RESPA Violations: Inconsistent Enforcement

QUESTION 

I am the General Counsel and Compliance Officer of a mortgage lender in the Northeast. We originate retail and wholesale loans and are licensed in all states and territories. Recently, we had a multistate banking audit. The audit found that some of our Third-Party Originators (TPOs) had violated RESPA. 

After conducting a servicing quality control audit, we have decided to sue several TPOs for causing these RESPA violations. The problem we’re having is that RESPA does not address its enforcement consistently or comprehensively. It provides specific penalties in some sections but fails to mention remedies for violations in other sections. 

I want some guidance in navigating RESPA’s maze to determine where a private right of action is available and where it isn’t. In particular, I need some advice on how the TRID rule affected RESPA enforcement and private causes of action. 

COMPLIANCE SOLUTIONS 

Servicing Quality Control Audits 

Servicing Tune-up® 

Servicing Compliance 

ANSWER 

The Dodd-Frank Wall Street Reform (Dodd-Frank) and Consumer Protection Act (CPA) may have altered your scenario somewhat. Although courts generally have failed to examine this issue thoroughly, it is important to note that courts have given Chevron deference to the CFPB’s analysis of the topic. However, that approach may be about to change in light of Chevron's demise,[i] which I will discuss a bit below. 

If you’re using outside counsel for this litigation, be sure to retain a firm that has extensive experience in such matters. You can contact me here to discuss a referral. 

I will give you a brief overview with an emphasis on the TILA-RESPA Disclosure Integration Rule (TRID Rule). Let’s first talk history! 

RESPA PENALTIES 

The Real Estate Settlement Procedures Act (RESPA) contains penalty provisions for Section 6, which deals with mortgage servicing and escrow administration);[ii] Section 8, which prohibits kickbacks and unearned fees);[iii] Section 9, which deals with title companies;[iv] and the escrow statement requirements of Section 10.[v] 

RESPA does not include penalties for violations of other sections, such as Section 4 (HUD-1 Settlement Statements), Section 5 (Special Information Booklets and Good Faith Estimates), Section 10 (Limitations on Escrow Accounts), and Section 12 (Fees for Preparation of Truth-in-Lending or Settlement Statements). However, the absence of RESPA penalty provisions may no longer afford defendants the comfort it once did. 

RESPA’s HANDOFF TO TILA 

The TRID Rule, adopted in November 2013, and effective October 3, 2015, introduced another twist to RESPA enforcement. As just stated, RESPA does not provide private rights of action for violations of Sections 4 and 5, the sections regarding Good Faith Estimates and Settlement Statements. The TRID Rule extrapolated some of the RESPA Section 4 and 5 requirements that had previously appeared in Regulation X (implementing RESPA) over to Regulation Z (implementing TILA, the Truth in Lending Act). 

A HISTORY LESSON 

This transmogrification of RESPA Sections 4 and 5 had the effect of expanding RESPA liability by bringing those provisions into the purview of the TILA – and TILA provides for a private right of action. You might think of it as legal and regulatory prestidigitation! 

Now, there was considerable pushback to this switcheroo. One of the biggest gripes was that the TRID Rule would invite consumers to bring lawsuits seeking TILA remedies for RESPA violations. The upshot of this concern was to have the Consumer Financial Protection Bureau (CFPB or Bureau) specify which provisions of Regulation Z, as affected by the TRID Rule, relate to TILA requirements and which relate to RESPA requirements.[vi] 

The CFPB awkwardly responded in this way: 

“While the final regulations and official interpretations do not specify which provisions relate to TILA requirements and which relate to RESPA requirements, the section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provision.” 

And, having side-stepped a formal resolution, the 

“… detailed discussions of the statutory authority for each of the integrated disclosure provisions [in the section-by-section analysis] provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.” 

Obviously, this was hardly a satisfying response. Nevertheless, industry participants implemented the TRID Rule while still expressing considerable concern about the CFPB's choice to fit the changes into Regulation Z. The apprehension stemmed from the fact that TILA and Regulation Z impose substantial liability for disclosure violations, compared to the general lack of liability under RESPA and its implementing Regulation X. 

THE CFPB’S SOLOMONIC DECISION 

The CFPB chose to exclude most closed-end consumer credit transactions secured by real property, other than reverse mortgages, from the early disclosure requirements of Regulation Z[vii] and the standard closed-end disclosure requirements of Regulation Z.[viii] In place of those requirements, the CFPB’s TRID Rule created three sets of provisions for the partially-excluded loans: 

1.     Loan Estimate. 

2.     Closing Disclosure. 

3.     Special Information Booklet. 

This partial exclusion of TRID Rule transactions from certain Regulation Z provisions leaves the rest of Regulation Z in effect for those transactions, as previously applied.[ix]

Conversely, the CFPB fit the TRID changes into the RESPA regime by excluding the loans covered by the TRID Rule from five provisions of RESPA Regulation X: 

·       Special Information Booklet. Regulation X § 1024.6. For loans subject to the TRID Rule, Regulation Z § 1026.19(g) imposes the same Special Information Booklet requirement. 

