CFPB Must Say Why Before Investigating You


Let’s face it, it takes guts to stand up to the Consumer Financial Protection Bureau, the federal Dodd-Frank watchdog agency. Once such challenge was decided on September 6, 2018 by the federal Fifth Circuit Court of Appeals in Consumer Fin. Prot. Bureau v. Source for Public Data, LP The CFPB had sent a Civil Investigative Demand (a form of agency subpoena) to Public Data requiring it to not only produce documents but also answer interrogatories and prepare a written report.  Public Data objected, saying that the law required it first be provided with fair notice of the specific violation under investigation. The lower court rejected Public Data’s objection, so Public Data appealed to the Fifth Circuit.

The Fifth Circuit reversed, holding that the law creating the CFPB (12 U.S.C. § 5511(c)(4)) required that any Civil Investigative Demand “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” This is known as the “Notification of Purpose,” a required element of a CID.  While the CFPB filled out that portion of the form, the Court found that the CFPB did so too vaguely to provide fair notice to Public Data.  The CFPB Notification of Purpose did not cite the violation of any specific federal consumer financial law.  The Court found that the catch-all “any other federal consumer financial law” did not cure the CID’s defects.

We know you will ask: What about the California Department of Real Estate and the Department of Business Oversight?

You know they never show their hand when asking for information from licensees. After all, that might give you a chance to prepare and that would take away the element of surprise.

First, let’s take a look at the typical DRE subpoena:

The Real Estate Commissioner (hereafter Commissioner) pursuant to the authority and for the purposes set forth in the following statute(s): §11181, Government Code; §10148, Business and Professions Code; §10071, Business and Professions Code; Other: 10050, Business and Professions Code, commands…….

Section 11181 requires that the subpoena of a government agency be “pertinent or material to any inquiry, investigation, hearing, proceeding, or action conducted in any part of the state.” Section 10148 is the primary power of the DRE to audit licenses if it is “in connection with any transactions for which a real estate broker license is required.” In other words, the DRE’s audit power is limited to transactions requiring a real estate license, which may be grounds to keep them out of your general bank account and files not relating to licensed activity. Sections 10050 and 10071 have nothing to do with a subpoena or audit power but the DRE routinely checks those boxes anyway.

California courts have considered challenges to the subpoena power of governmental agencies.  The cases require that the demand “be not too indefinite,” and the information sought “be reasonably relevant to the intended investigation.”  A “good cause affidavit” is not required for an agency subpoena but the recipient retains his or her right against self-incrimination and privileges such as the attorney-client privilege. See People v. West Coast Shows, Inc., 10Cal. App. 3d 462 (1970and Fiedler v. Berkeley Properties Company, 23 Cal. App. 3d 30 (1972).  More recent cases have said that to compel compliance with a subpoena, the agency must prove to the court that the information sought is “relevant and material.” Cross v. Superior Court of Los Angeles, 11 Cal. App. 5th305 (2017).  However, no case has said an agency must show its cards when issuing a subpoena (i.e. tell you about the issue it is investigating).  Thus, the CFPB is under a heavier burden when issuing a subpoena that the DRE or DBO.

Being served with a subpoena from the DRE or the DBO is a serious matter

They will look for violations of the law to discipline your license. Retain experienced legal counsel immediately to determine what the subpoena is requesting, as they are notoriously vague.  The law firm will also help you gather everything your file needs to make the best showing possible. Most importantly, your law firm will give you a preview of what the agency will most likely find if they studied your file carefully.  In addition, if the agency has questions about the materials produced, they are likely to contact your attorney and thus give him or her the chance to advocate your view on any given issue.

© Doss Law, LLP. Attorney advertising materials. These materials have been prepared for educational purposes only and are not legal advice.  This information is not intended to create an attorney-client relationship.  Consult a knowledgeable lawyer before implementing any of the ideas in this publication.

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