By Thomas G. Wolfe, J.D.
The Federal Deposit Insurance Corporation’s Office of Inspector General has issued a report evaluating “Technology Service Provider Contracts with FDIC-Supervised Institutions.” Generally, while the Inspector General commends the FDIC’s efforts during the past two years to provide financial institutions with guidance on “comprehensive business continuity, cybersecurity, and vendor management,” the February 2017 report (Report No. EVAL-17-004) recommends that the FDIC continue to communicate to supervised financial institutions the importance of bolstering risk-management practices in connection with third-party “technology service provider contracts (TSPs).” In underscoring ways in which the FDIC can direct the focus of its supervised financial institutions on TSP provisions and terms, the IG also recommends that the FDIC’s Division of Risk Management study and assess the extent to which the financial institutions have effectively addressed these issues.
In two prior evaluations, the IG determined that “greater scrutiny” of the sufficiency of TSP contracts with FDIC-supervised institutions was warranted. The stated objective of the latest evaluation was to “assess how clearly FDIC-supervised institutions’ contracts with TSPs address the TSP’s responsibilities related to (1) business continuity planning and (2) responding to and reporting on cybersecurity incidents.”
Findings. According to the report, the supervised financial institutions’ contracts with TSPs did not clearly address TSP responsibilities and “lacked specific contract provisions to protect FI interests or preserve FI rights.” Moreover, the IG found that the pertinent contracts “did not sufficiently define key terminology related to business continuity and incident response.” Consequently, the contracts provided financial institutions with “limited information and assurance” that TSPs could “recover and resume critical systems, services, and operations timely and effectively if disrupted” or that TSPs “would take appropriate steps to contain and control incidents and report them timely to appropriate parties.”
Recommendations. The IG’s report recommends that the FDIC’s Division of Risk Management Supervision continue to stress to the supervised financial institutions the importance of: “(1) fully considering and assessing the risks that TSPs present; (2) ensuring that contracts with TSPs include specific detailed provisions that address FI-identified risks and protect FI interests; and (3) clearly defining key contract terms that would be important in understanding FI and TSP rights and responsibilities.” In addition, the report recommends that, “at an appropriate time,” the FDIC division evaluate the supervised financial institutions’ progress on effectively addressing these issues.
FDIC response. According to the report, the FDIC concurred with the IG’s recommendations and agreed to complete its responsive actions by October 2018.
For more information about Inspector General reports about federal financial regulators, subscribe to the Banking and Finance Law Daily.
Tuesday, February 28, 2017
Thursday, February 23, 2017
Secondary market mortgage buyer can ignore public assistance income
By Richard A. Roth, J.D.
A bank that refused to consider Section 8 housing aid when it decided which mortgage loans met its criteria for secondary market purchases did not violate the Equal Credit Opportunity Act, according to the U.S. Court of Appeals for the Fifth Circuit. Rejecting the Consumer Financial Protection Bureau’s argument for a broader definition of “creditor” under the ECOA, the court said the bank did not participate in the lender’s credit decisions (Alexander v. AmeriPro Funding, Inc.).
Consumers who wanted to buy homes in the Houston, Texas, area sued Wells Fargo Bank and AmeriPro Funding for claimed ECOA violations. According to the consumers, Wells Fargo’s secondary market purchase guidelines explicitly said the bank would not buy mortgages if the buyer’s income came in part from Section 8 assistance. Since AmeriPro wanted to be able to sell mortgages it originated to Wells Fargo, it likewise refused to consider Section 8 assistance.
However, the ECOA makes it illegal for a creditor to discriminate against an applicant because some or all of the applicant’s income is from a public assistance program (15 U.S.C. §1691(a)(2)). AmeriPro directly violated this ban, the consumers claimed, and Wells Fargo violated it as well because its guidelines amounted to participating in AmeriPro’s credit decisions.
Loan buyer discrimination. Potentially the most significant discussion addressed four applicants’ claims that Wells Fargo was a creditor under the ECOA and that it had discriminated against them. Despite the CFPB’s arguments supporting the consumers, the theory was rejected.
Looking at the ECOA’s definitions of “applicant” and “creditor,” the court decided that Wells Fargo could be a creditor only if it participated in the decision to extend credit. The bank’s secondary market purchasing guidelines did not constitute participation in the credit decision.
The CFPB argued for a broader view of participation, such as that included in Reg. B. However, even Reg. B would not include “those who have no direct involvement whatsoever in an individual credit decision,” according to the court.
Other lending. This could be seen as bringing into question the CFPB’s guidance on the ECOA, Reg. B—Equal Credit Opportunity (12 CFR Part 1002), and indirect auto lending. The bureau has, since issuing guidance in 2013, held and enforced the position that indirect auto lenders—companies that buy loans originated by automobile dealers—are creditors and can be responsible for the dealers’ discriminatory practices (see CFPB Bulletin 2013-02).
However, the bureau’s position in this case seems to have gone one step farther than its indirect auto lending guidance. The process described in the 2013 bulletin included the dealer forwarding the consumer’s credit information to one or more potential loan borrowers, who then would make an individual decision as to whether to buy the loan. While mortgage loan originators may follow a similar practice in finding investors to fund a loan, the court opinion did not indicate that Wells Fargo, as a secondary market buyer, was consulted on individual loans before credit decisions were made. In fact, the court’s reference to direct involvement in an individual credit decision could imply that there was no such prior consultation.
Wells Fargo applicants. The court swiftly dispensed with the claims of the two consumers who applied directly to Wells Fargo. The consumers were applicants under the ECOA, and Wells Fargo was a creditor, the court agreed. However, the consumers had offered nothing to show that the bank had discriminated against them as a lender. Rather, they relied only on the bank’s secondary market purchase guidelines.
The ECOA applies only to loan originators, the court said, not to secondary market buyers. Moreover, what Wells Fargo did as a loan buyer was distinct from what it did as a loan originator. There was no showing that Wells Fargo refused to consider Section 8 income when it originated loans, the court noted.
Application requirement. The consumers who only made inquiries were not applicants under the ECOA and thus were not protected by the law, the court decided. The ECOA said that a creditor who violated the law was liable to an “aggrieved applicant,” and to be an applicant one must actually request credit.
It was possible that the consumers were discouraged from making an application because they were told their Section 8 income would not be considered, the court conceded. Also, Reg. B banned creditors from discouraging applications on a prohibited basis, the court observed. However, the ECOA does not allow a suit by an “aggrieved prospective applicant.”
The CFPB can enforce a regulatory ban on discouragement, the court said, but that did not mean there was a private right of action if the law did not provide one.
For more information about Equal Credit Opportunity Act issues, subscribe to the Banking and Finance Law Daily.
