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

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]

The Hedgehog and the Fox: A Regulatory Parable

The 7^th century BCE Greek lyric poet, Archilochus, observed: "the fox knows many things, but the hedgehog knows one big thing.”[i] Twenty-two centuries later, Erasmus transliterated Archilochus’s dictum by precisely rendering it into the Latin aphorism: “multa novit vulpes, verum echinus unum magnum.”[ii] When it comes to these two ways of thinking and acting, things didn’t change much between the 7^th century BCE and the 16^th century CE, when Erasmus penned his elucidation.

Isaiah Berlin, the British political philosopher, whose life span stretched nearly the whole 20^th century,[iii] wrote a well-known essay in 1953, inspired by Archilochus’s apothegm. It was entitled “The Hedgehog and the Fox: An Essay on Tolstoy's View of History.”[iv]

Of Berlin’s essay, Arnold Toynbee, one of the great historians of our time, wrote: 

“This fragment of verse by the Greek poet Archilochus describes the central thesis of Isaiah Berlin's masterly essay on Tolstoy, in which he underlines a fundamental distinction between those people (foxes) who are fascinated by the infinite variety of things and those (hedgehogs) who relate everything to a central, all embracing system.”[v]

Since its inception, it seemed clear to me that the Consumer Financial Protection Bureau (the “Bureau”) is a hedgehog. It tends to view the world through the lens of a single defining idea: consumer financial protection. In accordance with this idea, the Bureau exercises this vision through a single, predominant, and coherent framework of regulations. As a hedgehog, the Bureau stays focused on this one foundational principle and repeatedly, unvaryingly, and rigidly seeks to implement that overriding proposition by applying the same methods and solutions, usually to the exclusion of other possible remedies.

This predilection is not simply a matter of judgment or style. Hedgehogs actually have one grand theory which they seek to extend into many domains, furthering their rule through a fervent belief in the guiding principle. They express their views with confidence; assurance; coolness; obstinacy; unrelenting drive; generally rigid adherence to an impliable mission; unwavering obedience and devotion to a regnant objective; a proclivity to roll results up into an aggregate value; and, a tendency to express themselves with such idiomatic phrases as “mission critical,” “the ends justify the means,” “by and large,” “ball-park figure,” “jack-of-all-trades,” “grand strategy,” “seeing the larger picture,” and “the system is the solution.” Usually, hedgehogs have a unique vision that gives rise to the ability to notice complex circumstances and discern the underlying patterns. In effect, their reach exceeds their grasp. Examples of hedgehogs are Plato, Dante, Proust and Nietzsche.

Residential lenders and originators (the “RMLOs”) are, as a group, foxes - they draw on a wide variety of experiences and do not believe for a second that the world can be boiled down to a single idea, evinced through an all-embracing framework, howsoever cogent it appears to be.

Foxes are skeptical about grand theories. They are constrained in their forecasts, and adaptive to actual events. They tend to be more accurate in their predictions than hedgehogs, since they are more agile in assigning probabilities to their expectations. While hedgehogs see the larger picture, thereby missing opportunities, foxes notice each and every pixel contributing to it, and thus quickly find opportunities. Because the fox is acutely aware of each part of the whole, it devises complex strategies to gain an advantage on the hedgehog. Often, it succeeds in its plans due to this advantage.

The kinds of idiomatic expressions that foxes use are “zero in on something,” “devil's in the details,” “under construction,” “mixed feelings,” “barking up the wrong tree,” “at this stage,” “first in class”, “trying something new,” and “let’s get another pair of eyes on this matter.” Foxes are centrifugal: they pursue divergent ends and usually possess a sense of reality, which keeps them from designing a logistical framework that purports to contain all possibilities. They instinctively know that complexity does not conduce to a unitary structure. Although foxes may have a broad vision and much agility in complex interactions, often their grasp exceeds their reach. Examples of foxes are Montaigne, Balzac, Goethe and Shakespeare.