·       Good Faith Estimate. Regulation X § 1024.7. For loans subject to the TRID Rule, Regulation Z § 1026.19(e) imposes the Loan Estimate requirement. 

·       HUD-1/1A Settlement Statement. Regulation X § 1024.8. For loans subject to the TRID Rule, Regulation Z § 1026.19(f) imposes the Closing Disclosure requirement. 

·       HUD-1/1A Administration. Regulation X § 1024.10, one day advance inspection of HUD-1/1A Settlement Statement, delivery, and recordkeeping requirements. For loans subject to the TRID Rule, Regulation Z §§ 1026.19(e) and (f) impose corresponding requirements for Loan Estimates and Closing Disclosures. 

·       Servicing Transfer Application Disclosure. Regulation X § 1024.33(a). For loans subject to the TRID Rule, Regulation Z § 1026.37(m)(6) requires a corresponding disclosure on page three of the Loan Estimate. 

In general, the TRID Rule leaves these provisions of Regulation X in place for the loans not subject to TRID, that is, reverse mortgages and the few federally related mortgage loans made by creditors not subject to Regulation Z (i.e., lenders who make five or fewer mortgage loans per calendar year secured by dwellings, unless they make more than one High Cost Mortgage  (HCM)). All of the other provisions of Regulation X remain in place for federally related mortgage loans, including those subject to the TRID Rule. 

GOOD LUCK WITH THAT! 

A careful consideration of the CFPB’s detailed discussion in its section-by-section analysis of the TRID Rule suggests that the agency’s response can be summarized as follows: 

Bona Fortuna in separating disclosure liability between TILA and RESPA! 

Take a deep breath and consider this off-the-cuff outline of the TRID disclosures in the context of the statutory framework for each disclosure item through the lens of the following cascade: 

1.     Any prior implementation of that requirement,

2.     The CFPB’s research into the effectiveness of that disclosure from both a consumer and industry perspective,

3.     The Bureau’s alteration (if applicable) of the statutory requirement or previous regulatory implementation of the requirement to respond to its research,

4.     The Bureau’s agency’s reasons for implementing that disclosure as part of TILA-RESPA disclosure integration, and

5.     The statutory support for including the final version of the disclosure. 

And that’s just for starters! 

In most cases, the ultimate statutory support rested on a specific requirement stated in TILA, RESPA, and/or the Dodd-Frank Act, bolstered by the regulatory flexibility offered in TILA § 105(a) (sometimes also § 105(f)), RESPA § 19(a), and Dodd-Frank Act §§ 1032(a) and 1405(b). 

The CFPB relied on regulatory flexibility given by these provisions because the agency found it necessary to reconcile differences between the RESPA and TILA statutes and between sometimes differing provisions within the TILA statute itself. The agency also found it appropriate to alter many of the statutory requirements (and even discard some) based on conclusions drawn from its research. Consequently, many resulting disclosure items are not derived solely from one statute or the other but from one or more statutory starting points and the broad rulemaking authority given to the CFPB by TILA, RESPA, and the Dodd-Frank Act. Obviously, unraveling the final result to separate a RESPA claim from a TILA claim can be a challenging task. 

So far, most courts have taken the CFPB at its word and relied on its analysis of the TRID Rule (and the 2013 RESPA and TILA Mortgage Servicing Rule) to determine whether a private right of action is available for a regulatory violation. But there has been litigation.[x] And now, after the U.S. Supreme Court’s overruling of the Chevron deference,[xi] I think we’re likely to see courts dive more deeply into this issue.

OBSERVATIONS

As suggested above, the U.S. Supreme Court’s overruling of Chevron deference may require courts to ignore the CFPB’s stated “intentions” and look more closely at the underlying statutory provisions.[xii] 

Conceivably, borrowers might add Dodd-Frank Act claims to their RESPA claims. That is, they might claim that violations of RESPA violate the Dodd-Frank Act. Section 1055 of the Dodd-Frank Act offers the possibility of substantially higher penalties than those specified by RESPA – ranging from $5,000 per day for any violation to $1 million per day for a “knowing violation” (adjusted annually to reflect inflation). Whether an enforcement agency must seek Dodd-Frank penalties or may be obtained by consumers in private actions is an open question courts may someday decide. 

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

Lenders Compliance Group

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[i] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)

[ii] 12 USC §§ 2605(d) and 2614

[iii] 12 USC §§ 2607(d) and 2614

[iv] 12 USC §§ 2608(b) and 2614

[v] 12 USC §§ 2609(d)

[vi] Indeed, a rather convoluted view suggested that the CFPB should implement the TILA disclosure requirements in Regulation Z and the RESPA disclosure requirements in Regulation X in order to discourage litigation invoking TILA’s liability scheme for RESPA violations.

[vii] Regulation Z § 1026.19(a)

[viii] Regulation Z § 1026.18

[ix] For example, the Consumer Handbook on Adjustable Rate Mortgages (CHARM) Booklet and ARM Program Disclosure requirements of Regulation Z § 1026.19(b) continue to apply as they did prior to the TRID Rule.

