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CFPB Fines Online Mortgage Company And Its Owner For Alleged Deceptive Rate Advertising
On August 12, the CFPB announced a consent order with a nonbank mortgage lender, its affiliated appraisal management company (AMC), and the individual owner of both companies to resolve allegations that the lender deceptively advertised mortgage rates to consumers, improperly charged fees before providing consumers with Good Faith Estimates (GFE), and failed to disclose its affiliation with the AMC while allowing the AMC to charge inflated fees.
Allegations
As explained in the consent order, the lender primarily conducts business online through its own website, and also advertises its mortgages through display ads on independent websites and the website of an unaffiliated third-party rate publisher. The CFPB asserts that, over a roughly two-year period, a “systemic problem” caused the lender to list on the rate publisher’s website lower rates for certain mortgages than the lender was willing to honor, and that the lender supplied other rates to the rate publisher that were unlikely to be locked for the majority of the lender’s borrowers. The CFPB claims that the lender failed to perform systematic due diligence or quality control to ensure the accuracy of listed rates, even though the lender was made aware through consumer complaints that certain rates were inaccurate.
The CFPB also claims that, over a period of more than two years, the lender advertised in its display ads on independent websites rates that were based on (i) a consumer profile that included an 800 credit score, although most of the lender’s borrowers had scores below 800; and (ii) payment of high discount points, without adequate disclosure of the bases for the rates. In addition, the CFPB asserts that, over a nearly four-year period, the lender generated inaccurate personal loan quotes for certain consumers because the design of the lender’s website prevented those consumers from changing the model’s credit score from 800 to a more applicable lower score. The CFPB asserts these practices violated the Mortgage Advertising and Practices (MAP) Rule by misleading consumers.
The CFPB also alleges that the lender violated RESPA and TILA by overcharging for credit reports and by requiring consumers to schedule and give payment authorization information for appraisals before providing a GFE and receiving indication that the consumers intended to proceed with a loan from the lender, thereby restricting consumers’ ability to shop for alternatives. In addition, the CFPB claims that the lender violated RESPA by failing to properly disclose its affiliate relationship with the AMC and making numerous deceptive statements that led consumers to believe that the lender had no relationship with the AMC and that the AMC’s fees were reasonable third-party fees, and violated the MAP Rule by inflating prices for certain of the AMC’s services, including “appraisal validations.”
According to the CFPB, much of the alleged conduct was directed by, and provided a financial benefit to, the companies’ individual owner.
Redress, Penalties, and Corrective Actions
The consent order requires the lender to pay nearly $14.9 million to the CFPB, which will distribute the funds to consumers who: (i) viewed the lender’s misleading rates on the rate publisher’s website on or after July 21, 2011 and then took out a mortgage with the lender with higher than advertised rates; (ii) received misleading mortgage quotes on the lender’s website based on an inapplicable 800 FICO score on or after July 21, 2011 and then took out a mortgage with the lender at a rate higher than that quoted; (iii) on or after November 1, 2009 paid more than the actual costs of credit reports before the lender provided a GFE; (iv) paid an appraisal fee on or after January 1, 2011 without receiving a proper affiliated business disclosure; and (v) closed loans during or after December 2010 and paid for appraisal review fees.
The order also: (i) requires the lender to pay a $4.5 million penalty; (ii) regulates the way the lender is permitted to advertise interest rates; (iii) mandates numerous other corrective actions related to the alleged activity; and (iv) requires the lender to hire an independent consultant to assess the lender’s advertising and disclosure practices and report to the CFPB’s Enforcement Director.
Under the consent order, the individual owner is jointly and severally liable for the nearly $14.9 million redress judgment, and must pay a $1.5 million civil money penalty.