Foxes pursue many ends at the same time, with much energy and cunning. They see the world in all its complexity. Hedgehogs simplify a complex world into a basic principle or concept that unifies and guides everything. Foxes tend to be scattered, diffused, and inconsistent. For hedgehogs, the world is reductive; that is, all challenges and dilemmas are reduced to simple hedgehog ideas, and anything that does not correlate to the hedgehog idea is without relevance. Hedgehogs see what is essential and ignore the rest.

Generally, the fox’s style is often deprived of rigorous models, specific goals, and global metrics. Foxes learn incrementally, over many iterations of experience. The foxy RMLO has a succinct advantage in swaying the hedgehog Bureau, because it nimbly responds to new information, constantly reconfiguring its market knowledge in reaction to changing circumstances. Such vital information leads to greater performance and the ability to provide solutions that open up new ways for the Bureau to fine tune its single overarching vision.

The Bureau has set compliance effective dates in January 2014 for many new rules that will affect RMLOs. As these rules go into effect, we enter the New Year noting a rather obvious example of the hedgehog’s vision and the fox’s hastening to fulfill it. Their relationship is bound by the unwavering path of the Bureau and the serpentine path of the RMLO. The Bureau’s grand vision presents a broad plan of action that must be implemented. In complying with the Bureau’s rules, the RMLO must bestir itself to be particularly attuned to working with the minutiae of details that are a part of the practical experience of actually originating and servicing residential mortgage loans.

In 2014, here are three questions to keep in mind about the relationship between the Bureau and the RMLO: 

1) How prepared is your financial institution to comply with the Bureau’s expectations?

2) Are you ready to implement the Bureau’s complex requirements?

3) Does your company act like the visionary hedgehog or the nimble fox?

Foxes are cunning and have the advantage of knowing how reality works, poking holes in the hedgehog’s grand scheme of things, even as the many spindled hedgehog rolls into a big bulky ball. But beware of that ball! The hedgehog and the fox have learned never to underestimate each other. Although the fox is clever, swift, skilled in action, and knows many tricks, the hedgehog knows one big decisive trick: it can roll itself into a ball of sharp and painful spikes! 

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Jonathan Foxx

President & Managing Director
Lenders Compliance Group
Brokers Compliance Group

National Mortgage Professional Magazine - December 2013

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[i] Archilochos (c. 680–c. 645 BC) was a Greek lyric poet from the island of Paros in the Archaic period.

[ii] Adagia, ("Erasmus") Desiderius Erasmus Roterodamus (October 27, 1466-July 12, 1536), Paris, 1500, from Robert Bland, Proverbs, Chiefly Taken from the Adagia of Erasmus, with Explanations; and Further Illustrated by Corresponding Examples from the Spanish, Italian, French & English Languages, Volumes 1-2, London, 1814

[iii] Sir Isaiah Berlin, (June 6, 1909-November 5, 1997), British social and political theorist, philosopher and historian of ideas.

[iv] Berlin, Isaiah, The Hedgehog and the Fox: An Essay on Tolstoy's View of History, Weidenfeld & Nicolson, London, 1953.

[v] Idem

CFPB Toolbox - Update

On October 9, 2013, we notified you about our new CFPB Toolbox that we maintain in our Library.

We have added this new CFPB issuance:

eRegulations

(CFPB's Search Tool)

According to the CFPB (announced on October 22, 2013), the eRegulations search tool will provide the following:

• Easy to search and navigate.

• Key terms are defined throughout.Official interpretations are available throughout.

• Include certain sections of the "Federal Register preambles" to help explain the background to any particular paragraph.

• Ability to see previous, current, and future versions.

The CFPB timed the eRegulations announcement to coincide with the new remittance transfers examination procedures (Regulation E), so that is the first regulation linked into the tool.

Please use our CFPB Toolbox as a facilitating resource, while in many cases still visiting the CFPB's website for more information.

