A Connecticut federal district court has refused to dismiss claims filed by the CFPB against a mortgage company and three of its principals for alleged Truth in Lending Act (TILA), Mortgage Act and Practice (MAP) Rule, and Consumer Financial Protection Act (CFPA) violations.

The CFPB’s lawsuit names as defendants 1st Alliance Lending LLC and three individuals consisting of the company’s CEO, President of Production, and President of Capital Marketing.  The CFPB alleges:

• From about 2015 to 2019, 1^st Alliance’s business model relied on sales employees called Submission Coordinators (SCs) or Home Loan Consultants (HLCs) as the primary point of contact with consumers during the mortgage origination process.
• The duties performed by the SCs/HLCs required them to hold a mortgage originator license in every state in which 1^st Alliance operated.
• By 2017, 1^st Alliance’s compliance department began to raise concerns to company leadership, including the individual defendants, that SCs were engaging in activities that would require licensing.
• SCs/HLCs held themselves out as licensed in solicitation emails and social media profiles, required borrowers to submit certain documents before receiving Loan Estimates, and made false and misleading statements to consumers about the availability of FHA refinancing programs and program terms.

Based on these alleged facts, the CFPB makes the following claims:

• 1^st Alliance violated TILA and Regulation Z by failing to ensure that the SCs/HLCs were licensed as loan originators pursuant to SAFE Act and by asking for verifying documentation before providing a Loan E
• 1^st Alliance violated the MAP Rule by making false and misleading representations to prospective borrowers regarding their eligibility for refinancing programs and the program terms.
• Each of the above alleged violations also constituted CFPA violations by 1^st Alliance.
• 1^st Alliance and the individual defendants engaged in unfair and deceptive acts or practices in violation of the CFPA as a result of using unlicensed SCs/HLCs  and the SCs/HLCs presenting themselves to consumers as licensed and by making misrepresentations about the availability of FHA refinancing programs and program terms.

With the exception of the CFPB’s claim that 1st Alliance and the individual defendants engaged in deceptive acts or practices by making misrepresentations about the availability of FHA refinancing programs and program terms, the court denied the defendants’ motion to dismiss.  The court found as follows:

• With regard to the CFPB’s claim that 1st Alliance violated TILA and Regulation Z by failing to ensure that the SCs/HLCs were licensed as loan originators pursuant to SAFE Act, the court rejected 1^st Alliance’s arguments that (1) although licensing is required for loan originators, neither TILA nor the SAFE Act require a creditor to ensure that its individual employees are licensed, and (2) to the extent Regulation Z imposes such a requirement, it constitutes an impermissible exercise of agency authority.  The court found that Regulation Z requires loan originator organizations to ensure that their loan originators are licensed and that this requirement is clearly authorized by TILA’s grant of authority to the CFPB to issue implementing regulations.
• With regard to the CFPB’s claim that 1st Alliance violated TILA and Regulation Z by asking for verifying documentation before providing a Loan Estimate, the court rejected 1^st Alliance’s argument that asking for verifying documentation before providing a Loan Estimate would not violate Regulation Z.  The court found 1^st Alliance’s argument that the prohibition on requiring verifying information is only triggered when an application is complete to be “untenable.”  While the court acknowledged that the Regulation Z commentary states that a lender can collect “information” before providing a Loan Estimate, it noted that the commentary expressly states that that documentation to verify the information collected from the consumer cannot be required before providing a Loan E
• With regard to the CFPB’s claim that 1st Alliance violated the MAP Rule,  the court rejected 1^st Alliance’s argument that the complaint had to satisfy the pleading standard for fraud claims.  The court cited cases from other district courts within the Second Circuit that had declined to apply the standard for fraud claims in the context of consumer protection claims.  The court found that the CFPB’s allegations, such as the allegation that 1^st Alliance representatives repeatedly told consumers they would qualify for a mortgage when 1^st Alliance already had received information that would disqualify the consumer, were sufficient to plead a claim.
• Because the above claims survived dismissal, the court found that the CFPB’s CFPA claim based on such violations also survived.
• With regard to the CFPB’s UDAAP claims against the individual defendants, the court first concluded that the appropriate standard for individual liability for UDAAP claims was the Federal Trade Commission Act’s (FTCA) standard.  Under the FTCA, individuals can be liable for unfair or deceptive acts and practices when the individual participated directly in the acts or practices in question or had the authority to control them and also had or should have known or been aware of the acts or practices.  The court rejected the defendants’ argument that because the CFPA has a provision under which an individual can be liable for providing “substantial assistance” to a company engaged in UDAAP violations, it would undermine the CFPA’s enforcement scheme to also allow individual liability under the FTCA standard.  The court concluded that the “substantial assistance” theory of liability was not relevant to whether an individual had directly engaged in a UDAAP violation.  The court found that the CFPB had plausibly alleged that the duties assigned to the SCs/HLCs were subject to the knowledge and approval of the individual defendants and that the individual defendants were on notice that unlicensed employees were performing activities that required licensing or were at least recklessly indifferent to their activities.

With regard to the CFPB’s UDAAP claim based on alleged misrepresentations about the availability of FHA refinancing programs and program terms, the court found the CFPB’s allegations insufficient to support a claim.  According to the court, to plausibly allege that the defendants knew of the alleged misrepresentations, the complaint had to allege that the SCs/HLCs made the misrepresentations pursuant to or at least consistent with internal policies and the CFPB’s current allegations had not sufficiently done so.  While the court dismissed the CFPB’s claim, it did so without prejudice to refiling.

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