CFPB Takes Action on Allegedly Misleading Advertisements

Late last week, on February 12, the CFPB announced actions against three mortgage companies for alleged violations of Regulation N, the Mortgage Acts and Practices Advertising Rule. Among other restrictions, Regulation N bars any commercial misrepresentation of the relationship between a credit provider and a government. According to the CFPB, the three mortgage companies at issue—All Financial Services, Flagship Financial Group, and American Preferred Lending—wrongfully depicted their affiliation with the U.S. government in direct mail advertisements.

The three actions—one civil suit and two consent orders—mark the first we’ve heard from the Bureau or the FTC regarding their joint “sweep” of roughly 800 mortgage-related advertisements since the two agencies issued warning letters to several institutions in November 2012.

The facts articulated in the two consent orders are markedly similar. As alleged by the CFPB, Flagship Financial Group sent more than a million direct mail advertisements claiming to be a “HUD-approved” lender when, in fact, it was not. Thousands more Flagship mailers allegedly opened with a reference to a Federal Housing Administration (FHA) press release, “HUD No. 12-045,” and instructed recipients to phone an “assigned FHA loan specialist.” According to the order, Flagship’s name was buried in a disclaimer on the reverse side of the ad.

Likewise, the CFPB alleged that American Preferred Lending sent 100,000 mailers featuring an FHA-approved lender logo and a reference to a web address, While American Preferred is authorized to originate FHA-insured loans, it enjoys no greater affiliation with the government than any other lender authorized to engage in the same activity. The Bureau determined that these representations connoted affiliation with the U.S. government, and, as such, violated Regulation N.

Flagship and American Preferred agreed to pay penalties of $225,000 and $85,000, respectively, and both are required to establish compliance plans subject to the Bureau’s approval. Pursuant to the consent orders, however, neither Flagship nor American Preferred admitted or denied any of the Bureau’s findings of fact or conclusions of law.

The facts articulated in the civil complaint differ slightly. Like Flagship and American Preferred, All Financial Services allegedly sent thousands of mailers with arguably misleading allusions to an affiliation with the government, including an official-looking seal and a heading that read, “Government Lending Division.” Unlike the other companies in last week’s announcement, however, All Financial also allegedly misrepresented the terms of its reverse mortgage product by saying that no monthly payments “whatsoever” would be due “as long as you and your spouse live in the home.” According to the Bureau, this representation fails to depict the actual cost of the product, which does require payment of taxes and insurance, and it masks the reality that payment could be due on death of the borrower, even if the borrower’s spouse remains in the home.

The Bureau’s announcement does not indicate whether these actions effectively conclude the joint sweep effort, or whether additional actions based on the same investigation(s) may be forthcoming.

Richard J. Andreano, Jr., and Ryan J. Richardson 

CFPB Issues Report on Reverse Mortgage Complaints

The CFPB has issued a “Snapshot of reverse mortgage complaints” covering complaints submitted to the CFPB from December 2011 (when the CFPB began accepting consumer complaints on reverse mortgages) through December 2014.

According to the report, the CFPB handled approximately 1,200 reverse mortgage complaints during that period. The issues raised in those complaints and the percentage of total complaints for each issue were: problems when unable to pay (38%), making payments (32%), applying for the loan (18%), signing the agreement (10%), and receiving a credit offer (3%).

The CFPB states that the complaints indicate “confusion and frustration over the terms and requirements of reverse mortgages.” For example, the CFPB found that many consumers were frustrated when they could not refinance their loans due to insufficient equity. In the CFPB’s view, these complaints suggest homeowners may not understand that the loan proceeds and accrued interest over time will substantially decrease the amount of available equity. Other issues the CFPB found caused consumers confusion included the ability to obtain loan changes, such as adding additional borrowers to extend the loan term, and the consequences for non-borrower family members living in a home at the time of the reverse mortgage borrower’s death.

The complaints also involved loan servicing problems such as: difficulty paying off a reverse mortgage that had become due and payable, failure by the servicer to keep accurate records, and servicer unresponsiveness when a borrower attempted to prevent foreclosure.

The CFPB concludes the report with the comment that “[a]s the likelihood increases that older Americans will use their home equity to supplement their retirement income, it is essential that the terms, conditions and servicing of reverse mortgages be fair and transparent so that consumers can make informed decisions regarding their options.” While the CFPB has posted a new consumer advisory on its website to address some concerns raised in the complaints, this concluding comment suggests the CFPB is also likely to consider imposing additional disclosure and other requirements on reverse mortgages.

- Barbara S. Mishkin

FTC Touts Partnership with CFPB in Annual Debt Collection Report

In the FTC’s 2014 annual letter to the CFPB summarizing FTC debt collection activities, the FTC describes the CFPB as a “valuable partner” with whom the FTC anticipates an “even stronger [partnership] in the future.” The letter includes a discussion of the FTC’s collaboration with the CFPB on several amicus briefs in cases involving Fair Debt Collection Practices Act (FDCPA) issues, specifically Delgado and Buchanan, dealing with the collection of time-barred debts, and Hernandez, dealing with the requirements for a collector’s “initial communication.” The letter also indicates that the FTC has been consulting with the CFPB in connection with the CFPB’s expected debt collection rulemaking.