Best wishes,

Jonathan Foxx

President & Managing Director

HUD’s Safe and Rebuttable Qualified Mortgages

The anxiously awaited Proposed Rule (“Rule”) outlining the Qualified Mortgage for FHA loans was published in the Federal Register on September 30, 2013. Given the bland, bureaucratic title Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages (“Issuance”), HUD is submitting for public comment its definition of a “qualified mortgage” for the types of loans that HUD insures, guarantees, or administers that align with the statutory ability-to-repay (“ATR”) criteria of the Truth-in-Lending Act (“TILA”) and the regulatory criteria of the definition given by the Consumer Financial Protection Bureau (“CFPB”), without departing from HUD’s statutory requirements. The expiration of the comment period is October 30, 2013.

A copy of the Proposed Rule is available in our Library.

In this article, I will provide an overview of the Rule with respect to Title II mortgages of the National Housing Act. I shall offer some practical insights relating to the potential consequences and implementation of the Rule for residential mortgage lenders and originators.*

Birthing HUD’s Proposed Rule

The Rule has its genesis in a foundational document, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which created the new section 129C in TILA, establishing minimum standards for considering a consumer’s repayment ability for creditors originating certain closed-end, dwelling-secured mortgages, and generally prohibiting a creditor from originating a residential mortgage loan unless the creditor makes a reasonable and good faith determination of a consumer’s ability to repay the loan according to its terms.

Briefly, Section 129C is meant to provide lenders a specific format to meet the ATR requirements when lenders make “qualified mortgages” (“QMs”). A new section 129C(b), added by section 1412 of Dodd-Frank, establishes the presumption that the ATR requirements of section 129C(a) are satisfied if a mortgage is a “qualified mortgage,’’ and authorizes the CFPB, to prescribe regulations that revise, add to, or subtract from the criteria in TILA that define a “qualified mortgage.’’ (Section 129C also provides for a reverse mortgage to be a qualified mortgage if the mortgage meets the CFPB’s standards for a qualified mortgage, except to the extent that reverse mortgages are statutorily exempted altogether from the ATR requirements. The CFPB’s regulations provide that the ATR requirements of section 129C(a) do not apply to reverse mortgages. Section 129C(a)(8) excludes reverse mortgages from the repayment ability requirements.)

As you may know, I have published and presented extensively on QMs and have dubbed the non-qualified mortgage with the acronym “NQM.” For some of my work on this subject, please visit HERE, and HERE, and HERE.

Section 129C authorizes the agency with responsibility for compliance with TILA, that is, the CFPB, to issue a rule implementing these requirements. The CFPB already set forth its Final Rule on ATR, QMs, and NQMs, as issued in the Federal Register on January 30, 2013. Along with certain other agencies, HUD was also later on charged by the CFPB, pursuant to Dodd-Frank, with prescribing regulations defining the types of loans that it would insure, guarantee, or administer, as applicable, that are qualified mortgages. In the Rule, HUD now proposes that any forward single family mortgage insured or guaranteed by HUD must meet the criteria of a qualified mortgage, as defined in the Rule.

HUD reviewed its mortgage insurance and loan guarantee programs and, in the Issuance, stated that all of the single family residential mortgage and loan products offered under HUD programs are qualified mortgages; that is, they “exclude risky features and are designed so that the borrower can repay the loan.” However, for certain of its mortgage products, HUD proposes its Rule for qualified mortgage standards similar to those established by the CFPB in its definition of “qualified mortgage.” 

Safe Harbor and Rebuttable Presumption of Compliance

Through its “qualified mortgage” rulemaking, the CFPB established both a “safe harbor” and a “rebuttable presumption of compliance” for transactions that are qualified mortgages. CFPB's label of safe harbor is applied to those mortgages that are not higher-priced covered transactions (i.e., the annual percentage rate (“APR”) does not exceed the average prime offer rate (“APOR”) by 1.5 percent). These are considered to be the least risky loans and presumed to have conclusively met the ATR requirements of TILA. The label of rebuttable presumption of compliance is applied to those mortgages that are higher-priced transactions.