Ninth Circuit Holds Plaintiffs Not Required To Plead Tender Or Ability To Tender To Support TILA Rescission Claim
On July 16, the U.S. Court of Appeals for the Ninth Circuit held that an allegation of tender or ability to tender is not required to support a TILA rescission claim. Merritt v. Countrywide Fin. Corp., No. 17678, 2014 WL 3451299 (9th Cir. Jul. 16, 2014). In this case, two borrowers filed an action against their mortgage lender more than three years after origination of the loan and a concurrent home equity line of credit, claiming the lender failed to provide completed disclosures. The district court dismissed the borrowers’ claim for rescission under TILA because the borrowers did not tender the value of their HELOC to the lender before filing suit, and dismissed their RESPA Section 8 claims as time-barred.
On appeal, the court criticized the district court’s application of the Ninth Circuit’s holding in Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) that courts may at the summary judgment stage require an obligor to provide evidence of ability to tender. Instead, the appellate court held that borrowers can state a TILA rescission claim without pleading tender, or that they have the ability to tender the value of their loan. The court further held that a district court may only require tender before rescission at the summary judgment stage, and only on a case-by-case basis once the creditor has established a potentially viable defense. The Ninth Circuit also applied the equitable tolling doctrine to suspend the one-year limitations period applicable to the borrower’s RESPA claims and remanded to the district court the question of whether the borrowers had a reasonable opportunity to discover the violations earlier. The court declined to address two “complex” issues of first impression: (i) whether markups for services provided by a third party are actionable under RESPA § 8(b); and (ii) whether an inflated appraisal qualifies as a “thing of value” under RESPA § 8(a).
CFPB Issues Guidance On Ensuring Equal Treatment For Married Same-Sex Couples
On July 8, the CFPB released guidance designed to ensure equal treatment for legally married same-sex couples in response to the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). Windsor held unconstitutional section 3 of the Defense of Marriage Act, which defined the word “marriage” as “a legal union between one man and one woman as husband and wife” and the word “spouse” as referring “only to a person of the opposite sex who is a husband or a wife.”
The CFPB's guidance, which took the form of a memorandum to CFPB staff, states that regardless of a person’s state of residency, the CFPB will consider a person who is married under the laws of any jurisdiction to be married nationwide for purposes of enforcing, administering, or interpreting the statutes, regulations, and policies under the Bureau’s jurisdiction. The Bureau adds that it “will not regard a person to be married by virtue of being in a domestic partnership, civil union, or other relationship not denominated by law as a marriage.”
The guidance adds that the Bureau will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status in all statutes, regulations, and policies administered, enforced or interpreted by the Bureau (including ECOA and Regulation B, FDCPA, TILA, RESPA) to include same-sex marriages and married same-sex spouses. The Bureau’s stated policy on same-sex marriage follows HUD’s Equal Access Rule, which became effective March 5, 2012, which ensures access to HUD-assisted or HUD-insured housing for LGBT persons.
Special Alert: CFPB Issues Guidance On Supervision And Enforcement Of Mini-Correspondent Lenders
This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”
The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act.
Background
The CFPB explains that generally, a correspondent lender performs the activities necessary to originate a mortgage loan—it takes and processes applications, provides required disclosures, sometimes underwrites loans and makes the final credit approval decision, closes loans in its name, funds them (often through a warehouse line of credit), and sells them to an investor. The CFPB’s focus here is on mortgage brokers who are attempting to move to the role of a correspondent lender by obtaining a warehouse line of credit and establishing relationships with a few investors. The CFPB believes that some of these transitioning brokers may appear to be the lender or creditor in each transaction, but in actuality have not transitioned to the mini-correspondent lender role and are continuing to serve effectively as mortgage brokers, i.e. they continue to facilitate brokered loan transactions between borrowers and wholesale lenders.
RESPA (Regulation X) and TILA (Regulation Z) include certain rules related to broker compensation, including RESPA’s requirement that lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement, and TILA’s requirements that broker compensation be included in “points and fees” calculations, and its restrictions on broker compensation and prohibition on steering to increase compensation. Those requirements do not apply to exempt bona fide secondary-market transactions, but do apply to table-funded transactions, the difference between which depends on the “real source of funding” and the “real interest of the funding lender.”
