September 2020 OBA Legal Briefs

• Advertise this way, everyone is doing it!
• Trust documents

Advertise this way, everyone is doing it!

By Andy Zavoina

Penalties: In just over a month we heard of not one, two, or three cases of the Consumer Financial Protection Bureau (CFPB) enforcing advertising requirements on mortgage lenders, but four. Let’s cut to the chase for a recap of these enforcement decisions, (who, how much and the date of the action,) discuss why these are important, and dissect the individual actions.

1. Sovereign Lending Group, Inc. — $460,000, July 24, 2020

2. Prime Choice Funding, Inc. — $645,000, July 24, 2020

3. Go Direct Lenders, Inc. — $150,000 August 21, 2020

4. PHLoans.com, Inc. — $260,000, August 26, 2020

Yes, that is $1,515,000 in penalties.

There are several common bonds among the actions subject to this CFPB sweep. The first is Section 1 of the Overview of the action in each of the four cases starts with a similar opening, “…is a mortgage broker and lender that offers and provides mortgages guaranteed by the United States Department of Veterans Affairs….” The exception is Go Direct was not a broker, just a lender. Perhaps that contributed to the fact that it suffered the smallest penalty amount.

This four-lender sweep starts with VA loans, but that is not the sole reason these lenders and these advertisements are involved and there are lessons all lenders and banks should take away from these enforcement actions. There are marketing techniques, some questionable at best and illegal at worst, employed by these and other lenders. It is important to not only be conversant in the “letter of the law” when it comes to what is required in advertisements, but to also follow the spirit and intent of the law as well. What is not said can be as important as what is said, and follow-through is necessary to actually deliver products and services as advertised. When that does not happen, complaints will follow.

Additional commonalities between the enforcement actions include the manner in which marketing campaigns were delivered (direct-mail), and that these violated federal law because of misleading and deceptive statements and inadequate disclosures. Each action also noted that the lenders distributed their advertisements to service members, veterans, and other consumers.

In General: In many respects the content of an advertisement should be easy to pass regulatory scrutiny. Using a checklist, you look for keywords and triggering terms and ensure that any “if this, then that” conditions are met. For example, if the advertisement refers to the number of payments, the period of repayment, the amount of any payment, or the amount of any finance charge, the advertisement also references the terms of repayment, the “annual percentage rate” or “APR,” using one of those terms, and if the rate may be increased after loan consummation, a statement of that fact.

Advertising compliance may become subjective when creative salesmanship comes into play and one lender wants to separate itself from others. This may be done with promises or innuendo that may actually be beyond reach, or when promises are made that will not be kept. The advertisement may cause a consumer to contact the lender, and that is half the marketing battle. This is where many ads fail the compliance test. This may also be the case when omissions are made believing the full disclosures can be made later, perhaps after the applicant has passed “a point of no return” in the application process.

Another subjective element of an advertisement is the message being sent. Ads depicting only Whites may have a negative impact on minority applicants, and those with high minimum loan amounts may dissuade first-time home buyers and especially minorities wanting to buy more modest homes. These are often in older parts of town and stereotypically are often more populated by minorities. Restrictions such as this can negatively impact revitalization efforts in aging neighborhoods.

Examples of discriminatory housing advertisements include, statements promoting “no kids,” “Christian housing,” or “must speak English.” More covert ways include targeted marketing to a select group that eliminates a possible applicant based on one or more of the fair lending factors described above. While the intent of the ad may be to target a specific market perceived as more qualified or desirable, using these factors as a basis to deny or discourage an applicant is discriminatory.

Social Media: In 2019 the Department of Housing and Urban Development (HUD) initiated a lawsuit against Facebook for FHA violations. The complaint stated, “Respondent collects millions of data points about its users, draws inferences about each user based on this data, and then charges advertisers for the ability to micro-target ads to users based on Respondent’s inferences about them.”

Civil rights groups were involved and soon settled with Facebook as a result of its paid advertising platform. There were five separate legal claims alleging that Facebook’s platform unlawfully enabled advertisers to target housing, employment, and credit ads to Facebook users based on race, color, gender, age, national origin, family status, and disability. The groups believed that Facebook’s advertising platform contained pre-populated lists allowing advertisers to place housing, employment, and credit ads that could exclude certain protected groups, such as African Americans, Hispanics, and Asian Americans from exposure to the ads. The platform was not designed to exclude Whites in a similar manner. Exclusions or filters were used based on sex, age, interests, behaviors and demographics associated with the prohibited bases described above, either based of known demographics of the person logged onto Facebook, or their browsing history recorded by cookies and advertising websites.

