The new federal agency charged with enforcing consumer finance laws is emerging as an ambitious sheriff, taking on companies for deceptive fees and marketing and unmoved by protests that its tactics go too far.
In the 14 months it has existed, the Consumer Financial Protection Bureau has launched dozens of enforcement probes and issued more than 100 subpoenas demanding data, testimony and marketing materials — sometimes amounting to millions of pages — from companies that include credit card lenders, for-profit colleges and mortgage servicers.
More than two dozen interviews with agency officials and industry executives offered sweeping insight into the new agency's behind-the-scenes efforts, which have taken the financial industry off guard and have been far more aggressive than previously known.
The number of subpoenas and probes was confirmed by agency, industry and trade group officials who spoke to The Associated Press on condition of anonymity because the subpoenas bar both sides from discussing them.
The bureau's actions have many banks, payday lenders and credit card companies racing to adjust. They're tightening their record-keeping and budgeting for defense lawyers, according to attorneys and trade group executives who work with them. The companies themselves are reluctant to discuss the bureau because they don't want to be seen as criticizing a regulator that is still choosing its battles.
The financial crisis of 2008 led to far-reaching changes to how the U.S. government oversees financial companies. The consumer bureau, created by the 2010 financial overhaul law known as the Dodd-Frank Act, gained new powers to reach deep into the most mundane decisions of money-transfer agents, auto lenders and virtually anyone else who provides financial products and services.
For regular Americans, the bureau is the most visible result of the shake-up in financial oversight. Its decisions are changing the mortgage application and foreclosure process, the way people lodge complaints against financial companies and, in some cases, what fees they can be charged.
"The CFPB is a new animal, and they have to establish their turf and a way of doing business," says Jack Conway, the attorney general of Kentucky and an outspoken critic of for-profit colleges. "If that breaks from standard practice of other regulators, I don't have a huge problem with it."
For companies, the bureau embodies a bitter debate over whether the government has gone too far, imposing huge costs on firms that already operate legally but now must prove it. Why should regulators increase companies' costs, critics ask, in an economy that has many struggling to stay afloat?
Some industries, such as mortgage insurers and for-profit schools, are pushing back. They say the consumer bureau is redefining laws — deeming as illegal practices that were long acceptable to other regulators.
In other industries, the bureau's subpoenas are spurring action. American Express, for example, is overhauling some marketing policies and setting aside money that it might be forced to refund to customers.
Questions about the bureau's subpoenas and other enforcement tactics will likely come up Thursday morning, when bureau Director Richard Cordray is scheduled to testify before the Senate Banking Committee.
So far, the bureau's aggressive approach has netted one high-profile win: an agreement by Capital One Financial, the fifth-biggest U.S. credit card issuer, to refund $150 million in fees directly to the accounts of 2.5 million customers — without the complicated paperwork often associated with class-action settlements on behalf of consumers.
In July, the bureau accused Capital One's sales team of tricking customers into buying add-on services like credit protection and identity theft protection. Phone agents told people the services were free or mandatory or offered more benefits than they did, the government said.
Capital One also agreed to pay fines of $25 million to the CFPB and $35 million to the Office of the Comptroller of the Currency, a separate federal agency that oversees its banking operations. The company did not admit any wrongdoing.
As part of the same probe, officials are scrutinizing at least three other companies, according to public filings: card issuers American Express and Discover Financial Services; and Intersections Inc., which provides the add-on services sold by banks.
American Express and Discover have said in public filings that they expect similar enforcement actions and have overhauled their marketing of add-on products. Intersections, whose biggest bank customers are Bank of America and Citigroup, is cooperating with regulators. All three declined to comment on the probe.
The consumer bureau's history is short and contentious.
In the wake of the 2008 meltdown, advocates argued that existing regulators had allowed risky and abusive financial practices to spread and inflate a disastrous housing bubble. On the other side were Republican lawmakers and bank lobbyists who said the bureau would duplicate the efforts of existing bank regulators and the Federal Trade Commission.
The bureau's champions — mainly Democrats and consumer advocates — won, and in July 2011 it took over enforcement of 18 existing consumer laws. Since then, it has used a range of powers to clamp down on what it calls problematic lending, misleading marketing and secret deals between companies that end up costing consumers.
The bureau can't indict people or companies criminally; it refers possible criminal cases to the Department of Justice.
Still, the agency's office of enforcement wields a potent tool: the threat of civil charges against violators of consumer laws involving money transfers, foreclosures, payday loans and virtually every other financial product or service used by consumers.
