April 27, 2021|CFPB, Regulation by Enforcement, RESPA, UDAAP
Some people (on all sides of the debate) have asked me whether I thought justice was served[1]in the George Floyd murder verdict. My thoughts are that justice is not found in the verdict itself. Justice was served because the trial process was fair, and Derek Chauvin was found guilty by a jury of his peers. Had they not found him guilty beyond a reasonable doubt, justice also would have been served (but many would have been rightfully outraged at the result). I am grateful that Chauvin was not convicted or punished by a mob, but rather by a justice system that, to echo the statement of Senator Tim Scott[2], deserves renewed confidence.
Power and Billions
The government can wield massive power against citizens to achieve its goals. This can come in the form of police action, prosecutorial investigations and even regulatory oversight. Theoretically, the Constitution and judiciary are there to protect you from the worst abuses of government power, but, as a practical matter, unless you can afford an army of lawyers to defend your rights in court (or have damning video[3]) the government can always crush the “little person”.
Only when it’s a fair fight does the process of justice really get best served and that is the premise of our adversarial judicial system. Of course, rich people can influence the process in ways that ordinary folks can’t afford. Speaking of fair fights, I recently started watching the Showtime series Billions (now on Amazon Prime). No one seems to have many scruples on Billions[4], but, to me, this entertaining and well acted show looks like a fair fight[5]between the obsessed Manhattan US Attorney played by Paul Giamatti and the billionaire Wall Street hedge fund guy Bobby “Axe” Axelrod played by Damian Lewis.
Objectively unfair fights
And, speaking of billionaires who can afford to have a fair fight with the government, I am glad to see that Rocket Mortgage[6](and Cleveland Cavaliers) owner, Dan Gilbert, appears to be on the mend from the terrible stroke he had about two years ago and is back to making a huge ($500 million) difference in Detroit. Gilbert’s message of gratitude in the face of personal adversity is one that we should all appreciate[7]. Similarly, please send your thoughts and prayers for recovery for my long-time colleague, friend, neighbor and Waterstone Mortgage executive, Kim Newby. I am heartened to know that Kim is returning home soon to be with her family while they navigate the road of recovery from her recent hospitalizations.
CFPBsplaining
Elizabeth Warren’s “plan” for the CFPB was to have a powerful agency big enough to “take on Wall Street and the big banks” on behalf of the “little-guy” consumers. Consistent with Warren’s mission to “create a level playing field”, each press release issued by the CFPB contains the following statement at the bottom,
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” [emphasis added]
Yet, under Richard Cordray’s direction, the agency often moved more aggressively against small players, rather than the big banks, especially in the area of RESPA enforcement. Meanwhile, since the resignation of Kathleen Kraninger as CFPB Director, Acting Director David Uiegio and the current CFPB leadership are quickly charting a very Richard Cordray-like course for the CFPB. Under Cordray, the CFPB approached regulatory enforcement aggressively and as a tool for guidance[8]and interpretation, rather than as merely a means to correct or punish wrongdoing by violators.
Now, one might accuse me of complaining a lot about the CFPB. I have noted concerns about the CFPB’s regulation by enforcement in prior Musings and other writings. Most recently, I questioned CFPB’s dubious assertions about the ability of citizens to think straight during the pandemic[9]. Admittedly, it’s more interesting to write about the things CFPB gets wrong than to focus on the good work they can also do. Besides, the CFPB has a whole media department devoted to tooting their own horn, so I’ll let them do that themselves.
Breaking an Egh(bali) to make an omelette?
The most glaring RESPA example of Cordray’s CFPB picking on the little guy can be found in a May, 2016 consent order against former Wells Fargo mortgage originator, David Eghbali. Eghbali was accused of,
“[referring] a substantial number of loan closings to a single escrow company, which shifted its fees from some customers to others at Eghbali’s request. Eghbali could then manipulate loan costs and ultimately increase the number of loans he closed, increasing his commissions.”
According to Eghbali, however, the loans were all locked and disclosed to consumers as zero cost loans, but Wells was unable to close and fund loans during that period quickly enough to avoid lock extension fees. So, rather than charge the consumers whose locks had expired for Wells’ delays, Eghbali asked his escrow company to reduce its fees on those loans to make up the difference. In other words, consumers received the benefit of the referrals in the form of lower escrow fees to make up for the lock extension fees[10], but CFPB claimed it was Eghbali himself who benefitted because he could do more loans.
