Elder Financial Abuse: Disclosure, Schemes, and “Red Flags”

QUESTION 

Elder abuse is a big issue because we serve a demographic in Florida consisting of senior citizens and the elderly. Each year, we have incidences of elder abuse. We train our employees on how to identify and report elder financial abuse. But it seems that there’s no end to it. 

We are now updating our policies relating to elder abuse. We have three questions, and we hope you will provide some guidance. We have plenty of advice from our regulator. However, we would like information based on your firm’s experience. Here are our questions. 

· What are we permitted to disclose about an incident of elder financial abuse?

· What are some of the schemes you have encountered to commit elder abuse?

· What are some indicators of elder financial exploitation you often come across?

 ANSWER 

As you likely know, tellers, financial services representatives, and others who regularly interact with customers are in the best position to identify and report this type of problem. Consider them your front line! 

Abuse and exploitation of the elderly are statutorily defined at the state level. Federal guidelines have been issued not only by the federal prudential regulators but also the CFPB, FinCEN, FHA, VA, USDA, and the GSEs. Several states have certain requirements, such as mandatory reporting of suspected issues. You should consult your local bank or credit union association if you do not know your state’s laws. Be sure you are receiving ongoing guidance from compliance professionals. 

I have written extensively on elder financial exploitation. Here’s an article with downloads and links to some of my writing on this subject. 

I will take your questions one by one. 

What are we permitted to disclose about an incident of elder financial abuse? 

Various federal and state authorities either require or encourage reporting this type of information to the appropriate agency. However, many financial institutions were concerned that they might violate their privacy policy and the provisions of the Gramm-Leach-Bliley Act (GLBA) if they reported their suspicions, especially if their state law was mute on the subject. So in 2013, the federal banking agencies and the National Credit Union Administration (NCUA) issued guidance to clarify that reporting suspected financial abuse of older adults to appropriate local, state, or federal agencies does not, in general, violate the privacy provisions of the GLBA or its implementing regulations. 

In point of fact, specific privacy provisions of the GLBA and its implementing regulations permit the sharing of this type of information under appropriate circumstances without complying with notice and opt-out requirements. The guidance set forth exceptions to the GLBA’s notice and the opt-out requirement that, to the extent applicable, would permit the sharing of nonpublic personal information about consumers with local, state, or federal agencies for the purpose of reporting suspected financial abuse of older adults without the consumer’s authorization and without violating the GLBA. 

Those exceptions are: 

·    A financial institution may disclose nonpublic personal information to comply with federal, state, or local laws, rules, and other applicable legal requirements, such as state laws that require reporting by financial institutions of suspected abuse; 

·    A financial institution may disclose nonpublic personal information to respond to a properly authorized civil, criminal, or regulatory investigation, or subpoena or summons by federal, state, or local authorities, or to respond to judicial process or government regulatory authorities having jurisdiction for examination, compliance, or other purposes as authorized; and 

·    A financial institution may disclose nonpublic personal information to protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability. For instance, this exception generally would allow a financial institution to disclose to appropriate authorities nonpublic personal information to report incidents that result in taking an older adult’s funds without actual consent or in reporting incidents of obtaining an older adult’s consent to sign over assets through misrepresentation of the intent of the transaction. 

To the extent specifically permitted or required under other provisions of law, a financial institution may also disclose nonpublic personal information to law enforcement and regulatory agencies or for an investigation on a matter related to public safety. 

What are some of the schemes you have encountered to commit elder abuse?

I could probably fill several spreadsheets with the number of schemes. We’ve come across many in our audits. It seems that the schemers continue to pop up with new ways to commit elder financial abuse. Here are a few schemes that we’ve found over the years.

Misappropriation of income or assets

Perpetrator obtains access to an elder’s social security checks, pension payments, checking or savings accounts, credit or automated teller machine (ATM) card, or withholding portions of checks cashed for an elder.

