Since its inception, the Consumer Financial Protection Bureau (CFPB) has regularly issued enforcement actions in the form of Consent Orders intended to set industry-wide precedents; many of these orders include a penalty to be paid by the company. These penalties are deposited into the Bureau’s Civil Penalty Fund (Fund), which was established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In these consent orders, the way the CFPB uses the Fund is generally described in vague terms. An example from a Consent Order issued in October 2016 against Navy Federal Credit Union, which required them to pay $5,500,000 to the Civil Penalty Fund, reads as follows:
Respondent must treat the civil money penalty paid under this Consent Order as a penalty paid to the government for all purposes. Regardless of how the Bureau ultimately uses those funds, Respondent may not:
Claim, assert, or apply for a tax deduction, tax credit, or any other tax benefit for any civil money penalty paid under this Consent Order; or
Seek or accept, directly or indirectly, reimbursement or indemnification from any source, including, but not limited to, payment made under any insurance policy, with regard to any civil money penalty paid under this Consent Order.
Due to vague language used in these orders, some have wondered where that money ends up. A new audit from the Government Accountability Office (GAO) on the CFPB’s Fiscal Years 2016 and 2016 helps answer that question.
According to the audit, the Civil Penalty Fund had $170.1 million in funds available as of September 30, 2016. As you can see in the chart below, the amount collected by the Bureau has steadily increased:
To date, the CFPB has "spent" 61% of the funds they’ve collected, mostly in the form of victim compensation. Approximately 5.5% of the funds have gone to consumer education.
As you can see in the chart above, the Bureau has spent the vast majority of funds collected on victim compensation. They’ve not allocated nearly as much to consumer education and financial literacy programs - in fact, zero dollars were allocated to these programs in FY 2014 and 2015. Additionally, $4,573,322 has been allocated to administrative costs for FY 2013, 2015, and 2016.
The CFPB’s use of money from the Fund is governed by the Civil Penalty Fund rule, which requires the Bureau to regularly report on Fund activity. Under the rule, the Bureau’s Civil Penalty Fund Administrator allocates funds to victims and,
“to the extent that such victims cannot be located or such payments are otherwise not practicable, to consumer education and financial literacy programs.”
Allocations from the fund are made according to a schedule based on six-month periods. The Administrator “may allocate only those funds that were available as of the end of the six-month period, and may allocate funds to a class of victims only if that class had uncompensated harm as of the end of the six-month period.”
The Bureau looks at allocations on a case-by-case basis, determining whether consumers in a given case are "eligible victims with uncompensated harm." If eligible victims exist, the Bureau allocates funds to compensate them. The FY2015 audit notes one instance where “the total eligible uncompensated harm exceeded available funds,” and as a result, the Bureau allocated money from other cases without uncompensated harm.
In the majority of cases, victims have been compensated through direct redress stipulated in Consent Orders, though there are several cases in every period that the CFPB determined were worthy of compensation through the Fund.
With respect to future allocations from the Fund, the GAO audit notes that some distributions for FY 2016 are ongoing, and that “checks continue to be cashed by consumers” before distributions begin for FY 2017.
The CFPB has issued numerous Consent Orders against ARM industry firms during the past few years. CFPB Director Richard Cordray told the Consumer Bankers Association in March 2016 that any company not adapting to the policies called out in the CFPB’s Consent Orders is committing “compliance malpractice.”
insideARM recently updated our guide to The CFPB’s Consent Orders Regulating the ARM Industry, a crucial tool to help you understand how to stay compliant.