Eghbali’s consent order references over 100 loans that were referred to the escrow company, but Eghbali claims only about a dozen involved this fee adjustment. We can debate under RESPA whether Eghbali received a “thing of value” from the escrow company, but if he did, then so did his employer, Wells Fargo, since they were also able to do more loans. Yet, neither Wells (who may have self-reported the matter to CFPB) nor the escrow company faced any RESPA repercussions from the CFPB on the Eghbali matter[11]. Only Eghbali was accused of RESPA violations and, as a result of the consent order, was required to pay an $85,000 penalty and banned from working in the mortgage industry for a year.
Consistent and Fair?
Ironically, (perhaps “Karma” would be a better word choice), just a few months later, CFPB had a chance to “consistently and fairly enforce” the laws and regulations it administers against Wells Fargo. Wells’ account opening scandal hit the national news during the summer of 2016. Shortly thereafter, the CFPB’s September 2016 press release trumpeted Wells being fined $100 million for what CFPB claimed were over 2.1 million account violations.[12] $100 million is a lot of money to most folks, even most billionaires, but it’s almost a rounding error for Wells (consider that Dan Gilbert is voluntarily giving away 5 times that amount to Detroit), so I’m going to assess the consistency and fairness of that of rule enforcement a bit more.
Fairness is subjective, but math isn’t
100 divided by 2 is 50, so CFPB fined Wells roughly $50/per violation (less than 1% of the fine they could have asserted[13]). If you believe Eghbali about the dozen or so loans where escrow fees were reduced, he, on the other hand, paid closer to $7,000 per violation. Even taking the “over a hundred” loan figure used by the CFPB in his consent order, Eghbali’s fine was still well over $500/violation and he lost his livelihood for a year (actually longer).
CFPB didn’t provide any basis for punishing Eghbali’s violations more than ten times greater than Wells’. No consumer harm was alleged in the Eghbali consent order, but Wells had to redress consumers, so clearly CFPB found some harm caused by Wells. Likewise, state of mind is not an element of a regulatory violation, but Eghbali claimed that he didn’t think his actions were wrong because was just trying to keep his customers from having to pay lock extension fees caused by processing delays. There’s no way, however, that Wells’ actions in encouraging its staff to open unauthorized accounts can be spun as helping consumers.
Ultimately, I don’t know why Richard Cordray’s CFPB treated David Eghbali so harshly in relation to his former Big Bank employer, but unlike TV shows, in real life when the government “has to break a few eggs to make an omelette”, asking, “what omelette?” is a fair question. Here, unlike most questions of fairness which are subjective, it is mathematically clear that CFPB did not live up to its fairness and consistency claims.
[1]Justice and fairness are always in the eye of the beholder. Objective justice doesn’t exist-only relative justice. Relatively, you may be able to compare two results and say which is more just, but that doesn’t tell if either result was just or unjust. Still everyone is entitled to their own opinion of what is just and what isn’t.
[2] Tim Scott is a Black Republican Senator from South Carolina who has introduced federal legislation and is working across party lines to reform policing in the US. Senator Scott also said the following in his statement about the verdict, which is a sentiment I wholly endorse, ““To deny the progress we’ve made is just as damaging as not making progress at all. I urge people across this nation to peacefully make their voices heard and engage in conversations that will continue to move us toward a more just America. I believe in the goodness of our country; we can and will do better.”
[3]Absent the video, Chauvin might never have been even tried.
[4] While vastly preferable in a community or as friends, it can be difficult to make good and ethical people interesting for a television series. Why is that?
[5] Actually, no one is playing “fair” in Billions, but they seem equally matched in that respect. BTW, I’m only about halfway through Season 2, so please no spoiler alerts.
[6] Rocket Mortgage gets a lot of attention in these Musings. See, e.g., here and here
[7]See what I did there?
[8] See footnote #3 in my July 20, 2020 Musings.
[9]What makes CFPB think they themselves are thinking straight when they say everyone else isn’t?
[10] Eghbali’s consent order doesn’t allege that any consumers were charged more.
[11] RESPAs’ statute of limitations has expired, so there will be no regulatory consequences.
[12] Wells’ violations and accounts affected continued to grow after the Consent Order was issued. CFPB (OCC and FDIC too) may have rushed to put out enforcement orders before fully understanding the scope of the problems. Wells’ penalty was raised to $1 Billion after Cordray left the CFPB by Mick Mulvaney.
[13] The CFPA allows the CFPB to get up to $5,000/violation/day ($25,000/violation for reckless violations and $1,000,000 for intentional violations). CFPB missed a chance to make a serious dent in the national debt by using its full fining authority. Others have recognized the dangers in CFPB’s authority. See e.g., CFPB has too much flexibility in assessing fines | American Banker