Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Financial Institution Regulation

CFPB’s Proposed Arbitration Rule Prompts Thousands of Comments

contractThe comment period for the Consumer Financial Protection Bureau (CFPB)’s proposed arbitration rulemaking ended on Monday, and the Bureau received nearly 11,000 comments both strongly supporting and opposing the proposed rule.  As proposed, the rule would prohibit the use of ar
bitration clauses that preclude consumer class action lawsuits in consumer financial services contracts, but would allow companies to require consumers to pursue individual claims in arbitration.

Those supporting the rule – including Democratic Vice Presidential Candidate Tim Kaine and 37 other senators – argue that “forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked.”  Another letter, from a group of 19 state attorneys general, argues that consumer class actions “have been a vehicle to prompt rapid reform through settlement across a variety of industries.”

A number of organizations – including the Securities Industry and Financial Markets Association and the National Association of Insurance Commissioners – have weighed in to oppose the rule, with particular focus on the industries they represent.  And, in a 103 page submission yesterday, the U.S. Chamber of Commerce argued that in crafting this proposed rule, the Bureau ignored data from its own study demonstrating both the benefits of arbitration to consumers and the failure of class-action lawsuits to provide meaningful benefits to consumers . . . and has closed its eyes to the inevitable real-world consequence of its proposed rule: the elimination of arbitration, which would leave consumers without any means of redressing the injuries they most often suffer.”

Financial Institution Regulation

CFPB Proposes Multiple Changes to TRID “Know Before You Owe” Rule


The Consumer Financial Protection Bureau (“CFPB”) recently issued 293 pages of proposed changes (the “Amendments”) to the federal mortgage disclosure requirements it propounded in October 2015 commonly known as the TILA/RESPA Integrated Disclosure (“TRID”) or “Know Before You Owe” rule.  The changes are many, but the rulemaking is not intended to review policy decisions behind TRID, and does not include major changes “that could involve substantial reprogramming” of industry systems, compliance, and implementation efforts.  Instead, the Amendments are designed to formalize CFPB guidance on TRID and facilitate compliance through greater clarity and certainty.  However, despite the requests of industry participants, the Amendments do not provide additional clarity and further defined cure provisions for errors made in Loan Estimates or Closing Disclosures.

Know Before You Owe Background

The primary purpose of TRID was to integrate the mortgage loan disclosures required under the Truth in Lending Act and the Real Estate Settlement Procedures Act.  Thus, it combined the previously required Good Faith Estimate and early Truth-In-Lending disclosures into a single Loan Estimate form provided to borrowers.  It also created a single Closing Disclosure form that replaced the previously required HUD-1 and final Truth-In-Lending forms.  The goal was to create a simplified and streamlined disclosure process that allowed borrowers to more easily understand and compare mortgage terms.

Proposed Amendments

As evidenced by industry requests for greater clarity, additional procedures for curing errors, and improved guidance for existing cure provisions; implementation of TRID proved difficult and disruptive.  Market participants reported high levels of errors on the Loan Estimate and Closing Disclosure forms.  Private investors and secondary market players rejected loans due to TRID violations.  While the industry has adapted to some extent, uncertainties remain with respect to private suits from borrowers against lenders and investors.

While the proposed rulemaking is intended to remove some of these uncertainties and provide increased clarity to the mortgage industry, the CFPB has acknowledged that it “does not and cannot address every concern that has been raised to the Bureau.”  The major changes highlighted by the CFPB  include the following:

  • Creation of tolerances for the total of payments – Pre-TRID calculation of total of payments included finance charges. TRID eliminated the specific use of finance charges in such calculations.  The Amendments essentially roll-back the TRID approach and make the treatment of the total of payments disclosure consistent or “parallel” to the pre-TRID approach of including finance charges as part of the calculation.  The Amendments create new tolerances based on that approach.
  • Housing assistance lending – The Amendments clarify that fees and transfer taxes may be charged in connection with housing assistance loans without making such loans ineligible for the Rule’s partial exemption from disclosure requirements.
  • Co-ops – The Amendments clarify that loans involving cooperatives are covered by the Rule.
  • Privacy and information sharing – The Amendments clarify how a creditor and other market participants may provide disclosure forms and share information with each other while remaining compliant with the disclosure restrictions of the Gramm-Leach-Bliley Act and state laws.