TILA Section 129C(b)(2)(ix) provides that the term “qualified mortgage” may include a “residential mortgage loan” that is “a reverse mortgage which meets the standards for a qualified mortgage, as set by the Bureau in rules that are consistent with the purposes of this subsection.” But the Federal Reserve Board’s proposal, adopted by the CFPB, does not include reverse mortgages in the definition of a “qualified mortgage.” Indeed, the CFPB’s Final Rule does not define a “qualified” reverse mortgage.

HUD proposes to designate Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans covered by the Rule to be safe harbor qualified mortgages and HUD proposes no changes to the underwriting requirements of these mortgage and loan products.

The largest volume of HUD mortgage products - those insured under Title II of the National Housing Act – would be bifurcated into qualified mortgages similar to the two categories created in the CFPB final rule: a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage.

Specifically, the Rule would define the safe harbor qualified mortgage as a mortgage insured under Title II of the National Housing Act (excepting reverse mortgages insured under section 255 of this act) that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR 1026.43(e)(3), and that has an APR for a first-lien mortgage relative to the APOR that is less than the sum of the annual mortgage insurance premium (“MIP”) and 1.15 percentage points. HUD would define a rebuttable presumption qualified mortgage as a single family mortgage insured under Title II of the National Housing Act (excepting reverse mortgages insured under section 255 of this act) that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR 1026.43(e)(3), but has an APR that exceeds the APOR for a comparable mortgage, as of the date the interest rate is set, by more than the sum of the annual MIP and 1.15 percentage points for a first-lien mortgage.

Revolving Door Regulators

Senator yesterday. Lobbyist today.

Representative yesterday. CEO today.

Cabinet level appointee yesterday. Bank Chairperson today.

Government Agency Director yesterday. Law firm senior partner today.

CFPB Regulator yesterday. Competitor today.

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IN THIS ARTICLE

The Inside-Outside Gambit

The Four Horsemen

A Business Model for Former Regulators

Partners in Business

Making a Market in Non-QM

Timeline

What did they know, and when did they know it?

Extinguishing the Fire

Library

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The Inside-Outside Gambit

There are many forms of corruption. Perhaps the most pernicious is where an elected or duly appointed representative of the citizenry leaves office to use the sloughed off position for financial gain in the private sector.

Let's set up a definition for such (mostly unregulated) behavior. I will give it a phrase: "inside-outside gambits."

What is an inside-outside gambit? It is the use of information obtained in the course of a former governmental position by an official for financial gain, directly or indirectly, soon or immediately after leaving government employment in that position. Such information includes contacts with decision-makers in the government; providing information about proprietary conversations leading up to the promulgating of laws, rules, and regulations; access to insiders and knowledge of their views; navigating the systemic and organizational structure; non-public facts regarding the governmental plans or condition that could provide a financial advantage. Note that I use the phrase "inside-outside," not "insider trading."

I am not talking about a situation where there is the illegal trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the subject company (such trading being illegal).

However, the effect of “inside-outside gambit” and “insider trading” is practically the same: these strategies lead to an unfair, usually economic, advantage.

A basic concept of law is that an injury must be sustained by a plaintiff. Broadly speaking, no injury, no case.

So who is harmed when an equity trader uses inside information for personal financial benefit? The public, of course. Certainly, that part of the public that invests in the stock market, relying on rules, regulations, and laws to be impartially applied, with equal access to all. And who is harmed when a former government official uses inside information for personal financial benefit almost immediately after being employed in the government position. Of course, the public. Certainly, that part of the public that relies on rules, regulations, and laws to be impartially applied, with equal access to all.

