Saturday Cup of Joe: a lending and techish newsletter

Friends & Colleagues:

Good Morning! Two weeks ago, I wrote about the communal living regulations in Boulder, CO and a supportive Saturday CoJ reader, Debbie Hoffman, happened to be in Boulder right after and confirmed some of the houses mentioned in the article. Here’s a photo of a home in Boulder with all the signs of having multiple occupants, including skis all over the porch.

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Debbie is the Chief Legal Officer at Digital Risk and we are speaking on the same panel — Other CFPB Issues like Vendor Management — at the Mortgage Bankers Association Reg Compliance conference on Monday, September 19th. If you are attending the conference, please stop by our session and/or track us down for a cup of coffee at one of the breaks. It’s shaping up to be another large and productive conference this year. Have a great weekend.

This week we look at the CFPB from many different angles:

· The expansion of CFPB legal theories and authority (Of Interest and Quick Hits)

· The Wells Fargo consent order (Have You Heard About This Too?)

· The fast growing technology of remote e-notary (A Look Ahead)

· A new feature simply by coincidence (Tip of the Week)

Of Interest: Last week, a federal court in California agreed with a CFPB motion under a legal theory that many are calling the“true lender” theory. In the suit, CFPB contends that loans made by Western Sky Financial are null and void because Western Sky and parent company CashCall violated state law in making consumer loans. A quick summary of the facts — CashCall assisted Western Sky in setting up operations after 2 banks ended their relationship with CashCall over pressure from the FDIC. CashCall assisted Western Sky by hosting servers, paying marketing, operation and personnel cost, setting up an account for funding loans and buying 100% of Western Sky production. As a result, CFPB was able to convince the court that CashCall not WS was the “true or de facto lender” and apply all relevant law (including licensing) to CashCall. A few of the items CFPB weighed in the analysis included, the funded account allowing Western Sky no less than 2 days worth of loans, full indemnification in the agreements, CashCall accepting all payments directly from the consumer, and the fact that CashCall never declined to purchase a single loan.

The Takeaways: CFPB stood firm to the commitment to look beyond the contractual arrangement at the substance of any operation to see what is actually occurring (think Marketing Services Agreements). CFPB was able to apply licensing requirements to CashCall even though day-to-day it was WS participating in the licensed activities. CFPB was able to use the true lender theory to apply state law to these transactions even though Western Sky and the agreements with CashCall were under the Cheyenne River Sioux Tribe sovereign laws. I think the bottom line is that the CFPB will fundamentally look to find out “who’s in charge around here?” and whatever entity that is must be prepared to articulate the exact arrangement and understanding of the products and services being offered. Anything short of that risks a variety of laws being applied in new ways to accomplish whatever it is the CFPB is working toward.

Have you heard?: Colorado outright prohibited Marketing Services Agreements (MSAs) for title insurance providers. Regardless of what the CFPB says (or doesn’t). Colorado’s Division of Insurance is taking no chances. Prohibiting MSAs involving title insurance providers speaks to the regulators’ suspicion between settlement service providers and lenders. It also fails to acknowledge that data rules the day. Theoretically, if lenders maintain accurate data on the establishment of the relationship, the fair market valuation and the bona fide services involved, we should all be able to prove any provider relationship exists within the law. If a lender cannot defend decisions with data that should be the deficiency (the reason for the sanction). Not simply the existence of an agreement.

Have You Heard This Too? The buzz in the office this week was all about Wells Fargo. For those of us in this industry, the news of a CFPB consent order will garner significant attention but for the mainstream media, this week’s consent order with Wells Fargogarnered national attention. My initial reaction was to give Wells Fargo the benefit of the doubt (perhaps because I’m a lawyer, perhaps because I’m used to CFPB’s hyperbolic language). As we dug into the Consent Order (public document), the allegations painted a tough picture for the well-respected bank. A complete lack of internal controls and no oversight in this area. There is really no other way to describe it. The bank didn’t know what was going on, and worse, did not know what was going on with its own employees. The bank’s internal analysis found thousands of employees “illegally” signed up customers for more than two million deposit and credit-card accounts that may have not had their knowledge or consent. As a result, Wells will pay $100 million to the CFPB, full restitution to customers, $5 million in customer remediation and hire an independent consultant for a review. Wells decided to terminate 5300 employees involved in the schemes. A massive hit to be sure.