The Amendments also contain “minor changes and technical corrections” regarding affiliate charges, calculating cash to close table (used for transactions without a seller), construction loans, escrow account disclosures and notices, expiration dates for closing costs identified on the Loan Estimate, seller and lender credits, agent responsibilities, written list of providers, property tax and property value estimates, as well as other items.

Comments on the proposed Amendments are due by October 18, 2016.


Compliance, Financial Institution Regulation

CFPB Issues Final Mortgage Servicing Rules

OnGovernment-Regulatory-and-Criminal-Investigations.jpg August 4, 2016, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited final mortgage servicing rule under the Real Estate Settlement Procedures Act (RESPA) and implementing Regulation X, and the Truth in Lending Act (TILA) and implementing Regulation Z.  The rule finalizes many of the proposed amendments that the CFPB issued in November 2014, revising portions of Regulation X, Regulation Z, and the CFPB’s official interpretations related to mortgage servicing.  The CFPB presented its changes to the servicing rules in a 900-page document, and grouped them into several broad categories.  Some of the most significant changes are discussed below:

  1. Successors in Interest. The final rule makes various changes relating to borrowers who are successors in interest to an original borrower, such as individuals who receive property upon the death of a relative or joint tenant, as a result of a divorce or legal separation, or from a spouse or parent. The final rule adopts a definition of “successor in interest” that is modeled on categories of transfers protected in the Garn-St. Germain Depository Institutions Act of 1982. Significantly, the rule applies the mortgage servicing rules contained in Regulations X and Z to successors in interest once the servicer confirms the status of that successor in interest. The CFPB noted that it received more comments on the successor in interest provisions than on any other aspect of the proposal. The CFPB hopes its new rule affords confirmed successors in interest the same protections under the mortgage servicing rules as original borrowers.
  2. Definition of Delinquency. Recognizing that a number of consumer protections under its servicing rules depend on how long a consumer has been delinquent under a mortgage, the CFPB’s new rule defines “delinquency” as a period of time that begins on the date that a periodic payment sufficient to cover principal and interest (and if applicable, escrow) becomes due and unpaid, and runs until such time as no periodic payment is due and unpaid. The rule also provides servicers discretion to consider a borrower as having made a timely payment even if that payment falls short of a full periodic payment (called a “payment tolerance”), but provides that if such a tolerance is given, the borrower cannot be treated as “delinquent” under the CFPB’s new definition.
  3. Force-Placed Insurance. The new rule finalizes amendments to force-placed insurance disclosures and model forms to account for situations when a servicer wishes to force-place insurance, but the borrower has insufficient—rather than expiring or expired—hazard insurance coverage on the property.
  4.  Early Intervention. The final rule clarifies that servicers’ early intervention live contact obligations recur in each billing cycle while the borrower is delinquent. It also attempts to clarify requirements regarding the frequency of written early intervention notices, including when there is a servicing transfer. The rule also finalizes exemptions from servicers’ live contact obligations where the borrower is in bankruptcy or invokes cease communication rights under the FDCPA; however, it now requires that servicers provide written early intervention notices to those borrowers under certain circumstances.
  5.  Loss Mitigation. The final rule implements several significant changes to loss mitigation requirements applicable to servicers under the mortgage servicing rules, including:
    1. Requiring servicers to meet loss mitigation requirements each time a borrower becomes delinquent, specifically addressing delinquent borrowers who bring their loans current and later default again;
    2. Modifying an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a superior or subordinate lienholder;
    3. Providing that if a borrower timely submits a complete loss mitigation application after the servicer has already made a first notice or filing, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, unless the loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement;
    4. Requiring that servicers provide a written notice to a borrower within five days of receiving a complete loss mitigation application;
    5. Requiring servicers to make efforts to obtain required information from third parties that the borrower does not possess, and prohibiting servicers from denying borrowers for loss mitigation due to a lack of such information;
    6. Providing that servicers may stop collecting documents and information from a borrower for a particular loss mitigation option after confirming that the borrower is ineligible for that option; and,
    7. Addressing how loss mitigation procedures apply when a transferee servicer receives a mortgage loan for which there is a pending loss mitigation application, and generally requiring that the new servicer comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer, with limited extensions under certain circumstances.
  6. Prompt Payment Crediting. The final rule provides that periodic payments made pursuant to temporary loss mitigation programs must continue to be credited according to the loan contract, while payments made pursuant to a permanent loan modification must be credited under the terms of the permanent loan agreement.
  7.  Periodic Statements. The final rule attempts to clarify disclosure requirements for periodic statements relating to mortgage loans that have been accelerated, are in loss mitigation programs, or have been permanently modified, “to conform generally the disclosure of the amount due with the Bureau’s understanding of the legal obligation in each of those circumstances.” It also requires servicers to send modified statements to consumers who have filed for bankruptcy, with content varying based on whether the debtor is in Chapter 7 or 11, or Chapter 12 or 13, bankruptcy. The rule also exempts servicers from the periodic statement requirement for charged-off loans, “if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off.”
  8.  Small Servicers. The final rule excludes from the 5,000-loan limit for small servicers certain seller-financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee.

