Update Regarding Marketing Services Agreements (“MSAs”)

On Thursday, June 30, 2015, a CFPB spokesman issued a statement to HousingWire in response to the announcement by a large lender that it was terminating its MSAs:

[This] decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with [the Real Estate Settlement Procedures Act (“RESPA”)] and freeing up more choices for consumers.  We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.  Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.

These announcements come in the wake of the CFPB’s September 2014 consent order against Lighthouse Title, Inc. and CFPB Director Cordray’s June 2015 ruling against PHH Corporation and its affiliates. Both matters involved alleged violation of Section 8 of RESPA, which states that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). However, Section 8 also states that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” 12 U.S.C. § 2607(c)(2).  Read more…


Florida Appellate Court Rules Non-Signing Spouse in Reverse Mortgage is Protected from Foreclosure

On July 15, a three-judge panel of the Florida Third District Court of Appeal issued its opinion in Smith v. Reverse Mortgage Solutions, Inc., 2015 WL 4257632. In 2008, Mr. Smith took out a reverse mortgage on his home where he lived with his wife; only Mr. Smith signed the promissory note, but both spouses signed the mortgage. Mr. Smith died in late 2009, and Reverse Mortgage Solutions filed a complaint for foreclosure, although Mrs. Smith was still alive. The mortgage allowed foreclosure if “a Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” The lower court ruled in favor of Reverse Mortgage Solutions. On appeal, however, the court interpreted the documents de novo and found that Mrs. Smith was a “borrower” “based on the plain and unambiguous language of the mortgage,” and therefore was protected from foreclosure until she died. Although the court stated that this finding would be sufficient to decide the case, it also noted several other bases for its decision, including that (i) Mrs. Smith was identified as the “Borrower” on the signature page of the mortgage; (ii) Florida’s homestead provisions require the spouse’s signature on a mortgage of jointly held property to validly convey the interest in property; and (iii) federal law applicable to reverse mortgages contemplates the foreclosure of mortgaged property and expressly defines “homeowner” to include the spouse of the homeowner. The court remanded the case to the lower court to decide whether the other condition precedent preventing foreclosure, that the property was Mrs. Smith’s primary residence, had been met. A dissenting judge argued that neither the Florida homestead provisions nor HUD requirements should affect the interpretation of the loan note. Although he was prepared to affirm the lower court decision based on the unavailability of a trial transcript, he stated that if it was necessary to address the question of whether Mrs. Smith was a “borrower,” he would conclude that she was not because both the mortgage and the promissory note generally identified Mr. Smith as the only borrower.


CFPB Orders Mortgage Servicer to Pay $1.6 Million over Servicing Practices

On July 30, the CFPB ordered a Texas-based mortgage servicer to pay $1.5 million in restitution and $100,000 in civil money penalties for allegedly engaging in faulty servicing practices, according to a settlement announced by the CFPB. The CFPB alleged that, beginning in 2009, the mortgage servicing firm failed to honor “in-process” modifications—trial modifications that were pending when a loan was transferred to the company—until it determined that the prior servicer should have agreed to the trial modification. In addition, the CFPB alleged that the servicing firm provided inaccurate account statements to borrowers related to their loan balance, interest rates, payment due dates, and the amount available in escrow accounts. The CFPB further contends that, in certain instances, the servicing firm coerced consumers into waiving certain legal protections as a condition to being allowed to pay off delinquent payments in installments. Under the terms of the consent order, the servicing firm agreed to, among other things, (i) provide $1.5 million in restitution to consumers whose loan modifications were not acknowledged; (ii) pay a $100,000 civil money penalty; (iii) mitigate the impact of its allegedly unlawful practices by, for example, converting “in-process” loan modifications to permanent modifications and stopping foreclosure processes for certain borrowers; and (iv) honor loss-mitigation agreements entered into by prior servicers and “in-process” loan modifications and engage in outreach to contact borrowers and offer them loss-mitigation options.


Spotlight on the Military Lending Act: Did the Final Rule Improve on the Proposal?

Valerie-Hletko-captionBen-Olson-captionOn July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.
Andrew-Grant-captionManley-Williams-captionSpecifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.

