Supervisory or Enforcement Action? Deputy Director Explains How the CFPB Decides

In his prepared remarks for an appearance last month at the Exchequer Club, Consumer Financial Protection Bureau Deputy Director Steven Antonakes discussed the CFPB’s risk-based approach to supervision. (The Exchequer Club’s members include senior professionals from trade associations, federal regulatory agencies, law firms, congressional committees, and the national press.)

Mr. Antonakes commented on why “the traditional approach to supervision wouldn’t work at the Bureau.” He explained that “visiting all of the banks and nonbanks under our jurisdiction on a set, regular schedule, as other federal agencies have in the past, would be impractical given their number, size, and complexity as well as the relatively small size of our examination force.” He also stated that a “fixed-schedule approach would fail consumers by focusing precious resources on potentially less severe problems, when larger, more pressing consumer protection issues awaited their turn.”

He then explained the two key distinctions between the CFPB’s supervisory approach and that of the federal banking agencies. First, the CFPB focuses on risks to consumers rather than risks to institutions. Second, the CFPB conducts its examinations by product line rather than by using an institution-centric approach. Mr. Antonakes indicated that the product line approach allows the CFPB to compare product lines across institutions, charters, or licenses.

He then stated that the CFPB evaluates each product line “based on potential for consumer harm related to a particular market; the size of the product market; the supervised entity’s market share; and risks inherent to the supervised entity’s operations and offering of financial consumer products within that market.” He also observed that the CFPB views certain markets, such as debt collection and mortgage servicing, as presenting higher risk.

Mr. Antonakes’ most interesting comments concerned how the CFPB approaches the decision to take corrective action based on an examination. He indicated that in certain instances, where there are “more significant violations,” the CFPB refers matters to its action review committee. That committee determines whether a matter will be resolved through confidential supervisory action, such as a board resolution or memorandum of understanding, or through a public enforcement action. He also indicated that the CFPB’s examination team will recommend to senior leadership in the Division of Supervision, Enforcement, and Fair Lending whether supervisory or enforcement action is appropriate.

Mr. Antonakes explained that the CFPB uses a common set of factors to ensure consistency in making determinations. He described these factors as generally falling into “one of three buckets: violation-focused factors; institution-focused factors; and policy-focused factors.” Violation-focused factors include the severity of the violation “in terms of the number of consumers affected, the magnitude of the harm, and the nature of the violation,” whether the violation has ceased or is ongoing, and the importance of deterrence. He observed that if “we suspect a troubling practice is widespread, we may want to put the entire industry on notice through public enforcement actions.”

The CFPB’s institution-focused factors look at the regulated entity’s behavior after the violation occurred, particularly whether the entity has cooperated with the CFPB and its willingness and ability to comply in the future. Mr. Antonakes indicated that the balance may tilt in favor of supervisory action if an entity identified or corrected the violation, with a public enforcement action viewed as more appropriate when an entity has been unwilling to take corrective action or has repeatedly been cited by the CFPB or another regulator for similar conduct.

The CFPB’s policy-focused factors include how the CFPB has treated similar violations in the past, other Bureau activity related to the problematic conduct, and how the CFPB’s action fits into the agency’s broader priorities and goals.

- Barbara S. Mishkin 

U.S. Supreme Court To Decide Whether ECOA Applies to Loan Guarantors

The U.S. Supreme Court has agreed to review whether the Equal Credit Opportunity Act (ECOA) applies to loan guarantors. The case will be argued in the Supreme Court’s term that begins in October 2015.

In Hawkins v. Community Bank of Raymore (cert. granted March 2, 2015), the U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s ruling that the ECOA did not provide a cause of action to the plaintiffs who alleged that they were required to sign guaranties of several loans made by the bank to a company their husbands controlled. The plaintiffs claimed that by requiring the guaranties, the bank violated the ECOA provision that prohibits discrimination by a creditor against an “applicant” on the basis of marital status.

