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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 regulations, and maintained contact with individual 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.
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 begins, the next steps are critical. This is 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.
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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, notice 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 firstname.lastname@example.org.
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