Attorneys are paid to give advice, but when it comes to mortgage lending they're actually advising clients to limit contact with their lawyers.
The reason: despite assurances from the Consumer Financial Protection Bureau that confidential attorney-client information is protected, any discussions about lending policies and procedures could wind up haunting lenders at exam time.
So mortgage lenders are now engaged in a polemical discussion about how frank and candid any exchange should be with their attorneys. If they ask their attorneys a question about, say, offering more favorable rates to wealthy borrowers, could they end up paying the price for even engaging in the discussion?
"Clients are only going to ask for advice if they are assured they don't have to tell others about it," Jim Brodsky, a founding member of Weiner Brodsky Sidman Kider, told lenders at a mortgage conference in Las Vegas last week.
The banking industry has warned that turning over privileged information to the CFPB amounts to a waiver of privilege, which could open the door to subpoenas from civil plaintiffs who may want to use the information to build a legal case against a bank or mortgage lender.
A thornier issue could arise if bank or mortgage loan executives tell the bureau about an exchange with attorneys. If they do not take the advice rendered, disclosure of the discussion with attorneys alone could result in a higher settlement.
Steve Jacobson, the chief executive at Fairway Independent Mortgage, expressed some concern that the bureau's focus on fair-lending enforcement could land mortgage lenders in hot water because they are only now coming under supervision and increasingly are relying on the advice of their attorneys.
He gave an example of how a lender might get in trouble if it gives a reduced interest rate to a high-down payment home buyer that may inadvertently discriminate against other protected classes.
"Are you telling your loan officer not to do a loan at 3% loan, if your rates [for other borrowers] are at 3 ¼?" Jacobson asked rhetorically. "Does anybody think they're doing anything wrong? We don't think so."
John Konyk, an executive director of government affairs at Weiner Brodsky, says the Office of the Comptroller of the Currency typically won't ask for privileged information but even if it is turned over, privilege is not waived.
"There is a fear that privileged information would be discoverable down the line," Konyk said. "If you turn it over, what will keep consumer attorneys from using a Freedom of Information Act request to get that information?"
Like so many issues related to the CFPB, the question of attorney-client privilege is rooted in mistrust of the bureau and lingering doubts about the recess appointment of its director, Richard Cordray.
Typically, information given to a third party is no longer privileged, but other banking agencies generally treat it as such in exchange for the access.
The CFPB has said that the Dodd-Frank Act gives it enough authority to ensure confidential treatment of banks' information obtained through the supervisory process. But banks and their attorneys are not so sure.
They are suspicious because the CFPB ended up finalizing its own rule in July, essentially giving itself a waiver that they say should only be granted by Congress.
The bureau had supported legislation that stalled earlier this year that would have given it the same formal exemption as other agencies.
Brodsky says that from what he has seen in exams so far, the CFPB has been fairly aggressive in requesting privileged information — in contrast to the other banking agencies, which tend to tread more carefully.
"Banking agencies typically have been prudent because they want compliance," he said. "The bureau to date has not shown the kind of respect that we are used to."
Given their skepticism, lawyers and consultants at the Las Vegas conference offered some advice on how to address attorney-client privilege when the CFPB comes calling.
First, remember that fact and advice are two different things. There is no privilege protecting the disclosure of facts. Regarding advice itself, they advised lenders to keep in mind that if a banker asks an attorney for advice and then tells the CFPB he did so, the CFPB may infer that the banker was worried about non-compliance.
"They will come in and ask, 'What was the advice of your attorney?' " Brodsky said. "If you tell them, they will know whether you took the advice, and [if the lender did not take the advice] the penalty could be greater."
Lenders were further warned to be careful about written statements or communications with employees regarding compliance issues. A memo about a change in lending practices, for example, could later be used as ammunition for an enforcement action, attorneys said.