Benjamin Edwards, professor at the William S. Boyd School of Law at the University of Nevada in Las Vegas, discusses the additional rewards needed for effective consumer protection in the payday loan industry …
Regulators need to know what’s going on in the world in order to understand and oversee the industries under their supervision. The flow of information can be a particular challenge for monitoring payday loans. Now, most states do not have a database system to track payday loan transactions. Even when states have database systems, federal regulators may not have easy access to this surveillance information.
Without a comprehensive national reporting structure for payday loan operations, the CFPB must use other tools to collect information. A standard tool is to deploy the agency’s limited staff resources to review the day-to-day operations of payday lenders. Recent reviews have revealed real problems with payday lenders ranging from failure to credit principal payments to incorrect statements about the true cost of loans.
The reviews also collect information that the CFPB can use to better understand industry behavior. For example, a 2016 report Payday Loans explained that it relied on data collected from confidential investigations, legal authorization requests and voluntary industry participation. Relying entirely on this monitoring approach has its flaws as it requires the CFPB to first collect information and then research it to identify problems. Regulators can miss important issues if they lack data or do not understand the information in their possession.
Whistleblower bonus programs work differently and aim to point regulators directly and effectively to key information. These programs encourage those who are aware of the problems within an industry to direct the regulator’s gaze to what it really needs to see. If the report gives rise to an enforcement action that generates a fine or other sanction, the regulator may attribute part of this recovery to the whistleblower.
Recognizing the need for a whistleblower bonus program, the CFPB recently offers a whistleblower bonus program to enhance its enforcement efforts. CFPB proposed text offers a promising start that could be made considerably more effective with a few modifications.
Initially, the CFPB Whistleblower Bill unnecessarily capped whistleblower rewards at $ 10 million. While a $ 10 million reward is important, the cap on possible rewards can dissuade some whistleblowers come forward. Whistleblowers who are considering asking for a bounty face significant risks. Because simply reporting valuable information to the CFPB will not guarantee a reward, potential bounty hunters should rule out a possible reward by the likelihood that the CFPB will actually get a significant penalty. The CFPB could prosecute the case incompetently or settle far too little cost if politically connected regulators sympathize with a member of the industry caught in the error.
A cap on whistleblower rewards can deter potential whistleblowers from developing or reporting important information. Consider the incentives a high-level executive faces. Becoming a whistleblower may offer a possible reward, but it would also result in his exclusion from the industry if his reporting ever became known. A potential whistleblower must balance the benefits of remaining silent and staying in the industry with the uncertain prospects of reward. If the potential whistleblower owns a significant amount of stock in an entity that could face real liability, she may be reluctant to make a report that would destroy her family’s wealth.
Reward caps can also prevent other potential whistleblowers from getting involved. It is important to note that not all whistleblowers will be industry insiders. Opportunistic bounty hunters can spend time and treasure developing information that the CFPB could use in enforcement actions. These types of private investigations may never happen if the CFPB program includes a cap that would deter a bounty hunter from spending time and money investigating.
Fortunately, the bill presented by Senator Cortez Masto intended to to allow a whistleblower bonus program for the CFPB with no cap on a whistleblower’s recovery potential. This approach can make the bounty carrot attractive enough to entice whistleblowers to provide information to the CFPB.
The bill could go further and look the other side of the whistleblower registry. A potential whistleblower must balance the rewards and the risks. Without immediate access to protection against retaliation, an employer’s stick can produce more fear than the carrot of a bounty can overcome. A whistleblower may report information in good faith and suddenly find her office a hostile place and herself unemployed.
The whistleblower program proposed by the CFPB could be further enhanced by strengthening existing protections designed to reduce the risk for whistleblowers who come forward. CFPB’s current whistleblower protections require whistleblowers to seek redress in the event of retaliation relief through the Ministry of Labor, although the Office of Labor Whistleblowers was confronted with challenges. It would be better to let them go straight to court with an enhanced private cause of action. It is important to note that any cause of action must include a anti-arbitration provision for a whistleblower to seek protection in a public court.
As it stands, the CFPB proposal will do some real good and pull information from those who can afford the risk. But the proposal could become much more effective if it addressed the risk as well as the reward.
Benjamin Edwards is a professor at the William S. Boyd School of Law at UNLV. He researches and writes on business and securities law, corporate governance, arbitration and consumer protection. Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he has represented clients in complex civil litigation, including securities class actions arising from the Madoff Ponzi scheme and litigation arising from the 2008 financial crisis.
Suggested citation: Benjamin Edwards, CFPB Needs An Effective Whistleblower Program To Oversee Payday Loans, JURIST – Academic Commentary, July 9, 2020, http://jurist.org/forum/2020/07/benjamin-edwards-effective- whistleblower
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