(Editor's Note: This select print feature originally appeared in the January 2016 issue of DS News)
By Elizabeth Pophal, Esq., Gilbert Garcia Group, P.A.
The demand for Compliance Attorneys and Compliance Officers in default servicing law firms is at an all-time high. Default servicing law firms now join corporations in hiring these specialized risk managers to cope with the enormous amount of agency regulation and applicable legislation. With the threat of hefty fines and enduring reputational harm in the balance, most firms have learned to adapt quickly as they throw their best efforts into staying ahead of the regulatory compliance game. So why the demand for compliance and risk management now as opposed to in the past? A changing environment is to blame. Since 2008, nothing in the default servicing industry from a law firm’s perspective has been the same.
The Effects and Results of a Post-2008 Landscape
The sudden boom in the need for compliance teams and attorneys in law firms is attributable to the effects of the market crash and the associated regulatory backlash.
According to statistics reported by CNN Money, foreclosure filings in the United States spiked by more than 81 percent in 2008. Due to the economic downtown, 2008 featured more than 3.1 million foreclosure filings, such that one in every 54 homes received a notice of default that year. Thus, foreclosures were at an all-time high and default servicing law firms took in more business than ever before.
Though some benefited from the increased amount of foreclosures, consumers and government agencies perceived abuse and unfair practices on the part of financial institutions and default servicers. The Consumer Financial Protection Bureau (“CFPB”) has become a champion for the consumer and a staunch enemy of financial institutions and default servicers alike since it began operation in 2011. According to the CFPB, the agency was “…created in the wake of the financial meltdown to stand up for consumers and make sure they are treated fairly in the consumer financial marketplace. Supervising financial companies and enforcing consumer protection laws is core to the Bureau carrying out its mission. Since opening its doors in 2011, the CFPB has held bad actors accountable and helped consumers harmed by illegal practices.” The CFPB has specifically targeted banks and credit unions, as well as mortgage lenders and servicers, resulting in billions of dollars in penalties.
The trickle-down effect of increased regulation for clients is extensive compliance frameworks within default servicing law firms.
In the wake of such regulation and the threat of such large penalties, default servicing and financial institution clients have reacted by implementing compliance and risk assessment measures to coordinate and monitor every function of their business. Strict and specific systems for auditing, monitoring, and training are now commonplace. Default servicing and financial institution clients are responsible for compliance with an extensive amount of rules, laws, and regulations. For example, the Servicemembers Civil Relief Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, to name a few. Many additional regulations and rules are enforced by the CFPB. Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB the ability to issue rules concerning mortgages. The TILA-RESPA Integrated Disclosure Rule requires new and specific disclosure forms for consumers. The Home Mortgage Disclosure Act, “requires many financial institutions to collect, and report, information about mortgage loans and applications for public disclosure.”
The CFPB has shown itself to be a formidable opponent for default servicing law firm clients. The post-2008 landscape is fraught with risk management and compliance related obstacles. That translates to extensive risk management by the client, imposed on law firms that provide legal services to them.
The Changing Client Expectation Environment
The trickle-down effect of increased regulation for clients is extensive compliance frameworks within default servicing law firms. Clients now expect firms to have substantial policies, procedures, and training schedules in place, with strict oversight and accountability to the client. Regular audits are commonplace and default servicing law firms must be prepared to demonstrate to clients at any given time that the firm is in compliance with specific laws, rules, and regulations.
In service and support of clients, default servicing law firms adhere to their requirements and maintain such regulatory compliance, even to laws, rules, and regulations not directly applicable to the firm. Some may indirectly apply, or the firm, as a provider of legal services, may be considered an agent of the client. However, overall, many policies, procedures, and trainings most clients require of default servicing law firms are inapplicable to the firms. Nevertheless, default servicing law firms comply. As they say, better safe than sorry!
How to Stay Ahead of the Compliance Game
In the ever changing landscape of regulatory compliance, default servicing law firms are now moving towards a more preventative compliance structure rather than a reactionary stance. Once a compliance framework is in place, it can accommodate change on an ongoing basis. Policies and procedures can be updated as laws, rules, and regulations change. Consistent and thorough training is an absolute must for any firm concerned with keeping ahead of the compliance game. There seems to be no indication that the CFPB is going to decrease their involvement with default servicing and financial institution clients. The best advice compliance professionals can offer each other, then, is to be ready for continued change. Adapt quickly and you may be able to continue to do business unscathed by the CFPB.