In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA.  At a high level, industry comment letters fell into five categories: Read more…


CFPB Settles with Payment Processor and Mortgage Servicer over Deceptive Mortgage Advertisement Allegations

On July 28, the CFPB announced that a Colorado-based payment processor, along with a Virginia-based mortgage servicer, agreed to pay a total of $38.5 million to resolve allegations that both entities used misleading advertisements related to a mortgage payment program. The CFPB alleged that both entities advertised the “Equity Accelerator Program” as a program that would help consumers save on interest payments by making mortgage payments biweekly rather than monthly. However, according to the CFPB, the program failed to make the biweekly payments, and no more than a “tiny” percentage of consumers enrolled in the program benefitted from the promised savings. Under the terms of the consent orders, the payment processor agreed to provide $33.4 million in restitution to affected consumers and pay a $5 million civil money penalty. The mortgage servicer will pay a $100,000 civil money penalty. Both entities also agreed to ensure that any advertisements concerning the mortgage program’s benefits complied with federal law.


CFPB Files Complaint Against Student Financial Aid Consulting Company for Allegedly Illegal Sales and Billing Practices

On July 23, the CFPB announced that it had entered into a proposed consent order with a Sacramento-based company that provides fee-based student financial aid counseling and preparation services. The CFPB’s simultaneously filed complaint alleges that the company violated the Telemarketing and Consumer Fraud and Abuse Prevention Act by engaging in deceptive sales tactics through its websites and call center representatives. The complaint claims that from at least July 21, 2011 to present (recognizing that the company no longer operates one of the websites effective July 13, 2015), the company offered consumers certain services “as an upgrade from its ‘standard’ service level at ‘no additional cost.’” However, consumers were allegedly charged future annual fees of $67 to $85 for such upgrades. The Bureau also alleges that the company violated the Electronic Fund Transfer Act by enrolling consumers in automatic, recurring payments without their knowledge or consent: “The Company did not provide consumers a copy of the consumers’ authorization for electronic fund transfers in which the terms of the preauthorized transfers – including automatic, recurring charges going forward – were clear and readily understandable.” The proposed consent order would require the company to pay $5.2 million in consumer relief and cancel all automatic and recurring charges currently in place. Due to the company’s limited financial resources, the proposed order seeks a civil money penalty of $1.00.


CFPB Settles with Bank and its Two Affiliates for $18.5 Million over Alleged Faulty Student Loan Servicing Practices

On July 22, the CFPB announced that a major bank and its two affiliates agreed to pay $18.5 million to resolve allegations that the entities engaged in inadequate private student loan servicing practices. According to the consent order, the CFPB alleged that the bank and its affiliates (i) failed to provide clear information regarding the student-loan interest consumers paid; (ii) overstated the minimum amount due in student-loan billing statements; (iii) initiated collection phone calls to student loan borrowers that were non-compliant with certain provisions of the Fair Debt Collection Practices Act; and (iv) failed to provide students with defaulted student loans with information about the amount and source of the debt and the consumers’ right to contest the debt’s validity, as required by the Fair Debt Collection Practices Act. Under terms of the settlement, the bank agreed to provide $16 million in restitution to affected borrowers, improve its student loan servicing and collections practices, and pay a $2.5 million civil money penalty. The announcement comes as the CFPB, along with the Department of Education and Department of Treasury, concluded its comment period for public feedback on ways to improve borrower service, reduce defaults, develop best practices, implement consumer protections, and spur innovation in the student loan servicing market.


District Court Applies Supreme Court’s Inclusive Communities Decision in Rejecting Disparate Impact Claim

On July 17, the U.S. District Court for the Central District of California granted summary judgment for Wells Fargo in a Fair Housing Act (FHA) case brought by the City of Los Angeles. City of Los Angeles v. Wells Fargo & Co., No. 2:13-cv-09007-ODW (RZx) (C.D. Cal. July 17, 2015). The City alleged that the bank engaged in mortgage lending practices that had a disparate impact on minority borrowers. In rejecting the City’s claims, the court’s opinion heavily relied on the Supreme Court’s recent decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which imposed limitations on the disparate impact theory of liability under the FHA, despite holding that the theory remains cognizable. 135 S. Ct. 2507 (2015). Citing Inclusive Communities, the district court warned that disparate impact claims may only seek to “remove policies that are artificial, arbitrary, and unnecessary barriers and not valid governmental and private priorities.” The court further held that the City failed to point to a specific defendant policy that caused the disparate impact and failed to show “robust causality” between any of defendant’s policies and the alleged statistical disparity, as Inclusive Communities requires. The court also rejected the notion that disparate impact claims could be used to impose new policies on lenders, and said that the City’s argument that lenders should adopt policies to avoid disproportionate lending was a “roundabout way of arguing for a racial quota,” which Inclusive Communities also warns against. Finally, the court was sharply critical of the City’s argument that Federal Housing Administration loans are harmful to minority borrowers, and that, in any event, any disparate impact from these loans would be a result of the federal government’s policies, not the defendant’s policies.


