Mortgage lenders and other finance providers doing business in the Bay State are on notice: The Massachusetts Attorney General’s Office is watching you.
Enforcement actions against finance providers were down overall in the first quarter of 2016, according to Goodwin Procter’s Consumer Finance Enforcement Watch, but seven of the 50 actions reported were brought by the Massachusetts AG’s office. That’s more actions initiated by the Department of Justice, the Office of Housing and Urban Development, or any other state’s attorney general.
Lenders who have invested heavily in meeting compliance standards have little love for their peers who pay the consequences of not doing so, said Benjamin Giumarra, a banking regulatory consultant with Spillane Consulting. But there are other possible consequences of the AG’s vigilance, he added.
“So if I’m a large lender looking to expand into 20 states on the East Coast, maybe Massachusetts doesn’t make that list,” he said. “Perhaps that would be a small advantage for local lenders, because it could mean less pressure from new, out-of-state lenders. But maybe it also gradually makes it harder to sign up new investors with many of the large companies who might be less interested in the exposure that a loan originated in Massachusetts brings.”
Mortgages remain the primary target of enforcement actions nationwide, according to the report. Federal and state agencies brought 14 actions totaling $1.8 billion in the first quarter of 2016, down 33 percent from the 21 actions in the first quarter of 2015.
The remaining enforcement actions fell into the categories of debt collection (9), debt settlement (7), auto lending (5), payday lending (4), student lending (4), credit (4) and banking (3).
Fair Lending Fails
The first 50 enforcements of 2016 show a continuation of two trends, according to Sabrina Rose-Smith, partner at Goodwin Procter: legacy issues that arose from the crisis in 2008 and fair lending issues.
“The focus of fair lending enforcement action tends to focus on the loans you made and those you did not make,” Rose-Smith said. “It has always been a concern of regulators if the reason you’re not lending to minorities is that you’re redlining. There’s more of a focus on it now because credit is tight.”
When credit is abundant, as it was before the crash, some lenders took advantage of that abundance and recklessly made loans to people in minority neighborhoods who couldn’t reasonably be expected to repay them, she said. Now that credit is tight, the concern is that lenders are ignoring minority neighborhoods in favor of making loans in more affluent neighborhoods.
“It’s a vicious cycle from the lender’s perspective,” Rose-Smith said. “It’s difficult to know what to do. You have to find the perfect middle ground. You have to be marketing to minorities and making loans at an equal pace for minorities and non-minorities. It’s tough for the lenders to navigate. It sounds simple, but in practice when you drill down on the requirements, it’s not that easy to make sure you’ve done what each of the different agencies want you to do.”
Giumarra said in general lenders tend to see fair lending more passively than regulators do. Increasingly, regulators are relying more heavily on statistics, rather than just complaints to determine lender compliance.
“It’s not good enough to ignore whether or not a borrower is a member of a protected class,” he said. “A lender should actively ensure it is serving the population. If you lend in an area with a population that is predominantly African-American and African-American borrowers are only 3 percent of your total applications, it is more common than ever for a regulator to call you on this. The question will be: why don’t African-Americans apply more? Is your advertising policy discriminatory? Good intentions aren’t enough to overcome harsh statistics.”
Mortgage servicing was once less exciting than origination, but it was safer – until servicers started to see big outcomes like HSBC’s $601 million settlement with the CFPB, HUD, the Department of Justice, 49 states and the District of Columbia for what the government called “abusive” mortgage servicing practices.
“Servicers struggle to staff appropriately and when the market dips, there are too few employees left handling too many borrower cases,” Giumarra said. “This is why we got the extensive new federal servicing regulations in 2014. Undoubtedly the same staffing and other issues will crop up again. I look at how harsh these enforcement actions are compared to actions prior to the 2014 rules. How much firepower will consumers have against these larger servicers post-2014?”
Rose-Smith said enforcements like that one and the $1.2 billion Wells Fargo settlement in January over allegedly reckless lending practices create instability in the marketplace because it isn’t altogether clear what constitutes “abusive” or “reckless” practices.
“There’s a lot of concern in the market,” she said. “There’s a flood of new regulations that have come out that are ripe for enforcement actions, like TRID. Lenders don’t have a real sense of how the CFPB will see them. At this minute, what is abusive is unclear. At the top level, it sounds simple, but what it actually means is subject to interpretation.”
Market Stability Going Forward
Rose-Smith expects mortgage-related enforcement actions in the 2016 Q2 report to continue the trends from the first quarter, which she said leave a lot of uncertainty, especially in the mortgage markets.
“You’ll see more new cases, more focus on the RESPA arena,” she said. “We know the CFPB is very much concerned with RESPA. And they’ve made it very clear how they feel about things like marketing service agreements.”
Rose-Smith does not expect to see a lot of TRID-related actions until after it’s been in place for a while longer. Overall, she predicts enforcement actions will trend downward as legacy cases work their way through the system over the next few years.
“There’s probably not going to be enough new enforcement activity to sustain the level of enforcement that stemmed from the crisis,” she said. But the number will never be negligible.”