Charging excessive rent or fees for service

Perpetrator charges an elder an excessive rent or unreasonable fees for basic care services, such as transportation, food, or medicine.

Obtaining money or property by undue influence, misrepresentation, or fraud

Perpetrator coerces an elder into signing over investments, real estate, or other assets through manipulation, intimidation, or threats.

Improper or fraudulent use of the power of attorney or fiduciary authority

Perpetrator improperly or fraudulently uses the power of attorney or fiduciary authority to alter an elder’s will, borrow money using an elder’s name, or dispose of an elder’s assets or income.

Appraiser Coercion

QUESTION

We are a small lender in the southeast. We originate only conventional loans. We are currently licensed in three states. 

Last fall, we had a state banking examination which didn’t go well. The examiner found several problems but the biggest involved how we deal with appraisers. 

The banking department sent us their report, which showed a few instances of “appraiser coercion.” I have to say, this really caught us off guard because we thought that our procedures prevented that from happening. However, now we are facing the potential for serious administrative actions. 

What guidance can you provide on how we could avoid a charge that we coerce appraisers? 

ANSWER

Many companies do not tend to have a comprehensive understanding of appraiser independence. They think of it as a compliance issue, meaning a regulatory matter. But it is much more. There is a view that adopting policies and procedures is a sufficient resolution, but there is hardly much implementation monitoring. 

Appraiser independence, when done correctly, can prevent appraiser coercion. 

You should be monitoring appraiser independence – whether appraisers are staffed, individually retained, or in an Appraisal Management Company (AMC). If you were to have been doing such monitoring, you might have caught the appraiser coercion issues and corrected them. You could have conducted the review internally or used our firm to provide the Appraiser Tune-up. Either way, the decision not to monitor was irresponsible. 

Keep this in mind: appraiser independence covers a broad range of appraisal rules, such as the ECOA appraisal rule. There are many dimensions to ensuring that appraiser coercion is avoided. I will provide a brief list that should help you prepare appropriate procedures. But, remember, without monitoring, your procedures are no more than useless pontifications. 

Notwithstanding the prohibitions that I will outline, a lender may ask an appraiser to consider additional information about a dwelling or comparable properties. A lender may ask an appraiser to provide additional information about the basis for a valuation or correct factual errors in a valuation. And, a lender may withhold compensation for breach of contract or substandard performance as provided by contract. 

Here are some prohibitions that I have compiled. The list is certainly not meant to be comprehensive. 

A lender must not imply to an appraiser that the current or future retention of the appraiser depends on the amount at which the appraiser values a dwelling. Indeed, you must not exclude an appraiser from consideration for future engagement because the appraiser reports a value that does not meet or exceed a minimum threshold. 

Along the same lines, you must not withhold or threaten to withhold payment or partial payment for an appraisal report because the appraiser does not value a dwelling at or above a certain amount; and you must not condition an appraiser’s compensation on loan consummation. 

Trying to influence the appraiser leads into the appraiser coercion ditch quickly. Thus, you shouldn’t attempt to influence an appraiser by withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser. Moreover, a lender must not attempt to influence an appraiser by expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. Avoid the quid pro quo debacle, where a lender attempts to influence an appraiser by conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached or on a preliminary estimate requested from an appraiser. 

One violation we encounter much too often is where a lender attempts to influence an appraiser by asking the appraiser to provide an estimated, predetermined, or desired valuation in an appraisal report before completion of the appraisal report or requesting the appraiser to provide estimated values or comparable values or comparable sales at any time prior to the appraiser’s completion of an appraisal report. Furthermore, you must not attempt to influence an appraiser by providing a minimum reported, anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, other than a copy of the sales contract for a purchase transaction. 

Any form of bribing the appraiser lead straight to administrative action. Put bluntly, a lender must not attempt to influence an appraiser by providing stock or other financial or non-financial benefits to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company. 

