CFPB finalizes update to administrative enforcement proceedings

Congress directed the CFPB to enforce a specific set of laws related to consumer financial protection. The CFPB brings the large majority of its contested enforcement matters in federal district court, and it will continue to do so. However, Congress also envisioned that administrative adjudication would play a role at the CFPB, as it had at the CFPB’s predecessor agencies.

While the CFPB rarely brings cases through administrative adjudication, it was clear that the existing procedures needed a fresh look to ensure that they provide a fair and efficient process. Today, we finalized an update to our Rules of Practice for Adjudication Proceedings, in order to better carry out our statutory responsibilities.

Role of Administrative Adjudication

The Consumer Financial Protection Act of 2010 directs the CFPB to bring enforcement matters either: (A) through administrative adjudications, subject to review by a federal court of appeals (section 1053 ); or (B) in federal district court (section 1054 ). This reflects the fact that the CFPB inherited enforcement responsibilities from a number of agencies. Some agencies used administrative adjudications, like the federal banking regulators; other agencies used both types of forums, like the Federal Trade Commission and Department of Housing and Urban Development.

One important benefit of administrative adjudication is that it can allow an agency to harness its regulatory expertise. In the landmark administrative law case of SEC v. Chenery Corp., which concerned a Securities and Exchange Commission adjudication, the Supreme Court highlighted the importance of case-by-case agency expertise. According to the Court, an “agency must retain power to deal with the problems on a case-to-case basis if the administrative process is to be effective. There is thus a very definite place for the case-by-case evolution of statutory standards.” 332 U.S. 194, 203 (1947).

Agency familiarity with the regulatory regime and with regulated institutions can be valuable not only when identifying violations of law, but also when crafting effective prospective remedies that prevent recurrence of those violations. As the Supreme Court observed in a case concerning an FTC adjudication, the “Commission is the expert body to determine what remedy is necessary to eliminate the unfair or deceptive trade practices which have been disclosed.” Jacob Siegel Co. v. FTC, 327 U.S. 608, 612 (1946).

An administrative adjudication is conducted in accordance with the Administrative Procedure Act and is subject to review by a United States Court of Appeals. It is a time-honored process that is fair to litigants. The federal government has been conducting administrative adjudications since the First Congress. See Freytag v. Comm’r, 501 U.S. 868, 909 (1991) (Scalia, J., concurring). Simply because a case is heard administratively does not make it unfair. For example, an empirical study found “no statistically significant distinction” between outcomes in the SEC’s administrative forum and cases brought by the SEC in the Southern District of New York. David Zaring, Enforcement Discretion at the SEC, 94 Tex. L. Rev. 1155, 1189 (2016).

The CFPB still plans to bring the vast majority of its matters in district court, but in certain circumstances, administrative adjudications can be valuable. Accordingly, we are updating our procedures to make them as fair and effective for all parties as possible.

The CFPB’s Updated Procedures

Section 1053(e) of the Consumer Financial Protection Act requires the CFPB to issue rules to establish procedures for administrative adjudications. As part of carrying out that statutory responsibility, we updated those procedural rules earlier this year. And although not legally required to do so, we solicited public comment. In today’s rule, the Bureau has decided to retain the updates after considering the comments received.

The updated procedures will benefit all parties in adjudication proceedings. They provide, among other things, that:

• Parties will have the flexibility to conduct depositions of potential witnesses: Administrative hearings will more closely track federal court proceedings because parties will be able to question witnesses in advance. This approach will mean hearings can proceed more efficiently and focus more on issues central to the proceeding.
• A proceeding can be divided into two or more stages: Federal courts sometimes decide that it is efficient to divide cases into separate stages. The updated rule makes the same case-management tool available in the CFPB’s administrative adjudications. If a case is bifurcated, issues can be resolved or clarified at the initial stage and so make subsequent stages more focused and efficient for all parties.

Read today’s rule here.