Regulators Are Back In The Saddle

Since the CFPB’s creation a decade ago, Republicans have been diametrically opposed to the watchdog agency. They don’t like its single-director structure, nor the fact that it is funded through the Federal Reserve Board instead of the more traditional budgetary process. And they don’t like Chopra – who was eventually confirmed 50-48 along party lines and who has his roots in the beginnings of the agency he now heads.

During the previous administration – the one between Obama and Biden – the CFPB pretty much looked the other way – or, as one observer put it, “drastically scaled back” its enforcement actions. “It was (in) stark contrast to how the bureau was run under the Obama Administration, when it aggressively collected fines...and returned billions of dollars in damages to borrowers,” this person said.

Now, the CFPB is back, and Chopra, was wasn’t confirmed until October, has put the housing finance sector on notice that not only will his agency go after companies which violate the law but also their officers and directors when the CFPB believes they “have meaningfully participated in unlawful conduct or negligently turned a blind-eye” to it.

Finding Racism

As I sit at my keyboard for this month’s story, the CFPB, the Department of Justice and the Office of the Comptroller of the Currency have just cited Jackson, Miss.-based Trustmark National Bank for alleged discriminatory redlining by “purposely” not marketing, offering or originating mortgages to consumers in majority Black and Hispanic neighborhoods in the Memphis market. The CFPB and DOJ also charged Trustmark with discouraging people living in those neighborhoods from applying for credit.

“The federal government will be working to rid the market of racist business practices,” Chopra said in announcing what amounts to a nearly $9 million action – a $5 million fine and $3.85 million to increase access to credit in the areas impacted by the company’s redlining activities.

“Today, we are committing ourselves to addressing modern-day redlining by making far more robust use of our fair lending authorities,” added Attorney General Merrick Garland. “We will spare no resource to ensure that federal fair lending laws are vigorously enforced and that financial institutions provide equal opportunity for every American to obtain credit.” And OCC’s Acting Comptroller, Michael Hsu, warned that the case “signifies the unified and unmitigated focus that each of our agencies has placed on enforcement”

It’s also worth noting that during his remarks about the case, Chopra said his agency will be watching closely for digital redlining, or so-called neutral algorithms that reinforce biases. “While machines crunching numbers might seem capable of taking human bias out of the equation, that’s not what is happening,” he said, pointing to an academic study of some 2 million mortgage applications that found Blacks were 80 percent more likely to be denied by an algorithm when compared to Whites with similar financial and credit histories.

Mortgage companies maintain that the data does not present the full story. But Chopra says that defense illuminates the problem. “When consumers and regulators do not know how decisions are made by the algorithms, consumers are unable to participate in a fair and competitive market free from bias. Algorithms can help remove bias, but black box underwriting algorithms are not creating a more equal playing field and only exacerbate the biases fed into them,” he said. “We should never assume that algorithms will be free of bias. If we want to move toward a society where each of us has equal opportunities, we need to investigate whether discriminatory black box models are undermining that goal.”

Red Notice

In announcing the Trustmark case, Garland also revealed a new DOJ program to combat what he called “modern day redlining.” Under the “Combating Redlining Initiative,” which will be run through the Civil Rights Division’s housing and civil enforcement section, will look for violations in concert with the states and other financial regulatory agencies, placing a renewed emphasis on non-depository lenders. “We will spare no resource to ensure federal fair lending laws are vigorously enforced,” the Attorney General said. 

The Trustmark case is just the tip of the proverbial iceberg. Since Biden took up residence in the White House, federal regulators have been particularly active in the mortgage sphere. In one case, for example, the CFPB took action against the American Advisors Group for deceptively marketing reverse mortgages. Actor Tom Selleck may trust AAG, but the government does not.

According to an analysis by the Inside Mortgage Finance newsletter group, gripes against mortgage-related outfits by seniors increased by more than a third during the first half of this year. Those with issues about their reverse loans were up 12.3 percent. And if the charges against AAG are on the money, it’s no wonder complaints are up so significantly.

In its marketing materials, the company said it “makes every attempt to ensure the home’s value information provided is reliable.” But the CFPB says, in fact, AAG made no attempt to do so. Consequently, consumers were lured into negotiations with the Irvine, Calif.-based company on the basis of inflated value.

