Two law firms have teamed up to offer banks a defense against the epidemic of class actions against lenders that commit minor, technical violations of the law.
Lawyers at Boston's Goodwin, Procter & Hoar and at Washington's Negroni & Winston have created a service to unearth and correct the errors that class-action lawyers target.
The firm's lawyers perform a comprehensive audit of a bank's lending and servicing operations, divided into six exams.
The first exam reviews compliance with federal loan-origination laws including: the Truth-in-Lending, Equal Credit Opportunity, Fair Housing, Fair Credit Reporting, and Home Mortgage Disclosure acts.
The second exam focuses on federal mortgage servicing laws, including the Fair Debt Reporting Act and tax laws. Two other exams focus on state loan origination and mortgage servicing laws. The bank's insurance sales practices are reviewed in the fifth exam while all of its loan forms are reviewed in the final exam.
The six exams, known collectively as the RECAP program, include reviews of loan files, interviews with main office and branch employees, and evaluations of disclosure forms and compliance policies. Because most compliance is automated, the lawyers have also hired the McGladrey & Pullen accounting firm to review the bank's computer systems.
Other consultants, including KPMG Barefoot Marrinan, offer similar services. But RECAP is one of the few focused specifically on reducing exposure to class actions.
Also, the results of the RECAP program cannot be subpoenaed because they are compiled by the bank's lawyers and are covered by attorney-client privilege. "That is the advantage we have over consulting firms," said Jeremiah S. Buckley, a Goodwin, Procter partner.
Industry officials said this type of comprehensive review makes sense. "As long as we have the detailed nature of these consumer protection statutes, there is always the threat of technical violations," said Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America. "When you multiply one technical violation by thousands of borrowers you are talking about large sums of money in damages."
RECAP is not cheap. A full-blown review for a large lender could cost more than $300,000 and take about six months.
