By Laura Marquez-Garrett
Attorney
Foster Pepper PLLC
State Regulators
brokers, an escrow company and at
least one real estate agent. Many of
the charges included a scheme of
flipping properties through the use
of straw buyers. Inaccurate apprais-
als, false information on loan applica-
tions and poor underwriting also have
formed the basis of criminal and civil
proceedings.
a less obvious category, however,
comprises those financial-services pro-
viders who had no direct involvement
in fraudulent activities but who failed
to recognize and correct widespread
employee misconduct. although these
providers’ involvement does not rise
to the level of fraud, failure to ensure
proper monitoring can result in steep
fines, investigative costs, and restitu-
tion to consumers who may have been
harmed by employee misconduct.
In the absence of adequate oversight
— as undefined as that concept is —
there are few defenses to substantive
and procedural violations of state and
federal regulations.
another group now facing regulatory
scrutiny are those financial-services
providers who consistently attended
regulator meetings, tried to stay ahead
of complex and rapidly evolving regula-
tions, and maintained contact with indi-
vidual employees in an effort to ensure
companywide compliance. Some hired
in-house attorneys or contracted with
third-party software providers to help
navigate and ensure compliance with
state and federal regulations. Others
conducted internal trainings and took
quick and decisive corrective action at
the first evidence of misconduct.
Many of these well-meaning providers may now find themselves caught
in the wide nets cast by state regulators, regardless of what they believed
to be adequate efforts to ensure compliance with state and federal regulations. This is not necessarily surprising: Financial-services providers often
deal with hundreds of transactions on
a given day, have multiple branch locations and even more employees, and
are subject to a series of complex and
rapidly changing regulations. It seems
that some degree of human error was
inevitable. Regardless, noncompliance
— however small — is enough for liability to attach.
Past Articles
Cast a Wide Net
individual liability may be at stake with
regulatory enforcement actions
As the dust of the economic downturn begins to clear, state regulators are turning out in full
force to investigate financial-services
providers, including mortgage brokers
and loan originators, with respect to
past actions and future compliance.
In addition to investigating what happened and how to stop it from happening again, regulators are examining
who is to blame and liable.
Their heightened scrutiny translates
to greatly increased risk and liability
across the board. The regulatory pursuit of answers may also come with unintended casualties, but so far, that’s
a price state regulators appear willing
to pay.
So who do the regulators consider
bad actors in all of this? among the
providers in the headlights of state
regulators are payday lenders, car-title
lenders, mortgage servicers, loan origi-
nators and mortgage brokers.
to blame or not to blame?
No one questions that there were individuals and entities who behaved
badly and who, whether on a micro or
macro level, contributed to events culminating in the economic crisis. These
providers have found little sympathy in
public opinion or the press and are at
the forefront of regulatory and criminal
proceedings.
In mid-2009, for example, federal
agents dismantled the largest mortgage-fraud conspiracy in Washington
state’s history. The indictment began
with 40 counts against two mortgage
by Laura Marquez-Garrett
“National Licensing Raises the Bar,”
with Douglas L. Davies,
October 2008
“Conflicted in the Line of Duty,”
with Douglas L. Davies,
March 2009
“Fighting Back on the Buyback,”
July 2009
“Guess What? Regulation Z already
Changed,” with Miriam Cho,
September 2009
“When State Regulators Come
Knocking,” with John L. Bley,
October 2009
view these articles and more at
scotsmanguide.com.
particularly true as many companies’
financial problems have pushed state
regulators toward targeting not only
the offending entity but also its owners
and executives.
The benefit of involving a corporation and its principals in enforcement
proceedings is clear: The likelihood of
recovering fines, investigation fees and
restitution increases when multiple entities and individuals are held accountable. Further, many state-licensing
statutes contain provisions authorizing
personal liability even in the absence of
the traditional corporate-veil-piercing
requirements.
as a result, these corporations’ principals — however well-meaning — may
find themselves at risk for personal liability to the tune of hundreds of thousands of dollars. Because individual
liability is a possible outcome of any
regulatory investigation, corporate officers and executives should participate
actively and from the outset. Ensuring
an adequate defense for a corporation
translates into ensuring an adequate
defense for its principals.
Principal defense
The regulatory process often begins
with a records subpoena, either general
or targeted at specific transactions; a
routine notice of examination; or — as
was the case for 52 mortgage servicers
identified in an Oct. 13, 2010, press release by the Washington state Department of Financial Institutions — a letter
stating that the recipient is or will be
under investigation and instructing a
cease and desist as to the perceived
prohibited activities.
Regardless of how the process be-
gins, the next steps are critical. This is
•••
With the increased focus on regulatory
compliance and investigations of past
actions, mortgage brokers and loan
originators should remain vigilant if
their companies face a subpoena, no-
tice of examination or notification of
forthcoming investigation. •
Laura Marquez-Garrett is an attorney with
Foster Pepper PLLC ( www.foster.com) whose
practice encompasses the area of financial
institutions, including the representation of
mortgage companies, banks, and asset-based
lenders in complex litigation and regulatory
proceedings. She also represents contractors
and developers in construction disputes, and
individuals and corporations in class-action
litigation and commercial disputes. Marquez-Garrett graduated from Harvard Law School in
2002. E-mail her at marql@foster.com.