How about when regulators in the most powerful agency that regulates the origination of residential mortgage loans, the Consumer Financial Protection Bureau (CFPB), leave that agency and start a mortgage company soon after leaving the CFPB, to compete or partner with mortgage companies?

When Thomas Jefferson advocated that legislators should have term limits in order to prompt the return to private life in order to live under the rules they promulgated, somehow I don't think this is what he had in mind.

In a letter of 1776, Jefferson wrote:

[His] "reason for fixing them [elected representatives] in office for a term of years rather than for life was that they might have an idea that they were at a certain period to return into the mass of the people and become the governed instead of the governor, which might still keep alive that regard to the public good that otherwise they might perhaps be induced by their independence to forget."

In other words, Jefferson viewed public service as a privilege. He fully expected government officials to return to private life and live under the laws they passed. I quite doubt that he viewed such a return to be a means for an ex-official’s self-enrichment, by utilizing public service to exploit – or even appear to exploit - the very laws promulgated by the ex-official.

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The Four Horsemen

On July 31, 2013, the House Committee on Oversight and Government Reform and the House Committee on Financial Services sent an eight page Congressional letter (Letter) to Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB). Signed by a bi-partisan group of Representatives, it expressed concern about the recent departure from the CFPB of four high level officials. The Letter forms the basis of further inquiries by the Committees. Noting a news report, the Representatives indicated it appears that certain officials "have left the CFPB in order to profit from rules they helped create."

Who are these individuals? What were their former CFPB positions?

CFPB: Spying to Protect the Consumer

It all began with a Bloomberg article. Although the CFPB spying on the financial habits of at least 10 million consumers seems to be a far cry from NSA's spying on the telephone calls, emails, snail mails, website usage, and many other communication media used by hundreds of millions of US citizens, the timing of the Bloomberg article comes at, shall we say, a rather sensitive time - given its publication just shortly prior to the recent revelations regarding the NSA's rather unique way of interpreting the Fourth Amendment of the US Constitution regarding search and seizure.

Probable Cause Conundrum

 

I call it the "probable cause conundrum," because (1) the Fourth Amendment expressly states that "the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized," yet (2) a warrant to spy on Americans these days, at least with respect to probable cause and the requirement that a warrant to spy must be limited in scope according to specific information, has been hugely expanded. At least one of the Supremes has interpreted "probable cause" to mean "reasonable." For some reason, I really don't think that point of view was ever the way the Framers considered it, based on the law extant at the time the Constitution was actually drafted. But I digress.

As a result of Tennessee v. Garner [471 U.S. 1 (1985)], inter alia, we all learned that the "reasonableness requirement" applies not just to a search in combination with a seizure, but also to a search without a seizure, as well as to a seizure without a search. But, again, I digress. So not to go too far afield, let us return to that Bloomberg article which, by the way, was published back in April of this year.

To quote the very first paragraph of the article, its author, Carter Dougherty, writes that "the new U.S. consumer finance watchdog is gearing up to monitor how millions of Americans use credit cards, take out mortgages and overdraw their checking accounts. Their bankers aren’t happy about it." And Mr. Dougherty later on states that "Director Richard Cordray has said that the consumer bureau needs raw material to make 'data-driven', decisions based on how financial products and services are used or abused. Research will improve regulation as well as the marketplace."

We don't like to think that our federal agencies are spying on us, watching our communications, perhaps especially our financial habits, determining therefrom how best to "serve" the public interest. Sure, we know that Google and other web giants are constantly monitoring our financial habits - presumably with our permission to do so. Somehow, it's acceptable if private corporations do it, but when the government does it - not so much!

It all becomes rather weird when the NSA (backed by, say, the DOJ) orders private corporations to spy on us, but the latter are not permitted to admit that the former ordered them to do so - with or without our permission - on the basis of what appears to be a new meaning of "probable cause."

