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  • CFPB Settles With Mortgage Company, Senior Executives Over Alleged Loan Officer Compensation Practices

    Lending

    On November 7, the CFPB announced it reached a settlement with a mortgage company and two of its executives accused of using compensation to incentivize loan officers to steer consumers into costlier mortgages. The proposed consent order, entered jointly and severally against the company and the individual executives, requires the defendants to pay more than $9 million in restitution to over 9,400 consumers and a $4 million civil money penalty. In addition, all defendants are subject to regular and mandatory compliance reporting and monitoring for a period of three years and are permanently enjoined from paying compensation to loan officers in a manner that violates the Loan Originator Compensation Rule. The order also mandates that the company maintain compensation records in compliance with federal law going forward. The defendants do not admit the CFPB’s allegations.

    The settlement resolves an action commenced by the CFPB in July 2013 in which the CFPB employed its civil litigating authority to charge that the company’s quarterly bonus program violated the Federal Reserve Board’s Loan Originator Compensation Rule and other consumer financial protection laws by, among other things, incentivizing loan officers to steer consumers into loans with higher interest rates. According to the complaint, after the rule took effect in 2011, the defendants eliminated from their compensation program any written reference to compensation based upon loan terms or conditions, but in practice continued to adjust loan officers’ quarterly bonuses based on the interest rates of loans closed during the quarter. The case was referred to the Bureau by the Utah Department of Commerce, Division of Real Estate.

    BuckleySandler recently hosted a webinar about this CFPB action and impending changes to mortgage loan originator compensation rules. Please contact any of the attorneys below for materials from the webinar or with any questions about this action or the new mortgage loan originator regulations.

     

    CFPB Mortgage Origination Compensation Enforcement

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  • CFPB Begins Taking Payday Loan Complaints

    Consumer Finance

    On November 6, the CFPB announced that it now will formally accept borrower complaints regarding payday loans through its online complaint portal and by phone. The CFPB’s complaint taking process launched with the Bureau in July 2011, and the CFPB began publishing complaints through its online complaint database in June 2012. The CFPB started with credit card complaints and has since expanded the complaint program and public database to cover mortgages, debt collection, credit reporting, student and other consumer loans, and other products and services.

    For purposes of complaint collection, the CFPB defines a payday loan as a “small loan, generally for $500 or less, that is typically due on [the borrower’s] next payday or the next time [the borrower] receive[s] income.” The CFPB adds that a payday loan also may be known as a “cash advance” or a “check loan.” The complaint categories offered by the CFPB include: (i) unexpected fees or interest, (ii) unauthorized or incorrect charges to a bank account, (iii) failure to credit a payment, (iv) problems contacting a lender, (v) receiving a loan not applied for, and (vi) failure to provide borrowed funds. Separately, the CFPB highlighted servicemember payday loan protections provided by the Military Lending Act and encouraged servicemembers to submit payday loan complaints.

    These announcements are the most recent from the CFPB in connection with its sustained and expanding interest in short-term, small dollar products. Indeed, as we’ve reported here in the past, federal and state authorities more generally have increased their scrutiny of companies that offer these products and affiliated parties like payment processors. For its part, earlier this year the CFPB issued a white paper on payday loans and deposit advance products, and the CFPB has repeatedly ranked high on its enforcement agenda short-term products it believes have the potential to trap consumers in a “cycle of debt.” In addition, based on the CFPB’s most recent rulemaking agenda, the CFPB may publicly begin certain rulemaking activities with regard to payday loans and deposit advance products.

    CFPB Payday Lending Enforcement Consumer Complaints Internet Lending

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  • Federal Reserve Board Announces BSA/AML Enforcement Action Involving International Remittances

    Consumer Finance

    On October 31, the Federal Reserve Board released a BSA/AML enforcement action against a Pakistani bank and its New York branch. The Written Agreement addresses examiners’ findings of alleged compliance and risk management deficiencies in the branch’s international remittance services. The agreement requires the bank and branch to, among other things, (i) retain an independent consultant to conduct a compliance review, and (ii) implement enhanced BSA/AML compliance and SAR programs. The agreement also requires interim transaction monitoring procedures and a third-party review of the branch’s international remittance transaction activity over a six-month period.

    Federal Reserve Anti-Money Laundering Bank Secrecy Act Enforcement Remittance

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  • SEC Action Targets Investment Adviser Custody Rule Violations

    Securities

    On October 28, the SEC announced enforcement actions against three investment advisory firms and certain executives for allegedly violating the “custody rule,” which was updated in 2010 and applies to SEC-registered investment advisory firms that have legal ownership or access to client assets or an arrangement permitting them to withdraw client assets. According to the SEC, in addition to other alleged securities violations, the firms allegedly failed to maintain client assets with a qualified custodian or engage an independent public accountant to conduct required surprise exams. To avoid further administrative proceedings, the firms and executives agreed to settle but did not admit the allegations. The firms and individuals collectively agreed to pay $535,000 in penalties, and one firm was required to disgorge nearly $350,000, inclusive of prejudgment interest. The firms also must submit to independent compliance reviews and implement certain specified compliance enhancements.

