CFPB Pursuing Individuals, Seeking Admissions of Guilt
It didn't attract a lot of notice at the time, but a speech last Wednesday by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray appears to be making some people nervous. Cordray spoke to the Reuters Washington Summit and a story carried by the news agency quoted him as saying his agency "is committed to going after individuals, not just companies, when it punishes wrongdoers, reflecting a broader effort among enforcement officials to ensure penalties have real bite."
"I've always felt strongly that you can't only go after companies" Reuters quotes him as saying. "Companies run through individuals, and individuals need to know that they're at risk when they do bad things under the umbrella of a company." Cordray said his office is also seeking admissions of wrongdoing from persons who commit these offenses.
Cordray said the bureau would, in some cases, follow examples set by the Securities and Exchange Commission and the Commodities Futures Trading Commission in prosecuting offenders. "There are times when that makes sense, times when it makes less sense. It's very much a case-by-case matter," he said.
It is apparently the statement about admission of guilt and the references to SEC and FTC that are setting a few teeth on edge. Ballard and Spahr, a national law firm which pays particular attention to CFPB for its clients, reminded them today of two separate cases in which the agency did indeed pursue individuals. The most recent one filed only Monday.
The most recent was against a Kentucky law firm, Borders & Borders PLC and its principals. This suit alleges that the defendants created a network of Affiliated Business Arrangements (ABAs) consisting of nine title agency joint ventures which were owned by the defendants and local real estate and mortgage brokerage companies. CFPB alleges that there was a single common employee for all of the ventures, that all of their business was referred to them by Borders and Borders, and that the defendants used the joint ventures to disguise illegal referral fees and kickbacks as profit sharing. The fees and kickbacks, CFPB says, were not bona bide return on ownership interests and violated Section 8 of the Real Estate Settlement Procedures Act (RESPA.)
The Bureau denies that the alleged actions were protected under the affiliated business arrangement exception in RESPA because the defendants failed to file disclosures properly and modified the filing form. They also are alleged to have disclosed the relationship to clients not when required but only at closing.
The other case is one MND reported on in May. CFPB settled with Texas homebuilder Paul Taylor over referral fee infractions. Taylor owned two mortgage origination firms, one in partnership with a bank and the other with a mortgage company and received fees in return for referring his homebuilding company clients for mortgage financing. Once again CFPB claimed that the referral fees, disguised in this case as profit distributions, were not entitled to the ABA "safe harbor" provisions of Section 8 because these ABAs were a sham.
Taylor, who was named as an individual in the suit, was forced to disgorge the $118,194 he had received as fees over the previous two years and his homebuilding company and another affiliated company were prohibited from engaging in real estate settlements or owning an interest in any company that did for five years.
Incidentally, these weren't the only recent occasions that the Bureau has gone after kickbacks through Affiliated Business Arrangements. Also this year CFPB settled an enforcement action against four of the largest national mortgage insurers alleging they had paid kickbacks to mortgage lenders through captive reinsurance arrangements. After insuring loans made by the lender the companies purchased essentially worthless reinsurance from the lenders affiliate or subsidiary. The premiums represented kickbacks to the lenders in return for which the mortgage insurers received private mortgage insurance referrals from the lenders.
Alan S. Kaplinsky, writing on Tuesday in Ballard and Spahr's CFPB focused blog, noted the remark from Cordray about seeking admissions of wrongdoing. He also referred back to a policy change at SEC that Ballard and Spahr had advised its clients of earlier in which SEC will more frequently require an admission of wrongdoing from defendants as a condition of settlement. At that time, Kaplinsky said, his firm had said that Senator Elizabeth Warren's frequent criticism of SEC's "neither admit nor deny" policy might cause the CFPB to be more favorably disposed to making a similar change.
Kaplinsky said, Because of the difficulty that defendants in enforcement actions may face by admitting any wrongdoing, the CFPB's apparent decision to adopt the SEC's new policy could be an obstacle for many companies in reaching settlements with the CFPB." He noted that in the Borders and Taylor suits as well as in two mortgage modification enforcement suits which also named individuals there have been no admissions of wrongdoing by the individuals who have agreed to settlements.