What I find interesting is the similarity between the NSA's and the CFPB's reasons for the need to collect, respectively, virtually all communication data on American citizens and also the financial data on millions of American consumers. It seems that spying has an underlying positive cause, one that apparently we citizens simply don't fully appreciate. For if we did appreciate the workings of these agencies that are just trying to protect us, watch over us to make sure we are safe, and do what they can to mitigate our worst fears, we would overwhelmingly and clearly express our gratitude to the NSA and CFPB for their commitment to our protection - and some Americans certainly seem very grateful.

The Fourth Amendment - how quaint it has become!

Justifying Spying

NSA and CFPB – Two Peas in a Pod

 

But let's look at some of these justifications that both the NSA and the CFPB have in common for spying on us. Or, if you find that phrase to be nettlesome, perhaps the phrase ‘conducting surveillance on us’ is easier to accept.

First Justification: We need a bogeyman, whom we shall call El Coco, its Spanish version, as when a Spanish-speaking parent tells a child 'si no te portas bien vendrá el coco' ("if you're not good the bogeyman will come and get you"). Almost every civilization has had some version of the bogeyman, that amorphous, unpredictable, malevolent being whose primary role is to scare the living daylights out of us and make us willingly compliant and malleable victims.

So, in the case of the NSA, El Coco comes in the form of terrorists and other malcontents; and, in the case of the CFPB, El Coco seems to be residential mortgage lenders and originators (RMLOs) and other members of the financial markets and sometimes even consumers themselves. In both instances, we can thank the government for protecting us from the mischievous schemes of El Coco.

Fortunately, these federal agencies keep guard against El Coco and make sure that nothing physically or financially bad will happen to Americans. If you take the position, as did President Franklin Roosevelt, that "there is nothing to fear but fear itself," then you're really not showing much appreciation for the many protective efforts being done on your behalf, to protect you from the wrathful and heinous acts of El Coco.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*
 
These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

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IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

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SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

Part III (Frequently Asked Questions) consist of only a two-page set of questions and answers, most of them quite obvious, both in the asking and the answering. Perhaps the most interesting ‘question and answer’ set is this one:

Question: Will the CFPB coordinate and communicate supervisory activities with other regulatory agencies?

Answer: In accordance with the Dodd-Frank Act and its routine practice, the CFPB will coordinate with other regulators. Regulators will communicate examination plans and findings with each other. When appropriate, the regulators will coordinate examination efforts in order to reduce regulatory burden.

Although the CFPB gave a vaguely worded answer, let’s put it this way: the integration of information between the state banking departments and the CFPB and, where applicable, other state and federal agencies, has become (or is becoming) seamless.

Finally, Part IV (Tools) is a resource directly, commonly used on many websites to direct the reader to other website locations of interest. This section hosts many hyperlinks, seventeen in total, that cover most of the rules and regulations that the CFPB has promulgated relating to mortgage compliance.

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The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.

It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]

For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.

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IN THIS ARTICLE

Hearings and Adjudications

Scope of Legal Remedies

Blowing the Whistle on Violations

Policy Statement and Whistleblower Protection

Locking Horns with the Department of Labor

______________________________________________________

Hearings and Adjudications

On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]

Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]

Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:

Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and

“… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.” 

Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.

Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.

Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]

Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.

When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.

Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

Scope of Legal Remedies

The CFPB has extensive authorities to not only investigate violations of federal consumer protection laws but also implement broad enforcement relief.

Consider this list, which I do not assert to be comprehensive. These legal remedies are held to be “without limitation:”

• Rescission or reformation of contracts
• Refund of money
• Disgorgement and refund of various types of assets
• Return of real property
• Restitution
• Disgorgement or compensation for unjust enrichment
• Payment of damages or other monetary relief
• Public notification regarding the violation (including the costs of notification)
• Limits on the activities or functions of the person
• Civil monetary penalties

Indeed, Dodd-Frank authorizes the court in a court action, or the CFPB in an administrative proceeding, to grant “any appropriate legal or equitable relief with respect to a violation of federal consumer financial law, including a violation of a rule or order prescribed under a federal consumer financial law.”[x]

The relevant statute provides that there may not be an imposition of exemplary or punitive damages; however, in an action to enforce any federal consumer financial law, the CFPB, the states Attorneys General, or state regulators may recover their costs, if they prevail.