In issuing its final rule, the CFPB noted that it “recognizes that [the] industry has incurred costs in the implementation” of its mortgage servicing rules, but “believes that the majority of the provisions in this final rule would impose, at most, minimal new compliance burdens,” and perhaps even reduce compliance costs. The Bureau went on to note that any new requirements were added only “after careful weighing of incremental costs and benefits.”

The CFPB also lent significant discussion to the topic of language access and the struggles faced by consumers with limited English proficiency (LEP), but ultimately concluded that—because it had not had adequate opportunity to test RESPA and TILA disclosures in languages other than English—it would “not impos[e] mandatory language translation requirements or other language access requirements at this time with respect to the mortgage servicing disclosures and other mortgage servicing requirements.” However, the CFPB left the door open to such requirements, noting that it would “consider further requirements on servicer communications with LEP consumers in the mortgage servicing context, if appropriate.”

In conjunction with its final rule, the CFPB issued an interpretive rule under the Fair Debt Collection Practices Act to clarify the interaction between the FDCPA and the mortgage servicing rules in Regulations X and Z. Most of the provisions of the final rule will take effect 12 months after the rule is published in the Federal Register, except for the provisions relating to successors in interest and periodic statements to borrowers in bankruptcy, which will take effect 18 months after publication.

Anti-Bribery and Corruption, Compliance

Awaiting the Finale: France’s Debate Over Its New Anti-Corruption Law


France will soon change the anti-corruption landscape with a new law aimed at reducing foreign bribery.  Finance Minister Michel Sapin introduced the new law in July 2015 with hopes of aligning France’s efforts with those of the U.S., UK, and other countries.  The draft law was formally introduced in March 2016, but it has since been revised by the French Parliament in many subtle but important ways.  One of the more significant changes in the latest iteration of the bill is the re-introduction of a deferred prosecution process.  Companies operating in France (and those with significant ties to the country) should consider the impact of this imminent law on their compliance efforts.

The new law (known as Sapin II) comes after much criticism of France’s current anti-corruption regime.  Sapin II aims to fix many of the current law’s shortcomings.  It imposes compliance requirements on certain companies by introducing an offense against corporations that fail to prevent corruption.  It eliminates a dual criminality standard for foreign bribery of public officials.  Structurally, Sapin II creates a new agency under the Ministry of Justice with administrative responsibilities.

The French Parliament will continue debating the bill over the coming weeks with an expected approval later this year.  Nevertheless, as it stands now, the current bill contains changes to three features that are worth highlighting:

  1. The DPA is back in play . . . for now. The government continues the debate over the availability of a deferred prosecution agreement (DPA) in any new anti-corruption law.  Sapin’s initial DPA process allowed for a corporate entity (but not an individual) to avoid criminal conviction in exchange for implementing or enhancing a compliance program and/or paying a fine.  The latest draft bill includes many of Sapin’s original proposals, including calling for fines of up to 30% of an average annual turnover of a company, compliance obligations for up to three years, and compensation to third parties affected by any corruption.  We will have to wait to know whether the new law will include details about how a judge will review and validate a proposed corporate settlement.
  1. The new anti-corruption agency lacks standalone enforcement power. The original proposed bill called for a replacement of the Service Central de Répression de la Corruption with an agency that had broad supervisory authority over anti-corruption enforcement.  The contemplated agency would have ensured companies implemented compliance programs and continually improved those programs according to appropriate risk.  The agency would also have had investigatory power with the ability to impose penalties for wrongdoing.  After recent debate, however, Parliament has scaled back the proposed agency’s powers, leaving punishment to prosecutors and the judiciary.
  1. Possible retaliation against whistleblowers may impact the effectiveness of internal reporting processes. Current law does not provide general protections to whistleblowers (with the possible exception of specific but unrelated labor laws).  Sapin II originally included broad protection for whistleblowers by prohibiting retaliation and incentivizing people to come forward about instances of actual corruption or influence trafficking.  Recent debate, however, eliminated the anti-retaliation provisions from the bill.