[x] A recent decision by a federal district court in Texas illustrates this issue. Bassett v. PHH Mortgage, 2024 U.S. Dist. (S.D. Tex. June 27, 2024) (magistrate recommendation), approved and case dismissed by 2024 U.S. Dist. (July 16, 2024). Note: This litigation determined, in particular, that 12 U.S.C. §§ 2605(f) and 2614 do not create private causes of action, nor does RESPA provide private causes of action for violations of Regulation X §§ 1024.35 and 1024.39. As support, the court cited several other decisions within its district. The court acknowledged that Regulation X § 1024.41, “unlike the other RESPA provisions at issue…expressly provides for a private right of action.”

[xi] Op. cit. i

[xii] Op. cit. x

Restrictions on Gifts and Promotional Activities

QUESTION 

I am the Compliance Manager of a mortgage lender in the mid-West. Recently, we received a notice from the CFPB after their examination. One of their allegations is that we violated RESPA’s restrictions on referrals involving “gifts and promotional activities.” 

Our General Counsel has asked me not to go into the details. However, he approved my request to ask you a generic question about referrals. We need an “advanced warning” guideline to ensure this violation won’t happen. 

I want to know how to determine when a referral is a violation of RESPA. Maybe you can provide some guidance on whether an arrangement can be deemed an illegal referral. I want to be able to evaluate the arrangement based on a simple set of criteria to determine if it can lead to a referral violation. 

How can I determine if a referral is illegal under RESPA? 

COMPLIANCE SOLUTIONS 

Policies and Procedures 

Referrals Tune-up® 

Advertising & Marketing Compliance 

ANSWER 

It is possible to provide a generic guideline to act as an “advanced warning” of gifts and promotional activities that would likely trigger a violation of the Real Estate Settlement Procedures Act (RESPA). Under RESPA Section 8(a), gifts and promotions generally are “things of value” and, therefore, could, depending on the circumstances, violate RESPA Section 8(a).[i] 

If the gifts or promotions are given or accepted as part of an agreement or understanding for the referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited. 

Here’s an example. A settlement service provider[ii] gives professional sporting event tickets, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) to current or potential referral sources in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a). By the way, the agreement or understanding need not be written or oral; a practice, pattern, or course of conduct can establish it. 

However, in certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X, RESPA’s implementing regulation. 

Regulation X allows normal promotional and educational activities directed to a referral source if the activities meet two conditions: 

1.The activities are not conditioned on the referral of business.

2.The activities do not involve defraying expenses that otherwise would be incurred by the referral source. 

First Condition 

The first condition is that normal promotional and educational activities must not be conditioned on the referral of business. 

Factors that are relevant to whether the first condition is met may include the following: 

• Whether the item or activity is targeted to referral sources. If an item or activity is targeted narrowly towards prior, ongoing, or future referral sources, this could indicate that the item or activity is conditioned on referrals of business. 

Example A 

Suppose a promotional item is provided only to a limited set of settlement service providers who also happen to be current referral sources or an intentionally targeted group of future referral sources. In that case, this may suggest that the recipient is receiving the promotional item because of past or future referrals, and thus, the promotional item may be conditioned on referrals. 

Example B 

If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, then that may indicate that the promotional item is not conditioned on the referral of business. 

How often is the item or activity given to the referral source? If a referral source is routinely and frequently provided with an item or included in an activity, and particularly if that referral source is provided with the item or included in the activity more often than other persons, this could indicate that the item or activity is conditioned on referrals. 

Second Condition 

The second condition is that normal promotional and educational activities must not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident to those settlement services. 

Factors that may be relevant to whether the second condition is met may include the following:

• Whether the item or activity involves a good or service that the referral source would otherwise have to pay for itself. 

Example A 

Suppose a promotional activity involves paying for mandatory continuing education expenses, certifications, licenses, or other items that the referral source would otherwise need to pay for on its own. In that case, the promotional item or activity is more likely to defray expenses. 

Example B 

Similarly, suppose the activity involves paying for the referral source’s office supplies branded with the referral source’s name, contact information, or logo. In that case, this is more likely to defray the expenses of the referral source. But suppose the activity involves providing the referral source with office supplies featuring the name, contact information, or logo of the entity providing the supplies. In that case, this is less likely to defray expenses, since it is unlikely that the referral source would otherwise use its own funds to purchase office supplies featuring the name and information of another entity. 

If the particular item or activity does not meet either of these conditions, it is not a normal promotional or educational activity meeting the conditions in Regulation X.

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

Lenders Compliance Group

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[i] 12 CFR § 1024.14

[ii] 12 CFR § 1024.2(b)(29)

Fee Splitting Violations

QUESTION 

We were cited for two RESPA violations. The first thing we supposedly had was an undisclosed referral arrangement. But in our view, there was no increase in our charges, so we do not believe we did something wrong. 

The other violation was about fee splitting. I became a mortgage broker a year ago. I am not a compliance person, and I don’t even know what that is, but based on the banking department’s letter, it means we had an arrangement with a company to split the fees on a mortgage loan. Now, I disagree about us even having such an arrangement, let alone splitting any fees. I now have to prove it to the banking department. 