A bank that refused to consider Section 8 housing aid when it decided which mortgage loans met its criteria for secondary market purchases did not violate the Equal Credit Opportunity Act, according to the U.S. Court of Appeals for the Fifth Circuit. Rejecting the Consumer Financial Protection Bureau’s argument for a broader definition of “creditor” under the ECOA, the court said the bank did not participate in the lender’s credit decisions (Alexander v. AmeriPro Funding, Inc.).
Consumers who wanted to buy homes in the Houston, Texas, area sued Wells Fargo Bank and AmeriPro Funding for claimed ECOA violations. According to the consumers, Wells Fargo’s secondary market purchase guidelines explicitly said the bank would not buy mortgages if the buyer’s income came in part from Section 8 assistance. Since AmeriPro wanted to be able to sell mortgages it originated to Wells Fargo, it likewise refused to consider Section 8 assistance.
However, the ECOA makes it illegal for a creditor to discriminate against an applicant because some or all of the applicant’s income is from a public assistance program (15 U.S.C. §1691(a)(2)). AmeriPro directly violated this ban, the consumers claimed, and Wells Fargo violated it as well because its guidelines amounted to participating in AmeriPro’s credit decisions.
Loan buyer discrimination. Potentially the most significant discussion addressed four applicants’ claims that Wells Fargo was a creditor under the ECOA and that it had discriminated against them. Despite the CFPB’s arguments supporting the consumers, the theory was rejected.
Looking at the ECOA’s definitions of “applicant” and “creditor,” the court decided that Wells Fargo could be a creditor only if it participated in the decision to extend credit. The bank’s secondary market purchasing guidelines did not constitute participation in the credit decision.
The CFPB argued for a broader view of participation, such as that included in Reg. B. However, even Reg. B would not include “those who have no direct involvement whatsoever in an individual credit decision,” according to the court.
Other lending. This could be seen as bringing into question the CFPB’s guidance on the ECOA, Reg. B—Equal Credit Opportunity (12 CFR Part 1002), and indirect auto lending. The bureau has, since issuing guidance in 2013, held and enforced the position that indirect auto lenders—companies that buy loans originated by automobile dealers—are creditors and can be responsible for the dealers’ discriminatory practices (see CFPB Bulletin 2013-02).
However, the bureau’s position in this case seems to have gone one step farther than its indirect auto lending guidance. The process described in the 2013 bulletin included the dealer forwarding the consumer’s credit information to one or more potential loan borrowers, who then would make an individual decision as to whether to buy the loan. While mortgage loan originators may follow a similar practice in finding investors to fund a loan, the court opinion did not indicate that Wells Fargo, as a secondary market buyer, was consulted on individual loans before credit decisions were made. In fact, the court’s reference to direct involvement in an individual credit decision could imply that there was no such prior consultation.
Wells Fargo applicants. The court swiftly dispensed with the claims of the two consumers who applied directly to Wells Fargo. The consumers were applicants under the ECOA, and Wells Fargo was a creditor, the court agreed. However, the consumers had offered nothing to show that the bank had discriminated against them as a lender. Rather, they relied only on the bank’s secondary market purchase guidelines.
The ECOA applies only to loan originators, the court said, not to secondary market buyers. Moreover, what Wells Fargo did as a loan buyer was distinct from what it did as a loan originator. There was no showing that Wells Fargo refused to consider Section 8 income when it originated loans, the court noted.
Application requirement. The consumers who only made inquiries were not applicants under the ECOA and thus were not protected by the law, the court decided. The ECOA said that a creditor who violated the law was liable to an “aggrieved applicant,” and to be an applicant one must actually request credit.
It was possible that the consumers were discouraged from making an application because they were told their Section 8 income would not be considered, the court conceded. Also, Reg. B banned creditors from discouraging applications on a prohibited basis, the court observed. However, the ECOA does not allow a suit by an “aggrieved prospective applicant.”
The CFPB can enforce a regulatory ban on discouragement, the court said, but that did not mean there was a private right of action if the law did not provide one.
For more information about Equal Credit Opportunity Act issues, subscribe to the Banking and Finance Law Daily.
Wednesday, February 22, 2017
Enhanced cybersecurity standards should be consistent and risk-based, say industry groups
By J. Preston Carter, J.D., LL.M.
Comment
letters to the federal financial regulatory agencies from a number of industry
groups urge the adoption of a risk-based approach and consistent standards in
the agencies’ proposed enhanced cybersecurity standards for big banks. Last
October the Federal Reserve Board, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency proposed enhanced cybersecurity
risk-management and resilience standards for large and interconnected entities
under their supervision, as well as to services provided by third parties to
these financial institutions.
SIFMA, ABA, and IIB. In one comment letter, the Securities Industry and Financial
Markets Association, American Bankers Association, and Institute of
International Bankers noted the "extensive work that has been done by
regulators and industry to develop core principles and practices that are
risk-based and harmonized across the regulatory environment." The groups
also noted that financial institutions have already designed cybersecurity
programs to align with the NIST Cybersecurity Framework and to comply with
federal cybersecurity regulations such as those promulgated under the
Gramm-Leach-Bliley Act, which also adopt risk-based approaches to
cybersecurity.
If
any new rule is promulgated, they urged, it should adopt a risk-based approach
consistent with the global approach used in voluntary frameworks such as the
NIST Cybersecurity Framework, setting control objectives rather than
prescriptive requirements.
Specifically,
the letter states, the agencies should consider the risks of certain provisions
within the proposed regulation, which include: (1) arbitrary application of the
proposal to entities with $50 billion in assets (regardless of risk),
unnecessarily placing regional financial institutions in-scope; (2) creation of
a mandatory two-hour recovery time objective irrespective of active cyber
threats, potentially forcing targeted institutions to choose between resuming
services prior to firm readiness, or resuming services after the two-hour
window if necessary and facing noncompliance ramifications; and (3) lack of
harmonization with existing industry standards, which exacerbates existing
industry cyber risks by forcing information security personnel into compliance
functions, rather than actively defending their institutions.
FSR. The Financial Services Roundtable technology policy division
BITS said, "It is critical that the Agencies adopt a
risk-based approach to cybersecurity regulation." According to the FSR,
this would permit financial institutions to align their cyber risk strategies
with their particular risk profiles. The letter continued, "Rather than imposing a rigid set of
requirements that purports to fit the needs of all institutions in this very
diverse sector, a risk-based approach would hold institutions accountable to
develop a customized, enterprise-wide program of cyber preparedness based on a
more accurate assessment of their inherent and residual risks."
The
letter also highlighted the "many overlapping cybersecurity regulations
facing the financial industry," such as the Interagency Guidelines
Establishing Information Security Standards, the FFIEC Cybersecurity Assessment
Tool, the New York Department of Financial Services cybersecurity regulations
for financial services companies, and the Office of the Comptroller of the
Currency’s guidance on third-party relationships and risk management.
