HWG Regulatory Advisory: CFPB Sheds Light on Enforcement Approach in Settlement-Practice Cases

February 03, 2015

Steven Fredley and Patrick O’Donnell

On January 22, 2015, the Consumer Financial Protection Bureau (“CFPB”)—the independent government agency created in the wake of the 2007 financial crisis that is charged with consumer protection in the financial sector—announced settlements and penalties against two major lending institutions, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A.

In a complaint filed in Maryland federal court, the CFPB detailed an allegedly illegal marketing-services-kickback scheme involving Wells Fargo, JPMorgan, an unnamed financial institution, and a now-defunct title company, Genuine Title.  The CFPB alleged that Genuine Title paid for and provided the banks’ loan officers marketing materials and consumer information designed to increase the loan officers’ business in exchange for referring the banks’ loan customers to Genuine Title.  The CFPB asserts that the marketing scheme violated the Real Estate Settlement Procedures Act (“RESPA”), which prohibits giving or accepting any “fee, kickback, or thing of value” in exchange for a referral of business related to a real-estate-settlement service.  Under the terms of the stipulated judgments, Wells Fargo will pay $24 million in civil penalties and JPMorgan will pay $600,000.  In addition, the banks will pay $11.1 million in redress to consumers whose loans were involved in the scheme.

The unnamed financial institution participated in the same conduct with Genuine Title, but obtained a much different result.  The CFPB credited it with having in place procedures that allowed it to identify the suspect conduct, which the institution then self-reported to the CFPB.  Because the institution self-reported, took remedial action, and cooperated with the investigation, the CFPB elected not to take enforcement action against it.

RESPA was enacted in 1974 to protect consumers from practices such as kickbacks and referral fees that unnecessarily increase the cost of settlement services.  In the forty years since RESPA’s passage, the threat of enforcement was unlikely.  However, with the creation of the CFPB and its charge to enforce a variety of consumer-protection laws, including RESPA, the threat of enforcement is more real than ever.  The recent action against Wells Fargo and JPMorgan is just the latest in a line of enforcement actions brought against the mortgage-services industry.  In the last few years, the CFPB has initiated enforcement actions against title service companies, a brokerage firm, and a law firm for violating RESPA’s anti-kickback and referral provisions.

This recent enforcement action also sheds light on the CFPB’s June 25, 2013 “Responsible Business Conduct” bulletin—the policy outlining the factors the CFPB considers when exercising its “enforcement discretion.”  The lack of detail about the facts of the unnamed institution’s case make the no-action decision difficult to fully evaluate.  But it does suggest that the CFPB may be serious about providing financial institutions with real incentives to cooperate and self-report potential violations, and it distinguishes the CFPB from the approach taken by other government agencies such as the SEC and DOJ, which sometimes reward self-disclosure more stintingly.  If CFPB will offer more meaningful incentives to self-report, that fact should affect an institution’s decision on whether or not to self-report.  Given the welter of overlapping federal laws and competing regulatory agency enforcement, it may also affect the question of where to self-report a potential violation.

Investigations such as this can be disruptive to business and result in significant fines.  Real estate agents and brokers, lenders, title companies, builders, and others involved in the sale and settlement of real estate should be aware of these recent enforcement activities and mindful of RESPA’s statutory prohibitions, which have been augmented by a series of detailed and complex regulations.  Any referral program, fee-splitting, or affiliated business arrangements must be carefully considered and analyzed, especially in light of the CFPB’s increased enforcement activities.

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For more information regarding the requirements of RESPA, the CFPB’s enforcement activities, or Harris, Wiltshire & Grannis LLP’s Government Investigations practice, please contact Steven Fredley at (202) 730-1317 or sfredley@hwglaw.com or Patrick O’Donnell at (202) 730-1312 or podonnell@hwglaw.com.

This client advisory is not intended to convey legal advice.  It is circulated to our clients as a convenience and is not intended to reflect or create an attorney-client relationship as to its subject matter.

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