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From Banking and Finance Law Daily, April 30, 2013

CFPB Final Rule Establishes Civil Penalty Fund for Compensating Victims

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has adopted a final rule establishing the bureau’s Consumer Financial Civil Penalty Fund. The rule is intended to provide transparency to the process for allocating funds to victims harmed by a person or company fined in an enforcement action brought by the CFPB.

“Congress directed the Bureau to establish the Civil Penalty Fund in order to compensate people who were harmed by illegal actions,” said CFPB Director Richard Cordray. “Today’s rule will allow us to do this in a transparent, responsible way.”

In conjunction with the rule, the CFPB posted an explanation of the Civil Penalty Fund on its blog. In its post, the bureau notes that if the bureau is unable to locate victims, or it is not feasible to pay them, then the bureau may use money in the fund for consumer education.

Final rule. Section 1017(d)(1) of the Dodd-Frank Act establishes a Consumer Financial Penalty Fund into which the CFPB is required to deposit any civil penalty it obtains against any person in any judicial or administrative action under federal consumer financial laws. The funds may be used for payments to the victims of activities for which civil penalties have been imposed.

The rule:

  1. establishes the position of Civil Penalty Fund Administrator and provides that the fund administrator report to the Chief Financial Officer;
  2. identifies the category of victims who may receive payments from the Civil Penalty Fund and sets out the amounts they may receive. The bureau will make payments to victims from the Civil Penalty Fund only to the extent “practicable.” The rule identifies that part of victims’ harm that the bureau believes to be potentially practicable to calculate and susceptible to compensation under Section 1017(d)(2) and establishes procedures for determining compensable harm;
  3. provides that the CFPB will make payments from the Civil Penalty Fund to compensate only victims’ uncompensated harm. Under the rule, a victim’s uncompensated harm is the victim’s compensable harm, less any compensation for that harm that the victim has received or is reasonably expected to receive.
  4. requires that the fund administrator allocate funds on a six-month schedule. Following the end of any six-month period, the funds available for allocation are those in the Civil Penalty Fund as of the end of the period, minus funds allocated and certain other funds.

The rule requires the fund administrator to issue regular reports on the disposition of funds in the Civil Penalty Fund. The reports will be available on the CFPB’s website.

The final rule is effective upon publication in the Federal Register.

Proposed rule. In conjunction with the final rule, the CFPB issued a proposed rule seeking comments on possible revisions, adjustments, or refinements to the final rule.

Specifically, the bureau requests comments on the final rule’s provision on the category of victims who are eligible for payments. The CFPB is considering whether it should make payments to a broader category of victims. The bureau also seeks comment on how it might identify the types of activities for which civil penalties were imposed.

The CFPB is requesting input on the final rule’s provisions regarding the amounts of the payments that victims may receive. Under the final rule, the bureau will use funds in the Civil Penalty Fund for payments to compensate eligible victims’ uncompensated harm. The CFPB is considering whether it should pay victims a share of the civil penalties collected for the particular violations that harmed them.

The bureau also requests feedback on whether the Fund Administrator should allocate funds more or less frequently than the six months indicated in the final rule or whether a different method of timing for allocations would be appropriate.

Comments on the proposal are due 60 days after publication in the Federal Register.

FAQs. The CFPB has issued a series of frequently asked questions intended to provide a clearer understanding of the final and proposed rules on the Civil Penalty Fund. The FAQs supplement the rules by providing concise answers to questions covered in the rules, including:

  1. What is the fund?
  2. How will the funds be used by the CFPB?
  3. Who will administer the fund?
  4. Who will receive payments from the fund?

RegulatoryActivity: CFPB EnforcementActions

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