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CFPB Deputy Director's Remarks May Indicate Evolving Approach To Mortgage Rules Enforcement
On June 18, CFPB Deputy Director Steve Antonakes opened the CFPB’s first public Consumer Advisory Board (CAB) meeting with remarks about implementation of the CFPB’s mortgage rules and the Bureau’s approach to enforcing those rules.
Over the past year, the CFPB has attempted to publicly outline and clarify its expectations for mortgage originators and servicers as those companies seek to comply with a host of new rules and requirements while continuing to face significant market challenges. The CFPB’s initial public position, particularly with regard to the new servicing rules, was that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Mr. Antonakes made news in February when he attempted to clarify that position in remarks to a Mortgage Bankers Association conference. There he stated “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Mr. Antonakes took a somewhat softer tone in his remarks during the CAB meeting, stating that the CFPB’s goal “is not some one-sided aim to maximize consumer protection or industry deterrence at all costs.” He cautioned that “there is such a thing as doing too much” and explained that the Bureau’s true goal is to find “an appropriate balance where incentives for homeowners, creditors, and servicers are aligned.”
The CFPB has not announced any public enforcement actions related to its new mortgage rules. And the Bureau’s goal of aligning incentives is not necessarily inconsistent with Mr. Antonakes’s past remarks about vigilant enforcement. Although servicers—and originators—may take some solace in the shift in tone, by any measure the “early months” of implementation are coming to a close and the CFPB’s actual compliance and enforcement stance may only become apparent through its mortgage examinations and enforcement actions.
Latest CFPB RESPA Enforcement Action Targets Employee Referrals
Last week, the CFPB announced its latest RESPA enforcement action, adding to one of the CFPB’s most active areas of enforcement. In this case, the CFPB required a New Jersey title company to pay $30,000 for allegedly paying commissions to more than twenty independent salespeople who referred title insurance business to the company. The matter was referred to the CFPB by HUD.
The CFPB asserts that from at least 2008 to 2013, the title company offered commissions of up to 40% of the title insurance premiums the company received. The CFPB explained that paying commissions for referrals is allowed under RESPA if the recipient of the payment is an employee of the company that is paying the referral, but claimed in this case that the individuals involved were actually independent contractors and not bona fide employees. The CFPB determined that although the individuals received W-2 forms from the title company, the company “did not have the right or power to control the manner and means by which the individuals performed their duties.”
In determining the penalty amount, the CFPB took into consideration the company’s ability to pay and remain a viable business. Notably, the consent order removes the “employer-employee” exception for this company on a going forward basis, including under existing employment contracts. The order prohibits the company from paying any employee “any fee, kickback, or thing of value that is contingent on the referral of title insurance business or other settlement services, notwithstanding the ‘employee exception’ contained in 12 C.F.R. §1024.14(g)(vii).” The order also establishes certain compliance, record keeping, and reporting requirements.
Second Circuit Clarifies Standard For Reviewing Enforcement Agency Consent Judgments
On June 4, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s decision to reject a proposed settlement between the SEC and a financial institution in a securities fraud suit. SEC v. Citigroup Global Markets Inc., No. 11-5227, 2014 WL 2486793 (2d Cir, Jun. 6, 2014). In November 2011, the SEC and the financial institution entered into a consent judgment to resolve allegations that the institution violated securities laws in connection with certain mortgage-backed securities. Consistent with the SEC consent judgment convention at the time, the institution did not admit or deny any of the allegations as part of the agreement. Judge Jed Rakoff of the Southern District of New York rejected the agreement and held that because the parties agreed to settle without the institution having to admit or deny any of the underlying factual allegations, the settlement would deprive the public “of ever knowing the truth in a matter of obvious public importance,” and the court lacked evidence sufficient to determine whether the agreement was in the public interest. On appeal, the Second Circuit held that the proper standard for reviewing a proposed enforcement agency consent judgment is whether the proposed consent decree is fair and reasonable, and in the event the agreement includes injunctive relief, whether "the public interest would not be disserved." The court held that in evaluating whether an SEC consent decree is “fair and reasonable” one must review (i) the basic legality of the decree; (ii) whether the terms are clear; (iii) whether the decree resolves the actual claims in the complaint; and (iv) whether the decree is “tainted by improper collusion or corruption.” The court also ruled that the district court abused its discretion by requiring that the agreement establish the “truth” of the allegations, explaining that trials are meant to determine truth, while consent decrees are about “pragmatism.” Finally, the court held that the district court abused its discretion to the extent that it withheld approval of the settlement because it believes the SEC failed to bring the proper charges, which is the exclusive right of the SEC to decide.
