Regulators need to know what happens out in the world to understand and to oversee the industries under their supervision. Information flow may be a particular challenge for overseeing payday lending. At present, most states do not have database systems to track payday lending operations. Even when states do have database systems, federal regulators may lack ready access to that oversight information.  

Without a comprehensive, nationwide reporting structure for payday lending operations, the CFPB has to use other tools to gather information. One standard tool is deploying the agency’s limited personnel resources to examine payday lenders’ day-to-day operations. Recent examinations have uncovered real problems with payday lenders ranging from a failure to credit payments to principal to providing incorrect statements about the true cost of loans.  

Examinations also gather information which the CFPB can use to better understand industry behavior. For example, one 2016 report on payday lending explained that it drew from data collected confidential investigations, requests under statutory authority, and from voluntary industry participation. Relying entirely on this oversight approach has flaws because it requires the CFPB to first gather information and then search it to identify problems. Regulators may miss significant problems if they lack enough data or fail to understand the information in their possession.

Whistleblower bounty programs operate differently and aim to point regulators directly and efficiently at key information. These programs create incentives for those in the know about problems within an industry to direct the regulator’s gaze to what it actually needs to see. If the report results in an enforcement action that generates a fine or some other penalty, the regulator may award a portion of that recovery to the whistleblower.

Recognizing the need for a whistleblower bounty program, the CFPB recently proposed a whistleblower bounty program to enhance its enforcement efforts. The CFPB’s proposed text offers a promising start which could be made substantially more effective with some modifications.  

At the outset, the CFPB’s proposed whistleblower statute needlessly caps awards to whistleblowers at $10 million. Although a $10 million award would be significant, the cap on possible awards may deter some whistleblowers from coming forward. Whistleblowers considering whether to seek a bounty face significant risks. Because merely reporting valuable information to the CFPB will not guarantee a reward, potential bounty hunters must discount a possible award by the likelihood that the CFPB will actually secure a significant penalty. The CFPB might pursue the case ineptly or settle far too cheaply if politically connected regulators sympathize with an industry member caught in the wrong.  

A cap on whistleblower awards may deter potential whistleblowers from developing or reporting significant information. Consider the incentives faced by a high-level executive. Becoming a whistleblower may offer a possible award, but it would also likely result in her exclusion from the industry were her reporting ever to become known. A potential whistleblower must balance the benefits of staying silent and remaining in the industry against the uncertain prospects of an award. If the potential whistleblower holds a significant amount of stock in an entity that might face real liability, she may hesitate to make a report which would destroy her family’s wealth.

Award caps may also inhibit other potential whistleblowers from getting involved. Importantly, not every whistleblower will be an industry insider. Opportunistic, bounty-hunters may spend time and treasure to develop information which the CFPB could use in enforcement actions. These types of private investigations may never occur if the CFPB program includes a cap that would deter a bounty-hunter from spending time and money to investigate.

Fortunately, draft legislation introduced by Senator Cortez Masto aims to authorize a whistleblower bounty program for the CFPB without any cap on a whistleblower’s potential recovery. This approach may make the bounty an attractive enough carrot to induce whistleblowers to provide information to the CFPB. 

The legislation could go further and look at the other side of the whistleblower’s ledger. A potential whistleblower must balance rewards against risk. Without ready access to protection from retaliation, an employer’s stick may produce more fear than a bounty’s carrot can overcome. A whistleblower might report information in good faith and find her office suddenly a hostile place and herself without a job.  

The CFPB’s proposed whistleblower program could be further improved by enhancing existing protections designed to reduce the risk for whistleblowers who do come forward. The CFPB’s current whistleblower protections require whistleblowers seeking redress for retaliation to seek relief through the Department of Labor even though Labor’s whistleblower office has faced challenges. It would be better to let them go directly to court with an improved private cause of action. Importantly, any cause of action should include an anti-arbitration provision so that a whistleblower could seek protection in a public court.

As it stands, the CFPB’s proposal will do real good and pull information from those that can afford the risk.  But the proposal could become much more effective if it addressed risk as well as reward.

Benjamin Edwards is a professor at William S. Boyd School of Law at UNLV. He researches and writes about 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 represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis.

Suggested citation: Benjamin Edwards, The CFPB Needs an Effective Whistleblower Program to Oversee Payday Lending, JURIST – Academic Commentary, July 9, 2020, http://jurist.org/forum/2020/07/benjamin-edwards-effective-whistleblower

This article was prepared for publication by Brianna Bell, a JURIST Staff Editor. Please direct any questions or comments to her at commentary@jurist.org.