Bi-Weekly Baloney

Jonathan Foxx

Managing Director

Lenders Compliance Group

Almost two years ago, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in federal district court against Nationwide Biweekly Administration, Inc., Loan Payment Administration LLC (collectively, “Nationwide”), and the companies’ owner, Daniel Lipsky, alleging that Nationwide misrepresented the interest savings consumers would achieve through a bi-weekly mortgage payment program and also misled consumers about the cost of the program. The CFPB was seeking compensation for harmed consumers, a civil penalty, and an injunction against the companies and their owner.

An interesting feature of this lawsuit is the role that teaser ads, in general, and telemarketing sales scripts, in particular, have on exposure to regulatory violations.

This past Monday, after some haggling back and forth in the usual mix and bantering of legal procedures, the two entities found themselves in court at a bench trial.[*] The CFPB told a California federal judge at the beginning of the trial that Nationwide violated consumer protection laws by suggesting it was affiliated with the homeowners’ mortgage providers and hiding its fee structure in deceptive mailers and sales calls.

The CFPB argued during opening arguments that Nationwide sent deceptive mailers to potential customers that included the name of the bank holding their mortgage and stated the loan amount. These mailers allegedly told the customers that if they declined the bi-weekly program, they were “waiving” loan savings. When potential customers called in, sales representatives supposedly would say that Nationwide “has a working relationship with your bank.” According to the CFPB, these were misrepresentations that violated the Consumer Financial Protection Act and the Telemarketing Sales Rule.

The violations can be grouped into the following four categories, each of which I will explicate briefly.

1) Falsely promising consumers they could achieve savings without paying more:

In direct mail, online, and other marketing materials, Nationwide claimed that consumers who enrolled in its “Interest Minimizer” program would save money without increasing their mortgage payments. In a video on Nationwide’s website, Lipsky stated, “you’re not increasing your payment. You’re just switching to a smaller bi-weekly or weekly amount.” The CFPB alleged that, in fact, consumers in the program paid processing fees for each bi-weekly payment on top of the initial set-up fee to Nationwide, plus the equivalent of one additional monthly payment each year.

Flipping the Bird at the CFPB!

Jonathan Foxx
Managing Director
Lenders Compliance Group

Do you really want to tell the Consumer Financial Protection Bureau (CFPB) that it doesn’t regulate you?

Before flipping the bird at the CFPB, a company had better do some deep and serious deliberations!

Take the case of Intercept Corp., a company that the CFPB asserted allegedly took money from consumers’ bank accounts without authorization to do so. It was claimed that the company willfully ignored red flags and thereby allowed its client companies to take consumers’ funds.

Here’s what happened, as described in the complaint,[i] and argued in federal court a few days ago.

Intercept does business as InterceptEFT. The CFPB claimed that InterceptEFT, and its President, Bryan Smith, and also its CEO, Craig Dresser, knew about the alleged illegal withdrawals but they did nothing to protect consumers.

Intercept tried a gambit that, in this instance, seems to have been destined to failure: when in doubt, remove the opposing litigant for lack of standing. So, let’s do it, let’s try to remove the CFPB! Let’s contend - or maybe “pretend” should be the best word here - that we’re not governed by the Consumer Financial Protection Act (CFPA). Sure, that will work!

The CFPB, it seems, successfully argued otherwise.

What does InterceptEFT do? The CFPB describes this company as a financial service that is mainly used for consumer purposes – meaning personal, family, or household needs. It is a third party vendor. The CFPB took the position that although consumers don’t directly work with this third party vendor doesn’t alter the service, and the company's classification doesn't change just because the complaint doesn’t explicitly state that its products are offered for those consumer purposes.

Specifically, the CFPB alleges that Intercept and its executives processed transactions for clients they knew, or should have known, were making fraudulent or other illegal transactions, even after being warned several times of the wrongdoing. The injury to consumers reached into the many millions lifted from consumers’ bank accounts.

Now the gambit: Intercept claimed that it met exceptions for the law, including one that would allow it to escape the suit because not all of its clients are covered by the CFPA.

The CFPB descanted critically:

“That reading would produce the absurd result that an entity could not be a service provider if it provided support services to even a single non-covered-person client - regardless of the entity’s conduct with respect to covered persons.” … “Intercept provides no justification for such an arbitrary result, and indeed there is none.”