Another coercive tactic is where a lender allows the removal of an appraiser from a list of qualified appraisers without prior notice to the appraiser, including written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP), or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal. This prohibition does not preclude the management of appraiser lists for bona fide administrative reasons based on written management-approved policies. 

An adverse finding that comes up in our monitoring reviews occurs where a lender orders, obtains, uses, or pays for a second or subsequent appraisal or automated valuation model in connection with a mortgage loan, unless, of course, the lender has a reasonable basis to believe that the initial appraisal was flawed or tainted. With respect to a reasonable basis in believing an appraisal to be flawed or tainted, that view should be clearly and appropriately noted in the loan file. The appraisal or automated valuation model may be done pursuant to written, pre-established, bona fide, pre-funding or post-closing appraisal review or quality control process (or underwriting guidelines), in which case the lender should adhere to a policy of selecting the most reliable appraisal rather than the appraisal that states the highest value. 

A lender must not ask an appraiser to remove details about the material condition of the property to avoid problems in qualifying certain types of mortgage loans. 

Finally, do not threaten to place an appraiser on a “blacklist” (i.e., an exclusionary list), which is sometimes used to blackball appraisers for refusing to hit a predetermined value.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

Defining a Finance Charge

QUESTION 

We had asked our loan officers to tell us what areas in originating loans seem most complicated to them. Then, we compiled their answers. 

Many things confused them about TILA. They had a decent understanding of consummation and timeliness. However, they were unable to make sense of the finance charge. 

In the 2021 year-end meeting, we decided to contact you. 

What goes into making a finance charge? 

ANSWER 

The finance charge has baffled loan officers and consumers virtually from its inception. There is so much case law and disputes and settlements relating to the finance charge that one would need a detailed map to navigate through the iterations, zooming in and out of the ever-circuitous fractals. I will respond within the limits of this space, so whereas brevity is the soul of wit, for now, it will suffice as no more than a teaser. If there is an ongoing concern, I think you might want to do some training on finance charges. Use a reliable trainer or us. 

Let’s get consummation and timeliness out of the way, as they, along with the finance charge, are three essential concepts that underlie Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA). 

We can define consummation to mean the time when a consumer becomes contractually obligated on a credit transaction. This definition is critical because Regulation Z requires all closed-end credit disclosures to be made to the consumer before consummation. A creditor should not require a consumer to sign and return a commitment letter or other binding loan contract for a closed-end consumer credit transaction unless: (1) timely TILA disclosures have been provided before the document was signed, or (2) the document has been carefully drafted to avoid obligating the consumer to complete the loan transaction. 

With respect to timeliness, while TILA disclosures must be in a form the consumer can keep, the TILA-related disclosures typically are given when the form, such as a note (or retail installment contract), containing the disclosures (on its face) is handed to the consumer to be read and then signed (certainly, before consummation – that is, before the consumer is in any manner obligated on the transaction). Regulation Z states: “The disclosures need not be given any particular time before consummation.”[i] 

But, special timing rules do apply to the integrated disclosures required by TILA and the Real Estate Settlement Procedures Act (RESPA) (viz., Loan Estimates and Closing Disclosures), high-cost mortgage (HCM) disclosures, variable-rate transactions secured by the consumer’s principal dwelling with a term greater than one year, and private education loans. A creditor should not simply show a copy of the disclosures to the consumer before the consumer signs and becomes obligated,[ii] given specific performance requirements: 

“The disclosure requirement is satisfied if the creditor gives a copy of the document containing the unexecuted credit contract and disclosures to the consumer to read and sign; and the consumer receives a copy to keep at the time the consumer becomes obligated. It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing."[iii] 

Now, let’s move on to the finance charge. 

