The CFPB ended 2013 and started 2014 with a bang: updates on actions against online lenders, indirec The CFPB ended 2013 and started 2014 with a bang: updates on actions against online lenders, indirec

The CFPB ended 2013 and started 2014 with a bang: updates on actions against online lenders, indirect auto lenders, mortgage servicers and more.

The Consumer Financial Protection Bureau (CFPB) ended 2013 and started 2014 with a flurry of activity.  This article briefly summarizes the more significant recent CFPB enforcement activities.
1.  Alleged violation of Real Estate Settlement Procedures Act’s (RESPA) “anti-kickback rule.”  In the matter of Fidelity Mortgage Corporation and Mark Figert, Consent Order in Administrative Proceeding issued 1/16/14.  The following summary is taken from the Consent Order. In 2010, an originator of residential mortgage loans called Fidelity Financial Mortgage Company (FFMC) and its president Figert entered into an arrangement with a local bank, whereby the bank would outsource its mortgage lending to FFMC by exclusively referring customers to FFMC and, in exchange, FFMC would rent an office at the bank’s facility.  The lease agreement set a low monthly rental payment, but the parties understood that the monthly payments would increase based upon FFMC’s loan volume.  In 2012, Fidelity Mortgage Corporation was created and assumed the lease obligations and assets of FFMC’s arrangement with the bank; Mark Figert carried on as president of Fidelity.  The CFPB found the exclusivity and loan-volume variable payments were a violation of RESPA’s anti-kickback rule.  Fidelity agreed to disgorge $27,076 (its origination fees), and Fidelity and Figert jointly must pay a penalty of $54,000.
2.  Indirect Auto Lending.  In the matter of Ally Financial Inc. and Ally Bank, Consent Order in Administrative Proceeding issued 12/20/13.  The following summary is taken from the Consent Order.  Ally Bank is a Utah-chartered bank and a subsidiary of Michigan-based Ally Financial Inc.  Ally (collectively Ally Bank and Ally Financial Inc.) is one of the largest indirect auto financing companies in the country with contracts from more than 12,000 auto dealers.  Ally maintained a policy that gave dealers the discretion to mark up a consumer’s interest rate above the rate Ally set based on its risk-analysis.  The CFPB and the Department of Justice (DOJ) jointly investigated the interest rate set by the auto dealers with whom Ally did business to determine whether there were any Equal Credit Opportunity Act (ECOA) violations.  Using the proxy method of analysis (i.e., without any actual information about a consumer’s race, ethnicity or origin), the regulators concluded that the borrowers for 20 percent of Ally’s retail installment contracts were African-American, Hispanic or Asian/Pacific Islanders.  Applying the same proxy methodology, the regulators concluded those minority groups received less favorable interest rates from the dealers than their counterpart non-minority borrowers received.  Based off those conclusions, the CFPB concluded Ally violated the ECOA and ordered Ally to pay $80 million in damages and $18 million in civil penalties.  Moreover, the CFPB ordered that Ally must institute a compliance program that either effectively prevents dealer discrimination or eliminates dealer markups altogether, and Ally must continue paying damages to affected  consumers until that compliance plan is in place. 
            This is the CFPB’s first indirect auto lender proceeding and follows the CFPB’s Bulletin earlier in 2013 on this topic.  The legitimacy of the “proxy methodology” of determining statutory violations remains hotly contested.  In October 2013, a case addressing the legitimacy of that methodology under a different statute (the Fair Housing Act) was settled while briefing was ongoing at the Supreme Court.  The question will remain hotly disputed until the Supreme Court has opportunity to weigh in.

3.  Credit Card Enrollment.  In the matter of GE Capital Retail Bank, CareCredit, LLC, Consent Order in Administrative Proceeding issued 12/10/13.   The following summary is taken from the Consent Order. GE Capital Retail Bank (Bank) is a federally-chartered savings association.  CareCredit is a California limited liability company.  Both are indirect subsidiaries of General Electric Capital Corporation.  CareCredit and the Bank issue a CareCredit Card to consumers for financing of specified medical services, including dental, veterinarian, cosmetic, vision and audiology services.  The card typically offered two repayment options.  The option at issue included a no-interest promotional period.  The CFPB alleged that CareCredit and the Bank did not adequately disclose the fact that, although interest would not be owed during the promotional period, interest would accrue.  The CFPB found that fact to be misleading and constituted a deceptive act or practice in violation of the Consumer Financial Protection Act.  The CFPB additionally concluded that CareCredit and the Bank’s failure to monitor and train providers constituted an unfair act or practice in violation of the Consumer Financial Protection Act.  The CFPB ordered CareCredit and the Bank to set aside a $34.1 million reimbursement fund that will be administered by an independent administrator. 
4.  Mortgage servicing and foreclosure.   CFPB et al. v. Ocwen Financial, pending in the U.S. District Court for the District of Columbia.  On Dec. 19, 2013, the CFPB, 49 separate state Attorneys General and Ocwen Financial Corporation filed a Consent Judgment whereby Ocwen agreed, without admission of any liability, to pay more than $2 billion to settle alleged misconduct in its mortgage servicing and foreclosure practices.  Ocwen is the country’s largest non-bank mortgage loan servicer.  The CFPB and the Attorneys General alleged that Ocwen is responsible for collecting payments from borrowers and forwarding those payments to the owners of the loans, as well as handling customer service, collections, loan modifications and foreclosures.  The CFPB’s and the Attorneys Generals’ complaints regarding Ocwen spanned the entire spectrum of loan servicing, including application of fees, force-placement of mortgage insurance, providing misleading and false information in response to consumer complaints, failing to process applications, collecting monies under original financing terms after the agreement had been modified and robo-signing foreclosure documents.  In settlement, Ocwen agreed to refund $125 million to affected foreclosure customers, provide $2 billion in loan modification and principal reduction to affected customers and implement new compliance and servicing practices and procedures.  The Consent Judgment is currently awaiting court approval.
5.  Online lending.  CFPB v. CashCall, Inc., et al., U.S. District Court for the District of Massachusetts.  The CFPB filed a lawsuit against online loan servicer CashCall Inc., as well as its subsidiary WS Funding LLC, affiliate collections agency Delbert Services Corporation and J. Paul Reddam, the man who allegedly owns each company.  CashCall Inc. and WS Funding LLC are online loan servicers.  The CFPB alleged that those companies entered into an arrangement with online lender Western Sky Financial to service that company’s loans.  The complaint alleges that Western Sky Financial’s loans violated numerous state usury laws, rendering the loans illegal and unenforceable, and therefore alleges that the actions of CashCall, WS Funding and Delbert Services Corporation to service and collect on those loans were deceptive, unfair and abusive – as the argument goes, one cannot legally enforce or collect on a loan that does not exist.  In light of the underlying questions regarding the CFPB’s or the states’ jurisdiction to address business activities of a company owned by a Native American tribe (such as Western Sky Financial), this case will present numerous unique issues for the court to decide.  Regardless, this matter is the CFPB’s first effort to regulate online loan servicers and likely will not be the last.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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