An increasing number of banks, mortgage lenders, auto finance companies and other financial services industry participants are dealing with inquiries, investigations and actual or threatened legal claims from the Consumer Financial Protection Bureau (CFPB) and other enforcement agencies related to the fairness of their lending, servicing and collection practices. Noting that growing trend, a banking industry commentator recently published an article asking a fundamental question: Should banks push back?” The answer, I believe, is an emphatic “yes.”
Imagine you are a compliance officer at a bank or mortgage company. You take pride in the policies and protocols that your institution has in place regarding its lending practices. You know that your company personnel do a very good job adhering to the applicable procedures, and you know that instances in which rules are violated are dealt with and corrected, swiftly and appropriately, at your company.
Nevertheless, the CFPB — either in response to an erroneous complaint by a disgruntled loan applicant, or simply as a matter of seemingly random selection — begins inquiring about your lending practices and policies. It conducts an invasive investigation, disrupting your business. Or, alternatively, it takes a look at just a small selection of documents and makes sweeping conclusions based on that small sample. It concludes that even though your company’s policies appear to be fair and neutral, “statistical results” suggest that there must be discrimination going on at your company — or even at just one of its branches or locations. The CFPB threatens to file a lawsuit alleging a violation of “fair lending” laws, or violation of vague and open-ended UDAAP (Unfair, Deceptive or Abusive Acts and Practices) regulations.
Many companies living this scenario focus almost exclusively on the possible bad publicity that will flow from a possible news report that they allegedly discriminated in their lending practices. Their first impulse, therefore, is to essentially give in to payment demands. But the “penalty payment” sought by the CFPB is frequently in the tens of millions of dollars, so a tremendous number of companies can’t afford to pay such a steep price to avoid potential bad press. Moreover, the sad truth is that, in an environment in which more companies are in the crosshairs as to this type of allegation, the less newsworthy (much less, shocking) it is to the public to hear that such an allegation has been made against your company. And the fact is that these are, after all, only allegations. An emphatic denial of those allegations is likely a far more effective tool for combating possible bad press than a “quiet” multi-million dollar payment to resolve the allegations — especially since that payment generally gets publicly disclosed, in one fashion or another, by government agencies in any event.
“Fair lending” and UDAAP violation allegations can, and very often should, be vigorously defended against. Government bureaus must prove their cases just like other plaintiffs. That entails having to overcome various potential legal hurdles, as well as proving, fact-by-fact, that your company really did do something that materially caused damage and violated actual rules of law. Make no mistake, in many instances it would be extraordinarily difficult for the government bureau to establish a violation, much less also establish materiality, causation and damage. In addition, merely demonstrating that your company is indeed ready and willing to contest the claims made against it often has a beneficial effect on your ability to resolve the matter on acceptable (or even favorable) terms. Some fights are worth having, particularly when your company’s integrity is being unfairly maligned.