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Fair Lending and FDIC Insurance Enforcement Trends · COMPLY: The Marketing Compliance Podcast

• 0:05
  Speaker 1: Hey there, comply podcast listeners, and welcome to this week's episode. This Comply podcast episode is part one of a discussion between Ronda McGill, perform Line Senior Director of Client Success, and Kimberly Monty Hoel and Courtney Hayden from Goodwin as they take a deep dive into recent marketing compliance enforcement actions and share their advice for getting ahead of regulatory scrutiny. Listen, as they discuss several enforcement actions and trends, including fair lending and redlining and mortgage and beyond, and F D I C misrepresentations by fintechs. As always, thanks for listening and enjoy.
• 0:44
  Speaker 2: Thank you for joining us today. My name is Rhonda McGill and I'm the Senior Director of Client Success here at Perform Line . On behalf of the Perform Line team, I want to welcome each of you along with our wonderful guests who will be introducing themselves here in a moment. In the first half of 2023, there were over 100 enforcement actions taken against financial services organizations from federal, state, and local regulators. As we prepare to wrap up the second half of the year, we wanted to pause and take a look at a few notable violations that touched on compliance with marketing to customers. Today we will take a look at a few notable enforcement actions and discuss some trends. We will touch on some of the expectations from regulators that you may want to be prepared for, and we will also share some best practices that you can do to be proactive with your marketing compliance, keeping your business out of regulatory trouble. Joining us today are Kimberly Hosel and Courtney Hayden of Goodwin Proctor, Kimberly, and Courtney, please tell our guests a little bit about yourselves and your area of practice at your firm. Courtney, would you like to go first?
• 1:58
  Speaker 1: Happy to. Thanks for having us. My name is Courtney Hayden. I'm counsel in Goodwin's Boston office in our consumer financial services litigation practice area. I primarily represent financial institutions and FinTech companies in government investigations, enforcement matters, and complex litigation including class actions.
• 2:17
  Speaker 2: Thank you and Kim.
• 2:20
  Speaker 3: Hi, everyone. My name is Kim Zel . I'm a partner at Goodwin Proctor in our Boston office , um, where Courtney focuses on enforcement litigation. I'm on our business law and compliance side. I represent FinTech companies, banks, and their investors , um, in building financial services and making sure that the program's run in compliance with the law , um, so that hopefully there never is an enforcement action.
• 2:44
  Speaker 2: And Kimberly and I had an opportunity to work together about a year and a half ago , um, hosting a round table , um, to discuss Buy now and pay later. So it's so good to have you back with us here at Perform Line . So let's jump into some of the notable enforcement actions around marketing and advertising. Um, I think maybe first let's talk a little bit about , um, the mortgage space and redlining. So maybe it's just me, but it seems like the D O J has been very focused on redlining. Courtney, would you mind providing a bit of background and overview on some recent redlining cases for our show ? Yes ,
• 3:20
  Speaker 4: Sure. Happy to do so. Um, I thought it would also be helpful to give a little bit of context. Excellent. Um, in terms of where these cases are actually coming from and why. So as you mentioned , um, mortgage Fair lending cases in particular has been a large focus and continues to be a large focus of both state and federal regulators. Um, we have a firm blog that tracks enforcement data, and through that we've seen that there's a, there's a, you know, decrease generally speaking in overall mortgage origination and servicing related enforcement actions in the past couple of years in 2021 and 2022. But we're actually starting to see an uptick in a rise in that area in 2023. Um, it's our view that this is not surprising because the Consumer Financial Protection Bureau or C F P B had issued a fall 2022 supervisory highlights that suggested that more enforcement actions in the mortgage space were gonna be forthcoming. Um, and in the mortgage fair lending space in particular, the Bureau fairly recently had issued summer 2023 supervisory highlights, and these indicated that recent examination examiners had found , um, alleged violations of the eCOA . It's implementing regulation Reg B , um, and that it's also going to be focusing on potential violations of hamda and Reg C , um, for the remainder of the year and presumably years to come. So with that kind of context in mind , um, I'll mention a couple of , um, recent , um, mortgage redlining enforcement matters. So in February of this year, the D O J had announced a $9 million agreement to resolve allegations in the southern district of Ohio that a lender had engaged in a pattern or practice , um, of lending discrimination by redlining in the Columbus, Ohio metropolitan area. Um, this was part of the DOJs quote , combating redlining initiative, which was started and announced , um, by the D O J back in October of 2021. So almost two years ago at this point , um, the D O J alleged that this particular lender had failed to provide mortgage lending services to majority black and majority Hispanic communities. Um, this lender , um, had concentrated all of its branches and lenders in majority white neighborhoods . Um, the D O J found that it's the , the peer lenders had generated mortgage applications , uh, at rates five to 10 times higher than this particular lender in majority black and Hispanic communities. And then peer lenders had separately offered , um, mortgage loans at rates four and a half to 12 and a half