The CFPB states that the requirements and restrictions that RESPA and TILA and their implementing regulations impose on compensation paid to mortgage brokers do not depend on the labels that parties use in their transactions. Rather, under Regulation X, whether compensation paid by the “investor” to the “lender” must be disclosed depends on determinations such as whether that compensation is part of a secondary market transaction, as opposed to a “table-funded” transaction. And under Regulation Z, whether compensation paid by the “investor” to the “creditor” must be included in the points-and-fees calculation and whether the “creditor” is subject to the compensation restrictions as a mortgage broker depends on determinations such as whether the “creditor” finances the transaction out of its own resources as opposed to relying on table-funding by the “investor.”
CFPB’s Factors For Assessing Mini-Correspondent Lenders
The guidance advises lenders that in exercising its supervisory and enforcement authority under RESPA and TILA in transactions involving mini-correspondents, the CFPB considers the following questions, among others, to assess the true nature of the mortgage transaction:
- Beyond the mortgage transaction at issue, does the mini-correspondent still act as a mortgage broker in some transactions, and, if so, what distinguishes the mini-correspondent’s “mortgage broker” transactions from its “lender” transactions?
- How many “investors” does the mini-correspondent have available to it to purchase loans?
- Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
- Is the warehouse line of credit provided by a third-party warehouse bank?
- How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
- Does the mini-correspondent have more than one warehouse line of credit?
- Is the warehouse bank providing the line of credit one of, or affiliated with any of, the mini-correspondent’s investors that purchase loans from the mini-correspondent?
- If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans to, is the warehouse line a “captive” line (i.e., the mini-correspondent is required to sell the loans to the investor providing the warehouse line or to affiliates of the investor)?
- What percentage of the mini-correspondent’s total monthly originated volume is sold by the mini-correspondent to the entity providing the warehouse line of credit to the mini-correspondent, or to an investor related to the entity providing the warehouse line of credit?
- Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
- What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
- What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
- Which entity (mini-correspondent, warehouse lender, or investor) is performing the majority of the principal mortgage origination activities?
- Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
- What percentage of the principal mortgage origination activities, such as the taking of loan applications, loan processing, and pre-consummation underwriting, is being performed by the mini-correspondent, or an independent agent of the mini-correspondent?
- If the majority of the principal mortgage origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent, and, if so, what conditions must be met to make this transition (e.g. number of loans, time)?
The CFPB cautions that (i) the inquiries described in the guidance are not exhaustive, and that the CFPB may consider other factors relevant to the exercise of its supervisory and enforcement authorities; (ii) no single question listed in the guidance is necessarily determinative; and (iii) the facts and circumstances of the particular mortgage transaction being reviewed are relevant.
* * *
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Clinton R. Rockwell, (310) 424-3901, crockwell@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
- Joseph M. Kolar, (202) 349-8020, jkolar@buckleyfirm.com
- Jeremiah S. Buckley, (202) 349-8010, jbuckley@buckleyfirm.com
Second Circuit Affirms Dismissal Of RESPA Claims Based On Faulty QWR
On June 24, the U.S. Court of Appeals for the Second Circuit held that a borrower failed to state a claim under RESPA because her purported qualified written requests (QWRs) did not trigger the servicer’s RESPA duties. Roth v. CitiMortgage, Inc., No. 13-3839, 2014 WL 2853549 (2d Cir. Jun 24, 2014). A borrower who defaulted on her second residential mortgage sued the servicer of the loan after the servicer threatened to take legal action. The borrower alleged that the servicer violated RESPA by failing to respond to three letters the borrower characterized as QWRs. The court agreed with a Tenth Circuit holding that Regulation X permits servicers to designate an exclusive address for QWRs, and held that the borrower’s letters did not trigger the servicer’s RESPA duties because they were not sent to the QWR address designated by the servicer and provided on the borrower’s mortgage statements. The court further explained that servicers are not prohibited from changing a QWR address. For the same reasons, the court rejected the borrower’s claim that the alleged inadequate QWR address notice violated state prohibitions on unfair and deceptive practices. Finally, the court held that the borrower’s FDCPA claim failed because the servicer did not acquire the debt after it was in default and therefore the servicer did not qualify as a debt collector subject to the FDCPA.