The letter’s centerpiece is the FTC’s description of its “aggressive law enforcement activities” in the debt collection arena. The FTC states that in 2014, it filed 10 new cases against 56 new defendants, resolved nine cases and obtained nearly $140 million in judgments, and banned 47 companies and individuals “that engaged in serious and repeated violations of law from ever working in debt collection again.” The letter highlights cases in which the FTC was successful in obtaining judgments or injunctive relief that involved (1) deceptive, unfair or abusive collector conduct generally, (2) abusive collection practices targeting Spanish-speaking consumers, (3) phantom (fraudulent) debt collection, and (4) debt brokering and consumer data integrity.

- Barbara S. Mishkin

The Sixth Circuit, Relying upon Michigan’s Nonrecourse Mortgage Loan Act, Rejects the Enforceability of an Insolvency Covenant 

Notwithstanding Michigan’s 2012 Nonrecourse Mortgage Loan Act (NMLA), which provides that solvency covenants in nonrecourse loans unenforceable, in Borman, LLC v. 18718 Borman, LLC, a third-party purchaser of a foreclosed property sought a deficiency judgment against the borrower and guarantor on the grounds that the solvency clause in the promissory note transformed the nonrecourse loan into a recourse loan when the borrower defaulted as a result of insolvency. On February 3, 2015, the U.S. Court of Appeals for the Sixth Circuit upheld summary judgment in favor of the borrower, holding that the NMLA applies retroactively. 

In Borman, the borrower obtained an $8.7 million commercial mortgage-backed security loan in 2005 and defaulted on the loan in 2010.  At the foreclosure sale in 2011, the servicer acquired the commercial property with a $2.1 million credit bid.  Neither the lender nor the servicer sought a deficiency judgment against the borrower.  A year later, the servicer sold the property at auction with a high bid of $756,000, advertising that the borrower “held the property subject to a nonrecourse loan before foreclosure.”  The purchaser, contending that it stood in the shoes of the lender, then sought a deficiency judgment against the borrower and guarantor.  The district court granted summary judgment in favor of the borrower and guarantor.

On appeal, the purchaser asserted that the loan failed to qualify as a “nonrecourse loan” under the NMLA because by the time the NMLA took effect, pursuant to the terms of the promissory note, the loan had transformed to a recourse loan as a result of the borrower’s insolvency.  The purchaser also claimed that the loan did not constitute a “nonrecourse loan” under the NMLA because the loan was no longer secured by mortgage on real property following the foreclosure.

The Sixth Circuit rejected the purchaser’s arguments, holding that the NMLA applied to any loan containing a nonrecourse provision existing at the time the NMLA became effective, regardless of whether the nonrecourse provision remained enforceable at the time of NMLA’s effective date.  And, following the same logic, the Sixth Circuit concluded that, although the NMLA defined nonrecourse loans as “secured by a mortgage on real property,” the loan need only have been secured by a mortgage on real property at any time, not merely beyond the effective date of the NMLA.

Accordingly, the Borman decision underscores that solvency covenants in promissory notes will be held unenforceable in Michigan.

- Alan S. Petlak and Edward Chang

California Amends Mortgage Originator Testing and Education Requirements

The state of California has made significant changes to the testing and education requirements for its mortgage loan originators licensed under the California Finance Lenders Law and the California Residential Mortgage Lending Act. Governor Jerry Brown signed SB 1459 into law on July 10, 2014, and the measure took effect on January 1, 2015.

The law allows an applicant for a mortgage loan originator license to pass a qualified written test developed by the Nationwide Mortgage Licensing System (NMLS) as part of the state's written test requirement. Under the old law, a mortgage loan originator applicant had to satisfy the testing requirement by passing the National SAFE Act Test component with the Uniform State Test (UST) component and a separate California state-specific test. Under the new law, the pre-licensing test requirement may be satisfied by passing only the National Test and the UST. This means California mortgage loan originator applicants will no longer have to take a separate California state-specific test.

The law is now being implemented by the California Department of Business Oversight (California DBO). When the California DBO adopts the UST at a future date, it will become the 47th state mortgage agency to do so.

The law also establishes new pre-licensing and continuing education requirements for mortgage loan originators. Specifically, the law requires an applicant for a mortgage loan originator license to complete two hours of approved education related to relevant state law and regulations. It also requires a current licensee to complete one hour of continuing education related to relevant state law.

Overall, the law requires that a mortgage loan originator applicant complete at least 20 hours of approved education, including at least:

  • Three hours of instruction on federal law and regulations
  • Three hours of ethics, which must include instructions on fraud, consumer protection, and fair lending issues
  • Two hours of training related to lending standards for the nontraditional mortgage product marketplace
  • Two hours of training related to relevant California law and regulations

Further, SB 1459 states that current licensees must complete at least eight hours of approved continuing education each year, including at least:

  • Three hours of instruction on federal law and regulations
  • Two hours of ethics, which must include instruction on fraud, consumer protection, and fair lending issues
  • Two hours of training related to lending standards for the nontraditional mortgage product marketplace.
  • One hour of annual training related to relevant California law and regulations  

The law allows pre-licensing and continuing education requirements to be offered in a classroom, online, or by any other approved means. Education requirements approved for any other state are accepted as credit toward completion of education requirements in California.

Note that California has three state regulatory regimes that apply to lenders that employ residential mortgage loan originators. The California Finance Lenders Law and California Residential Mortgage Lending Act are administered by the California DBO. The other is the California Real Estate Law, which is administered by the California Bureau of Real Estate.  The changes made by SB 1459 only affect mortgage loan originators who work for lenders licensed under the California Finance Lenders Law and the California Residential Lending Act. Accordingly, mortgage loan originators subject to the California Real Estate Broker Law must still pass a separate state-specific test.

 - Marc D. Patterson

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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