FINANCIAL SERVICES ENFORCEMENT ACTIONS TRACKER - Q4 2016

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1 FINANCIAL SERVICES ADVISORY AND COMPLIANCE FINANCIAL SERVICES ENFORCEMENT ACTIONS TRACKER - Q 16 In Q 16, the number of regulatory actions increased by approximately 29 percent, driven by a 0 percent increase in actions by other regulatory bodies (36 actions this quarter versus 18 in the prior quarter), which consist of actions by the U.S. Department of Justice ( DOJ ), the Department of Housing and Urban Development ( HUD ), as well as various state and local regulators. The Consumer Financial Protection Bureau ( CFPB ) continued to remain active, accounting for nearly percent of all actions. A noteworthy change in Q 16 was the type of action levied. The instances of lawsuits in this quarter were more than four times the total observed in the previous four quarters, demonstrating a diminishing willingness of financial institutions to settle in the face of accusations of wrongdoing. Also of note, the CFPB paid special attention to pawnbrokers in Q 16, with approximately one-third of its actions levied against this type of institution a financial institution type that is not often represented in regulatory actions. Further details of Q 16 actions and trends are provided below. Q 16 SUMMARY OF REGULATORY ACTIONS Frequency of regulatory enforcement action increased from Q3 16 to Q 16, as seen in Figure 1, to nearly the level of action observed in Q of 1, which had the highest instance of enforcement action of the five periods under review. Actions by other regulators doubled this quarter and were percent higher than any other quarter in the review period. The increase is being driven both by increased DOJ and HUD actions, as well as more activism at the state and local level, the latter of which may be a direct response by blue states to the change in the administration. Half of enforcement actions were issued by the four major agencies, with 13 from both the CFPB and Federal Deposit Insurance Corporation ( FDIC ), three from the Office of the Comptroller of the Currency ( OCC ), and seven from the Federal Reserve Bank ( FRB ) (See Figure 2). This is the lowest proportion of actions coming from the four primary federal regulators in the last five quarters. The CFPB s actions centered around unfair, deceptive, or otherwise improper lending practices in violation of the Truth in Lending Act ( TILA ), and European Free Trade Association, while the FDIC, the OCC and the FRB issued actions for violations of rules and regulations including Bank Secrecy Act/Anti-Money Laundering ( BSA/AML ), compliance with capital adequacy requirements, and the National Flood Insurance Program. Unfair, Deceptive, or Abusive Acts and ( UDAAP ), BSA/AML-, and mortgage lending-related violations accounted for the highest numbers of actions in Q 16, as evidenced by an increase in actions related to Fair Housing Act and Regulation AB: Asset-Backed Securities & Residential Mortgage-Backed Securities ( RMBS ).

2 INCREASED OCCURRENCE OF LAWSUITS The instance of lawsuits brought by state and federal regulators against financial institutions has spiked dramatically in this quarter from the prior four periods. Fourteen lawsuits were filed in Q 16, half by the CFPB, related to alleged violations of several regulations, including UDAAP, TILA, Regulation AB, and the Fair Housing Act. This trend continued into January 17, as the CFPB filed suit against Navient, the nation s leading student loan servicer, alleging that the lender failed borrowers consistently throughout the repayment process. 1 Navigant believes that this trend demonstrates a decreasing willingness of financial institutions to settle with regulators when allegations of wrongdoing are made, forcing the regulators to file suit to seek redress. PAWNBROKERS AND THE CFPB Also of note was the special attention paid by the CFPB to pawnbrokers, who were the target of approximately onethird of the CFPB s actions in the quarter. The CFPB asserted four pawnbrokers violated the TILA s Regulation Z, related to disclosures of finance charges and annual percentage rates ( APR ) to consumers related to the extension of closed-end loans to consumers, taking personal property as collateral. 2,3,, Per the complaints filed by the CFPB, failure to include charges such as interest, storage fees, and other miscellaneous costs in the finance charge and APR calculations, as required by Regulation Z, resulted in material understatement of the cost of the loan to the consumer. POTENTIAL CHANGES TO THE CFPB However, changes may lie ahead for the CFPB, potentially impacting its regulation of bank and non-bank financial institutions that it regulates. With ongoing shifts in the political landscape, focused in part on economic reform, the CFPB, whose single-leader structure was ruled unconstitutional in October 16 6, may be a new target for reform in the coming year. The House-sponsored Financial Choice Act of 16, which was unveiled in full in June, posits that consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty and simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful. 7 Changes proposed to achieve these, and five other key principles driving the Act, include changing capital and liquidity standards and provide regulatory relief for institutions meeting certain capital election standards, repeal the Financial Stability Oversight Council ( FSOC ) and several sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to bank bailouts, reform the CFPB, increase accountability and oversight of financial regulatory bodies, increase penalties for fraud, and provide relief for small businesses and community financial institutions. 8 For the CFPB specifically, the proposed change would start from the top, with a renaming of the agency the Consumer Financial Opportunity Commission and a shift in its mission to not only protect consumers, but to also foster competitiveness in the market. Additionally, the Financial Choice Act proposes a change in structure of the CFPB, from a single leader to a bipartisan commission with congressional oversight, and eliminates the FSOC. The Act also proposes changes to the Qualified Mortgage/ Ability To Repay, Basel III, and Volcker rules, and allows for oversight relief for community banks and credit unions. Additional commentary on Q 16 financial enforcement action, and related charts and graphs, can be found below Q 1 Figure 1. Regulatory Action Quarterly Counts Q1 16 Q2 16 Q Q CFPB Sues Nation s Largest Student Loan Company Navient for Failing Borrowers at Every Stage of Repayment, CFPB, Jan. 17, 17. See about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/. 2. CFPB v. B&B Pawnbrokers, Inc., U.S. District Court, Nov. 3, 16. See 3. CFPB v. Pawn, U.S.A., Inc., U.S. District Court, Dec. 19, 16. See CFPB v. Spotsylvania Gold & Pawn, Inc., U.S. District Court, Dec. 19, 16. Seehttp://files.consumerfinance.gov/f/documents/161216_cfpb_SpotsylvaniaComplaint.pdf.. CFPB v. Fredericksburg Gold & Pawn, Inc., U.S. District Court, Dec. 19, 16. See 6. Weinberger, Evan. CFPB Single-Director Structure Ruled Unconstitutional, Law360, Oct. 11, 16. See 7. The Financial Choice Act, FinancialServices.House.Gov. See 8. Ibid. 9. Liput, Andrew. The Financial Choice Act Means Big Changes at CFPB, CFPB, Sept. 2, 16. See 2