I need to know more. I want to understand how these violations could cause such a big response from the banking department. I have other questions, but these are the two that matter most to me. I contacted your Brokers Compliance Group to discuss everything. 

Did we actually violate RESPA if there was no increase in our charges? 

Are there exemptions to the prohibitions on referral fees and fee splitting? 

COMPLIANCE SOLUTIONS 

Brokers Compliance Group 

Policies and Procedures 

ANSWER 

RESPA (Real Estate Settlement Procedures Act) refers to a “thing of value” as including, but not limited to, any payment, advance, funds, loan, service, or other consideration.[i] To broaden this concept, a “thing of value” includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicative payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or fee rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. My firm has come across many types of “thing of value” arrangements at one time or another. You get the point! 

By the way, the term “payment” is effectively synonymous with the giving or receiving of any “thing of value” and does not require a transfer of money.[ii] 

If you have a particular arrangement for referrals, and you are not sure if the arrangement violates RESPA, contact a competent compliance professional to discuss your plans. 

With respect to your view that there was no increase in the charge, therefore, there should be no violation of RESPA, you are 100% wrong. The fact that the transfer of a thing of value does not result in an increase in any charge made by the entity giving the thing of value is irrelevant in determining whether the act is prohibited.[iii] 

The answer about exemptions[iv] to the referral and fee splitting prohibitions is both specifically outlined in RESPA with examples. I will provide a brief outline here; however, a compliance evaluation should be undertaken to ensure any plan based on an exemption is thoroughly vetted by a compliance professional. 

The RESPA specifically provides seven exemptions to referral and fee splitting prohibitions. 

The RESPA exemptions are: 

1.   A payment to an attorney at law for services actually rendered; 

2.   A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; 

3.   A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan; 

4.   A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; 

5.   A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers;[v] 

6.   Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or 

7.  An employer’s payment to its own employees for any referral activities. 

I would argue that each of these examples requires significant explication by a compliance professional who has core competency in interpreting and applying the requirements of RESPA and Regulation X. 

There has been some confusion about different versions of exemptions for payments to employees. The exemptions from the referral fee and fee splitting prohibitions are contained in Regulation X, the implementing regulation of RESPA.[vi] The Code of Federal Regulations includes an Effective Date Note[vii] that sets forth a second version of the same version with different provisions regarding payments to employees. Congress prohibited the Department of Housing and Urban Development (HUD) from implementing the revised version until July 31, 2007, and it required HUD to provide advance public notice if it ever intended to implement the different provisions. But, HUD has never acted to implement the revised version. 

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

Lenders Compliance Group

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[i] 12 USC § 2602(2)
[ii] 12 CFR 3500.14(d)
[iii] 12 CFR § 3500.14(g)(2)
[iv] 12 CFR 3500.14(g)(1)
[v] The statutory exemption refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.
[vi] Regulation X § 3500.14(g)(3)
[vii] 12 CFR § 3500.14(g), Effective Date Note

Risk-Based Pricing Notice: Timing

QUESTION 

We have a question about the risk-based pricing method. Our procedures already cover the required format of the pricing notice and the types of credit covered. What we want to know is when we are required to provide the risk-based pricing notice for closed-end credit transactions. Also, a question that concerns us is if we need to provide it if we are not going to do the loan. 

When are we required to provide the risk-based pricing notice for closed-end credit? 

Do we have to provide the risk-based notice if we don’t do the loan? 

COMPLIANCE SOLUTION 

Policies & Procedures 

ANSWER 

FACTA  (Fair and Accurate Credit Transactions Act), which amended the FCRA (Fair Credit Reporting Act), added a requirement that mandates that if you use a consumer report in connection with an application for, or a grant, extension, of other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through your financial institution, based in whole or in part on a consumer report, then you must provide a notice to the consumer containing specific information. 

The purpose of the requirement is to alert the consumer as to how information in their consumer report and their credit score can affect the terms of credit they receive. It is meant to enable the consumer to assess if there are any errors in their consumer report and, further, allows them to understand better how certain factors may influence their credit standing. 

Timing is a central feature of the risk-based pricing notice (“Notice”). The timing of the Notice depends on the particular situation. However, I can summarize the general timing rules for a closed-end credit transaction.

Suppose you are granting, extending, or offering some other provision of closed-end credit. In that case, the Notice must be provided to the consumer before consummation of the transaction – but not earlier than the time the decision to approve an application for, or a grant, extension, or other provision of, credit is communicated to the consumer by the financial institution required to provide the Notice. 

In the case of a review of credit that has been extended to a consumer, the Notice must be provided to the consumer at the time the decision to increase the APR (Annual Percentage Rate) based on a consumer report is communicated to the consumer by the financial institution required to provide the Notice. 

If no Notice of the increase in the APR is provided to the consumer before the effective date of the change in the APR, the Notice must be provided no later than five days after the effective date of the change in the APR.[i] 

Now, your other question is often asked because the answer does not seem intuitive. You asked if a Notice must be provided if a financial institution does not grant, extend, or otherwise provide credit. 

