International banking conglomerate HSBC, affiliates, and subsidiaries, abused banking and mortgage laws in the United States to their client’s detriment. Regulators with the Housing and Urban Development and Consumer Financial Protection Bureau investigated allegations of mortgage abuse by HSBC. We see how HSBC agreed to pay hundreds of millions of dollars due to its abusive mortgage practices.
Upon completion of this Case Study, participants should:
- Understand abusive mortgage practices and how to avoid them;
- Describe penalties against mortgage lending institutions who engage in corrupt or illegal finance operations;
- Understand how mortgage abuse affects consumers;
- Identify ways to avoid adverse outcomes from federal investigations;
- Explain how compliance programs and employee training creates a positive learning experience for employees.
State of the Industry
When obtaining a mortgage to purchase a home, consumer protection laws protect people from fraud and abusive practices. Federal agencies like Housing and Urban Development, the Consumer Finance Protection Bureau, and the Federal Reserve regulate the mortgage industry by enforcing those consumer protection laws. While abusive mortgage practices are not prevalent in the United States, they create unfair and uneven application of the rules. When banking and other financial institutions violate consumer protection laws, federal regulators seek justice for those affected individuals.
Background and Analysis
This case study profiles banking giant HSBC and its affiliate, HSBC Financing (HSBC). All the information in this background comes from one Department of Justice (DOJ) press release, the Consent Judgment filed in this case, one Order of Settlement with the Federal Reserve, and one news article.
Originally based in Hong Kong, HSBC purportedly is one of the largest financial institutions in the world. HSBC also claims to have customers in 64 countries. According to reports, HSBC holds mortgages on millions of residences worldwide, making it one of the world’s largest lending institutions.
This case study profiles two separate but related lawsuits filed by federal agencies and 49 state attorney generals against HSBC. According to investigators with the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB), HBSC used abusive and illegal practices while servicing their client’s mortgages.
According to investigators at HUD and CFPB, HSBC minimal standards for servicing its mortgage loans, violating consumer protection laws. Further, HSBC mishandled client’s mortgage foreclosures and repeatedly failed to ensure the accuracy of information provided in federal bankruptcy court when those clients were in foreclosure.
HBSC also lost paperwork related to its mortgage loans and improperly used “robo-signing” practices. “Robo-signing” practices are illegal under consumer protection laws. This practice involved HSBC employees’ receipt of mortgage foreclosure documents for review. However, instead of reviewing the documents, they rubber-stamp the documents with no review at all. Robo-signing mortgage documents can result in uneven application of mortgage foreclosure rules at the company.
HSBC sought mortgage foreclosures against their clients unequally. According to federal prosecutors, one of HSBC’s abusive practices involved forcing their clients into foreclosure when they had filed for bankruptcy protection. These actions violated federal bankruptcy protection laws. Investigators also alleged HSBC filed documents with the bankruptcy courts that included false or misleading information. In some cases, no one at HSBC reviewed the court filings at all.
HSBC agreed to a consent judgment in favor of the HUD and CFPB. A consent judgment occurs when two parties involved in a lawsuit agreed to settle the matter with an enforceable judgment against one party. After filing the signed document with the court, the consent judgment becomes enforceable. According to the consent judgment, HSBC agreed to the following terms:
- Pay $40.5 million to HUD and CFPB;
- Pay $59.3 million into an escrow account for payment to HSBC borrowers who lost their homes due to HSBC’s illegal practices;
- Reimburse the various state attorneys general $200,000 for costs of the investigation;
- Pay $370 million in consumer relief to homeowners who are at risk of default by reducing mortgage interest rates and forgiving forbearance;
- Implementation of new internal standard for mortgage loan servicing, foreclosures, and bankruptcy filings;
- Forbid the use of Robo-signing procedures;
- Undertake an internal review of documents before filings in any bankruptcy court;
- Restrict instituting foreclosure procedures when a borrower has filed for bankruptcy protection or has requested a loan modification.
In total, HSBC agreed to pay $601 million to resolve this case.
In a second proceeding, The Federal Reserve Bank (Fed) filed a lawsuit against HSBC based on the same facts discussed above. The Fed alleged HSBC used “unsafe and unsound practices and foreclosure activities” related to its mortgage lending business. In this case, HSBC agreed to pay $131 million. However, the Fed indicated HSBC could resolve this $131 million settlement if it complies with the consent judgment.
We recommend companies learn and understand the law to avoid situations like those experienced at HSBC. Business owners and leaders should make internal compliance programs a priority. Additionally, employee training can support the internal compliance program.
Not only do internal compliance programs educate employees on laws that apply to their specific industry, but they also show the employees the business owners take compliance with the law seriously. They teach employees the types of behavior expected by management. When people understand how federal authorities view violations of the law, they may be more inclined to make law-abiding decisions.