CFPB Pursuing Individuals, Seeking Admissions of Guilt

It didn’t attract a lot of notice at the time, but a speech last Wednesdayrnby Consumer Financial Protection Bureau (CFPB) Director Richard Cordray appearsrnto be making some people nervous. rnCordray spoke to the Reuters Washington Summit and a story carried byrnthe news agency quoted him as saying his agency “is committed to going afterrnindividuals, not just companies, when it punishes wrongdoers, reflecting arnbroader effort among enforcement officials to ensure penalties have real bite.”</p

“I’ve always felt strongly that you can’t only go after companies”rnReuters quotes him as saying. “Companies run through individuals, andrnindividuals need to know that they’re at risk when they do bad things under thernumbrella of a company.” Cordray said his office is also seeking admissionsrnof wrongdoing from persons who commit these offenses. </p

Cordray said the bureau would, in some cases, follow examples set by thernSecurities and Exchange Commission and the Commodities Futures TradingrnCommission in prosecuting offenders.  “Therernare times when that makes sense, times when it makes less sense. It’s very muchrna case-by-case matter,” he said.</p

It is apparently the statement about admission of guilt and the referencesrnto SEC and FTC that are setting a few teeth on edge.  Ballard and Spahr, a national law firm whichrnpays particular attention to CFPB for its clients, reminded them today of two separaterncases in which the agency did indeed pursue individuals.  The most recent one filed only Monday.   </p

The most recent was against a Kentuckyrnlaw firm, Borders & Borders PLC and its principals.  This suit alleges that the defendants createdrna network of Affiliated Business Arrangements (ABAs) consisting of nine titlernagency joint ventures which were owned by the defendants and local real estaternand mortgage brokerage companies.  CFPBrnalleges that there was a single common employee for all of the ventures, thatrnall of their business was referred to them by Borders and Borders, and that therndefendants used the joint ventures to disguise illegal referral fees andrnkickbacks as profit sharing.  The feesrnand kickbacks, CFPB says, were not bona bide return on ownership interests andrnviolated Section 8 of the Real Estate Settlement Procedures Act (RESPA.) </p

The Bureau denies that the allegedrnactions were protected under the affiliated business arrangement exception inrnRESPA because the defendants failed to file disclosures properly and modifiedrnthe filing form.  They also are allegedrnto have disclosed the relationship to clients not when required but only atrnclosing. </p

The other case is one MND reported on in May.   CFPB settledrnwith Texas homebuilder Paul Taylor over referral fee infractions.  Taylor owned two mortgage origination firms,rnone in partnership with a bank and the other with a mortgage company andrnreceived fees in return for referring his homebuilding company clients forrnmortgage financing.  Once again CFPBrnclaimed that the referral fees, disguised in this case as profit distributions,rnwere not entitled to the ABA “safe harbor” provisions of Section 8 becausernthese ABAs were a sham.  </p

Taylor, who was named as an individual inrnthe suit, was forced to disgorge the $118,194 he had received as fees over thernprevious two years and his homebuilding company and another affiliated companyrnwere prohibited from engaging in real estate settlements or owning an interestrnin any company that did for five years. </p

Incidentally, these weren’t the onlyrnrecent occasions that the Bureau has gone after kickbacks through AffiliatedrnBusiness Arrangements.  Also this year CFPBrnsettled anrnenforcement action against four of the largest national mortgage insurersrnalleging they had paid kickbacks to mortgage lenders through captivernreinsurance arrangements.  After insuringrnloans made by the lender the companies purchased essentially worthless reinsurancernfrom the lenders affiliate or subsidiary. rnThe premiums represented kickbacks to the lenders in return for whichrnthe mortgage insurers received private mortgage insurance referrals from thernlenders.  </p

Alan S. Kaplinsky, writing on Tuesday in Ballard and Spahr’s CFPB focusedrnblog, noted the remark from Cordray about seeking admissions of wrongdoing.  He also referred back to a policy change atrnSEC that Ballard and Spahr had advised its clients of earlier in which SEC willrnmore frequently require an admission of wrongdoing from defendants as arncondition of settlement.  At that time,rnKaplinsky said, his firm had said that Senator Elizabeth Warren’s frequentrncriticism of SEC’s “neither admit nor deny” policy might cause the CFPB to bernmore favorably disposed to making a similar change.  </p

Kaplinskyrnsaid, Because of the difficulty thatrndefendants in enforcement actions may face by admitting any wrongdoing, thernCFPB’s apparent decision to adopt the SEC’s new policy could be an obstacle forrnmany companies in reaching settlements with the CFPB.”  He noted that inrnthe Borders and Taylor suits as well as in two mortgage modificationrnenforcement suits which also named individuals there have been no admissions ofrnwrongdoing by the individuals who have agreed to settlements.

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