The CFPB Loses a Second CID Appeal

Acting CFPB Director Mick Mulvaney is reexamining the agency’s enforcement processes and specifically requested public comment on Civil Investigative Demands earlier this year.

For the second time in two years, a U.S. Court of Appeals has struck down a Civil Investigative Demand (CID) issued by the Consumer Financial Protection Bureau (CFPB) because its Notification of Purpose is overly broad.

The case is CFPB v. Public Data, in which a three-judge panel for the Fifth Circuit Court of Appeals refused to enforce a CID because it didn’t adequately identify the conduct being investigated or the provision of law alleged to have been violated.

The September 6, 2018 decision follows an April 21, 2017, opinion by a three-judge panel for the D.C. Circuit Court of Appeals in CFPB v. ACICS, which refused to enforce a similarly-worded CID. Together, these cases reveal an increased judicial scrutiny of the CFPB’s Civil Investigative Demand process.

The CFPB’s Civil Investigative Demands

Dodd-Frank gave the CFPB broad enforcement authority concerning several consumer financial protection laws. When the CFPB suspects a violation, it issues CIDs to any person it believes has information relevant to the violation. Each CID must contain a Notification of Purpose that “state[s] the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”

In the seven years of the CFPB’s existence, its CIDs have been worded in extremely broad terms. It’s not uncommon for a CID’s Notification of Purpose to describe the purpose of the investigation as being whether the recipient is engaging in “unlawful acts or practices” in violation of a named federal consumer financial law or “any other federal consumer financial law,” without citation to any specific statutory provision.

Some CID recipients have called the resulting investigations fishing expeditions that ultimately force them to settle with the CFPB.

The Fifth Circuit Ruling in Public Data

In the Public Data case, the CFPB issued a CID to a company that provides public records to the public through an internet-based search engine.

The CID’s Notification of Purpose read: “The purpose of this investigation is to determine whether consumer reporting agencies, persons using consumer reports, or other persons have engaged or are engaging in unlawful acts and practices in connection with the provision or use of public records information in violation of the Fair Credit Reporting Act . . . or any other federal consumer financial law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest.”

Public Data petitioned the CFPB (then headed by Director Richard Cordray) to set aside the Notification of Purpose because it was inadequate. The CFPB denied the petition. When the CFPB sought a federal court order to enforce the CID, the court rejected Public Data’s argument that the CID failed to provide fair notice of the violation under investigation and ordered that it respond to the CID.  Public Data appealed to the Fifth Circuit.

Like the D.C. Circuit panel in 2017, a Fifth Circuit panel reversed the trial court’s ruling and struck the CID down in its entirety.

First, the panel determined that the CID did not identify what conduct it believed violated the law when it stated that the purpose of the investigation was to determine whether persons were engaging in “unlawful acts and practices in connection with the provision or use of public records information.” “Providing and using public records are not violations of federal law,” it wrote. There must be a Notification of Purpose that tells a reviewing court “what the inquiry actually is.”

Second, the panel noted that the CID only referred to a potential violation of the Fair Credit Reporting Act (FCRA), an expansive law with at least 71 provisions, without identifying the applicable provision in that law. Moreover, the additional statement that the CFPB was investigating potential violations of “any other federal consumer financial law” defeated “any specificity provided by the reference to FCRA.”

Summary

Acting CFPB Director Mick Mulvaney is reexamining the agency’s enforcement processes and specifically requested public comment on Civil Investigative Demands earlier this year.

The CFPB defended the Public Data CID before the Fifth Circuit under Mulvaney’s leadership, and, as recently as July 23, 2018, Mulvaney denied a request by Firstsource Advantage to modify or set aside a CID with similarly broad language.  “[T]he fact that a notification of purpose [uses] broad terms to articulate an investigation’s purpose…does not constitute a defect in the CID,” he said in his decision.

It is possible that the Public Data decision, coupled with public comments received this year on the CID process, may motivate the CFPB to reconsider its approach. In the meantime, there now are two legal precedents that may provide companies in receipt of broadly-worded CIDs more strategic options.

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