Introduction
In a Consumer Financial Protection Bureau (“CFPB”) action against a mortgage services company, its subsidiary, and its founder, a California district judged denied an award of $73.9 million in restitutionary relief, and imposed a civil money penalty for a fraction of that amount. See Consumer Fin. Prot. Bureau v. Nationwide Biweekly Admin., Inc., Case No. 15-cv-02106-RS, 2017 U.S. Dist. LEXIS 145923 (N.D. Cal. Sept. 8, 2017).
In 2015, the CFPB filed a complaint against Nationwide Biweekly Administration, Inc. (“Nationwide”), Loan Payment Administration LLC (“LPA”), and the founder of Nationwide and LPA, Daniel S. Lipsky (“Lipsky”), (collectively, “Defendants”), in the U.S. District Court for the Northern District of California. The litigation focused on a mortgage payment program known as the Interest Minimizer Program (the “Interest Minimizer”), which allowed consumers to make mortgage payments on a biweekly basis in amounts equal to one-half of their monthly mortgage payments. Defendants promised consumers who enrolled in the Interest Minimizer that, by allowing them to make an extra monthly payment each year to reduce their loan principal, the Interest Minimizer would enable them to save on overall interest.
The CFPB alleged that Nationwide and LPA, under the direction of Lipsky, had engaged in deceptive acts in violation of the Consumer Financial Protection Act (“CFPA”), as well as deceptive telemarketing acts in violation of the Telemarketing Sales Rule. The CFPB sought civil money penalties, monetary damages, and restitutionary relief for fees paid by approximately 126,500 consumers who had participated in the Interest Minimizer from July 2011 to December 2015.
After a seven-day bench trial, the Court held that some of Defendants’ marketing statements had been false or misleading, but that the CFPB had failed to show that it was entitled to restitution.
The CFPB’s Allegations and the Court’s Rulings
The CFPB first alleged that Defendants’ failure to adequately disclose the existence of the Interest Minimizer set-up fee and/or its dollar amount in mailers that Nationwide and LPA sent to potential consumers constituted misrepresentation. The Court rejected this argument, holding that the dollar amount of the set-up fee had been clearly disclosed. Under the Dodd-Frank Act, a requisite element of deception is that the statement at issue be misleading to a consumer acting reasonably under the circumstances. In construing this element, the Court stated that “because [the amount of the biweekly payment] is the amount a consumer who enrolls in the program will thereafter be expecting to have withdrawn from his or her account every two weeks, any consumer acting reasonably under the circumstances will have that dollar figure well in mind.” Because the set-up fee was equivalent to one biweekly payment, the Court held that Defendants had not committed a deceptive act in connection with misleading consumers about the existence or amount of the set-up fee.
The CFPB’s second allegation was that the disclaimers on the mailers created the misleading impression that Nationwide or LPA was affiliated with the potential consumers’ lenders. The Court found that most of Defendants’ mailers contained adequate disclaimers, but that some mailers and marketing materials were likely to confuse consumers. In particular, the Court referenced examples of mailers marked “Second Notice,” as well as some containing statements such as, “If you waive the biweekly option, you will be asked to confirm that you understand you are voluntarily waiving the interest saving and loan term reduction achieved with the biweekly option.” Such examples, the Court, created the net impression in potential consumers “that they had some kind of existing obligation by virtue of their loan to respond to the mailers.”
Third, the CFPB alleged that Nationwide’s representations as to when and how much consumers could save in interest through the Interest Minimizer were false or misleading. Nationwide provided potential consumers with an “average” savings amount per month. Nationwide calculated the specific dollar amount of “average” monthly savings by taking the total amount of savings over the full loan term and dividing it by the number of months. While recognizing that Defendants often included disclaimers explaining that these figures were based on the “life of the loan,” the Court stated that such disclaimers were insufficient to offset the misleading effect of the assertions about monthly savings. In addition, the Court found any representations regarding “immediate” savings to be misleading because, in actuality, a consumer would not have realized any savings until the first “extra payment” was applied, which may not have occurred for several months, and after Nationwide had collected the set-up fee. Moreover, the Court found misrepresentations in Defendants’ statement to potential consumers that 100% of the extra payments that a consumer makes would go toward the principal loan balance, which was inaccurate given that Defendants in fact retained a portion as the consumer’s set-up fee.
