Blowing the whistle on consumer financial abuse.

• Author: Cooper, David
• Position: COMMENT

The whistleblower programs that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) created within the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) offer large monetary rewards for actionable information. These "bounties" have attracted commentary from the academy, the bar, and corporate America. Less often discussed is section 1057 of Dodd-Frank, which creates a private cause of action for informants who experience retaliation for reporting violations of federal consumer financial law to the Consumer Financial Protection Bureau (CFPB). These informants could be a valuable tool for discharging the CFPB's supervisory and enforcement responsibilities. Unfortunately, the history of whistleblower protection under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) demonstrates that section 1057 alone is not a viable long-term incentive for insiders to come forward. Therefore, this Comment argues that Congress or the CFPB should offer bounties for information that protects consumers' financial welfare, much as existing Dodd-Frank programs remunerate individuals who contact law enforcement for the benefit of investors.

INTRODUCTION I. THE CONSUMER FINANCIAL PROTECTION ACT OF 2010 A. The Powerful and Insulated CFPB B. Section 1057 II. WHISTLEBLOWING UNDER FEDERAL CONSUMER FINANCIAL LAW A. The Potential Value of Consumer Financial Services Informants B. Is Anybody Listening? III. FIXING A CRACK IN THE INSULATION A. The Shortcomings of Pre-Amendment Sarbanes-Oxley Section 806.. B. Undermining the Lock-In Effect IV. CONSUMER FINANCIAL BOUNTY HUNTERS A. The Argument for CFPB Whistleblower Bounties 1. Offering an Effective Incentive 2. Functional Consolidation 3. Shaping Compliance Culture B. Implementing a CFPB Bounty Rule C. Design Concerns CONCLUSION INTRODUCTION

Las Vegas police found Tracy Lawrence's body on November 28, 2011, the day she was scheduled to be sentenced to up to one year of jail time for notarizing the signature of an individual not in her presence. (1) Earlier that month, Lawrence had tipped off the Attorney General of Nevada to widespread fraud at Lender Processing Services Inc. (LPS) (since redubbed Black Knight Financial Services,2) one of America's largest loan processors. (3) In February 2014, foreclosure-ravaged Nevada became the fiftieth state to reach a civil settlement with LPS. (4)

LPS's alleged misconduct consisted of churning out thousands of default notices with forged signatures and no review. (5) Similar allegations underlay the $25 billion National Mortgage Settlement in February 2012, the "largest consumer financial protection settlement in United States history." (6) This settlement was also predicated on information revealed by whistleblowers, who claimed that a host of banks contracted for illegitimate foreclosure documents and forged reviewers' signatures on the paperwork. (7)

From its earliest days, American law has recognized the utility of enlisting private citizens as monitors by encouraging them to blow the whistle on violations of public mandates. (8) Whistleblowing has been discussed and celebrated largely in the financial fraud context, (9) although it also has been suggested as an enforcement device in other arenas. (10) Whistleblowing carries an intuitive appeal. Government agencies have limited resources, cannot afford to bring enforcement actions on the basis of incomplete information, and can only monitor so many entities effectively. Employees, by contrast, constantly watch these regulated companies and, as insiders, may have access to detailed information and key evidence. Convincing such insiders to report illegality provides supplemental supervision and fosters efficient enforcement. (11) And as the stories of LPS and the National Mortgage Settlement illustrate, these principles equally apply to the universe of consumer credit regulation.

Section 1057 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) creates antiretaliation protection for employees of banks, mortgage servicers, payday lenders, debt collectors, and other consumer financial product or service providers, who blow the whistle on a violation of federal consumer financial laws or Consumer Financial Protection Bureau (CFPB) regulations. (12) A robust whistleblowing program would complement the CFPB's mandate. Like securities fraud, many violations of consumer financial protection laws are characterized by hidden information. (13) For example, inside information would be valuable in revealing forbidden kickbacks in the real estate and loan servicing industries, as well as the wide and vaguely defined world of fraud-like "unfair, deceptive or abusive act[s] or practice[]" banned by the CFPB's organic statute. (14)

Even where the violation at issue could have been exposed by an agency investigation, or where specific instances are revealed through consumer complaints, an inside source could still add value by confirming the systemic nature of malfeasance and preserving evidence from spoliation--an investigatory impediment that the CFPB can expect to arise more frequently in those markets, such as payday lending, in which consumer financial activities have rarely been subjected to federal oversight. (15) The CFPB can spur the evolution of compliance culture in such industries by demonstrating early and consistent commitment to working with whistleblowers.