As to attempts to remove the President and the CEO from the litigation, the CFPB said that they should be held accountable as individuals because they’re involved in the company’s day-to-day operations and not just “uninvolved company figureheads or passive shareholders.” These company officers had said that they worked with the banks on due diligence checks, so their work was not recklessness.

But, that position came under this withering fire from the CFPB:

“[That argument] contradicts the factual allegations in the complaint, which describe how numerous banks warned Smith and Dresser about apparent fraud and illegality and how the two men responded, not by acting on those concerns, but by seeking to minimize and work around them.” ... “Smith and Dresser cannot now hope to hide behind the very warnings they previously chose to ignore.”

The injury was substantive, claimed the CFPB. The Bureau said that it had proved substantial injury was caused as direct monetary losses, as described by category in the suit. Indeed, consumers couldn’t have avoided the harm because they didn’t even know about the unauthorized withdrawals in the first place.

So, first gambit: fail.

Second gambit: obfuscate, complicate, baffle and befuddle.

InterceptEFT launched a second line of counter-attack. As the CFPB stated in its suit, “…rather than confronting these allegations head-on, defendants claim not to understand them, asserting that the complaint is too vague or ambiguous for defendants even to present a defense on this element of unfairness.”

If adumbration is the tactic, better be prepared with a phalanx of facts! Unfortunately, Intercept had few facts to support their endeavor to becloud the issues. Although the Bureau did not name the clients, the complaint points to specific communications that Intercept had concerning access as well as its more common practices – such as allegedly ignoring specific warnings.

Second gambit: arrested development.

Third gambit: invoke statute of limitations.

Worth mentioning is that the motion to dismiss had also claimed the suit was barred under the statute of limitations. This really could not go anywhere, since the CFPB said the dates Intercept proffered regarding the government's discovery of the alleged violations were irrelevant because they were determined by when the Federal Trade Commission did a separate investigation, not the one conducted by the Bureau itself.

Third gambit: boomerang.

Now comes the last and fourth gambit, one that is like a last gasp of air in a hot air tunnel: challenge the constitutionality of the Consumer Financial Protection Bureau.

Intercept raised a motion challenging the constitutionality of the CFPB as an agency. The Bureau squelched that line of reasoning by stating every court that has considered the Bureau’s constitutionality has ruled in the government’s favor and that Intercept didn’t provide any new, substantial arguments that would justify a ruling otherwise.

Fourth gambit: crash and burn.

In sum, the Bureau pled that Intercept and its officers failed to meet the standard of proof needed to dismiss a case at this stage. The court will determine if the foregoing gambits will put this case down or keep it going forward on some subtle and abstruse vapors. 

But why prolong the agony?

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[i] Consumer Financial Protection Bureau v. Intercept Corp. et al., case number 3:16-cv-00144, in the U.S. District Court for the District of North Dakota. 

Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

So, even though PHH is challenging Director Cordray’s interpretation of violations under RESPA that allowed him to distend a $6 million penalty handed down by an administrative law judge into an engorged, ballooned penalty of $109 million that the CFPB director handed down when PHH appealed, the fact is the instant arguments are really going quite far beyond that issue.

Here’s a pivot point: whether the Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. Short answer: Yes, it is constitutional if you go by the Supreme Court’s decision in 2010 in Free Enterprise Fund v. Public Company Accounting Oversight Board, which affirmed the DC Court’s ruling that such protections were constitutional.

Recess Appointment Gambit

Some people just won’t take No for an answer!

The most recent fool’s errand is offered thanks to the irrepressible, litigious efforts of the State National Bank of Big Spring, Texas, and two advocacy groups, conservative think tank Competitive Enterprise Institute and the 60 Plus Association.

In State National Bank of Big Spring et al. v. Geithner et al. (U.S. District Court, DC, Case 1:12-cv-01032), the plaintiff seeks to disabuse the Consumer Financial Protection Bureau (“Bureau”) of its constitutionality.

Here is one of the lawsuits that started droning high and mighty soon after the Bureau received its enumerated authorities in the summer of 2011.