"Viewed in isolation," FSR said, "these regulations are each
well-intentioned and can contribute to the cybersecurity of the financial
services sector. When layered upon one another, however, they create differing
and potentially conflicting approaches to cybersecurity."
The
FSR called for "a temporary pause in regulatory proceedings and adoption
of a more unified approach to cyber risk management … coalescing around clear
and more consistent standards that simplify execution and translates into
improved critical infrastructure protection."
For more information about cybersecurity standards for financial institutions, subscribe to the Banking and Finance Law Daily.
Tuesday, February 21, 2017
En banc rehearing of suit invalidating CFPB structure granted
By Richard Roth
The U.S. Court of Appeals for the District of Columbia Circuit on Feb. 16, 2017, granted the Consumer Financial Protection Bureau’s request for a full-court rehearing of PHH Corp. v. CFPB, in which a majority of a three-judge panel decided that constitutional separation of powers principles prevents the Dodd-Frank Act’s organization of the CFPB. According to the panel decision, it is impermissible for the bureau to be structured as an independent agency whose director can be removed by the president only for cause. The panel said that the bureau is instead to be treated as an executive agency whose director can be removed at the president’s pleasure.
The per curiam order by the full court explicitly vacates the panel’s decision.
RESPA enforcement suit. The origin of the case was a CFPB administrative enforcement action against PHH Corp. that alleged violations of the Real Estate Settlement Procedures Act ban on kickbacks and unearned fees. The bureau reinterpreted RESPA’s application to captive insurance companies, applied its new interpretation to PHH Corp.’s prior business activities, found a RESPA violation, and entered a $109 million disgorgement order.
PHH Corp. appealed the bureau’s administrative enforcement proceeding, asserting both that the CFPB was unconstitutional and that the retroactive application of RESPA had denied the company due process.
Panel RESPA decision. The three-judge panel unanimously rejected the bureau’s RESPA arguments. The CFPB’s interpretation of RESPA was wrong, the judges decided. Moreover, even if the bureau’s interpretation was right, it could not be applied to prior conduct that was legal under the prior interpretation.
The new interpretation could at most apply only to conduct within the three-year statute of limitations, the judges added. They unanimously rejected the bureau’s claim that there was no time limit on administrative enforcement proceedings.
Separation of powers. Two of the three judges, over the objections of a dissenter, also decided that the bureau’s single director structure violated the Constitution’s separation of powers requirements. Noting that the Constitution neither condemned nor approved the bureau’s arrangement, the majority based its conclusions on a lack of precedent.
Historical practices consistently allowed an executive agency to have a single director but required independent agencies to have multi-member boards, the majority said. The use of a multi-member board provides a check against arbitrary actions and abuses of power because power is not concentrated in the hands of one person.
However, the majority declined the sweeping remedy that PHH Corp. desired—the invalidation of the entire CFPB. The Dodd-Frank Act included a severability clause that made clear Congress’s intent. The removal-for-cause requirement was to be severed from the remainder of the act and the bureau was to continue to operate.
The dissenter argued that the case should have been decided based on the interpretation of RESPA. It was unnecessary to consider the larger constitutional issue.
Issues outlined by the court. The order granting rehearing asked the parties to address three specific issues:
The court could be signaling that it sees some connection between the two cases, given the explicit question in the PHH Corp. order, that the court granted en banc rehearings of both cases on the same day, and that oral arguments in both cases are scheduled for the same day.
Possible results. There are three likely results of the en banc rehearing:
Oral arguments are scheduled for May 24, 2017.
For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.
The U.S. Court of Appeals for the District of Columbia Circuit on Feb. 16, 2017, granted the Consumer Financial Protection Bureau’s request for a full-court rehearing of PHH Corp. v. CFPB, in which a majority of a three-judge panel decided that constitutional separation of powers principles prevents the Dodd-Frank Act’s organization of the CFPB. According to the panel decision, it is impermissible for the bureau to be structured as an independent agency whose director can be removed by the president only for cause. The panel said that the bureau is instead to be treated as an executive agency whose director can be removed at the president’s pleasure.
The per curiam order by the full court explicitly vacates the panel’s decision.
RESPA enforcement suit. The origin of the case was a CFPB administrative enforcement action against PHH Corp. that alleged violations of the Real Estate Settlement Procedures Act ban on kickbacks and unearned fees. The bureau reinterpreted RESPA’s application to captive insurance companies, applied its new interpretation to PHH Corp.’s prior business activities, found a RESPA violation, and entered a $109 million disgorgement order.
PHH Corp. appealed the bureau’s administrative enforcement proceeding, asserting both that the CFPB was unconstitutional and that the retroactive application of RESPA had denied the company due process.
Panel RESPA decision. The three-judge panel unanimously rejected the bureau’s RESPA arguments. The CFPB’s interpretation of RESPA was wrong, the judges decided. Moreover, even if the bureau’s interpretation was right, it could not be applied to prior conduct that was legal under the prior interpretation.
The new interpretation could at most apply only to conduct within the three-year statute of limitations, the judges added. They unanimously rejected the bureau’s claim that there was no time limit on administrative enforcement proceedings.
Separation of powers. Two of the three judges, over the objections of a dissenter, also decided that the bureau’s single director structure violated the Constitution’s separation of powers requirements. Noting that the Constitution neither condemned nor approved the bureau’s arrangement, the majority based its conclusions on a lack of precedent.
Historical practices consistently allowed an executive agency to have a single director but required independent agencies to have multi-member boards, the majority said. The use of a multi-member board provides a check against arbitrary actions and abuses of power because power is not concentrated in the hands of one person.
However, the majority declined the sweeping remedy that PHH Corp. desired—the invalidation of the entire CFPB. The Dodd-Frank Act included a severability clause that made clear Congress’s intent. The removal-for-cause requirement was to be severed from the remainder of the act and the bureau was to continue to operate.
The dissenter argued that the case should have been decided based on the interpretation of RESPA. It was unnecessary to consider the larger constitutional issue.
Issues outlined by the court. The order granting rehearing asked the parties to address three specific issues:
- Is the single director structure a violation of the separation of powers principles and, if not, is severing the removal for cause requirement the proper remedy?
- Would it be proper to decide the case based on the RESPA interpretation issues and avoid deciding the larger constitutional issue?
- What effect, if any, would a decision in Lucia v. SEC have on the PHH Corp. case?
The court could be signaling that it sees some connection between the two cases, given the explicit question in the PHH Corp. order, that the court granted en banc rehearings of both cases on the same day, and that oral arguments in both cases are scheduled for the same day.
