January 13, 2020

Cortez Masto, Brown, Colleagues Urge Inspector General to Investigate CFPB Director Kraninger’s Failure to Provide Relief for Defrauded Consumers

Washington, D.C. – U.S. Senators Catherine Cortez Masto (D-Nev.) and Sherrod Brown (D-Ohio) led Senators Richard Blumenthal (D-Conn.), Ron Wyden (D-Ore.), Tammy Duckworth (D-Ill.), Cory Booker (D-N.J.), Tina Smith (D-Minn.), Chris Van Hollen (D-Md.), Elizabeth Warren (D-Mass.), Ben Cardin (D-Md.). Ed Markey (D-Mass.), Bernie Sanders (I-Vt.), Jacky Rosen (D-Nev.), Amy Klobuchar (D-Minn.) and Dick Durbin (D-Ill.) in calling on the Inspector General of the Federal Reserve to open an investigation into four recent consumer fraud cases where Consumer Financial Protection Bureau (CFPB) Director Kathleen Kraninger provided no or inadequate restitution to harmed consumers.

“Under Director Kathleen Kraninger, the Bureau appears to be ignoring existing legal authority for calculating restitution in order to reduce the amount of restitution returned to harmed consumers or undercount the consumers who should receive restitution,” the senators wrote in a letter to Inspector General Mark Bialek. “The Bureau’s approach to restitution under Director Kraninger also creates a perverse incentive for companies to violate the law by allowing allow them to retain all or nearly all of the funds they illegally obtain from consumers.”

The senators continued, “And in all four cases, the Bureau made a conscious decision to disregard legal precedent in order to allow companies that violated the law to keep all, or nearly all, of the money they illegally collected from consumers. This new approach to providing restitution to consumers is fundamentally at odds with the Bureau’s mission: it fails to provide relief to victimized consumers, it allows bad actors to retain the profits from their illegal conduct, and it is unfair to those companies who follow the law.”

Full text of the letter can be found HERE and below:

Dear Mr. Bialek:

We write to request that you open an investigation into several Consumer Financial Protection Bureau (Bureau) settlements that provide limited or no restitution to harmed consumers. Under Director Kathleen Kraninger, the Bureau appears to be ignoring existing legal authority for calculating restitution in order to reduce the amount of restitution returned to harmed consumers or undercount the consumers who should receive restitution. The Bureau’s approach to restitution under Director Kraninger also creates a perverse incentive for companies to violate the law by allowing allow them to retain all or nearly all of the funds they illegally obtain from consumers.

The Bureau’s recent settlement with debt collector Asset Recovery Associates, Inc. (ARA) reflects the Bureau’s new approach to restitution under Director Kraninger. In its consent order, the Bureau found that ARA used illegal debt collection practices—such as falsely and improperly threatening to sue or arrest consumers and misrepresenting to consumers that collection employees were attorneys—to induce consumers to make payments.  The consent order required ARA to pay $36,800 in restitution, a $200,000 civil money penalty, and injunctive relief including a prohibition from any further illegal collection practices.

Through its investigation of ARA, the Bureau specifically found that the company had “regularly” engaged in these practices “since at least January 1, 2015,”  revealing that ARA’s unlawful debt collection tactics were the rule, not the exception. Despite this finding, the Bureau limited restitution to only those consumers who affirmatively “complained about a false threat or misrepresentation” by ARA.  The result is that consumers whom ARA subjected to illegal threats and misrepresentations in order to induce them to make payments but did not complain received no restitution. It also means that ARA gets to retain all but $36,800 of the amount it illegally collected from consumers over a more than four-year period.

The Bureau’s settlement with ARA is no outlier, but rather represents a purposeful approach under Director Kraninger to cut out important restitution to consumers. Indeed, earlier this year, the Bureau settled three other cases that provided for zero restitution for consumers:

