Wednesday, April 26, 2017

Bi-Weekly Baloney

Managing Director
Lenders Compliance Group

Almost two years ago, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in federal district court against Nationwide Biweekly Administration, Inc., Loan Payment Administration LLC (collectively, “Nationwide”), and the companies’ owner, Daniel Lipsky, alleging that Nationwide misrepresented the interest savings consumers would achieve through a bi-weekly mortgage payment program and also misled consumers about the cost of the program. The CFPB was seeking compensation for harmed consumers, a civil penalty, and an injunction against the companies and their owner.

An interesting feature of this lawsuit is the role that teaser ads, in general, and telemarketing sales scripts, in particular, have on exposure to regulatory violations.

This past Monday, after some haggling back and forth in the usual mix and bantering of legal procedures, the two entities found themselves in court at a bench trial.[*] The CFPB told a California federal judge at the beginning of the trial that Nationwide violated consumer protection laws by suggesting it was affiliated with the homeowners’ mortgage providers and hiding its fee structure in deceptive mailers and sales calls.

The CFPB argued during opening arguments that Nationwide sent deceptive mailers to potential customers that included the name of the bank holding their mortgage and stated the loan amount. These mailers allegedly told the customers that if they declined the bi-weekly program, they were “waiving” loan savings. When potential customers called in, sales representatives supposedly would say that Nationwide “has a working relationship with your bank.” According to the CFPB, these were misrepresentations that violated the Consumer Financial Protection Act and the Telemarketing Sales Rule.

The violations can be grouped into the following four categories, each of which I will explicate briefly.

1)      Falsely promising consumers they could achieve savings without paying more:
In direct mail, online, and other marketing materials, Nationwide claimed that consumers who enrolled in its “Interest Minimizer” program would save money without increasing their mortgage payments. In a video on Nationwide’s website, Lipsky stated, “you’re not increasing your payment. You’re just switching to a smaller bi-weekly or weekly amount.” The CFPB alleged that, in fact, consumers in the program paid processing fees for each bi-weekly payment on top of the initial set-up fee to Nationwide, plus the equivalent of one additional monthly payment each year.

2)      Falsely promising immediate savings that take years to achieve:
Despite promises of immediate savings, the CFPB alleged that a consumer would have had to stay enrolled for many years to recoup the fees that Nationwide charged. Nationwide used a metric for its calculations, claiming that the median consumer in its Interest Minimizer program in 2013 had a 30-year mortgage for approximately $160,000 with an interest rate of 4.125 percent. But the CFPB calculated that a consumer with those loan terms would have to stay in the program for nine years to recoup the fees – at which point the consumer would have paid more than $1,200 in fees to Nationwide. Moreover, only 25 percent of the consumers enrolled at the end of 2014 had been enrolled for longer than four years.

3)      Misleading consumers about the cost of the program:
It was the CFPB’s contention that Nationwide’s direct mail and marketing materials falsely claimed that consumers’ extra payments “are directed 100% to the principal of the loan.” However, Nationwide kept the first extra bi-weekly payment (up to $995) as the set-up fee. When consumers asked Nationwide sales representatives how much the program costs, some of the company’s sales scripts allegedly instructed the representative to redirect the consumer, and other scripts said representatives should only mention the fee if consumers “persist to ask about fees.” According to the CFPB, none of the scripts stated the dollar amount of the setup fee.

4)      Falsely claiming to be affiliated with mortgage lenders or servicers:
Nationwide’s marketing materials allegedly misrepresented that it was affiliated with consumers’ mortgage lenders or servicers. For example, in one telemarketing sales script, when consumers ask, “Do you work with/affiliated with my lender?” sales representatives were supposedly instructed, “Do NOT say ‘No’” – when the accurate answer is actually “No.”

I’m not particularly impressed with Nationwide’s case, especially when its counsel tries to give the impression that Nationwide meant well! Counsel praised Nationwide’s founder Lipsky’s “entrepreneurial spirit,” and said he and the company had grown more vigilant after a regulatory “learning curve” during which he obtained state-by-state licensing – and a 2008 lawsuit brought by the Ohio Attorney General’s Office over similar claims, which, by the way, ended two years later with a settlement for consumer refunds, injunctive relief and $30,000 in penalties. I call this the “errant fool” defense, where we seek mercy from the court by claiming mistakes were made, but at least they were well-meaning mistakes. Or, to give Nationwide’s counsel a chance to speak, “This is just a company trying to sell a wonderful financial concept, trying to do so in a way that complies with regulations, and a hyper-vigilant agency looking at things in a way a reasonable consumer would not.” Yeah! That’s the ticket! Blame the CFPB!

Let’s put this in perspective. Nationwide bifurcates a bank’s monthly payment system in half and automatically makes withdrawals from a customer’s bank account. According to the CFPB, call representatives would falsely indicate that the program would save callers money and reduce the length of the mortgage, but then rushed through their explanation of Nationwide’s one-time sign-up fee, which could total as much as $995, plus its $3.50 service fee for each withdrawal. You read that right: a sign-up fee of $995 and $3.50 fee for each withdrawal!

According to plaintiff’s counsel, “the letters promise monthly consumer savings, but that’s not true, given how loan repayment works. It would take nine years to achieve any net savings.” Furthermore, “the misrepresentations at issue were pervasive. They appeared on every sales call. There’s no dispute defendants made representations to consumers in mailers and scripts and consumers bought the product. What’s in dispute is whether there were misrepresentations about the hidden non-refundable set-up fee and the fact consumers must stay in it for several years before seeing any savings.”

All of which begs the question that if this is such a “wonderful financial concept” why did the CFPB’s first two witnesses, both of whom were Nationwide phone center sales representatives, say that although Nationwide gave them a script to follow during calls, they were allegedly told never to answer the question “are you my lender?” with a simple “No,” but to read a paragraph-long explanation of Nationwide’s status as the largest mortgage services company in the country? Or why they also would allegedly never say the dollar amount of the set-up fee that was going to be withdrawn from the first payment to Nationwide? Let’s give those witnesses voice: “In training, we were told we needed to read from the script exactly as written…That was found to be the most successful method. If we were to say the dollar amount, it would peak the curiosity of the consumer and we would get more objections.”

To which all that defense counsel could muster on cross was to question whether omissions about the fees misled customers or were intended to.

Here’s the convoluted logic posed by defense counsel:

“When you determined what the biweekly debit was, there was no way to populate the Word document [of the script] with that number, right? A generic phrase in the script allowed the same script to be used, right?” …  “Half the time the customer asked what was that about set-up fee. That was after you read the script portion about the fee. So they knew there was one.”

All this being an obvious attempt to take the legal consequences of intentional action off the table!

But this observation from one of those sales representatives gives it away, stating that when Nationwide briefly altered its script to include the set-up fee, there was a drop in the rate at which representatives closed sales and got customers to enroll - from 25 percent to about 20 percent.

I’m going with what Pablo Picasso once said: “What one does is what counts.”

[*] Consumer Financial Protection Bureau v. Nationwide Biweekly Administration Inc et al., case number 3:15-cv-02106 in the U.S. District Court for the Northern District of California

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