In Consumer Financial Protection Bureau (“CFPB”) examinations, an assessment factor in the CFPB’s implementation of the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Consumer Compliance Rating System (“CC Rating System”) is “self-identification of consumer compliance issues and corrective action undertaken as such issues are identified” (“self-cures”). The CFPB Supervision and Examination Manual states:
This early detection can limit the size and scope of consumer harm. Moreover, self-identification and prompt correction of serious violations represents concrete evidence of an institution’s commitment to responsibly address underlying risks. In addition, appropriate corrective action, including both correction of programmatic weaknesses and full redress for injured parties, limits consumer harm and prevents violations from recurring in the future.
These statements raise practical questions about how to implement a self-cure, including the implementation of a “full redress for injured parties.”
Holland & Knight’s Consumer Protection Defense and Compliance Team (“Holland & Knight”) and NERA Economic Consulting’s Antitrust and Competition Practice (“NERA”) recently worked together on a project in which a financial institution sought to implement a self-cure resulting from an inadvertent coding issue that affected the frequency of the financial institution’s review of consumers’ interest rates for certain credit products. In this article, we discuss questions we encountered in the course of the case and how they were addressed.
It is instructive to think about full redress as one would think about economic damages, in which one calculates affected individuals’ loss of economic value from the wrongful act. Isolating a consumer’s loss of economic value involves assessing what the consumer’s economic situation would have been but for the wrongful act (“but-for scenario”) and comparing it to the consumer’s actual economic situation with the wrongful act (“actual scenario”).
Modeling but-for scenarios can be particularly involved for consumer financial products because the products can be complex and one might have to model multiple interactions between the consumer and the financial institution. For example, a difference in interest rates between the actual and but-for scenarios for a credit card program could affect (1) the allocation of payments between interest and principal; (2) outstanding balances, number of installments, late payment fees (when applicable), etc.; and (3) the accrual of interest.
A rigorous framework for approaching redress is important as redress analysis can face scrutiny from the CFPB and result in protracted interaction with the agency, including potential escalation to a formal enforcement action. In addition, as supervised entities are likely to engage with the agency and/or their prudential regulators repeatedly, choosing a method for redress analysis may commit the financial institution to the methodology should similar issues arise in the future.
In a recent project, Holland & Knight and NERA worked with the legal, business, and data and analytics teams at a financial institution to assess the financial institution’s (1) redress approach and associated payment amounts to affected customers and (2) updates to its procedures and associated code that required redress.
NERA’s review and analyses of the financial institution’s materials, including computer scripts and associated generated inputs and outputs, helped the financial institution to identify coding errors in the financial institution’s computer scripts that impacted interest calculations for a credit product. NERA also assisted the institution with potential remedies and their implementation, and provided an independent review of the financial institution’s code that implemented a remedy.
NERA’s role involved working with outside counsel and directly with the financial institution to analyze the issue and associated data, audit computer scripts, recommend solutions, and assist with the implementation of a redress analysis. To perform this work, NERA’s experts drew on their collective experience and expertise with damages analyses and consumer financial services products, as well as their experience with programming languages (including, for example, SAS, Stata, R, Python, and VBA) and technical knowledge, to understand the structure of the client’s data and business logic. The NERA team was able to communicate directly with the data and analytics team at the financial institution and review the financial institution’s code associated with the project of implementing redress for the coding error that resulted in incorrect interest calculations for a credit product. This work provided the legal team at the financial institution with more insight into their internal processes and supported the in-house data and analytics team with insight into the likely perspectives used by regulators in the context of redress analyses.
Holland & Knight, as outside counsel, provided guidance through the supervisory process and interactions with the CFPB. Specific guidance included a comprehensive analysis of applicable CFPB regulations and innovative compliance recommendations to implement a self-cure and address other critical compliance observations. The law firm also effectively liaised with regulators to disclose the coding issue and the implemented self-cure.
NERA contributed memoranda and exhibits that described the redress analysis for submissions that Holland & Knight made to the CFPB on behalf of the financial institution. Due to the NERA team’s experience writing expert reports and presenting to regulators, the memoranda and exhibits featured clear, compelling language and graphics to explain the redress approach in ways that all parties (the financial institution, in-house counsel, outside counsel, and regulators) could easily understand. In addition to contributing exhibits to counsel’s responses to the CFPB, including responses to the CFPB’s notice of Potential Action and Request for Response (“PARR letter”), NERA created memoranda that were attached to letters to the CFPB. The team also prepared high-level executive summaries to assist counsel in their preparation for meeting with the CFPB. The executive summaries summarized the redress procedure and highlighted features of the procedure that, when there was ambiguity, erred on the side of benefiting affected customers.
The CFPB accepted the self-cure redress approach in this project. We think that the preparation and work at the supervisory stage by the financial institution, Holland & Knight, and NERA provided for effective responses to the CFPB that may have mitigated a protracted process.
That said, should the process have continued, the NERA team was structured so that, if needed, an economic expert could provide testimony in an enforcement action or litigation. The team included PhD economists who could testify on economic issues, which are broader in scope than the calculations performed in the redress analysis. This was strategically valuable: because the consulting team was already familiar with the case and the financial institution, duplicative work would have been avoided had the issue proceeded to enforcement or litigation, whether with a regulator or a plaintiff class action attorney.
Dr. Ling Ling Ang is a director and Tilling Lee is an associate director at NERA Economic Consulting. The opinions expressed in this article are those of the authors and do not necessarily reflect the views of NERA Economic Consulting or its clients. Leonard Bernstein, Da’Morus Cohen, and Anthony DiResta are partners at Holland & Knight LLP.
Consumer Fin. Prot. Bureau, CFPB Supervision and Examination Manual 7–10 (Jan. 2023) (PDF pp. 22–25) [hereinafter CFPB Manual]. ↑
Id. at 9–10 (PDF pp. 24–25). ↑
Holland & Knight’s team was led by Anthony DiResta, Esq.; Leonard Bernstein, Esq.; and Da’Morus Cohen, Esq. ↑
NERA’s team was led by Dr. Ling Ling Ang, Dr. Alan Grant, and Tilling Lee. ↑
See, e.g., Mark A. Allen, Robert E. Hall & Victoria A. Lazear, Reference Guide on Estimation of Economic Damages, in Reference Manual on Scientific Evidence 429 (Academies Press 3d ed. 2011). ↑
Id. at 432; Roman L. Weil, Daniel G. Lenz & Elizabeth Evans, Litigation Services Handbook 4–12 (John Wiley & Sons, Inc. 6th ed. 2017). ↑
CFPB Manual, supra note 1, at Overview 5–6 (PDF pp. 7–8). ↑
“A PARR letter provides an entity with notice of preliminary findings of conduct that may violate Federal consumer financial laws and advises the entity that the Bureau is considering taking supervisory action or a public enforcement action based on the potential violations identified in the letter. Supervision invites the entity to respond to the PARR letter within 14 days and to set forth in the response any reasons of fact, law or policy why the Bureau should not take action against the entity. The Bureau often permits extensions of the response time when requested.” Bureau of Consumer Fin. Prot., Request for Information Regarding the Bureau’s Supervision Program, Docket No. CFPB-28-0004 (Feb. 12, 2018). ↑