What does all of this mean for multinationals?  Most importantly, the new law may hold companies with a connection to France accountable for misconduct occurring anywhere in the world by the companies’ employees and agents.  Existing compliance programs and internal controls designed to meet the requirements of the U.S. Foreign Corrupt Practices Act and UK Bribery Act may not need to change because of the new law.  But companies will want to confirm whether gaps exist and whether their French-connected activities present new risks.  Also, as with any change to an anti-corruption regime, companies will need to analyze if France’s new law impacts voluntary disclosure decisions and whether those decisions or any discovered misconduct imposes new collateral consequences.  We will keep an eye out for Parliament’s finale.

Financial Institution Regulation

The CFPB Issues New Proposals Overhauling The Debt Collection Industry


On Thursday July 28, 2016, the Consumer Financial Protection Bureau (CFPB) released a series of proposals aimed at overhauling the debt collection business.  The new proposals require debt collectors to take additional steps to substantiate the accuracy of a debt, limit certain types of communications with consumers, and simplify dispute and litigation procedures.

In prepared remarks delivered in Sacramento, California, CFPB Director Richard Cordray explained that nearly a quarter of all complaints filed with the CFPB involved debt collection—more complaints than any other financial service or product that the CFPB regulates.  The new proposals are the CFPB’s attempt to combat some of the most common complaints.  However, given the scale of the proposals, the new regulations are likely to impose significant financial costs on the debt collection industry.


As part of the CFPB’s proposals, collectors would be required to take additional steps to verify and maintain the accuracy of the debt.  Specifically, collectors would be required to substantiate the debt “or possess a reasonable basis, for claims that a particular consumer owes a particular debt.”  Debt collectors would also be responsible for passing certain information about the debt to other debt collectors to help ensure that only valid debt is subject to the collections process.

The proposals further require debt collectors to include a Statement of Rights to consumers when attempting to collect a debt.  The Statement of Rights would outline legal protections that consumers may take advantage of during the debt collections process and would further help consumers verify the accuracy of the debt.


The new proposals also seek to limit communications between the debt collectors and consumers.  Under the proposals, the CFPB is considering imposing a limit on the number of attempted communications with a consumer at six times per week if the collector does not have confirmed consumer contact and three times per week if the collector has confirmation of contact.  Additionally, debt collectors would be prohibited from attempting to contact a surviving spouse for 30-days after the consumer had passed away.

Disputes and Litigation

Under the new proposals, debt collectors would be required to provide consumers with easier procedures for disputing debts.  The CFPB proposes that debt collectors include a “tear-off” dispute provision on a debt collection notice.  If the consumer wished to dispute the debt, the consumers would be able to simply remove the tear-off portion, mark why they are disputing the debt, and mail the dispute back to the debt collector.  Upon receipt of the dispute tear-off, the debt collector would be responsible for sending a report substantiating the debt to the consumer within 30-days.  If the debt collector failed to do so, the debt collector would be barred from attempting to collect the debt.  Debt collectors would also be prohibited from transferring the debt in an attempt to circumvent the written report requirement.  If a debt collector transferred the debt before it responded to the dispute, the next debt collector would not be allowed to collect on the debt until the dispute was resolved.

The new proposals further require a debt collector to make additional disclosures if a debt collector chooses to sue the consumer over a debt.  Specifically, the debt collector would need to inform the consumer that the collector intended to sue and that if the consumer did not appear in court, the court may rule against the consumer.  The debt collector would also need to include a statement that the consumer may obtain information for legal services through the CFPB website and by calling the CFPB’s toll free number.

The CFPB’s proposals marks the first steps in the rule making process.  Next, the CFPB will convene a Small Business Review Panel and gather feedback before issuing a final proposed rule.

