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Financial Services Law Insights and Observations


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  • SEC Announces Compliance Penalties Against Investment Advisory Firms, Executives


    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

  • New York Announces Mortgage Discount Fees Enforcement Action


    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

  • 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

  • CFPB Sues Law Firm Over Alleged RESPA Violations


    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

  • D.C. Federal Court Dismisses Lawyer, Service Provider Challenge to CFPB Probe

    Consumer Finance

    On October 17, the U.S. District Court for the District of Columbia granted the CFPB’s motion to dismiss an attorney and service provider’s lawsuit challenging the authority of the CFPB.  The court declined to exercise jurisdiction in the case and did not reach the merits of the service provider’s constitutional challenge.  The court agreed with the CFPB’s argument that the service provider could obtain complete relief on its constitutional claim in an enforcement action currently pending in the Central District of California, and thus, injunctive and declaratory relief in the D.C. District Court was inappropriate.  The court also held that the attorney, who is not a party to the Central District of California action, lacked standing to raise her claim, because she had failed to demonstrate a substantial probability of being forced to produce privileged information to the Bureau.

    CFPB Enforcement Single-Director Structure

  • CFPB Deputy Director Discusses Supervisory Framework

    Consumer Finance

    As reported last week, the CFPB has decided to stop sending enforcement attorneys to routine examinations of financial institutions effective November 1.  In a recent interview, CFPB Deputy Director Steven Antonakes said that the decision followed an “assess[ment of] the effectiveness and efficiency of the operation” over the past two years.  He clarified that the presence of enforcement attorneys was “absolutely not” intended to intimidate supervised institutions but rather reflected the CFPB’s ongoing efforts to ensure “strong communication” between supervision and enforcement teams throughout the examination process.

    Going forward, Antonakes explained that enforcement attorneys will continue to have a “line of sight throughout the beginning, middle, and end of the exam process,” in addition to serving other important functions, like conducting independent investigations.  He noted the recent action targeting a debt settlement payment processor as “just one example of an independent investigation [the] enforcement team conducted completely outside of the supervisory process”.  Antonakes further explained that “charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations.”  Rather, the CFPB has “begun to implement a prioritization framework” that allocates resources based on potential consumer risk, assessed through consideration of several qualitative and quantitative factors, including:

    • the size of a product market;
    • a regulated entity’s market share in that product market;
    • the potential for consumer harm related to a particular product market; and
    • field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity's management, the existence of other regulatory actions, default rates, and consumer complaints.

    Antonakes also noted that, although the Bureau has “sacrificed some timeliness” in issuing examination reports to date in exchange for “strong quality control [] [that] ensure[s] consistency in [] findings across the country and across banks and non-banks,” the Bureau is “now positioned to ensure consistency while also improving timeliness.”  Specifically, he stated that, while “[t]here will always be some variance,” he would like exam reports to be issued “within 90-120 days from the time the examiner leaves the institution.”

    In terms of staffing, Antonakes noted the Office of Enforcement currently has approximately 150 employees, including more than 100 attorneys.  He said that the targeted staffing level for the supervision offices is about 600.  The offices are currently 75-80% staffed, but the CFPB hopes to have them fully staffed by the end of the year.

    CFPB Examination Enforcement

  • CFPB To Stop Sending Enforcement Attorneys to Exams

    Consumer Finance

    The CFPB has decided to end its policy of sending enforcement attorneys to routine examinations of supervised financial institutions. The policy change will take effect on November 1, 2013.

    The CFPB decision followed an internal review designed to streamline the examination process and make it less costly. The CFPB asserts that the change was not in response to criticism it has received from supervised institutions and others. Bank and nonbank financial service providers and their trade associations have objected to the CFPB’s policy from its start, arguing that it differs from the traditional approach taken by other federal regulators and limits the effectiveness of the examination process. Hearing those concerns, last November the CFPB Ombudsman’s Office identified the presence of enforcement attorneys at supervisory examinations as one of several “systemic issues” at the Bureau and recommended that the CFPB review its implementation of the policy. In addition, the Federal Reserve Office of Inspector General, which also serves as the CFPB’s inspector general, was in the process of reviewing the policy and was set to release its report in the coming weeks, and just recently the Bipartisan Policy Center called on the CFPB to end the policy.