As a generic approach to understanding the finance charge, a recent case in the federal district court in Connecticut helps to set us off on the discussion. It not only defined consummation and timeliness but also provided a good definition of a finance charge. In Sparano v. JLO Auto,[iv] the court noted the specific – some might even say “peculiar” – rules regarding the term “finance charge.” Regulation Z defines “finance charge” as “the cost of consumer credit as a dollar amount.” The term includes[v] 

“…  any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”[vi] 

I have given you a broad starting point. So, now I would like to offer a response directed at your loan officers, those individuals who need practical advice more than cringe-worthy legal theory. I will provide a categorized outline of the types of concerns that often befuddle and confound loan officers. 

Dollar Amount 

The finance charge is the cost of consumer credit as a dollar amount.[vii] This is not often recognized. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the lender as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. 

To determine whether an item is a finance charge, a lender should compare the credit transaction in question with a similar cash transaction. For instance, taxes or registration fees paid by both cash and credit customers are not finance charges. However, inspection and handling fees for the staged disbursement of construction loan proceeds are finance charges. Charges absorbed by a lender as a cost of doing business are not finance charges, even though the lender may consider the costs in determining the interest rate to be charged or the cash price of the property or service sold. Thus, a discount imposed on a credit obligation when a seller-creditor assigns it to another party is not a finance charge as long as the discount is not separately imposed on the consumer.[viii]

Elder Financial Exploitation

QUESTION

Your newsletters and papers on elder abuse really resonate with us. Our bank is located in an area in Florida where there is a high percentage of retired people. We also own a non-bank subsidiary that our retired customers use for various real estate financing needs. 

So, we have considerable experience in looking out for potential elder financial abuse. That said, our non-bank subsidiary is branching to other states, and we would like to know more about the mandatory reporting requirements in states. 

Our compliance department personnel know you have written a lot about this subject, so we feel you could help us identify some of these states and maybe even some laws that we can consider to include in our policies and procedures. 

What states mandate reporting of elder financial abuse? What states have voluntary reporting? Are there a few tips you could give us about monitoring for such abuse? And, are there helpful Best Practices you would suggest? 

ANSWER

Yes. I have written extensively about elder financial exploitation. Go to my article that provides numerous links to my articles and papers on this subject, Elder Financial Exploitation: Prevention and Filing SARs. It seems every time we identify a scam against senior citizens, another one pops up. 

Elders are taken advantage of by scam artists, financial advisors, family members, friends, acquaintances, caregivers, home repair contractors, real estate firms, residential mortgage loan originators, credit repair companies, stockbrokers, accountants, lawyers, collection agents, appraisers, fiduciaries, guardians, unscrupulous professionals and business people (or those posing as such), pastors, annuity salespersons, and doctors. 

A majority of the states now mandate financial institutions and or persons tied to the financial institution to report suspected financial exploitation against seniors and other vulnerable customers to law enforcement and social service agencies. 

Depending upon the state, the applicable law will limit the definition of persons to a subset of persons such as “officers and employees” or cover “any person.” 

Here is the list of the states with mandatory reporting requirements. 

States with Mandatory Reporting Requirements 

As of this writing, the 27 states include: 

 1.       Arizona 

 2.       Arkansas 

 3.      California 

 4.      Colorado 

 5.      Delaware 

 6.      Florida 

 7.      Georgia 

 8.      Hawaii 

 9.      Indiana 

10.     Kansas 

11.     Kentucky 

12.     Louisiana 

13.     Maryland 

14.     Michigan[i] 

15.     Mississippi 

16.     Nevada 

17.     New Hampshire 

18.     New Mexico 

19.     North Carolina 

20.     Ohio 

21.     Oklahoma 

22.     Rhode Island 

23.     South Carolina 

24.     Tennessee 

25.     Texas 

26.     Utah 

27.     Wyoming 

In July 2019, Appendix A of the CFPB’s 2019 Revised Advisory and Recommendations for Financial Institutions on “Reporting of Suspected Elder Financial Exploitation” (“CFPB 2019 Revised Advisory”). The CFPB 2019 Revised Advisory is available HERE.