Tag Archives: penalties

Is $321 Billion The Right Amount?

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Whipping Post and Stocks

The Boston Consulting Group has released its Global Risk 2017 report, Staying the Course in Banking. Buried in the report is Boston Consulting’s calculation of the amount of penalties paid by banks since the financial crisis:  $321,000,000,000. The report states,

Strict regulatory enforcement has now been place for several years, with cumulative financial penalties of about $321 billion assessed since the 2007-2008 financial crisis through the end of 2016.

About $42 billion in fines were assessed in 2016 alone, levied on the basis of past behavior. While postcrisis regulatory fines and penalties appear to have stabilized a lower level in 2105, with US regulators remaining the most active, we expect fines and penalties by regulators in Europe and Asia to rise in coming years.

As conduct-based regulations evolve, fines and penalties, along with related legal and litigation expenses, will remain a cost of doing business.  Managing these costs will continue to e a major task for banks. They will have to create a strong non-financial framework around the first, second, and third lines of defense — business units, independent risk function, and internal audit — to avoid continued fallout from past behavior.

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[C]onduct risk and the prevention of financial crime remain high on regulators’ agendas. (16-17, references omitted)

Readers of this blog know that I have called for aggressive enforcement of wrongdoing in the consumer financial services sector. But I have also have trouble figuring out if the penalties assessed were properly scaled to the wrongdoing. Now that ten and eleven figure settlements have become routine, we may have forgotten that they were unheard of before the financial crisis. Many of these settlements were negotiated by federal prosecutors who were constrained only by their own judgment and the possibility that a defendant would call the government’s bluff and go to trial.  Now that post-crisis litigation is winding down, it makes sense to study how to make sure that the financial penalty fits the financial crime.

Impact on Consumers of Dodd-Frank Repeal

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TheStreet.com quoted me in What Would a Repeal of Dodd-Frank Mean to Consumers? It reads, in part,

With the political atmosphere unsettled at best, much of the current talk out of Washington, D.C. centers on unraveling the Dodd-Frank Act.

But what would such a move mean to the normal Main Street consumer?

“Consumers should not get too freaked out in the short term,” said David Reiss, a professor of law at the Brooklyn Law School. “The rollback is not going to happen overnight and we don’t yet know how far it will go.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010, as a response to the financial crisis the country saw in 2007 and 2008. However, with a new administration in the White House, some now see it as too restrictive to banks.

“Consumers should focus on the fundamentals — what are their short- and medium-term goals and how can they best achieve them?” Reiss said.

Reiss said homebuyers, for instance, should stay focused on identifying a home that is affordable for the long-term, and educate themselves about how mortgages work. And homeowners should evaluate whether their current mortgage is right for them — or should they refinancing with a mortgage that has a lower interest rate?

Repealing the act could affect more than mortgages, with many pointing to the credit card industry as being impacted the most. Ben Woolsey, president of CreditCardForum.com, said many of the protections afforded in Dodd-Frank were intended to roll back abusive practices by the financial services industry, often triggered when consumers occasionally strayed — such as by paying their card late or exceeding their credit limits. These consumer errors resulted in interest rate hikes and penalty fees.

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The good news likely is consumers still have time to prepare.
“People have plenty of time to act, but they should also not be putting off until tomorrow the things they should be doing today,” Reiss said. “We don’t know where interest rates are heading, so it makes sense to be on top of things while rates are still at historically low levels, notwithstanding the bump we saw after the election.”

Kickbacks in Residential Transactions

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Flazingo Photos

The Consumer Financial Protection Bureau has issued Compliance Bulletin 2015-05, RESPA Compliance and Marketing Servicing Agreements. The Bulletin opens,

The Consumer Financial Protection Bureau (CFPB or the Bureau) issues this compliance bulletin to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601, et seq.) and describe the substantial risks posed by entering into marketing services agreements (MSAs). The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefits either consumers or industry. Based on the Bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. This bulletin provides an overview of RESPA’s prohibitions against kickbacks and unearned fees and general information on MSAs, describes examples of market behavior gleaned from CFPB’s enforcement experience in this area, and describes the legal and compliance risks we have observed from such arrangements. (1, footnote omitted)

RESPA had been enacted to curb industry abuses in residential closings. Segments of the industry have been very creative in developing new strategies to avoid RESPA liability, with MSAs a relatively new twist. MSAs are often “framed as payments for advertising or promotional services” but in some cases the providers “fail to provide some or all of the services required under their agreements.” (2,3)

This Bulletin is a shot across the bow of industry participants that are using MSAs, reminding them of the significant penalties that can result from RESPA violations. It seems to me that the Bureau is right to warn industry participants to “consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.” (4)

Monday’s Adjudication Roundup

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