  • On January 19, 2019, the Bureau announced a consent order with Sterling Jewelers Inc. for violating the Truth in Lending Act, Regulation Z, and the Consumer Financial Protection Act (CFPA) by opening store credit-card accounts without consumers’ consent, enrolling consumers in payment protection plans without their consent, and deceiving consumers about the financing terms associated with the credit-card accounts.  The Bureau required Sterling Jewelers to pay a $10 million fine, but did not require the company to provide refunds of money consumers paid for the payment protection plans or any other monetary relief to consumers.
  • On January 25, 2019, the Bureau announced a consent order with Enova International Inc., an online payday lender, for engaging in unfair acts or practices in violation of the CFPA for withdrawing funds from consumers’ accounts without their authorization.  The Bureau imposed a $3.2 million civil penalty, but did not require Enova to pay back the funds they had unlawfully withdrawn from consumers’ bank accounts.
  • On February 1, 2019, the Bureau announced a stipulated final judgment with NDG Financial Corporation and other defendants for running a payday lending enterprise that engaged in unfair, deceptive, and abusive acts practices in violation of the CFPA and the Credit Practices Rule.  The Bureau’s Amended Complaint, filed under Director Cordray, sought “damages and other monetary relief . . . to redress injury to consumers.”  The settlement, however, dropped the requests for restitution and other relief for victimized consumers.

The U.S. House Financial Services Committee conducted an investigation and on October 16, 2019, issued a report (House Report) containing its findings on these three cases.  The House Report included internal memoranda from career staff in the Bureau’s Office of Enforcement and Legal Division that recommended and provided legal support for providing for restitution for consumers.  Director Kraninger overruled the Bureau’s career staff, however, and refused to require any of these three entities to provide redress to the consumers they had harmed—even though at least one of the entities offered to repay $1.3 million to victimized consumers.  In response to the House investigation, the Bureau explained that it did not seek restitution in these cases because it could not determine “with certainty” which consumers had been harmed or the amount of the harm.

The Bureau has provided restitution for uncompensated victims through its Civil Penalty Fund. The Bureau’s claims that they cannot determine “with certainty” which consumers were harmed is in direct contradiction to your Office’s January 2016 report on the Civil Penalty Fund.   Your report described how the Bureau locates victims of fraud and abusive practices and found that the Bureau had the internal controls needed to find and locate victims in a manner that is “generally effective and efficient.”

Thus, in each of these cases, the Bureau departed from the well-established standard operating procedure and legal standard for restitution. The Ninth Circuit set forth the standard for restitution in Bureau cases in CFPB v. Gordon.  As the court explained, restitution is “‘a form ancillary relief’ that a court can order ‘[i]n the absence of a proof of actual damages’.” Restitution is measured by “the full amount lost by consumers” or the amount that “reasonably approximates the defendants’ unjust gains.”  In debt collection cases by the Bureau and the FTC, courts have ordered defendants like ARA to refund to consumers the entire amount they collected through the unlawful collection scheme.  For example, in a prior Bureau debt collection case, the district court determined that the correct amount of restitution was the $5,261,484, which represented the total amount that the defendants had collected from consumers through their unlawful debt-collection scheme.

Accordingly, we believe there was no legal basis for the Bureau to withhold or limit restitution to just those consumers who complained in its settlement with ARA. And in all four cases, the Bureau made a conscious decision to disregard legal precedent in order to allow companies that violated the law to keep all, or nearly all, of the money they illegally collected from consumers. This new approach to providing restitution to consumers is fundamentally at odds with the Bureau’s mission: it fails to provide relief to victimized consumers, it allows bad actors to retain the profits from their illegal conduct, and it is unfair to those companies who follow the law.

Based on the foregoing, we request that the Inspector General open an investigation that addresses the following questions:

  1. What is the standard that the Bureau applied in the above cases to determine whether to provide restitution, which consumers are eligible for restitution, and the amount of restitution?
  2. Is the standard for restitution that the Bureau applied in the above cases different than the standard applied by courts and in prior Bureau settlements? If so, what is the case law or legal support for the Bureau’s new restitution standard?  
  3. To determine the number of consumers whom the Bureau may have improperly excluded from receiving restitution in the ARA case, please include the following in your investigation:
    1. From January 1, 2015 through the date of the Consent Order, from how many consumers did ARA attempt to collect a debt?
    2. From January 1, 2015 through the date of the Consent Order, from how many consumers did ARA actually collect a debt?
    3. From January 1, 2015 through the date of the Consent Order, what is the total amount that ARA collected from consumers?
  4. For each of the four cases:
    1. What did Bureau career staff in Enforcement recommend for restitution? 
    2. Did political appointees, including Eric Blankenstein and Brian Johnson, overrule career staff’s recommendations?
    3. Did political appointees further restrict restitution by eliminating claims?
    4. Did Director Kraninger ratify the decision of political appointees to limit or eliminate restitution?

We look forward to hearing back from you regarding our concerns about the Bureau departing from the well-established standard operating procedure and legal standard for restitution.