    SEC Investment Adviser Enforcement

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  • DOJ, SEC Announce FCPA Actions Against U.S. ATM Maker

    Financial Crimes

    On October 22, the DOJ and the SEC announced parallel criminal and civil actions against a U.S. company for allegedly violating the FCPA by paying bribes and falsifying documents in connection with selling ATMs to bank customers in China, Indonesia, and Russia. The federal authorities allege that from 2005 to 2010 the company provided approximately $1.8 million of value to employees of its bank customers in China and Indonesia, including state-owned banks, in the form of payments, gifts, and non-business travel. The company allegedly attempted to disguise the benefits by routing the payments through third parties designated by the banks and by recording leisure trips for bank employees as “training” expenses. The government also alleges that from 2005 to 2009, the company entered into false contracts with a distributor in Russia for services that the distributor was not performing. Instead, the distributor allegedly used the approximately $1.2 million in payments to bribe employees of privately-owned Russian banks to secure ATM-related contracts for the company. The company entered into a deferred prosecution agreement with the DOJ, agreeing to pay a $25.2 million penalty, and it consented to a final judgment in the SEC action, pursuant to which it will disgorge approximately $22.97 million, inclusive of prejudgment interest. The company agreed to implement numerous specific changes to its internal controls and compliance systems and to retain a compliance monitor for at least 18 months. The government acknowledged the company’s voluntary disclosure, cooperation, and extensive internal investigation.

    FCPA Anti-Corruption SEC DOJ Enforcement

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  • SEC Administrative Action Resolves Foreign Bribery Allegations

    Securities

    On October 24, the SEC released a cease-and-desist order that resolves FCPA allegations against a Michigan-based medical technology company. The SEC alleged that the company’s subsidiaries in five different countries—Argentina, Greece, Mexico, Poland, and Romania—bribed doctors, health care professionals, and other government officials to obtain or retain business. The alleged activities involved approximately $2.2 million in direct payments, travel and conference expenses, and donations to a university associated with a foreign official made over a four-and-a-half year period. The SEC investigation found that the payments were incorrectly described as legitimate expenses in the company’s books and records and were described as, among other things, charitable donations, consulting and service contracts, travel expenses, commissions, and legal expenses. Without admitting the allegations, the company agreed to disgorge approximately $7.5 million in profits obtained through the alleged activities, and to pay a $3.5 million civil penalty plus an additional $2.3 million in pre-judgment interest.

    FCPA Anti-Corruption SEC Enforcement

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  • SEC Announces Compliance Penalties Against Investment Advisory Firms, Executives

    Securities

    On October 23, the SEC announced penalties totaling $400,000 against three investment advisory firms and their executives for allegedly repeatedly ignoring problems with their compliance programs, which the SEC deemed inadequate to prevent misleading statements in marketing materials or inadvertent overbilling of clients. The penalties ranged from $25,000 for individuals to $100,000 for one of the firms. Among other things, the SEC highlighted the following deficiencies, which varied among the firms: (i) failing to complete annual compliance reviews, (ii) making misleading statements on company’s website and investor brochures by overstating the amount of assets under management while contradicting the amount the firm presented in its SEC filing, (iii) failing to adopt and implement written compliance policies and procedures, (iv) making false and misleading disclosures about historical performance, compensation, and conflicts of interest, (v) repeatedly over- and under-billing clients, (vi) failing to disclose known compliance deficiencies to potential clients in response due diligence questionnaires or requests for proposals, (vii) inflating the amounts of assets under management in SEC filings, and (viii) improperly removing and retaining nonpublic personal client information by an executive who left one of the firms. In addition to agreeing to the penalties, the firms agreed to hire compliance consultants and adopt specific compliance enhancements. The SEC took the actions as part of its Compliance Program Initiative, which targets firms that fail to effectively act upon SEC warnings about compliance deficiencies.

