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
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
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
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.
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.