However, Dodd-Frank did not institutionalize whistleblowing at the CFPB in the same way as it did at the Securities Exchange Commission (SEC), where the Act created an Office of the Whistleblower to award bounty payments to qualified informants. (16) Therefore, the statute leaves it to the CFPB to gauge how much infrastructure to develop in order to encourage reporting and support informants. Because would-be tipsters often stay silent when they fear no one will act on their reports, the CFPB must cultivate a reputation for responsiveness in the early days of its nonbank supervisory activities. Furthermore, the CFPB must ensure that its program will be prepared to handle an increase in tip volume as the contours of the CFPB's authority to prevent "unfair, deceptive, or abusive act[s] or practice[s]" (17) are clarified over time.

In light of the potential effectiveness of consumer financial whistleblowers, it is discouraging to see the CFPB backpedal on the lone public commitment it has made to facilitate whistleblowing and to see no further improvements mentioned in its latest strategic plan. (18) Given that the CFPB promises to maintain informants' confidentiality, it is possible that no news is good news, but a historical analogy to Sarbanes-Oxley's whistleblower provision (19) suggests that this is unlikely. That provision, section 806, (20) did not incentivize whistleblowing due to the persistent impotence of its antiretaliation cause of action. (21)

The regulatory scheme surrounding Sarbanes-Oxley section 806 requires whistleblowers to present complaints to the Department of Labor's (DOL) Occupational Safety and Health Administration (OSHA) before going to court. (22) If OSHA finds a claim meritless, the whistleblower can appeal first to a DOL administrative law judge (ALJ), then to the Administrative Review Board (ARB), and finally to a federal court. (23) Dodd-Frank's section 1057 includes an identical exhaustion requirement. (24) Throughout the Bush II administration, the DOL was notoriously hostile to Sarbanes-Oxley whistleblowers. (25) ALJs strictly policed the requirements of the Sarbanes-Oxley section 806 regulations, (26) while the ARB invented a series of new prerequisites to Sarbanes-Oxley section 806 claims--for example, a requirement that the fraud reported be "material" for section 806 to cover the reporting employee. (27)

Whereas the CFPB's insulation from both Congress and the President makes it well-suited to maintain a commitment to whistleblowers, the DOL's priorities are far more susceptible to the vagaries of the political branches, as the agency's track record with Sarbanes-Oxley section 806 attests. Dodd-Frank's section 1057 will be similarly undependable in the long term if its effectiveness depends on the DOL.

Even if Congress is unwilling to remove the DOL exhaustion requirement from Dodd-Frank's section 1057 for fear of frivolous litigation, Congress could provide whistleblowers with a dependable incentive by means of a financial reward regime akin to the programs for securities, commodities, futures, options, and derivatives whistleblowers under Dodd-Frank. In the absence of legislative action, this Comment argues that the CFPB should use its rulemaking power to achieve the same result.

I begin by outlining the structure and objectives of the CFPB, as well as the protection its organic statute creates for whistleblowers. Next, I explain why the development of a vigorous consumer financial whistleblower scheme deserves more attention than it currently receives from the CFPB. After pointing out the crucial weakness in the existing incentive for informants by comparing Dodd-Frank section 1057 to Sarbanes-Oxley section 806, I conclude by arguing for a bounty system and discussing concerns related to implementing such a system.

1. THE CONSUMER FINANCIAL PROTECTION ACT OF 2010

   Adopting a proposal originally advanced by Senator Elizabeth Warren,28 Title X of the Dodd-Frank Act (the Consumer Financial Protection Act of 2010, or the CFPA) (29) established what amounts to a Consumer Product Safety Commission for the credit market: the Bureau of Consumer Financial Protection (CFPB, or the Bureau). (30) One provision of the CFPA, Dodd-Frank section 1057, (31) prohibits retaliation against whistleblowers who report violations of the Bureau's regulations or the statutes it administers. Coupled with the CFPB's structural independence, section 1057 creates the possibility for a potent consumer financial whistleblower program.

   1. The...