Possible results. There are three likely results of the en banc rehearing:
- The effects of the panel decision could be affirmed. In that case, it would be up to the CFPB to decide whether to ask the Supreme Court to hear an appeal. Of course, whether President Trump would attempt to remove CFPB Director Richard Cordray in the interim, and what the result of such an attempt might be, would be open questions.
- The panel’s decision could be rejected, with the full court deciding that the single-director structure does not violate the Constitution.
- The full court could decide that the CFPB’s administrative order should be overturned based on the RESPA issues. In that case, the court could exercise judicial restraint and decline to consider the constitutional issues.
Oral arguments are scheduled for May 24, 2017.
For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.
Thursday, February 16, 2017
‘Laughable’ loan applications might cost Bank of America $900,000 restitution
By Katalina M. Bianco, J.D.
A U.S. district judge should not have ordered defendants convicted of mail fraud to pay Bank of America $893,015 in restitution without considering the bank’s responsibility for its losses, the U.S. Court of Appeals for the Seventh Circuit has decided. The judge was told he should consider whether fining the defendants in the same amount would be a better choice (U.S. v. Litos, Feb. 10, 2017, Posner, R.).
The three defendants were convicted of scheming to induce B of A to make mortgage loans to straw buyers that they knew the buyers could never repay. The properties were bought from the defendants, who furnished the buyers with necessary down payments and helped them complete loan applications. When the purchases were complete, the defendants ended up with the loan proceeds, and the loans went into default.
Bank’s complicity. In ordering restitution, the judge should not have relied on a claim by a bank employee that B of A would not have made the loans if it had known the source of the down payments, the appellate court said. The bank "ignored clear signs" of problems with the loans, the court said, and the bank’s lack of clean hands made the restitution order questionable.
The appellate court made its scorn for B of A’s practices clear, beginning by charging the bank with "a long history of blunders and shady practices." Statements by the district judge that the loan applications were "a joke on their face" and "laughable" were supported by the loans, the appellate court said. B of A made multiple mortgage loans to individuals in short spans of time, based on financial claims in loan applications that were clearly untrue—the most notable transactions being the extension of six loans over only 10 days to a borrower who falsely claimed to own two other properties, to have $3,400 in monthly gross income, and to have $320,000 in a bank account.
The fraud was "transparent," the court charged—if the bank had done any investigation, it would have discovered that the borrowers’ applications were fraudulent and that the loans would not be repaid. B of A was not negligent, it was reckless, ignoring the risk of the loans because it intended to sell the loans and transfer the risk to Fannie Mae. The district judge needed to consider whether a reckless bank is entitled to restitution, the appellate court said.
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A U.S. district judge should not have ordered defendants convicted of mail fraud to pay Bank of America $893,015 in restitution without considering the bank’s responsibility for its losses, the U.S. Court of Appeals for the Seventh Circuit has decided. The judge was told he should consider whether fining the defendants in the same amount would be a better choice (U.S. v. Litos, Feb. 10, 2017, Posner, R.).
The three defendants were convicted of scheming to induce B of A to make mortgage loans to straw buyers that they knew the buyers could never repay. The properties were bought from the defendants, who furnished the buyers with necessary down payments and helped them complete loan applications. When the purchases were complete, the defendants ended up with the loan proceeds, and the loans went into default.
Bank’s complicity. In ordering restitution, the judge should not have relied on a claim by a bank employee that B of A would not have made the loans if it had known the source of the down payments, the appellate court said. The bank "ignored clear signs" of problems with the loans, the court said, and the bank’s lack of clean hands made the restitution order questionable.
The appellate court made its scorn for B of A’s practices clear, beginning by charging the bank with "a long history of blunders and shady practices." Statements by the district judge that the loan applications were "a joke on their face" and "laughable" were supported by the loans, the appellate court said. B of A made multiple mortgage loans to individuals in short spans of time, based on financial claims in loan applications that were clearly untrue—the most notable transactions being the extension of six loans over only 10 days to a borrower who falsely claimed to own two other properties, to have $3,400 in monthly gross income, and to have $320,000 in a bank account.
The fraud was "transparent," the court charged—if the bank had done any investigation, it would have discovered that the borrowers’ applications were fraudulent and that the loans would not be repaid. B of A was not negligent, it was reckless, ignoring the risk of the loans because it intended to sell the loans and transfer the risk to Fannie Mae. The district judge needed to consider whether a reckless bank is entitled to restitution, the appellate court said.
For more information about banking law cases, subscribe to the Banking and Finance Law Daily.
Tuesday, February 14, 2017
Trade groups urge FHFA to increase consultation on 2017 Scorecard
By Thomas G. Wolfe, J.D.
In connection with the Federal Housing Finance Agency’s “2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions,” nine national banking, mortgage, and finance groups have jointly submitted a letter to FHFA Director Melvin Watt, urging the agency to “engage more openly and broadly” with the industry “through a public forum.” Further, in their Feb. 8, 2017, letter, the trade groups ask the FHFA to better inform the industry about relevant data from the government-sponsored enterprises that may impact the credit score models and to share its assessment of fair lending risks “posed by contemplated changes.”
The letter from the American Bankers Association, Community Home Lenders Association, Community Mortgage Lenders of America, Credit Union National Association, Housing Policy Council of the Financial Services Roundtable, Independent Community Bankers of America, Mortgage Bankers Association, National Association of Federally-Insured Credit Unions, and U.S. Mortgage Insurers also requests that the FHFA provide an implementation period “of at least 24 months once there is a final decision regarding any new/alternative credit score model.”
As observed in the trade groups’ letter, the 2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions directs the Enterprises to “conclude assessment of updated credit score models for underwriting, pricing, and investor disclosures, and, as appropriate, plan for implementation.” While the groups express their appreciation for the FHFA’s work in this area, they urge the FHFA to actively seek “additional consultation with industry on potential options.” Moreover, the trade groups propose a meeting with the FHFA to discuss these options and to provide feedback “directly to FHFA staff.”
For more information about the government-sponsored enterprises and the concerns of the financial services industry, subscribe to the Banking and Finance Law Daily.
In connection with the Federal Housing Finance Agency’s “2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions,” nine national banking, mortgage, and finance groups have jointly submitted a letter to FHFA Director Melvin Watt, urging the agency to “engage more openly and broadly” with the industry “through a public forum.” Further, in their Feb. 8, 2017, letter, the trade groups ask the FHFA to better inform the industry about relevant data from the government-sponsored enterprises that may impact the credit score models and to share its assessment of fair lending risks “posed by contemplated changes.”
The letter from the American Bankers Association, Community Home Lenders Association, Community Mortgage Lenders of America, Credit Union National Association, Housing Policy Council of the Financial Services Roundtable, Independent Community Bankers of America, Mortgage Bankers Association, National Association of Federally-Insured Credit Unions, and U.S. Mortgage Insurers also requests that the FHFA provide an implementation period “of at least 24 months once there is a final decision regarding any new/alternative credit score model.”