Energy Enforcement, Enforcement and Prosecution Policy and Trends, Fraud, Deception and False Claims

Court Holds FERC De Novo Review to Proceed as “Ordinary Civil Action”

Last77006468.jpeg week, a federal district judge ruled for the first time that the “review de novo” promised by section 31(d) of the Federal Power Act (“FPA”), 16 U.S.C. § 823b(d), will be “treated as an ordinary civil action requiring a trial de novo.”  FERC v. Maxim Power Corp., Civ. No. 3:15-30113-MGM, at 2 (D. Mass. Jul. 21, 2016).  This issue has been hotly debated in several of the market manipulation cases FERC is currently litigating,[1] without any court issuing a definitive ruling on the scope and meaning of review de novo, as discussed previously here.  For example, courts in California and Massachusetts—the only two courts with an opportunity to make such a ruling—had only touched on what a review de novo might entail without definitively deciding what procedures would be followed.[2]

The FPA provides that once a party under investigation receives an Order to Show Cause and Notice of Proposed Penalty, that party has the option to have its case heard by an administrative law judge with an evidentiary hearing (which the Maxim court called “Option 1”), or to receive an immediate penalty assessment, with the opportunity for a federal district judge to review the facts and law de novo (which the Maxim court called “Option 2”).  See 16 U.S.C. § 823b.  In Maxim, as in the other market manipulation cases, the targets of the investigation chose Option 2, an immediate penalty assessment followed by “review de novo” in a federal district court.  After 60 days had passed without Maxim paying its penalty, FERC filed a petition seeking an order affirming its civil penalty assessment, and Maxim moved to dismiss.  In addition to substantive arguments about the alleged fraud and “duty of candor” claims, FERC and Maxim disagreed as to what procedures the court should follow, specifically whether FERC’s “petition” should proceed as a standard civil lawsuit.

To resolve the question of de novo review, the court analyzed the language of the statute, FERC’s prior positions and interpretations of the statute (and similar language in parallel statutes), and the lack of binding precedent from other courts,[3] concluding that FERC’s petition to affirm its civil penalty assessment should proceed as any normal civil action would, complete with a trial de novo by jury if necessary.

The court also weighted the due process concerns of both parties, applying the test from Mathews v. Eldridge, 424 U.S. 319, 333 (1976)The court concluded that, while FERC’s interests were strong, the scale tipped in favor of Maxim and proceeding as an “ordinary civil action with a de novo trial.”[4]  Central to the court’s reasoning was the fact that the additional process which FERC made available to Maxim after Maxim’s election of an immediate penalty assessment was not required by the FPA and, more importantly, did not offer a truly “adversarial proceeding.”[5]  If the court were to accept FERC’s arguments, litigants choosing between an administrative hearing and a review de novo would not have a “meaningful choice.”  The conclusion reached by the court offers such a meaningful choice: an evidentiary hearing before an Administrative Law Judge, or an immediate penalty assessment followed by a de novo trial conducted by a district court.

Critical to the court’s conclusion was the fact that within the framework of a “standard” civil action, a judge is given significant discretion to tailor fact discovery to the needs of the case.  In Maxim, the court noted that it would allow some additional factual discovery, but hinted that the presence of the voluminous administrative record, and the fact that most of FERC’s allegations were based on documents and data provided by Maxim, would likely reduce the scope of discovery.

The court also denied Maxim’s motion to dismiss, finding that FERC had pled the allegations of fraud and a violation of FERC’s regulation involving a “duty of candor” with sufficient particularity.  The court also agreed with FERC’s interpretation of the word “entity”, finding that “entity” could mean individuals for the purposes of holding individuals liable for violations of the FPA’s manipulation prohibitions.

*  *  *

Should other courts follow Maxim’s lead and treat the petition for affirmation of a civil penalty assessment as a standard civil action, FERC may decide to reduce the amount of process it provides to investigation targets, for example, in the time period following the issuance of the Order to Show Cause and Notice of Proposed Penalty to avoid duplicating efforts.  This would allow FERC, as well as the investigation target, to conserve resources until the case proceeds to the district court, instead of spending so much time and effort between the issuance of the Order to Show Cause and the Order Assessing Civil Penalties.  It may also impact how FERC chooses to resolve cases based on, for example, the amount of resources it may be required to expend on court cases, the reduced control by FERC over the timing of ultimate resolution, or the possibility that it FERC will receive less deference to its positions in the district court than it might have enjoyed under other adjudicative processes.  Such a shift would seem likely to impact the subject’s decision-making process when faced with a FERC investigation.

[1] See FERC v. City Power Marketing, LLC, Civ. No. 1:15-cv-01428 (JDB) (D. D.C.); FERC v. Powhatan Energy Fund, LLC, Civ. No. 3:15-cv-0452 (E.D. Va.); FERC v. Maxim Power Corp., Civ. No. 3:15-cv-30133 (D. Mass.); FERC v. Barclays Bank, PLC, Civ. No. 2:13-cv-2093-TLN-DAD (E.D. Cal.); FERC v. Silkman, Civ. No. 13-13054-DPW (D. Mass.);  FERC v. Lincoln Paper and Tissue, LLC, Civ. No. 13-13056-DPW (D. Mass.).

