Delivering the University of Pennsylvania Law School’s 2022 Distinguished Lecture on Regulation yesterday, CFPB Director Chopra addressed the following question: “How do we stop large dominant firms from violating the law over and over again with seeming impunity?” His remarks made clear that, under his leadership, large companies charged by the CFPB with repeat violations or new violations of a different kind than previously charged can expect the CFPB to demand significantly more than the payment of large amounts in consumer relief and/or penalties as part of a settlement agreement.
Director Chopra characterized repeat offenders as falling primarily into two general categories. The first category, which he called “the worst type of repeat offender,” is a company that violates a formal court or agency order. According to Mr. Chopra, such companies understand what is required of them but fail to comply “due to dysfunction or they took a calculated risk.” The second category is a company with multiple violations across different business lines where the violations stem from “problematic sales practices incentives or a failure to properly integrate IT systems after a large merger.”
According to Mr. Chopra, while large penalties can threaten the viability of small companies, they only “give the guise of deterrence” for dominant firms. In his view, this means agencies need to consider imposing non-monetary “bright-line structural remedies” on large firms so that they are equally deterred from future violations as small firms. The Dodd-Frank Act (Section 1055) authorizes the CFPB to impose “limits on the activities or functions” of a person as a remedy in an administrative proceeding or court action. Mr. Chopra indicated that the CFPB could rely on such authority to impose the following types of remedies:
- Asset caps and limitations on transferring or acquiring assets
- Limits on or termination of business or product lines
- Divestiture of certain product lines
- Limitations on leverage or requirements to raise equity capital
- Revocation of government-granted privileges (such as loss of access to federal deposit insurance or receivership for depository institutions and, in collaboration with state regulators, suspension or revocation of licenses or liquidation of assets for nonbanks)
He also indicated that more consideration should be given to imposing individual liability on officers and directors, including dismissal and lifetime occupational bans, clawbacks, and forfeitures. A specific change to executive compensation suggested by Mr. Chopra was to defer compensation for longer periods of time and use it as the first source of funds to pay fines.
Mr. Chopra stated that the CFPB is planning to establish dedicated units in supervision and enforcement to enhance the detection of repeat violations. This will include closer scrutiny to ensure orders are being followed and closer coordination with other agencies to ensure there is compliance with each agency’s order.
There is serious doubt whether the CFPB has the authority to impose all of the remedies that Director Chopra identified under the rubric of “limits on the activities or functions,” particularly where the entity is a financial institution that is chartered or whose deposits are federally-insured. Nevertheless, there is no doubt that the CFPB has the power to impose draconian non-monetary relief. That being the case, companies and banks that are already subject to a CFPB or court order need to take steps to ensure that they don’t become recidivists.
While Director Chopra has engaged in a lot of jawboning since he has been in office, so far the CFPB has filed or entered into no more than a handful of complaints or consent orders under his leadership. This may very well turn out to be the lull before the storm.
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