How Compliance Violations Become Conspiracies

AUG 18, 2014 1:00pm ET

One thing lenders often overlook is the manner in which potentially isolated compliance problems can in retrospect be weaved into an elaborate and intentional conspiracy.

An example is the Amerisave consent decree, entered into last week. The lender was accused of bait and switch marketing — advertising lower payments and rates than were actually available to borrowers.

Further, the company allegedly failed to give affiliated business disclosures in a timely manner and had borrowers provide payment authorization for appraisals before the GFE and other disclosures were delivered. The result was a $19.5 million settlement, which included a $4.5 million corporate penalty and a $1.5 million penalty personally levied against a corporate executive.

The reason for the CFPB's aggressive penalties was its belief that these particular actions were part of an overall plan intended to lure in borrowers with false advertising and lock them in to higher payment loans by getting them to provide payment authorization before they were issued GFEs.

Obviously, the CFPB's theory is plausible and possible. Also, it's possible that there was no sinister plot, but rather a flaw in the compliance infrastructure and an overzealous sales team that in combination focused too much on "closing" a deal and not enough on following each rule.

While an outside observer can never know all of the information developed in the investigation, one thing lenders often overlook is the manner in which potentially unrelated actions can be perceived as a larger conspiracy. Of course, from the perspective of enforcement attorneys, lenders should realize enforcement staff are trained to look for and identify conspiracies and intentional misconduct.

Predictably, when potentially isolated compliance shortcomings are simultaneously identified, there is an immediate assumption from regulators that these problems were not merely shortcomings. Sadly, once enforcement staff form such a belief, the cost of investigations and settlement go up exponentially.

Lenders should consider viewing their aggregate actions from the enforcement and regulatory perspective as opposed to their own. Regulators and enforcement staff are generally not interested in "good business" strategy, the actions of competitors, and/or the need to meet certain production goals or satisfy originators' demands.

Hence, what some lenders may consider as merely aggressive and "necessary" sales practices, when done consistently and broadly without sufficient compliance controls, can lead to a perception that a company was intentionally engaging in deceptive and unlawful activity intentionally to achieve a particular —and illegal — result.

Lenders concerned about such a perception must learn to evaluate their conduct globally from a regulators' perspective. Otherwise, engaging in day-to-day business survival without sufficient compliance infrastructure can lead to regulatory and enforcement problems far eclipsing the day-to-day challenges that caused such risks to be overlooked in the first place.

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