The bank sued in June 2012, arguing that the Bureau has an inordinate amount of power because (1) the Bureau’s director can't be removed at will, and (2) the agency's funding is routed around the congressional appropriations process.

A little over a year later, in August 2013, the case was booted, only to be resuscitated in July 2015 by the D.C. Circuit, since the appeals court found the bank has standing to challenge the Bureau’s constitutionality – based on the fact that the Bureau regulated the remittance market, which is the bank’s business. That said, there had been no enforcement action.

Lacking an enforcement action to protest, maybe the bank just wanted to get out in front of the problem before it started!

The bank went forward with a summary judgment challenge in November 2015.

In any event, about the 2012 suit’s allegation: the claim is that the law creating the Bureau, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is unconstitutional. The bank claimed the president's inability to remove the Bureau’s director without good cause violates the separation of powers doctrine, a claim, the Bureau argues, that ignores Supreme Court precedent.

This gambit has been pushed hither and yon for some time. For instance, right from the start there has been a challenge to the recess appointment of Richard Cordray to be the Bureau's first director. President Barack Obama used a recess appointment to put Mr. Cordray in charge of the Bureau, albeit only after mostly Republican senators refused to vote on his nomination. Their opposition was based on the structure and congressional oversight of the Bureau, not really at all based on Mr. Cordray’s credentials.

But Conservatives have long held that the recess appointment violated the Constitution, engendering the recess appointment itself by keeping the Congress technically open by holding a series of pro forma sessions, gaveling in sessions for minutes or seconds, in order to meet the lowest bar for being open for business.

So, we’re back in court!

Now, the Bureau has asked a Washington, D.C., federal court for summary judgment. Filing last Friday, the Bureau asserts that the bank’s challenge to the Bureau's constitutionality can't get around long-standing precedent supporting legislators' authority to create independent agencies.

Here’s two of the pivotal quotes:

“SNB’s arguments that Title X violates constitutional separation-of-powers principles rest on policy arguments with no support in the constitutional text or judicial precedent.” 

“The challenged provisions of Title X – considered either individually or collectively – are consistent with Articles I and II of the Constitution, as they have been interpreted and applied by the Supreme Court.”

The Bureau argues that the Supreme Court had ruled in 1935, in Humphrey’s Executor v. United States, that Congress has the authority to create independent agencies with overseers appointed by the president who can only be removed for good cause.

Thus, asserts the Bureau, the authority is grounded in the establishment of the Federal Communications Commission, which was at issue in that case, or any of several other federal agencies, including the Securities and Exchange Commission, that are considered to have been created under the same authority.

Given precedent, the Bureau’s view is that, whether or not the Bureau is headed by a single, appointed director or several commissioners (or multiple directors or a phalanx of overseers), is entirely irrelevant and nugatory. In defending the single appointee, the Bureau’s brief states: “If anything, it should be easier for the president to hold accountable a single officer than several.” 

Furthermore, the Bureau stated that the foregoing argument didn't appear in the bank's complaint and that it can't raise the claim now in its own motion for summary judgment filed in early November. Indeed, it is argued that the bank was not harmed by the rules approved by Director Cordray, and, in cases where the bank claims it was harmed, invalidating them would not serve to correct the injuries alleged by the bank.

From a regulatory perspective, the Bureau is correct with respect to the validity of rules approved by the Bureau’s director. Even if the court were to consider the validity of rules approved by Director Cordray during his recess appointment, the D.C. Circuit has upheld such rules when later ratified by an agency.

I think you can see how this Hatfields and McCoys battle can get very complicated.

I expect this species of litigation to find its way into the dustbin of history.

Still, as Alexander Pope said, "Hope springs eternal in the human breast."

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Jonathan Foxx

President & Managing Director
Lenders Compliance Group

Closing Disclosure: Deep Dive – Pages One and Two

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Jonathan Foxx

President & Managing Director

Lenders Compliance Group

This is the fourth article of a six-part series devoted to TILA/RESPA Integration Disclosure. Although the series, structured as White Papers, was initially established with four parts, I have added a fifth and sixth part to discuss additional features of the Closing Disclosure. In this article, I will take you through a review of Page One and Page Two of the Closing Disclosure. In the fifth part, I will discuss Page Three. The sixth and final part of the series will provide an outline of Page Four and Page Five. Through a review of important highlights, I invite you to join me in a deep dive into the intricate features of the Closing Disclosure.