The short answer is No! 

The requirement to provide a Notice applies only when, based in whole or in part on a consumer report, a financial institution grants, extends or otherwise provides credit to a consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that financial institution. That leads to a brief discussion of adverse action. 

There is an express exception to the Notice requirement when a consumer is provided with an adverse action notice.[ii] Potentially, a financial institution may need to provide a Notice if it grants, extends, or otherwise provides credit and the consumer does not accept the credit, because the deadline by which a Notice must be provided may be reached before the financial institution learns that the consumer will not accept the credit.

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

Lenders Compliance Group

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[i] 75 FR 2724, 12 CFR § 222.73(c); 16 CFR § 640.4(c)

[ii] 75 FR 2724, 2731

Quality Control Red Flags and Automated Fraud Alerts

QUESTION 

I am the Chief Risk Officer of our company, a mortgage lender in the northwest. We have a nationwide footprint and an excellent Chief Compliance Officer. A persistent problem that she and I talk about is quality control findings, especially when the QC reports are showing fraud and misrepresentation. As a lawyer, I am cognizant of federal and state laws involving mortgage fraud. 

However, we want a Red Flags approach. We want to put Red Flag checks into our underwriting processes. Our IT department is ready to install them. However, it seems that Red Flags have to be brought in from many other areas other than quality control, such as anti-money laundering and identity theft prevention screening. Our interest, though, is concerning quality control flags. We want to layer them on the other Red Flags in our processing systems. 

What are some Red Flags relating to quality control that may be installed in our loan origination system? 

What suggestions do you have for digitizing flags, alerts, and Red Flags picked up by quality control? 

COMPLIANCE SOLUTIONS 

Quality Control Audits 

QC Tune-up®

ANSWER 

Although an objective of Quality Control (QC) is to identify and reduce fraud and misrepresentation, Red Flag awareness arising out of QC is important because it alerts to risks that can destabilize many areas of a company’s risk management areas. Please download the White Paper I published on Risk Management Principles (PDF). 

Red flag identification should be part of both post-closing and prefunding QC processes; indeed, prefunding QC is uniquely positioned to support production teams in identifying and remedying these defects. The prefunding Red Flags should be positioned in your prior-to-closing procedures. 

I hear all the time about the importance of Red Flags. But I have yet to hear a great definition of what should be considered Red Flags. Are Red Flags just itemized factors listed on an automated underwriting system, credit report, or even a mortgage fraud screening tool? Putting them in an LOS requires logic to go with it. A Red Flag is “something that indicates or draws attention to a problem, danger, or irregularity,” according to Merriam-Webster. Irregularities can take many forms, and you must ensure the logic needed to digitize those forms in a constantly changing business environment. 

The irregularities can topple an otherwise dependable approach to QC. A strong QC program is notable for its ability to assess all files for any irregularities to determine both the materiality and the cause of each irregularity. Such causes include human error, process gaps, data irregularities, misinformation, misrepresentation, and fraud. Human errors are likely to be isolated. Sure, irregularities can be identified through the use of digital technologies or simply by comparing similar data in various locations throughout the loan file (i.e., Social Security Number being consistent on all documents in the loan file). And, misinformation can be corrected through confirmation. However, multiple instances of error and misinformation may indicate misrepresentation or fraud. 

There are generally three types of Red Flags detection sources that should be installed in the logic of your loan origination system. These are digitized, automated systems such as credit reports and GSE engines, such as Desktop Underwriter and Collateral Underwriter. Digitized types function according to specific logic, for instance, by means of data validation and reconciliation, pattern recognition, and fraud detection. Each often requires a human to check online search engines to identify corroborating information, review documents for inconsistencies, and consider written or verbal reverification of information. 

You are not going to be able to rely solely on Red Flags in your loan origination system to catch mortgage fraud. At best, such embedded Red Flags will alert you to a potential threat. I would be very cautious in allowing Artificial Intelligence (AI) to trigger systemic loan flow decisions, such as issuing Adverse Action based entirely on its Red Flag utility. AI is still in the nascent stage of development. I’ve published several articles on Artificial Intelligence, if you want to consider my perspective. 

It is laudable as a matter of governance and risk management that you plan to use digital solutions that have the potential to enable QC to be more effective. Automated fraud tools can be installed in the LOS logic requirements. I also think you should watch for new solutions to automate lower-risk data accuracy elements, leaving human resources free to perform more complex reviews to some extent. Keeping your digital solutions deployed within operations must be accompanied by monitoring and periodic testing. Nevertheless, digital solutions also have limitations, and you must control for those limitations! Over-reliance on any technological solution may cause more harm than good. 

Red Flags caused by QC do not and cannot stand alone. They are part and parcel of the entirety of the loan origination process. Take a look at the prefunding checklist that your QC auditor uses. Suppose the prefunding screen is convertible into a technological solution, which thereby effectuates a means to identify loan origination risks. In that case, your list of Red Flags will grow and change over time. 

