CFPB Issues Revised Administrative Litigation Procedures, Signaling Possible Increase in In-House Adjudications

The upshot, for busy people:

• The Consumer Financial Protection Bureau (CFPB) can sue companies in federal court or in its in-house administrative proceedings. Although the CFPB regularly announces settlements styled as administrative proceedings, it has rarely held administrative trials or other contested enforcement proceedings in that forum.
• On February 22, 2022, and without an accompanying press release, the CFPB published in the Federal Register a number of changes to its in-house adjudication procedures. Some changes are administrative—how to count days, etc.  But others clarify and expand the powers Director Rohit Chopra has to shape proceedings, including to bifurcate remedial and liability determinations and to decide all dispositive motions.
• These procedural changes don’t alter any of the CFPB’s substantive rules. But these changes do signal that the agency may start bringing enforcement cases in-house, where Director Chopra will decide what does and does not violate the law.

Background.  Like many agencies, the CFPB’s statute allows the agency to sue companies that violate the law in two different fora:  in federal court, where the matter is decided by an Article III judge or jury; or in in-house administrative proceedings, where the matter is initially decided by an administrative law judge (ALJ) but ultimately by the CFPB Director.  And, like other agencies, the CFPB has a comprehensive set of procedures for administrative adjudication, covering initial pleadings, discovery, summary adjudication, trial, and appeal.

But the CFPB rarely has used its in-house court.  Whereas administrative consent orders are very common, the CFPB has (by our count) initiated only a handful of contested administrative proceedings in its history, and only two proceeded to an administrative trial.  This is in stark contrast with the Federal Trade Commission, which regularly uses its administrative court in connection with allegedly illegal mergers, unfair and deceptive acts and practices or other legal violations.

What were the rule changes?  On February 22, 2022, the CFPB published in the federal register its entire procedural rulebook, noting a number of changes it made and requesting comments on the changes by April 8, 2022.  The CFPB explained the changes and provided a helpful redline against the prior version.  The most important changes include:

• Director decision on dispositive motions. Under the old rules, any dispositive motions were decided by the ALJ, with the Director possessing only an overarching authority to review matters “at any time” (and possessing ultimate review authority over the final decision in the case).  The new rules place power directly into the Director’s hands, authorizing him to decide a dispositive motion, refer it back to the ALJ, or decide part and refer part.  This procedure could be important to a Director interested in moving cases along faster—avoiding ALJ decisions that he will ultimately reverse.
• Bifurcated proceedings. The new rules allow the Director to bifurcate proceedings to allow for separate decisions on liability and remedies.  Although the CFPB notes that this is an option in federal court case management, bifurcating proceedings also may give the agency more leverage to convince companies to settle after the finding of liability, but before the remedial order.
• Exhaustion requirements. The new rules include a brand-new provision requiring defendants to exhaust all arguments before the ALJ to preserve them for appeal before the Director or, eventually, on appeal in federal court.  There also is a new, related, requirement to raise any “avoidance” defenses in the defendant’s answer—an expansion on the prior requirement that defendants raise “affirmative defenses.”
• Withholding documents during discovery. The new rules add a provision allowing the CFPB to withhold documents reflecting settlement discussions between the agency and any other party (other than the defendant).
• Expanded use of depositions. Whereas prior rules allowed depositions only if the witness was unable to attend the trial, the new rules allow for a limited number of depositions.  Notably, the procedures appear to bar subpoenas to require the testimony of CFPB employees “whose only knowledge of these matters arises from the Bureau’s investigation.”  This is in contrast to a regular practice in federal court to require agencies to produce representatives for deposition under Federal Rule of Civil Procedure 30(b).

What does this mean for my business?  It seems that the CFPB may be interested in reviving its administrative litigation practice.  Companies subject to CFPB jurisdiction should be aware that future enforcement actions may be decided by Director Chopra under these new rules, rather than by a neutral Article III judge.  That may not affect what your company needs to do to comply with the CFPB’s laws and rules.  But it does affect what might happen if the CFPB thinks you violated the law.