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Compliance Management

Mortgage Company Sued by CFPB After Ignoring Compliance, Audit Warnings & a Whistleblower Complaint

January 27, 2021 | Posted by Kimberly Boatwright, CRCM, CAMS
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8 Minute Read

Here is a news story to file under “why you should listen when your compliance officer and auditors are concerned.”

The Consumer Financial Protection Bureau (CFPB) is suing 1st Alliance Lending in Hartford, Conn., and three of its executives for knowingly and actively engaging in unlawful mortgage practices that allegedly violated the Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), the Mortgage Acts and Practices—Advertising Rule (MAP Rule), and the Consumer Financial Protection Act of 2012 (CFPA). 

That’s after the company got into trouble in its home state of Connecticut after a whistleblower alerted the Connecticut Banking Department to unlicensed mortgage origination activity. The company ultimately went out of business in 2019.

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Failing to ensure mortgage originators were licensed

Between 2015 and when the company stopped operating in 2019, 1st Alliance allowed unlicensed employees, called “submission coordinators,” to engage in mortgage-origination activities. The interactions these employees had with consumers required them to be licensed under state law—a violation of TILA and Regulation Z. (The company operated in as many as 46 states and the District of Columbia and had 178 employees.)

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) defines a loan originator as someone who “takes a residential mortgage loan application” or “offers or negotiates terms of a residential mortgage loan”—and some states have even broader definitions.

1st Alliance’s coordinators, which they were later retitled as “Home Loan Consultants” were essentially salespeople, acting as the primary point of contact for borrowers. However, according to the CFPB they were not licensed. As Home Loan Consultants they handled intake calls, discussed the applicant’s financials, performed credit checks, and suggested the loan program most suitable for the borrower’s circumstances. Additionally, they were tasked with quoting mortgage rates and providing estimates of down payments and monthly payments. (Policy permitted the coordinators to quote an interest-rate range—not a specific figure.) Their commissions were heavily tied to mortgage originations—far more than for licensed mortgage loan originators.

The consultants did more than act as licensed brokers—the correspondence they sent implied they were licensed and registered.

The consultants also allegedly misrepresented loan terms, telling consumers that after six months of on-time loan payments they could use the company’s Streamline Refi Program to get a much better rate—even though it could make no guarantee of a better rate. They also stated the refi would not cost anything even though it would end up costing the borrower something.

The CFPB says these actions qualify as deceptive acts and practices (UDAP) under the CFPA. The CFPB stated these consumers lost money and time by working with someone that misrepresented their licensing and the consumer’s likelihood of getting a loan. In some cases, partway through the process applicants were told there was a mistake and their loan had been denied.

Consultants lacked the training of a licensed broker and as such had no license to suspend or revoke or list in the NMLS directory when misrepresenting themselves and the company. The CFPB says the consultants “did not provide critical, accurate, and timely loan-term information to any potential borrower concerning what was, for many, the biggest financial transaction of their life.”

The consequences of ignoring compliance & audit

According to the CFPB, the executives at 1st Alliance could not plead ignorance. By February 2017, the company’s chief compliance officer warned the company leaders that the consultants were doing work that could require licensing under federal or state SAFE Acts. Later that year, compliance management warned that an internal audit found consultants “were at times engaged in what may constitute . . . licensed activity under the SAFE Act.” The audit also identified that consultants sometimes provided credit-repair advice, discussed interest rates and other loan terms with consumers, made credit decisions, and disqualified consumers.

The CFPB says the defendants named in the suit “approved all aspects of 1st Alliance’s business model, policies, and procedures,” including the acts and practices that underlie this claim. They either participated in deceptive acts and practices or knew of them and did nothing to correct it.

Other alleged violations in the lawsuit include:

  • Failing to send adverse-action notices. Over 7,000 consumers were discouraged from applying due to a recent bankruptcy or low credit score and labeled “not qualified” after speaking with 1st Alliance staff. These consumers were entitled to adverse action notices but did not receive them. During the same two-year period, 1st Alliance staff only officially denied 30 applicants, which was a red flag and a violation under ECOA.

  • Requiring consumers to submit verifying documents before receiving a loan estimate. This was allegedly a regular occurrence and a violation of Reg Z.

  • Violating FTC’s MAP rule. Regulation N, known as the Mortgage Acts and Practices (MAP) Rule, prohibits commercial miscommunication of mortgage terms. Yet the company allegedly sent emails, texts, and other communications to consumers saying they qualified for a mortgage when the company already knew the consumer did not.

The takeaway

This is a clear case where the second and third lines of defense (i.e., compliance and audit) were working as intended, but management failed to live up to its compliance obligations. Not only was there no culture of compliance, but there also seems to have been a culture of active non-compliance.

Situations like this make me wonder what other potential violations were lurking under the surface, besides the lack of a top-down approach to compliance. Was this company actively analyzing its loan activity for fair lending compliance? If yes, was management doing anything to address the results of any findings? Did this company have business partners in their lending practice? That would prompt vendor life cycle management, including due diligence that might have revealed ongoing legal problems since at least 2018.

The next time you are talking to your management and you do not feel there is top-down approach to compliance pull up this article. It proves COMPLIANCE is not a COST CENTER, but a company saver.

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Kimberly Boatwright, CRCM, CAMS

Kimberly Boatwright, CRCM, CAMS

Kimberly Boatwright has more than two decades of experience working in compliance and risk management in the financial services industry. Ms. Boatwright is a Certified Anti-Money Certified Laundering Specialist (CAMS) as well as and Certified Regulatory Compliance Manager (CRCM). She specializes in development and implementation of risk assessments for AML, fair lending, and compliance management systems. During Ms. Boatwright’s career, she has worked with traditional banks, credit unions, mortgage and lending companies, prepaid and payments industry.