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!