Latest CFPB RESPA Enforcement Action Targets Employee Referrals
Last week, the CFPB announced its latest RESPA enforcement action, adding to one of the CFPB’s most active areas of enforcement. In this case, the CFPB required a New Jersey title company to pay $30,000 for allegedly paying commissions to more than twenty independent salespeople who referred title insurance business to the company. The matter was referred to the CFPB by HUD.
The CFPB asserts that from at least 2008 to 2013, the title company offered commissions of up to 40% of the title insurance premiums the company received. The CFPB explained that paying commissions for referrals is allowed under RESPA if the recipient of the payment is an employee of the company that is paying the referral, but claimed in this case that the individuals involved were actually independent contractors and not bona fide employees. The CFPB determined that although the individuals received W-2 forms from the title company, the company “did not have the right or power to control the manner and means by which the individuals performed their duties.”
In determining the penalty amount, the CFPB took into consideration the company’s ability to pay and remain a viable business. Notably, the consent order removes the “employer-employee” exception for this company on a going forward basis, including under existing employment contracts. The order prohibits the company from paying any employee “any fee, kickback, or thing of value that is contingent on the referral of title insurance business or other settlement services, notwithstanding the ‘employee exception’ contained in 12 C.F.R. §1024.14(g)(vii).” The order also establishes certain compliance, record keeping, and reporting requirements.
CFPB Fines Realty Firm $500K Over RESPA Disclosures
On May 28, the CFPB ordered the largest real estate company in Alabama to pay a $500,000 civil penalty to settle claims that the company provided inadequate disclosures of its relationship with an affiliated title insurance company. The CFPB alleged that the realty company failed to comply with the disclosure-related provisions of RESPA in connection with affiliated business arrangements (AfBAs). Under RESPA, AfBAs do not violate the prohibition on the exchange of referral fees if, among other things, the party referring a consumer to its affiliate gives the consumer a disclosure clearly stating that the consumer may shop for other, lower-cost providers and that the consumer is not required to use the affiliate.
The CFPB alleged that, over a 14-month period in 2011 and 2012, the realty company provided consumers a document explicitly directing that title and closing services would be performed by the affiliate. Then, in 2012, the realty company changed its document to allow the consumer to choose the affiliate or another provider. During all of these periods, the realty company also provided an AfBA disclosure, but the CFPB alleged that the disclosure did not comply with RESPA’s Regulation X because it was not in the format required by Appendix D to Regulation X.
The CFPB charged that the realty company’s AfBA disclosure deviated from the format set forth in Regulation X and thus did not comply with RESPA. For instance, the CFPB claimed that the AfBA disclosure did not use capital letters or otherwise highlight the fact that consumers could obtain services from other providers and that the disclosure language was “hidden” among other statements. Further, the CFPB raised concerns that the AfBA disclosure “included marketing statements touting the benefit and value of the affiliated entities,” such as by saying that the affiliates are “in a unique position to provide you with exceptional value and service.”
The CFPB concluded that, based on these disclosures, the realty company and its affiliates violated RESPA’s prohibition on the exchange of referral fees by affirmatively referring consumers to the affiliates and then collecting profits from the affiliated entities, without satisfying the “safe harbor” under RESPA for AfBAs. The CFPB ordered the company to use AfBA disclosures that do not materially deviate from the model disclosure in Appendix D, to update its training and guidance documents on AfBAs, and to pay a civil money penalty of $500,000 to the CFPB. HUD, which previously had authority over RESPA, initially referred this matter to the CFPB.
