New Consumer Financial Protection Bureau leadership is showing that it means business, and financial services companies are going to take it personally.
Former Bureau Director Kathy Kraninger resigned on January 20, 2021, at the behest of the Biden administration, thereby paving the way for the appointment of Acting Director Dave Uejio. Although President Biden nominated FTC Commissioner Rohit Chopra as bureau director on January 18, 2021, it is widely expected that Chopra will not receive a Senate confirmation vote until President Biden nominates and the Senate confirms a replacement for departed FTC Chairman Joseph Simons. Until then, Acting Director Uejio has pledged to ensure a smooth transition for Commissioner Chopra.
In the few months of Acting Director Uejio's tenure, the Bureau has already demonstrated that there's a new sheriff in town. For instance, the Bureau has issued an interim final rule allowing tenants to sue debt collectors for evictions that violate the CDC's eviction moratorium and is considering a new rule to limit foreclosures for those financially impacted by COVID-19. But one trend that may have escaped notice is the Bureau's increase in enforcement activity, including naming individuals as defendants.
Under the Consumer Financial Protection Act (CFPA), the Bureau has statutory authority to name three types of individuals as parties in its unfair, deceptive, or abusive acts or practices (UDAAP) enforcement actions. The first category of individuals is "covered persons," which includes "any person that engages in offering or providing a consumer financial product or service." Second, "related persons" under the CFPA are considered covered persons and include people such as officers, directors, employees with managerial responsibility, shareholders, consultants, joint venture partners, and other persons who materially participate "in the conduct of the affairs" of a covered person. Independent contractors who knowingly or recklessly violate any law or regulation or who breach fiduciary duties, such as lawyers, may also be related persons. Finally, "service providers" – persons who provide a "material service to a covered person" related to that covered person's offering of a consumer financial product or service – could count as covered persons.
The Bureau has been busily exercising opportunities to include individuals in enforcement actions. Since Acting Director Uejio took the reins in January, the Bureau has included individuals in five out of eight enforcement actions taken to date. All five actions targeted "related persons" of the principal business entity, some of whom are sole owners or sole proprietors. Others are executives, controlling shareholders, presidents, and vice presidents. In the Nexus Services, Inc. lawsuit, for instance, the Bureau named as a defendant the executive vice president of Nexus and its subsidiary. As alleged by the Bureau, this individual not only had significant control over the companies' operations, but also actively managed both companies, supervised the subsidiary's call center, and knew that several customers were owed refunds but failed to remit those refunds. Similarly, in the 1st Alliance Lending case, the Bureau sued the company's president of production and president of capital markets. Both presidents had authority to control the company but also directly participated in allegedly unlawful acts, such as approving the company's business model and assigning particular duties to unlicensed home loan consultants and mortgage loan originators. The president of production also allegedly oversaw the business's structure, operation of sales, and other production functions of unlicensed employees.
Notably, none of the principal business entities involved in those actions are large, publicly traded companies; all are small, closely held corporations, LLCs, or sole proprietorships. There is nothing remarkable about the acts of the named individuals. The Bureau could, in fact, name an individual in every enforcement matter, given the apparent theories of liability at issue in these cases. After all, companies are controlled by people, and there is always an individual who materially participates in the allegedly unlawful acts. But these most recent actions appear to be something different and seem to suggest a sustained drive to hold individuals accountable for allegedly unlawful conduct of a business in which they have an ownership interest and/or significant management role. This has applied even when the individuals pay symbolic amounts of money. In the Yorba Capital Management, LLC enforcement matter, for example, Yorba Capital agreed to pay redress of nearly $1 million, while its sole owner agreed to pay a $2,200 civil monetary penalty.
With these early enforcement matters of the Biden administration emphasizing individual liability, the Bureau might be signaling that no actor is too small (or too human) to be beyond the CFPA's enforcement authority. Director-nominee Chopra, who is expected to be vigorous about initiating investigations and bringing enforcement actions, will likely continue, if not accelerate, this trend. The message is clear: Now, it's personal.