West Virginia Supreme Court Upholds $14 Million Award In Finance Company "True Lender" Case
On May 30, the West Virginia Supreme Court of Appeals affirmed a series of trial court orders requiring a nonbank consumer finance company to pay $14 million in penalties and restitution for allegedly violating the state’s usury and debt collection laws. CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL 2404300 (W. Va. May 30, 2014). On appeal, the finance company contended, among other things, that the trial court erred in applying the “predominant economic interest” test to determine whether the finance company or the bank that funded the loans was the “true lender.” The trial court held that the finance company was the de facto lender and was therefore liable for violating the state’s usury and other laws because: (i) the agreement placed the entire monetary burden and risk of the loan program the finance company; (ii) the company paid the bank more for each loan than the amount actually financed by the bank; (iii) the finance company’s owner personally guaranteed the company’s obligations to the bank; (iv) the company had to indemnify the bank; (v) the finance company was contractually obligated to purchase the loans originated and funded by the bank only if the finance company’s underwriting guidelines were employed; and (vi) for financial reporting, the finance company treated such loans as if they were funded by the company. The court affirmed the trial court holding and rejected the finance company’s argument that the trial court should have applied the “federal law test” established by the Fourth Circuit in Discover Bank v. Vaden, 489 F3d 594 (4th Cir. 2007). In Discover Bank the Fourth Circuit held that the true lender is (i) the entity in charge of setting the terms and conditions of a loan and (ii) the entity who actually extended the credit. In support of the trial court ruling, the court explained that the “federal law test” addresses “only the superficial appearance” of the finance company’s business model. Further, the court stated that the Fourth Circuit test was established in a case where the non-bank entity was a corporate affiliate of the bank, which was not the case here, and added that if the court were to apply the federal law test, it would “always find that a rent-a-bank was the true lender of loans” like those at issue in this case.
CFPB Fines Realty Firm $500K Over RESPA Disclosures
On May 28, the CFPB ordered the largest real estate company in Alabama to pay a $500,000 civil penalty to settle claims that the company provided inadequate disclosures of its relationship with an affiliated title insurance company. The CFPB alleged that the realty company failed to comply with the disclosure-related provisions of RESPA in connection with affiliated business arrangements (AfBAs). Under RESPA, AfBAs do not violate the prohibition on the exchange of referral fees if, among other things, the party referring a consumer to its affiliate gives the consumer a disclosure clearly stating that the consumer may shop for other, lower-cost providers and that the consumer is not required to use the affiliate.
The CFPB alleged that, over a 14-month period in 2011 and 2012, the realty company provided consumers a document explicitly directing that title and closing services would be performed by the affiliate. Then, in 2012, the realty company changed its document to allow the consumer to choose the affiliate or another provider. During all of these periods, the realty company also provided an AfBA disclosure, but the CFPB alleged that the disclosure did not comply with RESPA’s Regulation X because it was not in the format required by Appendix D to Regulation X.
The CFPB charged that the realty company’s AfBA disclosure deviated from the format set forth in Regulation X and thus did not comply with RESPA. For instance, the CFPB claimed that the AfBA disclosure did not use capital letters or otherwise highlight the fact that consumers could obtain services from other providers and that the disclosure language was “hidden” among other statements. Further, the CFPB raised concerns that the AfBA disclosure “included marketing statements touting the benefit and value of the affiliated entities,” such as by saying that the affiliates are “in a unique position to provide you with exceptional value and service.”