    CFPB Examination Enforcement

  • Special Alert: CFPB Announces First HMDA Enforcement Actions, Issues HMDA Guidance


    On October 9, the CFPB (or Bureau) announced it had assessed civil money penalties totaling $459,000 against two financial institutions—one bank and one nonbank—after examinations identified significant data errors in mortgage loans reported pursuant to the Home Mortgage Disclosure Act (HMDA). The Bureau simultaneously issued a HMDA bulletin to all mortgage lenders regarding the elements of an effective HMDA compliance management system, resubmission thresholds, and factors the Bureau may consider when evaluating whether to pursue a public HMDA enforcement action and related civil money penalties.

    Enforcement Actions

    According to the consent orders (available here and here), both financial institutions maintained inadequate HMDA compliance systems that resulted in the reporting of “severely compromised mortgage lending data.” The nonbank, which reported 21,015 applications in its 2011 HMDA Loan Application Register (LAR), agreed to pay a penalty of $425,000. The consent order notes previous violations identified by the state regulator and states that the Bureau sampled 32 loans and concluded that the sample error rate unreasonably exceeded the Bureau’s resubmission threshold, although the error rate was not disclosed. The investigation of the nonbank was conducted in cooperation with the Massachusetts Division of Banks, which announced its own consent order imposing a $50,000 administrative fine at the same time that the CFPB announced its order. The bank, which reported 5,785 applications in its 2011 HMDA LAR, agreed to pay a penalty of $34,000. The consent order against the bank states that the bank’s sample error rate was 38 percent but does not disclose the size of the sample. Both institutions will be required to correct and resubmit their 2011 HMDA data and develop and implement an effective HMDA compliance management system to prevent future violations. Neither of the orders reveals the specific deficiencies in the institutions’ HMDA compliance programs.


    As noted above, the Bureau also issued a bulletin regarding HMDA compliance along with HMDA resubmission guidelines. The bulletin discusses the components of an effective HMDA compliance management system, including: (i) comprehensive policies, procedures, and internal controls; (ii) comprehensive and regular internal, pre-submission HMDA audits; (iii) a process for reviewing regulatory changes; (iv) reporting systems commensurate with lending volume; (v) one or more individuals responsible for oversight, data entry, and data updates, including timely and accurate reporting; (vi) appropriate, sufficient, and periodic employee training on HMDA, Regulation C, and reporting requirements; (vii) a process for effective corrective action in response to deficiencies identified; and (viii) appropriate board and management oversight.

    In addition, the bulletin announces the Bureau’s new HMDA Resubmission Schedule and Guidelines, which sets forth thresholds that will apply when determining whether resubmission is required when errors are discovered in a HMDA data integrity examination. The new resubmission schedule creates a two-tier system in which resubmission thresholds are lower for institutions reporting fewer than 100,000 entries on the HMDA LAR. Under the guidance, institutions that report 100,000 or more entries on their LAR should correct and resubmit their entire HMDA LAR if the error rate exceeds four percent of the total sample (or two percent in any individual data field), while institutions with fewer than 100,000 entries on their LAR should correct and resubmit their LAR if the error rate exceeds ten percent in the total sample (or five percent in any individual data field). The guidance states that resubmission for error rates below the applicable thresholds may be called for if “the errors prevent an accurate analysis of the institution’s lending.” Under the Bureau’s current standards, institutions, regardless of size, must resubmit a corrected LAR if any “key fields” have an error rate of five percent, or if at least ten percent of the institution’s records have an error in at least one of the key fields. The new resubmission schedule and guidelines will apply to all HMDA data integrity reviews initiated on or after January 18, 2014.

