Episode Description
This COMPLY Podcast episode is part one of a discussion between Rhonda McGill, PerformLine’s Senior Director of Client Success, and Kimberly Monty Holzel 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 in mortgage and beyond
- FDIC misrepresentation by fintechs
Show Notes:
- Quick Tips for Fair Lending Compliance: https://bit.ly/3QiTGnM
- Marketing Compliance Insights from Recent Enforcement Actions: https://bit.ly/3PS4lnW
- Top Marketing Compliance Enforcement Actions 1H 2023: https://bit.ly/3Fl137N
- Connect with Rhonda: https://www.linkedin.com/in/rhonda-mcgill/
- Connect with Kimberly: https://www.linkedin.com/in/kimberly-monty-holzel/
- Connect with Courtney: https://www.linkedin.com/in/haydencourtney/
- Connect with Ashley “AC” Cianci: https://www.linkedin.com/in/ashley-cianci/
Subscribe to COMPLY: The Marketing Compliance Podcast
About COMPLY: The Marketing Compliance Podcast
The state of marketing compliance and regulation is evolving faster than ever, especially for those in the consumer finance space. On the COMPLY podcast, we sit down with the biggest names in marketing, compliance, regulations, and innovation as they share their playbooks to help you take your compliance practice to the next level.
Episode Transcript:
Ashley:
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, PerformLine 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 in mortgage and beyond, and FDIC misrepresentations by fintechs. As always, thanks for listening, and enjoy.
Rhonda:
Thank you for joining us today. My name is Rhonda McGill, and I am the Senior Director of Client Success here at PerformLine. On behalf of the PerformLine 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 Monty Holzel 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?
Courtney:
Happy to. Thanks for having us. My name is Courtney Hayden. I am 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.
Rhonda:
Thank you and Kim.
Kimberly:
Hi, everyone. My name is Kim Holzel. I am a partner at Goodwin Proctor in our Boston office, where Courtney focuses on enforcement litigation. I am on our business law and compliance side. I represent FinTech companies, banks, and their investors in building financial services and making sure that the programs run in compliance with the law so that, hopefully, there never is an enforcement action.
Rhonda:
Kimberly and I had an opportunity to work together about a year and a half ago, hosting a round table, to discuss Buy Now, Pay Later. It is so good to have you back with us here at PerformLine. Let us jump into some of the notable enforcement actions around marketing and advertising. I think, maybe first, let us talk a little bit about the mortgage space and redlining. Maybe it is just me, but it seems like the DOJ has been very focused on redlining. Courtney, would you mind providing a bit of background and an overview on some recent redlining cases for our show?
Courtney:
Sure. Happy to do so. I thought it would also be helpful to give a little bit of context in terms of where these cases are actually coming from and why. As you mentioned, mortgage Fair lending cases, in particular, have been a large focus and continue to be a large focus of both state and federal regulators. We have a firm blog that tracks enforcement data, and through that, we have seen that there is 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 are actually starting to see an uptick in a rise in that area in 2023. It is our view that this is not surprising because the Consumer Financial Protection Bureau or CFPB had issued a Fall 2022 Supervisory Highlights that suggested that more enforcement actions in the mortgage space were gonna be forthcoming.
Courtney:
And, in the mortgage fair lending space in particular, the Bureau fairly recently had issued a Summer 2023 Supervisory Highlights, and these indicated that recent examination examiners had found alleged violations of the ECOA. It is implementing regulation Reg B, and that it is also going to be focusing on potential violations of HMDA and Reg C for the remainder of the year and presumably years to come. With that kind of context in mind, I will mention a couple of recent mortgage redlining enforcement matters. In February of this year, the DOJ 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 of lending discrimination by redlining in the Columbus, Ohio, metropolitan area. This was part of the DOJ’s “Combating Redlining Initiative,” which was started and announced by the DOJ back in October of 2021.