The CFPB concluded that, based on these disclosures, the realty company and its affiliates violated RESPA’s prohibition on the exchange of referral fees by affirmatively referring consumers to the affiliates and then collecting profits from the affiliated entities, without satisfying the “safe harbor” under RESPA for AfBAs. The CFPB ordered the company to use AfBA disclosures that do not materially deviate from the model disclosure in Appendix D, to update its training and guidance documents on AfBAs, and to pay a civil money penalty of $500,000 to the CFPB. HUD, which previously had authority over RESPA, initially referred this matter to the CFPB.
New York AG Bars Collection Of Time Barred Debt By Debt Buyers
On May 8, New York Attorney General (AG) Eric Schneiderman announced that two debt buyers agreed to resolve allegations that they engaged in improper collection of untimely debt against New York consumers. The AG claims that the companies purchased unpaid consumer debt—largely credit card debt—from original creditors and then sought to collect on that debt by suing debtors and obtaining uncontested default judgments against those who failed to respond to lawsuits, even though the underlying claims were outside of the applicable statute of limitations. The applicable statute of limitations is determined based on the state of the original creditor’s residence and may be shorter than New York’s six-year statute of limitations. According to the AG, obtaining or collecting on a judgment based on such untimely claims is unlawful under New York law. Together, the companies allegedly obtained nearly three thousand improper judgments, totaling approximately $16 million. The companies will pay civil penalties and costs of $300,000 and $175,000 and agreed to vacate the allegedly improper judgments and cease any further collection activities on the judgments. The companies also agreed to adjust their debt collection practices by (i) disclosing in any written or oral communication with a consumer about a time-barred debt that the company will not sue to collect on the debt; (ii) disclosing in any written or oral communication with a consumer about a debt that is outside the date for reporting the debt provided for by FCRA that, because of the age of the debt, the company will not report the debt to any credit reporting agency; (iii) alleging certain information relevant to the statute of limitations in any debt collection complaint, “including the name of the original creditor of the debt, the complete chain of title of the debt, and the date of the consumer’s last payment on the debt”; and (iv) submitting an affidavit with any application for a default judgment that "attests that after reasonable inquiry, the company or its counsel has reason to believe that the applicable statute of limitations has not expired.”
CFPB Report Recaps Fair Lending Activities
On April 30, the CFPB published its second annual report to Congress on its fair lending activities. According to the report, in 2013 federal regulators referred 24 ECOA-related matters to the DOJ—6 by the CFPB—as opposed to only 12 referrals in 2012. The report primarily recaps previously announced research, supervision, enforcement, and rulemaking activities related to fair lending issues, devoting much attention to mortgage and auto finance. However, the Bureau notes that it is conducting ongoing supervision and enforcement in other product markets, including credit card lending. The Bureau also identifies the most frequently cited technical Regulation B violations.
With regard to housing finance supervision and enforcement, the CFPB reports that while many lenders have strong compliance management systems and no violations, the CFPB’s ECOA baseline reviews have identified factors that indicate heightened fair lending risk at some institutions, including weak or nonexistent fair lending CMS, underwriting and pricing policies that consider prohibited bases in a manner that presents fair lending risk, and inaccurate HMDA data. The CFPB referred three mortgage-related cases to the DOJ. Two of those involved findings that a mortgage lender discriminated on the basis of marital status; the DOJ deferred to the Bureau’s handling of the merits of both. The third contained findings that a mortgage lender discriminated on the basis of race and national origin in the pricing of mortgage loans. That referral led to a joint DOJ-CFPB enforcement action.
In the area of auto finance, the report highlights the CFPB’s auto finance forum and March 2013 auto finance bulletin, and again defends the CFPB’s proxy methodology, which has been challenged by members of Congress and industry since the CFPB issued its auto finance bulletin. The CFPB states that it is currently investigating whether a number of indirect auto financial institutions unlawfully discriminated in the pricing of automobile loans, particularly in their use of discretionary dealer markup and compensation policies using a disparate impact analysis. During the reporting period, the Bureau made one referral to the DOJ, and subsequently took joint enforcement action with the DOJ against that indirect auto financial institution for alleged violations of ECOA.