times larger , um, or higher, rather than this particular lender lender. Um, and so some of the specifics of the consent agreement is fairly similar to what you'll hear , um, from me with respect to the next redlining action that I'll mention too . But it required an investment in a loan subsidy fund , um, money to outreach, advertising, financial education in minority neighborhoods and communities and development of community partnerships. It also required , uh, the company to open new branch and loan production offices in majority minority , um, neighborhoods too. Um, kind of, if I can just jump to the next tag along Okay . And then we'll do some takeaways at the end here. Okay. Um, so a couple of months later, in May of 2023, also as a part of the DOJs Combating Redlining initiative , um, they had brought a separate enforcement action that resulted in a settlement , um, that had kind of an added marketing heavy focus to it. Mm-hmm . , so a community bank was sued by the D O J over claims that it had also engaged in a pattern or practice of , uh, lending discrimination by redlining in black and Hispanic neighborhoods around the Philadelphia area. Um, it alleged that the bank had excluded a specific Pennsylvania County from its community re , um, community , um, I'm completely blanking. Reinvestment. Thank you. Community Ress , uh, reinvestment assessment area , um, which, you know, commonly referred to as the C R A . Um, the , uh, claims that it asserted pretty similar Fair Housing Act claims, a co-ed claims, which is pretty repetitive in this area. Um, and it can, it , um, actually, I'll , I'll mention like an interestingly procedural nugget of how the D O J got this case, which is how the D O J sometimes does get , get matters. So this was initiated by an F D I C , um, examination, and the F D I C had referred this case to the D O J . Um, and that's fairly , um, not necessarily common, but it does happen technically. There's , um, a requirement that certain agencies, when they've identified a potential pattern or practice discrimination claim, they must refer such cases to the D O J for the D O J to potentially do its own investigation and decide whether it wants to pursue an enforce enforcement matter. So that's how this case got got to the D O J . Um, so kind of the marketing focus here was that D O J alleged targeted marketing efforts had occurred in majority white areas, but not , uh, minority areas. Um, and then one additional interesting fact here that the D O J focused on was that the , um, company had ascertained fair lending reports from third party vendors, and those vendors that the be that the community bank had engaged actually identified these as potential issues. And then the D O J found that the bank didn't actually , um, address 'em in any meaningful way. Mm-hmm. . So , uh, so the consent order ended up being a , uh, $3.2 million consent order here with the same types of financial requirements , um, providing money to a loan subsidy fund, investing in community partnerships , um, and then hiring , um, designated loan officers to serve minority communities. Um, so happy to talk about some takeaways on the , um, kind of more , uh, I guess like low level front. And then Kim, maybe you can provide some higher level risk management ones. Absolutely . I would just say that , um, you know, from these two enforcement actions, it's important to make sure you're reviewing your own data, reviewing peer, peer lender data if possible , um, especially to understand mortgage application and origination separately , um, between minority and non-minorities. Um, monitor locations of loan officers and brokers and branch locations and, you know, pay attention to what vendors are telling you. And perhaps if you're not going to , um, implement identified issues, consider documenting that and documenting the reasoning why. Mm-hmm. . Um, so Kim, I'm not sure if you have any other , uh, risk issues you'd like to discuss.
• 10:36
  Speaker 3: Yeah, I mean, I think at a very high level , um, there's been longstanding F F I E C fair lending guidance for a long time, so it's always con , you know, important to continue to adhere to that. Um, however, I do think there's everything that Courtney mentioned , um, represents a pretty big shift in the D O J and CFDs enforcement priorities to redlining specifically. Um, and in some of their more recent actions, you can tell that they're focused on some specific , um, metropolitan areas in particular. Um, so if that's an area that you do lend in or lend near and should be lending in , um, then that those are perhaps some , uh, metro areas to , uh, consider doing more targeted analysis , uh, with your redlining for a lending program. Um, in addition, we've had some learnings that , um, you know, even if you're not lending in a particular area , um, if your peer lenders are lending there , um, you know, the C F P V doesn't necessarily see it as an excuse that it would be difficult to break into that area mm-hmm . , um, where there is mortgage need. Um, so certainly there are business considerations in expanding into any new area. Um, but we found that the CF p d has been unsympathetic , uh, as well as the D O J has been unsympathetic to , um, the fact that that market may be saturated by other lenders who , um, have a market capture in those areas. Um, so that's all I have to add. Um, one other point that I wanted to make is that , um, you know, the C F P B and the D O J are not necessarily limiting their redlining enforcement to mortgages. Um, we're starting to see some inquiries into other financial service products. And so , um, for example, if you're a bank that offers a credit card program , um, it's, it's still important to make sure that you're advertising and offering the, the service throughout your footprint , um, and making sure that your footprint is fair from a redlining perspective.