For instance, here are just a few such tools: fraud detection systems; investors’ software, such as Fannie Mae’s CU; and digital applications and proprietary tools for scrubbing internal data. Using tools such as these to identify Red Flags and elevated risk can be helpful in determining the loans that the QC auditor should sample. Other tools exist that may also be helpful, but to ensure you are selecting the best tools for your organization, you should develop a method for selecting, testing, and monitoring the efficacy of the tools you use. 

For a long time, I have heard of QC companies that provide their version of automated QC auditing, including color-coded tabs, all manner of interactive feedback, online transactions, digitized metrics, and supposedly automatic QC auditing at the loan level. Let me tell you a fact: automated risk and data-screening tools complement but do not replace a comprehensive prefunding QC program. My firm uses advanced technology for QC auditing of client files, and we audit thousands of files a year, but we never rely solely on a system solution to replace our prefunding or post-closing QC reviews. 

We always provide human analysis to prefunding and post-closing QC audits. No matter how sophisticated the automated tool is, it can fail or have gaps. If you plan to install logic that gleans prefunding QC findings in particular, you must continuously monitor for results that may reveal deficiencies while also highlighting new logic for tool enhancements and improvements. False positives can turn up in automated solutions, and there goes efficiency – along with the possibility of canceling a viable loan! Adjustments to testing parameters must be considered to ensure the proper balance between defect identification and false positives. In any event, you should continue to think of ways the tool can fail and how to fill those gaps operationally. 

If automated hard stops are not possible, implement a funding condition or post-funding review process to ensure loans with unresolved eligibility, compliance, or fraud flags do not get delivered to investors. Inevitably, some of these alerts become Red Flags that may be specific to your loan products, complexity, origination channels, geographic areas, and loan originator relationships (i.e., retail, wholesale). You should ensure that any automated tool is customized for your company’s desired controls before its use. And reject out-of-the-box settings that do not align with your organization’s unique risks. 

You do not mention the correlating action that should be taken when a Red Flag is triggered. That must be built into a system solution, with clear escalation paths for when the tool identifies flags or alerts, including individual management authorities and a sequence of escalation. It is essential that reporting, evaluation, and oversight of digitized system solutions, such as I have described above, are independent of the origination and underwriting staff. 

A final word about the “checkbox” approach to Red Flags triggered by prefunding or post-closing QC: the output of your tools should promote action that reduces a “check the box” approach. This may seem counterintuitive, but if the tool operates efficiently, it should constantly update and integrate its analytics. Therefore, your IT should consider integrating your tools into the loan origination system. Integration creates a basis for strategic loan selections and system hard stops for loans with defined eligibility, compliance, or fraud flags.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Elder Theft and Elder Scams

QUESTION 

Our bank formed a group to prevent elder financial exploitation. Most of our clients are seniors and elderly, so we want to be sure our customers are protected from being exploited. They revised a number of screening procedures to catch fraud. They report directly to our Chief Compliance Officer. 

In the last year, we have seen a substantial increase in elder financial exploitation. What bothers me is that most of the crooks seem to get away with financially exploiting older people because we sometimes catch the crooks after the fraud happens. This means we are constantly revising the filters, and we are continually having to update our training. 

As a member of the group, I have been asked to contact you to help us further develop our policy and procedures involving the prevention of elder financial exploitation. In particular, we are interested in outlining the difference between Elder Theft and Elder Scams because we plan to separate the policy into those two primary parts. We have read your articles on elder financial exploitation and have heard you speak on this subject. We need some assistance in developing better filters. 

What is the difference between Elder Theft and Elder Scams? 

COMPLIANCE SOLUTIONS 

EFE TUNE-UP®

Elder Financial Exploitation - Prevention 

POLICIES AND PROCEDURES 

ANSWER 

I have published extensively on the financial abuse and scams referred to as Elder Financial Exploitation (EFE). My efforts have included numerous articles and published White Papers, lectures, and webinars, being a panelist in organizational conferences, and, of course, working with clients who needed to file a Strategic Activity Report (SAR) or notify the FBI with respect to EFE concerns. 

Here are a few of my writings on this subject: 

Suspicious Activity and Elder Financial Abuse 

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

Elder Financial Exploitation 

Elder Financial Exploitation: Prevention and Filing SARs 

Elder Financial Abuse Epidemic 

Elder Financial Abuse: Prevention and Remedies (PDF) 

Elder Financial Abuse (PDF) 

The Articles section of our website has several articles that directly and indirectly relate to Elder Financial Exploitation. Use them to help build your policy and procedures document. 

My firm even provides a free checklist of Behavioral and Financial Red Flags – Elder Financial Abuse! Contact us for a copy! 

I will tell you straight out: EFE seems to keep happening relentlessly – and growing rapidly. 

My answer here is going to be in the form of a “preamble” to your policy. Consider using these preambles as a base for the further formulation of your policies and procedures relating to Elder Theft and Elder Scams. 

For many years, amid rampant fraud and abuse targeting older adults, FinCEN has urged financial institutions to detect, prevent, and report suspicious financial transactions. Every year since 2006, FinCEN has issued an advisory in support of World Elder Abuse Awareness Day[i], commemorated on June 15^th. The statistics are not getting better. They are worsening. 

