Aggressive start for consumer bureau

DANIEL WAGNER

AP Busi­ness Writer

WASHINGTON — The new fed­eral agency charged with enforc­ing con­sumer finance laws is emerg­ing as an ambi­tious sher­iff, tak­ing on com­pa­nies for decep­tive fees and mar­ket­ing and unmoved by protests that its tac­tics go too far.

In the 14 months it has existed, the Con­sumer Finan­cial Pro­tec­tion Bureau has launched dozens of enforce­ment probes and issued more than 100 sub­poe­nas demand­ing data, tes­ti­mony and mar­ket­ing mate­ri­als — some­times amount­ing to mil­lions of pages — from com­pa­nies that include credit card lenders, for-profit col­leges and mort­gage servicers.

More than two dozen inter­views with agency offi­cials and indus­try exec­u­tives offered sweep­ing insight into the new agency’s behind-the-scenes efforts, which have taken the finan­cial indus­try off guard and have been far more aggres­sive than pre­vi­ously known.

The num­ber of sub­poe­nas and probes was con­firmed by agency, indus­try and trade group offi­cials who spoke to The Asso­ci­ated Press on con­di­tion of anonymity because the sub­poe­nas bar both sides from dis­cussing them.

The bureau’s actions have many banks, pay­day lenders and credit card com­pa­nies rac­ing to adjust. They’re tight­en­ing their record-keeping and bud­get­ing for defense lawyers, accord­ing to attor­neys and trade group exec­u­tives who work with them. The com­pa­nies them­selves are reluc­tant to dis­cuss the bureau because they don’t want to be seen as crit­i­ciz­ing a reg­u­la­tor that is still choos­ing its battles.

The finan­cial cri­sis of 2008 led to far-reaching changes to how the U.S. gov­ern­ment over­sees finan­cial com­pa­nies. The con­sumer bureau, cre­ated by the 2010 finan­cial over­haul law known as the Dodd-Frank Act, gained new pow­ers to reach deep into the most mun­dane deci­sions of money-transfer agents, auto lenders and vir­tu­ally any­one else who pro­vides finan­cial prod­ucts and services.

For reg­u­lar Amer­i­cans, the bureau is the most vis­i­ble result of the shake-up in finan­cial over­sight. Its deci­sions are chang­ing the mort­gage appli­ca­tion and fore­clo­sure process, the way peo­ple lodge com­plaints against finan­cial com­pa­nies and, in some cases, what fees they can be charged.

“The CFPB is a new ani­mal, and they have to estab­lish their turf and a way of doing busi­ness,” says Jack Con­way, the attor­ney gen­eral of Ken­tucky and an out­spo­ken critic of for-profit col­leges. “If that breaks from stan­dard prac­tice of other reg­u­la­tors, I don’t have a huge prob­lem with it.”

For com­pa­nies, the bureau embod­ies a bit­ter debate over whether the gov­ern­ment has gone too far, impos­ing huge costs on firms that already oper­ate legally but now must prove it. Why should reg­u­la­tors increase com­pa­nies’ costs, crit­ics ask, in an econ­omy that has many strug­gling to stay afloat?

Some indus­tries, such as mort­gage insur­ers and for-profit schools, are push­ing back. They say the con­sumer bureau is redefin­ing laws — deem­ing as ille­gal prac­tices that were long accept­able to other regulators.

In other indus­tries, the bureau’s sub­poe­nas are spurring action. Amer­i­can Express, for exam­ple, is over­haul­ing some mar­ket­ing poli­cies and set­ting aside money that it might be forced to refund to customers.

Ques­tions about the bureau’s sub­poe­nas and other enforce­ment tac­tics will likely come up Thurs­day morn­ing, when bureau Direc­tor Richard Cor­dray is sched­uled to tes­tify before the Sen­ate Bank­ing Committee.

So far, the bureau’s aggres­sive approach has net­ted one high-profile win: an agree­ment by Cap­i­tal One Finan­cial, the fifth-biggest U.S. credit card issuer, to refund $150 mil­lion in fees directly to the accounts of 2.5 mil­lion cus­tomers — with­out the com­pli­cated paper­work often asso­ci­ated with class-action set­tle­ments on behalf of consumers.

In July, the bureau accused Cap­i­tal One’s sales team of trick­ing cus­tomers into buy­ing add-on ser­vices like credit pro­tec­tion and iden­tity theft pro­tec­tion. Phone agents told peo­ple the ser­vices were free or manda­tory or offered more ben­e­fits than they did, the gov­ern­ment said.