3 Figure 2. Regulatory Actions Taken by Major Regulators Q1 1 Q1 16 Q2 16 Q3 16 Q CFPB OCC FDIC FED Other 36 The total regulatory actions identified in Q 16 increased by approximately 29% from the third quarter of 16 to total 72. The CFPB, OCC, FDIC, and FED were the primary actors in the quarter, with the agencies combined actions accounting for 0% of the total. Seven of these actions were taken in conjunction with state regulatory bodies, and an additional 1 actions were taken by state or local regulators, independent from one of the key regulatory agencies. The Department of Justice ( DOJ ) and the U.S. Department of Housing and Urban Development ( HUD ) were also primary actors, combining for one third of actions in the quarter not taken by the four primary regulatory bodies. Since Q 1, the regulatory actions taken by the OCC, CFPB, and FDIC have accounted for 7% of all actions being tracked by major enforcement agencies. Figure 3. Major Regulatory Trends Q1 1 Q1 16 Q2 16 Q3 16 Q Civil Action Civil Money Penalty Formal Agreement/ Consent Order Settlement Investigation Cease & Desist Other Fines Prompt Corrective Action Lawsuit While the distribution of regulatory actions varies across each quarter, Settlement and Formal Agreement/Consent Order represented 79% of regulatory action types over the last five quarters. Frequency of Lawsuits increased dramatically from previous periods, with nearly five times as many suits observed in the current period than in the previous year combined, to account for 19% of all actions in the period. This trend of financial institutions refusing to settle and forcing regulators to sue appears to be continuing beyond Q 16, with CFPB lawsuits against Navient in January and Ocwen in April. Formal Agreement/Consent Order and Settlement ranked as the most frequent regulatory actions taken in Q 16. These top regulatory actions types accounted for 66% of the total actions observed in the current quarter. Frequency of Settlement and Civil Money Penalty increased approximately twofold in Q 16, after remaining consistent in the two prior quarters, to account for 0% of all actions observed in the quarter. 3

4 Figure. Q 1 to Q 16 Regulation/Regulating Agency Types of Violations REGULATORY VIOLATION TYPE Q 1 Q1 16 Q2 16 Q3 16 Q 16 TOTAL % OF TOTAL Allowance for Loan and Lease Losses % Bank Secrecy Act/Anti-Money Laundering Act % Basel - Capital Requirements % Commodities or Securities Exchange Act % Fair Housing Act % Financial Industry Regulatory Authority % Generally Accepted Accounting Principles % Gramm-Leach-Bliley Act % National Flood Insurance Program % Office of Foreign Assets Control % Regulation AB: Asset-Backed Securities & RBMS Violations % Regulation B: Equal Credit Opportunity Act % Regulation C: Home Mortgage Disclosure Act % Regulation E: Electronic Funds Transfer Act % Regulation H: Membership of State Banking Institutions in The Federal Reserve System Regulation O: Loans to Executive Officers, Directors, and Principal Shareholders % % Regulation V: Fair Credit Reporting Act % Regulation X: Real Estate Settlement Procedures % Regulation Y: Bank Holding Companies and Change in Bank Control % Regulation Z: Truth in Lending Act % Servicemembers Civil Relief Act % State Foreclosure Laws % State Payday Lending Statutes % Unfair, Deceptive, and Abusive Acts and % Other % Total % Percentage of Total 2.% 19.% 1.% 16.9% 23.7% 0.0% 0.0% Note: Multiple violations types may be counted as part of one consent order or action taken by federal and state regulators. The top areas of violations over the last five quarters were: issues around Unfair and Deceptive (22.%); Bank Secrecy Act/Anti- Money Laundering (13.%); Basel/Capital Requirements (6.2%); and Regulation AB: Asset-Backed Securities & RMBS Violations (6.2%). Violations involving Unfair, Deceptive and Abusive Acts and, which in this quarter included improper consumer and student lending and were coupled with violations of TILA and ECOA, and BSA/AML compliance remained the highest instances of regulatory enforcement action. Instances of actions related to the Fair Housing Act, Payday Lending Statues, and sale residential mortgage backed securities backed by faulty mortgages form the 08 financial crisis and beyond, violating Regulation AB: Asset-Backed Securities & RMBS Violations increased after limited or no action in Q3 16.