In the first article, I discussed the mission of TILA-RESPA Integration and the Loan Estimate (LE).[i] The second article introduced and treated the numerous features of the Closing Disclosure (CD).[ii] In the third article, I provided the salient features of the Loan Estimate, in considerable detail.[iii] The first two articles were accompanied by detailed tables to be used for certain itemized categories and action requirements.

I would suggest that you read all the articles in this series in order to better understand the TILA-RESPA Integration Disclosure (TRID) rule promulgated by the Consumer Financial Protection Bureau (CFPB).

One of the reasons I have written this series is to cut through the information noise. My concern stems from the nearly profiteering stance of the flourishing punditry to opine on TRID. This approach to learning seems to have become the norm recently at conferences, conventions, webinars, seminars, lectures, and pricey city-to-city forums. Indeed, also, people with no real experience in directing regulatory compliance, though having some training background, seem to hang out their TRID webinar shingle. I view the latter as but shills for generating leads for their affiliated pundits.

I happen to think that TRID is too important, being a generational change in disclosure, to hog the helpful information about TRID by charging a fee just so somebody could attend and possibly learn something about it. With that in mind, my firm recently established two proactive paths to a TRID knowledgebase:

(1) We established the TEAM TRID™ task force,[iv] a relatively inexpensive, cost-effective way to get TRID integration implementation done efficiently (viz., www.teamtrid.com); and importantly

(2) We established TRIDHotline.com,[v] an entirely free online service, manned by our task force, to assist people with their questions about TRID. We want to listen to their compliance needs (viz., www.tridhotline.com).

Hopefully, you will have read the previous three articles. Now we will continue a detailed review of the new disclosures, by providing this fourth article on the Closing Disclosure. As indicated above, a fifth and sixth article will further elucidate the Closing Disclosure analysis.

In focusing on the Closing Disclosure, I will offer a perspective of its pertinent and critical highlights. As I have stated throughout this series, I caution you to realize that this review is not exhaustive or comprehensive, given that the TRID rule contains very complex disclosure requirements, and there are on-going updates and interpretations involving its implementation, some of which are borne of the CFPB’s own issuances as well as the areas that may be subject to litigation.

Please consider my analysis carefully. Follow along with a copy of the Closing Disclosure. I will provide, where helpful, some information as Suggested Guidance. Allow at least two hours to consider this explication. And as I have admonished all along, make notes, raise questions, and seek answers from competent compliance professionals!

There are five pages to the Closing Disclosure. We will visit each of them, with particular interest in understanding their key features. Although I will take the CD somewhat in order, it should be noted that this method of explanation is not meant to suggest that each Closing Disclosure contains five pages or that in all instances the information described appears on that page in the same order. For example, Regulation Z allows an alternative “Calculating Cash to Close” table for transactions without sellers.[vi]

Page One

The first page of the Closing Disclosure includes General Information, the Loan Terms table, the Projected Payments table, and the Costs at Closing table. The CD begins with the title “Closing Disclosure” and a form purpose statement, followed by three columns of basic information headed “Closing Information,” “Transaction Information,” and “Loan Information.”[vii] The page then includes three tables: “Loan Terms,” Projected Payments,” and “Costs at Closing.”[viii] The text itself is required for federally related mortgage loans subject to TILA-RESPA disclosure integration. Note should be taken that the model form is for transactions subject to TILA only and not RESPA.

Loan Estimate: Deep Dive

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Jonathan Foxx

President & Managing Director

Lenders Compliance Group

This third article of a four-part series beckons us to a deep dive into the Loan Estimate.

In the first article, I discussed the mission of TILA-RESPA Integration and the Loan Estimate (LE).[i] The second article introduced and treated the numerous features of the Closing Disclosure (CD).[ii] Each of the foregoing articles were accompanied by detailed tables to be used for certain itemized categories and action requirements.

The final and fourth article will provide an extensive analysis of the Closing Disclosure.

I would suggest that you read all the articles in this series in order to better understand the TILA-RESPA Integration Disclosure (TRID) rule promulgated by the Consumer Financial Protection Bureau (CFPB).