[2] See FERC v. Maxim Power Corp., Civ. No. 3:15-30113-MGM, at 16-17 (D. Mass. Jul. 21, 2016) (explaining how the Barclays and Silkman decisions addressed the issue of de novo review without completely resolving the scope and procedure questions).

[3] See id. at 16-17 (discussing the Barclays and Silkman decisions’ treatment of de novo review).

[4] Id. at 21.

[5] Id. at 19-20.

Compliance, Enforcement and Prosecution Policy and Trends

BancorpSouth Bank Agrees to Pay More Than $10 million to Settle Charges of Redlining and Discrimination in Mortgage Underwriting and Pricing

On June 29, the C77006486onsumer Financial Protection Bureau (CFPB), the Department of Justice (DOJ), and BancorpSouth Bank (BancorpSouth) agreed to settle allegations of redlining and discrimination in violation of the Equal Credit Opportunity Act and the Fair Housing Act.  Notably, this case marks the second instance of the CFPB’s new approach to redlining analysis, which, as we reported, focuses on mortgage loan applications, rather than just originations, and compares a bank to its peers on several metrics, including applications and branch locations.  Also noteworthy is the CFPB’s first use of testers or “mystery shoppers” posing as consumers at local branches to support charges of discrimination.

Redlining Allegations

The joint complaint alleges that BancorpSouth illegally redlined majority-minority neighborhoods (census tracts with a more than 50% minority population) in the Memphis Metropolitan Statistical Area (“Memphis MSA”), an eight-county area across Mississippi, Arkansas, and Tennessee in which BancorpSouth generates a significant number of applications.  Notably, the redlining allegations against BancorpSouth largely track those against Hudson City Savings Bank (Hudson City), which, as we reported, settled similar charges in late 2015.

Like Hudson City, the CFPB and DOJ alleged that BancorpSouth excluded majority-minority neighborhoods from its Community Reinvestment Act assessment area.  The complaint also identified “statistically significant” disparities in mortgage loan applications that BancorpSouth received from minority neighborhoods compared to its peers and the area’s demographics.

For example, tracts in the Memphis MSA are 36.9% high-minority (census tracts with a more than 80% minority population) and 51.6% majority-minority.  According to government data, between 2011 and 2013, BancorpSouth received 3.2% of its applications from high-minority neighborhoods and 9% from majority-minority neighborhoods, while its peers generated 17.6% and 27.6% of its applications from these areas, respectively.  Meanwhile, BancorpSouth received 91% of its applications from majority-white neighborhoods, which account for 48.4% of Memphis MSA tracts.  The complaint alleges that these disparities “cannot be explained by a legitimate, non-discriminatory reason.”

The CFPB and DOJ further emphasized disparities in branch locations and marketing across these areas.  BancorpSouth allegedly placed a large majority of branches in the Memphis MSA outside of majority-minority neighborhoods, despite numerous consultants recommending expansion into these areas.  And the agencies allege that BancorpSouth “failed to advertise meaningfully” in majority-minority neighborhoods, citing data representing that BancorpSouth sent 90% of its direct mailings to majority-white areas and 5% to high-minority areas during the two-year period.

Underwriting and Pricing

In addition to redlining, the agencies allege that BancorpSouth engaged in discriminatory practices in mortgage loan underwriting and pricing.  According to the complaint, while BancorpSouth’s Mortgage Department, which originates loans for sale on the secondary market, makes underwriting and pricing decisions with little to no discretion, the Community Banking Department, which originates loans held by BancorpSouth, had “wide discretion” in underwriting and pricing.  The CFPB and DOJ allege that this discretion caused “racial disparities” in approving applications and pricing loans.

For example, government data shows that, from 2011 to 2013, BancorpSouth denied applications for first-lien mortgages from African-American borrowers at a rate of 2.2 times the expected rate if the borrower had been white; the rate rose to 2.9 times for second-lien mortgages.  Then, for approved borrowers, the complaint alleges that loan officers charged higher interest rates and origination fees to African-Americans.  Overall, the agencies emphasized a lack of adequate controls and monitoring to ensure that loan officers made consistent underwriting and pricing decisions across borrowers and products.