    Finally, the bulletin provides a non-exclusive list of factors the Bureau may consider when evaluating whether to pursue a public HMDA enforcement action, including: (i) size of the institution’s HMDA LAR and observed error rates; (ii) whether errors were self-identified and independently corrected outside of an examination; and (iii) history of previous HMDA errors that exceed the permissible threshold. In addition, the guidance states that the Bureau may seek civil money penalties for HMDA violations depending on such factors as (i) size of financial resources and good faith effort of compliance by the institution; (ii) gravity of the violations or failure to pay; (iii) severity of harm to consumers; (iv) history of previous violations; and (v) such other matters as justice may require.


    These recent CFPB announcements reinforce BuckleySandler’s experience to date that the CFPB is stepping up scrutiny of HMDA practices both at banks and nonbanks. These examination and enforcement initiatives dovetail with the CFPB’s other recent HMDA-related activities. The CFPB recently launched new tools to allow the public—including consumer and housing advocates—to leverage HMDA data to attempt to identify lending patterns. The CFPB also has started internally drafting a proposed rule to implement changes to HMDA data collection requirements, as required by the Dodd-Frank Act. Though a final rule is a distant prospect, once finalized the CFPB may require institutions to report, among other things: (i) ages of loan applicants and mortgagors; (ii) the difference between the annual percentage rate associated with the loan and benchmark rates for all loans; (iii) the term of any prepayment penalty; (iv) the term of the loan and of any introductory interest rate for the loan; (v) the origination channel; and (vi) the credit scores of applicants and mortgagors.

    All of these developments suggest bank and nonbank mortgage originators should review their HMDA practices and processes to ensure they are reporting data that are accurate or at least within the CFPB’s revised tolerances.

    CFPB Enforcement HMDA Agency Rule-Making & Guidance

  • New York AG Announces Mortgage Servicing Enforcement Actions


    On October 2, New York Attorney General Eric Schneiderman (NY AG) announced actions to address alleged failures by two servicers to comply with certain of the 304 servicing standards established by the National Mortgage Servicing Settlement. In May, the NY AG threatened to sue both servicers based on borrower complaints that the servicers were not fulfilling their settlement obligations. The NY AG now has initiated proceedings to enforce the terms of the settlement against one of the banks, alleging numerous servicing deficiencies. In exchange for the NY AG suspending planned legal action against the second servicer, that servicer entered an agreement pursuant to which it is required to, among other things, (i) designate staff with decision-making authority to every housing counseling and legal services agency within the NY AG’s Homeowner Protection Program, (ii) revise the letters it uses to request from borrowers missing documents or information needed to complete a loan modification, (iii) halt the sale of mortgage servicing rights to third parties on New York mortgages when borrowers are already in negotiations for a loan modification or are making trial payments on a loan modification, and (iv) allow borrowers' attorneys permission to negotiate loan modifications directly with bank staff, as opposed to the bank's outside foreclosure lawyers.

    Mortgage Servicing State Attorney General Enforcement National Mortgage Servicing Settlement

  • New York AG Settles with Payday Loan Debt Collectors

    Consumer Finance

    On September 30, the NY AG announced settlements with five companies that collected debts on allegedly illegal payday loans. The AG alleged that the companies collected on behalf of payday lenders who allegedly made illegal loans; under state law, the maximum allowable interest rate is 16% for most lenders not licensed by the state. In August, the NY AG sued payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. In March, the New York Department of Financial Services warned third-party debt collectors that it is illegal to attempt to collect a debt on an illegal payday loan made in New York, even if such loans were made on the Internet, and followed up with a similar warning to lenders in August. The NY AG’s settlement requires the five companies collectively to pay approximately $280,000 in restitution and $30,000 in penalties. One of the companies is required to reverse negative reporting to the credit reporting bureaus related to approximately 8,550 consumer accounts. In addition, all of the companies will be prohibited from collecting on payday loans from New Yorkers in the future.

    Payday Lending State Attorney General Debt Collection Enforcement


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