C.D. Cal. Limits Scope Of RESPA Kickback Safe Harbor For "Services Actually Performed"
On April 29, the U.S. District Court for the Central District of California held that RESPA’s preclusion of liability for otherwise illegal kickbacks based on “services actually performed” relates only to “settlement services” as defined in RESPA, and not to some broader set of services. Henson v. Fidelity Nat’l Fin. Inc., No. 14-cv-01240, 2014 WL 1682005 (C.D. Cal. Apr. 29, 2014). Last month in the same case, the court held that the overnight delivery services provided by certain delivery companies to a parent company of various escrow companies were “settlement services” under RESPA and concluded that the borrowers had pleaded facts sufficient to establish that the defendant parent company may have violated RESPA by accepting marketing fees from certain delivery companies in exchange for “referring”—via its escrow subsidiaries—overnight delivery business to those delivery companies. The defendant then moved for judgment on the pleadings, asserting that its subsidiary performed actual services in exchange for the marketing fees it received from the delivery companies, and therefore was not liable under RESPA. The court held that although the relevant RESPA section uses only the general term “services” and not the specific phrase “settlement services” used elsewhere in the statue, “Congress would have vitiated RESPA’s purposes by permitting kickbacks as long as the recipient performed any service—even if the service bore no relationship to a real-estate settlement.” The court held that Congress clearly intended to provide a safe harbor only with regard to “settlement services.” In this case, the court held that issues of fact persist as to whether the services performed were settlement services and denied the motion for judgment on the pleadings.
CFPB Issues Integrated Mortgage Disclosure Rule Compliance Resources
On April 17, the CFPB issued a guide to completing the disclosure forms required by its November 2013 TILA-RESPA integrated disclosures rule, which generally applies to transactions for which a creditor or broker receives an application on or after August 1, 2015. The guide provides instructions for completing the Loan Estimate and Closing Disclosure and highlights common situations that may arise when completing the forms. The CFPB states in addition to serving as a resource to creditors, the guide also may assist settlement service providers, software providers, and other service providers. The disclosure forms guide follows the release last month of a small entity compliance guide, which summarizes the rule and highlights issues that small creditors, and their partners or service providers, might find helpful to consider when implementing the rule.
C.D. Cal. Court Holds Overnight Delivery Companies Covered By RESPA
On March 21, in a suit brought by borrowers who had paid overnight delivery fees at closing, the U.S. District Court for the Central District of California held that the overnight delivery services provided by certain delivery companies to a parent company of various escrow companies were “settlement services” under RESPA and concluded that borrowers had pleaded facts sufficient to establish that defendant parent company may have violated RESPA by accepting marketing fees from certain delivery companies in exchange for “referring”—via its escrow subsidiaries—overnight delivery business to those delivery companies. Henson v. Fidelity Nat’l Fin. Inc., No. 14-cv-01240, slip op. (C.D. Cal. Mar. 21, 2014). In this case, the defendant parent company’s allegedly required its escrow subsidiaries to use certain delivery companies in connection with loan closings. Defendant parent company, in turn, allegedly received a marketing fee from those delivery companies based on the volume of business it sent to the delivery companies through its escrow subsidiaries. On the parent company’s motion to dismiss, the court held that the overnight delivery service was a “settlement service” under RESPA given that Regulation X specifically lists a “delivery” as a settlement service if provided in connection with a real estate settlement. The court further held that a “referral” under RESPA need not be linked to particular transactions and thus that a RESPA violation could occur where a master agreement required subsidiaries to use certain delivery service providers in exchange for a marketing fee received by a parent company. However, the court agreed with the defendant that the borrowers failed to adequately plead either a split of an unearned fee or that defendant did not perform any service in exchange for the marketing fee it received. Thus the court denied, in part, and granted, in part, the defendant’s motion to dismiss.