• 12:33
  Speaker 2: And I think it's easy for people to overlook outside of the mortgage space because everybody thinks of redlining as in neighborhoods and in , you know, city blocks. So , um, thank you so much for bringing that up. I think it's really important for , um, other areas in the financial services to be really attentive at, you know, making sure that they are not , um, creating the imaginary redlining , um, with the way that they're advertising their products. And Courtney, a few moments ago you were talking a little bit about some of the , um, how the F D I C was a part of that referral process over to the D O J in the redlining instance. Um, but it seems like the F D I C has been really active too , as it applies to how people are representing and utilizing the F D I C , um, the F D I C title specifically. Um, I've seen a lot in the crypto space. Could you talk a little bit about some things that are going on in that space? Because I think it's, you know, it's an emerging space and it's continuing to , um, have some, some nuances that, you know, folks are just not sure about. So I'd love to hear your, in your wisdom on that.
• 13:35
  Speaker 4: Sure, absolutely. Um, so the, the matter that I was going to discuss, I realized just yesterday that there was basically a duplicative one that came out , um, just a couple of weeks ago that I'll touch on too. So , um, back in February of this year, also, the F D I C had issued letters demanding that two companies, one was a , um, cryptocurrency exchange, and the separate entity was a non-bank financial servicer pri , uh, provider demanding that they cease and desist from making alleged false and misleading statements about F D I C deposit insurance. Mm-hmm. , um, the , separately, the F D I C had also directed two websites of separate companies to remove similar , um, alleged false and misleading statements about the nature of F D I C insured status of that cryptocurrency exchange. Um, the F D I C alleged that the, that the entities had stated that they were F D I C insured when they actually were not. Um, the F D I C ACT prohibits anyone from representing that an uninsured product is F D I C , um, insured or misrepresenting the extent of deposit insurance. Um, and, you know, the F D I C here , uh, claimed that the companies had misused also the F D I C name or logo , um, kind of in furtherance of that alleged misrepresentation. Mm-hmm . Um, and then what I was just alluding to at the very beginning here was that just two weeks ago, the F D I C made a very similar demand against another crypto non-bank. Um, so we continue to see them pretty active, as you mentioned in the crypto space , uh, with these demand letters in particular. Hmm .
• 15:19
  Speaker 2: It just seems like it's not going away . So it's , um, the monitoring, especially for the companies themselves, just importance of that monitoring. And , um, Kim, if you could talk a little bit more about some of the things that some of these companies can do, because things may not always be intentional, but it is just that extra step of making sure that the monitoring is occurring and that the compliance measurements are in place.
• 15:40
  Speaker 3: Yeah. Oftentimes it's not intentional at all. And we see these programs , uh, set up in such a way that they just don't qualify for F D I C insurance because the requirements were not met, and they're not particularly difficult requirements, but they're things that, you know, kind of get overlooked. And that's what generates a lot of these actions. So , um, obviously only a bank can be a member bank of the F D I C. And so, you know, first and foremost, non-banks and crypto companies, they can't really represent that they are F D I C insured or that any funds that they hold are F D I C insured, unless those funds are actually held , uh, perhaps in a custodial manner at an F D I C insured bank , um, where they'd set up in such a way that that insurance would pass through the non-banks account to the people who actually own the funds. Mm-hmm . . Um , and so we see a lot of this in , um, these bank FinTech partnerships these days where a FinTech wants to offer , um, an account or a payment product or a debit card to consumers. Um, they wanna to be F D I C insured. Um, and that's all fine and good, that's definitely possible. But what you need to do is , um, the bank or the non-bank, if they're appropriately licensed, needs to set up , um, an account at the bank that's either gonna be titled in the name of the insured deposit or their customer. Um, or what's more common is you don't even have individual accounts, but you have some sort of omnibus pooled account, and that's either gonna be held in the name of the bank or in the name of the FinTech if they're actually licensed to hold that money. Now the problem with that is that , um, you know, the titled account owner would typically be the depositor who's insured, and that insurance is $250,000 per person per bank. So if you've got the name of the FinTech company on that account, and they're holding money for other people, each person is not insured for $250,000 unless you can meet the additional requirements for pass through insurance. Um, so in order to get passed through insurance, the titling on the account has to show that , um, that money is being held either by the bank or by the FinTech company , um, in a custodial manner for the benefit of , um, these individual beneficiary customers. And then there has to be record keeping that's either done by the bank or adopted