Many advertisers likely believed that micro-targeting customers was an optimal use of advertising dollars, without understanding the underlying factors contributing to the process. As a result of the settlement, Facebook agreed to eight key concessions which would end these practices.

Specifics – Each of these four consent orders cited violations of:

1. Reg Z – 1026.24 (closed-end advertising)

2. the lesser known Mortgage Acts and Practices—Advertising Rule (MAP Rule or Regulation N for those subject to Federal Trade Commission oversight) – 12 CFR 1014.3 which prohibits any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including (for example) interest charges, the APR, fees and costs associated with the loan, payment terms, prepayment penalties, etc. and

3. various sections of the Consumer Financial Protection Act — 12 USC 5531, 5536 (deceptive and prohibited practices).

As noted above, the advertisements in each case were for VA mortgage loan products and involved direct mail advertising sent to hundreds of thousands to millions of potential borrowers. The advertisements contained misleading and deceptive statements and inadequate disclosures.

The advertisement stated specific credit terms which the reader would assume were representative of what the lender was offering them. In fact, in each case, the lender was not making loans at the terms described.

As examples, Sovereign, Prime, and Go Direct mortgage ads described mortgages with a simple interest rate and APR combination that, on the date of the advertisement, none of the advertisers was actually prepared to arrange or offer. PHLoans mortgage advertisements misrepresented the payment amount applicable to the advertised mortgage or amount of cash available to the consumer in connection with the advertised mortgage.

Sovereign Lending Group, Inc. In September 2018 Sovereign sent 87,000 ads for a variable-rate mortgage with a fixed interest rate of 2.75% for the first five years and an APR of 3.5%. In fact, the advertised APR was not correct because it did not take into account the fully indexed rate, required discount points, or origination fees. The actual APR for this loan with the required discount points, and origination, underwriting, and funding fees, exceeded 3.75%.

Similar to a PHLoans example below but with different numbers, advertisements misrepresented payment amounts applicable to mortgage examples. In September 2018 some 87,000 ads were sent stating the consumer could “Take $27,909 CASH-OUT FOR ONLY $113.94 PER MONTH!” In fact, the product requires the refinance of an existing mortgage and the stated payment only includes the cash-out portion which would not be enough to also service the refinanced balance.

There were also examples of loans using the term and capitalizations “New FIXED Rate” next to an interest rate on page one, but on page two there was a fine print disclaimer that this was a variable-rate loan. The term “fixed” was often used before the more accurate terms “Adjustable-Rate Mortgage,” “Variable-Rate Mortgage,” or “ARM” and these were not as prominent as the former, “fixed.”

Many ads falsely represented that consumers were prequalified for or would likely qualify for a loan. One ad stated: “As a VA loan holder, you’re prequalified to upgrade your home loan and pay off your mortgage sooner by refinancing with Sovereign . . . ” The ad went on to say “PRESCREEN & OPTOUT NOTICE: This ‘prescreened’ offer of credit is based on information in your credit report indicating that you meet certain criteria.” In fact, consumers who received these ads had not been selected or screened based on credit scores or other criteria.

There was also an ad stating, “Low FICO Score OK.” This phrase was very near other specific credit terms such as the APR, interest rate, and payment amount. However, the fine print on the back stated: “Offer rate… assumes… all borrowers having a credit score of at least 740.” The qualifying credit score is not low, and the ad is misleading. Sovereign actually targeted these ads to consumers with FICO scores in the range of 560-750. Most consumers receiving the ads likely would not qualify but could be sold other products at higher rates.

Sovereign was also cited for false or misleading representations that it was affiliated with the government. Because it used phrases or terms like “Eligibility Notice,” “Reference #: V146310333,” and “…as a VA loan holder, the Department of Veteran Affairs allows you to combine…” These ads were published on light green paper that is similar to the light green paper that the VA has used for Certificates of Eligibility, and the VA Certificates of Eligibility contain a certificate “Reference Number” that generally has eight digits.