One of the reasons I have written this series is to cut through the information noise. My concern stems from the nearly profiteering stance of the flourishing punditry to opine on TRID. This approach to learning seems to have become the norm recently at conferences, conventions, webinars, seminars, lectures, and pricey city-to-city forums. Indeed, also, people with no real experience in directing regulatory compliance, though having some training background, seem to hang out their TRID webinar shingle. I view the latter as but shills for generating leads for their affiliated pundits.

Attendees sometimes leave these convocations and ad hoc caboodles more confused than beforehand. Occasionally, they call my firm and want to know who has the correct view, Mr. Pundit A or Ms. Pundit B. I have noticed recently that certain pundits that previously, freely offered advice on TRID are now charging fees for their webinars or offering their guidance, for a fee, via well-known webinar purveyors and online audio/visual enablers. I offer these reflections not as exculpation, rather as expiation, since I have been on panels, and given lectures and webinars, alongside many members of the conscientious punditocracy.

But I happen to think that TRID is too important, being a generational change in disclosure, to hog the helpful information about TRID by charging a fee just so somebody could attend and possibly learn something about it. With that in mind, my firm recently did two proactive things: (1) we established the TEAM TRID™ task force,[iii] a relatively inexpensive, cost-effective way to get TRID integration implementation done efficiently; and importantly (2) we established TRIDHotline.com,[iv] an entirely free online service, manned by our task force, to assist people with their questions about TRID. We want to listen to their compliance needs!

In my view, these two foregoing measures help to address the challenge we face as we head toward the compliance effective date of August 1, 2015. I want to do what I can to ensure that we all are ready! “Ready” means ready for everybody, since the stability of the residential mortgage loan originations industry and the financial protection of the consumer depend on understanding and implementing the many features of the TRID rule.

Hopefully, you will have read the previous two articles (i.e., Part I and Part II). Now we will embark on a detailed review of the new disclosures, beginning in this third article with the Loan Estimate.

Let’s get real close to the Loan Estimate. In this article I will not discuss pre-application estimates and worksheets in detail, except to mention that a creditor or other person may choose to provide a consumer with a written preliminary estimate of terms or costs specific to that consumer before providing the Loan Estimate. If it does so, the creditor or other person must clearly and conspicuously state at the top of the front of the first page of the estimate in a font size no smaller than 12-point: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”[v] Furthermore, the estimate may not be made with headings, content, and format substantially similar to the Loan Estimate or Closing Disclosure.[vi]

So let’s focus on the Loan Estimate, since I plan to take you solely through the Loan Estimate in considerable detail. I will discuss salient highlights of the Loan Estimate, though I caution you to realize that this review is not exhaustive or comprehensive, given that the TRID rule contains very complex disclosure requirements, far more involved, byzantine, elaborate, incisive, and potentially enigmatic than the compendiary features of it discussed herein.

Please follow my analysis carefully. Allow at least two hours to consider this elucidation. Make notes, raise questions, seek answers from competent compliance professionals!

HIGHLIGHTS

Loan Estimate Form

For any federally related mortgage loan,[vii] the Loan Estimate must be made using the model form set forth in Exhibit H - Form H-24 in the CFPB’s Federal Register issuance.[viii] TRID does not require the use of the model form for non-RESPA transactions; that is, those subject to the integrated disclosures because they are subject to TILA and secured by real property but are not subject to RESPA.[ix] There are numerous text, structure, and field descriptions associated with the LE disclosure. Thus, it would be wise not to deviate from the model provided.

For those non-RESPA loans, the disclosures must be made with headings, content and format substantially similar to form H-24. Use of model form H-24, properly completed with accurate content, would constitute compliance for those loans.[x]

According to the CFPB, the Loan Estimate integrates at least seven pages of disclosures, including:

·       Three pages of the RESPA Good Faith Estimate;

·       Two pages typically used for early TILA disclosures;

·       One page typically used for the appraisal notice under the Equal Credit Opportunity Act;

·       One page typically used for the servicing disclosure.