As observed in the trade groups’ letter, the 2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions directs the Enterprises to “conclude assessment of updated credit score models for underwriting, pricing, and investor disclosures, and, as appropriate, plan for implementation.” While the groups express their appreciation for the FHFA’s work in this area, they urge the FHFA to actively seek “additional consultation with industry on potential options.” Moreover, the trade groups propose a meeting with the FHFA to discuss these options and to provide feedback “directly to FHFA staff.”
For more information about the government-sponsored enterprises and the concerns of the financial services industry, subscribe to the Banking and Finance Law Daily.
Thursday, February 9, 2017
RushCard technology breakdown costs companies $13 million
By Andrew A. Turner, J.D.
After technological breakdowns in October 2015 left RushCard users unable to access their money and without customer support, the Consumer Financial Protection Bureau says that it received more than 800 complaints. The failures culminated in an enforcement action brought by the CFPB against UniRush, which administers the RushCard, and Mastercard, its payment processor.
RushCard is a prepaid card advertised as a way to get direct deposits, including government benefits or payroll funds “up to two days sooner” by allowing deposits of that money onto the card. The CFPB found that Mastercard or UniRush denied consumers access to their own money, botched the processing of deposits and payments, gave consumers inaccurate account information, and failed to provide customer service to consumers impacted by the breakdowns.
Mastercard and UniRush have agreed to pay a total of $13 million to settle the charges based on an October 2015. According to the CFPB, more than 45,000 consumers were in some way affected by problems that arose when UniRush changed its payment processor to Mastercard. The two companies are jointly liable for approximately $10 million in consumer redress and an additional $3 million civil penalty. The settlement does not include any admission of wrongdoing by either company.
Service breakdown. Bureau Director Richard Cordray said that tens of thousands of users were locked out of their RushCard accounts, with service disruptions in some cases lasting for weeks. Many RushCard users rely on the card to pay basic living expenses because they have no bank accounts, Cordray said, and their inability to make payments resulted in late fees and penalties.
UniRush also failed to process direct deposits for approximately 45,000 consumers and improperly returned deposits for others, Cordray said. This left consumers unable to gain access to their funds.
On the other hand, some deposits were erroneously posted twice, and some debits were not posted in a timely manner, Cordray charged. This led users to believe they had larger balances than was true, which in turn induced them to overdraw their accounts. UniRush compounded the problem by using subsequent deposits to repay the overdrafts without notifying the customers.
UniRush’s customer service personnel were inadequate to handle the problems, the bureau added.
Mastercard alleged failures. The consent order against Mastercard is based on what the bureau described as the company’s inadequate preparation for the change-over. The company’s testing did not accurately simulate the conditions of the change-over, which generated an overly optimistic estimate of how quickly the process would be completed. The company rejected UniRush’s request for additional testing of one necessary data file that Mastercard knew was central to a successful change-over, the bureau said.
Mastercard also did not communicate adequately with UniRush, the CFPB added.
Consent order. Under the consent order, entered under the bureau’s authority to act against unfair, deceptive, or abusive acts or practices, the two companies are permitted to decide between themselves how to allocate liability for the $13 million in payments. However, the CFPB is not bound by their agreement, leaving the bureau able to collect the full amount should either company default.
Mastercard is required to create procedures to avoid similar problems in future change-overs, while UniRush must create an incident tracking system and a disaster recovery plan. Both companies are to implement improved compliance programs.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
After technological breakdowns in October 2015 left RushCard users unable to access their money and without customer support, the Consumer Financial Protection Bureau says that it received more than 800 complaints. The failures culminated in an enforcement action brought by the CFPB against UniRush, which administers the RushCard, and Mastercard, its payment processor.
RushCard is a prepaid card advertised as a way to get direct deposits, including government benefits or payroll funds “up to two days sooner” by allowing deposits of that money onto the card. The CFPB found that Mastercard or UniRush denied consumers access to their own money, botched the processing of deposits and payments, gave consumers inaccurate account information, and failed to provide customer service to consumers impacted by the breakdowns.
Mastercard and UniRush have agreed to pay a total of $13 million to settle the charges based on an October 2015. According to the CFPB, more than 45,000 consumers were in some way affected by problems that arose when UniRush changed its payment processor to Mastercard. The two companies are jointly liable for approximately $10 million in consumer redress and an additional $3 million civil penalty. The settlement does not include any admission of wrongdoing by either company.
Service breakdown. Bureau Director Richard Cordray said that tens of thousands of users were locked out of their RushCard accounts, with service disruptions in some cases lasting for weeks. Many RushCard users rely on the card to pay basic living expenses because they have no bank accounts, Cordray said, and their inability to make payments resulted in late fees and penalties.
UniRush also failed to process direct deposits for approximately 45,000 consumers and improperly returned deposits for others, Cordray said. This left consumers unable to gain access to their funds.
On the other hand, some deposits were erroneously posted twice, and some debits were not posted in a timely manner, Cordray charged. This led users to believe they had larger balances than was true, which in turn induced them to overdraw their accounts. UniRush compounded the problem by using subsequent deposits to repay the overdrafts without notifying the customers.
UniRush’s customer service personnel were inadequate to handle the problems, the bureau added.
Mastercard alleged failures. The consent order against Mastercard is based on what the bureau described as the company’s inadequate preparation for the change-over. The company’s testing did not accurately simulate the conditions of the change-over, which generated an overly optimistic estimate of how quickly the process would be completed. The company rejected UniRush’s request for additional testing of one necessary data file that Mastercard knew was central to a successful change-over, the bureau said.
Mastercard also did not communicate adequately with UniRush, the CFPB added.
Consent order. Under the consent order, entered under the bureau’s authority to act against unfair, deceptive, or abusive acts or practices, the two companies are permitted to decide between themselves how to allocate liability for the $13 million in payments. However, the CFPB is not bound by their agreement, leaving the bureau able to collect the full amount should either company default.
Mastercard is required to create procedures to avoid similar problems in future change-overs, while UniRush must create an incident tracking system and a disaster recovery plan. Both companies are to implement improved compliance programs.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Wednesday, February 8, 2017
Bill introduced to ‘slow revolving door between Wall Street and Washington’
By J. Preston Carter, J.D., LL.M.
The "Financial Services Conflict of Interest Act" has been reintroduced in Congress by Sen. Tammy Baldwin (D-Wis) and House Committee on Oversight and Government Reform Ranking Member Elijah Cummings (D-Md). First introduced in 2015, the measure is intended to "slow the revolving door between Wall Street and Washington."