Cap­i­tal One also agreed to pay fines of $25 mil­lion to the CFPB and $35 mil­lion to the Office of the Comp­trol­ler of the Cur­rency, a sep­a­rate fed­eral agency that over­sees its bank­ing oper­a­tions. The com­pany did not admit any wrongdoing.

As part of the same probe, offi­cials are scru­ti­niz­ing at least three other com­pa­nies, accord­ing to pub­lic fil­ings: card issuers Amer­i­can Express and Dis­cover Finan­cial Ser­vices; and Inter­sec­tions Inc., which pro­vides the add-on ser­vices sold by banks.

Amer­i­can Express and Dis­cover have said in pub­lic fil­ings that they expect sim­i­lar enforce­ment actions and have over­hauled their mar­ket­ing of add-on prod­ucts. Inter­sec­tions, whose biggest bank cus­tomers are Bank of Amer­ica and Cit­i­group, is coop­er­at­ing with reg­u­la­tors. All three declined to com­ment on the probe.

The con­sumer bureau’s his­tory is short and contentious.

In the wake of the 2008 melt­down, advo­cates argued that exist­ing reg­u­la­tors had allowed risky and abu­sive finan­cial prac­tices to spread and inflate a dis­as­trous hous­ing bub­ble. On the other side were Repub­li­can law­mak­ers and bank lob­by­ists who said the bureau would dupli­cate the efforts of exist­ing bank reg­u­la­tors and the Fed­eral Trade Commission.

The bureau’s cham­pi­ons — mainly Democ­rats and con­sumer advo­cates — won, and in July 2011 it took over enforce­ment of 18 exist­ing con­sumer laws. Since then, it has used a range of pow­ers to clamp down on what it calls prob­lem­atic lend­ing, mis­lead­ing mar­ket­ing and secret deals between com­pa­nies that end up cost­ing consumers.

The bureau can’t indict peo­ple or com­pa­nies crim­i­nally; it refers pos­si­ble crim­i­nal cases to the Depart­ment of Justice.

Still, the agency’s office of enforce­ment wields a potent tool: the threat of civil charges against vio­la­tors of con­sumer laws involv­ing money trans­fers, fore­clo­sures, pay­day loans and vir­tu­ally every other finan­cial prod­uct or ser­vice used by consumers.

Com­pa­nies that inhabit these finan­cial back­wa­ters have never faced strict, ongo­ing over­sight by fed­eral offi­cials. They say they feel dragged down by the costs of respond­ing to the investigations.

For some banks and indus­trial lenders, the new over­sight may be so costly that they stop offer­ing some prod­ucts, says Bill Him­pler, vice pres­i­dent of the Amer­i­can Finan­cial Ser­vices Asso­ci­a­tion, a trade group for card com­pa­nies, mort­gage lenders and finance com­pa­nies. He says the bureau’s tac­tics put com­pa­nies on the defensive.

“It doesn’t leave some­body with the best feel­ing that what they’re try­ing to do is ensure com­pli­ance so much as cre­ate a gotcha sit­u­a­tion,” Him­pler says.

Kent Markus, who heads up the bureau’s enforce­ment office, says the costs are nec­es­sary to make sure com­pa­nies aren’t prey­ing on con­sumers. “We want to make it more expen­sive to break the law than to abide by it,” he says.

Com­pa­nies that receive sub­poe­nas didn’t nec­es­sar­ily do any­thing wrong. The doc­u­ments, offi­cially called civil inves­tiga­tive demands, mean the offi­cials are prob­ing an issue that the com­pany is involved in. Both the agency and the com­pa­nies are barred from dis­cussing these early inves­ti­ga­tions, and declined to com­ment on them.

Among the other cases occu­py­ing the 100-odd lawyers, ana­lysts and accoun­tants work­ing for the con­sumer bureau’s enforce­ment division:

— Mortgage-insurance com­pa­nies trans­ferred bil­lions of dol­lars to banks that offered mort­gage loans. The money came from hefty pre­mi­ums charged to bor­row­ers who couldn’t afford big down pay­ments. Crit­ics say the deals amounted to insur­ers pay­ing the banks kick­backs in exchange for a slice of their cus­tomers’ busi­ness. Mort­gage insur­ers say the deals were per­mit­ted by their pre­vi­ous reg­u­la­tor, the Depart­ment of Hous­ing and Urban Devel­op­ment. Radian Group Inc., Gen­worth Finan­cial Inc., Amer­i­can Inter­na­tional Group Inc. and MGIC Invest­ment Corp. all received sub­poe­nas, accord­ing to their pub­lic filings.