Finally, the CFPB contended that Defendants’ statements to potential consumers that “the only way to achieve savings through making bi-weekly payments was to enroll in the [Interest Minimizer]” was inaccurate. Upon review, the Court found that such statements were only partially inaccurate as some lenders did not offer a biweekly payment option. For those consumers whose lenders did not offer such an option, Defendants’ statements were immaterial. Even for consumers whose lenders offered a biweekly payment option without charging any fees, the Court recognized that the set-up fee that Defendants charged covered additional services, which served as another basis for consumers to choose the Interest Minimizer. Nonetheless, the Court held that Defendants were liable because they offered the Interest Minimizer to consumers while knowing whose lenders offered similar payment options.
Restitutionary Relief
The CFPB sought $73.9 million in restitutionary relief, which was the total amount of set-up fees that Defendants had collected from 126,500 consumers during the period July 2011 to December 2015. The Court denied this request, finding the record to be insufficient to support such a result. Courts have held that restitution may generally be awarded where consumers were defrauded into making purchases, even if they derived some benefit from the fraudulent sales. Here, however, the Court found that the CFPB had not proven that Defendants had engaged in “snake oil salesman”-like fraud, or that any fully-informed consumer would not have elected to pay to participate in the Interest Minimizer. Moreover, Defendants’ misrepresentations or omissions did not apply to all consumers. Defendants’ only misleading representation that may have affected all consumers involved the timing of the savings. While the way in which Defendants presented the savings calculations was misleading, their statements regarding “average” monthly savings were nonetheless true. Thus, the Court determined that restitutionary relief was not warranted.
Civil Penalty
Although the Court found that Defendants’ conduct was not so egregious as to support an award of restitution, the Court imposed a civil money penalty on Defendants. The Dodd-Frank Act allows courts to impose money penalties for violations of federal consumer financial regulations, with 12 U.S.C. § 5565(c)(2) setting forth a multi-tiered structure of up to $5,000, $25,000, and $1,000,000 in penalties per day of violation, depending on the nature of a defendant’s conduct. Notwithstanding the different standards underlying the penalty structure, the CFPB must consider mitigating factors set forth in 12 U.S.C. § 5565(c)(3), including a defendant’s financial resources and its good faith, the severity of the risks to or losses of the consumer, and a defendant’s history of any past violations. Here, while the CFPB requested the maximum first-tier penalty for each Defendant, the Court determined that despite Defendants’ aggressive marketing of the Interest Minimizer, they also took affirmative steps to stay within the law. Consequently, the Court imposed a first-tier maximum civil money penalty of $7.93 million, for which all three Defendants were held jointly and severally liable.
Implications for CFPB Cases
This case is notable because, although not the first action to be litigated by the CFPB to trial, it is one in which the Court closely scrutinized the CFPB’s ability to prove its entitlement to equitable relief in the form of restitution. Although the Dodd-Frank Act authorizes the CFPB to seek restitution, only a court can determine the extent to which the CFPB has proven the legal elements required to obtain restitution. Based on the outcome of this case, the CFPB is likely to be more circumspect as to the type of relief it seeks in future litigated matters. This case also allows institutions and covered persons to consider an additional roadmap for challenging the availability of restitutionary relief.
Finally, the case sheds light on the mechanics of the CFPB’s framework for imposing civil money penalties. Because Congress granted the CFPB broad power and discretion to seek civil money penalties, the substantial size of a CFPB penalty could—as a practical matter—very well overshadow or nullify the success a party might achieve in blocking the CFPB’s attempt to obtain restitutionary relief, as this case demonstrates.