Discriminatory Policies

The complaint also alleges that BancorpSouth had a policy of denying minority applicants more quickly and failing to provide credit assistance to “borderline” minority applicants.  The government obtained an audio recording from a 2012 internal BancorpSouth meeting in which a manager instructed loan officers that mortgage applications from minorities must be “turned down” in 21 days.  Further, despite a general policy that allowed loan officers to assist marginal applicants with improving credit, in the recording, the manager instructs employees to turn down “borderline” minority applicants quickly.  According to the government, the recording also documents employees “making derisive comments about minorities.”

Use of Testers Posing as Home Buyers

Finally, the CFPB sent a series of “matched-pair tests” to several BancorpSouth branches.  The CFPB sent an African-American tester and a white tester posing as first-time home buyers to the same branch within 10 days.  The African-American tester had a “slightly better” financial profile than the white counterpart, such as a higher credit score, higher monthly income, and less debt.  The complaint alleges that, on average, loan officers treated African-American testers less favorably than white testers with respect to products offered, cost estimates, real estate agent recommendations, and overall assistance.

Requisite Remedial Actions

Much like the redlining allegations, the remedial actions required by the proposed consent order track those in Hudson City’s case, albeit at a lower cost.  BancorpSouth agreed to pay a $3 million civil penalty to the CFPB and nearly $2.8 million in redress to affected consumers.  BancorpSouth must also establish a $4 million loan subsidy program to increase access to mortgage loans in majority-minority neighborhoods and extend credit offers to African-American applicants who were denied credit during the relevant time period.  In contrast, Hudson City agreed to pay a $5.5 million penalty and invest $25 million in a loan subsidy program.

Additionally, BancorpSouth must spend $300,000 on targeted advertising and outreach to minority areas and $500,000 on partnerships with community-based or governmental organizations that provide financial education and credit repair services.  Finally, BancorpSouth must open one additional branch or loan production office in a high-minority neighborhood and implement certain reporting, monitoring, and training policies and practices.

Takeaways For Lenders

In light of Hudson City’s settlement, BancorpSouth’s case is a reminder that the CFPB now focuses its redlining analysis on applications and peer comparisons on several metrics, including branch locations and marketing efforts.  Therefore, it remains important for lenders to identify institutions in their peer group and compare performance on the metrics emphasized by the government.  Finally, the CFPB’s novel use of testers to support charges of discrimination should prompt lenders to ensure that non-discrimination policies are implemented on the ground at the local-branch level.

Enforcement and Prosecution Policy and Trends

SEC Announces Settlement with Investment Advisory Firm Regarding Alleged Failure to Disclose Costs to Investors

On July 14, Government-Regulatory-and-Criminal-Investigations.jpg2016, the Securities and Exchange Commission announced the settlement of an enforcement action against RiverFront Investment Group (“RiverFront”), an investment advisory firm, for failing to properly prepare clients for transaction costs.

At issue is a wrap fee program, in which a subadviser uses a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of the trades are included in an annual wrap fee paid by the client.  The SEC alleges that RiverFront actually used brokers in addition to the wrap program sponsor to execute most of its wrap program trading, resulting in additional costs to the client.  Although RiverFront disclosed that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, and thus the disclosures were materially misleading.

In the press release, Sharon Binger, Director of the SEC’s Philadelphia Regional Office, stated, “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.”

The SEC’s National Exam Program includes wrap fee programs as a 2016 examination priority, particularly in assessing whether advisors are fulfilling fiduciary and contractual obligations to clients and properly managing issues such as disclosures, conflicts of interest, best execution and trading away from the sponsor.

Without admitting or denying any wrongdoing, RiverFront consented to a $300,000 settlement and to post on its website the volumes of trades by market value executed away from sponsors and the associated transaction costs passed onto clients on a quarterly basis.

Compliance, Enforcement and Prosecution Policy and Trends, Financial Institution Regulation

CFPB’s Supervisory Highlights Regarding Auto Lending

Government-Regulatory-and-Criminal-Investigations.jpgThe Consumer Financial Protection Bureau (“CFPB”) recently issued its Supervisory Highlights – Issue 12, Summer 2016 report, addressing, among other industries, automobile origination.  The report reflects supervisory activity generally completed between January 2016 and April 2016 and makes it clear that there is increased scrutiny and consumer complaint activity in the auto lending industry.  The CFPB found that several auto lenders have been deceptive in their advertisements for guaranteed asset protection (“GAP”) coverage and disclosures of payment deferral terms.