Sovereign also sent about 237,000 consumers an ad with what appears to be “official language” such as, “Eligibility Status: Pending Authorization,” “Mortgage Payment Reduction Notification,” “Reduction Notice;” “Reference # V107652374,” and “…as a VA loan holder, the Department of Veteran Affairs allows you to combine…” These ads included the year “2019” printed in block numbers in the top right corner, with the “20” in white and the “19” in black, a distinctive format used by the IRS and similar to a withholding form W-4. Simulating official government forms or correspondence may draw attention from the consumer, but it may also draw unwanted attention from an examiner.

There were ads sent to nearly 237,000 consumers with a banner across the center stating in capitalized letters, “NOTICE REGARDING LATE PAYMENT, UNAUTHORIZED INTEREST RATE ADJUSTMENTS OR UNNECESSARY PAYMENT INCREASES YOUR IMMEDIATE PARTICIPATION IS REQUESTED.” These were not sent to past due borrowers but were likely to get the reader’s attention, tricking them into reading the ad out of fear they were past due on a debt or had interest rate adjustments on an existing mortgage.

There were also inadequate disclosures in ads. Triggering terms were used without the accompanying required disclosures. One such loan ad stated it had 360 payments and a fixed payment of $923 for the first five years. This stated the number of payments and the amount for the fixed-rate period of the loan, but it failed to state the amount of each payment and the number and period of the payments during the variable-rate period of the loan.

Numerous advertisements that included periods in which more than one interest rate would apply stated a simple annual rate of interest, but failed to state the period during which each simple annual rate of interest would apply, failed to state an accurate APR for the loan because the stated APR was not correctly calculated, or failed to state these terms clearly and conspicuously.

One example cited a loan for a variable-rate mortgage on the front with a simple annual interest rate of 2.75% and an APR of 3.5% that applied to the first five years of the loan. But the advertised APR was not correct as it did not take into account the fully indexed rate, discount points required to obtain the advertised rate, and origination fees. The actual APR for this loan exceeded 3.75%. This exceeds tolerances under Reg Z § 1026.22(a)(2). The ad did not have an equally prominent and closely proximate statement of the period during which the 2.75% interest rate would apply. The fact that the advertised interest rate applied only to the first five years was disclosed, but was in fine print on the back of the ad.

Numerous mortgage advertisements stated the amount of a payment, but failed to state the amount of each payment that would apply over the term of the loan such as for adjustable-rate mortgages, or failed to state the period during which each payment would apply. One example was a mortgage with an introductory, discounted rate of 2.75% that applied only to the first five years. That payment was not calculated based on the index and margin that would be used to make subsequent payment adjustments over the remaining term. And the ads failed to state any payment amount based on a reasonably current index and margin. As of the date of the ad, the fully indexed rate based on a reasonably current index and margin was at least 4.3%. It failed to disclose the payment amounts associated with that rate after the first five years and failed to state the period during which each payment would apply.

Ads also used the name of the consumer’s current lender but did not clearly indicate that the ad was not from that lender.

Numerous Reg Z violations were noted including advertising credit terms that were not actually available, triggering-term problems under 1026.24(d)(1) and (2)(ii), inadequate payment term disclosures and misleading terms being used such as “fixed” in the examples above for variable-rate products. Many of these same violations carry into the MAP Rule, and CFPA (UDAAP) violations cited in the consent order.

Prime Choice Funding, Inc. Violations were similar to those in the Sovereign case. Prime Choice was cited for advertising mortgage products with terms it was not offering at the time. There were confusing ads for variable-rate products but with fixed-rate terms and miscalculated APRs. Like some of the other consent orders, there were ads with similar faults but using varied amounts. The Sovereign and Go Direct orders include a cash-out example which ignores the principal and interest payment portion of a refinanced balance. Prime Choice, however, used an example with a loan amount of $366,715 stating the consumer could obtain a 2.75% APR fixed-rate loan with a payment amount of $840, with an additional $30,000 in cash for a total new payment amount of $909. Those payment amounts were incorrect. The actual minimum payments that would apply to the advertised loans were each at least $600 more than the advertised amounts.

There were also ads insinuating or misleading the consumer into believing there was an affiliation with a government agency, that a consumer “could obtain $27,500 in cash, today” meaning the same day as the ad and ignoring the fact that there may not even be equity in the property, misrepresenting fixed and variable rate loans, excluding discount fees and other closing costs plus many other similar violations as noted above.

