Another day, another consent order against a mortgage company from the Consumer Financial Protection Bureau (CFPB).
The CFPB has ordered a California-based mortgage company licensed in at least 11 states to pay a $150,000 civil money penalty after sending over 700,009 consumers, including U.S. service members and veterans, misleading or deceptive mailers for VA-guaranteed mortgage loans.
The CFPB says the company’s mailers ”contained false, misleading, and inaccurate statements or that lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts and practices, the Mortgage Acts and Practices – Advertising Rule (MAP Rule), and Regulation Z.”
It’s the CFPB’s third case against mortgage companies using deceptive mailers to advertise VA-guaranteed mortgages in the past month.
What Do False, Misleading, and Inaccurate Statements Look Like?
The first concern most bankers have when they see another institution fined for bad behavior is making sure their institution is not engaging in similar behavior. Financial institutions do not want to harm consumers or be subjected to large fines.
Let’s take a look at what the CFPB says the mortgage company was doing wrong:
Specific credit terms in the mailer. By including specific information about interest rates, annual percentage interest rates (APR), and mortgage costs or fees, the CFPB says the company suggested that applicants would be offered a mortgage with those terms—but that was not the case. In some cases, printed mailers included credit terms the company was not prepared to offer.
Misrepresenting APR. A mailer that went to 30,000 customers advertised a mortgage with a fixed interest rate of 2.75% and an APR of 2.885 for borrowers with a credit score of 740 or higher (a fact mentioned in the fine print). Yet under Reg Z’s calculations, including the required discount points and prepaid finance charges, the APR was actually around 3.162%.
Contradictory terms. The same mailer said borrowers needed a credit score of 740 or higher in the fine print. However, on the same mailer, it was also advertised as available to borrowers with “FICO scores as low at 500.”
Misrepresenting variable rate loans as “fixed” rate loans. Another mailer sent to 30,000 customers used the word fixed in big, bold letters on the first page and buried the information about the variable rate on page 2.
Misrepresenting fees. A mailer promised no application or processing fees. However, most borrowers, and nearly everyone who got a VA loan in the three months after the mailer was sent, paid a processing fee.
Misrepresenting requirements. VA cash-out refinances have required fees for appraisals, assets, and income documentation. The mailers clearly stated “No Appraisal, No Assets, & No Income Documentation Needed” for the cash-out refinance loans being offered.
Implying government affiliation. Mailers used design elements suggestive of IRS forms and mentioned “VA Benefits” and other language implying the advertisement came from the government. Even though the text identified the mailer as an advertisement, the CFPB said it could still mislead.
Misrepresenting property appreciation. The mortgage company’s mailers claimed records indicated the recipient’s property value had increased by 21%, 22% or 23%. The appreciation rate was not individualized by property and could not be backed up.
Missing disclosures. Period of repayment disclosures were missing from many advertisements.
3 Lessons from CFPB’s Deceptive Advertising Consent Order
We can learn three critical lessons from these mistakes:
- If your advertisement includes a specific offer, the consumer who receives it better be able to apply for a loan with those terms. You cannot take a scattershot approach to mortgage advertising, if you want to include rates and pricing. If your advertisement implies a consumer is eligible for a certain rate, fees, or that their house is worth a certain amount, those numbers better be accurate. You cannot combine detailed numbers with a general mailing.
- Disclosures do not count when they are contradicted by other information in the ad. The mortgage company’s ad stated that a credit score of 740 or higher was needed, but that fine print contradicted with other text saying a FICO score as low as 500 could be sufficient. Using the correct disclosure is not a sufficient defense when it’s directly contradicted within the ad.
- Make sure ads align with loan requirements. If you say a loan has no fees, it better have no fees. If an ad is promoting a variety of loan types, make it clear which loans are fee-free and which require fees or additional requirements. Consumers will assume a general disclosure applies to every product in the ad. If a loan is variable, never claim it’s fixed.
Correcting Deficiencies to Avoid Future Fines
If there is one thing that riles up regulators more than harming consumers, it is an institution that continues to harm consumers after it’s been made aware of a problem. They want to see FIs follow up on findings to avoid repeat violations. Findings management is critical.
To prevent future violations, the CFPB is requiring the mortgage company to improve its compliance management by:
- Running mortgage advertisements past a designated compliance professional before they are placed into production. This is to ensure compliance with advertising laws.
- Prohibiting misrepresentations like those in the consent order.
- Complying with certain enhanced disclosure requirements to prevent future misrepresentations.
I’d go one step further by recommending an overhaul of the institution’s compliance management system (CMS). A good CMS will have policies, procedures, and controls to ensure advertising regulations are followed. Roles and responsibilities are defined. It would allow for easy collaboration between marketing and compliance to ensure all campaigns received an adequate review prior to use.
There is no excuse for being caught off guard when it comes to lending compliance. Lending compliance should be an important element of your compliance management system (CMS). Internal controls like Fair Lending Analysis can help you identify trends early on so you can investigate the root cause and proactively make corrections which can lead to better practices.