The Loan Estimate also incorporates disclosures of:

·       The total interest percentage (TIP);[xi]

·       The aggregate amount of loan charges and closing costs the consumer must pay at consummation;[xii]

·       For refinances, the anti-deficiency protection notice;[xiii]

·       The homeowner’s insurance disclosure.[xiv]

TRID imposes strict specifications for the Loan Estimate. For instance, unless otherwise specifically provided, a disclosure that does not apply to a transaction should be left blank, not marked “not applicable” or “N/A,” and, as a general rule, may not be deleted.[xv]

The Lead Generation Company: Managing the Risk

Jonathan Foxx

President & Managing Director

Generating leads is an important way to reach consumers. It is also fraught with regulatory risk. A lead is consumer information that signals consumer interest or inquiry into products or services offered by a business, such as residential mortgage lenders and originators. There are several factors to be considered, not just licensing. I will list some rudimentary guidelines in this article, specifically with respect to contact with the consumer. Caution is urged to consult with a risk management professional to ensure compliance with federal and state guidelines required by a marketing campaign to generate leads. Although my focus is primarily on the online lead generation process, virtually all the guidelines provided herein may be extrapolated for use in offline lead generation campaigns.

My firm often is requested by clients to vet a lead generator, which I will call a Lead Generation Company. Careful risk management advice should be considered when developing and managing leads, whether obtained from an outsourced entity or a loan originator’s own website, in-house, or through online lead generation advertisements. Certainly, any loan originator that uses leads must have an internal compliance function that accounts for proper licensing of the Lead Generation Company (where required), monitoring of the data integrity derived therefrom, testing conformance with the originator’s policies, and training of staff in the appropriate use of lead generated, consumer data.

Banking departments these days are not just looking at licensing qua licensing. They are looking for loan originator compensation violations that are triggered by lead generation. For instance, they know that loans may have different cost structures depending on how the loans were initially received by the lender. A lead generated by the loan originator may be compensated differently than those generated by the creditor. As long as this doesn’t constitute a proxy for a loan term or condition, it is generally acceptable; that is, the loan officer may also be reimbursed for lead generation and other legitimate business costs, but the creditor must beware of how this may serve as a proxy for terms and conditions. It is up to the lender to make this determination (and properly document it).

Four Rules

In any lead generating marketing, the following four rules should be implemented:

1.  Complete, accessible, and straightforward disclosure of all parties’ intent regarding data collection and usage is essential;

2.  Data should not be brokered or sold without consent (or notice and choice) of all parties involved, including the consumer and the loan originator;

3.  Both the consumer, Lead Generation Company, and the loan originator should be made aware, through clear notices, of all parties involved in data collection and sharing; and,

4.  All parties should be educated and aware of current regulations regarding consumer protection and privacy.

These four rules become the bases of the policies, procedures, contractual arrangements, and protocols that ensure a viable marketing campaign that relies, in whole or in part, on lead generation.

Regulatory Focus

The regulators involved in enforcement of compliance with lead generation rules include, but are not limited to, state banking departments, state Attorneys General, the Federal Trade Commission (“FTC”),[i] and the Consumer Financial Protection Bureau (“Bureau”). We already know that the Bureau examines for whether the lead generator is a third-party provider and reviews the terms and appropriateness of the relationship. The Bureau reviews advertisements and advertising sources. It will review TV, radio, print media, Internet, scripts, recordings, and so forth. It will determine if there was proper consumer disclosure all along the way, from point of contact with the consumer to point of contact with the lender, including any intimation of fees and other terms and conditions. Plus, a review is conducted for online data security and sharing of consumer information.

Although the new loan originator qualification standards do not impose licensing requirements, every lender must ensure that each loan originator in its employ is licensed and registered in compliance with laws related to Secure and Fair Enforcement for Mortgage Licensing Act (SAFE), if applicable. Further, entities engaged in lead generation and marketing activities, as well as the companies that do business with such entities, need to pay particular attention to their activities to ensure that they do not inadvertently engage in loan originator activity. If they do, they’ll need to make sure that they meet the new loan originator qualification standards, including licensing requirements. Failure to meet these standards will give rise to severe civil liability that could impair the collectability of the loan.

The Bureau has stated that anytime a consumer gives out sensitive personal and financial information on the Internet there are risks involved to the consumer. In the context of Pay Day Loans, for instance, the Bureau has already warned consumers that if a consumer applies for a loan online, the consumer could be increasing risk significantly.

