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Insolvency & Financial Institutions Alert >> Consumer Financial Protection Bureau Cracks Down on Deceptive Advertising and Abuses in the Mortgage Industry

March 16, 2015

The Consumer Financial Protection Bureau (CFPB) has recently put the mortgage industry on notice that it is willing to take action where it perceives there exists any unfair, deceptive or abusive practices.

As the latest in a string of actions, in February 2015 the CFPB ordered NewDay Financial, LLC to pay a $2 million civil penalty and institute widespread changes to its business practices after the CFPB found the company engaged in deceptive advertising practices and paid illegal kickbacks for leads.

Although the CFPB was granted supervisory authority over the financial sector, including non-bank mortgage lenders and servicers, in 2010 in connection with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, after a lengthy startup period it has begun what appears to be a crackdown on mortgage companies. Based on recent comments by the CFPB, the sanctions against NewDay may foreshadow greater activity by the CFPB in the future against mortgage lenders and other service providers.

NewDay CASE
According to the CFPB, NewDay acted as the exclusive lender of a veteran’s organization and sent advertising communications to members that were falsely identified as being from the organization itself. Although NewDay paid the organization $15,000 a month to be spacing its exclusive lender and for lead generation fees, NewDay’s communications with prospective borrowers created the false impression that NewDay was selected by the veterans’ organization as its lender of choice. These acts were found to be in direct contravention of the Dodd-Frank Act, which expressly prohibits service providers from “engag[ing] in any unfair, deceptive, or abusive act or practice.” In addition, the CFPB found that NewDay participated in a scheme to pay the veterans’ organization broker kickbacks for customer referrals in violation of the Real Estate Settlement Procedures Act (RESPA).

The CFPB’s stance against NewDay did not come wholly without warning. More than two years ago, the CFPB, along with the Federal Trade Commission, issued warning letters to mortgage lenders and brokers advising them to halt the use of misleading advertising tactics. In particular, the CFPB’s warning letters were concerned with misleading advertisements aimed at veterans and older Americans. Further, the CFPB recently filed suit against three reverse mortgage lenders, typically marketed to older borrowers, for misleading customers with advertisements implying U.S. government approval of their products.

Further CFPB Action
It is likely that further CFPB action will extend beyond targeting mortgage companies’ advertising to veterans and older populations. The NewDay decision, along with other recent CFPB activity, reflects a heightened concern with mortgage companies’ practices more generally. For example, in January the CFPB and the Maryland Attorney General filed a complaint against Wells Fargo and JPMorgan Chase, among others, for participating in an illegal mortgage kickback scheme that included marketing services, marketing leads and letters to consumers without regard to affiliation in any particular demographic. CFPB Director Richard Cordray stated that this action “should serve as a warning for all those in the mortgage market.”

Bottom Line

Recent statements and actions of the Consumer Financial Protection Bureau against mortgage lenders suggest a crackdown in the mortgage industry that is likely to expand to products offered across all demographics.