The press release announcing their bill stated, "Recently, many of President Trump’s nominees have been found to have troubling conflicts of interest and golden parachute payouts."
Baldwin said, "When Wall Street insiders and corporate executives move through the revolving door from the private sector to public service, they should not be rewarded with golden parachutes simply for joining the Trump Administration."
"Our bill is critical to ensuring that federal employees are working for the American people—not for Wall Street investors," said Cummings. "President Trump’s administration is filled with Wall Street executives who are lining their pockets with hefty payouts from their previous employers."
The measure would:
- outlaw bonuses from former private sector employers for entering government service;
- expand the cooling-off period from one to two years between working for, and lobbying, the federal government;
- increase from one year to two years the current prohibition on federal examiners from accepting employment with any financial institutions they oversaw; and
- reduce conflicts of interest by requiring senior financial service regulators to recuse themselves from any official actions that directly or substantially benefit the former employers or clients for whom they worked in the previous two years before joining federal service.
A summary of the proposed legislation notes that it is supported by the American Federation of Labor, Congress of Industrial Organizations (AFL-CIO), American Federation of State, County, and Municipal Employees (AFSCME), Americans for Financial Reform, Center for Effective Government, Common Cause, Consumer Action, Government Accountability Project, Greenpeace, Institute for Agriculture and Trade Policy, James A. Thurber, Public Citizen, RootStrikers, and U.S. Public Interest Research Group (USPIRG).
For more information about the Trump Administration's financial regulatory plans, subscribe to the Banking and Finance Law Daily.
Tuesday, February 7, 2017
If you want offer of judgment to include attorney fees, say so
By Richard Roth
A consumer who accepted a debt collector’s $2,500 offer of judgment in a Fair Debt Collection Practices Act suit could later ask for an award attorney fees and costs because nothing in the offer made clear that it was to include anything other than damages, according to a U.S. District Judge. An offer of judgment does not implicitly include attorney fees; instead, a clear and unambiguous waiver of the right to fees must be included as part of accepting the offer, the judge said (Williams v. Pinnacle Services, Inc.).
An award of a consumer’s reasonable attorney fees and costs is mandatory under the FDCPA, the judge pointed out. However, the consumer’s complaint did not explicitly ask for a fee award, and the offer of judgment did not say that it included a fee award. That could not result in a clear waiver of the consumer’s entitlement to attorney fees.
The judge also rejected the argument that the offer implicitly included fees because the $2,500 amount was $1,000 more than the statutory damages that the FDCPA permitted. The consumer had demanded actual damages, he said, and there was no proof that actual damages would have been unavailable.
The failure to make clear that the offer of judgment included attorney fees resulted in an additional $4,900 in fees and $437 in costs.
For more information about consumer debt collection protections, subscribe to the Banking and Finance Law Daily.
A consumer who accepted a debt collector’s $2,500 offer of judgment in a Fair Debt Collection Practices Act suit could later ask for an award attorney fees and costs because nothing in the offer made clear that it was to include anything other than damages, according to a U.S. District Judge. An offer of judgment does not implicitly include attorney fees; instead, a clear and unambiguous waiver of the right to fees must be included as part of accepting the offer, the judge said (Williams v. Pinnacle Services, Inc.).
An award of a consumer’s reasonable attorney fees and costs is mandatory under the FDCPA, the judge pointed out. However, the consumer’s complaint did not explicitly ask for a fee award, and the offer of judgment did not say that it included a fee award. That could not result in a clear waiver of the consumer’s entitlement to attorney fees.
The judge also rejected the argument that the offer implicitly included fees because the $2,500 amount was $1,000 more than the statutory damages that the FDCPA permitted. The consumer had demanded actual damages, he said, and there was no proof that actual damages would have been unavailable.
The failure to make clear that the offer of judgment included attorney fees resulted in an additional $4,900 in fees and $437 in costs.
For more information about consumer debt collection protections, subscribe to the Banking and Finance Law Daily.
Monday, February 6, 2017
President orders 120-day regulatory review; reaction falls along ideological lines
By John M. Pachkowski, J.D.
Making good on his promise to “do a big number” on the Dodd-Frank Act, President Donald J. Trump signed an Executive Order on Feb. 3, 2017 that directs the Secretary of the Treasury to report back in 120 days on what rules promote or inhibit the administration’s priorities. It should be noted that the Executive Order does not explicitly mention the Dodd-Frank Act.
In remarks before a Strategy and Policy Forum, the president said, “we expect to be cutting a lot out of Dodd-Frank, because, frankly, I have so many people, friends of mine that have nice businesses that can’t borrow money, they just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”
Reaction to the Executive Order fell along ideological lines. Industry groups and organizations advocating limited regulation supported the president’s action; while individuals and groups advocating better regulation of the financial industry were strongly opposed the executive order.
Sensible and careful review. Rob Nichols, president and CEO, of the American Bankers Association stated, “A sensible and careful review of Dodd-Frank and other financial regulations can and should strengthen those goals while unleashing the power of the banking industry—from small towns and communities to our nation’s financial centers—to fuel the increase in economic prosperity that we all seek. We look forward to working in a bipartisan manner with the administration, Congress and bank regulators on policy changes that will keep banks strong and focused on providing the capital that is so essential to rebuilding our economy.”
Accountability. House Financial Service Committee Chairman Jeb Hensarling (R-Texas) said he was “very pleased that President Trump signed this executive action, which closely mirrors provisions that are found in the Financial CHOICE Act to end Wall Street bailouts, end ‘too big to fail,’ and end top-down regulations that make it harder for our economy to grow and for hardworking Americans to achieve financial independence.” He added, “Republicans are eager to work with the President to end and replace the Dodd-Frank mistake with legislation that holds Wall Street and Washington accountable, ends taxpayer-funded bailouts forever, and unleashes America’s economic potential.”
Sensible action. John Berlau of the Competitive Enterprise Institute, an organization that advocates for limited government regulation, referred to the Executive Order as a “sensible action,” but cautioned, “Congress, however, still must do its duty and repeal the most burdensome provisions of this law.”
Onerous regulatory burdens. Camden R. Fine, president and CEO of the Independent Community Bankers of America, noted that the ICBA “will continue working with Congress and the Trump administration to unleash the economic power of community banks in the small towns, suburban communities and urban areas they serve.” He further noted, “Community banks strongly support pro-growth regulatory relief from one-size-fits-all regulations designed to address the nation’s largest banks. Onerous regulatory burdens on community banks are stifling lending and innovation in local communities, hindering economic and job growth across the nation.”
Boosting financial opportunities. Tim Pawlenty, CEO of the Financial Services Roundtable, echoed the sentiment of cooperation made by the ICBA and added, “Modernizing America’s financial regulatory system in ways that will grow the economy, create jobs and protect consumers as well as taxpayers is a key ingredient to boosting financial opportunities for America’s families and businesses.”