Courtney:
Almost two years ago, at this point, the DOJ alleged that this particular lender had failed to provide mortgage lending services to majority black and majority Hispanic communities. This lender had concentrated all of its branches and lenders in majority-white neighborhoods. The DOJ found that the peer lenders had generated mortgage applications at rates five to 10 times higher than this particular lender in majority black and Hispanic communities. And, then, the peer lenders had separately offered mortgage loans at rates four and a half to 12 and a half times larger or higher, rather than this particular lender. Some of the specifics of the consent agreement are fairly similar to what you will hear from me with respect to the next redlining action that I will mention, too. But it required an investment in a loan subsidy fund money to outreach, advertising, financial education in minority neighborhoods and communities, and the development of community partnerships.
Courtney:
It also required the company to open new branches and loan production offices in majority-minority neighborhoods too. Kind of, if I can just jump to the next tag-along. And then we will do some takeaways at the end here. Okay, so, a couple of months later, in May of 2023, also as a part of the DOJ’s Combating Redlining Initiative, they had brought a separate enforcement action that resulted in a settlement that had kind of an added marketing-heavy focus to it. A community bank was sued by the DOJ over claims that it had also engaged in a pattern or practice of lending discrimination by redlining in black and Hispanic neighborhoods around the Philadelphia area. It alleged that the bank had excluded a specific Pennsylvania County from its community reinvestment assessment area, which commonly referred to as the CRA. The claims that it asserted pretty similar to the Fair Housing Act claims, a co-ed claim, which is pretty repetitive in this area. I will mention like an interestingly procedural nugget of how the DOJ got this case, which is how the DOJ sometimes does get matters. This was initiated by an FDIC examination, and the FDIC had referred this case to the DOJ. That is fairly not necessarily common, but it does happen technically. There is a requirement that certain agencies, when they have identified a potential pattern or practice discrimination claim, they must refer such cases to the DOJ for the DOJ to potentially do its own investigation and decide whether it wants to pursue an enforcement matter.
Courtney:
So, that is how this case got to the DOJ. Kind of the marketing focus here was that DOJ alleged targeted marketing efforts had occurred in majority-white areas but not minority areas. Then one additional interesting fact here that the DOJ focused on was that the company had ascertained fair lending reports from third-party vendors, and those vendors that the community bank had engaged actually identified these as potential issues. And then the DOJ found that the bank did not actually address them in any meaningful way. The consent order ended up being a $3.2 million consent order here with the same types of financial requirements providing money to a loan subsidy fund, investing in community partnerships, and then hiring designated loan officers to serve minority communities.
Courtney:
Happy to talk about some takeaways on the kind of more, I guess, like the low-level front. Then Kim, maybe you can provide some higher-level risk management ones.
Kimberly:
Absolutely.
Courtney:
I would just say that from these two enforcement actions, it is important to make sure you are reviewing your own data, reviewing peer lender data if possible, especially to understand mortgage application and origination separately between minority and non-minorities. Monitor locations of loan officers and brokers and branch locations, and pay attention to what vendors are telling you. And perhaps if you are not going to implement identified issues, consider documenting that and documenting the reasoning why. Kim, I am not sure if you have any other risk issues you would like to discuss.
Kimberly:
Yeah, I mean, I think at a very high level there has been longstanding FFIEC Fair Lending Guidance for a long time. So, it is always important to continue to adhere to that. However, I do think there is everything that Courtney mentioned that represents a pretty big shift in the DOJ’s and CFPB’s enforcement priorities to redlining specifically. In some of their more recent actions, you can tell that they are focused on some specific metropolitan areas in particular. If that is an area that you do lend in or lend near and should be lending in. Then those are perhaps some metro areas to consider doing a more targeted analysis with your redlining for a lending program. In addition, we have had some learnings that even if you are not lending in a particular area if your peer lenders are lending there, the CFPB does not necessarily see it as an excuse that it would be difficult to break into that area where there is a mortgage need.