— High-cost loans made by auto deal­ers and resold to banks or investors. Loans to bor­row­ers with spotty credit his­to­ries can carry addi­tional fees and inter­est rates many times the rates on main­stream loans. The con­sumer bureau issued a sub­poena to Dri­ve­Time Auto­mo­tive Group Inc., which bills itself as the nation’s largest car dealer tar­get­ing peo­ple with bad credit. The com­pany says it is cooperating.

— In July, the bureau won a tem­po­rary restrain­ing order against two Cal­i­for­nia busi­ness­men who it says preyed on at-risk home­own­ers in more than 25 states. The busi­ness­men, Chance Gor­don and Abra­ham Michael Pes­sar, promised peo­ple that their com­pa­nies could pre­vent fore­clo­sures and charged thou­sands in ille­gal, upfront fees — some­times encour­ag­ing peo­ple to skip mort­gage pay­ments to cover them, the bureau said in court papers. Pes­sar says he is in talks with author­i­ties to set­tle the case. Gary Kurtz, a lawyer for Gor­don, says his client’s actions were legal and that he had a much higher suc­cess rate with bor­row­ers than what the gov­ern­ment has alleged.

— ITT Edu­ca­tional Ser­vices Inc. and Corinthian Col­leges Inc., which run for-profit col­leges, are turn­ing over doc­u­ments related to the “adver­tis­ing, mar­ket­ing or orig­i­na­tion of pri­vate stu­dent loans,” they said in pub­lic fil­ings. Con­sumer bureau offi­cials are look­ing at how the com­pa­nies sub­si­dized pri­vate loans for some stu­dents, says Con­way, the Ken­tucky attor­ney gen­eral. Corinthian has pro­vided doc­u­ments, but is peti­tion­ing the bureau to scrap or mod­ify the sub­poena, it said in a fil­ing last month.

It’s often smaller com­pa­nies that have a harder time adjust­ing to the demands from the bureau. Some have flown under the reg­u­la­tory radar for years, and have never bud­geted for rig­or­ous record-keeping or defense lawyers.

Over­sight of many of these firms used to fall under the Fed­eral Trade Com­mis­sion, an agency that was spread espe­cially thin. It over­saw pay­day loans and fore­clo­sures as well as almost every other con­sumer prod­uct — shoes, for exam­ple. The con­sumer bureau deals exclu­sively with finan­cial prod­ucts, sold by banks or any other kind of company.

“It’s the FTC on steroids,” says attor­ney Jonathan Pom­pan, who rep­re­sents com­pa­nies being inves­ti­gated by the con­sumer agency for the law firm Ven­able LLP in Wash­ing­ton. Because of the con­sumer bureau’s nar­rower focus, Pom­pan says, its enforce­ment team is in a stronger posi­tion to go after finan­cial prod­ucts that the bureau thinks might harm consumers.

As it pur­sues its inves­ti­ga­tions, the con­sumer agency is using its bully pul­pit to dis­cour­age abuse of con­sumers and encour­age bet­ter finan­cial dis­clo­sure. Announc­ing the action against Cap­i­tal One, for exam­ple, Direc­tor Cor­dray said the agency had put “all finan­cial insti­tu­tions on notice about these pro­hib­ited prac­tices” by warn­ing con­sumers to ques­tion add-on fees.

The bureau’s enforce­ment team also col­lab­o­rates closely with super­vi­sors, the beat-cop reg­u­la­tors who con­duct rou­tine exams of some types of com­pa­nies. In the Cap­i­tal One case, it was day-to-day super­vi­sors who spot­ted call cen­ter oper­a­tors lying to push add-on prod­ucts and shared their obser­va­tions with enforce­ment lawyers.

Eliz­a­beth War­ren, the Demo­c­ra­tic can­di­date for the U.S. Sen­ate from Mass­a­chu­setts who is cred­ited with propos­ing the agency, says the Cap­i­tal One case reflects the agency’s emer­gence as a con­se­quen­tial enforcer of finan­cial laws.

“They didn’t start with easy pick­ings — they went straight to the heart of the prob­lem,” War­ren says. “It’s a sober agency. It’s a care­ful agency. But it’s not timid.”

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