by the bank, even if it's done by the tech company , um, which shows exactly who owns what money in that account and , um, who the beneficiaries are and in what amount. And if all those requirements are met, then , um, the individual depositors would typically be eligible for , uh, deposit insurance on a pass through basis, even though they don't have an individual account at the bank or at the tech company. So those formalities, they're, they're not typically a big deal, but they are things that can just be done incorrectly and it entirely , um, you know, makes your customers ineligible for F D I C insurance. And then if you misrepresent the insurance status, that's when the F D I C um, can pursue enforcement on that. And then , um, the one additional thing I'll say about this is , uh, there's been a rise in these deposit suite programs after the failures of , uh, Silicon Valley Bank and others. And , um, the reason for that is because so many, as we saw so many big companies , um, were at risk of losing a lot of their money because the F D I C insurance only goes up to $250,000 per person, per bank mm-hmm . . And it's just not realistic for a lot of companies to hold 250 here, 250 there, and have all these different operating accounts. It's just not feasible. Um, so where that left a lot of people when we were waiting over the weekend for , um, the F D I C to say something about Silicon Valley Bank is all these depositors thought they were gonna lose everything over two 50, that was at SS e b . So after that happened, we saw huge explosions in sweep accounts. And what a sweep program is, for those of you who don't know, is , um, there is a deposit sweep network where , uh, they have a number of different participating banks. So for the purposes of this example, let's say that there's four banks participating. Um, uh, let's say I have a , an account at Bank One and I have a million dollars that I wanna deposit at Bank number one , um, but I only get $250,000 of insurance , uh, per bank. So what the Sweep Network does is they take , um, the excess funds over two 50 and then they sweep them out into the other four banks. And so I can get up to a million dollars in insurance and then all of my , um, all of my accounts and funds are insured. And that's great. Um, however, in order to do that, we have to meet the formalities of the F D I C insurance at every single bank. Um, and as we said, what typically happens is there will be maybe one big pooled account where everyone in the Suite account , uh, everyone in the Suite program has their funds pooled in this one account. Um, one of the banks will have , uh, some sort of custodial account that holds all that money, and then they have to keep records of every single person who has money , um, in every single bank where , uh, those funds are held in that suite network. So it's a bit of an undertaking , um, but it is possible. And now we're, we're seeing quite a big increase in the use of these programs because , um, you know, companies can get tens of millions of dollars in insurance for their funds if they wanna keep cash on hand.
• 21:01
  Speaker 2: Yeah, I noticed that also, like a lot of local municipalities, they've been doing more sweeping ever since that happened because small towns can't afford to lose their money. So definitely it's , um, something that I think , um, folks need to really learn about those sweep accounts and why they're so important and critical to , um, maintaining the money over the $250,000 threshold.
• 21:25
  Speaker 3: Yeah, that's right. And the other thing too is , um, not all sweep programs are created equally. So , uh, over that weekend when we were wondering what S D B was gonna do, we had clients come to us and ask, you know, I have the sweep agreement, am I okay, where am my , where's my money? It's , I don't think it's all at SS d b I think it's swept to these other banks, but I don't know. And unfortunately, some of the suite programs didn't guarantee that the funds would even be swept into f din insured accounts. So it's really important in evaluating these suite programs that it's actually swept into , um, anur account and not maybe some kind of uninsured investment account or uninsured money market account. There are types of sweeps that really don't guarantee that insurance. Mm-hmm . . Um , and so it's really important to read these , uh, agreements very carefully.
• 22:12
  Speaker 2: Wow . Well, thank you. That was very insightful and useful information. And so hopefully everybody out there is taking good notes , um, because there's a lot to this and , um, you can definitely find yourself on the , on the wrong end if you're not , um, informed and well-informed.
• 22:33
  Speaker 1: Thanks for listening to this episode of the Comply podcast. If Fair lending is something you'd like to learn more about, we have several resources for you, one of which I'll drop in today's show notes titled Quick Tips for Fair Lending Compliance. And if you feel like you need to learn more about recent enforcement trends and the marketing compliance insights you can take from them, perform Line has done the heavy lifting for you and created two great pieces on this exact subject that I will also drop for you in today's show notes. As always, for the latest content on all things marketing compliance, you can head to content dot perform line.com . And for the most up-to-date pieces of industry news events and content, be sure to follow Perform Line on LinkedIn. Thanks again for listening and we'll see you next time.