Other the other hand, reaction by advocacy groups was more pointed.
Another devastating crash. Dennis Kelleher, president and CEO of Better Markets, said, “Trump’s government of Wall Street, by Wall Street and for Wall Street is going to cause another devastating financial crash, ruin the lives of tens of millions of Americans and probably end in a second Great Depression.“ He added, “No matter how many of Wall Street’s talking points President Trump parrots, it can’t be denied that the 2008 financial crash was caused by de-regulating Wall Street’s high risk gambling. That’s what enabled Wall Street to crash the financial system in 2008, which required trillions of dollars in taxpayer-funded bailouts and rescue programs. De-regulating Wall Street is as bad an idea today as it was in the years before the 2008 crash.”
No authority. Lisa Donner, Executive Director of Americans for Financial Reform, stated, “the President does not have the authority to overturn laws or tell independent agencies what to do. And it’s flat-out illegal for agencies to change rules by fiat without public input.” She continued that the Executive Order “betrays the promises Trump made to stand up to Wall Street, and it will have dire consequences if he’s successful.”
Doomed to repeat mistakes. Debbie Goldstein, Executive Vice President for the Center for Responsible Lending remarked, “If this Administration has not learned from the mistakes that caused the 2008 economic crisis, they are doomed to repeat them. Lest we forget, lax regulation allowed Wall Street to back extremely reckless loans whose failure snowballed into a financial crisis and Great Recession.” She added, “It is our sincere hope that the Administration fulfills its campaign pledge to help the middle class by protecting them from Wall Street’s abuse by standing by consumer protections and against predatory lending, rather than seeking to roll back Dodd-Frank.”
Watchdog, not lapdog. Rohit Chopra, a Senior Fellow at the Consumer Federation of America and a former official at the Consumer Financial Protection Bureau, said, “Wall Street needs a watchdog, not a lapdog. This isn’t just good for consumers, it’s good for the entire economy so we can prevent the next financial crash.”
Betraying Campaign Promises. A number of officials from the advocacy group Public Citizen also weighed in on the Executive Order. The group’s president Robert Weissman said, “If Trump succeeds in rolling back Dodd-Frank rules he will rush the country straightforward into another job-killing financial crisis. This may be the most spectacular betrayal yet by the president of his voters, as he shunts aside their concerns and pushes forward the agenda of his cronies and the well-connected.”
Fight for CFPB. Ed Mierzwinski, Consumer Program Director with U.S. PIRG, said, “We will fight to protect Wall Street reform and the highly-successful Consumer Financial Protection Bureau, the agency at the front lines of consumer protection that has been targeted by big Wall Street banks, debt collectors and even payday lenders because it works for consumers, not them. We will also defend the CFPB's extraordinary director, Richard Cordray. We cannot let Wall Street convince the President and Congress to re-rig the system so they win and everyone else loses.”
Talked a big game. Finally, Sen. Elizabeth Warren (D-Mass) said, “Donald Trump talked a big game about Wall Street during his campaign—but as President, we're finding out whose side he's really on.” She noted that the Executive Order puts “two former Goldman Sachs executives in charge of gutting the rules that protect you from financial fraud and another economic meltdown.” Warren concluded, “The Wall Street bankers and lobbyists whose greed and recklessness nearly destroyed this country may be toasting each other with champagne, but the American people have not forgotten the 2008 financial crisis - and they will not forget what happened today.”
For more information about Trump's executive order, subscribe to the Banking and Finance Law Daily.
Making good on his promise to “do a big number” on the Dodd-Frank Act, President Donald J. Trump signed an Executive Order on Feb. 3, 2017 that directs the Secretary of the Treasury to report back in 120 days on what rules promote or inhibit the administration’s priorities. It should be noted that the Executive Order does not explicitly mention the Dodd-Frank Act.
In remarks before a Strategy and Policy Forum, the president said, “we expect to be cutting a lot out of Dodd-Frank, because, frankly, I have so many people, friends of mine that have nice businesses that can’t borrow money, they just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”
Reaction to the Executive Order fell along ideological lines. Industry groups and organizations advocating limited regulation supported the president’s action; while individuals and groups advocating better regulation of the financial industry were strongly opposed the executive order.
Sensible and careful review. Rob Nichols, president and CEO, of the American Bankers Association stated, “A sensible and careful review of Dodd-Frank and other financial regulations can and should strengthen those goals while unleashing the power of the banking industry—from small towns and communities to our nation’s financial centers—to fuel the increase in economic prosperity that we all seek. We look forward to working in a bipartisan manner with the administration, Congress and bank regulators on policy changes that will keep banks strong and focused on providing the capital that is so essential to rebuilding our economy.”
Accountability. House Financial Service Committee Chairman Jeb Hensarling (R-Texas) said he was “very pleased that President Trump signed this executive action, which closely mirrors provisions that are found in the Financial CHOICE Act to end Wall Street bailouts, end ‘too big to fail,’ and end top-down regulations that make it harder for our economy to grow and for hardworking Americans to achieve financial independence.” He added, “Republicans are eager to work with the President to end and replace the Dodd-Frank mistake with legislation that holds Wall Street and Washington accountable, ends taxpayer-funded bailouts forever, and unleashes America’s economic potential.”
Sensible action. John Berlau of the Competitive Enterprise Institute, an organization that advocates for limited government regulation, referred to the Executive Order as a “sensible action,” but cautioned, “Congress, however, still must do its duty and repeal the most burdensome provisions of this law.”
Onerous regulatory burdens. Camden R. Fine, president and CEO of the Independent Community Bankers of America, noted that the ICBA “will continue working with Congress and the Trump administration to unleash the economic power of community banks in the small towns, suburban communities and urban areas they serve.” He further noted, “Community banks strongly support pro-growth regulatory relief from one-size-fits-all regulations designed to address the nation’s largest banks. Onerous regulatory burdens on community banks are stifling lending and innovation in local communities, hindering economic and job growth across the nation.”
Boosting financial opportunities. Tim Pawlenty, CEO of the Financial Services Roundtable, echoed the sentiment of cooperation made by the ICBA and added, “Modernizing America’s financial regulatory system in ways that will grow the economy, create jobs and protect consumers as well as taxpayers is a key ingredient to boosting financial opportunities for America’s families and businesses.”
Other the other hand, reaction by advocacy groups was more pointed.
