On July 11, 2019, I presented at the American Bankers Association webinar, entitled, “Mortgage Disclosure Cures and Corrections — Mitigating Liability.” Below is a summary of the points presented in the webinar and additional analysis.
Among the most complex, technical restrictions and allowances affecting financial institutions and mortgage companies under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) are the TILA/RESPA integrated disclosure rules (TRID).
Significantly, the rule itself cancels liability in the event that TRID errors have been “cured,” which involves a complex protocol of prerequisites. Certain TILA cures would absolve both the creditor and the assignee of liability. The webinar panel addressed the distinctions between curable and non-curable errors, including the parameters that must be met to satisfy cures on high-cost mortgage errors and Closing Disclosure errors.
The panel also discussed the legal basis for individual liability for corporate acts. During earlier years of the Bureau (since its inception in July 2011), the enabling statute of the Bureau (Title X of the Dodd-Frank Act) presented at least three paths through which the regulator could “pierce the corporate veil,” so to speak, and hold individuals liable for conduct of the corporation.
First, the enabling statute had set forth a “related person” definition which stated that a related person is deemed liable to the same extent as the company to which the person was related. Second, the Bureau’s liability theories emulated Federal Trade Commission case precedent, which generally provided that an individual would be held liable and/or receive an imposition of fines if the individual had participated directly in the misconduct of the company or had the authority to control them; and/or had knowledge of the misrepresentations; was recklessly indifferent to the truth or falsity of the misrepresentation; or was aware of a high probability of fraud. Third, under the “substantial assistance” provision in Section 1036(a)(3) of the Dodd-Frank Act, the Bureau may hold one liable for providing substantial assistance, with reckless indifference or conscious avoidance, to a primary violator.
In general, the Bureau has gravitated in recent years towards the second and third paths set forth above rather than the first.
The relationship to the above framework for individual liability to TRID cures is important. If there have been actionable violations of TILA and RESPA without cures or liability avoidance, and if there are managers or other employees who had been knowledgeable of the misconduct or recklessly indifferent to them, the individual liability doctrine of the Bureau can be used to establish personal liability. The panel discussed this issue and pragmatic steps to manage risk.
General Framework: Self-Reporting to the Bureau
The Bureau published its bulletin on “responsible conduct,” (i.e., CFPB Bulletin 2013-06), and has applied the factors therein in recent years, to varying effect. The non-comprehensive factors used to determine whether an entity acted responsibly include: (a) self-policing, (b) self-reporting, (c) remediation, and (d) extraordinary cooperation. The panel fleshed out each of these factors in comparison to the statutory framework for penalty mitigation.
In addition, the potential positive outcomes arising out of responsible conduct include: (a) no public enforcement action, (b) a decision that the conduct will be deemed less severe of a violation, (c) a decrease in the number of violations, and (d) a reduction in the penalties or financial sanctions in the matter. In light of the reputational harm and follow-on risk of consumer class actions from a public enforcement action, a decision to resolve a matter non-publicly can be a significantly valuable form of potential outcomes.
In April 2015, the Bureau resolved a matter with several parties (including two large financial institutions and an individual) in a notable case brought jointly with the state of Maryland. In that example, the Bureau decided that an additional company’s conduct satisfied the Responsible Conduct factors so as to warrant a decision not to name the entity publicly in the enforcement order. A comparison between the 2015 case involving RESPA violations and a more recent self-reporting case from 2018 involving TILA violations on credit cards was of interest. During the panel presentation, we compared and contrasted the cases to illustrate how the Bureau applies the responsible conduct policy in practice.
Self-Reporting Climate Under the Trump Administration
Following the inauguration of President Trump, the Bureau under newly appointed leadership has confirmed the agency’s expectations concerning self-reporting.
During an interview, Mick Mulvaney, former Acting CFPB Director, stated on July 27, 2018: “Lawsuits are sort of the last resort,” and added that CFPB would reward self-reporting when negotiating settlements. On April 17, 2019, during a speech (which we wrote about here), new Bureau Director Kathleen L. Kraninger addressed how a financial entity creates a culture of compliance: “That institution needs to self-examine, self-report, and provide restitution where appropriate.”
The panel also discussed the flip-side of self-reporting: in addition to responding to issues after they arise, the Bureau has been more active in disseminating industry guidance so as to help businesses understand how to comply. Bureau has been publishing new guidance to financial institutions on TRID, and is releasing FAQ’s on a rolling basis as they are cleared.
Finally, the panel addressed the tension naturally arising from the TRID liability cancelling provisions versus the broader Bureau responsible conduct bulletin. The panel answered questions from institutions regarding the extent to which a bank will be absolved of liability from self-reporting, and how compliance managers can best serve their principals internally when faced with discovery of TRID issues.