The ECOA defines an “applicant” as someone who “applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” Rejecting the plaintiffs’ attempt to have the guaranties declared void and unenforceable and to recover damages, the Eighth Circuit concluded that “the plain language of the ECOA unmistakably provides that a person is an applicant only if she requests credit. But a person does not, by executing a guaranty, request credit.” Characterizing a guaranty as “collateral and secondary to the underlying loan transaction,” the court observed that “[w]hile a guarantor no doubt desires for a lender to extend credit to a borrower, it does not follow from the execution of a guaranty that a guarantor has requested credit or otherwise been involved in applying for credit.”

Regulation B, which implements the ECOA, provides that the term “applicant” includes a guarantor. However, having found the ECOA’s text to be “unambiguous regarding whether a guarantor constitutes an applicant,” the Eighth Circuit ruled that the Regulation B definition was not entitled to deference under the framework established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council. The Eighth Circuit also declined to follow the Sixth Circuit’s contrary decision last year in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp.

The ECOA’s marital and other discrimination prohibitions apply to both consumer and business purpose credit. Because the Consumer Financial Protection Bureau has authority to enforce the ECOA, lenders making business loans are subject to the CFPB’s ECOA jurisdiction.

- Alan S. Kaplinsky, John L. Culhane, Jr., and Christopher J. Willis


Equitable Subordination Allowed Even Though First Lienholder Had Constructive Knowledge of Subordinated Mortgage at Closing, S.C. Supreme Court Holds

The Supreme Court of South Carolina recently held that a lienholder’s ability to obtain equitable subordination of a prior mortgage was not precluded by its agent’s knowledge that the prior mortgage had not been satisfied.

In the case, a bank paid off a first mortgage on the borrower’s property, believing that it had put itself in first lien position. The borrower’s principal, however, held a prior second mortgage on the property that the bank’s agent—who also represented the borrower in the transaction—neglected to have satisfied. The bank did not discover this title defect until the borrower defaulted and the bank began foreclosure proceedings.

The master in the foreclosure proceeding corrected the error by equitably subordinating the borrower’s principal’s prior second mortgage to the bank’s first mortgage. The intermediate appellate court reversed, reasoning that the agent’s actual knowledge of the prior second mortgage constituted actual knowledge on the part of the bank, defeating the bank’s claim for equitable subordination.

The South Carolina Supreme Court granted certiorari, and then reversed the intermediate appellate court and reinstated the foreclosure master’s judgment. The Supreme Court reasoned that, under state law, a principal has only constructive—not actual—knowledge of material facts about which the principal’s agent receives notice. The principal’s constructive knowledge of a prior mortgage, the Supreme Court continued, does not defeat a claim for equitable subrogation under state law.

- Joel E. Tasca, Stefanie H. Jackman, and Theodore R. Flo


Utah Amends Licensing Requirements for Lending Managers

The Utah Division of Real Estate amended its licensing provisions to expand the ways an individual may satisfy the experience requirement necessary to qualify for a Utah lending manager license, which is a prerequisite to serve as a branch lending manager. The amendment will create a third option for an applicant to demonstrate the necessary pre-licensing experience.

Under the new experience option, an applicant will need to have 10 years of experience as a loan manager directly supervising a minimum of five licensed or registered loan originators within the past 12 years. In addition, the applicant must have personally originated at least 15 first-lien residential mortgages within the previous five years.

The amendment also allows a lending manager applicant to request approval to take the required Utah-specific pre-licensing education, despite not having yet documented the necessary experience, upon the applicant’s written affirmation that:

  • The applicant’s current employment status could be affected by documenting his or her experience
  • The applicant requests approval to proceed with the Utah-specific pre-licensing education despite not having documented the necessary experience
  • The applicant understands that if division approval is granted, he or she assumes the risk of the time and expense of the pre-licensing education, testing, and application fee with no assurance that the experience will qualify him or her for licensure as a lending manager  

These provisions are effective immediately.

- Marc D. Patterson


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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