Harried lenders that have not already identified imminent compliance needs related to the massive Dodd-Frank Act’s largely neglected “whistleblower” and fair lending requirements can do so more simply and cost-effectively than they may think, according to one legal expert.
While some Dodd-Frank regulations are still taking shape, there are several defined broad requirements that the law’s approaching implementation date should be lenders’ cue to address. Lenders generally are well aware of and have been working on some of these requirements, but Offit Kurman attorney Ari Karen is concerned that they are overlooking these two.
The more pressing of the two is the so-called whistleblower policy, he said.
“By July 22, if you don’t have a whistleblower policy, you’ve got a problem,” said Karen.
The whistleblower policy states “that any employee will be able to bring a claim against…an employer in this industry if that employee believes they have been treated in an adverse manner because they either refuse to engage in an act that they believed, in good faith, was a violation of the law,” he said.
“You’d be shocked at what people can say is a good-faith belief,” Karen added. “It really is shocking how the courts give that such latitude and breadth.” This creates a potential liability for lenders, he said.
To address this, lenders should work in consultation with legal experts to disseminate whistleblower policies that specify, for example, what channels employees should report concerns of this type through, he said. These concerns might include situations where loan officers allege they are being forced to be “too aggressive” with borrowers. Other things a whistleblower policy should cover include specific information about “what you report, what’s protected, what to do if you think something is wrong and how it should be handled.”
Among other things, the policies should require multiple channels be made available for complaints and that all complaints are written/recorded in some manner regardless of whether or not they are legitimate or not, Karen said.
Having documentation continues to increasingly be a theme when it comes to lending compliance, and another often-overlooked area where lenders should act soon to this end as a result of Dodd-Frank is in fair lending, he said.
Where fair lending laws are not changing, per se, there will be a change “in the level of scrutiny I think is going to be brought about by the law,” Karen said, noting that the new Consumer Financial Protection Bureau created by Dodd-Frank will have an office within it specifically focused on fair lending.
The new fair lending office will, for example, take any consumer complaint, require a lender to answer it and allow the consumer to follow up with a request for supporting documentation from the lender. “The simple fact of not having the documentation can in and of itself be a violation of Dodd-Frank,” he said.
Karen recommends lenders make sure they have or are working on an updated fair lending policy that they can actively use and make sure to track and document any reasons for differences in consumer loan pricing in different areas.
“It’s very commonplace, for instance, where you pay differently in different states. Let’s say you’ve got different pricing at those different locations. You’re going to need to really have an explanation for that,” he said.
“Companies need to take a look at their fair lending, at the way they price at the policies for that, at what type of procedures and type of training they have,” said Karen. “You also have issues with the loan officer duty of care. You have issues with the ability to repay” that may need to be accounted for as well as fair lending requirements, and reconciling the two can be a challenging balancing act lenders should pay close attention to, he said.
Unlike the already-existing Department of Labor enforcing the whistleblower policy, the CFPB fair lending unit is still gearing up. But Karen advises making sure companies have strong fair lending policies as soon as possible as well as whistleblower policies.
“On July 22, you’re probably not going to get a letter from the CFPB about a fair lending violation, but how long do you wait, knowing this is the environment? Who’s going to get the first letter? Don’t be that person.”
Karen acknowledges that some of these issues are being neglected because, “Let’s be honest: it’s hard to focus on something that might happen July 22 when something happened on July 8 that a lender might have to deal with because they might lose a branch.”
But identifying the most serious compliance concerns that could arise due to issues like Dodd-Frank’s fair lending and whistleblower requirements may be simply a matter of an audit by a legal expert that should have no more than a four-figure price tag, Karen said.
“A simple audit is going to find your instances of ‘egads, we can’t do this anymore’ or ‘you don’t have a policy at all?’ That’s where you’re going to get in trouble,” he said.
Lenders also will likely want to address concerns identified in the audit with some operational changes made in-house to address such concerns, possibly with some vendor assistance, Karen said. He said he advises using a third party for such audits both because outsiders generally have a clearer view of concerns and because third-party work is legally privileged while in-house audits are not.