Companies that inhabit these financial backwaters have never faced strict, ongoing oversight by federal officials. They say they feel dragged down by the costs of responding to the investigations.
For some banks and industrial lenders, the new oversight may be so costly that they stop offering some products, says Bill Himpler, vice president of the American Financial Services Association, a trade group for card companies, mortgage lenders and finance companies. He says the bureau's tactics put companies on the defensive.
"It doesn't leave somebody with the best feeling that what they're trying to do is ensure compliance so much as create a gotcha situation," Himpler says.
Kent Markus, who heads up the bureau's enforcement office, says the costs are necessary to make sure companies aren't preying on consumers. "We want to make it more expensive to break the law than to abide by it," he says.
Companies that receive subpoenas didn't necessarily do anything wrong. The documents, officially called civil investigative demands, mean the officials are probing an issue that the company is involved in. Both the agency and the companies are barred from discussing these early investigations, and declined to comment on them.
Among the other cases occupying the 100-odd lawyers, analysts and accountants working for the consumer bureau's enforcement division:
— Mortgage-insurance companies transferred billions of dollars to banks that offered mortgage loans. The money came from hefty premiums charged to borrowers who couldn't afford big down payments. Critics say the deals amounted to insurers paying the banks kickbacks in exchange for a slice of their customers' business. Mortgage insurers say the deals were permitted by their previous regulator, the Department of Housing and Urban Development. Radian Group Inc., Genworth Financial Inc., American International Group Inc. and MGIC Investment Corp. all received subpoenas, according to their public filings.
— High-cost loans made by auto dealers and resold to banks or investors. Loans to borrowers with spotty credit histories can carry additional fees and interest rates many times the rates on mainstream loans. The consumer bureau issued a subpoena to DriveTime Automotive Group Inc., which bills itself as the nation's largest car dealer targeting people with bad credit. The company says it is cooperating.
— In July, the bureau won a temporary restraining order against two California businessmen who it says preyed on at-risk homeowners in more than 25 states. The businessmen, Chance Gordon and Abraham Michael Pessar, promised people that their companies could prevent foreclosures and charged thousands in illegal, upfront fees — sometimes encouraging people to skip mortgage payments to cover them, the bureau said in court papers. Pessar says he is in talks with authorities to settle the case. Gary Kurtz, a lawyer for Gordon, says his client's actions were legal and that he had a much higher success rate with borrowers than what the government has alleged.
— ITT Educational Services Inc. and Corinthian Colleges Inc., which run for-profit colleges, are turning over documents related to the "advertising, marketing or origination of private student loans," they said in public filings. Consumer bureau officials are looking at how the companies subsidized private loans for some students, says Conway, the Kentucky attorney general. Corinthian has provided documents, but is petitioning the bureau to scrap or modify the subpoena, it said in a filing last month.
It's often smaller companies that have a harder time adjusting to the demands from the bureau. Some have flown under the regulatory radar for years, and have never budgeted for rigorous record-keeping or defense lawyers.
Oversight of many of these firms used to fall under the Federal Trade Commission, an agency that was spread especially thin. It oversaw payday loans and foreclosures as well as almost every other consumer product — shoes, for example. The consumer bureau deals exclusively with financial products, sold by banks or any other kind of company.
"It's the FTC on steroids," says attorney Jonathan Pompan, who represents companies being investigated by the consumer agency for the law firm Venable LLP in Washington. Because of the consumer bureau's narrower focus, Pompan says, its enforcement team is in a stronger position to go after financial products that the bureau thinks might harm consumers.
As it pursues its investigations, the consumer agency is using its bully pulpit to discourage abuse of consumers and encourage better financial disclosure. Announcing the action against Capital One, for example, Director Cordray said the agency had put "all financial institutions on notice about these prohibited practices" by warning consumers to question add-on fees.
The bureau's enforcement team also collaborates closely with supervisors, the beat-cop regulators who conduct routine exams of some types of companies. In the Capital One case, it was day-to-day supervisors who spotted call center operators lying to push add-on products and shared their observations with enforcement lawyers.
Elizabeth Warren, the Democratic candidate for the U.S. Senate from Massachusetts who is credited with proposing the agency, says the Capital One case reflects the agency's emergence as a consequential enforcer of financial laws.
"They didn't start with easy pickings — they went straight to the heart of the problem," Warren says. "It's a sober agency. It's a careful agency. But it's not timid."