Notwithstanding the foregoing exclusion of exemplary or punitive damages, for any violation of a law, rule, or final order, or condition imposed in writing by the CFPB, a civil penalty may not exceed $5,000 for each day during which the violation or failure to pay continues. However, take note: that penalty amount jumps to $25,000 for each day for any person that recklessly engages in a violation of a federal consumer financial law, and to $1,000,000 for each day for any person that knowingly violates a federal consumer financial law.

And if the CFPB obtains evidence that any person has engaged in conduct that may constitute a violation of federal criminal law, the Bureau will immediately refer the case to the Attorney General of the United States.

Blowing the Whistle on Violations

The Bureau has distinguished whistleblower information from consumer complaints. Section 1057 of Dodd-Frank protects certain employees from retaliation who submit information about their employers' potential violations of the consumer financial protection laws now enforced by the CFPB. On December 15, 2011, the CFPB issued Bulletin 2011-05 (Enforcement and Fair Lending) to solicit information about potential violations of federal consumer financial laws.[xi] The Bulletin notes that Dodd-Frank § 1057 protects certain employees and their representatives who provide information against retaliation by their employers.[xii]

Dodd-Frank provides broad whistleblower protections to employees of covered persons and their subsidiaries (viz., “covered persons” being defined in Sections 1024, 1025, and 1026 of Dodd-Frank).

A covered person or service provider is defined in the foregoing sections as:

Being one that:

• Offers or provides origination, brokerage, or servicing of loans secured by real estate for use by consumers primarily for personal, family, or household purposes, or loan modification or foreclosure relief services in connection with such loans;
• Is a larger participant of a market for other consumer financial products or services, as defined by the applicable section of Dodd-Frank;
• The Bureau has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity for such covered person to respond, based on complaints collected through the CFPB’s complaint system under or information from other sources, that such covered person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services; [xiii]
• Offers or provides to a consumer any private education loan;[xiv] or
• Offers or provides to a consumer a payday loan.

Being an:

• Insured depository institution with total assets of more than $10,000,000,000 and any affiliate thereof; or
• Insured credit union with total assets of more than $10,000,000,000 and any affiliate thereof.

Being an:

• Insured depository institution with total assets of $10,000,000,000 or less; or
• Insured credit union with total assets of $10,000,000,000 or less.

A covered person may not terminate or in any other way discriminate against any covered employee or any authorized representative of covered employees.

Policy Statement and Whistleblower Protection

The protections afforded the whistleblower and the Bureau’s procedures relating to whistleblower protection should invoke a response from all affected financial institutions to draft and ratify a policy statement relating to preventing retaliation toward a whistleblower.

Such a policy should include various statements of principle, practice, policy, and procedures – what I call the “Four Ps” – to ensure that all employees understand the importance of internally reporting to a company’s chain of command any suspicious practices or potential violations. When the internal route fails, whistleblowers may go to a government entity, such as the CFPB, to report their concerns. As part of the policy statement, there should be a clear and unambiguous provision to protect the whistleblower from any harassment by the employer or any employees.

Therefore, the aforementioned policy should specifically state that whistleblowers will be protected from retaliation if they:

• Provided, caused to be provided, or are about to provide or cause to be provided, information to the employer, the CFPB, or any other state, local, or federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of any other provision of law that is subject to the jurisdiction of the CFPB, or any rule, order, standard, or prohibition promulgated by the CFPB.
• Testified or will testify in any proceeding resulting from the administration or enforcement of any provision of law that is subject to the jurisdiction of the CFPB, or any rule, order, standard, or prohibition prescribed by the CFPB;
• Filed, instituted, or caused to be filed or instituted any proceeding under any federal consumer financial law; or
• Objected to, or refused to participate in, any activity, policy, practice, or assigned task that the covered employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the CFPB.

