As the Consumer Financial Protection Bureau (CFPB) completes its fifth year as a fully operating entity in 2016, distinct enforcement patterns have emerged that can assist businesses and individuals that have or may become targets of the agency in assessing penalties and their impact should they elect to settle with the CFPB.
The CFPB’s Settlement Precondition Provisions
Key provisions required by the CFPB as a precondition for settlement deeply impact the bottom line result of a settlement and are different in material respects from those typically required by other federal and state financial services enforcement agencies. These key provisions include the following:
- Prohibitions on the settling party (Respondent) claiming favorable tax treatment for monetary penalties
- Prohibitions on the Respondent claiming any part of the monetary penalties against available insurance
- Prohibitions against the Respondent asserting a setoff for payments made to the CFPB against any judgment in a related private action or, in the alternative, the payment of any such setoff to the US Treasury
The specific language is comprehensive, but will vary somewhat depending on whether the matter is a resolution in US District Court or in an administrative proceeding, as well as if the matter involves entities, individuals, or both.
As to tax treatment, the typical settlement provides that the 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 [CFPB] ultimately uses those funds, Respondent may not:
a. 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.
Although it is rarely possible to obtain favorable tax treatment for monetary payments in enforcement actions, in practice, there can be significant ambiguities as to when this prohibition actually applies. The CFPB language, however, definitively resolves these ambiguities in favor of the government.
As to insurance, the same typical settlement provides that the same Respondent
[m]ay not [s]eek, 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 paid under this Consent Order.
Although federal banking law generally limits the ability of banks to indemnify or insure their employees, officers, directors, and other related parties against monetary penalties, the CFPB’s standard settlement language takes this notion one step further by applying it to all Respondents. Finally, the same typical settlement also provides that in any related consumer action, Respondent
may not argue that Respondent is entitled to, nor may Respondent benefit by, any offset or reduction of any compensatory monetary remedies imposed in the Related Consumer Action because of the civil money penalty paid in this action (“Penalty Offset”). If the court in any Related Consumer Action grants such a Penalty Offset, Respondent must, within 30 days after entry of a final order granting the Penalty Offset, notify the [CFPB] and pay the amount of the Penalty Offset to the US Treasury.
Taken as a whole, these provisions assure that the penalties assessed in the CFPB’s settlement will not be reduced by operation of law or other device. For consumer financial businesses, these provisions stand in stark contrast to other settlement planning. In turn, the CFPB’s settlement terms will require significant adjustment in negotiating and calculating the financial impacts of any settlement, as well as any cost-benefit analysis done to determine if settlement is an appropriate path for the business.