Got Me Thinking: How do you know what’s going on in your company? Certainly, at a place like Wells Fargo, a multi-million dollar practice involving thousands and thousands of employees should not be able to impact as many customers as it did. But for the rest of us, what are the ways we get information about our companies/teams? Sometimes it requires mixing things up on your staff. Not the usual enterprise risk management audit or the routine internal audit or vendor management review. I’m thinking more of the old bank policy where employees had to take a vacation of 1–2 weeks each year. Forcing employees to cover each other can disrupt internal schemes and reveal critical information. Or asking more questions of the departments where everything is reported to being going well and above goals than those flailing at the bottom.

A Look Ahead: Things are really heating up quickly in the world of remote e-notarization. E-notarization, when the notary is co-located with the client but uses a tablet or similar device to sign, is market ready (for the right price) from several different vendors. Remote e-notarization is still in development and significantly more complicated to roll out due to overlapping state, federal and investor requirements. This week, Reuters profiled the state of the union, so to speak, and focused more on the lenders than the “providers.” Still an interesting story and each day closer to the fully electronic mortgage process end to end.

Quick Hits: Two more observations on CFPB. First, the Chamber of Commerce of the US filed an amicus brief in the case between CFPB and JG Wentworth. The Chamber contends the CFPB exceeded its jurisdiction in trying to reach JGW. For example, Chamber argues that, as an initial matter, TILA cannot be a basis for the CFPB’s jurisdiction because “the statute applies only to extensions of credit, and JGW does not extend credit.” Under the CFPB’s theory, any marketing of any consumer good, including refrigerators, would be subject to CFPB authority. Hard to tell how the courts will go on CFPB jurisdiction and authority. There are several cases that bring up similar questions. There are plenty of foundational cases throughout history where bizarre facts or unconventional parties created important decisions. You never know. At the same time, federal agencies come with a major presumption to overcome. It’s a big lift to paint the entity in charge of consumer protection as too interested in protecting consumers.

Second, Ballard Spahr’s blog CFPB Monitor reported on a trade association’s Freedom of Information Act (FOIA) request that revealed something like 98% of comments submitted to the CFPB regarding payday lenders were positive. Of 12,546 comments, the group found 240 were negative. With the CFPB building out the complaints database and considering allowing consumer ratings (literally, 1–5) on lender responses to be made public, more data is needed to know how CFPB views positive comments and the value of this type of feedback.

Today’s Thought: Contained curiosity. Or perhaps better put, focused curiosity. There are two competing positions on curiosity — the personal and the professional. Without question the one characteristic I’ve heard from successful, experienced people (and the one I’ve tried to model) is that staying curious, being a lifelong learner, always asking questions maintains a healthful lifestyle. Inside an organization curiosity is also critical otherwise the market will pass it by with incredible speed. Being willing to learn and adapt, however, is different than allowing the organization itself to chase wild ideas. Rare is the entrepreneur who can be successful launching ideas in wide-ranging, disparate industries (think, Richard Branson). The better lesson is not the outlier but the scientist. In a controlled experiment, you cannot change everything all at once. You change one thing at a time, keeping everything else consistent, to find the best way to move forward. Curiosity in our businesses is similar. We want healthy curiosity. If you are looking to take risks, expand into new markets or launch a new enterprise, find a product or service that has 2 or 3 key elements in common with your current business and 1 piece that is new or expansive. This way, the common ground creates stability and the new territory feeds curiosity. Stay curious. Be smart.

Quote: As a Jamaican native [author Marlon James] who has witnessed quite a few third-world missions, I tell him that sometimes our biggest laugh is directed at foreign do-gooders who really have no idea how to fix our problems. “I’ve been one of those at times,” he admits. “But you’ve got to start somewhere. You start with your best intentions, understanding the world as you do. And then you get in and you see that it’s much more complicated than you could possibly imagine.” He is Brad Pitt, in an interview with T Magazine in this Sunday’s New York Times

Bonus article: I’ve often said that the key to leadership, management and compliance can be boiled down to articulation. It’s not sexy to say that clear and consistent communication is the key to success. It’s like saying diet and exercise will help you lose weight. This week I found an author describe it another way hoping to spice it up. Coherence. Coherence is probably a slightly better framing of what I’m trying to say because it’s articulation with an idea. The basic advice is this — clearly define your company and your values, drive those values into your people in a measured and consistent way, and embody your message in everything you do. When possible, hold other leaders in the organization accountable. If you are interested, the article has 10 ways to address this (and then attempts to sell a training product.) But the message is a good reminder.

Continued Success,


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