By Eric J. Mogilnicki & Timothy J. Perla,  Wilmer Cutler Pickering Hale and Dorr LLP

The authors gratefully acknowledge the assistance of Summer Associates Ian Coghill, Stephanie Neely, and Ryan Tansey.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “the Act”) and thereby created the Consumer Financial Protection Bureau (“the Bureau”). The Act gives the Bureau the power to enforce a wide range of consumer financial protection laws, and jurisdiction over the myriad companies and people who provide financial products or services. Many of the Bureau’s powers, including its ability to seek penalties of up to a million dollars a day per violation, became effective on July 21, 2011.

Even though the Bureau has gained broad enforcement authority, it has not established procedures that would allow the targets of potential enforcement actions to understand and respond to potential charges before they are made public. This is a serious gap. The stakes in enforcement matters are often high – both for the target and for an agency’s credibility. The interests of both are well-served by a pre-enforcement process that tests the factual and legal basis of potential charges before they are made. Written, publicly available procedures governing that process make particular sense for the Bureau, which counts transparency as a core value.

Fortunately, the Bureau need not start from scratch in establishing fair and responsible pre-enforcement procedures. Many federal agencies with broad enforcement authority have such written procedures, including the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation.

One particularly helpful model is the Securities and Exchange Commission’s “Wells process.” The Wells process is named after John A. Wells, a lawyer in private practice who was asked by SEC Chairman William J. Casey in 1972 to head up a committee of outside lawyers to work with the SEC to improve its enforcement programs. That consultative process led the Commission to create what is now known as the Wells process. The Wells process provides that prospective defendants are typically provided with notice of the charges against them, and the opportunity to respond, prior to the Commission filing an enforcement action. The Wells Process is set forth in an SEC Release and addressed in more detail in the agency’s Enforcement Manual.

Courts and commentators have long recognized that procedures like the Wells process add to the credibility and efficiency of the enforcement process. This article sets forth the case for the Bureau adopting written pre-enforcement procedures that provide due process to potential enforcement targets. Part I sets out the Bureau’s statutory enforcement authority and the need for such procedures. Part II describes the SEC’s Wells process and similar procedures at other agencies, and explains why the underlying policy rationales for such procedures apply with special force to the new Bureau. Part III suggests ways in which the Bureau could proceed with drafting such procedures.

I. The Bureau’s Broad Enforcement Authority and Need For Pre-Enforcement Procedures

Title X of Dodd-Frank grants the Bureau extensive enforcement powers and broad discretion regarding its enforcement process. The Bureau generally has jurisdiction over: “(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.” The Bureau’s subject matter jurisdiction encompasses a wide array of existing consumer protection statutes, as well as additional rules it is authorized to promulgate. When the Bureau identifies a potential violation of these laws, it may investigate, conduct administrative proceedings, initiate civil litigation, and/or make referrals to the U.S. Attorney General. The Bureau may sue in its own name, and seek monetary or equitable relief.  Together with other relief (such as rescission or reformation of contracts, refunds, disgorgement, and restitution), the Bureau (or a court) may impose three tiers of civil monetary penalties, ranging from $5,000 to $1 million per day for each violation…

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NEW YORK—The Justice Department alleged May 3 a wholly owned Deutsche Bank AG subsidiary fraudulently misrepresented its mortgage lending and underwriting practices for years while participating in a federal mortgage-insurance program that to date has led to $386 million in losses (United States v. Deutsche Bank AG, S.D.N.Y., No. 11-cv-2976, complaint filed 5/3/11).

The subsidiary, MortgageIT Inc., repeatedly lied to federal regulators in order to qualify for a Housing and Urban Development program, and after becoming a program participant it engaged in reckless mortgage lending practices that resulted in underwriting government-insured mortgages totaling more than $5 billion in underlying principal obligations, a civil complaint filed May 3 in U.S. district court claims.

“While [the defendants] promised to select quality mortgages to be insured, they repeatedly abused the public trust by brushing aside the rules, lying about the quality of their underwriting operation, and passing on the costs of the inevitable—hundreds of millions of dollars of defaults—to the government,” U.S. Attorney Preet Bharara told reporters May 3.

The government seeks damages and penalties for past and future claims associated with mortgage defaults as well as False Claims Act and common law violations, which the complaint said will total in the hundreds of millions of dollars.

A May 3 Deutsche Bank statement labeled the allegations “unreasonable and unfair,” and said the bank intends to defend itself against the charges “vigorously.” MortgageIT, acquired by Deutsche Bank in 2007, participated in the HUD program between 1999-2009, the complaint said.

Abuse of FHA Insurance Alleged

HUD’s Direct Endorsement program allows qualified lenders to originate housing loans eligible for Federal Housing Administration insurance. In the event of a default, the mortgage holder may submit a claim to HUD for costs associated with the defaulted mortgage.

According to the complaint, Deutsche Bank and MortgageIT “repeatedly lied to HUD to obtain and maintain MortgageIT’s Director Endorsement Lender status.” For instance, the defendants failed to implement required internal quality control procedures, such as devoting sufficient personnel to quality-control functions, the complaint said.

Once confirmed as a Direct Endorsement lender, MortgageIT began churning out mortgages to sometimes unsuitable borrowers, including borrowers with no incomes, because of profits associated with reselling loans, Bharara said.

“Deutsche Bank and MortgageIT had powerful financial incentives to invest resources into generating as many FHA-insured mortgages as quickly as possible for resale to investors,” the complaint said, but had little incentive to ensure the quality of the FHA-insured mortgages. The loans were relatively easy to sell because of the government insurance, the complaint said…

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The Financial Stability Oversight Council (FSOC) Jan. 18 approved a study on the “Volcker rule” that calls for new types of quantitative metrics to determine banned proprietary trading activities and for regulated banks to develop internal compliance regimes in which top corporate officers could be held…

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Seven overseas banking organizations joined together Jan. 11 to tell federal financial regulators that the best way to regulate the swaps activities of such entities is to allow them to operate their…

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The Federal Reserve Board is seeking public comment on a Nov. 17 proposed rule that would give banks two years to comply with Volcker rule restrictions on proprietary trading once they…

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NEW YORK—An unsolicited request from the Commodity Futures Trading Commission to meet with financial specialists concerning the implementation of landmark financial regulatory reform legislation illustrates a…

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The Senate Banking Committee remains in Democratic hands with the party having maintained a narrow majority in the Senate after the midterm elections, but a change of leadership next session is inevitable with the retirement of …

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NEW YORK—A recent U.S. Supreme Court decision effectively limiting the breadth of the honest-services theory of fraudulent behavior will likely lead to fewer criminal cases launched against senior…

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Two major stakeholders asked the Internal Revenue Service to exclude a wide range of financial institutions from the broad new reporting, disclosure, and withholding requirements in the Foreign Account Tax Compliance Act (FATCA) in…

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