Kimberly:
Certainly, there are business considerations in expanding into any new area, but we found that the CFPB has been unsympathetic as well as the DOJ has been unsympathetic to the fact that the market may be saturated by other lenders who have a market capture in those areas. That is all I have to add. One other point that I wanted to make is that you know. The CFPB and the DOJ are not necessarily limiting their redlining enforcement to mortgages. Um, we are starting to see some inquiries into other financial service products. For example, if you are a bank that offers a credit card program, it is still important to make sure that you are advertising and offering the service throughout your footprint and making sure that your footprint is fair from a redlining perspective.
Rhonda:
I think it is easy for people to overlook outside of the mortgage space because everybody thinks of redlining as in neighborhoods and in city blocks. Thank you so much for bringing that up. I think it is really important for other areas in the financial services to be really attentive at making sure that they are not creating the imaginary redlining with the way that they are advertising their products. Courtney, a few moments ago, you were talking a little bit about some of how the FDIC was a part of that referral process over to the DOJ in the redlining instance. But, it seems like the FDIC has been really active, too, as it applies to how people are representing and utilizing the FDIC title specifically. I have 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 is an emerging space and it is continuing to have some nuances that folks are just not sure about. I would love to hear your wisdom on that.
Courtney:
Sure, absolutely. The matter that I was going to discuss, I realized just yesterday that there was basically a duplicative one that came out just a couple of weeks ago that I will touch on too. Back in February of this year, also, the FDIC had issued letters demanding that two companies, one was a cryptocurrency exchange, and the separate entity was a non-bank financial servicer provider demanding that they cease and desist from making alleged false and misleading statements about FDIC deposit insurance. Separately, the FDIC had also directed two websites of separate companies to remove similar alleged false and misleading statements about the nature of FDIC insured status of that cryptocurrency exchange. The FDIC alleged that the entities had stated that they were FDIC-insured when they actually were not.
Courtney:
The FDIC Act prohibits anyone from representing that an uninsured product is FDIC-insured or misrepresenting the extent of deposit insurance. The FDIC here claimed that the companies had also misused the FDIC name or logo, kind of in furtherance of that alleged misrepresentation. Then what I was just alluding to at the very beginning here was that just two weeks ago, the FDIC made a very similar demand against another crypto non-bank. We continue to see them pretty active, as you mentioned, in the crypto space, with these demand letters in particular.
Rhonda:
It just seems like it is not going away. It is the monitoring, especially for the companies themselves, just the importance of that monitoring. 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.
Kimberly:
Yeah. Oftentimes it is not intentional at all. We see these programs set up in such a way that they just do not qualify for FDIC insurance because the requirements were not met, and they are not particularly difficult requirements, but they are things that, you know, kind of get overlooked. That is what generates a lot of these actions. Obviously, only a bank can be a member bank of the FDIC. First and foremost, non-banks and crypto companies, they cannot really represent that they are FDIC-insured or that any funds that they hold are FDIC-insured unless those funds are actually held perhaps in a custodial manner at an FDIC-insured bank where they would set up in such a way that that insurance would pass through the non-banks account to the people who actually own the funds.
Kimberly:
We see a lot of this in these bank FinTech partnerships these days where a FinTech wants to offer an account or a payment product or a debit card to consumers. They want to be FDIC-insured. That is all fine and good, that is definitely possible. But what you need to do is the bank or the non-bank, if they are appropriately licensed, needs to set up an account at the bank that is either gonna be titled in the name of the insured deposit or their customer. Or what is more common is you do not even have individual accounts, but you have some sort of omnibus pooled account, and that is either going to be held in the name of the bank or in the name of the FinTech if they are actually licensed to hold that money. Now the problem with that is that the titled account owner would typically be the depositor who is insured, and that insurance is $250,000 per person per bank.
