TopMortgage Compliance Update (1)

June 4, 2012


CFPB's "Notice of Reasonable Cause"

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On May 25, 2012, the Consumer Financial Protection Bureau (Bureau) issued a Proposed Rule (Rule) which, if adopted, would govern the process by which a "nonbank covered person" may become subject to the supervisory authority of the Bureau.

Under the proposed process, the Bureau would provide a nonbank covered person a notice (Notice or Notice of Reasonable Cause) stating that the Bureau may have reasonable cause to determine that such covered person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.

The Proposal establishes mechanisms to provide the nonbank covered person a reasonable opportunity to respond to the Notice.

According to the Bureau, the proposed procedures would provide a recipient of a Notice (respondent) with a more robust process than required by Section 1024(a)(1)(C) in Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

For example, as set forth now by Dodd-Frank, to satisfy the statutory requirement that the Bureau provide a reasonable opportunity to respond, the Bureau does not need to offer respondents an opportunity to participate in a supplemental oral response. The Rule, however, if adopted, would provide such an opportunity to respondents.

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The Rule would require that a Notice include a description of the basis for the assertion that the Bureau may have "reasonable cause" to determine that a respondent is a nonbank covered person that is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.

The Notice is intended to afford a respondent the opportunity to evaluate the assertions set forth therein and to formulate an appropriate response.

The Rule would provide a respondent with two opportunities to respond to a Notice: first, in writing, and then, if requested by a respondent, through a supplemental oral response generally to be conducted by telephone.

Under the Rule, a respondent would be required to include with the written response records, documents, or other items supporting the arguments set forth in the response that a respondent wants the Bureau's Assistant Director for Nonbank Supervision (Assistant Director) and the Bureau's Director (Director) to consider.

A supplemental oral response, if requested, would provide a respondent with the opportunity to present arguments to the Bureau's Assistant Director or her or his designee.
Under the Rule, a Notice of Reasonable Cause would not constitute a notice of charges for any alleged violation of Federal consumer financial law or other law. The proceedings would be informal and would not constitute an adjudicatory proceeding under section.

In the informal process, no discovery would be permitted, a supplemental oral response would not constitute a hearing on the record, and no witnesses would be permitted to be called as part of a supplemental oral response.
1) The Bureau's Deputy Assistant Director for Nonbank Supervision (Deputy) would commence a proceeding by issuing a Notice.

2) The response (both written and oral, if any) would then be considered by the Bureau's Assistant Director, who would provide to the Bureau's Director a recommended determination.

3) The Director would make the final determination in any proceeding by adopting without revision, modifying, or rejecting the Assistant Director's recommended determination.

4) The result would be either an order subjecting a respondent to the Bureau's supervisory authority, or a notice stating that a respondent is not subject, as a result of the proceeding, to the Bureau's supervisory authority.
Under the Proposed Rule there would be two ways in which a respondent could consent to the Bureau's supervisory authority:

Expedited Method: respondent may execute the consent agreement form attached to the Notice that is served on the respondent and file it with the Assistant Director in lieu of a response.

Voluntary Consent
: at any time during a proceeding, a respondent may voluntarily consent to the Bureau's supervisory authority under such terms as the parties may agree.
If a determination by the Director results in an order bringing a respondent within the Bureau's supervisory authority, the respondent would be permitted, after two (2) years (and no more than annually thereafter), to petition the Director for the termination of such an order.

However, under the Rule, where a respondent voluntarily consents to the Bureau's supervisory authority for a specified period of time, the respondent would not be permitted to petition for the termination of supervision during the period specified in the consent agreement.

A petition for termination of an order provides a method for a respondent to inform the Bureau of actions taken and progress made to reduce the risks to consumers after the issuance of the order.

Please take note: nothing in the rule affects the relief the Bureau may seek in any civil action or administrative adjudication.
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Consumer Financial Protection Bureau

Procedural Rules To Establish Supervisory Authority
Over Certain Nonbank Covered Persons
Based on Risk Determination

Proposed Rule

Federal Register
Friday, May 25, 2012
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