U.S. consumer bureau’s first criminal referral is a warning for regulated banks

May 15, 2013

By Emmauel Olaoye, Compliance Complete

WASHINGTON, May 15 (Thomson Reuters Accelus) – Lenders who work closely with unregulated financial companies should conduct a thorough background check on the track record of such companies if they want to avoid being sanctioned by regulators.

The advice comes a few days after federal prosecutors charged debt settlement company Mission Settlement Agency and four individuals with mail and wire fraud. The charges were the result of allegations that the defendants ran a scheme that victimized more than 1,200 people across the United States.

Mission, through its principal Michael Levitis, charged borrowers who owed money on credit cards and loans a $49 fee to cut their debts. But federal prosecutors say Mission failed to reduce the debts of its customers and charged excessive fees for doing little or no work.

From mid-2009 to March 2013, 2,200 customers paid nearly $14 million for Mission’s services. Out of that money, Mission paid just $4.4 million to creditors, prosecutors said. Mission kept $6.6 million of the money as fees.

The case was the first criminal referral from the Consumer Financial Protection Bureau, which was created after the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. A spokesman for the CFPB said the agency would be referring other cases for criminal prosecution but declined to give specific details on how many cases the agency planned to refer to the Department of Justice.

Paul Schieber, a shareholder at the law firm Stevens & Lee, said banks who work with unregulated financial companies needed to carry out thorough checks on their partners past behavior to avoid being on the wrong end of an enforcement action.

“Once you get past the black and white of the new regulations, banks have to start thinking about their other relationships to see whether [this is a] relationship that the CFPB will review,” Schieber said.

“The CFPB hasn’t taken any aggressive action in that regard yet but they certainly have the flexibility and they can call the banking agencies to work with them,” Schieber said.

The CFPB has no criminal enforcement authority. In the course of its work, its examiners can refer cases to the Department of Justice for criminal prosecution if they find evidence that a regulated firm has violated federal criminal law.

When conducting an examination, its examiners look at issues such as potential legal violations involving unfair, deceptive, or abusive practices, issues arising from complaints, and specific regulatory compliance issues.

Banks who are making a reasonable effort to comply with the consumer laws have no reason to fear tough sanctions from the CFPB, said Ivan Serchuk, a partner at Todtman, Nachamie, Spizz & Johns, P.C. Serchuk, a former deputy superintendent and counsel to the New York State Banking Department, said a bank was likely to face tough action –such as a criminal referral — if it kept repeating the same mistakes in compliance.

“You worry about a situation where you make a repeated mistake instantly…and the government overreacts and treats you unjustly. That’s where the reputable business people–whether they are in the financial services industry or any other industry — have concerns.”

Serchuk said the establishment of the CFPB simply means banks face more scrutiny over their consumer financial products. Compliance officers would need to pay closer attention to the products and services that their firm offers to ensure that they do not violate the law.

“The more people are looking the more likely they are to find more things that people are doing wrong….In times past there were two referees on the floor in a basketball game. Now there are three. They see more.”

For the CFPB complaint, please click here.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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