The Bureau has expressed concern that an online application or form that consumers fill out could be sold to a loan originator that offers to originate a loan on behalf of the consumer. Indeed, the Bureau also has indicated it has concerns that multiple lenders or other settlement service providers could pay for this information, thereby causing them to contact or email the consumer.

The Bureau’s Pursuit of Fair Lending

By now it is a known fact that one of the most important features of an examination conducted by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is a rigorous review of fair lending compliance. So, given its importance, it behooves us to learn about what the CFPB has found out about fair lending and what actions are needed to ensure its compliance. In this article, I provide an analysis of the CFPB’s most recent findings in the mortgage space as well as practical actions to be taken that help to build a vibrant fair lending initiative, gleaned from both the Bureau’s own issuances and actions, as well as my firm’s experience in assisting institutions with their CFPB fair lending examinations.

On April 30, 2014, the Bureau issued an Annual Report, entitled “Fair lending Report of the Consumer Financial Protection Bureau” (“Report”).[i] Richard Cordray, Director of the CFPB, stated in the Report’s preamble:

“Far too many consumers still must navigate a financial marketplace laden with deceptive marketing, debt traps, dead ends, and discrimination. At the Consumer Bureau, we are fierce advocates for a consumer financial marketplace that allows all Americans to pursue a path to greater opportunity. To that end, we are working to remove the unnecessary obstacles too many Americans face in the consumer financial marketplace. This includes ferreting out discrimination in credit markets, including the markets for home mortgages and auto lending.”[ii]

The Report generally covers the period from July 21, 2012 through December 31, 2013. In addition, there is Interagency Reporting on ECOA and HMDA contained therein, which conveys information on the Bureau’s and other administrative agencies’ functions under ECOA and HMDA, as required by those statutes, for the period of January 1, 2012 to December 31, 2013.

Patrice Alexander Ficklin, the Bureau’s Director of Fair Lending and Equal Opportunity, offered this overview of the Report:

“In this report we describe our steady focus on ensuring that consumers have fair, equitable, and nondiscriminatory access to credit by using all of the tools at our disposal – including research, supervision, enforcement, consumer education and outreach, rulemaking, and interagency engagement.”[iii]

The Bureau issued the Report to Congress “in fulfillment of its statutory obligation and continued commitment to accountability and transparency.”[iv] In this regard, the Bureau is relying on its claimed efforts to fulfill its fair lending monitoring mandate, and provides additional reporting required by the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA).[v]

Dodd-Frank established the Office of Fair Lending and Equal Opportunity (the “Office of Fair Lending”) within the CFPB, and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the Bureau,” including ECOA and HMDA.[vi] The Office of Fair Lending is required to coordinate “fair lending efforts of the Bureau with other Federal agencies and State regulators, as appropriate, to promote consistent, efficient, and effective enforcement of federal fair lending laws,” and works “with private industry, fair lending, civil rights, consumer and community advocates on the promotion of fair lending compliance and education.”[vii]

Since the Bureau’s last report to Congress in December 2012, the Bureau has built fair lending tools and materials and engaged in public dialogue in order to educate, inform, and learn from consumers, advocates, and industry. It introduced a Home Mortgage Disclosure Act Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. Additionally, the Bureau has published a bulletin on lending discrimination to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets.[viii]

REPORT’S CONCLUSIONS 

We can derive certain salient observations about the Report’s findings.

In the first place, the Bureau has noted increasing efficiencies in fair lending activity. Thus, they have “created, refined, and implemented a risk-based fair lending prioritization process” to ensure that their supervisory procedures focus on the “areas presenting the greatest fair lending risk to consumers.” The approach, dubbed “risk-based prioritization” by the Bureau, uses the collection of both quantitative and qualitative data to assess fair lending risk to consumers as well as assessments of risk in order to prioritize enforcement actions.[ix]

Diversity and Inclusion

In January 2012, the Consumer Financial Protection Bureau (“Bureau”) launched the Office of Minority and Women Inclusion (“OMWI”).[i] Then, in March 2013, the OWMI published its Annual Report to Congress (“Report”) about the Bureau’s due diligence review of diversity and inclusion in certain work environments. The period subject to review was January 1, 2012 to December 31, 2012. The Report produced statistical diversity findings relating to the Bureau and other federal agencies and, importantly, indicated a mission to produce diversity findings for regulated entities.[ii]

The Dodd-Frank Act (“Dodd-Frank”) created not only the Bureau’s OWMI but also similar offices at other federal financial regulatory agencies (collectively, the “Agencies”),[iii] tasking them with advising on the impact of the policies and regulations regarding minority-owned and women-owned businesses (collectively, the “OWMIs”).