In a variation of the pre-qualified/prescreened ad, a 2018 Prime Choice ad said, “URGENT NOTICE,” and included a quote from forbes.com stating that the Federal Reserve “expects three or more rate increases in 2018” and stated: “Based on our information, this WILL affect your monthly budget.” The ads further stated, “You have been preselected and already have what it takes to qualify” for the loan product in the ad. These statements were misleading because Prime Choice had not used any pre-screening qualifications for the ad campaign. Some ads misled the consumer into believing that a property value assessment had already been done and the ad was an offer based on value when this was incorrect. Other ads even had photos of the recipient’s home showing through the envelope with the subject line “RE: Property Assessment” to mislead the reader into believing this was pertaining to the taxable value of their home.

Prime Choice also had its share of inadequate and misleading disclosures under various sections of Reg Z, failed to mention taxes or insurance payment requirements, or that some ads were not from their current lender even though that lender was named in such a way as to appear to be from it.

Go Direct Lenders, Inc. sent advertisements to about 30,000 consumers in June 2018 advertising a mortgage with a fixed interest rate of 2.75% and an APR of 2.885%. These advertisements stated in the fine print that the offer was only available to borrowers with a credit score of 740 or higher. But for those qualifying borrowers, when allowing for discount points and prepaid fees the APR was instead 3.612% or .28% higher than advertised.

These ads also stated in a large font on the first page that the 2.75% interest rate and 2.885% APR were available to borrowers with “FICO scores as low as 500.” But the fine print contradicted this with the qualifying requirement of a credit score of at least 740. The interest rate and APR may have been even higher for those with lower credit scores.

In another similarity to the Sovereign case, Go Direct sent numerous ads misrepresenting what were variable rate loans as fixed rate products. As an example, advertisements sent to 30,000 consumers in February 2019 used the word “fixed” in capitalized, bold font lettering next to the advertised interest rate on the first page. But in the fine print on page two it indicated that the advertised loan was actually a variable-rate mortgage. This was misleading and deceptive. The term “fixed” was often more prominent and used before the more accurate terms, “adjustable rate mortgage, “ARM” or “variable rate mortgage.”

Fees were also often misrepresented. Ads dating back to November 2017 and sent to about 30,000 consumers stated, without qualification or condition, that there was “No Application or Processing Fee” for the advertised loan. But the vast majority of consumers who obtained a loan from Go Direct paid a processing fee, and virtually every consumer who obtained a VA loan from them in the three-month period following this advertisement paid a processing fee. Therefore, the statement “No Application or Processing Fee” was deemed false or misleading.

In another example, advertisements included a blanket statement: “No Appraisal, No Assets, & No Income Documentation Needed.” While this statement is generally true for Interest Rate Reduction Refinance loans, it was not true for VA cash-out refinance loans. The latter do require appraisals, sufficient assets, and income documentation. The ads sent rarely differentiated the products which would qualify for the blanket statement made.

Ads sent by Go Direct also misrepresented that it was affiliated with the government or that the advertised product was endorsed, sponsored by, or affiliated with the government. About 28,000 ads were sent in July 2018 enclosed in envelopes which prominently displayed the year 2018 across the bottom with the “20” in white block letters and the “18” in black box letters. This distinctive format is used by the Internal Revenue Service. The envelope stated that it was a “Notification” and the contents pertained to a “NOTICE” about “VA BENEFIT ELIGIBILITY.” The ad stated that it was an “ELIGIBILITY ADVISORY” about “VA BENEFITS. It also included a boxed headline that stated the contents were about a “2018 – VA Policy Change Advisory.” It said: “The U.S. Department of Veterans Affairs offers you an Interest Rate Reduction based on your mortgage payment history.” The enclosure did state in fine print that “This is an advertisement,” but the mailing strongly implied that the solicitations originated from a lender affiliated with the VA or the IRS. UDAAP rules have long stated that what is misleading is not cured by a follow-up disclosure.