Another devastating crash. Dennis Kelleher, president and CEO of Better Markets, said, “Trump’s government of Wall Street, by Wall Street and for Wall Street is going to cause another devastating financial crash, ruin the lives of tens of millions of Americans and probably end in a second Great Depression.“ He added, “No matter how many of Wall Street’s talking points President Trump parrots, it can’t be denied that the 2008 financial crash was caused by de-regulating Wall Street’s high risk gambling. That’s what enabled Wall Street to crash the financial system in 2008, which required trillions of dollars in taxpayer-funded bailouts and rescue programs. De-regulating Wall Street is as bad an idea today as it was in the years before the 2008 crash.”
No authority. Lisa Donner, Executive Director of Americans for Financial Reform, stated, “the President does not have the authority to overturn laws or tell independent agencies what to do. And it’s flat-out illegal for agencies to change rules by fiat without public input.” She continued that the Executive Order “betrays the promises Trump made to stand up to Wall Street, and it will have dire consequences if he’s successful.”
Doomed to repeat mistakes. Debbie Goldstein, Executive Vice President for the Center for Responsible Lending remarked, “If this Administration has not learned from the mistakes that caused the 2008 economic crisis, they are doomed to repeat them. Lest we forget, lax regulation allowed Wall Street to back extremely reckless loans whose failure snowballed into a financial crisis and Great Recession.” She added, “It is our sincere hope that the Administration fulfills its campaign pledge to help the middle class by protecting them from Wall Street’s abuse by standing by consumer protections and against predatory lending, rather than seeking to roll back Dodd-Frank.”
Watchdog, not lapdog. Rohit Chopra, a Senior Fellow at the Consumer Federation of America and a former official at the Consumer Financial Protection Bureau, said, “Wall Street needs a watchdog, not a lapdog. This isn’t just good for consumers, it’s good for the entire economy so we can prevent the next financial crash.”
Betraying Campaign Promises. A number of officials from the advocacy group Public Citizen also weighed in on the Executive Order. The group’s president Robert Weissman said, “If Trump succeeds in rolling back Dodd-Frank rules he will rush the country straightforward into another job-killing financial crisis. This may be the most spectacular betrayal yet by the president of his voters, as he shunts aside their concerns and pushes forward the agenda of his cronies and the well-connected.”
Fight for CFPB. Ed Mierzwinski, Consumer Program Director with U.S. PIRG, said, “We will fight to protect Wall Street reform and the highly-successful Consumer Financial Protection Bureau, the agency at the front lines of consumer protection that has been targeted by big Wall Street banks, debt collectors and even payday lenders because it works for consumers, not them. We will also defend the CFPB's extraordinary director, Richard Cordray. We cannot let Wall Street convince the President and Congress to re-rig the system so they win and everyone else loses.”
Talked a big game. Finally, Sen. Elizabeth Warren (D-Mass) said, “Donald Trump talked a big game about Wall Street during his campaign—but as President, we're finding out whose side he's really on.” She noted that the Executive Order puts “two former Goldman Sachs executives in charge of gutting the rules that protect you from financial fraud and another economic meltdown.” Warren concluded, “The Wall Street bankers and lobbyists whose greed and recklessness nearly destroyed this country may be toasting each other with champagne, but the American people have not forgotten the 2008 financial crisis - and they will not forget what happened today.”
For more information about Trump's executive order, subscribe to the Banking and Finance Law Daily.
Thursday, February 2, 2017
Illegal kickbacks spur CFPB penalties against mortgage lender, partners in scheme
By Katalina M. Bianco, J.D.
For more information about CFPB enforcement activity, subscribe to the Banking and Finance Law Daily.
The Consumer Financial Protection Bureau has charged a mortgage lender with allegedly paying illegal kickbacks prohibited by Section 8(a) the Real Estate Settlement Procedures Act. Prospect Mortgage, LLC, a major mortgage lender, is ordered to pay a $3.5 million civil penalty for its illegal conduct. The CFPB also charged two real estate brokers and a mortgage servicer for taking the kickbacks from Prospect. The brokers and servicer will pay a combined $495,000.
"Today’s action sends a clear message that it is illegal to make or accept payments for mortgage referrals," said CFPB Director Richard Cordray. "We will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses."
Prospect Mortgage, LLC, is one of the largest independent retail mortgage lenders in the United States. The two real estate brokers are RGC Services, Inc., doing business as ReMax Gold Coast, and Willamette Legacy, LLC, doing business as Keller Williams Mid-Willamette. The brokers are two of more than 100 real estate brokers with which Prospect had improper arrangements, according to the bureau. The CFPB named Planet Home Lending, LLC, as the mortgage servicer involved in the scheme. The CFPB charged that Planet Home Lending referred consumers to Prospect Mortgage and accepted fees in return.
Prospect Mortgage. The CFPB charged that Prospect Mortgage, from at least 2011 through 2016, used a variety of schemes to pay kickbacks for referrals of mortgage business. According to the consent order issued on Jan. 31, 2017, Prospect Mortgage:
- paid for referrals through agreements with over 100 real estate brokers, tracking the number of referrals made by each broker and adjusting the amounts paid accordingly;
- paid brokers to engage in the practice of "writing in" Prospect into their real estate listings, meaning that brokers and their agents required anyone seeking to purchase a listed property to obtain prequalification with Prospect; and
- plit fees with Planet Home Lending to obtain consumer referrals through the Home Affordable Refinance Program.
Under the consent order, the mortgage lender will pay $3.5 million to the CFPB’s Civil Penalty Fund for its illegal kickback schemes. The company also is prohibited from future RESPA violations and is ordered to refrain from paying for referrals and entering into any agreements with settlement service providers to endorse the use of their services.
Real estate brokers. Under the ReMax Gold Coast consent order and the order issued against Keller Williams Mid-Willamette, both companies are prohibited from violating RESPA moving forward. The companies will not pay or accept payment for referrals nor enter into any agreements with settlement service providers to endorse the use of their services. ReMax Gold Coast will pay $50,000 in civil money penalties, and Keller Williams Mid-Willamette will pay $145,000 in disgorgement and $35,000 in penalties.
Planet Home Lending. The CFPB found that Planet Home Lending accepted fees from Prospect for referring consumers seeking to refinance. According to the consent order, Planet Home Lending took half the proceeds earned by Prospect for the sale of each mortgage loan originated as a result of a referral from Planet. Planet also accepted the return of the mortgage servicing rights of that consumer’s new mortgage loan.
The CFPB also alleged that Planet ordered "trigger leads" from one of the major consumer reporting agencies to identify which of its consumers were seeking to refinance so it could market Prospect to them. According to the bureau, this was a prohibited use of credit reports under the Fair Credit Reporting Act because Planet was not a lender and could not make a firm offer of credit to those consumers.
The order requires Planet pay harmed consumers $265,000 in redress. The company also is prohibited from violating the FCRA and RESPA and ordered not to pay or accept payment for referrals or enter into any agreements with settlement service providers to endorse the use of their services.
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