Not only that, but the CFPB also said AAG violated a 2016 administrative consent order that addressed the company’s deceptive advertising. A proposed consent order would prohibit AAG from future unlawful conduct, and require the company to pay $173,400 in consumer redress and a $1.1 million civil money penalty.

For what it’s worth, IMF also reported that complaints against the three major credit reporting companies – Equifax, Trans Union and Experian – topped the list of complaints to the CFPB in the third quarter. Squawks about credit reporting and credit repair services accounted for nearly two-thirds of all the complaints the agency took in during the period.

Meanwhile, lenders should hope they haven’t been doing business with Critical Resolution Mediation or Seed Consulting in collecting delinquent accounts. Both have come under the FTC’s eagle eye, CRM because it posed as police and attorneys to threaten consumers over fake debts – debts they didn’t owe -- and Seed for, among other things, opening multiple credit card accounts in the names of unwary consumers. Remember the old adage: You are known by the company you keep.

In Seed’s case, the outfit pitched training companies as a way to get funding to people who wanted to start a business or become real estate investors. But according to the FTC complaint, rather than provide any funds, the company charged people $3,000 or more to apply for numerous credit cards, a practice known as credit stacking. It told consumers they would make enough after they completed their training to pay off their cards, which they used to pay for the programs sold by the training companies.

Fly-By-Night

This kind of thing smacks of how “fly-by-night” – in this case, they tend to advertise on late-night television – real estate gurus hawk their training programs; you know the ones that promise that you, too, can get rich quick by following our training program and investing in our how-to-do-it manuals. It also reminds this writer of a certain so-called university named after an ex-president who promised to teach you how he made it big in real estate. I don’t know whether TU actually used the tactics described above – it wasn’t charged with that that crime, so it probably didn’t – but I never saw a class on how to file for bankruptcy more than a few times. Ah, but I digress.

Speaking of the late-night hawkers who role out numerous “successful investors” who used their classes to score big in real estate, the FTC has taken what it calls “a big step” to make sure such endorsements are on the up-and-up by notifying more than 700 companies, advertisers, retailers, et al, that statements must reflect actual experience and opinions of real people. Any deceptive practice can be fined up to $43,792 per violation.

The FTC has sent a similar notice to for-profit institutions of higher learning, but the warning also applies to lenders, agents, brokers and anyone else in the housing and mortgage business who used paid spokespersons. “Fake reviews and other forms of deceptive endorsements cheat consumers and undercut honest businesses,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “Advertisers will pay a price if they engage in these deceptive practices.”

The watchdog agency also updated its rules recently regarding the data safeguards financial institutions muct put in place to protect their customers’ data in case of a breach or cyberattack. The updated Safeguards Rule requires non-banking financial institutions such as mortgage brokers, motor vehicle dealers and payday lenders to develop, implement and maintain a comprehensive security system to keep their customers’ information safe. Entitites which collect consumer information “have a responsibility” to protect it, Levine said.

At the same time, the FTC adopted largely technical changes to its authority under a separate Gramm-Leach Bliley Act rule which requires financial institutions to inform customers about their information-sharing practices and allow customers to opt out of having their information shared with certain third parties.

Servicers also are coming under increased examination. The OCC has sanctioned Cenlar, the nation’s second largest, for “unsafe or unsound” practices that do not support the scope of its $900 billion sub-servicing portfolio. Under the consent order, the New Jersey outfit cannot take on any new sub-servicing clients with the OCC’s explicit approval.

The consent order, to which Cenlar voluntarily agreed, reads in part: “The bank has failed to take timely corrective actions to remediate its deficiency and unsafe or unsound practices.” The agency requested that the federal savings bank develop efficient default operations and IT control programs, and the institution said it is working with the OCC to do so.  

Even Department of Housing and Urban Development and some states are getting in on the act. And fintech lenders aren’t immune from examination, either.

HUD has reached an agreement with the owner of a Phoenix apartment complex that failed to provide an adequate language services for a resident from Chad with limited English skills. The project receives funding from HUD, which said “having access to important information related to federally-financed housing, such as details about application procedures and the terms of lease agreements, shouldn’t depend on being fluent in English.”

Meanwhile, New York has joined Illinois and Massachusetts is subjecting non-depositories to state-mandated Community Reinvestment Act requirements. And Chicago-based Enova International says the CFPB is having another look at its payday and consumer loan business. In 2019, the company paid $3.2 million to settle with the CFPB after it debited some customers bank accounts without their authorization and failed to honor some approved credit extensions.