The follow-up to these studies was the goal of developing standards for (1) equal employment opportunity and the racial, ethnic, and gender diversity of the agency workforce and senior management; (2) increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency; and (3) assessing the diversity policies and practices of entities regulated by the agency.[iv]

The Report noted that in February 2013 the Bureau entered into a Memorandum of Understanding with the Equal Employment Opportunity Commission to access employment demographic survey data. That data will provide the analytical and statistically derived composition of regulated entities. The intent on the part of the Bureau and the OWMIs was to develop common standards for assessing the diversity policies and practices of regulated entities and publish a proposal of these standards for public comment sometime in 2013.[v]

On October 23, 2013, the Federal Agencies announced their “common standards” proposal, entitled Joint Standards for Assessing Diversity Policies and Practices of Regulated Entities (“Proposal”).[vi] This is an Interagency Proposal that is meant to “promote transparency and awareness of diversity policies and practices within the institutions.”[vii]

The Proposal sets forth four areas:

1. Organizational commitment to diversity and inclusion;
2. Workforce profile and employment practices;
3. Procurement and business practices and supplier diversity; and
4. Practices to promote transparency of organizational diversity and inclusion.

In developing these proposed standards, the Agencies have expressed their view that there are operative variables, such as an institution’s asset size, number of employees, governance structure, income, number of members or customers, contract volume, location, and community characteristics.

The Agencies notified the public that their respective OMWI Directors held roundtable discussions with a range of parties, including “representatives from depository institutions, holding companies, credit unions, and industry trade groups to solicit input on assessment standards and to learn about the challenges and successes of current diversity programs and policies.”[viii] Roundtable discussions also were held with financial professionals, consumer advocates, and community representatives to gain a greater understanding of issues facing minorities and women in employment and in business contracting in the financial sector.[ix]

The Proposal was published in the Federal Register on October 25, 2013, entitled Notice of Proposed Interagency Policy Statement with request for Public Comment.[x] For a period of 60 days from its publication date, this policy statement was available for public comment.[xi] The comments were due by December 24, 2013. To allow the public more time to consider the proposed standards, the Agencies extended the comment period to February 7, 2014. Thus, comments must be received on or before February 7, 2014.[xii]

It is important to institute a policy and procedures for implementing the requirements set forth in the Proposal. In anticipation of the Final Rule, the following provides an outline both of the diversity requirements and the recommended features of a policy statement for diversity and inclusion. 

Diversity: Policies, Practices, and Standards

It should be noted that diversity policies, procedures, practices, and standards of the entities regulated by the Agencies would take into consideration an individual entity’s size and other characteristics, such as total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics. These characteristics are to be taken into account when establishing an individual entity’s standards. 

Organizational Commitment to Diversity and Inclusion

The Agencies provide their philosophical position with respect to organizational commitment on the part of an entity’s management. According to the Proposal, “leadership of a successful organization demonstrates its commitment to diversity and inclusion. Leadership comes from the governing body such as a board of directors, senior officials, and those managing the organization on a day-to-day basis.”

Standards

The Proposal offers a ‘high-level’ standard that is meant to promote diversity and inclusion both in employment and contracting. The corporate culture that embraces diversity and inclusion would adopt the following standards:

· The regulated entity includes diversity and inclusion considerations in both employment and contracting as an important part of its strategic plan including hiring, recruiting, retention and promotion.

· The entity has a diversity and inclusion policy that is approved and supported by senior leadership, including senior management and the board of directors.

· The entity provides regular progress reports to the board and/or senior management.

· The entity conducts equal employment opportunity and diversity and inclusion education and training on a regular and periodic basis.