Kimberly:
So if you have got the name of the FinTech company on that account, and they are holding money for other people, each person is not insured for $250,000 unless you can meet the additional requirements for pass-through insurance. In order to get passed through insurance, the titling on the account has to show that money is being held either by the bank or by the FinTech company in a custodial manner for the benefit of these individual beneficiary customers. Then there has to be record keeping that is either done by the bank or adopted by the bank, even if it is done by the FinTech company which shows exactly who owns what money in that account and who the beneficiaries are, and in what amount. If all those requirements are met, then the individual depositors would typically be eligible for deposit insurance on a pass-through basis, even though they do not have an individual account at the bank or at the tech company.
Kimberly:
Those formalities, they are not typically a big deal, but they are things that can just be done incorrectly and it entirely makes your customers ineligible for FDIC insurance. Then if you misrepresent the insurance status, that is when the FDIC can pursue enforcement on that. Then, one additional thing I will say about this is there has been a rise in these deposit suite programs after the failures of Silicon Valley Bank and others. The reason for that is because so many, as we saw so many big companies were at risk of losing a lot of their money because the FDIC insurance only goes up to $250,000 per person, per bank. It is just not realistic for a lot of companies to hold 250 here, 250 there, and have all these different operating accounts.
Kimberly:
It is just not feasible. Where that left a lot of people when we were waiting over the weekend for the FDIC to say something about Silicon Valley Bank is all these depositors thought they were going to lose everything over 250, that was at SVB. After that happened, we saw huge explosions in sweep accounts. What a sweep program is, for those of you who do not know, there is a deposit sweep network where they have a number of different participating banks. For the purposes of this example, let us say that there are four banks participating. Let us say I have an account at Bank One and I have a million dollars that I want to deposit at Bank number one, but I only get $250,000 of insurance per bank. So what the Sweep Network does is they take the excess funds over 250 and then they sweep them out into the other four banks.
Kimberly:
I can get up to a million dollars in insurance and then all of my accounts and funds are insured. That is great. However, in order to do that, we have to meet the formalities of the FDIC insurance at every single bank. As we said, what typically happens is there will be maybe one big pooled account where everyone in the Suite account, everyone in the Suite program has their funds pooled in this one account. One of the banks will have some sort of custodial account that holds all that money, and then they have to keep records of every single person who has money in every single bank where those funds are held in that suite network. It is a bit of an undertaking, but it is possible. Now we are seeing quite a big increase in the use of these programs because companies can get tens of millions of dollars in insurance for their funds if they want to keep cash on hand.
Rhonda:
Yeah, I noticed that also, like a lot of local municipalities, they have been doing more sweeping ever since that happened because small towns cannot afford to lose their money. Definitely, it is something that I think folks need to really learn about those sweep accounts and why they are so important and critical to maintaining the money over the $250,000 threshold.
Kimberly:
Yeah, that is right. The other thing too is not all sweep programs are created equally. Over that weekend when we were wondering what SVB was gonna do, we had clients come to us and ask I have the sweep agreement, am I okay, where is my money? It is. I do not think it is all at SVB, I think it is swept to these other banks, but I do not know. Unfortunately, some of the suite programs did not guarantee that the funds would even be swept into FDIC-insured accounts. It is really important in evaluating these suite programs that it is actually swept into the account and not maybe some kind of uninsured investment account or uninsured money market account. There are types of sweeps that really do not guarantee that insurance. It is really important to read these agreements very carefully.
Rhonda:
Wow. Well, thank you. That was very insightful and useful information. Hopefully, everybody out there is taking good notes because there is a lot to this, and you can definitely find yourself on the wrong end if you are not informed and well-informed.
Ashley:
Thanks for listening to this episode of the COMPLY podcast. If Fair Lending is something you would like to learn more about, we have several resources for you, one of which I will 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. PerformLine 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.performline.com. And for the most up-to-date pieces of industry news events and content, be sure to follow PerformLine on LinkedIn. Thanks again for listening, and we will see you next time.
Rhonda McGill 
Xavier Holland