The latest financial institution to get hit with a Consumer Financial Protection Bureau charge of unfair and deceptive practices was GE Capital, which was ordered this month to pay $225 million. In large part, the unfair and deceptive practices charges were based upon misrepresentations and omissions by telemarketers. In other words, because these representatives told consumers the wrong information and/or failed to provide material information, the company was determined to have engaged in unfair and deceptive actions.
This is not the first time the CFPB has relied upon omissions and misrepresentations of low level personnel to support a charge of unfair and deceptive practices. Indeed, there have been multiple consent decrees entered into with the CFPB finding unfair and deceptive actions arising from low-level communications with borrowers or consumers. Apparently, consistent with the CFPB’s warnings, the agency will hold financial institutions accountable for everything that happens to a borrower or consumer when the institution knows or should know of possible harm that it can control. If misrepresentations and omissions are occurring en masse, it is the institution’s job to know that and take corrective action.
For lenders, this poses a unique and challenging problem. After all, loan officers are paid in a manner that awards expedited lending and high volumes of sales. There is little opportunity for evaluation of the information explained to and exchanged with a borrower. Especially given the weakness, created by UDAP, in the Qualified Mortgage rule's safe harbor, a lender needs to carefully consider systems and procedures that will allow it to evaluate the accuracy and completeness of interactions and communications with borrowers. In the past, loan officers have in large part been on an island with the borrower, with little management involvement in regard to an originator’s communications with clients. Increasingly, lenders need to think about systems and/or protocols to ensure that such communications are handled properly. Otherwise, lenders will be subject to potentially huge risks for the information provided by employees whose financial compensation incentivized speed over accuracy.
I am not suggesting that lenders should necessarily change compensation practices – only that they should begin thinking about some level of checks and balances to ensure borrowers are properly advised of information material to their loans.