GAP coverage helps borrowers cover the difference between the amount owed on an auto loan or lease and a totaled car’s actual cash value.  Even if a car can no longer be used, the borrower is generally still responsible for any remaining loan or lease payments.  Thus, if the reimbursement check from the insurance company is not enough to cover the amount outstanding on the loan or lease, GAP coverage may help pay the remaining amount.  With respect to GAP coverage, the CFPB reported that “one or more auto lenders deceptively advertised the benefits of their gap coverage products, leaving the impression that these products would fully cover the remaining balance of a consumer’s loan in the event of vehicle loss,” when in fact “the product only covered amounts below a certain loan to value ratio.”

As for disclosures related to payment deferral terms, the Supervisory Highlights indicate that some lenders used a telephone script to communicate with borrowers and create a false impression that the only effects of taking advantage of an auto loan payment deferral would be to extend the loan and accrue interest during the deferral. They omitted to inform consumers that the subsequent payments would initially be “applied to the interest earned on the unpaid amount financed from the date of the last payment received from the consumer,” which “could result in the consumer paying more finance charges than originally disclosed.”  The CFPB is currently reviewing these alleged violations to determine “what, if any, remedial and corrective actions should be undertaken by the relevant financial institutions,” the Supervisory Highlights said.

In its separate June 2016 Monthly Complaint Report, the CFPB revealed that auto lending comprised 60 percent of consumer loan complaints since July 11, 2011.  Those include vehicle loan, vehicle lease, and title loan complaints submitted to the CFPB.  Nearly half of the complaints centered on managing the loan, lease, or line of credit, and roughly a quarter of them related to problems that occur when customers are unable to pay.  Though the June Report did not include statistics on what might be causing these issues, many consumers expressed a lack of understanding for the terms of their loans.  However, it is not clear whether that lack of understanding is the fault of the auto lenders.  It is clear that, comparing the period from March to May in 2015 with that same period in 2016, the number of complaints had grown in all but sixteen states, including the District of Columbia.

The Supervisory Highlights and June Report should alert auto lenders that the CFPB likely will pursue remedial and corrective actions.  To the extent auto lenders can commence mitigation efforts in response to the CFPB’s findings related to GAP coverage and payment deferral disclosures, it could help them avoid CFPB scrutiny.  Director Richard Cordray made it clear that he believes it is “compliance malpractice for other institutions not to look carefully at our orders . . . and not to think, ‘Am I doing the same thing? Am I violating the law? And therefore should I clean that up?”


SEC Loses Chief of the SEC’s Office of the Whistleblower

On FSEC Enforcement Defenseriday, July 8, 2016, the Securities and Exchange Commission (SEC) announced Sean McKessey, Chief of the SEC’s Office of the Whistleblower, will be leaving his post by the end of the month.  Jane Norberg, Deputy Chief of the SEC’s Office of the Whistleblower will serve as Acting Chief until a replacement is found.

McKessey previously worked at the SEC from 1997 to 2000 as Senior Counsel in the SEC’s Enforcement Division.  In, February 2011 he became the first head of the SEC’s whistleblower program.  He is credited with helping to establish an office that assesses and reviews whistleblower tips, evaluates award claims, and makes recommendations to the SEC on whether claimants are eligible to receive an award.

During his time as chief of the program:

  • The Office of the Whistleblower received and reviewed over 14,000 tips;
  • Over 30 whistle blowers have been awarded more than $85 million in awards;
  • The SEC brought over $504 million in successful enforcement actions due to the whistleblower tips (collecting $453 million to date), which included over $300 million in disgorgement and interest for investors who were harmed; and

McKessy made the following comments about his time with the program, “It has been an honor and pleasure to serve as the first Chief of the SEC’s Office of the Whistleblower.  Working with the extraordinarily talented and dedicated staff of the Whistleblower Office and the Enforcement Division in standing up a groundbreaking and exemplary Whistleblower Office has been the highlight of my professional career.”

The change in leadership will not change the focus of the program.  As Subject to Inquiry readers already know, it is important to have internal compliance programs that are communicated and followed throughout the organization, so if a complaint is ever made, the organization can show the regulator(s) that proper steps were taken to investigate and correct any illegal action(s) outlined in the complaint or uncovered as a result of the investigative process.  And as always, a company should take prompt action to address misconduct within its ranks.