The Bureau established an email address and phone number for submitting whistleblower tips. Additionally, the CFBP has built a web space for whistleblower communications.

Locking Horns with the Department of Labor

Dodd-Frank gives an employee who believes that he or she has been discharged or otherwise discriminated against 180 days after the date on which the alleged violation occurs to file a complaint with the Secretary of Labor. Furthermore, Dodd-Frank sets forth certain rules for Department of Labor investigations, such that if the Department concludes that there is reasonable cause to believe that a violation has occurred, it may issue a preliminary order providing relief. However, the Department must dismiss a complaint unless the complainant makes a prima facie showing that the action in question was a contributing factor in the unfavorable personnel action. No investigation is permitted if the employer demonstrates, “by clear and convincing evidence,” that the employer would have taken the same unfavorable personnel action in the absence of that behavior.

The Department of Labor has vast authorities to redress the grievances of covered employees. If it determines that a violation has occurred, the Department may order the person who committed the violation to, among other things, take affirmative action to abate the violation; reinstate the complainant to his or her former position, together with compensation (including back pay) and restore the terms, conditions, and privileges associated with his or her employment; and provide compensatory damages to the complainant.

At the request of the covered employee who has been retaliated against, the Department may assess a sum equal to the aggregate amount of all costs and expenses (including attorney fees and expert witness fees) reasonably incurred by the complainant. But, if the Department finds that the complaint is frivolous or has been brought in bad faith, it may award to the prevailing covered employer a reasonable attorney fee, not exceeding $1,000, to be paid by the complainant.

---

[i] The Designated Transfer Date, Dodd–Frank Wall Street Reform and Consumer Protection Act, (Pub. L. 111–203, H.R. 4173), signed into law on July 21, 2010

[ii] Ibid. Subtitle E of Title X

[iii] Op. cit. 1 Title X

[iv] Enforcement, Early Warning Notice, CFPB Bulletin 2011-04, November 7, 2011

[v] 77 Federal Register 27446 (May 10, 2012)

[vi] Specifically, on June 29, 2012, the CFPB revised the interim rules it had adopted on July 28, 2011 regarding these procedures. See: 76 Federal Register 45168 (July 28, 2011); 77 Federal Register 39101 (June 29, 2012)

[vii] Op. cit. 1, § 1052(d)

[viii] The Consent Order was issued pursuant to 12 U.S.C. § 5563 (Hearings and Adjudication Proceedings, Dodd-Frank § 1053) and § 5565 (Relief Available, Dodd-Frank § 1055).The consent order stated that the CFPB found – though the bank had not admitted or denied - violations of Dodd-Frank §1031 regarding unfair, deceptive or abusive acts or practices.

[ix] Op. cit. 6, 77 Federal Register 39117

[x] Op. cit. 1, §1055, codified at 12 USC § 5565

[xi] Enforcement and Fair Lending, Bureau Invites Whistleblower Information and Law Enforcement Tips, and Highlights Anti-Retaliation Protections, CFPB Bulletin 2011-05, December 15, 2011

[xii] Ibid. The bulletin encourages “knowledgeable sources” with information about potential violations to email their information to whistleblower@cfpb.gov or to call toll-free (855) 695-7974. On February 2, 2012, the CFPB published its own whistleblower protection notice for its employees.

[xiii] Op. cit. 1, § 1013(b)(3)

[xiv] As defined in § 140 of the Truth in Lending Act (15 USC 1650), notwithstanding § 1027(a)(2)(A) and subject to § 1027(a)(2)(C) of Dodd-Frank

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*Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

National Mortgage Professional Magazine [April 2013, Volume 5, Issue 4, pp. 8-32]