company only acts through individuals—both decision-makers and those who carry out decisions. This is nothing new. It accords with time-honored principles of law, including those governing relationships between the corporation and its employees and agents, principles of vicarious liability, and the concept of piercing the corporate veil. These determinations must be handled in a measured manner, but if treated properly they can achieve just and effective results in more fully redressing legal violations. The issues should not devolve into mere technical arguments about corporate form and structure; instead they must represent the more straightforward concept of accountability.”
“In other words, there are legitimate occasions where it is appropriate to pursue not only the company that was a party to the consumer’s transaction, but also individuals who were decision-makers or actors relevant to that transaction. And so the Consumer Bureau has sued not only companies but also their executives in cases where we are authorized to do so. Under the law, this includes not only a provider of consumer financial products or services, but also, in certain cases, anyone with ‘managerial responsibility’ or who ‘materially participates in conduct of [the service provider’s] affairs.’ We have named such individuals as parties in a variety of cases, and they have been required to finance restitution to consumers and submit to injunctive relief. Individuals have also been barred, sometimes permanently, from offering certain kinds of financial products or services. And they have been referred to the Justice Department for criminal prosecution in appropriate instances.”
If you are a director or an officer of a non-depository institution, these words may well send a chill down your spine. And there is no question that the CFPB means business. In December 2013 the CFPB sued an online lender and its individual owner/CEO. The CFPB alleged that the defendants attempted to collect on hundreds of thousands of small loans that violated state usury laws, and it rejected the defense that those laws did not apply to its business because it was based on an Indian reservation. The complaint alleged that the owner/CEO had managerial responsibility and was therefore a related person, and that he “knew or should have known” about the alleged violations of the law.
In addition, in January 2014 the CFPB sued a mortgage loan originator and its owner/president for allegedly violating RESPA’s anti-kickback provisions by paying above-market rental fees in exchange for mortgage referrals. The CFPB has also named individuals as defendants in a number of cases against companies marketing debt-relief services in an allegedly deceptive manner. In these cases the named individual has typically been the owner/CEO, but it is nevertheless clear that the CFPB has the authority to bring actions against other related persons where it deems such actions appropriate.
So who might be next to feel the wrath of the CFPB? A recent study by the CFPB of payday loan renewals found that a large share of consumers end up in a cycle of repeated borrowing and incur significant costs over time. The study found that:
- Four out of five payday loans are rolled over or renewed within two weeks;
- Three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed;
- Four out of five payday borrowers either default or renew a payday loan over the course of a year;
- Four out of five payday borrowers who renew end up borrowing the same amount or more;
- One out of five payday borrowers receiving monthly benefits are trapped in debt, i.e., remained in debt the entire year of the CFPB study. These borrowers include elderly Americans or disability recipients receiving Supplemental Security Income or Social Security Disability.
The CFPB began accepting complaints from borrowers encountering problems with payday loans in November 2013. It would not be surprising to see actions commenced by the CFPB against payday lenders soon, and those actions may well include claims against related persons.