CFPB Reaches $700 Million Settlement to Resolve Credit Card Ancillary Products Investigation

On July 21, the CFPB announced a nearly $700 million settlement against a leading financial institution and its subsidiaries.  According to the consent order, the Bureau alleges that the entities engaged in deceptive marketing, billing, and collection practices related to various credit card ancillary products, including debt protection and credit monitoring services. Specifically, the Bureau alleges that the institution or its vendors marketing practices, consisting of telemarketing calls, online enrollment, point-of-sale application, and direct enrollment at retailers, mislead consumers into enrolling for certain ancillary products. The Bureau further alleges that, in some instances, telemarketers failed to accurately disclose the cost and fees associated with the ancillary products. With respect to the unfair billing allegations, the Bureau contends that the institution or its vendors improperly charged consumers, without authorization, for services that were not rendered, and failed to provide full product benefits of the services marketed to consumers. In addition, the Bureau alleges that the institution misrepresented payment fee information to consumers by failing to disclose the actual purpose of the fee associated with making payments by phone on delinquent credit card accounts. Under terms of the settlement, the institution and its subsidiaries agreed to (i) provide $479 million in consumer relief related to its marketing practices; (ii) pay roughly $220 million in restitution related to its payments collection practices and for consumers not receiving the full benefits of services promised; and (iii) pay a $35 million civil money penalty.

In a parallel enforcement action, the OCC imposed a separate $35 million civil money penalty against the institution for engaging in similar practices, and requires the institution to strengthen its oversight of third-party vendors and develop a comprehensive risk management program for ancillary products marketed or sold by the bank.


Department of Treasury Seeks Public Feedback on Online Marketplace Lending

On July 20, the Federal Register published the Department of the Treasury’s Request For Information on Expanding Access to Credit Through Online Marketplace Lending (RFI). The RFI seeks public comment on the three specific areas relating to the online marketplace lending industry: (i) business models of and products offered to consumers and small businesses; (ii) potential expansion of access to credit to the historically underserved; and (iii) the ways in which the financial regulatory framework can develop to support safe growth within the industry. According to the RFI, online marketplace lending delivers lower costs and faster decision times than traditional lenders, but, so far, the loans are usually only originated to prime or near-prime consumers. However, some online marketplace lenders are developing product structures and underwriting models that may allow for originating loans to non-prime borrowers at lower interest rates. With the rapid growth occurring in the online lending industry, the RFI aims to assist the Treasury Department in examining online lenders’ potential “to expand access to credit, and how the financial regulatory framework can develop to ensure the industry grows safely.” Comments are due August 31, 2015.


CFPB and DOJ Reach $24 Million Settlement with Indirect Auto Lender to Resolve Discriminatory Pricing Allegations

On July 14, the CFPB and DOJ announced a $24 million settlement with an indirect auto lender to resolve allegations that the lender offered higher interest rates to minority borrowers compared to white borrowers with a similar credit risk profile. Specifically, both agencies contended that the lender allowed their partnering dealers excessive discretion to increase the lender’s base interest rate with a “dealer markup” on auto loan contracts, which resulted in discriminatory pricing. Under terms of the settlement, the lender agreed to, among other things, (i) pay $24 million in restitution to affected borrowers, (ii) impose dealer markup rate caps on auto loans, and (iii) improve its policies and procedures related to auto loan pricing and compensation program. Notably, the Bureau did not impose a civil money penalty due to the lender’s responsible conduct. The Bureau filed its consent order in an administrative enforcement action. In a separate announcement, the DOJ filed its complaint and consent order in federal court, which will require judicial approval.  The lender was represented in the matter by BuckleySandler.