5 Figure. Q 16 to Q 1 Number of Enforcement Occurences and Total Amount in Fines and Penalties 0 $2, $19,3 $,000 Number of Occurences $1,000 $,000 $,000 Enforcement Amount in Millions 0 3 $- 0 $- 0 $1 1 $32 $ 8 8 $30 $63 $32 $- $1 $37 $2,022 $301 $890 $2,183 $- Fraudulent Lending to Insiders Third-Party Vendor Management Accounting Payday Loans Violation Service member Civil Relief Act Violation Auto Lending Foreign Transactions Student Lending Insufficient Capital National Flood Insurance Program Violation Consumer Lending Securities, Commodities, or FX Violation Governance Deficiences Bank Secrecy Act Violation Mortgage Loan Unfair or Deceptive Acts or Note: Multiple violations types may be counted as part of one consent order or action taken by federal and state regulators. mortgage loan practices accounted for the highest total related fines over the last quarters; Securities, Commodities or Forex-related violations, accounts for the second most total dollars in fines and penalties. UDAAP violations (26%), improper mortgage loan practices (19%), BSA/AML violations (1%), governance deficiencies (13%), and securities, commodities and forex violations (7%) were the largest enforcement occurrences over the last five quarters. METHODOLOGY Our internal research team collected information about actions taken over the past five quarters by the following U.S. regulators including: Office of the Comptroller of Currency ( OCC ); Federal Depository Insurance Commission ( FDIC ); Federal Reserve ( FRB ); Consumer Financial Protection Bureau ( CFPB ); and, others. Regulatory issues include: Unfair, Deceptive, or Abusive Acts and ( UDAAP ); Real Estate Settlement Procedures Act ( RESPA ); Bank Secrecy Act/Anti Money Laundering ( BSA / AML ); Servicemembers Civil Relief Act ( SCRA ); Equal Credit Opportunity Act ( ECOA ); Truth in Lending Act ( TILA ); Fair Credit Reporting Act ( FCRA ); and, others.

6 CONTACTS To discuss Navigant s Financial Services Enforcement Actions Tracker in detail, please contact: PAUL NORING Managing Director, Co-Practice Leader Consumer Finance pnoring@navigant.com CHRIS SICURANZA Managing Director, Co-Practice Leader - Consumer Finance csicuranza@navigant.com JOHN DELPONTI Managing Director, Consumer Finance - BPO Solutions Leader - Consumer Finance john.delponti@navigant.com BEJI VARGHESE Managing Director, Consumer Finance beji.varghese@ncacf.com RAMAN MANDAPAKA Managing Director, Consumer Finance raman.mandapaka@navigant.com GREG CROUSE Managing Director, Consumer Finance greg.crouse@navigant.com navigant.com About Navigant Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global professional services firm that helps clients take control of their future. Navigant s professionals apply deep industry knowledge, substantive technical expertise, and an enterprising approach to help clients build, manage, and/or protect their business interests. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, the firm primarily serves clients in the healthcare, energy, and financial services industries. Across a range of advisory, consulting, outsourcing, and technology/analytics services, Navigant s practitioners bring sharp insight that pinpoints opportunities and delivers powerful results. More information about Navigant can be found at navigant.com. linkedin.com/company/navigant twitter.com/navigant 17 Navigant Consulting, Inc. All rights reserved Navigant Consulting, Inc. ( Navigant ) is not a certified public accounting or audit firm. Navigant does not provide audit, attest, or public accounting services. See navigant.com/about/legal for a complete listing of private investigator licenses. This publication is provided by Navigant for informational purposes only and does not constitute consulting services or tax or legal advice. This publication may be used only as expressly permitted by license from Navigant and may not otherwise be reproduced, recorded, photocopied, distributed, displayed, modified, extracted, accessed, or used without the express written permission of Navigant.