The report indicates that the Bureau has expanded its focus beyond mortgage and auto finance, noting that the CFPB is conducting ECOA Baseline Reviews and ECOA Targeted Reviews of consumer financial services providers of other products, singling out credit cards as an example. The report adds that the CFPB also referred to DOJ three matters related to unsecured consumer lending, but that DOJ declined to act upon such referrals.
New York AG Action Targets Out-Of-State Retail Installment Obligation Finance Companies
On April 30, New York Attorney General (AG) Eric Schneiderman announced that four out-of-state companies alleged to have financed retail installment obligations (RIOs) at rates in excess of the state’s usury cap agreed to recast the RIOs at a rate of not more than 16% and provide repayment or credits to impacted New York consumers. The settlements are the latest in a series of actions in New York targeting out-of-state or online lenders and finance companies that make loans in New York without obtaining a license to operate in that state.
The companies financed elective medical and surgical procedures through RIOs offered by medical providers to patients, an activity the AG believes required the companies to obtain a state license to operate as sales finance companies or lenders. The AG’s Health Care Bureau initiated the investigation after it received complaints about an online lead generation site. As described in the AG’s release, that lead generator requested information regarding a consumer’s employment and credit history, automatically set the APR and RIO repayment terms, and submitted the completed application to sales finance companies. The AG explains that once a finance company agreed to purchase the RIO, the medical provider and the patient both signed a financing agreement that the medical provider immediately assigned to the finance company. The finance company then transferred the funds to the medical provider who agreed to accept less than their usual and customary fees in exchange for upfront payments from the finance company. The patient, however, would be required to repay to the financier full fees plus interest, which in this case allegedly exceeded the statutory usury cap, up to 55% in some instances. State law restricts unlicensed lenders to charging an APR of up to 16%, and establishes criminal penalties for unlicensed lenders that charge interest at a rate exceeding 25% APR.
In addition to revising existing loans and providing approximately $230,000 in remediation to 317 consumers, the agreements require the companies to (i) collectively pay $35,000 in penalties; (ii) cease all conduct as unlicensed sales finance companies in New York; and (iii) notify any consumer reporting agencies to which they gave consumer information to delete all references to the transactions from customers’ credit records. The agreements do not include any criminal penalties.
In addition to extending the state’s licensing enforcement focus, this is at least the second financial services case initiated in recent months by the AG’s Health Care Bureau. In June 2013, the AG announced a settlement with a credit card issuer related to alleged illegal deferred interest products offered through medical provider offices.
New York Financial Services Regulator First To Sue Under Dodd-Frank's UDAAP Provisions
On April 23, New York State Department of Financial Services (NYS DFS) Superintendent Benjamin Lawsky became the first state regulator to sue a financial services company to enforce the Dodd-Frank Act’s Title X prohibitions against unfair, deceptive, and abusive practices (UDAAP). Last month, Illinois Attorney General Lisa Madigan filed what appears to be the first suit by a state attorney general to enforce Dodd-Frank’s UDAAP provisions. Although state authorities generally are limited to enforcing Title X against state banks and non-bank financial service companies—except that state attorneys general may enforce rules of the CFPB against national banks and thrifts—these actions bring into sharp focus the full scope and reach of the Title X’s enforcement provisions and are likely to inspire similar state actions.