Department of Labor Guidance Clarifies Classification of Employees Under Fair Labor Standards Act

On July 15, the Wage and Hour Division of the Department of Labor (DOL) issued guidance to employers in determining whether a worker should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA).  The Guidance first noted the “problematic trend” in misclassifying workers as independent contractors and the potential adverse effects of such misclassification, including the loss of workplace protections such as minimum wage, overtime compensation, unemployment insurance, and workers’ compensation, as well as the loss of tax revenues and the creation of an uneven playing field for employers.  Beginning with the expansive FLSA definition of “employ” and applying a detailed six factor “economic realities” test, rather than a narrower common law control test, the Guidance concludes that most workers are employees under the FLSA’s broad definitions.


Special Alert: CFPB Launches First Monthly Complaint Report Providing Snapshot of Consumer Trends

On July 16, 2015, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) launched the first in a new series of monthly complaint reports highlighting key trends from consumer complaints submitted to the CFPB. Importantly, its monthly report provides significant detail on the complaints the CFPB has received, including the names of the companies that received the largest number of complaints.

Currently, the most-complained-about companies are also the largest bank and nonbank financial institutions in the country. Since these institutions have the highest numbers of customers, it is only natural that they have received the highest number of complaints. On the same day as the monthly report’s release, CFPB Director Richard Cordray provided remarks at an Americans for Financial Reform event in Washington, D.C. Director Cordray noted that in future monthly reports, the CFPB hopes to “normalize” its consumer complaint data by accounting for financial institutions’ respective size and volume. To that end, the CFPB issued a Request for Information seeking input on ways to enable the public to more easily understand company-level complaint information and make comparisons. The comment period closes August 31, 2015. Read more…


New York AG Schneiderman Settles with Auto Dealers Over Alleged Deceptive Auto Advertising

On July 14, New York Attorney General Eric Schneiderman announced two settlements with auto dealers over allegedly deceptive advertising practices. The first settlement was reached with a White Plains-based auto dealer that allegedly misled consumers by promoting, in its print and online ads, illusory sale and lease prices by including “discounts or rebates that were not available to most consumers, and thus, did not represent the actual sale or lease prices.” According to the Attorney General, rebates or discounts offered to “military” or “college graduates” were among the deceptive advertisements used by the auto dealer. An investigation by the AG’s Office revealed that the dealership would only make the rebates or discounts available to certain military personnel and recent college graduates. In addition to failing to comply with the Attorney General’s Advertising Guidelines for Automobile Dealers, the Attorney General alleged that the ads used footnotes and asterisks that contradicted or materially modified the principal message of the advertisements. The dealership will pay $32,500 to the state and has agreed to reform its advertising practices.

In a separate action, the Attorney General announced a settlement resolving allegations that 22 dealerships “persistently defrauded consumers with misleading promotions and fraudulent sales tactics.” According to the Attorney General’s office, the dealers’ advertisements included certain game cards that led consumers to believe that they would be guaranteed winners of certain items – such as cash, a free vehicle, or an Apple iPad – if they received a winning ticket containing three matching symbols. However, virtually none of the consumers won a prize when they brought in their winning tickets to the dealers. In addition to misleading game cards, the dealers were alleged to have charged unauthorized fees for vehicle maintenance plans that had not been requested by purchasers and to have upcharged the retail sales price on cars to effectively nullify discounts offered to consumers. Under the terms of the settlement agreement, the dealers will pay $310,000 in penalties and restitution.


HUD Issues Guidance Based On Equal Access Rule

On July 13, HUD announced guidance regarding discrimination on the basis of sexual orientation, gender identity, and marital status.  The guidance on Multifamily Assisted and Insured Housing Programs was intended to clarify the 2012 Equal Access to Housing in HUD Programs Regardless of Sexual Orientation or Gender Identity Rule (“Equal Access Rule”). HUD clarified that, in addition to individual program eligibility requirements established by HUD, a determination of eligibility for housing that is assisted by HUD or subject to a mortgage insured by the FHA “will be made available without regard to actual or perceived sexual orientation, gender identity, or marital status.” The guidance also clarifies that owners, administrators, and other recipients and sub-recipients of HUD funds associated with HUD-assisted housing or housing whose financing is insured by HUD may not inquire about the sexual orientation or gender identity of an applicant for, or occupant of, such housing, and notes that the rule is applicable whether such housing is renter or owner occupied.  HUD noted that future Management and Occupancy Reviews may include a review for compliance with the Equal Access Rule.  The guidance was coordinated with the July 13 White House Conference on Aging, with the White House emphasizing that the Equal Access Rule also applies to Section 202 Supportive Housing for the Elderly.