For instance, depository institutions filed 46,888 EFE-related BSA reports from March 2023 to May 2023, accounting for nearly 30 percent of the total EFE-related reports filed in the review period. This pace appears to be continuing, as FinCEN received an average of 15,993 EFE BSA reports per month between 15 June 2023 and 15 January 2024.[ii] You do the math! 

Before we get too far into my response, let me put down a working definition of EFE: 

Elder Financial Exploitation (EFE) is the illegal or improper use of an older adult’s funds, property, or assets. Older adults are typically considered individuals aged 60 or older. EFE consists of two primary subcategories: elder theft and elder scams. 

Elder theft consists of schemes involving the theft of an older adult’s assets, funds, or income by a trusted person. Elder scams involve the transfer of money to a stranger or imposter for a promised benefit or good that the older adult did not receive. EFE is one type of elder abuse, which includes physical, emotional, and financial abuse. Elder abuse and EFE definitions vary statutorily by state.[iii] 

Elder theft often occurs when persons known and trusted by older adults steal victim funds, while elder scams involve fraudsters with no known relationship to their victims. Indeed, some scammers are located outside the United States.[iv] Sadly, elder theft is likely to be underreported and can go undetected because the perpetrators are typically individuals whom the victim trusts.[v] 

FinCEN analysis of Bank Secrecy Act (BSA) information indicates that elder scams mostly rely on less sophisticated scam typologies. However, some scammers make their scams more complex by blending multiple scam types into one victimization and using victims both as a source of funds and to launder illicit gains.[vi] 

Scammers are often organized, with fraud rings ranging from small groups of individuals to organizations with hundreds of members. There are violent criminal organizations known to carry out fraud schemes, including EFE-related fraud. 

Unfortunately, perpetrators of EFE schemes often do not stop after first exploiting their victims. In both elder theft and elder scams, older adults are frequently re-victimized[vii] and subject to potentially further financial loss, isolation, and emotional or physical abuse long after the initial exploitation due to the significant illicit gains at stake. Scammers may also sell victims’ Personally Identifiable Information (PII) on the black market to other criminals who continue to target the victims using new and emerging scam typologies.[viii] 

ELDER THEFT 

Elder theft is so insidious because the family of the victim is often the perpetrator. Another form of elder theft is where a non-family caregiver financially abuses the relationship from t a position of trust. In 2019, FinCEN analyzed SARs based on elder theft narratives.[ix] The analysis found that a family member was involved in the theft of assets from older adults in 46 percent of elder theft cases reported between 2013 and 2019. 

Who were these perpetrators? Family members, familiar associates, acquaintances such as neighbors, friends, financial services providers, business associates, or those in routine close proximity to the victims. 

Considerable studies have been undertaken by senior citizen organizations, FinCEN, DOJ, and many state governmental authorities to find a pattern to this criminality. It turns out elder theft often follows a similar methodology in which trusted persons may use deception, intimidation, and coercion against older adults in order to access, control, and misuse their finances. Criminals frequently exploit victims’ reliance on support and services and will take advantage of any cognitive and physical disabilities.[x] Environmental factors such as social isolation lead to elder theft. 

The criminal’s goal is to establish control over the victims’ accounts, assets, or identity.[xi] Here are just a few of the ways in which financial exploration takes place. The elder may be financially abused by the exploitation of legal guardianships[xii] and power of attorney arrangements[xiii] or the use of fraudulent investments such as Ponzi schemes[xiv] to defraud older adults of their income and retirement savings. These relationships lead to repeated abuse, as the trusted person repeatedly abuses the victims by liquidating their savings and retirement accounts, stealing Social Security benefit checks and other income, transferring property and other assets, or maxing out credit cards in the name of the victims until most of their assets are stolen.[xv] 

ELDER SCAMS 

Criminals involved in elder scams defraud victims into sending payments and disclosing PII under false pretenses or for a promised benefit or good the victims will never receive. These scammers are often located outside of the United States and have no known previous relationship with the victims. 

Like Elder Theft, a pattern of criminality can be identified. Elder scams often follow a similar methodology in which scammers contact older adults under a fictitious persona via phone call, robocall, text message, email, mail, in-person communication, online dating apps and websites, or social media platforms. In order to appear legitimate and establish trust with older adults, scammers commonly impersonate government officials, law enforcement agencies, technical and customer support representatives, social media connections, or family, friends, and other trusted persons. 

There are several typical types of elder scams. To name but a few: 

·       Government Imposter Scams; 

·       Romance Scams;[xvi] 

·       Emergency or Person-in-Need Scams; 

·       Lottery and Sweepstakes Scams; 

·       Tech and Customer Support Scams. 