Mr. Lawsky’s complaint accuses a nonbank auto finance company of violating Sections 1031 and 1036 of the Dodd-Frank Act, as well as Section 408 of the New York Financial Services Law and Section 499 of the New York Banking Law by, among other things, “systematically hid[ing] from its customers the fact that they have refundable positive credit balances.” The complaint alleges that the company concealed its customers’ positive account balances—from insurance payoffs, overpayments, trade-ins, and other reasons—by programming its customer-facing web portal to shut down a customer’s access to his or her loan account once the loan was paid off, even if a positive credit balance existed. The company allegedly failed to refund such balances absent a specific request from a customer. In addition, the complaint charges that the company hid the existence of positive credit balances by submitting to the New York State Comptroller’s Office false and misleading “negative” unclaimed property reports, which represented under penalty of perjury that the company had no unrefunded customer credit balances.The complaint claims that DFS’s examination findings for the company “demonstrate the persistent refusal and failure of [the company] and its owner . . . to implement even the most basic policies, procedures and controls necessary to manage a $300 million, state-licensed lending institution.” Further, Mr. Lawsky asserts that the company rejected “virtually all of those findings” and ignored or refused, based largely on economic considerations, to comply with written directives to institute proper policies, procedures, and controls.
In addition to being the first of its kind, the suit is notable for several other reasons. First, the suit names the company’s individual owner and CEO. Mr. Lawsky recently urged financial services regulators to consider taking more actions against individuals. His remarks added to a trend among regulators and enforcement authorities to more aggressively pursue individual alleged bad actors. In the complaint, Mr. Lawsky argues that “as the person responsible for oversight of [the company’s] operations and for setting and effectuating policies” the owner caused the company to adopt a policy of “stealing, converting, and retaining for its positive credit balances belonging to its customers.”
Second, Mr. Lawsky claims that certain of the alleged practices violate Dodd-Frank’s prohibition against “abusive” acts or practices. Although defined in the statute, the government has yet to provide additional guidance as to which acts or practices might be considered “abusive.” For instance, the CFPB, which has authority to draft regulations defining abusive practices, has declined to do so. Instead it has elected to develop the abusive standard through enforcement, most recently in an action against a for-profit educational institution, though no court has yet ruled on what constitutes an abusive practice.
Third, Mr. Lawsky filed the suit with the help of an outside plaintiffs’ firm. The practice of state agencies hiring outside counsel to represent them in investigations has been the subject of lawsuits and criticisms. The practice has been criticized in part because it creates an incentive for the outside lawyers to find violations in order to be paid. It also has been the subject of litigation where the law firm assisting the agency also represented other clients adverse to the target of the investigation.
Fourth, the complaint alleges that the finance company violated Section 1036 with regard to its data security and privacy practices and representations. Mr. Lawsky claims that the finance company falsely represented to its customers, in connection with servicing automobile loans, that it implemented reasonable and appropriate measures to protect borrowers’ personal information against unauthorized access. Instead, the complaint charges the company failed to take such reasonable and necessary actions and/or expend resources necessary to provide such protection, and in doing so took unreasonable advantage of (i) the inability of its customers to protect their own interests; and (ii) the reasonable reliance by its customers on the company to act it their interests.
Finally, the suit demonstrates the significant level of regulatory and enforcement activity originating from the NYS DFS. In recent months, Mr. Lawsky has moved to exercise the full scope of his authorities and has positioned himself at the forefront of numerous financial services issues, including, for example, by: (i) developing a regulatory framework for virtual currencies; (ii) aggressively supervising mortgage servicing rights transfers; (iii) obtaining a substantial settlement in a state licensing enforcement action; and (iv) conducting an expansive investigation related to online payday lending.
Washington Amends Provisions Impacting Non-Depository Institutions
Recently, the state of Washington enacted SB 6134, which amends numerous provisions related to the supervision of non-depository institutions. The bill clarifies the statute of limitations applicable to certain violations by non-depository institutions by providing that enforcement actions for violations of the Escrow Act, the Mortgage Broker Practices Act, the Uniform Money Services Act (UMSA), the Consumer Loan Act, and the Check Cashers and Check Sellers Act (CCSA) are subject to a five-year statute of limitations. In addition, the bill provides that licensees under the CCSA and the UMSA that conduct business in multiple states and register through the NMLS must submit call reports to the Department of Financial Institutions. The changes take effect June 12, 2014.