    SEC Compliance Investment Adviser Enforcement

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  • New York Announces Mortgage Discount Fees Enforcement Action

    Lending

    On October 23, New York Governor Andrew Cuomo announced a $3 million penalty against a mortgage lender that the New York State Department of Financial Services (DFS) determined engaged in deceptive practices concerning interest rate charges and related conduct. The DFS identified the violations during a 2010 examination. The consent order states that the lender (i) collected loan discount fees from certain borrowers to reduce the initial rate but failed to provide the discounted rates, (ii) facilitated originations through unlicensed originators, (iii) conducted business with unlicensed entities and through unauthorized websites and unlicensed branches, (iv) conducted business through improper “affiliated business arrangements,” (v) failed to disclose loan origination information, (vi) failed to issue commitment agreements to certain borrowers, and (vii) failed to properly maintain books and records. The lender consented to the penalty, agreed to refund $427,155 of unearned loan discount fees to 270 borrowers, and agreed to submit a written compliance program within 120 days, submit quarterly compliance progress reports over a three-year period, and take other corrective actions. The consent order noted that in 2011 the company entered into a $3.1M settlement with HUD over similar alleged conduct.

    Mortgage Licensing Mortgage Origination Enforcement

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  • CFPB Director Discusses Mortgage Rule Implementation And Enforcement Against Individuals

    Consumer Finance

    On October 23, CFPB Director Richard Cordray briefly spoke with the Reuters Washington Summit about the Bureau’s rulemaking and enforcement work.

    Upcoming Effective Dates for Mortgage Rules

    According to the report, Cordray stated that he was confident most mortgage lenders would be able to comply with the new mortgage rules by the January 2014 effective dates. "Everybody's had plenty of time to see this coming," Cordray said. However, he added that the Bureau would take into consideration that some smaller firms would need more time to fully comply. "What we're looking for come January 10 is that they've made good-faith efforts to come into substantial compliance with the rules," he said.

    Enforcement Actions Against Individuals

    Corday also stated that the Bureau would continue to take enforcement action against individual officers and employees, as well as banks and other entities. "I've always felt strongly that you can't only go after companies. Companies run through individuals, and individuals need to know that they're at risk when they do bad things under the umbrella of a company," Cordray said.

    The CFPB already has pursued individuals in several civil litigation matters. For example, the CFPB has named individuals in actions to enforce Section 8 of RESPA, including a lawsuit announced just this week against principals of a law firm. In July, the CFPB announced an enforcement action against a Utah-based mortgage company and two of its officers for giving bonuses to loan officers who allegedly steered consumers into mortgages with higher interest rates.

    CFPB Mortgage Origination Mortgage Servicing Compliance Enforcement Qualified Mortgage

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  • CFPB Sues Law Firm Over Alleged RESPA Violations

    Lending

    On October 24, the CFPB announced the filing of a lawsuit against a Kentucky law firm and its principals for allegedly violating Section 8 of RESPA by operating a network of affiliated companies in order to pay “kickbacks” for referrals of mortgage settlement business. The CFPB claims, among other things, that from 2006 until 2011 the law firm established nine joint ventures (JVs) with owners and managers of real estate and mortgage brokerage companies. According to the CFPB, when a JV partner or an agent or employee of the JV made an initial referral of closing or other settlement services to the law firm, the law firm arranged for the title insurance for the underlying transaction to be issued through the co-owned JV in exchange for the settlement business. The parties subsequently split profits generated by the JVs as a result of the title insurance referrals, the CFPB alleges. The CFPB is seeking to enjoin the defendants from the alleged activity, and disgorgement of all income, revenue, proceeds, or profits received in connection with settlement services provided as a result of or in connection with a referral made in violation of RESPA.

    The CFPB supports its claims in part by referencing certain factors first established in a HUD policy statement for use in determining whether a controlled business arrangement is a “sham.” For example, the CFPB alleges that (i) in most instances, the initial capitalization for the JV was provided by the law firm and comprised of only enough funds to cover the JV’s Errors and Omissions insurance, (ii) each JV had only one staffer—a single independent contractor simultaneously shared by all nine JVs and concurrently employed by the law firm, (iii) the law firm principals and employees or agents of the law firm managed the business affairs of the JVs, (iv) the JVs did not have their own office spaces, email addresses, or phone numbers and could not function independently from the law firm, (v) the JVs did not advertise themselves to the public, and (vi) all of the JV’s business was referred by the law firm.  However, the CFPB never characterizes the business arrangements in this case as a “sham” and does not explicitly cite HUD’s policy statement.

    This is at least the sixth RESPA action publicly announced by the CFPB and the second involving allegedly improper affiliated business arrangements. As with the other RESPA actions it has announced to date, the investigation that led to the current lawsuit originated with HUD and transferred to the CFPB when authority for RESPA transferred in July 2011. The CFPB appears to be exercising for the first time in a RESPA case its independent civil litigating authority to pursue the allegations, whereas HUD lacked such litigating authority and typically would have resolved the investigation through a negotiated settlement or a referral to the DOJ for litigation. The announcements, combined with the prior actions, suggests that the Bureau remains focused on enforcing Section 8 of RESPA—including through litigation—even as it focuses substantial attention on implementing extensive revisions to RESPA and other mortgage rules.

    CFPB HUD RESPA Title Insurance Enforcement

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