PHLoans.com, Inc. There did not have to be many thousands of bad credit offers to get the attention of the CFPB. PHLoans advertisements were sent to just 25 consumers from May through July 2018 (similar to the ad example above under Sovereign) which stated the borrower could “take” a $20,000 cash-out loan for “ONLY $95.68 PER MONTH.” But PHLoans did not offer a product with those terms. The cash-out amount was only available if the loan was a refinance and the example failed to allow for the existing balance to be refinanced. The payment example was only on the cash-out portion so it was only part of what would be the scheduled payment.

Ads for VA products specified “No out of pocket expenses” but there are closing costs for VA loans and this statement could be incorrect. As with the other consent orders, there were Reg Z and UDAAP issues all of which have already been described and some with examples.

“Everyone else is doing it.” It would seem from comparing the four consent orders that each of these mortgage lending companies either copied the others for many years, or they used the same advertising agency which was big on recycling. The numbers were changed, but not the violations. It is easy to violate one citation in many ways, but these descriptions and violations so closely tracked one another, it is difficult to believe each was simply not trying to keep up with its competition using similar ad campaigns. The mentality that “everyone else is doing it” can be outright dangerous and, as Mom used to say, “if everyone jumped off a cliff, would you?”

Properly employing compliance controls and checklists could have avoided years of accumulated violations and $1.5 million in fines. These cases are highlighted here so that your bank will see what others are doing wrong and avoid jumping off that cliff that Mom talked about. A review of CFPB complaint files shows that many lenders have been aggressive in marketing products and in selling products. It appears first they want to get the consumer’s attention, and then to offer higher-priced products by using misleading information. That is a recipe for disaster.

Editor’s note: Since Andy wrote his article, the Bureau has continued its sweep of VA loan advertisers. At least three more settlements, all involving violations very similar to those Andy has described, were announced before our press deadline.

Trust documents

By Pauli D. Loeffler

Some banks require the entire trust while others only require specific pages (e.g., declaration, trustees/successor trustees, and execution pages), accept a Memorandum of Trust prepared by an attorney, or require a Certificate of Trust authorized under the Banking Code.

One problem with obtaining a copy of the entire Trust is that most trusts run 20 pages or more, contain a lot of legal terms, and cover tax and other matters which the vast majority of bankers have neither the time to read, understand, nor really need to know. A larger issue with having the actual trust is that if the trustee violates explicit provisions of the trust, the bank may be complicit with the trustee in breaching fiduciary duty.

The problem with requiring only certain pages of the Trust is that the bank may not get all the information it needs such as what constitutes incapacity of a trustee or whether co-trustees can act independently, by majority, or independently. These problems also exist with regard to an attorney prepared Memorandum of Trust which is really for use and recording for conveyances (deeds, mortgages, etc.) rather than opening an account.

Let’s look at Sec. 902 of the Banking Code’s Certificate of Trust provisions:

B.

2. If a deposit account is opened with a bank by one or more persons expressly as a trustee for one or more other named persons pursuant to or purporting to be pursuant to a written trust agreement, the trustee may provide the bank with a certificate of trust to evidence the trust relationship. The certificate shall be an affidavit of the trustee and must include the effective date of the trust, the name of the trustee, the name or method for choosing successor trustees, the name and address of each beneficiary, the authority granted to the trustee, the disposition of the account on the death of the trustee or the survivor of two or more trustees, other information required by the bank, and an indemnification of the bank. The bank may accept and administer the account, subject to the provisions of Title 58 of the Oklahoma Statutes’ in accordance with the certificate of trust without requiring a copy of the trust agreement. The bank is not liable for administering the account as provided by the certificate of trust, even if the certificate of trust is contrary to the terms of the trust agreement, unless the bank has actual knowledge of the terms of the trust agreement.

The biggest advantage to using a Certificate of Trust is that the bank is protected from liability provided it has no actual knowledge of contrary provisions in the actual trust. There is no need to comb through dozens of pages covering marital and residuary trusts, generation skipping tax and other provisions that are useful to the trustee and accountants but of little use to the bank. Instead of struggling with a massive document peppered with “legalese,” a Certificate of Trust can be read and digested in a few minutes with information that the bank really needs. Finally, in addition to the informational requirements for the Certificate of Trust under Sec. 902, the bank can require other useful information such as whether co-trustees may act independently and what constitutes incapacity which is include in the Certificate of Trust Template.

The Certificate of Trust Template (Word format) is accessible on the OBA’s Legal Links webpage once you create an account through the My OBA Member Portal.