What’s Next for the CFPB and Lender Oversight?

As the Consumer Financial Protection Bureau (CFPB) continues its crackdown on mortgage lenders for unsavory practices, industry insiders say the bureau’s actions open the gate for further lawsuits and enforcement actings which can weaken already vulnerable companies.

A recent mortgage enforcement action is the latest example of a CFPB move that has regulatory implications that are serving as still uncharted territory for the agency. 

Utah-based Castle & Cooke Mortgage, LLC, which paid millions in connection with a consent decree for allegedly steering consumers into costlier mortgages issued in November of last year, is now being sued civilly in a class action pertaining to the same activity.

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“This is exactly what everyone worries will happen when they settle with the government,” Jeffrey Naimon, partner with BuckleySandler LLP, tells RMD, noting that currently the CFPB’s position of not providing for consumer releases creates additional risk for settling parties.

A release would be a separate signed document from the consumer that releases the lender from any litigation claims in return for the payment received as a result of the governmental settlement.

Currently, plaintiffs can seek return of all interest and fees over the first three years of their loans, as well as statutory penalties and attorneys’ fees on a class-wide basis. The class action lawsuit filed this summer against Castle & Cooke asserts violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, and state law based on the allegation that the “loan officer who sold plaintiff his mortgage loan was paid a bonus that was based, at least in part, on the fact that plaintiff received a more expensive and/or less favorable loan than he otherwise would have received.”

Thus far, a CFPB consent order has not generally led to a class action suit afterward, says Christopher Willis, partner with Ballad Spahr LLP, noting that private class action plaintiffs have “quite a few hurdles to overcome” in terms of proof of the viability of a case as a class action.

But whatever the impact the outcome of this case has on forward lenders, the same will be applicable to some of those in the reverse mortgage space, says Richard J. Andreano, Jr., practice leader of Ballard Spahr’s Mortgage Banking Group.

“The loan originator compensation rule [under the Truth in Lending Act] applies to closed-end reverse mortgage loans but not open-end reverse mortgage loans,” Andreano says. “As a result, plaintiff attorneys are more likely to focus on the forward loan market if they are considering bringing cases under the rule, as there are simply more lenders in that space making loans subject to the rule and the volume of forward loans is much higher than the volume of closed-end reverse mortgage loans.” 

The complaint seeks various remedies, including actual and statutory damages under the Truth in Lending Act. The complaint specifically references the CFPB consent order and states that the “plaintiff received a check from the CFPB in the amount of $795.02, representing his share of the CFPB’s restitution fund.”

However, the complaint further asserts that the “plaintiff is owed additional amounts as a result of C&C Mortgage’s illegal practices” and that the statute of limitations was tolled until the date the CFPB distributed restitution checks to the plaintiff and other members of the putative class.

Because the government already investigated the case and a consent decree was entered into it will make it more difficult to defend such a case, Naimon says.

“Even if you don’t have a confession of guilt, there is the consent decree setting forth the government’s findings,” Naimon says. “If in addition to the government’s views, the defendant admits something as part of the settlement, such admission can make it much more difficult to avoid liability in a follow-on case. This is why defendants don’t want to make admissions — sometimes it can be used collaterally in some other lawsuit.”

 

Recently, K&L Gates’ Consumer Financial Services group said the CFPB’s consent order issued against title insurance agency — Lighthouse Title, Inc. — raised “troubling questions” about the bureau’s views on marketing services agreements (MSAs) under Section 8 of the Real Estate Settlement Procedures Act (RESPA).

And, the CFPB’s recent loan originator compensation enforcement action against California mortgage lender Franklin Loan Corporation appears “to be a case of picking low-hanging fruit,” says K&L Gates’ Consumer Financial Services Group in a written statement, adding that “the CFPB is not afraid to admit that they are out to make examples of “bad actors.’”

The Castle & Cooke case is an important one that “everyone is following,” Naimon says. “One implication will be how this class action may well make it more difficult for the CFPB to have defendants settle cases with them. Or alternatively you might see lenders settling with the CFPB insist on getting a release of claims in return for providing consumer restitution.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.  

Written by Cassandra Dowell

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