This set-up is a con that evokes stress in the victim. Perpetrators often create high-pressure situations by appealing to their victims’ emotions and taking advantage of their trust or by instilling fear to solicit payments and PII. This is, in effect, an Imposter Scam.[xvii] Scammers often request victims to make payments through wire transfers at money services businesses (MSBs) but are increasingly requesting payments via prepaid access cards, gift cards, money orders, tracked delivery of cash and high-valued personal items through the U.S. Postal Service, ATM deposits, cash pick-up at the victims’ houses, and convertible virtual currency (CVC).[xviii] 

Money Mules are a particularly deceitful way to trap victims into an elder scam.[xix] A money mule is a person who, wittingly or unwittingly, transfers or moves illicit funds at the direction of or on behalf of another, in this case, transfers or moves illicit funds at the direction of the scammers. The victim of an elder scam can also serve as a money mule: the scammer convinces the victim to set up a bank account or Limited Liability Corporation (LLC) in the victim’s name to receive, withdraw, deposit, or transfer multiple third-party payments from other victimized older adults to accounts controlled by the scammer under the illusion of a “business opportunity.” In some circumstances, victims of EFE acting as money mules may be prosecuted for this illegal activity and are liable for repaying the other victims. They may also be subject to damaged credit and further victimized through their stolen PII.[xx] 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] World Elder Abuse Awareness Day, Administration for Community Living, launched by the International Network for the Prevention of Elder Abuse and the World Health Organization at the United Nations.

[ii] Financial Trend Analysis, Elder Financial Exploitation: Threat Pattern & Trend Information, June 2022 to June 2023, April 2024, Financial Crimes Enforcement Network.

[iii] Memorandum on Financial Institution and Law Enforcement Efforts to Combat Elder Financial Exploitation, Consumer Financial Protection Bureau (CFPB) and FinCEN, August 30, 2017; see also, Elder Abuse and Elder Financial Exploitation Statutes, U.S. Department of Justice (DOJ).

[iv] Advisory on Elder Financial Exploitation, FinCEN Advisory, FIN-2022-A002, June 15, 2022

[v] Recovering from Elder Financial Exploitation, A Framework for Policy and Research, September 2022, Consumer Financial Protection Bureau

[vi] Phantom Hacker Scams Target Senior Citizens and Result in Victims Losing their Life Savings, Alert Number I-091223-PSA, September 29, 2023, Federal Bureau of Investigations Internet Crime Complaint Center

[vii] For additional information on re-victimization in EFE schemes, see Addressing the Challenge of Chronic Fraud Victimization, March 2021, FINRA Investor Education Foundation (FINRA Foundation), American Association of Retired Persons (AARP), and Heart+Mind Strategies.

[viii] List Brokerage Firm Pleads Guilty to Facilitating Elder Fraud Schemes, September 28, 2020, Department of Justice

[ix] Elders Face Increased Financial Threat from Domestic and Foreign Actors, December 2019, FinCEN Financial Trend Analysis

[x] Idem

[xi] Associate Deputy Attorney General Paul R. Perkins Delivers Remarks at the ABA/ABA Financial Crimes Enforcement Conference, December 9, 2020, Department of Justice

[xii] Court-Appointed Pennsylvania Guardian and Virginia Co-Conspirators Indicted for Stealing Over $1 Million from Elderly Wards, June 30, 2021, Department of Justice

[xiii] Franklin, Tennessee Couple Charged With Defrauding Elderly Widow of $1.7 Million, May 12, 2021, Department of Justice; and Former Waterloo Medicaid Provider Sentenced to More than Five Years in Federal Prison for Defrauding Elderly Victim, June 28, 2021, Department of Justice

[xiv] Arizona Man Sentenced for Multimillion-Dollar Nationwide Investment Fraud Scheme, March 15, 2021, Department of Justice

[xv] Annual Report to Congress on Department of Justice Activities to Combat Elder Fraud and Abuse, October 18, 2021, Department of Justice

[xvi] In Romance Gone Awry: A Tale of AML and Negligence, April 14, 2022, I outline litigation involving a Romance Scam. Visit https://mortgage-faqs.blogspot.com/2022/04/romance-gone-awry-tale-of-aml-and.html. See O’Rourke v. PNC Bank, 2022 Del. Super. (Del. Sup. Ct. February 15, 2022)

[xvii] The Federal Trade Commission provides extensive information about Imposter Scams. Visit its webpage How To Avoid Imposter Scams, https://consumer.ftc.gov/features/how-avoid-imposter-scams. See my articles, such as Imposter Robocalls, February 9, 2023, https://mortgage-faqs.blogspot.com/2023/02/imposter-robocalls.html and COVID-19: Imposters and Money Mules, August 6, 2020, https://mortgage-faqs.blogspot.com/2020/08/covid-19-imposters-and-money-mules.html.

[xviii] FBI Warns of a Grandparent Fraud Scheme Using Couriers, Alert Number I-072921-PSAJuly 29, 2021, FBI; New Twist to Grandparent Scam: Mail Cash, December 3, 2018, Federal Trade Commission

[xix] See my article Op. cit. xvi COVID-19: Imposters and Money Mules.

[xx] The FBI maintains a website to increase public awareness of money mules. Visit Money Mules at https://www.fbi.gov/how-we-can-help-you/scams-and-safety/common-scams-and-crimes/money-mules