Maximizing Insurance Coverage for CFPB Investigations and Enforcement Actions

Seven years removed from the 2008 financial crisis, an increasing number of financial institutions are now finding themselves in the crosshairs of the Consumer Financial Protection Bureau (“CFPB”), a new federal agency created by the Dodd-Frank Act and charged with protecting consumers from violations of federal consumer financial laws. Although the agency is less than four years old, the CFPB already has targeted a large number of mortgage lenders, credit card companies, auto lenders, student loan companies, banks, and other financial institutions through investigations and enforcement actions. In doing so, the CFPB has settled a large number of claims through consent orders directing financial institutions to pay hundreds of millions of dollars. To take just a few recent examples, the CFPB obtained a $37.5 million settlement with Flagstar Bank involving alleged unlawful activities in processing loan modification applications;1 a $2 billion settlement with Ocwen Financial Corporation involving alleged misconduct in mortgage loan servicing;2 and a $727 million settlement with Bank of America in a case involving discriminatory credit card practices allegations.3 Of course, on top of these record settlement costs, companies have been forced to defend themselves against these investigations, incurring millions of dollars of defense costs in the process.

The only good news when facing a CFPB investigation or lawsuit, if there is such a thing, is that most financial institutions have valuable insurance policies that may reimburse—or at least defray—some of the CFPB-related losses. While insurers may argue that coverage for CFPB investigations should be unavailable because the damages being requested are “uninsurable,” directors and officers (“D&O”) and errors and omissions (“E&O”) policies increasingly provide coverage for defense costs associated with regulatory investigations. These policies may also cover settlements with the CFPB of alleged misconduct that are reached before a final adjudication, in the same way that these policies cover similar investigations by the Securities & Exchange Commission, the Department of Justice, and other regulatory agencies. Indeed, even commercial general liability (“CGL”) policies may provide coverage for CFPB investigations depending on the nature of the misconduct alleged. Given the huge amounts of damages and defense costs that are potentially at stake in a CFPB investigation or lawsuit, it is a mistake to leave these policies on the table.